10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended September 30, 2010

OR

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

For the transition period from                             to                             

COMMISSION FILE NUMBER 1-6780

RAYONIER INC.

Incorporated in the State of North Carolina

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

1301 Riverplace Boulevard, Jacksonville, Florida 32207

(Principal Executive Office)

Telephone Number: (904) 357-9100

Former Address

50 North Laura Street, Jacksonville, Florida 32202

Indicate by check mark whether the registrant (l) has filed all reports required to be filed by Section l3 or l5(d) of the Securities Exchange Act of l934 during the preceding l2 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

YES  x    NO  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

YES  x    NO  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer	x	Accelerated filer	¨
Non-accelerated filer	¨  (Do not check if a smaller reporting company)	Smaller reporting company	¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

YES  ¨    NO  x

As of October 22, 2010, there were outstanding 80,564,846 Common Shares of the Registrant.

TABLE OF CONTENTS

		PAGE
PART I.	FINANCIAL INFORMATION
Item l.	Financial Statements
	Condensed Consolidated Statements of Income and Comprehensive Income for the Three and Nine Months Ended September 30, 2010 and 2009		1
	Condensed Consolidated Balance Sheets as of September 30, 2010 and December 3l, 2009		2
	Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2010 and 2009		3
	Notes to Condensed Consolidated Financial Statements		4
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		21
Item 3.	Quantitative and Qualitative Disclosures about Market Risk		33
Item 4.	Controls and Procedures		33
PART II.	OTHER INFORMATION
Item 1a.	Risk Factors		34
Item 2.	Unregistered Sale of Equity Securities and Use of Proceeds		34
Item 6.	Exhibits		35
	Signature		36

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

RAYONIER INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

AND COMPREHENSIVE INCOME

(Unaudited)

(Dollars in thousands, except per share data)

	Three Months Ended September 30,						Nine Months Ended September 30,
	2010			2009			2010			2009
SALES	$	377,515		$	300,648		$	999,925		$	858,731
Costs and Expenses
Cost of sales		269,203			231,836			744,996			672,855
Selling and general expenses		17,125			15,972			49,264			44,962
Other operating income, net (Note 2)		(792	)		(59,251	)		(6,620	)		(150,425	)
		285,536			188,557			787,640			567,392
Equity in income (loss) of New Zealand joint venture		103			(943	)		634			(2,782	)
OPERATING INCOME BEFORE GAIN ON SALE OF A PORTION OF THE INTEREST IN THE NEW ZEALAND JOINT VENTURE		92,082			111,148			212,919			288,557
Gain on sale of a portion of the interest in the New Zealand joint venture (Note 6)		—			—			12,367			—
OPERATING INCOME		92,082			111,148			225,286			288,557
Interest expense		(12,943	)		(12,789	)		(37,680	)		(37,630	)
Interest and miscellaneous income, net		345			310			943			594
INCOME BEFORE INCOME TAXES		79,484			98,669			188,549			251,521
Income tax expense		(16,580	)		(17,529	)		(30,134	)		(36,707	)
NET INCOME		62,904			81,140			158,415			214,814
OTHER COMPREHENSIVE INCOME (LOSS)
Foreign currency translation adjustments		3,198			2,620			(64	)		13,568
Joint venture cash flow hedges		(104	)		968			922			(1,659	)
Amortization of pension and postretirement benefit costs, net of income tax expense (benefit) of $661 and $347, and ($1,705) and $1,013		1,210			1,170			5,849			2,286
COMPREHENSIVE INCOME	$	67,208		$	85,898		$	165,122		$	229,009
EARNINGS PER COMMON SHARE
Basic earnings per share	$	0.78		$	1.03		$	1.98		$	2.72
Diluted earnings per share	$	0.77		$	1.01		$	1.95		$	2.69

See Notes to Condensed Consolidated Financial Statements.

1

RAYONIER INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

(Dollars in thousands)

	September 30, 2010			December 31, 2009
ASSETS
CURRENT ASSETS
Cash and cash equivalents	$	405,665		$	74,964
Accounts receivable, less allowance for doubtful accounts of $349 and $1,150		114,545			103,740
Inventory
Finished goods		61,817			70,548
Work in process		6,368			8,884
Raw materials		15,750			6,829
Manufacturing and maintenance supplies		2,280			2,243
Total inventory		86,215			88,504
Income tax and alternative fuel mixture credit receivable		1,582			192,579
Prepaid and other current assets		53,690			49,909
Total Current Assets		661,697			509,696
TIMBER AND TIMBERLANDS, NET OF DEPLETION AND AMORTIZATION		1,130,661			1,188,559
PROPERTY, PLANT AND EQUIPMENT
Land		24,818			24,789
Buildings		127,064			126,443
Machinery and equipment		1,329,152			1,275,955
Total property, plant and equipment, gross		1,481,034			1,427,187
Less – accumulated depreciation		(1,109,744	)		(1,082,248	)
Total property, plant and equipment, net		371,290			344,939
INVESTMENT IN JOINT VENTURE		65,312			50,999
OTHER ASSETS		163,175			158,738
TOTAL ASSETS	$	2,392,135		$	2,252,931
LIABILITIES AND SHAREHOLDERS’ EQUITY
CURRENT LIABILITIES
Accounts payable	$	50,689		$	58,584
Bank loans and current maturities		—			4,650
Accrued interest		11,633			6,512
Accrued customer incentives		13,751			25,644
Current liabilities for dispositions and discontinued operations (Note 11)		11,696			10,648
Other current liabilities		87,285			69,073
TOTAL CURRENT LIABILITIES		175,054			175,111
LONG-TERM DEBT		766,102			694,999
NON-CURRENT LIABILITIES FOR DISPOSITIONS AND DISCONTINUED OPERATIONS (Note 11)		80,474			87,943
PENSION AND OTHER POSTRETIREMENT BENEFITS (Note 13)		111,957			111,662
OTHER NON-CURRENT LIABILITIES		35,909			37,010
COMMITMENTS AND CONTINGENCIES (Notes 10 and 12)
SHAREHOLDERS’ EQUITY
Common Shares, 240,000,000 and 120,000,000 shares authorized, 80,549,849 and 79,541,974 shares issued and outstanding		594,147			561,962
Retained earnings		701,527			663,986
Accumulated other comprehensive loss		(73,035	)		(79,742	)
TOTAL SHAREHOLDERS’ EQUITY		1,222,639			1,146,206
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY	$	2,392,135		$	2,252,931

See Notes to Condensed Consolidated Financial Statements.

2

RAYONIER INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(Dollars in thousands)

	Nine Months Ended September 30,
	2010			2009
OPERATING ACTIVITIES
Net income	$	158,415		$	214,814
Adjustments to reconcile net income to cash provided by operating activities:
Depreciation, depletion and amortization		115,687			126,834
Non-cash cost of real estate sold		6,531			6,295
Stock-based incentive compensation expense		11,610			11,952
Gain on sale of a portion of the interest in the New Zealand joint venture		(11,545	)		—
Amortization of convertible debt discount		6,103			4,575
Deferred income tax expense (benefit)		14,871			(5,721	)
Excess tax benefits on stock-based compensation		(5,071	)		(2,287	)
Other		4,571			9,250
Changes in operating assets and liabilities:
Receivables		(10,756	)		(20,493	)
Inventories		(3,481	)		(4,122	)
Accounts payable		(8,993	)		(16,407	)
Income tax and alternative fuel mixture credit receivable		190,997			(132,616	)
Other current assets		(6,032	)		(13,018	)
Accrued liabilities		16,476			32,922
Other assets		629			15
Other non-current liabilities		(321	)		8,293
Expenditures for dispositions and discontinued operations		(6,484	)		(5,968	)
CASH PROVIDED BY OPERATING ACTIVITIES		473,207			214,318
INVESTING ACTIVITIES
Capital expenditures		(95,614	)		(65,078	)
Change in restricted cash		(13,209	)		1,243
Other		6,211			(7,685	)
CASH USED FOR INVESTING ACTIVITIES		(102,612	)		(71,520	)
FINANCING ACTIVITIES
Issuance of debt		157,000			257,500
Repayment of debt		(96,650	)		(185,620	)
Dividends paid		(120,156	)		(118,540	)
Proceeds from the issuance of common shares		21,532			9,228
Excess tax benefits on stock-based compensation		5,071			2,287
Purchase of exchangeable note hedge		—			(23,460	)
Proceeds from issuance of warrant		—			12,506
Debt issuance costs		(537	)		(4,129	)
Repurchase of common shares		(6,028	)		(1,388	)
CASH USED FOR FINANCING ACTIVITIES		(39,768	)		(51,616	)
EFFECT OF EXCHANGE RATE CHANGES ON CASH		(126	)		278
CASH AND CASH EQUIVALENTS
Increase in cash and cash equivalents		330,701			91,460
Balance, beginning of year		74,964			61,685
Balance, end of period	$	405,665		$	153,145
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the period:
Interest	$	24,499		$	21,749
Income taxes	$	4,538		$	9,547
Non-cash investing activity:
Capital assets purchased on account	$	9,800		$	3,315

See Notes to Condensed Consolidated Financial Statements.

3

RAYONIER INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(Dollars in thousands unless otherwise stated)

1. BASIS OF PRESENTATION AND NEW ACCOUNTING PRONOUNCEMENTS

Basis of Presentation

The unaudited condensed consolidated financial statements and notes thereto of Rayonier Inc. and its subsidiaries (“Rayonier” or “the Company”) have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and in accordance with the rules and regulations of the Securities and Exchange Commission (“SEC”). Accordingly, certain information in the financial statements of the Company’s Annual Report on Form 10-K has been condensed. In the opinion of management, these financial statements and notes reflect all adjustments (including normal recurring adjustments) necessary for a fair presentation of the results of operations, financial position and cash flows for the periods presented. These statements and notes should be read in conjunction with the financial statements and supplementary data included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2009, as filed with the SEC.

Subsequent Events

The Company evaluated events and transactions that occurred after the balance sheet date but before financial statements were issued, and two subsequent events warranted disclosure. See Note 2 – Alternative Fuel Mixture Credit (“AFMC”) and Cellulosic Biofuel Producer Credit (“CBPC”) and Note 13 – Employee Benefit Plans for additional information.

New or Recently Adopted Accounting Pronouncements

In June 2009, the Financial Accounting Standards Board (“FASB”) issued new guidance related to consolidation which replaced the quantitative-based risks and rewards calculation for determining which enterprise has a controlling interest in a variable interest entity with an approach primarily qualitative in nature. This Standard requires additional disclosures about an enterprise’s involvement in variable interest entities and was effective January 1, 2010 for Rayonier. The Company’s application of this guidance had no effect on the accompanying condensed consolidated financial statements. See Note 9 – Fair Value Measurements for additional information about the Company’s variable interest entity.

Also in June 2009, the FASB issued new guidance related to the accounting for transfers of financial assets. The new standard eliminates the concept of a “qualifying special-purpose entity” (“QSPE”) and associated guidance and creates more stringent conditions for reporting a transfer of a portion of a financial asset as a sale. Entities formerly classified as QSPEs are now evaluated for consolidation under the provisions related to the consolidation of controlling and non-controlling interests in an entity. Under the new guidance, the Company’s investment in a special purpose entity does not require consolidation. See Note 9 – Fair Value Measurements for additional information about this entity.

2. ALTERNATIVE FUEL MIXTURE CREDIT (“AFMC”) AND CELLULOSIC BIOFUEL PRODUCER CREDIT (“CBPC”)

The U.S. Internal Revenue Code allowed a tax credit for taxpayers that produced and used an alternative fuel in the operation of their business. Rayonier produces and uses an alternative fuel (“black liquor”) at its Jesup, Georgia and Fernandina Beach, Florida Performance Fibers mills, which qualified for the $0.50 per gallon credit of alternative fuel used in operations through December 31, 2009. Accordingly, the Condensed Consolidated Statements of Income and Comprehensive Income for the three and nine months ended September 30, 2009, include income of $55.8 million and $141.8 million, net of associated expenses, recorded in “Other operating income, net” for black liquor produced and used.

Subsequent Event

In October 2010, the Internal Revenue Service released clarification that both the AFMC and CBPC can be claimed in the same taxable year for different volumes of black liquor. Rayonier has applied for the cellulosic biofuel producer registration. If IRS approval is received, Rayonier will be able to claim the CBPC credit, which is $1.01 per gallon, for black liquor used in the operation of its business in 2009 which was not claimed for the AFMC. Rayonier will recognize the benefits for CBPC when approval is received.

4

RAYONIER INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

(Dollars in thousands unless otherwise stated)

3. EARNINGS PER COMMON SHARE

The following table provides details of the calculation of basic and diluted earnings per common share:

	Three Months Ended September 30,				Nine Months Ended September 30,
	2010		2009		2010		2009
Net income	$	62,904	$	81,140	$	158,415	$	214,814
Shares used for determining basic earnings per common share		80,262,781		79,145,323		80,038,032		78,956,526
Dilutive effect of:
Stock options		386,407		413,740		383,529		356,068
Performance and restricted shares		821,561		548,052		763,284		433,440
Shares used for determining diluted earnings per common share		81,470,749		80,107,115		81,184,845		79,746,034
Basic earnings per common share:	$	0.78	$	1.03	$	1.98	$	2.72
Diluted earnings per common share:	$	0.77	$	1.01	$	1.95	$	2.69

4. INCOME TAXES

Rayonier is a real estate investment trust (“REIT”). In general, only Rayonier TRS Holdings Inc. (“TRS”), the Company’s wholly-owned taxable subsidiary whose businesses include the Company’s non-REIT qualified activities, is subject to corporate income taxes. However, Rayonier Inc. 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 upon REIT election at January 1, 2004) on taxable sales of such property during calendar years 2004 through 2010 and 2012 through 2013. Accordingly, the provision for corporate income taxes relates principally to current and deferred taxes on certain property sales and on TRS income.

The Company’s effective tax rate is below the 35 percent U.S. statutory tax rate primarily due to tax benefits associated with being a REIT. Effective tax rates before discrete items were 19.2 percent and 25.2 percent for the three months ended September 30, 2010 and 2009, respectively. Year-to-date effective tax rates before discrete items were 18.3 percent and 22.1 percent in 2010 and 2009, respectively. The lower rates in 2010 were due to proportionately higher earnings from the REIT.

Including discrete items, the effective tax rates for the quarter and year-to-date were 20.9 percent and 16.0 percent compared to 17.8 percent and 14.6 percent in 2009, respectively.

5. RESTRICTED DEPOSITS

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 LKE purchases are not completed, the proceeds are returned to the Company after 180 days and reclassified as available cash. As of September 30, 2010 and December 31, 2009, the Company had $13.3 million and $0.1 million, respectively, of proceeds from real estate sales classified as restricted cash in Other Assets, which were deposited with an LKE intermediary.

6. JOINT VENTURE INVESTMENT

The Company owns an interest in Matariki Forestry Group (“Matariki”), a joint venture (“JV”) that owns or leases approximately 0.3 million acres of New Zealand timberlands. In addition to this investment, Rayonier New Zealand Limited (“RNZ”), a wholly-owned subsidiary of Rayonier, serves as the manager of the JV forests and operates a log trading business.

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. A portion of Rayonier’s 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 in 2005. The deferred gain is recognized on a straight-line basis over the estimated number of years the JV expects to harvest the timberlands.

5

RAYONIER INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

(Dollars in thousands unless otherwise stated)

In the third quarter of 2008, Rayonier’s Board of Directors approved a plan to offer to sell the Company’s 40 percent interest in the JV as well as the operations of RNZ. As a result, the operating results of the JV and RNZ were segregated from continuing operations in the Condensed Consolidated Statements of Income and Comprehensive Income and reported as discontinued operations.

In the second quarter of 2009, as a result of distressed capital markets and the weak global economic conditions, Rayonier and its joint venture partners decided to discontinue the sale process and continue with ongoing operations. Accordingly, the operating results of the joint venture are included in continuing operations in the Condensed Consolidated Statements of Income and Comprehensive Income for all periods presented.

In February 2010, the JV sold a 35 percent interest in the JV to a new investor for NZ$167 million. Matariki issued new shares to the investor and used the proceeds entirely to pay down a portion of its outstanding NZ$367 million debt. Upon closing, Rayonier’s ownership interest in Matariki declined from 40 percent to 26 percent. As a result of this transaction, results for 2010 include a gain of $11.5 million, net of $0.9 million in tax, or $0.14 per diluted share.

7. SHAREHOLDERS’ EQUITY

An analysis of shareholders’ equity for the nine months ended September 30, 2010 and the year ended December 31, 2009 is shown below (share amounts not in thousands):

	Common Shares						Retained Earnings			Accumulated Other Comprehensive Income (Loss)			Shareholders’ Equity
	Shares			Amount
Balance, December 31, 2008		78,814,431		$	527,302		$	509,931		$	(98,296	)	$	938,937
Net income		—			—			312,541			—			312,541
Dividends ($2.00 per share)		—			—			(158,486	)		—			(158,486	)
Issuance of shares under incentive stock plans		776,905			11,115			—			—			11,115
Equity portion of convertible debt		—			8,850			—			—			8,850
Warrants and hedge, net		—			(2,391	)		—			—			(2,391	)
Stock-based compensation		—			15,754			—			—			15,754
Excess tax benefit on stock-based compensation		—			2,720			—			—			2,720
Repurchase of common shares		(49,362	)		(1,388	)		—			—			(1,388	)
Net gain from pension and postretirement plans		—			—			—			4,879			4,879
Foreign currency translation adjustment		—			—			—			15,980			15,980
Joint venture cash flow hedges		—			—			—			(2,305	)		(2,305	)
Balance, December 31, 2009		79,541,974		$	561,962		$	663,986		$	(79,742	)	$	1,146,206
Net income		—			—			158,415			—			158,415
Dividends ($1.50 per share)		—			—			(120,874	)		—			(120,874	)
Issuance of shares under incentive stock plans		1,143,983			21,532			—			—			21,532
Stock-based compensation		—			11,610			—			—			11,610
Excess tax benefit on stock-based compensation		—			5,071			—			—			5,071
Repurchase of common shares		(136,108	)		(6,028	)		—			—			(6,028	)
Amortization of pension and postretirement benefit costs		—			—			—			5,849			5,849
Foreign currency translation adjustment		—			—			—			(64	)		(64	)
Joint venture cash flow hedges		—			—			—			922			922
Balance, September 30, 2010		80,549,849		$	594,147		$	701,527		$	(73,035	)	$	1,222,639

6

RAYONIER INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

(Dollars in thousands unless otherwise stated)

8. SEGMENT INFORMATION

Rayonier operates in four reportable business segments: 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 higher and better use (“HBU”). The assets of the Real Estate segment include HBU property held by the Company’s real estate subsidiary, TerraPointe LLC. The Performance Fibers segment includes two major product lines, cellulose specialties and absorbent materials. The Wood Products segment is comprised of lumber operations. The Company’s remaining operations include harvesting and selling timber acquired from third parties (log trading). These operations are reported in “Other Operations.” Sales between operating segments are made based on fair market value, and intercompany sales, purchases and profits (losses) are eliminated in consolidation. The Company evaluates financial performance based on the operating income of the segments.

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

Total assets, sales, operating income (loss) and depreciation, depletion and amortization by segment including Corporate were as follows:

	September 30, 2010		December 31, 2009
ASSETS
Timber	$	1,275,276	$	1,259,675
Real Estate		77,654		71,118
Performance Fibers		554,186		517,941
Wood Products		20,180		21,972
Other Operations		26,656		19,432
Corporate and other		438,183		362,793
TOTAL	$	2,392,135	$	2,252,931

	Three Months Ended September 30,						Nine Months Ended September 30,
	2010			2009			2010			2009
SALES
Timber	$	47,343		$	46,465		$	143,368		$	124,957
Real Estate		45,162			21,966			90,891			89,936
Performance Fibers		246,314			216,837			648,032			597,580
Wood Products		14,652			13,259			52,157			37,532
Other Operations		25,449			8,512			72,803			23,171
Intersegment Eliminations		(1,405	)		(6,391	)		(7,326	)		(14,445	)
TOTAL	$	377,515		$	300,648		$	999,925		$	858,731

7

RAYONIER INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

(Dollars in thousands unless otherwise stated)

	Three Months Ended September 30,						Nine Months Ended September 30,
	2010			2009			2010			2009
OPERATING INCOME (LOSS)
Timber	$	9,151		$	1,038		$	26,023		$	(867	)
Real Estate		30,788			12,795			52,325			51,363
Performance Fibers		62,311			49,524			152,158			125,060
Wood Products		(1,368	)		(1,999	)		2,943			(8,142	)
Other Operations		(798	)		(1,286	)		538			(2,618	)
Corporate and other		(8,002	)		51,076	(a)		(8,701	)(b)		123,761	(a)
TOTAL	$	92,082		$	111,148		$	225,286		$	288,557

(a) Three and nine months ended September 30, 2009 include $55.8 million and $141.8 million relating to the AFMC. For additional information, see Note 2 – Alternative Fuel Mixture Credit (“AFMC”) and Cellulosic Biofuel Producer Credit (“CBPC”).

(b) Includes a gain of $12.4 million from the sale of a portion of the Company’s interest in its New Zealand joint venture. See Note 6 – Joint Venture Investment for additional information.

	Three Months Ended September 30,				Nine Months Ended September 30,
	2010		2009		2010		2009
DEPRECIATION, DEPLETION AND AMORTIZATION
Timber	$	14,813	$	19,083	$	48,819	$	58,515
Real Estate		9,284		4,811		21,286		22,256
Performance Fibers		13,922		15,025		41,929		42,021
Wood Products		936		1,060		3,080		3,491
Other Operations		—		1		2		2
Corporate and other		210		179		571		549
TOTAL	$	39,165	$	40,159	$	115,687	$	126,834

9. FAIR VALUE MEASUREMENTS

The following table presents the carrying amount and estimated fair values of financial instruments held by the Company at September 30, 2010 and December 31, 2009, using market information and what the Company believes to be appropriate valuation methodologies under generally accepted accounting principles:

	September 30, 2010						December 31, 2009
Asset (liability)	Carrying Amount			Fair Value			Carrying Amount			Fair Value
Cash and cash equivalents	$	405,665		$	405,665		$	74,964		$	74,964
Short-term debt		—			—			(4,650	)		(4,650	)
Long-term debt		(766,102	)		(882,920	)		(694,999	)		(790,763	)

8

RAYONIER INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

(Dollars in thousands unless otherwise stated)

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.

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

Asset	Carrying Value at September 30, 2010		Level 2		Carrying Value at December 31, 2009		Level 2
Investment in special-purpose entity	$	2,879	$	2,879	$	2,733	$	2,733

The fair value of the investment in the special-purpose entity is determined by summing the discounted value of future principal and interest payments that Rayonier will receive from the special-purpose entity. The interest rate of a similar instrument is used to determine the discounted value of the payments.

Variable Interest Entity

Rayonier holds a variable interest in a bankruptcy-remote, limited liability subsidiary (“special-purpose entity”) which was created in 2004 when Rayonier monetized a $25.0 million installment note and letter of credit received in connection with a timberland sale. The Company contributed the note and a letter of credit to the special-purpose entity and using the installment note and letter of credit as collateral, the special-purpose entity issued $22.6 million of 15-year Senior Secured Notes and remitted cash of $22.6 million to the Company. There are no restrictions that relate to the transferred financial assets. Rayonier maintains a $2.6 million interest in the entity 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. The Company’s interest is recorded at fair value and is included in “Other Assets” in the Condensed Consolidated Balance Sheets. In addition, the Company calculated and recorded a de minimus guarantee liability to reflect its obligation of up to $2.6 million under a make-whole agreement pursuant to which it guaranteed certain obligations of the entity. This guarantee obligation is also collateralized by the letter of credit. The Company’s interest in the entity, together with the make-whole agreement, represents the maximum exposure to loss as a result of the Company’s involvement with the special-purpose entity. Upon maturity of the Senior Secured Notes in 2019 and termination of the special purpose entity, Rayonier will receive the remaining $2.6 million of cash. The Company determined, based upon an analysis under the variable interest entity guidance, that it does not have the power to direct activities that most significantly impact the entity’s economic success. Therefore, Rayonier is not the primary beneficiary and is not required to consolidate the entity.

10. GUARANTEES

The Company provides financial guarantees as required by creditors, insurance programs, and state and foreign governmental agencies. As of September 30, 2010, the following financial guarantees were outstanding:

	Maximum Potential Payment		Carrying Amount of Liability
Standby letters of credit (a)	$	43,807	$	38,110
Guarantees (b)		2,555		43
Surety bonds (c)		11,718		1,786
Total	$	58,080	$	39,939

(a) Approximately $39 million of the standby letters of credit serve as credit support for industrial revenue bonds. The remaining letters of credit support obligations under various insurance related agreements, primarily workers’ compensation and pollution liability policy requirements. These letters of credit expire at various dates during 2010 and 2011 and will be renewed as required.

(b) 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 $2.6 million of obligations of a special-purpose entity that was established to complete the monetization. At September 30, 2010, the Company has recorded a de minimus liability to reflect the fair market value of its obligation to perform under the make-whole agreement.

9

RAYONIER INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

(Dollars in thousands unless otherwise stated)

(c) Rayonier issued surety bonds primarily to secure timber in the State of Washington and to provide collateral for the Company’s workers’ compensation self-insurance program in Washington and Georgia. These surety bonds expire at various dates during 2010, 2011 and 2014, and are expected to be renewed as required.

11. LIABILITIES FOR DISPOSITIONS AND DISCONTINUED OPERATIONS

An analysis of activity in the liabilities for dispositions and discontinued operations for the nine months ended September 30, 2010 and the year ended December 31, 2009, is as follows:

	September 30, 2010			December 31, 2009
Balance, January 1	$	98,591		$	104,575
Expenditures charged to liabilities		(6,484	)		(8,095	)
Increase to liabilities		63			2,111
Balance, end of period		92,170			98,591
Less: Current portion		(11,696	)		(10,648	)
Non-current portion	$	80,474		$	87,943

Subject to the factors described in the next paragraph of this footnote and in Note 16 – Liabilities for Dispositions and Discontinued Operations in the 2009 Annual Report on Form 10-K, 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 and sediments, recovery and treatment/remediation of groundwater, and other remediation and/or control of contamination sources.

In addition, the Company is exposed to the risk of reasonably possible additional losses in excess of the established liabilities. As of September 30, 2010, it is estimated that this amount could range up to $36 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.

For additional information on the Company’s environmental liabilities refer to Note 16 – Liabilities for Dispositions and Discontinued Operations in the 2009 Annual Report on Form 10-K.

12. CONTINGENCIES

Rayonier is engaged in various legal actions, including certain environmental proceedings. 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.

There have been no material changes in the status of the other specific matters referenced in Note 16 – Liabilities for Dispositions and Discontinued Operations in the 2009 Annual Report on Form 10-K.

13. EMPLOYEE BENEFIT PLANS

The Company has four qualified non-contributory defined benefit pension plans covering the majority of its employees and an unfunded plan that provides benefits in excess of amounts allowable under current tax law in the qualified plans. Three of the qualified plans, as well as the unfunded plan, are closed to new participants. 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.

10

RAYONIER INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

(Dollars in thousands unless otherwise stated)

The net periodic benefit costs of the Company’s pension and postretirement plans (medical and life insurance) are shown in the following table:

	Pension						Postretirement
	Three Months Ended September 30,						Three Months Ended September 30,
	2010			2009			2010			2009
Components of Net Periodic Benefit Cost
Service cost	$	1,549		$	1,182		$	148		$	181
Interest cost		4,435			4,864			258			257
Expected return on plan assets		(5,412	)		(5,489	)		—			—
Amortization of prior service cost		414			664			21			22
Amortization of plan amendment		—			—			(637	)		(2,391	)
Amortization of losses		1,614			1,949			459			1,273
Net periodic benefit cost	$	2,600		$	3,170		$	249		$	(658	)

	Pension						Postretirement
	Nine Months Ended September 30,						Nine Months Ended September 30,
	2010			2009			2010			2009
Components of Net Periodic Benefit Cost
Service cost	$	4,647		$	4,867		$	440		$	361
Interest cost		13,305			13,562			772			858
Expected return on plan assets		(16,238	)		(16,071	)		—			—
Amortization of prior service cost		1,243			1,372			65			66
Amortization of plan amendment		—			—			(5,421	)		(7,175	)
Amortization of losses		4,842			4,647			3,415			4,389
Net periodic benefit cost	$	7,799		$	8,377		$	(729	)	$	(1,501	)

The Company made no discretionary contributions to the pension plans during the nine months ended September 30, 2010.

Subsequent Event

In October 2010, Rayonier made a $50 million discretionary pension contribution in order to improve funded status. The Company does not expect to make any additional discretionary contributions in 2010.

14. DEBT

In March 2010, TRS borrowed $75 million under a five-year term loan agreement with a group of banks at LIBOR plus 275 basis points. There were no other significant changes to the Company’s outstanding debt as reported in Note 13 – Debt of the Company’s 2009 Annual Report on Form 10-K.

11

RAYONIER INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

(Dollars in thousands unless otherwise stated)

15. ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)

Accumulated Other Comprehensive Income (Loss) was comprised of the following:

	September 30, 2010			December 31, 2009
Foreign currency translation adjustments	$	26,705		$	26,769
Joint venture cash flow hedges		(1,383	)		(2,305	)
Unrecognized components of employee benefit plans, net of tax		(98,357	)		(104,206	)
Total	$	(73,035	)	$	(79,742	)

16. CONSOLIDATING FINANCIAL STATEMENTS

In October 2007, TRS issued $300 million of 3.75% Senior Exchangeable Notes due 2012, and in August 2009 TRS issued $172.5 million of 4.50% Senior Exchangeable Notes due 2015. The notes for both transactions are guaranteed by Rayonier 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 incurred for the benefit of its subsidiaries.

On July 29, 2010, Rayonier Inc. reorganized its operating structure by creating a new wholly owned operating entity Rayonier Operating Company LLC (“ROC”), and entering into a contribution agreement under which Rayonier Inc. contributed all assets and liabilities to ROC. As part of this agreement, ROC guarantees the TRS notes mentioned above. Rayonier Inc.’s guarantee of the TRS notes was unchanged by the transaction. Accordingly, the Company has revised its presentation of previously reported consolidating financial statements to reflect ROC as a subsidiary guarantor.

12

RAYONIER INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

(Dollar amounts in thousands unless otherwise stated)

	CONDENSED CONSOLIDATING STATEMENTS OF INCOME For the Three Months Ended September 30, 2010
	Rayonier Inc. (Parent		ROC (Subsidiary			Rayonier TRS Holdings Inc.			Subsidiaries of Rayonier TRS Holdings Inc.			All Other Subsidiaries			Consolidating			Total
	Guarantor)		Guarantor)			(Issuer)			(Non-guarantors)			(Non-guarantors)			Adjustments			Consolidated
SALES	$	—	$	—		$	—		$	349,311		$	69,040		$	(40,836	)	$	377,515
Costs and Expenses
Cost of sales		—		—			—			280,715			33,900			(45,412	)		269,203
Selling and general expenses		—		2,735			—			13,613			777			—			17,125
Other operating expense (income), net		—		54			—			679			(1,525	)		—			(792	)
		—		2,789			—			295,007			33,152			(45,412	)		285,536
Equity in (loss) income of New Zealand joint venture		—		(44	)		—			147			—			—			103
OPERATING (LOSS) INCOME		—		(2,833	)		—			54,451			35,888			4,576			92,082
Interest expense		—		(80	)		(7,352	)		(5,483	)		(28	)		—			(12,943	)
Interest and miscellaneous income (expense), net		—		1,335			(1,299	)		(4,866	)		5,175			—			345
Equity in income from subsidiaries		62,904		66,724			26,606			—			—			(156,234	)		—
INCOME BEFORE INCOME TAXES		62,904		65,146			17,955			44,102			41,035			(151,658	)		79,484
Income tax (expense) benefit		—		(2,242	)		3,158			(17,496	)		—			—			(16,580	)
NET INCOME	$	62,904	$	62,904		$	21,113		$	26,606		$	41,035		$	(151,658	)	$	62,904

13

RAYONIER INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

(Dollar amounts in thousands unless otherwise stated)

	CONDENSED CONSOLIDATING STATEMENTS OF INCOME For the Three Months Ended September 30, 2009
	Rayonier Inc. (Parent		ROC (Subsidiary			Rayonier TRS Holdings Inc.			Subsidiaries of Rayonier TRS Holdings Inc.			All Other Subsidiaries			Consolidating			Total
	Guarantor)		Guarantor)			(Issuer)			(Non-guarantors)			(Non-guarantors)			Adjustments			Consolidated
SALES	$	—	$	—		$	—		$	266,859		$	47,691		$	(13,902	)	$	300,648
Costs and Expenses
Cost of sales		—		—			—			215,399			31,218			(14,781	)		231,836
Selling and general expenses		—		2,926			—			12,222			829			(5	)		15,972
Other operating expense (income), net		—		43			—			(57,004	)		(2,290	)		—			(59,251	)
		—		2,969			—			170,617			29,757			(14,786	)		188,557
Equity in (loss) income of New Zealand joint venture		—		(1,248	)		—			305			—			—			(943	)
OPERATING (LOSS) INCOME		—		(4,217	)		—			96,547			17,934			884			111,148
Interest income (expense)		—		209			(5,919	)		(5,920	)		(1,159	)		—			(12,789	)
Interest and miscellaneous income (expense), net		—		1,255			(1,124	)		(1,087	)		1,296			(30	)		310
Equity in income from subsidiaries		81,140		85,757			71,305			—			—			(238,202	)		—
INCOME BEFORE INCOME TAXES		81,140		83,004			64,262			89,540			18,071			(237,348	)		98,669
Income tax (expense) benefit		—		(1,864	)		2,570			(18,235	)		—			—			(17,529	)
NET INCOME	$	81,140	$	81,140		$	66,832		$	71,305		$	18,071		$	(237,348	)	$	81,140

14

RAYONIER INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

(Dollar amounts in thousands unless otherwise stated)

	CONDENSED CONSOLIDATING STATEMENTS OF INCOME For the Nine Months Ended September 30, 2010
	Rayonier Inc. (Parent		ROC (Subsidiary			Rayonier TRS Holdings Inc.			Subsidiaries of Rayonier TRS Holdings Inc.			All Other Subsidiaries			Consolidating			Total
	Guarantor)		Guarantor)			(Issuer)			(Non-guarantors)			(Non-guarantors)			Adjustments			Consolidated
SALES	$	—	$	—		$	—		$	928,643		$	203,909		$	(132,627	)	$	999,925
Costs and Expenses
Cost of sales		—		—			—			754,937			99,782			(109,723	)		744,996
Selling and general expenses		—		7,591			—			39,343			2,330			—			49,264
Other operating expense (income), net		—		73			—			(955	)		(5,738	)		—			(6,620	)
		—		7,664			—			793,325			96,374			(109,723	)		787,640
Equity in (loss) income of New Zealand joint venture		—		(18	)		—			652			—			—			634
OPERATING (LOSS) INCOME BEFORE GAIN ON SALE OF A PORTION OF THE INTEREST IN THE NEW ZEALAND JOINT VENTURE		—		(7,682	)		—			135,970			107,535			(22,904	)		212,919
Gain on sale of a portion of the interest in the New Zealand joint venture		—		4,670			—			7,697			—			—			12,367
OPERATING (LOSS) INCOME		—		(3,012	)		—			143,667			107,535			(22,904	)		225,286
Interest income (expense)		—		70			(22,075	)		(15,568	)		(107	)		—			(37,680	)
Interest and miscellaneous income (expense), net		—		11,595			(3,897	)		(21,214	)		14,459			—			943
Equity in income from subsidiaries		158,415		153,546			71,055			—			—			(383,016	)		—
INCOME BEFORE INCOME TAXES		158,415		162,199			45,083			106,885			121,887			(405,920	)		188,549
Income tax (expense) benefit		—		(3,784	)		9,480			(35,830	)		—			—			(30,134	)
NET INCOME	$	158,415	$	158,415		$	54,563		$	71,055		$	121,887		$	(405,920	)	$	158,415

15

RAYONIER INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

(Dollar amounts in thousands unless otherwise stated)

	CONDENSED CONSOLIDATING STATEMENTS OF INCOME For the Nine Months Ended September 30, 2009
	Rayonier Inc. (Parent		ROC (Subsidiary			Rayonier TRS Holdings Inc.			Subsidiaries of Rayonier TRS Holdings Inc.			All Other Subsidiaries			Consolidating			Total
	Guarantor)		Guarantor)			(Issuer)			(Non-guarantors)			(Non-guarantors)			Adjustments			Consolidated
SALES	$	—	$	—		$	—		$	724,718		$	165,713		$	(31,700	)	$	858,731
Costs and Expenses
Cost of sales		—		—			—			599,381			108,397			(34,923	)		672,855
Selling and general expenses		—		7,824			—			34,635			2,503			—			44,962
Other operating expense (income), net		—		131			—			(143,781	)		(6,775	)		—			(150,425	)
		—		7,955			—			490,235			104,125			(34,923	)		567,392
Equity in (loss) income of New Zealand joint venture		—		(2,808	)		—			26			—			—			(2,782	)
OPERATING (LOSS) INCOME		—		(10,763	)		—			234,509			61,588			3,223			288,557
Interest expense		—		(27	)		(15,133	)		(18,998	)		(3,472	)		—			(37,630	)
Interest and miscellaneous income (expense), net		—		2,831			(2,671	)		(3,357	)		3,884			(93	)		594
Equity in income from subsidiaries		214,814		227,265			173,441			—			—			(615,520	)		—
INCOME BEFORE INCOME TAXES		214,814		219,306			155,637			212,154			62,000			(612,390	)		251,521
Income tax (expense) benefit		—		(4,492	)		6,498			(38,713	)		—			—			(36,707	)
NET INCOME	$	214,814	$	214,814		$	162,135		$	173,441		$	62,000		$	(612,390	)	$	214,814

16

RAYONIER INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

(Dollar amounts in thousands unless otherwise stated)

	CONDENSED CONSOLIDATING BALANCE SHEETS As of September 30, 2010
	Rayonier Inc. (Parent		ROC (Subsidiary		Rayonier TRS Holdings Inc.		Subsidiaries of Rayonier TRS Holdings Inc.			All Other Subsidiaries		Consolidating			Total
	Guarantor)		Guarantor)		(Issuer)		(Non-guarantors)			(Non-guarantors)		Adjustments			Consolidated
ASSETS
CURRENT ASSETS
Cash and cash equivalents	$	—	$	39,334	$	—	$	304,289		$	62,042	$	—		$	405,665
Accounts receivable, less allowance for doubtful accounts		—		1,028		—		111,675			1,842		—			114,545
Inventory		—		—		—		99,114			—		(12,899	)		86,215
Intercompany interest receivable		—		—		—		—			4,296		(4,296	)		—
Income tax and alternative fuel mixture credit receivable		—		1		—		1,581			—		—			1,582
Prepaid and other current assets		—		1,759		804		48,969			2,158		—			53,690
Total current assets		—		42,122		804		565,628			70,338		(17,195	)		661,697
TIMBER AND TIMBERLANDS, NET OF DEPLETION AND AMORTIZATION		—		—		—		38,004			1,091,555		1,102			1,130,661
NET PROPERTY, PLANT AND EQUIPMENT		—		1,529		—		367,855			1,148		758			371,290
INVESTMENT IN JOINT VENTURE		—		77,435		—		(12,123	)		—		—			65,312
INVESTMENT IN SUBSIDIARIES		1,222,639		1,253,561		907,669		—			—		(3,383,869	)		—
INTERCOMPANY/NOTES RECEIVABLE		—		—		—		—			—		—			—
OTHER ASSETS		—		22,691		9,309		664,725			18,545		(552,095	)		163,175
TOTAL ASSETS	$	1,222,639	$	1,397,338	$	917,782	$	1,624,089		$	1,181,586	$	(3,951,299	)	$	2,392,135
LIABILITIES AND SHAREHOLDERS’ EQUITY
CURRENT LIABILITIES
Accounts payable	$	—	$	1,948	$	—	$	46,073		$	2,668	$	—		$	50,689
Accrued interest		—		244		6,158		5,231			—		—			11,633
Accrued customer incentives		—		—		—		13,751			—		—			13,751
Current liabilities for dispositions and discontinued operations		—		—		—		11,696			—		—			11,696
Other current liabilities		—		20,318		—		43,886			23,081		—			87,285
Total current liabilities		—		22,510		6,158		120,637			25,749		—			175,054
LONG-TERM DEBT		—		—		447,435		318,667			—		—			766,102
NON-CURRENT LIABILITIES FOR DISPOSITIONS AND DISCONTINUED OPERATIONS		—		—		—		80,474			—		—			80,474
PENSION AND OTHER POSTRETIREMENT BENEFITS		—		87,415		—		24,542			—		—			111,957
OTHER NON-CURRENT LIABILITIES		—		11,798		—		23,506			605		—			35,909
INTERCOMPANY PAYABLE		—		52,976		—		148,594			19,039		(220,609	)		—
TOTAL LIABILITIES		—		174,699		453,593		716,420			45,393		(220,609	)		1,169,496
TOTAL SHAREHOLDERS’ EQUITY		1,222,639		1,222,639		464,189		907,669			1,136,193		(3,730,690	)		1,222,639
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY	$	1,222,639	$	1,397,338	$	917,782	$	1,624,089		$	1,181,586	$	(3,951,299	)	$	2,392,135

17

RAYONIER INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

(Dollar amounts in thousands unless otherwise stated)

	CONDENSED CONSOLIDATING BALANCE SHEETS As of December 31, 2009
	Rayonier Inc. (Parent		ROC (Subsidiary		Rayonier TRS Holdings Inc.		Subsidiaries of Rayonier TRS Holdings Inc.			All Other Subsidiaries		Consolidating			Total
	Guarantor)		Guarantor)		(Issuer)		(Non-guarantors)			(Non-guarantors)		Adjustments			Consolidated
ASSETS
CURRENT ASSETS
Cash and cash equivalents	$	—	$	2,895	$	—	$	69,722		$	2,347	$	—		$	74,964
Accounts receivable, less allowance for doubtful accounts		—		—		—		101,710			2,030		—			103,740
Inventory		—		—		—		114,187			—		(25,683	)		88,504
Intercompany interest receivable		—		—		—		—			1,081		(1,081	)		—
Income tax and alternative fuel mixture credit receivable		—		—		—		192,579			—		—			192,579
Prepaid and other current assets		—		1,430		758		44,722			2,999		—			49,909
Total current assets		—		4,325		758		522,920			8,457		(26,764	)		509,696
TIMBER AND TIMBERLANDS, NET OF DEPLETION AND AMORTIZATION		—		1,807		—		87,747			1,099,005		—			1,188,559
NET PROPERTY, PLANT AND EQUIPMENT		—		1,493		—		341,790			1,147		509			344,939
INVESTMENT IN JOINT VENTURE		—		75,248		—		(24,249	)		—		—			50,999
INVESTMENT IN SUBSIDIARIES		1,146,206		1,173,256		869,169		—			—		(3,188,631	)		—
OTHER ASSETS		—		23,135		11,668		496,195			4,313		(376,573	)		158,738
TOTAL ASSETS	$	1,146,206	$	1,279,264	$	881,595	$	1,424,403		$	1,112,922	$	(3,591,459	)	$	2,252,931
LIABILITIES AND SHAREHOLDERS’ EQUITY
CURRENT LIABILITIES
Accounts payable	$	—	$	3,057	$	—	$	54,871		$	656	$	—		$	58,584
Bank loans and current maturities		—		—		—		4,650			—		—			4,650
Accrued interest		—		519		5,286		707			—		—			6,512
Accrued customer incentives		—		—		—		25,644			—		—			25,644
Current liabilities for dispositions and discontinued operations		—		—		—		10,648			—		—			10,648
Other current liabilities		—		18,885		—		37,726			12,462		—			69,073
Total current liabilities		—		22,461		5,286		134,246			13,118		—			175,111
LONG-TERM DEBT		—		5,000		441,332		243,667			5,000		—			694,999
NON-CURRENT LIABILITIES FOR DISPOSITIONS AND DISCONTINUED OPERATIONS		—		—		—		87,943			—		—			87,943
PENSION AND OTHER POSTRETIREMENT BENEFITS		—		86,522		—		25,140			—		—			111,662
OTHER NON-CURRENT LIABILITIES		—		13,352		—		23,035			23,553		(22,930	)		37,010
INTERCOMPANY PAYABLE		—		5,723		—		41,203			8,706		(55,632	)		—
TOTAL LIABILITIES		—		133,058		446,618		555,234			50,377		(78,562	)		1,106,725
TOTAL SHAREHOLDERS’ EQUITY		1,146,206		1,146,206		434,977		869,169			1,062,545		(3,512,897	)		1,146,206
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY	$	1,146,206	$	1,279,264	$	881,595	$	1,424,403		$	1,112,922	$	(3,591,459	)	$	2,252,931

18

RAYONIER INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

(Dollar amounts in thousands unless otherwise stated)

	CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS For the Nine Months Ended September 30, 2010
	Rayonier Inc. (Parent			ROC (Subsidiary			Rayonier TRS Holdings, Inc.			Subsidiaries of Rayonier TRS Holdings Inc.			All Other Subsidiaries			Consolidating			Total
	Guarantor)			Guarantor)			(Issuer)			(Non-guarantors)			(Non-guarantors)			Adjustments			Consolidated
CASH PROVIDED BY OPERATING ACTIVITIES	$	104,652		$	146,909		$	25,000		$	296,986		$	196,190		$	(296,530	)	$	473,207
INVESTING ACTIVITIES
Capital expenditures		—			(818	)		—			(73,617	)		(21,179	)		—			(95,614	)
Purchase of timberlands		—			—			—			—			(48,487	)		48,487			—
Purchase of real estate		—			—			—			(41,253	)		—			41,253			—
Change in restricted cash		—			—			—			—			(13,209	)		—			(13,209	)
Other		—			—			—			6,590			(379	)		—			6,211
CASH USED FOR INVESTING ACTIVITIES		—			(818	)		—			(108,280	)		(83,254	)		89,740			(102,612	)
FINANCING ACTIVITIES
Issuance of debt		—			—			—			75,000			82,000			—			157,000
Repayment of debt		—			(5,000	)		—			(4,650	)		(87,000	)		—			(96,650	)
Dividends paid		(120,156	)		—			—			—			—			—			(120,156	)
Proceeds from the issuance of common shares		21,532			—			—			—			—			—			21,532
Excess tax benefits on stock-based compensation		—			—			—			5,071			—			—			5,071
Debt issuance costs		—			—			—			(537	)		—			—			(537	)
Repurchase of common shares		(6,028	)		—			—			—			—			—			(6,028	)
Distributions to parent		—			(104,652	)		(25,000	)		(28,897	)		(48,241	)		206,790			—
CASH (USED FOR) PROVIDED BY FINANCING ACTIVITIES		(104,652	)		(109,652	)		(25,000	)		45,987			(53,241	)		206,790			(39,768	)
EFFECT OF EXCHANGE RATE CHANGES ON CASH		—			—			—			(126	)		—			—			(126	)
CASH AND CASH EQUIVALENTS
Change in cash and cash equivalents		—			36,439			—			234,567			59,695			—			330,701
Balance, beginning of year		—			2,895			—			69,722			2,347			—			74,964
Balance, end of period	$	—		$	39,334		$	—		$	304,289		$	62,042		$	—		$	405,665

19

RAYONIER INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

(Dollar amounts in thousands unless otherwise stated)

	CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS For the Nine Months Ended September 30, 2009
	Rayonier Inc. (Parent			ROC (Parent			Rayonier TRS Holdings Inc.			Subsidiaries of Rayonier TRS Holdings Inc.			All Other Subsidiaries			Consolidating			Total
	Guarantor)			Guarantor)			(Issuer)			(Non-guarantors)			(Non-guarantors)			Adjustments			Consolidated
CASH PROVIDED BY OPERATING ACTIVITIES	$	98,194		$	122,216		$	25,000		$	58,394		$	169,973		$	(259,459	)	$	214,318
INVESTING ACTIVITIES
Capital expenditures		—			(4	)		—			(45,513	)		(22,155	)		2,594			(65,078	)
Change in restricted cash		—			—			—			—			1,243			—			1,243
Investment in Subsidiaries		—			—			(144,911	)		—			—			144,911			—
Other		—			—			—			(7,240	)		(445	)		—			(7,685	)
CASH USED FOR INVESTING ACTIVITIES		—			(4	)		(144,911	)		(52,753	)		(21,357	)		147,505			(71,520	)
FINANCING ACTIVITIES
Issuance of debt		—			—			172,500			5,000			80,000			—			257,500
Repayment of debt		—			(20,000	)		—			(85,620	)		(80,000	)		—			(185,620	)
Dividends paid		(118,540	)		—			—			—			—			—			(118,540	)
Proceeds from the issuance of common shares		9,228			—			—			—			—			—			9,228
Excess tax benefits on stock-based compensation		—			—			—			2,287			—			—			2,287
Repurchase of common shares		(1,388	)		—			—			—			—			—			(1,388	)
Purchase of exchangeable note hedge		—			—			(23,460	)		—			—			—			(23,460	)
Proceeds from issuance of warrant		12,506			—			—			—			—			—			12,506
Debt issuance costs		—			—			(4,129	)		—			—			—			(4,129	)
Distributions to / from Parent		—			(98,194	)		(25,000	)		117,240			(106,000	)		111,954			—
CASH (USED FOR) PROVIDED BY FINANCING ACTIVITIES		(98,194	)		(118,194	)		119,911			38,907			(106,000	)		111,954			(51,616	)
EFFECT OF EXCHANGE RATE CHANGES ON CASH		—			—			—			278			—			—			278
CASH AND CASH EQUIVALENTS
Change in cash and cash equivalents		—			4,018			—			44,826			42,616			—			91,460
Balance, beginning of year		—			9,741			—			47,082			4,862			—			61,685
Balance, end of period	$	—		$	13,759		$	—		$	91,908		$	47,478		$	—		$	153,145

20

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

When we refer to “we,” “us,” “our,” “the Company,” or “Rayonier,” we mean Rayonier Inc. and its consolidated subsidiaries. References herein to “Notes to Financial Statements” refer to the Notes to the Condensed Consolidated Financial Statements of Rayonier Inc. included in Item 1 of this Report.

The Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is intended to provide a reader of our financial statements with a narrative from the perspective of management on our financial condition, results of operations, liquidity, and certain other factors which may affect future results. Our MD&A should be read in conjunction with the 2009 Annual Report on Form 10-K.

Forward - Looking Statements

Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, provide a “safe harbor” for forward-looking statements to encourage companies to provide prospective information about their companies. 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 subject to future events, risks and uncertainties (many of which are beyond our control or are currently unknown to us) as well as potentially inaccurate estimates, assumptions and judgments by us that could cause actual results to differ materially from results contemplated by our forward-looking statements. Some of these events, risks and uncertainties are set forth in Item 1A – Risk Factors in our 2009 Annual Report on Form 10-K. Forward-looking statements are not guarantees of future performance and undue reliance should not be placed on these statements.

Critical Accounting Policies and Use of Estimates

The preparation of our consolidated financial statements requires us to make estimates, assumptions and judgments that affect our assets, liabilities, revenues and expenses and disclosure of contingent assets and liabilities. We base these 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. For a full description of our critical accounting policies, see Item 7 – Management’s Discussion and Analysis of Financial Condition and Results of Operations in the 2009 Annual Report on Form 10-K.

Segments

We are a leading international forest products company primarily engaged in timberland management, the sale and entitlement of real estate, and the production and sale of high value specialty cellulose fibers and fluff pulp. We operate in four reportable business segments: Timber, Real Estate, Performance Fibers, and Wood Products. The Timber sales include all activities which relate to the harvesting of timber. Real Estate sales include all property sales, including those designated for higher and better use (“HBU”). The assets of the Real Estate segment include HBU property held by the Company’s real estate subsidiary, TerraPointe LLC. The Performance Fibers segment includes two major product lines, cellulose specialties and absorbent materials. The Wood Products segment is comprised of lumber operations. Our remaining operations include harvesting and selling timber acquired from third parties (log trading). These operations are combined and reported in “Other Operations.” Sales between operating segments are made based on fair market value, and intercompany sales, purchases and profits or losses are eliminated in consolidation.

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

21

Results of Operations, Three and Nine Months Ended September 30, 2010 Compared to Three and Nine Months Ended September 30, 2009.

Financial Information (in millions)	Three Months Ended September 30,						Nine Months Ended September 30,
	2010			2009			2010			2009
Sales
Timber	$	47.3		$	46.5		$	143.4		$	125.0
Real Estate
Development		0.4			—			2.0			1.4
Rural		18.6			14.1			26.2			23.7
Non-Strategic Timberlands		26.2			7.8			62.7			64.8
Total Real Estate		45.2			21.9			90.9			89.9
Performance Fibers
Cellulose specialties		186.7			173.1			506.6			464.5
Absorbent materials		59.6			43.7			141.4			133.1
Total Performance Fibers		246.3			216.8			648.0			597.6
Wood Products		14.7			13.3			52.1			37.5
Other operations		25.4			8.5			72.8			23.2
Intersegment Eliminations		(1.4	)		(6.4	)		(7.3	)		(14.5	)
Total Sales	$	377.5		$	300.6		$	999.9		$	858.7
Operating Income (Loss)
Timber	$	9.2		$	1.0		$	26.0		$	(0.9	)
Real Estate		30.8			12.8			52.3			51.4
Performance Fibers		62.3			49.5			152.2			125.1
Wood Products		(1.4	)		(2.0	)		2.9			(8.1	)
Other operations		(0.8	)		(1.3	)		0.5			(2.6	)
Corporate and other expenses / eliminations (1)		(8.0	)		51.1			(8.6	)		123.7
Total Operating Income		92.1			111.1			225.3			288.6
Interest Expense		(12.9	)		(12.8	)		(37.7	)		(37.6	)
Interest / Other income		0.3			0.3			0.9			0.5
Income tax expense		(16.6	)		(17.5	)		(30.1	)		(36.7	)
Net Income	$	62.9		$	81.1		$	158.4		$	214.8
Diluted Earnings Per Share	$	0.77		$	1.01		$	1.95		$	2.69

(1) The nine months ended September 30, 2010 includes a first quarter gain of $12.4 million from the sale of a portion of the Company’s interest in its New Zealand joint venture. See Note 6 – Joint Venture Investment for additional information. The three and nine months ended September 30, 2009 include $55.8 million and $141.8 million, respectively, related to the alternative fuel mixture credit (“AFMC”). See Note 2 – Alternative Fuel Mixture Credit (“AFMC”) and Cellulosic Biofuel Producer Credit (“CBPC”) for additional information.

22

TIMBER

Sales (in millions)			Changes Attributable to:
	2009		Price		Volume/Mix			Other		2010
Three months ended September 30,
Eastern	$	29.5	$	3.5	$	(8.2	)	$	—	$	24.8
Western		14.8		6.3		(0.9	)		—		20.2
New Zealand		2.2		—		—			0.1		2.3
Total Sales	$	46.5	$	9.8	$	(9.1	)	$	0.1	$	47.3
Nine months ended September 30,
Eastern	$	84.3	$	12.3	$	(13.1	)	$	0.7	$	84.2
Western		34.8		14.3		3.0			—		52.1
New Zealand		5.9		—		—			1.2		7.1
Total Sales	$	125.0	$	26.6	$	(10.1	)	$	1.9	$	143.4

In the Eastern region, average prices rose 15 percent and 28 percent in the three and nine months ended September 30, 2010 compared to the prior year periods, respectively, primarily from restricted timber supply, strong pulpwood demand and wet weather conditions in the first half of the year. Volumes declined 27 percent and 22 percent in third quarter and year-to-date 2010 from the prior year periods, respectively, as we returned to more normalized thinning volumes. Year-to-date volumes were also unfavorably impacted by the weather-related restricted hardwood supply in the first quarter.

In the Western region, prices increased 42 percent and 36 percent in the three and nine months ended September 30, 2010 from the respective 2009 periods reflecting improved export demand. Overall volumes declined eight percent for third quarter but increased five percent for the nine months as we accelerated the year’s harvest schedule to the first half to capitalize on increased prices. The sales impact of the year-to-date volume increase also reflects a mix shift to higher-priced delivered logs.

New Zealand sales represent timberland management fees for services provided to the joint venture, of which Rayonier has a 26 percent equity interest.

Operating Income (Loss) (in millions)				Changes Attributable to:
	2009			Price		Volume/Mix			Cost/ Other			2010
Three months ended September 30,
Eastern	$	2.4		$	3.5	$	(1.7	)	$	0.3		$	4.5
Western		(0.4	)		6.3		(0.4	)		(0.9	)		4.6
New Zealand/Other		(1.0	)		—		—			1.1			0.1
Total Operating Income	$	1.0		$	9.8	$	(2.1	)	$	0.5		$	9.2
Nine months ended September 30,
Eastern	$	8.8		$	12.3	$	(4.5	)	$	1.6		$	18.2
Western		(6.7	)		14.3		(0.2	)		(0.1	)		7.3
New Zealand/Other		(3.0	)		—		—			3.5			0.5
Total Operating Income (Loss)	$	(0.9	)	$	26.6	$	(4.7	)	$	5.0		$	26.0

In the Eastern region, third quarter and year-to-date operating income improved from the 2009 periods as higher sales prices more than offset lower volumes. The 2010 periods were also favorably impacted by lower costs primarily from depletion and logging expenses due to geographic sales mix and improved production and transportation costs.

In the Western region, operating income in the third quarter and year-to-date improved from the prior year periods as higher prices more than offset increased logging costs and an unfavorable shift in sales mix.

New Zealand operating income primarily represents equity earnings related to the joint venture’s timber activities which have increased from the prior year periods primarily due to improved export demand.

23

REAL ESTATE

Sales (in millions)			Changes Attributable to:
	2009		Price			Volume/Mix			2010
Three months ended September 30,
Development	$	—	$	—		$	0.4		$	0.4
Rural		14.1		0.1			4.4			18.6
Non-Strategic Timberlands		7.8		(7.9	)		26.3			26.2
Total Sales	$	21.9	$	(7.8	)	$	31.1		$	45.2
Nine months ended September 30,
Development	$	1.4	$	(0.7	)	$	1.3		$	2.0
Rural		23.7		(3.9	)		6.4			26.2
Non-Strategic Timberlands		64.8		9.6			(11.7	)		62.7
Total Sales	$	89.9	$	5.0		$	(4.0	)	$	90.9

Operating Income (in millions)			Changes Attributable to:
	2009		Price			Volume/Mix			Cost/ Other			2010
Three months ended September 30,
Total Operating Income	$	12.8	$	(7.8	)	$	17.2		$	8.6		$	30.8
Nine months ended September 30,
Total Operating Income	$	51.4	$	5.0		$	(1.1	)	$	(3.0	)	$	52.3

For third quarter 2010, sales and operating income improved from 2009 levels primarily due to higher volumes. Third quarter 2010 included 10,000 acres of rural and 13,000 acres of non-strategic timberland sales compared to 8,000 acres and 3,000 acres in third quarter 2009, respectively. Although non-strategic prices declined in third quarter 2010 from the prior year period mainly due to the mix of properties sold, the impact was partially offset by lower basis in properties sold.

Year-to-date, sales and operating income were consistent with 2009 results. While rural acres sold increased 27 percent year-to-date from the prior year period, rural prices decreased primarily due to a change in geographic mix. Non-strategic timberland acres sold year-to-date declined 18 percent from the prior year while prices and costs increased due to site specific characteristics.

24

PERFORMANCE FIBERS

Sales (in millions)			Changes Attributable to:
	2009		Price			Volume/Mix			2010
Three months ended September 30,
Cellulose specialties	$	173.1	$	1.5		$	12.1		$	186.7
Absorbent materials		43.7		16.6			(0.7	)		59.6
Total Sales	$	216.8	$	18.1		$	11.4		$	246.3
Nine months ended September 30,
Cellulose specialties	$	464.5	$	(9.0	)	$	51.1		$	506.6
Absorbent materials		133.1		20.3			(12.0	)		141.4
Total Sales	$	597.6	$	11.3		$	39.1		$	648.0

Cellulose specialties sales improved for the three and nine months ended September 30, 2010 as volume increased seven percent and 11 percent, respectively, from the prior year periods reflecting strong demand. While prices were one percent higher for the quarter, year-to-date prices were two percent below the prior year period due to the removal of a cost-based surcharge in third quarter 2009.

Absorbent materials sales increased for the quarter and year-to-date as prices rose 41 percent and 17 percent, respectively, mainly due to tight supply. Sales volumes declined by one percent and ten percent for the three and nine months, respectively, due to the timing of customer orders, a shift in production to cellulose specialties and production issues.

Operating Income (in millions)			Changes Attributable to:
	2009		Price		Volume/Mix		Costs/ Other			2010
Three months ended September 30,
Total Operating Income	$	49.5	$	18.1	$	3.4	$	(8.7	)	$	62.3
Nine months ended September 30,
Total Operating Income	$	125.1	$	11.3	$	14.3	$	1.5		$	152.2

Operating income improved in both 2010 periods primarily due to increased cellulose specialties volumes and higher absorbent materials prices. Third quarter 2010 was unfavorably impacted by higher wood, chemical and transportation costs, while year-to-date costs continued to be favorable to 2009 as lower chemical and energy costs more than offset higher wood costs.

25

WOOD PRODUCTS

Sales (in millions)				Changes Attributable to:
	2009			Price		Volume			2010
Three months ended September 30,
Total Sales	$	13.3		$	0.7	$	0.7		$	14.7
Nine months ended September 30,
Total Sales	$	37.5		$	11.7	$	2.9		$	52.1
Operating (Loss) Income (in millions)				Changes Attributable to:
	2009			Price		Volume/Mix /Costs			2010
Three months ended September 30,
Total Operating (Loss) Income	$	(2.0	)	$	0.7	$	(0.1	)	$	(1.4	)
Nine months ended September 30,
Total Operating (Loss) Income	$	(8.1	)	$	11.7	$	(0.7	)	$	2.9

Sales and operating income improved from the prior year as prices rose five percent and 29 percent for the three and nine months ended September 30, 2010. Supply constraints caused by wet weather in the first half of the year began easing in the third quarter, however prices still remained above prior year.

Although below historical averages, volumes increased five percent and eight percent in third quarter and year-to-date 2010 from the 2009 periods as we increased production to capitalize on improved pricing. Operating income was unfavorably impacted by higher costs in both 2010 periods, primarily due to increased conversion costs in third quarter and higher wood costs on a year-to-date basis.

OTHER OPERATIONS

Sales and operating results improved from the prior year periods primarily due to foreign exchange gains and higher earnings from log trading.

Corporate and Other Expenses

The nine months ended September 30, 2010 results include a first quarter gain of $12 million from the sale of a portion of the Company’s interest in its New Zealand joint venture. See Note 6 – Joint Venture Investment for additional information. The three and nine months ended September 30, 2009 results include $56 million and $142 million, respectively, relating to the AFMC. See Note 2 – Alternative Fuel Mixture Credit (“AFMC”) and Cellulosic Biofuel Producer Credit (“CBPC”) for additional information. Excluding these special items, corporate and other expenses were $8 million and $5 million for the three months ended September 30, 2010 and 2009, respectively, and $21 million and $18 million for the nine months ended September 30, 2010 and 2009, respectively. The three months ended September 30, 2009 benefited from a $3 million favorable insurance settlement. The increase in expense for the nine months ended September 30, 2010 from the prior year period primarily reflects higher incentive compensation accruals.

Interest Expense and Other Income, Net

For the three and nine months ended September 30, 2010, interest and other expenses were comparable to the prior year periods.

Income Tax Expense

Third quarter effective tax rates before discrete items were 19.2 percent and 25.2 percent in 2010 and 2009, respectively. For the nine months, the effective tax rates were 18.3 percent and 22.1 percent in 2010 and 2009, respectively. The decreased rates in 2010 were due to proportionately higher earnings from the REIT.

26

Including discrete items, the effective tax rates for the quarter and year-to-date were 20.9 percent and 16.0 percent compared to 17.8 percent and 14.6 percent in 2009, respectively.

Two recent tax developments, the cellulosic biofuel producer credit (“CBPC”) and the Small Business Jobs Act, are expected to benefit the Company in future periods.

In October 2010 the Internal Revenue Service (“IRS”) released clarification that both the AFMC and CBPC can be claimed in the same year for different volumes of black liquor. The Company has applied for the cellulosic biofuel producer registration. If IRS approval is received, the CBPC would increase fourth quarter 2010 net income by approximately $23 million, or $0.28 per share. See Note 2 – Alternative Fuel Mixture Credit (“AFMC”) and Cellulosic Biofuel Producer Credit (“CBPC”) for additional information.

In September 2010 the Small Business Jobs Act was enacted, which has a provision that eliminates the built-in gains tax for Rayonier in 2011. The built-in gains tax was approximately $9 million in 2009 and is expected to be approximately $6 million in 2010.

Outlook

Our actions to create value are driving strong cash flows and operating results in 2010. We expect to be at the upper end of our guidance for earnings of $2.05 to $2.20 per share for 2010, excluding special items, and CAD of $360 million to $380 million.

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.

$75 million Five-Year Term Loan Agreement

In March 2010, TRS borrowed $75 million under a five-year term loan agreement with a group of banks at LIBOR plus 275 basis points. We expect to use these funds for general corporate purposes.

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

	As of September 30, 2010			As of December 31,  2009
Cash and cash equivalents (a)	$	406		$	75
Total debt		766			700
Shareholders’ equity		1,223			1,146
Total capitalization (total debt plus equity)		1,989			1,846
Debt to capital ratio		39	%		38	%

(a) Cash and cash equivalents consisted primarily of time deposits with original maturities of 90 days or less.

Cash Provided by Operating Activities (in millions of dollars)

	2010		2009		Increase
Nine months ended September 30,	$	473	$	214	$	259

Cash provided by operating activities for the nine months ended September 30, 2010 increased primarily due to a cash refund of $189 million related to the AFMC received in April 2010. See Note 2 – Alternative Fuel Mixture Credit (“AFMC”) and Cellulosic Biofuel Producer Credit (“CBPC”) for additional information. Excluding the impact of the AFMC, cash provided by operating activities increased by approximately $70 million primarily due to improved operating results.

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Cash Used for Investing Activities (in millions of dollars)

	2010		2009		Increase
Nine months ended September 30,	$	103	$	72	$	31

Cash used for investing activities increased primarily due to a planned increase in capital expenditures for cost reduction and efficiency projects as well as environmental expenditures at our Jesup, Georgia Performance Fibers mill required under a 2008 consent decree. Additionally, restricted cash increased over prior year due to the timing of like-kind exchange (“LKE”) transactions.

Cash Used for Financing Activities (in millions of dollars)

	2010		2009		Decrease
Nine months ended September 30,	$	40	$	52	$	12

Cash used for financing activities decreased mainly due to higher cash proceeds on stock options exercised.

Expected 2010 Expenditures

As previously announced, we increased our quarterly dividend by eight percent to $0.54 per share in fourth quarter 2010, which will raise our quarterly dividend payment to approximately $43 million, compared to $40 million in the third quarter. Income tax payments totaled $5 million during the first nine months of 2010 compared to payments of $10 million in the same period 2009. Cash payments for income taxes during 2010 are anticipated to be between $10 million and $14 million. The expected 2010 tax payments include a benefit from the AFMC and CBPC. See Note 2 – Alternative Fuel Mixture Credit (“AFMC”) and Cellulosic Biofuel Producer Credit (“CBPC”) for additional information.

A cash refund of $189 million related to the AFMC was received in April 2010. The proceeds from the AFMC were partially used to increase 2010 pension contributions and capital expenditures. We made no discretionary pension contributions in the first nine months of 2010; however, we made a discretionary pension contribution of $50 million on October 20, 2010. We do not expect to make any additional discretionary contributions in 2010. Capital expenditures in 2010 are forecasted to be between $140 million and $145 million compared to $92 million in 2009.

Expenditures related to dispositions and discontinued operations were $6 million for the first nine months of 2010 and 2009; full year 2010 expenditures of approximately $10 million are anticipated.

Performance and Liquidity Indicators

The discussion below is presented to enhance the reader’s understanding of our operating performance, 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 operating performance, financial condition and cash generating ability. Management uses EBITDA as a performance measure and Adjusted CAD as a liquidity measure. 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.

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We reconcile EBITDA to Net Income for the consolidated Company and Operating Income for the Segments, as those are the nearest GAAP measures for each. Below is a reconciliation of Net Income to EBITDA for the respective periods (in millions of dollars):

	Three Months Ended September 30,				Nine Months Ended September 30,
	2010		2009		2010		2009
Net Income	$	62.9	$	81.1	$	158.4	$	214.8
Income tax expense		16.6		17.5		30.1		36.7
Interest, net		12.6		12.5		36.8		37.1
Depreciation, depletion and amortization		39.1		40.1		115.6		126.7
EBITDA	$	131.2	$	151.2	$	340.9	$	415.3

EBITDA by segment is a critical valuation measure used by our Chief Operating Decision Maker, existing shareholders and potential shareholders to measure how the Company is performing relative to the assets under management. EBITDA by segment for the respective periods was as follows (millions of dollars):

	Three Months Ended September 30,						Nine Months Ended September 30,
	2010			2009			2010			2009
EBITDA by Segment
Timber	$	24.0		$	20.1		$	74.8		$	57.6
Real Estate		40.1			17.5			73.6			73.6
Performance Fibers		76.2			64.6			194.1			167.1
Wood Products		(0.5	)		(1.0	)		6.0			(4.7	)
Other Operations		(0.8	)		(1.3	)		0.5			(2.6	)
Corporate and other		(7.8	)		51.3	(a)		(8.1	)(b)		124.3	(a)
Total	$	131.2		$	151.2		$	340.9		$	415.3

(a) Three and nine months ended September 30, 2009 results include $55.8 million and $141.8 million, respectively, related to the AFMC. See Note 2 – Alternative Fuel Mixture Credit (“AFMC”) and Cellulosic Biofuel Producer Credit (“CBPC”) for additional information.

(b) Nine months ended September 30, 2010 results include a gain of $12.4 million from the sale of a portion of the Company’s interest in the New Zealand joint venture. See Note 6 – Joint Venture Investment for additional information.

For the three months ended September 30, 2010, EBITDA was $20 million below the prior year period primarily due to the inclusion of $56 million in the 2009 results related to the AFMC. Excluding the AFMC, EBITDA was $36 million above prior year primarily due to higher operating results.

For the nine months ended September 30, 2010, EBITDA was $74 million below the prior year period primarily due to the inclusion of $142 million in the 2009 results related to the AFMC. Excluding the AFMC, 2010 EBITDA was $68 million above prior year primarily due to higher operating results and a $12 million gain from the sale of a portion of Rayonier’s interest in its New Zealand joint venture.

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The following tables reconcile Operating Income by segment to EBITDA by segment (millions of dollars):

	Timber			Real Estate		Performance Fibers		Wood Products			Other Operations			Corporate and Other			Total
Three Months Ended September 30, 2010
Operating income (loss)	$	9.2		$	30.8	$	62.3	$	(1.4	)	$	(0.8	)	$	(8.0)		$	92.1
Add: Depreciation, depletion and amortization		14.8			9.3		13.9		0.9			—			0.2			39.1
EBITDA	$	24.0		$	40.1	$	76.2	$	(0.5	)	$	(0.8	)	$	(7.8)		$	131.2
Three Months Ended September 30, 2009
Operating income (loss)	$	1.0		$	12.8	$	49.5	$	(2.0	)	$	(1.3	)	$	51.1	(a)	$	111.1
Add: Depreciation, depletion and amortization		19.1			4.7		15.1		1.0			—			0.2			40.1
EBITDA	$	20.1		$	17.5	$	64.6	$	(1.0	)	$	(1.3	)	$	51.3		$	151.2
Nine Months Ended September 30, 2010
Operating income (loss)	$	26.0		$	52.3	$	152.2	$	2.9		$	0.5		$	(8.6)	(b)	$	225.3
Add: Depreciation, depletion and amortization		48.8			21.3		41.9		3.1			—			0.5			115.6
EBITDA	$	74.8		$	73.6	$	194.1	$	6.0		$	0.5		$	(8.1)		$	340.9
Nine Months Ended September 30, 2009
Operating (loss) income	$	(0.9	)	$	51.4	$	125.1	$	(8.1	)	$	(2.6	)	$	123.7	(a)	$	288.6
Add: Depreciation, depletion and amortization		58.5			22.2		42.0		3.4			—			0.6			126.7
EBITDA	$	57.6		$	73.6	$	167.1	$	(4.7	)	$	(2.6	)	$	124.3		$	415.3

(a) Three and nine months ended September 30, 2009 results include $55.8 million and $141.8 million, respectively, related to the AFMC. See Note 2 – Alternative Fuel Mixture Credit (“AFMC”) and Cellulosic Biofuel Producer Credit (“CBPC”) for additional information.

(b) Nine months ended September 30, 2010 results include a gain of $12.4 million from the sale of a portion of the Company’s interest in the New Zealand joint venture. See Note 6 – Joint Venture Investment for additional information.

Adjusted CAD is a non-GAAP measure of cash generated during a period which 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 adjusted for capital spending, the tax benefits associated with certain strategic acquisitions, the change in committed cash, and other items which include cash provided by discontinued operations, proceeds from matured energy forward contracts, excess tax benefits on stock based compensation 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.”

Below is a reconciliation of Cash Provided by Operating Activities to Adjusted CAD (in millions of dollars):

	Nine Months Ended September 30,
	2010			2009
Cash used for investing activities	$	(102.6	)	$	(71.5	)
Cash used for financing activities	$	(39.8	)	$	(51.6	)
Cash provided by operating activities	$	473.2		$	214.3
Capital expenditures		(95.6	)		(65.1	)
Change in committed cash		11.6			21.8
Other		11.2			(5.4	)
CAD		400.4			165.6
Mandatory debt repayments		—			(0.6	)
Adjusted CAD	$	400.4		$	165.0

30

For the nine months ended September 30, 2010, adjusted CAD was $235 million higher than the prior year period primarily due to the receipt of $189 million related to the AFMC and higher operating results. Adjusted CAD generated in any period is not necessarily indicative of amounts that may be generated in future periods.

Liquidity Facilities

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 September 30, 2010, the available borrowing capacity was $245 million.

In connection with our installment notes, $75 million five-year term loan agreement, and $250 million revolving credit facility, covenants must be met, including ratios based on the covenant definition of EBITDA, Funds from Operations, and ratios of cash flows to fixed charges. At September 30, 2010, we are in compliance with all of these covenants.

In addition to these financial covenants, the installment notes, five-year term loan agreement and credit facility include customary covenants that limit the incurrence of debt, the disposition of assets, and the making of certain payments between Rayonier Forest Resources, L.P. (“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, 2009, the excess proceeds were $19.8 million. During March 2010, the excess proceeds exceeded the $50 million limit and as a result, repayment of $53.0 million was offered to the note holders. The note holders declined the offer and the excess proceeds were reset to zero. As of September 30, 2010, the excess proceeds were $12.2 million.

Contractual Financial Obligations and Off-Balance Sheet Arrangements

We have no material changes to the Contractual Financial Obligations table as presented in Item 7 – Management’s Discussion and Analysis of Financial Condition and Results of Operations of our 2009 Annual Report on Form 10-K. See Note 10 — Guarantees for details on the letters of credit, surety bonds and guarantees as of September 30, 2010.

New or Recently Adopted Accounting Pronouncements

For information on new or recently adopted accounting pronouncements, see Note 1 – Basis of Presentation and New Accounting Pronouncements.

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Sales Volumes by Segment:

	Three Months Ended September 30,				Nine Months Ended September 30,
	2010		2009		2010		2009
Timber
Western region, in millions of board feet		46		50		132		126
Eastern region, in thousands of short green tons		1,266		1,726		4,131		5,317
Real Estate
Acres sold
Development		56		—		431		223
Rural		10,242		7,809		15,192		11,971
Non-strategic timberlands		12,912		2,970		43,134		52,663
Total		23,210		10,779		58,757		64,857
Performance Fibers
Sales Volume
Cellulose specialties, in thousands of metric tons		131		123		357		321
Absorbent materials, in thousands of metric tons		67		68		179		198
Lumber
Sales volume, in millions of board feet		60		57		180		167

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Item 3. Quantitative and Qualitative Disclosures about Market Risk

Market and Other Economic Risks

Our exposures to market risk have not changed materially since December 31, 2009. For quantitative and qualitative disclosures about market risk, see Item 7A – Quantitative and Qualitative Disclosures about Market Risk in our 2009 Annual Report on Form 10-K.

Item 4. Controls and Procedures

Rayonier management is responsible for establishing and maintaining adequate disclosure controls and procedures. Disclosure controls and procedures (as defined in Exchange Act Rule 13a-15(e) of the Securities Exchange Act of 1934 (the “Exchange Act”)), are designed with the objective of ensuring that information required to be disclosed by the Company in reports filed under the Exchange Act, such as this quarterly report on Form 10-Q, is (1) recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s (“SEC”) rules and forms and (2) accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

Because of the inherent limitations in all control systems, no control evaluation can provide absolute assurance that all control exceptions and instances of fraud have been prevented or detected on a timely basis. Even systems determined to be effective can provide only reasonable assurance that their objectives are achieved.

Based on an evaluation of our disclosure controls and procedures as of the end of the period covered by this quarterly report on Form 10-Q, our management, including the Chief Executive Officer and Chief Financial Officer, concluded that the design and operation of the disclosure controls and procedures were effective as of September 30, 2010.

In the quarter ended September 30, 2010, based upon the evaluation required by paragraph (d) of SEC Rule 13a-15, there were no changes in our internal control over financial reporting that would materially affect or are reasonably likely to materially affect our internal control over financial reporting.

33

PART II. OTHER INFORMATION

Item 1A. Risk Factors

There were no material changes from the risk factors previously disclosed in our Form 10-K for the year ended December 31, 2009, except as noted below. For a full description of these risk factors, please refer to Item 1A – Risk Factors, in the 2009 Annual Report on Form 10-K.

The following has been added as a risk factor:

Cellulosic biofuel producer credit.

The Company has disclosed information concerning its eligibility for the cellulosic biofuel producer credit. See Note 2 – Alternative Fuel Mixture Credit (“AFMC”) and Cellulosic Biofuel Producer Credit (“CBPC”) for additional information. The tax credit is based on the burning of black liquor used in the Company’s performance fibers business in 2009. There can be no assurance that the IRS will approve the Company’s eligibility for, and amount of, such tax credit.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

Issuer Purchases of Equity Securities

The following table provides information regarding our purchases of Rayonier common stock during the quarter ended September 30, 2010:

Period	Total Number of Shares Purchased (1)		Average Price Paid per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs		Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs
July 1 to July 31		662	$	46.49		—		2,483,169
August 1 to August 31		—		—		—		2,483,169
September 1 to September 30		—		—		—		2,483,169
Total		662				—		2,483,169

(1) Repurchased to satisfy the minimum tax withholding requirements related to the vesting of restricted shares under the 2004 Rayonier Incentive Stock Plan.

See Item 5 – Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities in our 2009 Annual Report on Form 10-K for additional information regarding our Common Share repurchase program.

34

Item 6. Exhibits

3.1	Amended and Restated Articles of Incorporation	Incorporated by reference to Exhibit 3.1 to the Registrant’s May 25, 2010 Form 8-K
3.2	Bylaws	Incorporated by reference to Exhibit 3.2 to the Registrant’s October 21, 2009 Form 8-K
31.1	Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act	Filed herewith
31.2	Certification of the Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act	Filed herewith
32	Certification pursuant to Section 906 of the Sarbanes-Oxley Act	Furnished herewith
101	The following financial information from our Quarterly Report on Form 10-Q for the fiscal quarter ended September 30, 2010, formatted in Extensible Business Reporting Language (“XBRL”), includes: (i) the Condensed Consolidated Statements of Income and Comprehensive Income for the Three and Nine Months Ended September 30, 2010 and 2009; (ii) the Condensed Consolidated Balance Sheets as of September 30, 2010 and December 31, 2009; (iii) the Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2010 and 2009; and (iv) the Notes to Condensed Consolidated Financial Statements, tagged as blocks of text.	Furnished herewith pursuant to Rule 406T of Regulation S-T

35

SIGNATURE

Pursuant to the requirements of Section 13 of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

RAYONIER INC.
By:	/S/ HANS E. VANDEN NOORT
	Hans E. Vanden Noort Senior Vice President and Chief Financial Officer (Principal Accounting Officer)

October 28, 2010

36

EX-31.1

EXHIBIT 31.1

CERTIFICATION

I, Lee M. Thomas, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Rayonier Inc.;

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

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

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

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

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

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

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

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

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

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

Date: October 28, 2010

/S/ LEE M. THOMAS

Lee M. Thomas

Chairman and Chief Executive Officer

EX-31.2

EXHIBIT 31.2

CERTIFICATION

I, Hans E. Vanden Noort, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Rayonier Inc.;

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

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

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

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

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

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

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

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

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

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

Date: October 28, 2010

/S/ HANS E. VANDEN NOORT

Hans E. Vanden Noort

Senior Vice President and Chief Financial Officer

EX-32

EXHIBIT 32

CERTIFICATION

The undersigned hereby certify, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350, that:

1. The quarterly report on Form 10-Q of Rayonier Inc. (the “Company”) for the period ended September 30, 2010 (the “Report”) fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

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

October 28, 2010

/S/ LEE M. THOMAS	/S/ HANS E. VANDEN NOORT
Lee M. Thomas Chairman and Chief Executive Officer	Hans E. Vanden Noort Senior Vice President and Chief Financial Officer