1.
       

We have reviewed the accompanying condensed consolidated balance sheet of Aracruz Celulose S.A. and subsidiaries (“the Company”) as of September 30, 2006 and the related condensed consolidated statements of operations for the three-month and nine-month periods ended September 30, 2006 and 2005, and changes in stockholders’ equity and cash flows for the nine-month periods ended September 30, 2006 and 2005, all expressed in United States dollars. These financial statements are the responsibility of the Company's management.

2.
       

We conducted our reviews in accordance with the standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the Public Company Accounting Oversight Board (United States), the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.

Based on our reviews, we are not aware of any material modifications that should be made to the condensed financial statements referred to above for them to be in conformity with accounting principles generally accepted in the United States of America.

We have previously audited in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of the Company as of December 31, 2005, and the related consolidated statements of operations, changes in shareholders’ equity, and cash flows for the year then ended (not presented herein) and, in our report dated January 10, 2006, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of December 31, 2005 is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.

Stockholders’ equity included in the financial information presented herein differs from that included in the Company's statutory accounting records as a result of differences between the variations in the US dollar exchange rate and in the indexes mandated, in previous years, for indexation of the statutory financial statements, and of adjustments made to reflect the requirements of US GAAP. Brazilian law permits the payment of cash dividends only from unappropriated retained earnings and certain reserves registered in the Company's statutory accounting records.

At September 30, 2006, the statutory reserves available for distribution as dividends, upon approval by the Company's stockholders, amounted to the equivalent of US$ 1.171 million.

Basic and diluted earnings per share ("EPS") as of September 30, 2006 and 2005 as presented in the Company's statement of income have been calculated on the following basis taking into consideration the Dividend Allocation between Class A and Class B preferred stock and common stock as discussed in the following summary of significant rights, terms, privileges and conversion features of the Company's stock:

Priority in the return of capital in the liquidation of the Company;

Right to receive cash dividends in an amount 10% higher than dividends attributable to each common stock.

Priority in the distribution of a minimum annual cash dividend equivalent to 6% of the capital attributable to it. 

Priority in the return of capital in the liquidation of the Company;

Right to receive cash dividends in an amount 10% higher than dividends attributable to each common stock.

At September 30, 2006, the Company had a total provision recorded for other cases of US$ 17.1 million (US$ 16.7 million in December 31, 2005) based on the Court’s computation framework and existing labor jurisprudence and a corresponding deposit in an escrow account of US$ 7.5 million (US$ 7.0 million in December 31, 2005). These proceedings are mainly represented by salary readjustments indexes over specific years questioned by some ex-employees.

In March 1997, the Company received notification from the INSS (the Brazilian Social Security System) relating to the value of housing allowances paid to certain employees over a period of several years. The Company has been contesting this notification and, at September 30, 2006, has placed approximately US$ 7.8 million in an escrow account to cover this claim. Based on the opinion of its legal advisors, Company’s management does not believe that the ultimate resolution of this matter will have a material adverse impact on the Company, and accordingly, no provision has been recognized.

The Company is taking action in court against certain changes in the rates and rules for the calculation of the PIS (Social Integration Program) and COFINS (Social Fund) contributions determined by Law 9.718/98, the basis of calculation of which includes financial income and exchange and monetary variations. At September 30, 2006, the accrual for disputed taxes included US$ 72.1 million related to PIS and COFINS on exchange gains on U.S. dollar denominated debt resulting from the appreciation of the Real against the U.S. dollar that occurred following the significant devaluation in early 1999.

After analyzing certain legal decisions on similar legal actions of other companies and their implications for Aracruz’s case, the Company decided to cancel part of the legal action, regarding the rate increase and the basis of calculation modifications (except for foreign exchange variation), and decided to pay the accrued amount in installments according to a special program of tax collection called PAES, enacted by the law 10.684/2003. Notwithstanding, due to a judgment issued by the Brazilian Supreme Court which considered the modification in the rules for the calculation of PIS and COFINS to be unconstitutional, the Company requested and was granted a provisional remedy allowing it not to pay the PAES installments related to such modification. As of September 30, 2006 the remaining balance amounted to US$ 24.7 million (US$ 23.5 million as of December, 2005) and is recorded in long-term liabilities.

In 2002, the Company took action in court against the government of the State of Espírito Santo to confirm the legal right to use its accumulated ICMS credits arising from fixed assets, raw material and other goods acquired for utilization in the process of pulp production. In August 2005, the Company entered into a Term of Settlement with the State of Espírito Santo, pursuant to which it liquidated debts on tax rate differences ("diferencial de alíquota") in the amount of US$ 55.7 million. Of this amount, US$ 5.4 million were paid and US$ 50.3 million were compensated with accumulated ICMS credits. The legal action referred to above became redundant due to such settlement and, accordingly it was cancelled by the Company.

In September 2005, the government of the State of Espírito Santo passed a new legislation allowing the transference to other taxpayers of ICMS credits resulting from export sales. The new legislation, as amended in June 2006, sets forth that the assignment of such credits shall be requested by October 31, 2006. The Company envisages good chances of successful negotiation aiming to assign accumulated credits to third parties. In May 2006 the Company assigned credits to third parties in the amount of US$ 592 thousand at a discount of US$ 178 thousand.

As of September 30, 2006, the balance recorded as a tax asset was US$ 141.2 million (US$ 117.3 million as of December 31, 2005), of which the amount of US$ 137.0 million had a provision for loss (US$ 113.5 million as of December 31, 2005).

On September 10, 2003, the Company obtained a Court Order giving it the right not to pay Social Contribution on profits generated by export sales from January 2002 as well as the right to recognize the amounts of tax credits previously compensated in this regard. Pending of final determination, the Company has accrued a liability of US$ 86.3 million as of September 30, 2006 (US$ 74.4 million to December 2005).

The Company’s forestry and manufacturing operations are subject to both Federal and State government environmental regulations. The Company’s management believes that it is in compliance, in all material respects, with all applicable environmental regulations.

On June 29, 2005, the Company received a tax assessment notice claiming that social contribution charges should not have been deducted from taxable income when calculating income tax for 2000 and 2001. The accrual amounts to US$ 16.2 million as of September 30, 2006.

In July 2005, the Company reviewed its calculation of the income tax for the periods covered in the assessment and decided to pay US$ 10.1 million of the requested amount. The Company challenged the balance of the tax assessment via an administrative appeal and therefore the ability of the authorities to charge the tax debt is currently suspended.

On June 29, 2005, the Company received a tax assessment notice relating to the offsetting of tax losses against taxable income of 2000 and 2001. The Company also received a tax assessment notice relating to 2000, regarding tax losses generated during the period in which the Company took advantage of the BEFIEX tax benefit program.

In July 2006 a Court decision did not recognize the Company's right to offset tax losses against taxable income. The Company challenged such decision. Notwithstanding, with the purpose of avoiding penalty charges the Company paid the amount of US$ 23.1 million

The existing accrual at September 30, 2006 for the period in which the Company took advantage of the BEFIEX tax benefit program is US$ 30.1 million.

Based on an analysis of the disputes involved and on consultation with its legal counsel, the Company has recorded additional provisions in the amount of US$ 14.9 million relating to several other legal disputes and has also made deposits in the amount of US$ 6.7 million in escrow accounts as of September 30, 2006.

In the first semester of 1998, the Indian communities and the Company entered into Terms of Settlement in which both parties recognized the legitimacy of the Ministry of Justice Edicts 193, 194 and 195, dated March 6, 1998, that determined the enlargement of the Indian reservation in 2,571 hectares of land belonging to the Company. The Company committed itself to a financial aid program to be implemented through social, agricultural, educational, shelter and health projects, up to an amount of approximately R$ 13.5 million (equivalent to US$ 6.2 million at September 30, 2006), monetarily restated by one of the official inflation indexes, to be disbursed within a twenty-year period, conditioned to the accomplishment of certain obligations by the Indian communities.

Despite the fact that the Terms of Settlement were in force, during the year 2005 members of the Indian communities invaded some forestry areas and the industrial premises of the Company. Although the Company had obtained provisional measures to be reintegrated in the possession of the invaded areas, as of the end of the second quarter of 2006, these invaders still occupy approximately 11,000 hectares of land to which the Company is legally entitled. Since the invasion represented the breach of the Terms of Settlement by the Indian communities, the Company - after having notified the communities themselves, the National Indian Foundation - FUNAI and the Federal Public Prosecutor (Ministério Público Federal) - suspended all its commitments towards the Indian communities under the Terms of Settlement. As of Setember 30, 2006, during the period in which the Terms of Settlement were being complied with, the Company had donated to the Indian Associations the amount of approximately R$ 9.6 million, equivalent to US$ 4.4 million.

On February 17, 2006 FUNAI published Dispatches No. 11 and 12 in the Official Federal Gazette, approving the conclusion of the working group set up by FUNAI Edict No. 1.299/05, which recommends the extension of Indian reserves by approximately 11 thousand hectares, comprised almost entirely of lands whose title and possession belong to Aracruz. These areas were identified by the working group as being land traditionally occupied by Indians. Confident in the robustness of its rights, the Company presented its challenge of those Dispatches on June 19, 2006.

As a result of the Barra do Riacho operations being located within the geographic area of ADENE (Agency for the Development of the Northeast) and since Decree No. 4213, of April 16, 2002, recognizes the pulp and paper sector as a priority in the development of the region, Aracruz requested and was granted by the Federal Revenue Service in December 2002 the right to benefit from reductions in corporate income tax.

On January 9, 2004, the Company was notified by the Liquidator of the former Superintendência de Desenvolvimento do Nordeste (SUDENE) of its decision to revoke the fiscal benefits previously granted to the Company based on an opinion of the Legal Counsel to the National Integration Ministry on the definition of the geographical area eligible for the recognition of such benefit.

During 2004 and 2005, ADENE issued several acts with the objective of annulling the tax benefit used by the Company. Such acts were always challenged by the Company and no final decision on the merits was issued as this point. Nevertheless, in December 2005 the Company was notified by the Federal Revenue Service to pay the amount corresponding to the tax incentive it had recorded, plus interest, in the total amount of US$ 97 million. The Company presented its defense in January 2006 and is currently awaiting a decision.

The Company’s management, based on the advice of external legal counsel, believes that the decisions of ADENE and of the Federal Revenue Service do not invalidate the benefits recorded (US$ 75 million on December 31, 2005, credited to “Capital reserve” account). Thus, no provisions for loss were booked for the amounts of the benefits recognized through those dates.

Starting January 2005 the Company has not been recognizing this benefit in the calculation of income taxes payable, as it had previously done in prior years.

The Company’s foreign currency risk management strategy may use derivative instruments to protect against foreign exchange rate volatility, which may impair the value of certain of the Company’s assets.

During the nine-month period ended September 30, 2006 the Company has recognized a positive result of US$ 73 million (US$ 37 million in the same period of 2005) related to future dollar contracts registered in BM&F - Brazilian Mercantile & Futures Exchange. These operations have aggregated notional amount of US$ 289 million as of September 30, 2006 and are marked to market on a daily basis, with outstanding balance to be received of US$ 0.4 million (US$ 4 million as of December 31, 2005).

The Company's exports from Brazil, classified by geographic destination, are as follows: