Registrant’s telephone number, including area code: ~~(203) 541-8000~~(901) 419-7000

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

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

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

The number of shares outstanding of the registrant’s common stock as of ~~April 28,~~July 31, 2006 was ~~492,944,895.~~493,108,492.


	Three Months Ended
	March 31,						Three Months Ended June 30,						Six Months Ended June 30,
	2006			2005			2006			2005			2006			2005
Net Sales	$	5,668		$	5,593		$	6,270		$	5,860		$	12,333		$	11,817
Costs and Expenses
Cost of products sold		4,229			4,107			4,666			4,359			9,241			8,774
Selling and administrative expenses		490			494			476			462			966			956
Depreciation, amortization and cost of timber harvested		316			316			305			333			644			673
Distribution expenses		294			245			305			259			617			518
Taxes other than payroll and income taxes		54			58			59			55			115			116
Restructuring and other charges		46			24			54			31			100			55
Insurance recoveries		(19	)		—			—			(35	)		(19	)		(35	)
Net losses on sales and impairments of businesses held for sale		3			79
Net (gains) losses on sales and impairments of businesses held for sale								75			(19	)		1,358			60
Interest expense, net		148			168			148			155			296			323

Earnings From Continuing Operations Before Income Taxes and Minority Interest		107			102
Earnings (Loss) From Continuing Operations Before Income Taxes and Minority Interest								182			260			(985	)		377
Income tax provision		35			2			61			166			69			174
Minority interest expense, net of taxes		5			2			5			3			9			5

Earnings From Continuing Operations		67			98
Earnings (Loss) From Continuing Operations								116			91			(1,063	)		198
Discontinued operations, net of taxes and minority interest		(1,304	)		(21	)		(1	)		(14	)		(59	)		(44	)

Net (Loss) Earnings	$	(1,237	)	$	77
Net Earnings (Loss)							$	115		$	77		$	(1,122	)	$	154

Basic Earnings (Loss) Per Common Share
Earnings from continuing operations	$	0.14		$	0.20
Earnings (loss) from continuing operations							$	0.24		$	0.19		$	(2.19	)	$	0.41
Discontinued operations		(2.68	)		(0.04	)		—			(0.03	)		(0.12	)		(0.09	)

Net (loss) earnings	$	(2.54	)	$	0.16
Net earnings (loss)							$	0.24		$	0.16		$	(2.31	)	$	0.32

Diluted Earnings (Loss) Per Common Share
Earnings from continuing operations	$	0.14		$	0.20
Earnings (loss) from continuing operations							$	0.24		$	0.19		$	(2.19	)	$	0.41
Discontinued operations		(2.66	)		(0.04	)		—			(0.03	)		(0.12	)		(0.09	)

Net (loss) earnings	$	(2.52	)	$	0.16
Net earnings (loss)							$	0.24		$	0.16		$	(2.31	)	$	0.32

Average Shares of Common Stock Outstanding - assuming dilution		491.7			488.9			487.2			487.4			486.6			488.0

Cash Dividends Per Common Share	$	0.25		$	0.25		$	0.25		$	0.25		$	0.50		$	0.50


	March 31,			December 31,
	2006			2005			June 30, 2006			December 31, 2005
Assets
Current Assets
Cash and temporary investments	$	709		$	1,641		$	274		$	1,641
Accounts and notes receivable, net		2,923			2,796			2,987			2,796
Inventories		2,315			2,310			2,334			2,310
Assets of businesses held for sale		1,696			3,002			1,661			3,002
Deferred income tax assets		282			279			307			279
Other current assets		171			113			158			113

Total Current Assets		8,096			10,141			7,721			10,141

Plants, Properties and Equipment, net		10,244			10,297			10,248			10,297
Forestlands		2,220			2,190			484			2,190
Forestlands Held for Sale								1,666			—
Investments		620			625			618			625
Goodwill		3,840			3,838			3,862			3,838
Deferred Charges and Other Assets		1,616			1,680			1,555			1,680

Total Assets	$	26,636		$	28,771		$	26,154		$	28,771

Liabilities and Common Shareholders’ Equity
Current Liabilities
Notes payable and current maturities of long-term debt	$	894		$	1,181		$	1,774		$	1,181
Accounts payable		1,951			1,981			1,998			1,981
Accrued payroll and benefits		317			399			385			399
Liabilities of businesses held for sale		203			195			216			195
Other accrued liabilities		1,427			1,103			1,212			1,103

Total Current Liabilities		4,792			4,859			5,585			4,859

Long-Term Debt		10,562			11,023			9,038			11,023
Deferred Income Taxes		252			726			377			726
Other Liabilities		3,768			3,601			3,853			3,601
Minority Interest		214			211			200			211
Common Shareholders’ Equity
Common stock, $1 par value, 492.7 shares in 2006 and 490.5 shares in 2005		493			491
Common stock, $1 par value, 493.1 shares in 2006 and 490.5 shares in 2005								493			491
Paid-in capital		6,599			6,627			6,642			6,627
Retained earnings		1,812			3,172			1,803			3,172
Accumulated other comprehensive loss		(1,855	)		(1,935	)		(1,837	)		(1,935	)

		7,049			8,355			7,101			8,355
Less: Common stock held in treasury, at cost, 2005 - 0.1 shares		1			4			—			4

Total Common Shareholders’ Equity		7,048			8,351			7,101			8,351

Total Liabilities and Common Shareholders’ Equity	$	26,636		$	28,771		$	26,154		$	28,771


	Three Months Ended
	March 31,						Six Months Ended June 30,
	2006			2005			2006			2005
Operating Activities
Net (loss) earnings	$	(1,237	)	$	77		$	(1,122	)	$	154
Discontinued operations, net of taxes and minority interest		1,304			21			59			44

Earnings from continuing operations		67			98			(1,063	)		198
Depreciation and amortization		316			316			644			673
Deferred income tax expense (benefit), net		18			(12	)
Deferred income tax expense, net								11			80
Restructuring and other charges		46			24			100			55
Payments related to restructuring and legal reserves		(26	)		(41	)		(41	)		(90	)
Insurance recoveries		(19	)		—			(19	)		(35	)
Net losses on sales and impairments of businesses held for sale		3			79			1,358			60
Periodic pension expense, net		93			54			189			122
Other, net		24			66			175			47
Changes in current assets and liabilities
Accounts and notes receivable		(97	)		(82	)		(110	)		(70	)
Inventories		17			(65	)		(21	)		(116	)
Accounts payable and accrued liabilities		(109	)		(215	)		(254	)		(227	)
Other		(82	)		(8	)		(104	)		(154	)

Cash provided by operations - continuing operations		251			214			865			543
Cash used for operations - discontinued operations		(5	)		(59	)
Cash provided by operations - discontinued operations								7			36

Cash Provided by Operations		246			155			872			579

Investment Activities
Invested in capital projects		(171	)		(177	)		(501	)		(487	)
Proceeds from divestitures								—			280
Other		(118	)		(6	)		(63	)		33

Cash used for investment activities - continuing operations		(289	)		(183	)		(564	)		(174	)
Cash used for investment activities - discontinued operations		(10	)		(92	)		(3	)		(206	)

Cash Used for Investment Activities		(299	)		(275	)		(567	)		(380	)

Financing Activities
Issuance of common stock		7			16			21			19
Issuance of debt		—			247			522			322
Reduction of debt		(740	)		(812	)		(1,958	)		(1,368	)
Change in book overdrafts		(38	)		(16	)		(23	)		1
Dividends paid		(123	)		(123	)		(247	)		(246	)
Other		3			(13	)		(5	)		(18	)

Cash used for financing activities - continuing operations		(891	)		(701	)		(1,690	)		(1,290	)
Cash used for financing activities - discontinued operations		—			(241	)		—			(155	)

Cash Used for Financing Activities		(891	)		(942	)		(1,690	)		(1,445	)

Effect of Exchange Rate Changes on Cash - Continuing Operations		12			(2	)		18			(98	)
Effect of Exchange Rate Changes on Cash - Discontinued Operations		—			(3	)		—			(1	)

Change in Cash and Temporary Investments		(932	)		(1,067	)		(1,367	)		(1,345	)
Cash and Temporary Investments
Beginning of the period		1,641			2,596			1,641			2,596

End of the period		709			1,529			274			1,251
Less - Cash, End of Period - Discontinued Operations		—			(119	)		—			(114	)

Cash, End of Period - Continuing Operations	$	709		$	1,410		$	274		$	1,137


											Accumulated								Total				Common Stock Issued				Paid-in			Retained				Accumulated Other Comprehensive				Treasury Stock							Total Common Shareholders’
																							Shares	Amount			Capital			Earnings				Income (Loss)				Shares			Amount				Equity
Balance, December 31, 2005																							490,501	$	491		$	6,627		$	3,172			$	(1,935	)		112			$	4			$	8,351
Issuance of stock for various plans, net																							2,643		2			15			—				—			(112	)			(4	)			21
Cash dividends - Common stock ($0.50 per share)																							—		—			—			(247	)			—			—				—				(247	)
Comprehensive income (loss):
Net loss																							—		—			—			(1,122	)			—			—				—				(1,122	)
Change in cumulative foreign currency translation adjustment (less tax of $8)																							—		—			—			—				114			—				—				114
Net gains (losses) on cash flow hedging derivatives:
Net loss arising during the period (less tax of $4)																							—		—			—			—				(11	)		—				—				(11	)
Less: Reclassification adjustment for gains included in net income (less tax of $1)																							—		—			—			—				(5	)		—				—				(5	)

Total comprehensive loss																																														(1,024	)

Balance, June 30, 2006																							493,144	$	493		$	6,642		$	1,803			$	(1,837	)		—			$	—			$	7,101


Six Months Ended June 30, 2005																						Six Months Ended June 30, 2005
											Other								Common
	Common Stock Issued			Paid-in Capital			Retained Earnings				Comprehensive Income (Loss)				Treasury Stock				Shareholders’ Equity				Common Stock Issued				Paid-in			Retained				Accumulated Other Comprehensive				Treasury Stock							Total Common Shareholders’
	Shares	Amount								Shares	Comprehensive Income (Loss)				Amount			Shares	Shareholders’ Equity				Amount		Capital			Earnings				Income (Loss)				Shares			Amount				Equity
Balance, December 31, 2004	487,495	$	487	Paid-in Capital	$	6,562	Retained Earnings		$	2,562			$	(1,357	)	16		$	—		$	8,254		487,495		$	487		$	6,562		$	2,562			$	(1,357	)		16			$	—			$	8,254
Issuance of stock for various plans, net	2,992		3		17			—				—			44		2			18			3,004		3			31			—				—			126				5				29
Cash dividends - Common stock ($0.25 per share)	—		—		—			(123	)			—			—		—			(123	)
Cash dividends - Common stock ($0.50 per share)																							—		—			—			(246	)			—			—				—				(246	)
Comprehensive income (loss):
Net earnings	—		—		—			77				—			—		—			77			—		—			—			154				—			—				—				154
Change in cumulative foreign currency translation adjustment (less tax of $10)	—		—		—			—				14			—		—			14
Change in cumulative foreign currency translation adjustment (less tax of $17)																							—		—			—			—				(101	)		—				—				(101	)
Net gains (losses) on cash flow hedging derivatives:
Net gain arising during the period (less tax of $8)	—		—		—			—				21			—		—			21
Less: Reclassification adjustment for gains included in net income (less tax of $4)	—		—		—			—				(11	)		—		—			(11	)
Net gain arising during the period (less tax of $10)																							—		—			—			—				26			—				—				26
Less: Reclassification adjustment for gains included in net income (less tax of $9)																							—		—			—			—				(20	)		—				—				(20	)

Total comprehensive income																				101																										59

Balance, March 31, 2005	490,487	$	490	$	6,579		$	2,516			$	(1,333	)		60	$	2		$	8,250
Balance, June 30, 2005																							490,499	$	490		$	6,593		$	2,470			$	(1,452	)		142			$	5			$	8,096

The accompanying unaudited consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and, in the opinion of Management, include all adjustments that are necessary for the fair presentation of the Company’s financial position, results of operations, and cash flows for the interim periods presented. Except as disclosed in ~~the~~these Condensed Notes to Consolidated Financial Statements, such adjustments are of a normal, recurring nature. Results for the first ~~three~~six months of the year may not necessarily be indicative of full year results. ~~It is suggested that these~~These consolidated financial statements should be read in conjunction with the audited financial statements and the notes thereto included in International Paper’s (the Company) Annual Report on Form 10-K for the year ended December 31, 2005, which has previously been filed with the Securities and Exchange Commission.

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

Prior-year amounts have been restated to present the Company’s ~~Coated and Supercalendered Papers business and~~ Kraft Papers business as a discontinued ~~operations~~operation (see Note 4).

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


	Three Months Ended
	March 31,				Three Months Ended June 30,				Six Months Ended June 30,
*In millions, except per share amounts*	2006		2005		2006		2005		2006			2005
Earnings from continuing operations	$	67	$	98
Earnings (loss) from continuing operations					$	116	$	91	$	(1,063	)	$	198
Effect of dilutive securities		—		—		—		—		—			—

Earnings from continuing operations - assuming dilution	$	67	$	98
Earnings (loss) from continuing operations - assuming dilution					$	116	$	91	$	(1,063	)	$	198

Average common shares outstanding		486.3		486.1		486.9		485.9		486.6			486.0
Effect of dilutive securities
Profit sharing plan		1.4		1.4		—		1.2		—			1.2
Stock options		4.0		1.4		0.3		0.3		—			0.8

Average common shares outstanding - assuming dilution		491.7		488.9		487.2		487.4		486.6			488.0

Earnings per common share from continuing operations	$	0.14	$	0.20
Earnings (loss) per common share from continuing operations					$	0.24	$	0.19	$	(2.19	)	$	0.41

Earnings per common share from continuing operations - assuming dilution	$	0.14	$	0.20
Earnings (loss) per common share from continuing operations - assuming dilution					$	0.24	$	0.19	$	(2.19	)	$	0.41

Note: ~~If an amount does not appear in the~~Average common shares outstanding exclude unvested restricted shares. The above table ~~the security was~~excludes securities that were antidilutive for the ~~period presented.~~periods presented, principally zero-coupon convertible debentures repurchased in June 2006.

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

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

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

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

In the 2006 first quarter, the Company had reported its Coated and Supercalendered Papers business as a discontinued operation based on a plan to sell the business. In the second quarter of 2006, the Company signed a definitive agreement to sell this business for approximately $1.4 billion, subject to certain post-closing adjustments, and agreed to acquire a 10% limited partnership interest in CMP Investments L.P., the parent company that will own this business. Since this limited partnership interest will represent significant continuing involvement in the operations of this business under U.S. generally accepted accounting principles, the operating results for Coated and Supercalendered Papers are required to be included in continuing operations in the accompanying consolidated statement of operations. Accordingly, the operating results for this business, including a charge in the first quarter of $1.3 billion before and after taxes to write down the assets of the business to their estimated fair value, are now included in continuing operations for all periods presented. An additional pre-tax charge of $85 million ($53 million after taxes) was recorded in the second quarter to adjust the net assets of this business to their estimated fair value based on the terms of the definitive sales agreement discussed above (see “Other Transactions” below).

During the ~~first~~2006 second quarter, ~~of 2006, in connection with the evaluation of strategic options for certain businesses under the previously announced Transformation Plan,~~ the Company ~~determined that the sales of the Company’s Coated and Supercalendered Papers business and~~signed a definitive agreement to sell its Kraft Papers business ~~were~~for approximately $155 million in cash, subject to certain closing and post-closing adjustments, and two additional payments totaling up to $60 million payable five years from the ~~best interests~~date of ~~the Company’s shareholders.~~closing contingent upon business performance. The Company is currently engaged in exclusive negotiations with potential buyers of each of these businesses to attempt to finalize sales agreements, and has determined that the accounting requirements as “held for sale” businesses have been met. Accordingly, a pre-tax charge of approximately $1.4 billion was recorded to reduce the carrying values of the net assets of these businesses, including goodwill, to their estimated fair values based on their estimated sales proceeds less costs to sell. This first quarter charge and the operating results of ~~these businesses~~this business for all periods presented are ~~reported~~included in Discontinued operations in the accompanying consolidated statement of operations, ~~with prior periods also restated~~including a pre-tax charge of $101 million ($62 million after taxes) recorded in the 2006 first quarter to ~~reflect~~reduce the carrying value of the business’s net assets to their estimated fair values. Additionally, a pre-tax charge of $16 million ($10 million after taxes) was recorded in Discontinued operations in the 2006 second quarter to further reduce the carrying value of the assets of this ~~presentation.~~business based on the terms of the definitive agreement discussed above. Revenues associated with ~~the Coated and Supercalendered Papers business and~~ the Kraft Papers business were ~~$451~~$57 million and ~~$419~~$113 million, respectively for the three-month and six-month periods ended ~~March 31, 2006~~June 30, 2006. Revenues for the comparable 2005 periods were $56 million and ~~2005,~~$111 million, respectively. Earnings and diluted earnings per share related to ~~these~~the Kraft Papers operations were as follows:


	Three Months Ended			Three Months Ended			Three Months Ended June 30,					Six Months Ended June 30,
*In millions, except per share amounts*	March 31, 2006			March 31, 2005			2006			2005		2006			2005
Earnings (loss) from discontinued operations
Earnings from operations	$	12		$	18		$	14		$	—	$	20		$	2
Loss on asset write-down		(1,380	)		—			(16	)		—		(117	)		—
Income tax expense		64			(8	)
Income tax benefit								1			—		38			(1	)

(Loss) earnings from discontinued operations, net of taxes	$	(1,304	)	$	10		$	(1	)	$	—	$	(59	)	$	1

Earnings (loss) per common share from discontinued operations - assuming dilution
Earnings from operations, net of taxes	$	0.02		$	0.02		$	0.02		$	—	$	0.03		$	—
Loss on asset write-down, net of taxes		(2.68	)		—			(0.02	)		—		(0.15	)		—

(Loss) earnings per common share from discontinued operations, net of taxes - assuming dilution	$	(2.66	)	$	0.02
Loss per common share from discontinued operations, net of taxes - assuming dilution							$	—		$	—	$	(0.12	)	$	—

~~Assets and liabilities of the Coated and Supercalendered Papers business and the Kraft Papers business, included in International Paper’s consolidated balance sheet at March 31,~~

At June 30, 2006 and December 31, 2005, ~~as Assets~~assets held for sale totaled $1.7 billion and ~~Liabilities~~$3.0 billion, respectively, and liabilities of businesses held for sale ~~were~~totaled $216 million and $195 million, respectively, and included Kraft Papers, Coated and Supercalendered Papers and certain smaller businesses, as follows:


*In millions*	March 31, 2006		December 31, 2005		June 30, 2006		December 31, 2005
Accounts receivable, net	$	118	$	130	$	158	$	130
Inventories		154		124		184		138
Plants, properties and equipment, net		1,372		1,504		1,287		1,504
Goodwill		—		1,205		—		1,205
Other assets		26		25		32		25

Assets of businesses held for sale	$	1,670	$	2,988	$	1,661	$	3,002

Accounts payable	$	97	$	104	$	125	$	123
Accrued payroll and benefits		28		26		39		34
Other accrued liabilities		6		14		35		20
Other liabilities		15		15		17		18

Liabilities of businesses held for sale	$	146	$	159	$	216	$	195

In the third quarter of 2005, International Paper completed the sale of its 50.5% interest in Carter Holt Harvey Limited for approximately U.S. $1.1 billion. The pre-tax gain on the sale of $29 million ($361 million after taxes and minority interest), including a $186 million pre-tax credit from cumulative translation adjustments, was included in Discontinued operations, together with CHH’s operating results prior to the sale. Revenues associated with the discontinued operation were ~~$538~~$598 million and $1.1 billion for the three-month ~~period~~and six-month periods ended ~~March 31,~~June 30, 2005. Earnings and diluted earnings per share related to these operations were as follows:


*In millions, except per share amounts*	Three Months Ended June 30, 2005			Six Months Ended June 30, 2005
Earnings (loss) from discontinued operations
Earnings (loss) from operations	$	10		$	(32	)
Minority interest, net of taxes		(9	)		10
Income tax expense		(15	)		(23	)

Loss from discontinued operations, net of taxes and minority interest	$	(14	)	$	(45	)

Loss per common share from discontinued operations - assuming dilution
Loss from operations, net of taxes	$	(0.03	)	$	(0.09	)
Loss on asset write-down, net of taxes		—			—

Loss per common share from discontinued operations, net of taxes and minority interest—assuming dilution	$	(0.03	)	$	(0.09	)

In March 2006, International Paper, The Nature Conservancy and The Conservation Fund reached an agreement to sell approximately 218,000 acres of forestlands across 10 ~~states in the single largest private land conservation sale in the history of the South, and one of the largest in the nation.~~U.S. states. The Nature Conservancy will acquire more than 173,000 acres in North Carolina, Virginia, Georgia, Florida, Alabama, Arkansas, Tennessee, Louisiana and Mississippi. The Conservation Fund will acquire more than 5,000 acres in Florida

and 500 acres in North Carolina. The two groups will jointly purchase an additional 39,000 acres in South Carolina. International Paper will receive approximately $300 million ~~for the land~~from these sales at closing, ~~which is~~ expected to occur ~~later in~~during 2006.

Also in March 2006, International Paper announced an agreement to sell 69,000 acres of forestlands in Wisconsin to The Nature ~~Conservancy. Proceeds from~~Conservancy for approximately $83 million.

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

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

During the second quarter of 2006, the Company completed the sales of approximately 75,000 acres of forestlands under the above agreements for approximately $97 million, resulting in a pre-tax gain of approximately $62 million ($39 million after taxes). This gain, together with a pre-tax charge of $85 million ($53 million after taxes) recorded to ~~total approximately $83 million. This~~adjust the carrying value of the assets of the Company’s Coated and Supercalendered Papers business to their estimated fair value based on the terms of the definitive sales agreement signed in the second quarter, and a pre-tax charge of $52 million ($37 million after taxes) recorded to write down the carrying value of certain assets in Brazil to their estimated fair value, is included in Net (gains) losses on sales and impairments of businesses held for sale ~~is also~~in the accompanying consolidated statement of operations for the three months ended June 30, 2006. The assets in Brazil were written down to estimated net realizable value upon sale since the sale of these assets was considered probable at June 30, 2006.

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

~~See Note 11 for a discussion of additional forestlands sales announced in April 2006.~~

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

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

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

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

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

At March 31, 2006 and December 31, 2005, assets of businesses held for sale totaled $1.7 billion and $3.0 billion, respectively, and liabilities of businesses held for sale totaled $203 million and $195 million, respectively, and included the Coated and Supercalendered Papers business, the Kraft Papers business and certain smaller businesses.


	March 31,		December 31,
*In millions*	2006		2005		June 30, 2006		December 31, 2005
Raw materials	$	411	$	382	$	378	$	382
Finished pulp, paper and packaging products		1,499		1,539		1,523		1,539
Finished lumber and panel products		34		33		33		33
Operating supplies		312		286		338		286
Other		59		70		62		70

Total	$	2,315	$	2,310	$	2,334	$	2,310

Temporary investments with an original maturity of three months or less are treated as cash equivalents and are stated at cost. Temporary investments totaled ~~$535~~$97 million and $1.4 billion at ~~March 31,~~June 30, 2006 and December 31, 2005, respectively.

Interest payments made during the ~~three-month~~six-month periods ended ~~March 31,~~June 30, 2006 and 2005 were ~~$160~~$346 million and ~~$175~~$373 million, respectively. Capitalized net interest costs were $3$7 million and $2$5 million for the ~~three~~six months ended ~~March 31,~~June 30, 2006 and 2005, respectively. Total interest expense was ~~$171~~$336 million for the first ~~three~~six months of 2006 and ~~$184~~$370 million for the first ~~three~~six months of 2005. Preferred Securities distributions paid by Southeast Timber, Inc., a consolidated subsidiary of International Paper, were $3$6 million and $2$5 million during the first ~~three~~six months of 2006 and 2005, respectively. The expense related to these preferred securities was included in minority interest expense in the consolidated statement of operations. Income tax payments of ~~$37~~$80 million and ~~$68~~$174 million were made during the first ~~three~~six months of 2006 and 2005, respectively.

Accumulated depreciation was ~~$17.6~~$17.8 billion at ~~March 31,~~June 30, 2006 and $17.3 billion at December 31, 2005. The allowance for doubtful accounts was ~~$104~~$100 million at ~~March 31,~~June 30, 2006 and $102 million at December 31, 2005.

The following tables present changes in the goodwill balances as allocated to each business segment for the ~~three-month~~six-month periods ended ~~March 31,~~June 30, 2006 and 2005:


	Balance		Reclassifications						Balance
	December 31,		and			Additions/			March 31,
*In millions*	2004		Other (a)			(Reductions)			2005		Balance December 31, 2005		Reclassifications and Other (a)		Additions/ (Reductions)			Balance June 30, 2006
Printing Papers	$	1,671	$	6		$	—		$	1,677	$	1,674	$	1	$	—		$	1,675
Industrial Packaging		591		(2	)		(1	)(c)		588		676		3		20	(b)		699
Consumer Packaging		1,014		—			—			1,014		987		1		(1	)(c)		987
Distribution		299		—			—			299		299		—		—			299
Forest Products		190		1			—			191		191		—		—			191
Corporate		24		—			—			24		11		—		—			11

Total	$	3,789	$	5		$	(1	)	$	3,793	$	3,838	$	5	$	19		$	3,862

Goodwill totaling approximately $1.2 billion at December 31, 2005 relating to the Company’s Coated and Supercalendered Papers business was written off in connection with the ~~$1.4~~2006 first-quarter $1.3 billion pre-tax charge to reduce the net assets of that business to estimated fair value (see Note 4).

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


	Three Months Ended
	March 31,						Six Months Ended June 30,
*In millions*	2006			2005			2006			2005
Asset retirement obligation, January 1	$	44		$	41		$	33		$	30
New liabilities		—			5			1			5
Liabilities settled		(1	)		(1	)		(1	)		(3	)
Net adjustments to existing liabilities		—			(1	)		(1	)		(3	)
Accretion expense		1			—			1			1

Asset retirement obligation, March 31	$	44		$	44
Asset retirement obligation, June 30							$	33		$	30

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

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


	Three Months Ended
	March 31,						Three Months Ended June 30,						Six Months Ended June 30,
*In millions*	2006			2005			2006			2005			2006			2005
Service cost	$	1		$	1		$	—		$	—		$	1		$	1
Interest cost		9			10			7			9			16			19
Actuarial loss		4			6			7			4			11			10
Amortization of prior service cost		(9	)		(10	)		(15	)		(10	)		(24	)		(20	)

Net postretirement benefit cost (a)	$	5		$	7		$	(1	)	$	3		$	4		$	10

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

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

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

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

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

International Paper has established reserves relating to the settlement, during 1998 and 1999, of three nationwide class action lawsuits against the Company and Masonite Corp., a former wholly-owned subsidiary of the Company. Those settlements relate to (1) exterior hardboard siding installed during the 1980’s (the “1980’s Hardboard Claims”) and during the 1990’s (the “1990’s Hardboard Claims,” and together with the 1980’s Hardboard Claims, the “Hardboard Claims”); (2) Omniwood siding installed during the 1990’s (the “Omniwood Claims”); and (3) Woodruf roofing installed during the 1980’s and 1990’s (the ~~“Woodruf~~

“Woodruf Claims”). Each of these settlements is discussed in detail in Note 10, Commitments and Contingent Liabilities, to the Financial Statements included in International Paper’s Annual Report on Form 10-K for the year ended December 31, 2005 (the “2005 10-K”).

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

Substantially all of the 1980’s Hardboard Claims ~~during the first quarter~~were settled as of June 30, 2006, ~~and now expects to pay all of the remaining 1980’s Hardboard Claims by the end of the second quarter.~~

~~First quarter~~although settlement payments made in 2006 ~~payments relating to settlements of 1980’s Hardboard Claims~~ were approximately $3$7 million more than ~~projected for that period. In addition, the Company expects to pay $2 million in the second quarter of 2006 to settle the remaining 1980’s Hardboard Claims.~~projected.

In 2005, the number of 1990’s Hardboard Claims filed was in line with projections. However, as reported in the 2005 10-K, the average cost of those claims increased above projected levels in 2005. As was the case for the 1980’s Hardboard Claims, the increased cost was due, in part, to a 2005 increase in the Means Price Data (an inflation-adjusted compensation formula based on replacement and refinishing cost for a particular area that is used in the determination of claims payments) compared to prior years. InFor the ~~first quarter of~~six months ended June 30, 2006, the number of 1990’s Hardboard Claims filed ~~was slightly above projections~~ and the average cost per claim ~~remained~~were both higher than projected, ~~by $392 per claim.~~with claims payments totaling approximately $4 million more than projected. The claims filing deadline for the 1990’s Hardboard Claims is January 15, 2008.

The following table presents the claims activity of the 1980’s and 1990’s Hardboard Claims for the ~~three-month~~six-month period ended ~~March 31,~~June 30, 2006:


*In thousands*	Single Family		Multi- Family		Total
December 31, 2005	20.2		3.2		23.4
No. of Claims Filed	9.0		0.2		9.2
No. of Claims Paid	(6.8	)	(1.1	)	(7.9	)
No. of Claims Dismissed	(2.2	)	—		(2.2	)

June 30, 2006	20.2		2.3		22.5

The average settlement cost per claim for the ~~three-month~~six-month period ended ~~March 31,~~June 30, 2006 for the Hardboard settlement was ~~$2,353.~~$2,389.

Throughout 2005, and in the first ~~quarter~~and second quarters of 2006, the Omniwood Claims activity and the Woodruf Claims activity have been in line with projections. The Company expects this trend to continue. The filing deadline for both the Omniwood and Woodruf claims is January 6, 2009. The following table presents the claims activity of the Omniwood Claims and the Woodruf Claims for the ~~three-month~~six-month period ended ~~March 31,~~June 30, 2006:

The average settlement costs per claim for the ~~three-month~~six-month period ended ~~March 31,~~June 30, 2006 for the Omniwood and Woodruf settlements were ~~$4,651~~$4,633 and ~~$5,490,~~$5,337, respectively.

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

During the first quarter of 2006, based on advice from the ~~Company was advised by its~~Company’s third-party consultant, that almost all of the 1980’s Hardboard Claims have been processed, and that a reasonable estimate could be made of the amount necessary to settle the remaining unpaid 1980’s Hardboard Claims. Based on this updated analysis, the Company determined that a charge of $15 million was ~~required in the first quarter of 2006~~recorded to increase the aggregate hardboard siding and roofing reserve to management’s best estimate of the amount required for future payments under the Settlements. The Company will continue to ~~evaluate~~monitor claims activity through the end of the claims period for these Settlements to determine if any further adjustments to reserve balances will be warranted.

~~The following table presents an analysis of the net reserve activity for the three-month period ended March 31, 2006:~~

As discussed in the 2005 10-K, the Company has entered into favorable agreements with various insurance carriers to settle claims relating to their refusal to indemnify and/or defend the Company and Masonite for, among other things, the settlement of Hardboard Claims. Through March 31, 2006, these insurance carriers have agreed to pay the Company approximately $625 million. In the ~~first~~second quarter, ~~of 2006,~~ the Company ~~entered into three additional settlement agreements. Under those agreements~~participated in a binding arbitration proceeding, with Ace Insurance to resolve the ~~Company is entitled to receive net cash payments totaling approximately $19 million,~~sole remaining coverage dispute, the outcome of which ~~was recognized as income in~~will be decided by the ~~first quarter~~arbitration panel sometime before the end of 2006. ~~Including the amount received under these settlement agreements, cumulative~~

Cumulative net cash settlements received by the Company through June 30, 2006 in connection with ~~the Hardboard Claims~~these insurance settlements totaled approximately ~~$324~~$335 million, and the balance will be received in installments through ~~March 31, 2006.~~the end of 2008.

As disclosed in the ~~Company’s periodic report on Form 8-K filed on March 10, 2006,~~2005 10-K, the Company ~~entered into~~is party to a ~~settlement agreement relating~~class action lawsuit by a group of private landowners alleging that the Company and certain of its fiber suppliers, known as Quality Suppliers, engaged in an unlawful conspiracy to ~~claims of patent infringement filed against~~artificially depress the prices at which the Company procures fiber for its ~~former Nevamar business. The agreement was entered into on March 8, 2006 and provides, inter alia,~~mills. While the Company continues to maintain that its Quality Supplier program did not violate any antitrust laws, it agreed to settle this case in the second quarter for a payment by the Company ~~of $8.5 million~~ to the class of $12.4 million, including plaintiff ~~not later than June 30,~~counsel fees. The Federal District Court in Columbia, South Carolina has preliminarily approved the settlement. A final hearing for court approval is scheduled for September 25, 2006. ~~A pre-tax charge of approximately $3 million was recorded~~

Also as disclosed in the ~~2006 first~~2005 10-K, the Company was a defendant in a purported antitrust class action brought by purchasers of coated publication papers in various U.S. federal and state courts. These cases are based on alleged cartel activity by various U.S. and European manufacturers of coated papers. The Company believed it was not a proper party to these cases, and in the second quarter, has been dismissed with prejudice from all but one remaining indirect-purchaser California case. In that case, the Company and the California indirect-purchaser class counsel have filed a stipulation to ~~increase~~dismiss the ~~recorded liability for this matter to this settlement amount.~~Company as a defendant, which is pending court approval.

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

On June 20, 2006, International Paper paid approximately $1.2 billion to repurchase substantially all of its zero-coupon convertible debentures at a price equal to their accreted principal value plus interest, using proceeds from divestitures and $730 million of third party commercial paper issued under the Company’s receivables securitization program. As of June 30, 2006, International Paper had repaid $120 million of this commercial paper borrowing and plans to repay the remainder by the end of 2006.

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

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

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

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

At ~~March 31, 2006 and~~ December 31, 2005, International Paper classified as Long-term debt ~~$1.5 billion and~~ $1.25 billion ~~respectively,~~ of tenderable bonds, commercial paper and bank notes and current maturities of long-term debt. International Paper ~~has~~had the intent and ability to renew or convert these obligations as evidenced by the credit facilities described above.

Maintaining a strong investment-grade credit rating is an important element of International Paper’s corporate finance strategy. At ~~March 31,~~June 30, 2006, the Company held long-term credit ratings of BBB (negative outlook) and Baa3 (stable outlook) by Standard & Poor’s (S&P) and Moody’s Investor Services (Moody’s), respectively. The Company currently has short-term credit ratings by S&P and Moody’s of A-3 and P-3, respectively.

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

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

~~Net periodic pension expense for our qualified and nonqualified U.S. defined benefit plans consisted of the following:~~


	Three Months Ended
	March 31,						Three Months Ended June 30,						Six Months Ended June 30,
*In millions*	2006			2005			2006			2005			2006			2005
Service cost	$	36		$	31		$	35		$	34		$	71		$	65
Interest cost		126			117			127			120			253			237
Expected return on plan assets		(135	)		(139	)		(135	)		(139	)		(270	)		(278	)
Actuarial loss		59			38			63			46			121			84
Amortization of prior service cost		7			7			6			7			14			14

Net periodic pension expense (a)	$	93		$	54		$	96		$	68		$	189		$	122

While International Paper may elect to make voluntary contributions to its U.S. qualified plan up to the maximum deductible amount per Internal Revenue Service tax regulations in the coming years, it is unlikely that any contributions to the plan will be required before 2007 unless investment performance is negative or International Paper changes its funding ~~policy to make contributions above the minimum requirements.~~policy. The nonqualified plan is funded to the extent of benefit payments, which equaled $9$12 million through ~~March 31,~~June 30, 2006.

International Paper has a Long-Term Incentive Compensation Plan (LTICP) that includes a Stock Option Program, a Restricted Performance Share Program and a Continuity Award Program, administered by a committee of independent members of the Board of Directors who are not eligible for awards. A detailed discussion of these plans is presented in Note 17 to the Financial Statements included in International Paper’s Annual Report on Form 10-K for the year ended December 31, 2005. As of ~~March 31,~~June 30, 2006, ~~21.5~~21.9 million shares were available for grant under the LTICP.

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

Total stock-based compensation cost recognized in Selling and administrative expense in the accompanying consolidated statement of operations for the ~~three~~six months ended ~~March 31,~~June 30, 2006 and 2005 was ~~$18.0~~$38.8 million and ~~$9.3~~$19.4 million, respectively. The actual tax benefit realized for stock-based compensation costs was $1$2.0 million and $2$2.4 million for the ~~three-month~~six-month periods ended ~~March 31,~~June 30, 2006 and 2005, respectively. ~~First-quarter~~At June 30, 2006, ~~stock-based compensation expense was $1 million higher as a result of adopting SFAS No. 123 (R). At March 31, 2006, $145~~$130.5 million of compensation cost related to unvested restricted performance shares and continuity awards attributable to future performance had not yet been recognized. This amount will be recognized in expense over a weighted-average period of ~~1.7~~1.6 years.

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

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

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

The following summarizes the activity for all performance-based programs for the ~~three~~six months ended ~~March 31,~~June 30, 2006:


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

Outstanding at March 31, 2006	6,087,467		$	38.83
Outstanding at June 30, 2006					6,087,467		$	38.83

The Company discontinued its stock option program in 2004 for members of executive management, and in 2005 for all other eligible U.S. and non-U.S. employees. NoStock-based compensation expense related to a stock ~~options were granted during~~option reload totaling $5,000 was recorded for the ~~quarter,~~three months ended June 30, 2006. The expense was calculated under the Black-Scholes option pricing model using 19.7% expected volatility, an interest rate of 4.97%, a 2.7% expected dividend yield, and a term of two years. As of June 30, 2006, all options were fully ~~vested as of July 12, 2005. Accordingly, no stock option expense has been recorded for the three-month period ending March 31, 2006.~~vested.

A summary of option activity under the plan as of ~~March 31,~~June 30, 2006 is presented below:


					Weighted	Aggregate
			Weighted		Average	Intrinsic
			Average		Remaining Life	Value
	Options		Exercise Price		(years)	(thousands)		Options		Weighted Average Exercise Price		Weighted Average Remaining Life (years)	Aggregate Intrinsic Value (thousands)
Outstanding at December 31, 2005	41,581,598		$	39.49				41,581,598		$	39.49
Granted	—			—				997			39.06
Exercised	(200,390	)		31.70				(603,645	)		32.77
Forfeited	(206,039	)		48.43				(309,074	)		45.62
Expired	(1,460,915	)		42.68				(1,836,080	)		41.99

Outstanding at March 31, 2006	39,714,254		$	39.37	5.80	$	608
Outstanding at June 30, 2006								38,833,796		$	39.43	5.57	$	2,029

The following summarizes the activity of the Continuity Award Program for the ~~three~~six months ended ~~March 31,~~June 30, 2006:


			Weighted Average
	Nonvested		Grant Date
	Shares		Fair Value		Nonvested Shares		Weighted Average Grant Date Fair Value
Outstanding at December 31, 2005	250,375		$	38.49	250,375		$	38.49
Granted	—			—	55,000			34.41
Issued	(67,250	)		39.29	(74,875	)		38.91
Forfeited	(23,750	)		38.05	(32,750	)		38.41

Outstanding at March 31, 2006	159,375		$	38.21
Outstanding at June 30, 2006					197,750		$	37.21

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

Prior to January 1, 2006, the Company accounted for stock-based awards under the intrinsic value method, which followed the recognition and measurement principles of APB Opinion No. 25. The following table illustrates the effect on net earnings, net earnings per common share and net earnings per common share, assuming dilution, for the three and six months ended ~~March 31,~~June 30, 2005 if the Company had applied the fair value recognition provisions of SFAS No. 123.


	Three Months Ended
*In millions, except per share amounts*	March 31, 2005			Three Months Ended June 30, 2005			Six Months Ended June 30, 2005
Net earnings, as reported	$	77		$	77		$	154
Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects		(13	)		(15	)		(28	)

Pro forma net earnings	$	64		$	62		$	126

Earnings per common share
Basic and diluted - as reported	$	0.16		$	0.16		$	0.32

Basic and diluted - pro forma	$	0.13		$	0.13		$	0.26

On ~~April 4,~~July 13, 2006, in connection with the planned use of projected proceeds from the Company’s Transformation Plan, International Paper announced ~~definitive agreements with two separate investor groups under which it will sell~~that its board of directors had authorized a total of approximately 5.1 million acres of forestlands for aggregate proceeds of approximately $6.1 billion. Under one of the agreements, International Paper will sell approximately 3.8 million acres of forestlands located in the southern U.S. and 440,000 acres in Michiganshare repurchase program to ~~an investor group led by Resource Management Service, LLC (RMS) for approximately $5~~acquire up to $3.0 billion in cash and notes at closing. Under a separate agreement, International Paper will sell approximately 900,000 acres of forestlands in Louisiana, Texas and Arkansas to an investor group led by TimberStar for approximately $1.1 billion in cash and notes at closing.

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

The agreements discussed above are expected to be completed over the remainder of 2006. When completed, these sales, along with other pending sale transactions announced in March 2006 (see Note 4), will substantially complete International Paper’s sales of U.S. forestlands identified as part of the Company’s Transformation Plan. Anticipated proceeds from these sale agreements, totaling about 5.7 million acres or approximately 87% of its U.S. forestland holdings, are approximately $6.6 billion. International Paper is retaining approximately 830,000 acres, some of which may be later sold to maximize the value of the land. The amount of gain that will be recognized by the Company upon the completion of these transactions will be dependent upon the final amount of proceeds received and costs incurred and the portion, if any, of the gain that will be required to be deferred under applicable accounting standards.stock.


	Three Months Ended
	March 31,						Three Months Ended June 30,						Six Months Ended June 30,
	2006			2005 (1)			2006			2005 (2)			2006			2005 (2)
Printing Papers	$	120		$	157		$	1,915		$	1,775		$	3,810		$	3,650
Industrial Packaging		38			102			1,240			1,165			2,410			2,380
Consumer Packaging		35			32			795			790			1,570			1,530
Distribution		27			18			1,690			1,570			3,340			3,100
Forest Products		226	(5)		207	(5)		595	(5)		605	(5)		1,225	(5)		1,215	(5)
Specialty Businesses and Other (2)		10			10
Specialty Businesses and Other (3)								235			230			465			505
Corporate and Inter-segment Sales								(200	)		(275	)		(487	)		(563	)

Net Sales							$	6,270		$	5,860		$	12,333		$	11,817


Operating Profit by Industry Segment

							Three Months Ended June 30,						Six Months Ended June 30,
							2006			2005 (2)			2006			2005 (2)
Printing Papers							$	254	(1,6)	$	139	(8)	$	382	(1,6)	$	313
Industrial Packaging								100			84			138			186	(8)
Consumer Packaging								41	(6)		53			76	(6)		85
Distribution								36			18			63			36
Forest Products								184	(7)		191	(7,8)		410	(7)		398	(7,8)
Specialty Businesses and Other (3)								16			7			26			17

Operating Profit		456			526			631			492			1,095			1,035
Interest expense, net		(148	)		(168	)		(148	)		(155	)(9)		(296	)		(323	)(9)
Minority interest (3)		3			(1	)
Minority interest (4)								2			2			5			1
Corporate items, net		(174	)		(152	)		(174	)		(133	)		(350	)		(287	)
Restructuring and other charges		(46	)		(24	)		(54	)		—			(100	)		(24	)
Insurance recoveries		19			—			—			35			19			35
Net losses on sales and impairments of businesses held for sale		(3	)		(79	)
Net (losses) gains on sales and impairments of businesses held for sale								(75	)		19			(1,358	)		(60	)

Earnings from continuing operations before income taxes and minority interest	$	107		$	102
Earnings (loss) from continuing operations before income taxes and minority interest							$	182		$	260		$	(985	)	$	377


	Three Months Ended
	March 31,		Three Months Ended June 30,		Six Months Ended June 30,
	2006	2005	2006	2005	2006	2005
Printing Papers (In thousands of short tons)
Brazil Uncoated Papers	118	112	114	107	232	219
Europe & Russia Uncoated Papers	379	359	340	358	719	717
U.S. Uncoated Papers	1,029	1,031	996	915	2,025	1,946

Uncoated Papers	1,526	1,502	1,450	1,380	2,976	2,882
Coated Papers	93	97	588	580	1,183	1,155
Market Pulp (3)	285	296	289	307	574	603

Packaging (In thousands of short tons)
Container of the Americas	901	890	930	906	1,831	1,796
European Container (Boxes)	321	259	325	273	646	532
Other Industrial and Consumer Packaging	119	127	120	134	239	261

Industrial and Consumer Packaging	1,341	1,276	1,375	1,313	2,716	2,589
Containerboard	496	470	438	438	934	909
Bleached Packaging Board	376	371	393	351	769	722
Coated Bristols	108	103	102	107	210	210
Kraft	60	62	74	60	134	122

Forest Products (In millions)
Panels (sq. ft. 3/8" - basis)	402	401
Panels (sq. ft. 3/8”- basis)			413	367	815	768
Lumber (board feet)	628	613	666	663	1,294	1,276

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

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

~~Operating~~International Paper had solid operating results ~~for~~in the 2006 ~~first~~second quarter, ~~were solid, with broad-based improvement over the fourth quarter of 2005. Sales volumes for~~experiencing strong growth in revenues. Average prices improved during the quarter ~~were stronger~~ across ~~many of our key product lines, including~~all uncoated paper, ~~and coated paperboard, with shipments of containerboard and market~~ pulp ~~constrained by low inventory levels. The Company’s product pricing improved across all paper~~ and packaging grades as a number of previously announced price increases were ~~implemented. Input~~partially or fully realized. Sales volumes were comparable to first-quarter levels as low inventories constrained shipments for both containerboard and market pulp. Raw material costs were lower ~~driven by~~than in the first quarter, reflecting declining natural gas and wood ~~costs, although~~prices, while fuel oil ~~coal and transportation~~ costs were ~~higher. Our global manufacturing operations continued to perform well. Our U.S. distribution business, xpedx, also continued to improve, posting record first quarter earnings.~~

~~Entering the second quarter, we expect operating profits to be somewhat~~essentially flat. Freight costs were higher than in the first quarter. ~~Product demand~~Our global manufacturing operations performed well during the quarter. We reported lower land sales and ~~projected sales~~a slightly higher tax rate compared with the first quarter.

Looking to the third quarter, we expect that earnings from continuing operations, excluding any special items, will be higher than in the second quarter. Sales volumes ~~are solid across all of~~in our key platform ~~businesses. Average price~~businesses should be solid, supported by improved product inventory levels. Price realizations should continue to improve ~~as we implement~~reflecting previously announced global International Paper price increases in paper and packaging grades. ~~We also anticipate~~The cost outlook is mixed, with wood costs continuing to decline while freight costs are expected to increase. The outlook for energy costs is uncertain. On the operating side, we expect continued progress in improving our global manufacturing operations. ~~Input cost movements are expected to be mixed in the second quarter with lower natural gas and wood costs, but higher fuel and transportation costs; however, the net impact should be favorable.~~

For the ~~first~~second quarter of 2006, International Paper reported net sales of ~~$5.7~~$6.3 billion, compared with ~~$5.6~~$5.9 billion in the second quarter of 2005 and $6.1 billion in the first quarter of ~~2005 and $5.7 billion in the fourth quarter of 2005.~~2006.

Net ~~losses~~earnings totaled ~~($1.2) billion,~~$115 million, or ~~($2.52)~~$0.24 per share, in the 2006 ~~first~~second quarter. This compared with net earnings of $77 million, or ~~$.16~~$0.16 per share, in the ~~first~~second quarter of 2005 and a net loss of ~~($77) million,~~$1.2 billion, or ~~($.16)~~$2.54 per share, in the ~~fourth~~first quarter of ~~2005.~~2006. The ~~first-quarter~~first quarter 2006 net loss ~~involved~~included a ~~$1.4~~$1.3 billion pre-tax charge ($~~1.3 billion after taxes, or $2.66~~2.57 per share) to reduce the carrying values of the net assets of the Coated and Supercalendered Papers ~~and Kraft Papers~~ businesses to their estimated fair ~~values, and~~value. Amounts include the effects of special items in all periods.

Earnings from continuing operations were ~~$67~~$116 million in the ~~first~~second quarter of 2006 compared with earnings of ~~$98~~$91 million in the ~~first~~second quarter of 2005 and a loss from continuing operations of ~~$95 million~~$1.2 billion in the ~~2005 fourth~~2006 first quarter. Earnings in the 2006 ~~first~~second quarter benefited from ~~the impact~~higher average price realizations ($38 million), improved operations and a more favorable mix of products sold ($30 million), higher sales volumes and decreased market-related downtime ($2748 million), and higher gains from land sales ($1816 million) compared with the 2005 ~~first~~second quarter. These benefits were partially offset by ~~lower average price realizations ($7 million),~~ higher ~~operating costs and a less favorable mix of products sold ($9 million), and higher~~freight, energy and raw material costs ($6250 million). In addition, corporate items and other costs ($11 million) were higher ~~($32 million) primarily~~ due to higher pension ~~costs,~~and benefit costs. Special items expense ($54 million) increased but ~~this~~ was partially offset by lower net interest expense ($~~14 million) and lower special items expense ($43~~4 million). Income tax expense was ~~$23~~$4 million ~~higher~~lower in the 2006 ~~first~~second quarter ~~due to~~reflecting a ~~higher~~lower estimated effective tax rate.

Compared with the ~~fourth~~first quarter of ~~2005,~~2006, earnings from continuing operations benefited from higher average price realizations ($3948 million), improved manufacturing costs resulting from cost reduction actions ($46 million) in prior periods, ~~($25 million),~~ and lower wood and natural gas costs ($1125 million). These benefits were partially offset by lower sales volumes ($2 million) and lower gains from land sales ($2212 million). Additionally, compared with the 2006 first quarter, ~~was impacted by lower net interest expense ($2 million),~~2006 second-quarter earnings reflected a higher effective tax rate ($85 million), increased corporate and other items ($15 million), and significantly lower special charges ($~~116 million).~~1.2 billion), reflecting a $1.3 billion charge in the 2006 first quarter relating to the Coated and Supercalendered Papers business discussed below.

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

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


	Three Months Ended								Three Months Ended
	March 31,					December 31, 2005			June 30,						March 31,
*In millions*	2006			2005		December 31, 2005			2006			2005			2006
Net (Loss) Earnings	$	(1,237	)	$	77	$	(77	)
Net Earnings (Loss)									$	115		$	77		$	(1,237	)
Deduct - Discontinued operations:
(Earnings) loss from operations		(7	)		21		(13	)		(9	)		14			(4	)
Loss (gain) on sales or impairment		1,311			—		(5	)
Loss on sales or impairments										10			—			62

Earnings (Loss) From Continuing Operations		67			98		(95	)
Earnings From Continuing Operations										116			91			(1,179	)
Add back (deduct):
Income tax provision (benefit)		35			2		(94	)
Income tax provision										61			166			8
Minority interest expense, net of taxes		5			2		3			5			3			4

Earnings (Loss) From Continuing Operations Before Income Taxes and Minority Interest		107			102		(186	)
Earnings From Continuing Operations Before Income Taxes and Minority Interest										182			260			(1,167	)
Interest expense, net		148			168		151			148			155			148
Minority interest included in operations		(3	)		1		1			(2	)		(2	)		(3	)
Corporate items		174			152		165			174			133			176
Special items:
Restructuring and other charges		46			24		230			54			—			46
Insurance recoveries		(19	)		—		(35	)		—			(35	)		(19	)
Net losses on sales and impairments of businesses held for sale		3			79		46
Reversal of reserves no longer required, net		—			—		(1	)
Net losses (gains) on sales and impairments of businesses held for sale										75			(19	)		1,283

	$	456		$	526	$	371		$	631		$	492		$	464

Industry Segment Operating Profits
Industry Segment Operating Profit
Printing Papers	$	120		$	157	$	60		$	254		$	139		$	128
Industrial Packaging		38			102		5			100			84			38
Consumer Packaging		35			32		29			41			53			35
Distribution		27			18		25			36			18			27
Forest Products		226			207		257			184			191			226
Specialty Businesses and Other		10			10		(5	)		16			7			10

Total Industry Segment Operating Profits	$	456		$	526	$	371
Total Industry Segment Operating Profit									$	631		$	492		$	464

~~During~~In the 2006 first quarter, ~~of 2006, in connection with the evaluation of strategic options for certain businesses under the previously announced Transformation Plan,~~ the Company ~~determined that the sales of~~had reported its Coated and Supercalendered Papers business ~~and Kraft Papers~~as a discontinued operation based on a plan to sell the business. In the 2006 second quarter, the Company signed a definitive agreement to sell this business were in the best interests of the Company’s shareholders. The Company is currently engaged in exclusive negotiations with potential buyers of each of these businesses to attempt to finalize sales agreements, and has determined that the accounting requirements as “held for ~~sale” businesses have been met. Accordingly, a pre-tax charge of~~ approximately $1.4 billion, ~~($1.3 billion after taxes, or $2.66 per share) was recorded~~subject to ~~reduce~~certain post-closing adjustments, and agreed to acquire a 10% limited partnership interest in CMP Investments L.P., the ~~carrying values~~parent company that will own this business. Since this interest will represent significant continuing involvement in the operations of the net assets of these businesses, including goodwill, to their estimated fair values based on their estimated sales proceeds less costs to sell. In the 2005 third quarter, the sale of the Company’s majority share of Carter Holt Harvey Limited was completed. The 2006 first-quarter charge andthis business under U.S. generally accepted accounting principles, the operating results ~~of these businesses~~ for ~~all periods presented~~this business are ~~reported as Discontinued~~required to be included in continuing operations in the accompanying consolidated statement of operations. Accordingly, the operating results for this business, including a $1.3 billion charge before and after taxes ($2.57 per share) to write down the assets of the business to their estimated fair value in the 2006 first quarter, are now included in continuing operations for all periods presented.

Discontinued operations includes the operating results of the Company’s Kraft Papers business. In the 2006 first quarter, a pre-tax charge of $101 million ($0.13 per share) had been recorded to write down the carrying value of the assets of this business to their estimated fair value. During the 2006 second quarter, International Paper signed a definitive agreement to sell this business to Stone Arcade Acquisition Corp. and recorded an additional pre-tax charge of $16 million ($0.02 per share) based on the terms of this agreement. Discontinued operations for the second quarter of 2005 also includes the operating results of Carter Holt Harvey Limited sold in the third quarter of 2005.

The income tax provision ~~of $35~~was $61 million for the 2006 second quarter. Excluding a $45 million credit relating to the tax effects of special items, the effective income tax rate for continuing operations was 34% for the quarter.

The income tax provision of $8 million in the 2006 first quarter included a $6$5 million ~~charge~~benefit related to the adjustment of previously recorded tax reserves. Excluding ~~this charge and an $11~~a $36 million credit relating to the tax effects of ~~other~~ special items, the effective income tax rate for continuing operations was 30% for the quarter.

The income tax ~~benefit~~provision of $166 million in the second quarter of 2005 included a special charge of $94 million, in the 2005 fourth quarter included a $74 million benefit resulting from an agreement reached with the U.S. Internal Revenue Service concerning the 1997 through 2000 U.S. federal income tax audit, a $43 million provisionprincipally for deferred taxes related to earnings repatriated during the quarter under the American Jobs Creation Act of ~~2004, and a $71 million net benefit related to other special items. Excluding these items, the effective tax rate for the quarter was 14%, resulting in a full-year tax rate of 26%.~~

2004. The effective income tax rate for continuing operations before special items for the ~~first~~second quarter of 2005 was ~~19% which reflected the favorable resolution of a tax matter that reduced the tax provision by $19 million.~~31%.

Net interest expense for the 2006 ~~first~~second quarter was $148 million, ~~as compared with $151~~equal to the $148 million ~~for~~in the 2006 first quarter and below the $155 million in the 2005 ~~fourth quarter and $168 million for~~second quarter. Net interest expense in the 2005 ~~first quarter.~~second quarter included interest income of $11 million related to the collection of a note receivable from the 2001 sale of the Flexible Packaging business. Excluding this, net interest expense was $166 million. The lower expense in the current quarter reflects lower average debt balances and interest rates due to debt refinancings and repayments in 2005 and 2006.

Corporate items, net, of $174 million in the 2006 ~~first~~second quarter were ~~higher~~slightly lower than ~~2005 fourth-quarter~~the 2006 first-quarter net expenses of ~~$165~~$176 million, ~~and~~but were ~~also~~ higher than the net expenses of ~~$152~~$133 million in the ~~first~~second quarter of 2005. The ~~increases~~increase compared with ~~both~~ the 2005 ~~fourth~~second quarter ~~and the 2005 first quarter were~~was primarily due to higher pension and benefit costs.

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

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

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

During the fourth quarter of 2005, restructuring and other charges totaling $230 million before taxes ($141 million after taxes) were recorded. Included in these charges were a pre-tax charge of $196 million ($121 million after taxes) for organization restructuring programs, principally severance costs associated with the Company’s Transformation Plan, a pre-tax charge of $27 million ($16 million after taxes) for legal reserves and a pre-tax charge of $7 million ($4 million after taxes) for losses on early extinguishment of debt.

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

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

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

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

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

During the fourth quarter of 2005, a pre-tax charge of $46 million ($30 million after taxes) was recorded for adjustments of losses of businesses held for sale, principally $45 million to write down the carrying value of the Company’s Polyrey business in France to its estimated net realizable value.

Industry segment operating profits of ~~$456~~$631 million in the 2006 second quarter were higher than both $492 million in the 2005 second quarter and $464 million in the 2006 first ~~quarter decreased from $526 million in the 2005 first quarter, but increased from $371 million in the 2005 fourth~~ quarter. Compared with the ~~first~~second quarter of 2005, earnings in the current quarter benefited from higher average prices ($57 million), higher sales volumes and the impact of ~~lower~~reduced market-related ~~mill~~ downtime ($3873 million), lower manufacturing operating costs and ~~from~~a more profitable mix of products sold ($45 million), higher gains from land sales ($2524 million) and other items ($15 million). These benefits ~~were~~ more than offset by the effects of ~~lower average sales prices ($10 million), higher mill operating costs and a less profitable mix of products sold ($14 million),~~ higher raw material costs ~~particularly energy~~ ($8875 million), ~~and other items, including higher transportation costs ($21 million).~~particularly energy. Compared with the ~~2005 fourth~~2006 first quarter, operating profits benefited from higher average prices ($5572 million), improved ~~mill~~manufacturing operating performance and the impact of cost reduction efforts ($3669 million), lower raw material costs ($37 million) including wood and natural gas ~~($16 million),~~ and lower other costs ($910 million) ~~were all positive earning factors. However, these factors~~. These benefits were partially offset by lower sales volumes and the impact of higher market-related downtime ($3 million) and lower gains from land sales ($3118 million).

During the 2006 second quarter, International Paper took approximately 240,000 tons of downtime, including 25,000 tons for market-related downtime, compared with approximately 500,000 tons of downtime in the second quarter of 2005, which included 275,000 tons of market-related downtime. During the 2006 first quarter, International Paper took approximately 165,000 tons of downtime, including 30,000 tons for market-related downtime, compared with approximately 200,000 tons of downtime in the first quarter of 2005, which included 95,000 tons of market-related downtime. During the 2005 fourth quarter, International Paper had taken approximately 360,000 tons of downtime, including 200,000 tons for market-related downtime. Market-related downtime is taken to balance internal supply with our customer demand to help manage inventory levels, while maintenance downtime, which makes up the majority of the difference between total downtime and market-related downtime, is taken periodically during the year. The costs for annual planned maintenance downtime are charged to expense evenly ~~in each quarter.~~throughout the year. Market-related downtime costs are expensed in the periods in which the downtime is taken.

The following presents segment discussions for the ~~first~~second quarter of 2006.


	2006		2005				2006						2005
*In millions*	1st Quarter		1st Quarter		4th Quarter		2nd Quarter		1st Quarter		Six Months		2nd Quarter		1st Quarter		Six Months
Sales	$	1,500	$	1,510	$	1,485	$	1,915	$	1,895	$	3,810	$	1,775	$	1,875	$	3,650
Operating Profit		120		157		60		254		128		382		139		174		313

Printing Papers net sales for the ~~first~~second quarter of 2006 were 1% higher than the ~~fourth~~first quarter of ~~2005~~2006 and ~~essentially even with~~8% higher than the ~~first~~second quarter of 2005. Operating profits in the second quarter of 2006 were about double profits in the first quarter of 2006, ~~were double those of the fourth quarter of 2005, but 24% lower~~and 83% higher than in the ~~first~~second quarter of 2005.

U.S. Uncoated Papers earnings increased substantially in the ~~first~~second quarter of 2006 versus the ~~fourth~~first quarter of ~~2005. Sales~~2006. Despite strong market demand, sales volumes ~~increased in almost all uncoated freesheet grades, particularly in cut size, converting and printing papers.~~decreased slightly as seasonal planned maintenance outages impacted production levels. Average price realizations were ~~higher~~up for uncoated freesheet papers asreflecting previously announced price increases ~~began to be realized.~~for both roll and cut-size product lines. Raw material costs for wood, ~~and~~ natural gas ~~costs declined slightly~~and caustic soda were favorable during the quarter, partially offset by the effects of higher oil prices. Freight costs remained high, while manufacturing operations were favorable for the quarter.

Earnings were also significantly higher than in the second quarter of 2005. Sales volumes were up for all product categories of imaging and ~~coal prices. Manufacturing operations improved despite start-up costs relating to~~printing papers and converting grades. Strong product demand in the ~~fourth-quarter rebuild of the paper machine at our Eastover mill. Additionally, the 2006 first~~ quarter ~~benefited from~~resulted in no ~~lack-of-order~~market-related downtime, compared with ~~130,000~~110,000 tons taken in the ~~fourth~~second quarter of 2005.

~~Compared to the first quarter of 2005, earnings declined primarily due to increased energy costs for coal, natural gas and oil and higher freight costs driven by higher fuel prices.~~ Average sales prices were higher ~~reflecting the impact of~~as price increases announced in the ~~fourth quarter 2005 and the first quarter 2006. Sales volumes were also slightly higher. Additionally, in the~~ first quarter of 2006 were realized. However, input costs for wood, oil, coal and starch and freight costs were above 2005 levels. In addition, operating results for the ~~business had taken 40,000 tons~~second quarter of ~~lack-of-order downtime.~~2005 included a $17 million special charge for severance and other charges related to the indefinite shutdown of three paper machines.

Looking ahead to the ~~second~~third quarter, earnings are expected to further improve with the continued realization of ~~uncoated freesheet papers~~previously announced price increases, particularly the cut-size paper increase announced inat the ~~first~~end of the second quarter. Sales volumes are ~~anticipated~~expected to increase slightly with the expected seasonal increase in demand. Input costs should be about flat todespite slightly ~~lower. Higher~~higher wood costs; however, further increases in freight and distribution expenses are ~~expected, reflecting increases~~anticipated due, in part, to an announced July rail ~~and truck rates. Input costs for wood and natural gas are expected to be somewhat lower.~~price increase.

European Papers earnings for the ~~first~~second quarter of 2006 were ~~also~~nearly 40% higher than in the ~~2005 fourth~~2006 first quarter. Sales volumes ~~increased, and average~~declined slightly, largely due to tight inventory conditions as the quarter began. Average sales prices were ~~up for all products. These~~higher, primarily in Russia. Input costs were favorable ~~effects were partially offset by higher energy costs and usage in the first quarter reflecting unusually harsh winter weather. Earnings declined versus the 2005 first quarter~~ due to ~~increases in~~lower energy and wood costs. ~~Sales~~Higher production coupled with the lower sales volumes resulted in improved inventory levels by the end of the quarter. Earnings also improved versus the 2005 second quarter as higher average price realizations and slightly higher sales volumes were ~~up, but largely~~only partially offset by ~~lower production~~increased input costs for energy and wood.

Entering the 2006 third quarter, earnings are expected to further improve, primarily as a result of continued good demand and seasonally higher sales volumes ~~due to production disruptions from the announced closure of the Maresquel mill in France~~for both paper and ~~a higher level of planned maintenance outages.~~board, and improved product inventories. Average sales prices ~~were favorable in most markets.~~

~~Entering~~and input costs are expected to be comparable to the 2006 second quarter, production volume is expected to be higher but sales volumes will be lower until inventory levels are rebuilt. Sales price realizations are expected to increase reflecting the realization of an announced price increase beginning in mid-April. Energy usage and costs should decrease in the coming quarter with the seasonal improvement in weather conditions.quarter.

Brazilian Paperearnings for the ~~first~~second quarter of 2006 were ~~about~~down slightly from the ~~same as in the 2005 fourth~~2006 first quarter. Sales volumes ~~for coated groundwood papers decreased slightly compared with the prior quarter.~~declined due to lower uncoated freesheet paper and chip sales. Average sales price realizations for uncoated freesheet and coated groundwood papers also ~~decreased in local currency as unfavorable foreign exchange rates reduced exports, resulting in increased competition and price pressures in domestic markets.~~declined. Raw material costs were ~~slightly unfavorable~~favorable due to ~~higher pulpwood~~lower energy and ~~gas prices; however manufacturing operations were favorable.~~chemical prices. Earnings also benefited from an $8 million favorable settlement of a Brazilian tax matter. Compared to the ~~first~~second quarter of 2005, earnings improved in the ~~first~~

second quarter of ~~2006 increased. Both sales~~2006. Sales volumes ~~and average~~were higher, primarily for uncoated freesheet paper. Average sales prices ~~improved, although this was~~for paper also increased with the biggest improvements in uncoated freesheet and coated groundwood papers. These benefits were partially offset by ~~higher pulpwood~~the impacts of unfavorable exchange rates and ~~energy costs. Operating~~a planned coated paper’s outage.

Looking ahead to the third quarter, operating results ~~for the second quarter~~ are expected to ~~benefit~~be flat. Benefits from ~~higher~~ sales ~~volumes~~volume increases for uncoated freesheet paper, coated groundwood paper and chips, plus some improvements in price realizations for coated groundwood and uncoated papers, ~~and slightly higher average sales prices in both domestic and export markets.~~are expected to be offset by lower tax settlements. Raw material prices ~~for pulpwood, chemicals and electricity~~ should ~~also improve.~~be about flat.

Market Pulpearnings in the U.S. in the ~~first~~second quarter of 2006 were ~~lower~~higher than in the ~~fourth~~first quarter of ~~2005 due to lower sales~~2006. Sales volumes ~~and unfavorable manufacturing operations.~~were essentially flat. Average ~~sales~~ price realizations were up over the prior quarter, reflecting an increase in both softwood and hardwood pulp prices in the ~~first~~second quarter. ~~Raw~~The benefits of slightly favorable raw material costs were ~~also slightly favorable.~~largely offset by increased distribution costs. Compared with the ~~first~~second quarter of 2005, earnings in the ~~first~~second quarter of 2006 ~~decreased~~declined, primarily due to higher input costs for wood and ~~energy.~~energy and less favorable manufacturing operations. Sales volumes were essentially flat, ~~but average~~with increased fluff pulp shipments offsetting lower market pulp shipments. Average sales prices increased, ~~slightly as~~reflecting higher average prices for ~~fluff pulp and~~ bleached hardwood pulp ~~were offset by lower~~shipments to Europe and higher softwood pulp prices. Earnings are expected to improve ~~slightly~~further in the ~~second~~third quarter of 2006 as announced price increases for ~~market~~softwood and ~~fluff~~hardwood pulp begin to be realized.

U.S. Coated Papersearnings in the second quarter of 2006 increased compared with the first quarter of 2006. Results included a $31 million reduction in depreciation expense to reflect the treatment of the business as held for sale. Sales volumes ~~are expected to decline due to~~and average sales prices were essentially flat; however, input costs for energy and wood were lower. Manufacturing operations improved over the ~~strength~~prior quarter. Earnings decreased compared with the second quarter of 2005 as benefits from increases in average sales price realizations and favorable manufacturing operations were offset by increased input costs for energy. Sales volumes were flat. The Coated and Supercalendered Papers business was sold in the ~~shipments in March and seasonally lower second-quarter demand.~~third quarter of 2006.


	2006		2005				2006						2005
*In millions*	1st Quarter		1st Quarter		4th Quarter		2nd Quarter		1st Quarter		Six Months		2nd Quarter		1st Quarter		Six Months
Sales	$	1,170	$	1,215	$	1,170	$	1,240	$	1,170	$	2,410	$	1,165	$	1,215	$	2,380
Operating Profit		38		102		5		100		38		138		84		102		186

Industrial Packaging net sales for the second quarter of 2006 were 6% higher than in both the first quarter of 2006 ~~were even with~~and the ~~fourth quarter of 2005 and 4% lower than in the first~~second quarter of 2005. Operating profits in the second quarter of 2006 were more than double those of the first quarter of 2006, ~~were significantly~~and 19% higher than in the ~~fourth quarter of 2005, but 63% lower than in the first~~second quarter of 2005.

Containerboard earnings in the ~~first~~second quarter of 2006 increased significantly compared with the ~~fourth~~first quarter of ~~2005.~~2006. Average sales price realizations increased during the quarter, reflecting ~~fourth-quarter~~ price ~~increase announcements~~increases announced in the first quarter plus some realization of ~~a further price~~an additional increase announced in ~~January.~~April. Third-party sales volumes were slightly lower as more production was used by our converting operations. Raw material costs were favorable, reflecting lower average wood and natural gas costs. Manufacturing costs were ~~comparable with~~also favorable reflecting improved performance and reliability. However, freight costs remained high during the ~~prior~~ quarter. ~~Compared with the first quarter of 2005, earnings decreased~~Earnings also increased in the 2006 ~~first~~second quarter ~~primarily due to lower average sales prices and higher input costs for fuel oil, gas, electricity and caustic soda.~~compared with the 2005 second quarter. Sales volumes were uphigher as no market-related downtime was taken in ~~both domestic~~the 2006 second quarter versus 140,000 tons of market related downtime taken in the second quarter of 2005. Average sales prices were higher reflecting the realization of previously announced price increases. The impacts of higher costs for freight and ~~integrated channels.~~energy were more than offset by benefits from improved manufacturing operations.

Entering the ~~second~~third quarter, earnings are expected to continue to improve. Average sales prices for the quarter should increase with the ~~complete~~ realization of the full impact of the price increase announced in ~~January and some realization of a further price increase in~~ April. Raw material costs for wood are ~~also~~ expected to continue to improve, ~~for gas~~although distribution costs and ~~wood.~~manufacturing costs (reflecting scheduled maintenance outages) are projected to be unfavorable.

U.S. Convertingearnings for the 2006 ~~first~~second quarter were higher than in the fourth quarter of 2005. Sales volumes increased slightly as a result of additional shipping days during the period. Average sales prices increased, reflecting the pass-through of earlier increases in containerboard costs. Manufacturing operations were favorable due to improved run rates and lower maintenance spending. Raw material costs were slightly unfavorable due to higher wax and distribution costs, but utility costs were down. Compared to the first quarter of 2005, earnings improved in the first quarter of 2006. Sales volumes increased despite fewer shipping days during the period, reflecting solid demand for packaging products. Average sales prices for container products improved during the quarter; however, these increases were less than the increases in average containerboard costs, resulting in lower average margins. Manufacturing operations were favorable, reflecting improved run rates and lower maintenance spending. Input costs were favorable due to lower utility costs, slightly offset by higher raw material costs. Earnings also improved in the second quarter of 2006 compared with the 2005 second quarter. Sales volumes were higher. Average sales prices for boxes were ~~lower~~higher than in the ~~first~~second quarter of 2005, ~~but~~and exceeded the ~~decline was less than the decline~~increase in containerboard costs, resulting in slightly higher margins. Distribution, utility and ~~wax~~raw material costs increased compared with 2005. Operating costs were favorable, reflecting the benefits of plant rationalizations and ~~run rate~~run-rate improvements.

Entering the ~~second~~third quarter, earnings are expected to ~~continue~~decline slightly due to ~~improve. Sales~~a seasonal decrease in sales volumes and continuing pressure on margins. Distribution, utility and raw material costs are also expected to ~~increase. The realization of announced box price increases is expected to occur~~be higher in the ~~latter part of the quarter, but the average margin for the quarter will be down. Moderating utility costs should offset increases in wax and distribution costs.~~third quarter.

European Container earnings for the 2006 ~~first~~second quarter ~~declined~~improved compared with the ~~fourth~~first quarter of ~~2005.~~2006. Sales volumes ~~decreased slightly~~increased, reflecting ~~the seasonality of~~seasonal strengthening in the European agricultural business. Average sales ~~price increases~~prices improved, but were not able to ~~offset earlier~~counterbalance the effects of continued increases in containerboard costs. Input costs for energy were ~~also unfavorable.~~favorable. Compared with the ~~first~~second quarter of 2005, earnings ~~increased.~~decreased. Sales volumes were ~~higher due to the impact of bad weather conditions on the agricultural markets in the first quarter of 2005.~~flat. Containerboard costs increased faster than average sales prices. Energy costs were also unfavorable when compared with the 2005 ~~first~~second quarter. However, earnings contributions from the Moroccan box plant acquisition in the fourth quarter of 2005 favorably impacted 2006 ~~first~~second quarter results. Looking ahead to the ~~second~~third quarter, earnings are expected to improve as ~~average~~benefits from improved price realizations more than offset the effects of seasonally lower sales ~~price increases are realized and sales volumes seasonally increase.~~volumes. Energy costs are expected to average about the same as in the ~~first~~second quarter.


	2006		2005				2006						2005
*In millions*	1st Quarter		1st Quarter		4th Quarter		2nd Quarter		1st Quarter		Six Months		2nd Quarter		1st Quarter		Six Months
Sales	$	775	$	740	$	800	$	795	$	775	$	1,570	$	790	$	740	$	1,530
Operating Profit		35		32		29		41		35		76		53		32		85

Consumer Packaging net sales for the ~~first~~second quarter of 2006 were 3% ~~lower than in the fourth quarter of 2005 but 5%~~ higher than in the first quarter of 2006 and essentially even with the second quarter of 2005. Operating profits in the second quarter of 2006 were 17% higher than in the first quarter of 2006, ~~were 21% higher~~but 23% lower than in the ~~fourth quarter of 2005 and 9% higher than in the first~~second quarter of 2005.

Coated Paperboard earnings for bleached packaging board and coated bristols in the ~~first~~second quarter of 2006 ~~were well above fourth-quarter 2005~~exceeded first-quarter 2006 levels. Sales volumes increased, primarily in the ~~cupstock, coated bristols and plate~~folding carton board product ~~lines.~~line. Average sales prices were also up, mainly ~~in cupstock.~~for cupstock and folding carton board. Favorable input costs reflected lower natural gas, wood and ~~wood~~polyethylene costs. Manufacturing operations ~~improved at all facilities. Lack-of-order downtime declined to 4,000 tons compared with 45,000 tons in the fourth quarter of 2005.~~were slightly unfavorable. Compared with the 2005 ~~first~~second quarter, earnings in the ~~first~~second quarter of 2006 were ~~relatively flat.~~slightly lower. The favorable impacts of increased sales volumes and higher average sales prices ~~and improved manufacturing operating performance~~ were more than offset by increased ~~polyethylene~~distribution, energy and ~~energy~~polyethylene costs. Operating results are expected to improve in the 2006 ~~second~~third quarter. Sales volumes for bleached board products and coated bristols ~~should increase, and~~are expected to decline slightly, but average price realizations should continue to improve, reflecting previously announced price ~~increases. Further improvements in polyethylene~~increases for cupstock and ~~fiber raw material costs should~~folding carton board. Manufacturing operations are also ~~have a positive impact. Scheduled maintenance downtime in the second quarter is~~ expected to ~~offset some of these favorable effects.~~improve.

Foodservice Packagingearnings ~~decreased~~increased in the ~~first~~second quarter of 2006 compared with the ~~fourth~~first quarter of ~~2005.~~2006. Sales volumes were seasonally ~~lower. Average~~higher, and average sales prices increased ~~due to the realization of price increases announced in the fourth quarter.~~slightly. Raw material costs ~~were flat.~~declined slightly, reflecting favorable resin costs. Operating costs were unfavorable,

but these effects were partially offset by decreased production downtime. Compared with the ~~first~~second quarter of 2005, sales volumes were relatively flat. Average sales prices were higher ~~due to~~reflecting the realization of announced price ~~increases implemented during 2005.~~increases. Raw material costs were unfavorable as the result of higher bleached board ~~costs, partially offset by lower~~and resin costs. Entering the ~~second~~third quarter, sales volumes are expected to ~~grow reflecting seasonal demand increases. A cupstock~~improve slightly. Average sales price ~~increase announced April 1~~realizations should ~~favorably impact average sales prices for the quarter. Raw~~also continue to increase. However, raw material costs are expected to increase ~~slightly.~~due to higher bleached board and resin costs.

Shorewood Packaging earnings for the ~~first~~second quarter of 2006 declined compared with the fourth quarter of 2005 reflecting a seasonal decline in sales volumes. Demand in the tobacco segment was strong, but was offset by weaker demand in the home entertainment and display segments. Compared with the first quarter of ~~2005, lower sales~~2006 primarily due to the write-off of equipment that was removed from production. Sales volumes ~~for~~increased in the ~~home entertainment,~~tobacco, consumer products and display segments, but these favorable effects were partially offset by ~~higher tobacco~~a decline in home entertainment segment ~~volumes. Operating performance improved, but raw material~~sales. Manufacturing operating costs ~~increased, reflecting bleached board cost increases implemented during 2005. Moving into~~were unfavorable due, in part, to start-up costs for a new rotary press. Compared with the second quarter of ~~2006,~~2005, the benefits from strong tobacco demand were partially offset by weaker consumer products and home entertainment sales. Operating costs were higher and raw materials were unfavorable due to bleached board cost increases. As the third quarter begins, earnings are expected to ~~improve~~increase significantly with seasonally higher sales ~~volumes.~~volumes in the home entertainment segment. Improvements in converting costs are anticipated as the new rotary press begins normal production.

Beverage Packagingearnings increased in the ~~first~~second quarter of 2006 compared with the ~~fourth~~first quarter of ~~2005,~~2006. Sales volumes for converted products increased, primarily ~~due to sales price and input cost improvements. Average sales prices for liquid packaging board increased,~~in Asia, but were partially offset by ~~lower average~~a decrease in third-party sales ~~volume~~volumes for liquid packaging board and coated ~~paperboard.~~groundwood papers. Average sales prices increased. Input costs were ~~favorable,~~lower, primarily due to improved natural gas ~~prices~~and purchased steam prices. Manufacturing operations at the mill were favorable reflecting reduced maintenance spending and reduced ~~purchased~~ energy, ~~consumption.~~chemical and fiber usage. Converting plant operations were also favorable in both North America and Asia. Earnings for the ~~first~~second quarter of 2006 were ~~lower~~higher than the ~~first~~second quarter of 2005 largely due to higher ~~input costs, particularly~~average prices for ~~polyethylene and natural gas. Sales volumes were relatively flat. Prices improved for both~~ liquid packaging board and coated ~~paperboard. Manufacturing~~groundwood papers. Sales volumes were lower across the business, while manufacturing costs were ~~slightly unfavorable reflecting higher maintenance spending.~~flat. Looking forward to the ~~second~~third quarter, earnings are expected to improve principally due to higher ~~sales volumes somewhat offset by a margin compression resulting from increasing input costs.~~shipments of coated groundwood papers.


	2006		2005				2006						2005
*In millions*	1st Quarter		1st Quarter		4th Quarter		2nd Quarter		1st Quarter		Six Months		2nd Quarter		1st Quarter		Six Months
Sales	$	1,650	$	1,530	$	1,635	$	1,690	$	1,650	$	3,340	$	1,570	$	1,530	$	3,100
Operating Profit		27		18		25		36		27		63		18		18		36

Distribution’s 2006 ~~first-quarter~~second-quarter sales were up 1%2% compared with the ~~fourth~~first quarter of ~~2005,~~2006, and up 8% compared with the ~~first~~second quarter of 2005. Operating profits were up 8%33% in the ~~first~~second quarter of 2006 compared with the ~~fourth~~first quarter of ~~2005,~~2006, and ~~up 50%~~doubled compared with the ~~first~~second quarter of 2005.

Compared with the ~~2005 fourth~~2006 first quarter, earnings were higher in the 2006 ~~first quarter were unchanged.~~second quarter. Sales volumes were ~~about the same~~flat overall as ~~the seasonally high volumes of the fourth quarter. Volume~~volume increases in the ~~printing segment~~facilities supplies and packaging segments were offset by ~~expected~~ declines in the ~~facilities supply~~printing and ~~packaging~~graphics segments. Average sales ~~margins increased slightly.~~prices were higher in all segments. Operating expenses were favorable due to lower utilities, decreased legal costs and lower labor costs reflecting organizational restructurings. Compared with 2005 second-quarter results, sales volumes and average sales prices for all segments improved significantly. Operating expenses were favorable, reflecting benefits from facility ~~realignment~~realignments and cost reduction actions ~~in prior periods. Compared with 2005 first-quarter results, sales volumes for all segments improved. Average sales prices were up 3% for all segments. Operating expenses, however, were higher than~~that began in the ~~first quarter~~second half of ~~2005 reflecting increased sales volume.~~2005.

Looking forward, operating results in the ~~second~~third quarter are expected to continue to be strong ~~although~~with sales volumes and prices ~~should remain~~ comparable to ~~first-quarter~~second-quarter levels. ~~Further increases in delivery costs are also expected.~~


	2006			2005						2006									2005
*In millions*	1st Quarter			1st Quarter			4th Quarter			2nd Quarter			1st Quarter			Six Months			2nd Quarter			1st Quarter			Six Months
Sales	$	630		$	610		$	665		$	595		$	630		$	1,225		$	605		$	610		$	1,215

Operating Profit:
Forest Resources-
Sales of Forestlands	$	103		$	69		$	139			101			103			204			67			69			136
Harvest & Recreational Income		72			69			75			61			72			133			62			69			131
Forestland Expenses		(30	)		(34	)		(30	)		(31	)		(29	)		(60	)		(39	)		(34	)		(73	)
Real Estate Operations		45			54			40			29			45			74			39			54			93
Wood Products		36			49			33			24			35			59			62			49			111

Operating Profit	$	226		$	207		$	257		$	184		$	226		$	410		$	191		$	207		$	398

Forest Products net sales in the second quarter of 2006 were 6% lower than in the first quarter of 2006 ~~were 5%~~and 2% lower than in the ~~fourth quarter of 2005 and 3% higher than in the first~~second quarter of 2005. Operating profits in the second quarter of 2006 were 19% lower than in the first quarter of 2006, and were ~~12%~~4% lower than in the ~~fourth quarter of 2005, but were 9% higher than in the first~~second quarter of 2005.

Forest ResourcesU.S. harvest and recreational income declined ~~slightly~~ versus the ~~2005 fourth~~2006 first quarter ~~as slightly higher~~due to lower harvest volumes ~~improved hardwood~~as the effects of lower average stumpage pricing ~~and~~offset the benefits from a better product ~~mix were offset by lower miscellaneous income.~~mix. Gross margins from forestland sales in the ~~first~~second quarter of 2006 ~~decreased by $36 million reflecting a decrease in the acreage sold, somewhat mitigated by higher average per-acre pricing.~~were essentially flat. Profits from sales of ~~higher and better use~~higher-and-better-use real estate properties ~~increased~~decreased by $5$16 million. Compared with the 2005 ~~first~~second quarter, harvest and recreational income ~~increased slightly, reflecting higher income from mineral sales and nurseries and orchards seedling sales.~~was about flat. Harvest volumes were ~~flat,~~lower, but ~~were~~this impact was partially offset by a favorable ~~sawtimber pricing.~~product mix. Gross margins on forestland sales increased $34 million due to ~~increases~~a significant increase in ~~both~~per-acre pricing, offsetting a decline in total acreage ~~sold and per-acre pricing.~~sold. Forestland operating expenses in the ~~first~~second quarter of 2006 were $4$8 million better than in the ~~first~~second quarter of 2005 reflecting expenses included in 2005 for the ~~effects of prior cost reduction initiatives. In~~office relocation to Memphis. For the ~~second~~2006 third quarter, a ~~decline~~slight increase in timber harvest volumes is anticipated. ~~In addition,~~However, expected improvement in profits from forestland sales should be offset by lower profits from ~~sales of higher and better use~~higher-and-better-use real estate ~~are expected to result in lower earnings from forestland sales.~~sales and seasonally higher forest operation expenses.

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

Wood Productsearnings in the second quarter of 2006 decreased compared with the first quarter of 2006, ~~increased compared~~reflecting declines in both lumber and plywood earnings. Earnings in both segments were positively impacted by higher sales volumes, lower wood costs and lower manufacturing costs, but these benefits were more than offset by lower average sales prices. Compared with the ~~fourth~~second quarter of 2005, ~~reflecting higher~~earnings declined significantly, primarily in the lumber ~~earnings offset by a decrease in plywood earnings. Sales volumes~~business. Average sales prices for lumber ~~decreased slightly,~~declined sharply reflecting reduced demand in the housing market. In addition, the lumber segment was negatively impacted by lower sales volumes and higher wood and manufacturing costs. In the plywood segment, sales volumes increased, but this favorable impact was more than offset by ~~higher average lumber sales prices and lower manufacturing costs. Sales volumes for plywood increased slightly, but the impact on earnings was offset by~~ lower average sales ~~prices reflecting pricing pressure~~prices. Benefits from competing oriented strandboard products. Compared with the first quarter of 2005, earnings declined in both the lumber and plywood businesses. The benefits from higher sales volumes and price increases for lumberfavorable wood costs were offset by ~~increases in wood costs and higher manufacturing costs. Sales volumes for plywood were essentially flat, but earnings were negatively impacted by lower average sales prices and increased~~unfavorable manufacturing costs. Entering the ~~second~~third quarter, lower earnings are expected in both segments as average sales prices continue to ~~improve compared to the first quarter for both businesses.~~decline, particularly in lumber markets. Sales volumes ~~for lumber~~are anticipated to increase slightly and wood costs should be slightly favorable. Manufacturing costs are expected to ~~increase. Average sales prices for both lumber and plywood are expected to strengthen in the~~approximate second ~~quarter. Manufacturing and input costs should remain essentially flat.~~quarter levels.


	2006		2005					2006						2005
*In millions*	1st Quarter		1st Quarter		4th Quarter			2nd Quarter		1st Quarter		Six Months		2nd Quarter		1st Quarter		Six Months
Sales	$	230	$	275	$	195		$	235	$	230	$	465	$	230	$	275	$	505
Operating Profit		10		10		(5	)		16		10		26		7		10		17

The Specialty Businesses and Other segment principally includes the operating results of Arizona Chemical, as well as certain smaller businesses. ~~First~~Second quarter of 2006 net sales were ~~18%~~2% higher than in both the ~~fourth~~first quarter of ~~2005, but were 16% lower~~2006 and in ~~than~~ the ~~first~~second quarter of 2005. Earnings in the 2006 ~~first~~second quarter were up significantly from both the 2006 first quarter and the 2005 ~~fourth quarter and were even with the 2005 first~~second quarter.

Earnings for Arizona Chemical for the ~~first~~second quarter of 2006 increased significantly from the ~~fourth~~first quarter of ~~2005~~2006 reflecting robust average sales prices with the realization of second-quarter price ~~increases that went into effect at the beginning of 2006. While sales volumes increased slightly, and~~increases. Benefits from improved costs for energy ~~showed improvement,~~and favorable manufacturing costs were partially offset by lower sales volumes and higher input costs for crude tall oil (CTO) ~~were higher than in the fourth quarter.~~. Compared with the ~~first~~second quarter of 2005, earnings improved due to higher average sales prices and ~~volumes and~~ favorable manufacturing costs, ~~were~~partially offset by ~~increases in~~lower sales volumes and increased costs for ~~energy and~~ CTO. Looking ahead to the ~~second~~third quarter of 2006, earnings should continue to improve as both sales volumes and price realizations are expected to ~~further improve, reflecting higher sales prices and lower energy costs.~~increase slightly.

Cash provided by continuing operations totaled ~~$251~~$865 million for the first ~~three~~six months of 2006, up from ~~$214~~$543 million for the comparable 2005 ~~three-month~~six-month period, ~~as slightly lower~~reflecting higher earnings adjusted for non-cash charges ~~were offset by~~and lower increases in working capital ~~components.~~components for the 2006 six-month period.

Investments in capital projects totaled ~~$171~~$501 million for the first six months of 2006 compared with $487 million in the ~~2006~~ first ~~quarter compared with $177 million in the 2005 first quarter.~~six months of 2005. Full-year 2006 capital spending is expected to be approximately $1.2 billion, or about ~~80% of~~equal to depreciation and amortization expense.

Financing activities for the first ~~three~~six months of 2006 included a ~~$740 million~~$1.4 billion net decrease in debt versus a ~~$565 million~~$1.0 billion net decrease during the comparable 2005 ~~three-month~~six-month period. On June 20, 2006, International Paper paid approximately $1.2 billion to repurchase substantially all of its zero-coupon convertible debentures at a price equal to their accreted principal value plus interest, using proceeds from divestitures and $730 million of third party commercial paper issued under the Company’s receivables securitization program. As of June 30, 2006, International Paper had repaid $120 million of this commercial paper borrowing and plans to repay the remainder by the end of this year. First quarter 2006 activity included the repurchase of $195 million 6.4% debentures with an original maturity date of February 2026 and early payment of approximately $495 million of notes with coupon rates ranging from 4% to 8.875% and original maturities from 2007 to 2029.

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

On June 20, 2006, the holders of International Paper’s zero-coupon convertible debt have the option to require the Company to repurchase these securities at a price equal to the accreted principal amount of approximately $1.2 billion plus interest. The repurchase may be settled in International Paper common stock or cash, or a combination of both, at the Company’s option, in an amount equal to the accreted principal amount through the repurchase date. The Company anticipates using a combination of divestiture proceeds or borrowings under existing liquidity facilities or new debt issuances if this repurchase is required.

At ~~March 31, 2006 and~~ December 31, 2005, International Paper classified as Long-term debt ~~$1.5 billion and~~ $1.25 billion ~~respectively,~~ of tenderable bonds, commercial paper and bank notes and current maturities of long-term debt. International Paper ~~has~~had the intent and ability, through its fully committed credit facilities, to renew or convert these obligations.

In the first ~~three~~six months of 2006, approximately ~~2.2~~2.6 million shares of common stock were issued for various incentive plans, including stock option exercises that generated $7$21 million of cash and restricted stock that

did not generate cash. During the first ~~three~~six months of 2005, approximately 3.0 million shares of common stock were issued for various incentive plans, including stock option exercises that generated ~~$16~~$19 million of cash and restricted stock that did not generate cash. Common stock dividend payments totaled ~~$123~~$247 million and $246 million for the first ~~three~~six months of ~~both~~ 2006 and ~~2005.~~2005, respectively. Dividends were ~~$.25~~$.50 per share for both periods.

Maintaining an investment-grade credit rating is an important element of International Paper’s finance strategy. At ~~March 31,~~June 30, 2006, the Company held long-term credit ratings of BBB (negative outlook) and Baa3 (stable outlook) by Standard & Poor’s (S&P) and Moody’s Investor Services (Moody’s), respectively. The Company currently has short-term credit ratings by S&P and Moody’s of A-3 and P-3, respectively.

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

At ~~March 31,~~June 30, 2006, International Paper has approximately $3.2 billion of committed liquidity, including contractually committed bank credit agreements and a receivables securitization program. In March 2006, International Paper replaced its maturing $750 million revolving bank credit agreement with a 364-day $500 million fully committed revolving bank credit agreement that expires in March 2007 and has a facility fee of 0.08% payable quarterly, and replaced its $1.25 billion revolving bank credit agreement with a $1.5 billion fully committed revolving bank credit agreement that expires in March 2011 and has a facility fee of 0.10% payable quarterly.The new agreements generally provide for interest rates at a floating rate index plus a pre-determined margin dependent upon International Paper’s credit rating. At ~~March 31,~~June 30, 2006, International Paper had $610 million of outstanding borrowings under its receivables securitization program and ~~December 31, 2005, there were~~ no outstanding borrowings under the fully committed revolving bank credit ~~agreements or the receivables securitization program.~~agreements. Additionally, International Paper Kwidzyn S.A., a wholly-owned foreign subsidiary of International Paper, has a PLN 400 million (approximately $124 million) bank credit agreement that expires in May 2006 with no outstanding borrowings as of March 31, 2006, and International Paper Investments (Luxembourg) S.ar.l, a wholly-owned subsidiary of International Paper, has a $100 million revolving bank credit agreement that expires in November 2006 with ~~$70~~approximately $30 million in associated borrowings outstanding as of ~~March 31,~~June 30, 2006.

The Company will continue to rely upon debt and capital markets for the majority of any necessary funding not provided by operating cash flow or divestiture proceeds. Funding decisions will be guided by our capital structure planning and liability management practices. The primary goals of the Company’s capital structure planning are to maximize financial flexibility and preserve liquidity while reducing interest expense. The majority of International Paper’s debt is accessed through global public capital markets where we have a wide base of investors.

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

In connection with this ~~process,~~plan, the Company completed the sale of its 50.5% interest in Carter Holt Harvey Limited for $1.1 billion in the third quarter of 2005. In addition, in March and April of 2006, International Paper announced agreements for future sales in 2006 of approximately 5.7 million acres of U.S. forestlands for proceeds of approximately $6.6 billion. During the second quarter of 2006, the Company completed sales of approximately 75 thousand acres of these forestlands for approximately $97 million, resulting in a gain of approximately $62 million. The remaining announced forestland sales are expected to be completed by the end of 2006. These forestlands had a carrying value of approximately $1.7 billion at June 30, 2006.

Also during the 2006 second quarter, the Company announced the signing of definitive agreements to sell its Coated and Supercalendered Papers business for approximately $1.4 billion, and its Kraft Papers business for approximately $155 million plus two additional future payments of up to $60 million contingent upon business performance, with the estimated proceeds from both sales subject to certain closing and post-closing adjustments. The Company continues to evaluate alternatives for its Wood Products, Beverage Packaging, and Arizona Chemical businesses and Brazilian coated paper operations.

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

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

Also in connection with the above program, the Company announced in July 2006 that its board of directors had authorized a share repurchase program to acquire up to $3 billion of its common stock. International Paper intends to begin this program in the third quarter and intends to repurchase a significant amount of shares before the end of 2006. The $3 billion share repurchase represents approximately 20 percent of the Company’s outstanding shares based on the stock price of $32.12 per share at the time of the initial announcement in July 2005, International Paper estimated after-tax proceeds from potential divestitures would be in the range of $8 billion to $10 billion. Assuming that the forestlands sales discussed above are completed as contemplated, it is likely that total proceeds will be higher than the Company’s original estimates, potentially as high as $11 billion or more, provided that proceeds from other potential divestitures are generally in the range previously expected.

International Paper remains committed to its previously announced balanced use of the $8 billion to $10 billion in proceeds; with 40% to 50% for debt repayment, 25% to 30% for returning value to shareowners, and 20% to 25% for some selective reinvestment.announcement. The Company ~~expects to communicate details~~is considering various share repurchase vehicles, including tender offers, accelerated share repurchases and/or open market purchases, with the intention of ~~its plans for returning value to shareowners by~~completing the program before the end of ~~July 2006.~~2007.

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

Accounting policies whose application may have a significant effect on the reported results of operations and financial position of International Paper, and that can require judgments by management that affect their application, include SFAS No. 5, “Accounting for Contingencies,” SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” SFAS No. 142, “Goodwill and Other Intangible Assets,” SFAS No. 87, “Employers’ Accounting for Pensions,” SFAS No. 106, “Employers’ Accounting for Postretirement Benefits Other Than Pensions,” as amended by SFAS No. 132 and 132R, “Employers’ Disclosures About Pension and Other Postretirement Benefits,” and SFAS No. 109, “Accounting for Income Taxes.”

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

Pension Accounting. Net pension expense totaled approximately ~~$93~~$189 million for International Paper’s U.S. plans for the ~~three~~six months ended ~~March 31,~~June 30, 2006, or about ~~$39~~$67 million higher than the pension expense recorded for the first ~~three~~six months of 2005. Net pension expense for non-U.S. plans was about $4$8 million for the first ~~three quarters~~six months of 2006 and 2005. The increase in U.S. plan pension expense was principally due to a change in the mortality assumption to use the Retirement Protection Act 2000 Table, an increase in the amortization of unrecognized actuarial losses over a shorter average remaining service period, and a decrease in the assumed discount rate to 5.50% in 2006 from 5.75% in 2005.

After consultation with our actuaries, International Paper determines key actuarial assumptions on December 31 of each year that are used to calculate liability information as of that date and pension expense for the following year. Key assumptions affecting pension expense include the discount rate, the expected long-term rate of return on plan assets, the expected rate of future salary increases, and various demographic assumptions including expected mortality. The discount rate assumption is determined based on a yield curve that incorporates approximately 500-550 Aa-graded bonds. The plan’s projected cash flows are then matched to the yield curve to develop the discount rate. The expected long-term rate of return on plan assets is based on projected rates of return for current and planned asset classes in the plan’s investment portfolio. At ~~March 31,~~June 30, 2006, the market value of plan assets for International Paper’s U.S. plans totaled approximately ~~$7.0~~$6.8 billion, consisting of approximately ~~62%~~59% equity securities, ~~26%~~29% fixed income securities, and 12% real estate and other assets.

International Paper makes contributions that are sufficient to fully fund its actuarially determined costs, generally equal to the minimum amounts required by the Employee Retirement Income Security Act (ERISA). While International Paper may elect to make voluntary contributions to its U.S. qualified plan up to the maximum deductible amount per IRS tax regulations in the coming years, it is unlikely that any contributions to the plan will be required before 2007 unless investment performance is negative or

International Paper changes its funding ~~policy~~policy. In connection with the use of projected proceeds from the Company’s Transformation Plan, International Paper is planning to make voluntary contributions ~~above~~to the ~~minimum requirements.~~U.S. qualified pension fund in the range of $500 million to $1.0 billion to begin satisfying longer-term funding requirements and to lower future pension expense. The U.S. Congress ~~is currently considering various proposals~~recently passed legislation that ~~would change~~changes the minimum funding requirements for qualified defined benefit plans in future years. While the amount of any required contributions after 2006 will depend upon the final rules adopted and other factors, including any voluntary contributions, changes in discount rates and actual plan asset returns, the Company currently estimates that a contribution in 2007 of $40 million to $200 million may be required. The U.S. nonqualified plans are only funded to the extent of benefits paid which are expected to be $34 million in 2006.

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

The Company adopted SFAS No. 123(R), “Share-Based Payment,” effective January 1, 2006 using the modified prospective transition method. This standard requires that compensation cost related to share-based payments be recognized in the financial statements. The amount of compensation cost is measured based on the grant date fair value of the award. The resulting cost is recognized over the period during which an employee is required to provide service in exchange for the award, usually the vesting period. ~~The adoption of SFAS No. 123(R) resulted in a $1 million increase in stock-based compensation expense for the three months ended March 31, 2006, with no effect on prior periods.~~ Prior to January 1, 2006, the Company accounted for share-based compensation in accordance with APB Opinion No. 25, “Accounting for Stock Issued to Employees.”

Certain statements in this Quarterly Report on Form 10-Q, and in particular, statements found in Item 2, Management’s Discussion and Analysis of Financial Condition and Results of Operations, which are not historical in nature may constitute forward-looking statements. These statements are often identified by the words, “will,” “may,” “should,” “continue,” “anticipate,” “believe,” “expect,” “plan,” “appear,” “project,” “estimate,” “intend,” and words of similar import. Such statements reflect the current views of International Paper with respect to future events and are subject to risks and uncertainties that could cause actual results to differ materially from those expressed or implied in these statements. Item 1A. Risk Factors contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2005 contains a specific list of risks and uncertainties that you should carefully read and consider. That list has been updated in Item 1A. Risk Factors contained in this Form 10-Q. We undertake no obligation to publicly update any forward-looking statements, whether as a result of new information, future events or otherwise.

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

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

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

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

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

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

The Company has amended the risk factors set forth in the 2005 10-K to include the following:

~~with respect to~~ the execution of sale transactions currently under contract and the realization of anticipated sales proceeds thereunder, including the ability to successfully consummate the ~~transaction~~transactions without a material purchase price adjustment, the successful fulfillment (or waiver) of all conditions set forth in the sale agreements, the successful closing of the transactions within the estimated timeframes, and the ability to monetize the non-cash portion of the sale ~~proceeds.~~proceeds;

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

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


New York		13-0872805
(State or other jurisdiction of incorporation of organization)		(I.R.S. Employer Identification No.)

~~400 Atlantic Street, Stamford, CT~~6400 Poplar Avenue, Memphis, TN		~~06921~~38197
(Address of principal executive offices)		(Zip Code)


		PAGE NO.
PART I.	FINANCIAL INFORMATION
Item 1.	Financial Statements

	Consolidated Statement of Operations -
	Three Months and Six Months Ended ~~March 31,~~June 30, 2006 and 2005	1

	Consolidated Balance Sheet - ~~March 31,~~
	June 30, 2006 and December 31, 2005	2

	Consolidated Statement of Cash Flows - ~~Three~~
	Six Months Ended ~~March 31,~~June 30, 2006 and 2005	3

	Consolidated Statement of Changes in Common Shareholders’ Equity - ~~Three~~
	Six Months Ended ~~March 31,~~June 30, 2006 and 2005	4

	Condensed Notes to Consolidated Financial Statements	5

	Financial Information by Industry Segment	1921

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	2123

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	3539

Item 4.	Controls and Procedures	3640

PART II.	OTHER INFORMATION

Item 1.	Legal Proceedings	3741

Item 1A.	Risk Factors	3842

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	*43

Item 3.	Defaults upon Senior Securities	*

Item 4.	Submission of Matters to a Vote of Security Holders	*44

Item 5.	Other Information	*

Item 6.	Exhibits	3945

Signatures		4046


	Three Months Ended ~~March 31,~~June 30, 2006	Six Months Ended June 30, 2006
Expected volatility	~~25.20~~20.50%	%20.50% -25.20%
Risk-free interest rate	~~4.30~~5.26% -5.30%	%4.30% -5.30%


	For	Withheld
John L. Townsend III	424,491,379	23,281,549
John F. Turner	424,540,338	23,232,590
Alberto F. Weisser	424,180,858	23,592,070
John V. Faraci	419,060,179	28,712,749
Donald F. McHenry	419,144,494	28,626,434
William G. Walter	424,082,291	23,690,637


For	Against	Abstain	Broker Non-Vote
442,731,999	2,358,909	2,682,018	(0	)


	Three Months Ended
In millions, except per share amounts	March 31, 2005
Loss from discontinued operations
Loss from operations	$	(42	)
Income tax expense		(8	)
Minority interest benefit, net of taxes		19

Loss from discontinued operations, net of taxes and minority interest	$	(31	)

Loss per common share from discontinued operations - assuming dilution
Loss from operations, net of taxes	$	(0.06	)
Gain on sale, net of taxes and minority interest		—

Loss per common share from discontinued operations, net of taxes and minority interest— assuming dilution	$	(0.06	)


*In millions*	Balance December 31, 2004		Reclassifications and Other (a)			Additions/ (Reductions)			Balance June 30, 2005
Printing Papers	$	1,671	$	3		$	—		$	1,674
Industrial Packaging		591		(5	)		31	(b)		617
Consumer Packaging		1,014		(4	)		5	(c)		1,015
Distribution		299		—			—			299
Forest Products		190		1			—			191
Corporate		24		—			(13	)(d)		11

Total	$	3,789	$	(5	)	$	23		$	3,807


	Omniwood				Woodruf			Total				Total
*In thousands*	Single Family		Multi- Family		Single Family		Multi- Family	Single Family		Multi- Family		Total
December 31, 2005	2.4		0.5		0.8		0.3	3.2		0.8		4.0
No. of Claims Filed	1.3		0.1		0.1		—	1.4		0.1		1.5
No. of Claims Paid	(1.0	)	(0.1	)	(0.1	)	—	(1.1	)	(0.1	)	(1.2	)
No. of Claims Dismissed	(0.1	)	—		(0.1	)	—	(0.2	)	—		(0.2	)

March 31, 2006	2.6		0.5		0.7		0.3	3.3		0.8		4.1


*In millions*	Hard- board			Omni- wood			Woodruf		Total
Balance, December 31, 2005	$	34		$	74		$	5	$	113
Additional Provisions		15			—			—		15
Payments		(28	)		(15	)		—		(43	)

Balance, June 30, 2006	$	21		$	59		$	5	$	85



10.1	~~Retirement Agreement dated March 21, 2006 between Robert M. Amen~~	Amended and International Paper Company*


10.2		~~10.3~~	Amendment No. 1 to Agreement of Purchase ~~Agreement dated as of April 4, 2006~~and Sale by and among ~~TimberStar,~~ International Paper Company, CMP Investments L.P. and ~~other selling parties named therein.~~CMP Holdings LLC, dated and effective as of August 1, 2006.

	~~10.4~~
11	Form of Non-Competition Agreement entered into by certain Company employees (including named executive officers) who may receive performance share awards or restricted stock awards pursuant to the Long-Term Incentive Compensation Plan of the Company (this replaces the Form of Confidentiality and Non-Competition Agreement filed as Exhibit 10.2 to the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2003, File No. 1-3157).


12		Computation of Ratio of Earnings to Fixed Charges and Preferred Stock Dividends


31.1		Certification of principal executive officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002


31.2		Certification of principal financial officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002


32		Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002


	INTERNATIONAL PAPER COMPANY (Registrant)

Date: ~~May 9,~~August 7, 2006	By	/s/ MARIANNE M. PARRS
		Marianne M. Parrs
		Executive Vice President and Chief
		Financial Officer

Date: ~~May 9,~~August 7, 2006	By	/s/ ROBERT J. GRILLET
		Robert J. Grillet
		Vice President – Finance and Controller