##### Table of Contents

As filed with the Securities and Exchange Commission on June 28, 2007

---

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



---

FORM 20-F



---

ANNUAL REPORT PURSUANT TO SECTION 13 OR

15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934

For the fiscal year ended December 31, 2006

Commission File Number: 33-99720

CELULOSA ARAUCO Y CONSTITUCIÓN S.A.

(Exact name of Registrant as specified in its charter)

Arauco and Constitution Pulp Inc.

(Translation of Registrants name into English)

Republic of Chile

(Jurisdiction of
incorporation or organization)

Avenida El Golf 150

14thFloor

Las Condes, Santiago

Chile

(Address of principal executive
offices)

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

None

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:

Title of each class:

7% Notes due 2007

7.20% Notes due 2009

8.625% Notes due 2010

7.75% Notes due 2011

5.125% Notes due 2013

5.6% Notes due 2015

7.50% Notes due 2017

Indicate the number of outstanding shares of each of the issuers classes of capital or common stock as of the close of the period covered by the
annual report:

Shares of Common Stock, without par value: 113,152,446

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.    Yes ̈No  x

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities
Act.    Yes ̈No  x

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  x    No ̈

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer.

Large accelerated filer ̈Accelerated filer ̈Non-accelerated filer  x

Indicate by check mark which financial statement item the registrant has elected to follow:    Item 17 ̈Item 18  x

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).    Yes ̈No  x



---





---

##### Table of Contents

TABLE OF CONTENTS



|          |  |                                                                                  |  |     
|--------- |  | -------------------------------------------------------------------------------- |  | ----
|          |  |                                                                                  |  | Page
|PART I   
|          |  |                                                                                 
|ITEM 1.   |  | Identity of Directors, Senior Management and Advisers                            |  | 1   
|          |  |                                                                                 
|ITEM 2.   |  | Offer Statistics and Expected Timetable                                          |  | 1   
|          |  |                                                                                 
|ITEM 3.   |  | Key Information                                                                  |  | 1   
|          |  |                                                                                 
|ITEM 4.   |  | Information on the Company                                                       |  | 11  
|          |  |                                                                                 
|ITEM 5.   |  | Operating and Financial Review and Prospects                                     |  | 38  
|          |  |                                                                                 
|ITEM 6.   |  | Directors, Senior Management and Employees                                       |  | 58  
|          |  |                                                                                 
|ITEM 7.   |  | Major Shareholders and Related Party Transactions                                |  | 63  
|          |  |                                                                                 
|ITEM 8.   |  | Financial Information                                                            |  | 65  
|          |  |                                                                                 
|ITEM 9.   |  | The Offer and Listing                                                            |  | 68  
|          |  |                                                                                 
|ITEM 10.  |  | Additional Information                                                           |  | 69  
|          |  |                                                                                 
|ITEM 11.  |  | Quantitative and Qualitative Disclosures About Market Risk                       |  | 77  
|          |  |                                                                                 
|ITEM 12.  |  | Description of Securities Other Than Equity Securities                           |  | 78  
|         
|PART II  
|          |  |                                                                                 
|ITEM 13.  |  | Defaults, Dividend Arrearages and Delinquencies                                  |  | 79  
|          |  |                                                                                 
|ITEM 14.  |  | Material Modifications to the Rights of Security Holders and the Use of Proceeds |  | 79  
|          |  |                                                                                 
|ITEM 15.  |  | Controls and Procedures                                                          |  | 79  
|          |  |                                                                                 
|ITEM 16A. |  | Audit Committee Financial Expert                                                 |  | 79  
|          |  |                                                                                 
|ITEM 16B. |  | Code of Ethics                                                                   |  | 79  
|          |  |                                                                                 
|ITEM 16C. |  | Principal Accountant Fees and Services                                           |  | 80  
|          |  |                                                                                 
|ITEM 16D. |  | Exemptions From the Listing Standards for Audit Committees                       |  | 80  
|          |  |                                                                                 
|ITEM 16E. |  | Purchases of Equity Securities by the Issuer and Affiliated Purchasers           |  | 80  
|         
|PART III 
|          |  |                                                                                 
|ITEM 17.  |  | Financial Statements                                                             |  | 81  
|          |  |                                                                                 
|ITEM 18.  |  | Financial Statements                                                             |  | 81  
|          |  |                                                                                 
|ITEM 19.  |  | Exhibits                                                                         |  | 81  



i



---

##### Table of Contents

Celulosa Arauco y Constitución S.A. is a public corporation (sociedad anónima
abierta) organized under the laws of the Republic of Chile. Except where otherwise specified or the context otherwise requires, when we refer to the Company, Arauco or we, in this annual report, we mean
Celulosa Arauco y Constitución S.A. and its consolidated subsidiaries. When we refer to Chile, we mean the Republic of Chile; when we refer to Argentina, we mean the Argentine Republic; when we refer to
Brazil, we mean the Federative Republic of Brazil; and when we refer to Uruguay, we mean the Oriental Republic of Uruguay. All references to tons are to metric tons (1,000 kilograms), which equal 2,204.7 pounds.
One hectare equals 10,000 square meters or 2.471 acres. Discrepancies in any table between totals and the sums of the amounts listed are due to rounding.

Unless otherwise specified, all references to $, U.S.$, U.S. dollars or dollars are to United States dollars; references to Chilean pesos or Ch$
are to Chilean pesos; references to Argentine pesos or Ar$ are to Argentine pesos; references to Brazilian reals or R$ are to Brazilian reals; references to  or
euro are to the euro, the single European currency established pursuant to the European Economic and Monetary Union; and references to UF are to Unidades de Fomento. The UF is a unit of account that is linked to, and
adjusted daily to reflect changes in, the Chilean consumer price index reported by the Chilean National Institute of Statistics (Instituto Nacional de Estadísticas). At December 31, 2006, one UF equaled U.S.$34.44 and
Ch$18,336.38.

Item 18 of this annual report includes our audited consolidated financial statements as of December 31, 2005 and
2006 and for the years ended December 31, 2004, 2005 and 2006, including the notes thereto, which have been prepared in accordance with generally accepted accounting principles in the United States, or U.S. GAAP.

For your convenience, we have included translations of certain amounts into dollars at a specified rate. Unless otherwise indicated, the U.S. dollar
equivalent for information in Chilean pesos is based on the observed exchange rate (dólar observado) reported by the Central Bank of Chile (Banco Central de Chile), which we refer to as the Central Bank, for December 31,
2006, which was Ch$532.39 to U.S.$1.00. The observed exchange rate is, for any date, the average exchange rate at which transactions are actually carried out in the Formal Exchange Market (Mercado Cambiario Formal) on the previous day, as
certified by the Central Bank on the following business day. You should not construe these translations as representations that the Chilean peso amounts actually represent such dollar amounts or could be converted into dollars at the rates indicated
or at any other rate. On June 25, 2007, the observed exchange rate was Ch$527.38 to U.S.$1.00. For information regarding historical rates of exchange in Chile from January 1, 2002 see Item 3. Key InformationExchange
Rates.

The Federal Reserve Bank of New York does not report a noon buying rate for Chilean pesos.

Unless otherwise specified, references to the devaluation or the appreciation of the Chilean peso against the U.S. dollar are in nominal terms (without
adjusting for inflation), based on the observed exchange rates for the relevant period.



ii



---

##### Table of Contents

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
|------- | ---------------

SELECTED FINANCIAL DATA

The selected financial information presented below is prepared in accordance with U.S. GAAP as of and for the years ended
December 31, 2002, 2003, 2004, 2005 and 2006. The selected U.S. GAAP financial information should be read in conjunction with, and is qualified in its entirety by reference to, our audited consolidated financial statements, prepared in
accordance with U.S. GAAP, included in Item 18.

The selected U.S. GAAP financial information as of December 31, 2005 and 2006
and for the years ended December 31, 2004, 2005 and 2006 is derived from our audited consolidated financial statements provided in Item 18.

For all periods, the financial data in the following table are expressed in U.S. dollars, the currency in which we publish our audited consolidated financial statements. See Note 1 to our audited consolidated
financial statements.



|                                                                                             |  |                                                           |           |   |      |       |           |      |  |       |            |   |  |       |            |   |  |       |            |  
|-------------------------------------------------------------------------------------------- |  | --------------------------------------------------------- | --------- | - | ---- | ----- | --------- | ---- |  | ----- | ---------- | - |  | ----- | ---------- | - |  | ----- | ---------- | -
|                                                                                             |  | As of and for the year ended December 31,                 |          
|                                                                                             |  | 2002                                                      |           |   | 2003 |       |           | 2004 |  |       | 2005       |   |  | 2006  |           
|                                                                                             |  | (in thousands of U.S.$, except ratios and per share data) |          
|Income Statement Data                                                                        |  |                                                           |           |   |      |       |           |      |  |       |            |   |  |       |            |   |  |       |            |  
|Sales revenue                                                                                |  | U.S.$                                                     | 1,188,018 |   |      | U.S.$ | 1,458,220 |      |  | U.S.$ | 2,075,052  |   |  | U.S.$ | 2,373,907  |   |  | U.S.$ | 2,850,012  |  
|Cost of sales                                                                                |  |                                                           | (620,464  | ) |      |       | (782,793  | )    |  |       | (1,041,590 | ) |  |       | (1,388,322 | ) |  |       | (1,626,088 | )
|Depreciation                                                                                 |  |                                                           | (103,885  | ) |      |       | (112,636  | )    |  |       | (141,329   | ) |  |       | (170,291   | ) |  |       | (186,995   | )
|Selling and administrative expenses                                                          |  |                                                           | (100,515  | ) |      |       | (105,897  | )    |  |       | (124,784   | ) |  |       | (180,355   | ) |  |       | (229,220   | )
|                                                                                             |  |                                                           |           |   |      |       |           |      |  |       |            |   |  |       |            |   |  |       |            |  
|Income from operations                                                                       |  |                                                           | 363,154   |   |      |       | 456,894   |      |  |       | 767,349    |   |  |       | 634,939    |   |  |       | 807,759    |  
|Interest income                                                                              |  |                                                           | 21,995    |   |      |       | 30,051    |      |  |       | 25,431     |   |  |       | 34,487     |   |  |       | 40,899     |  
|Other income (expense)                                                                       |  |                                                           | 1,513     |   |      |       | 1,570     |      |  |       | (4,990     | ) |  |       | (2,225     | ) |  |       | (344       | )
|Foreign exchange gains (losses)                                                              |  |                                                           | 11,668    |   |      |       | 52,353    |      |  |       | 16,227     |   |  |       | (6,249     | ) |  |       | 10,510     |  
|Interest expenses                                                                            |  |                                                           | (61,692   | ) |      |       | (46,629   | )    |  |       | (78,109    | ) |  |       | (109,886   | ) |  |       | (82,460    | )
|Income before taxes, minority interest and equity from earnings of unconsolidated affiliates |  |                                                           |           |   |      |       |           |      |  |       |            |   |  |       |            |   |  |       |            |  
|                                                                                             |  |                                                           |           |   |      |       |           |      |  |       |            |   |  |       |            |   |  |       |            |  
|                                                                                             |  |                                                           | 336,638   |   |      |       | 494,239   |      |  |       | 725,908    |   |  |       | 551,066    |   |  |       | 776,364    |  
|Provision for income taxes                                                                   |  |                                                           | (52,578   | ) |      |       | (80,574   | )    |  |       | (139,899   | ) |  |       | (113,328   | ) |  |       | (161,958   | )
|Minority interest in consolidated subsidiaries                                               |  |                                                           | (267      | ) |      |       | (199      | )    |  |       | (321       | ) |  |       | (72        | ) |  |       | 100        |  
|Equity in earnings of unconsolidated affiliates                                              |  |                                                           | 2,558     |   |      |       | 6,001     |      |  |       | 6,473      |   |  |       | 6,682      |   |  |       | 7,926      |  
|                                                                                             |  |                                                           |           |   |      |       |           |      |  |       |            |   |  |       |            |   |  |       |            |  
|Net income                                                                                   |  |                                                           | 286,351   |   |      |       | 419,467   |      |  |       | 592,161    |   |  |       | 444,348    |   |  |       | 622,432    |  
|Dividends paid                                                                               |  |                                                           | 71,702    |   |      |       | 133,906   |      |  |       | 175,387    |   |  |       | 207,724    |   |  |       | 194,691    |  

(table continues on following page)



1



---

##### Table of Contents

|                                                   |  |                                                           |   |  |             |   |  |             |   |  |             |   |  |             |  
|-------------------------------------------------- |  | --------------------------------------------------------- | - |  | ----------- | - |  | ----------- | - |  | ----------- | - |  | ----------- | -
|                                                   |  | As of and for the year ended December 31,                 |  
|                                                   |  | 2002                                                      |   |  | 2003        |   |  | 2004        |   |  | 2005        |   |  | 2006        |  
|                                                   |  | (in thousands of U.S.$, except ratios and per share data) |  
|Balance Sheet Data(1)                              |  |                                                           |   |  |             |   |  |             |   |  |             |   |  |             |  
|Property, plant and equipment (less forests), net  |  | 1,851,240                                                 |   |  | 2,176,701   |   |  | 2,524,428   |   |  | 3,087,900   |   |  | 3,447,037   |  
|Forests                                            |  | 1,188,013                                                 |   |  | 1,243,638   |   |  | 1,412,488   |   |  | 1,549,903   |   |  | 2,016,637   |  
|Total assets                                       |  | 4,110,336                                                 |   |  | 4,736,027   |   |  | 5,273,866   |   |  | 6,114,019   |   |  | 7,068,952   |  
|Total long-term liabilities                        |  | 1,570,080                                                 |   |  | 2,026,365   |   |  | 1,919,979   |   |  | 2,434,810   |   |  | 2,501,850   |  
|Total shareholders equity                         |  | 2,157,665                                                 |   |  | 2,421,001   |   |  | 2,787,267   |   |  | 3,090,118   |   |  | 3,430,559   |  
|                                                   |  |                                                           |   |  |            
|Other Financial Data                               |  |                                                           |   |  |             |   |  |             |   |  |             |   |  |             |  
|Capital expenditures (2)                           |  | 330,804                                                   |   |  | 512,939     |   |  | 757,320     |   |  | 618,337     |   |  | 1,090,450   |  
|Depreciation                                       |  | 103,885                                                   |   |  | 112,636     |   |  | 141,329     |   |  | 170,291     |   |  | 186,995     |  
|Number of shares                                   |  | 113,152,446                                               |   |  | 113,152,446 |   |  | 113,152,446 |   |  | 113,152,446 |   |  | 113,152,446 |  
|Net income per share                               |  | 2.53                                                      |   |  | 3.71        |   |  | 5.23        |   |  | 3.93        |   |  | 5.50        |  
|Dividends per share (in US$)                       |  | 0.63                                                      |   |  | 1.18        |   |  | 1.55        |   |  | 1.84        |   |  | 1.72        |  
|Dividends per share (in Ch$)(3)                    |  | 478.5                                                     |   |  | 831.7       |   |  | 1,023.2     |   |  | 1,051.1     |   |  | 891.4       |  
|                                                   |  |                                                           |   |  |            
|Cash Flow Data                                     |  |                                                           |   |  |             |   |  |             |   |  |             |   |  |             |  
|Total operating cash flow                          |  | 481,651                                                   |   |  | 346,513     |   |  | 870,523     |   |  | 750,952     |   |  | 1,013,829   |  
|Total cash flow arising from financing activities  |  | (124,566                                                  | ) |  | 193,388     |   |  | (127,636    | ) |  | 115,661     |   |  | 71,871      |  
|Total cash flow arising from investment activities |  | (330,362                                                  | ) |  | (561,773    | ) |  | (745,679    | ) |  | (865,138    | ) |  | (1,089,478  | )

---

|(1) | In 2006, we adopted the SEC Staff Accounting Bulletin No. 108 with respect to quantifying
misstatements in financial statements. See Note 1(u) to our audited consolidated financial statements.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | Accrued for the period. Capital expenditures do not include acquisitions of other companies. See Note 13
to our audited consolidated financial statements.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) | In constant Chilean pesos as of December 31, 2006.
|--- | --------------------------------------------------



2



---

##### Table of Contents

EXCHANGE RATES

The following table sets forth, for the periods and dates indicated, certain information concerning the observed exchange rate reported by the Central Bank. No representation is made that the Chilean peso or U.S.
dollar amounts referred to in this annual report could have been or could be converted into U.S. dollars or Chilean pesos, as the case may be, at the rates indicated or at any other rate. The Federal Reserve Bank of New York does not report a noon
buying rate for Chilean pesos. See Item 10. Additional InformationExchange Controls.



|                        |  |                              |  |             |  |            |  |           
|----------------------- |  | ---------------------------- |  | ----------- |  | ---------- |  | ----------
|                        |  | Daily Observed Exchange Rate
|Year Ended December 31, |  | High                         |  | Low         |  | Average(1) |  | Period-End
|                        |  |                              |  | Ch$ per US$ |  |           
|2002                    |  | 756.56                       |  | 641.75      |  | 692.32     |  | 718.61    
|2003                    |  | 758.21                       |  | 593.10      |  | 686.89     |  | 593.80    
|2004                    |  | 649.45                       |  | 557.40      |  | 611.11     |  | 557.40    
|2005                    |  | 592.75                       |  | 509.70      |  | 558.06     |  | 512.50    
|2006                    |  | 549.63                       |  | 511.44      |  | 529.64     |  | 532.39    
|                        |  |                              |  |            
|2006                    |  |                              |  |             |  |            |  |           
|December                |  | 534.43                       |  | 524.78      |  | 527.83     |  | 532.39    
|                        |  |                              |  |            
|2007                    |  |                              |  |             |  |            |  |           
|January                 |  | 545.18                       |  | 534.42      |  | 541.06     |  | 544.49    
|February                |  | 548.67                       |  | 535.29      |  | 542.05     |  | 540.07    
|March                   |  | 541.95                       |  | 535.36      |  | 538.45     |  | 539.21    
|April                   |  | 539.69                       |  | 525.96      |  | 531.64     |  | 525.96    
|May                     |  | 527.52                       |  | 517.64      |  | 521.98     |  | 525.10    

---

Source: Central Bank of Chile



|(1) | For each year, the average of the month-end exchange rates for the relevant year. For each month, the
average daily exchange rate for the relevant month.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------

On June 25, 2007, the observed exchange rate was Ch$527.38 to
U.S.$1.00.



3



---

##### Table of Contents

RISK FACTORS

We are subject to various changing economic, political, social and competitive conditions, particularly in our principal markets. Any of the following risks, if they actually occur, could materially and adversely
affect our business, results of operations, prospects and financial condition.

Risks Relating to Arauco and the Forestry Industry

Environmental concerns led us to temporarily suspend our operations at the Valdivia Mill, which adversely affected, and in the future may continue to adversely
affect, our business, financial condition and results of operations

Our operations at the Valdivia Mill, an industrial development
in the Province of Valdivia in the Tenth Region of Chile (which shall become part of the newly-created Fourteenth Region of Chile), have been subject to continued environmental scrutiny by Chilean environmental regulators and the Chilean public
since the mill began its operations in 2004. A variety of concerns and claims have been raised regarding potential environmental impacts in the area. Primarily, it has been alleged that the mills operations impacted the nearby Carlos Anwandter
Nature Sanctuary and contributed to the migration and death of black-neck swans living in the area. In connection with an environmental administrative proceeding, environmental regulators required us to temporarily suspend operations at the Valdivia
Mill for approximately one month in January 2005. We resumed operations at the mill on February 18, 2005. See Item 8. Financial InformationLegal Proceedings.

On June 8, 2005, we voluntarily suspended operations at the Valdivia Mill, until certain technical and legal conditions could be clarified with the
applicable regulatory authorities. We estimate this voluntary suspension resulted in a loss of sales of approximately U.S.$1.0 million per day and a loss of profits of approximately U.S.$250,000 per day. Pursuant to the decision of our board of
directors, based on certain clarifications provided by the Environmental Regional Commission (Comisión Regional del Medio Ambiente), or COREMA, of the Tenth Region of Chile, the mill resumed operations on August 12, 2005 at 80% of
its authorized production capacity, after 64 days of suspended operations. In order to achieve the full production capacity authorized by applicable permits, the mill would have to fulfill certain new requirements established by the COREMA. Subject
to compliance with these new requirements, we have requested permission from the environmental authorities to resume full authorized production capacity (550,000 metric tons of pulp per year). The suspension of operations at the Valdivia Mill
adversely affected our business, financial condition and results of operations. Any future suspension of operations at the Valdivia Mill or at any other of our significant operating plants can be expected to have similar adverse effects. We offer no
assurance that the Valdivia Mill will be able to operate without further interruption or that it will resume operations at full capacity notwithstanding our compliance with the new requirements imposed by the COREMA are fulfilled. See
Item 4. Information on the CompanyDescription of BusinessPulpPulp millsChileValdivia Mill.

We
submitted to the COREMA of the Tenth Region of Chile an environmental impact study for the implementation of substantial technological improvements on the quality of the effluents generated by the Valdivia Mill. By March 31, 2009, we must also
submit an environmental impact study for the construction of a pipeline to discharge the Valdivia Mills wastewater in a body of water other than the Cruces River or the Carlos Anwandter Nature Sanctuary or their sources. We will have to
construct and put into operation this pipeline no later than 15 months from the date in which the COREMA approves the environmental impact study in its final form. The COREMA has also appointed a consulting firm to analyze and prepare a report on
different feasible alternatives for discharge of the Valdivia Mill effluents. Approval by the COREMA of our environmental impact studies regarding the pipeline and the improvement of the quality of the effluents and the construction and operation of
such a pipeline are each subject to many environmental, regulatory, engineering and political uncertainties at this time. As a result, we cannot give you any assurance that such projects will ever be approved or completed. If either our
environmental study or the installation of the pipeline is delayed for reasons that COREMA attributes to us, we may face sanctions that include warnings, fines or the revocation of the Valdivia Mills environmental permit of operation.
Alternatively, if COREMA determines that such delays are beyond our control, we believe that COREMA should extend the applicable deadlines. However, we can offer no assurances that any of such deadline extensions will be granted, even if we comply
with all the requirements set forth by COREMA. See Item 4. Information on the CompanyDescription of BusinessPulpPulp millsChileValdivia Mill.



4



---

##### Table of Contents

Environmental concerns led us to suspend our operations at the Licancel Mill indefinitely, which may adversely
affect our business, financial condition and results of operations

Since June 2007, our operations at the Licancel Mill, a pulp
mill located in the Seventh Region of Chile, have been subject to environmental scrutiny by Chilean environmental regulators and the public. On June 5, 2007, in connection with the death of fish in the Mataquito River, approximately 15
kilometers downstream of the mill, we decided to voluntarily suspend our operations in the Licancel Mill as a preventive measure. In addition, Chilean authorities, including the health authorities and the Superintendencia de Servicios
Sanitarios (Sanitary Services Superintendency), required that we suspend activities at the Licancel Mill and that we suspend any further discharges into the river. We also commenced independent investigations relating to the cause of the death
of the fish. On June 18, 2007, as a result of a pipe leakage in the water treatment system currently in place at the Licancel Mill, an estimated 50 cubic meters of effluents reached the Mataquito River. On that same date, we decided to close
the mill indefinitely and informed the Sanitary Services Superintendency of the incident.

We have resolved not to resume operations at the
Licancel Mill until we have replaced the current environmental treatment system with a new system that incorporates a new effluent treatment system approved by the environmental authorities. Several administrative and judicial proceedings have been
commenced regarding the events at the Licancel Mill, including the death of fish at the Mataquito River. Our ability to resume operations at the Licancel Mill may also depend upon our ability to comply with any requirements that may be imposed by
any applicable governmental authority. We estimate that the suspension of operations at the Licancel Mill will result in a loss of profits of approximately U.S.$4 million per month, and that these losses will continue for so long as the mill remains
closed. Furthermore, we cannot predict any monetary or other sanctions that may be imposed on us as a result of any ongoing or future environmental, administrative or judicial proceeding. Consequently, the suspension of operations at the Licancel
Mill may adversely affect our business, financial condition and results of operations. We cannot assure you that the Licancel Mill will be reopened or that the Licancel Mill, if reopened, would be able to operate without interruptions or changes in
its operations. See Item 4. Information on the CompanyDescription of BusinessPulpPulp millsChileLicancel Mill.

We are subject to legal proceedings related to our mills, which could adversely affect our business, financial condition and results of operations

On April 27, 2005, the National Defense Council (Consejo de Defensa del Estado), the Chilean national agency that institutes legal proceedings on behalf of the Chilean government, instituted a civil lawsuit
seeking reparations, damages and indemnification from us for environmental harm allegedly caused by the Valdivia Mill. If the results of this lawsuit are unfavorable to us, we may be required to invest funds or take other action to repair any
environmental harm a court determines we have caused, which could materially and adversely affect our business, financial condition and results of operations. We cannot predict the outcome or impact of this lawsuit or when it may be resolved. See
Item 8. Financial InformationLegal Proceedings.

Since the end of 2004, various criminal proceedings relating to alleged
violations of several environmental laws have been instituted in Chile in which some of our mills may be affected. We cannot predict the outcome or impact of these proceedings or when they may be resolved. While Chilean law provides that only
individuals can be convicted in criminal actions, as a consequence of these proceedings, certain measures may be taken that could materially and adversely affect our business, financial conditions and results of operations. See Item 8.
Financial InformationLegal Proceedings.

We are also subject to certain other proceedings described in Item 8. Financial
InformationLegal Proceedings. We cannot assure you that, as a result of such proceedings, our mills will be able to operate without interruption. Any such interruption could have a material and adverse effect on our business, financial
condition and results of operations.

The application of environmental regulations could adversely affect our ability to accomplish our development
goals and adversely affect our results of operations

In each country where we have operations, we are subject to numerous national
and local environmental laws concerning, among other matters, health, the handling and disposal of waste and discharges into the air, soil



5



---

##### Table of Contents

and water. We have made and expect to continue to make substantial expenditures to manage our existing operations in accordance with environmental
requirements. The application of environmental laws in the countries where we have operations may affect our business strategy and our development goals, which may have an adverse effect on our business, financial condition and results of
operations.

Environmental requirements are a factor in the development and operation of new projects. Chilean environmental regulations
have become increasingly stringent in recent years, particularly in connection with the approval of new projects, and this trend is likely to continue. The implementation of these environmental policies in Chile will affect various aspects of our
operations, but the effect on our operations and the outcome of any regulatory review or proceedings is uncertain. Environmental concerns and enforcement matters also attract public interest and, therefore, may be subject to political considerations
that are beyond our control.

Since 2004, we have been subject to a number of environmental administrative and judicial proceedings in
Chile, including proceedings related to the Valdivia Mill, the Arauco Mill, the Nueva Aldea Project, a forestry-industrial complex in the Eighth Region of Chile, and the Licancel Mill. As a result of these proceedings, we have been subject to fines
and sanctions, and we may be subject to fines, injunctions or other sanctions in the future. In January 2005, we were ordered to suspend construction of the pulp mill under construction at the Nueva Aldea Project for approximately two months in
connection with an environmental proceeding instituted by the COREMA for the Eighth Region of Chile. Additional proceedings, enforcement actions or claims related to environmental requirements or impacts may also be brought against us. Any such
proceedings or claims may have an adverse effect on our business, financial condition and results of operations. See Item 4. Information on the CompanyDescription of the BusinessPulpChile, Item 8. Financial
InformationRecent Developments and Legal Proceedings.

In the future, the addition of new or more stringent
environmental requirements or changes in the application, interpretation or enforcement of existing requirements, in any country where we have operations, could result in substantially increased capital, operating or compliance costs, impose
conditions that restrict or limit our operations or otherwise adversely affect our business, financial condition and results of operations. These changes could limit the availability of our funds for other purposes, which could adversely affect our
business, financial condition and results of operations.

Fluctuations in market price for our products could adversely affect our financial
condition and results of operations

Prices for pulp, forestry and wood products can fluctuate significantly. The average price, on
an annual basis, for Norscan bleached softwood kraft market pulp (pulp produced in Canada and Northern Europe sold to manufacturers of paper products delivered in Northern Europe, or NBSK), which is the benchmark for softwood bleached pulp, ranged
from U.S.$435.1 in 2002 to U.S.$648.6 in 2005. In 2006, the price of NBSK ranged from a minimum of U.S.$598 to a maximum of U.S.$730.0. Our business, financial condition and results of operations could be materially and adversely affected if the
price of pulp or other forestry products were to decline significantly from current levels. The prices that we are able to obtain for pulp products and, to a lesser extent, other forestry products depend on the following:



| |  |  | prevailing world prices, which historically have been subject to significant fluctuations over relatively short periods of time, depending on worldwide demand;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | world production capacity;
| | - |  | --------------------------



| |  |  | the business strategies adopted by major integrated forestry, pulp and paper producers and other major producers; and
| | - |  | ---------------------------------------------------------------------------------------------------------------------



| |  |  | the availability of substitutes.
| | - |  | --------------------------------

Each of these
factors is beyond our control.



6



---

##### Table of Contents

Worldwide competition in the markets for our products could adversely affect our business and results of operations

We experience substantial worldwide competition in each of our geographical markets and in each of our product lines. Several of
our competitors are larger than we are and have greater financial and other resources, which they could use to take steps that could adversely affect our financial and competitive position. The market pulp industry is sensitive to changes in
industry capacity and producer inventories, as well as to cyclical changes in the worlds economies, all of which may significantly affect selling prices and, thereby, our profitability. Increased competition could materially and adversely
affect our business, financial condition and results of operations.

We depend on free international trade as well as economic and other conditions
in our principal export markets

In 2006, export sales accounted for approximately 77.1% of our total sales revenues. During this
period, 33.2% of our export sales were to customers in Asia, 32.0% to customers in North America, 19.1% to customers in Europe and 9.2% to customers in Central and South America. As a result, our results of operations depend, to a significant
degree, on economic, political and regulatory conditions in our principal export markets. Our ability to compete effectively in our export markets could be materially and adversely affected by a number of factors beyond our control, including
deterioration in macroeconomic conditions, exchange rate volatility, government subsidies, and the imposition of increased tariffs or other trade barriers. If our ability to sell our products competitively in one or more of our principal export
markets were impaired by any of these developments, it might be difficult to re-allocate our products to other markets on equally favorable terms and our business, financial condition and results of operations might be adversely affected.

Disease or fire could affect our forests and manufacturing processes and, in turn, adversely affect our financial condition and results of
operations

Our operations are subject to various risks affecting our forests and manufacturing facilities, including disease and
fire. Although, in the past, certain pests and diseases afflicting radiata or taeda pine plantations in other parts of the world have not significantly affected the forestry industries in Chile, Argentina, Brazil and Uruguay, these pests or diseases
may appear in Chile, Argentina, Brazil or Uruguay in the future. Although, in the past, forest fires have not significantly affected our plantations partly due to the broad geographic extension of our plantations and the varied ages and climatic
conditions of our plantations, forest fires may affect our plantations in the future. Our operations and, as a result, our financial condition and results of operations could be adversely affected if any of these risks were realized.

Risks Relating to Chile

Chilean political and economic
conditions directly impact our business and the market price of our securities

At December 31, 2006, 81.6% of our property,
plant and equipment and forest assets were located in Chile, and in 2006, approximately 80.7% of our net sales were attributable to our Chilean operations. Accordingly, our business, financial condition and results of operations depend, to a
considerable extent, upon economic conditions in Chile. Future developments in the Chilean economy could adversely affect our financial condition or results of operations and may impair our ability to proceed with our strategic plan of business. In
addition, such developments may impact the market price of our securities.

The Chilean government has exercised and continues to exercise
a substantial influence over many aspects of the private sector and has changed monetary, fiscal, tax and other policies to influence the Chilean economy. We have no control over and cannot predict how government intervention and policies will
affect the Chilean economy or, directly and indirectly, our operations and revenues. Our operations and financial condition and the market price of our securities may be adversely affected by changes in policies involving exchange controls, taxation
and other matters. In addition, our operations and financial condition and the market price of our securities may be adversely affected by factors such as:



| |  |  | fluctuations in exchange rates;
| | - |  | -------------------------------



7



---

##### Table of Contents

| |  |  | base interest rate fluctuations; and
| | - |  | ------------------------------------



| |  |  | other political, diplomatic, social and economic developments in or affecting Chile.
| | - |  | ------------------------------------------------------------------------------------

Changes in inflation, which was 3.7% in 2005 and 2.6% in 2006, as measured by changes in the Chilean consumer price index, may adversely affect our
operations and financial condition and the market price of our securities.

Risks Relating to Argentina

The economic crisis in Argentina may adversely affect our financial condition and results of operations

At December 31, 2006, approximately 12.5% of our property, plant and equipment and forest assets were located in Argentina, and in 2006,
approximately 12.4% of our net sales were attributable to our Argentine operations. On October 31, 2005, through our subsidiary Industrias Forestales S.A., we acquired from Louis Dreyfus S.A.S. 100% of the stock of Ecoboard S.A.I.F. and
Ecoresin S.A. (formerly Louis Dreyfus S.A.I.F.) in Argentina and, indirectly as a result of that purchase, 100% of the stock of CAIF S.A. and Faplac S.A. (formerly LD Manufacturing S.A.) and 60% of the stock of Flooring S.A. The financial condition
and results of our Argentine operations, including the ability of Alto Paraná S.A., or Alto Paraná, our Argentine subsidiary, to raise capital, depend, to a certain extent, upon political and economic conditions prevailing in
Argentina. SeeItem 4. Information on the CompanyDescription of BusinessHistory.

From 1998 to 2002, the
Argentine economy experienced an economic recession marked by reduced levels of consumption and investment and an elevated unemployment rate. The Argentine gross domestic product decreased by 0.8% in 2000, 4.04% in 2001 and 10.9% in 2002. Since
2003, economic indicators have showed some signs of recovery, and the Argentine gross domestic product increased by 8.8% in 2003, by 8.7% in 2004, by 9.2% in 2005 and by 8.5% in 2006. However, the Argentine economy may not continue to recover, and
future economic, social and political developments in Argentina, over which we have no control, could adversely affect our business, financial condition and results of operations.

In addition, the Argentine government has exercised and continues to exercise a significant influence over many aspects of the Argentine economy.
Accordingly, the Argentine governments actions, including actions with respect to inflation, price controls, interest rates, foreign exchange controls, organized labor and taxes, have had and may continue to have a material adverse effect on
private sector entities, including our operations in Argentina.

Argentine Central Bank restrictions may impair Alto Paranás ability to
meet its obligations and transfer money abroad

We guarantee a portion of Alto Paranás debt. We may be required to
fulfill our obligation under our guarantees if the Argentine government were to restrict Alto Paranás ability to transfer funds abroad. For a description of Alto Paranás debt which we guarantee see Item 5. Operating
and Financial Review and ProspectsLiquidity and Capital Resources.

Since 2001, the Argentine government has imposed a number
of monetary and currency exchange control measures, which have included the obligation to repatriate foreign currency earned abroad and tight restrictions on transferring funds abroad, with certain exceptions for authorized transactions. Although
current restrictions have not materially affected Alto Paranás financial condition and results of operations, there can be no assurance that the Central Bank of Argentina will not reverse its position and again restrict payments, which
could impose material obstacles to Alto Paranás ability to transfer money abroad and negatively affect its financial condition and results of operations.



8



---

##### Table of Contents

Risks Relating to Brazil

Economic conditions in Brazil may have a direct impact on our financial condition and results of operations

At
December 31, 2006, approximately 6.0% of our property, plant and equipment and forest assets were located in Brazil, and in 2006, approximately 7.0% of our net sales were attributable to our Brazilian operations. During the first quarter of
2005, we acquired all of the shares of capital stock of LD Forest Products S.A. and of Placas do Paraná S.A. in Brazil, as well as 50% of the shares of capital stock of Dynea Brasil S.A. in Brazil. Consequently, to a certain extent, our
financial condition and results of operations will be dependent on economic conditions in Brazil. SeeItem 4. Information on the CompanyDescription of BusinessHistory.

The Brazilian government has exercised, and continues to exercise, significant influence over the Brazilian economy. Brazilian political and economic conditions
have a direct impact on our business

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 other policies and regulations have often involved, among other measures, wage and price controls, currency devaluations, capital
controls and limits on imports. The business, financial condition and results of operations of our recently acquired Brazilian subsidiaries may be adversely affected by changes in policy or regulation involving tariffs and exchange controls, as well
as by factors such as:



| |  |  | currency fluctuations;
| | - |  | ----------------------



| |  |  | inflation;
| | - |  | ----------



| |  |  | social instability;
| | - |  | -------------------



| |  |  | price instability;
| | - |  | ------------------



| |  |  | interest rates;
| | - |  | ---------------



| |  |  | liquidity of domestic capital and lending markets;
| | - |  | --------------------------------------------------



| |  |  | tax policy; and
| | - |  | ---------------



| |  |  | other political, diplomatic, social and economic developments in or affecting Brazil.
| | - |  | -------------------------------------------------------------------------------------

Inflation and efforts by the Brazilian government to combat inflation may contribute significantly to economic uncertainty in Brazil and could harm the business of
our Brazilian subsidiaries

Brazil has, in the past, experienced extremely high rates of inflation. More recently, Brazils
rates of inflation were 6.1% in 2004, 5.0% in 2005 and 2.8% in 2006, as measured by the Brazilian consumer price index (Índice Nacional de Preços ao Consumidor). In the past, inflation, governmental measures to combat inflation
and public speculation about possible future actions have had significant negative effects on the Brazilian economy. Future measures taken by the Brazilian government, including interest rate increases, intervention in the foreign exchange market
and actions to adjust or fix the value of the real may trigger increases in inflation, and consequently, have adverse economic impacts on our business. If Brazil experiences high inflation in the future, the business, financial condition and
results of operations of our recently acquired Brazilian subsidiaries could suffer.

Fluctuations in the value of Brazils currency against the
value of the U.S. dollar may result in uncertainty in the Brazilian economy and the Brazilian securities market, which may adversely affect the financial condition and results of operations of our recently acquired Brazilian subsidiaries

The Brazilian realhas historically suffered frequent devaluation. In the past, the Brazilian government has implemented
various economic plans and exchange rate policies, including sudden devaluations, periodic mini-devaluations



9



---

##### Table of Contents

during which the frequency of adjustments has ranged from daily to monthly, floating exchange rate systems, exchange controls and dual exchange rate markets.
Although over long periods depreciation of the realgenerally is correlated with the differential in the inflation rate in Brazil versus the inflation rate in the U.S., depreciation over shorter periods has resulted in significant
fluctuations in the exchange rate between the realand the U.S. dollar and other currencies.

The realappreciated by 8.7%
against the U.S. dollar in 2006, and appreciated by 9.8% during the first five months of 2007. The exchange rate between the realand the U.S. dollar may continue to fluctuate and may rise or decline substantially from current levels.

Devaluation of the Brazilian real and currency instability could adversely affect the ability of our Brazilian subsidiaries to meet
their foreign currency obligations in the future and could result in a monetary loss relating to this indebtedness.

Risks Relating to Other Markets

Our business, earnings and prospects may be adversely affected by developments in other countries that are beyond our control

Our business and results of operations depend, to a large extent, on the level of economic activity, government and foreign exchange policies and
political and economic developments in our principal export markets. In 2006, approximately 92.7% of our total pulp sales and approximately 67.5% of our total sales of forestry, wood and panel products were attributable to exports, principally to
customers in Asia, the Americas and Western Europe. Our business, earnings and prospects, as well as our financial condition, results of operations and the market price of our securities, may be materially and adversely affected by developments in
these export markets relating to inflation, interest rates, currency fluctuations, protectionism, government subsidies, price and wage controls, exchange control regulations, taxation, expropriation, social instability or other political, economic
or diplomatic developments. We have no control over these conditions and developments, which could adversely affect our business, financial condition and results of operations.

Developments in other emerging markets may adversely affect the market price of our securities and our ability to raise additional capital

The market price of our securities may be adversely affected by declines in the international financial markets and world economic conditions. Chilean
securities markets are, to varying degrees, influenced by economic and market conditions in other emerging market countries, especially those in Latin America. Although economic conditions are different in each country, investors reactions to
developments in one country can affect the securities markets and the securities of issuers in other countries, including Chile. Negative developments in the international financial markets in the future could adversely affect the market price of
our securities and impair our ability to raise additional capital.

Risks Relating to Our Securities

The non-payment of funds by our subsidiaries could have a material and adverse effect on our business, financial condition, results of operations and ability to
service our debt, including our securities

Our cash flow and our ability to service debt is dependent, in part, on the cash flow
and earnings of our subsidiaries and the payment of funds by those subsidiaries to us, in the form of loans, interest, dividends or otherwise. Our subsidiaries are separate and distinct legal entities and have no obligation, contingent or otherwise,
to pay any amounts due under the terms of our securities or to make any funds available for such purpose. Furthermore, claims of creditors of our subsidiaries, including trade creditors, will have priority over our creditors, including holders of
our securities, with respect to the assets and cash flow of the subsidiaries. Our right to receive assets of any of our subsidiaries upon their liquidation or reorganization (and the consequent right of the holders of our securities to participate
in those assets) will be effectively subordinated to the claims of that subsidiarys creditors.



10



---

##### Table of Contents

Changes in Chilean tax laws could lead us to redeem our securities

Under current Chilean law and regulations, payments of interest to holders of debt securities that are not residents of Chile for purposes of Chilean
taxation will, generally, be subject to Chilean withholding tax at a rate of 4.0%. Subject to certain exceptions, we will pay additional amounts (as described in Item 10. Additional InformationTaxation) so that the amount received
by the holder of securities after Chilean withholding tax will equal the amount that would have been received if no such taxes had been applicable. In the event of certain changes in Chilean tax laws requiring that we pay additional amounts that are
in excess of the additional amounts that we would owe if payments of interest on our securities were subject only to a 4.0% withholding tax, we will have the right to redeem our securities.

FORWARD-LOOKING STATEMENTS

This annual report on Form 20-F contains words
such as believe, expect, anticipate and similar expressions that identify forward-looking statements, which reflect our views about future events and financial performance. Statements that are not historical
facts, including statements about our beliefs and expectations, are forward-looking statements.

Forward-looking statements involve
inherent risks and uncertainties. These forward-looking statements are based on current plans, estimates and projections; therefore, readers should not place undue reliance on them. Actual results could differ materially from those projected in such
forward-looking statements because of various factors that may be beyond our control, including but not limited to our ability to service our debt, fund our working capital requirements, comply with financial covenants in certain of our debt
instruments, fund and implement our capital expenditure programs and maintain our relationships with customers, as well as a change in control, the effects on us from competition, future demand for forestry, panels and wood products in the Chilean,
Argentine, Brazilian, Uruguayan and export markets, international prices for forestry and wood products, the state of the Chilean and world economies and manufacturing industries, the relative value of the Chilean peso compared to other currencies,
inflation, increases in interest rates and changes in our regulatory environment. Forward-looking statements in this annual report speak only as of their dates, and we do not undertake any obligation to update or revise any of them, whether as a
result of new information, future events or otherwise.



|Item 4. | Information on the Company
|------- | --------------------------

DESCRIPTION OF
BUSINESS

We believe that, as of December 31, 2006, we were Chiles largest forest plantation owner, and that we are
Chiles largest exporter of forestry and wood products in terms of sales revenue. We have operations in Chile, Argentina and Brazil. As of December 31, 2006, we had approximately 884,296 hectares of plantations in Chile, Argentina,
Brazil and Uruguay. During 2006, we harvested 14.2 million cubic meters of sawlogs and pulplogs and sold 4,963,743 cubic meters of wood products, including sawn timber (green and kiln-dried lumber), remanufactured wood products and panels
(plywood, medium density fiber board, or MDF, particle board, or PBO, and high density fiber board, or HB).

Based on information published
by Resource Information Systems, Inc., an independent research company for the pulp and paper industry, at December 31, 2006, we were one of the worlds largest producers of bleached and unbleached softwood kraft market pulp in terms of
volume of pulp produced in 2006, with an estimated 5.9% share of the total world production of bleached softwood kraft market pulp and an 11.4% share of the total world production of softwood kraft market unbleached pulp. Market pulp is
pulp sold to manufacturers of paper products, as opposed to pulp produced by an integrated paper producer for use in its paper production facilities. Kraft pulp is pulp produced using a chemical process.

Based on information published by Resource Information Systems, Inc., we were also one of the worlds lowest-cost producers of softwood kraft market
pulp. We believe that we are able to produce our products at a lower cost than our competitors because of the high growth rate and short harvest cycle of radiata pine compared to other commercial softwoods, the advanced genetic and silviculture
techniques we apply in our forest management, our competitive labor costs, our modern mill facilities and the proximity of our operations to Pacific coast ports.



11



---

##### Table of Contents

History

Celulosa Arauco y Constitución S.A. is a public corporation (sociedad anónima
abierta) organized under the laws of Chile. Our principal executive offices are located at Avenida El Golf 150, 14thFloor, Las Condes, Santiago, Chile, and our telephone number is +56-2-461-7200.

We were formed on September 14, 1979
in a merger between Industrias de Celulosa Arauco S.A., or Industrias Arauco, and Celulosa Constitución S.A., or Celulosa Constitución. Our two predecessor companies were created in the late 1960s and early 1970s by Corporación
de Fomento de la Producción, or Corfo, a Chilean government development corporation, to develop forest resources, improve soil quality in former farming areas and promote employment. As part of the Chilean governments privatization
program, Corfo sold Industrias Arauco to Compañía de Petróleos de Chile S.A., or Copec, in 1977 and Celulosa Constitución to Copec in 1979. In October 2003, Copec transferred all of its gasoline- and fuel-related business
assets to a new subsidiary, and changed its legal name to Empresas Copec S.A., or Empresas Copec. See Item 7. Major Shareholders and Related Party TransactionsMajor Shareholders.

In 1990, we founded Investigaciones Forestales Bioforest S.A., or Bioforest, to conduct applied research in genetic improvement, site productivity, pest
and disease control and wood quality, with the goal of increasing the productivity of our forest resources.

In 1990, we also began the
construction of a second production line at the Arauco Mill, Arauco II, which was completed in 1991. Arauco II had an annual production capacity of approximately 350,000 metric tons, at that time, and was built next to Arauco I, the existing
production line. The construction of Arauco II cost approximately U.S.$600 million, which was, at that time, the largest investment in our history.

In 1996, we acquired Alto Paraná S.A., an Argentine company, which, at that time, owned plantations and other land in Argentina and manufactured and sold bleached softwood kraft pulp. With this acquisition, we expanded our market
opportunities outside of Chile.

In 2000, we acquired 98% of the shares of Forestal Cholguán S.A., or Cholguán, and 50% of
Trupán S.A., or Trupán, which permitted us to enter the MDF and HB markets, and in 2002, we began operations at two new MDF mills, one in Chile and one in Argentina.

During 2003, we began construction of the first phase of the Nueva Aldea Project, a new forestry-industrial complex in the Eighth Region of Chile, which
was completed during 2004. Total capital expenditures related to the first phase of the Nueva Aldea Project were approximately U.S.$169.6 million.

During the first quarter of 2004, we completed construction of the Valdivia Mill, which required a capital expenditure of approximately U.S.$573.7 million.

During 2004, we commenced construction of the second phase of the Nueva Aldea Project, which includes the development of a new pulp mill with installed annual production capacity of 856,000 tons of bleached pulp,
consisting of softwood pulp and eucalyptus pulp. We completed the construction and started production in August 2006. Total capital expenditures related to the construction of the pulp mill in the Nueva Aldea Project as of December 31, 2006
amounted to approximately U.S.$841.2 million. See Item 4. Information on the CompanyDescription of the BusinessPulpPulp millsChile.

On January 6, 2005, through Forestal Valdivia S.A., we acquired 80% of Forestal Los Lagos S.A., which represented an investment of U.S.$21.4 million
and included 9,234 hectares of land planted with eucalyptus in the Tenth Region of Chile.



12



---

##### Table of Contents

On March 9, 2005, we acquired from Louis Dreyfus S.A.S. 100% of the stock of LD Forest Products
S.A., a forest company located in the Brazilian state of Paraná that owned 43,000 hectares of land, of which 25,800 hectares were forest plantations, and, indirectly as a result of that purchase, 100% of the stock of Placas do Paraná
S.A., an industrial company that owns an MDF mill and a particleboard mill in Paraná, and 50% of the stock of Dynea Brasil S.A., which owns a mill that produces impregnated paper and a formaldehyde and resin plant in Paraná. We paid an
aggregate purchase price for these acquisitions of approximately U.S.$168.0 million. With these acquisitions, we acquired an MDF mill in Brazil with installed annual production capacity of approximately 250,000 cubic meters, a particleboard mill
with installed annual production capacity of approximately 320,000 cubic meters, an impregnated paper mill, a formaldehyde and resin plant and 25,800 hectares of plantations.

On October 31, 2005, we acquired from Louis Dreyfus S.A.S., 100% of the stock of two holding companies in Argentina, Ecoboard S.A.I.F. and Louis
Dreyfus S.A.I.F., and, indirectly as a result of that purchase, 100% of the stock of Caif S.A., a holding company that owns LD Manufacturing S.A. and 60% of the stock of Flooring S.A. As a result of these acquisitions, we own a particleboard mill
with installed annual production capacity of approximately 230,000 cubic meters, a chemical plant that produces resins used for the production of wood panels, an MDF and particleboard-based wood floor mill with installed annual production capacity
of approximately two million square meters, and an additional 8,000 hectares of plantations in Argentina. We paid an aggregate purchase price of approximately U.S.$55.0 million for this acquisition.

In February 2006, the COREMA of the Seventh Region of Chile approved an environmental impact study for the construction of a new pipeline for the
Constitución Mill, which commenced operations in March 2007.

On February 20, 2006, the COREMA of the Eighth Region of Chile
approved the environment impact study for the construction and operation of the Nueva Aldea Mill Pipeline, which we anticipate will commence operations during 2008. During the last quarter of 2006, we commenced construction of a second plywood line
at the Nueva Aldea Mill, with a capacity of 225,000 cubic meters.

On June 30, 2006, through Aserraderos Arauco S.A., Forestal Celco
S.A., Bosques Arauco S.A. and Forestal Valdivia S.A., we acquired the forestry assets of Cementos Bío-Bío S.A. The acquisition represented an investment of approximately U.S.$133.3 million. The acquired assets consist of 21,000
hectares of pine plantations, one sawmill with an annual production capacity of approximately 250,000 cubic meters per year and a remanufacturing facility.

In October 2006, Arauco began exclusive negotiations with Stora Enso Oyj with respect to potential agreements for the joint ownership of certain forestry land and the acquisition of sawmill in the State of
Paraná, Brazil. The forest consists of 50,000 hectares of land, including 30,000 hectares of productive plantations and the sawmill has a capacity of 150,000 cubic meters per year. We cannot provide any assurances that we will
reach a definitive agreement with Stora Enso.

On November 10, 2006, through its subsidiary Arauco Internacional S.A., Arauco acquired
La Señora del Milagro S.R.L., an Argentine forestry company, which owns approximately 4,000 hectares of land in Argentina, for U.S. $5.4 million.

During the last quarter of 2006, Arauco started the construction of a second line of plywood at the Nueva Aldea Mill with an expected capacity of 225,000 cubic meters.

Corporate Structure

We are substantially wholly
owned by Empresas Copec S.A., a public company listed on the Santiago Stock Exchange, the Valparaíso Stock Exchange and the Chilean Electronic Stock Exchange. Empresas Copec is a holding company, the principal interests of which are in
Arauco, gasoline distribution, retailing, electricity, gas distribution and fishing. See Item 7. Major Shareholders and Related Party TransactionsMajor Shareholders.



13



---

##### Table of Contents

The following table sets forth our ownership interests in our subsidiaries as of December 31, 2006.



|                                                  |  |                         |  |                  |  
|------------------------------------------------- |  | ----------------------- |  | ---------------- | -
|                                                  |  | Country ofincorporation |  | Total stock held |  
|Agenciamiento y Servicios Profesionales S.A.      |  | Mexico                  |  | 99.9985          | %
|Alto Paraná S.A.                                  |  | Argentina               |  | 99.9686          |  
|Arauco Denmark ApS                                |  | Denmark                 |  | 99.9990          |  
|Arauco Distribución S.A.                          |  | Chile                   |  | 99.9992          |  
|Arauco Ecuador S.A.                               |  | Ecuador                 |  | 99.9985          |  
|Arauco Forest Brasil S.A. (Ex LD Forest Products) |  | Brazil                  |  | 99.9972          |  
|Arauco Forest Products B.V.                       |  | The Netherlands         |  | 99.9999          |  
|Arauco Generación S.A.                            |  | Chile                   |  | 99.9985          |  
|Arauco Honduras S. de R.L. de C.V.                |  | Honduras                |  | 99.9985          |  
|Arauco Internacional S.A.                         |  | Chile                   |  | 99.9985          |  
|Araucomex S.A. de C.V.                            |  | Mexico                  |  | 99.9985          |  
|Arauco Perú S.A.                                  |  | Peru                    |  | 99.9985          |  
|Arauco Wood Products, Inc.                        |  | U.S.A.                  |  | 99.9985          |  
|Aserraderos Arauco S.A.                           |  | Chile                   |  | 99.9992          |  
|Bosques Arauco S.A.                               |  | Chile                   |  | 99.9256          |  
|Caif S.A.                                         |  | Argentina               |  | 99.9987          |  
|Controladora de Plagas Forestales S.A.            |  | Chile                   |  | 60.4359          |  
|Ecoboard S.A.                                     |  | Argentina               |  | 99.9987          |  
|Ecoresin S.A.                                     |  | Argentina               |  | 99.9987          |  
|Faplac S.A.                                       |  | Argentina               |  | 99.9987          |  
|Flooring S.A.                                     |  | Argentina               |  | 59.9992          |  
|Forestal Arauco S.A.                              |  | Chile                   |  | 99.9248          |  
|Forestal Arauco Costa Rica S.A.                   |  | Costa Rica              |  | 99.9987          |  
|Forestal Arauco Guatemala S.A.                    |  | Guatemala               |  | 99.9985          |  
|Forestal Celco S.A.                               |  | Chile                   |  | 99.9256          |  
|Forestal Cholguán S.A.                            |  | Chile                   |  | 97.3143          |  
|Forestal Concepción S.A.                          |  | Panama                  |  | 99.9985          |  
|Forestal Conosur S.A.                             |  | Uruguay                 |  | 99.9986          |  
|Forestal Los Lagos S.A.                           |  | Chile                   |  | 79.9404          |  
|Forestal Misiones S.A.                            |  | Argentina               |  | 99.9861          |  
|Forestal Valdivia S.A.                            |  | Chile                   |  | 99.9256          |  
|Industrias Forestales S.A.                        |  | Argentina               |  | 99.9987          |  
|Inversiones Celco S.L.                            |  | Spain                   |  | 99.9990          |  
|Investigaciones Forestales Bioforest S.A.         |  | Chile                   |  | 99.9256          |  
|La Señora del Milagro S.R.L.                      |  | Argentina               |  | 99.9986          |  
|Molduras Trupán S.A.                              |  | Chile                   |  | 99.9992          |  
|Paneles Arauco S.A.                               |  | Chile                   |  | 99.9992          |  
|Placas do Paraná S.A.                             |  | Brazil                  |  | 99.9985          |  
|Servicios Logísticos Arauco S.A.                  |  | Chile                   |  | 99.9995          |  
|Southwoods Arauco Lumber LLC                      |  | U.S.A.                  |  | 99.6110          |  
|Trupán Argentina S.A.                             |  | Argentina               |  | 99.9999          |  

Business Strategy

Our business strategy is to maximize the commercial value of our plantations by pursuing sustainable growth opportunities in our core businesses and expanding into new markets and products. We are implementing our
business strategy through the following initiatives:



| |  |  | We are executing a capital expenditure plan designed to increase production capacity for pulp and forestry and wood products and to improve efficiency and
productivity;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | We are improving the growth rate and quality of our plantations and increasing production of higher margin clear wood through advanced forest management techniques;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------



14



---

##### Table of Contents

| |  |  | We are expanding our product line to enter into new markets by, among other activities, planting eucalyptus trees to provide hardwood pulp; and
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | We continue to develop our state-of-the-art transportation, shipping, storage and product distribution network that allow us to reach over 60 countries worldwide.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------



15



---

##### Table of Contents

Domestic and Export Sales

The following table sets forth our sales revenue derived from exports and domestic sales for the years indicated.



|                             |  |                         |       |      |   |       |  |   |      
|---------------------------- |  | ----------------------- | ----- | ---- | - | ----- |  | - | -----
|                             |  | Year ended December 31,
|                             |  | 2004                    |       | 2005 |   | 2006 
|                             |  | (in millions of U.S.$) 
|Export Sales                 |  |                         |       |      |   |       |  |   |      
|Bleached pulp                |  | $                       | 791   |      | $ | 757   |  | $ | 982  
|Unbleached pulp              |  |                         | 155   |      |   | 160   |  |   | 184  
|Sawlogs                      |  |                         | 1     |      |   |      |  |   | 0    
|Sawn timber                  |  |                         | 312   |      |   | 359   |  |   | 413  
|Remanufactured wood products |  |                         | 226   |      |   | 208   |  |   | 219  
|Plywood and fiber panels     |  |                         | 272   |      |   | 350   |  |   | 391  
|Posts                        |  |                         | 25    |      |   | 22    |  |   | 8    
|Other                        |  |                         | 1     |      |   | 1     |  |   | 1    
|                             |  |                         |       |      |   |       |  |   |      
|Total export sales revenue   |  | $                       | 1,781 |      | $ | 1,857 |  | $ | 2,198
|                             |  |                         |       |      |   |       |  |   |      
|Domestic Sales               |  |                         |       |      |   |       |  |   |      
|Bleached pulp                |  |                         | 58    |      |   | 72    |  |   | 89   
|Unbleached pulp              |  |                         | 2     |      |   | 2     |  |   | 2    
|Sawlogs                      |  |                         | 32    |      |   | 51    |  |   | 56   
|Pulplogs                     |  |                         | 4     |      |   | 7     |  |   | 8    
|Sawn timber                  |  |                         | 70    |      |   | 75    |  |   | 82   
|Remanufactured wood products |  |                         | 4     |      |   | 8     |  |   | 13   
|Chips                        |  |                         |      |      |   | 7     |  |   | 8    
|Electric power               |  |                         | 11    |      |   | 39    |  |   | 34   
|Plywood and fiber panels     |  |                         | 102   |      |   | 238   |  |   | 330  
|Other                        |  |                         | 10    |      |   | 18    |  |   | 30   
|                             |  |                         |       |      |   |       |  |   |      
|Total domestic sales revenue |  | $                       | 294   |      | $ | 517   |  | $ | 652  
|                             |  |                         |       |      |   |       |  |   |      
|Total sales revenue          |  | $                       | 2,075 |      | $ | 2,374 |  | $ | 2,850
|                             |  |                         |       |      |   |       |  |   |      

The following table sets forth a geographic market breakdown of our export sales revenue for the
years indicated.



|                          |  |                               |       |      |   |       |  |   |      
|------------------------- |  | ----------------------------- | ----- | ---- | - | ----- |  | - | -----
|                          |  | Year ended December 31,      
|                          |  | 2004                          |       | 2005 |   | 2006 
|                          |  | (in millions of U.S. dollars)
|North America             |  | $                             | 546   |      | $ | 631   |  | $ | 703  
|Central and South America |  |                               | 173   |      |   | 130   |  |   | 202  
|Asia                      |  |                               | 637   |      |   | 596   |  |   | 730  
|Europe                    |  |                               | 340   |      |   | 357   |  |   | 420  
|Other                     |  |                               | 84    |      |   | 142   |  |   | 143  
|                          |  |                               |       |      |   |       |  |   |      
|Total                     |  | $                             | 1,781 |      | $ | 1,857 |  | $ | 2,198
|                          |  |                               |       |      |   |       |  |   |      

Forestry Activity

Radiata pine grows at the fastest rates within a narrow band of latitude and under certain climatic conditions. One of Chiles principal advantages in the forestry products industry lies in the short growing
cycle of our radiata pine plantations. The faster rate of growth of radiata pine trees in Chile allows harvesting of pulplogs and sawlogs 16 to 18 years after planting and of high quality sawlogs 25 years after planting. For most temperate softwood
forests in the Northern Hemisphere this range is 18 to 45 years for pulplogs and 50 to 150 years for high quality sawn timber. Consequently, the Chilean forestry industry is a relatively low cost producer, since a Chilean producer generally requires
less time and a smaller area to produce the same volume of pine as its North American or European competitors, who face lower forest growth rates and higher transportation and investment costs as a result of the larger tracts of forests necessary to
produce equivalent yields of softwood. Accordingly, since the mid-1970s, we have focused our forest management toward the application of advanced genetic and silviculture techniques to increase productivity and the quality of our plantations.



16



---

##### Table of Contents

Eucalyptus, which we started planting in 1989, grows well in the forest regions of Chile. Once planted,
eucalyptus trees require no further forest management (other than fire control and reduction of weeds) until harvest. The average harvest cycle of eucalyptus plantations is approximately 12 years. Once cut, eucalyptus regrows and it is only after
two additional harvest rotations of approximately 12 years each that it becomes necessary to replant.

We have adopted environmentally
sensitive policies towards our holdings of native forests. In selected areas, we thin native forests in compliance with applicable laws and regulations, but we do not permit clear cutting of native forests in areas surrounding rivers and streams,
areas of notable environmental interest or areas with particularly fragile soil conditions. See Government Regulation.

Our forestry activities have obtained ISO 14001 certification through 2007 from the International Standards Organization, or ISO. Additionally, during 2003, we obtained certification in Chile from the National Standard for Sustainable
Forest Management (Estándar Nacional de Certificación Forestal Sustentable), or CERTFOR, and in 2004, CERTFOR performed its first audit of our operations and confirmed that we complied with CERTFOR requirements. In 2004, CERTFOR
obtained its membership in the Pan European Forest Certification, the forestry certification that covers the largest segment of the world forestry market. We also have obtained ISO 14001 certification for our forestry activities in Argentina. In
November 2005, we obtained OHSAS certification for our forestry activities in Argentina.

Forest Plantations

At December 31, 2006, our planted forests consisted of 84.7% radiata and taeda pine, and the balance primarily consisted of eucalyptus. Radiata and
taeda pine have a rapid growth rate and a short harvest cycle compared to other commercial softwoods. Radiata and taeda pine are sufficiently versatile for both the production of forestry and wood products and the production of long fiber pulp for
sale to manufacturers of paper and packaging.

We seek to manage our forestry resources in a way that ensures that the annual growth of our
forest is equal to or greater than the volume of resources harvested each year. In 2006, we planted 41,718 hectares and harvested 32,988 hectares in Chile, Argentina, Brazil and Uruguay. We believe that we will reach a long-term
sustainable equilibrium in the latter part of this decade, with annual harvests and plantations of approximately 40,000 hectares.

The
majority of our radiata pine is less than 16 years old. Our planted radiata pine forests are located in central and southern Chile, and most are located in close proximity to our major production facilities and to port facilities.

At December 31, 2006, our aggregate radiata pine holdings comprised approximately 40.0% of all Chilean radiata pine plantations, making us the
countrys largest radiata pine plantation owner according to the Chilean Forestry Institute.

At December 31, 2006, we
owned 246,007 hectares of forest and other land in Argentina, 65,733 hectares of forest and other land in Brazil and 38,037 hectares of forest and other land in Uruguay. Approximately 159,039 hectares of this land is planted with
taeda pine and elliotti pine, a species of softwood that has a growth rate similar to that of radiata pine. The balance includes plantations of other species of trees, land to be planted, protected areas and natural forests.

The following table sets forth the number of hectares and types of uses of our land holdings and rights, as of December 31, 2006.



17



---

##### Table of Contents

|                            |  |                      |  |              |  
|--------------------------- |  | -------------------- |  | ------------ | -
|                            |  | At December 31, 2006 | 
|                            |  | Total                |  | Distribution |  
|                            |  | (in hectares)        |  | (percentage) |  
|Pine plantations(1)         |  |                      |  |              |  
|0-5 years                   |  | 206,864              |  | 14.7         |  
|6-10 years                  |  | 193,311              |  | 13.7         |  
|11-15 years                 |  | 142,247              |  | 10.1         |  
|16-20 years                 |  | 125,041              |  | 8.9          |  
|21+ years                   |  | 81,785               |  | 5.8          |  
|                            |  |                      |  |              |  
|Subtotal(2)                 |  | 749,247              |  | 53.1         |  
|Eucalyptus plantations(3)   |  | 122,939              |  | 8.7          |  
|Plantation of other species |  | 12,109               |  | 0.9          |  
|Subtotal                    |  | 884,296              |  | 62.7         |  
|Land for plantations        |  | 44,353               |  | 3.1          |  
|Land for other uses(4)      |  | 481,620              |  | 34.2         |  
|                            |  |                      |  |              |  
|Total                       |  | 1,410,268            |  | 100.0        | %
|                            |  |                      |  |              |  

---

|(1) | All years are calculated from the date of planting.
|--- | ---------------------------------------------------

|(2) | These figures include 25,093 hectares as to which we have the right to harvest but which we do not own.
|--- | -------------------------------------------------------------------------------------------------------

|(3) | Approximately 83% of our eucalyptus plantations are less than 10 years old.
|--- | ---------------------------------------------------------------------------

|(4) | Includes roads, firebreaks, native forests and yards.
|--- | -----------------------------------------------------

Land Acquisition and Afforestation

Our total
land assets have increased from fewer than 170,000 hectares in 1980 to 1,410,268 hectares at December 31, 2006. That number includes 25,093 hectares owned by third parties (but not including the assets owned by the Bío
Bío Investment Fund) as to which we have harvesting rights. Although we have acquired afforested land, the bulk of the increase in our forest plantations has been through the acquisition of bare land that is, subsequently, planted with trees.
In the five years ending December 31, 2006, we purchased 55,505 hectares of bare land for plantations and other uses and 78,826 hectares of forested land in Chile. We have also significantly increased our land assets in Argentina,
Uruguay and Brazil.

We expect to acquire additional land in Chile, Argentina, Uruguay and Brazil if we are presented with the opportunity
to do so at a desired price or location. There can be no assurance that we would be able to acquire land at the desired price or location.

We plan to continue our policy of supplementing our pulplog production with purchases from domestic third parties. We believe that this policy is efficient, given the significant quantities of pulpwood available from third parties and our
increasing proportion of sawlogs yielded from our plantations. We believe that the aggregate of our existing plantations, land currently held by us that we intend to afforest and the third-party purchases we make in the ordinary course of our
business will be sufficient to satisfy our anticipated future demand for sawlogs and pulplogs.

Chile

In December 2003, we acquired a controlling interest in Forestal Celsur S.A. by purchasing 83.05% of its shares, and we acquired an additional 16.95%
of the shares in January 2004. As a result of the purchase, we acquired 13,590 hectares of land.

In May 2004, our forestry affiliates
entered into an agreement with affiliates of Empresas CMPC S.A., or CMPC, to exchange forestry land held by the CMPC affiliates for land held by our forestry affiliates and made a cash payment to the CMPC affiliates. Pursuant to the agreement, our
forestry affiliates acquired approximately 26,000 hectares of forestry land from the CMPC affiliates and transferred approximately 9,000 hectares of forestry land.



18



---

##### Table of Contents

In December 2004, we acquired from Terranova S.A. 21,800 hectares of forestry land located in the Seventh
Region of Chile. Approximately 12,300 hectares of this land is planted with radiata pine.

On January 6, 2005, through Forestal
Valdivia S.A., we acquired 80% of Forestal Los Lagos S.A., which represented an investment of U.S.$21.4 million and included 9,234 hectares of land planted with eucalyptus in the Tenth Region of Chile.

On June 30, 2006, through our subsidiaries Aserraderos Arauco S.A., Forestal Celco S.A., Bosques Arauco S.A. and Forestal Valdivia S.A., we acquired
the forestry assets of Cementos Bío-Bío S.A. The acquisition represented an investment of approximately U.S.$133.3 million. The acquired assets consist of 21,000 hectares of pine plantations, one sawmill with an annual production
capacity of approximately 250,000 cubic meters per year and a remanufacturing facility.

In October 2006, we began exclusive
negotiations with Stora Enso Oyj for a joint ownership of certain forestry land and a sawmill in the State of Paraná, Brazil. The forest consists of 50,000 hectares of land, including 30,000 hectares of productive plantations and
the sawmill has a capacity of 150,000 cubic meters per year. We cannot provide any assurances that we will reach a definite agreement with Stora Enso.

On October 11, 2006, the Bío Bío Investment Fund, a Chilean fund in which a group of Chilean insurance companies and other private investors participate, acquired the assets of Forestal
Bío-Bío S.A. for U.S.$346 million, which include approximately 40,000 hectares of plantations. On that same date, Arauco entered into certain agreements with the Bío Bío Investment Fund pursuant to which Arauco became the
administrator and exclusive buyer of these forestry assets. Arauco will receive an annual fee for the administration of the forests. Araucos obligations under these agreements include the purchase of the funds forestry assets over a
seven-year term beginning in 2006 and the purchase of the funds supply of timber during the same period. Arauco will pay a total of U.S.$461.6 million for the purchase of the funds forestry assets and timber supply over such seven-year
term.

The Bío Bío Investment Fund was financed through financial debt amounting to U.S.$240 million and capital
contributions. Arauco has determined that Bío Bío Investment Fund is a variable interest entity of which Arauco is the primary beneficiary. As a result, commencing on October 11, 2006, Arauco consolidates the assets and
liabilities of the Bío Bío Investment Fund. The indebtedness of the Bío Bío Investment Fund is neither secured by Arauco nor is Arauco liable for such indebtedness. See Note 1(c) to our audited consolidated financial
statements.

On November 10, 2006, through its subsidiary Arauco Internacional S.A., Arauco acquired La Señora del Milagro
S.R.L., an Argentine forestry company, which owns approximately 4,000 hectares of land in Argentina, for U.S. $5.4 million.

In January
2007, through its subsidiary Bosques Arauco S.A., Arauco acquired 5,105 hectares of radiata pine plantation (excluding land) from Forestal Anchile Ltda. This acquisition represented an investment of approximately U.S.$43.6 million.

Argentina

In October 2005, through
our Brazilian subsidiary Arauco do Brasil Ltda., we acquired from Louis Dreyfus S.A.S. 100% of the stock of Ecoboard S.A.I.F. and Louis Dreyfus S.A.I.F. in Argentina and, indirectly as a result of that purchase, 100% of the stock of Caif S.A. and LD
Manufacturing S.A. and 60% of the stock of Flooring S.A.As a result of these acquisitions, we own an additional 8,000 hectares of plantations in Argentina.



19



---

##### Table of Contents

Brazil

In March 2005, we acquired from Louis Dreyfus S.A.S. 100% of the stock of LD Forest Products S.A. in Brazil and, indirectly as a result of that purchase, 100% of the stock of Placas do Paraná S.A. and 50%
of the stock of Dynea Brasil S.A. As a result of these acquisitions, we acquired 25,800 hectares of plantations in Brazil.

In August 2006,
through our subsidiary Arauco Forest Brasil S.A., we acquired from the Marchiori Group certain forestry land in Brazil. This investment of U.S.$39.6 million includes 14,715 hectares of land and plantations, mostly consisting of elliotti pine.
This acquisition is expected to increase our supply capacity for medium-density fiberboard (MDF) and particleboard (PBO) mills in Brazil.

Forest
Management

For our pine plantations, our forestry management activities seek to increase sawlogs through advanced genetic
techniques, planting and site preparation procedures, thinning and pruning. Managed forests can produce trees of larger diameter and, if pruned, a higher proportion of clear wood, which generally commands a higher price than knotted wood. Although
some land is not suitable for the production of pruned logs, at December 31, 2006, over 41.0% of our pine forests in Chile were actively managed for clear wood production.

For our eucalyptus plantations, our forestry management activities seek to increase the amount of fiber production per hectare through advanced genetic
techniques and planting and site preparation procedures. Eucalyptus is more expensive to plant than pine; however, after planting, eucalyptus requires minimal forest management, yields more fiber per hectare and has a shorter growth cycle and
greater wood density than pine, resulting in a greater amount of pulp production per hectare.

As of December 31, 2006, we had eight
nurseries in Chile, Argentina and Brazil, in which we grow seedlings using seeds and using cuttings from genetically selected trees. To achieve higher quality trees and an increased growth rate, we apply strict selection criteria to the trees from
which seedlings are produced. Then, we plant the seedlings manually. Depending upon the species of tree to be planted and the nutrient and physical characteristics of the soil, we may also undertake a certain amount of ground preparation before
planting.

Our other principal forest activities are thinning, pruning and harvesting.

Thinning, or culling inferior trees from the plantation, occurs in the following two stages:



| |  |  | Thinning to waste. Some thinned trees are chipped and used in pulp production. Thinning to waste occurs after four to six years and results in an average
reduction of the number of trees per hectare from 1,250 to approximately 700.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Commercial thinning. Thinned trees are used in pulp production or, depending on the quality of the particular land, as sawlogs. Commercial thinning occurs at
10 to 12 years and results in an average reduction of the number of trees per hectare from 700 to approximately 450.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

This high level of culling is economical for the following reasons:



| |  |  | the cost of planting is relatively low,
| | - |  | ---------------------------------------



| |  |  | the higher number of young trees provide each other with natural protection from the elements, and
| | - |  | --------------------------------------------------------------------------------------------------



| |  |  | the high degree of selection that thinning makes possible leaves only the highest quality trees to be harvested.
| | - |  | ----------------------------------------------------------------------------------------------------------------

Pruning involves removing branches, the source of knots, which are the main defect in sawn timber. Pruning results in a high-quality clearwood sawlog of
5.3 meters from each tree, and is conducted three times:



| |  |  | at the time of the first thinning,
| | - |  | ----------------------------------



20



---

##### Table of Contents

| |  |  | two years later, when trees are six to eight years old, and
| | - |  | -----------------------------------------------------------



| |  |  | one year later, when trees are seven to nine years old.
| | - |  | -------------------------------------------------------

Our eucalyptus plantations are neither thinned nor pruned.

Harvesting timber involves felling trees, removing branches from the
logs, cutting the logs into appropriate sections and loading the logs onto trucks for transport to sawmills, panel mills, pulp mills or ports for direct export. We use the lower section of the radiata pine, comprising the first seven to 12 meters,
in sawmills and plywood mills or it is exported as sawlogs. We use the mid-section of the radiata pine, comprising, on average, the next eight to 13 meters, in either sawmills or pulp mills, depending on the diameter and quality of the pine. We use
the top section of the tree for pulp and MDF production.

We keep apprised of product demand and our current inventory levels, and we match
harvests from sections of our plantations that will provide the optimal yield given our product requirements. This process involves the use of sophisticated operations research models and close communication between our different operating areas to
ensure that the correct amounts of timber of the required characteristics are supplied. We replant as soon as practicable after harvesting, with an average period between harvesting and replanting of one year.

The following table illustrates, on a hectare basis, the extent of our thinning, pruning and harvesting activities during the periods indicated.



|           |  |                         |  |        |  |       
|---------- |  | ----------------------- |  | ------ |  | ------
|           |  | Year ended December 31,
|           |  | 2004                    |  | 2005   |  | 2006  
|           |  | (in hectares)          
|Thinning   |  | 28,779                  |  | 23,219 |  | 22,773
|Pruning    |  | 38,453                  |  | 38,477 |  | 45,945
|Harvesting |  | 28,611                  |  | 30,971 |  | 32,988

We manage our forest activities, but we hire independent contractors to perform the bulk of our
operations, including planting, maintenance, thinning, pruning, harvesting, transportation and access road construction. As of December 31, 2006, we had arrangements with more than 430 independent contractors, which employed over 13,850
workers. Many of these contractors have long-standing relationships with us, but we award many contracts based on competitive bids. We believe that our arrangements with independent contractors provide greater flexibility and efficiency than
performing these activities directly.

Since areas of farmland and native forests geographically separate our forest holdings, our
plantations are naturally protected against the spread of certain diseases. In addition, our subsidiary Bioforest has developed techniques to protect our forests from pests and diseases. The most prevalent pest is the European pine shoot moth, which
may damage the tips of the radiata pine, resulting in deformations to the tree. We control this moth with biological methods. Specifically, we introduced the Orgilus Obscurator, a parasitic wasp that attacks only the European pine shoot moth. Other
methods we use to control pests include the mechanical removal of affected tips and the use of low toxicity chemical products. Other potential diseases and pests include a fungus called Dothistroma, a fungus that reduces a trees growth rate,
and the Sirex insect, which attacks decaying trees and results in a thinned forest.

We operate an extensive fire control organization that
interacts with the fire control organizations of other forestry companies to ensure that any fire damage to our forests is minimal. The operation primarily consists of a system of spotter towers, manned 24 hours a day during the summer months, from
which spotters report the direction of any fire observed to a central command post, where the fires exact location is determined and an appropriate ground and/or aerial response is formulated. Over the last five years, this system has limited
fire damage to our forests to an average of 0.21% of the plantations per year.



21



---

##### Table of Contents

Forest Production

We harvested 14.2 million cubic meters of logs during the year ended December 31, 2006, consisting of 9.1 million cubic meters of sawlogs, 4.2 million cubic meters of radiata pine pulplogs and
0.9 million cubic meters of eucalyptus pulplogs and other logs. We did not export any pulplogs during 2006 because substantially all of the pulplogs from our forests were used in our pulp mills. During 2006, our sawmills and panel mills used
7,844,399 cubic meters of sawlogs, and no sawlogs were exported. We also sold 1,473,817 cubic meters of sawlogs to unaffiliated domestic sawmills during 2006.

A log merchandising facility located at the same site as our Horcones I and Horcones II Sawmills optimizes, cuts and classifies wood destined for our plywood facility, sawmills or pulp mills, The Nueva Aldea Project
also includes a log merchandising facility, which was completed during the first phase of the project.

Pulp

We believe that we were Chiles largest producer of bleached and unbleached softwood market pulp in terms of production in 2006. For the year ended
December 31, 2006, pulp sales were U.S.$1,257.8 million, representing 44.1% of our total sales revenue for the period.

Pulp
obtained from wood fibers is used in the manufacture of printing and writing paper, hygienic and sanitary paper, board and packaging. Whether a specific kind of pulp is suitable for a particular end use depends not only on the type of wood but also
on the process used to transform the wood into pulp. Pulp made from softwoods, such as radiata pine, has long fibers and is used to provide durability and strength to paper products. Bleached pulp is used primarily for printing and writing papers
and for tissue. Unbleached pulp is used primarily for linerboard (a packaging material). Pulp made from hardwoods, such as eucalyptus, has short fibers and is used in combination with long fiber in manufacturing paper products.

We use a chemical process, known as the kraft process, in our pulp mills in Chile and Argentina. The raw wood is in the form of pulplogs and chips, which
are combined in the production process to produce pulp. The pulplogs are first debarked and chipped. The chips are then screened, mixed and cooked with chemicals to separate the bulk of the lignin from the wood fibers. After the material is screened
and washed, it is then passed to high-density tanks. For bleached pulp, the next step is a five-stage bleaching process using chemicals, primarily chlorine dioxide. At all of our pulp mills, the bleaching process is preceded by an oxygen
delignification stage. Then, the fibers are subjected to a final stage where the sheets are formed and subsequently dried and baled for transport to customers. The lignin and bark produced during this process is used to fuel the boilers that produce
steam, providing heat and generating electricity for the mill. Our bleached pulp is bleached to a 90+ brightness level, as measured by the ISO test procedure, which is one of the industrys measurement methods.

Pulp Mills

At December 31, 2006, we owned and
operated five pulp mills in Chile and one in Argentina, with an aggregate installed annual production capacity of approximately 3,041,000 metric tons. Our six pulp mills produced 1,840,453 metric tons of bleached pulp and
338,228 metric tons of unbleached pulp in 2006.

All of our pulp mills in Chile except for the Nueva Aldea Mill are ISO
9001:2000 and ISO14001:2004 certified. The Alto Paraná Mill in Argentina is certified under ISO 9001:2000 and we expect it will be certified under ISO14001:2004 by 2007. No seasonal factors affect plant utilization, and the pulp mills
generally run at full capacity throughout the year, with eight to ten days of maintenance scheduled every 12 months.



22



---

##### Table of Contents

The following table sets out bleached and unbleached kraft pulp production by plant for each of the years
indicated.



|                               |  |                               |  |       |  |       |  |       |  |      
|------------------------------ |  | ----------------------------- |  | ----- |  | ----- |  | ----- |  | -----
|                               |  | Year ended December 31,      
|                               |  | 2002                          |  | 2003  |  | 2004  |  | 2005  |  | 2006 
|                               |  | (in thousands of metric tons)
|Chile                          |  |                               |  |       |  |       |  |       |  |      
|Arauco Mill (bleached)         |  |                               |  |       |  |       |  |       |  |      
|Arauco I                       |  | 258                           |  | 252   |  | 260   |  | 263   |  | 295  
|Arauco II                      |  | 498                           |  | 494   |  | 508   |  | 494   |  | 494  
|Valdivia Mill (bleached)(1)    |  |                              |  |      |  | 430   |  | 351   |  | 440  
|Constitución Mill (unbleached) |  | 354                           |  | 357   |  | 355   |  | 353   |  | 338  
|Nueva Aldea Mill (bleached)    |  |                              |  |      |  |      |  |      |  | 123  
|Licancel Mill (bleached)       |  | 113                           |  | 134   |  | 141   |  | 145   |  | 141  
|                               |  |                               |  |       |  |       |  |       |  |      
|Subtotal                       |  | 1,223                         |  | 1,237 |  | 1,694 |  | 1,606 |  | 1,831
|                               |  |                               |  |       |  |       |  |       |  |      
|Argentina                      |  |                               |  |       |  |       |  |       |  |      
|Alto Paraná (bleached)         |  | 323                           |  | 345   |  | 349   |  | 331   |  | 348  
|Total                          |  | 1,546                         |  | 1,582 |  | 2,043 |  | 1,937 |  | 2,179
|                               |  |                               |  |       |  |       |  |       |  |      

---

|(1) | Operations at the Valdivia Mill commenced in February 2004, were temporarily suspended for approximately
one month during January and February of 2005 and for approximately two months during June, July, and August of 2005.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Chile

Arauco I.Arauco I, which was completed in 1972, is located at the Arauco Mill in the heart of a group of our
radiata pine plantations in the Eighth Region of Chile. Arauco I produces elementary chlorine-free pulp, which does not use chlorine gas. Elementary chlorine-free pulp is also produced by a significant portion of our competitors in each of the
worlds major pulp producing regions. The installed annual production capacity of Arauco I is approximately 290,000 metric tons of eucalyptus and pine bleached kraft pulp.

Arauco II.Also located at the Arauco Mill, Arauco II was completed in 1991. Arauco IIs pulping process is fundamentally the same as that of
Arauco I, but it includes technological improvements in its production process and environmental design. Arauco II is also equipped to produce elementary chlorine-free pulp. The installed annual production capacity of Arauco II is approximately
500,000 metric tons of pine bleached kraft pulp.

Constitución Mill.The Constitución Mill is located in the
heart of a group of our radiata pine forests in the Seventh Region of Chile. As of December 31, 2006, the Constitución Mill is the largest unbleached softwood market pulp mill in the world, with an installed annual production capacity of
approximately 355,000 metric tons. In February 2006, the COREMA of the Seventh Region of Chile approved an environmental impact study for the construction of a new pipeline for the Constitución Mill, which commenced operations in March 2007.

Licancel Mill.We acquired the Licancel Mill in September 1999. It is located in Licantén, which is 250 kilometers south of
Santiago. The mill has an installed annual production capacity of approximately 140,000 metric tons of eucalyptus kraft pulp and pine bleached kraft pulp. The Licancel Mill is equipped to produce elementary chlorine-free pulp.

Since June 2007, our operations at the Licancel Mill, a pulp mill located in the Seventh Region of Chile, have been subject to environmental scrutiny by
Chilean environmental regulators and the public. On June 5, 2007, in connection with the death of fish in the Mataquito River, approximately 15 kilometers downstream of the mill, we decided to voluntarily suspend our operations in the Licancel
Mill as a preventive measure. In addition, Chilean authorities, including the health authorities and the Superintendencia de Servicios Sanitarios (Sanitary Services Superintendency), required that we suspend activities at the Licancel Mill
and that we suspend any further discharges into the river. We also commenced independent investigations relating to the cause of the death of the fish. On June 18, 2007, as a result of a pipe leakage in the water treatment system currently in
place at the Licancel Mill, an estimated 50 cubic meters of effluents reached the Mataquito River. On that same date, we decided to close the mill indefinitely and informed the Sanitary Services Superintendency of the incident.



23



---

##### Table of Contents

We have resolved not to resume operations at the Licancel Mill until we have replaced the current
environmental treatment system with a new system that incorporates a new effluent treatment system approved by the environmental authorities. Several administrative and judicial proceedings have been commenced regarding the events at the Licancel
Mill, including the death of fish at the Mataquito River. Our ability to resume operations at the Licancel Mill may also depend upon our ability to comply with any requirements that may be imposed by any applicable governmental authority. We
estimate that the suspension of operations at the Licancel Mill will result in a loss of profits of approximately U.S.$4 million per month, and that these losses will continue for so long as the mill remains closed. Furthermore, we cannot predict
any monetary or other sanctions that may be imposed on us as a result of any ongoing or future environmental, administrative or judicial proceeding. Consequently, the suspension of operations at the Licancel Mill may adversely affect our business,
financial condition and results of operations. We cannot assure you that the Licancel Mill will be reopened or that the Licancel Mill, if reopened, would be able to operate without interruptions or changes in its operations. Item 8. Financial
InformationLegal Proceedings.

Valdivia Mill.We completed construction of the Valdivia Mill during the first quarter of
2004 and commenced operations in February 2004. The Valdivia Mill is located in the province of Valdivia, Tenth Region of Chile (which shall become part of the newly-created Fourteenth Region of Chile), an area with significant radiata pine and
eucalyptus plantations. The Valdivia Mill has an installed potential annual production capacity of approximately 550,000 metric tons of bleached pulp, consisting of softwood pulp and eucalyptus pulp.

The Valdivia Mill has been subject to legal and administrative proceedings by the Chilean environmental regulators. Primarily, it has been alleged that
the Valdivia Mills operations impacted the nearby Carlos Anwandter Nature Sanctuary and contributed to the migration and death of black-neck swans in an area downstream from the mill on the Cruces River. In connection with an environmental
administrative proceeding, environmental regulators required us to temporarily suspend operations at the Valdivia Mill for approximately one month in January 2005. We resumed operations at the mill on February 18, 2005. On June 8, 2005, we
voluntarily suspended operations at the Valdivia Mill which we estimate resulted in a loss of sales of approximately U.S.$1.0 million per day and a loss of profits of approximately U.S.$250,000 per day. Pursuant to the decision of our board of
directors based on certain clarifications provided by the COREMA of the Tenth Region of Chile, the mill resumed operations on August 12, 2005 at a reduced annual production of 440,000 metric tons or 80% of its authorized production capacity,
after 64 days of suspended operations. In order to achieve the full production capacity authorized by applicable permits (equal to 550,000 metric tons of wood pulp per year), the pulp mill would have to comply with certain new requirements
established by the COREMA of the Tenth Region of Chile including modifications to the effluents parameters (including, among others, aluminum, sulfate, nitrogen and chlorate). In March 2006, Knight Piesold, an independent environmental
auditing firm appointed by the COREMA of the Tenth Region of Chile, officially determined that the Valdivia Mill had complied with the applicable requirements. As a result, we are currently requesting permission from the environmental authorities to
resume full production capacity (500,000 metric tons of wood pulp per year). See Item 3. Key InformationRisk FactorsRisks Relating to Arauco and the Forestry IndustryEnvironmental concerns led us to
temporarily suspend our operations at the Valdivia Mill, which adversely affected, and in the future may continue to adversely affect, our business, financial condition and results of operations, Item 4. Information on the
CompanyGovernment RegulationEnvironment and Item 8. Financial InformationLegal Proceedings.

In
connection with our decision to suspend operations at the Valdivia Mill, our President and Chief Executive Officer resigned from his positions. For more information about our executive officers, see Item 6. Directors, Senior Management and
EmployeesDirectors and Executive Officers.

The National Defense Council has instituted a reparation action for environmental
damage seeking reparations, damages and indemnification from us for environmental harm allegedly caused by the Valdivia Mill. In addition, since the end of 2004, various criminal proceedings relating to alleged violations of several environmental
laws have been instituted in Chile in which some of our mills may be involved. SeeItem 3. Key InformationRisk FactorsRisks Relating to Arauco and the Forestry IndustryWe are subject to legal proceedings related to our
mills, which could adversely affect our business, financial condition and results of operations.



24



---

##### Table of Contents

In 2005, the COREMA instructed us to present by March 31, 2006, an environmental impact study for
the construction of a pipeline to discharge the Mills wastewater in a body of water other than the Cruces River or the Carlos Anwandter Nature Sanctuary or their sources. The COREMA also instructed us to construct and put into operation the
pipeline no later than 15 months from the date COREMA approves the environmental impact study in final form. COREMA initially extended the deadline for the presentation of this environmental impact study to April 2007 and recently extended it again
to March 31, 2009. When it approved the new deadline, COREMA required us to present an additional environmental impact study for the implementation of substantial technological improvements on the quality of the effluents generated by the
Valdivia Mill. We submitted this study on June 13, 2007.

Most recently, the COREMA of the Tenth Region of Chile has appointed a
Canadian consulting company, Ecometrix, to analyze and prepare a report on different feasible alternatives for discharge of the Valdivia Mill effluents. Approval by the COREMA of Araucos environmental impact study regarding a pipeline, the
construction and operation of such a pipeline and also the approval of the environmental impact study regarding the improvement of the quality of the effluents are each subject to many environmental, regulatory, engineering and political
uncertainties at this time. As a result, we cannot give you any assurance that such projects will ever be approved or completed. If either our environmental study or the installation of the pipeline is delayed for reasons that COREMA attributes to
us, we may face sanctions that include warnings, fines or the revocation of the Valdivia Mills environmental permit of operation. Alternatively, if COREMA considers that such delays are beyond our control, we believe that COREMA should extend
the applicable deadlines. However, we can offer no assurances that any deadline extension will be granted, even if we comply with all the requirements set forth by COREMA.

As a result, we offer no assurance that the Valdivia Mill will be able to operate without further interruption or that it will resume operations at full
capacity, notwithstanding our compliance with the new requirements imposed by COREMA. Any future suspension of operations at the Valdivia Mill or at any other of our significant operating plants would likely have a material adverse effect on our
business, financial condition and results of operations.

Nueva Aldea Mill. During 2004, we commenced construction of the second
phase of the Nueva Aldea Project, which includes the development of a new pulp mill with authorized annual production capacity of 856,000 tons of bleached pulp, consisting of softwood pulp and eucalyptus pulp. In August 2006, we commenced the
start-up process of the Nueva Aldea Pulp Mill, and production capacity reached designed capacity in May 2007. The second phase of the Nueva Aldea Project has been subject to significant environmental challenges, and construction of the pulp mill was
temporarily suspended between January 12 and March 10, 2005. See Item 3. Key InformationRisk FactorsRisks Relating to ChileThe application of Chilean environmental regulations could adversely affect our
ability to accomplish our development goals and adversely affect our results of operations, Item 4. Information on the CompanyGovernment RegulationEnvironment and Item 8. Financial InformationLegal
Proceedings.

On February 20, 2006, the COREMA of the Eighth Region of Chile approved the environmental impact study for the
construction and operation of the Nueva Aldea Mill Pipeline, which will permit the mill to discharge certain liquid effluents into the ocean. We anticipate the Nueva Aldea Mill Pipeline will commence operations during 2008, subject the satisfaction
of certain conditions, including the receipt of certain public approvals.

Argentina

Alto Paraná Mill.Alto Paranás softwood pulp mill is located in the Province of Misiones, a region whose soil and climate are
favorable for the rapid growth of pine trees. The Alto Paraná Mill is the only bleached softwood kraft market pulp facility in Argentina. The mill has installed annual production capacity of approximately 350,000 tons of pulp, which includes
approximately 250,000 tons of bleached softwood pulp, currently representing almost all of the total bleached softwood pulp production capacity in Argentina, and approximately 100,000 tons of fluff pulp.



25



---

##### Table of Contents

Production Costs

Based on information published by Resource Information Systems, Inc., our cash costs for softwood pulp production are significantly lower than the average costs of market pulp producers in Canada, the United States
and Scandinavia, particularly with respect to timber and labor costs. While our modern facilities result in depreciation exceeding some of such Northern Hemisphere producers, our costs are still significantly lower than the average costs of our
Northern Hemisphere competitors, on a total delivered cost basis. The following table compares our costs for the production of bleached softwood kraft market pulp to the average costs of market pulp producers in selected regions in the Northern
Hemisphere for the year ended December 31, 2006.



|                     |  |                                                                |  |                      |  |                         |  |                   |  |        |  |        
|-------------------- |  | -------------------------------------------------------------- |  | -------------------- |  | ----------------------- |  | ----------------- |  | ------ |  | -------
|                     |  | Bleached Softwood Kraft Pulp Producers Cost                  
|                     |  | Arauco                                                         |  | BritishColumbiaCoast |  | BritishColumbiaInterior |  | UnitedStatesSouth |  | Sweden |  | Finland
|                     |  | (in U.S.$ per metric ton for the year ended December 31, 2006)
|Wood                 |  | 124                                                            |  | 178                  |  | 116                     |  | 156               |  | 194    |  | 269    
|Total chemicals      |  | 33                                                             |  | 63                   |  | 68                      |  | 70                |  | 53     |  | 52     
|Labor                |  | 41                                                             |  | 76                   |  | 70                      |  | 42                |  | 40     |  | 45     
|Others(1)            |  | 32                                                             |  | 196                  |  | 177                     |  | 139               |  | 79     |  | 59     
|                     |  |                                                                |  |                      |  |                         |  |                   |  |        |  |        
|Total cash cost      |  | 231                                                            |  | 513                  |  | 431                     |  | 407               |  | 366    |  | 425    
|Depreciation         |  | 64                                                             |  | 53                   |  | 31                      |  | 62                |  | 59     |  | 76     
|                     |  |                                                                |  |                      |  |                         |  |                   |  |        |  |        
|Total mill cost      |  | 295                                                            |  | 566                  |  | 462                     |  | 469               |  | 425    |  | 501    
|Transportation(2)    |  | 67                                                             |  | 69                   |  | 104                     |  | 66                |  | 32     |  | 37     
|                     |  |                                                                |  |                      |  |                         |  |                   |  |        |  |        
|Total delivered cost |  | 362                                                            |  | 635                  |  | 566                     |  | 535               |  | 457    |  | 538    
|                     |  |                                                                |  |                      |  |                         |  |                   |  |        |  |        

---

|(1) | Includes energy, materials and other production costs.
|--- | ------------------------------------------------------

|(2) | Delivered in Northern Europe.
|--- | -----------------------------

Source: Resource Information Systems, Inc. World Pulp Annual Historical Data, December 2006, except Arauco information, which is furnished by Arauco.

Sales

The world market for bleached kraft
market pulp during the year ended December 31, 2006 was approximately 41.1 million metric tons. Based on information published by Resource Information Systems, Inc., we believe that our production represented 4.5% of this market in 2006.
During the year ended December 31, 2006, we sold approximately 91.7% of our bleached pulp abroad, principally to customers in Asia and Western Europe. The domestic market in Chile is dominated by a single integrated pulp and paper manufacturer,
so the Chilean market for bleached market pulp is relatively small.

Integrated manufacturers dominate the world production of unbleached
softwood pulp, which leaves non-integrated companies that sell market pulp, like us, with only a small percentage of total production. Market pulp is pulp sold to manufacturers of paper products, as opposed to pulp produced by an
integrated paper producer for use in its paper production facilities. With a total world production of unbleached softwood kraft market pulp of 3.0 million metric tons for 2006, according to Resource Information Systems, Inc., our
Constitución Mill was the worlds largest single producer of unbleached softwood market pulp, with 11.4% of the total market in 2006. During the year ended December 31, 2006, approximately 99.0% of our total unbleached market pulp
sales consisted of export sales. While for the last five years Asia has been our principal export market for unbleached market pulp, we continually seek niche markets for our products in Western Europe and the United States. Historically, our sales
in the Chilean market have been less than 5% of our total unbleached pulp sales revenue.

The following table sets forth, by region, the
sales volumes of bleached and unbleached pulp for the years indicated.



26



---

##### Table of Contents

|                        |  |                         |  |           |  |          
|----------------------- |  | ----------------------- |  | --------- |  | ---------
|                        |  | Year ended December 31,
|                        |  | 2004                    |  | 2005      |  | 2006     
|                        |  | (in metric tons)       
|Bleached Pulp           |  |                         |  |           |  |          
|North and South America |  | 272,679                 |  | 276,496   |  | 357,592  
|Europe                  |  | 540,454                 |  | 538,306   |  | 592,842  
|Asia                    |  | 825,829                 |  | 793,631   |  | 854,125  
|Other                   |  | 553                     |  | 30,872    |  | 44,801   
|                        |  |                         |  |           |  |          
|Total                   |  | 1,639,515               |  | 1,639,305 |  | 1,849,360
|                        |  |                         |  |           |  |          
|Unbleached Pulp         |  |                         |  |           |  |          
|North and South America |  | 34,593                  |  | 50,963    |  | 58,838   
|Europe                  |  | 19,115                  |  | 19,928    |  | 21,420   
|Asia                    |  | 308,039                 |  | 284,455   |  | 275,405  
|Other                   |  |                        |  |          |  |          
|                        |  |                         |  |           |  |          
|Total                   |  | 361,747                 |  | 355,346   |  | 355,664  
|                        |  |                         |  |           |  |          

While there are many grades and varieties, pulp is a commodity that is marketed primarily on the
basis of price and service. In marketing our pulp, we seek to establish long-term relationships with non-integrated end users of pulp by providing a competitively priced, high-quality, consistent product and excellent service. The consistency of our
pulp derives from our state-of-the-art mills and our use of a single species of tree, in contrast to pulp producers in some of the worlds major softwood pulp producing regions that mix different species, depending on availability and
seasonality. Our bleached pulp is marketed under the brand names Arauco and Alto Paraná, and our unbleached pulp is marketed under the brand name Celco.

Prices for bleached softwood kraft market pulp produced from radiata pine generally fluctuate depending on prevailing world prices, which historically
have been cyclical. The fluctuations generally depend on worldwide demand, world production capacity, business strategies adopted by major forestry, pulp and paper producers and the availability of substitutes. See Item 5. Operating and
Financial Review and ProspectsManagements Discussion and Analysis of Financial Conditions and Results of OperationsOverview and Prices.

The following table sets forth our average bleached and unbleached pine pulp prices per metric ton at the indicated dates, for the years indicated.



|                |  |                        |  |      |  |     
|--------------- |  | ---------------------- |  | ---- |  | ----
|                |  | 2004                   |  | 2005 |  | 2006
|                |  | (U.S.$ per metric ton)
|Bleached Pulp   |  |                        |  |      |  |     
|March 31        |  | 528                    |  | 540  |  | 532 
|June 30         |  | 583                    |  | 490  |  | 573 
|September 30    |  | 495                    |  | 495  |  | 620 
|December 31     |  | 486                    |  | 497  |  | 631 
|                |  |                        | 
|Unbleached Pulp |  |                        |  |      |  |     
|March 31        |  | 446                    |  | 470  |  | 484 
|June 30         |  | 451                    |  | 456  |  | 505 
|September 30    |  | 417                    |  | 462  |  | 559 
|December 31     |  | 421                    |  | 456  |  | 587 

In accordance with customary pulp market practice, we do not have long-term sales contracts with
our customers; rather we maintain long-standing relationships with our customers pursuant to which we periodically reach agreements on specific volumes and prices. We have a diversified customer base located throughout the world and totaling, as of
December 31, 2006, more than 320 clients. As of December 31, 2006, we employ more than 10 sales agents to represent us in more than 50 countries. We manage this worldwide sales network from our headquarters in Chile.



27



---

##### Table of Contents

Wood Products

Our wood products consist of sawmill and remanufactured wood products. For the year ended December 31, 2006, revenue from sales of wood products was U.S.$726.2 million, representing 25.5% of our total sales revenue for the year.

The following table sets forth, by category, our wood products sales to unaffiliated third parties for each of the periods indicated.:



|                             |  |                                |  |       |  |       |  |       |  |      
|---------------------------- |  | ------------------------------ |  | ----- |  | ----- |  | ----- |  | -----
|                             |  | Year ended December 31,       
|                             |  | 2002                           |  | 2003  |  | 2004  |  | 2005  |  | 2006 
|                             |  | (in thousands of cubic meters)
|Sawn timber                  |  | 1,563                          |  | 1,665 |  | 1,968 |  | 2,425 |  | 2,512
|Remanufactured wood products |  | 248                            |  | 299   |  | 344   |  | 360   |  | 430  

Sawmills

Our sawmill products are sawn timber (green, kiln-dried lumber and flitches) and remanufactured wood products. For the year ended December 31, 2006, revenue from sales of sawmill products was
U.S.$726.2 million, representing 25.5% of our total sales revenues for the period.

As of December 31, 2006, we own 15 sawmills,
13 in Chile and two in Argentina, with aggregate installed annual processing capacity of approximately 7,030,000 cubic meters of sawlogs and an aggregate installed annual production capacity of approximately 3,750,000 cubic meters of
lumber. Contractors that are not related to us or to each other operate our 13 sawmills in Chile. We operate our sawmills in coordination with our forestry and sales operations, since our sawn timber is generally produced in accordance with customer
specifications. All of the sawmills are located near our pine plantations.

As of December 31, 2006, we also own six remanufacturing
facilities, five in Chile and one in Argentina, that reprocess sawn timber into remanufactured wood products, such as moldings, jams and pre-cut pieces that end users require for doors, furniture and door and window frames. These facilities produced
424.3 thousand cubic meters of remanufactured wood products in 2006.

Aserraderos Arauco S.A. was established in 1993 to centralize
management and control production in our sawmill and remanufacturing operations. Our sawmills and remanufacturing facilities in Chile are currently operated by independent contractors that are paid sawing service fees calculated on a fixed and
variable basis depending on productivity, with price renegotiations in the event of material changes in costs or productivity. Each of our 19 independent contractors operates exclusively for us and only with respect to one sawmill or remanufacturing
facility. We believe that our arrangements with independent contractors provide us with greater flexibility and efficiency than performing such activities on our own. We operate our sawmills and remanufacturing facilities in Argentina.

The following is a brief description of our sawmills and remanufacturing facilities and their production capacity, as of December 31, 2006.
Processing capacity measures a facilitys input, while production capacity measures its output. Typically, a facilitys production capacity is 45% to 50% less than its processing capacity.

Chile

Araucana Sawmill.This
sawmill processes logs to produce sawn timber, including high-grade sawn timber for remanufacturing and flitches. It has installed annual production capacity of approximately 140,000 cubic meters of lumber.

Cholguán Sawmill. This sawmill was acquired in March 2000 and has installed annual production capacity of approximately 350,000 cubic
meters of lumber, as well as drying kiln facilities and two remanufacturing



28



---

##### Table of Contents

facilities with installed annual production capacity of approximately 70,000 cubic meters of remanufactured wood products. The Cholguán sawmill also
has a special facility for making laminating beams with installed annual production capacity of approximately 11,200 cubic meters and drying facilities with installed annual production capacity of approximately 260,000 cubic meters.

Coelemu Sawmill.This sawmill has installed annual production capacity of approximately 80,000 cubic meters of lumber. Much of the mills
production is sold into the Japanese market for thin and narrow sawn timber.

Colorado Sawmill. This sawmill has installed annual
production capacity of approximately 370,000 cubic meters of lumber and produces green sawn timber (or sawn timber that is not kiln dried) for the Chilean, Japanese and Middle Eastern markets. It also has drying facilities with installed
annual production capacity of approximately 190,000 cubic meters.

El Coronel Sawmill. This sawmill was acquired from Forestal
Bío-Bío S.A. in October 2006. It has installed annual production capacity of approximately 150,000 cubic meters of sawn timber. It is also equipped with drying kilns with installed annual production capacity of approximately 150,000
cubic meters.

El Cruce Sawmill.This sawmill has installed annual production capacity of approximately 110,000 cubic meters of
lumber.

Horcones I Sawmill.This sawmill has installed annual production capacity of approximately 360,000 cubic meters of
lumber. It also has drying kilns with installed annual production capacity of approximately 420,000 cubic meters and a remanufacturing facility with installed annual production capacity of approximately 136,000 cubic meters of remanufactured wood
products.

Horcones II Sawmill.This sawmill has installed annual production capacity of approximately 260,000 cubic meters of
lumber, as well as drying kiln facilities with installed annual production capacity of approximately 200,000 cubic meters.

Lomas
Coloradas Sawmill. This sawmill was acquired from Cementos Bío-Bío S.A. in June 2006. This sawmill has installed annual production capacity of approximately 260,000 cubic meters of sawn timber. It is also equipped with drying kilns
with installed annual production capacity of approximately 72,000 cubic meters and a remanufacturing facility with installed annual production capacity of approximately 40,000 cubic meters of remanufactured wood products.

Mutrún Sawmill.This sawmill has installed annual production capacity of approximately 130,000 cubic meters of lumber. It is also equipped
with drying kilns with installed annual production capacity of approximately 95,000 cubic meters.

Nueva Aldea Sawmill. This sawmill
has installed annual production capacity of approximately 450,000 cubic meters of sawn timber. It is also equipped with drying kilns with installed annual production capacity of approximately 365,000 cubic meters.

Valdivia Sawmill.This sawmill has installed annual production capacity of approximately 360,000 cubic meters of lumber. It also has drying
facilities with installed annual production capacity of approximately 295,000 cubic meters of remanufactured wood products and a remanufacturing facility with installed annual production capacity of approximately 72,000 cubic meters of
remanufactured wood products.

Viñales Sawmill.This sawmill has installed annual production capacity of approximately
260,000 cubic meters of lumber. It is also equipped with drying kilns with installed annual production capacity of approximately 210,000 cubic meters and a remanufacturing facility with installed annual production capacity of approximately 120,000
cubic meters of remanufactured wood products.



29



---

##### Table of Contents

Argentina

Bosetti Sawmill. Alto Paraná S.A. acquired this sawmill in 2004 as part of its purchase of the forestry assets of Pecom Energía S.A. in Argentina. This mill has installed annual production
capacity of approximately 150,000 cubic meters of lumber. It also has drying facilities with installed annual production capacity of approximately 180,000 cubic meters of remanufactured wood products.

Piray Sawmill. This sawmill, previously known as the Misiones Sawmill, was completed in 2000. It has installed annual production capacity of
approximately 320,000 cubic meters of lumber. It is also equipped with drying kilns with installed annual production capacity of approximately 320,000 cubic meters and a remanufacturing facility with installed annual production capacity of
approximately 65,000 cubic meters of remanufactured wood products.

Plywood and Fiberboard Panels

Our panel products are plywood and fiber panels. At December 31, 2006, we owned two plywood mills, one HB mill and two MDF mills in Chile, one MDF
mill and one PBO mill in Argentina, and one MDF mill and one PBO mill in Brazil. For the year ended December 31, 2006, sales of panels were U.S.$720.9 million, representing 25.3% of our total sales revenues.

The following table sets forth, by category, our plywood and fiberboard panel sales to unaffiliated third parties for each of the years indicated.



|                                    |  |                                |  |       |  |       |  |       |  |      
|----------------------------------- |  | ------------------------------ |  | ----- |  | ----- |  | ----- |  | -----
|                                    |  | Year ended December 31,       
|                                    |  | 2002                           |  | 2003  |  | 2004  |  | 2005  |  | 2006 
|                                    |  | (in thousands of cubic meters)
|Total plywood and fiberboard panels |  | 643                            |  | 1,059 |  | 1,107 |  | 2,046 |  | 2,397

The total annual production capacity of these nine mills is approximately 2,320,000 cubic meters
of plywood and fiberboard panels, placing us among the principal wood panel companies in Latin America. The total installed annual production capacity of our two plywood mills is approximately 580,000 cubic meters of plywood. During 2006, they
produced an aggregate of 574,867 cubic meters of plywood. Our HB mill has installed annual production capacity of approximately 60,000 cubic meters per year, and produced 60,197 cubic meters of panels in 2006. Our MDF mills have an
installed annual production capacity of approximately 1,120,000 cubic meters, and in 2006 they produced an aggregate of 1,105,338 cubic meters of panels. Our PBO mills in Brazil and Argentina (acquired in March 2005 and October 2005,
respectively) have an installed annual production capacity of approximately 560,000 cubic meters, and produced an aggregate of 504,069 cubic meters of panels in 2006.

On March 9, 2005, we acquired from Louis Dreyfus S.A.S. 100% of the stock of LD Forest Products S.A. in Brazil and, indirectly as a result of that
purchase, 100% of the stock of Placas do Paraná S.A. and 50% of the stock of Dynea Brasil S.A. We paid an aggregate purchase price for these acquisitions of approximately U.S.$168.0 million. With these acquisitions, we acquired an MDF mill
with installed annual production capacity of approximately 250,000 cubic meters, a particleboard mill with installed annual production capacity of approximately 320,000 cubic meters, an impregnated paper mill and a formaldehyde and resin plant.

On October 31, 2005, we acquired from Louis Dreyfus S.A.S. 100% of the stock of Ecoboard S.A.I.F. and Louis Dreyfus S.A.I.F. in
Argentina and, indirectly as a result of that purchase, 100% of the stock of CAIF S.A. and LD Manufacturing S.A. and 60% of the stock of Flooring S.A. As a result of these acquisitions, we own a particleboard mill with installed annual production
capacity of approximately 230,000 cubic meters, a chemical plant that produces resins used for the production of wood panels, and an MDF and particleboard-based wood floor mill with installed annual production capacity of approximately two million
square meters. We paid an aggregate purchase price of approximately U.S.$55.0 million for this acquisition.



30



---

##### Table of Contents

Exports, which include sales to countries other than Chile, Argentina and Brazil, accounted for 54.3% of
our total sales revenues of plywood and fiberboard panels for the year ended December 31, 2006. We sell plywood and fiberboard panels primarily to customers in North America, Europe, Brazil, Chile and Argentina.

Forestry Products

Our forestry products are
sawlogs, pulplogs, posts and chips. As a result of our forest management policies and the increasing maturity of our plantations, our plantations are yielding increasing volumes of forestry products, particularly clear wood. As the volume of clear
wood has grown, we have broadened our range of forestry products. For the year ended December 31, 2006, sales of forestry products were U.S.$80.4 million, representing 2.8% of our sales revenues for such year.

The following table sets forth, by category, forestry product sales to unaffiliated third parties for each of the years indicated.



|         |  |                                |  |      |  |      |  |       |  |      
|-------- |  | ------------------------------ |  | ---- |  | ---- |  | ----- |  | -----
|         |  | Year ended December 31,       
|         |  | 2002                           |  | 2003 |  | 2004 |  | 2005  |  | 2006 
|         |  | (in thousands of cubic meters)
|Sawlogs  |  | 585                            |  | 516  |  | 941  |  | 1,457 |  | 1,474
|Pulplogs |  | 419                            |  | 256  |  | 177  |  | 254   |  | 239  
|Posts    |  | 45                             |  | 54   |  | 101  |  | 88    |  | 34   
|Chips    |  | 36                             |  | 30   |  | 2    |  | 109   |  | 178  

Competition

We experience substantial worldwide competition in each of our geographical markets and in each of our product lines. Several of our competitors are larger than we are and may have greater financial and other
resources than we have.

Pulp

We face competition in our pulp sales from one other major Chilean producer, CMPC Celulosa S.A., and from pulp producers in other regions, particularly Canada, the United States, New Zealand and the Scandinavian countries for soft wood
bleached market pulp, Brazil and Indonesia for hardwood bleached market pulp and South Africa, the United States, Portugal and New Zealand for unbleached market pulp.

Plywood and fiberboard panels

Arauco competes in the plywood and fiberboard panels markets mainly
with North American, European and Latin American companies principally based in Brazil, Argentina and Chile. Arauco is recognized in the worldwide market as an attractive supplier for customers with diversified demands of panels, due to the quality,
variety, and wide range of its products. These clients also value the capacity of the company in providing them a constant and growing product line for the construction, furniture, decoration and molding industries.

Wood and forestry products

Araucos principal competitors in the forestry and wood products markets are the major European, North American, New Zealand and Chilean forestry companies. Arauco believes that its relatively low cost of wood, its operating
efficiencies, such as in transportation, its ability to customize orders, its domestic and offshore sales and marketing organizations, and the versatility of radiata pine allow it to compete effectively in the world market for forestry and wood
products.



31



---

##### Table of Contents

Transportation, Storage and Distribution

To remain competitive with pulp suppliers elsewhere in the world, we ship pulp to various distribution centers around the world from which final delivery
to the customer is made. Historically, Arauco and other Chilean pulp and forestry products producers have coordinated their transportation requirements to achieve larger lots to fill specially designed pulp, forestry products and log ships and thus
obtain competitive freight rates.

The following are the principal Chilean ports that we use:



| |  |  | Coronel. A private port located between Concepción and the Arauco Mill, which we constructed as a member of a consortium with five other companies and
in which we have an equity interest of 50.0%. We shipped approximately 39.5% of our aggregate export volume through this port in 2006;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Lirquén. A private port in Concepción in which we have an equity interest of 20.1% and through which we shipped approximately 26.5% of our
aggregate export volume during 2006; and
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | San Vicente and Talcahuano. Both are state-owned ports near the city of Concepción through which we shipped approximately 33.5% of our aggregate
export volume during 2006.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------

The ports we use in Chile are approximately 55 kilometers from the Arauco Mill, 330
kilometers from the Constitución Mill, 370 kilometers from the Licancel Mill, 100 kilometers from the Nueva Aldea Mill, and 410 kilometers from the Valdivia Mill. We do not own pulp storage warehouses in any of these ports.

We ship pulp to various ports in Europe, North and South America and Asia and, as is customary in the pulp industry, we store some stock in those ports.
We use 18 foreign ports that have warehouse facilities available, and standard storage terms provide that we are entitled to a certain period of storage free of charge. We seek to ensure that it does not exceed the free storage period for each
shipment. At December 31, 2006, we had approximately 30,810 metric tons in storage in warehouses at foreign ports.

We believe that
our shipping costs are comparable to those of our international competitors, notwithstanding Chiles greater distance from Europe, because of the proximity of our plantations and mills to the Pacific coast and the economies of scale we achieve
through our coordinated shipments with other Chilean producers.

In Argentina, timely and economical delivery of finished products to our
customers is an important factor in our ability to compete effectively, and we ship most orders either by truck or railway almost immediately after they are produced.

Description of Property

Our principal properties consist of land and production plants and
facilities, the majority of which are located in Chile. At December 31, 2006, we owned approximately 1,060,491 hectares of land in Chile, over 709,435 hectares of which consist of forest plantations, and 349,777 hectares of land in
Argentina, Brazil and Uruguay, of which 174,861 consist of forest plantations. In addition, at December 31, 2006, we owned various plants and facilities, including five pulp mills, five panel mills, 13 sawmills and five remanufacturing
facilities in Chile; one pulp mill, two sawmills, one MDF mill, one PBO mill and one remanufacturing facility in Argentina; and one MDF mill and one PBO mill in Brazil.

Insurance

Consistent with industry practice, we maintain fire insurance coverage for all our Chilean
forest holdings and nurseries but do not insure against pests or disease. Depending on the age of the trees affected, our insurance covers timber loss, either at replacement cost or commercial value. Our Argentine operations do not maintain fire
insurance for their timber assets because we believe that the risk of damage from fire is low because Argentina receives significant amounts of rainfall, particularly during the summer months. We do not carry fire insurance for our forests in Brazil
because the risk of damage from fire does not justify the costs of carrying insurance.



32



---

##### Table of Contents

We also carry insurance, consistent with industry practice, covering our production plants, facilities
and equipment. This insurance provides coverage, in the event of fire, explosion, machinery breakdown or natural disaster, for 12 months of business interruptions (18 months in the case of a boiler explosion in our pulp mills). All of our insurance
policies covering our forest holdings and production plants, facilities and equipment in Chile are carried by the Royal & Sun Alliance insurance group and La Chilena Consolidada (part of the Zürich Group). Our insurance policies for
facilities and equipment in Argentina are carried by the Royal & Sun Alliance and the Zürich Group, and these policies cover damage resulting from fire. Our MDF and particleboard mills in Brazil are insured by Itaú, and these
policies cover fire, explosions, electrical damage, equipment damage and loss of profit.

CAPITAL EXPENDITURES

To utilize our increasing volume of forest production, we have continually added to, expanded and modernized our processing facilities. Our planned
capital expenditures for 2007 include the construction of the second line of the Nueva Aldea plywood mill and the construction of the Nueva Aldea and Constitución pipelines.

Currently, we expect to complete the second line of the Nueva Aldea plywood mill in the fourth quarter of 2007, with a projected annual capacity of
250,000 cubic meters and projected capital expenditures of approximately US$34.8 million, to be funded with cash. We completed the Constitución pipeline in March 2007 and expect to complete the Nueva Aldea pipeline in 2008. The completion of
the Nueva Aldea pipeline will require approximately US$53.0 million in capital expenditures, to be funded with cash. See Item 4. Information on the CompanyDescription of BusinessForestry ActivityLand Acquisition and
Afforestation.

In 2006, aggregate capital expenditures were U.S.$1,090.5 million, consisting primarily of U.S.$652.2 million in
investments in the forestry business, principally U.S.$332.3 million relating to the Bío-Bío Investment Fund transaction, an investment of U.S.$352.3 million related to the acquisition of the forestry assets of Cementos
Bío-Bío S.A. and U.S$39.6 million related to the acquisition of 14,715 hectares of forestry land in Brazil. Capital expenditures for 2006 also included U.S.$352 million in investments in the pulp business, principally U.S.$227.5
relating to the construction of the Nueva Aldea pulp mill and U.S.$53.0 relating to the Nueva Aldea and Constitución pipelines.

These capital expenditures represent amounts accrued for purposes of our audited consolidated financial statements and do not necessarily represent the cash cost of capital expenditures in 2006.

GOVERNMENT REGULATION

Environment

In each country where we have operations, we are subject to numerous national and local environmental laws, regulations, decrees and municipal
ordinances concerning, among other things, health, the handling and disposal of solid and hazardous waste, discharges into the air, soil and water and other environmental impacts. Some of these laws require us to conduct environmental impact studies
of future projects or activities (or major modifications thereto). Under these laws, our operations may be subject to specific approvals, consents and regulatory requirements, and emissions and discharges may be required to meet specific standards
and limitations. We have made and will continue to make substantial expenditures to comply with such environmental laws, regulations, decrees and ordinances.

Chile

The Chilean legislation to which we are subject includes the Chilean Environmental Law (Ley
Sobre Bases Generales del Medio Ambiente) and related regulations. The Chilean Environmental Law created the National Environmental Commission (Comisión Nacional del Medio Ambiente), or CONAMA, which includes under its organization
the various Regional Environmental Commissions (the COREMAs). CONAMA is a public agency



33



---

##### Table of Contents

under the supervision of the President of Chile through the Environmental Ministry (Ministro Presidente de la Comisión Nacional del Medio
Ambiente). These commissions are responsible for, among other things, coordinating existing environmental regulations and evaluating environmental impact studies or declarations of environmental impact. Under the Chilean Environmental Law, we
are required to conduct environmental impact studies or declarations of environmental impact of any future projects or activities (or their significant modifications) that may affect the environment. These and other regulations also establish
procedures for private citizens to object to the plans or studies submitted by project owners.

CONAMA, the COREMA, and other governmental
agencies may also participate in the oversight of the implementation of projects in accordance with their environmental impact studies or declarations of environmental impact. Under the Chilean Environmental Law and other regulations, affected
private citizens, public agencies and local authorities can sue to enforce environmental compliance. Enforcement remedies include temporary or permanent closure of facilities and fines. The application of these environmental laws and remedies may
adversely affect the manner in which we seek to implement our business strategy and our ability to realize our strategy.

We recently
faced, and continue to face, certain environmental administrative proceedings in connection with certain of our pulp mills. In connection with these proceedings and based on recent legislation, Administrative Proceedings Law No. 19,880, the
COREMA for the Tenth Region of Chile, ordered the suspension of production at the Valdivia Mill as an interim preventive measure in January 2005. The mill reopened in February 2005, after the COREMA for the Tenth Region of Chile determined that the
mill could continue operations subject to a number of conditions.

On June 6, 2005, the COREMA for the Tenth Region of Chile modified
our permit for the Valdivia Mill by, among other requirements, reducing the annual production capacity of the mill to 440,000 metric tons until we comply with certain conditions, which include additional monitoring of some aspects of our emissions.
In addition, the modifications set new emission limits for several pollutants and require us to conduct a new environmental impact study for an alternative system for the discharge of wastewater, which we were directed to submit to the COREMA for
the Tenth Region of Chile for approval no later than March 31, 2006. On February 1, 2006, the COREMA of the Tenth Region of Chile extended this deadline to March 31, 2007. We must construct and implement the alternative system, which
cannot involve the discharge of effluents into the Cruces River, the Carlos Anwandter Sanctuary or their effluents, within 15 months of approval of the environmental impact study in final form. COREMA initially extended the deadline for the
presentation of this environmental impact study to April 2007 and recently extended it again to March 31, 2009. At the time of approving the new deadline, COREMA required us to present an additional environmental impact study for the
implementation of substantial technological improvements on the quality of the effluents generated by the Valdivia Mill. We submitted this environmental impact study on June 13, 2007.

In connection with an environmental administrative proceeding, environmental regulators required us to temporarily suspend operations at the Valdivia
Mill for approximately one month in January 2005. We resumed operations at the mill on February 18, 2005. On June 8, 2005, we voluntarily suspended operations at the Valdivia Mill which we estimate resulted in a loss of sales of
approximately U.S.$1.0 million per day and a loss of profits of approximately U.S.$250,000 per day. Pursuant to the decision of our board of directors based on certain clarifications provided by the COREMA of the Tenth Region of Chile, the mill
resumed operations on August 12, 2005 at a reduced annual production of 440,000 metric tons or 80% of its authorized production capacity, after 64 days of suspended operations. In order to achieve the full production capacity authorized by
applicable permits (equal to 550,000 metric tons of wood pulp per year), the pulp mill would have to comply with certain new requirements established by the COREMA of the Tenth Region of Chile including modifications to the effluents
parameters (including, among others, aluminum, sulfate, nitrogen and chlorate). In March 2006, Knight Piesold, an independent environmental auditing firm appointed by the COREMA of the Tenth Region of Chile, officially determined that the Valdivia
Mill had complied with the applicable requirements. As a result, we are currently requesting permission from the environmental authorities to resume full production capacity (550,000 metric tons of wood pulp per year). See Item 3. Key
InformationRisk FactorsRisks Relating to Arauco and the Forestry IndustryEnvironmental concerns led us to temporarily suspend our operations at the Valdivia Mill, which adversely affected, and in the future may continue to
adversely affect, our business, financial condition and results of operations and Item 4. Information on the CompanyDescription of BusinessPulpPulp millsChileValdivia Mill.



34



---

##### Table of Contents

Most recently, the COREMA of the Tenth Region of Chile has appointed a Canadian consulting company,
Ecometrix, to analyze and prepare a report on different feasible alternatives for discharge of the Valdivia Mill effluents. Approval by the COREMA of our environmental impact study regarding a pipeline, the construction and operation of such a
pipeline and also the approval of the environmental impact study regarding the improvement of the quality of the effluents are each subject to many environmental, regulatory, engineering and political uncertainties at this time. As a result, we
cannot give you any assurance that such projects will ever be approved or completed. If either our environmental study or the installation of the pipeline is delayed for reasons that COREMA attributes to us, we may face sanctions that include
warnings, fines or the revocation of the Valdivia Mills environmental permit of operation. Alternatively, if COREMA considers that such delays are beyond our control, we believe that COREMA should extend the applicable deadlines. However, we
can offer no assurances that any deadline extension will be granted, even if we comply with all the requirements set forth by COREMA. Any future suspension of operations at the Valdivia Mill or at any other of our significant operating plants can be
expected to have similar adverse effects. We offer no assurance that the Valdivia Mill will be able to operate without further interruption or that it will resume operations at full capacity notwithstanding our compliance with the new requirements
imposed by the COREMA are fulfilled.

The National Defense Council has instituted an action seeking reparations, damages and
indemnification from us for environmental harm allegedly caused by the Valdivia Mill. In addition, since the end of 2004, various criminal proceedings relating to alleged violations of several environmental laws have been instituted in Chile in
which some of our mills may be involved. SeeItem 3. Key InformationRisk FactorsRisks Relating to Arauco and the Forestry IndustryWe are subject to legal proceedings related to our mills, which could adversely affect
our business, financial condition and results of operations and Item 8. Financial InformationLegal Proceedings.

We
also faced environmental proceedings in connection with the pulp mill at the Nueva Aldea Project while it was under construction. As a result, the COREMA for the Eighth Region of Chile required us to suspend construction at the Nueva Aldea Project
for approximately two months in January 2005. We resumed the construction of the pulp mill in March 2005, after complying with the conditions set by the COREMA for the Eighth Region of Chile. On August 30, 2006, the Nueva Aldea pulp mill
initiated its production, and production capacity reached designed capacity in May 2007. There can be no assurance that the pulp mills will continue to operate without further interruption. See Item 8. Financial InformationLegal
Proceedings.

Argentina

Our operations in Argentina are subject to Argentine environmental legislation, including regulation by municipal, provincial and federal governmental authorities. Argentine environmental legislation includes the requirement that water used
or recovered in the production process be treated and purified before being returned to the Alto Paraná River at the proper temperature. All gaseous emissions must be scrubbed to ensure satisfactory levels of waste particle recovery and odor
removal. Regular testing of river and air quality is used to monitor the ultimate impact of the mill on the environment.

We believe that
we are currently in material compliance with all applicable local and national environmental regulations governing our operations in Argentina.

Brazil

Our Brazilian operations are subject to environmental legislation, including municipal, regional and federal governmental
laws, regulations and licensing requirements. Law No. 6,938 establishes strict liability for environmental damage, mechanisms for enforcement of environmental standards and licensing requirements for activities that are damaging or potentially
damaging to the environment. A violation of environmental laws and regulations may result in



| |  |  | fines,
| | - |  | ------



| |  |  | partial or total suspension of activities,
| | - |  | ------------------------------------------



35



---

##### Table of Contents

| |  |  | forfeiture or restriction of tax incentives or benefits, or
| | - |  | -----------------------------------------------------------



| |  |  | forfeiture or suspension of participation in credit lines with official credit establishments.
| | - |  | ----------------------------------------------------------------------------------------------

As a result, we may become liable for environmental damages caused by management of our materials, including damages caused during the transportation, treatment and
disposal of our industrial waste, even where third parties manage such activities on our behalf.

Law No. 9,605 provides that
individuals or entities whose conduct or activities cause harm to the environment are subject to criminal and administrative sanctions and are liable for any costs to repair the damages resulting from such harm. For individuals who commit
environmental crimes, criminal sanctions range from fines to imprisonment; for legal entities, criminal sanctions may include fines, partial or total suspension of activities, restrictions on participation in government contracts and, in cases of
bad faith, dissolution. In addition, Law No. 9,605 also establishes that the corporate structure of a company may be disregarded if the structure impedes the recovery for harm caused to the environment. We are not aware of any successful
assertion of claims against shareholders under this provision of Law No. 9,605.

We believe we are currently in material compliance
with all applicable local and national environmental regulations governing our operations in Brazil.

Forestry Regulation

Chile

The management and exploitation
of forests in Chile is regulated by the Forests Law of 1931, as amended, and Decree-Law No. 701 of 1974, as amended. The Forests Law and Decree-Law No. 701 impose a variety of restrictions on the management and exploitation of forests.
Forestry activities, including thinning, on land that is designated as preferably suited for forests or that has natural or planted forests, are subject to management plans that require the approval of the National Forestry Corporation
(Corporación Nacional Forestal). In addition, the Forests Law and Decree-Law No. 701 impose certain standards for the prevention of forest fires, as well as fines for the harvesting or destruction of trees and shrubs in violation
of the terms of a forest management plan. We believe that we are in material compliance with the Forests Law and Decree-Law No. 701.

The Chilean Congress is currently considering a bill that provides for the management and conservation of native tree forests and forest development. This bill would establish a fund for the conservation and sustainable management of native
forests. Owners of native forests would be able to participate so long as they had a management plan approved by the National Forestry Corporation. Depending on the owners approved plan, as well as other factors, the subsidy provided by the
fund would be between U.S.$200 and U.S.$400 per hectare. The bill would prohibit the harvesting of native trees in certain areas and under certain conditions. The possible effect of this bill on our business, if any, cannot be quantified, but
management believes it will not have a material effect. Currently, we do not perform clear cutting of native forest or any cutting in areas surrounding rivers and streams, areas of notable environmental interest or areas with particularly fragile
soil conditions.

All of our forest activities are ISO 14001 certified. During 2003, we obtained the certification in Chile from CERTFOR,
and in 2004, CERTFOR undertook its first audit of our operations and confirmed that we complied with CERTFOR requirements. See Item 4. Information on the CompanyDescription of BusinessForestry Activity.

In 2005, CERTFOR certified the chain of custody of the Arauco, Constitución, Licancel and Valdivia pulp mills and Arauco and Nueva Aldea plywood
mills, pursuant to the Sustainable Forestry Management practices, which require that sources used for production are not endangered or that their use is not otherwise prohibited. The National Regulatory Institute (Instituto Nacional de
Normalización) also accredited the effluent laboratories of the Constitución and Arauco wood mills in accordance with the strict requirements of Chilean environmental standards.



36



---

##### Table of Contents

Argentina

The management and exploitation of forests in Argentina is regulated by National Law 13,273, National Law 25,080, National Decree 710, Provincial Law No. 854, Provincial Law No. 3,426 and other regulations
promulgated thereunder, which collectively constitute the regulatory framework. The regulatory framework imposes a variety of restrictions on the management and exploitation of forests in Argentina. The regulatory framework regulates the replanting
of land after harvesting. We believe that our Argentine operations are in material compliance with the regulatory framework.

Brazil

Environmental laws and regulations relating to the management and exploitation of forests and the protection of Brazilian plant and
wildlife govern our Brazilian forestry operations. Under this regulatory framework Brazilian authorities establish forest preservation areas and regulate replanting of forests after harvesting. We believe that our Brazilian operations are in
material compliance with the regulatory framework.



37



---

##### Table of Contents

|Item 5. | Operating and Financial Review and Prospects
|------- | --------------------------------------------

MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS

The following discussion is based on and should be read in conjunction with our audited consolidated financial statements and the notes thereto, included
elsewhere in this annual report. Our consolidated financial statements are prepared in U.S. dollars in accordance with U.S. GAAP.

Overview

We derive our sales revenue from the sale of bleached and unbleached pulp and forestry and wood products, such as sawlogs, pulplogs,
sawn timber, remanufactured wood products and panels. For the year ended December 31, 2006, export sales constituted approximately 77.1% of our total sales revenue. Sales of pulp constitute the single largest component of our sales revenue. As
with many commodities, pulp is subject to significant cyclical price fluctuations determined by global supply and demand. Accordingly, our sales revenue is subject to cyclical fluctuations. World prices for forestry and wood products, which are also
generally viewed as commodities, fluctuate significantly.

Although prices tend to have the most significant effect on our results of
operations, sales volume and product mix, costs and exchange rate fluctuations also can have a substantial impact on our results.

Our
business and results of operations depend, to a large extent, on the level of economic activity, on government and foreign exchange policies and on political and economic developments in our principal export markets. In 2006, we exported our
products to Asia, to North, Central and South America, to Europe and, to a lesser extent, to Africa and the Middle East. In 2006, approximately 92.7% of our total pulp sales and approximately 67.5% of our total forestry, wood products and panel
product sales were attributable to exports, principally to customers in the Americas, Asia and Western Europe. Our business, earnings and prospects may be materially and adversely affected by developments in these export markets with respect to
inflation, interest rates, currency fluctuations, protectionism, government subsidies, price and wage controls, exchange control regulations, taxation, expropriation or social instability, as well as by political, economic or diplomatic
developments.

At December 31, 2006, approximately 81.6%of our property, plant, equipment and forest assets were located in Chile,
approximately 12.5% were located in Argentina and approximately 6.0% were located in Brazil. In 2006, approximately 10.2% of our consolidated sales revenue was derived from sales to customers in Chile, approximately 5.7% of our consolidated sales
revenue was derived from sales to customers in Argentina, and approximately 7.0% of our consolidated sales revenue was derived from sales to customers in Brazil. Accordingly, our financial condition and results of operations depend, to a significant
degree, upon economic conditions in Chile, Argentina and Brazil.

Despite growth in the 1980s and 1990s, the Chilean economy has remained
smaller than the economies of certain other Latin American countries. In 2000, the Chilean gross domestic product grew 4.5%, but growth slowed to 3.4% in 2001, 2.2% in 2002 and 3.9% in 2003. In 2004, GDP growth was stronger than previous years,
reaching 6.2%. Unemployment was high, averaging 9.2% in 2001, 9.0% in 2002, 8.5% in 2003, 8.8% in 2004 and 8.1% in 2005. GDP grew 4.0% in 2006 and unemployment began to decline, reaching 6.0%.

From late 1998 to 2002, the Argentine economy went through an economic recession marked by reduced levels of consumption and investment and an elevated
unemployment rate. Argentine GDP decreased by 3.4% in 1999, 0.8% in 2000, 4.0% in 2001 and 10.9% in 2002. In December 2001, amid public demonstrations and the resignation of the Argentine president, Argentina declared a suspension on payment of
its foreign debt. In early 2002, the government released the Argentine peso from its one-to-one peg to the dollar and allowed the exchange rate to float, resulting in a 49.6% devaluation of the Argentine peso from January 1, 2002 to
December 31, 2002. From 2003 to 2006, economic indicators showed some signs of recovery, and the Argentine gross domestic product increased by 8.8% in 2003, 8.7% in 2004, 9.2% in 2005 and 8.5% in 2006. In June 2005, Argentina restructured a
significant portion of its sovereign bonds outstanding. The Argentine economy may not continue to recover and future economic, social and political developments in Argentina, over which it has no control, could impair Alto Paranás
business, financial condition or results of operations.



38



---

##### Table of Contents

Brazils GDP grew by an estimated 2.9% in real terms in 2006, compared to a growth rate of 2.3% in
2005. However, in recent years, the Brazilian economy has experienced turbulence. In 2000, GDP grew 4.4%, but in 2001 and 2002, due to the international crisis in Latin and North America and the electric energy rationing in Brazil, GDP grew only
1.3% and 1.9%, respectively. GDP decreased 0.5% in 2003, mainly due to uncertainty regarding the election process and new economic policies to be implemented by the newly elected government of President Luis Ignacio Lula da Silva. The Brazilian
real/U.S. dollar exchange rate also experienced turbulence in that period. During 2001, the Brazilian real declined in value by 18.7% against the U.S. dollar, and in 2002, it further devalued by 52.3%, closing at R$3.5333/U.S.$1.00 on
December 31, 2002. These changes were attributable primarily to uncertainties regarding the ongoing presidential election process. Those concerns dissipated during 2003, resulting in an appreciation of the Brazilian real by 18.2% against
the U.S. dollar in that year. During 2004, the Brazilian real continued to recover against the U.S. dollar, with an 8.1% appreciation. The Brazilian real appreciated 8.6% during 2006.

Future developments in the Chilean, Argentine and Brazilian economies may impair our ability to proceed with our strategic plan or our business,
financial condition or results of operations. Our financial condition and results of operations could also be materially and adversely affected by changes in political, economic, regulatory or other policies of the Chilean, Argentine and Brazilian
governments, which have exercised and continue to exercise substantial influence over many aspects of the private sector in these countries, or other political or economic developments in Chile, Argentina and Brazil, as well as regulatory changes or
administrative practices of Chilean authorities, over which we have no control.

Valdivia Mill Closure

Our operations at the Valdivia Mill have been subject to continued environmental scrutiny by Chilean environmental regulators and the Chilean public since
the mill began its operations in 2004. In connection with an environmental administrative proceeding, environmental regulators required us to temporarily suspend operations at the Valdivia Mill for approximately one month in January 2005. We resumed
operations at the mill on February 18, 2005. On June 8, 2005, we voluntarily suspended operations at the Valdivia Mill for 64 days, which we estimate resulted in a loss of sales of approximately U.S.$1.0 million per day and a loss of
profits of approximately U.S.$250,000 per day. Operations of the Valdivia Pulp Mill resumed on August 12, 2005 at a reduced annual production of 440,000 metric tons or 80% of its authorized production capacity supervision by the COREMA. In
March 2006, Knight Piesold, an independent environmental auditing firm appointed by the COREMA of the Tenth Region of Chile, officially determined that the Valdivia Mill had complied with all applicable requirements necessary for it to resume full
production capacity. As a result, Arauco is requesting permission from the environmental authorities to resume full production capacity (equal to 550,000 metric tons of wood pulp per year).

In 2005, the COREMA instructed us to present by March 31, 2006, an environmental impact study for the construction of a pipeline to discharge the
Mills wastewater in a body of water other than the Cruces River or the Carlos Anwandter Nature Sanctuary or their sources. The COREMA also instructed us to construct and put into operation the pipeline no later than 15 months from the date
COREMA approves the environmental impact study in final form. COREMA initially extended the deadline for the presentation of this environmental impact study to April 2007 and recently extended it again to March 31, 2009. When it approved the
new deadline, COREMA required us to present an additional environmental impact study for the implementation of substantial technological improvements on the quality of the effluents generated by the Valdivia Mill. We submitted this study on
June 13, 2007.

Most recently, the COREMA of the Tenth Region of Chile has appointed a Canadian consulting company, Ecometrix, to
analyze and prepare a report on different feasible alternatives for discharge of the Valdivia Mill effluents. Approval by the COREMA of Araucos environmental impact study regarding a pipeline, the construction and operation of such a pipeline
and also the approval of the environmental impact study regarding the improvement of the quality of the effluents are each subject to many environmental, regulatory, engineering and political uncertainties at this time. As a result, we cannot give
you any assurance that such projects will ever be approved or completed. If either our environmental study or the installation of the pipeline is delayed for reasons



39



---

##### Table of Contents

that COREMA attributes to us, we may face sanctions that include warnings, fines or the revocation of the Valdivia Mills environmental permit of
operation. Alternatively, if COREMA considers that such delays are beyond our control, we believe that COREMA should extend the applicable deadlines. However, we can offer no assurances that any deadline extension will be granted, even if we comply
with all the requirements set forth by COREMA. See Item 3. Key InformationRisk FactorsRisks Relating to Arauco and the Forestry IndustryEnvironmental concerns led us to temporarily suspend our operations at the Valdivia Mill,
which will adversely affected, and in the future may continue to adversely affect, our business, financial condition and results of operations, Item 4. Information on the CompanyDescription of BusinessPulpPulp
millsChileValdivia Mill and Item 8. Financial InformationLegal Proceedings.

As a result, we offer no
assurance that the Valdivia Mill will be able to operate without further interruption or that it will resume operations at full capacity, notwithstanding our compliance with the new requirements imposed by COREMA. Any future suspension of operations
at the Valdivia Mill or at any other of our significant operating plants would likely have a material adverse effect on our business, financial condition and results of operations.

At the time of suspension, the Valdivia Mill represented approximately 25% of our total pulp capacity. Currently, it represents 18.1% of our total pulp
capacity. As a result, the suspension of operations at the Valdivia Mill adversely affected our business, financial condition and results of operations.

In connection with our decision to suspend operations at the Valdivia Mill, our President and Chief Executive Officer resigned from his positions. For more information about our executive officers, see Item 6.
Directors, Senior Management and EmployeesDirectors and Executive Officers.

Licancel Mill Closure

Since June 2007, our operations at the Licancel Mill, a pulp mill located in the Seventh Region of Chile, have been subject to environmental scrutiny by
Chilean environmental regulators and the public. On June 5, 2007, in connection with the death of fish in the Mataquito River, approximately 15 kilometers downstream of the mill, we decided to voluntarily suspend our operations in the Licancel
Mill as a preventive measure. In addition, Chilean authorities, including the health authorities and the Superintendencia de Servicios Sanitarios (Sanitary Services Superintendency), required that we suspend activities at the Licancel Mill
and that we suspend any further discharges into the river. We also commenced independent investigations relating to the cause of the death of the fish. On June 18, 2007, as a result of a pipe leakage in the water treatment system currently in
place at the Licancel Mill, an estimated 50 cubic meters of effluents reached the Mataquito River. On that same date, we decided to close the mill indefinitely and informed the Sanitary Services Superintendency of the incident.

We have resolved not to resume operations at the Licancel Mill until we have replaced the current environmental treatment system with a new system that
incorporates a new effluent treatment system approved by the environmental authorities. Several administrative and judicial proceedings have been commenced regarding the events at the Licancel Mill, including the death of fish at the Mataquito
River. Our ability to resume operations at the Licancel Mill may also depend upon our ability to comply with any requirements that may be imposed by any applicable governmental authority. We estimate that the suspension of operations at the Licancel
Mill will result in a loss of profits of approximately U.S.$4 million per month, and that these losses will continue for so long as the mill remains closed. Furthermore, we cannot predict any monetary or other sanctions that may be imposed on us as
a result of any ongoing or future environmental, administrative or judicial proceeding. Consequently, the suspension of operations at the Licancel Mill may adversely affect our business, financial condition and results of operations. We cannot
assure you that the Licancel Mill will be reopened or that the Licancel Mill, if reopened, would be able to operate without interruptions or changes in its operations. See Item 3. Key InformationRisk FactorsRisks Relating to Arauco
and the Forestry IndustryEnvironmental concerns led us to temporarily suspend our operations at the Licancel Mill, which may adversely affect, our business, financial condition and results of operations, Item 4. Information on the
CompanyDescription of BusinessPulpPulp millsChileLicancel Mill and Item 8. Financial InformationLegal Proceedings.



40



---

##### Table of Contents

Prices

In recent years, our sales revenue has been affected by price level volatility in the export market. The prices for each of our pulp products and forestry and wood products depend on the markets in which they are sold. While prices are
generally similar for a given product on a global basis, regionalized market conditions affect prices in markets such as Asia, Europe and the United States.

The following table sets forth, for the periods indicated, average unit sales prices for our products.



|                              |  |                            |  |       |  |      
|----------------------------- |  | -------------------------- |  | ----- |  | -----
|                              |  | Year ended December 31,(1)
|Product(2)                    |  | 2004                       |  | 2005  |  | 2006 
|                              |  | (U.S.$ per metric ton)(3) 
|Pulp                          |  |                            |  |       |  |      
|Bleached pulp                 |  | 518.1                      |  | 505.9 |  | 579.4
|Unbleached pulp               |  | 433.6                      |  | 455.6 |  | 523.5
|                              | 
|                              |  | (U.S.$ per cubic meter)(3)
|Wood Products                 |  |                            |  |       |  |      
|Sawn timber                   |  | 194.2                      |  | 178.7 |  | 197.1
|Remanufactured wood products  |  | 670.5                      |  | 600.3 |  | 537.6
|Panels                        |  |                            |  |       |  |      
|Plywood and fiberboard panels |  | 337.6                      |  | 287.5 |  | 300.8
|Forestry Products             |  |                            |  |       |  |      
|Sawlogs                       |  | 34.8                       |  | 35.2  |  | 38.3 
|Pulplogs                      |  | 20.4                       |  | 28.7  |  | 33.1 
|Posts                         |  | 242.5                      |  | 248.7 |  | 230.4

---

|(1) | Calculated as average unit prices for the year based on our internally collected data.
|--- | --------------------------------------------------------------------------------------

|(2) | Each category of product contains different grades and types and the shipping terms vary with the
product, as well as the customer.
|--- | -----------------------------------------------------------------------------------------------------------------------------------

|(3) | We generally quote our prices in U.S. dollars for export sales and in Chilean pesos, Argentine pesos or
Brazilian reals for domestic sales.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------

Pulp Prices

The prices that we are able to obtain for our pulp products depend on prevailing world prices as well as regional market conditions. Historically, world
pulp prices are cyclical; prices are subject to significant fluctuations over relatively short periods of time, depending on worldwide demand, world production capacity, the business strategies adopted by major integrated forestry, pulp and paper
producers and other major producers and the availability of substitutes. All of these factors are beyond our control.

Over the last five
years, the average price, on an annual basis, for Norscan bleached softwood kraft market pulp, or NBSK, which is the benchmark for softwood bleached pulp, has ranged from a high of U.S.$616 per ton in 2004 to a low of U.S.$463 per ton in 2002.
During 2001, the market price for NBSK fell 33.8%, from U.S.$710 per ton at December 31, 2000 to U.S.$470 per ton at December 31, 2001, largely due to the global recession. Prices continued to decrease in 2002, largely due to the sluggish
global economy, reaching their lowest known level in April 2002 at U.S.$434 per ton and ending 2002 at a price of U.S.$440 per ton on December 31, 2002, a 6.4% decrease from the price per ton recorded on December 31, 2001. The price for
NBSK was U.S.$560 per ton at December 31, 2003, a 27.3% increase over December 31, 2002, and U.S.$621 per ton at December 31, 2004, and 10.9% increase as compared to December 31, 2003. Although the price for NBSK increased during
the fourth quarter of 2005 due to the strong market demand and mill closures in North America, the price of U.S.$599 per ton recorded at December 31, 2005 represented a decrease of 3.5% as compared to December 31, 2004. Although the price
for NBSK increased during the fourth quarter of 2005 due to the strong market demand and mill closures in North America, the price of U.S.$599 per ton recorded at December 31, 2005 represented a decrease of 3.5% as compared to December 31,
2004. During the first three quarters of 2006, the average price for NBSK increased, reaching a peak of U.S.$711.9 per ton at September 26, 2006. The price of U.S.$730.0 per ton recorded at December 31, 2006 represented an increase of
21.9% as compared to December 31, 2005.



41



---

##### Table of Contents

Prices for bleached grades of pulp, including eucalyptus, generally follow the same pattern as prices for
NBSK. However, each grade follows its own cycle based on market demand and production capacity. During the last five years, the majority of the new capacity developed has been for hardwood pulp, particularly eucalyptus pulp. This has led to a
greater spread between the prices for hardwood and for softwood. The price for eucalyptus kraft pulp delivered in Northern Europe, or BEKP, was U.S.$450 per ton at January 1, 2003, U.S.$10 per ton above the price for NBSK, and was U.S.$500 per
ton at December 31, 2003, U.S.$60 per ton below the price for NBSK. During 2002 the market price for BEKP rose 6.8%, to U.S.$453 per ton at December 31, 2002. The market price for BEKP was U.S.$500 per ton at December 31, 2003, an
increase of 8.0% over the price of December 2002, and U.S.$520 per ton at December 31, 2004, a 4% increase over the price of December 2003. At December 31, 2005, the price for BEKP was U.S.$589 per ton, an increase of 13.3% over the
price of December 2004. At December 31, 2006, the price for BEKP was U.S.$671.6 per ton, an increase of 14.0% over the price at December 2005.

Prices for unbleached softwood market pulp also follow cyclical patterns related to worldwide demand. Unbleached softwood market pulp represents about 5.0% of the total wood pulp market. The majority of such pulp is sold in Asia, and its
price does not necessarily follow the cycle of prices for NSBK.

During the first half of 2003 the market price for UKP rose, and then
fluctuated during the second half of the year, rising 23.3% overall, to U.S.$530 per ton at December 31, 2003. During 2004, UKP prices consistently rose, reaching U.S.$575 per ton by December 31, an increase of 8.5% with respect to
December 31, 2003. In 2005, prices fluctuated throughout the year reaching U.S.$460 per ton by December 31, 2005, a decrease of 20% as compared to the price of December 31, 2004. In 2006, UKP prices increased reaching U.S.$589.3 per
ton by December 31, 2006, an increase of 27.6% as compared to the price of December 31, 2005.

Forestry, Wood Product, Plywood and
Fiberboard Prices

Over the last five years, the average prices for our forestry and wood products have fluctuated significantly,
reflecting the effect on demand of global economic developments. The economic downturn in the aftermath of the terrorist attacks in the United States on September 11, 2001 led to considerable declines in prices for wood products across North
America. Japans poor economic performance at that time led to prices that were at their lowest levels in 15 years. In China, on the other hand, prices were unaffected by developments in other markets.

Demand for forestry and wood products, including panel and lumber products, rose in the first three months of 2002, leading to increased sale prices. The
increased demand was largely the result of economic growth in the United States, a stronger euro and increased market activity in Asia. During the second and third quarters of 2002, however, prices for forestry products fell in the United States,
Mexico and Brazil, as well as in most of Europe. Prices increased in Asian markets, due in large part to increased economic activity relating to the soccer World Cup, but the overall effect was a decrease in sale prices. Prices for forestry and wood
products continued to decline during the last quarter of 2002, as the United States economy felt the effects of the possible war with Iraq. Prices remained stable in Europe, while MDF prices decreased but prices of remanufactured products increased
in Asia.

The downward trend in prices continued during the first half of 2003. Plywood and remanufactured products producers were affected
by the closing of various plywood mills in the United States. Latin America maintained relatively higher prices for forestry and wood products. Prices in the Middle East remained high, despite the conflict in Iraq, and prices also remained high in
Asia. During the second half of 2003, forestry and wood product prices increased, reflecting mill closures, a general improvement in the world economy, low inventory levels, increased transportation costs and the depreciation of the U.S. dollar
against several foreign currencies.

In early 2004, strong worldwide economic growth outpaced the supply of wood products in all of our
primary markets, leading to particularly great demand in the U.S. and China. The weakness of the U.S. dollar also contributed to substantial price increases for panel and lumber products during the year. Ocean freight availability was scarce and
freight rates for breakbulk and container line services escalated to high levels, putting further pressure on prices. Though economic growth continued through the end of 2004, prices in the U.S. decreased slightly due to excess inventories of panel,
lumber and molding products at distributors.

In spite of strong international growth and demand for wood products, the decline in prices
in the U.S. continued during the first three quarters of 2005 due to excess inventories of panel and remanufactured wood



42



---

##### Table of Contents

products at distributors. This trend affected the average prices for wood products during 2005. By the end of 2005, the average prices for wood products
demonstrated signs of recovery. However, the continued weakening of the construction sector in the United States caused a decrease in the price and demand for wood, particularly moldings, during 2006.

The continued weakening of the construction sector in the United States throughout 2006 caused a decrease in the price and demand for wood, especially in
moldings in that market. Along with the markets in Asia, the Middle East and Central America have been strengthening and Europe registered strong demand and prices for wood throughout 2006. The prices of plywood in the United States and Canada
slightly decreased during 2006, while the other markets maintained levels comparable to those for 2005. The demand for products directed at furniture markets in Latin America remained strong during the year, and sales of medium-density fiberboard
(MDF) panels also experimented important improvements due to the high demand in all the markets in which Arauco participates, which are concentrated in North, Central and South America.

Prices for our pulp, forestry and wood products may decline in the future. Our results of operations may be materially adversely affected if the prices
of our products were to decline from current levels.

Costs

Our major costs of sales are the following:



| |  |  | costs related to harvesting (forestry works),
| | - |  | ---------------------------------------------



| |  |  | the cost of timber,
| | - |  | -------------------



| |  |  | the cost of mill processing,
| | - |  | ----------------------------



| |  |  | the cost of freight,
| | - |  | --------------------



| |  |  | depreciation and
| | - |  | ----------------



| |  |  | maintenance costs.
| | - |  | ------------------

Our major administrative and
selling expenses are wages and salaries, insurance expenses and commissions.

Our cost of timber consists of the cost of growing our own
trees, the cost of timber purchased from third parties and the cost of purchasing the right to harvest plantations owned by third parties, known as stumpage. The cost of our own trees consists of the cost of planting, capitalized direct
and indirect interest, cost of forest development and the cost of forestry management activities (planting and site preparation procedures, thinning and pruning, protection and maintenance) performed in each plantation during the harvest cycle
before harvesting.

We account for the accumulated cost of our own trees on a plantation-by-plantation basis as long-term forest assets.
The cost of each plantation differs depending on the types of forest management activities performed (e.g., pruning and extensive thinning for plantations managed for a high proportion of clear wood production and application of fertilizer in
areas of relatively poor soil quality), as well as the plantations accessibility, so that total inventory cost depends on the mix of plantations designated for harvest. Such costs are charged to cost of sales at the time of sale.

Our property, plant and equipment are depreciated on a straight-line basis over the remaining useful lives of the underlying assets. However, the
amount of such depreciation that relates to our fixed production assets, such as pulp mills and sawmills, is allocated to finished goods held as inventories and accumulates until charged to cost of sales when the finished goods are sold. Forests and
land are not depreciated.

Our transportation costs are accounted for as cost of sales and include port costs and freight and other
transportation costs. Port costs are those costs arising from the transportation of products from one of our site



43



---

##### Table of Contents

storage facilities into the hold of the ship. Freight is the cost of shipping the product to the port of destination. Other transportation costs are incurred
primarily in the transportation of products from the forest to one of our facilities and between such facilities. Selling expenses consist primarily of per ton fees we paid to our selling agents.

During 2003 and 2004, the demand for ocean transportation outpaced fleet growth in the dry cargo market, and increased port congestion in some areas had
a negative effect on fleet availability. As a result, ocean freight availability was scarce and freight rates for breakbulk and container line services escalated to high levels, putting further pressure on prices. However, most of our ocean
transportation is carried out under three-year freight contracts with staggered expirations, so the effects on us of these fluctuations in the ocean freight market were not severe.

During 2005, fleet growth outpaced the demand for ocean transportation in the dry cargo segment due in part to a decrease in port congestion in certain
areas. Container freight rates remained stable throughout most of 2005, but showed some signs of increase toward the end of the year due to increases in fuel costs, the risks of which are borne by the shipper under most of our long-term ocean
freight contracts.

During 2005 cost of lumber and maintenance costs increased principally due to higher market prices for lumber and a
strong appreciation of the Chilean peso relative to the U.S. dollar. The appreciation of the Chilean peso negatively affected most of our costs, which are incurred in Chilean pesos and translated to U.S. dollars.

During 2006, costs increased principally due to an increase in depreciation resulting from the commencement of the start-up operations at the Nueva Aldea
pulp mill, an increase in transportation costs due to an increase in the average price of petroleum and an appreciation of the Chilean peso relative to the U.S. dollar.

Exchange Rate Fluctuations

The Chilean peso has been subject to devaluation in the past and could be
subject to significant fluctuations in the future. In the period from December 31, 1998 to December 31, 2006 the value of the Chilean peso relative to the U.S. dollar decreased approximately 12.4% in nominal terms and increased 11.9% in
real terms, as compared to a 3.2% increase in value in real terms in the period from December 31, 1995 to December 31, 1998. During 2006, the value of the Chilean peso relative to the U.S. dollar decreased approximately 3.7% in nominal
terms and approximately 0.5% in real terms, based on the observed exchange rates on December 31, 2005 and December 31, 2006. The observed exchange rate on June 25, 2007 was Ch$527.38 to U.S.$1.00. For information regarding historical
rates of exchange in Chile from January 1, 2002 see Item 3. Key InformationExchange Rates.

We generally price our
exports in U.S. dollars and domestic sales in Chilean pesos. To the extent that the Chilean peso depreciates against the U.S. dollar, our domestic sales revenues may be adversely affected when expressed in U.S. dollars. Conversely, appreciation of
the Chilean peso may have a positive effect on domestic sales revenue when expressed in U.S. dollars. The effect of exchange rate fluctuations is partially offset by the fact that certain of our operating expenses are denominated in U.S. dollars
(such as our freight costs and selling expenses in the form of commissions paid to our sales agents abroad) and a significant part of our indebtedness is denominated in U.S. dollars. As of December 31, 2006, our U.S. dollar-denominated
indebtedness was U.S.$2.6 billion. In addition, as the U.S. dollar appreciates against the local currency in any of our export markets, we must from time to time price our sales in that local currency to compete effectively.



44



---

##### Table of Contents

Critical Accounting Policies

A summary of our significant accounting policies is included in Note 1 to our audited consolidated financial statements. We believe that the consistent application of these policies enables us to provide readers of
our audited consolidated financial statements with more useful and reliable information about our operating results and financial condition. The following policies are the accounting policies that we believe are the most important to the portrayal
of our financial condition and results of operations and require managements most difficult, subjective or complex judgments.

Property, Plant
and Equipment

The key judgments management must make under the property, plant and equipment policy include the estimation of the
useful lives of our various asset types, the election to utilize primarily the straight-line method for recording depreciation, managements judgment regarding appropriate capitalization or expensing of costs related to fixed assets and
managements determination that no impairment exists.

Property, plant and equipment costs are stated on our balance sheet at cost
less accumulated depreciation. Depreciation of buildings, equipment and other depreciable assets is determined using primarily the straight-line method. The estimation of useful lives for fixed assets impacts the level of annual depreciation expense
recorded. Utilization of the straight-line method for recording depreciation or any of the other acceptable methods for depreciating assets will result in the same amount of depreciation over the life of an asset; however, the amount of annual
depreciation expense and the resulting carrying amount of net property, plant and equipment can vary significantly, depending on the method elected.

Property, plant and equipment assets are evaluated for possible impairment on a specific asset basis or in groups of similar assets, as applicable. This process requires managements estimate of future cash flows
generated by each asset or group of assets. For any instance where this evaluation process indicates impairment, the appropriate assets carrying values are written down to net realizable value and the amount of the write-down is charged
against the results of continuing operations. If we overestimated our future cash flows by 10%, the reported value of our property, plant and equipment would not be materially affected as of December 31, 2006.

Expenditures that substantially improve and/or increase the useful life of facilities or equipment are capitalized. Maintenance and repair costs are
expensed as incurred. Our evaluation of whether an expenditure related to property, plant and equipment substantially improves and/or increases the useful life of an asset and should be capitalized as an addition to the assets cost basis or is
expensed as normal maintenance and repair expense can significantly affect results of operations for a given period, as well as our financial position.

Forests

Forest costs are stated at cost of development less the cost of forest harvested. Forest costs consist
primarily of purchased timber, planting, maintenance, protection and other direct costs related to the plantation of the forest. Direct and indirect interest costs of developing forests are capitalized until the forest is deemed to have reached an
exploitable stage. These capitalized interest costs are included in the historical cost of the forest. Forests do not include any estimated future reforestation costs. The cost of forest harvested is based on the volume of forest harvested in
relation to the estimated volume of forest recoverable. Our estimated volume of forest recoverable is based on statistical information and data obtained from physical measurements and other information gathering techniques. This information gathered
and data used requires, to a certain extent, estimates and judgments in determining the amount of forest recoverable.

Depletion

Depletion, or the costs attributed to timber harvested, is determined according to each identifiable farm block that is in the harvesting stage, based
on the relationship between unamortized timber costs and the estimated volume of recoverable timber multiplied by the amount of timber cut. We review our depletion rate estimates on a recurring basis. Our statistical data indicates that, during
2006, our depletion rates were understated by less than 0.04%. If our estimated volume of timber harvested at December 31, 2006 were underestimated by 0.04%, our reported cost of sales for the year ended December 31, 2006 would not be
materially affected.



45



---

##### Table of Contents

Inventories

Inventories of raw materials, work-in-process and spare parts are stated at the lower of cost or market, using primarily the average cost method. Finished goods are stated at the lower of average production costs for
the period, or market. Inventory costs include materials, labor, transportation, depreciation of fixed assets and production overhead, as appropriate. The determination of the net realizable value of each component of inventory is based on the
current invoice price. Work-in-process inventories require an estimation of the future cost per unit to complete manufacturing from each stage of processing, using historical manufacturing costs. These estimates can affect the carrying value for
inventories, and any required inventory write-down can affect results of operations in both current and future periods.

At
December 31, 2006, our inventory reserves amounted to U.S.$1.0 million, which represented 0.2% of our total inventory. Additionally for the year ended December 31, 2006, our inventory write-downs represented 0.0% of our cost of sales. If
our inventory reserves and write-downs were underestimated by 10%, our reported cost of sales for the year ended December 31, 2006 would not be materially affected.

Goodwill

Goodwill is the excess of acquisition cost of a business over the fair value of
identifiable net assets acquired. Goodwill is deemed to have an indefinite life and is not amortized. We test these assets for impairment by applying a fair-value based test on an annual basis; we also test these assets when we determine that
indicators of impairment exist. We must exercise judgment in assessing goodwill for impairment. Generally, we review the recorded value of our goodwill annually, but we will review it sooner if changes in circumstances indicate that the
carrying amount may exceed fair value. Recoverability of the carrying value of the asset is determined by comparing it to net book value, including goodwill and the estimated future net cash flows of the relevant assets.

Deferred Income Tax

We use the asset and
liability method of accounting for income taxes. Under this method, the provision for income taxes includes amounts currently payable and amounts deferred as tax assets and liabilities, based on differences between the financial statement carrying
amounts and the tax bases of existing assets and liabilities, and is measured using the current tax rates, which we assume will be in effect when the differences reverse. Deferred tax assets are reduced by a valuation allowance, which is established
when it is more likely than not that some portion or all of the deferred tax assets will not be realized. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment
date. In making the determination of the valuation allowance, we consider both positive and negative evidence and make certain assumptions, including projections of taxable income. Changes in these assumptions may have a material impact on results.

We consider both positive and negative evidence and make certain assumptions, including projections of taxable income. Changes in these
assumptions may have a material impact on results. If we overestimated taxable income by 10%, our reported valuation allowance at December 31, 2006 would not be materially affected.

Allowance for Doubtful Accounts

We provide an allowance for doubtful accounts based on a
review of the specific receivable. A 100% provision is applied for those customers for whom collectibility is in doubt. Management must make certain judgments and estimates in determining accounts that are considered to be in doubt.



46



---

##### Table of Contents

Changes in Accounting Standards

In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements (SFAS No. 157). SFAS No. 157 defines fair value, establishes a framework for measuring fair value in
accordance with generally accepted accounting principles, and expands disclosures about fair value measurements. This statement does not require any new fair value measurements; rather, it applies to other accounting pronouncements that require or
permit fair value measurements. The provisions of this statement are to be applied prospectively as of the beginning of the fiscal year in which this statement is initially applied, with any transition adjustment recognized as a cumulative-effect
adjustment to the opening balance of retained earnings. The provisions of SFAS No. 157 are effective for the fiscal years beginning after November 15, 2007; therefore, we anticipate adopting this standard as of January 1, 2008. This
Statement will not have a material effect on the Companys consolidated financial condition or results of operations.

In September
2006, the FASB issued SFAS No. 158, Employers Accounting for Defined Benefit Pension and Other Postretirement Plansan amendment of FASB Statements No. 87, 88, 106, and 132(R) (SFAS No. 158). SFAS
No. 158 requires employers to recognize a net liability or asset and an offsetting adjustment to accumulated other comprehensive income to report the funded status of defined benefit pension and other post-retirement benefit plans. SFAS
No. 158 requires prospective application; thus, the recognition and disclosure requirements are effective for our fiscal year ended December 31, 2006. Additionally, SFAS No. 158 requires companies to measure plan assets and
obligations at their year-end balance sheet date. This requirement is effective for our fiscal year ending December 31, 2008. This Statement will not have a material effect on the Companys consolidated financial position or results of
operation.

In September 2006, the SEC issued Staff Accounting Bulletin No. 108, Considering the Effects of Prior Year
Misstatements when Quantifying Misstatements in Current Year Financial Statements (SAB 108). SAB 108 provides guidance on how prior year misstatements should be taken into consideration when quantifying misstatements in current
year financial statements for purposes of determining whether the current years financial statements are materially misstated. SAB 108 permits registrants to record the cumulative effect of initial adoption by recording the necessary
correcting adjustments to the carrying values of assets and liabilities as of the beginning of that year with the offsetting adjustment recorded to the opening balance of retained earnings only if material under the dual method. SAB 108
is effective for fiscal years ending on or after November 15, 2006. As described in Note 1(u) to the audited consolidated financial statements, the Company adopted SAB 108 in 2006.

In July 2006, the FASB issued FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes, an Interpretation of FASB Statement
No. 109 (FIN 48). FIN 48 provides guidance on the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN 48 requires that we recognize in the financial statements
the impact of a tax position if that position will more likely than not be sustained on audit, based on the technical merits of the position. FIN 48 also provides guidance on derecognition, classification, interest and penalties, accounting in
interim periods, disclosures, and transition provisions. Any transition adjustment recognized on the date of adoption will be recorded as an adjustment to retained earnings as of the beginning of the adoption period. FIN 48 is effective for fiscal
years beginning after December 15, 2006. Based on our current evaluation, we do not expect the adoption of this interpretation to have a material impact on our financial position or results of operations.

In June 2006, the FASBs Emerging Issues Task Force reached a consensus on Issue No. 06-3, How Taxes Collected from Customers and
Remitted to Governmental Authorities Should be Presented in the Income Statement (That Is, Gross versus Net Presentation) (EITF 06-3). EITF 06-3 requires disclosure of an entitys accounting policy regarding the presentation
of taxes assessed by a governmental authority that are directly imposed on a revenue-producing transaction between a seller and a customer, including sales, use, value added and some excise taxes. Our policy is to exclude all such taxes from revenue
on a net reporting basis.



47



---

##### Table of Contents

Results of Operations

The following table provides a breakdown of our sales revenue and volumes, cost of sales and administration and selling expenses for the last three years.



|                                          |  |                                                |         |      |        |       |       |       |         |        |  |       |  |       |         |   |  |        
|----------------------------------------- |  | ---------------------------------------------- | ------- | ---- | ------ | ----- | ----- | ----- | ------- | ------ |  | ----- |  | ----- | ------- | - |  | -------
|                                          |  | Year ended December 31,                       
|                                          |  | 2004                                           |         | 2005 |        | 2006 
|                                          |  | Sales                                          |         |      | Volume |       | Sales |       |         | Volume |  | Sales |  |       | Volume 
|                                          |  | (in millions of U.S.$, except where indicated)
|Sales Revenue                             |  |                                                |         |      |        |       |       |       |         |        |  |       |  |       |         |   |  |        
|Pulp                                      |  |                                                |         |      |        |       |       |       |         |        |  |       |  |       |         |   |  |        
|Bleached pulp(1)                          |  | U.S.$                                          | 849.1   |      |        | 1,639 |       | U.S.$ | 829.2   |        |  | 1,639 |  | U.S.$ | 1,071.6 |   |  | 1,849  
|Unbleached pulp(1)                        |  |                                                | 156.8   |      |        | 362   |       |       | 161.9   |        |  | 355   |  |       | 186.2   |   |  | 356    
|Total                                     |  |                                                | 1,006.0 |      |        | 2,001 |       |       | 991.2   |        |  | 1,995 |  |       | 1,257.8 |   |  | 2,205  
|                                          |  |                                                |         |      |        |      
|Wood Products                             |  |                                                |         |      |        |       |       |       |         |        |  |       |  |       |         |   |  |        
|Sawn timber(2)                            |  |                                                | 382.0   |      |        | 1,968 |       |       | 433.4   |        |  | 2,425 |  |       | 495.0   |   |  | 2,512  
|Remanufactured wood products(2)           |  |                                                | 230.4   |      |        | 344   |       |       | 215.9   |        |  | 360   |  |       | 231.2   |   |  | 430    
|Total                                     |  |                                                | 612.5   |      |        | 2,311 |       |       | 649.3   |        |  | 2,785 |  |       | 726.2   |   |  | 2,942  
|                                          |  |                                                |         |      |        |      
|Plywood and Fiberboard panels             |  |                                                | 373.8   |      |        | 1,107 |       |       | 588.3   |        |  | 2,046 |  |       | 721.2   |   |  | 2,397  
|                                          |  |                                                |         |      |        |      
|Forestry Products                         |  |                                                |         |      |        |       |       |       |         |        |  |       |  |       |         |   |  |        
|Sawlogs (net)(2)                          |  |                                                | 32.8    |      |        | 941   |       |       | 51.3    |        |  | 1,457 |  |       | 56.5    |   |  | 1,474  
|Pulplogs(2)                               |  |                                                | 3.6     |      |        | 177   |       |       | 7.3     |        |  | 254   |  |       | 7.9     |   |  | 239    
|Posts                                     |  |                                                | 24.5    |      |        | 101   |       |       | 21.8    |        |  | 88    |  |       | 7.9     |   |  | 34     
|Chips                                     |  |                                                | 0.1     |      |        | 2     |       |       | 7.1     |        |  | 109   |  |       | 7.7     |   |  | 178    
|Total                                     |  |                                                | 61.1    |      |        | 1,221 |       |       | 87.5    |        |  | 1,908 |  |       | 79.9    |   |  | 1,925.6
|                                          |  |                                                |         |      |        |      
|Other                                     |  |                                                | 21.8    |      |        |      |       |       | 57.7    |        |  |      |  |       | 65.0    |   |  |       
|                                          |  |                                                |         |      |        |      
|Total sales revenue                       |  | U.S.$                                          | 2,075.1 |      |        |       |       | U.S.$ | 2,373.9 |        |  |       |  | U.S.$ | 2,850.0 |   |  |        
|                                          |  |                                                |         |      |        |      
|Cost of Sales                             |  |                                                |         |      |        |       |       |       |         |        |  |       |  |       |         |   |  |        
|Forestry labor costs                      |  |                                                | 168.6   |      |        |       |       |       | 199.3   |        |  |       |  |       | 248.9   |   |  |        
|Timber                                    |  |                                                | 249.3   |      |        |       |       |       | 339.1   |        |  |       |  |       | 412.9   |   |  |        
|Port costs                                |  |                                                | 14.5    |      |        |       |       |       | 17.3    |        |  |       |  |       | 22.4    |   |  |        
|Freight and other transportation costs    |  |                                                | 254.8   |      |        |       |       |       | 311.5   |        |  |       |  |       | 330.4   |   |  |        
|Other costs of sales                      |  |                                                | 354.3   |      |        |       |       |       | 521.0   |        |  |       |  |       | 611.4   |   |  |        
|                                          |  |                                                |         |      |        |       |       |       |         |        |  |       |  |       |         |   |  |        
|Total cost of sales                       |  | $                                              | 1,041.6 |      |        |       |       | $     | 1,388.3 |        |  |       |  | $     | 1,626.0 |   |  |        
|Gross margins                             |  |                                                | 49.8    | %    |        |       |       |       | 41.5    | %      |  |       |  |       | 42.9    | % |  |        
|                                          |  |                                                |         |      |        |      
|Depreciation                              |  |                                                | 141.3   |      |        |       |       |       | 170.3   |        |  |       |  |       | 187.0   |   |  |        
|Administration and Selling Expenses       |  |                                                |         |      |        |       |       |       |         |        |  |       |  |       |         |   |  |        
|Wages and salaries                        |  |                                                | 45.6    |      |        |       |       |       | 57.0    |        |  |       |  |       | 71.0    |   |  |        
|Other administration and selling expenses |  |                                                | 79.2    |      |        |       |       |       | 123.3   |        |  |       |  |       | 158.2   |   |  |        
|                                          |  |                                                |         |      |        |       |       |       |         |        |  |       |  |       |         |   |  |        
|Total selling and administrative expenses |  | $                                              | 124.8   |      |        |       |       | $     | 180.4   |        |  |       |  | $     | 229.2   |   |  |        
|                                          |  |                                                |         |      |        |       |       |       |         |        |  |       |  |       |         |   |  |        
|Total operating costs and expenses        |  | $                                              | 1,307.7 |      |        |       |       | $     | 1,739.0 |        |  |       |  | $     | 2,042.3 |   |  |        
|Operating margin                          |  |                                                | 37.0    | %    |        |       |       |       | 26.7    | %      |  |       |  |       | 28.3    | % |  |        

---

|(1) | Volumes measured in thousands of metric tons.
|--- | ---------------------------------------------

|(2) | Volumes measured in thousands of cubic meters.
|--- | ----------------------------------------------



48



---

##### Table of Contents

Year Ended December 31, 2005 Compared to Year Ended December 31, 2006

Net Sales

Net sales increased 20.1%, from
U.S.$2,373.9 million in 2005 to U.S.$2,850.0 million in 2006 principally as a result of a 26.9% increase in sales of pulp, a 22.6% increase in sales of plywood and fiberboard panels and a 11.8% increase in sales of wood products.

These increases were partially offset by an 8.7% decrease in sales of forestry products, reflecting a decrease of 9.5% decrease in sales prices.

Pulp Sales

Sales
revenue of bleached and unbleached pulp increased 26.9%, from U.S.$991.2 million in 2005 to U.S.$1,257.8 million in 2006, reflecting a 10.5% increase in sales volume and a 14.8% increase in average prices. Sales of bleached pulp increased by 29.2%
due principally to an increase of 14.5% in average prices and higher sales volume of 12.8% in 2006 compared to 2005. The increase in sales volume in 2006 reflects primarily the commencement of start-up operations of the Nueva Aldea Pulp Mill in
August 2006 and a full year of production in the Valdivia Mill, which had been shut down for approximately three months during 2005. Sales of unbleached pulp increased by 15.0% principally due to a 14.9% increase in average prices and a 0.1%
increase in sales volume.

Wood Products Sales

Sales of wood products, including sawn timber and remanufactured products increased 11.8%, from U.S.$649.3 million in 2005 to U.S.$726.2 million in 2006, reflecting a 5.6% increase in sales volume and a 5.9% increase
in average prices. Sawn timber sales revenue increased 14.2%, from U.S.$433.4 million in 2005 to U.S.$495.0 million in 2006 due to a 10.3% increase in average prices and a 3.6% increase in sales volume. Sales of remanufactured wood products
increased 7.1% from U.S.$215.9 million in 2005 to U.S.$231.2 million in 2006 due to a 19.6% increase in sales volume, partially offset by a 10.5% decrease in average prices due to the continued weakening of the construction sector in the United
States throughout 2006.

Plywood and Fiberboard Panels Sales

Sales of plywood and fiberboard panels increased 22.6%, from U.S.$588.3 million in 2005 to U.S.$721.2 million in 2006. This increase was primarily due to
a 17.2% increase in sales volume reflecting the consolidation of the acquisition of Placas do Paraná S.A. in Brazil and Faplac S.A. in Argentina in March 2005 and October 2005, respectively, and the consolidation of the operations of
Araucos Nueva Aldea plywood mill in Chile which commenced in the last quarter of 2004. The increase in sales was also attributable to a 4.6% increase in average prices resulting from increasing prices for medium-density fiberboard (MDF),
particleboard (PBO) and hardboard (HB).

Forestry Sales

Sales revenue from forestry products decreased 8.7%, from U.S.$87.5 million in 2005 to U.S.$79.9 million in 2006. This decrease is mainly attributable to
63.9% decrease in sales revenue from posts reflecting a 61.0% decrease in sales volume, which in turn is due principally to a reduction in demand for posts in Araucos principal market (the Mexican Telecommunications Industry) as a result of a
change in the technology used for telecommunications which requires a lower consumption of posts. This decrease in demand was also reflected in a 7.4% decrease in average nominal prices. The decrease in sales of posts was partially offset by higher
sales of sawlogs. Sales revenue of sawlogs increased by 8.0%, primarily due to an 8.8% increase in average prices and a 1.2% increase in sales volume. Our sales of sawlogs and pulplogs are primarily in the Chilean market.



49



---

##### Table of Contents

Cost of Sale

Cost of sales increased 17.1% from U.S.$1,388.3 million for 2005 to U.S.$1,626.0 million for 2006 primarily due to due to an increase in other cost of sales, primarily due to an increase in maintenance cost and
chemical costs and to a higher cost of timber that negatively affected the unit cost of pulp, wood products, plywood and fiber panels and forestry products. The higher cost of timber was due mainly to an increase in the market price of timber bought
from third parties. Cost of sales were also affected by a 10.5% increase in sales volumes of pulp, a 17.2% increase in sales volume of plywood and fiberboard panels and a 5.6% increase in sales volumes of wood products.

Gross Margins

Gross margins increased from
41.5% for 2005 to 42.9 % for 2006 primarily due to a 20.1% increase in sales revenue. This increase was partially offset by a 17.1% increase in cost of sales.

Depreciation

Depreciation increased 9.8% from U.S.$170.3 million for 2005 to U.S.$187.0 million for 2006 due
primarily to a 7.8% increase in pulp industry depreciation expense from U.S.$115.6 million in 2005 to U.S.$124.9 million in 2006 and to a 18.7% increase in the plywood and fiberboard panels industry depreciation expense from U.S.$27.0 million in
2005 to U.S.$32.0 million in 2006. These increases were principally to the commencement of operations of the Nueva Aldea Pulp Mill and the consolidation of the acquisitions of Placas do Paraná. S.A. in Brazil and Faplac S.A. in Argentina in
March 2005 and October 2005, respectively.

Selling and Administrative Expenses

Selling and administrative expenses increased 27.1% from U.S.$180.4 million in 2005 to U.S.$229.2 million in 2006, primarily as a result of primarily as a
result of a 28.3% increase in other administrative and selling expenses and a 24.6% increase in wages and salaries, which was, in turn, due largely to an increase in the number of employees associated with the commencement of operations of the Nueva
Aldea Pulp Mill. As a percentage of sales revenue, selling and administrative expenses increased from 7.6% during 2005 to 8.0% during 2006.

Income
from Operations

Income from operations increased 27.2% from U.S.$634.9 million in 2005 to U.S.$807.8 million in 2006, primarily as
a result of a 20.1% increase in sales revenues that resulted from an increase in sales volume and average price of pulp and wood products and an increase in sales volume of plywood and fiber panels, partially offset by a 17.1% increase in cost of
sales and a 27.1% increase in administration and selling expenses.

Non-Operating Income (Expense)

We recorded a total non-operating expense of U.S.$31.4 million in 2006 compared to an expense of U.S.$83.9 million in 2005, primarily due to a 25.0%
decrease in interest expense and a 268.2% increase in foreign exchange gain.

Interest Income

Interest income increased from U.S.$34.5 million in 2005 to U.S.$40.9 million in 2006, primarily due to an increase during 2006 in the average nominal
interest rate for our cash balance, time deposits and short-term investment positions.

Other Income (Expense)

We recorded other expense of U.S.$0.3 million in 2006 compared to an expense of U.S.$2.2 million in 2005.



50



---

##### Table of Contents

Foreign Exchange Gains (Losses)

We recorded foreign exchange gains of U.S.$10.5 million in 2006 compared to a loss of U.S.$6.2 million in 2005, primarily due to an increase in the value
of Araucos Euro denominated investments expressed in U.S. dollars, attributable to the revaluation of the euro against the U.S. dollar in 2006.

Interest Expense

Interest expenses decreased 25.0%, from U.S.$109.9 million in 2005 to U.S.$82.5
million in 2005, primarily due to an increase in capitalized interest expense related to the Nueva Aldea Pulp Mill project.

Income
Taxes

In 2006, we recorded a tax expense of U.S.$162.0 million, compared to an expense of U.S.$113.3 million in 2005. This increase was
principally due to a 40.9% increase in pre-tax earnings in 2006, attributable to an increase in income from operations in 2006. Our effective tax rate was 20.9% in 2006 compared to 20.6% in 2005, primarily due to our acquisitions in Argentina and
Brazil, where income tax rates are higher relative to Chilean tax rates.

Our effective tax rate was 20.9% in 2006 compared to 20.6% in
2005, primarily due to our acquisitions in Argentina and Brazil, where income tax rates are higher relative to Chilean tax rates.

In
accordance with Chilean law, we and each of our subsidiaries compute and pay tax on a separate basis and not on a consolidated basis.

At
December 31, 2006, our consolidated subsidiaries had an aggregate tax loss carryforwards of U.S.$141.8 million.

Net Income

Our net income increased by 40.1% from U.S.$444.3 million in 2005 to U.S.$622.4 million in 2006. This increase was primarily due to an increase in
prices of pulp and wood products and an increase in sales volume of pulp, plywood and fiberboard panels and wood products, resulting in higher operating income, partially offset by the increase in cost of sales, non-operating expense and tax
expense.

Year Ended December 31, 2004 Compared to Year Ended December 31, 2005

Net Sales

Net sales increased 14.4%, from
U.S.$2,075.1 million in 2004 to U.S.$2,373.9 million in 2005, principally as a result of a 57.4% increase in sales of plywood and fiberboard panels, a 13.4% increase in sales of sawn timber and a 56.5% increase in sales of sawlogs, which were
partially offset by a 1.5% decrease in sales of pulp and a 6.3% decrease in sales of remanufactured wood products.

Pulp Sales

Sales revenue of bleached and unbleached pulp decreased 1.5%, from U.S.$1,006.0 million in 2004 to U.S.$991.2 million in 2005,
reflecting a 1.2% decrease in average prices and a 0.3% decrease in sales volume. Sales of unbleached pulp increased by 3.2% due to a 5.1% increase in prices, which was partially offset by a 1.8% decrease in sales volume. Sales of bleached pulp
decreased by 2.3% due principally to a 2.4% decrease in average prices.



51



---

##### Table of Contents

Wood Products Sales

Sales of wood products, including sawn timber, remanufactured products and flitches, increased 6.0%, from U.S.$612.5 million in 2004 to U.S.$649.3 million in 2005, reflecting a 20.5% increase in sales volume partially
offset by a 12.0% decrease in average prices. Sawn timber sales revenue increased 13.4%, from U.S.$382.0 million in 2004 to U.S.$433.4 million in 2005 due to an increase of 23.2% in sales volume resulting from the start of production at Nueva Aldea
Sawmill, partially offset by a 7.9% decrease in average prices. Sales of remanufactured wood products decreased 6.3% from U.S.$230.4 million in 2004 to U.S.$215.9 million in 2005 due to a 13.0% decrease in average prices, which was partially offset
by a 4.7% increase in sales volume. The decrease in price of remanufactured products was attributable in large part to an excess of inventories in the U.S., which depressed the average prices.

Plywood and Fiberboard Panels Sales

Sales of plywood and fiberboard panels increased 57.4%, from U.S.$373.8 million in 2004 to U.S.$588.3 million in 2005. This increase was primarily due to a 84.8% increase in sales volume attributable to our panel mill acquisitions in Brazil
and Argentina, as well as the commencement of operations of the Nueva Aldea Plywood Mill during the last quarter of 2004. These increases were partially offset by a 14.8% decrease in average prices due to a change in the composition of the product
mix offered by our panel division resulting from the introduction of PBO following our acquisitions in Argentina and Brazil and a decrease in sales to the U.S. market attributable to an excess of inventories.

Forestry Sales

Sales revenue from
forestry products increased 43.3%, from U.S.$61.1 million in 2004 to U.S.$87.5 million in 2005. This increase is mainly attributable to a 56.2% increase in sales volume, which was partially offset by an 8.2% decrease in nominal prices. Sales revenue
of sawlogs increased by 56.5%, mainly the result of a 54.8% increase in sales volume. This increase in overall forestry products sales revenue was partially offset by a 11.1% decrease in sales revenue from posts attributable to a 13.3% decrease in
sales volume partially offset by a 1.7% decrease in nominal prices. Our sales of forestry products are primarily in the Chilean and Brazilian markets. Such sales are subject to fluctuations in volume and price, which are not cyclical in nature.

Cost of Sales

Cost of sales
increased 33.3% from U.S.$1,041.6 million for 2004 to U.S.$1,388.3 million for 2005, primarily due to an increase in the cost of timber that negatively affected the unit cost of pulp, wood products, plywood and fiber panels and forestry products.
The increase in the cost of timber was due mainly to an increase the market price of timber and the appreciation of the Chilean peso with respect to the U.S. dollar. Cost of sales were also affected by an increase in sales volume of wood products,
plywood and fiber panels and forestry products. These increases were partially offset by a 13.3% decrease in sales volume of posts and a decrease of 11.6% in sales volume of flitches.

Gross Margins

Gross margins decreased from 49.8% for 2004 to 41.5% for 2005, primarily due to
the increase in cost of sales attributable to an increase in sales volume and higher cost of timber, which was partially offset by an increase in consolidated sales.

Depreciation

Depreciation increased 20.5% from U.S.$141.3 million for 2004 to U.S.$170.3
million for 2005, due primarily to a 17.0% increase in pulp industry depreciation expense from U.S.$99.0 million in 2004 to U.S.$115.9 million in 2005 and to a 76.9% increase in the plywood and fiberboard panels industry depreciation expense from
U.S.$15.3 million in 2004 to U.S.$27.0 million in 2005. These increases were principally attributable to the operation of the Valdivia Mill, the commencement of operation of the Nueva Aldea Plywood Mill and the March and October acquisitions of
panel mills in Argentina and Brazil.



52



---

##### Table of Contents

Selling and Administrative Expenses

Selling and administrative expenses increased 44.5% from U.S.$124.8 million in 2004 to U.S.$180.4 million in 2005, primarily as a result of a 55.7%
increase in other administrative and selling expenses attributable to our new operations in Brazil and a 25.1% increase in wages and salaries, which was, in turn, due largely to an increase in the number of employees associated with the commencement
of operations of the Nueva Aldea Sawmill and Plywood Mill and our acquisitions in Argentina and Brazil, as well an appreciation in the exchange rate between the U.S. dollar and the local currencies of our principal operating markets that caused
increases in the salaries paid to our employees when measured in U.S. dollars. As a percentage of sales revenue, selling and administrative expenses increased from 6.0% during 2004 to 7.6% during 2005.

Income from Operations

Income from operations
decreased 17.3% from U.S.$767.3 million in 2004 to U.S.$634.9 million in 2005, primarily as a result of an increase in cost of sales, depreciation and selling and administrative expenses.

Non-Operating Income (Expense)

We recorded a
total non-operating expense of U.S.$83.9 million in 2005 compared to an expense of U.S.$41.4 million in 2004, primarily as a result of a 40.7% increase in interest expense and an increase in foreign exchange losses.

Interest Income

Interest income
increased from U.S.$25.4 million in 2004 to U.S.$34.5 million in 2005, primarily due to an increase in the average nominal interest rate for our cash balance, time deposits and short-term investment positions.

Other Income (Expense)

We recorded
other expense of U.S.$2.2 million in 2005 compared to an expense of U.S.$5.0 million in 2004, due primarily to a decrease in indirect project expenses and an increase in other non-operating income attributable to an increase in insurance indemnity.

Foreign Exchange Gains (Losses)

We recorded foreign exchange losses of U.S.$6.2 million in 2005 compared to a gain of U.S.$16.2 million in 2004, primarily due to a decrease in the value of our euro-denominated investments expressed in U.S. dollars,
attributable to a depreciation of the euro against the U.S. dollar, and an appreciation of the Brazilian real against the U.S. dollar that negatively affected our real-denominated liabilities.

Interest Expense

Interest expenses
increased 40.7%, from U.S.$78.1 million in 2004 to U.S.$109.9 million in 2005, primarily due to higher levels of indebtedness after the issuance in April 2005 of our 5.625% Notes due in 2015 and the consolidation of debt in connection with our
acquisitions in Brazil and Argentina. Interest expenses also increased due to higher interest rates.

Income Taxes

In 2005, we recorded a tax expense of U.S.$113.3 million, compared to an expense of U.S.$139.9 million in 2004. This decrease was principally due to a
decrease in taxable income earned in 2005. Our effective tax rate was 21% in 2005 compared to 19% in 2004, primarily due to our acquisitions in Argentina and Brazil, where income tax rates are higher relative to Chilean tax rates.



53



---

##### Table of Contents

In accordance with Chilean law, we and each of our subsidiaries compute and pay tax on a separate basis
and not on a consolidated basis.

At December 31, 2005, our consolidated subsidiaries had an aggregate tax loss carryforwards of
U.S.$128.4 million.

Net Income

Our net income decreased by 25.0% from U.S.$592.2 million in 2004 to U.S.$444.3 million in 2005. This decrease was primarily due to the decrease in our operating income, which was partially offset by a decrease in income taxes.

LIQUIDITY AND CAPITAL RESOURCES

Our primary sources of liquidity are funds from operations, domestic and international borrowings from commercial and investment banks and debt offerings in the domestic and international capital markets.

Our net cash flow provided by operating activities was U.S.$1,013.8 during the year ended December 31, 2006, U.S.$751.0 million during the year
ended December 31, 2005 and U.S.$870.5 million during the year ended December 31, 2004. The increase in cash flow from operating activities in 2006 as compared to 2005 was principally due to a 27.2% increase in operating income, 224.4%
increase in other liabilities resulting from the Bío Bío Investment Fund transaction, and a 145.8% increase in investments and proceeds in trading securities, which was partially offset by a 709.8% increase in receivables due to the
increase in sales attributable to the commencement of operations of the Nueva Aldea pulp mill. The decrease in cash flow from operating activities in 2005, compared to 2004, was principally due to a 17.3% decrease in operating income, an increase of
24.2% in prepaid expenses and other current and long-term assets and a decrease of 15.6% in short-term investments, partially offset by a 62.7% increase in accrued liabilities and other current and long-term liabilities.

In accordance with customary practice in the pulp industry, we do not have long-term sales contracts with our customers; rather, we maintain
relationships with our customers pursuant to which we reach agreements from time to time on specific volumes and prices.

We expect our
principal capital expenditures for 2007 to include the construction of the second line of the Nueva Aldea plywood mill, the construction of the Nueva Aldea and Constitución pipelines. SeeItem 4. Information on the
CompanyCapital Expenditures. For subsequent years, our capital expenditures will depend on the state of the economy in each country where we have operations, as well as market conditions.

We believe that cash flow generated by operations, cash balances, borrowings from commercial banks, export credit agencies and multilateral lending
agencies and debt offerings in the domestic and international capital markets, will be sufficient to meet our working capital, debt service and capital expenditure requirements for the foreseeable future.



54



---

##### Table of Contents

The following table sets forth certain contractual obligations as of December 31, 2006, and the
period in which the contractual obligations come due.



|                                      |  |                               |         |                 |   |           |  |           |       |                  |   |       |  |   |        
|------------------------------------- |  | ----------------------------- | ------- | --------------- | - | --------- |  | --------- | ----- | ---------------- | - | ----- |  | - | -------
|                                      |  | Payments Due by Period       
|                                      |  | Total                         |         | Less than 1year |   | 1-3 years |  | 3-5 years |       | More than 5years
|                                      |  | (in millions of U.S. dollars)
|Contractual obligation(1)             |  |                               |         |                 |   |           |  |           |       |                  |   |       |  |   |        
|Long-term debt obligations(2)         |  | $                             | 3,190.2 |                 | $ | 412.8     |  | $         | 786.6 |                  | $ | 927.1 |  | $ | 1,063.7
|Capital (finance) lease obligations   |  |                               | 4.7     |                 |   | 1.7       |  |           | 3.0   |                  |   | 0.0   |  |   | 0.0    
|Operating lease obligations           |  |                               |         |                 |   |           |  |           |       |                  |   |       |  |   |        
|Purchase obligations(3)               |  |                               | 88.4    |                 |   | 79.7      |  |           | 8.7   |                  |   | 0.0   |  |   | 0.0    
|Registrants balance sheet under GAAP |  |                               |         |                 |   |           |  |           |       |                  |   |       |  |   |        
|                                      |  |                               |         |                 |   |           |  |           |       |                  |   |       |  |   |        
|Total                                 |  | $                             | 3,283.3 |                 | $ | 494.2     |  | $         | 798.3 |                  | $ | 927.1 |  | $ | 1,063.7
|                                      |  |                               |         |                 |   |           |  |           |       |                  |   |       |  |   |        

---

|(1) | Excludes obligations to purchase
wood, plantations and land from the Bío Bío Investment Fund. Arauco began consolidating the Bío Bío Investment Fund in 2006. Therefore, the assets that we are obligated to purchase from the Bío Bío
Investment Fund are already included in our consolidated financial statements.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | On June 11, 2007, Alto
Paraná S.A. issued U.S.$270 million of 6.375% Notes due 2017 in the form of Rule 144A/Regulation S notes sold in the international debt and debt capital markets, which were fully and unconditionally guaranteed by Arauco. The proceeds of the
offering were used to refinance U.S.$200 million of existing notes.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) | Excludes contracts entered into
with independent contractors to perform operations on our behalf. Our payment obligations under such contracts are not pre-determined, but rather depend on the performance of certain variables. Accordingly, we cannot quantify our contractual
obligations under such contracts.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

At December 31, 2006, our short-term bank borrowings were U.S.$203.5 million. At
December 31, 2005, our short-term bank borrowings were U.S.$113.4 million. At December 31, 2004, we did not have any short-term bank borrowings.

Our total long-term bank, export credit agency and multilateral lending agency debt (including the current portion of such debt) was U.S.$739.1 million at December 31, 2006, of which 97.7% was U.S.
dollar-denominated. At December 31, 2006, we also had total capital markets borrowings of U.S.$1,679.6 million, 100.0% of which was U.S. dollar-denominated. At December 31, 2006, the weighted average maturity of our foreign
currency-denominated debt was 4.4 years. The interest rate on our variable rate debt is determined principally by reference to the London inter-bank offered rate (LIBOR), and at December 31, 2006 the average interest rate for our foreign
currency-denominated floating rate debt over LIBOR was 0.37%. The average interest rate for our foreign currency-denominated fixed rate debt was 6.8%. These average rates do not reflect the effect of swap agreements and subsequent unwinds effective
as of December 31, 2006.

The following are our principal financing activities during 2006:



| |  |  | On December 12, 2006, our subsidiary Alto Paraná paid at maturity U.S.$50 million of its U.S.$250 million floating rate trust notes due 2008.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------

The instruments and agreements governing our syndicated loans set limits on our incurrence of debt and liabilities
through the use of financial covenants. The principal financial covenants contained in these agreements are as follows:



| |  |  | Our debt to equity ratio must not exceed 1.2:1;
| | - |  | -----------------------------------------------



| |  |  | Our interest coverage ratio must not be less than 2:1; and
| | - |  | ----------------------------------------------------------



| |  |  | We are required to maintain a minimum consolidated net worth of U.S.$2.5 billion, as measured in accordance with generally accepted accounting principles in Chile,
or Chilean GAAP.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

We were in compliance with these covenants as of December 31, 2006.



55



---

##### Table of Contents

On June 21, 2001, we irrevocably and unconditionally guaranteed as primary obligor the issuance of
U.S.$250,000,000 Floating Rate Trust Notes due 2006 by a financial trustee in the name of The Chase Manhattan Bank, holder of Alto Paraná notes or the Trust Notes, under Argentine law 24,441. Our guarantee is in favor of the
holders of the Trust Notes and The Chase Manhattan Bank, as trustee. The Trust Notes have a stated maturity of June 13, 2006.

On
January 22, 2004, Alto Paraná carried out a restructuring of the Trust Notes. At a noteholders meeting, the noteholders approved the restructuring and certain amendments to the Trust Notes. The terms of the notes and the guarantee
were amended as follows:



| |  |  | the stated maturity was extended to December 12, 2008;
| | - |  | ------------------------------------------------------



| |  |  | the interest rate was fixed at LIBOR plus 6.5%; and
| | - |  | ---------------------------------------------------



| |  |  | the irrevocable and unconditional guarantee granted by us in 2001 was terminated.
| | - |  | ---------------------------------------------------------------------------------

At the same time, we offered the holders of the restructured Trust Notes, upon deposit of such notes with a foreign custodian, a new full, irrevocable
and unconditional guarantee of the notes, as primary obligor in the event of any failure to comply with the conditions of the Trust Notes. All the holders of the restructured Trust Notes accepted the guarantee.

On June 11, 2007, in order to refinance the notes (obligaciones negociables) issued by Alto Paraná S.A. in 2001 (the APSA
Notes) and other existing debt and to finance capital expenditures in the ordinary course of business, Alto Paraná S.A. issued U.S.$270 million of 6.375% Notes due 2017 in the form of Rule 144A/Regulation S notes sold in the
international debt and debt capital markets. Arauco fully and unconditionally guaranteed these Notes. Alto Paraná paid the APSA Notes with the proceeds of the 6.375% Notes.

Substantially all of our borrowings are denominated in dollars. See Item 11. Quantitative and Qualitative Disclosures about Market
RiskForeign Currency Risk.

OFF-BALANCE SHEET ARRANGEMENTS

We do not have any off-balance sheet arrangements.



56



---

##### Table of Contents

TREASURY MANAGEMENT

We manage the treasury activities of all of our Chilean subsidiaries on a centralized basis. Our subsidiaries borrow from or lend money to us in accordance with their daily cash requirements or surplus, maintaining
their cash balance close to zero. Our policy is not to allow our Chilean subsidiaries to invest in financial instruments and other transactions. We make decisions regarding short-term loans, short-term investments, currency transactions and other
transactions on a consolidated basis. Treasury activities are governed by our cash and deposits policy, which is approved by the board of directors.

Our Argentine subsidiaries and our recently acquired Brazilian subsidiaries manage their treasury activities independently from us. Their activities are governed by cash and deposit policies that are approved by their
chief executive officers. These policies are based on the same principles of our cash and deposits policy.

HEDGING

We periodically review our exposure to risks arising from fluctuations in foreign exchange rates and interest rates and make a determination, on a
case-by-case basis, at our senior management level whether or not to hedge such risks. As a result, from time to time we enter into currency and interest rate swaps with respect to a portion of our borrowings. See Note 1(k) to our audited
consolidated financial statements.

We have entered into two offsetting interest rate swap agreements, each in a notional amount of
U.S.$130 million, to reduce the interest rate on our 7.75% Notes due 2011. These interest rate swaps settle semi-annually and terminate in 2011. The net effect of our interest rate swap agreements is that we pay fixed interest at a rate of 5.506%
and receive fixed interest at a rate of 7.75%. See Note 8 to our audited consolidated financial statements.

The Bío
Bío Investment Fund entered into one interest rate swap agreement, in an initial notional amount of U.S.$240 million with amortizations during the life of the swap in the same amount and dates of the amortizations of the credit agreement the
Bío Bío Investment Fund obtained on October 6, 2007, with interest rate settled quarterly and with a final maturity in October 2013. The net effect of this interest rate swap agreement is that the Bío Bío Investment
Fund pays fixed interest rate at a rate of 5.256% and receives a floating rate at 3 months LIBOR.

We have also analyzed our exposure to
risks associated with fluctuations in prices of commodities, including pulp, but have, thus far, not entered into any material hedging transactions with respect to such risks. See Item 11. Quantitative and Qualitative Disclosures About
Market Risk.

RESEARCH AND DEVELOPMENT

We spent U.S.$2.0 million in 2004, U.S.$3.4 million in 2005 and U.S.$3.2 million in 2006 on research and development. We conduct our principal research and development programs through Bioforest, which concentrates
its efforts on applying and implementing the advanced technology available in the market to the specific characteristics of our forests and mills.

We are continuously researching and attempting to develop different strains of long-fiber pine trees to improve their quality and to shorten the average harvest cycle. Additionally, we maintain close relations with international research
institutes, equipment suppliers and the scientific and engineering community involved with our industry.



57



---

##### Table of Contents

|Item 6. | Directors, Senior Management and Employees
|------- | ------------------------------------------

DIRECTORS AND EXECUTIVE OFFICERS

Directors

A board of directors manages our business. Our by-laws (estatutos) require that the board of directors consist of nine directors. Our directors cannot also be our executives. The entire board is elected every
three years and can be re-elected for any number of periods. The current board was elected in April 2005, and their terms will expire in 2008. The board may appoint replacements to fill any vacancies that occur during periods between elections;
however, at the annual shareholders meeting following any such replacement, an election of the entire board must take place. Scheduled meetings of the board of directors are, generally, held once a month. Extraordinary board meetings are
called when summoned by the Chairman or when requested by at least two directors.

We do not have an audit committee or compensation
committee.

Our current directors are listed below.



|                     |  |                  |  |                      |  |    
|-------------------- |  | ---------------- |  | -------------------- |  | ---
|Name                 |  | Years asDirector |  | Position             |  | Age
|José Tomás Guzmán    |  | 21               |  | Chairman             |  | 78 
|Roberto Angelini(1)  |  | 21               |  | First Vice-Chairman  |  | 58 
|Manuel Bezanilla     |  | 21               |  | Second Vice-Chairman |  | 62 
|Jorge Andueza        |  | 13               |  | Director             |  | 58 
|Anacleto Angelini(1) |  | 21               |  | Director             |  | 93 
|Jorge Bunster        |  | 13               |  | Director             |  | 54 
|Carlos Croxatto      |  | 21               |  | Director             |  | 92 
|Alberto Etchegaray   |  | 13               |  | Director             |  | 57 
|Timothy C. Purcell   |  | 2                |  | Director             |  | 47 

---

|(1) | Anacleto Angelini is the uncle of Roberto Angelini.
|--- | ---------------------------------------------------

Included below are brief biographical descriptions of each of our directors.

José Tomás Guzmánbecame a Director on April 30, 1986 and became Chairman of the board of directors on May 4, 2007.
He served as Chairman of the board of directors from April 18, 1991 to January 4, 2005, when he voluntarily resigned, and as First Vice-Chairman of the board of directors from January 27, 2005 to May 4, 2007. He is a partner of
the law firm Portaluppi, Guzmán y Bezanilla, is a Vice-Chairman of COPEC, Empresas Copec and Empresa Pesquera Eperva S.A., is Chairman of the board of directors of Forestal Arauco and Inversiones Siemel S.A., and serves as a member of the
boards of directors of Compañía de Seguros de Vida Cruz del Sur S.A., Industrias Forestales S.A., Sigma S.A., Servicios Corporativos Sercor S.A., AntarChile, Corpesca S.A. and Astilleros Arica S.A. Mr. Guzmán holds a law
degree from the Catholic University of Chile.

Roberto Angelinibecame a Director on April 30, 1986 and became First
Vice-Chairman of the board of directors on May 4, 2007. He served as Vice-Chairman of the board of directors from April 18, 1991 to January 4, 2005, when he voluntarily resigned, and as Second Vice-Chairman of the board of directors
from January 27, 2005 to May 4, 2007. He serves as Chairman of the board of directors of Empresas Copec, COPEC, Corpesca S.A., SouthPacific Korp S.A., Pesquera Iquique-Guanaye S.A., Compañía de Seguros de Vida Cruz del Sur
S.A., Astilleros Arica S.A. and Servicios Corporativos Sercor S.A. He also serves as a member of the boards of directors of Forestal Arauco, Industrias Forestales S.A., Empresa Pesquera Eperva S.A., Inversiones Siemel S.A., AntarChile and Sigma S.A.
Mr. Angelini holds a degree in civil engineering from the Catholic University of Chile.

Manuel Bezanillabecame a Director on
April 30, 1986. He was appointed as Second Vice-Chairman of the board of directors on May 4, 2007. He is also a partner of the law firm Portaluppi, Guzmán y Bezanilla and serves as a member of the boards of directors of Forestal
Arauco, Pesquera Iquique-Guanaye S.A. and Inversiones Siemel S.A. Mr. Bezanilla holds a law degree from the Catholic University of Chile.



58



---

##### Table of Contents

Jorge Anduezabecame a Director on April 11, 1994. He is also the Chief Executive Officer of
AntarChile and serves as a member of the boards of directors of COPEC, Empresa Pesquera Eperva S.A., Corpesca S.A., Compañía de Seguros de Vida Cruz del Sur S.A., Inversiones Siemel S.A., Astilleros Arica S.A., Pesquera Iquique-Guanaye
S.A., SouthPacific Korp S.A. and Servicios Corporativos Sercor S.A. Mr. Andueza holds a degree in electronic civil engineering from Federico Santa María Technical University.

Anacleto Angelinibecame a Director on April 30, 1986. He is also the Chairman of the board of directors of AntarChile and serves as a member
of the boards of directors of Empresas Copec and Servicios Corporativos Sercor S.A.

Jorge Bunsterbecame a Director on
April 11, 1994. He is also the Chief Executive Officer of COPEC, is the Chairman of the board of directors of Abastecedora de Combustibles S.A., and serves as a member of the boards of directors of Metrogas S.A., Empresa Eléctrica
Guacolda S.A., Gasmar S.A. and Sociedad Nacional de Oleoductos S.A. Mr. Bunster holds degrees in commercial engineering and economics from the Catholic University of Chile and a masters degree in business administration from Navarra
University.

Carlos Croxattobecame a Director on April 30, 1986. He also serves as a member of the boards of directors of
Empresas Copec, COPEC, Forestal Arauco, Industrias Forestales S.A. and Servicios Corporativos Sercor S.A. Mr. Croxatto holds a degree in civil engineering from the University of Chile.

Alberto Etchegaraybecame a Director on April 11, 1994 and served as Chairman of the board of directors from January 4, 2005 to
May 4, 2007, when he voluntarily resigned. He is also a partner of Domet Ltda., the Chairman of the board of directors of Invesco Internacional S.A., Salfacorp S.A. and Habitaria S.A., Vice-Chairman of the board of directors of Banco del
Desarrollo and Isapre Consalud S.A. He served as the Chilean Minister of Housing for four years. Mr. Etchegaray holds a degree in civil engineering from the Catholic University of Chile.

Timothy C. Purcell became a director on April 26, 2005. He is also Managing Partner of Linzor Capital Partners, LP. Mr. Purcell
currently serves as a member of the boards of directors of Compañía de Seguros de Vida Cruz del Sur S.A., Cruz del Sur Administradora General de Fondos S.A., Metronet S.A. de C.V., BOPP Holdings, and Parque Arauco S.A. He is also a
Trustee of International House in New York. Mr. Purcell received an undergraduate degree with distinction in Economics from Cornell University, as well as a Masters Degree in International Studies from the University of Pennsylvania and a
masters degree in business (MBA) from Wharton Business School.

Executive Officers

Our executive officers are appointed by the board of directors and hold office at its discretion. In June 2005, Alejandro Pérez, our President and
Chief Executive Officer, and Pablo Daud, our Environmental Managing Director, resigned from their positions. Our board of directors appointed Matías Domeyko, who served as our Chief Financial Officer, to replace Mr. Pérez and
Andrés Camaño has been appointed as our Environmental Managing Director. On June 22, 2005, Gianfranco Truffello was appointed as Chief Financial Officer, and Robinson Tajmuch was appointed as Chief Accounting Officer.



59



---

##### Table of Contents

Our current principal executive officers and the directors of each area or department are listed below.



|                     |  |                   |  |                                        |  |    
|-------------------- |  | ----------------- |  | -------------------------------------- |  | ---
|Name                 |  | Years with Arauco |  | Position                               |  | Age
|Matías Domeyko(1)    |  | 18                |  | President and Chief Executive Officer  |  | 45 
|Gianfranco Truffello |  | 12                |  | Chief Financial Officer                |  | 39 
|Robinson Tajmuch     |  | 16                |  | Chief Accounting Officer               |  | 50 
|Hernán Arriagada     |  | 16                |  | Engineering and Construction Director  |  | 59 
|Franco Bozzalla      |  | 17                |  | Panels Area Managing Director          |  | 44 
|Jorge Garnham        |  | 30                |  | Woodpulp Area Managing Director        |  | 53 
|Cristián Infante     |  | 12                |  | Argentina Managing Director            |  | 40 
|Pablo Mainardi       |  | 5                 |  | Brazil Managing Director               |  | 40 
|Charles Kimber       |  | 21                |  | Corporate Affairs & Marketing Director |  | 45 
|Antonio Luque        |  | 15                |  | Sawn Timber Area Managing Director     |  | 50 
|Alvaro Saavedra      |  | 15                |  | Forestry Area Managing Director        |  | 51 
|Mario Urrutia(2)     |  | 13                |  | Project Development Director           |  | 59 

---

|(1) | Matías Domeyko worked at Arauco from 1987 to 1994. He rejoined Arauco in 1997.
|--- | ------------------------------------------------------------------------------

|(2) | Mario Urrutia worked at Arauco from 1989 to 1991 and from 1995 to 1998. He rejoined Arauco in 2002.
|--- | ---------------------------------------------------------------------------------------------------

Included below are brief biographical descriptions of each of our executive officers and the directors of each area or
department.

Matías Domeykois the President and Chief Executive Officer of Arauco. Mr. Domeyko is also a member of the
board of directors of Puerto Lirquén S.A. He worked at Arauco from 1987 to 1994. He rejoined in 1997 and served as our Chief Financial Officer until 2005. He previously served as the Director of Development of Copec. Mr. Domeyko holds a
degree in commercial engineering from the University of Chile.

Gianfranco Truffellois the Chief Financial Officer of Arauco. He
joined Arauco in 1994 and was previously our Finance Manager. He also served as the Chief Financial Officer of Alto Paraná S.A. Mr. Truffello holds a degree in civil engineering from the Catholic University of Chile and a masters
degree in business administration from the Massachusetts Institute of Technology.

Robinson Tajmuch is the Chief Accounting Officer
of Arauco. He joined Arauco in 1991 and was previously our Comptroller. Before joining Arauco, he served as Auditing Manager at Price Waterhouse. Mr. Tajmuch holds a degree in accounting and auditing from the Santiago University of Chile.

Hernán Arriagadais our Engineering and Construction Director. He joined Arauco in 1991 and was previously the Engineering
Manager and Engineering and Maintenance Manager of the mills at the Arauco site. Mr. Arriagada holds a degree in mechanical engineering from the University of Santiago.

Franco Bozzallais our Panels Area Managing Director of Arauco. He joined Arauco in 1990. He was formerly a sales representative of Forestal
Arauco. Mr. Bozzalla holds a degree in civil engineering from the Catholic University of Chile.

Jorge Garnhamis the Woodpulp
Area Managing Director of Arauco. He joined Arauco in 1978. He was formerly the Managing Director of Alto Paraná S.A., Chief Accounting Officer and Manager of Forestry Sales of Arauco. Mr. Garnham holds a degree in civil engineering from
the Catholic University of Chile.

Cristián Infanteis the Argentina Managing Director. He joined Arauco in 1996 as a
woodpulp sales representative, where he worked for two years. In 1998, Mr. Infante was appointed sales manager for industrial lumber and remanufactured products of Forestal Arauco, where he worked until 1999, at which time he moved to
Centromaderas S.A., where he worked for two years. Mr. Infante holds a degree in civil engineering from the Catholic University of Chile.



60



---

##### Table of Contents

Pablo Mainardi is the Brazil Managing Director. He joined Arauco in 2002 as Chief Financial
Officer of Alto Paraná S.A., where he worked for three years. Mr. Mainardi holds a degree in industrial engineering from the University of Buenos Aires in Argentina and a masters degree in business administration from CEMA in Argentina.

Charles Kimberis the Corporate Affairs & Marketing Director of Arauco. Mr. Kimber also supervises the Environmental
Area Managing Director, Andrés Camaño. He graduated from the Catholic University of Chile with a degree in Commercial Engineering and joined Arauco in 1986, where he has held several positions in sales. He was previously Managing
Director of Arauco Wood Products Inc.

Antonio Luqueis the Sawn Timber Area Managing Director of Arauco and has held that position
since 1993. Before joining Arauco, he was the General Manager of Cabildo S.A. and a research engineer at Compañía Industrial. Mr. Luque holds a degree in civil engineering from the University of Chile.

Alvaro Saavedrais the Forestry Area Managing Director of Arauco. He joined Arauco in 1991. Previously, he was the Director of Development of
Forestal Arauco. He holds a degree in civil engineering from the University of Chile and a masters degree in science from the University of London.

Mario Urrutiais the Project Development Director of Arauco. He was the Director of Construction for the Arauco II Project and of the Valdivia Project. He was director of the Nueva Aldea Project until 2006. Mr. Urrutia holds a
degree in civil engineering from the University of Chile.

Compensation

For 2006, the aggregate compensation of all our directors and executive officers and senior managers paid or accrued in that year for services in all
capacities, including salaries and compensation for their service to those executive officers who serve as directors, was approximately U.S.$16.9 million. We do not maintain any pension or retirement programs or incentive compensation plans for our
directors or executive officers. We also do not maintain any plans providing for benefits upon termination of employment. The following table sets out the compensation of our directors for their services as directors in the years provided.



|                   |  |       |         |      |       |        
|------------------ |  | ----- | ------- | ---- | ----- | -------
|                   |  | 2005  |         | 2006
|Roberto Angelini   |  | U.S.$ | 63,315  |      | U.S.$ | 67,475 
|José Tomás Guzmán  |  |       | 108,630 |      |       | 116,950
|Carlos Croxatto    |  |       | 63,315  |      |       | 67,475 
|Alejandro Pérez(1) |  |       | 34,089  |      |       |       
|Manuel Bezanilla   |  |       | 58,649  |      |       | 61,475 
|Anacleto Angelini  |  |       | 22,658  |      |       | 24,738 
|Jorge Andueza      |  |       | 22,658  |      |       | 24,738 
|Jorge Bunster      |  |       | 22,658  |      |       | 24,738 
|Alberto Etchegaray |  |       | 67,973  |      |       | 74,213 
|Felipe Lamarca(2)  |  |       | 5,383   |      |       |       
|Juan Cambiaso      |  |       | 18,000  |      |       | 18,000 
|Antonio Luque      |  |       | 18,898  |      |       | 20,548 
|Matías Domeyko     |  |       | 52,346  |      |       | 75,286 
|René Katz          |  |       | 9,451   |      |       | 10,261 
|Manfred Mayer      |  |       | 9,451   |      |       | 10,261 
|Jorge Garnham      |  |       | 14,393  |      |       | 20,548 
|Eduardo Zañartu    |  |       | 9,447   |      |       | 10,287 
|Alvaro Saavedra    |  |       | 18,898  |      |       | 31,548 
|Franco Bozzalla    |  |       | 22,780  |      |       | 22,287 



61



---

##### Table of Contents

|                   |  |       |         |      |       |        
|------------------ |  | ----- | ------- | ---- | ----- | -------
|                   |  | 2005  |         | 2006
|Cristián Infante   |  |       | 13,333  |      |       | 12,000 
|Charles Kimber     |  |       | 13,667  |      |       | 20,548 
|Timothy C. Purcell |  |       | 15,482  |      |       | 24,738 
|                   |  |       |         |      |       |        
|Total compensation |  | U.S.$ | 685,474 |      | U.S.$ | 738,113
|                   |  |       |         |      |       |        

---

|(1) | Alejandro Pérez resigned as our President and Chief Executive Officer on June 8, 2005.
|--- | --------------------------------------------------------------------------------------

|(2) | Felipe Lamarca resigned as a director in April 1, 2005.
|--- | -------------------------------------------------------

Employees

The following table provides a breakdown
of our employees by main category of activity as of the end of each year in the three-year period ended December 31, 2006.



|                           |  |                    |  |       |  |      
|-------------------------- |  | ------------------ |  | ----- |  | -----
|                           |  | As of December 31,
|                           |  | 2004               |  | 2005  |  | 2006 
|Pulp mill employees        |  | 1,739              |  | 1,812 |  | 1,930
|Other industrial employees |  | 2,172              |  | 3,432 |  | 3,229
|Forestry employees         |  | 478                |  | 527   |  | 537  
|Administrative employees   |  | 339                |  | 414   |  | 711  
|                           |  |                    |  |       |  |      
|Total(1)                   |  | 4,728              |  | 6,185 |  | 6,408
|                           |  |                    |  |       |  |      

---

|(1) | In March 2005, we acquired Brazilian subsidiaries, which employ more than 530 people.
|--- | -------------------------------------------------------------------------------------

In addition, as of December 31, 2006, we had contracts with approximately 839 contractors, who employed
approximately 27,711 employees. Contractors that are not affiliated with us or with each other operate our 13 sawmills and 5 remanufacturing facilities in Chile. The 13 independent contractors that operate our Chilean sawmills employed 2,831
employees at December 31, 2006. The five independent contractors that operate our Chilean remanufacturing facilities employed 2,133 employees at December 31, 2006 and the independent contractor that operates the laminating beams line
employed 109 employees at December 31, 2006.

Under Chilean labor legislation, we are secondarily liable for the payment of labor and
the social security obligations owed to employees of our contractors. In the event that we do not exercise the rights granted to us by the labor laws regarding the supervision of our contractors in their compliance of their labor and social security
obligations, then our responsibility is elevated from secondary to joint and several, thus enabling an employee of a contractor to bring a claim relating to these obligations against both the contractor and to us, as the party hiring such
contractor, although the contractor would remain primarily liable for such obligations. Furthermore, we are also responsible for the health and safety conditions of the contractors workers and are obligated to ensure that the contractors
comply with all obligations related to such conditions while such workers are performing activities for us within our corporate purpose.

Approximately 16.2% of our employees in Chile, 55.9% of our employees in Argentina and 38.3% of our employees in Brazil were unionized at December 31, 2006. We negotiate collective bargaining agreements of two or three years
duration with unionized employees.

Our Chilean operations have not experienced any strikes or other work stoppages in the last five years
other than a six-day work stoppage in May 2007 at our Horcones complex (which includes the Arauco pulp mill, a panel plant and two sawmills), located in the Province of Arauco in the Eighth Region in Chile, due to a work stoppage by the employees of
our third party forestry contractors in that region. We consider our relations with our employees to be good. In June 2002, we experienced a one-day strike at the Puerto Esperanza Mill in Argentina. In 2006, the Faplac Mill experienced two strikes
each lasting 30 days and 12 days, respectively. These strikes did not materially affect mill operations, and management considers relations with our employees in Argentina to be satisfactory. During the last five years, there have been no strikes at
our recently acquired Brazilian subsidiaries.



62



---

##### Table of Contents

SHARE OWNERSHIP

Our director, Anacleto Angelini, owns 20.8% of Inversiones Angelini y Compañía Limitada, or Inversiones Angelini, which is the principal shareholder of AntarChile. He directly owns 0.9% of AntarChile.
Through his direct and indirect interests in Inversiones Angelini, AntarChile and Empresas Copec, Anacleto Angelini beneficially owns 8.3% of our shares.

Our Second Vice-Chairman, Roberto Angelini, owns 12.2% of Inversiones Angelini. He directly owns 0.2% of AntarChile. Through his direct and indirect interests in Inversiones Angelini, AntarChile and Empresas Copec,
Roberto Angelini beneficially owns 4.7% of our shares.

Our First Vice-Chairman, José Tomás Guzmán, owns 1.9% of
Inversiones Angelini. Directly and indirectly through Agroforestal e Inversiones Maihue S.A., he owns 2.9% of AntarChile and 0.1% of Empresas Copec. Through his interests in Inversiones Angelini, AntarChile and Empresas Copec, José
Tomás Guzmán beneficially owns 2.6% of our shares.

None of our other directors or executive officers beneficially owns 1% or
more of our shares.



|Item 7. | Major Shareholders and Related Party Transactions
|------- | -------------------------------------------------

MAJOR SHAREHOLDERS

Our only outstanding voting securities are shares of common stock of a single series, without nominal
(par) value. The following table sets forth certain information concerning ownership of our common stock, as of June 22, 2007, with respect to each shareholder known by us to own more than 5% of the outstanding shares of our common stock and
all of our directors and executive officers, as a group.



|                                                            |  |                       |  |                    
|----------------------------------------------------------- |  | --------------------- |  | -------------------
|                                                            |  | Number of SharesOwned |  | PercentageOwnership
|Empresas Copec                                              |  | 113,127,452           |  | 99.98              
|Directors and executive officers of the Company, as a group |  |                      |  |                   

Through its ownership of our Common Stock, Empresas Copec currently has voting control over us.

Empresas Copec is a Chilean public company listed on the Santiago Stock Exchange, the Valparaíso Stock Exchange and the Chilean
Electronic Stock Exchange. It is a holding company, the principal interests of which are in Arauco, gasoline distribution, electricity, gas distribution and fishing. Before October 1, 2003, Empresas Copecs legal name was
Compañía de Petróleos de Chile S.A. As of that date, Compañía de Petróleos de Chile S.A. transferred all its gasoline- and fuel-related business assets to a new subsidiary, Compañía de
Petróleos de Chile COPEC S.A., which we call COPEC, and changed its legal name to Empresas Copec S.A. In May 2005, AntarChile purchased 3.1 million shares of COPEC, increasing its ownership to 60.4% of Empresas Copec. At
December 31, 2006, AntarChile owned 60.8% of Empresas Copec.

Through its ownership in Empresas Copec, AntarChile beneficially owned
60.8% of our shares at December 31, 2006. As of May 31, 2007, AntarChile beneficially owns 60.8% of our shares.

Inversiones
Angelini y Compañía Limitada (Inversiones Angelini) in turn owns 61.1% of AntarChiles shares, and certain other related investors own an additional 12.3% of AntarChile. Inversiones Angelini and such other investors
are defined herein as the Angelini Group.

The principal shareholders of Inversiones Angelini are Mr. Anacleto Angelini
with approximately 21%, Mrs. María Noseda Zambra with approximately 16%, Mr. Roberto Angelini Rossi with approximately 12%, and Mrs. Patricia Angelini Rossi with approximately 12%.



63



---

##### Table of Contents

As of December 31, 2006, the Angelini Group controls Arauco through the ownership structure
described above.

RELATED PARTY TRANSACTIONS

We engage in a variety of transactions in the ordinary course of business with affiliates. Article 89 of the Chilean Companies Act requires that our transactions with related parties be on a market basis or on terms
similar to those customarily prevailing in the market. Directors and managers of companies that violate Article 89 are liable for losses and damages resulting from such violation.

In addition, Article 44 of the Chilean Companies Act provides that any transaction in which a director has a personal interest or is acting on behalf of
a third party that has an interest in the transaction may be approved only when the board of directors has been informed of and has approved the transaction and when the terms of the transaction are similar to those prevailing in the market.

When the transaction involves material amounts, the board of directors must determine whether the terms of such transaction are similar to
those prevailing in the market. If the board decides that it is not possible to determine whether the terms of the transaction are similar to those prevailing in the market, the board, with the abstention of the interested director, may approve or
reject the transaction or designate two independent appraisers. Any transaction involving material amounts must be reported to the Chilean Securities Commission (Superintendencia de Valores y Seguros). Moreover, resolutions approving such
transactions must be reported to our shareholders at the next annual shareholders meeting.

Article 44 presumes that a director has a
personal interest in a transaction when



| |  |  | the director, his or her spouse, certain relatives, a company in which such director is also a director or in which such director has a minimum direct or indirect
ownership interest of at least 10% are involved in the transaction,
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | or the companies in which any of the above mentioned persons is a director, a direct or indirect owner of 10% or more of our paid in capital are involved in the
transaction; or
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the persons for whom such director acts as a representative are involved in the transaction.
| | - |  | --------------------------------------------------------------------------------------------

Violation of Article 44 may result in administrative or criminal sanctions and civil liability to shareholders or third parties who suffer losses as a result of such
violation, but it does not affect the validity of the transaction. We believe that we have complied with the requirements of Article 89 and Article 44 in all transactions with related parties.

Our transactions with affiliates include the following:



| |  |  | We purchase goods and services that may also be provided by other suppliers. Among the most significant are our fuel purchases from COPEC, a subsidiary of Empresas
Copec, our majority shareholder; and
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | We obtain legal services from Portaluppi, Guzmán y Bezanilla, a law firm of which two of our directors, José Tomás Guzmán and Manuel
Bezanilla, are partners.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------

Financial information concerning transactions with affiliates is included in Note 11 to our
audited consolidated financial statements.

On June 21, 2001, we irrevocably and unconditionally guaranteed as primary obligor the
issuance of U.S.$250,000,000 Floating Rate Trust Notes due 2006 by a financial trustee in the name of The Chase Manhattan Bank, holder of Alto Paraná notes or the Trust Notes, under Argentine law 24,441. Our guarantee is in favor
of the holders of the Trust Notes and The Chase Manhattan Bank, as trustee. The Trust Notes have a stated maturity of June 13, 2006.



64



---

##### Table of Contents

On January 22, 2004, Alto Paraná carried out a restructuring of the Trust Notes. At a
noteholders meeting, the noteholders approved the restructuring and certain amendments to the Trust Notes. The terms of the notes and the guarantee were amended as follows:



| |  |  | the stated maturity was extended to December 12, 2008;
| | - |  | ------------------------------------------------------



| |  |  | the interest rate was fixed at LIBOR plus 6.5%; and
| | - |  | ---------------------------------------------------



| |  |  | the irrevocable and unconditional guarantee granted by us in 2001 was terminated.
| | - |  | ---------------------------------------------------------------------------------



| |  |  | At the same time, we offered the holders of the restructured Trust Notes, upon deposit of such notes with a foreign custodian, a new full, irrevocable and
unconditional guarantee of the notes, as primary obligor in the event of any failure to comply with the conditions of the Trust Notes. All the holders of the restructured Trust Notes accepted the guarantee.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

On June 11, 2007, in order to refinance the notes (obligaciones negociables) issued by Alto Paraná S.A. in 2001 (the APSA
Notes) and other existing debt and to finance capital expenditures in the ordinary course of business, Alto Paraná S.A. issued U.S.$270 million of 6.375% Notes due 2017 in the form of Rule 144A/Regulation S notes sold in the
international debt and debt capital markets. Arauco fully and unconditionally guaranteed these Notes. Alto Paraná paid the APSA Notes with the proceedings of the 6.375% Notes.



|Item 8. | Financial Information
|------- | ---------------------

See Item 18Financial
Statements.

EXPORT SALES

Export sales constituted approximately 77.1% of our sales revenue for the year ended December 31, 2006. Our total export sales revenue for 2006 was U.S.$2,198 million. Our principal overseas markets are North America, Asia and Western
Europe. See Item 4. Information on the CompanyDescription of BusinessDomestic and Export Sales.

LEGAL
PROCEEDINGS

We have been and continue to be subject to environmental proceedings related to allegations by the Chilean environmental
regulators and private parties. We are also subject to certain other legal proceedings arising from the ordinary course of our business. For more information regarding the environmental proceedings and other legal proceedings arising from the
ordinary course of business, see Note 12 to our audited consolidated financial statements.

Since the end of 2004, various criminal
proceedings relating to alleged violations of several environmental laws have been instituted in Chile in which some of our mills may be affected. We cannot predict the outcome or impact of these proceedings or when they may be resolved. While
Chilean law provides that only individuals can be convicted in criminal actions, as a consequence of these proceedings, certain measures may be taken that could materially and adversely affect our business or operations. The proceedings related to
our operating plants could have a material and adverse effect on our business, financial condition and results of operations. See Item 8. Financial InformationLegal Proceedings. See Item 3. Key InformationRisk
FactorsRisks Relating to Arauco and the Forestry IndustryWe are subject to legal proceedings related to our mills, which could adversely affect our business, financial condition and results of operations.



65



---

##### Table of Contents

Valdivia Mill

On January 18, 2005, the COREMA for the Tenth Region of Chile initiated an administrative proceeding against the Valdivia Mill, claiming that there were several differences between the project as approved by CONAMA in 1998 and the
constructed mill. In connection with this proceeding and based on the Administrative Proceedings Law No. 19,880, the COREMA for the Tenth Region of Chile ordered suspension of production at the Valdivia Mill as an interim preventive measure. To
achieve prompt resolution of the matter, we accepted, among other things, an annual production limit of 550,000 tons, including daily maximum requirements, and agreed to be reviewed under the Environmental Impact Evaluation System before increasing
production capacity beyond that limit. As a result, the COREMA for the Tenth Region of Chile lifted its suspension order on February 17, 2005, and we recommenced operations at the Valdivia Mill promptly thereafter. On March 18, 2005, the
COREMA for the Tenth Region of Chile terminated the administrative proceeding against us described above and imposed a fine of approximately U.S.$77,000. We have determined that the suspension of operations at the Valdivia Mill resulted in a loss of
sales of approximately U.S.$1,000,000 per day and a loss of profit of approximately U.S.$250,000 per day.

On January 17, 2005, in a
separate judicial claim before the Court of Appeals of Valdivia, a group of private citizens and local organizations requested suspension of production at the Valdivia Mill until the differences between the approved design and the executed project
were resolved under the Environmental Impact Evaluation System. On April 18, 2005, the Valdivia Court of Appeals issued a decision ordering us to again cease operations at the Valdivia Mill and to resolve the differences between the Valdivia
Mills design and the project as completed. We appealed the decision, and on May 30, 2005, the Supreme Court reversed the decision of the Valdivia Court of Appeals. Since the decision of Valdivia Court of Appeals was subject to the review
of the Supreme Court, there was no suspension of operations at the Valdivia Mill during the review of this claim.

The COREMA for the Tenth
Region of Chile evaluated claims regarding the migration and death of black-neck swans, whose habitat in the nearby Carlos Anwandter Nature Sanctuary is downstream from the mill on the Cruces River. There have been allegations of a causal connection
between the migration and death of black-neck swans and the operations at the Valdivia mill, and in a study dated April 18, 2005, researchers at the Austral University in Valdivia concluded that wastewater discharges from the Valdivia mill had
significantly altered the quality of the Cruces River. The study also concluded that the effluent discharges were a significant contributing factor in the death or migration of a large population of the black-necked swans in the Carlos Anwandter
Nature Sanctuary downstream from the Valdivia Mill.

On June 8, 2005, we voluntarily suspended operations at the Valdivia Mill until
certain technical and legal operating conditions could be clarified with the applicable regulatory authorities. We estimate this second suspension resulted in a loss of sales of approximately U.S.$1.0 million per day and a loss of profits of
approximately U.S.$250,000 per day. Pursuant to the decision of our board of directors based on certain clarifications provided by the COREMA of the Tenth Region of Chile, the mill resumed operations on August 12, 2005 at a reduced annual
production of 440,000 metric tons or 80% of its authorized production capacity, after 64 days of suspended operations. In order to achieve the full production capacity authorized by applicable permits (equal to 550,000 metric tons of wood pulp per
year), the pulp mill would have to comply with certain new requirements established by the COREMA of the Tenth Region of Chile including modifications to the effluents parameters (including, among others, aluminum, sulfate, nitrogen and
chlorate). In March 2006, Knight Piesold, an independent environmental auditing firm appointed by the COREMA of the Tenth Region of Chile, officially determined that the Valdivia Mill had complied with the applicable requirements. As a result, we
have requested permission from the environmental authorities to resume full-authorized production capacity (550,000 metric tons of pulp per year). The suspension of operations at the Valdivia Mill adversely affected our business, financial condition
and results of operations. Any future suspension of operations at Valdivia or at any other of our significant operating plants can be expected to have similar adverse effects. We offer no assurance that the Valdivia Mill will be able to operate
without further interruption or that it will resume operations at full capacity notwithstanding our compliance with the new requirements imposed by the COREMA are fulfilled.

The National Defense Council has instituted an action seeking reparations, damages and indemnification from us for environmental harm allegedly caused by
the Valdivia Mill. In addition, since the end of 2004, various criminal proceedings relating to alleged violations of several environmental laws have been instituted in Chile in which some of our mills may be affected.



66



---

##### Table of Contents

In 2005, the COREMA instructed us to present by March 31, 2006, an environmental impact study for
the construction of a pipeline to discharge the Mills wastewater in a body of water other than the Cruces River or the Carlos Anwandter Nature Sanctuary or their sources. The COREMA also instructed us to construct and put into operation the
above-mentioned pipeline not later than 15 months from the date in which the resolution of COREMA approving the environmental impact study is final. COREMA initially extended the deadline for the presentation of this environmental impact study to
April 2007 and recently extended it again to March 31, 2009. At the time of approving the new deadline, COREMA required us to present an additional environmental impact study for the implementation of substantial technological improvements on
the quality of the effluents generated by the Valdivia Mill. This study has been submitted on June 13, 2007.

Most recently, the
COREMA of the Tenth Region of Chile has appointed a Canadian consulting company, Ecometrix, to analyze and prepare a report on different feasible alternatives for discharge of the Valdivia Mill effluents. Approval by the COREMA of our environmental
impact study regarding a pipeline, the construction and operation of such a pipeline and also the approval of the environmental impact study regarding the improvement of the quality of the effluents are each subject to many environmental,
regulatory, engineering and political uncertainties at this time. As a result, we cannot give you any assurance that such projects will ever be approved or completed. If either our environmental study or the installation of the pipeline is delayed
for reasons that COREMA attributes to us, we may face sanctions that include warnings, fines or the revocation of the Valdivia Mills environmental permit of operation. Alternatively, if COREMA considers that such delays are beyond our control,
we believe that COREMA should extend the applicable deadlines. However, we offer no assurance that any of such deadline extensions would be granted, even if all the requirements set forth by the authority were complied with. As a result, we offer no
assurance that the Valdivia Mill will be able to operate without further interruption or that it will resume operations at full capacity, notwithstanding our compliance with the new requirements imposed by the COREMA. Any future suspension of
operations at the Valdivia Mill or at any other of our significant operating plants would likely have a material and adverse effect on our business, financial condition and results of operations. See Item 3. Key InformationRisk
FactorsRisks Relating to Arauco and the Forestry IndustryWe are subject to legal proceedings related to our mills, which could adversely affect our business, financial condition and results of operations, Item 4. Information
on the CompanyDescription of BusinessPulpPulp millsChileValdivia Mill. and Item 8. Financial InformationLegal Proceedings and Recent Developments.

Nueva Aldea

In January 2001, we obtained
environmental approval for the Nueva Aldea Project that included the construction of a pulp mill with an annual production capacity of 550,000 metric tons. After obtaining approval, we determined that we could increase the annual production capacity
of the mill to 856,000 tons without an additional environmental impact study. The COREMA for the Eighth Region of Chile determined that it was necessary to formally review the difference in capacity before we proceeded with construction, and in
August 2004, we submitted a new environmental impact study that considered the higher capacity. In September 2004, while this new study was under consideration, we began construction of the pulp mill according to the parameters approved in 2001. The
COREMA for the Eighth Region of Chile disagreed with our decision and, on January 12, 2005, initiated an administrative proceeding and ordered suspension of construction of the mill until the new environmental impact study was reviewed and
approved.

On March 10, 2005, the COREMA for the Eighth Region of Chile unanimously approved the new study and expressly authorized
construction of the mill with installed annual capacity of 856,000 metric tons. We promptly resumed the construction of the pulp mill. The COREMA for the Eighth Region of Chiles new approval requires submission of a new environmental impact
study of the discharge of wastewater through a pipeline into the sea. On February 20, 2006, the COREMA of the Eighth Region of Chile approved this new environmental impact study. Certain proceedings relating to these approvals are pending. See
Note 12 to our audited consolidated financial statements.

Licancel Mill

Since June 2007, our operations at the Licancel Mill, a pulp mill located in the Seventh Region of Chile, have been subject to environmental scrutiny by
Chilean environmental regulators and the public. On June 5, 2007, in connection with the death of fish in the Mataquito River, approximately 15 kilometers downstream of the



67



---

##### Table of Contents

Licancel Mill, we decided to voluntarily suspend our operations as a preventive measure. We also commenced independent investigations relating to the cause
of the death of the fish. On June 18, 2007, as a result of a pipe leakage in the water treatment system currently in place at the mill, an estimated 50 cubic meters of effluents reached the Mataquito River. On that same date, we closed the mill
indefinitely and informed the Sanitary Services Superintendency (Superintendencia de Servicios Sanitarios) of the incident. See Item 3. Key InformationRisk FactorsRisks Relating to Arauco and the Forestry
IndustryEnvironmental concerns led us to temporarily suspend our operations at the Licancel Mill, which may adversely affect, our business, financial condition and results of operations and Item 4. Information on the
CompanyDescription of BusinessPulpPulp millsChileLicancel Mill.

By resolution dated June 7, 2007,
the Sanitary Services Superintendency ordered that we suspend the discharge of effluents from the Licancel Mill into the Mataquito River. On June 9 and June 12, 2007, the Regional Ministerial Secretary of Health of the Seventh Region of
Chile (the SEREMI) ordered that we suspend operations of the Licancel Mill as a preventive measure for a period of thirty days and/or until the SEREMI determines that any potential health risk has been resolved. By resolution dated
June 13, 2007, the Sanitary Services Superintendency commenced an administrative proceeding against us with respect to the quality of the effluents discharged from the Licancel Mill. Further, on June 16, 2007, private citizens presented a
judicial claim (recurso de protección) before the Court of Appeals of Talca requesting, among other things, the immediate suspension of discharges from the Licancel Mill into the Mataquito River and other water sources and the adoption
of any steps that would be necessary to protect the environment, including, if necessary, the definitive closure of the mill. In response to the recurso de protección, the court ordered the suspension of any such discharges as a
preventive measure until the court concludes its investigations and all necessary measures have been taken to avoid environmental damage. We have requested that the court reconsider its order. Further, on June 2007, the Public Ministry
(Ministerio Público) commenced a criminal investigation regarding the death of the fish in the Mataquito River. In addition, several other administrative and judicial proceedings have been commenced by Chilean authorities in connection
with the events at the Licancel Mill, including the death of fish at the Mataquito River. As of the date of this annual report, these proceedings are ongoing.

DIVIDEND POLICY

Chilean law currently requires that, unless otherwise decided by the unanimous vote
of our issued and subscribed shares eligible to vote, public corporations distribute a cash dividend in an amount equal to at least 30% of the corporations consolidated net income for each year on the basis of Chilean GAAP, unless and except
to the extent the corporation has unabsorbed losses from prior years. In April 2002, our shareholders approved the current dividend policy, setting the cash dividend at 40% of our consolidated net income for each year, on a Chilean GAAP basis.

In accordance with a resolution adopted by our board of directors on October 24, 2006, we approved an interim dividend for 2006,
which was distributed on December 13, 2006. On April 24, 2007, our shareholders approved a final dividend for 2006, which was distributed on May 9, 2007. In the aggregate, dividends distributed equaled 40% of our consolidated net
income for 2006, on a Chilean GAAP basis.

Although the board of directors has no current plans to recommend changes in our dividend
policy, the policy has been changed in the past and no assurance can be given that the policy will not be changed in the future, due to changes in Chilean law, capital requirements, operating results or other factors.

RECENT DEVELOPMENTS



|Item 9. | The Offer and Listing
|------- | ---------------------

Neither our stock nor our
securities are listed on any stock exchange or other regulated market.

Trading in our securities takes place primarily in the
over-the-counter market. Accordingly, we are unable to obtain reliable information on such trading.



68



---

##### Table of Contents

|Item 10. | Additional Information
|-------- | ----------------------

ARTICLES OF
INCORPORATION AND BY-LAWS

When we refer to the Company, Arauco or we, in this description of
the articles of incorporation and by-laws, we mean Celulosa Arauco y Constitución S.A.

Organization and Registration

We are a public corporation (sociedad anónima abierta) organized in Chile under the laws of Chile and registered on August 18, 1971, by
resolution 300-S of the Chilean Securities Commission and recorded in the Santiago Commercial Register of 1971 on page 6433 under entry number 2994 and on page 6431 under entry number 2993. Notice was published in the Official Gazette on
September 4, 1971.

Objects and Purposes

Our purpose, as stated in our estatutos, or by-laws, includes the manufacture of forestry products, the management of forestry lands and other activities that are incidental to the forestry industry.

Capital

In 2002, our by-laws were amended such that
our capital is denominated in U.S. dollars. In 2002, we and two of our subsidiaries, Aserraderos Arauco and Paneles Arauco, received authorization from the Chilean Internal Tax Service to prepare our audited consolidated financial statements in U.S.
dollars, beginning January 1, 2002. In January 1, 2003, our subsidiaries Forestal Arauco, Bosques Arauco, Forestal Valdivia, Forestal Celco and Cholguán obtained the same permission from the Chilean Internal Tax Service.

Directors

Pursuant to our by-laws, our board of
directors is composed of nine members elected by a general meeting of our shareholders. Our directors are not required to be shareholders. Our by-laws state that the amount of compensation to be received by the directors for their directorial
services shall be fixed by the general shareholders meeting. Directors may be compensated for any non-directorial services rendered to us at levels of compensation comparable with compensation commonly paid for these services, compensation
which is compatible with the directors compensation fixed by the general shareholders meeting. The by-laws also state that our board of directors has all of the authorities of administration and disposal that Chilean law or the by-laws
do not confer upon the general shareholders meeting. The board of directors has the right to act on our behalf without the need for a special power of attorney, even in cases where a power of attorney is required by law. In particular, the
by-laws provide that the board of directors is empowered to encumber our assets, real and personal property with mortgages, easements or pledges regardless of the value of such property or the amount of the respective encumbrances and to borrow
money paying interest, with or without a guaranty for the loan.

Our by-laws provide that we may enter into acts or contracts in which one
or more directors are interested only if the interested directors interest is made known to the board, the acts or contracts are approved by the board and the terms of the act or contract conform to those prevailing in the market. In addition,
board resolutions approving interested director transactions must be reported by the chair of the meeting at the first general shareholders meeting following the approval of the interested director transaction.

See Item 6. Directors, Senior Management and Employees for further information about our board of directors.

Shareholders

Our share capital consists of ordinary
shares of no par value issued in registered form. Record holders of shares are registered in our share register. Any transfer of shares must be noted in our share register.



69



---

##### Table of Contents

Voting Rights

Each share of our stock entitles the holder to one vote at any meeting of shareholders. Resolutions may be taken upon a vote of an absolute majority of the voting shares present or represented. Any resolution relating
to amendments to our by-laws must be approved by an absolute majority of the voting shares issued. Resolutions with regard to the following matters require the affirmative vote of two-thirds of the voting shares issued:



| |  |  | transformation, including division or merger with another company;
| | - |  | ------------------------------------------------------------------



| |  |  | advanced dissolution;
| | - |  | ---------------------



| |  |  | change of corporate domicile;
| | - |  | -----------------------------



| |  |  | reduction in our equity capital;
| | - |  | --------------------------------



| |  |  | approval and appraisal of non-cash capital contributions;
| | - |  | ---------------------------------------------------------



| |  |  | reduction in the number of members of the board of directors;
| | - |  | -------------------------------------------------------------



| |  |  | disposal of our assets and liabilities or all of our assets; and
| | - |  | ----------------------------------------------------------------



| |  |  | changes to the way in which corporate benefits will be distributed.
| | - |  | -------------------------------------------------------------------

According to our by-laws, holders of our shares also have the right to vote at the general shareholders meeting for the election of directors. Shareholders or their representatives may accumulate their votes in
favor of one candidate or distribute them among various candidates. A vote on the election of directors may be omitted if an election is proposed by acclamation and none of the shareholders present or represented opposes the motion. The board of
directors may also be dismissed by a regular or special general shareholders meeting, though the shareholders may only vote to dismiss the board as a whole.

Changes to Shareholders Rights

To change the rights of holders of our shares or create a new series of our
shares, we must amend our by-laws. In addition, under Chilean law, any public company wishing to issue a new class of shares must register the new class of shares with the Chilean Securities Commission. Any reduction in the number of our shares also
requires a two-thirds majority vote of all holders of our shares under Chilean law. Chilean law also requires that public corporations distribute a cash dividend in an amount equal to at least 30% of the corporations consolidated net income
for each year (on a Chilean GAAP basis), unless otherwise decided by a unanimous vote of the corporations issued and subscribed shares eligible to vote. Any changes to the corporations dividend policy must be approved by a two-thirds
majority of all holders of the corporations shares.

Shareholders Meetings

Our by-laws provide that the board of directors shall call general shareholders meetings. Notice of general shareholders meetings must be made
by a prominent notice published at least three times, on different days, in the newspaper of one of our corporate domiciles, as determined by a general shareholders meeting, or in the absence of a determination, in the Official Gazette.

A shareholder must be registered in our share register five business days before the meeting date to be entitled to participate and vote
at any shareholders meeting. In addition, other persons may represent shareholders at general meetings. Powers of attorney must be given in writing and must be granted with respect to all of the shares the shareholder is entitled to vote as of
the date five days before the general shareholders meeting.

General shareholders meetings may be regular or special meetings.
Regular shareholders meetings are held once a year within the first four months of the year. Among other things, the regular general shareholders



70



---

##### Table of Contents

meeting appoints independent external auditors to examine our accounts, inventory, balance sheet and other financial results. The by-laws provide that the
following matters are to be considered at regular shareholders meetings:



| |  |  | the review of our results of operations and external auditors reports and the approval or rejection of our annual report, our balance sheet and financial
statements;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the distribution of profits of each financial period and the distribution of our dividends;
| | - |  | -------------------------------------------------------------------------------------------



| |  |  | the election or dismissal of the members of the board of directors; and
| | - |  | -----------------------------------------------------------------------



| |  |  | any matter of corporate interest that is not transacted at a special general shareholders meeting.
| | - |  | ---------------------------------------------------------------------------------------------------

Special shareholders meetings may be held at any time required by corporate needs to consider any matter that the law or our by-laws require to be
considered at a general shareholders meeting. Our by-laws require the meeting notice to disclose any matters to be discussed at a special shareholders meeting. According to the by-laws, the following matters must be considered at special
shareholders meetings:



| |  |  | dissolution;
| | - |  | ------------



| |  |  | transformation, merger or division and the amendment of our by-laws;
| | - |  | --------------------------------------------------------------------



| |  |  | the issue of bonds or debentures convertible into shares;
| | - |  | ---------------------------------------------------------



| |  |  | the disposal of our fixed assets and liabilities or of all of our assets; and
| | - |  | -----------------------------------------------------------------------------



| |  |  | the grant of real or personal guarantees to secure obligations of third parties, unless they are subsidiaries, in which case the approval of the board of directors
will be sufficient.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Any other matters within the competence of general shareholders meetings may be considered at special
shareholders meetings.

Any act of a general shareholders meeting relating to our dissolution, transformation, merger or
division, the amendment of our by-laws, any disposal of our fixed assets and liabilities or all of our assets or the issue of bonds convertible into shares or convertible debentures must be held before a notary public, who must certify that the
minutes of such meeting are the true expression of what occurred and was resolved at the meeting.

Allocation of Net Income and Distribution of
Dividends

Our by-laws provide that the shareholders at a general shareholders meeting shall determine the annual distribution
of our net profits for each financial period, within the limitations prescribed by law. The shareholders shall also set the date on which any distribution shall be paid, within the time limits prescribed by law. Chilean law prescribes that
distributions shall be paid within 30 days of the general shareholders meeting at which such distribution was determined.

In
accordance with Chilean law, in the event of liquidation, capital can be distributed to the shareholders only after the rights of the creditors have been secured or debts owed to creditors have been paid. Our by-laws provide that a general
shareholders meeting will appoint one or more liquidators to carry out the liquidation and to call shareholders meetings, as required under Chilean law.

Regulation of and Restrictions on Foreign Investors

There are no limitations on the rights to hold
securities, including rights of non-resident or foreign shareholders to hold or exercise voting rights on securities.



71



---

##### Table of Contents

Disclosure of Shareholder Ownership

We register certain information about our shareholders in our shareholder registry. We are required to disclose this information to the Chilean Securities Commission on a quarterly basis.

Rights of Shareholders

Our by-laws provide that, in
the case of a dispute between shareholders or between shareholders and management, the parties will submit their dispute to a mixed arbitrator, who may determine the procedural rules to be used in the arbitration but must issue a final judgment in
accordance with Chilean law. Subject to limited exceptions, the arbitrators judgment shall not be subject to appeal. The parties shall appoint the arbitrator by mutual agreement and if no agreement is reached, an arbitrator will be appointed
by the civil court system from among present and former associate justices of the Supreme Court of Justice of Chile.

EXCHANGE CONTROLS

The Central Bank is responsible for, among other things, monetary policies and exchange controls in Chile. Prior to 1989, Chilean law
permitted the purchase and sale of foreign exchange only in cases explicitly authorized by the Central Bank. Law No. 18,840, the Organic Law of the Central Bank of Chile (Ley Orgánica Constitucional del Banco Central de Chile), or
the Central Bank Act, enacted in 1989, liberalized the rules that govern the ability to buy and sell foreign exchange.

The Central Bank
Act empowers the Central Bank to determine which types of foreign exchange operations must be carried out in the Formal Exchange Market rather than the Informal Exchange Market (Mercado Cambiario Informal).The Central Bank has
ruled that certain foreign exchange transactions, including those attendant to foreign investments and bond issuances, may be effected only in the Formal Exchange Market. The Central Bank may also impose restrictions on foreign exchange operations
that are conducted or are required to be conducted in the Formal Exchange Market. These restrictions may include the requirement of prior authorization from the Central Bank, the imposition of reserve requirements and the limitation of foreign
exchange operations that may be conducted by the entities that participate in the Formal Exchange Market.

The Formal Exchange Market
consists of banks and other entities authorized by the Central Bank to participate in such Formal Exchange Market. On April 16, 2001, the Central Bank agreed that, effective April 19, 2001, the prior foreign exchange restrictions would be
eliminated and a new Compendium of Foreign Exchange Regulations (Compendio de Normas de Cambios Internacionales) would be applied.

The main objective of this change is to facilitate capital movements from and into Chile and to encourage foreign investment.

The
following specific restrictions were eliminated:



| |  |  | a reserve requirement with the Central Bank for a period of one year;
| | - |  | ---------------------------------------------------------------------



| |  |  | the requirement for prior approval by the Central Bank for certain operations, such as repatriation of investments and payments to foreign creditors;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the mandatory return of foreign currencies to Chile; and
| | - |  | --------------------------------------------------------



| |  |  | the mandatory conversion of foreign currencies into Chilean pesos.
| | - |  | ------------------------------------------------------------------

Under the amended regulations, only the following limitations are applicable to these operations:



| |  |  | the Central Bank must be provided with information related to certain operations, such as foreign investments and foreign credits; and
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------



72



---

##### Table of Contents

| |  |  | certain operations,such as money transfers to and from Chile, must be conducted within the Formal Exchange Market.
| | - |  | ------------------------------------------------------------------------------------------------------------------

Bonds Denominated in Currencies other than Chilean Pesos

Before April 19, 2001, any international issue of bonds was subject to approval by the Central Bank after submission of an application to the Central Bank through a bank or other participant in the Formal Exchange Market. Absent the
Central Banks authorization, issuers were unable to offer bonds outside of Chile. On April 19, 2001, the Central Bank issued new foreign exchange regulations, effective as of March 1, 2002, that were included in the new
Chapters XIV and VIII of the Compendium, applicable to bond issues made either from Chile or through an agency abroad. It must be noted however, that all debt issues made before the new regulations remain subject to the regulations existing at
the time of their issue.

Debt securities issued directly by us

In accordance with regulations issued by the Central Bank, which were included in the new Chapter XIV of the Compendium, effective March 1, 2002, as amended, any international issue of bonds in an aggregate
amount exceeding U.S.$10,000 must be registered and dated by the Central Bank or by a bank or other entity authorized by the Central Bank to participate in the Formal Exchange Market before the proceeds from the issuance can be remitted to Chile and
received by the issuer or simultaneously with the remittance into Chile of such proceeds. The issuer must submit forms regarding the offering to the registering entity or directly to the Central Bank, along with a letter of instructions indicating
whether it prefers to receive the proceeds in Chilean pesos or in a foreign currency. If presented through a Formal Exchange Market entity, such entity must, in turn, verify that the forms submitted by the issuer are in accordance with the
documentation relating to the issue and inform the Central Bank of the operation no later than 11:00 a.m. on the banking business day following the date on which the proceeds of the issue are transferred to the issuer.

If the issuer opts to receive the proceeds of the issue outside of Chile, it must report this to the Central Bank directly or through a Formal Exchange
Market entity during the first ten calendar days of the month following the one in which the proceeds were received.

Chapter XIV of
the Compendium also states that proceeds from the issue, as well as payment of capital and interest relating to the issue, must be received and sent from and through the Formal Exchange Market, but purchases of U.S. dollars in connection with
payments on debt securities issued directly by us can be made either in the Formal or in the Informal Exchange Market. There can be no assurance, however, that we will be able to purchase U.S. dollars in the Informal Exchange Market or in the Formal
Exchange Market at the time or in the amounts required to pay debt service related to any such debt securities. There can also be no assurance that further Central Bank regulations or legislative changes to the current foreign exchange control
regime in Chile would not restrict or prevent our purchase of U.S. dollars to make payments under our securities.

In the case of debt
securities issued directly by us before the effectiveness of the new regulations, the registration of the debt securities with the Central Bank grants us access to the Formal Exchange Market for the purchase of U.S. dollars necessary to make
payments in respect of those securities but requires that payments on such debt securities shall be made only with U.S. dollars purchased in the Formal Exchange Market.

The regulations of Chapter XIV of the Compendium do not make any reference to the one-year mandatory deposit in the Central Bank that was previously required by Chapter XIV. However, the Central Bank is
authorized, under the Central Bank Act, to impose such a requirement.

Debt securities issued through our Panamanian agency

In December 1996, we established a registered agency in Panama. We may from time to time issue debt securities directly or through our Panamanian agency
depending on, among other factors, whether or not we expect to bring the proceeds thereof into Chile. In such cases, the proceeds of such issuance of the notes may be brought into Chile or held abroad. In either case, however, in accordance with
Chapter VIII of the Compendium, we must



73



---

##### Table of Contents

inform the Central Bank of the issuance of international bonds through our Panamanian agency during the first ten calendar days of the month following the
one in which the disbursement of funds to the agency was produced, and provide the schedule of payments of the notes.

Purchases of U.S.
dollars in connection with payments on debt securities issued through our Panamanian agency, whether before or after April 19, 2001, can be made either in the Formal Exchange Market or in the Informal Exchange Market. Although we would need to
inform the Central Bank of the issuance of debt securities through our Panamanian agency, such communication to the Central Bank would not give us access to the Formal Exchange Market for the purchase of U.S. dollars necessary to make payments in
respect of those debt securities.

There can be no assurance that we will be able to purchase U.S. dollars in the Informal Exchange Market
or in the Formal Exchange Market at the time or in the amounts required to pay debt service related to any such debt securities. There can also be no assurance that further Central Bank regulations or legislative changes to the current foreign
exchange control regime in Chile and will not restrict or prevent our purchase of U.S. dollars to make payments under our securities from Chile.

TAXATION

General

The
following summary contains a description of the principal Chilean and United States federal income tax consequences of the purchase, ownership and disposition of our securities, but it does not purport to be a comprehensive description of all the
tax considerations that may be relevant to a decision to purchase our securities. This summary does not describe any tax consequences arising under the laws of any state, locality or taxing jurisdiction other than the United States and Chile.

This summary is based on the tax laws of Chile and the United States as in effect on the date of this Form 20-F, as well as regulations,
rulings and decisions of Chile and the United States available on or before such date and now in effect. All of the foregoing is subject to change, and any changes could apply retroactively and could affect the continued validity of this summary.

Prospective purchasers of our securities should consult their own tax advisors as to the Chilean, United States or other tax consequences
of the purchase, ownership and disposition of our securities, including, in particular, the application to their particular situations of the tax considerations discussed below, as well as the application of state, local, foreign or other tax laws.

Currently, there is no tax treaty between the United States and Chile.

Chilean Taxation

The following is a general summary of the principal consequences under Chilean tax
law, as currently in effect, of an investment in our securities made by a foreign holder. Foreign holder means either:



| |  |  | in the case of an individual, a person who neither is a resident nor is domiciled in Chile (for purposes of Chilean taxation, an individual holder is domiciled in
Chile if this individual has his or her principal place of business in Chile, and is resident in Chile if the individual has resided or has been domiciled in Chile for more than six months in one calendar year or a total of more than six months in
two consecutive fiscal years); or
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | in the case of a legal entity, a legal entity that is not organized under the laws of Chile, unless our securities are assigned to a branch or a permanent
establishment of the entity in Chile.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Under Chiles income tax law, our payments of interest made from Chile in
respect of our securities to a Foreign Holder will generally be subject to a Chilean withholding tax assessed at a rate of 4.0% (the Chilean Interest Withholding Tax).



74



---

##### Table of Contents

We have agreed, subject to specific exceptions and limitations, to pay to the foreign holders of Notes
additional amounts in respect of the Chilean Interest Withholding Tax in order that the interest the foreign holder receives, net of the Chilean Interest Withholding Tax, equals the amount which would have been received by the foreign holder in the
absence of withholding. If we pay additional amounts in respect of the Chilean Interest Withholding Tax, any refunds of the additional amounts will be for our account. In the event of certain changes in Chilean tax laws requiring us to pay
additional amounts in excess of the additional amounts that would be payable were payments of interest on our securities subject to the Chilean Interest Withholding Tax at a 4.0% rate, we have the right to redeem our securities.

Under existing Chilean law and regulations, a foreign holder will not be subject to any Chilean taxes in respect of payments of principal that we make
with respect to our securities. Our payments with respect to our securities of amounts not considered principal or interest may be subject to a Chilean withholding tax of up to 35%.

The Chilean Income Tax Law provides that a foreign holder is subject to income tax on his Chilean source income. For this purpose, Chilean source income
means earnings from activities performed in Chile or from a sale, disposition or other transaction in connection with assets or goods located in Chile. Therefore, any capital gains realized on the sale or other disposition by a Foreign Holder of our
securities generally will not be subject to any Chilean taxes provided that such sale or other disposition occurs outside Chile.

A foreign
holder will not be liable for estate, gift, inheritance or similar taxes with respect to its holdings unless the securities held by a foreign holder:



| |  |  | are located in Chile at the time of such Foreign Holders death or at the time the transfer takes place, or
| | - |  | -----------------------------------------------------------------------------------------------------------



| |  |  | were purchased or acquired with monies obtained from Chilean sources.
| | - |  | ---------------------------------------------------------------------

A foreign holder will not be liable for Chilean stamp, registration or similar taxes.

The issue of our securities directly by us was subject to stamp tax, which we paid. The issue of our securities through our Panamanian agency was not
subject to stamp tax.

United States Taxation

This summary of certain United States federal income tax considerations deals principally with United States Holders that acquire our securities as part of the initial offering of our securities and will hold our securities as capital
assets and whose functional currency is the United States dollar. It does not purport to be a comprehensive description of all of the tax considerations that may be relevant to a particular investors decision to purchase our securities and
generally does not address the tax treatment of United States Holders that may be subject to special tax rules, such as banks, financial institutions, tax-exempt entities, regulated investment companies, real estate investment trusts, insurance
companies, dealers in securities or currencies, traders in securities electing to mark to market, certain short-term holders of our securities, persons that will hold our securities as a position in a straddle or conversion transaction,
or as part of a synthetic security or other integrated financial transaction, persons that own (or are deemed to own for United States tax purposes) 10% or more of our voting stock or persons that are not United States Holders. United
States Holders should be aware that the U.S. federal income tax consequences of holding our securities may be materially different for investors described in the previous sentence, including as a result of certain laws applicable to investors with
short holding periods or that engage in hedging transactions.

As used under this section United States Taxation, the term
United States Holder means a beneficial owner of a Note that is a citizen or resident of the United States or a United States domestic corporation or that otherwise is subject to United States federal income taxation on a net income
basis in respect of our securities.

Taxation of Interest and Additional Amounts

A United States Holder will treat the gross amount of interest and Additional Amounts (i.e., without reduction for Chilean Interest Withholding
Tax, determined utilizing the 4.0% Chilean Interest Withholding Tax rate



75



---

##### Table of Contents

applicable to all United States Holders of our securities) as ordinary interest income in respect of our securities at the time that such payments are
accrued or are received, in accordance with the United States Holders method of tax accounting. Any Chilean Interest Withholding Tax paid will be treated as foreign income taxes eligible for credit against such United States Holders
United States federal income tax liability, subject to generally applicable limitations and conditions, or, at the election of such United States Holder, for deduction in computing such United States Holders taxable income. Interest and
Additional Amounts will constitute income from sources outside the United States for foreign tax credit purposes. Such income generally will constitute passive income. Foreign tax credits will not be allowed for withholding taxes imposed
in respect of certain short-term or hedged positions in securities and may not be allowed for withholding taxes imposed in respect of arrangements in which a United States Holders expected economic profit is insubstantial. United States
Holders should consult their own advisors concerning the implications of these rules in light of their particular circumstances.

The
calculation of foreign tax credits and, in the case of a United States Holder that elects to deduct foreign taxes, the availability of deductions, involves the application of rules that depend on a United States Holders particular
circumstances. United States Holders should consult their own tax advisors regarding the availability of foreign tax credits and the treatment of Additional Amounts.

A Holder of our securities that is, with respect to the United States, a foreign corporation or a nonresident alien individual (a Non-U.S. Holder) generally will not be subject to United States federal
income or withholding tax on interest income or Additional Amounts earned in respect of our securities, unless such income is effectively connected with the conduct by the Non-U.S. Holder of a trade or business in the United States.

Taxation of Dispositions

Gain or loss
realized by a United States Holder on the sale, redemption or other disposition of our securities generally will be treated as capital gain or loss and such gain or loss will be long-term capital gain or loss if at the time of the disposition, our
securities have been held for more than one year. The net amount of long-term capital gain realized by a United States Holder that is an individual is taxed at a maximum rate of 15%. Gain, if any, realized by a United States Holder generally will be
treated as U.S. source income for U.S. foreign tax credit purposes.

A Non-U.S. Holder of our securities will not be subject to United
States federal income or withholding tax on gain realized on the sale or other disposition of our securities unless (i) such gain is effectively connected with the conduct by the Non-U.S. Holder of a trade or business in the United States or
(ii) in the case of gain realized by an individual Non-U.S. Holder, the Non-U.S. Holder is present in the United States for 183 days or more in the taxable year of the sale and certain other conditions are met.

Backup Withholding and Information Reporting

Payments of principal, premium, if any, and interest on our securities and payment of the proceeds of any disposition of our securities made to certain United States Holders may be subject to U.S. information reporting requirements. In
addition, certain United States Holders may be subject to a U.S. backup withholding tax in respect of such payments if they do not provide their taxpayer identification numbers to the payor or otherwise establish an exemption. Non-U.S. Holders
generally are exempt from these withholding and reporting requirements, but may be required to comply with applicable certification and identification procedures to establish their eligibility for such an exemption.

DOCUMENTS ON DISPLAY

We are subject
to the informational requirements of the Securities Exchange Act of 1934, as amended. In accordance with these requirements, we file reports and other information with the Securities and Exchange Commission. These materials, including this Annual
Report and the exhibits thereto, 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 at the Commission
at 450 Fifth Street, N.W., Washington, D.C. 20549 at prescribed rates. In addition, the Commission maintains an Internet website at



76



---

##### Table of Contents

http://www.sec.gov, from which these materials may be electronically accessed. 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.



|Item 11. | Quantitative and Qualitative Disclosures About Market Risk
|-------- | ----------------------------------------------------------

The following discussion about our risk management activities includes forward-looking statements that involve risk and uncertainties. Actual results could differ materially from those projected in such forward-looking statements.

We are exposed to market risk from changes in interest rates and currency exchange rates. From time to time, we assess our exposure and
monitor opportunities to manage these risks, including entering into derivative contracts. In the normal course of business, we also face risks that are either non-financial or non-quantifiable. Such risks principally include country risk, credit
risk and legal risk and are not represented in the tables below.

INTEREST RATE RISK

Interest rate risk exists principally with respect to our indebtedness that bears interest at floating rates. At December 31, 2006, we had
outstanding approximately U.S.$2,622.1 million of indebtedness excluding accrued interest, of which approximately 66.1% bore interest at fixed interest rates and approximately 33.9% bore interest at floating rates of interest. These average rates do
not reflect the effect of swap agreements. All of the indebtedness was denominated in U.S. dollars as of that date. The interest rate on our variable rate debt is determined principally by reference to LIBOR.

The following table summarizes our long-term debt obligations, including 2007 maturities, at December 31, 2006 that are sensitive to changes in
interest rates. The table presents the aggregate principal amount of each category of indebtedness maturing in each year, at the weighted average interest rate for each category of indebtedness. Average interest rates for liabilities are calculated
based on the prevailing interest rate for each loan at December 31, 2006.



|                                |  |                                |      |  |                                    |  |                     |  |               |  |       |  |             |  |       |  |         |  |        
|------------------------------- |  | ------------------------------ | ---- |  | ---------------------------------- |  | ------------------- |  | ------------- |  | ----- |  | ----------- |  | ----- |  | ------- |  | -------
|                                |  | As of December 31, 2006(3)    
|                                |  | AverageInterestRate(1)         |      |  | Expected contractual maturity date |  | Total LongTerm Debt |  | Fair Value(2)
|                                |  |                                | 2007 |  | 2008                               |  | 2009                |  | 2010          |  | 2011  |  | There-after |  |      
|                                |  | (U.S.$ equivalent in millions)
|Long-Term Interest Bearing Debt |  |                                |      |  |                                    |  |                     |  |               |  |       |  |             |  |       |  |         |  |        
|Fixed Rate                      |  |                                |      |  |                                    |  |                     |  |               |  |       |  |             |  |       |  |         |  |        
|(U.S.$-denominated)             |  | 6.8                            | %    |  | 100.0                              |  |                    |  | 100.0         |  | 270.5 |  | 387.0       |  | 825.0 |  | 1,682.5 |  | 1,798.0
|Variable Rate                   |  | LIBOR +                        |      |  |                                    |  |                     |  |               |  |       |  |             |  |       |  |         |  |        
|(U.S.$-denominated)             |  | 0.38                           | %    |  | 141.8                              |  | 221.5               |  | 200.0         |  | 39.8  |  | 38.6        |  | 68.6  |  | 710.2   |  | 710.2  
|(R.$-denominated)               |  |                                |      |  | 14.8                               |  | 2.0                 |  | 0.1           |  |      |  |            |  |      |  | 16.9    |  | 16.9   

---

|(1) | Average interest rate means, for variable rate debt, the weighted average prevailing interest rate at
December 31, 2006, on our variable rate debt, and for fixed rate debt, the weighted average prevailing interest rate at December 31, 2006, on our fixed rate debt. Average rates do not reflect the effect of swap agreements.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | These figures were calculated based on the discounted value of future cash flows expected to be received
or paid, considering current discount rates that reflect the different risks involved. See Note 10to our audited consolidated financial statements.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) | As of December 31,2006. On June 11, 2007, Alto Paraná S.A. issued U.S.$270 million of
6.375% Notes due 2017 sold in the form of Rule 144A/Regulation S notes in the international debt and debt capital markets, which were fully and unconditionally guaranteed by Arauco. The proceeds of the offering were used to refinance U.S.$200
million of existing notes.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

FOREIGN CURRENCY RISK

Our principal exchange rate risk involves changes in the value of the euro, the Chilean peso and, to a lesser extent, the Argentine peso and the
Brazilian real relative to the dollar. We generally believe that our foreign currency exposure is not material to our net income. In 2006, substantially all of our consolidated revenues were denominated in or indexed to foreign currencies. We
estimate that a majority of our consolidated costs and expenses are denominated in dollars. As of December 31, 2006:



| |  |  | A significant portion of our accounts receivable were denominated in U.S. dollars;
| | - |  | ----------------------------------------------------------------------------------



77



---

##### Table of Contents

| |  |  | 67.0% of our short-term investments were denominated in U.S. dollars and 33.0% were denominated in euros;
| | - |  | ---------------------------------------------------------------------------------------------------------



| |  |  | substantially all of our indebtedness was denominated in U.S. dollars; and
| | - |  | --------------------------------------------------------------------------



| |  |  | a significant portion of our consolidated total assets was denominated in U.S. dollars.
| | - |  | ---------------------------------------------------------------------------------------

Substantially all of our foreign currency-denominated revenues, costs and expenses, receivables and indebtedness are denominated in U.S. dollars. As of
December 31, 2006, all of our long-term debt was denominated in U.S. dollars. Accordingly, variations in the value of the Chilean peso relative to the dollar will not have a significant effect in the cost in dollars of our foreign debt service
obligations.



|Item 12. | Description of Securities Other than Equity Securities
|-------- | ------------------------------------------------------

Not applicable.



78



---

##### Table of Contents

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
|-------- | -----------------------

We carried out an
evaluation under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Accounting Officer, of the effectiveness of the design and operation of our disclosure controls and procedures, as of
December 31, 2006. There are inherent limitations to the effectiveness of any system of disclosure controls and procedures, including the possibility of human error and the circumvention or overriding of the controls and procedures.
Accordingly, even effective controls and procedures can only provide reasonable assurance of achieving their control objectives. Based upon our evaluation, our Chief Executive Officer and Chief Accounting Officer concluded that the disclosure
controls and procedures, as of December 31, 2006, were effective to provide reasonable assurance that information required to be disclosed in the reports we file and submit under the U.S. Securities Exchange Act of 1934, as amended, is
recorded, processed, summarized and reported as and when required.

There has been no change in our internal control over financial
reporting during 2006 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.



|Item 16A. | Audit Committee Financial Expert
|--------- | --------------------------------

We do not have an
audit committee. Accordingly, certain rules under the U.S. federal securities laws that would otherwise apply to the audit committee apply to our board of directors as a whole. We believe that the members of our board of directors have sufficient
financial and other experience to perform their responsibilities under these rules. Our board of directors has determined that Timothy C. Purcell qualifies as an audit committee financial expert within the meaning of Item 16A of
Form 20-F. Our board of directors has determined that Timothy C. Purcell is independent as that term is defined in Rule 10A-3 under the Exchange Act. For a description of Mr. Purcells professional experience, see Item 6. Directors,
Senior Management and EmployeesDirectors and Executive Officers.



|Item 16B. | Code of Ethics
|--------- | --------------

We have adopted a code of ethics, as defined in Item 16B of Form 20-F under the Securities Exchange Act of 1934, as amended. Our code of ethics applies to our Chief Executive Officer, Chief Financial Officer and
Chief Accounting Officer. We will provide any person without charge, upon request, a copy of such code of ethics. Requests for a copy of the code of ethics may be made to Celulosa Arauco y Constitución S.A., El Golf 150, 14thFloor, Santiago, Chile, Attn: Gianfranco Truffello, tel. (011-562) 461-7200, fax (011-562) 461-7541. If we amend the
provisions of our code of ethics that apply to our Chief Executive Officer, Chief Financial Officer and Chief Accounting Officer, or if we grant any waiver of such provisions, we will disclose the amendment or waiver in our annual report on Form
20-F.



79



---

##### Table of Contents

|Item 16C. | Principal Accountant Fees and Services
|--------- | --------------------------------------

Audit and Non-Audit Fees

The following table sets forth the fees billed to us by our independent auditors, PricewaterhouseCoopers, during the fiscal years ended
December 31, 2005 and 2006.



|                   |  |                         |         |      |   |        
|------------------ |  | ----------------------- | ------- | ---- | - | -------
|                   |  | Year ended December 31,
|                   |  | 2005                    |         | 2006
|                   |  | (U.S.$ in thousands)   
|Audit fees         |  | $                       | 935.1   |      | $ | 1,186.1
|Audit-related fees |  |                         | 204.6   |      |   | 119.9  
|Tax fees           |  |                         | 198.2   |      |   | 88.9   
|Other fees         |  |                         |        |      |   |       
|                   |  |                         |         |      |   |        
|Total fees         |  | $                       | 1,337.9 |      | $ | 1,394.9
|                   |  |                         |         |      |   |        

Audit fees in the above table are the aggregate fees billed by PricewaterhouseCoopers in
connection with the audit of our annual financial statements in accordance with Chilean GAAP and U.S. GAAP, as well as the review of other filings.

Audit-related fees in the above table are the are the aggregate fees billed by PricewaterhouseCoopers for assurance and related services that are reasonably related to the performance of the audit or review of our financial statements or
that are traditionally performed by the external auditor, including consultations regarding the Sarbanes-Oxley Act and due diligence related to acquisitions.

Tax fees in the above table are fees billed by PricewaterhouseCoopers associated with the issuance of certificates for tax and legal compliance purposes in Mexico and Argentina; tax consultation on the impact of debt
restructured by our subsidiaries in Argentina and Brazil; and tax consultation in the United States.

Other fees in the above table are
fees billed by PricewaterhouseCoopers in connection with compensation research studies in Argentina.

Audit Committee Approval Policies and Procedures

Our board of directors has established pre-approval policies and procedures for the engagement of our independent auditors. Pursuant to
our pre-approval policy, our board of directors has pre-approved a list of services that our independent auditors are allowed to provide to us or our subsidiaries.

Additionally, our board of directors expressly approves, on a case-by-case basis, any engagement of our independent auditors for audit and non-audit services that are not included on the pre-approved list.



|Item 16D. | Exemptions from the Listing Standards for Audit Committees
|--------- | ----------------------------------------------------------

Not applicable.



|Item 16E. | Purchases of Equity Securities by the Issuer and Affiliated Purchasers
|--------- | ----------------------------------------------------------------------

Not applicable.



80



---

##### Table of Contents

PART III



|Item 17. | Financial Statements
|-------- | --------------------

Not applicable.



|Item 18. | Financial Statements
|-------- | --------------------

See our audited
consolidated financial statements beginning on page F-1, incorporated herein by reference.



|Item 19. | Exhibits
|-------- | --------

Documents filed as exhibits to this
annual report:



|     |  |                                                                                                                                                                                  
|---- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|1.1  |  | English translation of the by-laws (estatutos) of Celulosa Arauco y Constitución S.A., dated as of January 27, 2005                                                              
|     | 
|8.1  |  | List of subsidiaries                                                                                                                                                             
|     | 
|12.1 |  | Certification of chief executive officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002                                
|     | 
|12.2 |  | Certification of principal financial officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002                            
|     | 
|13.1 |  | Certification of chief executive officer and principal financial officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
|     | 
|15.1 |  | Valuation and qualifying accounts                                                                                                                                                

Omitted from the exhibits filed with this annual report are certain instruments and agreements
with respect to our long-term debt, none of which authorizes securities in a total amount that exceeds 10% of our total assets. We hereby agree to furnish to the SEC copies of any such omitted instruments or agreements as the SEC requests.



81



---

##### Table of Contents

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.



CELULOSA ARAUCO Y CONSTITUCIÓN S.A.By:

/s/ Matías DomeykoMatías DomeykoChief Executive Officer


Date: June 28, 2007



---

##### Table of Contents

CELULOSA ARAUCO Y CONSTITUCION S.A. AND SUBSIDIARIES

Consolidated financial statements

December 31, 2006

ThU.S.$ - Thousands of United States dollars

Ch$ - Chilean pesos



F - 1



---

##### Table of Contents

|     |  |  |  |                                                                                                                                       
|---- |  |  |  | --------------------------------------------------------------------------------------------------------------------------------------
|LOGO |  | 
|     |  | 
|     |  |  |  | PricewaterhouseCoopers RUT: 81.513.400-1 Santiago de Chile Av. Andrés Bello 2711-Torre Costanera Las Condes Teléfono [56] (2) 940 0000

Report of Independent Registered Public Accounting Firm

To the Board of Directors and Stockholders of

Celulosa Arauco y
Constitución S.A.

In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of income and comprehensive
income, of stockholders equity and of cash flows present fairly, in all material respects, the financial position of Celulosa Arauco y Constitución S.A. and its subsidiaries at December 31, 2006 and 2005, and the results of their
operations and their cash flows for each of the three years in the period ended December 31, 2006 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement
schedule included under Exhibit 15.1 presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. These financial statements and financial statement
schedule are the responsibility of the Companys management. Our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits. We conducted our audits of these statements in
accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management and evaluating the overall
financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

/s/ PricewaterhouseCoopers

Santiago, Chile.

June 18, 2007



F - 2



---

##### Table of Contents

CELULOSA ARAUCO Y CONSTITUCION S.A. AND SUBSIDIARIES

Consolidated Balance Sheets



|                                              |  |                      |           |      |   |          
|--------------------------------------------- |  | -------------------- | --------- | ---- | - | ---------
|                                              |  | At December 31,     
|ASSETS                                        |  | 2006                 |           | 2005
|                                              |  | (U.S.$ in thousands)
|CURRENT ASSETS:                               |  |                      |           |      |   |          
|Cash and cash equivalents 1d)                 |  | $                    | 22,180    |      | $ | 25,958   
|Time deposits                                 |  |                      | 21,719    |      |   | 32,276   
|Short-term investments 1e)                    |  |                      | 143,851   |      |   | 280,276  
|Trade receivables  net                       |  |                      | 550,746   |      |   | 371,791  
|Other receivables  net (2)                   |  |                      | 120,911   |      |   | 96,327   
|Inventories 1f), (3)                          |  |                      | 409,251   |      |   | 363,670  
|Prepaid expenses and other current assets (4) |  |                      | 130,393   |      |   | 108,788  
|                                              |  |                      |           |      |   |          
|Total current assets                          |  |                      | 1,399,051 |      |   | 1,279,086
|                                              |  |                      |           |      |   |          
|LONG-TERM ASSETS:                             |  |                      |           |      |   |          
|Forest 1g)                                    |  |                      | 2,016,637 |      |   | 1,549,903
|Property, plant and equipment  net 1h), (5)  |  |                      | 3,447,037 |      |   | 3,087,900
|Investments in affiliates                     |  |                      | 90,834    |      |   | 91,361   
|Goodwill, net of amortization 1n)             |  |                      | 27,240    |      |   | 23,065   
|Other long-term assets                        |  |                      | 88,153    |      |   | 82,704   
|                                              |  |                      |           |      |   |          
|Total long-term assets                        |  |                      | 5,669,901 |      |   | 4,834,933
|                                              |  |                      |           |      |   |          
|Total assets                                  |  | $                    | 7,068,952 |      | $ | 6,114,019
|                                              |  |                      |           |      |   |          

Notes to the financial statements are an integral part of these financial statements.



F - 3



---

##### Table of Contents

CELULOSA ARAUCO Y CONSTITUCION S.A. AND SUBSIDIARIES

Consolidated Balance Sheets



|                                                                           |  |                      |           |      |   |          
|-------------------------------------------------------------------------- |  | -------------------- | --------- | ---- | - | ---------
|                                                                           |  | At December 31,     
|LIABILITIES AND STOCKHOLDERS EQUITY                                       |  | 2006                 |           | 2005
|                                                                           |  | (U.S.$ in thousands)
|CURRENT LIABILITIES:                                                       |  |                      |           |      |   |          
|Short-term debt                                                            |  | $                    | 203,453   |      | $ | 113,360  
|Current portion of long-term notes                                         |  |                      | 168,596   |      |   | 65,534   
|Current portion of long-term bonds 1p)                                     |  |                      | 99,980    |      |   |         
|Accounts payable (6)                                                       |  |                      | 424,431   |      |   | 286,337  
|Accrued liabilities and other current liabilities (7)                      |  |                      | 124,405   |      |   | 110,960  
|                                                                           |  |                      |           |      |   |          
|Total current liabilities                                                  |  |                      | 1,020,865 |      |   | 576,191  
|                                                                           |  |                      |           |      |   |          
|LONG-TERM LIABILITIES:                                                     |  |                      |           |      |   |          
|Long-term notes (8)                                                        |  |                      | 570,485   |      |   | 497,078  
|Long-term bonds 1p) (8)                                                    |  |                      | 1,579,586 |      |   | 1,679,136
|Deferred income taxes (9)                                                  |  |                      | 285,582   |      |   | 197,240  
|Other long-term liabilities                                                |  |                      | 66,197    |      |   | 61,356   
|                                                                           |  |                      |           |      |   |          
|Total long-term liabilities                                                |  |                      | 2,501,850 |      |   | 2,434,810
|                                                                           |  |                      |           |      |   |          
|MINORITY INTEREST                                                          |  |                      | 115,678   |      |   | 12,900   
|                                                                           |  |                      |           |      |   |          
|STOCKHOLDERS' EQUITY:                                                      |  |                      |           |      |   |          
|Common stock (nominal par value, 113,152,446 shares authorized and issued) |  |                      |          |      |   |         
|Paid-in capital                                                            |  |                      | 363,833   |      |   | 363,833  
|Retained earnings                                                          |  |                      | 3,025,246 |      |   | 2,695,448
|Accumulated other comprehensive income                                     |  |                      | 41,480    |      |   | 30,837   
|                                                                           |  |                      |           |      |   |          
|Total stockholders' equity                                                 |  |                      | 3,430,559 |      |   | 3,090,118
|                                                                           |  |                      |           |      |   |          
|Total liabilities and stockholders' equity                                 |  | $                    | 7,068,952 |      | $ | 6,114,019
|                                                                           |  |                      |           |      |   |          

Notes to the financial statements are an integral part of these financial statements.



F - 4



---

##### Table of Contents

CELULOSA ARAUCO Y CONSTITUCION S.A. AND SUBSIDIARIES

Consolidated Statements of Income and Comprehensive Income



|                                                                                           |  |                         |            |   |      |   |            |      |  |   |            |  
|------------------------------------------------------------------------------------------ |  | ----------------------- | ---------- | - | ---- | - | ---------- | ---- |  | - | ---------- | -
|                                                                                           |  | Year Ended December 31, |           
|                                                                                           |  | 2006                    |            |   | 2005 |   |            | 2004 | 
|                                                                                           |  | (U.S. $ in thousands)   |           
|Net sales                                                                                  |  | $                       | 2,850,012  |   |      | $ | 2,373,907  |      |  | $ | 2,075,052  |  
|Operating costs and expenses:                                                              |  |                         |            |   |      |   |            |      |  |   |            |  
|Cost of sales                                                                              |  |                         | (1,626,038 | ) |      |   | (1,388,322 | )    |  |   | (1,041,590 | )
|Depreciation (13)                                                                          |  |                         | (186,995   | ) |      |   | (170,291   | )    |  |   | (141,329   | )
|Selling and administrative                                                                 |  |                         | (229,220   | ) |      |   | (180,355   | )    |  |   | (124,784   | )
|                                                                                           |  |                         |            |   |      |   |            |      |  |   |            |  
|Total operating costs and expenses                                                         |  |                         | (2,042,253 | ) |      |   | (1,738,968 | )    |  |   | (1,307,703 | )
|                                                                                           |  |                         |            |   |      |   |            |      |  |   |            |  
|Income from operations                                                                     |  |                         | 807,759    |   |      |   | 634,939    |      |  |   | 767,349    |  
|                                                                                           |  |                         |            |   |      |   |            |      |  |   |            |  
|Non-operating income (expense):                                                            |  |                         |            |   |      |   |            |      |  |   |            |  
|Interest income                                                                            |  |                         | 40,899     |   |      |   | 34,487     |      |  |   | 25,431     |  
|Other income gains (losses)                                                                |  |                         | (344       | ) |      |   | (2,225     | )    |  |   | (4,990     | )
|Foreign exchange gains (losses)                                                            |  |                         | 10,510     |   |      |   | (6,249     | )    |  |   | 16,227     |  
|Interest expense                                                                           |  |                         | (82,460    | ) |      |   | (109,886   | )    |  |   | (78,109    | )
|                                                                                           |  |                         |            |   |      |   |            |      |  |   |            |  
|Total non-operating income (expense)                                                       |  |                         | (31,395    | ) |      |   | (83,873    | )    |  |   | (41,441    | )
|                                                                                           |  |                         |            |   |      |   |            |      |  |   |            |  
|Income before taxes, minority interest and equity in earnings of unconsolidated affiliates |  |                         | 776,364    |   |      |   | 551,066    |      |  |   | 725,908    |  
|Provision for income taxes (9)                                                             |  |                         | (161,958   | ) |      |   | (113,328   | )    |  |   | (139,899   | )
|Minority interest in consolidated subsidiaries                                             |  |                         | 100        |   |      |   | (72        | )    |  |   | (321       | )
|Equity in earnings of unconsolidated affiliates                                            |  |                         | 7,926      |   |      |   | 6,682      |      |  |   | 6,473      |  
|                                                                                           |  |                         |            |   |      |   |            |      |  |   |            |  
|Net income                                                                                 |  | $                       | 622,432    |   |      | $ | 444,348    |      |  | $ | 592,161    |  
|                                                                                           |  |                         |            |   |      |   |            |      |  |   |            |  
|Other comprehensive income                                                                 |  |                         |            |   |      |   |            |      |  |   |            |  
|Foreign currency translation adjustment                                                    |  |                         | 10,643     |   |      |   | 30,837     |      |  |   |           |  
|                                                                                           |  |                         |            |   |      |   |            |      |  |   |            |  
|Comprehensive income                                                                       |  | $                       | 633,075    |   |      | $ | 475,185    |      |  | $ | 592,161    |  
|                                                                                           |  |                         |            |   |      |   |            |      |  |   |            |  

Notes to the financial statements are an integral part of these financial statements.



F - 5



---

##### Table of Contents

CELULOSA ARAUCO Y CONSTITUCION S.A. AND SUBSIDIARIES

Consolidated Statements of Cash Flows



|                                                                                  |  |                         |            |   |      |   |          |      |  |   |          |  
|--------------------------------------------------------------------------------- |  | ----------------------- | ---------- | - | ---- | - | -------- | ---- |  | - | -------- | -
|                                                                                  |  | Year Ended December 31, |           
|                                                                                  |  | 2006                    |            |   | 2005 |   |          | 2004 | 
|                                                                                  |  | (U.S.$ in thousands)    |           
|CASH FLOWS FROM OPERATING ACTIVITIES                                              |  |                         |            |   |      |   |          |      |  |   |          |  
|Net income                                                                        |  | $                       | 622,432    |   |      | $ | 444,348  |      |  | $ | 592,161  |  
|Adjustments to reconcile net income to net cash provided by operating activities: |  |                         |            |   |      |   |          |      |  |   |          |  
|Depreciation and amortization                                                     |  |                         | 187,031    |   |      |   | 173,509  |      |  |   | 144,547  |  
|Minority interest in net income of consolidated subsidiaries                      |  |                         | 100        |   |      |   | 72       |      |  |   | 321      |  
|Earnings of unconsolidated affiliates                                             |  |                         | (7,926     | ) |      |   | (6,682   | )    |  |   | (6,473   | )
|Deferred income taxes                                                             |  |                         | 44,091     |   |      |   | 10,730   |      |  |   | 15,592   |  
|Allowance for doubtful accounts                                                   |  |                         | 2,532      |   |      |   | (628     | )    |  |   | 2,652    |  
|(Gain) loss on sale of fixed assets                                               |  |                         | (761       | ) |      |   | (590     | )    |  |   | 2,206    |  
|Investments and proceeds in trading securities                                    |  |                         | 146,982    |   |      |   | 59,787   |      |  |   | 150,454  |  
|Decrease (increase) in receivables                                                |  |                         | (181,487   | ) |      |   | 29,760   |      |  |   | (131,246 | )
|Decrease (increase) in inventories                                                |  |                         | (45,581    | ) |      |   | (52,836  | )    |  |   | (45,790  | )
|Decrease (increase) in other assets                                               |  |                         | (40,362    | ) |      |   | (37,264  | )    |  |   | 79,540   |  
|Increase in accounts payable                                                      |  |                         | 71,290     |   |      |   | 64,323   |      |  |   | 44,260   |  
|Increase in other liabilities                                                     |  |                         | 215,488    |   |      |   | 66,423   |      |  |   | 22,299   |  
|                                                                                  |  |                         |            |   |      |   |          |      |  |   |          |  
|Net cash provided by operating activities                                         |  |                         | 1,013,829  |   |      |   | 750,952  |      |  |   | 870,523  |  
|                                                                                  |  |                         |            |   |      |   |          |      |  |   |          |  
|CASH FLOWS FROM INVESTING ACTIVITIES                                              |  |                         |            |   |      |   |          |      |  |   |          |  
|Additions to property, plant and equipment and forest                             |  |                         | (1,094,360 | ) |      |   | (631,480 | )    |  |   | (743,247 | )
|Proceeds from sales of property, plant and equipment                              |  |                         | 6,460      |   |      |   | 1,893    |      |  |   | 2,860    |  
|Investment in related companies                                                   |  |                         | (10,176    | ) |      |   | (237,397 | )    |  |   | (6,691   | )
|Dividends received from related companies                                         |  |                         | 8,598      |   |      |   | 1,846    |      |  |   | 1,399    |  
|                                                                                  |  |                         |            |   |      |   |          |      |  |   |          |  
|Net cash used in investing activities                                             |  |                         | (1,089,478 | ) |      |   | (865,138 | )    |  |   | (745,679 | )
|                                                                                  |  |                         |            |   |      |   |          |      |  |   |          |  
|CASH FLOWS FROM FINANCING ACTIVITIES                                              |  |                         |            |   |      |   |          |      |  |   |          |  
|Bonds issued                                                                      |  |                         |           |   |      |   | 400,000  |      |  |   |         |  
|Bank borrowings and notes                                                         |  |                         | 957,005    |   |      |   | 372,230  |      |  |   | 307,697  |  
|Debt issue costs                                                                  |  |                         |           |   |      |   | (3,710   | )    |  |   | (77      | )
|Payment of notes and bond principal                                               |  |                         | (690,443   | ) |      |   | (445,135 | )    |  |   | (259,869 | )
|Dividends paid                                                                    |  |                         | (194,691   | ) |      |   | (207,724 | )    |  |   | (175,387 | )
|                                                                                  |  |                         |            |   |      |   |          |      |  |   |          |  
|Net cash provided by (used in) financing activities                               |  |                         | 71,871     |   |      |   | 115,661  |      |  |   | (127,636 | )
|                                                                                  |  |                         |            |   |      |   |          |      |  |   |          |  
|Net increase (decrease) in cash and cash equivalents                              |  |                         | (3,778     | ) |      |   | 1,475    |      |  |   | (2,792   | )
|Cash and cash equivalents at beginning of year                                    |  |                         | 25,958     |   |      |   | 24,483   |      |  |   | 27,275   |  
|                                                                                  |  |                         |            |   |      |   |          |      |  |   |          |  
|Cash and cash equivalents at end of year                                          |  | $                       | 22,180     |   |      | $ | 25,958   |      |  | $ | 24,483   |  
|                                                                                  |  |                         |            |   |      |   |          |      |  |   |          |  

Notes to the financial statements are an integral part of these financial statements.



F - 6



---

##### Table of Contents

CELULOSA ARAUCO Y CONSTITUCION S.A. AND SUBSIDIARIES

Consolidated Statements of Stockholders Equity



|                                                                                                  |  |                                                                  |           |   |      |   |           |      |  |   |           |  
|------------------------------------------------------------------------------------------------- |  | ---------------------------------------------------------------- | --------- | - | ---- | - | --------- | ---- |  | - | --------- | -
|                                                                                                  |  | Year Ended December 31,                                          |          
|                                                                                                  |  | 2006                                                             |           |   | 2005 |   |           | 2004 | 
|                                                                                                  |  | (Dollar and Share Amounts in Thousands,Except Per Share Amounts) |          
|Common Stock                                                                                      |  |                                                                  |          |   |      |   |          |      |  |   |          |  
|Nominal par value (113,152,446 shares authorized and issued at December 31, 2006, 2005, and 2004) |  |                                                                  |           |   |      |   |           |      |  |   |           |  
|                                                                                                  |  |                                                                  |          
|Paid in capital                                                                                   |  |                                                                  |           |   |      |   |           |      |  |   |           |  
|Balance at beginning of year                                                                      |  | $                                                                | 363,833   |   |      | $ | 363,833   |      |  | $ | 363,833   |  
|Balance at end of year                                                                            |  |                                                                  | 363,833   |   |      |   | 363,833   |      |  |   | 363,833   |  
|                                                                                                  |  |                                                                  |           |   |      |   |           |      |  |   |           |  
|Retained earnings                                                                                 |  |                                                                  |           |   |      |   |           |      |  |   |           |  
|Balance at beginning of year                                                                      |  |                                                                  | 2,695,448 |   |      |   | 2,423,434 |      |  |   | 2,057,168 |  
|Initial application of SAB 108                                                                    |  |                                                                  | (32,403   | ) |      |   |          |      |  |   |          |  
|Net income                                                                                        |  |                                                                  | 622,432   |   |      |   | 444,348   |      |  |   | 592,161   |  
|Dividends                                                                                         |  |                                                                  | (260,231  | ) |      |   | (172,334  | )    |  |   | (225,895  | )
|Balance at end of year                                                                            |  |                                                                  | 3,025,246 |   |      |   | 2,695,448 |      |  |   | 2,423,434 |  
|                                                                                                  |  |                                                                  |           |   |      |   |           |      |  |   |           |  
|Accumulated other comprehensive income                                                            |  |                                                                  |           |   |      |   |           |      |  |   |           |  
|Foreign currency translation adjustments                                                          |  |                                                                  | 41,480    |   |      |   | 30,837    |      |  |   |          |  
|                                                                                                  |  |                                                                  |           |   |      |   |           |      |  |   |           |  
|Total stockholders equity                                                                        |  | $                                                                | 3,430,559 |   |      | $ | 3,090,118 |      |  | $ | 2,787,267 |  
|                                                                                                  |  |                                                                  |           |   |      |   |           |      |  |   |           |  

Notes to the financial statements are an integral part of these financial statements.



F - 7



---

##### Table of Contents

CELULOSA ARAUCO Y CONSTITUCION S.A. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements



NOTE 1SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

a) Nature of operations

Celulosa Arauco y
Constitución S.A., a Chilean corporation (the Company), and its subsidiaries (the Company, together with its subsidiaries, Arauco) are principally engaged in the production of pulp, forestry and wood products, and the
management of their forestry assets. Arauco owns and operates facilities in Chile, Argentina, Brazil and Uruguay and has customers throughout the world including Asia, Europe, North America and Central and South America.

b) Use of estimates in the preparation of financial statements

The preparation of financial statements in conformity with generally accepted accounting principles in the United States of America requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Significant items subject to such estimates
and assumptions include the carrying value of property, plant and equipment; recoverable forest; allowance for doubtful accounts; inventories and deferred income tax assets. Actual results could differ from those estimates.

c) Consolidation

The consolidated financial
statements include the accounts of the Company and all majority owned subsidiaries in which the Company has voting control and variable interest entities (VIEs) in which the Company is the primary beneficiary. Investments in affiliates,
companies in which the Company owned from 20% to 50% of the shares, (directly or indirectly), and therefore exercises significant influence, but which it does not control, and where the entity is either not a VIE or the Company is not the primary
beneficiary, are accounted for under the equity method. The Companys share of earnings of such investments is shown in the income statement under the heading Equity in earnings of unconsolidated affiliates.

In October 2006, Fondo de Inversión Privado Bío-Bío (Forbío) acquired Forestal Bío-Bíos
assets for U.S.$ 346 million. At the same time, Arauco signed with Forbío certain contracts to become the administrator and exclusive buyer of these forestry assets which include 40,000 hectares of plantations. Arauco receives an annual fee
for the administration of the forest. Arauco also signed a purchase contract with Forbío whereby it has the obligation to buy the wood, plantations and land over a seven-year term starting in October 2006. Forbío was formed by
Araucos unrelated companies Foresta Administradora de Fondos de Inversión S.A. and Fondo Inmobiliario Independencia. Forbío was financed through financial debt amounting to U.S.$ 240 million and capital contributions. The
Company has determined that Forbío is a variable interest entity and the Company is the primary beneficiary. As such, commencing in October 2006, the Company consolidates Forbío. There are no assets of the Company that serve as
collateral for Forbío and the creditors of Forbío have no recourse to the general credit of the Company.



F - 8



---

##### Table of Contents

CELULOSA ARAUCO Y CONSTITUCION S.A. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements



d) Cash and cash equivalents

Arauco considers all highly liquid securities with maturities of three months or less at the time of purchase to be cash equivalents. Arauco invests its excess cash in short-term time deposits and repurchased
agreements with high quality financial institutions. These time deposits and repurchased agreements are included in cash and cash equivalents at fair value. Arauco generally holds these cash investments until maturity and is therefore not subject to
significant market risk. The Company has accounts with a variety of banks and does not hold significant deposits with any single bank.

e) Short-term
investments

Araucos short-term investments consist primarily of investments in mutual fund units, which are classified as trading
securities. These short-term investments are recorded at fair value with unrealized holding gains and losses included in earnings. Net unrealized holding gains included in net earnings amounted to U.S.$0.5 million, U.S.$9.7 million and U.S.$6.0
million for the years ended December 31, 2006, 2005, and 2004, respectively.

f) Inventories

Inventories of raw materials, work-in-process and spare parts are stated at the lower of cost or market, primarily using the average cost method. Finished
goods are stated at the lower of average production costs for the period or market. Inventory costs include materials, labor, transportation, depreciation of fixed assets and production overhead as appropriate.

g) Forests

Timber and timberlands are stated at cost
less cost of timber harvested. The costs incurred in developing and growing timber such as site preparation, property taxes, seedling, planting, fertilization, insect and wildlife control, herbicide application and thinning, are capitalized. Direct
and indirect interest costs incurred in connection with the development of timber and timberlands are also capitalized. These capitalized costs are accumulated by specifically identifiable farm blocks. Accounting practices for these costs do not
change when timber becomes merchantable and harvesting commences.

Costs incurred related to logging roads are capitalized and amortized
over their expected useful lives or as the related timber is harvested.

Depletion, or costs attributed to timber harvested is determined
by each identifiable farm block that is in the harvesting stage based on the relationship of unamortized timber costs to the estimated volume of recoverable timber multiplied by the amount of timber cut. The estimated volume of recoverable timber is
determined using statistical information and other data related to growth rates and yields gathered from physical observations, models and other information gathering techniques. Changes in yields are generally due to adjustments in growth rates and
similar matters and are accounted for prospectively as changes in estimates. The cost of timber harvested is included in the carrying values of raw material and product inventories and in the cost of products sold as these inventories are sold to
third parties.



F - 9



---

##### Table of Contents

CELULOSA ARAUCO Y CONSTITUCION S.A. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements



h) Property, plant and equipment

Property, plant and equipment are stated at cost less accumulated depreciation. Depreciation of buildings, equipment and other depreciable assets is primarily determined using the straight-line method. Expenditures
that substantially improve and/or increase the useful life of facilities or equipment are capitalized. Interest costs associated with financing the construction of property, plant and equipment are capitalized. Maintenance and repair costs are
expensed as incurred. Profits and losses on the sale of property, plant and equipment are accounted for as the difference between the book value and the consideration received.

i) Asset impairments

Arauco reviews long-lived assets for impairment when events or changes in
circumstances indicate that the carrying amount of the assets may not be recoverable. Losses are recognized when the book values exceed expected undiscounted future net cash flows from the use and eventual disposition of the asset. These
undiscounted cash flows are based upon managements estimate of future cash inflows and outflows. The key assumptions in estimating these cash flows are future pricing of forest and future estimates of expenses to be incurred. When impairment
is indicated, the book values of the assets are written down to their estimated fair value.

j) Income taxes

Arauco uses the asset and liability method of accounting for income taxes. Under this method, the provision for income taxes includes amounts currently
payable and amounts deferred as tax assets and liabilities, based on differences between the financial statement carrying amounts and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are
measured using enacted tax rates expected to be recovered or settled. Deferred tax assets are reduced by a valuation allowance which is established when it is more likely than not that some portion or all of the deferred tax assets will not be
realized. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.

k) Derivative financial instruments

To cover risk of exposure to interest rate differences, Arauco utilizes interest rate
swap derivative financial instruments. It has established procedures for assessing risk and approving, reporting and monitoring derivative financial instrument activities. Contracts are recorded on the balance sheet and measured at fair value. The
interest differential paid or received is recognized in interest expense in the period incurred. Arauco does not use hedge accounting treatment or utilize derivative instruments for trading or speculative purposes.

l) Allowance for doubtful accounts and trade receivables

Arauco provides an allowance for doubtful accounts based on a review of the specific receivables. As of December 31, 2006 and 2005, no single customer accounted for more than 10% of the outstanding balance of accounts receivable. At
December 31, 2006 and 2005, the balance in the allowance account for receivables was U.S.$12.1 million and U.S.$10.7 million, respectively.



F - 10



---

##### Table of Contents

CELULOSA ARAUCO Y CONSTITUCION S.A. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements



The trade receivables at December 31, 2006 and 2005, include restricted receivables amounting to
U.S.$70,388 thousand and U.S.$61,415 thousand that secure the payment of short-term debt.

m) Currency translation

The functional currency of the Company and its subsidiaries, except for Brazilian subsidiaries, is the U.S. dollar. The Company has subsidiaries that
maintain their records in local currencies. Because the U.S. dollar is the functional currency, subsidiaries that maintain their records in local currency remeasure their financial statements into U.S. dollars using the historical exchange rates for
non-monetary assets and liabilities and shareholders equity accounts. For monetary assets and liabilities, the year-end exchange rate prevailing on December 31 of each year is used. The income statement amounts are remeasured into U.S.
dollars at a weighted average exchange rate for the year. Re-measurement gains or losses are recorded in foreign exchange gains (losses) in the income statement.

In the case of Brazilian subsidiaries, the local currency is the functional currency. As such, assets and liabilities are translated using the exchange rates in effect at the balance sheet date. Income and expenses
are translated at the average exchange rates during the year. Translation gains and losses not reflected in earnings are reported in accumulated other comprehensive net income in stockholders equity.

n) Goodwill

Goodwill is the excess of acquisition
cost of a business over the fair value of identifiable net assets acquired. Goodwill and other intangible assets are deemed to have an indefinite life and are not amortized. However, these indefinite life assets are tested for impairment on an
annual basis and when indicators of impairment are determined to exist by applying a fair-value based test.

o) Revenue recognition

Revenues are recorded at the time of shipment of products to the customer. Revenue from inter-segment sales is recorded when the forest is harvested and
sold; such inter-segment sales, which are generally made at prices that approximate market prices, are eliminated in the consolidated financial statements. The following criteria must be met in order to recognize revenue: (1) persuasive
evidence of an arrangement exists; (2) delivery has occurred or services have been rendered; (3) the price to the buyer is fixed or determinable; and (4) collection is reasonably assured.

p) Bonds

Bonds are shown at face value plus accrued
interest less discount on issue of the bonds. The expenses incurred in, the issue of the bonds are shown under other current and long- term assets and are amortized using the interest method of amortization over the term of the instruments. Total
capitalized costs associated with bonds were U.S.$10.1 million and U.S.$12.1 million at December 31, 2006 and 2005, respectively.

q) Research and
development expenses

The cost of research, project development and special studies are charged to income in the year in which they are
incurred. The cost of research and development charged to income was U.S.$3.2 million, U.S.$3.4 million and U.S.$2.0 million for the years ended December 31, 2006, 2005, and 2004, respectively.



F - 11



---

##### Table of Contents

CELULOSA ARAUCO Y CONSTITUCION S.A. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements



r) Software

External direct costs of materials and services consumed in developing or obtaining internal use computer software are capitalized. Payroll and payroll-related costs for employees who are directly associated with and
who devote time to the internal use computer software project and interest costs incurred while developing internal use computer software are capitalized. Maintenance, training, data conversion and reengineering costs are charged to the results of
operations as incurred. Purchased software is capitalized and amortized over the estimated useful life up to a maximum of three years. Capitalized software assets are classified in Property, plant and equipment.

s) Severance benefit plan

Arauco sponsors a
retirement plan that covers certain employees. It has recorded a liability for long-term severance indemnities based on agreements it has entered into with its employees at certain of its companies in Chile. Generally, upon leaving Arauco, employees
who have completed five years of service are entitled to one months salary for each year of service, up to the retirement age of 60 and 65 years for women and men, respectively. In accordance with Emerging Issues Task Force (EITF)
88-1, Arauco records the undiscounted obligation for this plan as if it was payable at each balance sheet date. Severance expense for this plan was U.S.$3.9 million, U.S.$4.6 million and U.S.$2.8 million, for fiscal 2006, 2005 and 2004,
respectively. The severance liability is recorded in other long-term and current liabilities and amounted to U.S.$24.0 million and U.S.$21.5 million, at December 31, 2006 and 2005, respectively.

t) Acquisitions

On October 11, 2006, through
the subsidiary Aserraderos Arauco S.A., Arauco acquired the company Norwood S.A. for U.S.$4.7 million. Goodwill amounting to U.S.$ 2.0 million was allocated to the Wood products segment.

On November 10, 2006 through the subsidiary Arauco Internacional S.A., Arauco acquired the Argentine company, La Señora del Milagro S.R.L.,
for U.S.$5.4 million. Goodwill amounting to U.S.$ 2.0 million was allocated to the Forestry segment.

On January 6, 2005, the
subsidiary Forestal Valdivia S.A. acquired 80% of Forestal Los Lagos S.A. for U.S.$ 21.4 million. Goodwill amounting to U.S.$ 0.9 million was allocated to the Forestry segment. Had this acquisition taken place on January 1 of the
previous year, consolidated net sales and net income would not have been significantly different from reported amounts.

On March 9,
2005, the subsidiary Arauco Do Brasil Ltda. acquired from Louis Dreyfus S.A. 100% of the stock of the companies incorporated in Brazil, L.D. Forest Products S.A. and Placas do Parana S.A. for U.S.$ 168 million in cash. Subsequently, on
October 31, 2005, the subsidiary Industrias Forestales S.A., acquired from Louis Dreyfus S.A. 100% of the companies incorporated in Argentina, Ecoboard S.A.I.F. and Ecoresin S.A. for U.S.$55 million in cash.



F - 12



---

##### Table of Contents

CELULOSA ARAUCO Y CONSTITUCION S.A. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements



The initial purchase price of Araucos acquisitions in Argentina and Brazil in 2005 have been
allocated based on independent appraisals and managements estimates as follows:



|                               |  |        |          |  
|------------------------------ |  | ------ | -------- | -
|                               |  | ThU.S. |         
|Cash acquired                  |  | $      | 7,698    |  
|Accounts receivable            |  |        | 46,487   |  
|Inventories                    |  |        | 28,881   |  
|Other current assets           |  |        | 36,433   |  
|Non-current assets             |  |        | 28,056   |  
|Property, equipment and forest |  |        | 312,576  |  
|Current liabilities            |  |        | (104,775 | )
|Long-term liabilities          |  |        | (91,250  | )
|Deferred tax liabilities       |  |        | (41,106  | )
|                               |  |        |          |  
|Total purchase price           |  |        | 223,000  |  
|                               |  |        |          |  

The following unaudited pro forma financial information reflects the results of operations of
Arauco as if the acquisitions of the companies in Argentina and Brazil described above had taken place on January 1, 2004. The pro forma financial information is not necessarily indicative of the results of operations as it would have been had
the transaction been effected on the assumed date.



|               |  |           |  |          
|-------------- |  | --------- |  | ---------
|               |  | 2005      |  | 2004     
|(In thousands) |  | Pro forma |  | Pro forma
|Net sales      |  | 2,452,307 |  | 2,252,656
|Net income     |  | 449,555   |  | 615,506  

u) Initial application of SAB 108

In September 2006, the SEC staff issued Staff Accounting Bulletin No. 108, Considering the Effects of Prior Year Misstatements when Quantifying
Misstatements in Current Year Financial Statements. SAB 108 was issued in order to eliminate the diversity of practice surrounding how public companies quantify financial statement misstatements.

Traditionally, there have been two widely-recognized methods for quantifying the effects of financial statement misstatements: the roll-over
method and the iron curtain method. The roll-over method focuses primarily on the impact of a misstatement on the income statementincluding the reversing effect of prior year misstatementsbut its use can lead to the
accumulation of misstatements in the balance sheet. The iron-curtain method, on the other hand, focuses primarily on the effect of correcting the period-end balance sheet with less emphasis on the reversing effects of prior year errors on the income
statement. Prior to our application of the guidance in SAB 108, the Company used the roll-over method for quantifying financial statement misstatements.



F - 13



---

##### Table of Contents

CELULOSA ARAUCO Y CONSTITUCION S.A. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements



In SAB 108, the SEC staff established an approach that requires quantification of financial statement
misstatements based on the effects of the misstatements on each of the companys financial statements and the related financial statement disclosures. This model is commonly referred to as a dual approach because it requires
quantification of errors under both the iron curtain and the roll-over methods.

SAB 108 permits existing public companies to initially
apply its provisions either by (i) restating prior financial statements as if the dual approach had always been applied or (ii) recording the cumulative effect of initially applying the dual approach as adjustments
to the carrying values of assets and liabilities as of January 1, 2006 with an offsetting adjustment recorded to the opening balance of retained earnings. The Company elected to record the effects of applying SAB 108 using the cumulative effect
transition method. The following table summarizes the effects (up to January 1, 2006) of applying the guidance in SAB 108:



|                                                            |  |                                               |   |  |                                      |   |  |        
|----------------------------------------------------------- |  | --------------------------------------------- | - |  | ------------------------------------ | - |  | -------
|                                                            |  | Period in which themisstatement originated(1)
|                                                            |  | Year endedDecember 31,                        |   |  | Adjustment recorded as of January 1,
|                                                            |  | 2004                                          |   |  | 2005                                 |   |  | 2006   
|                                                            |  | ThU.S.$                                       |   |  | ThU.S.$                              |   |  | ThU.S.$
|Property, plant and equipment-deferred tax liability(2)     |  | 28,236                                        |   |  | 16,311                               |   |  | 44,547 
|Fair value of interest rate swaps (3)                       |  |                                              |   |  | 14,632                               |   |  | 14,632 
|Effect on deferred tax liability of interest rate swaps (3) |  |                                              |   |  | 2,488                                |   |  | 2,488  
|Impact on net income (4)                                    |  | (28,236                                       | ) |  | (4,167                               | ) |  |       
|Retained earnings(5)                                        |  |                                              |   |  |                                     |   |  | 32,403 

---

|(1) | The Company previously quantified these misstatements under the roll-over method and concluded that they were immaterial.
|--- | -------------------------------------------------------------------------------------------------------------------------

|(2) | The Companys subsidiaries located in Argentina and Brazil did not properly quantify and record in 2004 and 2005, a deferred tax liability for the temporary differences between
book and tax basis on certain property, plant and equipment. As a result of this error, the Companys income tax expense was understated by ThU.S.$ 28,236 and ThU.S.$ 16,311 for the years ended December 31, 2004 and 2005,
respectively. The Company recorded a ThChU.S.$ 44,547 increase in its deferred tax liability as of January 1, 2006 with a corresponding reduction in retained earnings to correct this misstatement.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) | The Company did not record an asset associated with the fair value of certain interest rate swap agreements. As a result of this misstatement, the Companys interest income was
understated by ThU.S.$ 14,632 and income tax expense was understated by ThU.S.$ 2,488 for the year ended December 31, 2005. The Company recorded a ThChU.S.$ 14,632 increase in its other receivables and ThChU.S.$ 2,488 increase in its
deferred tax liability as of January 1, 2006 with a corresponding net increase in retained earnings of ThChU.S.$ 12,145 to correct this misstatement.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



F - 14



---

##### Table of Contents

CELULOSA ARAUCO Y CONSTITUCION S.A. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements



|(4) | Represents the net over-statement of net income for the indicated periods resulting from these misstatements.
|--- | -------------------------------------------------------------------------------------------------------------

|(5) | Represents the net reduction to retained earnings recorded as of January 1, 2006 to give effect to the initial application of SAB 108.
|--- | --------------------------------------------------------------------------------------------------------------------------------------

v) New accounting pronouncements

In September 2006,
the FASB issued SFAS No. 157, Fair Value Measurements (SFAS No. 157). SFAS No. 157 defines fair value, establishes a framework for measuring fair value in accordance with generally accepted accounting
principles, and expands disclosures about fair value measurements. This statement does not require any new fair value measurements; rather, it applies to other accounting pronouncements that require or permit fair value measurements. The provisions
of this statement are to be applied prospectively as of the beginning of the fiscal year in which this statement is initially applied, with any transition adjustment recognized as a cumulative-effect adjustment to the opening balance of retained
earnings. The provisions of SFAS No. 157 are effective for the fiscal years beginning after November 15, 2007; therefore, we anticipate adopting this standard as of January 1, 2008. This Statement will not have a material effect on
the Companys consolidated financial condition or results of operations.

In September 2006, the FASB issued SFAS No. 158,
Employers Accounting for Defined Benefit Pension and Other Postretirement Plansan amendment of FASB Statements No. 87, 88, 106, and 132(R) (SFAS No. 158). SFAS No. 158 requires employers to
recognize a net liability or asset and an offsetting adjustment to accumulated other comprehensive income to report the funded status of defined benefit pension and other post-retirement benefit plans. SFAS No. 158 requires prospective
application; thus, the recognition and disclosure requirements are effective for our fiscal year ended December 31, 2006. Additionally, SFAS No. 158 requires companies to measure plan assets and obligations at their year-end balance sheet
date. This requirement is effective for our fiscal year ending December 31, 2008. This Statement will not have a material effect on the Companys consolidated financial position or results of operation.

In September 2006, the SEC issued Staff Accounting Bulletin No. 108, Considering the Effects of Prior Year Misstatements when Quantifying
Misstatements in Current Year Financial Statements (SAB 108). SAB 108 provides guidance on how prior year misstatements should be taken into consideration when quantifying misstatements in current year financial statements for
purposes of determining whether the current years financial statements are materially misstated. SAB 108 permits registrants to record the cumulative effect of initial adoption by recording the necessary correcting adjustments to
the carrying values of assets and liabilities as of the beginning of that year with the offsetting adjustment recorded to the opening balance of retained earnings only if material under the dual method. SAB 108 is effective for fiscal years ending
on or after November 15, 2006. As described in note 1 u), the Company adopted SAB 108 in 2006.



F - 15



---

##### Table of Contents

CELULOSA ARAUCO Y CONSTITUCION S.A. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements



In July 2006, the FASB issued FASB Interpretation No. 48, Accounting for Uncertainty in
Income Taxes, an Interpretation of FASB Statement No. 109 (FIN 48). FIN 48 provides guidance on the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN 48
requires that we recognize in the financial statements the impact of a tax position if that position will more likely than not be sustained on audit, based on the technical merits of the position. FIN 48 also provides guidance on derecognition,
classification, interest and penalties, accounting in interim periods, disclosures, and transition provisions. Any transition adjustment recognized on the date of adoption will be recorded as an adjustment to retained earnings as of the beginning of
the adoption period. FIN 48 is effective for fiscal years beginning after December 15, 2006. Based on our current evaluation, we do not expect the adoption of this interpretation to have a material impact on our financial position or results of
operations.

In June 2006, the FASBs Emerging Issues Task Force reached a consensus on Issue No. 06-3, How Taxes Collected
from Customers and Remitted to Governmental Authorities Should be Presented in the Income Statement (That Is, Gross versus Net Presentation) (EITF 06-3). EITF 06-3 requires disclosure of an entitys accounting policy regarding
the presentation of taxes assessed by a governmental authority that are directly imposed on a revenue-producing transaction between a seller and a customer, including sales, use, value added and some excise taxes. Our policy is to exclude all such
taxes from revenue on a net reporting basis.

NOTE 2OTHER RECEIVABLESNET



|                            |  |              |   |  |         |  
|--------------------------- |  | ------------ | - |  | ------- | -
|                            |  | December 31, |  
|                            |  | 2006         |   |  | 2005    |  
|                            |  | ThU.S.$      |   |  | ThU.S.$ |  
|Value added tax receivable  |  | 78,603       |   |  | 66,064  |  
|Related party receivables   |  | 2,243        |   |  | 2,202   |  
|Other receivables           |  | 41,842       |   |  | 29,906  |  
|Allowance                   |  | (1,777       | ) |  | (1,845  | )
|                            |  |              |   |  |         |  
|Total other receivablesnet |  | 120,911      |   |  | 96,327  |  
|                            |  |              |   |  |         |  

NOTE 3INVENTORIES

Inventories were valued in accordance with the policy described in note 1(f). The principal components were as follows:



|                            |  |              |  |        
|--------------------------- |  | ------------ |  | -------
|                            |  | December 31,
|                            |  | 2006         |  | 2005   
|                            |  | ThU.S.$      |  | ThU.S.$
|Finished goods              |  | 244,796      |  | 229,139
|Work in progress            |  | 14,528       |  | 12,469 
|Sawlogs, pulpwood and chips |  | 53,696       |  | 36,528 
|Raw materials               |  | 67,484       |  | 65,403 
|Other parts and materials   |  | 28,747       |  | 20,131 
|                            |  |              |  |        
|Total inventories           |  | 409,251      |  | 363,670
|                            |  |              |  |        



F - 16



---

##### Table of Contents

CELULOSA ARAUCO Y CONSTITUCION S.A. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements



NOTE 4PREPAID EXPENSES AND OTHER CURRENT ASSETS



|                                                |  |              |  |        
|----------------------------------------------- |  | ------------ |  | -------
|                                                |  | December 31,
|                                                |  | 2006         |  | 2005   
|                                                |  | ThU.S.$      |  | ThU.S.$
|Prepaid freight and other expenses              |  | 69,169       |  | 59,130 
|Deferred tax assets                             |  | 1,269        |  | 1,565  
|Spare parts                                     |  | 42,600       |  | 27,551 
|Other current assets                            |  | 17,355       |  | 20,542 
|                                                |  |              |  |        
|Total prepaid expenses and other current assets |  | 130,393      |  | 108,788
|                                                |  |              |  |        

NOTE 5PROPERTY, PLANT AND EQUIPMENTNET



|                                          |  |              |  |              |   |  |            |  
|----------------------------------------- |  | ------------ |  | ------------ | - |  | ---------- | -
|                                          |  |              |  | December 31, |  
|                                          |  | Useful lives |  | 2006         |   |  | 2005       |  
|                                          |  |              |  | ThU.S.$      |   |  | ThU.S.$    |  
|Land and improvements                     |  |             |  | 585,770      |   |  | 471,862    |  
|Buildings and improvements                |  | 37 years     |  | 1,795,274    |   |  | 1,646,932  |  
|Machinery and equipment                   |  | 12 years     |  | 2,771,776    |   |  | 1,915,535  |  
|Construction in progress                  |  |             |  | 115,264      |   |  | 621,178    |  
|Other                                     |  | 17 years     |  | 253,812      |   |  | 309,832    |  
|                                          |  |              |  |              |   |  |            |  
|                                          |  |              |  | 5,521,896    |   |  | 4,965,339  |  
|Accumulated depreciation                  |  |              |  | (2,074,859   | ) |  | (1,877,439 | )
|                                          |  |              |  |              |   |  |            |  
|Total property, plant and equipment  net |  |              |  | 3,447,037    |   |  | 3,087,900  |  
|                                          |  |              |  |              |   |  |            |  

NOTE 6 -_ ACCOUNTS PAYABLE



|                                 |  |              |  |        
|-------------------------------- |  | ------------ |  | -------
|                                 |  | December 31,
|                                 |  | 2006         |  | 2005   
|                                 |  | ThU.S.$      |  | ThU.S.$
|Accounts payabletrade           |  | 200,063      |  | 171,097
|Dividends payable                |  | 170,473      |  | 102,992
|Notes payable                    |  | 6,634        |  | 5,438  
|Accounts payablerelated parties |  | 4,617        |  | 3,452  
|Income tax payable               |  | 42,644       |  | 3,358  
|                                 |  |              |  |        
|Total accounts payable           |  | 424,431      |  | 286,337
|                                 |  |              |  |        



F - 17



---

##### Table of Contents

CELULOSA ARAUCO Y CONSTITUCION S.A. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements



NOTE 7ACCRUED LIABILITIES AND OTHER CURRENT LIABILITIES



|                                                        |  |              |  |        
|------------------------------------------------------- |  | ------------ |  | -------
|                                                        |  | December 31,
|                                                        |  | 2006         |  | 2005   
|                                                        |  | ThU.S.$      |  | ThU.S.$
|Accrued interest                                        |  | 41,491       |  | 38,563 
|Other accruals                                          |  | 61,314       |  | 52,479 
|Withholding taxes                                       |  | 18,150       |  | 16,682 
|Deferred income                                         |  | 3,450        |  | 3,236  
|                                                        |  |              |  |        
|Total accrued liabilities and other current liabilities |  | 124,405      |  | 110,960
|                                                        |  |              |  |        

NOTE 8LONG-TERM DEBT



|                                             |  |                                   |      |              |   |      |         |  
|-------------------------------------------- |  | --------------------------------- | ---- | ------------ | - | ---- | ------- | -
|                                             |  | Interest Rate at December 31,2006 |      | December 31, |  
|Long-term notes                              |  |                                   | 2006 |              |   | 2005 |        
|                                             |  | %                                 |      | ThU.S.$      |   |      | ThU.S.$ |  
|Notes payable:                               |  |                                   |      |              |   |      |         |  
|Citigroup (Revolving Facility) (due in 2009) |  | LIBOR+0.30                        |      | 240,000      |   |      | 240,000 |  
|J.P. Morgan Chase Bank N.A                   |  | LIBOR+0.375                       |      | 240,000      |   |      |        |  
|Citibank                                     |  | 5.44                              |      | 7,000        |   |      |        |  
|Argentine Collateral Trust I (due in 2006)   |  | LIBOR+0.35                        |      | 200,000      |   |      | 250,000 |  
|Note payableArgentina (due in 2008)         |  | LIBOR+0.375                       |      | 1,400        |   |      | 1,606   |  
|Santander Overseas Bank Inc                  |  | LIBOR + 0.50                      |      | 12,000       |   |      | 12,000  |  
|Sampo Bank                                   |  | 6.470                             |      | 9,819        |   |      | 13,093  |  
|ABN Bank                                     |  | 6.500                             |      | 1,939        |   |      | 2,908   |  
|HSBC Bank                                    |  | 6.400                             |      |             |   |      | 3,750   |  
|Alfa Bank                                    |  | 7.250                             |      |             |   |      | 4,000   |  
|International Finance Corporation            |  | LIBOR+4.00                        |      |             |   |      | 7,930   |  
|International Finance Corporation            |  | LIBOR+5.50                        |      | 5,000        |   |      | 5,000   |  
|Safra Bank                                   |  | 11.850                            |      | 271          |   |      | 343     |  
|Alfa Bank                                    |  | 12.250                            |      | 280          |   |      | 338     |  
|Itau Bank                                    |  | 16.170                            |      | 7,951        |   |      | 7,263   |  
|Modal Bank                                   |  | 14.810                            |      | 6,080        |   |      | 5,775   |  
|DEG                                          |  | LIBOR+3.95                        |      |             |   |      | 8,606   |  
|Banco Río                                    |  | 5.150                             |      | 3,000        |   |      |        |  
|Banco Francés                                |  | 5.95                              |      | 2,000        |   |      |        |  
|Banco do Brasil                              |  | 9.38                              |      | 2,341        |   |      |        |  
|                                             |  |                                   |      |              |   |      |         |  
|Total notes payable                          |  |                                   |      | 739,081      |   |      | 562,612 |  
|Less: current portion                        |  |                                   |      | (168,596     | ) |      | (65,534 | )
|                                             |  |                                   |      |              |   |      |         |  
|Total long-term notes                        |  |                                   |      | 570,485      |   |      | 497,078 |  
|                                             |  |                                   |      |              |   |      |         |  



F - 18



---

##### Table of Contents

CELULOSA ARAUCO Y CONSTITUCION S.A. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements



On August 3, 2004, the Company obtained a syndicated loan of U.S.$ 240 million with a group
of banks led by Citigroup, BBVA, Calyon and Dresdner Kleinwort Wasserstein. The syndicated loan is structured as a revolving facility, allowing the Company to borrow, prepay and borrow the committed amount again during the life of the credit
facility. Funds will be used for debt refinancing and other corporate purposes. The term of the syndicated loan is five years and the interest rate is LIBOR plus 0.275% if the outstanding amount is less than 50% of the facility, and LIBOR plus 0.30%
if the outstanding amount is more than 50% of the facility.

Through the Companys subsidiary Alto Paraná S.A., Arauco obtained
a U.S.$250 million note from Argentine Collateral Trust I on June 13, 2001. Interest is payable semi-annually. The Company has guaranteed repayment of the notes.

Arauco has a note payable to the Argentine Tesoro Nacional. The loan was initially obtained by Alto Paraná, a subsidiary of the Company acquired in 1997. The principal amount of the initial loan was U.S.$13
million, payable to Banco Nacional de Desarrollo, and was guaranteed by the Argentine government. The loan was refinanced when Banco Nacional de Desarrollo was taken over by the Argentine government. The note is due in annual installments with final
payment due in 2008. Interest is payable semi-annually in arrears.

In accordance with the loans, the Company must maintain a minimum
interest coverage ratio of 2:1 (on a rolling four-quarter basis), a maximum debt to equity ratio of 1.2:1 and a minimum consolidated net worth of at least U.S.$2,500 million under Chilean GAAP. The Company was in compliance with these covenants at
December 31, 2006.

On October 6, 2006, Fondo de Inversión Privado Bío Bío obtained a U.S.$ 240 million
notes from J.P. Morgan Chase Bank, N.A. The term of the loan is seven years and the interest rate is LIBOR plus 37 basis points. Interest is payable quarterly.

Also in October 2006, Forbío entered into a rate swap agreement with JP Morgan Chase Bank. The notional amount of the contract was U.S.$240 million. Forbío swapped its variable interest rate for fixed
interest. Under the terms of the contract, Forbío pays fixed interest at a rate of 5.256% and receives variable interest at a rate of three months LIBOR. The interest rate swap settles quarterly, and the contract terminates in 2013.

The six-month LIBOR at December 31, 2006 and 2005 was 5.37% and 4.69%, respectively.



F - 19



---

##### Table of Contents

CELULOSA ARAUCO Y CONSTITUCION S.A. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements



|                                           |  |                                          |   |  |                                              |   |  |          
|------------------------------------------ |  | ---------------------------------------- | - |  | -------------------------------------------- | - |  | ---------
|Long-term bonds                            |  | Annual Interest Rate at December 31,2006 |   |  | Outstanding Principal Amount at December 31,
|                                           |  | 2006                                     |   |  | 2005                                        
|                                           |  |                                          |   |  | ThU.S.$                                      |   |  | ThU.S.$  
|Bonds:                                     |  |                                          |   |  |                                              |   |  |          
|U.S.$ bonds (1stissue) due December 2007   |  | 7.00                                     | % |  | 99,980                                       |   |  | 99,958   
|U.S.$ bonds (2ndissue) due September 2009  |  | 7.20                                     | % |  | 99,957                                       |   |  | 99,941   
|U.S.$ bonds (2ndissue) due September 2017  |  | 7.50                                     | % |  | 124,343                                      |   |  | 124,281  
|U.S.$ bonds (3rdissue) due August 2010     |  | 8.625                                    | % |  | 270,124                                      |   |  | 270,020  
|U.S.$ bonds (4thissue) due September 2011  |  | 7.75                                     | % |  | 386,825                                      |   |  | 386,788  
|U.S.$ bonds (5thissue) due July 2013       |  | 5.125                                    | % |  | 300,000                                      |   |  | 300,000  
|U.S.$ bonds (6thissue) due April 2015      |  | 5.625                                    | % |  | 398,337                                      |   |  | 398,148  
|                                           |  |                                          |   |  |                                              |   |  |          
|Total bonds                                |  |                                          |   |  | 1,679,566                                    |   |  | 1,679,136
|Less current maturities of long-term bonds |  |                                          |   |  | (99,980                                      | ) |  |         
|                                           |  |                                          |   |  |                                              |   |  |          
|Total long-term bonds                      |  |                                          |   |  | 1,579,586                                    |   |  | 1,679,136
|                                           |  |                                          |   |  |                                              |   |  |          

In April 2005, the Company issued U.S.$400 million of 10-year bonds at 5.625% (6th issue). The
interest on these bonds is payable semi-annually in arrears.

In July 2003, the Company issued U.S.$300 million of 10-year bonds at 5.125%
(5th issue). The interest on these bonds is payable semi-annually in arrears.

In September 2001, the Company issued U.S.$400 million of
10-year bonds at 7.75% (4th issue). The interest on these bonds is payable semi-annually in arrears.

In August 2000, the Company issued
U.S.$300 million of 10-year bonds at 8.625% (3rd issue). The interest on these bonds is payable semi-annually in arrears.

In October 1997,
the Company issued U.S.$175 million of 8-year bonds at 6.95% which was paid in 2005, U.S.$100 million of 12-year bonds at 7.2% and U.S.$125 million of 20 year-bonds at 7.5% (2nd issue). The interest on these bonds is payable semi-annually in
arrears.

In December 1995, the Company issued U.S.$200 million of 8-year bonds at 6.75% which was paid in 2003 and U.S.$100 million of
12-year bonds at 7.0% (1st issue). The interest on these bonds is payable semi-annually in arrears.

In the period between October 2002 and
December 2002, the Company repurchased and retired approximately U.S.$42.5 million of its 7.75% and 8.625% bonds due in 2011 and 2010, respectively. The bonds were obtained at a premium, resulting in a loss of U.S.$3,006 thousand, net of income
taxes. The loss includes the write-off of unamortized capitalized issuance costs associated with these bonds of U.S.$916 thousand. In September 2001, the Company repurchased and retired U.S.$119.8 million of its 6.75% bonds due in 2003. The bonds
were obtained at a premium, resulting in a loss of U.S.$3.9 million, net of income taxes. The loss includes the write-off of unamortized capitalized bond issuance costs of U.S.$967 thousand.



F - 20



---

##### Table of Contents

CELULOSA ARAUCO Y CONSTITUCION S.A. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements



The Company entered into a rate swap agreement in May 2002 with Dresdner Bank A.G. The notional
amount of the contract was U.S.$200 million. The Company swapped its fixed interest rate for variable interest. Under the terms of the contract, the Company pays variable interest at a rate of LIBOR plus 1.79875% and receives interest at a rate
equal to 7.75%. This is the rate equal to the 4th bond issue. The interest rate swap settles semi-annually, and the contract terminates in 2011.

The Company entered into a rate swap agreement in May 2003 with JP Morgan Chase Bank. The notional amount of the contract was U.S.$200 million. The company swapped its variable interest rate for fixed interest. Under the terms of the
contract, the Company pays fixed interest at a rate of 5.506% and receives variable interest at a rate of LIBOR plus 1.79875%. The interest rate swap settles semi-annually, and the contract terminates in 2011.

In July and August 2003 the Company made settlements of U.S.$30 million and U.S.$40 million, respectively, of both interest rate swap agreements, leaving
a notional amount of U.S.$130 million for both contracts.

The weighted average interest rate for all long-term debt at December 31,
2006 and 2005 was approximately 6.54% and 6.50%, respectively. Required repayment of principal for long-term debt is as follows:



|      |  |                       
|----- |  | ----------------------
|      |  | Year EndedDecember 31,
|      |  | ThU.S.$               
|2007  |  | 268,576               
|2008  |  | 189,299               
|2009  |  | 265,629               
|2010  |  | 275,622               
|2011  |  | 391,127               
|2013  |  | 540,000               
|2015  |  | 398,337               
|2017  |  | 90,057                
|      |  |                       
|Total |  | 2,418,647             
|      |  |                       

Cash paid during 2006, 2005 and 2004 for interest was U.S.$172.3 million, U.S.$170.9 million
and U.S.$138.3 million, respectively. The total amount of interest cost incurred by Arauco was U.S.$176.5 million (net of U.S.$22.2 million related to interest rate swaps), U.S.$173.5 million (net of U.S.$16.0 million related to interest rate swaps)
and U.S.$138.9 million (net of U.S.$5.0 million related to interest rate swaps) for the years ended December 31, 2006, 2005, and 2004, respectively. The amount of interest capitalized for these periods was U.S.$94.0 million, U.S.$63.0 million,
and U.S.$60.8 million, respectively.



F - 21



---

##### Table of Contents

CELULOSA ARAUCO Y CONSTITUCION S.A. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements



NOTE 9 INCOME TAXES

Provision for income taxes was as follows:



|                                 |  |                         |  |         |   |  |        
|-------------------------------- |  | ----------------------- |  | ------- | - |  | -------
|                                 |  | Year ended December 31,
|                                 |  | 2006                    |  | 2005    |   |  | 2004   
|                                 |  | ThU.S.$                 |  | ThU.S.$ |   |  | ThU.S.$
|Domestic                         |  |                         |  |         |   |  |        
|Current                          |  | 85,509                  |  | 65,709  |   |  | 87,878 
|Deferred                         |  | 30,304                  |  | 12,874  |   |  | 14,100 
|Foreign                          |  |                         |  |         |   |  |        
|Current                          |  | 32,358                  |  | 36,889  |   |  | 36,429 
|Deferred                         |  | 13,787                  |  | (2,144  | ) |  | 1,492  
|                                 |  |                         |  |         |   |  |        
|Total provision for income taxes |  | 161,958                 |  | 113,328 |   |  | 139,899
|                                 |  |                         |  |         |   |  |        

The tax effects of significant temporary differences creating deferred tax assets and liabilities
at December 31 were as follows:



|                                |  |              |   |  |          |  
|------------------------------- |  | ------------ | - |  | -------- | -
|                                |  | December 31, |  
|                                |  | 2006         |   |  | 2005     |  
|                                |  | ThU.S.$      |   |  | ThU.S.$  |  
|Deferred income tax liabilities |  |              |   |  |          |  
|                                |  |             
|Inventories                     |  | (8,945       | ) |  | (7,961   | )
|Other                           |  | (32,827      | ) |  | (25,202  | )
|Property, plant and equipment   |  | (335,500     | ) |  | (245,918 | )
|Debt issue costs                |  | (2,719       | ) |  | (2,888   | )
|                                |  |              |   |  |          |  
|Total deferred tax liabilities  |  | (379,991     | ) |  | (281,969 | )
|Deferred income tax asset       |  |              |   |  |          |  
|Accruals                        |  | 25,500       |   |  | 31,362   |  
|Tax loss carry forwards         |  | 34,716       |   |  | 30,142   |  
|Other                           |  | 35,462       |   |  | 30,713   |  
|                                |  |              |   |  |          |  
|Total deferred tax assets       |  | 95,678       |   |  | 92,217   |  
|                                |  |              |   |  |          |  
|Valuation allowance             |  |             |   |  | (5,923   | )
|                                |  |              |   |  |          |  
|Total deferred tax assets - net |  | 95,678       |   |  | 86,294   |  
|                                |  |              |   |  |          |  
|Net deferred tax liability      |  | (284,313     | ) |  | (195,675 | )
|                                |  |              |   |  |          |  

Net long-term deferred tax liabilities were U.S.$285.6 million at December 31, 2006 and
U.S.$197.2 million at December 31, 2005. In addition, net short-term deferred tax assets of U.S.$1.2 million at December 31, 2006 and U.S.$ 1.5 million at December 31, 2005, are included in the Consolidated Balance Sheets in
prepaid expenses and other current assets.



F - 22



---

##### Table of Contents

CELULOSA ARAUCO Y CONSTITUCION S.A. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements



Cash paid during 2006, 2005 and 2004 for income taxes was U.S.$79.8 million, U.S.$126.5 million
and U.S.$67.8 million, respectively.

As of December 31, 2005, Arauco had valuation allowances of U.S.$5.9 million, respectively, to
reduce its deferred tax assets to estimated realizable value. The valuation allowances relate to the deferred tax assets arising from Argentina.

In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of Araucos total deferred tax assets will not be realized. The ultimate realization of these
deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future
taxable income, and tax planning strategies in making this assessment. Based on the level of historical taxable income and projections for future taxable income over the periods in which the temporary differences are anticipated to reverse,
management believes it is more likely than not that Arauco will realize the benefits of its deferred tax assets, net of the valuation allowance, at December 31, 2005, as reductions of future taxable income or by utilizing available tax planning
strategies. However, the amount of the net deferred tax assets considered realizable could be adjusted in the future if estimates of taxable income are revised.

At December 31, 2006, Arauco had operating loss carry-forwards of approximately U.S.$141.8 million. Loss carry-forwards associated with Chile are U.S.$76.6 million, which can be carried forward indefinitely. Loss
carry-forwards associated with Argentina were U.S.$16.5 million, which expire in 2007. Loss carry-forwards in Brazil were U.S.$48.7 million, which can be carried forward indefinitely.

At December 31, 2005, Arauco had operating loss carry-forwards of approximately U.S.$128.4 million. Loss carry-forwards associated with Chile are
U.S.$46.0 million, which can be carried forward indefinitely. Loss carry-forwards associated with Argentina were U.S.$35.6 million, which expire in 2007. Loss carry-forwards in Brazil were U.S.$46.8 million, which can be carried forward
indefinitely.

The following table summarizes the effect of the differences between the statutory income tax rate and the effective income
tax rates:



|                                               |  |                         |   |  |         |   |  |         |  
|---------------------------------------------- |  | ----------------------- | - |  | ------- | - |  | ------- | -
|                                               |  | Year ended December 31, |  
|                                               |  | 2006                    |   |  | 2005    |   |  | 2004    |  
|                                               |  | ThU.S.$                 |   |  | ThU.S.$ |   |  | ThU.S.$ |  
|Pretax income multiplied by enacted tax rate   |  | 133,346                 |   |  | 94,805  |   |  | 124,099 |  
|Change in valuation allowance                  |  | (5,923                  | ) |  | (105    | ) |  | (262    | )
|Tax effect resulting from foreign subsidiaries |  | 24,269                  |   |  | 19,845  |   |  | 21,818  |  
|Permanent differences                          |  | 10,384                  |   |  | (1,021  | ) |  | (2,716  | )
|Non-taxable income                             |  | (118                    | ) |  | (196    | ) |  | (3,040  | )
|                                               |  |                         |   |  |         |   |  |         |  
|Effective income tax amount                    |  | 161,958                 |   |  | 113,328 |   |  | 139,899 |  
|                                               |  |                         |   |  |         |   |  |         |  

The Chilean statutory, first category (corporate) income tax rate was 17% in 2004, 2005 and 2006
and thereafter in accordance with currently enacted tax legislation. Also, in accordance with Chilean law, the Company and each of its subsidiaries compute and pay tax on a separate basis and not on a consolidated basis. The Argentine statutory
first category income tax rate was 35% for all years presented. The Brazilian statutory first category income tax rate was 34% in 2005 and 2006.



F - 23



---

##### Table of Contents

CELULOSA ARAUCO Y CONSTITUCION S.A. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements



NOTE 10FAIR VALUE OF FINANCIAL INSTRUMENTS

The Companys financial instruments include cash and short-term investments, receivables, payables, debt including notes and bonds and an interest
rate swap agreement. The estimated fair value of these financial instruments is based on the amount at which such instruments could be exchanged in a current transaction between willing parties, other than in a forced sale or liquidation. There are
certain limitations inherent in the fair value data since, while the data represents managements best estimates, the data is subjective, involving significant estimates regarding current economic and market conditions.

The methods and assumptions used to estimate the fair values are as follows:

For cash, short-term time deposits, trade receivables, other receivables and accounts payable the carrying amounts approximate the fair value due to the
short-term maturity of these instruments. The fair value of short-term investments is estimated based on quoted market prices. The fair value of short-term and long-term debt is estimated based on current interest rates available to the Company for
debt instruments with similar terms, degrees of risk, and remaining maturities. The fair value of the interest-rate swap agreements is obtained from dealer quotes and represents the estimated amount the Company would receive or pay to terminate the
agreements.

The estimated fair values of the Companys financial instruments are summarized below.



|                       |  |                      |  |                      |  |                |  |                     
|---------------------- |  | -------------------- |  | -------------------- |  | -------------- |  | --------------------
|                       |  | At December 31, 2006 |  | At December 31, 2005
|                       |  | Carrying value       |  | Estimated fair value |  | Carrying value |  | Estimated fair value
|                       |  | (ThU.S.$)            |  | (ThU.S.$)           
|Assets                 |  |                      |  |                      |  |                |  |                     
|Cash                   |  | 22,180               |  | 22,180               |  | 25,958         |  | 25,958              
|Time deposits          |  | 21,719               |  | 21,719               |  | 32,276         |  | 32,276              
|Short-term investments |  | 143,851              |  | 143,851              |  | 280,276        |  | 280,276             
|Trade receivables      |  | 550,746              |  | 550,746              |  | 371,791        |  | 371,791             
|Other receivables      |  | 134,329              |  | 134,329              |  | 96,327         |  | 96,327              
|                       |  |                      |  |                     
|Liabilities            |  |                      |  |                      |  |                |  |                     
|Short-term debt        |  | 203,453              |  | 203,453              |  | 113,360        |  | 113,360             
|Accounts payable       |  | 424,431              |  | 424,431              |  | 286,337        |  | 286,337             
|Notes payable          |  | 739,081              |  | 739,081              |  | 562,612        |  | 562,612             
|Bonds                  |  | 1,679,566            |  | 1,832,513            |  | 1,679,136      |  | 1,786,795           
|                       |  |                      |  |                     
|Derivative instrument  |  |                      |  |                      |  |                |  |                     
|Interest rate swap     |  | 13,418               |  | 13,418               |  |               |  |                    



F - 24



---

##### Table of Contents

CELULOSA ARAUCO Y CONSTITUCION S.A. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements



NOTE 11RELATED PARTY TRANSACTIONS

Arauco enters into fuel purchase contracts with Compañía de Petróleos de Chile COPEC S.A., subsidiary of the parent corporation of
the Company. Arauco purchased fuel totaling U.S.$41.0 million during 2006 and U.S.$23.8 million in 2005. The terms of these contracts and purchases were generally similar to those prevailing with unrelated parties.

Arauco obtains insurance from Compañía de Seguros Generales Cruz del Sur S.A. (Cruz del Sur), a Chilean insurance company
controlled by a related party until October 2005. Cruz del Sur was the supplier of all of Araucos insurance policies covering its forest holdings and production plants, facilities and equipment. Arauco paid direct insurance premiums of
U.S.$8.5 million and U.S.$10.9 million for the years ended December 31, 2005 and 2004, respectively.

We made purchases from Puerto de
Lirquén S.A., our 20.1% affiliate and a supplier of port services, of U.S.$3.2 million in 2004, U.S.$4.2 million in 2005 and U.S.$5.6 million in 2006. Outstanding balances at December 31, 2006 and 2005 with Puerto de Lirquén S.A
included a receivable of U.S.$1,079 thousand and U.S.$264 thousand, respectively.

We made purchases from Compañía Puerto de
Coronel S.A., our 50.0% affiliate and a supplier of port services, of U.S.$6.0 million in 2004, U.S.$5.9 million in 2005 and U.S.$ 5.5 million in 2006.

We made purchases from EKA Chile, which is 50% controlled by Arauco and 50% by EKA Chemicals of U.S.$17.4 million in 2005 and U.S.$19.6 million in 2006. We provided EKA Chile with electricity for payment of U.S.$16.1
million during 2005 and U.S.$17.2 million in 2006. EKA Chile, a sodium chlorate supplier, was formed in January 2003. We had an outstanding receivable from EKA Chile of U.S.$1.8 million at December 31, 2005 and U.S.$1.7 million at
December 31, 2006.

We paid Portaluppi, Guzmán y Bezanilla an aggregate amount of approximately U.S.$670 thousand during 2004,
U.S.$1.1 million during 2005 and U.S.$1.2 million during 2006, as payment for legal services.

NOTE 12CONTINGENCIES AND COMMITMENTS

In the normal course of business, the Company and its subsidiaries are parties to various legal claims, actions and complaints. It
is not possible to predict with certainty whether or not the Company and its subsidiaries will ultimately be successful in any of the legal matters, or if not, what the impact may be. However, Araucos management does not expect that the
results in any of these legal proceedings described below will have a material adverse effect on Araucos results of operations, financial position or cash flows.

Trials or other legal proceedings



|A) | The Company is involved in the following proceedings and legal actions regarding the operation of the Valdivia plant:
|-- | ---------------------------------------------------------------------------------------------------------------------



|1) | Through Exempt Resolution No. 0250 dated April 1, 2004, the Environmental Regional Commission (COREMA) opened an investigation in connection with some alleged
violations of environmental regulations pursuant to Resolution of Environmental Description No. 279-1998 by the Valdivia Project.
|-- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



F - 25



---

##### Table of Contents

CELULOSA ARAUCO Y CONSTITUCION S.A. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements



The Company answered the charges before the Commission. Nevertheless, through Resolution No.387 dated
May 24, 2004, the Commission resolved, among other things, to (a) fine the Company 900 Monthly Tax Units (UTM, a Monthly Tax Unit that is a Chilean inflation-indexed, peso-denominated monetary unit which is set monthly in
advance based on the previous months inflation rate) (U.S.$54 thousand at December 31, 2006) for failure to comply with the terms and conditions set forth in Sections 2, 11, 12 and 13 of the Resolution of Environmental Description;
(b) accept the measures proposed by the Company to mitigate the odor problem, establishing a schedule for the execution of such measures and (c) point out that the industrial waste fluids discharge system of the emergency system must
comply with the Evaluating System of Environmental Impact (Law 19,300). The aforementioned Resolution No. 387 was judicially appealed in the Civil Court of Puerto Montt on June 4, 2004, in connection with part of the fine mentioned in
clause (a) above, and the Company paid 10% of the total claimed. The case is currently in progress.



|2) | Pursuant to the Records of Inspection dated July 8, 2004 and finalized on July 15, 2004, Valdivias Department of Health Services began a Sanitary Indictment for the
alleged emission of odors at the Valdivia Plant. On July 19, 2004, the Valdivia Plant filed its reply. Through Resolution 1775 dated December 17, 2004, Valdivias Department of Health Services resolved to fine Arauco 1,000 UTM
(U.S.$60 thousand at December 31, 2006) and established some requirements to be fulfilled by the Company.
|-- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

On
December 27, 2004, Arauco judicially appealed the aforementioned Resolution in the First Civil Court of Valdivia. The matter is currently pending resolution.



|3) | Through Resolution No. 610 dated April 15, 2004 (of which the Company received notice on April 19, 2004), Valdivias Department of Health Services fined Arauco
1,000 UTM (U.S.$60 thousand at December 31, 2006), due to odors at the Valdivia Plant. The Company appealed the fine in the appropriate Civil Court of Valdivia, case No. 1151-04 and obtained a favorable resolution from the Civil Court.
However, Valdivias Department of Health Services judicially appealed the resolution in the Court of Appeals of Valdivia. The matter is currently in progress.
|-- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|4) | Through Resolution No. 860 dated December 21, 2004, COREMA began sanction proceedings against the Company due to the discharge of refrigeration water at the Valdivia
Plant, the disposal of solid waste, the accumulation of spills and the spilling of non-authorized effluents.
|-- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

On
January 11, 2005, Arauco filed its response, and through Resolution No. 182 dated March 15, 2005, COREMA resolved to sanction the Company with 800 UTM (U.S.$48 thousand at December 31, 2006), Arauco appealed that sanction on
March 31, 2005 and paid 10% of the total claimed. The case is currently in progress.



|5) | Through resolution dated April 22, 2005, the Regional Ministerial Secretary of Health (the Health SEREMI) fined Arauco 1,000 UTM (U.S.$60 thousand at
December 31, 2006), due to a fatal accident involving an employee in January 2005. The Company appealed the fine in the Second Civil Court of Valdivia, through case No. 785-2005, which is currently in progress.
|-- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|6) | Through Resolution No. 17 dated January 18, 2005, COREMA began sanction proceedings against the Company due to an alleged increase in the capacity of the plant, an
increase of additional discharge waters into the Cruces River, a lack of compliance with the quality and emission guidelines for fluid waste, a lack of compliance with the required measurement of TRS gas and a lack of compliance with other
measurement parameters. The Company filed its appeal last January 31, 2005.
|-- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



F - 26



---

##### Table of Contents

CELULOSA ARAUCO Y CONSTITUCION S.A. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements



Through Resolution No. 197 dated March 18, 2005, COREMA fined Arauco 1,400 UTM (U.S.$84
thousand at December 31, 2006). Arauco appealed that sanction and paid the required percentage of the total claimed. The case is currently in progress.



|7) | Through Resolutions 3300 and 3301 dated December 20, 2004, the Superintendent of Sanitary Services began sanction proceedings against the Company due to the Company exceeding
the guidelines of the Resolution on Environmental Description, approved by the Study of Environmental Impact regarding the total emission of phosphate and temperature.
|-- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Through Resolution 290 dated January 26, 2005, the Superintendent of Sanitary Services fined Arauco 200 Annual Tax Units (UTA, an Annual
Tax Unit that is a Chilean inflation-indexed, peso-denominated monetary unit which is set monthly in advance based on the previous months inflation rate, U.S.$144 thousand at December 31, 2006). This Resolution was judicially appealed on
February 9, 2005 in the appropriate Civil Court of Santiago, which rejected the complaint. The resolution was appealed in the Appeal Court, and the matter is currently in progress.



|8) | Several complaints have been filed with the Warranty Court of Valdivia, due to alleged violations in connection with the operations of the Valdivia Plant. All the complaints are
being addressed through a single investigation. The complaints charge alleged violations set forth in Article 291 of the Penal Code, Article 136 of the Fishing Law and Article 38 of the National Monuments Law. The investigation is currently in
progress in the appropriate District Attorneys office.
|-- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|9) | On April 27, 2005, the State of Chile Defense Committee filed an indemnity demand against the Company in the First Civil Court of Valdivia for environmental harm and
indemnities. The Company filed its response, and the matter is currently in progress.
|-- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|10) | Through Resolution 1755 dated June 24, 2005, the Superintendent of Sanitary Services began a sanction proceeding against the Company for exceeding emissions standards regarding
temperature, suspended solid waste, arsenic, total phosphorus, hexavalente chrome, molybdenum and nickel. On July 11, 2005, the Company filed its response to the Superintendent. Nevertheless, on December 26, 2005, the Superintendent
resolved to sanction the Company with a fine of 400 UTA (U.S.$288 thousand at December 31, 2006). The Company has appealed the decision, and the matter is currently in progress.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|11) | On January 25, 2006, the Health SEREMI commenced a sanitary proceeding with regard to a fatal accident in January 2006 involving an employee of a contractor working in the
Valdivia project. The proceeding is currently pending resolution.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|12) | On June 20, 2006, the family of an employee of Arauco who died in an accident filed suit in the family court of San José de la Mariquina, file No. 14.146. The suit
demands Ch$488,525,280 (U.S.$918 thousand at December 31, 2006) in damages. The lawsuit is covered by our insurance and our insurance provider has assumed the defense. The matter is currently in process.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|13) | Through Resolution No 177, dated February 15, 2007, the COREMA of the 10th Region, resolved to initiate proceedings against Celulosa Arauco y Constitución S.A., in
connection with the project for Definitive Works of the Emergency Spills Lagoon of the Valdivia Plant.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



F - 27



---

##### Table of Contents

CELULOSA ARAUCO Y CONSTITUCION S.A. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements



The proceedings started by virtue of a potential breach of contract with regard to certain conditions
established in the COREMA Resolution No 763 that environmentally graded the above-referenced project. The breach would be related to the volume of outflows reaching the lagoon upon completion of the Tracking Plan of the project, the maintenance
of a given volume of water in this lagoon and the Monitoring Plan that applies to it.

The Company presented its response on March 2,
2007. Currently, the final decision of COREMA regarding this proceeding is pending.



|14) | On May 19, 2007 due to odors emerged from Valdivia Plant, the Health Services of Valdivia began a Sanitary Indictment against the Plant. Arauco presented its response on
May 28, 2007. Currently, the final proceeding is pending.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|B) | Arauco is subject to the following legal actions and proceedings affecting its Arauco pulp mill:
|-- | ------------------------------------------------------------------------------------------------



|1) | On August 23, 2004, Araucos Department of Health Services began a sanitation investigation based on the nuisance caused by a turpentine spill at the Arauco Plant. Through
a Resolution dated November 8, 2004, Araucos Department of Health Services resolved to fine the Company 1,000 UTM (U.S.$60 thousand at December 31, 2006).
|-- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

This Resolution was judicially appealed on November 17, 2004 before the Court of Lebu, and is currently pending resolution.



|2) | On June 7, 2005, individuals and associations related to small-scale fishers in Laraquete and Arauco filed a criminal complaint in Warranty Court for violation of Article 136
of the Fishing Law relating to potential harm to the fishing resources in the area of the Arauco Plant. The investigation is in progress in the District Attorneys office, which requested that there be a definitive stay of proceedings on the
case. On the other hand, the plaintiffs have demanded the enforcement of the acusation. Both matters shall be treated in court on June 26, 2007 in the Arauco Security Court.
|-- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|C) | Arauco is subject to the following legal actions and proceedings affecting its Nueva Aldea Forestry Industrial Complex:
|-- | -----------------------------------------------------------------------------------------------------------------------



|1) | On April 8, 2005, several appeal claims were filed against the Resolution on Environmental Qualification of the Project of New Works and Updates of the Itata Forestry
Industrial Complex, which had been approved on March 10, 2005. The aforementioned appeals were filed by individuals who participated in the development of the Study on Environmental Impact, with the participation of citizens. On May 4 and
May 31, 2005, respectively, the Company and the Regional Environmental Commission of the Eighth Region informed the public about the appeals, which are currently in progress.
|-- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|2) | On December 15, 2005, the Health SEREMI commenced a sanitary proceeding with regard to an accident involving the exposure of three employees of Echeverría Izquierdo
Montajes Industriales, S.A., while handling the equipment owned by a subcontractor of Echeverría Izquierdo Montajes Industriales, S.A. The Company was required to appear in the proceeding and submitted all required paperwork. Through
Resolution 2810, dated June 29, 2006, the SEREMI resolved to sanction various companies, including Arauco, which was fined 300 UTM (U.S.$182 thousand at December 31, 2006). Arauco subsequently presented an appeal to the sanction before the
court of Concepción. The proceeding is currently in progress.
|-- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



F - 28



---

##### Table of Contents

CELULOSA ARAUCO Y CONSTITUCION S.A. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements



|3) | In connection with the accident that occurred at the Nueva Aldea Plant, which is referenced in section C.2 above, the office of the state prosecutor of Quirihue commenced an
investigation. Once the criminal investigation closed, the records were sent to the oral tribunal of Chillán, without any formal sentence against any person linked to Arauco.
|-- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|4) | In March 2006, several appeal claims were presented against the Resolution on Environmental Qualification of the Project of New Works and Updates of the Nueva Aldea Forestry
Industrial Complex, which were approved on February 20, 2006. The appeals were filed by individuals who participated in the development of the Environmental Impact Study, with the participation of other Chilean citizens. On May 31, 2006,
the Company informed the Executive Committee of the CONAMA about the appeals. The proceedings are currently in progress.
|-- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|5) | On December 9, 2006, Mr. Osmán Miguel Vergara Zambrano appeared before the Court of Appeals of Chillán with an appeal of protection against Besalco S.A. and
Celulosa Arauco y Constitución S.A. The appeal seeks to have the companies immediately abandon a section of property that the claimants argue has been illegally occupied, repair the damage caused by the construction of the Waste Conduction
and Discharge to the Sea of the Nueva Aldea Forestry Industrial Complex.
|-- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

The appeal was rejected by the Court of Appeals of
Chillán on February 6, 2007. This ruling was appealed before the Supreme Court. On March 26, 2007, the Supreme Court affirmed the decision to reject the appeal.



|6) | On December 27, 2006, a dispute was presented by relatives of Mr. Pablo Reyes Cerda, a former employee of a contracting company of the Nueva Aldea Forestry Industrial
Complex, who died on November 24, 2006, relating to his alleged homicide. The investigation is being carried out by the State Prosecutor of Quirihue.
|-- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|7) | In October of 2006, Mr. Héctor Manuel Rabanal Baeza filed charges with the corresponding Prosecutor for damages to private property. The complaint alleges damages were
caused by operations of the Pulp Plant of the Forestry Industrial Complex of Nueva Aldea. The investigation is being carried out by the corresponding Prosecutor.
|-- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|D) | Arauco is subject to the following legal actions and proceedings affecting its Constitucion Plant:
|-- | --------------------------------------------------------------------------------------------------



|1) | On January 24, 2006, the Company was notified of a claim for an injunction brought by Alvaro Santa María Prieto and Alejandro Lagos Letelier in the Court of
Constitucion, seeking to modify the Companys activities in the area with respect to air quality control guidelines.
|-- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|2) | According to the Inspection Act No. 235 of September 25, 2006, the Sanitary Authority of the Seventh Region began a sanitary investigation against the Company,
investigating whether the monitoring system for TRS gases from their clay ovens and boilers has the necessary Sanitary Authority approval required by DS 167. The Company presented its responses. Regardless, through Sanitary Sentence No. 72
dated April 3, 2007, the SEREMI of the 7th Region resolved to warn the Company.
|-- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



F - 29



---

##### Table of Contents

CELULOSA ARAUCO Y CONSTITUCION S.A. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements



|E) | Celulosa Arauco y Constitución S.A. has the following legal actions and proceedings affecting its Pulp Plant of Licancel:
|-- | -------------------------------------------------------------------------------------------------------------------------



|1) | According to Inspection Act No. 670 of September 14, 2006, the Sanitary Authority of the Seventh Region began a sanitary investigation against the Company, investigating
whether the monitoring system for TRS gases required by DS 167 has the required approval. The Company appropriately presented its responses. Regardless, due to Sanitary Sentence No. 71 dated April 3, 2007, the SEREMI of the 7th region
resolved to warn the Company.
|-- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

The Company is not currently involved in any other court proceedings or any other legal actions
that could significantly affect its financial, economic or operational conditions.

Other contingencies

The Electricity and Fuel Superintendent imposed sanctions on Araucos subsidiary Arauco Generación S.A. for alleged deficiencies in the
Central Interconnected System. Arauco Generación S.A. is appealing these sanctions in the Court of Justice and with the Superintendent, and the matter is currently pending resolution. The fines in question amount to Ch$113,365 thousand
(U.S.$213 thousand at December 31, 2006), and have been recorded in the Consolidated Financial Statements.

Guarantees

The Company has guaranteed the debt of one of its subsidiaries, Alto Paraná S.A. At December 31, 2006, the outstanding principal amount of the
guaranteed debt totaled U.S.$200 million. This guarantee would require payment by the Company in the event of default by Alto Paraná S.A.. The guarantee coincides with the terms of the note and expires in 2008. Arauco has no other material
guarantees.

Environmental Proceedings

The Company and its subsidiaries are subject to certain Chilean environmental laws and regulations. Under such regulations, the Company is required to conduct environmental impact studies of any future projects or activities that may affect
the environment. These regulations also establish procedures for private citizens to object to the plans or studies submitted by project owners. The extent to which such regulations will affect Arauco will depend upon how the authorized Chilean
governmental agencies decide to implement such legislation. Enforcement remedies could include temporary or permanent closure of facilities and fines.

Arauco entered into various projects related to the improvement of, or investment in, product processes designed to protect the environment during the year ended December 31, 2006.

Arauco entered into a project to reduce gases and steam which are a by-product of the mill production process. Arauco has incurred costs of U.S.$66.5
million during 2006 (U.S.$20.1 thousand during 2005) and Arauco expects to incur an additional U.S.$50.3 million on this project.

The
Company entered into an environmental protection project in connection with the Valdivia Mill construction project. The Company has incurred costs of U.S.$1.7 million during 2004. The Company expects to incur an additional U.S.$253 thousand on this
project.



F - 30



---

##### Table of Contents

CELULOSA ARAUCO Y CONSTITUCION S.A. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements



The Company entered into an environmental protection project in connection with the Nueva Aldea Mill
construction project and the Nueva Aldea Thermic Plant project. The Company has incurred costs of U.S.$8.2 million during 2006 (U.S.$21.7 million in 2005) and expects to incur an additional U.S.$0.9 million in 2007.

The Company entered into a project to improve the evacuation of water and effluent treatment of the Paneles mill. The Company has incurred costs of
U.S.$3.4 million in 2006 (U.S.$368 thousand during 2005) and expects to incur an additional U.S.$3.2 million.

The Companys
subsidiaries Forestal Celco S.A., Forestal Cholguán S.A., Bosques Arauco S.A. and Forestal Valdivia S.A. are implementing an environmental system regulated under a certification process pursuant to ISO 14.001. During 2006, these subsidiaries
incurred U.S.$345 thousand in relation to this project (U.S.$215 thousand in 2005) and expect to incur an additional U.S.$240 thousand.

Covenants

The Companys long-term borrowings require compliance with certain financial restrictions (see note 8). Non-compliance could
result in these debts becoming fully payable upon demand. Arauco was in compliance with all financial covenants at December 31, 2006.

An agreement of Wood Supply and Future Land Purchases entered into by Celulosa Arauco y Constitución S.A. and a contract of Forestry Administration entered into by certain of Araucos forestry subsidiaries, both with the Fondo
de Inversión Bío Bío, pursuant to which Arauco is subject to the following minimum financial restrictions. Failure to meet these restrictions could result in the purchase in advance of future obligations.



| | (i) | the ratio of debt to consolidated tangible net worth must not be greater than 1.2;
| | --- | ----------------------------------------------------------------------------------



| | (ii) | consolidated net worth must not be less than U.S.$ 2,500 million; and
| | ---- | ---------------------------------------------------------------------



| | (iii) | the interest coverage ratio must not be less than 2.0.
| | ----- | ------------------------------------------------------

Pursuant to the agreement of Wood Supply between Arauco and the Fondo de Inversiones Bio Bio, Arauco would be required to advance the future purchases of wood (in part or entirely, depending on the situation) if the Fondo Bío
Bío, in the event of Significant Adverse Event, as defined by the agreement, cannot meet its financial obligations with its own resources.

NOTE 13SEGMENT INFORMATION

The Company operates principally in four identifiable product segments, which
comprise the production and sales of goods for (i) pulp products, (ii) forestry products, (iii) wood products and (iv) plywood and fiberboards panels. Pulp products include bleached and unbleached wood pulp products that result
from the processing of pulp logs and chips. Forestry products include sawlogs and pulpwood. Wood products include flitches, sawn timber (lumber) and remanufactured wood products. Plywood and fiberboards panels are consumer products manufactured at
production facilities. Other services and products include mainly forestry services performed by the Company and electricity generation, which began production in late 1996.

Total revenues by segment include sales to unaffiliated customers, as reported in Araucos consolidated income statement, and inter-segment sales,
which are accounted for at invoice price.



F - 31



---

##### Table of Contents

CELULOSA ARAUCO Y CONSTITUCION S.A. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements



|                                            |  |                              |  |           |  |              |  |                              |  |         |   |  |                                                      |   |  |             
|------------------------------------------- |  | ---------------------------- |  | --------- |  | ------------ |  | ---------------------------- |  | ------- | - |  | ---------------------------------------------------- | - |  | ------------
|                                            |  | Year ended December 31, 2006
|                                            |  | (ThU.S.$)                   
|                                            |  | Pulp                         |  | Forestry  |  | WoodProducts |  | Plywood andfiberboardspanels |  | Others  |   |  | Eliminations ofintercompany salesand corporateassets |   |  | Consolidated
|Sales to unaffiliated customers             |  | 1,257,773                    |  | 83,452    |  | 726,198      |  | 721,164                      |  | 61,425  |   |  |                                                     |   |  | 2,850,012   
|Inter-segment sales                         |  | 11,339                       |  | 514,253   |  | 320,400      |  | 381,603                      |  | 179,861 |   |  | (1,407,456                                           | ) |  |            
|                                            |  |                              |  |           |  |              |  |                              |  |         |   |  |                                                      |   |  |             
|Total sales revenue                         |  | 1,269,112                    |  | 597,705   |  | 1,046,598    |  | 1,102,767                    |  | 241,286 |   |  | (1,407,456                                           | ) |  | 2,850,012   
|                                            |  |                              |  |           |  |              |  |                              |  |         |   |  |                                                      |   |  |             
|Operating income                            |  | 411,479                      |  | 104,135   |  | 114,143      |  | 174,188                      |  | 3,814   |   |  |                                                     |   |  | 807,759     
|                                            |  |                              |  |           |  |              |  |                              |  |         |   |  |                                                      |   |  |             
|Identifiable assets as of December 31, 2006 |  | 3,508,909                    |  | 2,347,265 |  | 466,387      |  | 452,746                      |  | 35,976  |   |  | 257,669                                              |   |  | 7,068,952   
|                                            |  |                              |  |           |  |              |  |                              |  |         |   |  |                                                      |   |  |             
|                                            | 
|                                            |  | Year ended December 31, 2005
|                                            |  | (ThU.S.$)                   
|                                            |  | Pulp                         |  | Forestry  |  | WoodProducts |  | Plywood andfiberboardspanels |  | Others  |   |  | Eliminations ofintercompany salesand corporateassets |   |  | Consolidated
|Sales to unaffiliated customers             |  | 991,157                      |  | 79,510    |  | 649,339      |  | 588,260                      |  | 65,641  |   |  |                                                     |   |  | 2,373,907   
|Inter-segment sales                         |  | 7,114                        |  | 497,117   |  | 306,677      |  | 296,612                      |  | 96,060  |   |  | (1,203,580                                           | ) |  |            
|                                            |  |                              |  |           |  |              |  |                              |  |         |   |  |                                                      |   |  |             
|Total sales revenue                         |  | 998, 271                     |  | 576,627   |  | 956,016      |  | 884,872                      |  | 161,701 |   |  | (1,203,580                                           | ) |  | 2,373,907   
|                                            |  |                              |  |           |  |              |  |                              |  |         |   |  |                                                      |   |  |             
|Operating income                            |  | 278,717                      |  | 130,684   |  | 92,338       |  | 136,634                      |  | (3,434  | ) |  |                                                     |   |  | 634,939     
|                                            |  |                              |  |           |  |              |  |                              |  |         |   |  |                                                      |   |  |             
|Identifiable assets as of December 31, 2005 |  | 2,985,769                    |  | 1,886,874 |  | 388,205      |  | 421,937                      |  | 24,443  |   |  | 406,791                                              |   |  | 6,114,019   
|                                            |  |                              |  |           |  |              |  |                              |  |         |   |  |                                                      |   |  |             
|                                            | 
|                                            |  | Year ended December 31, 2004
|                                            |  | (ThU.S.$)                   
|                                            |  | Pulp                         |  | Forestry  |  | WoodProducts |  | Plywood andfiberboardspanels |  | Others  |   |  | Eliminations ofintercompany salesand corporateassets |   |  | Consolidated
|Sales to unaffiliated customers             |  | 1,005,970                    |  | 61,685    |  | 612,572      |  | 373,750                      |  | 21,075  |   |  |                                                     |   |  | 2,075,052   
|Inter-segment sales                         |  | 2,602                        |  | 493,951   |  | 252,501      |  | 287,380                      |  | 48,640  |   |  | (1,085,074                                           | ) |  |            
|                                            |  |                              |  |           |  |              |  |                              |  |         |   |  |                                                      |   |  |             
|Total sales revenue                         |  | 1,008,572                    |  | 555,636   |  | 865,073      |  | 661,130                      |  | 69,715  |   |  | (1,085,074                                           | ) |  | 2,075,052   
|                                            |  |                              |  |           |  |              |  |                              |  |         |   |  |                                                      |   |  |             
|Operating income                            |  | 379,336                      |  | 112,594   |  | 144,887      |  | 125,965                      |  | 4,567   |   |  |                                                     |   |  | 767,349     
|                                            |  |                              |  |           |  |              |  |                              |  |         |   |  |                                                      |   |  |             
|Identifiable assets as of December 31, 2004 |  | 2,641,704                    |  | 1,462,896 |  | 363,958      |  | 326,479                      |  | 38,782  |   |  | 440,047                                              |   |  | 5,273,866   
|                                            |  |                              |  |           |  |              |  |                              |  |         |   |  |                                                      |   |  |             



F - 32



---

##### Table of Contents

CELULOSA ARAUCO Y CONSTITUCION S.A. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements



Araucos sales revenue and property, plant, equipment and forests, detailed by country, were as
follows:



|          |  |                              |  |                                     
|--------- |  | ---------------------------- |  | ------------------------------------
|          |  | Year ended December 31, 2006
|          |  | (ThU.S.$)                   
|Country   |  | SalesRevenue (*)             |  | Property, plant,equipment and forest
|Chile     |  | 2,298,888                    |  | 4,456,728                           
|Argentina |  | 352,292                      |  | 681,837                             
|Brazil    |  | 198,832                      |  | 325,109                             
|          |  |                              |  |                                     
|Total     |  | 2,850,012                    |  | 5,463,674                           
|          |  |                              |  |                                     
|          | 
|          |  | Year ended December 31, 2005
|          |  | (ThU.S.$)                   
|Country   |  | SalesRevenue (*)             |  | Property, plant,equipment and forest
|Chile     |  | 1,947,081                    |  | 3,656,129                           
|Argentina |  | 284,234                      |  | 699,773                             
|Brazil    |  | 142,592                      |  | 281,901                             
|          |  |                              |  |                                     
|Total     |  | 2,373,907                    |  | 4,637,803                           
|          |  |                              |  |                                     
|          | 
|          |  | Year ended December 31, 2004
|          |  | (ThU.S.$)                   
|Country   |  | SalesRevenue (*)             |  | Property, plant,equipment and forest
|Chile     |  | 1,818,534                    |  | 3,301,173                           
|Argentina |  | 256,518                      |  | 635,743                             
|          |  |                              |  |                                     
|Total     |  | 2,075,052                    |  | 3,936,916                           
|          |  |                              |  |                                     

---

|(*) | Sales revenues are attributed to countries based on the location of the sales office where the sale was recorded.
|--- | -----------------------------------------------------------------------------------------------------------------



F - 33



---

##### Table of Contents

CELULOSA ARAUCO Y CONSTITUCION S.A. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements



Depreciation expense for Araucos segments was summarized as follows:



|                                                                                                                                                                                                                             |  |                         |   |  |           |   |  |           |   |  |  |  | 
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ----------------------- | - |  | --------- | - |  | --------- | - |  |  |  | 
|                                                                                                                                                                                                                             |  | Year ended December 31, |   |  |           |   | 
|                                                                                                                                                                                                                             |  | 2006                    |   |  | 2005      |   |  | 2004      |   |  |  |  | 
|                                                                                                                                                                                                                             |  | (ThU.S.$)               |   |  |           |   | 
|Industry                                                                                                                                                                                                                     |  |                         |   |  |           |   |  |           |   |  |  |  | 
|Pulp                                                                                                                                                                                                                         |  | 124,870                 |   |  | 115,858   |   |  | 99,045    |   |  |  |  | 
|Forestry                                                                                                                                                                                                                     |  | 5,656                   |   |  | 5,119     |   |  | 6,823     |   |  |  |  | 
|Wood products                                                                                                                                                                                                                |  | 21,293                  |   |  | 19,145    |   |  | 16,229    |   |  |  |  | 
|Plywood and fiberboards panels                                                                                                                                                                                               |  | 32,045                  |   |  | 26,993    |   |  | 15,256    |   |  |  |  | 
|Other                                                                                                                                                                                                                        |  | 3,131                   |   |  | 3,176     |   |  | 3,976     |   |  |  |  | 
|                                                                                                                                                                                                                             |  |                         |   |  |           |   |  |           |   |  |  |  | 
|Total depreciation                                                                                                                                                                                                           |  | 186,995                 |   |  | 170,291   |   |  | 141,329   |   |  |  |  | 
|                                                                                                                                                                                                                             |  |                         |   |  |           |   |  |           |   |  |  |  | 
|                                                                                                                                                                                                                             |  |                         |   |  |          
|Capital expenditures for Araucos segments were summarized as follows:                                                                                                                                                       |  |                         |   |  |           |   |  |           |   |  |  |  | 
|                                                                                                                                                                                                                             |  |                         |  
|                                                                                                                                                                                                                             |  | Year ended December 31, |   |  |           |   | 
|                                                                                                                                                                                                                             |  | 2006                    |   |  | 2005      |   |  | 2004      |   |  |  |  | 
|                                                                                                                                                                                                                             |  | (ThU.S.$)               |   |  |           |   | 
|Industry                                                                                                                                                                                                                     |  |                         |   |  |           |   |  |           |   |  |  |  | 
|Pulp                                                                                                                                                                                                                         |  | 352,311                 |   |  | 419,899   |   |  | 348,040   |   |  |  |  | 
|Forestry                                                                                                                                                                                                                     |  | 652,159                 |   |  | 145,503   |   |  | 289,073   |   |  |  |  | 
|Wood products                                                                                                                                                                                                                |  | 34,486                  |   |  | 10,653    |   |  | 65,373    |   |  |  |  | 
|Plywood and fiberboards panels                                                                                                                                                                                               |  | 43,586                  |   |  | 39,440    |   |  | 42,485    |   |  |  |  | 
|Other                                                                                                                                                                                                                        |  | 7,908                   |   |  | 2,842     |   |  | 12,349    |   |  |  |  | 
|                                                                                                                                                                                                                             |  |                         |   |  |           |   |  |           |   |  |  |  | 
|Total capital expenditures                                                                                                                                                                                                   |  | 1,090,450               |   |  | 618,337   |   |  | 757,320   |   |  |  |  | 
|                                                                                                                                                                                                                             |  |                         |   |  |           |   |  |           |   |  |  |  | 
|                                                                                                                                                                                                                             |  |                        
|Accounts payable for the acquisitions of property, plant and equipment and forest was U.S. $(3.9) million, U.S.$(13.1) million, and U.S.
$(14.0) million for the years ended December 31, 2006, 2005 and 2004, respectively. |  |                         |   |  |          
|                                                                                                                                                                                                                             |  |                        
|Araucos export sales detailed by major geographic area were as follows:                                                                                                                                                     |  |                         |   |  |          
|                                                                                                                                                                                                                             |  |                         |  
|                                                                                                                                                                                                                             |  | Year ended December 31, |   |  |           |   | 
|                                                                                                                                                                                                                             |  | 2006                    |   |  | 2005      |   |  | 2004      |   |  |  |  | 
|                                                                                                                                                                                                                             |  | (ThU.S.$)               |   |  |           |   | 
|North America                                                                                                                                                                                                                |  | 702,836                 |   |  | 631,487   |   |  | 546,155   |   |  |  |  | 
|Central and South America                                                                                                                                                                                                    |  | 201,619                 |   |  | 129,832   |   |  | 173,495   |   |  |  |  | 
|Asia                                                                                                                                                                                                                         |  | 730,098                 |   |  | 595,802   |   |  | 637,455   |   |  |  |  | 
|Europe                                                                                                                                                                                                                       |  | 420,158                 |   |  | 357,030   |   |  | 339,505   |   |  |  |  | 
|Other                                                                                                                                                                                                                        |  | 142,922                 |   |  | 142,448   |   |  | 84,105    |   |  |  |  | 
|                                                                                                                                                                                                                             |  |                         |   |  |           |   |  |           |   |  |  |  | 
|Total export sales                                                                                                                                                                                                           |  | 2,197,633               |   |  | 1,856,599 |   |  | 1,780,715 |   |  |  |  | 
|                                                                                                                                                                                                                             |  |                         |   |  |           |   |  |           |   |  |  |  | 
|Export sales as a percentage of total sales revenue                                                                                                                                                                          |  | 77.12                   | % |  | 78.21     | % |  | 85.82     | % |  |  |  | 



F - 34



---

##### Table of Contents

CELULOSA ARAUCO Y CONSTITUCION S.A. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements



NOTE 14SUBSEQUENT EVENTS

On June 11, 2007, the Companys subsidiary, Alto Paraná S.A., issued bonds in the amount of U.S.$ 270 million. The maturity of the bonds is 10
years. The annual interest rate is 6.375%. The net proceeds from the bonds issuance will be used to refinance a portion of the outstanding debt of Alto Paraná S.A. and for capital expenditures purposes.

On June 5, 2007, in connection with the death of fish in the Mataquito River, approximately 15 kilometers downstream of the Licancel mill, we decided to
voluntarily suspend our operations in the Licancel Mill as a preventive measure. In addition, Chilean authorities, including the health authorities and the Superintendencia de Servicios Sanitarios(Sanitary Services Superintendency), required
that we suspend activities at the Licancel Mill and that we suspend any further discharges into the river. We also commenced independent investigations relating to the cause of the death of the fish. On June 18, 2007, as a result of a pipe leakage
in the water treatment system currently in place at the Licancel Mill, and estimated 50 cubic meters of effluents reached the Mataquito River. On that same date, we decided to close the mill indefinitely and informed the Sanitary Services
Superintendency of the incident. We have resolved not to resume operations at the Licancel Mill until we have replaced the current environmental treatment system with a new system that incorporates a new effluent treatment system approved by the
environmental authorities.

No other events have occurred since December 31, 2006 and up to the issue of these financial statements that
may affect significantly the financial situation of the Company.



F - 35



---

##### Table of Contents

Index of Exhibits



|     |  |                                                                                                                                                                                  
|---- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|1.1  |  | English translation of the by-laws (estatutos) of Celulosa Arauco y Constitución S.A., dated as of January 27, 2005                                                              
|     | 
|8.1  |  | List of subsidiaries                                                                                                                                                             
|     | 
|12.1 |  | Certification of chief executive officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002                                
|     | 
|12.2 |  | Certification of principal financial officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002                            
|     | 
|13.1 |  | Certification of chief executive officer and principal financial officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
|     | 
|15.1 |  | Valuation and qualifying accounts