UNITED
STATES SECURITIES AND EXCHANGE COMMISSION


WASHINGTON,
D.C.  20549





FORM
20-F





þ
            ANNUAL
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
      EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31,
      2008


Commission file number 1-15018





Votorantim
Celulose e Papel S.A.


(Exact
name of Registrant as specified in its charter)




Votorantim
Pulp and Paper Inc.


(Translation
of Registrant’s name into English)




Federative
Republic of Brazil


(Jurisdiction
of incorporation or organization)




Alameda
Santos, 1357, 6th
floor


01419-908,
São Paulo, SP, Brazil


(Address
of principal executive offices)




Paulo
Prignolato


Chief
Financial and Accounting Officer & Investor Relations Officer


Phone:
(55 11) 2138-4287


Fax:
(55 11) 2138-4066


Email:
ir@vcp.com.br


(Name,
Telephone, E-mail and/or Facsimile number and Address of Company Contact
Person)




Securities
registered or to be registered pursuant to Section 12(b) of the
Act.


Title
      of each class:
                  Name
      of each exchange on which registered:Preferred
      Shares, without par value
                  New
      York Stock Exchange*American
      Depositary Shares (as evidenced by American Depositary Receipts), each
      representing one share of Preferred Stock
                  New
      York Stock
Exchange





* Not for trading purposes but
only in connection with the registration on the New York Stock Exchange of
American Depositary Shares representing those preferred shares.





Securities
registered or to be registered pursuant to Section 12(g) of the Act: None





Securities
for which there is a reporting obligation pursuant to Section 15(d) of the
Act: None





The
number of outstanding shares of each class of stock of Votorantim Celulose e
Papel S.A. as of December 31,
2008:


105,702,452
                
                Shares
      of Common Stock95,658,964
                
                Shares
      of Preferred Stock


Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act.


þ
Yes o
No


If this
report is an annual or transition report, indicate by check mark if the
registrant is not required to file reports pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934.


o
Yes þ
No


Note—Checking
the box above will not relieve any registrant required to file reports pursuant
to Section 13 or 15(d) of the Securities Exchange Act of 1934 from their
obligations under those Sections.




Indicate
by check mark whether the registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.


þ Yes
o
No


Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files).


o
Yes o
No


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


Large
Accelerated Filer þAccelerated Filer  ̈Non-accelerated
Filer  ̈


Indicate
by check mark which basis of accounting the registrant has used to prepare the
financial statements included in this filing:


þ
      U.S. GAAP
             ̈
      International Financial Reporting Standards as issued by the International
      Accounting Standards Board
             ̈Other


If this
is an annual report, indicate by check mark whether the registrant is a shell
company (as defined in Rule 12b-2 of the Exchange Act).


o
Yes þ
No





TABLE
OF CONTENTS




PagePART
      IITEM
      1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS
                                                                  3ITEM
      2. OFFER STATISTICS AND EXPECTED TIMETABLE
                                                                  3ITEM
      3. KEY INFORMATION
                                                                  3ITEM
      4. INFORMATION ON VCP
                                                                  20ITEM
      4A. UNRESOLVED STAFF COMMENTS
                                                                  53ITEM
      5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS
                                                                  53ITEM
      6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
                                                                  87ITEM
      7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
                                                                  94ITEM
      8. FINANCIAL INFORMATION
                                                                  96ITEM
      9. THE OFFER AND LISTING
                                                                  102ITEM
      10. ADDITIONAL INFORMATION
                                                                  105ITEM
      11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
    RISK
                                                                  118ITEM
      12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
                                                                  123PART
      IIITEM
      13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES
                                                                  123ITEM
      14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF
      PROCEEDS
                                                                  123ITEM
      15. CONTROLS AND PROCEDURES
                                                                  123ITEM
      16A. AUDIT COMMITTEE FINANCIAL EXPERT
                                                                  124ITEM
      16B. CODE OF ETHICS
                                                                  124ITEM
      16C. PRINCIPAL ACCOUNTANT FEES AND SERVICES
                                                                  124ITEM
      16D. EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT
      COMMITTEES
                                                                  125ITEM
      16E. PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED
      PURCHASERS
                                                                  125ITEM
      16F. CHANGES IN REGISTRANT’S CERTIFYING ACCOUNTANT
                                                                  125ITEM
      16G. CORPORATE GOVERNANCE
                                                                  125PART
      IIIITEM
      17. FINANCIAL STATEMENTS
                                                                  128ITEM
      18. FINANCIAL STATEMENTS
                                                                  128ITEM
      19. EXHIBITS
                                                                  128







INTRODUCTION




All
references in this annual report to:




·
            “VCP,”
      “we,” “our”, “us” and the “Company” are to Votorantim Celulose e Papel
      S.A. and its consolidated subsidiaries (unless the context otherwise
      requires);




·
            “Votorantim
      group” are to the group of companies, including VCP, controlled by the
      Ermírio de Moraes family;




·
            “Votorantim
      Investimentos Industriais”, or “VID,” are to our immediate parent company
      and the holding company of the Votorantim Group; Votorantim Participações
      S.A. or “VPAR” controls three areas of the Group’s business: Votorantim
      Industrial, Votorantim Finance and Votorantim New Businesses, each of them
      containing one or more business
units;




·
            “BNDESPar”
      are to BNDES Participações S.A. – BNDESPar, a wholly owned subsidiary of
      BNDES, the Brazilian economic and social development bank owned by the
      Brazilian federal government;




·
            “Nova”
      are to Nova HPI Participações Ltda., a company of the Votorantim
      group;




·
            the
      “Ermírio de Moraes family” are to the families of Antonio Ermírio de
      Moraes, Ermírio Pereira de Moraes, Maria Helena de Moraes Scripilliti and
      José Ermírio de Moraes (in
memoriam);




·
            the
      “Brazilian government” are to the federal government of the Federative
      Republic of Brazil;




·
            “real,” “reais” or “R$” are to
      Brazilian reais,
      the official currency of Brazil;




·
            “US$,”
      “dollars” or “U.S. dollars” are to United States
  dollars;




·
            “ton”
      and “MT” are to one metric ton (1,000 kilograms). One kilogram equals
      approximately 2.2 pounds;




·
            “BEKP”
      are to bleached eucalyptus kraft
pulp;




·
            “ADSs”
      are to our American Depositary Shares, each one of our ações preferenciais, or
      preferred shares;




·
            “CVM”
      are to the Comissão de
      Valores Mobiliários, the Brazilian securities
      commission;




·
            “Brazilian
      GAAP” are to accounting practices adopted in Brazil, which are based on
      Brazilian corporate law (Law No. 6,404 of December 15, 1976, as
      amended by Law No. 10,303 of October 1, 2001 and by Law No.
      11,638 of December 2007), the rules and regulations of the CVM, and
      the accounting standards issued by the Instituto dos Auditores
      Independentes do Brasil, the Brazilian Institute of Independent
      Accountants, or IBRACON and the Brazilian accounting standards board, the
      Comitê de
      Pronunciamentos Contábeis, or the
CPC;




·
            “Commission”
      are to the Securities and Exchange Commission;
  and




·
            “U.S.
      GAAP” are to generally accepted accounting principles in the United
      States.




As used
in this annual report, one hectare equals approximately 2.471 acres and one
kilometer equals approximately 0.621 miles. References in this annual
report to nominal production capacity or production capacity mean annual
projected capacity for which the facility was designed, with the facility
operating under optimal conditions, 24 hours a day, for 365 days a
year and subject to reductions in rates of production for scheduled maintenance
only. Actual production capacity will vary depending on operating conditions,
the grades of pulp or paper produced and other factors.


1


PRESENTATION
OF FINANCIAL AND OTHER DATA




We
maintain our books and records in reais, which are the basis
for our statutory financial statements (not included in this annual report),
prepared under Brazilian GAAP, which are used to determine income taxes and
mandatory minimum dividend calculations. We have also prepared consolidated
balance sheets at December 31, 2008 and 2007 and the related consolidated
statements of operations, cash flows and changes in shareholders’ equity for the
years ended December 31, 2008, 2007 and 2006, all stated in U.S. dollars in
accordance with generally accepted accounting principles in the United States,
or U.S. GAAP. Our U.S. GAAP financial statements are included in this annual
report. The selected financial information at and for the years ended
December 31, 2008, 2007, 2006, 2005 and 2004 are derived from our audited
U.S. GAAP financial statements. You should read the selected financial
information together with our financial statements, including the
notes thereto, included elsewhere in this annual report.




Our
reporting currency in this annual report for all periods is the U.S. dollar. As
a result of the remeasurement of amounts to U.S. dollars and other adjustments
related to the differences in the accounting principles between U.S. GAAP and
Brazilian GAAP, the amounts of net income and shareholders’ equity as reported
in our audited consolidated financial statements presented herein differ from
those included in our statutory accounting records.




The
commercial selling rate in Brazil is used in this annual report rather than the
noon buying rate in New York City as reported by the Federal Reserve Bank of New
York because the noon buying rate was not consistently reported for reais during the periods
shown in this annual report. The U.S. dollar equivalent information presented in
the annual report should not be construed as implying that the real amounts represent or
could have been or could be converted into U.S. dollars at these or any other
rate. See “Item 3—Key Information—Selected Financial Data—Exchange Rates”
for information regarding exchange rates applicable to the Brazilian currency
since 2003.




We make statements in this annual
report about our competitive position and market share in, and the market size
of, the pulp and paper industry. We have made these statements on the basis of
statistics and other information from third-party sources that we believe are
reliable. We derive this third-party information principally from reports
published by BRACELPA — Associação Brasileira de Celulose e
Papel (the Brazilian Association of Pulp and Paper), RISI (Resource
Information Systems Inc.), PPPC (Pulp and Paper Product Council), which are a
monthly report on the pulp markets, and Hawking Wright, a specialized consulting
firm in the pulp market. Although we have no reason to believe that any of this
information or these reports are inaccurate in any material respect, we have not
independently verified the competitive position, market share, market size or
market growth data provided by third parties or by industry or general
publications.




FORWARD-LOOKING
STATEMENTS




This
annual report includes forward-looking statements, principally in
“Item 3D—Key Information—Risk Factors” “Item 4B—Information on
VCP—Business Overview” and “Item 5—Operating and Financial Review and
Prospects.” We have based these forward-looking statements largely on our
current expectations about future events and financial trends affecting our
business. These forward-looking statements are subject to risks, uncertainties
and assumptions, including, among other things:




·
            general
      economic, political and business conditions, both in Brazil and in our
      principal export markets;




·
            changes
      in market prices, customer preferences, competitive conditions and general
      level of demand for our products;




·
            our
      management’s expectations and estimates concerning future financial
      performance, financing plans and the effects of
    competition;




·
            our
      level of debt;




·
            anticipated
      trends in the pulp and paper industry, including changes in capacity and
      industry price movements;




2


·
            our
      capital expenditure plans;




·
            variations
      in interest rates, inflation and in currency exchange rates, including
      thereal;




·
            our
      ability to produce and deliver our products on a timely
    basis;




·
            existing
      and future governmental regulation, including environmental laws, tariffs
      on pulp and paper imports and import tax policies in
    Brazil;




·
            our
      ability to successfully undertake or complete expansion projects and to
      manage the engineering, construction and regulatory challenges and costs
      involved in such projects; and




·
            other
      risk factors as set forth under “Item 3D—Key Information—Risk
      Factors.”




The words “anticipate”, “believe”,
“continue”, “could”, “estimate”, “expect”, “hope”, “intend”, “may”, “might”,
“should”, “would”, “will”, “understand” and similar words are intended to
identify forward looking statements. We undertake no obligation to update
publicly or revise any forward-looking statements because of new information,
future events or otherwise. In light of these risks and uncertainties, the
forward looking information, events and circumstances discussed in this annual
report might not occur and are not guarantees of future performance. Our actual
results and performance could differ substantially.




PART
I




ITEM
1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS




Not
applicable.




ITEM
2. OFFER STATISTICS AND EXPECTED TIMETABLE




Not
applicable.




ITEM
3. KEY INFORMATION




A.           Selected
Financial Data




The
following table presents a summary of our selected financial and operating data
at the dates and for each of the periods indicated. You should read the
following information together with our financial statements, including the
notes thereto, included elsewhere in this annual report, “Presentation of
Financial and other data” and “Item 5 – Operating and Financial review and
prospects”.


3





For
      the Years Ended December 31,2008
              
              
              2007
              
              
              2006
              
              
              2005
              
              
              2004(U.S.
      dollars in millions, unless otherwise indicated)STATEMENT
      OF OPERATIONS DATANet
      operating revenues:Domestic
      sales
              
              
              721
              
              
              
              709
              
              
              
              685
              
              
              
              564
              
              
              
              512Export
      sales
              
              
              645
              
              
              
              624
              
              
              
              632
              
              
              
              566
              
              
              
              498Total
      net operating revenues
              
              
              1,366
              
              
              
              1,333
              
              
              
              1,317
              
              
              
              1,130
              
              
              
              1,010Operating
      costs and expenses:Cost
      of sales
              
              
              934
              
              
              
              887
              
              
              
              813
              
              
              
              654
              
              
              
              518Selling,
      marketing, general and administrative
              
              
              215
              
              
              
              202
              
              
              
              199
              
              
              
              193
              
              
              
              161Gain
      on exchange of assets, net
              
              
              -
              
              
              
              (955
              )
              
              
              -
              
              
              
              -
              
              
              
              -Other,
      net
              
              
              17
              
              
              
              13
              
              
              
              20
              
              
              
              36
              
              
              
              6Total
              
              
              1,166
              
              
              
              147
              
              
              
              1,032
              
              
              
              883
              
              
              
              685Operating
      income
              
              
              200
              
              
              
              1,186
              
              
              
              285
              
              
              
              247
              
              
              
              325Non-operating
      income (expenses):Financial
      income (expenses), net
              
              
              (78
              )
              
              
              91
              
              
              
              18
              
              
              
              (40
              )
              
              
              (29
              )Foreign
      exchange gain (loss) and unrealized gain (loss) on swap,
    net
              
              
              (593
              )
              
              
              214
              
              
              
              (4
              )
              
              
              (5
              )
              
              
              12Total
              
              
              (671
              )
              
              
              305
              
              
              
              14
              
              
              
              (45
              )
              
              
              (17
              )Income
      (loss) before taxes on income and equity in affiliates
              
              
              (471
              )
              
              
              1,491
              
              
              
              299
              
              
              
              202
              
              
              
              308Income
      tax (expense) benefit
              
              
              198
              
              
              
              (56
              )
              
              
              (4
              )
              
              
              8
              
              
              
              (36
              )Deferred
      income tax expense on gain on exchange of assets
              
              
              -
              
              
              
              (327
              )
              
              
              -
              
              
              
              -
              
              
              
              -Income
      (loss) before equity in affiliates
              
              
              (273
              )
              
              
              1,108
              
              
              
              295
              
              
              
              210
              
              
              
              272Equity
      in earnings (losses) of affiliates
              
              
              (132
              )
              
              
              113
              
              
              
              77
              
              
              
              54
              
              
              
              31Net
      income (loss)
              
              
              (405
              )
              
              
              1,221
              
              
              
              372
              
              
              
              264
              
              
              
              303Net
      income applicable to preferred stock
              
              
              -
              
              
              
              618
              
              
              
              188
              
              
              
              124
              
              
              
              143Net
      income (loss) applicable to common stock
              
              
              (405
              )
              
              
              603
              
              
              
              184
              
              
              
              140
              
              
              
              160Net
      income (loss)
              
              
              (405
              )
              
              
              1,221
              
              
              
              372
              
              
              
              264
              
              
              
              303Basic an diluted earnings
      (losses) per share or ADR (in U.S. dollars):(1)Preferred
              
              
              -
              
              
              
              6.28
              
              
              
              1.97
              
              
              
              1.46
              
              
              
              1.67Common
              
              
              (3.83
              )
              
              
              5.71
              
              
              
              1.79
              
              
              
              1.33
              
              
              
              1.51Weighted
      average number of shares outstanding (in thousands):Preferred
              
              
              96,888
              
              
              
              98,444
              
              
              
              92,240
              
              
              
              85,451
              
              
              
              85,773Common
              
              
              105,702
              
              
              
              105,702
              
              
              
              105,702
              
              
              
              105,702
              
              
              
              105,702Dividends and interest
      attributable to capital per share (in U.S. dollars):(2)Preferred
              
              
              -
              
              
              US$
              0.70
              
              
              US$
              0.80
              
              
              US$
              0.45
              
              
              US$
              0.58Common
              
              
              -
              
              
              
              0.64
              
              
              
              0.72
              
              
              
              0.41
              
              
              
              0.52




4




As
      at December 31,2008
                
                
                2007
                
                
                2006
                
                
                2005
                
                
                2004(U.S.
      dollars in millions)BALANCE
      SHEET DATACash
      and cash equivalents
                
                US$
                280
                
                
                US$
                565
                
                
                US$
                405
                
                
                US$
                261
                
                
                US$
                151Trading
      securities
                
                
                43
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -Available
      for sale securities
                
                
                -
                
                
                
                176
                
                
                
                365
                
                
                
                446
                
                
                
                -Held-to-maturity
      investments(3)
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                278Property,
      plant and equipment, net
                
                
                3,866
                
                
                
                3,916
                
                
                
                1,945
                
                
                
                1,758
                
                
                
                1,443Investment
      in affiliates, including all goodwill
                
                
                289
                
                
                
                1,009
                
                
                
                900
                
                
                
                596
                
                
                
                249Total
      assets
                
                
                5,230
                
                
                
                6,405
                
                
                
                4,404
                
                
                
                3,731
                
                
                
                2,644Short-term
      debt(4)
                
                
                438
                
                
                
                211
                
                
                
                242
                
                
                
                132
                
                
                
                79Long-term
      debt, including current portion
                
                
                1,649
                
                
                
                1,353
                
                
                
                1,299
                
                
                
                1,364
                
                
                
                866Shareholders’
      equity
                
                
                2,525
                
                
                
                3,883
                
                
                
                2,275
                
                
                
                1,737
                
                
                
                1,498




For
      the Years Ended December 31,2008
                
                
                2007
                
                
                2006
                
                
                2005
                
                
                2004(U.S.
      dollars in millions, except for percentages)OTHER
      FINANCIAL DATAGross
      margin
                
                
                31.6
                %
                
                
                33.5
                %
                
                
                38.3
                %
                
                
                42.1
                %
                
                
                48.7
                %Operating
      margin(5)
                
                
                14.6
                %
                
                
                89.0
                %
                
                
                21.6
                %
                
                
                21.9
                %
                
                
                32.2
                %Capital
      expenditures(6)
                
                
                660
                
                
                
                353
                
                
                
                248
                
                
                
                247
                
                
                
                218Acquisition
      of interest in equity affiliate(7)
                
                
                -
                
                
                
                -
                
                
                
                36
                
                
                
                275
                
                
                
                -Depreciation
      and depletion
                
                
                160
                
                
                
                143
                
                
                
                193
                
                
                
                117
                
                
                
                89Cash
      flow provided by (used in):Operating
      activities
                
                
                388
                
                
                
                333
                
                
                
                382
                
                
                
                234
                
                
                
                277Investing
      activities
                
                
                (507
                )
                
                
                (145
                )
                
                
                (113
                )
                
                
                (626
                )
                
                
                (170
                )Financing
      activities
                
                
                116
                
                
                
                (113
                )
                
                
                (107
                )
                
                
                505
                
                
                
                (258
                )





For
      the Years Ended December 31,2008
              
              
              2007
              
              
              2006
              
              
              2005
              
              
              2004OPERATIONAL
      DATANumber
      of employees (at year end)(8)
              
              
              3,010
              
              
              
              2,857
              
              
              
              3,498
              
              
              
              3,620
              
              
              
              3,624Nominal
      production capacity (thousand metric tons):Pulp
              
              
              1,425
              
              
              
              1,415
              
              
              
              1,480
              
              
              
              1,400
              
              
              
              1,400Paper
              
              
              415
              
              
              
              365
              
              
              
              640
              
              
              
              635
              
              
              
              610Sales
      volumes (thousand metric tons):
              
              
              1,591
              
              
              
              1,597
              
              
              
              1,611
              
              
              
              1,493
              
              
              
              1,459Domestic
      market:
              
              
              635
              
              
              
              630
              
              
              
              591
              
              
              
              506
              
              
              
              515Market
      pulp
              
              
              289
              
              
              
              228
              
              
              
              109
              
              
              
              80
              
              
              
              80Paper
              
              
              346
              
              
              
              402
              
              
              
              482
              
              
              
              426
              
              
              
              435Printing
      and writing and Coated
              
              
              219
              
              
              
              287
              
              
              
              371
              
              
              
              331
              
              
              
              338Other
      specialty papers(9)
              
              
              127
              
              
              
              115
              
              
              
              111
              
              
              
              95
              
              
              
              97International
      market:
              
              
              956
              
              
              
              967
              
              
              
              1,020
              
              
              
              987
              
              
              
              944Market
      pulp
              
              
              911
              
              
              
              870
              
              
              
              832
              
              
              
              787
              
              
              
              764Paper
              
              
              45
              
              
              
              97
              
              
              
              188
              
              
              
              200
              
              
              
              180





(1)
            Based
      on the weighted average number of shares outstanding for each period.
      Following the reverse stock split of our shares and ADSs on October 18,
      2004, we have retrospectively adjusted all shares and ADS data to reflect
      the reverse split. For additional information on earnings per share, see
      Note 2(l) to our audited consolidated financial statements and “Item
      5A—Operating Results.”


(2)
            Dividends
      and interest attributable to capital paid per shares in U.S. dollars.
      Dividends and interest attributable to capital per share were adjusted to
      reflect the reverse stock split that occurred in October
    2004.


(3)
            Includes
      current and non-current portions.


(4)
            Excludes
      current portion of long-term debt.


(5)
            The
      2007 percentage includes the non-recurring gain of US$ 955 million related
      to the exchange of assets.


(6)
            Represents
      cash expenditures for acquisition of property, plant and equipment and
      excluding the financial income derived from Três Lagoas construction
      deposit trust investments in 2008 of US$ 32 million. Disbursements from
      this trust may be only for property, plant and equipment related to this
      project.


(7)
            Includes
      the excess of the cost of investment over the underlying fair value of net
      assets on the acquisition of a 23.03% indirect interest in Ripasa S.A.
      Celulose e Papel (Ripasa) in 2005 for US$ 275 million. In July 2006, VCP
      disbursed an additional US$ 36 million to Ripasa minority preferred
      shareholders in settlement of their claims challenging Ripasa’s corporate
      restructuring. In May, 2006, shareholders of VCP, Suzano Bahia Sul Papel e
      Celulose S.A., Ripasa and Ripasa Participações S.A. (“Ripar”) approved the
      corporate restructuring that allowed Ripasa’s minority preferred
      shareholders to exchange their interests in Ripasa for VCP and Suzano
      shares, thus increasing VCP’s capital by US$ 168
  million.


5


(8)
            The
      decline in the number of employees that occurred during 2007 reflects our
      organizational restructuring and divestments, principally in the paper
      assets. The increase that occurred in 2008 is due to Horizonte Project.
      See “Item 4A – Information on VCP – History and Development of
      VCP”.


(9)
            Includes
      sales of thermal and carbonless papers, sales of third-party products by
      KSR and sales of specialty papers produced at the Mogi das Cruzes mill
      (which was sold in April 2007), such as label papers, finish foil, soap
      wrapping papers, etc.




Exchange
Rates




The appreciation of the real that occurred during the
period beginning January 1, 2004 continued through August, 2008 (reaching its
highest value during the year on August 1st when
the official rate reached R$ 1.5593 to US$ 1.00) but was followed by sharp
depreciations in many Emerging Markets currencies, including the real, beginning in September
2008. The exchange rate, which has floated freely since 1999, is determined
principally by negotiations within the Brazilian interbank market, but still may
be influenced by occasional Brazilian Central Bank intervention to control
unstable movements in the market-driven rate.  All foreign exchange
transactions are carried out through institutions authorized to operate by the
Central Bank and are subject to registration with the Central Bank’s electronic
registrations system.




During
each year of the four years ending December 31, 2007, the real appreciated against the
U.S. dollar 21%, 9%, 13%, and 9%, respectively.  For the year ending
December 31, 2008 the real depreciated by 24% in
the year. At December 31, 2008, the commercial market rate for purchasing U.S.
dollars was R$ 2.337 to US$ 1.00.  The real’s depreciation during
the last 5 months of 2008 has been due to external factors (including a
global recession, poor results of individual financial institutions, the
subprime mortgage crisis in the United States, lack of liquidity, etc.), which
have increased risk aversion to the Brazilian and other emerging
markets.  Foreign exchange reserves have increased significantly during the
five years ending December 31, 2008, from US$ 52 billion at January 1, 2004 to
approximately US$ 206 billion at December 31, 2008.




The
Brazilian government has, since 2000, and with the intent of simplification,
consistently introduced significant changes to the Brazilian foreign exchange
market.  Recent changes have included, among others, the Brazilian Central
Bank reduction of exchange controls over exports. Exporters may retain outside
of Brazil up to 100% of the proceeds generated by exports.  Resolution 3417
of October 27, 2006 increased the maximum period for the compulsory
liquidation of foreign exchange related to export transactions from 360 to 750
days.




We cannot
assure you that the real will not either devalue
or appreciate substantially in the near future.  See “Item 3D – Key
Information- Risk factors – Risks related to Brazil” and “Item 5—Operating
and Financial Review and Prospects—Overview—Brazilian Economic
Environment.”  The following table shows the commercial selling rate for
U.S. dollars for the periods and dates indicated.




Exchange
Rate of Reais per
US$ 1.00





Year
      Ended December 31,
                            
                            Low
                            
                            
                            High
                            
                            
                            Average(1)
                            
                            
                            Period-end2004
                            
                            
                            2.6544
                            
                            
                            
                            3.2051
                            
                            
                            
                            2.9263
                            
                            
                            
                            2.65442005
                            
                            
                            2.1633
                            
                            
                            
                            2.7621
                            
                            
                            
                            2.4357
                            
                            
                            
                            2.34072006
                            
                            
                            2.0586
                            
                            
                            
                            2.3711
                            
                            
                            
                            2.1751
                            
                            
                            
                            2.13802007
                            
                            
                            1.7325
                            
                            
                            
                            2.1556
                            
                            
                            
                            1.9483
                            
                            
                            
                            1.77132008
                            
                            
                            1.5593
                            
                            
                            
                            2.5004
                            
                            
                            
                            1.8357
                            
                            
                            
                            2.3370





Exchange Rate ofReaisper
US$ 1.00  -  Month Ended





Low
                    
                    
                    HighDecember 31,
      2008
                    
                    
                    2.3370
                    
                    
                    
                    2.5004January
      30, 2009
                    
                    
                    2.1889
                    
                    
                    
                    2.3803February
      27, 2009
                    
                    
                    2.2446
                    
                    
                    
                    2.3916March
      31, 2009
                    
                    
                    2.2375
                    
                    
                    
                    2.4218April
      30, 2009
                    
                    
                    2.1699
                    
                    
                    
                    2.2899May
      30, 2009
                    
                    
                    1.9730
                    
                    
                    
                    2.1783





6





Source:
Central Bank.


(1)
              Represents
      the daily average exchange rate during each of the relevant
      periods.
  B.
              Capitalization
      and Indebtedness




Not
applicable.




C.
            Reasons
      for the Offer and Use of Proceeds




Not
applicable.




D.
            Risk
      Factors




We are
subject to various risks resulting from changing competitive, economic,
political and social conditions that could harm our business, results of
operations or financial condition. The risks described below are not the only
ones we face.




It is
worth mentioning that throughout the years, more specifically in 2007, we
changed our strategy to focus more on pulp as its core business than on paper.
However, paper still remains as a complementary business to pulp. This
repositioning in its strategy may have some impact on the company’s risk
factors. See “Item 4A – Information on VCP – History and Development of
VCP.”




Risks
Relating to VCP and the Pulp and Paper Industry




The market prices
for our products are cyclical.




The
prices we are able to obtain for our products depend on prevailing world prices
for market pulp and paper. World prices have historically been cyclical and
subject to significant fluctuations over short periods of time depending on a
number of factors, including:




·
            worldwide
      demand for pulp and paper products;


·
                  worldwide
      production capacity and
inventories;


·
                the
      strategies adopted by major pulp and paper producers;
  and


·
            the
      availability of substitutes for our
products.




All of
these factors are beyond our control.




Over the
last three years, BEKP prices (market pulp) in the United States, Europe and
Asia, respectively, have fluctuated from US$ 635, US$ 590, and US$ 540 per ton
on January 1, 2006, to US$ 860, US$ 840, and US$ 810 per ton at July 30, 2008 in
these respective regions, returning to US$ 680, US$ 590 and US$ 530 at December
31, 2008 (see graph below). Such price fluctuations occur not only year to year
but also within a year as a result of global and regional economic conditions,
capacity constraints and mill closures, supply and demand of both raw materials
and finished products, among other factors. In 2008, pulp market remained
favorable with robust demand through August, particularly in China and Europe,
and reduced supply caused by the low level of world inventories, few capacity
additions, environmental issues, shortage of wood and closures of high cost
capacity, contributed to multiple price increases of US$20-30 per ton each in
all regions. During the remaining four-month period prices declined
significantly due to lower demand caused by the worldwide financial crisis, see
“Item 3 – Key Information – exchange rates” for further
comments.


7


The price
of paper products, although less volatile than the price of pulp, also
fluctuates in response to global demand and production and fluctuations in pulp
prices. Capacity adjustments have also occurred on the paper side, and in 2006
we saw paper prices for several grades increasing in the United States and
Europe. For uncoated woodfree papers, international prices climbed 15% in the
first six months of 2006, but declined approximately 5% in the last quarter of
the year. In 2007, the prices rose 7% from January to December in North America
and within the European market, the prices climbed 9% in the first nine months
of 2007. In 2008, the pulp prices in the United States, Europe and Asia,
respectively, decreased 15.55%, 23.07% and 33.33% from January to December,
after an increase of 6.83%, 7.69%, 12.50% respectively during the first
eight-month period of the year. For a more detailed discussion of prices of pulp
and paper, see “Item 4B–Information on VCP – Business Overview – Cyclical nature
of world pulp prices.”




The
following chart shows the historical eucalyptus pulp price fluctuations per
region during 2008:











Source:
RISI December 2008





It is
possible that the market prices for pulp and paper will decline in the future or
that there will not be sufficient demand for our products to enable us to
operate our production facilities in an economical manner.




A slowdown in
demand in China may adversely affect our exports.




China is
an increasingly important market for us. China currently represents
approximately 15% of our total sales and 18% of our exports. During the last
quarter of 2008 the Chinese market slowed down considerably and there is no
assurance that the market pulp demand in China will recover to earlier levels or
that China will continue to constitute a significant part of our exports. A
decline in demand by China for our products could adversely affect our exports
and, therefore, our operational and financial results.




A slowdown due to the global economic
crisis may adversely affect demand and price for our
products.





Demand,
for pulp and paper products, is directly linked to overall economic activity
within both the domestic and those international markets in which we conduct
commercial operations. A continued decrease in the level of activity in either
the domestic or the international markets within which we operate could
adversely affect both the demand and the price of our products and thus our
operational and financial results. “See Item 5 – Operating and Financial Review
and Prospects – Overview.”





We face
significant competition in some of our lines of business, which may adversely
affect our market share and profitability.




The pulp
and paper industry is highly competitive. Competitive features within the
industry include the following:





8




·
            in
      the domestic paper market, though on a smaller scale, we face competition
      from larger international companies that have greater ability to support
      strategic expenditures directed to increase market share;
    and





·
            in
      the international pulp market, on a larger scale than the paper markets,
      we compete with larger competitors that have greater financial strength
      and higher production capacities.




Traditionally,
imports of pulp and paper have not provided substantial competition for us in
Brazil due to, among other factors, logistical costs, tariff rates and exchange
rates affecting those products. However, the appreciation of the real through August 1, 2008
resulted in increased imports of selected grades of paper, thus increasing
competition in this product line. If the Brazilian government were to decrease
import tariffs, we may face a sudden additional increase in competition in the
domestic market by foreign producers.




In
addition, most markets are served by several suppliers, often from different
countries. Many factors influence our competitive position, including mill
efficiency and operating rates and the availability, quality and cost of wood,
energy, water, chemicals and labor, and exchange rate fluctuations. See “Item
3D—Risks Relating to Brazil— Exchange rate instability may adversely affect our
financial condition and results of operations and the market price of our
preferred shares and ADSs.” Some of our competitors have greater financial and
marketing resources, larger customer bases and greater breadth of product
offerings than we do. If we are unable to remain competitive with these
producers in the future, our market share may be adversely affected. In
addition, downward pressure on the prices of pulp and paper by our competitors
may affect our profitability.




Delays in the
expansion of our facilities or in building new facilities may affect our costs
and results of operations.




As part
of our strategy to increase our international market share and improve our
competitiveness through greater economies of scale, we may expand or build one
or more production facilities. The expansion or construction of a production
facility involves various risks. These risks include engineering, construction,
regulatory and other significant challenges that may delay or prevent the
successful operation of the project or significantly increase our costs. Our
ability to complete successfully any expansion or new construction project on
time is also subject to financing and other risks.




We may be
adversely affected because:




·
            we
      may either not be able to complete any expansion or new construction
      project on time or within budget or be required by market conditions or
      other factors to delay the initiation of construction or the timetable to
      complete new projects or
expansions;




·
            our
      new or modified facilities may not operate at designed capacity or may
      cost more to operate than we expect;
and




·
            we
      may not be able to sell our additional production at attractive
      prices.




Any
downgrade in our credit ratings could adversely affect the availability of new
financing and increase our cost of capital.




In 2006
and during 2007, the risk rating agencies Fitch Ratings, Moody’s Investor
Service (Moody’s) and Standard & Poor’s, three of the most important rating
agencies in the world, assigned an investment-grade rating to the Company’s
foreign currency debt under foreign law, thus reducing the Company’s average
cost of capital.




However,
on February 2, 2009 Fitch Ratings reduced our rating to one level below
investment-grade. If the ratings were to be further downgraded by the rating
agencies due to any external factor, our own operating performance and/or
increased debt levels associated with acquisition of Aracruz or its eventual
merger with us, our cost of capital would increase. Any downgrade could also
negatively affect our operational and financial results and the availability of
future financing.


9




Our
level of indebtedness may adversely affect us.




We currently have a significant level
of indebtedness. We may need to incur additional debt in the future in order to
refinance our current indebtedness, and we cannot ensure that any such
refinancing will be available to us, if at all, or that we will be able to
obtain favorable financing terms. We may be unable to generate sufficient cash
flow to make principal, interest or other debt-related payments under our
financing agreements. The need to use our cash flow to make payments under our
financing agreements may restrict us from making investments required for our
operations or mandatory dividend distributions to our shareholders.




We may be
adversely affected by the imposition and enforcement of more stringent
environmental regulations that would require us to spend additional
funds.




We are
subject to stringent federal, state and local environmental laws and regulations
in Brazil governing air emissions, effluent discharges, solid wastes, odor and
reforestation, and we require permits from governmental agencies for certain of
our operations. Changes in these laws and regulations and/or changes in the
policies and procedures used to enforce existing laws and regulations could
adversely affect us. If we violate or fail to comply with these laws,
regulations and permits, we could be fined or otherwise sanctioned by regulators
or our permits could be revoked, and our ability to operate could be suspended
or otherwise adversely affected. In addition, noncompliance with these laws,
regulations and permits could result in criminal sanctions for us and for our
employees. We could also be responsible for related environmental remediation
costs, which could be substantial.




Brazilian
environmental regulations applicable to forests are complex because they are a
blend composition of federal and state regulations; requirements and
restrictions may vary from state to state. States like Espirito Santo prohibit
expansion of eucalyptus forests as a matter of state law. These
restrictions are a consequence of pressure from social movements and
organizations against so-called “green deserts” which include sugar cane
plantations for ethanol production and eucalyptus forests.





It is
possible that governmental agencies or other authorities will pass new laws or
impose additional laws and regulations even more stringent than the ones
currently in force or will seek a more stringent interpretation of existing laws
and regulations that would require us to spend additional funds on environmental
compliance or limit our ability to operate as we currently do. In addition,
these actions could increase the costs associated with renewing existing permits
or applying for new ones. There can be no assurance that these additional funds
or costs will not be material or that existing permits will be
renewed.




In
addition, environmental laws and regulations in certain countries may be more
stringent than the ones we are subject to in Brazil, which may lead to such
countries imposing trade related sanctions against Brazil or our industry.
Furthermore, our inability to comply with more stringent foreign environmental
laws and regulations may prevent us from seeking lower cost financing from
foreign governmental related or multilateral development organizations, which
may condition future financing on our compliance with more stringent
environmental laws and regulations.




Our
insurance coverage may be insufficient to cover our losses, especially in cases
of damage to our forests.




Our
insurance may be insufficient to cover losses that we might incur. We have
comprehensive insurance with leading insurers to cover damages to our mills
caused by fire, general third-party liability for accidents and operational
risks, and international and domestic transportation. However, we do not
maintain insurance coverage against fire, disease and other risks to our
forests. The occurrence of losses or other damages not covered by insurance or
that exceed our insurance limits could result in significant unexpected
additional costs. “See Item 4B - Information on VCP - Business Overview –
Insurance”




10




If we are unable
to manage potential problems and risks related to acquisitions and alliances,
including the pending acquisition of a significant equity interest in Aracruz
Celulose SA, our business and growth prospects may suffer. Some of our
competitors may be better positioned to acquire other pulp and paper
businesses.




We may,
as part of our business strategy, acquire other businesses in Brazil or
elsewhere or enter into alliances. Our management is unable to predict whether
or when any prospective acquisitions or alliances will occur, or the likelihood
of a material transaction being completed on favorable terms and conditions. Our
ability to continue to expand successfully through acquisitions or alliances
depends on many factors, including our ability to identify acquisitions and
negotiate, finance and close transactions. Even if we complete future
acquisitions:·we could fail to
successfully integrate the operations, services and products of any acquired
company;




·
            we
      could fail to select the best partners or fail to effectively plan and
      manage any alliance strategy;




·
            the
      acquisitions could increase our
costs;




·
            our
      management’s attention could be diverted from other business concerns;
      and




·
            we
      could lose key employees of the acquired
  company.




Our
failure to integrate new businesses or manage new alliances successfully could
adversely affect our business and financial performance. Furthermore, the world
pulp and paper industry is undergoing consolidation, and many companies compete
for acquisition and alliance opportunities in our industry. Some of our
competitors have greater financial and other resources than we do. This may
reduce the likelihood that we will be successful in completing acquisitions and
alliances necessary for the expansion of our business. In addition, any major
acquisition we consider may be subject to regulatory approval. We may not be
successful in obtaining required regulatory approvals on a timely basis or at
all. See “Item 4A—Information on VCP—History and Development of VCP.” and “Item
5.A Operating and Financial Review and Prospects – Operating Results – Recent
Developments.”





We are controlled
by a defined group of individuals who have the power to control all our
subsidiaries and us and the interests
of these individuals may conflict with those of other
shareholders.




We are
controlled by the Ermírio de Moraes family, which indirectly controls all of our
outstanding common voting shares. Consequently, our controlling shareholders
have the power to control us and all of our subsidiaries, including the power
to:




·
            elect
      our directors; and




·
            determine
      the outcome of any action requiring shareholder approval, including
      transactions with related parties, corporate reorganizations and
      dispositions and the timing and payment of any future
      dividends.




We
currently engage in, and expect in the future to engage in, commercial and
financial transactions, from time to time, with our controlling shareholders or
their affiliates. Commercial and financial transactions between our affiliates
and us create the potential for, or could result in, conflicts of interests. For
a discussion of certain related party transactions, see “Item 7—Major
Shareholders and Related Party Transactions—Related Party
Transactions.”




In
addition, our direct controlling shareholder, VID, has entered into a
shareholders agreement under which the approval of certain matters will depend
on the affirmative vote of BNDESPar. See “Item 10.C Material Contracts –
Shareholders’ Agreement of VCP”. BNDESPar is a subsidiary of Banco Nacional de Desenvolvimento
Econômico e Social, or BNDES, the Brazilian social and economic
development bank. BNDES is also currently one of our major creditors, having
lent approximately 10% (6% as of December 31, 2008) of our consolidated
indebtedness as of May 31, 2009, and is expected to loan significant funds in
the future. See “Item 6 – Operating and Financial Review and Prospects—Liquidity
and capital resources—Debt—BNDES” and Exhibits 4.11 and 4.12 to this annual
report. As one of our significant shareholders and major creditor BNDESPar may
exercise a significant influence over our business and corporate decisions and
its actions may be influenced by the policies of the Brazilian federal
government, which may conflict with the interest of our
shareholders.




We rely on third
parties for some of our technology.




We rely
on third parties for the technology that we use to make some of our value-added
pulp and paper products. For example, Oji Paper of Japan has granted us the
right to use its technology to manufacture and sell certain thermal papers in
Brazil and to sell these products in some other countries, see “Item 4A –
Information on VCP - History and Development of VCP- Strategic Business
Agreement (SBA) with Oji Paper”. If a third-party licensor of technology that we
use refused to continue licensing its technology to us, our results of
operations could be adversely affected.


11


We
may be adversely affected by price volatility of energy inputs.




The
effectiveness of our energy matrix planning, composed by black liquor, electric
energy, gas, oil and others, can be placed at risk due to price volatility of
these components, and, as a result such price volatility has a direct impact on
our operational and financial result.




Our
eucalyptus forests, which are cultivated on large tracts of land, are subject to
known and unknown plagues or diseases.





Our
forests are cultivated on large tracts, which have high densities of trees
per unit of land, and are, very homogeneous (clone based forests); these
conditions that facilitate events such as:




·
            epidemic
      propagation of some known and unknown diseases or
  plagues;




·
            weakness
      to adverse climate change; and




·
            fire
      propagation.




If any of
these events happen, we could be forced to buy wood from third parties, possibly
at a higher price and/or a greater distance from our plants, resulting in higher
logistics costs. These conditions would impact our costs adversely. In the worst
case scenario, we could be forced to stop our production due to lack of wood at
an economical cost.





Competition
of eucalyptus forests with other crops like soy bean, sugar cane and other
commodities for land may affect our expansion.




The
worldwide high demand for commodities, especially for grains and bio-fuel may
impact our forestry operations in two ways:




·
            Competition
      for land with impact on its price. Grain and bio-fuel production generally
      are economically superior to forestry activities and as a result,
      prospective increases in land values may inhibit expansion of new
      forests.




·
            For
      the same reason, we may face difficulties in convincing third party
      partners to begin or to expand eucalyptus production for use in the pulp
      industry.




Various other
risks could have a material adverse effect on our operational and financial
results.




Our
operations are subject to various other risks affecting our forests and
manufacturing processes, including fire, drought, disease, climate changes,
strikes, post closings, shipping costs, electrical failures and factory
explosions, which could have a material adverse effect on our operational and
financial results.




Risk
Factors Relating to Aracruz




The
following risk factors have been included in light of our acquisition of
additional interest in Aracruz (see “Item 5.A Operating and Financial Review and
Prospects – Operating Results – Recent Developments”), which represents a
significant investment for us.




Aracruz’s
level of indebtedness may adversely affect us.




Aracruz
currently has a significant level of indebtedness. In 2008, due to a sharp
devaluation of the real
against the U.S. dollar, Aracruz suffered significant losses in connection with
certain of its derivative financial instruments. As of December 31, 2008,
Aracruz’s total indebtedness, including these related to losses arising from its
derivative financial instruments, amounted to US$3,913 million, 90.6% of which
represented long-term debt payments.




12




Aracruz
renegotiated these liabilities with its respective counterparties under those
derivative financial instruments and at May 13, 2009 converted such liabilities
into an Export Prepayment Facility Agreement and Secured Loan, or the Export
Prepayment Credit Facility, which provides for interest payments based on the
London Interbank Offered Rate, or LIBOR. Any material adverse change in the
LIBOR could adversely affect Aracruz, resulting in an increase of its future
debt, which in turn could reduce its net income and, consequently, limit its
ability to pay dividends and make distributions to us.




In
addition, Aracruz may need to incur additional debt in the future in order to
refinance its current indebtedness, and we cannot ensure that any such
refinancing will be available, if at all, or that we will be able to obtain
favorable financing terms. Aracruz may be unable to generate sufficient cash
flow to make principal, interest or other debt-related payments under its
financing agreements. The need to use its cash flow to make payments under its
financing agreements may restrict Aracruz from making investments required for
its operations or mandatory dividend distributions to its
shareholders.




Aracruz
indebtedness may have negative impacts on our credit ratings and our ability to
meet certain financial ratios and covenants in some of our financing agreements,
as these may take into account our consolidated financial statements and levels
of indebtedness.




Actions
by federal or state legislatures or public enforcement authorities may adversely
affect Aracruz’s operations.




State
laws have in the past tried to restrict planting eucalyptus forests for purposes
of pulp production within the state of Espírito Santo. Although injunctive
relief against those state laws has been obtained, and new state legislation has
revoked them, there can be no assurance that similar laws will not be enacted in
the future which would impose limitations or restrictions on planting eucalyptus
in the region where Aracruz operates.




On March
13, 2002, the Espírito Santo legislative assembly created an investigating
commission (Comissão
Parlamentar de Inquérito) to investigate the legality of Aracruz’s
permits and the acquisition of its properties. As the procedures in the
investigation were not concluded within the prescribed time period for this a
type of investigation, the commission was terminated without issuing a final
report. Aracruz is confident that all its permits and acquisition documents are
strictly in accordance with all laws and regulations. However, we cannot be
certain that a governmental entity will not initiate similar or other
investigations in the future that would cause Aracruz to incur significant
expense and divert its management’s attention.




In May
2003 the Human Rights Commission of the Brazilian House of Representatives
(Câmara dos Deputados)
created a working group to discuss the alleged violation of economic, social,
cultural and environmental rights in eucalyptus plantations in the state of
Espírito Santo. Among other issues, several complaints involving Aracruz were
discussed. Representatives of Aracruz participated in a public hearing and
presented to the commission extensive reports, information, evidence, technical
studies and governmental and judicial decisions that demonstrate that the
complaints were unjustified. The working group was terminated without issuing a
final report. However, Aracruz cannot be certain that a governmental entity will
not initiate similar or other investigations in the future that would cause
Aracruz to incur significant expense and divert its management’s
attention.




In the
second quarter of 2007, a number of non-governmental organizations and the
Federal Public Prosecution Office of the Rio Grande do Sul state brought two
Civil Public Suits (Ações
Civis Públicas) questioning the validity of the procedures adopted by the
Fundação Estadual de Proteção
Ambiental, or FEPAM, the Rio Grande do Sul state agency for environmental
protection, in issuing environmental licenses for eucalyptus plantations in that
state. A provisional measure was initially granted, to determine that FEPAM
cease to issue environmental licenses for eucalyptus plantations, and so the
responsibility for the issuance of such licenses was transferred to the Instituto Brasileiro de Meio
Ambiente, or IBAMA, the Brazilian environmental institute. The
provisional measure was suspended by the Federal Court of the Fourth Region at
the request of the Government of Rio Grande do Sul state. Aracruz believes that
such suspension will be confirmed by the court’s definitive decision on the
merits. However, there can be no assurance that such definitive decision will be
favorable to Aracruz or that similar suits will not be brought in the future
that would impose a limitation or restriction on plantation of eucalyptus or
that would affect its licenses or permits.


13




Unfavorable
outcomes in pending litigation may negatively affect Aracruz’s financial
performance and financial condition.




Aracruz
is involved in numerous tax, civil and labor disputes involving significant
monetary claims. If unfavorable decisions are rendered in one or more of these
lawsuits, Aracruz could be required to pay substantial amounts, which could
materially adversely affect its financial condition and results of operations.
For some of these lawsuits, Aracruz has not established any provision on its
balance sheet or has established provisions only for part of the amounts in
question, based on its judgments as to the likelihood of winning these lawsuits.
An unfavorable outcome in any of such lawsuits could have a material effect on
Aracruz’s financial condition, results of operations and cash
flows.




Such
lawsuits include a securities class action lawsuit filed in November 2008
against Aracruz and certain of its current and former officers and directors in
a U.S. federal court purportedly on behalf of persons who purchased Aracruz’s
shares and American Depositary Receipts between April 7 and October 2, 2008,
which lawsuit Aracruz is defending. The complaint asserts claims for alleged
violations of Section 10(b) of the Securities Exchange Act of 1934 and Rule
10b-5 promulgated thereunder and Section 20(a) of the Securities Exchange Act of
1934, alleging that Aracruz represented or failed to disclose information in
connection with, and losses arising from, certain derivative transactions into
which it had entered. The plaintiffs are seeking unspecified compensatory
damages and expense reimbursement.




Risk
Factors Relating to the implementation of the corporate reorganization following
the acquisition of additional interest in Aracruz




The
implementation of the corporate reorganization following the acquisition by us
of an additional interest in Aracruz may face significant
challenges.




The
implementation of the corporate reorganization may present significant
challenges, including unanticipated costs and delays, shareholder or creditor
opposition, regulatory interference and excessive diversion of our management’s
attention from the day–to–day management of our operating activities. If our
senior management is unable to efficiently implement the corporate
reorganization, our business could suffer. We cannot guarantee that our
management will successfully or cost-effectively implement the corporate
reorganization.




We expect
the implementation of the corporate reorganization to simplify our capital
structure, thereby improving the access to capital markets by the entity
resulting from the corporate reorganization and increasing the liquidity of our
shareholders’ securities. Even if our management is able to successfully and
cost-effectively implement the corporate reorganization, our access to capital
markets and the liquidity of our shareholders’ securities will continue to
depend upon, among other things, our future performance, market conditions,
investor interest and general economic, political and business conditions both
in Brazil and abroad. In addition, our shareholders may still experience a
decrease in their ability to sell shares of the combined VCP–Aracruz, as
compared to their current ability to sell our shares or ADSs.




The
benefits that are expected to be achieved from operating VCP and Aracruz as a
combined enterprise may not be achieved.




Although
VCP expects that the merger will produce substantial synergies, the integration
of two large companies presents significant challenges to management. No
assurance can be given that VCP and Aracruz will be able to integrate their
operations without encountering difficulties, which may include, among other
things, the loss of key employees, the disruption of their respective ongoing
businesses or possible inconsistencies in standards, procedures and policies.
There can also be no assurance as to the extent to which VCP will be able to
produce the synergies that we anticipate from the merger, or as to the timing
for their realization, or as to the expenses that will be incurred in connection
with realizing synergy benefits from the merger. In particular, it may be
difficult for VCP to realize anticipated cost savings from the merger of the two
companies’ production facilities. It may also be difficult for VCP to realize
anticipated synergy benefits from the joint acquisition of raw materials,
sharing of improved production techniques and integration of administrative
departments. Moreover, possible actions by antitrust authorities could limit or
eliminate our ability to integrate our business operations with those of Aracruz
and achieve synergies.


14


The
exercise of appraisal rights by our preferred shareholders may reduce our cash
balances or cause the cancellation of the corporate reorganization
transaction.




Our
preferred shareholders have appraisal rights arising from the undertaking of the
corporate reorganization as it concerns the conversion of all preferred shares
into common shares. If holders of a significant number of our preferred
shares exercise their appraisal rights, the requirement to make significant cash
payments to honor such rights could decrease the cash balances of the combined
entity or cause VCP’s management to cancel this transaction, as permitted under
Brazilian Corporate Law. The appraisal rights period is until July 1, 2009
and VCP’s management have up to 10 days after July 1, 2009.




While
it is expected that shares of the new combined entity will be listed on the
Bovespa’s Novo Mercado listing segment, there can be no assurance that such
listing will occur in a timely fashion, if at all.




The
listing of the new combined entity’s shares on the Bovespa’s Novo Mercado
listing segment is expected to occur sometime after the consummation of the
corporate reorganization. However, there can be no assurance as to when such
listing will occur in a timely fashion, if at all. Delays to complete such Novo
Mercado listing may occur for a number of reasons, including the impossibility
of the combined entity to meet the corporate governance standards of the
Bovespa’s Novo Mercado listing segment or our controlling shareholder’s decision
to abandon the listing application altogether. Delays or failure to list on the
Bovespa’s Novo Mercado may adversely affect the trading price of shares of the
combined entity’s shares and prevent shareholders from enjoying the enhanced
corporate governance standards of the Bovespa’s Novo Mercado listing
segment.




If
regulatory agencies impose conditions on the approval of the corporate
reorganization, its anticipated benefits could be diminished.




If
regulators were to impose any requirements for the deal’s approval and we or
Aracruz failed or had difficulties to comply with such requirements, the
benefits of the corporate reorganization could be delayed, possibly for a
significant period of time after shareholder approval for the transaction has
been obtained. In addition, if governmental agencies conditioned their approval
upon our or Aracruz’s compliance with conditions affecting the deal’s terms, our
operating results or the value of our shares could be adversely
affected.




The Conselho Administrativo de Defesa
Econômica, or CADE, the Brazilian antitrust authority, is reviewing the
business combination and has the authority to require us to dispose of assets or
adopt other restrictive measures with a view to protecting competition. If we
were required to dispose of assets or adopt any such restrictive measures
following the completion of the transaction, the share price of the new combined
entity or the competitive gains expected to be achieved with the transaction
could be adversely affected.




There
is no clear guidance under Brazilian law regarding the income tax consequences
to investors resulting from a corporate reorganization.




There is
no specific legislation, nor administrative or judicial precedent regarding the
income tax consequences to investors resulting from a corporate reorganization.
Based on the opinion of its external tax advisors, we believe that there are
reasonable legal grounds to sustain that the receipt (resulting from the
corporate reorganization) by a non-Brazilian holder of ADSs or by a U.S. person
of shares that are registered as a foreign portfolio investment under Resolution
2,689 or are registered as a foreign direct investment under Law No. 4,131/62
would not be subject to income tax pursuant to Brazilian tax law. However, this
position may not prevail, in which case we would be liable to the Brazilian tax
authorities for withholding and collecting the taxable capital gains of
shareholders resident abroad. While such shareholders would not be directly
liable to Brazilian tax authorities, we would be entitled to reimbursements from
them.


15


Risks
Relating to Brazil




Brazilian economic and political
conditions and perceptions of these conditions in the international market have
a direct impact on our business, our access to international capital and debt
markets, and the market price of our preferred shares and ADSs.




Our operations are conducted in Brazil,
and in 2008 we sold approximately 41% (39% in 2007) of our products in terms of
volume to our customers located in Brazil. Accordingly, our financial conditions
and results of operations are substantially dependent on economic conditions in
Brazil. Brazil’s gross domestic product (GDP), in real terms, grew by 3.8% in
2006, 5.4% in 2007 and 5.1% in 2008 (including a 3.6% decline in the fourth
quarter of the year). As a result of this fourth quarter decline, among other
factors, we cannot assure you that GDP will increase or remain stable in the
future. Future developments in the Brazilian economy may affect Brazil’s growth
rates and, consequently, the consumption of pulp and paper. As a result, these
developments could impair our business strategies, financial condition or
results of operations.




The Brazilian government frequently
intervenes in the Brazilian economy and occasionally makes material changes in
policy and regulations. Our business, financial condition and results of
operations may be adversely affected by changes in government policies as well
as general economic factors, including:




·
            currency
      fluctuations;




·
            inflation;




·
            interest
      rates;




·
            energy
      policy;




·
            liquidity
      of domestic capital and lending
markets;




·
            tax
      policy; and




·
            other
      political, diplomatic, social and economic developments in or affecting
      Brazil.




Historically,
the country’s political scenario has influenced the performance of the Brazilian
economy and political crises have affected the confidence of investors and the
general public, which resulted in economic deceleration and affected the trading
prices of common and preferred shares issued by companies listed on the stock
exchange. Future developments in policies of the Brazilian government and/or the
uncertainty of whether and when such policies and regulations may be
implemented, all of which are beyond the control of the Company and could
adversely affect our business, financial condition, results of operations or
prospects and the market price of our preferred shares and ADSs.




Inflation
and certain governmental measures to combat inflation may contribute
significantly to economic uncertainty in Brazil and to heightened volatility in
the Brazilian securities markets.




Brazil
has, in the past, experienced extremely high inflation rates. More recently,
according to the Índice de
Preços ao Consumidor
Amplo(IPCA), the official price inflation index used by the government,
the Brazilian inflation rates were at 5.7% in 2005, 3.1% in 2006, 4.5% in 2007
and 5.9% in 2008. Our cash costs and operating expenses are substantially
denominated in reais
and tend to increase with Brazilian inflation because our suppliers and
providers generally increase prices to reflect the depreciation of the currency.
If either the rate of Brazilian inflation increases more rapidly than any rate
of appreciation of the U.S. dollar, then, as expressed in U.S. dollars, our
operating expenses may increase. In addition, high inflation generally leads to
higher domestic interest rates, and, as a result, our costs of real-denominated debt may
increase. See “Item 5—Operating and Financial Review and
Prospects—Overview—Brazilian Economic Environment.”


16


Exchange
rate instability may adversely affect our financial condition and results of
operations and the market price of our preferred shares and ADSs.




Because a
significant portion of our revenues and assets is denominated in reais and we have U.S.
dollar-denominated debt and other liabilities, we may be adversely affected by
any future depreciations of the real against the U.S. dollar.
The Brazilian currency has been devalued periodically during the last four
decades. See “Item 3—Key Information—Selected Financial Data—Exchange
Rates.”




Our
production costs and operating expenses are substantially all in reais and will generally
increase, when expressed in U.S. dollars, as a result of local currency
appreciation. If either the rate of Brazilian inflation increases more rapidly
than the rate of appreciation of the U.S. dollar against the real or the rate of
appreciation of the U.S. dollar against the real increases more rapidly
than the rate of the Brazilian inflation, then, as expressed in U.S. dollars,
our operating expenses may increase. In addition, any significant depreciation
of the real may produce
exchange losses on unhedged debt denominated in foreign currency.




During
the years 2006, 2007 and 2008 the real has appreciated against
the dollar, 12%, 12% and 6%, respectively, in year average terms, even with the
strong depreciation observed in the last 5 months of 2008.




The
Central Bank has intervened occasionally to control unstable movements in the
foreign exchange rate. We cannot predict whether the Central Bank will continue
to let the real float
freely. Accordingly, it is not possible to predict what impact the Brazilian
government’s exchange rate policies may have on us. We cannot assure you that
the Brazilian government will not in the future impose a band within which the
real/U.S. dollar
exchange rate could fluctuate or set a fixed exchange rate, nor can we predict
what impact such an event might have on our financial condition or results of
operations.




Depreciations
of the real relative to
the U.S. dollar also create additional inflationary pressures in Brazil that may
negatively affect us. They generally curtail access to foreign financial markets
and may require government intervention, including recessionary governmental
policies. See “Item 3D—Key Information—Risk Factors—Inflation and certain
governmental measures to combat inflation may contribute significantly to
economic uncertainty in Brazil and to heightened volatility in the Brazilian
securities markets.” Depreciations also reduce the U.S. dollar value of
distributions and dividends on our ADSs and the market price of our preferred
shares and ADSs.




Foreign
exchange fluctuation may impact the results of our derivative instruments, used
in accordance with our hedging strategy. See “Item 11 – Quantitative and
Qualitative Disclosures about Market Risk.”




Developments
in other markets may adversely affect the market price of our preferred shares
and ADSs.




The
market for securities issued by Brazilian companies is influenced by economic
and market conditions in Brazil and, to varying degrees, market conditions in
other Latin American and emerging market countries. Although economic conditions
in such countries may differ significantly from economic conditions in Brazil,
the reaction of investors to developments in these other countries may have an
adverse effect on the market value of securities of Brazilian issuers.
Developments or conditions in other emerging market countries have at times
significantly affected the availability of credit in the Brazilian economy and
resulted in considerable outflows of funds and declines in the amount of foreign
currency invested in Brazil. This could adversely affect the trading price of
the ADSs and our preferred shares. An eventual lack of liquidity could also make
it difficult for us to access the capital markets and finance our operations in
the future on acceptable terms, or at all.




The
current uncertainty about, among other things, the rate of growth and the lack
of credit availability in the United States economy has created volatility in
the worldwide financial markets, including the emerging markets. Prospective
negative changes in the economy in the United States may adversely affect the
market price of our preferred shares and ADSs.


17


Risks
Relating to Our Preferred Shares and ADSs




Exchange
controls and restrictions on remittances abroad may adversely affect holders of
our ADSs.




You may be adversely affected if the
Brazilian government imposes restrictions on the remittance to foreign investors
of the proceeds of their investments in Brazil and, as it has done in the past,
on the conversion of the real into
foreign currencies. These restrictions could hinder or prevent the conversion of
dividends, distributions or the proceeds from any sale of preferred shares or
ADSs, as the case may be, into U.S. dollars and the remittance of U.S. dollars
abroad. We cannot assure you that the government will not take this type of or
similar measures in the future. Holders of our ADSs could be adversely affected
by delays in, or a refusal to grant, any required governmental approval for
conversion of real payments and
remittances abroad in respect of the preferred shares, including the preferred
shares underlying the ADSs. In such a case, our ADS depositary will distribute
reais or hold the reais it cannot convert for the account of the
ADS holders who have not been paid.




Exchanging ADSs for the underlying
preferred shares may have unfavorable consequences.




The
Brazilian custodian for the preferred shares must obtain an electronic
certificate of registration from the Central Bank to remit U.S. dollars abroad
for payments of dividends, any other cash distributions, or upon the disposition
of the preferred shares and sales proceeds related thereto. If you decide to
exchange your ADSs for the underlying preferred shares, you will be entitled to
continue to rely, for five business days from the date of exchange, on the ADS
depositary’s electronic certificate of registration. Thereafter, you may not be
able to obtain and remit U.S. dollars or other foreign currencies outside Brazil
upon the disposition of the preferred shares, or distributions relating to the
preferred shares, and you will generally be subject to less favorable tax
treatment on gains with respect to the preferred shares, unless you obtain your
own electronic certificate of registration with the Central Bank, under
Resolution No. 2,689 of January 26, 2000 of the National Monetary
Council, which entitles foreign investors to buy and sell on the Brazilian stock
exchanges. If you attempt to obtain your own electronic certificate of
registration, you may incur expenses or suffer significant delays in the
application process. Obtaining an electronic certificate of registration
involves generating significant documentation, including completing and filing
various electronic forms with the Central Bank and the CVM. In order to complete
this process, the investor will need to appoint at least one representative in
Brazil with powers to perform certain actions relating to the foreign investment
and will usually need to have a consultant or an attorney who has expertise in
Central Bank and CVM regulations. These expenses or delays could adversely
impact your ability to receive dividends or distributions relating to the
preferred shares or the return of your capital in a timely manner. If you decide
to exchange your preferred shares back into ADSs once you have registered your
investment in the preferred shares, you may deposit your preferred shares with
the custodian and rely on the ADS depositary’s electronic certificate of
registration, subject to certain conditions. We cannot assure you that the ADS
depositary’s electronic certificate of registration or any certificate of
foreign capital registration obtained by you may not be affected by future
legislative or other regulatory changes, or that additional restrictions
applicable to you, the disposition of the underlying preferred shares or the
repatriation of the proceeds from disposition could not be imposed in the
future. See “Item 8—Financial Information—Dividend Policy and
Dividends—Payment of dividends.”




The
relative volatility and illiquidity of the Brazilian securities markets may
adversely affect holders of our preferred shares or ADSs.




Investments
in securities, such as the preferred shares or the ADSs, of issuers from
emerging market countries, including Brazil, involve a higher degree of risk
than investing in securities of issuers from more developed
countries.




The
Brazilian securities market is substantially smaller, less liquid, more
concentrated and more volatile than major securities markets in the United
States. Accordingly, the ability of the holders to sell the preferred shares
underlying the ADSs at a price and time at which holders wish to do so may be
substantially limited. The São Paulo Stock and Futures Exchange (Bolsa de Valores e Futuros de São
Paulo), or BM&F BOVESPA, the main Brazilian stock exchange, had a
market capitalization of approximately US$ 600 billion as of
December 31, 2008, and an average daily trading volume of approximately
US$ 1.1 billion, US$ 2.6 billion and US$ 3.0 billion in 2006, 2007 and
2008 respectively. In comparison, the New York Stock Exchange had a market
capitalization of approximately US$ 17 trillion as of December 31,
2008 (US$ 27 trillion and US$23 trillion, in 2007 and 2006
respectively)




18





Changes in Brazilian tax laws may have
an adverse impact on the taxes applicable to a disposition of our preferred
shares or ADSs.





Law No.
10,833 of December 29, 2003 provides that the disposition of assets located in
Brazil by a non-resident to either a Brazilian resident or a non-resident is
subject to taxation in Brazil, regardless of whether the disposition occurs
outside or within Brazil. This provision results in the imposition of income tax
on the gains arising from a disposition of our preferred shares by a nonresident
of Brazil to another non-resident of Brazil. There is no judicial guidance as to
the application of Law No. 10,833 of December 29, 2003 and, accordingly, we are
unable to predict whether Brazilian courts may decide that it applies to
dispositions of our ADSs between non-residents of Brazil. However, in the event
that the disposition of assets is interpreted to include a disposition of our
ADSs, this tax law would accordingly result in the imposition of withholding
taxes on the disposition of our ADSs by a nonresident of Brazil to another
non-resident of Brazil.





Because
any gain or loss recognized by a U.S. Holder (as defined in “Item 10. Additional
Information — E. Taxation — U.S. Federal Income Tax considerations”) will
generally be treated as a U.S. source gain or loss unless such credit can be
applied (subject to applicable limitations) against tax due on the other income
treated as derived from foreign sources, such U.S. Holder would not be able to
use the foreign tax credit arising from any Brazilian tax imposed on the
disposition of our preferred shares.





Because
we are subject to specific rules and regulations as a Brazilian company, holders
of our preferred shares or ADSs have fewer and less well- defined shareholders’
rights than investors in U.S. companies.




Our
corporate affairs are governed by our by-laws and the Brazilian corporate law,
which differ from the legal principles that would apply if we were incorporated
in a jurisdiction in the United States, such as Delaware or New York, or in
certain other jurisdictions outside Brazil. In addition, your rights or the
rights of holders of the preferred shares under the Brazilian corporate law to
protect your interests relative to actions taken by our Board of Directors or
the holders of common shares may be fewer and less well-defined than under the
laws of other jurisdictions outside Brazil.




Although
Brazilian law imposes restrictions on insider trading and price manipulation,
the Brazilian securities markets are not as highly regulated and supervised as
the securities markets in the United States or certain other jurisdictions. In
addition, rules and policies against self-dealing and regarding the preservation
of shareholder interests may be less well developed and enforced in Brazil than
in the United States, potentially disadvantaging holders of our preferred shares
and ADSs. When compared to Delaware general corporation law, the Brazilian
corporate law and practice have less detailed and less well established rules
and judicial precedents relating to the review of management decisions under
duty of care and duty of loyalty standards in the context of corporate
restructurings, transactions with related parties and sale-of-business
transactions. In addition, shareholders must hold 5% of the outstanding share
capital of a corporation to have standing to bring shareholders’ derivative
suits, and shareholders ordinarily do not have standing to bring a class
action.




The
preferred shares underlying the ADSs have limited voting rights.




Of our
two classes of shares outstanding (common and preferred), only our common shares
have full voting rights. Except in certain limited circumstances, our preferred
shares will not be entitled to voting rights. As a result of these limited
voting rights and the fact that our controlling shareholder owns approximately
100% of our common shares, our preferred shares, including in the form of the
ADSs, generally will not be able to influence most of the corporate decisions
requiring a shareholder vote. In addition, only shareholders appearing in our
shareholder records are recognizable to us and given admission to our
shareholders’ meetings. The record holder of the preferred shares underlying the
ADSs is The Bank of New York, the depositary of our ADS program, and not our ADS
holders. As a result, ADS holders depend on us and on the depositary to be
represented at our shareholders’ meetings and vote the preferred shares
underlying the ADSs in the very limited circumstances where our preferred shares
may have a vote pursuant to Brazilian corporate law. Accordingly, even in the
limited circumstances where our preferred shares may be entitled to a vote, the
exercise of those limited voting rights might not be structured in a convenient
and/or timely fashion, or not at all, for our ADS holders. See “Item
10—Additional Information—Memorandum and Articles of Association.”




19




Holders
of ADSs may be unable to exercise preemptive rights with respect to our
preferred shares.




You may
not be able to exercise the preemptive rights relating to the preferred shares
underlying your ADSs unless a registration statement under the Securities Act of
1933, as amended, or the Securities Act, is effective with respect to those
rights or an exemption from the registration requirements of the Securities Act
is available and the ADS depositary determines to make the rights available to
you. We are not obligated to file a registration statement with respect to the
shares relating to these preemptive rights, and we cannot assure you that we
will file any such registration statement. Unless we file a registration
statement or an exemption from registration applies, you may receive only the
net proceeds from the sale of your preemptive rights by the ADS depositary or,
if the preemptive rights cannot be sold, the rights will be allowed to lapse.
See “Item 10—Additional Information—Exchange Controls—Preemptive
Rights.”




ITEM
4. INFORMATION ON VCP




A.
            History
      and Development of VCP




We are
incorporated under the laws of the Federative Republic of Brazil under the name
Votorantim Celulose e Papel S.A., as a corporation with unlimited duration. We
have the legal status of a sociedade por ações, or a
stock corporation, operating under the Brazilian corporate law. Our principal
executive offices are located at Alameda Santos, 1357, 6th floor,
01419 908, São Paulo, SP, Brazil (telephone: 55-11-2138-4287/4168/4361). Our
website address is www.vcp.com.br. Investor information can be found on our
website under the caption of “Investors Relations”. Information contained on our
website is, however, not incorporated by reference in, and should not be
considered a part of this annual report. Our agent for service of process in the
United States is CT Corporation, 111 Eighth Avenue, New York, New York
10011.




At
December 31, 2008, our industrial facilities consisted of one integrated pulp
mill in Jacareí, state of São Paulo, one facility exclusively dedicated to paper
production in Piracicaba, state of São Paulo and a 50% stake in Conpacel, the consortium resulting after the spin off ofRipasa S.A. Celulose e Papel, located in Americana, state of São Paulo
together with their related forestry bases. We also have two additional forest
bases under development in the states of Mato Grosso do Sul and Rio Grande do
Sul and a Project Mill in Três Lagoas, in the state of Mato Grosso do Sul, which
began its commercial production on March 30, 2009. We also have a paper
distribution division, KSR, with an extensive product line, including graphic
papers and products, which utilizes a multiple location, automated, warehouse
system that permits efficient distribution of its products throughout Brazil.
This warehouse and distribution system is supported by a specialized
transportation fleet.




At
December 31, 2008, our installed capacity was 1,425,000 tons per year of pulp
and 415,000 tons per year of coated, uncoated and specialty papers, with
approximately 88% of our paper sales volume and 24% of our pulp sales volume
sold to the domestic market. In 2008, we continued the strategic repositioning
of our pulp and paper businesses that had begun in 2007 via a number of
significant transactions/events: (i) construction continued at the Project Mill,
a unit we obtained by asset swap with International Paper Investment (Holland)
B.V. (“International Paper”) in 2007, (ii) sold our remaining 40% interest in
the joint-venture business to produce coated and uncoated papers at the Jacarei
mill to our partner, (iii), repurchased and retired a portion of our preferred
stock originally issued to purchase our part of the Ripasa mill pursuant to the
acquisition agreement, (iv) transformed the Ripasa unit into a production
consortium and continued to obtain productivity gains, (v) our parent company,
VID, began negotiations in 2008with theother
controlling shareholders of Aracruz CeluloseS.A. (“Aracruz”)to purchase their respective equity interests in Aracruz.
The negotiations were concluded in early 2009, see
“Item 5.A - Operating and Financial Review and Prospects – Operating Results –
Recent Developments”.




Our
activities began in 1988 when the Votorantim group purchased Celpav Celulose e
Papel Ltda., or Celpav, a pulp and paper producer based in the state of São
Paulo. We began production in 1991 after expanding and modernizing our
facilities. In September 1992, the Votorantim group purchased Indústrias de
Papel Simão S.A., or Papel Simão, which was listed on the Bovespa. Via
subsequent corporate reorganizations, the two companies were merged and Papel
Simão was renamed Votorantim Celulose e Papel S.A. in 1999.




On April
19, 2000, we completed a registered offering of 7,920,000 ADSs. Each ADS
represented 500 preferred shares, and the ADSs were listed on the New York Stock
Exchange under the symbol “VCP.” Of the 7,920,000 ADSs being offered at that
time, we sold 2,047,648 ADSs and certain of our shareholders sold the remaining
5,872,352 ADSs. Concurrently, 440,000,000 preferred shares were sold in
Brazil.




20




Since our
founding in 1988, VCP has grown and expanded by the organic expansion of its
pulp mills and paper production facilities, including the disposition of assets
and lines of business that were deemed not a part of its core business, and
selective acquisition of equity interests in other pulp and paper companies.
During the period of 1988 through 2005 the more significant of these capacity
expansions and acquisitions were as follows:




1)
Expansion of the Jacarei mill, completed in 2005, which increased our installed
capacity for pulp to 1.4 million metric tons per annum with a total investment
of US$ 495 million. See “Item 4D—Information on VCP—Property, Plant and
Equipment—Expansions.”




2)
Acquisition, in 2001, of 28.0% of the voting shares (representing 12.35% of the
total capital) of Aracruz from the Mondi Group, for approximately US$ 370
million. Aracruz is a Brazilian pulp exporter whose ADSs trade on the New York
Stock Exchange under the symbol “ARA.” We acquired our interest in Aracruz in
order to increase our exposure to the international pulp market, and we
accounted for this investment under the equity method. We reduced the book value
of our investment in Aracruz to an amount equal to the market value of Aracruz
ADRs at December 31, 2002. The impairment provision of US$ 136 million was
determined based on the market price of US$ 18.56 per each Aracruz ADRs on
December 31, 2002, and the amount was charged directly to income. On December
31, 2008 and 2007 the market price for each Aracruz ADR was US$ 11.28 and US$
74.35, respectively. See “Item 5.A - Operating and
Financial Review and Prospects – Operating Results – Recent
Developments”.




3) In
2005 we purchased through a 50% joint venture with Suzano Bahia Sul Papel e
Celulose S.A., or Suzano, the common and preferred stock of Ripasa. On March 31,
2005, we finalized the acquisition, through a 50% joint venture, of 77.59% (our
interest – 38.80%) indirect interest in the voting capital and 46.06% (our
interest – 23.03%) indirect interest in the total capital of Ripasa, for US$ 275
million. A purchase option was also signed for the option to purchase common
shares and preferred shares, totaling 22.41% of the voting stock and 13.45% of
the total stock, respectively and to be exercised within six years, for a total
current amount of US$ 179 million. In subsequent periods a summary of related
transactions that occurred with respect to the Ripasa acquisition is as
follows:




a) In
2006 we and Suzano reached an agreement with minority shareholders of Ripasa and
began selling Americana’s unit products as
a pre-consortium stage whereby each party purchased 50% of Ripasa’s production
and resold it within its own distribution channels. The share purchase option
with the former controlling shareholders of Ripasa was modified.




b) In
2007 we completed the disposition of Ripasa operating facilities not deemed to
be a part of our core business.




c) In
2008 we and Suzano received permission from the Brazilian tax authorities to
form a production consortium to operate the Ripasa facility and re-purchased
part of our preferred shares issued in 2005 to acquire Ripasa and cancel
substantially all of the above share purchase option.




4)In 2005, we announced the
beginning of the social and environmental licensing process for the
implementation of a bleached eucalyptus pulp factory to be built in Rio Grande
do Sul. If implemented, this unit will occupy an area of approximately 500
hectares, located in the region of Rio Grande-Pelotas-Arroio Grande. Overall
nominal capacity is expected to be 1.3 million tons of pulp per year. We have
progressed with the environmental licensing and basic engineering and technical
aspects of the project and continue to form the forestry base. On October 13,
2008, we announced a postponement of one year, until 2010, in further
development of the project’s industrial aspects in view of the current uncertainty as to worldwide economic conditions.
See “4D - Information on VCP — Property,
Plant and Equipment—Expansions”.




During
the period of 2006 to 2008 the following significant transactions and events
have occurred:




21




1)
Exchange of assets with International Paper:




In
September, 2006, International Paper, a wholly owned subsidiary of International
Paper Company, and VCP entered into an Exchange Agreement (the “Exchange
Agreement”). Pursuant to the terms of the Exchange Agreement, International
Paper agreed to exchange its pulp mill project (the “Project Mill”) developed in
Três Lagoas, state of Mato Grosso do Sul, Brazil (together with approximately
100,000 hectares of surrounding forestlands) for VCP’s Luiz Antonio pulp and
uncoated paper mill and approximately 60,000 hectares of forestlands located in
the state of São Paulo, Brazil. The Luiz Antonio mill produces 355,000 metric
tons of uncoated papers and 100,000 metric tons of market pulp annually. The
100,000 metric tons of market pulp will be supplied to VCP, for its use in other
facilities, on competitive terms under a long-term supply agreement. The Três
Lagoas Project Mill began its commercial production on March 30,
2009.




Under the
Exchange Agreement, International Paper is granted the right to construct, at
its cost, up to two paper machines adjacent to, and integrated with, the Project
Mill. If International Paper exercises its right to build one or both paper
machines adjacent to the Project Mill, (1) certain parcels of real property will
be retained by International Paper upon which the paper machines will be
constructed and (2) the paper machines will be supported by long-term supply
agreements under which VCP will provide International Paper pulp on competitive
terms and utilities and rates based on VCP’s actual operating costs.
International Paper has already fully funded the Project Mill as stated at the
exchange asset date in the amount of US $1.15 billion for the mill. Pursuant to
an amendment to the agreement, all financial income accruing from the funds in
trust will be applied, exclusively, to the project under construction. This
financial income in 2008 and 2007 was US$ 32 million and US$ 124 million,
respectively.




On
January 2, 2007, VCP created a new subsidiary, LA Celulose e Papel Ltda. (“LA”),
as part of the asset exchange agreement with International Paper. This wholly
owned subsidiary has no significant assets or liabilities. On January 2, 2007,
VCP transferred to LA the assets of the Luiz Antonio mill and related forests.
On February 1, 2007, VCP transferred LA to International Paper and received
Chamflora (then an International Paper subsidiary) in exchange. Chamflora had
contracted an internationally recognized engineering and construction company,
Pöyry Engenharia (“Pöyry”), on an Engineering, Procurement and Construction, or
EPC, basis to build the Três Lagoas mill as a turn-key project. Pöyry will
manage subcontractors and acquire the equipment and other supplies in order to
place the plant in operation. Pöyry will earn a management fee and will bear the
construction risks and will be entitled to any surpluses or be responsible for
shortfalls based on the funds already paid
to Pöyry for the EPC, which had in turn transferred to a commercial bank acting
as the Trustee Bank (“Trustee”) the corresponding funds to complete the project.
These resources have been and will continue to be disbursed by the Trustee in
accordance with the physical construction schedule of the project, which also
contemplates the orders with third parties to supply equipment and services
being rendered in Três Lagoas to Chamflora. Effective February 1, 2007, and with
the completion of the asset exchange, Chamflora’s name was changed to VCP Mato
Grosso do Sul Celulose Ltda. (VCP-MS), and is accounting for these EPC
disbursements as a “Construction in Progress”. Upon completion of the
construction and start-up of the mill, these costs will be transferred to the
appropriate fixed assets accounts. Additionally, pursuant to an amendment to the
agreement all financial income accruing from the funds in trust will be applied,
exclusively, to the project under construction.




In June
2007, we redefined the scope of the pulp project mill in Três Lagoas, state of
Mato Grosso do Sul, by increasing the nominal capacity from 1,000,000 tons to
1,300,000 tons per year of bleached eucalyptus pulp with a total estimated cost
for the mill of approximately US$ 1.5 billion. The capacity and value of the
project were redefined due to three factors: (i) changes in market conditions
such as commodities and international price increases, especially for metals;
(ii) currency appreciation over the US dollar; and (iii) strong demand for
equipment in every sector of the economy. We believe that the resulting capacity
increase will result in the achievement of a greater economy of scale from the
plant. We believe that the pulp project mill in Três Lagoas, state of Mato
Grosso do Sul, has a potential for a future second phase expansion. See “Item 4C
-Organizational Structure” and Item 10.C “Additional Material
Contracts.”




In
October 2007, our subsidiary VCP-MS signed an agreement with ALL - América
Latina Logística S.A (“ALL”) for ALL to provide transport services for more than
1 million tons per year of pulp from Três Lagoas to the port of Santos for a
twenty-year term beginning in 2009. The agreement provides primarily for (i)
railway transportation service from the facility to the port of the pulp volume
produced in Três Lagoas; (ii) construction of a railway spur line connecting
ALL’s main rail line to the facility; and (iii) investments by both companies
for wagons, locomotives and permanent railway infrastructure.




22




The
mill’s start up occurred on March 30, 2009.




2)
Joint-venture with Ahlstrom:




In May
2007, we announced an intended joint venture agreement with the Finnish company
Ahlstrom for the paper production in our facility located in Jacareí, state of
São Paulo. The agreement was concluded in September 2007 and Ahlstrom acquired a
60% interest of this new joint venture for the paper assets in Jacareí mill,
denominated Ahlstrom VCP Indústria de Papéis Especiais S.A. (“Ahlstrom VCP”)
with an option to purchase the remaining 40% within two years.




The
specialty papers produced at the Jacareí mill are primarily directed to the
labeling applications and flexible packaging markets, in which Ahlstrom will
reinforce its worldwide leadership per assets of the joint venture have an
annual production capacity of approximately 105,000 tons per year of uncoated
wood-free papers, with capacity to convert up to 80,000 tons per year of coated
papers. The parties also signed a long-term agreement whereby VCP will supply
eucalyptus pulp, utilities and other services to the joint venture operations at
the Jacareí mill at competitive prices.




In September 2008, pursuant to a series of options which
were part of the agreement with Ahlstrom, we sold to Ahlstrom our
remaining 40% equity interest in the joint-venture company for US$ 42 million.
See “Item 4C -Organizational Structure” and
“Item 10CAdditional Information –Material Contracts.”




3)
Strategic Business Agreement (SBA) with Oji Paper:




In August
2007 we announced the execution of a long term SBA with Oji Paper. The agreement
will allow us to further our offering of thermal paper technologies in Brazil
and the region of Latin America, while allowing Oji to expand its worldwide
presence as a market leader in thermal technology. Through the execution of the
SBA, we will be able to draw on the technologies of Oji as well as its global
subsidiaries including the technology of Kanzaki Specialty Papers, Inc (KSP),
Kanzan Spezialpapiere GmbH (Kanzan) and Oji Paper Thailand Ltd. (OPT). Going
forward, we will be prepared to meet the growing demands of an expanding market
by drawing on the technological process of Oji Paper globally. The SBA agreement
coupled with the completion in 2008 of our Piracicaba mill expansion permitted
the continuation of enhanced quality products and improved value to our
customers. See “Item 10
C - Additional Information-Material Contracts.”




4) Dow
Jones Sustainability Index – DJSI World




For the
first time, VCP has been included in the Dow Jones Sustainability World Index,
out of 13 forestry companies worldwide that were up for consideration for the
2008/2009 index. The index highlights the best corporate sustainability
practices around the world.




The DJSI
has become an important benchmark for foreign currency fund management
companies. These institutions base their investment decisions on the DJSI
performance criteria and offer diversified products to their customers, based on
shares of companies, committed to sustainability practices through economic,
environmental and social performances.




5)
Obtaining investment grade ratings and subsequent downgrade:




In
November 2006, Fitch Ratings assigned VCP a credit
rating of‘BBB-’ foreign and local currency issuer default ratings
(IDRs), an investment grade rating, to the
Company.However, on February 2, 2009 Fitch
Ratings downgraded our foreign and local currency global scale corporate credit
rating to “BB+”, one level below investment-grade.In October, 2008
Standard & Poor’s Ratings Services (S&P) downgraded our foreign and
local currency global scale corporate credit rating to “BBB-” from the “BBB”
rating obtained in May 2007, still an
investment grade rating. In October 2007, Moody’s assigned issuer ratings of
Baa3 on its global scale and Aa1.br on its Brazilian national scale to VCP, an
investment grade rating category.




23




If the ratings were to be further downgraded by the
rating agencies, our cost of capital would increase. Any downgrade could also
negatively affect our business and the availability of future financing. See
“Item D – Risk Factors”.




6)
Acquisition of additional equity interest in Aracruz




Negotiations began in 2008 and were concluded in early
2009 by which we acquired an additional equity interest in Aracruz and, as a
result, increased our interest to approximately 84.09% of Aracruz’s voting
capital as of April 29, 2009. See “Item 5.A - Operating and Financial Review and
Prospects – Operating Results – Recent Developments”.




7) Conversion of preferred shares into common
shares




On May 30, 2009, at an Extraordinary Shareholders
Meeting of VCP, the conversion of our preferred shares into common shares at the
exchange ratio of 0.91 common shares for one preferred share was approved and,
thereafter, subsequently ratified by a majority of the company’s preferred
shareholders at a Special Meeting held on the same day. Preferred shareholders
who do not wish to their shares to be converted have a 30-day period that ends
on July 1, 2009, to inform the company that they, instead of converting their
shares, choose to redeem the shares for the respective book value per share.
Under Brazilian Corporate Law, our management is entitled to cancel the
conversion if, at the discretion of our management, the amount that would have
to be paid by us in respect of appraisal rights could jeopardize our financial
situation. See “Item 5.A - Operating and Financial Review and Prospects –
Operating Results – Recent Developments”.




8) Merger
of shares




As part
of the corporate reorganization following our acquisition of additional interest
in Aracruz, our management and Aracruz’s management intend to call an
Extraordinary Shareholder Meeting of each company to vote a business combination
under the Brazilian Corporate Law known as a merger of shares (incorporação de ações).
Pursuant to the merger of shares, subject to the approval of both companies’
common shareholders, all the issued and outstanding Aracruz shares not held by
VCP will be exchanged for VCP common shares (assuming the VCP Conversion, in
which VCP converts preferred shares into common shares) at an exchange ratio of
0.1347 VCP common share (assuming the VCP Conversion is consummated) for each
and every one of Aracruz common shares (assuming the Aracruz Conversion is
approved and consummated). See “Item 5.A - Operating and Financial Review and
Prospects – Operating Results – Recent Developments”.




9)
Adhesion to Novo Mercado




Within
270 days after the conclusion of the merger of the shares of Aracruz by VCP, VID
intends to cause VCP to become a member of the Novo Mercado segment of BOVESPA,
modifying its statutes to the Regulations for Listing on the Novo Mercado,
unless said membership would result in VCP being required to pay withdrawal
rights to shareholders; in that circumstance, the membership would be postponed
until such time as withdrawal rights are no longer applicable.




Capital
Expenditures




Our
capital expenditures disbursements totaled US$ 660 million in 2008, US$ 353
million in 2007, and US$ 248 million in 2006. We expect our capital expenditure
to be US$ 435 million in 2009. The increase in capital expenditures from 2007 to
2008 was mainly due to large investments in the increase of nominal capacity of
the pulp mill in Três Lagoas (state of Mato Grosso do Sul) and in the new coater
off-machine for special papers in Piracicaba (state of São Paulo). We continued
investing in a new forest reserve (land acquisition and plantation) in Rio
Grande do Sul State, in the south of Brazil, and plantation and additional land
acquisition for the pulp project mill in Três Lagoas, acquired by exchange in
2007. These expenditures for land acquisition and forestry plantation not only
reduce our dependence on raw materials from third parties, but also assure our
supply of raw materials for current or eventual expansion of our pulp mill
capacity.




24




We
believe that our participation in Ripasa as a production unit, with 50% of
volumes being sold by VCP, the corresponding synergies and our prior investments
in our own facilities will allow us to continue to grow and continue to
implement our business plan.




The table
below sets forth a breakdown of our most significant capital expenditures for
the periods indicated:




For
      the years ended December 31,2008
                      
                      
                      2007
                      
                      
                      2006(in
      US$ millions)Expansion
                      
                      
                      391
                      
                      
                      
                      67
                      
                      
                      
                      47Forests
      (including land purchases)
                      
                      
                      222
                      
                      
                      
                      216
                      
                      
                      
                      116Improvements/modernization
                      
                      
                      12
                      
                      
                      
                      12
                      
                      
                      
                      33Other
      (includes maintenance and information technology)
                      
                      
                      35
                      
                      
                      
                      58
                      
                      
                      
                      52Sub
      Total
                      
                      
                      660
                      
                      
                      
                      353
                      
                      
                      
                      248Fixed
      assets related to Três Lagoas expansion purchased with proceeds of
      financial income earned on trust fund deposits (see “Item 4A – Information
      on VCP – History and Development of VCP)
                      
                      
                      32
                      
                      
                      
                      124
                      
                      
                      
                      -Total
                      
                      
                      692
                      
                      
                      
                      477
                      
                      
                      
                      248




If we
consider our 50% stake in Conpacel, we have an additional capital expenditure of
US$ 12.4 million, primarily related to the plantation and forestry maintenance,
increasing our total capital expenditure for 2008 to US$ 672
million.




The
following table shows the estimated breakdown of planned capital expenditures
during 2009, which is expected to be financed by cash generated from operations
and by existing cash:




in
      US$ millionsExpansion
      projects
                    
                    
                    328Forests
                    
                    
                    85Other
      (includes maintenance, information technology and
      improvements/modernization)
                    
                    
                    22Total
                    
                    
                    435





If we
consider our 50% stake in Conpacel, which results
in planned expenditures of US$ 28 million, we will have a total capital
expenditure in 2009 of US$ 463 million. Planned forestry plantation and
maintenance in 2009 will occur principally in São Paulo and Mato Grosso do Sul
states. Disbursements for expansion will be principally related to the
conclusion of the Três Lagoas mill project.




B.
            Business
      Overview




We are
one of the largest pulp and paper products companies in Brazil and among the
leading Brazilian producers of wood-free printing and writing papers and
specialty papers in terms of net operating revenue and total assets, according
to Bracelpa. We produce BEKP, which is a high-quality variety of hardwood pulp.
In 2007 and 2008 we sold approximately 80% and 84%, respectively, of our pulp
production to third parties, and we use the remainder internally to manufacture
a wide range of printing and writing paper products, including coated and
uncoated printing and writing papers, thermal papers, carbonless papers and
other specialty papers.




25




Operations




Our total
sales volume was 1,611,398 tons in 2006, 1,596,988 tons in 2007 and 1,591,454 in
2008. Our net operating revenues were US$ 1,317 million in 2006, US$ 1,333
million in 2007 and US$ 1,366 million in 2008.




In 2008,
40% of the volume and 53% of total operating revenue were derived from the
domestic market compared to 39% and 54%, respectively, in 2007, 37% and 52%,
respectively, in 2006. In the pulp market, the domestic market accounted for 24%
of the sales volume and 22% of the total operating revenue derived from pulp in
2008. In the paper market, the domestic market accounted for 88% of the sales
volume and for 93% of the total operating revenue derived from paper in 2008.
The table below sets forth the percentages of our net operating revenues in
2008, 2007 and 2006 that correspond to the domestic and export markets and the
breakdown by product of our net revenues.




2008
                  
                  
                  2007
                  
                  
                  2006Sales
      by marketDomestic
                  
                  
                  53
                  %
                  
                  
                  54
                  %
                  
                  
                  52
                  %Export
                  
                  
                  47
                  %
                  
                  
                  46
                  %
                  
                  
                  48
                  %Sales
      by productMarket
      Pulp
                  
                  
                  56
                  %
                  
                  
                  49
                  %
                  
                  
                  39
                  %Paper
                  
                  
                  44
                  %
                  
                  
                  51
                  %
                  
                  
                  61
                  %





In 2008,
we produced 1,263,227 tons of eucalyptus pulp compared to 1,394,370 tons in 2007
and 1,444,480 tons in 2006. In 2008, we sold 1,200,767 tons of this production
as market pulp to third-party producers and we used the remainder to manufacture
paper products. Our production and related U.S. dollar based exports of pulp
also increased during 2007 and 2008. We sold US$ 520 million in 2006, US$ 657
million in 2007 and US$ 1,087 million in 2008. The increase in our market pulp
revenues from 2005 to 2008 was mainly due to the debottlenecking of the new pulp
line and the divestiture process the company has been through releasing part of
the pulp used as integrated to market pulp. See “Item 4A—Information on
VCP—History and Development of VCP.”




In 2008,
our sales volume of paper products decreased to 390,688 tons from 499,336 tons
in 2007. This decrease in sales volume is mainly due to the divestiture process
in which the company has begun focusing more on pulp and continuing to shift our
paper sales mix toward higher margin products. Uncoated and coated printing and
writing paper sales accounted for 54% of our total paper products revenues in
2008 and 64% in 2007. The remainder of our revenues from paper products in 2008
and 2007 were derived from sales of special and chemical (thermal and
carbonless) paper, accounting for 46% in 2008 and 36 % in 2007) of paper sales.
Our printing and writing papers are used for a variety of business supplies,
including notebooks, books, continuous forms, labels, brochures and magazines.
Our market share in Brazil in 2008, based on data from Bracelpa, was 19% for
coated papers, 12.5% for uncoated cut-size papers and 8% for uncoated offset
papers. We sold 12% of our paper sales volume outside of Brazil in 2008 (20% in
2007).




Our
Ownership Structure




We are
part of the Votorantim group, one of the largest privately held Brazilian groups
of companies. The Votorantim group was founded in 1918 by Senator José Ermírio
de Moraes and is controlled by the Ermírio de Moraes family. The three core
businesses of the Votorantim group are cement, aluminum and pulp and paper. The
Votorantim group is also involved in other industries, including metallurgy,
financial services, chemicals and agribusiness. The following chart shows our
ownership structure and principal subsidiaries as of December 31, 2008. See
“Item 4.C.—Organizational Structure” for the total economic structure of VCP and
“Item 5.A - Operating and Financial Review and
Prospects – Operating Results – Recent Developments” for prospective changes in
our ownership structure and principal subsidiaries:




26










VCP’s
immediate parent company is VID, which in turn is ultimately controlled by VPAR,
which in turn is controlled by Hejoassu Administração S.A. which is controlled
by the Ermírio de Moraes family. As of December 31, 2008, our total shares
outstanding were 201,361,416 (105,702,452 voting and 95,658,964
preferred).




As a
result of the purchase of an additional equity interest in Aracruz and corporate
re-organization of VCP, both of which occurred during the first semester of 2009
our ownership structure and principal subsidiaries as of May 31, 2009 is
presented in the following chart:










As of May
31, 2009, our total shares outstanding were 412,155,668 (167.807.715 voting and
244.347.953 preferred). See “Item 5.A – Operating and Financial Review and
Prospects – Operating Results – Recent Developments”.




Our
Business Strategy




We intend
to be one of the leaders in the pulp and paper industry, building on our
competitive strengths with the aid of the Votorantim Management System (SGV –
Sistema de Gestão Votorantim) in order to create sustainable value to our
shareholders. The principal components of our strategy are to:




·
            be
      an important player in the international pulp market, leveraging the
      structural competitive advantages in
Brazil;




·
            consolidate
      our leadership position in the growing regional market for specialty
      papers;




27




·
            expand
      our production capacity through both mill expansion and strategic
      acquisitions, alliances and joint ventures to meet increased demand in
      both the domestic and export
markets;




·
            achieve
      sales of 6 million tons per year of market pulp and maintain a selective
      presence in key profitable paper markets;
and




·
            focus
      on research and development and in genetics development aided by
      operational efficiency and cost control
  programs.




Expand
our presence in the international pulp market




We intend
to take advantage of our competitive strengths to increase our market share in
the international pulp market. In 2008 and 2007, we sold approximately 80% of
our market pulp tonnage outside of Brazil, compared to 2% in 1996 when we began
exporting. Our technology, productivity, sustainability of our forest operations
and our use of cloning methods in addition to the high forest yields due to
climate and soil conditions in Brazil and the short harvest cycle are important
competitive advantages over producers in many other countries, and allow us to
play an active and competitive role in the global pulp market. The Jacareí
expansion, completed in 2005, together with the initial (2001) investment in
Aracruz as complemented by the subsequent (2009) acquisition of an additional
equity interest in Aracruz (see “Item 5A Operating and Financial Review and
Prospects - Operating Results – Recent Developments”) has reinforced, our
presence in the international pulp market. The Três Lagoas pulp mill obtained
via our asset exchange with International Paper, which began production on March
30, 2009, as supported by continued investment in new forestry bases in the
Brazilian states of Rio Grande do Sul and Mato Grosso do Sul, are sources for
our future organic growth in the pulp business.




Maintain
our leadership position in the growing regional market for coated, thermal and
carbonless papers




We are
currently a market leader for value-added papers, such as coated papers, in
Brazil. We are also one of the main players for uncoated printing and writing
paper in Brazil. We expect domestic demand to grow along with the expected
growth in the economy of Brazil over the next few years. In order to consolidate
our market position, we focus on long-term relationships with our customers by
seeking to increase our understanding of our customers and their industries and
to tailor our products to their specific needs. Our investment in Conpacel
(formerly Ripasa) strengthens our presence in the domestic coated and uncoated
market.




Continue
to shift our paper sales mix toward higher margin products




We
believe that an improved product mix with more value-added products can increase
operating margins even if average paper prices do not improve significantly. In
addition, these products are subject to less cyclical price variations.
Therefore, we seek to increase our production of value-added paper products,
such as coated, thermal, carbonless and other specialty papers; our sales of
these papers increased to approximately 60% of our net paper sales in 2008, from
approximately 33% in 1998. We are producing higher margin products to replace
products that Brazilian consumers previously had to import, such as labels for
beer and soft drinks.




We have
developed our production facilities for thermal and carbonless papers through a
licensing arrangement with a leading producer in the area of chemical papers,
Oji Paper, which allows us to benefit from Oji Paper’s technology. We expect to
continue to benefit from an increase in domestic demand and continue to work
closely with our customers to develop new products. We estimate that, since
2003, we have lost approximately 14% of our coated paper domestic market share
mainly to imports, which became more competitive as the real appreciated against the
U.S. dollar. We now plan to take advantage of the opportunity to recover our
market share, due to the depreciation of the realagainst theU.S. dollar that has
occurred during the last five months of 2008.




Increase
operating efficiencies




28




We intend
to remain a low-cost producer of pulp and paper by continuing our ongoing
program to increase operating efficiencies and reduce operating costs per unit.
We intend to continue to:




·
            focus
      on reducing wood costs through increased eucalyptus yields and reduced
      harvesting costs;




·
            focus
      on improving the efficiency of our operations through investment in
      harvesting equipment, production facilities and advanced information
      technology; and




·
            improve
      information flow to facilitate
decision-making.




Continue
to develop state-of-the-art technology in the forest area




Technological
research and improvement has made it possible to attain productivity records,
together with a lesser impact on the environment. In the forest area, the gain
in competitiveness is the result of an intense research program and the adoption
of modern forestry practices. The genetic improvement of eucalyptus trees
allowed for the plantings of clones of selected trees, resulting in higher
productivity. Today, 95% of planting is done with cloned seedlings. We have
achieved speed, better seedling use and quality thanks to a pioneering procedure
of multiplication of clones. We use the most modern technology for planting,
harvesting, storing and transporting with a completely mechanized system.
Currently, wood production per hectare has reached 45-50 cubic meters, compared
to 30 cubic meters recorded in 1987.




Expand
our forest and mill production capacity through both expansion and strategic
acquisitions to meet increased demand in both the domestic and export
markets




We intend
to further increase our production capacity through both the expansion of
existing facilities and strategic acquisitions. We continue to pursue growth
opportunities to create value for our shareholders through strategic
acquisitions, alliances and joint ventures and we intend to participate in the
continuing consolidation among pulp and paper producers, both domestically and
internationally.




In
February 2007, we exchanged our existing Luiz Antonio pulp and paper facility
for a pulp mill project in the state of Mato Grosso do Sul, which was mostly
funded by International Paper, which was completed and began operating on March
30, 2009. In 2009 we expect to complete the acquisition of an additional equity
interest in Aracruz resulting in control via shareholder agreement of that
entity and, as a result, operate it in a coordinated manner with our existing
facilities. See “Item 5.A Operating and Financial Review and Prospects –
Operating Results – Recent Developments” for additional information regarding
the acquisition of an equity interest in Aracruz. We continue to acquire land
for a new forest base in both the south and western regions of Brazil, preparing
fiber supply for future business expansions. Between 1997 and 2008, the average
annual rate of paper consumption in Brazil increased by 3.0%, reaching 9.0
million tons in 2008, as estimated by Bracelpa. In recent years, there has been
a marked increase in paper consumption in Brazil. We believe that demand for
pulp and paper in the domestic and export markets will continue to grow over
time. See “Item 3D – Risk Factors - Risks Relating to our Business Combination
with Aracruz”.




Our
Products




We
produce a variety of pulp and paper products. We produce pulp both for sale
(market pulp) and for use in our paper production. We sell BEKP to both the
Brazilian domestic and export market. We produce coated and uncoated printing
and writing paper and other specialty/chemical papers. Within the printing and
writing paper category, we produce cut-size, folio-size, and rolled products.
The following table sets forth the breakdown by categories of our net operating
revenues for the periods indicated:




29




Years
      ended December 31,2008
                    
                    
                    2007
                    
                    
                    2006Market
      Pulp
                    
                    
                    56
                    %
                    
                    
                    49
                    %
                    
                    
                    39
                    %Paper:Uncoated
      (P&W/Cut Size)
                    
                    
                    14
                    %
                    
                    
                    19
                    %
                    
                    
                    31
                    %Coated
                    
                    
                    10
                    %
                    
                    
                    13
                    %
                    
                    
                    13
                    %Specialty
      / Chemical papers
                    
                    
                    20
                    %
                    
                    
                    19
                    %
                    
                    
                    17
                    %





Pulp




Production




The
following table sets forth our total hardwood pulp production, total Brazilian
hardwood pulp production, and our hardwood pulp production as a percentage of
total Brazilian pulp production for the periods indicated:




Years
      ended December 31,2008
                    
                    
                    2007
                    
                    
                    2006VCP’s
      production (in tons)
                    
                    
                    1,404,489
                    
                    
                    
                    1,394,370
                    
                    
                    
                    1,444,480Total
      Brazilian production (in tons)
                    
                    
                    12,850,000
                    
                    
                    
                    11,997,000
                    
                    
                    
                    11,180,000VCP’s
      production as percentage of total Brazilian production
                    
                    
                    11.0
                    %
                    
                    
                    11.6
                    %
                    
                    
                    12.9
                    %







Sources:
Bracelpa and VCP. Figures for Brazilian production of 2007 and 2006 as reported
in previous annual reports of the company have been changed due to updated
reports released by Bracelpa.




In 2008,
we sold 1,200,768 tons of bleached pulp as market pulp to third parties in the
domestic market and outside of Brazil. We had a 29% share of the Brazilian
domestic market for bleached hardwood pulp according to Bracelpa’s figures
released in December 2008. In 2008, approximately 76% of our market pulp sales
volume was to customers located outside of Brazil. The following table sets
forth our sales volume of pulp to the export market by geographic region for the
periods indicated:




Year
      ended December 31,2008
                  
                  
                  2007
                  
                  
                  2006Tons
                  
                  
                  %
      of Total
                  
                  
                  Tons
                  
                  
                  %
      of Total
                  
                  
                  Tons
                  
                  
                  %
      of TotalEurope
                  
                  
                  543,745
                  
                  
                  
                  59.6
                  %
                  
                  
                  557,610
                  
                  
                  
                  64.1
                  %
                  
                  
                  508,489
                  
                  
                  
                  61.1
                  %North
      America
                  
                  
                  85,910
                  
                  
                  
                  9.4
                  %
                  
                  
                  81,038
                  
                  
                  
                  9.3
                  %
                  
                  
                  77,075
                  
                  
                  
                  9.3
                  %Latin
      America
                  
                  
                  2,231
                  
                  
                  
                  0.2
                  %
                  
                  
                  1,685
                  
                  
                  
                  0.2
                  %
                  
                  
                  -
                  
                  
                  
                  -Asia/Middle
      East/Oceania/Africa
                  
                  
                  279,626
                  
                  
                  
                  30.8
                  %
                  
                  
                  229,563
                  
                  
                  
                  26.4
                  %
                  
                  
                  246,618
                  
                  
                  
                  29.6
                  %Total
      Exports
                  
                  
                  911,511
                  
                  
                  
                  100.0
                  %
                  
                  
                  869,897
                  
                  
                  
                  100.0
                  %
                  
                  
                  832,182
                  
                  
                  
                  100.0
                  %





In 2008
Santher remained our largest domestic customer of pulp, followed by Ahlstrom and
IBEMA. SCA, SAPPI, UPM-Kymmene & Georgia Pacific were our largest customers
of exported pulp.




Demand
for our pulp has generally exceeded our production capacity even during cyclical
downturns of the pulp industry, and, according to the most recent study issued
by Hawkins Wright, an independent international consulting firm, in December
2008, the projected average demand growth in the world for BEKP, is 5.47% per
year from 2007 to 2012, while the total demand for white pulp is projected to
grow 0.7% in the period.




We have
long-term sales contracts with substantially all of our customers in the
domestic and the export markets. These contracts generally provide for the sale
of our market pulp at prices we announce each month. These prices may vary among
the different geographic areas where our customers are located. Usually the
price arrangements under our long-term contracts are consistent with prices for
our other sales within the same region and follow the established list price of
BEKP announced by major global pulp producers. The sales contracts provide for
early termination in the event of a material breach, the insolvency of one of
the parties or force
majeure events of extended duration.




30




Paper




Our paper
products can be divided into three major categories:




·
            uncoated
      printing and writing papers;




·
            coated
      printing and writing papers; and




·
            carbonless
      and thermal and papers.




The
production and sale of uncoated printing and writing papers is our major line of
paper business, accounting for approximately 48% of our total net paper sales
and 94% of our paper exports in 2008. The following table provides a brief
description of our principal paper products and lists the facilities where they
are produced:




Product
              
              Description
              
              FacilityCoated
      printing and writing paper
              
              Coated
      woodfree paper used for promotional materials, folders, internal sheets
      and cover of magazines, books, tabloids, inserts and
    mailing.
              
              Piracicaba
                AmericanaUncoated
      printing and writing paper
              
              Uncoated
      woodfree paper in reels, sheets and cut-size designed for maximum
      performance in photocopying machines and laser and inkjet printers, and
      alkaline offset paper.
              
              AmericanaCarbonless
      paper
              
              Used
      to produce multi-copy forms for credit card receipts, invoices and other
      applications in place of traditional carbon paper.
              
              PiracicabaThermal
      paper
              
              Traditionally
      used in fax machines; new applications include supermarket receipts, bar
      code labels, toll tickets, water and gas bills and receipts for ATMs and
      credit card machines.
              
              Piracicaba





Source:
VCP.




Production




Production
of paper is a multi-stage process, which begins with the production of its
principal raw material, pulp, from wood. Throughout the production process from
wood to paper, various pulp and paper products are produced that may be
converted by us into value-added products or sold.




We employ
advanced, automated harvesting equipment in our forests. On easily accessible
terrain, the harvesting process involves a feller-buncher that cuts and gathers
a number of trees and lays them in bundles in the forest. Branches are removed
by advanced equipment. A skidder then carries the trees to a track area, where a
log cutter removes the tops, cuts the trees into logs and loads the logs on
trucks for transportation to the mill. On difficult terrain, a harvester cuts,
de-limbs and debarks the trees, then cuts them into logs and stacks them in
bundles in the forest. A forwarder carries the bundles to a loading area, where
a loader loads the logs on trucks for transportation to the mill. Recently, we
acquired a simulator to train harvest equipment operators, which lowers the
number of hours dedicated to employee training, in addition to reducing
equipment-operating time.




The logs
are transported by truck from the forests. The logs are then taken by conveyor
belt to be debarked and chipped. The chips are sent to digesters, where they are
mixed with chemicals and cooked under pressure. During this process, lignin and
resins are removed from the wood. The removed lignin is used as fuel for the
pulp mill.




31




In 2001,
we introduced a new, more efficient production process whereby wood chips for
the production of pulp are produced at plantation sites using portable chipping
equipment. With these chipping machines, we are able to carry out chipping in
the forest and thereby improve tree utilization and reduce noise levels at the
mill. In addition, forest residues are returned directly to the plantation soil,
contributing to the recycling of nutrients. Approximately 30% of the wood
required for the Jacareí mill is supplied in the form of chips directly from the
forest.




The
unbleached pulp is then sent through the oxygen delignification process and the
chemical bleaching process. The cellulose fibers are screened, pressed and
dried. The dried pulp is cut into sheets and baled, resulting in market pulp. In
recent years, pulp customers, particularly in Europe, have preferred pulp that
is bleached with little or no chlorine compounds due to environmental concerns
relating to the bleaching process. All of the phases in the pulp production
process that have reduced amounts of chlorine create effluents, which are sent
to an effluent treatment station, where approximately 90% of the organic charge
is removed.




To
produce printing and writing paper, we use 100% short-fiber eucalyptus bleached
pulp. Once in the paper mill, the pulp is sent to refiners, which increases the
level of resistance of the fibers for the production of specific grades of
paper. Certain materials are then added to the refined pulp to strengthen and
improve the quality of the paper. These additives include synthetic sizing and
precipitated calcium carbonate (the alkaline process). The mixture is pumped to
the paper machine where the paper is pressed and dried. Finally, the resulting
paper is sent to be finished in accordance with client
specifications.




The
following table sets forth our paper production, total Brazilian paper
production, and our total paper production as a percentage of total Brazilian
production for the periods indicated:




Year
      ended December 31,2008
              
              
              2007
              
              
              2006VCP’s
      production* (in tons)
              
              
              316,684
              
              
              
              423,568
              
              
              
              611,044Total
      Brazilian paper and paperboard production (in tons)
              
              
              9,154,000
              
              
              
              9,010,000
              
              
              
              8,724,631VCP’s
      production as percentage of total Brazilian production
              
              
              3.4
              %
              
              
              4.7
              %
              
              
              7.0
              %





Sources:
Bracelpa and VCP.


(*) Considers
total production paper and coater machines, excluding base paper production for
coated paper.




Printing and Writing Paper.
According to Bracelpa, in 2008, we were Brazil’s fourth largest producer of
uncoated offset paper, third largest producer of uncoated cut-size paper and
second largest producer of coated paper. During 2008 we produced 251,358 tons of
printing and writing paper consisting of 155,216 tons of uncoated and 96,142
tons of coated paper. Our coated paper is used for a variety of purposes,
including labels, inserts, brochures and magazine covers. Uses for our uncoated
paper include notebooks, books and continuous forms. We produce coated and
uncoated paper in reels and sheets and in cut-size paper. We currently have
estimated domestic market shares of 19%, 8% and 12% in the coated, uncoated
(offset) and cut-size printing and writing markets, respectively.




The
following table sets forth our printing and writing paper production, total
Brazilian printing and writing paper production and our production as a
percentage of Brazilian production of such products for the periods
indicated:




Year
      ended December 31,2008
              
              
              2007
              
              
              2006VCP’s
      production* (in tons)
              
              
              251,358
              
              
              
              348,065
              
              
              
              525,476Uncoated
      paper (in tons)
              
              
              155,216
              
              
              
              202,115
              
              
              
              382,436Coated
      paper (in tons)
              
              
              96,142
              
              
              
              145,950
              
              
              
              143,040Total
      Brazilian production (in tons)
              
              
              2.504,000
              
              
              
              2,538,833
              
              
              
              2,512,956VCP’s
      percentage of Brazilian production
              
              
              10
              %
              
              
              13.7
              %
              
              
              20.7
              %





Sources:
Bracelpa and VCP.


(*) Considers
total production paper and coater machines excluding base paper production for
coated paper.




32




Carbonless and Thermal
Papers. In 2008, we produced 65,326 tons of carbonless and thermal paper
at our Piracicaba production facility. We produce carbonless and thermal paper
in reels and sheets for use as facsimile and medical paper as well as
supermarket receipts, banking and commercial automation paper, bar code paper,
toll tickets and commercial invoices.




In
addition, we have a technology transfer agreement with Oji Paper pursuant to
which Oji Paper agreed to share secret formulae, processes, technical
information and know-how developed by it for thermal paper. The agreement also
grants us an exclusive, non-assignable license to manufacture and sell certain
thermal papers in Brazil and a non-exclusive, non-assignable license to sell
such products in Latin America, Africa and the Middle East. This existing
agreement was enhanced by the execution, in August 2007, of a long-term SBA with
Oji Paper. The agreement will allow us to further expand the offering of thermal
paper technologies in Brazil and the Latin America region, thereby allowing Oji
to expand its worldwide presence as a market leader in thermal technology.
Through the execution of the SBA, we will be able to draw on the technologies of
Oji as well as their global subsidiaries including the technology of KSP, Kanzan
and OPT. Going forward, we will be prepared to meet the growing demands of an
expanding market by drawing on the technological process of Oji Paper globally.
The SBA agreement coupled with the expansion of our Piracicaba mill will permit
the continuation of enhanced quality and improved value to our
customers.




Other Specialty Papers. Prior
to the sale of Mogi das Cruzes mill in May 2007 we were one of the largest
producers of specialty papers in Latin America. With the sale of this facility
we have exited this line of paper business as part of our strategy of shifting
our paper sales mix to higher margin products.




The
following table sets forth our carbonless, thermal and other specialty paper
production.




Year
      ended December 31,2008
              
              
              2007
              
              
              2006VCP’s
      carbonless and thermal paper production* (in tons)
              
              
              65,326
              
              
              
              67,148
              
              
              
              62,466VCP’s
      other specialty paper production* (in tons)
              
              
              -
              
              
              
              8,355
              
              
              
              23,102Total*
      (in tons)
              
              
              65,326
              
              
              
              75,503
              
              
              
              85,568








Sources:
VCP.


(*) Includes
total paper production and paper processed by our coater machines, excluding
base paper production for coated paper.




Sales




We sell
our paper products in all major world markets. The following table sets forth
our sales volume of paper to the export market by geographic region for the
periods indicated:




2008
                  
                  
                  2007
                  
                  
                  2006Tons
                  
                  
                  %
      of total
                  
                  
                  Tons
                  
                  
                  %
      of total
                  
                  
                  Tons
                  
                  
                  %
      of totalNorth
      America
                  
                  
                  11,644
                  
                  
                  
                  25.9
                  %
                  
                  
                  20,774
                  
                  
                  
                  21.3
                  %
                  
                  
                  59,822
                  
                  
                  
                  31.8
                  %Latin
      America(1)
                  
                  
                  26,615
                  
                  
                  
                  59.2
                  %
                  
                  
                  57,883
                  
                  
                  
                  59.4
                  %
                  
                  
                  51,531
                  
                  
                  
                  27.4
                  %Europe
                  
                  
                  6,699
                  
                  
                  
                  14.9
                  %
                  
                  
                  15,648
                  
                  
                  
                  16.0
                  %
                  
                  
                  62,536
                  
                  
                  
                  33.3
                  %Middle
      East/Asia/Africa/Other
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  3,194
                  
                  
                  
                  3.3
                  %
                  
                  
                  14,150
                  
                  
                  
                  7.5
                  %Total
      Exports
                  
                  
                  44,958
                  
                  
                  
                  100.0
                  %
                  
                  
                  97,499
                  
                  
                  
                  100.0
                  %
                  
                  
                  188,039
                  
                  
                  
                  100.0
                  %







(1)
            Excluding
      Brazil.




33




The
following table sets forth our domestic sales of specialty, carbonless and
thermal paper, Brazilian specialty, carbonless and thermal paper sales, and our
sales as a percentage of Brazilian sales for such products for the periods
indicated:




Year
      ended December 31,2008
              
              
              2007
              
              
              2006VCP’s
      carbonless and thermal paper sales (in tons)
              
              
              73,308
              
              
              
              66,353
              
              
              
              64,186VCP’s
      other specialty paper sales(1)(in tons)
              
              
              56,104
              
              
              
              48,054
              
              
              
              45,976Total
      (in tons)
              
              
              129,412
              
              
              
              114,407
              
              
              
              110,162








(1) Includes
sales of third-party products by KSR and sales of specialty papers produced at
the Mogi das Cruzes mill (divested in May 2007).


Source:
VCP




Printing
and writing paper represents the largest category of paper exports from Brazil.
In 2007 and 2008, we exported 96,424 tons and 43,251 tons, respectively, of
printing and writing paper, which primarily consisted of uncoated
paper.




The
following table sets forth our exports and domestic sales of coated and uncoated
papers for the periods indicated:




Year
      ended December 31,2008
              
              
              2007
              
              
              2006VCP’s
      exports (in tons)
              
              
              44,505
              
              
              
              96,424
              
              
              
              187,644Brazilian
      exports (in tons)
              
              
              848,913
              
              
              
              855,165
              
              
              
              800,297VCP’s
      percentage of Brazilian exports
              
              
              5.0
              %
              
              
              11.3
              %
              
              
              23.4
              %VCP’s
      domestic sales (in tons)
              
              
              219,465
              
              
              
              286,288
              
              
              
              371,393Brazilian
      market (in tons)
              
              
              1,662,911
              
              
              
              1,599,251
              
              
              
              1,616,800VCP’s
      percentage of Brazilian market
              
              
              13.0
              %
              
              
              18.0
              %
              
              
              23.0
              %








Sources:
Bracelpa and VCP.




The
customer base for our paper products is diversified. None of our customers
individually accounted for more than 10% of our domestic or international sales
as of December 31, 2008. In 2007 one customer accounted for 19% of our total
trade accounts receivables.




We have a
commercial agreement with Ahlstrom, which acts as a commercial representative,
and we will sell printing, writing and coated paper produced by Ahlstrom. This
agreement ends at September 2010.




Raw
Materials




Wood




Our pulp
production is 100% based on bleached eucalyptus hardwood grown in sustainable
forest plantations. We use modern technologies that enable us to obtain high
product quality in producing ECF pulp and VCF pulp.




We rely
exclusively on eucalyptus trees to meet our pulpwood requirements. Eucalyptus
trees are among the fastest growing trees in the world. The combination of
modern technology with Brazil’s climate and soil conditions permit eucalyptus
tree harvest rotations of approximately seven years. The table below presents
both the harvest rotation cycle and the per annum yield per hectare in Brazil as
compared to those of other principal pulp producers and illustrates this
competitive advantage:




34




Country
                                
                                Harvest (years)
                                
                                Yield (m3/ha/yr)Brazil
                                
                                7
                                
                                45-50Argentina
                                
                                7-12
                                
                                25Chile
                                
                                10-12
                                
                                20-50Indonesia
                                
                                7
                                
                                20-35Australia
                                
                                7
                                
                                20-25Iberia
                                
                                12-15
                                
                                10-12Sweden
                                
                                35-40
                                
                                5.5Finland
                                
                                35-40
                                
                                4USA
                                
                                25
                                
                                10Canada
                                
                                45
                                
                                7





The
following table presents a comparison of the forest area required to produce the
quantity of wood necessary to operate a 100,000 ADTB/year (equivalent of 1
million tons per year) pulp mill in Brazil to those of other principal pulp
producing areas and further illustrates this competitive advantage:





Country
                          
                          Area
      - haBrazil
                          
                          
                          100,000Iberian
      Peninsula
                          
                          
                          300,000Scandinavia
                          
                          
                          720,000


Source:
Pöyry Engineering




Energy
and chemicals




We use
several sources to generate thermal and electrical energy for the pulp and paper
production process, including biomass derived from wood debarking, chip
screening rejects, fuel oil, natural gas and black liquor. By producing
electricity internally, we realize substantial savings compared to purchasing
electrical energy in the open market. In 2008, we generated approximately 82.6%
(82.3% in 2007) of our energy requirements for the pulp and paper production
process internally, of which 85.3% was from renewable fuels, such as biomass and
black liquor, and 14.7% was from non-renewable fuels, such as fossil fuels (oil
and gas). The separate Conpacel facility generated approximately 45% (40% in
2007) of its energy requirements for the pulp and paper production process
internally, of which 84% was from renewable fuels, such as biomass and black
liquor, and 16% was from non-renewable fuels, such as fossil fuels (oil and
gas). Recovery boilers recycle substantially all of the chemicals used in the
pulp production process. We believe that our sources of supply will allow us to
maintain a cost advantage in these areas for the foreseeable
future.




In 2008
we purchased approximately 17.4% (17.7% in 2007) of our energy requirements from
concessionaires, including CPFL—Companhia Paulista de Força e Luz (for the
Piracicaba facility), Bandeirante (for the Jacareí facility) and Eletropaulo
(for our headquarters), as well as from fuel oil and natural gas suppliers. The
separate Conpacel facility purchased approximately 55% (60% in 2007) of its
energy requirements from concessionaires, including Duke Energy and Elektro, as
well as from fuel oil and natural gas suppliers. In 2007, we began operating a
new combined cycle gas turbine and heat recovery boiler in the Jacareí mill,
and, consequently, reduced the global percentage of our purchased electrical
energy from 34% to 17%. The new gas turbine system improved our already low
dependence on external supplies of energy.




The pulp
production process traditionally involved the use of elementary chlorine. In
recent years, demand for pulp that is bleached with little or no chlorine has
grown significantly because of concerns over possible carcinogenic effects of
chlorinated organic compounds released in water. This pulp, known as elementary
chlorine-free pulp, or ECF, is produced without using elementary chlorine in its
bleaching process. It uses chlorine dioxide instead. As a result, we only
produce ECF pulp. Our bleaching sequences are based mostly on oxygen compounds,
such as oxygen, ozone and hydrogen peroxide, which are more environmentally
friendly. In addition, we have developed a bleaching process referred to as
Votorantim chlorine free, or VCF pulp, which utilizes a smaller amount of
chlorine dioxide than the ECF process. The separate Conpacel facility has a
similar production process. In 2008, 100% of our pulp was produced without the
use of elementary chlorine.




35




At
December 31, 2008, we had long-term “take-or-pay” contracts with suppliers of
chemical products for periods from 1 to 10 years. Our contractual obligations in
connection with such contracts are US$ 64 million per year. Additionally, we
have long-term “take-or-pay” contracts with a supplier of pulp for 30 years. The
contractual obligation in connection with this contract is US$ 65 million per
year. See Note 15(d) to our audited consolidated financial
statements.




Water




Water,
while not a significant cost component of our raw materials, is essential to the
production of pulp and paper. We currently
require about 23.4 cubic meters to produce one metric ton of pulp or paper (26
cubic meters in 2007), one of the lowest usage rates within the pulp and paper
industry, and are continuously introducing
new technology and implementing improvements in our industrial processes and
methods to further decrease these usage rates. The separate Conpacel facility
currently requires 24.4 cubic meters of water per ton of pulp and paper (23.8
cubic meters per ton of pulp and paper in 2007). These new technologies and
processes also permit us to remain in strict compliance with the environmental
regulations under which we operate.




We
believe that our water supplies are currently adequate. The water we use is
obtained from either the Paraiba do Sul and Piracicaba river systems, which are
adjacent to our mills, and each river system is within a separate hydrological
river basin; thereby reducing the overall risk of unavailability of water due to
adverse atmospheric or hydrological conditions. The Brazilian government imposes
tariffs on the industrial usage of river water. These tariffs, imposed since
2003 and 2006 in the Paraiba do Sul and Piracicaba river systems, respectively,
have not had a significant impact on our costs.




Eco-efficiency




Our
papers now emphasize eco-efficiency throughout the production process, including
packaging containing the seal of approval emblem of the Forest Stewardship
Council (FSC), highlighting the care shown regarding environmental preservation
in each product sold. At the beginning of 2007, we introduced the new Copimax
paper packaging highlighting the fully self-sustainable nature of its
production. The brand furthermore showed its pioneering quality in the Brazilian
market for printer and copier papers: it was the first to receive the Forest
Stewardship Council (FSC) seal of approval, a worldwide recognition of products
deriving from responsible forestry management and manufacturing policies. Other
elements of our eco-efficiency production factors include:




·
            Sustainably
      managed forests in the state of São Paulo, awarded FSC
      certification;




·
            Low
      consumption of water to produce pulp: 23-24 cubic meters per ton
      produced;




·
            Reutilization
      of 85% of the water in the production
process;




·
            84%
      of energy comes from renewable sources, such as
  biomass;




·
            Reduction
      of the emission of greenhouse gases through control of atmospheric
      emissions, and the priority use of railroads and waterways for the
      transportation of raw materials and finished
  products;




·
            100%
      of the industrial residues are treated through the 3R concept (reduce,
      reutilize, recycle);




·
            First
      Brazilian company in the sector to sign the U.N.’s international Cleaner
      Production Declaration; and




·
            Socio-environmental
      programs that encourage the development of partners in
      communities.




36




Transportation




For wood
transportation we use trucks and the railroads, while the separate Conpacel
facility uses only trucks. The trucks are owned and operated by independent
contractors to transport wood from our forests to our production facilities. The
train is operated by a private railway concession and also transports wood from
our forests to a dedicated wood train terminal in the Jacareí Mill. Our forests
are located an average distance of 357 kilometers from our pulp mills. We also
use trucks owned and operated by third parties to transport finished pulp and
paper products from our facilities to our customers in Brazil and other regions
in Latin America. To the port of Santos, from which we handle 100% of our
exportation of products, we transport our products by train. Santos is located
on the coast of the state of São Paulo, approximately 150 kilometers from the
Jacareí mill.




In 1998,
we obtained a concession from the state government of São Paulo to operate a
terminal and a warehouse in Santos under a renewable ten-year operational lease
agreement with CODESP, which is the government-owned corporation that owns and
operates the port. This lease was non-cancelable during the initial period and
set to expire in 2007. In September 2003, an amendment to the agreement renewed
it for another ten years from September 2007 to September 2017. The terminal has
facilitated the growth of our exports because it allows us to load vessels with
pulp directly from our terminal, thereby significantly reducing freight and
handling costs. Our yearly expense for this has been approximately US$ 0.3
million, and future annual lease payments under the CODESP lease will also be
approximately US$ 0.3 million per year. There is no contingent rent under the
contract. In addition, in 2001, we rented another warehouse at the terminal in
Santos in anticipation of future increases of our pulp exports as a result of
the Jacareí expansion. This expanded our total warehouse area in Santos to
16,020 square meters from 9,550 square meters, and our total warehouse volume
capacity in Santos increased to 38,000 tons from 28,000 tons.




In
December 2002, we signed a contract with MRS Logística S.A., or MRS, a private
railway concession, permitting the construction of a railway spur-line
connecting the Jacareí plant to MRS’s main railroad line, and thereby enabling
us to transport pulp by rail from the mill to the port of Santos. In March 2005,
we signed another contract with MRS to transport wood to our Jacareí mill and
also approved an investment to construct a railway terminal to receive this wood
in the Jacareí plant. The new wood terminal has been operational since October
2005 and has resulted in a significant reduction in VCP’s wood transportation
costs. As part of our agreement with MRS in 2002, MRS was responsible for the
reconstruction of the 27-kilometer railway spur-line and the investment in
dedicated railway wagons, while we were responsible for the construction of
terminals inside the Jacareí plant and at the port of Santos. Total investment
was approximately US$ 9.4 million and we were responsible for 50% of such costs,
which amounts have been disbursed. The pulp transportation agreement also
requires the transportation of a minimum tonnage, equivalent to US$ 7.4 million
per year, over a ten-year period. For the wood transportation agreement, the
minimum tonnage requirement is equivalent to US$ 1.3 million per year, starting
in 2006. In 2008, we shipped 765,000 tons of pulp and over 112,000 tons of wood
through MRS and paid approximately US$ 12.1 million to MRS.




In 2007
we conducted a bidding process for the outsourcing of integrated logistics for
the plants of Jacareí, Piracicaba, Ripasa and Três Lagoas for four years. This
contract was awarded to Abrange Logística, a logistics operator that has reduced
our costs by capturing economies of scale and synergies. Abrange Logística was
contracted to handle all the operational logistical activities for these plants,
from receiving the raw material to delivering the product to the final customer.
This has resulted in lower costs, gains of scale, lower investment in
infrastructure and greater specialization in providing services to clients.




Further
to this new logistics outsourcing contract, VCP established in 2008 a
strategically located Distribution Center (DC) accessible by two major road
systems (Anhanguera and D. Pedro) in Campinas, São Paulo. This DC is specialized
in handling and storage of paper in reels and pallets. The total covered storage
area is 15,000 square meters which provides a storage capacity of approximately 21,000 metric tons of paper. VCP’s
Piracicaba and Conpacel paper mills now transfer the majority of their
production to this DC where the products are stored and efficiently distributed
with a lesser average transit time.




Another
logistical advantage is derived from KSR, our paper distribution unit which is
the leader in the sector in Brazil. KSR plays a strategic role by reaching all
regions of Brazil and servicing clients in areas such as printing, editorial,
stationery, copying, small business, converters (forms, notebooks), newspaper
and public bodies. KSR has 19 affiliates and an automated storage system which
results in fast service, supported by a specialist fleet which can make
deliveries throughout Brazil.




37




In
October 2007, our subsidiary VCP-MS signed an agreement with ALL to provide
transport services for more than 1 million tons per year of pulp from Três
Lagoas to the port of Santos for a twenty year term beginning in 2009. Our total
investment will be approximately US$ 70 million and the object of the agreement
includes primarily (i) railway transportation service from the facility to the
port of the pulp volume produced in Três Lagoas; (ii) construction of a railway
spur line connecting ALL’s main rail line to the facility; and (iii) investments
by both companies for wagons, locomotives and permanent railway
infrastructure.




In
October 2008, VCP-MS and Gear Bulk Terminals signed a 10 year rental and
services agreement via which VCP-MS has rented Gear Bulk’s Terminal 31
facilities in Santos and it will provide storage and terminal handling services.
The terminal site will be totally refurbished by Gear Bulk’s estimated
investments of US$ 8 million. Upon completion of the refurbishment in April
2009, the terminal will have the capacity to store up to 55,000 metric tons of
pulp, utilizing modern equipment including six gantry cranes installed at the
terminal’s roof, and will be able to receive unit trains at any
hour.




During
2008, VCP modified its offshore logistical structure based upon a reassessment
of its distribution channels in Europe, the United States and Asia. The
principal changes were a reduction in the number of ports and logistic service
suppliers (ship owners and terminal operators) from 14 to 10 and from 13 to 7,
respectively. These modifications will ensure that VCP maintains its stable cost
structure and competitive position.




Marketing
and distribution




We sell
our pulp and paper products in both the domestic and export markets. In 2007 and
2008, approximately 76% and 80%, respectively, of our total sales volume of
market pulp and 13% and 20%, respectively of our total sales volume of paper
products was sold outside of Brazil. Our internal sales staff consists of 48
employees operating throughout Brazil. We also have 255 employees assigned to
KSR—our paper distributor— and 80 independent sales agents. Abroad, our sales
staff consists of 11 employees, operating throughout North America, Europe and
Asia.




Through
KSR and our internal sales staff, we focus on developing close, long-term
customer relationships by meeting the customer’s specific requirements. We
constantly seek to increase our understanding of our customers and their
industries and to tailor our products to their specific needs. See “Item
5—Operating and Financial Review and Prospects—Research and development, patents
and licenses, etc.” for a detailed description of our technology upgrades in the
area of customer relationships




Pulp




Our
internal sales staff handles substantially all of our domestic market pulp
sales. We sell pulp to other Brazilian paper producers, including Fábrica de
Papel Santa Therezinha S.A. (a company specialized in the production of tissue
and special paper), Arjo Wiggins Ltda. (the largest producer of security and
fine papers) and the former Ahlstrom facility within the Jacareí mill (a joint
venture with Ahlstrom from September 2007 until VCP’s minority interest was
acquired by Ahlstrom in August 2008). In addition, due to the expansion of the
Jacareí facility completed in 2005, we sell significant quantities of market
pulp abroad. In order to distribute and market this additional market pulp, we
operate our own terminal at the port of Santos. The delivery of pulp is done
through proper equipment and logistics, providing high productivity in all
stages of the process.




Currently,
our pulp and paper products are distributed overseas through our wholly owned
subsidiary: VCP Overseas Holding Kft branch office, located in Zug, Switzerland,
which is responsible for all export and sales transactions.




In 2007,
we opened our Representative Office in China, located in Shanghai to develop a
closer relationship with our clients in Asia and to pursue new profitable supply
agreements for our company’s future expansions.  Our North American client
liaison and new business development activities are conducted from our Baltimore
office.  Independent sales agents are used in some of the markets
currently deemed to be non-strategic.




38


Paper




In 2008,
approximately 88% of paper sales volume and 93% of our net revenues derived from
paper came from the domestic market, compared to 80% and 87%, respectively, in
2007.  We sell 15% of our paper products through
KSR.  Domestically, KSR’s distribution network consists of 34
branches, which are strategically located with warehouses used for storage
purposes, and a workforce composed of 99 independent sales agents.  In
2008, KSR was the segment leader in paper distribution in Brazil, with a market
share of approximately 22% of the total sales in this market.  Through
KSR, we sell our paper products to approximately 16,200 customers, including
small printers, stationery stores and industrial companies throughout Brazil, as
well as the Brazilian government.  KSR also sells the products of
other paper companies in areas where they do not compete with us, in both the
export and domestic markets.  As a result, we are able to offer a wide
range of complementary products, with prompt delivery.  In 2008,
through KSR we had net revenues of US$ 162 million, representing 29%
(US$ 151 million and 22%, respectively, in 2007) of our total consolidated
paper sales in the domestic market.




Vendor
Program




Sales of
our products to our domestic customers are for cash, credit or through a program
called the vendor program.  For purposes of this annual report, we
have referred to our credit sales as the “non-vendor program.”




The
vendor program, available to only some of our customers, is a means by which the
bank essentially finances our customers’ purchases.  Under this
program, the customer agrees to pay the bank at a later date and the bank in
turn pays us on behalf of the customer for the purchase price of the product
upon its delivery to the customer.  We, as the vendor, act as a
guarantor under the program of the value of the sale plus the interest on the
funds charged to the customer.  As a result, the customer can take
advantage of lower interest costs that arise as a result of the bank looking to
us, and not our individual customers, as the primary support for the credit
risk.  In addition to the lower interest cost, the customer obtains
additional benefits in the form of lower value-added taxes since the interest
charged by the bank to the customer is not subject to these taxes that would
otherwise have accrued had we incorporated the finance charges into the sales
value and billed the amount directly to our customer.  The terms of
sale under the vendor program depend on the customer’s credit rating, which is
based on our own internal credit review, and typically are for 150 to 160 days;
although in the case of a few selected customers may be up to either 180 or 240
days.  We estimate that during each of the years 2006, 2007 and 2008
an average of approximately 8% of our total regular domestic customers obtained
our guarantee for our sales of product to them and these sales represented 22%,
23% and 31%, respectively of our total domestic sales value.  The
amount of the guarantee outstanding was US$ 120 million, US$ 127 million and US$
112 million at December 31, 2006, 2007 and 2008, respectively.




This
guarantee does not expose the Company to any greater risk or net obligation than
a credit sale.  We retain the same risk of loss on customer accounts
under the vendor program that we do under our own non-vendor program sales, and
we mitigate this risk by the continuous evaluation of both vendor and non-vendor
receivables for collectability.  In the case of a non-vendor credit
sale, revenue is recorded on shipment, and a receivable is
created.  If the credit sales customer does not pay the receivable,
then the Company would establish a doubtful accounts allowance if it considered
loss to be probable.  In a vendor financed sale, the Company records
revenue also on shipment and receives full payment from the bank.  If
the customer does not pay the bank within the specified time period, the Company
must satisfy its guarantee with the bank.  The Company would, at that
time, charge the obligation to selling expenses if it considered the loss to be
probable.  The Company would then look to the customer for payment on
the sale.  At this point, after satisfying the guarantee to the bank,
the Company is in the same position as if it had made a credit sale; the
customer owes the Company for the value of the sale.  If the customer
does not pay, the Company loses the value of the sale which had been recorded as
a bad debt expense.  The Company’s losses from guarantees, net of
amounts recovered from our customers, has historically been
negligible.




Annually,
the Company considers the provisions of FIN 45 and Emerging Issues Task Force
(“EITF”) 00-21 “Revenue Arrangements with Multiple Deliverables” in accounting
for the guarantee income from vendor program.  Guarantee income from
these arrangements is not significant and although EITF 00-21 was considered in
the determination of how to account for possible multiple deliverables, we
finally the income from such guarantees considered not to be
material.  The Company recognizes revenue for each of the elements of
the sale when the customer takes delivery.


39




We
consider the vendor program to be an important component of our sales and
marketing efforts and believe that the favorable credit terms we are able to
offer our customers give us an additional competitive advantage.




Competition




The
international markets for pulp and paper products are highly competitive and
involve a large number of producers worldwide.  As an integrated pulp and
paper producer, we compete not only with other integrated pulp and paper
producers but also with companies that produce only pulp or paper.  Many of
these producers have greater financial resources than we do.  Our
production levels have been, and will continue to be, small by comparison to
overall world pulp and paper production, and the prices for our products will
depend on prevailing world prices and other factors.




According
to preliminary information released by Hawkins Wright (an “Outlook for Market
Pulp”) at December, 2008, world market pulp capacity should reach 57.0 million
tons out of which 41% is bleached softwood kraft, 47% is hardwood and the
remaining percentage other pulp grades.  During 2008, the world’s net
capacity of bleached kraft pulp increased by 2.66 million tons (3.56
million tons additions and 905,000 tons capacity closures).




Based on
2008 preliminary figures from Bracelpa on net revenues of Brazilian pulp and/or
paper producers, we were the second largest Brazilian producer, behind
Aracruz.  In the domestic market, with respect to market pulp, we had
the largest Brazilian market share in terms of volume, with 29%.




According
to Bracelpa, with respect to writing and printing uncoated paper, we were the
fourth largest Brazilian producer in 2008 in terms of volume, producing more
than Aracruz, but less than International Paper, Santa Maria and
Suzano.  In addition, in 2008, we were the leader in Brazil in the
production of certain carbonless and thermal paper.  Our main
competitors in carbonless and thermal paper are located outside
Brazil.  We were the second largest Brazilian producer in 2008 in
coated paper in terms of volume, producing less than Suzano with a 19% market
share.




During
the period of 2006 to 2008 our main domestic competitors announced/concluded the
following major changes in the pulp production capacity:




2006:  No
significant events.




2007:




International
Paper: began construction of a 200,000 ton capacity across-the-fence integrated
paper machine project for printing and writing paper adjacent to VCP’s Horizonte
pulp mill project in Três Lagoas, Mato Grosso.




Suzano:
Start-up begins in September of its second pulp line with capacity of 1 million
tons at its Mucuri, Bahia pulp mill.




2008:




Aracruz:
In May it announced its intent, subject to subsequent approval by its Board of
Directors, to (a) together with its partner Stora Enso, expand the production
capacity of the Veracel mill, located in the state of Bahia, by the construction
of a second pulp line with an annual capacity of 1.4 million tons, which would
begin production by the beginning of 2012; and (b) build three river terminals
for the transport of wood and a private maritime port terminal as part
of  its future expansion of the production capacity of its Guaíba, Rio
Grande do Sul, pulp mill. In July it announced its intent, subject to subsequent
approval by its Board of Directors, to build the first of up to three pulp
mills, each with a capacity of 1.4 million tons, in the Governador Valadares
region of the state of Minas Gerais together with the acquisition of land for
the implementation of a forestry base.  Construction of the first mill
would begin in 2013 with expected start-up of operations in 2015.  In
August it announced the approval of its Board of Directors of its plans to
expand the Guaíba mill with the addition of a second pulp line with an initial
capacity of 1.3 million tons; construction had been expected to commence in the
second semester of 2008.


40




In
October 17, 2008, Aracruz announced that it has suspended the construction
activities of the Guaíba facility and the further studies of the implementation
of the other aforementioned projects due to (a) overall market conditions and
(b) its internal financial considerations.




International
Paper: Continued construction of its aforementioned integrated paper mill
project. Start-up occurred in the first quarter of 2009.




Suzano:
Completed the start-up phase of the aforementioned second pulp line at its
Mucuri mill.  In July, announced its intent, subject to the future
approval by its Board of Directors, to (a) expand the production capacity of its
existing two pulp lines at its Mucuri, Bahia facility by 400,000 tons with
conclusion expected during the second semester of 2011; and (b) develop a
forestry base in partnership with Vale do Rio Doce,  Brazil’s largest
natural resource company, in the state of Pará, that together with Suzano’s own
plantations and those of other producers could supply wood to a 1.3 million ton
capacity pulp mill project  that would be built in the state of
Maranhão and with start-up in 2013; and (c) build a second pulp unit with a
capacity of 1.3 million tons in the state of Piauí with start-up in 2014; and
(d) build a third pulp line with a 1.3 million ton capacity adjacent to one of
the units in Maranhão or Piauí, or in another location, with start-up in
2015.




On
October 17, 2008, Suzano announced that it had suspended until further notice
the implementation of all of the aforementioned projects due to overall market
conditions.




In June
2009 Suzano informed the market that, projects (b) and (c) above continue as
part of their current plans.




Environmental
policies




As part
of our commitment to sustainable development, we are developing one of the
largest forest plantations in Brazil.  Annually we plan to plant
approximately 60,000 hectares of eucalyptus to supply the future pulpwood
requirements of the existing and planned mills.  All the forest
operations are developed based on Environmental Planning in order to promote the
environmental improvement of the site, looking for forestry sustainability,
biodiversity and environmental sanity.




By the
end of 2008, the timberland area under our control, in states of São Paulo, Rio
Grande do Sul and Mato Grosso do Sul was about 547,000 hectares, of which 38%
are mainly preserved as conservation areas with native vegetation.  If
we consider approximately 52,000 hectares associated with our 50% stake in
Conpacel, we control more than 600,000 hectares.  For conservation
areas, environmental planning may recommend the plantation or recovery (recovery
by means of natural regeneration) of native vegetation.  In
partnership with various universities, we conduct research and monitor the fauna
and flora of the sites.




These
timberlands are distributed as follows within Brazil:




Total
      area
                    (hectares)
                
                
                Percentage
      of total
                    area
      preserved as
                    native
      forests and/or
                    for
      environmental
                    recoverySão
      Paulo
                
                
                184,113
                
                
                
                37
                %Mato
      Grosso do Sul
                
                
                237,891
                
                
                
                29
                %Rio
      Grande do Sul
                
                
                124,542
                
                
                
                49
                %TOTAL
                
                
                546,546


41





Our
policy for quality of the environment, health and safety, based on the following
principles:




·
            to
      fulfill the needs and expectations of investors, customers, suppliers,
      professionals, communities and other parties involved in our
      business;




·
            to
      operate responsibly and in compliance with laws, regulations and corporate
      commitments;




·
            to
      ensure the integrity, qualification and career development of our
      employees; and




·
            to
      provide continuous improvement in management systems and processes,
      including the prevention and reduction of wastes, accidents and adverse
      impacts on the environment.




We use
technologies that process and bleach pulp and paper wood pulp with ozone, which
minimizes water consumption and reduces effluents and organic chlorine
compounds.




We have
an electronic system that monitors and coordinates all our environmental
activities to facilitate operational control, management of environmental risks
and compliance with legal requirements at the Jacareí plant.




We
obtained an ISO 14001 (environmental) certification for the forestry area and
for the industrial area of the Jacareí mill in
February 2004.  All integrated industries, forestry areas in São
Paulo and the port terminal of Santos are certified as conforming to
international standards.




The
forestry operation in São Paulo is also certified as Well Managed Forest
Plantation by the Forest Stewardship Council- FSC since September 2005
(Capão Bonito Region) and since December 2006 (Paraiba Valley
Region).




Brazilian
environmental regulation and investments




The
federal constitution assigns to the federal government, the states, the federal
district and the municipalities the responsibility for environmental protection
and preservation of the Brazilian fauna and flora.  However, the
authority to enact laws and issue regulations with respect to environmental
protection is granted jointly to the legislative branches of the federal
government, the states and the federal district.  The municipalities
may only issue regulations with respect to matters of local interest or to
supplement federal and state laws.  The state agency for pollution
control in the state of São Paulo is CETESB - Companhia de Tecnologia de
Saneamento Ambiental, or CETESB.  Pursuant to the pollution control
laws of the state of São Paulo, as enforced by CETESB, the installation,
construction or expansion, as well as the operation, of industrial equipment
likely to cause pollution must be licensed by CETESB.




A
renewable licensing system was introduced in São Paulo in December 2002,
according to which previously issued licenses shall be renewed upon CETESB’s
convocation.  The new licenses issued by CETESB under this system are
valid for periods of up to six years for installation licenses and ten years for
environmental licenses.  The use of efficient environmental management
systems and the practice of environmental auditing are taken into account by
CETESB in granting longer validity terms for licenses.  Our operations
are subject to various environmental laws and regulations issued by these
authorities, including those relating to air emissions, effluent discharges,
solid waste disposal, odor and reforestation.




We have
expended more financial resources to modernize our equipment, processes and
environmental quality gains.  In addition, we invested in
environmental education, communities’ sewage treatment system and other
projects.  Our investments amounted to US$ 24.6 million in 2008, US$
17.6 million in 2007, and US$ 15.7 million in 2006.




We cannot
assure you, however, that the implementation of more stringent environmental
regulations in the future will not require significant capital or other
expenditures.  For a description of certain legal matters relating to
environment regulation, see “Item 8―Financial
Information―Consolidated Statements and Other Financial Information―Legal
Matters.”


42




In
Brazil, individuals or legal entities that violate environmental laws can be
punished by criminal sanctions that range from fines to imprisonment, in the
case of individuals, or dissolution, in the case of legal
entities.  In addition, administrative sanctions that can be imposed
include, among others:




•           fines;




•           partial
or total suspension of activities;




•           forfeiture
or restriction of tax incentives or benefits; and




•           forfeiture
or suspension of participation in credit lines with official credit
establishments.




In
addition to criminal and administrative sanctions, pursuant to Brazilian
environmental laws, the violator must also repair the damage that was caused to
the environment and/or indemnify third parties, regardless of the existence of
actual fault.




We have
received a number of administrative warnings in the past five years for isolated
violations of the maximum levels for emissions or effluents, including
odors.  The largest payment we have made individually was related to a
solid residue release that occurred on September 10, 2005, when an industrial
embankment burst at the Jacareí unit and non-dangerous residues (class 2A)
covered part of a road and a stream, causing reversible damage to the
environment.  VCP took all necessary measures to reduce the damage to
the environment and community.  We acted in a transparent manner by
immediately notifying CETESB and other government agencies of the incident, as
well as issuing a press release.  We developed a project to recover
the industrial embankment and to reduce the damage to the environment,
representing an investment cost of approximately US$ 9 million, of which US$ 3
million were disbursed in 2005 and US$ 6 million in 2006.  In 2007, an
additional US$ 2 million out of US$ 4 million was disbursed.  In view
of continuing to invest in environmental projects, we also have a project to
provide alternatives to treat solid waste disposals.  We expect a
total investment cost of US$ 11.6 million, of which US$ 4.5 million was
disbursed in 2007 and US$ 7.1 million was disbursed in 2008.  This
project will be divided into four phases:  composting, which will
involve two phases, lake cleaning and extension of the industrial
embankment.




Environmental
indicators




Our
operating and production processes utilize natural resources and generate liquid
effluents, residual wastes and air emissions which may adversely affect the
environment.




According
to ecoefficiency, environmental management aims to produce the minimum waste
acceptable by the environment.  We believe that by using
state-of-the-art technology, in conjunction with environmental management
system, environmental protection becomes more efficient and it is possible to
pursue the path to sustainability.




Liquid
effluents




Water is
critical to the process of manufacturing pulp and paper.  We obtain
water from the rivers that flow adjacent to our mills.  After the
water has been used in the manufacturing process, we pass the effluents through
mechanical and biological treatments before returning them to the
rivers.  We also have emergency lagoons and tanks that enable us to
avoid releasing untreated effluents into the rivers in the event of a problem
with our effluent process.  Effluent characteristics are monitored
constantly through chemical, physical and biological analyses.  We
also have a spill control system to avoid disturbances in the wastewater
treatment plant.




Our units
use a two-stage process to treat the effluents generated during the production
process.  During the first stage, solids such as fibers, clay and
carbonates are removed from the effluents.  During the second stage,
these solids undergo a biological treatment in which suspended and dissolved
materials are broken down through the action of microorganisms.  We
hired a third party to evaluate the quality of the effluents generated during
the production process and with the results of these analyses, we implement
actions to minimize the generation of effluents and maximize the reutilization
in the process.  Our industrial units are developing alternatives that
seek to reduce the consumption of water and the generation of effluents by
optimizing the production process and increasing the reuse and recirculation of
water.  In Jacareí mill, the closing circuit project reached a water
reutilization rate of 85%.  For a description of the imposition of
tariffs on river water use, see “—Raw materials—Water” above.


43




Solid
wastes




We have
identified productive uses for a portion of the solid waste generated during our
pulp and paper production processes and have adopted the following programs for
handling and disposal of such solid waste residue:




•           co-processing
with ceramic manufacturing companies (Piracicaba and Jacareí
mills);




•           licensed
landfills (Jacareí mill); and




•           use
in forests as soil correction agents.




With
respect to the co-processing activities at our Piracicaba and Jacareí
facilities, we use industrial residue as the raw material to manufacture
bricks.  Currently, both facilities’ solid waste residue is being
recycled and used in ceramic factories located in each city.  We have
been using these selective waste collections and recycling systems at the
Jacareí facility since 2001 and the Piracicaba since 2002.  Our
separate Conpacel facility uses similar programs and, in addition, a composting
system in which solid wastes are transformed into organic material for use in
our forests.




The
remainder of solid waste is either sold to third parties for use in their
production processes or disposed of in sanitary landfills.  The small
amount of hazardous waste generated at our facilities is collected, treated and
disposed of in accordance with the requirements of Brazilian law.




Atmospheric emissions




As a
byproduct of production, certain odoriferous compounds and particulate emissions
are released into the atmosphere.  In order to control these
emissions, the sources of these emissions are fitted with control equipment such
as electrostatic precipitators, multi-cyclones and gas scrubbers, which minimize
or remove certain particles and compounds from the emissions.  In
order to control odor emissions, our Jacareí mill uses an efficient system for
collection and incineration of odoriferous, diluted and concentrated gases and
is outfitted with an alternative gas scrubber removal system to be used when
incineration is not possible.  In addition, the auxiliary boilers,
which previously burned fuel oil, were adapted to burn natural gas in
2001.  The expansion of the Jacareí facility included similar
equipment and processes to control emissions.




Forest
preservation




All our
wood comes from tree plantations rather than native forests.  The land
we manage is generally not of high enough quality to be used for other forms of
agriculture.  Our cultivation program seeks to preserve the health of
our forests, and Brazilian law requires that at least 20% of our land either be
covered with native forests or cultivated with indigenous species of trees
rather than eucalyptus or pine.




Forestry
Certification System




In
October 2002, VCP received ISO 9001/2000 and ISO 14001 certifications for
forests located in Capão Bonito and Jacareí regions.  The forestry
areas controlled by VCP, which supply pulpwood to Jacareí pulp mill, are also
certified by FSC (Forest Stewardship Council).  The Capão Bonito
region was certified in September 2005 and Vale do Paraíba regions were
certified in December 2006.  VCP will reach approximately 70% to
80% of certified pulpwood production for the Jacareí mill.  The
separate Conpacel facility has also received ISO 9001/2000 and ISO 14001
certifications, and the related FSC certification.


44




Natural
resources




Since the
1990s, we have been harvesting eucalyptus through uniform micro-propagated
seedlings from carefully selected trees.  The characteristics of the
seedlings we select are matched to different growing regions and our
products.  This method allows us to (1) greatly increase forestry
productivity, (2) comply with environmental regulations, and
(3) contribute to carbon reduction in the atmosphere.




Pursuant
to the Brazilian Forestry Code (Law No. 4,771 of September 15, 1965),
we set aside a portion of our forests for preservation, conservation and
environmental recovery.  These areas consist of either native forests
or riparian buffer zones, or are maintained to satisfy specific ecological
interests.  We also invest in environmental studies, together with
domestic and international universities, research centers and renowned
consultants, in order to improve the environmental conditions of our
plantations, and ensure that we protect the native fauna in the areas in which
we operate.  We created a program designed to protect and preserve the
fauna of areas with distinctive environmental aspects and implemented it in all
forest areas.




Insurance




We
maintain insurance policies for our mills against fire, lightning and explosion
by any cause up to US$ 128 million; as for the basic coverage and
additional coverages, Electrical Damages up to US$ 1.5 million, Windstorm
(extended coverage) up to US$ 4.3 million, Machinery Breakdown up to
US$ 4.3 million and Business Interruption up to US$ 233
million.  We renewed this insurance on December 1,
2008.  We do not maintain insurance against fire, disease and other
risks to our forests.  We have taken various steps to prevent fires
from occurring at our forests, including the maintenance of fire observation
towers, a fleet of fire engines and teams of fire-fighting personnel, which we
believe are safe and cost-effective methods of fire prevention.  In
each of the past three years, forest fires have not resulted in material damages
to our total planted area.  Given the natural protection afforded by
the dispersion of our forests, we do not believe that insuring our forests would
be cost-effective.  We do not make provisions for risks of loss from
fire and other casualties, all losses and damages that occur are charged to
expense when incurred.  We have not suffered a material loss from
either fire or disease in the forests that we harvest.




Overview
of the Pulp and Paper Industry




Pulp
Industry Overview




Wood pulp
is the principal ingredient in the manufacture of woodpulp-containing
paper.  Pulp is classified according to (a) the type of wood or fiber
from which it is made, (b) the manner in which the wood or fiber is
processed, and (c) whether it is bleached.




There are
two types of wood pulp that can be produced.  Hardwood pulp is produced
using hardwood trees, such as eucalyptus, aspen, birch and acacia.  Pulp
made from hardwood, such as eucalyptus, has short fibers and is generally better
suited to manufacturing coated and uncoated printing and writing papers, tissue
and coated packaging boards.  Chemically pulped short
fibers are the best type for the manufacture of wood-free paper with good
printability, smoothness, brightness and uniformity.  Softwood pulp is
produced using softwood trees, such as pines and fir.  Pulp made from
softwoods has long fibers and is generally used in manufacturing papers that
require durability and strength, such as kraftliner, and those requiring high
opacity, such as newsprint and directory papers.  We produce only hardwood
pulp from planted eucalyptus trees.




The pulp
manufacturing process may determine a pulp’s suitability for particular end
uses.  Mechanical pulp refers to pulp processed to leave in some lignin and
other organic materials holding the wood fibers together.  Chemical pulp
refers to pulp made using chemical processes to dissolve the lignin.  Among
the various chemical processes for chemical pulp, the most common is the kraft
process, which we use to produce our pulp.  The kraft process helps to
maintain the inherent strength of the wood fibers and thus produces a pulp that
is especially well suited for manufacturing printing and writing papers,
specialty papers and tissue.


45


Bleached
pulp is used for a variety of purposes, including printing and writing papers,
specialty papers and tissue.  Unbleached pulp is brown in color and is used
in the production of wrapping paper, corrugated containers and other paper and
cardboard materials.  Many companies, including us, are using the ECF method
in their production of bleached pulp.  ECF is a bleaching process that does
not utilize elemental chlorine.  This process has been developed in part to
eliminate any possible carcinogenic effects attributed to the dioxins that are
produced during the bleaching process and released in the water.




As a
result of the variety of wood types and processes used to produce pulp, the pulp
market has become increasingly specialized in terms of technical
characteristics.  Hardwood and, particularly, eucalyptus pulp, exhibit many
of the physical and chemical properties most valued by printing and writing
paper manufacturers and other bleached pulp consumers, such as opacity, grade
and printability.  As a result of increasing specialization, many papermanufacturers developed
their own customized mix of pulp inputs known as “furnish” for use in their
paper manufacturing.  In addition, as more paper manufacturers have come to
appreciate the technical characteristics of hardwood pulp and rely upon a
significant hardwood pulp component in their furnish, the market for hardwood
pulp has grown more rapidly than the market for softwood pulp.




Eucalyptus
is one of many types of hardwood used to make pulp.  We believe that for
certain uses eucalyptus pulp is superior because of the greater consistency in
the quality of its fibers and because it can improve paper’s opacity, formation
and printability.  Eucalyptus pulp has gained wide acceptance among
producers of printing and writing papers in Europe and among producers of tissue
papers in North America because of its softness and absorbency.




Paper
Industry Overview




There are
six major groups of paper products produced by the paper industry:




·
            newsprint
      paper, used to print newspaper;




·
            printing
      and writing papers, used for a broad range of purposes, including writing,
      photocopying, commercial printing, business and computer
      forms;




·
            tissue
      papers, used to produce tissue, toilet papers and paper
      towels;




·
            packaging
      papers encompassing kraft paper, containerboard (corrugated paper and
      linerboard) and liquid packaging
board;




·
            cardboard;
      and




·
            specialty
      papers.




We
produce printing and writing papers, specialty papers, and thermal and
carbonless paper, a subcategory of specialty papers.




Printing
and writing papers are classified according to whether they are coated or
uncoated, and whether the pulp from which they are made is chemically processed
to eliminate lignin, called wood-free paper, or contains some lignin, called
mechanical or wood-containing.  We make uncoated and coated wood-free
printing and writing paper.




Printing
and writing paper is sold either in reels or in packages of pre-cut sheets,
called cut-size.  We sell our paper in both reels and
cut-size.  Reels of paper are used by manufacturers of paper products
such as business forms, writing pads, packaged sheets of pre-cut paper, books
and envelopes.  Customers require different size reels depending on
the type of machines they use.  Cut-size paper is used in offices for
general commercial purposes, such as photocopying and writing.  There
has been a general trend in recent years toward the use of standardized pre-cut
sheets rather than preprinted and continuous business forms and computer
paper.  This trend has led many paper producers, including us, to
reduce sales of reels and to integrate cutting machines in their paper mills,
increasing their production of cut-size papers.


46




The
market for paper has a large number of producers and consumers and more product
differentiation than the market for pulp.  Prices for paper are
cyclical but are less volatile than pulp prices.  The prices for paper
and paperboard have historically followed the trends of pulp
prices.  The key factors that drive paper prices are overall economic
activity, capacity expansion and fluctuations in current exchange
rates.




During
the period of 2006 to 2008 Brazilian paper companies maintained their export
volumes in order to compensate for the negligible growth in the domestic market
(see “Item 4.B Information on VCP – Business Overview – Production – Printing
and Writing Paper”) and the increased competition from imports of selected paper
grades due to appreciation of the Brazilian currency through August 1, 2008 (see
“Item 3.D – Key Information – Risk Factors – Risks Related to VCP and the Pulp
and Paper Industry”).  Regarding the international market, although
the appreciation of the real against the US dollar of
approximately 9% in 2006 and 21% in 2007 and the depreciation of 24% in 2008
impacted our revenues, the volume sold in 2008 increased due to a good economic
environment, through August 2008 and the carry over from orders in backlog
through year end, especially for the North American and European
markets.  After suffering some years at low price levels,
international paper prices start a recovery in the first half of 2006, with
price increases being announced in February, April and June 2006, in
both North America and Europe.  For uncoated woodfree papers,
international prices rose 15% in the first six months of 2006 and fell about 5%
in the last quarter of 2006.  In 2007, prices rose 7% from
January to December in North America, and in the European market,
prices climbed 9% in the first nine months of 2007.  In 2008, prices
rose 11% from January to December in North America, but declined 4% in the
European market.




The
Brazilian pulp and paper industry




Brazil is
predominantly a tropical country, with approximately 90% of its territory
located north of the Tropic of Capricorn.  As a result, in most
regions of Brazil, the soil and climate are very favorable to forest
growth.  In Brazil, eucalyptus trees have short growing cycles of
approximately seven years, compared to 10 to 12 years for eucalyptus trees in
Chile and 25 years in the United States.  The production of wood in
Brazil, therefore, requires less time and a smaller growing area than in North
America and Europe, which results in higher yields.  See “Item 4.B
Information on VCP – Business Overview – Raw Materials – Wood”.




Brazil’s
high technology and natural advantages in forestry make it one of the world’s
lowest-cost producers of pulp, and in the last 20 years Brazil has become an
important pulp exporter.  As one of the world’s lowest-cost producers
of pulp, Brazilian pulp producers are able to weather more favorably than other
producers through periods of low pulp demand.  This shorter maturing
period also enables Brazilian producers to expedite the process of genetically
improving the Eucalyptus species utilized.  In this manner, the
Brazilian Eucalyptus is one of the pulping trees species that have evolved more
rapidly and consistently over recent years, resulting in significant
improvements in its productivity.




Capitalizing
on its advantages in pulp production, Brazil has developed a diversified paper
industry with modern technology and a potential for growth in both the domestic
and export markets.  In recent years, there has been a marked increase
in paper consumption in Brazil, which is an important indicator of the economic
development of a country.  Between 1997 and 2008, the average annual
rate of paper consumption increased by approximately 3% per year, reaching 9.0
million tons in 2008, according to estimated figures from
Bracelpa.  We believe that there is growth potential for domestic
consumption, because per capita consumption is still low in comparison with
developed countries.  Per capita consumption of paper is estimated at
39.5 kilos per year, according to PPI, a news and information provider for the
pulp, paper, converting forest products and allied industries.




According
to preliminary data from Bracelpa in 2008, Brazil was the twelfth largest paper
producer and the fourth largest pulp producer in the world.  Brazilian
pulp and paper companies have made large investments over the last ten years in
order to compete more effectively and on a larger scale with traditional pulp
suppliers in the international market.  In addition, technological
development in the paper industry has been supported by the research efforts of
major producers and by financing from BNDES.




Consolidation
in the Brazilian pulp and paper industry is currently underway.  The
table below shows the market participation of the five largest producers in
terms of sales for the years indicated:


47




Year
      ended December 31,(in
      thousands of tons)
                
                
                2008
                *
                
                2007
                
                
                2006
                
                
                2005
                
                
                2004Brazilian
      pulp production (1)
                
                
                12,740.0
                
                
                
                11,997.0
                
                
                
                11,180.0
                
                
                
                10,352.0
                
                
                
                9,620.1Brazilian
      paper production
                
                
                9,180.0
                
                
                
                9,010.0
                
                
                
                8,724.6
                
                
                
                8,597.0
                
                
                
                8,452.4Total
      pulp and paper production
                
                
                21,920.0
                
                
                
                20,770.0
                
                
                
                19,904.6
                
                
                
                18,949.0
                
                
                
                18,072.5Total
      five top producers*
                
                
                12,100.0
                
                
                
                12,579.5
                
                
                
                11,982.3
                
                
                
                11,461.9
                
                
                
                10,987.2%
      Top five*
                
                
                55.2
                %
                
                
                59,9
                %
                
                
                60.2
                %
                
                
                60.5
                %
                
                
                60.8
                %





_______________


(1)
            Pulp
      numbers represent pulp volume
produced.


Source:  Bracelpa.


*
Estimates for December




Brazil
produces both commodity grade paper, such as kraft linerboard, and more
value-added paper products, such as thermal, carbonless and fiduciary
paper.  Brazil is self-sufficient in all types of paper, except
newsprint, coated paper and certain specialty grades.  The paper
market is larger than the pulp market in terms of the numbers of producers,
consumers and variety of products.  Paper prices tend to be less
volatile than prices for pulp.




Cyclical
nature of world pulp prices




World
pulp prices are cyclical because demand for paper depends heavily on general
economic conditions and because production capacity adjusts slowly to changes in
demand.




Over the
last three years, BEKP prices (market pulp) in the United States, Europe and
Asia, respectively, have fluctuated from US$ 635, US$ 590, and US$ 540 per ton
on January 1, 2006, to US$ 860, US$ 840, and US$ 810 per ton at July 30, 2008 in
these respective regions, returning to US$ 680, US$ 590 and US$ 530 at December
31, 2008.  As demonstrated, such price fluctuations occur not only
year to year but also within a year as a result of global and regional economic
conditions, and supply and demand.  The price of paper products,
although less volatile than the price of pulp, also experienced fluctuations in
response to global demand and production and fluctuations in pulp
prices.  Capacity adjustments have also occurred on the paper side,
and in the first half of 2006 we saw paper prices increasing for several grades
in the United States and Europe.  In 2008 the prices in US dollars
rose 10.6% on average when compared to 2007.




The
following table sets forth the estimated cash production costs per ton of
bleached hardwood kraft market pulp pre-sold in Northern Europe, Brazil and the
United States for the third quarter of 2008, for producers in the regions
indicated.  Cash production costs are total production costs less
depreciation and depletion and does not include any transportation
costs.  Amounts have been expressed on a per ton basis in U.S.
dollars, with local currencies translated at prevailing exchange
rates.  Particular producers may have production costs significantly
above or below regional averages.




Delivered Cash Costs BHKP CIF
      (per ton)
              December,
      2008
              March,
      2009Brazil
              271
              268Indonesia
              282
              298Chile
              305
              308Sweden
              422
              389Finland
              459
              453Iberia/Norway
              449
              457France/Belgium
              453
              478China
              502
              504Canada
              544
              513USA
              547
              562South
      Korea
              535
              618Japan
              706
              641





Source:  Hawkins
Wright.


48


C.
            Organizational
      Structure





The chart
below shows our organizational structure as of December 31, 2008 (% of
total capital):










(1) VCP acquired in 2009 an additional equity interest in
Aracruz, after execution of two share purchase agreements
(“SPAs”).  VCP currently owns 84.09% of Aracruz’s voting
capital.




Our
operations are conducted by Votorantim Celulose e Papel S.A. as the controlling
and principal operating company.  We are a member of the Votorantim
group, which has other interests in Brazil and abroad, principally in cement,
metallurgy, agribusiness, chemicals and financial
services.  Consolidated net operating revenues of the Votorantim group
were approximately US$ 18 billion, US$ 16 billion and US$ 13 billion
in 2008, 2007 and 2006, respectively, based on the Consolidated Financial
Statements prepared in accordance with Brazilian GAAP, data translated to U.S.
dollars at the corresponding year-end exchange rates, of which 9%, 10%, 10% in
2008, 2007 and 2006 respectively, represented pulp and paper
activities.  Net consolidated sales include the industrial units of
the Votorantim group, as well as Votorantim Finanças, which includes Banco
Votorantim.  Our immediate parent company is VID, which in turn is
ultimately controlled by Hejoassu Administração S.A.
(“Hejoassu”).  Hejoassu is formed by the Board Members of the
Votorantim Group.  It is composed by family members, responsible for
the main decisions and business strategies.  Hejoassu is controlled by
the Ermírio de Moraes family.  See “Item 4B—Information on
VCP—Business Overview—Our Ownership Structure.”


49




In order
to facilitate access to our international customers and to the international
financial markets, we have established two subsidiaries of Newark Financial Inc.
(“Newark”), VCP Trading N.V. and VCP North America Inc., to manage our exports
to clients in Europe and in North America, respectively, until
2005.  As of January 2006 we have been performing the total
export sales from VCP Overseas Holding Limited Budapest, Zug
(Switzerland).




During
2008 the following transactions occurred that affected our organizational
structure:




(i)           Disposition
of non-core assets




VCP and
Suzano jointly determined that Conpacel’s (formerly Ripasa) core business is the
Americana pulp and paper mill and all other non-core assets should be
disposed.  During 2007, the following non-core asset dispositions
occurred: (i) Embu - on February 15, 2007 VCP signed an agreement to sell VCP’s
interest in the Ripasa unit located in Embu, state of Sao Paulo, to
Suzano.  This transaction was concluded on March 30, 2007 at which
time Suzano disbursed US$ 20 million to VCP.  This operation
generated a loss of US$ 12 million including the write-off of goodwill; and
(ii) Cubatão and Limeira - on August 1, 2007 VCP and Suzano signed an
agreement to sell these units, located in Cubatão and Limeira, state of São
Paulo, to a third party.  The transaction was concluded on November 1,
2007 at which time VCP and Suzano each received US$ 32
million.  This operation generated a loss of US$ 4 million
including the write-off of goodwill.




During
August 2008, the remaining unsold assets, which have a book value of US$ 29
million at September 30, 2008, were segregated by Ripasa and contributed as the
initial capital of Asapir Produção Florestal e Comércio Ltda. (“Asapir”), a
newly incorporated Brazilian company.




(ii)           The
Conpacel (formerly Ripasa) Consortium




VCP
participates in a cost and production sharing venture with Suzano which operates
a pulp and paper plant in Americana, São Paulo.  Under the various
agreements, the members have undivided interests in assets, liabilities and
operations of the venture.




On May
12, 2008, Brazilian tax authorities approved the transformation of Ripasa into a
production unit operating as a consortium (an unincorporated joint-venture in
which each party has an undivided interest) of VCP and Suzano, named
Conpacel.  Conpacel began its operations on September 1,
2008.  VCP and Suzano each own 50% of the net assets of
Conpacel.  VCP is entitled to 50% of the Conpacel’s production
beginning September 1, 2008.




Brazilian
law specifies that such consortium contracts do not constitute legal
entities.  Each of the legal entities party to a consortium contract
is responsible only for its contractually defined obligations.  The
bankruptcy of one of the legal entities does not impact the legal obligations
and rights of the other parties, the debts and assets of the bankrupt entity
relate only to that entity according to contractual conditions.




The
consortium contract defines the obligations and responsibilities of each party;
the rights to revenues, management of operations and accounting.  The
consortium term is for 30 years unless wound-up through deliberation of the
parties, bankruptcy or settlement.




Each
party has 50% of the specific assets, liabilities and costs, and each legal
entity is obligated to make payments based on the consortium
agreement.  The payments made by VCP and Suzano, as well as the budget
for capital expenditures, are defined by the independent General
Manager.  VCP and Suzano agree to make payments in accordance with the
decisions of the independent General Manager.  See Exhibit 4.13
“Private Instrument of Protocol and Justification of total spin-off of Ripasa
S.A. Celulose e Papel October 1, 2008.”




As no
separate legal entity exists, there is no consolidation of a separate
entity.  As per EITF 00-01 “Applicability of the Pro-Rata Method of
Consolidation to Investments in Certain Partnerships and Other Unincorporated
Joint Ventures”, VCP accounts for its rights and obligations according to its
undivided interest as defined in the consortium agreement, and records them as
part of VCP’s operations according to their nature.


50




The
carrying value of 50% of Conpacel’s net assets at August 31, 2008 which
represents the undivided interest of VCP is demonstrated below:




Millions
      of US$AssetsCurrent assets
                
                
                43Non-current
    assetsProperty, plant and equipment
      at cost
                
                
                596Other non-current
      assets
                
                
                38LiabilitiesCurrent
      liabilities
                
                
                (59
                )Non-current
      liabilities
                
                
                (177
                )Net
      assets
                
                
                441





(iii)
Acquisition of an additional equity interest in Aracruz





Negotiations
began in August, 2008 and were concluded in early 2009 whereby VCP acquired an
additional equity interest in Aracruz.  See “Item 5.A Operating and
Financial Review and Prospects – Operating Review – Recent Developments” to this
annual report and note 22 “Subsequent Events” to the accompanying Financial
Statements.  See “Item 3D – Risk Factors - Risks Relating to our
Business Combination with Aracruz”.




D.
            Property,
      Plant and Equipment




Our main
production facilities are located in the state of São Paulo and the Três Lagoas,
Mato Grosso do Sul, facility which was concluded on March 30,
2009.  We also have forest plantations in the state of São Paulo,
timberland in the State of Rio Grande do Sul acquired by purchases beginning in
2004 and timberland in the state of Mato Grosso do Sul obtained via the asset
swap with International Paper, effective February 2007.  The
state of São Paulo accounts for more than 30% of Brazil’s gross domestic
product, and is home to most of the domestic consumers of pulp and paper
products.  In 2008, our forests (including purchased wood) were
located an average of 357 kilometers from our pulp mills, which is, in turn,
located an average of 150 kilometers from Santos, which is the port facility
that we use for most of our exporting activities.  The relatively
short distance between our forests, our plants, our port facility and most of
our domestic customers results in relatively low transportation
costs.




The
following table sets forth the distance between our forests (including the
transport of pulpwood purchased in the market) and our mills, the distance of
these mills to the port of Santos, and the nominal capacity of each mill at
December 31, 2008:




Facility
                                  
                                  Pulp/Paper
                                  
                                  Distance
      from
                                    forest
      (pulp) or
                                    pulp mill (paper)
                                  
                                  Distance
      from
                                    port of Santos
                                  
                                  Pulp/Paper
                                    capacity
                                    (tons/year)
                                  
                                  Major productsJacareí
                                  
                                  Pulp/Paper
                                  
                                  294
      km
                                  
                                  150
      km
                                  
                                  1,100,000
                                  
                                  Bleached
      eucalyptus kraft pulp.  Uncoated printing and writing paper;
      coated printing and writing paperPiracicaba
                                  
                                  Paper
                                  
                                  150
      km
                                  
                                  229
      km
                                  
                                  190,000
                                  
                                  Thermal
      and carbonless paper; coated printing and writing paperConpacel
      (50%)
                                  
                                  Pulp/Paper
                                  
                                  218km
                                  
                                  220
      km
                                  
                                  325,000/195,000
                                  
                                  Bleached
      eucalyptus kraft pulp.  Uncoated printing and writing paper;
      coated printing and writing
paper


_______________


51





Source:  VCP.




Eucalyptus
forests




Currently,
we obtain a majority of our wood from approximately 102,000 hectares of forest
plantation in a total area of 184,000 hectares of land located in the state of
São Paulo.  While we have enough wood to satisfy our requirements,
from time to time and when the terms are attractive, we purchase wood from
unrelated third parties for use in our paper and pulp mills.  In the
year ended December 31, 2008, we consumed approximately 88% of our own wood
and 12% of our wood from those third parties.




At
December 31, 2008, in the state of São Paulo we owned or leased
approximately 556 different tracts of forests for cultivation, making our wood
supplies relatively dispersed.  Our forests are located an average of
220 kilometers from our pulp mills.  In order to reduce the average
distance from our forests to our mills, we did not renew the leases of forests
that were relatively far from our mills and, instead, have purchased forests
that are closer to our mills.  Brazilian law requires that at least
20% of the land we own either remains uncultivated or planted with indigenous
species of vegetation.  Of our own forests, approximately 56% of the
land area consists of planted eucalyptus forest, approximately 37% is reserved
for preservation and the remaining 7% is used for other activities.




While the
dispersion of our woodland entails some additional costs, we believe that it
significantly reduces the risks of fire and disease.  We also seek to
minimize fire risk by maintaining a system of fire observation towers and a
fleet of 13 fire engines, all of which are manned by members of our fire
fighting teams.  Given the natural protection afforded by the
dispersion of our forests, we do not believe that insuring our forests would be
cost-effective.  We therefore assume all risks of loss from fire and
other casualties.  In addition, we annually treat certain of our
forests to prevent tree destruction by ants.  We have never suffered a
material loss from either fire or disease in forests that we
harvest.




Our
strategic goal to guarantee fiber supply and ensure our long-term growth also
includes the establishment of a new forest area in the state of Rio Grande do
Sul, currently with 125,000 hectares of which 60,000 hectares is with forest
plantations, and a new forest base of 238,000 hectares, of which 154,000
hectares with forest plantations in the state of Mato Grosso do Sul, originating
from the asset swap with International Paper, concluded in
February 2007.




Growth in
the southern region of Brazil is driven mostly by the availability of land at
attractive costs, the proximity to northern Uruguay (wood availability) and also
the proximity to Rio Grande port, which will allow us the creation of an export
platform.  The forestry productivity in this new area is similar to
São Paulo forests and coupled with that we also have:  (i) a
qualified labor force; (ii) inter-modal transportation options; and
(iii) favorable political, social and environmental
conditions.  This particular region has a distinct climate regime in
which the main rainfall period is during the winter.  This variation
permits us to grow some subtropical eucalyptus species such as E.globulus, E.maidenii, and others which
have favorable wood properties and very high pulp yield, and are recognized by
pulp producers as the best eucalyptus species for pulp production.




As part
of our reforestation efforts, in 2008, in the state of São Paulo we planted
approximately 16,000 hectares of eucalyptus in order to supply our wood
requirements to produce pulp at the Jacareí mill.  The forests used to
supply the Jacareí mill generally yield between 45 and 50 cubic meters of
pulpwood per hectare per year.  At seven years old, the normal time to
harvest, these trees normally have an average productivity of 315 to 350 cubic
meters per hectare in Jacareí.  The separate Conpacel facility has
planted an average of 11,500 hectares per year in order to satisfy its separate
wood requirements.  These levels of productivity reflect the excellent
climate conditions for growing eucalyptus trees in São Paulo State, with ample
amounts of both sun and rain.




In 2008
we grew approximately 80 million rooted cuttings/seedlings at our nurseries, all
of which were planted in our forests or supplied to the tree farm
project.  To develop our eucalyptus forests, we select trees after
strict field trials, which are denominated as clones or cultivars and are
multiplied for commercial utilization via vegetative propagation process (rooted
cuttings).  We operate four nurseries for cutting/seedling
production.  We produce both seedlings and rooted cuttings (a
vegetative propagation method) to carry out the planting of our eucalyptus
trees.  Vegetative propagation allows to plant trees with the most
favorable genetic characteristics for pulp production.  These
characteristics include fast growth rate, good quality of wood fibers,
resistance to disease and “self-pruning” trees with fewer
branches.  Greater tree standardization provided by cloning also
allows for increased mechanization in tree felling and transportation, and makes
it easier to adjust equipment and machinery to topographical
conditions.  Currently, almost 90% of our plantations are made with
rooted cuttings and 10% using seedlings produced with seeds obtained in our Tree
Breeding Program.


52




In 2008
we obtained patents on six Eucalyptus cultivars (clones).




We
continue to review our efforts at community relations and the common good, as
part of our contribution to social and economic development.  For
example, we invited our neighbors in the state of Rio Grande do Sul to
participate in a project in which we have already planted approximately 50,000
hectares of eucalyptus.  The Forestry Savings program, launched in
2006 is an innovative way of cooperation and social inclusion involving our
neighbors in the countryside and is progressing well.  In 2008 more
than 5,500 hectares were planted in this program.




Expansion




We
invested US$ 333 million in the Três Lagoas expansion project (Projeto
Horizonte) in 2008.  This amount includes only disbursements made
directly from VCP, being in addition
to the funds we received through our Asset Swap agreement with
International Paper.  See “Item 4 – Information on VCP – History and
Development”.  This project, in the state of Mato Grosso do Sul, will
expand our annual pulp capacity by 1,300,000 tons and begin its operations on
March 30, 2009.  We also maintain
investments in the acquisition of land and eucalyptus plantations in the states
of Mato Grosso do Sul (Três Lagoas mill) and Rio Grande do Sul, part of a long
term plan to reduce dependence on wood supply from third parties.  The
project in Rio Grande do Sul also includes, upon approval by the Board of
Directors, the construction of an industrial facility, for which
socio-environmental licensing procedures are already being
conducted.  On October 13, 2008 we announced a postponement of one
year, until 2010, in further development of the project’s industrial aspects in
view of the uncertainty of worldwide economic conditions.




Another
significant investment carried out by VCP in 2008 was the conclusion of a new
coater for special paper in Piracicaba mill, with disbursement of US$ 25
million.  This investment increased our special paper capacity by
25,000 tons per year.




ITEM
4A.  UNRESOLVED STAFF COMMENTS




None.




ITEM
5.  OPERATING AND FINANCIAL REVIEW AND PROSPECTS




You
should read the following discussion in conjunction with our audited
consolidated financial statements and accompanying notes and other
financial information included elsewhere in this annual report, and in
conjunction with the financial information included under “Item 3A—Key
Information—Selected Financial Data.”  This section contains
forward-looking statements that involve risks and uncertainties.  Our
actual results may differ materially from those discussed in the forward-looking
statements as a result of various factors, including, without limitation, those
set forth in “Item 3D—Key Information—Risk Factors” and the matters set
forth in this annual report generally.




Overview




We
produce pulp and paper products in Brazil, including wood free printing and
writing papers and specialty papers.




Pulp.  VCP produces
bleached eucalyptus pulp, part of which it sells domestically and
internationally and the remainder of which it uses for its paper
business.  It has responded to the increased demand in the
international pulp market during the period beginning 2005 by increasing its
U.S. dollar denominated pulp exports via increased volumes arising from the
completion of the Jacarei mill expansion in 2006 and its de-bottlenecking in
2007 and the expansion of its market presence in the Asian and European
markets.  Its export volumes and revenues for the period beginning
2006 are demonstrated in the tabular presentation below.  The increase
in domestic market pulp volumes and revenues, as demonstrated by the inverse of
the percentages presented in the table columns entitled “% of Totals” below, is
principally the result of the Company’s divestment in 2007 and 2008 of selected
domestic paper assets (Luiz Antonio, Mogi and Ahlstrom).  Pulp
production previously used in its paper business and classified as such is now
supplied and sold to these production facilities owned by third-parties and,
accordingly, is now classified as domestic market pulp.


53




Its pulp
export volumes and revenues are expected to continue to increase due to the
completion of its Três Lagoas mill project on March 30, 2009 (see “Asset
Exchange Program with International Paper” below)and the Losango project at
a future date (see “Item 4.D Information on VCP – Property Plant and Equipment –
Expansion”)




In 2008,
we sold 1,200,768 tons of bleached pulp as market pulp to third parties in the
domestic market and outside of Brazil.  We had a 29% share of the
Brazilian domestic market for bleached hardwood pulp according to Bracelpa’s
figures released in December 2008.  In 2008, approximately 76% of
our market pulp sales volume was to customers located outside of
Brazil.  The following table sets forth our sales volume of pulp to
the export market by geographic region for the periods indicated:




Year
      ended December 31,2008
                  
                  
                  2007
                  
                  
                  2006Tons
                  
                  
                  %
      of Total
                  
                  
                  Tons
                  
                  
                  %
      of Total
                  
                  
                  Tons
                  
                  
                  %
      of TotalNorth
      America
                  
                  
                  85,910
                  
                  
                  
                  9.4
                  
                  
                  
                  81,038
                  
                  
                  
                  9.3
                  
                  
                  
                  77,075
                  
                  
                  
                  9.3Latin
      America
                  
                  
                  2,231
                  
                  
                  
                  0.2
                  
                  
                  
                  1,685
                  
                  
                  
                  0.2
                  
                  
                  
                  -
                  
                  
                  
                  -Europe
                  
                  
                  543,745
                  
                  
                  
                  59.6
                  
                  
                  
                  557,610
                  
                  
                  
                  64.1
                  
                  
                  
                  508,489
                  
                  
                  
                  61.1Asia/Middle
      East/Oceania/Africa
                  
                  
                  279,626
                  
                  
                  
                  30.7
                  
                  
                  
                  229,563
                  
                  
                  
                  26.4
                  
                  
                  
                  246,618
                  
                  
                  
                  29.6Total
      Exports
                  
                  
                  911,511
                  
                  
                  
                  100.0
                  
                  
                  
                  869,897
                  
                  
                  
                  100.0
                  
                  
                  
                  832,182
                  
                  
                  
                  100.0





Paper.  VCP
produces various types of paper products for the domestic and international
markets.  It is important to note that the 2007 and 2008 periods are
not fully comparable with prior periods due to the divestments of the Luis
Antonio, Mogi and Ahlstrom units during those periods as part of the strategic
repositioning of its paper business.




Within
the domestic market, we have continued
our strategy of increasing the proportion of our sales of value-added products,
such as coated, thermal and carbonless and other specialty papers, and to remain
as a leading market share producer of these value-added paper
products.  The percentage of our net operating revenues of these
value-added products in relation to our total net operating revenues for paper
in the Brazilian market was 49% for 2005, 50% for 2006, 67% for 2007 and for
2008 92%.  The relevance of high value added papers will continue with
the expansion, on August this year, of the capacity of the Piracicaba coated
machine by 25 thousand tons of thermal papers, allowing for an even higher
leverage of the benefits of the technology exchange agreement that VCP has with
Oji Paper.  Within its domestic coated paper market, while sales have
increased during the last three years, we have lost market share due to the
increased competition from imports as a result of appreciation of the real through August
2008.  The depreciation of the real beginning in August 2008
(see “Item 3 Key Information Selected Financial Data – Exchange Rates”) will
permit VCP to recover this market share loss due to anticipated lesser
competition from imported products.




Our sales
of paper outside Brazil as a percentage of our total sales of paper in terms of
volume were 32% for 2005, 28% for 2006, 20% for 2007 and 13% for
2008.  We intend to take advantage of the opportunity to recover our
market share now that the real has depreciated against the U.S.
dollar.




The
following table shows a breakdown of VCP’s total exports in 2007 and 2008 in
terms of volume by geographic location:


54




Year
      ended December 31, 2008
              
              
              Year
      ended December 31, 2007Pulp
              
              
              Paper
              
              
              Pulp
              
              
              PaperThousands
                  of
      Tons
              
              
              %
      of
                  Total
              
              
              Thousands
                  of
      Tons
              
              
              %
      of
                  Total
              
              
              Thousands
                  of
      Tons
              
              
              %
      of
                  Total
              
              
              Thousands
                  of
      Tons
              
              
              %
      of
                  TotalNorth
      America
              
              
              85.9
              
              
              
              9
              %
              
              
              11.3
              
              
              
              26
              %
              
              
              81.0
              
              
              
              9
              %
              
              
              20.8
              
              
              
              21
              %Latin
      America (1)
              
              
              2.2
              
              
              
              -
              
              
              
              25.9
              
              
              
              59
              %
              
              
              1.7
              
              
              
              1
              %
              
              
              57.9
              
              
              
              59
              %Europe
              
              
              543.8
              
              
              
              60
              %
              
              
              6.5
              
              
              
              15
              %
              
              
              557.6
              
              
              
              64
              %
              
              
              15.6
              
              
              
              16
              %Asia
      and
      Africa
              
              
              279.6
              
              
              
              31
              %
              
              
              -
              
              
              
              -
              
              
              
              229.6
              
              
              
              26
              %
              
              
              3.2
              
              
              
              4
              %Total
      Exports
              
              
              911.5
              
              
              
              100
              %
              
              
              43.7
              
              
              
              100
              %
              
              
              869.9
              
              
              
              100
              %
              
              
              97.5
              
              
              
              100
              %





(1)Excluding
Brazil.




Revenue denominated in U.S.
dollars:  As a result of its Business Strategy, VCP’s revenue
denominated in U.S. dollars has increased during the period and that increase
continued with the completion of Três Lagoas mill project on March, 30
2009.  See “Assets Exchange Agreement with International Paper”
below.




Asset
Exchange Agreement with International Paper




Our Asset
Exchange Program permitted VCP, as part of the business strategy, to begin to
operate the Três Lagoas Project Mill facility on March 30, 2009 to expand its
forest and mill production capacity to meet increased demand in the export pulp
market and, as a result, expand our presence in the international pulp
market.  See “Item 4B—Information on VCP—Business Overview—Our
Business Strategy” and “Item 10C—Additional Information—Material
Contracts.”




The Asset
Exchange Program which was effective on February 1, 2007 resulted in the
removal of the 100,000 tons of market pulp and 355,000 ton paper production
capacity of the Luiz Antonio mill from the Company’s total production
facilities.  See “Item 4D—Information on VCP—Property, Plant and
Equipment.”  As a consequence, VCP’s production of both market pulp
and paper have declined effective from the above date, together with the
resulting decline in revenue, EBITDA and net income attributable to the
facility.  VCP management concluded that the long-term benefits of the
asset exchange transaction outweighed the short and medium-term
losses.




Liquidity
and Capital Resources




The Company’s liquidity has
historically been sourced from cash generated by operations, short-term
borrowings and, depending upon market conditions and other factors, long-term
borrowings.  We manage our liquidity position by first considering our
cash and cash equivalents, short-term financial investments and short-term debt;
and thereafter accounts receivable and long-term borrowings, together with our
prioritization and re-ordering the capital expenditure projects.





Since a significant portion of our
operating revenues is derived from exports (2008: 47%, 2007: 46% - See “Item 4B
- Information on VCP - Business Overview-Operations”) we traditionally choose
from a variety of trade finance programs offered by several financial
institutions under which we borrow short-term funds by transferring either our
current or future export receivables to these institutions.  See Notes
11 and 12 to our audited consolidated financial statements.  These
trade finance programs generally have less financial and administrative cost
than discounting our domestic accounts receivables or short-term working capital
loans; thus our preference not to use either of the latter to manage our
liquidity.  The current worldwide financial crisis has not diminished
our ability to continue to invest funds in short-term
investments.  Likewise, this crisis has not affected the availability
to VCP of the aforementioned short-term credit facilities; their cost has
however increased due to the combined effect of the crisis itself, its effect on
the availability of trade finance to emerging markets such as Brazil, the
financial market’s perception and evaluation of the country risk of Brazil and
thedowngrade in
our credit rating by Fitch on February 2, 2009.  See “Item 3D—Key
Information—Risk Factors—Risks Relating to VCP and the Pulp and Paper
Industry”.


55


Long-term borrowings have generally
been used to finance our major capital expenditure projects and have
historically been sourced principally by either export prepayment contracts
under which we, or a wholly owned subsidiary, borrow funds by offering the
guarantee of export contracts (see Note 12(a) to our audited consolidated
financial statements) or fixed asset acquisition financing programs offered by
the BNDES, a related party, (see Note 12(e) to our audited consolidated
financial statements).  The scheduled maturities of these long-term
loans have been structured to match the expected cash flow from the conclusion
of the related capital expenditure projects and, as a result, reduce the risk of
any significant deterioration of our liquidity position.  To a lesser
extent we also have relied on bonds or notes issued in the international markets
by either wholly owned subsidiaries or by Votorantim Group subsidiaries, all
domiciled in other countries.  See Notes 12(c) and (d) to our audited
consolidated financial statements.  Our ability to access these
aforementioned long-term funding sources has not been, to-date, significantly
affected by the effects of the global financial crisis, although the maturity of
any intended borrowings have been reduced and their prospective cost has
increased for the same reasons cited above with respect to our short-term
borrowings.





These long-term borrowings contain
various covenants regarding compliance with certain financial ratios and other
restrictions. At December 31, 2008, the Company was not in compliance with
covenants on certain loan agreements as a result of a proportional consolidation
of Aracruz based on Brazilian GAAP, plus Três Lagoas project investments and the
devaluation of the real. See Note 9(a) and 12(i)
to the consolidated financial statements and “Item 5 – Management Discussion and
Analysis – Year ended December 31, 2008 compared to year ended December 31, 2007
- Equity in earnings (losses) of affiliates”. Nonetheless, in November 2008, we
began the renegotiation of the terms of these covenants with the creditor banks,
for which we have concluded the negotiations for more than 80% of the affected
loan agreements. Management, at this time, considers none of these renegotiated
covenants or guarantees, if requested, are restrictive or inhibitive to the
Company’s current level of operations. We believe that our sources of funds and
management actions, such as the capital increase that occurred on April 30, 2009
(partially offsetting the effect of additional leverage of the purchase of
Aracruz common shares) and increase of credit lines by diversifying creditor
banks portfolio, are, and will continue to be, adequate to meet our liquidity
levels and currently anticipated uses of funds, which include working capital,
recurring capital expenditures and debt repayment.





In the case of the 20% of affected loan
agreements, which includes a loan from BNDES (one of our shareholders) the
creditor banks do not have the right to demand repayment. In these cases, the
only penalty is, if requested by banks, assets pledged as guarantee and just the
loan agreements that were renegotiated (more than 80%) give the right to demand
payment. We have concluded that there is no requirement to classify these debts
as current.





Capital
resources to support our business growth and expansion plans may also be
obtained from the issuance of equity. Negotiations began in 2008 and were
concluded on January 21, 2009 and April 29, 2009 under which we will, via a
series of coordinated transactions, purchase, via principally an initial payment
and semi-annual installments thereafter, the remaining outstanding common stock
of Aracruz from other controlling shareholders and/or exchange any still
remaining and outstanding Aracruz common stock for preferred shares of the
Company to be issued, and thereafter, exchange Aracruz’s outstanding preferred
stock for preferred stock of the Company to be issued. See Note 22 to our
audited consolidated financial statements and “Item 5.A Operating and Financial
Review and Prospects – Operating Results – Recent Developments”.





Capital subscriptions for our common
shares by our controlling shareholder, VID, and a related party, BNDES, totaling
R$ 2.648 billion (US$1.215 million at date of actual capital subscription) were
made in March and April, 2009 and provided funds to make the initial payment of
these common share purchases as well as to manage our liquidity position. The
payments of the remaining non-interest bearing share purchase installments,
R$2.5 billion and R$1.4 billion (about US$1.1 billion and US$600,000 at December
31, 2008 exchange rates), due in 2010 and 2011, respectively, were structured so
as not to significantly affect our prospective liquidity position; and these
future payments are expected to be made principally from our traditional funding
sources.





For further information on liquidity
and capital resources, see “Item 5.B – Liquidity and Capital
Resources.”




Prices




All
references to prices relate to average prices determined by dividing the net
operating revenues by the corresponding tonnage.


56




Pulp.  Our pulp
operations are affected by prevailing world market prices for pulp, the amount
of pulp produced and sold worldwide, and the pulp requirements of our paper
business.  The prices that we are able to obtain for our pulp depend
upon prevailing world market prices, which historically have been cyclical and
subject to significant fluctuations over relatively short periods of
time.  The price of pulp is quoted in U.S.
dollars.  Domestic sales of pulp are denominated in reais; however, as export
sales, they generally reflect the international price of pulp, which is
denominated in U.S. dollars.  Over the last three years BEKP or market
pulp prices in the United States, Europe and Asia, respectively, have fluctuated
from lows of US$ 635, US$ 590, and US$ 540 per ton on
January 1, 2006, to highs of US$ 860, US$ 840, and US$ 810
per ton at July 30, 2008 in these respective regions, returning to US$ 680,
US$ 600, and US$ 480 at December 31, 2008.  As demonstrated, such
price fluctuations occur not only year to year but also within a year as a
result of global and regional economic conditions, and supply and
demand.  The price of paper products, although less volatile than the
price of pulp, also experiences fluctuations in response to global demand and
production and fluctuations in pulp prices.  At May 31, 2009 the list
price of BEKP, or market pulp, was US$ 540, US$ 500 and US$ 420, in the United
States, European and Asian markets, respectively.




The
long-term historical cyclicality of pulp prices as measured by the changes in
average C&F (Cost and Freight) price per ton for our export sales of
bleached eucalyptus market pulp over the last several years is illustrated in
the following table.




C&F
      in US$2001
                      
                      
                      3822002
                      
                      
                      3892003
                      
                      
                      4562004
                      
                      
                      4622005
                      
                      
                      5112006
                      
                      
                      5592007
                      
                      
                      6152008
                      
                      
                      661




Paper.  Our paper
operations are affected primarily by demand for paper in Brazil and by Brazilian
economic conditions and, to a lesser extent, international paper
prices.  The price of paper products, although less volatile than the
price of pulp, experiences fluctuations in response to global demand and
production and fluctuations in pulp prices.  Prices for printing and
writing papers are generally linked to international prices.  The
first half of 2006 was marked by capacity adjustments and shutdowns, combined
with a continuous expansion in global demand, which also improved the
international scenario for paper.  For uncoated woodfree papers,
international prices climbed 15% in the first six months of 2006, but declined
approximately 5% in the last quarter of the year.  In 2007, we saw a
similar trend, increasing the prices approximately 8%, in both North American
and European markets.  In 2008, for uncoated woodfree papers,
international prices climbed 11% in North America, despite the sharp drop in
demand, due to capacity closures, cost pressures and reasonably good operating
rates, but declined 4% in European markets.  For Brazil, increasing
the prices 12% for coated papers.  In response to the cyclical nature
of the paper market, we have increased our production of value-added paper
products, such as coated, thermal and carbonless papers, which are less
sensitive to cyclical price variations.




Costs
and operating expenses




Our
principal costs of production are incurred in reais and consist of raw
materials (primarily wood and chemicals), labor and depreciation.  In the
last three years, our cost has increased significantly when expressed in U.S.
dollars as a result of the appreciation of the real, pressuring our U.S.
dollars margins.  Our business is capital intensive and a portion of
our costs is fixed.  We seek to maintain high capacity utilization rates to
benefit from economies of scale and production efficiencies resulting from the
operation of large, efficient production facilities and machines.  As a
percentage of net operating revenues, selling and marketing expenses were 10% in
2006, 11% in 2007, and 10% in 2008.  The increase of 5% in the pulp export
volumes and higher freight costs in 2008, due to high oil prices on the 1st
semester,have
resulted in a 13% increase of the total logistics costs in 2008 when compared
with 2007.  General and administrative expenses as a percentage of net
operating revenues were 5% in 2006, 2007 and 2008.


57




Financial
income




We derive
financial income from several sources, including interest on cash and cash
equivalents and finance charges on sales with credit terms. The unrealized gains
from cross-currency interest-rate swap contracts are recorded at fair market
value on our balance sheet as a liability and in our statement of operations as
“Foreign exchange gain (loss) and unrealized gain (loss) on swaps,
net.”  We enter into these arrangements to reduce our exposure
resulting from a possible depreciation of the real in relation to the U.S.
dollar because a high proportion of our debt is denominated in U.S.
dollars.  See “Item 5—Operating and Financial Review and
Prospects—Overview—Brazilian economic environment” and “Item 6 – Operating and
Financial Review and Prospects—Liquidity and capital
resources—Debt.”  Our financial income also includes income from the
funds in trust related to the construction of the Três Lagoas project
mill.  See “Item 4A –Information on VCP –History and Development of
VCP”.




Financial
expenses




We incur
financial expenses from several sources, including short-term debt and long-term
debt. We principally seek long-term financing to fund our projects, which are
generally of a long-term nature. Short-term debt is comprised of U.S.
dollar-denominated working capital from commercial banks and short-term secured
loans. Long-term debt consists of both U.S.-dollar debt, mainly due to
pre-payment export loans, and real-denominated debt,
borrowed from BNDES. Additionally, we consider the natural hedging from the
funds obtained by exports denominated in dollars when deciding to incur such
arbitrage. We provide no assurance that such favorable results will be earned in
the future or that we will continue with these arbitrage transactions. See “Item
6 – Operating and Financial Review and Prospects—Liquidity and capital
resources.”




Discussion
of critical accounting policies




Critical
accounting policies are those that are important both to the portrayal of our
financial condition and operational results and that require our management’s
most difficult, subjective or complex judgments, often as a result of the need
to make estimates about the effect of matters that are inherently uncertain.
 As the number of variables and assumptions affecting the possible future
resolution of the uncertainties increase, those judgments become even more
subjective and complex.  In order to provide an understanding about
how management forms its judgments about future events, including the variables
and assumptions underlying the estimates, and the sensitivity of those judgments
to different circumstances, we have identified the following critical accounting
policies:




·
            revenue
      recognition and accounts
receivable;




·
            impairment
      of investments, including goodwill and intangible
  assets;




·
            recoverability
      of long-lived assets;




·
            asset
      retirement obligation;




·
            investment
      - consolidation or equity method
analysis;




·
            forest
      development costs and impairment
tests;




·
            deferred
      taxes;




·
            tax
      contingencies;




·
            employee
      benefits and other related
matters;


58




·
              fair
      value of financial instruments – put and call
  options;




·
              financial
      instruments and hedge; and




·
              earning
      per shares.




Revenue
recognition and accounts receivable




We
recognize revenue and associated costs of sales at the time our products are
delivered to our customers or when title and associated risks pass to our
customers.  Revenue is recorded net of sales returns of US$ 9 million
in 2008 (US$ 8 million in 2007 and US$ 10 million in
2006).  Our customers that purchase on credit agree to payment terms
that effectively include finance charges.  The finance charge on each
sale is the difference between the amount the customer agrees to pay at the due
date and the cash sale price.  The finance charges are recognized over
the payment period and are included in financial income.  Recognition
of revenue for our two segments and for domestic and export sales is based on
the following principles:




Pulp - domestic
market:  Sales are primarily under credit terms which do not
exceed 30 days or through VCP’s vendor program.  Revenue recognition
is consistent with that applied to paper sales.




Pulp - export
market:  All export orders are normally fulfilled from
inventories maintained at own or third-party warehouses located close to
strategic markets.  These sales are recognized when products are
delivered to the carrier and risks have passed to the customer.




Paper - domestic
market:  Sales are either on cash or credit terms (normally 30,
60, 90 days) or through our vendor program.  Credit sales receivables
are discounted to present values as our price list is dependent on the length of
credit granted.  Revenue is recognized when the customer takes
delivery of the product either upon delivery to the customer’s carrier
(Incoterms FOB) or premises (Incoterms CIF).  Sales through our vendor
program are made to certain of our pre-qualifying domestic customers
(approximately 8% of accounts receivable), and represented approximately 31% of
our domestic sales in 2008 (2007 – 23% and 2006 – 22%).  Under the
vendor program, the customer agrees to pay the bank at a later date and the bank
in turn pays us on behalf of the customer for the purchase price of the product
upon its delivery.  We guarantee full repayment of the loan for which
the maximum allowable term for payment is generally 180 days, though in the case
of a few customers, we extend the term to 240 days.




Paper - export
market:  Export orders are normally fulfilled from inventories
maintained at our own or third-party warehouses located close to strategic
markets.  We recognize revenue and associated costs of sales at the
time products are delivered to the carrier and risks have passed to the
customer.  Incoterms CIF and Incoterms FOB terms determine timing of
revenue recognition.




Discounting
of short-term receivables and interest income




Our
customers that purchase on credit agree to payment terms that effectively
include finance charges.  The finance charge on each sale is the
difference between the amount the customer agrees to pay at the due date and the
cash sale price at date of sale.  The finance charges are recognized
over the payment period and are included in financial income, and accounts
receivable from these transactions, including short-term receivables, are
discounted to present value.




Vendor
program




Some of
the sales of our products to certain of our domestic customers are performed
through a program called the “vendor program,” where the purchases from us are
financed by a bank that has established a direct financing
program.


59




The
vendor program, available to only some of our customers, is a means by which the
bank essentially finances our customers’ purchases.  Under this
program, the customer agrees to pay the bank at a later date and the bank in
turn pays us on behalf of the customer for the purchase price of the product
upon its delivery to the customer.  We, as the vendor, act as a
guarantor under the program of the value of the sale plus the interest on the
funds charged to the customer.  As a result, the customer can take
advantage of lower interest costs that arise as a result of the bank looking to
us, and not our individual customers, as the primary support for the credit
risk.  In addition to the lower interest cost, the customer obtains
additional benefits in the form of lower value-added taxes since the interest
charged by the bank to the customer is not subject to these taxes that would
otherwise have accrued had we incorporated the finance charges into the sales
value and billed the amount directly to our customer.  The terms of
sale under the vendor program depend on the customer’s credit rating, which is
based on our own internal credit review, and typically are for 150 to 160 days;
although in the case of a few selected customers may be up to either 180 or 240
days.  We estimate that during each of the years 2006, 2007 and 2008
an average of approximately 8% of our total regular domestic customers obtained
our guarantee for our sales of product to them and these sales represented 22%,
23% and 31%, respectively of our total domestic sales value.  The
amount of the guarantee outstanding was US$ 120 million, US$ 127 million and US$
112 million at December 31, 2006, 2007 and 2008, respectively.




This
guarantee does not expose the Company to any greater risk or net obligation than
a credit sale.  We retain the same risk of loss on customer accounts
under the vendor program that we do under our own non-vendor program sales and
we mitigate this risk by the continuous evaluation of both vendor and non-vendor
receivables for collectability.  In the case of a non-vendor credit
sale, revenue is recorded on shipment, and a receivable is
created.  If the credit sales customer does not pay the receivable,
then the Company would establish a doubtful accounts allowance if it considered
loss to be probable.  In a vendor financed sale, the Company records
revenue also on shipment and receives full payment from the bank.  If
the customer does not pay the bank within the specified time period, the Company
would have to satisfy it guarantee with the bank.  The Company would,
at that time, charge the obligation to selling expenses if it considered the
loss to be probable.  The Company would then look to the customer for
payment on the sale.  At this point, after satisfying the guarantee to
the bank, the Company is in the same position as if had made a credit sale; the
customer owes the Company for the value of the sale.  If the customer
does not pay, the Company loses the value of the sale which had been recorded as
a bad debt expense.  The Company’s losses from guarantee’s, net of
amounts recovered from our customers, has historically been
negligible.




Annually,
the Company considers the provisions of FIN 45 and EITF 00-21 “Revenue
Arrangements with Multiple Deliverables” in accounting for the vendor
program.  Guarantee income from these arrangements are not significant
and although EITF 00-21 was considered in the determination of whether to
account for our product sales and income from guarantees as a possible multiple
deliverables, these were considered not to be material.  The Company’s
historical analysis indicates that the fair value of the guarantees to be
insignificant as the Company has not incurred significant losses in the
past.  The Company recognizes revenue for each of the elements of the
sale of the products when the customer takes delivery.




Allowance
for doubtful accounts




The
allowance for doubtful accounts is recorded in an amount we consider sufficient
to cover any probable losses on realization of our accounts receivable from our
customers and is included under selling expenses; no adjustment is made to net
operating revenues.  Our accounting policy for establishing the
allowance for doubtful accounts reserve is summarized as follows:




·
              all
      invoices are individually analyzed by our accounting department, in
      connection with the legal, collection and credit departments, in order to
      measure the amount of the probable expected losses, and, consequently, to
      determine the allowance for doubtful accounts to be
    recorded.




·
              for
      bankrupt customers, the Company has the criteria of accruing 100% of their
      open balances.




·
            the
      other customers who have overdue invoices will have accruals varying from
      the range of 1% to 100% calculated over their open
    balances.


60




We
perform initial and ongoing credit evaluations of our customers and, when deemed
necessary, obtain collateral or letters of credit to protect our
interests.  Additionally, most of our export sales to the US, Europe
and Asia are secured by letters of credit.  We establish an allowance
for doubtful accounts against receivables we believe will not be fully
collected.




Impairment
of investments, including goodwill and intangible assets




Aracruz




We
acquired 28.0% of the voting capital and 12.4% of the total capital of Aracruz
on October 3, 2001, for US$ 370 million, generating goodwill on our
portion of the underlying fair value of the net assets of US$ 155
million.  Financial Accounting Standards Board Statement, or SFAS
No. 142, “Goodwill and Other Intangible Assets,” was applied.




Accounting
Principles Board Opinion No. 18, “The Equity Method of Accounting for
Investment in Common Stock,” requires us to determine if, among other factors, a
decrease in market value is other than a temporary impairment.  As the
quoted market price of the investee’s publicly traded stock during 2002 was
consistently quoted below book value, a one-off impairment provision was
recorded in 2002 based on the market price of US$ 18.56 for the Aracruz
ADRs on December 31, 2002.  The impairment charge of US$ 136
million (gross of deferred income tax effects of US$ 46 million) was
recorded directly as a charge to income (“Equity loss of
investee”).  The deferred tax effect of US$ 46 million is
reflected at historical values to reflect the underlying functional currency of
the investee.  At December 31, 2008, the Aracruz ADR was quoted
at US$ 11.28.  The Company however, does not hold ADR securities
but rather Aracruz common shares, whose quoted price at December 31, 2008 on the
Bovespa stock exchange was R$ 3.98, the equivalent of US$
1.70.  Consequently, at December 31, 2008, the quoted market value of
our 127,506,457 (representing 12.4% of total shares) Aracruz common shares was
US$ 217 million (US$ 1,150 million at December 31,
2007).  Accordingly, there would be no requirement for an impairment
provision since the market value is above the current value of VCP’s investment
in Aracruz.  See
“Item 5A Operating and Financial Review and Prospects – Operating Results –
Recent Developments”.




Aracruz
suffered significant losses from financial instrument related to derivative
instruments in 2008 and on May 13, 2009 concluded negotiations for the repayment
of debts originating from these transactions.  See “Item 5.A Operating
Results – Recent Developments – Liquidity and Capital Resources”.




Conpacel




The
Company accounted for its investment in Conpacel using the equity method of
accounting until August 31, 2008.  Beginning September 1, 2008, we
started to recognize our 50% interest in the Consortium’s operations (which
basically operates in our paper segment) and no longer applied the equity
method.  The related goodwill is disclosed separately as “Other
goodwill” at December 31, 2008 of US$ 132
million.  This goodwill is tested, at least, annually for impairment
pursuant to SFAS 142, “Goodwill and Other Intangible Assets”.





Recoverability of long-lived
assets




We review
our long-lived assets to be held and used in the Company’s activities, for
possible impairment whenever events or changes in circumstances indicate that
the carrying value of an asset or group of assets may not be recoverable on the
basis of undiscounted future cash flows as required by SFAS No. 144, “Accounting
for the Impairment or Disposal of Long-Lived Assets”.  The reviews are
carried out at the lowest level of groups of assets to which we are able to
attribute identifiable future cash flows.  Asset groups are forestry
projects or production facilities for paper and pulp.  We adjust the
net book value of the underlying assets if the sum of the expected future cash
flows is less than book value.  These reviews to date have not
indicated the need to recognize any impairment.




Asset retirement
obligation


We
considered SFAS 143, “Accounting for Asset Retirement Obligations”, in
determining whether to record an asset retirement obligation for property, plant
and equipment and have concluded that no such adjustment was required as we have
no retirement obligation for which there are existing legal obligations and that
obligation is unavoidable.  The Company does not have any long-lived
asset that it expects to abandon, or dispose of that would require an asset
retirement obligation provision.




61




Investment - consolidation or equity
method analysis




FASB
Interpretation No. 46R, “Consolidation of Variable Interest Entities, an
interpretation of ARB No. 51”, requires companies to apply the “variable
interest model” to determine which entity holds the controlling financial
interest on an investee for consolidation purposes.  Three investees,
all incorporated in Brazil are not consolidated and are accounted for using the
equity method.  They are:




·
              Conpacel: VCP
      participates in a cost and production sharing venture with Suzano which
      operates a pulp and paper plant in Americana, São Paulo, which was
      formerly owned by Ripasa, a subsidiary of VCP and Suzano.  Under
      the various agreements, the members have undivided interests in assets,
      liabilities and operations of the venture.  On May 12, 2008,
      Brazilian tax authorities approved the transformation of Ripasa into a
      production unit operating as a Consortium (an unincorporated joint-venture
      in which each party has an undivided interest) of VCP and
      Suzano.  Conpacel began its operations on September 1,
      2008.  VCP and Suzano each own 50% of the net assets of
      Conpacel.  VCP is entitled to 50% of the Consortium’s production
      beginning September 1, 2008.  Through August 30, 2008, the
      investment in the corporate entity Ripasa was recorded on the equity basis
      of accounting.  From September 1, 2008 when the Consortium began
      operations, as no separate legal entity exists, there is no consolidation
      of a separate entity, pursuant to EITF 00-01 “Applicability of the
      Pro-Rata Method of Consolidation to Investments in Certain Partnerships
      and Other Unincorporated Joint Ventures”, VCP accounts for its rights and
      obligations according to its undivided interest as defined in the
      consortium agreement, and records them according to their nature,
      principally property, plant and equipment.  Revenue and costs
      are recorded as part of VCP’s operations and the liabilities are recorded
      as suppliers or financing, according to their
  nature;




·
              Aracruz: Through
      December 31, 2008, we owned 28.0% of the common voting shares, which
      represent 12.4% of the total share capital, of Aracruz, which we acquired
      in 2001.  We had the right to appoint three of the ten directors
      to the Aracruz Board of Directors under the terms of a Shareholder
      Agreement that expired on May 11, 2008.  The investment is
      treated on an equity accounting basis.  See
      “Item 5.A Operating and Financial Review and Prospects – Operating Results
      – Recent
Developments”.




·
              Ahlstrom VCP: Management
      has concluded that the venture is not required to be consolidated as
      Ahlstrom has been the controlling shareholder with a 60% participation
      from the venture’s inception in September 2007 until Ahlstrom purchased
      the remaining 40% held by VCP in August 2008.  Additionally,
      Ahlstrom is the primary beneficiary due to (i) its 60% participation (ii)
      VCP’s option to sell its 40% interest at a fixed or formula based price
      insulating it from absorbing future possible losses, (iii) Ahlstrom’s
      option to buy VCP’s 40% interest in the joint venture at a fixed or
      formulae-based price allows it to receive the majority of the residual
      returns and (iv) the fair value of the puts and calls between VCP and
      Ahlstrom would not increase VCP’s interest to more than 50% of the fair
      value of the entity.  Accordingly the investment was treated on
      an equity accounting basis during the period of September 2007 to August
      2008.




Forest
development costs




Forest
development costs, primarily project implementation costs (preparation of soil,
planting, pest control and clearing, etc.) and similar ongoing development costs
are capitalized as incurred.  As a result of improvements in forest
management techniques, including genetic improvement in trees, we now harvest
and replant our forests approximately every seven years and capitalized costs
are expensed at the time of each harvest.




Deferred
taxes




We
recognize deferred tax assets and liabilities based on the temporary differences
between the financial statement carrying amounts and the tax basis of assets and
liabilities.  If we or one of our subsidiaries operate at a loss or
are unable to generate sufficient future taxable income, or if there is a
material change in the actual effective tax rates or time period within which
the underlying temporary differences become taxable or deductible, we evaluate
the need to establish a valuation allowance against all or a significant portion
of our deferred tax assets resulting in an increase in our effective tax
rate.


62




Tax
contingencies




We are
currently involved in certain tax proceedings and have filed claims to avoid
payment of taxes that we do not believe are due.  When tax obligations
are clearly established by current legislation, even though we are contesting
the tax and may not have settled amounts allegedly due, we fully provide for the
obligation and related charges.  As discussed in Note 15 to our
audited consolidated financial statements at and for the year ended
December 31, 2008, in the case of tax assessments or other contingent
liabilities, we have accrued our estimate of the costs for the resolution of
these claims when we consider loss of our claim to be probable.  The
tax contingencies and obligations which are being disputed relate primarily to
value-added sales and excise taxes, taxes on revenue, social security
contributions, income tax and tax on bank account transactions.  These
estimates have been developed in consultation with outside legal counsel
handling our defense in these matters and were based upon an analysis of
potential results.  Additionally, effective January 1, 2007, the
Company adopted the provisions of FASB Interpretation no. 48 (“FIN 48”),
“Accounting for Uncertainty in Income Taxes,” which had no effect on the
financial information or disclosures (Note 20 to our audited consolidated
financial statements for the year ended December 31, 2008).




Employee
benefits and other related matters




In
March 2000, we began co-sponsoring a multi-employer defined contribution
plan which provides pension and post-retirement benefits.  We also
contribute to the Government pension, welfare and redundancy plans on behalf of
our employees and these contributions are expensed as incurred.  Most
of our employees are members of unions, with which we enter into
collective-bargaining arrangements annually.  The liability for future
compensation for employee vacations is accrued as earned.




We adopt
SFAS 106, “Employers’ Accounting for Post-retirement Benefits Other than
Pensions” and SFAS 158, “Employers’ Accounting for Defined Benefit Pension and
Other Postretirement Plans an amendment of FASB Statements No. 87, 88, 106, and
132(R)”, which require a provision for the costs of post-retirement benefits
expected to be paid to current, former or inactive employees upon
retirement.  Expenses relating to benefits we provide to our current
employees are expensed as incurred whereas those relating to retired employees
(current as well as expected in the future) and their dependents are accounted
for in accordance with SFAS 106.




Fair
value of financial instruments –call and put options




Put and
call options exist as a result of the (i) acquisition of Ripasa in 2005 and (ii)
disposal of the Paper product facilities within the Jacareí mill to Ahlstrom in
2007.  The options are accounted for as derivative instruments
pursuant to SFAS 133 “Accounting for Derivative Instruments and Hedging
Transactions” which requires, among other things, that these instruments be
initially recognized at their fair values and subsequent fair value changes be
recognized in the statement of operations for the
period.  Descriptions of the relevant details are as
follows:




(i)
Ripasa:




Written
put and call options were established in separate agreements (subsequently
amended) at the time of the acquisition of the Ripasa shares, which originally
provided former controlling shareholders of Ripasa, the Zarzur family (directly
and indirectly through CMT), with an option to require VCP and Suzano to
repurchase their shares at any time, provided that the shares be free of any
encumbrances by the exercise date, during the five-year period ending
March 31, 2010 and VCP has a call option to acquire these same shares from
CMT during a twelve-month period beginning March 31, 2010 under the same terms,
values and preceding conditions as the original call option agreement for the
reais equivalent, at
that date, of US$ 80 million plus Brazilian market rate interest from
March 31, 2005 (on December 31, 2007, that amount, including interest,
totaled US$ 179 million). The corresponding put option held by the former
principal shareholding group has the same term, values and preceding conditions
and expiration date as in the original put agreement, only the underlying
security had been substituted.  For more information on the fair value
of financial instruments.  See Note 4(a) to our audited consolidated
financial statements.


63




(ii) The Ahlstrom VCP
venture





When, in 2007, VCP contributed a portion
of its Jacareí mill assets in exchange for a 40% interest in Ahlstrom VCP, under
the terms of the agreement, Ahlstrom had an option to purchase an additional 20%
and, at a later stage, the remaining 20% of the shares in the joint venture held
by VCP, whereas VCP had an option to sell the same number of shares at the same
time.  In September 2008, we sold to Ahlstrom our remaining 40% equity
interest in the joint-venture company for US$ 42 million, canceling the put and
call options mentioned above.





Financial
instruments and hedge




For the
financial instruments, we make and assume assumptions as to future foreign
exchange and interest rates to recognize the fair value of each
instrument.  See Note 14 to our audited consolidated financial
statements.  For more details related to the possible impact of
fluctuations in the foreign exchange and interest rates on our principal
financial instruments and positions, see “Item 11 -Quantitative and Qualitative
Disclosures About Market Risk.”





Earnings (loss) per
share




In conformity with SFAS 128, “Earnings
per Share”, we have presented earnings per share for each class of shares,
taking into account that the preferred shares are entitled to a dividend 10%
greater than that paid to the common shares.  The computation has been
made as if the net income (loss) for each period will be fully
distributed.  As earnings may be capitalized or otherwise
appropriated, there is no assurance that either common or preferred shareholders
will receive dividends.  We may also pay dividends through interest
attributed to capital in accordance with our by-laws.





Consistent with guidance provided by
EITF No. 03-06 “Participating Securities and the Two-Class Method under SFAS No.
128, ‘Earnings per Share’”, an entity would allocate losses to the preferred
shares in periods of net loss if, based on the contractual terms of the
participating security, the preferred shares had not only the right to
participate in the earnings of the issuer, but also a contractual obligation to
share in the losses.  The Company’s preferred shares do not have a
contractual obligation to share in the losses.  Accordingly, the loss
per share for the year ended December 31, 2008 was computed only for common
shares.





Changes to Brazilian
GAAP




Law No.
11.638, enacted on December 28, 2007, amended Brazilian Corporate Law with
respect to certain accounting practices as from the year ending December 31,
2008, which affected the presentation of the financial statements prepared in
accordance with accounting practices adopted in Brazil (not presented herewith)
which are the basis for computing the minimum mandatory dividend.  Law
No. 11.638 also instructed the CVM to effect changes to the accounting practices
adopted in Brazil which were introduced by new standards issued by the CPC in
2008.





(i) Law
11.638





Law
11.638, enacted on December 28, 2007, introduced the most far reaching revision
of accounting practices adopted in Brazil (Brazilian GAAP) since the Brazilian
Corporate Law was sanctioned in 1976.  In addition to the accounting
provisions stipulated by Law 11.638, the law mandated that the public company
regulator, the Comissão e
Valores Mobiliários, or the CVM, and the Brazilian Central Bank, or
BACEN, instruct a new Brazilian accounting standards board, the Comitê de Pronunciamentos
Contábeis, or the CPC, to issue standards to harmonize Brazilian GAAP
with International Financial Reporting Standards (“IFRS”).  The CPC’s
timetable calls for 25 new standards to be issued in 2009 and 2010, in addition
to the 15 issued in 2008.  The standards that have been issued so far
that came into effect in 2008 have had a profound impact on the measurement of
transactions and reporting at December 31, 2008.  Although the new
Brazilian GAAP will not be the same as IFRS, Brazilian publicly listed
companies, banks and insurance companies will be required to present
consolidated IFRS financial statements (fully compliant with the regulations of
the International Accounting Standards Board, or IASB) for the year ending 2010
(with comparatives for 2009).  The new Brazilian GAAP will still be
prepared for statutory purposes.


64





Law
11.638 came into effect for the year ending December 31, 2008.  For
publicly listed companies the CVM issued instructions providing for additional
disclosures and implementations of certain adjustments in the quarterly filings
of financial information.  Certain companies have elected to early
adopt the provisions of the law for their interim financial statements during
2008.  All companies will be required to reflect the effects of the
new accounting standards introduced by the law and, for those standards which
are effective for 2008, also conform to the new accounting standards introduced
by the CPC.





The
Brazilian federal income tax authorities issued in January 2009 their
regulations (Medida
Provisória No. 449, or MP 449) with respect to the effects of the
Law.  These regulations provide companies an option to maintain the
pre-Law tax regime for two years or, in certain cases, allow the accounting
adjustments to already trigger tax effects from 2008.





Brazilian
economic environment




Our
results of operations and financial condition, as reported in our financial
statements, have been affected by the rate of Brazilian inflation and the rate
of appreciation of the Brazilian currency against the U.S. dollar, when the
annual average rate is considered.




The table
below shows the Brazilian general price inflation (according to the IPCA),
appreciation of the real against the U.S. dollar
and the period-end exchange rate and average exchange rates for the periods
shown:




Year ended December 31,2008
              
              
              2007
              
              
              2006
              
              
              2005
              
              
              2004Inflation
      (IPCA)
              
              
              5.9
              %
              
              
              4.5
              %
              
              
              3.1
              %
              
              
              5.7
              %
              
              
              7.6
              %Appreciation of therealvs. U.S. dollar (annual average)(1)
              
              
              6
              %
              
              
              10
              %
              
              
              11
              %
              
              
              17
              %
              
              
              5
              %Year/period-end exchange
      rate—US$ 1.00(1)
              
              R$
              2.34
              
              
              R$
              1.77
              
              
              R$
              2.14
              
              
              R$
              2.34
              
              
              R$
              2.65Average
      (daily-weighted) exchange
      rate(1) US$ 1.00
              
              R$
              1.83
              
              
              R$
              1.95
              
              
              R$
              2.18
              
              
              R$
              2.44
              
              
              R$
              2.93





(1)The average (daily) exchange
rate is the sum of the closing exchange rates at the end of each business day
divided by the number of business days in the period.  When using the
2008 average annual rate consideration should be given to the effect of the
significant depreciation of the real (18.1%) in the last
quarter.




A.
            Operating
      Results




Recent
Developments




Acquisition
of additional equity interest in Aracruz




On January 20,
2009, VCP announced the
conclusion of negotiations with the controlling shareholders of Arapar S.A.
(“Arapar”) and members of the Lorentzen, Moreira Salles and Almeida Braga
families (the “Families”) to acquire 127,506,457 common shares issued by
Aracruz, representing approximately 28% of the voting capital of
Aracruz.The purchase price of R$2,710 million is payable in
six semi-annual installmentsas
follows: (i) R$ 500 million was paid in cash on January 21, 2009;(ii) R$
500 million is due on July 5, 2009, of which R$ 400 million will be paid in
cash, and the remaining R$ 100 million could be credited in favor of the
Families against VCP to be used as payment for preferred shares issued by VCP in
a capital increase; (iii) R$ 500 million will be paid in cash on January 5,
2010; (iv) R$ 500 million will be paid in cash on July 5, 2010;(v) R$
410 million will be paid in cash on January 5, 2011; and (vi) R$ 300 million
will be paid in cash on July 5, 2011.


65





On March 5,
2009, VCP entered into an agreement withMessrs. Joseph Yacoub Safra and
Moise Yacoub Safra (“Safra Family”),
to acquire an additional 127,506,457 common shares of Aracruz, representing
another 28.03% of Aracruz’s voting capital, as a result of Arainvest’s exercise
of tag-along rights in connection with the transaction carried out with the
Families.  The purchase price is of R$ 2,710 million and will be paid
in six tranches pursuant to a schedule similar to that applicable to the
Families.  The acquisition of the Safra Family interest in Aracruz was
closed by the end of April 2009.  At that time, VCP owned
approximately 84.09% of Aracruz’s voting capital, becoming the controlling
shareholder of Aracruz.




The
nominal value of the total transaction is R$5,420 million and its present value
is the equivalent of approximately R$4,700 million.




Pursuant to Brazilian law, we have
registered with the CVM a Public Purchase Offer for the acquisition of the
remaining outstanding common shares of Aracruz, for a value equal to 80% of the
price per share agreed with both the Families and the Safra Family, and to be
paid upon the same terms and conditions as agreed with both the Families and the
Safra Family.  On June 1, 2009 VCP published the Public Purchase Offer
for the acquisition of the remaining outstanding common shares of Aracruz and
the offer is open from June 2, 2009 until July 1,
2009.




Aracruz’s preferred shares are traded in
the NYSE in the form of ADSs under the symbol “ARA” and the company files
periodic information with the SEC, including annual
reports.




Increase of VCP’s corporate
capital




Concurrently with the acquisition of the
additional equity interest in Aracruz, an Extraordinary Shareholders Meeting of
the Company was held on February 6, 2009, which contemplated management’s
proposal to increase capital by up to R$4,254 million, with the issuance of up
to 223,047,368 new shares, of which 62,105,263 would be common shares and up to
161,789,474 preferred shares at a unit price of R$19 per share, via a private
subscription.




The issuance price corresponds to the value of the average
market price of VCP shares traded on the stock exchange during the period
beginning December 2, 2008 through and including January 16, 2009 as increased
by a premium of 11.78%, which represented in the opinion of the Company’s
management, the value of the new shares to be issued.  At this Extraordinary Shareholder Meeting,
management’s proposal was approved as presented, with the aforementioned capital
increase to be subscribed and paid in the following
manner:





(i)
            VID
      subscribed to, via the exercise of its preemptive right, 62,105,263 common
      shares with a total value of R$1,180 million that was paid via the
      utilization of R$1 billion of previously issued Advances for Capital
      Increases and the remaining R$180 million in
  money;





(ii)
            BNDESPar,
      holder of 56,880,857 common shares of Aracruz subscribed the equivalent of
      R$828 million for 43,588,699 preferred shares of VCP, utilizing its common
      shares of Aracruz, which received and subscribed at a unit price of
      R$14.56.  The shares of VCP were issued at a unit price of
      R$19.00;





(iii)
            BNDESPar
      subscribed to 95,789,517 preferred shares of VCP for a value of R$1,820
      million, requiring VID to transfer to BNDESPar, the preemptive right to
      subscribe to these preferred shares that remain after the
      subscription;





(iv)
            The
      remaining shareholders of Aracruz, holders of outstanding and in
      circulation common shares, had the right to subscribe using these common
      shares of Aracruz, which received at a unit value of
      R$14.56.  The exchange of these shares forpreferred shares
      of VCP was at the per unit value of R$19.00 and the difference was
      subscribed in money and none of such shareholders elected to
      subscribe;





(v)
            The
      Families and Safra Family subscribed preferred shares of VCP totaling a
      value of R$90 million each.


66




The above capital subscriptions made on
April 30, 2009 were ratified at an Extraordinary Shareholder Meeting’s of VCP on
May 27, 2009.  See “Item 7.A Major
Shareholders”.




After completion of the capital increase,
our controlling shareholder VID and BNDESPar on May 5, 2009 executed a
shareholders’ agreement which provides that (a) 21.04% of the total capital of
VCP held by BNDESPar will be bound to the agreement for 3 years after its
execution, such that BNDESPar and VID will together hold at least 50.1% of the
voting capital of VCP during this period; (b) the approval of certain matters
will depend on the affirmative vote of BNDESPar; (c) between the 3rd and 5th
year after its execution the shareholders’ agreement will subject only 10.94% of
the shares held by BNDESPar to the terms of the agreement; and (d) from June
2014 onwards none of the BNDESPar shares will be bound by the terms of the
agreement.  See “Item 10. Additional Information – C Material
Contracts – Shareholders’ Agreement of Aracruz”.




Conversion
of preferred shares into common shares




On May
30, 2009, at an Extraordinary Shareholder Meetings of VCP, the conversion of its
preferred shares into common shares at the exchange ratio of 0.91 common shares
for one preferred share (VCP Conversion) was ratified and, thereafter,
subsequently ratified by a majority of the company’s preferred shareholders at a
Special Meeting held on the same day.  Preferred shareholders who do
not wish to their shares to be converted have a 30-day period that ends on July
2, 2009, to inform the company that they, instead of converting their shares,
choose to redeem the shares for the respective book value per
share.  If a significant amount of VCP preferred shareholders choose
to exercise this appraisal right, the conversion of VCP preferred shares into
common shares may be cancelled.  If the conversion occurs, VCP’s
capital stock will consist only of common shares.  VCP’s ADSs will
represent common shares.




In
addition, also on May 30, 2009, the common shareholders of Aracruz convened at
an Extraordinary Shareholder Meeting and voted to approve a recapitalization of
Aracruz consisting of the conversion of Aracruz’s Class A Preferred and Class B
Preferred Shares into common shares of Aracruz at the ratio of 0.91 common share
for each and every one of Aracruz’s Class A Preferred and Class B Preferred
Shares (Aracruz Conversion).  Pursuant to the Brazilian Corporate Law,
corporate transactions that alter the features of a company’s class of shares,
including the Aracruz Conversion, must be approved by Aracruz’s common
shareholders and ratified by holders of a majority of the issued and outstanding
class of the affected stock, voting as separate classes.




The Class
A Preferred and Class B Preferred Shareholders of Aracruz were invited, on first
call, to convene at Special Shareholder Meetings of Preferred Shareholders of
Aracruz scheduled for May 30, 2009 to deliberate on the Aracruz
Conversion.  However, the required quorum under the Brazilian
Corporate Law to convene the May 30 Special Meetings was not
obtained.




As a
result, on June 19, 2009 Aracruz published a second call for Special Shareholder
Meetings of Preferred Shareholders of Aracruz to be held on July 10, 2009 in
order to submit the Aracruz Conversion to the approval of holders of Aracruz’s
Class A Preferred and Class B Preferred Shares.




Although
the common shareholders of Aracruz have already voted in favor of the Aracruz
Conversion at the May 30, 2009 Extraordinary Shareholder Meeting, their
resolution does not by itself have the power, under the Brazilian Corporate Law,
to convert Aracruz’s Class A Preferred or Class B Preferred Shares into Aracruz
common shares.  In order for the Class A Preferred and Class B
Preferred Shares of Aracruz to be converted into Aracruz common shares, both the
Class A Preferred and B Preferred Shareholders must approve the Aracruz
Conversion at the Special General Meetings voting as separate
classes.  If only one of the classes of Aracruz’s Preferred Stock
approves the Aracruz Conversion, that class will not be converted into Aracruz
common shares unless the other class of Aracruz’s Preferred Stock also approves
this transaction.




If the
Aracruz Conversion is not ratified by Aracruz’s preferred shareholders at the
Special General Meetings, we may evaluate alternative methods of effecting the
corporate reorganization following our acquisition of additional interest in
Aracruz, if at all.


67




Merger
of shares issued by Aracruz into VCP




As part
of the corporate reorganization following our acquisition of additional interest
in Aracruz, our management and Aracruz’s management intend to call an
Extraordinary Shareholder Meeting of each company to vote a business combination
under the Brazilian Corporate Law known as a merger of shares (incorporação de
ações).  Pursuant to the merger of shares, subject to the
approval of both companies’ common shareholders, all the issued and outstanding
Aracruz shares not held by VCP will be exchanged for VCP common shares (assuming
the VCP Conversion).




As in
most corporate actions submitted to a vote of a corporation’s shareholders,
under the Brazilian Corporate Law the preferred shares of either the acquirer or
the target of a merger of shares do not have voting rights in connection with
this corporate action.




The
merger of shares is not an exchange offer, since, if the transaction is
approved, Aracruz shareholders will not have the option to hold on to their
Aracruz shares.  They will either agree to have their Aracruz shares
exchanged for VCP common shares or exercise appraisal rights, to the extent
available, as further explained below.




Set forth
below is a diagram that illustrates the effect of the merger of shares, if
approved and consummated, to the capital structure of VCP.




Proposed
Merger of shares (1)
(2) (3)












(1)
            Ownership
      interests in VCP assume the consummation of the VCP Conversion with VCP
      shareholdings


as
      of May 29, 2009.


(2)
            Ownership
      interests in Aracruz assume the approval and consummation of the Aracruz
      Conversion with shareholdings as of May 29,
  2009.


(3)
            Amounts
      of shareholders’ equity participation will be dependent on various
      factors, including the exercise of appraisal
  rights.




A - Exchange Ratio




The
exchange ratio for the merger of shares will be 0.1347 VCP common share
(assuming the VCP Conversion is consummated) for each and every one of Aracruz
common shares (assuming the Aracruz Conversion is approved and
consummated).  If the Aracruz Conversion is not approved or
consummated, the structure of the merger of shares Merger could be altered (if
not cancelled) to provide for the exchange each class of Aracruz’s stock
(common, Class A Preferred and Class B Preferred) for shares of
VCP.  If this were to occur, the 0.1347 merger of shares exchange
ratio would be adjusted, so that a new ratio to exchange Aracruz Preferred
Shares for VCP common shares (assuming the VCP Conversion is consummated) would
take into account the effect of the application of the Aracruz Conversion
exchange ratio of 0.91 Aracruz common share for each and every one of Aracruz’s
preferred shares, which effect would have resulted had the Aracruz Conversion
been approved and consummated.


68




B - Special Independent
Committees




In 2008,
the CVM approved Practice Bulletin (Parecer de Orientação) No. 35
which provided certain guidelines to management of controlling and controlled
companies in the negotiation of business combinations, including negotiations of
stock swap mergers, involving those companies.  CVM Practice Bulletin
No. 35 sets forth some procedures that, without the exclusion of others, might
serve to contribute to the protection of the target’s minority shareholders in
business combinations, including stock swap mergers.  One such
procedure is for each affiliated company involved in a merger to establish
certain special independent committees, or Special Independent Committees,
comprised, entirely or in part, of independent members who will help negotiate
the transaction and make recommendations to the boards of directors of each
company.




In
connection with the merger of shares, VCP and Aracruz formed such Special
Independent Committees comprised entirely of independent members who helped the
boards of directors of each company negotiate and make recommendations in
respect of the merger of shares and related exchange ratio.




The VCP
Special Independent Committee and the Aracruz Special Independent Committee
prepared reports on the terms of the merger of shares, including its related
exchange ratio, that were submitted to the boards of directors of each
company.  As a result, on June 1, 2009, separate meetings of the
boards of directors of Aracruz and VCP were convened to analyze the
recommendations made by the Special Independent Committees of each company with
respect to the merger of shares.




After (i)
having been made aware of the discussions between the VCP Special Independent
Committee, and the Aracruz Special Independent Committee (ii) having examined
the reports submitted by those committees; and (iii) having discussed the
conclusions of those committees among themselves, the boards of directors of VCP
and Aracruz unanimously decided to set the exchange ratio for the merger of
shares at 0.1347 VCP common share for each and every one of Aracruz’s common
shares.




The
unanimous decisions of each of the boards of directors of VCP and Aracruz were
essentially based upon the following:




·
            the
      VCP Special Independent Committee considered an exchange ratio ranging
      between 0.0924 and 0.1347 VCP common share for each and every one of
      Aracruz’s common shares to be appropriate, while the Aracruz Special
      Independent Committee proposed an exchange ratio ranging between 0.1342
      and 0.1473 VCP common share for each and every one Aracruz’s common
      shares;




·
            given
      the proposed exchange ratios stated above, the Special Independent
      Committees of each company agreed on an exchange ratio between 0.1342 and
      0.1347 VCP common share for each and every one of Aracruz’s common
      shares;




·
            in
      its report, the Aracruz Special Independent Committee suggested that,
      within the range it considered acceptable, the exchange ratio should be
      fixed at 0.1384 VCP common share for each and every one of Aracruz’s
      common shares;




·
            however,
      the suggestion of the Aracruz Special Independent Committee stated above
      was not within the acceptable range set by the VCP Special Independent
      Committee; and




·
            considering
      the rationales presented by the Special Independent Committees and the
      acceptable exchange ratio ranges recommended by the Special Independent
      Committees, the Boards of Directors of VCP and Aracruz agreed to set an
      exchange ratio as close as possible to the range suggested by the Aracruz
      Special Independent Committee but, at the same time, within the limits set
      by the VCP Special Independent Committee.  Therefore, the
      Directors of VCP and Aracruz decided to set the exchange ratio for the
      merger of shares at 0.1347 VCP common share for every Aracruz common
      share, since this exchange ratio complies with the recommendations of both
      Special Independent Committees.


69




In
connection with conversions and merger of shares, Brazilian Corporate Law does
not (1) establish any specific minimum or maximum exchange ratio,
(2) require that the boards of directors of any of the involved companies
formally determine that the terms of those transaction as a whole are “fair,”
either procedurally or financially, to its non-controlling shareholders,
(3) require the formation of any special independent committee or otherwise
that the involved companies alter their corporate governance rules or
(4) impose any prohibition or limitation on the voting rights of
controlling shareholders.




In
addition, while the Special Independent Committees were appointed in compliance
with one of the procedures recommended by CVM Practice Bulletin No. 35 and took
an active role in assisting in the negotiation of the financial terms of the
merger of shares and advising the Boards of Directors of VCP and Aracruz, U.S.
holders of VCP shares and ADS holders should bear in mind that the role of these
Special Independent Committees differs in certain respects from that of a
traditional special committee appointed by a U.S. company in connection with a
transaction similar to the merger of shares. In particular, while the Special
Independent Committees were involved in the process of establishing the merger
of shares exchange ratio, they did not, however, determine such ratios as such
determination is to be made by the Boards of Directors.




C - Quorum




Under the
Brazilian Corporate Law, quorum to convene an Extraordinary Shareholder Meeting
of VCP to deliberate on the merger of shares is at least 25% of the issued and
outstanding VCP common shares.  A favorable vote of the majority of
VCP common shareholders present at a duly convened Extraordinary Shareholder
Meeting to decide on the merger of shares will approve this corporate
action.  It is expected that the merger of shares would be approved at
an Extraordinary Shareholder Meeting of VCP, as VID and BNDESPar have indicated
to VCP that they would vote in favor of the merger of shares.




Under the
Brazilian Corporate Law, quorum to convene an Extraordinary General Shareholder
Meeting of Aracruz to deliberate on the merger of shares and approve this
corporate action is at least 50% of the issued and outstanding Aracruz common
shares.  Assuming the Aracruz Conversion is approved and consummated,
we would own approximately 44.8% of Aracruz’s common shares and would vote in
favor of the merger of shares.  Therefore, assuming the Aracruz
Conversion is approved, a favorable vote of Aracruz common shareholders owning
approximately and additional 5.2% plus one of Aracruz’s common shares would be
required to approve the merger of shares at the Aracruz Extraordinary
Shareholder Meeting.




D - Appraisal Rights




Under the
Brazilian Corporate Law, target shareholders who do not vote in favor of the
merger of shares, including those who abstain from voting or do not attend the
relevant Extraordinary Shareholder Meeting, as well as target preferred
shareholders, are entitled to exercise appraisal rights, which, under the
Brazilian Corporate Law, is generally paid at book value.




However,
under the Brazilian Corporate Law a class of shares that meets certain
dispersion and liquidity criteria set forth under the law will not entitle their
holders to appraisal rights in respect of corporate resolutions that approve a
stock swap merger.  Of Aracruz’s three classes of shares (common,
Class A Preferred and Class B Preferred), only the Class B Preferred currently
meet the liquidity and dispersion criteria set forth under the Brazilian
Corporate Law.  As the Aracruz Conversion has not yet been approved,
it is not possible to determine at this time whether the Aracruz common shares
following this corporate action would still meet the dispersion and liquidity
criteria of the Brazilian Corporate Law, such as Aracruz’s Class B Preferred
Shares currently do.  If, following the Aracruz Conversion, the
Aracruz common shares meet those criteria, then none of the Aracruz
shareholders, including its ADS holders, would be entitled to appraisal rights
in connection with the merger of shares.  If, on the other hand, the
Aracruz common shares are unable to meet those criteria following the Aracruz
Conversion, then all of Aracruz’s shareholders, including its ADS holders, will
be entitled to appraisal rights in connection with the merger of shares at an
appraisal price to be announced by Aracruz in due course.


70




In
addition, under the Brazilian Corporate Law, even if the merger of shares is
approved, our management may call another Extraordinary Shareholder Meeting
following the approval of the merger of shares to submit to the vote of our
common shareholders a proposal to reconsider and, as the case may be, cancel the
merger of shares if, at the discretion of our management, the amount that would
have to be paid by the entity resulting from the merger of shares in respect of
appraisal rights could, in the opinion of our management, jeopardize our
financial situation.




Adhesion
to Novo Mercado




Within
270 days after the conclusion of the merger of the shares of Aracruz by VCP, VID
intends to cause VCP to become a member of the Novo Mercado segment of BOVESPA,
modifying its statutes to the Regulations for Listing on the Novo Mercado,
unless said membership would result in VCP being required to pay withdrawal
rights to shareholders; in that circumstance, the membership would be postponed
until such time as withdrawal rights are no longer applicable.




Results
of operations




The
following table sets forth certain items derived from our statements of
operations for the years indicated:




Year ended December 31,2008
              
              
              2007
              
              
              2006(US$ in millions)Net
      operating revenue
              
              US$
              1,366
              
              
              US$
              1,333
              
              
              US$
              1,317Cost
      of sales
              
              
              (934
              )
              
              
              (887
              )
              
              
              (813
              )Gross
      profit
              
              
              432
              
              
              
              446
              
              
              
              504Selling
      and marketing expenses
              
              
              (143
              )
              
              
              (138
              )
              
              
              (136
              )General
      and administrative expenses
              
              
              (72
              )
              
              
              (64
              )
              
              
              (63
              )Other
      operating income (expenses), net
              
              
              (17
              )
              
              
              942
              
              
              
              (20
              )Operating
      income
              
              US$
              200
              
              
              US$
              1,186
              
              
              US$
              285





The
following table sets forth certain items derived from our statements of
operations as a percentage of net operating revenue for the years indicated
(certain totals may not add due to rounding):




Year ended December 31,2008
              
              
              2007
              
              
              2006Net
      operating revenue
              
              
              100
              %
              
              
              100
              %
              
              
              100
              %Cost
      of sales
              
              
              (68
              )
              
              
              (67
              )
              
              
              (62
              )Gross
      margin
              
              
              32
              
              
              
              33
              
              
              
              38Selling
      and marketing expenses
              
              
              (10
              )
              
              
              (10
              )
              
              
              (10
              )General
      and administrative expenses and other operating expense,
    net
              
              
              (5
              )
              
              
              (5
              )
              
              
              (5
              )Operating
      income
              
              
              15
              
              
              
              89
              
              
              
              22Financial
      income
              
              
              10
              
              
              
              18
              
              
              
              13Financial
      expenses
              
              
              (17
              )
              
              
              (11
              )
              
              
              (11
              )Foreign
      exchange gains (losses) and unrealized gains (losses) on swaps
      and trading securities, net
              
              
              (43
              )
              
              
              16
              
              
              
              (4
              )Income
      tax benefit (expenses)
              
              
              14
              
              
              
              (29
              )
              
              
              (4
              )Equity
      in earnings (losses) of affiliates
              
              
              (10
              )
              
              
              8
              
              
              
              6Net
      income.(loss)
              
              
              (30
              )%
              
              
              92
              %
              
              
              28
              %


71





We
operate in two business segments:  pulp and paper, which together
account for 100% of our sales.  The following table sets forth, by
reportable segment, our net operating revenue as determined in accordance with
U.S. GAAP:




Year ended December 31,2008
                
                
                2007
                
                
                2006Pulp:Volumes
      (in tons)Domestic
                
                
                289,256
                
                
                
                227,756
                
                
                
                109,683Export
                
                
                911,511
                
                
                
                869,897
                
                
                
                832,121Total
                
                
                1,200,767
                
                
                
                1,097,652
                
                
                
                941,804Average
      prices (U.S. dollars per ton)Domestic
                
                US$
                590
                
                
                US$
                533
                
                
                US$
                500Export
                
                US$
                661
                
                
                US$
                615
                
                
                US$
                559Net
      operating revenue (in thousands of US$)Domestic
                
                
                170,759
                
                
                
                121,411
                
                
                
                54,884Export
                
                
                602,600
                
                
                
                535,277
                
                
                
                465,033Total
                
                
                773,359
                
                
                
                656,689
                
                
                
                519,916Paper:Volumes
      (in tons)DomesticUncoated
      printing and writing
                
                
                121,194
                
                
                
                158,405
                
                
                
                245,179Coated
      printing and writing
                
                
                98,271
                
                
                
                129,025
                
                
                
                126,213Chemical
      / Special
                
                
                126,265
                
                
                
                114,407
                
                
                
                110,162ExportUncoated
      printing and writing
                
                
                41,799
                
                
                
                81,329
                
                
                
                169,806Coated
      printing and writing
                
                
                2,706
                
                
                
                15,891
                
                
                
                17,839Chemical
      / Special
                
                
                453
                
                
                
                279
                
                
                
                395Total
                
                
                390,688
                
                
                
                499,336
                
                
                
                669,594Average
      prices (in US$ per ton)Domestic
                
                US$
                1,591
                
                
                US$
                1,462
                
                
                US$
                1,308Export
                
                US$
                955
                
                
                US$
                908
                
                
                US$
                888Net
      operating revenue (in thousands of US$)Domestic
                
                
                550,163
                
                
                
                587,464
                
                
                
                629,950Export
                
                
                42,928
                
                
                
                88,513
                
                
                
                166,988Total
                
                
                593,090
                
                
                
                675,976
                
                
                
                796,938Combined:Volumes
      (in tons)Domestic
                
                
                634,986
                
                
                
                629,592
                
                
                
                591,237Export
                
                
                956,469
                
                
                
                967,396
                
                
                
                1,020,161Total
                
                
                1,591,455
                
                
                
                1,596,988
                
                
                
                1,611,398Average
      prices (in US$ per ton)Domestic
                
                US$
                1,135
                
                
                US$
                1,126
                
                
                US$
                1,158Export
                
                US$
                675
                
                
                US$
                645
                
                
                US$
                619Net
      operating revenue (in thousands of US$)Domestic
                
                
                720,922
                
                
                
                708,875
                
                
                
                684,833Export
                
                
                645,527
                
                
                
                623,790
                
                
                
                632,021Total
                
                
                1,366,449
                
                
                
                1,332,665
                
                
                
                1,316,854




72




Year
ended December 31, 2008 compared to year ended December 31,
2007




Introduction




During
the first half of 2008, the pulp market conditions were favorable with robust
demand, particularly in China and Europe, and reduced supply on low world
inventories, few capacity additions, environmental issues, shortage of wood and
closures of high cost capacity.  In addition, the price differential
between softwood and eucalyptus pulp price remained at about US$ 100/ton during
the first half of the year, thereby reinforcing the substitution process from
softwood to hardwood from both the clients of and producers with swing
mills.  As a result, pulp prices increased until July.  On
the paper side, market conditions were marked by higher competition in local
market, mainly from imports, due to the appreciation of the real against the US dollar
through early August, resulting in lower local prices.  Additionally,
the stronger exchange rate reduced export margins and forced local paper
producers to shift exports to the local market, increasing supply and
competition in this market.  But after August, a demand slowdown
resulted in several individual decreases in pulp list prices of US$20/ton in
Europe and North America, and US$30/ton in Asia, reducing the implemented
increases of the first half of this year.  Final list prices at
December 31, 2008 were US$680/ton in North America, US$600/ton in Europe and
US$480/ton in Asia.  Even with this reduction, the average list price
was higher than the previous year.




Due to the depreciation
of the realbeginning
in September 2008 paper notebook exports sales dropped and, as a result,
competition for notebook sales increased in the local market.  During
the second half of the year, it is historically normal to see an increase in
paper demand when compared to the first half of the year.  This result
is attributed to a larger number of advertising campaigns (more commemorative
dates and end of year celebrations) and the notebook segment beginning
production and increasing inventories for the upcoming school
year.  In addition, a Federal Government program that distributes
books to students who need assistance began.  These factors, which
contributed to the growing domestic consumption for paper products, did not
result in increased volumes of paper sales, since the appreciation of the realthrough August 2008
caused intense competition from imported products.  The depreciation
of the real beginning
in September 2008 has recently resulted in reduced competition from imported
products.




The
annual average real
exchange rate was R$ 1.8346 to US$ 1.00 in December 31, 2008, compared to R$
1.9501 to US$ 1.00 in the same period in 2007, an appreciation of
6%.  See “Item 5—Operating and Financial Review and
Prospects—Overview— Brazilian economic environment.”




Net
operating revenue




Net
operating revenue increased by 2% to US$ 1,366 million in December 31, 2008 from
US$ 1,333 million in December 31, 2007, with an increase in average price of 3%
and stable sales volumes.  The steadiness of volume was attributable
to lower paper sales derived from the paper asset divestments during the year,
offset by the higher efficiency in pulp production at both Jacareí and Ripasa
units.  On the price side, international pulp and paper prices
increased while local prices increased in U.S. dollars due to the appreciation
of the real against the
US dollar through early August.  Sales volume totaled 1,591,455 tons
for the period ended December 31, 2008 from 1,596,988 tons for the period ended
December 31, 2007.  Approximately 53% of VCP’s net operating revenue
was made in the domestic market for the years ended December 31, 2008 and
2007.  VCP’s revenue mix for the year ended December 31, 2008 was 43%
for paper and 57% for pulp consistent
with the 51% and 49%, respectively, for the year ended December 31,
2007.




Pulp.  In
the pulp segment, sales volume increased by 9% to 1,200,767 tons for the year
ended December 31, 2008 from 1,097,652 tons for the year ended December 31,
2007.  The increase in volume was due to greater market pulp
production at the Jacareí mill, to new volumes from Conpacel and due to the
Ahlstrom and Mogi paper asset divestments, whose integrated pulp became market
pulp.  Net operating revenue attributable to pulp increased by 18% to
US$ 773.4 million for the year ended December 31, 2008 from US$ 656.7 million
for the year ended December 31, 2007.  This increase was due to the
additional sales volume and to the 8% higher average prices of
pulp.  Pulp exports constituted 78 % and 76% of revenues and sales
volume, respectively, of pulp for the year ended December 31, 2008 compared to
82% and 79% for the year ended December 31, 2007.  In the domestic
market, the volume of pulp sold increased 27% to 289,256 tons.  This
increase was mainly due to the additional volumes of Ripasa and to the
integrated pulp that became market pulp after the paper assets were
restructured.


73




Paper.  In
the paper segment, total volumes decreased by 22% for the year ended December
31, 2008, driven mainly by the Luiz Antonio asset exchange and by the volumes
allocated to the Ahlstrom joint venture at the Jacareí mill.  Export
volumes decreased by 54% to 44,958 tons for the year ended December 31, 2008
compared to the year ended December 31, 2007 while domestic volumes declined 14%
to 345,730 tons in the same period.  Net operating revenue
attributable to paper decreased by 12% to US$ 593.1 million for the year ended
December 31, 2008, from US$ 676.0 million for the year ended December 31, 2007,
boosted by a 12% increase in the average price of paper.  The domestic
market accounted for 93% of paper revenues for the year ended December 31, 2008
compared to 87% for the year ended December 31, 2007.




Cost of
sales




Cost of
sales increased by 5% to US$ 934 million for the year ended December 31, 2008
from US$ 887 million for the year ended December 31, 2007.  This
increase was mostly due to the negative impact of a stronger real through early August on
VCP’s costs denominated in reais, an increase in labor
costs, higher costs related to the purchase and resale of the products from
Conpacel and greater mix of high value added products whose pulp is purchased at
the market prices.  These variations were partially offset by
productivity gains and cost savings.  For the same reasons, VCP’s
gross margin decreased to 32% for the year ended December 31, 2008 compared to
33% for the year ended December 31, 2007, partially offset by higher average
prices.




Selling
and marketing expenses




Sales
expenses increased by 4% to US$ 143 million for the year ended December 31,
2008.  This increase resulted mainly from the higher sales in the
domestic market which are denominated in local currency, partially offset by
lower logistics expenses, particularly of paper exports.  As a
percentage of net operating revenue, sales expenses however remained stable at
10% when compared to the year ended December 31, 2007.




General
and administrative expenses




General
and administrative expenses increased by 13% to US$ 72 million for the year
ended December 31, 2008.  The increase was mainly attributable to
expenses with corporate reorganization of US$ 4 million.  As a
percentage of net operating revenue this expenses remained stable at 5% when
compared to the year ended December 31, 2007.




The
corporate reorganization that occurred during the fourth quarter with the
objective to adjust VCP to the global economy slowdown scenario resulted in
additional, non-recurring administrative expense of about US$ 4.4
million.




Other
operating expenses (income), net




Other net
operating expenses totaled US$ 17 million for the year ended December 31, 2008
compared to net operating income of US$ 942 million for the year ended December
31, 2007.  This variation is due solely to the inclusion of the
pre-tax gain of US$ 955 million on the 2007 related to the asset exchange of the
Luiz Antonio mill. See Note 4(b) to our audited consolidated financial
statements.




Operating
income




Operating
income decreased to US$ 200 million for the year ended December 31, 2008 from
US$ 1,186 million for the year ended December 31, 2007.  This decrease
was primarily due to the inclusion of the non-recurring gain on the 2007 related
to the asset exchange of Luiz Antonio mill.  See Note 4(b) to our
audited consolidated financial statements.


74


Pulp
(including intersegment transactions at market values).  Operating
income attributable to pulp increased by 1% to US$ 143 million for the year
ended December 31, 2008 from US$ 142 million for the year ended December 31,
2007.  This increase was primarily due to the adverse effect of the
currency depreciation through early August on production costs, which are mostly
denominated in local currency.  The
increase was also helped by higher volumes which increased 9% compared to
the year ended December 31, 2007 and higher sales prices which increased 8% over
the year ended December 31, 2008.




Paper
(including intersegment transactions at market values).  Operating
income attributable to paper decreased by 36% to US$ 57 million for the year
ended December 31, 2008 from US$ 89 million for the year ended December 31,
2007.  This decrease was primarily due to 22% lower sales volume,
partially offset by 12% higher sales price, mainly in the domestic market which
was driven by high value-added papers mix.




Financial
income




Financial
income decreased by 37% to US$ 149 million for the year ended December 31, 2008
from US$ 236 million for the year ended December 31, 2007.  The
decrease was primarily due to the reduction of the financial income accrued from
the funds in the Trustee ( See “Item 4A—Information on VCP—History and
Development of VCP.”) to be applied to the Projeto Horizonte in 2007, also due
to lower amount of cash investments in local currency,




Financial
expenses




Financial
expenses increased to US$ 227 million for the year ended December 31, 2008 from
US$ 145 million for the year ended December 31, 2007.  The increase
was primarily due to real depreciation against
the U.S.
dollarfrom early August to December 31, 2008, based on our debts
amounts denominated in dollars.




Foreign
exchange gain (loss) and unrealized gain (loss) on swaps and trading securities,
net




Foreign
exchange losses amounted to US$ 593 million for the year ended December 31, 2008
from US$ 214 million gains for the year ended December 31, 2007.  This
result was primarily due to the impact of the depreciation of the real against the U.S. dollar
from early August to December 31, 2008 on our sale of non-deliverable forwards,
swaps and target forwards derivative instruments.  The losses recorded
on foreign-currency based transactions are translated to U.S. dollars and
reported in VCP’s statement of operations.




Income
tax benefit (expenses)




For the
year ended December 31, 2008, VCP recorded an income tax benefit of US$ 198
million compared to an expense of US$ 383 million for the year ended December
31, 2007.  The benefit was mainly due to the recognition of deferred
income tax benefits on tax loss carryforwards and on temporary differences
related to foreign exchange gains and losses, which are taxed on a cash
basis.  The effective tax rate was (42%) for the year ended December
31, 2008, generated mainly by the equity in earnings (losses) of affiliates and
by the differences in foreign income tax rates, which are considered permanent
differences, compared to 26% for the year ended December 31, 2007.




Equity in
earnings (losses) of affiliates




VCP
recorded losses of affiliates in the total amount of US$ 132 million for the
year ended December 31, 2008 against earnings of US$ 113 million for the year
ended December 31, 2007.  This decrease was mostly due to Aracruz’s
losses in the total amount of US$ 1,239million, mainly due to
derivatives loss.




Net
income (loss)




As a
result of the foregoing, VCP recorded a loss of US$ 405 million for the year
ended December 31, 2008 compared to net income of US$ 1,221 million for the year
ended December 31, 2007.


75




Year
ended December 31, 2007 compared to year ended December 31, 2006




Introduction




In
2007, the pulp market conditions were favorable throughout the year with robust
demand, particularly in China and Europe, and reduced supply on low world
inventories, few capacity additions, environmental issues, shortage of wood and
closures of high cost capacity.  In addition, the price differential
between softwood and eucalyptus pulp price remained at about US$ 100/ton
throughout the year, thereby reinforcingthe
substitution processfrom
softwood to hardwood from both the client and producers with swing
mills.  As a result, pulp prices increased throughout the year above
our initial expectations.  On the paper side, market conditions were
marked by higher competition in local market, mainly from imports, due to the
appreciation of the currency, resulting in lower local
prices.  Additionally, the stronger exchange rate reduced export
margins and forced local paper producers to shift exports to the local market,
increasing supply and competition in this market.  Paper export prices
improved, mainly for the uncoated papers, due primarily to the rationalization
of supply in North America and to the greater VCP’s paper exports to South
America at lower logistic costs and at higher prices than Europe.  Therealcontinued
to appreciate averaging R$ 1.95 to US$1.00 in 2007, compared to R$ 2.18 to US$
1.00 in 2006.




Net
operating revenue




Net
operating revenue increased by 1% to US$ 1,333 million in 2007 from US$ 1,317
million in 2006, with an increase in average price of 2% and a decrease in
overall sales volumes of 1%.  The volume reduction was attributable to
lower paper sales derived from the paper asset divestments during the year,
partially offset by the higher efficiency in pulp production at both our Jacareí
and Conpacel (formerly Ripasa) units.  On the price side,
international pulp and paper prices rose while local prices increased in U.S.
dollars due to the exchange rate appreciation.  Sales volume totaled
1,597,988 tons in 2007 from 1,611,398 tons in 2006.  Approximately 53%
of our net operating revenue in 2007 was made in the domestic market compared to
52% in 2006.  Our revenue mix in 2007 was 51% for paper and 49% for
pulp compared to 61% and 39%, respectively, in
2006.




Pulp.  In
the pulp segment, sales volume increased by 17% to 1,098,652 tons in 2007 from
941,804 tons in 2006.  The increase in volume was due to greater
market pulp production at the Jacareí mill, to new volumes from Ripasa and due
to the paper asset divestments, whose integrated pulp became market
pulp.  Net operating revenue attributable to pulp increased by 25% to
US$ 651 million in 2007 from US$ 520 million in 2006.  This increase
was due to the additional sales volume and to the 8% higher average prices of
pulp.  Pulp exports constituted 79% and 81% of revenues and sales
volume, respectively, of pulp in 2007 compared to 89% and 88% in
2006.  In the domestic market, the volume of pulp sold increased 108%
to 227,756 tons.  This increase was mainly due to the additional
volumes of Ripasa and to the integrated pulp that became market pulp after the
paper assetsrestructuring.




Paper.  In
the paper segment, total volumes decreased by 25% in 2007, driven mainly by the
Luiz Antonio asset exchange and by the volumes allocated to the joint venture at
Jacareí mill.  Export volumes decreased by 48% to 97,499 tons in 2007
compared to 2006 while domestic volumes declined 17% to 401,837 tons in the same
period.  Net operating revenue attributable to paper decreased by 14%
to US$ 682 million in 2007, from US$ 798 million in 2006, boosted by a 14%
increase in the average price of paper.  The domestic market accounted
for 87% of paper revenues in 2007 compared to 79% in
2006.




Cost
of sales




Cost
of sales increased by 9% to US$ 887 million in 2007 from US$ 813 million in
2006.  This increase was mostly due to the negative impact of a
strongerrealon
our costs denominated inreais,
increase in labor costs, higher costs related to the purchase and resale of the
products from the Ripasa, and greater mix of high value added products whose
pulp is purchased at the market prices.  These variations were
partially offset by productivity gains and cost savings.  The increase
in labor costs was due to wage increases under our collective bargaining
agreements negotiated in October 2006 and October 2007.  For the same
reasons, our gross margin decreased to 33% in 2007 compared to 38% in 2006,
partially offset by higher average prices.


76




Selling
and marketing expenses




Sales
expenses increased by 1% to US$ 138 million in 2007, keeping the 10% level of
net revenue compared to 2006.  This increase resulted mainly from the
higher sales in the domestic market which are denominated in local currency,
partially offset by lowerlogisticexpenses,
particularly of paper exports.




General
and administrative expenses




General
and administrative expenses increased by 2% to US$ 64 million in 2007,
maintaining the 5% level of net revenue compared to 2006.  The
increase was mainly attributable to the negative effect of the appreciation of
therealon
our expenses denominated in local currency, in addition to increases in wages
and partially offsetting fixed cost
reductions.




Other
operating expenses (income)




Other
operating income totaled US$ 942 million, compared to a net expense of US$ 20
million in 2006.  This change is primarily explained by the gain on
the asset exchange of the Luiz Antonio mill.  See Note 4b – Notes to
the Consolidated Financial Statements as of December 31,
2007.




Operating
income




Operating
income increased to US$ 1,186 million in 2007 from US$ 285 million in
2006.  This increase was primarily due to the gain on the asset
exchange of Luiz Antonio mill, partially offset by the lower gross margin for
both pulp and paper due to the negative effect of the stronger exchange rate on
local denominated costs.




Pulp
(including intersegment transactions at market values).  Operating
income attributable to pulp decreased by 22% to US$ 142 million in 2007 from US$
181 million in 2006.  This decrease was primarily due to the adverse
effect of the currency appreciation on production costs, which are mostly
denominated in local currency.  This negative effect was partially
offset by higher volumes which were up 17% compared to 2006 and higher sales
prices which increased 8% over 2006.




Paper
(including intersegment transactions at market values).  Operating
income attributable to paper decreased by 14% to US$ 89 million in 2007 from US$
104 million in 2006.  This decrease was primarily due to 25% lower
sales volume, partially offset by 14% higher sales price, mainly in the domestic
market which was driven by high value-added papers
mix.




Financial
income




Financial
income increased by 42% to US$ 236 million in 2007 from US$ 166 million in
2006.  The increase was primarily due to the financial income accrued
from the funds in the Trustee Bank to be applied to the Project mill (See Note
4b—Notes to the Consolidated Financial Statements as at December 31, 2007) of
US$ 124 million, partially offset by the impact of lower Brazilian interest
rates on cash investments in local currency.  Additionally, the 2006
income was positively affected by the reversal of US$ 43 million related to
PIS/COFINS tax provisions on financial
income.




Financial
expenses




Financial
expenses decreased to US$ 145 million in 2007 from US$ 148 million in
2006.  The decrease was primarily due to lower financing costs derived
from the “investment grade” ratings by Standard and Poor’s, Moody’s and Fitch
(the latter downgraded to below investment grade on February 2, 2009), partially
offset by higher indebtedness.




Foreign
exchange gain (loss) and unrealized gain (loss) on swap,
net


Foreign
exchange gains amounted to US$ 214 million in 2007, from a US$ 4 million loss in
2006.  This result was primarily due to the impact of the appreciation
of therealagainst
the U.S. dollar over financial exposure to the U.S. dollar.  The gains
(losses) recorded on foreign-currency based transactions, which are mainly U.S.
dollar denominated debt or gains (losses) from cross-currency interest rate swap
contracts, are translated to U.S. dollars and reported in our statement of
income.




77




Income
tax expense




In
2007, we recorded an income tax expense of US$ 383 million compared to US$ 4
million in 2006.  The increase was mainly due to deferred tax expense
over the gains on the asset exchange (See Note 4(b)—Notes to the Consolidated
Financial Statements as at December 31, 2007), partially offset by the
deductibility of tax on a charge for interest attributed to capital (a tax
deductible distribution) and the difference in foreign income tax
rates.  The effective tax rate was 26% in 2007 compared to 1% in
2006.




Equity
in earnings of affiliates




The
equity in earnings of affiliates increased to US$ 113 million in 2007 from US$
77 million 2006.  This increase was mostly due to a non-taxable gain
of US$ 48 million generated by the Ahlstrom VCP transaction.  See Note
4(d) Notes to the Consolidated Financial Statements as at December 31,
2007.




Net
income




As a result of the foregoing, net income
increased by 228% to US$ 1,221 million in 2007 compared to US$ 372 million in
2006.




B.
            Liquidity
      and Capital Resources




Liquidity




Our
principal sources of liquidity have historically been represented by cash
generated from operations and short-term and long-term borrowings.  We
believe these sources will continue to be adequate to meet our currently
anticipated use of funds, which include working capital, investment in capital
expenditures and debt repayments.




We
have historically made capital investments in order to, among other things,
increase our production and modernize our facilities.  We also review
acquisition and investment opportunities.  We may fund these
investments through internally generated funds, the issuance of debt or equity
or a combination of these methods.




At
December 31, 2008, our cash and cash equivalents (which exclude available
for sale securities and unrealized gains from swaps) decreased to US$ 280
million (US$ 565 million at year-end
2007)primarily due to their use in financing the continuing capital
expenditure disbursements related principally to the Três Lagoas
mill.




At December 31, 2008, we had US$ 40 million (of a
total of US$ 323 million) in deposits and investments with our affiliate,
Banco Votorantim S.A.  See “Item 7—Major Shareholders and Related
Party Transactions—Related Party Transactions” and Note 13 to our audited
consolidated financial statements.  At year-end 2007 we had approximately US$
34 million (of a total of US$ 741 million) in deposits and investments with our
affiliate, Banco Votorantim S.A.




At December 31, 2008, our cash, cash equivalents
trading and available for sale securities (current portion) were US$ 323
million (US$ 741 million at year-end
2007), of which US$ 234 million (US$ 420 million at year-end 2007)
were denominated in reais.




At December 31, 2008, our balance sheet presented a
negative working capital balance of US$ 337 million compared to a positive
working capital balance of US$ 446
million at year-end 2007, but we do not expect to have any
difficulty in meeting our short-term obligations due to capital increases
occurred in early 2009 as a result of the acquisition of an additional equity
interest in Aracruz.  See “Item 5.A Operating Results – Recent
Developments – Liquidity and Capital Resources”.


78


Aracruz
suffered significant losses from financial instrument related to derivative
instruments in 2008 and on May 13, 2009 concluded negotiations for the repayment
of debts originating from these transactions.  Presented below is a
summary of the terms and conditions of this agreement by Aracruz and its
creditor banks:
  A. Total
amortization period of nine (9) years with a possibility of reduction to seven
(7) years depending on the operating performance of the Aracruz and on the
occurrence of certain liquidity events;
  B.
Amortization in semiannual installments starting on June 30, 2009 and then,
beginning in 2010, installments at the end of each quarter;
  C.
Interest at three-month Libor plus an initial spread of 3.5% p.a. increased by
semiannual charges of 0.25% p.a. beginning in 2010, resulting in a weighted
average interest rate of Libor + 4.6% p.a.;
  D.
Collateral guarantees on rural and industrial assets of the Barra do Riacho Unit
- ES; and
  E. VCP’s
pledge of 28% of Aracruz’s common shares.
  We do not
expect to have any difficulty in meeting our short-term obligations due to
capital increases occurred in early 2009 in connection with the acquisition of
an additional equity interest in Aracruz (see “Item 5.A Operating Results –
Recent Developments”).
  Sources
of funds
  Operating
activities provided net cash flows of US$ 388 million in 2008 compared to
US$ 333 million in 2007 and US$ 382 million in 2006.
  Financing
activities, which include short-term and long-term secured and unsecured
borrowings and debt repayments, generated positive net cash flow of US$ 116
million in 2008, negative of US$ 113 million in 2007 and US$107 million in
2006.
  At
December 31, 2008, our gross debt totaled US$ 2,087 million; of this
amount, long-term debt represented 56% (excluding current portion) in 2008
compared to 77% in 2007.  Approximately 88 % of our debt was
denominated in foreign currencies.  At December 31, 2008, our net
debt increased to US$ 1,764 million from US$ 823 million posted on
December 31, 2007.
  At
December 31, 2007, our gross debt totaled US$ 1,564 million; of this
amount, long-term debt represented 77% (excluding current portion) in 2007
compared to 73% in 2006.  Approximately 90% of our debt was
denominated in foreign currencies.  At December 31, 2007, the net
debt increased to US$ 823 million from US$ 771 million posted on
December 31, 2006.  When including 50% of Conpacel’s net debt,
our net debt amounted to US$ 935 million on December 31, 2007 and we
maintained our net debt ratio at approximately two times EBITDA (investment
grade) and 21% of its shareholder’s equity.
  Uses
of funds
  Investing
activities, including production capacity increases in Jacareí mill, the
development of forestry assets (land acquisition, planting and forest
maintenance) and other capital expenditures consumed cash in investing
activities of US$ 113 million in 2006, US$ 145 million in 2007 and US$
507 million in 2008.  The increase in 2008 was mainly due to Projeto
Horizonte.
  Debt
  At
December 31, 2008, our total debt was US$ 2,087 million, consisting of
US$ 928 million in short-term debt (44% of total debt), including the
current portion of long-term debt and represented an increase of US$ 561
million on the debt recorded at December 31, 2007.  At
December 31, 2007, our total debt was US$ 1,564 million, consisting of
US$ 367 million in short-term debt (23% of total debt), including the
current portion of long-term debt and represented an increase of US$ 23
million on the debt recorded at December 31, 2006.
  79
  Most of
our U.S. dollar-denominated borrowings are either advances made in respect of
our export sales or international capital market borrowings which have lower
interest rates compared to domestic financings.  In 2007 and 2008 our
outstanding borrowings with BNDES was at US$ 181 million and US$
120  million, respectively out of which US$ 140 million and
US$ 97 million in 2007 and 2008, respectively, represented the long-term
financing, US$ 38 million lower than the amount at December 31,
2007.
  Export
credits (prepayment)
  In
September 2008, VCP recorded its 50% share of the Conpacel’s loans which at
September 30, 2008 totaled US$ 83 million comprising contracts for export
prepayment (US$ 73 million) and import financing (US$ 10 million) which mature
in 2012.  At December 31, 2008 the outstanding amount was US$ 62
million.
  In May
2008, VCP signed an export prepayment contract with Nordea Bank AB for the
aggregate amount US$ 50 million at LIBOR plus 0.68% p.a. Payments are due
through 2012 in installments to match export shipments.  The
financings are guaranteed by export contracts.
  In April
2008 VCP signed a bridge loan with ABN AMRO Bank NA in an aggregate amount of
US$ 200 million at LIBOR plus 2% p.a. The financing matured on September 26,
2008, and was guaranteed by a security interest in financial
assets.  The maturity date was renegotiated and deferred to March 24,
2010, indexed at LIBOR plus 5%.
  In June
2007 we signed an Export Prepayment contract with Banco Bilbao Vizcaya
Argentaria for US$ 100 million at LIBOR plus 0.38% p.a. Payments are due through
2015 in installments to match export shipments.  The financings are
guaranteed by export contracts.
  In
September 2006 we signed an Export Prepayment Facility Agreement with a pool of
banks (ABN AMRO Bank, Banco Santander Central Hispano and Banco Bradesco) in an
aggregate amount of US$ 550 million at LIBOR plus 0.57%.  Payments are
due from 2007 through 2014 in installments to match export
shipments.  The financings are guaranteed by export
contracts.  The proceeds of the Agreement were used to prepay various
then outstanding Export Prepayment loans.
  In July
2006, our wholly owned subsidiary VCP Overseas Holding KFT, signed an Export
Prepayment Agreement with a syndicate of banks in an aggregate amount of US$ 375
million at LIBOR plus 0.57%.  Payments are due from 2007 through 2014
in installments to match export shipments.  The financings are
guaranteed by export contracts.  The proceeds were used to purchase
from the lender and convert into an inter-company loan various outstanding
Export Prepayment loans.
  Fixed-rate
notes
  On May
2008, we renewed a foreign-exchange denominated financing agreement with
UNIBANCO - União de Bancos Brasileiros S.A. for the reais equivalent of US$ 50
million obtained for working capital purposes, which matures in
2009.
  Voto-Votorantim
III
  In
January 2004, VPAR, our ultimate controlling shareholder, formed Voto-Votorantim
III, a company based in the Cayman Islands, for the sole purpose of raising
funds.  Voto-Votorantim III issued US$ 300 million, 7.875% Bonds
due 2014 in the international market.  We received 15% of the total
amount originally issued US$ 45 million, and are the guarantors for this
amount.
  The
indenture for the issue of notes by Voto-Votorantim III contains a number
of covenants including, among others:
  ·
                limitations
      on our ability to incur debt;
   80
  ·
                limitations
      on the existence of liens on our properties;
and
  ·
                limitations
      on transactions with related parties, which generally must be on terms no
      less favorable than those that could be obtained in comparable
      arm’s-length transactions.
  Voto-Votorantim
IV
  On
June 24, 2005, Voto-Votorantim Overseas Trading Operations IV Limited, or
Voto-Votorantim IV, a wholly owned subsidiary of VPAR, issued US$ 400
million of 7.75% Notes due 2020 that were placed with investors in North
America, Europe, Asia and Latin America.  VCP is a guarantor of 50% of
the 7.75% Notes due 2020 and in turn received US$ 200 million of the
proceeds.  On September 6, 2005, we acquired a 50% equity interest in
Voto-Votorantim IV and continue as the guarantor for 50% of these
Notes.
  The
indenture for the issue of notes by Voto-Votorantim IV contains a number of
covenants including, among others:
  ·
                limitations
      on our ability to incur debt;
  ·
                limitations
      on the existence of liens on our properties;
and
  ·
                limitations
      on transactions with related parties, which generally must be on terms no
      less favorable than those that could be obtained in comparable
      arm’s-length transactions.
  BNDES
  BNDES,
the parent of BNDESPar, one of our principal shareholders, has been an important
source of debt financing.  At December 31, 2008, the BNDES loans
totaled US$ 120 million related to the capacity increase projects, all of
which are denominated in reais.  The BNDES loans
are secured by liens on property, plant and equipment, and a lien on certain
land, and by personal guarantees of an owner of Hejoassu, the ultimate parent of
the Votorantim group.  The majority of our loans with BNDES bear
interest are indexed using either the Taxa de Juros de Longo Prazo,
or TJLP, a nominal long-term interest rate that includes an inflation
factor.  The remaining BNDES loans are indexed by the UMBNDES which is
a weighted average exchange variation on a basket of currencies, predominantly
U.S. dollars, held by BNDES.  At December 31, 2008, the TJLP was
fixed at 6.50% per year, and during 2007 averaged 6.25% per year.
  As of May
31, 2009, BNDES had lent approximately 10% of our financial indebtedness, and is
expected to loan significant funds in the future. See below details on amount
and maturities:
  Index
                  US$
      MM
                  MaturityTJLP
                  103
                  2015UMBNDES
                  17
                  2015Bridge
      loan 16 % p.y
                  82
                  2009Finame
                  9
                  2013209
  For
further information on the financing agreements with BNDES, see Exhibits 4.11
and 4.12 to this annual report.
  Leasing
  The
Company signed capital leases agreement with the Bank Société Générale for the
acquisition of machinery used to fell and harvesting trees in the total amount
of US$ 50 million. The first tranche of US$ 3 million was released in September
2008 and matures in 2013.
  81
  On
December 31, 2008, VCP recorded its 50% share of the Consortium pulp machine
leasing liabilities that totaled US$ 22 million which mature in
2014.
  Maturities
  At
December 31, 2008, the amount of our short-term debt (including current
portion of our long-term debt) was US$ 928 million.  At
December 31, 2008, the annual maturities of our long-term debt excluding
current portion were as follows:
  Year
                    
                    Amount(US$ in millions)2010
                    
                    
                    1962011
                    
                    
                    1802012
                    
                    
                    2252013
                    
                    
                    168After
      2013
                    
                    
                    390Total
                    
                    
                    1,159
 
 At
December 31, 2008, all of our short-term debt related to trade financing
was secured.  At December 31, 2008, the outstanding amount of
that short-term debt was US$ 438 million, with a weighted average interest
rate of 6.06 %, compared to US$ 211 million at December 31, 2007, with
a weighted average interest rate of 5.72%.
  Covenants
  Our
long-term borrowings contain various covenants regarding compliance with certain
financial ratios and other restrictions.  At December 31, 2008, the
Company was not in compliance with covenants on certain loan agreements as a
result of a proportional consolidation of Aracruz based on Brazilian GAAP, plus
Três Lagoas project investments and the devaluation of the real. See Note 9(a) and 12(i)
to the consolidated financial statements and “Item 5 – Management Discussion and
Analysis – Year ended December 31, 2008 compared to year ended December 31, 2007
- Equity in earnings (losses) of affiliates”.  Nonetheless, in
November 2008, we began the renegotiation of the terms of these covenants with
the creditor banks, for which we have concluded the negotiations for more than
80% of the affected loan agreements.  Management, at this time,
considers none of these renegotiated covenants or guarantees, if requested, are
restrictive or inhibitive to the Company’s current level of
operations.  We believe that our sources of funds and management
actions, such as the capital increase that occurred on April 30, 2009 (partially
offsetting the effect of additional leverage of the purchase of Aracruz common
shares) and increase of credit lines by diversifying creditor banks portfolio,
are, and will continue to be, adequate to meet our liquidity levels and
currently anticipated uses of funds, which include working capital, recurring
capital expenditures and debt repayment.
  In the
case of the 20% of affected loan agreements, which includes a loan from BNDES
(one of our shareholders) the creditor banks do not have the right to demand
repayment.  In these cases, the only penalty is, if requested by
banks, assets pledged as guarantee and just the loan agreements that were
renegotiated (more than 80%) give the right to demand payment.  We
have concluded that there is no requirement to classify these debts as
current.
  Capital
expenditures
  During
2008, we invested US$ 692 million in capital expenditure representing
an increase of 45% from the US$ 477 million invested
in 2007, and 179% higher than the amount of
US$ 248 million invested in 2006.  Of this amount, US$
391 million was spent on expansion projects (pulp mill in Três Lagoas and coater
for special paper in Piracicaba), US$ 222 million was spent on forestry
assets (land acquisition, planting and forest maintenance), and the remaining
was invested in the modernization and maintenance of our
plants.
  82
  The table
below sets forth a breakdown of our most significant capital expenditures for
the periods indicated:
  For the years
      ended December 31,2008
                                
                                
                                2007
                                
                                
                                2006(in
      US$ millions)Expansion
                                
                                
                                391
                                
                                
                                
                                67
                                
                                
                                
                                47Forests
      (including land purchases)
                                
                                
                                222
                                
                                
                                
                                216
                                
                                
                                
                                116Improvements/modernization
                                
                                
                                12
                                
                                
                                
                                12
                                
                                
                                
                                33Other
      (includes maintenance and information technology)
                                
                                
                                35
                                
                                
                                
                                58
                                
                                
                                
                                52Sub   Total
                                
                                
                                660
                                
                                
                                
                                353
                                
                                
                                
                                248Fixed
      assets related to Três Lagoas expansion purchased with
                                  proceeds
      of financial income earned on trust fund deposits
                                  (see
      “Item 4A – Information on VCP – History and Development of
      VCP)
                                
                                
                                32
                                
                                
                                
                                124
                                
                                
                                
                                -Total
                                
                                
                                692
                                
                                
                                
                                477
                                
                                
                                
                                248
  Commitments
and contingencies
  We are
subject to numerous commitments and contingencies with respect to tax, labor and
other claims.  See “Item 8—Financial Information—Consolidated
Statements and Other Financial Information—Legal Matters,” and Note 15 to
our audited consolidated financial statements and discussions on our critical
accounting policies.
  The
significant contractual obligations and commitments that affect our liquidity
are short-term debt, long term debt, take-or-pay contracts, leases and capital
expenditures.
  We are
party to certain legal proceedings in Brazil arising in the normal course of
business, and have made provisions when we believe that we can reasonably
estimate probable losses.  In connection with some of these
proceedings we have made deposits (included in other non-current assets) which
will only be released to us upon a judgment in our favor.  The
provisions for tax and other litigation and the deposits are as
follows:
  2008
                  
                  
                  2007(In millions of US$)
                  
                  
                  (In millions of US$)Deposits
                  
                  
                  Provisions
                  
                  
                  Deposits
                  
                  
                  ProvisionsTax-related
                  
                  
                  127
                  
                  
                  
                  135
                  
                  
                  
                  150
                  
                  
                  
                  173Labor-related
                  
                  
                  3
                  
                  
                  
                  20
                  
                  
                  
                  8
                  
                  
                  
                  15Civil-related
                  
                  
                  -
                  
                  
                  
                  6
                  
                  
                  
                  -
                  
                  
                  
                  9Total
                  
                  
                  130
                  
                  
                  
                  161
                  
                  
                  
                  158
                  
                  
                  
                  197
 
 We have
long-term “Take-or-Pay” contracts with suppliers of energy, transportation,
diesel fuel and chemical products for periods from 1 to 10 years for which the
contractual obligations are US$ 64 million per year.  Additionally, we
have long-term “Take-or-Pay” contracts with a supplier of pulp for 30
years.  The contractual obligation in connection with this contract is
US$ 65 million per year.
  The
following is a summary of the guarantees provided by us in favor of other
companies of the Votorantim group:
  83
  Primary
      obligor
                
                
                Obligations
                
                
                Outstanding
      guarantee amount at December 31, 2008
                
                Date
      of Expiration of guarantee
                
                BeneficiaryVoto-Votorantim
      III
                
                US$
                300
                  million
                  notes issuance
                
                US$
                45
      million
                
                January 23,
      2014
                
                Noteholders
      and the trusteeVoto-Votorantim
      IV
                
                US$
                400
                  million
                  notes issuance
                
                US$
                200
      million
                
                June 24,
      2020
                
                Noteholders
      and the trusteeTotal
                
                
                
                
                US$
                245
      million
 
 Note:  The
      guarantees provided by us are in favor of other companies of the
      Votorantim Group.
  We
estimate that, for 2006, 2007 and 2008, an average of approximately 8% of our
total number of regular domestic customers (approximately 22%, 23% and 31%,
respectively, of total domestic sales value) obtained our guarantee for their
loans under our vendor program.  Our vendor program exposure was
US$ 120 million, US$ 127 million and US$ 112 million at December 31,
2008, 2007 and 2006, respectively.  See “Item 4B—Information on
VCP—Marketing and Distribution—Paper.”
  The
vendor guarantee does not expose the Company to any greater risk or net
obligation than a credit sale.  In the case of a credit sale, revenue
is recorded on shipment, and a receivable is created.  If the credit
sale customer does not pay the receivable, then the Company would establish a
doubtful debts allowance if it considered loss to be probable.  In a
vendor financed sale, the Company records revenue on shipment and receives full
payment from the bank.  If the customer does not pay the bank within
the specified time period, the Company would have to satisfy its guarantee to
the bank.  The Company would, at that time, charge the obligation to
selling expenses if it considered the loss to be probable.  The
Company would then look to the customer for payment on the sale.  The
Company’s losses from guarantees honored to-date have been
negligible.
  Buyback
programs
  The
Company may purchase, upon authorization of its Board of Directors, preferred
stock in the open market which, after purchase, will be held in treasury to be
sold and/or cancelled.  The number of shares held in treasury may not,
however, exceed 10% of the total outstanding and in circulation
shares.  During the periods indicated below the buyback programs and
summary of all transactions have been as follows:
  Program name
                                        
                                        Period
                                        
                                        Maximum
                                          amount of shares
                                          authorized to be
                                          purchased
                                        
                                        
                                        Shares
                                          purchased
                                        
                                        
                                        Average price
                                          paid per share
                                          R$/US$2005
                                        
                                        May 17,
      2005 to
                                          May 16,
      2006
                                        
                                        
                                        8,000,000
                                        
                                        
                                        
                                        1,050,700
                                        
                                        
                                        
                                        R$28.21/US$13.002007
                                        
                                        March 2,
      2007 to
                                          February 29,
      2008
                                        
                                        
                                        9,000,000
                                        
                                        
                                        None
                                        
                                        
                                        None
 
 No
Buyback program has been authorized for the period of March 1 to December 31,
2008.
  Summary
of Transactions:
  Preferred Shares held in
      Treasury2006
                  
                  
                  2007
                  
                  
                  2008Balance
      – January 1st
                  
                  
                  1,081,500
                  
                  
                  
                  31,998
                  
                  
                  
                  28,900Purchases
      (1)
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  2,784,091Sales
                  
                  
                  (1,049,502
                  )
                  
                  
                  (3,098
                  )
                  
                  
                  (28,900
                  )Cancellations
      (1)
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (2,784,091
                  )Balance
      – December 31st
                  
                  
                  31,998
                  
                  
                  
                  28,900
                  
                  
                  
                  -
  84
  (1) The 2008 purchase and
cancellation of preferred shares relate to the Ripasa acquisition and are not
included within any Buyback program (see Note 4(a)(i) to our audited
consolidated financial statements)
  Our Board
of Directors may authorize a new buyback program whenever
necessary.
  C.
              Research
      and development, patents and licenses,
etc.
  As an
integrated producer of pulp and paper, we seek to gain a better understanding
the entire production process and obtain competitive advantages by continuous
investments in Research and Development.  By attempting to identify
the characteristics of both wood and pulp that are essential for the production
of high quality pulp and paper we improve our processes and develop innovative,
higher quality products.  The research and development activities
conducted within our three research centers, each an individual center for
forest, pulp and paper, are directed towards not only sustainability but also
increasing the productivity of our forests, improving the quality of the
eucalyptus wood used as our raw material, increasing the efficiency of our
productive process and industrial yields, and developing new, innovative higher
quality products.  These efforts are conducted not only within our
three research centers, but also in partnership with various universities,
suppliers and private research institutes.  Our total disbursements,
both directly and indirectly, in research and development (excluding
disbursements related to environmental matters) was approximately US$ 6.4
million, US$ 7.6 million and US$ 9.3 million during 2008, 2007 and 2006,
respectively.
  At our
Forest Research Center studies are focused on wood quality and forest
productivity in such areas as genetic improvement, silviculture and forest
handling and forest protection.  We are actively involved in several
biotechnology research projects related to several aspects of the eucalyptus
tree and pulp process, the more significant being the following:
  Genomic
Project
  The
FOREST project, which began in 2001, is a (pre-competitive) consortium of
several forestry companies located within the Sao Paulo State and the state
government’s research foundation (FAPESP).  It involves the
development of the eucalyptus gene bank (130,000 ESTs- Expressed Sequence Tags,
which has more than 30,000 genes), which when completed will be the world’s
largest gene bank for this species.  Upon conclusion, expected to
occur in 2012, the project should permit the evolution of research to the
succeeding “functional genomics” phase.
  A
separate genome project, GENOLYPTUS, is a national project involving several
major forestry companies, seven universities, three EMBRAPA centers (the Federal
agency for agricultural research) and with the partial financial support of the
Brazilian Ministry of Science and Technology.  It is jointly funded by
the government (70%) and by the private forestry companies (30%).  Its
principal objective is to improve forest tree breeding and production
technologies by focusing on the development of a suite of experimental resources
and genomic tools to discover, map, validate, and further investigate
economically viable improvements in the eucalyptus tree
species.  This project encompasses
the installation of the world’s largest tree genomic trial network (more
than 40,000 trees resulting from 31 crosses) to evaluate expected improvements
in wood quality.  The project, now in its third stage, is conducting
field experiments that analyze the growth and determination of wood
technological variables and correlated with Eucalypts DNA.  Previous
stages, now concluded, were first focused on experimental field installation and
calibration of equipment and the construction of the database genomics, with DNA
sequence and bioinformatics analyses; and thereafter, the mapping of the
eucalyptus plant gene).
  Assisted
Selection by Molecular Marker
  Via
marker selection, we will be able to accelerate our tree breeding program with
the selection of stress resistant (natural factors such as drought and disease)
trees that have lesser nutrient problems and will result in a tree with better
wood properties.  This project is partially supported by the Federal
Ministry of Science and Technology for Support/Financing of studies and
projects, FINEP.
  85
  Genetic
Transformation
  This
project’s objective, developed since 2003 via a joint-partnership between VCP
and Alellyx Applied Genomics, (a Votorantim Group affiliate until its sale in
November, 2008), has been to improve forest and industrial productivity and
reduce total costs by: a) better wood quality for industry applications (wood
density, fiber length, pulp and lignin content); b) higher operation yields
(forest and industry); c) increased syringyl/guaiacyl ratio; d) greater raw
material homogeneity.  Several patents have been granted for the
research findings to date and VCP, as a partner, will share in the future
benefits.
  Biotechnology
Applied in Pulp and Paper Process
  This
project, solely supported by VCP, involves three lines of research: a) bio
cooking and bio bleaching using enzymes and/or fungus on pulp process, b) bio
refining using enzymes to help the paper refining process, c) bio refinery by
means of the biological transformation of forest and industrial residues into
power and bio fuels.  Its main objectives are to preserve fiber, use
less chemicals and energy and create new products.
  Our Pulp
Research Center’s studies are focused in the fiber and technology and process
development areas.  New technologies are tested in the wood treatment,
cooking and bleaching processes, together with optimization of additives and
other raw materials to improve pulp quality and the utilization of
non-conventional technologies to find alternate usages for biomass.
  Our Paper
Research Center’s studies are focused on understanding the individual customer’s
pulp requirements based upon its industrial technologies and product portfolio
and providing him with our knowledge of paper products production using
eucalyptus fibers.
  D.
              Trend
      Information
  The
primary trends which influence our sales and production and inventory levels
are:  the patterns and cycles of pulp purchases by paper producers,
pulp and paper prices, the level of pulp inventory in the hands of pulp
producers in the global market, global economic conditions and the effect of
currency fluctuations.
  We
continue to pursue growth opportunities to create value for our shareholders
through business expansion, strong operational performance and profitability
and/or technological and product improvements, always in the context of a long
term strategic focus.
  For
additional information regarding trends in our business, see
“Item 4B.  Business Overview—Our Business Strategy”,
“Item 4B.  Business Overview—Cyclical nature of world pulp
prices” and “Item 5A—Operating Results.”  For risks affecting our
business, see “Item 3D—Key Information—Risk Factors.”
  E.
              Off-Balance
      Sheet Arrangements
  We
participate in a number of off-balance sheet arrangements, principally relating
to guarantees and take or pay contracts.  We also have a number of
swap transactions that are described in “Item 11 - Quantitative and
Qualitative Disclosures about Market Risk.”  All of these transactions
are further described elsewhere in this annual report.
  F.
              Tabular
      Disclosure of Contractual
Obligations
  The
following table and discussion provide additional disclosure regarding our
material contractual obligations and commercial commitments as of
December 31, 2008:
  86
  Contractual
      Obligations
                
                Total
                
                
                Less
      than 1
                    year
                
                
                1-3
      years
                
                
                3-5
      years
                
                
                More
      than 5
                    years(in
      millions of U.S. dollars)Total
      debt commitments (1)
                
                
                2,069
                
                
                
                910
                
                
                
                376
                
                
                
                393
                
                
                
                390Interest
      payable
                
                
                18
                
                
                
                18
                
                
                
                -
                
                
                
                -
                
                
                
                -Capital
      lease obligations (2)
                
                
                38
                
                
                
                13
                
                
                
                13
                
                
                
                11
                
                
                
                1Operating
      leases (3)
                
                
                173
                
                
                
                13
                
                
                
                35
                
                
                
                35
                
                
                
                90Purchase
      obligations (4)
                
                
                151
                
                
                
                72
                
                
                
                57
                
                
                
                19
                
                
                
                3Pension
      contribution
                
                
                18
                
                
                
                3
                
                
                
                6
                
                
                
                6
                
                
                
                3Total
                
                
                2,547
                
                
                
                1,036
                
                
                
                503
                
                
                
                480
                
                
                
                528
 
 (1)
              Includes
      short and long-term loans and financings shown in our consolidated
      financial statements, excluding interest
  payable.
 (2)
              Includes
      any agreements with suppliers of our assets (including for the Jacareí
      project).
 (3)
              Includes
      land leases and wood supply.
 (4)
              Includes
      take-or-pay contracts.
 Note:
                estimated
      interest expense for the purchase obligations of approximately
      6%.
  The above
table does not reflect swap transactions discussed in “Item 5E—Off-Balance
Sheet Arrangements” above.
  ITEM
6.  DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
  A.
              Directors
      and Senior Management
  We are
managed by our Conselho de
Administração, or Board of Directors, composed of at least three and at
most ten members, and our Diretoria, or board of
officers, composed of at least three and at most ten members (each an executive
officer).  Since our general shareholders’ meeting on April 20,
2005 we have had a permanent Conselho Fiscal, or fiscal
committee, which is composed of at least three and at most five
members.
  Board
of Directors
  Pursuant
to our by-laws, our Board of Directors is required to meet whenever necessary,
according to the Company’s interest or when called by the chairman or by the
majority of members of the Board of Directors.  Our Board of Directors
met eleven times during 2008.  Our Board of Directors is responsible
for, among other things, establishing our general business policies and for
electing our executive officers and supervising their management.  The
board of executive officers meets periodically to review production, and
commercial and financial operations.
  Pursuant
to Brazilian corporate law, shareholders of publicly traded companies such as us
that together hold preferred shares representing at least 10% of our total share
capital for at least three months are entitled to appoint one member to our
Board of Directors.  Beginning in 2006, the holders of our preferred
shares have not elected any member of our Board of Directors.
  Pursuant
to our bylaws, the members of the Board of Directors are elected by the holders
of our common shares at the general meeting of shareholders.  Members
of the Board of Directors serve two year terms.  The terms of the
current members, elected at our shareholders’ general meeting on April 28,
2007, expired in 2009.
  Set forth
below are the name, age and position of each member of our Board of Directors in
December 31, 2008:
  Name
                  
                  Age
                  
                  PositionJosé
      Roberto Ermírio de Moraes(1)
                  
                  51
                  
                  ChairmanFábio
      Ermírio de Moraes(2)
                  
                  46
                  
                  Vice-ChairmanCarlos
      Ermírio de Moraes(3)
                  
                  53
                  
                  MemberClóvis
      Ermírio de Moraes Scripilliti(4)
                  
                  49
                  
                  MemberJosé
      Luciano Duarte Penido
                  
                  60
                  
                  Member
  87
  
 (1)
              José
      Roberto Ermírio de Moraes is the son of José Ermírio de Moraes Filho, who
      passed away in 2001.
 (2)
              Fábio
      Ermírio de Moraes is the son of Ermírio Pereira de Moraes, who was once a
      board member.  He is also the cousin of José Roberto Ermírio de
      Moraes.
 (3)
              Carlos
      Ermírio de Moraes is the son of Antonio Ermírio de Moraes, who was once a
      board member.  He is also the cousin of José Roberto Ermírio de
      Moraes.
 (4)
              Clóvis
      Ermírio de Moraes Scripilliti is the son of Clovis Scripilliti, who passed
      away in 2000.  He is also the cousin of José Roberto Ermírio de
      Moraes.
  The name,
age and position of each member of our Board of Directors, elected at our
Shareholders’ General Meeting on April 30, 2009, is as
follows:
  Name
                  
                  Age
                  
                  PositionPaulo
      Henrique de Oliveira Santos(1)
                  
                  50
                  
                  ChairmanJoão
      Carvalho de Miranda(2)
                  
                  56
                  
                  Vice-ChairmanJosé
      Luciano Duarte Penido
                  
                  60
                  
                  Member
 _______________
 (1)
              Mr.
      Santos holds a bachelor’s degree in production engineering from Faculdade
      de Engenharia Industrial (class of 1983) and a MS in business
      administration from Fundação Getúlio Vargas.  He also completed
      in 2005 the Owner President Management Program at Harvard Business
      School.  He joined the Votorantim Group in 1994.  He
      was Executive Director of Votorantim Bank from March 1994 until November
      1996, worked in some privatization processes from December 1996 until
      November 1997 and became Chief Financial Officer of Votorantim Metais in
      December 1997.  He established Votorantim New Businesses, the new
      business and private equity arm of Votorantim Group, in 2000 and has been
      its CEO and partner since them.  Before joining Votorantim, Mr.
      Santos worked as Treasurer and Corporate Officer for banks in Brazil and
      in NY.  He serves as a chairman of the board of directors of TIVIT
      S.A, a leading IT/BPO company in Brazil, and Anfreixo S.A, a MRO
      distribution company and Chairman of the Board of Directors of Votorantim
      Celulose Papel S/A.
  (2)
              Mr.
      Miranda holds a bachelor’s degree in economic sciences from Pontifícia
      Universidade Católica do Rio de Janeiro (class of 1984) and a MS in
      business administration from Instituto de Pós-Graduação e Pesquisa em
      Administração da Universidade Federal do Rio de Janeiro
      (COPPEAD).  He also participated in the Students Exchange
      Program established between COPPEAD and the Wharton Business School of the
      University of Pennsylvania as a foreign student at Wharton Business School
      from January to May 1991.  Before joining the Votorantim Group
      as General Corporate Financial Officer in 2009, Mr. Miranda was
      Vice-President of Global Banking of Banco Citibank S.A. in Sao Paulo,
      Brazil, in 2006, Chief Executive Officer of Citibank NA in Santiago,
      Chile, from 2004 to 2006, Financial Managing Officer of Citibank NA in Sao
      Paulo, Brazil, from 1998 to 2004, Executive Officer of ING Barings from
      1991 to 1998 where he was responsible for several of company’s divisions
      such as Banking and M&A, and was Manager of the Planning and Financial
      Transactions sector of Aracruz Celulose S.A. from 1985 to 1988 after a two
      year period as a management trainee at Citibank NA in São Paulo, Brazil.
      He serves as Vice-Chairman of the board of directors of Votorantim
      Celulose Papel S/A.
  Board
of Executive Officers
  Our
executive officers are responsible for our day-to-day management.  The
executive officers have individual responsibilities established by our by-laws
and by the Board of Directors and are independent from the Ermírio de Moraes
family, our ultimate controlling shareholders.  The executive officers
are elected by the Board of Directors for one year terms, although any executive
officer may be removed by the Board of Directors before the expiration of his
term.  The current term of all our executive officers expires on
April 30, 2009.
  Set forth
below are the name, age and position of each of our executive officers elected
in April 2008:
  Name
                  
                  Age
                  
                  PositionJosé
      Luciano Duarte Penido
                  
                  60
                  
                  Chief
      Executive OfficerPaulo
      Prignolato
                  
                  45
                  
                  Chief
      Financial and Investor Relations OfficerMiguel
      Pinto Caldas
                  
                  44
                  
                  Human
      Resources OfficerFrancisco
      Fernandes Campos Valério
                  
                  61
                  
                  Technical
      and Industrial OfficerMarcelo
      Strufaldi Castelli
                  
                  44
                  
                  Supply
      Chain and Strategy OfficerCarlos
      Roberto Paiva Monteiro
                  
                  58
                  
                  Engineering
      Officer
  88
  On June
25, 2008, Mr. Antonio Sergio Pinzan de Almeida, then Pulp Executive Officer at
VCP Overseas Holding Limited, Budapest, in Zug, Switzerland, resigned from his
position and Mr. Ari Borg, General Manager of Pulp Sales assumedthe responsibility for the worldwide commercial
issues of the pulp business.
  On
October 10, 2008, Mr. Valdir Roque, then Chief Financial and Investor Relations
Officer at VCP, resigned from his position to thereafter be appointed the Chief
Financial and Investor Relations Officer at Aracruz.  Simultaneously,
Mr. José Luciano Duarte Penido, Chief Executive Officer at VCP, assumed the
position of Investor Relations Officer and Mr. Osvaldo Ayres, General
Manager-Controllers Department at VCP, acting interim as Chief Financial
Officer.
  On
October 22, 2008, Mr. Paulo Prignolato, Chief Financial Officer of Citrovita
(Votorantim Agribusiness), was appointed to be the Chief Financial and Investor
Relations Officer at VCP, effective November 1st
2008.  On that date he assumed the
positions which had been temporarily held by Mr. José Luciano Duarte
Penido and Mr. Osvaldo Ayres.
  On
December 1, 2008, both Mr. José Maria de Arruda Mendes Filho, then the Forest
Operations Officer at VCP, and Mr. Roberto Bento Vidal, then the Supply Chain
Officer at VCP, resigned from their positions.  Concurrently, Mr.
Marcelo Strufaldi Castelli, the then  Chief Operations Officer, was
appointed  to be the Supply Chain and Strategy Officer at VCP and Mr.
Francisco Fernandes Campos Valério assumed the position of Forest Operations
Officer in addition to his role as the Technical and Industrial Officer at
VCP.
  Biographical
Information
  Set forth
below is certain biographical information on our directors and executive
officers.
  José Roberto Ermírio de
Moraes.  Mr. José Roberto Ermírio de Moraes has been the
chairman of our Board of Directors since 1992 and was our president from 1992 to
April 26, 2002.  He is the Chief Executive Officer of Votorantim
Industrial and member of Executive Committee of Votorantim Group, and he has a
B.A. in Metallurgy Engineering from the Armando Alvares Penteado Foundation
College in São Paulo, Brazil.
  Fábio Ermírio de
Moraes.  Mr. Fábio Ermírio de Moraes is a mechanical engineer
and has been working for the Votorantim Group since 1985.  Chairman of
the Board of Directors of Votorantim Cimentos, Director Vice-President of
Votorantim Industrial and Member of the Executive Committee of Votorantim
Group.
  Carlos Ermírio de
Moraes.  Mr. Carlos Ermírio de Moraes has been working for the
Votorantim Group since 1983.  He is the President of the Board of
Directors of CPFL (Cia.
Paulista de Força e Luz) and a member of the Board of Directors of VBC
Energia S/A (Votorantim, Bradesco and Camargo Energia).
  Clóvis Ermírio de Moraes
Scripilliti.  Mr. Scripilliti has served as a member of our
Board of Directors since 2000.  He is the President of Family Council
and a member of the Executive Committee of Votorantim Group.  He
studied Metallurgy Engineering at Mackenzie University in São Paulo,
Brazil.
  José Luciano Duarte
Penido.  Mr. Penido has served as our chief executive officer
since January 5, 2004.  Prior to that, he was the president of
Samarco Mineração S.A. for eleven years.  He is also the
vice-president of the Minas Gerais Industry Federation, where he directs the
Enterprise Citizenship Council.  He has a degree in mining engineering
from the Federal University of Minas Gerais.
  Francisco Fernandes Campos
Valério.  Mr. Valério joined us in
January 1998.  He previously worked in senior positions at Bahia
Sul, Aracruz, Suzano, Braskraft Florestal e Industrial and Olinkraft Celulose e
Papel.  He holds a B.A. in Mechanical Engineering from the
Universidade Federal de Santa Catarina, Brazil.
  Carlos Roberto Paiva
Monteiro.  Mr. Carlos Monteiro joined the Company in
1990.  He previously worked in senior positions at Klabin Group,
Aracruz and Simão Group.  He has a degree in Industrial Mechanical
Engineering from FURG/RS, Master Business Administration from BSP - Business
School São Paulo, and he teaches in a graduate course in Pulp and Paper by USP –
University of São Paulo.
  89
  Marcelo Strufaldi
Castelli.  Mr. Castelli is a mechanical engineer and joined us
in 1997 when he held positions as Recovery, Utilities & Environment Manager,
General Manger of the Jacareí mill and Associate Director of
Operations.  Recently, he became the Chief Operating Officer of
VCP.  Prior to that, he worked at Suzano Bahia Sul and
Aracruz.
  Miguel Pinto Caldas.Mr. Caldas
has been VCP’s Director of Human and Organizational Development Officer at
VCP since 2007.  Prior to his appointment to the VCP board, he
had a 15-years career in consulting, reaching partner status at Coopers &
Lybrand, Andersen Business Consulting, and PricewaterhouseCoopers.  He
has also held long-term academic positions at Loyola University New Orleans and
FGV-EAESP, Brazil’s most prestigious business school.  He holds a bachelor
degree in business from Brasilia Federal University and earned a Master in
Science and a Ph.D., both in Organization and Human Resources, from
FGV-EAESP.
 
 Paulo
Prignolato.Mr. Paulo Prignolato has a degree in Metallurgical
Engineering from the Engineering University of Mauá.  He begins his
career at Confab and joined the Votorantim Group in 1997.  He was the
Controller at Votorantim International in the Netherlands from 1997 to 2002,
General Corporate Financial Manager for the Votorantim Group from 2002 to 2004
and Chief Financial Officer at Citrovita (Votorantim Agribusiness) from 2004
until October 2008.
 
 Certain
of our executive officers are also Board Members.  See “Board of
Directors.”
  Fiscal
Committee
  Under the
Brazilian Corporate Law, the Conselho Fiscal (Fiscal
Committee) is a corporate body independent of management and a company’s
external auditors.  In the past, a Conselho Fiscal was not
typically equivalent to or comparable with a U.S. audit committee; its primary
responsibility had been to monitor management’s activities, review the financial
statements, and report its findings to the shareholders.  However,
pursuant to an exemption under the SEC rules regarding the audit committees
of listed companies, a foreign private issuer is not required to have a separate
audit committee composed of independent directors if it has a board of auditors
established and selected pursuant to home country legal or listing provisions
expressly requiring or permitting such a board and such board meets certain
requirements.  Pursuant to this exemption, our Conselho Fiscal exercises the
required duties and responsibilities of a U.S. audit committee to the extent
permissible under Brazilian Corporate Law.  To comply with the SEC
rules, the board of auditors meets the following standards:  it is
separate from the full board, its members are not elected by management, no
executive officer is a member, and Brazilian law sets forth standards for the
independence of the members.  In addition, in order to qualify for the
exemption, the board of auditors, to the extent permitted by Brazilian law (as
discussed further below):
  a.
              is
      responsible for the appointment, retention, compensation and oversight of
      the external auditors (including the resolution of disagreements between
      management and the external auditors regarding financial
      reporting);
  b.
              is
      responsible for establishing procedures for the receipt, retention and
      treatment of complaints regarding accounting, internal accounting controls
      or auditing matters, and procedures for the confidential, anonymous
      submission by employees of concerns regarding questionable accounting or
      auditing matters;
  c.
              has
      the authority to engage independent counsel and other advisors as it
      determines necessary to carry out its duties;
  and
  d.
              receives
      appropriate funding from the company for payment of compensation to the
      external auditors, for any advisors and ordinary administrative
      expenses.
  90
  As a
foreign private issuer, we decided to modify our Conselho Fiscal to comply
with the exemption requirements.  Our Board of Directors approved the
delegation to the Conselho
Fiscal of certain additional responsibilities and the Conselho Fiscal and the Board
of Directors adopted an additional charter that delegates to the Conselho Fiscal the duties
and responsibilities of a U.S. audit committee to the extent permitted under
Brazilian Corporate Law.  Because Brazilian Corporate Law does not
permit the Board of Directors to delegate responsibility for the appointment,
retention and compensation of the external auditors and does not provide the
board or the Conselho
Fiscal with the authority to resolve disagreements between management and
the external auditors regarding financial reporting, the Conselho Fiscal cannot
fulfill these functions.  Therefore, in addition to its oversight
responsibilities, the Conselho
Fiscal may only make recommendations to the Board of Directors with
respect to the appointment, retention and compensation of the external auditors,
and with regard to resolution of disagreements between management and the
external auditors, the Conselho Fiscal may only make
recommendations to management and the board.
  Under the
Brazilian Corporate Law, the Conselho Fiscal may not
contain members who are members of the Board of Directors or the executive
committee, or who are employees of VCP or the Votorantim group, or a spouse or
relative of any member of our management.  In addition, the Brazilian
Corporate Law requires that Conselho Fiscal members
receive a remuneration at least 10% of the average amount paid to each executive
officer.  The Brazilian Corporate Law requires a Conselho Fiscal to be
composed of a minimum of three and a maximum of five members and their
respective alternates.
  Our Conselho Fiscal is composed
of three members who are elected at the annual shareholders’ meeting, with terms
lasting until the next annual shareholders’ meeting after their
election.  Under the Brazilian Corporate Law, holders of preferred
shares have the right to elect separately one member of the Conselho
Fiscal.  Also, under the Brazilian Corporate Law, minority
groups of shareholders that hold at least 10% of the voting shares also have the
right to elect separately one member of the Conselho
Fiscal.  In any event, however, the common shareholders have
the right to elect the majority of the members of the Conselho
Fiscal.  Set forth below are the names, ages and positions of
the members of our Conselho
Fiscal and their respective alternates, as of April 22, 2008, the
date of the last annual shareholders’ meeting.
  Name
                
                Age
                
                Length of Term
                
                Year First Elected
                
                PositionJoão
      Carlos Hopp
                
                79
                
                one
      year
                
                2001
                
                MemberGeraldo
      Gianini
                
                58
                
                one
      year
                
                2006
                
                AlternateSamuel
      de Paula Matos (1)
                
                60
                
                one
      year
                
                2007
                
                MemberMarcos
      Elias Sarsur
                
                59
                
                one
      year
                
                2008
                
                AlternateHaroldo
      do Rosário Vieira
                
                52
                
                one
      year
                
                2007
                
                MemberAntonio
      Sérgio Battochio
                
                60
                
                one
      year
                
                2005
                
                Alternate
 
 (1)Samuel de Paula Matos is the
audit committee financial expert.
  B.
              Compensation
  Pursuant
to our by-laws, our directors do not receive any compensation.  As of
the year ended December 31, 2008, the aggregate compensation, including
cash and benefits-in-kind, paid to our executive officers (a total of six
persons at the time) was approximately R$ 13.8 million (corresponding to
US$ 7.5 million).
  C.
              Board
      Practices
  Our Board
of Directors generally meets whenever necessary, according to the company’s
interest or when called by the chairman or by the majority of the members of the
Board of Directors.  Our Board of Directors met eleven times during
2008.  Our Board of Directors is responsible for, among other things,
establishing our general business policies and for electing our executive
officers and supervising their management.  The board of executive
officers meets periodically to review production, commercial and financial
operations.
  According
to our by-laws, the members of the Board of Directors are elected by the holders
of our common shares at the general meeting of shareholders.  Members
of the Board of Directors serve two year terms.  The terms of the
members at December 31, 2008 expired on April 30, 2009 (see “Item 6 - Board
of Directors” for the new Board of Directors elected on April 30,
2009).
  91
  D.
              Employees
  As of
December 31, 2008, we employed 3,010 persons, and our separate Conpacel
facility employed additionally 907 persons.  We use subcontractors for
many of our forestry operations and for substantially all of the transportation
of wood, pulp and other raw materials.  These subcontractors employed
4,838 persons for our business as of December 31,
2008.  Approximately 75% of the workers in our forests are employed by
third parties, predominantly in areas such as maintenance and
security.  See “Item 4B—Information on VCP—Business Overview—Raw
Materials—Wood” and “Item 4B—Information on VCP—Business
Overview—Transportation.”  We are in compliance with all local, state
and federal worker health and safety regulations.
  Several
unions represent our employees and they are considered well organized
institutions.  Annual Collective agreements related to forest workers
were renewed in 2008 for another year, resulting in a 7.5% base salary
increase.  In 2008 we had a strike in November, which lasted four days
and affected the paper production of our site located in
Piracicaba.  We believe we have good relationships with our
employees.
  In
March 2000, we began to participate in a Votorantim group pension plan,
which was made available to all of our employees.  For more detailed
information, see “—Defined Contribution Pension Plan” below.
  In
December 2005, we provisioned for the costs of post-retirement benefits
expected to be paid to current, former or inactive employees upon
retirement.  For more detailed information, see “—Post-retirement
Benefit Plan” below.
  Defined
Contribution Pension Plan
  In
March 2000, we began co-sponsoring a multi-employer defined contribution
plan of the Votorantim Group which is available to all employees.  For
employees below a certain income level we match the employee’s contribution
limited to 1.5% of the employee’s compensation.  For employees above
that income level we match the employee’s contribution up to 6% of the
employee’s compensation.  At our option we may also make additional
contributions.  Our contributions vest in varying percentages
depending on the employee’s years of service and will fully vest upon the
employee’s retirement, death or disability, provided the employee has at least
one year of service.  Our contributions amounted to US$ 2 million
in 2008, US$ 5 million in 2007 and US$ 3 million in 2006.
  Profit
Sharing Plan
  Pursuant
to Brazilian federal law, companies operating in Brazil are required to share
profits with employees beginning from fiscal year 1996.  In 1996, we
instituted a profit sharing plan for our employees in addition to providing
health and life insurance, transportation, meals and
training.  Pursuant to the program, each employee’s share of profits
is linked to our operational and financial results.  Employees are
eligible to receive a target payment of 1.1 monthly salaries payable in
February of each year.  Part of the profit sharing payment
relating to the income for that year is advanced in August.  Payment
is granted if defined goals set by management are achieved by the process or
industrial unit in which the employee works and based on the individual
performance of the employee.  Several unions that represent our
employees have agreed to this profit sharing plan.
  Post-retirement
Benefit Plan
  The
Company has an actuarial liability that relates to its proportion of the costs
of Sepaco, a hospital facility it shares with co-sponsors.  Although
the not-for-profit hospital is funded by multiple-employers, it has no separate
assets and its costs are apportioned among the sponsors based on
usage.  Contributions paid to the hospital in the year ended December
31, 2008, 2007 and 2006 amounted to US$ 2 million, US$ 3 million and US$ 1
million, respectively and the accumulated post-retirement benefit obligation and
accrued benefit cost (no plan assets) was US$ 26 million at December 31, 2008
and US$ 23 million at December 31, 2007.
 
 Measurement
of obligations for the post-retirement benefits plan is calculated as of
December 31, 2008.  Based on the report of our independent
actuary, the accumulated post-retirement benefit obligation and accrued benefit
cost (no plan assets) was US$ 26 million.
  92
  
 Percentage2008
                                        
                                        
                                        2007Weighted-average
      assumptionsDiscount
      rate
                                        
                                        
                                        7.75
                                        
                                        
                                        
                                        8.0Health
      care cost trend on covered changes
                                        
                                        
                                        3.0
                                        
                                        
                                        
                                        3.0
 
 2008
                  
                  
                  2007(US$
      in millions)Components
      of net periodic benefit cost for 2009 and 2008Interest
      cost
                  
                  
                  3
                  
                  
                  
                  3Total
      net periodic benefit cost (benefit)
                  
                  
                  3
                  
                  
                  
                  3
 
 It has
been assumed, for measurement purposes, that health care cost trends
for 2009 will not be considerably different from 2008.  Our
actuaries are unable to project the direction and pattern of changes in both the
assumed and ultimate trend rates, nor can they estimate when the rates are
expected to be achieved.
 
 A
one-percentage-point change in assumed health care cost trend rates would have
had the following effects in 2008 and 2007 (all other assumptions have been
held constant):
 
 One-percentage -
                      point decrease2008
                    
                    
                    2007(US$
      in millions)Sensitivity
      of retiree welfare resultsOn total service and interest
      cost components
                    
                    
                    (0.3
                    )
                    
                    
                    (0.3
                    )On post-retirement benefit
      obligation
                    
                    
                    (3.0
                    )
                    
                    
                    (2.6
                    )
 
 E.
              Share
      Ownership
  As of
December 31, 2008, the members of our Board of Directors and our officers,
on an individual basis and as a group, directly own less than 1% of our
preferred shares and none of our common shares.  For information on
the beneficial ownership by the Ermírio de Moraes family, see “Item 7—Major
Shareholders and Related Party Transactions—Major Shareholders.”
  The
following table lists the amount of shares held directly by each individual
member of our Board of Directors or executive officer and their representative
percentage relative to the total outstanding shares as of December 31,
2008:
  Common
                  
                  
                  PreferredNumber
                      of
      Shares
                  
                  
                  Percentage
      of
                      the
      Total
                      Outstanding
                      Shares
                  
                  
                  Number
      of
                      Shares
                  
                  
                  Percentage
                      of
      the Total
                      Outstanding
                      SharesBoard
      of DirectorsJosé
      Roberto Ermíriode
      Moraes .
                  
                  
                  0
                  
                  
                  
                  0
                  %
                  
                  
                  1
                  
                  
                  
                  0
                  %Fábio
      Ermíriode
      Moraes
                  
                  
                  0
                  
                  
                  
                  0
                  %
                  
                  
                  1
                  
                  
                  
                  0
                  %Clóvis
      Ermíriode
      Moraes Scripilliti
                  
                  
                  0
                  
                  
                  
                  0
                  %
                  
                  
                  1
                  
                  
                  
                  0
                  %Carlos
      Ermírio de
      Moraes
                  
                  
                  0
                  
                  
                  
                  0
                  %
                  
                  
                  1
                  
                  
                  
                  0
                  %José
      Luciano Penido
      (*)
                  
                  
                  0
                  
                  
                  
                  0
                  %
                  
                  
                  1
                  
                  
                  
                  0
                  %Executive
      OfficersJosé
      Luciano Penido (*)
                  
                  
                  0
                  
                  
                  
                  0
                  %
                  
                  
                  1
                  
                  
                  
                  0
                  %Francisco
      Fernandes Campos Valério
                  
                  
                  0
                  
                  
                  
                  0
                  %
                  
                  
                  3,000
                  
                  
                  
                  0
                  %Marcelo
      Strufaldi
      Castelli
                  
                  
                  0
                  
                  
                  
                  0
                  %
                  
                  
                  0
                  
                  
                  
                  0
                  %Miguel
      Caldas
                  
                  
                  0
                  
                  
                  
                  0
                  %
                  
                  
                  0
                  
                  
                  
                  0
                  %Carlos
      Roberto Paiva Monteiro
                  
                  
                  0
                  
                  
                  
                  0
                  %
                  
                  
                  0
                  
                  
                  
                  0
                  %Paulo
      Prignolato
                  
                  
                  0
                  
                  
                  
                  0
                  %
                  
                  
                  0
                  
                  
                  
                  0
                  %Total
                  
                  
                  0
                  
                  
                  
                  0
                  %
                  
                  
                  3,005
                  
                  
                  
                  0
                  %
  93
 
 Source:  Itaú
Custódia.
 (*)
              Mr.
      José Luciano Penido is part of both the Board of Directors and Executive
      Officers and he owns only one preferred share of
  VCP.
  ITEM
7.  MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
  A.
              Major
      Shareholders
  The
following table sets forth the principal holders of common and preferred shares
and their respective shareholdings as of December 31, 2008:
  Shareholders
                    
                    Common
                        Shares
                    
                    
                    (%)
                    
                    
                    Preferred
                        Shares
                    
                    
                    (%)
                    
                    
                    Total
                        Shares
                    
                    
                    (%)Votorantim
      Participações S.A.
                    
                    
                    105,702,452
                    
                    
                    
                    100.00
                    
                    
                    
                    677
                    
                    
                    
                    -
                    
                    
                    
                    105,702,450
                    
                    
                    
                    52.49Total
      Votorantim group
                    
                    
                    105,702,452
                    
                    
                    
                    100.00
                    
                    
                    
                    677
                    
                    
                    
                    -
                    
                    
                    
                    105,703,127
                    
                    
                    
                    52.49BNDES
      Participações S.A.
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    6,327,669
                    
                    
                    
                    6.61
                    
                    
                    
                    6,327,669
                    
                    
                    
                    3.14Treasury
      Stock
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -Board,
      Directors and Fiscal Council
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    3,005
                    
                    
                    
                    -
                    
                    
                    
                    3,005
                    
                    
                    
                    -Public
      (Free Float)
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    89,327,613
                    
                    
                    
                    93.38
                    
                    
                    
                    89,327,613
                    
                    
                    
                    44.36Total
                    
                    
                    105,702,452
                    
                    
                    
                    100.00
                    
                    
                    
                    95,658,964
                    
                    
                    
                    100.00
                    
                    
                    
                    201,361,414
                    
                    
                    
                    100.00
 
 The
ultimate beneficial owner, in each case, of more than 5% of our common shares
through intermediate holdings companies is the Ermírio de Moraes family which,
in the aggregate, beneficially owns 100% our voting common stock, via trust
holding companies maintained by each of the family Board members.  All
holders of our common stock have the same voting rights.  Mr. Jose
Luciano Duarte Penido, a member of the Board, holds one common share as
beneficial owner.
  As a
result of capital subscriptions that have occurred in 2009 the following table
presents a summary of these changes and the principal holders of common and
preferred shares at May 31, 2009;
  Balance
      December 31, 2008
                            
                            
                            Capital
                              Subscription
                            
                            
                            Balance
      May 31, 2009Shareholders
                            
                            Number
      of
                              shares
                            
                            
                            %
      of total
                            
                            
                            
                            
                            
                            Number
      of
                              shares
                            
                            
                            %
      of totalCommon
      SharesVotorantim
      Group
                            
                            
                            105,702,452
                            
                            
                            
                            52.49
                            
                            
                            
                            62,105,263
                            
                            
                            
                            167,807,715
                            
                            
                            
                            40.71Total
      Common
                            
                            
                            105,702,452
                            
                            
                            
                            52.49
                            
                            
                            
                            62,105,263
                            
                            
                            
                            167,807,715
                            
                            
                            
                            40.71Preferred
      SharesVotorantim
      Group
                            
                            
                            677
                            
                            
                            
                            
                            
                            
                            
                            -
                            
                            
                            
                            677BNDES
      Participações S.A.
                            
                            
                            6,327,669
                            
                            
                            
                            3.14
                            
                            
                            
                            139,378,216
                            
                            
                            
                            145,705,885
                            
                            
                            
                            32.35Board,
      Directors and Fiscal Council
                            
                            
                            3,005
                            
                            
                            
                            
                            
                            
                            
                            -
                            
                            
                            
                            3,005The
      Families, Safra Family and others
                            
                            
                            -
                            
                            
                            
                            
                            
                            
                            
                            9,300,594
                            
                            
                            
                            9,300,594
                            
                            
                            
                            2.26Public
      (Free Float)
                            
                            
                            89,327,613
                            
                            
                            
                            44.36
                            
                            
                            
                            10,189
                            
                            
                            
                            89,337,802
                            
                            
                            
                            21.68Total
      Preferred
                            
                            
                            95,658,964
                            
                            
                            
                            47.51
                            
                            
                            
                            148,688,989
                            
                            
                            
                            244,347,953
                            
                            
                            
                            59.29Total
      Common and Preferred
                            
                            
                            201,361,414
                            
                            
                            
                            100.00
                            
                            
                            
                            210,794,252
                            
                            
                            
                            412,155,668
                            
                            
                            
                            100.00
  94
  B.
              Related-Party
      Transactions
  We have
engaged in a number of transactions with related parties.
  Distributions
and Sales Outside of Brazil
  In 2005,
all of our exports were sold through VCP Overseas Holding KfT by VCP Trading
N.V. and VCP North America Inc.  Beginning in 2006, all of our exports
are sold through VCP Overseas Holding KfT by VCP Overseas Holding Limited,
Budapest, the Switzerland branch of our international subsidiary.
  Banco
Votorantim S.A.
  We have
entered into a number of financial transactions with or through Banco
Votorantim, a financial institution controlled by the Votorantim group and its
affiliates.  At December 31, 2008, we had US$ 40 million (of
a total of US$ 323 million) in deposits and investments.
  Guarantees
  At
December 31, 2008, we guaranteed US$ 245 million of debt of other
members of the Votorantim group which pertains to the aggregate amount of debt
issued in the international capital markets.  In each case, the
outstanding guarantee amount at December 31, 2008 pertains to the amount of
proceeds that were received by us and/or our subsidiaries on the issue
date.  The remaining debt raised was received and also guaranteed by
other members of the Votorantim group.  The US$ 245 million
corresponding to VCP is made up of the following:
  Primary
      obligor
                      
                      
                      Obligations
                      
                      Issue
      Date
                      
                      Outstanding
                        guarantee
                        amount
      at
                        December 31,
                        2008
                      
                      Date
      of
                          Expiration
                          of
                          guarantee
                      
                      BeneficiaryVoto-Votorantim
      Overseas Trading Operations III Limited.
                      
                      US$
                      300
      million notes issuance
                      
                      January 23,
                        2004
                      
                      US$
                      45
      million
                      
                      January 23,
                        2014
                      
                      Noteholders
      and the trusteeVoto-Votorantim
      Overseas Trading Operations IV Limited.
                      
                      US$
                      400
      million notes issuance
                      
                      June 24,
                        2005
                      
                      US$
                      200
      million
                      
                      June 24,
                        2020
                      
                      Noteholders
      and the trusteeTotal
                      
                      
                      
                      
                      
                      
                      US$
                      245
      million
 
 Note:
              The
      guarantees provided by us are in favor of other companies of the
      Votorantim Group.
  Each of
the primary obligors listed above are special purpose companies established with
the sole purpose of issuing debt.  As such, upon maturity of the debt
issued, which is also the date of expiration of the guarantee, we will either
repay lenders or seek to refinance the maturing debt.
  At
December 31, 2008, we have guaranteed to banks their collection of U.S. dollar
120 million from certain customers related to sales of our products to these
customers under our Vendor Program (see “Item 4B Information on VCP – Business
Overview - Vendor Program”).
  The BNDES
loans are secured by property, plant and equipment and a lien on certain land
and personal guarantees of an owner of Hejoassu, our ultimate parent
company.
  We
believe the other companies of the Votorantim group, whose debt we guarantee,
are creditworthy and we do not expect to be called on to make payments on our
guarantees.  In addition, given our ability to obtain short term
financing, we do not believe that there is substantial risk of illiquidity even
if we are called upon to make payments under our guarantees, individually or in
the aggregate.  See “Item 5—Operating and Financial Review and
Prospects—Liquidity and Capital Resources—Commitments and Contingencies” for a
summary of the guarantees we provided in favor of other companies of the
Votorantim group.  For additional information on our commitments and
contingencies, see Note 15 to our audited consolidated financial
statements.
  95
  Leases
of Forest Land
  At
December 31, 2008, we leased approximately 142,000 hectares of forestland,
out of approximately 87,000 hectares of planted area, or approximately 32% of
the land devoted to our forestry plantations.  The leases, most of
which commenced in 1991, are typically for a term of 21 years, which covers
approximately three harvest cycles.  The lease payments are equivalent
to 30% of the market prices of the wood produced on the property and are payable
after each harvest, based on market prices
  BNDESPar
  We have
entered into a number of financing transactions with BNDES.  At
December 31, 2008 we had an aggregate of US$ 120 million in
outstanding loans to BNDES denominated in reais that we borrowed to
fund expansion and modernization projects.  The BNDES loans are
secured by liens on land, equipment and property (including the Jacareí mill),
and by personal guarantees of an owner of Hejoassu, the ultimate parent of the
Votorantim group.  Our loans with BNDES bear interest at around 3% per
annum on the principal amount and are indexed using the TJLP, a nominal long
term interest rate that includes an inflation factor.  At
December 31, 2008, we had an additional aggregate amount of US$ 22
million in loans to BNDES denominated in reais and bearing an interest
rate of around 3% per year as adjusted by the UMBNDES Index.  The
UMBNDES Index is a weighted average rate based on the exchange rate of a basket
of currencies, predominantly the U.S. dollar, held by BNDES and during 2008, the
Index’s average rate was 37% per annum and the average spread over the UMBNDES
index was 3.8%.  At December 31, 2008, the TJLP was fixed at
6.50% and, during 2007 averaged 6.25% per year (see Notes 12 and 13 to our
audited consolidated financial statements).   As of May 31, 2009,
BNDES had lent approximately 10% of our consolidated indebtedness, and is
expected to loan significant funds in the future.  See “Item 6 –
Operating and Financial Review and Prospects—Liquidity and capital
resources—Debt—BNDES” and Exhibits 4.11 and 4.12 to this annual
report.
  We have entered (as an intervening party) into an
Investment Agreement between BNDESPar and VID.  VID and BNDESPar have
agreed to enter into a form shareholders’ agreement of VCP under which the
approval of certain matters will depend on the affirmative vote of
BNDESPar.  See “Item 10.C Material Contracts - Shareholders’
Agreement of VCP.”
  For
additional information regarding related-party transactions, see
“Item 5—Operating and Financial Review and Prospects—Liquidity and Capital
Resources” and Note 13 to our audited consolidated financial
statements.
  Aracruz
  Aracruz suffered significant losses
from financial instruments related to derivative instruments in 2008, and on May
13, 2009 concluded negotiations for the repayment of debts originating from
these transactions. Consequently, one condition was that 28% of Aracruz’ common
shares owned directly or indirectly by the Company were pledged.  See
“Item 5.A Operating and Financial Review and Prospects – Operating Results –
Recent Developments.”
  C.
              Interests
      of Experts and Counsel
  Not
applicable.
  ITEM
8.  FINANCIAL INFORMATION
  Our
consolidated financial statements include the accounts of VCP and our directly
and indirectly controlled subsidiaries.  The more significant
subsidiaries are the following: Normus Empreendimentos e Participações Ltda.
(“Normus”), Newark Financial Inc. (“Newark”), VCP North America Inc., VCP
Trading N.V., VCP Overseas Holding KFT and VCP-MS all of which are wholly
owned.  All significant intercompany accounts and transactions,
unrealized profits and intra-group profit distributions have been eliminated on
consolidation.
  96
  On December 31, 2008 we owned 28.0% of the common
voting shares, which represented 12.4% of the total share capital, of Aracruz,
which we acquired in 2001.  At December 31, 2008, the quoted market
value of our 127,506,457 Aracruz common shares was US$ 217 million as compared
to US$ 1,150 million at December 31, 2007 against a carrying value of the
investment including goodwill of US$ 135 million and the deferred tax asset on
impairment of Aracruz investment (Note 5(b) to our audited consolidated
financial statements) of US$ 46 million.  The Aracruz common share
quoted price at December 31, 2008 was at R$ 3.98 and at R$ 5.60 on January 19,
2009, equivalent to US$ 1.70 and US$ 2.40.  Effective January 19, 2009 and April 29, 2009 we have
acquired an additional interest in Aracruz from the Families and the Safra
Family (see Notes 4(e) and 22 to our audited consolidated financial
statements).  See “Item 5.A Operating and Financial Review and
Prospects – Operating Results – Recent Developments”
  We own
50% of the voting and total shares of Asapir and of VOTO IV.  From
September 2007 to August 2008, we also owned 40% of the voting and total shares
of Ahlstrom VCP.  These investees, which are incorporated in Brazil,
are accounted for using the equity method.
  On March
31, 2005, via a 50% owned joint venture Ripar, we acquired a 46.06% interest in
the total capital and 77.59% interest in the voting capital of Ripasa, a
Brazilian pulp and paper producer (Note 4(a) to our audited consolidated
financial statements).  On May 24, 2006, Ripasa’s minority preferred
non-voting shareholders exchanged their interests in Ripasa for shares in the
joint venture partners of Ripar (Note 4(a) to our audited consolidated financial
statements) which, among other things, resulted in VCP indirectly owning 50% of
Ripasa, via Ripar.  Subsequently Ripar was dissolved and its assets
were distributed to VCP and Suzano, in equal parts (Note 4(a) to our audited
consolidated financial statements).  On July 4, 2006, the joint
venture partners paid US$ 71 million to a group of Ripasa’s minority preferred
non-voting shareholders.  We accounted for our equity interest in
Ripasa using financial information with a one month lag.  Through
August 31, 2008, effective September 1, 2008 Ripasa was transformed into a cost
and production sharing unit, know as Consorcio Paulista de Papel e Celulose
(“Conpacel” or “Consortium”), wherein VCP has an undivided 50% interest in the
assets liabilities and operations of the Consortium (Note 4(a)(v) to our audited
consolidated financial statements).  Since then the one month lag was
eliminated and we recorded equity in earnings based on August 31,
2008.  From September 1, 2008, we started to recognize our 50%
interest in the Consortium’s operations and no longer applied the equity
method.  Upon derecognition of the investment in the affiliate and
recording our share in its net assets, investments in affiliates were reduced by
US$ 441 million and fixed assets and other assets increased by US$ 677
million.  During the period it was treated as an equity investment,
sales to third parties by Conpacel were made through its joint venture partners;
similarly, the Consortium does not make sales directly to third
parties.  From the date of the Consortium’s formation and through
December 31, 2008, the Company recorded cost of sales of US$ 1.7 million on
sales of products it received from the Consortium.
  A.
              Consolidated
      Statements and Other Financial
Information
  See
“Item 3—Key Information—Selected Financial Data” and
“Item 18—Financial Statements.”
  Legal
Matters
  We are
party to administrative proceedings and lawsuits that are incidental to the
normal course of our business.  These include general civil, tax and
employee litigation and administrative proceedings.  At
December 31, 2008, we were defendants in 1,643 labor lawsuits filed by our
former employees and former employees of our subcontractors and 568 civil
proceedings.  We believe that we will prevail in the majority of these
lawsuits, and do not consider that, if decided against us, these proceedings
individually or in the aggregate will have a material adverse effect on us or on
our financial condition.  At December 31, 2008, our provisions
for legal proceedings were US$ 161 million, of which US$ 135 million
related to tax disputes and US$ 26 million related to civil and labor
proceedings.  We believe that our provisions for legal proceedings are
sufficient to meet probable and reasonably estimable losses in the event of
unfavorable court decisions and that the ultimate outcome of these matters will
not have a material effect on our financial condition or results of
operations.  We cannot estimate the amount of all potential costs that
we may incur or penalties that may be imposed on us other than those amounts for
which we have provisions.
  97
  We have
instituted a number of legal proceedings in which we are seeking a refund or
contesting the imposition of certain taxes.  The more significant of
these proceedings are as follows:
  In 1999,
we filed a lawsuit challenging the 1% increase in the COFINS (Social
Contributions on Revenues) tax rate (from 2% to 3%), a tax on
revenues.  Although we have obtained a legal injunction, based on
advice of our legal counsel and reflecting rulings by the Federal Supreme Court,
we accrued US$ 55 million relating to this claim, from 2002 through
2004.  In December 2005 we made a judicial deposit of US$ 55 million
following an unfavorable decision of the Supreme Court.
  During
2002, we filed a lawsuit challenging the inclusion of the ICMS (Value-added
sales tax) in the computation basis for the COFINS tax, relating to the period
from 1996 to 2003, as well as our deductibility of recoverable ICMS originated
from raw material used for tax exempt paper products.  We have accrued
and deposited US$ 26 million relating to this claim.
  In 1996,
we filed a lawsuit to assure our right to the deductibility of inflation-indexed
devaluation (an uplift of 70%) arising from a government economic stabilization
program in January 1989.  We obtained a favorable decision enabling
the partial deduction of an uplift of 43%.  Based on advice of our
legal counsel, we have accrued US$ 7 million relating to this
claim.
  In 1998,
Brazilian Law 9718/98 was enacted which increased the basis for both PIS and
COFINS for 1999 (levying other revenue lines and not only billings), while at
the same time, increasing the rate for COFINS.  On June 23, 2006 and
August 29, 2006, we received unappealable favorable rulings for separate legal
cases related to our challenge that the payment of Social Contributions on
Revenues (PIS and COFINS) on other revenues (primarily on financial income) was
inappropriate.  As a result, in 2006 we reversed US$ 47 million in the
statement of operations as Financial income.
  Provisions
relating to Conpacel in the total amount of US$ 16 million are a result of our
assumption on September 1, 2008 of 50% of the legal proceedings of that
operating entity.
  In
addition, we are party to certain lawsuits and administrative proceedings before
various courts and governmental agencies with respect to certain other tax
liabilities arising in the ordinary course of our business.  We cannot
assure you that we will be successful in obtaining the right to these tax
credits or in contesting the imposition of these taxes.
  The possible losses, at
December 31, 2008 involved US$ 274 million related to tax disputes
(US$ 196 million in 2007) and US$ 20 million related to civil and labor
proceedings (US$ 23 million in 2007).
 
 Additionally, in December 2007 our
wholly owned subsidiary, Normus, was assessed US$ 512 million, the reais equivalent of
R$ 906.9 million, by the Brazilian tax authorities for its alleged
non-payment of income and social contribution taxes relating to the operations
of its wholly owned foreign subsidiary during the period of 2002
to 2006.  Normus, which is domiciled and operates from Hungary,
has as its principal business activity the resale of our pulp and paper in
international markets.
 
 Management is confident, as supported
by the position of external legal counsel, that the subsidiary has fully settled
its tax obligations in Hungary and that the claim by the Brazilian tax
authorities to the effect that the income should have been taxed in Brazil is
totally unfounded.  Management believes, on this basis, and on
existing Brazilian legal precedents including, among others, the
Brazilian-Hungarian bi-lateral income tax treaty, that the risk of loss to the
Company from this assessment is remote.  Said treaty establishes,
among other things, that Hungary has the exclusive sovereign right to tax the
operations of entities domiciled and doing business from its
territory.
 
 On December 21, 2007, Normus
filed an administrative appeal and, as management and external legal counsel
believe the Company’s position will prevail, it has not recognized a
liability.
  98




For more
information on our lawsuits, see Note 15 to our audited consolidated
financial statements.




Dividend
Policy and Dividends




General




In order
to determine the amounts available for dividend distribution, we are subject to
the following procedures, established by the Brazilian corporate
law.  We must allocate 5% of our annual net income, determined in
accordance with the requirements of the Brazilian corporate law and Brazilian
GAAP, to a legal reserve until the legal reserve equals 20% of our share capital
as of the end of the most recent fiscal year.  However, we are not
required to make any allocations to our legal reserve in respect of any fiscal
year in which such reserve, when added to our other capital reserves, exceeds
30% of our capital.  The legal reserve may be used only to offset any
accumulated deficit or to increase our share capital and may not be
distributed.  The legal reserve may be used only to offset any
accumulated deficit or to increase our share capital and may not be
distributed.  At December 31, 2008, the legal reserve outstanding
balance was R$ 248 million, equivalent to US$ 106 million at the
December 31, 2008 exchange rate.




According
to the Brazilian corporate law, after allocation of any amounts to the legal
reserve, we may, subject to shareholders’ approval, make allocations from the
remaining balance to a contingency reserve against future losses.




At the
end of each fiscal year, all shareholders are entitled to receive a mandatory
dividend, also known as the mandatory distribution.  For the mandatory
distribution, we must distribute at least 25% as determined under Brazilian GAAP
of the net income after taxes, after deducting the accumulated losses and after
deducting any amounts allocated to employee’s and management participation, and
as reduced or increased, as the case may be, by the following
amounts:




·
            the
      amount allocated to the legal reserve;
and




·
            the
      amount allocated to the contingency reserve and any amount written off in
      respect of the contingency reserve accumulated in previous fiscal
      years.




Under the
Brazilian corporate law, the amount by which the mandatory distribution exceeds
the “realized” portion of net income for any particular year may be allocated to
the unrealized income reserve and the mandatory distribution may be limited to
the “realized” portion of net income.  The “realized” portion of net
income is the amount by which “net income” exceeds the sum of (1) our net
positive results, if any, from the equity method of accounting for earnings and
losses of our subsidiaries and certain affiliates, and (2) the profits,
gains or income obtained on transactions maturing after the end of the following
fiscal year.  As amounts allocated to the unrealized income reserve
are realized in subsequent years, such amounts must be added to the dividend
payment relating to the year of realization.




The
amounts available for distribution are determined on the basis of financial
statements prepared in accordance with the requirements of the Brazilian
corporate law.  In addition, amounts arising from tax incentive
benefits or rebates are appropriated to a separate capital reserve in accordance
with the Brazilian corporate law.  This investment incentive reserve
is not normally available for distribution, although it can be used to absorb
losses under certain circumstances, or be capitalized.  Amounts
appropriated to this reserve are not available for distribution as
dividends.




The
Brazilian corporate law permits a company to pay interim dividends out of
preexisting and accumulated profits for the preceding fiscal year or semester,
based on financial statements approved by its shareholders.  The
dividends we paid in 2008 relate to profits earned through December 31,
2007.




99




Unappropriated
retained earnings, as reported in our U.S. GAAP financial statements, represent
retained earnings after appropriations specified in the Brazilian corporate law
as described in the fourth paragraph under “—General.”  Unappropriated
retained earnings in U.S. GAAP have no relevant impact on U.S. investors since
the distributable earnings are those recorded in our books in accordance with
Brazilian GAAP.  The appropriated reserve balances in the U.S. GAAP
financial statements at the balance sheet dates reflect the underlying Brazilian
statutory accounts translated at historical exchange rates.  The
unappropriated retained earnings balance in the U.S. GAAP financial statements
does not reflect amounts available for distribution.  The depreciation
of the real impacts the
amount available for distribution when measured in U.S.
dollars.  Amounts reported as available for distribution in our
statutory accounting records prepared under Brazilian GAAP will decrease or
increase when measured in U.S. dollars as the real depreciates or
appreciates, respectively, against the U.S. dollar.  The depreciation
of the real results in
net foreign exchange losses which are included in the statement of operations
determined under Brazilian GAAP and which reduces the amount of unappropriated
earnings available for distribution.  Brazilian law permits the
payment of dividends only in reais limited to the
unappropriated retained earnings in our financial statements prepared in
accordance with Brazilian GAAP.  At December 31, 2008, in our
legal books prepared in accordance with Brazilian GAAP, we had unappropriated
retained earnings (Reserve for Investments (Reserva de Investimentos) of
R$ 835 million, equivalent to US$ 357 million at the exchange rate of
December 31, 2008 (2007 - R$ 2,240 million, equivalent to US$ 1,265
million at the exchange rate of December 31, 2007).  Unappropriated
retained earnings as reported in accordance with Brazilian GAAP may be used to
make additional discretionary dividend payments, but we cannot assure you that
we will make dividend payments out of these Unappropriated retained earnings in
the foreseeable future.  No dividend distribution can be made if an
accumulated deficit is reported in accordance with Brazilian GAAP, unless the
negative balance is eliminated by the reversal of other reserves.




Mandatory
distribution




Under our
by-laws, at least 25% of our adjusted net income as determined under Brazilian
GAAP for the preceding fiscal year must be distributed as a mandatory annual
dividend.  The dividend must be distributed within 60 days of the
annual shareholders’ meeting at which the distribution is approved, unless a
shareholders’ resolution determines another date for distribution, which may not
be later than the end of the fiscal year in which such dividend was
declared.  Pursuant to our by-laws, holders of preferred shares are
not entitled to a fixed or minimum dividend, but have the right to receive
dividend payments per share that are 10% greater than those paid to holders of
common shares.  The mandatory distribution is based on a percentage of
adjusted net income, which may not be lower than 25%, rather than a fixed
monetary amount per share.  The Brazilian corporate law permits,
however, a public company to suspend the mandatory distribution of dividends if
the Board of Directors reports to the shareholders’ meeting that the
distribution would be incompatible with the financial condition of the company,
subject to approval by the shareholders’ meeting and review by the Conselho
Fiscal.  The Board of Directors must file a justification for a
dividend suspension with the CVM within five days of the date of the
shareholders’ meeting.  Profits not distributed by virtue of the
suspension mentioned above must be attributed to a special reserve and, if not
absorbed by subsequent losses, must be paid as dividends as soon as the
financial situation of the company permits such payments.  The
rules regarding suspension apply to the holders of preferred shares and,
consequently, to the holders of ADSs.  The mandatory distribution may
also be limited to the “realized” portion of net income, as described under
“—General.”  For further information on our dividend policy, see
“Dividend Policy.”




Payment
of dividends




We are
required by the Brazilian corporate law to hold an annual shareholders’ meeting
by April 30 of each year at which, among other things, the shareholders
have to decide on the payment of our annual dividend.  Under the
Brazilian corporate law, dividends are required to be paid within 60 days
following the date the dividend was declared, unless a shareholders’ resolution
sets forth another date of payment, which must occur prior to the end of the
fiscal year in which such dividend was declared.  A shareholder has a
three-year period from the dividend payment date to claim dividends (or interest
payments as described under “—Additional payments on shareholders’ equity”) in
respect of its shares, after which we will have no liability for such
payments.




We may
prepare financial statements semiannually or for shorter periods.  Our
Board of Directors may declare a distribution of dividends based on the profits
reported in semiannual financial statements.  The Board of Directors
may also declare a distribution of interim dividends based on profits previously
accumulated or in profits reserve which are reported in such financial
statements or in the last annual financial statement approved by resolution
taken at a shareholders’ meeting.




100




In
general, shareholders who are not residents of Brazil must register their equity
investment with the Central Bank to have dividends, sales proceeds or other
amounts with respect to their shares eligible to be remitted outside of
Brazil.  The preferred shares underlying the ADSs are held in Brazil
by Banco Itaú S.A., also known as the custodian, as agent for the depositary,
which is the registered owner on the records of the registrar for our
shares.  The current registrar is Banco Itaú S.A.  The
depositary registers the preferred shares underlying the ADSs with the Central
Bank and, therefore, is able to have dividends, sales proceeds or other amounts
with respect to the preferred shares remitted outside Brazil.




Payments
of cash dividends and distributions, if any, are made in Brazilian reais to the custodian on
behalf of the depositary, which then converts such proceeds into U.S. dollars
and causes such U.S. dollars to be delivered to the depositary for distribution
to holders of ADSs.  In the event that the custodian is unable to
convert immediately the Brazilian currency received as dividends into U.S.
dollars, the amount of U.S. dollars payable to holders of ADSs may be adversely
affected by devaluations of the Brazilian currency that occur before the
dividends are converted.  Under the current Brazilian corporate law,
dividends paid to persons who are not Brazilian residents, including holders of
ADSs, will not be subject to Brazilian withholding tax, except for dividends
declared based on profits generated prior to December 31, 1995, which will
be subject to Brazilian withholding income tax at varying tax
rates.  See “Item 10—Additional Information—Taxation—Certain
Brazilian tax consequences.”




In 2007
and 2006 we paid dividends in excess of the mandatory amount.  In
2008, no dividends were paid or accrued relating to 2008 operations as we
incurred a loss as measured under Brazilian GAAP.





Dividend
policy




The
declaration of annual dividends, including dividends in excess of the mandatory
distribution, requires approval by the vote of the majority of the holders of
our common stock and will depend on many factors.  These factors
include our results of operations, financial condition, cash requirements,
future prospects, our credit ratings, macroeconomic conditions and other factors
deemed relevant by our shareholders.  Our shareholders have
historically acted on these matters at the recommendation of our Board of
Directors.  Within the context of our tax planning, we may in the
future determine that it is to our benefit to distribute interest attributed to
capital.




On
December 3, 2003, our Board of Directors approved a change in our dividend
policy effective for distributions and/or interest or equity related to any
distribution beginning in the 2003 fiscal year.  Under the policy, we
intend to pay dividends and/or interest on equity based on 60% of “free cash
flow.”  “Free cash flow” is expected to be an amount equal to “EBITDA”
minus “changes in working capital,” minus “income taxes” and minus “capital
expenditures” and will be based upon our financial statements prepared in
accordance with the Brazilian corporate law, Brazilian GAAP and the
rules and regulations of the CVM and Bovespa.  “EBITDA” means
operating income before financial expenses (income) and gains (losses) from
certain investments accounted for by the equity method plus depreciation,
amortization and depletion; “changes in working capital” means the net cash
provided by (or used in) the decrease (increase) of current assets and the
increase (decrease) of current liabilities; “income tax” means the income tax
and social contribution effectively paid by us and “capital expenditures” means
the net cash used in our capital expenditures, in each case as such items appear
in the income statement and/or the statement of cash flows contained in our
year-end financial statements prepared in accordance with the requirements of
the Brazilian corporate law.  It is anticipated that, given the
cyclical nature of our pulp and paper business, distributions of dividends
and/or interest on equity will be made once a year.




The
declaration of annual dividends, including dividends in excess of the mandatory
distribution, will continue to require approval by the majority of our common
stockholders and will continue to depend on many factors, including our results
of operations, financial condition, cash requirements, future prospects, credit
ratings, macroeconomic conditions and other factors deemed relevant by our
shareholders and Board of Directors.  We may change or rescind our
dividend policy at any time.




Dividends




The
following table sets forth the dividends paid to holders of our capital stock
since fiscal year 2004.  The amounts in the table below relate to cash
dividends declared, which differ from the dividends reported in U.S. dollars in
the statement of changes in shareholders’ equity in our consolidated financial
statements due to translation effects recorded through to the date of dividend
payment:




101




First
      payment date
                    
                    Fiscal
      year
                    
                    Common
      shares
                    
                    
                    Preferred
      shares
                    
                    
                    Common
      shares(1)
                    
                    
                    Preferred
                        shares(1)(in
      R$ per share)
                    
                    
                    (in
      US$ per share)May 13,
      2005
                    
                    2004
                    
                    
                    1.0400
                    
                    
                    
                    1.1400
                    
                    
                    
                    0.4208
                    
                    
                    
                    0.4613May 10,
      2006 (2)
                    
                    2005
                    
                    
                    1.4069
                    
                    
                    
                    1.5476
                    
                    
                    
                    0.6834
                    
                    
                    
                    0.7518May 10,
      2007(2)
                    
                    2006
                    
                    
                    1.4963
                    
                    
                    
                    1.6459
                    
                    
                    
                    0.7379
                    
                    
                    
                    0.8117May 10,
      2008(2)
                    
                    2007
                    
                    
                    1.4863
                    
                    
                    
                    1.6349
                    
                    
                    
                    0.6360
                    
                    
                    
                    0.7171





(1)
            Based
      on declared cash amount in R$ translated to U.S. dollars at the exchange
      rate on the first payment date.


(2)
            Dividends
      distributed as Interest on Equity (ISE).  Amounts are gross of
      the 15% withholding tax.




The
dividends and interest attributable to capital we paid totaled US$ 88
million in 2005, US$ 111 million in 2006 and US$ 136 million in
2007.  On December 11, 2007, we declared dividends (as interest
attributable to capital) related to 2007 fiscal year, in the gross amount
of  R$ 318 million (equivalent to US$ 188 million), paid in May,
2008, after our annual shareholders’ meeting (held April 30,
2008).  This amount represents approximately 30% of our net earnings
for the year 2007 and 3% yield.  Holders of our preferred shares have
the right to receive a dividend per share of 10% more than that paid to the
common shares.




B.
            Significant
      Changes




No
significant changes or events have occurred after the close of the balance sheet
date at December 31, 2008, other than the events already described in this
annual report.




ITEM
9.  THE OFFER AND LISTING




A.
            Offer
      and Listing Details




The ADSs
are listed on the New York Stock Exchange under the trading symbol
“VCP.”  Our preferred shares trade on the São Paulo Stock Exchange
under the symbol “VCPA4” (prior to December 3, 1999 we traded under the
symbol “PSIM4”).  At December 31, 2008, we had approximately
9,100 shareholders of record.




Market
Price Information




The table
below sets forth, for the periods indicated, the reported high and low closing
sale prices in nominal reais for each preferred
shares on the São Paulo Stock Exchange.  The table also sets forth,
for the periods indicated, the reported high and low sales prices per ADS at the
last day of each respective quarter.  See “Item 3—Key
Information—Selected Financial Data—Exchange Rates” for information with respect
to exchange rates applicable during the periods set forth below:




102




Reais per
                            Preferred
      Share
                        
                        
                        U.S.
      dollars
                            per
      ADSHigh
                        
                        
                        Low
                        
                        
                        High
                        
                        
                        Low2004:
                        Annual
                        
                        
                        44.00
                        
                        
                        
                        33.00
                        
                        
                        
                        16.55
                        
                        
                        
                        10.722005:
                        Annual
                        
                        
                        39.37
                        
                        
                        
                        23.39
                        
                        
                        
                        15.69
                        
                        
                        
                        10.612006:
                        Annual
                        
                        
                        44.30
                        
                        
                        
                        27.20
                        
                        
                        
                        20.04
                        
                        
                        
                        12.22


2007:
                        First
      Quarter
                        
                        
                        43.17
                        
                        
                        
                        36.19
                        
                        
                        
                        19.90
                        
                        
                        
                        17.01Second
      Quarter
                        
                        
                        46.30
                        
                        
                        
                        37.75
                        
                        
                        
                        24.38
                        
                        
                        
                        18.30Third
      Quarter
                        
                        
                        52.50
                        
                        
                        
                        41.76
                        
                        
                        
                        28.62
                        
                        
                        
                        19.60Fourth
      Quarter
                        
                        
                        59.18
                        
                        
                        
                        49.31
                        
                        
                        
                        34.45
                        
                        
                        
                        28.08Annual
                        
                        
                        59.18
                        
                        
                        
                        36.19
                        
                        
                        
                        34.45
                        
                        
                        
                        17.01


2008:
                        First
      Quarter
                        
                        
                        57.31
                        
                        
                        
                        43.79
                        
                        
                        
                        34.00
                        
                        
                        
                        24.94Second
      Quarter
                        
                        
                        57.46
                        
                        
                        
                        42.84
                        
                        
                        
                        34.93
                        
                        
                        
                        26.68Third
      Quarter
                        
                        
                        43.03
                        
                        
                        
                        27.90
                        
                        
                        
                        27.05
                        
                        
                        
                        13.94Fourth
      Quarter
                        
                        
                        28.80
                        
                        
                        
                        11.80
                        
                        
                        
                        14.96
                        
                        
                        
                        4.84Annual
                        
                        
                        57.46
                        
                        
                        
                        11.80
                        
                        
                        
                        34.93
                        
                        
                        
                        4.84




Share
      Price for the most recent six months:December,
      2008
                              
                              
                              18.50
                              
                              
                              
                              11.80
                              
                              
                              
                              7.99
                              
                              
                              
                              4.84January,
      2009
                              
                              
                              19.75
                              
                              
                              
                              13.61
                              
                              
                              
                              9.00
                              
                              
                              
                              5.80February,
      2009
                              
                              
                              13.80
                              
                              
                              
                              11.50
                              
                              
                              
                              6.20
                              
                              
                              
                              4.78March,
      2009
                              
                              
                              11.60
                              
                              
                              
                              8.51
                              
                              
                              
                              5.23
                              
                              
                              
                              3.57April,
      2009
                              
                              
                              19.50
                              
                              
                              
                              11.10
                              
                              
                              
                              8.88
                              
                              
                              
                              4.92May,
      2009
                              
                              
                              25.40
                              
                              
                              
                              19.01
                              
                              
                              
                              12.10
                              
                              
                              
                              9.03





B.
            Plan
      of Distribution




Not
applicable.




C.
            Markets




Trading
on the São Paulo Stock Exchange




Settlement
of transactions conducted on the São Paulo Stock Exchange is effected three
business days after the trade date.  Delivery of, and payment for,
shares is made through the facilities of separate clearinghouses for each
exchange, which maintain accounts for member brokerage firms.  The
seller is ordinarily required to deliver the shares to the clearinghouse on the
second business day following the trade date.  The clearinghouse for
the São Paulo Stock Exchange is Companhia Brasileira de Liquidação e
Custódia, or CBLC.




In order
to better control volatility, the São Paulo Stock Exchange has adopted a
“circuit breaker” system pursuant to which trading sessions may be suspended for
a period of 30 minutes or one hour whenever the indices of these stock exchanges
fall below the limits of 10% and 15%, respectively, in relation to the index
registered in the previous trading session.




The São
Paulo Stock Exchange is less liquid than the New York Stock Exchange or other
major exchanges in the world.  At December 31, 2008, the
aggregate market capitalization of the 449 companies listed on the São Paulo
Stock Exchange was equivalent to approximately US$ 723 billion, and the ten
largest companies listed on the São Paulo Stock Exchange represented
approximately 51% of the total market capitalization of all listed
companies.  Although any of the outstanding shares of a listed company
may trade on a Brazilian stock exchange, in most cases fewer than half of the
listed shares are actually available for trading by the public, the remainder
being held by small groups of controlling persons, by governmental entities or
by one principal shareholder.  On December 31, 2008, we accounted
for approximately 0.26% of the market capitalization of all listed companies on
the São Paulo Stock Exchange.  .




Trading
on the São Paulo Stock Exchange by non-residents of Brazil is subject to certain
limitations under Brazilian foreign investment and tax legislation See
“Item 10—Additional Information—Taxation” and “Item 10—Additional
Information—Exchange Controls.”




103




Regulation
of Brazilian Securities Markets




The
Brazilian securities markets are regulated by the CVM, which has authority over
stock exchanges and the securities markets generally, by the Conselho Monetário Nacional,
the National Monetary Council, and by the Central Bank, which has, among others,
licensing authority over brokerage firms and regulates foreign investment and
foreign exchange transactions.




Under the
Brazilian corporate law, a corporation is either public (companhia aberta), such as we
are, or closely held (companhia
fechada).  All publicly held companies, including us, are
registered with the CVM and are subject to reporting requirements, in order to
be allowed to have their securities offered to the public and to be listed in a
Brazilian stock exchange.  Our preferred shares are traded on the São
Paulo Stock Exchange but may be traded privately subject to certain limitations
or on the Brazilian over-the-counter market.  The Brazilian
over-the-counter market consists of direct trades in which a financial
institution registered with the CVM serves as intermediary.




We have
the option to ask that trading in securities on the São Paulo Stock Exchange be
suspended in anticipation of a material announcement.  Trading may
also be suspended at the initiative of the São Paulo Stock Exchange or the CVM
based on or due to a belief that a company has provided inadequate information
regarding a material event or has provided inadequate responses to the inquiries
by the CVM or the São Paulo Stock Exchange, among other reasons.




The
Brazilian securities law, the Brazilian corporate law and the regulations issued
by the CVM, the National Monetary Council and the Central Bank provide, among
other things, disclosure requirements and restrictions on insider trading, price
manipulation and protection of minority shareholders.  However, the
Brazilian securities markets are not as highly regulated and supervised as the
U.S. securities markets or markets in some other jurisdictions.




Differentiated
Levels of Corporate Governance




On
November 14, 2001, we agreed to comply with heightened corporate governance
and disclosure requirements established by the São Paulo Stock Exchange in order
to qualify for a differentiated listing qualification as a company admitted to
the “Level 1 of Corporate Governance Requirements.”




To become
a Level 1 company, an issuer must agree to (i) ensure that shares of the
issuer representing 25% of its total capital are effectively available for
trading; (ii) adopt offering procedures that favor widespread ownership of
shares whenever making a public offering; (iii) comply with minimum
quarterly disclosure standards; (iv) follow stricter disclosure policies
with respect to transactions made by controlling shareholders, directors and
officers involving securities issued by the issuer; (v) disclose any
existing shareholders’ agreements and stock option plans; and (vi) make a
schedule of corporate events available to the shareholders.




The rules
applicable for Corporate Governance Level 1 are being reviewed by a Committee
lead by Bovespa, in order to improve the regulation applicable to this
level.  It is VCP intention to follow the new rules and maintain
qualified standards of corporate governance and transparency.




Significant
Differences between our Corporate Governance Practices and NYSE Corporate
Governance Standards




See “Item 16G – Corporate Governance – Significant
Differences between our Corporate Governance Practices and NYSE Corporate
Governance Standards.”




D.
            Selling
      Shareholders




Not
applicable.




E.
            Dilution




Not
applicable.




104




F.
            Expenses
      of the Issue




Not
applicable.




ITEM
10.  ADDITIONAL INFORMATION




A.
            Share
      Capital




Not
applicable.




B.
            Memorandum
      and Articles of Association




Our
by-laws are filed as Exhibit 1 to this annual report.




C.
            Material
      Contracts




Acquisition of additional equity interest in
Aracruz




VCP has acquired an additional equity interest in
Aracruz, after execution of two share purchase agreements
(“SPAs”).  Upon the closing of the second SPA on April 29, 2009, VCP
owned approximately 84.09% of Aracruz’s voting capital.




On January 19, 2009, VCP entered into an SPA with the
Families, through which VCP acquired 127,506,457 common shares issued by
Aracruz, representing approximately 28.03% of the voting capital of
Aracruz.  The transaction was closed on January 21,
2009.  The purchase price of R$ 2,710 million is payable in six
tranches as follows: (i) R$ 500 million were paid in cash on January 21,
2009;(ii) R$ 500 million is due on July 5, 2009, of which R$
400 million will be paid in cash, and the remaining R$ 100 million could be
credited in favor of the Families against VCP to be used as payment for
preferred shares issued by VCP in a capital increase; (iii) R$ 500 million will
be paid in cash on January 5, 2010; (iv) R$ 500 million will be paid in cash on
July 5, 2010;(v) R$ 410 million will be paid in cash on January 5,
2011; and (vi) R$ 300 million will be paid in cash on July 5,
2011.




On March 5, 2009, VCP entered into a second SPA with the
Safra Family, to acquire an additional 127,506,457 common shares of Aracruz,
representing another 28.03% of Aracruz’s voting capital, as a result of
Arainvest’s exercise of tag-along rights in connection with the transaction
carried out with the Families.  The purchase price is of R$ 2,710
million and will be paid in six tranches pursuant to a schedule similar to that
applicable to the Families.  The second SPA was concluded by the end
of April 2009.  See “Item 5.A Operating and Financial Review and
Prospects – Operating Results – Recent Developments”.




Shareholders’
Agreement of Aracruz




A
subsidiary of ours became a party to the Aracruz shareholders’ agreement, along
with BNDESPar, Arapar S.A. (the Lorentzen Group) and Arainvest Participações
(the Safra Group).  This agreement has expired on May 2008 and was not
renewed.




On
February 7, 2003, the Lorentzen Group and the Safra Group announced the
signing of an agreement in which the Lorentzen Group and the Safra Group agreed
that, until the termination of the existing Aracruz shareholders’ agreement, a
sale by either party of its voting interest in Aracruz must be approved by the
other party.  This agreement provides that (i) neither party may
take any action or omit to take any action which results in the extension or
renewal of the existing shareholders’ agreement, and (ii) after
May 11, 2008 (the date of termination of the above mentioned shareholders’
agreement), (A) the sale by either party shall be subject to rights of
first refusal by the other party and to “tag-along” rights (the right of a party
to the agreement to sell on a pro rata basis its shares if
another party is selling shares) and (B) in the event of a sale by either
of them to a third party, the purchaser must adhere to the provisions of the
agreement.




105




Shareholders’ Agreement of VCP




Under the terms of the Investment Agreement entered into
between BNDESPar, VID and ourselves (as an intervening party), VID and BNDESPar
have entered into a shareholders’ agreement of VCP (See “Item 5.A Operating and
Financial Review and Prospects – Operating Results – Recent Developments”) under
which the approval of certain matters will depend on the affirmative vote of
BNDESPar; including:





Effective immediately:





·
            Indebtednessincurred by the Company and its controlled
      companies;




·
            capital stock
  reduction;




·
            proposal of extrajudicial reorganization plan,
      filing for judicial reorganization or bankruptcy, liquidation or
      dissolution;




·
            change in the preferences and advantages of the
      preferred shares or creation of a new and more favored class of
      shares;




·
            reduction of mandatory
      dividend;




·
            any proposal for distribution of dividends or
      interest on equity;




·
            participation of the Company in groups of
      companies,reduction in the level of listing with Bovespa or
      deregistration;




·
            any
      amendment to the Bylaws before the Adherence to the Novo
      Mercado;




Effective
after Adherence to the Novo Mercado it will also include:




·
            amendment
      to the articles of the Bylaws regarding the business purpose of the
      Company, Fiscal Council, diluted control and maintenance of the share base
      dilution;




·
            conversion,
      consolidation, split or merger, including of
  shares;




·
            capital
      increase, issuance of any security convertible into or exchangeable for
      shares;




·
            any
      transaction between the Company and/or its controlled companies, on the
      one part, and any related parties, on the other part, in an amount
      exceeding R$20 million per year;




·
            disposal
      of or encumbrance on permanent
assets;




·
            proposal
      for creation of reserves, provisions or for changing accounting
      criteria;




·
            the
      approval of annual budget;




·
            execution
      of agreements of any nature in an individual amount exceeding R$500
      million;




·
            capital
      investments not provided for in the business or budget plan approved by
      the Board of Directors;




·
            acquisition
      by the Company of material interest, as defined by applicable law, not
      provided for in the business or budget plan approved by the Board of
      Directors of the Company;




·
            creation
      of encumbrances or guarantees to ensure performance of third-party
      obligations;




·
            acquisition
      of any equity interest in companies whose core business is not provided
      within the scope of the business
purpose;






106




·
            reappraisal
      of assets resulting in positive variation of the asset in an amount
      exceeding R$500 million.




Technology
Transfer Agreements




We have
had a technology transfer agreement with Oji Paper since 1989 pursuant to which
Oji Paper agreed to share secret formulae, processes, technical information and
know-how developed by it for thermal and carbonless paper.  The
agreement also granted us an exclusive, non-assignable license to manufacture
and sell certain carbonless (until 2007, see “Item 4 Information on VCP -
Strategic Business Agreement (SBA) with Oji Paper) and thermal papers in Brazil
and a non-exclusive, non-assignable license to sell such products in Latin
America, Africa and the Middle East.  Oji Paper receives quarterly
royalties based on net operating revenue.  The royalties payment has
been less than US$ 1.0 million per annum in 2006, 2007 and
2008.




Strategic
Business Agreement




In
August 2007, we signed this agreement with Oji Paper which will permit us
to further our offering of thermal paper technologies in Brazil and the Latin
America regions, while allowing Oji Paper to expand its worldwide presence as
market leader in thermal paper market.




Through
the execution of the SBA, we will be able to draw on the technologies of Oji as
well as their global subsidiaries including the technology of Kanzaki Specialty
Papers, Inc, (KSP) Kanzan Spezialpapiere GmbH (Kanzan) and Oji Paper Thailand
Ltd. (OPT).  Going forward, we will be prepared to meet the growing
demands of an expanding market by drawing on the technological process of Oji
Paper globally.  The SBA agreement coupled with the expansion of our
Piracicaba mill will permit the continuation of enhanced quality and improved
value to our customers.




Exchange
Agreement with International Paper




On
September 19, 2006, International Paper, a wholly owned subsidiary of
International Paper Company, and VCP entered into the Exchange Agreement. 
Pursuant to the terms of the Exchange Agreement, International Paper agreed to
exchange the Project Mill developed in Três Lagoas, state of Mato Grosso do Sul,
Brazil (together with approximately 100,000 hectares of surrounding forestlands)
for VCP’s Luiz Antonio pulp and uncoated paper mill and approximately 60,000
hectares of forestlands located in the state of São Paulo, Brazil. 
International Paper has already fully funded the project mill in the amount of
US $1.15 billion.




The Luiz
Antonio mill produces 355,000 metric tons of uncoated papers and 100,000 metric
tons of market pulp annually.  The 100,000 metric tons of market pulp will
be supplied to VCP, for its use in other facilities, on competitive terms under
a long-term supply agreement.  The Três Lagoas project mill was completed
on March 30, 2009 and will have a capacity of 1,100,000 tons of market pulp
per annum.  Under VCP management the capacity was increased to
1,300,000 tons of market pulp per annum.




Under the
Exchange Agreement, International Paper is granted the right to construct, at
its cost, up to two paper machines adjacent to, and integrated with, the Project
Mill.  If International Paper exercises its right to build one or both
paper machines adjacent to the Project Mill, (1) certain parcels of real
property will be retained by International Paper upon which the paper machines
and ancillary facilities will be constructed and (2) the paper machines
will be supported by long-term supply agreements under which VCP will provide
International Paper pulp on competitive terms and utilities and other services
at rates based on VCP’s actual operating costs.




Pursuant
to the Exchange Agreement, each of International Paper and VCP agreed to provide
indemnification following closing to the other party for certain matters,
including for certain environmental liabilities and breaches of representations,
warranties or covenants.




Consummation
of the transaction was effective as of February 1, 2007.




The
foregoing description of the Exchange Agreement does not purport to be complete
and is qualified in its entirety by reference to the full text of the Exchange
Agreement, which has been filed with the Commission as an exhibit to this
report.




107




Agreements
filed as Exhibits




The
representations, warranties and covenants made by us in any agreement that is
filed as an exhibit to this report were made solely for the benefit of the
parties to such agreement, including, in some cases, for the purpose of
allocating risk among the parties to such agreements, and should not be deemed
to be a representation, warranty or covenant to others.  Moreover,
such representations, warranties or covenants were accurate only as of the date
when made.  Accordingly, such representations, warranties and
covenants should not be relied on as accurately representing the current state
of our affairs.




For
additional information on our material contracts, see “Item 5—Operating and
Financial Review and Prospects—Liquidity and Capital Resources.”




D.
            Exchange
      Controls




Under the
Brazilian Corporate Law, payment of the mandatory dividend is not required if
the board of directors has formally declared such distribution to be inadvisable
in view of the company’s financial condition and has provided the shareholders
at the annual shareholders’ meeting with an opinion to that effect which has
been reviewed by the Conselho
Fiscal prior to such meeting.  The board of directors must file
a justification for a distribution suspension with the CVM within five days of
the shareholders’ meeting.  See “Item 8—Financial
Information—Dividend Policy and Dividends”




There are
no restrictions on ownership of our common shares or preferred shares by
individuals or legal entities domiciled outside Brazil.  However, the
right to convert dividend payments and proceeds from the sale of common shares
or preferred shares into foreign currency and to remit such amounts outside
Brazil are subject to exchange control restrictions and foreign investment
legislation which generally require, among other things, obtaining an electronic
registration with the Central Bank.




Under
Resolution No. 2,689, foreign investors may invest in almost all financial
assets and engage in almost all transactions available in the Brazilian
financial and capital markets, provided that some requirements are
fulfilled.  In accordance with Resolution No. 2,689, the definition of
foreign investor includes individuals, legal entities, mutual funds and other
collective investment entities that are domiciled or headquartered
abroad.




Investors
under Resolution No. 2,689 who are not a Tax Haven Holder or a country that does
not impose income tax or in which the maximum income tax rate is lower than 20%,
are entitled to favorable tax treatment.  See “Material Tax
Considerations—Material Brazilian Tax Considerations.”




Resolution
No. 1,927 provides for the issuance of depositary receipts in foreign
markets in respect of shares of Brazilian issuers.  An application was
filed to have the ADSs approved by the Central Bank and the CVM under Annex V,
and we received final approval before the ADS Offering.




An
electronic registration, which replaced the amended Certificate of Registration,
was issued in the name of the depositary with respect to the ADSs and is
maintained by the Custodian on behalf of the Depositary.  This
electronic registration was carried on through the SISBACEN.  Pursuant
to the electronic registration, the Custodian and the Depositary are able to
convert dividends and other distributions with respect to the preferred shares
represented by the ADSs into foreign currency and remit the proceeds outside
Brazil.  In the event that a holder of ADSs exchanges the ADSs for
preferred shares, the holder will be entitled to continue to rely on the
Depositary’s electronic registration for only five business days after the
exchange.  Thereafter, a holder must seek to obtain its own electronic
registration.  Unless the preferred shares are held pursuant to
Resolution No. 2,689 by a duly registered investor or a holder of preferred
shares who applies for and obtains a new electronic registration, that holder
may not be able to obtain and remit abroad U.S. dollars or other foreign
currencies upon the disposition of the preferred shares, or distributions with
respect thereto.  In addition, if the foreign investor resides in a
tax haven jurisdiction or is not an investor registered pursuant to Resolution
No. 2,689, the investor will also be subject to less favorable tax
treatment.




108




Preemptive
Rights




Each of
our shareholders has a general preemptive right to subscribe for shares or
convertible securities in any capital increase, in proportion to its
shareholding, except (i) in the event of the grant and exercise of any stock
option to acquire or subscribe for shares of our capital stock; and (ii) in the
context of a capital increase derived from merger, merger of shares and/or
spin-off implemented according to Brazilian Corporate Law.  A minimum
period of 30 days following the publication of notice of the issuance of shares
or convertible securities is allowed for exercise of the right, and the right is
negotiable.  However, according to our by-laws, our Board of Directors
can eliminate this preemptive right or reduce the 30-day period in case we issue
debentures that are convertible into shares, warrants (bônus de subscrição) or
shares within the limits authorized by the by-laws:  (i) through a
stock exchange or through a public offering or (ii) through an exchange of
shares in a public offering to acquire control of another publicly-held
company.




Except as
described above, in the event of a capital increase that would (i) maintain the
proportion of capital represented by common and preferred shares, the holders of
common and preferred shares would have preemptive rights to subscribe to our
newly issued shares in proportion to their shareholdings in each class of
shares; (ii) modify the proportion of capital represented by common and
preferred shares, the holders of common and preferred shares would have
preemptive rights to subscribe to our newly issued common and preferred shares,
respectively, in proportion to their shareholdings, and to the other class of
shares only to the extent necessary to prevent dilution of their interest in
their shares; and (iii) create a new class or type of shares, all shareholders
have preemptive rights to subscribe to our newly issued shares of such new class
or type, in proportion to their shareholdings.  You may not be able to
exercise the preemptive rights relating to the preferred shares underlying your
ADSs unless a registration statement under the Securities Act is effective with
respect to the shares to which the rights relate or an exemption from the
registration requirements of the Securities Act is available and the ADS
depositary determines to make the rights available to you.  See “Item
3—Key Information—Risk Factors—Risks Relating to Our Preferred Shares and
ADSs—You may not be able to exercise preemptive rights with respect to our
preferred shares.”




Right
of Withdrawal




The
Brazilian corporate law provides that, under certain circumstances, a
shareholder has the right to withdraw its equity interest from the company and
to receive payment for the portion of shareholders’ equity attributable to its
equity interest.  Such right of withdrawal, analogous to appraisal
rights discussed elsewhere herein, may be exercised by a dissenting or
non-voting shareholder, including any holder of preferred shares, if a vote of
at least 50% of voting shares authorizes us:




·
            to
      establish new classes of preferred shares or to disproportionately
      increase an existing class of preferred shares relative to the other
      classes of shares, unless such action is provided for or authorized by the
      by-laws (our by-laws currently authorize such
  action);




·
            to
      modify a preference, privilege or condition of redemption or amortization
      conferred on one or more classes of preferred shares, or to create a new
      class with greater privileges than the existing classes of preferred
      shares;




·
            to
      reduce the mandatory distribution of
dividends;




·
            to
      change our corporate purpose;




·
            to
      merge with another company (including if we are merged into one of our
      controlling companies) or to consolidate, except as described in the
      fourth paragraph following this
list;




·
            to
      transfer all of our shares to another company or in order to make us a
      wholly owned subsidiary of such company, known as an incorporação de ações,
      except as described in the fourth paragraph following this
      list;




109




·
            to
      approve the acquisition of control of another company at a price which
      exceeds certain limits set forth in the Brazilian corporate law, except as
      described in the fourth paragraph following this
  list;




·
            to
      approve our participation in a centralized group of companies, as defined
      under the Brazilian corporate law, and subject to the conditions set forth
      therein, except as described in the fourth paragraph following this list;
      or




·
            to
      conduct a spin-off that results in (a) a change of our corporate purposes,
      except if the assets and liabilities of the spun-off company are
      contributed to a company that is engaged in substantially the same
      activities, (b) a reduction in the mandatory dividend or (c) any
      participation in a centralized group of companies, as defined under
      Brazilian corporate law.




In
addition, in the event that the entity resulting from a merger of shares, or
incorporação de ações,
a consolidation or a spin-off of a listed company fails to become a listed
company within 120 days of the shareholders’ meeting at which such decision was
taken, the dissenting or non-voting shareholders may also exercise their
withdrawal rights.




Only
holders of shares adversely affected by the changes mentioned in the first and
second items above may withdraw their shares.  The right of withdrawal
lapses 30 days after publication of the minutes of the relevant shareholders’
meeting.  In the first two cases mentioned above, however, the
resolution is subject to confirmation by the preferred shareholders, which must
be obtained at a special meeting held within one year.  In those
cases, the 30 day term is counted from the date the minutes of the special
meeting are published.  We would be entitled to reconsider any action
giving rise to appraisal rights within 10 days following the expiration of such
rights if the withdrawal of shares of dissenting shareholders would jeopardize
our financial stability.




The
Brazilian corporate law allows companies to redeem their shares at their
economic value as set forth in the Brazilian corporate law, subject to certain
requirements.  Because our by-laws currently do not provide that our
shares be subject to withdrawal at their economic value, our shares would be
subject to withdrawal at their book value, determined on the basis of the last
balance sheet approved by the shareholders.  If the shareholders’
meeting giving rise to appraisal rights occurs more than 60 days after the date
of the last approved balance sheet, a shareholder may demand that its shares be
valued on the basis of a new balance sheet that is of a date within 60 days of
such shareholders’ meeting.




Pursuant
to the Brazilian corporate law, in events of consolidation, merger, incorporação de ações,
participation in a group of companies, and acquisition of control of another
company, the right to withdraw does not apply if the shares meet certain tests
relating to liquidity and dispersal of the type or class of shares in question
on the market.  In these cases, shareholders will not be entitled to
withdraw their shares if the shares are a component of a general securities
index in Brazil or abroad admitted to trading on the securities markets, as
defined by the Brazilian Securities Commission, and the shares held by persons
unaffiliated with the controlling shareholder represent more than half of the
outstanding shares of the relevant type or class.




E.
Taxation




The
following discussion contains a description of the material Brazilian and United
States federal income tax consequences of the purchase, ownership and
disposition of preferred shares or ADSs but does not purport to be a
comprehensive description of all the tax considerations that may be
relevant  to these matters based upon the particular circumstances of
a holder.




This
summary is based upon tax laws of Brazil and the federal income tax laws of the
United States as in effect on the date of this annual report, which are subject to
change, possibly with retroactive effect, and to differing
interpretations.  You should consult your own tax advisors as to the
Brazilian, United States or other tax consequences of the purchase, ownership
and disposition of preferred shares or ADSs, including, in particular, the
effect of any U.S. federal estate, gift, or alternative minimum taxes, and non
U.S., state or local tax laws.




110




Although
there is presently no income tax treaty between Brazil and the United States,
the tax authorities of the two countries have had discussions that may culminate
in such a treaty.  No assurance can be given, however, as to whether or
when a treaty will enter into force or how it will affect the U.S. holders of
preferred shares or ADSs.




For
purposes of Brazilian taxation, there are two types of Non-Brazilian Holders of
preferred shares or ADSs: (a) Non-Brazilian Holders that are not resident or
domiciled in a tax haven jurisdiction (i.e., a country or location that does not
impose income tax or where the maximum income tax rate is lower than 20% or
where the internal legislation imposes restrictions to disclosure of
shareholding composition or the ownership of the investment), and that, in the
case of holders of preferred shares, are registered before the Central Bank and
the CVM to invest in Brazil in accordance with Central BankResolution No. 2.689;
and (b) other Non-Brazilian Holders, which include any and all non-residents of
Brazil who invest in equity securities of Brazilian companies through any other
means and all types of investors that are located in tax haven jurisdictions. The investors mentioned in
item (a) above are subject to a favorable tax regime in Brazil, as described
below.




Brazilian
Tax Considerations




The
following discussion summarizes the material Brazilian tax consequences of the
acquisition, ownership and disposition of our preferred shares or ADSs by a
holder that is not domiciled in Brazil for purposes of Brazilian taxation and,
in the case of preferred shares, which has registered its investment in such
securities with the Central Bank as a U.S. dollar investment (in each case, a
Non-Brazilian Holder).




Central
Bank Resolution No. 2.689 permits foreign investors, defined to include
individuals, legal entities, mutual funds and other collective investment
entities, domiciled or headquartered abroad may invest in almost all financial
assets and to engage in almost all transactions available in the Brazilian
financial and capital markets, provided that certain legal and regulatory
requirements are fulfilled.  The foreign investors must: (a) appoint
at least one representative in Brazil with powers to perform actions relating to
the foreign investment; (b) complete the appropriate foreign investor
registration form; (c) register as a foreign investor with the Brazilian
securities commission; and (d) register the foreign investment with the Central
Bank.




Securities
and other financial assets held by foreign investors pursuant to Resolution No.
2.689 must be registered or maintained in deposit accounts or under the custody
of an entity duly licensed by the Central Bank or the CVM.  In
addition, securities trading is restricted to transactions carried out in the
stock exchanges or organized over-the-counter markets licensed by the CVM,
except for transfers resulting from a corporate reorganization, occurring upon
the death of an investor by operation of law or will or as a consequence of the
delisting of the relevant shares from a stock exchange and the cancellation of
the registration with the CVM.




Taxation
of dividends




As
a result of tax legislation adopted on December 26, 1995, dividends based
on profits generated after January 1, 1996, including dividends paid in
kind, payable by us in respect of preferred shares, are exempt from income tax
withholding.  Stock dividends with respect to profits generated before
January 1, 1996 are not subject to Brazilian tax, provided that the stock
is not redeemed by us or sold in Brazil within five years after distribution of
such stock dividends.  Dividends relating to profits generated prior to
January 1, 1996 are subject to Brazilian income tax withholding at either
the 15% or 25% rate, depending on the year in which the profits were
generated.




Taxation
of gains




Transactions
conducted outside of a Brazilian stock, future or commodity exchange (or similar
entities)




Non
Brazilian holders are generally subject to income tax imposed at a rate of 15%
on gains realized on disposal or exchanges of preferred shares if the
transaction is carried out outside any Brazilian stock, future or commodities
exchange (and also in case of redemption of shares in a transaction occurring
outside of a stock exchange), except for a Tax Haven Holder which, in this case,
is subject to income tax at a rate of 25%.  If these gains are related
to transactions conducted on the Brazilian over-the-counter market with
intermediation (or in case of transactions carried out on markets subject to
future liquidation), the withholding income tax of 0.005% of the gross proceeds
shall also be applicable and can be offset against the eventual income tax due
on the capital gains.




111




Transactions
conducted within a Brazilian stock, future or commodity exchange (or similar
entities):




Disposal
of securities:




**ADS’s:




Gains
realized outside Brazil by a non Brazilian holder on the disposition of assets
located in Brazil to another non-Brazilian holder were not subject to Brazilian
tax through December 29, 2003. However, according to
Law No. 10.833, enacted on that date, capital gains realized on the disposition
of these assets by a Non-Brazilian Holder are subject to taxation in Brazil (at
a 15% or 25% rate, depending on the case), regardless of whether the sale or the
disposition is made by a Non-Brazilian Holder to another non-Brazilian resident
or to a Brazilian resident.  At the present time no definitive
jurisprudence has been established with respect to this matter.  There
are grounds to sustain that the gains realized by a Non-Brazilian Holder on the
disposition of ADSs to another non-Brazilian resident are not taxed in Brazil,
based on the argument that ADSs would not constitute assets located in Brazil
for purposes of Law No. 10,833/03.  However, we cannot assure you how
Brazilian courts would interpret the definition of assets located in Brazil in
connection with the taxation of gains realized by a Non- Brazilian Holder on the
disposition of ADSs to another non-Brazilian resident.





As
a result, gains on a disposition of ADSs by a Non-Brazilian Holder to Brazilian
resident, or even to Non-Brazilian Holder in the event that courts determine
that ADSs would constitute assets located in Brazil, may be subject to income
tax in Brazil according to the rules described above.  It is important
to clarify that, for purposes of Brazilian taxation, the income tax rules on
gains related to disposition of preferred shares or ADSs vary depending on the
domicile of the Non-Brazilian Holder, the form by which such Non-Brazilian
Holder has registered its investment before the Central Bank and/or how the
disposition is carried out, as described below.





**Preferred
Stock:





With
respect to the disposition of preferred shares, as they are assets located in
Brazil, the Non-Brazilian Holder will be subject to income tax on the gains
assessed, following the rules described below, regardless of whether the
disposition is conducted in Brazil or with a Brazilian
resident.  Gains assessed on the disposition of the preferred shares
carried out on the Brazilian stock exchange (which, in principle, should also
include the transactions carried out on the organized over-the-counter market)
are:




• Exempt from income tax, when assessed
by a Non-Brazilian Holder that (1) has  registered its investment in
Brazil before the Central Bank under the rules of   Resolution
No. 2,689/00 (“2,689 Holder”) and (2) is not a Tax Haven Holder; or





• Subject to income tax at a rate of
15% in any other case, including the gains assessed by  a
Non-Brazilian Holder that is not a 2,689 Holder or is a Tax Haven
Holder.  In these cases, a withholding income tax of 0.005% shall also
be applicable on the gross proceeds and can be offset with the eventual income
tax due on the capital gain.





Exchange
of securities via deposit





The
deposit of preferred shares in exchange for ADSs may be subject to Brazilian
capital gain tax at the rate of 15%, if the amount previously registered with
the Central Bank as a foreign investment in the preferred shares is lower than
(1) the average price per preferred share on a Brazilian stock exchange on
which the greatest number of such shares were sold on the day of deposit; or
(2) if no preferred shares were sold on that day, the average price on the
Brazilian stock exchange on which the greatest number of preferred shares were
sold in the 15 trading sessions immediately preceding such
deposit.  In this case, the difference between the amount previously
registered and the average price of the preferred shares, calculated as above,
shall be considered a capital gain (although there are grounds to challenge this
taxation).  On receipt of the underlying preferred shares, the non
Brazilian holder registered under Resolution No. 2,689 will be entitled to
register the U.S. dollar value of such shares with the Central Bank as described
below in “—Registered Capital.”  However, if this non Brazilian holder
does not register under Resolution No. 2,689, it will be subject to the
less favorable tax treatment described below.





112





Exercise
of preemptive rights





Any exercise of preemptive rights
relating to the preferred shares will not be subject to Brazilian
taxation.  However, any gain on the disposition or assignment of
preemptive rights relating to preferred shares by a holder of preferred shares,
or by the depositary on behalf of holders of the ADSs, will be subject to
Brazilian taxation at the same rate applicable to the sale or disposition of
preferred shares.




Interest
attributed to capital




Distribution
of a notional interest charge attributed to capital in respect of the preferred
or common shares as an alternative form of dividend payment to shareholders or
depositary agents who are either Brazilian residents or non-Brazilian residents
is subject to Brazilian withholding income tax at the rate of 15% (except for
those shareholders or beneficiaries resident in tax havens or low tax
jurisdictions -see further discussion below).  Such payments, subject to
certain limitations, are deductible for Brazilian income tax and for social
contribution purposes as long as the payment of a distribution of interest is
credited to a shareholder’s account and approved at our general meeting of
shareholders and is calculated by reference to the TJLP interest rate determined
by the Central Bank from time to time and cannot exceed the greater
of:




* 50% of
net income (after the deduction of social contribution on profits and before
taking such distribution and the provision for income tax into account) for the
period from which the payment is being made; or




* 50% of
the sum of retained profits and profit reserves that exist as of the beginning
of the period from which the payment is being made.




Current
Brazilian corporate law establishes that a notional interest charge attributed
to shareholders’ equity can either be accounted for as part of the mandatory
dividend or not.  In case the payment of such interest is accounted for as
part of the mandatory dividend, we would be required to pay an additional amount
to ensure that the net amount received by the shareholders, after the income
tax, is at least equal to the mandatory dividend.  The distribution of
interest attributed to capital would be proposed by our Board of Directors and
subject to subsequent declaration by the shareholders at a general
meeting.




Beneficiaries
resident or domiciled in tax havens or low tax jurisdictions




Law
No. 9.779/99, in effect as of January, 1999, states that, with the
exception of certain prescribed circumstances, income derived from operations by
a beneficiary, resident or domiciled in a country considered as a tax haven, is
subject to withholding income tax at a rate of 25%.  Accordingly, if the
distribution of interest attributed to capital is made to a beneficiary resident
or domiciled in a tax haven, the income tax rate applicable will be 25% instead
of 15%.  A tax haven jurisdiction is considered to be, for this purpose,
any country or location, which does not impose income tax or imposes income tax
at a maximum rate lower than 20% (there is also an interpretation according to
which the definition of tax haven for this purpose also encompasses a country or
location where internal legislation imposes restrictions on the disclosure of
the shareholding composition or beneficial owners of investments).




Currently,
said countries / location considered to be a tax haven are listed within the
Brazilian tax regulation.




Other
Relevant Brazilian taxes




There are
no Brazilian inheritance, gift or succession taxes applicable to the ownership,
transfer or disposition of preferred shares or ADSs by a non Brazilian
holder.  However, some Brazilian states may impose gift and estate taxes on
gifts made or inheritances bestowed by individuals or entities not resident or
domiciled within such state to individuals or entities residing or domiciled
within such state in Brazil.  There are no Brazilian stamp, issue,
registration, or similar taxes or duties payable by holders of preferred shares
or ADSs.




113




Tax
on bank account transactions (CPMF)




The
financial transaction tax (CPMF) was imposed on any removal of funds  from
bank accounts maintained in Brazil in an amount equal to 0,38% of the
transaction’s value through December 31, 2007, but has been revoked
effective January 1, 2008.




Taxation
of foreign exchange transactions (IOF/Câmbio)




Pursuant
to Decree Law 6.306/07, the conversion into foreign currency or the conversion
into Brazilian currency of the proceeds received or remitted by a Brazilian
entity from a foreign investment in the Brazilian securities market, including
those in connection with the investment by the Non-Brazilian Holder in the
preferred shares and ADSs may be subject to the Tax on Foreign Exchange
Transaction (“IOF/Exchange).  Currently, for most exchange
transactions related to this type of investment, the rate of IOF/ Exchange is
zero, however the Minister of Finance has the legal power to increase at any
time the rate to a maximum of 25%, but only on a prospective basis.




Tax on bonds and securities
transactions (IOF/ Financial securities)




Pursuant
to Decree Law 6.306/0, the Tax on Bonds and Securities Transactions (the
IOF/Financial securities) may be imposed on any transactions involving bonds and
securities, even if these transactions are performed on Brazilian stock, futures
or commodities exchanges.  The applicable rate for variable income
transactions is currently 0%, but the Minister of Finance has the legal power to
increase at any time the rate to a maximum of 1.5% per day of the transaction’s
value, but only on a prospective basis.




Registered
capital




The
amount of an investment in preferred shares held by a non-Brazilian holder who
qualifies under Resolution No. 2,689 and obtains registration with the CVM,
or by the depositary representing such holder, is eligible for registration with
the Central Bank; such registration (the amount registered is referred to as
registered capital) allows the remittance of foreign currency outside Brazil,
converted at the commercial market rate, acquired with the proceeds of
distributions on, and amounts realized with respect to dispositions of, such
preferred shares.  The registered capital for each preferred share
purchased as part of the international offering, or purchased in Brazil after
that date, and deposited with the Depositary will be equal to its purchase price
in U.S. dollars.  The registered capital for a preferred share that is
withdrawn upon surrender of an ADS will be the U.S. dollar equivalent of
(i) the average price of a preferred share on the Brazilian stock exchange
on which the greatest number of such shares was sold on the day of withdrawal,
or (ii) if no preferred shares were sold on that day, the average price on
the Brazilian stock exchange on which the greatest number of preferred shares
was sold in the 15th trading session immediately preceding such
withdrawal.  The U.S. dollar value of the preferred shares is
determined on the basis of the average commercial market rates quoted by the
Central Bank on such date (or, if the average price of preferred shares is
determined under clause (ii) above, the average of such quoted rates on the
same 15 dates used to determine the average price of the preferred
shares).




A non
Brazilian holder of preferred shares may experience delays in effecting such
registration, which may delay remittances abroad.  Such a delay may
adversely affect the amount in U.S. dollars received by the non Brazilian
holder.




U.S.
federal income tax considerations




The
following discussion summarizes the principal U.S. federal income tax
considerations relating to the purchase, ownership and disposition of preferred
shares or ADSs by a U.S. holder (as defined below) holding such preferred shares
or ADSs as capital assets (generally, property held for
investment).  This summary is based upon the Internal Revenue Code of
1986, as amended (the “Code”), Treasury regulations, administrative
pronouncements of the U.S. Internal Revenue Service (the “IRS”) and judicial
decisions, all as in effect on the date hereof, and all of which are subject to
change (possibly with retroactive effect) and to differing
interpretations.  This summary does not describe any implications
under state, local or non-U.S. tax law, or any aspect of U.S. federal tax law
other than income taxation.




114




This
summary does not purport to address all the material U.S. federal income tax
consequences that may be relevant to the U.S. holders of the preferred shares or
ADSs, and does not take into account the specific circumstances of any
particular investors, some of which (such as tax-exempt entities, banks or other
financial institutions, insurance companies, broker-dealers, traders in
securities that elect to use a mark-to-market method of accounting for their
securities holdings, regulated investment companies, real estate investment
trusts, U.S. expatriates, investors liable for the alternative minimum tax,
partnerships and other pass-through entities, investors that own or are treated
as owning 10% or more of our voting stock, investors that hold the preferred
shares or ADSs as part of a straddle, hedge, conversion or constructive sale
transaction or other integrated transaction and U.S. holders (as defined below)
whose functional currency is not the U.S. dollar) may be subject to special tax
rules.




As used
below, a “U.S. holder” is a beneficial owner of preferred shares or ADSs that
is, for U.S. federal income tax purposes:




(i)
            an
      individual citizen or resident of the United
  States;




(ii)
            a
      corporation (or entity taxable as a corporation) created or organized in
      or under the laws of the United States, any state thereof, or the District
      of Columbia;




(iii)
            an
      estate the income of which is subject to U.S. federal income tax
      regardless of its source; or




(iv)
            a
      trust if (A) a court within the U.S. is able to exercise primary
      supervision over the administration of the trust and one or more U.S.
      persons have the authority to control all substantial decisions of the
      trust or (B) the trust has a valid election in effect under
      applicable Treasury regulations to be treated as a U.S.
      person.




If a
partnership or other entity taxable as a partnership holds preferred shares or
ADSs, the tax treatment of a partner will generally depend on the status of the
partner and the activities of the partnership.  Partners of
partnerships holding preferred shares or ADSs should consult their tax
advisors.




In
general, for U.S. federal income tax purposes, holders of American Depositary
Receipts evidencing ADSs will be treated as the beneficial owners of the
preferred shares represented by those ADSs.




Taxation
of Distributions




In
general, distributions with respect to the preferred shares or ADSs (which
likely would include distributions of interest on shareholders’ equity, as
described above under “—Brazilian Tax
Considerations Interest attributed to capital) will, to the extent made
from our current or accumulated earnings and profits, as determined under U.S.
federal income tax principles, constitute dividends for U.S. federal income tax
purposes.




If a
distribution exceeds the amount of our current and accumulated earnings and
profits, as determined under U.S. federal income tax principles, it will be
treated as a non-taxable return of capital to the extent of the U.S. holder’s
tax basis in the preferred shares or ADSs, and thereafter as capital
gain.  As used below, the term “dividend” means a distribution that
constitutes a dividend for U.S. federal income tax purposes.




The gross
amount of any dividends (including amounts withheld in respect of Brazilian
taxes) paid with respect to the preferred shares or ADSs generally will be
subject to U.S. federal income taxation as ordinary income and will not be
eligible for the dividends received deduction allowed to
corporations.  Dividends paid in Brazilian currency will be included
in the gross income of a U.S. holder in a U.S. dollar amount calculated by
reference to the exchange rate in effect on the date the dividends are received
by the U.S. holder, or in the case of dividends received in respect of ADSs, on
the date the dividends are received by the depositary or its agent, whether or
not converted into U.S. dollars.  A U.S. holder will have a tax basis
in any distributed Brazilian currency equal to its U.S. dollar amount on the
date of receipt, and any gain or loss recognized upon a subsequent disposition
of such Brazilian currency generally will be foreign currency gain or loss that
is treated as U.S. source ordinary income or loss.  If dividends paid
in Brazilian currency are converted into U.S. dollars on the day they are
received by the U.S. holder or the depositary or its agent, as the case may be,
U.S. holders generally should not be required to recognize foreign currency gain
or loss in respect of the dividend income.  U.S. holders should
consult their own tax advisors regarding the treatment of any foreign currency
gain or loss if any Brazilian currency received by the U.S. holder or the
depositary or its agent is not converted into U.S. dollars on the date of
receipt.




115




Subject
to certain exceptions for short-term and hedged positions, the U.S. dollar
amount of dividends received by an individual with respect to the ADSs will be
subject to taxation at a maximum rate of 15% if the dividends represent
“qualified dividend income.”  Dividends paid on the ADSs will be
treated as qualified dividend income if (i) the ADSs are readily tradable
on an established securities market in the United States and (ii) we were
not in the year prior to the year in which the dividend was paid, and are not in
the year in which the dividend is paid, a passive foreign investment company
(“PFIC”).  The ADSs are listed on the New York Stock Exchange, and
should qualify as readily tradable on an established securities market in the
United States so long as they are so listed.  However, no assurances
can be given that the ADSs will be or remain readily tradable.  Based
on our audited financial statements as well as relevant market and shareholder
data, we believe that we were not treated as a PFIC for U.S. federal income tax
purposes with respect to our 2008 taxable year.  In addition, based on
our audited financial statements and current expectations regarding the value
and nature of our assets, the sources and nature of our income, and relevant
market and shareholder data, we do not anticipate becoming a PFIC for our 2009
taxable year.  Because these determinations are based on the nature of
our income and assets from time to time, and involve the application of complex
tax rules, no assurances can be provided that we will not be considered a PFIC
for the current (or any past or future tax year).




Based on
existing guidance, it is not entirely clear whether dividends received with
respect to the preferred shares (to the extent not represented by ADSs) will be
treated as qualified dividend income, because the preferred shares are not
themselves listed on a U.S. exchange.  In addition, the U.S. Treasury
Department has announced that the IRS is continuing to study procedures pursuant
to which holders of ADSs or preferred stock and intermediaries through whom such
securities are held will be able to determinate whether dividends are treated as
qualified dividends.  Because such procedures have not yet been
issued, we are not certain that we will be able to comply with
them.  U.S. Holders of ADSs and preferred shares should consult their
own tax advisors regarding the availability of the reduced dividend tax rate in
the light of their own particular circumstances.




Dividends
paid by us generally will constitute income from non-U.S. sources and will be
subject to various classification and other limitations for U.S. foreign tax
credit purposes.  Subject to generally applicable limitations under
U.S. federal income tax law, Brazilian withholding tax imposed on such
dividends, if any, will be treated as a foreign income tax eligible for credit
against a U.S. holder’s U.S. federal income tax liability (or at a U.S. holder’s
election if it does not elect to claim a foreign tax credit for any foreign
taxes paid during the taxable year, all foreign income taxes paid may instead be
deducted in computing such U.S. holder’s taxable income).  In general,
special rules will apply to the calculation of foreign tax credits in
respect of dividend income that is subject to preferential rates of U.S. federal
income tax.  U.S. holders should be aware that the IRS has expressed
concern that parties to whom ADSs are released may be taking actions that are
inconsistent with the claiming of foreign tax credits by U.S. holders of
ADSs.  Accordingly, the discussion above regarding the creditability
of Brazilian withholding tax on dividends could be affected by future actions
that may be taken by the IRS.




Taxation
of Capital Gain




Deposits
and withdrawals of preferred shares by U.S. holders in exchange for ADSs will
not result in the realization of gain or loss for U.S. federal income tax
purposes.




116




In
general, gain or loss, if any, realized by a U.S. holder upon a sale or other
taxable disposition of preferred shares or ADSs will be subject to U.S. federal
income taxation as capital gain or loss in an amount equal to the difference
between the amount realized on the sale or other taxable disposition and such
U.S. holder’s adjusted tax basis in the preferred shares or
ADSs.  Such capital gain or loss will be long-term capital gain or
loss if at the time of sale or other taxable disposition the preferred shares or
ADSs have been held for more than one year.  Under current U.S.
federal income tax law, net long-term capital gain of certain U.S. holders
(including individuals) is eligible for taxation at preferential
rates.  The deductibility of capital losses is subject to certain
limitations under the Code.  Gain, if any, realized by a U.S. holder
on the sale or other taxable disposition of preferred shares or ADSs generally
will be treated as U.S. source gain for U.S. foreign tax credit
purposes.  Consequently, if a Brazilian withholding tax is imposed on
the sale or disposition of preferred shares or ADSs, a U.S. holder that does not
receive sufficient foreign source income from other sources may not be able to
derive effective U.S. foreign tax credit benefits in respect of such Brazilian
withholding tax.  Alternatively, a U.S. holder may take a deduction
for all foreign income taxes paid during the taxable year if it does not elect
to claim a foreign tax credit for any foreign taxes paid during the taxable
year.  U.S. holders should consult their own tax advisors regarding
the application of the foreign tax credit rules to their investment in, and
disposition of, preferred shares or ADSs.




Passive
Foreign Investment Company Rules




Based
upon our current and projected income, assets and activities, we do not expect
the preferred shares or ADSs to be considered shares of a PFIC for our current
fiscal year or for future fiscal years.  However, because the
determination of whether the preferred shares or ADSs constitute shares of a
PFIC will be based upon the composition of our income and assets, and entities
in which we hold at least a 25% interest, from time to time, and because there
are uncertainties in the application of the relevant rules, there can be no
assurance that the preferred shares or ADSs will not be considered shares of a
PFIC for any fiscal year.  If the preferred shares or ADSs were shares
of a PFIC for any fiscal year, U.S. holders (including certain indirect U.S.
holders) may be subject to adverse tax consequences, including the possible
imposition of an interest charge on gains or “excess distributions” allocable to
prior years in the U.S. holder’s holding period during which we were determined
to be a PFIC.  If we are deemed to be a PFIC for a taxable year,
dividends on our preferred shares orADSs
would not be “qualified dividend income” subject to preferential rates of U.S.
federal income taxation.  U.S. holders should consult their own tax
advisors regarding the application of the PFIC rules to the preferred
shares or ADSs.




U.S.
Backup Withholding and Information Reporting




A U.S.
holder of preferred shares or ADSs may, under certain circumstances, be
subjected to information reporting and “backup withholding” with respect to
certain payments to such U.S. holder, such as dividends paid by our company or
the proceeds of a sale or other taxable
dispositionof preferred shares or ADSs, unless such U.S. holder
(i) is a corporation or comes within certain other exempt categories, and
demonstrates this fact when so required, or (ii), in the case of backup
withholding, provides a correct taxpayer identification number, certifies that
it is a U.S. person and that it is not subject to backup withholding, and
otherwise complies with applicable requirements of the backup withholding
rules.  Backup withholding is not an additional tax.  Any
amount withheld under these rules will be creditable against a U.S.
holder’s U.S. federal income tax liability or may
be refunded, provided the requisite information is timely furnished to
the IRS.




F.           Dividends
and Paying Agents




Not
applicable.




G.           Statements
by Experts




Not
applicable.




H.           Documents
on Display




We are
subject to the informational requirements of the Securities Exchange Act of
1934, as amended, pursuant to which we file reports and other information with
the Commission.  These materials, including this annual report and the
accompanying exhibits, may be inspected and copied at the Commission’s Public
Reference Room at 100 F Street, N.E., Washington,
D.C.  20549-2521.  Copies of the materials may be obtained
from the Public Reference Room of the Commission at 100 F Street, N.E.,
Washington, D.C. 20549-2521 at prescribed rates.  The public may
obtain information on the operation of the Commission’s Public Reference Room by
calling the Commission in the United States at 1 800 SEC-0330.  In
addition, the SEC maintains an internet website at www.sec.gov  from which you
can electronically access these materials.  Furthermore, material we
filed can be inspected at the offices of the New York Stock Exchange at 20 Broad
Street, New York, New York 10005, on which our ADSs are listed.




117




We also
file electronically financial statements and other periodic reports with the
CVM.  The CVM website is www.cvm.gov.br.




Copies of
our annual reports on Form 20 F and accompanying documents and our by-laws will
be available for inspection at our headquarters or our website at
www.vcp.com.br.  The information on our website is however, not
incorporated by reference in, and shall not be considered a part of this annual
report.




I.           Subsidiary
Information




Not
required.




ITEM
11.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK




We are
exposed to various market risks, including changes in foreign currency exchange
rates and interest rates.  Market risk is the potential loss arising
from adverse changes in market rates and prices, such as foreign currency
exchange rates and interest rates.




General




We use
cross-currency interest rate swap contracts in the market to reduce our foreign
currency exposure and also take into account the natural hedge provided by our
exports in determining our hedging needs.  We establish strict
internal policies with respect to our currency exposure positions and revise
these policies from time to time in response to new economic information on the
macroeconomic environment in Brazil.  The exposure to foreign currency
risk is guided by closely monitored policies.  We also invest in
instruments linked to exchange variations.




We also
use cross-currency interest rate swap contracts to mitigate the volatility of
foreign exchange rate fluctuations on our U.S. dollar-denominated
debt.  The unrealized gains and losses on these contracts are recorded
on our balance sheet as assets or liabilities and in our statement of income in
“Foreign exchange gain (loss) and unrealized gain (loss) on swaps,
net.”




These
financial instruments have been used extensively as part of a defined financial
strategy designed to optimize opportunities in the Brazilian foreign exchange
and interest rate markets.  Like many other Brazilian exporters, we
have had access to U.S. dollar-denominated sources of long-term financing in the
form of export prepayments or credits.  Opportunities arise between
the lower interest rates payable on the U.S. dollar-denominated export credits
and borrowings, the proceeds of which are invested in real-denominated cash and
cash equivalents and trading securities, which provide higher
yields.




At
present, we, along with other Brazilian companies, have limited sources of
long-term financing denominated in reais.  We believe
we have access to a sufficient number of foreign-currency financing sources to
meet our needs without resorting to more expensive real-denominated
financing.




Our
foreign currency debt reflects a strategy to continue borrowing funds in U.S.
dollars, and to invest the proceeds in investments bearing higher interest rates
in the Brazilian market.  We have succeeded in lengthening the average
maturity of our debt over time.  The percentage of our short-term debt
(i.e., the debt, including the current portion of long-term debt, maturing
within 12 months) compared to our total debt was 27% at December 31, 2006
and 23% at December 31, 2007 and 44% at December 31,
2008.




118






Foreign
currency risk




Our
foreign currency exposure gives rise to market risks associated with exchange
rate movements against the U.S. dollar.  Foreign currency-denominated
liabilities include borrowings denominated mainly in U.S.
dollars.  Our sales outside of Brazil are largely U.S.
dollar-denominated, while sales of pulp within Brazil are denominated in reais but based on U.S.
dollar prices, working as a natural hedging for our currency exposure, with most
of our operating costs being denominated in reais.  Our export
revenues and cross-currency interest rate swap contracts partially mitigate the
exposure arising from our U.S. dollar-denominated debt.  We evaluate
the macroeconomic situation and its impact on our financial position on a weekly
basis.




We
incurred most of the following debt mainly to mitigate our risk in relation to
the position of the interest rate differentials between real-denominated financial
instruments (cash and cash equivalents and trading securities) and our foreign
currency export credits  See “Item 5—Operating and Financial
Review and Prospects—Liquidity and capital resources—Capital
expenditures.”  We believe that, given our level of assets and
resources, we should have sufficient cash and sources of working capital to meet
our debt service.




Expected maturity date2009
              
              
              2010
              
              
              2011
              
              
              After 2011
              
              
              Total(US$ in millions)Short-term debt:Reais
              
              
              139
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              139U.S.
      dollars
              
              
              789
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              789Total
      short-term debt (includingcurrent
      portion of long-term debt)Long-term
      debt:Reais
              
              
              -
              
              
              
              13
              
              
              
              21
              
              
              
              65
              
              
              
              99U.S.
      dollars
              
              
              -
              
              
              
              183
              
              
              
              159
              
              
              
              718
              
              
              
              1,060Total
      long-term debt
              
              
              -
              
              
              
              196
              
              
              
              180
              
              
              
              783
              
              
              
              1,159Total
              
              
              928
              
              
              
              196
              
              
              
              180
              
              
              
              783
              
              
              
              2,087





We
estimate that the foreign currency-denominated component of our paper costs does
not exceed 20% of our total costs.  We are self-sufficient in pulp,
the principal raw material used in producing paper products.  The
energy, labor and other domestic components of our paper production costs are
denominated in reais
and, together with the cost of pulp, account for almost 90% of our paper
costs.  Although, in the long term, there is a clear correlation
between international U.S. dollar-denominated pulp prices, reflecting the
international nature of this commodity, and the prices we are able to charge,
fluctuations in exchange rate are not always immediately reflected in our
domestic prices.  In the long term, when the international price of
pulp increases, the domestic price follows and our domestic sales in reais also
increase.  In the short term, our domestic prices may deviate from the
international U.S. dollar-denominated pulp prices.  Timing of the
fluctuations in exchange rate reflected in our prices may vary with the type of
product, generally as follows:




·
            immediately
      for commodity products, such as pulp and uncoated wood-free
      paper;




·
            with
      a relatively short lag for coated papers, due to the sale of imported
      products in the domestic market;
and




·
            with
      some lag for other specialty papers with limited exposure to external
      factors.




The
percentage of our debt subject to fixed and floating interest rates (before
taking into account the cross-currency swaps) is as follows:




119




As
      of December 31,2008
                  
                  
                  2007Floating
      rate debt:·Denominated in U.S. dollars
                  
                  
                  73
                  %
                  
                  
                  69
                  %·Denominated in reais
                  
                  
                  14
                  %
                  
                  
                  12
                  %Subtotal
                  
                  
                  87
                  %
                  
                  
                  81
                  %Fixed
      rate debt:·Denominated in U.S. dollars
                  
                  
                  13
                  %
                  
                  
                  19
                  %Total
                  
                  
                  100
                  %
                  
                  
                  100
                  %





Interest
rate risk




Our
floating interest rate exposure is primarily subject to the variations of LIBOR
as it relates to U.S. dollar-denominated borrowings and to the variations of the
TJLP, an annual long-term interest rate that includes an inflation factor and is
determined quarterly by the Central Bank.  On December 31, 2007,
the TJLP was fixed at 6.25%, and during 2006 averaged 6.38% per
year.  On December 31, 2008 the TJLP was fixed at 6.50%, and
during 2007, averaged 6.25 % per year.  The interest rate on our cash
and cash equivalents denominated in reais is based on the CDI
rate, the benchmark interest rate set by the interbank market on a daily basis
and during 2008 averaged 12.32% per year.




To determine the fair value of assets
and liabilities, amounts were adjusted, when applicable, based on market or
contractual interest rate.





The table
below provides information about our significant interest rate-sensitive
instruments.  For variable interest rate debt, the rate presented is
the weighted average rate calculated as of December 31, 2008.




2009
              
              
              2010
              
              
              2011
              
              
              After
      2011
              
              
              Total
              
              
              Fair value(1)(US$ in
      millions)Assets:Cash
      and cash equivalents denominated in reais
              
              
              234
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              234
              
              
              
              234Cash
      and cash equivalents denominated in U.S. dollars
              
              
              46
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              46
              
              
              
              46Trading
      securities denominated in U.S. dollars
              
              
              43
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              43
              
              
              
              43Total
      cash, cash equivalents and trading securities
              
              
              323
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              323
              
              
              
              323Liabilities:Short-term
      debt:Floating
      rate, denominated in U.S. dollars
              
              
              738
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              738
              
              
              
              729Floating
      rate, denominated in reais
              
              
              189
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              189
              
              
              
              185Fixed
      rate, denominated in U.S. dollars
              
              
              1
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              1
              
              
              
              -Long-term
      debt:Floating
      rate, denominated in U.S. dollars
              
              
              -
              
              
              
              183
              
              
              
              159
              
              
              
              466
              
              
              
              808
              
              
              
              780Floating
      rate, denominated in reais
              
              
              -
              
              
              
              13
              
              
              
              21
              
              
              
              65
              
              
              
              99
              
              
              
              99Fixed
      rate, denominated in U.S. dollars
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              252
              
              
              
              252
              
              
              
              235Total
      debt
              
              
              928
              
              
              
              196
              
              
              
              180
              
              
              
              783
              
              
              
              2,087
              
              
              
              2,028




120







(1)
            The
      methodology used to determine the fair value included in the table above
      is described in Note 14 to our audited consolidated financial
      statements.




Cross-currency
interest rate swaps




We
primarily use derivatives to hedge our U.S. dollar-denominated
debt.  Because a large portion of our debt is denominated in U.S.
dollars, we protect ourselves from the effects of unfavorable exchange movements
by entering into cross-currency interest rate swap contracts or Brazilian public
bonds.  See Note 14 to our audited consolidated financial
statements for a discussion of the accounting policies for derivatives and other
financial instruments.




At December 31, 2008, derivatives held
by the Company are as follows:





(i)
            A
      conventional swap in which the Company receives Yen and pays dollars, with
      a notional amount of US$ 45 million and maturity date at
      2014.  This swap was contracted to hedge the long-term loan
      denominated VOTO III from the fluctuation of these
      currencies.  As of December 31, 2008, the fair value receivable
      was US$ 3 million and at December 31, 2007, the fair value payable was US$
      5 million;





(ii)
            A
      conventional swap in which the Company receives CDI and pays dollars
      (denominated “Call’s NCE”), with a notional amount of US$ 50
      million.  This swap was contracted to reduce the loan’s cost and
      to adequate the dollars outflow.  This swap was subjected to
      four call options up to February 2009, with an average strike of
      US$1.90.  As of December 31, 2008, the fair value payable was
      US$ 32 million;





(iii)
            A
      conventional swap in which the Company receives dollars and pays CDI, with
      a notional amount of US$ 100 million and maturity date at November
      2009.  This swap was contracted to hedge the short-term loans
      denominated in foreign currency.  As of December 31, 2008, the
      fair value receivable was US$ 2
million;





(iv)
            A
      conventional swap in which the Company receives dollars plus interest plus
      300% of CDI and pays 100% of CDI, with notional amount of US$ 6 million
      and maturity date at January 2009.  This swap was contracted to
      hedge the short-term loans denominated in foreign currency.  As
      of December 31, 2008, the fair value receivable was
  nil;





(v)
            A
      swap with verification in which the Company receives LIBOR plus interest
      and pays 99.7% of CDI, with notional amount of US$ 50 million and maturity
      date at March 29, 2010.  This swap was contracted to hedge the
      export credit agreements.  As of December 31, 2008, the fair
      value receivable was US$3 million;





(vi)
            Sale
      of Non-Deliverable Forwards (“NDF”) are over-the-counter transactions
      without physical delivery.  It is related to a future purchase
      and/or sale of determined quantity of currency, without initial
      disbursement, based on a notional amount and a strike
      price.  The notional amount is US$ 24 million and the maturity
      date is January 2010.  At the maturity date the result will be
      the difference of the contracted rate and the maturity date rate,
      multiplied by the notional amount.  As of December 31, 2008 (no
      similar operations in 2007), the sale average strike was US$ 1.94, the
      purchase average strike was US$ 2.24, and the fair value liability is US$
      8 million; and





(vii)
            Swaps
      and Target Forwards (“TARN”) are over-the-counter transactions without
      initial disbursement.  The notional amount is US$ 126 million
      and the maturity date is January 2010.  If at the maturity date,
      the exchange rate be below of the strike price contracted, the Company
      will receive the difference of these rates multiplied by the notional
      amount, limited to a contracted gain, which can be reach at each maturity
      date and cancel all the subsequent maturities (“Knock
      out”).  However, if the exchange rate at maturity date is above
      of the strike price contracted, the Company will pay the difference of
      these rated multiplied by the duplicated notional amount.  As of
      December 31, 2008 (no similar operations in 2007), the average strike
      was US$ 1.75 and the fair value liability was US$ 68
    million.





The
following procedures were adopted for the derivatives contract evaluations at
December 31, 2008:





(i)
            Swaps
      - were evaluated by the future cash flow, considering the contractual
      rates up to maturity dates, discounted to present value using the BM&F
      fixed rate curves;




121


(ii)
            NDF
      -  were evaluated by the difference of the asset estimated at
      each maturity date by the vertices interpolation obtained from equivalent
      transactions at BM&F at December 31, 2008 and the contractual
      reference amount at the maturity
date;





(iii)
            TARN
      - were evaluated using the Monte Carlo Model, in which possible
      trajectories for the U.S. dollar forward curve are generated based on the
      current exchange rate level and implicit volatility obtained from
      Bloomberg.  Based on these simulations, possible payables or
      receivables are obtained on each verification dates.  Then,
      these flows are discounted to present value using the BM&F fixed rate
      curve.  The average of these present values represents the fair
      value of the transaction.





Our
counterparties are financial institutions, including Banco Votorantim, a member
of the Votorantim group.  Banco Votorantim is a commercial banking
institution and is subject to Central Bank regulations.  The rates
that we negotiate with Banco Votorantim reflect those available in the current
financial market.  Our treasury department also compares these rates
to those offered by other banks before closing the deal in order to assure that
we receive the most favorable terms and conditions available for each
transaction.




Derivative instruments are classified
and demonstrated in the table below based on one of the following
categories:





(i)
            Level
      I - quoted prices (unadjusted) in active markets for identical assets or
      liabilities that the reporting entity has the ability to access at the
      measurement date.  An active market for the asset or liability
      is a market in which transactions for the asset or liability occur with
      sufficient frequency and volume to provide pricing information on an
      ongoing basis.





(ii)
            Level
      II - other than quoted prices included within Level I that are observable
      for the asset or liability, either directly or indirectly, such as: quoted
      prices for similar assets or liabilities in active or not active markets
      and other than quoted prices that are observable for the asset or
      liability (for example, interest rates and yield curves observable at
      commonly quoted intervals, volatilities, prepayment speeds, loss
      severities, credit risks, and default rates).  Determined
      adjustments to these inputs can be adopted to these inputs, based, for
      instance, on the volume and level of activity in the markets the inputs
      are observed.





(iii)
            Level
      III - unobservable inputs for the asset or
      liability.  Unobservable inputs are used to measure fair value
      to the extent that observable inputs are not available and reflect the
      management’s assumptions about the assumptions that market participants
      would use in pricing the asset or liability.  Unobservable
      inputs shall be developed based on the best information available in the
      circumstances and are highly dependent on management’s
      judgment.





At December 31, 2008Fair value at the reporting dateNotionalamount
              
              
              Carryingamount
              
              
              Level I
              
              
              Level II
              
              
              Level III
              
              
              Year endedDecember31, 2008Unrealized
      gain (loss) from cross-currency interest rate swaps, TARN and
      NDFYen x
US$
              
              
              45
              
              
              
              3
              
              
              
              -
              
              
              
              3
              
              
              
              -
              
              
              
              6US$ x
CDI
              
              
              100
              
              
              
              2
              
              
              
              -
              
              
              
              2
              
              
              
              -
              
              
              
              2CDI x US$ (Call’s
      NCE)
              
              
              50
              
              
              
              (32
              )
              
              
              -
              
              
              
              (32
              )
              
              
              -
              
              
              
              (57
              )US$/CDI  x
      CDI
              
              
              6
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -LIBOR x
    CDI
              
              
              50
              
              
              
              3
              
              
              
              -
              
              
              
              3
              
              
              
              -
              
              
              
              31TARN
              
              
              126
              
              
              
              (68
              )
              
              
              -
              
              
              
              (68
              )
              
              
              -
              
              
              
              (100
              )NDF
              
              
              24
              
              
              
              (8
              )
              
              
              -
              
              
              
              (8
              )
              
              
              -
              
              
              
              (64
              )




122





At December 31, 2007Fair value at the reporting dateNotionalamount
                  
                  
                  Carryingamount
                  
                  
                  Level I
                  
                  
                  Level II
                  
                  
                  Level III
                  
                  
                  Year endedDecember31, 2007Unrealized
      gain from crosscurrency interest rate
      swapsYen x US$
                  
                  
                  45
                  
                  
                  
                  (5
                  )
                  
                  
                  -
                  
                  
                  
                  (5
                  )
                  
                  
                  -
                  
                  
                  
                  17





ITEM
12.  DESCRIPTION OF SECURITIES OTHER THAN EQUITY
SECURITIES




Not
applicable.




PART
II




ITEM
13.  DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES




None.




ITEM
14.  MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE
OF PROCEEDS




None.




ITEM
15.  CONTROLS AND PROCEDURES




Disclosure Controls and
Procedures: Management, with the participation of our chief executive
officer and our chief financial officer, after evaluating the effectiveness of
our disclosure controls and procedures (as defined in the U.S. Securities
Exchange Act of 1934 under Rules 13a-15(e)) as of the end of the period covered
by this annual report, has concluded that, as of that date, our disclosure
controls and procedures were effective to provide reasonable assurance that
information required to be disclosed by us in the reports we file or submit
under the Exchange Act is recorded, processed, summarized and reported, within
the time periods specified in the Commission’s rules and forms, and is
accumulated and communicated to management, including our chief executive
officer and chief financial officer, to allow timely decisions regarding
required disclosure.




Management’s Report on Internal
Control over Financial Reporting: VCP’s management is responsible for
establishing and maintaining effective internal control over financial reporting
as defined in Rules 13a-15(f) under the Securities Exchange Act of 1934. VCP’s
internal control over financial reporting is a process designed to provide
reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with
generally accepted accounting principles.




Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.




Management
assessed the effectiveness of VCP’s internal control over financial reporting as
of December 31, 2008. In making this assessment, management used the criteria
set forth by the Committee of Sponsoring Organizations of the Treadway
Commission in Internal Control—Integrated Framework (COSO). Based on this
assessment, management concluded that, as of December 31, 2008, VCP’s internal
control over financial reporting is effective based on those
criteria.




Changes in internal controls.
There was no change in our internal control over financial reporting that
occurred in the period covered by this annual report that has materially
affected, or is reasonably likely to materially affect, our internal control
over financial reporting.




123


Attestation Report of the Registered
Public Accounting Firm.The effectiveness of our internal
control over financial reporting as of December 31, 2008 has been audited
by PricewaterhouseCoopers Auditores Independentes, an independent registered
public accounting firm, as stated in their attestation report which appears
herein.




ITEM
16A.  AUDIT COMMITTEE FINANCIAL EXPERT




On
April 25, 2007, we determined that Samuel de Paula Matos is our “audit
committee financial expert,” serving on our Conselho
Fiscal.  Mr. Matos is independent, as required by rules of
the New York Stock Exchange.




ITEM
16B.  CODE OF ETHICS




Our Board
of Directors has adopted a code of ethics that applies to all VCP’s employees
including the members of our financial department, including our chief executive
officer, our chief financial officer and our chief accounting
officer.  No waivers, either explicit or implicit, of provisions of
the code of ethics were granted to our chief executive officer, chief financial
officer or chief accounting officer in 2008.  A copy of our Code of
Ethics has been filed as Exhibit 11.1 to this annual report.




Our code
of ethics addresses, among others, the following topics:




·
            honest
      and ethical conduct, including the ethical handling of actual or apparent
      conflicts of interest between personal and professional
      relationships;




·
            full,
      fair, accurate, timely, and understandable disclosure in reports and
      documents that we file with, or submit to, the SEC and in other public
      communications made by us;




·
            compliance
      with applicable governmental laws, rules and regulations;
      and




·
            the
      prompt internal reporting of violations of the code of the appropriate
      person or persons identified in the
code.




ITEM
16C.  PRINCIPAL ACCOUNTANT FEES AND SERVICES




The
following table sets forth by category of service the total fees for services
performed by PricewaterhouseCoopers Auditores Independentes during the fiscal
years ended December 31, 2008, 2007 and 2006:




Year Ended December 312008
                
                
                2007
                
                
                2006(in thousands of U.S. dollars)Audit Fees
                
                US$
                622
                
                
                US$
                1,213
                
                
                US$
                1,571Tax
      Fees
                
                
                276
                
                
                
                253
                
                
                
                -Audit-Related
      Fees
                
                
                109
                
                
                
                4
                
                
                
                250Total
                
                US$
                1,007
                
                
                US$
                1,470
                
                
                US$
                1,821









Audit
Fees




Audit
fees in 2008, 2007 and 2006 consisted of the aggregate fees billed by
PricewaterhouseCoopers Auditores Independentes in connection with the integrated
audit of our annual financial statements, reviews of quarterly financial
statements and statutory audits of our subsidiaries and of our internal control
over financial reporting as of December 31, 2008, based on criteria established
in Internal Control - Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO).




124


Tax
Fees




Tax fees
in 2008 consisted of the aggregate fees billed by PricewaterhouseCoopers
Auditores Independentes in connection with tax services related to the audit
procedures.  Includes fees charged in connection with the review of
the income tax returns of Votorantim Celulose e Papel S.A.




Audit-Related
Fees




Audit-related
fees in 2008 consisted of the aggregate fees billed by PricewaterhouseCoopers
Auditores Independentes in connection with a tentative registration statement on
Form F-4 drafted in October 2008 and related due diligence procedures, when VCP
first announced Aracruz’s acquisition process.




Pre-Approval
Policies and Procedures




Our Board
of Directors approves, based on the recommendation of the Audit Committee, all
audit, audit-related, tax and other services provided by PricewaterhouseCoopers
Auditores Independentes.  Any services provided by
PricewaterhouseCoopers Auditores Independentes that are not specifically
included within the scope of the audit must be pre-approved by our Board of
Directors in advance of any engagement.  Under the Sarbanes Oxley Act
of 2002, audit committees are permitted to approve certain fees for
audit-related, tax and other services pursuant to a de minimis exception prior to
the completion of an audit engagement.  In 2008, 2007 and 2006 none of
the fees paid to PricewaterhouseCoopers Auditores Independentes were approved
pursuant to the de
minimis exception.




ITEM
16D.  EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT
COMMITTEES




Under the
listed company audit committee rules of the NYSE and the SEC, effective
July 31, 2005, we had to comply with Exchange Act Rule 10A-3, which
requires that we either establish an audit committee composed of members of the
Board of Directors that meets specified requirements or designate and empower
our Conselho Fiscal to perform the role of the audit committee in reliance on
the exemption set forth in Exchange Act Rule 10A-3(c)(3).  In our
assessment, our Conselho Fiscal is able to act independently in performing the
responsibilities of an audit committee under the Sarbanes-Oxley Act of 2002 and
to satisfy the other requirements of Exchange Act Rule 10A
3.  For a further discussion of our Conselho Fiscal and the audit
committee exemption, see “Item 6C—Board Practices—Conselho
Fiscal.”




ITEM
16E.  PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED
PURCHASERS




Treasury
shares transactions and additional paid-in capital:




(i)           On
June 10, 2008 we repurchased 2,784,091 of our own shares from CMT at an average
price of US$ 33.49 per share (Note 4(a) to our consolidated financial
statements).




(ii)          On
July 14, 2008 we retired these treasury shares acquired reducing the
corresponding balances of Additional paid-in capital and Retained
earnings.




ITEM
16F.  CHANGES IN REGISTRANT’S CERTIFYING ACCOUNTANT




Not applicable.




ITEM
16G.  CORPORATE GOVERNANCE




Significant Differences between our Corporate Governance
Practices and NYSE Corporate Governance Standards




We are subject to the NYSE corporate governance listing
standards. As a foreign private issuer, the
standards applicable to us are considerably different than the standards applied
to U.S. listed companies.  Under the NYSE rules, we are required only
to: (i) have an audit committee or audit board, pursuant to an applicable
exemption available to foreign private issuers, that meets certain requirements,
as discussed below, (ii) provide prompt certification by our chief executive
officer of any material non compliance with any corporate governance rules, and
(iii) provide a brief description of the significant differences between our
corporate governance practices and the NYSE corporate governance practice
required to be followed by U.S. listed companies.  The discussion of
the significant differences between our corporate governance practices and those
required of U.S. listed companies follows below.




125


Majority of Independent Directors




The NYSE rules require that a majority of the board must
consist of independent directors.  Independence is defined by various
criteria, including the absence of a material relationship between the director
and the listed company.  Brazilian law does not have a similar
requirement. Under Brazilian law, neither
our Board of Directors nor our management is required to test the independence
of directors before their election to the board.  However, both the
Brazilian Corporate Law and the CVM have established rules that require
directors to meet certain qualification requirements and that address the
compensation and duties and responsibilities of, as well as the restrictions
applicable to, a company’s executive officers and directors.  While
our directors meet the qualification requirements of the Brazilian Corporate Law
and the CVM, we do not believe that our directors would be considered
independent under the NYSE test for director independence.




The Brazilian Corporate Law and our by-laws require that
our directors be elected by our shareholders at a general shareholders’
meeting.  All of our directors are elected by, and represent, our
controlling shareholders.




Executive Sessions




NYSE rules require that the non management directors
must meet at regularly scheduled executive sessions without management.
The Brazilian Corporate Law does not have a
similar provision. According to the
Brazilian Corporate Law, up to one third of the members of the Board of
Directors can be elected from management.In our case, only one of five
occupiesboth an executive and director
position.  The directors are not expressly empowered to serve as check
on management and there is no requirement that our directors meet regularly
without management.  As a result, our directors do not typically meet
in executive sessions.




Nominating/Corporate Governance
Committee




NYSE rules require that listed companies have a
Nominating/Corporate Governance Committee composed entirely of independent
directors and governed by a written charter addressing the committee’s required
purpose and detailing its required responsibilities, which include, among other
things, identifying and selecting qualified board member nominees and developing
a set of corporate governance principles applicable to the
company.  We are not required under applicable Brazilian law to have a
Nominating Committee/Corporate Governance Committee, and accordingly, to date,
have not established such a committee.  The directors are elected by
our shareholders at a general shareholders’ meeting.  Our corporate
governance practices are adopted by the entire board.




Compensation Committee




NYSE rules require that listed companies have a
Compensation Committee composed entirely of independent directors and governed
by a written charter addressing the committee’s required purpose and detailing
its required responsibilities, which include, among other things, reviewing
corporate goals relevant to CEO compensation, evaluating CEO performance and
approving CEO compensation levels and recommending to the board non CEO
compensation, incentive compensation and equity based plans.  We are
not required under applicable Brazilian law to have a Compensation
Committee.  Under the Brazilian Corporate Law, the total amount
available for compensation of our directors and executive officers and for
profit sharing payments to our executive officers is established by our
shareholders at the annual general meeting.  The Board of Directors is
then responsible for determining the individual compensation and profit-sharing
of each executive officer, as well as the compensation of our board and
committee members.  In making such determination, the board reviews
the performance of each executive officer and each of the goals they were
supposed to achieve during the year.




126


Audit Committee




NYSE rules require that listed companies have an audit
committee that (i) is composed of a minimum of three independent directors who
are all financially literate, (ii) meets the SEC rules regarding audit
committees for listed companies, (iii) has at least one member who has
accounting or financial management expertise and (iv) is governed by a written
charter addressing the committee’s required purpose and detailing its required
responsibilities.  However, as a foreign private issuer, we need only
to comply with the requirement that the audit committee, or audit board in our
case, meet the SEC rules regarding audit committees for listed
companies.  The Brazilian Corporate Law requires companies to have a
non permanentConselho
Fiscalcomposed of three to five members
who are elected at the general shareholders’ meeting.  TheConselho
Fiscaloperates independently from
management and from a company’s external auditors.  Its main function
is to monitor the activities of management, examine the financial statements of
each fiscal year and provide a formal report to our
shareholders.




We have a permanentConselho Fiscalthat consists of three members and three
alternates.  The members of ourConselho Fiscalare all financially literate and one member has
accounting expertise that qualifies him as an audit committee financial
expert.  In order to comply with the exemption requirements that allow
ourConselho
Fiscalto act as an audit committee
pursuant to SEC rules, our Board of Directors approved the delegation to theConselho
Fiscalof certain additional
responsibilities and theConselho Fiscaland the Board of Directors adopted an additional
charter that delegates to theConselho Fiscalthe duties and responsibilities of a U.S. audit
committee to the extent permitted under Brazilian Corporate Law.  For
a further discussion of ourConselho Fiscal, see “Item 6C—Board Practices—Conselho Fiscal.”




Shareholder Approval of Equity Compensation
Plans




NYSE rules require that shareholders be given the
opportunity to vote on all equity compensation plans and material revisions
thereto, with limited exceptions.  Under the Brazilian Corporate Law,
shareholders must approve all stock option plans.  In addition, any
issuance of new shares that exceeds our authorized share capital is subject to
shareholder approval.  We have no equity compensation
plans.




Corporate Governance Guidelines




NYSE rules require that listed companies adopt and
disclose corporate governance guidelines.  We have not adopted any
formal corporate governance guidelines beyond those required by applicable
Brazilian law.  We believe that the corporate governance guidelines
applicable to us under Brazilian corporate law are consistent with the
guidelines established by the NYSE.




Code of Business Conduct and Ethics




NYSE rules require that listed companies adopt and
disclose a code of business conduct and ethics for directors, officers and
employees, and promptly disclose any waivers of the code for directors or
executive officers.  Applicable Brazilian law does not have a similar
requirement.  However, we have amended our code of ethics to comply
with the requirements of the Sarbanes-Oxley Act and the NYSE
rules.  We believe our code, as amended, substantially addresses the
matters required to be addressed by the NYSE rules.  A copy of our
Code of Ethics has been filed as Exhibit 11.1 to this annual
report.  For a further discussion of our Code of Ethics, see “Item
16B—Code of Ethics.”




Internal Audit Function




NYSE rules require that listed companies maintain an
internal audit function to provide management and the audit committee with
ongoing assessments of the company’s risk management processes and system of
internal control.  Brazilian law does not require that companies
maintain an internal audit function.  However, as a best practice, we
maintain an internal audit function.  Our internal audit function is
under the supervision of the Chief Executive Officer, assuring the necessary
independence and competence to assess the design of our internal control over
financial reporting, as well as to test its effectiveness as required by Section
404 of the Sarbanes-Oxley Act of 2002.




127




PART
III




ITEM
17.  FINANCIAL STATEMENTS




Not
applicable.




ITEM
18.  FINANCIAL STATEMENTS




The
following financial statements are filed as part of this annual report, together
with the report of Independent Registered Public Accounting Firm:




Management’s
      Report on Internal Control Over Financial Reporting
                  
                  F-2Report
      of Independent Registered Public Accounting Firm
                  
                  F-4Aracruz’s
      Report of Independent Registered Public Accounting Firm
                  
                  F-7Consolidated
      Balance Sheets as of December 31, 2008 and 2007
                  
                  F-9Consolidated
      Statements of Operations for the years ended December 31, 2008, 2007
      and 2006
                  
                  F-11Consolidated
      Statements of Cash Flows for the years ended December 31, 2008, 2007
      and 2006
                  
                  F-13Consolidated
      Statements of Changes in Shareholders’ Equity for the years ended
      December 31, 2008, 2007 and 2006
                  
                  F-15Notes to
      the Consolidated Financial Statements
                  
                  F-17





All
schedules for which provision is made in the applicable accounting regulations
of the Commission are not required under the related instructions or are
inapplicable and therefore have been omitted.




ITEM
19.  EXHIBITS




Exhibit
                        Number
                      
                      Description1*
                      
                      English
      translation of the By-laws.2**
                      
                      Form
      of Amended and Restated Deposit Agreement among us, The Bank of New York,
      as depositary, and the Owners and Beneficial Owners of American Depositary
      Receipts, including the form of American Depositary
    Receipts.2.4***
                      
                      Indenture,
      dated January 23, 2004, among Voto-Votorantim Overseas Trading
      Operations III Limited, as issuer, The Bank of New York, as trustee, The
      Bank of New York, as transfer agent, paying agent and registrar, The Bank
      of Tokyo-Mitsubishi Ltd., London Branch, as principal paying agent, and
      Votorantim Participações S.A., Votorantim Celulose e Papel S.A., Cimento
      Rio Branco S.A., and Companhia Níquel Tocantins, as
      guarantors.2.5*****
                      
                      Indenture,
      dated June 24, 2005, among Voto-Votorantim Overseas Trading
      Operations IV Limited, as issuer, The Bank of New York, as trustee, The
      Bank of New York, as transfer agent, paying agent and registrar, The Bank
      of Tokyo-Mitsubishi Ltd., London Branch, as principal paying agent, and
      Votorantim Participações S.A., Votorantim Celulose e Papel S.A., Cimento
      Rio Branco S.A., and Companhia Níquel Tocantins, as
      guarantors.




128





Exhibit
                                                          Number
                                                        
                                                        Description3.1.1#
                                                        
                                                        Investment Agreement, dated January 19, 2009,
      among us, VID, BNDESPar and VPAR3.1.2#
                                                        
                                                        Form of Shareholders’ Agreement, Annex 3.1.10 to the Investment Agreement,
      dated January 19, 2009, among us, VID,
      BNDESPar and VPAR4.1.1+
                                                        
                                                        VCP
      Overseas Holding Export Prepayment Facility Agreement dated as of
      June 30, 2006 among VCP Overseas Holding Kft, Votorantim Celulose e
      Papel S.A., VCP Overseas Holding Ltd Budapest - Baar Branch, the Lenders
      defined therein, ABN AMRO Bank N.V., LaSalle Bank National Association, et
      al.  US$ 375,000,000 Senior Loans.4.1.2+
                                                        
                                                        Export
      Finance Agreement dated as of June 30, 2006 among VCP Overseas
      Holding Kft, Votorantim Celulose e Papel S.A., VCP Overseas Holding Ltd
      Budapest - Baar Branch, and LaSalle Bank National
    Association.4.1.3+
                                                        
                                                        Collateral
      Account Control Agreement dated as of June 30, 2006 among VCP
      Overseas Holding Kft, VCP Overseas Holding Ltd Budapest - Baar Branch, the
      Lenders defined therein, ABN AMRO Bank N.V., LaSalle Bank National
      Association.4.1.3A+
                                                        
                                                        Security
      Agreement dated as of June 30, 2006 among VCP Overseas Holding Kft,
      Votorantim Celulose e Papel S.A., VCP Overseas Holding Ltd Budapest - Baar
      Branch, the Lenders defined therein, ABN AMRO Bank N.V., LaSalle Bank
      National Association.4.2.1+
                                                        
                                                        Restatement
      Agreement dated 27 September 2006 for Votorantim Celulose e Papel
      S.A. and the other parties named therein, relating to the ABN AMRO
      Facility Agreements and the ABN Loan No. 3, as defined
      therein.4.2.2+
                                                        
                                                        Restated
      US$ 223,000,000 Pre-Export Finance Agreement as restated on 27
      September, 2006 pursuant to a Restatement Agreement dated 27 September,
      2006 for Votorantim Celulose e Papel S.A. and ABN AMRO Bank
      N.V.4.2.3+
                                                        
                                                        Disclosed
      Pledge of Collection Account between VCP Overseas Holding Ltd Budapest -
      Baar Branch and ABN AMRO Bank N.V.4.2.4+
                                                        
                                                        Assignment
      Agreement between VCP Overseas Holding Ltd Budapest - Baar Branch and ABN
      AMRO Bank N.V.4.3.1+
                                                        
                                                        Restatement
      Agreement dated 27 September 2006 for Votorantim Celulose e Papel
      S.A. and the other parties named therein, relating to the Santander
      Facility Agreements and the Santander Loan No. 6, as defined
      therein.4.3.2+
                                                        
                                                        Restated
      US$ 225,000,000 Pre-Export Finance Agreement as restated on 27
      September 2006 pursuant to a Restatement Agreement dated 27
      September, 2006 for Votorantim Celulose e Papel S.A. and Banco Santander
      Central Hispano S.A. – London Branch.4.3.3+
                                                        
                                                        Collection
      Account between VCP Overseas Holding Ltd Budapest - Baar Branch and Banco
      Santander Central Hispano S.A. – London Branch.4.3.4+
                                                        
                                                        Assignment
      Agreement between VCP Overseas Holding Ltd Budapest - Baar Branch and
      Banco Santander Central Hispano S.A. – London Branch.4.4.1+
                                                        
                                                        Restatement
      Agreement dated 27 September 2006 for Votorantim Celulose e Papel
      S.A. and the other parties named therein, relating to the Syndicated
      Facility Agreement as defined therein.4.4.2+
                                                        
                                                        Restated
      US$ 102,000,000 Pre-Export Finance Agreement as restated on 27
      September 2006 pursuant to a Restatement Agreement dated 27
      September 2006 for Votorantim Celulose e Papel S.A., ABN AMRO Bank
      N.V. and Banco Santander Central Hispano S.A. – London
    Branch.4.4.3+
                                                        
                                                        Disclosed
      Pledge of Collection Account between VCP Overseas Holding Ltd Budapest -
      Baar Branch and ABN AMRO Bank N.V.4.4.4+
                                                        
                                                        Assignment
      Agreement between VCP Overseas Holding Ltd Budapest - Baar Branch and ABN
      AMRO Bank
N.V.




129




Exhibit
                                                              Number
                                                            
                                                            Description4.5+
                                                            
                                                            Exchange
      Agreement dated September 19, 2006 by and between Votorantim Celulose
      e Papel S.A. and International Paper Investments
      (Holland) B.V.4.6++
                                                            
                                                            Joint
      Venture Agreement dated May 8, 2007 between Votorantim Celulose e Papel
      S.A. and Ahlstrom Louveira Ltda.4.7++
                                                            
                                                            Strategic
      Business Agreement dated as of August 6, 2007 between Oji Paper Co., Ltd.
      and Votorantim Celulose e Papel S.A.4.8++
                                                            
                                                            Export
      Prepayment Agreement dated as of June 22, 2007 by and among Votorantim
      Celulose e Papel S.A., VCP Overseas Holding Ltd., and Banco Bilbao Vizcaya
      Argentaria, S.A.4.9#
                                                            
                                                            Share Purchase Agreement, dated January 19, 2009,
      among us, the Families and VID.4.10#
                                                            
                                                            Share Purchase Agreement, dated March 5, 2009,
      among us, Joseph Yacoub Safra, Moise Yacoub Safra and
      VID.4.11#
                                                            
                                                            Financing
      Agreement dated January, 2009 through credit facility of R$160,000,000.00
      by and between the National Bank of Economic and Social
      Development  - BNDES, VCP4.12#
                                                            
                                                            Financing
      Agreement dated July, 2008 through credit facility of R$108,000,000.00 and
      R$432,000,000.00  by and between the National Bank of Economic
      and Social Development  - BNDES, VCP4.13#
                                                            
                                                            Private
      Instrument of Protocol and Justification of total spin-off of Ripasa S.A.
      Celulose e Papel October 1, 20086#
                                                            
                                                            See
      Note 2(l) to our audited consolidated financial statements for
      information explaining how earnings per share information was
      calculated.8#
                                                            
                                                            See
      Note 2(c) to our audited consolidated financial statements for
      information regarding our subsidiaries.11.1***
                                                            
                                                            English
      translation of Code of Ethics.12.1#
                                                            
                                                            Rule 13a-14(a)/15(d)-14(a) Certificate
      of Chief Executive Officer.12.2#
                                                            
                                                            Rule 13a-14(a)/15(d)-14(a) Certificate
      of Chief Financial Officer.13.1#
                                                            
                                                            Section 1350
      Certification of Chief Executive Officer.13.2#
                                                            
                                                            Section 1350
      Certification of Chief Financial
Officer.








*
            Incorporated
      herein by reference to our report on Form 6-K filed on April 27, 2007
      (File No. 001-15018).


**
            Incorporated
      herein by reference to our registration statement on Form F-6 filed on
      March 25, 2002 (File
No. 333-84964).


***
            Incorporated
      herein by reference to our annual report on Form 20-F filed on
      June 30, 2004 (File
No. 001-15018).


****
            Incorporated
      herein by reference to our annual report on Form 20-F filed on
      May 21, 2002 (File
No. 001-15018).


*****
            Incorporated
      herein by reference to our annual report on Form 20-F filed on
      June 29, 2006 (File
No. 001-15018).


+
            Incorporated
      herein by reference to our annual report on Form 20-F filed on February 1,
      2007 (File No. 001-15018).


++
            Incorporated
      herein by reference to our annual report on Form 20-F filed on January 31,
      2008 (File No. 001-15018).


#
            Filed
      herewith.




130


SIGNATURES




The
registrant hereby certifies that it meets all of the requirements for filing on
Form 20-F and that it has duly caused and authorized the undersigned to sign
this annual report on its behalf.




VOTORANTIM
      CELULOSE E PAPEL S.A.By:
              /s/
      Paulo PrignolatoName:  Paulo
      PrignolatoTitle:   Chief
      Financial OfficerBy:
              /s/
      José Luciano Duarte PenidoName:     José
      Luciano Duarte PenidoTitle:      Chief
      Executive Officer





Date:  June
30, 2009




131


Votorantim
Celulose e Papel S.A.


Consolidated
Financial Statements


as
at December 31, 2008 and 2007,


and
for the Three Years Ended


December
31, 2008


and
Reports of Independent Registered


Public
Accounting Firms




Index
      to the Consolidated Financial Statements
                
                PageManagement's
      Report on Internal Control Over Financial Reporting
                
                F-2Report
      of Independent Registered Public Accounting Firm
                
                F-4Aracruz's
      Report of Independent Registered Public Accounting Firm, on Internal
      Control Over Financial Reporting
                
                F-6Consolidated
      Balance Sheets
                
                F-9Consolidated
      Statements of Operations
                
                F-11Consolidated
      Statements of Cash Flows
                
                F-13Consolidated
      Statements of Changes in Shareholders' Equity
                
                F-15Notes
      to the Consolidated Financial Statements
                
                F-17







Management's
Report on Internal Control


Over
Financial Reporting





1
            The
      management of Votorantim Celulose e Papel S.A. and subsidiaries ("the
      Company") is responsible for establishing and maintaining effective
      internal control over financial reporting and for its assessment of the
      effectiveness of internal control over financial
  reporting.





2
            The
      Company's internal control over financial reporting is a process designed
      by, or under the supervision of, the Company's Audit Committee, principal
      executive and principal financial officers, and effected by the Company's
      board of directors, management, and other personnel to provide reasonable
      assurance regarding the reliability of financial reporting and the
      preparation of financial statements for external purposes in accordance
      with accounting principles generally accepted in the United
      States. The Company's internal control over financial reporting
      includes those policies and procedures that (a) pertain to the
      maintenance of records that, in reasonable detail, accurately and fairly
      reflect the transactions and dispositions of the assets of the Company;
      (b) provide reasonable assurance that transactions are recorded as
      necessary to permit preparation of financial statements in accordance with
      accounting principles generally accepted in the United States, and that
      receipts and expenditures of the Company are being made only in accordance
      with authorizations of management and directors of the Company; and
      (c) provide reasonable assurance regarding prevention or timely
      detection of unauthorized acquisition, use, or disposition of the
      Company's assets that could have a material effect on the consolidated
      financial statements.





3
            Because
      of its inherent limitations, internal control over financial reporting may
      not prevent or detect material misstatements on a timely basis. Therefore
      even those systems determined to be effective can provide only reasonable
      assurance with respect to financial statement preparation and
      presentation. Also, projections of any evaluation of effectiveness to
      future periods are subject to the risk that controls may become inadequate
      because of changes in conditions, or that the degree of compliance with
      the policies or procedures may
deteriorate.


F-2


Votorantim
Celulose e Papel S.A.





4
            The
      effectiveness of the Company's internal control over financial reporting
      as of December 31, 2008, is based on the criteria established in Internal
      Control - Integrated Framework issued by the Committee of Sponsoring
      Organizations of the Treadway Commission (COSO). Based on that assessment
      management has concluded that as of December 31, 2008 the Company's
      internal control over financial reporting is
  effective.





São
      Paulo, June 29, 2009José
      Luciano Penido
                      
                      Paulo
      PrignolatoChief
      Executive Officer
                      
                      Chief
      Financial OfficerJune
      29, 2009
                      
                      June
      29,
2009




F-3


Report
of Independent Registered


Public
Accounting Firm





To the
Board of Directors and Shareholders


Votorantim
Celulose e Papel S.A.





1
            In
      our opinion, based on our audits and the report of other auditors, the
      accompanying consolidated balance sheets and the related consolidated
      statements of operations, of changes in shareholders' equity and of cash
      flows present fairly, in all material respects, the financial position of
      Votorantim Celulose e Papel S.A. and its subsidiaries at December 31, 2008
      and 2007, and the results of their operations and their cash flows for
      each of the three years in the period ended December 31, 2008 in
      conformity with accounting principles generally accepted in the United
      States of America. Also in our opinion, based on our audit and the report
      of other auditors, the Company maintained, in all material respects,
      effective internal control over financial reporting as of December 31,
      2008, based on criteria established in Internal Control - Integrated
      Framework issued by the Committee of Sponsoring Organizations of the
      Treadway Commission (COSO). The Company's management is responsible for
      these financial statements, for maintaining effective internal control
      over financial reporting and for its assessment of the effectiveness of
      internal control over financial reporting, included in the accompanying
      "Management's Report on Internal Control Over Financial Reporting". Our
      responsibility is to express opinions on these financial statements and on
      the Company's internal control over financial reporting based on our
      integrated audits. We did not audit the consolidated financial statements
      or internal control over financial reporting of Aracruz
      Celulose S.A., an affiliate. The investment in which totaled
      US$ 135 million and US$ 314 million at December 31, 2008
      and 2007, respectively, and for which the equity in earnings (losses) of
      affiliates, included in net income (loss), totaled a loss of US$ 153
      million and income of US$ 52 million and US$ 56 million for the
      years ended December 31, 2008, 2007 and 2006, respectively. The financial
      statements and internal control over financial reporting of Aracruz
      Celulose S.A. were audited by other auditors whose report thereon has been
      furnished to us, and our opinion expressed herein, insofar as it relates
      to the amounts included for Aracruz Celulose S.A. and as to the
      effectiveness of its internal control over financial reporting as of
      December 31, 2008, is based solely on the report of the other auditors. We
      conducted our audits in accordance with the standards of the Public
      Company Accounting Oversight Board (United
  States).


F-4


Votorantim
Celulose e Papel S.A.





2
            Those
      standards require that we plan and perform the audits to obtain reasonable
      assurance about whether the financial statements are free of material
      misstatement and whether effective internal control over financial
      reporting was maintained in all material respects. Our audits of the
      financial statements included examining, on a test basis, evidence
      supporting the amounts and disclosures in the financial statements,
      assessing the accounting principles used and significant estimates made by
      management, and evaluating the overall financial statements presentation.
      Our audit of internal control over financial reporting included obtaining
      an understanding of internal control over financial reporting, assessing
      the risk that a material weakness exists, and testing and evaluating the
      design and operating effectiveness of internal control based on the
      assessed risk. Our audits also included performing such other procedures
      as we considered necessary in the circumstances. We believe that our
      audits and the report of other auditors provide a reasonable basis for our
      opinions.





3
            A
      company's internal control over financial reporting is a process designed
      to provide reasonable assurance regarding the reliability of financial
      reporting and the preparation of financial statements for external
      purposes in accordance with generally accepted accounting principles. A
      company's internal control over financial reporting includes those
      policies and procedures that (i) pertain to the maintenance of
      records that, in reasonable detail, accurately and fairly reflect the
      transactions and dispositions of the assets of the company;
      (ii) provide reasonable assurance that transactions are recorded as
      necessary to permit preparation of financial statements in accordance with
      generally accepted accounting principles, and that receipts and
      expenditures of the company are being made only in accordance with
      authorizations of management and directors of the company; and
      (iii) provide reasonable assurance regarding prevention or timely
      detection of unauthorized acquisition, use, or disposition of the
      company's assets that could have a material effect on the financial
      statements.





4
            Because
      of its inherent limitations, internal control over financial reporting may
      not prevent or detect misstatements. Also, projections of any evaluation
      of effectiveness to future periods are subject to the risk that controls
      may become inadequate because of changes in conditions, or that the degree
      of compliance with the policies or procedures may
    deteriorate.





/s/PricewaterhouseCoopers
Auditores Independentes


São
Paulo, Brazil


June 29,
2009


F-5


Votorantim
Celulose e Papel S.A.





Report
of Independent Registered


Public
Accounting Firm, on Internal


Control
Over Financial Reporting




To the
Board of Directors and Stockholders of


Aracruz
Celulose S.A.


Aracruz -
ES




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





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





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


F-6


Votorantim
Celulose e Papel S.A.





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





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





In our
opinion, because of the effect of the material weaknesses identified above on
the achievement of the objectives of the control criteria, the Company has not
maintained effective internal control over financial reporting as of December
31, 2008, based on the criteria established in Internal Control — Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission.





We have
also audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the consolidated financial statements as of and
for the year ended December 31, 2008, of the Company and our report dated June
30, 2009 expressed an unqualified opinion on those financial
statements.





/s/Deloitte
Touche Tohmatsu Auditores Independentes


Deloitte
Touche Tohmatsu Auditores Independentes


Rio de
Janeiro, Brazil


June 30,
2009


F-7


Votorantim
Celulose e Papel S.A.





Report
of Independent Registered Public


Accounting
Firm, On Consolidated


Financial
Statements





To the
Board of Directors and Stockholders of


Aracruz
Celulose S.A.


Aracruz -
ES





We have
audited the accompanying consolidated balance sheets of Aracruz Celulose S.A.
and subsidiaries (the “Company”) as of December 31, 2008 and 2007, and the
related consolidated statements of operations, changes in stockholders’ equity,
and cash flows for each of the three years in the period ended December 31,
2008. These financial statements are the responsibility of the Company’s
management. Our responsibility is to express an opinion on these financial
statements based on our audits.





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





In our
opinion, such consolidated financial statements present fairly, in all material
respects, the financial position of the Company as of December 31, 2008 and
2007, and the results of its operations and cash flows for each of the three
years in the period ended December 31, 2008, in conformity with accounting
principles generally accepted in the United States of America.





We have
also audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the Company’s internal control over financial
reporting as of December 31, 2008, based on the criteria established in Internal Control — Integrated
Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission and our report dated June 30, 2009 expressed an unqualified
opinion on the Company’s internal control over financial reporting.





/s/Deloitte
Touche Tohmatsu Auditores Independentes


Deloitte
Touche Tohmatsu Auditores Independentes


Rio de
Janeiro, Brazil


June 30,
2009


F-8




Votorantim
      Celulose e Papel S.A.Consolidated
      Balance Sheets at December 31In
      millions of U.S. dollars, except number of shares




Assets
                
                Note
                
                
                2008
                
                
                2007Current
      assetsCash and cash
      equivalents
                
                
                
                
                
                280
                
                
                
                565Available for sale
      securities
                
                
                6
                
                
                
                -
                
                
                
                176Trading
    securities
                
                
                
                
                
                
                43
                
                
                
                -Trade accounts receivable,
      net
                
                
                7
                
                
                
                151
                
                
                
                165Inventories
                
                
                8
                
                
                
                193
                
                
                
                186Recoverable
    taxes
                
                
                
                
                
                
                73
                
                
                
                71Deferred income
    tax
                
                
                5(b
                )
                
                
                43
                
                
                
                5Other
                
                
                
                
                
                
                32
                
                
                
                34815
                
                
                
                1,202Non-currentInvestment in affiliates,
      including goodwill
                
                
                9
                
                
                
                157
                
                
                
                1,009Goodwill, other
                
                
                9
                
                
                
                132
                
                
                
                -Property, plant and equipment,
      net
                
                
                10
                
                
                
                3,866
                
                
                
                3,916Other assetsRecoverable taxes
                
                
                
                
                
                
                105
                
                
                
                68Accounts receivable for
      investment sold
                
                
                4(a
                )
                
                
                10
                
                
                
                34Advances to
    suppliers
                
                
                
                
                
                
                7
                
                
                
                10Judicial deposits
                
                
                15
                
                
                
                130
                
                
                
                158Other
                
                
                
                
                
                
                8
                
                
                
                8260
                
                
                
                278Total
      assets
                
                
                
                
                
                
                5,230
                
                
                
                6,405


F-9


Votorantim
      Celulose e Papel S.A.Consolidated
      Balance Sheets at December 31In
      millions of U.S. dollars, except number of shares
                (continued)





Liabilities
      and shareholders' equity
                
                Note
                
                
                2008
                
                
                2007Current
      liabilitiesTrade payables
                
                
                
                
                
                65
                
                
                
                139Short-term debt
                
                
                11
                
                
                
                438
                
                
                
                211Current portion of long-term
      debt
                
                
                12
                
                
                
                490
                
                
                
                156Unrealized loss from
      cross-currency interest rate swaps
                
                
                14
                
                
                
                97
                
                
                
                5Payroll, profit sharing and
      related charges
                
                
                
                
                
                
                23
                
                
                
                23Taxes on income and other
      taxes
                
                
                
                
                
                
                5
                
                
                
                34Interest attributable to
      capital payable
                
                
                17
                
                
                
                -
                
                
                
                170Other
                
                
                
                
                
                
                34
                
                
                
                181,152
                
                
                
                756Non-currentLong-term
      liabilitiesLong-term debt
                
                
                12
                
                
                
                1,159
                
                
                
                1,197Unrealized loss from
      cross-currency interest rate swaps
                
                
                14
                
                
                
                3
                
                
                
                -Deferred income tax,
      net
                
                
                5(b
                )
                
                
                204
                
                
                
                349Accrued liabilities for legal
      proceedings
                
                
                15
                
                
                
                161
                
                
                
                197Post-retirement
      benefits
                
                
                21
                
                
                
                26
                
                
                
                231,553
                
                
                
                1,766Commitments
      and contingencies
                
                
                15Shareholders'
      equity
                
                
                17Preferred shares, no par value,
      280,000,000 shares
                  authorized, 95,658,964 shares
      issued and outstanding
                  (2007 -
    98,443,055)
                
                
                
                
                
                
                953
                
                
                
                953Common shares, no par value,
      140,000,000 shares
                  authorized, 105,702,452 shares
      issued and outstanding
                
                
                
                
                
                
                1,053
                
                
                
                1,053Additional paid-in
      capital
                
                
                4(a)(i
                )
                
                
                35
                
                
                
                35Treasury shares, at cost, 2007
      - 28,900 preferred shares
                
                
                4(a)(i
                )
                
                
                -
                
                
                
                (1
                )Appropriated retained
      earnings
                
                
                
                
                
                
                110
                
                
                
                110Unappropriated retained
      earnings
                
                
                
                
                
                
                1,215
                
                
                
                1,711Accumulated other comprehensive
      income (deficit)Cumulative translation
      adjustments
                
                
                
                
                
                
                (847
                )
                
                
                19Post-retirement
      benefits
                
                
                21
                
                
                
                6
                
                
                
                32,525
                
                
                
                3,883Total
      liabilities and shareholders' equity
                
                
                
                
                
                
                5,230
                
                
                
                6,405




The
accompanying notes are an integral part of the consolidated financial
statements.


F-10




Votorantim
      Celulose e Papel S.A.Consolidated
      Statements of OperationsYears
      Ended December 31In
      millions of U.S. dollars, except number of shares





Note
                  
                  
                  2008
                  
                  
                  2007
                  
                  
                  2006Net
      operating revenueDomestic
      sales (net of sales taxes: 2008 - US$ 223;2007
      - US$ 226 and 2006 - US$ 222)
                  
                  
                  
                  
                  
                  721
                  
                  
                  
                  709
                  
                  
                  
                  685Export
      sales
                  
                  
                  
                  
                  
                  645
                  
                  
                  
                  624
                  
                  
                  
                  6321,366
                  
                  
                  
                  1,333
                  
                  
                  
                  1,317Operating
      costs and expensesCost
      of sales
                  
                  
                  
                  
                  
                  934
                  
                  
                  
                  887
                  
                  
                  
                  813Selling
      and marketing
                  
                  
                  
                  
                  
                  143
                  
                  
                  
                  138
                  
                  
                  
                  136General
      and administrative
                  
                  
                  
                  
                  
                  72
                  
                  
                  
                  64
                  
                  
                  
                  63Gain
      on exchange of assets, net
                  
                  
                  4(b
                  )
                  
                  
                  -
                  
                  
                  
                  (955
                  )
                  
                  
                  -Other,
      net
                  
                  
                  
                  
                  
                  
                  17
                  
                  
                  
                  13
                  
                  
                  
                  201,166
                  
                  
                  
                  147
                  
                  
                  
                  1,032Operating
      income
                  
                  
                  
                  
                  
                  
                  200
                  
                  
                  
                  1,186
                  
                  
                  
                  285Non-operating
      income (expense)Financial
      income
                  
                  
                  19
                  
                  
                  
                  149
                  
                  
                  
                  236
                  
                  
                  
                  166Financial
      expense
                  
                  
                  19
                  
                  
                  
                  (227
                  )
                  
                  
                  (145
                  )
                  
                  
                  (148
                  )Foreign
      exchange gain (loss) and unrealized gain(loss) on swaps and trading
      securities, net
                  
                  
                  
                  
                  
                  
                  (593
                  )
                  
                  
                  214
                  
                  
                  
                  (4
                  )(671
                  )
                  
                  
                  305
                  
                  
                  
                  14Income
      (loss) before taxes on income and equityin
      affiliates
                  
                  
                  
                  
                  
                  
                  (471
                  )
                  
                  
                  1,491
                  
                  
                  
                  299Current income tax
      expense
                  
                  
                  
                  
                  
                  
                  (2
                  )
                  
                  
                  (35
                  )
                  
                  
                  (25
                  )Deferred income tax expense on
      asset exchange gain
                  
                  
                  
                  
                  
                  
                  -
                  
                  
                  
                  (327
                  )
                  
                  
                  -Deferred income tax (expense)
      benefit
                  
                  
                  
                  
                  
                  
                  200
                  
                  
                  
                  (21
                  )
                  
                  
                  215(a
                  )
                  
                  
                  198
                  
                  
                  
                  (383
                  )
                  
                  
                  (4
                  )Income
      (loss) before equity in affiliates
                  
                  
                  
                  
                  
                  
                  (273
                  )
                  
                  
                  1,108
                  
                  
                  
                  295Equity in earnings (losses) of
      affiliates
                  
                  
                  9
                  
                  
                  
                  (132
                  )
                  
                  
                  113
                  
                  
                  
                  77Net
      income (loss)
                  
                  
                  
                  
                  
                  
                  (405
                  )
                  
                  
                  1,221
                  
                  
                  
                  372




F-11


Votorantim
      Celulose e Papel S.A.Consolidated
      Statements of OperationsYears
      Ended December 31In
      millions of U.S. dollars, except number of shares
                (continued)





Note
                
                
                2008
                
                
                2007
                
                
                2006Net
      income applicable to preferred shares
                
                
                
                
                
                -
                
                
                
                618
                
                
                
                188Net
      income (loss) applicable to common shares
                
                
                
                
                
                (405
                )
                
                
                603
                
                
                
                184Net
      income (loss)
                
                
                
                
                
                (405
                )
                
                
                1,221
                
                
                
                372Basic
      and diluted earnings (loss) - in U.S. dollars
                
                
                2(l
                )Per preferred share or
      ADS
                
                
                
                
                
                
                -
                
                
                
                6.28
                
                
                
                1.97Per common
    share
                
                
                
                
                
                
                (3.83
                )
                
                
                5.71
                
                
                
                1.79Weighted
      average number of shares outstanding(thousand)Preferred
                
                
                
                
                
                
                96,888
                
                
                
                98,444
                
                
                
                92,240Common
                
                
                
                
                
                
                105,702
                
                
                
                105,702
                
                
                
                105,702


The
accompanying notes are an integral part of the consolidated financial
statements.




F-12


Votorantim
      Celulose e Papel S.A.Consolidated
      Statements of Cash FlowsYears
      Ended December 31In
      millions of U.S. dollars





Note
                
                
                2008
                
                
                2007
                
                
                2006Cash
      flows from operating activitiesNet
      income (loss)
                
                
                
                
                
                (405
                )
                
                
                1,221
                
                
                
                372Adjustments
      to reconcile net income (loss) to cash from operationsDepreciation
      and depletion
                
                
                
                
                
                160
                
                
                
                143
                
                
                
                193Loss
      on disposal of property, plant and equipment
                
                
                
                
                
                21
                
                
                
                10
                
                
                
                14Gain
      on sale of investments
                
                
                4(a)/4(d)
                
                
                
                -
                
                
                
                (65
                )
                
                
                -Gain
      on exchange of assets, net of deferred tax of
    (US$ 338)
                
                
                4(b)
                
                
                
                -
                
                
                
                (651
                )
                
                
                -Foreign
      exchange and unrealized swap and trading securities (gains) losses,
      net
                
                
                
                
                
                
                593
                
                
                
                (214
                )
                
                
                4Deferred
      income tax
                
                
                
                
                
                
                (200
                )
                
                
                21
                
                
                
                (21
                )Equity
      in losses (earnings) of affiliates
                
                
                
                
                
                
                132
                
                
                
                (113
                )
                
                
                (77
                )Interest
      attributable to capital and dividends received
                
                
                
                
                
                
                27
                
                
                
                23
                
                
                
                15Other
                
                
                
                
                
                
                88
                
                
                
                23
                
                
                
                -Decrease
      (increase) in assetsTrade
      accounts receivable
                
                
                
                
                
                
                14
                
                
                
                36
                
                
                
                6Inventories
                
                
                
                
                
                
                (7
                )
                
                
                13
                
                
                
                (19
                )Other
      assets
                
                
                
                
                
                
                18
                
                
                
                (95
                )
                
                
                (89
                )Decrease
      in liabilities
                
                
                
                
                
                
                (53
                )
                
                
                (19
                )
                
                
                (16
                )Net
      cash provided by operating activities
                
                
                
                
                
                
                388
                
                
                
                333
                
                
                
                382Cash
      flows from investing activitiesAvailable
      for sale securitiesPurchase
                
                
                
                
                
                
                (7
                )
                
                
                (823
                )
                
                
                (431
                )Proceeds
      from sale and maturities
                
                
                
                
                
                
                193
                
                
                
                1,078
                
                
                
                602Trading
      securities, net
                
                
                
                
                
                
                (43
                )
                
                
                -
                
                
                
                -Sale
      of an interest in an affiliate
                
                
                4(a)
                
                
                
                42
                
                
                
                93
                
                
                
                -Acquisition
      of an interest in an affiliate
                
                
                4(a)
                
                
                
                -
                
                
                
                -
                
                
                
                (36
                )Acquisition
      of property, plant and equipment
                
                
                
                
                
                
                (692
                )
                
                
                (477
                )
                
                
                (248
                )Exchange
      of cash and cash equivalents assets
                
                
                
                
                
                
                -
                
                
                
                (16
                )
                
                
                -Net
      cash used in investing activities
                
                
                
                
                
                
                (507
                )
                
                
                (145
                )
                
                
                (113
                )Cash
      flows from financing activitiesShort-term
      debtBorrowings
                
                
                
                
                
                
                936
                
                
                
                622
                
                
                
                603Repayments
                
                
                
                
                
                
                (433
                )
                
                
                (709
                )
                
                
                (441
                )Long-term
      debtThird
      partiesIssuance
                
                
                
                
                
                
                50
                
                
                
                382
                
                
                
                134Repayments
                
                
                
                
                
                
                (37
                )
                
                
                (240
                )
                
                
                (299
                )Related
      partiesIssuance
                
                
                
                
                
                
                21
                
                
                
                12
                
                
                
                45Repayments
                
                
                
                
                
                
                (51
                )
                
                
                (44
                )
                
                
                (56
                )Treasury
      sharesAcquisition
      and CMT extra-judicial agreement
                
                
                4(a)(i)
                
                
                
                (182
                )
                
                
                -
                
                
                
                -Sale
                
                
                
                
                
                
                -
                
                
                
                -
                
                
                
                18Interest
      attributable to capital and dividends paid
                
                
                
                
                
                
                (188
                )
                
                
                (136
                )
                
                
                (111
                )Net
      cash provided by (used in) financing activities
                
                
                
                
                
                
                116
                
                
                
                (113
                )
                
                
                (107
                )


F-13


Votorantim
      Celulose e Papel S.A.Consolidated
      Statements of Cash FlowsYears
      Ended December 31In
      millions of U.S. dollars
                  (continued)





Note
                
                
                2008
                
                
                2007
                
                
                2006Effect
      of exchange rate changes on cash and cash equivalents
                
                
                
                
                
                (282
                )
                
                
                85
                
                
                
                (18
                )Net
      (decrease) increase in cash and cash equivalents
                
                
                
                
                
                (285
                )
                
                
                160
                
                
                
                144Cash
      and cash equivalents at beginning of year
                
                
                
                
                
                565
                
                
                
                405
                
                
                
                261Cash
      and cash equivalents at end of year
                
                
                
                
                
                280
                
                
                
                565
                
                
                
                405Supplemental
      cash flow informationCash
      paid during the year forIncome
      tax
                
                
                
                
                
                1
                
                
                
                -
                
                
                
                14Interest
                
                
                
                
                
                91
                
                
                
                110
                
                
                
                98Supplemental
      non cash flow informationIncome
      tax offset with tax credits
                
                
                
                
                
                33
                
                
                
                46
                
                
                
                12Issue
      of shares upon acquisition of an interest in an affiliate
                
                
                4(a)
                
                
                
                -
                
                
                
                -
                
                
                
                168Asset
      exchange
                
                
                4(b)Assets
      received (fair value)
                
                
                
                
                
                
                -
                
                
                
                1,498
                
                
                
                -Assets
      provided (book value)
                
                
                
                
                
                
                -
                
                
                
                509
                
                
                
                -




The
accompanying notes are an integral part of the consolidated financial
statements.




F-14


Votorantim
      Celulose e Papel S.A.Consolidated
      Statements of Changes inShareholders'
      EquityIn
      millions of U.S. dollars, except number of
  shares




2008
                    
                    
                    2007
                    
                    
                    2006Preferred
      sharesAt
      beginning of year
                    
                    
                    953
                    
                    
                    
                    953
                    
                    
                    
                    785Capital
      increase
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    168At
      end of year
                    
                    
                    953
                    
                    
                    
                    953
                    
                    
                    
                    953Common
      sharesAt
      beginning and end of year
                    
                    
                    1,053
                    
                    
                    
                    1,053
                    
                    
                    
                    1,053At
      end of year
                    
                    
                    1,053
                    
                    
                    
                    1,053
                    
                    
                    
                    1,053Additional
      paid-in-capitalAt
      beginning of year
                    
                    
                    35
                    
                    
                    
                    35
                    
                    
                    
                    29Gain
      on sale of treasury shares
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    6Put
      option exercised by CMT (Note 4(a)(i))
                    
                    
                    (44
                    )
                    
                    
                    -
                    
                    
                    
                    -Shares
      retired (Note 4(a)(i))
                    
                    
                    44
                    
                    
                    
                    -
                    
                    
                    
                    -At
      end of year
                    
                    
                    35
                    
                    
                    
                    35
                    
                    
                    
                    35Treasury
      sharesAt
      beginning of year
                    
                    
                    (1
                    )
                    
                    
                    (1
                    )
                    
                    
                    (13
                    )Preferred
      shares sold (2008 - 28,900; 2007 - 3,098;2006
      - 1,049,502)
                    
                    
                    1
                    
                    
                    
                    -
                    
                    
                    
                    12Put
      option exercised by CMT (Note 4(a)(i))
                    
                    
                    (50
                    )
                    
                    
                    -
                    
                    
                    
                    -Shares
      retired (Note 4(a)(i))
                    
                    
                    50
                    
                    
                    
                    -
                    
                    
                    
                    -At
      end of year
                    
                    
                    -
                    
                    
                    
                    (1
                    )
                    
                    
                    (1
                    )Appropriated
      retained earningsAt
      beginning of year
                    
                    
                    110
                    
                    
                    
                    86
                    
                    
                    
                    72Transferred
      from unappropriated retained earnings
                    
                    
                    -
                    
                    
                    
                    24
                    
                    
                    
                    14At
      end of year
                    
                    
                    110
                    
                    
                    
                    110
                    
                    
                    
                    86Unappropriated
      retained earningsAt
      beginning of year
                    
                    
                    1,711
                    
                    
                    
                    694
                    
                    
                    
                    487Net
      income (loss)
                    
                    
                    (405
                    )
                    
                    
                    1,221
                    
                    
                    
                    372Transferred
      to appropriated retained earnings
                    
                    
                    -
                    
                    
                    
                    (24
                    )
                    
                    
                    (14
                    )Shares
      retired (Note 4(a)(i))
                    
                    
                    (94
                    )
                    
                    
                    -
                    
                    
                    
                    -Reversal
      of dividends expired
                    
                    
                    3
                    
                    
                    
                    -
                    
                    
                    
                    -Dividends
      and interest attributed to capitalPreferred
                    
                    
                    -
                    
                    
                    
                    (91
                    )
                    
                    
                    (76
                    )Common
                    
                    
                    -
                    
                    
                    
                    (89
                    )
                    
                    
                    (75
                    )At
      end of year
                    
                    
                    1,215
                    
                    
                    
                    1,711
                    
                    
                    
                    694




F-15


Votorantim
      Celulose e Papel S.A.Consolidated
      Statements of Changes inShareholders'
      EquityIn
      millions of U.S. dollars, except number of shares
              (continued)





2008
                
                
                2007
                
                
                2006Cumulative
      translation adjustmentsAt
      beginning of year
                
                
                19
                
                
                
                (545
                )
                
                
                (687
                )Gain
      (loss) for the year
                
                
                (866
                )
                
                
                564
                
                
                
                142At
      end of year
                
                
                (847
                )
                
                
                19
                
                
                
                (545
                )Post-retirement
      benefitsAt
      beginning of year
                
                
                3
                
                
                
                -
                
                
                
                -Provision
      for the year
                
                
                3
                
                
                
                3
                
                
                
                -At
      end of year
                
                
                6
                
                
                
                3
                
                
                
                -Net
      unrealized gains on available for sale securitiesAt
      beginning of year
                
                
                -
                
                
                
                -
                
                
                
                11Realized
      (transferred to results of operations)
                
                
                -
                
                
                
                -
                
                
                
                (11
                )At
      end of year
                
                
                -
                
                
                
                -
                
                
                
                -Shareholders'
      equity at end of year
                
                
                2,525
                
                
                
                3,883
                
                
                
                2,275Comprehensive
      income (loss)Net
      income (loss)
                
                
                (405
                )
                
                
                1,221
                
                
                
                372Translation
      adjustments
                
                
                (866
                )
                
                
                564
                
                
                
                142Post-retirement
      benefits
                
                
                3
                
                
                
                3
                
                
                
                -Comprehensive
      income (loss)
                
                
                (1,268
                )
                
                
                1,788
                
                
                
                514


The
accompanying notes are an integral part of the consolidated financial
statements.


F-16


Votorantim
Celulose e Papel S.A.





Notes
to the Consolidated Financial Statements


at
December 31, 2008 and 2007, and for the


Three
Years Ended December 31, 2008


In
millions of U.S. dollars, unless otherwise stated





1
            Operations





Votorantim
Celulose e Papel S.A. and its subsidiaries (the "Company", "VCP" or "we") is a
limited liability company constituted in accordance with the laws of the
Federative Republic of Brazil and headquartered in São Paulo.





We
produce eucalyptus pulp which we use in our own paper manufacturing facilities
and sell the excess in the domestic and foreign markets. We also have forestry
operations which produce the pulp wood required for our production. Our business
has experienced, and is likely to continue to experience, cycles relating to
available industry capacity and general industry economic conditions. Our sales
(volumes and prices) are affected by such conditions which are beyond our
control. We are a member of the Votorantim Group, which has other interests in
Brazil and abroad, principally in cement, metallurgy, agribusiness, chemicals
and financial services.





In 2009,
the shareholders agreed to postpone the Company's planned project, and initial
environmental licensing process, to install a pulp plant in the State of Rio
Grande do Sul due to the current global economy crisis.





On March
30, 2009 the Company's new production unit located in the city of Três Lagoas,
Mato Grosso, became operational and is programmed to reach full capacity in four
years.





On
February 1, 2007 VCP and International Paper Investments (Holland) B.V.
("International Paper") exchanged industrial and forestry assets whereby VCP
provided a pulp and paper plant and timberlands and received land, forests and a
pulp mill under development (Note 4(b)). On June 25, 2007, VCP paid
US$ 34 to International Paper for closing adjustments (Note 4(b)). The
transaction was treated as a non cash exchange of assets for accounting and tax
purposes and generated no immediate tax consequences in the companies'
operating environment.





On
September 3, 2007, the Company contributed a portion of its Jacareí mill assets
in exchange for a 40% interest in Ahlstrom VCP Indústria de Papéis Especiais
S.A. ("Ahlstrom VCP"). Ahlstrom Corporation ("Ahlstrom"), contributed
US$ 124 in cash in exchange for its 60% interest. On August 29, 2008 the
remaining 40% equity interest was sold to Ahlstrom for US$ 42 (Note
4(d)).





Our
preferred shares are traded on the Brazilian Stock Exchange under the symbol
"VCPA4." Our American Depositary Shares ("ADS") are traded on the New York Stock
Exchange under the symbol "VCP". Each ADS represents one of our preferred
shares.


F-17


Votorantim
Celulose e Papel S.A.





Notes
to the Consolidated Financial Statements


at
December 31, 2008 and 2007, and for the


Three
Years Ended December 31, 2008


In
millions of U.S. dollars, unless otherwise stated





2
            Significant
      Accounting Policies





(a)
            Basis
      of presentation





We have
prepared our consolidated financial statements in accordance with accounting
principles generally accepted in the United States of America ("US GAAP"), which
differ in certain respects from the accounting principles applied by the Company
in its financial statements prepared in accordance with accounting practices
generally accepted in Brazil ("Brazilian GAAP") as filed with the Comissão de
Valores Mobiliários (Brazilian Securities Commission or "CVM"), or for other
statutory purposes in Brazil.





(b)
            Translation
      of financial statements





We
transact the majority of our business in Brazilian Reais (R$) and, therefore,
have adopted the Brazilian Real as the functional currency and have selected the
United States dollar as our reporting currency. Our affiliates located outside
Brazil have the U.S. dollar as their functional currency. The U.S. dollar
amounts for all years presented have been translated from Reais amounts in
accordance with the criteria set forth in Statement of Financial Accounting
Standards ("SFAS") 52, "Foreign Currency Translation" issued by the Financial
Accounting Standards Board ("FASB"). Assets and liabilities are translated from
the functional currency to the reporting currency using the official exchange
rates reported by the Brazilian Central Bank at the balance sheet date (December
31, 2008 - US$ 1.00 : R$ 2.3370 - December 31, 2007 - US$ 1.00 :
R$ 1.7713; December 31, 2006 - US$ 1.00 :
R$ 2.1380).





Revenue,
expenses and gains and losses are translated from the functional currency to the
reporting currency using the monthly weighted-average exchange rates for the
year. Capital accounts are recorded at historical exchange rates. Translation
gains and losses are recorded in the Cumulative Translation Adjustments account
- "CTA" in shareholders' equity.





(c)
            Principles
      of consolidation





Our
consolidated financial statements include the accounts of VCP and our directly
and indirectly controlled subsidiaries. The more significant subsidiaries are
the following: Normus Empreendimentos e Participações Ltda. ("Normus"), Newark
Financial Inc. ("Newark"), VCP North America Inc., VCP Trading N.V., VCP
Overseas Holding KFT and VCP-MS Celulose Sul Mato-Grossense Ltda. ("VCP-MS") all
of which are wholly owned. All significant intercompany accounts and
transactions, unrealized profits and intra-group profit distributions have been
eliminated on consolidation.


F-18


Votorantim
Celulose e Papel S.A.





Notes
to the Consolidated Financial Statements


at
December 31, 2008 and 2007, and for the


Three
Years Ended December 31, 2008


In
millions of U.S. dollars, unless otherwise stated





We own
28.0% of the common voting shares, which represent 12.35% of the total share
capital, of Aracruz Celulose S.A. ("Aracruz"), which we acquired in 2001. At
December 31, 2008, the quoted market value of our 127,506,457 Aracruz common
shares was US$ 217 compared to US$ 1,150 at December 31, 2007 against
a carrying value of the investment including goodwill of US$ 135 and the
deferred tax asset on impairment of Aracruz investment (Note 5(b)) of
US$ 46. The Aracruz common share quoted price at December 31, 2008 was
R$ 3.98 and R$ 5.60 on January 19, 2009, equivalent to US$ 1.70
and US$ 2.40.





On
January 20, 2009, VCP management announced that it had concluded negotiations
with members of the Lorentzen, Moreira Salles and Almeida Braga families (the
"Families") for VCP to acquire 127,506,457 common shares issued by Aracruz,
representing approximately 28.03% of the voting capital of Aracruz. The
transaction closed on January 21, 2009. The purchase price of R$ 2,710
million is to be paid in six tranches (Note 4(e)).





On
January 20, 2009, Aracruz management announced that it had reached an agreement
with 80% of the banks party to derivative transactions which had caused Aracruz
to record significant losses during 2008 (Note 22).





We own
50% of the voting and total shares of Asapir Produção Florestal e Comércio Ltda.
("Asapir") and of Voto - Votorantim Overseas Trading Operations IV Limited.
("VOTO IV"). From September 2007 to August 2008, we also owned 40% of the voting
and total shares of Ahlstrom VCP. These investees, which are incorporated in
Brazil, are accounted for using the equity method.





On March
31, 2005, via a 50% owned joint venture Ripasa Participações S.A. ("Ripar"),
Ripar acquired a 46.06% interest in the total capital and 77.59% interest in the
voting capital of Ripasa, a Brazilian pulp and paper producer (Note 4(a)). On
May 24, 2006, Ripasa's minority preferred non-voting shareholders exchanged
their interests in Ripasa for shares in the joint venture partners of Ripar
(Note 4(a)) which, among other things, resulted in VCP indirectly owning 50% of
Ripasa, via Ripar. Subsequently Ripar was dissolved and its assets were
distributed to VCP and Suzano, in equal parts (Note 4(a)). On July 4, 2006, the
joint venture partners paid US$ 71 to a group of Ripasa's minority
preferred non-voting shareholders. We accounted for our equity interest in
Ripasa using financial information with a one month lag. through August 31,
2008. Effective September 1, 2008 Ripasa was transformed into a cost and
production sharing unit, know as Consórcio Paulista de Papel e Celulose
("Conpacel or "Consortium"), wherein VCP has an undivided 50% interest in the
assets liabilities and operations of the Consortium (Note 4(a)(v)).
Subsequently, the one month lag was eliminated and we recorded equity in
earnings based on August 31, 2008. From September 1, 2008, we started to
recognize our 50% interest in the Consortium's operations and no longer applied
the  equity method. Upon derecognizing the investment in the affiliate
and recording our share in its net assets, investments in affiliates were
reduced by US$ 441 and fixed assets and other assets increased by
US$ 677. During the period it was treated as an equity investment, sales to
third parties by Ripasa were made through its joint venture partners; similarly,
the Consortium does not make sales directly to third parties. From the date of
the Consortium's formation through December 31, 2008, the Company recorded cost
of sales of US$ 2 on sales of products it received from the
Consortium.


F-19


Votorantim
Celulose e Papel S.A.





Notes
to the Consolidated Financial Statements


at
December 31, 2008 and 2007, and for the


Three
Years Ended December 31, 2008


In
millions of U.S. dollars, unless otherwise stated





(d)
            Cash
      and cash equivalents





We
consider all highly liquid investments with a maturity at acquisition of three
months or less to be cash equivalents. Cash and cash equivalents are stated at
cost plus accrued interest, and the balances approximate market
values.





(e)
            Available
      for sale securities





We
consider debt securities as available for sale securities when we intend to sell
the securities before its maturity. Available for sale securities are presented
based on fair market value and the unrealized gain or loss, net of taxes, is
recorded in shareholders' equity until the maturity or sale date, when the gain
or loss is recorded in the statement of operations. Interest income, including
amortization of any premium or discount arising at acquisition, is recognized as
Financial income, in the statement of operations.





(f)
            Inventories





Inventories,
including timber, are stated at average cost of acquisition or production which
is lower than market. We record allowances for slow moving or obsolete
inventories when deemed appropriate.





(g)
            Investment
      in affiliates, including goodwill
      and other goodwill








Investments
in affiliates in which we have the ability to exercise significant influence
over the operating and financial policies are accounted for under the equity
method. Our investment in affiliates is presented together with goodwill from
the acquisitions of such investments. Investments in affiliates, which includes
the corresponding goodwill on the acquisition of such affiliates is tested, at
least, annually for impairment. The Goodwill, other balance (Note 9) relates to
Ripasa, which began to operate as a consortium on September 1, 2008. This
goodwill is tested, at least, annually for impairment pursuant to SFAS 142,
"Goodwill and Other Intangible Assets".


F-20


Votorantim
Celulose e Papel S.A.





Notes
to the Consolidated Financial Statements


at
December 31, 2008 and 2007, and for the


Three
Years Ended December 31, 2008


In
millions of U.S. dollars, unless otherwise stated





(h)
            Property,
      plant and equipment





Property,
plant and equipment are stated at cost of acquisition or construction, including
interest during the period of construction. Expenditures which materially extend
the useful lives of the existing facilities and equipment are capitalized. We
depreciate property, plant and equipment using the straight-line method at rates
we consider to be compatible with the useful lives, principally ten years for
furniture and fixtures and five years for vehicles and capitalized software
costs. Machinery and equipment is, effective May 2006 and based upon an
appraisal, depreciated over a useful life of 18 years and 3 months instead of
the previously used 25 years. Depletion of forests is computed using the
units-of-production method, based on the volume of timber harvested in each
period and capitalized costs are expensed at the time of each harvest. Costs
related to the start-up of new facilities and re-structuring charges are
expensed as incurred.





Forest
development costs, primarily project implementation costs (preparation of soil,
planting, pest control and clearing etc.) and on-going development costs are
capitalized as incurred. As a result of improvements in forest management
techniques, including genetic improvement in trees, we harvest and replant our
forests approximately every seven years. Capitalized costs are expensed at the
time of each harvest.





We review
our property, plant and equipment for possible impairment whenever events or
changes in circumstances indicate that the carrying value of an asset or group
of assets may not be recoverable on the basis of undiscounted future cash flows.
The reviews are carried out at the lowest level of groups of assets to which we
are able to attribute identifiable future cash flows. Asset groups are forestry
projects or production facilities for paper and pulp. We adjust the net book
value of the underlying assets if the sum of the expected future cash flows is
less than book value. These reviews to date have not indicated the need to
recognize any impairment.





We
considered SFAS 143 "Accounting for Asset Retirement Obligations" in determining
whether to record an asset retirement obligation for property, plant and
equipment and have concluded that no such adjustment was required as we have no
retirement obligation for which there are existing legal obligations and that
obligation is unavoidable. The Company does not have any long-lived asset that
it expects to abandon, or dispose of that would require an asset retirement
obligation provision.





(i)
            Income
      taxes





Brazilian
taxes on income consist of federal income and social contribution taxes, the
latter being a federal tax based on adjusted taxable income determined under
Brazilian tax regulations. There are no taxes levied by state or local
authorities on income in Brazil.


F-21


Votorantim
Celulose e Papel S.A.





Notes
to the Consolidated Financial Statements


at
December 31, 2008 and 2007, and for the


Three
Years Ended December 31, 2008


In
millions of U.S. dollars, unless otherwise stated


For the
purposes of these financial statements, we have applied SFAS 109 "Accounting for
Income Taxes", for all periods presented. The effect of adjustments made to
reflect the requirements of US GAAP as well as the differences between the tax
bases of non-monetary assets have been recognized as temporary differences for
the purpose of recording deferred income taxes.





Effective
January 1, 2007, the Company adopted the provisions of FASB Interpretation
no. 48 ("FIN 48"), "Accounting for Uncertainty in Income Taxes". The
adoption of FIN 48 had no effect on the financial information or disclosures
(Note 20).





(j)
            Revenues
      and expenses





We
recognize revenue and associated costs of sales at the time our products are
delivered to our customers which are when title and associated risks pass to our
customers. Revenue was recorded net of sales returns of US$ 9 in 2008
(US$ 8 in 2007 and US$ 10 in 2006). Our customers that purchase on
credit agree to payment terms that effectively include finance charges. The
finance charge on each sale is the difference between the amount the customer
agrees to pay at the due date and the cash sale price. The finance charges are
recognized over the payment period and are included in financial income.
Recognition of revenue for our two segments and for domestic and export sales is
based on the following principles:





(i)
            Paper
      - domestic market





Sales are
either on cash or credit terms (normally 30, 60, 90 days) or through our vendor
program. Credit sales receivables are discounted to present values as our price
list is dependent on the length of credit granted. Revenue is recognized when
the customer takes delivery of the product either upon delivery to the
customer's carrier (FOB) or premises (CIF). Sales through our vendor program are
made to certain of our pre-qualifying domestic customers (approximately 8% of
accounts receivable), and represented approximately 31% of our domestic sales in
2008 (2007 - 23% and 2006 - 22%). Under the vendor program, the customer
agrees to pay the bank and the bank in turn pays us on behalf of the customer
for the purchase price of the product. We guarantee full repayment of the loan
for which the maximum allowable term for payment is generally 180 days,
though in the case of a few customers, we extend the term to 240 days. The
Company charges the same price on vendor program sales as it does on
cash-on-delivery sales. There is no embedded charge for the
guarantee.


F-22


Votorantim
Celulose e Papel S.A.





Notes
to the Consolidated Financial Statements


at
December 31, 2008 and 2007, and for the


Three
Years Ended December 31, 2008


In
millions of U.S. dollars, unless otherwise stated





(ii)
            Paper
      - export market





Export
orders are normally fulfilled from inventories maintained at our own or third
party warehouses located close to strategic markets. These sales are recognized
when products are delivered to the carrier and risks have passed to the
customer. CIF and FOB terms determine timing of revenue
recognition.





(iii)
            Pulp
      - domestic market





Sales are
primarily under credit terms which do not exceed 30 days. Revenue recognition is
consistent with that applied to paper sales.





(iv)
            Pulp
      - export market





All
export orders are normally fulfilled from inventories maintained at our own or
third party warehouses located close to strategic markets. These sales are
recognized when products are delivered to the carrier and risks have passed to
the customer. Shipping and handling costs, when billed to customers in a sales
transaction, are included in revenue and the related costs are charged to
selling and marketing expenses. These costs totaled US$ 92, US$ 89 and
US$ 79 in 2008, 2007 and 2006, respectively.





Annually,
the Company considers the provisions of FIN 45 and EITF 00-21 "Revenue
Arrangements with Multiple Deliverables" in accounting for the vendor program.
Guarantee income from these arrangements are not significant and although EITF
00-21 was considered in the determination of how to account for a possible
multiple deliverables, these were considered not to be material. The Company's
historical analysis indicates that the fair value of the guarantees is
insignificant as the Company has not incurred significant losses in the past.
The Company recognizes revenue for each of the elements of the sale of the
products when the customer takes delivery.





(k)
            Comprehensive
      income





We report
comprehensive income in accordance with SFAS 130, "Reporting Comprehensive
Income", and have elected to present this in the Statement of changes in
shareholders' equity. In our case, comprehensive income comprises the results of
our operations, the translation adjustments included in the CTA component of
shareholders' equity, the changes in the fair value of available for sale
securities and the post-retirement benefits.


F-23


Votorantim
Celulose e Papel S.A.





Notes
to the Consolidated Financial Statements


at
December 31, 2008 and 2007, and for the


Three
Years Ended December 31, 2008


In
millions of U.S. dollars, unless otherwise stated





(l)
            Earnings
      (loss) per share





In
conformity with SFAS 128, "Earnings per Share", we have presented earnings per
share for each class of shares, taking into account that the preferred shares
are entitled to a dividend 10% greater than that paid to the common shares. The
computation has been made as if the net income (loss) for each period will be
fully distributed. As earnings may be capitalized or otherwise appropriated,
there is no assurance that either common or preferred shareholders will receive
dividends. We may also pay dividends through interest attributed to capital in
accordance with our by-laws.





Consistent
with guidance provided by Emerging Issues Task Force (EITF) No. 03-06
"Participating Securities and the Two-Class Method under SFAS No. 128, 'Earnings
per Share'", an entity would allocate losses to the preferred shares in periods
of net loss if, based on the contractual terms of the participating security,
the preferred shares had not only the right to participate in the earnings of
the issuer, but also a contractual obligation to share in the losses. The
Company's preferred shares do not have a contractual obligation to share in the
losses. Accordingly, the loss per share for the year ended December 31, 2008 was
computed only for common shares.





(m)
            Use
      of estimates





The
preparation of financial statements requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities and the reported amounts of
revenues and expenses. Estimates are used for, but not limited to: accounting
for allowance for doubtful accounts, inventory valuation allowances, selection
of depreciable lives of assets, asset exchange, asset impairments, tax valuation
allowances, employee post-retirement benefits, uncertain tax positions,
contingencies and other similar evaluations. Actual results could differ from
those estimates.





(n)
            Employee
      benefits and other related
      matters








In March
2000 we launched a defined contribution plan which provides pension and
post-retirement benefits (Note 21). We also contribute to the Government
pension, welfare and redundancy plans on behalf of our employees and these
contributions are expensed as incurred. Most of our employees are members of
unions, with which we enter into collective-bargaining arrangements annually.
The liability for future compensation for employee vacations is accrued as
earned.


F-24




Votorantim
Celulose e Papel S.A.





Notes
to the Consolidated Financial Statements


at
December 31, 2008 and 2007, and for the


Three
Years Ended December 31, 2008


In
millions of U.S. dollars, unless otherwise stated







We adopt
SFAS 106, "Employers' Accounting for Post-retirement Benefits Other than
Pensions" and SFAS 158, "Employers' Accounting for Defined Benefit Pension and
Other Postretirement Plans an amendment of FASB Statements No. 87, 88, 106, and
132(R)", which require a provision for the costs of post-retirement benefits
expected to be paid to current, former or inactive employees upon retirement.
Expenses relating to benefits we provide to our current employees are expensed
as incurred whereas those relating to retired employees (current as well as
expected in the future) and their dependents are accounted for in accordance
with SFAS 106.





(o)
            Environmental
      matters





Our
production facilities and forestry operations are subject to a number of
environmental risks which we seek to mitigate by strict operating procedures and
investments in pollution control equipment and systems. Ongoing environmental
compliance expenditures are expensed as incurred and new equipment and systems
are capitalized. We believe that no provision for losses related to
environmental matters is currently required based on prevailing laws and
regulations in Brazil.





(p)
            Restructuring
      expenses





A
corporate restructuring was carried out during the fourth quarter of 2008.
Expenses relating primarily to employee terminations expenses totaling
US$ 4 were recorded as General and administrative expenses.





3
            Recently
      Issued Accounting Pronouncements





The FASB
recently issued a number of SFAS and interpretations.





(a)
            Accounting
      pronouncements adopted





In
September 2006, the FASB issued SFAS 157 - "Fair value measurements", which
defines fair value, establishes a framework for measuring fair value, and
expands disclosures about fair value measurements. This Statement applies under
other accounting pronouncements that require or permit fair value measurements,
the FASB having previously concluded in those accounting pronouncements that
fair value is the relevant measurement attribute. Accordingly, this Statement
does not require any new fair value measurements.




F-25




Votorantim
Celulose e Papel S.A.
 
 Notes
to the Consolidated Financial Statements
 at
December 31, 2008 and 2007, and for the
 Three
Years Ended December 31, 2008
 In
millions of U.S. dollars, unless otherwise stated




The
adoption of SFAS 157 did not generate a material impact on the Company's
financial position, except for certain required disclosures about fair value
measurements (Note 14).





In
February 2007, the FASB issued SFAS 159, "The Fair Value Option for Financial
Assets and Financial Liabilities - Including an amendment of SFAS No. 115". SFAS
159 permits companies to choose to measure many financial instruments and
certain other items at fair value in order to mitigate volatility in reported
earnings caused by measuring related assets and liabilities differently without
having to apply complex hedge accounting provisions. The adoption of SFAS 159
did not generate a material impact on the Company's financial position, as it
did not elect to adopt the fair value option for any of its financial assets or
liabilities at January 1, 2008.





On
September 12, 2008, the FASB issued an FASB Staff Position (FSP) that introduces
new disclosure requirements for credit derivatives and guarantees and clarifies
the effective date of SFAS 161, "Disclosures about Derivative Instruments and
Hedging Activities". The new disclosure requirements are designed to result in
similar disclosures for financial instruments with similar risks and rewards
relating to credit risk, regardless of their legal form. For some companies, the
additional disclosures may be significant, particularly given the increased use
in recent years of credit default swaps to manage and gain exposure to
particular credit risks. This FSP is effective for fiscal years, and interim
periods within those fiscal years, ending after December 15, 2008. The adoption
of this FSP did not generate a material impact on the Company's financial
disclosures.




(b)
                Accounting
      pronouncements


not
yet adopted





In
December 2007, the FASB issued SFAS 141 (revised 2007), "Business Combination",
which replaces SFAS 141, (issued 2001) Business Combinations. This Statement
retains the fundamental requirements in SFAS 141 that the acquisition method of
accounting (which SFAS 141 called the purchase method) be used for all business
combinations and for an acquirer to be identified for each business combination.
This Statement defines the acquirer as the entity that obtains control of one or
more businesses in the business combination and establishes the acquisition date
as the date that the acquirer achieves control. SFAS 141 did not define the
acquirer, although it included guidance on identifying the acquirer, as does
this Statement. This Statement's scope is broader than that of SFAS 141, which
applied only to business combinations in which control was obtained by
transferring consideration.




F-26




Votorantim
Celulose e Papel S.A.
 
 Notes
to the Consolidated Financial Statements
 at
December 31, 2008 and 2007, and for the
 Three
Years Ended December 31, 2008
 In
millions of U.S. dollars, unless otherwise stated


The
result of applying SFAS 141's guidance on recognizing and measuring assets and
liabilities in a step acquisition was to measure them at a blend of historical
costs and fair values, a practice that provided less relevant,
representationally faithful, and comparable information than will result from
applying this Statement. In addition, this Statement's requirement to measure
the noncontrolling interest in the acquiree at fair value will result in
recognizing the goodwill attributable to the noncontrolling interest in addition
to that attributable to the acquirer, which improves the completeness of the
resulting information and makes it more comparable across entities. By applying
the same method of accounting, the acquisition method, to all transactions and
other events in which one entity obtains control over one or more other
businesses, this Statement improves the comparability of the information about
business combinations provided in financial reports. This Statement applies
prospectively to business combinations for which the acquisition date is on or
after the beginning of the first annual reporting period beginning on or after
December 15, 2008. An entity may not apply it before that date. The effective
date of this Statement is the same as that of the related SFAS 160,
"Noncontrolling Interests in Consolidated Financial Statements". The Company is
currently assessing the impact of this statement on its consolidated financial
statements and will apply such pronouncement on a prospective basis for each new
business combination.





In
December 2007, the FASB issued SFAS 160, "Noncontrolling Interests in
Consolidated Financial Statements - an amendment of ARB No. 51", which clarifies
that a noncontrolling interest in a subsidiary is an ownership interest in the
consolidated entity that should be reported as equity in the consolidated
financial statements. This Statement is effective for fiscal years, and interim
periods within those fiscal years, beginning on or after December 15, 2008 (that
is, January 1, 2009, for entities with calendar year-ends). Earlier adoption is
prohibited. The effective date of this Statement is the same as that of the
related SFAS 141(R). This Statement will be applied prospectively as of the
beginning of the fiscal year in which this Statement is initially applied,
except for the presentation and disclosure requirements. The presentation and
disclosure requirements will be applied retrospectively for all periods
presented.





In March
2008, the FASB issued FASB SFAS161, "Disclosures about Derivative Instruments
and Hedging Activities". The new standard is intended to improve financial
reporting about derivative instruments and hedging activities by requiring
enhanced disclosures to enable investors to better understand their effects on
an entity's financial position, financial performance, and cash flows. It is
effective for financial statements issued for fiscal years and interim periods
beginning after November 15, 2008, with early application encouraged. The
Company is currently assessing the impact of this statement on its consolidated
financial statements but believes that such pronouncement will not generate a
material impact on the Company's consolidated financial statement.




F-27


Votorantim
Celulose e Papel S.A.
 
 Notes
to the Consolidated Financial Statements
 at
December 31, 2008 and 2007, and for the
 Three
Years Ended December 31, 2008
 In
millions of U.S. dollars, unless otherwise stated




In May
2008, the FASB issued SFAS 162, "The Hierarchy of Generally Accepted Accounting
Principles", which identifies the sources of accounting principles and the
framework for selecting the principles used in the preparation of financial
statements of nongovernmental entities that are presented in conformity with US
GAAP. This Statement will be effective 60 days following the SEC's approval of
the Public Company Accounting Oversight Board - PCAOB amendments to AU Section
411, "The Meaning of Present Fairly in Conformity with Generally Accepted
Accounting Principles". The Company is currently assessing the impact of this
statement on its consolidated financial statements but believes that such
pronouncement will not generate a material impact on the Company's consolidated
financial statement.




4
            Acquisition
      or Sale of Affiliates





(a)
            Ripasa





(i)
            Acquisition





On
November 10, 2004 we signed an agreement to acquire an interest in Ripasa with
its principal shareholder group through a venture we formed with Suzano Bahia
Sul Papel e Celulose S.A. ("Suzano"). On March 31, 2005 VCP and Suzano each
contributed US$ 275 as capital and formed Ripasa Participações S.A.
("Ripar") in exchange for equal shareholder rights and responsibilities in that
entity, including direct and indirect control in the capital of Ripasa. Ripar
then acquired 77.59% of the common shares and additional preferred shares that,
in the aggregate, totaled 46.06% of the total capital stock of Ripasa for the
Reais equivalent, at that date, of US$ 550.





Pursuant
to the November 10, 2004 agreement, VCP and Suzano also had a call option to
acquire from the former principal shareholder of Ripasa (formerly ZDZ
Participações e Administração S.A., now CMT Empreendimentos e Administração S.A.
or "CMT") additional common shares representing 22.41% of the voting common
shares and additional preferred shares that, in the aggregate, totaled 13.45% of
the total capital of Ripasa.





As a
result of the completion of a corporate restructuring (item (ii) below), the
aforementioned put and call option agreements were modified to substitute the
Ripasa shares for shares of VCP and Suzano since the former Ripasa minority
shareholders had exchanged their shares of Ripasa for shares of VCP and Suzano.
Accordingly, CMT had a put option that would require VCP to acquire 3,124,139 of
its own non-voting preferred shares during a five-year period
ending March 31, 2010 and VCP has a call option to acquire these same shares
from CMT during a twelve-month period beginning March 31, 2010 under the same
terms, values and preceding conditions as the original call option agreement for
the Reais equivalent of US$ 80 plus Brazilian market rate interest
beginning from March 31, 2005. The corresponding put option held by the former
principal shareholding group has the same term, values and preceding conditions
and expiration date as in the original put agreement, only the underlying
security had been substituted.




F-28


Votorantim
Celulose e Papel S.A.
 
 Notes
to the Consolidated Financial Statements
 at
December 31, 2008 and 2007, and for the
 Three
Years Ended December 31, 2008
 In
millions of U.S. dollars, unless otherwise stated




On August
10, 2007, CADE, the Brazilian federal government anti-trust authority, approved
the Ripasa acquisition.





On March
3, 2008, CMT announced its intention to exercise its put option related to
2,784,091 preferred shares of VCP. Pursuant to the exercise of such option by
CMT, VCP and Suzano had to acquire shares of their own capital, to be kept in
treasury.





On May
26, 2008, VCP and Suzano presented a Reconsideration Request to the CVM whereby
the companies proposed to acquire the shares at market price. To avoid possible
challenge due to breach of contract, the parties also informed the CVM about a
transaction with CMT regarding the portion of the amount originally agreed upon
under the Option of Purchase and Sale Agreement that exceeded the market price
of the shares which would be acquired under the contractual terms.





On June
5, 2008, the CVM Board authorized the acquisition of the shares contemplated in
the Option of Purchase and Sale Agreement at their then current market value
without specific reference to the payment of the amount under the transaction.
On June 10, 2008, VCP and Suzano each acquired its own shares from CMT at the
then current market value of the shares for US$ 94, which was recorded
directly in shareholders' equity, under Treasury shares and as Additional
paid-in capital, and executed an extra-judicial agreement with CMT, for the
payment of US$ 88, recorded under Financial expenses, in consideration for
CMT's waiver for any rights against VCP in regards to the acquisition of the
above mentioned shares and the Option Agreement. The payment of the above
mentioned amounts concluded the transfer of the aforementioned shares and the
transaction, with mutual acquittal of the parties in regards to the exercise of
the put option in regards to such shares.





On July
14, 2008 VCP retired the 2,784,091 preferred shares which were held in treasury
thereby reducing the corresponding amounts in Additional paid-in capital and
Treasury shares by charging Retained earnings.




F-29




Votorantim
Celulose e Papel S.A.
 
 Notes
to the Consolidated Financial Statements
 at
December 31, 2008 and 2007, and for the
 Three
Years Ended December 31, 2008
 In
millions of U.S. dollars, unless otherwise stated




There are
340,048 outstanding preferred shares that remain under the Option of Purchase
and Sale Agreement, encumbered and unavailable for the exercise of the option
thereunder. At December 31, 2008, their contractually stipulated acquisition
cost would be the Reais equivalent of US$ 17. However, until such time as
the restrictions on sale of these shares by CMT are lifted (item (iii) below),
the Company believes the fair value of its obligation to meet the put option is
insignificant. Accordingly, no liability has been recorded in VCP's financial
statements with respect to the option related to these shares.




(ii)
            Restructuring





On July
20, 2005 the Boards of Directors of VCP, Suzano and Ripasa approved the Protocol
and Justification of Share Merger and Distribution ("Protocol") document that
would allow CMT, representing 13.45% of Ripasa's total capital, and the
remaining minority preferred shareholders of Ripasa, representing 40.49% of its
total capital, to exchange their common and preferred shares for shares of VCP
and Suzano, in equal parts. The restructuring plan involved two phases: (i) the
merger of Ripasa into Ripar and (ii) the distribution of assets to VCP and
Suzano, in equal parts. Upon completion of the proposed restructuring, Ripasa's
minority shareholders would become shareholders in VCP and Suzano, in accordance
with the Protocol. However, certain minority shareholders subsequently filed a
lawsuit seeking to suspend the restructuring plan.





On April
20, 2006, VCP and Suzano entered into a judicial agreement to pay the alleged
damages, settle the judicial action and implement the restructuring. The
agreement required the payment of an additional amount for each of the preferred
shares held by all minority shareholders.





On May
24, 2006, the shareholders of VCP, Suzano, Ripasa and Ripar approved the
restructuring that allowed all of Ripasa's minority common and preferred
shareholders to exchange their interests in Ripasa for VCP and Suzano shares
pursuant to a new Protocol executed on May 5, 2006. VCP issued 12,532,009
preferred shares, with no par value, to all of the former Ripasa shareholders
for the purchase of its portion of the remaining outstanding Ripasa common and
preferred shares. As a result, VCP's preferred share capital was increased by
US$ 168 to US$ 953, determined based on the share's quoted market
price at that date. Suzano, simultaneously, issued its own preferred shares to
all of the former Ripasa shareholders in a similar aggregate value.




F-30


Votorantim
Celulose e Papel S.A.
 
 Notes
to the Consolidated Financial Statements
 at
December 31, 2008 and 2007, and for the
 Three
Years Ended December 31, 2008
 In
millions of U.S. dollars, unless otherwise stated




On July
4, 2006, pursuant to the aforementioned April 20 judicial agreement, VCP and
Suzano disbursed to all the former Ripasa shareholders the Reais equivalent, at
the date, of US$ 71 (split equally between VCP and Suzano). Accordingly,
VCP and Suzano jointly became the sole owners of all Ripasa shares via their
joint ownership in Ripar.





On April
30, 2006 Ripar was liquidated by dissolution and its only assets, the shares in
Ripasa, were distributed equally to both VCP and Suzano. As a result, VCP became
the direct holder of its 50% interest in Ripasa.





(iii)
            Valuation
      of the put/call options





The
remaining VCP preferred shares now owned by CMT are still subject to
encumbrances under a legal order filed by a government agency as collateral to a
legal proceeding to which CMT is a party. The options are accounted for as
derivative instruments pursuant to SFAS 133 "Accounting for Derivative
Instruments and Hedging Transactions" which requires, among other things, that
these instruments be initially recognized at their fair values as of May 2006
and subsequent fair value changes be recognized in the statement of operations
for the period.





In the
event the restrictions on sale are lifted and the option becomes exercisable,
VCP will record the fair value of its shares acquired directly in Additional
paid-in capital in shareholders' equity and the difference in earnings of the
period in which the restrictions are lifted.





(iv)
            Disposition
      of non-core assets





VCP and
Suzano jointly determined that Ripasa's core business is the Americana pulp and
paper mill and all other non-core assets should be disposed. During 2007, the
following non-core asset dispositions occurred: (i) Embu - on February 15, 2007
VCP signed an agreement to sell VCP's interest in the Ripasa unit located in
Embu, state of Sao Paulo, to Suzano. This transaction was concluded on March 30,
2007 at which time Suzano disbursed US$ 20 to VCP. This operation generated
a loss of US$ 12 including the write-off of goodwill; and (ii) Cubatão
and Limeira - on August 1, 2007 VCP and Suzano signed an agreement to sell these
units, located in Cubatão and Limeira, state of São Paulo, to a third party. The
transaction was concluded on November 1, 2007 at which time VCP and Suzano each
received US$ 32. This operation generated a loss of US$ 4 including
the write-off of goodwill.





During
August 2008, the remaining unsold non-sale assets, which have a book value of
US$ 29 at September 30, 2008, were segregated by Ripasa and contributed as
the initial capital of Asapir, a newly incorporated Brazilian
company.




F-31




Votorantim
Celulose e Papel S.A.
 
 Notes
to the Consolidated Financial Statements
 at
December 31, 2008 and 2007, and for the
 Three
Years Ended December 31, 2008
 In
millions of U.S. dollars, unless otherwise stated




(v)
            The
      Ripasa Consortium - Conpacel





VCP
participates in a cost and production sharing venture with Suzano which operates
a pulp and paper plant in Americana, São Paulo. Under the various agreements,
the members have undivided interests in assets, liabilities and operations of
the venture.





On May
12, 2008, Brazilian tax authorities approved the transformation of Ripasa into a
production unit operating as a Consortium (an unincorporated joint-venture in
which each party has an undivided interest) of VCP and Suzano. Conpacel
began its operations on September 1, 2008. VCP and Suzano each own 50% of the
net assets of Conpacel. VCP is entitled to 50% of the Consortium's production
beginning September 1, 2008.





Brazilian
law specifies that such consortium contracts do not constitute legal entities.
Each of the legal entities party to a consortium contract is responsible only
for its contractually defined obligations. The bankruptcy of one of the legal
entities does not impact the legal obligations and rights of the other parties,
the debts and assets of the bankrupt entity relate only to that entity according
to contractual conditions.





The
Consortium contract defines the obligations and responsibilities of each party;
the rights to revenues, management of operations and accounting. The Consortium
term is for 30 years unless wound-up through deliberation of the parties,
bankruptcy or settlement.





Each
party has 50% of the specific assets, liabilities and costs, and each legal
entity is obligated to make payments based on the Consortium agreement. The
payments made by VCP and Suzano, as well as the budget for capital expenditures,
are defined by the independent General Manager. VCP and Suzano agree to make
payments in accordance with the decisions of the independent General
Manager.





As no
separate legal entity exists, there is no consolidation of a separate entity. As
per EITF 00-01 "Applicability of the Pro-Rata Method of Consolidation to
Investments in Certain Partnerships and Other Unincorporated Joint Ventures",
VCP accounts for its rights and obligations according to its undivided interest
as defined in the Consortium agreement, and records them as part of VCP's
operations according to their nature.





The
carrying value of 50% of Conpacel's net assets at August 31, 2008 which
represents the undivided interest of VCP is demonstrated below:




F-32




Votorantim
Celulose e Papel S.A.
 
 Notes
to the Consolidated Financial Statements
 at
December 31, 2008 and 2007, and for the
 Three
Years Ended December 31, 2008
 In
millions of U.S. dollars, unless otherwise stated




AssetsCurrent assets
                  
                  
                  43Non-current
    assetsProperty, plant and equipment
      at cost
                  
                  
                  596Other non-current
      assets
                  
                  
                  38LiabilitiesCurrent
      liabilities
                  
                  
                  (59
                  )Non-current
      liabilities
                  
                  
                  (177
                  )Net
      assets
                  
                  
                  441





(b)
            Asset
      exchange





On
September 19, 2006, VCP entered into an Exchange Agreement with International
Paper to exchange industrial and forestry assets between the two entities. On
February 1, 2007 VCP and International Paper consummated a non-cash agreement to
exchange industrial and forestry assets between the two entities. As a
consequence, VCP transferred to International Paper its pulp and paper plant
located in Luiz Antonio (state of São Paulo) and the plant's related
timberlands. International Paper in turn, transferred to VCP assets used for the
production of eucalyptus pulp, including: land, forests, and all rights related
to an eucalyptus pulp mill development and construction project with a fair
value of US$ 1,150, located in Três Lagoas (state of Mato Grosso do Sul).
The assets received by VCP are held by its wholly-owned subsidiary
VCP-MS.





As a
result of this operation VCP recorded an initial gain on exchange of assets of
US$ 989 in the statement of operations and a corresponding deferred income
tax liability of US$ 344. The deferred tax liability was recorded in
recognition that this non cash gain is a temporary difference under US GAAP.
Pursuant to APB 29 "Accounting for Nonmonetary Transactions", the fair value of
the assets surrendered was used when measuring the cost of an exchange
transaction in order to determine the gain or loss to be recognized. The assets
surrendered comprised an operating pulp and paper plant for which an appraisal
was not readily available. The Company believes the fair value of the net assets
acquired was more clearly evident than the fair value of the asset surrendered
as the fair value of the assets received were substantially represented by cash
based heavily on the liquid assets received (escrow deposit).





On June
20, 2007, pursuant to the Exchange Agreement, the parties finalized adjustments
that resulted in a cash disbursement by VCP to International Paper of
US$ 34, reducing the total gain to US$ 955 and deferred income tax
expense to US$ 327.




F-33




Votorantim
Celulose e Papel S.A.
 
 Notes
to the Consolidated Financial Statements
 at
December 31, 2008 and 2007, and for the
 Three
Years Ended December 31, 2008
 In
millions of U.S. dollars, unless otherwise stated




The net
assets provided to International Paper, at book value, and the net assets
received from International Paper, at fair value, are summarized
below:





Net assets
                  
                  
                  Net assetsprovided
                  
                  
                  received(Book value )
                  
                  
                  (Fair value
      )Current
      assets
                  
                  
                  118
                  
                  
                  
                  62Non-current
      assets
                  
                  
                  7
                  
                  
                  
                  6Property,
      plant and equipment, net
                  
                  
                  406
                  
                  
                  
                  1,527Total
      assets
                  
                  
                  531
                  
                  
                  
                  1,595Liabilities
                  
                  
                  (22
                  )
                  
                  
                  (97
                  )Total
      shareholders' equity
                  
                  
                  509
                  
                  
                  
                  1,498Gain
      on exchange of assets (pre-tax)
                  
                  
                  
                  
                  
                  
                  989





International
Paper's subsidiary owned land, 15-year mature timberlands and environmental
permits (issued by the Brazilian authorities based on an existing construction
project), that allow the construction of a pulp mill in Três Lagoas.
International Paper also transferred to its subsidiary (now denominated VCP-MS),
cash of US$ 1,200 which was placed, pursuant to VCP-MS instructions, in
trust to restrict its use only to the construction of the turnkey pulp mill.
Pursuant an amendment to the agreement all financial income accruing from the
funds in trust will be applied, exclusively, to the project under construction.
Financial income accrued and recorded by VCP was US$ 32 and US$ 124
for the years ended December 31, 2008 and 2007, respectively.





A third
party, Pöyry Engenharia ("Pöyry"), was contracted in 2006 by International
Paper's subsidiary (now VCP-MS) as a project manager for the pulp mill
construction. Pöyry will manage subcontractors and acquire the equipment and
other supplies in order to place the plant in operation. The Três Lagoas project
became operational on March 30, 2009. Pöyry will earn a management fee and will
bear the construction risks and will be entitled to any surpluses or be
responsible for shortfalls.





During
2007 VCP-MS modified the technical specifications of the original project for
the construction of the pulp plant. The modifications resulted in an increase in
the plant's initial annual production capacity from 1,000,000 to 1,300,000 tons
of bleached eucalyptus pulp. As a result of these modifications, VCP-MS and its
factory supplier agreed to price adjustments to the original contracted
price.




F-34




Votorantim
Celulose e Papel S.A.
 Notes
to the Consolidated Financial Statements
 at
December 31, 2008 and 2007, and for the
 Three
Years Ended December 31, 2008
 In
millions of U.S. dollars, unless otherwise stated




Although
this transaction is still subject to the approval by the Brazilian antitrust
authorities, the review process is considered by management to be merely
perfunctory by nature and authorizations are expected to be obtained without
significant restrictions.




(c)
            Mogi
      das Cruzes





On March
6, 2007, VCP signed an agreement to sell its Mogi das Cruzes production unit for
US$ 27. In 2006 the Mogi das Cruzes unit generated net revenues of
US$ 30, representing approximately 2% of VCP's total net revenues. On April
2, 2007, the Company transferred to a new entity, Mogi das Cruzes Indústria de
Papel Ltda., the net assets of its paper mill and the sale was concluded at May
1, 2007, generating a gain of US$ 9 recorded as Other operating (income)
expenses, net.





(d)
            Ahlstrom
      VCP





The
Ahlstrom VCP venture, produced specialty papers in the Jacareí mill primarily
for labeling applications and flexible packaging markets.





Ahlstrom
Louveira Ltda., a Brazilian subsidiary of Ahlstrom, held an initial 60% interest
and VCP held the remaining 40% interest, during the period from September 3,
2007 through August 29, 2008. The initial 2007 transaction involved an
investment by Ahlstrom of US$ 119 and generated a non-taxable capital gain
of US$ 48 and a gain on sale of investment of US$ 15, net of tax of
US$ 8, recorded in Non-operating income. The remaining 40% interest of VCP
was sold to Ahlstrom in August, 29, 2008 for US$ 42 in a single
transaction.





(e)
            Acquisition
      of shares of Aracruz





On
January 20, 2009, the Company announced the conclusion of negotiations with
members of the Families to acquire 127,506,457 common shares issued by Aracruz,
representing approximately 28% of the voting capital of Aracruz. The purchase
price was R$ 2,710 million (equivalent to US$ 1,160, at the December
31, 2008 exchange rate) and it is to be paid in six fixed semi-annual
installments, the first of which totaling R$ 500 million (equivalent to
US$ 214, at the December 31, 2008 exchange rate) was paid on January 21,
2009.





The
remaining installments will be paid as follows:





.
            July
      5, 2009 - R$ 500 million, of which R$ 400 million will be paid
      in cash, and the balance of R$ 100 million to be credited in favor of
      the Families for private subscription of VCP preferred shares at a price
      of R$ 19.00 per share.




F-35




Votorantim
Celulose e Papel S.A.
 
 Notes
to the Consolidated Financial Statements
 at
December 31, 2008 and 2007, and for the
 Three
Years Ended December 31, 2008
 In
millions of U.S. dollars, unless otherwise stated




.
            January
      5, 2010 - R$ 500 million to be paid in
  cash.





.
            July
      5, 2010 - R$ 500 million to be paid in
  cash.





.
            January
      5, 2011 - R$ 410 million to be paid in
  cash.





.
            July
      5, 2011 - R$ 300 million to be paid in
  cash.





The
shareholders' agreement executed by the Families and Messrs. Joseph Yacoub Safra
and Moise Yacoub Safra ("Safra") in relation to their investments in Aracruz
provided that: neither party may take any action or omit to take any action
which results in the extension or renewal of the existing Shareholders'
Agreement, and after May 11, 2008: (a) the sale by either party shall be subject
to rights of first refusal by the other party and to tag-along rights, and, (b)
in the event of a sale by either of them to a third party, the purchaser must
adhere to the provisions of the agreement (same price and
conditions).





In March
2009 Safra exercised its tag along right and, consequently, VCP owns, at the
closing date of April 29, 2009, 84% of the voting capital of Aracruz. The
nominal value of the total transaction is R$ 5,420 million (equivalent to
US$ 2,319, at the December 31, 2008 exchange rate) and its present value at
December 31, 2008 is approximately R$ 4,700 million (equivalent to
US$ 2,011, at the December 31, 2008 exchange rate) (Note 22).





Pursuant
to the conditions of the final contract signed between Aracruz and its creditor
banks, the obligations relating to the settlement of its derivatives losses were
renegotiated to be paid over nine years beginning in 2009 in semi-annual
installments and as from 2010 in quarterly installments (Note
22(b)).





5
            Income
      Taxes





Income
taxes in Brazil include federal income tax and social contribution. The
composite tax rate on adjusted taxable income is 34%. Taxes on income are based
on adjusted taxable income determined under Brazilian tax regulations. VCP is
also subject to tax in certain foreign jurisdictions.





(a)
            Income
      tax analysis





The
statutory rate applied to income before taxes is reconciled to income tax
expense (benefit), as follows:




F-36




Votorantim
Celulose e Papel S.A.





Notes
to the Consolidated Financial Statements


at
December 31, 2008 and 2007, and for the


Three
Years Ended December 31, 2008


In
millions of U.S. dollars, unless otherwise stated







2008
                    
                    
                    2007
                    
                    
                    2006Income
      (loss) before taxes on income
                    
                    
                    (471
                    )
                    
                    
                    1,491
                    
                    
                    
                    299Income
      tax benefit (expense) at statutory tax rate - 34%
                    
                    
                    160
                    
                    
                    
                    (507
                    )
                    
                    
                    (102
                    )Reconciliation
      of statutory to effective rateBenefit
      from interest attributable to capital
                    
                    
                    -
                    
                    
                    
                    56
                    
                    
                    
                    51Equity
      in earnings (losses) of affiliates
                    
                    
                    (45
                    )
                    
                    
                    39
                    
                    
                    
                    26Differences
      in foreign income tax rate
                    
                    
                    67
                    
                    
                    
                    23
                    
                    
                    
                    24Other
      permanent differences
                    
                    
                    16
                    
                    
                    
                    6
                    
                    
                    
                    (3
                    )Income
      tax (expense) benefit
                    
                    
                    198
                    
                    
                    
                    (383
                    )
                    
                    
                    (4
                    )





(b)
            Analysis
      of deferred tax balances





December
      31,2008
                  
                  
                  2007Deferred
      tax assetsTemporary
      differences
                  
                  
                  127
                  
                  
                  
                  38Tax
      loss carryforwards
                  
                  
                  104
                  
                  
                  
                  47Tax
      effects on impairment of Aracruz investment
                  
                  
                  46
                  
                  
                  
                  46US
      GAAP adjustments and others
                  
                  
                  14
                  
                  
                  
                  2Total
      deferred tax assets
                  
                  
                  291
                  
                  
                  
                  133Less:
      current portion
                  
                  
                  (43
                  )
                  
                  
                  (5
                  )Total
      deferred tax assets non-current portion
                  
                  
                  248
                  
                  
                  
                  128Deferred
      tax liabilitiesUS
      GAAP adjustmentsGain
      on exchange of assets (Note 4(b))
                  
                  
                  (293
                  )
                  
                  
                  (386
                  )Tax
      effect on fair value of asset exchange (Note 4(b))
                  
                  
                  (63
                  )
                  
                  
                  (83
                  )Other
                  
                  
                  (96
                  )
                  
                  
                  (8
                  )Total
      deferred tax liabilities
                  
                  
                  (452
                  )
                  
                  
                  (477
                  )Net
      deferred tax liabilities non-current portion
                  
                  
                  (204
                  )
                  
                  
                  (349
                  )


F-37




Votorantim
Celulose e Papel S.A.





Notes
to the Consolidated Financial Statements


at
December 31, 2008 and 2007, and for the


Three
Years Ended December 31, 2008


In
millions of U.S. dollars, unless otherwise stated








We
recognize deferred tax assets and liabilities based on the temporary differences
between the financial statement carrying amounts and the tax basis of assets and
liabilities. If we or one of our subsidiaries operate at a loss or are unable to
generate sufficient future taxable income, or if there is a material change in
the actual effective tax rates or time period over which the underlying
temporary differences become taxable or deductible, we evaluate the need to
establish a valuation allowance against all or a significant portion of our
deferred tax assets resulting in an increase in our effective tax
rate.





A new
cost basis for our off-shore holding company, Newark's, carrying value of its
investment in Aracruz (which uses the U.S. dollar as its functional currency)
was determined based on the market price of US$ 18.56 for the Aracruz ADS
on December 31, 2002, and an impairment charge of US$ 136 (gross of
deferred income tax effects of US$ 46) was recorded directly to income
(Equity loss of investee). The deferred tax effect is included in Deferred
income tax benefit (expense). At December 31, 2008, Aracruz ADS traded at
US$ 11.28; each ADS represents 10 Aracruz preferred class B
shares.





6
            Available
      for Sale Securities





2008
                    
                    
                    2007Denominated
      in ReaisCredit
      linked notes
                    
                    
                    -
                    
                    
                    
                    176Total
                    
                    
                    -
                    
                    
                    
                    176





Securities
were adjusted to their fair values and the difference between the carrying
amounts of the securities at the date of transfer and their fair value as of
such date was recognized, net of the related tax effects, in Net unrealized
gains (losses) on available for sale securities directly in shareholders'
equity.





7
            Trade
      Accounts Receivable





2008
                  
                  
                  2007Domestic
      receivables
                  
                  
                  90
                  
                  
                  
                  114Export
      receivables, denominated in U.S. dollars
                  
                  
                  67
                  
                  
                  
                  60Allowance
      for doubtful accounts
                  
                  
                  (6
                  )
                  
                  
                  (9
                  )151
                  
                  
                  
                  165


F-38


Votorantim
Celulose e Papel S.A.





Notes
to the Consolidated Financial Statements


at
December 31, 2008 and 2007, and for the


Three
Years Ended December 31, 2008


In
millions of U.S. dollars, unless otherwise stated








At
December 31, 2008, no single customer represented more than 10% of our trade
accounts receivable balance (for December 31, 2007 one customer accounted for
19% of total trade accounts receivables).








8
            Inventories





2008
                  
                  
                  2007Finished
      products
                  
                  
                  89
                  
                  
                  
                  105Work
      in process
                  
                  
                  14
                  
                  
                  
                  7Raw
      materials and supplies
                  
                  
                  83
                  
                  
                  
                  71Imports
      in transit and other
                  
                  
                  7
                  
                  
                  
                  3193
                  
                  
                  
                  186




9
            Investment
      in Significant Affiliated
              Companies
      and Goodwill, Other





2008
                  
                  
                  2007Investment
      and goodwill in affiliated CompaniesAracruz
                  
                  
                  135
                  
                  
                  
                  314Ripasa (Note
    4(a))
                  
                  
                  -
                  
                  
                  
                  646Ahlstrom VCP
                  
                  
                  -
                  
                  
                  
                  39Other
                  
                  
                  22
                  
                  
                  
                  10157
                  
                  
                  
                  1,009Goodwill,
      other (Note 9(b))
                  
                  
                  132
                  
                  
                  
                  -132
                  
                  
                  
                  -





The
Aracruz investment account balance was determined as follows:





2008
                    
                    
                    2007Aracruz
      US GAAP shareholders' equity
                    
                    
                    938
                    
                    
                    
                    2,387Participation
      in total equity (common and preferred) - %
                    
                    
                    12.35
                    
                    
                    
                    12.35Investment
      account
                    
                    
                    116
                    
                    
                    
                    295Goodwill
                    
                    
                    19
                    
                    
                    
                    19Investment
      and goodwill
                    
                    
                    135
                    
                    
                    
                    314


F-39


Votorantim
Celulose e Papel S.A.





Notes
to the Consolidated Financial Statements


at
December 31, 2008 and 2007, and for the


Three
Years Ended December 31, 2008


In
millions of U.S. dollars, unless otherwise stated








2008
                  
                  
                  2007
                  
                  
                  2006Equity
      in earnings (losses)Aracruz
                  
                  
                  (153
                  )
                  
                  
                  52
                  
                  
                  
                  56Ripasa
      (through August 31, 2008)
                  
                  
                  20
                  
                  
                  
                  15
                  
                  
                  
                  19Capital
      gain on sale of investments (Note 4(d))
                  
                  
                  -
                  
                  
                  
                  48
                  
                  
                  
                  -Ahlstrom
      VCP
                  
                  
                  -
                  
                  
                  
                  1
                  
                  
                  
                  -Other
                  
                  
                  1
                  
                  
                  
                  (3
                  )
                  
                  
                  2(132
                  )
                  
                  
                  113
                  
                  
                  
                  77





(a)
            Aracruz





The
Company accounts for its investment in Aracruz using the equity method of
accounting. At December 31, 2008 the Company's investment in
Aracruz amounted to US$ 135, included in the investment balance is
unamortized goodwill of US$ 19. In 2008, the Company recorded a loss for
its share in the equity losses for this investee of US$ 153 (gains of
US$ 52 in 2007 and US$ 56 in 2006). Aracruz uses the U.S. dollar as
its functional currency.





VCP
provides no guarantees to Aracruz and is not liable for amounts due to Aracruz
creditors. VCP's equity at risk is limited to its investment in Aracruz. For
statutory purposes in Brazil and under Brazilian GAAP, VCP accounts for its
investment in Aracruz on the proportional consolidation method. VCP has certain
financial covenants that are based on Brazilian GAAP (Note 12(i)).





Subsequent
to the balance sheet date the Company acquired an additional interest in
Aracruz, which concluded the renegotiation of certain outstanding loans with its
creditors (Note 4(e)).





(b)
            Ripasa





The
Company accounted for its investment in Ripasa using the equity method of
accounting until August 31, 2008. Beginning September 1, 2008, we started to
recognize our 50% interest in the Consortium's operations (which basically
operates in our paper segment) and no longer applied the equity method. The
related goodwill is disclosed separately as "Other goodwill" at
December 31, 2008 of US$ 132.





Aracruz
and Ripasa's December 31 condensed balance sheets and condensed statements of
operations for the three years ended December 31, 2008 are as
follows:


F-40


Votorantim
Celulose e Papel S.A.





Notes
to the Consolidated Financial Statements


at
December 31, 2008 and 2007, and for the


Three
Years Ended December 31, 2008


In
millions of U.S. dollars, unless otherwise stated








Aracruz
      (i)2008
                        
                        
                        2007Current
      assets
                        
                        
                        1,194
                        
                        
                        
                        1,251Property,
      plant and equipment, and other assets
                        
                        
                        4,206
                        
                        
                        
                        3,374Current
      liabilities
                        
                        
                        604
                        
                        
                        
                        328Long-term
      debt (long-term portion)
                        
                        
                        3,567
                        
                        
                        
                        1,312Other
      long-term liabilities
                        
                        
                        291
                        
                        
                        
                        597Net
      assets
                        
                        
                        938
                        
                        
                        
                        2,388





Aracruz
      (i)2008
                              
                              
                              2007
                              
                              
                              2006Net
      sales
                              
                              
                              1,911
                              
                              
                              
                              1,884
                              
                              
                              
                              1,681Operating
      income
                              
                              
                              342
                              
                              
                              
                              594
                              
                              
                              
                              499Net
      income (loss)
                              
                              
                              (1,239
                              )
                              
                              
                              422
                              
                              
                              
                              455





Ripasa
      (ii)2007Current
      assets
                  
                  
                  208Property,
      plant and equipment, and other assets
                  
                  
                  1,411Current
      liabilities
                  
                  
                  175Non-current
      liabilities
                  
                  
                  500Net
      assets
                  
                  
                  944





Ripasa
      (ii)2008
                                
                                
                                2007
                                
                                
                                2006Net
      sales
                                
                                
                                462
                                
                                
                                
                                478
                                
                                
                                
                                573Operating
      income
                                
                                
                                68
                                
                                
                                
                                59
                                
                                
                                
                                67Net
      income
                                
                                
                                38
                                
                                
                                
                                28
                                
                                
                                
                                55





(i)
            12.35%
      total ownership interest (28.0% of the voting
  shares).


F-41


Votorantim
Celulose e Papel S.A.





Notes
to the Consolidated Financial Statements


at
December 31, 2008 and 2007, and for the


Three
Years Ended December 31, 2008


In
millions of U.S. dollars, unless otherwise stated








(ii)
            50%
      interest recorded based on the equity method until August 31, 2008,
      thereafter the consortium's started to operate and the results of the
      production sharing unit were then recorded on a line by-line basis
      directly in VCP's statement of
operations.




10
            Property,
      Plant and Equipment





2008
                    
                    
                    2007Land
                    
                    
                    464
                    
                    
                    
                    482Buildings
                    
                    
                    183
                    
                    
                    
                    183Machinery,
      equipment and installations
                    
                    
                    1,494
                    
                    
                    
                    1,250Forests
                    
                    
                    738
                    
                    
                    
                    706Other
                    
                    
                    201
                    
                    
                    
                    326Construction
      in progressVCP-MS
      (Note 4(b))
                    
                    
                    1,396
                    
                    
                    
                    1,285Other
                    
                    
                    76
                    
                    
                    
                    2794,552
                    
                    
                    
                    4,511Accumulated
      depreciation and depletion
                    
                    
                    (686
                    )
                    
                    
                    (595
                    )3,866
                    
                    
                    
                    3,916





Financial
income accruing from the VCP-MS trust (Note 4(b)), totaling US$ 32, was
disbursed in 2008 as construction in progress. Interest capitalized on
construction in progress in each of the periods was: 2008 - US$ 3; 2007 -
US$ 6 and 2006 - US$ 11. The accumulated depreciation of
capitalized leases was US$ 1 in 2008 (none in previous
years).





11
            Short-term
      Debt





Short-term
debt represents commitments under recourse provisions to honor export
receivables transferred to banks accounted for as secured borrowings (ACEs),
bearing an annual average interest rate of 6.06% at December 31, 2008
(2007 - 5.72%). Historically, we have not incurred significant losses in
connection with such recourse provisions.


F-42


Votorantim
Celulose e Papel S.A.





Notes
to the Consolidated Financial Statements


at
December 31, 2008 and 2007, and for the


Three
Years Ended December 31, 2008


In
millions of U.S. dollars, unless otherwise stated








12
            Long-term
      Debt





Interest rate
                            December 31, 2008
                          
                          
                          2008
                          
                          
                          2007Third
      partiesIn
      U.S. dollarsExport
      credits (prepayment)
                          
                          LIBOR
      + 1.30%
                          
                          
                          
                          1,040
                          
                          
                          
                          848Export
      credits (prepayment)
                          
                          6.05%
                          
                          
                          
                          25
                          
                          
                          
                          -Fixed
      rate notes
                          
                          2.15%
                          
                          
                          
                          50
                          
                          
                          
                          50Leasing
      agreements
                          
                          LIBOR
      + 1%
                          
                          
                          
                          16
                          
                          
                          
                          -Import
      notes
                          
                          LIBOR
      + 3%
                          
                          
                          
                          8
                          
                          
                          
                          -In
      ReaisExport
      credit notes
                          
                          94%
      of CDI
                          
                          
                          
                          113
                          
                          
                          
                          30Leasing
      agreements
                          
                          101%
      of CDI
                          
                          
                          
                          22
                          
                          
                          
                          -Total
      third parties
                          
                          
                          
                          
                          
                          
                          1,274
                          
                          
                          
                          928Related
      partiesIn
      U.S. dollarsVOTO
      III loan
                          
                          7.88%
                          
                          
                          
                          54
                          
                          
                          
                          43VOTO
      IV loan
                          
                          7.75%
                          
                          
                          
                          201
                          
                          
                          
                          201In
      ReaisBanco
      Nacional de DesenvolvimentoEconômico
      e Social - BNDESTJLP
                          
                          TJLP
      + 3.68%
                          
                          
                          
                          102
                          
                          
                          
                          159UMBNDES
                          
                          UMBNDES
      + 3.8%
                          
                          
                          
                          18
                          
                          
                          
                          22Total
      related parties
                          
                          
                          
                          
                          
                          
                          375
                          
                          
                          
                          425Total
      debt
                          
                          
                          
                          
                          
                          
                          1,649
                          
                          
                          
                          1,353Less:
      current portion
                          
                          
                          
                          
                          
                          
                          (490
                          )
                          
                          
                          (156
                          )Long-term
      portion
                          
                          
                          
                          
                          
                          
                          1,159
                          
                          
                          
                          1,197





.
            LIBOR
      (London Interbank Offered Rate) at December 31, 2008 was 1.75% p.a. (2007
      - 4.60%).





.
            TJLP
      ("Taxa de juros de longo prazo"), a long-term interest rate fixed
      quarterly by the Brazilian Central Bank. At December 31, 2008, the TJLP
      was 6.50% p.a. (2007 - 6.25%).





.
            The
      UMBNDES is a weighted average rate based on the exchange rates in a basket
      of currencies, predominantly U.S. dollars, held by
  BNDES.





.
            CDI
      (Interbank Deposit Certificate) at December 31, 2008 was 13.6% p.a. (2007
      - 11.11%).


F-43


Votorantim
Celulose e Papel S.A.





Notes
to the Consolidated Financial Statements


at
December 31, 2008 and 2007, and for the


Three
Years Ended December 31, 2008


In
millions of U.S. dollars, unless otherwise stated





(a)
            Export
      credits (prepayment)





In
September 2008, VCP recorded its 50% share of the Consortium loans which at
September 30, 2008 totaled US$ 83 comprising contracts for export
prepayment (US$ 73) and import financing (US$ 10) which mature in
2012. At December 31, 2008 the outstanding amount was US$ 62.





In May
2008, VCP signed an export prepayment contract with Nordea Bank AB for the
aggregate amount US$ 50 at LIBOR plus 0.68% p.a. Payments are due through
2012 in installments to match export shipments. The financings are guaranteed by
export contracts.





In April
2008 VCP signed a bridge loan with ABN AMRO Bank NA in an aggregate amount of
US$ 200 at LIBOR plus 2% p.a. The financing matured on September 26, 2008,
and was guaranteed by a security interest in financial assets. The maturity date
was renegotiated and deferred to March 24, 2010, indexed at LIBOR plus
5%.





In June
2007 we signed an Export Prepayment contract with Banco Bilbao Vizcaya
Argentaria for US$ 100 at LIBOR plus 0.38% p.a. Payments are due
through 2015 in installments to match export shipments. The financings are
guaranteed by export contracts.





In
September 2006 we signed an Export Prepayment Facility Agreement with a pool of
banks (ABN Amro Bank, Banco Santander Central Hispano and Banco Bradesco) in an
aggregate amount of US$ 550 at LIBOR plus 0.57%. Payments are due from 2007
through 2014 in installments to match export shipments. The financings are
guaranteed by export contracts. The proceeds of the Agreement were used to
prepay various then outstanding Export Prepayment loans.





In July
2006, our wholly-owned subsidiary VCP Overseas Holding KFT, signed an Export
Prepayment Agreement with a syndicate of banks in an aggregate amount of
US$ 375 at LIBOR plus 0.57%. Payments are due from 2007 through 2014 in
installments to match export shipments. The financings are guaranteed by export
contracts. The proceeds were used to purchase from the lender and convert into
an inter-company loan various outstanding Export Prepayment loans.





(b)
            Fixed
      rate notes





On May
2008, we renewed a foreign exchange denominated financing agreement with
UNIBANCO - União de Bancos Brasileiros S.A. for the Reais equivalent of
US$ 50 obtained for the working capital purposes, which matures in
2009.


F-44


Votorantim
Celulose e Papel S.A.





Notes
to the Consolidated Financial Statements


at
December 31, 2008 and 2007, and for the


Three
Years Ended December 31, 2008


In
millions of U.S. dollars, unless otherwise stated








(c)
            VOTO
      III loan





In
January 2004, Votorantim Participações S.A. ("VPAR"), our ultimate controlling
shareholder, formed VOTO III, a company based in the Cayman Islands, for the
sole purpose of raising funds. VOTO III issued US$ 300, 7.875% Bonds due
2014 in the international market. We received 15% of the total amount originally
issued US$ 45, and are the guarantors for this amount.





(d)
            VOTO
      IV loan





On June
24, 2005 VOTO IV, a wholly-owned subsidiary of VPAR, issued US$ 400, 7.75%
Fixed Rate Notes due 2020 in the international market, under Rule 144A and
Regulation S. VCP was a guarantor of 50% of the debt issued by VOTO IV and we
received 50% of the total amount originally issued (US$ 200). On September
6, 2005, we acquired a 50% interest in VOTO IV and continue as the guarantor for
50% of these Notes.





(e)
            BNDES





On
October 4, 2007, we signed a new financing agreement for the Reais
equivalent of US$ 13 for the purpose of financing the construction of the
plant house in Rio Grande Sul state. Part of the loan, equivalent to
US$ 12, bears interest at TJLP plus 1.8% per annum and the remaining
balance is indexed to the UMBNDES plus 1.3% per annum. This financing will
mature in 2012.





On
May 20, 2005, we signed a financing agreement with BNDES for the Reais
equivalent of US$ 93 for the purpose of financing acquisition of
timberlands. Part of the loan, equivalent to US$ 79, bears interest at TJLP
plus 4.5% per annum. The remaining balance is indexed to the UMBNDES
plus 4.5% per annum. This financing will mature in July 2015. Amounts
drawn down at December 31, 2008 and 2007 were US$ 66 at each
year.





We have
several other financing agreements outstanding with BNDES primarily related to
the acquisition of machinery and equipment. These obligations mature at varying
dates through 2015 and bear interest at TJLP plus 3.68% p.a.





(f)
            Leasing





The
Company signed capital leases agreement with the Bank Société Générale for the
acquisition of machinery used to fell and harvesting trees in the total amount
of US$ 50. The first tranche of US$ 3 was released in September 2008
and matures in 2013.


F-45


Votorantim
Celulose e Papel S.A.





Notes
to the Consolidated Financial Statements


at
December 31, 2008 and 2007, and for the


Three
Years Ended December 31, 2008


In
millions of U.S. dollars, unless otherwise stated








On
December 31, 2008, VCP recorded its 50% share of the Consortium pulp machine
leasing liabilities that totaled US$ 22 which mature in 2014.





(g)
            Other
      guarantees





The BNDES
loans are secured by property, plant and equipment and a lien on certain land
and personal guarantees of an owner of VPAR.





(h)
            Long-term
      debt maturities





At
December 31, 2008, the long-term portion of long-term debt maturities is as
follows:





2010
                  
                  
                  1962011
                  
                  
                  1802012
                  
                  
                  2252013
                  
                  
                  168After
      2013
                  
                  
                  3901,159





(i)
            Covenants





We are
subject to a number of material affirmative and negative covenants including,
among others: limitations on our ability to incur debt; limitations on the
existence of liens on our properties; limitations on transactions with related
parties, which generally must be on terms no less favorable than those that
could be obtained in a comparable arm's-length transaction; and maintenance of
certain financial ratios calculated based on Brazilian GAAP or US GAAP,
depending on the contract. We were in compliance with all covenants during each
period presented, except as of December 31, 2008. Following the breach of
certain covenants at December 31, 2008, which could have resulted in accelerated
amortization of balances due, we renegotiated the covenant terms with the
creditor banks, for those loans which were subjected to accelerated repayment.
The banks provided waivers of the covenants ratios for the period ended December
31, 2008. The remaining loans for which covenant terms had been breached,
including a loan from BNDES (one of our shareholders), do not have the right to
demand accelerated repayment. In these cases, if requested by the banks, we may
be required to provide additional assets pledged as guarantees.


F-46


Votorantim
Celulose e Papel S.A.





Notes
to the Consolidated Financial Statements


at
December 31, 2008 and 2007, and for the


Three
Years Ended December 31, 2008


In
millions of U.S. dollars, unless otherwise stated








13
            Related
      Parties





Balances
and transactions with related parties are as follows:





Nature
      and businesspurpose
      of transactions
                      
                      2008
                      
                      
                      2007Cash,
      cash equivalents and available for sale
                      
                      Surplus
      cash funds invested with Banco Votorantim S.A.
                      
                      
                      40
                      
                      
                      
                      34Unrealized
      losses from cross-currency interest rate swaps
                      
                      Arising
      from swap contract transactions in which the Banco Votorantim S.A. acts as
      counter-party
                      
                      
                      (7
                      )
                      
                      
                      -Long-term
      loans
                      
                      Loans
      from related partiesVotorantim
      GroupVOTO
      III
                      
                      
                      
                      
                      54
                      
                      
                      
                      43VOTO
      IV
                      
                      
                      
                      
                      201
                      
                      
                      
                      201BNDES
      and its subsidiary
                        BNDESpar
      (shareholder)
                      
                      
                      
                      
                      120
                      
                      
                      
                      181Trade
      payables from related parties
                      
                      Purchases
      of wood, pulp and paperRipasa
                      
                      
                      
                      
                      -
                      
                      
                      
                      67Asapir
                      
                      
                      
                      
                      5
                      
                      
                      
                      -





Revenue,
income and expenses from transactions with related parties were as
follows:





2008
                  
                  
                  2007
                  
                  
                  2006Purchases
      from Ripasa (*)
                  
                  
                  180
                  
                  
                  
                  213
                  
                  
                  
                  75Purchases
      from Votener Votorantim Comercializadora de Energia Ltda.
                  
                  
                  15
                  
                  
                  
                  9
                  
                  
                  
                  6Purchases
      from TIVIT Tecnologia da Informação S.A.
                  
                  
                  6
                  
                  
                  
                  8
                  
                  
                  
                  4Financial
      income
                  
                  
                  28
                  
                  
                  
                  34
                  
                  
                  
                  70Financial
      expenses
                  
                  
                  181
                  
                  
                  
                  4
                  
                  
                  
                  73





(*)
            Through
      August 31, 2008; effective September 1, 2008 Ripasa is operating as a
      consortium (Note 9(b)).





Financial
income arises from investments made in Banco Votorantim S.A.; financial
expenses represent mainly losses on cross-currency interest rate swaps based on
their respective fair values.


F-47


Votorantim
Celulose e Papel S.A.





Notes
to the Consolidated Financial Statements


at
December 31, 2008 and 2007, and for the


Three
Years Ended December 31, 2008


In
millions of U.S. dollars, unless otherwise stated








14
            Financial
      Instruments





We are
exposed to various market risks, including changes in foreign currency rates and
interest rates. Market risk is the potential loss arising from adverse changes
in market rates and prices, such as foreign currency exchange rates and interest
rates.





We use
cross-currency interest rate swap contracts in the market to reduce our foreign
currency exposure and also take into account the natural hedge provided by our
exports in determining our hedging needs. We establish strict internal policies
with respect to our currency exposure positions and revise these policies from
time to time in response to new economic information on the macroeconomic
environment in Brazil. The exposure to foreign currency risk is guided by
closely monitored policies. We also invest in instruments linked to exchange
variations.





We also
use cross-currency interest rate swap contracts to mitigate the volatility of
foreign exchange rate fluctuations on our U.S. dollar-denominated debt. The
unrealized gains and losses on these contracts are recorded on our balance sheet
as assets or liabilities and in our statement of income in "Foreign exchange
gain (loss) and unrealized gain (loss) on swaps, net."





Our
foreign currency exposure gives rise to market risks associated with exchange
rate movements against the U.S. dollar. Foreign currency-denominated liabilities
include borrowings denominated mainly in U.S. dollars. Our sales outside of
Brazil are largely U.S. dollar-denominated, while sales of pulp within Brazil
are denominated in Reais but based on U.S. dollar prices with most of our
operating costs being denominated in Reais. Our export revenues and
cross-currency interest rate swap contracts partially mitigate the exposure
arising from our U.S. dollar-denominated debt.





The
majority of the Company's sales revenue is denominated in U.S. dollars while
more than half of its costs are incurred in Reais. The Company's foreign
currency risk management strategy permits it to use derivative instruments to
protect against foreign exchange rate volatility.





The
percentage of our debt subject to fixed and floating interest rates (before
taking into account the cross-currency swaps) is as follows:


F-48


Votorantim
Celulose e Papel S.A.





Notes
to the Consolidated Financial Statements


at
December 31, 2008 and 2007, and for the


Three
Years Ended December 31, 2008


In
millions of U.S. dollars, unless otherwise stated





December 312008
                                      
                                      
                                      2007PercentageFloating
      rate debtDenominated in U.S.
      dollars
                                      
                                      
                                      73
                                      
                                      
                                      
                                      69Denominated in
      reais
                                      
                                      
                                      14
                                      
                                      
                                      
                                      1287
                                      
                                      
                                      
                                      81Fixed
      rate debtDenominated in U.S.
      dollars
                                      
                                      
                                      13
                                      
                                      
                                      
                                      19100
                                      
                                      
                                      
                                      100





Our
floating interest rate exposure is primarily subject to the variations of LIBOR
as it relates to U.S. dollar-denominated borrowings and to the variations of the
TJLP.





(a)
            Policy
      for use of derivatives





The
Company's policy for derivatives aligns the maturity dates of the foreign
currency financing obligations with the foreign exchange free cash flows, and is
intended to hedge the Company's cash against fluctuations in foreign exchange
and interest rate movements. The Chief Financial Officer is responsible for
managing derivatives by identifying exposures and correlations among different
risk factors that are involved in the Company's business.





This
policy is restricted to mitigating the effects of exposure of cash flow to
foreign currencies and prohibits transactions effected for speculation purposes.
The risk mitigation transactions take into account a variety of products and
counterparties.





(b)
            Fair
      value of derivative contracts, criteria for evaluation and measurement,
      methods, and significant assumptions used to determine the fair
      value





Derivative
financial instruments held by the Company are as follows:





(i)
            A
      conventional swap in which the Company receives Yen and pays U.S. dollars,
      with a notional amount of US$ 45 and maturity date of 2014. This swap
      was contracted to mitigate currency risks from the VOTO III loan. As of
      December 31, 2008, the fair value receivable is US$ 3 (2007-
      US$ 5).


F-49




Votorantim
Celulose e Papel S.A.





Notes
to the Consolidated Financial Statements


at
December 31, 2008 and 2007, and for the


Three
Years Ended December 31, 2008


In
millions of U.S. dollars, unless otherwise stated


(ii)
            A
      conventional swap in which the Company receives the CDI rate and pays U.S.
      dollar (Call's NCE) with a notional amount of US$ 50. This swap was
      contracted to reduce the loan cost and to match cash outflow. This swap is
      subjected to four call options through February 2009, with an average
      strike price of US$ 1.9. As of December 31, 2008, the fair value
      payable is US$ 32.





(iii)
            A
      conventional swap in which the Company receives U.S. dollars and pays CDI
      rate with a notional amount of US$ 100 and maturity in November 2009.
      This swap was contracted to mitigate risks from fluctuations on the
      short-term loans denominated in foreign currency. As of December 31, 2008,
      the fair value receivable is
US$ 2.





(iv)
            A
      conventional swap in which the Company receives U.S. dollars plus interest
      plus 300% of the CDI and pays 100% of the CDI, with a notional amount of
      US$ 6 and maturity in January 2009. This swap was contracted to
      mitigate risks from the short-term loans denominated in foreign currency.
      As of December 31, 2008, the fair value receivable is
  nil.





(v)
            A
      swap in which the Company receives LIBOR plus interest and pays 99.7% of
      the CDI, with a notional amount of US$ 50 and maturity on March 29,
      2010. This swap was contracted to mitigate risks from the export credit
      agreements. As of December 31, 2008, the fair value receivable is
      US$ 3.





(vi)
            Sale
      of Non-Deliverable Forwards ("NDF") from over-the counter transactions
      without physical delivery. NDFs relate to a future purchase and/or sale of
      a fixed currency amount, without initial disbursement, based on a notional
      amount and a strike price. The notional amount is US$ 24 and the
      maturity date is January 2010. At the maturity date the result will be the
      difference between the contracted rate and the maturity date rate,
      multiplied by the notional amount. As of December 31, 2008 (no similar
      operations in 2007), the sale average strike is US$ 1.94 and the
      purchase average strike is US$ 2.24 and, the fair value liability is
      US$ 8.





(vii)
            Swaps
      and Target Forwards ("TARN") are over-the counter transactions without
      initial disbursement. The notional amount is US$ 126 and the maturity
      date is January 2010. If at the maturity date, the exchange rate is be
      below the strike price, the Company will receive the difference between
      these rates multiplied by the notional amount, limited to a contracted
      gain, which if reach at each maturity date will cancel all the subsequent
      maturities ("Knock out"). However, if the exchange rate at maturity is
      above the strike price, the Company will pay the difference between these
      rates multiplied by the double the notional amount. As of December
      31, 2008 (no similar operations in 2007), the average strike is
      US$ 1.75 and the fair value liability is
  US$ 68.


F-50




Votorantim
Celulose e Papel S.A.





Notes
to the Consolidated Financial Statements


at
December 31, 2008 and 2007, and for the


Three
Years Ended December 31, 2008


In
millions of U.S. dollars, unless otherwise stated


The
following means were used to measure the fair value of the derivative contracts
positions:





(i)
            Swaps
      - were measured based on the future cash flows, considering the
      contractual rates up to maturity dates, discounted to present value using
      the BM&F fixed rate yield
curves.





(ii)
            NDF
      - were measured by the difference between the asset estimated at each
      maturity date from similar transactions at the BM&F on December 31,
      2008 and the contractual reference amount at the maturity
      date.





(iii)
            TARN
      - were measured by application of the Monte Carlo Model, in which possible
      U.S. dollar forward scenarios are generated based on the current exchange
      rate level and implicit volatility obtained from Bloomberg. Based on these
      simulations, possible payables or receivables are obtained at each
      verification dates. These flows are then discounted to present value using
      the BM&F fixed rate yield curve. The average of these present values
      represents the fair value of the
transaction.





Derivative
instruments are classified and demonstrated in the table below based on one of
the following categories:





.
            Level
      I - quoted prices (unadjusted) in active markets for identical assets or
      liabilities that the reporting entity has the ability to access at the
      measurement date. An active market for the asset or liability is a market
      in which transactions for the asset or liability occur with sufficient
      frequency and volume to provide pricing information on an ongoing
      basis.





.
            Level
      II - other than quoted prices included within Level I that are observable
      for the asset or liability, either directly or indirectly, such as: quoted
      prices for similar assets or liabilities in active or not active markets
      and other than quoted prices that are observable for the asset or
      liability (for example, interest rates and yield curves observable at
      commonly quoted intervals, volatilities, prepayment speeds, loss
      severities, credit risks, and default rates). Determined adjustments to
      these inputs can be adopted to these inputs, based, for instance, on the
      volume and level of activity in the markets the inputs are
      observed.





.
            Level
      III - unobservable inputs for the asset or liability. Unobservable inputs
      are used to measure fair value to the extent that observable inputs are
      not available and reflect the management's assumptions about the
      assumptions that market participants would use in pricing the asset or
      liability. Unobservable inputs shall be developed based on the best
      information available in the circumstances and are highly dependent on
      management's judgment.


F-51


Votorantim
Celulose e Papel S.A.
 
 Notes
to the Consolidated Financial Statements
 at
December 31, 2008 and 2007, and for the
 Three
Years Ended December 31, 2008
 In
millions of U.S. dollars, unless otherwise stated


December 31, 2008Fair value at the reporting date
                  
                  
                  Year endedNotional
                    amount
                  
                  
                  Carrying
                    amount
                  
                  
                  Level I
                  
                  
                  Level II
                  
                  
                  Level III
                  
                  
                  December
                    31, 2008Unrealized
      gain (loss) from cross- currency interest rate swaps,  TARN and
      NDFTARN
                  
                  
                  126
                  
                  
                  
                  (68
                  )
                  
                  
                  -
                  
                  
                  
                  (68
                  )
                  
                  
                  -
                  
                  
                  
                  (100
                  )NDF
                  
                  
                  24
                  
                  
                  
                  (8
                  )
                  
                  
                  -
                  
                  
                  
                  (8
                  )
                  
                  
                  -
                  
                  
                  
                  (64
                  )CDI
      x US$ (Call's NCE)
                  
                  
                  50
                  
                  
                  
                  (32
                  )
                  
                  
                  -
                  
                  
                  
                  (32
                  )
                  
                  
                  -
                  
                  
                  
                  (57
                  )LIBOR
      x CDI
                  
                  
                  50
                  
                  
                  
                  3
                  
                  
                  
                  -
                  
                  
                  
                  3
                  
                  
                  
                  -
                  
                  
                  
                  31Yen
      x US$
                  
                  
                  45
                  
                  
                  
                  3
                  
                  
                  
                  -
                  
                  
                  
                  3
                  
                  
                  
                  -
                  
                  
                  
                  6US$ x
      CDI
                  
                  
                  100
                  
                  
                  
                  2
                  
                  
                  
                  -
                  
                  
                  
                  2
                  
                  
                  
                  -
                  
                  
                  
                  2US$ /CDI
      x CDI
                  
                  
                  6
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -





December 31, 2007Fair value at the reporting date
                  
                  
                  Year endedNotional
                    amount
                  
                  
                  Carrying
                    amount
                  
                  
                  Level I
                  
                  
                  Level II
                  
                  
                  Level III
                  
                  
                  December
                    31, 2007Unrealized
      gain from cross currency interest rate swaps Yen x
    US$
                  
                  
                  45
                  
                  
                  
                  (5
                  )
                  
                  
                  -
                  
                  
                  
                  (5
                  )
                  
                  
                  -
                  
                  
                  
                  17





Our
counterparties are financial institutions, including Banco Votorantim S.A., a
member of the Votorantim group. The rates that we negotiate with Banco
Votorantim S.A. reflect those available in the current financial market. Our
treasury department also compares these rates to those offered by other banks in
order to assure that we receive the most favorable terms and conditions
available for each transaction.





(c)
            Fair
      value of other financial
instruments





To
determine the fair value of assets and liabilities, amounts were adjusted, when
applicable, based on market or contractual interest rate.





The fair
value of other financial instruments and investments are disclosed at the
following table:




F-52


Votorantim
Celulose e Papel S.A.
 
 Notes
to the Consolidated Financial Statements
 at
December 31, 2008 and 2007, and for the
 Three
Years Ended December 31, 2008
 In
millions of U.S. dollars, unless otherwise stated


December 31, 2008Fair value at the reporting dateCarrying
                    amount
                  
                  
                  Level I
                  
                  
                  Level II
                  
                  
                  Level IIICash
      and cash equivalents
                  
                  
                  280
                  
                  
                  
                  -
                  
                  
                  
                  280
                  
                  
                  
                  -Trading
      securities
                  
                  
                  43
                  
                  
                  
                  -
                  
                  
                  
                  43
                  
                  
                  
                  -Investment
      in Aracruz
                  
                  
                  135
                  
                  
                  
                  217
                  
                  
                  
                  -
                  
                  
                  
                  -Short-term
      debt, including current portion from long-term debt
                  
                  
                  928
                  
                  
                  
                  -
                  
                  
                  
                  856
                  
                  
                  
                  -Long-term
      debt
                  
                  
                  1,159
                  
                  
                  
                  -
                  
                  
                  
                  1,114
                  
                  
                  
                  -





December 31, 2007Fair value at the reporting dateCarrying
                    amount
                  
                  
                  Level I
                  
                  
                  Level II
                  
                  
                  Level IIICash
      and cash equivalents
                  
                  
                  565
                  
                  
                  
                  -
                  
                  
                  
                  565
                  
                  
                  
                  -Available-for-sale
      securities
                  
                  
                  176
                  
                  
                  
                  -
                  
                  
                  
                  176
                  
                  
                  
                  -Investment
      in Aracruz
                  
                  
                  314
                  
                  
                  
                  1,150
                  
                  
                  
                  -
                  
                  
                  
                  -Short-term
      debt, including current portion from long-term debt
                  
                  
                  367
                  
                  
                  
                  -
                  
                  
                  
                  367
                  
                  
                  
                  -Long-term
      debt
                  
                  
                  1,197
                  
                  
                  
                  -
                  
                  
                  
                  1,213
                  
                  
                  
                  -





15
            Commitments
      and Contingencies





We are
party to certain legal proceedings in Brazil arising in the normal course of
business, and have made provisions when we believe that we can reasonably
estimate probable losses. In connection with some of these proceedings we have
made deposits (in Other assets) which will only be released to us upon a
judgment in our favor. The position of such provisions for tax and other
litigation and the corresponding deposits is as follows:





2008
                        
                        
                        2007Deposits
                        
                        
                        Provisions
                        
                        
                        Deposits
                        
                        
                        ProvisionsTax-related
                        
                        
                        127
                        
                        
                        
                        135
                        
                        
                        
                        150
                        
                        
                        
                        173Labor-related
                        
                        
                        3
                        
                        
                        
                        20
                        
                        
                        
                        8
                        
                        
                        
                        15Civil-related
                        
                        
                        -
                        
                        
                        
                        6
                        
                        
                        
                        -
                        
                        
                        
                        9130
                        
                        
                        
                        161
                        
                        
                        
                        158
                        
                        
                        
                        197


F-53




Votorantim
Celulose e Papel S.A.





Notes
to the Consolidated Financial Statements


at
December 31, 2008 and 2007, and for the


Three
Years Ended December 31, 2008


In
millions of U.S. dollars, unless otherwise stated


The
transactions in our provision account were as follows:





2008
                    
                    
                    2007
                    
                    
                    2006At
      beginning of year
                    
                    
                    197
                    
                    
                    
                    152
                    
                    
                    
                    172Provisions for new legal
      proceedings
                    
                    
                    -
                    
                    
                    
                    21
                    
                    
                    
                    11Reversal
                    
                    
                    (8
                    )
                    
                    
                    -
                    
                    
                    
                    (47
                    )Consortium -
      Conpacel
                    
                    
                    16
                    
                    
                    
                    -
                    
                    
                    
                    -Translation
      adjustment
                    
                    
                    (44
                    )
                    
                    
                    24
                    
                    
                    
                    16At
      end of year
                    
                    
                    161
                    
                    
                    
                    197
                    
                    
                    
                    152





(a)
            Tax-related





We have
instituted a number of legal proceedings which we are seeking a refund or
contesting the imposition of certain taxes. The more significant of these
proceedings are as follows:





(i)
            In
      1999, we filed a lawsuit challenging the 1% increase in the COFINS
      (Social Contributions on Revenues) tax rate (from 2% to 3%), a
      tax on revenues. Although we have obtained a legal injunction, based on
      advice of our legal counsel and reflecting rulings by the Federal Supreme
      Court, we accrued US$ 55 relating to this claim, from 2002
      through 2004. In December 2005 we made a judicial deposit of
      US$ 55 following an unfavorable decision of the Supreme
      Court.





(ii)
            During 2002,
      we filed a lawsuit challenging the inclusion of the ICMS (Value-added
      sales tax) in the computation basis for the COFINS tax, relating to the
      period from 1996 to 2003, as well as our deductibility of
      recoverable ICMS originated from raw material used for tax exempt paper
      products. We have accrued and deposited US$ 26 relating to this
      claim.





(iii)
            In
      1996, we filed a judicial claim to assure our right to the deductibility
      of inflation-indexed depreciation (an uplift of 70%) arising
      from a government economic stabilization program in January 1989. We
      obtained a favorable decision enabling the partial deduction of an uplift
      of 43%. Based on advice of our legal counsel, we have accrued
      US$ 7 relating to this claim.





(iv)
            In
      1998, Brazilian Law No. 9718/98 was enacted which increased the base
      for both PIS and COFINS for 1999 (levying other revenue lines and not
      only billings), while at the same time, increasing the rate for COFINS. On
      June 23, 2006 and August 29, 2006, we received
      unappealable favorable rulings for separate legal cases related to our
      challenge that the payment of Social Contributions on Revenues (PIS and
      COFINS) on other revenues (primarily on financial income) was
      inappropriate. As a result, in 2006 we reversed US$ 47 in the
      statement of operations as Financial
income.


F-54




Votorantim
Celulose e Papel S.A.





Notes
to the Consolidated Financial Statements


at
December 31, 2008 and 2007, and for the


Three
Years Ended December 31, 2008


In
millions of U.S. dollars, unless otherwise stated


(v)
            Provisions
      relating to Conpacel are a result of our assumption on September 1, 2008
      of 50% of the legal proceedings of that operating
  entity.





(b)
            Unprovided
      possible loss contingencies





VCP is
party to a substantial number of other legal proceedings in the normal course of
its business involving possible risk of loss, in addition to the lawsuits and
administrative proceedings discussed above.





Management
does not believe that such legal proceedings will, individually or in the
aggregate, have a material adverse affect on our business, results of operations
or financial condition, and therefore, no provisions have been recorded based on
management's assessment of the probability of loss.





These
possible losses, at December 31, are as follows:





2008
                    
                    
                    2007Tax-related
                    
                    
                    274
                    
                    
                    
                    196Labor-related
                    
                    
                    14
                    
                    
                    
                    14Civil-related
                    
                    
                    6
                    
                    
                    
                    9294
                    
                    
                    
                    219





(c)
            Unprovided
      remote loss contingencies





Income
tax assessment





In
December 2007 our wholly-owned subsidiary, Normus, was assessed of US$ 512,
the Reais equivalent of R$ 906.9 million by the Brazilian tax authorities
for its alleged non-payment of income and social contribution taxes relating to
the operations of its wholly-owned foreign subsidiary during the period
of 2002 to 2006. Normus, which is domiciled and operates from Hungary,
has as its principal business activity the resale of our pulp and paper in
international markets.





Management
is confident, as supported by the position of external legal counsel, that the
subsidiary has fully settled its tax obligations in Hungary and that the claim
by the Brazilian tax authorities to the effect that the income should have been
taxed in Brazil is totally unfounded. Management believes, on this basis, and on
existing Brazilian legal precedents including, among others, the
Brazilian-Hungarian bi-lateral income tax treaty, that the risk of loss to the
Company from this assessment is remote. The said treaty establishes, among other
things, that Hungary has the exclusive sovereign right to tax the operations of
entities domiciled and doing business from its territory.


F-55


Votorantim
Celulose e Papel S.A.
 
 Notes
to the Consolidated Financial Statements
 at
December 31, 2008 and 2007, and for the
 Three
Years Ended December 31, 2008
 In
millions of U.S. dollars, unless otherwise stated


On
December 21, 2007, Normus filed an administrative appeal and, as
management and external legal counsel believe the Company's position will
prevail, it has not recognized a liability.





(d)
            Commitments





We do not
maintain insurance for our forests; rather, our policy is to self-insure against
fire, disease and other risks to our forests. We have taken measures to mitigate
these risks, but any losses from damage outside of our control would be for our
own account.





We
provide guarantees to banks, not in excess of 180 days, although in exceptional
cases, this is extended to 240 days, which finance sales to certain of our
selected customers. We recognize revenue on these sales at the time our products
are delivered which is the time we transfer title to our customers. Under the
vendor program we are the secondary obligor to the bank and monitor the amount
due from the customer to the bank. We periodically review the adequacy of our
allowance for estimated losses and adjust our allowance accordingly. At
December 31, 2008, customer guarantees provided by us totaled
US$ 112, including interest (US$ 127 at December 31, 2007 and
US$ 120 at December 31, 2006). Our guarantees are usually secured by the
personal guarantee of the customer's owner.





The
vendor guarantee does not expose the Company to any greater risk or net
obligation than a credit sale. In the case of a credit sale, revenue is recorded
on shipment, and a receivable is created. If the credit sale customer does not
pay the receivable, then the Company would establish a doubtful debts allowance
if it considered loss to be probable. In a vendor financed sale, the Company
records revenue on shipment and receives full payment from the bank. If the
customer does not pay the bank within the specified time period, the Company
would have to satisfy its guarantee to the bank. The Company would, at that
time, charge the obligation to selling expenses if it considered the loss to be
probable. The Company would then look to the customer for payment on the sale.
The Company's losses from guarantees honored to-date have been
negligible.





We lease
timberlands under operating leases from third parties as a source for raw
material for our products. The leases, most of which commenced in 1991, are
typically for a term of 21 years. Lease payments, equal to 30% of the
market value of the timber harvested on the property, are payable after each
harvest. We guarantee to the lessor a minimum harvest payment. Payments under
these operating leases were US$ 13 in 2008 and in 2007 and US$ 2
in 2006. At December 31, 2008, minimum lease payments due
in 2009 total US$ 13.


F-56


Votorantim
Celulose e Papel S.A.
 
 Notes
to the Consolidated Financial Statements
 at
December 31, 2008 and 2007, and for the
 Three
Years Ended December 31, 2008
 In
millions of U.S. dollars, unless otherwise stated


At
December 31, 2008, future minimum operating lease payments were as
follows:





2009
                  
                  
                  132010
                  
                  
                  182011
                  
                  
                  182012
                  
                  
                  172013
                  
                  
                  17After
      2013
                  
                  
                  90173





We have
commitments for capital expenditures amounting to US$ 300 at
December 31, 2008.





We have
long-term "take-or-pay" contracts with suppliers of energy, transportation,
diesel fuel and chemical products for periods from one to ten years for which
the contractual obligations are US$ 64 per annum. Additionally, we have
long-term "take-or-pay" contracts with a supplier of pulp for 30 years. The
contractual obligation in connection with this contract is US$ 65 per
annum.





The
following is a summary of guarantees issued to other companies of the Votorantim
Group:





Outstanding
                              guarantee amountPrimaryobligor
                            
                            Obligations
                            
                            Beneficiary
                            
                            
                            2008
                            
                            
                            2007VOTO
      III
                            
                            US$ 300
      notes issuance
                            
                            Noteholders
      and the trustee
                            
                            
                            
                            45
                            
                            
                            
                            45VOTO
      IV
                            
                            US$ 400
      notes issuance
                            
                            Noteholders
      and the trustee
                            
                            
                            
                            200
                            
                            
                            
                            200





16
            Segment
      Information





(a)
            Segment
      information





The
following information about segments is based upon information used by our
senior management to assess the performance of our operating segments and decide
on the allocation of resources. This approach is required by SFAS 131,
"Disclosure about Segments of an Enterprise and Related Information", and has
been applied for all periods presented. Our paper and pulp operations are based
solely in Brazil. Intersegment revenues are accounted for at amounts which
approximate those that would be obtained in a sale to third
parties.


F-57




Votorantim
Celulose e Papel S.A.





Notes
to the Consolidated Financial Statements


at
December 31, 2008 and 2007, and for the


Three
Years Ended December 31, 2008


In
millions of U.S. dollars, unless otherwise stated


The
accounting policies underlying the financial information provided for the
segments are based on Brazilian GAAP. We evaluate segment performance
information generated from the statutory accounting records, except for the
effects of our current affiliate Aracruz and former affiliates, Ripasa and
Ahlstrom VCP through August 31, 2008 which are proportionally consolidated in
our Brazilian GAAP financial statements but are not included in information used
by our senior management to assess the performance of our segments. The local
currency information related to statement of operations data has been translated
to U.S. dollars, for convenience purposes, at the average rate of each year
presented. The information as at the balance sheet dates has been translated at
the respective year-end exchange rates.





2008
                  
                  
                  2007
                  
                  
                  2006Net
      operating revenue - Brazilian GAAPPulp
                  
                  
                  771
                  
                  
                  
                  653
                  
                  
                  
                  520Paper
                  
                  
                  602
                  
                  
                  
                  691
                  
                  
                  
                  803Reconciling
      item to US GAAPPulp
                  
                  
                  (2
                  )
                  
                  
                  (2
                  )
                  
                  
                  (1
                  )Paper
                  
                  
                  (5
                  )
                  
                  
                  (9
                  )
                  
                  
                  (5
                  )Total
      net operating revenue - US GAAP
                  
                  
                  1,366
                  
                  
                  
                  1,333
                  
                  
                  
                  1,317Intersegment
      sales of pulp to paper segment
                  
                  
                  18
                  
                  
                  
                  43
                  
                  
                  
                  254Net
      operating revenue before intersegment sales eliminations - US
      GAAP
                  
                  
                  1,384
                  
                  
                  
                  1,376
                  
                  
                  
                  1,571Depreciation
      and depletion expense - Brazilian GAAPPulp
                  
                  
                  132
                  
                  
                  
                  136
                  
                  
                  
                  127Paper
                  
                  
                  37
                  
                  
                  
                  12
                  
                  
                  
                  68Reconciling
      items to US GAAPPulp
                  
                  
                  (8
                  )
                  
                  
                  (4
                  )
                  
                  
                  (2
                  )Paper
                  
                  
                  (1
                  )
                  
                  
                  (1
                  )
                  
                  
                  -Depreciation
      and depletion expense - US GAAP
                  
                  
                  160
                  
                  
                  
                  143
                  
                  
                  
                  193





There are
certain differences between the methodologies we use to determine the operating
profit shown in the following table and operating profit reported in our US GAAP
statement of operations. For segment reporting purposes we defer start-up costs
of new facilities and amortize them against operating profit over the subsequent
ten years. We allocate depreciation to segments based on property, plant and
equipment amounts which have been indexed for inflation, rather than the
historical real amounts.


F-58


Votorantim
Celulose e Papel S.A.
 
 Notes
to the Consolidated Financial Statements
 at
December 31, 2008 and 2007, and for the
 Three
Years Ended December 31, 2008
 In
millions of U.S. dollars, unless otherwise stated


These
differences are reconciled as follows:





2008
                      
                      
                      2007
                      
                      
                      2006Segment
      operating income - Brazilian GAAPPulp
                      
                      
                      145
                      
                      
                      
                      143
                      
                      
                      
                      200Paper
                      
                      
                      65
                      
                      
                      
                      103
                      
                      
                      
                      124Operating
      income under Brazilian GAAP
                      
                      
                      210
                      
                      
                      
                      246
                      
                      
                      
                      324Reconciling
      items to US GAAPDepreciation
      and amortization expensePulp
                      
                      
                      -
                      
                      
                      
                      1
                      
                      
                      
                      2Paper
                      
                      
                      -
                      
                      
                      
                      1
                      
                      
                      
                      2Other
      adjustmentsPulp
                      
                      
                      (2
                      )
                      
                      
                      (4
                      )
                      
                      
                      (21
                      )Paper
                      
                      
                      (8
                      )
                      
                      
                      (13
                      )
                      
                      
                      (22
                      )Gain
      on exchange of assets, net
                      
                      
                      -
                      
                      
                      
                      955
                      
                      
                      
                      -Total
      pulp
                      
                      
                      143
                      
                      
                      
                      142
                      
                      
                      
                      181Total
      paper
                      
                      
                      57
                      
                      
                      
                      89
                      
                      
                      
                      104Gain
      on exchange of assets, net
                      
                      
                      -
                      
                      
                      
                      955
                      
                      
                      
                      -Operating
      income - US GAAP
                      
                      
                      200
                      
                      
                      
                      1,186
                      
                      
                      
                      285Segment
      assetsPulp
                      
                      
                      4,000
                      
                      
                      
                      3,364
                      
                      
                      
                      1,332Paper
                      
                      
                      597
                      
                      
                      
                      495
                      
                      
                      
                      556Total
      segment assets per Brazilian GAAP
                      
                      
                      4,597
                      
                      
                      
                      3,859
                      
                      
                      
                      1,888Reconciling
      items to US GAAPPulp
                      
                      
                      (560
                      )
                      
                      
                      50
                      
                      
                      
                      37Paper
                      
                      
                      (171
                      )
                      
                      
                      7
                      
                      
                      
                      20Total
      pulp
                      
                      
                      3,440
                      
                      
                      
                      3,414
                      
                      
                      
                      1,369Total
      paper
                      
                      
                      426
                      
                      
                      
                      502
                      
                      
                      
                      576Property,
      plant and equipment - US GAAP
                      
                      
                      3,866
                      
                      
                      
                      3,916
                      
                      
                      
                      1,945Capital
      expenditures per Brazilian GAAPPulp
                      
                      
                      634
                      
                      
                      
                      420
                      
                      
                      
                      198Paper
                      
                      
                      55
                      
                      
                      
                      51
                      
                      
                      
                      50Reconciling
      items to US GAAPCapitalized
      interest - Pulp
                      
                      
                      3
                      
                      
                      
                      6
                      
                      
                      
                      2Total
      pulp
                      
                      
                      637
                      
                      
                      
                      426
                      
                      
                      
                      199Total
      paper
                      
                      
                      55
                      
                      
                      
                      51
                      
                      
                      
                      49Capital
      expenditures - US GAAP
                      
                      
                      692
                      
                      
                      
                      477
                      
                      
                      
                      248


F-59


Votorantim
Celulose e Papel S.A.
 
 Notes
to the Consolidated Financial Statements
 at
December 31, 2008 and 2007, and for the
 Three
Years Ended December 31, 2008
 In
millions of U.S. dollars, unless otherwise stated
 
 (b)
              Export
      sales by region
 
 The sales
by geographic area are determined based on the location of the
customers.
  2008
                
                
                
                
                
                2007
                
                
                
                
                
                2006Paper
                
                
                Pulp
                
                
                Paper
                
                
                Pulp
                
                
                Paper
                
                
                PulpEurope
                
                
                6
                
                
                
                359
                
                
                
                14
                
                
                
                342
                
                
                
                54
                
                
                
                292Middle
      East and Asia
                
                
                -
                
                
                
                183
                
                
                
                -
                
                
                
                141
                
                
                
                5
                
                
                
                127North
      America
                
                
                11
                
                
                
                57
                
                
                
                20
                
                
                
                52
                
                
                
                57
                
                
                
                46South
      America, other than Brazil
                
                
                26
                
                
                
                1
                
                
                
                54
                
                
                
                1
                
                
                
                49
                
                
                
                -Africa
                
                
                -
                
                
                
                2
                
                
                
                -
                
                
                
                -
                
                
                
                2
                
                
                
                -43
                
                
                
                602
                
                
                
                88
                
                
                
                536
                
                
                
                167
                
                
                
                465
 
 17
              Shareholders'
      Equity
 
 (a)
              Dividends
 
 Our
by-laws require that we pay a dividend to our common and preferred shareholders
of at least 25% of our annual net distributable income determined in accordance
with Brazilian Corporate Law. In accordance with VCP's dividend policy, VCP is
committed to pay dividends and/or interest attributable to capital based on 60%
of its "free operating cash flow". Free operating cash flow is expected to be an
amount equal to net income, as adjusted by the sum of (a) non - cash items such
as depreciation, amortization, unrealized foreign exchange gains (losses) and
equity gain (loss) of affiliate, and (b) net financial income (expense) and
income and social contribution taxes effectively paid, and reduced by (c) the
sum of changes in working capital required in the business and capital
expenditures. The computation is based upon VCP's financial statements prepared
in accordance with Brazilian GAAP.
 
 In 2007
and 2006 we paid dividends in excess of the mandatory amount. In 2008, no
dividends were paid or accrued relating to 2008 operations as we presented a
loss under Brazilian GAAP.
 
 The
devaluation of the Real impacts the amount available for distribution when
measured in U.S. dollars. Amounts reported as available for distribution in our
statutory accounting records prepared under Brazilian GAAP will decrease or
increase when measured in U.S. dollars as the Real depreciates or appreciates,
respectively, against the U.S. dollar. The devaluation of the Real results in
net foreign exchange losses which are included in the statement of operations
determined under Brazilian GAAP and which reduces the amount of
unappropriated  earnings available for distribution. Brazilian law
permits the payment of dividends only in Reais limited to the unappropriated
retained earnings in our financial statements prepared in accordance with
Brazilian GAAP. At December 31, 2008, we had R$ 835 million (equivalent to
US$ 357) of unappropriated retained earnings balances in reserves available
for distribution (2007 - R$ 2,240 million, equivalent to US$ 1,265) in
our statutory books.
  F-60
  Votorantim
Celulose e Papel S.A.
 
 Notes
to the Consolidated Financial Statements
 at
December 31, 2008 and 2007, and for the
 Three
Years Ended December 31, 2008
 In
millions of U.S. dollars, unless otherwise stated
 
 Dividends
paid per shares in U.S. dollars were as follows:
 
 2007
                    
                    
                    2006Preferred
                    
                    
                    0.70
                    
                    
                    
                    0.80Common
                    
                    
                    0.64
                    
                    
                    
                    0.72
 
 Preferred
shareholders are entitled to receive a dividend per share 10% higher than that
paid to common shareholders but do not have a contractual obligation to share in
losses of the Company.
 
 The
preferred shareholders may not vote at shareholders meetings but have priority
in repayment of their capital, in the case of liquidation.
 
 In
accordance with the Brazilian Corporate Law and our by-laws we are required to
make annual appropriations to certain reserves (Appropriated retained earnings).
These comprise mainly (a) 5% of the net income (loss) in our statutory accounts
which must be transferred to a legal reserve until such reserve reaches 20% of
our share capital and (b) appropriation to an investment incentive reserve of an
amount equal to income tax abatements related to income generated from
investments in certain underdeveloped regions of Brazil. The legal and
investment incentives reserves cannot be used to distribute dividends to our
shareholders.
 
 Brazilian
companies are permitted to pay limited amounts of interest attributable to
capital to shareholders and treat such payments as an expense for Brazilian
income and social contribution tax purposes. This notional interest distribution
is treated for accounting purposes as a deduction from shareholders' equity in a
manner similar to a dividend. Interest attributable to capital is treated as a
dividend for purposes of the mandatory dividend payable. A 15% tax is
withheld and paid by upon credit of the interest.
 
 (b)
              Treasury
      shares acquisition and retirement
 
 Treasury
shares transactions and additional paid-in capital:
 
 (i)
              On
      June 10, 2008 we repurchased 2,784,091 of our own shares from CMT at an
      average price of US$ 33.49 per share (Note
  4(a)).
  F-61
  Votorantim
Celulose e Papel S.A.
 
 Notes
to the Consolidated Financial Statements
 at
December 31, 2008 and 2007, and for the
 Three
Years Ended December 31, 2008
 In
millions of U.S. dollars, unless otherwise stated
 
 (ii)
              On
      July 14, 2008 we retired these treasury shares acquired reducing the
      corresponding balances of Additional paid-in capital and Retained
      earnings.
 
 18
              Concentration
      of Credit Risk
 
 We are
potentially subject to credit risk with respect to our cash equivalents,
available for sales securities, trade receivables, guarantees provided to banks
which finance our customers, and derivative contracts. We limit our risk
associated with cash equivalents and available for sales securities by placing
our investments with highly rated financial institutions and we only take out
derivative contracts with financially sound counter-parties. With respect to
trade receivables and guarantees, provided to banks financing our customers, we
perform initial and ongoing credit evaluations of our customers and, when deemed
necessary, obtain collateral or letters of credit to protect our interests.
Additionally, most of our export sales to the US, Europe and Asia are secured by
letters of credit. We establish an allowance for doubtful accounts against
receivables we believe will not be fully collected.
 
 19
              Financial
      Income and Financial Expense
 
 2008
                      
                      
                      2007
                      
                      
                      2006Financial
      incomeInterest
      income on cash equivalents
                      
                      
                      68
                      
                      
                      
                      27
                      
                      
                      
                      37Interest
      income on Pöyry's fund (Note 4(b))
                      
                      
                      32
                      
                      
                      
                      124
                      
                      
                      
                      -Gain
      on available for sale securities
                      
                      
                      -
                      
                      
                      
                      42
                      
                      
                      
                      62Reversal
      of contingency provision (Note 15(a))
                      
                      
                      8
                      
                      
                      
                      -
                      
                      
                      
                      47Present
      value adjustment
                      
                      
                      7
                      
                      
                      
                      12
                      
                      
                      
                      16Other
      (including taxes)
                      
                      
                      34
                      
                      
                      
                      31
                      
                      
                      
                      4149
                      
                      
                      
                      236
                      
                      
                      
                      166Financial
      expensesInterest
      and charges on U.S. dollar debt
                      
                      
                      67
                      
                      
                      
                      65
                      
                      
                      
                      91CMT
      payment (Note 4(a)(i))
                      
                      
                      88
                      
                      
                      
                      -
                      
                      
                      
                      -Interest
      and charges on real debt
                      
                      
                      19
                      
                      
                      
                      14
                      
                      
                      
                      15Tax
      on checking accounts - CPMF
                      
                      
                      -
                      
                      
                      
                      12
                      
                      
                      
                      9Indexation
      and interest charges on contingencies
                      
                      
                      2
                      
                      
                      
                      20
                      
                      
                      
                      6Other
                      
                      
                      51
                      
                      
                      
                      34
                      
                      
                      
                      27227
                      
                      
                      
                      145
                      
                      
                      
                      148
  F-62
  Votorantim
Celulose e Papel S.A.
 
 Notes
to the Consolidated Financial Statements
 at
December 31, 2008 and 2007, and for the
 Three
Years Ended December 31, 2008
 In
millions of U.S. dollars, unless otherwise stated
 
 20
              Liabilities
      Associated with Unrecognized
 Tax
      Benefits
 
 The
Company adopted the provisions of FIN 48, "Accounting for Uncertainty in Income
Taxes", on January 1, 2007. Beginning January 1, 2007, the Company records the
financial statement effects of an income tax and social contribution tax
position when it is more likely than not, based on the technical merits, that it
will be sustained upon examination. A tax position that meets the
more-likely-than-not recognition threshold is measured and recorded as the
largest amount of tax benefit that is greater than 50 percent likely of being
realized upon ultimate settlement with a taxing authority. Previously recognized
tax positions are derecognized in the first period in which it is no longer more
likely than not that the tax position will be sustained. The benefit associated
with previously unrecognized tax positions are generally recognized in the first
period in which the more-likely-than-not threshold is met at the reporting date,
the tax matter is ultimately settled through negotiation or litigation or when
the related statute of limitations for the relevant taxing authority to examine
and challenge the tax position has expired. The recognition, derecognition and
measurement of tax positions are based on management's best judgment given the
facts, circumstances and information available at the reporting
date.
 
 Differences
between a tax position taken or expected to be taken in the Company's tax
returns and the amount of benefit recognized and measured in the financial
statements result in unrecognized tax benefits, which are recorded in the
balance sheet as either a liability for unrecognized tax benefits or reductions
to recorded tax assets, as applicable. Interest and penalties are accrued with
respect to unrecognized tax benefits in accordance with the legislation of the
respective taxing jurisdictions, which are recognized as a component of interest
expense.
 
 The
adoption of FIN 48 did not have any impact in the Company's statements of
operations and financial position and did not result in a cumulative adjustment
to retained earnings upon adoption (Note 2(i)).
 
 As of
December 31, 2008, we have no amount recorded for any uncertainty in income
taxes.
 
 The
Company or its subsidiaries file income tax returns in Brazil and other foreign
federal and state jurisdictions. Brazilian income tax returns are normally open
to audit for five years.
  F-63
  Votorantim
Celulose e Papel S.A.
 
 Notes
to the Consolidated Financial Statements
 at
December 31, 2008 and 2007, and for the
 Three
Years Ended December 31, 2008
 In
millions of U.S. dollars, unless otherwise stated
 
 21
              Retirement
      Benefits
 
 (a)
              Defined
      contribution plan
 
 In March
2000 we began co-sponsoring a multi-employer defined contribution plan of the
Votorantim Group which is available to all of our employees. For employees below
a certain income level we match the employee's contribution limited to 1.5% of
the employee's compensation. For employees above that income level we match the
employee's contribution up to 6% of the employee's compensation. At our option
we may also make additional contributions. Our contributions vest in varying
percentages depending on the employee's years of service and will fully vest
upon the employee's retirement, death or disability, provided the employee has
at least one year of service. Our contributions were US$ 2 in 2008,
US$ 5 in 2007 and US$ 3 in 2006.
 
 (b)
              Post-retirement
      benefits
 
 The
Company has an actuarial liability that relates to its proportion of the costs
of Sepaco, a hospital facility it shares with co-sponsors. Although the
not-for-profit hospital is funded by multiple-employers, it has no separate
assets and its costs are apportioned among the sponsors based on usage.
Contributions paid to the hospital in the year ended
December 31, 2008, 2007 and 2006 amounted to, US$ 2,
US$ 3 and US$ 1, respectively and the accumulated post-retirement
benefit obligation and accrued benefit cost (no plan assets) was US$ 26 at
December 31, 2008 and US$ 23 at December 31, 2007.
 
 Measurement
of obligations for the post-retirement benefits plan is calculated as of
December 31, 2008. Based on the report of our independent actuary, the
accumulated post-retirement benefit obligation and accrued benefit cost (no plan
assets) was US$ 26.
 
 Percentage2008
                          
                          
                          2007Weighted-average
      assumptionsDiscount
      rate
                          
                          
                          7.75
                          
                          
                          
                          8.0Health
      care cost trend on covered changes
                          
                          
                          3.0
                          
                          
                          
                          3.0Components
      of net periodic benefit cost for 2009 and 2008Interest
      cost
                          
                          
                          3
                          
                          
                          
                          3Total
      net periodic benefit cost (benefit)
                          
                          
                          3
                          
                          
                          
                          3
  F-64
  Votorantim
Celulose e Papel S.A.
 
 Notes
to the Consolidated Financial Statements
 at
December 31, 2008 and 2007, and for the
 Three
Years Ended December 31, 2008
 In
millions of U.S. dollars, unless otherwise stated
 
 It has
been assumed, for measurement purposes, that health care cost trends
for 2009 will not be considerably different from 2008. Our actuaries
are unable to project the direction and pattern of changes in both the assumed
and ultimate trend rates, nor can they estimate when the rates are expected to
be achieved.
 
 A
one-percentage-point change in assumed health care cost trend rates would have
had the following effects in 2008 and 2007 (all other assumptions have been
held constant):
  One-percentage
      -
                pint
      decrease2008
              
              
              2007Sensitivity
      of retiree welfare resultsOn
      total service and interest cost components
              
              
              (0.3
              )
              
              
              (0.3
              )On
      post-retirement benefit obligation
              
              
              (3.0
              )
              
              
              (2.6
              )
 
 22
              Subsequent
      Events
 
 (a)
              Acquisition
      of shares of Aracruz
 
 On
January 21, 2009, the Families, owners of Arapar S.A. ("Arapar") and São Teófilo
Representação e Particapações S.A. ("Sao Teófilo"), which hold 6.03% and 6.32%,
respectively, of the total capital of Aracruz (equivalent to 28% of the voting
capital or 127,506,457 common shares of Aracruz) sold to VCP, for R$ 2,710
million (equivalent to US$ 1,160 at December 31, 2008), their
participations in the Arapar and São Teófilo. At an Extraordinary Shareholders
Meeting of the Company on February 6, 2009, the shareholders approved a capital
increase of up to R$ 4,254 million (equivalent to US$ 1,877, at the
exchange rate on February 6, 2009), through the issuance of 62,105,263 common
shares and up to 161,789,474 preferred shares at a unit price of R$ 19.00
per share, via a private subscription.
 
 The
Shareholders Meeting approved the capital increase subscription to be paid in
the following manner:
 
 (i)
              Votorantim
      Investimentos Industriais S.A. ("VID"), shareholder, will exercise its
      pre-emptive right to subscribe 62,105,263 common shares with a total value
      of R$ 1,180 million that will be paid via the capitalization of
      R$ 1,000 million of existing Advances for Capital Increases and the
      remaining R$ 180 million in
cash.
  F-65
  Votorantim
Celulose e Papel S.A.
 
 Notes
to the Consolidated Financial Statements
 at
December 31, 2008 and 2007, and for the
 Three
Years Ended December 31, 2008
 In
millions of U.S. dollars, unless otherwise stated
 
 (ii)
              BNDESpar,
      holder of 56,880,857 common shares of Aracruz will subscribe R$ 828
      million for 43,588,699 preferred shares of VCP, utilizing its common
      shares of Aracuz, which will be received and subscribed at a unit price of
      R$ 14.56. The shares of VCP will be issued at a unit price of
      R$ 19.00.
 
 (iii)
              BNDESpar
      will guarantee the subscription and payment of up to 95,789,517 preferred
      shares and or the unsubscribed preferred shares of VCP up to R$ 1,820
      million, requiring VID to transfer to BNDESpar, the preemptive right to
      subscribe to these preferred shares that remain after the
      subscription.
 
 (iv)
              The
      remaining shareholders of Aracruz, holders of outstanding common shares,
      will have the right to subscribe using these common shares of Aracruz, at
      a unit value of R$ 14.56 in exchange for preferred shares of VCP at
      the per unit value of R$ 19.00; The difference will be subscribed in
      cash.
 
 (v)
              The
      Families and Safra will guarantee the subscription and payment of
      unsubscribed preferred shares of VCP up to R$ 90 million
      each.
 
 On March
5, 2009, VCP executed a contract to acquire 127,506,457 common shares issued by
Aracruz, representing approximately 28% of the voting capital, from Safra, as a
result of Safra having exercised its tag along right of a joint sale with the
Families. The closing date was April 29, 2009, when the first payment occurred
and, upon its conclusion, VCP holds, directly and indirectly, approximately 84%
of the voting capital of Aracruz. The remaining payment will be settled under
the same terms agreed with the Families.
 
 Pursuant
to the deliberations that occurred on February 6, 2009 at the Extraordinary
Shareholders Meeting relating to the capital increase of VCP, the following
capital increases were made on April 30, 2009 and these capital increases as
well as subscriptions (i), (ii) and (iii) described in the second preceding
paragraph were ratified on May 27, 2009 at an Extraordinary Shareholders Meeting
on May 27, 2009 called specifically for this purpose:
 
 (i)
              Safra
      subscribed 4,537,335 preferred shares of VCP for R$ 86 million
      (equivalent to US$ 40, at the April 30, 2009 exchange
      rate).
 
 (ii)
              The
      Families subscribed 4,763,249 preferred shares of VCP for R$ 91
      million (equivalent to US$ 40, from March 6, 2009 to May 5, 2009
      exchange rate).
  F-66
  Votorantim
Celulose e Papel S.A.
 
 Notes
to the Consolidated Financial Statements
 at
December 31, 2008 and 2007, and for the
 Three
Years Ended December 31, 2008
 In
millions of U.S. dollars, unless otherwise stated
 
 (b)
              Shareholder's
      agreement with BNDESpar
 
 Upon the
conclusion of the aforementioned capital increase, VID and BNDESpar executed a
shareholders agreement that contemplated, among others, the following
conditions:
 
 (i)
              Shares
      representing 21.04% of the common shares that will be held by BNDESpar
      after the migration of VCP to the New Market of the São Paulo Stock
      Exchange - BOVESPA, will be subject to the conditions of the shareholder's
      agreement for a period of up to three years from signature and, as a
      result, BNDESpar and VID will together hold, at a minimum, 50.1% of the
      voting capital of VCP.
 
 (ii)
              Approval
      of specified matters requires the affirmative vote of
      Bndespar.
 
 (iii)
              Between
      the fourth and fifth year of the agreement's term, 10.94% of the common
      shares held by BNDESpar will be subject to the above conditions and, as of
      June 2014 all shares held by BNDESpar will no longer be subject to its
      terms.
 
 (c)
              Renegotiation
      of the debts of Aracruz
 
 On May
13, 2009, Aracruz signed the final contract with the creditor banks to pay
amounts owing from the financial derivative transactions in 2008. The principal
terms and conditions of this contract ratified the terms previously established
in the preliminary contract executed in January 2009.
 
 (d)
              Public
      Offer
 
 Pursuant
to the deliberations of an Extraordinary Shareholders Meeting of May 27, 2009,
VCP launched on June 1, 2009 a Public Offering, filed with the Comissão de
Valores Mobiliários ("CVM"), to acquire 15,507,357 common shares issued by
Aracruz (representing approximately 3.41% of the total common shares) for a per
share price of R$ 17.00. This price, which is equal to 80% of the price per
share paid to each of the Families, will be paid on the same terms and
conditions to those accepted by the Families and Safra. The Public Offer will
expire on June 30, 2009 and upon its completion all common shares of Aracruz,
representing approximately 42.5% of its total capital will be held by VCP and
BNDESPar.
 
 (e)
              Corporate
      reorganization and
 corporate
      governance
 
 In this
regard the following events have occurred:
  F-67
  Votorantim
Celulose e Papel S.A.
 
 Notes
to the Consolidated Financial Statements
 at
December 31, 2008 and 2007, and for the
 Three
Years Ended December 31, 2008
 In
millions of U.S. dollars, unless otherwise stated
 
 (i)
              On
      May 30, 2009, at an Extraordinary Shareholder Meeting of VCP, the
      conversion of its preferred shares into common shares at the exchange
      ratio of 0.91 common shares for one preferred share was ratified and,
      thereafter, subsequently ratified by a majority of the company's preferred
      shareholders at a Special Meeting held on the same day. Preferred
      shareholders who do not wish to their shares to be converted have a 30 day
      period that ends on July 2, 2009, to inform the company that they, instead
      of converting their shares, choose to redeem the shares for the respective
      book value per share.
 
 (ii)
              On
      June 1, 2009, the Boards of Directors of both Aracruz and VCP unanimously
      agreed and established the exchange ratio of 0.1347 preferred shares of
      VCP for one preferred share of Aracruz, based upon among other factors,
      the reports of the special independent committees of both Aracruz and VCP,
      that had been previously constituted for this purpose and the previous
      computation based upon the average of the daily exchange ratios as
      determined by the daily market prices of the shares of VCP and Aracruz as
      traded on the stock exchange for the period beginning December 2, 2008
      through and including January 16,
2009.
 
 (f)
              Merger
      of Aracruz's shares by VCP
 
 Within 15
days after the conclusion of the Public Offering a shareholders meeting will be
called at both VCP and Aracruz to approve the merger of all Aracruz's shares by
VCP, in accordance with the terms and conditions to be approved by their
respective Boards of Directors. At the shareholders meeting of VCP, the
acquisition of the control of Aracruz will be ratified pursuant of Brazilian
Corporate Law.
 
 The
approval by VCP of the merger of the shares issued by Aracruz does not grant
appraisal rights to preferred shareholders of either company, since the
preferred shares rights are defined pursuant of Brazilian Corporate
Law.
 
 Within
270 days from the conclusion of the merger of the shares of Aracruz by VCP, VID
intends to cause VCP to become a member of the Novo Mercado, modifying its
statutes to the Regulations for Listing on the Novo Mercado of the BM&F
BOVESPA, including the conversion of its preferred shares to common shares,
unless said membership would result in VCP being required to pay the appraisal
rights, in which case the membership would be postponed until such time as the
appraisal rights are no longer applicable.
 
 To
conform with Novo Mercado regulations, the VCP's preferred shares will be
converted into common shares. The exchange ratio will be of one preferred share
for 0.91 common shares, on the assumption that the BNDESPar will concur with the
conversion.
 
 *          *          *
  F-68