PART I.

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 North America, Europe, Latin America, Russia, Asia and North Africa. 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, 2009, the Company operated 21 pulp, paper and packaging mills, 146 converting and packaging plants, 19 recycling plants and three bag facilities. Production facilities at December 31, 2009 in Europe, Asia, Latin America and South America included nine pulp, paper and packaging mills, 52 converting and packaging plants, and two recycling plants. We distribute printing, packaging, graphic arts, maintenance and industrial products principally through over 226 distribution branches in the United States and 38 distribution branches located in Canada, Mexico and Asia. At December 31, 2009, we owned or managed approximately 200,000 acres of forestlands in the United States, approximately 250,000 acres in Brazil and had, through licenses and forest management agreements, harvesting rights on 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: Industrial Packaging; Printing Papers; Consumer Packaging; Distribution; Forest Products; and Specialty Businesses and Other. A description of these industry segments can be found on pages 24 through 25 of Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations. The Company’s 50% equity interest in Ilim Holding S.A. is also a separate reportable industry segment.

From 2005 through 2009, International Paper’s capital expenditures approximated $5.0 billion, excluding

mergers and acquisitions. These expenditures reflect our continuing efforts to improve product quality and environmental performance, as well as to lower costs, maintain reliability of operations and improve forestlands. Capital spending for continuing operations in 2009 was approximately $534 million and is expected to be approximately $800 million in 2010. You can find more information about capital expenditures on page 32 of Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Discussions of acquisitions can be found on pages 32 and 33 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 21 through 23 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 Website 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 47 and 48 of Item 8. Financial Statements and Supplementary Data.

FINANCIAL INFORMATION ABOUT INTERNATIONAL AND U.S. OPERATIONS

The financial information concerning international and U.S. operations and export sales is set forth on page 48 of Item 8. Financial Statements and Supplementary Data.

COMPETITION AND COSTS

Despite the size of the Company’s manufacturing capacity for paper, packaging and pulp products, the markets in all of the cited product lines are large and fragmented. The major markets, both U.S. and non-U.S., in which the Company sells its principal products are very competitive. Our products compete with similar products produced by other forest products companies. We also compete, in some instances, with companies in other industries and against substitutes for wood and wood-fiber products.

Many factors influence the Company’s competitive position, including price, cost, product quality and services. You can find more information about the impact of price and cost on operating profits on pages 16 through 31 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-4 of Appendix II.

MARKETING AND DISTRIBUTION

The Company sells paper, packaging products 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, paperboard, 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 24 and 25 of Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

RESEARCH AND DEVELOPMENT

The Company operates its primary research and development center in Loveland, Ohio, as well as 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 $13 million in 2009, $22 million in 2008 and $24 million in 2007. The decrease in cost in 2009 reflects cost cutting measures.

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 44 and 45 of Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

EMPLOYEES

As of December 31, 2009, we had approximately 56,100 employees, 37,500 of whom were located in the United States. Of the U.S. employees, approx -

imately 24,100 are hourly, with unions representing approximately 14,300 employees. Approximately 10,200 of the union employees are represented by the United Steel Workers (USW).

International Paper and the USW entered into the 2007 Mill Agreement in July 2007, which established the framework for bargaining future local labor contracts at 14 of our U.S. pulp, paper and packaging mills. In April 2008, we entered into the 2008 Converting Agreement, which similarly establishes the framework for bargaining future local labor contracts at 32 of our converting facilities. These two agreements cover several specific items, including but not limited to wages, active medical benefits, successorship, employment security and health and safety. If local facility agreements are not successfully negotiated at the time of expiration, then, under the 2007 Mill Agreement and 2008 Converting Agreement, the local facility agreements will automatically renew with the same terms in effect at the time of expiration. Individual facilities continue to have local agreements for other items not covered by these agreements.

During 2009, labor agreements for four mills covered by the 2007 Mill Agreement expired. Of those four, local agreements at Pensacola, Florida and Augusta, Georgia were negotiated, and local agreements at Savannah, Georgia and Ticonderoga, New York were renewed with the same terms.

In November 2009, International Paper and the USW reached an agreement to integrate into the 2007 Mill Agreement the four mills we acquired from Weyerhaeuser Company in August 2008. The four mills are located in Pine Hill, Alabama, Red River, Louisiana, Valliant, Oklahoma and Port Hueneme, California. The local labor agreement for the mill at Pine Hill, Alabama renewed under the terms of the 2007 Mill Agreement.

Additionally during 2009, International Paper announced the shutdown, and bargained the effects of the closing of the Franklin, Virginia, Pineville, Louisiana and Albany, Oregon mills.

During 2010, labor agreements that are scheduled to expire at the mills in Riegelwood, North Carolina, Courtland, Alabama, Port Hueneme, California and Red River, Louisiana will automatically renew under the terms of the 2007 Mill Agreement if new agreements are not reached.

With regard to converting facilities, during 2009, labor agreements were renewed at Chicago, Illinois

and Kalamazoo, Michigan pursuant to the 2008 Converting Agreement. Also in 2009, labor agreements were negotiated at seven converting facilities covered by the 2008 Converting Agreement. Labor agreements were also reached at 12 converting, distribution and consumer packaging locations (two of which were acquired from Weyerhaeuser Company in August 2008) that were not covered by the 2008 Converting Agreement.

Additionally during 2009, International Paper announced the shutdown, and bargained the effects of the closing, of the following nine facilities: Vernon, California, Cedarburg, Wisconsin, Kansas City, Kansas, St. Paul, Minnesota, Chesapeake, Virginia, Hartford City, Indiana, Howell, Michigan, Auburndale, Florida and Portland, Oregon.

During 2010, 32 labor agreements are scheduled to be negotiated in 36 converting, distribution and consumer packaging facilities. Two of these agreements will automatically renew under the terms of the 2008 Converting Agreement if new agreements are not reached. Thirty of these agreements are not covered by the 2008 Converting Agreement.

EXECUTIVE OFFICERS OF THE REGISTRANT

John V. Faraci, 60, chairman and chief executive officer since 2003. Mr. Faraci joined International Paper in 1974.

John N. Balboni, 61, senior vice president and chief information officer since 2005. Mr. Balboni previously served as vice president and chief information officer from 2003 to 2005. Mr. Balboni joined International Paper in 1978.

C. Cato Ealy, 53, senior vice president – corporate development since 2003. Mr. Ealy is a director of Ilim Holding S.A., a Swiss holding company in which International Paper holds a 50% interest, and of its subsidiary, Ilim Group. Mr. Ealy joined International Paper in 1992.

Tommy S. Joseph, 50, senior vice president – manufacturing, technology, EHS&S and global sourcing since January 2010. Mr. Joseph previously served as senior vice president – manufacturing, technology, EHS&S from February to December 2009, and vice president – technology from 2005 to February 2009. He served as vice president – specialty papers business from 2003 to 2005. Mr. Joseph joined International Paper in 1983.

Thomas G. Kadien, 53, senior vice president – consumer packaging and IP Asia since January 2010. Mr. Kadien previously served as senior vice president and president – xpedx from 2005 to 2009, and senior vice president-Europe from 2003 to 2005. Mr. Kadien joined International Paper in 1978.

Paul J. Karre, 57, senior vice president human resources and communications since May 2009. Mr. Karre previously served as vice president – human resources from 2000 to 2009. Mr. Karre joined International Paper in 1974.

Mary A. Laschinger, 49, senior vice president since 2007 and president – xpedx since January 2010. Ms. Laschinger previously served as president – IP Europe, Middle East, Africa and Russia from 2005 to 2009, vice president – wood products from 2004 to 2005, and vice president – pulp from 2001 to 2004. Ms. Laschinger joined International Paper in 1992.

Tim S. Nicholls, 48, senior vice president and chief financial officer since December 2007. Mr. Nicholls previously served as vice president and executive project leader of IP Europe during 2007. Mr. Nicholls served as vice president and chief financial officer – IP Europe from 2005 to 2007, and as president of the Company’s former Canadian pulp and wood products business from 2002 to 2005. Mr. Nicholls joined International Paper in 1991.

Maximo Pacheco, 57, senior vice president since 2005 and president – IP Europe, Middle East, Africa and Russia since January 2010. Mr. Pacheco previously served as president – IP do Brasil from 2004 to 2009. Mr. Pacheco is a director of Ilim Holding S.A., a Swiss holding company in which International Paper holds a 50% interest, and of its subsidiary, Ilim Group. Mr. Pacheco joined International Paper in 1994.

Carol L. Roberts, 50, senior vice president – industrial packaging since 2008. Ms. Roberts previously served as senior vice president – IP packaging solutions from 2005 to 2008. Ms. Roberts served as vice president – container the Americas from 2000 to 2005. Ms. Roberts joined International Paper in 1981.

Maura A. Smith, 54, senior vice president, general counsel, corporate secretary and global government relations since 2003. Ms. Smith joined International Paper in 2003.

Mark S. Sutton, 48, senior vice president – printing and communications papers of the Americas since January 2010. Mr. Sutton previously served as senior

vice president – supply chain from 2008 to 2009, and vice president – supply chain from 2007 until 2008. Mr. Sutton served as vice president – strategic planning from 2005 to 2007, and vice president and general manager – European Corrugated Packaging Operations from 2002 to 2005. Mr. Sutton joined International Paper in 1984.

Robert J. Grillet, 54, vice president – finance and controller since 2003. Mr. Grillet joined International Paper in 1976.

RAW MATERIALS

Raw materials essential to our businesses include wood fiber, purchased in the form of pulpwood, wood chips and old corrugated containers (OCC), and certain chemicals, including caustic soda and starch. Information concerning fiber supply purchase agreements that were entered into in connection with the Company’s 2006 Transformation Plan is presented in Note 11 Commitments and Contingent Liabilities on page 75 of Item 8. Financial Statements and Supplementary Data.

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, ENERGY AND TRANSPORTATION COULD AFFECT OUR PROFITABILITY. We rely heavily on the use of certain raw materials (principally virgin wood fiber, recycled fiber, caustic soda and starch), energy sources (principally natural gas, coal and fuel oil) and third-party companies that transport our goods. The market price of virgin wood fiber varies based upon availability and source. In addition, the increase in demand of products manufactured, in whole or in part, from recycled fiber, on a global basis, may cause an occasional tightening in the supply of recycled fiber. Energy prices, in particular prices for oil and natural gas, have fluctuated dramatically in the past and may continue to fluctuate in the future. Our profitability has been, and will continue to be, affected by changes in the costs and availability of such raw materials, energy sources and transportation sources.

THE INDUSTRIES IN WHICH WE OPERATE EXPERIENCE BOTH ECONOMIC CYCLICALITY AND CHANGES IN CONSUMER PREFERENCES. FLUCTUATIONS IN THE PRICES OF, AND THE DEMAND FOR, OUR PRODUCTS COULD MATERIALLY AFFECT OUR FINANCIAL CONDITION, RESULTS OF OPERATIONS AND CASH FLOWS. Substantially all of our businesses have experienced, and are likely to continue to experience, cycles relating to industry capacity and general economic conditions. The length and magnitude of these cycles have varied over time and by product. In addition, changes in consumer preferences may increase or decrease the demand for our fiber-based products and non-fiber substitutes. Consequently, our operating cash flow is sensitive to changes in the pricing and demand for our products.

COMPETITION IN THE UNITED STATES AND INTERNATIONALLY COULD NEGATIVELY IMPACT OUR FINANCIAL RESULTS. We operate in a competitive environment, both in the United States and internationally, in all of our operating segments. Pricing or product strategies pursued by competitors could negatively impact our financial results.

RISKS RELATING TO MARKET AND ECONOMIC FACTORS

CONTINUED ADVERSE DEVELOPMENTS IN GENERAL BUSINESS AND ECONOMIC CONDITIONS COULD HAVE AN ADVERSE EFFECT ON THE DEMAND FOR OUR PRODUCTS AND OUR FINANCIAL CONDITION AND RESULTS OF OPERATION. General economic conditions may adversely affect industrial non-durable goods production, consumer spending, commercial printing and advertising activity, white-collar employment levels and consumer confidence, all of which impact demand for our products. In addition, a return to volatility in the capital and credit markets, which impacts interest rates, currency exchange rates and the availability of credit, could have a material adverse effect on our business, financial condition and our results of operations.

CHANGES IN CREDIT RATINGS ISSUED BY NATIONALLY RECOGNIZED STATISTICAL RATING ORGANIZATIONS COULD ADVERSELY AFFECT OUR COST OF FINANCING AND HAVE AN ADVERSE EFFECT ON THE MARKET PRICE OF OUR SECURITIES. Maintaining an investment-grade credit rating is an important element of our financial strategy, and a downgrade of our Company’s ratings below investment grade may limit our access to the capital markets, have an adverse effect on the market price of our securities, and increase our cost of borrowing and require us to post collateral for derivatives in a net liability position. Similarly, we are subject to the risk that one of the banks that has issued irrevocable letters of credit supporting the installment notes issued in connection with sales of our forestlands is downgraded below a required rating. If this were to happen, it may subject the Company to additional costs of securing a replacement letter-of-credit bank or could result in an acceleration of deferred taxes if a replacement bank cannot be obtained.

THE IMPAIRMENT OF FINANCIAL INSTITUTIONS MAY ADVERSELY AFFECT US. We have exposure to counterparties with which we execute transactions, including U.S. and foreign commercial banks, insurance companies, investment banks, investment funds and other financial institutions, some of which may be exposed to ratings downgrade, bankruptcy, liquidity, default or similar risks, especially in connection with recent financial market turmoil. A ratings downgrade, bankruptcy, receivership, default or similar event involving a counterparty may adversely affect our access to capital, liquidity position, future business and results of operations.

OUR PENSION AND HEALTH CARE COSTS ARE SUBJECT TO NUMEROUS FACTORS WHICH COULD CAUSE THESE COSTS TO CHANGE. We have defined benefit pension plans covering substantially all U.S. salaried employees hired prior to July 1, 2004 and substantially all hourly and union employees regardless of hire date. We provide retiree health care benefits to certain of our U.S. salaried and certain hourly employees. Our pension 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, changes in general interest rates and changes in the number of retirees may result in increased pension costs in future periods. Likewise, changes in assumptions regarding current discount rates and expected rates of return on plan assets could also increase pension and health care costs. Significant changes in any of these factors may adversely impact our cash flows, financial condition and results of operations.

THE AMOUNT OF OUR DEBT OBLIGATIONS COULD ADVERSELY AFFECT OUR BUSINESS. As of December 31, 2009, we had $9.0 billion of long-term debt, including notes payable and current maturities, and the amount of our debt obligations could adversely affect our business. If we are unable to generate sufficient cash from operations to repay our debt, or are unable to refinance our debt because credit market conditions become volatile, this may have an adverse impact on our cost of borrowing, liquidity, financial condition and results of operations.

OUR PENSION PLANS ARE CURRENTLY UNDERFUNDED, AND OVER TIME WE WILL BE REQUIRED TO MAKE CASH PAYMENTS TO THE PLANS, REDUCING THE CASH AVAILABLE FOR OUR BUSINESS. We record a liability associated with our pension plans equal to the excess of the benefit obligation over the fair value of plan assets. The benefit liability recorded under the provisions of Accounting Standards Codification (ASC) 715, “Compensation – Retirement Benefits,” at December 31, 2009 was $2.8 billion. Although we expect to have no obligation to fund our plans in 2010, we continually reassess the amount and timing of any discretionary contributions and could elect to make such a contribution in 2010. Regardless of whether we make a discretionary contribution in 2010, over the next several years we will make contributions to the plans that are likely to be material. The amount of such contributions will depend upon

a number of factors, principally the actual earnings and changes in values of plan assets, changes in interest rates and the impact of possible funding relief legislation currently under consideration in the U.S. Congress.

CHANGES IN INTERNATIONAL CONDITIONS COULD ADVERSELY AFFECT OUR BUSINESS AND RESULTS OF OPERATIONS. Our operating results and business prospects could be substantially affected by risks related to the countries outside the United States in which we have manufacturing facilities or sell our products. Specifically, Brazil, Russia, Poland and China, where we have substantial manufacturing facilities, are countries that are exposed to economic and political instability in their respective regions of the world. Downturns in economic activity, adverse tax consequences, fluctuations in the value of local currency versus the U.S. dollar, nationalization or any change in social, political or labor conditions in any of these countries or regions could negatively affect our financial results.

RISKS RELATING TO LEGAL PROCEEDINGS AND COMPLIANCE COSTS

UNANTICIPATED EXPENDITURES RELATED TO THE COST OF COMPLIANCE WITH ENVIRONMENTAL, HEALTH AND SAFETY LAWS AND REQUIREMENTS COULD ADVERSELY AFFECT OUR BUSINESS AND RESULTS OF OPERATIONS. Our operations are subject to U.S. and non-U.S. laws and regulations relating to the environment, health and safety. There can be no assurance that compliance with existing and new laws and requirements, including with global climate change laws and regulations, will not require significant expenditures, or that existing reserves for specific matters will be adequate to cover future costs.

RESULTS OF LEGAL PROCEEDINGS COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR CONSOLIDATED FINANCIAL STATEMENTS. The costs and other effects of pending litigation against us cannot be determined with certainty. Although we believe that the outcome of any pending or threatened lawsuits or claims, or all of them combined, will not have a material adverse effect on our consolidated financial statements, there can be no assurance that the outcome of any lawsuit or claim will be as expected.

RISKS RELATING TO OUR OPERATIONS

MATERIAL DISRUPTIONS AT ONE OF OUR MANUFACTURING FACILITIES COULD NEGATIVELY IMPACT OUR FINANCIAL RESULTS. We operate our facilities in compliance with applicable rules and regulations and take measures to minimize the risks of disruption at our facilities. A material disruption at one of our manufacturing facilities could prevent us from meeting customer demand, reduce our sales and/or negatively impact our financial results. Any of our manufacturing facilities, or any of our machines within an otherwise operational facility, could cease operations unexpectedly due to a number of events, including:

Any such downtime or facility damage could prevent us from meeting customer demand for our products and/or require us to make unplanned capital expenditures. If one of these machines or facilities were to incur significant downtime, our ability to meet our production targets and satisfy customer requirements could be impaired, resulting in lower sales and having a negative effect on our financial results.

SEVERAL OPERATIONS ARE CONDUCTED BY JOINT VENTURES THAT WE CANNOT OPERATE SOLELY FOR OUR BENEFIT. Several operations, particularly in emerging markets, are carried on by joint ventures such as the Ilim joint venture in Russia. In joint ventures we share ownership and management of a company with one or more parties who may or may not have the same goals, strategies, priorities or resources as we do. In general, joint ventures are intended to be operated for the benefit of all co-owners, rather than for our exclusive benefit. Operating a business as a joint venture often requires additional organizational formalities as well as time-consuming procedures for sharing information and making decisions. In joint ventures, we are required to pay more attention to our relationship with our co-owners as well as with the joint venture, and if a co-owner changes, our relationship may be adversely affected. In addition, the benefits from a successful joint venture are shared among the co-owners, so that we do not receive all the benefits from our successful joint ventures. For additional information with respect to our Ilim joint venture, see “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operation – Liquidity and Capital Resources – Ilim Holding S.A. Shareholders Agreement” on page 37.

ITEM 1B. UNRESOLVED STAFF COMMENTS

None.

ITEM 2. PROPERTIES

FORESTLANDS

As of December 31, 2009, the Company owned or managed approximately 200,000 acres of forestlands in the United States, approximately 250,000 acres in Brazil, and had, through licenses and forest management agreements, harvesting rights on government-owned forestlands in Russia. All owned lands are independently third-party certified for sustainable forestry (under operating standards of the Sustainable Forestry Initiative (SFI™) in the United States and ISO 14001 and CERFLOR in Brazil). Our

remaining forestlands are being marketed to optimize the economic value to our shareholders. Most of these forestlands consist of properties that are likely to be sold to investors and other buyers for various uses or held for real estate development.

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 capital investments for 2009 on page 32, and dispositions and restructuring activities as of December 31, 2009, on pages 21 through 23 of Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations, and on pages 63 through 66 and pages 69 through 71 of Item 8. Financial Statements and Supplementary Data.

ITEM 3. LEGAL PROCEEDINGS

Information concerning the Company’s legal proceedings is set forth on pages 44 and 45 of Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations, and on pages 75 and 76 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, 2009.

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 2009 and 2008 are set forth on page 94 of Item 8. Financial Statements and Supplementary

Data. As of the filing of this Annual Report on Form 10-K, the Company’s common shares are traded on the New York stock exchange. International Paper options are traded on the Chicago Board of Options Exchange. As of February 19, 2010, there were approximately 18,323 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.

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 Exchange Act of 1934, as amended.

The following graph compares a $100 investment in Company stock on December 31, 2004 with a $100 investment in each of our ROI Peer Group and the S&P 500 also made on December 31, 2004. The graph portrays total return, 2004–2009, assuming reinvestment of dividends.

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 plus total shareholders’ equity.

Return on shareholders’ equity—

net earnings attributable to International Paper Company divided by average shareholders’ equity (computed monthly).

Return on investment—

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

FOOTNOTES TO FIVE-YEAR FINANCIAL SUMMARY

2009:

2008:

2007:

2006:

2005:

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

EXECUTIVE SUMMARY

International Paper Company reported net sales of $23.4 billion in 2009, compared with $24.8 billion in 2008 and $21.9 billion in 2007. Net earnings totaled $663 million in 2009, including $1.4 billion of alternative fuel mixture credits and $853 million of charges to restructure ongoing businesses, compared with a loss of $1.3 billion in 2008, which included a $1.8 billion goodwill impairment charge. Net earnings in 2007 totaled $1.2 billion.

The Company performed well in 2009 considering the magnitude of the challenges it faced, both domestically and around the world. Despite weak global economic conditions, the Company generated record cash flow from operations, enabling us to reduce long-term debt by $3.1 billion while increasing cash balances by approximately $800 million. Also during 2009, the Company incurred 3.6 million tons of downtime, including 1.1 million tons associated with the shutdown of production capacity in our North American mill system to continue to match our production to our customers’ needs. These actions should result in higher operating rates, lower fixed costs and lower payroll costs in 2010 and beyond. Furthermore, the realization of integration synergies in our U.S. Industrial Packaging business and overhead reduction initiatives across the Company position International Paper to benefit from a lower cost profile in future years.

As 2010 begins, we expect that first-quarter operations will continue to be challenging. In addition to being a seasonally slow quarter for many of our businesses, poor harvesting weather conditions in the U.S. South and increasing competition for limited supplies of recycled fiber are expected to lead to further increases in fiber costs for our U.S. mills. Planned maintenance outage expenses will also be higher than in the 2009 fourth quarter. However, we have announced product price increases for our major global manufacturing businesses, and while these actions may not have a significant effect on first-quarter results, we believe that the benefits beginning in the second quarter will be significant. Additionally, we expect to benefit from the capacity management, cost reduction and integration synergy actions taken during 2009. As a result, the Company remains positive about projected operating results in 2010, with improved earnings versus 2009 expected

in all major businesses. We will continue to focus on aggressive cost management and strong cash flow generation as 2010 progresses.

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, equity earnings, noncontrolling interests, 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: Industrial Packaging, Printing Papers, Consumer Packaging, Distribution, Forest Products, and Specialty Businesses and Other.

The following table shows the components of net earnings (loss) attributable to International Paper Company for each of the last three years:

Industry segment operating profits of $2.4 billion were $967 million higher in 2009 than in 2008. Operating profits benefited from lower energy and raw material costs ($447 million), lower distribution costs ($142 million), favorable manufacturing operating costs ($481 million), incremental earnings from the CBPR business acquired in the third quarter of 2008 ($202 million), and other items ($35 million), offset by lower average sales price realizations ($444 million), lower sales volumes and increased lack-of-order downtime ($684 million), unfavorable

mix of products sold ($109 million) and lower earnings from land and mineral rights sales ($383 million). However, special items were a gain of $898 million in 2009 compared with a loss of $382 million in 2008.

The principal changes in 2009 operating profit by segment were as follows:

Corporate items, net, of $181 million of expense in 2009 were higher than the $103 million of expense in 2008 due to higher pension expenses. The decrease in 2008 versus $206 million of expense in 2007 reflects lower pension expenses.

Corporate special items, including restructuring and other items, impairments of goodwill, and net losses (gains) on sales and impairments of businesses, were a loss of $334 million in 2009 compared with a loss of $1.9 billion in 2008 and a gain of $241 million in 2007. The loss in 2008 includes $1.8 billion of goodwill impairment charges.

Interest expense, net, was $669 million in 2009 compared with $492 million in 2008 and $297 million in 2007. The increases in 2009 and 2008 reflect the issuance of approximately $6.0 billion of debt in connection with the acquisition of the CBPR business in 2008 and higher interest rates in 2009 due to refinancing actions taken to extend debt maturities.

The 2009 income tax provision of $469 million includes a net $165 million provision related to 2009 special tax adjustment items. The 2008 income tax provision of $162 million includes a net $11 million benefit related to 2008 special tax adjustment items. The 2007 income tax provision of $415 million includes a $41 million benefit related to 2007 special tax adjustment items. Excluding the tax effect of all special items, taxes as a percent of pre-tax earnings were 30% in 2009 compared with 31.5% in 2008 and 30% in 2007. The higher income tax rate in 2008 reflects a higher proportion of earnings in higher tax rate jurisdictions.

Discontinued Operations

In 2008, $13 million of net adjustments were recorded relating to post-closing adjustments and estimates associated with prior sales of discontinued businesses.

During 2007, the Company completed the sale of its Wood Products, Beverage Packaging and Kraft Papers operations. 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 applicable periods presented.

Liquidity and Capital Resources

For the year ended December 31, 2009, International Paper generated $4.7 billion of cash flow from continuing operations, including $1.7 billion from alternative fuel mixture credits, compared with $2.7 billion in 2008. Capital spending from continuing operations for 2009 totaled $534 million, or 36% of depreciation and amortization expense. Cash expenditures for acquisitions totaled $17 million, while net reductions of debt totaled $3.1 billion. Our liquidity position remains strong, supported by approximately $2.5 billion of committed credit facilities that we believe are adequate to meet future 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 2010 will be to maximize free cash flow, and we will use that cash to invest in high-return consumption-reduction capital projects and to reduce total debt, including the Company’s unfunded pension obligation.

Capital spending for 2010 is targeted at $800 million, or about 55% of 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, pension and postretirement benefit obligations and income taxes.

Legal

See Note 11 of the Notes to Consolidated Financial Statements in Item 8. Financial Statements and Supplementary Data for a discussion of legal matters.

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 North America, Europe, Russia, Latin America, Asia and North Africa. 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 are affected by general economic trends, inventory levels, currency movements and worldwide capacity utilization. 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, recycled fiber and chemical costs; energy costs; freight 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, 2009, and the major factors affecting these results compared to 2008 and 2007.

RESULTS OF OPERATIONS

For the year ended December 31, 2009, International Paper reported net sales of $23.4 billion, compared with $24.8 billion in 2008 and $21.9 billion in 2007. International net sales (including U.S. exports) totaled $6.4 billion, or 27% of total sales in 2009. This compares with international net sales of $6.9 billion in 2008 and $6.3 billion in 2007.

Full year 2009 net earnings attributable to International Paper Company totaled $663 million ($1.55 per share), compared with a loss of $1.3 billion ($3.05 per share) in 2008 and income of $1.2 billion ($2.70 per share) in 2007. Amounts include the results of discontinued operations.

Earnings from continuing operations attributable to International Paper Company, after taxes, in 2009 were $663 million, including $285 million of net

special items charges, compared with a loss of $1.3 billion, including $2.1 billion of net special items charges, in 2008 and income of $1.2 billion, including $252 million of net special item income, in 2007. Compared with 2008, lower average raw material costs, favorable operating performance, incremental earnings from the CBPR business acquired in the 2008 third quarter, lower distribution costs, lower tax expense, and the incremental gain from special items were offset by the impact of lower average sales price realizations, lower sales volumes, lower earnings from land and mineral sales, higher net interest expense and higher corporate expenses. Additionally, 2009 results included lower equity earnings, net of taxes, relating to the Company’s investment in Ilim Holding S.A.

See Industry Segment Results on pages 25 through 31 for a discussion of the impact of these factors by segment.

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

Discontinued Operations

2008: In 2008, net after-tax charges totaling $12 million were recorded for adjustments of net losses (gains) on sales and impairments of businesses reported as discontinued operations, including a pre-tax charge of $25 million ($16 million after taxes) in the first quarter for the settlement of a post-closing adjustment on the sale of the Beverage Packaging business, and pre-tax gains of $9 million ($5 million after taxes) in the fourth quarter for adjustments to reserves associated with the sale of discontinued businesses.

2007: In 2007, after tax charges totaling $36 million were recorded for adjustments of net losses (gains) on sales and impairments of businesses reported as discontinued operations.

During the fourth quarter of 2007, the Company recorded a pre-tax charge of $9 million ($6 million after taxes) and a pre-tax credit of $4 million ($3 million after taxes) for adjustments to estimated losses on the sales of its Beverage Packaging and Wood Products businesses, respectively.

During the third quarter of 2007, the Company completed the sale of the remainder of its non-U.S. Beverage Packaging business.

During the second quarter of 2007, the Company recorded pre-tax charges of $6 million ($4 million after taxes) and $5 million ($3 million after taxes) relating to adjustments to estimated losses on the sales of its Wood Products and Beverage Packaging businesses, respectively.

During the first quarter of 2007, the Company recorded pre-tax credits of $21 million ($9 million after taxes) and $6 million ($4 million after taxes) relating to the sales of its Wood Products and Kraft Papers businesses, respectively. In addition, a $15 million pre-tax charge ($39 million after taxes) was recorded for adjustments to the loss on the completion of the sale of most of the Beverage Packaging business. Finally, a pre-tax credit of approximately $10 million ($6 million after taxes) was recorded for refunds received from the Canadian government of duties paid by the Company’s former Weldwood of Canada Limited business.

Additionally, a $4 million pre-tax charge ($3 million after taxes) was recorded for additional taxes associated with the Company’s former Weldwood of Canada Limited business.

Discontinued operations also includes the operating results for these businesses for all applicable periods presented.

Income Taxes

A net income tax provision of $469 million was recorded for 2009, including a $156 million expense for the write-off of deferred tax assets in France, a $15 million write-off of a deferred tax asset for a recycling tax credit in the state of Louisiana, and a $26 million tax benefit related to the settlement of the 2004 and 2005 U.S. federal income tax audit. Excluding these items and the tax effect of other special items, the tax provision was $190 million or 30% of pre-tax earnings before equity earnings.

A net income tax provision of $162 million was recorded for 2008, including a $40 million tax benefit related to the restructuring of the Company’s international operations and a $29 million charge for estimated U.S. income taxes on a gain recorded by the Company’s Ilim Holding S.A. joint venture related to the sale of a Russian subsidiary. Excluding these items and the tax effect of other special items, the tax provision was $369 million or 31.5% of pre-tax earnings before equity earnings.

In 2007, a net income tax provision of $415 million was recorded, including a $41 million tax benefit relating to the effective settlement of certain income tax audit issues and other special tax adjustment items. Excluding this item and the tax effect of other special items, the tax provision was $423 million, or 30% of pre-tax earnings before equity earnings.

The higher income tax rate in 2008 reflects a higher proportion of earnings in higher tax rate jurisdictions.

Equity Earnings, Net of Taxes

Equity earnings, net of taxes in 2009 and 2008 consisted principally of the Company’s share of earnings from its 50% investment in Ilim Holding S.A. in Russia (see pages 30 and 31).

Corporate Items and Interest Expense

Corporate items totaled $181 million of expense for the twelve months ended December 31, 2009 compared with $103 million in 2008 and $206 million in 2007. The increase in 2009 principally reflects higher pension expenses. The decrease in 2008 from 2007 primarily reflects lower pension expenses.

Net interest expense totaled $669 million in 2009 and $492 million in 2008. In 2007, net interest expense totaled $297 million ($299 million excluding a pre-tax credit of $2 million for interest received from the Canadian government on refunds of prior-year softwood lumber duties). The increases from 2008 to 2009 and from 2007 to 2008 reflect a higher average debt balance due to the issuance of approximately $6 billion of debt in 2008, mainly in connection with the acquisition of the CBPR business, and higher average interest rates in 2009 due to refinancing actions taken to extend debt maturities.

Net earnings attributable to noncontrolling interests totaled $18 million in 2009 compared with $3 million in 2008 and $24 million in 2007. The increase in 2009 reflects higher earnings for the International Paper &

Sun Cartonboard Co., Ltd. joint ventures. The decrease in 2008 from 2007 reflected lower earnings for the International Paper & Sun Cartonboard Co., Ltd. joint ventures in 2008 and the Company’s acquisition of the remaining shares of a Moroccan packaging joint venture in the third quarter of 2007.

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. 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. 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.

During 2009, the Company closed or announced the pending closure of five mills globally, closed 24 converting or distribution locations, and reduced overhead headcount through a program initiated in 2008. These actions will allow the Company to reduce its fixed costs, reduce payroll costs due to a reduction in headcount by 6,000, and should result in higher operating rates in 2010 and beyond. We expect the annual savings from these actions to approximate $650 million.

2009: During 2009, corporate restructuring and other charges totaling $333 million before taxes ($205 million after taxes) were recorded. These charges included:

In addition, restructuring and other charges totaling $1.0 billion before taxes ($648 million after taxes) were recorded in the Industrial Packaging, Printing

Papers, Consumer Packaging and Distribution industry segments including:

2008: During 2008, corporate restructuring and other charges totaling $179 million before taxes ($110 million after taxes) were recorded. These charges included:

In addition, restructuring and other charges totaling $191 million ($117 million after taxes) were recorded in the Printing Papers, Industrial Packaging and Consumer Packaging industry segments including:

2007: During 2007, total restructuring and other charges of $95 million before taxes ($59 million after taxes) were recorded. These charges included:

A further discussion of restructuring and other charges can be found in Note 5 of the Notes to Consolidated Financial Statements in Item 8. Financial Statements and Supplementary Data.

Gain on Sale of Forestlands

2008: During the second and third quarters of 2008, a pre-tax gain totaling $6 million ($4 million after taxes) was recorded to adjust reserves related to the 2006 Transformation Plan forestland sales.

2007: During the third quarter of 2007, a pre-tax gain of $9 million ($5 million after taxes) was recorded to reduce estimated transaction costs accrued in connection with the 2006 Transformation Plan forestland sales.

Impairments of Goodwill

In the fourth quarter of 2008, in conjunction with annual testing of its reporting units for possible goodwill impairments as of the beginning of the fourth quarter, the Company recorded a $59 million charge to write off all recorded goodwill of its European Coated Paperboard business. Subsequent to this testing date, and based on interim goodwill impairment tests performed as of December 31, 2008, additional goodwill impairment charges of $1.3 billion and $379 million were recorded for the Company’s U.S. Printing Papers business and its U.S. Coated Paperboard business, respectively.

No goodwill impairment charges were recorded in 2009 or 2007.

Net Losses (Gains) on Sales and Impairments of Businesses

Net losses (gains) on sales and impairments of businesses included in Corporate special items totaled a pre-tax loss of $1 million (a gain of $2 million after taxes) in 2009, a gain of $1 million, before and after taxes, in 2008 and a pre-tax gain of $327 million ($267 million after taxes) in 2007. The principal components of these gains/losses and other net gains/losses included in the industry operating segment results were:

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 noncash charge, before and after taxes, was recorded to write down the long-lived assets of the mill to their estimated fair value.

During the fourth quarter of 2009, an $8 million noncash charge, before and after taxes, was

recorded related to the Company’s Etienne, France mill which was closed at the end of November 2009. In addition, a pre-tax charge of $3 million ($0 million after taxes) was recorded for other items, of which a $2 million charge (before and after taxes) was recorded in the Industrial Packaging segment.

2008: During the first quarter of 2008, a $1 million credit (before and after taxes) was recorded to adjust the estimated loss for a business previously sold.

In addition, a $107 million noncash loss ($84 million after taxes) for the impairment of the Inverurie, Scotland mill was recorded in the Printing Papers industry segment.

2007: During the fourth quarter of 2007, a $13 million net pre-tax credit ($9 million after taxes) was recorded to adjust estimated gains/losses of businesses previously sold, including a $7 million pre-tax credit ($5 million after taxes) to adjust the estimated loss on the sale of box plants in the United Kingdom and Ireland, and a $5 million pre-tax credit ($3 million after taxes) to adjust the estimated loss on the sale of the Maresquel mill in France.

During the third quarter of 2007, a pre-tax charge of $1 million ($1 million credit after taxes) was recorded to adjust previously estimated losses on businesses previously sold.

During the second quarter of 2007, a $1 million net pre-tax credit (a $7 million charge after taxes, including a $5 million tax charge in Brazil) was recorded to adjust previously estimated gains/losses of businesses previously sold.

During the first quarter of 2007, a $103 million pre-tax gain ($96 million after taxes) was recorded upon the completion of the sale of the Company’s Arizona Chemical business. As part of the transaction, International Paper acquired an equity interest of approximately 10% in the resulting new entity. Since the interest acquired represents significant continuing involvement in the operations of the business under accounting principles generally accepted in the United States, the operating results for Arizona Chemical have been included in continuing operations in the accompanying consolidated statement of operations through the date of sale.

In addition, during the first quarter of 2007, a $6 million pre-tax credit ($4 million after taxes) was recorded to adjust previously estimated gains/losses of businesses previously sold.

These gains are included, along with a $205 million pre-tax gain ($159 million after taxes) on the

exchange for the Luiz Antonio mill in Brazil (see Note 6 of the Notes to Consolidated Financial Statements in Item 8. Financial Statements and Supplementary Data), in Net losses (gains) on sales and impairments of businesses in the accompanying consolidated statement of operations.

Industry Segment Operating Profits

Industry segment operating profits of $2.4 billion in 2009 increased from both $1.4 billion in 2008 and $1.9 billion in 2007 reflecting a $898 million net gain from special items in 2009 versus a $382 million net loss in 2008. The benefits of lower energy and raw material costs ($447 million), lower distribution costs ($142 million), favorable manufacturing operating costs ($481 million), incremental earnings from the CBPR business acquired in the third quarter of 2008 ($202 million), and other items ($35 million) were offset by lower average sales price realizations ($444 million), lower sales volumes and increased lack-of-order downtime ($684 million), unfavorable mix of products sold ($109 million) and lower earnings from land and mineral rights sales ($383 million).

Lack-of-order downtime in 2009 increased to approximately 3.6 million tons compared with approximately one million tons in 2008 and 50,000 tons in 2007. The 2009 total includes approximately 400,000 tons associated with the shutdown of a paper machine at our Valliant mill in 2009, and 50,000 tons associated with the permanent shutdown of our Pineville and Albany mills at the end of the fourth quarter of 2009. In addition, approximately 600,000 tons are included in the 2009 total and 105,000 tons are included in the 2008 total associated with the permanent shutdown of our Bastrop mill and the shutdown of an uncoated paper machine at our Franklin mill in the fourth quarter of 2008.

Looking ahead to the 2010 first quarter, operating conditions in January and February are expected to be difficult. The first quarter is typically a seasonally slow period, and we anticipate only modest U.S. economic recovery. Input cost inflation experienced in the 2009 fourth quarter is expected to continue, reflecting poor wood harvesting conditions in the U.S. South due to unusually cold and wet weather, and strong global competition for recycled fiber primarily due to a reduction in supply for recycled fiber caused by the global recession in 2009. Demand for North American paper and packaging should improve slightly, while slight seasonal decreases are expected in other global markets. Pulp prices are expected to continue to improve, and we expect to realize previously announced price

increases on paper and packaging grades as the first quarter progresses. Planned maintenance outage costs in the United States are expected to increase while remaining about flat in Europe and Brazil. Earnings from our xpedx distribution business will reflect seasonally lower shipments and the absence of a favorable inventory valuation adjustment in the 2009 fourth quarter. Equity earnings from our Ilim joint venture are expected to decrease, reflecting higher input costs, an extended mill outage and foreign exchange losses.

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.

Industrial Packaging

International Paper is the largest manufacturer of containerboard in the United States. Our production capacity is about 10 million tons annually. Our products include linerboard, medium, whitetop, recycled linerboard, recycled medium and saturating kraft. About 70% of our production is converted domestically into corrugated boxes and other packaging by our 129 U.S. container plants. Additionally, we recycle approximately one million tons of OCC and mixed and white paper through our 21 recycling plants. In Europe, our operations include one recycled containerboard mill in Morocco and 21 container plants in France, Italy, Spain, and Morocco. In Asia, our operations include 11 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.

Printing Papers

International Paper is one of the largest manufacturers of uncoated freesheet printing papers in the world. Products in this segment principally include uncoated papers and market pulp. We also produce coated papers and uncoated bristols.

UNCOATED PAPERS: This business produces papers for use in copiers, desktop and laser printers and digital imaging. End-use applications include advertising and promotional materials such as brochures, pamphlets, greeting cards, books, annual reports and direct mail. 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, Chamex, Ballet, Rey, Pol and Svetocopy. The mills producing uncoated papers are located in the United States, France, Poland, Russia and Brazil. The mills have uncoated paper production capacity of approximately 5.3 million tons annually. Brazilian operations function through International Paper do Brasil, Ltda, which owns or manages approximately 250,000 acres of forestlands in Brazil.

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 southern and birch hardwood paper pulps. These products are produced in the United States, France, Poland, Russia and Brazil and are sold around the world. International Paper facilities have annual dried pulp capacity of about 1.5 million tons.

Consumer Packaging

International Paper is the world’s largest producer of solid bleached sulfate board with annual U.S. production capacity of about 1.7 million tons. 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. Our U.S. capacity is supplemented by about 330,000 tons of capacity at our mills producing coated board in Poland and Russia, and by our International Paper & Sun Cartonboard Co., Ltd. joint venture in China which has an annual capacity of 915,000 tons.

Shorewood Packaging Corporation produces premium packaging with high-impact graphics for a variety of markets, including home entertainment, tobacco, cosmetics, general consumer and pharmaceuticals, in 16 facilities worldwide.

Our Foodservice business produces cups, lids, food containers and plates through three domestic plants and five international facilities.

Distribution

xpedx, our North American merchant distribution business, distributes products and services to a number of customer markets including: commercial printers with printing papers and graphic pre-press, printing presses and post-press equipment; 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 122 warehouse locations and 130 retail stores in the United States, Mexico and Canada.

Forest Products

International Paper owns and manages approximately 200,000 acres of forestlands and development properties in the United States, mostly in the South. 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 purposes.

Specialty Businesses and Other

CHEMICALS: This business was sold in the first quarter of 2007.

Ilim Holding S.A.

In October 2007, International Paper and Ilim Holding S.A. (Ilim) completed a 50:50 joint venture to operate a pulp and paper business located in Russia. Ilim’s facilities include three paper mills located in Bratsk, Ust-Ilimsk, and Koryazhma, Russia, with combined total pulp and paper capacity of over 2.5 million tons. Ilim has exclusive harvesting rights on timberland and forest areas exceeding 12.8 million acres (5.2 million hectares).

Products and brand designations appearing in italics are trademarks of International Paper or a related company.

INDUSTRY SEGMENT RESULTS

Industrial Packaging

Demand for Industrial Packaging products is closely correlated with non-durable industrial goods production, 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, freight costs, manufacturing efficiency and product mix.

INDUSTRIAL PACKAGING results for 2009 and 2008 include the CBPR business acquired in the 2008 third quarter. Net sales for 2009 increased 16% to $8.9 billion compared with $7.7 billion in 2008, and 69% compared with $5.2 billion in 2007. Operating profits were 95% higher in 2009 than in 2008 and more than double 2007 levels. Benefits from higher total year-over-year shipments, including the impact of the CBPR business, ($11 million), favorable operating costs ($294 million), and lower raw material and freight costs ($295 million) were partially offset by the effects of lower price realizations ($243 million), higher corporate overhead allocations ($85 million), incremental integration costs associated with the acquisition of the CBPR business ($3 million) and higher other costs ($7 million). Additionally, operating profits in 2009 included a gain of $849 million relating to alternative fuel mixture credits, U.S. plant closure costs of $653 million, and costs associated with the shutdown of the Etienne mill in France of $87 million.

NORTH AMERICAN INDUSTRIAL PACKAGING results include the net sales and operating profits of the CBPR business from the August 4, 2008 acquisition date. Net sales were $7.6 billion in 2009 compared with $6.2 billion in 2008 and $3.9 billion in 2007. Operating profits in 2009 were $791 million ($682 million excluding alternative fuel mixture credits, mill closure costs and costs associated with the CBPR integration) compared with $322 million ($414 million excluding charges related to the write-up of CBPR inventory to fair value, CBPR integration costs and other facility closure costs) in 2008 and $305 million in 2007.

Excluding the effect of the CBPR acquisition, containerboard and box shipments were lower in 2009 compared with 2008 reflecting weaker customer demand. Average sales price realizations were significantly lower for both containerboard and boxes due to weaker world-wide economic conditions. However, average sales margins for boxes

increased, reflecting a slower decline in box prices than in the raw material cost of containerboard, and CBPR integration benefits. Full-year input costs for wood, energy and chemicals were lower, although costs for fiber and energy increased significantly in the fourth quarter of 2009. Freight costs were also lower. Planned maintenance downtime costs decreased slightly from 2008 levels, and operating costs were significantly lower, particularly in the box plants, reflecting benefits from cost control initiatives. Lack-of-order downtime totaled 2.2 million tons, including approximately 450,000 tons related to the idled paper machine at the Valliant, Oklahoma mill and the late December shutdowns of the Albany, Oregon and Pineville, Louisiana mills in 2009, compared with 700,000 tons in 2008.

Looking forward to the first quarter of 2010, sales volumes are expected to be slightly higher than in the fourth quarter of 2009 and average sales price realizations are expected to improve by the end of the quarter, reflecting the impact of previously announced price increases for containerboard. However, input costs are expected to be significantly higher for energy as well as for wood and recycled fiber due to poor harvesting weather conditions in the U.S. South and strong competition for recycled fiber. Planned maintenance downtime costs will also be higher with outages scheduled at five mills. Manufacturing operating costs are expected to be lower, reflecting benefits of the mill closures in December and improved operations.

EUROPEAN INDUSTRIAL PACKAGING net sales for 2009 were $980 million compared with $1.2 billion in 2008, and $1.1 billion in 2007. Operating profits in 2009 were a loss of $30 million (a gain of $57 million excluding costs associated with the closure of the Etienne mill in France) compared with earnings of $64 million in 2008 and $67 million in 2007. Sales volumes in 2009 were lower than in 2008, principally reflecting weak customer demand for industrial packaging containers throughout the region. Sales margins improved as reductions in kraft and recycled containerboard costs were greater than declines in box prices. Input costs were favorable, primarily for energy, but operating costs were unfavorable. The operating loss in 2009 includes $87 million of costs associated with the closure of the Etienne mill in November 2009.

Entering the first quarter of 2010, sales volumes are expected to be lower, reflecting seasonally weaker demand for agricultural boxes and continued weak demand for industrial packaging boxes. Average sales price realizations for boxes are expected to

improve, but costs for containerboard are expected to increase.

ASIAN INDUSTRIAL PACKAGING net sales for 2009 were $325 million compared with $350 million in 2008 and $265 million in 2007. Operating profits in 2009 were about breakeven (earnings of $2 million excluding the impairment of an investment in a joint venture) compared with profits of $4 million in 2008 and $2 million in 2007.

Printing Papers

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, raw material and energy costs and freight costs.

PRINTING PAPERS net sales for 2009 decreased 17% from 2008 and 13% from 2007. Operating profits in 2009 were more than double profits in 2008 and 30% higher than in 2007. However, excluding alternative fuel mixture credits and plant closure costs, operating profits in 2009 were 37% lower than in 2008 and 45% lower than in 2007. Benefits from improved manufacturing operations ($144 million), lower raw material and energy costs ($130 million), lower freight costs ($61 million), favorable foreign exchange impacts ($22 million) and other items ($11 million) were more than offset by lower sales volumes and increased lack-of-order downtime ($215 million), lower average sales price realizations ($341 million) and an unfavorable mix of products sold ($82 million). Operating profits in 2009 included $884 million of alternative fuel mixture credits, $223 million of costs associated with the permanent shutdown of our Franklin mill and $34 million of other restructuring costs, while 2008 operating profits included a charge of $123 million for costs associated with the permanent shutdown of our Bastrop mill, a $107 million impairment charge to reduce the carrying value of the fixed assets at our Inverurie, Scotland mill and $30 million of costs associated with the shutdown of a paper machine at our Franklin mill. The printing papers segment took 1.4 million tons of downtime in 2009 including 1.1 million tons of lack-of-order downtime of which approximately 600,000 tons were related to the shutdowns of our Bastrop mill and a paper machine at our Franklin

mill in the fourth quarter of 2008. This compares with 635,000 tons of total downtime in 2008 of which 305,000 tons were lack-of-order downtime.

NORTH AMERICAN PRINTING PAPERS net sales in 2009 were $2.8 billion compared with $3.4 billion in 2008 and $3.5 billion in 2007. Operating earnings in 2009 were $746 million ($307 million excluding alternative fuel mixture credits and plant closure costs) compared with $405 million ($435 million excluding shutdown costs for a paper machine) in 2008 and $415 million in 2007. Sales volumes decreased significantly in 2009 compared with 2008 reflecting weak customer demand and reduced production capacity resulting from the shutdown of a paper machine at the Franklin mill in December 2008 and the conversion of the Bastrop mill to pulp production in June 2008. Average sales price realizations were lower reflecting slight declines for uncoated freesheet paper in domestic markets and significant declines in export markets. Margins were also unfavorably affected by a higher proportion of shipments to lower-margin export markets. Input costs, however, were favorable due to lower wood and chemical costs and significantly lower energy costs. Freight costs were also lower. Planned maintenance downtime costs in 2009 were comparable with 2008. Operating costs were favorable, reflecting cost control efforts and strong machine performance. Lack-of-order downtime increased to 525,000 tons in 2009, including 120,000 tons related to the shutdown of a paper machine at our Franklin mill in the 2008 fourth quarter, from 135,000 tons in 2008. Operating earnings in 2009 included $671 million of alternative fuel mixture credits, $223 million of costs associated with the shutdown of our Franklin mill and $9 million of other shutdown costs, while operating earnings in 2008 included $30 million of costs for the shutdown of a paper machine at our Franklin mill.

Looking ahead to 2010, first-quarter sales volumes are expected to increase slightly from fourth-quarter 2009 levels. Average sales price realizations should be higher, reflecting the full-quarter impact of sales price increases announced in the fourth quarter for converting and envelope grades of uncoated freesheet paper and an increase in prices to export markets. However, input costs for wood, energy and chemicals are expected to continue to increase. Planned maintenance downtime costs should be lower and operating costs should be favorable.

BRAZILIAN PAPERS net sales for 2009 of $960 million increased from $950 million in 2008 and $850 million in 2007. Operating profits for 2009 were $112 million compared with $186 million in 2008 and $174 million in 2007. Sales volumes increased in 2009 compared with 2008 for both paper and pulp reflecting higher export shipments. Average sales price realizations were lower due to strong competitive pressures in the Brazilian domestic market in the second half of the year, lower export prices and unfavorable foreign exchange rates. Margins were unfavorably affected by a higher proportion of lower margin export sales. Input costs for wood and chemicals were favorable, but these benefits were partially offset by higher energy costs. Planned maintenance downtime costs were lower, and operating costs were also favorable. Earnings in 2009 were adversely impacted by unfavorable foreign exchange effects.

Entering 2010, sales volumes are expected to be seasonally lower compared with the fourth quarter of 2009. Profit margins are expected to be slightly higher reflecting a more favorable geographic sales mix and improving sales price realizations in export markets, partially offset by higher planned maintenance outage costs.

EUROPEAN PAPERS net sales in 2009 were $1.3 billion compared with $1.7 billion in 2008 and $1.5 billion in 2007. Operating profits in 2009 of $92 million ($115 million excluding expenses associated with the closure of the Inverurie mill) compared with $39 million ($146 million excluding a charge to reduce the carrying value of the fixed assets at the Inverurie, Scotland mill to their estimated realizable value) in 2008 and $171 million in 2007. Sales volumes in 2009 were lower than in 2008 primarily due to reduced sales of uncoated freesheet paper following the closure of the Inverurie mill in 2009. Average sales price realizations decreased significantly in 2009 across most of Western Europe, but margins increased in Poland and Russia reflecting the effect of local currency devaluations. Input costs were favorable as lower wood costs, particularly in Russia, were only partially offset by higher energy costs in Poland and higher chemical costs. Planned maintenance downtime costs were higher in 2009 than in 2008, while manufacturing operating costs were lower. Operating profits in 2009 also reflect favorable foreign exchange impacts.

Looking ahead to 2010, sales volumes are expected to decline from strong 2009 fourth-quarter levels despite solid customer demand. Average sales price realizations are expected to increase over the quarter, primarily in Eastern Europe, as price increases

for uncoated freesheet paper and market pulp announced at the end of 2009 become effective. Input costs are expected to be higher due to wood supply constraints at the Kwidzyn mill and annual tariff increases on energy in Russia. Planned maintenance outage costs are expected to be about flat, while operating costs should be favorable.

ASIAN PRINTING PAPERS net sales were approximately $50 million in 2009 compared with approximately $20 million in both 2008 and 2007. Operating earnings increased slightly in 2009 compared with 2008, but were less than $1 million in all periods.

U.S. MARKET PULP net sales in 2009 totaled $575 million compared with $750 million in 2008 and $655 million in 2007. Operating earnings in 2009 were $140 million (a loss of $71 million excluding alternative fuel mixture credits and plant closure costs) compared with a loss of $156 million (a loss of $33 million excluding costs associated with the permanent shutdown of the Bastrop mill) in 2008 and earnings of $78 million in 2007.

Sales volumes in 2009 decreased from 2008 levels due to weaker global demand. Average sales price realizations were significantly lower as the decline in demand resulted in significant price declines for market pulp and smaller declines in fluff pulp. Input costs for wood, energy and chemicals decreased, and freight costs were significantly lower. Mill operating costs were favorable across all mills, and planned maintenance downtime costs were lower. Lack-of-order downtime in 2009 increased to approximately 540,000 tons, including 480,000 tons related to the permanent shutdown of our Bastrop mill in the fourth quarter of 2008, compared with 135,000 tons in 2008.

In the first quarter of 2010, sales volumes are expected to increase slightly, reflecting improving customer demand for fluff pulp, offset by slightly seasonally weaker demand for softwood and hardwood pulp in China. Average sales price realizations are expected to improve, reflecting the realization of previously announced sales price increases for fluff pulp, hardwood pulp and softwood pulp. Input costs are expected to increase for wood, energy and chemicals, and freight costs may also increase. Planned maintenance downtime costs will be higher, but operating costs should be about flat.

Consumer Packaging

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, freight costs, manufacturing efficiency and product mix.

CONSUMER PACKAGING net sales in 2009 decreased 4% compared with 2008 and increased 1% compared with 2007. Operating profits increased significantly compared with both 2008 and 2007. Excluding alternative fuel mixture credits and facility closure costs, 2009 operating profits were significantly higher than 2008 and 57% higher than 2007. Benefits from higher average sales price realizations ($114 million), lower raw material and energy costs ($114 million), lower freight costs ($21 million), lower costs associated with the reorganization of the Shorewood business ($23 million), favorable foreign exchange effects ($14 million) and other items ($12 million) were partially offset by lower sales volumes and increased lack-of-order downtime ($145 million) and costs associated with the permanent shutdown of the Franklin mill ($67 million). Additionally, operating profits in 2009 included $330 million of alternative fuel mixture credits.

NORTH AMERICAN CONSUMER PACKAGING net sales were $2.2 billion compared with $2.5 billion in 2008 and $2.4 billion in 2007. Operating earnings in 2009 were $343 million ($87 million excluding alternative fuel mixture credits and facility closure costs) compared with $8 million ($38 million excluding facility closure costs) in 2008 and $70 million in 2007.

Coated Paperboard sales volumes were lower in 2009 compared with 2008 reflecting weaker market conditions. Average sales price realizations were significantly higher, reflecting the full-year realization of price increases implemented in the second half of 2008. Raw material costs for wood, energy and chemicals were significantly lower in 2009, while freight costs were also favorable. Operating costs, however, were unfavorable and planned maintenance downtime costs were higher. Lack-of-order downtime increased to 300,000 tons in 2009 from 15,000 tons in 2008 due to weak demand. Operating results in 2009 include income of $330 million for alternative fuel mixture credits and $67 million of expenses for shutdown costs for the Franklin mill.

Foodservice sales volumes were lower in 2009 than in 2008 due to generally weak world-wide economic conditions. Average sales price realizations were

higher in the first half of the year, but declined during the second half of the year reflecting the pass-through to customers of lower resin input costs. However, average margins benefitted from a more favorable mix of products sold. Raw material costs were lower, primarily for resins. Freight costs were also favorable, while operating costs increased.

Shorewood sales volumes in 2009 declined from 2008 levels reflecting weaker demand in the home entertainment segment and a decrease in tobacco segment orders as customers have shifted production outside of the United States, partially offset by higher shipments in the consumer products segment. Average sales margins improved reflecting a more favorable mix of products sold. Raw material costs were higher, but were partially offset by lower freight costs. Operating costs were favorable, reflecting benefits from business reorganization and cost reduction actions taken in 2008 and 2009. Charges to restructure operations totaled $7 million in 2009 and $30 million in 2008.

Entering 2010, Coated Paperboard sales volumes are expected to increase, while average sales price realizations should be comparable to 2009 fourth-quarter levels. Raw material costs are expected to be significantly higher for wood, energy and chemicals, but planned maintenance downtime costs will decrease. Foodservice sales volumes are expected to remain about flat, but average sales price realizations should improve slightly. Input costs for resins should be higher, but will be partially offset by lower costs for bleached board. Shorewood sales volumes are expected to decline reflecting seasonal decreases in home entertainment segment shipments. Operating costs are expected to be favorable reflecting the benefits of business reorganization efforts.

EUROPEAN CONSUMER PACKAGING net sales in 2009 were $315 million compared with $300 million in 2008 and $280 million in 2007. Operating earnings in 2009 of $66 million increased from $22 million in 2008 and $30 million in 2007. Sales volumes in 2009 were higher than in 2008 reflecting increased shipments to export markets. Average sales margins declined due to increased shipments to lower-margin export markets and lower average sales prices in Western Europe.

Entering 2010, sales volumes for the first quarter are expected to remain strong. Average margins should improve reflecting increased sales price realizations and a more favorable geographic mix of products sold. Input costs are expected to be higher due to increased wood prices in Poland and annual energy tariff increases in Russia.

ASIAN CONSUMER PACKAGING net sales were $545 million in 2009 compared with $390 million in 2008 and $330 million in 2007. Operating earnings in 2009 were $24 million compared with a loss of $13 million in 2008 and earnings of $12 million in 2007. The improved operating earnings in 2009 reflect increased sales volumes, higher average sales margins and lower input costs, primarily for chemicals. The loss in 2008 was primarily due to a $12 million charge to revalue pulp inventories at our Shandong International Paper and Sun Coated Paperboard Co., Ltd. joint venture and start-up costs associated with the joint venture’s new folding box board paper machine.

Distribution

xpedx, our distribution 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 consumer advertising and promotional spending. Distribution’s margins are relatively stable across an economic cycle. 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.

DISTRIBUTION’S 2009 annual sales decreased 18% from 2008 and 11% from 2007 while operating profits in 2009 decreased 51% compared with 2008 and 54% compared with 2007.

Annual sales of printing papers and graphic arts supplies and equipment totaled $4.1 billion in 2009 compared with $5.2 billion in 2008 and $4.7 billion in 2007, reflecting weak economic conditions in 2009. Trade margins as a percent of sales for printing papers increased from 2008 but decreased from 2007 due to a higher mix of lower margin direct shipments from manufacturers. Revenue from packaging products was $1.3 billion in 2009 compared with $1.7 billion in 2008 and $1.5 billion in 2007. Trade margins as a percent of sales for packaging products were higher than in the past two years reflecting an improved product and service mix. Facility supplies annual revenue was $1.1 billion in 2009, essentially

even with 2008 and 2007 levels. Operating profit decreased to $50 million in 2009 from $103 million in 2008 and $108 million in 2007 primarily due to the weak U.S. economy. Earnings in 2009 benefited from a $17 million fourth-quarter favorable inventory valuation adjustment. In addition, operating earnings in 2009 include a $5 million charge for costs associated with the reorganization of the Company’s xpedx operations in New Jersey.

Looking ahead to the first quarter of 2010, sales volumes and earnings are expected to be seasonally lower. The business will continue to focus on efficiency and productivity initiatives to mitigate the effect of the demand decline. Also, the favorable inventory valuation adjustment that impacted fourth-quarter 2009 earnings will not recur in the first quarter of 2010.

Forest Products

Forest Products currently manages nearly 200,000 acres of forestlands in the United States. Operating results are driven by the timing and pricing of specific forestland tract sales. Future operations will continue to be driven by pricing and demand for forestland and real estate sales.

Sales in 2009 decreased 78% from 2008 and 91% from 2007. Operating profits were down 94% from 2008 and 95% from 2007. As part of the Company’s 2006 Transformation Plan, 5.6 million acres of forestlands were sold in 2006, resulting in a significant decline in forestland acreage. The Company intends to focus future operations on maximizing the value from the sale of its remaining forestland and real estate properties. Operating profits in 2008 included $261 million from the sale of 13,000 net acres of subsurface mineral rights in Louisiana. In the first quarter of 2010, a previously announced agreement to sell 143,000 acres expired in accordance with its terms and will not be completed.

Looking forward to 2010, the amount and timing of operating earnings will reflect the periodic sales of remaining acreage and mineral rights and can be expected to vary from quarter to quarter.

Specialty Businesses and Other

The Specialty Businesses and Other segment principally included the operating results of the Arizona Chemical business as well as certain smaller businesses. The Arizona Chemical business was sold in February 2007.

Equity Earnings, Net of Taxes – Ilim Holding S.A.

In October 2007, International Paper and Ilim Holding S.A. (“Ilim”) announced the completion of a 50:50 joint venture to operate in Russia. Due to the complex structure of Ilim’s operations, and the extended time required to prepare consolidated financial information in accordance with accounting principles generally accepted in the United States, the Company reports its share of Ilim’s operating results on a one-quarter lag basis. Accordingly, the accompanying consolidated statement of operations for the twelve months ended December 31, 2009 includes the Company’s 50% share of Ilim’s operating results for the period from October 1, 2008 through September 30, 2009, together with the results of other small equity investments, under the caption Equity earnings (losses), net of taxes. Ilim is reported as a separate reportable industry segment.

The Company recorded an equity loss, net of taxes, of $50 million for Ilim in 2009 compared with equity earnings, net of taxes, of $54 million in 2008. Operating results recorded in 2009 included a $25 million after-tax foreign exchange loss on the remeasurement of U.S. dollar-denominated debt, a $19 million charge to write-off project development expenses, and a $5 million provision for the write-down of assets. Operating results recorded in 2008 included a $4 million after-tax foreign exchange gain on the remeasurement of U.S. dollar-denominated debt, a $3 million after-tax charge to write off a share repurchase option, and a one-time $6 million after-tax charge reflecting the write-up of finished goods and work-in-process inventory to fair value as of the acquisition date. In August 2008, Ilim sold its 56% investment in the Saint Petersburg Cartonboard and Printing Mill (KPK) for $238 million. No gain or loss was realized by the Company on the sale of KPK because the fair value assigned to that business by the Company at the acquisition date was equal to the sales proceeds.

Sales volumes for the joint venture decreased year-over-year, principally for market pulp, reflecting significantly weaker customer demand in 2009, particularly in China, although demand strengthened in China in the second and third quarters of 2009. Average sales price realizations were lower in 2009 across all product lines. Softwood and hardwood

pulp prices declined sharply in the fourth quarter of 2008, but began to recover in the second quarter of 2009. Mill operating costs were favorable, and input costs for wood, chemicals and energy were also favorable. The Company received cash dividends from the joint venture of $51 million in December 2009 and $67 million in December 2008.

For Ilim’s 2009 fourth quarter, which will be reported in the Company’s 2010 first quarter, demand in China is expected to remain good, while demand in European and Russian markets should improve slightly. Average sales price realizations are expected to reflect slight improvement in pulp prices in China and Europe. However, operating earnings are expected to decrease due to higher input costs, mill downtime costs and unfavorable foreign exchange impacts.

A key element of the proposed joint venture strategy is a long-term investment program in which the joint venture will invest, through cash from operations and additional borrowings by the joint venture, approximately $1.5 billion in Ilim’s three mills over approximately five years. This planned investment in the Russian pulp and paper industry will be used to upgrade equipment, increase production capacity and allow for new high-value uncoated paper, pulp and corrugated packaging product development. This capital expansion strategy is expected to be initiated in the second half of 2010, subject to Ilim obtaining financing sufficient to fund the project.

LIQUIDITY AND CAPITAL RESOURCES

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, raw material and transportation 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 our 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.

Financing activities in 2009 focused on strengthening our balance sheet by reducing debt by $3.1 billion and refinancing $2.8 billion in long-term debt.

Cash Provided by Operations

Cash provided by continuing operations totaled $4.7 billion in 2009 compared with $2.7 billion for 2008 and $1.9 billion for 2007.

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 income and expense items, increased by $1.8 billion in 2009 versus 2008 driven mainly by $1.7 billion of cash received from alternative fuel mixture credits. This compares with a decrease of $135 million for 2008 versus 2007. Changes in working capital components, accounts receivable and inventory less accounts payable and accrued liabilities, contributed $479 million of cash in 2009 compared to $317 million of cash contributed in 2008, and a $539 million use of cash in 2007. Included in the 2009 changes in working capital is $211 million of cash from the sale of accounts receivable in Europe.

Alternative Fuel Mixture Credits

The U.S. Internal Revenue Code provides a tax credit for companies that use alternative fuel mixtures to produce energy to operate their businesses. The credit, equal to $0.50 per gallon of alternative fuel contained in the mixture, is refundable to the taxpayer. In January 2009, the Company received notification that its application to be registered as an alternative fuel mixer had been approved. For the year ended December 31, 2009, the Company filed claims for alternative fuel mixture credits covering eligible periods subsequent to November 2008 through October 25, 2009 totaling approximately $1.7 billion, all of which had been received in cash at December 31, 2009 and included in the calculation of U.S. federal taxable income. Additionally, the Company has recorded $379 million of alternative fuel mixture credits as a reduction of income taxes payable at December 31, 2009. The Company recorded these credits using the accrual method of accounting based on the estimated eligible volumes reflected in its filed claims. Accordingly, the accompanying consolidated statement of operations includes credits of approximately $2.1 billion for the year ended December 31, 2009 in Cost of products sold ($1.4 billion after taxes), representing eligible alternative fuel mixture credits earned through December 31, 2009, when the credit expired.

Investment Activities

Investment activities in 2009 were down significantly from 2008 reflecting reduced capital spending and no significant acquisitions. Capital spending for continuing operations was $534 million in 2009, or 36% of depreciation and amortization, compared with $1.0 billion in 2008, or 74% of depreciation and amortization, and $1.3 billion, or 119% of depreciation and amortization in 2007.

The following table shows capital spending for continuing operations by business segment for the years ended December 31, 2009, 2008 and 2007.

Capital expenditures in 2010 are currently expected to be about $800 million, or 55% of depreciation and amortization.

Acquisitions

On August 4, 2008, International Paper completed the acquisition of the assets of Weyerhaeuser Company’s Containerboard, Packaging and Recycling (CBPR) business for approximately $6 billion in cash, subject to post-closing adjustments. In June 2008, the Company had issued $3 billion of unsecured senior notes in anticipation of the acquisition. The remainder of the purchase price was financed through borrowings under a $2.5 billion bank term loan, $0.4 billion of borrowings under a receivables securitization program and existing cash balances. The CBPR operating results are included in International Paper’s North American Industrial Packaging business from the date of acquisition.

On August 24, 2007, International Paper completed the acquisition of Central Lewmar LLC, a privately held paper and packaging distributor in the United States, for $189 million. Central Lewmar’s results of operations have been included in International Paper’s consolidated financial statements since its acquisition.

On July 31, 2007, International Paper purchased the remaining shares of Compagnie Marocaine des

Cartons et des Papiers (CMCP) in Morocco for approximately $40 million. In October 2005, the Company had acquired approximately 65% of CMCP for approximately $80 million in cash plus assumed debt of approximately $40 million. The Moroccan packaging company is now wholly owned by International Paper and fully managed as part of the Company’s European Container business.

Exchanges

On February 1, 2007, the Company completed the non-cash exchange of certain pulp and paper assets in Brazil with Votorantim Celulose e Papel S.A. (VCP) that had been announced in the fourth quarter of 2006. The Company exchanged its in-progress pulp mill project and certain forestland operations, including approximately 100,000 hectares of surrounding forestlands in Tres Lagoas, Brazil, for VCP’s Luiz Antonio uncoated paper and pulp mill and approximately 55,000 hectares of forestlands in the state of Sao Paulo, Brazil. The exchange improved the Company’s competitive position by adding a globally cost-competitive paper mill, thereby expanding the Company’s uncoated freesheet capacity in Latin America and providing additional growth opportunities in the region. The exchange was accounted for based on the fair value of assets exchanged, resulting in the recognition in the 2007 first quarter of a pre-tax gain of $205 million ($159 million after taxes) representing the difference between the fair value and book value of the assets exchanged. This gain is included in Net losses (gains) on sales and impairments of businesses in the accompanying consolidated statement of operations.

Joint Ventures

In October 2007, International Paper and Ilim Holding S.A. announced the completion of the formation of a 50:50 joint venture to operate in Russia as Ilim Group. To form the joint venture, International Paper purchased 50% of Ilim Holding S.A. (Ilim) for approximately $620 million, including $545 million in cash and $75 million of notes payable, and contributed an additional $21 million in 2008. A key element of the proposed joint venture strategy is a long-term investment program in which the joint venture will invest, through cash from operations and additional borrowings by the joint venture, approximately $1.5 billion in Ilim’s three mills over approximately five years. This planned investment in the Russian pulp and paper industry will be used to upgrade equipment, increase production capacity and allow for new high-value uncoated paper, pulp and corrugated packaging product development. This capital

expansion strategy is expected to be initiated in the second half of 2010, subject to Ilim obtaining financing sufficient to fund the project.

International Paper is accounting for its investment in Ilim using the equity method of accounting. Due to the complex structure of Ilim’s operations, and the extended time required to prepare consolidated financial information in accordance with accounting principles generally accepted in the United States, the Company is reporting its share of Ilim’s results of operations on a one-quarter lag basis. The Company’s investment in Ilim is included in the caption Investments in the accompanying consolidated balance sheet.

Financing Activities

2009: Financing activities during 2009 included debt issuances of $3.2 billion and retirements of $6.3 billion, for a net reduction of $3.1 billion.

In December 2009, International Paper issued $750 million of 7.3% senior unsecured notes with a maturity date in November 2039. The proceeds from this borrowing, along with available cash, were used to repay the remaining $1 billion of the $2.5 billion long-term debt issued in connection with the CBPR acquisition. During 2009, additional payments related to this debt totaled approximately $1.4 billion. Also in connection with the above debt repayment, International Paper undesignated $1 billion of interest rate swaps entered into in 2008 that qualified as cash flow hedges, resulting in a $24 million loss. This loss was reclassified from Accumulated other comprehensive loss and included in Restructuring and other charges in the accompanying consolidated statement of operations.

Also in the fourth quarter of 2009, the Company entered into various fixed-to-floating interest rate swap agreements with a notional amount of approximately $1 billion to hedge existing debt. These interest rate swaps mature within a range of five to ten years. Subsequently in January 2010, approximately $600 million of these swaps and the $100 million swap entered into in August 2009 (discussed below) were terminated. These terminations were not in connection with early debt retirements. The resulting $2 million gain was recorded in Long-term debt and will be amortized as an adjustment of interest expense over the life of the underlying debt through April 2015.

In December 2009, International Paper Investments (Luxembourg) S.a.r.l, a wholly-owned subsidiary of

International Paper, repaid $214 million of notes with an interest rate of LIBOR plus 40 basis points and an original maturity in 2010. Other debt activity in the fourth quarter of 2009 included the repayment of approximately $235 million of notes with interest rates ranging from 4.0% to 9.375% and original maturities from 2009 to 2038.

Additional pre-tax early debt retirement costs of $34 million related to fourth-quarter debt repayments and swap activity are included in Restructuring and other charges in the accompanying consolidated statement of operations.

In August 2009, International Paper issued $1 billion of 7.5% senior unsecured notes with a maturity date in August 2021. The proceeds from this borrowing were used to repay approximately $942 million of notes with interest rates ranging from 5.125% to 7.4% and original maturities from 2012 to 2026.

Also during the third quarter in connection with these early debt retirements, interest rate swaps with a notional value of $520 million, including $500 million of swaps issued in the second quarter of 2009, were terminated or undesignated as effective fair value hedges, resulting in a gain of approximately $9 million. In addition, previously deferred net gains of $7 million related to earlier swap terminations were recognized in earnings. Pre-tax early debt retirement costs of $102 million related to these debt repayments, net of the gains on swap terminations, are included in Restructuring and other charges in the accompanying consolidated statement of operations.

Also in August 2009, International Paper entered into a fixed-to-floating interest rate swap agreement with a notional amount of $100 million due in 2015 to manage interest rate exposure.

In May 2009, International Paper issued $1 billion of 9.375% senior unsecured notes with a maturity date in May 2019. The proceeds from this borrowing were used to repay approximately $875 million of notes with interest rates ranging from 4.0% to 9.25% and original maturities from 2010 to 2012. Also during the second quarter, International Paper Company Europe Ltd, a wholly-owned subsidiary of International Paper, repaid $75 million of notes issued in connection with the Ilim Holdings S.A. joint venture that matured during the quarter. Pre-tax early debt retirement costs of $25 million related to second- quarter debt repayments and swap activity are included in Restructuring and other charges in the accompanying consolidated statement of operations.

In March 2009, Luxembourg borrowed $468 million of long-term debt with an initial interest rate of LIBOR plus a margin of 450 basis points that varied depending upon the credit rating of the Company, and a maturity date in March 2012. International Paper used the $468 million of proceeds from the loan and cash of approximately $170 million to repay a 500 million euro-denominated debt (equivalent to $638 million at date of payment) with an original maturity date in August 2009. As of the end of the third quarter of 2009, the $468 million loan was repaid. Other debt activities in the first quarter of 2009 included the repayment of approximately $366 million of notes with interest rates ranging from 4.25% to 5.0% that had matured.

Also in the first quarter of 2009, International Paper terminated an interest rate swap with a notional value of $100 million designated as a fair value hedge, resulting in a gain of $11 million that was deferred and recorded in Long-term debt in the accompanying consolidated balance sheet. As the swap agreement was terminated early, the resulting gain will be amortized to earnings over the life of the related debt through April 2016.

International Paper utilizes interest rate swaps to change the mix of fixed and variable rate debt and manage interest expense. At December 31, 2009, International Paper had interest rate swaps with a total notional amount of $3.2 billion and maturities ranging from one to nine years. During 2009, existing swaps increased the weighted average cost of debt from 6.55% to an effective rate of 6.67%. The inclusion of the offsetting interest income from short-term investments reduced this effective rate to 6.36%.

Other financing activities during 2009 included the issuance of approximately 2.2 million shares of treasury stock, net of restricted stock withholding, and 3.5 million shares of common stock for various plans. Payments of restricted stock withholding taxes totaled $10 million.

2008: Financing activities during 2008 included debt issuances of $6.0 billion and retirements of $696 million, for a net issuance of $5.3 billion.

In August 2008, International Paper borrowed $2.5 billion of long-term debt with an initial interest rate of LIBOR plus a margin of 162.5 basis points. The margin varied depending upon the credit rating of the Company. Debt issuance costs of approximately $50 million related to this borrowing were recorded in Deferred charges and other assets in the accompanying consolidated balance sheet and were being

amortized until the debt was repaid in 2009. Also in August 2008, International Paper borrowed approximately $395 million under its receivables securitization program. These funds, together with the $3 billion from unsecured senior notes borrowed in the second quarter (discussed below) and other available cash, were used for the CBPR business acquisition in August 2008. As of December 31, 2008, all of the borrowings under the receivables securitization program were repaid.

Also in the third quarter of 2008, International Paper repaid $125 million of the $2.5 billion long-term debt and repurchased $63.5 million of notes with interest rates ranging from 4.25% to 8.70% and original maturities from 2009 to 2038.

The Company also entered into a series of forward-starting floating-to-fixed interest rate swap agreements with a notional amount of $1.5 billion in anticipation of borrowing for the purchase of the CBPR business. The floating-to-fixed interest rate swaps were effective September 2008 and mature in September 2010. These forward-starting interest rate swaps were accounted for as cash flow hedges in accordance with ASC 815. In the fourth quarter of 2008, the Company terminated $550 million of these floating-to-fixed interest rate swap agreements resulting in a loss of approximately $17 million recorded in Accumulated other comprehensive loss in the accompanying consolidated balance sheet.

In the second quarter of 2008, International Paper issued $3 billion of unsecured senior notes consisting of $1 billion of 7.4% notes due in 2014, $1.7 billion of 7.95% notes due in 2018, and $300 million of 8.7% notes due in 2038. Debt issuance costs of approximately $20 million related to the new debt were recorded in Deferred charges and other assets in the accompanying consolidated balance sheet and were amortized over the terms of the respective notes.

Also in the second quarter of 2008, International Paper entered into a series of fixed-to-floating interest rate swap agreements, with a notional amount of $1 billion and maturities in 2014 and 2018, to manage interest rate exposures associated with the new $3 billion of unsecured senior notes. These interest rate swaps were terminated in December 2008 along with other existing fixed-to-floating interest rate swaps, resulting in a gain of $127 million that was deferred and recorded in Long-term debt in the accompanying consolidated balance sheet. This gain will be amortized over the life of the related debt through June 2018.

At December 31, 2008, International Paper had interest rate swaps with a total notional amount of $1.4 billion and maturities ranging from one to eight years. During 2008, existing swaps decreased the weighted average cost of debt from 6.41% to an effective rate of 6.07%. The inclusion of the offsetting interest income from short-term investments further reduced this effective rate to 5.21%.

Other financing activities during 2008 included the issuance of approximately 2.4 million shares of treasury stock for various incentive plans, including stock option exercises that generated approximately $1 million of cash and restricted stock that did not generate cash. Payments of restricted stock withholding taxes totaled $47 million.

2007: Financing activities during 2007 included debt issuances of $78 million and retirements of $875 million, for a net reduction of $797 million.

In December 2007, International Paper repurchased $96 million of 6.65% notes with an original maturity date of December 2037. Other reductions in the fourth quarter of 2007 included the repayment of $147 million of maturing 6.5% debentures, and the payment of $42 million for various environmental and industrial development bonds with coupon rates ranging from 4.25% to 5.75% that also matured within the quarter.

In October 2007, Luxembourg issued $75 million of long-term notes with an initial interest rate of LIBOR plus 100 basis points and a maturity date in April 2009, in connection with its investment in the Ilim Holding S.A. joint venture.

In the second quarter of 2007, International Paper repurchased $35 million of 5.85% notes with an original maturity in October 2012.

In March 2007, Luxembourg repaid $143 million of long-term debt with an interest rate of LIBOR plus 40 basis points and a maturity date in November 2010. Other debt activity in the first quarter included the repayment of $198 million of 7.625% notes that matured within the quarter.

At December 31, 2007, International Paper had interest rate swaps with a total notional amount of $1.7 billion and maturities ranging from one to nine years. During 2007, existing swaps increased the weighted average cost of debt from 6.51% to an effective rate of 6.62%. The inclusion of the offsetting interest income from short-term investments reduced this effective rate to 4.36%.

Other financing activity in 2007 included the repurchase of 33.6 million shares of International Paper common stock for approximately $1.2 billion, and a net issuance of 5.2 million shares under various incentive plans, including stock option exercises that generated $128 million of cash.

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 2006 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 should not consolidate these entities. 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 $5.1 billion of interest in the entities against $5.1 billion of International Paper debt obligations held by the entities as of December 31, 2009 and 2008.

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

Liquidity and Capital Resources Outlook for 2010

Capital Expenditures and Long-Term Debt

International Paper expects to be able to meet projected capital expenditures, service existing debt and meet working capital and dividend requirements during 2010 through current cash balances and cash from operations, supplemented as required by its various existing credit facilities.

At December 31, 2009, International Paper had approximately $1.9 billion in cash and $2.5 billion of committed liquidity facilities, including a $1.5 billion

contractually committed revolving bank credit agreement and $1.0 billion of commercial paper-based financing based on eligible receivable balances under a receivables securitization program, which management believes are adequate to cover expected operating cash flow variability during the current economic cycle. The credit agreements generally provide for interest rates at a floating rate index plus a pre-determined margin dependent upon International Paper’s credit rating. In November 2009, International Paper replaced its $1.5 billion revolving bank credit agreement that was scheduled to expire in March 2011 with a new $1.5 billion fully committed revolving bank credit agreement that expires in November 2012 and has a facility fee of 0.50% payable quarterly. The liquidity facilities also include up to $1.0 billion of commercial paper-based financings on eligible receivable balances ($816 million at December 31, 2009) under a receivables securitization program that was scheduled to expire in January 2010 with a facility fee of 0.75%. On January 13, 2010, the Company amended this program to extend the maturity date from January 2010 to January 2011. The amended agreement has a facility fee of 0.50% payable monthly. At December 31, 2009, there were no borrowings under either the bank credit agreements or receivables securitization program.

The Company was in compliance with all of its debt covenants at December 31, 2009. The Company’s financial covenants require the maintenance of a minimum net worth of $9 billion and a total-debt-to-capital ratio of less than 60%. Net worth is defined as the sum of common stock, paid-in capital and retained earnings, less treasury stock plus any cumulative goodwill impairment charges. The calculation also excludes accumulated other comprehensive loss. The total-debt-to-capital ratio is defined as total debt divided by the sum of total debt plus net worth. At December 31, 2009, International Paper’s net worth was $11.8 billion, and the total-debt-to-capital ratio was 43.3%.

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 flows. Funding decisions will be guided by our capital structure planning objectives. 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.

Maintaining an investment grade credit rating is an important element of International Paper’s financing strategy. At December 31, 2009, the Company held long-term credit ratings of BBB (negative outlook) and Baa3 (negative outlook) and short-term credit ratings of A-3 and P-3 by S&P and Moody’s, respectively.

On February 5, 2010, Moody’s Investor Services reduced its credit rating of senior unsecured long-term debt of The Royal Bank of Scotland N.V. (formerly ABN AMRO Bank N.V.), which had issued letters of credit that support $1.4 billion of installment notes received in connection with the Company’s 2006 sale of forestlands. Following this sale, the installment notes were contributed to third-party entities that used them as collateral for borrowings from a third-party lender. The related loan agreements require that if the credit rating of any bank issuing letters of credit is downgraded below a specified level, these letters of credit must be replaced within 60 days by letters of credit from another qualifying institution. The Company expects that the issuer of installment notes will complete this replacement within the required 60-day period.

Contractual obligations for future payments under existing debt and lease commitments and purchase obligations at December 31, 2009, were as follows: