**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


**WASHINGTON,
      D.C. 20549**




**FORM
      20-F**




o
            REGISTRATION
                STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE
                SECURITIES EXCHANGE ACT OF 1934ORþ
            ANNUAL
                REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
                EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31,
                2007ORo
            TRANSITION
                REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
                EXCHANGE ACT OF 1934ORo
            SHELL
                COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
                EXCHANGE ACT OF 1934




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, 6** **th** **floor**


**01419-908,
      São Paulo, SP, Brazil**


(Address
      of principal executive offices)





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, 2007:
 **105,702,452**
                
                **Shares
                    of Common Stock****98,443,055**
                
                **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.
 Yes  þ No o
  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 þ Accelerated
        Filer oNon-accelerated
        Filer o
  Indicate
        by check mark which financial statement item the registrant has elected to
        follow.
 Item 17  o Item 18  þ
  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**


**Page**PART
                  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
              
              14ITEM
                  4A.
              
              UNRESOLVED
                STAFF COMMENTS
              
              48ITEM
                  5.
              
              OPERATING
                AND FINANCIAL REVIEW AND PROSPECTS
              
              48ITEM
                  6.
              
              DIRECTORS,
                SENIOR MANAGEMENT AND EMPLOYEES
              
              69ITEM
                  7.
              
              MAJOR
                  SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
              
              77ITEM
                  8.
              
              FINANCIAL
                INFORMATION
              
              79ITEM
                  9.
              
              THE
                OFFER AND LISTING
              
              84ITEM
                  10.
              
              ADDITIONAL
                INFORMATION
              
              88ITEM
                  11.
              
              QUANTITATIVE
                AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
              
              99ITEM
                  12.
              
              DESCRIPTION
                OF SECURITIES OTHER THAN EQUITY SECURITIES
              
              103PART
                  IIITEM
                  13.
              
              DEFAULTS,
                DIVIDEND ARREARAGES AND DELINQUENCIES
              
              103ITEM
                  14.
              
              MATERIAL
                  MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE
                OF
                  PROCEEDS
              
              103ITEM
                  15.
              
              CONTROLS
                AND PROCEDURES
              
              103ITEM
                  16A.
              
              AUDIT
                COMMITTEE FINANCIAL EXPERT
              
              104ITEM
                  16B.
              
              CODE
                OF ETHICS
              
              104ITEM
                  16C.
              
              PRINCIPAL
                ACCOUNTANT FEES AND SERVICES
              
              104ITEM
                  16D.
              
              EXEMPTIONS
                FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES
              
              105ITEM
                  16E.
              
              PURCHASES
                OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS
              
              105PART
                  IIIITEM
                  17.
              
              FINANCIAL
                STATEMENTS
              
              106ITEM
                  18.
              
              FINANCIAL
                STATEMENTS
              
              106ITEM
                  19.
              
              EXHIBITS
              
              107




i




**INTRODUCTION**




All
      references in this annual report to:




·
            “VCP,”
                “we,” “our” and “us” 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”
                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, as amended), 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




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




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.




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.




1




We
      have
      prepared our consolidated financial statements included in this annual report
      in
      conformity with generally accepted accounting principles in the United States,
      or U.S. GAAP. Our reporting currency in this annual report for all periods
      is
      the U.S. dollar.




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, PPPC, which is 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;




·
            our
                capital expenditure plans;




·
            changes
                in currency exchange rates;




·
            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
“believe,” “may,” “will,” “estimate,” “continue,” “anticipate,” “intend,”
“expect” 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.




2




**** **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**




We
      maintain our books and records in *reais* ,
      which
      are the basis for our statutory financial statements, prepared as prescribed
      under Law No. 6,404/76, as amended, known as the Brazilian corporate law,
      and used to determine income taxes and mandatory minimum dividend calculations.
      The statutory financial statements (not included in this annual report) are
      prepared in accordance with accounting practices adopted in Brazil, or Brazilian
      GAAP, which are based on the Brazilian corporate law, 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. We have also
      prepared consolidated balance sheets at December 31, 2007 and 2006 and the
      related consolidated statements of income, cash flows and changes in
      shareholders’ equity for the years ended December 31, 2007, 2006 and 2005,
      all stated in U.S. dollars in accordance with 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, 2007, 2006, 2005, 2004
      and 2003 are derived from our audited U.S. GAAP financial statements.




3




The
      following table presents a summary of our selected financial 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.




**For
                the Years Ended December 31,****2007**
            
            **2006**
            
            **2005**
            
            **2004**
            
            **2003****(U.S.
                dollars in millions, unless otherwise indicated)****STATEMENT
                OF INCOME DATA****Net
                operating revenues:**Domestic
                sales
            
            US$
            709
            
            US$
            685
            
            US$
            564
            
            US$
            512
            
            US$
            443Export
                sales
            
            
            624
            
            
            632
            
            
            566
            
            
            498
            
            
            373Total
                net operating revenues
            
            
            1,333
            
            
            1,317
            
            
            1,130
            
            
            1,010
            
            
            816**Operating
                costs and expenses:**Cost
                of sales
            
            
            887
            
            
            813
            
            
            654
            
            
            518
            
            
            421Selling,
                marketing, general and administrative
            
            
            202
            
            
            199
            
            
            193
            
            
            161
            
            
            115Gain
                on exchange of assets, net
            
            
            (955
            )
            
            —
            
            
            —
            
            
            —
            
            
            —Other,
                net
            
            
            13
            
            
            20
            
            
            36
            
            
            6
            
            
            12Total
            
            
            147
            
            
            1,032
            
            
            883
            
            
            685
            
            
            548**Operating
                income**
            
            
            1,186
            
            
            285
            
            
            247
            
            
            325
            
            
            268**Non-operating
                income (expenses):**Financial
                income (expenses), net
            
            
            91
            
            
            18
            
            
            (40
            )
            
            (29
            )
            
            (6
            )Foreign
                exchange gain (loss) and unrealized gain (loss) on swap,
                net
            
            
            214
            
            
            (4
            )
            
            (5
            )
            
            12
            
            
            (14
            )Total
            
            
            305
            
            
            14
            
            
            (45
            )
            
            (17
            )
            
            (20
            )**Income
                before taxes on income and equity in affiliates**
            
            
            1,491
            
            
            299
            
            
            202
            
            
            308
            
            
            248Income
                tax (expense) benefit
            
            
            (56
            )
            
            (4
            )
            
            8
            
            
            (36
            )
            
            (23
            )Deferred
                income tax expense on gain on exchange of assets
            
            
            (327
            )
            
            —
            
            
            —
            
            
            —
            
            
            —**Income
                before equity in affiliates**
            
            
            1,108
            
            
            295
            
            
            210
            
            
            272
            
            
            225Equity
                in earnings (losses) of affiliates
            
            
            113
            
            
            77
            
            
            54
            
            
            31
            
            
            19**Net
                income**
            
            US$
            1,221
            
            US$
            372
            
            US$
            264
            
            US$
            303
            
            US$
            244Net
                income applicable to preferred stock
            
            US$
            618
            
            US$
            188
            
            US$
            124
            
            US$
            143
            
            US$
            115Net
                income applicable to common stock
            
            
            603
            
            
            184
            
            
            140
            
            
            160
            
            
            129**Net
                income**
            
            US$
            1,221
            
            US$
            372
            
            US$
            264
            
            US$
            303
            
            US$
            244**Basic
                an diluted earnings per share or ADR (in U.S.
                dollars):**(1)Preferred
            
            US$
            6.28
            
            US$
            1.97
            
            US$
            1.46
            
            US$
            1.67
            
            US$
            1.34Common
            
            
            5.71
            
            
            1.79
            
            
            1.33
            
            
            1.51
            
            
            1.22**Weighted
                average number of shares outstanding (in
                thousands):**Preferred
            
            
            98,444
            
            
            92,240
            
            
            85,451
            
            
            85,773
            
            
            85,510Common
            
            
            105,702
            
            
            105,702
            
            
            105,702
            
            
            105,702
            
            
            105,702**Dividends
                and interest attributable to capital per share (in U.S.
                dollars):**(2)Preferred
            
            US$
            0.70
            
            US$
            0.80
            
            US$
            0.45
            
            US$
            0.58
            
            US$
            0.22Common
            
            
            0.64
            
            
            0.72
            
            
            0.41
            
            
            0.52
            
            
            0.20





4





**As
                at December 31,****2007**
            
            **2006**
            
            **2005**
            
            **2004**
            
            **2003****(U.S.
                dollars in millions)****BALANCE
                SHEET DATA**Cash
                and cash equivalents
            
            US$
            565
            
            US$
            405
            
            US$
            261
            
            US$
            151
            US
            $
            290Available
                for sale securities
            
            
            176
            
            
            365
            
            
            446
            
            
            —
            
            
            —Held-to-maturity
                investments(3)
            
            
            —
            
            
            —
            
            
            —
            
            
            278
            
            
            303Property,
                plant and equipment, net
            
            
            3,916
            
            
            1,945
            
            
            1,758
            
            
            1,443
            
            
            1,202Investment
                in affiliates, including goodwill
            
            
            1,009
            
            
            900
            
            
            596
            
            
            249
            
            
            245Total
                assets
            
            
            6,405
            
            
            4,404
            
            
            3,731
            
            
            2,644
            
            
            2,468Short-term
                debt(4)
            
            
            211
            
            
            242
            
            
            132
            
            
            79
            
            
            48Long-term
                debt, including current portion
            
            
            1,353
            
            
            1,299
            
            
            1,364
            
            
            866
            
            
            1,098Shareholders’
                equity
            
            
            3,883
            
            
            2,275
            
            
            1,737
            
            
            1,498
            
            
            1,185





**For
                the Years Ended December 31,****2007**
            
            **2006**
            
            **2005**
            
            **2004**
            
            **2003****(U.S.
                dollars in millions, except for percentages)****OTHER
                FINANCIAL DATA**Gross
                margin
            
            
            33.5
            %
            
            38.3
            %
            
            42.1
            %
            
            48.7
            %
            
            48.4
            %Operating
                margin(5)
            
            
            89.0
            %
            
            21.6
            %
            
            21.9
            %
            
            32.2
            %
            
            32.8
            %Capital
                expenditures(6)
            
            
            353
            
            
            248
            
            
            247
            
            
            218
            
            
            165Acquisition
                of interest in equity affiliate(7)
            
            
            —
            
            
            36
            
            
            275
            
            
            —
            
            
            —Depreciation
                and depletion
            
            
            143
            
            
            193
            
            
            117
            
            
            89
            
            
            72Cash
                flow provided by (used in):Operating
                activities
            
            
            333
            
            
            382
            
            
            234
            
            
            277
            
            
            238Investing
                activities
            
            
            (145
            )
            
            (113
            )
            
            (626
            )
            
            (170
            )
            
            (97
            )Financing
                activities
            
            
            (113
            )
            
            (107
            )
            
            505
            
            
            (258
            )
            
            39





**For
                the Years Ended December 31,****2007**
            
            **2006**
            
            **2005**
            
            **2004**
            
            **2003****OPERATIONAL
                DATA**Number
                of employees (at year end)(8)
            
            
            2,855
            
            
            3,498
            
            
            3,620
            
            
            3,624
            
            
            3,702Nominal
                production capacity (thousand metric tons):Pulp
            
            
            1,415
            
            
            1,480
            
            
            1,400
            
            
            1,400
            
            
            1,150Paper
            
            
            365
            
            
            640
            
            
            635
            
            
            610
            
            
            580Sales
                volumes (thousand metric tons):
            
            
            1,597
            
            
            1,611
            
            
            1,493
            
            
            1,459
            
            
            1,175Domestic
                market:
            
            
            630
            
            
            591
            
            
            506
            
            
            515
            
            
            477Market
                pulp
            
            
            228
            
            
            109
            
            
            80
            
            
            80
            
            
            77Paper
            
            
            402
            
            
            482
            
            
            426
            
            
            435
            
            
            400Printing
                and writing
            
            
            287
            
            
            371
            
            
            331
            
            
            338
            
            
            313Other
                specialty papers(9)
            
            
            115
            
            
            111
            
            
            95
            
            
            97
            
            
            87International
                market:
            
            
            967
            
            
            1,020
            
            
            987
            
            
            944
            
            
            698Market
                pulp
            
            
            870
            
            
            832
            
            
            787
            
            
            764
            
            
            530Paper
            
            
            97
            
            
            188
            
            
            200
            
            
            180
            
            
            168







(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 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 2007 of US$124 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, 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 increased by US$168
                million.




5




(8)
            The
                decline in the number of employees reflects our organizational
                restructuring and divestments that occurred during 2007, principally
                in
                the paper assets. See “Item 4 - 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**




Fluctuations
      in the exchange rate of the *real* have
      had, and may continue to have, an adverse effect on our operational results
      and
      financial condition. 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 five year period ending December 31, 2007, the *real* has
      appreciated against the U.S. dollar 22%, 9%, 13%, 9% and 21%, respectively.
      At
      December 31, 2007, the commercial market rate for purchasing U.S. dollars
      was R$ 1.7713 to US$ 1.00. The *real’s* appreciation during this period has been due to many factors including, but
      not
      limited to, the external factors of the positive effect of trade balance
      surpluses on the country’s balance of payments account and the reduction in the
      country risk factor and the results of various internal structural adjustments
      to the Brazilian economy. Foreign exchange reserves have increased significantly
      during this period, from US$ 37 billion at January 1, 2003 to
      approximately US$ 182 billion at December 31, 2007.




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 National
      Monetary Council Resolution Number 3389 of August 4, 2006 which reduced
      exchange controls over exports. Exporters may now retain outside of Brazil
      up to
      30% of the proceeds generated by exports with the remaining 70% still
      compulsorily remitted to Brazil and converted to *Reais* .
      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 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-end**2003
            
            
            2.8219
            
            
            3.6623
            
            
            3.0775
            
            
            2.88922004
            
            
            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
            
            
            1.7713





**Exchange
                Rate of*****Reais*****per
                US$ 1.00 - Month Ended**
            
            **Low**
            
            **High**July 31,
                2007
            
            
            1.8448
            
            
            1.9176August 31,
                2007
            
            
            1.8729
            
            
            2.1124September 30,
                2007
            
            
            1.8389
            
            
            1.9640October 31,
                2007
            
            
            1.7440
            
            
            1.8284November 30,
                2007
            
            
            1.7325
            
            
            1.8501December 31,
                2007
            
            
            1.7616
            
            
            1.8233





Source:
      Central Bank.




(1)
            Represents
                the daily average exchange rate during each of the relevant periods.




6




**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.




**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, bleached
      eucalyptus kraft pulp (“BEKP”) or market pulp prices in the United States,
      Europe and Asia, respectively, have fluctuated from lows of US$ 585,
      US$ 550, and US$ 500 per ton on January 1, 2005, to highs of
      US$ 805, US$ 780, and US$ 720 per ton at December 30, 2007
      in these respective regions. 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 others. In 2007, the pulp market remained favorable
      with robust demand, particularly in China and Europe, and reduced supply caused
      by low world inventories, few capacity additions, environmental issues, a
      shortage of wood and closures of high cost capacity, all of which contributed
      to
      price increases in all regions of US$ 20-30 per ton.




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. Capacity adjustments have also occurred on the
      paper side, and in 2006 we saw paper prices increasing for several grades 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 prices climbed 9%
      in
      the first nine months of 2007. For a more detailed discussion of prices of
      pulp
      and paper, see “Item 4.B—Information on VCP—Business Overview—Cyclical
      nature of world pulp prices.”




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.




7




The
      following chart shows the historical eucalyptus pulp price fluctuations by
      region during 2007 (list price CIF):










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




China
      is
      an increasingly important market to us. According to the Pulp and Paper Products
      Council (“PPPC”), the demand for chemical and market pulp in China grew to about
      8.4 million tons in 2007, a 12% increase over 2006, and represented 16% of
      the
      world pulp demand in 2007, compared to approximately 2% in 1995. China currently
      represents approximately 15% of our total export volume and 12% of our total
      sales volume, including the volume originated from Ripasa. There is no assurance
      that demand by China for pulp will continue its current pace of growth 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 financial results.




******Changes
      in worldwide or regional economic activity may adversely affect both demand
      and
      price.**




Demand
      for pulp and paper products is directly linked to overall economic activity
      within each market we conduct commercial operations. A decrease in the level
      of
      activity in either the worldwide or any of the regional markets we operate
      within could adversely affect both the demand and the price of our products
      and
      thus our financial results.




****** ***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:




·
            in
                the domestic paper market, 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 and 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 on those products. However, currently an appreciated *real* has
      resulted in increased imports of selected grades of paper, thus increasing
      competition in this product line. In addition, the Brazilian government were
      to
      decrease import tariffs, we may face a sudden additional increase in competition
      in the domestic market by foreign producers.




8




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 not be able to complete any expansion or new construction project
                on
                time or within budget;




·
            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.




****** ***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 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.




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.




9




******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.




**If
      we are unable to manage potential problems and risks related to acquisitions
      and
      alliances, 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.”




****** ***We
      are part of a family controlled group of companies.***




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.”




10




****** ***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
      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. 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.




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




We
      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 financial results.




**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 and the market price
      of our preferred shares and ADSs.***




Our
      operations are conducted in Brazil, and in 2007 we sold approximately 39% 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 grew by 2.3% in
      2005, 2.8% in 2006 and about 5.2% in 2007, but we cannot assure you that gross
      domestic product 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 drastic changes in policy and regulations. The Brazilian
      government’s actions to control inflation and affect other policies have
      included wage and price controls, currency devaluations, capital controls,
      and
      limits on imports. 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 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 could adversely affect our business,
      financial condition, results of operations or prospects and the market price
      of
      our preferred shares and ADSs.




11




***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 rates of inflation. More recently,
      according to the *Índice
      Geral de Preços-Disponibilidade Interna* ,
      or
      IGP-DI, a general price inflation index, the Brazilian general price inflation
      rates were 1%, 4% and 7.9% in 2005, 2006 and 2007, respectively. Inflation
      itself and certain governmental measures to combat inflation in the past have
      had significant negative effects on the Brazilian economy. Our cash costs and
      operating expenses are substantially all in *reais* and tend
      to increase with Brazilian inflation because our suppliers and providers
      generally increase prices to reflect the depreciation of the value 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.”




***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 devaluations 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 decrease, as expressed in U.S. dollars, as a result of any devaluation
      of the *real* .
      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 devaluation of the *real* may
      produce exchange losses on unhedged debt denominated in foreign
      currency.




During
      the years 2005, 2006 and 2007 the *real* has
      appreciated against the dollar, 13%, 9% and 21%, respectively.




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.




Devaluations
      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 “—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.” Devaluations
      also reduce the U.S. dollar value of distributions and dividends on our ADSs
      and
      the market price of our preferred shares and ADSs.




***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. Crises in other emerging market countries may
      hamper investor enthusiasm for securities of Brazilian issuers, including ours.
      This could adversely affect the trading price of the ADSs and our preferred
      shares and 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.




12




Recent
      speculation about, among other things, the rate of growth and the availability
      of credit 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.




**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.




13


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 Exchange ( *Bolsa
      de Valores de São Paulo* ),
      or
      BOVESPA, the main Brazilian stock exchange, had a market capitalization of
      approximately US$ 1,4 trillion as of December 31, 2007, and an average
      daily trading volume of approximately US$ 667 million, US$ 1.1 billion
      and US$ 2.6 billion in 2005, 2006 and 2007 respectively. In comparison, the
      New York Stock Exchange had a market capitalization of approximately US$ 27
      trillion as of December 31, 2007.




***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.




Also,
      in
      accordance with Brazilian corporate law and our by-laws, holders of our
      preferred shares, and therefore of our ADSs, are not entitled to vote at
      meetings of our shareholders except in limited circumstances.




***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, 6 th floor,
      01419 908, São Paulo, SP, Brazil (telephone: 55-11-2138-4287/4261/4361). Our
      agent for service of process in the United States is CT Corporation, 111 Eighth
      Avenue, New York, New York 10011.




14




At
      December 31, 2007, our industrial facilities consisted of one integrated
      pulp mill in Jacareí, state of São Paulo (integrated with our 40% stake in the
      joint venture with Ahlstrom Corporation (“Ahlstrom”) for the Jacareí paper mill,
      as discussed below), one facility exclusively dedicated to paper production
      in
      Piracicaba, state of São Paulo and a 50% stake in Ripasa Celulose e Papel,
      currently denominated Conpacel, located in Americana, state of São Paulo. We
      also have two forest bases under development in the states of Mato Grosso do
      Sul
      and Rio Grande do Sul and a Project Mill under construction in Três Lagoas, in
      the state of Mato Grosso do Sul. At December 31, 2007, our installed
      capacity was 1,415,000 tons per year of pulp and 365,000 tons per year of
      coated, uncoated and specialty papers with approximately 85% of our paper sales
      volume and 27% of our pulp sales volume are sold to the domestic market. In
      2007
      a number of significant transactions took place, (i) we concluded the asset
      swap with International Paper Investment (Holland) B.V. (“International Paper”),
      (ii) we sold the small scale and non-core mills of Ripasa (Embu, Cubatão
      and Limeira) and Mogi das Cruzes mill, (iii) we began a joint-venture with
      the Finnish company Ahlstrom for coated and uncoated papers in the Jacareí mill,
      (iv) we signed an Strategic Business Agreement (“SBA”) with Oji Paper for
      the technology transfer in the special papers, (v) we achieved productivity
      gains at Ripasa and (vi) we negotiated long-term contracts for pulp
      supply,in connection with the paper assets divestments. Additionally, we have
      received an investment-grade rating from three world’s most respected rating
      agencies: Standard and Poors, Fitch Rating and Moody’s. See “Item 4.A.
      Information on VCP - History and Development of VCP.”




We
      also
      have a paper distribution division, KSR, with an extensive product line,
      including graphic papers and products. We have an automated, modern warehouse
      system that permits efficient distribution and that is supported by a
      specialized transportation fleet for deliveries throughout Brazil.




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 Bovespa. In 1995, Celpav
      became a subsidiary of Papel Simão, and Papel Simão changed its name to
      Votorantim Celulose e Papel S.A. We later transferred our operating assets
      to
      Celpav and, in July 1999, Celpav was merged into VCP.




In
      1991,
      our annual capacity was 350,000 tons per year of pulp and 280,000 tons per
      year
      of paper. With the acquisition of Papel Simão, the Votorantim group added
      220,000 tons of pulp and 250,000 tons of paper to the annual pulp and paper
      production capacity, respectively. Following the acquisition of Papel Simão, the
      Votorantim group’s combined pulp and paper operations were the third largest in
      Brazil in terms of sales. We further increased our pulp production capacity
      by
      230,000 tons in 1996 with the addition of a new pulp production line at the
      Jacareí mill. We also added a new coater in 1996 at the Piracicaba mill, which
      increased our annual production capacity of thermal and carbonless paper to
      40,000 tons per year and further production optimizations in 2001 raised the
      production capacity by 50,000 tons of pulp per year. Our annual production
      capacity of coated paper increased to 175,000 tons per year with the addition
      of
      a new coater at the Jacareí mill in 1997 and the addition of a new on line
      coater at the Piracicaba mill in 1998. As a result of these additions and other
      optimization projects, our paper production capacity reached 635,000 tons per
      year in 2005.




On
      December 29, 1999, we sold our 51% stake in Indústria de Papel de Salto
      Ltda., or Salto, to Arjo Wiggins Participações e Comércio Ltda., a subsidiary of
      Arjo Wiggins S.A., a French company, for a cash payment of US$ 23 million.
      Salto produced security, industrial and other specialty papers, including paper
      used for bank notes, checks, identification cards, vouchers and bibles. We
      realized a gain of US$ 13 million on this sale.




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.




On
      August 14, 2000, our Board of Directors approved the Jacareí expansion,
      which has expanded the pulp production capacity at our Jacareí mill by
      approximately 570,000 metric tons, raising our total current annual installed
      capacity from 850,000 in 2002 to 1.4 million metric tons per year in 2005.
      We
      had invested a total of US$ 495 million in the Jacareí expansion. The
      government-owned development bank, Banco Nacional de Desenvolvimento Econômico e
      Social—BNDES, or BNDES, financed part of our investment in the Jacareí
expansion. See “Item 4—Information on VCP—Property, Plant and
      Equipment—Expansions.”




15




On
      October 3, 2001, we purchased 28.0% of the voting shares (representing
      12.35% of the total capital) of Aracruz Celulose S.A., or 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 incorporated Newark Financial Inc. (“Newark”) to enable us to acquire
      our interest in Aracruz and we financed this acquisition with a bridge loan
      in
      the amount of US$ 370 million in 2001, which was refinanced in
      May 2002 with a US$ 380 million syndicated loan and fully paid in
      2005. See “Item 5—Operating and Financial Review and Prospects—Liquidity
      and Capital Resources—Debt.” Our acquisition of 28% of Aracruz’s voting shares
      was unconditionally approved by the *Conselho
      Administrativo de Defesa Econômica* ,
      known
      as CADE, the Brazilian antitrust regulator, on November 25, 2003. 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, 2007 and 2006 the market
      price for each Aracruz ADR was US$ 74.35 and US$ 61.21,
      respectively.




We
      do not
      expect to have significant operational involvement at Aracruz at this time.
      A
      subsidiary of ours became a party to the Aracruz shareholders’ agreement, along
      with BNDESPAR, the Lorentzen Group and the Safra Group. Under the shareholders’
agreement, our subsidiary is entitled to and has appointed three directors
      to
      the Aracruz Board of Directors, which currently consists of ten directors.
      The
      shareholders’ agreement, which expires on May 11, 2008, provides that the
      maximum number of shares of voting stock of Aracruz to be held by any party
      to
      the shareholders’ agreement may not exceed 28% of the total outstanding shares
      of voting stock of Aracruz. In addition, the shareholders’ agreement requires
      that each person or entity who acquires shares of voting stock of Aracruz from
      any of the parties to the shareholders’ agreement become a party to such
      agreement.




On
      December 1, 2001, VCP Exportadora e Participações S.A., or VCP Exportadora,
      incorporated in April 2001, indirectly acquired VCP North America Inc.,
      incorporated in Delaware, United States, or VCP North America, and VCP Trading
      N.V. incorporated in Curaçao, or VCP Trading, from Votorantim International
      Holding N.V., for US$ 50,000 and US$ 30,000, respectively, for the
      purpose of centralizing our commercial operations in VCP Exportadora.




In
      January 2002, we incorporated VCP Florestal, which assumed all of the
      assets and liabilities relating to our forestry operations. In March 2002,
      we incorporated VCP Overseas Holding KfT, or Overseas Holding, our wholly owned
      subsidiary incorporated in Hungary. In June 2002, we incorporated St. Helen
      Holding III, B.V., located in Curaçao.




In
      February 2003, Arapar S.A. and Lorentzen Empreendimentos S.A., collectively
      Grupo Lorentzen, on the one hand, and SODEPA, on the other hand, as shareholders
      of Aracruz, entered into an agreement pursuant to which each party agreed not
      to
      sell their respective shareholding in Aracruz without the consent of the
      other.




In
      November 2004, we signed an agreement with Suzano Bahia Sul Papel e
      Celulose S.A., or Suzano, for the acquisition of the common and preferred stock
      of Ripasa S.A. Celulose e Papel, or 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.




On
      January 26, 2005, in an Extraordinary General Meeting, our shareholders
      determined that VCP Florestal be merged into us to achieve cost reductions
      and
      increased business synergies between the two companies. VCP Florestal was
      dissolved as a result of the merger and we succeeded it with respect to all
      rights and obligations thereof. There was no increase in our capital stock
      as a
      result of the merger as we owned all the shares of VCP Florestal.




16




On
      July 20, 2005, VCP and Suzano announced a proposed corporate restructuring
      to be implemented in Ripasa, which would allow that company’s minority
      shareholders (around 1,300 shareholders) to migrate to VCP and Suzano. This
      restructuring was examined by the CVM, which did not object to or restrict
      its
      realization; however, the restructuring was suspended by judicial decision.
      Given the potentially lengthy period of delay to reach a favorable outcome
      and
      the fact that the synergies generated by the acquisition of Ripasa were not
      being fully realized, on April 26, 2006, VCP and Suzano, in order to settle
      the judicial action and implement the restructuring, entered into an agreement
      with the group of Ripasa’s preferred shareholders, who had brought the action to
      block the acquisition. Ripasa’s minority shareholders received shares of VCP and
      Suzano plus a complementary amount in cash equivalent to R$ 1.0712 for each
      Ripasa preferred share in their possession on the date of registration. Ripasa’s
      restructuring was concluded and, in September 2006, VCP and Suzano started
      to sell Americana’s unit products as a pre-consortium stage whereby each party
      purchases 50% of Ripasa’s production and resells it within its own distribution
      channels. In August 2007, the Brazilian anti-trust authority (CADE)
      approved the Ripasa purchase with minor restrictions. We are still waiting
      for
      the Brazilian tax authorities’ approval to transform Ripasa’s unit of Americana
      into a consortium (Conpacel). See “Competition” for more details about the
      Ripasa transaction.




Following
      the corporate restructuring, the said call options and the put option of certain
      former controlling shareholders of Ripasa, were modified to substitute the
      Ripasa shares for shares in VCP and Suzano as those former Ripasa minority
      shareholders had exchanged their shares for shares in VCP and Suzano.
      Accordingly, VCP has a call option to acquire 3,124,139 of its own
      non-redeemable preferred shares during a twelve-month period starting on
      March 31, 2010. At December 31, 2007, the total updated amount was
      US$ 358 million for both VCP and Suzano interests. The former shareholders
      of Ripasa, now shareholders of VCP, who are party to the agreement, have a
      put
      option which may require VCP to acquire all their non-redeemable preferred
      shares during a period of five years through March 31, 2010. Pursuant to
      the agreement, as a required condition precedent, the put/call options can
      only
      be exercised if the underlying shares are free of liens and encumbrances. For
      more information on the call and put options, see Note 4(a) to our financial
      statements.




In
      November 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 450 to 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 are progressing on the environmental licensing
      and the project should be submitted to the Board of Directors approval by 2009,
      after which the basic engineering and the technical proposals should be
      developed.




In
      February 2006, we announced that Standard & Poor’s Ratings Services
      (S&P) assigned its ‘BBB-’ foreign and local currency global scale corporate
      credit ratings to VCP, an investment grade rating category. According to
      S&P, the outlook is stable for VCP, which reflects the assumptions that VCP
      will improve its financial performance by 2006 based on the recovery of the
      domestic paper sector; will continue to adopt a prudent financial policy,
      presenting comfortable levels of cash holdings; and will start to show debt
      de-leverage at the same pace as its debt amortization, depending on future
      investment opportunities.




In
      April 2006, for administrative and economic reasons, we merged VCP
      Exportadora e Participações S.A., a wholly owned subsidiary, into VCP and
      assumed all of the assets and liabilities relating to its export
      operations.




In
      September 2006, we announced a plan to divest our non-integrated special
      paper mill located in the city of Mogi das Cruzes in the state of São Paulo. For
      additional information on our divestiture plan, see note 4 (c) to our
      financial statements.




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”) being
      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 as stated at the exchange asset date
      in
      the amount of US $1.15 billion for the mill construction. Pursuant
      to an amendment to the agreement, all financial income accruing from the funds
      in trust will be applied, exclusively, to the project under construction. This
      financial income in 2007 totaled US$ 124 million.




17




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 previously contracted an internationally
      recognized engineering and construction company, Pöyry
      Engenharia (“Pöyry”) ,
      on an
      EPC Engineering, Procurement and Construction, or EPC, basis to build the Três
      Lagoas mill as a turn-key project. Chamflora has already paid Pöyry for the EPC,
      which had in turn transferred to a commercial bank acting as the Trustee Bank
      (“Trustee”) the corresponding funding of this 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 the completion of the construction and start-up of the mill,
      these costs will be transferred to the appropriate fixed assets accounts.
      Additionally, pursuant an amendment to the agreement all financial income
      accruing from the funds in trust will be applied, exclusively, to the project
      under construction. See Item 4C “Organizational Structure” and
      Item 10.C “Additional Information—Material Contracts.”




A
      third
      party, Pöyry, was contracted in 2006 by International Paper's subsidiary (now
      denominated VCP-MS) as a project manager for the project mill construction.
      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.




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 tonnes 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 is expected to be
      completed in May 2009 and to have a nominal capacity of 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.




In
      November 2006, Fitch Ratings has assigned ‘BBB-’ foreign and local currency
      issuer default ratings (IDRs), and investment grade rating, to the Company.
      According to Fitch Ratings, the rating outlook is stable. VCP’s ratings are
      supported by its strong business position and solid financial profile. The
      rating confirms our strategy to diversify our products and markets, maintaining
      competitive costs and the commitment with business sustainability.




In
      February 2007, we concluded the exchange of our industrial and forestry
      assets located in the city of Luiz Antonio (state of São Paulo) for
      International Paper’s pulp mill project and forestry assets located in Três
      Lagoas (state of Mato Grosso do Sul), which are held by our wholly owned
      subsidiary VCP-MS.




Also
      in
      February 2007 we announced the sale to Suzano of our 50% interest in the
      Ripasa unit located at Embu, in the municipality of São Paulo, as part of the
      Ripasa reorganization. The Embu unit was valued at US$ 40 million, so our
      50% indirect interest totaled US$ 20 million. The closing date of the
      divestment was on March 30, 2007. This transaction was in line with our
      strategic plan to divest Ripasa’s non-strategic units. The Embu unit had a
      production capacity of 48,000 tons per year of cardboard.




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.




18




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 position. The paper 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.




Under
      the
      terms of the agreement, Ahlstrom has 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 has an option to sell the same number of shares at the
      same
      time. The first option can be exercised at any time from the beginning of the
      second year of the venture’s operations through the end of that year. This first
      option allows VCP to sell and/or Ahlstrom to buy 20% of VCP’s interest for the
      equivalent of US$ 38 million in *reais* .
      The
      second option can be exercised at any time between the beginning of the third
      year of operations and terminates at the end of the fourth year of operations.
      This option allows VCP to sell and/or Ahlstrom to buy the remaining 20% of
      its
      interest (if the first option has been exercised) or the remaining 40% (if
      the
      first option has not been exercised). The price of this second option will
      be
      calculated based on a formula determined in the contract such that the total
      amount to be paid for the 100% interest will not be less than US$ 165 million
      and not be higher than US$ 190 million. See Item 4C “Organizational Structure”
and Item 10.C “Additional Information - Material Contracts.”




In
      May,
      2007 Standard & Poor’s Ratings Services (S&P) upgraded our foreign and
      local currency global scale corporate credit rating to “BBB” from “BBB-,”
strengthening our position within the investment grade rating category. The
      outlook is stable. The rating reflects our solid and long-standing track record
      of financial performance coupled with the reduced country risks and better
      economic prospects for Brazil. The upgrade is also supported by the steady
      ongoing and increasing export base of our company which guarantees its strong
      capacity to service debt and which should be strengthened by the relevant cash
      generation originated from the Três Lagoas project from 2009 onwards.
      Additionally, the Brazilian forest product industry shows positive long-term
      trends in which we have a highly competitive position, with one of the lowest
      pulp production costs in the world, and contributing to prudent growth prospects
      through organic expansions.




In
      June 2007, we redifined the scope of the pulp project mill now under
      construction in Três Lagoas, state of Mato Grosso do Sul, by increasing the
      nominal capacity from 900,000 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. The resulting capacity increase will result in
      the
      plant being more competitive and the optimization of the investment per metric
      ton. We believe that the pulp project mill in Três Lagoas, in the state of Mato
      Grosso do Sul, has a potential for a future second phase expansion.




In
      August 2007 we and Suzano announced, as part of the Ripasa reorganization,
      the sale of our respective interests in the Ripasa’s units located in Cubatão
      and Limeira, to MD Papéis LTDA for a total of US$ 65 million. The closing
      of the transaction occurred in November 2007. The Cubatão unit has a
      production capacity of approximately 61,000 tons per year of graphic, editorial
      and special printing and writing papers. The Limeira unit has a production
      capacity of approximately 58,000 tons per year of cardboard. This transaction
      concluded the restructuring process of Ripasa.




Also
      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 expansion of our Piracicaba mill will permit
      the continuation of enhanced quality and improved value to our
      customers.




19




On
      August 9, 2007, the Administrative Council for Economic Defense (CADE)
      approved with minor restrictions relating to Corporate Governance and free
      competition, the acquisition of RIPASA by VCP and Suzano, announced in 2004.
      Approval is still pending from tax authorities to convert the Americana mill
      production unit into a consortium (Conpacel).




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. The ratings outlook was stable. According to Moody’s, the ratings
      reflect primarily our position as one of the lowest cost pulp producers globally
      based on a long-term sustainable business model, depicted by structural cost
      advantages against most international peers, including substantial
      self-sufficiency in wood fiber and electricity, and efficient logistics. The
      stable outlook reflects Moody’s view that our company will remain a global
      cost-competitive pulp producer over the near term, and will prudently manage
      its
      capital structure during its expansion program while simultaneously maintaining
      healthy liquidity levels.




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.




**Capital
      Expenditures**




Our
      capital expenditures disbursements totaled US$ 353 million in 2007,
      US$ 248 million in 2006 and US$ 247 million in 2005. We expect our
      capital expenditure to be US$ 583 million in 2008. The increase in capital
      expenditures from 2006 to 2007 was mainly due to continued large investments
      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, state of Mato Grosso do Sul 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.




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,****2007**
              
              **2006**
              
              **2005****(in
                  US$ millions)**Expansion
              
              US$
              67
              
              US$
              47
              
              US$
              32Forests
                  (includes land purchase)
              
              
              216
              
              
              116
              
              
              131Improvements/modernization
              
              
              12
              
              
              33
              
              
              35Other
                  (includes maintenance and information technology)
              
              
              58
              
              
              52
              
              
              49Total
              
              US$
              353
              
              US$
              248
              
              US$
              247





If
      we
      consider our 50% stake in Ripasa, we have an additional capital expenditure
      of
      US$ 57 million, primarily related to the expansion of the pulp capacity of
      the mill (Project P630), increasing our total capital expenditure for 2007
      to
      US$ 410 million.




20




The
      following table shows the estimated breakdown of planned capital expenditures
      during 2008, which is expected to be financed by cash generated from operations
      and by existing cash:




**US$ in
                millions**Expansion
                projects
            
            $
            247Forests
                (includes land purchase)
            
            
            281Improvements/modernization
            
            
            13Other
                (includes maintenance and information technology)
            
            
            42Total
            
            $
            583





If
      we
      consider our 50% stake in Ripasa, US$ 47 million, we have for 2008 a total
      capital expenditure amounting to US$ 629 million. Planned land acquisition
      and forestry plantation in 2008 will occur principally in Rio Grande do Sul
      and
      Mato Grosso do Sul states. Disbursements for expansion will be principally
      related to the capacity expansion of the Três Lagoas mill, currently under
      construction, including US$ 129 million for the Três Lagoas mill related
      mostly to costs associated with the increase in nominal capacity and similar
      matters. Disbursements from the construction trust account for the initial
      project are not included within these amounts.




**B.**
            **Business
                Overview**




We
      are
      one of the largest pulp and paper products companies in Brazil and among the
      leading Brazilian producer of wood-free printing and writing papers and
      specialty papers in terms of net operating revenue and total assets, according
      to Bracelpa. We produce bleached eucalyptus kraft pulp (“BEKP”), which is a
      high-quality variety of hardwood pulp. In 2006 and 2007 we sold approximately
      63% and 80%, 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.




**Operations**




Our
      total
      sales volume was 1,492,527 tons in 2005, 1,611,398 tons in 2006 and 1,596,988
      tons in 2007. Our net revenues were US$ 1,130 million in 2005,
      US$ 1,317 million in 2006 and US$ 1,333 million in 2007.




In
      2007,
      40% of the volume and 53% of total sales were derived from the domestic market
      compared to 37% and 52%, respectively, in 2006, 34% and 50% , respectively,
      in
      2005. In the pulp market, the domestic market accounted for 21% of the sales
      volume and 18% of the revenues derived from pulp in 2007. In the paper market,
      the domestic market accounted for 80% of the sales volume and for 87% of the
      revenues derived from paper in 2007. The table below sets forth the percentages
      of our net revenues in 2007, 2006 and 2005 that correspond to the domestic
      and
      export markets and the breakdown by product of our net revenues:




**2007**
            
            **2006**
            
            **2005****Sales
                by market**Domestic
            
            
            53
            %
            
            52
            %
            
            50
            %Export
            
            
            47
            %
            
            48
            %
            
            50
            %**Sales
                by product**Market
                Pulp
            
            
            49
            %
            
            39
            %
            
            39
            %Paper
            
            
            51
            %
            
            61
            %
            
            61
            %





In
      2007,
      we produced 1,394,370 tons of eucalyptus pulp compared to 1,444,480 tons in
      2006
      and 1,372,197 tons in 2005. In 2007, we sold 1,097,652 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. We sold US$ 439 million in 2005, US$ 520
      million in 2006 and US$ 657 million in 2007. The increase in our market
      pulp revenues from 2005 to 2007 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 4—Information
      on VCP—History and Development of VCP.”




21




In
      2007,
      our sales volume of paper products decreased to 499,336 tons from 669,593 tons
      in 2006. 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 64% of our total paper products revenues
      in
      2007 and 72% of our total paper products revenues in 2006. The remainder of
      our
      revenues from paper products in 2006 and 2005 were made up of sales of special
      and chemical (thermal and carbonless) paper, accounting for 36% in 2007 and
      28%
      in 2006 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 2007, based on data
      from
      Bracelpa, was 32% for coated papers, 15% for uncoated cut-size papers and 12%
      for uncoated offset papers. We sold 20% of our total printing and writing paper
      sales volume outside of Brazil in 2007 (30% in 2006).




**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, 2007 (see
“Item 4.c.—Organizational Structure” for the total economic structure of
      VCP):










VCP’s
                immediate parent company is VID, which in turn is ultimately controlled
                by
                VPAR, which in turn is controlled by Hejoassu Administração Ltda., which
                is controlled by the Ermírio de Moraes family. As of December 31,
                2007, our total shares outstanding were 204,145,507 (105,702,452
                voting
                and 98,443,055 preferred).




**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;




·
            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;




22




·
            achieve
                sales of 6 million tons per year of market pulp and reducing the
                paper
                presence to 0.5 million tons per year of printing and writing papers
                by
                2020; 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 2007, we sold approximately 80% of our market
      pulp tonnage outside of Brazil (88% in 2006), 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.
      Investment in Aracruz and the Jacareí expansion reinforce our presence in the
      international pulp market. The Três Lagoas pulp mill now under construction
      obtained via our asset exchange with International Paper, as supported by
      continued investment in new forestry bases in the Brazilian states of Rio Grande
      do Sul and Mato Grosso do Sul, are the sources for 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 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 2007,
      from
      approximately 33% in 1997. 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 plan to take advantage of the
      opportunity to recover our market share if the *real* depreciates or stabilizes against the U.S. dollar.




***Increase
      operating efficiencies***




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




23




·
            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, being built and expected to be completed
      in May 2009. We continue to acquire land for a new forest base in both the
      south and western regions of Brazil, preparing fiber supply for future growth.
      Between 1997 and 2007, the average annual rate of paper consumption in Brazil
      increased by 3.3%, reaching 8.0 million tons in 2007, 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.




**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:




**Years
                ended December 31,****2007**
            
            **2006**
            
            **2005**Market
                Pulp
            
            
            49
            %
            
            39
            %
            
            39
            %Paper:Uncoated
                (P&W/Cut Size)
            
            
            19
            %
            
            31
            %
            
            31
            %Coated
            
            
            13
            %
            
            13
            %
            
            14
            %Specialty
                / Chemical papers
            
            
            19
            %
            
            17
            %
            
            16
            %





24




**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,****2007**
            
            **2006**
            
            **2005**VCP’s
                production (in tons)
            
            
            1,394,370
            
            
            1,444,480
            
            
            1,372,197Total
                Brazilian production (in tons)
            
            
            11,800,000
            *
            
            11,180,000
            
            
            8,093,529VCP’s
                production as percentage of total Brazilianproduction
            
            
            11,8
            %
            
            12.9
            %
            
            17.0
            %







Sources:
      Bracelpa and VCP. Figures for Brazilian production changed due to updated
      reports released by Bracelpa.




(*)
            Bracelpa:
                figure through November 2007.




***Sales***




In
      2007,
      we sold 1,097,652 tons of bleached pulp as market pulp to third parties in
      the
      domestic market and outside of Brazil. We had a 26% share of the Brazilian
      domestic market for bleached hardwood pulp as of Bracelpa’s figures released in
      December 2007. In recent years, however, we have sought to increase our
      sales of market pulp outside of Brazil. In 2007, approximately 80% 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,****2007**
            
            **2006**
            
            **2005****Tons**
            
            **%
                of Total**
            
            **Tons**
            
            **%
                of Total**
            
            **Tons**
            
            **%
                of Total**North
                America
            
            
            81,038
            
            
            9.3
            
            
            77,075
            
            
            9.3
            
            
            75,987
            
            
            9.7Latin
                America
            
            
            1,685
            
            
            0.2
            
            
            —
            
            
            —
            
            
            1,608
            
            
            0.2Europe
            
            
            557,610
            
            
            64.1
            
            
            508,489
            
            
            61.1
            
            
            474,484
            
            
            60.3Asia/Middle
                East/Oceania/Africa
            
            
            229,563
            
            
            26.4
            
            
            246,618
            
            
            29.6
            
            
            234,865
            
            
            29.8Total
                Exports
            
            
            869,897
            
            
            100.0
            
            
            832,182
            
            
            100.0
            
            
            786,944
            
            
            100.0





In
      2007
      Santher remained our largest domestic customer of pulp, followed by the joint
      venture between Ahlstrom and VCP and IBEMA. UPM-Kymmene, Georgia Pacific, APP,
      M-Real and PKS 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 a study conducted in
      November 2007 by Hawkins Wright, an independent international consulting
      firm, the projected average demand growth in the world for bleached eucalyptus
      kraft pulp, or BEKP, is 8.7% per year from 2006 to 2011 (and 2.2% per year
      for
      the total white pulp demand), while the total white pulp capacity (including
      BEKP) projected average growth is 3.9% per year in the same 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.




25




**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 other specialty
                papers.




The
      production and sale of uncoated printing and writing papers is our major line
      of
      paper business, accounting for approximately 38% of our total net paper sales
      and 84% of our paper exports in 2007. The following table provides a brief
      description of our principal paper products and lists the facilities where
      they
      are produced:




**Product**
            
            **Description**
            
            **Facility**Coated
                printing and writing paper
            
            Coated
                woodfree paper used for labels, self-adhesive, flexible packaging
                markets
                and publishing sector (magazine, book and catalogue) inserts
                brochures and other publications; pioneer line of coated cut-size
                paper
                for small/home office market designed for printing of high-resolution
                and
                high-quality images; coated paper to be used on labels for plastic
                PET
                soft drink packaging.
            
            Jacareí
              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.
            
            Jacareí
              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.




26




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,****2007**
            
            **2006**
            
            **2005**VCP’s
                production* (in tons)
            
            
            423,568
            
            
            611,044
            
            
            602,214Total
                Brazilian paper and paperboard production (in tons)
            
            
            8,970,000
            **
            
            8,724,631
            
            
            8,597,716VCP’s
                production as percentage of total Brazilian production
            
            
            4.7
            %
            
            7.0
            %
            
            7.0
            %





Sources:
      Bracelpa and VCP.




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




(**)
            For
                2007, estimated figure from
                Bracelpa.




*Printing
      and Writing Paper* .
      According to Bracelpa, in 2007, we were Brazil’s third largest producer of
      uncoated offset paper and second largest producer of uncoated cut-size paper,
      and we ranked first in coated paper production. During 2007, we produced 348,065
      tons of printing and writing paper consisting of approximately 202,115 tons
      of
      uncoated and 145,950 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 32%, 12% and 15% in the
      coated, uncoated (offset) and cut-size printing and writing markets,
      respectively.




27




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,****2007**
            
            **2006**
            
            **2005**VCP’s
                production* (in tons)
            
            
            348,065
            
            
            525,476
            
            
            520,294Uncoated
                paper (in tons)
            
            
            202,115
            
            
            382,436
            
            
            376,211Coated
                paper (in tons)
            
            
            145,950
            
            
            143,040
            
            
            144,083Total
                Brazilian production (in tons)
            
            
            2,538,000
            **
            
            2,512,956
            
            
            2,414,014VCP’s
                percentage of Brazilian production
            
            
            13.7
            %
            
            20.7
            %
            
            21.6
            %





Sources:
      Bracelpa and VCP.




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




(**)
            For
                2007, estimated figure from
                Bracelpa.




*Carbonless
      and Thermal Papers* .
      In
      2007, we produced 67,148 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 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.




*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. In 2007, we produced 8,355
      tons
      of other specialty papers from our Mogi das Cruzes facility, including art
      papers for catalogues, folders, letters and envelopes and finish foil for the
      furniture industry. 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,****2007**
            
            **2006**
            
            **2005**VCP’s
                carbonless and thermal paper production* (in tons)
            
            
            67,148
            
            
            62,466
            
            
            59,386VCP’s
                other specialty paper production* (in tons)
            
            
            8,355
            
            
            23,102
            
            
            22,534Total*
                (in tons)
            
            
            75,503
            
            
            85,568
            
            
            81,920





Sources:
      VCP.




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




28


**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:




**2007**
            
            **2006**
            
            **2005****Tons**
            
            **%
                of total**
            
            **Tons**
            
            **%
                of total**
            
            **Tons**
            
            **%
                of Total**North
                America
            
            
            20,774
            
            
            21.3
            %
            
            59,822
            
            
            31.8
            %
            
            66,551
            
            
            33.3
            %Latin
                America(1)
            
            
            57,883
            
            
            59.4
            %
            
            51,531
            
            
            27.4
            
            
            53,767
            
            
            26.9Europe
            
            
            15,648
            
            
            16.0
            %
            
            62,536
            
            
            33.3
            
            
            61,173
            
            
            30.7Middle
                East/Asia/Africa/Other
            
            
            3,194
            
            
            3.3
            %
            
            14,150
            
            
            7.5
            
            
            18,216
            
            
            9.1Total
                Exports
            
            
            97,499
            
            
            100.0
            %
            
            188,039
            
            
            100.0
            %
            
            199,707
            
            
            100.0
            %








(1)
            Excluding
                Brazil.




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,****2007**
            
            **2006**
            
            **2005**VCP’s
                carbonless and thermal paper sales (in tons)
            
            
            66,353
            
            
            64,186
            
            
            60,669VCP’s
                other specialty paper sales(1)(in
                tons)
            
            
            48,054
            
            
            45,976
            
            
            33,765Total
                (in tons)
            
            
            114,407
            
            
            110,162
            
            
            94,434








(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 2006 and 2007, we exported 187,644 tons and 97,220 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,****2007**
            
            **2006**
            
            **2005**VCP’s
                exports (in tons)
            
            
            97,220
            
            
            187,644
            
            
            199,424Brazilian
                exports (in tons)
            
            
            863,100
            *
            
            800,297
            
            
            903,527VCP’s
                percentage of Brazilian exports
            
            
            11.2
            %
            
            23.4
            %
            
            22.1
            %VCP’s
                domestic sales (in tons)
            
            
            287,430
            
            
            371,393
            
            
            331,434Brazilian
                market (in tons)
            
            
            1,604,250
            *
            
            1,616,800
            
            
            1,496,003VCP’s
                percentage of Brazilian market
            
            
            18.0
            %
            
            23.0
            %
            
            22.2
            %





Sources:
      Bracelpa and VCP.




(*)
            Bracelpa:
                figure through November 2007.




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
      of paper products in 2007.




29




**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:




**Country**
            
            **Harvest
                (years)**
            
            **Yield
                (m****3****/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





***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 2007, we generated approximately 82.3%
      (66.2% in 2006) of our energy requirements for the pulp and paper production
      process internally, of which 79.1% is from renewable fuels, such as biomass
      and
      black liquor, and 20.9% is 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
      2007
      we purchased approximately 17.7% (34% in 2006) 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.
      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. In 2007, 100% of our pulp was produced
      without the use of elementary chlorine.




30




At
      December 31, 2007, 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$ 58 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$ 42 million per year. See note 15(d) to our financial
      statements.




***Water***




We
      currently require about 26 cubic meters of water per ton of pulp and paper
      (32
      cubic meters per ton of pulp and paper in 2006). The costs of obtaining our
      water were not a significant component of our total cost of raw materials in
      2007. We get our water from several rivers in the state of São Paulo, Brazil,
      including the Paraíba do Sul, Piracicaba. We believe our average water supplies
      are currently adequate and that our water consumption per ton is very low;
      particular in the Jacareí mill because of that facility’s use of more modern
      technology.




Beginning
      in 2003, the Brazilian government imposed tariffs on the industrial use of
      river
      water. For the Paraíba do Sul River, which is located near the Jacareí mill, the
      levying of tariffs related to water consumption started in the beginning of
      2003. From our experience to date, the imposition of such tariffs has not had
      a
      significant impact on our production costs. The levying of tariffs for water
      consumption from the Piracicaba River started in 2006.




***Eco-efficiency***




Our
      papers now emphasize eco-efficiency throughout the production process through
      a
      seal of approval that highlights the care shown regarding environmental
      preservation in each product sold. At the beginning of 2007, new Copimax paper
      packaging was introduced as a way of communicating 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. The eco-efficiency production factors also include:




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




·
            Low
                consumption of water to produce pulp: 30 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;




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




**Transportation**




For
      wood
      transportation we use trucks and also the railroad. 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 products, the transport is done by train.
      Santos is located on the coast of the state of São Paulo approximately 150
      kilometers from the Jacareí mill.




31




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, in order to invest in a private railway from the
      Jacareí plant to the port of Santos to transport pulp to the port from the mill.
      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 and
      the
      investment in dedicated railway wagons, while we were responsible for the
      construction of the building 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 the costs incurred, which has 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 2007, we
      shipped 825,000 tons of pulp and over 120,000 tons of wood through MRS and
      paid
      US$ 11.5 million to MRS.




In
      2007
      we conducted a tender 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 expert that will capture
      economies of scale and synergies and reduce our costs. They were contracted
      to
      handle all the operational activities, 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. Another logistical advantage comes from KSR,
      a
      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 27 affiliates and
      an
      automated storage system which results in a fast service, supported by a
      specialist fleet which can make deliveries throughout Brazil.




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.




The
      VCP
      unit in Três Lagoas, in the state of Mato Grosso do Sul, is the largest
      eucalyptus pulp facility under construction in Brazil, with a capacity of 1.3
      million tons per year. The Project Mill construction is under Pöyry management
      and, when concluded in May 2009, will result in the state of Mato Grosso do
      Sul becoming a significant Brazilian pulp production center, thereby
      contributing to the social and economic development of the region.




In
      order
      to simplify and increase the productivity of the deliveries of pulp to our
      final
      customers in Europe, the United States and Asia, we made in 2007 a complete
      reassessment of the logistics set up for all those three regions. Those changes
      will be implemented during the year of 2008 and the main consequence is a
      reduction on the number of ports from 14 to 10 and logistics suppliers from
      13
      to 7 (ship owners and terminal operators). All those modifications will
      guarantee to VCP a very competitive and stable total cost to serve all offshore
      clients throughout the next years.




32




**Marketing
      and distribution**




We
      sell
      our pulp and paper products in both the domestic and export markets. In 2006
      and
      2007, approximately 88% and 80%, respectively, of our sales volume of market
      pulp and 28% and 20%, respectively, of our sales volume of paper products were
      made 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) and Arjo Wiggins Ltda. (the largest producer of security
      and
      fine papers) and beginning September 2007, Ahlstrom VCP our new joint venture
      in
      the Jacareí mill. In addition, due to the expansion of the Jacareí facility, we
      are selling substantially more 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, the following
      wholly owned subsidiaries: VCP Overseas; Newark, a wholly owned subsidiary
      of
      VCP Exportadora; VCP North America; and VCP Trading. Effective
      January 2006, VCP implemented a new international sales structure, intended
      to streamline and integrate its growing volume of export sales. This structure
      included the establishment by VCP Overseas of a branch office, located in Zug,
      Switzerland, which is responsible for all export and sales transactions. In
      April 2006, for administrative and economic reasons, we merged VCP
      Exportadora into VCP and assumed all of the assets and liabilities relating
      to
      its export operations and also significantly reduced the involvement of the
      other subsidiaries mentioned above in sales activities.




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.




***Paper***




In
      2007,
      approximately 80% of paper sales volume and 87% of our net revenues derived
      from
      paper came from the domestic market compared to 72% and 79%, respectively,
      in
      2006. We sell 20% of our paper products through KSR. Domestically, KSR’s
      distribution network consists of 27 branches, which are strategically located
      with warehouses used for storage purposes, and a workforce composed of 85
      independent sales agents. In 2007, KSR was the segment leader in paper
      distribution in Brazil, with a market share of approximately 22% of the
      distribution sales. Through KSR, we sell our paper products to approximately
      15,600 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 2007, through
      KSR
      we had net revenues of US$ 151 million, representing 22% (US$ 131
      million and 22%, respectively, in 2006) of our total consolidated paper sales
      in
      the domestic market.




33




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 is available to some of our domestic customers, and approximately
      23% of our domestic sales in 2007 were made by this method. 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, as the vendor,
      act as a guarantor under the arrangement with the bank so that the customer
      can
      take advantage of lower interest costs. The lower interest rate is a result
      of
      the bank typically looking to us, and not our individual customers, as the
      primary support for the credit risk. The vendor program is a means by which
      the
      bank essentially finances customers’ purchases.




A
      customer applying for the vendor program must first be approved by us. If we
      determine that the customer is creditworthy, the customer enters into a
      standard-form agreement with the bank that is providing the financing, which
      is
      guaranteed by us. The bank then forwards to us an amount of money equal to
      the
      purchase price of the products sold. The standard-form agreement into which
      the
      customer enters with a bank specifies loan repayment terms that are generally
      more favorable than prevailing market rates because the customer receives the
      benefit of our financial strength through our guarantee. We guarantee full
      repayment of the loan and, in the event of a customer default, the bank charges
      our cash account for the principal amount of the loan, plus interest, 15 days
      after the due date of the loan. We closely monitor the collection of these
      amounts and are advised by the bank once amounts have been settled. If we are
      called upon to settle the obligation with the bank, we pursue the customer
      through legal proceedings for final settlement of amounts due to us. The
      accounting and management controls exercised over these “receivables” are no
      different from our systems in place to monitor our direct receivables due from
      direct sales customers. We consider this 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.




Additional
      tax benefits arise under this facility because the interest charged by the
      bank
      to the customer is not subject to the sales taxes that would otherwise accrue
      had we incorporated the finance charges into the sales value and billed the
      amount directly to our customer.




Under
      the
      terms of our vendor program, 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 terms of the vendor program depend on the customer’s credit rating, which is
      based on our own internal credit review.




Historically,
      the amounts we have paid on our guarantees, net of amounts recovered from
      customers, have been negligible. In 2007, 2006 and 2005, we recovered 100%
      of
      the amounts we paid under guarantees.




Our
      customers who make purchases using 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 sales price. The finance charges are recognized over the payment period
      and
      are included in financial income.




We
      retain
      the same risk of loss on customer accounts under the vendor program that we
      do
      under our own non-vendor program. To mitigate this risk, we continuously monitor
      the receivables under both programs and periodically update our assessment
      of
      each customer. In addition, we continuously evaluate both vendor program
      receivables and our receivables for collectibility.




We
      estimate that for 2005, 2006 and 2007, an average of approximately 8% of our
      total number of regular domestic customers (approximately 22%, 22% and 23%
      respectively, of total domestic sales value) obtained our guarantee for their
      loans. Our vendor program exposure was US$ 57 million at December 31,
      2005, US$ 120 million at December 31, 2006 and US$ 127 million at
      December 31, 2007.




**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.




34




According
      to preliminary information released by Hawkins Wright (an “Outlook for Market
      Pulp”) at November 30, 2007, world market pulp capacity should reach 54.3
      million tons out of which 43% is softwood, 44% is hardwood and the remaining
      percentage other pulp grades. During 2007, the world’s net capacity increased by
      2.26 million tons (3,000 additions and 740,000 capacity closures).




Based
      on
      2007 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 26%.




According
      to Bracelpa, with respect to writing and printing uncoated paper, we were the
      third largest Brazilian producer in 2007 in terms of volume, producing more
      than
      Santa Maria, but less than International Paper and Suzano/Bahia Sul. In
      addition, in 2007, we were the leader in Brazil in the production of certain
      specialty papers and carbonless and thermal paper. We had a leadership position
      in 2007 in coated paper in Brazil with a 30% market share followed by Ripasa
      and
      Suzano. Our main competitors in carbonless and thermal paper are located outside
      Brazil.




During
      the period of 2005 to 2007 our main domestic competitors announced/concluded
      the
      following major changes in the pulp production capacity:




*2005* :
      (i) Veracel, jointly owned by Aracruz and Stora Enso, began its start-up in
      May. Full capacity of 1,000,000 tons of BEKP was reached before year-end;
      (ii) Suzano began the construction of a new 950,000,000 BEKP line with
      start-up expected for the second half of 2007 of its Mucuri
      facility.




*2006* :
      No
      significant events.




*2007* :
      Suzano’s Mucuri facility began its startup in September 2007.




**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 2007, the timberland area under our control, in states of São Paulo, Rio
      Grande do Sul and Mato Grosso do Sul was about 480,000 hectares, of which 41%
      are mainly preserved as conservation areas with native vegetation. If we
      consider approximately 52,000 hectares associated with our 50% stake in Ripasa,
      we control more than 500,000 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.




35




These
      timberlands are distributed as follows within Brazil:




**Total
                area (hectares)**
            
            **Percentage
                of total area preserved as native forests and/or for environmental
                recovery**São
                Paulo
            
            
            180,000
            
            
            41
            %Mato
                Grosso do Sul
            
            
            189,000
            
            
            33
            %Rio
                Grande do Sul
            
            
            111,000
            
            
            53
            %**TOTAL**
            
            
            **480,000**





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 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.




36




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$ 10 million in 2007, US$ 13 million in 2006
      and US$ 23 million in 2005.




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
      regulati on,
      see
“Item 8―Financial Information―Consolidated Statements and Other Financial
      Information―Legal Matters.”




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 is expected to be 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.




37




***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.




***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 around the city. We have been using these selective waste
      collections and recycling systems at the Jacareí facility since 2001 and the
      Piracicaba since 2002.




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 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 are 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.




38




***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). Capão Bonito region was certified
      in September 2005 and *Vale
      do Paraíba* regions
      were certified in December 2006. CERFLOR Certifications (Brazilian
      Certifications) for the forest area which supplies Jacareí pulp mill are still
      in process and should be concluded in early 2007. VCP will reach approximately
      70% to 80% of certified pulpwood production for the Jacareí mill.




***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.
      This program has been implemented at Fazenda São Sebastião do Ribeirão Grande, a
      large private native forest in the Vale do Paraíba region, and at Várzea do
      Jenipapo in the Ribeirão Preto region.




***Insurance***




We
      maintain insurance policies for our mills against fire, lightning and explosion
      by any cause up to US$ 159 million; as for the basic coverage and
      additional coverages, Electrical Damages up to US$ 1.9 million, Windstorm
      (extended coverage) up to US$ 5.7 million, Machinery Breakdown up to
      US$ 4.8 million and Business Interruption up to US$ 311 million. We
      renewed this insurance on December 1, 2007.




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 wood-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. 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.




39




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.




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, have been using the ECF
      methods in their production of bleached pulp. ECF is a bleaching process that
      does not utilize elementary chlorine and chlorine chemical compounds,
      respectively. These two processes have 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 manufacturers
      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 furnishings, 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. In addition, eucalyptus
      trees generally grow straighter and have fewer branches than most other hardwood
      trees. This allows for dense growth, easy harvesting and decreased need for
      pruning.




**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.




40




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.




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.




In
      2005,
      Brazilian paper companies increased their export volumes in order to compensate
      the demand reduction in the domestic market. Regarding the international market,
      although the appreciation of the real of approximately 13% in 2005, 9% in 2006
      and 17% in 2007 impacted our revenues, the volume sold increased due to a good
      economic environment, 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.




**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.




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 2007, the average annual rate of
      paper consumption increased by approximately 3% per year, reaching 8.0 million
      tons in 2007, 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 PPI (Pulp and Paper Industry), in 2007, Brazil was
      the
      twelfth largest paper producer and the sixth 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.




41




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




**Year
                ended December 31,**(in
                thousands of tons)
            
            **2007***
            
            **2006**
            
            **2005**
            
            **2004**
            
            **2003**Brazilian
                pulp production(1)
            
            
            11,800.0
            
            
            11,180.0
            
            
            10,352.0
            
            
            9,620.1
            
            
            9,104.2Brazilian
                paper production
            
            
            8,970.0
            
            
            8,724.6
            
            
            8,597.0
            
            
            8,452.4
            
            
            7,811.1Total
                pulp and paper production
            
            
            20,770.0
            
            
            19,904.6
            
            
            18,949.0
            
            
            18,072.5
            
            
            16,915.3Total
                five top producers
            
            
            NA
            
            
            11,982.3
            
            
            11,461.9
            
            
            10,987.2
            
            
            10,547.0%
                Top five
            
            
            NA
            
            
            60.2
            %
            
            60.5
            %
            
            60.8
            %
            
            62.4
            %








(1)
            Pulp
                numbers represent pulp volume
                produced.




Source:
      Bracelpa.




NA:
      Not
      Available. At the time of the filing of this document, the updated information
      was not released by Bracelpa.




(*)
            For
                2007 Bracelpa figures through
                November 2007.




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, bleached eucalyptus kraft pulp (“BEKP”) or market pulp prices
      in the United States, Europe and Asia, have fluctuated from lows of
      US$ 585, US$ 550, and US$ 500 per ton on January 1, 2005, to
      highs of US$ 805, US$ 780, and US$ 720 per ton at
      December 30, 2007 in these respective regions. 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. 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. 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 8% on average, following
      the
      same capacity adjustments.




42




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 second quarter of 2007, 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.




BHKP
                operating costs, Q2 2007
            
            **Cash
                production costs (per ton)**Indonesia
            
            US$
            291
            *Brazil
            
            
            309Chile
            
            
            307Finland/
                Sweden
            
            
            484Iberia
            
            
            470France/Belgium
            
            
            511Southern
                U.S.
            
            
            495Eastern
                Canada
            
            
            561





Source:
      Hawkins Wright as of July 2007.




*
      Mixed
      with native forest.




**C.**
            **Organizational
                Structure**




The
      chart
      below shows our organizational structure as of December 31, 2007 (% of
      total 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. In 2006, consolidated net
      operating revenues of the Votorantim group reached approximately US$ 13
      billion (US$ 7.8 billion in 2005) based on the Consolidated Financial
      Statements in accordance with Brazilian GAAP, data translated to U.S. dollars
      at
      2006 year-end exchange rates, of which 10% (18% in 2005) 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 Votoramtim Investimentos Industriais
      (VID), which in turn is controlled by Hejoassu Administração S.A. 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 4—Information on
      VCP—Business Overview—Our Ownership Structure.”




43


On
      March 1, 2002, we incorporated VCP Overseas, our wholly owned subsidiary
      incorporated in Hungary.




As
      of
      December 31, 2002, we had a 50% stake in Voto-Votorantim Overseas Trading
      Operations N.V. and three wholly owned subsidiaries, VCP Terminais Portuários
      S.A., VCP Exportadora and VCP Florestal. In April 2001, we incorporated VCP
      Exportadora as a wholly owned subsidiary, and in the fall of 2001 we
      incorporated Newark, which was used to acquire our interest in
      Aracruz.




In
      order
      to facilitate access to our international customers and to the international
      financial markets, we have established two subsidiaries of Newark, VCP Trading
      and VCP North America, 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).




In
      November 2004, we signed an agreement with Suzano Bahia Sul Papel e
      Celulose S.A., or Suzano, for the joint acquisition of all of 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. We disbursed US$ 275 million for our 50%
      interest in the venture. A purchase and sale option was also signed for the
      sale
      of 37,449,084 common shares and 12,388,719 preferred shares, totaling 22.41%
      of
      the voting stock and 13.45% of the total stock, to be exercised up to 2010
      for a
      total amount of US$ 160 million for VCP and Suzano interest at that date
      (our interest was US$ 80 million).




On
      July 20, 2005, VCP and Suzano announced a restructuring plan for Ripasa,
      including a delisting of Ripasa from the Bovespa, through a share exchange
      by
      VCP’s and Suzano preferred shares. Each of Ripasa’s preferred shares would
      correspond to 0.0072 VCP preferred shares and to 0.0167 Suzano class “A”
preferred shares. The reasons for the restructuring were: (i) to permit
      Ripasa’s current minority shareholders to hold VCP and Suzano shares, which were
      more liquid than those of Ripasa; and (ii) to allow future reorganization
      of Ripasa, which would permit cost reductions, operational gains, enhanced
      competitiveness and economies of scale for the companies. The restructuring
      plan
      was analyzed and approved by the CVM; however, certain minority shareholders
      filed a judicial action and suspended the process. On April 26, 2006, VCP
      and Suzano entered into a judicial agreement with a group of Ripasa’s preferred
      shareholders, with the aim of settling the claims challenging Ripasa’s corporate
      restructuring, and implementing the restructuring, once the conditions in the
      agreement were met.




Since
      the
      conditions of the agreement were met (including suspension of the ongoing legal
      procedures relating to the restructuring, and the absence of any decision,
      judicial or administrative, that prevented or hindered the restructuring, or
      rendered it inadvisable) the restructuring was concluded in July 2006, VCP
      and Suzano paid the group of minority shareholders R$ 1.0538 for each Ripasa
      preferred share held by them (corresponding to an additional US$ 36 million
      cash disbursement by VCP). VCP’s capital increased, in 2006, by R$ 573,629.83
      from R$ 2,478,582,123.76 to R$ 3,052,211,393.59, upon the issuance of 12,532,009
      preferred shares with no par value.




The
      acquisition of the share control in Ripasa and its future transformation into
      a
      production unit was already approved by CADE.




Following
      the corporate restructuring, the said call options and the put option of certain
      former minority shareholders of Ripasa, were modified to substitute the Ripasa
      shares for shares in VCP and Suzano as those former Ripasa minority shareholders
      had exchanged their shares for shares in VCP and Suzano. Accordingly, VCP has
      a
      call option to acquire 3,124,139 of its own non-redeemable preferred shares
      during a twelve-month period starting on March 31, 2010. At
      December 31, 2007, the total updated amount was US$ 358 million for
      VCP and Suzano’s combined interest. The former shareholders of Ripasa, now
      shareholders of VCP, who are party to the agreement, have a put option which
      may
      require VCP to acquire all their non-redeemable preferred shares during a period
      of five years through March 31, 2010. Pursuant to the agreement, as a
      required condition precedent, the put/call options can only be exercised if
      the
      underlying shares are free of liens and encumbrances. For more information
      on
      the call and put options see Note 4(a) to our financial statements.




On
      January 26, 2005, in an Extraordinary General Meeting, our shareholders
      decided that VCP Florestal would merge into us to achieve cost reductions and
      increased business synergies between the two companies. VCP Florestal was
      dissolved as a result of the merger and we succeeded to all its rights and
      obligations. There was no increase in our capital stock as a result of the
      merger, due to the fact that we owned all the shares of VCP
      Florestal.




44




On
      June 24, 2005 Voto-Votorantim IV, a wholly-owned subsidiary of VPAR, issued
      US$ 400 million, 7.75% Fixed Rate Notes due 2020 in the international
      capital market, under Rule 144A and Regulation S of the U.S. Securities Act
      of 1933. Along with VPAR, VCP is a guarantor of 50% of the debt issued by
      Voto-Votorantim IV and in turn received US$ 200 million of the proceeds,
      which is also 50% of the total loan. On September 6, 2005, we acquired a
      50% interest in Voto-Votorantim IV. Of the proceeds of US$ 200 million,
      US$ 125 million was used by St. Helen III to repay the debt incurred with
      Voto-Votorantim II.




On
      July 20, 2005, Ripasa’s restructuring was concluded and, in
      September 2006, VCP and Suzano started to sell Americana’s unit products as
      a pre-consortium stage. We are still waiting for the Brazilian tax authorities’
approval to transform Ripasa’s unit of Americana in a consortium (Conpacel).
      Upon approval, VCP will sell 50% of the unit’s production (its interest) as if
      it were any other VCP’s unit.




In
      April 2006, for administrative and economic reasons, we merged VCP
      Exportadora e Participações S.A., VCP’s 100% subsidiary, into us and assumed all
      of the assets and liabilities relating to our export operations.




In
      September 2006, we announced a plan to divest our non integrated special
      paper mill located in the city of Mogi das Cruzes in the state of São Paulo. The
      unit was sold in May 2007. Additionally, we declared the intention to sell
      our
      50% stake in the other three production mills of Ripasa, in addition to the
      Americana mill, which produce cardboard and special papers. These units were
      sold in March 2007 (Embu unit) and in August 2007 (Cubatão and Limeira). This
      divestment plan is part of our strategy to focus and grow in the production
      of
      market pulp and printing & writing papers (coated and uncoated) in large
      scale.




In
      September, 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 the Project
      Mill
      being 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 tonnes 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 is expected to be
      completed in January 2009 and to have a capacity of 1,100,000 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. See “Item 4.A—Information
      on VCP—History and Development of VCP,” “Item 10.C—Additional
      Information—Material Contracts,” and Note 4(b) to our financial statements.




**D.**
            **Property,
                Plant and Equipment**




Our
      main
      production facilities are located in the state of São Paulo and there is also
      the Três Lagoas facility which is under construction, located in the state of
      Mato Grosso do Sul. We also have forests plantations in the State of São Paulo,
      timberland in the State of Rio Grande do Sul which have been acquired since
      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 33% of Brazil’s gross domestic product, and is home to
      most of the domestic consumers of pulp and paper products. In 2007, 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.




45




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, 2007:




**Facility**
            
            **Pulp/Paper**
            
            **Distance
                from**
              **forest
                (pulp) or**
              **pulp
                mill (paper)**
            
            **Distance
                from**
              **port
                of Santos**
            
            **Pulp/Paper**
              **capacity**
              **(tons/year)**
            
            **Major
                products**Jacareí*
            
            Pulp/Paper
            
            220
                km
            
            150
                km
            
            1,100,000
            
            Bleached
                eucalyptus kraft pulp. Uncoated printing and writing paper; coated
                printing and writing paperPiracicaba
            
            Paper
            
            150
                km
            
            200
                km
            
            170,000
            
            Thermal
                and carbonless paper; coated printing and writing paperRipasa
                (Americana’s 50%)
            
            Pulp/Paper
            
            215km
            
            220
                km
            
            315,000/195,000
            
            Bleached
                eucalyptus kraft pulp. Uncoated printing and writing paper; coated
                printing and writing paper





Source:
      VCP.




(*)
            In
                Jacareí we have a joint-venture for the paper asset with the Finnish
                company Ahlstrom. See “Item 4—Information on VCP—History and
                Development of VCP.”




For
      more
      details of our asset exchange with International Paper pursuant to which we,
      effective February 2007, exchanged our Luiz Antonio facility for a funded
      pulp project under construction in Três Lagoas, see “Item 4C—Organizational
      Structure” and “Item 10C—Additional Information—Material
      Contracts.”




******Eucalyptus
      forests**




Currently,
      we obtain a majority of our wood from approximately 100,000 hectares of forest
      plantation in a total area of 180,000 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,
      2007, we consumed approximately 76% of our own wood and 24% of our wood from
      those third parties.




At
      December 31, 2007, in the state of São Paulo we owned or leased
      approximately 450 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 38% is reserved for preservation and the
      remainder 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.




46




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 111,000 hectares of which 53,000 hectares is with forest
      plantations, and a new forest base of 189,000 hectares, of which 126,000
      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 also some subtropical eucalyptus species
      like *E.globulus* , *E.maidenii* ,
      and
      others which have good wood properties and very high pulp yield; and they are
      recognizes by pulp producers as the best Eucalyptus species for pulp
      production.




As
      part
      of our reforestation efforts, in 2007, in the state of São Paulo we planted
      approximately 14,500 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
      per
      year in Jacareí. 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
      2007
      we grew approximately 70 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 95% of our plantations are made
      with
      rooted cuttings and 5% using seedlings produced with seeds obtained in our
      Tree
      Breeding Program.




In
      2007
      we obtained patents on nine 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 2007 more than 3,000 hectares were planted in this
      program.




**Expansion**




We
      spent
      approximately US$ 87 million in expansion projects in 2007 (including our
      own expansion projects and 50% stake in Ripasa). This investment will expand
      our
      annual pulp capacity by over 135,000 tons, and will increase our annual special
      paper capacity by 25,000 tons. We have been investing in the acquisition of
      land
      and eucalyptus plantations in the south of the state of Rio Grande do Sul and
      in
      Mato Grosso do Sul (Três Lagoas mill) in order to reduce our dependence on raw
      materials from third parties. The project in the South also includes, upon
      approval of the Board of Directors, the construction of an industrial facility
      at the beginning of the next decade, for which socio-environmental licensing
      procedures have already begun.




In
      February 2007, we concluded the exchange of our industrial and forestry
      assets located in Luiz Antonio city (state of São Paulo) for International
      Paper’s pulp mill project and forestry assets located in Três Lagoas (state of
      Mato Grosso do Sul). The Três Lagoas assets are held by our wholly owned
      subsidiary VCP-MS, received as part of the asset exchange. See
“Item 4.A—Information on VCP—History and Development of VCP” and
“Item 10.C—Additional Information—Material Contracts”




47




**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* .
      We
      produce bleached eucalyptus pulp, part of which we sell domestically and
      internationally and the remainder of which we use for our paper business.




*Paper* .
      We
      produce paper for the domestic and international markets. As part of our
      strategy for paper products, we have continued to increase 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 in the domestic market. 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 and 67% for 2007. In 2005, we continued to increase exports of uncoated
      papers despite the appreciation of the *real* against
      the U.S. dollar because the weak domestic market conditions lowered domestic
      demand and shifted our sales to the export market. In 2007, the better scenario
      in the local market allowed us to increase our coated paper sales, but we lost
      market share due to the competition with imported products, as a consequence
      of
      the stronger foreign exchange rate. 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 and 20% for 2007. While we increased our sales of coated papers in
      the
      last three years, we lost market share to imports in the coated paper domestic
      market, as the *real* appreciated during those years. We intend to take advantage of the opportunity
      to recover our market share if the *real* depreciates or stabilizes against the U.S. dollar.




We
      have
      sought to increase the proportion of our production of value-added paper
      products, which have higher margins, using various strategies: (1) in the
      domestic market, we are focusing our efforts on the increase of the proportion
      of our product mix devoted to coated and chemical papers, targeting specific
      segments of the market; and (2) in the export market, we increased sales of
      uncoated papers, especially cut-size. We have increased our total volume of
      pulp
      sales due to the completion of the Jacareí expansion. See
“Item 4—Information on VCP—Business Overview—Our Business Strategy.” We
      have also responded to the increased demand in the international market by
      increasing our U.S. dollar-denominated pulp exports.




*Asset
      Exchange Agreement with International Paper (“IP”)*




Our
      Asset
      Exchange Program will permit VCP, as part of the business strategy, to begin
      to
      operate the Três Lagoas Project Mill facility in May 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. These
      are components of our Business Strategy. See “Items 4B—Business Overview—Our
      Business Strategy” and “Item 10C—Additional Information—Material
      Contracts.”




48




The
      exchange 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—Business Overview—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 has concluded
      that the long-term benefits of the asset exchange transaction outweighed the
      short and medium-term losses.




The
      following table shows a breakdown of our total exports in 2007 and in 2006
      in
      terms of volume by geographic location:




**Year
                ended December 31, 2007**
            
            **Year
                ended December 31, 2006****Pulp**
            
            **Paper**
            
            **Pulp**
            
            **Paper****Thousands
                of Tons**
            
            **%
                of Total**
            
            **Thousands
                of Tons**
            
            **%
                of Total**
            
            **Thousands
                of Tons**
            
            **%
                of Total**
            
            **Thousands
                of Tons**
            
            **%
                of Total**North
                America
            
            
            81.0
            
            
            9
            %
            
            20.8
            
            
            21
            %
            
            77.1
            
            
            9
            %
            
            59.8
            
            
            32
            %Latin
                America (1)
            
            
            1.7
            
            
            1
            %
            
            57.9
            
            
            59
            %
            
            -
            
            
            -
            
            
            51.5
            
            
            27
            %Europe
            
            
            557.6
            
            
            64
            %
            
            15.6
            
            
            16
            %
            
            508.5
            
            
            61
            %
            
            62.5
            
            
            33
            %Asia
                and Africa
            
            
            229.6
            
            
            26
            %
            
            3.2
            
            
            4
            %
            
            246.6
            
            
            30
            %
            
            14.2
            
            
            8
            %Total
                Exports
            
            
            869.9
            
            
            100
            %
            
            97.5
            
            
            100
            %
            
            832.2
            
            
            100
            %
            
            188.0
            
            
            100
            %








(1)
            Excluding
                Brazil.




**Prices**




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




*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. In January , March and
      April 2005, pulp prices were US$ 570 per ton in Asia, US$ 600 per
      ton in Europe and US$ 635 per ton in the United States, respectively. These
      prices remained stable during the second half of 2005, except in Asia where
      the
      price declined US$ 30 in August 2005. In 2006, prices began to
      increase again due to the healthy demand and capacity shutdown announcements
      in
      the northern hemisphere. In 2007, in addition to new capacities in Chile, the
      bleached eucalyptus kraft pulp industry faced high demand stimulated by the
      substitution process, due to the lack of some grades of pulp coupled with some
      interruptions occurred in the market through 2007. Therefore, eucalyptus pulp
      producers were able to increase the list prices during the year in all regions,
      reaching in December 2007 US$ 720 per ton in Asia, US$ 780 per
      ton in Europe and US$ 805 per ton in the United States.




The
      cyclicality of pulp prices is illustrated 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. The prices were US$ 579 in 2000,
      US$ 382 in 2001, US$ 389 in 2002, US$ 456 in 2003, US$ 462
      per ton in 2004, US$ 511 per ton in 2005 and US$ 559 per ton in 2006. In
      2007, the average C&F price increased to US$ 615 per ton.




*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. Prices for printing and writing papers are generally linked to
      international prices. In 2005, the *real* appreciated 13% against the U.S. dollar but the domestic market was weaker
      than
      expected, and this was combined with a weaker scenario in the international
      markets. However, domestic average prices were almost stable in *reais* .
      As a
      result, domestic paper average prices increased an average of 13% in U.S.
      dollars in 2005, as compared to 2004. 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. During 2005, paper prices
      in the European and North American markets had not increased to match the
      increases in pulp prices, since the fourth quarter of 2004. Therefore, margins
      for paper prices have continued to be low in those markets. 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.




49




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 12%
      in
      2005, 10% in 2006 and 11% in 2007. The increase of 5% in the export volumes
      and
      higher freight costs in 2007 has not resulted in higher selling and marketing
      expenses because they were offset by other efforts related to our cost reduction
      program. We generally pay up to 10% of the FOB price to export and shipping
      agents, which varies by geographic region and responsibilities. General and
      administrative expenses as a percentage of net operating revenues were 5% in
      2005, 2006 and 2007.




**Financial
      income**




We
      derive
      financial income from several sources, including interest on cash and cash
      equivalents. Since January 1, 2001, we have derived financial income from
      accessing low-cost foreign-currency financing and investing the proceeds in
      higher-yielding Brazilian financial instruments. 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 income 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 devaluation
      of the *real* in
      relation to the U.S. dollar because a high proportion of our debt is denominated
      in U.S. dollars. See “—Brazilian economic environment” and “—Liquidity and
      capital resources—Debt.” Our financial income also includes income from
      the
      funds in trust related to the construction of the Project Mill. See “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, mainly due to pre-payment
      export loans, and *real* -denominated
      debt, borrowed from BNDES. We have consistently derived profits from arbitrage
      when we borrow funds in U.S. dollar denominated liabilities and invest amounts
      in *real* -denominated
      assets despite the hedging costs involved, but we do not incur such debt in
      order to gain from that arbitrage. 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 “—Liquidity and capital resources.”




**Discussion
      on critical accounting policies**




Critical
      accounting policies are those that are important both to the portrayal of our
      financial condition and 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 our 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;




50




**·**
            impairment
                of investments and intangible
                assets;




**·**
            investment
                - consolidation or equity method
                analysis;




**·**
            forest
                development costs and impairment
                tests;




**·**
            deferred
                taxes;




**·**
            tax
                contingencies;




**·**
            employee
                benefits and other related matters;
                and




**·**
            fair
                value of financial instruments - put and call
                options




**** **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$ 8 million in
      2007 (US$ 10 million in 2006 and US$ 7 million in 2005). 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. Revenue
      recognition is consistent with that applied to paper sales. In 2007 none of
      our
      customers qualified for sales through our vendor program (2006 - none and 2005
      -
      none).




Pulp
      -
      export market :
      All
      export orders are normally satisfied by 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,
      and represented approximately 23% of our domestic sales in 2007 (2006 - 22%
      and
      2005 - 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.




We
      estimate that for 2007, 2006 and 2005, an average of approximately 8% of our
      total number of regular domestic customers (approximately 23%, 22% and 22%,
      respectively, of total domestic sales value) obtained our guarantee for their
      loans.




51




Paper
      - export market :
      Export
      orders are normally met by 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. Incoterms CIF and Incoterms
      FOB
      terms determine timing of revenue recognition.




We
      recognize revenue and associated costs of sales at the time our products are
      delivered to our customers or when title and the associated risks pass to our
      customers.




*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.




Under
      the
      vendor program, (1) the bank finances the customers’ purchases (by making a
      payment to us on behalf of the customers in cash equal to the amount of the
      purchase price payable by the customers) and (2) we issue separate
      guarantees in which we guarantee payment to the bank in the event that the
      relevant customer fails to pay the bank. No separate fee is received by us
      for
      the guarantee. The risk of the vendor program is exactly the same as the direct
      sale.




Under
      the
      vendor program, a separate note agreement exists between the bank and the
      customer, and the customer is considered to be the primary obligor under that
      note agreement. Under our guarantee contract with the bank, we are
      considered a secondary obligor of a specified percentage of the amount (in
      some
      cases up to the full amount) that the bank finances for the customer. Although
      the “receivables” are payable by our customers directly to the banks under the
      vendor financing program, we closely monitor the collection of these amounts
      and
      are advised by the bank once amounts have been settled. In the event of a
      default by a customer under the vendor financing program with the banks, the
      bank will charge, pursuant to the guarantee, our checking account established
      with the bank in the amount of the default. Accordingly, during the period
      of
      our guarantee, we assess any contingent liabilities that may arise from the
      guarantee.




Under
      the
      vendor program, we recognize revenue as the goods are delivered to our customers
      or when title and associated risks pass to our customers.




*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
                overdue invoices over R$ 100,000 (equivalent to US$ 56,402 at the
                December 31, 2007 exchange rate) 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; and




·
            overdue
                invoices of less than R$ 100,000 are reviewed by our collection and
                credit
                department in order to identify probable losses to be recorded based
                on
                our knowledge of the customer’s credit history and current
                situation.




52




******Impairment
      of investments and intangible assets**




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 in connection with our acquisition,
      and no amortization of the goodwill generated as a result of this acquisition
      has been recorded.




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, 2007, the
      Aracruz ADR was quoted at US$ 74.35. Considering the market price for the
      Aracruz ADR today, there would be no impairment provision since it is above
      the
      current value of our investments in Aracruz (US$ 29 per ADR).




***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.




Our
      investment in Ripasa is managed via joint control with Suzano (see Note 4(a)
      to
      the financial statements and item 4(c) information on VCP-Organizational
      Structure) and, as a result, the investment in the equity is treated on an
      equity accounting basis.




We
      have
      also analyzed our investment in Ahlstrom VCP and have concluded that the venture
      is not required to be consolidated as Ahlstrom is the controlling shareholder.
      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 formulae
      based price insulating it from absorbing future possible losses, (iii)
      Ahlstrom's option to buy VCP's 40% interest in the JV 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 in the entity is treated on an equity accounting basis.




******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.




53




******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,
      2007, 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, 2007).




******Employee
      benefits and other related matters**




In
      March 2000, we launched a 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
      have
      adopted 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**




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 a Ripasa minority shareholder, the Zarzur family with an option to
      require Ripasa (later amended to be 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, for the *reais* equivalent, at that date, of US$ 80 million (our portion) plus interest
      from March 31, 2005 (on December 31, 2007, that amount, including
      interest, totaled US$ 179 million (our portion)). Thereafter, for a
      twelve-month period, VCP and Suzano will have a call option ending
      March 2011 which if exercised would require the shares to be redeemed for
      the same amount.




Following
      the corporate restructuring, the separate agreement dated November 10,
      2004, which established the Suzano and VCP call options and the put option
      of
      certain former minority shareholders of Ripasa, were modified to substitute
      the
      Ripasa shares for shares in VCP and Suzano as those former Ripasa minority
      shareholders had exchanged their shares for shares in VCP and Suzano.
      Accordingly, VCP has a call option to acquire 3,124,139 of its own
      non-redeemable preferred shares during a twelve-month period starting on
      March 31, 2010, for the reais equivalent, at that date, of US$ 80
      million (our portion) plus interest from March 31, 2005 (on
      December 31, 2007, that amount, including interest, totaled US$ 179
      million (our portion)). The former shareholders of Ripasa, now shareholders
      of
      VCP, who are party to the agreement, have a put option which may require VCP
      to
      acquire all their non-redeemable preferred shares during a period of five years
      through March 31, 2010.




These
      instruments meet the derivative definition in FAS 133 and the put option and
      the
      call option should be initially recognized at fair value, with subsequent fair
      value changes recognized in the statement of income for the period.




54




The
      shares owned by the Zarzur family have been subject to encumbrances under a
      legal order filed by the Brazilian Central Bank as collateral in a bank
      liquidation process and cannot be sold. The rights to exercise the option cannot
      be transferred to a third party without the previous written consent of the
      other parties to the agreement. Therefore, the put option is not currently
      exercisable and based on management’s assessment (supported by a position of
      legal counsel) and it is not probable that the options will become exercisable
      prior to expiration.




In
      conclusion, VCP is recording the put option at fair value as a liability as
      of
      May 2006. The call option is deemed out of the money; therefore, it would
      not require the recognition of an asset at inception. As the VCP shares held
      by
      the former Ripasa minority shareholders party to the agreement are subject
      to
      liens and encumbrances under legal proceedings which are not expected to be
      released prior to the expiration of the put/call options, the fair value of
      the
      derivative instruments, is not material to company’s financial statements as of
      December 31, 2007. This legal determination will be re-evaluated at each
      balance sheet date and the financial instrument marked-to-market. For more
      information on the fair value of financial instruments, see Note 4(a) to our
      financial statements.




Additionally,
      with respect to Ahlstrom
      VCP, Ahlstrom has 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 has an option to sell
      the same number of shares at the same time. The first option can be exercised
      at
      any time from the beginning of the second year of the venture’s operations
      through the end of that year. This first option allows VCP to sell and/or
      Ahlstrom to buy 20% of VCP’s interest for the equivalent of US$ 38 million in *reais* .
      The
      second option can be exercised at any time between the beginning of the third
      year of operations and terminates at the end of the fourth year of operations.
      This option allows VCP to sell and/or Ahlstrom to buy the remaining 20% of
      its
      interest (if the first option has been exercised) or the remaining 40% (if
      the
      first option has not been exercised).





The
      price
      of this second option will be calculated based on a formula determined in the
      contract such that the total amount to be paid for the 100% interest will not
      be
      less than US$ 165 million and not be higher than US$ 190
      million.




**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 devaluation of the Brazilian currency against the U.S. dollar.




The
      table
      below shows the Brazilian general price inflation (according to the IGP-DI),
      devaluation 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,****2007**
            
            **2006**
            
            **2005**
            
            **2004**
            
            **2003**Inflation
                (IGP-DI)
            
            
            8
            %
            
            4
            %
            
            1
            %
            
            12
            %
            
            8
            %Appreciation
                of the*real*vs. U.S. dollar
            
            
            (21
            )%
            
            (9
            )%
            
            (13
            )%
            
            (9
            )%
            
            (22
            )%Year/period-end
                exchange rate—US$ 1.00(1)
            
            R$
            1.77
            
            R$
            2.14
            
            R$
            2.34
            
            R$
            2.65
            
            R$
            2.89Average
                (daily-weighted) exchange rate(1) US$ 1.00
            
            R$
            1.95
            
            R$
            2.18
            
            R$
            2.44
            
            R$
            2.93
            
            R$
            3.08







(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.




**A.**
            **Operating
                Results**




**Recent
      Developments**




On
      January 2, 2007, VCP created a new subsidiary, 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 previously contracted
      an internationally recognized engineering and construction company, Pöyry, on an
      EPC Engineering, Procurement and Construction, or EPC, basis to build the Três
      Lagoas mill as a turn-key project. Chamflora has already paid Pöyry for the EPC,
      which had in turn transferred to a commercial bank acting as the Trustee the
      corresponding funding of this 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-MS and is accounting for these EPC
      disbursements as a “Construction in Progress”. Upon the completion of the
      construction and start-up of the mill, these costs will be transferred to the
      appropriate fixed assets accounts. Additionally, pursuant an amendment to the
      agreement all financial income accruing from the funds in trust will be applied,
      exclusively, to the project under construction. See Item 4C “Organizational
      Structure” and Item 10.C “Additional Information—Material
      Contracts.”




55




In
      May 2007, we signed a joint venture agreement with the Finnish company
      Ahlstrom for the paper production in our facility located in Jacareí, state of
      São Paulo. With such agreement, Ahlstrom began to hold 60% interest of this new
      joint venture, Ahlstrom VCP, for the paper assets in Jacareí mill. The specialty
      papers produced in this mill will be primarily intended to the labeling
      applications and flexible packaging markets, in which Ahlstrom will reinforce
      its worldwide leadership position. The paper 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. Additionally, Jacareí facility is an integrated eucalyptus pulp mill
      with a production capacity of approximately 1.1 million tons per year, which
      is
      not part of the joint venture agreement. 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.




Under
      the
      terms of the agreement, Ahlstrom has 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 has an option to sell the same number of shares at the
      same
      time. The first option can be exercised at any time from the beginning of the
      second year of the venture's operations through the end of that year. This
      first
      option allows VCP to sell and/or Ahlstrom to buy 20% of VCP's interest for
      the
      equivalent of US$ 38 in Reais. The second option can be exercised at any time
      between the beginning of the third year of operations and terminates at the
      end
      of the fourth year of operations. This option allows VCP to sell and/or Ahlstrom
      to buy the remaining 20% of its interest (if the first option has been
      exercised) or the remaining 40% (if the first option has not been exercised).
      The price of this second option will be calculated based on a formula determined
      in the contract such that the total amount to be paid for the100% interest
      will
      not be less than US$ 165 million and not be higher than US$ 190 million. See
      Item 4C “Organizational Structure” and Item 10.C “Additional Information -
      Material Contracts.”




**Results
      of operations**




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




**Year
                ended December 31,****2007**
            
            **2006**
            
            **2005****(US$ in
                millions)**Net
                operating revenue
            
            US$
            1,333
            
            US$
            1,317
            
            US$
            1,130Cost
                of sales
            
            
            (887
            )
            
            (813
            )
            
            (654
            )Gross
                profit
            
            
            446
            
            
            504
            
            
            476Selling
                and marketing expenses
            
            
            (138
            )
            
            (136
            )
            
            (138
            )General
                and administrative expenses
            
            
            (64
            )
            
            (63
            )
            
            (55
            )Other
                operating expenses, net
            
            
            943
            
            
            (20
            )
            
            (36
            )Operating
                income
            
            US$
            1,186
            
            US$
            285
            
            US$
            247




56




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




**Year
                ended December 31,****2007**
            
            **2006**
            
            **2005**Net
                operating revenue
            
            
            100
            %
            
            100
            %
            
            100
            %Cost
                of sales
            
            
            (67
            )
            
            (62
            )
            
            (58
            )Gross
                margin
            
            
            33
            
            
            38
            
            
            42Selling
                and marketing expenses
            
            
            (10
            )
            
            (10
            )
            
            (12
            )General
                and administrative expenses and other operating expense,
                net
            
            
            (5
            )
            
            (5
            )
            
            (8
            )Operating
                income
            
            
            89
            
            
            22
            
            
            22Financial
                income
            
            
            18
            
            
            13
            
            
            7Financial
                expenses
            
            
            (11
            )
            
            (11
            )
            
            (11
            )Foreign
                exchange gains (losses) and unrealized gains (losses) on swap,
                net
            
            
            16
            
            
            (4
            )
            
            -Income
                tax benefit (expenses)
            
            
            (29
            )
            
            (4
            )
            
            1Equity
                in earnings of affiliates
            
            
            8
            
            
            6
            
            
            5Net
                income
            
            
            92
            %
            
            28
            %
            
            23
            %





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,****2007**
            
            **2006**
            
            **2005****Pulp:**Volumes
                (in tons)Domestic
            
            
            227,756
            
            
            109,683
            
            
            80,007Export
            
            
            869,897
            
            
            832,121
            
            
            786,944Total
            
            
            1,097,652
            
            
            941,804
            
            
            866,951Average
                prices (U.S. dollars per ton)Domestic
            
            US$
            533
            
            US$
            500
            
            US$
            464Export
            
            
            615
            
            
            559
            
            
            511Net
                operating revenue (in thousands of US$)Domestic
            
            
            121,411
            
            
            54,884
            
            
            37,107Export
            
            
            535,277
            
            
            465,033
            
            
            402,372Total
            
            US$
            656,689
            
            US$
            519,916
            
            US$
            439,479**Paper:**Volumes
                (in tons)DomesticUncoated
                printing and writing
            
            
            158,405
            
            
            245,179
            
            
            207,919Coated
                printing and writing
            
            
            129,025
            
            
            126,213
            
            
            123,515Chemical
                / Special
            
            
            114,407
            
            
            110,162
            
            
            94,434ExportUncoated
                printing and writing
            
            
            81,329
            
            
            169,806
            
            
            179,563Coated
                printing and writing
            
            
            15,891
            
            
            17,839
            
            
            19,861Chemical
                / Special
            
            
            279
            
            
            395
            
            
            284Total
            
            
            499,336
            
            
            669,594
            
            
            625,576Average
                prices (in US$ per ton)Domestic
            
            
            1,462
            
            
            1,308
            
            
            1,238Export
            
            
            908
            
            
            888
            
            
            818




57




**Year
                ended December 31,****2007**
            
            
            **2006**
            
            
            **2005**Net
                operating revenue (in thousands of US$)Domestic
            
            US$
            587,464
            
            US$
            629,950
            
            US$
            527,386Export
            
            
            88,513
            
            
            166,988
            
            
            163,392Total
            
            US$
            675,976
            
            US$
            796,938
            
            US$
            690,778**Combined:**Volumes
                (in tons)Domestic
            
            
            629,592
            
            
            591,237
            
            
            505,875Export
            
            
            967,396
            
            
            1,020,161
            
            
            986,652Total
            
            
            1,596,988
            
            
            1,611,398
            
            
            1,492,527Average
                prices (in US$ per ton)Domestic
            
            US$
            1,126
            
            US$
            1,158
            
            US$
            1,116Export
            
            
            645
            
            
            619
            
            
            573Net
                operating revenue (in thousands of US$)Domestic
            
            
            708,875
            
            
            684,833
            
            
            564,493Export
            
            
            623,790
            
            
            632,021
            
            
            565,764Total
            
            US$
            1,332,665
            
            US$
            1,316,854
            
            US$
            1,130,257





**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 reinforcing the substitution process from 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. The *real* continued 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 Jacareí and
      Ripasa units. On the price side, international pulp and paper prices went up
      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 were 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 assets
      restructuring.




58




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 stronger *real* on our
      costs denominated in *reais* ,
      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.




******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 lower logistic expenses, 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 the real
      on
      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.




59




******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, 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 US$ 4 million
      losses in 2006. This result was primarily due to the impact of the appreciation
      of the *real* against
      the U.S. dollar over financial exposure to 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.




******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.




**Year
      ended December 31, 2006 compared to year ended December 31, 2005**




******Introduction**




In
      2006,
      we continued to face favorable conditions for pulp driven by reduced supply
      mainly in North America and by higher demand mainly from Asia. As a result,
      pulp
      prices increased throughout the year above our initial expectations. On the
      paper side, international prices recovered mainly driven by supply discipline
      in
      North America allowing for better margins for the global producers. In Brazil,
      the paper demand improved because of higher local consumption, increased orders
      from the educational program of the Federal government, better demand from
      notebooks’ exporters, elections and the World Cup. On the other hand, 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. The *real* continued to appreciate averaging R$ 2.18 to US$ 1.00 in 2006 compared to
      R$ 2.44 to US$ 1.00 for 2005.




60




******Net
      operating revenue**




Net
      operating revenue increased by 17% to US$ 1,317 million in 2006 from
      US$ 1,130 million in 2005, with an increase in both sales and prices of all
      products, especially in the local market. This increase was attributable to
      higher efficiency in production mainly of pulp through the debottlenecking
      at
      the Jacareí unit and to higher paper sales derived from the volumes resold from
      the Americana unit (Ripasa) since September 1, 2006. On the price side,
      international pulp and paper prices went up while local prices increased in
      U.S.
      dollars due to the exchange rate appreciation. Sales volume increased by 8%
      to
      1,611,398 tons in 2006 from 1,492,527 tons in 2005. Approximately 52% of our
      net
      operating revenue in 2006 were made in the domestic market compared to 50%
      in
      2005. Our revenue mix in 2006 was 61% for paper and 39% for pulp compared to
      61%
      and 39%, respectively, in 2005.




*Pulp* .
      In the
      pulp segment, sales volume increased by 9% to 941,804 tons in 2006 from 866,951
      tons in 2005. The increase in volume was due to greater market pulp production
      as a result of the capacity debottlenecking at the Jacareí mill, new volumes
      from the resale of Americana mill products and also due to favorable market
      conditions. Net operating revenue attributable to pulp increased by 18% to
      US$ 520 million in 2006 from US$ 439 million in 2005. This increase
      was due to the additional sales volume and to the 9% higher average prices
      of
      pulp.




Pulp
      exports constituted 89% and 88% of revenues and sales volume, respectively,
      of
      pulp in 2006 compared to 92% and 91% in 2005. In the domestic market, the volume
      of pulp sold increased 37% to 109,683 tons compared to the same period in 2005.
      Revenues from domestic pulp sales represented 11% of the total pulp net revenues
      in 2006 and increased by 48% in 2006 to US$ 55 million from US$ 37
      million in 2005. This increase was mainly due to the additional volumes of
      the
      Americana mill and higher domestic prices in U.S. dollars in the local market,
      the prices of which follow international markets.




*Paper* .
      In the
      paper segment, total volumes increased by 7% in 2006, driven by higher sales
      volume in the local market that grew 13%. Export volumes decreased by 6% in
      2006
      compared to 2005, mainly due to the shift of uncoated printing and writing
      paper
      exports to the local market driven by the lower exchange rate and better local
      demand. Net operating revenue attributable to paper increased by 15% to
      US$ 797 million in 2006, from US$ 691 million in 2005, boosted by an
      8% increase in the average price of paper. The domestic market accounted for
      79%
      of paper revenues in 2006 compared to 76% in 2005.




******Cost
      of sales**




Cost
      of
      sales increased by 24% to US$ 813 million in 2006 from US$ 654 million
      in 2005. This increase was mostly due to the negative impact of a stronger *real* on our
      costs denominated in *reais* ,
      increase in the depreciation rate related to the revaluation of the estimated
      useful lives of our machinery, equipment and installations from 25 to 18 years
      and three months, increase in labor costs, higher production volumes and higher
      costs related to the purchase and resale of the products from the Americana
      mill. 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 2005 and
      October 2006. For the same reasons, the cost per unit sold increased by 15%
      in 2006 as compared to 2005.




Our
      gross
      margin decreased to 38% in 2006 compared to 42% in 2005 mainly due to the
      increase in the cost per unit sold, partially offset by higher average
      prices.




******Selling
      and marketing expenses**




Sales
      expenses decreased by 1% to US$ 136 million in 2006, equivalent to 10% of
      net revenue, compared to US$ 138 million in 2005, equivalent to 12% of net
      revenue. This decrease resulted mainly from the reduction of logistic expenses
      and a better sales mix in the domestic market.




******General
      and administrative expenses**




General
      and administrative expenses increased by 15% to US$ 63 million in 2006 from
      US$ 55 million in 2005. The increase was mainly attributable to the
      negative effect of the appreciation of the *real* on our
      expenses denominated in local currency, in addition to increases in wages and
      partially offsetting fixed cost reductions. As a percentage of net operating
      revenue, general and administrative expenses remained stable at 5% in 2006
      and
      2005.




61




******Operating
      income**




Operating
      income increased by 15% to US$ 285 million in 2006 from US$ 247
      million in 2005. This increase was primarily due to higher production volumes
      and sales prices, productivity gains, fixed and variable cost reductions and
      lower provisions which were partially offset by the negative effect of the
      stronger exchange rate on local denominated costs and by the higher depreciation
      rate.




*Pulp
      (including intersegment transactions at market values)* .
      Operating income attributable to pulp increased by 23% to US$ 181 million
      in 2006 from US$ 147 million in 2005. This increase was primarily due to
      higher production volumes which were 9% up compared to 2005 and higher sales
      prices which increased 9% over 2005.




*Paper
      (including intersegment transactions at market values)* .
      Operating income attributable to paper increased by 4% to US$ 104 million
      in 2006 from US$ 100 million in 2005. This increase was primarily due to 7%
      higher sales volume and 8% higher sales price, mainly in the domestic
      market.




******Financial
      income**




Financial
      income increased by 110% to US$ 166 million from US$ 79 million in
      2005. The increase is primarily due to the reversal of US$ 43 million
      related to the PIS/COFINS tax provisions on financial income, higher investments
      in local currency derived from positive net cash generation and the positive
      effect of the appreciation of the *real* .
      The
      PIS/COFINS rate is a social contribution on revenues and the reversal of the
      provision was due to a favorable decision by the court on VCP’s claims that the
      tax should not be extended to revenues other than billings.




We
      use
      derivative instruments to mitigate the effects of volatility of interest rates
      on U.S. dollar denominated borrowings (principally export credits) and local
      interest rates available on *real* -denominated
      investments and recorded an increased gain in 2006 on these transactions
      compared with 2005. The amount we earned from these transactions was recorded
      as
      financial income.




******Financial
      expenses**




Financial
      expenses increased to US$ 148 million in 2006 from US$ 119 million in
      2005. The increase was primarily due to higher indebtedness and higher
      international interest rates (principally LIBOR). The increase was partially
      offset by the renegotiation of approximately US$ 1 billion debt with lower
      spread over LIBOR after the “investment grade” rating granted to VCP by Standard
      and Poor’s in the first quarter of 2006.




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




Foreign
      exchange losses amounted to US$ 4 million in 2006 from US$ 5 million
      in 2005. This result was primarily due to the appreciation of the *real* against
      the U.S. dollar and the fair-value adjustments on swap contracts. 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.




******Income
      tax expense**




In
      2006,
      we recorded an income tax expense of US$ 4 million compared to an income
      tax benefit of US$ 8 million in 2005. The effective tax rate was (4%) in
      2005 compared to 1% in 2006. This increase primarily arose from the higher
      pre-tax profit and was partially offset by the deductibility of a charge for
      interest attributed to capital (a tax deductible distribution similar to a
      dividend), difference in foreign income tax rates and higher depreciation
      expense.




62




******Equity
      in earnings of affiliates**




The
      equity in earnings of affiliates increased to US$ 77 million from
      US$ 54 million in 2005. This increase was due to our share in the higher
      earnings of our investees mainly in Ripasa Celulose e Papel S.A. which generated
      earnings of US$ 19 million.




******Net
      income**




As
      a
      result of the foregoing, net income increased by 41% to US$ 372 million in
      2006 compared to US$ 264 million in 2005.




**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,
      debt repayment and dividend payments.




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, 2007, our cash and cash equivalents (which exclude investments
      held to maturity, available for sale securities and unrealized gains from swaps)
      increased to US$ 565 million primarily due to the cash generated in our
      operation and the increase in long-term loans. These sources were partially
      offset by the additional payment to Ripasa’s minority preferred shareholders,
      capital investments made, particularly in forestry assets, as well as the
      increase in working capital due to a higher level of sales in 2006. Cash and
      cash equivalents of US$ 405 million in 2006 was increased primarily due to
      the cash generated in our operations and the increase in long-term loans. These
      sources were partially offset by the payment for the acquisition of a 23% stake
      in Ripasa, capital investments made as well as the increase in working capital.




At
      December 31, 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. See “Item 7—Major Shareholders and Related Party
      Transactions—Related Party Transactions” and Note 13 to our financial
      statements.




At
      December 31, 2006, our cash, cash equivalents and available for sale
      securities (current portion) were US$ 770 million, of which US$ 722
      million were denominated in *reais* .
      At
      December 31, 2007, our cash, cash equivalents and available for sale
      securities (current portion) were US$ 741 million, of which US$ 420
      million were denominated in *reais* .




At
      December 31, 2006, our balance sheet presented a working capital balance of
      US$ 567 million. At December 31, 2007, our balance sheet presented a
      working capital balance of US$ 446 million. We do not expect to have any
      difficulty in meeting our short-term obligations.




**Sources
      of funds**




Operating
      activities provided net cash flows of US$ 333 million in 2007 compared to
      US$ 382 million in 2006 and US$ 234 million in 2005.




Financing
      activities, which include short-term and long-term secured and unsecured
      borrowings and debt repayments, generated negative net cash flow of US$ 113
      million in 2007, US$ 107 million in 2006 and a positive cash flow of
      US$ 505 million in 2005.




63




At
      December 31, 2005 our debt was US$ 1,496 million. The long-term
      position amounted to 86% in 2005 compared to 60% in 2004. Approximately 88%
      of
      the debt was denominated in foreign currencies. At December 31, 2005, we
      had net debt (total long- and short-term financing less cash position and
      held-to-maturity or available for sale investments) of US$ 866 million
      compared to net debt of US$ 469 million at December 31, 2004, as a
      result of the payment for the acquisition of a 23% stake in Ripasa, capital
      investments made, particularly in forestry assets, as well as the increase
      in
      working capital. These investments were partially offset by the cash generation
      during the period.




At
      December 31, 2006, our debt was US$ 1,541 million of this amount;
      long-term debt represented 73% (excluding current portion) in 2006 compared
      to
      86% in 2005. Approximately 90% of the debt was denominated in foreign
      currencies. At December 31, 2006, we had net debt (defined as total long-
      and short-term financing less cash position and held-to-maturity or available
      for sale investments) of US$ 771 million compared to US$ 866 million
      at December 31, 2005.




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 on December 31, 2007 from US$ 771 million posted
      on December 31, 2006. Including 50% of Ripasa’s net debt, our net debt
      amounted to US$ 935 million on December 31, 2007 and we kept our net
      debt 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 represented a net cash used in
      investing activities of US$ 626 million in 2005, US$ 113 million in
      2006 and US$ 145 million in 2007. The increase in 2005 is mainly explained
      by the acquisition of a 23% stake in Ripasa (US$ 275 million) and the
      purchase of available for sale securities (US$ 110 million). In 2006, we
      acquired an additional interest from the minority shareholders of Ripasa
      totaling US$ 36 million.




Our
      significant uses of cash included the repayment of our debt totaling
      US$ 363 million in 2005. In 2006, repayment of debt totaled US$ 355
      million and in 2007 it amounted to US$ 284 million.




**Debt**




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. At December 31,
      2006, our total debt was US$ 1,541 million, consisting of US$ 412
      million in short-term debt (27% of total debt), including the current portion
      of
      long-term debt and represented an increase of US$ 45 million on the debt
      recorded at December 31, 2005. At December 31, 2005, our total debt
      was US$ 1,496 million, consisting of US$ 211 million in short-term
      debt (14% of total debt), including the current portion of long-term debt and
      represented an increase of US$ 551 million on the debt recorded at
      December 31, 2004.




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. For our expansion projects,
      we
      also use long-term financing in *reais* from
      BNDES. In 2006 and 2007 our outstanding borrowings with BNDES was at
      US$ 185 million and US$ 181 million, respectively out of which
      US$ 140 million and US$ 134 million in 2006 and 2007, respectively,
      represented the long-term financing, US$ 6 million lower than the amount at
      December 31, 2006.




During
      the period from July through September 2006, VCP concluded the
      refinancing of significantly all of its outstanding export prepayment loans
      pursuant to a liability management program. See Note 12(a) to our financial
      statements. As a result, the interest rate on the outstanding loans was reduced
      from an average of LIBOR plus 1.75% to LIBOR plus 1.08% p.a., thereby resulting
      in a prospective reduction in interest expense of about US$ 10.6 million
      per annum. Furthermore, the re-financing limited the maximum annual amortization
      on all loans to US$ 123 million during the remaining loan
      period.




64




Export
      credits and import credits with a number of financial institutions comprise
      a
      significant portion of our long-term debt. The lines of credit with respect
      to
      export credits generally mature within 24 to 96 months. Upon shipment, the
      export credits are associated with that specific, identifiable shipment. The
      export credits are repaid with the proceeds of the export receipts from the
      specific shipment. The total amount of outstanding export credits was
      US$ 873 million and US$ 848 million at December 31, 2006 and
      2007, respectively. The export credits bear annual interest of LIBOR plus
      varying spread above LIBOR based upon individual pre-export borrowing
      agreements. The export credits bore annual interest of LIBOR plus 0.67% and
      LIBOR plus 1.08% at December 31, 2006 and 2007, respectively. At
      December 31, 2006 and 2007, there was no outstanding amount of import
      credits. See Notes 12(a) to our financial statements.




On
      January 23, 2004, Voto-Votorantim Overseas Trading Operations III Limited,
      or Voto-Votorantim III, a Cayman Islands limited liability company and a wholly
      owned subsidiary of VPAR, issued US$ 300 of 7.875% Notes due 2014 in
      the international capital markets. Under the terms of the indenture, we are
      a
      guarantor of the notes for an amount of up to 15% of the outstanding amount
      of the notes, which corresponds to the total amount received by us under the
      indenture.




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;




·
            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.




We
      act as
      guarantor, together with other members of the Votorantim group, for up to
      US$ 150 million of obligations of Votorantrade N.V. under a US$ 300
      million export finance agreement between VCP Exportadora and Votorantrade N.V.,
      as borrower, dated as of November 29, 2001. As part of an amendment
      executed on April 26, 2004, VCP Trading N.V. assumed half of the
      US$ 300 million debt that was previously held by Votorantrade N.V. However,
      VCP Exportadora and VCP’s financial obligations under such agreement were not
      amended. This export financing matured in November 2006.




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.




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,
      the parent of BNDESPAR, one of our principal shareholders, has been an important
      source of debt financing. At December 31, 2007, the BNDES loans totaled
      US$ 181 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 at 3.0% to 4.5% per annum on the principal amount and 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, 2007, the TJLP was fixed at 6.25% per year, and
      during 2007 averaged 6.38% per year.




65




At
      December 31, 2007, the amount of our short-term debt (including current
      portion of our long-term debt) was US$ 367 million. At December 31,
      2007, the amount of maturities of our long-term debt excluding current portion
      was as follows:




**Year**
            
            **Amount****(US$ in
                millions)**2009
            
            
            1842010
            
            
            1422011
            
            
            1652012
            
            
            1652013
            
            
            157After
                2013
            
            
            384Total
            
            
            1,197





At
      December 31, 2007, all of our short-term debt related to trade financing
      was secured. At December 31, 2007, the outstanding amount of that
      short-term debt was US$ 211 million, with a weighted average interest rate
      of 5.7%, compared to US$ 242 million at December 31, 2006, with a
      weighted average interest rate of 5.5%.




******Capital
      expenditures**




During
      2007, we invested US$ 353 million in capital expenditure representing an
      increase of 42% from the US$ 248 million invested in 2006, and 43% higher
      than the amount of US$ 247 million invested in 2005. Of this amount,
      US$ 216 million was spent on forestry assets (land acquisition, planting
      and forest maintenance), and the remaining was invested in the expansion,
      modernization and sustaining of our plants.




******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.




At
      December 31, 2007, we had made provisions in the amount of US$ 197
      million, for civil, labor and tax legal proceedings, in long-term liabilities,
      compared to US$ 152 million in 2006. We have made judicial escrow deposits
      under the custodianship of a court held under our name (included in “Other
      assets—other” in our balance sheet) in the amount of US$ 158 million at
      December 31, 2007 for certain proceedings. The position of such provisions
      for tax and other litigation and deposits is as follows:




**2007**
            
            **2006**Deposits
            
            Provisions
            
            Deposits
            
            ProvisionsTax-related
            
            
            150
            
            
            173
            
            
            92
            
            
            133Labor-related
            
            
            8
            
            
            15
            
            
            5
            
            
            13Civil-related
            
            
            -
            
            
            9
            
            
            -
            
            
            6Total
            
            
            158
            
            
            197
            
            
            97
            
            
            152





We
      are
      one of the guarantors, together with other companies of the Votorantim group,
      of
      the US$ 300 million notes issued by Voto-Votorantim III and the
      US$ 400 million issued by Voto-Votorantim IV. At December 31, 2007, we
      had loans outstanding totaling US$ 245 million. For additional information
      on our commitments and contingencies, see “Item 7—Major Shareholders and
      Related Party Transactions—Related Party Transactions” and Note 15(d) to
      our audited consolidated financial statements.




66




The
      following is a summary of the guarantees provided by us in favor of other
      companies of the Votorantim group:




**Primary
                obligor**
            
            **Obligations**
            
            **Outstanding
                guarantee amount at December 31, 2006**
            
            **Date
                of Expiration of guarantee**
            
            **Beneficiary**Voto-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 trustee**Total**
            
            
            
            
            US$
            245
                million





Note:
      The
      guarantees provided by us are in favor of other companies of the Votorantim
      Group.




We
      estimate that, for 2005, 2006 and 2007, an average of approximately 8% of our
      total number of regular domestic customers (approximately 22%, 22% and 23%,
      respectively, of total domestic sales value) obtained our guarantee for their
      loans under our vendor program. Our vendor program exposure was US$ 57
      million at December 31, 2005, US$ 120 million at December 31,
      2006 and US$ 127 million at December 31, 2007. See
“Item 4—Information on VCP—Marketing and Distribution—Paper.”




******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 2005, 2006 and
      2007
      period 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$/US$**2004
            
            
            May
                13, 2004 to May 13, 2005
            
            
            1,716,000
            
            
            None
            
            
            None2005
            
            
            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





Summary
      of Transactions:




**Preferred
                Shares held in Treasury****2005**
            
            **2006**
            
            **2007**Balance
                - January 1st
            
            
            157,200
            
            
            1,081,500
            
            
            31,998Purchases
            
            
            1,050,700
            
            
            -
            
            
            -Sales
            
            
            (126,400
            )
            
            (1,049,502
            )
            
            (3,098
            )Balance
                - December 31st
            
            
            1,081,500
            
            
            31,998
            
            
            28,900





Our
      Board
      of Directors may authorize a new buyback program whenever
      necessary.




67




**C.**
            **Research
                and development, patents and licenses, etc.**




Our
      total
      disbursements, direct and indirect, in Research & Development (excluding the
      disbursement in environmental area) were approximately US$ 11 million,
      US$ 7 million and US$ 6 million during 2007, 2006 and 2005,
      respectively. We direct research and development activities towards
      sustainability and also increasing the forest productivity, eucalyptus wood
      quality and industrial yields, making our production more efficient, developing
      new products and improving the quality of our products. We maintain close links
      with various universities and private research institutes. As an integrated
      producer of pulp and paper, we have sought to gain an even better understanding
      of the whole production process. We attempt to identify the characteristics
      of
      both wood and pulp that are essential for the production of high quality paper.
      In 2008, we plan to invest almost US$ 1.8 million in order to build a new
      Forest Research Laboratory in Jacareí mill site, which will improve the research
      activities of our Company.




Within
      our facilities, Genomics studies undertaken to increase the forest productivity
      as well as improve wood quality via the tree improvement program have resulted
      in expenditures of more than US$ 8 million up to the end of 2007. We
      operate a modern Molecular Markers Laboratory to validate the authenticity
      of
      clones for the operational plantation program.




During
      2007 we began an innovative project in biotechnology, aiming the marker-assisted
      selection of Eucalyptus trees, a powerful tool to accelerate our tree breeding
      program, enabling the early selection of stress-resistant trees (i.e. resistant
      to drought and disease), better wood properties and addressing nutrition
      problems. The Ministry of Science and Technology, FINEP (agency for
      support/financing the development of studies and projects) has contributed
      US$ 1.8 million towards this project.




We
      participate as a consortium member in two Brazilian Genomics Projects related
      to
      Brazilian eucalyptus (FOREST and GENOLYPTUS) and also develop our own genomic
      project in partnership with Alellyx Applied Genomics (a Votorantim Group
      Company) to improve tree quality via biotechnology.




The
      FOREST project is a pre-competitive consortium between forest companies within
      the state of São Paulo and includes financial support from FAPESP (the State of
      São Paulo Research Foundation). This project includes the development of the
      largest available eucalyptus gene bank (130,000 ESTs - Expressed Sequence Tags,
      which has more than 30,000 genes). The project’s studies should result in an
      evolution to the “functional genomics” phase.




The
      GENOLYPTUS is a national project involving several major forest-based companies,
      seven universities, three EMBRAPA centers (The Federal Agency for Agricultural
      Research), and with the financial support of the Brazilian Ministry of Science
      and Technology. The project is jointly funded by the government (70%) and by
      the
      consortium of forestry-based companies (30%). Its focus is the generation of
      a
      suite of experimental resources and genomic tools to discover, map, validate
      and
      further investigate gains of economic importance in species of eucalyptus.
      The
      project’s principal objective is to translate this acquired scientific knowledge
      into improved forest tree breeding and production technologies. It includes
      the
      installation of the world’s largest tree genomic trial network (more than 40,000
      trees resulting from 31 crosses) to evaluate wood quality. The project, now
      in
      its third stage, is currently concentrating on the mapping of the eucalyptus
      gene.




The
      nursery facilities, the largest in South America, with production capacity
      of
      100 million rooted cuttings/seedlings, allow the continued development of
      laboratory findings, the acceleration of plant development for introduction
      to
      the forestry areas, and the utilization of the innovations obtained by Research
      and Development.




The
      Eucalyptus Tree Breeding Program has introduced some new Eucalyptus species
      in
      Rio Grande do Sul, such as *Euclayptus
      globulus* ,
      which
      will allow VCP, in the future, to produce different kinds of pulp and products.
      We have also implemented controlled cross pollination, utilizing pollen of
      different species of Eucalyptus in seeking increased pulp yield and reduced
      pulpwood consumption.




We
      also
      have developed important studies with the focus on soil conservation and site
      sustainability, so that all silvicultural practices and products avoid soil
      erosion/depletion and environmental impacts.




68




**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—Our Business Strategy” and “Item 5A—Operating Results.” For risks
      affecting our business, see “Item 3D—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, 2007.




**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)
            
            
            1,549
            
            
            352
            
            
            326
            
            
            330
            
            
            541Interest
                payable
            
            
            15
            
            
            15
            
            
            -
            
            
            -
            
            
            -Capital
                lease obligations (2)
            
            
            78
            
            
            13
            
            
            26
            
            
            26
            
            
            13Operating
                leases (3)
            
            
            58
            
            
            46
            
            
            10
            
            
            2
            
            
            -Purchase
                obligations (4)
            
            
            382
            
            
            76
            
            
            126
            
            
            95
            
            
            85Pension
                contribution
            
            
            23
            
            
            3
            
            
            6
            
            
            6
            
            
            8Total
            
            
            2,105
            
            
            505
            
            
            494
            
            
            459
            
            
            647








(1)
            Includes
                loans and financings shown in our financial statements, less interest
                payable.




(2)
            Includes
                any agreements with suppliers of our assets (including for the Jacareí
                project). Excludes the Três Lagoas
                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 contractual commitments 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). From our general shareholders’ meeting at April 20,
      2005 we had a permanent *Conselho
      Fiscal* ,
      or
      fiscal committee, which is composed of at least three and at most five
      members.




69




**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
      fifteen times during 2007. 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.




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.Until 2005, the board members that may be elected by holders
      of preferred shares shall be chosen from a list of three names drawn up by
      our
      controlling shareholder. Beginning in 2006, the holders of our preferred shares
      have not yet elected any member of our Board of Directors.




Pursuant
      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 current members,
      elected at our shareholders’ general meeting on April 28, 2007, expire in
      2009.




Set
      forth
      below are the name, age and position of each member of our Board of Directors
      elected at that meeting:




**Name**
            
            **Age**
            
            **Position**José
                Roberto Ermírio de Moraes(1)
            
            50
            
            ChairmanFábio
                Ermírio de Moraes(2)
            
            46
            
            Vice-ChairmanCarlos
                Ermírio de Moraes(3)
            
            52
            
            MemberClóvis
                Ermírio de Moraes Scripilliti(4)
            
            49
            
            MemberJosé
                Luciano Duarte Penido
            
            59
            
            Member








(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.




**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, 2008.




70




Set
      forth
      below are the name, age and position of each of our executive officers elected
      in April 2007:




**Name**
            
            **Age**
            
            **Position**José
                Luciano Duarte Penido
            
            59
            
            Chief
                Executive OfficerMiguel
                Pinto Caldas
            
            43
            
            Human
                Resources OfficerFrancisco
                Fernandes Campos Valério
            
            60
            
            Technical
                & Growth OfficerValdir
                Roque
            
            57
            
            Chief
                Financial Officer & Investor Relations OfficerJosé
                Maria de Arruda Mendes Filho
            
            53
            
            Forest
                Operations OfficerMarcelo
                Strufaldi Castelli
            
            43
            
            Chief
                Operations OfficerCarlos
                Roberto Paiva Monteiro
            
            57
            
            Engineering
                OfficerRoberto
                Bento Vidal
            
            37
            
            Logistics
                Officer





On
      December 13, 2007, Mr. Antonio Sergio Pinzan de Almeida was elected the new
      Pulp Executive Officer at VCP Overseas Holding Limited, Budapest, in Zug,
      Switzerland, pursuant to our organizational restructuring. The pulp offshore
      structure was also strengthened with the opening of a representative office
      in
      China and with the transfer of pulp decision-making to Switzerland, where the
      pulp executive officer, Mr. Sergio Almeida, began to manage the pulp
      business.




Additionally,
      in 2007, two new officers were elected to take office immediately at VCP, Mr.
      Miguel Pinto Caldas in the position of Human Resources Officer and Mr. Roberto
      Bento Vidal in the position of Logistics Officer.




**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.




*Valdir
      Roque* .
      Mr.
      Roque has been our chief financial officer and our Investor Relations director
      since 1994. He previously worked at Monsanto do Brasil S.A. as Treasurer, and
      at
      General Electric and Ford. He has completed postgraduate courses in Business
      Administration at the Getúlio Vargas Foundation in São Paulo, Brazil, holds a
      B.A. in Economics from the Catholic Pontifice University in São Paulo, Brazil
      and has taken specialized courses in financial management at the Stanford
      Business School, California in the United States and IMD in Lausanne,
      Switzerland.




71




*José
      Maria de Arruda Mendes Filho* .
      Mr.
      Mendes is a forest engineer and has been working for the Votorantim Group since
      1982, when he started at Companhia de Cimento Portland Itaú. He joined VCP in
      1988 to develop the forest area of the Company and to supply the pulp mills.
      He
      has a degree in forest engineering from ESALQ/USP, Universidade de São Paulo,
      Brazil, and also a Master’s degree from USP. He has been VCP’s forest
      operations’ director since August 2004.




*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.




*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.




*Roberto
      Bento Vidal* .
      Mr.
      Vidal joined the Company in 2004 to be the Logistics Officer. He previously
      worked in senior positions at Ambev - Companhia de Bebidas das Américas and RR
      Donnelley & Sons. He holds a B.A. in Business Administration from PUC and a
      Master Business Administration from both IBMEC, Brazil and Vanderbilt
      University, Nashville, USA.




*Miguel
      Pinto Caldas* .  Mr.
      Caldas is VCP’s Director of Human and Organizational Development since 2007.
      Prior to his appointment to the VCP board, he had a 15-year 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.




*Antonio
      Sérgio Pinzan de Almeida* .
      Mr.
      Almeida joined the Company in 1990, as a Sales Manager in the paper division.
      In
      1996, Mr. Almeida was transferred to the pulp division, and has been responsible
      for this business line since the beginning of its activities. Previously, he
      has
      been working in Trading Companies and Industries for more than twenty years,
      always focused in the international markets. He holds a B.A. in Business
      Administration from FASP, Brazil and Master Business Administration from
      FEA/USP, Universidade de São Paulo, Brazil.




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);




72




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.




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 25, 2007, the date of the last
      annual shareholders’ meeting.




**Name**
            
            **Age**
            
            **Length
                of Term**
            
            **Year
                First Elected**
            
            **Position**João
                Carlos Hopp
            
            78
            
            one
                year
            
            2001
            
            MemberGeraldo
                Gianini
            
            57
            
            one
                year
            
            2006
            
            AlternateSamuel
                de Paula Matos(1)
            
            59
            
            one
                year
            
            2007
            
            MemberSérgio
                Seidiyu Yatabe
            
            51
            
            one
                year
            
            2005
            
            AlternateHaroldo
                do Rosário Vieira
            
            51
            
            one
                year
            
            2007
            
            MemberAntonio
                Sérgio Battochio
            
            59
            
            one
                year
            
            2005
            
            Alternate





(1)
            Samuel
                de Paula Matos is the audit committee financial
                expert.




73




**B.**
            **Compensation**




According
      to our by-laws, our directors do not receive any compensation. As of the year
      ended December 31, 2007, the aggregate compensation, including cash and
      benefits-in-kind, paid to our executive officers (a total of nine persons at
      the
      time) was approximately R$ 10.3 million (corresponding to US$ 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 fifteen times during 2007. 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 current members expire
      on April 30, 2009.




**D.**
            **Employees**




As
      of
      December 31, 2007, we employed 2,855 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 4,912
      persons for our business as of December 31, 2007. Approximately 76% of the
      workers in our forests are employed by third parties, predominantly in areas
      such as maintenance and security. See “Item 4—Information on VCP—Business
      Overview—Raw Materials—Wood” and “Item 4—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 we consider the unions to be well organized.
      Collective bargaining agreements relating to forest workers expired in
      November 2007. We are currently engaged in negotiations to renew the
      agreements for another year. Collective bargaining agreements relating to other
      employees that expired in September 2007 were renewed for another year,
      with the employees receiving a 6% pay increase and an R$ 830.00 advance for
      employees hired before September 30, 2007. Since 1989, we have experienced
      four labor strikes, all of which affected the pulp and paper industry generally
      and lasted an average of three days. 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 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$ 5 million in 2007.




74




**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 payment of up to one month’s salary 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, 2007,
      2006 and 2005 amounted to US$ 3 million, US$ 1 million and US$ 1
      million, respectively and the accumulated post-retirement benefit obligation
      and
      accrued benefit cost (no plan assets) was US$ 23 million at
      December 31, 2007 and US$ 24 million at December 31,
      2006.




Measurement
      of obligations for the post-retirement benefits plan is calculated as of
      December 31, 2007. The actual discount rates used to determine the
      actuarial present value of projected benefit obligations under such plans were
      8.0% as of December 31, 2007. The assumed weighted annual average rate of
      increase in health care cost trend on covered changes was 3.0% as of
      December 31, 2007.




Based
      on
      the report of our independent actuary, the accumulated post-retirement benefit
      obligation and accrued benefit cost (no plan assets) was US$ 23
      million.




**Percentage****2007**
            
            **2006**Weighted-average
                assumptionsDiscount
                rate
            
            
            8.0
            
            
            8.5Health
                care cost trend on covered changes
            
            
            3.0
            
            
            3.0




**In
                million of US$ dollars****2007**
            
            **2006**Components
                of net periodic benefit cost for 2008 and 2007Interest
                cost
            
            
            3
            
            
            3Total
                net periodic benefit cost (benefit)
            
            
            3
            
            
            3





We
      assume, for measurement purposes, that health care cost trends for 2008 will not
      be considerably different from 2007. 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
      the following effects in 2007 (all other assumptions have been held
      constant):




**One-percentage-point
                decrease**
            
            **One-percentage-point
                increase**2007
            
            2006Sensitivity
                of retiree welfare resultsOn
                total service and interest cost components
            
            
            (0.3
            )
            
            0.3On
                post-retirement benefit obligation
            
            
            (2.6
            )
            
            2.3




75




**E.**
            **Share
                Ownership**




As
      of
      December 31, 2007, 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,
      2007:




**Common**
            
            **Preferred****Number**
              **of
                Shares**
            
            **Percentage
                of the Total Outstanding Shares**
            
            **Number**
              **of
                Shares**
            
            **Percentage
                of the Total Outstanding Shares****Board
                of Directors**José
                Roberto Ermírio**de
                Moraes.
            
            
            0
            
            
            0
            %
            
            1
            
            
            0
            %Fábio
                Ermírio**de
                Moraes
            
            
            0
            
            
            0
            %
            
            1
            
            
            0
            %Clóvis
                Ermírio**de
                Moraes Scripilliti
            
            
            0
            
            
            0
            %
            
            1
            
            
            0
            %Carlos
                Ermírio de Moraes
            
            
            0
            
            
            0
            %
            
            1
            
            
            0
            %José
                Luciano Penido (*)
            
            
            0
            
            
            0
            %
            
            1
            
            
            0
            %**Executive
                Officers**José
                Luciano Penido(*)
            
            
            0
            
            
            0
            %
            
            1
            
            
            0
            %Francisco
                Fernandes Campos Valério
            
            
            0
            
            
            0
            %
            
            3,000
            
            
            0
            %Roberto
                Bento Vidal
            
            
            0
            
            
            0
            %
            
            0
            
            
            0
            %Marcelo
                Strufaldi Castelli
            
            
            0
            
            
            0
            %
            
            0
            
            
            0
            %Miguel
                Caldas
            
            
            0
            
            
            0
            %
            
            0
            
            
            0
            %Carlos
                Roberto Paiva Monteiro
            
            
            0
            
            
            0
            %
            
            0
            
            
            0
            %Valdir
                Roque
            
            
            0
            
            
            0
            %
            
            0
            
            
            0
            %José
                Maria de Arruda Mendes Filho
            
            
            0
            
            
            0
            %
            
            15
            
            
            0
            %Antônio
                Sérgio Pinzan de Almeida
            
            
            0
            
            
            0
            %
            
            0
            
            
            0
            %Total
            
            
            0
            
            
            0
            %
            
            3,020
            
            
            0
            %





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.




76




**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, 2007:




**Shareholders**
            
            **Common**
              **Shares**
            
            **(%)**
            
            **Preferred**
              **Shares**
            
            **(%)**
            
            **Total**
              **Shares**
            
            **(%)**Votorantim
                Participações S.A.
            
            
            105,702,450
            
            
            100.00
            
            
            677
            
            
            0
            
            
            105,703,127
            
            
            51.78**Total
                Votorantim group**
            
            
            **105,702,450**
            
            
            **100.00**
            
            
            **677**
            
            
            **0**
            
            
            **105,703,127**
            
            
            **51.78**BNDES
                Participações S.A.
            
            
            0
            
            
            0
            
            
            7,555,369
            
            
            7.67
            
            
            7,555,369
            
            
            3.70Treasury
                Stock
            
            
            1
            
            
            0
            
            
            28,900
            
            
            0.01
            
            
            28,900
            
            
            0.01Board,
                Directors and Fiscal Council
            
            
            0
            
            
            0
            
            
            3,020
            
            
            0
            
            
            3,020
            
            
            0Public
                (Free Float)
            
            
            1
            
            
            0
            
            
            90,855,089
            
            
            92.29
            
            
            90,855,091
            
            
            44.51**Total******
            
            
            **105,702,452**
            
            
            **100.00**
            
            
            **98,443,055**
            
            
            **100.00**
            
            
            **204,145,507**
            
            
            **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% of our voting common shares. The
      Ermírio de Moraes family does not own any of our preferred shares. All holders
      of our voting common shares have the same voting rights. Each of our directors,
      other than José Luciano Duarte Penido has material beneficial interests in trust
      holdings.




**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
      and
      VCP North America. 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
      S.A., or Banco Votorantim, a financial institution controlled by the Votorantim
      group and its affiliates. At December 31, 2007, we had approximately
      US$ 34 million (of a total of US$ 741 million) in deposits.




**Guarantees**




At
      December 31, 2007, 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, 2007 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, 2007**
            
            **Date
                of Expiration of guarantee**
            
            **Beneficiary**Voto-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 trustee**Total**
            
            
            
            
            
            
            
            US$
            245
                million





Note:
            The
                guarantees provided by us are in favor of other companies of the
                Votorantim Group.




77




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.




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.




**Leases
      of Forest Land**




At
      December 31, 2007, 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**




A
      shareholder of our preferred shares, BNDESPAR is a wholly owned subsidiary
      of
      BNDES, the Brazilian economic development bank owned by the Brazilian federal
      government. We have entered into a number of financing transactions with BNDES.
      At December 31, 2007, we had an aggregate of US$ 159 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 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, 2007, we had an
      additional aggregate amount of US$ 22 million in loans to BNDES denominated
      in *reais* and
      bearing an interest rate of 10% 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 2007,
      the
      Index’s average rate was 6.4% per annum and the average spread over the index
      was 3.8%. At December 31, 2007, the TJLP was fixed at 6.25%, and during
      2007 averaged 6.38% per year. See Notes 12 and 13 to our consolidated
      financial statements.




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 consolidated financial
      statements.




78




**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: VCP Exportadora e Participações S.A. (“VEP”) which was merged
      into VCP on April 1, 2006, Normus Emprendimentos e Participações Ltda.
      (“Normus”), Newark, VCP North America Inc., VCP Trading N.V., VCP Overseas
      Holding KFT and from February 1, 2007, following the exchange of assets
      with International Paper, VCP-MS which was acquired through the exchange of
      assets (Note 4(b) to our consolidated Financial Statements), all of which
      are wholly owned. All significant intercompany accounts and transactions,
      unrealized profits and intra-group profit distributions have been eliminated
      on
      consolidation.




We
      own
      28.0% of the common voting shares, which represent 12.35% of the total share
      capital, of, Aracruz, which we acquired in 2001. We own 50% of the voting and
      total shares of Ripasa and of Voto-Votorantim Overseas Trading Operations IV
      Limited. And, as from September 2007, we also own 40% of the voting and
      total shares of Ahlstrom VCP. These investees, which are incorporated in Brazil,
      are not consolidated and are accounted for using the equity method.




On
      March 31, 2005, Ripar, a 50% owned joint venture, 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 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 which, among other things, resulted in VCP
      indirectly owning 50% of Ripasa. Subsequently, their assets were distributed
      to
      VCP and Suzano, in equal parts (Note 4(a) to our 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
      account for our interest in Ripasa by the equity method using financial
      information with a one-month lag.




**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, 2007, we were
      defendants in 1,355 labor lawsuits filed by our former employees and former
      employees of our subcontractors and 548 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, 2007, our provisions for legal proceedings were US$ 197
      million, of which US$ 173 million related to tax disputes and approximately
      US$ 24 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.




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 legal
      proceedings within this category are summarized in the succeeding
      paragraphs.




In
      1999,
      we filed a lawsuit challenging the 1% increase in the COFINS tax rate (from
      2%
      to 3%), a tax on revenues. Although we have obtained a legal injunction, based
      on advice from 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. The lawsuit is now
      pending Supreme Court judgment.




79




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$ 18 million relating to this claim. The lawsuit is now pending
      Appellate Court judgment.




In
      1996,
      we filed a judicial claim to assure our right to the deductibility of
      inflation-indexed depreciation (an increase of 70%) arising from a government
      economic stabilization program in January 1989. We obtained a favorable
      decision enabling the partial deduction of an increase of 43%. Based on advice
      from our legal counsel, we have accrued US$ 7 million relating to this
      claim. The lawsuit is now pending Supreme Court judgment.




In
      December 2007 our wholly-owned subsidiary, Normus, was assessed US$ 512 million,
      the Reais equivalent of R$ 907 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 to be remote. The 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. See Note 15(c) to our consolidated financial statements.




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.




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, 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. At December 31, 2007, the legal reserve outstanding balance
      was R$ 248 million, equivalent to US$ 140 million at the December 31,
      2007 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% 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




80




·
            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 2007 relate to profits earned through December 31,
      2006.




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. At December 31, 2007, in our legal books
      prepared in accordance with Brazilian GAAP, we had unappropriated retained
      earnings (sum of the accounts Reserve for Accumulated Financial Results
      ( *Reserva
      de Resultados Acumulados* )
      and
      Reserve for Retained Earnings ( *Reserva
      de Lucros* ))
      of R$
      2,488 million, equivalent to US$ 1,405 million at the exchange rate at
      December 31, 2007. We had unappropriated retained earnings of
      US$ 1,265 million at December 31, 2007, US$ 824 million at
      December 31, 2006 and US$ 628 million at December 31, 2005 at the
      exchange rate at the referred dates. 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 reversed by releasing other reserves.




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. In addition,
      the devaluation of the *real* creates
      foreign exchange gains and losses that are included in the results of operations
      determined under Brazilian GAAP and which affect the amount of unappropriated
      earnings available for distribution. At December 31, 2007, on a
      consolidated basis, we and our subsidiaries recorded under Brazilian GAAP
      foreign exchange losses and monetary variation (including gains from foreign
      currency swap contracts and excluding Aracruz’s foreign exchange gain on equity)
      of US$ 214 million at an average exchange rate for 2007.




81




**Mandatory
      distribution**




Under
      our
      by-laws, at least 25% of our adjusted net income 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.




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.”




82




***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 2003. 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.




**First
                payment date**
            
            **Fiscal
                year**
            
            **Common**
              **shares**
            
            **Preferred**
              **shares**
            
            **Common**
              **shares****(1)**
            
            **Preferred**
              **shares****(1)****(in
                R$ per share)**
            
            **(in
                US$ per share)**May 10,
                2004
            
            
            2003
            
            
            1.1928
            
            
            1.3121
            
            
            0.3798
            
            
            0.4177November 5,
                2004
            
            
            2004
            
            
            0.3999
            
            
            0.4399
            
            
            0.1419
            
            
            0.1561May 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
            
            
            0.8117





(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 amounted US$ 88
      million in 2005 and US$ 111 million in 2006. 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 (approximately US$ 180
      million), to be paid in 2008, after our next annual shareholders’ meeting (to be
      held until April 30, 2008), which will confirm the final approval. 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.




83




**B.**
            **Significant
                Changes**




No
      significant changes or events have occurred after the close of the balance
      sheet
      date at December 31, 2007, 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, 2007, we had approximately 7,700 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:




***Reais*****per**
              **Preferred
                Share**
            
            **U.S.
                dollars**
              **per
                ADS****High**
            
            **Low**
            
            **High**
            
            **Low**2003:
            
            
            Annual
            
            
            36.78
            
            
            19.20
            
            
            12.82
            
            
            6.402004:
            
            
            Annual
            
            
            44.00
            
            
            33.00
            
            
            16.55
            
            
            10.722005:
            
            
            Annual
            
            
            39.37
            
            
            23.39
            
            
            15.69
            
            
            10.61





2006:
            
            
            First
                Quarter
            
            
            35.01
            
            
            27.20
            
            
            16.18
            
            
            12.22Second
                Quarter
            
            
            36.56
            
            
            29.95
            
            
            17.58
            
            
            12.65Third
                Quarter
            
            
            38.50
            
            
            32.60
            
            
            17.78
            
            
            14.78Fourth
                Quarter
            
            
            44.30
            
            
            36.40
            
            
            20.04
            
            
            17.11Annual
            
            
            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
  Share
                  Price for the most recent six months:July,
                  2007
              
              
              42.02
              
              
              51.01
              
              
              27.40
              
              
              22.88August,
                  2007
              
              
              46.82
              
              
              41.76
              
              
              24.48
              
              
              19.60September,
                  2007
              
              
              52.50
              
              
              45.65
              
              
              28.62
              
              
              23.53October,
                  2007
              
              
              53.68
              
              
              49.31
              
              
              31.35
              
              
              28.08November,
                  2007
              
              
              57.33
              
              
              50.99
              
              
              33.22
              
              
              28.52December,
                  2007
              
              
              59.18
              
              
              52.40
              
              
              34.45
              
              
              29.60




**B.**
            **Plan
                of Distribution**




Not
      applicable.




84


**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, 2007, 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, 2007, we accounted for approximately 0.5% 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.”




**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.




85




**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.




**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.




******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. No member of our executive committee serves as a director. 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.




86




******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.




******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 permanent *Conselho
      Fiscal* composed
      of three to five members who are elected at the general shareholders’ meeting.
      The *Conselho
      Fiscal* operates
      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
      permanent *Conselho
      Fiscal* that
      consists of three members and three alternates. The members of our *Conselho
      Fiscal* are 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 our *Conselho
      Fiscal* to act
      as an audit committee pursuant to SEC rules, 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. For a further discussion of our *Conselho
      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.




87




******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 recently
      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, which
      is
      co-assisted by Deloitte Touche Tohmatsu in an outsourced partnership. 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.




**D.**
            **Selling
                Shareholders**




Not
      applicable.




**E.**
            **Dilution**




Not
      applicable.




**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**




**Shareholders’
      Agreement of Aracruz Celulose S.A.**




A
      subsidiary of ours became a party to the Aracruz shareholders’ agreement, along
      with BNDESPAR, the Lorentzen Group and the Safra Group. Under the shareholders’
agreement, our subsidiary will be entitled to appoint three directors to the
      Aracruz’s board, which currently consists of ten directors. The shareholders’
agreement, which expires in May 2008, provides that the maximum number of shares
      of voting stock of Aracruz to be held by any party to the shareholders’
agreement may not exceed 28% of the total outstanding shares of voting stock.
      In
      addition, the shareholders’ agreement requires that each person or entity who
      acquires shares of voting stock of Aracruz from any of the parties to the
      shareholders’ agreement become a party to such agreement.




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 existing 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.




88




**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 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 2005, 2006 and
      2007.




*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 being 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 tonnes 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 is expected to be
      completed in January 2009 and to have a capacity of 1,100,000 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.




89




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.




**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**




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 do not reside in a “tax haven,” 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 “—Taxation—Certain
      Brazilian Tax Consequences.”




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.




**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 in the event of the grant and exercise of any option to
      acquire shares of our capital stock. 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 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 company.




90




In
      the
      event of a capital increase that would maintain or increase the proportion
      of
      capital represented by preferred shares, the holders of preferred shares, except
      as described above, would have preemptive rights to subscribe to our newly
      issued 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 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. In the event of a capital increase that would reduce
      the proportion of capital represented by preferred shares, the holders of the
      preferred shares, except as described above, would have preemptive rights to
      subscribe for preferred shares in proportion to their shareholdings, and for
      common shares, only to the extent necessary to prevent dilution of their
      interest in their shares. 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 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;




·
            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*;




·
            to
                approve the acquisition of control of another company at a price
                which
                exceeds certain limits set forth in the Brazilian corporate
                law;




·
            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; 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.




91




In
      addition, in the event that the entity resulting from a merger, 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.




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 withdrawal 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
      withdrawal 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.




According
      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 stock index in Brazil
      or
      abroad, 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 prospectus, 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.




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.




**Certain
      Brazilian tax consequences**




The
      following discussion, subject to the limitations therein, summarizes certain
      Brazilian tax consequences of the acquisition, ownership and disposition of
      preferred shares or ADSs, as the case may be, by a holder that is not domiciled
      in Brazil for purposes of Brazilian taxation, or by a holder of preferred shares
      with an investment in preferred shares registered with the Central Bank as
      a
      U.S. dollar investment (in each case, a “non Brazilian holder”). It is based on
      Brazilian law as currently in effect, and, therefore, any change in such law
      may
      change the consequences described below. Each non-Brazilian holder should
      consult his or her own tax adviser concerning the Brazilian tax consequences
      of
      an investment in preferred shares or ADSs.




92




**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 withholding income
      tax. 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
      may be subject to Brazilian withholding income tax at varying rates, depending
      on the year the profits were generated.




**Taxation
      of gains**




Gains
      realized outside Brazil by a non Brazilian holder on the disposition of ADSs
      to
      another non-Brazilian holder are not subject to Brazilian tax. According to
      Provisional Measure No. 135 Enacted on October 30, 2003, which came
      into force on January 1, 2004, the disposition of assets located in Brazil
      by a non-Brazilian holder may become subject to taxation in Brazil. Although
      we
      believe that the ADSs do not fall within the definition of assets located in
      Brazil for the purposes of Provisional Measure No. 135, considering the
      general and unclear scope of Provisional Measure No. 135 and the lack of a
      judicial court ruling in respect thereto we are unable to predict whether our
      belief will ultimately prevail in the Brazilian courts.




The
      withdrawal of ADSs in exchange for preferred shares is not subject to Brazilian
      tax. 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. 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.




Non
      Brazilian holders are generally subject to income tax imposed at a rate of
      15%
      on gains realized on sales or exchanges of preferred shares if the transaction
      is carried out outside any Brazilian stock, future or commodities exchange.
      Gains realized by a non-Brazilian holder upon the redemption of preferred shares
      will be treated as gain from the disposition of such preferred shares occurring
      outside of a stock exchange and will accordingly be subject to tax at a rate of
      15%.




Non
      Brazilian holders are subject to income tax, at a rate of 20%, on gains realized
      on sales or exchanges in Brazil of preferred shares that occur on the Brazilian
      stock exchanges, unless such a sale is made by a non-Brazilian holder who is
      not
      a resident in a “tax haven” (as described below) and (1) such sale is made
      within five business days of the withdrawal of the preferred shares in exchange
      for ADSs and the proceeds thereof are remitted abroad within such five day
      period, or (2) such sale is made under Resolution No. 2,689 by
      registered non Brazilian holders who obtain registration with the CVM. In these
      two last cases, the gains realized are exempt from income tax. The gain realized
      from transactions on the Bovespa is the difference between the amount in
      Brazilian currency realized on the sale or exchange and the acquisition cost,
      measured in Brazilian currency, without any correction for inflation, of the
      shares sold. The gain realized as a result of a transaction that occurs other
      than on the Bovespa is the positive difference between the amount realized
      on
      the sale or exchange and the acquisition cost of the preferred shares, both
      values in reais; there are grounds, however, to hold that the gain realized
      should be calculated based on the foreign currency amount registered with the
      Central Bank, such foreign currency amount to be translated into Brazilian
      currency at the commercial market rate. There is no assurance that the current
      preferential treatment for holders of ADSs and non Brazilian holders of
      preferred shares under Resolution No. 2,689 will continue in the future or
      that it will not be changed in the future.




Any
      exercise of preemptive rights relating to the preferred shares will not be
      subject to Brazilian taxation. Any gain on the sale or assignment of preemptive
      rights relating to the 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.




93




**Capital
      gains on disposition of ADSs involving non-residents in
      Brazil**




Article
      26 of Law 10,833, enacted on December 29, 2003, states that the capital
      gain upon the disposition of “assets located in Brazil” by a non-resident to
      another non-resident in Brazil is subject to Brazilian withholding income
      usually at the rate of 15%. Such tax rate, however, increases to 25% in case
      the
      beneficiary of the capital gain is domiciled in a “tax haven” jurisdiction
      (i.e., a country or location that does not impose any taxation on income or
      that
      taxes the income up to the maximum rate of 20%).




In
      our
      opinion, the expression “assets located in Brazil” in principle does not
      encompass ADSs as they are issued outside Brazil. Consequently, the referred
      legal provision is not applicable to the disposition of ADSs by a non-resident
      to another non-resident. However, considering that such legal provision is
      quite
      recent and as far as we know there is no judicial or administrative precedent
      related to this matter, we can not guarantee that our understanding will
      ultimately prevail in the Brazilian courts.




**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 payment to shareholders who are
      either Brazilian residents or non-Brazilian residents, including holders of
      ADSs, is subject to Brazilian withholding income tax at the rate of 15%. 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. 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 1, 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%. Capital gains for gains realized are not subject to this 25% tax even
      if
      the beneficiary is a resident in a tax haven. A tax haven jurisdiction is
      considered to be any country or location, (i) which does not impose income
      tax or imposes income tax at a maximum rate lower than 20% or (ii) where
      internal legislation imposes restrictions on the disclosure of the shareholding
      composition or ownership of investments.




**Other
      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.




******Tax
      on bank account transactions (CPMF)**




The
      financial transaction tax (CPMF) is imposed on any removal of funds from bank
      accounts maintained in Brazil in an amount equal to 0,38% of the transaction’s
      value. The CPMF tax was imposed on all such transactions through
      December 31, 2007, but has been revoked effective January 1, 2008.
      Transactions that may have occurred during 2007 by the depository or the holders
      of preferred shares that involved the transfer of Brazilian currency through
      Brazilian financial institutions will be subject to the CPMF tax. Should
      non-Brazilian holders transfer the proceeds from the sale or assignment of
      preferred shares by an exchange transaction in 2007, the CPMF tax was imposed
      on
      the amount to be remitted abroad in Brazilian *reais* .
      The
      responsibility for the collection of the CPMF tax is borne by the financial
      institution that carries out the relevant financial transaction. In the event
      we
      performed any exchange transaction in connection with ADRs or preferred shares
      during 2007, we had a corresponding CPMF tax burden.




94




******Taxation
      of foreign exchange transactions (IOF/Câmbio)**




Pursuant
      to Decree No. 2,219 of May 2, 1997, *IOF/Câmbio* may be
      imposed upon the conversion of Brazilian currency into a foreign currency
      ( *e.g* .,
      for
      purposes of paying dividends and interest) and on the conversion of foreign
      currency into Brazilian currency. Except under specific circumstances, there
      is
      no current IOF tax on such conversions, but the Minister of Finance has the
      legal power to increase the rate to a maximum of 25% at any time, but only
      in
      relation to future transactions.




******Tax
      on bonds and securities transactions (IOF/Títulos)**




Law
      No. 8,894/94 created the Tax on Bonds and Securities Transactions (the *IOF/Títulos* ),
      which
      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 these transactions is currently 0%, although the
      executive branch may increase the rate up to 1.5% per day, but only with respect
      to futures transactions.




******Social
      Contribution Tax (COFINS and PIS)**




The
      Federal government enacted law No. 10,833/03, which created the
      non-cumulative COFINS, which came into effect in February 2004. The COFINS
      tax previously charged at a flat rate of 3.0% on revenues was increased to
      7.6%
      on revenues less certain costs and expenses on a value-added basis. Similarly,
      the PIS tax was increased from a flat rate of 0.65% on revenues to 1.65% on
      revenues less certain costs and expenses on a value added basis. These new
      value-added taxes allowed for certain credits in the basis of calculation such
      as raw materials, services and certain finance expenses. Sales of investments
      (shares and fixed assets) are not considered in the calculation of these
      taxes.




**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.




95




**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.




This
      summary does not purport to address all the material 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 United States is able to exercise
                primary supervision over the administration of the trust and one
                or more
                United States persons have the authority to control all substantial
                decisions of the trust or (B) the trust has a valid election in
                effect under applicable U.S. 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 “—Certain Brazilian tax consequences—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 so 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.




96




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.




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
      2007
      taxable year. In addition, based on the our audited financial statements and
      current expectations regarding the value and nature of its assets, the sources
      and nature of its income, and relevant market and shareholder data, we do not
      anticipate becoming a PFIC for our 2008 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.




97




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 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, 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 ADSs 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 of 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, 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 450 Fifth Street, N.W., Washington, D.C. 20549. Copies of
      the
      materials may be obtained from the Public Reference Room of the Commission
      at
      450 Fifth Street, N.W., Washington, D.C. 20549 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, 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.




98




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 not 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, cash equivalents and held-to-maturity investments, 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 14% at December 31, 2005 and 27% at
      December 31, 2006 and 23% at December 31, 2007.




99




**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.




The
      specific foreign currency risks which have caused us to enter into swap
      contracts to protect ourselves against a possible devaluation of the *real* were
      associated with the exposures generated by our U.S. dollar denominated (short-
      and long-term) debt. The contracts mitigate these risks by committing the
      counterparties and ourselves to positions in foreign currency, thereby
      offsetting, to the extent of these contracts, the effects of currency
      fluctuations on our foreign currency debts. The management of our net exposure
      position takes into account a number of current and projected economic factors
      and market conditions. At December 31, 2006 and 2007, the notional amounts
      of our outstanding foreign currency swap contracts were US$ 480 million and
      US$ 193 million, respectively, and their fair values were less than the
      aforementioned notional values by US$ 93 million and US$ 5 million,
      respectively. The weighted average pay rates on our outstanding foreign currency
      swap contracts are floating rate-based on the *Certificado
      de Depósito Interbancário* ,
      or CDI.
      The fair values of our cross-currency interest rate swap contracts were
      estimated based on quoted market prices of comparable contracts. The table
      below
      provides information on our debt outstanding as of December 31, 2007. The
      amounts have been translated into U.S. dollars based on the exchange rate
      prevailing on December 31, 2007, as determined by the Central Bank (R$
      1.7713 for US$ 1.00).




Our
      cross
      currency interest rate swap contracts are effected to mitigate the potential
      foreign currency exchange losses which would be generated by our U.S.
      dollar-denominated liabilities in the event of a devaluation. We make our export
      sales in U.S. dollars, which helps us to mitigate potential losses in the event
      of a devaluation.




**Expected
                maturity date****2008**
            
            **2009**
            
            **2010**
            
            **After
                2010**
            
            **Total****(US$ in
                millions)**Short-term
                debt:*Reais*
            
            
            42
            
            
            0
            
            
            0
            
            
            0
            
            
            42U.S.
                dollars
            
            
            114
            
            
            0
            
            
            0
            
            
            0
            
            
            114Total
                short-term debt (including
            
            
            **156**
            
            
            **0**
            
            
            **0**
            
            
            **0**
            
            
            **156**current
                portion of long-term debt)Long-term
                debt:*Reais*
            
            
            0
            
            
            57
            
            
            17
            
            
            73
            
            
            147U.S.
                dollars
            
            
            0
            
            
            127
            
            
            125
            
            
            798
            
            
            1,050Total
                long-term debt
            
            
            **0**
            
            
            **184**
            
            
            **142**
            
            
            **871**
            
            
            **1,197****Total**
            
            
            **156**
            
            
            **184**
            
            
            **142**
            
            
            **871**
            
            
            **1,353**





We
      incurred most of this 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 held-to-maturity
      investments) 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.




On
      December 31, 2007, the carrying value of our U.S. dollar-denominated
      short-term debt was US$ 211 million and our U.S. dollar- and *real* -denominated
      long-term debt, including the current portion, was US$ 1,353
      million.




100




We
      estimate that the foreign currency-denominated component of our paper costs
      does
      not exceed 10% 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 is as
      follows:




**As
                of December 31,****2007**
            
            **2006**Floating
                rate debt:·Denominated
                in U.S. dollars
            
            
            69
            %
            
            58
            %·Denominated
                in*reais*
            
            
            12
            %
            
            11
            %Subtotal
            
            
            81
            %
            
            69
            %Fixed
                rate debt:·Denominated
                in U.S. dollars
            
            
            19
            %
            
            31
            %Subtotal
            
            
            19
            %
            
            31
            %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, 2006, the TJLP
      was fixed at 6.85%, and during 2006 averaged 7.88% per year. On
      December 31, 2007, the TJLP was fixed at 6.25%, and during 2007 averaged
      6.38% per year. The interest rate on our cash, cash equivalents and
      held-to-maturity investments denominated in reais is based on the CDI rate,
      the
      benchmark interest rate set by the interbank market on a daily basis and during
      2007 averaged 11.82% per year.




101




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, 2007.




**2008**
              
              **2009**
              
              **2010**
              
              **After
                  2010**
              
              **Total**
              
              **Fair
                  value**(1)**(US$ in
                  millions)****Assets:**Cash
                  and cash equivalents denominated in*reais*
              
              
              244
              
              
              -
              
              
              -
              
              
              -
              
              
              244
              
              
              244Cash
                  and cash equivalents denominated in U.S. dollars
              
              
              321
              
              
              -
              
              
              -
              
              
              -
              
              
              321
              
              
              321Available-for-sales
                  investments denominated in*reais*
              
              
              176
              
              
              -
              
              
              -
              
              
              -
              
              
              176
              
              
              176Available-for-sales
                  investments denominated in U.S. dollars
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -Total
                  cash, cash equivalents and available-for-sales investments
              
              
              741
              
              
              -
              
              
              -
              
              
              -
              
              
              741
              
              
              741**Liabilities:**Short-term
                  debt:Floating
                  rate, denominated in U.S. dollars
              
              
              64
              
              
              -
              
              
              -
              
              
              -
              
              
              64
              
              
              64Floating
                  rate, denominated in*reais*
              
              
              42
              
              
              -
              
              
              -
              
              
              -
              
              
              42
              
              
              42Fixed
                  rate, denominated in U.S. dollars
              
              
              261
              
              
              -
              
              
              -
              
              
              -
              
              
              261
              
              
              261Fixed
                  rate, denominated in*reais*
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -Long-term
                  debt:Floating
                  rate, denominated in U.S. dollars
              
              
              -
              
              
              127
              
              
              125
              
              
              555
              
              
              807
              
              
              807Floating
                  rate, denominated in*reais*
              
              
              -
              
              
              57
              
              
              17
              
              
              73
              
              
              147
              
              
              147Fixed
                  rate, denominated in U.S. dollars
              
              
              -
              
              
              -
              
              
              -
              
              
              243
              
              
              243
              
              
              259Total
                  debt
              
              
              367
              
              
              184
              
              
              142
              
              
              871
              
              
              1,564
              
              
              1,580








(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.




(2)
            Held-to-maturity
                or available-for-sale investments.




**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.




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.




102




The
      table
      below provides information about our cross-currency interest rate swap
      contracts:




**As
                of December 31, 2007****Expected
                maturity date****2008**
            
            **2009**
            
            **2010**
            
            **After
                2010**
            
            **Total**
            
            **Fair
                Value of assets (liabilities)****(1**)
            
            **Average
                paying rate in reais**
            
            **Average
                receiving rate**Cross-currency
                interest rate swap contracts notional amountU.S.
                dollars to*reais*
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -Yen
                to U.S. dollars
            
            
            (5
            )
            
            -
            
            
            -
            
            
            -
            
            
            (5
            )
            
            (5
            )
            
            8.02%
                per year
            
            
            4.25%
                per year*Reais*to*Reais*
            
            
            
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -Total
            
            
            (5
            )
            
            -
            
            
            -
            
            
            -
            
            
            (5
            )
            
            (5
            )








(1)
            The
                methodology used to determine the fair value included in the table
                above
                is described in note 13 to our audited consolidated financial
                statements.




**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, 2007. 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, 2007, VCP’s
      internal control over financial reporting is effective based on those
      criteria.




103




The
      effectiveness of the Company's internal control over financial reporting as
      of
      December 31, 2007, has been audited by PricewaterhouseCoopers Auditores
      Independentes, an independent registered public accounting firm, as stated
      in
      their report which appears herein.




*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.




**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 2007. 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, 2007, 2006 and 2005:.




**Year
                Ended December 31,****2007**
            
            **2006**
            
            **2005****(in
                thousands of U.S. dollars)**Audit
                Fees
            
            US$
            1,213
            
            US$
            1,571
            
            US$
            285Tax
                Fees
            
            
            253
            
            
            -
            
            
            -Audit-Related
                Fees
            
            
            4
            
            
            250
            
            
            5Total
            
            US$
            1,470
            
            US$
            1,821
            
            US$
            290










104




**Audit
      Fees**




Audit
      fees in 2007, 2006 and 2005 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, 2007, based on criteria established
      in Internal Control - Integrated Framework issued by the Committee of Sponsoring
      Organizations of the Treadway Commission (COSO).




**Audit-Related
      Fees**




Audit-related
      fees in 2006 and 2005 consisted of the aggregate fees billed by
      PricewaterhouseCoopers Auditores Independentes in connection with analysis
      of
      compliance by us of Sarbanes-Oxley provisions.




**Tax
      Fees**




Tax
      fees
      in 2007 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.




**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 2007, 2006 and
      2005
      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**




In
      2007,
      no shares were repurchased or sold. At December 31, 2007, a total of 28,900
      preferred shares were held in treasury, at the amount of R$ 0.8 million
      (approximately US$ 0.4 million).




105




**** **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-4Consolidated
                  Balance Sheets as of December 31, 2007 and 2006
              
              
              F-7Consolidated
                  Statements of Income for the years ended December 31, 2007, 2006 and
                  2005
              
              
              F-9Consolidated
                  Statements of Cash Flows for the years ended December 31, 2007, 2006
                  and 2005
              
              
              F-11Consolidated
                  Statements of Changes in Shareholders’ Equity for the years ended
                  December 31, 2007, 2006 and 2005
              
              
              F-13Notes to
                  Consolidated Financial Statements
              
              
              F-15




Aracruz
      -
      Report of Independent Registered Public Accounting Firm




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.




106




**ITEM
          19. EXHIBITS** ****




**Exhibit**
                **Number**
            
            **Description**1*
            
            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.




107




**Exhibit**
              **Number**
            
            **Description**3.3****
            
            Terms
                of Adhesion to the Shareholders’ Agreement of Aracruz Celulose S.A., dated
                November 1, 2001.4.1.1+
            
            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.4.5+
            
            Exchange
                Agreement dated September 19, 2006 by and between Votorantim Celulose
                e Papel S.A. and International Paper Investments
                (Holland) B.V.




108




**Exhibit**
              **Number**
            
            **Description**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, 2007between
                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.6#
            
            See
                Note 2(l) to our financial statements for information explaining
                how earnings per share information was calculated.8#
            
            See
                Note 2(c) to our 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 6K 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).




#
            Filed
                herewith.




109


**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/
                Valdir RoqueName:
                Valdir RoqueTitle:
                 Chief Financial Officer




By:
            /s/
                José Luciano Duarte PenidoName:
                   José Luciano Duarte PenidoTitle:
                    Chief Executive
                Officer




Date:
      January 31, 2008




110


**Votorantim
        Celulose e Papel S.A.**
 **Consolidated
        Financial Statements**
 **as
        at December 31, 2007 and 2006,**
 **and
        for the Three Years Ended**
 **December
        31, 2007**
 **and
        Report of Independent Registered**
 **Public
        Accounting Firm**
  **Page****Index
                  to Consolidated Financial Statements**Management's
                  Report on Internal Control Over Financial Reporting
              
              
              F-2Report
                  of Independent Registered Public Accounting Firm
              
              
              F-4Consolidated
                  Balance Sheet
              
              
              F-7Consolidated
                  Statements of Income
              
              
              F-9Consolidated
                  Statements of Cash Flows
              
              
              F-11Consolidated
                  Statements of Changes in Shareholders' Equity
              
              
              F-13Notes
                  to the Consolidated Financial Statements
              
              
              F-15
 
 
  **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, 2007, 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,
                  2007 the Company's internal control over financial reporting is
                  effective.
 
 5
              Management's
                  assessment of the effectiveness of the Company's internal control
                  over
                  financial reporting as of December 31, 2007 has been audited by
                  PricewaterhouseCoopers Auditores Independentes, the Company's independent
                  registered public accounting firm, which opinion is stated in their
                  report, dated January 16, 2008, included
                  herein.
 
 São
        Paulo ,
        January
        16, 2008
 
 José
                  Luciano Penido
              
              Valdir
                  RoqueChief
                  Executive Officer
              
              Chief
                  Financial OfficerJanuary
                  16, 2008
              
              January
                  16, 2008
 
 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 income, 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, 2007
                  and 2006, and the results of their operations and their cash flows
                  for
                  each of the three years in the period ended December 31, 2007 in
                  conformity with accounting principles generally accepted in the
                  United
                  States of America. Also in our opinion, the Company maintained,
                  in all
                  material respects, effective internal control over financial reporting
                  as
                  of December 31, 2007, 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 (which were integrated audits in 2007 and 2006).
                  We did
                  not audit the financial statements of Aracruz Celulose S.A., an
                  affiliate, the investment in which totaled US$ 314 million and
                  US$ 291 million at December 31, 2007 and 2006, respectively, and
                  for which the equity in earnings of affiliates, included in net
                  income,
                  totaled US$ 52 million, US$ 56 million and US$ 42 million
                  for each of the three years in the period ended December 31, 2007.
                  The
                  financial statements 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., 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 audit 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 statement 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 permitpreparation
                  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.
 
 F-5
  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.****
 
 São
        Paulo, January 16, 2008
  PricewaterhouseCoopers
 Auditores
        Independentes
 
 F-6
  **Votorantim
        Celulose e Papel S.A.**
 
 **Consolidated
        Balance Sheets at December 31**
 **In
        millions of U.S. dollars, except number of shares**
 
 **Note**
              
              
              **2007**
              
              
              **2006****Assets**Current
                  assetsCash
                  and cash equivalents
              
              
              
              
              
              565
              
              
              405Available
                  for sale securities
              
              
              6
              
              
              176
              
              
              365Trade
                  accounts receivable, net
              
              
              7
              
              
              165
              
              
              201Inventories
              
              
              8
              
              
              186
              
              
              198Recoverable
                  taxes
              
              
              
              
              
              71
              
              
              94Deferred
                  income tax
              
              
              5(b)
              
              
              5
              
              
              49Long-lived
                  assets held for sale
              
              
              
              
              
              -
              
              
              15Other
              
              
              
              
              
              34
              
              
              201,202
              
              
              1,347Non-currentInvestment
                  in affiliates, including goodwill
              
              
              9
              
              
              1,009
              
              
              900Property,
                  plant and equipment, net
              
              
              10
              
              
              3,916
              
              
              1,945Other
                  assetsRecoverable
                  taxes
              
              
              
              
              
              68
              
              
              25Deferred
                  income tax
              
              
              5(b)
              
              
              -
              
              
              79Judicial
                  deposits
              
              
              15
              
              
              158
              
              
              97Accounts
                  receivable for investment sold
              
              
              4(a)
              
              
              34
              
              
              -Advances
                  to suppliers
              
              
              
              
              
              10
              
              
              -Other
              
              
              
              
              
              8
              
              
              11278
              
              
              2126,405
              
              
              4,404
 
 F-7
  **Votorantim
        Celulose e Papel S.A.**
 
 **Consolidated
        Balance Sheets at December 31**
 **In
                  millions of U.S. dollars, except number of shares**
              **(continued)**
 
 **Note**
              
              **2007**
              
              **2006****Liabilities
                  and shareholders' equity**Current
                  liabilitiesTrade
                  payables
              
              
              
              
              
              139
              
              
              111Short-term
                  debt
              
              
              11
              
              
              211
              
              
              242Current
                  portion of long-term debt
              
              
              12
              
              
              156
              
              
              170Unrealized
                  loss from cross currency interest rateswaps
              
              
              14
              
              
              5
              
              
              50Payroll,
                  profit sharing and related charges
              
              
              
              
              
              23
              
              
              20Taxes
                  on income and other taxes
              
              
              
              
              
              34
              
              
              34Interest
                  attributable to capital payable
              
              
              17
              
              
              170
              
              
              129Liabilities
                  associated with long-lived assetsclassified
                  as held for sale
              
              
              
              
              
              -
              
              
              1Other
              
              
              
              
              
              18
              
              
              23756
              
              
              780Non-currentLong-term
                  liabilitiesLong-term
                  debt
              
              
              12
              
              
              1,197
              
              
              1,129Deferred
                  income tax, net
              
              
              5(b)
              
              
              349
              
              
              -Unrealized
                  loss from cross currency interest rateswaps
              
              
              14
              
              
              -
              
              
              44Accrued
                  liabilities for legal proceedings
              
              
              15
              
              
              197
              
              
              152Post-retirement
                  benefits
              
              
              21
              
              
              23
              
              
              241,766
              
              
              1,349Commitments
                  and contingencies
              
              
              15Shareholders'
                  equity
              
              
              17Preferred
                  shares, no par value, 280,000,000 shares authorized, 98,443,055
                  shares
                  issued andoutstanding
              
              
              
              
              
              953
              
              
              953Common
                  shares, no par value, 140,000,000 shares authorized, 105,702,452
                  shares
                  issued andoutstanding
              
              
              
              
              
              1,053
              
              
              1,053Additional
                  paid-in capital
              
              
              
              
              
              35
              
              
              35Treasury
                  shares, at cost, 2007 - 28,900 preferred shares (2006 - 31,998
                  preferred
                  shares)
              
              
              
              
              
              (1
              )
              
              (1
              )Appropriated
                  retained earnings
              
              
              
              
              
              110
              
              
              86Unappropriated
                  retained earnings
              
              
              
              
              
              1,711
              
              
              694Accumulated
                  other comprehensive income (deficit)Cumulative
                  translation adjustments
              
              
              
              
              
              19
              
              
              (545
              )Post-retirement
                  benefits
              
              
              21
              
              
              3
              
              
              -3,883
              
              
              2,2756,405
              
              
              4,404
  The
        accompanying notes are an integral part of the consolidated financial
        statements.
  F-8
  **Votorantim
        Celulose e Papel S.A.**
 
 **Consolidated
        Statements of Income**
 **Years
        Ended December 31**
 **In
        millions of U.S. dollars, except number of shares**
 
 **Note**
              
              **2007**
              
              **2006**
              
              **2005****Net
                  operating revenue**Domestic
                  sales (net of sales taxes: 2007 -US$
                  226; 2006 - US$ 222 and 2005 -US$
                  183)
              
              
              
              
              
              709
              
              
              685
              
              
              564Export
                  sales
              
              
              
              
              
              624
              
              
              632
              
              
              5661,333
              
              
              1,317
              
              
              1,130**Operating
                  costs and expenses**Cost
                  of sales
              
              
              
              
              
              887
              
              
              813
              
              
              654Selling
                  and marketing
              
              
              
              
              
              138
              
              
              136
              
              
              138General
                  and administrative
              
              
              
              
              
              64
              
              
              63
              
              
              55Gain
                  on exchange of assets, net
              
              
              4(b)
              
              
              (955
              )
              
              -
              
              
              -Other,
                  net
              
              
              
              
              
              13
              
              
              20
              
              
              36147
              
              
              1,032
              
              
              883**Operating
                  income**
              
              
              
              
              
              1,186
              
              
              285
              
              
              247**Non-operating
                  income (expense)**Financial
                  income
              
              
              19
              
              
              236
              
              
              166
              
              
              79Financial
                  expense
              
              
              19
              
              
              (145
              )
              
              (148
              )
              
              (119
              )Foreign
                  exchange gain (loss) and unrealized gain (loss) on swaps,
                  net
              
              
              
              
              
              214
              
              
              (4
              )
              
              (5
              )305
              
              
              14
              
              
              (45
              )**Income
                  before taxes on income and****equity
                  in affiliates**
              
              
              
              
              
              1,491
              
              
              299
              
              
              202Current
                  income tax expenseDomestic
              
              
              
              
              
              (35
              )
              
              (25
              )
              
              (51
              )Deferred
                  income tax expense on gain onexchange
                  of assets
              
              
              
              
              
              (327
              )
              
              -
              
              
              -Deferred
                  income tax (expense) benefit
              
              
              
              
              
              (21
              )
              
              21
              
              
              595(a)
              
              
              (383
              )
              
              (4
              )
              
              8**Income
                  before equity in affiliates**
              
              
              
              
              
              1,108
              
              
              295
              
              
              210Equity
                  in earnings of affiliates
              
              
              9
              
              
              113
              
              
              77
              
              
              54**Net
                  income**
              
              
              
              
              
              1,221
              
              
              372
              
              
              264
  F-9
  **Votorantim
        Celulose e Papel S.A.**
 
 **Consolidated
        Statements of Income**
 **Year
        Ended December 31**
 **In
                  millions of U.S. dollars, except number of
                  shares**
              **(continued)**
 
 **2007**
              
              **2006**
              
              **2005**Net
                  income applicable to preferred shares
              
              
              618
              
              
              188
              
              
              124Net
                  income applicable to common shares
              
              
              603
              
              
              184
              
              
              140**Net
                  income**
              
              
              1,221
              
              
              372
              
              
              264Basic
                  and diluted earnings - in U.S. dollarsPer
                  preferred share or ADS
              
              
              6.28
              
              
              1.97
              
              
              1.46Per
                  common share
              
              
              5.71
              
              
              1.79
              
              
              1.33Weighted
                  average number of shares outstanding (thousand)Preferred
              
              
              98,444
              
              
              92,240
              
              
              85,451Common
              
              
              105,702
              
              
              105,702
              
              
              105,702
  The
        accompanying notes are an integral part of the consolidated financial
        statements.
  F-10
 **Votorantim
        Celulose e Papel S.A.**
 
 **Consolidated
        Statements of Cash Flows**
 **Years
        Ended December 31**
 **In
        millions of U.S. dollars**
 **Note**
                
                **2007**
                
                **2006**
                
                **2005****Cash
                    flows from operating activities**Net
                    income
                
                
                
                
                
                1,221
                
                
                372
                
                
                264Adjustments
                    to reconcile net income to cash provided by operating
                    activitiesGain
                      on exchange of assets, net of deferred tax
                      of US$ 338
                
                
                4(b)
                
                
                (651
                )
                
                -
                
                
                -Foreign
                    exchange (gains) losses and unrealized (gains) losses on swaps,
                    net
                
                
                
                
                
                (214
                )
                
                4
                
                
                5Equity
                    in earning of affiliates
                
                
                
                
                
                (113
                )
                
                (77
                )
                
                (54
                )Interest
                    attributable to capital and dividends received
                
                
                
                
                
                23
                
                
                15
                
                
                11Deferred
                    income tax
                
                
                
                
                
                21
                
                
                (21
                )
                
                (59
                )Depreciation
                    and depletion
                
                
                
                
                
                143
                
                
                193
                
                
                117Loss
                    on disposal of property, plant and equipment
                
                
                
                
                
                10
                
                
                14
                
                
                9(Gain)
                    loss on sale of investments
                
                
                
                
                
                (44
                )
                
                -
                
                
                -Capital
                    gain on sale of investments
                
                
                4(d)
                
                
                (48
                )
                
                -
                
                
                -Goodwill
                    write-off
                
                
                4(a)
                
                
                27
                
                
                -
                
                
                -Complement
                    paid to International Paper, net of deferred tax of US$ 11
                
                
                4(b)
                
                
                23
                
                
                -
                
                
                -Decrease
                        (increase)in
                        assets
                
                
                
                
                
                36
                
                
                6
                
                
                (4
                )Trade
                    accounts receivableInventories
                
                
                
                
                
                13
                
                
                (19
                )
                
                (6
                )Judicial
                    deposits
                
                
                
                
                
                (61
                )
                
                (10
                )
                
                (61
                )Other
                    assets
                
                
                
                
                
                (34
                )
                
                (79
                )
                
                (10
                )Decrease
                    in liabilities
                
                
                
                
                
                (19
                )
                
                (16
                )
                
                22**Net
                    cash provided by operating activities**
                
                
                
                
                
                333
                
                
                382
                
                
                234**Cash
                    flows from investing activities**Held-to-maturity
                    securities purchased, net of proceeds on sale
                
                
                
                
                
                -
                
                
                -
                
                
                6Available
                    for sale securitiesPurchase
                
                
                
                
                
                (823
                )
                
                (431
                )
                
                (259
                )Proceeds
                    from sale and maturities
                
                
                
                
                
                1,078
                
                
                602
                
                
                149Sale
                    of an interest in an affiliate
                
                
                4(a)
                
                
                93
                
                
                -
                
                
                -Acquisition
                    of an interest in an affiliate
                
                
                4(a)
                
                
                -
                
                
                (36
                )
                
                (275
                )Acquisition
                    of property, plant and equipment
                
                
                
                
                
                (477
                )
                
                (248
                )
                
                (247
                )Effect
                    of exchange of assets on cash and cashequivalents
                
                
                
                
                
                (16
                )
                
                -
                
                
                -**Net
                    cash used in investing activities**
                
                
                
                
                
                (145
                )
                
                (113
                )
                
                (626
                )**Cash
                    flows from financing activities**Short-term
                    debtBorrowings
                
                
                
                
                
                622
                
                
                603
                
                
                458Repayments
                
                
                
                
                
                (709
                )
                
                (441
                )
                
                (403
                )Third
                    parties long-term debtBorrowings
                
                
                
                
                
                382
                
                
                134
                
                
                869Repayments
                
                
                
                
                
                (240
                )
                
                (299
                )
                
                (324
                )Related
                    parties long-term debtBorrowings
                
                
                
                
                
                12
                
                
                45
                
                
                43Repayments
                
                
                
                
                
                (44
                )
                
                (56
                )
                
                (39
                )Treasury
                    sharesAcquisition
                
                
                
                
                
                -
                
                
                -
                
                
                (12
                )Sale
                
                
                
                
                
                -
                
                
                18
                
                
                1Interest
                    attributable to capital and dividends paid
                
                
                
                
                
                (136
                )
                
                (111
                )
                
                (88
                )**Net
                    cash provided by (used in) financing activities**
                
                
                
                
                
                (113
                )
                
                (107
                )
                
                505
   F-11
  **Votorantim
                  Celulose e Papel S.A.**
                
                **Consolidated
                  Statements of Cash Flows**
                **In
                  millions of U.S. dollars**
              **(continued)**
 
 **Note**
              
              **2007**
              
              **2006**
              
              **2005****Effect
                  of exchange rate changes on cash **and
                  cash equivalents****
              
              
              
              
              
              85
              
              
              (18
              )
              
              (3
              )**Net
                  increase in cash and cash equivalents**
              
              
              
              
              
              160
              
              
              144
              
              
              110**Cash
                  and cash equivalents at beginning of year**
              
              
              
              
              
              405
              
              
              261
              
              
              151**Cash
                  and cash equivalents at end of year**
              
              
              
              
              
              565
              
              
              405
              
              
              261**Supplemental
                  cash flow information**Cash
                  paid during the year forIncome
                  tax
              
              
              
              
              
              -
              
              
              14
              
              
              43Interest
              
              
              
              
              
              110
              
              
              98
              
              
              65**Supplemental
                  non cash flow information**Income
                  tax offset with tax credits
              
              
              
              
              
              46
              
              
              12
              
              
              -Issue
                  of shares upon acquisition of an interest in anaffiliate
              
              
              4(a)
              
              
              -
              
              
              168
              
              
              -Asset
                  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-12
  **Votorantim
        Celulose e Papel S.A.**
 **Consolidated
          Statements of Changes in Shareholders' Equity**
 **In
          millions of U.S. dollars, except number of shares**
 **2007**
              
              **2006**
              
              **2005****Preferred
                  shares**At
                  beginning of year
              953
              
              785
              
              785Capital
                  increase
              -
              
              168
              
              -At
                  end of year
              953
              
              953
              
              785**Common
                  shares**At
                  beginning and end of year
              1,053
              
              1,053
              
              1,053At
                  end of year
              1,053
              
              1,053
              
              1,053**Additional
                  paid-in-capital**At
                  beginning of year
              35
              
              29
              
              29Gain
                  on sale of treasury shares
              -
              
              6
              
              -At
                  end of year
              35
              
              35
              
              29**Treasury
                  shares**At
                  beginning of year
              (1
              )
              (13
              )
              (2
              )Preferred
                    shares sold (2007 - 3,098; 2006 -1,049,502; 2005 -
                    126,400)
              -
              
              12
              
              1Preferred
                  shares purchased (2005 - 1,050,700)
              -
              
              -
              
              (12
              )At
                  end of year
              (1
              )
              (1
              )
              (13
              )**Appropriated
                  retained earnings**At
                  beginning of year
              86
              
              72
              
              60Transferred
                  from unappropriated retained earnings
              24
              
              14
              
              12At
                  end of year
              110
              
              86
              
              72**Unappropriated
                  retained earnings**At
                  beginning of year
              694
              
              487
              
              440Net
                  income
              1,221
              
              372
              
              264Transferred
                  to appropriated retained earnings
              (24
              )
              (14
              )
              (12
              )Dividends
                  and interest attributed to capitalPreferred
              (91
              )
              (76
              )
              (97
              )Common
              (89
              )
              (75
              )
              (108
              )At
                  end of year
              1,711
              
              694
              
              487
  F-13
  **Votorantim
                  Celulose e Papel S.A.**
                **Consolidated
                  Statements of Changes in Shareholders' EquityIn millions of U.S.
                  dollars, except number of shares**
              **(continued)**
 
 **2007**
              
              **2006**
              
              **2005****Cumulative
                  translation adjustments**At
                  beginning of year
              (545
              )
              (687
              )
              (867
              )Gain
                  for the year
              564
              
              142
              
              180At
                  end of year
              19
              
              (545
              )
              (687
              )**Post-retirement
                  benefits**At
                  beginning of year
              -
              
              -
              
              -Provision
                  for the year
              3
              
              -
              
              -At
                  end of year
              3
              
              -
              
              -**Net
                  unrealized gains on available for sale securities**At
                  beginning of year
              -
              
              11
              
              -Realized
                  (transferred to results of operations)
              -
              
              (11
              )
              -Gain
                  for the year (2005 - net of tax of US$ 6)
              -
              
              -
              
              11At
                  end of year
              -
              
              -
              
              11**Shareholders'
                  equity at end of year**
              3,883
              
              2,275
              
              1,737**Comprehensive
                  income**Net
                  income
              1,221
              
              372
              
              264Unrealized
                  gains on available for sale securities
              -
              
              -
              
              11Translation
                  adjustments
              564
              
              142
              
              180Post-retirement
                  benefits
              3
              
              -
              
              -**Comprehensive
                  income**
              1,788
              
              514
              
              455
 The
          accompanying notes are an integral part of the consolidated financial
          statements.
  F-14
 **Votorantim
          Celulose e Papel S.A.**
 
 **Notes
          to the Consolidated Financial Statements**
 **as
          at December 31, 2007 and 2006, and for the Three Years**
 **Ended
          December 31, 2007**
 **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 the state of São
        Paulo.
 
 We
        produce eucalyptus pulp, using pulp wood derived principally from our forestry
        operations, which we sell as "market pulp" to other paper producers and we
        use
        in our integrated paper facilities to produce a variety of products. 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
 
 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 a
        complement of US$ 34 to International Paper for closing adjustments arising
        from the asset Exchange Agreement upon conclusion of the respective due
        diligence procedures and negotiations (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 (Note 4(d)).
 
 Our
        preferred shares are traded on the São Paulo 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.
 
 **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.
  F-15
  ****Votorantim
        Celulose e Papel S.A.****
 **Notes
          to the Consolidated Financial Statements**
 **as
          at December 31, 2007 and 2006, and for the Three Years**
 **Ended
          December 31, 2007**
 **In
            millions of U.S. dollars, unless otherwise stated**
 
  **(b)**
                  **Translation
                      of financial
                      statements**
 
 We
        transact the majority of our business in Brazilian Reais (R$) and, therefore,
        have adopted the Brazilian Real as the functional currency and have selected
        the
        United States dollar as our reporting currency. Our affiliates located outside
        Brazil have the U.S. dollar as their functional currency. The U.S. dollar
        amounts for all years presented have been translated from Reais amounts in
        accordance with the criteria set forth in Statement of Financial Accounting
        Standards ("SFAS") 52, "Foreign Currency Translation" issued by the Financial
        Accounting Standards Board ("FASB"). Assets and liabilities are translated
        from
        the functional currency to the reporting currency using the official exchange
        rates reported by the Brazilian Central Bank at the balance sheet date (December
        31, 2007 - US$ 1.00 : R$ 1,7713 - December 31, 2006 - US$ 1.00 :
        R$ 2.1380; December 31, 2005 - US$ 1.00 : R$ 2.3407). Capital
        accounts are remeasured at historical exchange rates.
 
 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: VCP Exportadora e Participações S.A. ("VEP") which was merged
        into VCP on April 1, 2006, Normus Emprendimentos e Participações Ltda.
        ("Normus"), Newark Financial Inc. ("Newark"), VCP North America Inc., VCP
        Trading N.V., VCP Overseas Holding KFT and from February 1, 2007, following
        the
        exchange of assets with International Paper, VCP-MS Celulose Sul Mato-Grossense
        Ltda. ("VCP-MS") which was acquired through the exchange of assets (Note
        4(b)),
        all of which are wholly owned. All significant intercompany accounts and
        transactions, unrealized profits and intra-group profit distributions have
        been
        eliminated on consolidation.
 
 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.
        We
        own 50% of the voting and total shares of Ripasa S.A. Celulose e Papel
        ("Ripasa") and of Voto - Votorantim Overseas
        Trading Operations IV Limited. ("VOTO IV"). And, as from September 2007,
        we also
        own 40% of the voting and total shares of Ahlstrom VCP. These investees,
        which
        are incorporated in Brazil, are not consolidated and are accounted for using
        the
        equity method.
 F-16
  **Votorantim
        Celulose e Papel S.A.**
 
 **Notes
        to the Consolidated Financial Statements**  **as
        at December 31, 2007 and 2006, and for the Three Years**  **Ended
        December 31, 2007**
 **In
        millions of U.S. dollars, unless otherwise stated**
 
 On
          March
          31, 2005, Ripasa Participações S.A. ("Ripar"), a 50% owned joint venture,
          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
          which, among other things, resulted in VCP indirectly owning 50% of Ripasa.
          Subsequently their assets were distributed to VCP and Suzano Bahia Sul
          Papel e
          Celulose S.A. ("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 account for our interest in Ripasa
          by the
          equity method using financial information with a one month lag.
 
 **(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. They are stated at cost plus accrued
          interest, which approximates market.
 
 **(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 quoted market prices 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 income. Interest income, including
        amortization of any premium or discount arising at acquisition, is recognized
        as
        "financial income", in the statement of income.
 
 **(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**
 
 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
        resulting on 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.
  F-17
 **Votorantim
          Celulose e Papel S.A.**
 
 **Notes
          to the Consolidated Financial Statements**
 **as
          at December 31, 2007 and 2006, and for the Three Years**
 **Ended
          December 31, 2007**
 **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
        independent 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.
 
 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.
 
 **(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.
 
 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
        basis of non-monetary assets
        have been recognized as temporary differences for the purpose of recording
        deferred income taxes. Current and non-current deferred tax assets and
        liabilities are presented separately.
  F-18
 **Votorantim
          Celulose e Papel S.A.**
 
 **Notes
          to the Consolidated Financial Statements**
 **as
          at December 31, 2007 and 2006, and for the Three Years**
 **Ended
          December 31, 2007**
 **In
          millions of U.S. dollars, unless otherwise stated**
  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 is recorded net of sales returns of US$ 8 in 2007
        (US$ 10 in 2006 and US$ 7 in 2005). 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, and represented
        approximately 23% of our domestic sales in 2007 (2006 and 2005 - 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. We estimate that for 2007, 2006 and 2005, an
        average of approximately 8% of our total number of regular domestic customers
        (approximately 23% for 2007, 22% for 2006 and 2005 of total domestic sales
        value) obtained our guarantee for their loans.
 
 **(ii)**
              **Paper
                  - export market**
 
 Export
        orders are normally met by 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.
  F-19
  **Votorantim
          Celulose e Papel S.A.**
 
 **Notes
          to the Consolidated Financial Statements**
 **as
          at December 31, 2007 and 2006, and for the Three Years**
 **Ended
          December 31, 2007**
 **In
          millions of U.S. dollars, unless otherwise stated**
 **(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 satisfied by 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.
        They totaled US$ 89, US$ 79 and US$ 75 in 2007, 2006 and 2005,
        respectively. Costs related to the start-up of new facilities and re-structuring
        charges are expensed as incurred.
 
 **(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.
 
 **(l)**
              **Earnings
                  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 for each period will be fully
        distributed. Earnings may be capitalized or otherwise appropriated; consequently
        such earnings would no longer be available as dividends. Therefore, there
        is no
        assurance that preferred shareholders will receive a 10% premium on
        undistributed earnings. We may also pay dividends through interest attributed
        to
        capital in accordance with our by-laws.
 **(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. E stimates
        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.
  F-20
 **Votorantim
          Celulose e Papel S.A.**
 
 **Notes
          to the Consolidated Financial Statements**
 **as
          at December 31, 2007 and 2006, and for the Three Years**
 **Ended
          December 31, 2007**
 **In
          millions of U.S. dollars, unless otherwise stated**
  **(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.
 
 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.
 
 **3**
              **Recently
                  Issued Accounting
                  Pronouncements**
 
 The
        FASB
        recently issued a number of Statements of Financial Accounting Standards
        and
        interpretations.
  F-21
  **Votorantim
          Celulose e Papel S.A.**
 
 **Notes
          to the Consolidated Financial Statements**
 **as
          at December 31, 2007 and 2006, and for the Three Years**
 **Ended
          December 31, 2007**
 **In
          millions of U.S. dollars, unless otherwise stated**
 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. This Statement is effective for financial statements issued
        for
        fiscal years beginning after November 15, 2007 and interim periods within
        those
        fiscal years (that is, in the case of VCP, January 1, 2008). The Company
        continues to evaluate 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 results of operations or financial
        position.
 
 In
        February 2007, the FASB issued SFAS 159, "The Fair Value Option for
        Financial Assets and Financial Liabilities". SFAS 159, including an amendment
        of
        SFAS 115,"Accounting for Certain Investments in Debt and Equity Securities".
        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. SFAS 159 is effective
        for
        the Company's fiscal year that begins after November 15, 2007 (that
        is,
        in the case of VCP, January 1, 2008) .
        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 results of operations or financial position .
 
 In
        December 2007, the FASB issued SFAS 141 (revised 2007), "Business Combination",
        which replaces SFAS 141, Business Combinations. SFAS 141(R) 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.
        SFAS 141(R) 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(R) did not define
        the
        acquirer, although it included guidance on identifying the acquirer. SFAS
        141(R)'s scope is broader than that of SFAS 141, which applied only to business
        combinations in which control was obtained by transferring consideration.
        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. In addition, SFAS 141(R) requires to measure the
        noncontrolling interest in the acquiree at fair value which results in
        recognizing the goodwill attributable to the noncontrolling interest in addition
        to that attributable
        to the acquirer. SFAS 141(R) 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 (that is, in the
        case
        of VCP, January 1, 2009). 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 - an amendment
        of
        ARB No. 51" (described below). The Company will apply such pronouncement
        on a
        prospective basis for each new business combination.
  F-22
 **Votorantim
          Celulose e Papel S.A.**
 
 **Notes
          to the Consolidated Financial Statements**
 **as
          at December 31, 2007 and 2006, and for the Three Years**
 **Ended
          December 31, 2007**
 **In
          millions of U.S. dollars, unless otherwise stated**
  In
        December 2007, the FASB issued SFAS 160, 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.
        SFAS
        160 is effective for fiscal years, and interim periods within those fiscal
        years, beginning on or after December 15, 2008 (that is, in the case of VCP,
        January 1, 2009). Earlier adoption is prohibited. SFAS 160 shall 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 shall be applied retrospectively
        for
        all periods presented. The Company is currently evaluating the impact of
        such
        new pronouncement in its consolidated financial statements but
        believes that it will not generate a material impact on the Company's
        consolidated results of operations or financial position .
 
 **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.
  F-23
 **Votorantim
          Celulose e Papel S.A.**
 
 **Notes
          to the Consolidated Financial Statements**
 **as
          at December 31, 2007 and 2006, and for the Three Years**
 **Ended
          December 31, 2007**
 **In
          millions of U.S. dollars, unless otherwise stated**
 Pursuant
        to the November 10 agreement, VCP and Suzano also had a call option to acquire
        from the principal shareholder group 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. The call option was exercisable for a twelve-month
        period beginning March 31, 2010 for the Reais equivalent, at exercise date
        of
        US$ 160 plus Brazilian market rate interest (split equally between VCP and
        Suzano). The principal shareholder group had a put option that would require
        Ripar to acquire these remaining shares during a five year period ending
        March
        31, 2010. The put/call option agreements require, as a preceding condition,
        that
        they may be exercisable only in the case the underlying shares of Ripasa
        are
        free of liens and encumbrances.
 
 **(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 the aforementioned principal shareholder group, 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 judicial action 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 shareholder 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.
  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).
        As a
        result of the above transactions and on that date,
        VCP
        and Suzano jointly became the sole owners of all Ripasa shares via their
        joint
        ownership in Ripar. The acquisition transaction was, however, still subject
        to
        approval by the Brazilian antitrust authorities.
  F-24
 **Votorantim
          Celulose e Papel S.A.**
 
 **Notes
          to the Consolidated Financial Statements**
 **as
          at December 31, 2007 and 2006, and for the Three Years**
 **Ended
          December 31, 2007**
 **In
          millions of U.S. dollars, unless otherwise stated**
  **(iii)**
              **Government
                  approval**
 
 On
        August
        9, 2007, the acquisition was approved by the Brazilian antitrust authorities.
        Approval is still pending from tax authorities to convert the Americana mill
        production unit into a consortium.
 
 **(iv)**
              **Disolution
                  of 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
        is the
        direct holder of its 50% interest in Ripasa.
 
 **(v)**
              **Modification
                  of the November 10,****2004
                  Agreement**
 
 As
        a
        result of the completion of the corporate restructuring, 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,
        VCP
        has a call option to acquire 3,124,139 of its own non-voting preferred shares
        from the former principal Ripasa shareholding group 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. At December
        31,
        2007 and 2006, that amount, including interest totaled the Reais equivalent
        of
        US$ 179 and US$ 133, respectively; with Suzano having a similar obligation
        for
        its pro rata part. 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
        has been substituted.
  F-25
 **Votorantim
          Celulose e Papel S.A.**
 
 **Notes
          to the Consolidated Financial Statements**
 **as
          at December 31, 2007 and 2006, and for the Three Years**
 **Ended
          December 31, 2007**
 **In
          millions of U.S. dollars, unless otherwise stated**
 **(vi)**
              **Valuation
                  of the put/call options**
 
 The
        VCP
        shares now owned by the former principal Ripasa shareholding group are subject
        to encumbrances under a legal order filed by a government agency as collateral
        to a legal proceeding to which this group is a party. These shares may not
        be
        sold and the rights to the exercise the option cannot be transferred to third
        parties without the prior written consent of the other
        parties to the agreement. As such, the VCP shares are not expected to be
        released prior to the expiration of the respective put/call options. 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
        income for the period.
 
 **(vii)**
              **Disposition
                  of non-core assets**
 
 VCP
        and
        Suzano have jointly determined that Ripasa's core business asset 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:
 
 .
              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.
 
 .
              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.
 
 **(b)**
              **Asset
                  exchange**
 
 On
        September 19, 2006, VCP entered into an 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.
  F-26
 **Votorantim
          Celulose e Papel S.A.**
 
 **Notes
          to the Consolidated Financial Statements**
 **as
          at December 31, 2007 and 2006, and for the Three Years**
 **Ended
          December 31, 2007**
 **In
          millions of U.S. dollars, unless otherwise stated**
  As
        a
        result of this operation VCP recorded an initial gain on exchange of assets
        of
        US$ 989 in the statement of income 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 .
        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.
 
 The
        net
        assets provided to International Paper, at book value, and the net assets
        received from International Paper, at fair value, before the closing
        adjustments, are summarized below:
 
 **Net assets**
              
              **Net assets****provided**
              
              **received****(Book value)**
              ****
              **(Fair value)**Current
                  assets
              
              
              118
              
              
              62Non-current
                  assets
              
              
              7
              
              
              6Property,
                  plant and equipment, net
              
              
              400
              
              
              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 owns 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$ 1.2 billion which was placed, pursuant to VCP-MS instructions,
        in trust to restrict its use only in 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.
        This financial income accrued in 2007 and recorded by VCP totaled US$
        124.
 
 A
        third
        party, Pöyry Engenharia ("Pöyry"), was contracted in 2006 by International
        Paper's subsidiary (now denominated 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 is expected to become operational in 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.
  F-27
 **Votorantim
            Celulose e Papel S.A.**
 
 **Notes
            to the Consolidated Financial Statements**
 **as
            at December 31, 2007 and 2006, and for the Three Years**
 **Ended
            December 31, 2007**
 **In
            millions of U.S. dollars, unless otherwise stated**
 During
        the second semester of 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 1,250,000 tons of bleached eucalyptus pulp. As a result of these
        modifications, VCP-MS and Pöyry agreed a price adjustment of US$ 340, the Reais
        equivalent of R$ 602,077 thousand, to the original contracted
        price.
  Although
        this transaction is still subject to the approval of the Brazilian antitrust
        authorities, approval is expected to be obtained without restrictions and
        the
        review is considered by management to be merely perfunctory by
        nature.
 
 **(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, will produce specialty papers in the Jacareí mill
        primarily for labeling applications and flexible packaging markets.
  Ahlstrom
        Louveira Ltda., a Brazilian subsidiary of Ahlstrom, holds a 60% interest
        and VCP
        holds the remaining 40% interest. The 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.
  Ahlstrom
        has 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 has an option
        to
        sell the same number of shares at the same time. The first option can be
        exercised at any time from the beginning of the second year of the venture's
        operations through the end of that year. This first option allows VCP to
        sell
        and/or Ahlstrom to buy 20% of VCP's interest for the equivalent of US$ 38
        in Reais. The second option can be exercised at any time between the beginning
        of the third year of operations and terminates at the end of the fourth year
        of
        operations. This option allows VCP to sell and/or Ahlstrom to buy the remaining
        20% of its interest (if the first option has been exercised) or the remaining
        40% (if the first option has not been exercised).
 
 F-28
 **Votorantim
            Celulose e Papel S.A.**
 
 **Notes
            to the Consolidated Financial Statements**
 **as
            at December 31, 2007 and 2006, and for the Three Years**
 **Ended
            December 31, 2007**
 **In
            millions of U.S. dollars, unless otherwise stated**
 
 The
        price
        of this second option will be calculated based on a formula determined in
        the
        contract such that the total amount to be paid for the100% interest will
        not be
        less than US$ 165 and not be higher than US$ 190.
  The
        Company has concluded that the venture is not required to be consolidated
        as
        Ahlstrom is the controlling shareholder. 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 formulae based price insulating it from absorbing
        future
        possible losses, (iii) Ahlstrom's option to buy VCP's 40% interest in the
        JV 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 in the entity is treated on an equity accounting
        basis.
 
 **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:
  **2007**
              
              **2006**
              
              **2005**Income
                  before taxes on income
              
              
              1,491
              
              
              299
              
              
              202Income
                  tax expense at statutory tax rate - 34%
              
              
              (507
              )
              
              (102
              )
              
              (69
              )Reconciliation
                  of statutory to effective rateBenefit
                  from interest attributable to capital
              
              
              56
              
              
              51
              
              
              42Equity
                  in earnings of affiliates
              
              
              39
              
              
              26
              
              
              18Differences
                  in foreign income tax rate
              
              
              23
              
              
              24
              
              
              24Other
                  permanent differences
              
              
              6
              
              
              (3
              )
              
              (7
              )Income
                  tax (expense) benefit
              
              
              (383
              )
              
              (4
              )
              
              8
  F-29
  **Votorantim
        Celulose e Papel S.A.**
 
 **Notes
        to the Consolidated Financial Statements**
 **as
        at December 31, 2007 and 2006, and for the Three Years**
 **Ended
        December 31, 2007**
 **In
        millions of U.S. dollars, unless otherwise stated**
 
 **(b)**
              **Analysis
                  of deferred tax balances**
 
 **December
                  31,****2007**
              
              **2006**Deferred
                  tax assetsTax
                  loss carryforwards
              
              
              47
              
              
              10Tax
                  effects on impairment of Aracruz investment
              
              
              46
              
              
              46Provisions
              
              
              31
              
              
              24Post-retirement
                  benefits
              
              
              7
              
              
              8Cross
                  currency interest rate swap contracts
              
              
              2
              
              
              38US
                  GAAP adjustments and others
              
              
              -
              
              
              2Total
                  deferred tax assets
              
              
              133
              
              
              128Less:
                  current portion
              
              
              (5
              )
              
              (49
              )Total
                  deferred tax assets non-current portion
              
              
              128
              
              
              79Deferred
                  tax liabilitiesUS
                  GAAP adjustmentsGain
                  on exchange of assets (Note 4(b))
              
              
              (386
              )
              
              -Tax
                  effect on fair value of asset exchange(Note
                  4(b))
              
              
              (83
              )
              
              -Other
                  US GAAP adjustments
              
              
              (8
              )
              
              -Total
                  deferred tax liabilities
              
              
              (477
              )
              
              -Net
                  deferred tax assets (liabilities) non-current portion
              
              
              (349
              )
              
              79
 
 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 ADRs
        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". At December 31, 2007, Aracruz ADSs traded at
        US$ 74.35.
 
 F-30
 **Votorantim
          Celulose e Papel S.A.**
 
 **Notes
          to the Consolidated Financial Statements**
 **as
          at December 31, 2007 and 2006, and for the Three Years**
 **Ended
          December 31, 2007**
 **In
          millions of U.S. dollars, unless otherwise stated**
  **6**
              **Available
                  for Sale Securities**
 
 **2007**
              
              **2006**Denominated
                  in ReaisCredit
                  linked notes
              
              
              176
              
              
              294Foreign
                  Government Bonds
              
              
              -
              
              
              67FIDC
                  (Securitized receivables fund)
              
              
              -
              
              
              4Total
              
              
              176
              
              
              365
 
 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**
 
 **2007**
              
              **2006**Domestic
                  receivables
              
              
              114
              
              
              109Export
                  receivables, denominated in U.S. dollars
              
              
              60
              
              
              100Allowance
                  for doubtful accounts
              
              
              (9
              )
              
              (8
              )165
              
              
              201
 
 At
        December 31, 2007, one customer accounted for 19% of total customers
        receivables; no other customer accounted for more than 10% of the balance
        (none
        at December 31, 2006).
 
 F-31
  **Votorantim
          Celulose e Papel S.A.**
 
 **Notes
          to the Consolidated Financial Statements**
 **as
          at December 31, 2007 and 2006, and for the Three Years**
 **Ended
          December 31, 2007**
 **In
          millions of U.S. dollars, unless otherwise stated**
  **8**
              **Inventories**
 
 **2007**
              
              **2006**Finished
                  products
              
              
              105
              
              
              101Work
                  in process
              
              
              7
              
              
              10Raw
                  materials and supplies
              
              
              71
              
              
              86Imports
                  in transit and other
              
              
              3
              
              
              5186
              
              
              202Inventories
                  transferred to held for sale
              
              
              -
              
              
              (4
              )186
              
              
              198
  **9**
              **Investment
                  in Significant****Affiliated
                  Companies**
 
 **2007**
              
              **2006**Investment
                  and goodwillAracruz
              
              
              314
              
              
              291Ripasa
              
              
              646
              
              
              600Ahlstrom
                  VCP
              
              
              39
              
              
              -Other
              
              
              10
              
              
              91,009
              
              
              900
  **2007**
              
              **2006**
              
              **2005**Equity
                  in earningsAracruz
              
              
              52
              
              
              56
              
              
              42Ripasa
              
              
              15
              
              
              19
              
              
              10Capital
                  gain on sale of investments(Note 4(d))
              
              
              48
              
              
              -
              
              
              -Ahlstrom
                  VCP
              
              
              1
              
              
              -
              
              
              -Other
              
              
              (3
              )
              
              2
              
              
              2113
              
              
              77
              
              
              54
  F-32
  **Votorantim
          Celulose e Papel S.A.**
 
 **Notes
          to the Consolidated Financial Statements**
 **as
          at December 31, 2007 and 2006, and for the Three Years**
 **Ended
          December 31, 2007**
 **In
          millions of U.S. dollars, unless otherwise stated**
  **(a)**
              **Aracruz**
 
 The
        Company accounts for its investment in Aracruz using the equity method of
        accounting. At December 31, 2007 the Company's investment in
        Aracruz amounted to US$ 314. Included in the investment balance is
        unamortized goodwill of US$ 19. In 2007, the Company recorded equity in
        earnings for this investee of US$ 52 (2006 - US$ 56; 2005 -
        US$ 42). Aracruz uses the U.S. dollar as its functional
        currency.
 
 **(b)**
              **Ripasa**
 
 The
        Company accounts for its investment in Ripasa using the equity method of
        accounting using financial information with a one month lag. At
        December 31, 2007 the Company's investment in Ripasa amounted to
        US$ 646. Included in the investment balance is unamortized goodwill of
        US$ 174. In the year ended December 31, 2007, the Company
        recorded equity in earnings for this investee of US$ 15 (2006 - US$ 19
        and 2005 -US$ 10).
 
 Ripasa
        and Aracruz's condensed balance sheet and condensed statement of income for
        the
        three years then ended are as follows:
 
 **Ripasa(i)****2007**
              
              **2006**Current
                  assets
              
              
              208
              
              
              327Property,
                  plant and equipment, and other assets
              
              
              1,411
              
              
              1,258Current
                  liabilities
              
              
              175
              
              
              170Long-term
                  debt (long-term portion)
              
              
              155
              
              
              236Other
                  long-term liabilities
              
              
              345
              
              
              315Net
                  assets
              
              
              944
              
              
              864
 
 **Ripasa(i)****2007**
              
              **2006**
              
              **2005**Net
                  sales
              
              
              478
              
              
              573
              
              
              507Operating
                  income
              
              
              59
              
              
              67
              
              
              39Net
                  income
              
              
              28
              
              
              55
              
              
              38
 
 F-33
  **Votorantim
          Celulose e Papel S.A.**
 
 **Notes
          to the Consolidated Financial Statements**
 **as
          at December 31, 2007 and 2006, and for the Three Years**
 **Ended
          December 31, 2007**
 **In
          millions of U.S. dollars, unless otherwise stated**
 **Aracruz(ii)****2007**
              
              **2006**Current
                  assets
              
              
              1,251
              
              
              1,200Property,
                  plant and equipment, and other assets
              
              
              3,374
              
              
              2,796Current
                  liabilities
              
              
              328
              
              
              287Long-term
                  debt (long-term portion)
              
              
              1,312
              
              
              1,155Other
                  long-term liabilities
              
              
              597
              
              
              352Net
                  assets
              
              
              2,388
              
              
              2,202
 
 **Aracruz(ii)****2007**
              
              **2006**
              
              **2005**Net
                  sales
              
              
              1,345
              
              
              1,681
              
              
              1,345Operating
                  income
              
              
              447
              
              
              499
              
              
              447Net
                  income
              
              
              341
              
              
              455
              
              
              341
  (i)
              50%
                  ownership interest.
 (ii)
                12.35%
                    ownership interest (28.0% of the voting
                    shares).
  **(c)**
              **Ahlstrom
                  VCP**
 The
          Company accounts for its investment in Ahlstrom VCP using the equity method
          of
          accounting. At December 31, 2007 the Company's investment in Ahlstrom
          VCP amounted to US$ 39. In the year ended December 31, 2007, the
          Company recorded equity in earnings for this investee of US$ 1. The net
          assets of Ahlstrom VCP at December 31, 2007 were
          US$ 97.
  **10**
                **Property,
                    Plant and Equipment**
  **2007**
                
                **2006**Land
                
                
                482
                
                
                191Buildings
                
                
                183
                
                
                161Machinery,
                    equipment and installations
                
                
                1,250
                
                
                1,609Forests
                
                
                706
                
                
                379
  F-34
  **Votorantim
            Celulose e Papel S.A.**
 
 **Notes
            to the Consolidated Financial Statements**
 **as
            at December 31, 2007 and 2006, and for the Three Years**
 **Ended
            December 31, 2007**
 **In
            millions of U.S. dollars, unless otherwise stated**
 **2007**
                
                
                **2006**Other
                
                
                326
                
                
                186Construction
                    in progressVCP-MS
                    (Note 4(b))
                
                
                1,285
                
                
                -Other
                
                
                279
                
                
                1224,511
                
                
                2,648Accumulated
                    depreciation and depletion
                
                
                (595
                )
                
                (703
                )3,916
                
                
                1,945
  In
          May
          2006, the average estimates of total useful lives of the machinery, equipment
          and installations were reduced from 25 years to 18 years and 3 months.
          As a
          consequence, the 2006 depreciation expense increased by US$ 65 (2006
          effect on net income per average: preferred shares US$ 0.70; common shares
          US$ 0.61).
 
 Financial
          income accruing from the VCP-MS trust (Note 4 (b)), totaling US$ 114, was
          capitalized in 2007 in construction in progress.
 
 During 2006,
          the Company concluded a physical inventory of machinery, equipment and
          installations and, as a result, wrote off US$ 8. Interest capitalized on
          construction in progress in each of the periods was: 2007 - US$ 6; 2006 -
          US$ 11 and 2005 - US$ 5.
 
 **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 5.72% at December 31, 2007
          (2006 - 5.50%). Historically, we have not incurred significant losses in
          connection with such recourse provisions.
  F-35
 **Votorantim
              Celulose e Papel S.A.**
 
 **Notes
              to the Consolidated Financial Statements**
 **as
              at December 31, 2007 and 2006, and for the Three Years**
 **Ended
              December 31, 2007**
 **In
              millions of U.S. dollars, unless otherwise stated**
 **12**
                **Long-term
                    Debt**
  **Interest
                      rate****December**
                    **31,
                      2007**
                  
                  **2007**
                  
                  **2006**Third
                      partiesIn
                      U.S. dollarsExport
                      credits (prepayment)
                  
                  LIBOR
                    + 1.08%
                  
                  
                  848
                  
                  
                  873Fixed
                      rate notes
                  
                  
                  
                  
                  
                  50
                  
                  
                  -In
                      ReaisExport
                      credit notes
                  
                  94%
                    of CDI
                  
                  
                  30
                  
                  
                  -Total
                      third parties
                  
                  
                  
                  
                  
                  928
                  
                  
                  873Related
                      partiesIn
                      U.S. dollarsVOTO
                      III loan
                  
                  7.88%
                  
                  
                  43
                  
                  
                  41VOTO
                      IV loan
                  
                  7.75%
                  
                  
                  201
                  
                  
                  200In
                      ReaisBanco
                      Nacional de DesenvolvimentoEconômico
                      e Social - BNDESTJLP
                  
                  TJLP
                    + 3.68%
                  
                  
                  159
                  
                  
                  160UMBNDES
                  
                  UMBNDES
                    + 3.8%
                  
                  
                  22
                  
                  
                  25Total
                      related parties
                  
                  
                  
                  
                  
                  425
                  
                  
                  426Total
                      debt
                  
                  
                  
                  
                  
                  1,353
                  
                  
                  1,299Less:
                      current portion
                  
                  
                  
                  
                  
                  (156
                  )
                  
                  (170
                  )Long-term
                      portion
                  
                  
                  
                  
                  
                  1,197
                  
                  
                  1,129
  .
              LIBOR
                  (London Interbank Offered Rate) at December 31, 2007 was 4.60%
                  p.a. (2006
                  - 5.3%).
 .
                TJLP
                    ("Taxa de juros de longo prazo"), a long-term interest rate fixed
                    quarterly by the Brazilian Central Bank. At December 31, 2007,
                    the TJLP
                    was 6.25% p.a. (2006 - 6.85%).
 .
                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, 2007 was 11.11%
                    p.a.
  F-36
  **Votorantim
          Celulose e Papel S.A.**
 
 **Notes
          to the Consolidated Financial Statements**
 **as
          at December 31, 2007 and 2006, and for the Three Years**
 **Ended
          December 31, 2007**
 **In
          millions of U.S. dollars, unless otherwise stated**
  **(a)**
              **Export
                  credits (prepayment)**
 
 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 financing are
        guaranteed by export contracts. The proceeds of the Agreement were used to
        prepay the following then outstanding Export Prepayment loans: (i) agreements
        dated May and July 2004 with ABN Amro Bank N.V., Banco Santander Central
        Hispano
        and Banco Bradesco in the aggregate amount of US$ 350 at LIBOR plus 2.00%
        due through 2011 in installments to match export shipments; and
 (ii)
        various other agreements including those executed during 2006.
 
 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 financing are guaranteed by export
        contracts. The proceeds were used to purchase from the lender and convert
        into
        an inter-company loan the following then outstanding Export Prepayment loans:
        (i) agreements dated May 2005 with ING Bank N.V. and Bayerishe Hypo and
        Vercinsbank in an aggregate amount of US$ 150.
 
 **(b)**
              **Fixed
                  rate notes**
 
 We
        signed
        a financing agreement with UNIBANCO - União de Bancos Brasileiros for the reais
        equivalent of US$ 50 for the purpose of working capital. This financing
        will mature in May 2008.
 
 **(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 issued or US$ 45 for which we are the guarantors.
 
 F-37
  **Votorantim
          Celulose e Papel S.A.**
 
 **Notes
          to the Consolidated Financial Statements**
 **as
          at December 31, 2007 and 2006, and for the Three Years**
 **Ended
          December 31, 2007**
 **In
          millions of U.S. dollars, unless otherwise stated**
 
 **(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 is a guarantor of 50% of the debt issued by VOTO IV and
        in turn received US$ 200 of the proceeds. On September 6, 2005,
        we acquired a 50% interest in VOTO IV and together with VPAR we are the
        guarantors for this operation.
 
 **(e)**
              **BNDES**
 
 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, 2007 and 2006 were US$ 66 and
        US$ 46, respectively.
 
 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. The remaining balance is indexed to
        the
        UMBNDES plus 1.3% per annum and carries annual interest of TJLP + 1.8%.
        This financing will mature in 2012.
 
 We
        have
        outstanding several other financing agreements with BNDES primarily related
        to
        the acquisition of nationally-manufactured machinery and equipment. These
        obligations mature at varying dates through 2015 and bear interest at TJLP
        plus
        3.68% p.a. The balance outstanding was US$ 181 and US$ 185 at
        December 31, 2007 and 2006, respectively.
 
 **(f)**
              **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.
  F-38
  **Votorantim
          Celulose e Papel S.A.**
 
 **Notes
          to the Consolidated Financial Statements**
 **as
          at December 31, 2007 and 2006, and for the Three Years**
 **Ended
          December 31, 2007**
 **In
          millions of U.S. dollars, unless otherwise stated**
 **(g)**
              **Long-term
                  debt maturities**
 
 At
        December 31, 2007, the long-term position of long-term debt maturities is
        as
        follows:
 2009
                
                
                1842010
                
                
                1422011
                
                
                1652012
                
                
                1652013
                
                
                157After
                    2013
                
                
                3841,197
 **(h)**
                **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. We are in
          compliance with all covenants during each period presented.
 
 **13**
                **Related
                    Parties**
 
 Balances
          and transactions with related parties are as follows:
 **Nature
                      and business****purpose
                      of transactions**
                  
                  **2007**
                  
                  **2006**Cash,
                      cash equivalents andavailable
                      for sale
                  
                  Surplus
                      cash funds invested with Votorantim Group financial institutionsBanco
                      Votorantim S.A.
                  
                  
                  
                  34
                  
                  325FIDC
                      - Cia Nitroquímica
                    Brasileira
                  
                  
                  
                  -
                  
                  4Unrealized
                      losses from crosscurrency
                      interest rateswaps
                  
                  Arising
                      from swap contract transactions in which the Banco Votorantim
                      S.A. acts as
                      counter- party
                  
                  -
                  
                  (91
                  )
  F-39
  **Votorantim
              Celulose e Papel S.A.**
 
 **Notes
              to the Consolidated Financial Statements**
 **as
              at December 31, 2007 and 2006, and for the Three Years**
 **Ended
              December 31, 2007**
 **In
              millions of U.S. dollars, unless otherwise stated**
  **Nature
                      and business****purpose
                      of transactions**
                  
                  **2007**
                  
                  **2006**Long-term
                      loans
                  
                  Loans
                      from related partiesVotorantim
                      GroupVOTO
                      III
                  
                  
                  
                  43
                  
                  41VOTO
                      IV
                  
                  
                  
                  201
                  
                  200BNDES
                      (shareholder)
                  
                  
                  
                  181
                  
                  185Trade
                      payables from relatedparties
                      Ripasa
                  
                  Purchases
                      of wood, pulp and paper
                  
                  67
                  
                  43
  Revenue,
          income and expenses from transactions with related parties were as
          follows:
 **2007**
                  
                  **2006**
                  
                  **2005**Purchases
                      from Ripasa
                  
                  
                  213
                  
                  
                  75
                  
                  
                  -Purchases
                      from Votener Votorantim
                    Comercializadora
                      de Energia Ltda.
                  
                  
                  9
                  
                  
                  6
                  
                  
                  3Purchases
                      from TIVIT Tecnologia da
                    Informação
                      S.A.
                  
                  
                  8
                  
                  
                  4
                  
                  
                  -Financial
                      income
                  
                  
                  34
                  
                  
                  70
                  
                  
                  52Financial
                      expenses
                  
                  
                  4
                  
                  
                  73
                  
                  
                  115
  Financial
        income arises from investments made in Banco Votorantim S.A.; and financial
        expenses represent mainly losses on cross currency interest rate swaps,
        including their respective fair values.
  **14**
              **Financial
                  Instruments**
 
 We
        primarily use cross currency interest rate swap contracts and Brazilian
        Government bonds indexed to the U.S. dollar to hedge our U.S. dollar denominated
        debt. By entering into these contracts or purchasing Brazilian Government
        bonds,
        we partially protect ourselves from the effects of unfavorable exchange
        movements. Accordingly, if the real devalues against the U.S. dollar
        and results in a foreign exchange loss, we are at least in part protected
        by an
        offsetting gain from the swap contracts.
 
 The
        fair
        values of our long-term and short-term debt were estimated based on available
        quoted rates for loans of substantially similar terms and
        maturities.
  F-40
  **Votorantim
          Celulose e Papel S.A.**
 
 **Notes
          to the Consolidated Financial Statements**
 **as
          at December 31, 2007 and 2006, and for the Three Years**
 **Ended
          December 31, 2007**
 **In
          millions of U.S. dollars, unless otherwise stated**
  The
        fair
        values of our cross currency interest rate swap contracts were estimated
        based
        on quoted market prices of comparable contracts. At December 31, 2007
        and 2006 the notional amounts of our outstanding cross currency interest
        rate swap contracts were US$ 45 and US$ 480, respectively and their
        fair values of negative US$ 1 and positive US$ 8, respectively. The
        actual cash settlements on the contracts occur at times specified in each
        agreement.
 
 The
        carrying amounts and fair values of our financial instruments at
        December 31 were as follows:
 
 **2007**
              
              **2006****Carrying**
              
              **Fair**
              
              **Carrying**
              
              **Fair****amount**
              
              **value**
              
              **amount**
              
              **value**Cash
                  and cash equivalents
              
              
              565
              
              
              565
              
              
              405
              
              
              405Available
                  for sale securities
              
              
              176
              
              
              176
              
              
              365
              
              
              365Unrealized
                      losses from cross currency interest rate swaps
              
              
              (5
              )
              
              (5
              )
              
              (94
              )
              
              (94
              )Short-term
                  debt
              
              
              211
              
              
              211
              
              
              242
              
              
              242Long-term
                  debt
              
              
              1,353
              
              
              1,369
              
              
              1,299
              
              
              1,329
 **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:
 
 **2007**
                
                **2006****Deposits**
                
                **Provisions**
                
                **Deposits**
                
                **Provisions**Tax-related
                
                
                150
                
                
                173
                
                
                92
                
                
                133Labor-related
                
                
                8
                
                
                15
                
                
                5
                
                
                13Civil-related
                
                
                -
                
                
                9
                
                
                -
                
                
                6158
                
                
                197
                
                
                97
                
                
                152
  F-41
 **Votorantim
                Celulose e Papel S.A.**
 
 **Notes
                to the Consolidated Financial Statements**
 **as
                at December 31, 2007 and 2006, and for the Three Years**
 **Ended
                December 31, 2007**
 **In
                millions of U.S. dollars, unless otherwise stated**
  The
            activity in our provision account was as follows:
 **2007**
                    
                    **2006**
                    
                    **2005**At
                        beginning of year
                    
                    
                    152
                    
                    
                    172
                    
                    
                    104Provisions
                        for new legal proceedings
                    
                    
                    21
                    
                    
                    11
                    
                    
                    54Reversal
                        (iv)
                    
                    
                    -
                    
                    
                    (47
                    )
                    
                    -Translation
                        adjustment
                    
                    
                    24
                    
                    
                    16
                    
                    
                    14At
                        end of year
                    
                    
                    197
                    
                    
                    152
                    
                    
                    172
  **(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 02% 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 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 income as "Financial
                      income".
  F-42
  **Votorantim
        Celulose e Papel S.A.**
  **Notes
        to the Consolidated Financial Statements**
 **as
        at December 31, 2007 and 2006, and for the Three Years**
 **Ended
        December 31, 2007**
 **In
        millions of U.S. dollars, unless otherwise stated**
 
 **(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:
 
 **2007**
              
              **2006**Tax-related
              
              
              196
              
              
              196Labor-related
              
              
              14
              
              
              12Civil-related
              
              
              9
              
              
              8219
              
              
              216
 
 **(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$ 906,903 thousand 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 to be 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. 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.
  F-43
  **Votorantim
        Celulose e Papel S.A.**
 
 **Notes
        to the Consolidated Financial Statements**
 **as
        at December 31, 2007 and 2006, and for the Three Years**
 **Ended
        December 31, 2007**
 **In
        millions of U.S. dollars, unless otherwise stated**
 
 **(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 360 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, 2007, customer guarantees provided by us totaled
        US$ 127, including interest (US$ 120 at December 31, 2006 and
        US$ 57 at December 31, 2005). Our guarantees are usually secured by the
        personal guarantee of the customer's owner.
 
 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 2007 and US$ 2 in 2006
        and 2005. At December 31, 2007, future minimum lease payments are
        due in 2008 total US$ 13.
 
 At
        December 31, 2007, future minimum operating lease payments were as
        follows:
 
 2008
              
              
              132009
              
              
              132010
              
              
              132011
              
              
              132012
              
              
              13After
                  2012
              
              
              1378
  F-44
  **Votorantim
        Celulose e Papel S.A.**
 
 **Notes
        to the Consolidated Financial Statements**
 **as
        at December 31, 2007 and 2006, and for the Three Years**
 **Ended
        December 31, 2007**
 **In
        millions of U.S. dollars, unless otherwise stated**
 
 
 We
        have
        commitments for capital expenditures amounting to US$ 59 at
        December 31, 2007.
 
 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$ 58 p.a. 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$ 42
        p.a.
 
 The
        following is a summary of guarantees issued to other companies of the Votorantim
        Group:
 **Outstanding**
                    **guarantee amount****Primary obligor**
                  
                  **Obligations**
                  
                  **Beneficiary**
                  
                  **2007**
                  
                  **2006**VOTO
                      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.
 
 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 affiliates Aracruz, Ripasa and Ahlstrom VCP 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 income 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.
  F-45
  **Votorantim
        Celulose e Papel S.A.**
 
 **Notes
        to the Consolidated Financial Statements**
 **as
        at December 31, 2007 and 2006, and for the Three Years**
 **Ended
        December 31, 2007**
 **In
        millions of U.S. dollars, unless otherwise stated**
 
 **2007**
                
                **2006**
                
                **2005**Net
                    operating revenue - Brazilian GAAPPulp
                
                
                653
                
                
                520
                
                
                440Paper
                
                
                691
                
                
                803
                
                
                704Reconciling
                    item to US GAAPPulp
                
                
                (2
                )
                
                (1
                )
                
                (1
                )Paper
                
                
                (9
                )
                
                (5
                )
                
                (13
                )Total
                    net operating revenue - US GAAP
                
                
                1,333
                
                
                1,317
                
                
                1,130Intersegment
                    sales of pulp to paper segment
                
                
                43
                
                
                254
                
                
                249Net
                    operating revenue before intersegment sales eliminations - US
                    GAAP
                
                
                1,376
                
                
                1,571
                
                
                1,379
  **2007**
              
              **2006**
              
              **2005**Depreciation
                  and depletion expense -Brazilian
                  GAAPPulp
              
              
              136
              
              
              127
              
              
              89Paper
              
              
              12
              
              
              68
              
              
              31Reconciling
                  items to US GAAPPulp
              
              
              (4
              )
              
              (2
              )
              
              (2
              )Paper
              
              
              (1
              )
              
              -
              
              
              (1
              )Depreciation
                  and depletion expense - US GAAP
              
              
              143
              
              
              193
              
              
              117
 
 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 income. 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. Also, we depreciated our machinery, equipment and
        installations over ten years up to December 31, 1996, over 25 years up to
        December 31, 2005 and over 18.25 years thereafter.
  F-46
  **Votorantim
        Celulose e Papel S.A.**
 
 **Notes
        to the Consolidated Financial Statements**
 **as
        at December 31, 2007 and 2006, and for the Three Years**
 **Ended
        December 31, 2007**
 **In
        millions of U.S. dollars, unless otherwise stated**
 
 These
        differences are reconciled as follows:
 
 **2007**
              
              **2006**
              
              **2005**Segment
                  operating income - Brazilian GAAPPulp
              
              
              143
              
              
              200
              
              
              155Paper
              
              
              103
              
              
              124
              
              
              113Operating
                  income under Brazilian GAAP
              
              
              246
              
              
              324
              
              
              268Reconciling
                  items to US GAAPDepreciation
                  and amortization expensePulp
              
              
              1
              
              
              2
              
              
              2Paper
              
              
              1
              
              
              2
              
              
              1Other
                  adjustmentsPulp
              
              
              (4
              )
              
              (21
              )
              
              (10
              )Paper
              
              
              (13
              )
              
              (22
              )
              
              (14
              )Gain
                  on exchange of assets, net
              
              
              955
              
              
              -
              
              
              -Total
                  pulp
              
              
              142
              
              
              181
              
              
              147Total
                  paper
              
              
              89
              
              
              104
              
              
              100Gain
                  on exchange of assets, net
              
              
              955
              
              
              -
              
              
              -Operating
                  income - US GAAP
              
              
              1,186
              
              
              285
              
              
              247Segment
                  assetsPulp
              
              
              3,364
              
              
              1,332
              
              
              1,167Paper
              
              
              495
              
              
              556
              
              
              513Total
                  segment assets per Brazilian GAAP
              
              
              3,859
              
              
              1,888
              
              
              1,680Reconciling
                  items to US GAAPPulp
              
              
              50
              
              
              37
              
              
              44Paper
              
              
              7
              
              
              20
              
              
              34Total
                  pulp
              
              
              3,414
              
              
              1,369
              
              
              1,211Total
                  paper
              
              
              502
              
              
              576
              
              
              547Property,
                  plant and equipment - US GAAP
              
              
              3,916
              
              
              1,945
              
              
              1,758Capital
                  expenditures per Brazilian GAAPPulp
              
              
              420
              
              
              198
              
              
              188Paper
              
              
              51
              
              
              50
              
              
              54
  F-47
  **Votorantim
          Celulose e Papel S.A.**
 
 **Notes
          to the Consolidated Financial Statements**
 **as
          at December 31, 2007 and 2006, and for the Three Years**
 **Ended
          December 31, 2007**
 **In
          millions of U.S. dollars, unless otherwise stated**
 **2007**
                
                **2006**
                
                **2005**Reconciling
                    items to US GAAPCapitalized
                    interestPulp
                
                
                6
                
                
                2
                
                
                4Paper
                
                
                -
                
                
                -
                
                
                1Total
                    capitalized interest
                
                
                6
                
                
                2
                
                
                5Total
                    pulp
                
                
                426
                
                
                199
                
                
                192Total
                    paper
                
                
                51
                
                
                49
                
                
                55Capital
                    expenditures - US GAAP
                
                
                477
                
                
                248
                
                
                247
 
 **(b)**
              **Export
                  sales by region**
 
 The
        following table includes our sales made directly to unaffiliated customers
        (the
        final customers) as well as our sales made to Votorantrade N.V. and related
        parties (also a member of the Votorantim Group) to the final customers. Sales
        are classified by region based on the location of the customer.
 
 **2007**
              
              **2006**
              
              **2005****Paper**
              
              **Pulp**
              
              **Paper**
              
              **Pulp**
              
              **Paper**
              
              **Pulp**Europe
              
              
              14
              
              
              342
              
              
              54
              
              
              292
              
              
              50
              
              
              243Middle
                  East and Asia
              
              
              -
              
              
              141
              
              
              5
              
              
              127
              
              
              10
              
              
              120North
                  America
              
              
              20
              
              
              52
              
              
              57
              
              
              46
              
              
              54
              
              
              39South
                  America, other than Brazil
              
              
              54
              
              
              1
              
              
              49
              
              
              -
              
              
              44
              
              
              -Africa
              
              
              -
              
              
              -
              
              
              2
              
              
              -
              
              
              5
              
              
              188
              
              
              536
              
              
              167
              
              
              465
              
              
              163
              
              
              403
  **17**
              **Shareholders'
                  Equity**
 
 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. Preferred shareholders are entitled to receive
        a
        dividend per share 10% higher than that paid to common shareholders. In 2007,
        2006 and 2005 we paid dividends in excess of the mandatory amount.
  F-48
  **Votorantim
        Celulose e Papel S.A.**
 
 **Notes
        to the Consolidated Financial Statements**
 **as
        at December 31, 2007 and 2006, and for the Three Years**
 **Ended
        December 31, 2007**
 **In
        millions of U.S. dollars, unless otherwise stated**
 
  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 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.
 
 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 income
        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,
        2007, we had unappropriated retained earnings of R$ 2,240 million (2006 -
        R$ 1,761 million) in our statutory books, equivalent, at the exchange rate
        at December 31, 2007, to US$ 1,265 (2006 - US$ 824).
 
 Dividends
        paid per shares in U.S. dollars were as follows:
 
 **2007**
              
              **2006**
              
              **2005**Preferred
              
              
              0.70
              
              
              0.80
              
              
              0.45Common
              
              
              0.64
              
              
              0.72
              
              
              0.41
  F-49
  **Votorantim
        Celulose e Papel S.A.**
 
 **Notes
        to the Consolidated Financial Statements**
 **as
        at December 31, 2007 and 2006, and for the Three Years**
 **Ended
        December 31, 2007**
 **In
        millions of U.S. dollars, unless otherwise stated**
 
  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.
  **18**
              **Concentration
                  of Credit Risk**
 
 We
        are
        potentially subject to credit risk with respect to our cash equivalents,
        held-to-maturity investments, 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
        USA, 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**
 **2007**
                
                **2006**
                
                **2005**Financial
                    incomeGain
                    onAvailable
                    for sale securities
                
                
                112
                
                
                62
                
                
                22Held-to-maturity
                    securities
                
                
                -
                
                
                -
                
                
                13Interest
                    income on cash equivalents
                
                
                81
                
                
                37
                
                
                32Reversal
                    of contingency provision (Note 15(a)(iv))
                
                
                -
                
                
                47
                
                
                -Present
                    value adjustment
                
                
                12
                
                
                16
                
                
                5Interest
                    income on credit sales
                
                
                6
                
                
                4
                
                
                7Other
                    (including taxes)
                
                
                25
                
                
                -
                
                
                -236
                
                
                166
                
                
                79
  F-50
 **Votorantim
          Celulose e Papel S.A.**
 
 **Notes
          to the Consolidated Financial Statements**
 **as
          at December 31, 2007 and 2006, and for the Three Years**
 **Ended
          December 31, 2007**
 **In
          millions of U.S. dollars, unless otherwise stated**
 
 **2007**
                
                **2006**
                
                **2005**Financial
                    expensesInterest
                    and charges on U.S. dollar debt
                
                
                65
                
                
                91
                
                
                62Interest
                    and charges on real debt
                
                
                14
                
                
                15
                
                
                16Tax
                    on checking accounts - CPMF
                
                
                12
                
                
                9
                
                
                10Indexation
                    and interest charges oncontingencies
                
                
                20
                
                
                6
                
                
                17Other
                
                
                34
                
                
                27
                
                
                14145
                
                
                148
                
                
                119
 **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, circumstance 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 a 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.
  F-51
  **Votorantim
        Celulose e Papel S.A.**
 
 **Notes
        to the Consolidated Financial Statements**
 **as
        at December 31, 2007 and 2006, and for the Three Years**
 **Ended
        December 31, 2007**
 **In
        millions of U.S. dollars, unless otherwise stated**
 
 The
        adoption of FIN 48 did not have any impact in the Company's statements of
        income
        and financial position and did not result in a cumulative adjustment to retained
        earnings upon adoption (Note 2(a)).
 
 As
        of
        December 31, 2007, 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.
  **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$ 5 in 2007,
        US$ 3 in 2006 and US$ 2 in 2005.
 
 **(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, 2007, 2006 and 2005 amounted to, US$ 3,
        US$ 1 and US$ 1, respectively and the accumulated post-retirement
        benefit obligation and accrued benefit cost (no plan assets) was US$ 23 at
        December 31, 2007 and US$ 24 at December 31, 2006 **.**
 
 Measurement
        of obligations for the post-retirement benefits plan is calculated as of
        December 31, 2007. The actual discount rates used to determine the
        actuarial present value of projected benefit obligations under such plans
        were 8.0% as of December 31, 2007. The assumed weighted annual
        average rate of increase in health care cost trend on covered changes
        was 3.0% as of December 31, 2007.
  F-52
  **Votorantim
        Celulose e Papel S.A.**
 
 **Notes
        to the Consolidated Financial Statements**
 **as
        at December 31, 2007 and 2006, and for the Three Years**
 **Ended
        December 31, 2007**
 **In
        millions of U.S. dollars, unless otherwise stated**
 
 
 Based
        on
        the report of our independent actuary, the accumulated post-retirement benefit
        obligation and accrued benefit cost (no plan assets) was
        US$ 23.
 
 **Percentage****2007**
              
              **2006**Weighted-average
                  assumptionsDiscount
                  rate
              
              
              8.0
              
              
              8.5Health
                  care cost trend on covered changes
              
              
              3.0
              
              
              3.0
 
 **US$ dollars****2007**
              
              **2006**Components
                  of net periodic benefit cost for 2008 and 2007Interest
                  cost
              
              
              3
              
              
              3Total
                  net periodic benefit cost (benefit)
              
              
              3
              
              
              3
 
 It
        has
        been assumed, for measurement purposes, that health care cost trends
        for 2008 will not be considerably different from 2007. 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
        the following effects in 2007 (all other assumptions have been held
        constant):
  **One-percentage -**
                  **pint decrease****2007**
                
                **2006**Sensitivity
                    of retiree welfare resultsOn
                    total service and interest cost components
                
                
                (0.3
                )
                
                0.3On
                    post-retirement benefit obligation
                
                
                (2.6
                )
                
                2.3
  *          *          *
  F-53