ITEM 7. MANAGEMENT’S DISCUSSION AND  ANALYSIS OF FINANCIAL  CONDITION AND RESULTS  OF OPERATIONS Executive Summary The following table shows the components of net earnings (loss) for each of the last three years: In Millions 2004 ) 2003) 2002) Industry segment operating profits $2,087) $1,772) $ 1,887) Corporate items (469) (466) (253) Corporate special items* (188) (290) (586) Interest expense, net (743) (772) (785) Minority interest  (3) (63) (75) Income tax benefit (provision) (206) 113) 72) Discontinued operations (513) 21) 35) Accounting changes and  extraordinary items -) (13) (1,175) Net earnings (loss) $ (35) $ 302) $ (880) International Paper benefited from a strong economy in 2004 as demand for paper and packaging products was improved from 2003. Overall average price realizations were up year over year across all our major product lines except for European paper products where a strong Euro attracted imports. Our total industry segment operating profits were up from 2003 reflecting the higher average prices and improved shipments combined with benefits from cost reduction initiatives and a more favorable product mix. These positive effects were partially offset by higher input costs, including wood, energy and chemical costs. *Special items include restructuring and other charges, net losses (gains) on sales and impairments of businesses held for sale, insurance recoveries and reversals of reserves no longer required. Industry segment operating profits were $315 million higher in 2004 due principally to improved sales volume ($263 million), higher average prices ($201 million), and the effect of cost reduction initiatives, improved operating performance and a more favorable product mix ($186 million), all partially offset by the impact of higher energy and raw material costs ($192 million), lower earnings from land sales ($95 million), the impact of hurricanes in the South ($18 million), and foreign currency translation rates and other items ($30 million). Looking forward to 2005, we expect demand in the first quarter to be somewhat positive, although this is a seasonally slow period for many of our businesses. Overall, demand remains solid in the United States and Europe, with strong order backlogs in our coated papers and bleached board businesses. Containerboard and box orders are also good. Uncoated papers’ backlogs were below prior year levels, but are improving as the first quarter progresses. Our average price realizations for most paper and packaging products began the year well above 2004 levels reflecting the realization of previously announced price increases. Raw material costs, especially wood, polyethylene and chemical costs, are expected to increase in early 2005, although energy costs should be flat compared with the fourth quarter of 2004. In addition, pension and other benefit related costs, plus supply chain expenses are expected to be higher in 2005. However, interest costs will decline due to debt repayments in 2004 and the 2005 first quarter. Industry segment operating profits are used by International Paper’s management to measure the earnings performance of its businesses. Management believes that this measure allows a better understanding of trends in costs, operating efficiencies, prices and volumes. Industry segment operating profits are defined as earnings before taxes and minority interest, interest expense, corporate items and corporate special items. Industry segment operating profits are defined by the Securities and Exchange Commission as a non-GAAP financial measure, and are not GAAP alternatives to net income or any other operating measure prescribed by accounting principles generally accepted in the United States. International Paper operates in six segments: Printing Papers, Industrial and Consumer Packaging, Distribution, Forest Products, Carter Holt Harvey, and Specialty Businesses and Other. The principal changes by segment were as follows: Printing Papers’ profits were $119 million higher as increased sales volume, improved sales mix and lower operating and overhead costs more than offset higher energy and raw material costs. Industrial and Consumer Packaging’s profits were up $92 million. Higher average sales prices and volumes, improved product mix, and reduced overhead costs and improved operations more than offset the effect of higher energy and raw material costs. Forest Products’ profit was $73 million higher. Higher average prices for wood products more than offset the effect of lower harvest volumes and lower earnings from land sales. Results of Operations $1,000 2003 Land Sales Hurricanes FX/Other V olume Price Cost/ Operations/Mix Energy/ Raw Materials 2004 $1,200 $1,400 $1,600 $1,800 $2,000 $2,200 $2,400 $1,772 $263 $201 $186 $(192) $(95) $(18) $(30) $2,087 9 Segment Operating Profit (in millions)