SECURITIES AND EXCHANGE COMMISSIONWASHINGTON, D.C. 20549

FORM 20-F! REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES

EXCHANGE ACT OF 1934OR

" ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF1934 for the Fiscal Year Ended December 31, 1998

OR

! TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACTOF 1934

Commission file number 1-11005

ARACRUZ CELULOSE S.A.(Exact name of Registrant as specified in its charter)

Aracruz Cellulose(Translation of Registrant's name into English)

Federative Republic of Brazil(Jurisdiction of incorporation or organization)

Rua Lauro Müller, 11622299-900 Rio de Janeiro, RJ, Brazil

(Address of principal executive offices)

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

Title of each class: Name of each exchange on which registered:

Class B Stock, without par value New York Stock Exchange*American Depositary Shares (as evidenced New York Stock Exchange

by American Depositary Receipts), eachrepresenting ten shares of Class B Stock

* Not for trading purposes, but only in connection with the registration of American Depositary Shares pursuant to the requirements of theSecurities and Exchange Commission.

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

None(Title of Class)

Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act.

None(Title of Class)

Indicate the number of outstanding shares of each of the issuer's classes of capital or common stock as of theclose of the period covered by the annual report.

455,390,699 Shares of Common Stock41,042,246 Shares of Class A Stock

581,486,768 Shares of Class B Stock

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 registrantwas required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes " No !Indicate by check mark which financial statement item the registrant has elected to follow.

Item 17 ! Item 18 "

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TABLE OF CONTENTS

PART IItem 1. Description of Business ..................................................................................................... 1Item 2. Description of Property.................................................................................................... 24Item 3. Legal Proceedings ............................................................................................................ 24Item 4. Control of Registrant........................................................................................................ 26Item 5. Nature of Trading Market ................................................................................................ 28Item 6. Exchange Controls and Other Limitations Affecting Security Holders........................... 32Item 7. Taxation ........................................................................................................................... 35Item 8. Selected Financial Data.................................................................................................... 42Item 9. Management's Discussion and Analysis of Financial Condition and Results of

Operations49Item 9A. Market Risk................................................................................................................... 64Item 10. Directors and Officers of Registrant .............................................................................. 67Item 11. Compensation of Directors and Officers........................................................................ 71Item 12. Options to Purchase Securities from Registrant or Subsidiaries.................................... 71Item 13. Interest of Management in Certain Transactions ........................................................... 71

PART IIItem 14. Description of Securities to Be Registered .................................................................... 73

PART IIIItem 15. Defaults upon Senior Securities..................................................................................... 73Item 16. Changes in Securities and Changes in Security for Registered Securities..................... 73

PART IVItem 17. Financial Statements ...................................................................................................... 74Item 18. Financial Statements ...................................................................................................... 74Item 19. Financial Statements and Exhibits ................................................................................. 74

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Unless otherwise specified, all references in this Annual Report to (i) "U.S. dollars", "$" or "US$"are to United States dollars, (ii) "Reais", "Real" or "R$" are to Brazilian Reais, (iii) the "Company" are toAracruz Celulose S.A. and its consolidated subsidiaries, (iv) "tonnes" are to metric tonnes of 1,000kilograms each and (v) "billions" are to units of 1,000,000,000. One hectare equals approximately 2.471acres, one kilogram equals approximately 2.2 pounds and one kilometer equals approximately 0.621 miles. Unless otherwise indicated, (i) all references in this Annual Report to percentages, tonnes and U.S. dollaror Real amounts of pulp are to "market pulp" (as defined below) and (ii) all share data in this AnnualReport have been adjusted to reflect a stock split effective on April 5, 1995, pursuant to which holders ofClass A Stock and Class B Stock (each, as defined below) received one share of Class B Stock for everythree shares of Class A Stock or Class B Stock held and holders of Common Stock received one share ofCommon Stock for every three shares of Common Stock held (the "1995 Stock Split") and a changeeffective March 17, 1997 in the number of shares of Class B Stock underlying each ADS from five sharesof Class B Stock per ADS to ten shares of Class B Stock per ADS (the "ADS Ratio Change"). Unlessotherwise indicated, amounts in Reais stated at a particular date and followed by U.S. Dollars equivalentshave been converted using the Reais to US Dollars exchange rate in effect on such date.

This Annual Report contains statements which constitute forward looking statements within themeaning of Section 21E of the Securities Exchange Act of 1934, as amended. Certain such forward-looking statements can be identified by the use of forward-looking terminology such as “believes,”“expects,” “may,” “are expected to,” “will,” “will allow,” “will continue,” “will likely result,” “should,”“would be,” “seeks,” “approximately,” “intends,” “plans,” “projects,” “estimates,” or “anticipates,” orsimilar expressions or the negative thereof or other variations thereof of comparable terminology, or bydiscussions of strategy, plans or intentions. In addition, all information included herein with respect tofuture operations, financial condition, financial performance or other financial or statistical mattersconstitute such forward looking statements. Such forward-looking statements are necessarily dependent onassumptions, data or methods that may be incorrect or imprecise and that may be incapable of beingrealized. Those statements appear in a number of places in this Annual Report including withoutlimitation the information set forth under the headings the "Business", "Legal Proceedings" and"Management’s Discussion and Analysis of Financial Condition and Results of Operations", and includestatements regarding the intent, belief or current expectations of the Company, its directors or its executiveofficers with respect to (i) the declaration or payment of dividends, (ii) the direction and future operation ofthe Company, (iii) the implementation of the principal operating strategies of the Company, including itspotential participation in acquisition or joint venture transactions or other investment opportunities, (iv) theimplementation of the Company’s financing strategy and capital expenditure plans, (v) the development ofsolid wood products, (vi) the factors or trends affecting the pulp and paper market (including its cyclicalnature and the Company’s financial condition or results of operations) or (vii) problems encountered inconnection with the year 2000 issue. Prospective investors are cautioned that any such forward lookingstatements are not guarantees of future performance and involve risks and uncertainties, and that actualresults may differ materially from those in the forward looking statements as a result of various factors. The Company does not undertake, and specifically disclaims any obligation to update any forward-lookingstatements, which speak only as of the date made.

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PART I

Item 1. Description of Business

General

The Company is the world's largest producer of bleached hardwood kraft market pulp. The Company produces eucalyptus pulp, which is a high quality variety of hardwood pulp usedby paper manufacturers to produce a wide range of products, including premium tissue, printingand writing papers, liquid packaging board and specialty papers. Eucalyptus pulp'sdistinguishing characteristics are its softness, opacity and suitability for printing. "Market pulp"is pulp sold to producers of paper products, as opposed to pulp produced by an integrated paperproducer, for use in its paper production facility. "Kraft" pulp is pulp produced in a chemicalprocess using sulphate.

The Company produced 1,166,000 tonnes of bleached eucalyptus kraft market pulp in1998, representing approximately 19% of the total worldwide production of bleached eucalyptuskraft market pulp during that year. In 1998, eucalyptus accounted for approximately 40% of thetotal worldwide production of bleached hardwood kraft market pulp. In 1998, sales to customerslocated outside Brazil, principally in North America, Western Europe and Asia, accounted forapproximately 94% of the Company's sales volume. See "—Markets and Customers" and "—Competition".

The Company is headquartered in Rio de Janeiro and its production facilities are locatedprincipally in the Brazilian coastal State of Espírito Santo. The Company's production facilitiesconsist of a eucalyptus pulp mill which has two production units, each with two production lines,and an electrochemical plant that services the mill. The Company owns approximately 214,000hectares of forest and other land in the State of Espírito Santo and the State of Bahia, of which138,000 hectares are planted eucalyptus forests. The pulp mill is located approximately 1.8kilometers from the port facilities at Barra do Riacho, which are 51% owned by the Company. In1991, the Company completed an expansion project (the "Expansion Project"), which increasedthe mill's nominal production capacity (i.e., the production capacity for which the mill wasdesigned) to approximately 1,025,000 tonnes per year, and in 1994 the Company increased itseffective production capacity to 1,070,000 tonnes through system upgrades and productivitygains. In addition, the Company has invested US$338.5 million (a substantial portion of whichhas been contracted in Reais) from October 1995 to December 1998 in a modernization project(the "Modernization Project"). See "Item 9. Management's Discussion and Analysis of FinancialCondition and Results of Operations—Liquidity and Capital Resources—Capital Expenditures". This modernization is expected to (i) increase the mill's nominal production capacity to1,240,000 tonnes per year, (ii) allow the Company to produce 100% elemental chlorine-free("ECF") pulp, and (iii) achieve a further reduction in the impact of the Company's productionfacilities on the environment. The Company expects that the the full benefits of theModernization Project will be realized during 1999.

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The Company believes that it is one of the lowest-cost producers of bleached kraft marketpulp in the world. See "—Business Strategy". The Company's relatively low production costsare due to a number of factors, including economies of scale, advanced forestry techniques inmanaging the processes of planting, growing and harvesting of its trees, a comparatively shortharvest cycle of its trees and lower energy and chemical costs. During 1998, the Company wasable to meet almost 100% of its wood fiber requirements from Company-owned eucalyptusforests. Climate and soil conditions in Brazil enable the Company to harvest its eucalyptus treesin only seven years, while harvest cycles for other types of hardwood trees in the southern UnitedStates, Canada and Scandinavia range from 25 to 70 years. Harvest cycles for the Company'sprincipal non-Brazilian competitors in the eucalyptus pulp market, which are located in Spain,Portugal and Chile, are approximately eight to ten years. See "—Raw Materials—Wood" and "—Competition". The Company internally produces approximately 76% of its electrical energyrequirements, mainly from by-products of its pulp production process, and recycles the greaterpart of the chemicals used at its mill.

The direct and indirect subsidiaries of the Company are Portocel Terminal Especializadode Barra do Riacho S.A. ("Portocel"), Mucuri Agroflorestal S.A., Aracruz Trading S.A.("Aracruz Trading"), Aracruz Celulose (U.S.A.), Inc., Aracruz (Europe) S.A., and AracruzProdutos de Madeira S.A. (“Aracruz Produtos”; formerly named Tecflor Industrial S.A.)

Aracruz Florestal S.A. ("AFSA"), a predecessor to the Company, was incorporated in1967 to plant eucalyptus forests. AFSA became a subsidiary of the Company in 1972 when theCompany was incorporated and, on July 20, 1993, it was merged into the Company. TheCompany began producing pulp in 1978.

The Company's principal office is located at Rua Lauro Mü1ler, 116, 22299-900 Rio deJaneiro, RJ, Brazil, and its telephone number is 55-21-545-8111. The Company's mill is locatedat Rodovia Barra do Riacho, Municipality of Aracruz, State of Espírito Santo, Brazil.

Business Strategy

The key elements of the Company's business strategies are to: (i) produce and sell pulp ofconsistent quality to high-value added market segments and to maintain long-term relationshipswith its customers, (ii) assure that the Company remains one of the lowest-cost producers in thepulp industry, (iii) secure and maintain a supply of wood of high and homogeneous quality inorder to ensure that it produces high quality pulp and (iv) base its operations and environmentalpractices on the principles of sustainable development.

The Company intends to maintain its low-cost strategy through the implementation of thefollowing programs:

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(a) Economies of scale resulting from the Expansion Project completed in1991, which increased nominal production capacity from 500,000 tonnes per year to1,025,000 tonnes per year, and from continuing productivity gains thereafter whichincreased the effective production capacity to 1,070,000 tonnes in 1994. See "—TheMill".

(b) Modernization and debottlenecking resulting from the ModernizationProject, which, among other things, is expected to increase the mill's nominal productioncapacity to 1,240,000 tonnes per year. See "—The Mill".

(c) Improvements in forestry technology, which continue to result in asignificative increase of the forest yield. The Company is modernizing its forestryoperations, and has mechanized the harvesting, processing and transporting of eucalyptustrees, resulting in efficiency gains and cost reductions with respect to its forestryoperations.

(d) Redesigning of all management processes, with the support of state-of-the-art information technology, in order to improve efficiency and reduce costs. Theconceptual phase of this reengineering process was concluded in 1996, and the resultingprojects are being implemented in 1997-2000.

The strength of the Company's business operations combined with the Company'ssignificant cash holdings and securities have led the Company to evaluate various future strategicalternatives, including: (i) diversification into other forest products businesses, (ii) furtherexpansion of current pulp operations either through acquisition or expansion of existing capacityand (iii) prepayment of certain debt obligations. Consistent with such strategy, the Companyestablished a joint venture (the “Tecflor Project”) with Gutchess International Group of theUnited States to create a new company, Tecflor Industrial S.A. (now Aracruz Produtos), for theproduction of solid wood products. The first sawmill, which is located in the State of Bahia, wascommissioned in February and March, 1999, and will be starting sales during the third quarter of1999. The sawmill has a total capacity of 75,000 cubic meters per year, and the Companyestimates that the total investment in connection therewith would amount to approximatelyUS$51.8 million. In 1998, the Company acquired all ownership interests of GutchessInternational Inc. in Tecflor Industrial S.A which became a fully owned subsidiary of theCompany. As of March 31, 1999, the Company had invested US$ 39.6 million in the TecflorProject, of which US$ 21.4 million was obtained through financing from BNDES and theremaining through the Company’s working capital. See “—Item 9. Management's Discussionand Analysis of Financial Condition and Results of Operations—Liquidity and CapitalResources".

Consistent with the strategies set forth above, the Company may, from time to time, enterinto joint venture, technological exchange, marketing or other arrangements with third parties

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where such arrangements will complement, and not conflict with, the Company's business andcompetitive positions.

Market Overview

General

Wood pulp is the principal raw material used in manufacturing paper and paperboard. Whether a specific type of wood pulp is suitable for a particular end use depends on the type ofwood used to make the pulp as well as the process used to transform the wood into pulp. Hardwood pulp is produced using hardwood trees, such as oak, eucalyptus, aspen, birch andacacia trees. It has short fibers and is generally better suited for manufacturing coated anduncoated printing and writing papers, tissue and specialty papers. Softwood pulp is producedusing softwood trees, such as pines. It has long fibers and is generally used to add strength to thepaper. The Company does not produce softwood pulp.

The pulp manufacturing process also can determine a pulp's suitability for particular enduses. Chemical pulp refers to pulp made using chemical processes to dissolve the lignin andother organic materials holding the wood fibers together. Among the various chemicalprocesses, the most common is the "kraft" process, which is used by the Company to produce itspulp. The kraft process helps to maintain the inherent strength of the wood fibers and thusproduces a pulp especially well suited for manufacturing printing and writing papers, specialtypapers and tissue papers. Pulp producers may sell their pulp in the worldwide market or use itinternally to manufacture various types of papers.

Bleached pulp is used for a variety of purposes, including printing and writing papers,specialty papers and tissues. Unbleached pulp, which is brown in color, is used in the productionof wrapping papers, corrugated containers and other paper and cardboard transportationmaterials.

As a result of the variety of wood types and processes used to produce pulp, which haveevolved significantly over time, the pulp market has become increasingly specialized in terms oftechnical characteristics. Many of the physical and chemical properties most valued by printingand writing paper manufacturers and other bleached pulp consumers, such as opacity andbrightness, are exhibited by hardwood and, particularly, eucalyptus pulp. In addition, theincreasing specialization of paper manufacturers has resulted in many such manufacturersdeveloping their own customized mix of pulp inputs (known as "furnish") for use in their papermanufacturing. In addition, as more paper manufacturers have come to appreciate the technicalcharacteristics of hardwood pulp and to rely on a significant hardwood pulp component in theirfurnish, the market for hardwood pulp has grown more rapidly than the market for softwoodpulp. Within the hardwood segment, bleached eucalyptus pulp has demonstrated the highest

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annual rate of growth in demand from 1988 to 1998. Over the same ten-year period, the annualrate of growth of demand for bleached eucalyptus pulp was 5.6% while the annual rate of growthof demand for other types of hardwood pulp during the same period was 2.9%.

Eucalyptus is only one of many types of hardwoods used to make pulp. Eucalyptus treesgenerally grow straight and have few branches. This allows for dense growth, easy harvestingand less need for pruning. Since 1980, eucalyptus pulp has steadily increased as a percentage ofthe total worldwide production of bleached hardwood kraft market pulp (from 28% in 1980 to42% in 1998) primarily due to its high quality, and because of its properties such as softness,opacity and printability.

International Markets

From 1990 to 1998, the worldwide production capacity of bleached hardwood kraftmarket pulp is estimated to have grown an average 5.9% per year from 10.6 million tonnes to16.2 million tonnes. The start-up of new or expanded production facilities during the last twoyears has increased the total worldwide capacity for bleached hardwood kraft market pulp byapproximately 1.5 million tonnes to 16.2 million tonnes at the end of 1998. In light of the majorannounced projects (greenfield and expansion), it is estimated that production capacity forbleached hardwood kraft market pulp will increase by 1.1 million tonnes by 2001.

Worldwide demand for bleached hardwood kraft market pulp is strongly influenced bythe demand for paper and board products, which correlates to world GDP growth. Demand formarket pulp has grown in recent years, increasing from 9.7 million tonnes in 1990 toapproximately 14.1 million tonnes in 1998. Consumption of market pulp is concentrated mainlyin Europe, North America and Asia. In 1998, the demand for bleached hardwood kraft marketpulp in Europe (including Western, Eastern and Nordic countries), North America and Asia wasapproximately 6.4 million tonnes, 2.3 million tonnes and 4.6 million tonnes, respectively,accounting for approximately 45%, 17% and 32% of the world's demand. The Companysupplied approximately 453,000 tonnes, or 7%, of the total European demand, approximately390,000 tonnes, or 17% of the total North American demand and approximately 211,000 tonnes,or 4% of the total Asian demand during 1998.

The market pulp industry is highly competitive and is also sensitive to changes in industrycapacity, producer inventories and cyclical changes in the world's economies, all of which maysignificantly affect pulp prices and thereby the Company's profitability. The price of pulpgenerally increases as economies expand around the world. Strong demand during most of the1980s caused the market price per tonne of bleached eucalyptus kraft market pulp delivered inthe United States by the Company to peak in 1989 at a nominal US$775. A global recessionaryenvironment and a substantial increase in worldwide pulp supply during the early 1990s led to asharp decline in the prices of market pulp, reaching their lowest levels in 10 years in Decemberl993. Thereafter, a significant price recovery occurred, beginning in 1994. The principal factors

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of such price recovery were: (i) a fast recovery in demand for pulp resulting from the increasingworldwide demand for paper and board products throughout 1994, (ii) low paper and pulpinventory levels at the end of 1993 and (iii) constraints on the supply of birch pulpwood due tothe severe winter in the Northern Hemisphere during 1993 and 1994. Pulp prices increasedfurther in 1995 and reached the 1989 peak price level.

However, pulp prices began to fall during the last quarter of 1995 and continued to fallthrough the second quarter of 1996 due to a significant drop in demand for new orders of wood-free papers for all regions, mainly from Europe and, to a lesser extent, from the United States. This drop in demand forced paper producers, merchants and distributors to adjust their inventorylevels, which resulted in significantly higher levels of inventory for pulp producers. Pulpproducers responded to rising inventory levels by lowering prices beginning in January 1996. During 1996, the Company's average F.O.B. price per tonne of bleached eucalyptus kraft marketpulp sold in the United States was US$487 per tonne, a decrease of 38% as compared to the 1995price of US$785 per tonne. In 1997, the average F.O.B. price per tonne of bleached eucalyptuskraft market pulp sold in the United States was US$496, an increase of 2% as compared to 1996of US$ 487. For 1998 the average F.O.B. price per tonne of bleached eucalyptus kraft marketpulp sold in the United States was US$465. In the first quarter of 1999 the average F.O.B. priceper tonne of bleached eucalyptus kraft market pulp delivered in the United States was US$ 422, adecrease of approximately 13% as compared to the first quarter of 1998 price of US$485 pertonne. This decrease was primarily due to weak demand in Asia and Europe as well as highinventory levels and over capacity of pulp production throughout the industry. See "—Item 9.Management's Discussion and Analysis of Financial Condition and Results of Operations."

As shown below, during the past 10 year period average annual prices for bleachedeucalyptus kraft market pulp produced by the Company and delivered in the United States havebeen generally higher than prices of U.S. southern and northern hardwood pulp delivered in theUnited States.

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Sources: For Eucalyptus prices, the Company; for U.S. Southern Hardwood and U.S. Northern Hardwood, Hawkins Wright.

Domestic Market

Demand for bleached hardwood kraft market pulp in Brazil increased from 480,000tonnes in 1997 to 529,700 tonnes in 1998, largely due to the continuation, during the second halfof 1998, of the economic recovery in Brazil that began in 1994. In the first quarter of 1999 thedemand was approximately 122,700 tonnes compared to approximately 130,700 tonnes in thesame period last year. This decrease was primarily due to the Brazilian economic crisis in late1998 and early 1999. See “Item 9. Management’s Discussion and Analysis of FinancialCondition and Results of Operations — Brazilian Economic Environment.” The five majorBrazilian producers of bleached hardwood kraft market pulp are the Company, Celulose NipoBrasileira S.A. ("CENIBRA"), Bahia Sul Celulose S.A. ("Bahia Sul"), Riocell S.A. and JariCelulose S.A., which together accounted for 56% of the total domestic sales in 1998, with theCompany accounting for 13%. In 1991, the Company was responsible for 33% of domestic salesof bleached hardwood kraft market pulp. The Company's domestic market share of bleachedhardwood kraft market pulp has decreased from 33% in 1991 to 13% in 1998 due to an increaseof hardwood pulp supply within the Brazilian market. Accordingly, the Company's domesticsales volume of bleached hardwood kraft market pulp has decreased from 19% of its total salesvolume in 1991 to 6% in 1998 as a result of the Company's increase in sales in other markets andother producers increasing their own share of the Brazilian Market. See “—Competition.” Although domestic pulp prices are affected to a certain degree by general economic conditions inBrazil, domestic pulp prices have been, and are expected to continue to be, correlated withinternational pulp prices.

Eucalyptus Forests

The Company owns approximately 214,000 hectares of forest and other land, of which58,000 hectares are situated in the State of Espírito Santo near the mill site, 62,000 hectares aresituated farther north primarily in the municipalities of São Mateus and Conceição de Barra inthe State of Espírito Santo and 93,000 hectares are situated in the southernmost region of theState of Bahia, which at their farthest are less than 300 kilometers from the mill. The average

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distance from the Company's forest areas currently in use to the mill site is 216 kilometers. See"—Raw Materials—Wood". Because of the cost of transportation, the average distance from theforest to the mill has an important effect on the Company's cost structure, and the Company hassought to reduce the distance in various ways, including by accelerating the substitution of clonedtrees with higher productivity near the mill as discussed in "—Raw Materials—Wood". TheCompany is always evaluating opportunities for acquiring land with forest in the State of EspíritoSanto that is close to the mill in order to reduce the distance of hauling wood between the forestand the mill. Of the 214,000 hectares owned by the Company, approximately 138,000 hectaresare currently used for the planting of trees to supply pulp production and solid wood production,approximately 62,000 hectares are reserved for preservation, approximately 13,000 hectares havebeen used in the construction of roads and the remainder is used for research and developmentand other activities. Brazilian law requires that 20% of the Company's land either remainuncultivated with eucalyptus trees or planted with indigenous species.

In 1998, the Company's planting program covered 7,985 hectares compared to 20,129hectares in 1997, and approximately 14.4 million seedlings were grown at the Company'snurseries, compared to 16.0 million in 1997, of which 11.0 million were planted in theCompany's forests and the remaining 3.4 million were given to the farmers in the State ofEspírito Santo who own land near the mill. See "—Raw Materials—Wood". A typical Companyplantation grows 41 cubic meters of pulp wood per hectare per year. A typical eucalyptus treegrows an average of approximately three inches per week and will grow to a height of 90 feet inseven years, at which point it is harvested.

The Company pioneered the use of cloned seedlings from rooted cuttings, a method alsoknown as vegetative propagation, to carry out large-scale planting of eucalyptus trees. TheCompany's method of cloning results in trees whose fibers are extremely homogeneous, whichthe Company believes results in a more streamlined industrial process and higher quality pulp. Today, approximately 90% of the Company's eucalyptus forests are grown from this type ofseedling. Rather than growing from seeds, clones are the "offspring" of asexual propagation. Bymeans of this type of generation, the descendant receives the entire genetic code of the originaltree. Accordingly, the risk of disease and pests can be lessened by choosing parent trees betteradapted to the region. Other benefits of vegetative propagation include significantly lower barkper cubic meter of wood and "self-pruning" trees with fewer branches.

Raw Materials

Wood

The Company relies exclusively on eucalyptus trees to meet its pulp wood requirements. Eucalyptus is a short-fibered hardwood that grows back from the stump after being cut, with eachtree capable of regenerating twice. Eucalyptus trees are among the fastest growing trees in theworld. Climate and soil conditions in Brazil allow for eucalyptus tree harvest rotations of

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approximately seven years as compared to eight-to-ten year harvest rotations in Spain, Portugaland Chile. As part of its growth strategy, the Company has sought to eliminate the need forexternal sources of wood and to maximize both the yield and quality of fiber grown onCompany-owned timberlands through advanced forestry and tree cloning techniques.

In 1998, the Company supplied all of its 4.9 million cubic meter wood requirements fromits own eucalyptus forests. Through the development of cloned trees selected on the basis ofcertain characteristics, the Company was able to reduce its wood consumption per tonne of pulpproduced from 4.5 solid cubic meters in 1985 to 3.89 solid cubic meters in 1998. The optimaltime to harvest the Company's trees is approximately seven years from the time of planting. In1998, the Company did not purchase any wood from third party suppliers (other than certainpurchases in connection with the contract farming program described below) because it was ableto internally meet its wood requirements from its forests in the State of Espírito Santo and fromtrees grown from seedlings it had planted since 1988 on approximately 84,000 hectares of land ithad acquired in the State of Bahia. This land, which is within 300 kilometers of the mill, wasacquired in the southernmost region of the neighboring State of Bahia in response to certainrestrictions on further land purchases in the State of Espírito Santo contained in the permitgranted to the Company for its expanded mill facility. See " Environmental and OtherRegulatory Matters".

Based on the current demand for pulp and the Company's current supply of trees suitablefor harvesting, the Company may not need to purchase wood from third-party suppliers in thefuture, except in certain limited circumstances. Wood purchased from independent suppliers isnot always of the same quality and uniformity of fiber as wood from forests owned and managedby the Company. With the aim of reducing its dependence on wood supplied by traditionalindependent sources, the Company during 1990 and 1991 initiated a program pursuant to whichthe Company has provided approximately 36.8 million seedlings (along with financial andtechnical assistance to ensure that the cultivated trees meet the Company standards) to farmers inthe State of Espírito Santo who own land near the mill in exchange for contractual commitmentsfrom the farmers that the mature trees will be sold to the Company. Under this program, theCompany estimates that seedlings have been planted on approximately 20,000 hectares of landby approximately 2,145 farmers. The Company is obligated to purchase the mature trees fromthe farmers at certain agreed-upon prices not to exceed the market prices at the time of suchpurchases. The Company made its first purchases of trees under this program totalingapproximately 83,000 cubic meters of wood during 1997, at a cost of US$ 1.3 million. During1998, the Company made purchases of trees corresponding to 379,000 cubic meters of wood,totaling approximately US$ 5.2 million. To the extent such obligation creates any excessinventory of wood, the Company believes that it will be able to use any excess wood fordiversification projects (such as solid wood products produced by Aracruz Produtos ). Alternatively, the Company may be able to sell such excess wood to third parties. See " Business Strategy". The Company believes that under this arrangement it will be able topurchase from these farmers wood of quality and uniformity of fiber that is comparable to woodfrom the Company's forests at a cost lower than that obtainable from traditional independent

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sources. This program, however, has been subject to legal proceedings by the Brazilian FederalProsecutor. Regardless of the outcome of the legal proceedings, the Company believes that woodsupply from its forests alone will be sufficient to meet its pulp production needs based on currentdemands without further wood supply from this program. See "Item 3. Legal Proceedings". TheCompany already sells wood logs from time to time and, based on its belief that in the short-termits supplies will exceed its requirements, has entered into an agreement with SociedadePortuguesa de Celulose S.A. ("Soporcel") in Portugal, for the sale of 300,000 cubic meters oflogs per year from 1997 through 1999. The Company sold to Soporcel approximately (i) 279,000cubic meters of logs for approximately US$ 22 million in 1997, (ii) 260,000 cubic meters of logsfor approximately US$ 20 million in 1998, and (iii) 65,000 cubic meters of logs forapproximately US$ 4.9 million through June, 1999.

In order to secure additional wood supply, in 1989 the Company also entered into acontract with Bahia Sul, another pulp producer located in the State of Bahia, pursuant to whichthe Company granted Bahia Sul a one-time right, which expired in the second quarter of 1997, toharvest trees on the Company-owned land in the State of Bahia, in exchange for the right by theCompany to harvest trees on land owned by Bahia Sul in the State of Espírito Santo. Bahia Sulcompleted harvesting trees on the Company-owned land in the State of Bahia prior to suchexpiration. Such action by Bahia Sul did not create a shortage of wood supply for the Company'spulp production.

Energy and Chemicals

Reducing the Company's need for outside sources of energy and chemicals is animportant component of the Company's low cost production strategy. In 1998, approximately73% of the Company's electrical energy needs were met by burning by-products generated fromthe pulp production process. The remainder of the Company's energy needs were met throughpurchases of electricity, fuel oil and natural gas. In 1998, the production of electrical energyrepresented approximately 3% of the Company's production cost.

The Company maintains and operates chemical plants on the same site as the pulp millwhich produce substantially all of the chemicals used in the pulp bleaching process. Thechemical operation uses two main raw materials, industrial salt and limestone, in the productionprocess, which the Company purchases 100% in the local market. In 1998, chemicalsrepresented approximately 13% of the Company's production cost. The pulp mill also includestwo recovery boilers which recycle a greater part of the chemicals used.

The Company produces all of its caustic soda and chlorine requirements and sells aportion of unused chlorine to local buyers. In addition, the Company produces sodium chlorate,which in turn is used to make chloride dioxide, a bleaching agent. The caustic soda andbleaching agent are both used in the pulp manufacturing process. See " Pulp Production" for adiscussion of ECF and TCF pulp (as defined below).

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Water

Large amounts of water are required in the pulp production process and in the cultivationof seedlings. Water is primarily provided by several rivers, which feed into a 35 million cubicmeter reservoir on the mill site. The reservoir holds enough water to supply the mill's need for afive-year period in the event of a drought (based on statistical information on periods of very lowrainfall). Waste water undergoes a two-stage purification treatment process before it flows intothe ocean.

Beginning in the latter half of 1998, the State of Espírito Santo experienced a severedrought which reduced the Company’s water supply and caused the Company to pursuealternative long-term sources of water to meet its current operating needs as well as anyforeseeable expansion plans. As a result, in May 1999, the Company, together with themunicipal governments of Aracruz and Linhares, a neighboring city, began a project to divertwater from the Rio Doce river, a major river, to a system of canals and rivers which in turn feedinto the Company’s reservoir. The Company provided the financing of US$ 3 million for theproject, which involved the use of existing canals and the construction of a 1.3 mile canal. Theproject was completed in June 1999. The project, which is also expected to provide water for theindustrial and chemical districts of the City of Aracruz as well as for irrigation of agriculturalactivities in the southern region of the State, was approved by the federal, state and localauthorities.

The Mill

The Company's pulp mill, located in the State of Espírito Santo, is the largest bleachedhardwood kraft market pulp production facility in the world. The mill has a nominal productioncapacity (i.e. the production capacity for which the mill was designed) of approximately1,025,000 tonnes of pulp per year. In 1994 the Company increased its effective productioncapacity to 1,070,000 tonnes through system upgrades and productivity gains. Its actualproduction of 1,166,000 tonnes in 1998 represented 19% of the 1998 total worldwide productionof bleached eucalyptus kraft market pulp and 40% of total worldwide production of bleachedhardwood kraft market pulp in 1998.

The Company commenced pulp production operations in September 1978 with a nominalcapacity of approximately 400,000 tonnes of pulp per year. In early 1991, the Companycompleted the Expansion Project, which substantially increased the production capacity of themill. The Expansion Project consisted of building new pulp lines having an aggregate nominalproduction capacity of 525,000 tonnes per year, a new water supply system and additionalresidential housing for Company employees located near the mill site (which has nowsubstantially been all sold), as well as development of new forest areas. The new pulp linesbegan production in March 1991 and, in 1995, the new pulp lines produced 566,000 tonnes of

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pulp. The Company's pulp production in 1994, 1995, 1996, 1997 and 1998 was 1,072,000,1,042,000, 1,080,000, 1,058,000 and 1,166,000 tonnes, respectively. The Company's pulpproduction in 1997 decreased from the year before by 22,000 tonnes. The decrease in productionwas caused by construction work and production downtime related to the Modernization Project. The increase in 1998 production was caused by (i) improvement of the Expansion Project and(ii) modernization and debottlenecking resulting from the Modernization Project. See “—General.”

The production facility at Espírito Santo consists of large receiving yards for the logs,debarking, chipping and digesting equipment, packaging and warehousing facilities capable ofholding 40,000 tonnes of pulp and a fully computerized control system that continuouslymonitors the entire production process. Included in the production facility are chemical plantsthat provide substantially all chemicals used in the pulp bleaching process. Each of the mill'spulp systems has five steam turbines, and generators that provide a continuous power supply forthat system. Fuel for the generation of steam is mainly provided by waste products from the pulpproduction process. External backup power supplies are also available on site, as is a laboratoryto analyze raw materials and finished products. A tree nursery capable of producingapproximately 50.4 million seedlings per year and a research facility are located nearby as well.

The Company has invested approximately US$338.5 million (a substantial portion ofwhich has been contracted in Reais) from October 1995 to December 1998 in the ModernizationProject. The principal features of the Modernization Project are retrofitting of the mill's originalpulp lines, which were completed in 1978, with new equipment and the improvement of theproduction process through the removal of bottlenecks. This modernization is expected to (i)increase the mill's nominal production capacity to 1,240,000 tonnes per year, (ii) allow theCompany to produce 100% ECF pulp, and (iii) achieve a further reduction in the impact of theCompany's production facilities on the environment. The Company expects that the full benefitsof the modernization will be realized during 1999.

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Pulp Production

When operating at full capacity, the mill can process over 12,500 solid cubic meters oftimber each day. The logs are debarked using a tumbling drum and then cut into chips which aretransferred by conveyor system to the digesters where they are mixed with chemicals and heatedunder pressure. During this chemical cooking process, the lignin and cellulose are separated. Once removed, the lignin is used as fuel to produce steam and electrical energy for the millingprocess. The used chemicals are removed at various stages of the production process andrecycled within the plant. The cellulose fibers are then washed, bleached using bleachingchemicals (which are produced on site), filtered, pressed and dried. The dried pulp is then cutinto sheets, packed into bales and transported by truck to domestic destinations and to the port atBarra do Riacho, located approximately 1.8 kilometers from the mill, for shipments abroad. See" Transportation".

In recent years, pulp customers, particularly in Europe, have preferred pulp that isbleached with little or no chlorine due to the environmental concerns relating to the pulpproduction process, particularly the bleaching process. This has led to growing demand for ECFpulp and, to a lesser extent, pulp produced without any chlorine compounds ("TCF" pulp),although recently the Company has detected a shift in environmental concerns away from thebleaching process to forestry management and efficient control. During the period from 1991 to1994, the Company spent US$85.1 million to equip its mill facility so that it will have thecapacity to produce enough ECF pulp to meet the growing demand for ECF pulp. The Companyfirst produced ECF pulp in November 1990. From 1993 to 1997, the Company was producing75% ECF pulp. Commencing in 1998, with the completion of the Modernization Project, theCompany is now able to produce 100% ECF pulp. See " The Mill". The Company hasdeveloped a process, for which patent applications are currently pending in Brazil, for theproduction of TCF pulp. The Company has been producing TCF pulp since October 1991. In1997 the Company produced approximately 637,000 tonnes of ECF pulp and 73,000 tonnes ofTCF pulp. In 1998, the Company commenced production and sales of ACF pulp, a new productproduced with lower levels of Organo Halogens (OX) than ECF pulp. ACF pulp is soldprimarily in the European market. Actual production of ACF pulp, ECF pulp and TCF pulp in1998 was approximately 126,000 tonnes 629,000 tonnes and 16,000 tonnes respectively.

Transportation

Wood from the Company's three forest areas is transported by truck (owned byindependent contractors) to the mill site for processing into pulp. The distance from theCompany's main forest areas to the mill site ranges from one to 300 kilometers with an averagedistance of 188 kilometers for wood currently in use.

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The Company's pulp produced for export is transported from the mill to the port of Barrado Riacho, which is located approximately 1.8 kilometers from the mill site. This port is usedalmost exclusively to hold and load pulp and provides the Company with convenient access toocean transport vessels. The port is a modern facility which currently has the capacity to handleapproximately 2,000,000 tonnes of pulp per year. The port includes a warehouse capable ofholding approximately 100,000 tonnes of pulp.

The Company owns 51% of Portocel—Terminal Especializado de Barra do Riacho S.A.("Portocel"), the company that operates the port. The remaining 49% of Portocel is owned byCENIBRA, another pulp manufacturer and a competitor of the Company. The Company doesnot own any ships for transportation of its pulp.

Since the expansion of the Company's mill, which was completed in 1991, the port hasoperated at its full capacity (3 million tonnes per year). During 1995 and part of 1996, theCompany and CENIBRA invested approximately US$13 million (of which 51% (US$6.6million) was invested by the Company) in a project to expand the existing quay and increase thestorage capacity of the warehouse. This expansion project was completed in October 1996. In1998, the equivalent of approximately 94% of the production of the Company was shipped fromthe port. The remaining equivalent of 6% of the Company’s production was transported todomestic market by truck.Markets and Customers

The Company's principal markets are in North America, Europe, Asia and Brazil. Therelative geographic distribution of sales and the average F.O.B. prices for the past five years ispresented below:

Tonnes of Pulp Sold by the Company

(in thousands of tonnes)

1994 1995 1996 1997 1998 First Quarter 1999

Tonnes% ofTotal

Tonnes% ofTotal

Tonnes% ofTotal

Tonnes% ofTotal

Tonnes% ofTotal

Tonnes% ofTotal

Europe 387.9 36 353.0 36 362.5 33 422.2 39 455.4 39 139.4 47

NorthAmerica

349.1 33 365.9 37 403.2 36 394.4 36 390.1 34 65.5 22

Asia 235.6 22 168.7 17 252.1 23 190.5 17 230.0 20 68.3 23

LatinAmerica

11.7 1 9.0 1 9.6 1 6.9 1 9.5 1 8.5 3

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Tonnes of Pulp Sold by the Company

(in thousands of tonnes)

1994 1995 1996 1997 1998 First Quarter 1999

Tonnes% ofTotal

Tonnes% ofTotal

Tonnes% ofTotal

Tonnes% ofTotal

Tonnes% ofTotal

Tonnes% ofTotal

TotalExports

984.3 92 896.6 91 1,027.4 93 1,014.0 93 1,085.0 94 281.7 95

Brazil 81.6 8 86.7 9 73.7 7 77.7 7 68.8 6 16.0 5

Total 1065.9 100 983.3 100 1,101.1 100 1,091.7 100 1,153.8 100 297.7 100

F.O.B PRICEYear Ended December 31, First Quarter,

1994 1995 1996 1997 1998 1999Average F.O.B. Price ..................... $496.50 $809.96 $468.58 $482.08 $433.88 394.03

The Asian economic crisis, which began in the last quarter of 1997, reduced demand inAsia during that year. In 1998, demand for pulp in Asia recovered but pulp production continuedto be depressed. The Company’s sales to Asia increased by 21%, principally due to suchincreased demand.

Approximately 6% of the Company's 1998 sales by tonnage were sold in Brazil. In thepast, Brazilian pulp prices have been subject from time to time to price restrictions imposed by theBrazilian government. There can be no assurance that the Brazilian government will not seek toimpose such restrictions again.

The Company's marketing strategy is to develop long-term relationships with customersthat will purchase the Company's production year after year. Stable long-term relationshipspermit the Company to reduce its marketing expenses, better understand its customers needs, andtake advantage of competitive strengths, including the consistency of its pulp and its efficientlogistic and technical support. In 1998, the Company's ten largest customers accounted forapproximately 56% of its sales and the largest customer accounted for approximately 22% of itssales. Because the demand for the Company's pulp has exceeded its production capacity evenduring cyclical downturns of the pulp industry, the Company believes that a loss of any onecustomer would not have a material adverse effect on the Company's results of operations sincethe Company will be able to replace such customer with other customers without difficulty.

The Company has long-term sales contracts with some of its customers, including severalof its largest customers. These contracts generally provide for sales of specified amounts of pulpat prices announced from time to time by the Company (which are in line with the prevailing

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market prices) for pulp sold to customers in the geographic area of the purchaser under thecontract. Early termination is provided for in the contracts in the event of a material breach, aninsolvency of one of the parties or force majeure events of extended duration. Certain salescontracts include provisions that permit the Company to reduce the quantities to be shipped ifsales to the purchaser and its affiliates would exceed a specified percentage of the Company'sannual production capacity.

The Company has sought to diversify its sales among different market segments, such asconsumer products (for example, tissue paper), specialty papers and high quality printing andwriting papers. Producers of these products, as opposed to producers of commodity papers, valuethe consistency of the Company's pulp as well as the reliability of the Company's service. Thefollowing table shows the breakdown by end uses of the Company's pulp production in 1994,1995, 1996, 1997 and 1998.

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End Uses for Company Produced Pulp Percentage ofProduction Year Ended December 31,

1994 1995 1996 1997 1998Tissue .................................... 44% 48% 45% 47% 46%Printing, and Writing Paper .. 27% 25% 27% 23% 27%Specialty Papers(1) ................ 25% 25% 26% 27% 24%Cartonboard........................... 4% 2% 2% 3% 3%Total...................................... 100% 100% 100% 100% 100%

___________________

(1) Includes liquid packaging board, carbonless paper, base paper for laminated paper and coated wood-free specialties.

The Company is party to certain agency agreements whereby the Company agrees to sellthird parties' softwood kraft pulp. The Company does not produce softwood kraft pulp. See “—Business Strategy” and “—Research and Development.”

The Company was awarded the ISO 9001 standard system certificate for internationalquality by the Bureau Veritas Quality International in 1996. The ISO 9001 award is an extensionof the ISO 9002 certificate awarded to the Company in February l993. The ISO 9001 certificate isintended to assure the Company's customers that they are purchasing a product produced and soldunder strict quality control and specifications. The ISO 9001 system covers all activities of theCompany, including forestry operations, development, manufacturing, sales and services ofbleached eucalyptus pulp.

Competition

While the Company competes with other producers of bleached hardwood kraft marketpulp, the Company's most direct competitors are other producers of eucalyptus pulp due to thespecial characteristics of this fiber. To a lesser degree, all producers of hardwood pulp competewith producers of softwood pulp and with other raw materials, such as recycled paper.

Competition is based primarily on quality (particularly consistency of product), service,price and reliability. The Company and other Brazilian eucalyptus pulp producers havesignificant cost advantages over producers in other regions. See "—Raw Materials —Wood". The Company, however, does not generally compete on the basis of price alone. Instead, theCompany emphasizes quality, reliability and stable long-term relationships with customers.

If demand for recycled paper increases in the future, demand for pulp could be adverselyaffected. While no assurance can be given, the Company believes that increases in demand forrecycled paper would not materially affect the results of operations of the Company, at least in the

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near future, because (i) it is more costly to produce recycled paper using current technology due tothe high costs of sorting out wastes and de-inking the recycled fiber, and (ii) the Company'scustomers are predominantly manufacturers of higher quality paper products such as premiumtissue paper, coated papers and specialty papers, which are less likely to use recycled fibers fortheir products.

Bleached Eucalyptus Kraft Market Pulp

The Company is the largest producer and exporter of bleached eucalyptus kraft marketpulp in the world. The Company's main competitors in this market are located in Brazil, Portugal,Chile and Spain and are listed by country (without any priority as to order) in the following table:

Producer Country

Cenibra ...................................................................................................... BrazilBahia Sul ................................................................................................... BrazilRiocell S.A ................................................................................................ BrazilJari Celulose S.A....................................................................................... BrazilVotorantim Celulose e Papel..................................................................... BrazilFlorestal Industrial Sante Fé...................................................................... ChileEmpresa de Celulose e Papel de Portugal SGPS, S.A. ("Portucel") ......... PortugalSociedade Portuguesa de Celulose S.A..................................................... PortugalCelulose Beira Industrial S.A.................................................................... PortugalCelulosas de Asturias S.A. ........................................................................ SpainEmpresa Nacional de Celulosas S.A. ........................................................ SpainScott lbérica S.A........................................................................................ SpainArauco ....................................................................................................... Chile

Management estimates that the five major producers of bleached eucalyptus kraft marketpulp in the world (the Company, CENIBRA, Empresa Nacional de Celulosas S.A., Portucel, andBahia Sul) accounted for 54% of the total world production capacity of bleached eucalyptus kraftmarket pulp in 1998, with the Company accounting for 19% of world eucalyptus productioncapacity and 7% of the world production capacity of bleached hardwood kraft market pulp. TheCompany was the largest producer of eucalyptus market pulp in the world in 1998, producing1,166,000 tonnes.

Bleached Hardwood Kraft Market Pulp

To the extent that pulp from other hardwoods can be substituted for the slightly moreexpensive bleached eucalyptus kraft pulp, the Company also competes with producers of pulpfrom other hardwoods. Such competition is based more on cost and less on quality or suitability

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of the pulp for use in higher quality paper products. Although bleached hardwood kraft marketpulp is produced in most regions of the world, the dominant producers are located in NorthAmerica, Latin America, Western Europe and the Scandinavian countries (Finland, Norway andSweden), which in 1998 are estimated to have accounted for 78% in aggregate, and respectively31%, 20%, 17% and 10% of the world's bleached hardwood kraft market pulp productioncapacity. Producers in the United States sold approximately 3,100,000 tonnes during 1995;2,773,000 tonnes during 1996; 2,766,000 tonnes during 1997; and 2,200,000 tonnes during 1998,while Brazilian producers sold approximately 2,122,000 tonnes; 2,634,000 tonnes; 2,770,000tonnes; and 3,170,000 tonnes, respectively, in such periods. Several of the Company'scompetitors in this market are larger than the Company and may have greater economic and otherresources than the Company.

Worldwide production capacity for bleached hardwood kraft market pulp grew 5.9% from1990 to 1998, totaling 16.2 million tonnes, and is expected to grow at an annual rate of 2.3%during the period of 1998 to 2001 (or approximately 1.1 million tonnes in total during thisperiod). Approximately 40% of this growth in capacity is expected to occur in Latin America,where bleached eucalyptus kraft market pulp capacity is expected to grow from approximately 3.7million tonnes in 1998 to approximately 4.2 million tonnes in the year 2002. Worldwide demandfor bleached hardwood kraft market pulp is expected to grow by 4.15 % per year from 1998through 2001, adding 1.83 million tonnes to present demand 1.

Research and Development

During 1996, 1997 and 1998, the Company's research and development expenditurestotaled approximately US$5.3 million, US$4.9 million and US$ 4.9 million respectively. TheCompany believes that its research and development activities are an important part of theCompany's on-going effort to maintain its competitive edge. The Company strives to develophigh quality forests, with high productivity at minimum cost, in specific ecosystems, and toproduce the highest quality wood pulp, with minimum environmental impact.

As a result of the continuous use of the latest available technology in planting and growingtrees, the development and use of high-productivity clones and its forest management strategy, thewoodpulp yield from the Company's eucalyptus plantations has been increased from an average of6.7 tonnes of pulp per hectare per year, for the trees planted in the early seventies, to 11.7 tonnesof pulp per hectare per year, for the new clones planted in the last decade. New biotechnology

1 Source: The International Pulp Statistical Committee (IPSC) which includes the American Forest Paper Association (AFPA),

the Canadian Pulp & Paper Association (CPPA), the Finnish Forest Industry Federation (FFIF) and the Brazilian Pulp andPaper Association (Bracelpa)).

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techniques have been applied every year to the Company's production processes, in order toincrease process yield and decrease production costs. Studies have also been geared towardsdevelopment of new fiber sources, including new eucalypt hybrids, as well as other genera.

Research on wood components and their modifications during production of bleachedpulp, as well as evaluation and adaptation of new production processes have been undertaken,together with development of new methods of chemical and physical modification of fibercharacteristics, to meet market demands and maintain competitiveness. These studies havefocused on the optimization of different pulping and bleaching alternatives, as well as extendeddelignification with oxygen, ozone and enzymes and the continuous development andoptimization of chlorine-free bleaching. More fundamental research has been performed on ligninstructure and its modifications during pulping and bleaching using novel techniques such asatomic force microscopy. Most of the new technology has been applied in the development andstart up phases of the Modernization Project.

The development of specific pulp qualities to meet differentiated market demands is alsoone of the Company's present priorities. This work integrates the forest improvement programwith all process development results.

The Company believes that technological cooperation is an important part of managementof its competitive advantages, and has been exploring opportunities to cooperate in thedevelopment of process and environmental technologies with different partners, whilesimultaneously monitoring its competitors' strengths. See "—Business Strategy" and "—Marketsand Customers".

Environmental and Other Regulatory Matters

The Company's mills and forestry operations are subject to governmental regulations andapprovals.

The State of Espírito Santo requires local manufacturing concerns to obtain variouspermits, including operating permits for manufacturing facilities. Pursuant to state law, stateauthorities are empowered to regulate the Company's operations by prescribing company-specificenvironmental standards in each company's operating permit. On February 10, 1998, the State ofEspírito Santo issued to the Company a two-year operating permit. The operating permit requiresthat the Company maintain certain emissions, effluent and waste disposal standards. Beginning inMarch 1997, the Company became subject to an environmental audit every three years.

The Company's installation permit granted by the State of Espírito Santo in January 1988contains certain provisions which limit the Company from purchasing additional land in the Stateof Espírito Santo. See "—Raw Materials—Wood".

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The Company's forestry activities are regulated by the Brazilian federal government andthe governments of the States of Espírito Santo and Bahia. The Company's operating permit forits forest operations in Espírito Santo was renewed for a two year-period commencing on March4, 1998. In order to meet the increasing wood requirements resulting from the Expansion Project,the Company purchased 92,000 hectares of land in the State of Bahia and entered into contractswith farmers in the State of Espírito Santo pursuant to which the farmers have agreed to growtrees for sale to the Company. See "—Raw Materials—Wood" and "Item 3. Legal Proceedings". In 1996, the Company received an operating permit for its forest operations in the State of Bahiawhich is valid for a five-year period.

Plantings may be undertaken only pursuant to a plan presented to and approved by theappropriate governmental authorities. In accordance with federal law, at least 20% of theCompany's landholdings must be preserved uncultivated or planted with indigenous species. TheCompany actually exceeds this requirement, since such uncultivated or indigenous species landaccounts for approximately 29% of the Company's total landholdings.

The Company believes that it is in compliance in all material respects with all applicableenvironmental regulations. In addition, environmental considerations are fundamental in thedevelopment of new technologies. The Company's integrated pest management relies onbiological control of pests and diseases. Soil and plant nutrients are continuously monitored toguarantee an adequate balance. The principles of sustainable development are also applied in thestudy of the biodiversity of flora and fauna. At the mill, methods for the evaluation ofenvironmental effects of effluents on receiving bodies have been developed and used. The originsof pulp and effluent toxicity have been studied, considering all possible sources, from the rawmaterial (wood) to bleaching effluents. In addition, environmental quality is considered in thedevelopment of new technologies and products. Pulp products are continuously evaluated interms of their possible effects on the quality of effluents of the Company's customers' papermachines as well.

In 1996, a public hearing was held in the State of Bahia, as part of the process for issuingenvironmental permits in that state. As part of this process, the State of Bahia issued a five yearoperating permit to the Company beginning July 26, 1996.

In 1996, the State of Espírito Santo granted Aracruz a two year operating permit for theforestry farmers' program. This operating permit is in the process of being renewed for anothertwo-year period beginning June, 1998. See " Raw Materials —Wood".

In 1996, the State of Bahia granted a permit for the location of the Company’s newsawmill, the Tecflor Project. See " Business Strategy".

Income Tax Exemption

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In May 1987, the Company was granted an exemption from Brazilian federal incometaxation on its profits from export sales, which expired in May 1997. The Company's profits fromexport sales are subject to federal income tax at the full rate, which is currently 25%. Without theexemption the Company would have been subject to an additional Brazilian federal income taxexpense of US$34.2 million in 1996, which would have been partially offset by tax losscarryforwards available for use against non-exempt taxable earnings. In 1998 the Companygenerated US$24.9 million of tax credit, compared to an expense of US$16.9 million in 1997 andUS$6.8 million in 1996. See Note 4 to the Consolidated Financial Statements.

Year 2000 Compliance

For a discussion of the Company’s Year 2000 compliance process, see "Item 9.Management’s Discussion and Analysis of Financial Condition and Results of Operation— Year2000 Compliance".

Employees

At December 31, 1998, the Company employed 1,972 people, down 17.6% from 2,393employees at the end of 1997. At March 31, 1999, the Company employed 1,780 people. Thisdecline was primarily due to an on-going restructuring program commenced in 1990 to increaseproductivity and reduce overhead expenses as well as normal turnover. Such reduction has beenpartially offset by the hiring of independent contractors for various projects.

All of the Company's employees are subject to collective bargaining agreements withseven unions. Each collective bargaining agreement is renegotiated annually in November. InMarch 1999, the Company completed negotiations of its agreements with all seven unions for theyear ending October 31, 1999.

In December 1994, the Executive Branch of the Brazilian government issued a provisionalmeasure giving employees the right to receive a bonus based on certain operating results of theiremployer. This right is contemplated in the Brazilian Constitution. The provisional measureprovides that each company and its employees shall agree on the details of such bonus plan,including the calculation of the amount of the bonus and the applicable payment periods.

Pursuant to the provisional measure, the Company established in 1995 two bonus plans,one for the management employees of the Company and a separate one for the non-managementemployees, which meet the requirements of the provisional measure. Any bonus to be paid undereither of the plans is based on the Company reaching certain operating targets and financialresults. The total amount paid by the Company under these bonus plans for 1998 amounted to

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US$4.1 million. The Company has completed negotiations with six unions (which representapproximately 55% of its employees), concerning the Company’s 1999 bonus plan. Theremaining union, Sinticel, representing 45% of the employees, has not accepted the terms of theCompany’s 1999 bonus plan. Therefore, the Company is not legally required to pay bonus to suchemployees for the year of 1999.

Since 1995, numerous other Brazilian companies have negotiated bonus plans with theiremployees. Although the provisional measure has been continuously reissued over the past fouryears by the Brazilian government, the Company is unable to predict whether the provisionalmeasure will be ultimately approved by the Brazilian Congress or allowed to lapse by theExecutive Branch of the Brazilian government.

The Company provides certain social benefits to its employees, including funds to operatea school. The Company contributes, jointly with the employees, to an employee pension fund,most of the trustees of which are also officers of the Company.

The Company has also built a significant number of residential homes and relatedcommercial facilities to provide its employees with affordable housing and certain amenities. InMay 1994, the Company initiated a program to sell all of its employee residential properties andrelated commercial properties in order to reduce or eliminate related maintenance expenses. Through December 31, 1998 the Company has sold substantially all of the properties, realizing anet loss of US$4.9 million on such sales. The carrying value of the remaining properties atDecember 31, 1998, for which no allowance for loss has been provided, was US$0.4 million.

Insurance

The Company believes that its insurance coverage is in line with Brazilian andinternational industry standards.

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Item 2. Description of Property

The Company is headquartered in Rio de Janeiro and its production facilities are locatedprincipally in the Brazilian coastal State of Espírito Santo. The Company's production facilitiesconsist of a eucalyptus pulp mill which has two production units, each with two production lines,and an electrochemical plant that services the mill. The Company owns approximately 214,000 hectares of land, of which approximately 138,000 are planted eucalyptus forests. The pulp mill islocated approximately 1.8 kilometers from the port facilities at Barra do Riacho, which are 51%owned by the Company. See "Item 1. Description of Business—The Mill—Eucalyptus Forests—Transportation".

Item 3. Legal Proceedings

The Company is a party to a number of legal actions arising from its normal businessactivities. Although the amount of any liability that could arise with respect to these actionscannot be accurately predicted, in the opinion of the Company, except as described below, suchactions, if decided adversely, would not, individually or in the aggregate, have a material adverseeffect on the financial condition of the Company.

The Company has been involved in legal proceedings with the State of Espírito Santoconcerning the State's imposition of value-added tax on the Company's export revenues. Prior toSeptember 1992, the Company contested the imposition of value-added tax through legalproceedings and paid the amounts in dispute into an escrow account. Pursuant to a May 1994settlement reflected in state legislation, the amounts held in escrow were released in part to theCompany outright and in part to the State with a corresponding credit for the Company againstfuture value-added taxes on domestic sales. The amount released to the Company in 1994 wasUS$19.1 million, including US$2.5 million of interest, and the corresponding credit amounted toUS$6.6 million. At December 31, 1995 such credit had been used by the Company in its entirety. See "Item 9. Management's Discussion and Analysis of Financial Condition and Results ofOperations—Results of Operations". From September 1992 through April 1994, the Companywas exempt from value-added tax on its exports revenues pursuant to an agreement among allBrazilian states to exempt pulp export revenues from value-added tax. In May 1994, theCompany’s export revenues became subject to value-added tax at a rate capped by State law at4.55% of the Company’s total export revenues. Pursuant to Complementary Law No. 87 ofSeptember 13, 1996, the Company’s export revenues are no longer subject to value-added tax.

In 1991 the Company was involved in a legal proceeding before the local Labor Court,relating to wage adjustments with the labor union representing certain of the Company's industrialarea employees. The Regional Labor Court which presided over this proceeding ruled in favor ofthe union and ordered the Company to adjust the affected employees' salaries to take into account

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inflation for the period between February 18, 1990 and March 15, 1990. The Company hasappealed this judgment to the Superior Labor Court which ruled in favor of the Company in afinal decision.

The Company has obtained a favorable final decision in all of the claims brought by itsemployees from the forestry and industrial area and its union, under which they were demandingcompensation for commuting time other than one claim in which the Company was required topay approximately US$1.0 million. Im July 1998 the Company paid approximately US$ 0.7million in a settlement with the union, extinguishing such claim.

The Company received an unfavorable judgment in 1995 in relation to a suit brought bycertain employees and their union for additional compensation for alleged hazardous workingconditions at the mill. The court's decision established a framework for computing the amount ofliability which has not yet occurred. Based on this framework and existing Superior Labor Courtprecedents, the Company estimated its potential liability at US$10.3 million, established a reservein such amount on the Company's books in 1995 and has appealed this judgment. In 1997, theamount of the reserve was increased to US$14.6 million. In five other similar suits, expert studieshave been completed but no judgement has been rendered. Based on existing precedent andanalysis of the framework established in the first case for computing damages, the Companyrecorded at December 31, 1998 a provision for eventual losses in the six cases of US$ 20.4million. For additional information regarding the labor suits, see Note 15 to the ConsolidatedFinancial Statements.

In October 1993, the Brazilian Federal Prosecutor brought a suit against the Company, theState of Espírito Santo and IBAMA (the Brazilian environmental protection agency) to halt allactivities of the farmers' program described in "Item 1. Description of Business—RawMaterials—Wood" and to seek damages on the grounds that the program did not follow certainprescribed environmental procedures. Although the litigation is still pending in Brazilian federalcourts, the Company has been allowed, pursuant to an interim judicial decision, to continue theprogram with respect to areas other than native forest and areas cultivated with other plantings. The Company does not believe, based on its current supply of wood and its current level ofdemand as well as its ability to purchase wood from third party suppliers, if necessary, that anadverse decision will have a material adverse effect on its operations.

In January 1997, the National Indian Foundation (FUNAI), the Brazilian governmentagency responsible for Indian affairs instituted an administrative proceeding to force the Companyto relinquish 13,000 hectares of its property to enlarge neighboring Indian reservationsencompassing the Indian communities of Pau Brasil, Caieiras Velhas and Comboios. In January1997, the Company filed its arguments and related documents before FUNAI stating that theCompany was a good-faith owner, since it had legally acquired such land from the former owners,based on proper documentation. In March 1998, the Ministry of Justice issued the Edicts Nos.193, 194 and 195, which provided solely for the enlargement of the Indian reservation by 2,571

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hectares of land belonging to the Company. In April and June 1998, the Company signed twoTerms of Settlement with the Indian communities of Pau Brasil, Caieiras Velhas and Comboioswhich settled the administrative proceeding and which, (i) the Indians recognized the legitimacyof Edicts Nos. 193, 194 and 195 and (ii) provides for the commitment of the Company to afinancial aid program for social, agricultural, educational, shelter and health projects, in anamount of approximately R$13.5 million (US$11.7 million on June 30, 1998),over a 20-yearperiod. The financial aid program is subject to the performance by the Indian communities of thefollowing main obligations: (a) the formation of an Association to receive the funds; (b) thedelivery to Aracruz of a proposed allocation of funds approved by two representatives of eachIndian village, by the Association’s board, by the National Indian Foundation—FUNAI and by theBrazilian Federal Prosecutor ("BFP"); (c) the use of the funds exclusively in projects whichguarantee the subsistence of all members of the communities; such use of the funds to bemonitored by a commission formed by FUNAI and Indian communities members not affiliated tothe Association's board and to be reviewed of FUNAI and the BFP; (d) the observance of agreedboundaries; and (e) the guarantee of Aracruz’s right to use the existing roads in the enlarged areasobject of the reservation. If the Indian communities breach any of their obligations, Aracruz willbe released of its obligations under the Terms of Settlement. Through March 31, 1999, theCompany advanced approximately R$ 1.7 million (US$ 1.4 million), in accordance with theTerms of Settlement. For additional information, see Note 15 of the Consolidated FinancialStatements.

Item 4. Control of Registrant

Of the Company's three classes of capital stock outstanding, only the common stock,without par value (the "Common Stock"), has voting rights. Approximately 96.5% of theCommon Stock of the Company is owned by the following four principal shareholders (the"Principal Shareholders"): Arapar S.A. (a company associated with the Chairman of the Board ofthe Company), S.O.D.E.P.A. - Sociedade de Empreendimentos, Publicidade e Participação S.A.("SODEPA") (an affiliate of Banco Safra S.A.), Mondi Brazil Limited (a subsidiary of AngloAmerican Corporation of South Africa Limited) and BNDES Participações S.A. - BNDESPAR(an affiliate of the Company's principal bank lender, Banco Nacional de DesenvolvimentoEconômico e Social (the National Bank for Economic and Social Development or "BNDES", adevelopment bank wholly owned by the Brazilian government). Accordingly, the PrincipalShareholders have the ability to control the election of the Company's Conselho de Administração("Board of Directors") and the direction and future operations of the Company, includingdecisions regarding acquisitions and other business opportunities, the declaration of dividends inexcess of the required amounts as set forth under the Company's Estatuto Social ("By-Laws") andBrazilian corporate law, and the issuance of securities. See "Item 13. Interest of Management inCertain Transactions—Shareholders' Agreement".

Mondi Brazil Limited purchased its holding of 127.5 million shares of the Company’sCommon Stock from the Company's former shareholder, Souza Cruz S.A., on June 13, 1996.

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Mondi Brazil Limited has expressed its commitment to the Company's policy of focusing on itspulp business and reducing its holdings of Real-denominated investments. See "Item 9. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources".

The following table sets forth the amount and percentage ownership at December 31, 1997of each shareholder known to the Company to own more than 10% of each class of its capitalstock and of the Company's officers and directors as a group:

Share Ownership at December 31, 1998Common Stock Class A Stock (1) Class B Stock (1)

Name of Owner (in millions, except percentages)

Mondi Brazil Limited (2) ....................... 127.5 28.0% --- 0.0%---

0.0%

Arapar S.A. (3) (4) (5)............................. 127.5 28.0 --- 0.0 4.5 0.8

Sociedade de Empreendimentos, Publicidade e Participação S.A. (6) ................................................ 127.5 28.0 27.6 67.4 59.8 10.3

BNDES Participações S.A. (7) ................ 56.9 12.5 10.0 24.4 50.2 8.6

Others ..................................................... 16.0 3.5 3.4 8.2 467.0 80.3

Total........................................................ 455.4 100.0% 41.0 100.0% 581.5 100.0%

Officers and directors as a group ............. (8) (8) (8)

Source: Banco Itaú S.A.

(1) Each share of ações preferenciais classe A ("Class A Stock") may be converted into one share of ações preferenciais classe B ("Class BStock") at any time at the holder's option. Shares of Class B Stock are not convertible into shares of Class A Stock.

(2) Mondi Brazil Limited purchased its Common Stock from the Company’s former shareholder, Souza Cruz S.A., on June 13, 1996.(3) Lorentzen Empreendimentos S.A. owns indirectly approximately 44.7% of Arapar S.A. Lorentzen Empreendimentos S.A. is indirectly

controlled by Erling Sven Lorentzen, Chairman of the Company's Board of Directors. Haakon Lorentzen, also a member of the Company'sBoard of Directors, owns indirectly 2.6% of the stock of Lorentzen Empreendimentos S.A.

(4) Fort James International Holdings Ltd. owns indirectly approximately 43.7% of Arapar S.A. through its wholly owned subsidiary, BrusaraParticipações Ltda., and its other affiliates. Fort James International Holdings Ltd. is a subsidiary of Fort James Corporation, which is one ofthe 10 largest customers of the Company, accounting for approximately 5.7% of total sales of the Company during 1998.

(5) Den norske Bank ASA owns indirectly approximately 23.3% of Arapar S.A. Den norske Bank ASA has agreed to finance the Company’sacquisition of certain equipment. See "Item 13. Interest of Management in Certain Transactions—Other Matters".

(6) Albatroz S.A., previously a shareholder, was merged into Safra Holding S.A. in January 1995, which in turn was merged into SODEPA inMarch 1996.

(7) A wholly owned subsidiary of BNDES.(8) Officers and directors as a group own less than 1.0% of each category of stock.

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Item 5. Nature of Trading Market

The principal non-United States markets for the Company's Class B Stock are on the Bolsade Valores de São Paulo (the "São Paulo Stock Exchange") and the Bolsa de Valores do Rio deJaneiro (the "Rio Stock Exchange"). In the United States, the Class B Stock trades in the form ofAmerican Depositary Shares (the "ADSs"), which are evidenced by American DepositaryReceipts issued by Morgan Guaranty Trust Company of New York as Depositary (the"Depositary"), each currently representing ten shares of Class B Stock. The ADSs are listed onthe New York Stock Exchange (the "NYSE") under the symbol "ARA".

Market Price Information

The table below sets forth for the periods indicated the high and low sales prices for (i) theClass B Stock on each of the Rio Stock Exchange and the São Paulo Stock Exchange and (ii) theADSs on the NYSE. Prices on the Rio Stock Exchange and São Paulo Stock Exchange aredetermined independently on each exchange and need not have occurred on the same date. Suchhigh and low sales prices have been restated in Reais of constant purchasing power based oninflation as measured by the Indice Nacional de Preços ao Consumidor (the "National ConsumerPrice Index" or the "INPC"). See "Item 6. Exchange Controls and Other Limitations AffectingSecurity Holders" for information with respect to exchange rates applicable during the periods setforth below. Information for all periods shown below has been adjusted to reflect (i) a stock spliteffective May 15, 1992, pursuant to which holders of Class A Stock and Class B Stock receivedone share of Class B Stock for every 10 shares of Class A Stock or Class B Stock held, andholders of Common Stock outstanding on such date received one share of Common Stock forevery 10 such shares held, (ii) a stock split effective May 13, 1994, pursuant to which holders ofClass A Stock and Class B Stock received one share of Class B Stock for every two shares ofClass A Stock or Class B Stock held, and holders of Common Stock received one share ofCommon Stock for every two such shares held (the "1994 Stock Split"), (iii) the 1995 Stock Spliteffective April 5, 1995, pursuant to which holders of Class A Stock and Class B Stock receivedone share of Class B Stock for every three shares of Class A Stock or Class B Stock held andholders of Common Stock received one share of Common Stock for every three shares ofCommon Stock held (the "1995 Stock Split") and (iv) a change effective March 17, 1997 in thenumber of shares of Class B Stock underlying each ADS from five shares of Class B Stock perADS to ten shares of Class B Stock per ADS (the "ADS Ratio Change").

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Nominal ReaisperShare of Class B Stock

U.S. Dollars per ADS (1)

Rio StockExchange

São PauloStock Exchange NYSE

High Low High Low High Low

1995:First Quarter...... R$2.04 R$1.53 R$2.04 R$1.41 $19.88 $14.62Second Quarter . 2.47 1.94 2.48 1.87 23.76 18.00Third Quarter .... 2.89 2.27 2.91 2.14 27.50 19.26Fourth Quarter . 2.23 1.71 2.24 1.68 20.76 15.00

1996:First Quarter ..... R$2.13 R$1.60 R$2.14 R$1.56 $19.26 $14.26Second Quarter . 2.17 1.72 2.19 1.69 20.00 15.50Third Quarter .... 2.09 1.79 2.09 1.78 19.26 16.50Fourth Quarter .. 1.93 1.70 1.93 1.70 18.00 15.50

1997:First Quarter ..... R$2.06 R$1.80 R$2.09 R$1.74 $19.26 $16.26Second Quarter . 2.27 1.90 2.27 1.86 20.88 16.25Third Quarter .... 2.46 2.25 2.48 2.18 22.56 20.13Fourth Quarter .. 2.24 1.50 2.34 1.44 20.81 13.00

1998:First Quarter...... R$1.88 R$1.58 R$1.87 R$1.47 $16.75 $13.12Second Quarter . 1.85 1.67 1.90 1.27 16.62 10.81Third Quarter .... 1.30 0.62 1.35 0.57 11.81 4.69Fourth Quarter .. 1.35 1.10 1.35 0.74 11.44 6.44

1999:First Quarter 2.96 0.96 3.00 0.93 14.94 7.94

(1)All information on a per ADS basis for the indicated period has been adjusted to reflect the ADS Ratio Change, pursuant towhich each ADS represents ten shares of Class B Stock.

The closing sales price for the Class B Stock on the São Paulo Stock Exchange as of theclose of business on March 31, 1999 was R$2.50 per share, which is equivalent to US$14.16 perADS, translated at a rate of R$1.7655 per US$1.00, the commercial market rate for such day. The closing sales price for the ADS on the NYSE as of the close of business on March 31, 1999was US$14.50 per ADS.

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At December 31, 1998, an aggregate of 326,059,172 shares of Class B Stock, or anaggregate of approximately 56.1% of the outstanding Class B Stock, was held in the form ofADSs by registered holders in the United States.

To take advantage of the market price of its stocks, the Company engaged in a stock buy-back program in late 1997. In 1997 and 1998 the total number of Class B shares bought underthis program was 6,394,000 and 21,832,000 at a total cost of approximately US$8.6 million andUS$26.4 million, respectively.

The following presentation sets forth information regarding the average daily tradingvolume of (i) the Class B Stock on each of the Rio Stock Exchange and the São Paulo StockExchange and (ii) the ADSs on the NYSE (adjusted to reflect the ADS Ratio Change) for each ofthe periods indicated:

Average Daily Number of Sharesof Class B Stock Traded

Average DailyNumber of ADSs

Traded (1) Rio

Stock Exchange São Paulo

Stock Exchange Total NYSE

1995:First Quarter............................ 11,076 438,806 449,883 73,083Second Quarter ....................... 71,118 1,867,830 1,938,948 84,102Third Quarter .......................... 47,828 2,077,140 2,124,968 113,818Fourth Quarter ........................ 44,716 584,366 629,082 119,125

1996:First Quarter............................ 53,316 1,333,083 1,386,399 191,008Second Quarter ....................... 12,623 781,337 793,960 154,100Third Quarter .......................... 82,773 344,015 426,788 71,785Fourth Quarter ........................ 11,200 252,217 263,417 68,281

1997:First Quarter............................ 121,593 733,186 854,779 115,932Second Quarter ....................... 26,852 497,967 524,819 110,316Third Quarter .......................... 7,297 702,328 709,625 122,681Fourth Quarter ........................ 183 1,302,500 1,302,683 142,666

1998:First Quarter............................ 40,614 994,193 1,034,807 120,918Second Quarter ....................... 1,333 759,407 760,740 106,575Third Quarter .......................... 10,800 1,515,048 1,525,848 169,130Fourth Quarter ........................ 175,883 762,334 938,217 123,868

1999:First Quarter............................ 12,667 660,334 673,001 226,230

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(1) Each ADS represents ten shares of Class B Stock.

Trading on the Brazilian Stock Exchanges

Of Brazil's nine stock exchanges, the São Paulo Stock Exchange and the Rio StockExchange are the most significant, accounting for approximately 100% of the value of the equitysecurities traded on the Brazilian stock exchanges. Securities may also be traded through the"Telecorrespondent" system, which allows financial institutions throughout Brazil to access theRio Stock Exchange directly, provided they have contracted with a member firm of the Rio StockExchange, and through the National Electronic Trading System ("SENN"), a computerized systemthat links the Rio Stock Exchange with seven smaller regional exchanges.

On December 31, 1998, the aggregate market capitalization of the 535 issuers listed on theSão Paulo Stock Exchange was R$194.4 billion (US$160.9 billion). Substantially the samesecurities are listed on the São Paulo Stock Exchange and on the Rio Stock Exchange. In 1998,the five most actively traded issues represented approximately 72.91% of the total trading in thecash market on the São Paulo Stock Exchange and 64.40% of the total trading in the cash marketon the Rio Stock Exchange. During 1998, the combined daily trading volume on these twoexchanges averaged approximately R$815.5 million (US$569.1 million).

Although all outstanding shares of an exchange-listed company may legally trade on aBrazilian stock exchange, in most cases less than half of the listed shares are actually available fortrading by the public, the remainder being held by small groups of controlling persons that rarelytrade their shares. This is particularly true in the case of mixed-capital companies, for which morethan 50% of the voting shares must by law be owned by Brazilian entities. For this reason, datashowing the total market capitalization of Brazilian stock exchanges may overstate the liquidity ofthe Brazilian equity securities market.

Economic conditions in Brazil are influenced by economic and securities marketconditions in other emerging market countries. Although economic conditions are different ineach country, investors’ reaction to developments in one country can have effects on the securitiesof issuers in other countries, including Brazil. For example, in December 1994, the MexicanGovernment sharply devalued the Mexican peso and allowed its value to float, setting off aneconomic crisis in Mexico and negatively impacting economic conditions in many LatinAmerican countries. The downturn in the Asian markets in late 1997 and the first half of 1998,had a negative effect on the economic conditions in many Latin American countries, includingBrazil. As a consequence of the most recent crisis in the Asian markets, Brazil experiencedsignificant downturns in its financial markets, with large decreases in Brazilian stock and bondprices and pressure for a devaluation of the Brazilian currency.

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In August, 1998, after Russia devaluated its currency, foreign investors withdrew fundsfrom emerging market countries. Brazil was particularly affected and its exchange reservesdecreased dramatically. The Brazilian Government responded with a series of austerity measuresincluding sharply increased interest rates, public spending cuts and tax increases. Despite thesemeasures, the pressures on the Real continued to grow and, as a response, the Central Bankallowed the Real to float which caused a sharp devaluation to R$ 2.165/US$ 1.00 on March 3,1999.

There can be no assurance that Brazilian economic conditions will not continue to beaffected negatively by events elsewhere, especially in emerging markets, or that such effects willnot adversely affect the market value of the Company’s securities including the ADSs. See “Item9. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Overview—Brazilian Economic Environment.”

Regulation of Brazilian Securities Markets

The Brazilian securities markets are governed principally by Law No. 6385 ofDecember 7, 1976 and Law No. 6404 of December 15, 1976, both as amended by Law No. 9457of May 5, 1997, and by regulations issued by the Comissão de Valores Mobiliários (the BrazilianSecurities Commission or the "CVM") and Conselho Monetário Nacional (the National MonetaryCouncil). These laws and regulations, among others, provide for disclosure requirements,restrictions on insider trading and price manipulation, and protection of minority shareholders. Nonetheless, the Brazilian securities markets are not as highly regulated and supervised as U.S.securities markets.

Item 6. Exchange Controls and Other Limitations Affecting Security Holders

There are two legal foreign exchange markets in Brazil: the commercial rate exchangemarket (the "Commercial Market") and the floating rate exchange market (the "Floating Market"). The Commercial Market is reserved primarily for foreign trade transactions and transactions thatgenerally require prior approval from Brazilian monetary authorities, such as transactions relatingto the purchase or sale of shares or the payment of dividends with respect to shares or ADSs. Purchase of foreign exchange in the Commercial Market may be carried out only through afinancial institution in Brazil authorized to buy and sell currency in that market. The CommercialMarket rate is the commercial selling rate for Brazilian currency into U.S. dollars, as reported bythe Brazilian Central Bank. The purchase of foreign exchange for repatriation of registeredcapital invested in Brazil, for remittance of dividends and for payment of principal of and intereston loans, notes, bonds and other debt instruments denominated in foreign currencies and dulyregistered with the Brazilian Central Bank is made in the Commercial Market. The obligors undersuch obligations may purchase the necessary foreign exchange to make the required payments

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abroad by presenting to a bank authorized to deal in foreign exchange the Certificate ofRegistration issued by the Brazilian Central Bank in connection with such obligations. TheFloating Market rate generally applies to specific transactions for which Brazilian Central Bankapproval is not required. Prior to the implementation of the Real Plan, the Commercial Marketrate and the Floating Market rate differed significantly at times. After the introduction of theReal, the two rates did not differ significantly.

On January 25, 1999, the Government eliminated the distinction between the CommercialMarket rate and the Floating Market rate by unifying all exchange positions of Brazilian financialinstitutions (all other rules applicable to each market remain the same). There can be no assurancethat a new differentiation in the rates will not be established in the future. Both the CommercialMarket rate and the Floating Market rate are reported by the Brazilian Central Bank on a dailybasis.

Both the Commercial Market rate and the Floating Market rate are freely traded but arestrongly influenced by the Brazilian Central Bank, which, prior to the implementation of the RealPlan, typically intervened in the Commercial Market in order to control fluctuations and toregulate disparities between the Commercial Market rate and the Floating Market rate. Afterimplementation of the Real Plan, the Brazilian Central Bank allowed the Real to float withminimal intervention. However, as described below, on March 6, 1995, the Brazilian CentralBank announced its intention to intervene in the foreign exchange markets and has subsequentlyintervened in the markets and taken other actions affecting such markets.

On August 1, 1993, the Cruzeiro Real replaced the cruzeiro as the unit of Brazilian currency,with each Cruzeiro Real being equal to 1,000 cruzeiros. Beginning in December 1993, the BrazilianGovernment began implementation of the Real Plan, which was intended to reduce inflation. On July1, 1994, the Real replaced the Cruzeiro Real as the unit of Brazilian currency, with each Real beingequal to 2,750 Cruzeiro Reais and having an exchange rate of R$ 1.00 to US$1.00. According toBrazilian law, the issuance of Reais is controlled by quantitative limits backed by a correspondingamount of U.S. dollars in reserves, but the Brazilian Government subsequently expanded thosequantitative limits and allowed the Real to float, with parity between the Real and the U.S. dollar(R$1.00 to US$1.00) as a ceiling.

On March 6, 1995, the Brazilian Central Bank announced that it would intervene in themarket and buy or sell U.S. dollars, establishing a band (faixa de flutuação) in which the exchangerate between the Real and the U.S. dollar could fluctuate. The Brazilian Central Bank initially setthe band with a floor of R$0.86 per US$1.00 and a ceiling of R$0.90 per US$1.00 and providedthat, from and after May 2, 1995, the band would fluctuate between R$0.86 and R$0.98 perUS$1.00. Since then, the Brazilian Central Bank has issued several directives establishing newbands, which went from R$0.88 and R$0.93 per US$1.00, to R$1.12 and R$1.22 per US$1.00 onJanuary 20, 1998. On January 13, 1999 the Real was devalued again and the band was set atR$1.20 and R$1.32 per US$1.00. Two days later, on January 15, 1999, due to severe pressures of

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the market, the Brazilian Central Bank abolished the band system and allowed the Real/U.S.dollar exchange rate to float freely. Since then, the Real/U.S. dollar exchange rate has beenestablished exclusively by the interbank market. The Brazilian Central Bank has only intervenedoccasionally to control unstable movements in the foreign exchange rate. There can be noassurance that the band system will not be imposed again in the future.

The following table sets forth information on the Central Bank's Commercial ExchangeRate for U.S. dollars for the periods and dates indicated. Amounts expressed in Reais have beentranslated from the predecessor currencies in effect during the relevant period at the rates ofexchange at the time the successor currency took effect.

Exchange Rates of Brazilian Currency per US$1.00

Period Low High Average (1) Period-End 1990 $0.000004 $0.000062 $0.000025 $0.000062

1991 0.000063 0.000389 0.000149 0.000389

1992 0.000393 0.004505 0.001655 0.004505

1993 0.004557 0.118584 0.032809 0.118584

1994 0.120444 1.000000 0.645000 0.846000

1995 0.834000 0.972600 0.917700 0.972500

1996 0.972500 1.04070 1.00496 1.03940

1997 1.0395 1.1164 1.0808 1.1164

1998 1.1165 1.2087 1.1643 1.2087

1999 - first quarter 1.2078 2.1647 1.9233 1.7220

1999 - second quarter (throughJune 15)

1.6487 1.7892 1.7246 1.7892

Source: Central Bank

(1) Represents the average of the month-end exchange rates during the relevant period.

Any payment of cash dividends and distributions with respect to shares of Class B Stockwill be paid in Reais by the Company to Banco Itau S.A., as custodian (including any successorthereto, the "Custodian"), which will then convert them into U.S. dollars in the CommercialMarket and will cause such U.S. dollars to be delivered to the Depositary for distribution to ADRholders. Consequently, the value of the ADSs and any cash dividends or distributions to bereceived from the Depositary may be affected by changes in the value of the Real relative to theU.S. dollar.

The registration at the Central Bank of the proceeds of an offering abroad of ADSs mustbe made by the authorized custodian bank on behalf of the depositary bank issuing ADRs whichrepresent such ADSs. The Central Bank is required to issue a certificate of registration in theamount of the foreign capital entering the country pursuant to that offering. Such registrationcertificate amount may be increased by the amount of any foreign currency that enters Brazil andis used to purchase shares that are deposited with a custodian bank, as agent for the depositarybank in Brazil, administering the corresponding ADR program. Similarly, such registration

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certificate amount may be decreased when ADR holders exercise their rights to exchange theirADSs for the underlying shares of Class B Stock. Remittances of dividends, capital gains andrepatriation of invested capital are permitted only pursuant to such a registration certificate. Alltransactions related to ADRs that involve foreign currency entering or leaving Brazil must becarried out at the Commercial Market rate.

Brazilian law provides that, whenever there is a serious imbalance in Brazil's balance ofpayments or serious reasons to foresee such imbalance, temporary restrictions may be imposed onremittances of foreign capital abroad. For approximately six months in 1989 and early 1990, forexample, to conserve Brazil's foreign currency reserves, the Brazilian Government froze alldividend and capital repatriations that were owed to foreign equity investors and these amountswere held by the Brazilian Central Bank. These amounts were subsequently released. There canbe no assurance that similar measures will not be taken by the Brazilian Government in the future. See “Item 9. Management’s Discussion and Analysis of Financial Condition and Results ofOperations—Overview—Brazilian Economic Environment.”

Item 7. Taxation

The following summary contains a description of the principal Brazilian and U.S. federalincome tax consequences of the purchase, ownership and disposition of Class B Stock or ADSs,but it does not purport to be a comprehensive description of all the tax considerations that may berelevant to a decision to purchase Class B Stock or ADSs. Prospective purchasers of Class BStock or ADSs should consult their own tax advisors as to the tax consequences of the purchase,ownership and disposition of Class B Stock or ADSs, including, in particular, the effect of anystate, local or other national tax laws.

The summary is based upon the tax laws of Brazil and the United States and regulationsthereunder as in effect on the date hereof, which are subject to change (possibly with retroactiveeffect). This summary is also based upon the representations of the Depositary and on theassumption that each obligation in the Deposit Agreement relating to the ADRs and any relateddocuments will be performed in accordance with its terms.

Although there is at present no income tax treaty between Brazil and the United States, thetax authorities of the two countries have had discussions that may culminate in such a treaty. Noassurance can be given, however, as to whether or when a treaty will enter into force or how itwill affect the U.S. Holders of Class B or ADSs. Prospective purchasers of Class B Stock orADSs should consult their own tax advisors as to the tax consequences of the acquisition,ownership and disposition of the Class B Stock or ADSs in their particular circumstances.

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Brazilian Tax Considerations

The following discussion summarizes the principal Brazilian tax consequences of theacquisition, ownership and disposition of Class B Stock or ADSs by a holder that is not domiciledin Brazil for Brazilian taxation purposes and, in the case of a holder of Class B Stock, who has aninvestment in foreign currency registered at the Central Bank (a "Foreign Holder"). The materialtax consequences applicable under current Brazilian tax law to Foreign Holders of Class B Stockor ADSs and does not specifically address all of the Brazilian tax considerations applicable to anyparticular Foreign Holder. Each Foreign Holder should consult his own tax adviser concerningthe Brazilian tax consequences of an investment in Class B Stock or ADSs. Any change in suchlaw may change the consequences described below.

Registered Capital

The amount of an investment in Class B Stock must be registered by the Foreign Holder ofsuch Class B Stock (or by the Custodian in the case of Class B Stock held by the Depositary) withthe Central Bank as "Registered Capital" in order to allow remittances outside Brazil of foreigncurrency acquired with the proceeds of distributions on, and amounts obtained from dispositionsof, such Class B Stock. The Registered Capital for each share of Class B Stock issued to theDepositary will be equal to its issue price (in U.S. dollars). The Registered Capital for a share ofClass B Stock that is withdrawn upon surrender of an ADS will be the U.S. dollar equivalent of(i) the average price of a share of Class B Stock on the two Brazilian stock exchanges on whichthe greatest number of such shares were sold on the day of withdrawal or (ii) if no such shareswere sold on that day, their average price on the exchanges on which the greatest number of suchshares were sold in the 15 trading sessions immediately preceding such withdrawal. The U.S.dollar value of the average price of the Class B Stock is determined on the basis of theCommercial Market rate for U.S. dollars entering Brazil in effect on the date the Class B Stock iswithdrawn or, at the Foreign Holder's option, the sale rate quoted for U.S. dollars by the CentralBank Information System on such date (or, if the average price of the Class B Stock is determinedunder clause (ii) of the preceding sentence, the average of such quoted sale rates on the same 15dates used to determine the average price of the Class B Stock).

Taxation on Distributions

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Imposto de Renda na Fonte—Withholding Income Tax. Dividends paid with respect toincome earned since January 1996 are not subject to Withholding Income Tax. However,dividends paid with respect to income earned until December 31, 1995 are subject to WithholdingIncome Tax at rates ranging from 15% to 25%, according to the tax legislation applicable to eachcorresponding year. The rate of such tax may be reduced under certain circumstances by a taxtreaty (at least with respect to shares not held by the Depositary). However, there is no tax treatybetween the United States and Brazil, and the only existing tax treaty that reduces the rate ofWithholding Income Tax to less than 15% is that between Brazil and Japan, which reduces therate of Withholding Income Tax to 12.5%.

Taxation on Gains

Gains on the Disposition of ADSs. Gains obtained outside Brazil by a Foreign Holder onthe disposition to another Foreign Holder of ADSs representing Class B Stock are not subject toBrazilian tax.

Deposits and Withdrawals of Class B Stock in Exchange for ADSs. A Foreign Holder maydeposit or withdraw Class B Stock in exchange for ADSs without incurring Brazilian tax. Onreceipt of the underlying Class B Stock, the Foreign Holder will be entitled to register the U.S.dollar value of such shares with the Central Bank as described above in "Registered Capital" andwill be subject to the rules on Taxation on Distributions and Taxation of Gains applicable to theClass B Stock, discussed herein. Such rules generally are less favorable to Foreign Holders thanthe rules applicable to ADSs. In addition, such a Foreign Holder may experience delays ineffecting such registration, which may delay remittances abroad. Such a delay may adverselyaffect the amount, in U.S. dollars, received by the Foreign Holder.

Gains on the Disposition of Class B Stock. Foreign Holders are not subject to tax in Brazilon gains obtained on sales of Class B Stock that occur abroad to persons who are not resident inBrazil or on the proceeds of a redemption of, or liquidating distribution with respect to, the ClassB Stock. Beginning January 1, 1996 Foreign Holders are subject to Withholding Income Tax (i)at a rate of 15% on gains obtained on sales or exchanges to, or with, a resident in Brazil and (ii) ata rate of 10% on gains obtained on sales or exchanges that occur in Brazil (e.g., on a Brazilianstock exchange). However, a Foreign Holder who withdraws Class B Stock in exchange forADSs generally will not be subject to Withholding Income Tax. The gain obtained as a result of atransaction on a Brazilian stock exchange is the difference between the amount in Braziliancurrency obtained on the sale or exchange and the acquisition cost, without any correction forinflation, of the Class B Stock sold. The gain obtained as a result of a transaction outside of aBrazilian stock exchange will be calculated based on the Registered Capital for the Class B Stocksold. Reductions in the rate of Withholding Income Tax provided for in tax treaties do not applyto the Withholding Income Tax on such gains. The tax on gains is collected out of the proceeds ofa sale or exchange by the stock exchange in the case of sales effected through a Brazilian stockexchange and, in other cases, by the purchaser.

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Taxation on Income Obtained Abroad

Prior to January 1, 1996, Brazilian tax laws taxed earnings related to the activitiesperformed within Brazil by Brazilian companies, branches of foreign companies and non-residentsin general. Since January 1, 1996, profits, capital gains and other income obtained abroad by aBrazilian company or by its foreign branches or subsidiaries or by foreign companies controlledby or affiliated to it must be computed in the determination of such Brazilian company’s profitsand therefore taxed in Brazil, when distributed or otherwise made available to the Brazilianshareholders. Since the overseas subsidiaries of the Company do not contribute significantly tothe consolidated financial performance of the Company, the Company does not expect anyadditional taxation which may be payable as a result of this change to be material.

Stamp and Excise Taxes

There are no stamp, transfer, estate, gift or other similar taxes in Brazil applicable to theClass B Stock or to the ADSs.

United States Tax Considerations

The following discussion summarizes the principal U.S. federal income tax consequencesof the acquisition, ownership and disposition of Class B Stock or ADSs. The followingdiscussion deals only with the U.S. Holders (as defined below) that will hold Class B Stock orADSs as “capital assets” (generally property held for investment) within the meaning of Section1221 of the Internal Revenue Code of 1986, as amended (the “Code”), and does not address thetax treatment of holders that may be subject to special tax rules, such as banks, insurancecompanies, dealers in securities, persons that will hold Class B Stock or ADSs in a hedgingtransaction or as a position in a “straddle” or “conversion transaction” for tax purposes, personsthat have a “functional currency” other than the U.S. dollar and persons that own or are treated asowning 10% or more of the voting shares of the Company. In the opinion of Shearman &Sterling, this discussion, insofar as it relates to U.S. federal tax matters currently applicable toholders of Class B Stock or ADSs, fairly summarizes, subject to the limitations stated herein, thematerial tax consequences of acquiring, owning and disposing of the Class B Stock or ADSs.

This summary is based on the Code, judicial decisions, published rulings, administrativepronouncements and Treasury Regulations, as in force on the date of this Annual Report on Form20-F, changes (or changes in interpretation) to any of which could apply on a retroactive basis andaffect the tax consequences described herein. In addition, such statements are based in part onrepresentations of the Depositary and assume that the obligations contemplated by the DepositAgreement and related documents will be performed in accordance with their terms. Thissummary is not exhaustive of all possible tax considerations and each prospective purchaser is

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advised to consult his own tax advisor concerning the overall tax consequences to him, includingthe consequences under state and local laws, of the acquisition, ownership and disposition ofClass B Stock or ADSs. In this discussion, references to "ADSs" also refer to shares of Class BStock, references to a "U.S. Holder" are to a holder of an ADS (i) that is a citizen or resident ofthe United States of America, (ii) that is a corporation, partnership, or other business entitycreated or organized under the laws of the United States of America or any state thereof, (iii) thatis an estate or trust the income of which is subject to U.S. federal income taxation regardless of itssource or (iv) that is otherwise subject to United States federal income taxation on a net basis withrespect to the ADS (including a nonresident alien or foreign corporation that holds, or is treated asholding, an ADS in connection with the conduct of a U.S. trade or business), and references to a"non-U.S. Holder" are to a holder that is not a U.S. Holder.

For U.S. federal income tax purposes, U.S. Holders of ADRs will be treated as owners ofthe ADSs represented by such ADRs and of the Class B Stock represented by such ADSs.

Taxation of Dividends

A U.S. Holder will recognize ordinary dividend income for U.S. federal income taxpurposes in an amount equal to the amount of any cash and the value of any property distributedby the Company as a dividend to the extent that such distribution is paid out of current oraccumulated earnings and profits of the Company, as determined for U.S. federal income taxpurposes ("e&p"), when such distribution is received by the Custodian. To the extent that such adistribution exceeds the e&p of the Company, it will be treated as a non-taxable return of capital,to the extent of the U.S. Holder's tax basis in the ADS, and, to the extent in excess of such taxbasis, will be treated as gain from the sale or exchange of property. The taxable amount of anydistribution will include the amount of Brazilian tax withheld on the amount distributed, and theamount of a distribution paid in Reais will be measured by reference to the exchange rate forconverting Reais into U.S. dollars in effect on the date the distribution is received by theCustodian, regardless of whether the payment is in fact converted to U.S. dollars. If the Custodiandoes not convert such Reais into U.S. dollars on the date it receives them, it is possible that theU.S. Holder will recognize foreign currency loss or gain when the Custodian (or Depositary) doesconvert such Reais into U.S. dollars. U.S. Holders should consult their own tax advisors regardingthe treatment of any foreign currency gain or loss if any Brazilian currency amounts received bythe U.S. Holder or the Depositary are not converted into U.S. dollars on the date of receipt. Dividends paid by the Company will not be eligible for the dividends received deduction allowedto U.S. corporations under the Code.

Distributions out of e&p with respect to the ADSs generally will be treated as dividendincome from sources outside the United States and generally will be treated separately along withother items of "passive" (or in the case of certain U.S. Holders, "financial services") income forpurposes of determining the credit for foreign income taxes allowed under the Code. Subject tocertain conditions and limitations, the Brazilian withholding tax paid in connection with any

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distribution with respect to the ADSs may be claimed as a credit against the U.S. federal incometax liability of a U.S. Holder (or, if such U.S. Holder elects, such Brazilian withholding tax maybe taken as a deduction) in computing taxable income. The United States Treasury has expressedconcerns that holders of foreign securities, such as depositary shares or depositary receipts, maybe claiming foreign tax credits in situations where an intermediary has taken actions inconsistentwith the ownership of the underlying security by the person claiming the credit. Accordingly, thediscussion above regarding the creditability of Brazilian withholding tax on dividends could beaffected by future actions that may be taken by the United States Treasury. U.S. Holders shouldconsult their own tax advisers concerning the availability and utilization of the foreign tax credit.

A non-U.S. Holder generally will not be subject to U.S. federal income tax or withholdingtax on distributions with respect to ADSs that are treated as dividend income for U.S. federalincome tax purposes, and generally will not be subject to U.S. federal income tax or withholdingtax on distributions with respect to ADSs that are treated as capital gain for U.S. federal incometax purposes unless such holder would be subject to U.S. federal income tax on gain realized onthe sale or other disposition of ADSs, as discussed below.

Taxation of Capital Gains

A U.S. Holder's tax basis in an ADS generally will equal the cost of such ADS to suchU.S. Holder. Upon the sale or other disposition of an ADS, a U.S. Holder will recognize gain orloss for U.S. federal income tax purposes in an amount equal to the difference between theamount realized on the disposition of the ADS and the U.S. Holder's tax basis in the ADS. Suchgain or loss generally will be subject to U.S. federal income tax and generally will be treated ascapital gain or loss from U.S. sources. If Brazilian withholding tax is imposed on a sale or otherdisposition of ADSs (see “— Brazilian Tax Considerations” above), the amount realized by aU.S. Holder will include the gross amount of the proceeds of such sale or disposition beforededuction of the Brazilian withholding tax. The availability of U.S. foreign tax credits for suchBrazilian taxes, as well as for any Brazilian taxes imposed on distributions that do not constitutedividends for U.S. federal income tax purposes, is subject to certain limitations and involves theapplication of rules that depend on a U.S. Holder’s particular circumstances. U.S. Holders shouldconsult their own tax advisors regarding the application of the foreign tax credit rules to theirinvestment in, and disposition of ADSs.

Subject to the discussion below under “United States Backup Withholding andInformation Reporting”, a non-U.S. Holder of an ADS generally will not be subject to U.S.federal income tax or withholding tax on gain realized on the sale or other disposition of the ADSunless (i) such holder is an individual who is present in the United States of America for 183 daysor more in the taxable year of the sale and certain other conditions are met, or (ii) such gain iseffectively connected with the conduct by such non-U.S. Holder of a trade or business within theUnited States.

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A redemption by the Company of an ADS generally will be treated as a sale by the holderof such ADS, provided that such U.S. Holder does not own (and is not deemed to own) any otherequity interest in the Company after the redemption. The amount of gain or loss realized on aredemption will be equal to the difference between (i) the redemption price less any amounttreated as a dividend for U.S. federal income tax purposes and (ii) such Holder's tax basis in theADSs redeemed. Non-U.S. Holders are advised to consult their own tax advisers as to the U.S.federal income tax consequences of a redemption of ADSs.

Passive Foreign Investment Companies

If during any taxable year of the Company 75% or more of the Company's gross incomeconsists of certain types of "passive" income, or the average value during a taxable year of"passive assets" (generally assets that generate passive income) is 50% or more of the averagevalue of all the Company's assets, the Company will be treated as a "passive foreign investmentcompany" ("PFIC") under United States Federal income tax law for such year and succeedingyears. If the Company is treated as a PFIC, a U.S. Holder may be subject to increased tax liabilityupon the sale of its Shares or upon the receipt of certain dividends, unless such U.S. Holder makesan election to be taxed currently on its pro rata portion of the Company's income, whether or notsuch income is distributed in the form of dividends or otherwise or makes a mark-to-marketelection with respect to the Company’s stock as permitted by the Code. Based on the Company'sinvestment plans, the Company is not currently, nor is it expected to become, a PFIC.

United States Backup Withholding and Information Reporting

The information reporting requirements of the Code generally will apply to distributions toa U.S. Holder. Subject to certain exceptions, generally such payments may also be subject to"backup" withholding tax at a rate of 31% if such U.S. Holder fails to supply a correct taxpayeridentification number and certain other information in the required manner. Backup withholdingwill not apply with respect to payments made to certain recipients, such as corporations and tax-exempt organizations. Any amounts withheld under the U.S. backup withholding rules from apayment with respect to the ADSs generally may be refunded or credited against such U.S.Holder's U.S. federal income tax liability, provided that the required information is properlyfurnished to the U.S. Internal Revenue Service. U.S. Holders should consult their own taxadvisors regarding their qualification for exemption from backup withholding and the procedurefor obtaining such exemption, if applicable.

While non-U.S. Holders generally are exempt from information reporting andbackup withholding, under certain circumstances a non-U.S. Holder may be required to complywith applicable certification procedures in order to obtain an exemption from and avoid theapplication of United States information reporting requirements and backup withholding. Holdersshould consult with their own tax advisors regarding their qualification for exemption frombackup withholding and the procedure for obtaining any applicable exemption. Recently adopted

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Treasury regulations (the “New Regulations”) will change certain of the backup withholding andinformation reporting rules and certification requirements discussed above. The New Regulationsgenerally will be effective for payments made after December 31, 2000, subject to certaintransition rules. Holders should consult their tax advisors regarding the application of the NewRegulations to their particular situation.

Item 8. Selected Financial Data

The following selected consolidated financial data at, and for the years ended, December31, 1994, 1995, 1996, 1997 and 1998 have been derived from Consolidated Financial Statementsof the Company. The selected consolidated financial data should be read in conjunction with"Item 9. Management's Discussion and Analysis of Financial Condition and Results ofOperations" and the Consolidated Financial Statements and the respective Notes related theretoappearing elsewhere herein.

The consolidated financial statements of the Company have been prepared in accordancewith U.S. GAAP. Because the Company exports around 95% of its production and operates in anindustry that uses the U.S. dollar as its currency of reference, management believes that the U.S.dollar is the most appropriate currency in which to present the Company’s financial statements. Accordingly, the Company decided to present its primary U.S. GAAP financial statements in U.S.dollars beginning in 1994, as permitted by the Securities and Exchange Commission. For thispurpose, amounts in Brazilian currency for all periods presented have been remeasured into U.S.dollars in accordance with the methodology set forth in Statement of Financial AccountingStandards No. 52 ("SFAS 52").

During 1997, the 36-month cumulative rate of inflation in Brazil fell below the 100%threshold and the Company’s management determined the Brazilian economy to have ceasedbeing a highly inflationary economy as of the fourth quarter of 1997. Accordingly, theCompany’s management reevaluated the economic profile of the Company and its operations anddetermined that the U.S. dollar should remain as the Company’s functional currency, inaccordance with the criteria established by SFAS 52. As such, the Company’s transition from ahighly inflationary status to a non-highly inflationary status accounting, as from January 1, 1998,will have no financial reporting effect on the Company and its results of operations and financialposition as the Company’s reporting currency (which has been, since 1994, the US dollar) wasalso its functional currency under highly inflationary conditions according to SFAS 52.

Pursuant to SFAS 52 as it applies to the Company, inventories, property, plant andequipment, accumulated depreciation and stockholders' equity are remeasured at historical rates ofexchange, and other assets and liabilities denominated in Reais are remeasured at period-end rates. Export sales invoiced in currencies other than the U.S. dollar are remeasured at the respectiveexchange rate on the date of sale. Cost of sales, depreciation and other expenses relating to assets

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remeasured at historical rates are calculated based on the U.S. dollar values of such assets, andother statement of operations accounts are remeasured at the rate prevailing on the date of thecharge or credit to income. Beginning with the full-year 1995 financial statements, gains or lossesresulting from the remeasurement of the financial statements and from foreign-currenciestransactions have been allocated to the statement of operations line items to which they relate. Previously, such gains or losses had been reported in the statements of operations as single lineitems. These allocations have no effect on net income or loss.

The Company publishes its financial statements in Brazil in accordance with BrazilianGAAP, which differs in certain significant respects from U.S. GAAP. The principal differencesbetween Brazilian GAAP and U.S. GAAP as applied to the Company are: (i) the method used toaccount for pensions, (ii) the non-recognition under Brazilian GAAP of certain deferred-tax assetsrecognized under U.S. GAAP and (iii) disclosure requirements. In addition, for all financialstatements prepared for any period ended after January 1, 1996, the Law 9.249/95 has abolishedthe requirement that companies apply monetary correction to their financial statements, which waspreviously required by the Brazilian corporate law. Accordingly, the Company's Brazilian GAAPfinancial statements at and for the years ended 1996, 1997 and 1998 are not adjusted to accountfor the effects of inflation. The Company's taxes and dividends are determined on the basis ofBrazilian GAAP financial statements.

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Selected Financial DataExpressed in thousands of U.S. Dollars (except number of shares and per-share amounts)

Year Ended December 31

1994 1995 1996 1997 1998

STATEMENT OF OPERATIONS DATA:Domestic sales $ $ $ $ $ 38,449Export sales 462,163Total sales $ $ $ $ $ 500,612Value-added tax and other sales deductions (41,658)Net operating revenues $ $ $ $ $ 458,954

Operating costs and expenses:Cost of sales $ $ $ $ $ 349,160Selling 34,516Administrative 47,238(Gain)/Loss and provision for loss sale of

property, plant and equipment and spare-parts inventories

18,902

Other, net (4,476) 1,472 9,627Total $ $ $412,198 $ $ 459,443

Operating income (loss) $ $ $78,931 $ $ (489)

Other income (expenses):Financial income $ $ $185,157 $ $ 94,213Financing expense (128,776) (115,433)Other (28) 192Total $ $ $56,353 $ $ (21,028)

Income (loss) before income taxes, etc. $ $ $135,284 $ $ (21,517)Income taxes:Current $ $ $(3,549) $ (9,231)Deferred 10,324 (15,733)Total $ $ $6,775 $ $ (24,964)

Cumulative effect of a change in accountingprinciple, net of taxNet income $ $ $128,509 $ $ 3,447

Earnings per share(1):Class A Stock $ $ $0.12 $ $ 0.09Class B Stock 0.12 $ 0.00Common Stock 0.12 $ 0.00

Dividends per share:Class A Stock $ $ $0.06 (3) $ 0.09Class B Stock 0.06 (3) $ 0.02Common Stock 0.06 (3) $ 0.02

Weighted-average number of sharesoutstanding (thousands of shares):

Class A Stock $ 41,007Class B Stock 564,374 Common Stock 454,908 Total 1,060,289__________________

(1) Holders of Class B Stock have no dividend preference. Holders of Class A Stock are entitled to an annual preferential dividend.(2) Including (i) the dividend declared on December 29, 1994 and paid on January 12, 1995, (ii) the dividend declared on March 22, 1995

and paid on April 5, 1995 and (iii) the dividend declared on August 24, 1995 and paid on September 5, 1995.(3) Including (i) the dividend declared on February 22, 1996 and paid on March 4, 1996 and (ii) the dividend declared on April 30, 1996 and

paid on May 13, 1996.

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(4) Including the dividend declared on May 12, 1997 and paid on May 23, 1997.

Year Ended December 31 1994 1995 1996 1997 1998

BALANCE SHEET DATA:Cash and cash equivalents $

450,286$1,192,908

$761,308

$ 27,738 $ 151,886

Other current assets 215,288

236,310

266,411

180,466

182,028

Debt securities held to maturity 698,139

696,404

Property, plant and equipment, net 1,830,038

1,780,050

1,881,463

1,978,656

1,892,451

Other assets 97,981

87,471 130,080

237,720

277,720

Total assets $ 2,593,593

$ 3,296,739

$ 3,039,262

$ 3,122,719

$ 3,200,489

Short-term debt $688,998

$903,811

$581,615

$671,476

$ 821,157

Other current liabilities 117,804

73,058 97,244 59,345 39,312

Long-term debt 540,220

723,047

721,001

715,049

730,939

Other long-term liabilities 41,531

62,297 39,485 51,008 41,917

Stockholders' equity 1,205,040

1,534,526

1,599,917

1,625,841

1,567,164

Total liabilities and stockholders' equity $ 2,593,593

$ 3,296,739

$ 3,039,262

$ 3,122,719

$ 3,200,489

Exchange Rates

For information regarding the exchange rates for Brazilian currency into U.S. dollars forthe five most recent fiscal years and at a recent date, see " See Item 6. Exchange Controls andOther Limitations Affecting Security Holders".

Dividends

General

Under Brazilian corporate law, the Company is required to hold an Annual Meeting ofShareholders by April 30th of each year. At that meeting, the financial statements of theCompany for the previous year and the proposal for distribution of dividends are submitted forshareholder approval. Accordingly, dividends for each fiscal year ending December 31 may bedeclared by April 30 of the subsequent year. Dividends are to be paid within 60 days from thedate declared, unless otherwise resolved at the shareholders' meeting at which they were declared. The declared dividend in any case must be paid before the next ensuing December 31. Dividendsrelating to prior years in excess of those required to be paid by law may be declared and paid atany time by decision of the Board of Directors. The Board of Directors may also elect to payinterim dividends either (a) based on the Company's net income for any period within its fiscalyear or (b) from retained earnings or certain other revenue reserves established in prior years.

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Holders of Class A Preferred Stock ("Class A Stock") are entitled to an annual preferentialdividend equal to a minimum of 6% of the capital attributable to the Class A Stock to be paidfrom the company's annual adjusted net income. In the event dividends in excess of those paid tothe holders of Class A Stock are distributed, holders of Common Stock and Class B Stock shareratably in such excess up to an amount equal to the Class A Stock preferential dividend. Anydividends thereafter remaining for distribution are shared ratably by all holders of Class A Stock,Class B Stock and Common Stock. See "—Dividend Preference".

The following table sets forth the dividends paid by the Company to holders of its capitalstock since 1990. The exchange rates used to convert dividends in Reais into U.S. dollars werethe rates at the related payment dates.

Dividend Payment History(1)

Common Stock Class A Stock(in U.S. dollars per share)

Class B Stock

Year

1990 — — —

1991 — 0.03 —

1992 — 0.06 —

1993 — 0.07 —

1994 — 0.07 —

1995(2) 0.13 0.13 0.13

1996(3) 0.06 0.06 0.06

1997(4) 0.02 0.10 0.02

1998(5) 0.02 0.09 0.02

1999(6) 0.01 0.06 0.02

(1) Adjusted to give effect to (i) the 1992 Stock Dividend, which was declared on April 30, 1992 and which was distributed on May 15,1992, (ii) the 1994 Stock Split, which was declared on April 29, 1994 and became effective on May 13, 1994, and (iii) the 1995 StockSplit, which was declared on March 22, 1995 and became effective on April 5, 1995.

(2) Including (i) the dividend declared on December 29, 1994 and paid on January 12, 1995, (ii) the dividend declared on March 22, 1995and paid on April 5, 1995 and (iii) the dividend declared on August 24, 1995 and paid on September 5, 1995.

(3) Including (i) the dividend declared on February 22, 1996 and paid on March 5, 1996 and (ii) the dividend declared on April 30,1996 andpaid on May 13, 1996.

(4) Including the dividend declared on May 12, 1997 and paid on May 23, 1997.(5) Including the dividend declared on April 17, 1998 and paid on May 11, 1998(6) Including dividend declared on March 25, 1999 and paid on April 22, 1999.

Calculation of Adjusted Net Income

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Brazilian corporate law requires that 5% of a company's annual net income beappropriated to a legal reserve fund, until the amount of such fund reaches an amount equal to20% of the capital of such company, as recorded in its statutory accounting records. For purposesof calculating such amount, Brazilian law provides that the "capital" of a company is equal to theamount paid in by investors upon the subscription of such company's capital stock, plus theamount of annual increases to such amount due to monetary corrections for inflation. The amountof the Company's legal reserve at December 31, 1998 was approximately R$85.6 million(US$66.8 million), or 5% of its capital.

Brazilian corporate law allows for three additional appropriations of net income, each ofwhich must be approved by the holders of common stock. First, a portion of net income may beappropriated to a reserve for anticipated losses which are deemed probable in future years. Conversely, any amount so reserved in prior years must be returned to net income in the fiscalyear in which the reason for such reserve ceases to exist or in which the loss takes place. Second,net income may be appropriated to an unrealized-income reserve for future income to be realizedfrom (a) inflationary income, (b) increases in the net worth of affiliated companies and (c) incomefrom term sales to be received in subsequent fiscal years. Third, net income may be appropriatedfor discretionary purposes, ratified by the stockholders, for business expansion and other capitalprojects, the amount of which is based on an approved capital budget presented by management. After completion of the projects, a company may elect to retain the appropriations until thestockholders vote to transfer all or a portion of the reserve to capital or to retained earnings, fromwhich (retained earnings) a cash dividend may then be paid. Net income in any year, as adjustedfor appropriations to the legal reserve, to tax on adjusted net income (see "Item 7. Taxation—Brazilian Tax Considerations—Taxation on Distributions") and to the three items referred to inthis paragraph, are hereinafter referred to as "Adjusted Net Income".

Brazilian legislation requires that the calculation of the amount of a company's net incomeavailable for dividend distributions to its shareholders be determined on the basis of financialstatements prepared in accordance with Brazilian GAAP using the "corporate law" method. Suchnet income of a company may not be the same as those determined by the currency of constantpurchasing power method. Through 1995 the Company's net income was the same under bothBrazilian methods, but differed from that determined in accordance with U.S. GAAP. For allfinancial statements prepared for any period ended after January 1, 1996, the Law 9.249/95 hasabolished the requirement that companies apply monetary correction to their financial statements.. Although the actual amount of dividends as remeasured into U.S. dollars is contained in theConsolidated Financial Statements, investors will be unable to use U.S. GAAP financialinformation made available by the Company to calculate such dividends. See "Item 8. SelectedFinancial Data."

Payment of Dividends

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Under Brazilian corporate law and in accordance with the Company's By-Laws, theCompany is required to allocate at least 25% of its Adjusted Net Income for each fiscal year to thepayment of dividends (such amount being hereinafter referred to as the "Mandatory Dividend"). However, Brazilian law provides that a public company is not required to pay the MandatoryDividend in any year if the management of such company communicates to its shareholders at itsannual shareholders' meeting that the payment of such a dividend would be harmful based on thefinancial situation of the company and if, within five days of such shareholders' meeting, thecompany forwards to the CVM an explanation for the nonpayment of the dividend. DistributableAdjusted Net Income that is not so distributed and is not absorbed by losses in subsequent yearsmust be paid in dividends as soon as the financial condition of the company permits.

Proposals to declare and pay dividends in excess of the statutory minimum are generallymade at the recommendation of the Board of Directors and require approval by the vote of holdersof Common Stock. The Board of Directors has adopted a policy pursuant to which any suchproposal will be dependent upon the Company's results of operations, financial condition, cashrequirements for its business, future prospects and other factors deemed relevant by the Board ofDirectors. There can be no assurance that there will be any Adjusted Net Income or that dividendsin excess of the statutory minimum will be paid nor is there any legal or other requirement to sucheffect. In the event that the Board of Directors elects to pay interim dividends in any year, suchinterim dividends will count toward the calculation of the Mandatory Dividend for such year. Generally, dividends are payable to persons who are shareholders of record on the date on whichdividends are declared. The Company is not required by law to monetarily correct dividends forinflation occurring during the period from the date such dividends are declared to the date they arepaid.

As a general requirement, shareholders who are not residents of Brazil must be registeredwith the Central Bank in order to have dividends, sales proceeds or other amounts with respect totheir shares remitted outside of Brazil. The shares of Class B Stock underlying the ADSs will beheld in Brazil by the Custodian, as agent for the Depositary, which will be the registered owner ofsuch shares on the records of the Transfer Agent. Payments of cash dividends and distributions, ifany, will be made in Reais to the Custodian on behalf of the Depositary, which will exchange theReais for U.S. dollars and will deliver the U.S. dollars to the Depositary for distribution to ADRholders. In the event that the Custodian is unable to immediately convert the Reais received asdividends into U.S. dollars, the amount of U.S. dollars payable to holders of ADRs may beadversely affected if the Real devalues against the U.S. dollar before such dividends are convertedand remitted. Devaluation of the Real will reduce the value in U.S. dollars of distributions anddividends on the Class B Stock and may reduce the value of the Class B Stock and the ADSs. There can be no assurance that the Real will not again be devalued relative to the U.S. dollar as inthe past, that the Real will not fluctuate significantly relative to the U.S. dollar or that any suchdepreciation or fluctuations will not adversely affect the value of the Class B Stock or ADSs orany distributions and dividends thereon. Dividends in respect of shares of the Class B Stock of

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the Company paid to holders who are not Brazilian residents, including holders of ADSs, are notsubject to Brazilian withholding tax. See "Item 7. Taxation—Brazilian Tax Considerations".

Dividend Preferences

Depending on the company's annual adjusted net income holders of Class A Stock areentitled to a minimum preferential dividend equal to 6% of the capital attributable to its class ofshares. For the purpose of calculating the preferential dividend, the "capital" attributable to theClass A Stock is equal to the amount paid for such stock upon subscription therefor, plus theamount of annual increases in such amount due to monetary correction for inflation and/or to anycapital increase as well. In the event dividends are not paid for three consecutive years, holders ofall classes of preferred shares, including Class A and Class B Stock, will be entitled to votingrights.

In the event of dividends in excess of those paid to the holders of Class A Stock aredistributed, holders of Common Stock and Class B Stock share ratably in such excess up to anamount equal to the Class A minimum preferential dividend. Any dividends thereafter remainingfor distribution are shared ratably by all holders of Class A Stock, Class B Stock and CommonStock. Payment of the Mandatory Dividend is subject to the Class A Preferred Stock minimumpreferential dividend.

On June 5, 1997 a new law (Law No. 9457 of May 5, 1997) went into effect which grantsholders of preferred stock that does not carry a right to a fixed or minimum dividend a statutoryright to receive dividends in an amount per share of at least ten percent more than the amount pershare paid to holders of common stock. The CVM has not yet indicated how it will interpret thisnew law. If the law applies to stock issued before June 5, 1997, the Class B Stock, including theClass B Stock held in the form of ADSs, may in the future be entitled to a dividend that is tenpercent higher than the dividend paid on the Common Stock.

Item 9. Management's Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis should be read in conjunction with the ConsolidatedFinancial Statements of the Company, including the respective notes thereto, included elsewherein this Annual Report, and in conjunction with the discussion of the method of presentation offinancial information under "Item 8. Selected Financial Data". In particular, it should be notedthat beginning with the financial statements for the year ended December 31, 1995, gains andlosses resulting from the remeasurement of the financial statements and from foreign-currencytransactions have been allocated to the statement of operations line items to which they relate. Previously, such gains and losses had been reported in the statements of operations as single lineitems. In order to facilitate year-to-year comparisons of its financial statement discussions setforth in this Management's Discussion and Analysis of Financial Condition and Results of

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Operations section, the Company has allocated gains and losses resulting from foreign-currencytransactions to the statement of operations line items to which they relate with respect to the 1998,1997 and 1996 financial statements. In any event, these allocations have no effect on net incomeor loss.

Overview

The Company is the world's largest producer of bleached hardwood kraft market pulp. During 1998, the Company produced approximately 1,166,000 tonnes of bleached eucalyptuspulp, a 10.2% increase as compared with 1997. Pulp sales in 1998 were 1,154,000 tonnes, a 5.7%increase as compared with 1997, of which 1,085,000 tonnes, or 94%, were export sales. See"Item 1. Description of Business—General".

The primary factors affecting the Company's results of operations are (i) prevailing worldmarket prices for pulp, (ii) the amount of pulp produced and sold by the Company, (iii) theCompany's costs of production, which principally consist of the costs of materials (primarily woodand chemicals), labor and depreciation and (iv) the relationship between the Real, the currency inwhich substantially all of the Company's cash operating expenses (i.e., operating expenses otherthan depreciation and amortization of property, plant and equipment) are incurred, and the foreigncurrencies, principally the U.S. dollar, in which more than 90% of the Company's sales are made. See "—Effects of Inflation and Currency Exchange Fluctuations" below.

The prices that the Company is able to obtain for its pulp depend upon prevailing worldmarket prices, which historically have been cyclical, with prices subject to significant fluctuationsover relatively short periods of time. See "Item 1. Description of Business— Market Overview—International Markets". After reaching a peak in the mid of 1995, pulp prices began to fall duringthe last quarter of such year and continued to fall through the second quarter of 1996, due to asignificant drop in demand for new orders of wood-free papers. This drop in demand forced paperproducers, merchants and distributors to adjust their inventory levels, which resulted insignificantly higher levels of inventory for pulp producers and consequently caused the decreaseof pulp prices. During 1996, the Company's average F.O.B. price per tonne of bleachedeucalyptus kraft market pulp sold in the United States was US$487 per tonne, a decrease of 38%as compared to the 1995 price of US$785 per tonne. In 1997, the average F.O.B. price per tonneof bleached eucalyptus kraft market pulp sold in the United States was US$496, an increase of 2%as compared to 1996 of US$ 487. For 1998 the average F.O.B. price per tonne of bleachedeucalyptus kraft market pulp sold in the United States was US$465. In the first quarter of 1999the average F.O.B. price per tonne of bleached eucalyptus kraft market pulp delivered in theUnited States was US$ 422, a decrease of approximately 13% as compared to the first quarter of1998 price of US$485 per tonne. This decrease was primarily due to weak demand principally inAsia and Europe, high inventory levels and over capacity of pulp production.

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The Company believes that it is one of the lowest cost producers of bleached kraft marketpulp in the world. The Company's relatively low production costs are due to economies of scale,advanced forestry techniques, a comparatively short regional harvest rotation and low energy andchemical costs. See "Item 1. Description of Business—General—Business Strategy".

Brazilian Economic Environment

The Brazilian economy has been characterized by frequent and occasionally drasticintervention by the Brazilian government. The Brazilian government often changes monetary,credit, tariff and other policies to influence the course of Brazil's economy. The Braziliangovernment's actions to control inflation and effect other policies have often involved wage andprice control as well as other measures, such as freezing bank accounts, imposing capital controlsand inhibiting exports from Brazil. Changes in policy involving tariffs, exchange controls,regulatory policy and taxation could adversely affect the Company's business and financial results,as could inflation, devaluation, social instability and other political, economic or diplomaticdevelopments and the Brazilian government's response to such developments.

Beginning in December 1993, the Brazilian government launched an economicstabilization plan, the Real Plan, an anti-inflationary and economic stabilization plan. CurrentPresident Fernando Henrique Cardoso co-ordinated the Real Plan's implementation, as Franco'sFinance Minister, and was elected his successor in large part due to its results. The Real becameBrazil's currency. The Real Plan succeeded in lowering inflation and stimulating growth. GDPgrew in constant terms by 0.2% in 1998, 3.0% in 1997, 2.8% in 1996, 4.2% in 1995 and 5.9% in1994. As measured by IGP-DI, annual inflation in 1998 was 1.7%, down from 7.5% in 1997,9.3% in 1996, 14.8% in 1995, 1,094% in 1994 and 2,709% in 1993.

After Russia devalued its currency in August 1998, foreign investors withdrew funds fromemerging market countries. Brazil was particularly affected due to its growing budget and currentaccount deficits. As a result, foreign exchange reserves decreased dramatically. To defend theReal, the Brazilian Government increased interest rates from 20% in August 1998 to 45% inSeptember 1998. Further, in October 1998, the Brazilian Government announced a fiscal packagedesigned to curb government spending and offset higher debt service costs caused by higherinterest rates.

The October fiscal package was comprised of: (a) an R$8.7 billion budget cut; (b) an 11%social security contribution tax on retired federal civil servants; (c) a 9% social securitycontribution tax on active federal civil servants earning more than R$1,200 a month; (d) theextension of the Cofins tax to the financial services industry (at a rate of 2%); (e) an additional 1%increase in the Cofins rate, deductible from the CSLL tax (Social Contribution on Net Profit); (f)the extension of the CPMF and the increase of the tax rate from 0.20% to 0.38%; and (g) aConstitutional Amendment to reform the social security system. The Constitutional Amendmentfor social security reform and increase in the Cofins tax rate were passed in December 1998.

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However, the other proposals were either rejected or delayed. On December 2, 1998, the IMFapproved a standby accord with the Brazilian Government, making US$41 billion available toBrazil from contributions made by the IMF and, among others, 20 developed countrygovernments, under the coordination of the BIS.

Despite the fiscal package and the IMF accord, the confidence of the market continued toerode. The situation was further aggravated in the first week of January when a 90-daymoratorium on the repayment of debt owed to the federal government was declared by the stategovernment of Minas Gerais. Responding to pressure on the Real, the Central Bank widened theforeign exchange band on January 13, 1999. This widening of the foreign exchange bandeffectively abandoned the “crawling peg” policy adopted in 1995. The Central Bank alsoincreased its interventions in the spot and future currency markets. The pressure, though, did notease, and, on January 15, the Central Bank allowed the Real to float freely and it devalued to alow of R$2.1647 on March 3, 1999.

As a result of the devaluation, certain economic benchmarks established in the standbyaccord had to be revised. In March 1999, the Brazilian Government and the IMF executive boardagreed to a memorandum of economic policies for Brazil that allowed the Central Bank tointervene in the spot foreign exchange market and stipulated how much the Central Bank couldsell in the market to improve liquidity and reduce volatility of the Real. As a result, an additionalUS$9.8 billion was available to Brazil in early April 1999.

The Brazilian Government also agreed with foreign private-sector banks to maintaininterbank lines at the February 28, 1999 level, thereby halting a significant decline in such linessince September 1998.

To minimize excessive market volatility and reduce the inflationary effects of thedevaluation, the Central Bank raised interest rates to more than 40% per annum. Interest rateshave since decreased, but are still near historical highs and have affected consumer and businessconfidence.

Since March 3, 1999, the Real has appreciated 18.7% against the U.S. dollar to R$1.7597per US$1.00 at June 10, 1999. The strengthening currency enabled the Central Bank to makeseveral cuts on interest rates from May to June. On June 8 the SELIC rate was further reducedfrom 23.5% to 22%. Inflation has also remained relatively low with consumer prices in Brazilrising only 1.2%, 4.4%, 2.0% and 0.03% in January, February, March and April, respectively,according to the IGP-DI. As a result of lower government spending, lower than expected inflationand the IMF's approval of the memorandum of economic policy, several Brazilian financialinstitutions have attracted capital from the international markets. On April 23 1999, the BrazilianTreasury issued $2 billion of fixed-rate securities for the first time since the Russian crisis.

Effects of Inflation and Currency Exchange Fluctuations

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Until July 1994, Brazil had for many years experienced high and generally unpredictablerates of inflation and steady devaluation of its currency relative to the U.S. dollar. The followingtable sets forth Brazilian inflation as measured by the Indice Nacional de Preços ao Consumidor(the "National Consumer Price Index" or the "INPC") and the devaluation of Brazilian currencyagainst the U.S. dollar for the periods shown:

1993 1994 1996 1995 1997 1998

1stQuarter 1999

Inflation (INPC)................................................................... 2,489% 929% 22% 9.11% 4.34% 2.49% 3.25%Devaluation(R$ vs. US$).............................. 2,533% 613% 15% 6.87% 7.42% 8.27% 42.47

%

As a result of the Real Plan, the rate of inflation and the rate of devaluation have beenreduced considerably from July 1, 1994 to date. As measured by the INPC, the rate of inflation in1995 was 22%, as compared to 929% in 1994. In 1995, the Real devalued against the U.S. dollarby 15%, as compared to 613% in 1994. In 1996, the rate of inflation was 9.11%, and the Realdevalued against the U.S. dollar by 6.87%. In 1997 the rate of inflation was 4.34% and the Realdevalued against the U.S. dollar by 7.42%. In 1998 the rate of inflation was 2.49% and the Realdevalued against the U.S. dollar by 8.27%. For the first quarter of 1999, the rate of inflation was3.25%, and the Real devalued against the U.S. dollar by 42.47%, which reflected the decision ofthe Central Bank to float the Real as discussed above. See “— Brazilian EconomicEnvironment.”

Inflation and exchange rate variations have had, and may continue to have, substantialeffects on the financial condition and results of operations of the Company.

One significant effect of inflation and exchange rate variations concerns the Company’soperating expenses. The Company's cash operating expenses (i.e., operating expenses other thandepreciation and amortization of property, plant and equipment) are substantially all in Reais andtend to increase with Brazilian inflation. As expressed in U.S. dollars, however, these increasesare typically offset at least in part by the effect of devaluation of the Real against the U.S. dollar. If the rate of Brazilian inflation increases more rapidly than the rate of devaluation, then, asexpressed in U.S. dollars, the Company’s operating expenses increase and (assuming constantsales prices) its profit margins decrease. If the rate of devaluation exceeds the rate of inflation,then, as expressed in U.S. dollars, the Company’s operating expenses decrease, and its profitmargins increase. In 1995, 1996, 1997 and 1998, the Company's operating expenses, as expressedin U.S. dollars, increased because the rate of Brazilian inflation exceeded the rate of devaluationof the Real. In the first quarter of 1999 the Company's operating expenses, as expressed in U.S.dollars, decreased because the rate of devaluation of the Real exceeded the rate of Brazilianinflation.

A second significant effect of inflation and exchange rate variations concerns theCompany’s monetary assets and liabilities denominated in Reais. The value of such assets and

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liabilities as expressed in U.S. dollars declines when the Real devalues against the U.S. dollarand increases when the Real appreciates. In addition, many financial instruments denominated inReais are indexed for inflation. In periods of devaluation of the Real, the Company reports (a)remeasurement loss on Real-denominated monetary assets, which is offset, at least in part, bymonetary indexation of Real-denominated financial instruments and (b) remeasurement gain onReal-denominated monetary liabilities, which is offset, at least in part, by monetary indexation ofReal-denominated financial instruments.

The Company has adopted a conservative policy of having almost all of its financialassets denominated in U.S. dollars. At December 31, 1998 the Company’s financial assetsdenominated in U.S. dollars represented approximately 95% of total financial assets. See "—Liquidity and Capital Resources—Financial Strategy".

Results of Operations

Year ended December 31, 1998 compared with Year Ended December 31, 1997

The Company reported net income of US$3.4 million for the year ended December 31,1998, as compared with net income of US$59.7 million for 1997. The decrease was mainly aresult of lower net prices, higher net financial expenses and provisions for assets write-offs andlabor disputes. The negative impacts were partially offset by lower operating costs and expensesand reversal of a provision related to a favorable court decision in a tax dispute.

Net operating revenues decreased by 5.9% to US$ 459.0 million in 1998 from netoperating revenues of US$487.7 million in 1997. This decrease was primarily due to a 11.6%fall in sales price, partially offset by a 5.7% increase in sales volume. Total pulp sales volume in1998 was 1,154,000 tonnes, compared to 1,092,000 tonnes in 1997, of which 1,085,000 tonnes,or 94% were export sales.

Total operating costs and expenses increased by US$31.9 million, or 7.4%, fromUS$427.6 million in 1997 to US$459.5 million in 1998. Cost of sales was US$349.2 million in1998 compared to US$335.4 million in 1997, which reflects a 3.7% decrease of the productioncost per tonne from US$312 in 1997 to US$300 in 1998. The 1997 figure was negativelyimpacted by the disruptions caused by the implementation of the mill modernization program. In1998, chemicals consumption was high due to the commissioning of the modernization projectand production mix. Operating expenses in 1998 totaled US$110.3 million, including US$31.2million of non-recurring adjustments. The net amount of US$79.1 million reflects significantproductivity improvements, as compared to net operating expenses of US$82.4 million in 1997(the original figure of US$92.2 million includes US$9.8 million of favorable non-recurringadjustments).

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In 1998 the Company had a net financial expense of US$ 21.2 million compared to netfinancial income of US$19.9 million in 1997. The Company maintained its strategy of investingthe proceeds of short term and export financing lines in dollar indexed Brazilian governmentbonds which has provided protection against devaluations of the Real. Profits from this strategywere lower than the profits in 1997 primarily due to the increased cost of such short term andexport financing lines.

In 1998 the Company generated US$24.9 million of tax credit, compared to an expense ofUS$16.9 million in 1997 and US$6.8 million in 1996. The 1998 figure included a US$ 10.4million tax credit due to a favorable court decision in a dispute over the amount of SocialContribution paid in 1989. For additional information regarding the Company’s tax credit, seeNote 15 to the Consolidated Financial Statements.

Year Ended December 31, 1997 Compared with Year Ended December 31, 1996

The Company reported net income of US$59.7 million for the year ended December 31,1997, as compared with net income of US$128.5 million for 1996. This decrease resultedprimarily from higher production costs and lower financial income on cash investments due to adecline in domestic interest rates, as well as the Company’s strategy to hedge fully its cash againsta possible acceleration in the devaluation of the Brazilian Real.

Net operating revenues decreased by 0.7% to US$487.7 million in 1997 from net operatingrevenues of US$491.1 million in 1996. This decrease was primarily due to a 0.8% fall in salesvolume, partially offset by a 2.9% increase in average pulp prices. Total pulp sales volume in1997 was 1,092,000 tonnes, compared to 1,101,000 tonnes in 1996, of which 1.014,000 tonnes, or93% were export sales.

Total operating costs and expenses increased by US$15.4 million, or 3.7%, fromUS$412.2 million in 1996 to US$427.6 million in 1997. Cost of sales was US$335.4 million in1997 compared to US$329.3 million in 1996, which reflects a 1% increase of the production costper tonne from US$290 in 1996 to US$312 in 1997. This increase was mainly due to the higherlevel of maintenance services and chemicals consumption related to the production mix,combined with additional costs related to extended downtimes for the implementation of the millmodernization program. Operating expenses in 1997 totaled US$92.2 million, including US$9.8million of non-recurring adjustments. The net amount of US$82.4 million reflects significantproductivity improvements, as compared to net operating expenses of US$94.9 million in 1996(the original figure of US$82.9 million includes US$12.0 million of favorable non-recurringadjustments).

Net financial income decreased by US$36.5 million, or 64.7%, from US$56.4 million in1996 to US$19.9 million in 1997. Aracruz maintained its strategy of taking advantage of interestrate differentials in domestic and foreign markets by obtaining financing denominated in foreign

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currencies and investing the proceeds, together with cash flow from operations, in domesticfinancial instruments. Profits from this strategy were lower than those obtained in 1996 mainlydue to the Company's decision to reduce cash and investments to approximately US$730 million,the reduction in domestic interest rates and the decision to hedge cash investments by investing allcash proceeds in US dollar denominated Brazilian government long-term bonds.

Income taxes increased by US$10.1 million from US$6.8 million in 1996 to US$16.9million in 1997. This increase resulted from (i) the expiration in May 1997 of the exemption fromBrazilian federal income taxation on its profits from export sales and (ii) a lower income tax in1996 due to a tax credit of US$18.2 million, related to a favorable court decision in a 1991income tax dispute. Net income in 1997 was determined after a non-recurring charge of US$3.9million, net of tax, which resulted from a write-off, in the fourth quarter, of prior years' BusinessProcess Reengineering costs, that had been deferred in the past, reflecting new FASB and SECguidelines for such expenses.

Liquidity and Capital Resources

At December 31, 1998, cash and cash equivalents were US$151.9 million, an increase ofUS$124.2 million from US$27.7 million at December 31, 1997. This increase was primarily dueto (i)US$90.9 million in net cash provided by operating activities, resulting from decreasedoperating revenues, (ii)US$ 123.5 million in net cash provided by financing activities during1998, resulting from a US$171.8 million increase in net short-term debt, partially offset by aUS$2.0 million decrease in long-term debt and a payment of US$24.4 million in dividends and(iii) a negative cash flow from investing activities of US$88.3 million, resulting from addition toproperty, plant and equipment. On December 31, 1998 the Company held US$ 696.4 million inU.S. dollar denominated Brazilian government long-term bonds. See Note 8 to ConsolidateFinancial Statements.

At December 31, 1997, cash and cash equivalents were US$27.7 million, a decrease ofUS$733.6 million from US$761.3 million at December 31, 1996. This decrease was primarilydue to (i) the decision by the Company to hedge its cash investments by investingUS$699.0 million in U.S. dollar denominated Brazilian government long-term bonds,(ii) US$200.8 million in net cash provided by operating activities, resulting from decreasedoperating revenues, (iii) US$76.1 million in net cash provided by financing activities during 1997,resulting from a US$132.9 million increase in net short-term debt, partially offset by aUS$20.4 million decrease in long-term debt and a payment of US$25.0 million in dividends and(iv) a negative cash flow from investing activities of US$963.4 million, resulting frominvestments of US$699.0 million in long-term debt securities, and additions to property, plant andequipment in amount of US$264.4 million.

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At December 31, 1996, cash and cash equivalents were US$761.3 million, a decrease ofUS$431.6 million from US$1,192.9 million at December 31, 1995. This decrease from 1995 wasprimarily due to (i) US$250.4 million in net cash provided by operating activities, resulting fromdecreased operating revenues, (ii) US$ 378.7 million in net cash used in financing activitiesduring 1996, resulting from a US$401.7 million decrease in net short-term debt and a payment ofUS$62.9 million in dividends, partially offset by a US$83.9 million increase in long-term debtand (iii) a negative cash flow from investing activities of US$239.3 million (as compared tonegative cash flow from investing activities of US$88.6 million in 1995).

At December 31, 1998, total debt was US$ 1,552.1 million, consisting ofUS$821.2 million in short-term debt, including the current portion of long-term debt and accruedfinance charges, and US$730.9 million in long-term debt, including accrued finance charges. Total debt at December 31, 1998 was up US$165.7 million from total debt of US$1,386.4 millionat December 31, 1997. See Notes 10 and 11 to Consolidated Financial Statements. Total debt atDecember 31, 1996 and 1995 was US$1,302.6 million and US$1,626.8 million, respectively.

At December 31, 1998, net debt (i.e., total debt less cash and cash equivalents plusretentions on financing contracts and debt securities) was US$700 million, up US$47.7 millionfrom December 31, 1997. Net debt at December 31, 1996 and 1995 was US$535.8 million andUS$426.5 million, respectively.

At December 31, 1997, total debt was US$1,386.4 million, consisting of US$671.4 millionin short-term debt, including the current portion of long-term debt and accrued finance charges,and US$715.0 million in long-term debt. Total debt at December 31, 1997 was upUS$83.8 million from total debt of US$1,302.6 million at December 31, 1996. Total debt atDecember 31, 1995 and 1994 was US$1,626.8 million and US$1,229.2 million, respectively.

At December 31, 1997, net debt (i.e., total debt less cash and cash equivalents plusretentions on financing contracts and debt securities) was US$652.3 million, up US$116.5 millionfrom December 31, 1996. Net debt at December 31, 1995 and 1994 was US$426.5 million andUS$726.4 million, respectively.

At December 31, 1996, total debt was US$1,302.6 million, consisting of US$581.6 millionin short-term debt, including the current portion of long-term debt and accrued finance charges,and US$721.0 million in long-term debt. Total debt at December 31, 1996 was down US$324.2million from total debt of US$1,626.8 million at December 31, 1995. Total debt at December 31,1994 was US$1,229.2 million.

At December 31, 1996, net debt (i.e., total debt less cash and cash equivalents plusretentions on financial markets) was US$535.8 million, down US$109.3 million from December31, 1995. Net debt at December 31, 1994 was US$726.4 million.

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The Company's short-term debt consists primarily of trade financing in the form of exportsales advances ("ACC"), discounted export accounts receivables ("ACE"), prepayments forexports and Euro-commercial paper borrowings, all denominated in foreign currency. ACC andACE are forms of financing available from Brazilian financial institutions or Brazilian branchesof foreign financial institutions at a fixed rate with a maturity of up to 180 days (i) prior toshipment of pulp for export, in the case of ACC, and (ii) after shipment of pulp for export, in thecase of ACE. Prepayments for exports are a form of financing available from importers or foreignfinancial institutions at a fixed rate with maturity of either up to 180 days or more than one year,in each case prior to the shipment. Aracruz Trading from time to time raises short-term funds forcash management purposes through issuances of commercial paper under its Euro-CommercialPaper program. On September 2, the Central Bank of Brazil approved the renewal and theincrease of the program from US$ 100 million to US$ 200 million. At December 31, 1998,Aracruz Trading had no commercial paper outstanding under this program. At December 31,1998, the outstanding amount of such short-term trade financing (ACC/ACE and pre-exportfinancing) was US$430.6 million (compared with US$368.8 million at December 31, 1997), withan average month-end balance of US$366.9 million (compared with US$269.6 million atDecember 31, 1997) at an average annual interest rate of 7.7% during 1998 (8.0% during 1997.)

The Company's long-term debt consists primarily of U.S. dollar-denominated debt issuedoutside Brazil in the amount of US$505.5 million at December 31, 1998 (US$497.4 million atDecember 31, 1997) and loans from BNDES, one of the Principal Shareholders, denominated inReais and in foreign currencies. In July 1993, the Company issued in the Euromarkets US$80million aggregate principal amount of 9% unsecured bonds due 1998, which were refinanced inJuly 1996. In order to allow the Company greater financial flexibility, certain of the terms andconditions of such bonds, including the negative pledge, were amended. The bonds wereredeemed at their face value on July 22, 1998, as scheduled. In January 1994, the Companyissued in the Euromarkets US$120 million aggregate principal amount of 10.375% unsecurednotes due 2002, which were refinanced in January 1997. In order to allow the Company’s greaterfinancial flexibility, certain of the terms and conditions of such bonds and notes, including thenegative pledge, were also amended. In February 1995, Aracruz Trading completed the firsttranche, totaling US$50 million, of an export securitization program pursuant to which AracruzTrading securitized existing and future accounts receivables due to Aracruz Trading from certaincustomers of Aracruz Trading. The securitization program is limited to an aggregate principalamount of US$200 million, and the second and third tranches for the remaining US$150 millionwere completed in July 1995. The certificates issued under the program have an average life ofapproximately three to five years. During 1997, US$38 million of five-year certificates, related tothe third floating rate tranche and accrued interests of this program, were fully redeemed.

BNDES has been a principal lending source for the Company. At December 31, 1998, anaggregate principal amount of approximately R$425.4 million (US$352.2 million) (compared toR$379.0 million (US$339.5 million) at December 31, 1997) in loans was outstanding, whichrepresented approximately 23.1% of all of the Company's indebtedness at such date. Of the total

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aggregate principal amount, US$217.6 million was denominated in Reais and adjusted by theTaxa de Juros de Longo Prazo (the Long-term Interest Rate or the "TJLP") and US$134.6 millionwas adjusted by a currency basket. See "Item 13. Interest of Management in CertainTransactions".

Financial Strategy

In the past, a principal element of the Company's financial strategy was to take advantageof interest rate differentials existing in the domestic and foreign markets by obtaining debtfinancing (short-term pre-export financing or long-term debt) denominated in foreign currenciesand investing the proceeds, together with cash flows from operations, in Brazilian financialinstruments which have generally provided higher yields.

The Company’s ability to generate profits from this arbitrage activity has been reduced asa result of declining interest rates in Brazil as well as a change in the Company’s financial strategyduring 1997. The Company expects this trend to continue. Since August 1997, the Companyadopted a conservative policy of having almost all of its financial assets denominated in U.S.dollars.

At December 31, 1998, the Company held approximately US$151.9 million in cash andcash equivalents, of which US$28.4 million were denominated in Reais (consisting of certificatesof deposit from Brazilian and international banks) and US$120.5 million in U.S. dollars inTrading’s accounts. At December 31, 1997, the Company held US$27.7 million in cash and cashequivalents, of which US$17.3 million were denominated in Reais. At the same date, theCompany held US$698,139 in debt securities held to maturity (consisting of Brazilian governmentbonds denominated in U.S. Dollars with different maturities from September 1999 to November2001). In December 1998, the Company reviewed its financial strategy in relation to the long-term debt securities due to the drastic reduction in financing available as well as a result of thevolatility in the international capital markets. Accordingly, at the same date, the debt securitieswere considered as available-for-sale and reclassified to current assets. The value of thesesecurities was adjusted to their fair value (US$696,404) at that date.

The Company typically limits its investment to the following amounts in the followingcategories: (i) US$650 million for fixed income government obligations, (ii) US$120 million toUS$150 million with each of selected large Brazilian banks and (iii) US$5 million toUS$80 million with each of selected mid-size Brazilian banks and foreign banks.

At present, the Company, like other Brazilian companies, has limited sources of long-termdebt financing denominated in Reais and the Company does not intend to incur short-term debtdenominated in Reais due to high costs associated with such financing. At December 31, 1998,83% of the Company's total indebtedness was denominated in foreign currencies, as comparedwith 81% at the end of 1997 and 79% at the end of 1996. Although the Company's access to debt

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financing denominated in foreign currencies, beyond pre-export and receivables financing, mayalso be limited, the Company believes that it has access to a sufficient number of financingsources to meet its needs without resorting to expensive short-term Real-denominated financing tothe same degree as in prior years.

Because the Company operates internationally, the Company is exposed to market risksfrom changes in foreign exchange markets and interest rates. To protect against exchange-ratemovements affecting its non-Real, non-U.S. dollar denominated financial assets, the Companyfrom time to time enters into forward foreign-exchange contracts. The Company may be exposedto a counterparty credit risk in the event of nonperformance by the counterparty to the forwardexchange-rate contracts and the interest-rate-swap agreements. Management, however, believesthat nonperformance by counterparties with whom it has contracts is unlikely to occur.

Dividends

Subject to certain exceptions, the Company is required under Brazilian corporate law topay a minimum annual dividend equal to 25% of its Adjusted Net Income. In addition, theCompany may pay interim dividends either (a) based on the Company's net income for any periodwithin its fiscal year or (b) from retained earnings or certain other revenue reserves established inprior years. See "Item 8. Selected Financial Data—Dividends".

Capital Expenditures

The Company’s capital expenditures in 1998, 1997, 1996 and 1995 were US$88.3 million,US$264.4 million, US$239.3 million, and US$88.6 million, respectively.

The Company invested US$338.5 million from October 1995 to December 1998 in theModernization Project. Of this amount, US$8.9 million was spent in 1995, US$160.7 million in1996, US$166.9 million in 1997 and the remaining US$ 2.0 million in 1998. The principalfeatures of the Modernization Project were (i) the retrofitting of the mill’s original pulp lines,which were completed in 1978, with new equipment and (ii) the improvement of the productionprocess through the removal of bottlenecks. This modernization is expected to (i) increase themill’s nominal production capacity to 1,240,000 tonnes per year, (ii) allow the Company toproduce 100% ECF pulp and (iii) achieve a further reduction in the impact of the Company’sproduction facilities on the environment. The Company expects that the full benefits of theModernization Project will be realized during 1999. Financing arrangements for theModernization Project are substantially complete.

Capital expenditures in 1998 reached US$88.3 million. Other investments were US$34.7million related to silviculture and other forestry investments, US$23.6 million of ongoingindustrial investments and US$19.1 million directed to the new hardwood sawmill Tecflor project

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(now named Aracruz Produtos de Madeira S.A.). The balance was invested in severalproductivity related projects in all areas of the Company.

The Company expects to invest during 1999 approximately US$20.0 million in industrialinvestments, US$34.4 million in silviculture and other forestry investments, US$5.2 million in thesolid wood products project and US$17.7 million in other projects.

Year 2000 Compliance

The problems associated with the passage to the year 2000 result from software programsthat were developed to code year information using two digits instead of four. Certain softwareprograms used by the Company could interpret a date code “00” to be 1900 instead of 2000.

In 1997, the Company instituted procedures to evaluate risks and adapt or replace bothinformation technology and non-information technology systems, including software programs;network systems and equipments. An officer of the Company was appointed to take charge of theYear 2000 compliance issue and two teams were formed: (i) an executive committee to takeresponsibility for the eventual effects of this issue on the Company; and (ii) a company-wide taskforce responsible for assisting each department on identifying, correcting or replacing its systems.The Company is also evaluating whether its material suppliers and customers are Y2K compliant through the Company’s Customers and Suppliers Compliance Plan. The following chart sets forththe schedule for the Year 2000 compliance program of the Company.

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(1) Company-wide information campaign about the year 2000 problem.(2) Assessment of all the Company’s systems and diagnosis of possible problems.(3) As defined below.(4) As defined below.(5) As defined above.

In order to improve access to business information through common, integrated computersystems, in 1997 the Company began a business system replacement project with systems that useprograms primarily from SAP America Inc. (“SAP R/3 system”). The first phase of theimplementation of the SAP R/3 system was completed in May 1998 and included the Company’sfinance, accounting, sales and distribution, and supply systems. The second phase began in thesecond half of 1998, and were already implemented the systems of fixed assets management,treasury cash management, quality management and project. The last system to be implemented,the human resources system, is expected to be ready by the end of the second quarter of 1999.Besides SAP R/3 system, the Company has also implemented (i) the Forestry Information System(“SIF”) which controls all forestry activities; (ii) the Maximo System which controls allequipment maintenance (“Maximo”); and (iii) the Digital System for Production Control(“SDCD”) which controls the pulp production process. The Company is also implementing the

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Cash Company System which controls its financial assets and liabilities (“Cash Company”). TheCompany believes that it currently has approximately 95% of its systems Y2K compliant.

The total investment by the Company in connection with its systems evaluation,adaptation and replacement procedures is expected to be approximately US$19.5 million from1997 to mid-1999 of which approximately (i)US$15.6 million is related to the implementationand installation of SAP R/3; (ii) US$1.4 million is related to the implementation of the SIF; (iii)US$1 million is related to the Maximo; (iv) US$0.5 is related to the SDCD; (v) US$0.2 million isrelated to the Cash Company; and (vi) the remaining 0.8 million to other miscellaneous systemsand projects.

As of March 31, 1999, the Company had incurred an expense of approximately US$14million to evaluate the extent of the Year 2000 problem, to establish the action plan and begin itsimplementation. Approximately US$ 13.5 million of the expenses were related to the SAP R/3system and the remaining was related to other systems. All the expenses incurred by the Companywith regard to the Year 2000 issue, will be financed out of working capital.

The Company is also implementing a comprehensive contingency plan that takes intoaccount the possibility of both internal and external failures (the “Contingency Plan”). Itsplanning involves identifying critical business functions and responses to failures that mayreasonably be expected to occur so that the Company may, to the extent practical, maintainminimum levels of operations and service. As part of the Contingency Plan, the Company iscurrently reviewing its stock strategies of finished products and raw materials. However, itscontingency plan cannot guarantee that material systems failures be adequately addressed.

In March, 1999, the Company completed all the corrections and tests on the systems andequipment of the mill. Based on these tests, the Company believes that the systems andequipments of the mill are 100% Y2K compliant.

In June, 1999 after testing each system, the Company conducted integrated test of all itssystems and procedures to evaluate any possible adverse impacts on its operations (the “GeneralTest”). In this test all computers had their dates changed to the year 2000, and simulated normaloperations. Although certain minor problems were identified, the overall results of the test weresatisfactory.

Although the Company is confident about the Y2K compliance of its internal systems andequipments, in the event that its efforts to prepare fully for the passage to the year 2000 are notsuccessful, the Company believes its core business can be materially adversely affected. Whilethe cost of the project and the expected date of completion of the Year 2000 Project are based onthe best information available to management, such estimates have been made based on a numberof variable factors and hypotheses of future events, including the continuing availability of certain

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resources, modifications of third-party systems and other factors. No assurances can be given thatsuch estimates or costs will not differ significantly from those described above.

Item 9A. Market Risk

As an exporter, Aracruz considers as its operating currency the US dollar. The market riskexposures are the US Dollar against Brazilian local currency variation and interest rate variation(fixed, floating and US Dollar-indexed).

Aracruz holds, on a weekly basis or more frequently if necessary, Treasury CashCommittee meetings where macroeconomic issues are discussed for its implications on financialmatters. During such meetings future steps are also decided in accordance with the directives setby the Board of Directors and with corporate policies.

Exchange Rate Sensitivity:

Aracruz was fully hedged on balance sheet basis against local currency risk at the end of1998.

Balance Sheet in terms of currency denomination:

Expressed in millions of United States Dollars

FY Denomination

1998 R$

ASSETS 3,200 336 2,864

CURRENT ASSETS 1,030 64 966

LONG-TERM ASSETS 278 272 6

PERMANENT ASSETS 1,892 - 1,892

LIABILITIES 3,200 341 2,859

CURRENT LIABILITIES 860 79 781

LONG-TERM LIABILITIES 773 262 511

STOCKHOLDERS’EQUITY

1,567 - 1,567

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As a result of its hedged position, the gainand loss on currency translations at the end of the first quarter of 1999 (after the local currencydevaluation) was a net gain of US$ 11.2 million.

Having its revenues 100% US Dollar denominated and its costs and expenses almostentirely local currency denominated, the Company highly benefitted from the local currencydevaluation on an ongoing basis, significantly improving its margins and cash generation.

The table below shows a sensitivity impact analysis over 1998 results of local currencydevaluation, considering two scenarios, a 20% devaluation above inflation rates and a scenario ofan exchange rate of R$2 per US$1.

US$ MILLION Actual Results With a With a Excluding Devaluation X-Ratenon-recurring of 20%

(R$2-US$1)

SALES VOLUME (thousand tonnes) 1,154 1,154 1,154

Av. NET PRICE (US$/t)

NET REVENUE

COST OF SALES (1)

DISTRIBUTION OF EXPENSES (2)

SG&A EXPENSES (3)

OPERATING INCOME

OPERATING MARGIN (%) 6.8 17.0 35.9

EBITDA (4)

______________________

(1) - Aprox. 9.5% of Cash cost denominated in local currency.(2) - Aprox. 30% of Cash Distribution Expenses denominated in local currency.(3) - Aprox. 90% of Cash SG&A Expenses denominated in local currency.(4) - Earnings Before Tax, Depreciation and Amortization.

Interest Rate Sensitivity and Sensitivity to Inflation Rates:

At March 31, 1999, the Company had approximately 13.6% of its total indebtednessdenominated in Brazilian Reais, which consisted of loans bearing interest at a variable rate. Theprincipal amount of such loans is also indexed to inflation. In times of high inflation, the Taxa deJuros de Longo Prazo (the Long-term interest rate or “TJLP”) is generally higher, i.e., the

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nominal rates include an inflation factor. The TJLP ranged from 9.89% to 18.0% in 1998, andaveraged 11.67 for the year. The interest payable by the Company on the Real-denominated debtis equal to TJLP, plus 5.5% to 11.7% per annum. See “—Item 9. Management’s Discussion andAnalysis of Financial Condition and Results of Operations—Liquidity and Capital Resources”and “Item 13. Interest of Management in Certain Transactions—BNDES Loan Agreements.”

At March 31, 1999, the Company had outstanding Real denominated loans with BNDESwith an aggregate amount of approximately R$316.1 million (US$ 179.0 million). If the TJLPincreased to 20%, interest payments on such loans would be approximately R$65.4 millionannually, as compared to interest rate expense in 1998 of R$42.3 million. If the TJLP increased to25% the Company’s annual interest payments would be approximately R$79.3 million. Suchinterest payments represented approximately 10% of the Company’s financial expenses on March31, 1999.

The inflation rate for 1998 was 1.7%. However, as a result of the devaluation of theBrazilian Real, the monthly inflation in January, February, March and April was 1.2%, 4.4%,2.0% and 0.03%, respectively. See “Item 9. Management’s Discussion and Analysis of FinancialCondition and Results of Operations—Overview—Brazilian Economic Environment.”

Set forth in the table below the Company’s currency and interest rate exposures, onfinancial debt outstanding for the years 1999-2004:

Principal Amount Outstanding (US$ million)Denomination

Interest Rate

1999 2000 2001 2002 2003 2004

Localcurrency

TJLP (1) 37.5 53.5 62.0 55.1 32.4 19.4

ForeignCurrencyBasket (2)

8.3 4.9 1.7 1.3 1.4 0.1

Fixed 469.8 30.7 36.7 136.0 2.2 3.3

Foreigncurrency

LIBOR 279.3 201.3 25.6 21.0 20.6 18.7

Total

Total per year 794.9 290.4 126.0 213.4 56.6 41.5 1,522.8

(1) Long Term Interest Rate(2)Basket of foreign currencies including US Dollar, Japanese Yen and European Currencies

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Commodity Price Sensitivity

The Company is exposed to commodity price risks through the fluctuation of pulp prices. The Company does not utilize derivative financial instruments to manage any remaining exposureto fluctuations in commodity prices. However, it seeks to minimize these risks through efficientoperating and inventory management procedures.

Item 10. Directors and Officers of Registrant

The Company is managed by its Board of Directors (i.e., Conselho de Administração),which may consist of no fewer than nine and no more than twelve members (each a "Director"),and its Executive Officers (i.e., Diretoria) which may consist of no fewer than five and no morethan eight officers (each an "Officer"). In accordance with the Company's By-Laws, the Board of Directors is elected for a term of three years by the Company's shareholders at the annualshareholders' meeting. The term of office of the current Board of Directors will end on April 30,2000. See "Item 13. Interest of Management in Certain Transactions— Shareholders'Agreement". The term of office of each Officer will end on May 20, 2000.

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At June 28, 1999, the Company's Directors and Officers are:

Name Position

Board of Directors

Erling Sven Lorentzen ChairmanHaakon Lorentzen MemberEliezer Batista da Silva MemberCarlos Alberto Vieira MemberRicardo Antonio Weiss MemberLadimir Enore Pellizzaro MemberNelson Pereira dos Reis MemberIsaac Selim Sutton MemberErnane Galvêas MemberJosé Mauro Mettreau Carneiro da Cunha Member

Executive Officers

Carlos Augusto Lira Aguiar(1) PresidentAgílio Leão de Macedo Filho OfficerJoão Felipe Carsalade OfficerWalter Lídio Nunes(2) Officer

_________________(1) Mr. Aguiar replaced Mr. Luiz Kaufmann as President on April 17, 1998 when Mr. Kaufmann

resigned to pursue personal interests.(2) Mr. Nunes was elected an officer on May 27, 1998.

Erling Sven Lorentzen. Mr. Lorentzen has been Chairman of the Board of the Companysince April 24, 1972. He is also Chairman of the Board and Chief Executive Officer of LorentzenEmpreendimentos S.A., which indirectly controls Arapar S.A., and is a member of the ExecutiveCommittee of the World Business Council for Sustainable Development and a member of theAdvisory Board of the American International Group.

Haakon Lorentzen. Mr. Lorentzen has been a Director of the Company since April 29,1991 and is the son of Mr. Erling Lorentzen. He is Executive Vice President of LorentzenEmpreendimentos S.A., as well as Chairman of Carbo Industrial S.A., Carbo Derivados S.A. andProvida ASA.

Eliezer Batista da Silva. Mr. Batista da Silva has been a Director of the Company sinceJune 28, 1996. He was also Chairman of Rio Doce Internacional. In 1992, he served as the

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Brazilian Government's Secretary for Strategic Affairs. From 1979 to 1986, he was Chairman ofCompanhia Vale do Rio Doce and also President of its Board of Officers. He was President ofMinerações Brasileiras Reunidas S.A. (Caemi Group) from 1964 to 1968, and Minister of Minesand Energy from 1962 to 1964. His first term as Chairman of Companhia Vale do Rio Doce wasfrom 1961 to 1962.

Carlos Alberto Vieira. Mr. Vieira has been a Director of the Company since April 15,1988. He is also President of the Board of Banco Safra S.A., Safra Leasing S.A. ArrendamentoMercantil, Agropecuária Potrillo S.A., and Pastoril Agropecuária Couto Magalhães S.A. He isalso an officer of Safra Seguradora S.A.

Ricardo Antonio Weiss. Mr. Weiss was elected director of the Company on March 25,1999. During 1999, he has also been member of the Executive Committee and Regional Managerof Anglo Base Metals for Brazil, Venezuela and Caribbean and responsible for the nickel portfolioworldwide. He is also President of Anglo American Brazil and Salobo Metais S.A. and BoardMember of Copebrás S.A. Since 1996, he has been President of Anglo American Venezuela andCEO of Minera Loma de Níquel . From 1992 to 1996, he was Vice-President of Anglo AmericanBrazil. He was also President of Codemin, Morro do Níquel and Mineiração Catalão de Goiás. From 1987 to 1992 he was Managing Director of Base Metal Divisions of Anglo AmericanBrazil. From 1980 to 1987 he held various managerial positions with the Hochschild Group. From 1978 to 1980, he was associated with Price Waterhouse Consulting Services.

Ladimir Enore Pellizzaro. Mr. Pellizzaro has been a Director of the Company since June28, 1996. He has also been a Technical Director of GTS, a member of the Mondi Group, since1993. From 1990 to 1993, he was Mill Manager of Mondi Richards Bay; from 1989 to 1990, hewas Acting Engineering Manager for Cia. Suzano de Papel e Celulose; from 1986 to 1989, he wasDirector of Jaakko Poyry Project, with responsibility for the expansion of the Company’s millcapacity; from 1984 to 1986, he was Industrial Superintendent of Indústrias de Papel Simão S.A.;from 1976 to 1984, he was Engineering and Development Manager of the Company; and from1968 to 1976, he was a Production Manager for the Klabin Group.

Nelson Pereira dos Reis. Mr. Reis has been a Director of the Company since April 30,1997. He is also the President of Copebrás S.A., Vice-President of Minorco Brasil ParticipaçõesLtda., the holding company of the Minorco Group in Brazil and Vice-President of ANDANational Fertilizer Industry Association.

Isaac Selim Sutton. Mr. Sutton has been a Director of the Company since June 28, 1996. He has also been an Officer and Managing Director of Safra Group since 1994. From 1992 to1994, he was Executive Director of Indústria e Comércio Cardinalli Ltda. and also a Director ofthe holding company of Unigel Group. Between 1986 and 1992, he was Marketing andCommercial General Director of Cosmoquímica Indústria e Comércio S.A. and, between 1980and 1986, Marketing Manager of Dow Chemical S.A.

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Ernane Galvêas. Mr. Galvêas has been a Director of the Company since April 29, 1994. He has also been a member of the Technical Committee of the Brazilian Association ofCommerce since 1975 and since 1988 he has been the Economic Counsel for the Presidencythereof. Mr. Galvêas has been the President of the Managing Committee of the BrazilianAssociation for Economic Studies Promotion since 1988, Minister of Finance of Brazil during theperiod January 1980 to March 1985, and President of the Central Bank of Brazil twice. He wasalso the Company's chief financial officer during the period 1974 to 1978 and Executive VicePresident in 1979.

José Mauro Mettrau Carneiro da Cunha. Mr. Carneiro da Cunha has been a memberof the Board since July 4, 1996. He is also Vice-President of Banco Nacional deDesenvolvimento Econômico e Social — BNDES. From 1995 to January 1999 he wasSuperintendent Directors of BNDES Participações S.A. — BNDESPAR. From 1990 to 1991 hewas Executive Director of Agência Especial de Financiamento Industrial — FINAME. Mr.Carneiro da Cunha has held various managerial positions with the Project Priorities Departmentand Administration Area of BNDES. From 1972 to 1973 ha was Engineer and head of PlanningDepartment of Empresa Klabin S.A.

Carlos Augusto Lira Aguiar. Mr. Aguiar became President of the Company on April 17,1998. He has been an Officer of the Company since October 25, 1985 and a Vice President fromApril 1993 to April 17, 1998. Due to the resignation of Mr. Armando da Silva Figueira asPresident, effective at February 11, 1993, Mr. Aguiar was also the Acting President from suchdate until November 16, 1993. Since 1981, Mr. Aguiar has held various managerial positionswith the operations department of the Company.

Agílio Leão de Macedo Filho. Mr. Macedo Filho has been Chief Financial Officer andStock Market Relations Officer of the Company since March 15, 1995. Mr. Macedo Filho hasheld executive positions with other Brazilian corporations, including Courtaulds InternationalLtda., Companhia Ceras Johnson, Companhia Fiat Lux and Xerox do Brasil.

João Felipe Carsalade. Mr. Carsalade has been an Officer of the Company sinceSeptember 6, 1993. Since 1976, Mr. Carsalade has held various managerial positions with thecommercial department of the Company.

Walter Lídio Nunes. Mr. Nunes has been an Officer of the Company since May 27,1998. Since 1977, Mr. Nunes has held various managerial positions with the industrialdepartment of the Company.

Item 11. Compensation of Directors and Officers

For the year ended December 31, 1998, the aggregate compensation of all Directors andOfficers of the Company was approximately US$3.7 million which includes bonuses related to

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1998 in the amount of US$1.0 million. In addition, for 1998 the Company paid an aggregate ofapproximately US$125,000 into the Company's Pension Plan on behalf of Directors and Officersof the Company.

Item 12. Options to Purchase Securities from Registrant or Subsidiaries

None.

Item 13. Interest of Management in Certain Transactions

Shareholders' Agreement

The Principal Shareholders are parties to a Shareholders' Agreement, dated January 22,1988, as amended on June 30, 1989 and June 13, 1996 (the "Shareholders' Agreement"). Whilethe Company is a signatory to the Shareholders' Agreement, its sole obligation under theagreement is to administer compliance by the Principal Shareholders in accordance with the termsof the Shareholders' Agreement. The Shareholders' Agreement relates only to the Company'sCommon Stock. The Shareholders' Agreement provides that the Principal Shareholders will beentitled to elect directors to the Company's Board of Directors in proportion to their respectiveproportionate interests in the Company's voting stock, except that each Principal Shareholder isensured the right to elect at least one director so long as such Principal Shareholder retains 5% ormore of the Company's voting stock. Such right is not transferable without the unanimousconsent of the other shareholder parties to the Shareholders' Agreement. In addition, theShareholders' Agreement provides that the maximum number of shares of Common Stock to beheld by any Principal Shareholder may not exceed 28% of the total outstanding shares ofCommon Stock. Furthermore, the Shareholders' Agreement provides that the PrincipalShareholders may sell, encumber or otherwise transfer their rights in the Company's voting stockto any third party as long as the beneficial ownership of 51% or more of such stock is retained byBrazilian nationals. Brazilian nationals are defined as (a) individual residents who are domiciledin Brazil, (b) corporate instrumentalities of the Brazilian government or subdivisions thereof or(c) corporate entities whose headquarters are in, and are incorporated in, Brazil and which,directly or indirectly, are controlled by persons referred to in (a) or (b) above. The Shareholders'Agreement also requires that each person or entity who acquires shares of Common Stock fromany of the Principal Shareholders become a party to such agreement.

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BNDES Loan Agreements

BNDES has been a principal lender of the Company. At December 31, 1998, theCompany had outstanding loans with BNDES with an aggregate principal amount outstanding ofapproximately R$425.4 million (US$352.0 million) (the "BNDES Debt"), which representsapproximately 23.1% of the Company’s total indebtedness. Of this amount, approximatelyR$352.7 million (US$291.9 million) is long-term debt with maturities up to seven years. Theinterest payable by the Company on the Real-denominated debt is equal to the Taxa de Juros deLongo Prazo (the Long-term Interest Rate or the "TJLP"), plus 5.5% to 11.77% per annum. TheTJLP is settled based on a mix of the long-term local and foreign debt instruments issued by thegovernment. The rate is reset quarterly. The debt that is denominated in, or indexed to, foreigncurrencies is corrected by changes in the exchange rate, plus interest of 6.4% to 11.51% perannum. Approximately two-thirds of the BNDES Debt was incurred in connection with theExpansion Project.

One of the financing arrangements that the Company has entered into with BNDESextends a credit line to the Company of up to US$205.0 million for use, principally in connectionwith the Modernization Project. See "Item 9. Management's Discussion and Analysis of FinancialCondition and Results of Operations—Liquidity and Capital Resources—Capital Expenditures".

Several of the BNDES Debt loan agreements contain covenants that require the Companyto maintain a ratio of total liabilities to total assets of less than 60.0%. At December 31, 1998 andas of the date hereof, the Company was in compliance with this requirement.

The BNDES Debt is secured by liens on substantially all of the Company's assets. Certainof the Principal Shareholders have provided BNDES with assurances that the Company will meetthe debt-to-equity and liquidity ratios contained in one of the BNDES Debt loan agreements andagreed that, in the event such ratios are not maintained, they will contribute to the Company ascapital any amount they would otherwise have been entitled to receive as dividends. Each ofArapar S.A., SODEPA and Mondi Brazil Limited has agreed to act as a guarantor of 32% of theCompany's obligations undertaken pursuant to three of the BNDES Debt loan agreements.

The Company believes that the BNDES Debt is on terms comparable to those offered byBNDES to unaffiliated third parties in similar financings. Because BNDES was organized by theBrazilian government in large part to support development of businesses within Brazil, loansmade by BNDES, including the BNDES Debt, are typically on terms more favorable to theborrower than would be available from non-governmental lending institutions. See Note 11 of theConsolidated Financial Statements of the Company.

Other Matters

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On January 1, 1998, Companhia de Navegação Norsul ("Norsul"), a company indirectlycontrolled by Mr. Erling Sven Lorentzen, the Chairman of the Board of the Company and aShareholder of Arapar S.A., one of the Principal Shareholders, entered into a contract with theCompany expiring on December 31, 2002 pursuant to which Norsul ships pulp for the Companyto the United States and Northern Europe. For Northern Europe, Norsul has a joint serviceagreement with Geralbulk Pool Ltd. In 1998, Norsul shipped approximately 316,000 tonnes ofpulp for the Company, representing approximately 29% of the Company’s export sales.

On June 14, 1996, the Company entered into a buyer’s credit agreement with Den norskeBank ASA, an indirect shareholder of Arapar S.A., pursuant to which Den norske Bank ASA hasagreed to provide approximately US$8,400,000 to the Company to finance the acquisition ofcertain equipment and related services in connection with the Modernization Project. Nodisbursements may be made pursuant to this agreement unless and until it is approved by theCentral Bank.

For additional information concerning indirect ownership of the Company by one of itscustomers, see "Item 4. Control of Registrant".

PART II

Item 14. Description of Securities to Be Registered

Not applicable.

PART III

Item 15. Defaults upon Senior Securities

None.

Item 16. Changes in Securities and Changes in Security for Registered Securities

None.

PART IV

Item 17. Financial Statements

Not applicable.

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Item 18. Financial Statements

See Item 19(a) for a list of financial statements filed under Item 18.

Item 19. Financial Statements and Exhibits

(a) Financial Statements. The following financial statements and schedules are filedas part of this annual report, together with the report of the independent accountants.

Page

Consolidated Financial Statements:Index to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . .............. F-1Report of PricewaterhouseCoopers Auditores Independentes.......................... F-2Consolidated balance sheets at December 31, 1998 and 1997 ......................... F-3Consolidated statements of operations for each of the three years in the period

ended December 31, 1998............................................................................ F-4Consolidated statements of cash flows for each of the three years in the period

ended December 31, 1998............................................................................ F-6Consolidated statements of changes in stockholders' equity for each of the three

years in the period ended December 31, 1998 ............................................. F-8Notes to consolidated financial statements....................................................... F-10

All other schedules are omitted because they are not applicable or because the requiredinformation is contained in the consolidated financial statements or notes thereto.

(b) Exhibits. Not applicable.

The Company hereby agrees to furnish to the Securities and Exchange Commission, uponrequest, copies of any instruments that define the rights of holders of long-term debt of theCompany that are not filed as exhibits to this annual report.

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ARACRUZ CELULOSE S.A.INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

Consolidated Financial Statements:Report of PricewaterhouseCoopers Auditores Independentes.......................... F-2Consolidated balance sheets at December 31, 1998 and 1997 ......................... F-3Consolidated statements of operations for each of the three years in the period

ended December 31, 1998............................................................................ F-4Consolidated statements of cash flows for each of the three years in the period

ended December 31, 1998............................................................................ F-6Consolidated statements of changes in stockholders' equity for each of the three

years in the period ended December 31, 1998 ............................................. F-8Notes to consolidated financial statements....................................................... F-10

F-1

SIGNATURES

Pursuant to the requirements to Section 12 of the Securities Exchange Act of 1934, theregistrant certifies that it meets all the requirements for filing on Form 20-F and has duly causedthis annual report to be signed on its behalf by the undersigned, thereunto duly authorized.

ARACRUZ CELULOSE S.A.

By: /s/ Carlos Augusto Lira AguiarPresident

By: /s/ Agílio Leão de Macedo FilhoChief Financial Officer

Date: June 30, 1999