8-K

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 8-K

CURRENT REPORT

PURSUANT TO SECTION 13 OR 15(d) OF

THE SECURITIES EXCHANGE ACT OF 1934

DATE OF REPORT (DATE OF EARLIEST EVENT REPORTED)

August 5, 2009

RAYONIER INC.

COMMISSION FILE NUMBER 1-6780

Incorporated in the State of North Carolina

I.R.S. Employer Identification Number 13-2607329

50 North Laura Street, Jacksonville, Florida 32202

(Principal Executive Office)

Telephone Number: (904) 357-9100

Check the appropriate box below if the form 8-K filing is intended to simultaneously satisfy the filing obligations of the registrant under any of the following provisions:

¨ Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)

¨ Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)

¨ Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))

¨ Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))

RAYONIER INC.

TABLE OF CONTENTS

		PAGE
8-K	Form 8-K
Item 8.01.	Other Events	3
Item 9.01.	Financial Statements and Exhibits	4
	Signature	5
	Exhibit Index	6

ITEM 8.01. OTHER EVENTS

On January 1, 2009, Rayonier (“we,” “our,” “us,” or the “Company”) adopted Financial Standards Board Staff Position (“FSP”) APB 14-1, Accounting for Convertible Debt Instruments That May Be Settled in Cash Upon Conversion (Including Partial Cash Settlement). FSP APB 14-1 requires that entities with convertible debt instruments that may be settled in cash upon conversion (including partial cash settlement) separately account for the liability and equity components in a manner that reflects the entity’s nonconvertible debt borrowing rate when interest expense is recognized in subsequent periods. FSP APB 14-1 requires retrospective application to all periods presented.

The Company holds a 40 percent interest in a joint venture (“JV”) that owns approximately 329,000 acres of New Zealand timberlands. In addition to the investment, Rayonier New Zealand Limited (“RNZL”), a wholly-owned subsidiary of Rayonier Inc., serves as the manager of the JV forests and operates a log trading business. During the third quarter of 2008, Rayonier and its JV partners decided to offer to sell their interests in the JV as well as the operations of RNZL. In the second quarter of 2009, as a result of stressed capital markets and weak global economic conditions, Rayonier and its JV partners decided to discontinue the sale process and continue on-going operations. Accordingly, the interest in the JV and the operations of RNZL (collectively, the “New Zealand operations”) no longer qualify for treatment as discontinued operations.

We are filing this Current Report on Form 8-K to reflect the impact on our previously issued financial statements of the adoption of FSP APB 14-1 and the reclassification of the New Zealand operations from discontinued operations held for sale to continuing operations. For further detail see Note 2 – Summary of Significant Accounting Policies in the Notes to Consolidated Financial Statements. Accordingly, the following items of our Annual Report on Form 10-K for the fiscal year ended December 31, 2008 are being revised in Exhibit 99.1 to this Current Report on Form 8-K:

• Part I, Item 1A, Risk Factors

• Part II, Item 6, Selected Financial Data

• Part II, Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations

• Part II, Item 7A, Quantitative and Qualitative Disclosures about Market Risk

• Part II, Item 8, Financial Statements and Supplementary Data

The revised sections of the Annual Report have not been updated for any other activities or events occurring after February 27, 2009, the date this information was filed with the Securities and Exchange Commission in our Annual Report on Form 10-K for the fiscal year ended December 31, 2008. This Current Report on Form 8-K should be read in conjunction with our 2008 Annual Report on Form 10-K for the fiscal year ended December 31, 2008, our Quarterly Reports on Form 10-Q for the quarterly periods ended March 31, 2009 and June 30, 2009 and our Current Reports on Form 8-K and any amendments thereto for updated information.

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ITEM 9.01. FINANCIAL STATEMENTS AND EXHIBITS

(d) Exhibits.

12	Statements re computation of ratios
23.1	Consent of Independent Registered Public Accounting Firm
99.1	Revised items in 2008 Annual Report on Form 10-K:
	Part I, Item 1A, Risk Factors
	Part II, Item 6, Selected Financial Data
	Part II, Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations
	Part II, Item 7A, Quantitative and Qualitative Disclosures about Market Risk
	Part II, Item 8, Financial Statements and Supplementary Data
	Schedule II - Valuation and Qualifying Accounts

4

SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of l934, the registrant has duly caused this Report to be signed on its behalf by the undersigned hereunto duly authorized.

RAYONIER INC. (Registrant)
BY:	/s/ HANS E. VANDEN NOORT
	Hans E. Vanden Noort
	Senior Vice President and
	Chief Financial Officer

August 5, 2009

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EXHIBIT INDEX

EXHIBIT NO.	DESCRIPTION	LOCATION
12	Statements re computation of ratios	Filed herewith
23.1	Consent of Independent Registered Public Accounting Firm	Filed herewith
99.1	Revised items in 2008 Annual Report on Form 10-K:	Filed herewith
	Part I, Item 1A, Risk Factors
	Part II, Item 6, Selected Financial Data
	Part II, Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations
	Part II, Item 7A, Quantitative and Qualitative Disclosures about Market Risk
	Part II, Item 8, Financial Statements and Supplementary Data
	Schedule II - Valuation and Qualifying Accounts

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EX-12

Exhibit 12

RAYONIER INC. AND SUBSIDIARIES

RATIO OF EARNINGS TO FIXED CHARGES

(Unaudited, thousands of dollars)

	For the Years Ended December 31,
	2008		2007		2006		2005			2004
Earnings:
Income from continuing operations	$	148,583	$	173,559	$	171,134	$	202,477		$	160,063
Add:
Income tax expense (benefit)		29,435		23,350		19,085		(20,139	)		(33,649	)
Amortization of capitalized interest		45		1,871		2,004		1,876			2,408
		178,063		198,780		192,223		184,214			128,822
Adjustments to earnings for fixed charges:
Interest and other financial charges		50,729		57,448		48,905		46,961			46,718
Interest factor attributable to rentals		761		496		636		722			476
		51,490		57,944		49,541		47,683			47,194
Earnings as adjusted	$	229,553	$	256,724	$	241,764	$	231,897		$	176,016
Fixed Charges:
Fixed charges above	$	51,490	$	57,944	$	49,541	$	47,683		$	47,194
Capitalized interest		—		32		1,020		—			—
Total fixed charges	$	51,490	$	57,976	$	50,561	$	47,683		$	47,194
Ratio of earnings as adjusted to total fixed charges		4.46		4.43		4.78		4.86			3.73

EX-23.1

Exhibit 23.1

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

We consent to the incorporation by reference in Registration Statement Nos. 333-148525-01, 333-143150, and 333-52857 on Form S-3, in Registration Statement No. 333-114858 on Form S-4 and in Registration Statement Nos. 333-152505, 333-136920, 333-129176 and 333-129175 on Forms S-8 of our report dated February 25, 2009 (August 5, 2009, as to the effects of the retrospective adoption of Financial Accounting Standards Board Staff Position No. APB 14-1 Accounting for Convertible Debt Instruments that May be Settled in Cash Upon Conversion and the reclassification of the New Zealand operations from held for sale discontinued operations to continuing operations as discussed in Note 2), relating to the consolidated financial statements and financial statement schedule of Rayonier Inc. and subsidiaries (the “Company”) (which report expresses an unqualified opinion and includes an explanatory paragraph regarding the retrospective adoption of Financial Accounting Standards Board Staff Position No. APB 14-1, Accounting for Convertible Debt Instruments that May be Settled in Cash Upon Conversion and the reclassification of the New Zealand operations from held for sale discontinued operations to continuing operations), and our report dated February 25, 2009 relating to the effectiveness of the Company’s internal control over financial reporting for the year ended December 31, 2008, appearing in this Current Report on Form 8-K of Rayonier Inc. and subsidiaries.

/s/ Deloitte & Touche LLP

Certified Public Accountants

Jacksonville, FL

August 5, 2009

EX-99.1

Exhibit 99.1

Revised Items in 2008 Annual Report on Form 10-K

PART I

Item 1A. RISK FACTORS

Certain statements in this document regarding anticipated financial outcomes including earnings guidance, if any, business and market conditions, outlook and other similar statements relating to Rayonier’s future financial and operational performance, are “forward-looking statements” made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 and other federal securities laws. These forward-looking statements are identified by the use of words such as “may,” “will,” “should,” “expect,” “estimate,” “believe,” “anticipate” and other similar language. Forward-looking statements are not guarantees of future performance and undue reliance should not be placed on these statements. The following risk factors, among others, could cause actual results to differ materially from those expressed in forward looking statements that are made in this document.

Our operations are subject to a number of risks, including those listed below. When considering an investment in our securities, you should carefully read and consider these risks, together with all other information in this report. If any of the events described in the following risk factors actually occur, our business, financial condition or operating results, as well as the market price of our securities, could be materially adversely affected. Rayonier assumes no obligation to update these statements except as is required by law.

Business and Operating Risks

The current global economic downturn and turmoil in the global credit markets could limit demand for our products and real estate, and affect the overall availability and cost of credit for Rayonier and its customers and suppliers.

The global economic downturn and unprecedented deterioration of the global credit markets has adversely affected, and could further adversely affect, various aspects of our business and the businesses of our customers and suppliers. At this time, it is impossible to predict the outcome of various actions taken by the U.S. government, including the passage of the Emergency Economic Stabilization Act of 2008 and the American Recovery and Reinvestment Act of 2009, and whether these and other measures currently being implemented or contemplated by the government will mitigate the effects of the crisis. With respect to Rayonier, while we have no immediate need to access the credit markets, the impact of the current crisis on our ability to obtain financing in the future, and the cost and terms of that financing, is unclear. Similarly, the inability of our customers and suppliers to obtain financing could adversely affect our business if their ability to operate or fund transactions (such as real estate purchases) is impacted. We have already seen a small number of our customers file for bankruptcy protection due to economic conditions or the inability to refinance debt, although the effects of these bankruptcies to Rayonier have not been significant to date. No assurances can be given that the effects of the current economic downturn and deterioration of the credit markets will not have a material adverse effect on our business, financial condition and results of operations.

The precipitous decline in the stock market has impacted our pension plan investment performance and, absent a significant recovery in the market or additional federal legislation, may require us to make significant additional cash contributions to our plans.

We sponsor several defined benefit pension plans, which cover many of our salaried and hourly employees. Due to the precipitous decline in the stock market (the Dow Jones Industrial Average declined approximately 32 percent in 2008), the value of our pension plan equity assets has also dropped significantly. However, the Federal Pension Protection Act of 2006 (the PPA) requires that certain capitalization levels be maintained in each of these plans. Recognizing that this issue affects much of Corporate America, in December 2008 federal legislation was passed (as part of the Worker, Retiree, and Employer Recovery Act of 2008) which provides short term relief to plan sponsors by allowing them to phase in the funding requirements of the PPA over three years, among other things. Because it is unknown how the stock market will perform over the next 12 to 24 months and whether additional legislation will be passed to address this issue, no assurances can be given that any additional plan contributions required by applicable law will not be material.

The cyclical nature of our businesses could adversely affect our results of operations.

        Our financial performance is affected by the cyclical nature of the forest products and real estate industries. The markets for timber, real estate, performance fibers and wood products are influenced by a variety of factors beyond our control. For example, the demand for real estate can be affected by changes in interest rates, availability and terms of financing, local economic conditions, new housing starts, population growth and demographics. The demand for sawtimber is primarily affected by the level of new residential and commercial construction activity. Both our Real Estate and Timber businesses have been negatively impacted by the current economic downturn, primarily due to the decline in housing starts and the deterioration of the credit markets. The supply of timber and logs has historically increased during favorable pricing environments, which then causes downward pressure on prices.

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The forest products and real estate industries are highly competitive.

Some of our competitors in the forest products businesses have greater financial and operating resources and own more timberlands than we do. Some of our forest products competitors may also be lower-cost producers in some of the businesses in which we operate. In addition, wood products are subject to significant competition from a variety of non-wood and engineered wood products. We are also subject to competition from various forest products, including logs, imported from foreign countries to the United States as well as to the export markets served by us. To the extent there is a significant increase in competitive pressures from substitute products or other domestic or foreign suppliers, our business could be adversely affected. With respect to our real estate business, one of our key strategies is to engage in activities that add long term value to our properties, including obtaining entitlements and entering into joint venture type arrangements. Many of our competitors in this segment have greater experience in real estate entitlement and development than we do.

Changes in energy and raw materials prices could impact our operating results and financial condition.

Energy and raw material costs, such as oil, natural gas, wood, and chemicals are a significant operating expense, particularly for the Performance Fibers and Wood Products businesses. The prices of raw materials and energy can be volatile and are susceptible to rapid and substantial increases due to factors beyond our control such as changing economic conditions, political unrest, instability in energy-producing nations, and supply and demand considerations. For example, in 2008, we experienced significant volatility in energy, chemicals, transportation and other input costs. Oil and natural gas costs have also increased substantially in recent years and we have experienced, at times, a limited availability of hardwood which has resulted in increased production costs for some Performance Fibers products. Increases in production costs could have a material adverse effect on our business, financial condition and results of operations. In addition, in our Timber, Performance Fibers and Wood Products businesses, the rising cost of fuel, and its impact on the cost and availability of transportation for our products, both domestically and internationally, and the cost and availability of third party logging and trucking services, could have a material adverse effect on our business, financial condition and results of operations.

Changes in global economic conditions, market trends and world events could impact customer demand.

The global reach of our business, particularly the Performance Fibers business and our interest in the New Zealand joint venture, causes us to be subject to unexpected, uncontrollable and rapidly changing events and circumstances in addition to those experienced in the U.S. The current global economic and financial market crises are examples of such changes. Adverse changes in the following factors, among others, could have a negative impact on our business and results of operations:

• exposure to currencies other than the United States dollar;

• regulatory, social, political, labor or economic conditions in a specific country or region; and,

• trade protection laws, policies and measures and other regulatory requirements affecting trade and investment, including loss or modification of exemptions for taxes and tariffs, and import and export licensing requirements.

The impacts of climate initiatives, at the international, federal and state levels, are uncertain at this time.

Currently, there are numerous international, federal and state-level initiatives and proposals addressing global climate issues. Within the U.S., most of these proposals would regulate and/or tax, in one fashion or another, the production of carbon dioxide and other so-called “greenhouse gases.” Moreover, the results of the recent federal election will likely result in a shift to a more aggressive approach on the federal level in addressing climate change issues. It is likely that future legislative and regulatory activity in this area will impact Rayonier, but it is unclear at this time whether such impact will be, in the aggregate, positive or negative. For example, while Rayonier’s Performance Fibers mills produce greenhouses gases and utilize fossil fuels, they also generate a substantial amount of their energy from wood fiber (often referred to as “biomass”), which is favored under most current legislative proposals. In addition, our extensive timber holdings and the biomass they produce may provide opportunities for us to benefit from new legislation and regulation, especially in states that have implemented “renewable portfolio standards” that mandate the use of non-fossil fuels by electricity generators. We continue to monitor political and regulatory developments in this area, but their overall impact on Rayonier is uncertain at this time.

Our businesses are subject to extensive environmental laws and regulations that may restrict or adversely impact our ability to conduct our business.

If regulatory and environmental permits are delayed, restricted or rejected, a variety of our operations could be adversely affected. In connection with a variety of operations on our properties, we are required to seek permission from government agencies in the states and countries in which we operate to perform certain activities. Any of these agencies could delay review of, or reject, any of our filings. In our Timber business, any delay associated with a filing could result in a delay or restriction in replanting, thinning, insect control, fire control or harvesting, any of which could have an adverse effect on our operating results. For example, in Washington State, we are required to file a Forest Practice Application for each unit of timberland to be harvested. These applications may be denied, conditioned or restricted by the regulatory agency or appealed by other parties,

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including citizen groups. Appeals or actions of the regulatory agencies could delay or restrict timber harvest activities pursuant to these permits. Delays or harvest restrictions on a significant number of applications could have an adverse effect on our operating results. In our Performance Fibers and Wood Products businesses, many modifications and capital projects at our manufacturing facilities require an environmental permit, or an amendment to an existing permit. Delays in obtaining these permits could have an adverse effect on our results of operations.

Environmental groups and interested individuals may seek to delay or prevent a variety of operations. We expect that environmental groups and interested individuals will intervene with increasing frequency in the regulatory processes in the states and countries where we own, lease or manage timberlands, and operate mills. For example, as described in more detail in Note 16 - Contingencies, the Altamaha Riverkeeper, a non-profit environmental group, has alleged noncompliance by our Jesup mill with certain laws relating to its effluent discharge, and has threatened to file a “citizen suit” against Rayonier pursuant to the provisions of the Clean Water Act if the group’s concerns are not addressed to their satisfaction. In Washington State, environmental groups and interested individuals may appeal individual forest practice applications or file petitions with the Forest Practices Board to challenge the regulations under which forest practices are approved. These and other challenges could materially delay or prevent operations on our properties. Delays or restrictions due to the intervention of environmental groups or interested individuals could adversely affect our operating results. In addition to intervention in regulatory proceedings, interested groups and individuals may file or threaten to file lawsuits that seek to prevent us from obtaining permits or implementing capital improvements or pursuing operating plans. Any lawsuit or even a threatened lawsuit could delay harvesting on our timberlands, or impact how we operate or our ability to invest in our mills. Among the remedies that could be enforced in a lawsuit is a judgment preventing or restricting harvesting on a portion of our timberlands, or adversely affecting the projected operating benefits or cost of capital projects at our mills.

The impact of existing regulatory restrictions on future harvesting activities may be significant. Federal, state and local laws and regulations, as well as those of other countries, which are intended to protect threatened and endangered species, as well as waterways and wetlands, limit and may prevent timber harvesting, road building and other activities on our timberlands. The threatened and endangered species restrictions apply to activities that would adversely impact a protected species or significantly degrade its habitat. The size of the area subject to restriction will vary depending on the protected species at issue, the time of year and other factors, but can range from less than one to several thousand acres. A number of species that naturally live on or near our timberlands, including the northern spotted owl, marbled murrelet, bald eagle, several species of salmon and trout in the Northwest, and the red cockaded woodpecker, bald eagle, wood stork, red hill salamander, and flatwoods salamander in the Southeast, are protected under the Federal Endangered Species Act or similar state laws. As we gain additional information regarding the presence of threatened or endangered species on our timberlands, or if other regulations, such as those that require buffers to protect water bodies, become more restrictive, the amount of our timberlands subject to harvest restrictions could increase.

Our manufacturing operations, and in particular our Performance Fibers and Wood Products mills, are subject to stringent environmental laws and regulations concerning air emissions, wastewater discharge, water usage and waste handling and disposal. Many of our operations are subject to stringent environmental laws and regulations and permits which contain conditions that govern how we operate our facilities and, in many cases, how much product we can produce. These laws, regulations and permits, now and in the future, may restrict our current production and limit our ability to increase production, and impose significant costs on our operations with respect to environmental compliance. It is expected that, overall, these costs will likely increase over time as environmental laws, regulations and permit conditions become more stringent, and as the expectations of the communities in which we operate become more demanding.

We currently own or may acquire properties which may require environmental remediation or otherwise be subject to environmental and other liabilities. We currently own, or formerly operated, manufacturing facilities and discontinued operations, or may acquire timberlands and other properties, which are subject to environmental liabilities, such as remediation of hazardous material contamination and other existing or potential liabilities. The cost of investigation and remediation of contaminated properties could increase operating costs and adversely affect financial results. Although we believe we have adequate reserves for the investigation and remediation of our current properties, there can be no assurance that actual expenditures will not exceed our expectations, or that other unknown liabilities will not be discovered in the future.

Environmental laws and regulations are constantly changing, and are generally becoming more restrictive. Laws, regulations and related judicial decisions and administrative interpretations affecting our business are subject to change and new laws and regulations that may affect our business are frequently enacted. These changes may adversely affect our ability to harvest and sell timber, operate our manufacturing facilities, remediate contaminated properties and/or develop real estate. These laws and regulations may relate to, among other things, the protection of timberlands, endangered species, timber harvesting practices, recreation and aesthetics, protection and restoration of natural resources, air and water quality, and remedial standards for contaminated property and groundwater. Over time, the complexity and stringency of these laws and regulations have increased markedly and the enforcement of these laws and regulations has intensified. Moreover, we believe that environmental policies of the current administration are likely to be, in the aggregate, more restrictive for industry and landowners than those of the previous administration. Nonetheless, irrespective of any particular presidential administration, environmental laws and regulations will likely continue to become more restrictive and over time could adversely affect our operating results.

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Entitlement and development of real estate entails a lengthy, uncertain and costly approval process.

Entitlement and development of real estate entails extensive approval processes involving multiple regulatory jurisdictions. It is common for a project to require various approvals, permits and consents from federal, state and local governing and regulatory bodies. For example, in Florida, real estate projects must generally comply with the provisions of the Local Government Comprehensive Planning and Land Development Regulation Act (the “Growth Management Act”) and local land use and development regulations. In addition, in Florida, development projects that exceed certain specified regulatory thresholds require approval of a comprehensive Development of Regional Impact (DRI) application. Compliance with the Growth Management Act, local land development regulations and the DRI process is usually lengthy and costly and significant conditions can be imposed on a developer with respect to a particular project. In addition, development of properties containing delineated wetlands may require one or more permits from the federal government. Any of these issues can materially affect the cost and timing of our real estate projects.

The real estate entitlement process is frequently a political one, which involves uncertainty and often extensive negotiation and concessions in order to secure the necessary approvals and permits. A significant amount of our development property is located in counties in which local governments face challenging issues relating to growth and development, including zoning and future land use, public services, infrastructure and funding for same, and the requirements of state law, especially in the case of Florida under the Growth Management Act and DRI process. In addition, anti-development groups are active, especially in Florida, in seeking constitutional amendments, legislation and other anti-growth limitations on real estate development activities. We expect this type of activity to continue in the future.

Issues affecting real estate development also include the availability of potable water for new development projects. For example, in Georgia, the Legislature enacted the Comprehensive Statewide Watershed Management Planning Act (the “Watershed Management Act”), which, among other things, created a governmental entity called the Georgia Water Council which was charged with preparing a comprehensive water management plan for the state and presenting it to the Georgia Legislature. It is unclear at this time how the plan will affect the cost and timing of real estate development along the I-95 coastal corridor in southern Georgia, where the Company has significant real estate holdings.

Changes in the interpretation or enforcement of these laws, the enactment of new laws regarding the use and development of real estate, changes in the political composition of state and local governmental bodies, and the identification of new facts regarding our properties could lead to new or greater costs, delays and liabilities that could materially adversely affect our business, profitability or financial condition.

Changes in demand for our real estate and delays in the timing of real estate transactions may affect our revenues and operating results.

A number of factors, including changes in demographics, tightening of credit, and a slowing of commercial or residential real estate development, particularly along the I-95 coastal corridor in Florida and Georgia, could reduce the demand for our properties and negatively affect our results of operations. The current decline in the economy generally and in the housing market in particular, together with the deterioration of the credit markets, has certainly had such an effect in 2008 and is expected to continue into 2009.

In addition, there are inherent uncertainties in the timing of real estate transactions that could adversely affect our operating results. Delays in the completion of transactions or the termination of potential transactions can be caused by factors beyond our control. These events have in the past and may in the future adversely affect our operating results.

Our joint venture partners may have interests that differ from ours and may take actions that adversely affect us.

We participate in a joint venture in New Zealand, and may enter into other joint venture projects: for example, as part of our real estate strategy. A joint venture involves potential risks such as:

• not having voting control over the joint venture;

• the venture partner at any time may have economic or business interests or goals that are inconsistent with ours;

• the venture partner may take actions contrary to our instructions or requests, or contrary to our policies or objectives with respect to the investment; and,

• the venture partner could experience financial difficulties.

Actions by our venture partners may subject property owned by the joint venture to liabilities greater than those contemplated by the joint venture agreement or to other adverse consequences.

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We may be unsuccessful in carrying out our acquisition strategy.

We have pursued, and intend to continue to pursue, acquisitions of strategic timberland and real estate properties that meet our investment criteria. Our timberland and real estate acquisitions may not perform in accordance with our expectations. We anticipate financing any such acquisitions through cash from operations, borrowings under our credit facilities, proceeds from equity or debt offerings or proceeds from asset dispositions, or any combination thereof. The failure to identify and complete suitable timberland and real estate properties, and the failure of any acquisitions to perform to our expectations, could adversely affect our operating results.

Our failure to maintain satisfactory labor relations could have a material adverse effect on our business.

Approximately 48 percent of our work force is unionized. These workers are exclusively in our Performance Fibers business. As a result, we are required to negotiate the wages, benefits and other terms with these employees collectively. Our financial results could be adversely affected if labor negotiations were to restrict the efficiency of our operations. In addition, our inability to negotiate acceptable contracts with any of these unions as existing agreements expire could result in strikes or work stoppages by the affected workers. For example, we are currently engaged in collective bargaining agreement negotiations with unions representing substantially all of the hourly employees at our Jesup mill. If the unionized employees were to engage in a strike or other work stoppage, or other employees were to become unionized, we could experience a significant disruption of our operations, which could have a material adverse effect on our business, results of operations and financial condition.

Weather and other natural conditions may limit our timber harvest and sales.

Weather conditions, timber growth cycles and restrictions on access may limit harvesting of our timberlands, as may other factors, including damage by fire, insect infestation, disease, prolonged drought and natural disasters such as wind storms and hurricanes.

We do not insure against losses of timber from any causes, including fire.

The volume and value of timber that can be harvested from our timberlands may be reduced by fire, insect infestation, severe weather, disease, natural disasters, and other causes beyond our control. A reduction in our timber inventory could adversely affect our financial results and cash flows. As is typical in the industry, we do not maintain insurance for any loss to our timber, including losses due to these causes.

A significant portion of the timberland that we own, lease or manage is concentrated in limited geographic areas.

We own, lease or manage approximately 2.6 million acres of timberland and real estate located primarily in the United States and New Zealand. Over 75 percent of our timberlands are located in four states: Alabama, Florida, Georgia and Washington. Accordingly, if the level of production from these forests substantially declines, or if the demand for timber in those regions declines, it could have a material adverse effect on our overall production levels and our revenues.

We are dependent upon attracting and retaining key personnel.

We believe that our success depends, to a significant extent, upon our ability to attract and retain key senior management and operations management personnel. Our failure to recruit and retain these key personnel could adversely affect our financial condition or results of operations.

Market interest rates may influence the price of our common shares.

One of the factors that may influence the price of our common shares is our annual dividend yield as compared to yields on other financial instruments. Thus, an increase in market interest rates will result in higher yields on other financial instruments, which could adversely affect the price of our common shares.

We have a significant amount of debt and the capacity to incur significant additional debt.

As of December 31, 2008, we had $747 million of debt outstanding. See Item 7 – Management’s Discussion and Analysis of Financial Condition and Results of Operations – Contractual Financial Obligations for the payment schedule of our long-term debt obligations. We expect that existing cash, cash equivalents, marketable securities, cash provided from operations, and our bank credit facilities will be sufficient to meet ongoing cash requirements. Moreover, we have the borrowing capacity to incur significant additional debt and may do so if we enter into one or more strategic, merger, acquisition or other corporate or investment opportunities, or otherwise invest capital in one or more of our businesses. However, failure to generate sufficient cash as our debt becomes due, or to renew credit lines prior to their expiration, may adversely affect our business, financial condition, operating results, and cash flow.

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REIT and Tax-Related Risks

If we fail to qualify as a REIT or fail to remain qualified as a REIT, we will have reduced funds available for distribution to our shareholders because our timber-related income will be subject to taxation.

We intend to operate in accordance with REIT requirements pursuant to the Internal Revenue Code of 1986, as amended (the “Code”). For example, as a REIT, we generally will not pay corporate-level tax on income we distribute to our shareholders (other than the income of TRS) as long as we distribute at least 90 percent of our REIT taxable income (determined without regard to the dividends paid deduction and by excluding net capital gains). Qualification as a REIT involves the application of highly technical and complex provisions of the Code, which are subject to change, perhaps retroactively, and which are not entirely within our control. We cannot assure that we will qualify as a REIT or be able to remain so qualified or that new legislation, U.S. Treasury regulations, administrative interpretations or court decisions will not significantly affect our ability to qualify as a REIT or the federal income tax consequences of such qualification.

If in any taxable year we fail to qualify as a REIT, we will suffer the following negative results:

• we will not be allowed a deduction for dividends paid to shareholders in computing our taxable income; and,

• we will be subject to federal income tax on our REIT taxable income.

In addition, we will be disqualified from treatment as a REIT for the four taxable years following the year during which the qualification was lost, unless we are entitled to relief under certain provisions of the Code. As a result, our net income and the cash available for distribution to our shareholders could be reduced for up to five years or longer.

If we fail to qualify as a REIT, we may need to borrow funds or liquidate some investments or assets to pay the additional tax liability. Accordingly, cash available for distribution to our shareholders would be reduced.

The extent of our use of taxable REIT subsidiaries may affect the price of our common shares relative to the share price of other REITs.

We conduct a portion of our business activities through one or more taxable REIT subsidiaries. Our use of taxable REIT subsidiaries enables us to engage in non-REIT qualifying business activities such as the production and sale of performance fibers and wood products, real estate sales of HBU property and timberlands (as a dealer) and sales of logs. Taxable REIT subsidiaries are subject to corporate-level tax. Therefore, we pay income taxes on the income generated by our taxable REIT subsidiaries. Under the Code, no more than 20 percent (25 percent beginning in calendar year 2009) of the value of the gross assets of a REIT may be represented by securities of one or more taxable REIT subsidiaries. This limitation may affect our ability to increase the size of our taxable REIT subsidiaries’ operations. Furthermore, our use of taxable REIT subsidiaries may cause the market to value our common shares differently than the shares of other REITs, which may not use taxable REIT subsidiaries as extensively as we use them.

Lack of shareholder ownership and transfer restrictions in our articles of incorporation may affect our ability to qualify as a REIT.

In order to qualify as a REIT, an entity cannot have five or fewer individuals who own, directly or indirectly after applying attribution of ownership rules, 50 percent or more of its outstanding voting shares during the last six months in each calendar year. Although it is not required by law or the REIT provisions of the Code, almost all REITs have adopted ownership and transfer restrictions in their articles of incorporation or organizational documents which seek to assure compliance with that rule. While we are not in violation of the ownership rules, we do not have, nor do we have any current plans to adopt, share ownership and transfer restrictions. As such, the possibility exists that five or fewer individuals could acquire 50 percent or more of our outstanding voting shares, which could result in our disqualification as a REIT.

We may be limited in our ability to fund distributions using cash generated through our taxable REIT subsidiaries.

The ability for the REIT to receive dividends from taxable REIT subsidiaries is limited by the rules with which we must comply to maintain our status as a REIT. In particular, at least 75 percent of gross income for each taxable year as a REIT must be derived from passive real estate sources including sales of our standing timber and other types of qualifying real estate income and no more than 25 percent of our gross income may consist of dividends from our taxable REIT subsidiaries and other non-qualifying income.

This limitation on our ability to receive dividends from our taxable REIT subsidiaries may impact our ability to fund cash distributions to stockholders using cash flows from our taxable REIT subsidiaries. We can, however, under current law, issue stock dividends for up to 90 percent of our regular dividend distribution for 2009. The net income of our taxable REIT subsidiaries is not required to be distributed, and income that is not distributed will not be subject to the REIT income distribution requirement.

6

Certain of our business activities are potentially subject to prohibited transactions tax.

As a REIT, we will be subject to a 100 percent tax on any net income from “prohibited transactions.” In general, prohibited transactions are sales or other dispositions of property to customers in the ordinary course of business. Sales of performance fibers and wood products which we produce and sales of logs constitute prohibited transactions. In addition, sales of timberlands or other real estate (as a dealer) and certain development activities relating to real estate could, in certain circumstances, constitute prohibited transactions.

We intend to avoid the 100 percent prohibited transactions tax by conducting activities that would otherwise be prohibited transactions through one or more taxable REIT subsidiaries. We may not, however, always be able to identify timberland properties that will become part of our “dealer” real estate sales business. Therefore, if we sell timberlands which we incorrectly identify as property not held for sale to customers in the ordinary course of business or which subsequently become properties held for sale to customers in the ordinary course of business, we face the potential of being subject to the 100 percent prohibited transactions tax.

We may have adjustments to deferred and contingent tax liabilities.

The IRS may assert liabilities against us for corporate income taxes for taxable years prior to the time we qualified as a REIT, in which case we will owe these taxes plus interest and penalties, if any. Moreover, any increase in taxable income for those years will result in an increase in accumulated earnings and profits, or E&P, which could cause us to pay an additional taxable distribution to our then-existing shareholders within 90 days of the relevant determination.

Our cash dividends are not guaranteed and may fluctuate.

Generally, REITs are required to distribute 90 percent of their taxable income. However, REITs are required to distribute only their ordinary taxable income and not their net capital gains income. Accordingly, we do not believe that we are required to distribute material amounts of cash since substantially all of our taxable income is treated as capital gains income. Our Board of Directors, in its sole discretion, determines the amount of quarterly dividends to be provided to our stockholders based on consideration of a number of factors. These include, but are not limited to, our results of operations, cash flow and capital requirements, economic conditions, tax considerations, borrowing capacity and other factors, including debt covenant restrictions that may impose limitations on cash payments, future acquisitions and divestitures, harvest levels, changes in the price and demand for our products and general market demand for timberlands including those timberland properties that have higher and better uses. Consequently, our dividend levels may fluctuate.

We may not be able to complete desired like-kind exchange transactions for timberlands and real estate we sell.

When we sell timberlands and real estate, we generally seek to match these sales with the acquisition of suitable replacement real estate. This allows us “like-kind exchange” treatment for these transactions under section 1031 and related regulations of the Code. This matching of sales and purchases provides us with significant tax benefits, most importantly the deferral of any gain on the property sold until ultimate disposition of the replacement property. While we attempt to complete like-kind exchanges wherever practical, we will not be able to do so in all instances due to various factors, including the lack of availability of suitable replacement property on acceptable terms, our inability to complete a qualifying like-kind exchange transaction within the time frames required by the Code and if we incorrectly identify real estate as property not held for sale to customers in the ordinary course of business or which subsequently becomes real estate held for sale to customers in the ordinary course of business. The inability to obtain like-kind exchange treatment would result in the payment of taxes with respect to the property sold, and a corresponding reduction in earnings and cash available for distribution to shareholders as dividends.

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PART II

Item 6. SELECTED FINANCIAL DATA

The selected consolidated financial data presented below for the five fiscal years in the period ended December 31, 2008 should be read in conjunction with our audited financial statements in this Current Report on Form 8-K which have been adjusted to reflect the retrospective adoption of FSP APB 14-1, Accounting for Convertible Debt Instruments That May Be Settled in Cash Upon Conversion (Including Partial Cash Settlement) (“FSP APB 14-1”) and the reclassification of the New Zealand operations from held for sale discontinued operations to continuing operations.

	Year Ended December 31,
	2008			2007			2006			2005			2004
	(dollar amounts in millions, except per share data)
Profitability:
Sales (1)	$	1,271		$	1,225		$	1,230		$	1,181		$	1,163
Operating income before the gain on sale of New Zealand timber assets (1)		226			247			222			175			173
Operating income (1) (6)		226			247			230			212			173
Income from continuing operations (1) (5)		149			174			171			202			160
Net income		149			174			176			178			157
Income from continuing operations:
Per share - Diluted (1) (2)		1.87			2.20			2.19			2.61			2.09
Per share - Basic (1) (2)		1.89			2.24			2.24			2.68			2.15
Net income
Per share - Diluted (2)		1.87			2.20			2.26			2.29			2.05
Per share - Basic (2)		1.89			2.24			2.31			2.35			2.11
Financial Condition:
Total assets	$	2,082		$	2,068		$	1,965		$	1,841		$	1,944
Total debt		747			721			659			559			659
Shareholders’ equity		939			1,000			918			894			810
Shareholders’ equity - per share (2)		11.91			12.78			11.94			11.74			10.81
Cash Flows:
Cash provided by operating activities	$	340		$	324		$	307		$	254		$	292
Cash used for investing activities		(330	)		(126	)		(385	)		(24	)		(179	)
Cash used for financing activities		(128	)		(58	)		(30	)		(216	)		(52	)
Capital expenditures		105			97			105			85			88
Purchase of timberlands, real estate and other		234			27			299			24			89
Depreciation, depletion and amortization		168			165			136			147			146
Cash dividends paid		157			151			144			129			111
Non-GAAP Financial Measures:
EBITDA (3)	$	395		$	412		$	374		$	339		$	323
Debt to EBITDA		1.9 to 1			1.8 to 1			1.8 to 1			1.6 to 1			2.0 to 1
Performance Ratios (%):
Operating income to sales		18			20			19			18			15
Return on equity (4)		15			18			19			24			21
Return on capital (4)		9			11			11			14			11
Debt to capital		44			42			42			38			45
Other:
Timberland and real estate acres - owned, leased, or managed, in thousands of acres		2,575			2,545			2,681			2,473			2,155
Dividends paid - per share	$	2.00		$	1.94		$	1.88		$	1.71		$	1.49

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	Year Ended December 31,
	2008			2007			2006			2005			2004
Selected Operating Data:
Timber
Timber sales volume
Western U.S. - in millions of board feet		232			254			274			263			285
Eastern U.S. - in thousands of short green tons		6,824			6,168			4,740			4,832			4,291
New Zealand - in thousands of metric tons (7)		N/A			N/A			N/A			464			646
Real Estate - acres sold
Development		501			4,356			9,377			6,036			4,786
Rural		15,845			12,817			16,874			23,990			31,120
Non-Strategic Timberlands		49,801			—			—			—			—
Total Real Estate Sales		66,147			17,173			26,251			30,026			35,906
Performance Fibers
Sales volume (thousands of metric tons)
Cellulose Specialties		471			467			474			470			453
Absorbent Materials		253			259			272			276			266
Total		724			726			746			746			719
Wood Products
Lumber sales volume - in millions of board feet		321			329			350			351			347
Timber
Sales
Western U.S.	$	78		$	104		$	109		$	99		$	81
Eastern U.S.		112			106			88			86			77
New Zealand (7)		9			12			10			23			28
Total	$	199		$	222		$	207		$	208		$	186
Operating Income (Loss)
Western U.S.	$	12		$	49		$	60		$	55		$	42
Eastern U.S. (6)		21			9			31			30			24
New Zealand/Other (7)		(2	)		2			(1	)		2			6
Total	$	31		$	60		$	90		$	87		$	72
EBITDA (3)
Timber	$	116		$	146		$	152		$	147		$	128
Real Estate		101			98			91			68			80
Performance Fibers		205			209			153			121			125
Wood Products		(1	)		(2	)		4			(12	)		19
Other operations		3			(3	)		2			2			7
Corporate and other (8)		(29	)		(36	)		(28	)		13			(36	)
Total	$	395		$	412		$	374		$	339		$	323

(1) On August 28, 2005, we sold our MDF business. MDF results have been reclassified to discontinued operations.

(2) 2004 was restated to reflect the October 17, 2005 three-for-two stock splits.

(3) EBITDA is defined as earnings before interest, taxes, depreciation, depletion and amortization. EBITDA is a non-GAAP measure of the operating cash generating capacity of the Company. EBITDA by segment is a critical valuation measure used by the Chief Operating Decision Maker, existing shareholders and potential shareholders to measure how management is performing relative to the assets with which they have been entrusted. See page 11 for a reconciliation of Cash Provided by Operating Activities to EBITDA in total and by segment.

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(4) Return on equity is calculated by dividing income from continuing operations by the average of the opening (1/1/XX) and ending (12/31/XX) shareholders’ equity for each period presented. Return on capital is calculated by dividing income from continuing operations by the sum of average shareholders’ equity and average outstanding debt.

(5) Included in the calculation of income from continuing operations are certain items that are infrequent in occurrence. We believe these items are important to understand the financial performance or liquidity of the Company in the comparative annual periods being reported. These “items of interest” and their effect on income from continuing operations for the periods presented were as follows:

	Increase/(decrease) to Income from Continuing Operations for the Year Ended December 31,
	2008		2007			2006		2005		2004
Items of interest, net of tax:
Forest fire loss (a)	$	—	$	(10.9	)	$	—	$	—	$	—
Prior years IRS audit settlements including resulting adjustments to accrued interest and deferred taxes (b)		—		—			9.0		24.9		—
Reversal of deferred tax (c)		—		—			—		—		77.9

(a) Losses sustained from wildfires in southeast Georgia and northeast Florida.

(b) Tax benefits from the favorable resolution of tax audits for prior years and related interest.

(c) Reversal of timber-related deferred taxes not required after REIT conversion.

(6) The 2007 results include a $10.9 million loss from wildfires on timberlands in southeast Georgia and northeast Florida.

(7) 2005 reflects operations through October 4, 2005, prior to the JV formation.

(8) Corporate and other includes a $7.8 million gain from the partial sale of JV investment (2006) and a $37 million gain from the sale of New Zealand timberlands (2005).

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(dollars in millions)
	Timber			Real Estate			Performance Fibers			Wood Products			Other			Corporate and Eliminations			Total
2008
Cash provided by (used for) operating activities	$	114.4		$	115.2		$	190.9		$	(2.0	)	$	10.3		$	(88.6	)	$	340.2
Less: Non-cash cost basis of real estate sold		—			(11.1	)		—			—			—			—			(11.1	)
Add: Income tax expense (1)		—			—			—			—			—			29.4			29.4
Interest, net (1)		—			—			—			—			—			47.9			47.9
Other balance sheet changes		1.2			(2.7	)		13.9			1.3			(7.3	)		(18.3	)		(11.9	)
EBITDA	$	115.6		$	101.4		$	204.8		$	(0.7	)	$	3.0		$	(29.6	)	$	394.5
2007
Cash provided by (used for) operating activities	$	136.8		$	101.2		$	228.2		$	(0.1	)	$	(9.1	)	$	(133.0	)	$	324.0
Less: Non-cash cost basis of real estate sold		—			(8.4	)		—			—			(0.2	)		—			(8.6	)
Add: Income tax expense (1)		—			—			—			—			—			23.4			23.4
Interest, net (1)		—			—			—			—			—			49.7			49.7
Other balance sheet changes		9.0			5.0			(18.8	)		(2.2	)		6.1			24.1			23.2
EBITDA	$	145.8		$	97.8		$	209.4		$	(2.3	)	$	(3.2	)	$	(35.8	)	$	411.7
2006
Cash provided by (used for) operating activities	$	149.8		$	103.0		$	127.3		$	5.6		$	13.6		$	(92.4	)	$	306.9
Less: Non-cash cost basis of real estate sold		—			(12.3	)		—			—			(0.1	)		—			(12.4	)
Add: Income tax expense		—			—			—			—			—			22.3			22.3
Gain on sale of portion of New Zealand JV		—			—			—			—			—			7.8			7.8
Interest, net		—			—			—			—			—			39.1			39.1
Other balance sheet changes		2.1			(0.1	)		25.5			(1.5	)		(11.6	)		(4.0	)		10.4
EBITDA	$	151.9		$	90.6		$	152.8		$	4.1		$	1.9		$	(27.2	)	$	374.1
2005
Cash provided by (used for) operating activities	$	164.8		$	80.8		$	132.4		$	22.3		$	(4.6	)	$	(133.8	)	$	261.9
Less: Non-cash cost basis of real estate sold		—			(11.0	)		—			—			(0.8	)		—			(11.8	)
Income tax benefit		—			—			—			—			—			(30.6	)		(30.6	)
Add: Gain on New Zealand timberland sale		—			—			—			—			—			36.9			36.9
Interest, net		—			—			—			—			—			38.8			38.8
Other balance sheet changes		(17.7	)		(1.7	)		(11.0	)		(34.2	)		7.0			101.4			43.8
EBITDA	$	147.1		$	68.1		$	121.4		$	(11.9	)	$	1.6		$	12.7		$	339.0
2004
Cash provided by (used for) operating activities	$	126.2		$	83.9		$	125.8		$	22.6		$	17.8		$	(80.9	)	$	295.4
Less: Non-cash cost basis of real estate sold		—			(10.5	)		—			—			(0.5	)		—			(11.0	)
Income tax benefit		—			—			—			—			—			(33.4	)		(33.4	)
Add: Interest, net		—			—			—			—			—			44.1			44.1
Other balance sheet changes		2.1			6.3			(0.7	)		(3.3	)		(10.4	)		33.9			27.9
EBITDA	$	128.3		$	79.7		$	125.1		$	19.3		$	6.9		$	(36.3	)	$	323.0

(1) Adjusted to reflect the retrospective application of FSP APB 14-1 which resulted in an increase to interest expense of $5.4 million and $1.1 million and an associated income tax benefit of $2.0 million and $0.4 million for fiscal years 2008 and 2007, respectively.

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

Executive Summary

Our revenues, operating income and cash flows are primarily derived from three core business segments: Timber, Real Estate and Performance Fibers. We own or lease (under long-term agreements) approximately 2.2 million acres of timberland and real estate in Alabama, Arkansas, Florida, Georgia, Louisiana, New York, Oklahoma, Texas, and Washington. We believe we are the seventh largest private landowner in the United States. Our Real Estate business seeks to maximize the value of our properties which are more valuable for development, recreational or conservation uses than for growing timber, and sell our non-strategic timberland. Our Performance Fibers business has been a supplier of premier cellulose specialty grades of pulp for over eighty years.

We have consistently generated strong cash flows and operating results by focusing on the following critical financial measures: segment operating income and EBITDA, cash available for distribution in total and on a per-share basis, debt to EBITDA ratio, debt to capital ratio, return on equity, return on fair market value (Timber and Real Estate) and return on capital employed (Performance Fibers). Key non-financial measures include safety and environmental performance, quality, production as a percent of capacity and various yield statistics.

Our focus is on cash generation, prudent allocation of capital and maximizing returns for shareholders. Our strategy consists of the following key elements:

• Increase the size and quality of our timberland holdings through cash-accretive timberland acquisitions while selling timberland that no longer meets our strategic or financial return requirements. This strategy, which requires a disciplined approach and rigorous adherence to strategic and financial metrics, can result in significant year-to-year variation in timberland acquisitions and divestitures. For example, we acquired 110,000 acres of timberland in 2008, 6,000 acres in 2007 and 228,000 acres in 2006. In 2008, we sold approximately 49,000 acres of non-strategic timberland.

• Extract maximum value from our higher and better use (HBU) properties. We will continue entitlement activity on development property while maintaining a rural HBU program of sales for conservation, recreation and industrial uses.

• Continue to differentiate our Performance Fibers business by developing and improving customer specific applications. We will also emphasize operational excellence to ensure quality, reliability and efficiency.

We continuously evaluate our capital structure. Our debt-to-capital ratio was 44 percent and our debt-to-EBITDA ratio was 1.9 at December 31, 2008. We believe that a debt-to-EBITDA ratio of up to three times is appropriate to keep our weighted-average cost of capital low while maintaining an investment grade debt rating as well as retaining the flexibility to actively pursue growth opportunities.

We have historically had conservative leverage and believe in having ample liquidity. Maintaining an investment grade debt rating has been a key element of this overall financial strategy as it historically allowed access to corporate debt markets even in difficult economic conditions. The recent, extreme turmoil in the financial markets resulted in the corporate debt markets being temporarily closed, even for investment grade companies. Recently, these markets have begun to open, but the cost of borrowing is high compared to recent years. We have no major debt coming due until December 31, 2009 when $122 million in installment notes will mature. Our preference would be to refinance these notes by accessing the corporate debt markets this year. However, if the markets are closed or the cost of borrowing is prohibitive, we expect to refinance these installment notes by borrowing under our revolving bank facility which currently has $144 million of remaining capacity.

We maintain four qualified defined benefit plans and one unfunded plan to provide benefits in excess of amounts allowable under current law. The recent stock market decline has decreased the value of our pension assets by $73 million from year end 2007. Our minimum pension contribution in 2009 is $6 million, slightly below the $8 million of discretionary contributions we made in 2008. We may elect to contribute more to the plans depending on market conditions.

Our strategic capital allocation will be primarily in Timber, with the remainder in Real Estate and Performance Fibers. We do not expect to significantly reduce debt in 2009 and, in connection with appropriate growth opportunities, may incur additional debt that causes us to exceed the debt-to-capital ratio mentioned above.

In 2008, our annual dividend was $2.00 per share, a three percent increase over 2007. Our 2009 dividend payments are expected to total $158 million assuming no change in the current rate.

Overall, we believe we have adequate liquidity and sources of capital to run our businesses efficiently and effectively and to maximize the value of assets under management. We expect cash flow from operations to adequately cover planned capital expenditures, interest expense, pension contributions and dividends in 2009.

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Operational Strategies

Timber is sold primarily through an auction process, although it is also marketed through log supply agreements, particularly in the Western region. We operate Timber as a stand-alone business, requiring our mills to compete with third-party bidders for timber, primarily at auction. This promotes realizing market value, generating a true measure of fair value returns in Timber and minimizing the possibility of our manufacturing facilities being subsidized with below market-cost wood. We also focus on optimizing Timber returns by continually improving productivity and yields through advanced silvicultural practices which take into account soil, climate and biological considerations. We also actively pursue other non-timber sources of income, primarily hunting and other recreational licenses. Finally, we evaluate timberland acquisitions and pursue those that meet various financial and strategic criteria.

A significant portion of our acreage is more valuable for development, recreational or conservation purposes than for growing timber. To maximize the value of our development properties, our strategy is to engage in value-added entitlement activities versus selling real estate in bulk. We continue to seek entitlements for holdings in the Southeast and currently have approximately 8,000 acres of entitled land in Georgia. We may enter into joint ventures with recognized developers to maximize the value of our properties. Additionally, in 2008 we began a strategy of selling non-strategic timberland holdings that do not meet our investment criteria, which enables us to redeploy capital to higher value assets and upgrade our timberland portfolio.

In Performance Fibers, the focus has been to improve our position as a premier supplier of cellulose specialties. We are a market leader in cellulose specialties, utilizing our considerable technical applications expertise to customize products to exacting specifications, which allows differentiation from most competitors. Fluff pulp is a semi-commodity with opportunity for differentiation by price and customer service, although we do explore other ways to enhance the value of these fibers. There are a number of much larger companies in the fluff pulp market and we are not a market leader. We have been successful in executing a strategy of shifting production from absorbent materials to cellulose specialties. In 2008, 65 percent of our sales volume was cellulose specialties, versus 61 percent in 2003.

Cost control is a critical element to remaining competitive in the Performance Fibers markets. The keys to success are operating continuously, safely, and efficiently while closely managing raw materials and conversion costs. Capital expenditures typically are directed toward cost reduction, product enhancements, environmental requirements and efficiency projects. Historically, we have used a significant amount of fossil fuels to operate our mills. To reduce variability and cost, we completed a number of capital projects to reduce fossil fuel consumption, including a power boiler replacement at our Fernandina Beach, FL facility, which consumes primarily wood waste.

Our capital expenditures totaled $105 million in 2008. For 2009, capital expenditures (excluding strategic acquisitions) are expected to range from $95 million to $98 million.

Industry and Market Conditions

Timber markets continued to soften in 2008 caused by the declining demand for lumber due to considerably weakened housing and construction markets, offset partly by increased pulpwood demand. Lumber prices were unchanged in 2008 and remain near fifteen-year lows. As we enter 2009, these markets remain weak and we expect volumes and prices to be below 2008 levels.

In Real Estate, our sales mix shifted as demand for non-strategic timberlands held steady, while demand for development property softened due to the weak housing market and overall economic decline. We expect similar conditions in the near term.

In Performance Fibers, acetate market demand remains strong. Sales are typically made under one to five year contracts which establish prices and target volumes at the beginning of the year and buffer some of the changes in supply and demand typically seen in worldwide commodity pulp and paper markets. We have long-term contracts with the world’s largest manufacturers of acetate-based products and other key customers that extend into 2011 and represent nearly all of our high value cellulose specialties production. Our recognized technical and market leadership has allowed us to maintain strong pricing across our cellulose specialties product lines. In 2008, new capacity from competitors in the Southern hemisphere came on-line and their product is being sampled and tested by our customers. This new volume did not affect our 2008 results, and we do not expect this new capacity to adversely impact our results in 2009; however, it is unclear how these market dynamics may impact our business in 2010 and beyond. Also in the first half of 2008, we experienced unprecedented cost increases in raw materials, chemicals, fuel and transportation. While these cost increases began to subside in the second half of the year, our largest single chemical cost, caustic, may increase by as much as $70 million in 2009 from 2008.

Absorbent materials price increases through the first three quarters of 2008 were slightly offset by price declines in the fourth quarter. Prices are expected to continue to decline in 2009 reflecting the weakening global economy. Sales of absorbent materials are typically made with an annual volume agreement that allows price to move with the market during the year.

Critical Accounting Policies and Use of Estimates

The preparation of financial statements requires us to make estimates, assumptions and judgments that affect the assets, liabilities, revenues and expenses, and to disclose contingent assets and liabilities, reported in our Annual Report on Form 10-K. We base these

13

estimates and assumptions on historical data and trends, current fact patterns, expectations and other sources of information we believe are reasonable. Actual results may differ from these estimates under different conditions.

Merchantable inventory and depletion costs as determined by forestry timber harvest models

Significant assumptions and estimates are used in the recording of timberland inventory cost and depletion. We employ a forestry technical services group at each of our timberland management locations. Merchantable standing timber inventory is estimated annually, using industry-standard computer software. The inventory calculation takes into account growth, in-growth (annual transfer of oldest pre-merchantable age class into merchantable inventory), timberland sales and the annual harvest specific to each business unit. The age at which timber is considered merchantable is reviewed periodically and updated for changing harvest practices, future harvest age profiles and biological growth factors.

An annual depletion rate is established at each business unit for their particular regions by dividing merchantable inventory book cost by standing merchantable inventory. Pre-merchantable records are maintained for each planted year age class, recording acres planted, stems per acre, and costs of planting and tending. Changes in the assumptions and/or estimations used in these calculations may affect our results, in particular, timber inventory and depletion costs. Factors that can impact timber volume include weather changes, losses due to natural causes, differences in actual versus estimated growth rates and changes in the age when timber is considered merchantable. A three percent company-wide change in estimated standing merchantable inventory would cause 2008 depletion expense to change by approximately $2.6 million.

An acquisition of timberlands can also affect the depletion rate. Upon the acquisition of timberland, the Company makes a determination on whether to combine the newly acquired merchantable timber with an existing depletion pool or to create a new separate pool. The determination is based on the geographic location of the new timber, the customers/markets that will be served, relative profit margins, and species mix compared to its existing timberland holdings. During the second quarter of 2008, Rayonier acquired approximately 56,300 acres of timberland located in Washington State resulting in a higher depletion rate. Depletion expense increased by approximately $6.4 million in 2008 and we anticipate 2009 depletion expense in our Western region to be approximately $10.6 million higher due to the higher rate.

Depreciation and impairment of long-lived assets

Depreciation expense is computed using the units-of-production method for the Performance Fibers plant and equipment and the straight-line method on all other property, plant and equipment over the useful economic lives of the assets involved. We believe that these depreciation methods are the most appropriate under the circumstances as they most closely match revenues with expenses versus other generally accepted accounting methods. Long-lived assets are periodically reviewed for impairment whenever events or circumstances indicate that the carrying amount of an asset may not be recoverable. Cash flows used in such impairment analyses are based on long-range plan projections, which take into account recent sales and cost data as well as macroeconomic drivers including customer demand and industry capacity. The physical life of equipment, however, may be shortened by economic obsolescence caused by environmental regulation, competition and other causes.

We may temporarily suspend production at one or more of our lumber mills in 2009 if the current lumber markets do not improve. We performed an impairment analysis and estimate that our carrying amount is recoverable through future operations.

Environmental costs associated with dispositions and discontinued operations

At December 31, 2008, we had $105 million of accrued liabilities for environmental costs relating to past dispositions and discontinued operations. Numerous cost assumptions are used in estimating these obligations. Factors affecting these estimates include significant changes in contamination, discharge or treatment volumes, requirements to perform additional or different remediation, changes in environmental remediation technology, the extent of groundwater contamination migration, additional findings of contaminated soil or sediment off-site, remedy selection and the outcome of negotiations with governmental agencies. We periodically review our environmental liabilities and also engage third party consultants to assess our ongoing remediation of contaminated sites. A significant change in any of the estimates could have a material effect on the results of our operations. Typically, these cost estimates do not vary significantly on a quarter to quarter basis. The most recent material change in estimate occurred in 2006, when reserves decreased by $8 million primarily due to revised estimates of remediation costs required at certain Southern Wood Piedmont sites.

Expenditures for environmental costs at these sites totaled $8 million in 2008. Annual expenditures in 2009, 2010 and 2011 are expected to be approximately $8 million, $10 million and $11 million, respectively.

Determining the adequacy of pension and other postretirement benefit assets and liabilities

We have four qualified benefit plans which cover substantially our entire U.S. workforce and an unfunded plan to provide benefits in excess of amounts allowable under current tax law to certain participants in the qualified plans. Pension expense for all plans was $9 million in 2008. Numerous estimates and assumptions are required to determine the proper amount of pension and

14

postretirement liabilities and annual expense to record in our financial statements. The key assumptions include discount rate, return on assets, salary increases, health care cost trends, mortality rates, longevity and service lives of employees. Although there is authoritative guidance on how to select most of these assumptions, we exercise some degree of judgment when selecting these assumptions based on input from our actuary. Different assumptions, as well as actual versus expected results, would change the periodic benefit cost and funded status of the benefit plans recognized in the financial statements.

In determining pension expense in 2008, a $21 million return was assumed based on an expected long-term rate of return of 8.5 percent. The actual return for 2008 was a loss of $73 million, or 29 percent, due to the significant decline in the stock market in the fourth quarter. Our long-term return assumption was established based on historical long-term rates of return on broad equity and bond indices, discussions with our actuary and investment advisors and consideration of the actual annualized rate of return from 1994 (the date of our spin-off from ITT Corporation) through 2008. At the end of 2008, we reviewed this assumption for reasonableness and determined that the 2008 long-term rate of return assumption should remain at 8.5 percent. At December 31, 2008, our asset mix consisted of 66 percent equities, 31 percent bonds and three percent real estate. We do not expect this mix to change materially in the near future.

The Company’s pension plans were underfunded by $102 million at December 31, 2008, a $92 million decrease in funding status from December 31, 2007 due primarily to the unfavorable asset returns. There were no minimum funding requirements for the 2008 plan year. Discretionary contributions of $8 million, $20 million and $13 million were made in 2008, 2007 and 2006, respectively. In 2009, we are required to contribute approximately $6 million but may elect to contribute more. Future requirements will vary depending on actual investment performance, changes in valuation assumptions, interest rates, requirements under the recently enacted Pension Protection Act, and other employee related matters. See Item 1A – Risk Factors for more information about the potential risk of increased funding requirements.

In determining future pension obligations, we select a discount rate based on information supplied by our actuary. The actuarial rates are developed by models which incorporate high quality (AAA and AA rated), long-term corporate bond rates into their calculations. The discount rate at December 31, 2008 of 6.15 percent increased slightly over the 6.0 percent rate used at December 31, 2007.

We expect 2009 pension expense to increase to $10 million from $9 million in 2008 primarily due to the unfavorable return on assets over the past year. Future pension expense will be impacted by many factors including actual investment performance, changes in discount rates, timing of contributions and other employee related matters. For example, plan benefits may change as part of the negotiations for the Jesup collective bargaining agreement, which may impact our pension expense in future years.

The sensitivity of pension expense and projected benefit obligation to changes in economic assumptions is highlighted below:

	Impact on:
Change in Assumption	Pension Expense	Projected Benefit Obligation
25 bp decrease in discount rate	+1.0 million	+8.9 million
25 bp increase in discount rate	-0.9 million	-8.4 million
25 bp decrease in long-term return on assets	+0.6 million
25 bp increase in long-term return on assets	-0.6 million

In September 2008, the Company changed its postretirement medical plan for active and retired salaried employees to shift retiree medical costs to the plan participants over a three year phase-out period. Accordingly, at the beginning of 2012, the Company’s intent is to no longer incur retiree medical costs for retired salary plan participants. The change was accounted for as a negative plan amendment and curtailment which resulted in a reduction to the retiree medical liability. The net impact of the reduction was an unrecognized gain in accumulated other comprehensive income of $8 million which will be amortized over 1.9 years, the average remaining service period of the remaining active participants, and a $24 million decrease to the Company’s postretirement liability.

Realizability of both recorded and unrecorded tax assets and liabilities

As a REIT, certain operations are generally not subject to taxation. Our taxes can vary significantly based on the mix of income between our REIT and TRS businesses, thereby impacting our effective tax rate and the amount of taxes paid during various fiscal periods. Also, our projection of estimated tax for the year and our provision for quarterly taxes, in accordance with Statement of Financial Accounting Standards No. 109, Accounting for Income Taxes (SFAS 109), may have significant variability. Similarly, the assessment of the ability to realize certain deferred tax assets, or estimated deferred tax liabilities, may be subjective.

We have recorded certain deferred tax assets that we believe will be realized in future periods. These assets are reviewed periodically in order to assess their realizability. This review requires us to make assumptions and estimates about future profitability affecting the realization of these tax benefits. If the review indicates that the realizability may be less than likely, a valuation allowance is recorded at that time.

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In the first quarter of 2007, we adopted FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes – an interpretation of FASB Statement No. 109 (FIN 48). In accordance with the provisions of FIN 48, we recognize the impact of a tax position if a return’s position is “more likely than not” to prevail.

Deferred income taxes are provided using the asset and liability method under the provisions of SFAS 109 and FIN 48. An estimate of the U.S. income taxes on foreign operations has been provided based upon our best estimate of the ultimate liability.

Revenue Recognition

Revenue recognition policies are critical to the preparation of our financial statements in accordance with generally accepted accounting principles. The Company generally recognizes revenues when the following criteria are met: (i) persuasive evidence of an agreement exists, (ii) delivery has occurred, (iii) the Company’s price to the buyer is fixed and determinable, and (iv) collectibility is reasonably assured.

Revenue from the sale of timber is recorded when title passes to the buyer. Timber sales in the Eastern and Western regions are primarily made on a pay-as-cut basis. These contracts generally require a minimum 15 percent initial payment and title and risk of loss are transferred when the timber is cut.

Real estate sales are recorded when title passes and when full payment or a minimum down payment of 25 percent is received and full collectibility is assured, in compliance with SFAS 66, Accounting for Sales of Real Estate. If a down payment of less than 25 percent is received at closing or if full collectibility is not reasonably assured, the Company records revenue based on the installment method or cost recovery method. The Company follows the same revenue recognition policy when recording intercompany real estate sales from the REIT to the TRS and eliminates these transactions on a consolidated basis.

Revenue from domestic sales of Performance Fibers products is recorded when title passes which, depending on the contract, is either at time of shipment or when the customer receives goods. Foreign sales of Performance Fibers products are recorded when the customer or agent receives the goods and title passes.

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Summary of our results of operations for the three years ended December 31, 2008

Financial Information (in millions)	2008			2007			2006
Sales
Timber 1	$	199		$	222		$	207
Real Estate
Development		5			37			72
Rural		48			79			40
Non-Strategic Timberlands		74			—			—
Total Real Estate Sales		127			116			112
Performance Fibers
Cellulose Specialties		600			539			500
Absorbent Materials		198			183			172
Total Performance Fibers		798			722			672
Wood Products		86			88			111
Other Operations		61			77			128
Total Sales	$	1,271		$	1,225		$	1,230
Operating Income (Loss)
Timber 1, 2	$	31		$	60		$	90
Real Estate		80			93			89
Performance Fibers		149			141			80
Wood Products		(7	)		(8	)		(3	)
Other Operations		3			(3	)		1
Corporate and Other Expenses/Eliminations		(30	)		(36	)		(35	)
Operating Income Before Gain on Sale of Timber Assets		226			247			222
Gain on Sale of Timber Assets		—			—			8
Operating Income		226			247			230
Interest Expense 3		(50	)		(57	)		(49	)
Interest/Other Income		2			7			9
Income Tax Expense 1,3		(29	)		(23	)		(19	)
Income from Continuing Operations		149			174			171
Income from Discontinued Operations, net of tax		—			—			5
Net Income	$	149		$	174		$	176

¹ Reflects the reclassification of the New Zealand operations from held for sale discontinued operations to continuing operations.

² Includes a $10.9 million charge in 2007 for losses from wildfire damage on timberlands in southeast Georgia and northeast Florida.

³ Reflects the retrospective application of FSP APB 14-1.

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Results of Operations, 2008 versus 2007

Timber

Sales (in millions)			Changes Attributable to:
	2007		Price			Volume/Mix		2008
Total Sales	$	222	$	(35	)	$	12	$	199

In 2008, timber sales decreased $23 million, or ten percent, from the prior year primarily due to the results in the Western region as sawlog prices declined due to the weak housing market and an oversupply of salvaged timber from a December 2007 storm.

In the Eastern region, volumes improved by 11 percent from 2007 as a result of strong pulpwood demand which more than offset lower average prices due to the weak sawlog market and a shift in sales mix to lower priced pulpwood.

Operating Income (in millions)			Changes Attributable to:
	2007		Price			Volume / Costs*		Other		2008
Total Operating Income	$	60	$	(35	)	$	5	$	1	$	31

* 2007 included a $10.9 million charge for wildfires on timberlands in southeast Georgia and northeast Florida.

Operating income decreased from the prior year due to depressed sawlog prices and the impact of salvaged timber in the Western region. Excluding the 2007 fire losses, costs increased mostly from higher depletion expense in the Western region related to a second quarter timberlands acquisition. The 2008 results also include higher other income in the Eastern region resulting from improved recreational license profits.

Real Estate

Our HBU real estate holdings are primarily in the southeastern U.S. We segregate these real estate holdings into two groups: development and rural properties. Development properties are predominantly located in the eleven coastal counties between Savannah, GA and Daytona Beach, FL, while the rural properties essentially include the balance of our ownership. In addition, in 2008, we began selling non-strategic timberland holdings that did not meet our investment criteria, which enabled us to redeploy capital to higher value assets and upgrade our portfolio.

Sales (in millions)			Changes Attributable to:
	2007		Price			Volume/Mix			2008
Development	$	37	$	1		$	(33	)	$	5
Rural		79		(50	)		19			48
Non-Strategic Timberlands		—		—			74			74
Total Sales	$	116	$	(49	)	$	60		$	127

In 2008, real estate sales improved by $11 million from the prior year. Favorable demand for non-strategic timberlands offset lower average rural prices and reduced development sales due to the weak housing market. The lower average rural prices reflect the impact of a 2007 rural sale of 3,100 acres at $15,000 per acre to an industrial buyer. Excluding the impact of the 2007 industrial buyer sale, average rural prices declined $306 per acre, or nine percent, from the prior year mostly due to a change in geographic sales mix.

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Operating Income (in millions)			Changes Attributable to:
	2007		Price			Volume/Mix		2008
Total Operating Income	$	93	$	(49	)	$	36	$	80

Operating income declined $13 million due to a change in sales mix from higher-margin development properties to lower-margin non-strategic timberlands.

Performance Fibers

Sales (in millions)			Changes Attributable to:
	2007		Price		Volume/Mix			2008
Cellulose Specialties	$	539	$	57	$	4		$	600
Absorbent Materials		183		17		(2	)		198
Total Sales	$	722	$	74	$	2		$	798

In 2008, sales increased $76 million from the prior year largely due to higher prices. For cellulose specialties, average prices rose $119 per ton, or approximately 10 percent, resulting from strong market demand and a cost-related surcharge for cellulose specialty shipments effective September 1, 2008. Additionally, volumes for cellulose specialties improved slightly due to timing of customer shipments.

Average prices for absorbent materials increased $68 per ton, or 10 percent, from the prior year, which more than offset lower volume due to unplanned mill outages that occurred earlier in the year.

Operating Income (in millions)			Changes Attributable to:
	2007		Price		Volume		Mix/Costs			2008
Total Operating Income	$	141	$	74	$	1	$	(67	)	$	149

Operating income in 2008 improved from the prior year as higher sales prices and lower depreciation expense more than offset significant increases in wood, chemical, energy, maintenance and transportation costs and mark-to-market losses on fuel oil hedges.

Wood Products

Sales (in millions)			Changes Attributable to:
	2007		Price		Volume			2008
Total Sales	$	88	$	—	$	(2	)	$	86

Lumber prices were comparable while volume declined two percent from the prior year as a result of continued weak demand in the housing market.

Operating Loss (in millions)				Changes Attributable to:
	2007			Price		Costs		2008
Total Operating Loss	$	(8	)	$	—	$	1	$	(7	)

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Operating loss declined from 2007 primarily due to lower log costs resulting from weaker demand. Additionally, beginning in the fourth quarter 2008, we curtailed production due to the weak market conditions. We may temporarily suspend production at one or more of our mills in 2009 unless market conditions improve.

Other Operations

Sales decreased in 2008 reflecting reduced log sales in the northwest U.S. and the impact of the closure of our International Wood Products trading business during 2007, while operating income improved due to foreign exchange gains and the closure of the trading business in the prior year.

Corporate and Other Expenses/Eliminations

Corporate and Other Expense decreased $6 million in 2008 primarily due to lower incentive compensation expense and cost reduction measures.

Interest and Other Income/Expense

In comparison to the prior year, interest expense decreased $7 million primarily due to lower average rates and a favorable IRS settlement related to an uncertain tax position, partly offset by higher average debt balances used to partially finance strategic timberland acquisitions.

The $5 million decline in interest and other income in 2008 largely resulted from reduced average cash balances in 2008 compared to 2007.

Income Tax Expense

Our 2008 effective tax rate before discrete items was 15.0 percent compared to 13.3 percent in 2007. The increase was due to proportionately higher earnings from the Company’s taxable REIT subsidiary. Including discrete items, the effective tax rate was 16.5 percent compared to 11.9 percent in 2007.

See Note 9 – Income Taxes for additional information regarding the provision for income taxes.

Outlook

Despite uncertain economic times, we expect our diverse mix of businesses to generate cash flows in excess of our $2.00 per share dividend. With conservative debt levels, manageable debt maturities and a solid balance sheet, we should have significant operating flexibility.

Due to the weak economy, we anticipate 2009 results will be below 2008 across our three major business units. We expect that the weakened housing market will negatively impact our timber and real estate businesses, but anticipate continued interest in our non-strategic timberlands. In Performance Fibers, earnings are expected to be solid although below 2008 as demand for our cellulose specialties products is more than offset by higher costs and weakening fluff prices.

Results of Operations, 2007 versus 2006

Timber

Sales (in millions)			Changes Attributable to:
	2006		Price			Volume/Mix		2007
Total Sales	$	207	$	(17	)	$	32	$	222

In 2007, timber sales increased $15 million, or seven percent, from the prior year.

In the Eastern region, volumes improved primarily due to strong demand for pulpwood. Average prices declined from the prior year due to the higher mix of lower-value pulpwood and sales of salvage timber from the forest fires in southeast Georgia and northeast Florida. Sawlog prices were also lower due to the downturn in the housing market.

In the Western region, prices and volumes declined by two percent and seven percent, respectively, from 2006 due to the weak housing market.

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Operating Income (in millions)			Changes Attributable to:
	2006		Price			Volume/ Mix		Costs/Other*			2007
Total Operating Income	$	90	$	(17	)	$	12	$	(25	)	$	60

* Includes a $10.9 million charge for wildfires on timberlands in southeast Georgia and northeast Florida.

Operating income decreased from the prior year due to increased sales of lower-margin pulpwood, reduced sawlog demand and a $10.9 million fire loss charge.

Real Estate

Sales (in millions)			Changes Attributable to:
	2006		Price		Volume/Mix			2007
Development	$	72	$	4	$	(39	)	$	37
Rural		40		48		(9	)		79
Total Sales	$	112	$	52	$	(48	)	$	116

Operating Income (in millions)			Changes Attributable to:
	2006		Price		Volume/Mix			2007
Total Operating Income	$	89	$	52	$	(48	)	$	93

In 2007, real estate sales and operating income each improved by $4 million from 2006 primarily due to increased HBU rural land prices driven by our third quarter sale of approximately 3,100 rural acres in west central Florida at $15,000 per acre. Sales of HBU development properties were lower compared to 2006 due to the weakened housing market; however, in line with our strategy, we successfully entitled 3,300 acres along the I-95 corridor near Savannah, Georgia.

Performance Fibers

Sales (in millions)			Changes Attributable to:
	2006		Price		Volume/Mix			2007
Cellulose Specialties	$	500	$	47	$	(8	)	$	539
Absorbent Materials		172		18		(7	)		183
Total Sales	$	672	$	65	$	(15	)	$	722

In 2007, sales increased $50 million from the prior year largely due to higher prices resulting from strong market demand. For cellulose specialties, average prices rose $101 per ton, or approximately 10 percent, which more than offset the decline in volume resulting from the timing of customer shipments and unplanned mill outages that occurred at our Jesup and Fernandina mills late in the year.

Average prices for absorbent materials increased $71 per ton, or 12 percent, from the prior year, which more than offset lower volume due to increased scheduled maintenance downtime and the unplanned mill outages.

21

Operating Income (in millions)			Changes Attributable to:
	2006		Price		Volume			Mix/Costs			2007
Total Operating Income	$	80	$	65	$	(2	)	$	(2	)	$	141

Operating income in 2007 improved by $61 million, or 76 percent, from 2006 primarily due to price increases. Costs were higher in 2007 as we realized a $5 million favorable property tax settlement in 2006.

Wood Products

Sales (in millions)			Changes Attributable to:
	2006		Price			Volume			2007
Total Sales	$	111	$	(16	)	$	(7	)	$	88

Lumber prices and volume declined 16 percent and six percent, respectively, from the prior year as a result of reduced demand in the housing market.

Operating Income/(Loss) (in millions)				Changes Attributable to:
	2006			Price			Costs		2007
Total Operating Income/(Loss)	$	(3	)	$	(16	)	$	11	$	(8	)

Operating income decreased from 2006 as a result of lower selling prices partly offset by reduced costs. Costs were down from the prior year as log prices declined in response to the weak housing market.

Other Operations

Sales decreased in 2007 reflecting the impact of the closure of our International Wood Products trading business in the northwest U.S., while operating income was down slightly due to the absence of coal royalties.

Corporate and Other Expenses/Eliminations

Corporate and Other Expenses increased $1 million in 2007 primarily due to increased legal fees and incentive compensation expense, partly offset by reduced strategic business development expenses.

Interest and Other Income/Expense

In comparison to the prior year, interest expense increased $8 million primarily due to higher debt levels resulting from a $300 million debt issuance in the fourth quarter and interest accrued related to uncertain tax positions, partly offset by reduced rates.

The $2 million decline in interest and other income in 2007 largely resulted from reduced average cash balances for the year versus 2006.

Income Tax Expense

Our 2007 effective tax rate before discrete items was 13.3 percent compared to 16.3 percent in 2006. The decrease was primarily due to higher REIT income. Including discrete items, the effective tax rate was 11.9 percent compared to 10.0 percent in 2006.

See Note 9 – Income Taxes for additional information regarding the provision for income taxes.

Liquidity and Capital Resources

Historically, our operations have generally produced consistent cash flows and required limited capital resources. Short-term borrowings have helped fund cyclicality and seasonality in working capital needs and long-term debt has been used to fund major acquisitions. While we have no major debt coming due until December 31, 2009 when $122 million in installment notes will mature, the current turmoil in the financial markets may impact our ability to obtain, and may increase the costs of, short-term and long-term borrowings. We anticipate refinancing these notes by accessing the corporate debt markets, or by borrowing under our revolving bank facility which has $144 million of capacity. See Item 1A – Risk Factors for more information.

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

	As of December 31,			As of December 31,			As of December 31,
	2008			2007			2006
Cash and cash equivalents	$	62		$	181		$	40
Total debt (1)		747			721			659
Shareholders’ equity (1)		939			1,000			918
Total capitalization (total debt plus equity)		1,686			1,721			1,577
Debt to capital ratio		44	%		42	%		42	%

(1) Reflects the retrospective application of FSP APB 14-1.

Cash and cash equivalents consisted primarily of marketable securities with maturities at date of acquisition of 90 days or less.

Results, 2008 versus 2007

Cash Provided by Operating Activities (in millions of dollars)

	2008		2007		Increase
Year Ended December 31,	$	340	$	324	$	16

The increase in cash provided by operating activities was a result of lower working capital requirements for 2008 partly offset by lower 2008 earnings. The reduction in working capital requirements resulted primarily from the timing of interest and tax payments.

Cash Used for Investing Activities (in millions of dollars)

	2008			2007			Increase
Year ended December 31,	$	(330	)	$	(126	)	$	(204	)

Cash used for investing activities was above 2007 mainly resulting from the purchase of $230 million of timberlands in 2008 versus $23 million in 2007 (See Note 6 – Timberland Acquisitions). Capital expenditures of $105 million in 2008 were above 2007 expenditures of $97 million.

Cash Used for Financing Activities (in millions of dollars)

	2008			2007			Increase
Year ended December 31,	$	(128	)	$	(58	)	$	(70	)

The increase of $70 million was mainly due to lower net borrowings in 2008. Net borrowings increased $21 million in 2008 versus an increase of $89 million in 2007.

Our debt-to-capital ratio increased from prior year end as a result of lower equity primarily from foreign currency translation adjustments and a decline in pension assets. See Note 14 – Accumulated Other Comprehensive Income/(Loss) for additional information.

Results, 2007 versus 2006

In 2007, cash provided by operating activities from continuing operations of $324 million increased $17 million from 2006. The increase was a result of higher cash earnings partly offset by greater working capital requirements and an increase in discretionary pension contributions. The increase in working capital resulted primarily from the timing of interest payments, reductions in accounts payable and accounts receivable, and an increase in inventory, partly offset by lower tax payments.

In 2007, cash used for investing activities of $126 million was $259 million below 2006 mainly resulting from a reduction in timberland acquisitions ($272 million in 2006). The 2006 results also included $22 million of proceeds from the sell down of our interest in the New Zealand joint venture. Capital expenditures of $97 million in 2007 were below 2006 expenditures of $105 million, which included costs for a power boiler at our Fernandina mill.

Cash used for financing activities was $58 million and $30 million in 2007 and 2006, respectively. The increase was mainly due to debt issuance costs, the net cost of the hedge and warrants associated with the exchangeable notes and an increase in dividends of $7 million. Net debt increased $89 million from 2006 mainly due to the issuance of $300 million of Senior Exchangeable Notes, offset by the repayment of a $113 million note maturing in December 2007 and other debt repayments. See Note 12 – Debt for additional information.

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Our 2007 debt-to-capital ratio of 42 percent was consistent with the prior year end. As of December 31, 2007, cash and cash equivalents were $181 million, a $141 million increase from the prior year. The cash equivalents consist of marketable securities with maturities at the date of acquisition of 90 days or less.

Expected 2009 Expenditures

Capital expenditures in 2009 are forecasted to be between $95 million and $98 million. Our 2009 dividend payments are expected to increase from $157 million to $158 million assuming no change in the quarterly dividend rate of $0.50 per share. Cash payments for income taxes in 2009 are anticipated to be between $11 million and $15 million. We made discretionary pension contributions of $8 million and $20 million in 2008 and 2007 respectively, and we have mandatory pension contributions of approximately $6 million in 2009, although we may elect to increase contributions. Expenditures for environmental costs related to our dispositions and discontinued operations of $8 million are expected. See Environmental Regulation below for further information.

Liquidity Performance Indicators

The discussion below is presented to enhance the reader’s understanding of our liquidity, ability to generate cash and satisfy rating agency and creditor requirements. This information includes two measures of financial results: Earnings before Interest, Taxes, Depreciation, Depletion and Amortization (EBITDA), and Adjusted Cash Available for Distribution (Adjusted CAD). These measures are not defined by Generally Accepted Accounting Principles (GAAP) and the discussion of EBITDA and Adjusted CAD is not intended to conflict with or change any of the GAAP disclosures described above. Management considers these measures to be important to estimate the enterprise and shareholder values of the Company as a whole and of its core segments, and for allocating capital resources. In addition, analysts, investors and creditors use these measures when analyzing our financial condition and cash generating ability. EBITDA is defined by the Securities and Exchange Commission. Adjusted CAD as defined, however, may not be comparable to similarly titled measures reported by other companies.

EBITDA is a non-GAAP measure of operating cash generating capacity. In 2008, EBITDA was $395 million, a $17 million decrease from 2007 primarily due to lower operating results in our Timber Segment. In 2007, EBITDA was $412 million, a $38 million increase over 2006 primarily due to higher operating results in our Performance Fibers segment.

Below is a reconciliation of Cash Provided by Operating Activities to EBITDA for the five-year period ended December 31, 2008 (in millions of dollars):

	2008			2007			2006			2005			2004
Cash provided by operating activities	$	340.2		$	324.0		$	306.9		$	261.9		$	295.4
Gain on sale of New Zealand timber assets		—			—			7.8			36.9			—
Non-cash cost basis of real estate sold		(11.1	)		(8.6	)		(12.4	)		(11.8	)		(11.0	)
Income tax expense (benefit)		29.4			23.4			22.3			(30.6	)		(33.4	)
Interest, net		47.9			49.7			39.1			38.8			44.1
Other balance sheet changes		(11.9	)		23.2			10.4			43.8			27.9
EBITDA	$	394.5		$	411.7		$	374.1		$	339.0		$	323.0

A non-cash expense critical to the economics of both our Timber and Real Estate core businesses is the non-cash cost basis of real estate sold. EBITDA plus the non-cash cost basis of real estate sold for the five years ended December 31, 2008, 2007, 2006, 2005 and 2004 totaled $406 million, $420 million, $387 million, $351 million and $334 million, respectively.

Adjusted CAD is a non-GAAP measure of cash generated during a period that is available for dividend distribution, repurchasing common shares, debt reduction and for strategic acquisitions net of associated financing (e.g. realizing LKE tax benefits). We define Cash Available for Distribution (CAD) as Cash Provided by Operating Activities less capital spending, adjusted for the tax benefits associated with certain strategic acquisitions, the change in committed cash, less cash provided by discontinued operations and other items which include proceeds from matured energy forward contracts and the change in capital expenditures purchased on account. Committed cash represents outstanding checks that have been drawn on our zero balance bank accounts but have not been paid. In compliance with Securities and Exchange Commission requirements for non-GAAP measures, we reduce CAD by mandatory debt repayments which results in the measure entitled “Adjusted CAD.”

24

Below is a reconciliation of Cash Provided by Operating Activities to Adjusted CAD for the five-year period ended December 31, 2008 (in millions):

	2008			2007			2006			2005			2004
Cash provided by operating activities	$	340.2		$	324.0		$	306.9		$	261.9		$	295.4
Capital spending, net		(104.8	)		(97.0	)		(105.5	)		(85.3	)		(87.7	)
LKE tax benefits on third party real estate sales*		(12.1	)		(3.9	)		(4.8	)		(3.2	)		(11.3	)
Change in committed cash		(10.0	)		16.9	**		(19.1	)		1.8			(3.5	)
Other		(0.1	)		0.8			0.3			(14.7	)		(7.5	)
CAD		213.2			240.8			177.8			160.5			185.4
Mandatory debt repayments		(23.9	)		(162.9	)		(3.3	)		(3.6	)		(53.6	)
Adjusted CAD	$	189.3		$	77.9		$	174.5		$	156.9		$	131.8
*       Represents income taxes that would have been paid had the Company not completed the third-party LKE transactions. **     Primarily 2006 interest paid in 2007 and previously reflected as a reduction in 2006 CAD.

Adjusted CAD was $189 million in 2008, a $111 million increase from 2007 primarily due to $163 million in mandatory debt repayments in 2007 compared to $24 million in 2008, partly offset by higher capital expenditures in 2008. Adjusted CAD was $78 million in 2007, a $97 million decrease from 2006 primarily due to the $163 million in mandatory debt repayments, partially offset by higher operating results in 2007 and a decrease in committed cash. Adjusted CAD was $175 million in 2006, an increase of $18 million from 2005 primarily due to stronger operating earnings partly offset by higher capital spending and an increase in committed cash as of December 31, 2006. Adjusted CAD generated in any period is not necessarily indicative of the amounts that may be generated in future periods.

Liquidity Facilities

In October 2007, Rayonier TRS Holdings Inc. issued $300 million of 3.75% Senior Exchangeable Notes due 2012. The notes are guaranteed by Rayonier Inc., non-callable, and exchangeable by holders for cash and, in certain circumstances, common stock of Rayonier Inc. The initial exchange rate is 18.24 shares per $1,000 principal based on an exchange price equal to 122% of our stock’s closing price of $44.93 on October 10, 2007. In order to limit potential dilution to Rayonier shareholders, TRS and Rayonier Inc. entered into separate exchangeable note hedge and warrant transactions which have the effect of increasing the conversion premium from 22% to 40%, or to $62.90 per common share. See Note 12 – Debt for additional information.

We have a $250 million unsecured revolving credit facility at an interest rate of LIBOR plus 40 basis points. The facility expires in August 2011. At December 31, 2008, the available borrowing capacity was $144 million.

In connection with our installment notes and the $250 million revolving credit facility, certain covenants must be met, including ratios based on the facility’s definition of EBITDA (“Covenant EBITDA”). Covenant EBITDA consists of earnings from continuing operations before the cumulative effect of accounting changes and any provision for dispositions, income taxes, interest expense, depreciation, depletion, amortization and the non-cash cost of real estate sold. Our dividend restriction covenant limits the sum of dividends in any period of four fiscal quarters to 90 percent of Covenant Funds from Operations (“Covenant FFO”) plus the aggregate amount of dividends permitted under Covenant FFO in excess of the amount of dividends paid during the prior four fiscal quarters. Covenant FFO is defined as Consolidated Net Income excluding gains or losses from debt restructuring and investments in marketable securities plus depletion, depreciation, amortization and the non-cash cost of real estate sold. Under a covenant relating to the $328 million of installment notes, Rayonier Forest Resources, L.P. (“RFR”), a wholly-owned REIT subsidiary, may not incur additional debt unless, at the time of incurrence, and after giving pro forma effect to the receipt and application of the proceeds of such debt, RFR meets or exceeds a minimum ratio of cash flow to fixed charges. RFR’s ability to make certain quarterly distributions to Rayonier Inc. is limited to an amount equal to RFR’s “available cash,” which consists of its opening cash balance plus proceeds from permitted borrowings. At December 31, 2008, we are in compliance with all covenants.

In 2008, Standard & Poor’s Ratings Services affirmed its ‘BBB’ investment grade rating of our long-term debt with a ‘Stable’ outlook while Moody’s Investors Service affirmed its ‘Baa3’ investment grade rating on our long-term debt with a ‘Stable’ outlook.

25

The covenants listed below, which are the most significant financial covenants in effect as of December 31, 2008, are calculated on a trailing 12-month basis:

	Covenant Requirement	Actual ratio at December 31, 2008	Favorable (Unfavorable)
Covenant EBITDA to consolidated interest expense should not be less than	2.50 to 1	8.93 to 1	6.43
Total debt to Covenant EBITDA should not exceed	4.00 to 1	1.91 to 1	2.09
RFR cash flow available for fixed charges to RFR
fixed charges should not be less than	2.50 to 1	12.02 to 1	9.52
Dividends paid should not exceed 90 percent of
Covenant FFO	90%	48%	42%

In addition to the financial covenants listed above, the installment notes and credit facility include customary covenants that limit the incurrence of debt, the disposition of assets, and the making of certain payments between RFR and Rayonier among others. An asset sales covenant in the RFR installment note-related agreements requires us, subject to certain exceptions, to either reinvest cumulative timberland sales proceeds for individual sales greater than $10 million (the “excess proceeds”) in timberland-related investments and activities or, once the amount of excess proceeds not reinvested exceeds $50 million, to offer the note holders prepayment of the notes ratably in the amount of the excess proceeds. As of December 31, 2008 and 2007, there were no excess proceeds.

Off-Balance Sheet Arrangements

We utilize off-balance sheet arrangements to provide credit support for certain suppliers/vendors and customers in case of their default on critical obligations, and collateral for certain self-insurance programs that we maintain. These arrangements consist of standby letters of credit and surety bonds. As part of our ongoing operations, we also periodically issue guarantees to third parties. Off-balance sheet arrangements are not considered a source of liquidity or capital resources and do not expose us to material risks or material unfavorable financial impacts. See Note 17 – Guarantees for further discussion.

Contractual Financial Obligations

In addition to using cash flow from operations, we finance our operations through the issuance of debt, and by entering into leases. These financial obligations are recorded in accordance with accounting rules applicable to the underlying transaction, with the result that some are recorded as liabilities on the Balance Sheet, while others are required to be disclosed in the Notes to Consolidated Financial Statements and Management’s Discussion and Analysis.

The following table aggregates our contractual financial obligations as of December 31, 2008 and anticipated cash spending by period:

			Payments Due by Period
Contractual Financial Obligations (000’s)	Total		2009		2010-2011		2012-2013		Thereafter
Long-term debt (1)	$	648,317	$	—	$	194,422	$	324,650	$	129,245
Current maturities of long-term debt (2)		122,642		122,642		—		—		—
Interest payments on long-term debt (3)		178,851		43,046		74,530		39,958		21,317
Operating leases - timberland (4)		105,657		7,120		14,043		13,869		70,625
Environmental liabilities (5)		66,775		11,450		43,325		12,000		—
Postretirement obligations (6)		24,068		8,292		4,546		3,343		7,887
Operating leases - PP&E, offices		10,394		3,502		3,698		1,545		1,649
FIN 48 liabilities		3,906		3,906		—		—		—
Purchase obligations		220		90		130		—		—
Other long-term liabilities		1,081		361		360		360		—
Total contractual cash obligations	$	1,161,911	$	200,409	$	335,054	$	395,725	$	230,723

(1) Due to the adoption of FSP APB 14-1, our Senior Exchangeable Notes are currently valued at $276 million on the Company’s consolidated balance sheet, but upon maturity the liability will be $300 million in 2012.

(2) Includes $122 million of debt due in 2009, but not included in current maturities on the consolidated balance sheet as it is expected to be refinanced under the revolving credit facility.

(3) Projected interest payments for variable-rate debt were calculated based on outstanding principal amounts and interest rates as of December 31, 2008.

(4) The majority of timberland leases are subject to escalation clauses based on either the Consumer Price Index or the Producer Price Index.

26

(5) These liabilities represent obligations related to the Jesup mill consent order. See Note 16—Contingencies for discussion. For discussion of our liabilities for dispositions and discontinued operations, see Note 15 – Liabilities for Dispositions and Discontinued Operations.

(6) The amounts represent an estimate of our projected payments related to postretirement medical and life insurance plans for the next ten years and minimum required pension contributions for 2009. See Note 20 – Employee Benefit Plans for additional information.

In May 2004, we completed a Form S-4 acquisition shelf registration to offer and issue 7.0 million common shares for the acquisition of other businesses, assets or properties. As of December 31, 2008, no common shares have been offered or issued under the Form S-4 shelf registration. In September 2003, we completed a Form S-3 shelf registration statement to offer $500 million of new public debt and/or equity securities. On December 19, 2003, 6.4 million common shares were issued under the Form S-3 shelf registration as part of a special stock dividend paid in conjunction with our conversion to a REIT. The fair market value of the shares at the day of issuance was $253 million, leaving $247 million available under the $500 million shelf registration at December 31, 2008. In January 2008, we completed a Form S-3 shelf registration statement related to $300 million of new public convertible debt securities sold in a private placement on October 16, 2007. See the Liquidity Facilities section above for additional information.

New Accounting Standards

See Note 2 – Summary of Significant Accounting Policies for discussion of recently issued accounting pronouncements that will affect our financial results and disclosures in future periods.

Environmental Regulation

Rayonier is subject to stringent environmental laws and regulations concerning air emissions, water discharges and waste handling and disposal. Such environmental laws and regulations include the Clean Air Act, the Clean Water Act, the Resource Conservation and Recovery Act, CERCLA and similar state laws and regulations. Management closely monitors its environmental responsibilities, and believes that the Company is in substantial compliance with current environmental requirements. In addition to ongoing compliance with laws and regulations, the Company’s facilities operate in accordance with various permits, which are issued by state and federal environmental agencies. Many of these permits impose operating conditions on the Company which require significant expenditures to ensure compliance. Upon renewal and renegotiation of these permits, the issuing agencies often seek to impose new or additional conditions in response to new environmental laws and regulations, or more stringent interpretations of existing laws and regulations. During 2008, 2007 and 2006, we spent approximately $18 million, $11 million and $5 million, respectively, for capital projects related to environmental compliance for ongoing operations. During 2009 and 2010, our capital spending related to environmental compliance for continuing operations is expected to increase to approximately $21 million and $34 million, respectively. Over the next five years we expect environmental capital spending to total between $90 million and $95 million. The expected increase in environmental spending is primarily due to the Jesup mill consent order and manufacturing process and pollution control systems that will comply with the requirements of new or renewed air emission and water discharge permits, and other required improvements for our Performance Fibers mills. See Note 16 – Contingencies for additional information.

Notwithstanding Rayonier’s current compliance status, many of its operations are subject to constantly evolving environmental requirements which are often the result of legislation, regulation and negotiation. As such, contingencies in this area include, without limitation:

• Our manufacturing facilities operate in accordance with various permits, which often require significant expenditures for controls and systems to ensure compliance. Upon renewal and renegotiation of these permits, the issuing agencies often seek to impose new or additional conditions, which could adversely affect our operations and financial performance.

• As environmental laws and regulations change, and administrative and judicial interpretations of new and existing laws and regulations are made, our operations may be adversely affected.

• In our forestry operations, federal, state and local laws and regulations intended to protect threatened and endangered animal and plant species and their habitat, as well as wetlands and waterways, limit, and in some cases may prevent timber harvesting, road construction and other activities on private lands. For example, Washington, where we hold approximately 413,000 acres of timberlands, has among the most stringent forestry laws and regulations in the country.

• Environmental requirements relating to real estate development, and especially in respect of wetland delineation and mitigation, storm water management, drainage, waste disposal, and potable water supply and protection, may significantly impact the size, scope, timing, and financial returns of our projects. Moreover, multiple permits are often required for a project, and may involve a lengthy application process.

• More of our discontinued operations with historical environmental contamination are subject to a number of federal, state, and local laws. For example, operations at the Company’s Southern Wood Piedmont (“SWP”) wood treating sites used preservative formulations consisting primarily of creosote, pentachlorophenol, and chromated-copper arsenate (CCA). Investigations

27

performed at the SWP sites over the years have identified releases to soils, groundwater and sediments containing free product and constituents or derivatives of these formulations including, but not limited to, all or some combination of petroleum products, metals (e.g., arsenic, chromium), and/or organics (e.g., volatile organic compounds, phenols, polycyclic aromatic hydrocarbons, dioxins and furans). As it has for many years, SWP continues to actively work with federal and state environmental agencies to undertake appropriate steps to investigate and remediate these sites in accordance with applicable laws. As these requirements change over time, they may mandate more stringent levels of soil and groundwater investigation, remediation, and monitoring. While we believe that our current estimates are adequate, future changes to these legal requirements could adversely affect the cost and timing of our activities on these sites.

• Over time, the complexity and stringency of environmental laws and regulations have increased significantly, and the cost of compliance with these laws and regulations has also increased. For example, over time, states have tightened standards for the protection of groundwater and rivers and other waterways, as well as soil. In general, management believes these trends will continue. In addition, we expect that the environmental policies and initiatives of the current administration, as opposed to the prior administration, in the aggregate will impose additional and more stringent requirements on the regulated community.

It is the opinion of management that substantial expenditures will be required over the next ten years in the area of environmental compliance. See Note 15 – Liabilities for Dispositions and Discontinued Operations, for additional information regarding the Company’s environmental liabilities.

Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Market and Other Economic Risks

We are exposed to various market risks, including changes in interest rates, commodity prices and foreign exchange rates. Our objective is to minimize the economic impact of these market risks. We use derivatives in accordance with policies and procedures approved by the Finance Committee of the Board of Directors. Derivatives are managed by a senior executive committee whose responsibilities include initiating, managing and monitoring resulting exposures. We do not enter into financial instruments for trading or speculative purposes.

Cyclical pricing of commodity market paper pulp is one of the factors that influences Performance Fibers’ prices in the Absorbent Materials product line. However, since we are a non-integrated producer of specialized Performance Fibers for non-papermaking end uses, our fluff product mix tends to lag (on both the upturn and downturn) commodity paper pulp prices with pricing adjustments that are less severe. Our cellulose specialty products’ prices are based on market supply and demand and are not correlated to commodity paper pulp prices. Also, nearly all of our cellulose specialty products are under long-term volume contracts that extend into 2011.

We periodically enter into interest rate swap agreements to manage our exposure to interest rate changes. These swaps involve the exchange of fixed and variable interest rate payments without exchanging principal amounts. At December 31, 2008, we did not hold any swap agreements.

The fair market value of our long-term fixed interest rate debt is subject to interest rate risk; however, we intend to hold most of our debt until maturity. The estimated fair value of our fixed-rate debt at December 31, 2008, was $563 million compared to $609 million in carrying value. Our percentage of debt with fixed interest rates was 82 percent as of December 31, 2008. Generally, the fair market value of fixed-rate debt will increase as interest rates fall and decrease as interest rates rise. A hypothetical one-percentage point increase/decrease in prevailing interest rates at December 31, 2008, would result in a corresponding decrease/increase in the fair value of our fixed-rate debt of approximately $20 million.

We periodically enter into commodity forward contracts to fix some of our fuel oil and natural gas costs. The forward contracts partially mitigate the risk of a change in Performance Fibers margins resulting from an increase or decrease in these energy costs. We do not enter into commodity forwards for trading or speculative purposes. The net amounts paid or received under the contracts are recognized as an adjustment to fuel oil or natural gas expense. A hypothetical 10 percent increase/decrease in the prevailing price of natural gas and fuel oil would result in a change of $0.5 million in our pre-tax income/loss. Our natural gas and fuel oil contracts do not qualify for hedge accounting and, as such, mark-to-market adjustments are recorded in “Other operating income, net.”

Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Index to Consolidated Financial Statements

	Page
Management’s Report on Internal Control over Financial Reporting	F-1
Reports of Independent Registered Public Accounting Firm	F-2
Consolidated Statements of Income and Comprehensive Income	F-4
Consolidated Balance Sheets	F-5
Consolidated Statements of Cash Flows	F-6
Notes to Consolidated Financial Statements	F-7

28

MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

To Our Shareholders:

The management of Rayonier Inc. and its subsidiaries is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934, as amended). Our system of internal controls over financial reporting was designed to provide reasonable assurance to the Company’s management and Board of Directors regarding the preparation and fair presentation of the financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America.

Because of the inherent limitations of internal control over financial reporting, misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Rayonier Inc.’s management, under the supervision of the Chief Executive Officer and Chief Financial Officer, assessed the effectiveness of our internal control over financial reporting as of December 31, 2008. In making this assessment, we used the framework included in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on our evaluation under the criteria set forth in Internal Control—Integrated Framework, management concluded that our internal control over financial reporting was effective as of December 31, 2008.

Deloitte & Touche LLP, the independent registered public accounting firm that audited the Company’s consolidated financial statements, has issued an attestation report on the Company’s internal control over financial reporting as of December 31, 2008. The report on the Company’s internal control over financial reporting as of December 31, 2008, is on page F-3.

L.M. Thomas

Chairman, President and Chief Executive Officer

February 25, 2009

H. E. Vanden Noort

Senior Vice President and Chief Financial Officer

February 25, 2009

F-1

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders of

Rayonier Inc.

Jacksonville, Florida

We have audited the accompanying consolidated balance sheets of Rayonier Inc. and subsidiaries (the “Company”) as of December 31, 2008, and 2007, and the related consolidated statements of income and comprehensive income and cash flows for each of the three years in the period ended December 31, 2008. Our audits also included the financial statement schedule listed in the Index at Item 15. These financial statements and financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Rayonier Inc. and subsidiaries as of December 31, 2008 and 2007, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2008, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.

As discussed in Note 2 to the financial statements, the accompanying financial statements have been retrospectively adjusted for adoption of Financial Accounting Standards Board Staff Position No. APB 14-1, Accounting for Convertible Debt Instruments that May be Settled in Cash Upon Conversion and the reclassification of the New Zealand operations from discontinued operations held for sale to continuing operations.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company’s internal control over financial reporting as of December 31, 2008, based on the criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 25, 2009 expressed an unqualified opinion on the Company’s internal control over financial reporting.

DELOITTE & TOUCHE LLP

Certified Public Accountants

Jacksonville, Florida

February 25, 2009 (August 5, 2009, as to the effects of the retrospective adoption of Financial Accounting Standards Board Staff Position No. APB 14-1, Accounting for Convertible Debt Instruments that May be Settled in Cash Upon Conversion and the reclassification of the New Zealand operations from discontinued operations held for sale to continuing operations as discussed in Note 2.)

F-2

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders of

Rayonier Inc.

Jacksonville, Florida

We have audited the internal control over financial reporting of Rayonier Inc. and subsidiaries (the “Company”) as of December 31, 2008, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company’s internal control over financial reporting is a process designed by, or under the supervision of, the company’s principal executive and principal financial officers, or persons performing similar functions, and effected by the company’s board of directors, management, and other personnel 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. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2008, based on the criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial statements and financial statement schedule as of and for the year ended December 31, 2008 of the Company and our report dated February 25, 2009, (August 5, 2009, as to the effects of the retrospective adoption of Financial Accounting Standards Board Staff Position No. APB 14-1, Accounting for Convertible Debt Instruments that May be Settled in Cash Upon Conversion and the reclassification of the New Zealand operations from discontinued operations held for sale to continuing operations as discussed in Note 2) expressed an unqualified opinion on those financial statements and financial statement schedule and included an explanatory paragraph regarding the retrospective application of the adoption of Financial Accounting Standards Board Staff Position No. APB 14-1, Accounting for Convertible Debt Instruments that May be Settled in Cash Upon Conversion and the reclassification of the New Zealand operations from discontinued operations held for sale to continuing operations.

DELOITTE & TOUCHE LLP

Certified Public Accountants

Jacksonville, Florida

February 25, 2009

F-3

RAYONIER INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME

For the Years Ended December 31,

(Thousands of dollars, except per share data)

	2008			2007			2006
SALES	$	1,271,048		$	1,224,654		$	1,229,807
Costs and Expenses
Cost of sales (2007 includes a $10.9 million fire loss)		991,894			922,148			952,662
Selling and general expenses		64,503			66,941			63,445
Other operating income, net		(12,500	)		(10,516	)		(8,818	)
		1,043,897			978,573			1,007,289
Equity in (loss) income of New Zealand joint venture		(715	)		514			(610	)
OPERATING INCOME BEFORE GAIN ON SALE OF NEW ZEALAND
TIMBER ASSETS		226,436			246,595			221,908
Gain on sale of New Zealand timber assets		—			—			7,769
OPERATING INCOME		226,436			246,595			229,677
Interest expense		(50,729	)		(57,448	)		(48,905	)
Interest and miscellaneous income, net		2,312			7,762			9,447
INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES		178,019			196,909			190,219
Income tax provision		(29,436	)		(23,350	)		(19,085	)
INCOME FROM CONTINUING OPERATIONS		148,583			173,559			171,134
DISCONTINUED OPERATIONS, NET
Income from discontinued operations, net of income tax expense of ($3,201)		—			—			5,335
NET INCOME		148,583			173,559			176,469
OTHER COMPREHENSIVE INCOME (LOSS)
Foreign currency translation adjustment		(23,508	)		7,005			3,226
Employee Benefit Plans
Retiree benefit plan amendment, net of income tax expense of $7,662 in 2008		16,377			—			—
Minimum pension liability adjustment, net of income tax expense of $3,823 in 2006		—			—			13,339
Loss from amortization of pension and postretirement plans, net of income tax benefit of $27,120, $2,319 and $0		(65,527	)		(3,997	)		—
COMPREHENSIVE INCOME	$	75,925		$	176,567		$	193,034
EARNINGS PER COMMON SHARE
BASIC EARNINGS PER SHARE
Continuing Operations	$	1.89		$	2.24		$	2.24
Discontinued Operations		—			—			0.07
Net Income	$	1.89		$	2.24		$	2.31
DILUTED EARNINGS PER SHARE
Continuing Operations	$	1.87		$	2.20		$	2.19
Discontinued Operations		—			—			0.07
Net Income	$	1.87		$	2.20		$	2.26

See Notes to Consolidated Financial Statements.

F-4

RAYONIER INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

As of December 31,

(Thousands of dollars)

ASSETS
	2008			2007
CURRENT ASSETS
Cash and cash equivalents	$	61,685		$	181,081
Accounts receivable, less allowance for doubtful accounts of $1,130 and $677		75,657			81,068
Inventory (Note 11)		96,866			84,291
Other current assets		44,815			49,780
Total current assets		279,023			396,220
TIMBER AND TIMBERLANDS,
NET OF DEPLETION AND AMORTIZATION		1,254,978			1,117,219
PROPERTY, PLANT AND EQUIPMENT
Land		24,445			25,282
Buildings		124,174			124,030
Machinery and equipment		1,244,946			1,190,852
Total property, plant and equipment		1,393,565			1,340,164
Less - accumulated depreciation		(1,042,756	)		(994,409	)
		350,809			345,755
Investment in Joint Venture (Note 7)		42,950			62,766
OTHER ASSETS		154,104			146,428
	$	2,081,864		$	2,068,388
LIABILITIES AND SHAREHOLDERS’ EQUITY
CURRENT LIABILITIES
Accounts payable	$	70,714		$	66,224
Bank loans and current maturities		620			55,585
Accrued taxes		10,633			7,179
Accrued payroll and benefits		19,854			30,065
Accrued interest		4,202			3,481
Accrued customer incentives		13,936			12,350
Other current liabilities		31,448			33,460
Current liabilities for dispositions and discontinued operations (Note 15)		8,214			10,069
Total current liabilities		159,621			218,413
LONG-TERM DEBT		746,591			665,074
NON-CURRENT LIABILITIES FOR DISPOSITIONS AND DISCONTINUED OPERATIONS (Note 15)		96,361			103,616
PENSION AND OTHER POSTRETIREMENT BENEFITS (Note 20)		121,440			67,217
OTHER NON-CURRENT LIABILITIES		18,914			14,439
COMMITMENTS AND CONTINGENCIES (Notes 16, 17 and 18)
SHAREHOLDERS’ EQUITY
Common Shares, 120,000,000 shares authorized, 78,814,431 and 78,216,696 shares issued and outstanding		527,302			506,649
Retained earnings		509,931			518,618
Accumulated other comprehensive loss		(98,296	)		(25,638	)
		938,937			999,629
	$	2,081,864		$	2,068,388

See Notes to Consolidated Financial Statements.

F-5

RAYONIER INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

For the Years Ended December 31,

(Thousands of dollars)

	2008			2007			2006
OPERATING ACTIVITIES
Net income	$	148,583		$	173,559		$	176,469
Non-cash items included in income:
Depreciation, depletion and amortization		168,239			154,686			136,495
Non-cash cost of forest fire losses		—			10,411			—
Non-cash cost of real estate sold		11,145			8,612			12,362
Non-cash stock-based incentive compensation expense		13,344			13,478			12,078
Gain on sale of New Zealand timber assets		—			—			(7,769	)
Deferred income tax benefit (provision)		11,576			(8,866	)		(16,068	)
Amortization of convertible debt discount		5,437			1,119			—
Excess tax benefits on stock-based compensation		(3,248	)		(7,907	)		(4,143	)
Other		6,255			7,120			(6,764	)
Changes in operating assets and liabilities:
Receivables		1,794			19,239			(11,881	)
Inventories		(15,946	)		(7,370	)		2,742
Accounts payable		6,128			(8,502	)		11,349
Other current assets		5,130			1,285			(5,186	)
Accrued liabilities		(7,245	)		(10,353	)		11,106
Other assets		4,736			(7,659	)		4,847
Other non-current liabilities		(8,080	)		(6,257	)		1,080
Expenditures for dispositions and discontinued operations		(7,660	)		(8,575	)		(9,789	)
CASH PROVIDED BY OPERATING ACTIVITIES		340,188			324,020			306,928
INVESTING ACTIVITIES
Capital expenditures		(104,806	)		(97,004	)		(105,462	)
Purchase of timberlands and wood chipping facilities		(229,701	)		(22,872	)		(277,778	)
Purchase of real estate		(4,336	)		(4,350	)		(21,101	)
Proceeds from the sale of NZ timber assets		—			—			21,770
Increase (decrease) in restricted cash		8,523			(8,812	)		1,287
Other		(71	)		7,053			(3,909	)
CASH USED FOR INVESTING ACTIVITIES		(330,391	)		(125,985	)		(385,193	)
FINANCING ACTIVITIES
Issuance of debt (Note 12)		173,800			477,000			258,000
Repayment of debt		(152,685	)		(387,926	)		(158,310	)
Dividends paid		(156,978	)		(150,626	)		(143,883	)
Proceeds from the issuance of common shares		8,265			18,891			10,771
Excess tax benefits on stock-based compensation		3,248			7,907			4,143
Purchase of exchangeable note hedge (Note 12)		—			(33,480	)		—
Proceeds from issuance of warrant (Note 12 )		—			20,670			—
Debt issuance costs		—			(7,057	)		—
Repurchase of common shares		(3,979	)		(3,150	)		(560	)
CASH USED FOR FINANCING ACTIVITIES		(128,329	)		(57,771	)		(29,839	)
EFFECT OF EXCHANGE RATE CHANGES ON CASH		(864	)		646			2,048
CASH AND CASH EQUIVALENTS
(Decrease) increase in cash and cash equivalents		(119,396	)		140,910			(106,056	)
Balance, beginning of year		181,081			40,171			146,227
Balance, end of year	$	61,685		$	181,081		$	40,171
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the year:
Interest	$	42,691		$	71,317		$	29,647
Income taxes	$	12,752		$	25,944		$	38,956
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING ACTIVITY
Capital assets purchased on account	$	8,675		$	10,084		$	9,116

See Notes to Consolidated Financial Statements.

F-6

RAYONIER INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollar amounts in thousands unless otherwise stated)

1. NATURE OF BUSINESS OPERATIONS

Rayonier is a leading international forest products company primarily engaged in activities associated with timberland management, the sale and entitlement of real estate, and the production and sale of high value specialty cellulose fibers and fluff pulp. The Company owns, leases or manages approximately 2.6 million acres of timberland and real estate located in the United States and New Zealand. Included in this property is over 200,000 acres of high value real estate located primarily along the coastal region from Savannah, Georgia to Daytona Beach, Florida, which is referred to as the “coastal corridor.” The Company owns and operates two specialty cellulose mills in the United States. In addition, the Company manufactures lumber in three sawmills in Georgia and engages in the trading of logs and wood products.

Rayonier operates in four reportable business segments as defined by Statement of Financial Accounting Standard (“SFAS”) No. 131, Disclosures about Segments of an Enterprise and Related Information (“SFAS 131”): Timber, Real Estate, Performance Fibers, and Wood Products. See Note 3 – Segment and Geographical Information for further discussion.

The Company is a Real Estate Investment Trust (“REIT”). The Company is generally not required to pay federal income taxes on its U.S. timber harvest earnings and other REIT operations contingent upon meeting applicable distribution, income, asset, shareholder and other tests. The U.S. timber operations are primarily conducted by the Company’s wholly-owned subsidiary, Rayonier Forest Resources, L.P. (“RFR”). Non-REIT-qualifying and certain foreign businesses, which are subject to corporate-level tax on earnings, are operated by our wholly-owned taxable subsidiary, Rayonier TRS Holdings Inc. (“TRS”). These operations include the Performance Fibers and Wood Products businesses as well as the Real Estate segment’s entitlement and sale of higher and better use (“HBU”) properties.

Timber

Rayonier owns, leases, or manages approximately 2.5 million acres of timberlands located in the U.S. and New Zealand. The Company’s Timber segment includes all activities that relate to the harvesting of timber in addition to managing timberlands and selling timber and logs to third parties.

Real Estate

Rayonier has invested in timberlands seeking to maximize its total return from a full cycle of ownership, which includes selling portions of its asset base to capture the appreciated value. An increasing portion of Rayonier’s acreage has become more valuable for development, recreational or conservation purposes than for growing timber. As a result, the Company has expanded its focus to include more value-added real estate activities such as seeking entitlements directly or in participation with other developers. The Company’s Real Estate segment owns approximately 67,000 acres.

Performance Fibers

Rayonier is a manufacturer of high-performance cellulose fibers with two production facilities in Jesup, GA and Fernandina Beach, FL, which have a combined annual capacity of approximately 740,000 metric tons. These fiber products are sold throughout the world to companies that produce a wide variety of products, including cigarette filters, foods, pharmaceuticals, textiles, electronics and various industrial applications. Approximately 63 percent of performance fiber sales are to export customers, primarily in Europe, Asia and Latin America.

Cellulose Specialties - Rayonier is a producer of specialty cellulose products, most of which are used in dissolving chemical applications that require a highly purified form of cellulose fiber. The Company concentrates on producing the most high-value,

F-7

RAYONIER INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollar amounts in thousands unless otherwise stated) (Continued)

technologically-demanding forms of cellulose specialty products, such as cellulose acetate and high-purity cellulose ethers, and is a leading supplier of these products.

Absorbent Materials - Rayonier is a producer of fibers for absorbent hygiene products. These fibers are typically referred to as fluff fibers and are used as an absorbent medium in products such as disposable baby diapers, feminine hygiene products, incontinence pads, convalescent bed pads, industrial towels and wipes and non-woven fabrics.

Wood Products

The Company operates and sells dimension lumber products through three lumber manufacturing facilities in the U.S.

Other

Rayonier operates a log trading business and a wood products trading business.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation

The consolidated financial statements include the accounts of Rayonier and its subsidiaries, in which it has a majority ownership or controlling interest. All intercompany balances and transactions are eliminated. For income tax purposes, the Company files two U.S. federal income tax returns, one for REIT operations and a consolidated filing for TRS operations as well as several state, local and foreign income tax returns.

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and to disclose contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. There are risks inherent in estimating and therefore actual results could differ from those estimates.

New Accounting Standards

In September 2006, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 157, Fair Value Measurements (“SFAS 157”). This Standard defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. It applies to other accounting pronouncements where the FASB requires or permits fair value measurements but does not require any new fair value measurements. The Company adopted SFAS 157 for financial assets and liabilities on January 1, 2008. Adoption of SFAS 157 did not have any impact on the Company’s results of operations or financial position (See Note 5 – Fair Value Measurements).

In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activities—an amendment of FASB Statement No. 133 (“SFAS 161”). This Statement requires enhanced disclosures about an entity’s derivative and hedging activities, including (a) how and why an entity uses derivative instruments, (b) how derivative instruments and related hedged items are accounted for under SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities (“SFAS 133”), and its related interpretations, and (c) how derivative instruments and related hedged items affect an entity’s financial position, financial performance, and cash flows. SFAS 161 is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008. The Company will begin the enhanced disclosures required by this pronouncement in the first quarter of 2009.

In May 2008, the FASB issued FSP No. APB 14-1, Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement) (“FSP APB 14-1”). FSP APB 14-1 requires that entities with convertible debt instruments that may be settled in cash upon conversion (including partial cash settlement) separately account for the liability and equity components in a manner that reflects the entity’s nonconvertible debt borrowing rate when interest expense is recognized in subsequent periods. The FSP is effective for financial statements issued for fiscal years beginning after December 15, 2008 and requires prior years to be restated. The Company’s convertible bonds issued in October 2007 are within the scope of FSP APB 14-1. The fair value of the equity component at inception resulted in a $30 million debt discount, an $11 million deferred tax liability and a $19 million increase to additional paid-in-capital, net of income taxes. Retrospective application of the FSP in 2009 resulted in an increase to interest expense, net of tax benefits, of approximately $3 million in 2008 and $1 million in 2007. The additional interest expense represents the amortization of the debt discount using the interest method. See Note 12 – Debt and Note 23 – Revised Financial Statements for additional information on the retrospective adjustments to the Company’s Consolidated Financial Statements.

In November 2008, the Emerging Issues Task Force (“EITF”) issued EITF Issue No. 08-6, The Equity Method Investment

F-8

RAYONIER INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollar amounts in thousands unless otherwise stated) (Continued)

Accounting Considerations. EITF No. 08-6 clarifies the accounting for certain transactions and impairment considerations involving equity method investments and is effective January 1, 2009. We do not believe the adoption of EITF No. 08-6 will have a material impact, if any, on our consolidated financial statements.

In December 2008, the FASB issued FSP No. FAS 132(R)-1, Employers’ Disclosures about Postretirement Benefit Plan Assets. The FSP amends SFAS No. 132(R), Employers’ Disclosures about Pensions and Other Postretirement Benefits to provide guidance on an employer’s disclosures about plan assets of a defined benefit pension or other postretirement plan. The additional disclosures include investment policies and strategies, categories of plan assets and information about the fair value measurements of plan assets. The disclosures are effective for fiscal years ending after December 15, 2009.

In December 2008, the FASB issued FSP FAS 140-4 and FIN 46(R)-8, Disclosures by Public Entities (Enterprises) about Transfers of Financial Assets and Interests in Variable Interest Entities. The purpose of this FSP is to improve disclosures by public entities and enterprises until pending amendments to SFAS No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities (“SFAS 140”), and FASB Interpretation No. 46(R), Consolidation of Variable Interest Entities (“FIN 46(R)”), are finalized and approved by the FASB. The FSP amends SFAS 140 to require public entities to provide additional disclosures about transferors’ continuing involvements with transferred financial assets, including qualified special purpose entities (“QSPE”). It also amends FIN 46(R) to require public enterprises, to provide additional disclosures about their involvement with variable interest entities. FSP FAS 140-4 and FIN 46(R)-8 is effective for financial statements issued for fiscal years and interim periods ending after December 15, 2008. The Company adopted the FSP on December 31, 2008. See Note 5 – Fair Value Measurements for the new disclosures on our QSPE.

Cash and Cash Equivalents

Cash and cash equivalents include time deposits with original maturities of three months or less.

Inventory

Inventories are valued at the lower of cost or market. The costs of manufactured performance fibers are determined on the first-in, first-out (“FIFO”) basis. Other products are valued on an average cost basis. Inventory costs include material, labor and manufacturing overhead. Physical counts of inventories are taken at least annually. The need for a provision for estimated losses from obsolete, excess or slow-moving inventories is reviewed periodically.

HBU real estate properties that are expected to be sold within one year are included in inventory, while properties that are expected to be sold after one year are included in “Other assets.”

Equity Method Investments

The Company accounts for its interest in a New Zealand joint venture (“JV”) under the equity method of accounting in accordance with Accounting Principles Board (“APB”) Opinion No. 18, The Equity Method of Accounting for Investments in Common Stock. Rayonier does not have a controlling financial interest but exerts significant influence over the JV’s operating and financial policies as manager of the joint venture.

Timber

Timber is stated at the lower of cost or market value. Costs relating to acquiring, planting and growing of timber including real estate taxes, lease rental payments and site preparation are capitalized. Such accumulated costs attributed to merchantable timber are charged to cost of goods sold at the time the timber is harvested or the timberland is sold, based on the relationship of harvested timber to the estimated volume of currently merchantable timber. Upon the acquisition of timberland, the Company makes a determination on whether to combine the newly acquired merchantable timber with an existing depletion pool or to create a new separate pool. This determination is based on the geographic location of the new timber, the customers/markets that will be served, relative profit margins, and species mix compared to its existing timberland holdings. If the acquisition is similar, the cost of the acquired timber is combined into an existing depletion pool and a new depletion rate is calculated for the pool. This determination and depletion rate adjustment normally occurs in the quarter following the acquisition, concurrent with the harvesting of the acquired timber.

Property, Plant, Equipment and Depreciation

Property, plant and equipment additions are recorded at cost, including applicable freight, taxes, interest, construction and installation costs. Pulp mill assets are depreciated using the units-of-production method. The Company depreciates its non-production Performance Fiber assets, including office, lab and transportation equipment, using the straight-line depreciation method over 3 to 25 years. In addition, all of the assets at the Company’s sawmills are depreciated using the straight-line method over 3 to 15 years. Buildings and land improvements are depreciated using the straight-line method over 15 to 35 years and 5 to 30 years, respectively.

Gains and losses on the retirement of assets are included in operating income. Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of

F-9

RAYONIER INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollar amounts in thousands unless otherwise stated) (Continued)

assets that are held and used is measured by net undiscounted cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying value exceeds the fair value of the assets, which is based on a discounted cash flow model. Assets to be disposed of are reported at the lower of the carrying amount or fair value less cost to sell.

Foreign Currency Translation

The functional currency of the Company’s New Zealand-based operations and its JV investment is the New Zealand dollar. All assets and liabilities are translated into U.S. dollars at the exchange rate in effect at the respective balance sheet dates with the resulting translation gain or loss recorded as a separate component of Accumulated Other Comprehensive Income/(Loss), (“AOCI”), within Shareholders’ Equity.

Financial Instruments

The Company is exposed to various market risks, including changes in interest rates and commodity prices. The Company’s objective is to partially mitigate the economic impact of these market risks. Derivatives are used, as noted below, in accordance with policies and procedures approved by the Finance Committee of the Board of Directors and are managed by a senior executive committee, whose responsibilities include initiating, managing and monitoring resulting exposures. The Company does not enter into such financial instruments for trading or speculative purposes.

SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities (“SFAS 133”), as amended, requires that all derivative financial instruments such as commodity swap agreements be recognized in the financial statements and measured at fair value regardless of the purpose or intent for holding them. Transactions that provide for the forward purchase or sale of raw materials are not included in the financial statements until physical delivery of the product, as these transactions are done in the normal course of business and qualify for treatment under the normal purchases and sales scope exception under SFAS 133.

Commodity Swap Agreements

The Company periodically enters into commodity forward contracts to fix some of its fuel oil and natural gas costs at its Performance Fibers mills. The forward contracts partially mitigate the risk of a change in Performance Fibers’ margins resulting from an increase or decrease in fuel oil and natural gas prices. The Company’s commodity agreements do not qualify for hedge accounting and are marked to market. Gains or losses resulting from the valuation are recorded in “Other operating income, net.”

Revenue Recognition

The Company generally recognizes revenues when the following criteria are met: (i) persuasive evidence of an agreement exists, (ii) delivery has occurred, (iii) the Company’s price to the buyer is fixed and determinable, and (iv) collectibility is reasonably assured.

Revenue from the sale of timber is recorded when title passes to the buyer. Timber sales in the Eastern and Western regions are primarily made on a pay-as-cut basis. These contracts generally require a minimum 15 percent initial payment and title and risk of loss are transferred when the timber is cut.

Real estate sales are recorded when title passes, full payment or a minimum down payment of 25 percent is received and full collectibility is assured, in compliance with SFAS 66, Accounting for Sales of Real Estate. If a down payment of less than 25 percent is received at closing or if full collectibility is not reasonably assured, the Company typically records revenue based on the installment method or cost recovery method. The Company follows the same revenue recognition policy when recording intercompany real estate sales from the REIT to the TRS and eliminates these transactions on a consolidated basis.

Revenue from domestic sales of Performance Fibers products is recorded when title passes which, depending on the contract, is either at time of shipment or when the customer receives goods. Foreign sales of Performance Fibers products are recorded when the customer or agent receives the goods and title passes.

Lumber sales are recorded when the goods are shipped and title passes.

The Company’s Other segment includes log trading and wood product sales. Revenue is recorded when the goods are received by the customer and title passes.

Freight and Handling Costs

Costs for freight and handling are reported in cost of sales.

Environmental Costs

Rayonier expenses environmental costs related to ongoing businesses resulting from current operations. Expenditures that meaningfully extend the life or increase the efficiency of operating assets are capitalized. The Company expenses environmental

F-10

RAYONIER INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollar amounts in thousands unless otherwise stated) (Continued)

obligations related to dispositions or discontinued operations from which no current or future benefit is discernible and accrues its obligation to remediate and monitor environmental liabilities. These obligations are projected for a span of up to approximately 20 years and require significant estimates to determine the proper amount at any point in time. Generally, monitoring expense obligations are fixed once remediation projects are at or near completion. The projected period, from 2009 through 2028, reflects the time in which potential future costs are both estimable and probable. As new information becomes available, these cost estimates are updated and the Company adjusts its recorded liabilities appropriately. Environmental liabilities are accounted for on an undiscounted basis and are reflected in current and non-current “Liabilities for dispositions and discontinued operations” in the Consolidated Balance Sheet.

Research and Development

Research activities related to timberland operations include genetic tree improvement programs as well as applied silviculture programs to identify management practices that improve financial returns from timberland assets. Research and development efforts in Performance Fibers are directed primarily at further developing existing core products and technologies, improving the quality of cellulose fiber grades, absorbent materials and related products, improving manufacturing efficiency, reducing energy needs and developing improved environmental controls. Research and development costs are included in cost of sales in the Consolidated Statements of Income.

Income Taxes

Deferred income taxes are provided using the asset and liability method under the provisions of SFAS 109, Accounting for Income Taxes and FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes – an interpretation of FASB Statement No. 109 (“FIN 48”). An estimate of U.S. income taxes on foreign operations is provided based upon the best estimate of the ultimate liability. See Note 9 – Income Taxes for additional information.

Stock-Based Employee Compensation

The Company accounts for share-based compensation under SFAS No. 123(R), Share-Based Payment. See Note 19 - Incentive Stock Plans for additional information regarding the Company’s stock-based compensation.

Pension and Postretirement Benefits

Rayonier records pension and postretirement net periodic benefit cost in accordance with SFAS No. 87, Employers’ Accounting for Pensions (“SFAS 87”), SFAS No. 106(R), Employers’ Accounting for Postretirement Benefits Other Than Pensions (“SFAS 106(R)”), and SFAS No. 158, Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans – an amendment of FASB Statement Nos. 87, 88, 106 and 132(R) (’SFAS 158”). Several estimates and assumptions are required to record these costs and liabilities, including discount rate, return on assets, salary increases, health care cost trends, and longevity and service lives of employees. Management reviews and updates these assumptions periodically. See Note 20 - Employee Benefit Plans for additional information about the Company’s pension and postretirement plans.

Reclassifications

The Company holds a 40 percent interest in a joint venture (“JV”) that owns approximately 329,000 acres of New Zealand timberlands. In addition to the investment, Rayonier New Zealand Limited (“RNZL”), a wholly-owned subsidiary of Rayonier Inc., serves as the manager of the JV forests and operates a log trading business. During the third quarter of 2008, Rayonier and its JV partners decided to offer to sell their interests in the JV as well as the operations of RNZL. In the second quarter of 2009, as a result of stressed capital markets and weak global economic conditions, Rayonier and its JV partners decided to discontinue the sale process and continue on-going operations. Accordingly, the interest in the JV and the operations of RNZL no longer qualify for treatment as discontinued operations. See Note 23 – Revised Financial Statements for additional information about reclassifications for discontinued operations.

3. SEGMENT AND GEOGRAPHICAL INFORMATION

        Rayonier operates in four reportable business segments as defined by SFAS 131: Timber, Real Estate, Performance Fibers, and Wood Products. Timber sales include all activities that relate to the harvesting of timber. Real Estate sales include all property sales, including those designated for HBU. The assets of the Real Estate segment include HBU property held by the Company’s real estate subsidiary, TerraPointe LLC, and parcels under contract previously in the Timber segment. Allocations of depletion expense and non-cash costs of real estate sold are recorded when the Real Estate segment sells an asset from the Timber segment. The Performance Fibers segment includes two major product lines, cellulose specialties and absorbent materials. The Wood Products segment is comprised of the Company’s lumber operations. The Company’s remaining operations include harvesting and selling timber acquired from third parties (log trading) and trading wood products. These operations are reported in “Other Operations.” Sales between operating segments are made based on fair market value and intercompany profit or loss is eliminated in consolidation. The Company evaluates financial performance based on the operating income of the segments.

F-11

RAYONIER INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollar amounts in thousands unless otherwise stated) (Continued)

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

Two customers in the Performance Fibers segment represented 12 percent and 10 percent of the Company’s consolidated sales in 2008. One customer in the Performance Fibers segment represented 13 percent and 11 percent of the Company’s consolidated sales in 2007 and 2006, respectively.

Segment information for each of the three years ended December 31, 2008, follows (in millions of dollars):

	Sales
	2008		2007		2006
Timber	$	199	$	222	$	207
Real Estate		127		116		112
Performance Fibers		798		722		672
Wood Products		86		88		111
Other Operations		61		77		128
Total	$	1,271	$	1,225	$	1,230

	Operating Income/(Loss)
	2008			2007			2006
Timber *	$	31		$	60		$	90
Real Estate		80			93			89
Performance Fibers		149			141			80
Wood Products		(7	)		(8	)		(3	)
Other Operations		3			(3	)		1
Corporate and other **		(30	)		(36	)		(27	)
Total	$	226		$	247		$	230

* 2007 includes a $10.9 million charge resulting from wildfire damage on timberlands in southeast Georgia and northeast Florida.

** Includes an $8 million gain on sale of a partial interest in the New Zealand joint venture in 2006.

	Gross Capital Expenditures
	2008		2007		2006
Timber*	$	265	$	52	$	307
Real Estate		4		4		21
Performance Fibers		67		65		69
Wood Products		2		3		6
Corporate and other		1		—		1
Total	$	339	$	124	$	404

* Timber gross capital expenditures include strategic acquisitions of $230 million, $14 million and $278 million in 2008, 2007 and 2006, respectively.

F-12

RAYONIER INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollar amounts in thousands unless otherwise stated) (Continued)

	Depreciation, Depletion and Amortization
	2008		2007		2006
Timber*	$	85	$	85	$	53
Real Estate**		21		5		2
Performance Fibers		56		68		73
Wood Products		5		6		7
Corporate and other		1		1		1
Total	$	168	$	165	$	136

* 2007 includes $10.4 million charge resulting from wildfire damage on timberlands in southeast Georgia and northeast Florida.

** Real Estate depletion increased in 2008 due to higher non-strategic timberland sales.

	Identifiable Assets
	2008		2007
Timber	$	1,323	$	1,204
Real Estate		73		65
Performance Fibers		496		467
Wood Products		27		30
Other Operations		26		30
Corporate and other		137		272
Total	$	2,082	$	2,068

	Sales by Product Line
	2008		2007		2006
Timber	$	199	$	222	$	207
Real Estate
Development		5		37		72
Rural		48		79		40
Non-Strategic Timberlands		74		—		—
Total Real Estate		127		116		112
Performance Fibers
Cellulose Specialties		600		539		500
Absorbent Materials		198		183		172
Total Performance Fibers		798		722		672
Wood Products		86		88		111
Other		61		77		128
Total Sales	$	1,271	$	1,225	$	1,230

F-13

RAYONIER INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollar amounts in thousands unless otherwise stated) (Continued)

	Geographical Operating Information
	Sales						Operating Income							Identifiable Assets
	2008		2007		2006		2008		2007		2006			2008		2007
United States	$	1,220	$	1,172	$	1,182	$	223	$	245	$	231		$	2,019	$	1,965
New Zealand		39		43		32		3		2		(1	)		56		93
All Other		12		10		16		—		—		—			7		10
Total	$	1,271	$	1,225	$	1,230	$	226	$	247	$	230		$	2,082	$	2,068

	Sales by Destination
	2008		%	2007		%	2006		%
United States	$	720	57	$	741	60	$	777	63
Europe		163	13		155	13		167	14
China		149	12		118	10		69	5
Japan		122	10		95	8		88	7
Other Asia		47	4		45	3		47	4
Latin America		31	2		26	2		30	2
New Zealand		15	1		22	2		19	2
Canada		6	—		7	1		21	2
All other		18	1		16	1		12	1
Total Sales	$	1,271	100	$	1,225	100	$	1,230	100

The majority of sales to foreign countries are denominated in U.S. dollars.

4. FINANCIAL INSTRUMENTS

Interest Rate Swap Agreements

The Company did not enter into any interest rate swap agreements during 2008.

RFR previously entered into two interest rate swaps on $90 million of 8.288 percent fixed rate notes payable which matured on December 31, 2007. One swap converted interest payments from a fixed rate to six month LIBOR plus 4.99 percent on $40 million of debt, while the second swap converted interest payments from a fixed rate to six month LIBOR plus 4.7825 percent. These swaps qualified as fair value hedges under SFAS 133. As such, the net effect from the interest rate swaps was recorded as interest expense. The interest rate differentials on the swap agreements settled every June 30 and December 31, until maturity. For the two years ended December 31, 2007 and 2006, the swap agreements increased interest expense by $1.9 million and $1.7 million, respectively.

Commodity Swap Agreements

The Company recognized a pre-tax loss of $3.5 million, and pre-tax gains of $0.3 million and $1.1 million during the years ended December 31, 2008, 2007 and 2006, respectively, on fuel oil forward contracts. The mark-to-market valuation on outstanding fuel oil forward contracts at December 31, 2008 resulted in a liability of $3.8 million. There were no outstanding fuel oil forward contracts in 2007. The mark-to-market adjustments were recorded in “Other operating income, net.”

The Company did not enter into, or have any outstanding, natural gas forward contracts during 2008. In 2007 and 2006, the Company realized a de-minimus gain and a $0.7 million gain on natural gas forward contracts, respectively. The gains were recorded in “Other operating income, net.” As of December 31, 2007, there were no outstanding natural gas contracts.

5. FAIR VALUE MEASUREMENTS

The following table presents the carrying amount and estimated fair values of financial instruments held by the Company at December 31, 2008 and 2007, using market information and what the Company believes to be appropriate valuation methodologies under SFAS No. 107, Disclosures about Fair Value of Financial Instruments.

F-14

RAYONIER INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollar amounts in thousands unless otherwise stated) (Continued)

At December 31, 2008 and 2007, the estimated fair values of Rayonier’s financial instruments were as follows:

Asset (liability)	2008						2007
	Carrying Amount			Fair Value			Carrying Amount			Fair Value
Cash and cash equivalents	$	61,685		$	61,685		$	181,081		$	181,081
Short-term debt		(620	)		(620	)		(55,585	)		(55,585	)
Long-term debt *		(746,591	)		(700,369	)		(665,074	)		(742,622	)

* Due to the adoption of FSP APB 14-1, our Senior Exchangeable Notes were discounted by $24 million and $29 million as of December 31, 2008 and 2007, respectively, but upon maturity in 2012 the liability will be $300 million.

Rayonier uses the following methods and assumptions in estimating the fair value of its financial instruments:

Cash and cash equivalents - The carrying amount is equal to fair market value.

Debt - The Company’s short-term bank loans and floating rate debt approximate fair value. The fair value of fixed rate long-term debt is based upon quoted market prices for debt with similar terms and maturities.

Effective January 1, 2008, the Company adopted SFAS No. 157 which defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants at the measurement date. SFAS 157 establishes a three-level hierarchy that prioritizes the inputs used to measure fair value as follows:

Level 1 - Quoted prices in active markets for identical assets or liabilities.

Level 2 - Observable inputs other than quoted prices included in Level 1, such as quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets and liabilities in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.

Level 3 - Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. This includes certain pricing models, discounted cash flow methodologies and similar techniques that use significant unobservable inputs.

Assets and liabilities measured at fair value on a recurring basis are summarized below:

Asset (liability)	Carrying Value at December 31, 2008			Level 2
Commodity swap agreements	$	(3,825	)	$	(3,825	)
Investment in QSPE		2,757			2,757

In 2004, Rayonier monetized a $25 million installment note received in connection with a timberland sale by contributing the note and letter of credit to a bankruptcy-remote limited liability subsidiary that meets the requirements of a QSPE as defined by SFAS 140. Using the installment note and letter of credit as collateral, the QSPE issued $22.5 million of 15-year Senior Secured Notes and remitted cash of $22.5 million to the Company. Rayonier maintained a $2.5 million interest in the QSPE and receives immaterial cash payments equal to the excess of interest received on the installment note over the interest paid on the Senior Secured Notes. In addition, the Company calculated and recorded a guarantee liability of $43 thousand as per FIN 45, Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Others, to reflect its obligation of up to $2.5 million under a make-whole agreement pursuant to which it guaranteed certain obligations of the QSPE. This guarantee obligation is also collateralized by the letter of credit. The Company’s $2.5 million interest in the QSPE is recorded at fair value and adjusted on a quarterly basis. During the years ended December 31, 2008, 2007 and 2006, deminimus fair value adjustments were recorded. There are no restrictions that relate to the transferred financial assets. Upon maturity of the Senior Secured Notes in 2019 and termination of the QSPE, Rayonier will receive the remaining $2.5 million balance of cash.

F-15

RAYONIER INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollar amounts in thousands unless otherwise stated) (Continued)

6. TIMBERLAND ACQUISITIONS

In April 2008, the Company acquired approximately 56,300 acres of timberland in the state of Washington for $213 million, funding the acquisition with $128 million of cash on hand and borrowings from the Company’s existing credit facility. This acquisition increased the Company’s holdings of merchantable Douglas fir and western hemlock timber and was accounted for as an asset purchase.

In March 2008, the Company acquired approximately 53,800 acres of timberland consisting of high-value hardwoods in the state of New York for $19 million. The acquisition was funded with cash on hand and was accounted for as an asset purchase.

During the fourth quarter of 2006, Rayonier acquired approximately 228,000 acres of timberland located in six states for $272 million. The largest single block of timberland (75,000 acres), located in New York, contains high-value hardwoods and is located close to established hardwood and veneer markets in the U.S. and Canada. The remaining timberlands, which include timber deeds and leases, are in five Southern states with well-established saw timber and pulpwood markets: Alabama, Arkansas, Louisiana, Oklahoma and Texas. The Southern properties acquired are stocked primarily with loblolly pine. The Company accounted for the acquisitions as asset purchases.

7. JOINT VENTURE INVESTMENT

In 2005, the Company entered into a joint venture (JV) arrangement with RREEF Infrastructure, the global infrastructure investing arm of Deutsche Asset Management (RREEF), under which the JV purchased approximately 354,000 acres of New Zealand timberlands. The JV used investor capital of approximately $245 million and secured bank debt of approximately $260 million to purchase RNZ’s forests consisting of 118,000 acres for approximately $187 million and 236,000 acres of New Zealand forests and related businesses from Carter Holt Harvey (CHH), an Australasian forest products company, for approximately $301 million. The Company’s initial investment represented a 49.7 percent equity interest in the JV. In addition to having an equity investment, RNZ provides timberland management services to the JV, for which it receives a fee. The sale of RNZ’s forests in 2005 resulted in $65 million in cash proceeds, net of the Company’s investment in the JV, and a $73 million gain, of which $37 million was recognized (based on the proportion of non-Rayonier (outside) interests in the JV on the date of sale) and the remaining $36 million was deferred.

On June 30, 2006, the Company reduced its investment in the JV from 49.7 percent to 40 percent. AMP Capital Investors Limited, a subsidiary of the Australasian corporation AMP Limited, purchased a total interest in the JV of 35 percent, of which 9.7 percent was from RNZ and the remainder from RREEF. The Company received approximately $21.8 million in cash proceeds and recorded an after-tax gain of $6.5 million. The total after-tax gain includes approximately $4.9 million of previously deferred gain from RNZ’s October 3, 2005 timberland sale to the JV.

Rayonier’s investment in the JV is accounted for using the equity method of accounting. Income from the JV is reported in the Timber segment as operating income since the Company manages the forests and its JV interest is an extension of the Company’s operations. The JV is subject to New Zealand income taxes; however, Rayonier’s interest in its timber harvest operations are within the Company’s REIT, and therefore the Company generally is not required to pay U.S. federal income taxes on its equity investment income.

A portion of Rayonier’s equity method investment is recorded at historical cost which generates a difference between the book value of the Company’s investment and its proportionate share of the JV’s net assets. The difference represents the Company’s unrecognized gain from RNZ’s sale of timberlands to the JV. The deferred gain is recognized on a straight-line basis over the estimated number of years the JV expects to harvest the timberlands.

A rollforward of the Company’s investment in the JV for the three years ended December 31, 2008 (in millions) is as follows:

	2008			2007			2006
Balance at beginning of period	$	62.8		$	61.2		$	81.7
Equity in income/(loss) of JV		(0.7	)		0.5			(0.6	)
Distributions		(1.7	)		(5.8	)		(6.2	)
Partial sale of investment		—			—			(13.9	)
Foreign exchange translation (loss)/gain and other		(17.4	)		6.9			0.2
Balance at end of year	$	43.0		$	62.8		$	61.2

F-16

RAYONIER INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollar amounts in thousands unless otherwise stated) (Continued)

Summarized financial information for the JV for the three years ended December 31, 2008 (in millions) is as follows:

	2008			2007			2006
Sales	$	178.5		$	151.5		$	140.4
Operating income	$	3.9		$	10.6		$	7.3
Pretax loss from operations	$	(37.3	)	$	(22.3	)	$	(26.6	)
Net loss*	$	(22.6	)	$	(15.9	)	$	(17.8	)
	2008			2007			2006
Current assets	$	26.5		$	36.3		$	27.1
Timber and timberlands		328.9			477.3			452.3
Goodwill		31.7			42.5			38.7
Total assets	$	387.1		$	556.1		$	518.1
Current liabilities	$	31.9		$	34.6		$	24.2
Noncurrent liabilities		209.7			335.3			305.5
Partners’ debt and capital		145.5			186.2			188.4
Total liabilities and equity	$	387.1		$	556.1		$	518.1

* The Company’s equity interest in the joint venture’s net losses for 2008, 2007, and 2006 of $9.0 million, $6.4 million and $7.9 million, respectively, excludes interest expense recognized by the joint venture of $6.7 million, $5.8 million and $6.2 million, respectively, on debt owed to partners and includes $1.6 million, $1.1 million and $1.1 million of deferred gain amortization, respectively.

8. OTHER ASSETS

Included in Other Assets are non-current prepaid and deferred income taxes, restricted cash, HBU real estate not expected to be sold within the next 12 months, long-term receivables, manufacturing and maintenance supplies not expected to be utilized within the next 12 months, and other deferred expenses including debt issuance and capitalized software costs.

In order to qualify for like-kind exchange (LKE) treatment, the proceeds from real estate sales must be deposited with a third party intermediary. These proceeds are accounted for as restricted cash until a suitable replacement property is acquired. In the event that the LKE purchases are not completed, the proceeds are returned to the Company after 180 days and reclassified as available cash. As of December 31, 2008 and 2007, the Company had $1.5 million and $10.0 million, respectively, of proceeds from real estate sales classified as restricted cash in Other Assets, which were deposited with an LKE intermediary.

Debt issuance costs are capitalized and amortized to interest expense over the term of the debt to which they relate using a method that approximates the interest method. At December 31, 2008 and 2007, capitalized debt issuance costs were $6.5 million and $8.4 million, respectively. Software costs are capitalized and amortized over a period not exceeding five years using the straight-line method. At December 31, 2008 and 2007, capitalized software costs were $4.2 million and $3.9 million, respectively.

9. INCOME TAXES

In general, only the Company’s taxable REIT subsidiaries, whose businesses include the Company’s non-REIT qualified activities, are subject to corporate income taxes. However, the Company is subject to U.S. federal corporate income tax on built-in gains (the excess of fair market value over tax basis for property held by the Company upon REIT election at January 1, 2004) on taxable sales of such built-in gain property during the first 10 years following the election to be taxed as a REIT. Accordingly, the provision for corporate income taxes relates principally to current and deferred taxes on certain property sales and on income from taxable REIT subsidiary operations.

Prohibited Transactions

As a REIT, the Company can be subject to a 100 percent tax on the gain resulting from “prohibited transactions.” The Company believes it did not engage in any prohibited transactions since it elected REIT status.

F-17

RAYONIER INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollar amounts in thousands unless otherwise stated) (Continued)

Like-Kind Exchanges

Under current tax law, the built-in gain tax from the sale of REIT property can be deferred and eliminated if sale proceeds from “relinquished” properties are reinvested in similar property consistent with the like-kind exchange (“LKE”) requirements of the Internal Revenue Code of 1986, as amended, and administrative guidance, as long as the “replacement” property is owned through the built-in gain period (10-year period which began on January 1, 2004). The LKE requirements do not restrict the Company’s ability to harvest timber on a pay-as-cut basis from such replacement property during the built-in gain period.

Provision for Income Taxes from Continuing Operations

The components of “Income from continuing operations, before income taxes” consist of U.S. income of $175.4 million, $194.6 million and $179.3 million, and foreign income of $2.6 million, $2.3 million and $10.9 million for the years ended December 31, 2008, 2007 and 2006, respectively.

The (provision for)/benefit from income taxes from continuing operations consisted of the following:

	2008			2007			2006
Current
U.S. federal	$	(16,335	)	$	(30,983	)	$	(36,915	)
State and local		(600	)		(1,138	)		(962	)
Foreign		1,367			(78	)		(478	)
		(15,568	)		(32,199	)		(38,355	)
Deferred
U.S. federal		605			5,868			19,369
State and local		(265	)		278			620
Foreign		(6,750	)		(877	)		(719	)
		(6,410	)		5,269			19,270
Changes in valuation allowance		(7,458	)		3,580			—
Total	$	(29,436	)	$	(23,350	)	$	(19,085	)

A reconciliation of the income tax provision at the U.S. statutory rate to the reported provision for income taxes follows:

	2008			%		2007			%		2006			%
Income tax provision from continuing operations at U.S. statutory rate	$	(62,308	)	(35.0	)	$	(68,918	)	(35.0	)	$	(66,577	)	(35.0	)
State and local taxes, net of federal benefit		(1,191	)	(0.7	)		(896	)	(0.5	)		(1,170	)	(0.6	)
REIT income not subject to federal tax		35,033		19.7			42,296		21.5			33,597		17.7
Foreign operations		—		—			150		0.1			2,109		1.1
Permanent differences/other		1,704		1.0			1,101		0.6			968		0.5
Income tax provision from continuing operations before discrete items		(26,762	)	(15.0	)		(26,267	)	(13.3	)		(31,073	)	(16.3	)
Taxing authority settlements and FIN 48 adjustments including adjustment of accrued interest		5,195		2.9			(4,370	)	(2.2	)		5,387		2.8
Change in valuation allowance		(7,457	)	(4.2	)		3,580		1.8			—		—
Reversal of prior year built-in gain reserve		1,497		0.9			2,137		1.0			4,186		2.2
Deferred tax adjustments		(4,091	)	(2.3	)		(502	)	(0.3	)		3,689		2.0
Return to accrual adjustment/other		2,182		1.2			2,072		1.1			(1,274	)	(0.7	)
Income tax provision from continuing operations as reported	$	(29,436	)	(16.5	)	$	(23,350	)	(11.9	)	$	(19,085	)	(10.0	)

        The effective tax rate, before discrete items, increased to 15.0 percent in 2008 compared to 13.3 percent in 2007 due to proportionately higher earnings from the Company’s taxable REIT subsidiary. The effective tax rate, before discrete items, decreased to 13.3 percent in 2007 compared to 16.3 percent in 2006 due to proportionately higher REIT earnings.

F-18

RAYONIER INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollar amounts in thousands unless otherwise stated) (Continued)

The Company’s effective tax rate is below the 35 percent U.S. statutory tax rate primarily due to tax benefits associated with (i) being a REIT, and (ii) LKE transactions. Partially offsetting these benefits is the loss of tax deductibility for (i) interest expense ($4.5 million in 2008), and (ii) corporate overhead expenses associated with REIT activities ($10.6 million in 2008).

Provision for Income Taxes from Discontinued Operations

In 2006, the Company reduced its environmental liabilities by $8.5 million related to its previously closed Southern Wood Piedmont Company (SWP) sites. The closures were originally accounted for as discontinued operations.

	2006			%
Income tax provision from discontinued operations at U.S. statutory rates	$	(2,988	)	(35.0	)
State and local income tax provision		(213	)	(2.5	)
Income tax provision from discontinued operations as reported	$	(3,201	)	(37.5	)

Deferred Taxes

Deferred income taxes result from recording revenues and expenses in different periods for financial reporting versus tax reporting. The nature of the temporary differences and the resulting net deferred tax asset (liability) at December 31, 2008 and 2007 were as follows:

	2008			2007
Gross deferred tax assets:
Liabilities for dispositions and discontinued operations	$	38,629		$	43,145
Pension, postretirement and other employee benefits		47,691			32,503
Foreign and state NOL carryforwards		16,901			15,419
State tax credit carryforwards		7,810			8,606
Original issue discount		941			1,355
Other		14,325			13,547
Total gross deferred tax assets		126,297			114,575
Less: Valuation allowance		(23,331	)		(14,070	)
Total deferred tax assets after valuation allowance		102,966			100,505
Gross deferred tax liabilities:
Accelerated depreciation		(54,702	)		(53,628	)
Pension and other employee benefits		(264	)		(7,780	)
Gains on timberland sales		(1,941	)		(4,497	)
Repatriation of foreign earnings		(3,278	)		—
Other		(13,522	)		(13,290	)
Total gross deferred tax liabilities		(73,707	)		(79,195	)
Net deferred tax asset	$	29,259		$	21,310
Current portion of deferred tax asset	$	7,491		$	10,964
Noncurrent portion of deferred tax asset		26,987			10,346
Current portion of deferred tax liability		(3,278	)		—
Noncurrent portion of deferred tax liability		(1,941	)		—
Net deferred tax asset	$	29,259		$	21,310

Included in the above table are foreign and state net operating loss (NOL) and state tax credit carryforwards. At December 31, 2008, the Company had New Zealand NOL carryforwards of $12.5 million that have a full valuation allowance of $3.8 million.

F-19

RAYONIER INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollar amounts in thousands unless otherwise stated) (Continued)

The Company has $228 million of state NOL carryforwards which generally have an expiration term of 15 years. These NOL carryforwards have a full valuation allowance of $13.1 million.

The Company also has Georgia state tax credits of $7.8 million which have an expiration term of 10 years. Upon re-evaluation in 2008, the Company increased the valuation allowance for state tax credits by $2.1 million to $6.5 million due to a change in estimate for the Georgia state tax.

The Company expects to realize the full benefit of the remaining deferred tax assets.

In 2008 and 2007, the Company recorded cash tax benefits of $3.2 million and $7.9 million, respectively, related to stock-based compensation. These amounts were credited directly to shareholders’ equity and are not included in the consolidated tax provisions.

Tax Statutes

The following table provides detail of the tax years that remain open to examination by the Internal Revenue Service (“IRS”) and other significant taxing jurisdictions:

Taxing Jurisdiction	Open Tax Periods
U.S. Internal Revenue Service	2005 – 2008
State of Florida	2003 – 2008
State of Georgia	2003 – 2008
New Zealand Inland Revenue	2004 – 2008

In the third quarter of 2008, the Company reached a settlement with the IRS regarding the disputed issue for its 2003 and 2004 tax years, resulting in the reversal of $3.7 million of federal tax liabilities previously established for these years.

The Company has other matters under review by various taxing authorities, including the examination of tax years 2005 and 2006 by the IRS. The Company believes its reported tax positions are technically sound and its uncertain tax position liabilities at December 31, 2008 adequately reflect the probable resolution of these items.

FIN 48 Disclosures

In accordance with the provisions of FIN 48, we recognize the impact of a tax position if a return’s position is “more likely than not” to prevail.

(a) A reconciliation of the beginning and ending unrecognized tax benefits for the two years ended December 31 is as follows:

	2008			2007
Balance at January 1,	$	11,030		$	5,102
(Decreases) increases related to prior year tax positions		(233	)		8,719
Increases related to current year tax positions		—			361
Payments		(3,156	)		—
Settlements		(3,767	)		(3,152	)
Reclassifications		32			—
Balance at December 31,	$	3,906		$	11,030

(b) The total amount of unrecognized tax benefits that, if recognized, would affect the effective tax rate from continuing operations at December 31, 2008 and 2007 is $2.8 million and $11.0 million, respectively.

(c) The Company recorded interest on the above unrecognized tax benefits of $0.4 million at December 31, 2008 and $2.9 million at December 31, 2007. The Company records interest (and penalties, if applicable) in non-operating expenses.

(d) It is reasonably possible that within 12 months of December 31, 2008 the following unrecognized tax benefits could significantly decrease:

(i) U.S. federal tax issues relating to foreign operations and foreign earnings repatriation.

• The event that would cause such a change is the completion of the IRS examination of tax year 2005.

• An estimate of the reasonably possible change is a decrease of $1.1 million.

(ii) U.S. state tax issues relating to the taxability of a timberland sale and the deductibility of certain expenditures.

F-20

RAYONIER INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollar amounts in thousands unless otherwise stated) (Continued)

• The event that would cause such a change is the acceptance of IRS examination results for tax years 2003-2004.

• An estimate of the reasonably possible change is a decrease of $0.8 million.

(e) It is reasonably possible that within 12 months of December 31, 2008 the following uncertain tax position could result in a change in tax benefits previously recognized:

(i) U.S. federal tax issues relating to foreign operations and foreign earnings repatriation.

• The event that would cause such a change is the completion of the IRS examination of tax year 2005.

• An estimate of the reasonably possible change is an increase of $5.5 million.

10. INCOME FROM CONTINUING OPERATIONS AND NET INCOME PER COMMON SHARE

Basic earnings per share (“EPS”) is calculated by dividing income from continuing operations or net income by the weighted average number of common shares outstanding during the year. Diluted EPS is calculated by dividing income from continuing operations or net income by the weighted average number of common shares outstanding adjusted to include the potentially dilutive effect of outstanding stock options, performance shares and restricted shares. In 2008, 2007 and 2006, the stock options that were excluded from the computation of diluted EPS due to their anti-dilutive effect totaled 862,681, 309,699 and 423,350, respectively.

The 2007 issuance of the Senior Exchangeable Notes did not have an impact in determining diluted shares since the stock price did not exceed the strike price of $54.81. See Note 12 – Debt for additional information.

The following table provides details of the calculation of basic and diluted EPS from continuing operations, discontinued operations and net income for 2008, 2007 and 2006:

	2008		2007		2006
Income from continuing operations	$	148,583	$	173,559	$	171,134
Income from discontinued operations		—		—		5,335
Net income	$	148,583	$	173,559	$	176,469
Shares used for determining basic earnings per common share		78,476,635		77,571,684		76,486,690
Dilutive effect of:
Stock options		585,681		965,499		1,263,194
Performance and restricted shares		366,917		383,100		408,807
Shares used for determining diluted earnings per common share		79,429,233		78,920,283		78,158,691
Basic earnings per common share:
Continuing operations	$	1.89	$	2.24	$	2.24
Discontinued operations		—		—		0.07
Net income	$	1.89	$	2.24	$	2.31
Diluted earnings per common share:
Continuing operations	$	1.87	$	2.20	$	2.19
Discontinued operations		—		—		0.07
Net income	$	1.87	$	2.20	$	2.26

F-21

RAYONIER INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollar amounts in thousands unless otherwise stated) (Continued)

11. INVENTORY

As of December 31, 2008 and 2007, Rayonier’s inventory included the following:

	2008		2007
Finished goods*	$	78,577	$	63,083
Work in progress		7,412		9,188
Raw materials		8,400		10,122
Manufacturing and maintenance supplies		2,477		1,898
Total inventory	$	96,866	$	84,291

* Includes $2.6 million and $5.8 million of HBU real estate held for sale at December 31, 2008 and 2007, respectively.

12. DEBT

Rayonier’s debt included the following at December 31, 2008 and 2007:

	2008			2007
Revolving credit facility borrowings at a weighted average interest rate of 3.12% and 7.25% at December 31, 2008 and 2007, respectively	$	100,000		$	55,000
Senior Exchangeable Notes due 2012 at a fixed interest rate of 3.75% *		276,252			270,815
Installment notes due 2009-2014 at fixed interest rates of 8.39% to 8.64% at December 31, 2008 **		327,579			327,579
Pollution control and industrial revenue bonds due 2009-2020 at variable interest rates of 1.3% to 1.725% at December 31, 2008		38,110			61,410
Pollution control and industrial revenue bonds due 2009-2015 at a fixed interest rate of 6.20% at December 31, 2008		5,270			5,855
Total debt		747,211			720,659
Less: Current maturities and short-term borrowings		(620	)		(55,585	)
Long-term debt	$	746,591		$	665,074

Principal payments due during the next five years and thereafter are as follows:

2009	$	122,642	**
2010		660
2011		193,762
2012		323,855	*
2013		795
Thereafter		129,245
Total Debt	$	770,959

* Due to the adoption of FSP APB 14-1, our Senior Exchangeable Notes were discounted by $24 million and $29 million as of December 31, 2008 and 2007, respectively, but upon maturity in 2012 the liability will be $300 million.

** Includes $122 million of debt due in 2009, but not included in current maturities as the Company intends and has the ability to refinance the debt with its revolving credit facility.

The Company has a $250 million unsecured revolving credit facility with an accordion feature which allows additional borrowings above $250 million, in $25 million increments, up to an aggregate $100 million, provided no default exists. The facility expires in 2011. The Company had $144 million (excluding the accordion feature) and $188 million of available borrowings at December 31, 2008 and 2007, respectively. In addition to the credit facility, the Company has on file with the Securities and Exchange Commission, a shelf registration statement to offer $500 million of new public debt and equity securities, of which $247 million was available at December 31, 2008 and 2007.

In October 2007, TRS issued $300 million of 3.75% Senior Exchangeable Notes due 2012. The notes are guaranteed by Rayonier Inc., and are non-callable. The $300 million in principal will be settled in cash and any excess exchange value will be settled at the

F-22

RAYONIER INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollar amounts in thousands unless otherwise stated) (Continued)

option of the Company in either cash or stock of Rayonier Inc. Note holders may convert their notes subject to certain conversion provisions including the market price of the Company’s common stock and the trading price of the convertible notes. The initial exchange rate is 18.24 shares per $1,000 principal based on an exchange price equal to 122 percent of the stock’s closing price of $44.93 on October 10, 2007, or $54.81 per share.

In separate transactions, TRS and Rayonier, respectively, purchased an exchangeable note hedge and sold warrants based on 5,472,991 underlying shares of Rayonier Inc. These transactions had the effect of increasing the conversion premium from 22 percent to 40 percent or to $62.90 per share. On exercise of the hedge, TRS will receive shares of Rayonier Inc. common stock equal to the difference between the then market price and the strike price of $54.81. The holders of the warrants will receive net shares from Rayonier if the share price is above $62.90 at maturity of the warrants.

The purchased hedge and sold warrants are not part of the terms of the notes and will not affect the note holders’ rights. Likewise, the note holders will not have any rights with respect to the hedge or the warrants. The purchased hedge and the sold warrants meet the definition of derivatives under SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities. However, because these instruments have been determined to be indexed to the Company’s own stock in accordance with EITF Issue No. 01-6, The Meaning of Indexed to a Company’s Own Stock, and have been recorded in shareholders’ equity in the Consolidated Balance Sheet (as determined under EITF Issue No. 00-19, Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company’s Own Stock), the instruments meet the scope exception of SFAS No. 133 and are not subject to the mark-to-market provisions of that standard.

The amounts related to the Senior Exchangeable Notes in the Condensed Consolidated Balance Sheets as of December 31, 2008 and 2007 were as follows:

	2008			2007
Liabilities:
Principal amount of debt	$	300,000		$	300,000
Unamortized discount		(23,748	)		(29,185	)
Net carrying amount of debt	$	276,252		$	270,815
Equity:
Common stock	$	19,243		$	19,243

The unamortized discount will be amortized through October 2012.

The amount of interest related to the convertible debt recognized in the Condensed Consolidated Statements of Income and Comprehensive Income as December 31, 2008 and 2007 were as follows:

	2008		2007
Contractual interest coupon	$	11,224	$	2,370
Amortization of debt discount		5,437		1,119
Total interest expense recognized	$	16,661	$	3,489

The effective interest rate on the liability component for the years ended December 31, 2008 and 2007 was 6.21%.

In connection with the Company’s installment notes and the $250 million revolving credit facility, covenants must be met, including ratios based on the facility’s definition of EBITDA (“Covenant EBITDA”). Covenant EBITDA consists of earnings from continuing operations before the cumulative effect of accounting changes and any provision for dispositions, income taxes, interest expense, depreciation, depletion, amortization and the non-cash cost basis of real estate sold. The Company’s dividend restriction covenant limits the sum of dividends in any period of four fiscal quarters to 90 percent of Covenant Funds from Operations (Covenant FFO) plus the aggregate amount of dividends permitted under Covenant FFO in excess of the amount of dividends paid during the prior four fiscal quarters. Covenant FFO is defined as Consolidated Net Income excluding gains or losses from debt restructuring and investments in marketable securities plus depletion, depreciation and amortization and the non-cash cost basis of real estate sold. Under a covenant relating to the $328 million of installment notes, RFR may not incur additional debt unless, at the time of incurrence, and after giving pro forma effect to the receipt and application of the proceeds of such debt, RFR meets or exceeds a

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RAYONIER INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollar amounts in thousands unless otherwise stated) (Continued)

minimum ratio of cash flow to fixed charges. RFR’s ability to make certain quarterly distributions to Rayonier Inc. is limited to an amount equal to RFR’s “available cash,” which consists of its opening cash balance plus proceeds from permitted borrowings. At December 31, 2008, the Company is in compliance with all covenants.

The covenants listed below, which are the most significant financial covenants in effect as of December 31, 2008, are calculated on a trailing 12-month basis:

	Covenant Requirement	Actual ratio at December 31, 2008	Favorable (Unfavorable)
Covenant EBITDA to consolidated interest expense should not be less than	2.50 to 1	8.93 to 1	6.43
Total debt to Covenant EBITDA should not exceed	4.00 to 1	1.91 to 1	2.09
RFR cash flow available for fixed charges to RFR fixed charges should not be less than	2.50 to 1	12.02 to 1	9.52
Dividends paid should not exceed 90 percent of Covenant FFO	90%	48%	42%

In addition to the financial covenants listed above, the installment notes, Senior Exchangeable Notes and credit facility include customary covenants that limit the incurrence of debt, the disposition of assets, and the making of certain payments between RFR and Rayonier among others. An asset sales covenant in the RFR installment note-related agreements requires the Company, subject to certain exceptions, to either reinvest cumulative timberland sales proceeds in excess of $100 million (the “excess proceeds”) in timberland-related investments or, once the amount of excess proceeds not reinvested exceeds $50 million, to offer the note holders prepayment of the notes ratably in the amount of the excess proceeds. The amount of excess proceeds was $0 at both December 31, 2008 and 2007.

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RAYONIER INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollar amounts in thousands unless otherwise stated) (Continued)

13. SHAREHOLDERS’ EQUITY

An analysis of shareholders’ equity for each of the three years ended December 31, 2008 is shown below:

	Common Shares					Retained Earnings			Accumulated Other Comprehensive Income/(Loss)			Shareholders’ Equity
	Shares		Amount
Balance, December 31, 2005	76,092,566		$	422,364		$	463,568		$	7,604		$	893,536
Net income	—			—			176,469			—			176,469
Dividends ($1.88 per share)	—			—			(144,049	)		—			(144,049	)
Issuance of shares under incentive stock plans	801,521			12,611			—			—			12,611
Stock-based compensation	—			12,078			—			—			12,078
Excess tax benefit on stock-based compensation	—			4,143			—			—			4,143
Repurchases of common shares	(14,261	)		(560	)		—			—			(560	)
Minimum pension liability adjustment	—			—			—			13,339			13,339
Impact of adopting SFAS No. 158	—			—			—			(52,815	)		(52,815	)
Foreign currency translation adjustment	—			—			—			3,226			3,226
Balance, December 31, 2006	76,879,826		$	450,636		$	495,988		$	(28,646	)	$	917,978
Net income	—			—			173,559			—			173,559
Dividends ($1.94 per share)	—			—			(150,929	)		—			(150,929	)
Issuance of shares under incentive stock plans	1,412,781			18,891			—			—			18,891
Equity component of convertible debt	—			19,242			—			—			19,242
Warrants and hedge, net	—			(355	)		—			—			(355	)
Stock-based compensation	—			13,478			—			—			13,478
Excess tax benefit on stock-based compensation	—			7,907			—			—			7,907
Repurchases of common shares	(75,911	)		(3,150	)		—			—			(3,150	)
Net loss from pension and postretirement plans	—			—			—			(3,997	)		(3,997	)
Foreign currency translation adjustment	—			—			—			7,005			7,005
Balance, December 31, 2007	78,216,696		$	506,649		$	518,618		$	(25,638	)	$	999,629
Net income	—			—			148,583			—			148,583
Dividends ($2.00 per share)	—			—			(157,270	)		—			(157,270	)
Issuance of shares under incentive stock plans	690,031			8,265			—			—			8,265
Stock-based compensation	—			13,344			—			—			13,344
Excess tax benefit on stock-based compensation	—			3,248			—			—			3,248
Repurchase of common shares	(92,296	)		(3,979	)		—			—			(3,979	)
Net loss from pension and postretirement plans	—			—			—			(65,527	)		(65,527	)
Retiree medical benefit plan amendment (Note 20)	—			—			—			16,377			16,377
Foreign currency translation adjustment	—			—			—			(23,508	)		(23,508	)
Other	—			(225	)		—			—			(225	)
Balance, December 31, 2008	78,814,431		$	527,302		$	509,931		$	(98,296	)	$	938,937

The table below summarizes the tax characteristics of the cash dividend paid to shareholders for the three years ended December 31, 2008:

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RAYONIER INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollar amounts in thousands unless otherwise stated) (Continued)

	2008		2007		2006
Capital gain	$	1.82	$	1.94	$	1.88
Non-taxable return of capital		0.18		—		—
Total cash dividend per common share	$	2.00	$	1.94	$	1.88

14. ACCUMULATED OTHER COMPREHENSIVE INCOME/(LOSS)

Accumulated other comprehensive income/(loss) was comprised of the following as of December 31, 2008 and 2007:

	2008			2007
Foreign currency translation adjustments	$	10,789		$	34,297
Unrecognized components of pension and post-retirement plans, net of tax		(109,085	)		(59,935	)
Total	$	(98,296	)	$	(25,638	)

The decrease in foreign currency translation adjustments was due to the weakening of the New Zealand dollar against the U.S. dollar.

The increase in the unrecognized components of employee benefit plans was mainly due to losses on pension assets as a result of the significant decline in the stock market in 2008, partially offset by a $16.4 million benefit from a retiree medical benefit plan amendment. See Note 20 – Employee Benefit Plans for further discussion.

15. LIABILITIES FOR DISPOSITIONS AND DISCONTINUED OPERATIONS

The Company’s dispositions and discontinued operations include its Port Angeles, Washington former dissolving pulp mill site, which was closed in 1997; Southern Wood Piedmont Company (SWP), which ceased operations in 1989 except for investigation and remediation activities; the Eastern Research Division (ERD), which primarily relates to a former research and development facility in Whippany, New Jersey which ceased operations in 1981; and other miscellaneous assets held for disposition. SWP owns or has liability for ten inactive former wood treating sites that are subject to the Resource Conservation and Recovery Act (RCRA), the Comprehensive Environmental Response, Compensation and Liability Act of 1980 (CERCLA) and/or other similar federal or state statutes relating to the investigation and remediation of environmentally-impacted sites.

An analysis of activity in the liabilities for dispositions and discontinued operations for the two years ended December 31, 2008 follows:

	December 31, 2008			December 31, 2007
Balance, January 1,	$	113,685		$	122,516
Expenditures charged to liabilities		(7,660	)		(8,575	)
Reductions to liabilities		(1,450	)		(256	)
Balance, end of year		104,575			113,685
Less: Current portion		(8,214	)		(10,069	)
Non-current portion	$	96,361		$	103,616

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RAYONIER INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollar amounts in thousands unless otherwise stated) (Continued)

The Company discloses specific site liabilities that exceed 10 percent of the total liabilities for dispositions and discontinued operations at December 31, 2008. An analysis of the activity for the two years ended December 31, 2008 is as follows:

Sites	Activity (in millions) as of December 31,
	2006		Expenditures			Revisions to Estimates			2007		Expenditures			Revisions to Estimates			2008
Augusta, GA	$	13.6	$	(0.8	)	$	1.1		$	13.9	$	(0.8	)	$	0.9		$	14.0
Spartanburg, SC		14.1		(0.6	)		2.0			15.5		(0.5	)		0.6			15.6
East Point, GA		11.4		(0.5	)		2.2			13.1		(0.8	)		0.7			13.0
Other SWP sites		68.7		(4.6	)		(5.5	)		58.6		(3.5	)		(3.2	)		51.9
Total SWP		107.8		(6.5	)		(0.2	)		101.1		(5.6	)		(1.0	)		94.5
All other sites		14.7		(2.1	)		—			12.6		(2.1	)		(0.4	)		10.1
TOTAL	$	122.5	$	(8.6	)	$	(0.2	)	$	113.7	$	(7.7	)	$	(1.4	)	$	104.6

A brief description of each of these sites is as follows:

Augusta, Georgia - SWP operated a wood treatment plant at this site from 1928 to 1988. The majority of visually contaminated surface soils have been removed, and remediation activities currently consist of a groundwater recovery system. The site operates under a 10-year hazardous waste permit issued pursuant to RCRA, which expires in 2014. Current cost estimates could change if recovery or discharge volumes increase or decrease drastically, or if changes to current remediation activities are required in the future. Total spending-to-date at December 31, 2008 was $63.1 million. The Company’s recorded liabilities cover its obligations for estimated remaining remedial and monitoring activities through 2028.

Spartanburg, South Carolina - SWP operated a wood treatment plant at this site from 1925 to 1989. Remediation activities include: (1) a recovery system and biological wastewater treatment plant, (2) an ozone-sparging system treating soil and groundwater and (3) an ion-exchange resin system treating groundwater. The cost estimate includes potential remediation of an adjoining area also owned by SWP, which appears to have received runoff from a portion of the former operating plant. Total spending-to-date at December 31, 2008 was $35.6 million. The Company’s recorded liabilities cover its obligations for estimated remaining remedial and monitoring activities through 2028.

East Point, Georgia - SWP operated a wood treatment plant at this site from 1908 to 1984. This site operates under a 10-year RCRA hazardous waste permit, which is currently in the renewal process. Active remedial measures are currently ongoing, although additional remedial measures may be necessary in the future. Total spending-to-date at December 31, 2008 was $16.4 million. The Company’s recorded liabilities cover its obligations for estimated remaining remedial and monitoring activities through 2028. For information about current legal proceedings involving this site, see Note 16 – Contingencies.

The Company estimates that expenditures for environmental investigation, remediation, monitoring and other costs for all dispositions and discontinued operations will be approximately $8 million in 2009 and $10 million in 2010. Such costs will be charged against its liabilities for dispositions and discontinued operations, which include environmental investigation, remediation and monitoring costs. Subject to the factors described in the last paragraph of this footnote, the Company believes established liabilities are sufficient for costs expected to be incurred over the next 20 years with respect to its dispositions and discontinued operations. Remedial actions for these sites vary, but can include, among other remedies, on-site (and in certain cases off-site) removal or treatment of contaminated soils, recovery and treatment/remediation of groundwater, and source remediation and/or control.

In addition, the Company is exposed to the risk of reasonably possible additional losses in excess of the established liabilities. As of December 31, 2008, this amount could range up to $32 million and arises from uncertainty over the availability or effectiveness of certain remediation technologies, additional or different contamination that may be discovered, development of new or improved environmental remediation technologies, changes in applicable law and the exercise of discretion in interpretation of applicable law and regulations by governmental agencies.

The reliability and precision of cost estimates for these sites and the amount of actual future environmental costs can be impacted by various factors, including but not limited to: significant changes in discharge or treatment volumes, requirements to perform additional or different remediation, changes in environmental remediation technologies, the extent of groundwater contamination migration, additional findings of contaminated soil or sediment off-site, remedy selection, and the outcome of negotiations with federal and state agencies. Additionally, the potential for Brownfield (environmentally impacted site considered for re-development) treatment of a site, or other similar projects, could accelerate expenditures as well as impact the amount and/or type of remediation

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RAYONIER INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollar amounts in thousands unless otherwise stated) (Continued)

required, as could new laws, regulations and the exercise of discretion in interpretation of applicable law and regulations by governmental agencies. Based on information currently available, the Company does not believe that any future changes in estimates, if necessary, would materially affect its consolidated financial position or results of operations.

16. CONTINGENCIES

Rayonier is engaged in various legal actions, including certain environmental proceedings that are discussed more fully in Note 15 – Liabilities for Dispositions and Discontinued Operations.

The Company has been named as a defendant in various other lawsuits and claims arising in the normal course of business. While the Company has procured reasonable and customary insurance covering risks normally occurring in connection with its businesses, it has in certain cases retained some risk through the operation of self-insurance, primarily in the areas of workers’ compensation, property insurance, and general liability. These other lawsuits and claims, either individually or in the aggregate, are not expected to have a material effect on the Company’s financial position, results of operations, or cash flow.

Legal Proceedings

Combe Fill South - In 1998, the U.S. Environmental Protection Agency (EPA) and the New Jersey Department of Environmental Protection (DEP) filed separate lawsuits against Rayonier Inc. and approximately 30 other defendants, in the U.S. District Court, District of New Jersey, seeking recovery of current and future response costs and natural resource damages under applicable federal and state law relating to a contaminated landfill in Chester Township, New Jersey, referred to as Combe Fill South (Combe). It is alleged that the Company’s former research and development facility in Whippany, New Jersey sent small quantities of dumpster waste, via a contract hauler, to Combe in the 1960s and early 1970s. The Company is working with other defendants in a joint defense group, which subsequently filed third-party actions against over 200 parties seeking contribution. A court-ordered mediation process has been ongoing. In second quarter 2008, a tentative settlement of this matter was reached, subject to finalization of documentation and court approval, which would result in a liability to the Company of approximately $0.3 million. The Company believes that its liabilities at December 31, 2008 adequately reflect the probable costs to be incurred upon the ultimate resolution of these matters.

Jesup Mill Effluent Issues - In March of 2008, the Company and the Environmental Protection Division of the Georgia Department of Natural Resources (EPD) entered into a consent order to resolve certain potential compliance issues relating to the Jesup mill’s permitted effluent discharged to the Altamaha River. Under the consent order, Rayonier has agreed to implement a color reduction plan which will include installation of additional brown stock washing capacity (to better remove residual pulping liquors from cooked wood pulp) and oxygen delignification technology (which reduces the lignin content in the pulp prior to bleaching), spill recovery systems and modifications to certain operating practices. These projects are expected to be completed by the end of 2013, pursuant to a time frame set forth in the consent order, at a total cost of approximately $80.2 million. Through December 31, 2008, approximately $13.4 million has been spent. The consent order also provides for decreasing color limits in the mill’s effluent over the seven year period as projects are completed. No citations, fines or penalties are imposed by the consent order, except that stipulated penalties may be assessed by EPD in the event that the projects are not completed on the agreed schedule.

In December of 2008, Rayonier received a “sixty day letter” from lawyers representing a non-profit environmental organization, Altamaha Riverkeeper, Inc. (ARK), threatening a citizen’s suit under the federal Clean Water Act (the CWA) and analogous state law if ARK and Rayonier are unable to settle their differences within sixty days of the date of the letter. ARK primarily claims that the color and odor of the mill’s effluent violates provisions of the federal Clean Water Act and the Georgia Water Quality Control Act, and further asserts that the consent order between EPD and the Company does not appropriately address the issues of concern. Rayonier believes that it has good defenses to ARK’s claims including, without limitation, that the mill is in compliance with both applicable law and its wastewater discharge permit issued by EPD, and that the consent order constitutes a bar to the threatened citizen suit under the applicable provisions of the CWA. However, to avoid the cost and risks of litigation, the Company has engaged in discussions with ARK to explore whether a settlement is possible. Assuming that no settlement is reached, ARK has the right to file a lawsuit against the Company in respect of its claims, although as of the date of this filing no such suit has been filed.

East Point, Georgia Notice of Violation (“NOV”) - On March 28, 2008, SWP received an NOV and Proposed Consent Order (the “Order”) from EPD relating to its East Point, Georgia site. The Order asserted that SWP violated conditions in its permit issued under RCRA, specifically related to SWP’s alleged failure to report the presence of oil (referred to as DNAPL, or dense non-aqueous phase liquid) in a monitoring well. Under the terms of the Order, EPD proposed a fine of $0.8 million and demanded that SWP perform a facility-wide remedial investigation; also, based on such investigation, EPD has required that SWP prepare a new corrective action plan for the facility. Finally, EPD requested an increase in SWP’s financial assurance for the site based on a new estimate to be completed in the future. (Note that financial assurance is provided for SWP via a Rayonier Inc. guaranty.) The Company responded to the proposed NOV and denied liability for any permit violations or civil penalty. The Company is currently in discussions with

F-28

RAYONIER INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollar amounts in thousands unless otherwise stated) (Continued)

EPD to resolve the NOV and agree upon a specific path forward regarding final remedy for the site. If no acceptable resolution can be reached, the Company will vigorously defend itself in this matter. The Company believes its liabilities at December 31, 2008 adequately reflect the probable costs to be incurred upon the ultimate resolution of these matters.

17. GUARANTEES

The Company provides financial guarantees as required by creditors, insurance programs, and state and foreign governmental agencies. As of December 31, 2008, the following financial guarantees were outstanding:

Financial Commitments (000's)	Maximum Potential Payment		Carrying Amount of Liability
Standby letters of credit (1)	$	48,159	$	39,191
Guarantees (2)		4,521		63
Surety bonds (3)		8,154		1,321
Total financial commitments	$	60,834	$	40,575
(1)    Approximately $39 million of the standby letters of credit serve as credit support for industrial revenue bonds. The remaining letters of credit support various insurance related agreements, primarily workers’ compensation and pollution liability policy requirements. These letters of credit will expire at various dates during 2009 and will be renewed as required.
(2)    In conjunction with the sale of timberlands to the New Zealand joint venture in October 2005, the Company guaranteed five years of Crown Forest license obligations. The JV is the primary obligor and has posted a bank performance bond with the New Zealand government. If the JV fails to pay the obligation, the New Zealand government will demand payment from the bank that posted the bond. If the bank defaults on the bond, the Company would then have to perform. As of December 31, 2008, two annual payments, of $1.0 million each, remain. This guarantee expires in 2010.
In conjunction with a timberland sale and note monetization in the first quarter of 2004, the Company issued a make-whole agreement pursuant to which it guaranteed $2.5 million of obligations of a qualified special purpose entity that was established to complete the monetization. At December 31, 2008, the Company has recorded a de minimus liability to reflect the fair market value of its obligation to perform under the make-whole agreement.
(3)    Rayonier issues surety bonds primarily to secure timber harvesting obligations in the State of Washington and to provide collateral for the Company’s workers’ compensation self-insurance program in that state. These surety bonds expire at various dates during 2009 and are expected to be renewed as required.

18. COMMITMENTS

The Company leases certain buildings, machinery and equipment under various operating leases. Total rental expense for operating leases amounted to $2.9 million, $3.5 million, and $3.7 million in 2008, 2007 and 2006, respectively. The Company also has long-term leases on certain timberlands in the Southern U.S. These leases typically have initial terms of approximately 30 to 65 years, with renewal provisions in some cases. Such leases are generally non-cancelable and require minimum annual rental payments. Total expenditures for long-term leases and deeds on timberlands amounted to $7.5 million, $7.0 million, and $5.4 million in 2008, 2007 and 2006, respectively.

At December 31, 2008, the future minimum payments under non-cancelable operating and timberland leases were as follows:

	Operating Leases		Timberland Leases*		Total
2009	$	3,502	$	7,120	$	10,622
2010		2,578		7,092		9,670
2011		1,120		6,951		8,071
2012		789		6,938		7,727
2013		756		6,931		7,687
Thereafter through 2036		1,649		70,625		72,274
	$	10,394	$	105,657	$	116,051

* The majority of timberland leases are subject to escalation clauses based on either the Consumer Price Index or Producer Price Index.

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RAYONIER INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollar amounts in thousands unless otherwise stated) (Continued)

19. INCENTIVE STOCK PLANS

At December 31, 2008, the Company had two stock-based employee compensation plans. The 1994 Rayonier Incentive Stock Plan (the 1994 Plan) and the 2004 Rayonier Incentive Stock and Management Bonus Plan (the 2004 Plan) both provided 4.5 million shares for the grant of incentive stock options, non-qualified stock options, stock appreciation rights, performance shares and restricted stock, subject to certain limitations. The Company has issued non-qualified stock options, performance shares and restricted stock under both of the plans. New shares of stock are issued upon the exercise of stock options, the granting of restricted stock, and the vesting of performance shares.

Total compensation cost recorded in “Selling and general expenses” for stock-based compensation was $13.0 million, $13.5 million and $12.1 million for the years ended December 31, 2008, 2007 and 2006, respectively. For the year ended December 31, 2008, compensation expense related to our Jesup location non-compete agreements of $0.4 million was recorded in “Cost of sales.”

Tax benefits recognized related to stock-based compensation expense for the three years ended December 31, 2008 were $3.1 million, $2.9 million and $2.8 million, respectively.

Fair Value Calculations by Award

Restricted Stock

Restricted stock granted under the 1994 and 2004 Plans generally vests upon completion of a three-year period. The fair value of each share granted is equal to the share price of the Company’s stock on the date of grant. During 2008, 2007 and 2006, 38,696, 114,172 and 16,761, restricted shares were granted at a weighted average price of $45.62, $44.57 and $39.61, respectively, per share. As of December 31, 2008, there was $3.1 million of unrecognized compensation cost related to the Company’s outstanding restricted stock. This cost is expected to be recognized over a weighted average period of 1.7 years. The total intrinsic value of restricted stock outstanding was $4.4 million, $6.9 million and $3.8 million at December 31, 2008, 2007 and 2006, respectively. The total fair value of restricted stock that vested during the years ended December 31, 2008, 2007 and 2006 was $1.0 million, $1.5 million and $0.8 million, respectively. During the three years ended December 31, 2008, 2007 and 2006, $0.4 million, $0.5 million and $0.3 million, in cash was used to pay the minimum withholding tax requirements, respectively, in lieu of receiving common shares.

A summary of the Company’s non-vested restricted shares is presented below:

	2008
	Number of Shares		Weighted Average Grant Date Fair Value
Non-vested Restricted Shares at January 1,	131,672		$	43.52
Granted	38,696			45.62
Cancelled	(3,000	)		45.59
Vested	(26,672	)		39.29
Non-vested Restricted Shares at December 31,	140,696			44.86

Performance Shares

The Company’s performance shares generally vest upon completion of a three-year period. The number of shares, if any, that are ultimately awarded is contingent upon Rayonier’s total shareholder return versus selected peer group companies. Under SFAS 123(R), the performance share payout is based on a market condition and as such, the awards are valued using a Monte Carlo simulation model. The model generates the fair value of the award at the grant date.

        The 1994 and 2004 Plans allow for the cash settlement on the minimum required withholding tax on performance share awards. During the three years ended December 31, 2008, $3.2 million, $2.7 million and $3.9 million of cash was used to pay the minimum withholding tax requirements, respectively, in lieu of receiving common shares. In 2008, 2007 and 2006, 445,778, 386,925 and 259,000 common shares of Company stock were reserved for performance shares, with grant-date fair values of $48.92, $44.00 and $36.25, respectively. As of December 31, 2008, there was $11.6 million of unrecognized compensation cost related to the Company’s performance share awards. This cost is expected to be recognized over a weighted average period of 1.7 years. The total intrinsic value of outstanding performance shares at December 31, 2008, 2007 and 2006 was $19.3 million, $28.3 million and $23.2 million, respectively. The total fair value of shares that vested during the years ended December 31, 2008, 2007 and 2006 was $6.2 million, $7.5 million and $5.8 million, respectively.

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RAYONIER INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollar amounts in thousands unless otherwise stated) (Continued)

Expected volatility and dividend yield were estimated using daily returns on the Company’s common stock for the three-year period ending on the grant date. The following chart provides a tabular overview of the assumptions used in calculating the fair value of the awards granted in 2008, 2007 and 2006:

	2008		2007		2006
Expected volatility	22.3	%	19.1	%	21.2	%
Dividend yield	4.3	%	4.8	%	4.4	%
Risk-free rate	3.1	%	4.6	%	4.4	%

A summary of the status of the Company’s outstanding performance shares as of and for the year ended December 31, 2008 is presented below:

	2008
	Number of Shares		Weighted Average Grant Date Fair Value
Outstanding Performance Shares at January 1,	599,068		$	37.55
Granted	254,730			48.92
Shares Distributed	(230,695	)		32.27
Cancelled	(8,693	)		39.13
Outstanding Performance Shares at December 31,	614,410			44.22

Non-Qualified Employee Stock Options

The exercise price of each non-qualified stock option granted under both the 1994 and 2004 plans is equal to the closing market price of the Company’s stock on the grant date. Under the 1994 plan, the maximum term is 10 years and two days from the grant date while under the 2004 Plan, the maximum term is 10 years from the grant date. Awards vest ratably over three years. Under SFAS 123(R), the fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model. The expected volatility is based on historical volatility for each grant and is calculated using the historical change in the daily market price of the Company’s common stock over the expected life of the award. The expected life is based on prior exercise behavior. The Company has elected to value each grant in total and recognize the expense for stock options on a straight-line basis over three years.

The following chart provides a tabular overview of the weighted average assumptions and related fair value calculations of options granted for the three years ended December 31:

	2008			2007			2006
Expected volatility		23.8	%		28.4	%		30.2	%
Dividend yield		4.3	%		4.5	%		4.6	%
Risk-free rate		3.5	%		5.8	%		4.3	%
Expected life (in years)		5.7			6.5			6.3
Fair value per share of options granted	$	7.58		$	9.72		$	9.03
Fair value of options granted (in thousands of dollars)	$	2,532		$	2,723		$	3,600

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RAYONIER INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollar amounts in thousands unless otherwise stated) (Continued)

A summary of the status of the Company’s stock options as of and for the year ended December 31, 2008 is presented below:

	2008
	Number of Shares		Weighted Average Exercise Price (per common share)		Weighted Average Remaining Contractual Term (in years)	Aggregate Intrinsic Value (in thousands)
Options outstanding at January 1,	2,585,404		$	27.84
Granted	334,040			46.56
Exercised	(423,640	)		19.51
Canceled	(12,204	)		39.69
Options outstanding at December 31,	2,483,600			31.72	6.0	$	11,005
Options vested and expected to vest as of December 31,	2,479,645		$	31.69	6.0	$	11,005
Options exercisable at December 31,	1,989,987		$	28.58	5.4	$	11,005

The total intrinsic value of options exercised during the years ended December 31, 2008, 2007 and 2006 was $11.3 million, $30.4 million and $14.7 million, respectively. The total fair value of options that vested during the years ended December 31, 2008, 2007 and 2006 was $2.7 million, $2.9 million, $2.9 million, respectively. As of December 31, 2008, there was $2.1 million of unrecognized compensation cost related to the Company’s stock options. This cost is expected to be recognized over a weighted average period of 0.7 years.

20. EMPLOYEE BENEFIT PLANS

The Company has four qualified non-contributory defined benefit pension plans covering substantially all of its employees and an unfunded plan that provides benefits in excess of amounts allowable under current tax law in the qualified plans. Employee benefit plan liabilities are calculated using actuarial estimates and management assumptions. These estimates are based on historical information, along with certain assumptions about future events. Changes in assumptions, as well as changes in actual experience, could cause the estimates to change.

In September 2008, the Company changed its postretirement medical plan for active and retired salaried employees to shift retiree medical costs to the plan participants over a three year phase-out period. Accordingly, at the beginning of 2012, the Company’s intent is to no longer incur retiree medical costs for retired salary plan participants. The change was accounted for as a negative plan amendment and curtailment which resulted in a reduction to the retiree medical liability. The net impact of the reduction was an unrecognized gain in accumulated other comprehensive income of $7.7 million which will be amortized over 1.9 years, the average remaining service period of the remaining active participants.

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RAYONIER INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollar amounts in thousands unless otherwise stated) (Continued)

The following tables set forth the change in the projected benefit obligation and plan assets and reconcile the funded status and the amounts recognized in the Consolidated Balance Sheets for the pension and postretirement benefit plans for the years ended December 31:

	Pension						Postretirement
	2008			2007			2008			2007
Change in Projected Benefit Obligation
Projected benefit obligation at beginning of year	$	273,523		$	251,055		$	46,558		$	45,354
Service cost		6,872			6,948			656			670
Interest cost		16,569			14,779			2,182			2,623
Actuarial loss (gain)		3,739			12,566			(276	)		374
Plan amendments		—			—			(24,039	)		—
Benefits paid		(13,199	)		(11,825	)		(2,855	)		(2,463	)
Projected benefit obligation at end of year	$	287,504		$	273,523		$	22,226		$	46,558
Change in Plan Assets
Fair value of plan assets at beginning of year	$	263,886		$	237,574		$	—		$	—
Actual return on plan assets		(73,213	) *		17,888			—			—
Employer contributions		9,324			20,761			2,855			2,463
Benefits paid		(13,199	)		(11,825	)		(2,855	)		(2,463	)
Other expense		(1,366	)		(512	)		—			—
Fair value of plan assets at end of year	$	185,432		$	263,886		$	—		$	—
Funded Status at End of Year:
Net accrued benefit cost	$	(102,072	)	$	(9,637	)	$	(22,226	)	$	(46,558	)
Amounts Recognized in the Consolidated Balance Sheets Consist of:
Noncurrent assets	$	—		$	13,891		$	—		$	—
Current liabilities		(1,452	)		(756	)		(2,592	)		(3,254	)
Noncurrent liabilities		(100,620	)		(22,772	)		(19,634	)		(43,304	)
Net amount recognized	$	(102,072	)	$	(9,637	)	$	(22,226	)	$	(46,558	)
*       Loss due to the significant decline in the stock market in 2008.

Net gains or losses and prior service costs or credits recognized in other comprehensive income for the year ended December 31, 2008 are as follows:

	Pension						Postretirement
	2008			2007			2008		2007
Net (losses) gains	$	(99,390	)	$	(13,595	)	$	276	$	(374	)
Prior service cost		—			—			—		—
Negative plan amendment		—			—			24,039		—

Net gains or losses and prior service costs or credits reclassified from other comprehensive income and recognized as a component of pension and postretirement expense for the year ended December 31, 2008 are as follows:

	Pension				Postretirement
	2008		2007		2008			2007
Amortization of losses	$	4,845	$	4,158	$	2,838		$	1,267
Amortization of prior service cost		1,426		1,451		(2,642	)		777

Net gains or losses and prior service costs or credits that have not yet been included in pension and postretirement expense as of

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RAYONIER INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollar amounts in thousands unless otherwise stated) (Continued)

December 31, 2008 and 2007 have been recognized as a component of ending accumulated other comprehensive income (AOCI) as follows:

	Pension						Postretirement
	2008			2007			2008			2007
Prior service cost	$	(6,159	)	$	(7,585	)	$	14,281		$	(7,115	)
Net losses		(147,916	)		(53,370	)		(14,848	)		(17,962	)
Deferred income tax benefit		45,381			18,103			176			7,994
AOCI	$	(108,694	)	$	(42,852	)	$	(391	)	$	(17,083	)

The accumulated benefit obligation for all of the Company’s defined benefit plans was $271.3 million and $256.1 million at December 31, 2008 and 2007, respectively.

For pension and postretirement plans with accumulated benefit obligations in excess of plan assets, the following table sets forth the projected and accumulated benefit obligations and the fair value of plan assets for the years ended December 31:

	2008		2007
Projected benefit obligation	$	309,730	$	67,498
Accumulated benefit obligation		271,259		18,701
Fair value of plan assets		185,432		—

The following tables set forth the components of net pension and postretirement benefit cost that have been recognized during the three years ended December 31:

	Pension									Postretirement
	2008			2007			2006			2008			2007		2006
Components of Net Periodic Benefit Cost
Service cost	$	6,872		$	6,948		$	7,409		$	656		$	670	$	640
Interest cost		16,569			14,779			13,988			2,182			2,623		2,470
Expected return on plan assets		(21,072	)		(18,406	)		(16,562	)		—			—		—
Amortization of prior service cost		1,426			1,451			1,497			(2,642	)		777		777
Amortization of losses		4,845			4,158			5,659			2,838			1,267		1,310
Net periodic benefit cost	$	8,640		$	8,930		$	11,991		$	3,034		$	5,337	$	5,197

The estimated pre-tax net loss and prior service cost for the defined benefit pension plans that will be amortized from AOCI into net periodic benefit cost in 2009 are $5.2 million and $1.4 million, respectively. The estimated pre-tax loss and prior service cost benefit for the defined benefit postretirement plans that will be amortized from AOCI into net periodic benefit cost in 2009 are $6.2 million and $9.5 million, respectively.

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RAYONIER INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollar amounts in thousands unless otherwise stated) (Continued)

The following table sets forth the principal assumptions inherent in the determination of benefit obligations and net periodic benefit cost of the pension and postretirement benefit plans as of December 31:

	Pension				Postretirement
	2008		2007		2008		2007
Assumptions used to determine benefit obligations at December 31:
Discount rate	6.15	%	6.00	%	6.15	%	6.00	%
Rate of compensation increase	4.50	%	4.50	%	—		—
Assumptions used to determine net periodic benefit cost for years ended December 31:
Discount rate	6.00	%	6.00	%	6.00	%	6.00	%
Expected long-term return on plan assets	8.50	%	8.50	%	—		—
Rate of compensation increase	4.50	%	4.50	%	—		—

At December 31, 2008, the plans’ discount rate was 6.15 percent, which closely approximates interest rates on high quality, long-term obligations. Effective December 31, 2008, the expected return on plan assets remained at 8.5 percent, which is based on historical and expected long-term rates of return on broad equity and bond indices and consideration of the actual annualized rate of return since the Company’s spin-off from ITT in 1994. The Company’s external consultants utilize this information in developing assumptions for returns, risks and correlation of asset classes which are then used to establish the asset allocation ranges.

The following table sets forth the assumed health care cost trend rates at December 31:

	Postretirement
	2008		2007
Health care cost trend rate assumed for next year	9.00	%	10.00	%
Rate to which the cost trend rate is assumed to decline (ultimate trend rate)	5.00	%	4.75	%
Year that the rate reaches the ultimate trend rate	2012		2014

Assumed health care cost trend rates have a significant effect on the amounts reported for the postretirement benefit plans. The following table shows the effect of a one percentage point change in assumed health care cost trends:

Effect on:	1 Percent
	Increase		Decrease
Total of service and interest cost components	$	115	$	(99	)
Accumulated postretirement benefit obligation		1,142		(1,006	)

Investment of Plan Assets

The Company’s pension plans’ asset allocation at December 31, 2008 and 2007, and target allocation ranges by asset category are as follows:

Asset Category	Percentage of Plan Assets				Target Allocation Range
	2008		2007
Domestic Equity Securities	47.0	%	39.8	%	40-45	%
International Equity Securities	19.0	%	30.6	%	20-30	%
Domestic Fixed Income Securities	23.0	%	22.0	%	25-30	%
International Fixed Income Securities	8.0	%	4.6	%	4-6	%
Real Estate	3.0	%	3.0	%	2-4	%
Total	100	%	100	%

The Rayonier Pension Fund Trust and Investment Committee and the Finance Committee of the Board of Directors oversee the pension plans’ investment program which is designed to maximize returns and provide sufficient liquidity to meet plan obligations

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RAYONIER INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollar amounts in thousands unless otherwise stated) (Continued)

while maintaining acceptable risk levels. The investment approach emphasizes diversification by allocating the plans’ assets among asset categories and selecting investment managers whose various styles will be minimally correlative with each other. Investments within the equity categories may include large capitalization, small capitalization and emerging market securities, while the international fixed income portfolio may include emerging markets, debt. Pension assets did not include a direct investment in Rayonier common stock at December 31, 2008 and 2007.

Cash Flows

Expected benefit payments in future years are as follows:

	Pension Benefits		Postretirement Benefits
2009	$	14,348	$	2,592
2010		15,078		2,463
2011		15,822		2,083
2012		16,643		1,642
2013		17,578		1,701
2014 - 2018		98,738		7,887

The Company is required to make pension contributions of approximately $6 million in 2009, but may elect to contribute more.

Defined Contribution Plans

The Company provides defined contribution plans to all of its hourly and salaried employees. Company contributions charged to expense for these plans were $2.4 million, $2.7 million and $2.6 million in 2008, 2007 and 2006, respectively. Rayonier Hourly and Salaried Defined Contribution Plans include Rayonier common stock with a fair market value of $56.1 million and $76.5 million at December 31, 2008 and 2007, respectively.

The Company closed enrollment in its pension and postretirement medical plans to salaried employees hired after December 31, 2005. These salaried employees are immediately eligible to participate in the Company’s 401(k) plan and receive an enhanced contribution. Company contributions related to this plan enhancement in 2008, 2007, and 2006 were $0.3 million, $0.2 million, and $0.1 million, respectively.

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RAYONIER INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollar amounts in thousands unless otherwise stated) (Continued)

21. QUARTERLY RESULTS FOR 2008 and 2007 (UNAUDITED)

(Thousands of dollars, except per share amounts)

	Quarter Ended										Total Year
	March 31		June 30			Sep. 30		Dec. 31
2008
Sales	$	284,193	$	304,867		$	317,465	$	364,523		$	1,271,048
Operating Income		60,495		53,585			49,001		63,355			226,436
Net Income		39,698		36,564			28,902		43,419			148,583
Basic EPS		0.51		0.47			0.37		0.55			1.89
Diluted EPS		0.50		0.46			0.36		0.55			1.87
2007
Sales	$	299,729	$	300,351		$	334,215	$	290,359		$	1,224,654
Operating Income		55,160		55,723	(1)		92,634		43,078	(1)		246,595
Net Income		35,080		33,311	(1)		71,457		33,711	(1)		173,559
Basic EPS		0.45		0.43			0.92		0.43			2.24
Diluted EPS		0.45		0.42			0.90		0.43			2.20
(1)    Includes loss related to wildfires of $10.1 million and $0.8 million in the second and fourth quarters of 2007, respectively.

22. CONSOLIDATING FINANCIAL STATEMENTS

In October 2007, Rayonier TRS Holdings Inc. (“TRS”), a wholly-owned subsidiary of Rayonier Inc., issued $300 million of 3.75% Senior Exchangeable Notes due 2012. The notes are guaranteed by Rayonier Inc. and are non-callable. In connection with these exchangeable notes, the Company provides the following condensed consolidating financial information in accordance with SEC Regulation S-X Rule 3-10, Financial Statements of Guarantors and Issuers of Guaranteed Securities Registered or Being Registered. Each entity in the consolidating financial information follows the same accounting policies as described in the consolidated financial statements, except for the use of the equity method of accounting to reflect ownership interests in wholly-owned subsidiaries which are eliminated upon consolidation and the allocation of certain expenses of Rayonier Inc., incurred for the benefit of its subsidiaries.

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RAYONIER INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollar amounts in thousands unless otherwise stated) (Continued)

	CONDENSED CONSOLIDATING STATEMENTS OF INCOME For the Year Ended December 31, 2008
	Rayonier Inc. (Parent Guarantor)			Rayonier TRS Holdings Inc. (Issuer)			Subsidiaries of Rayonier TRS Holdings Inc. (Non-guarantors)			All Other Subsidiaries (Non-guarantors)			Consolidating Adjustments			Total Consolidated
SALES	$	—		$	—		$	1,121,576		$	376,287		$	(226,815	)	$	1,271,048
Costs and Expenses
Cost of sales		—			—			948,675			163,555			(120,336	)		991,894
Selling and general expenses		10,610			—			50,626			3,267			—			64,503
Other operating expense (income), net		150			—			602			(12,944	)		(308	)		(12,500	)
		10,760			—			999,903			153,878			(120,644	)		1,043,897
Equity in (loss) income of New Zealand joint venture		(874	)		—			159			—			—			(715	)
OPERATING (LOSS) INCOME		(11,634	)		—			121,832			222,409			(106,171	)		226,436
Interest income (expense)		1,121			(18,089	)		(28,102	)		(5,663	)		4			(50,729	)
Interest and miscellaneous income (expense), net		3,453			(3,094	)		(3,528	)		5,619			(138	)		2,312
Equity in income from subsidiaries		153,090			50,482			—			—			(203,572	)		—
INCOME BEFORE INCOME TAXES		146,030			29,299			90,202			222,365			(309,877	)		178,019
Income tax benefit (expense)		2,553			7,731			(39,720	)		—			—			(29,436	)
NET INCOME	$	148,583		$	37,030		$	50,482		$	222,365		$	(309,877	)	$	148,583

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RAYONIER INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollar amounts in thousands unless otherwise stated) (Continued)

	CONDENSED CONSOLIDATING STATEMENTS OF INCOME
	For the Year Ended December 31, 2007
	Rayonier Inc. (Parent Guarantor)			Rayonier TRS Holdings Inc. (Issuer)			Subsidiaries of Rayonier TRS Holdings Inc. (Non-guarantors)			All Other Subsidiaries (Non-guarantors)			Consolidating Adjustments			Total Consolidated
SALES	$	—		$	—		$	988,732		$	275,890		$	(39,968	)	$	1,224,654
Costs and Expenses
Cost of sales		—			—			829,410			132,501			(39,763	)		922,148
Selling and general expenses		14,636			—			48,839			3,466			—			66,941
Other operating (income) expense, net		(403	)		—			2,076			(12,189	)		—			(10,516	)
		14,233			—			880,325			123,778			(39,763	)		978,573
Equity in (loss) income of New Zealand joint venture		(351	)		—			865			—			—			514
OPERATING (LOSS) INCOME		(14,584	)		—			109,272			152,112			(205	)		246,595
Interest expense		(2,514	)		(3,783	)		(32,362	)		(19,467	)		678			(57,448	)
Interest and miscellaneous income (expense), net		3,361			(645	)		(1,790	)		7,514			(678	)		7,762
Equity in income from subsidiaries		194,172			56,996			—			—			(251,168	)		—
INCOME BEFORE INCOME TAXES		180,435			52,568			75,120			140,159			(251,373	)		196,909
Income tax (expense) benefit		(6,876	)		1,650			(18,124	)		—			—			(23,350	)
NET INCOME	$	173,559		$	54,218		$	56,996		$	140,159		$	(251,373	)	$	173,559

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollar amounts in thousands unless otherwise stated) (Continued)

	CONDENSED CONSOLIDATING STATEMENTS OF INCOME
	For the Year Ended December 31, 2006
	Rayonier Inc. (Parent Guarantor)			Rayonier TRS Holdings Inc. (Issuer)		Subsidiaries of Rayonier TRS Holdings Inc. (Non-guarantors)			All Other Subsidiaries (Non-guarantors)			Consolidating Adjustments			Total Consolidated
SALES	$	2,723		$	—	$	1,053,846		$	357,336		$	(184,098	)	$	1,229,807
Costs and Expenses
Cost of sales		199			—		903,067			96,551			(47,155	)		952,662
Selling and general expenses		13,995			—		46,292			3,158			—			63,445
Other operating (income) expense, net		(2,966	)		—		2,753			(8,605	)		—			(8,818	)
		11,228			—		952,112			91,104			(47,155	)		1,007,289
Equity in (loss) income of New Zealand joint venture		(1,279	)		—		669			—			—			(610	)
OPERATING (LOSS) INCOME BEFORE GAIN ON SALE OF NEW ZEALAND TIMBER ASSETS		(9,784	)		—		102,403			266,232			(136,943	)		221,908
Gain on sale of New Zealand timber assets		—			—		7,769			—			—			7,769
OPERATING (LOSS) INCOME		(9,784	)		—		110,172			266,232			(136,943	)		229,677
Interest expense		(2,089	)		—		(26,935	)		(20,157	)		276			(48,905	)
Interest and miscellaneous income, net		2,400			—		3,975			3,348			(276	)		9,447
Equity in income from subsidiaries		181,637			69,157		—			—			(250,794	)		—
INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES		172,164			69,157		87,212			249,423			(387,737	)		190,219
Income tax benefit (provision)		4,305			—		(23,390	)		—			—			(19,085	)
INCOME FROM CONTINUING OPERATIONS		176,469			69,157		63,822			249,423			(387,737	)		171,134
DISCONTINUED OPERATIONS, NET
Income from discontinued operations, net of income tax expense of $3,201		—			—		5,335			—			—			5,335
NET INCOME	$	176,469		$	69,157	$	69,157		$	249,423		$	(387,737	)	$	176,469

F-40

RAYONIER INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollar amounts in thousands unless otherwise stated) (Continued)

	CONDENSED CONSOLIDATING BALANCE SHEETS As of December 31, 2008
	Rayonier Inc. (Parent Guarantor)		Rayonier TRS Holdings Inc. (Issuer)			Subsidiaries of Rayonier TRS Holdings Inc. (Non-guarantors)			All Other Subsidiaries (Non-guarantors)		Consolidating Adjustments			Total Consolidated
ASSETS
CURRENT ASSETS
Cash and cash equivalents	$	9,741	$	—		$	47,082		$	4,862	$	—		$	61,685
Accounts receivable, less allowance for doubtful accounts		—		—			72,259			3,398		—			75,657
Inventory		—		—			102,934			—		(6,068	)		96,866
Intercompany interest receivable		—		—			—			1,772		(1,772	)		—
Other current assets		5,766		—			34,664			4,385		—			44,815
Total current assets		15,507		—			256,939			14,417		(7,840	)		279,023
TIMBER, TIMBERLANDS AND LOGGING ROADS, NET OF DEPLETION AND AMORTIZATION		1,807		—			92,189			1,160,982		—			1,254,978
NET PROPERTY, PLANT AND EQUIPMENT		2,151		—			347,210			1,448		—			350,809
INVESTMENT IN JOINT VENTURE		63,046		—			(20,096	)		—		—			42,950
INVESTMENT IN SUBSIDIARIES		990,391		453,564			—			—		(1,443,955	)		—
INTERCOMPANY/NOTES RECEIVABLE		26,673		—			—			6,744		(33,417	)		—
OTHER ASSETS		24,223		6,265			513,055			5,891		(395,330	)		154,104
TOTAL ASSETS	$	1,123,798	$	459,829		$	1,189,297		$	1,189,482	$	(1,880,542	)	$	2,081,864
LIABILITIES AND SHAREHOLDERS’ EQUITY
CURRENT LIABILITIES
Accounts payable	$	2,943	$	—		$	66,852		$	919	$	—		$	70,714
Bank loans and current maturities		—		—			620			—		—			620
Accrued taxes		198		(9,833	)		17,325			2,943		—			10,633
Accrued payroll and benefits		10,531		—			7,636			1,687		—			19,854
Accrued interest		781		2,375			1,046			—		—			4,202
Accrued customer incentives		—		—			13,936			—		—			13,936
Other current liabilities		4,568		—			15,445			11,435		—			31,448
Current liabilities for dispositions and discontinued operations		—		—			8,214			—		—			8,214
Total current liabilities		19,021		(7,458	)		131,074			16,984		—			159,621
LONG-TERM DEBT		20,000		276,252			397,760			52,579		—			746,591
NON-CURRENT LIABILITIES FOR DISPOSITIONS AND DISCONTINUED OPERATIONS		—		—			96,361			—		—			96,361
PENSION AND OTHER POSTRETIREMENT BENEFITS		87,562		—			33,878			—		—			121,440
OTHER NON-CURRENT LIABILITIES		12,416		—			5,790			17,110		(16,402	)		18,914
INTERCOMPANY PAYABLE		45,862		—			70,870			5,502		(122,234	)		—
TOTAL LIABILITIES		184,861		268,794			735,733			92,175		(138,636	)		1,142,927
TOTAL SHAREHOLDERS’ EQUITY		938,937		191,035			453,564			1,097,307		(1,741,906	)		938,937
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY	$	1,123,798	$	459,829		$	1,189,297		$	1,189,482	$	(1,880,542	)	$	2,081,864

F-41

RAYONIER INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollar amounts in thousands unless otherwise stated) (Continued)

	CONDENSED CONSOLIDATING BALANCE SHEETS As of December 31, 2007
	Rayonier Inc. (Parent Guarantor)		Rayonier TRS Holdings Inc. (Issuer)			Subsidiaries of Rayonier TRS Holdings Inc. (Non-guarantors)			All Other Subsidiaries (Non-guarantors)		Consolidating Adjustments			Total Consolidated
ASSETS
CURRENT ASSETS
Cash and cash equivalents	$	4,211	$	—		$	173,029		$	3,841	$	—		$	181,081
Accounts receivable, less allowance for doubtful accounts		217		—			79,142			1,709		—			81,068
Inventory		—		—			88,979			—		(4,688	)		84,291
Intercompany interest receivable		—		—			—			1,137		(1,137	)		—
Other current assets		12,823		—			32,226			4,731		—			49,780
Total current assets		17,251		—			373,376			11,418		(5,825	)		396,220
TIMBER, TIMBERLANDS AND LOGGING ROADS, NET OF DEPLETION AND AMORTIZATION		1,819		—			36,015			1,079,385		—			1,117,219
NET PROPERTY, PLANT AND EQUIPMENT		2,147		—			342,173			1,435		—			345,755
INVESTMENT IN JOINT VENTURE		89,933		—			(27,167	)		—		—			62,766
INVESTMENT IN SUBSIDIARIES		936,801		494,063			—			—		(1,430,864	)		—
INTERCOMPANY/NOTES RECEIVABLE		53,397		—			12,851			14,819		(81,067	)		—
OTHER ASSETS		28,692		8,119			386,762			13,260		(290,405	)		146,428
TOTAL ASSETS	$	1,130,040	$	502,182		$	1,124,010		$	1,120,317	$	(1,808,161	)	$	2,068,388
LIABILITIES AND SHAREHOLDERS’ EQUITY
CURRENT LIABILITIES
Accounts payable	$	3,123	$	—		$	60,673		$	2,428	$	—		$	66,224
Bank loans and current maturities		—		—			585			55,000		—			55,585
Accrued taxes		109		(1,687	)		6,483			2,274		—			7,179
Accrued payroll and benefits		18,339		—			11,726			—		—			30,065
Accrued interest		—		2,370			1,100			11		—			3,481
Accrued customer incentives		—		—			12,350			—		—			12,350
Other current liabilities		11,719		—			12,598			9,143		—			33,460
Current liabilities for dispositions and discontinued operations		—		—			10,069			—		—			10,069
Total current liabilities		33,290		683			115,584			68,856		—			218,413
LONG-TERM DEBT		—		270,815			341,680			52,579		—			665,074
NON-CURRENT LIABILITIES FOR DISPOSITIONS AND DISCONTINUED OPERATIONS		—		—			103,616			—		—			103,616
PENSION AND OTHER POSTRETIREMENT BENEFITS		67,606		—			(389	)		—		—			67,217
OTHER NON-CURRENT LIABILITIES		10,333		—			3,521			16,987		(16,402	)		14,439
INTERCOMPANY PAYABLE		19,182		—			65,935			55,486		(140,603	)		—
TOTAL LIABILITIES		130,411		271,498			629,947			193,908		(157,005	)		1,068,759
TOTAL SHAREHOLDERS’ EQUITY		999,629		230,684			494,063			926,409		(1,651,156	)		999,629
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY	$	1,130,040	$	502,182		$	1,124,010		$	1,120,317	$	(1,808,161	)	$	2,068,388

F-42

RAYONIER INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollar amounts in thousands unless otherwise stated) (Continued)

	CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
	For the Year Ended December 31, 2008
	Rayonier Inc. (Parent Guarantor)			Rayonier TRS Holdings Inc. (Issuer)			Subsidiaries of Rayonier TRS Holdings Inc. (Non-guarantors)			All Other Subsidiaries (Non-guarantors)			Consolidating Adjustments			Total Consolidated
CASH PROVIDED BY OPERATING ACTIVITIES	$	88,222		$	45,000		$	195,722		$	359,729		$	(348,485	)	$	340,188
INVESTING ACTIVITIES
Capital expenditures		—			—			(70,033	)		(34,773	)		—			(104,806	)
Purchase of timberlands and wood chipping facilities		—			—			(246,399	)		(172,958	)		189,656			(229,701	)
Purchase of real estate		—			—			(4,336	)		—			—			(4,336	)
Increase in restricted cash		—			—			—			8,523			—			8,523
Other		—			—			(71	)		—			—			(71	)
CASH USED FOR INVESTING ACTIVITIES		—			—			(320,839	)		(199,208	)		189,656			(330,391	)
FINANCING ACTIVITIES
Issuance of debt		20,000			—			138,800			15,000			—			173,800
Repayment of debt		—			—			(82,685	)		(70,000	)		—			(152,685	)
Dividends paid		(156,978	)		—			—			—			—			(156,978	)
Issuance of common shares		8,265			—			—			—			—			8,265
Excess tax benefits on stock-based compensation		—			—			3,248			—			—			3,248
Repurchase of common shares		(3,979	)		—			—			—			—			(3,979	)
Issuance of short-term intercompany notes		50,000			—			—			(50,000	)		—			—
Distributions to / from Parent		—			(45,000	)		(59,329	)		(54,500	)		158,829			—
CASH (USED FOR) PROVIDED BY FINANCING ACTIVITIES		(82,692	)		(45,000	)		34			(159,500	)		158,829			(128,329	)
EFFECT OF EXCHANGE RATE CHANGES ON CASH		—			—			(864	)		—			—			(864	)
CASH AND CASH EQUIVALENTS
Increase (decrease) in cash and cash equivalents		5,530			—			(125,947	)		1,021			—			(119,396	)
Balance, beginning of year		4,211			—			173,029			3,841			—			181,081
Balance, end of year	$	9,741		$	—		$	47,082		$	4,862		$	—		$	61,685

F-43

RAYONIER INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollar amounts in thousands unless otherwise stated) (Continued)

	CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
	For the Year Ended December 31, 2007
	Rayonier Inc. (Parent Guarantor)			Rayonier TRS Holdings Inc. (Issuer)			Subsidiaries of Rayonier TRS Holdings Inc. (Non-guarantors)			All Other Subsidiaries (Non-guarantors)			Consolidating Adjustments			Total Consolidated
CASH PROVIDED BY OPERATING ACTIVITIES	$	139,875		$	66,105		$	101,109		$	234,684		$	(217,753	)	$	324,020
INVESTING ACTIVITIES
Capital expenditures		—			—			(61,073	)		(35,931	)		—			(97,004	)
Purchase of timberlands and wood chipping facilities		—			—			(6,421	)		(49,751	)		33,300			(22,872	)
Purchase of real estate		—			—			(4,350	)		—			—			(4,350	)
Proceeds from the intercompany sale of timberlands		—			—			33,300			—			(33,300	)		—
Decrease in restricted cash		—			—			—			(8,812	)		—			(8,812	)
Investment In Subsidiaries		—			(258,818	)		—			—			258,818			—
Other		—			—			4,481			2,572			—			7,053
CASH USED FOR INVESTING ACTIVITIES		—			(258,818	)		(34,063	)		(91,922	)		258,818			(125,985	)
FINANCING ACTIVITIES
Issuance of debt		—			300,000			45,000			132,000			—			477,000
Repayment of debt		—			—			(153,505	)		(234,421	)		—			(387,926	)
Dividends paid		(150,626	)		—			—			—			—			(150,626	)
Issuance of common shares		18,891			—			—			—			—			18,891
Excess tax benefits on stock-based compensation		—			—			7,907			—			—			7,907
Purchase of exchangeable note hedge		—			(33,480	)		—			—			—			(33,480	)
Proceeds from issuance of warrant		20,670			—			—			—			—			20,670
Debt issuance costs		—			(7,057	)		—			—			—			(7,057	)
Repurchase of common shares		(3,150	)		—			—			—			—			(3,150	)
Issuance of short-term intercompany notes		(50,000	)		—			—			50,000			—			—
Distributions to / from Parent		—			(66,750	)		192,068			(86,500	)		(38,818	)		—
CASH (USED FOR) PROVIDED BY FINANCING ACTIVITIES		(164,215	)		192,713			91,470			(138,921	)		(38,818	)		(57,771	)
EFFECT OF EXCHANGE RATE CHANGES ON CASH		—			—			646			—			—			646
CASH AND CASH EQUIVALENTS
(Decrease) increase in cash and cash equivalents		(24,340	)		—			159,162			3,841			2,247			140,910
Balance, beginning of year		28,551			—			13,867			—			(2,247	)		40,171
Balance, end of year	$	4,211		$	—		$	173,029		$	3,841		$	—		$	181,081

F-44

RAYONIER INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollar amounts in thousands unless otherwise stated) (Continued)

	CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
	For the Year Ended December 31, 2006
	Rayonier Inc. (Parent Guarantor)			Rayonier TRS Holdings Inc. (Issuer)			Subsidiaries of Rayonier TRS Holdings Inc. (Non-guarantors)			All Other Subsidiaries (Non-guarantors)			Consolidating Adjustments			Total Consolidated
CASH PROVIDED BY OPERATING ACTIVITIES	$	125,003		$	37,000		$	206		$	320,966		$	(176,247	)	$	306,928
INVESTING ACTIVITIES
Capital expenditures		—			—			(73,940	)		(31,522	)		—			(105,462	)
Purchase of timberlands		—			—			(82,741	)		(195,037	)		—			(277,778	)
Purchase of real estate		—			—			(21,101	)		—			—			(21,101	)
Proceeds from the sale of NZ timberlands		—			—			21,770			—			—			21,770
Increase in restricted cash		—			—			—			1,287			—			1,287
Other		—			—			(3,909	)		—			—			(3,909	)
CASH USED FOR INVESTING ACTIVITIES FROM CONTINUING OPERATIONS		—			—			(159,921	)		(225,272	)		—			(385,193	)
FINANCING ACTIVITIES
Issuance of debt		—			—			115,000			143,000			—			258,000
Repayment of debt		—			—			(15,310	)		(143,000	)		—			(158,310	)
Issuance of common shares		10,771			—			—			—			—			10,771
Excess tax benefits on stock based compensation		—			—			4,143			—			—			4,143
Dividends paid		(143,883	)		—			—			—			—			(143,883	)
Repurchase of common shares		(560	)		—			—			—			—			(560	)
Distributions to Parent		—			(37,000	)		(37,000	)		(100,000	)		174,000			—
CASH (USED FOR) PROVIDED BY FINANCING ACTIVITIES FROM CONTINUING OPERATIONS		(133,672	)		(37,000	)		66,833			(100,000	)		174,000			(29,839	)
EFFECT OF EXCHANGE RATE CHANGES ON CASH		—			—			2,048			—			—			2,048
CASH AND CASH EQUIVALENTS
Decrease in cash and cash equivalents		(8,669	)		—			(90,834	)		(4,306	)		(2,247	)		(106,056	)
Balance, beginning of year		37,220			—			104,701			4,306			—			146,227
Balance, end of year	$	28,551		$	—		$	13,867		$	—		$	(2,247	)	$	40,171

F-45

RAYONIER INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollar amounts in thousands unless otherwise stated) (Continued)

23. REVISED FINANCIAL STATEMENTS

The following financial statement information is provided pursuant to the disclosure requirements of SFAS 154, Accounting Changes and Error Corrections and SFAS 144, Accounting for the Impairment or Disposal of Long-Lived Assets. The following information reflects the impact on previously issued financial statements of the adoption of FSP APB 14-1 and the reclassification of the discontinued operations held for sale to continuing operations. Also see Note 2 – Summary of Significant Accounting Policies.

RAYONIER INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF INCOME

For the Year Ended December 31, 2008

(Thousands of dollars, except per share data)

	As Reported in 2008 10-K			Implementation of FSP APB 14-1			New Zealand Reclassification			As Adjusted
SALES	$	1,232,100		$	—		$	38,948		$	1,271,048
Costs and Expenses
Cost of sales		953,908			—			37,986			991,894
Selling and general expenses		64,345			—			158			64,503
Other operating income, net		(9,241	)		—			(3,259	)		(12,500	)
		1,009,012			—			34,885			1,043,897
Equity in loss of New Zealand joint venture		—			—			(715	)		(715	)
OPERATING INCOME		223,088			—			3,348			226,436
Interest expense		(45,292	)		(5,437	)		—			(50,729	)
Interest and miscellaneous income, net		2,150			—			162			2,312
INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES		179,946			(5,437	)		3,510			178,019
Income tax provision		(20,312	)		1,984			(11,108	)		(29,436	)
INCOME FROM CONTINUING OPERATIONS		159,634			(3,453	)		(7,598	)		148,583
DISCONTINUED OPERATIONS, NET
Income from discontinued operations, net of income tax expense		(7,598	)		—			7,598			—
NET INCOME	$	152,036		$	(3,453	)	$	—		$	148,583
EARNINGS (LOSS) PER COMMON SHARE
BASIC EARNINGS (LOSS) PER SHARE
Continuing Operations	$	2.03		$	(0.04	)	$	(0.10	)	$	1.89
Discontinued Operations		(0.09	)		—			0.10			—
Net Income	$	1.94		$	(0.04	)	$	—		$	1.89
DILUTED EARNINGS (LOSS) PER SHARE
Continuing Operations	$	2.01		$	(0.04	)	$	(0.10	)	$	1.87
Discontinued Operations		(0.10	)		—			0.10			—
Net Income	$	1.91		$	(0.04	)	$	—		$	1.87

F-46

RAYONIER INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF INCOME

For the Year Ended December 31, 2007

(Thousands of dollars, except per share data)

	As Reported in 2008 10-K			Implementation of FSP APB 14-1			New Zealand Reclassification			As Adjusted
SALES	$	1,171,483		$	—		$	53,171		$	1,224,654
Costs and Expenses
Cost of sales (2007 includes a $10.9 million fire loss)		870,084			—			52,064			922,148
Selling and general expenses		66,581			—			360			66,941
Other operating income, net		(10,540	)		—			24			(10,516	)
		926,125			—			52,448			978,573
Equity in income of New Zealand joint venture		—			—			514			514
OPERATING INCOME		245,358			—			1,237			246,595
Interest expense		(56,329	)		(1,119	)		—			(57,448	)
Interest and miscellaneous income, net		7,263			—			499			7,762
INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES		196,292			(1,119	)		1,736			196,909
Income tax provision		(23,123	)		409			(636	)		(23,350	)
INCOME FROM CONTINUING OPERATIONS		173,169			(710	)		1,100			173,559
DISCONTINUED OPERATIONS, NET
Income from discontinued operations, net of income tax expense		1,100			—			(1,100	)		—
NET INCOME	$	174,269		$	(710	)	$	—		$	173,559
EARNINGS (LOSS) PER COMMON SHARE
BASIC EARNINGS (LOSS) PER SHARE
Continuing Operations	$	2.23		$	(0.01	)	$	0.01		$	2.24
Discontinued Operations		0.02			—			(0.01	)		—
Net Income	$	2.25		$	(0.01	)	$	—		$	2.24
DILUTED EARNINGS (LOSS) PER SHARE
Continuing Operations	$	2.19		$	(0.01	)	$	0.01		$	2.20
Discontinued Operations		0.02			—			(0.01	)		—
Net Income	$	2.21		$	(0.01	)	$	—		$	2.20

F-47

RAYONIER INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF INCOME

For the Year Ended December 31, 2006

(Thousands of dollars, except per share data)

	As Reported in 2008 10-K			New Zealand Reclassification			As Adjusted
SALES	$	1,121,543		$	108,264		$	1,229,807
Costs and Expenses
Cost of sales		843,700			108,962			952,662
Selling and general expenses		63,648			(203	)		63,445
Other operating (income) expense, net		(8,833	)		15			(8,818	)
		898,515			108,774			1,007,289
Equity in loss of New Zealand joint venture		—			(610	)		(610	)
OPERATING INCOME BEFORE GAIN ON SALE OF NEW ZEALAND TIMBER ASSETS		223,028			(1,120	)		221,908
Gain on sale of New Zealand timber assets		—			7,769			7,769
OPERATING INCOME		223,028			6,649			229,677
Interest expense		(48,904	)		(1	)		(48,905	)
Interest and miscellaneous income, net		8,926			521			9,447
INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES		183,050			7,169			190,219
Income tax provision		(18,423	)		(662	)		(19,085	)
INCOME FROM CONTINUING OPERATIONS		164,627			6,507			171,134
DISCONTINUED OPERATIONS, NET
Income from discontinued operations, net of income tax expense		11,842			(6,507	)		5,335
NET INCOME	$	176,469		$	—		$	176,469
EARNINGS (LOSS) PER COMMON SHARE
BASIC EARNINGS (LOSS) PER SHARE
Continuing Operations	$	2.15		$	0.09		$	2.24
Discontinued Operations		0.16			(0.09	)		0.07
Net Income	$	2.31		$	—		$	2.31
DILUTED EARNINGS (LOSS) PER SHARE
Continuing Operations	$	2.11		$	0.08		$	2.19
Discontinued Operations		0.15			(0.08	)		0.07
Net Income	$	2.26		$	—		$	2.26

F-48

RAYONIER INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEET

As of December 31, 2008

(Thousands of dollars)

	As Reported in 2008 10-K			Implementation of FSP APB 14-1			New Zealand Reclassification			As Adjusted
ASSETS
CURRENT ASSETS
Cash and cash equivalents	$	61,685		$	—		$	—		$	61,685
Accounts receivable, less allowance for doubtful accounts		72,549			—			3,108			75,657
Inventory		96,678			—			188			96,866
Other current assets		39,971			—			4,844			44,815
Assets held for sale		56,093			—			(56,093	)		—
Total current assets		326,976			—			(47,953	)		279,023
TIMBER AND TIMBERLANDS, NET OF DEPLETION AND AMORTIZATION		1,254,978			—			—			1,254,978
PROPERTY, PLANT AND EQUIPMENT
Land		24,432			—			13			24,445
Buildings		124,143			—			31			124,174
Machinery and equipment		1,243,911			—			1,035			1,244,946
Total property, plant and equipment		1,392,486			—			1,079			1,393,565
Less - accumulated depreciation		(1,041,779	)		—			(977	)		(1,042,756	)
		350,707			—			102			350,809
Investment in Joint Venture		—			—			42,950			42,950
OTHER ASSETS		157,870			(8,668	)		4,902			154,104
	$	2,090,531		$	(8,668	)	$	1		$	2,081,864
LIABILITIES AND SHAREHOLDERS’ EQUITY
CURRENT LIABILITIES
Accounts payable	$	70,011		$	—		$	703		$	70,714
Bank loans and current maturities		620			—			—			620
Accrued taxes		10,631			—			2			10,633
Accrued payroll and benefits		19,620			—			234			19,854
Accrued interest		4,202			—			—			4,202
Accrued customer incentives		13,936			—			—			13,936
Liabilities associated with assets held for sale		6,227			—			(6,227	)		—
Other current liabilities		29,490			—			1,958			31,448
Current liabilities for dispositions and discontinued operations		8,214			—			—			8,214
Total current liabilities		162,951			—			(3,330	)		159,621
LONG-TERM DEBT		770,339			(23,748	)		—			746,591
NON-CURRENT LIABILITIES FOR DISPOSITIONS AND DISCONTINUED OPERATIONS		96,361			—			—			96,361
PENSION AND OTHER POSTRETIREMENT BENEFITS		121,440			—			—			121,440
OTHER NON-CURRENT LIABILITIES		15,583			—			3,331			18,914
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS’ EQUITY
Common Shares, 120,000,000 shares authorized, 78,814,431 shares issued and outstanding		508,059			19,243			—			527,302
Retained earnings		514,094			(4,163	)		—			509,931
Accumulated other comprehensive loss		(98,296	)		—			—			(98,296	)
		923,857			15,080			—			938,937
	$	2,090,531		$	(8,668	)	$	1		$	2,081,864

F-49

RAYONIER INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEET

As of December 31, 2007

(Thousands of dollars)

	As Reported in 2008 10-K			Implementation of FSP APB 14-1			As Adjusted
ASSETS
CURRENT ASSETS
Cash and cash equivalents	$	181,081		$	—		$	181,081
Accounts receivable, less allowance for doubtful accounts		81,068			—			81,068
Inventory		84,291			—			84,291
Other current assets		49,780			—			49,780
Total current assets		396,220			—			396,220
TIMBER AND TIMBERLANDS, NET OF DEPLETION AND AMORTIZATION		1,117,219			—			1,117,219
PROPERTY, PLANT AND EQUIPMENT
Land		25,282			—			25,282
Buildings		124,030			—			124,030
Machinery and equipment		1,190,852			—			1,190,852
Total property, plant and equipment		1,340,164			—			1,340,164
Less - accumulated depreciation		(994,409	)		—			(994,409	)
		345,755			—			345,755
Investment in Joint Venture		62,766			—			62,766
OTHER ASSETS		157,081			(10,653	)		146,428
	$	2,079,041		$	(10,653	)	$	2,068,388
LIABILITIES AND SHAREHOLDERS’ EQUITY
CURRENT LIABILITIES
Accounts payable	$	66,224		$	—		$	66,224
Bank loans and current maturities		55,585			—			55,585
Accrued taxes		7,179			—			7,179
Accrued payroll and benefits		30,065			—			30,065
Accrued interest		3,481			—			3,481
Accrued customer incentives		12,350			—			12,350
Other current liabilities		33,460			—			33,460
Current liabilities for dispositions and discontinued operations		10,069			—			10,069
Total current liabilities		218,413			—			218,413
LONG-TERM DEBT		694,259			(29,185	)		665,074
NON-CURRENT LIABILITIES FOR DISPOSITIONS AND DISCONTINUED OPERATIONS		103,616			—			103,616
PENSION AND OTHER POSTRETIREMENT BENEFITS		67,217			—			67,217
OTHER NON-CURRENT LIABILITIES		14,439			—			14,439
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS’ EQUITY
Common Shares, 120,000,000 shares authorized, 78,216,696 shares issued and outstanding		487,407			19,242			506,649
Retained earnings		519,328			(710	)		518,618
Accumulated other comprehensive loss		(25,638	)		—			(25,638	)
		981,097			18,532			999,629
	$	2,079,041		$	(10,653	)	$	2,068,388

F-50

RAYONIER INC. AND SUBSIDIARIES

SCHEDULE II—VALUATION AND QUALIFYING ACCOUNTS

Years Ended December 31, 2008, 2007, and 2006

(In Thousands)

Description	Balance at Beginning of Year		Charged to Cost and Expenses			Deductions (1)			Balance at End of Year
Allowance for doubtful accounts:
Year ended December 31, 2008	$	677	$	897		$	(444	)	$	1,130
Year ended December 31, 2007	$	560	$	117		$	—		$	677
Year ended December 31, 2006	$	1,158	$	(604	)	$	6		$	560

(1)     Primarily collections, payments and adjustments to required reserves.

F-51