10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended September 30, 2006

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Transition Period From              to             

Commission File Number 1-3157

INTERNATIONAL PAPER COMPANY

(Exact name of registrant as specified in its charter)

New York	13-0872805
(State or other jurisdiction of incorporation of organization)	(I.R.S. Employer Identification No.)
6400 Poplar Avenue, Memphis, TN	38197
(Address of principal executive offices)	(Zip Code)

Registrant’s telephone number, including area code: (901) 419-7000

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.     Yes  x    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer  x            Accelerated filer  ¨            Non-accelerated filer  ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes¨    No  x

The number of shares outstanding of the registrant’s common stock as of October 31, 2006 was 454,969,467.

INTERNATIONAL PAPER COMPANY

INDEX

		PAGE NO.
PART I.	FINANCIAL INFORMATION
Item 1.	Financial Statements
	Consolidated Statement of Operations - Three Months and Nine Months Ended September 30, 2006 and 2005	1
	Consolidated Balance Sheet - September 30, 2006 and December 31, 2005	2
	Consolidated Statement of Cash Flows - Nine Months Ended September 30, 2006 and 2005	3
	Consolidated Statement of Changes in Common Shareholders’ Equity - Nine Months Ended September 30, 2006 and 2005	4
	Condensed Notes to Consolidated Financial Statements	5
	Financial Information by Industry Segment	23
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	25
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	42
Item 4.	Controls and Procedures	43
PART II.	OTHER INFORMATION
Item 1.	Legal Proceedings	44
Item 1A.	Risk Factors	45
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	46
Item 3.	Defaults Upon Senior Securities	*
Item 4.	Submission of Matters to a Vote of Security Holders	*
Item 5.	Other Information	*
Item 6.	Exhibits	47
Signatures		48

* Omitted since no answer is called for, answer is in the negative or inapplicable.

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

INTERNATIONAL PAPER COMPANY

Consolidated Statement of Operations

(Unaudited)

(In millions, except per share amounts)

	Three Months Ended September 30,						Nine Months Ended September 30,
	2006			2005			2006			2005
Net Sales	$	5,867		$	5,925		$	18,107		$	17,650
Costs and Expenses
Cost of products sold		4,335			4,444			13,513			13,162
Selling and administrative expenses		471			459			1,431			1,408
Depreciation, amortization and cost of timber harvested		308			339			944			1,005
Distribution expenses		291			261			905			776
Taxes other than payroll and income taxes		55			58			171			174
Restructuring and other charges		92			70			192			125
Insurance recoveries		—			(188	)		(19	)		(223	)
Net (gains) losses on sales and impairments of businesses		(110	)		5			1,248			65
Reversal of reserves no longer required, net		—			(3	)		—			(3	)
Interest expense, net		144			121			441			444
Earnings (Loss) From Continuing Operations Before Income Taxes and Minority Interest		281			359			(719	)		717
Income tax provision		163			(377	)		227			(210	)
Minority interest expense, net of taxes		5			3			14			8
Earnings (Loss) From Continuing Operations		113			733			(960	)		919
Discontinued operations, net of taxes and minority interest		88			290			39			258
Net Earnings (Loss)	$	201		$	1,023		$	(921	)	$	1,177
Basic Earnings (Loss) Per Common Share
Earnings (loss) from continuing operations	$	0.23		$	1.51		$	(1.98	)	$	1.89
Discontinued operations		0.19			0.59			0.08			0.53
Net earnings (loss)	$	0.42		$	2.10		$	(1.90	)	$	2.42
Diluted Earnings (Loss) Per Common Share
Earnings (loss) from continuing operations	$	0.23		$	1.46		$	(1.98	)	$	1.85
Discontinued operations		0.19			0.57			0.08			0.51
Net earnings (loss)	$	0.42		$	2.03		$	(1.90	)	$	2.36
Average Shares of Common Stock Outstanding - assuming dilution		484.9			507.1			485.2			507.5
Cash Dividends Per Common Share	$	0.25		$	0.25		$	0.75		$	0.75

The accompanying notes are an integral part of these financial statements.

1

INTERNATIONAL PAPER COMPANY

Consolidated Balance Sheet

(Unaudited)

(In millions)

	September 30, 2006			December 31, 2005
Assets
Current Assets
Cash and temporary investments	$	736		$	1,641
Accounts and notes receivable, net		3,048			2,750
Inventories		2,306			2,287
Assets of businesses held for sale		270			3,321
Deferred income tax assets		288			279
Other current assets		136			110
Total Current Assets		6,784			10,388
Plants, Properties and Equipment, net		9,992			10,137
Forestlands		357			2,127
Forestlands Held for Sale		1,575			—
Investments		648			625
Goodwill		3,661			3,838
Deferred Charges and Other Assets		1,672			1,656
Total Assets	$	24,689		$	28,771
Liabilities and Common Shareholders’ Equity
Current Liabilities
Notes payable and current maturities of long-term debt	$	1,399		$	1,181
Accounts payable		2,000			1,967
Accrued payroll and benefits		401			396
Liabilities of businesses held for sale		98			238
Other accrued liabilities		1,137			1,094
Total Current Liabilities		5,035			4,876
Long-Term Debt		9,051			11,023
Deferred Income Taxes		754			711
Other Liabilities		3,790			3,599
Minority Interest		185			211
Common Shareholders’ Equity
Common stock, $1 par value, 493.3 shares in 2006 and 490.5 shares in 2005		494			491
Paid-in capital		6,710			6,627
Retained earnings		1,879			3,172
Accumulated other comprehensive loss		(1,817	)		(1,935	)
		7,266			8,355
Less: Common stock held in treasury, at cost, 2006 - 38.5 shares; 2005 - 0.1 shares		1,392			4
Total Common Shareholders’ Equity		5,874			8,351
Total Liabilities and Common Shareholders’ Equity	$	24,689		$	28,771

The accompanying notes are an integral part of these financial statements.

2

INTERNATIONAL PAPER COMPANY

Consolidated Statement of Cash Flows

(Unaudited)

(In millions)

	Nine Months Ended September 30,
	2006			2005
Operating Activities
Net (loss) earnings	$	(921	)	$	1,177
Discontinued operations, net of taxes and minority interest		(39	)		(258	)
Net (loss) earnings from continuing operations		(960	)		919
Depreciation and amortization		944			1,005
Deferred income tax expense		132			139
Tax benefit - non-cash settlement of IRS audits		—			(553	)
Restructuring and other charges		192			125
Payments related to restructuring and legal reserves		(65	)		(133	)
Insurance recoveries		(19	)		(223	)
Reversal of reserves no longer required, net		—			(3	)
Net losses on sales and impairments of businesses held for sale		1,248			65
Periodic pension expense, net		283			182
Other, net		145			167
Changes in current assets and liabilities
Accounts and notes receivable		(164	)		(91	)
Inventories		(31	)		(25	)
Accounts payable and accrued liabilities		90			(609	)
Other		(201	)		(56	)
Cash provided by operations - continuing operations		1,594			909
Cash provided by operations - discontinued operations		44			47
Cash Provided by Operations		1,638			956
Investment Activities
Invested in capital projects		(802	)		(756	)
Acquisitions, net of cash acquired		—			(39	)
Proceeds from divestitures		2,163			1,440
Other		(241	)		63
Cash provided by investment activities - continuing operations		1,120			708
Cash used for investment activities - discontinued operations		(19	)		(219	)
Cash Provided by Investment Activities		1,101			489
Financing Activities
Issuance of common stock		26			20
Repurchase of common stock		(1,385	)		—
Issuance of debt		1,259			278
Reduction of debt		(3,156	)		(2,543	)
Change in book overdrafts		(50	)		(30	)
Dividends paid		(372	)		(368	)
Other		(3	)		(44	)
Cash used for financing activities - continuing operations		(3,681	)		(2,687	)
Cash used for financing activities - discontinued operations		22			(172	)
Cash Used for Financing Activities		(3,659	)		(2,859	)
Effect of Exchange Rate Changes on Cash - Continuing Operations		14			(85	)
Effect of Exchange Rate Changes on Cash - Discontinued Operations		1			(5	)
Change in Cash and Temporary Investments		(905	)		(1,504	)
Cash and Temporary Investments
Beginning of the period		1,641			2,596
End of the period		736			1,092
Less - Cash, End of Period - Discontinued Operations		—			—
Cash, End of Period - Continuing Operations	$	736		$	1,092

The accompanying notes are an integral part of these financial statements.

3

INTERNATIONAL PAPER COMPANY

Consolidated Statement of Changes in Common Shareholders’ Equity

(Unaudited)

(In millions, except share amounts in thousands)

Nine Months Ended September 30, 2006

	Common Stock Issued			Paid-in Capital		Retained Earnings			Accumulated Other Comprehensive Income (Loss)			Treasury Stock					Total Common Shareholders’ Equity
	Shares	Amount										Shares		Amount
Balance, December 31, 2005	490,501	$	491	$	6,627	$	3,172		$	(1,935	)	112		$	4		$	8,351
Issuance of stock for various plans, net	2,802		3		83		—			—		(115	)		(4	)		90
Repurchase of stock	—		—		—		—			—		38,465			1,392			(1,392	)
Cash dividends - Common stock ($0.75 per share)	—		—		—		(372	)		—		—			—			(372	)
Comprehensive income (loss):
Net loss	—		—		—		(921	)		—		—			—			(921	)
Change in cumulative foreign currency translation adjustment (less tax of $8)	—		—		—		—			135		—			—			135
Net gains (losses) on cash flow hedging derivatives:
Net loss arising during the period (less tax of $6)	—		—		—		—			(9	)	—			—			(9	)
Less: Reclassification adjustment for gains included in net income (less tax of $0)	—		—		—		—			(8	)	—			—			(8	)
Total comprehensive income																		(803	)
Balance, September 30, 2006	493,303	$	494	$	6,710	$	1,879		$	(1,817	)	38,462		$	1,392		$	5,874

Nine Months Ended September 30, 2005

	Common Stock Issued			Paid-in Capital		Retained Earnings			Accumulated Other Comprehensive Income (Loss)			Treasury Stock			Total Common Shareholders’ Equity
	Shares	Amount										Shares	Amount
Balance, December 31, 2004	487,495	$	487	$	6,562	$	2,562		$	(1,357	)	16	$	—	$	8,254
Issuance of stock for various plans, net	3,004		3		42		—			—		78		3		42
Cash dividends - Common stock ($0.75 per share)	—		—		—		(368	)		—		—		—		(368	)
Comprehensive income (loss):
Net earnings	—		—		—		1,177			—		—		—		1,177
Minimum pension liability adjustment (less tax of $1)	—		—		—		—			3		—		—		3
Change in cumulative foreign currency translation adjustment (less tax of $1)	—		—		—		—			(215	)	—		—		(215	)
Net gains (losses) on cash flow hedging derivatives:
Net gain arising during the period (less tax of $13)	—		—		—		—			38		—		—		38
Less: Reclassification adjustment for gains included in net income (less tax of $29)	—		—		—		—			(64	)	—		—		(64	)
Total comprehensive income																939
Balance, September 30, 2005	490,499	$	490	$	6,604	$	3,371		$	(1,595	)	94	$	3	$	8,867

The accompanying notes are an integral part of these financial statements.

4

INTERNATIONAL PAPER COMPANY

Condensed Notes to Consolidated Financial Statements

(Unaudited)

NOTE 1 - BASIS OF PRESENTATION

The accompanying unaudited consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and, in the opinion of Management, include all adjustments that are necessary for the fair presentation of International Paper’s (the Company) financial position, results of operations, and cash flows for the interim periods presented. Except as disclosed in these Condensed Notes to Consolidated Financial Statements, such adjustments are of a normal, recurring nature. Results for the first nine months of the year may not necessarily be indicative of full year results. It is suggested that these consolidated financial statements be read in conjunction with the audited financial statements and the notes thereto included in International Paper’s Annual Report on Form 10-K for the year ended December 31, 2005, and in International Paper’s Current Report on Form 8-K filed on August 14, 2006 to update the historical financial statements included in the Company’s Form 10-K for the year ended December 31, 2005, as amended by Form 10-K/A, to reflect that the Company’s Kraft Papers business is treated as a discontinued operation (collectively the “2005 10-K”), both of which have previously been filed with the Securities and Exchange Commission.

Financial information by industry segment is presented on page 23.

See Note 10 for required pro forma and additional disclosures related to stock-based compensation awards.

Prior-year amounts have been restated to present the Company’s Kraft Papers and Brazilian Coated Papers businesses as discontinued operations (see Note 4).

NOTE 2 - EARNINGS PER COMMON SHARE

Earnings per common share from continuing operations are computed by dividing earnings from continuing operations by the weighted average number of common shares outstanding. Earnings per common share from continuing operations, assuming dilution, are computed assuming that all potentially dilutive securities, including “in-the-money” stock options, are converted into common shares at the beginning of each period. In addition, the computation of diluted earnings per share reflects the inclusion of contingently convertible securities in periods when dilutive. A reconciliation of the amounts included in the computation of earnings per common share from continuing operations, and earnings per common share from continuing operations, assuming dilution, is shown below:

5

	Three Months Ended September 30,				Nine Months Ended September 30,
In millions, except per share amounts	2006		2005		2006			2005
Earnings (loss) from continuing operations	$	113	$	733	$	(960	)	$	919
Effect of dilutive securities		—		7		—			20
Earnings (loss) from continuing operations - assuming dilution	$	113	$	740	$	(960	)	$	939
Average common shares outstanding		482.5		486.0		485.2			486.0
Effect of dilutive securities
Profit sharing plan		2.1		1.0		—			1.2
Stock options		0.3		0.1		—			0.3
Zero coupon convertible debentures		—		20.0					20.0
Average common shares outstanding - assuming dilution		484.9		507.1		485.2			507.5
Earnings (loss) per common share from continuing operations	$	0.23	$	1.51	$	(1.98	)	$	1.89
Earnings (loss) per common share from continuing operations - assuming dilution	$	0.23	$	1.46	$	(1.98	)	$	1.85

Note: Average common shares outstanding exclude unvested restricted shares. The above table excludes securities that were antidilutive for the periods presented, principally zero-coupon convertible debentures repurchased in June 2006.

In July 2006, in connection with the planned use of projected proceeds from the Company’s Transformation Plan, International Paper’s Board of Directors authorized a share repurchase program to acquire up to $3.0 billion of the Company’s stock. In a modified “Dutch Auction” tender offer completed in September 2006, International Paper purchased 38,465,260 shares of its common stock at a price of $36.00 per share, plus costs to acquire the shares, for a total cost of approximately $1.4 billion. Following the completion of this tender offer, International Paper had approximately 454.8 million shares of common stock outstanding.

NOTE 3 - RESTRUCTURING AND OTHER CHARGES

2006:

During the third quarter of 2006, restructuring and other charges totaling $92 million before taxes ($56 million after taxes) were recorded. These charges consisted of a pre-tax charge of $57 million ($35 million after taxes), including severance and other termination benefit costs of approximately $15 million, $25 million of lease termination costs and $17 million of other charges associated with the Company’s Transformation Plan, and a $35 million pre-tax charge ($21 million after taxes) for adjustments to legal reserves (see Note 7).

During the second quarter of 2006, restructuring and other charges totaling $54 million before taxes ($33 million after taxes) were recorded, consisting of a pre-tax charge of $50 million ($30 million after taxes), including severance and other termination benefit costs of approximately $31 million and $19 million of other charges associated with the Company’s Transformation Plan, and a $4 million pre-tax charge ($3 million after taxes) for legal settlements.

During the first quarter of 2006, restructuring and other charges totaling $46 million before taxes ($28 million after taxes) were recorded. Included in these charges were a pre-tax charge of $20 million ($12 million after taxes) for organizational restructuring programs, principally severance costs associated with the Company’s Transformation Plan, a pre-tax charge of $8 million ($5 million after taxes) for losses on early extinguishment of debt, and a pre-tax charge of $18 million ($11 million after taxes) for adjustments to legal reserves. Also recorded was a pre-tax credit of $19 million ($12 million after taxes) for net insurance recoveries related to the hardboard siding and roofing litigation (see Note 7) and a charge of $6 million for tax adjustments.

6

2005:

During the third quarter of 2005, restructuring and other charges totaling $70 million before taxes ($48 million after taxes) were recorded. Included in this charge were a pre-tax charge of $44 million ($32 million after taxes) for organizational restructuring charges and a pre-tax charge of $26 million ($16 million after taxes) for losses on early extinguishment of debt. Also recorded in the third quarter were a pre-tax credit of $188 million ($109 million after taxes) for insurance recoveries related to the hardboard siding and roofing litigation (see Note 7) and a $3 million pre-tax credit ($2 million after taxes) for the net adjustment of previously provided reserves. In addition, a $517 million net reduction of the income tax provision was recorded, including a credit from an agreement reached with the U.S. Internal Revenue Service concerning the 1997 through 2000 U.S. federal income tax audits, a charge related to cash repatriations from non-U.S. subsidiaries, and a charge relating to a change in Ohio state tax laws. Interest expense, net, also includes a $43 million pre-tax credit ($26 million after taxes) relating to this agreement.

During the second quarter of 2005, a pre-tax charge of $31 million ($19 million after taxes) for organizational restructuring charges, and a pre-tax credit of $35 million ($21 million after taxes) for insurance recoveries related to the hardboard siding and roofing litigation were recorded. The organizational restructuring charges included $17 million before taxes ($11 million after taxes) recorded in the Printing Papers business segment for severance and other charges associated with the indefinite shutdown of three U.S. paper machines, and $14 million before taxes ($8 million after taxes) in the Forest Products business segment for costs associated with relocating the business headquarters to Memphis, Tennessee from Savannah, Georgia. Additionally, an $82 million increase in the income tax provision was recorded, including approximately $79 million for deferred taxes related to earnings repatriated during the quarter under the American Jobs Creation Act of 2004.

During the first quarter of 2005, a special charge of $24 million before taxes ($15 million after taxes) was recorded for losses on early extinguishment of high-coupon-rate debt.

NOTE 4 - BUSINESSES HELD FOR SALE AND DIVESTITURES

Discontinued Operations:

2006:

During the 2006 third quarter, International Paper completed the previously announced sale of its Brazilian Coated Papers business to Stora Enso Oyj for approximately $420 million, subject to certain post-closing adjustments. The business includes a coated paper mill and lumber mill in Arapoti, Parana State, Brazil, as well as 50,000 hectares (approximately 124,000 acres) of forestland in Parana. The operating results of this business for all periods presented are included in Discontinued operations in the accompanying consolidated statement of operations, including a pre-tax gain of $101 million ($80 million after taxes) recorded in the 2006 third quarter as a result of the sale. Revenues associated with this business were $33 million and $127 million, respectively for the three-month and nine-month periods ended September 30, 2006. Revenues for the comparable 2005 periods were $57 million and $149 million, respectively.

During the 2006 second quarter, the Company signed a definitive agreement to sell its Kraft Papers business for approximately $155 million in cash, subject to certain closing and post-closing adjustments, and two additional payments totaling up to $60 million payable five years from the date of closing contingent upon business performance. The operating results of this business for all periods presented are included in Discontinued operations in the accompanying consolidated statement of operations, including a pre-tax charge of $101 million ($62 million after taxes) recorded in the 2006 first quarter to reduce the carrying value of the business’s net assets to their estimated fair values. Additionally, a pre-tax charge of $16 million ($10 million after taxes) was recorded in Discontinued operations in the 2006 second quarter to further reduce the carrying value of the assets of this business based on the terms of the definitive agreement

7

discussed above. Revenues associated with the Kraft Papers business were $62 million and $174 million, respectively for the three-month and nine-month periods ended September 30, 2006. Revenues for the comparable 2005 periods were $54 million and $165 million, respectively.

Earnings and diluted earnings per share related to the Kraft Papers and Brazilian Coated Papers operations were as follows:

	Three Months Ended September 30,						Nine Months Ended September 30,
In millions, except per share amounts	2006			2005			2006			2005
Earnings (loss) from discontinued operations
Earnings from operations	$	14		$	14		$	49		$	33
Gain (loss) on sales or impairments		101			—			(16	)		—
Income tax (expense) benefit		(27	)		(5	)		6			(11	)
Earnings from discontinued operations, net of taxes	$	88		$	9		$	39		$	22
Earnings (loss) per common share from discontinued operations - assuming dilution
Earnings from operations, net of taxes	$	0.02		$	0.02		$	0.06		$	0.05
Gain on sales or impairments, net of taxes		0.17			—			0.02			—
Earnings per common share from discontinued operations, net of taxes - assuming dilution	$	0.19		$	0.02		$	0.08		$	0.05

At September 30, 2006 and December 31, 2005, assets of businesses held for sale totaled $270 million and $3.3 billion, respectively, and liabilities of businesses held for sale totaled $98 million and $238 million, respectively, and included the Kraft Papers business, the Brazilian Coated Papers business, the Coated and Supercalendered Papers business and certain smaller businesses, as follows:

In millions	September 30, 2006		December 31, 2005
Accounts receivable, net	$	48	$	176
Inventories		52		161
Plants, properties and equipment, net		114		1,664
Forestland		38		63
Goodwill		—		1,205
Other assets		18		52
Assets of businesses held for sale	$	270	$	3,321
Accounts payable	$	35	$	137
Accrued payroll and benefits		14		37
Other accrued liabilities		23		29
Other liabilities		26		35
Liabilities of businesses held for sale	$	98	$	238

2005:

In the third quarter of 2005, International Paper completed the sale of its 50.5% interest in Carter Holt Harvey Limited (CHH) for approximately U.S. $1.1 billion. The pre-tax gain on the sale of $29 million ($361 million after taxes and minority interest), including a $186 million pre-tax credit from cumulative translation adjustments, was included in Discontinued operations, together with CHH’s operating results prior to the sale. Revenues associated with the discontinued operation were $541 million and $1.7 billion for the three-month and nine-month periods ended September 30, 2005. Earnings and diluted earnings per share related to these operations were as follows:

8

In millions, except per share amounts	Three Months Ended September 30, 2005			Nine Months Ended September 30, 2005
Earnings (loss) from discontinued operations
Earnings (loss) from operations	$	(11	)	$	(43	)
Gain on sale of business		29			29
Income tax expense		265			242
Minority interest, net of taxes		(2	)		8
Loss from discontinued operations, net of taxes and minority interest	$	281		$	236
Earnings (loss) per common share from discontinue operation - assuming dilution
Loss from operations, net of taxes	$	(0.16	)	$	(0.25	)
Gain on sale, net of taxes and minority interest		0.71			0.71
Earnings per common share from discontinued operations, net of taxes and minority interest - assuming dilution	$	0.55		$	0.46

Other Transactions:

2006:

During the third quarter of 2006, a net pre-tax gain of $110 million (a loss of $13 million after taxes) was recorded for gains (losses) on sales and impairments of businesses. This net gain included pre-tax credits of $304 million ($185 million after taxes) for gains on sales of U.S. forestlands included in the Transformation Plan, the recognition of a previously deferred $110 million pre-tax gain ($68 million after taxes) related to a 2004 sale of forestlands in Maine, pre-tax losses of $165 million and $115 million ($165 million and $82 million after taxes) to adjust the carrying values of the Company’s Wood Products and Beverage Packaging businesses to estimated fair values based on preliminary bids received, a pre-tax charge of $38 million ($23 million after taxes) to reflect the completion of the sale of the Company’s Coated and Supercalendered Papers business in the 2006 third quarter, and a net pre-tax gain of $14 million (a loss of $2 million after taxes) related to other smaller sales.

Also during the third quarter of 2006, International Paper Investments (Holland) B.V. (IPI), a wholly-owned subsidiary of International Paper, announced that it had entered into an agreement with Votorantim Celulose e Papel S.A. (VCP) to exchange IPI’s pulp mill project being developed in Tres Lagoas, state of Mato Grosso do Sul, Brazil (together with approximately 100,000 hectares of forestlands) for VCP’s Luiz Antonio pulp and uncoated paper mill and approximately 60,000 hectares of forestlands located in the state of Sao Paulo, Brazil. IPI will fund the Tres Lagoas pulp mill project in the amount of U.S. $1.15 billion. This transaction is expected to close by February 1, 2007.

During the second quarter of 2006, a net pre-tax charge of $75 million ($51 million after taxes) was recorded, including a pre-tax credit of $62 million ($39 million after taxes) for gains on sales of U.S. forestlands included in the Transformation Plan, a pre-tax charge of $85 million ($53 million after taxes) recorded to adjust the carrying value of the assets of the Company’s Coated and Supercalendered Papers business to their estimated fair value based on the terms of the definitive sales agreement signed in the second quarter, and a pre-tax charge of $52 million ($37 million after taxes) recorded to write down the carrying value of certain assets in Brazil to their estimated fair value. The assets in Brazil were written down to estimated net realizable value upon sale since the sale of these assets was considered probable at June 30, 2006.

During the first quarter of 2006, a pre-tax special charge of $1.3 billion was recorded to write down the assets of the Company’s Coated and Supercalendered Papers business to their estimated fair value. In addition, other pre-tax charges totaling $3 million ($2 million after taxes) were recorded to adjust estimated losses of certain smaller operations that are held for sale.

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In the 2006 first quarter, the Company had reported its Coated and Supercalendered Papers business as a discontinued operation based on a plan to sell the business. In the second quarter of 2006, the Company signed a definitive agreement to sell this business for approximately $1.4 billion, subject to certain post-closing adjustments, and agreed to acquire a 10% limited partnership interest in CMP Investments L.P., the parent company that will own this business. Since this limited partnership interest will represent significant continuing involvement in the operations of this business under U.S. generally accepted accounting principles, the operating results for Coated and Supercalendered Papers are required to be included in continuing operations in the accompanying consolidated statement of operations. Accordingly, the operating results for this business, including a charge in the first quarter of $1.3 billion before and after taxes to write down the assets of the business to their estimated fair value, are now included in continuing operations for all periods presented. This sale was subsequently completed on August 1, 2006.

In March 2006, International Paper, The Nature Conservancy and The Conservation Fund reached an agreement to sell approximately 218,000 acres of forestlands across 10 U.S. states. The Nature Conservancy will acquire more than 173,000 acres in North Carolina, Virginia, Georgia, Florida, Alabama, Arkansas, Tennessee, Louisiana and Mississippi. The Conservation Fund will acquire more than 5,000 acres in Florida and 500 acres in North Carolina. The two groups will jointly purchase an additional 39,000 acres in South Carolina. Also in March 2006, International Paper announced an agreement to sell 69,000 acres of forestlands in Wisconsin to The Nature Conservancy for approximately $83 million.

On April 4, 2006 International Paper announced definitive agreements with two separate investor groups under which it will sell a total of approximately 5.1 million acres of forestlands for aggregate proceeds of approximately $6.1 billion. Under one of the agreements, International Paper will sell approximately 3.8 million acres of forestlands located in the southern U.S. and 440,000 acres in Michigan to an investor group led by Resource Management Service, LLC (RMS) for approximately $5 billion in cash and notes at closing. Under a separate agreement, International Paper will sell approximately 900,000 acres of forestlands in Louisiana, Texas and Arkansas to an investor group led by TimberStar for approximately $1.1 billion in cash and notes at closing.

On April 11, 2006, International Paper announced a definitive agreement with The Lyme Timber Company, for the benefit of the Lyme Forest Fund L.P., for the sale of approximately 275,000 acres of forestlands in New York’s Adirondack Park for approximately $137 million.

During the third quarter of 2006, the Company completed sales of approximately 477,000 acres of forestlands under the Nature Conservancy, Conservation Fund and Lyme Forest Fund L.P. agreements for approximately $401 million, including an installment note receivable of $136 million, resulting in a pre-tax gain of approximately $304 million ($185 million after taxes). During the second quarter of 2006, the Company completed the sales of approximately 75,000 acres of forestlands under the above agreements for approximately $97 million, resulting in a pre-tax gain of approximately $62 million ($39 million after taxes).

The remaining sales under the agreements discussed above are expected to be completed during the fourth quarter of 2006. This will substantially complete International Paper’s sales of U.S. forestlands identified as part of the Company’s Transformation Plan. Anticipated total proceeds from all of these sale agreements, covering about 5.7 million acres or over 85% of the Company’s U.S. forestland holdings, are approximately $6.6 billion. The carrying value of these forestlands is included in the accompanying consolidated balance sheet as of September 30, 2006 under the caption Forestlands held for sale. The amount of gain that will be recognized by the Company upon the completion of these transactions will be dependent upon the final amount of proceeds received, costs incurred and transactions terms, and the portion, if any, of the gain that will be required to be deferred under applicable accounting standards. International Paper has retained approximately 660,000 acres of forestlands at September 30, 2006, some of which may be later sold in separate transactions to maximize the proceeds from the land.

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2005:

In the third quarter of 2005, charges totaling $5 million before taxes ($3 million after taxes) were recorded for adjustments of losses on businesses previously sold.

In the second quarter of 2005, a $19 million pre-tax credit ($12 million after taxes) was recorded, including a $25 million credit before taxes ($15 million after taxes) from the collection of a note receivable from the 2001 sale of the Flexible Packaging business, final charges related to the sale of Fine Papers and Industrial Papers, as well as net adjustments of losses from businesses previously sold.

During the first quarter of 2005, International Paper announced an agreement to sell its Fine Papers business to Mohawk Paper Mills, Inc. of Cohoes, New York. A $24 million pre-tax loss ($13 million after taxes) was recorded in the first quarter to write down the net assets of the Fine Papers business to their estimated net realizable value. The sale of Fine Papers was completed in the second quarter of 2005.

Also during the first quarter of 2005, International Paper announced that it had signed an agreement to sell its Industrial Papers business to an affiliate of Kohlberg and Company, LLC. A $49 million pre-tax loss ($35 million after taxes) was recorded in the first quarter to write down the net assets of the Industrial Papers business and related corporate assets to their estimated net realizable value. The sale of Industrial Papers was completed in the second quarter of 2005.

Also in the first quarter of 2005, charges totaling $6 million before taxes ($4 million after taxes) were recorded for adjustments to estimated losses on sales of certain smaller operations.

NOTE 5 - SUPPLEMENTAL FINANCIAL STATEMENT INFORMATION

Inventories by major category were:

In millions	September 30, 2006		December 31, 2005
Raw materials	$	380	$	376
Finished pulp, paper and packaging products		1,519		1,534
Finished lumber and panel products		17		31
Operating supplies		319		276
Other		71		70
Total	$	2,306	$	2,287

Temporary investments with an original maturity of three months or less are treated as cash equivalents and are stated at cost. Temporary investments totaled $473 million and $1.4 billion at September 30, 2006 and December 31, 2005, respectively.

Interest payments made during the nine-month periods ended September 30, 2006 and 2005 were $507 million and $630 million, respectively. The 2005 interest payments include a $52 million payment to the U.S. Internal Revenue Service related to the settlement of the 1997 – 2000 U.S. federal income tax audits. Capitalized net interest costs were $13 million and $8 million for the nine months ended September 30, 2006 and 2005, respectively. Total interest expense was $498 million for the first nine months of 2006 and $507 million for the first nine months of 2005, net of a $43 million credit related to the settlement of the tax audits described above. Preferred Securities distributions paid by Southeast Timber, Inc., a consolidated subsidiary of International Paper, were $10 million and $7 million during the first nine months of 2006 and 2005, respectively. The expense related to these preferred securities was included in minority interest expense in the consolidated statement of operations. Income tax payments of $114 million and $357 million were made during the first nine months of 2006 and 2005, respectively.

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Accumulated depreciation was $17.9 billion at September 30, 2006 and $18.2 billion at December 31, 2005. The allowance for doubtful accounts was $100 million at September 30, 2006 and $98 million at December 31, 2005.

The following tables present changes in the goodwill balances as allocated to each business segment for the nine-month periods ended September 30, 2006 and 2005:

2006:

In millions	Balance December 31, 2005		Reclassifications and Other (a)		Additions/ (Reductions)			Balance September 30, 2006
Printing Papers	$	1,674	$	1	$	—		$	1,675
Industrial Packaging		676		3		11	(b)		690
Consumer Packaging		987		1		(28	)(c)		960
Distribution		299		—		—			299
Forest Products		191		—		(165	)(c)		26
Corporate		11		—		—			11
Total	$	3,838	$	5	$	(182	)	$	3,661

(a) Represents the effects of foreign currency translations and reclassifications.

(b) Reflects a $4 million increase from the completion of the accounting for the 50% interest in IPPM acquired August 1, 2005, a $16 million increase from the purchase of an additional 25% interest in IPPM on May 1, 2006, a $4 million decrease representing the completion of the purchase accounting for a 66.5% interest acquired in Compagnie Marocaine des Cartons et des Papiers in October 2005 and a $5 million decrease related to the Box USA acquisition.

(c) Reflects decreases of $27 million and $165 million representing the writedowns of the carrying values of the assets of the Beverage Packaging and Wood Products businesses, respectively, to fair value, and a $1 million decrease resulting from the settlement of a contingent purchase adjustment from the purchase of the minority interest in Shorewood EPC Europe Limited.

2005:

In millions	Balance December 31, 2004		Reclassifications and Other (a)			Additions/ (Reductions)			Balance September 30, 2005
Printing Papers	$	1,671	$	3		$	—		$	1,674
Industrial Packaging		591		(5	)		16	(b)		602
Consumer Packaging		1,014		(4	)		51	(c)		1,061
Distribution		299		—			—			299
Forest Products		190		1			—			191
Corporate		24		—			(13	)(d)		11
Total	$	3,789	$	(5	)	$	54		$	3,838

(a) Represents the effects of foreign currency translations and reclassifications.

(b) Reflects the completion of the accounting for the acquisition of Box USA of $22 million, offset by a $6 million decrease resulting from the sale of Industrial Papers.

(c) Reflects a $5 million adjustment resulting from the acquisition of the minority interest in Shorewood EPC Europe Limited, as well as a $46 million adjustment from the completion of the accounting for the 50% interest in IPPM.

(d) Reflects the sale of International Paper’s Fine Papers business.

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Goodwill totaling approximately $1.2 billion at December 31, 2005 relating to the Company’s Coated and Supercalendered Papers business was written off in connection with the 2006 first-quarter $1.3 billion pre-tax charge to reduce the net assets of that business to estimated fair value (see Note 4).

The following table presents an analysis of activity related to the Company’s asset retirement obligations:

	Nine Months Ended September 30,
In millions	2006			2005
Asset retirement obligation, January 1	$	33		$	30
New liabilities		1			6
Liabilities settled		(3	)		(4	)
Net adjustments to existing liabilities		1			(4	)
Accretion expense		1			1
Asset retirement obligation, September 30	$	33		$	29

This obligation is included in Other liabilities in the accompanying consolidated balance sheet.

The components of the Company’s postretirement benefit expense were as follows:

	Three Months Ended September 30,						Nine Months Ended September 30,
In millions	2006			2005			2006			2005
Service cost	$	1		$	1		$	2		$	2
Interest cost		8			10			24			29
Actuarial loss		6			5			17			15
Amortization of prior service cost		(13	)		(10	)		(37	)		(30	)
Net postretirement benefit cost (a)	$	2		$	6		$	6		$	16

(a) Excludes a credit of $2.3 million and net charges of $17.1 million for the three-month and nine-month periods ended September 30, 2006 for curtailments and termination benefits related to Kraft Papers, Coated Papers, and the Transformation initiative that were recorded in Discontinued operations, Net (gains) losses on sales and impairments of businesses and Restructuring and other charges, respectively; and a $3 million credit for the nine-month period ended September 30, 2005 for curtailments and special termination benefits related to Fine Papers, Industrial Papers and the Jackson Foodservice plant divestitures and organizational restructurings that were recorded in Net (gains) losses on sales and impairments of businesses and Restructuring and other charges, respectively.

NOTE 6 – RECENT ACCOUNTING DEVELOPMENTS

Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans:

In September 2006, the Financial Accounting Standards Board (FASB) issued SFAS No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans – an Amendment of FASB Statements No. 87, 88, 106, and 132(R).” This Statement requires a calendar year-end company with publicly traded equity securities that sponsors a postretirement benefit plan to fully recognize, as an asset or liability, the overfunded or underfunded status of its benefit plan(s) in its 2006 year-end balance sheet. It also requires a company to measure its plan assets and benefit obligations as of its year-end balance sheet date beginning with fiscal years ending after December 15, 2008. The Company is currently evaluating the provisions of this Statement.

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Fair Value Measurements:

In September 2006, the FASB also issued SFAS No. 157, “Fair Value Measurements,” which provides a single definition of fair value, together with a framework for measuring it, and requires additional disclosure about the use of fair value to measure assets and liabilities. It also emphasizes that fair value is a market-based measurement, not an entity-specific measurement, and sets out a fair value hierarchy with the highest priority being quoted prices in active markets. This Statement is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years, and is to be applied prospectively as of the beginning of the year in which it is initially applied.

Accounting for Planned Major Maintenance Activities:

In September 2006, the FASB issued FSP No. AUG AIR-1, “Accounting for Planned Major Maintenance Activities,” which prohibits the use of the accrue-in-advance method of accounting for planned major maintenance activities in annual and interim reporting periods. The FSP permits the application of three alternative methods of accounting for planned major maintenance activities: the direct expense, built-in-overhaul, and deferral methods. The FSP is effective for the first fiscal year beginning after December 15, 2006. International Paper is currently evaluating the effects of implementing the provisions of this FSP.

Accounting for Uncertainty in Income Taxes:

In June 2006, the FASB issued FASB Interpretation No. 48 (FIN 48), “Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109.” FIN 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. This Interpretation also provides guidance on classification, interest and penalties, accounting in interim periods, and transition, and significantly expands income tax disclosure requirements. It applies to all tax positions accounted for in accordance with SFAS No. 109 and is effective for fiscal years beginning after December 15, 2006. The Company is currently evaluating the effects of implementing the provisions of this Interpretation.

Accounting for Certain Hybrid Financial Instruments:

In February 2006, the FASB issued SFAS No. 155, “Accounting for Certain Hybrid Financial Instruments – an Amendment of FASB Statements No. 133 and 140,” which provides entities with relief from having to separately determine the fair value of an embedded derivative that would otherwise be required to be bifurcated from its host contract in accordance with SFAS No. 133. This Statement allows an entity to make an irrevocable election to measure such a hybrid financial instrument at fair value in its entirety, with changes in fair value recognized in earnings. This Statement is effective for all financial instruments acquired, issued, or subject to a remeasurement event occurring after the beginning of an entity’s first fiscal year that begins after September 15, 2006. International Paper believes that the adoption of SFAS No. 155 in 2007 will not have a material impact on its consolidated financial statements.

Exchanges of Nonmonetary Assets:

In December 2004, the FASB issued SFAS No. 153, “Exchanges of Nonmonetary Assets, an Amendment of APB Opinion No. 29,” that replaces the exception from fair value measurement in APB Opinion No. 29, “Accounting for Nonmonetary Transactions,” for nonmonetary exchanges of similar productive assets with a general exception from fair value measurement for exchanges of nonmonetary assets that do not have commercial substance. A nonmonetary exchange has commercial substance if the future cash flows of the entity are expected to change significantly as a result of the exchange. International Paper applied the provisions of SFAS No. 153 prospectively in the first quarter of 2006, with no material effect on its consolidated financial statements.

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Inventory Costs:

In November 2004, the FASB issued SFAS No. 151, “Inventory Costs, an Amendment of ARB No. 43, Chapter 4.” This Statement requires that abnormal amounts of idle facility expense, freight, handling costs and wasted material be recognized as current-period charges. This Statement also introduces the concept of “normal capacity” and requires the allocation of fixed production overhead to inventory based on the normal capacity of the production facilities. Unallocated overhead must be recognized as an expense in the period in which it is incurred. International Paper adopted SFAS No. 151 in the first quarter of 2006, with no material effect on its consolidated financial statements.

Share-Based Payment Transactions:

In December 2004, the FASB issued SFAS No. 123 (revised 2004), “Share-Based Payment,” that requires compensation costs related to share-based payment transactions to be recognized in the financial statements. The amount of the compensation cost is measured based on the grant-date fair value of the equity or liability instruments issued. In addition, liability awards are remeasured each reporting period. Compensation cost is recognized over the period that an employee provides service in exchange for the award. This Statement applies to all awards granted after the required effective date and to awards modified, repurchased, or cancelled after that date. International Paper adopted SFAS No. 123(R) in the first quarter 2006, with no material effect on its consolidated financial statements. See Note 10 for a further discussion of stock-based compensation plans.

NOTE 7 - COMMITMENTS AND CONTINGENCIES

Exterior Siding and Roofing Litigation:

International Paper has established reserves relating to the settlement, during 1998 and 1999, of three nationwide class action lawsuits against the Company and Masonite Corp., a former wholly-owned subsidiary of the Company. Those settlements relate to (1) exterior hardboard siding installed during the 1980’s (the “1980’s Hardboard Claims”) and during the 1990’s (the “1990’s Hardboard Claims,” and together with the 1980’s Hardboard Claims, the “Hardboard Claims”); (2) Omniwood siding installed during the 1990’s (the “Omniwood Claims”); and (3) Woodruf roofing installed during the 1980’s and 1990’s (the “Woodruf Claims”). Each of these settlements is discussed in detail in Note 10, Commitments and Contingent Liabilities, to the Financial Statements included in International Paper’s Annual Report on Form 10-K for the year ended December 31, 2005 (the “2005 10-K”).

Claims Data

1980’s Hardboard Claims

Since 2002, and until 2005, the aggregate claims activity with respect to the exterior siding and roofing settlements (the “Settlements”) had been in line with the projections prepared by the Company’s third-party consultant. As reported in the 2005 10-K, the number of valid 1980’s Hardboard Claims filed prior to the January 18, 2005 filing deadline significantly exceeded those projections. This increase, together with an increase in the average cost per claim, had resulted in payments by the Company in 2005 of approximately $119 million. These amounts exceeded projections by approximately $40 million.

Substantially all of the 1980’s Hardboard Claims were settled as of June 30, 2006, although settlement payments made in 2006 were approximately $8 million more than projected.

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1990’s Hardboard Claims

In 2005, the number of 1990’s Hardboard Claims filed was in line with projections. However, as reported in the 2005 10-K, the average cost of those claims increased above projected levels in 2005. As was the case for the 1980’s Hardboard Claims, the increased cost was due, in part, to a 2005 increase in the Means Price Data (an inflation-adjusted compensation formula based on replacement and refinishing cost for a particular area that is used in the determination of claims payments) compared to prior years. For the nine months ended September 30, 2006, the number of 1990’s Hardboard Claims filed and the average cost per claim were both higher than projected, with claims payments totaling approximately $8 million more than projected. The claims filing deadline for the 1990’s Hardboard Claims is January 15, 2008.

The following table presents the claims activity of the 1980’s and 1990’s Hardboard Claims for the nine-month period ended September 30, 2006:

In thousands	Single Family		Multi- Family		Total
December 31, 2005	20.2		3.2		23.4
No. of Claims Filed	14.1		0.4		14.5
No. of Claims Paid	(9.9	)	(1.4	)	(11.3	)
No. of Claims Dismissed	(4.0	)	(0.1	)	(4.1	)
September 30, 2006	20.4		2.1		22.5

The average settlement cost per claim for the nine-month period ended September 30, 2006 for the Hardboard settlement was $2,369.

Omniwood and Woodruf Claims

Throughout 2005, and through September 30, 2006, the Omniwood Claims activity and the Woodruf Claims activity have been in line with projections. The Company expects this trend to continue. The filing deadline for both the Omniwood and Woodruf Claims is January 6, 2009. The following table presents the claims activity of the Omniwood Claims and the Woodruf Claims for the nine-month period ended September 30, 2006:

	Omniwood				Woodruf			Total
In thousands	Single Family		Multi- Family		Single Family		Multi- Family	Single Family		Multi- Family		Total
December 31, 2005	2.4		0.5		0.8		0.3	3.2		0.8		4.0
No. of Claims Filed	4.2		0.2		0.4		—	4.6		0.2		4.8
No. of Claims Paid	(3.3	)	(0.2	)	(0.3	)	—	(3.6	)	(0.2	)	(3.8	)
No. of Claims Dismissed	(0.8	)	—		(0.2	)	—	(1.0	)	—		(1.0	)
September 30, 2006	2.5		0.5		0.7		0.3	3.2		0.8		4.0

The average settlement costs per claim for the nine-month period ended September 30, 2006 for the Omniwood and Woodruf settlements were $4,571 and $5,765, respectively.

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Reserve Analysis

The following table presents an analysis of the net reserve activity for the nine-month period ended September 30, 2006:

In millions	Hard- board			Omni- wood			Woodruf			Total
Balance, December 31, 2005	$	34		$	74		$	5		$	113
Additional Provisions		50			—			—			50
Payments		(43	)		(21	)		(2	)		(66	)
Balance, September 30, 2006	$	41		$	53		$	3		$	97

During the first quarter of 2006, based on advice from the Company’s third-party consultant, a charge of $15 million was recorded to increase the aggregate hardboard siding and roofing reserve to management’s best estimate of the amount required for future payments. In the second and third quarters of 2006, claims activity for the 1990s Hardboard Claims was in excess of projected amounts as both the number and average cost per claim exceeded projections. At the end of the third quarter, the Company determined that, pending receipt of an updated projection by the third-party consultant that takes into account trends and data through the end of the claims period (January 15, 2008) that is expected to be completed in the fourth quarter, an additional $35 million charge was required to increase the Hardboard Claims reserve balance to reflect these higher claims. Reserve balances at September 30, 2006 for Omniwood and Woodruf Claims continued to be in line with projections. The Company will reevaluate these reserve balances following the completion of the updated projection to determine whether any additional adjustments are required.

Hardboard Insurance Matters

As discussed in the 2005 10-K, the Company has entered into favorable agreements with various insurance carriers to settle claims relating to their refusal to indemnify and/or defend the Company and Masonite for, among other things, the settlement of Hardboard Claims. In the second quarter, the Company participated in a binding arbitration proceeding with Ace Insurance to resolve the sole remaining coverage dispute. The arbitration panel has now determined that the Company is not entitled to recover any amounts for these claims under the Ace insurance policy.

Cumulative net cash settlements received by the Company through September 30, 2006 in connection with Hardboard insurance settlements totaled approximately $359 million. Total insurance recoveries are expected to be approximately $625 million, with the balance to be received in installments through the end of 2008.

Antitrust Matters

As disclosed in the 2005 10-K, the Company is party to a class action lawsuit by a group of private landowners alleging that the Company and certain of its fiber suppliers, known as Quality Suppliers, engaged in an unlawful conspiracy to artificially depress the prices at which the Company procures fiber for its mills. While the Company continues to maintain that its Quality Supplier program did not violate any antitrust laws, it agreed to settle this case in the second quarter for a payment by the Company to the class of $12.4 million, including plaintiff counsel fees. An order from the Federal District Court in Columbia, South Carolina approving the settlement was issued on September 27, 2006.

Also as disclosed in the 2005 10-K, the Company was a defendant in a purported antitrust class action brought by purchasers of coated publication papers in various U.S. federal and state courts. The Company has been dismissed from all indirect-purchaser cases, including one previously disclosed California case from which the Company was dismissed during the third quarter.

Other Matters

International Paper is involved from time to time in various other inquiries, administrative proceedings and litigation relating to contracts, sales of property, environmental, tax, antitrust, personal injury, employment and other matters, some of which allege substantial monetary damages. While any proceeding or litigation has the element of uncertainty, International Paper believes that the outcome of any such matters, pending or threatened, or all of them combined, will not have a material adverse effect on its consolidated financial statements.

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NOTE 8 - DEBT

In August 2006, International Paper used approximately $320 million of cash to repay its maturing 5.375% euro-denominated notes that were designated as a hedge of euro functional currency net investments. Other debt activity in the third quarter included the repayment of $143 million of 7.875% notes and $96 million of 7% debentures, all maturing within the quarter.

On June 20, 2006, International Paper paid approximately $1.2 billion to repurchase substantially all of its zero-coupon convertible debentures at a price equal to their accreted principal value plus interest, using proceeds from divestitures and $730 million of third party commercial paper issued under the Company’s receivables securitization program. As of September 30, 2006, International Paper had reduced this commercial paper borrowing by a net of $30 million, reflecting repayments of second-quarter borrowings less amounts required for the “Dutch Auction” tender offer in September, and plans to repay the remainder by the end of 2006.

In February 2006, International Paper repurchased $195 million 6.4% debentures with an original maturity date of February 2026. Other reductions in the first quarter 2006 included early payment of approximately $495 million of notes with coupon rates ranging from 4% to 8.875% and original maturities from 2007 to 2029. Pre-tax early debt retirement costs of $8 million related to first quarter 2006 debt reductions are included in Restructuring and other charges in the accompanying consolidated statement of operations.

In March 2006, International Paper replaced its maturing $750 million revolving bank credit agreement with a 364-day $500 million fully committed revolving bank credit agreement that expires in March 2007 and has a facility fee of 0.08% payable quarterly, and replaced its $1.25 billion revolving bank credit agreement with a $1.5 billion fully committed revolving bank credit agreement that expires in March 2011 and has a facility fee of 0.10% payable quarterly. The new agreements generally provide for interest rates at a floating rate index plus a pre-determined margin dependent upon International Paper’s credit rating.

On October 25, 2006, the Company amended its existing receivables securitization program that provides for up to $1.2 billion of commercial paper-based financings with a facility fee of 0.20% and an expiration date in November 2007, to provide up to $1 billion of available commercial paper-based financings with a facility fee of 0.10% and an expiration date of October 2009.

During 2006, the Company entered into a series of fixed-to-floating interest rate agreements with a notional amount of approximately $1.2 billion. The objective of these transactions, all of which qualify as fully effective fair value hedges under SFAS No. 133, was to manage interest rate risks associated with International Paper’s debt. These additional agreements increased the outstanding notional amounts of fully effective fair value interest rate swaps to approximately $3 billion, with a fair value net asset of approximately $18 million as of September 30, 2006.

In September 2005, International Paper used proceeds from the sale of its interest in CHH to repay the remaining $250 million portion of a subsidiary’s $650 million long-term debt with an interest rate of LIBOR plus 62.5 basis points and a maturity date of June 2007, and $312 million of commercial paper that had been issued in the same quarter. Other reductions in the 2005 third quarter included repayment of $662 million of notes with coupon rates ranging from 4% to 7.35% and original maturities from 2009 to 2029, and the repayment of $150 million of 7.10% notes with a maturity date of September 2005. Pre-tax early debt retirement costs of $26 million related to third quarter 2005 debt reductions are included in Restructuring and other charges in the accompanying consolidated statement of operations.

In June 2005, International Paper repaid approximately $400 million of a subsidiary’s long-term debt with an interest rate of LIBOR plus 62.5 basis points and a maturity date of June 2007.

18

In February 2005, International Paper redeemed the outstanding $464 million aggregate principal amount of International Paper Capital Trust 5.25% convertible subordinated debentures originally due in July 2025 at 100.5% of par plus accrued interest. Other reductions in the first quarter of 2005 included early payment of approximately $295 million of principal on notes with coupon rates ranging from 4% to 7.875% and original maturities from 2006 to 2015. Pre-tax early debt retirement costs of $24 million related to first quarter 2005 debt reductions are included in Restructuring and other charges in the accompanying consolidated statement of operations.

At December 31, 2005, International Paper had classified as Long-term debt $1.25 billion of tenderable bonds, commercial paper and bank notes and current maturities of long-term debt. International Paper had the intent and ability to renew or convert these obligations as evidenced by credit facilities existing at that date.

Maintaining a strong investment-grade credit rating is an important element of International Paper’s corporate finance strategy. In the third quarter of 2006, Standard & Poor’s revised the outlook on the Company’s long-term credit ratings from BBB negative to stable outlook and upgraded its short-term credit rating from A-3 to A-2. At September 30, 2006, the Company also held a long-term credit rating of Baa3 (stable outlook) and a short-term credit rating of P-3 from Moody’s Investor Services.

NOTE 9 – RETIREMENT PLANS

International Paper maintains pension plans that provide retirement benefits to substantially all domestic employees hired prior to July 1, 2004. These employees generally are eligible to participate in the plans upon completion of one year of service and attainment of age 21. Employees hired after June 30, 2004, who are not eligible for this pension plan, will receive an additional company contribution to their savings plan.

The plans provide defined benefits based on years of credited service and either final average earnings (salaried employees), hourly job rates or specified benefit rates (hourly and union employees). A detailed discussion of these plans is presented in Note 15 to the Financial Statements included in International Paper’s Annual Report on Form 10-K for the year ended December 31, 2005.

Net periodic pension expense for the Company’s qualified and nonqualified U.S. defined benefit plans consisted of the following:

	Three Months Ended September 30,						Nine Months Ended September 30,
In millions	2006			2005			2006			2005
Service cost	$	35		$	32		$	106		$	97
Interest cost		127			118			380			355
Expected return on plan assets		(135	)		(139	)		(405	)		(417	)
Actuarial loss		60			41			182			125
Amortization of prior service cost		7			8			20			22
Net periodic pension expense (a)	$	94		$	60		$	283		$	182

(a) Excludes net charges of $3 million and $47 million for the three-month and nine-month periods ended September 30, 2006 for curtailments and termination benefits related to Kraft Papers, Coated Papers, and the Transformation initiative that were recorded in Discontinued operations, Net (gains) losses on sales and impairments of businesses and Restructuring and other charges, respectively; and charges of $1 million and $30 million for the three-month and nine-month periods ended September 30, 2005 for curtailments and special termination benefits related to the divestiture of Fine Papers, Industrial Papers and the Jackson Foodservice plant divestitures and an organizational restructuring that were recorded in Net (gains) losses on sales and impairments of businesses and Restructuring and other charges, respectively.

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While International Paper may elect to make voluntary contributions to its U.S. qualified plan up to the maximum deductible amount per Internal Revenue Service tax regulations in the coming years, it is unlikely that any contributions to the plan will be required before 2007 unless investment performance is negative or International Paper changes its funding policy. The nonqualified plan is funded to the extent of benefit payments, which equaled $23 million through September 30, 2006.

NOTE 10 – STOCK-BASED COMPENSATION

International Paper has a Long-Term Incentive Compensation Plan (LTICP) that includes a Stock Option Program, a Restricted Performance Share Program and a Continuity Award Program, administered by a committee of independent members of the Board of Directors who are not eligible for these awards. A detailed discussion of these plans is presented in Note 17 to the Financial Statements included in International Paper’s Annual Report on Form 10-K for the year ended December 31, 2005. As of September 30, 2006, 22.7 million shares were available for grant under the LTICP.

Effective January 1, 2006, the Company adopted the provisions of SFAS No. 123(R), “Share-Based Payment,” using the modified prospective transition method and, accordingly, prior period amounts have not been restated. This pronouncement requires that compensation costs related to share-based payments be recognized in the financial statements. For equity awards, the amount of compensation cost is measured based on the grant date fair value of the award. The resulting cost is recognized over the period during which an employee is required to provide service in exchange for the award, usually the vesting period. Prior to January 1, 2006, the Company applied the provisions of APB Opinion No. 25, “Accounting for Stock Issued to Employees,” and related interpretations and the disclosure provisions of SFAS No. 123, “Accounting for Stock-Based Compensation,” in accounting for its plans.

Total stock-based compensation cost recognized in Selling and administrative expense in the accompanying consolidated statement of operations for the nine months ended September 30, 2006 and 2005 was $98.8 million and $31.5 million, respectively. The actual tax benefit realized for stock-based compensation costs was $2.5 million for both nine-month periods ended September 30, 2006 and 2005. At September 30, 2006, $121.1 million, net of estimated forfeitures, of compensation cost related to unvested restricted performance shares and continuity awards attributable to future performance had not yet been recognized. This amount will be recognized in expense over a weighted-average period of 1.4 years.

Restricted Performance Share Program:

Restricted Performance Share Program (PSP) awards are earned based on the achievement of defined performance rankings of return on investment (ROI) and total shareholder return (TSR) compared to a peer group of companies. For awards issued to non-senior management, the awards are weighted 75% for ROI and 25% for TSR. For awards issued to certain members of senior management, the awards are weighted 50% for ROI and 50% for TSR. The ROI component of the PSP awards is valued at the closing stock price on the day prior to the grant date. As the ROI component contains a performance condition, compensation expense, net of estimated forfeitures, is recorded over the requisite service period based on the most probable number of awards expected to vest. The TSR component of the PSP awards is valued using a Monte Carlo simulation as the TSR component contains a market condition. The Monte Carlo simulation estimates the fair value of the TSR component based on the expected term of the award, risk-free rate, expected dividends, and the expected volatility for the Company and its competitors. The expected term was estimated based on the vesting period of the awards, the risk-free rate was based on the yield on U.S. Treasury securities matching the vesting period, the expected dividends were assumed to be zero for all companies, and the volatility was based on the Company’s historical volatility over the expected term.

PSP awards issued to the senior management group are liability awards, which are required to be remeasured at fair value at each balance sheet date. The valuation of these PSP liability awards is computed based on the same methodology as the PSP equity awards.

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The following table sets forth the assumptions used to determine compensation cost for the market condition component of the PSP plan consistent with the requirements of SFAS No. 123(R):

	Three Months Ended September 30, 2006	Nine Months Ended September 30, 2006
Expected volatility	20.6%	20.50% - 25.20%
Risk-free interest rate	4.59% - 4.89%	4.30% - 5.30%

The following summarizes the activity for all performance-based programs for the nine months ended September 30, 2006:

	Nonvested Shares		Weighted Average Grant Date Fair Value
Outstanding at December 31, 2005	4,195,317		$	41.47
Granted	2,320,858			33.58
Shares Issued (a)	(378,042	)		35.89
Forfeited	(50,666	)		39.16
Outstanding at September 30, 2006	6,087,467		$	38.83

(a) Includes 5,468 shares held for payout at the end of the performance period.

Stock Option Program:

The Company discontinued its stock option program in 2004 for members of executive management, and in 2005 for all other eligible U.S. and non-U.S. employees. Stock-based compensation expense totaling $5,000 related to a stock option reload was recorded for the nine months ended September 30, 2006. The expense was calculated under the Black-Scholes option pricing model using 19.7% expected volatility, an interest rate of 4.97%, a 2.7% expected dividend yield, and a term of two years. As of September 30, 2006, all outstanding options were fully vested.

A summary of option activity under the plan as of September 30, 2006 is presented below:

	Options		Weighted Average Exercise Price		Weighted Average Remaining Life (years)	Aggregate Intrinsic Value (thousands)
Outstanding at December 31, 2005	41,581,598		$	39.49
Granted	997			37.06
Exercised	(785,628	)		32.61
Forfeited	(678,339	)		44.95
Expired	(2,299,835	)		41.30
Outstanding at September 30, 2006	37,818,793		$	39.43	5.18	$	1,491

All options are exercisable as of September 30, 2006.

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Continuity Award Program:

The following summarizes the activity of the Continuity Award Program for the nine months ended September 30, 2006:

	Nonvested Shares		Weighted Average Grant Date Fair Value
Outstanding at December 31, 2005	250,375		$	38.49
Granted	55,000			34.41
Shares Issued	(81,958	)		38.74
Forfeited	(49,667	)		37.15
Outstanding at September 30, 2006	173,750		$	37.46

Pro Forma Information for Periods Prior to the Adoption of SFAS No. 123(R):

Prior to January 1, 2006, the Company accounted for stock-based awards under the intrinsic value method, which followed the recognition and measurement principles of APB Opinion No. 25. The following table illustrates the effect on net earnings, net earnings per common share and net earnings per common share, assuming dilution, for the three and nine months ended September 30, 2005 if the Company had applied the fair value recognition provisions of SFAS No. 123.

In millions, except per share amounts	Three Months Ended September 30, 2005			Nine Months Ended September 30, 2005
Net earnings, as reported	$	1,023		$	1,177
Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects		(27	)		(55	)
Pro forma net earnings	$	996		$	1,122
Earnings per common share
Basic - as reported	$	2.10		$	2.42
Basic - pro forma	$	2.04		$	2.31
Earnings per common share
Diluted - as reported	$	2.03		$	2.36
Diluted - pro forma	$	1.98		$	2.25

NOTE 11 – SUBSEQUENT EVENTS

On October 25, 2006, International Paper and Ilim Pulp, the largest forest products enterprise in Russia, announced that a letter of intent had been signed to establish a 50-50 joint venture. If definitive agreements are reached, this joint venture would be the largest foreign-domestic alliance in the Russian forest sector. It is currently contemplated that International Paper will purchase a 50% equity interest in the joint venture for approximately $400 million in cash. The total enterprise value of the joint venture is approximately $1.3 billion, excluding approximately $500 million of debt that will be nonrecourse to the joint venture partners. The parties currently expect to finalize the agreement in the next six months, following completion of due diligence, receipt of required regulatory approvals, and the approvals of their respective boards of directors.

On October 30, 2006 and November 3, 2006, International Paper completed the previously announced sales of approximately 5.1 million acres of forestlands to TimberStar and Resource Management Service, LLC, respectively, for proceeds totaling approximately $6.1 billion of cash and notes. These sales will result in an estimated special fourth-quarter pre-tax gain in excess of $4 billion.

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INTERNATIONAL PAPER COMPANY

Financial Information by Industry Segment

(Unaudited)

(In millions)

Sales by Industry Segment

	Three Months Ended September 30,						Nine Months Ended September 30,
	2006			2005 (1)			2006 (1)			2005 (1)
Printing Papers	$	1,670		$	1,795		$	5,385		$	5,350
Industrial Packaging		1,250			1,075			3,660			3,455
Consumer Packaging		855			785			2,425			2,290
Distribution		1,730			1,645			5,070			4,745
Forest Products		445	(4)		700	(4)		1,670	(4)		1,915	(4)
Specialty Businesses and Other (2)		245			220			710			725
Corporate and Inter-segment Sales		(328	)		(295	)		(813	)		(830	)
Net Sales	$	5,867		$	5,925		$	18,107		$	17,650

Operating Profit by Industry Segment

	Three Months Ended September 30,						Nine Months Ended September 30,
	2006			2005 (1)			2006 (1)			2005 (1)
Printing Papers	$	249		$	117	(7)	$	615		$	413	(7,9)
Industrial Packaging		138	(6)		29	(7)		277	(6)		215	(7)
Consumer Packaging		64			43	(7)		140			128	(7)
Distribution		34			23			97			59
Forest Products		129	(5)		271	(5,7)		539	(5)		669	(5,7,9)
Specialty Businesses and Other (2)		22			(8	)(7)		48			9	(7)
Operating Profit		636			475			1,716			1,493
Interest expense, net		(144	)		(121	)(8)		(441	)		(444	)(8,10)
Minority interest (3)		—			—			5			1
Corporate items, net		(216	)		(140	)		(565	)		(429	)
Restructuring and other charges		(92	)		(41	)		(192	)		(65	)
Insurance recoveries		—			188			19			223
Net (losses) gains on sales and impairments of businesses held for sale		97			(5	)		(1,261	)		(65	)
Reserve adjustments		—			3			—			3
Earnings (loss) from continuing operations before income taxes and minority interest	$	281		$	359		$	(719	)	$	717

(1) Prior-period industry information has been restated to reflect the classification of the Kraft Papers and Brazilian Coated Papers businesses as discontinued operations.

(2) Includes Arizona Chemical, European Distribution and certain smaller businesses.

(3) Operating profits for industry segments include each segment’s percentage share of the profits of subsidiaries included in that segment that are less than wholly owned. The pre-tax minority interest for these subsidiaries is added here to present consolidated earnings before income taxes and minority interest.

(4) Includes $135 million, $280 million, $575 million and $715 million for Forest Resources, and $310 million, $420 million, $1,095 million and $1,200 million for Wood Products, in the third quarter of 2006, third quarter of 2005, first nine months of 2006, and first nine months of 2005, respectively.

(5) Includes $166 million, $210 million, $517 million and $497 million for Forest Resources, and ($37) million, $61 million, $22 million and $172 million for Wood Products, in the third quarter of 2006, third quarter of 2005, first nine months of 2006, and first nine months of 2005, respectively.

(6) Includes a 2006 third-quarter gain of $13 million before taxes related to the sale of property in Spain.

(7) Includes 2005 third-quarter special charges of $6 million before taxes in the Printing Papers segment for severance and other charges related to the indefinite shutdown of three U.S. paper machines, $3 million before taxes in the Printing Papers segment and $1 million before taxes in the Consumer Packaging segment for environmental reserves, $4 million before taxes in the Industrial Packaging segment related to adjust reserve previously provided, $2 million before taxes in the Forest Products segment for costs associated with relocating the headquarters to Memphis, Tennessee from Savannah, Georgia and $13 million before taxes in the Other Businesses segment related to a plant shutdown.

(8) Includes interest income of $43 million before taxes related to a favorable tax adjustment.

(9) Includes 2005 second-quarter special charges of $17 million before taxes in the Printing Papers segment for severance and other charges related to the indefinite shutdown of three U.S. paper machines, and $14 million before taxes in the Forest Resources segment for 2005 second-quarter costs associated with relocating the Forest Products headquarters to Memphis, Tennessee from Savannah, Georgia.

(10) Includes interest income of $11 million before taxes from the collection of a note receivable from the 2001 sale of the Flexible Packaging business.

23

INTERNATIONAL PAPER COMPANY

Sales Volumes By Product (1) (2)

(Unaudited)

	Three Months Ended September 30,			Nine Months Ended September 30,
	2006		2005	2006	2005
Printing Papers (In thousands of short tons)
Brazil Uncoated Papers	121		111	353	330
Europe & Russia Uncoated Papers	353		342	1,072	1,059
U.S. Uncoated Papers	1,006		940	3,031	2,886
Uncoated Papers	1,480		1,393	4,456	4,275
Coated Papers	220	(4)	582	1,300	1,630
Market Pulp (3)	282		335	856	938
Packaging (In thousands of short tons)
Container of the Americas	902		886	2,733	2,682
European Container (Boxes)	293		262	939	794
Other Industrial and Consumer Packaging	115		126	354	387
Industrial and Consumer Packaging	1,310		1,274	4,026	3,863
Containerboard	451		466	1,385	1,375
Bleached Packaging Board	405		341	1,174	1,063
Coated Bristols	101		101	311	311
Kraft	62		63	196	185
Forest Products (In millions)
Panels (sq. ft. 3/8” - basis)	404		444	1,219	1,212
Lumber (board feet)	613		675	1,907	1,951

(1) Sales volumes include third party and inter-segment sales.

(2) Sales volumes for divested businesses are included through the date of sale, except for discontinued operations.

(3) Includes internal sales to mills.

(4) Includes one month of production for the U.S. Coated and Supercalendered business that was sold in the third quarter of 2006.

Sales Volumes represent supplemental information that is not included in Item 1. Financial Information.

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

EXECUTIVE SUMMARY

International Paper reported solid 2006 third quarter operating results driven by much improved performance in our key platform North American Paper and Packaging businesses. Average product prices improved compared with the second quarter across all uncoated paper, pulp and packaging grades as a number of announced price increases were fully implemented. Sales volumes were solid and generally comparable with the second quarter. Global manufacturing operations continued to perform well in the quarter, although we continue to be challenged by high input and distribution costs. However, the operating results for our Wood Products business were down sharply reflecting lower product prices in a weak housing market. The effective tax rate was lower for the third quarter reflecting a lower projected full-year rate.

Looking forward to the fourth quarter, sales volumes are expected to be seasonally slower toward the end of the year. For North America, we have realized substantially all of our announced paper and packaging price increases and believe that we are near the bottom on wood products prices. Input and distribution costs are likely to remain high, although we believe there are some favorable signs on the horizon. Benefits from expected continued improvement in our global manufacturing operations will be somewhat offset by an increase in planned maintenance downtime. Net interest expense should be lower in the quarter due to interest income from the installment notes we will receive as the Transformation Plan forestland sales close. Thus, earnings from continuing operations, before special items, are expected to be slightly lower than in the third quarter.

RESULTS OF OPERATIONS

For the third quarter of 2006, International Paper reported net sales of $5.9 billion, compared with $5.9 billion in the third quarter of 2005 and $6.2 billion in the second quarter of 2006.

Net earnings totaled $201 million, or $0.42 per share, in the 2006 third quarter. This compared with net earnings of $1.0 billion, or $2.03 per share, in the third quarter of 2005 and $115 million, or $0.24 per share, in the second quarter of 2006.

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Earnings from continuing operations were $113 million in the third quarter of 2006 compared with earnings of $733 million in the third quarter of 2005 and $112 million in the 2006 second quarter. Earnings in the 2006 third quarter benefited from higher average price realizations ($127 million), higher sales volumes and decreased market-related downtime ($15 million), and lower operating costs and a more favorable mix of products sold ($114 million) compared with the 2005 third quarter. These benefits were partially offset by higher raw material and freight costs ($58 million) and lower gains from land sales ($40 million). In addition, corporate items and other costs ($51 million) increased reflecting higher pension costs, incentive compensation and other benefit-related charges and supply chain costs. Net interest expense ($12 million) decreased. The Wood Products business reported significantly lower earnings ($64 million) as a result of lower price realizations. The Coated and Supercalendered business had lower after-tax earnings ($14 million) reflecting the sale of the business on August 1, 2006. Net special items were an expense of $75 million in the 2006 third quarter versus income of $603 million in the third quarter of 2005. Income tax expense was $17 million lower in the 2006 third quarter reflecting a lower estimated effective tax rate.

Compared with the second quarter of 2006, earnings from continuing operations benefited from higher average price realizations ($41 million), higher sales volumes ($7 million), and improved manufacturing costs ($26 million) resulting from cost reduction actions in prior periods. These benefits were partially offset by higher raw material and freight costs ($14 million). Corporate and other items increased ($31 million) due to higher incentive compensation and other benefit-related charges. Net interest expense ($3 million) decreased. Wood Products earnings were lower ($41 million) reflecting the sharp decline in price realizations. The Coated and Supercalendered Papers business had lower after-tax earnings ($18 million) due to the sale of the business. Additionally, compared with the 2006 second quarter, 2006 third-quarter earnings reflected benefits from lower special charges ($9 million) and a lower effective tax rate ($19 million).

To measure the performance of the Company’s business segments from period to period without variations caused by special or unusual items, International Paper’s management focuses on business segment operating profit. This is defined as earnings before taxes and minority interest, excluding interest expense, corporate charges and special items that include restructuring charges, early debt extinguishment costs, legal reserves, insurance recoveries, gains (losses) on sales and impairments of businesses, and the reversal of reserves no longer required. Prior-year industry segment information has been restated to conform to minor changes in the 2006 operational structure and to reflect the classification of the Kraft Papers and the Brazilian Coated Papers businesses as discontinued operations.

26

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

	Three Months Ended
	September 30,						June 30,
In millions	2006			2005			2006
Net Earnings (Loss)	$	201		$	1,023		$	115
Deduct - Discontinued operations:
(Earnings) loss from operations		(8	)		71			(13	)
(Gain) loss on sales or impairments		(80	)		(361	)		10
Earnings From Continuing Operations		113			733			112
Add back (deduct):
Income tax provision (benefit)		163			(377	)		59
Minority interest expense, net of taxes		5			3			5
Earnings From Continuing Operations Before Income Taxes and Minority Interest		281			359			176
Interest expense, net		144			121			147
Minority interest included in operations		—			—			(2	)
Corporate items		216			140			174
Special items:
Restructuring and other charges		92			41			54
Insurance recoveries		—			(188	)		—
Net (gains) losses on sales and impairments of businesses held for sale		(97	)		5			75
Reserve adjustments		—			(3	)		—
	$	636		$	475		$	624
Industry Segment Operating Profit
Printing Papers	$	249		$	117		$	247
Industrial Packaging		138			29			100
Consumer Packaging		64			43			41
Distribution		34			23			36
Forest Products		129			271			184
Specialty Businesses and Other		22			(8	)		16
Total Industry Segment Operating Profit	$	636		$	475		$	624

Discontinued Operations

During the 2006 third quarter, International Paper completed the previously announced sale of its Brazilian Coated Papers business to Stora Enso Oyj for approximately $420 million, subject to certain post-closing adjustments. The operating results of this business for all periods presented are included in Discontinued operations in the accompanying consolidated statement of operations, including a pre-tax gain of $101 million ($80 million after taxes) recorded in the 2006 third quarter as a result of the sale.

In the 2006 first quarter, a pre-tax charge of $101 million ($0.13 per share) had been recorded to write down the carrying value of the assets of the Kraft Papers business to their estimated fair value. During the 2006 second quarter, International Paper signed a definitive agreement to sell this business to Stone Arcade Acquisition Corp. and recorded an additional pre-tax charge of $16 million ($0.02 per share) based on the terms of this agreement.

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Discontinued operations for the second quarter of 2005 also includes the operating results of Carter Holt Harvey Limited sold in the third quarter of 2005.

Income Taxes

The income tax provision was $163 million for the 2006 third quarter. Excluding a $93 million charge relating to the tax effects of special items, the effective income tax rate for continuing operations was 27% for the quarter, bringing the effective tax rate for the 2006 nine-month period to 31%, the revised estimated full-year rate for 2006.

The income tax provision was $59 million in the 2006 second quarter. Excluding a $45 million credit relating to the tax effects of special items, the effective income tax rate for continuing operations was 34% for the quarter.

The income tax benefit of $377 million in the third quarter of 2005 included a $553 million non-cash income tax benefit resulting from an agreement reached with the U.S. Internal Revenue Service concerning the Company’s 1997 through 2000 federal income tax audits, a $21 million provision related to cash repatriated from non –U.S. subsidiaries under the American Jobs Creation Act of 2004, and a $15 million provision related to a change in Ohio state tax laws. Excluding these items, and a $73 million charge relating to the tax effects of special items, the effective income tax rate for continuing operations was 34% for the quarter.

Interest Expense and Corporate Items

Net interest expense for the 2006 third quarter was $144 million, slightly lower than the $148 million in the 2006 second quarter, but higher than the $121 million in the 2005 third quarter. Net interest expense in the 2005 third quarter included a pre-tax credit of $43 for a reduction of accrued interest related to the agreement with the U.S. Internal Revenue Service discussed above. Excluding this, net interest expense was $164 million. The lower expense in the current quarter reflects lower average debt balances and interest rates due to debt refinancings and repayments in 2005 and 2006.

Corporate items, net, of $216 million in the 2006 third quarter were higher than the 2006 second-quarter net expenses of $174 million, and were higher than the net expenses of $140 million in the third quarter of 2005. The higher expense in the current quarter is due primarily to higher incentive compensation and other benefit costs.

Special Items

Restructuring and Other Charges

During the third quarter of 2006, restructuring and other charges totaling $92 million before taxes ($56 million after taxes) were recorded. Included in these charges were a pre-tax charge of $57 million ($35 million after taxes), including severance and other charges associated with the Company’s Transformation Plan and a $35 million pre-tax charge ($21 million after taxes) for adjustments to legal reserves.

During the second quarter of 2006, restructuring and other charges totaling $54 million before taxes ($33 million after taxes) were recorded. Included in these charges were a pre-tax charge of $50 million ($30 million after taxes) for severance and other charges associated with the Company’s Transformation Plan and a $4 million pre-tax charge ($3 million after taxes) for legal settlements.

28

During the first quarter of 2006, restructuring and other charges totaling $46 million before taxes ($28 million after taxes) were recorded. Included in these charges were a pre-tax charge of $20 million ($12 million after taxes) for organizational restructuring programs, principally severance costs associated with the Company’s Transformation Plan, a pre-tax charge of $8 million ($5 million after taxes) for losses on early extinguishment of debt, and a pre-tax charge of $18 million ($11 million after taxes) for adjustments to legal reserves. Also recorded was a pre-tax charge of $6 million for tax adjustments.

During the third quarter of 2005, restructuring and other charges totaling $70 million before taxes ($48 million after taxes) were recorded. Included in this charge were a pre-tax charge of $44 million ($32 million after taxes) for organizational restructuring charges and a pre-tax charge of $26 million ($16 million after taxes) for losses on early extinguishment of debt.

During the second quarter of 2005, a pre-tax charge of $31 million ($19 million after taxes) for organizational restructuring charges was recorded. The organizational restructuring charges included $17 million before taxes ($11 million after taxes) recorded in the Printing Papers business segment for severance and other charges associated with the indefinite shutdown of three U.S. paper machines, and $14 million before taxes ($8 million after taxes) in the Forest Products business segment for costs associated with relocating the business headquarters to Memphis, Tennessee from Savannah, Georgia.

During the first quarter of 2005, a special charge of $24 million before taxes ($15 million after taxes) was recorded for losses on early extinguishment of high-coupon-rate debt.

Insurance Recoveries

During the first quarter of 2006, a pre-tax credit of $19 million ($12 million after taxes) was recorded for net insurance recoveries related to the hardboard siding and roofing litigation (see Note 7). The second and third quarters of 2005 also included pre-tax credit of $35 million ($21 million after taxes) and $188 million ($109 million after taxes), respectively, for insurance recoveries related to this litigation.

Net (Gains) Losses on Sales and Impairments of Businesses

During the third quarter of 2006, a net pre-tax gain of $110 million (a loss of $13 million after taxes) was recorded for (gains) losses on sales and impairments of businesses, including a $13 million pre-tax gain on sale of property in Spain recorded in the Industrial Packaging business. This net gain included pre-tax credits of $304 million ($185 million after taxes) for gains on sales of U.S. forestlands included in the Transformation Plan, the recognition of a previously deferred $110 million pre-tax gain ($68 million after taxes) related to a 2004 sale of forestlands in Maine, pre-tax losses of $165 million and $115 million ($165 million and $82 million after taxes) to adjust the carrying values of the Company’s Wood Products and Beverage Packaging businesses to estimated fair values, a pre-tax charge of $38 million ($23 million after taxes) to reflect the completion of the sale of the Company’s Coated and Supercalendered Papers business in the 2006 third quarter, and a net pre-tax gain of $14 million (a loss of $2 million after taxes) related to other smaller sales.

During the second quarter of 2006, a net pre-tax charge of $75 million ($51 million after taxes) for net (gains) losses on sales and impairments of businesses was recorded, including a pre-tax credit of $62 million ($39 million after taxes) for gains on sales of U.S. forestlands included in the Transformation Plan, a pre-tax charge of $85 million ($53 million after taxes) to adjust the net assets of the Company’s Coated and Supercalendered Papers business to their estimated fair value based on the terms of the definitive sales agreement signed in the second quarter, and a pre-tax charge of $52 million ($37 million after taxes) to write down the carrying value of certain assets in Brazil to their estimated fair value.

During the first quarter of 2006, a charge of $1.3 billion before and after taxes was recorded to write down the assets of the Company’s Coated and Supercalendered Papers business to their estimated fair value. In addition, other pre-tax charges totaling $3 million ($2 million after taxes) were recorded to adjust estimated losses of certain smaller operations that are held for sale.

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In the third quarter of 2005, charges totaling $5 million before taxes ($3 million after taxes) were recorded for adjustments of losses on businesses previously sold.

In the second quarter of 2005, a pre-tax gain of $19 million ($12 million after taxes) was recorded for net adjustments of losses on businesses previously sold.

During the first quarter of 2005, pre-tax charges of $79 million ($52 million after taxes) were recorded, including a $24 million pre-tax loss ($13 million after taxes) to write down the net assets of the Fine Papers business to their estimated net realizable value, $49 million pre-tax loss ($35 million after taxes) to write down the net assets of the Industrial Papers business and related corporate assets to their estimated net realizable value and a $6 million charge before taxes ($4 million after taxes) for adjustments to estimated losses on sales of certain smaller operations.

INDUSTRY SEGMENT OPERATING PROFIT

Industry segment operating profits of $636 million in the 2006 third quarter were higher than both $475 million in the 2005 third quarter and $624 million in the 2006 second quarter. Compared with the third quarter of 2005, earnings in the current quarter benefited from higher average prices ($189 million), higher sales volumes and the impact of reduced market-related downtime ($22 million), lower manufacturing operating costs and a more profitable mix of products sold ($170 million), and other items ($6 million). Additionally, special items ($41 million) were favorable in the quarter. These benefits more than offset the effects of higher raw material and freight costs ($86 million), and lower gains from land sales ($60 million). Wood Products earnings were significantly lower ($98 million) due to dramatically lower price realizations. The Coated and Supercalendered business had lower earnings ($23 million) as a result of the sale of the business on August 1, 2006.

Compared with the 2006 second quarter, operating profits benefited from higher average prices ($62 million), higher sales volumes ($11 million), improved manufacturing operating performance and the impact of cost reduction efforts ($39 million), favorable special charges ($13 million) and lower other costs ($1 million). These benefits were partially offset by higher raw material and freight costs ($22 million). Wood Products earnings declined ($61 million) due to lower price realizations; while the Coated and Supercalendered business had lower earnings ($31 million) because of the sale of the business.

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During the 2006 third quarter, International Paper took approximately 130,000 tons of downtime, including 28,000 tons for market-related downtime, compared with approximately 400,000 tons of downtime in the third quarter of 2005, which included 270,000 tons of market-related downtime. During the 2006 second quarter, International Paper took approximately 240,000 tons of downtime, including 25,000 tons for market-related downtime. Market-related downtime is taken to balance internal supply with our customer demand to help manage inventory levels, while maintenance downtime, which makes up the majority of the difference between total downtime and market-related downtime, is taken periodically during the year. The costs for annual planned maintenance downtime are charged to expense evenly in each quarter. Market-related downtime costs are expensed in the periods in which the downtime is taken.

BUSINESS SEGMENT OPERATING RESULTS

The following presents segment discussions for the third quarter of 2006.

Printing Papers

	2006						2005
In millions	3rd Quarter		2nd Quarter		Nine Months		3rd Quarter		2nd Quarter		Nine Months
Sales	$	1,670	$	1,860	$	5,385	$	1,795	$	1,725	$	5,350
Operating Profit		249		247		615		117		128		413

Printing Papers net sales for the third quarter of 2006 were 10% lower than the second quarter of 2006 and 7% lower than the third quarter of 2005. Operating profits in the third quarter of 2006 were only slightly above profits in the second quarter of 2006, but were more than double profits in the third quarter of 2005.

U.S. Uncoated Papers earnings increased substantially in the third quarter of 2006 versus the second quarter of 2006 to record levels. Sales volumes were flat as increases in printing paper and form shipments were offset by decreases in cut size and envelope paper shipments. Average price realizations were up for uncoated freesheet papers reflecting the full realization of previously announced price increases for both roll and cut-size paper product lines. Input costs for wood and energy were unfavorable during the quarter. Freight costs remained high, while manufacturing operations were favorable for the quarter reflecting seasonally lower energy consumption and fewer planned maintenance outages.

Earnings were also significantly higher than in the third quarter of 2005. Average sales prices were higher reflecting the benefits from price increases announced earlier in 2006. Sales volumes were up, reflecting improvements in cut size and printing papers and envelopes, while forms volumes declined slightly. Strong product demand in the 2006 quarter resulted in virtually no market-related downtime, compared with 173,000 tons taken in the third quarter of 2005. However, wood, energy and freight costs were all above 2005 levels. Manufacturing operations were favorable, benefiting from improved machine performance and energy conservation efforts. In addition, operating results for the third quarter of 2005 included a $6 million special charge for severance and other charges related to the indefinite shutdown of three paper machines, and a $3 million special charge for environmental reserves.

Looking ahead to the 2006 fourth quarter, earnings are expected to be slightly lower. Average sales price realizations will be slightly higher with a full quarter of realizations of previous price announcements. Scheduled maintenance outages are expected to increase costs, as will seasonally higher energy consumption. Natural gas prices are expected to average slightly lower.

European Papers earnings for the third quarter of 2006 were essentially flat with the 2006 second quarter. Sales volumes increased primarily in Eastern Europe as the inventory supply constraints that limited the

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second-quarter shipments were eliminated. Average sales prices were lower as a result of an increased mix of lower price exports. Input costs were favorable due to lower energy and wood costs. Manufacturing operations costs were higher due to planned maintenance outages. Earnings improved versus the 2005 third quarter as higher average price realizations and higher sales volumes were only partially offset by increased input costs for energy and wood.

Entering the 2006 fourth quarter, European Papers’ earnings are expected to improve, primarily as a result of higher sales volumes for pulp and paper and higher average sales price realizations. Some increases in manufacturing costs are anticipated due to seasonally higher energy usage plus higher input costs for wood.

Brazilian Paper earnings for the third quarter of 2006 were lower than the 2006 second quarter, which had benefited from an $8 million favorable settlement of a Brazilian tax matter. Sales volumes increased due to higher uncoated freesheet paper and chip shipments. Average sales price realizations for wood chips and exported uncoated freesheet paper also increased, and input costs were favorable due to lower natural gas prices. Compared to the third quarter of 2005, earnings declined in the third quarter of 2006. Sales volumes were lower, reflecting the absence of a large bulk timber sale that occurred in the third quarter of 2005 and lower wood chip shipments, partially offset by higher uncoated freesheet paper sales. Average sales price realizations for uncoated freesheet paper and wood chips were higher. Manufacturing operations and raw material costs were slightly favorable.

With the completion of the sale of the Brazilian Coated Papers business in the 2006 third quarter, the operating results of this business are now included in discontinued operations for all periods presented.

Looking ahead to the fourth quarter, earnings are expected to be lower reflecting costs associated with a planned recovery boiler outage. Excluding these costs, earnings would be higher than in the third quarter of 2006. Sales volumes and average sales price realizations are expected to improve, primarily for uncoated freesheet paper, while input costs should be about flat.

Market Pulp earnings in the U.S. in the third quarter of 2006 were higher than in the second quarter of 2006. Sales volumes decreased slightly as lower fluff pulp volume was partially offset by higher paper and tissue pulp shipments. However, average price realizations were up over the prior quarter, reflecting an increase in both softwood and hardwood pulp prices in the second quarter and an additional increase in softwood pulp prices in the third quarter. Raw material costs were slightly favorable, but were offset by higher freight costs. Compared with the third quarter of 2005, earnings in the third quarter of 2006 improved due largely to higher average sales price realizations. Sales volumes declined due to lower paper and tissue pulp shipments, partially offset by higher fluff pulp shipments. Input costs for wood increased. Earnings are expected to be essentially flat in the fourth quarter of 2006 as the benefits from further realizations of the softwood pulp price increase announced in September are offset by higher wood costs.

The U.S. Coated and Supercalendered Papers business was sold in the third quarter of 2006. Earnings for the quarter include the operating results for this business for the month of July. Earnings for the second quarter of 2006 and for the third quarter of 2005 reflected full three-month operations.

Industrial Packaging

	2006						2005
In millions	3rd Quarter		2nd Quarter		Nine Months		3rd Quarter		2nd Quarter		Nine Months
Sales	$	1,250	$	1,240	$	3,660	$	1,075	$	1,165	$	3,455
Operating Profit		138		100		277		29		84		215

Industrial Packaging net sales for the third quarter of 2006 were about even with the second quarter of 2006, but were 16% higher than in the third quarter of 2005. Operating profits in the third quarter of 2006 were 38% higher than in the second quarter of 2006, and significantly higher than in the third quarter of 2005.

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Containerboard earnings in the third quarter of 2006 increased significantly compared with the second quarter of 2006. Average sales price realizations increased during the quarter, reflecting the full realization of previously announced price increases. Third-party sales volumes were higher due to increased availability of product resulting from higher mill production. Raw material costs were favorable, reflecting lower average wood, coal and natural gas costs. Manufacturing costs were also favorably impacted by improved machine performance and fewer planned maintenance outages. However, freight costs remained high during the quarter. Earnings increased significantly in the 2006 third quarter compared with the 2005 third quarter. Sales volumes were higher as no market-related downtime was taken in the 2006 third quarter versus 50,000 tons of market related downtime taken in the third quarter of 2005. Average sales prices were significantly higher, reflecting the realization of price increases in late 2005 and 2006. The impacts of higher costs for freight and energy were more than offset by lower costs for raw materials and the benefits from improved manufacturing operations.

Entering the fourth quarter, earnings are expected to decline slightly. Sales volumes and average sales price realizations for the quarter should improve. However, raw material costs are expected to be higher, and manufacturing costs are projected to rise reflecting planned maintenance outages.

U.S. Converting earnings for the 2006 third quarter were significantly lower than in the second quarter of 2006. Sales volumes decreased due to softer demand in the southeastern and south central markets. Improved average sales prices for container products reflected the partial realization of previously announced price increases; however, these increases lagged increases in the cost of linerboard, resulting in lower average margins. Manufacturing operations were unfavorable due to higher maintenance spending. Input costs for utilities, raw materials and distribution were higher. Compared with the third quarter of 2005, earnings in the third quarter of 2006 were also lower. Sales volumes were higher, but average margins were down as average sales prices were not sufficient to offset increased board costs. Input costs for raw materials and distribution were higher as were the costs of manufacturing operations.

Entering the fourth quarter, earnings are expected to improve with slightly higher average sales price realizations and better manufacturing operations.

European Container earnings for the 2006 third quarter increased compared with the second quarter of 2006 due principally to a $13 million pre-tax gain on the sale of property in Spain. Sales volumes decreased, reflecting seasonal softness in the European agricultural business mainly affecting operations in Spain and Morocco. The impact of lower volume was softened by an increase in margins. Input costs for energy were favorable for the second quarter in a row. Compared with the third quarter of 2005, earnings increased due to the property sale in Spain. Otherwise, sales volumes were lower and containerboard cost increases were greater than the increase in container average sales prices, resulting in lower margins. Energy costs were also higher than 2005. Looking ahead to the fourth quarter, excluding the effect of the third-quarter gain in Spain, earnings are expected to improve significantly as sales volumes benefit from the European fruit and vegetable season and margins also improve. Energy costs are expected to average about the same as in the third quarter.

Consumer Packaging

	2006						2005
In millions	3rd Quarter		2nd Quarter		Nine Months		3rd Quarter		2nd Quarter		Nine Months
Sales	$	855	$	795	$	2,425	$	785	$	790	$	2,290
Operating Profit		64		41		140		43		53		128

Consumer Packaging net sales for the third quarter of 2006 were 8% higher than in the second quarter of 2006 and 9% higher than in the third quarter of 2005. Operating profits in the third quarter of 2006 were 56% higher than in the second quarter of 2006, and 48% higher than in the third quarter of 2005.

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Coated Paperboard earnings for bleached packaging board and coated bristols in the third quarter of 2006 exceeded second-quarter 2006 levels. Sales volumes increased, primarily in the folding carton board product line. Average sales prices were also up, mainly for cupstock and folding carton board. Input costs, however, were unfavorable, reflecting higher wood and polyethylene costs. Manufacturing operations were favorable, due to improved energy usage and significantly better system performance and reliability. Compared with the 2005 third quarter, earnings in the third quarter of 2006 were significantly higher. The favorable impacts of increased sales volumes, higher average sales prices and improved manufacturing operations more than offset the effects of higher distribution and input costs. Operating results are expected to soften in the 2006 fourth quarter. Sales volumes for bleached board products and coated bristols are expected to be seasonally lower, but average price realizations should continue to improve. Planned maintenance outages should also unfavorably impact manufacturing costs.

Foodservice Packaging earnings increased in the third quarter of 2006 compared with the second quarter of 2006. Sales volumes were seasonally lower, but average sales prices increased slightly as price increases were implemented in certain annual contracts. Raw material costs were higher, reflecting resin and uncoated bleached board cost increases. Operating costs were favorable. Compared with the third quarter of 2005, sales volumes were down, but average sales prices were higher as a result of the realization of announced price increases. Raw material costs were unfavorable due to higher bleached board and resin costs. Entering the 2006 fourth quarter, sales volumes are expected to be flat. Average sales price realizations should continue to increase, as will raw material costs with a full-quarter impact of a September increase in coated bleached board costs. As a result, overall earnings are expected to be slightly lower than in the third quarter.

Shorewood Packaging earnings for the third quarter of 2006 improved compared with the second quarter of 2006, which had included a write-off of equipment that was removed from production. Sales volumes increased in the tobacco, consumer products and home entertainment segments; however, this benefit was partially offset by lower demand in the display segment. A weaker mix in the home entertainment segment resulted in lower margins. Manufacturing operating costs were favorable due to efficiency gains and performance improvements at the home entertainment plants. Compared with the third quarter of 2005, the benefits from stronger tobacco and consumer products demand were partially offset by the effects of weaker display and home entertainment sales. Operating costs were flat, while raw material costs were unfavorable due to bleached board cost increases. As the 2006 fourth quarter begins, earnings are expected to increase, although seasonal improvement in sales volumes in the home entertainment segment are anticipated to be weaker than in previous years.

Beverage Packaging earnings increased in the third quarter of 2006 compared with the second quarter of 2006. Sales volumes for converted products were flat, however third-party sales volumes improved with increases in liquid packaging board and coated groundwood papers shipments from the Pine Bluff, Arkansas mill. Input costs were slightly higher, primarily due to higher polyethylene prices. Manufacturing operations were favorable, reflecting reduced maintenance spending and improved energy usage. Converting plant operations were unfavorable in both North America and Asia. Compared with the third quarter of 2005, earnings for the 2006 third quarter were higher largely due to higher average prices for liquid packaging board and coated groundwood papers. Sales volumes were lower across the business. Mill manufacturing costs were favorable due to improved productivity and energy efficiency improvements. Raw material costs for polyethylene and board were higher. Looking forward to the 2006 fourth quarter, earnings are expected to decrease principally due to seasonally lower shipments of coated groundwood papers.

Distribution

	2006						2005
In millions	3rd Quarter		2nd Quarter		Nine Months		3rd Quarter		2nd Quarter		Nine Months
Sales	$	1,730	$	1,690	$	5,070	$	1,645	$	1,570	$	4,745
Operating Profit		34		36		97		23		18		59

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Distribution’s 2006 third-quarter sales were up 2% compared with the second quarter of 2006, and up 5% compared with the third quarter of 2005. Operating profits were down 6% in the third quarter of 2006 compared with the second quarter of 2006, and 48% higher compared with the third quarter of 2005.

Compared with the very strong 2006 second quarter, earnings were only slightly lower in the 2006 third quarter. Sales volumes were flat overall as volume increases in the packaging segment were offset by declines in other segments. Average sales prices were higher in all segments, however margins were slightly lower. Operating expenses were essentially flat. Compared with the third quarter of 2005, earnings for the 2006 third quarter were much higher. Sales volumes were up with increases in the packaging segment only partially offset by decreases in the printing and facility supplies segments. Average sales prices increased approximately 5% across all segments. Operating expenses were favorable, reflecting lower current period labor costs as a result of restructuring activities, the absence of the prior year charges incurred to accomplish this restructuring, and lower legal expenses.

Looking forward, operating results in the fourth quarter are expected to decline due to seasonally weaker sales volume.

Forest Products

	2006									2005
In millions	3rd Quarter			2nd Quarter			Nine Months			3rd Quarter			2nd Quarter			Nine Months
Sales	$	445		$	595		$	1,670		$	700		$	605		$	1,915
Operating Profit:
Forest Resources-
Sales of Forestlands		125			101			329			125			67			261
Harvest & Recreational Income		63			61			196			63			62			194
Forestland Expenses		(27	)		(31	)		(87	)		(43	)		(39	)		(116	)
Real Estate Operations		5			29			79			65			39			158
Wood Products		(37	)		24			22			61			62			172
Operating Profit	$	129		$	184		$	539		$	271		$	191		$	669

Forest Products net sales in the third quarter of 2006 were 25% lower than in the second quarter of 2006 and 36% lower than in the third quarter of 2005. Operating profits in the third quarter of 2006 were 30% lower than in the second quarter of 2006, and were 52% lower than in the third quarter of 2005.

Forest Resources U.S. harvest and recreational income increased slightly versus the 2006 second quarter reflecting a slight increase in harvest volumes. Gross margins from forestland and timber lease sales in the third quarter of 2006 increased by $24 million, but this benefit was offset by a $24 million decrease in profits from sales of higher-and-better-use real estate properties. Compared with the 2005 third quarter, harvest and recreational income was flat although harvest volumes were higher. Gross margins on forestland sales were also flat, but earnings from sales of higher-and-better use properties were down $60 million. Forestland operating expenses in the third quarter of 2006 were $16 million lower than in the third quarter of 2005, reflecting the effects of operational improvements implemented since 2005 and some non-recurring 2005 cost items. Looking ahead to the 2006 fourth quarter, the anticipated closing of the remaining announced Transformation Plan forestland sales are expected to eliminate over 85% of timberland ownership during the fourth quarter. Forestland sales from remaining holdings should remain strong in the fourth quarter, however future earnings can be expected to begin to decline due to the lower contributions from harvest and forestland sales and lower recreational income.

In March and April of 2006, the Company announced agreements for the future sales of approximately 5.7 million acres, or over 85% of its U.S. forestlands, for proceeds of approximately $6.6 billion. A portion of these sales were completed in the third quarter 2006 for proceeds of $400 million, resulting in a pre-tax gain of $304 million. In the second quarter of 2006, sales totaling of $97 million were completed, resulting in a pre-tax gain of $62 million. These gains are included in Net (gains) losses on sales and impairments of businesses in the accompanying consolidated statement of operations. The remaining sales are expected to be completed during the fourth quarter of 2006. The completion of these sales transactions can be expected to significantly reduce the future operating earnings of this segment.

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Wood Products earnings in the third quarter of 2006 decreased significantly compared with the second quarter of 2006 as sales prices for both lumber and plywood declined to the lowest levels of the current cycle. Sales volumes were also down, and manufacturing costs were unfavorably impacted by a reduced production schedule. However, input costs for wood and chips were favorable. Compared with the third quarter of 2005, earnings were also significantly lower as the result of the declines in sales prices. The impacts of lower sales volumes and higher manufacturing costs were partially offset by lower input costs for wood and chips. Entering the fourth quarter, average sales prices are expected to average lower than in the 2006 third quarter, although market prices for lumber and plywood are not expected to decline much below third-quarter levels. Manufacturing costs will continue to reflect the negative impact of reduced production levels as well as holiday scheduling. Input costs should continue to be favorable.

Specialty Businesses and Other

	2006						2005
In millions	3rd Quarter		2nd Quarter		Nine Months		3rd Quarter			2nd Quarter		Nine Months
Sales	$	245	$	235	$	710	$	220		$	230	$	725
Operating Profit		22		16		48		(8	)		7		9

The Specialty Businesses and Other segment principally includes the operating results of Arizona Chemical, as well as certain smaller businesses. Net sales for the third quarter of 2006 were 4% higher than in the second quarter of 2006, and 11% higher than in the third quarter of 2005. Earnings in the 2006 third quarter were up 38% from the second quarter of 2006, and were up significantly compared with the third quarter of 2005.

Earnings for Arizona Chemical for the third quarter of 2006 improved from the second quarter of 2006 as average sales price realizations increased in both the U.S. and Europe. This favorable impact was largely offset by the effects of higher input costs for energy and crude tall oil (CTO), lower sales volumes, and higher manufacturing costs in Europe. Gains from property and equipment sales in the 2006 third quarter accounted for essentially all of the improvement in earnings. Compared with the third quarter of 2005, earnings improved due to higher average sales prices and favorable manufacturing costs, and the gain on land and equipment sales, partially offset by lower sales volumes and increased costs for CTO. The third quarter of 2005 also included a $13 million special charge related to a plant shutdown in Norway. Looking ahead to the fourth quarter of 2006, earnings are expected to decrease as input costs continue to increase. However, improved average sales price realizations and better manufacturing operations should be favorable factors.

LIQUIDITY AND CAPITAL RESOURCES

Cash provided by continuing operations totaled $1.6 billion for the first nine months of 2006, up from $0.9 billion for the comparable 2005 nine-month period, reflecting higher earnings after adjustments for non-cash charges and lower increases in working capital requirements.

Investments in capital projects totaled $802 million for the first nine months of 2006 compared with $756 million in the first nine months of 2005. Full-year 2006 capital spending is expected to be approximately $1.2 billion, or about equal to depreciation and amortization expense. Also during the 2006 nine-month period, approximately $2.2 billion of cash was generated from divestitures compared with approximately $1.4 billion in the first nine months of 2005.

Financing activities for the first nine months of 2006 included a $1.9 billion net decrease in debt compared with a $2.3 billion net decrease in the 2005 nine-month period. In August 2006, International Paper used

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approximately $320 million of cash to repay its maturing 5.375% euro-denominated notes that were designated as a hedge of euro functional currency net investments. Other debt activity in the third quarter included the repayment of $143 million of 7.875% notes and $96 million of 7% debentures, all maturing within the quarter.

In June 2006, International Paper paid approximately $1.2 billion to repurchase substantially all of its zero-coupon convertible debentures at a price equal to their accreted principal value plus interest, using proceeds from divestitures and $730 million of third party commercial paper issued under the Company’s receivables securitization program. As of September 30, 2006, International Paper had reduced this commercial paper borrowing by a net of $30 million, reflecting repayments of second-quarter borrowings less amounts required for the “Dutch Auction” tender offer in September, and plans to repay the remainder by the end of 2006.

In February 2006, International Paper repurchased $195 million 6.4% debentures with an original maturity date of February 2026. Other reductions in the first quarter 2006 included early payment of approximately $495 million of notes with coupon rates ranging from 4% to 8.875% and original maturities from 2007 to 2029. Pre-tax early debt retirement costs of $8 million related to first quarter 2006 debt reductions are included in Restructuring and other charges in the accompanying consolidated statement of operations.

In September 2005, International Paper used some of the proceeds from the CHH sale to repay the remaining $250 million portion of a subsidiary’s $650 million long-term debt with an interest rate of LIBOR plus 62.5 basis points and a maturity date of June 2007, and $312 million of commercial paper that had been issued in the same quarter. Other reductions in the third quarter of 2005 included $662 million of notes with coupon rates ranging from 4% to 7.35% and original maturities from 2009 to 2029, and the repayment of $150 million of 7.10% notes with a maturity of September 2005.

In the second quarter of 2005, International Paper repatriated approximately $1.2 billion in cash from certain of its foreign subsidiaries, including amounts under the American Jobs Creation Act of 2004. In June 2005, International Paper used approximately $400 million of cash available after the repatriations to repay a portion of a subsidiary’s long-term debt with an interest rate of LIBOR plus 62.5 basis points and a maturity date of June 2007. First-quarter 2005 activity included the redemption in February of the outstanding $464 million of International Paper Capital Trust 5.25% convertible subordinated debentures at 100.5% of par plus accrued interest, and early payment of approximately $295 million of notes with coupon rates ranging from 4% to 7.875% and original maturities from 2006 to 2015.

At December 31, 2005, International Paper classified as Long-term debt $1.25 billion of tenderable bonds, commercial paper and bank notes and current maturities of long-term debt. International Paper had the intent and ability, through its fully committed credit facilities, to renew or convert these obligations.

In July 2006, in connection with the planned use of projected proceeds from the Company’s Transformation Plan, International Paper’s Board of Directors authorized a share repurchase program to acquire up to $3.0 billion of the Company’s stock. In a modified “Dutch Auction” tender offer completed in September 2006, International Paper purchased 38,465,260 shares of its common stock at a price of $36.00 per share, plus costs to acquire the shares, for a total cost of approximately $1.4 billion.

In the first nine months of 2006, approximately 2.8 million shares of common stock were issued for various incentive plans, including stock option exercises that generated $26 million of cash and restricted stock that did not generate cash. During the first nine months of 2005, approximately 3.0 million shares of common stock were issued for various incentive plans, including stock option exercises that generated $20 million of cash and restricted stock that did not generate cash. Common stock dividend payments totaled $372 million and $368 million for the first nine months of 2006 and 2005, respectively. Dividends were $.75 per share for both periods.

Maintaining a strong investment-grade credit rating is an important element of International Paper’s corporate finance strategy. In the third quarter of 2006, Standard & Poor’s (S&P) revised the outlook on the Company’s long-term credit ratings from BBB negative to stable outlook and upgraded its short-term credit rating from A-3 to A-2. At September 30, 2006, the Company also held a long-term credit rating of Baa3 (stable outlook) and a short-term credit rating P-3 from Moody’s Investor Services.

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International Paper expects to be able to meet projected capital expenditures, service existing debt and meet working capital and dividend requirements during 2006 through cash from operations and divestiture proceeds, supplemented as required by its various existing credit facilities.

At September 30, 2006, International Paper has approximately $3.2 billion of committed liquidity, including contractually committed bank credit agreements and a receivables securitization program. In March 2006, International Paper replaced its maturing $750 million revolving bank credit agreement with a 364-day $500 million fully committed revolving bank credit agreement that expires in March 2007 and has a facility fee of 0.08% payable quarterly, and replaced its $1.25 billion revolving bank credit agreement with a $1.5 billion fully committed revolving bank credit agreement that expires in March 2011 and has a facility fee of 0.10% payable quarterly. The new agreements generally provide for interest rates at a floating rate index plus a pre-determined margin dependent upon International Paper’s credit rating. At September 30, 2006, International Paper had $700 million of outstanding borrowings under its receivables securitization program and no outstanding borrowings under the fully committed revolving bank credit agreements. Additionally, International Paper Investments (Luxembourg) S.ar.l, a wholly-owned subsidiary of International Paper, has a $100 million revolving bank credit agreement that expires in November 2006 with approximately $46 million in associated borrowings outstanding as of September 30, 2006.

On October 25, 2006, the Company amended its existing receivables securitization program that provided up to $1.2 billion of commercial paper-based financings with a facility fee of 0.20% and an expiration date in November 2007, to provide up to $1 billion of available commercial paper-based financings with a facility fee of 0.10% and an expiration date in October 2009.

The Company will continue to rely upon debt and capital markets for the majority of any necessary funding not provided by operating cash flow or divestiture proceeds. Funding decisions will be guided by our capital structure planning and liability management practices. 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.

TRANSFORMATION PLAN

In July, 2005, International Paper announced a plan to transform its business portfolio to concentrate on two key global platform businesses: Uncoated Papers (including Distribution) and Packaging. The plan also focuses on improving shareholder return through mill realignments in those two businesses, additional cost improvements and exploring strategic options for other businesses, including possible sale or spin-off.

In connection with this plan, the Company completed the sale of its 50.5% interest in Carter Holt Harvey Limited for $1.1 billion in the third quarter of 2005. In addition, in March and April of 2006, International Paper announced agreements for future sales in 2006 of approximately 5.7 million acres of U.S. forestlands for proceeds of approximately $6.6 billion. During the second and third quarters of 2006, the Company completed sales of approximately 552,000 acres of these forestlands for approximately $498 million, including an installment note receivable of $136 million, resulting in pre-tax gains of approximately $366 million. In October and November, following the end of the 2006 third quarter, International Paper completed two additional previously announced sales of approximately 5.1 million acres of forestlands for proceeds totaling approximately $6.1 billion of cash and notes. These sales will result in an estimated special fourth-quarter pre-tax gain in excess of $4 billion. With the closing of this sale, proceeds from Transformation Plan forestlands sales now total $6.6 billion.

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In the 2006 second quarter, the Company announced the signing of definitive agreements to sell its Coated and Supercalendered Papers business for approximately $1.4 billion, and its Kraft Papers business for approximately $155 million plus two additional future payments of up to $60 million contingent upon business performance, with the estimated proceeds from both sales subject to certain closing and post-closing adjustments. The sale of the Coated and Supercalendered Papers business was completed in the 2006 third quarter, with the Kraft Papers sale expected to close in late 2006 or early 2007. Also in the third quarter, the Company completed the sale of its Brazilian Coated Papers business to Stora Enso Oyj for approximately $420 million, subject to certain post-closing adjustments. The Company continues to evaluate strategic options for its Beverage Packaging, Wood Products and Arizona Chemical businesses.

International Paper currently estimates that after-tax proceeds from the above announced and possible future divestitures will total approximately $11 billion, and expects that the proceeds from these sales plus additional free cash flow generated from operations will be used as follows:

• Up to $3 billion to return value to shareholders,

• $6 to $7 billion to strengthen the balance sheet through debt repayment and possible voluntary cash contributions to its U.S. pension plan,

• A range of $2 to $4 billion for selective reinvestment, including possible uncoated papers and packaging options in Brazil, uncoated papers or packaging opportunities in China, and expanded pulp, paper and packaging operations in Russia in addition to current operations at Svetogorsk.

As part of the planned debt reduction, the Company is planning to make voluntary contributions to the U.S. qualified pension fund in the range of $500 million to $1.0 billion to begin satisfying longer-term funding requirements and to lower future pension expense. Pension obligations are viewed by the ratings agencies as equivalent to debt.

During the 2006 third quarter, in connection with the planned use of the above projected proceeds, the Company purchased through a modified “Dutch Auction” tender offer, 38,465,260 shares (or approximately 6%) of its common stock at a price of $36.00 per share, plus costs to acquire the shares, for a total cost of approximately $1.4 billion. Following the completion of this tender offer, International Paper had approximately 454.8 million shares of common stock outstanding.

Also during the quarter, the Company entered into an agreement to exchange a pulp mill project being developed in the state of Mato Grosso do Sul, Brazil (together with approximately 100,000 hectares of forestlands) for the existing Luiz Antonio pulp and uncoated paper mill and approximately 60,000 hectares of forestlands located in the state of Sao Paulo, Brazil. The Company will fund the pulp mill project in the amount of U.S. $1.15 billion. This exchange transaction is expected to close by February 1, 2007.

Finally, subsequent to the end of the 2006 third quarter, International Paper and Ilim Pulp, the largest forest products enterprise in Russia, announced that a letter of intent had been signed to establish a 50-50 joint venture. If definitive agreements are reached, this joint venture would be the largest foreign-domestic alliance in the Russian forest sector. It is currently contemplated that International Paper will purchase a 50% equity interest in the joint venture for approximately $400 million in cash. The total enterprise value of the joint venture is approximately $1.3 billion. The parties currently expect to finalize the agreement in the next six months, following completion of due diligence, receipt of required regulatory approvals, and the approvals of their respective boards of directors.

CRITICAL ACCOUNTING POLICIES

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires International Paper to establish accounting policies and to make estimates that affect both the amounts and timing of the recording of assets, liabilities, revenues and expenses. Some of these estimates require judgments about matters that are inherently uncertain.

Accounting policies whose application may have a significant effect on the reported results of operations and financial position of International Paper, and that can require judgments by management that affect their

39

application, include SFAS No. 5, “Accounting for Contingencies,” SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” SFAS No. 142, “Goodwill and Other Intangible Assets,” SFAS No. 87, “Employers’ Accounting for Pensions,” SFAS No. 106, “Employers’ Accounting for Postretirement Benefits Other Than Pensions,” as amended by SFAS No. 132 and 132R, “Employers’ Disclosures About Pension and Other Postretirement Benefits,” and SFAS No. 109, “Accounting for Income Taxes.”

The Company has included in its Annual Report on Form 10-K for the year ended December 31, 2005, a discussion of these critical accounting policies, which are important to the portrayal of the Company’s financial condition and results of operations and require management’s judgments. The Company has not made any changes in any of these critical accounting policies during the first nine months of 2006.

SIGNIFICANT ACCOUNTING ESTIMATES

Pension Accounting. Net pension expense totaled approximately $283 million for International Paper’s U.S. plans for the nine months ended September 30, 2006, or about $101 million higher than the pension expense recorded for the first nine months of 2005. Net pension expense for non-U.S. plans was about $13 million and $11 million for the first nine months of 2006 and 2005, respectively. The increase in U.S. plan pension expense was principally due to a change in the mortality assumption to use the Retirement Protection Act 2000 Table, an increase in the amortization of unrecognized actuarial losses over a shorter average remaining service period, and a decrease in the assumed discount rate to 5.50% in 2006 from 5.75% in 2005.

After consultation with our actuaries, International Paper determines key actuarial assumptions on December 31 of each year that are used to calculate liability information as of that date and pension expense for the following year. Key assumptions affecting pension expense include the discount rate, the expected long-term rate of return on plan assets, the expected rate of future salary increases, and various demographic assumptions including expected mortality. The discount rate assumption is determined based on a yield curve that incorporates approximately 500-550 Aa-graded bonds. The plan’s projected cash flows are then matched to the yield curve to develop the discount rate. The expected long-term rate of return on plan assets is based on projected rates of return for current and planned asset classes in the plan’s investment portfolio.

In 2006, International Paper modified its investment policy to use interest rate swap agreements to extend the duration of the Plan’s bond portfolio to better match the duration of the pension obligation, thus helping to stabilize the ratio of assets to liabilities when interest rates change. Thus, when interest rates fall, the value of the swap agreements increases directionally with increases in the pension obligation. The current portfolio is hedged at approximately 35% of the Plan’s liability, with plans to increase this ratio to 50% by no later than the end of 2008. This new strategy is not expected to alter the long-term rate of return on Plan assets. At September 30, 2006, the market value of plan assets for International Paper’s U.S. plans totaled approximately $7.1 billion, consisting of approximately 59% equity securities, 31% fixed income securities, and 10% real estate and other assets.

International Paper makes contributions that are sufficient to fully fund its actuarially determined costs, generally equal to the minimum amounts required by the Employee Retirement Income Security Act (ERISA). While International Paper may elect to make voluntary contributions to its U.S. qualified plan up to the maximum deductible amount per IRS tax regulations in the coming years, it is unlikely that any contributions to the plan will be required before 2007 unless investment performance is negative or International Paper changes its funding policy. In connection with the use of projected proceeds from the Company’s Transformation Plan, International Paper is planning to make voluntary contributions to the U.S. qualified pension fund in the range of $500 million to $1.0 billion to begin satisfying longer-term funding requirements and to lower future pension expense. The U.S. nonqualified plans are only funded to the extent of benefits paid which are expected to be $31 million in 2006.

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Accounting for Share-Based Compensation Plans. The Company discontinued its stock option program in 2004 for members of executive management, and in 2005 for all other eligible U.S. and non-U.S. employees. In the United States, the stock option program was replaced with a performance-based restricted share program for approximately 1,250 employees to more closely tie long-term compensation to Company performance on two key performance drivers: return on investment (ROI) and total shareholder return (TSR). As part of this shift in focus away from stock options to performance-base restricted stock, the Company accelerated the vesting of all 14 million unvested stock options to July 12, 2005. The Company also considered the benefit to employees and the income statement impact in making its decision to accelerate vesting of these options. Based on the market value of the Company’s common stock on July 12, 2005, the exercise prices of all such stock options were above the market value and, accordingly, the Company recorded no expense as a result of this action.

The Company adopted SFAS No. 123(R), “Share-Based Payment,” effective January 1, 2006 using the modified prospective transition method. This standard requires that compensation cost related to share-based payments be recognized in the financial statements. The amount of compensation cost is measured based on the grant date fair value of the award less estimated forfeitures. The resulting cost is recognized over the period during which an employee is required to provide service in exchange for the award, usually the vesting period. Prior to January 1, 2006, the Company accounted for share-based compensation in accordance with APB Opinion No. 25, “Accounting for Stock Issued to Employees.”

FORWARD-LOOKING STATEMENTS

Certain statements in this Quarterly Report on Form 10-Q, and in particular, statements found in Item 2, Management’s Discussion and Analysis of Financial Condition and Results of Operations, which 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 similar import. 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. Item 1A. Risk Factors contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2005 contains a specific list of risks and uncertainties that you should carefully read and consider. That list has been updated in Item 1A. Risk Factors contained in this Form 10-Q. We undertake no obligation to publicly update any forward-looking statements, whether as a result of new information, future events or otherwise.

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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Information relating to quantitative and qualitative disclosures about market risk is shown on pages 34 and 35 of International Paper’s Annual Report on Form 10-K for the year ended December 31, 2005, which information is incorporated herein by reference.

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ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures:

Disclosure controls and procedures are controls and procedures that are designed to ensure that information required to be disclosed in our reports filed or submitted under the Securities Exchange Act of 1934, as amended (Exchange Act), is recorded, processed, summarized and reported (and accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure) within the time periods specified in the Securities and Exchange Commission’s rules and forms. As of the end of the period covered by this report, we conducted an evaluation, under the supervision and with the participation of our management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Rules 13a-15(e) and 15d-15(e) of the Exchange Act. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective.

Changes in Internal Control over Financial Reporting:

During the period covered by this report, there were no changes in our internal controls over financial reporting that materially affected or are reasonably likely to materially affect our internal control over financial reporting.

The Company does have ongoing initiatives to standardize and upgrade its financial, operating and supply chain systems. The system upgrades will be implemented in stages, by business, over the next several years. Management believes the necessary procedures are in place to maintain effective internal control over financial reporting as these initiatives continue.

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PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

A discussion of material developments in the Company’s litigation and settlement matters occurring in the period covered by this report is found in Note 7 to the Financial Statements in this Form 10-Q which information is incorporated in this Item 1 by reference.

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ITEM 1A. RISK FACTORS

The Company’s Annual Report on Form 10-K for the year ended December 31, 2005 (the 2005 10-K) contains important risk factors that could cause the Company’s actual results to differ materially from those projected in any forward-looking statement. Forward-looking statements are statements that are not historical in nature and are often identified by the words, “will,” “may,” “should,” “continue,” “anticipate,” “believe,” “expect,” “plan,” “appear,” “project,” “estimate,” “intend,” and words of a similar nature.

The information presented below updates the risk factors set forth in the 2005 10-K, adding the following factors under the heading “Risks Relating To The Company’s Transformation Plan”:

The ability to successfully negotiate satisfactory sale terms for assets that are contemplated for sale but are not currently under contract. The Company may be unable to divest or spin-off businesses under evaluation on terms that are satisfactory to the Company.

The ability to successfully execute sale transactions currently under contract. The Company’s ability to successfully execute sales transactions under contract and realize the anticipated sales proceeds thereunder is dependent upon many factors, including the ability to successfully consummate the transactions without a purchase price adjustment, the successful fulfillment (or waiver) of all conditions set forth in the sale agreements, the successful closing of the transactions within the estimated timeframes and the ability to monetize the non-cash portion of the sale proceeds, if any.

The ability to invest proceeds with attractive financial returns. The Company will selectively seek attractive investment opportunities for a portion of the proceeds from the divestitures. The Company may be unable to identify and negotiate acceptable investments with attractive returns.

These risk factors do not represent a comprehensive list of factors that could cause our results to differ from those that are currently anticipated and should be read together with the risk factors set forth in the 2005 10-K and in the Company’s other filings with the Securities and Exchange Commission.

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ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

(c) Purchases of Equity Securities by the Issuer and Affiliated Purchasers.

Period	Total Number of Shares Purchased		Average Price Paid per Share			Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs	Maximum Number (or Approximate Dollar Value) of Shares that May Yet Be Purchased Under the Plans or Programs
August 1, 2006 - August 31, 2006	1,777		$	34.31		0	0
September 1, 2006 - September 30, 2006	38,465,784	(a)		36.00	(b)	38,465,260	0

(a) On August 15, 2006, the Company commenced a tender offer to buy back up to 41,666,667 shares of its common stock.

The tender offer expired on September 13, 2006, following the purchase of 38,465,260 shares.

(b) Excludes costs to acquire the shares.

No activity occurred in months not presented above.

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ITEM 6. EXHIBITS

(a)	Exhibits
	3.1	By-laws of International Paper Company, as amended through October 10, 2006 (filed as an exhibit to the Registrant’s Current Report on Form 8-K dated October 16, 2006 and incorporated herein by reference)
	10.1	Exchange Agreement dated September 19, 2006 by and between Votorantim Celulose E Papel S.A. and International Paper Investments (Holland) B.V. (filed as an exhibit to the Registrant’s Current Report on Form 8-K dated September 25, 2006 and incorporated herein by reference)
	10.2	Second Amendment, dated as of October 25, 2006, to the Amended and Restated Credit and Security Agreement, by and among Red Bird Receivables, Inc., as Borrower, International Paper Financial Services, Inc., as Servicer, International Paper Company, as Performance Guarantor, The Bank of Tokyo-Mitsubishi UFJ, Ltd., New York Branch (formerly known as The Bank of Tokyo-Mitsubishi, Ltd., New York Branch), as a Co-Agent, JPMorgan Chase Bank, N.A., as a Co-Agent, BNP Paribas, New York Branch, as a Co-Agent, Starbird Funding Corporation, Citicorp North America, Inc., as a Co-Agent and Wachovia Bank, National Association, as a Co-Agent and as Administrative Agent.
	10.3	First Amendment, dated October 30, 2006, to Purchase Agreement, dated as of April 4, 2006, among TimberStar Southwest Parent LLC, TimberStar Southwest LLC, International Paper Company and the other selling parties listed on Schedule A thereto.
	10.4	Amendment, dated November 3, 2006, to Amended and Restated Purchase Agreement, dated as of May 26, 2006, among Red Mountain Timberlands LLC, Forest Investment Associates L.P., Red Mountain Investments LLC, FIA Investments LLC, RMS Timberlands LLC, RMS Texas Timberlands I LP, Red Mountain Operations LLC, International Paper Company and the other selling parties listed on Schedule A thereto.
	11	Statement of Computation of Per Share Earnings
	12	Computation of Ratio of Earnings to Fixed Charges and Preferred Stock Dividends
	31.1	Certification of principal executive officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
	31.2	Certification of principal financial officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
	32	Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	INTERNATIONAL PAPER COMPANY
	(Registrant)
Date: November 8, 2006	By	/s/ MARIANNE M. PARRS
		Marianne M. Parrs
		Executive Vice President and Chief Financial Officer
Date: November 8, 2006	By	/s/ ROBERT J. GRILLET
		Robert J. Grillet
		Vice President – Finance and Controller

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EX-10.2

Exhibit 10.2

SECOND AMENDMENT TO THE AMENDED AND RESTATED CREDIT AND

SECURITY AGREEMENT

THIS SECOND AMENDMENT TO THE AMENDED AND RESTATED CREDIT AND SECURITY AGREEMENT, dated as of October 25, 2006 (this “Amendment”), is by and among Red Bird Receivables, Inc., as Borrower (“Borrower”), International Paper Financial Services, Inc., as Servicer (“Servicer”), International Paper Company, as Performance Guarantor (“Performance Guarantor”), The Bank of Tokyo-Mitsubishi UFJ, Ltd., New York Branch (formerly known as The Bank of Tokyo-Mitsubishi, Ltd., New York Branch), as a Co-Agent, JPMorgan Chase Bank, N.A., as a Co-Agent, BNP Paribas, New York Branch, as a Co-Agent, Starbird Funding Corporation, Citicorp North America, Inc., as a Co-Agent and Wachovia Bank, National Association, as a Co-Agent and as administrative agent (in its capacity as administrative agent, the “Administrative Agent”). Capitalized terms used and not otherwise defined herein shall have the meanings attributed thereto in the Credit Agreement (as defined below).

PRELIMINARY STATEMENTS

WHEREAS, Borrower, Servicer, Performance Guarantor, the Conduits, the Co-Agents, the Liquidity Banks and Administrative Agent are parties to that certain Amended and Restated Credit and Security Agreement, dated as of November 17, 2004 (as amended or otherwise modified from time to time, the “Credit Agreement”);

WHEREAS, Preferred Receivables Funding Company LLC, formerly known as Preferred Receivables Funding Corporation (“PREFCO”), has assigned all of its right, title and interest in, to and under the Credit Agreement and the other Transaction Documents to Park Avenue Receivables Company, LLC (“PARCO”);

WHEREAS, the Loan Parties desire to amend the Credit Agreement as hereinafter set forth; and

WHEREAS, Agents are willing to agree to such amendments on the terms and subject to the conditions set forth in this Amendment;

NOW, THEREFORE, in consideration of the foregoing premises and the mutual agreements herein contained and other good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, the parties hereto agree as follows:

1. Amendments.

(a) All references in the Credit Agreement to “The Bank of Tokyo-Mitsubishi, Ltd.,” “The Bank of Tokyo-Mitsubishi, Ltd., New York Branch” or “BTM” (whether alone or a part of another defined term) are hereby replaced with “The Bank of Tokyo-Mitsubishi UFJ, Ltd., New York Branch” and “BTMU”, respectively.

(b) All references in the Credit Agreement to “Preferred Receivables Funding Corporation” and “PREFCO” (whether alone or a part of another defined term) are hereby replaced with “Park Avenue Receivables Company, LLC” and “PARCO,” respectively.

(c) The second recital in the Credit Agreement is hereby amended and restated in its entirety to read as follows:

Borrower has asked the PARCO Group, the Starbird Group and the CAFCO Group to become Lenders under the Existing Agreement. On the terms and subject to the conditions hereinafter set forth, VFCC, PARCO, Starbird and CAFCO may, in their absolute and sole discretion, make Loans to Borrower from time to time, and Gotham shall make Loans to Borrower from time to time.

(d) Section 14.5(b) of the Credit Agreement is hereby amended and restated in its entirety to read as follows

(b) Anything herein to the contrary notwithstanding, each Loan Party hereby consents to the disclosure of any nonpublic information with respect to it (i) to any Agent, the Liquidity Banks or any Conduit by each other, (ii) to any prospective or actual assignee or Participant of any of them, (iii) to any rating agency who rates any Conduit’s Promissory Notes or other debt securities or to any Promissory Note dealer, (iv) to any provider of a surety, guaranty or credit or liquidity enhancement to any Conduit or any entity organized for the purpose of purchasing, or making loans secured by, financial assets for which Wachovia, BTMU, JPMorgan, BNP Paribas or Citibank or any of their respective Affiliates acts as the administrative agent (each of the foregoing, an “Enhancer”), and (iv) to any officers, directors, employees, outside accountants, advisors and attorneys of any of the foregoing, provided that each such Person is informed of the confidential nature of such information and (except in the case of a Person described in clause (iii) above) agrees to maintain the confidential nature of such information. In addition, the Lenders, the Agents and the Enhancers may disclose any such nonpublic information pursuant to any law, rule, regulation, direction, request or order of any judicial, administrative or regulatory authority or proceedings (whether or not having the force or effect of law).

(e) The following definitions in Exhibit I to the Credit Agreement are hereby amended and restated in their entirety to read, respectively as follows:

“CP Rate” means:

(a) with respect to each of the Pool Funded Conduits for any CP Tranche Period, the per annum interest rate that, when applied to the outstanding principal balance of such Pool Funded Conduits’ CP Rate Loans for the actual number of days elapsed in such CP Tranche Period, would result in an amount of accrued interest equivalent to such Pool Funded Conduits’ CP Costs for such CP Tranche Period; and

(b) with respect to Gotham, unless it has notified the Loan Parties that it will be pool funding its Loans, for any CP Tranche Period and with respect to any Loan (or portion thereof) funded by Commercial Paper notes issued by Gotham, a rate per annum calculated by the Gotham Agent to reflect Gotham’s cost of funding such Loan (or portion thereof), taking into account the weighted daily average interest rate payable in respect of such Commercial Paper during such CP Tranche Period (determined in the case of discount Commercial Paper by converting the discount to an interest-bearing equivalent rate per annum), applicable placement fees and commissions, and such other costs and expenses as the Gotham Agent in good faith deems appropriate. Such Commercial Paper may be issued in such maturities as the Gotham Agent may choose in accordance with Article II hereof. Gotham’s CP Rate shall be determined by the Gotham Agent, in its sole discretion.

“Facility Termination Date” means the earliest of (i) October 25, 2009, (ii) the occurrence of the applicable Liquidity Termination Date for any of the Conduits, and (iii) the Amortization Date.

“Liquidity Termination Date” means:

(a) as to the Gotham Group, October 25, 2009 (unless such date is extended from time to time in the sole discretion of the Gotham Liquidity Banks); and

(b) as to the VFCC Group, the earlier to occur of (i) October 25, 2009 (unless such date is extended from time to time in the sole discretion of the VFCC Liquidity Banks); and (ii) the date on which a Downgrading Event with respect to a VFCC Liquidity Bank shall have occurred and been continuing for not less than 30 days, and either (A) the Downgraded Liquidity Bank shall not have been replaced by an Eligible Assignee pursuant to the VFCC Liquidity Agreement, or (B) the Liquidity Commitment of such Downgraded Liquidity Bank shall not have been funded or collateralized in such a manner that will avoid a reduction in or withdrawal of the credit rating applied to the Commercial Paper to which such Liquidity Agreement applies by any of the rating agencies then rating such Commercial Paper.

(c) as to the PARCO Group, October 25, 2009 (unless such date is extended from time to time in the sole discretion of the PARCO Liquidity Banks).

(d) as to the Starbird Group, October 25, 2009 (unless such date is extended from time to time in the sole discretion of the Starbird Liquidity Banks).

(e) as to the CAFCO Group, October 25, 2009 (unless such date is extended from time to time in the sole discretion of the CAFCO Liquidity Banks).

“Pool Funded Conduits” means VFCC, PARCO, Starbird, CAFCO and, during any time as to which it has notified the Loan Parties that it will be pool funding its Loans, Gotham.

(f) Schedule A to the Credit Agreement is hereby amended and restated in its entirety to read as set forth in Schedule A hereto.

2. Representations and Warranties. In order to induce the other parties to enter into this Amendment, each of the Loan Parties hereby represents and warrants as follows:

(a) The execution and delivery by such party of this Amendment, and the performance of its obligations under the Credit Agreement as amended hereby, are within such party’s organizational powers and authority and have been duly authorized by all necessary organizational action on its part; and

(b) This Amendment has been duly executed and delivered by such party, and the Credit Agreement, as amended hereby, constitutes such party’s legal, valid and binding obligation, enforceable against such party in accordance with its terms, except as such enforcement may be limited by applicable bankruptcy, insolvency, reorganization or other similar laws relating to or limiting creditors’ rights generally and by general principles of equity (regardless of whether enforcement is sought in a proceeding in equity or at law).

3. Conditions Precedent. This Amendment shall become effective as of the date first above written upon (a) execution and delivery to the Administrative Agent of a counterpart hereof by each of the parties hereto, (b) execution and delivery to each of the Co-Agents of a counterpart of an amendment and restatement of its Fee Letter by each of the parties thereto, and (c) execution and delivery to each of the Co-Agents of a counterpart of an amendment to its Conduit’s Liquidity Agreement by the parties thereto extending the Liquidity Commitment(s) thereunder until October 25, 2009. (By its signature on this Amendment, each of the Co-Agents represents that its Group has executed and delivered the amendment described in clause (c) immediately above).

4. Miscellaneous.

(a) CHOICE OF LAW. THIS AMENDMENT SHALL BE GOVERNED AND CONSTRUED IN ACCORDANCE WITH THE INTERNAL LAWS OF THE STATE OF NEW YORK, WITHOUT REGARD TO THE PRINCIPLES OF CONFLICTS OF LAWS THEREOF OTHER THAN SECTION 5-1401 OF THE GENERAL OBLIGATIONS LAW.

(b) Counterparts. This Amendment may be executed in any number of counterparts and by different parties hereto in separate counterparts, each of which when so executed shall be deemed to be an original and all of which when taken together shall constitute one and the same agreement.

(c) Ratification. Except as expressly amended hereby, each of the Credit Agreement and the Performance Undertaking remains unaltered and in full force and effect and is hereby ratified and confirmed.

<Signature pages follow>

IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be executed and delivered by their duly authorized officers as of the date hereof.

RED BIRD RECEIVABLES, INC., AS BORROWER
By:	/s/ Lillian Shou
Name:	Lillian Shou
Title:	VP & Treasurer
INTERNATIONAL PAPER FINANCIAL SERVICES, INC., AS SERVICER
By:	/s/ David A. Riposo
Name:	David A. Riposo
Title:	Treasurer
INTERNATIONAL PAPER COMPANY, AS PERFORMANCE GUARANTOR
By:	/s/ Errol Harris
Name:	Errol Harris
Title:	VP & Treasurer

Second Amendment to CSA

WACHOVIA BANK, NATIONAL ASSOCIATION, AS VFCC AGENT AND AS ADMINISTRATIVE AGENT
By:	/s/ Michael J. Landry
Name:	Michael J. Landry
Title:	Vice President

Second Amendment to CSA

THE BANK OF TOKYO-MITSUBISHI UFJ, LTD., NEW YORK BRANCH, AS GOTHAM AGENT
By:	/s/ Aditya Reddy
Name:	Aditya Reddy
Title:	VP

Second Amendment to CSA

JPMORGAN CHASE BANK, N.A., AS PREFCO AGENT AND PARCO AGENT
By:	/s/ John M. Kuhns
Name:	John Kuhns
Title:	Vice President

Second Amendment to CSA

STARBIRD FUNDING CORPORATION
By:	/s/ Franklin P. Collaze
Name:	Franklin P. Collaze
Title:	Secretary
BNP PARIBAS, ACTING THROUGH ITS NEW YORK BRANCH, AS A LIQUIDITY BANK AND AS STARBIRD AGENT
By:	/s/ Sean Reddington
Name:	Sean Reddington
Title:	Managing Director
By:	/s/ Michael Gonik
Name:	Michael Gonik
Title:	Director

Second Amendment to CSA

CITICORP NORTH AMERICA, INC., AS CAFCO AGENT
By:	/s/ Debbie Ng
Name:	Debbie Ng
Title:	Vice President

Second Amendment to CSA

SCHEDULE A

COMMITMENTS

COMMITTED LENDER	COMMITMENT
VFCC Group	None
VFCC Liquidity Banks	$250,000,000
Gotham	$250,000,000 (less amounts funded under BTMU’s Commitment)
BTMU	$250,000,000 (less amounts funded under Gotham’s Commitment)
PARCO Liquidity Banks	$166,666,667
Starbird Liquidity Banks	$166,666,667
CAFCO Liquidity Banks	$166,666,667

Second Amendment to CSA

EX-10.3

Exhibit 10.3

EXECUTION COPY

International Paper Company

6775 Lenox Center Court, Suite 4037

Memphis, TN 38115-4428

October 30, 2006

TimberStar Southwest Parent LLC

c/o iStar Financial Inc.

1114 Avenue of the Americas, 27^th floor

New York, NY 10036

First Amendment to Purchase Agreement

We refer to the Purchase Agreement, dated as of April 4, 2006 (the “Purchase Agreement”), among TimberStar Southwest Parent LLC, TimberStar Southwest LLC, International Paper Company and the other selling parties listed on Schedule A thereto (the “Selling Parties”). Capitalized terms used but not otherwise defined herein shall have the meaning given to such terms in the Purchase Agreement.

This letter agreement (this “Agreement”) is to confirm that, pursuant to Section 14.1(b) of the Purchase Agreement, Seller has elected to exercise both of its extensions and extend the termination date by a total of 120 days. This Agreement further confirms our agreement that:

(a) Section 1.1(h)(i) of the Purchase Agreement is amended by replacing such Section 1.1(h)(i) in its entirety with the following text:

“Lying Timber. All timber that has been harvested by the Selling Parties from the Timberlands for their own use or for sale to third parties whether lying on the Timberlands, or lying on vehicles on or off the Timberlands, provided the timber has not crossed the scales at a receiving mill or other facility as of the Effective Time (“Lying Timber”).”

(b) Section 2.3(a)(i) of the Purchase Agreement is amended by replacing the first two lines of such Section 2.3(a)(i) with the following text:

“No later than January 5, 2007, Seller shall provide to Buyer Parent a harvest report (the “Harvest Statement”) certifying the volume, by”

(c) Section 3.1 of the Purchase Agreement is amended by replacing such Section 3.1 in its entirety with the following text:

“The closing of the transactions contemplated by this Agreement (the “Closing”) shall take place, subject to the satisfaction, or waiver by the Party or Parties

entitled to the benefit thereof, of the conditions set forth in Article XII, at a place designated by Seller, at 12:00 p.m., New York City time, on October 30, 2006 (the “Closing Date”). The effective time of the Closing shall be deemed to be 11:59 p.m., New York City time, on the Closing Date (the “Effective Time”). Except as specifically provided herein, time is of the essence for this Agreement for all purposes.”

(d) Section 9.1(b) of the Purchase Agreement is amended by replacing such Section 9.1(b) in its entirety with the following text:

“The Selling Parties and Buying Parties mutually agree that no necessary filings are required to be made pursuant to the HSR Act.”

(e) Section 10.9 of the Purchase Agreement is amended by inserting the following at the end of Section 10.9(c):

“Notwithstanding any provision contained herein to the contrary, it is agreed that in no event shall Buyer Parent or any transferee of Buyer Parent have any obligation, as a guarantor, surety or otherwise, to pay or perform any of the obligations of Buyer under the Timber Notes or the limited liability company agreement of Buyer.”

(f) Section 10.10 of the Purchase Agreement is amended by inserting the following at the end of Section 10.10:

“The Seller and the Other Selling Parties and their respective affiliates have not made and shall not make any elections to have any of the Timber Entities treated as corporations for federal, state or local income tax purposes.”

(g) Any reference in the Purchase Agreement to Section 13.5(d) of the Seller’s Disclosure Letter shall be deemed to refer instead to the schedule attached as Exhibit A of this Agreement.

(h) Section 16.1 of the Purchase Agreement is amended by (i) replacing the definitions of “Harvest Range” and “Merchantable Timber Category” and “Weighted Average Price” in their entirety with the definition set forth below and (ii) adding cross-references to the definitions of Lying Timber and Effective Time as set forth below:

“Harvest Range” means the permitted volume of timber set forth on the 2006 Harvest Plan attached as Exhibit L that the Selling Parties shall be permitted to remove from the Timberlands during the Timber Adjustment Period by FMA and Merchantable Timber Category.”

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“Merchantable Timber Category” means a category of merchantable timber identified by type and FMA and further divided into Installment Note Timberlands or Cash Timberlands as described on Exhibit L.

“Weighted Average Price” shall mean the weighted average price calculated in accordance with Section 5 of the Pulpwood Fiber Supply Agreement and adjusted to the net stumpage value.

“Lying Timber” has the meaning specified in Section 1.1(h)(i).

“Effective Time” has the meaning specified in Section 3.1.

(i) The recitals of the form of Pulpwood Supply Agreement, attached as Exhibit F-1 to the Purchase Agreement (the “Pulpwood Supply Agreement Form”), is amended so that the first “WHEREAS” clause reads in its entirety as follows;

“WHEREAS: BUYER is desirous of acquiring, and SELLER is desirous of providing, Pulpwood (as defined herein) and biomass from the timberlands described in Exhibit A (the “Timberlands”), to service for a period of years paper mills located at the locations set forth in Exhibit A – Annex 1 (the “Mills”) and such other facilities or locations as BUYER may from time to time designate in accordance herewith;”

(j) Section 1 of the form of Pulpwood Supply Agreement, attached as Exhibit F-1 to the Purchase Agreement (the “Pulpwood Supply Agreement Form”), is amended by adding the following at the end of the definition of “Delivery Point”:

“provided, however, that BUYER shall not designate a Delivery Point other than a facility, yard or location owned or leased by BUYER, or supplied by BUYER under a supply arrangement pre-existing as of the date of this Agreement, unless the delivery of Wood to such other Delivery Point is reasonably related to BUYER’S procurement activities for facilities owned, leased or supplied by BUYER.”

(k) Section 1 of the Pulpwood Supply Agreement Form is amended by replacing the definition of “Pulpwood” in its entirely with the following definition:

“‘Pulpwood’ means roundwood, including juvenile wood associated with thinnings, intended to be chipped, shredded, flaked, ground, or otherwise converted to make pulp, paper, or composite panel products.”

(l) Section 4 of the Pulpwood Supply Agreement Form is amended to add the following after the third sentence thereof:

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“BUYER shall not modify the specifications to set higher standards for SELLER than for any other suppliers of comparable products in comparable volume to the applicable Delivery Points.”

(m) Section 5(c) of the Pulpwood Supply Agreement Form is amended so that the last sentence thereof shall read in its entirety as follows:

“In the event the delivery destination is not a Mill, but is instead another facility or location as BUYER may designate from time to time in accordance herewith, then pricing for the Zone closest to the shipping zone that meets the minimum threshold shall be used and adjusted for freight according to the Freight Adjustment Table set out in Schedule 5.”

(n) Section 6(a) of the Pulpwood Supply Agreement Form is amended by replacing the schedule at the end thereof with the following:

“Nacogdoches
January – March	23	%
April – June	25	%
July – September	27	%
October – December	25	%
Texarkana
January – March	26	%
April – June	25	%
July – September	25	%
October – December	24	%]
West Louisiana
January – March	22	%
April – June	26	%
July – September	28	%
October – December	24	%”

(o) Section 9(c) of the Pulpwood Supply Agreement Form is amended so that clause (ii) of the first sentence thereof shall read in its entirety as follows:

“(ii) transfer all of its rights and obligations under this Agreement relative to the Wood Reduction, together with the ownership of a Mill, provided such transferee (“New Buyer”) (x) has the financial and operational resources and capacity to

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meet the obligations of BUYER hereunder and (y) assumes in writing all of BUYER’S duties and obligations hereunder arising after such transfer.”

(p) Section 1 of the form of Log Supply Agreement, attached as Exhibit F-2 to the Purchase Agreement (the “Log Supply Agreement Form”) is amended by replacing the definition of “Master Harvest Plan” in its entirety with the following definition:

“Master Harvest Plan” means the harvest plans for the Timberlands set out in Schedule 1, which harvest plans shall set forth the target volumes of Logs to be harvested by Seller on the Timberlands during the Term.

(q) Section 3(b) of the Log Supply Agreement Form is amended so that the third sentence thereof shall read in its entirety as follows:

“In no event shall the Annual Harvest Plan for each Harvest Year, or the actual amount made available for harvest in any given Harvest Year, be less than eighty percent (80%) of the Master Harvest Plan volumes set out in Schedule 1.”

(r) Section 3(b) of the Log Supply Agreement Form is amended so that sixth sentence thereof shall read in its entirety as follows:

“BUYER and SELLER shall continue to take turns designating Tracts for inclusion and exclusion as Obligated Tracts until the total Log volume on all Obligated Tracts designated by BUYER collectively equals (i) for the 2007 Harvest Year, not less than 30%, and not more than 60%, of the Annual Harvest Plan for such year (as determined by Buyer in its sole discretion), and (ii) for each Harvest Year after 2007, a percentage of the Annual Harvest Plan volume (as determined by Buyer in its sole discretion) that is within a range of 15 percentage points above or below the percentage of Annual Harvest Plan volume selected by Buyer in the previous Harvest Year, provided that the volume determined by Buyer shall be not less than 30%, and not more than 60%, of the Annual Harvest Plan for the current Harvest Year, and provided further that, in the event the Annual Harvest Plan for any Harvest Year described in (i) and (ii) above is greater that 120% of the Master Harvest Plan for such Harvest Year, the volume determined by Buyer shall be not less than 30%, and not more than 60%, of the amount equal to 120% of the Master Harvest Plan for such year instead of the Annual Harvest Plan for such year.”

(s) Section 9(c) of the Log Supply Agreement Form is amended so that clause (ii) of the first sentence thereof shall read in its entirety as follows:

“(ii) transfer all of its rights and obligations under this Agreement relative to the Logs Reduction, together with the ownership of a Mill, provided such transferee (“New Buyer”) (x) has the financial and operational resources and capacity to

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meet the obligations of BUYER hereunder and (y) assumes in writing all of BUYER’S duties and obligations hereunder arising after such transfer.”

(t) Exhibit K to the Purchase Agreement is hereby replaced in its entirety with the form of amended and restated Buyer LLC Agreement attached hereto as Exhibit B.

(u) Exhibit M attached to the Purchase Agreement is hereby replaced in its entirety with the form of Stumpage Agreement attached hereto as Exhibit C.

(v) The parties acknowledge and agree that certain of the Schedules and Exhibits to the Pulpwood Supply Agreement and the Log Support Agreement, including the Zone maps to be attached as Schedule 1(u) to the Pulpwood Supply Agreement, the Freight Adjustment Table to be attached as Schedule 5 to the Pulpwood Supply Agreement and the Master Harvest Plans to be attached as Schedule 1 to the Log Supply Agreements, have been amended by the parties in connection with the Closing and are in a form mutually acceptable to the parties.

(w) The parties acknowledge and agree that the provisions of the Purchase Agreement, as the same have been modified hereby, are in full force and effect and that, except as expressly set forth herein, the execution and delivery of this Agreement does not in any way constitute a modification, waiver or termination of any of the provisions of the Purchase Agreement.

[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]

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Please acknowledge your agreement with the foregoing by countersigning this letter agreement in the space provided below, whereupon it will be a binding agreement between us. This Agreement may be executed in any number of counterparts, each of which shall be an original, but such counterparts will together constitute one instrument. Signatures sent by facsimile or scanned signatures sent by electronic mail shall be binding.

INTERNATIONAL PAPER COMPANY
By:	/s/ Jill Witter
Name:	Jill Witter
Title:	Assistant Secretary

Acknowledged and agreed as of the date first written above:

TIMBERSTAR SOUTHWEST PARENT LLC

By:	/s/ John Rasor
Name:	John Rasor
Title:	Managing Director

EXHIBIT A

Revised Section 13.5(d) of the Seller’s Disclosure Letter

This schedule has been omitted in accordance with Item 601(b)(2) of Regulation S-K. A copy of this schedules will be furnished supplementally to the Securities and Exchange Commission upon request.

EXHIBIT B –FIRST AMENDMENT TO PURCHASE AGREEMENT

EXHIBIT K

AMENDED AND RESTATED

LIMITED LIABILITY COMPANY AGREEMENT

OF

TIMBERSTAR SOUTHWEST LLC

This Amended and Restated Limited Liability Company Agreement (together with the schedules attached hereto, this “Agreement”) of TIMBERSTAR SOUTHWEST LLC (the “Company”), is entered into by TIMBERSTAR SOUTHWEST PARENT LLC, a Delaware limited liability company, as the sole equity member (the “Initial Member” and together with its successors and assigns that are admitted to the Company as a member, the “Member”), and Camilia M. Denny, as the Independent Manager (as defined on Schedule A hereto). Capitalized terms used and not otherwise defined herein have the meanings set forth on Schedule A hereto.

As of March 30, 2006, the Company was formed as a limited liability company pursuant to and in accordance with the Delaware Limited Liability Company Act (6 Del. C. § 18-101 et seq.), as amended from time to time (the “Act”), and a Certificate of Formation was filed with the Secretary of State of the State of Delaware. The Member, as the sole initial equity member of the Company, entered into that certain Limited Liability Company Agreement of the Company, dated as of March 30, 2006 (the “Original Agreement”). The Member and the Independent Manager wish to amend and restate in its entirety the Original Agreement and enter into this Agreement. The Member and the Independent Manager hereby agree as follows:

Section 1. Name.

The name of the limited liability company formed hereby is TIMBERSTAR SOUTHWEST LLC, and its business shall be carried on in such name with such variations and changes as the board of managers of the Company (each member of which, a “Manager” and collectively, the “Managers” or the “Board of Managers”) shall determine or deem necessary to comply with requirements of the jurisdictions in which the Company’s operations are conducted.

Section 2. Principal Business Office.

The principal business office of the Company shall be located at c/o TimberStar Southwest Manager LLC, 8570 Business Park Drive, Shreveport, Louisiana 71105, or such other location as may hereafter be determined by the Board of Managers. The principal business office of the Company need not be in the State of Delaware. The Company may have such other offices as the Member may designate from time to time.

Section 3. Registered Office.

The address of the registered office of the Company in the State of Delaware is c/o The Corporation Trust Company, 1209 Orange Street, Wilmington, Delaware 19801.

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Section 4. Registered Agent.

The name and address of the registered agent of the Company for service of process on the Company in the State of Delaware are The Corporation Trust Company, 1209 Orange Street, Wilmington, Delaware 19801.

Section 5. Members.

(a) The mailing address of the Member is set forth on Schedule B attached hereto. The Member was admitted to the Company as a member of the Company upon its execution of a counterpart signature page to this Agreement.

(b) Subject to Section 9(e) and Section 10, the Member may approve a matter or take any action at a meeting or without a meeting by the written consent of the Member pursuant to subparagraph (c) below. Meetings of the Member may be called at any time by the Member.

(c) Any action may be taken by the Member without a meeting if authorized by the written consent of the Member. In no instance where action is authorized by written consent of the Member will a meeting of the Member be called or notice be given. A copy of the action taken by written consent shall be filed with the records of the Company.

(d) Liability of the Member.

(i) Except as otherwise provided in the Act, all debts, obligations and liabilities of the Company, whether arising in contract, tort or otherwise, shall be solely the debts, obligations and liabilities of the Company, and the Member shall not be obligated personally for any such debt, obligation or liability of the Company solely by reason of being the Member.

(ii) Except as otherwise expressly required by applicable law, the Member shall not have any liability in excess of the amount of its unpaid capital contribution to the Company and the amount of any distributions distributed to it in violation of this Agreement or applicable law.

(e) The Member shall not, in its capacity as a Member, take part in the management or control of the business of the Company, transact any business in the name of the Company, have the power or authority to bind the Company or to sign any agreement or document in the name of the Company, or have any power or authority with respect to the Company except as expressly provided in this Agreement.

(f) Except as provided in Sections 24 and 25, new Members shall not be admitted to the Company.

(g) Upon the occurrence of any event that causes the Member to cease to be a member of the Company (other than upon continuation of the Company without dissolution upon (i) an assignment by the Member of all of its limited liability company interest in the Company and the prior or simultaneous admission of the transferee pursuant to Section 24, or (ii) the resignation of the Member and the prior or simultaneous admission of an additional member of

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the Company pursuant to Section 25), each Person acting as an Independent Manager pursuant to Section 14 shall, without any action of any Person and simultaneously with the Member ceasing to be a member of the Company, automatically be admitted to the Company as a Special Member and shall continue the Company without dissolution. No Special Member may resign from the Company or transfer its rights as Special Member unless (i) a successor Special Member has been admitted to the Company as Special Member by executing a counterpart to this Agreement, and (ii) such successor has also accepted its appointment as Independent Manager pursuant to Section 14; provided, however, each Special Member shall automatically cease to be a member of the Company upon the admission to the Company of a substitute Member. Each Special Member shall be a member of the Company that has no interest in the profits, losses and capital of the Company and has no right to receive any distributions of Company assets. Pursuant to Section 18-301 of the Act, a Special Member shall not be required to make any capital contributions to the Company and shall not receive a limited liability company interest in the Company. A Special Member, in its capacity as Special Member, may not bind the Company. Except as required by any mandatory provision of the Act, each Special Member, in its capacity as Special Member, shall have no right to vote on, approve or otherwise consent to any action by, or matter relating to, the Company, including, without limitation, the merger, consolidation or conversion of the Company. In order to implement the admission to the Company of each Special Member, each Person acting as an Independent Manager pursuant to Section 14 shall execute a counterpart to this Agreement. Prior to its admission to the Company as Special Member, each Person acting as an Independent Manager pursuant to Section 14 shall not be a member of the Company.

(h) Restrictions on Debt Financing.

(i) The Member shall cause each Person that lends money to, or is lending money to another Person the repayment of which is guaranteed by, the Member to agree in writing for the benefit of the Company that neither it nor any Person acting on its behalf shall commence any case or proceeding against the Company under Title 11 of the United States Code, as now or hereafter in effect, or any other applicable federal or state bankruptcy, insolvency or similar law.

(ii) The Member shall not enter into any debt financing or other arrangement that imposes financial or other obligations on the Company or that obligates the Company to take any action that violates, or would, at the time that such financing or other arrangement is entered into, reasonably be expected to result in a violation of, the terms of this Agreement, the Purchase Agreement, the Timber Note, the LOC or the Basic Documents.

Section 6. Certificates.

Suzanne M. Hoffman is hereby designated as an “authorized person” within the meaning of the Act, and has executed, delivered and filed the Certificate of Formation of the Company with the Secretary of State of the State of Delaware on March 30, 2006. Such filing is hereby ratified and approved. Upon the filing of the Certificate of Formation with the Secretary of State of the State of Delaware, the aforementioned Person’s powers as an “authorized person” ceased

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and the Member thereupon became the designated “authorized person” and the Member shall continue as the designated “authorized person” within the meaning of the Act. The Member shall execute, deliver and file any other certificates (and any amendments and/or restatements thereof) necessary for the Company to qualify to do business in any other jurisdiction in which the Company may wish to conduct business.

The actions of Suzanne M. Hoffman in the execution, delivery and filing of the Certificate of Formation of the Company are hereby ratified and confirmed.

The existence of the Company as a separate legal entity shall continue until cancellation of the Certificate of Formation as provided in the Act.

Section 7. Purpose.

(a) The purpose to be conducted or promoted by the Company is to engage in the following activities:

(i) acquiring, owning and disposing of the outstanding limited liability company and/or partnership interests, as the case may be, in the Timber Entities; provided, however, that all references in this Agreement to limited liability company and/or partnership interests in the Timber Entities shall be deemed to include those interests, if any, (i) in limited partnerships that are directly or indirectly wholly owned by the Company and that are organized inter alia for the purpose of owning and/or operating the Timberlands, and (ii) those limited liability companies that are directly wholly owned by the Company and that are organized to serve as the general partners of the entities described in the foregoing clause;

(ii) acting and serving as, and exercising all of the authority of, a member or limited partner, as the case may be, of the Timber Entities;

(iii) entering into the Basic Documents and performing the obligations thereunder;

(iv) acquiring and owning the Time Deposit Accounts, cash and cash items;

(v) acquiring and owning the Member Note and the Transferee Member Note;

(vi) engaging in any lawful act or activity and exercising any powers permitted to limited liability companies formed under the laws of the State of Delaware that are related or incidental to and necessary, convenient or advisable for the accomplishment of the above-mentioned purposes.

(b) The Company, in addition to and in furtherance of its rights pursuant to Section 9(a) to authorize one or more of the members of its Board of Managers or any other authorized officer or officers of the Company to perform such actions, is hereby authorized to execute, deliver and perform, or to cause an Affiliate of the Company to execute, deliver and perform, and each member of the Board of Managers is hereby authorized to execute and deliver, or cause an Affiliate of the Company to execute and deliver, the Basic Documents and all documents,

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agreements, certificates, or financing statements contemplated thereby or related thereto, all without any further act, vote or approval of any other Person notwithstanding any other provision of this Agreement.

Section 8. Powers.

Subject to the limitations contained herein (including, without limitation, Section 9(e) and Section 10), the Company, and the Board of Managers on behalf of the Company, (i) shall have and exercise all powers necessary, convenient or incidental to accomplish its purposes as set forth in Section 7, and (ii) shall have and exercise all of the powers and rights conferred upon limited liability companies formed pursuant to the Act, together with any powers incidental thereto, including such powers and privileges as are necessary, appropriate or advisable by the Board of Managers in furtherance of the Company’s business. Subject to the limitations contained herein, the Company shall have the power to take any and all actions incidental and necessary or desirable to engage in the following activities:

(a) to enter into the Purchase Agreement, and to enter into and consummate the transactions and other agreements contemplated by the Purchase Agreement;

(b) to acquire, hold and dispose of the outstanding limited liability company and/or partnership interests, as the case may be, of the Timber Entities and to take such actions and engage in such activities as may be necessary or appropriate in connection therewith;

(c) to distribute to the Member (A) all cash distributions received by the Company directly or indirectly from the Timber Entities (the “Timber Entity Distributions”), and (B) all other available cash to the extent that such distributions of other available cash are not prohibited by applicable law, by this Agreement or by the Basic Documents;

(d) to execute and deliver the Timber Note;

(e) to obtain the LOC and to enter into any agreements and to execute such other documents as may be necessary or desirable in connection therewith, including, without limitation, the LOC Reimbursement Agreement, the Time Deposit Accounts Pledge, and any agreement to pledge the assets of the Company (including without limitation funds held by the Paying Agent pending disbursement to Seller on the Timber Note) as security for the Company’s obligations to reimburse the LOC Provider(s);

(f) to apply certain amounts of cash available to it to purchase one or more time deposit accounts, certificates of deposits, collateral notes or similar instruments (each, a “Time Deposit Account”) from the LOC Provider or an Affiliate of the LOC Provider, to enter into one or more agreements in connection with the purchase of such Time Deposit Accounts and to enter into and consummate the transactions and agreements contemplated thereby;

(g) to enter into the Paying Agency Agreement, and to enter into and consummate the transactions and agreements contemplated thereby, including, without limitation, directing the LOC Provider to pay interest and principal on the Time Deposit Accounts to the Paying Agent for disbursement in accordance with Article III of the Paying Agency Agreement;

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(h) in connection with the Paying Agency Agreement, to direct the Paying Agent to pay interest and principal on the Timber Note to Seller in accordance with Section 3.1 of the Paying Agency Agreement;

(i) to invest the excess of (A) the amount contributed to the Company by the Initial Member in cash, over (B) to the extent there is no duplication, the sum of (i) the amount paid to the LOC Provider as consideration for the Time Deposit Accounts, and (ii) the amount paid to the counterparty under any interest rate hedge agreement (such excess, if any, the “Excess Capital”) in obligations of the United States government or other high-quality securities that, so long as the Company is directly or indirectly owned by the Initial Member or any Person that has elected to be treated as a “real estate investment trust” under the Code, qualify as Government Securities or cash items for purposes of Section 856 of the Internal Revenue Code of 1986, as amended, and to hold the Member Note and the Transferee Member Note;

(j) to Transfer the limited liability company and/or partnership interests, as the case may be, of the Timber Entities to an unrelated third party at any time on or after the date hereof, to Transfer the limited liability company and/or partnership interests of the Timber Entities to a related party (including the Member) at any time after the one year anniversary of the date hereof, or to consummate any other Timber Entity Ownership Interest Transfer hereunder;

(k) to enter into the Interest Rate Protection Agreement in respect of interest payable on the Timber Note, as more fully described in the Paying Agency Agreement, and to enter into and consummate the transactions and agreements contemplated thereby, together with any amendments, supplements or restatements of, or replacements for, any of the foregoing;

(l) to pay the organizational, start-up and routine transactional and maintenance expenses of the Company, including the creation, assumption or incurrence of obligations to pay service providers to the Company and other ordinary course expenses of maintaining its existence and carrying out its various purposes under this Agreement, not evidenced by a promissory note and subject to Section 8 of this Agreement, incurred in the ordinary course of business which does not exceed, at any time, a maximum aggregate amount equal to $100,000 (such amount not to include, for purposes of applying the limitation in this Section 8(l), any costs, expenses, fees or other amounts payable by the Company pursuant to or in connection with the Timber Note or any of the transactions contemplated by the Purchase Agreement, including, without limitation, pursuant to and in connection with any interest rate protection or swap arrangements, letters of credit, letter of credit reimbursement agreements or paying agency arrangements entered into in connection therewith, it being agreed that such amount shall automatically increase by 15% of the amount of the limitation then in effect upon each fifth (5th) anniversary of the effective date of this Agreement), and provided that, when incurred, such debt is anticipated to be paid within sixty (60) days of the date invoiced to the Company (other than amounts being disputed in good faith);

(m) to enter into and perform its obligations under this Agreement, each document referred to in items (a) through (m) above and any other supplemental or related document or instrument; and

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(n) to engage in any other lawful activities which are necessary to accomplish the foregoing or are incidental thereto or necessary in connection therewith; provided, however, that after the payment in full of the Timber Note at its final maturity and the satisfaction of all obligations pursuant to the LOC and the LOC Reimbursement Agreement (collectively, a “Timber Note Payment Event”), the Company may engage or participate in any other lawful business activity permitted under the Act, and this Agreement, including without limitation Section 7, shall be thereupon deemed amended to permit all such activities.

Section 9. Management.

(a) The management of the Company is fully vested in its Board of Managers, which shall, in accordance with Section 9(e), consist of up to five (5) “managers”, which shall include, as long as any Obligation is outstanding, an Independent Manager, and, except as provided in this Section 9, the Company shall not have any other “managers”, as that term is used in the Act. The powers of the Company shall be exercised by or under the authority of, and the daily business and affairs of the Company shall be managed under the direction of, the Board of Managers, which, subject to Section 10(d), shall make all decisions and take all actions for the Company. Subject to Sections 9(e), 10(c) and 26(f), actions taken by the Board of Managers shall be approved by not less than a majority of the members present and voting. In managing the business and affairs of the Company and exercising its powers, the Board of Managers may, in addition to those actions contemplated pursuant to Section 9(c), act through resolutions adopted by written consents. Decisions or actions taken by the Board of Managers in accordance with this Agreement shall constitute decisions or actions by the Company and shall be binding on the Company. Except as otherwise provided herein, the vote of the Independent Manager shall not be required for any action to be taken by the Board of Managers of the Company, and, except in connection with any Material Action or other action expressly requiring the affirmative vote of the Independent Manager hereunder, the Independent Manager shall not be required to (i) receive notice of meetings or special meetings; (ii) attend or waive attendance at any meetings or special meetings; (iii) be considered in determining quorums or voting majorities for any meetings or special meetings; (iv) be involved or considered in any action taken by written consent in lieu of a meeting or special meeting; or (v) be otherwise involved or considered in the management of the Company by the Board of Managers. The Board of Managers may authorize any one or more of its members or any other authorized officer or officers of the Company to execute documents approved by the Board of Managers on behalf of the Company. The Managers are “managers” of the Company within the meaning of the Act.

(b) The Board of Managers shall mean the Board of Managers initially appointed by this Agreement and any replacement members of the Board of Managers that are appointed in accordance with Section 9(e) or, in the event that Section 9(e) does not apply due to the transfer of all Founding Members’ Units (as more particularly described in such Section 9(e)) or for any other reason, by (i) the vote of 50% or more of the then existing Board of Managers or (ii) the Member, with the Member having priority in the event that there is a conflict with the Board of Managers in the appointment of a replacement member of the Board of Managers. Each member of the Board of Managers so appointed shall serve until such Manager shall resign, be removed, be disqualified to serve, or until such Manager’s successor shall have been appointed and qualified. Subject to Section 9(e), the Member shall also have the power to remove any member of the Board of Managers, provided that, for so long as any Obligation is outstanding, the Board

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of Managers shall always contain not less than one Independent Manager. Subject to Section 14, members of the Board of Managers may resign upon giving sixty (60) days written notice to the Member.

(c) Meetings and Quorum.

(i) The meetings of the Board of Managers shall be held at the offices of the Member, unless some other place is designated in the notice of the meeting. Meetings of the Board of Managers shall be held at such times and with such frequency as is otherwise determined by the Board of Managers. Accurate minutes of any meeting of the Board of Managers shall be maintained by a Manager designated by the Board of Managers for such purpose.

(ii) Special meetings of the Board of Managers for any purpose may be called at any time by any member of the Board of Managers. At least three (3) business days’ notice of the time and place of a special meeting of the Board of Managers shall be delivered personally to the members of the Board of Managers at their last known business addresses as shown on the records of the Company or personally communicated to them by a member of the Board of Managers by telephone, electronic mail, facsimile or hand delivery. Such electronic mailing, telephoning, faxing or hand delivery shall be considered due, legal and personal notice to such member of the Board of Managers.

(iii) Subject to Sections 10(c) and 26(f), the transactions carried out at any special meeting of the Board of Managers, however called and noticed or wherever held, shall be as valid as though agreed to at a meeting regularly called and noticed if: (i) all members of the Board of Managers are present at the meeting or (ii) a majority of the members of the Board of Managers are present and if, either before or after the meeting, those not present signed a waiver of notice of such meeting, a consent to holding the meeting or an approval of the minutes thereof, which waiver, consent or approval shall be filed with the other records of the Company or made a part of the minutes of the meeting.

(iv) Any action required or permitted to be taken by the Board of Managers may be taken without a meeting and will have the same force and effect as if taken by a vote of the Board of Managers at a meeting properly called and noticed, if authorized by the written consent of such number of the members of the Board of Managers as would be required to approve such action at a meeting of the Board of Managers. In no instance where action is authorized by written consent need a meeting of the Board of Managers be called or noticed. A copy of the action taken by written consent shall be filed with the records of the Company. The written consent may be executed in one or more counterparts and by facsimile, and each such consent so executed shall be deemed an original.

(v) A majority of incumbent members of the Board of Managers present in person or by proxy shall be necessary to constitute a quorum for the transaction of business at any meeting of the Board of Managers. Except as otherwise provided in this Agreement or by the Act, the action of a majority of the members of the Board of Managers present in person or by proxy at any meeting at which there is a quorum, when

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duly assembled, is valid. Subject to Sections 9(e), 10(c) and 26(f), a meeting at which a quorum is initially present may continue to transact business, notwithstanding the withdrawal of any of the members of the Board of Managers, if any action taken is approved by a majority of the required quorum for such meeting.

(vi) Members of the Board of Managers may participate in a meeting of the Board of Managers by means of a telephone conference call or similar method of communication so long as all Persons participating in the meeting can hear one another. Participation in a telephonic meeting of the Board of Managers constitutes presence in person at the meeting.

(d) To the fullest extent permitted by law, including, without limitation Section 18-1101(c) of the Act, the Board of Managers shall consider only the interests of the Company and its creditors. Except as provided in the preceding sentence, in exercising its rights and performing its duties under this Agreement, each member of the Board of Managers shall have a fiduciary duty of loyalty and care similar to that of a director of a business corporation organized under the General Corporation Law of the State of Delaware. Any resignation or removal of a member of the Board of Managers may be accomplished in accordance with Section 9(b), and no appointment of a successor member shall be effective until the successor member shall have accepted his or her appointment by a written instrument.

(e) Notwithstanding any other provision of this Agreement and any provision of law that otherwise so empowers the Company, the Member or the Board of Managers, except for decisions or actions that pursuant to the provisions of this Agreement or non-waivable provisions of applicable law require the approval of all of the Members and/or the Managers (including the Independent Manager, in those instances where its affirmative vote is required hereunder), the powers of the Company shall be exercised by or under the authority of, and the business and affairs of the Company shall be managed under the direction of, the Board of Managers. Subject to any increase in the number of members of the Board of Managers approved by the prior written consent of each of the Managers (excluding the Independent Manager), the Board of Managers of the Company shall consist, in addition to the Independent Manager, of the following four (4) individuals:

(i) One (1) individual selected by TimberStar Southwest Investor LLC (“TimberStar Investor”) and/or by any successor pursuant to a TimberStar Transaction described in the Amended and Restated Limited Liability Company Agreement of TimberStar Southwest Holdco LLC (as hereafter amended and modified, the “Holdco Operating Agreement”), and TimberStar Investor and/or such successor shall have the right to remove and replace such individual and to fill any vacancy left on the Board of Managers by such individual;

(ii) One (1) individual selected by MSD Timber Investments, LLC (“MSD”); MSD shall have the right to remove and replace such individual and to fill any vacancy left on the Board of Managers by such individual;

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(iii) One (1) individual selected jointly by Perry Commitment Fund, LP and Perry Partners, L.P. (together, “Perry”); Perry shall have the right to remove and replace such individual and to fill any vacancy left on the Board of Managers by such individual;

(iv) One (1) individual selected jointly by York Capital Management, L.P. and York Select, L.P. (together, “York”); York shall have the right to remove and replace such individual and to fill any vacancy left on the Board of Managers by such individual.

Notwithstanding the foregoing, if any of TimberStar Investor, MSD, Perry or York (each, a “Founding Member”) transfers all of its Units (as such term is defined in the Holdco Operating Agreement) in TimberStar Southwest Holdco LLC (“Holdco”) (other than in accordance with Section 10.2(a)(i) of the Holdco Operating Agreement), whether in one transaction or in a series of transactions, such Founding Member and its transferees shall cease to have its and/or their right to designate, remove and replace a member of the Board of Managers pursuant to this Section, and the Board of Managers shall be reduced in size to reflect the foregoing.

Except as otherwise set forth herein, the Board of Managers, acting by Board Majority (as hereinafter defined), may make all decisions and take all actions for the Company in accordance with this Agreement. Notwithstanding the preceding sentence, but subject to Section 10, in connection with any Major Decision of the Company that would also constitute a “Major Decision” of Holdco pursuant to Section 6.10 of the Holdco Operating Agreement (but only to the extent that such Major Decision of the Company would implicate the provisions of Section 6.10 of the Holdco Operating Agreement and make such provisions applicable to the Company as a “Subsidiary” of Holdco), the unanimous vote of each member of the Board of Managers of the Company (excluding the Independent Manager, unless the vote or consent of such party is otherwise required pursuant to this Agreement) shall be required and, to the fullest extent permitted by law, each member of the Board of Managers shall consider the interests of the creditors of the Company in connection with the vote on such Major Decision. Notwithstanding the foregoing, the Board of Managers of the Company shall at all times act for the Company only and shall be independent of the Operating Board of Holdco. The Board of Managers of the Company shall take such actions as are necessary in order to insure that the independence of the Board of Managers is reasonably demonstrated and preserved. For the purposes of this Section 9(e), a “Board Majority” shall mean, with respect to the Company, the affirmative vote of a majority of the number of Managers that constitute the full Board of Managers, excluding the Independent Manager (unless the vote or consent of such party is otherwise required pursuant to this Agreement), on the assumption that all seats of the Board of Managers, excluding the seat of the Independent Manager, are filled (whether or not such seats are in fact filled).

(f) The Company acknowledges that iStar Financial Inc., a Maryland corporation (together with its successors, “iStar”), which indirectly owns and controls the majority of the limited liability company interests in TimberStar Investor, is a “real estate investment trust” or “REIT” under the Internal Revenue Code of 1986, as amended (the “Code”), and that the Company shall acquire, operate, manage and dispose of the Company’s assets so that all but an immaterial amount of iStar’s share of the gross revenues and net income of the Company constitutes qualifying income for REIT purposes for so long as iStar directly or indirectly holds an interest in the Member. To this end, the Company shall not hold, directly or indirectly (other than through a “taxable REIT subsidiary” as defined in Section 856(1) of the Code), any stock in

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trade or other property of a kind that would properly be includable in inventory at hand at the close of a taxable year or property held primarily for sale to customers in the ordinary course of a trade or business, unless the disposition of such property is expected to result in the direct or indirect allocation to iStar of no more than de minimus income. The Company shall not acquire any assets prohibited for REITs (or, if it is a “taxable REIT subsidiary,” any assets prohibited for “taxable REIT subsidiaries”) while iStar directly or indirectly holds an interest in the Member. While iStar directly or indirectly holds an interest in the Member, the Company shall take all necessary action to insure that, if it is treated as an “association taxable as a corporation” under the Code, it is a “taxable REIT subsidiary” with respect to iStar.

Section 10. Limitations on the Company’s Activities.

(a) This Section 10 is being adopted in order to comply with certain provisions required in order to qualify the Company as a “special purpose” entity. Notwithstanding any other provision of this Agreement and any provision of law that otherwise so empowers the Company, the Company shall not:

(i) transfer the limited liability company and/or partnership interests, as the case may be, of any Timber Entity except as permitted by Section 8(j); or

(ii) except as provided in that certain Master Stumpage Agreement, dated the date hereof, between the Timber Entities and, inter alia, as the case may be, TimberStar Texarkana TRS LP, TimberStar Louisiana TRS LP, and TimberStar Nacogdoches TRS LP, cause or permit any Timber Entity to distribute, transfer or otherwise dispose of any of its interest in the Timberlands to the Member (or any Person related to the Member), or commit to do so, until after the one year anniversary of the date hereof.

(b) The Member shall not, so long as any Obligation is outstanding, amend, alter, change or repeal the definitions of “Independent Manager” or “Special Member” or Sections 5(g) 7, 8, 9, 10, 11, 12, 13, 14, 19, 23, 24, 25, 26, 27, 28, 33 or Schedule A of this Agreement without the written consent of the Independent Manager unless the Approval Condition is satisfied. Subject to this Section 10, the Member reserves the right to amend, alter, change or repeal any provisions contained in this Agreement in accordance with Section 33.

(c) Notwithstanding any other provision of this Agreement and any provision of law that otherwise so empowers the Company, the Member, any Manager or any other Person, so long as any Obligation is outstanding, the Company shall not take, nor shall the Member, any Manager, or any other Person be authorized or empowered on behalf of the Company to take, any Material Action without the prior unanimous written consent of the Board of Managers, including the Independent Manager; provided, however, that for so long as any Obligation is outstanding, the Board of Managers may not authorize the taking of any such Material Action unless there is at least one Independent Manager then serving in such capacity.

(d) The Company shall do or cause to be done all things necessary to preserve and keep in full force and effect its existence, rights (charter and statutory) and franchises. So long as any Obligation is outstanding, the Company shall at all times:

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(i) maintain its own separate books, accounting records, bank accounts, and other entity documents and records separate from those of the Member or any Affiliate thereof;

(ii) at all times hold itself out to the public as a legal entity separate from the Member, any Affiliate thereof or any other Person, and not as a department or division of any Person, it being understood that, as contemplated by Section 21 hereof, the Company may be disregarded as an entity separate from its Member for federal, state and/or local income tax purposes;

(iii) file its own tax returns, if any, as may be required under applicable law, and pay any taxes so required to be paid under applicable law;

(iv) not commingle its assets with assets of the Member, any Affiliate thereof or any other Person and not hold itself out as being liable for the debts of another;

(v) conduct its business in its own name and through its own authorized officers and agents and strictly comply with all organizational formalities necessary to maintain its existence;

(vi) maintain and provide when requested separate financial statements, (which may be unaudited), showing its assets and liabilities separate and apart from those of any other Person, and not to have its assets listed on the financial statement of any other Person; provided however that the Company may report its financial statements on a consolidated basis with one or more Affiliates as may be required or permitted by generally accepted accounting principles (provided that any such consolidated financial statements shall contain appropriate footnote(s) indicating that such party and its affiliates are separate legal entities and maintain records, books of account and bank accounts separate from each other, except as otherwise contemplated by this Agreement and the Loan Documents);

(vii) separately manage its liabilities from those of the Member or any Affiliate thereof and pay its own liabilities, obligations and indebtedness of any kind, including all administrative expenses, from its own separate assets, provided that the Initial Member or any Affiliate thereof may pay certain of the organizational costs of the Company, and the Company shall reimburse the Member or any such Affiliate thereof for its fairly allocable portion of shared expenses paid by the Member or such Affiliate thereof;

(viii) except for capital contributions and distributions, maintain an arm’s length relationship with its Affiliates and enter into transactions with Affiliates only on a commercially reasonable basis;

(ix) pay the salaries of its own employees, if any, from its own assets;

(x) not hold out its credit or assets as being available to satisfy the obligations of others;

(xi) allocate fairly and reasonably any overhead for shared office space;

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(xii) use separate stationery, invoices and checks bearing its own name;

(xiii) except as contemplated by the Basic Documents, not pledge its assets for the benefit of any other Person, or create, incur or permit to exist any lien on its assets (including, without limitation, the limited liability company and/or partnership interests, as the case may be, of the Timber Entities while owned by the Company), or enter into any guarantees or otherwise become liable for the obligations of any other Person;

(xiv) correct any known misunderstanding regarding its separate identity;

(xv) refrain from engaging in any business activities without having adequate capital in light of its contemplated business purpose, operations, transactions and liabilities, provided that the foregoing shall not require the Member to make any capital contribution to the Company in excess of the capital contributions made on the date hereof as described in Section 16;

(xvi) not acquire any securities of its Member; provided however that the Company may hold the Member Note and the Transferee Member Note;

(xvii) maintain at least one Independent Manager in accordance with Section 14;

(xviii) not cause or permit any provision of the Paying Agency Agreement or, for so long as the Company owns the limited liability company and/or partnership interests of any Timber Entity, the organizational or governing document of such Timber Entity to be amended, modified, waived or terminated without the prior written consent of Seller, provided that Seller shall not unreasonably withhold or delay its consent to an amendment, modification, waiver or termination of any provision of the organizational or governing document of such Timber Entity other than those covenants relating to separateness and bankruptcy remoteness set forth in Section 9(j)(iv) of the limited liability company operating agreement and in Section 9(c)(iv) of the limited partnership agreement, as the case may be, of each Timber Entity;

(xix) for so long as the Company owns the limited liability company and/or partnership interests, as the case may be, of any Timber Entity, not cause or permit such Timber Entity to make any distribution to the Company other than in the form of cash or, subject to Section 8(j), equity interests in other Timber Entities; and

(xx) have a Board of Managers separate from that of the Member and any other Person and cause the Board of Managers to observe all other limited liability company formalities, including maintenance of current minute books.

(e) The Company shall not assume the liabilities of the Member or any Affiliate thereof and shall not guarantee the liabilities of the Member or any Affiliate thereof.

Failure of the Company, or the Member or the Board of Managers on behalf of the Company, to comply with any of the foregoing covenants or any other covenants contained in this Agreement shall not affect the status of the Company as a separate legal entity or the limited liability of the Member or the Managers.

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(f) So long as any Obligation is outstanding, the Company shall not:

(i) except as contemplated by the Basic Documents, guarantee any obligation of any Person, including any Affiliate;

(ii) engage, directly or indirectly, in any business other than the actions required or permitted to be performed under Section 7, the Basic Documents or this Section 10;

(iii) incur, create or assume any indebtedness other than (i) the loan evidenced by the Timber Note, (ii) the Company’s obligations under the LOC Reimbursement Agreement, (iii) the Company’s obligations under the Paying Agency Agreement, (iv) filing, accounting, or attorneys’ fees, (v) the Company’s obligations under the Interest Rate Protection Agreement, (vi) liabilities for federal, state and local taxes and other governmental fees and assessments, or (vii) such other indebtedness as may be expressly permitted under the Basic Documents;

(iv) except in connection with the Time Deposit Accounts, the Member Note and the Transferee Member Note, make or permit to remain outstanding any loan or advance to, or own or acquire any stock or securities of, any Person (other than limited liability company and/or partnership interests, as the case may be, in the Timber Entities), except that the Company may invest in those investments permitted under the Basic Documents and may make any advance required or expressly permitted to be made pursuant to any provisions of the Basic Documents and permit the same to remain outstanding in accordance with such provisions;

(v) engage in any dissolution, liquidation, consolidation, merger, asset sale or transfer of ownership interests other than (1) a Timber Entity Ownership Interest Transfer permitted under Section 8(j), and (2) such other activities as are expressly permitted pursuant to any provision of the Basic Documents; provided, however, that the foregoing prohibition shall not apply with respect to any dissolution arising or occurring pursuant to Section 18-802 of the Act or otherwise required to occur pursuant to any applicable law; or

(vi) except for the Timber Entities and as otherwise contemplated or permitted by the Basic Documents, form, acquire or hold any subsidiary (whether corporate, partnership, limited liability company or other).

Section 11. Continuation. Subject to the provisions of Section 26 hereof, the Company shall have perpetual existence.

Section 12. Fiscal Year. The fiscal year of the Company (the “Fiscal Year”) for financial statement and accounting purposes shall end on the 31st day of December in each year.

Section 13. Title to Company Property. Title to all assets owned by the Company, whether tangible or intangible, shall be held by the Company as an entity and no Member, individually, shall have any direct ownership of any such asset. The Company may hold any of its assets in its

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own name or in the name of a nominee, which nominee may be one or more individuals, corporations, trusts or other entities.

Section 14. Independent Manager(s). As long as any Obligation is outstanding, the Member shall cause the Company at all times to have at least one Independent Manager who will be appointed by the Member. To the fullest extent permitted by law, including Section 18-1101(c) of the Act, the Independent Manager(s) shall consider only the interests of the Company, and its creditors, in acting or voting with respect to any matter under this Agreement, including the matters referred to in Sections 10(b) and 10(c). No resignation or removal of an Independent Manager, and no appointment of a successor Independent Manager, shall be effective unless accomplished in accordance with Section 9(b) and unless such successor Independent Manager shall have first executed a counterpart to this Agreement as required pursuant to Section 5(g). In the event of a vacancy in the position of Independent Manager, the Member shall, promptly appoint a successor Independent Manager. All right, power and authority of the Independent Manager(s) shall be limited to the extent necessary to exercise those rights and perform those duties specifically set forth in this Agreement and the Independent Manager(s) shall have no authority to bind the Company. No Independent Manager shall at any time serve as trustee in bankruptcy for any Affiliate of the Company.

Section 15. Limited Liability.

Except as otherwise expressly provided by the Act, the debts, obligations and liabilities of the Company, whether arising in contract, tort or otherwise, shall be the debts, obligations and liabilities solely of the Company, and neither the Member nor the Special Member nor any Independent Manager shall be obligated personally for any such debt, obligation or liability of the Company solely by reason of being a Member, Special Member or Independent Manager of the Company.

Section 16. Capital Contributions.

On the date hereof, the Member has contributed to the capital of the Company (i) cash in the amount of $810,246,428.48, and (ii) a promissory note of the Member, a copy of which is attached hereto, in the amount of $15,949,398.20 (the “Member Note”), each as listed on Schedule B attached hereto. In addition, the Member is deemed to have contributed cash to the Company in an amount sufficient to fund the purchase of any Cash Assets (as defined in the Purchase Agreement) held by the Timber Entities acquired by the Company. The Member hereby represents and warrants to the Company that it has a net worth at least equal to the Required Net Worth and, for so long as the Member holds its interest in the Company, the Member shall maintain the Required Net Worth and shall deliver to the Company or Seller such information as the Company or Seller may reasonably request from time to time to verify such net worth. Upon any Transfer of its interest in the Company, the Member Note shall be distributed to the Member if so requested by the Member, but only if such transferee executes and delivers to the Company (i) a promissory note, in form substantially identical to the Member Note and in an identical principal amount and bearing a market rate of interest (together with any such note of any subsequent transferee, the “Transferee Member Note”) (the principal amount of which may be reduced by the amount of any cash contributed by the Member or transferee to the Company in connection with such Transfer) and (ii) such information as is reasonably sufficient

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to verify that such transferee has a net worth at least equal to the Required Net Worth (such determination to be approved by the Board of Managers) and such transferee agrees to maintain such Required Net Worth and provide information pursuant to this Section 16 as if such transferee were the Member. For purposes of this Agreement, (i) the “Required Net Worth” shall equal (A) 100% of the amount of the Member Note or Transferee Member Note if the Member (or transferee) owns the limited liability company and/or partnership interests, as the case may be, of the Timber Entities and (B) 110% of the amount of the Member Note or Transferee Member Note in all other cases, and (ii) the “net worth” of the Member (or any transferee) shall be determined without regard to the Member Note or Transferee Member Note, as the case may be, and without regard to the value of the Member’s (or such transferee’s) interest in the Company, except that, for so long as the Company owns the limited liability company and/or partnership interests, as the case may be, of the Timber Entities, the value of such Timber Entity limited liability company and/or partnership interests shall be taken into account. In lieu of distributing the Member Note upon a Transfer, the Member may elect to repay the outstanding principal of and accrued interest on the Member Note in cash. If such Member Note is repaid in cash in full prior to a Transfer, the transferee shall not be required to certify or maintain the Required Net Worth unless such transferee subsequently desires to cause the Company to make a loan to such transferee in an amount equal to the original principal amount of the Member Note. Such loan may only be made if such transferee executes and delivers (i) to the Company, the Transferee Member Note and (ii) to the Company and Seller, such information as is reasonably sufficient to verify that such transferee has a net worth at least equal to the Required Net Worth (such determination to be approved by the Board of Managers and Seller) and such transferee agrees to maintain such Required Net Worth and provide information pursuant to this Section 16 as if such transferee were the Member. For the avoidance of doubt, this Section 16 shall apply to all successive Transfers of interests in the Company and transferees thereof, it being understood that in connection with each such Transfer the transferring Member shall be required to comply with the obligations of the Member set forth herein, and the successor transferee shall be required to comply with the obligations of the transferee set forth herein. A capital account shall be maintained for the Member, to which contributions and profits shall be credited and against which distributions and losses shall be charged. Neither any Special Member, in accordance with Section 5(g), nor the Member, in accordance with Section 17, shall be required to make any further capital contributions to the Company.

Section 17. Additional Contributions.

The Member is not required to make any additional capital contribution to the Company. However, the Member may make additional capital contributions to the Company at any time upon the written consent of such Member. To the extent that the Member makes an additional capital contribution to the Company, the Member shall revise Schedule B of this Agreement. The provisions of this Agreement, including this Section 17, are intended to benefit the Member and the Special Member and, to the fullest extent permitted by law, shall not be construed as conferring any benefit upon any creditor of the Company (other than a Covered Person) (and no such creditor of the Company shall be a third-party beneficiary of this Agreement) and the Member and the Special Member shall not have any duty or obligation to any creditor of the Company to make any contribution to the Company or to issue any call for capital pursuant to this Agreement.

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Section 18. Allocation of Profits and Losses.

The Company’s profits and losses shall be allocated to the Member.

Section 19. Distributions.

(a) Subject to the remainder of this Section 19 and the other provisions of this Agreement, distributions shall be made to the Member at the times and in the aggregate amounts determined by the Board of Managers including, without limitation, distributions of the Timber Entity Distributions to the Member. Notwithstanding any provision to the contrary contained in this Agreement, the Company shall not be required to make a distribution to the Member on account of its interest in the Company if such distribution would violate the Act or any other applicable law or any Basic Document.

(b) The Company shall not make any distributions to the Member (other than (i) Timber Entity Distributions, (ii) distributions of amounts paid as interest on the Member Note, (iii) distributions of the Member Note in connection with the contribution of the Transferee Member Note as contemplated by Section 16, and (iv) distributions of the limited liability company and/or partnership interests, as the case may be, of the Timber Entities as permitted by Section 8(j)) unless, immediately after giving effect to such distributions, the amount by which (a) the fair market value of the Company’s assets (excluding, for this purpose, the value of each Timber Entity limited liability company and/or partnership interests, as the case may be, the value of the Interest Rate Protection Agreement and any funds and Permitted Investments credited to the LC Fee Collateral Account, the PFA and the Swap Reserve Account, as all such terms unless otherwise defined herein are defined in the Paying Agency Agreement) exceeds (b) the sum of the amount of the Company’s liabilities (excluding for this purpose the value of the Interest Rate Protection Agreement, all accrued fees and expenses payable to the LOC Provider to the extent recourse for such fees and expenses is limited to the LC Fee Collateral Account, and all accrued fees and expenses payable to the Paying Agent to the extent payment for such fees and expenses is reserved in the PFA, as all such terms unless otherwise defined herein are defined in the Paying Agency Agreement), is at least 3 percent of the aggregate principal amount of the Timber Note (such determination to be approved by the Board of Managers). For purposes of the determination referred to in the prior sentence, the Member Note or Transferee Member Note (as the case may be) shall be valued at face value, so long as the Member (or any transferee) provides to the Board of Managers and Seller a current certification of the Required Net Worth and such supporting documentation as is reasonably sufficient for the Board of Managers and Seller to verify such net worth and a certification that such Member or transferee is not aware of any liabilities, claims or obligations (contingent or otherwise) not otherwise taken into account in determining the Required Net Worth that, individually or in the aggregate, would reasonably be expected to result in the net worth of such Member or transferee being less than the Required Net Worth. For purposes of the determination referred to in this Section 19(b), the Time Deposit Accounts and the Timber Note each shall be valued at their respective outstanding principal amount.

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Section 20. Books and Records.

The Member and its duly authorized representatives shall have the right to examine the Company’s books, records and documents during normal business hours. The Company’s books of account shall be kept using the generally accepted accounting principles in the United States as in effect from time to time. The Company’s independent auditor, if any, shall be an independent public accounting firm selected by the Member.

Section 21. Tax Status.

No election has been or shall be made to treat the Company as a corporation for federal, state or local income tax purposes. It is the intent of the Company and its Member that the Company will be disregarded as an entity separate from its Member for federal income tax purposes, as provided in Treas. Reg. § 301.7701-3, and for state and local income tax purposes.

Section 22. Other Business.

Notwithstanding any duty otherwise existing at law or in equity, the Member, the Special Member and any Independent Manager and any Affiliate of the Member or the Special Member or the Independent Managers may engage in or possess an interest in other business ventures of every kind and description, independently or with others, provided that the Company shall insure that no violation of Section 10(d) is thereby caused. The Company shall not have any rights in or to such independent ventures or the income or profits therefrom by virtue of this Agreement.

Section 23. Exculpation and Indemnification.

(a) To the fullest extent permitted by applicable law, neither the Member nor any Special Member or Manager nor any Independent Manager nor any officer, director, manager, employee, agent or Affiliate of the foregoing (collectively, the “Covered Persons”) shall be liable to the Company or any other Person who is bound by this Agreement for any loss, damage or claim incurred by reason of any act or omission performed or omitted by such Covered Person in good faith on behalf of the Company and in a manner reasonably believed to be within the scope of the authority conferred on such Covered Person by this Agreement, except that a Covered Person shall be liable for any such loss, damage or claim incurred by reason of such Covered Person’s gross negligence or willful misconduct.

(b) To the fullest extent permitted by applicable law, a Covered Person shall be entitled to indemnification from the Company for any loss, damage or claim incurred by such Covered Person by reason of any act or omission performed or omitted by such Covered Person in good faith on behalf of the Company and in a manner reasonably believed to be within the scope of the authority conferred on such Covered Person by this Agreement, except that no Covered Person shall be entitled to be indemnified in respect of any loss, damage or claim incurred by such Covered Person by reason of such Covered Person’s gross negligence or willful misconduct with respect to such acts or omissions; provided, however, that any indemnity under this Section 23 by the Company shall be provided out of and to the extent of Company assets only, and neither Member, any Manager, nor any Special Member shall have personal liability on account thereof; and provided further, that so long as any Obligation is outstanding, no indemnity payment from assets of the Company (as distinct from funds from other sources, such

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as insurance) of any indemnity under this Section 23 shall be payable from assets in which any other Person has an interest pursuant to the Basic Documents.

(c) To the fullest extent permitted by applicable law, expenses (including reasonable legal fees) incurred by a Covered Person defending any claim, demand, action, suit or proceeding shall, from time to time, be advanced by the Company prior to the final disposition of such claim, demand, action, suit or proceeding upon receipt by the Company of an undertaking by or on behalf of the Covered Person to repay such amount if it shall be determined that the Covered Person is not entitled to be indemnified as authorized in this Section 23.

(d) Notwithstanding anything herein to the contrary, the obligations under Sections 23(b) and 23(c) shall be subordinated to the Company’s obligations under the Timber Note, the LOC and the LOC Reimbursement Agreement and shall not be paid (other than from funds available for distributions to Member pursuant to Section 19(b)) until the Obligations have been fully paid and the LOC has been cancelled.

(e) A Covered Person shall be fully protected in relying in good faith upon the records of the Company and upon such information, opinions, reports or statements presented to the Company by any Person as to matters the Covered Person reasonably believes are within such other Person’s professional or expert competence and who has been selected with reasonable care by or on behalf of the Company, including information, opinions, reports or statements as to the value and amount of the assets, liabilities, or any other facts pertinent to the existence and amount of assets from which distributions to the Member might properly be paid.

(f) The provisions of this Agreement, to the extent that they restrict or eliminate the duties and liabilities of a Covered Person to the Company or its members otherwise existing at law or in equity, are agreed by the parties hereto to replace such other duties and liabilities of such Covered Person.

(g) The foregoing provisions of this Section 23 shall survive any termination of this Agreement.

Section 24. Transfers; Assignments.

(a) The Member shall not sell, transfer, assign or otherwise dispose of (each, a “Transfer,” with such term excluding an “Encumbrance,” which is governed by Section 24(d)) its interest in the Company except in accordance with the provisions of this Agreement. Any purported Transfer by the Member (including any transferee thereof) of any interest not made strictly in accordance with the provisions of this Agreement shall, to the fullest extent permitted by law, be entirely null and void ab initio.

(b) So long as any Obligation is outstanding, the Member shall not Transfer its interest in the Company to the LOC Provider or any Affiliate thereof at any time.

(c) The Member shall not Transfer its interest in the Company to any other Person until a period of one year has elapsed from the Closing Date. Any Transfer by the Member (or any subsequent transferee) of its interest in the Company following such one year period shall be of its entire interest and shall be made only upon such transferee having executed and delivered

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(i) to the Company, (x) an agreement to be bound by this Agreement reasonably satisfactory in form and substance to the Board of Managers and (y) if the Member Note (or the Transferee Member Note in the case of a Member other than the Initial Member) is to be distributed to the Member in connection with such Transfer, the Transferee Member Note as described in Section 16, together with such information regarding such transferee’s net worth as is required by Section 16; (ii) to Seller, pursuant to the Purchase Agreement, a written agreement, reasonably satisfactory in form and substance, of such transferee to comply thereafter with the obligations, covenants and representations of the Initial Member under this Agreement, and with the obligations of the Initial Member under Sections 10.9, 10.10 and 15.7 of the Purchase Agreement applicable to the Company and the Initial Member in its capacity as the Member, and such evidence as Seller may reasonably require to confirm that such transferee has met all of the requirements for a Transfer hereunder; and (iii) to Seller and to the LOC Provider (A) a certificate of the transferee that it is solvent on a pro forma basis as of the consummation of the Transfer and (B) a legal opinion in customary form that the transferee, as a debtor in bankruptcy, would not be substantively consolidated with the Company. Upon such execution and delivery, such transferee shall be admitted to the Company as a member of the Company and have all of the rights and be bound by all of the obligations hereunder of the Member and immediately following such admission the transferring Member shall cease to be a member of the Company.

(d) So long as any Obligation is outstanding, the Member shall not pledge, grant a security interest in or otherwise encumber (each, an “Encumbrance”) its interest in the Company without the prior written consent of Seller and the LOC Provider.

(e) Notwithstanding anything to the contrary contained herein, no Transfer or Encumbrance of any interest in the Company shall be permitted if such Transfer or Encumbrance would cause the Company to be treated as an association taxable as a corporation for U.S. federal income tax purposes, including pursuant to Section 7704 of the Internal Revenue Code of 1986, as amended.

Section 25. Resignation.

So long as any Obligation is outstanding, other than in connection with a Transfer pursuant to Section 24 of the Member’s entire limited liability company interest, the Member may not resign, except as permitted under the Basic Documents and if the Approval Condition and Section 26(f) are satisfied. If the Member is permitted to resign pursuant to this Section 25, an additional member of the Company shall be admitted to the Company upon its execution of an instrument signifying its agreement to be bound by the terms and conditions of this Agreement, which instrument may be a counterpart signature page to this Agreement and satisfaction of the conditions to a Transfer of limited liability company interests to such additional member as set forth in Section 24. Such admission shall be deemed effective immediately prior to the resignation and, immediately following such admission, the resigning Member shall cease to be a member of the Company.

Section 26. Dissolution.

(a) The Company shall be dissolved, and its affairs shall be wound up upon the first to occur of the following: (i) following a Timber Note Payment Event, the Board of Managers,

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acting together, unanimously vote for dissolution; (ii) the entry of a decree of judicial dissolution under Section 18-802 of the Act; or (iii) the termination of the legal existence of the last remaining member of the Company or the occurrence of any other event that terminates the continued membership of the last remaining member of the Company in the Company unless the Company is continued without dissolution in a manner permitted by this Agreement (including, without limitation Section 5(g)) or the Act. Upon the occurrence of any event that causes the last remaining member of the Company to cease to be a member of the Company or that causes the Member to cease to be a member of the Company (other than upon continuation of the Company without dissolution upon (i) an assignment by the Member of all of its limited liability company interest in the Company and the prior or simultaneous admission of the transferee pursuant to Section 24, or (ii) the resignation of the Member and the prior or simultaneous admission of an additional member of the Company pursuant to Section 25), to the fullest extent permitted by law, the personal representative of such member is hereby authorized to, and shall, within 90 days after the occurrence of the event that terminated the continued membership of such member in the Company, agree in writing (i) to continue the Company and (ii) to the admission of the personal representative or its nominee or designee, as the case may be, as a substitute member of the Company, effective as of the occurrence of the event that terminated the continued membership of such member in the Company.

(b) Subject to the provisions of the Act and, so long as any Obligation is outstanding, with the affirmative vote of the Independent Manager, the Board of Managers shall have the right to wind up the Company’s affairs in accordance with Section 18-803 of the Act (and shall promptly do so upon dissolution of the Company in accordance with Section 26(a)) and shall also have the right to act as or appoint a liquidating trustee in connection therewith.

(c) Upon the winding up of the Company, the assets shall be distributed in the manner provided in Section 18-804 of the Act.

(d) Upon the completion of the winding up of the Company and the distribution of the Company’s assets, the Member shall execute and file a Certificate of Cancellation in accordance with Section 18-203 of the Act.

(e) Notwithstanding any other provision of this Agreement, the Bankruptcy of the Member or a Special Member shall not cause the Member or Special Member, respectively, to cease to be a member of the Company and upon the occurrence of such an event, the Company shall continue without dissolution. Notwithstanding any other provision of this Agreement, each of the Member and the Special Member waives any right it might have to agree in writing to dissolve the Company upon the Bankruptcy of the Member or a Special Member or the occurrence of an event that causes the Member or a Special Member to cease to be a member of the Company.

(f) Except in the case of an assignment of its limited liability company interest to a new Member, the Member may not resign from the Company without the affirmative vote of all of the members of the Board of Managers, including, so long as any Obligation is outstanding, the Independent Manager.

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(g) In the event of dissolution, the Company shall conduct only such activities as are necessary to wind up its affairs (including the sale of the assets of the Company in an orderly manner), and the assets of the Company shall be applied in the manner, and in the order of priority, set forth in Section 18-804 of the Act.

(h) The Company shall terminate when (i) all of the assets of the Company, after payment of or due provision for all debts, liabilities and obligations of the Company shall have been distributed to the Member in the manner provided for in this Agreement and (ii) the Certificate of Formation shall have been canceled in the manner required by the Act.

Section 27. Waiver of Partition; Nature of Interest.

Except as otherwise expressly provided in this Agreement, to the fullest extent permitted by law, each of the Member and each Special Member and Independent Manager hereby irrevocably waives any right or power that such Person might have to institute any proceeding at law or in equity to cause the dissolution, liquidation, winding up or termination of the Company. The Member shall not have any interest in any specific assets of the Company, and the Member shall not have the status of a creditor with respect to any distribution pursuant to Section 19 hereof. The interest of the Member in the Company is personal property.

Section 28. Benefits of Agreement.

None of the provisions of this Agreement shall be for the benefit of or enforceable by any creditor of the Company (other than Seller) or by any creditor of the Member or a Special Member. The Member acknowledges and agrees that Covered Persons and Seller shall be intended beneficiaries of the provisions of this Agreement and that Seller may assign its rights hereunder to any subsequent holder of the Timber Note.

Section 29. Severability of Provisions.

Each provision of this Agreement shall be considered severable and if for any reason any provision or provisions herein are determined to be invalid, unenforceable or illegal under any existing or future law, such invalidity, unenforceability or illegality shall not impair the operation of or affect those portions of this Agreement which are valid, enforceable and legal.

Section 30. Entire Agreement.

This Agreement constitutes the entire agreement of the parties with respect to the subject matter hereof.

Section 31. Binding Agreement.

Notwithstanding any other provision of this Agreement, the Member agrees that this Agreement, including, without limitation, Sections 7, 8, 9, 14, 19, 23, 24, 25, 26, 27, 28, and 33, constitutes a legal, valid and binding agreement of the Member, and is enforceable against the Member in accordance with its terms.

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Section 32. Governing Law.

This Agreement shall be governed by and construed under the laws of the State of Delaware (without regard to conflict of laws principles), all rights and remedies being governed by said laws.

Section 33. Amendments.

Subject to Sections 9(e) and 10, this Agreement may be modified, altered, supplemented or amended pursuant to a written agreement executed and delivered by the Member. Notwithstanding anything to the contrary in this Agreement, so long as any Obligation is outstanding, this Agreement may not be modified, altered, supplemented or amended unless the Approval Condition is satisfied except to cure any ambiguity.

Section 34. Counterparts.

This Agreement may be executed in any number of counterparts, each of which shall be deemed an original of this Agreement and all of which together shall constitute one and the same instrument.

Section 35. Notices.

Any notices required to be delivered hereunder shall be in writing and personally delivered, mailed or sent by telecopy, electronic mail or other similar form of rapid transmission, and shall be deemed to have been duly given upon receipt (a) in the case of the Company, to the Company at its address in Section 2, (b) in the case of the Member, to the Member at its address as listed on Schedule B attached hereto and (c) in the case of either of the foregoing, at such other address as may be designated by written notice to the other party.

Section 36. Effectiveness.

Pursuant to Section 18-201(d) of the Act, this Agreement shall be effective as of the 30^th day of October, 2006.

[SIGNATURE PAGE FOLLOWS]

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IN WITNESS WHEREOF, the undersigned, intending to be legally bound hereby, have duly executed this Amended and Restated Limited Liability Company Agreement as of the 30th day of October, 2006.

MEMBER:
TIMBERSTAR SOUTHWEST PARENT LLC, a Delaware limited liability company
By:
Name:	Jerrold Barag
Title:	Managing Director
INDEPENDENT MANAGER:
Camilia M. Denny

[Amended and Restated Limited Liability Company Agreement of Timberstar Southwest LLC]

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SCHEDULE A

Definitions

A. Definitions

When used in this Agreement, the following terms not otherwise defined herein have the following meanings:

“Act” has the meaning set forth in the preamble to this Agreement.

“Affiliate” means, with respect to any Person, any other Person directly or indirectly Controlling or Controlled by or under direct or indirect common Control with such Person.

“Agreement” means this Amended and Restated Limited Liability Company Agreement of the Company, together with the schedules attached hereto, as amended, restated or supplemented or otherwise modified from time to time.

“Approval Condition” means (i) prior to the payment in full of all obligations pursuant to the LOC and the LOC Reimbursement Agreement, to the extent required by the terms and conditions of the LOC Documents, the related LOC Provider has consented in writing to such action, and (ii) prior to payment in full of the Timber Note, Seller has consented in writing to such action.

“Bankruptcy” means, with respect to any Person, if such Person (i) makes an assignment for the benefit of creditors, (ii) files a voluntary petition in bankruptcy, (iii) is adjudged a bankrupt or insolvent, or has entered against it an order for relief, in any bankruptcy or insolvency proceedings, (iv) files a petition or answer seeking for itself any reorganization, arrangement, composition, readjustment, liquidation or similar relief under any statute, law or regulation, (v) files an answer or other pleading admitting or failing to contest the material allegations of a petition filed against it in any proceeding of this nature, (vi) seeks, consents to or acquiesces in the appointment of a trustee, receiver or liquidator of the Person or of all or any substantial part of its properties, or (vii) if 120 days after the commencement of any proceeding against the Person seeking reorganization, arrangement, composition, readjustment, liquidation or similar relief under any statute, law or regulation, if the proceeding has not been dismissed, or if within 90 days after the appointment without such Person’s consent or acquiescence of a trustee, receiver or liquidator of such Person or of all or any substantial part of its properties, the appointment is not vacated or stayed, or within 90 days after the expiration of any such stay, the appointment is not vacated. The foregoing definition of “Bankruptcy” is intended to replace and shall supersede and replace the definition of “Bankruptcy” set forth in Sections 18-101(1) and 18-304 of the Act.

“Basic Documents” means, collectively, the IP Documents, and the LOC Documents.

“Certificate of Formation” means the Certificate of Formation of the Company filed with the Secretary of State of the State of Delaware on March 30, 2006, as amended or amended and restated from time to time.

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“Closing Date” shall mean October 30, 2006.

“Code” means the Internal Revenue Code of 1986, as amended.

“Company” means TimberStar Southwest LLC, a Delaware limited liability company.

“Control” means the possession, directly or indirectly, of the power to direct or cause the direction of the management or policies of a Person, whether through the ownership of voting securities or general partnership or managing member interests, by contract or otherwise. “Controlling” and “Controlled” shall have correlative meanings. Without limiting the generality of the foregoing, a Person shall be deemed to Control any other Person in which it owns, directly or indirectly, a majority of the ownership interests.

“Covered Persons” has the meaning set forth in Section 23.

“Excess Capital” has the meaning set forth in Section 8(j).

“Exit Event” means any sale or disposition of all or substantially all of the property rights and assets of the Company and its subsidiaries (taken as a whole), recapitalization, extraordinary dividend or distribution, merger or business combination, consolidation, issuance and sale of equity interests, initial public offering or other similar business combination or transaction or significant liquidity event.

“Independent Manager” means a natural person who shall be a duly appointed manager who, at the time of his or her appointment and during the continuation of his or her service as Independent Manager shall not be, and at any time during the preceding five (5) years shall not have been: (a) a director, officer or employee of the Member or an Affiliate thereof, or of any major creditor thereof, (b) a supplier (other than an Independent Manager provided by a corporate services company that provides independent directors in the ordinary course of its business), an immediate family member (i.e. parent, descendant, spouse or sibling), manager or contractor of the Member or an Affiliate thereof, (c) the direct or indirect beneficial owner, at the time of such person’s appointment as a Independent Manager or at any time thereafter while serving as Independent Manager, of any of the limited liability company interests in the Member or more than 10% of the outstanding equity interests of an Affiliate thereof, or (d) a person who Controls, is Controlled by or under common Control with, whether directly, indirectly or otherwise, the Member, an Affiliate or any major creditor, supplier, employee, officer, director, manager or contractor of the Member or an Affiliate. The term “major creditor” shall mean a Person to which the Member or an Affiliate thereof has outstanding indebtedness for borrowed money in a sum sufficiently large as would reasonably be expected to influence the judgment of the proposed Independent Manager adversely to the interests of the Member when such Person’s interests are adverse to those of the Member or an Affiliate thereof. Each Independent Manager is a “manager” of the Company within the meaning of the Act.

“Interest Rate Protection Agreement” means that certain ISDA Master Agreement, including the Schedules and Credit Support Annex thereto, dated as of October 30, 2006, by and between the Company and JP Morgan Chase Bank, N.A., as the counterparty, together with any amendments, supplements or restatements thereof or replacements therefor.

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“IP” means International Paper Company, a New York corporation.

“IP Documents” means, collectively, (i) the Purchase Agreement, (ii) the Timber Note, (iii) the Paying Agency Agreement, and (iv) such other assignments, certificates, instruments, agreements, or other documents as may be required to effectuate the transactions contemplated by the Purchase Agreement.

“LOC” shall mean the letter(s) of credit to be obtained by the Company to secure the Company’s obligations under the Timber Note and to support the timely payment of principal and interest on the Timber Note.

“LOC Documents” shall mean any and all assignments, certificates, instruments, agreements, or other documents that may be required by the LOC Provider in connection with the issuance of the LOC, including, without limitation, the LOC Reimbursement Agreement and the Time Deposit Accounts Pledge.

“LOC Provider” shall mean any issuer of an LOC. The initial LOC Provider is The Royal Bank of Scotland plc, a limited liability company incorporated in Great Britain and registered under the law of Scotland.

“LOC Reimbursement Agreement” shall mean any agreement by and between the Company and the LOC Provider pursuant to which the Company agrees to reimburse the LOC Provider for any draws on the LOC.

“Major Decision” shall mean to commit to, authorize, engage or do any of the following: (a) approve the Company’s budget or its annual business, operating, expenditure and management plan (the “Budget”) or material deviations therefrom, provided that if for any year the Budget is not fully agreed upon, the Company shall be authorized to expend those amounts that have been approved by the Board of Managers, that are required for fixed costs such as utilities, real estate taxes, approved financing costs, costs of auditors and costs of employees, and that are required for the Company to repay its Obligations in accordance with their terms, to operate and comply with all agreements to which the Company or any of its subsidiaries is a party, to effectuate the master harvest schedule or harvest plan then in effect, to protect its assets or to comply with applicable law; (b) make, or permit any subsidiary to make, any capital expenditures or commitments therefor (including, but not limited to, entering into any capital leases) in any fiscal year in excess of, in the aggregate, on a consolidated basis, 120% of the amounts therefor specified in such fiscal year’s approved Budget; (c) except as required to consummate the transactions contemplated pursuant to the Purchase Agreement, authorize any capital calls, authorize, issue or enter into any agreement providing for the issuance (contingent or otherwise) of any notes or debt securities containing equity features (including, but not limited to, any notes or debt securities convertible into or exchangeable for equity securities, issued in connection with the issuance of equity securities or containing profit participation features), any equity securities (or any securities convertible into or exchangeable for any equity securities), or any capital appreciation or profit participation rights (other than bonus compensation paid to employees of the Company or any of its subsidiaries as approved by the Board of Managers); (d) except for Permitted Indebtedness (but not including material modifications thereto), create, incur, assume or suffer to exist, or permit the Company and its subsidiaries, taken as a whole, to

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create, incur, assume or suffer to exist, indebtedness in an aggregate amount exceeding $5,000,000 at any time, other than trade debt in the ordinary course of business, or authorize or enter into any such material modification to the Permitted Indebtedness; (e) other than pursuant to an Exit Event approved pursuant to Section 10.3 of the Holdco Operating Agreement, or other than in connection with dispositions of assets in the ordinary course of business or pursuant to agreements entered into by the Company or any subsidiaries in accordance with the terms hereof, or in connection with dispositions of assets (other than land or timber) not used or expected to be used in the operation of the business of the Company or any of its subsidiaries, sell, lease or otherwise dispose of, or permit any subsidiary to sell, lease or otherwise dispose of (including, but not limited to, pursuant to a lease transaction), its assets; (f) other than pursuant to an Exit Event approved pursuant to Section 10.3 of the Holdco Operating Agreement, merge, acquire or consolidate with any Person or permit any subsidiary to merge, acquire or consolidate with any Person (other than, in the case of a subsidiary, with or into the Company or any other subsidiary) or otherwise acquire or lease all or substantially all of the assets or equity of any Person; (g) approve or enter into any supply agreements (other than the supply agreements entered into with IP) or material amendments to any supply agreements (including those with IP), or material amendments to the master harvest schedule or harvest plan then in effect, other than those arising out of force majeure conditions; (h) enter into, or permit any subsidiary to enter into, any transaction with, or payment to, any officer, member of the Board of Managers or equity holder of the Company, any of their respective Affiliates, or any entity in which any officer, member of the Board of Managers or equity holder of the Company or any of their respective Affiliates has a material interest; provided, however, nothing in this clause shall be deemed to prohibit transactions between the Company and its subsidiaries or between such subsidiaries; (i) except for the agreements that are exhibits to the Purchase Agreement and in connection with an Exit Event approved pursuant to Section 10.3 of the Holdco Operating Agreement, approve or enter into any material agreements or commitments (including, but not limited to, property management agreements) or material amendments thereto; provided, however, that a decision to terminate or modify the consulting agreement with TimberStar Southwest Management Advisor LLC or its successors and assigns shall be a Major Decision; (j) approve or make any material modifications to, grant waivers of or fail to enforce, by the Company or any of its subsidiaries, the Purchase Agreement and the exhibits thereto, or any agreements relating to the acquisition contemplated pursuant to the Purchase Agreement; (k) make any amendment to this Agreement or the Certificate of Formation of the Company; (l) other than pursuant to an Exit Event approved pursuant to Section 10.3 of the Holdco Operating Agreement, declare or pay, or permit any subsidiary to declare or pay, any distributions not permitted under the Holdco Operating Agreement, or make or permit any subsidiary to make, any distributions not permitted under the Holdco Operating Agreement upon any of its equity securities, or repurchase, or cause any subsidiary to repurchase, any of its equity securities; (m) approve any Exit Event, other than an Exit Event approved pursuant to Section 10.3 of the Holdco Operating Agreement; (n) other than in connection with an Exit Event approved pursuant to Section 10.3 of the Holdco Operating Agreement, and additionally subject to Section 10(c), to the fullest extent permitted by law, liquidate, dissolve or effect a recapitalization or reorganization of the Company in any form of transaction, file, or authorize the filing for a subsidiary, for bankruptcy protection, make (or authorize in respect of a subsidiary) an assignment for the benefit of its creditors or agree or consent to (or authorize in respect of a subsidiary) a composition, reorganization or arrangement with its creditors; (o) approve the hiring or termination by the Company or any of its subsidiaries

A-4

of any senior employee, approve or enter into any employment agreements with any employees, and approve any incentive plans, discretionary bonus awards (in the aggregate), severance plans and other benefit arrangements, or approve the hiring (by any subsidiary of iStar Financial Inc. that presently holds, directly or indirectly, an ownership interest in Holdco) of any employee substantially all of whose time is dedicated to the management of the Company’s business and any decisions relating to the responsibilities and compensation of such Person if the compensation of such Person is to be reimbursed by the Company or any of its subsidiaries; (p) initiate or settle, or cause the initiation or settlement of, any material litigation or claims involving the Company or any of its subsidiaries; or (q) take any action resulting in a material change in the Company’s business as presently contemplated. For avoidance of doubt and notwithstanding any provision to the contrary contained herein, the affirmative vote of the Independent Manager on the Board of Managers shall be required only for those Major Decisions, if any, that would also constitute Material Action(s) hereunder.

“Material Action” means to consolidate or merge the Company with or into any Person, or sell all or substantially all of the assets of the Company, or to institute proceedings to have the Company be adjudicated bankrupt or insolvent, or consent to the institution of bankruptcy or insolvency proceedings against the Company or file a petition seeking, or consent to, reorganization or relief with respect to the Company under any applicable federal or state law relating to bankruptcy, or consent to the appointment of a receiver, liquidator, assignee, trustee, sequestrator (or other similar official) of the Company or a substantial part of its property, or make any assignment for the benefit of creditors of the Company, or admit in writing the Company’s inability to pay its debts generally as they become due, or take action in furtherance of any such action, or to dissolve or liquidate the Company (provided, however, that the foregoing shall not apply with respect to any dissolution arising or occurring pursuant to Section 18-802 of the Act or otherwise required to occur pursuant to any applicable law), or to take any action or expressly consent to any omission which action or omission would reasonably be expected to result in the acceleration or early maturity of the Timber Note. For the purposes of this Agreement, neither a Timber Entity Ownership Interest Transfer nor a Time Deposit Accounts Pledge shall be deemed a Material Action.

“Member” means TimberStar Southwest Parent LLC, a Delaware limited liability company, as the initial member of the Company, and includes any Person admitted as an additional member of the Company or a substitute member of the Company pursuant to the provisions of this Agreement, each in its capacity as a member of the Company; provided, however, the term “Member” shall not include any Special Member.

“Member Note” has the meaning set forth in Section 16.

“Obligation” shall mean the indebtedness, liabilities and obligations of the Company under or in connection with the Timber Note or the LOC Documents as of any date of determination.

“Paying Agent” means The Bank of New York, a New York banking corporation, and its successors and assigns.

“Paying Agency Agreement” shall mean that certain Paying Agency Agreement, dated as

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of October 30, 2006, by and among the Company, the LOC Provider, the Paying Agent and JP Morgan Chase Bank, N.A., the counterparty under the Interest Rate Protection Agreement, together with any amendments, supplements or restatements thereof or replacements therefor.

“Permitted Indebtedness” means the Timber Note, the Obligations and all other indebtedness permitted pursuant to Section 10(f)(iii).

“Person” means any individual, corporation, partnership, joint venture, limited liability company, limited liability partnership, association, joint stock company, trust, unincorporated organization, or other organization, whether or not a legal entity, and any governmental authority.

“Purchase Agreement” shall mean that certain Purchase Agreement dated as of April 4, 2006, by and among Seller, Member, the Company and certain Affiliates of the Company provided for therein, pursuant to which the Company and/or such Affiliates shall agree to purchase the Timberlands, together with any amendments, supplements or restatements thereof or replacements therefor.

“Required Net Worth” has the meaning set forth in Section 16.

“Seller” means Sustainable Forests L.L.C., and any successor holder of the Timber Note, provided that the Company has been given written notice by the last holder thereof as to the identity and address of the successor holder, with the Company being entitled to rely, without further inquiry, upon any such written notice.

“Special Member” means, upon such person’s admission to the Company as a member of the Company pursuant to Section 5(g), a person acting as Independent Manager, in such person’s capacity as a member of the Company. A Special Member shall only have the rights and duties expressly set forth in this Agreement.

“Timber Entities” means the entities that are formed for the purposes described in Section 1.2 of the Purchase Agreement, and any successor to each such entity; provided, however, that all references in this Agreement to the Timber Entities shall be deemed to include (i) those limited partnerships that are directly or indirectly wholly owned by the Company and that are organized inter alia for the purpose of owning and/or operating the Timberlands, and (ii) those limited liability companies that are directly wholly owned by the Company and that are organized to serve as the general partners of the entities described in the foregoing clause.

“Timber Entities Distributions” has the meaning set forth in Section 8(c).

“Timber Entity Ownership Interest Transfer” means any Transfer by the Company of all or part of the limited liability company and/or partnership interests, as the case may be, in the Timber Entities from and after the first (1^st) anniversary of the Closing Date.

“Timber Note” means one or more installment notes payable to Seller representing a portion of the purchase price payable under the Purchase Agreement.

“Timber Note Payment Event” has the meaning set forth in Section 8(o).

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“Timberlands” means certain timberlands located in Arkansas, Texas, and Louisiana and other related personal and real property to be conveyed by Seller or its affiliates to the Timber Entities pursuant to the Purchase Agreement.

“Time Deposit Accounts” has the meaning set forth in Section 8(f).

“Time Deposit Accounts Pledge” shall mean a pledge or pledges by the Company to the LOC Provider of the Time Deposit Accounts as additional security for the Company’s obligations under the LOC Documents.

“Transfer” has the meaning set forth in Section 24(a).

“Transferee Member Note” has the meaning set forth in Section 16.

B. Rules of Construction

Definitions in this Agreement apply equally to both the singular and plural forms of the defined terms. The words “include” and “including” shall be deemed to be followed by the phrase “without limitation.” The terms “herein,” “hereof” and “hereunder” and other words of similar import refer to this Agreement as a whole and not to any particular Section, paragraph or subdivision. The Section titles appear as a matter of convenience only and shall not affect the interpretation of this Agreement. All Section, paragraph, clause, Exhibit or Schedule references not attributed to a particular document shall be references to such parts of this Agreement.

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SCHEDULE B

Member

Name	Mailing Address	Capital Contribution	Membership Interest
TimberStar Southwest Parent LLC FEI #20-4615869	c/o TimberStar Southwest Manager LLC 8570 Business Park Dr. Shreveport, LA 71105	Cash:               $810,246,428.48 Member Note: $15,949,398.20	100	%

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EXHIBIT C—FIRST AMENDMENT TO PURCHASE AGREEMENT

EXHIBIT M

MASTER STUMPAGE AGREEMENT

This MASTER STUMPAGE AGREEMENT (the “Stumpage Agreement”) made and entered into on this, the      day of [            ], 2006, by and between TimberStar [            ] I LP, a Delaware limited partnership (“Timber LP I”) and TimberStar [            ] II LP, a Delaware limited partnership (“Timber LP II” and, together with Timber LP I, “Seller”) and TimberStar [            ] TRS LP, a Delaware limited partnership (herein called the “Buyer”).

W I T N E S S E T H:

That for and in consideration of the sum of Ten Dollars and other good and valuable considerations exchanged the receipt and sufficiency of which are hereby acknowledged, the parties hereby agree as follows:

SECTION 1: SALE OF MERCHANTABLE TIMBER. Seller contracts and agrees to sell to Buyer, and Buyer contracts and agrees to buy from Seller, merchantable pulpwood, logs, timber and other forest products (“Timber”) as more specifically set forth on Exhibit A, which Timber shall be harvested from the timberlands described on Exhibit B attached hereto and incorporated herein by reference (the “Timberlands”).

SECTION 2: CUTTING AND REMOVAL OF TREES. Seller contracts and agrees that Buyer shall have the right to take such actions as shall be necessary for Buyer to cut and remove, and Buyer contracts and agrees to so cut and remove, the Timber in the volumes herein contemplated from the Timberlands.

SECTION 3: PER-UNIT PURCHASE PRICE AND PAYMENT PROCEDURE. The per-unit prices of the Timber shall be initially set forth on Exhibit C attached hereto and incorporated herein by reference and shall be subject to adjustment upon the agreement of the parties from time to time and in any event not less frequently than price adjustments required under that certain [Log] [Pulpwood] Supply Agreement by and between International Paper Company and Buyer related to the Timberlands the (“Supply Agreement”). To the extent the parties are unable to agree upon the adjusted prices, the disputed items shall be settled by binding arbitration as set forth in Section 19 below.

(a) Retained Economic Interest by Seller. Buyer shall pay Seller for the Timber cut by Buyer at the per-unit rates stated above as follows:

(i) Determination of Monthly Cutting. Buyer shall deliver to Seller monthly, within seventeen (17) days following the end of the month during which cut Timber has been sold, weight tickets, scale tickets and such other documents as shall be necessary for Seller to determine the volume of Timber cut by and sold to Buyer under this Stumpage Agreement. The consideration allocable to the

Timber sold during such monthly period owing by Buyer to Seller shall then be computed by the parties by multiplying the per-unit prices set forth on Exhibit C (as adjusted pursuant to this Section 3) multiplied by the number of units sold for each product listed on Exhibit A during such monthly period.

(ii) Payment Procedure. Buyer shall pay to Seller monthly, on or before the seventeenth (17^th) of such month the consideration allocable to the cut Timber sold two months previously determined as set forth in subparagraph (i) above. For example, payment for cut Timber sold during the month of October shall be due on or before December 17.

SECTION 4: CUTTING SPECIFICATION. For purposes of this Stumpage Agreement, the Timber specifications shall be as set forth on Exhibit A attached hereto and incorporated herein by reference.

SECTION 5: CUTTING PERIOD. This Stumpage Agreement shall terminate and expire upon October     , 20[36][56] unless the parties otherwise agree in writing.

SECTION 6: INTENTIONALLY DELETED.

SECTION 7: FAILURE TO PAY FOR TIMBER CUT. In the event Buyer should fail to pay to Seller any amounts due for timber cut hereunder, the volume of such timber by species and products shall be determined by a timber cruise performed by Seller, or its agent, the cost thereof to be paid by Buyer. The amount so determined to be due from Buyer to Seller for such cut but unpaid for timber shall be based on those prices as set forth on Exhibit C (as adjusted pursuant to Section 3 hereof).

SECTION 8: RETENTION OF TITLE BY SELLER. Seller shall retain title to each tree subject to this Stumpage Agreement until such time as such tree is severed by Buyer. Until transfer of title to Buyer hereunder, Seller shall bear all risks of loss or damage to any tree, unless the loss or damage so such tree is caused by Buyer or Buyer’s agent, servant, employees or independent contractors. After severance, title to any tree so cut shall be in Buyer, except that Seller shall retain a lien until the same shall be paid for in full as herein provided. Without releasing the liability of any party to this Agreement, the lien, if any, encumbering the Timber sold to Buyer shall, without further action of the parties, be deemed automatically released with respect to any cut Timber sold to a person or entity not affiliated with the Buyer. Buyer hereby expressly authorizes the Seller to file, from time to time, such Uniform Commercial Code financing statements and continuation statements as Seller may, from time to time, determine is necessary to perfect and continue to perfect its liens

SECTION 9: RISK OF LOSS. In the event any tree for sale hereunder is damaged so as to be unmerchantable or is destroyed by fire, wind, flood, lightening, drought, disease, insect attacks, theft, trespass, condemnation or other casualty, the party holding title thereto shall bear the loss resulting from such damage or destruction. In the event such damage or destruction occurs while title to timber so damaged or destroyed is vested in Seller, Buyer shall be relieved

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of its obligations hereunder to cut and buy the tree so damaged or destroyed and Seller shall be under no obligation to sell, or Buyer to cut and buy, any other trees in lieu of that so damaged or destroyed.

SECTION 10: COVENANTS OF SELLER. Seller covenants (i) that it is fully authorized and empowered to enter into this Stumpage Agreement, and to offer for sale and to sell the Timber subject to this Stumpage Agreement, (ii) that the Timber subject to this Stumpage Agreement is, or when sold shall be, free and clear, of all liens and encumbrances, (iii) that Seller, and its successors and assigns, shall and will forever defend title to the timber subject to this Stumpage Agreement.

SECTION 11: ACCESS TO TIMBER AND LANDS. During the term of this Stumpage Agreement, Seller contracts and agrees that Buyer, its agents, employees, licensees and invitees, shall, for purposes of entering the Timberlands and cutting and removing the trees, and for the further purpose of Buyer meeting its obligations with respect to the maintenance of the lands under the Supply Agreement, have the right of reasonable access, ingress and egress to go over and across (i) the Timberlands and (ii) other lands of Seller as may be reasonably necessary or required by Buyer to cut and remove the trees for sale hereunder and meet its obligations under the Supply Agreement.

SECTION 12: COVENANTS OF BUYER. Buyer covenants and agrees (i) to cut and remove the Timber in a good and workmanlike manner, (ii) to take all reasonable precautions necessary to guard against destructive logging practices, (iii) to utilize every reasonable effort to obtain the maximum yield from each tree, and (iv) to conform to all applicable laws and regulations, including without limitations any environmental regulations.

SECTION 13: FIRE SUPPRESSION AND DAMAGE. Buyer covenants and agrees to take reasonable precautions against fire and to take all actions necessary to suppress any fire which occurs on the land during the Buyer’s presence on the Timberlands. The Buyer shall also be liable for any damages to the Seller occurring as a result of any fire attributable to Buyer’s activities.

SECTION 14: ASSIGNMENT BY BUYER. Buyer may assign or transfer any portion of the cutting rights to the Timber to a third party under the full terms and conditions hereof, but Buyer shall, in all events, be directly responsible to Seller for all the actions of any contracting third party, employee, assignee, contractor or subcontractor. Buyer further contracts and agrees to assume all liability for, and shall indemnify, protect and hold harmless the Seller against, all claims, demands, or causes of action, including the cost of defending the same, of every nature whatsoever arising out of or resulting from in any manner the operation of the Buyer or any contracting third party, employee, assignee, contractor or subcontractor under this Stumpage Agreement, and to assume, bear and pay, or have paid, all wages, workmen’s compensation claims, or any and all claims or obligations imposed on it by reason of the Buyer’s operation under this Stumpage Agreement. Seller hereby consents to the assignment, under the circumstances set forth in Section 7(d) of the Supply Agreement, of Buyer’s rights hereunder to

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International Paper Company or its permitted successors and assigns under the Supply Agreement.

SECTION 15: ASSIGNMENT BY SELLER. Seller may, without the consent of the Buyer, assign, pledge, or grant a security interest in, this Agreement to any mortgagee or transferee of the Timberlands.

SECTION 16: NOTICES AND PERMITS. Seller shall be responsible for providing any notices to governmental agencies required in connection with harvesting timber and for obtaining any necessary governmental permits to carry out the purposes of this Agreement.

SECTION 17: INDEMNIFICATION. Buyer shall indemnify and hold Seller harmless from any and all liability whatsoever for damages to any person or thing, and from any loss, damage or expense, including reasonable attorneys’ fees and other costs of litigation, arising out of or connected with the Buyer’s performance of this Stumpage Agreement, including, but not limited to, claims arising from Buyer’s negligence, acts or omissions, or the negligence, acts or omissions of Buyer’s agents, employees, contractors or subcontractors.

SECTION 18: DESTRUCTIVE LOGGING OPERATIONS. If Seller determines that destructive logging operations are occurring, or if ground conditions are such that continued logging operations would cause excessive damage to Seller’s land or timber unless cutting operations are suspended, then Seller shall be entitled, at its election, to postpone cutting operations hereunder by giving a written notice of such postponement to the Buyer.

SECTION 19: ARBITRATION. If the parties are unable to agree upon the price adjustments called for in this agreement, the parties shall endeavor, in good faith, to resolve such dispute between themselves. If the parties are unable to resolve the dispute, it shall be submitted to arbitration, pursuant to the Rules of Commercial Arbitration of the American Arbitration Association. Any such arbitration shall be conducted by a single arbitrator whose decisions hall be final. The parties shall first attempt to agree on the selection of the arbitrator, and, if they cannot agree within 14 days after it becomes necessary to submit the dispute to arbitration, either party may request the American Arbitration Association to appoint the arbitrator. In all cases, the arbitrator shall be a person knowledgeable about sales of timber in the geographic area involved in the dispute. The arbitrator shall be instructed to schedule all proceedings so that, if possible, a decision may be reached and communicated to the parties within 45 days after the appointment of the arbitrator. All expenses of the arbitration shall be divided equally between the parties, except that each party shall bear the expense of its own counsel and the expense of the preparation of its presentation.

SECTION 20: LEGAL ACTIONS. In the event that either party hereto shall breach this Stumpage Agreement, the party required to enforce the provisions hereof in any court of law shall be entitled to recover from the defaulting party, in addition to any other damages allowable by law, attorney fees and other costs and expenses incurred.

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SECTION 21: ENTIRE UNDERSTANDING. This Stumpage Agreement constitutes the entire understanding between the parties with respect to the subject matter and shall supersede all prior agreements, options and understandings between the parties with respect to such subject matter. This Stumpage Agreement is intended to qualify as a cutting contract with the Seller eligible for the treatment as an owner provided in Section 631(b) of the Internal Revenue Code of 1986, as amended, and, to the extent possible, shall be interpreted so as to comply with such intent.

SECTION 22: HEADINGS. The headings of the paragraphs of this Stumpage Agreement, where employed, are for the convenience of reference only and do not form a part hereof and in no way modify, interpret or construe the meanings of the parties.

SECTION 23: GOVERNING LAW. This Agreement and the obligations of the parties hereunder shall be interpreted, construed and enforced in accordance with the laws of the state in which the Timberlands are located applicable to agreements to be performed entirely within such state, including all matters of construction, validity and performance, without regard to principles of conflicts of law thereof.

SECTION 24: NOTICES. Any notice given pursuant to or in connection with this Agreement shall be in writing and delivered by way of (i) first class mail postage prepaid, (ii) recognized national courier or (iii) fax, in each case to the address set forth below for the party to whom it is intended:

Seller:

TimberStar [            ] I LP

TimberStar [            ] II LP

c/o TimberStar Southwest Manager LLC

8570 Business Park Drive, Suite 200

Shreveport, Louisiana 71105

Attention: Hugh McManus

Telephone: (318) 629-1830

Fax: (318) 629-1850

With a copies to:

TimberStar Operating Partnership LP

1600 RiverEdge Parkway, Suite 810

Atlanta, Georgia 30328

Telephone: (678) 339-2070

Fax: (678)339-2071

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iStar Financial Inc.

1114 Avenue of the Americas

27th Floor

New York, New York 10036

Attention: Kelly Wachowicz

Telephone: (212) 930-9400

Fax: (212) 930-9494

Katten Muchin Rosenman LLP

525 West Monroe Street

Chicago, Illinois 60661

Attention: Kenneth Jacobson, Esq.

Telephone: (312) 902-5200

Fax: (312) 902-1061

Buyer:

TimberStar Nacogdoches TRS LP

c/o TimberStar Southwest Manager, LLC

8570 Business Park Drive, Suite 200

Shreveport, Louisiana 71105

Attention: Hugh McManus

Telephone: (318) 629-1830

Fax: (318) 629-1850

With a copies to:

TimberStar Operating Partnership LP

1600 RiverEdge Parkway, Suite 810

Atlanta, Georgia 30328

Telephone: (678) 339-2070

Fax: (678)339-2071

iStar Financial Inc.

1114 Avenue of the Americas

27th Floor

New York, New York 10036

Attention: Kelly Wachowicz

Telephone: (212) 930-9400

Fax: (212) 930-9494

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Katten Muchin Rosenman LLP

525 West Monroe Street

Chicago, Illinois 60661

Attention: Kenneth Jacobson, Esq.

Telephone: (312) 902-5200

Fax: (312) 902-1061

SECTION 25: SUCCESSORS AND ASSIGNS. This Agreement shall apply to, inure to the benefit of and be binding upon and enforceable against the parties and their respective successors and assigns as if such were specified at length throughout this Agreement.

SECTION 26: NO THIRD PARTY BENEFICIARY. This Agreement is intended for the exclusive benefit of the parties and their permitted successors and assigns, and nothing herein is intended to confer on any other party any right or remedy, whether as a third party beneficiary or otherwise. The foregoing notwithstanding, International Paper Company and its permitted successors and assigns under the Supply Agreement are each intended beneficiaries of this Agreement for the sole purpose of enforcing their rights to purchase Timber under the Supply Agreement. For the purposes of this paragraph, it is agreed by the parties that it shall be a breach of this Agreement if Seller shall fail to sell Timber to Buyer in amounts at least sufficient for Buyer to satisfy its obligations under the Supply Agreement.

SECTION 27: COUNTERPARTS. This Agreement may be executed in any number of counterparts, each of which shall be deemed to be an original and all of which together shall comprise but a single instrument. To expedite the transaction contemplated herein, telecopied or facsimile signatures may be used in place of original signatures on this Agreement. Seller and Purchaser intend to be bound by the signatures on the telecopied document, are aware that the other party will rely on the telecopied signatures, and hereby waive any defenses to the enforcement of the terms of this Agreement based on the form of signature.

[SIGNATURES BEGIN ON FOLLOWING PAGE]

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IN WITNESS WHEREOF, Seller and Buyer have each caused this Master Stumpage Agreement to be executed by their duly authorized officers, each as of the date first above written.

TIMBERSTAR [            ] I LP,
a Delaware limited partnership
By:	TIMBERSTAR [            ] I GP LLC, a Delaware limited liability company, its General Partner
	By:
	Name:	Jerrold Barag
	Title:	Managing Director
TIMBERSTAR [            ] II LP, a Delaware limited partnership
By:	TIMBERSTAR [            ] II GP LLC, a Delaware limited liability company, its General Partner
	By:
	Name:	Jerrold Barag
	Title:	Managing Director
BUYER
TIMBERSTAR [            ] TRS LP, a Delaware limited partnership
By:	TIMBERSTAR [            ] TRS GP LLC, a Delaware limited liability company, its General Partner
	By:
	Name:	Jerrold Barag
	Title:	Managing Director

EXHIBIT A

Timber Specifications

EXHIBIT B

Description of the Timberlands

EXHIBIT C

Pricing

EX-10.4

EXHIBIT 10.4

EXECUTION COPY

International Paper Company

          6775 Lenox Center Court, Suite 4037

Memphis, TN 38115-4428        

November 3, 2006

Resource Management Service, LLC

P.O. Box 380757

Birmingham, AL 35238

Amendment to Purchase Agreement

We refer to the (i) Amended and Restated Purchase Agreement, dated as of May 26, 2006 (the “Purchase Agreement”), among Red Mountain Timberlands LLC, Forest Investment Associates L.P., Red Mountain Investments LLC, FIA Investments LLC, RMS Timberlands LLC, RMS Texas Timberlands I LP, Red Mountain Operations LLC, International Paper Company and the other selling parties listed on Schedule A thereto and (ii) the International Paper Company Seller’s Disclosure Letter delivered on April 4, 2006 (the “Disclosure Letter”). Capitalized terms used but not otherwise defined herein shall have the meaning given to such terms in the Purchase Agreement.

This letter confirms our agreement that:

(a) Section 2.3(a)(i) of the Purchase Agreement is amended by replacing the first two lines of such Section 2.3(a)(i) with the following text:

“Not later than January 5, 2007, Seller shall provide to the Buyer Representative a harvest report (the “Harvest Statement”) certifying the”

(b) Any acreage adjustments to the Purchase Price under Section 2.3(d) of the Purchase Agreement shall be made without duplication of the adjustments previously made to the Purchase Price as set forth on Annex A hereto.

(c) Section 3.4 of the Purchase Agreement shall be replaced in its entirety by the following text:

“Costs and Expenses.

Each Party shall be responsible for its own attorneys’ fees and expenses. The Selling Parties shall prepare the Deeds at the Selling Parties’ expense. Selling Parties and

Buyer Parents shall allocate other closing costs in accordance with Annex B hereto. Buyer Parents shall be responsible for any recapture, reassessment, roll-back Taxes or changes in Tax assessments in respect of the Purchased Assets that may become due and payable after the Closing caused by any action or inaction of any Buying Party with respect to the removal of the Purchased Assets after the Closing from their present classifications, or changes in use after the Closing. The Selling Parties’ shall pay all sales, use, excise, documentary, stamp duty, registration, transfer, conveyance, economic interest transfer and other similar Taxes related to the conveyance of the Purchased Assets (including the Timber Entity Assets) from the Selling Parties to the Buying Parties arising in connection with the transactions contemplated by this Agreement (collectively, together with any penalties and interest related to any underpayment thereof, “Transfer Taxes”), and shall timely prepare and file Tax Returns in respect of such Transfer Taxes with the applicable Tax Authority. The Buyer Parents collectively, on the one hand, and the Selling Parties, on the other hand, shall bear one-half of the costs incurred by the Parties with respect to any dispute resolution conducted pursuant to Section 9.5 hereof. Each of the Buyer Parents, on the one hand, and the Selling Parties, on the other hand, shall pay one-half of all filing fees incurred with respect to all filings made under the HSR Act in connection with this Agreement. All other costs shall be paid by the Party incurring such costs.”

(d) The list of Information Technology Purchased Personal Assets set forth in Section 1.1(h)(i) of the Disclosure Letter shall be replaced by Annex C and Annex D hereto.

(e) Section 11.1(b) of the Disclosure Letter shall be replaced by the revised Section 11.1(b) attached as Annex E hereto.

(f) Section 13.5(d) of the Disclosure Letter shall be replaced by the revised Section 13.5(d) attached as Annex F hereto.

(g) Section 16.1 of the Purchase Agreement shall be amended by deleting the word “Virginia” from clauses (i), (ii), (iii) and (iv) of the definition of “Reserved Mineral and Gas Rights” and the from the definition of “Subsurface Geosequestration Rights” contained therein and by replacing the definition of “Transfer Taxes” in its entirety with the following text: “Transfer Taxes” has the meaning specified in Section 3.4.”

(h) The following new Sections 2.6, 5.10 and 10.13 shall be added to, and deemed a part of, the Purchase Agreement:

“Section 2.6 Certain Events.

Seller acknowledges that the tax-exempt equity investors in the Buying Parties could be subject to material taxes under Section 4965 of the Code if any of the

transactions contemplated by this Agreement is a “listed transaction” within the meaning of Treasury Regulation §1.6011-4 (a “Listed Transaction”). Both Seller and the Buying Parties have independently determined that, as of the date hereof, none of the transactions contemplated by this Agreement should be treated as a Listed Transaction. If, prior to Closing, the Buying Parties deliver to Seller an opinion of Sutherland Asbill & Brennan LLP (“Sutherland”), counsel to the Buying Parties, in form and substance reasonably satisfactory to Seller, to the effect that, as a result of a designation or other official administrative action by the Internal Revenue Service subsequent to the date hereof, (i) any of the transactions contemplated by this Agreement should be treated as a Listed Transaction and (ii) the Buying Parties should be treated as parties thereto within the meaning of Section 4965 of the Code, then: (i) the parties shall cooperate in good faith to restructure the transactions contemplated by this Agreement so that, (A) in the opinion of both Sutherland and Debevoise & Plimpton LLP or other outside tax counsel to Seller (“Seller Counsel”), none of such transactions should be considered a Listed Transaction to which the Buying Parties are parties within the meaning of Section 4965 of the Code, and (B) in the opinion of Seller Counsel, such transactions shall be treated as an installment sale described in Section 453 of the Code; and (ii) in the event that the parties are unable following a reasonable period of time to restructure the transactions contemplated by this Agreement as described in the preceding clause (i), then, at the option of Seller, (x) this Agreement shall be terminated and the transactions contemplated hereby shall be abandoned, with the effects described in Section 14.2, or (y) this Agreement shall not be terminated, the entire amount of the Purchase Price shall be payable in cash, and the Pre-Adjustment Purchase Price shall be increased to $5,041,000,000 (with all necessary modifications to this Agreement being made to reflect such changes). If, prior to the completion by Seller of the transactions contemplated by Section 10.13, any such transaction is designated as a Listed Transaction prior to Seller completing such transaction, Seller will consult in good faith with the Buying Parties to discuss alternatives to such transaction that would be mutually acceptable.

Section 5.11 Reportable Transaction.

Seller has not entered into, in connection with any of the transactions contemplated by this Agreement, any “confidential transaction” or “transaction with contractual protection” (in each case, within the meaning of Treasury Regulation §1.6011-4).

Section 10.15 Reportable Transaction.

Seller will not enter into, in connection with any of the transactions contemplated by this Agreement, any “confidential transaction” or “transaction with contractual protection” (in each case, within the meaning of Treasury Regulation §1.6011-4). Seller will not treat any of the transactions

contemplated by this Agreement as a Listed Transaction and will not enter into, in connection with any of the transactions contemplated by this Agreement, any Listed Transaction (in each case, within the meaning of Treasury Regulation §1.6011-4, but excluding any transaction which is designated as a Listed Transaction after the date hereof).

(i) Section 1(e) of the form of Pulpwood Supply Agreement, attached as Exhibit G-1 to the Purchase Agreement, shall be amended so that the definition of Delivery Point shall read in its entirety as follows: “Delivery Point” means the location at which the Wood is delivered by SELLER, as shall be designated by BUYER in BUYER’S sole discretion; provided, however, that BUYER shall not designate a Delivery Point other than a facility, yard or location owned or leased by BUYER, or supplied by BUYER under a supply arrangement preexisting as of the date of this Contract, unless the delivery of Wood to such other Delivery Point is reasonably related to BUYER’S procurement activities for facilities owned, leased or supplied by BUYER.

(j) Section 9(c) of the form of Pulpwood Supply Agreement, attached as Exhibit G-1 to the Purchase Agreement, shall be amended so that clause (ii) of the first sentence thereof shall read in its entirety as follows: “(ii) transfer all of its rights and obligations under this Contract relative to the Wood Reduction, together with the ownership of a Mill, provided such transferee (“New Buyer”) (x) has the financial and operational resources and capacity to operate the Mill and to meet the obligations of BUYER hereunder and (y) assumes in writing all of BUYER’S duties and obligations hereunder arising after such transfer.”

(k) Section 9(c) of the form of Log Supply Agreement, attached as Exhibit G-2 to the Purchase Agreement, shall be amended so that clause (ii) of the first sentence thereof shall read in its entirety as follows: “(ii) transfer all of its rights and obligations under this Contract relative to the Logs Reduction, together with the ownership of a Mill, provided such transferee (“New Buyer”) (x) has the financial and operational resources and capacity to operate the Mill and to meet the obligations of BUYER hereunder and (y) assumes in writing all of BUYER’S duties and obligations hereunder arising after such transfer.”

(l) Section 3.2(i) of each of the forms of Pulpwood Support Agreement, attached as Exhibit G-3 and Exhibit G-4 to the Purchase Agreement, shall be amended to read in its entirety as follows: “In addition to the Transfers described in subparagraphs (a) through (h) above, which do not require the consent of IP, Landowner may Transfer Timberlands with the consent of IP, which, except as provided in Section 3.3, may be granted or withheld in IP’s sole discretion.”

(m) Section 3.3 of each of the forms of Pulpwood Support Agreement, attached as Exhibit G-3 and Exhibit G-4 to the Purchase Agreement, shall be amended so that the first introductory sentence thereof shall read in its entirety as follows: “Consent. With respect to the consent of IP required in subparagraph 3.2(i) in the case of a Transfer of Timberlands that is not described in subparagraphs 3.2(a) through 3.2(h), IP shall consent to a Transfer that meets all the following conditions:”

(n) Section 1(b) of the form of Log Supply Agreement, attached as Exhibit G-2 to the Purchase Agreement, shall be amended so that the definition of “Delivery Point” shall read in its entirety as follows: “Delivery Point” means the location at which Logs are delivered by SELLER, as shall be designated by BUYER in BUYER’S sole discretion; provided, that BUYER shall not designate a Delivery Point other than a facility, yard or location owned or leased by BUYER, or supplied by BUYER under a supply arrangement preexisting as of the date of this Contract, unless the delivery of Logs to such other Delivery Point is reasonably related to BUYER’S procurement activities for facilities owned, leased or supplied by BUYER.

(o) Section 3.2(f) of each of the forms of Log Support Agreement, attached as Exhibit G-5 and Exhibit G-6 to the Purchase Agreement, shall be amended to read in its entirety as follows: “In addition to the Transfers described in subparagraphs (a) through (e) above, which do not require the consent of IP, Landowner may Transfer Timberlands with the consent of IP, which, except as provided in Section 3.3, may be granted or withheld in IP’s sole discretion.”

(p) Section 3.3 of each of the forms of Log Support Agreement, attached as Exhibit G-5 and Exhibit G-6 to the Purchase Agreement, shall be amended so that of the first introductory sentence thereof shall read in its entirety as follows: “Consent. With respect to the consent of IP required in subparagraph 3.2(f) in the case of a Transfer of Timberlands that is not described in subparagraphs 3.2(a) through 3.2(e), IP shall consent to a Transfer that meets all the following conditions:”

[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]

Please acknowledge your agreement with the foregoing by countersigning this letter agreement in the space provided below, whereupon it will be a binding agreement between us. This letter agreement may be executed in any number of counterparts, each of which shall be an original, but such counterparts will together constitute one instrument.

INTERNATIONAL PAPER COMPANY
By:	/s/ Jill Witter
Name:	Jill Witter
Title:	Assistant Secretary

Acknowledged and agreed as of the date first written above:

Resource Management Service, LLC as Buyer Representative
By:	/s/ Ed Sweeten
Name:	Ed Sweeten
Title:	Vice President
Red Mountain Timberlands LLC, a Delaware limited liability company
By:	/s/ Ed Sweeten
Name:	Ed Sweeten
Title:	Vice President

Acknowledged and agreed as of the date first written above:

FIA PARTIES:
Forest Investments Associates L.P., a Delaware limited partnership
By:	Forest Investment Associates, Inc., its General Partner
By:	/s/ V. Scott Bond
Name:	V. Scott Bond
Title:	Vice President
FIATP Parent LLC, a Delaware limited liability company
By:	/s/ V. Scott Bond
Name:	V. Scott Bond
Title:	Vice President
FIATP SSF Parent LLC, a Delaware limited liability company
By:	/s/ V. Scott Bond
Name:	V. Scott Bond
Title:	Vice President
PH Parent LLC, a Delaware limited liability company
By:	/s/ V. Scott Bond
Name:	V. Scott Bond
Title:	Vice President

Erie Parent LLC, a Delaware limited liability company
By:	/s/ V. Scott Bond
Name:	V. Scott Bond
Title:	Vice President
Westervelt Parent LLC, a Delaware limited liability company
By:	/s/ V. Scott Bond
Name:	V. Scott Bond
Title:	Vice President
CIM Parent LLC, a Delaware limited liability company
By:	/s/ V. Scott Bond
Name:	V. Scott Bond
Title:	Vice President
Central Georgia Parent LLC, a Delaware limited liability company
By:	/s/ V. Scott Bond
Name:	V. Scott Bond
Title:	Vice President

Acknowledged and agreed as of the date first written above:

GMO PARTIES:
GMO Threshold Timber Buyer Parent LLC, a Delaware limited liability company
By:	GMO Threshold Timber LLC, its Manager
By:	Renewable Resources, LLC, its Manager
By:	/s/ Eva Greger
Name:	Eva Greger
Title:	Managing Director
GMO Threshold Buyer Parent II LLC, a Delaware limited liability company
By:	GMO Threshold Timber LLC, its Manager
By:	Renewable Resources, LLC, its Manager
By:	/s/ Eva Greger
Name:	Eva Greger
Title:	Managing Director

Acknowledged and agreed as of the date first written above:

GRIFFITH PARTIES:
	/s/ Benjamin W. Griffith, III
	Benjamin W. Griffith, III
Abbeville Timberlands, LLC, a South Carolina limited liability company
By:	/s/ Benjamin W. Griffith, III
	Benjamin W. Griffith, III, Manager
Ogeechee River Timberlands, LLC, a Georgia limited liability company
By:	/s/ Benjamin W. Griffith, III
	Benjamin W. Griffith, III, Manager
Southern Pine Plantations of Georgia, Inc., a Georgia corporation
By:	/s/ Benjamin W. Griffith, III
	Benjamin W. Griffith, III, President
Ten Governors Timberlands, LLC, a South Carolina limited liability company
By:	/s/ Benjamin W. Griffith, III
	Benjamin W. Griffith, III, Manager

Acknowledged and agreed as of the date first written above:

WARE PARTIES:
	/s/ Holland M. Ware
	Holland M. Ware
AJW Timberlands, LLC, a Georgia limited liability company
By:	/s/ Holland M. Ware
	Holland M. Ware, its Attorney-in-Fact
GJW Timberlands, LLC, a Georgia limited liability company
By:	/s/ Holland M. Ware
	Holland M. Ware, its Attorney-in-Fact
HMW Timberlands, LLC, a South Carolina limited liability company
By:	/s/ Holland M. Ware
	Holland M. Ware, Authorized Signor
St. Regis Paper Company, LLC, a Georgia limited liability company
By:	/s/ Holland M. Ware
	Holland M. Ware, Manager
St. Regis Timberlands, LLC, a South Carolina limited liability company
By:	/s/ Holland M. Ware
	Holland M. Ware, Manager

This following schedules have been omitted in accordance with Item 601(b)(2) of Regulation S-K. A copy of these schedules will be furnished supplementally to the Securities and Exchange Commission upon request.

Annex A	–	Acreage Adjustments
Annex B	–	Expense Obligations
Annex C	-	Disclosure Letter Section 1.1(h)(i)—Information Technology Purchased and Personal Property Assets
Annex D	-	Disclosure Letter Section 1.1(h)(i)—Information Technology Purchased and Personal Property Assets
Annex E	-	Disclosure Letter Section 11.1(b)—Human Resources Matters
Annex F	-	Disclosure Letter Section 13.5(d) - Adverse Environmental Carveouts

EX-11

Exhibit 11

INTERNATIONAL PAPER COMPANY

STATEMENT OF COMPUTATION OF PER SHARE EARNINGS

(Unaudited)

(In millions, except per share amounts)

	Three Months Ended September 30,				Nine Months Ended September 30,
	2006		2005		2006			2005
Earnings (loss) from continuing operations	$	113	$	733	$	(960	)	$	919
Discontinued operations		88		290		39			258
Net earnings (loss)		201		1,023		(921	)		1,177
Effect of dilutive securities		—		—		—			20
Net earnings (loss) - assuming dilution	$	201	$	1,023	$	(921	)	$	1,197
Average common shares outstanding		482.5		486.0		485.2			486.0
Effect of dilutive securities
Profit sharing plan		2.1		1.0		—			1.2
Stock options		0.3		0.1		—			0.3
Dilutive securities		—		20.0		—			20.0
Average common shares outstanding - assuming dilution		484.9		507.1		485.2			507.5
Earnings (loss) per common share from continuing operations	$	0.23	$	1.51	$	(1.98	)	$	1.89
Discontinued operations		0.19		0.59		0.08			0.53
Net earnings (loss) per common share	$	0.42	$	2.10	$	(1.90	)	$	2.42
Earnings (loss) per common share from continuing operations - assuming dilution	$	0.23	$	1.46	$	(1.98	)	$	1.85
Discontinued operations		0.19		0.57		0.08			0.51
Net earnings (loss) per common share - assuming dilution	$	0.42	$	2.03	$	(1.90	)	$	2.36

Note: If an amount does not appear in the above table, the security was antidilutive for the period presented.

EX-12

Exhibit 12

INTERNATIONAL PAPER COMPANY

COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES

AND PREFERRED STOCK DIVIDENDS

(Dollar amounts in millions)

(Unaudited)

		For the Years Ended December 31,															Nine Months Ended September 30,
		2001			2002			2003			2004			2005			2005			2006
	TITLE
A)	Earnings (loss) from continuing operations before income taxes and minority interest	$	(1,259.1	)	$	264.1		$	198.1		$	662.8		$	530.1		$	717.4		$	(719.0	)
B)	Minority interest expense, net of taxes		(144.0	)		(47.0	)		(83.5	)		(26.6	)		(12.4	)		(8.5	)		(14.5	)
C)	Fixed charges excluding capitalized interest		1,171.1			1,007.4			949.6			865.6			758.7			563.2			557.3
D)	Amortization of previously capitalized interest		31.8			43.3			41.4			42.2			39.7			30.2			28.0
E)	Equity in undistributed earnings of affiliates		14.1			20.3			2.9			(13.4	)		8.5			3.5			(2.4	)
F)	Earnings (loss) from continuing operations before income taxes, and fixed charges	$	(186.1	)	$	1,288.1		$	1,108.5		$	1,530.6		$	1,324.6		$	1,305.8		$	(150.6	)
	Fixed Charges
G)	Interest and amortization of debt expense	$	970.5		$	811.5		$	803.7		$	782.2		$	683.4		$	507.3		$	498.2
H)	Interest factor attributable to rentals		71.7			80.9			78.8			67.9			65.3			48.6			49.5
I)	Preferred dividends of subsidiaries		128.9			115.0			67.1			15.5			10.0			7.3			9.6
J)	Capitalized interest		13.0			11.9			8.0			9.7			13.7			8.3			12.9
K)	Total fixed charges	$	1,184.1		$	1,019.3		$	957.6		$	875.3		$	772.4		$	571.5		$	570.2
L)	Ratio of earnings to fixed charges					1.26			1.16			1.75			1.71			2.28
M)	Deficiency in earnings necessary to cover fixed charges	$	(1,370.2	)																$	(720.8	)

Note: Dividends on International Paper’s preferred stock are insignificant. As a result, for all periods presented, the ratios of earnings to fixed charges and preferred stock dividends are the same as the ratios of earnings to fixed charges.

EX-31.1

Exhibit 31.1

CERTIFICATION

I, John V. Faraci, certify that:

1. I have reviewed this quarterly report on Form 10-Q of International Paper Company;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: November 8, 2006

/s/ John V. Faraci

John V. Faraci

Chairman and Chief Executive Officer

EX-31.2

Exhibit 31.2

CERTIFICATION

I, Marianne M. Parrs, certify that:

1. I have reviewed this quarterly report on Form 10-Q of International Paper Company;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: November 8, 2006

/s/ Marianne M. Parrs

Marianne M. Parrs

Executive Vice President and Chief Financial Officer

EX-32

Exhibit 32

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

The certification set forth below is being submitted in connection with the Quarterly Report of International Paper Company (the “Company”) on Form 10-Q for the quarterly period ending September 30, 2006 for the purpose of complying with Rule 13a-14(b) or Rule 15d-14(b) of the Securities Exchange Act of 1934 (the “Exchange Act”) and Section 1350 of Chapter 63 of Title 18 of the United States Code. John V. Faraci, Chief Executive Officer of the Company, and Marianne M. Parrs, Chief Financial Officer of the Company, each certify that, to the best of his/her knowledge:

(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Exchange Act; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

/s/ John V. Faraci

John V. Faraci

Chairman and Chief Executive Officer

November 8, 2006

/s/ Marianne M. Parrs

Marianne M. Parrs

Executive Vice President and Chief Financial Officer

November 8, 2006

This certification accompanies this Report on Form 10-Q pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and shall not, except to the extent required by such Act, be deemed filed by the Company for purposes of Section 18 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Such certification will not be deemed to be incorporated by reference into any filing under the Securities Act of 1933, as amended, or the Exchange Act, except to the extent that the Company specifically incorporates it by reference.

A signed original of this written statement required by Section 906, or other document authenticating, acknowledging, or otherwise adopting the signature that appears in typed form within the electronic version of this written statement required by Section 906, has been provided to International Paper Company and will be retained by International Paper Company and furnished to the Securities and Exchange Commission or its staff upon request.