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, 2010, the Company operated 20 pulp, paper and packaging mills, 144 converting and packaging plants, 19 recycling plants and three bag facilities. Production facilities at December 31, 2010 in Europe, Asia, Latin America and South America included eight pulp, paper and packaging mills, 67 converting and packaging plants, and two recycling plants. We distribute printing, packaging, graphic arts, maintenance and industrial products principally through over 224 distribution branches in the United States and 38 distribution branches located in Canada, Mexico and Asia. At December 31, 2010, we owned or managed approximately 250,000 acres of forestland 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 five segments: Industrial Packaging; Printing Papers; Consumer Packaging; Distribution; and Forest Products. Beginning on January 1, 2011, the Forest Products business will no longer be reported by the Company as a separate industry segment due to the immateriality of the results of the remaining business on the Company’s consolidated financial statements. A description of these business segments can be found on pages 26 and 27 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 2006 through 2010, International Paper’s capital expenditures approximated $4.7 billion, excluding

mergers and acquisitions. These expenditures reflect our continuing efforts to improve product quality and environmental performance, as well as lower costs, maintain reliability of operations and improve forestlands. Capital spending for continuing operations in 2010 was approximately $775 million and is expected to be approximately $1.2 to $1.3 billion in 2011. You can find more information about capital expenditures on page 34 of Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Discussions of acquisitions can be found on pages 34 and 35 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 23 and 24 of Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

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

FINANCIAL INFORMATION CONCERNING INDUSTRY SEGMENTS

The financial information concerning segments is set forth in Note 18 Financial Information by Industry Segment and Geographic Area on pages 89 through 91 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 in Note 18 Financial Information by Industry Segment and Geographic Area on pages 90 and 91 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 18 through 33 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 26 and 27 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 an interest in ArborGen, Inc., a joint venture with certain other forest products 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 $12 million in 2010, $13 million in 2009 and $22 million in 2008. The decrease in cost beginning 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

International Paper is subject to extensive federal and state environmental regulation as well as similar regulations internationally. Our continuing objectives include: (1) controlling emissions and discharges from our facilities into the air, water and groundwater to avoid adverse impacts on the environment, and (2) maintaining compliance with applicable laws and regulations. A total of $62 million was spent in 2010 for capital projects to control environmental releases into the air and water, and to assure environmentally sound management and disposal of

waste. We expect to spend approximately $90 million in 2011 for similar capital projects.

In the U.S., the Environmental Protection Agency (EPA) proposed or finalized a number of new rules, including Greenhouse Gas Mandatory Reporting (see Climate Change section), Boiler MACT (see below), and more restrictive National Ambient Air Quality Standards (NAAQSs). During 2010, new NAAQSs were promulgated for nitrogen oxide (NOx) and sulfur dioxide (SO₂) and we anticipate that over the next 12-18 months additional NAAQSs will also be promulgated. Once implemented these rules could require significant investments of capital and/or operational changes that could potentially have a material impact on International Paper.

In June 2010, the EPA published four inter-related proposed rules commonly and collectively referred to as “Boiler MACT.” As proposed, these rules require owners of specified boilers to meet very strict air emission standards for certain substances. The promulgation of these rules has been subject to litigation among various parties and the EPA over a period of several years. In late December 2010, the EPA filed a motion with the U.S. District Court for the District of Columbia to further extend the time to promulgate the Boiler MACT rules for an additional 15 months to take into account the voluminous amount of new data EPA received in the comment period. On January 20, 2011, the Court denied EPA’s request and granted only one additional month (until February 21, 2011) to complete the rulemaking. On that same day, EPA announced in a press release that it will issue rules by the court-imposed deadline but indicated that the rules “will be significantly different” than previously proposed. Given EPA’s press release, International Paper cannot speculate on what the rules will require, or their impact on the amount or timing of any related future capital expenditures. The amount we will spend for environmental control projects in future years will also depend on other new laws and regulations and changes in rules that are likely to be promulgated, such as NAAQSs.

Recognizing these many uncertainties, our forecasts include an estimate of future expenditures that may be required for Boiler MACT and other regulatory initiatives. These amounts represent our current best estimate of future expenditures, which we believe are likely to change once the regulatory landscape becomes clearer. Our preliminary estimate for environmental control expenditures is approximately $300 million for 2012 and approximately $350 million for 2013. When regulatory requirements regarding

Boiler MACT become final, including likely subsequent legal challenges, the Company’s environmental, manufacturing and legal professionals will need time to assess fully the potential impacts on our Company before we will be able to provide a more precise estimate of future environmental control expenditures.

CLIMATE CHANGE

Since 1997, when an international conference on global warming concluded with an agreement known as the Kyoto Protocol, which called for reductions of certain emissions that may contribute to increases in atmospheric greenhouse gas concentrations, there have been a range of international, national and sub-national regulations proposed or implemented focusing on greenhouse gas reduction. These actual or proposed regulations apply currently or will apply in countries where we currently have, or may in the future have, manufacturing facilities or investments.

While the European Union (EU) has ratified the Kyoto Protocol, the framework of the Kyoto Protocol does not apply to “underdeveloped nations.” Three countries where we have operations, Brazil, Morocco, and China, are considered underdeveloped nations by the Kyoto Protocol. Although not subject to the Kyoto Protocol, Brazil and China may adopt greenhouse gas regulations in the future that may have a material effect on our operations in these countries. Unless extended, the Kyoto Protocol expires in 2012. A successor to the Kyoto Protocol is under negotiation at the international level. Due to the lack of clarity around the post-2012 climate control regime, it is not possible at this time to estimate with any certainty the potential impacts of future international agreements on International Paper’s operations.

Under the European Emissions Trading System (EUETS), the EU has committed to greenhouse gas reductions. International Paper had two sites covered by the EUETS in 2010. While these measures did not have an adverse effect on our European operations in 2010, nor are they expected to have such an impact in 2011, they may have a material adverse effect in the future.

The U.S. has not ratified the Kyoto Protocol nor have efforts in the U.S. Congress to legislate the control of greenhouse gas (GHG) emissions been successful. To date, the activity in the U.S. has been spearheaded by the U.S. EPA and, to some extent, by the states. Pursuant to its GHG Mandatory Reporting

Rule promulgated in 2009, EPA began a process to collect data on emitters of greater than 25,000 tons of greenhouse gas per year. Twenty of our U.S. facilities are covered by and will make reports as required under this new rule. We do not believe that the reporting rule will have a material impact on our operations. Additionally, the EPA has indicated that it will propose New Source Performance Standards (NSPS) for various industry sectors which will limit GHG emissions from certain sources. Currently, the EPA has not identified the pulp and paper industry in the first phase of sectors to be covered by the new standards. However, we anticipate that, at some future time, pulp and paper sources will be subject to new NSPS rules. It is uncertain what impacts, if any, future NSPS will have on International Paper’s operations.

Some U.S. states have considered legal measures to require the reduction of emissions of greenhouse gases by companies and public utilities, primarily through the planned development of greenhouse gas emission inventories or regional greenhouse gas cap-and-trade programs. One such state is California where International Paper has one site subject to California’s GHG regulatory plan. The final California rules are still being developed and do not take effect until 2012. Until the rules are finalized, it is unknown whether there will be any adverse impact on our California facility.

It is difficult to predict whether passage of climate control legislation or other regulatory initiatives by Congress or various U.S. states, or the adoption of regulations by the EPA or analogous state agencies that restrict emissions of greenhouse gases in areas in which we conduct business, may have a material effect on our operations in the U.S. In addition to possible direct impacts, future legislation and regulation could have indirect adverse effects on International Paper, such as higher prices for transportation, energy and other inputs, as well as more protracted air permitting processes, causing delays and higher costs to implement capital projects.

International Paper has controls and procedures in place to stay adequately informed about developments concerning possible climate change legislation and regulation in the U.S. and in other countries where we operate to ensure we continue to assess whether such legislation or regulation may have a material adverse effect on the Company, its operations or financial condition, and whether we have any related disclosure obligations.

In summary, regulation of greenhouse gases continues to evolve in various countries in which we do business. While it is likely that there will be increased regulation relating to greenhouse gases and climate change, at this time it is not reasonably possible to estimate either a timetable for the implementation of any new regulations or our costs of compliance.

Additional information regarding climate change and International Paper, including our carbon footprint, is available at http://internationalpaper.com/US/EN/
Company/Sustainability/Climate.html.

EMPLOYEES

As of December 31, 2010, we had approximately 59,500 employees, 36,120 of whom were located in the United States. Of the U.S. employees, approximately 23,460 are hourly, with unions representing approximately 13,920 employees. Approximately 10,000 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 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.

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. In March 2010, International Paper and the USW reached an agreement to integrate into the 2008 Converting Agreement the 20 facilities we acquired from Weyerhaeuser Company in August 2008.

These two agreements, the Mill and Converting 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 2010, labor agreements for four mills expired. Three of the four, Port Hueneme, California, Red River, Louisiana and Riegelwood, North Carolina are

covered by the 2007 Mill Agreement. Local agreements at Port Hueneme and Red River renewed with the same terms. Minor changes were negotiated at Courtland, Alabama (non-exempt union not covered by the 2007 Mill Agreement) and Riegelwood.

During 2011, labor agreements that are scheduled to expire at the mills in Georgetown, South Carolina, Riverdale (Selma), Alabama and Vicksburg, Mississippi will automatically renew under the terms of the 2007 Mill Agreement if new agreements are not reached.

With regard to converting facilities, during 2010 International Paper negotiated six contracts covering 13 locations represented by IBT District Council 2. Labor agreements were renewed at Omaha, Nebraska, Springhill, Louisiana, Butler, Indiana, Forest Park, Georgia, Three Rivers, Michigan and Mount Carmel, Pennsylvania pursuant to the 2008 Converting Agreement. Labor agreements were negotiated at two additional converting facilities covered by the 2008 Converting Agreement (Magnolia, Mississippi and Bellmawr, New Jersey). Labor agreements also were reached at seven additional converting, distribution and consumer packaging locations that were not covered by the 2008 Converting Agreement. A one year extension was negotiated at Louisville, Kentucky.

Additionally during 2010, International Paper announced the shutdown of facilities in Jonesboro, Arkansas, Newport News, Virginia, Spartanburg, North Carolina and Bellevue, Washington. Effects of the closings were bargained where applicable.

During 2011, 20 labor agreements are scheduled to be negotiated in 19 converting, distribution and consumer packaging facilities. Seven of these agreements will automatically renew under the terms of the 2008 Converting Agreement if new agreements are not reached. Thirteen of these agreements are not covered by the 2008 Converting Agreement.

EXECUTIVE OFFICERS OF THE REGISTRANT

John V. Faraci, 61, chairman and chief executive officer since 2003. Mr. Faraci joined International Paper in 1974.

John N. Balboni, 62, senior vice president and chief information officer since 2005. Mr. Balboni joined International Paper in 1978.

C. Cato Ealy, 54, 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, 51, 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. Mr. Joseph 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. Joseph joined International Paper in 1983.

Thomas G. Kadien, 54, 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. Mr. Kadien joined International Paper in 1978.

Paul J. Karre, 58, 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, 50, 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. Ms. Laschinger joined International Paper in 1992.

Tim S. Nicholls, 49, 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. Mr. Nicholls joined International Paper in 1991.

Maximo Pacheco, 58, 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, 51, senior vice president – industrial packaging since 2008. Ms. Roberts previously served

as senior vice president – IP packaging solutions from 2005 to 2008. Ms. Roberts joined International Paper in 1981.

Maura A. Smith, 55, senior vice president, general counsel, corporate secretary and global government relations since 2003. Ms. Smith joined International Paper in 2003.

Mark S. Sutton, 49, 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. Mr. Sutton joined International Paper in 1984.

Terri L. Herrington, 55, vice president – finance and controller since February 2011. Ms. Herrington previously served as vice president, finance – consumer packaging from 2009 to 2011 and vice president – internal audit from 2007 to 2009. Ms. Herrington previously served as director of audit for finance and financial control for BP p.l.c. from 2003 to 2007. Ms. Herrington joined International Paper in 2007.

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 10 Commitments and Contingent Liabilities on page 71 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. Factors

which could cause actual results to differ relate to: (i) increases in interest rates; (ii) industry conditions, including but not limited to changes in the cost or availability of raw materials, energy and transportation costs, competition we face, cyclicality and changes in consumer preferences, demand and pricing for our products; (iii) global economic conditions and political changes, including but not limited to the impairment of financial institutions, changes in currency exchange rates, credit ratings issued by recognized credit rating organizations, the amount of our future pension funding obligation, changes in tax laws and pension and health care costs; (iv) unanticipated expenditures related to the cost of compliance with existing and new environmental and other governmental regulations and to actual or potential litigation; and (v) whether we experience a material disruption at one of our manufacturing facilities and risks inherent in conducting business through a joint venture. 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. Product or pricing strategies pursued by competitors could negatively impact our financial results.

RISKS RELATING TO MARKET AND ECONOMIC FACTORS

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 OPERATIONS. 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.

OUR PENSION PLANS ARE CURRENTLY UNDERFUNDED, AND OVER TIME WE MAY 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, 2010 was $1.5 billion. The amount and timing of future contributions will depend upon a number of factors, principally the actual earnings and changes in values of plan assets and changes in interest rates.

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

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 future remediation requirements and compliance with existing and new laws and requirements, including with global climate change laws and regulations, Boiler MACT and National Ambient Air Quality Standards (NAAQSs), 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 business or 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 our corporate headquarters or one of our manufacturing facilities could prevent us from meeting customer demand, reduce our sales and/or negatively impact our financial condition. 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 business and 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 39.

ITEM 1B. UNRESOLVED STAFF COMMENTS

None.

ITEM 2. PROPERTIES

FORESTLANDS

As of December 31, 2010, the Company owned or managed approximately 250,000 acres of forestlands 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).

MILLS AND PLANTS

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

The Company’s facilities are in good operating condition and are suited for the purposes for which they are presently being used. We continue to study the economics of modernization or adopting other alternatives for higher cost facilities.

CAPITAL INVESTMENTS AND DISPOSITIONS

Given the size, scope and complexity of our business interests, we continually examine and evaluate a wide variety of business opportunities and planning alternatives, including possible acquisitions and sales or other dispositions of properties. You can find a discussion about the level of planned capital investments for 2011 on page 34, and dispositions and restructuring activities as of December 31, 2010, on pages 23 and 24 of Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations, and on pages 61 through 64 and pages 66 and 67 of Item 8. Financial Statements and Supplementary Data.

ITEM 3. LEGAL PROCEEDINGS

Information concerning the Company’s legal proceedings is set forth on pages 45 and 46 of Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations, and on pages 71 and 72 of Item  8. Financial Statements and Supplementary Data.

ITEM 4. REMOVED AND RESERVED

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 2010 and 2009 are set forth on page 92 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 18, 2011, there were approximately 16,886 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 30, 2005 with a $100 investment in each of our ROI Peer Group and the S&P 500 also made at market close on December 30, 2005. The graph portrays total return, 2005–2010, 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 and 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

2010:

2009:

2008:

2007:

2006:

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

EXECUTIVE SUMMARY

International Paper experienced a transition year in 2010, as we emerged from one of the worst recessions in decades to end the year with our highest fourth-quarter earnings per share in over ten years. The strong fourth quarter wrapped up a strong 2010. Our earnings per share before special items were more than twice what they were in 2009. The levers for improvement during 2010 included higher price realizations, volume recovery, better operations, and a significantly higher contribution from our Ilim joint venture in Russia. The primary downside came from input costs, where we saw pressure on virgin and recycled fiber costs. However, we were able to overcome these higher costs and expand our margins during 2010. We saw improvements across all of our segments and in each of our geographic regions.

The health of our balance sheet remains strong. We generated free cash flow before dividends of approximately $1.7 billion (see reconciliation on page 33), in spite of increased capital spending. We also continued to reduce debt, made voluntary contributions to our qualified U.S. pension plan totaling $1.15 billion and increased our annual dividend from $0.10 to $0.75 through an increase early in 2010 and another in early 2011.

Looking ahead, we believe that we continue to operate in a recovering, but not fully recovered, economy. Therefore we expect 2011 to be a year of accelerating improvement for International Paper. The first quarter has traditionally been seasonally slow and we expect first quarter results to be slightly lower than the fourth quarter of 2010, with stable volumes, prices and operations offset by rising input costs. We will also see a higher contribution from Ilim during the first quarter, which will represent their fourth quarter 2010 operations as they are reported on a one-quarter lag. As the global economy continues to recover, we expect price realizations and volumes to improve throughout 2011.

Earnings per share attributable to International Paper Company common shareholders before special items is a non-GAAP measure. Diluted earnings (loss) per share attributable to International Paper Company shareholders is the most direct comparable GAAP measure. The Company calculates

earnings per share before special items by excluding the after-tax effect of items considered by management to be unusual from the earnings reported under GAAP. Management uses this measure to focus on on-going operations, and believes that it is useful to investors because it enables them to perform meaningful comparisons of past and present operating results. The Company believes that using this information, along with the most direct comparable GAAP measure, provides for a more complete analysis of the results of operations. The following is a reconciliation of earnings per share attributable to International Paper Company common shareholders before special items to diluted earnings (loss) per share attributable to International Paper Company common shareholders.

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 five segments: Industrial Packaging, Printing Papers, Consumer Packaging, Distribution, and Forest Products.

The following table shows the reconciliation of industry segment operating profits to net earnings (loss) attributable to International Paper Company for each of the last three years:

Industry segment operating profits of $1.7 billion were $674 million lower in 2010 than in 2009 due principally to a $344 million net loss from special items in 2010 compared with an $898 million net gain in 2009 (which included the impact of alternative fuel mixture credits). Operationally, the impacts of higher energy and raw material costs ($548 million), higher distribution costs ($95 million), a bad debt provision for a large envelope company ($17 million), higher mill outages ($47 million), and other items ($15 million) were more than offset by higher average prices ($798 million), higher sales volumes ($269 million), improved operating performance and a more favorable product mix ($154 million), and higher earnings from land and mineral sales ($69 million).

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

Corporate items, net, of $226 million of expense in 2010 were higher than the $181 million of expense in 2009 due primarily to higher pension expenses. The increase in 2009 versus $103 million of expense in 2008 was due to higher pension expenses.

Corporate special items, including restructuring and other items, impairments of goodwill, gains on Transformation Plan forestland sales and net losses (gains) on sales and impairments of businesses, were a loss of $45 million in 2010 compared with a loss of $334 million in 2009 and a loss of $1.9 billion in 2008. The loss in 2008 includes $1.8 billion of goodwill impairment charges.

Interest expense, net, was $608 million in 2010 compared with $669 million in 2009 and $492 million in 2008. The decrease in 2010 reflects the repayment of $3.1 billion of debt in 2009. The increase in 2009 reflects 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 2010 income tax provision of $221 million includes a $14 million tax expense for an incentive compensation deferred tax write-off, a $32 million tax expense for a Medicare Part D deferred tax write-off and a $40 million net tax benefit related to cellulosic bio-fuel credits. 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. Excluding the tax effect of all special items, taxes as a percent of pre-tax earnings were 30% in both 2010 and 2009 compared with 31.5% in 2008. 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.

Liquidity and Capital Resources

For the year ended December 31, 2010, International Paper generated $1.6 billion of cash flow from continuing operations compared with $4.7 billion, including $1.7 billion from alternative fuel mixture credits, in 2009. Capital spending for 2010 totaled $775 million, or 53% of depreciation and amortization expense. Cash expenditures for acquisitions totaled $152 million, while net reductions of debt totaled $383 million. 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.

We expect to generate strong free cash flow again in 2011 and will continue our balanced use of cash through investments in capital projects, the continued reduction of total debt, including the Company’s unfunded pension obligation, returning value to shareholders (including the funding of our previously announced dividend increases) and strengthening our businesses through acquisitions, as appropriate.

Capital spending for 2011 is targeted at $1.2 to $1.3 billion, or about 86% to 93% 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 page 45 and Note 10 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, 2010, and the major factors affecting these results compared to 2009 and 2008.

RESULTS OF OPERATIONS

For the year ended December 31, 2010, International Paper reported net sales of $25.2 billion, compared with $23.4 billion in 2009 and $24.8 billion in 2008. International net sales (including U.S. exports) totaled $7.5 billion, or 30% of total sales in 2010. This compares to international net sales of $6.4 billion in 2009 and $6.9 billion in 2008.

Full year 2010 net earnings attributable to International Paper Company totaled $644 million ($1.48 per share), compared with net earnings of $663 million ($1.55 per share) in 2009 and a loss of $1.3 billion ($3.05 per share) in 2008. 2008 amounts include the results of discontinued operations.

Earnings from continuing operations attributable to International Paper Company after taxes in 2010 were $644 million, including $246 million of net special item charges, compared with income of $663 million, including $285 million of special item credits in 2009, and a loss of $1.3 billion in 2008, including $2.1 billion of net special item charges. Compared with 2009, higher mill outage costs, increased average raw material costs, higher distribution costs, a bad debt provision for a large envelope company, higher corporate expenses, and a net special items expense in 2010 compared with a net gain in 2009 were partially offset by the impact of increased average sales price realizations, higher sales volumes, favorable operating performance, higher earnings from land and mineral sales, and lower net interest expense. Additionally, 2010 results included higher equity earnings, net of taxes, relating to the Company’s investment in Ilim Holdings, SA.

See Industry Segment Results on pages 27 through 33 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.

Income Taxes

A net income tax provision of $221 million was recorded for 2010, including a $14 million tax expense and a $32 million tax expense for incentive compensation and Medicare Part D deferred tax write-offs, respectively, and a net $40 million tax benefit related to cellulosic bio-fuel tax credits. See discussion on pages 33 and 34. Excluding these items and the tax effect of other special items, the tax provision was $364 million, or 30% of pre-tax earnings before equity earnings.

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 audits. 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.

Equity Earnings, Net of Taxes

Equity earnings, net of taxes in 2010, 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 32 and 33).

Corporate Items and Interest Expense

Corporate items totaled $226 million of expense for the twelve months ended December 31, 2010 compared with $181 million in 2009 and $103 million in 2008. The increase in 2010 reflects higher supply chain initiative expenses and higher pension expense. The increase in 2009 from 2008 principally reflects higher pension expense.

Net interest expense totaled $608 million in 2010, $669 million in 2009 and $492 million in 2008. The decrease from 2010 to 2009 reflects the repayment of $3.1 billion of debt in 2009. The increase from 2008 to 2009 reflects 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 $21 million in 2010 compared with $18 million in 2009 and $3 million in 2008. The increases in 2010 and 2009 reflect higher earnings for the International Paper & Sun Containerboard Co., Ltd. joint ventures.

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.

2010: During 2010, corporate restructuring and other charges totaling $52 million before taxes ($32 million after taxes) were recorded. These charges included:

In addition, restructuring and other charges totaling $342 million before taxes ($210 million after taxes) were recorded in the Industrial Packaging, Printing Papers and Consumer Packaging industry segments including:

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:

A further discussion of restructuring and other charges can be found in Note 4 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.

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 2010 or 2009.

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 gain of $23 million ($13 million after taxes) in 2010, a pre-tax loss of $59 million ($56 million after taxes) in 2009 and a pre-tax loss of $106 million ($83 million after taxes) in 2008. The principal components of these gains/losses were:

2010: During the fourth quarter of 2010, the Company recorded a pre-tax gain of $25 million ($15 million after taxes) as a result of the partial redemption of the 10% interest the Company retained in its Arizona Chemical business after the sale of the business in 2006. The Company received $37 million in cash from the redemption of this interest.

Also during the fourth quarter of 2010, a $2 million charge, before and after taxes, was recorded to further write down the long-lived assets of the Company’s Inverurie, Scotland mill which was closed in March 2009.

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 to further write down the long-lived assets of the Company’s Etienne, France mill which was closed at the end of November 2009, to their estimated fair value. In addition, a pre-tax charge of $3 million ($0 million after taxes) was recorded for other items.

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.

Industry Segment Operating Profits

Industry segment operating profits of $1.7 billion in 2010 decreased from $2.4 billion in 2009, primarily due to a $344 million net loss from special items in 2010 compared with an $898 million net gain in 2009 (which included the impact of alternative fuel mixture credits). The benefits from higher average prices ($798 million), higher sales volumes ($269 million), improved operating performance and a more favorable product mix ($154 million), and higher earnings from land sales ($69 million) were offset by the impacts of higher energy and raw material costs ($548 million), higher distribution costs ($95 million), a bad debt provision for a large envelope company ($17 million), higher mill outages ($47 million), and other items ($15 million).

Lack-of-order downtime in 2010 decreased to approximately 170,000 tons. In addition, capacity was reduced by approximately 2.1 million tons associated with the permanent shutdowns of the Albany, Oregon and Pineville, Louisiana mills and the shutdown of a paper machine at our Valliant, Oklahoma mill in December 2009 and the permanent shutdown of the Franklin, Virginia mill in April 2010. Lack-of-order downtime in 2009 was approximately 3.6 million tons including approximately 450,000 tons associated with the permanent shutdown of the Albany, Oregon and Pineville, Louisiana mills and the shutdown of a paper machine at our Valliant, Oklahoma mill and approximately 600,000 tons associated with the permanent shutdown of our Bastrop, Louisiana mill and the shutdown of an uncoated paper machine at our Franklin, Virginia mill in 2008.

Looking ahead to the 2011 first quarter, demand for North American and European paper and packaging products will likely remain stable while a seasonal decrease in paper demand is expected in Brazil. Average sales prices are expected to be steady with some pressure on prices to export markets. Input costs in North America are expected to increase for purchased pulp and chemicals. Planned maintenance downtime costs should be slightly lower reflecting a decrease in Europe, partially offset by increased spending in North America. Earnings from our xpedx distribution business are expected to reflect seasonally lower sales volumes, but improved average margins. Equity earnings from our Ilim joint venture are expected to increase due to improving market demand and higher average sales price realizations for linerboard.

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 127 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 fiber containerboard mill in Morocco and 20 container plants in France, Italy, Spain, and Morocco. In Asia, our operations include 21 container plants in China and additional container plants in Indonesia, Malaysia, Singapore, and 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 world’s leading producers of printing and writing papers. Products in this segment include uncoated and coated papers, market pulp and uncoated bristols.

Uncoated Papers: This business produces papers for use in 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 4.9 million tons annually. Brazilian operations func-

tion 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 345,000 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 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 120 warehouse locations and 128 retail stores in the U.S., Mexico and Canada.

Forest Products

International Paper sold our remaining land portfolio in 2010 and has completed the monetization of our forest land and realty holdings.

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 include the CBPR business acquired in the 2008 third quarter. Net sales for 2010 increased 11% to $9.8 billion compared with $8.9 billion in 2009, and 28% compared with $7.7 billion in 2008. Operating profits were 9% higher in 2010 than in 2009 and more than double 2008 levels. Excluding alternative fuel mixture credits, facility closure costs and costs associated with the CBPR integration, operating profits in 2010 were 14% higher than in 2009 and 75% higher than in 2008. Benefits from higher sales volumes and decreased

lack-of-order downtime ($162 million), the effects of higher sales price realizations ($313 million), favorable operating costs ($40 million) and lower other costs ($22 million) were partially offset by less favorable mix ($40 million), higher planned maintenance downtime costs ($16 million) and higher raw material and freight costs ($375 million). Additionally, operating profits in 2010 included plant closure costs of $19 million, while operating profits in 2009 included a gain of $849 million relating to alternative fuel mixture credits, U.S. plant closure costs of $653 million, integration costs associated with the acquisition of the CBPR business of $87 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 since the August 4, 2008 acquisition date. Net sales were $8.4 billion in 2010 compared with $7.6 billion in 2009 and $6.2 billion in 2008. Operating profits in 2010 were $763 million ($776 million excluding facility closure costs) compared with $791 million ($682 million excluding alternative fuel mixture credits, mill closure costs and costs associated with the CBPR integration) in 2009 and $322 million ($414 million excluding charges related to the write-up of the CBPR inventory to fair value, CBPR integration costs and other facility closure costs) in 2008.

Sales volumes increased in 2010 compared with 2009 due to stronger customer demand for boxes and for exported linerboard. Average sales price realizations were significantly higher reflecting the impact of 2010 announced price increases for domestic and exported containerboard. Average sales margins for boxes decreased as box sales price increases were outpaced by increases in the raw material cost of containerboard. Input costs were sharply higher, primarily for recycled fiber, but also for wood and energy, while chemical costs decreased. Freight costs were also higher. Planned maintenance downtime costs increased from 2009 levels, while operating costs were significantly lower reflecting the fixed cost savings from the closures of the Albany, Oregon and Pineville, Louisiana mills in the 2009 fourth quarter and the realization of cost reduction and synergy initiatives in the box plants. Lack-of-order downtime in 2010 was about 130,000 tons in addition to a capacity reduction of about

1.5 million tons associated with the closures of the Albany, Oregon and Pineville, Louisiana mills and the idling of a paper machine at the Valliant mill in December 2009. Lack-of-order downtime in 2009 was about 2.2 million tons including 450,000 tons related to the idled paper machine at the Valliant, Oklahoma mill and the December 2009 shutdowns of the Albany, Oregon and Pineville, Louisiana mills.

Looking ahead to 2011, sales volumes in the first quarter are expected to remain at about fourth quarter levels although box volumes may be impacted by adverse weather conditions in the U.S. Average sales price realizations are expected to decrease reflecting a decline in exported linerboard sales prices, while domestic linerboard sales prices should be about flat and box sales price realizations should show a modest increase. Input costs for purchased fiber are expected to be higher on average as first-quarter 2011 costs are expected to remain at the late fourth-quarter 2010 level. In addition, wood and energy costs are expected to increase. Planned maintenance downtime costs should be higher with outages scheduled at three mills. Operating costs are expected to be favorable in both the containerboard and box businesses.

European Industrial Packaging net sales were $990 million in 2010 compared with $980 million in 2009 and $1.2 billion in 2008. Operating profits in 2010 were $70 million ($73 million before costs associated with the closure of the Etienne mill in France) compared with a loss of $30 million (a gain of $57 million excluding costs associated with the closure of the Etienne mill in France) in 2009 and earnings of $64 million in 2008. Sales volumes in 2010 were higher than in 2009 primarily reflecting improved demand for packaging in the industrial markets. Average sales margins decreased as box price increases only partially offset higher raw material costs for kraft and recycled containerboard. Other input costs were about the same in 2010 as in 2009. Operating costs were favorable and the business benefitted from the operating cost savings associated with the closure of the Etienne mill in France in November 2009. Operating earnings included $3 million in 2010 and $87 million in 2009 for closure costs associated with the Etienne, France mill closure.

Entering the first quarter of 2011, sales volumes are expected to be lower reflecting seasonally weaker demand for agricultural boxes than in the fourth quarter of 2010. Average margins are expected to remain stable as box price increases are expected to partly offset containerboard cost increases in Europe. Operating costs are expected to be favorable.

Asian Industrial Packaging net sales for 2010 were $495 million compared with $325 million in 2009 and $350 million in 2008. Operating earnings for the packaging operations were a loss of $7 million (a loss of $4 million excluding facility closure costs) in 2010 compared with earnings of $3 million in both 2009 and 2008. Earnings in 2010 include the results of SCA Packaging Asia since the acquisition on June 30, 2010, including the impact of incremental integration expenses.

Operating earnings for the distribution activities of the business were about breakeven for 2010 compared with a loss of $3 million in 2009 and earnings of $1 million in 2008. In 2009, an expense of $2 million was taken for the impairment of an investment in a joint venture.

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 2010 increased 5% from 2009, but decreased 13% from 2008. Operating profits in 2010 were 56% lower than in 2009, but 1% higher than in 2008. However, excluding alternative fuel mixture credits and plant closure costs, operating profits in 2010 were 72% higher than in 2009 and 9% higher than in 2008. Benefits from higher sales price realizations ($365 million), lower operating costs ($126 million) and improved mix ($32 million) were partially offset by the net impact of lower sales volumes ($13 million), higher raw material and freight costs ($111 million), higher planned mill maintenance downtime costs ($18 million) and higher other costs ($49 million). In addition, operating profits in 2010 included $315 million of costs associated with the permanent shutdown of our Franklin, Virginia mill, while operating profits in 2009 included $884 million of alternative fuel mixture credits, $223 million of shutdown costs for the Franklin, Virginia mill, and $34 million of other restructuring costs.