**U.S. SECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549**

**FORM 20-F**

**o****REGISTRATION STATEMENT PURSUANTTO SECTION 12(b) OR (g)OF THE SECURITIES EXCHANGE ACT OF 1934**

**OR**

**x****ANNUAL REPORT PURSUANT TOSECTION 13 OR 15 (d)OF THE SECURITIES EXCHANGE ACT OF 1934**

For the fiscal year ended **December 31,2006**

**o****TRANSITION REPORT PURSUANT TOSECTION 13 OR 15 (d)OF THE SECURITIES EXCHANGE ACT OF 1934**

**OR**

**o****SHELL COMPANY REPORT PURSUANT TOSECTION 13 OR 15 (d)OF THE SECURITIES EXCHANGE ACT OF 1934**

Commission file number **1-15184**

**SADIA S.A.**(Exact Name of Registrant as Specified in its Charter)

**FederativeRepublic of Brazil**(Jurisdiction of Incorporation or Organization)

**N/A**(Translation of Registrant’s name into English)

**RuaFortunato Ferraz, 659Vila Anastácio, São Paulo, SP05093-901, Brazil**(Address of principal executive offices)

Securities registered pursuant to Section 12(b) of theAct:
| Title of Each Class                            | ** ** | **Name of Each Exchange on which Registered** |
|------------------------------------------------|------------|-----------------------------------------------|
| Preferred Shares, no par value per share,      |       | New York Stock  Exchange                      |
| each represented by American Depositary Shares |       |                                          |

Securitiesregistered pursuant to Section 12(g) of the Act:

**None**

Securities forwhich there is a reporting obligation pursuant to Section 15(d) of the Act:

**None**

Thetotal number of issued shares of each class of stock of SADIA S.A. as ofDecember 31, 2006, was:

**257,000,000Common Shares, no par value per share**

**426,000,000Preferred Shares, no par value per share**

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

Yes  x  No  o

If this report isan annual or transition report, indicate by check mark if the registrant is notrequired to file reports

pursuant toSection 13 or 15(d) of the Securities Exchange Act of 1034.

Yes  o  No  x

Indicate by checkmark whether the Registrant (1) has filed all reports required to be filed bySection 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding12 months (or such shorter period that the Registrant was

required to filesuch reports), and (2) has been subject to such filing requirements for thepast 90 days.

Yes  x  No o

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

| x  Large accelerated filer |   | o  Accelerated filer |   | o  Non-accelerated filer |
|----------------------------|--------|----------------------|--------|--------------------------|

Indicate by check markwhich financial statement item the Registrant has elected to follow Item 17 oItem 18 x.

Please send copiesof notices and communications from the Securities and Exchange Commission to:

Ross Kaufman,Greenberg Traurig, LLP

200 Park Avenue,New York, New York 10166

 

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**CONTENTS**
| ***GENERAL***                                                        | ***4***      |
|----------------------------------------------------------------------|--------------|
| *** ***                                                         | *** *** |
| ***PART I***                                                         | ***4***      |
| *** ***                                                         | *** *** |
| ***ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND  ADVISERS*** | ***4***      |
| *** ***                                                         | *** *** |
| ***ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE***                | ***4***      |
| *** ***                                                         | *** *** |
| ***ITEM  3. KEY INFORMATION***                                       | ***4***      |
| *** ***                                                         | *** *** |
| ***A.  Selected Financial Data***                                    | ***4***      |
| *** ***                                                         | *** *** |
| ***B. Capitalization and Indebtedness***                             | ***6***      |
| *** ***                                                         | *** *** |
| ***C. Reasons for the offer and use of proceeds***                   | ***6***      |
| *** ***                                                         | *** *** |
| ***D. Risk  Factors***                                               | ***6***      |
| *** ***                                                         | *** *** |
| ***ITEM 4. INFORMATION ON THE COMPANY***                             | ***11***     |
| *** ***                                                         | *** *** |
| ***A. History and Development of the Company***                      | ***11***     |
| *** ***                                                         | *** *** |
| ***B.  Business Overview***                                          | ***14***     |
| *** ***                                                         | *** *** |
| ***C.  Organizational Structure***                                   | ***36***     |
| *** ***                                                         | *** *** |
| ***D. Property, Plant and Equipment***                               | ***36***     |
| *** ***                                                         | *** *** |
| ***ITEM 4A. UNRESOLVED SEC STAFF COMMENTS***                         | ***39***     |
| *** ***                                                         | *** *** |
| ***ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS***           | ***39***     |
| *** ***                                                         | *** *** |
| ***A.  Operating Results***                                          | ***43***     |
| *** ***                                                         | *** *** |
| ***B. Liquidity and Capital Resources***                             | ***51***     |
| *** ***                                                         | *** *** |
| ***C. Research and Development, patents and licenses***              | ***55***     |
| *** ***                                                         | *** *** |
| ***D.  Trend Information***                                          | ***56***     |
| *** ***                                                         | *** *** |
| ***E. Off- balance sheet arrangements***                             | ***57***     |
| *** ***                                                         | *** *** |
| ***F. Tabular disclosure of contractual obligations***               | ***58***     |
| *** ***                                                         | *** *** |
| ***G. Safe  Harbor***                                                | ***58***     |
| *** ***                                                         | *** *** |
| ***ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES***             | ***58***     |
| *** ***                                                         | *** *** |
| ***A. Directors and Senior Management***                             | ***58***     |
| *** ***                                                         | *** *** |
| ***B.  Compensation***                                               | ***63***     |
| *** ***                                                         | *** *** |
| ***D. Employees***                                                   | ***66***     |
| *** ***                                                         | *** *** |
| ***E. Share  Ownership***                                            | ***66***     |

 

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| ***ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY  TRANSACTIONS***                             | ***66***     |
|----------------------------------------------------------------------------------------------|--------------|
| *** ***                                                                                 | *** *** |
| ***A. Major Shareholders***                                                                  | ***66***     |
| *** ***                                                                                 | *** *** |
| ***B.  Related Party Transactions***                                                         | ***68***     |
| *** ***                                                                                 | *** *** |
| ***C. Interests of Experts and Counsel***                                                    | ***68***     |
| *** ***                                                                                 | *** *** |
| ***ITEM  8. FINANCIAL INFORMATION***                                                         | ***68***     |
| *** ***                                                                                 | *** *** |
| ***A. Consolidated Statements and Other Financial  Information***                            | ***68***     |
| *** ***                                                                                 | *** *** |
| ***B.  Significant Changes***                                                                | ***73***     |
| *** ***                                                                                 | *** *** |
| ***ITEM  9. THE OFFER AND LISTING***                                                         | ***73***     |
| *** ***                                                                                 | *** *** |
| ***A.  Offer and listing details***                                                          | ***73***     |
| *** ***                                                                                 | *** *** |
| ***B.  Plan of Distribution***                                                               | ***77***     |
| *** ***                                                                                 | *** *** |
| ***C. Markets***                                                                             | ***77***     |
| *** ***                                                                                 | *** *** |
| ***D.  Selling Shareholders***                                                               | ***79***     |
| *** ***                                                                                 | *** *** |
| ***E. Dilution***                                                                            | ***79***     |
| *** ***                                                                                 | *** *** |
| ***F.  Expenses of Issue***                                                                  | ***79***     |
| *** ***                                                                                 | *** *** |
| ***ITEM 10. ADDITIONAL INFORMATION***                                                        | ***79***     |
| *** ***                                                                                 | *** *** |
| ***A. Share  capital***                                                                      | ***79***     |
| *** ***                                                                                 | *** *** |
| ***B. Memorandum and Articles of Association***                                              | ***79***     |
| *** ***                                                                                 | *** *** |
| ***C.  Material Contracts***                                                                 | ***79***     |
| *** ***                                                                                 | *** *** |
| ***D.  Exchange Controls***                                                                  | ***79***     |
| *** ***                                                                                 | *** *** |
| ***E. Taxation***                                                                            | ***80***     |
| *** ***                                                                                 | *** *** |
| ***F.  Dividends and Paying Agents***                                                        | ***86***     |
| *** ***                                                                                 | *** *** |
| ***G.  Statement of Experts***                                                               | ***86***     |
| *** ***                                                                                 | *** *** |
| ***H.  Documents on Display***                                                               | ***86***     |
| *** ***                                                                                 | *** *** |
| ***I.  Subsidiary Information***                                                             | ***86***     |
| *** ***                                                                                 | *** *** |
| ***ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES  ABOUT MARKET RISK***                   | ***86***     |
| *** ***                                                                                 | *** *** |
| ***ITEM 12. DESCRIPTION OF THE SECURITIES OTHER THAN  SECURITIES***                          | ***89***     |
| *** ***                                                                                 | *** *** |
| ***PART II***                                                                                | ***89***     |
| *** ***                                                                                 | *** *** |
| ***ITEM 13. DEFAULTS, DIVIDENDS ARREARAGES AND  DELINQUENCIES***                             | ***89***     |
| *** ***                                                                                 | *** *** |
| ***ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF  SECURITY HOLDERS AND USE OF PROCEEDS*** | ***89***     |
| *** ***                                                                                 | *** *** |
| ***ITEM 15. CONTROL AND PROCEDURES***                                                        | ***89***     |

*** ***

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*** ***
| ***Report of Independent  Registered Public Accounting Firm***                   | ***90***     |
|----------------------------------------------------------------------------------|--------------|
| *** ***                                                                     | *** *** |
| ***ITEM 16***                                                                    | ***91***     |
| *** ***                                                                     | *** *** |
| ***A. Audit Committee Financial Expert***                                        | ***91***     |
| *** ***                                                                     | *** *** |
| ***B. Code of  Ethics***                                                         | ***91***     |
| *** ***                                                                     | *** *** |
| ***C. Principal Accountant Fees and Services***                                  | ***92***     |
| *** ***                                                                     | *** *** |
| ***D. Exemptions from the Listing Standards and for Audit  Committees***         | ***92***     |
| *** ***                                                                     | *** *** |
| ***E. Purchases of Equity Securities by the Issuer and  Affiliated Purchasers*** | ***92***     |
| *** ***                                                                     | *** *** |
| ***PART III***                                                                   | ***93***     |
| *** ***                                                                     | *** *** |
| ***ITEM  17. FINANCIAL STATEMENTS***                                             | ***93***     |
| *** ***                                                                     | *** *** |
| ***ITEM  18. FINANCIAL STATEMENTS***                                             | ***93***     |
| *** ***                                                                     | *** *** |
| ***ITEM 19.  EXHIBITS***                                                         | ***93***     |
| *** ***                                                                     | *** *** |
| ***BYLAWS***                                                                     | ***95***     |
| *** ***                                                                     | *** *** |
| ***Exhibit  12.01 Certification by the Company’s CEO***                     | *** *** |
| *** ***                                                                     | *** *** |
| ***Exhibit  12.02 Certification by the Company’s CFO***                     | *** *** |
| *** ***                                                                     | *** *** |
| ***Exhibit  13.01 Certification pursuant to 18 U.S.C. Section 1350.***           | *** *** |
| *** ***                                                                     | *** *** |
| ***Exhibit  13.02 Certification pursuant to 18 U.S.C. Section 1350.***           | *** *** |
| *** ***                                                                     | *** *** |
| ***SADIA S.A.***                                                                 | ***F-1***    |
| *** ***                                                                     | *** *** |
| ***CONSOLIDATED FINANCIAL  STATEMENTS***                                         | ***F-1***    |

 

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# **GENERAL**

*Unless otherwise indicated, all referencescontained herein, to the “Company”, to “Sadia”, or to “Sadia Group” arereferences to Sadia S.A., a corporation organized under the laws of theFederative Republic of Brazil (“Brazil”), and its consolidated subsidiaries:Sadia International Ltd.; Sadia GmbH; Rezende Marketing e Comunicação Ltda.,Rezende Óleo Ltda., Sadia Overseas Ltd. and Concórdia S.A. Corretora de ValoresMobiliários, Câmbio e Commodities.*

*Presentation of Certain Financial Information*

Referencesto “preferred shares” and “common shares” refer to the Company’s authorized andoutstanding preferred stock and common stock, designated as “açõespreferenciais” and “ações ordinárias”, respectively, each without par value.All references herein to the “real,” “reais” or “R$” are to the real, theofficial currency of Brazil since July 1, 1994. All references to (i) “U.S.dollars”, “dollars” or “US$” refer to United States dollars, (ii) “km” tokilometers, and (iii) “tons” to metric tons.

*Forward-Looking Statements*

Thisannual report contains certain forward-looking statements as defined in Section21E of the U.S. Securities Exchange Act of 1934 with respect to the financialcondition, results of operations and business achievements/ performance of Sadiaand certain of the plans and objectives of management of the Company withrespect thereto. These statements may generally, but not always, be identifiedby the use of words such as “should”, “expects”, “estimates”, “believes” orsimilar expressions. Such statements include, but are not limited to,statements under the following headings: (i) Item 4. Information on theCompany; and (ii) Item 5. Operating and Financial Review and Prospects. Thisannual report also contains forward-looking statements attributed to certainthird parties relating to their estimates regarding the growth of markets anddemand for products. By their nature, forward-looking statements involve riskand uncertainty because they reflect the Company’s current expectations andassumptions as to future events and circumstances that may not prove accurate:the factors discussed in Item 3. Key Information — Risk Factors, among others,could cause the Company’s actual financial condition, results of operations andbusiness achievements/ performance to differ materially from the estimates madeor implied in such forward-looking statements.

# **PART I**

## **ITEM1.  IDENTITY OF DIRECTORS, SENIORMANAGEMENT AND ADVISERS**

Notapplicable.

## **ITEM 2.OFFER STATISTICS AND EXPECTED TIMETABLE**

Notapplicable.

## **ITEM 3. KEYINFORMATION**

### **A. SelectedFinancial Data**

U.S.GAAP Presentation

Theselected financial information for the Company included in the following tableshould be read in conjunction with, and is qualified in its entirety byreference to, the U.S. GAAP financial statements of the Company and “Operatingand Financial Review and Prospects” appearing elsewhere herein. Theconsolidated financial data for the Company as of December 31, 2006, 2005,2004, 2003 and 2002 are derived from the audited U.S. GAAP financialstatements, which differ in certain respects from 

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accountingpractices adopted in Brazil (defined as Brazilian GAAP). Brazilian GAAP isdetermined by the requirements of Law No. 6,404, dated December 15, 1976, asamended (Brazilian corporate law), and the rules and regulations of theComissão de Valores Imobiliários, or CVM, the Brazilian Securities Commission.

**SADIA S.A.**

SELECTED FINANCIAL DATA

Years endedDecember 31, 2006, 2005, 2004, 2003 and 2002 (In thousands of *reais*- R$, except numbers of shares and per share amounts)
| ** **                                      | ** ** | **2006**    | ** ** | **2005**    | ** ** | **2004**    | ** ** | **2003**    | ** ** | **2002**    | ** ** |
|-------------------------------------------------|------------|-------------|------------|-------------|------------|-------------|------------|-------------|------------|-------------|------------|
| ** **                                      | ** ** | ** **  | ** ** | ** **  | ** ** | ** **  | ** ** | ** **  | ** ** | ** **  | ** ** |
| Net Operating  Revenue                          |       | 6,830,300   |       | 7,317,842   |       | 6,109,225   |       | 5,081,717   |       | 4,139,070   |       |
| Operating Income                                |       | 302,223     |       | 680,903     |       | 635,029     |       | 401,009     |       | 345,322     |       |
| Net income                                      |       | 360,560     |       | 603,268     |       | 489,501     |       | 473,268     |       | 284,262     |       |
|                                            |       |        |       |        |       |        |       |        |       |        |       |
| Basic earnings  per thousand shares in R$:      |       |        |       |        |       |        |       |        |       |        |       |
| Preferred                                       |       | 531.18      |       | 885.08      |       | 742.42      |       | 717.80      |       | 431.14      |       |
| Common                                          |       | 531.18      |       | 885.08      |       | 674.93      |       | 652.54      |       | 391.94      |       |
|                                            |       |        |       |        |       |        |       |        |       |        |       |
| Diluted earnings  per thousand share in R$:     |       |        |       |        |       |        |       |        |       |        |       |
| Preferred                                       |       | 529.79      |       | 884.38      |       | 742.42      |       | 717.80      |       | 431.14      |       |
| Common                                          |       | 529.79      |       | 884.38      |       | 674.93      |       | 652.54      |       | 391.94      |       |
|                                            |       |        |       |        |       |        |       |        |       |        |       |
| Dividends paid  per thousand shares in R$:      |       |        |       |        |       |        |       |        |       |        |       |
| Preferred                                       |       | 287.12      |       | 231.96      |       | 234.68      |       | 170.08      |       | 106.89      |       |
| Common                                          |       | 287.12      |       | 210.87      |       | 213.34      |       | 154.61      |       | 97.18       |       |
|                                            |       |        |       |        |       |        |       |        |       |        |       |
| Total Current  Assets                           |       | 4,929,689   |       | 4,588,176   |       | 3,944,802   |       | 3,645,379   |       | 2,759,217   |       |
| Total Assets                                    |       | 8,039,757   |       | 6,707,284   |       | 5,830,973   |       | 6,149,453   |       | 4,975,627   |       |
|                                            |       |        |       |        |       |        |       |        |       |        |       |
| Total Current  Liabilities                      |       | 2,493,279   |       | 2,625,812   |       | 2,766,719   |       | 2,969,833   |       | 2,591,383   |       |
| Total  Liabilities                              |       | 5,447,114   |       | 4,479,167   |       | 3,992,609   |       | 4,627,868   |       | 3,917,868   |       |
| Total  Shareholders’ Equity                |       | 2,592,643   |       | 2,228,117   |       | 1,838,364   |       | 1,521,585   |       | 1,057,759   |       |
|                                            |       |        |       |        |       |        |       |        |       |        |       |
| Weighted average  number of shares outstanding: |       |        |       |        |       |        |       |        |       |        |       |
| Preferred                                       |       | 421,785,712 |       | 424,595,712 |       | 425,695,712 |       | 425,695,712 |       | 425,695,712 |       |
| Common                                          |       | 257,000,000 |       | 257,000,000 |       | 257,000,000 |       | 257,000,000 |       | 257,000,000 |       |

 

Theexchange rates of *real* amounts into U.S. dollarsfor the years ended December 31, 2002,2003, 2004, 2005, 2006 and January 2007 through May 2007 are shown inthe table below:

|                                            | ** ** | **Reais per U.S. Dollar** | ** ** |
|--------------------------------------------|------------|------------------------------------------|------------|
| ** **                                 | ** ** | ** **                               | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Year Ended December 31,** | ** ** | **High**                                 | ** ** | **Low** | ** ** | **Average** | ** ** | **End of Period** | ** ** |
| 2002                                       |       | 3.9552                                   |       | 2.2709 |   | 2.9285 |   | 3.5333 |   |
| 2003                                       |       | 3.6623                                   |       | 2.8219 |   | 3.0715 |   | 2.8892 |   |
| 2004                                       |       | 3.2051                                   |       | 2.6544 |   | 2.9257 |   | 2.6544 |   |
| 2005                                       |       | 2.7621                                   |       | 2.1633 |   | 2.4341 |   | 2.3407 |   |
| 2006                                       |       | 2.3711                                   |       | 2.0586 |   | 2.1771 |   | 2.1380 |   |

 

|                       | ** ** | **Reais per U.S. Dollar** | ** ** |
|-----------------------|------------|------------------------------------------|------------|
| ** **            | ** ** | ** **                               | ** ** | ** ** | ** ** |
| **Months Ended** | ** ** | **High**                                 | ** ** | **Low** | ** ** |
| January 2007          |       | 2.1556                                   |       | 2.1247 |   |
| February 2007         |       | 2.1182                                   |       | 2.0766 |   |
| March 2007            |       | 2.1388                                   |       | 2.0504 |   |
| April 2007            |       | 2.0478                                   |       | 2.0231 |   |
| May 2007              |       | 2.0309                                   |       | 1.9289 |   |

 

5

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### **B.Capitalization and Indebtedness**

Notapplicable

### **C. Reasonsfor the offer and use of proceeds**

Notapplicable

### **D. RiskFactors**

**Risks Relating to Brazil**

***Brazilian political and economic conditions, and the Braziliangovernment’s economic and other policies, may negatively affect demand forSadia ́s products as well as net sales and overall financial performance.***

The Brazilian economy hasbeen characterized by frequent and occasionally extensive intervention by theBrazilian government. The Brazilian government has often changed monetary,taxation, credit, tariff and other policies to influence the course of Brazil’seconomy. The Brazilian government’s actions to control inflation and implementother policies have involved interest rate increases, wage and price controls,currency devaluations, freezing of bank accounts, capital controls and limitson imports.

Sadia’s results ofoperations and financial condition may be adversely affected by the followingfactors and governmental reaction to them:

·              fluctuations in exchange rates;

·              interest rates;

·              inflation;

·              tax policies;

·              exchange controls;

·              energy shortages;

·              liquidity of domestic capital andlending markets; and

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

Uncertainty over whetherthe Brazilian government will change policies or regulations affecting these orother factors may contribute to economic uncertainty in Brazil and toheightened volatility in the Brazilian capital markets. These and otherdevelopments in the Brazilian economy and governmental policies may adverselyaffect the Company and its business.

***Inflation and government actions to combat inflation may contributesignificantly to economic uncertainty in Brazil and could adversely affect theCompany’s business.***

Historically, Brazil hasexperienced high rates of inflation. Inflation, as well as certain governmentefforts to combat inflation, has had significant negative effects on theBrazilian economy. Inflation rates were 25.31% in 2002, 8.71% in 2003, 12.41%in 2004, 1.21% in 2005, 3.86% in 2006, and 1.11% in the first quarter of 2007,as measured by the*Índice Geral dePreços-Mercado*, or the IGP-M. The Brazilian government’s measures tocontrol inflation have often included maintaining a tight monetary policy withhigh interest rates, thereby restricting availability of credit and reducingeconomic growth. Inflation, actions to combat inflation and public speculationabout possible additional actions also contributed materially to economicuncertainty in Brazil.

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If Brazil experienceshigh levels of inflation in the future, the rate of growth of the Brazilianeconomy may be slowed, which would lead to reduced demand for the Company’sproducts in Brazil. Inflation also is likely to increase some of Sadia’s costsand expenses, which the Company may not be able to pass on to its customersand, as a result, may reduce profit margins and net income. In addition, highinflation generally leads to higher domestic interest rates, and, as a result,the costs of servicing its *real-*denominateddebt may increase. Inflation may, in addition, hinder access to capitalmarkets, which could adversely affect the Company’s ability to refinance itsindebtedness. Inflationary pressures may also lead to the imposition ofgovernment policies to combat inflation that could adversely affect itsbusiness.

***Foreign exchange variations between the Brazilian real and the US dollarmay raise the cost of servicing our foreign currency denominated debt andadversely affect our overall financial performance.***

The Company’s results ofoperations are affected by exchange-rate fluctuations between the Brazilian *real*and the U.S. dollar.

The *real* appreciated 8.9% in 2004, 13.4% in2005 and 9.5% in 2006 and 4.3% in the first three months of 2007 against thedollar. On March 31, 2007, the U.S. dollar/*real*exchange rate was US$1.00 per R$2.0504.

Devaluation of the *real*relative to the U.S. dollar couldresult in additional inflationary pressures in Brazil by generally increasingthe price of imported products and services and requiring recessionarygovernment policies to curb demand. In addition, a devaluation of the *real*could weaken investor confidence inBrazil. On the other hand, appreciation of the *real*against the U.S. dollar may lead to a deterioration of the country’scurrent account and the balance of payments and may dampen export-drivengrowth. A significant devaluation of the *real*in relation to the U.S. dollar or other currencies could reduce theCompany’s ability to meet debt service requirements of its foreigncurrency-denominated obligations.

Export revenues and theCompany’s margins are also affected by the *real*fluctuations in relation to the U.S. dollar. Production costs are denominatedin local currency but export sales are denominated in U.S. dollars or euros.Financial revenues generated by exports are reduced when translated to *reais* in the periods in which theBrazilian currency appreciates in relation to the U.S. currency.

In addition, fluctuationsin the value of the *real* relativeto the U.S. dollar can affect the market value of the ADSs. Devaluation of the *real* may reduce the U.S. dollar value of distributions anddividends on the ADSs and may also reduce the market value of the preferredshares and the ADSs.

***Restrictions on the movement of capital out of Brazil may hinderinvestors’ ability to receive dividends and other distributions as well as theproceeds of any sale of preferred shares.***

The Brazilian governmentmay impose temporary restrictions on the conversion of Brazilian currency intoforeign currencies and on the remittance to foreign investors, of proceeds frominvestments in Brazil. Brazilian law permits the government to impose theserestrictions whenever there is a serious imbalance in Brazil’s balance ofpayments or reasons to foresee a serious imbalance.

Government restrictionson capital outflow may hinder or prevent the custodian in Brazil, or ifinvestors have exchanged ADSs for the underlying preferred shares, fromconverting the proceeds relating to the preferred shares into U.S. dollars andremitting those proceeds abroad. Investors could be adversely affected bydelays in obtaining any required governmental approval for conversion ofBrazilian currency payments and remittances abroad in respect of the preferredshares underlying the ADSs. In addition, the Brazilian government may institutea more restrictive exchange control policy in the future.

Currently, in order toremit the proceeds of distributions on, and gains with respect to, thepreferred shares to the U.S., the depositary must register with the CentralBank the amount invested by non-Brazilians in the preferred shares underlyingthe ADSs. The depositary will register its interest in the preferred shares asa foreign investment with the Central Bank. The Central Bank will issue acertificate of foreign capital registration in the name of the depositary,under which the custodian will, assuming the continued availability of foreignexchange, be able to convert dividends and other Brazilian currency-denominateddistributions from the Company into U.S. dollars and remit such U.S. dollarsabroad to the depositary for distribution to the foreign investor.

7

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***Developmentsin other emerging markets may adversely affect the market price of thepreferred shares and ADSs***

The market price or thepreferred shares and ADSs may be adversely affected by declines in theinternational financial markets and world economic conditions. The Braziliansecurities market is, to varying degrees, influenced by economic and marketconditions in other emerging market countries, especially those in LatinAmerica. Although economic conditions may differ in each country, investors’reaction to developments in one country can have an effect on the securitiesmarkets and the securities of issuers in other countries, including Brazil.

Accordingly, adversedevelopments in emerging market countries could lead to a reduction in bothdemand and the market price for the preferred shares and ADSs. These events maydiscourage international investment in Brazil and, more directly, may hurt themarket price of the Company’s preferred shares and ADSs.

***Enforcementof civil liabilities may be difficult***

The Company is organizedunder the laws of Brazil. Most of the Company’s directors and officers and manyof its advisors reside in Brazil and substantially all of the assets of thesepersons and of the Company are located in Brazil. As a result, it may not bepossible to effect service of process upon these persons within the UnitedStates or other jurisdictions outside of Brazil. Similarly, it may not bepossible to enforce, judgments of non-Brazilian courts, including judgmentspredicated on civil liability under the U.S. securities laws against theCompany or its directors and officers.

Brazilian counsel hasadvised the Company that Brazilian courts will enforce judgments of U.S. courtsfor civil liabilities predicated on the U.S. securities laws only if thejudgment satisfies certain requirements imposed by the Brazilian federalsupreme court. The foreign judgment will be enforceable in Brazil if:

·              Itfulfills all formalities required for its enforceability under the laws of thecountry that granted the foreign judgment;

·              Itis for the payment of a certain sum of money;

·              Itwas issued by a competent court after service of process was properly made onthe Company in the jurisdiction where the judgment was awarded;

·              Itis not subject to appeal;

·              Itis authenticated by a Brazilian consular office in the country where it wasissued and is accompanied by a sworn translation into Portuguese; and

·              Itis not contrary to Brazilian national sovereignty, public policy or goodmorals, and does not contain any provision that for any reason would not beupheld by the courts of Brazil.

Brazilian counsel has also advised the Company that:

·              Asa plaintiff, a holder may bring an original action predicated on the U.S.securities laws in Brazilian courts and that Brazilian courts may enforceliabilities in such actions against the Company, its directors, and certain ofits officers and advisors;

·              Ifa holder resides outside Brazil and owns no real property in Brazil, suchholder must provide a bond to guarantee court costs and legal fees inconnection with litigation in Brazil; and

·              Brazilianlaw limits the ability of a judgment creditor of the Company to satisfy ajudgment against the Company by attaching certain of its assets.

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**Risks Relating to the Company’s Business**

***The business involves breeding of animals and meat processing subjectto a variety of risks which may impact the results of our operations.***

The Company’s operationsinvolve raising animals, which is subject to a variety of risks, includingdisease, contamination, consumer health concerns and adverse weatherconditions. Meat is subject to contamination during processing anddistribution. Contamination during processing could affect a large number ofthe Company’s products and therefore could have a significant impact on itsoperations. The Company’s sales are dependent on consumer preferences, and theloss of consumer confidence in the products sold by Brazilian producers becauseof disease or contamination could affect the Company’s results of operations.

***The prices charged for products and costs of production are subject tosignificant volatility which may adversely affect the Company’s results***

The Brazilian foodsindustry, like the processed foods industry in other countries, has beencharacterized by cyclical periods of higher prices and profitability, followedby overproduction, leading to periods of lower prices and lower profitability.The Company believes that domestic prices and export prices for its productline are likely to remain volatile and subject to cyclical variation. There canbe no assurance that the Company’s results will not be adversely affected byfuture downturns in market prices. The largest single component of the Company’scost of sales is the cost of ingredients used in the preparation of feed. Theprice of most of the Company’s feed ingredients is subject to significantvolatility resulting from weather, the size of harvests, transportation andstorage costs, governmental agricultural policies, currency exchange rates andother factors. Sadia may not be successful in addressing the effects ofcyclicality and volatility on costs and expenses and its overall financialperformance.

***Environmental issues and new regulation requirements canaffect costs***

Brazilian food producers,including the Company, are subject to stringent federal, state and localenvironmental laws and regulations concerning, among other things, humanhealth, the handling and disposal of wastes and discharges of pollutants to theair and water. In view of the possibility of unanticipated regulatory or otherdevelopments, particularly as environmental laws become more stringent both inBrazil and worldwide, the amount and timing of future expenditures required tomaintain compliance could vary substantially from their current levels andcould adversely affect the availability of funds for other capital expendituresand other purposes.

***Competition in both domestic and foreign livestock and foodprocessing sector is very strong and the Company’s performance may be adverselyaffected by increased competition***

The Company facessignificant competition from other Brazilian producers in the domestic marketsin which it sells its products, and from world producers in the export marketsin which it sells its products. Other major vertically integrated Brazilianproducers compete with the Company. To varying degrees, these companies havesubstantial financial resources and strengths in particular product lines andregions. The Company expects that it will continue to face strong competitionin every market and that existing or new competitors are likely to broadentheir product lines and to extend their geographic scope. Accordingly, therecan be no assurance that the Company’s performance will not be adverselyaffected by increased competition.

***Protectionist measures could restrict Company exportsaffecting thereby the Company’s sales performance***

Due to the growing shareof the Brazilian livestock, pork and poultry sector in the internationalmarket, companies are increasingly being affected by measures taken byimporting countries in order to protect local producers. Because of thecompetitiveness of Brazilian companies, certain countries have raised severalrestrictions to prevent the entrance of Brazilian livestock products. Outcomessuch as quota restrictions or import suspensions in a certain country orregion, can affect substantially the sector’s export volumes and consequentlythe Company’s export performance as well as the results of its operations.

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***FMDCases in Brazil can indirectly affect pork and beef sales and adversely impactthe results of the Company***

Although the detectedFoot and Mouth Disease (FMD) cases in the northeast region of Brazil in thepast have affected only cattle, swine can also be contaminated. Recent cases ofFMD have been identified in the states of Mato Grosso and Paraná. Sadia hasanimal breeding facilities located in the states of Santa Catarina and MinasGerais, internationally recognized FMD free regions. An outbreak of FMD couldhave an effect on livestock owned by Sadia, the availability of livestock forpurchase by Sadia, consumer perception of certain protein products or Sadia’sability to access certain markets.

***Anoutbreak of Avian Influenza could require the destruction of a significant portionof the Company’s flocks***

Recent outbreaks of ahighly pathogenic strain of avian influenza (“AI”) virus, known as H5N1, havebeen reported in Europe and Asia. Earlier outbreaks were reported during late2003 and early 2004 in eight countries in Asia. At that time, more than 100million birds in the affected countries either died from the disease or weredestroyed in order to try to control the outbreak. The virus, which is believedto be spread from region to region by infected wild birds, represents a significantrisk to flocks, which if infected must be destroyed to assure containment ofthe virus. No AI has been detected in Brazil and climatic conditions anddistance from previous outbreaks reduce the likelihood of any outbreak. In2003, through a joint effort of the Brazilian Ministries of Agriculture, Healthand Environment, Brazil implemented a program to monitor and test birds withpotential to carry the Avian Influenza virus from the South Pole.

In addition to the animalhealth requirements, which are part of the Brazilian National Poultry HealthProgram, Brazil has adopted a range of measures intended to limit thepossibility of an outbreak of AI, including: tightened controls at ports andairports for travelers arriving from Asia; a prohibition on the importation ofpaddy rice from Asia; restrictions on visits to Brazilian poultry farms bytravelers from Asia; and restrictions on the importation of poultry genetics.

Additional preventativemeasures have been discussed and the Brazilian government has proposed andapproved the adoption of a National Plan for the Prevention and Control ofNewcastle Disease and the Prevention of Avian Influenza (*PlanoNacional de Controle e Prevenção da Doenca de Newcastle e de Prevenção deInfluenza Aviária)*which will conform with OIE (World Organizationfor Animal Health) standards. These measures are intended to assureinternational markets that Brazil maintains sanitary barriers between states.Specific measures include regulation of animal transportation, traceability,blood tests, designated laboratories and other controls to monitor productionconditions on a regional basis. These measures are intended to permit the earlydetection of contamination in one region and to prevent the spread of thatcontamination to other regions within Brazil. Because the virus that causes AIis destroyed by cooking, it is generally agreed that the consumption ofcontaminated poultry does not present a threat to human health.

Despite measures adoptedby the Company, the Brazilian government, and other poultry producers, noassurance can be given that the Company will not be affected by AI, eitherdirectly or through limitations on exports imposed by importing countries.

**Risksrelating to Sadia S.A.**

***The Company is controlled by a Group of Shareholders and theinterests of the controlling group may conflict with those of othershareholders***

The Company is controlledby a group of shareholders under the Company’s shareholders’ agreement. Thepreferred shares and the ADSs are not entitled to vote at shareholders’meetings, except in limited circumstances. This means, among other things, thatpreferred shareholders are not entitled to vote on corporate transactions,including mergers or consolidations of the Company with other companies. In addition,the controlling shareholders have the ability to determine the outcome of anyaction requiring shareholder approval, including transactions such as corporatereorganizations, change of control transactions and the timing and payment offuture dividends. For more information, see Item 7 — “Major shareholders andrelated party transactions”.

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***If the Company loses any of its largest clients, or if theysignificantly reduce the amount they purchase from the Company, its revenue andoperating income could be materially adversely affected***

The Company’s ten largestcustomers in 2006 accounted for approximately 21% of total domestic sales andthe ten largest international customers in 2006 accounted for approximately 50%of our total export sales.While the Company has been developing newclient-oriented policies to reduce the concentration of revenues, if it losesany of its ten largest customers or if they reduce significantly the amountthey purchase from the Company, revenues and operating income could bematerially adversely affected.

***The Company’s ability to export could be adversely affectedby port labor disputes and disruptions and by import restrictions***

TheCompany’s ability to export is dependent, in part, on factors beyond itscontrol, including the lack of transport facilities due to strikes or othercauses, or the enactment of Brazilian laws or regulations restricting exportsin general or its products in particular. Any of these could affect the Company’srevenue and operating income.

## **ITEM 4. INFORMATION ON THECOMPANY**

### **A.History and Development of the Company**

SadiaS.A. is a publicly held company, incorporated in Brazil on June 7th, 1944, and therefore issubject to the requirements of Law No. 6,404, dated December 15th, 1976, as amended by Law 9,457/97(Brazilian Corporate Law), and the rules and regulations of the *Comissão de Valores Imobiliários* — CVM, the BrazilianSecurities Commission.

Sadia is Brazil’s leadingrefrigerated and frozen protein products company, operating in the processedproduct, poultry, pork and beef segments. The Company believes that its brandname and distinctive logotype are among the most widely recognized and admiredin Brazil and in the foreign markets in which it sells its products, associatedwith quality, tradition and value. The Company’s central administrativeheadquarters are located at Rua Fortunato Ferraz, 659, Vila Anastácio, SãoPaulo, state of São Paulo, Zip Code 05093-901, Brazil, telephone number (55 11)2113-3302, and the Company’s website is www.sadia.com.br or www.sadia.com ande-mail address is ri@sadia.com.br. Materials posted on the website are notdeemed incorporated by reference into this annual report nor made a parthereof.

Sadia S.A. began in 1944,with the acquisition by Attilio Fontana of the meatpacker Concórdia Ltda.,located in the municipality of the same name, in the Western part of the stateof Santa Catarina, Brazil. At the time, the Company consisted of a wheat milland an unfinished slaughterhouse for hogs.

At the end of the 1980sand early 1990s, the Company’s policy of expansion gave way to rationalizationof management and cost structures through reduction by merging a number ofcompanies in the Sadia Group. Sadia began the 1990s having controllingownership in 21 companies, and began to concentrate its operations in theproduction of processed meat products.

In 1997, the Company soldits cattle slaughterhouse in Barra do Garças, state of Mato Grosso, foursoybean processing facilities (crushing and refining), 12 grain purchasing and warehousingcenters, and also transformed its Várzea Grande slaughterhouse, state of MatoGrosso, into a plant for the production of processed meat products. Inaddition, product transportation, which had been made by a fleet of ownedvehicles, was outsourced to specialized transportation companies.

In July 1998 Sadia wascreated by the merger of Sadia Concórdia S.A. into Sadia Frigobrás S.A.,consolidating its operations in a single public company, simplifying itscorporate structure, emphasizing the Company ́s brand, and reducingadministrative expenses.

In December 1999, Sadiaacquired the capital stock of Granja Rezende S.A. (primarily a producer anddistributor of poultry and pork products) and its wholly owned subsidiariesRezende Alimentos Ltda., Rezende Óleo Ltda. and Rezende Marketing ComunicaçõesLtda. Immediately following the acquisition of Granja Rezende, the Companydecided to sell Granja Rezende’s soybean crushing and oil manufacturing plantand administrative complex.

During 2000, thesubsidiary Rezende Alimentos Ltda. was converted from a limited liabilitycompany into a corporation and the subsidiary’s name was changed to SadiaAlimentos S.A. On December 29, 2000, the then parent was merged into SadiaAlimentos S.A., whose name was then 

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changed to Sadia S.A. The purpose of the merger was topermit an operational and administrative rationalization, and the utilizationof tax loss carry forwards. In August 2002, Granja Rezende S.A. was merged intoSadia, aiming at cost reduction both through standardization and throughrationalization of the administrative and operational activities as well as byresulting reflections of financial and fiscal nature.

In April 2001, theCompany listed its American Depositary Receipts (ADRs) program on the New YorkStock Exchange, providing investors an alternate channel to buy its stocks. InJune 2001, the Company adhered to Bovespa’s Level One of corporate governance,certifying its commitment to transparency and fair disclosure of information.

In August 2001, Sadiaopened a distribution center (DC) in Jundiaí, São Paulo, to supply the SãoPaulo state region, considered the largest market in Brazil. The Jundiaí DC, isa technological milestone for the Company with 20,000 square meters of area.The Company invested R$ 30 million in facilities and IT structure.

Sadia GmbH was created inDecember 2001, and its subsidiary, Laxness F.C.P.A. Lda. (Laxness), wasincorporated in April 2002, with the aim of leveraging exports to the Europeanmarket. In February 2005, Laxness changed its name to Wellax Food LogisticsC.P.A.S.U. Ltd (Wellax).

In 2004 Sadia began theexpansion of the Uberlândia unit in order to improve the facility and make itone of the Company’s most modern facilities in Brazil. In November 2004, theCompany opened a distribution center in Ponta Grossa, state of Paraná, givingSadia greater capacity and efficiency in its export processes.

Also in November 2004,Sadia’s preferred shares were authorized to be traded on the Madrid StockExchange, by the International Latin American Market, Latibex, ender the symbol“XSDI”.

InJanuary 2005, Sadia acquired 100% of Só Frango Produtos Alimenticios Ltda. (SóFrango), a company based in Brasilia with a total slaughtering capacity of150,000 chickens per day (at the time of the acquisition). In March 2005, SóFrango was merged into Sadia.

Theincrease in liquidity of Sadia’s shares throughout 2005 led to the listing ofits preferred shares at the Bovespa Index, known as Ibovespa, starting inSeptember 2005.

InNovember 2005, Sadia decided to return to the beef segment due to the beliefthat it represents a complementary business to the Company’s activities. Sadia’sstrategy in this segment is to concentrate sales towards the export market; forthe domestic market the Company will focus its efforts on premium beef cuts.

Inorder to improve corporate governance levels and to more closely aligninterests among its shareholders, in 2005 Sadia granted 80% tag-along rights tothe holders of non-voting preferred shares, satisfying market expectations.

In2006 Sadia invested approximately R$970 million. The investments in 2006 weredirected towards poultry, processed products , beef and some facilitiesexpansion.

**Reclassification**

Therehave been no reclassifications made in the financial statements.

**Investments**

Inthe last years Sadia has continually increased its level of capitalexpenditures.

Sadiamaintained its investments in 2006 with a firm commitment to growth and focuson its core business and the potential for international growth. Sadia ended2006 with investments of R$969,6 million, including R$85.0 million for theJundiaí and Uberlândia distribution centers and R$60.0 million for theUberlândia margarine plant. The investments in 2006 were directed towardspoultry (38%), processed products (31%), pork (15%), beef (1%) and our projectsat Lucas do Rio Verde and Russia (15%).

From2006 to 2009, Sadia plans to invest R$1.5 billion in the state of Mato Grosso.The Company will be responsible for R$800 million, and the remainder will beinvested by its outgrowers. The amount will be directed towards theconstruction of a poultry slaughter house, with a slaughter 

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capacity of500,000 animals per day; a slaughter and industrialization hog unit, withslaughter capacity of 5,000 animals per day, one processing unit and a feedfactory.

Additionalinformation on this investment plan are as follow:

·  Sadia’s R$800 million investment will bedistributed as follows: 25% in 2006; 50% in 2007 and the remainder 25%, in2008;

·  For the first semester of 2008, the poultryslaughter houses will operate with 20% of capacity. In 2009, it is expectedthat these units will operate with 100% of capacity. • For the second semesterof 2008, the pork slaughter houses will operate with 40% of capacity. In 2009,it is expected that these units will operate with 100% of capacity;

·  The expected additional annual revenue forpoultry is R$600 million by 2009, and the expected additional revenue for thehog unit is R$400 million by 2009;

·  The R$800 million investment does notcontemplate additional working capital, which will add up to R$80 million in2009;

·  The tax incentives will be similar to thoseobtained in other states in the Midwest and better than those obtained in thesouthern states of Brazil.

In2005, an amount of R$ 742.4 million was invested, of which R$ 194.6 million(26.2%) was directed towards the processed products segment, R$ 372.8 million(50.2%) towards poultry, R$ 27.0 million (3.6%) to pork and the remainingR$148.0 million (20%) to other projects, mainly to information technology.These investments were made in order to supply the growing demand in thedomestic and export markets.

Aspart of the 2005 investment plan, in January 2005 Sadia acquired 100% of SóFrango Produtos Alimentícios Ltda. (“Só Frango”), for R$70.3 million. Só Frangowas active in poultry slaughtering and processing as well as in the productionof animal feed meal. Its product line ranges from whole chicken, special frozenand chilled cuts to sausages and cold cut meats. With 1,700 employees, SóFrango generated R$220 million in gross revenues in 2004 and had a slaughteringcapacity of 150,000 chickens per day. In April 2005, Só Frango was merged intoSadia S.A.. Sadia intends to expand this capacity over the next five years to400,000 chickens per day, which should generate 2,000 new direct jobs andaround 12,000 indirect jobs. All operations with out growers and suppliers, aswell as Só Frango’s job positions, have been maintained. Through thisacquisition, the Company strengthened its presence in the central region ofBrazil, close to raw material producers and to main centers of consumption.

In2004, the amount invested was R$324.9 million, of which R$93.2 million (28.7%)was directed towards the processed products segment, R$146.6 million (45.1%)towards poultry, R$40.1 (12.3%) to pork. The remaining  R$44.9 million (13.8%) was directed towardsthe Ponta Grossa distribution center located in the state of Paraná, andtowards the upgrade of the management software, SAP.

***Investment Plans***

Plans for 2007 contemplate investments of R$800million, which will be destined to the Lucas do Rio Verde unit, the Russiaplant, enlargement of our processed products capacity and to modernizemanufacturing processes with an additional R$150 million to be invested inbreeding stock.

The most significant investment, of about R$1.5billion in the period from 2006 to 2009, is destined to the agroindustrialcomplex of Lucas do Rio Verde, in Mato Grosso. An amount of R$440 million isdestined for 2007. This project contemplates the construction of a poultryslaughtering unit, one swine slaughtering and one processing unit. The worksstarted in the second half of 2006 and the plant startup is scheduled for thefirst half of 2008. Out of the total estimated amount, R$ 800 million shallcome from the company and the remaining R$700 million shall come from the groupof integrated farmers. They will be financed by the National Economic andSocial Development Bank (BNDES) to build the aviaries and poultry farms thatwill feed the agroindustrial complex.

The works for the expansion of the Uberlândia unit,which will become one of the most modern units among the 13 operated by thegroup in Brazil, are at the final stage and should be completed in 2007. Theinvestment in this project totals R$ 400 million, distributed during the yearsof 2004/2007, R$30 million is expectedto be invested in the Uberlândia unit in 2007.

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The investment in the Russia plant comprises a meatprocessing unit, developed in partnership with a Sadia distributor in thatcountry. This is an investment of R$ 92 million and has already consumed R$ 13million, will consume another R$ 60 million in 2007 and R$ 19 million in 2008.The works of this unit begun late in 2006 and startup is scheduled for thesecond half of 2007. The Russian market, which has become increasingly western,is compatible with Sadia’s business strategy abroad. For instance, the Companyhas already closed a pre-agreement to supply processed poultry to the McDonald’sfast food chain in that country.

A portion of the resources contemplated for 2007 willbe used to expand the Brasília unit, to modernize the Concórdia and Chapecó(SC) units and to improve internal technological processes. Another portionwill be allocated aiming to increase the Company ́s beef slaughtering capacity,currently around 1,000 animals per day, to 2,000 heads per day by the end of2007.

### **B.Business Overview**

Sadia is the leader inall of the markets in which it operates within Brazil (see “Market Share”),with a product portfolio of over 1,000 products. According to the BrazilianChicken Exports Association (ABEF), the Company is the largest Brazilianslaughterer and distributor of poultry and pork products, as well as thelargest domestic exporter of poultry. Sadia is also the largest domesticdistributor of frozen and refrigerated meat-based products (according to ACNielsen), and leader in the Brazilian market for margarine. As of December 31,2006, the Sadia Group had 47,490 employees, one of the largest employers inBrazil. During 2006 Sadia sold 918.0 thousand tons of poultry, 122.4 thousandtons of pork and 799.6 thousand tons of processed products, including frozenand refrigerated meat-based products and margarine, generating gross operatingrevenues of R$7.9 billion and net income of R$360.6 million.

The Company’s high degreeof vertical integration ensures control at all stages of production and distributionof products. Sadia’s operations include breeding farms for poultry and hoggrandparent and parent stock, hatcheries, pork breeding centers,slaughterhouses, processing units, animal feed production plants,representative offices and distribution centers. The Company pioneered thevertical integration of poultry and hog breeding in Brazil, initially in thestate of Santa Catarina. Today, with the exception of beef, all operationsemploy a system of vertical integration, consisting of a partnership with ruralproducers, with a view to obtaining animals for slaughter, raised in highlyproductive breeding conditions and controlled hygienic-sanitary conditions.Sadia produces one-day chicks and piglets and supplies them to outgrowers,along with feed, transport, technical and veterinary assistance.

Sadia exports around1,000 different products to approximately 100 countries. It currently producesa range of products that includes: frozen, refrigerated, salted and smoked porkcuts, lard, bacon, ingredients for “feijoada” (a Brazilian pork and bean stew);frozen and refrigerated pork and chicken giblets; whole frozen and seasonedchickens; frozen and refrigerated poultry cuts and parts; marinated andpartially cooked chicken parts; whole frozen and seasoned turkeys; frozen andseasoned turkey cuts and parts; breaded chicken parts; raw, cooked and smokedhams; “tender” gammons, hams, cold cuts and related products; “Parma-type”hams; smoked chickens and turkeys; cooked and smoked turkey hams andturkey-based cold cuts; partially cooked and frozen products, such as beef,turkey and chicken meatballs; beef, turkey and chicken-based hamburgers; pork,turkey and chicken based frankfurters; sausages; bolognas; salamis; coppa;turkey-based hams; cold cuts in general; chicken, meat and pork-based patés;beef, poultry and fish-based frozen ready-made dishes and pasta; frozenready-made foods for heating and serving as meals and snacks, such as breadedpoultry, fish and appetizers, frozen pizzas and refrigerated fresh pasta;margarine and refrigerated desserts.

Sadia owns 13 plantswithin 7 different states in Brazil, and distributes its product line of over1,000 items through distribution and sales centers located throughout Brazil,Latin America, the Middle East, Asia and Europe.

**BusinessStrategy**

Sadia’s business strategyis designed to give continuity to the Company’s growth and increase itsprofitability. The Company believes that with the recognition of its brand nameas a symbol of quality, tradition and value—Sadia means “healthy” in Portuguese— an unequaled domestic distribution network supported by excellent logistics,attention to customer needs across the product line and in all distributionchannels and highly favorable production economics in Brazil, the Company willbe able to achieve both increased growth and increased profitability, whilemaintaining its commitment to its employees, 

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outgrowers, suppliers and residents of the communitiesin which it does business. The principal elements of this strategy are asfollows:

·              **Increasedomestic market penetration through expanded distribution**. Sadia hasan extensive distribution network, supported by an outsourced transportationfleet, superior knowledge of wholesale, retail and institutional saleschannels, integrated logistics planning and strategically located distributioncenters, trans-shipment points and facilities. The Company plans to continue todevelop and improve its distribution network and systems in every productcategory.

·              **Focuson retail sales, institutional and food service sales channels for domesticbusiness**. Sadia has increased, and plans to continue focusing onmeeting the needs of retail sales outlets, institutional and food service saleschannels, such as restaurants, rather than concentrating on wholesale outlets,such as large supermarkets and distributors. Between 2002 and 2006 the Companyadded more than 25,000 customers to its list.

·              **Continueto increase service and market responsiveness**. Sadia intends toremain the leader in Brazil in the markets that it serves by maintaining highstandards of customer service and continuing to be responsive to the changingneeds of varying market segments. As part of this strategy, it has structuredits operations,distribution and logistics so that it can fill orders of varyingsizes depending on the particular demands of the market segment. In exportmarkets, the Company seeks to provide raw and processed products. It intends toremain close to its customer base, providing decentralized and rapid order fulfillmentand personalized service, including attention to refrigeration quality incustomers’ facilities.

·              **Maintainlow-cost product and operating efficiency**. The natural advantages ofoperating in Brazil—grains, labor, weather, out-grower and related costs—addedto the Company’s operating efficiency, permit it to compete in internationalmarkets. Sadia intends to continue to be amongst the lowest cost producers anddistributors of protein products in the Brazilian and international markets.The Company’s vertically integrated operations and attention to operatingefficiencies, permit quality and cost control throughout the entire productionprocess.

·              **Continuedbrand differentiation**. Sadia has developed its brand across theentire product line both in the domestic and international markets, and that isamongst its most valuable assets. The Company intends to continue to invest inthe development of  branded products,through shipping, packaging, advertising campaigns, with a view to continue todevelop brand loyalty and the perception of premium quality that is associatedwith the Sadia products.

·              **Increaseproduction, through organic growth, investment in production capacity andacquisitions.** Sadia’s goal is to expand production capacity at itsexisting facilities and to build new plants, while also continuing to focus onits core business. The Company estimates that investments in its facilitieswill total R$950 million for 2007, including R$150 million to be invested inbreeding stock, R$440 million to expand the complex at Lucas do Rio Verde,R$150 million for construction of new distribution centers, R$60 million forconstruction at the Russia unit and R$150 million for general expansion offacilities, including expansion and modernization of Brasilia, Concórdia,Chapecó and Uberlândia and of the beef slaughtering capacity at the VárzeaGrande unit.

Sadia is working on the expansion of the Uberlândiaunit, which will become one of the most modern units among the 13 operated bythe group in Brazil. The Company is at the final stages of completion and theexpansion should be completed in 2007.The expansion is intended to increase production capacity and Sadia estimatesthat once the expansion is completed, chicken production will increase by 110%(from 41,875 to 88,000), pork production will increase by 146% (from 614 to1,512) and turkey production will increase by 98% (from 6,379 to 12,614),measured by slaughtering heads per year, and production of industrializedproducts will increase by 62% (from 75,166 to 121,912), measured by tons peryear. The investment in this project totals R$400 million over the years of2004 through 2007,****R$30 million is expected to be invested inthe Uberlândia unit in 2007.

Sadia’slargest new investment is the agroindustrial complex of Lucas do Rio Verde, inMato Grosso. Over the period from 2006 to 2009 the project will involve a totalof approximately R$800 million in direct investment by Sadia and approximatelyan additional R$700 million in investments expected to be made by a group ofapproximately 130 integrated outgrowers. The investment involves theconstruction of a poultry slaughtering unit a swine slaughtering and aprocessing unit. The investment of the integrated outgrowers involves theconstruction of infrastructure for breeding and raising of poultry and swine tobe processed in Sadia’s new facilities. In 2007, Sadia expects to investapproximately R$440 million. Construction started in the second half of 2006and the complex is scheduled to begin operations in the first half of 2008. TheBrazilian National Economic and Social Development Bank (BNDES) and 

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FundoConstitucional do Centro-Oeste, a government program managed by Banco doBrasil, are expected to finance the portion of the project costs to be borne bythe integrated outgrowers. To date the BNDES has committed R$250 million to theoutgrowers. Sadia has assisted the outgrowers to obtain the BNDES financing andintends to grant a guarantee to the BNDES in support of the outgrowers’obligations to repay the BNDES financing to be drawn upon only in case BNDES’security interest in the outgrowers’ assets, such as land and equipment, is notsufficient to cover their obligations In the past Sadia has granted financialguarantees to its outgrowers only on a very limited basis (as of December 2006,only R$20.2 million in such guarantees were granted). The remaining R$450million in investments to be contributed by the outgrowers is expected to befinanced by the Banco do Brasil program and possibly by additional BNDEScommitments. Up to R$600 in commitments have been made available through theBanco do Brasil program to finance the outgrowers and, to the extent of anyexcess, Sadia’s investment in other projects. Sadia does not expect to offer aguarantee for any such additional amounts and the BNDES has made no additionalcommitment to finance it. Neither Sadia nor any other person has guaranteedthat these additional investments will be made, the amount and timing of whichwill depend entirely on the ability of the outgrowers to obtain financing onterms acceptable to them. This venture is expected to create 8,000 direct and24,000 indirect jobs.

The investment in the Russia plant comprises a meatprocessing unit, developed in partnership with a Sadia distributor in thatcountry.  This is an investment of R$92million approved in October 2006 and has already consumed R$13 million and willrequire another R$60 million in 2007 and R$19 million in 2008. The constructionof this unit began late in 2006 and startup is scheduled for the second half of2007. The Russian market, which has become increasingly westernized, iscompatible with Sadia’s business strategy abroad. For instance, the Companyalready closed a pre-agreement to supply processed poultry to the McDonald’s fastfood chain in that country.

·              **Maintainexports and domestic sales volumes approximately equal**. Thecompetitiveness of the production of poultry and pork gives the Company accessto international markets, economies of scale and low-cost export financing.Sadia has had success in increasing sales in foreign markets, such as Russia,where it previously did not have a presence, and increasing the number ofmarkets in which the Company is present and the products that it sells. Salesto international markets and domestic markets, in substantially equal amounts,provides an important hedge against volatility in any particular market.

·              **Investin environmentally sound projects and initiatives**. Sadia has beenincreasingly active in seeking to assure that its business is environmentallysound, beyond mere compliance with regulations, and it intends to investsignificantly in this aspect of  thebusiness. Recently, Sadia concluded a borrowing of R$60 million from theBrazilian development bank, BNDES, in order to develop the “3S Program” - SadiaSustainable Swine Production Program, which will consist in selling carboncertified emission reductions under the Clean Development Mechanism signed atthe Kyoto Treaty to finance social initiatives in the outgrowers area.

·              **Expandproduct portfolio, with emphasis on higher value-added processed products**.Sadia believes that continuous product innovation is essential to meet theneeds of customers and consumers. As the market for frozen ready to eatproducts has grown, both domestically and internationally, Sadia has sought tomeet the challenge by increasing emphasis from poultry and pork production toproduction of processed food products, including a product portfolio that nownumbers over 700 products. During the last three years, Sadia has introduced anaverage of 60 new products per year, after extensive product development andtest marketing.

**The Company’s Operation**

The Company’s operationsare organized into four segments: “processed products” (frozen and refrigeratedproducts and margarines), “poultry” (chickens and turkeys), “pork” and “beef”.

In 2006, 49.0% of totalgross operating revenue was derived from the processed products segment,poultry 36.3%, pork 6.7%, beef 3.7% and 4.2% from other activities. Of the Company’stotal gross operating revenue in 2005, 44.5% was derived from the processedproducts segment, poultry 41.4%, pork 8.9%, and 5.2% from other activities,such the grain and by-products segment, hog and poultry breeding, boiled beef,beef-parts and resale of products. In 2004 47.1% was derived from the processedproducts segment, poultry 40.8%, pork 8.2% and 3.9% from other activities.

Activities related to thegrains and by-products currently consist of the crushing of soy to obtain themeal used as a raw material in the production of feed for the company’s stockand that of the integrated producers.

16

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Thefollowing tables present sales volumes and gross operating revenue (preparedand presented in accordance with US GAAP) for the years ended 2006, 2005 and2004, as shown:

 
| ** **           | ** ** | **Sales Volumes (ton)** | ** ** |
|----------------------|------------|-----------------------------------|------------|
| ** **           | ** ** | **2006**                          | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **           | ** ** | ** **                        | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Domestic  Market** | ** ** | **928,626**                       | ** ** | **823,573** | ** ** | **736,465** | ** ** |
| Processed Products   |       | 723,086                           |       | 647,062 |   | 581,213 |   |
| Poultry              |       | 155,485                           |       | 142,177 |   | 105,826 |   |
| Pork                 |       | 41,022                            |       | 34,334 |   | 49,426 |   |
| Beef                 |       | 9,033                             |       | — |   | — |   |
|                 |       |                              |       |   |   |   |   |
| **Export  Market**   | ** ** | **963,959**                       | ** ** | **1,006,047** | ** ** | **855,303** | ** ** |
| Processed Products   |       | 76,470                            |       | 91,593 |   | 84,059 |   |
| Poultry              |       | 762,479                           |       | 808,636 |   | 692,192 |   |
| Pork                 |       | 81,382                            |       | 105,818 |   | 79,052 |   |
| Beef                 |       | 43,628                            |       | — |   | — |   |
|                 |       |                              |       |   |   |   |   |
| **Consolidated**     | ** ** | **1,892,585**                     | ** ** | **1,829,620** | ** ** | **1,591,768** | ** ** |
| Processed Products   |       | 799,556                           |       | 738,655 |   | 665,272 |   |
| Poultry              |       | 917,964                           |       | 950,813 |   | 798,018 |   |
| Pork                 |       | 122,404                           |       | 140,152 |   | 128,478 |   |
| Beef                 |       | 52,661                            |       | — |   | — |   |

 
| ** **           | ** ** | **Gross Operating Revenue (R$ Million)** | ** ** |
|----------------------|------------|--------------------------------------------------------------|------------|
| ** **           | ** ** | **2006**                                                     | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **           | ** ** | ** **                                                   | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Domestic  Market** | ** ** | **4,482.0**                                                  | ** ** | **4,251.7** | ** ** | **3,724.6** | ** ** |
| Processed Products   |       | 3,513.5                                                      |       | 3,289.1 |   | 2,946.4 |   |
| Poultry              |       | 492.3                                                        |       | 512.1 |   | 415.4 |   |
| Pork                 |       | 154.5                                                        |       | 148.3 |   | 154.9 |   |
| Beef                 |       | 40.6                                                         |       | — |   | — |   |
| Other                |       | 281.1                                                        |       | 302.2 |   | 207.9 |   |
|                 |       |                                                         |       |   |   |   |   |
| **Export  Market**   | ** ** | **3,412.0**                                                  | ** ** | **4,075.7** | ** ** | **3,392.7** | ** ** |
| Processed Products   |       | 361.6                                                        |       | 412.3 |   | 405.6 |   |
| Poultry              |       | 2,373.0                                                      |       | 2,937.6 |   | 2,488.7 |   |
| Pork                 |       | 371.1                                                        |       | 592.4 |   | 429.8 |   |
| Beef                 |       | 254.7                                                        |       | — |   | — |   |
| Other                |       | 51.6                                                         |       | 133.4 |   | 68.6 |   |
|                 |       |                                                         |       |   |   |   |   |
| **Consolidated**     | ** ** | **7,894.0**                                                  | ** ** | **8,327.4** | ** ** | **7,117.3** | ** ** |
| Processed Products   |       | 3,875.1                                                      |       | 3,701.4 |   | 3,352.0 |   |
| Poultry              |       | 2,865.3                                                      |       | 3,449.7 |   | 2,904.1 |   |
| Pork                 |       | 525.6                                                        |       | 740.7 |   | 584.7 |   |
| Beef                 |       | 295.3                                                        |       | — |   | — |   |
| Other                |       | 332.7                                                        |       | 435.6 |   | 276.5 |   |

----

*(*)**          Other:Grains and by-products, pig and chicken beeding and products resale*

17

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Thefollowing table presents the breakdown of gross operating revenue in percentageterms by segment, for the years ended 2006, 2005 and 2004, as shown:
| ** **          | ** ** | **Gross Operating Revenue by Segment (%)** | ** ** |
|---------------------|------------|---------------------------------------------------------------------|------------|
| ** **          | ** ** | **2006**                                                            | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **          | ** ** | ** **                                                          | ** ** | ** ** |   |   |   |
| Processed  Products |       | 49                                                                  |       | 44 |   | 47 |   |
| Poultry             |       | 36                                                                  |       | 41 |   | 41 |   |
| Pork                |       | 7                                                                   |       | 9 |   | 8 |   |
| Beef                |       | 4                                                                   |       | — |   | — |   |
| Other               |       | 4                                                                   |       | 5 |   | 4 |   |

----

*(*)**          Other:Grains and by-products, boiled beef parts, pig and chicken breeding and resaleof products*

The following informationabout segments is based upon information used by the Company’s management toassess the performance of operating segments and decide on the allocation ofresources and has been prepared and presented in accordance with Brazilian GAAPthat is adjusted for US GAAP presentation. The Company has four identifiablereportable segments: Processed Products, Poultry, Pork and Beef. 
| ** **                            | ** ** | **2006**  | ** ** | **2005**  | ** ** | **2004**  | ** ** |
|---------------------------------------|------------|-----------|------------|-----------|------------|-----------|------------|
| **Net  operating revenue**            |       |      |       |      |       |      |       |
| Processed  products                   |       | 3,102,397 |       | 3,147,296 |       | 2,731,136 |       |
| Poultry                               |       | 2,872,845 |       | 3,199,246 |       | 2,951,897 |       |
| Pork                                  |       | 494,571   |       | 732,710   |       | 586,595   |       |
| Beef                                  |       | 309,353   |       | —    |       | —    |       |
| Other                                 |       | 97,535    |       | 239,186   |       | 37,845    |       |
| Adjustments for  US GAAP presentation |       | (46,401   | )          | (596      | )          | (198,248  | )          |
| Total net  operating revenue          |       | 6,830,300 |       | 7,317,842 |       | 6,109,225 |       |

 

Other net operatingrevenue is primarily attributable to grains and by-products.
| ** **                                         | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
|----------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| **Depreciation  expense**                          |       |     |       |     |       |     |       |
| Processed  products                                |       | (92,214  | )          | (60,863  | )          | (76,648  | )          |
| Poultry                                            |       | (100,080 | )          | (80,336  | )          | (77,476  | )          |
| Pork                                               |       | (15,223  | )          | (16,853  | )          | (20,647  | )          |
| Beef                                               |       | (11,660  | )          | —   |       | —   |       |
| Other                                              |       | (4,072   | )          | (7,294   | )          | (1,363   | )          |
| Total depreciation expense allocated to Segments   |       | (223,249 | )          | (165,346 | )          | (176,134 | )          |
| Depreciation  allocated to administrative expenses |       | (17,320  | )          | (12,829  | )          | (13,461  | )          |
| Adjustments for US GAAP presentation               |       | 35,185   |       | (4,088   | )          | 31,774   |       |
| Total  depreciation expense                        |       | (205,384 | )          | (182,263 | )          | (157,821 | )          |

 

18

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| ** **                                                                            | ** ** | **2006**   | ** ** | **2005**   | ** ** | **2004**   | ** ** |
|---------------------------------------------------------------------------------------|------------|------------|------------|------------|------------|------------|------------|
| **Segment  operating income**                                                         | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Processed  products                                                                   |       | 194,494    |       | 273,684    |       | 274,197    |       |
| Poultry                                                                               |       | 100,204    |       | 269,766    |       | 260,393    |       |
| Pork                                                                                  |       | 35,489     |       | 94,586     |       | 70,902     |       |
| Beef                                                                                  |       | 11,482     |       | —     |       | —     |       |
| Other                                                                                 |       | 2,087      |       | 2,798      |       | (3,765     | )          |
| Adjustments for  US GAAP presentation                                                 |       | (41,533    | )          | 40,069     |       | 33,302     |       |
| Total operating income                                                                |       | 302,223    |       | 680,903    |       | 635,029    |       |
| Interest expense                                                                      |       | (310,442   | )          | (324,231   | )          | (413,461   | )          |
| Interest income  and other                                                            |       | 282,904    |       | 248,203    |       | 309,454    |       |
| Foreign currency  exchange gain (loss), net                                           |       | 104,219    |       | 159,602    |       | 20,672     |       |
| Adjustments for  US GAAP presentation                                                 |       | 9,812      |       | (93,825    | )          | 35,428     |       |
| Income before  income taxes, equity income or loss of investees and minority interest |       | 388,716    |       | 670,652    |       | 587,122    |       |

 
| **Segment  assets**                   |   |      |   |      |   |      |   |
|---------------------------------------|--------|-----------|--------|-----------|--------|-----------|--------|
| Processed  products                   |   | 715,248   |   | 624,619   |   | 491,982   |   |
| Poultry                               |   | 1,018,005 |   | 750,504   |   | 459,035   |   |
| Pork                                  |   | 275,533   |   | 147,724   |   | 137,798   |   |
| Beef                                  |   | 104,340   |   | —    |   | —    |   |
| Other                                 |   | 220,312   |   | 143,359   |   | 76,910    |   |
| Adjustments for  US GAAP presentation |   | (178,458  | )      | (142,897  | )      | (110,485  | )      |
| Total property, plant and equipment   |   | 2,145,980 |   | 1,523,309 |   | 1,055,240 |   |
|                                  |   |      |   |      |   |      |   |
| Reconciling  items - corporate assets |   |      |   |      |   |      |   |
| Cash and cash equivalents             |   | 2,550,602 |   | 2,663,689 |   | 2,406,125 |   |
| Accounts and notes receivable, net    |   | 678,598   |   | 509,615   |   | 349,605   |   |
| Inventories                           |   | 1,084,454 |   | 992,490   |   | 1,064,671 |   |
| Other corporate assets                |   | 929,259   |   | 690,825   |   | 739,691   |   |
| Adjustments for  US GAAP presentation |   | 463,406   |   | 184,459   |   | 105,156   |   |
| Total  consolidated assets            |   | 8,039,757 |   | 6,707,284 |   | 5,830,973 |   |
| ** **                            |   |      |   |      |   |      |   |
| **Capital  expenditures**             |   |      |   |      |   |      |   |
| Processed  products                   |   | 302,648   |   | 194,587   |   | 93,220    |   |
| Poultry                               |   | 367,581   |   | 372,761   |   | 146,606   |   |
| Pork                                  |   | 143,032   |   | 26,982    |   | 40,145    |   |
| Beef                                  |   | 7,786     |   | —    |   | —    |   |
| Other                                 |   | 234,331   |   | 91,662    |   | 52,286    |   |
| Adjustments for  US GAAP presentation |   | (85,776   | )      | 56,365    |   | (7,340    | )      |
| Total segment  capital expenditures   |   | 969,602   |   | 742,357   |   | 324,917   |   |

*ProcessedProducts*

As a result of theCompany’s strategy of concentrating on higher value-added, higher marginproducts, the processed products segment results increased significantly asfrom the second half of the 1990s. Average volumes sold increased 11.2% peryear since 1998. Sales of processed products accounted for 49.1% of the Company’sgross operating revenues in 2006.

Sadia owns nine plantsthat manufacture processed products, eight of which are dedicated to meatprocessing and one to margarine production. These plants are located close totheir suppliers of raw materials or to the main domestic centers ofconsumption.

The processed productssegment comprises a wide range of products, including: frozen products(hamburgers, breaded products, ready-to-eat dishes and pizzas), refrigeratedproducts (hams, sausages, frankfurters, bolognas, salamis, cold cuts, productportions and refrigerated pasta) and margarine, the majority of which are soldunder the Sadia brand.

19

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Processed products in thedomestic market, accounted for 90.7% of the total gross sales of this segment,with the remaining 9.3% directed towards exports. The total sales from thissegment grew 4.7% as compared to 2005.

Most of the raw materialsused derive from poultry and pork produced by the company. By contrast,selected suppliers, who are subject to inspection by the Federal AgricultureMinistry, produce all beef that is processed by the Company.

The Company believes thatthe use of chicken meat as a raw material for processed products should growsubstantially for two reasons: (i) the increase in the range of chicken-basedproducts such as breaded products, and (ii) an increasing share for this kindof meat in the composition of other processed products, such as sausages,frankfurters and bolognas. Moreover, the development of specialized products(boiled and roasted products) for the institutional and foreign markets shouldalso contribute to the increase in chicken production.

Thefollowing table presents gross operating revenue from sales of processedproducts in 2006, 2005 and 2004:
| ** **              | ** ** | **Gross Operating Revenue (R$ Million)** | ** ** |
|-------------------------|------------|--------------------------------------------------------------|------------|
| ** **              | ** ** | **2006**                                                     | ** ** | **2005** | ** ** | **2004** | ** ** |
| **Processed  Products** | ** ** | **3,875.1**                                                  | ** ** | **3,701.4** | ** ** | **3,352.0** | ** ** |
| Refrigerated            |       | 3,224.7                                                      |       | 3,084.7 |   | 2,778.0 |   |
| Frozen                  |       | 650.4                                                        |       | 616.7 |   | 574.0 |   |

 

Sadiais the Brazilian leader in frozen and refrigerated processed products accordingto AC Nielsen’s surveys. The Company’s market position is supported bysignificant investments in its brand, distribution channels and in qualitycontrol.
| ** **                       | ** ** | **Brazilian Market Share (2006)** | ** ** |
|----------------------------------|------------|--------------------------------------------------|------------|
| ** **                       | ** ** | ** **                                       | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                       | ** ** | **Position**                                     | ** ** | **Market Share by  Revenue (%)** | ** ** | **Period** | ** ** |
| Frozen Processed  Products       |       | 1st                                              |       | 43.2 |   | October/November-06 |   |
| Refrigerated  Processed Products |       | 1st                                              |       | 30.2 |   | November/December-06 |   |
| Margarine                        |       | 1st                                              |       | 38.1 |   | October/November-06 |   |

 
| *Source:  AC Nielsen* |   |   |   |
|-----------------------|--------|--------|--------|

 

In order to maintainmarket share, Sadia will continue to concentrate on launchings of highervalue-added products. In 2006, the Company launched 41 products, against 76products in 2005 and 57 products in 2004.

*Poultry, Pork and Beef*

In2006, sales of non-processed products reached R$3,686.3 million, and accountedfor 46.7% of the Company’s total gross operating revenue. In 2005, sales ofnon-processed products reached R$4,190.4 million, and accounted for 50.3% ofSadia’s total gross operating revenue. In 2004 sales of non-processed productsreached R$3,488.7 million, and accounted for 41.9% of total gross operatingrevenue. In 2006, poultry, pork and beef sales accounted for approximately87.9% of total export revenue, in 2005 for approximately 86.6% and in 2004,86.0%.

20

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Sadiaowns eight chicken slaughterhouses, three turkey slaughterhouses, and four porkslaughterhouses. In addition, the Company has one beef slaughterhouse in thestate of Mato Grosso, which became operational as of November 2005. The tablebelow shows slaughtering volumes of the Company for the years ended December31, 2006, 2005, and 2004, in millions of units:
| ** ** | ** ** | **Slaughtering Volumes (Million Heads)** | ** ** |
|------------|------------|---------------------------------------------------------|------------|
| ** ** | ** ** | **2006**                                                | ** ** | **2005** | ** ** | **2004** | ** ** |
| Poultry    |       | 666.9                                                   |       | 650.1 |   | 573.0 |   |
| Hogs       |       | 4.0                                                     |       | 3.8 |   | 3.5 |   |
| Beef       |       | 0.25                                                    |       | 0.07 |   | — |   |

 

Thefollowing table shows gross operating revenue from non-processed products, forthe years of 2006, 2005 and 2004:
| ** **  | ** ** | **Gross Operating Revenue (R$ Million)** | ** ** |
|-------------|------------|--------------------------------------------------------------|------------|
| ** **  | ** ** | **2006**                                                     | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **  | ** ** | ** **                                                   | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Poultry** | ** ** | **2,865.3**                                                  | ** ** | **3,449.7** | ** ** | **2,904.0** | ** ** |
| Whole       |       | 1,239.8                                                      |       | 1,492.9 |   | 1,206.9 |   |
| Parts       |       | 1,491.2                                                      |       | 1,811.0 |   | 1,583.9 |   |
| By-products |       | 134.3                                                        |       | 145.8 |   | 113.2 |   |
| **Pork**    | ** ** | **525.6**                                                    | ** ** | **740.7** | ** ** | **584.7** | ** ** |
| **Beef**    | ** ** | **295.3**                                                    | ** ** | **—** | ** ** | **—** | ** ** |
| **Total**   | ** ** | **3,686.2**                                                  | ** ** | **4,190.4** | ** ** | **3,488.7** | ** ** |

 

In 2006, Sadia had a14.7% share of chicken production in Brazil, in terms of tons and a 25.9% shareof the Brazilian poultry export market. This compares with results for 2005 and2004, when the Company had a 10.3% and 13.6% share of domestic chickenproduction and a 25.8% and 27.9% share of the Brazilian poultry export market,respectively. Sadia introduced turkey production to the Brazilian market in1973, when its consumption was virtually non-existent. Today the market isshared with other competitors, but the Company is still in the leadershipposition, with 63.2% of total slaughter in 2006, as compared with 65.6% oftotal slaughter in 2005 and 66.2% for 2004.

Approximately 70.0% ofthe Company’s pork production is used in its processed products segment. Theremainder is sold as fresh meat cuts in the domestic and international markets.According to the Brazilian Pork Producers Association (ABIPECS), in 2006, Sadiahad a 12.1% share of Brazilian pork production, and a 14.5% share of theBrazilian pork export market. This compares with results for 2005 and 2004,when the Company had a 14.2% and 10.4% share of Brazilian pork production and a14.2% and 19.7% share of the Brazilian pork export market, respectively.

InNovember 2005, Sadia decided to resume its beef operations because it believesthat it represents a complementary business to the Company’s activities. Sadia’sstrategy in this sector is to concentrate sales towards the export market; forthe domestic market the Company will focus its efforts on premium beef cuts. In2006, it accounted for 3.7% of total Gross Operating Revenues.

**ProductionProcess**

*Processed Products*

The Company uses specialcuts of pork, chicken and turkey, as well as selected and shaped fragments forthe production of hams, sausages, frankfurters, bologna, hamburgers, pressedham and related products. Seasonings and secondary raw materials are applied toeach product type or line, according to established formulas, in order toensure consistency, color, texture and flavor. The presentation of finalproducts is achieved by shaping, casing, cooking and freezing in specialmachines. Products are then subjected to quality controls and distributed tothe consumer market after having been packaged, labeled and boxed.

The raw material formargarine is crude soybean oil, which is subjected to refining and bleachingprocesses. Fats are obtained by hydrogenating bleached oil. Both of thesematerials are deodorized in order to prepare the “blend”. The process iscompleted by the preparation of an emulsion, the cooling and crystallization ofthe product, placing into containers, and the packing of these into boxes.

21

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*Poultry*

The production processfor poultry consists of four stages. The first two entail direct investment bythe Company in grandparent and parent stock. The third relates to thecommercial stock of birds, and involves the direct participation of integratedoutgrower farmers, and the last is the slaughtering process.

The Company importsgrandparent stock from the United States in the form of eggs that are hatchedin its hatcheries and then raised on company-owned farms. These birds produceparent stock that are also raised on Company-owned farms, and that in turnproduce eggs. The operation involves eleven hatchery centers, eight of whichproduce “one-day-chicks” and three “one-day-turkeys”. The “one-day-chicks” aresupplied to third-party outgrowers. Sadia operates a similar system forturkeys, importing eggs to produce grandparent stock that in turn producesparent stock that are raised on company-owned farms. The Company is notdependent on any foreign supplier for its genetic resources, nor does it faceany barriers to their development.

The “one-day-chicks”produced by parent stock are supplied to integrated outgrowers who areresponsible for raising the birds. Sadia has contracts with approximately 6,600outgrowers, to which the Company provides feed, technical and veterinaryassistance to allow such outgrowers the outgrowing process up to the time thebirds reach slaughtering age, which for chickens is normally 36 days (at aweight of 2.0 kg). There are no employment agreements between the Company andthe outgrowers, who generally carry out this activity in order to supplementtheir income. Most outgrowers farm on a small scale and raise six flocks peryear (each flock consists of approximately 14,000 chickens). The Companyremains the owner of the birds, and at the end of each production cycle, pays acommission fee based on a performance index that is calculated as a function ofindicators such as bird mortality, feed to meat conversion ratio and averageweight. The fee paid to the integrated farmers covers the outgrowing costs, rawmaterials, labor and their net profit.

Poultry are slaughteredthrough a process by which they are electrically stunned. They are then bled bypuncturing of major blood vessels. After heating to a temperature of 55/60oC, they are plucked and guttedby automatic machines. The gutting process is subject to health control andinspection. The carcasses are then moved for cooling or freezing at respectivetemperatures of 6oC and -12/-18oC, and are then packagedaccording to the required standards of the *Serviço de Inspeção deProdutos Animais* (SIPA — Animal based Product Inspection Agency). Atthis stage, the whole birds are either distributed to the consumer market asfresh meat or used as raw material in processed products.

*Pork*

TheCompany produces grandparent, parent and piglet stock on its own farms, 90%of the parent stock produced by the Company is supplied to integratedoutgrowers who receive feed, medicine and technical assistance by way ofsupport. These parent animals produce hogs that are sold to the Company forslaughter, after the fattening process is completed. The remainder of theparent stock produced by Sadia is sold to piglet producers, who also receivefeed, medicine and technical assistance. The Company repurchases the piglets atmarket prices and distributes them to integrated outgrowers, who after thefattening process sell such pigs to Sadia for slaughtering.

The hogs are slaughteredthrough a process in which they are bled after being stunned electrically.After heating to a temperature of 60/64oC, their bristles are removed by automaticmachines. The animals are then dried, flamed, brushed and gutted, which processis subject to health inspection. After cooling to a temperature of 5oC, the carcasses are cut up andprocessed.

*Beef*

Sadia acquires cattle forslaughter at our Várzea Grande unit from producers in the state of Mato Grosso,within a limited radius of our facility, whose cattle have been branded atbirth and therefore are of verifiable origin. Currently the Company is able toslaughter 1,000 heads of cattle per day on average.

**Principal markets where the Company competes**

In2006, Sadia had an average of 43.2% of its gross operating revenues providedfrom exports. This ratio was 48.9% for 2005 and 47.7% 2004. The table set forthbelow presents the main regions of the world where the company has commercialrelations and the discussion that follows describes the main trends andexpectations for its markets. This information has been prepared and presentedin accordance 

 

22

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with BrazilianGAAP and is adjusted for U.S. GAAP. Refer to Note 23 of the consolidatedfinancial statements for details on the primary differences between BrazilianGAAP and U.S. GAAP.
| ** **                                                                | ** ** | **Exports Gross Operating Revenues (Thousand R$)** | ** ** |
|---------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------|------------|
| ** **                                                                | ** ** | ** **                                                                  | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                                                | ** ** | **2006**                                                                    | ** ** | **2005** | ** ** | **2004** | ** ** |
|                                                                      |       |                                                                        |       |   |   |   |   |
| Europe                                                                    |       | 889,171                                                                     |       | 978,318 |   | 985,746 |   |
| Middle East                                                               |       | 787,838                                                                     |       | 1,047,615 |   | 802,935 |   |
| Asia                                                                      |       | 533,295                                                                     |       | 635,907 |   | 602,202 |   |
| South America                                                             |       | 528,453                                                                     |       | 542,151 |   | 387,130 |   |
| Emerging Markets  (mainly Russia and other former Soviet Union countries) |       | 719,706                                                                     |       | 872,333 |   | 806,520 |   |
| Adjustments to  US GAAP presentation                                      |       | (46,426                                                                     | )          | (627 | ) | (191,869 | ) |
| **Total**                                                                 | ** ** | **3,412,037**                                                               | ** ** | **4,075,697** | ** ** | **3,392,664** | ** ** |

Revenues areattributed to regions based upon where the products are shipped. All long-livedoperational assets are located in Brazil and assets located outside of Brazilconsist of sales offices located in various countries.

Europe is a largepurchaser of poultry cuts and processed products. Sadia maintains a traditionalpresence in the Middle East, with market leadership and strong brandrecognition. Middle Eastern countries primarily consume whole birds of lowweight (up to 1.4 kilograms) and processed products. With respect to Eurasia,which comprises the Caucasus region and Russia, the Company exports mainly porkand poultry cuts. The main exports to Asia are special poultry cuts, porkcarcasses and cuts. In the Americas, sales are concentrated primarily inprocessed products, poultry parts and whole birds. Secondary markets includeregions with great potential for growth in the medium term.

Seventy nine percent ofthe Company’s exports in 2006 were to investment grade countries.

**Market Overview — Domestic and InternationalMarkets**

The growth potential ofthe Brazilian market for processed food, poultry, pork and beef, and Brazil’slow production costs are attractive to international competitors. The mainbarrier to such companies has nevertheless been the need to build a wideranging refrigerated distribution chain, and a network of integrated producers.

The following analysiswas prepared based on information mainly gathered from: The USDA (United StatesDepartment of Agriculture), CONAB (Brazilian National Supply Company), ABEF(Brazilian Poultry Exporters Association) and ABIPECS (Brazilian Pork MeatExporters Association) and AC Nielsen reports.

**Brazilian Processed ProductsMarket**

Consumption of processedproducts is influenced by several factors, including the increase in consumerincome, and efforts related to the development of products, with a view tomeeting consumer demand for more sophisticated products.

The processed products segmentis divided into three categories: frozen products, refrigerated products andmargarines.

*Frozen Processed Products*

In 2006, the Brazilianmarket for frozen processed products accounted for sales of R$1,286.3 million.Approximately 80.1% of this total is attributable to the two largest companies,Sadia and Perdigão.

 

23

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| ** **              | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
|-------------------------|------------|----------|------------|----------|------------|----------|------------|
| Sales (R$ million) |       | 1,286.3  |       | 1,214.3  |       | 1,100.6  |       |
| Change %                |       | 3.6      | %          | 10.3     | %          | 12.9     | %          |
| Volume (thousand tons)  |       | 157.0    |       | 143.4    |       | 134.9    |       |
| Change %                |       | 9.5      | %          | 8.5      | %          | 10.9     | %          |

 

*Source:AC Nielsen*

 

Due to thecharacteristics of frozen processed products with production concentrated amonga small number of companies, and supply aimed at a more restricted group ofconsumers, Sadia believes that volume sales of frozen processed products willmaintain their growth trend, although at rates below the 9.7% annual averageregistered between 2004 and 2006. In any case, since the market for frozenprocessed products is still far from mature in Brazil, the Company believesthat medium and long-term prospects for this segment are highly positive basedon the trend over the preceding years.

*Refrigerated Processed Products*

In 2006, the Brazilianmarket for refrigerated processed products accounted for sales of R$6,163.0million. The two largest companies in this market together accounted forapproximately 50.0% of net sales, according to AC Nielsen, with the remainingshare being split among a large number of small companies.
| ** **              | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
|-------------------------|------------|----------|------------|----------|------------|----------|------------|
| Sales (R$ million) |       | 6,163.0  |       | 5,094.9  |       | 4,383.1  |       |
| Change %                |       | 21.0     | %          | 16.2     | %          | 19.9     | %          |
| Volume (thousand tons)  |       | 893.5    |       | 744.0    |       | 675.5    |       |
| Change %                |       | 20.1     | %          | 10.2     | %          | 9.5      | %          |

 

*Source: AC Nielsen*

 

*Margarine*

In 2006, the Brazilianmarket for margarine accounted for sales of R$1,541.0 million. The threelargest producers (including Sadia as the largest) accounted for 86.0% of themarket.
| ** **              | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
|-------------------------|------------|----------|------------|----------|------------|----------|------------|
| Value (R$ million) |       | 1,541.0  |       | 1,527.5  |       | 1,501.2  |       |
| Change %                |       | 0.9      | %          | 1.8      | %          | 1.1      | %          |
| Volume (thousand  tons) |       | 327.0    |       | 302.3    |       | 285.9    |       |
| Change %                |       | 8.2      | %          | 5.8      | %          | 2.9      | %          |

 

*Source: AC Nielsen*

 

**Poultry**

*Domestic Market*

The Brazilian poultrymarket is a complex sector where a few large companies share the market withsmall producers. According to UBA’s 2006/7 annual report, the four largestchicken producers in Brazil accounted for 37.5% of Brazilian production in2006. The low concentration in the market increases competitive pressure in thesegment. Prices are subject to supply and demand imbalances.

Many of these smallproducers operate under low quality standards because of the large number ofproducers and government difficulties to inspect producers on a regular basis.Additionally, there is widespread belief that tax evasion practices among theseproducers reduce their costs as compared to producers such as Sadia that complywith applicable regulations.

Growth in Brazilian percapita consumption of poultry over the last four years is expected to continueas the USDA forecast a 1.4% growth for 2006 as compared to 2005.

24

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----

(p) preliminary; (f) forecast

Source:USDA

In the local market,poultry export business in Brazil has grown more rapidly since the mid 1990s.This can be explained by the production shift of large Brazilian companies’exports, as well as by the competitiveness of Brazilian poultry. Sanitaryproblems in the main producing countries such as the Bovine SpongiformEncephalophy (“BSE”) cases in Europe, avian influenza problems in Thailand andboth BSE and avian influenza cases in the United States have changed the worldbroiler trade dynamics. The reduced competition from major exporting countriesaffected by sanitary issues and the competitive cost of Brazilian poultryfavors Brazil as the most competitive exporter of quality poultry cuts andmechanically de-boned chicken meat. Additionally, several new markets inEurope, Africa and the Middle East have opened to Brazilian chicken, and thenumber of markets which Brazil has access to has risen to 146 in 2006,according to ABEF.
| ** **    | ** ** | **Brazilian Broiler Exports Destination (thousand tons)** | ** ** |
|---------------|------------|------------------------------------------------------------------------------------|------------|
| ** **    | ** ** | **2006**                                                                           | ** ** | **06 V.A.%** | ** ** | **2005** | ** ** | **05 V.A.%** | ** ** | **06/05 %** | ** ** |
| Middle East   |       | 748                                                                                |       | 29 | % | 849 |   | 31 | % | -11 | % |
| Asia          |       | 738                                                                                |       | 29 | % | 757 |   | 27 | % | -2 | % |
| Africa        |       | 289                                                                                |       | 11 | % | 192 |   | 7 | % | 49 | % |
| EU            |       | 243                                                                                |       | 9 | % | 387 |   | 12 | % | -24 | % |
| Russia        |       | 182                                                                                |       | 7 | % | 258 |   | 9 | % | -28 | % |
| South America |       | 132                                                                                |       | 5 | % | 115 |   | 4 | % | 16 | % |
| Other         |       | 255                                                                                |       | 10 | % | 289 |   | 10 | % | -10 | % |
| **Total**     |       | 2,587                                                                              |       | 100 | % | 2,847 |   | 100 | % | -6 | % |

 

*Source: ABEF*

 

For 2007, the USDA hasrevised upwards the projected Brazilian broiler production to 9.7 million tons,4.3% higher than the record production level of nearly 9.3 million tons lastyear. The projected increase in production reflects the firm domestic demandderived from higher employment rates and consumer purchasing power as theeconomy improves and continues to boost demand for animal proteins. In additionto that, expansion in the export market will likely continue in view of theanimal health (mostly avian influenza) problems faced by other countries.

According to the USDA’sGAIN Report whole broiler exports in 2006 reached nearly 1.1 million tons,maintaining the volumes of 2005. Exports of broiler parts reached 1.8 milliontons, up 10.8% over 2005. Brazilian broiler exporters’ strategy is to increaseprofitability by focusing on higher value products, such as broiler parts andfurther processed products which increased significantly in 2006 by 51.5% involume, reaching 127,246 tons.

The European Union was,in 2006, the largest market for Brazilian broiler exports, mostly broilerparts. The increase in broiler exports to the European Union also reflects asignificant increase in exports of processed broilers. The European Unionmarket accounted for nearly 85.6% of all processed broiler exports from Brazil.

Saudi Arabia,traditionally Brazil’s largest single export market for poultry, now rankssecond. Saudi Arabia also accounted for nearly 45.0% of all Brazilian broilerexports to the Middle East.

25

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In 2006, Japan was thethird largest market for Brazil’s broiler exports, mostly broiler parts.

*International Poultry Market*

The prevalence of highlypathogenic avian influenza (“HPAI”), which is reportedly spreading from Asia toother countries, may impact the world broiler trade outlook in 2007.

According to the FAO,properly cooked poultry is safe to consume a conventional cooking temperaturesat or above 70°C in all parts of a food item) will inactivate the H5N1 virus.Moreover, there is no epidemiological evidence to indicate that people havebeen infected with the H5N1 virus following consumption of properly cookedpoultry or eggs. It is thus expected that as consumers become more aware of thetrue dangers of HPAI, the level of poultry consumption will not be affected.

According to the USDA,world economic growth is expected to remain at the same level of 2006. Theforecast economic environment will promote investment in meat production andprocessing capacity in many major livestock and poultry producing countries.

Moreover, increases inworldwide real per capita GDP in 2006 continued to fuel rising livestock andpoultry consumption and hence production. Asian economies particularly China,Hong Kong, Taiwan, and Thailand are forecast to experience growth, likelyfostering meat consumption as consumers will have more disposable income.

According to the USDA,macroeconomic stability and growth in low and some middle-income countriesresults in higher consumption of red meat and poultry, providing new growthopportunities for domestic producers and world suppliers.

According to FAO, percapita consumption of poultry in developed countries is more than three timesthat of developing countries. This difference is even more accentuated forcertain countries. In 2006, for instance, while India was expected to consume1.8kg poultry per capita, Japan was expected to consume almost 9 times thatamount with 15.0kg.

According to the USDA,broiler meat exports by major traders are forecast to reach 6.7 million tons in2007. Poultry demand is expected to be strong due to the absence of competitionfrom the United States in major beef markets and constraints on growth inBrazilian beef exports. The 2007 increase of nearly 4.1% is the result ofincreased trade by a number of countries including Argentina, Brazil, China, Thailand,and the United States.

According to the USDA, in2006, Russian poultry production is expected to increase by an additional 19.8%in 2007 as the sector continues to benefit from heavy investment. Despite theseinvestments Russia will continue to be the worldwide leader in poultry importswith a forecast 1.2 million tons for 2007.

Japan’s total broilerconsumption in 2007 is projected to stay flat from the level achieved last yearat 1.9 million tons. The USDA also expects a slight decrease of 2.0% in theJapanese poultry imports, as a consequence of the weaker outlook for foodservice demand, coupled with high year beginning stocks.

Saudi Arabia poultryimports for 2007 are expected to reach about 470,000 tons, an 8.3% increasecompared to 2006 volumes.

Sadia believes there is agreat potential market in the Middle East. In seeking new opportunities, Sadiawas the first Brazilian food company to enter the Egyptian market. Due to theoutbreak of avian influenza in its territory, the Egyptian government closedpoultry farms and slaughterhouses and was obliged to increase the share ofimports for this product.

The USDA projects thatthe European Union broiler meat consumption will have a slight increase of1.1%, reaching 7.5 million tons. Imports on the other hand, are expected toincrease by 7.5%, to 645,000 tons in 2007.

In 2007, Chinese broilermeat imports are projected to reach 430,000 tons, a 16.2% increase from theprevious year. The United States continues to be the only country that can sellpoultry products for direct consumption in China’s retail sector.

26

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| ** **    | ** ** | **World Broiler Balance (thousand tons)** | ** ** |
|---------------|------------|---------------------------------------------------------------|------------|
| ** **    | ** ** | **2006 (p)**                                             | ** ** | **2007 (f)** | ** ** |
| ** **    | ** ** | **Production**                                                | ** ** | **Consumption** | ** ** | **Exports** | ** ** | **Production** | ** ** | **Consumption** | ** ** | **Exports** | ** ** |
| China         |       | 10,350                                                        |       | 10,370 |   | 350 |   | 10,520 |   | 10,585 |   | 365 |   |
| Brazil        |       | 9,280                                                         |       | 6,780 |   | 2,500 |   | 9,670 |   | 7,120 |   | 2,550 |   |
| EU            |       | 7,425                                                         |       | 7,405 |   | 620 |   | 7,530 |   | 7,490 |   | 685 |   |
| Mexico        |       | 2,610                                                         |       | 3,010 |   | — |   | 2,724 |   | 3,148 |   | — |   |
| India         |       | 2,000                                                         |       | 2,000 |   | — |   | 2,200 |   | 2,200 |   | — |   |
| Argentina     |       | 1,210                                                         |       | 1,124 |   | 90 |   | 1,290 |   | 1,184 |   | 110 |   |
| Russia        |       | 1,080                                                         |       | 2,330 |   | — |   | 1,260 |   | 2,400 |   | — |   |
| Japan         |       | 1,195                                                         |       | 1,908 |   | — |   | 1,185 |   | 1,915 |   | — |   |
| Thailand      |       | 1,050                                                         |       | — |   | 280 |   | 1,100 |   | — |   | 280 |   |
| Canada        |       | 970                                                           |       | — |   | 95 |   | 980 |   | — |   | 95 |   |
| United States |       | 16,162                                                        |       | 13,817 |   | 2,454 |   | 16,413 |   | 13,901 |   | 2,508 |   |
| **Total**     | ** ** | **60,090**                                                    | ** ** | **58,888** | ** ** | **6,470** | ** ** | **61,596** | ** ** | **59,744** | ** ** | **6,737** | ** ** |

----

(p) preliminary; (f) forecast

*Source: USDA*

 
| ** **                 | ** ** | **World Broiler Imports** | ** ** |
|----------------------------|------------|-------------------------------------|------------|
| ** **                 | ** ** | **2006 (p)**                   | ** ** | **2007 (f)** | ** ** |
| ** **                 | ** ** | **Volume**                          | ** ** | **%** | ** ** | **Volume** | ** ** | **%** | ** ** |
| China                      |       | 370                                 |       | 7 | % | 430 |   | 8 | % |
| EU                         |       | 600                                 |       | 12 | % | 645 |   | 12 | % |
| Mexico                     |       | 400                                 |       | 8 | % | 424 |   | 8 | % |
| Russia                     |       | 1240                                |       | 24 | % | 1150 |   | 22 | % |
| Japan                      |       | 740                                 |       | 14 | % | 725 |   | 14 | % |
| Other                      |       | 649                                 |       | 13 | % | 700 |   | 13 | % |
| South Africa,  Republic of |       | 225                                 |       | 4 | % | 225 |   | 4 | % |
| Saudi Arabia               |       | 434                                 |       | 8 | % | 470 |   | 9 | % |
| United Arab  Emirates      |       | 137                                 |       | 3 | % | 165 |   | 3 | % |
| Venezuela                  |       | 120                                 |       | 2 | % | 150 |   | 3 | % |
| Hong Kong                  |       | 234                                 |       | 5 | % | 237 |   | 4 | % |
| United States              |       | 19                                  |       | 0 | % | 16 |   | 0 | % |
| **Total**                  | ** ** | **5,168**                           | ** ** | **100** | **%** | **5,337** | ** ** | **100** | **%** |

----

(p) preliminary;(f) forecast

*Source:USDA*

 

**Pork**

*Domestic Market*

Pork companies aresubject to the same problems as those in the poultry market, including unfaircompetition with small and low quality producers. Although these problemsinfluence product quality, there is a failure on the part of the consumer toperceive the quality risks involved and price dumping is widely practiced.According to ABIPECS 2006 annual report, the four largest pork producers inBrazil were responsible for 50.1% of Brazilian pork production in 2006.

27

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----

(p) preliminary; (f) forecast

Source:USDA

Brazilian pork breedingand slaughtering continues to increase the efficiency of production. Measuredby the average birth rate of piglets, productivity doubled since the 1970s, andthe birth rate reached 24 animals per female. At 160 days old, animals weigh100 kg on average, and are ready to be slaughtered. Research developments havealso contributed to help reduce fat by 31%, cholesterol by 10% and calories by14% in pork produced in Brazil. This enhancement allows for better productivityof prime cuts, more meat per carcass and more nutritious and healthier meat.

Brazilian pork exportsdecreased in volume by 15.5% in 2006 to 528,195 tons, from 625,075 tons in2005. In terms of market value, pork exports fell to US$1.0 billion in 2006from US$1.1 billion in 2005, a decrease of 11.2%.
| ** ** | ** ** | **Brazilian Pork Exports** | ** ** |
|------------|------------|--------------------------------------|------------|
| ** ** | ** ** | **Tons**                             | ** ** | **Thousand US$** | ** ** |
| ** ** | ** ** | **2006**                             | ** ** | **%** | ** ** | **2005** | ** ** | **%** | ** ** | **2006** | ** ** | **%** | ** ** | **2005** | ** ** | **%** | ** ** |
| Russia     |       | 267,689                              |       | 51 | % | 404,739 |   | 65 | % | 622,249 |   | 60 | % | 805,387 |   | 69 | % |
| Hong Kong  |       | 73,908                               |       | 14 | % | 60,902 |   | 10 | % | 95,917 |   | 9 | % | 83,760 |   | 7 | % |
| Ukraine    |       | 50,469                               |       | 10 | % | 21,968 |   | 4 | % | 75,158 |   | 7 | % | 34,094 |   | 3 | % |
| Singapore  |       | 25,254                               |       | 5 | % | 16,659 |   | 3 | % | 54,359 |   | 5 | % | 33,646 |   | 3 | % |
| Moldovia   |       | 20,792                               |       | 4 | % | 8,071 |   | 1 | % | 41,764 |   | 4 | % | 14,904 |   | 1 | % |
| Argentina  |       | 19,176                               |       | 4 | % | 17,288 |   | 3 | % | 35,011 |   | 3 | % | 33,387 |   | 3 | % |
| Other      |       | 70,908                               |       | 13 | % | 95,449 |   | 15 | % | 112,730 |   | 11 | % | 162,731 |   | 14 | % |
| **Total**  | ** ** | **528,195**                          | ** ** | **100** | **%** | **625,075** | ** ** | **100** | **%** | **1,037,187** | ** ** | **100** | **%** | **1,167,909** | ** ** | **100** | **%** |

 

*Source: Abipecs*

 

Russia remains theprincipal market for Brazilian pork exports. Russia accounted for 64.7% oftotal Brazilian exports in 2005, declining to 50.7% in 2006. Hong Kong is thesecond largest Brazilian market for pork exports with a 14.0% market share,followed by Ukraine, which is now the third largest market for Brazilian porkexports.

Pork production isexpected to increase by 4.7% to 2.9 million tons in 2007. The decline in porkproduction in 2006 is mostly attributable to lower exports to Russia. However,foreign and Brazilian companies estimate production will increase in thecenter-west region of Brazil as a result of maturing investments.

*International Market*

Pork consumptioncontinues to benefit from beef and poultry supply disruptions due to avianinfluenza and BSE. Increases in pork production are substituting for reduceddemand for beef and poultry in many countries. According to the USDA, globalpork exports are forecasted to increase 2.6% in 2007 reaching a record high of5.3 million tons.

Nevertheless, there is anincreasing awareness that meat trade flows are becoming largely dictated bysanitary conditions and regulations. Exporters worry that market access, drivenby trade policy, as well as veterinary and food safety controls, could becomeeasily susceptible to non-tariff trade 

 

28

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barriers, especially when those controls are not basedon technical criteria. In this very uncertain environment, exporting countriesare trying to maintain a competitive position in lucrative markets. At the sametime, importing countries are seeking to ensure fairness for their domesticproducers, while also safeguarding the health and economic needs of theirconsumers.

Pork consumption in themajor consuming countries is expected to grow about 3.5% in 2007 and Chinaaccounts for the largest portion of this forecasted growth.

Similar to poultry, it isprojected that in the coming years most of the growth in pork consumption willderive from the emerging economies. Not only are low and middle-incomecountries increasing their per capita consumption, but they are also graduallyaccounting for a greater share of world consumption. According to the USDA,China’s pork consumption accounted for 49.2% of pork consumption in major porkconsuming countries in 2002 and is forecast to account for 54.0% in 2007. Onthe other hand, the EU’s share of pork consumption is forecast to decrease from22.5% to 19.7% from 2002 to 2007.

EU pork production isexpected to marginally increase in 2007 while exports tend to be flat to nearly1.4 million tons for 2007. The European Union easily retains its position asthe world’s leading pork exporter and is forecast to account for 26.3% of porkexports by major traders.

The United States marketis currently signaling producers to expand production. Production in recentyears has been export driven. While only 8.2% of U.S. pork production wasexported in 2002, 14.3% of American pork production is expected to be exportedin 2007. In 2007, U.S. pork exports are forecast to reach 1.4 million tons.

In 2003, the Russiangovernment published the resolutions that established poultry quota and beefand pork tariff rate quotas (“TRQ”). The Russian TRQ establishes countryspecific quotas for the EU, Paraguay, United States and a general quota for allother countries. As processed pork, unlike other types of pork, is not underthe TRQ, imports of processed pork have increased.

Pork meat bans introducedby Russia at the end of 2005 (affecting Brazil and Poland) and in the beginningof 2006 (affecting Ukraine) created a state of uncertainty for importerslooking to fill their TRQ allocations.

According to the USDA, ifthe bans are not removed in the near future, it will be very difficult forimporters to find adequate substitution. Brazilian meat imports entered Rússiafor only half a year in 2005. In 2006, Russia partially lifted the ban for thestates of Mato Grosso, São Paulo and Rio Grande do Sul.
| ** **          | ** ** | **World Pork Balance (thousand tons)** | ** ** |
|---------------------|------------|------------------------------------------------------------|------------|
| ** **          | ** ** | **2006 (p)**                                          | ** ** | **2007 (f)** | ** ** |
| ** **          | ** ** | **Production**                                             | ** ** | **Consumption** | ** ** | **Exports** | ** ** | **Production** | ** ** | **Consumption** | ** ** | **Exports** | ** ** |
| China               |       | 53,000                                                     |       | 52,536 |   | 500 |   | 55,800 |   | 55,324 |   | 510 |   |
| EU                  |       | 21,450                                                     |       | 20,072 |   | 1,400 |   | 21,500 |   | 20,122 |   | 1,400 |   |
| Brazil              |       | 2,745                                                      |       | 2,205 |   | 540 |   | 2,875 |   | 2,305 |   | 570 |   |
| Russia              |       | 1,800                                                      |       | 2,590 |   | 20 |   | 1,910 |   | 2,715 |   | 20 |   |
| Canada              |       | 1,885                                                      |       | — |   | 1,100 |   | 1,860 |   | — |   | 1,120 |   |
| Vietnam             |       | 1,713                                                      |       | 1,698 |   | 15 |   | 1,832 |   | 1,815 |   | 18 |   |
| Mexico              |       | 1,200                                                      |       | 1,585 |   | 65 |   | 1,250 |   | 1,640 |   | 70 |   |
| Philippines         |       | 1,215                                                      |       | 1,240 |   | — |   | 1,245 |   | 1,272 |   | — |   |
| Japan               |       | 1,240                                                      |       | 2,530 |   | — |   | 1,235 |   | 2,501 |   | — |   |
| Korea, Republic  of |       | 1,039                                                      |       | 1,314 |   | 11 |   | 1,077 |   | 1,310 |   | 15 |   |
| United States       |       | 9,543                                                      |       | 8,657 |   | 1,346 |   | 9,809 |   | 8,874 |   | 1,402 |   |
| Other               |       | 2,946                                                      |       | 4,497 |   | 181 |   | 2,993 |   | 4,496 |   | 189 |   |
| **Total**           | ** ** | **99,776**                                                 | ** ** | **98,914** | ** ** | **5,178** | ** ** | **103,386** | ** ** | **102,374** | ** ** | **5,314** | ** ** |

----

(p) preliminary;(f) forecast

*Source:USDA*

 

According to the USDA,Japan is expected to remain the world’s largest pork importer in 2007,importing over 1,220 thousand tons, slightly below the previous year.

29

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| ** **          | ** ** | **World Pork Imports** | ** ** |
|---------------------|------------|----------------------------------|------------|
| ** **          | ** ** | **2006 (p)**                | ** ** | **2007 (f)** | ** ** |
| ** **          | ** ** | **Volume**                       | ** ** | **%** | ** ** | **Volume** | ** ** | **%** | ** ** |
| Japan               |       | 1,250                            |       | 30 | % | 1,228 |   | 29 | % |
| Russian  Federation |       | 800                              |       | 19 | % | 825 |   | 19 | % |
| Mexico              |       | 450                              |       | 11 | % | 460 |   | 11 | % |
| Hong Kong           |       | 310                              |       | 7 | % | 317 |   | 7 | % |
| Romania             |       | 288                              |       | 7 | % | 275 |   | 6 | % |
| Korea               |       | 254                              |       | 6 | % | 220 |   | 5 | % |
| Canada              |       | 140                              |       | 3 | % | 145 |   | 3 | % |
| Australia           |       | 90                               |       | 2 | % | 99 |   | 2 | % |
| Ukraine             |       | 45                               |       | 1 | % | 45 |   | 1 | % |
| Taiwan              |       | 33                               |       | 1 | % | 36 |   | 1 | % |
| Other               |       | 109                              |       | 3 | % | 118 |   | 3 | % |
| United States       |       | 463                              |       | 11 | % | 467 |   | 11 | % |
| **Total**           | ** ** | **4,232**                        | ** ** | **100** | **%** | **4,235** | ** ** | **100** | **%** |

----

(p) preliminary;(f) forecast

*Source:USDA*

 

**Beef**

According to the USDAAnnual Report, the world supply of beef continues to be tight due to thenegative impacts of bovine spongiform encephalopathy (BSE) and foot and mouthdisease (FMD)-related trade restrictions. Total beef exports by major tradersare forecast to increase over 6% in 2007 not only due to countries notsignificantly impacted by disease (Argentina, Australia, India and New Zealand)but also as some countries recover from disease related trade restrictions.Canadian and U.S beef exports have not achieved full recovery of lost marketsdue to BSE. U.S and Canadian beef exports in 2007 are forecast down 48.4% and39.2%, respectively, from 2002. However, U.S. beef exports are continuing torecover and are forecast to rise 30.0% in 2007 to 680,000 tons.
| ** **    | ** ** | **World Beef Balance (thousand tons)** | ** ** |
|---------------|------------|------------------------------------------------------------|------------|
| ** **    | ** ** | **2006 (p)**                                          | ** ** | **2007 (f)** | ** ** |
| ** **    | ** ** | **Production**                                             | ** ** | **Consumption** | ** ** | **Exports** | ** ** | **Production** | ** ** | **Consumption** | ** ** | **Exports** | ** ** |
| United States |       | 11,897                                                     |       | 12,800 |   | 523 |   | 12,168 |   | 13,024 |   | 680 |   |
| Brazil        |       | 8,850                                                      |       | 6,935 |   | 1,945 |   | 9,120 |   | 7,180 |   | 1,985 |   |
| China         |       | 7,500                                                      |       | 7,413 |   | 90 |   | 7,910 |   | 7,829 |   | 85 |   |
| EU-25         |       | 7,880                                                      |       | 8,220 |   | 200 |   | 7,880 |   | 8,240 |   | 200 |   |
| Argentina     |       | 3,100                                                      |       | 2,604 |   | 500 |   | 3,150 |   | 2,552 |   | 600 |   |
| India         |       | 2,375                                                      |       | 1,625 |   | 750 |   | 2,500 |   | 1,700 |   | 800 |   |
| Australia     |       | 2,150                                                      |       | 740 |   | 1,420 |   | 2,290 |   | 755 |   | 1,495 |   |
| Mexico        |       | 2,175                                                      |       | 2,505 |   | 35 |   | 2,200 |   | 2,535 |   | 40 |   |
| Russia        |       | 1,460                                                      |       | 2,285 |   | — |   | 1,380 |   | 2,270 |   | — |   |
| Canada        |       | 1,375                                                      |       | 1,067 |   | 455 |   | 1,335 |   | 1,059 |   | 440 |   |
| New Zealand   |       | 650                                                        |       | — |   | 540 |   | 690 |   | — |   | 570 |   |
| Other         |       | 4,099                                                      |       | 5,315 |   | 538 |   | 4,094 |   | 5,436 |   | 559 |   |
| **Total**     | ** ** | **53,511**                                                 | ** ** | **51,509** | ** ** | **6,996** | ** ** | **54,717** | ** ** | **52,580** | ** ** | **7,454** | ** ** |

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(p) preliminary; (f) forecast

*Source: USDA*

 

Beef production andconsumption in selected countries is forecast to increase in 2007 just over2.0%. China, Brazil and the United States are forecast to make the largestgains in production. Chinese beef production has grown 5.3% to 7.9% annuallysince 2002 and will increase over 5.5% in 2007 due to an increasing herd.Continued production growth in China is supported by strong domestic demand asdisposable income increases and consumers shift from poultry to other meats dueto avian influenza (AI) concerns. Similarly, beef production growth in Brazil,forecast at 3.0% in 2007 is driven by strong domestic demand. Though stillcombating FMD outbreaks, the Brazilian cattle herd continues to expand,forecast to rise 3.6% in 2007 bolstered by investments in genetics andgovernment supported improved production practices.

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Brazilian beef exportsare forecast to increase 2.1% in 2007 as several markets have partially liftedbans that were imposed because of FMD. Brazil’s total beef exports in the firsthalf of 2006 were stable as it compensated for the loss of major markets byexpanding sales to Egypt, Saudi Arabia, Israel, Romania and several othersmaller markets as well as cooked product to the United States. Brazil’s focuson smaller non-traditional markets will likely continue through 2007. The chartbelow about the forecast to Brazil beef consumption shows an increase of 2.4%when compared to 2006. It is possible to conclude that there is a trend ofgrowth in the beef consumption in Brazil since 2003.

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(p) preliminary; (f) forecast

Source:USDA

Japanese beef imports areforecast to increase more than 10.0% in 2007 after an expected 1.0% decrease in2006. High Japanese beef prices have negatively impacted consumption in 2006.The return of U.S. beef to Japan should help alleviate pressure on prices, inturn spurring increased demand. Initial reports of U.S. beef to Japan have beenslow for a range of reasons such as high U.S. beef prices, consumer anxiety,and strict scrutiny at ports. Further, U.S. beef exports have been and willcontinue to be constrained by the availability old under 21 month old cattleeligible for export to Japan. The food service sector, particularly beef blowsand barbeque establishments found the transition to Australian grass-fed beefunsuitable or had difficulty securing supplies of Australian grainfed beef.Thus, restaurants will be leaders in the United States’ return to the Japanesebeef market. With the return of the United States to the Japanese beef market,it is expected that Australian beef exports to Japan will decrease while U.S.beef imports to Japan begin to recover market share.

**Seasonal Nature of Business**

*Chicken, Pork and Beef*

Not seasonal in nature.

*Turkey*

Turkey productionactivities are seasonal in nature with respect to “whole turkeys”, whoseproduction is concentrated in the second half of the year, with a higher volumeof sales in the fourth quarter because of Christmas holidays.

*Processed products*

Processed products areseasonal only in the celebration products, with a higher volume of sales in thefourth quarter.

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***Raw Materials***

Sadia owns nine animalfeed plants with an installed capacity of 5.5 million tons per year, a volumesufficient to supply all the animal feed requirements of its breedingoperations. The basic raw materials used in animal feed production are corn andsoybeans, in a mix that contains preservatives and micronutrients. The Companysupplies the basic animal feed to its outgrowers and sell the remainder on thespot market.

The Company purchasescorn and soybeans from rural producers, small merchants, cooperatives, largescale traders and through auctions organized by the Brazilian government, aswell as occasionally from Argentina. Most of the production of these rawmaterials are concentrated in the states of Santa Catarina, Paraná, Rio Grandedo Sul, Goiás and Mato Grosso. Grains are received in sacks or in bulk, and arethen weighed. A sample is taken to measure humidity and impurities in thegrain. After approval, the grain is unloaded into a hopper for cleaning anddrying. Grain is then sieved in order to eliminate the residues that accompanyit. After selection and cleaning, the grain is milled and mixed with the otheringredients of the feed.

Sadia acquires beef forthe production of frozen and refrigerated processed products, and boiled beefparts. Other inputs, such as prepared animal intestines (for casing),seasonings and other ingredients, cardboard boxes, plastic bags (for packagingand labels), and veterinary medicines (for poultry and hog breeding), areacquired from many different sources, both at home and abroad.

**Costsand Operating Expenses**

Sadia’s principal costsof production are incurred in *reais* andconsist of grains, corn and soybeans, packaging, and labor. While input costsare *reais* denominated, the internationalcommodity prices (grains and packaging) tend to follow international prices andare influenced by exchange rate fluctuations. The Company operates with anaverage idle capacity of 20% in processed product lines but can be at fullcapacity depending on the market demand. Due to the flexibility in productionlines and to the diversity of the equipment present in its thirteen plants,production can be adapted and reformulated, depending on the Company’s needs toface a determined segment demand, night and weekend shifts as well as supplypartnerships are broadly used to reduce bottlenecks during the productionprocess.

*Corn*

Brazil’s corn prices usedto be determined only by domestic supply. Production was mainly on relativelysmall properties and had a low level of mechanization. However, during 2002,due to the *real* currency depreciation and theimprovement of several local producers, part of their crop was shifted to theinternational market. Therefore, Brazilian corn prices went up to adjust tointernational prices.

In Brazil, there are some20 different regions where buyers can bid for the product. Corn prices tend tobe influenced by local supply, but international prices also influence localquotes, according to crop expectations among the main world producers (U.S.A.,China and Argentina) and the level of international storage in the mainconsuming countries (Europe and Japan).

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The following chart setsforth the market ́s average monthly buying price of corn for the regions ofSanta Catarina, Parana, Barsilia, Mato Grosso and Rio Grande do Sul for theperiod between January~~,~~ 1996 and December 31, 2006:

According to CONAB’sMarch 2007 Report, it is expected that the 2006/07 Brazilian corn cropproduction will increase 14.7% compared to last year’s production, reachingapproximately 48.7 million tons. This increase is mainly due to increases inproductivity since the corn planted area grew only 3% for the same period.

Sadia does not believethat the current conditions affecting prices in the corn market will be ofsignificant duration. There can, however, be no assurance regarding how longthese conditions will last. This assessment is based on the Company ́s beliefthat other alternative energy sources will emerge, that there is a chance theUnited States government will cancel the alcohol import tax, so Brazil canbecome an important supplier, thus minimizing the importance of corn-basedethanol, that there are some plantable areas that can be released by the UnitedStates government in order to increase corn production and that ethanol madefrom cellulose is a viable alternative to corn.

*Soybean*

Soybean producers inBrazil have been increasing their productivity during the last several yearsand Brazil has become the second largest producer in the world. Soybeanproduction is substantially mechanized and grains are cultivated on largeproperties. Producers are well organized and production is oriented to theexport market. Production is also spread over several regions among thesouthern, southeastern and central region of the country, and prices areregionally given by local supply. However, international prices tend toinfluence local prices when foreign demand and supply are unbalanced.

CONAB expects the Brazilian soybeanplanted area for 2006/07 to decrease around 7.4% in comparison to the lastcrop. Despite the reduction in planted area,CONAB forecasts that the production for 2006/07 crop will be equivalent to 56.7million tons, a 6.2% increase as compared to the 2006/05 crop. This is due toan increase in productivity, especially in the southern region of Brazil

The following chart setsforth the market ́s average monthly buying price of soybeans in the regions ofParana and Brasilia for the period between January 1996 and December 31, 2006.

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**Marketing**

Sadia’s brand name isconsidered one of the Company’s most valuable assets. The Company maintains anactive marketing program using both electronic and printed media.

The Company incurredadvertising expenses of R$ 157.4 million, R$116.6 million, and R$121.4 millionduring the years ended December 31, 2006, 2005, and 2004  espectively.

Marketing expenses arerelated to investments in advertising of specific campaigns for the launch ofhigher value-added products and for the reinforcement of Sadia’s brand name.

**Logistics**

The Company’s logisticssystem and distribution channels are two of its principal competitiveadvantages. Sadia has taken many initiatives to sustain its leadership, whichincludes partnerships, information technology investments and the developmentof new processes for optimization of logistics, both domestic andexport-related.

**Distribution**

Within the Brazilianmarket, Sadia sells its finished products to wholesale and retail outlets, aswell as to institutional clients. For the year ended December 31, 2006, theCompany sold to approximately 96,000 customers throughout Brazil. Sadia ́sdistribution strategy is based on the importance of direct sales to customers,thereby avoiding concentration among a few large customers.

Sadia maintains salesrepresentation offices in Germany, England, Russia, Japan, China, the UnitedArab Emirates, Argentina, Uruguay, Chile, Panama and Turkey. In 2006, it soldto approximately 476 foreign clients.

In 2006, 50.0% of total exports were sold toapproximately 10 long-standing customers. All of these customers have importedincreasing quantities of the Company ́s products over the last ten years.

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**Transport**

*Transport*

Sadia uses trucks as theprimary method of distributing its products in Brazil. The Company’sdistribution system is handled by a network of approximately 2,000 refrigeratedhired vehicles for both long and short range deliveries, which servicecustomers directly throughout Brazil.

Distribution by truck ismade by refrigerated vehicles, given the perishable nature of the food products,whose shelf life varies from 12 days, refrigerated chicken to 540 days, frozenturkey. In the case of stoppage of transport by virtue of a general strike, theresult would be a complete loss of the products in transit and lack of supplyfor the points of sale if the period of interruption is greater than 30 days,an outcome the Company considers remote. As an alternative to highwaytransport, supply could be transported by air, although this would increase thefreight cost by more than 20 times. In the case of a sector strike, the impactwould be minimized because the Company has manufacturing units producing thesame products located in different regions of the country.

*Shipment of Exports*

The Company ships 58.0%of its exports through the ports of Paranaguá and Antonina, both in the Stateof Paraná, 39.0% through the ports of São Francisco do Sul, Itajaí andImbituba, in the state of Santa Catarina and the remaining 3.0% from otherports (Santos, SP; Sepetiba, RJ; Rio Grande, RS).

In the port of Paranaguá,the Company has two refrigerated warehouses, capable of receiving two thousandtons per day per warehouse and to load two thousand tons per day onto pallets.These warehouses have a “drive in” storage system and only operate withpalleted cargoes. Since one of the warehouses is located in the wharf area, theCompany has priority in the mooring of ships arriving at the port of Paranaguá,thereby avoiding possible cost increases due to delays in loading its cargo.These refrigerated warehouses have a storage capacity of 13,500 tons.

The Company also has afully automated warehouse in Ponta Grossa, in the state of Paraná, with storagecapacity of 11 thousand tons, and is able to receive and expedite one thousandtons per day.

The Company ships itscargoes in “full container” or conventional “reefer” vessels for palletedcargo.

**Sales**

Sadia has adapted itssales structure and commercial policies to include the large chain, wholesale(cash and carry), regional mid-size clients, traditional retail (small retail),institutional and distributor channels. The Company sales force has beenunified in a single management group, making it possible for the big retailchains to be serviced by an account manager, with the support of coordinators,promoters and re-stockers. For medium and small retailers, Sadia has instituteda telemarketing service, which complements the market work of the sales forceand also relies to a limited extent on local distributors.

**Brazilian Food Sector Regulation**

The Brazilian Ministry ofAgriculture, through the *Secretaria de DefesaAgropecuária* (SDA), Agricultural and Cattle Breeding DefenseSecretary, under the Animal Products Inspection Department (DIPOA), regulatesSadia’s activities. The latter department is responsible for the issuance ofregulations, conduct of inspections and legal support in respect to thelivestock, animal breeding, food processing and any other activity involvinganimal related affairs in the Brazilian territory.

**Sustainability and Environment**

Brazilian environmentalregulations have their principles established in the Federal Constitution, withconcurrent jurisdiction among the Brazilian federal government, the states andthe municipalities to regulate the subject. The public administration at eachsuch level of government is responsible for the supervision and control ofpollution in any form, as well as for the preservation of forests, hydraulicresources and the fauna and flora. The integration of all of the federal, stateand municipal agencies responsible for the protection and improvement ofenvironmental quality is undertaken by the National Environmental System(SISNAMA).

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As a producer of foodsusing a wide range of industrial processes, especially its meat product lineswhich require slaughter of animals, Sadia is subject to compliance with all ofthe legal requirements, covering environmental risks that are customary inthese processes, such as rules governing treatment of Green House Gases, liquideffluents, solid organic waste, particle suspension and odors. The Company iscareful to respect the environment at all stages of the production chain,including its activities in the field, the design of packaging (developed witha view to reducing the quantity of raw materials used) and adapting the same torecycling processes. In addition to simplify treating residues, Sadia investsin minimizing the generation of such residues by optimizing processes andadopting stringent procedures for controlling the emission of wastes andeffluents. The Company’s expenditures related to meeting environmentalrequirements and in process optimization amounted to approximately R$12.5million in 2006, R$10.1 million in 2005, R$13.3 million in 2004 and R$15.8million in 2003.

### **C.Organizational Structure**

The Sadia Group is currentlycomposed of seventeen companies, as shown in the chart above.

The Company concentratesall production, slaughtering, distribution and product sales activities withinBrazil. Sadia International Ltd. is one of the company’s smaller vehicles forsales outside Brazil. Rezende Óleo and Rezende Mkt. e Comunicações Ltda. arenon-operational. Sadia GmbH. is a holding that controls Wellax Food LogisticsC.P.A.S.U. Lda., an offshore company responsible for the largest part ofSadia ́s export operations. Sadia Alimentos is a subsidiary of SadiaInternational, established in 2003 aiming to develop commercial operations inthe Argentine market. Sadia Uruguay and Sadia Chile are each responsible forthe distribution and sales of the Company ́s products in their respectivecountries. Nordfin Holding Limited owns 40% of Sadia Chile. Concórdia CVMCC isa brokerage firm authorized to operate in accordance with current Brazilianlegislation. Sadia Overseas Ltd. was formed for the purpose of issuing theCompany ́s Eurobond. The companies not mentioned above are representativeoffices.

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

In 2006, Sadia ownsthirteen plants, including eight units for poultry production, four units forpork, one for beef, ten units for animal feed, two units for the crushing ofsoybeans and nine units for 

 

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processed products. Some plants are multi-operational,including several integrated activities. Sadia owns seventeen distribution andcommercial centers and eleven representative offices and distribution centersabroad.

**Operating Units**

Thetable below lists Sadia’s operating units and their principal activities:
| **State**  | ** ** | **City**                | ** ** | **Principal activity**                                                                       |
|------------|------------|-------------------------|------------|----------------------------------------------------------------------------------------------|
| ** ** | ** ** | ** **              | ** ** | ** **                                                                                   |
| **DF**     |       | Brasília           |       | Raising and slaughtering chicken, processed products  and animal feed                        |
| **MG**     |       | Uberlândia         |       | Raising and slaughtering chickens, turkeys and hogs,  processed products and animal feed     |
| **MT**     |       | Campo Verde             |       | Animal feed                                                                                  |
| **MT**     |       | Lucas do Rio  Verde     |       | Pork Genetics                                                                                |
| **MT**     |       | Várzea Grande      |       | Raising and slaughtering chickens, processed  products and animal feed. Beef slaughterhouse. |
| **PR**     |       | Dois Vizinhos           |       | Raising and slaughtering chickens; animal feed and  soybean crushing                         |
| **PR**     |       | Francisco  Beltrão |       | Raising and slaughtering chickens and turkeys and  animal feed                               |
| **PR**     |       | Paranáguá     |       | Margarine                                                                                    |
| **PR**     |       | Ponta Grossa            |       | Pizzas and pasta, Miss Daisy, processed products                                             |
| **PR**     |       | Toledo                  |       | Raising and slaughtering chickens and hogs;  processed products; animal feed and soy oil     |
| **RJ**     |       | Duque de Caxias         |       | Processed products                                                                           |
| **RS**     |       | Três Passos        |       | Raising and slaughtering hogs and animal feed                                                |
| **SC**     |       | Chapecó            |       | Raising and slaughtering chickens and turkeys,  animal feed and processed products           |
| **SC**     |       | Concórdia          |       | Raising and slaughtering chickens and hogs,  processed products and animal feed              |

 

*LeasedOperating Units*

Thetable below lists Sadia’s leased operating units and their principal activities:
| **State** | ** ** | **City**  | ** ** | **Principal activity**                           |
|-----------|------------|-----------|------------|--------------------------------------------------|
| **RS**    |       | Lajeado   |       | Raising and slaughtering poultry and animal feed |
| **RS**    |       | Garibaldi |       | Raising and slaughtering poultry and animal feed |

 

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**Distribution andCommercial Centers**

Thetable below lists Sadia’s distribution and commercial centers and thecorresponding region of activity:
| **State** | ** ** | **City**                       | ** ** | **Regional of Activity**                         |
|-----------|------------|--------------------------------|------------|--------------------------------------------------|
| **AM**    |       | Manaus                         |       | North Region                                     |
| **BA**    |       | Salvador                       |       | Northeast Region                                 |
| **CE**    |       | Fortaleza                      |       | Northeast Region                                 |
| **DF**    |       | Brasília                  |       | Federal District                                 |
| **ES**    |       | Vitória                   |       | Southeast Region                                 |
| **MG**    |       | Belo Horizonte                 |       | Southeast Region                                 |
| **MT**    |       | Cuiabá                    |       | Central Region                                   |
| **PA**    |       | Belém                     |       | North Region                                     |
| **PE**    |       | Recife                         |       | Northeast Region                                 |
| **PR**    |       | Curitiba                       |       | South Region                                     |
| **RJ**    |       | Rio de Janeiro                 |       | Southeast Region                                 |
| **RJ**    |       | Duque de Caxias                |       | Southeast Region                                 |
| **RS**    |       | Porto Alegre                   |       | South Region                                     |
| **SC**    |       | Itajaí                    |       | South Region                                     |
| **SP**    |       | São Paulo                 |       | Southeast Region                                 |
| **SP**    |       | Jundiaí                   |       | Southeast Region and São Paulo State Region |
| **SP**    |       | Campinas                       |       | Southeast Region and São Paulo State Region |
| **SP**    |       | Bauru                          |       | Southeast Region and São Paulo State Region |
| **SP**    |       | Ribeirão Preto            |       | Southeast Region and São Paulo State Region |
| **SP**    |       | São José dos  Campos |       | Southeast Region and São Paulo State Region |

** **

**ProductionCapacity**

Sadia’sconsolidated production capacity is as follow:
| ** **                                   | ** ** | **Production Capacity** | ** ** |
|----------------------------------------------|------------|------------------------------|------------|
| ** **                                   | ** ** | ** **                   | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                   | ** ** | **2006**                     | ** ** | **2005** | ** ** |
| ** **                                   | ** ** | **Capacity**                 | ** ** | **Production** | ** ** | **Production** | ** ** |
|                                         |       |                         |       |   |   |   |   |
| Poultry  Slaughtering (Million heads/year)   |       | 676.4                        |       | 666.8 |   | 650.1 |   |
| Hog Slaughtering  (Million heads/year)       |       | 5.0                          |       | 4.0 |   | 3.8 |   |
| Processed  Products (thousands of tons/year) |       | 1090                         |       | 773.2 |   | 695.4 |   |
| Animal Feed (thousands  of tons/year)        |       | 5,515.4                      |       | 4,745.8 |   | 4,647.0 |   |

 

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** **

**Environmentalissues affecting the Company’s activities**

Asa poultry and hog livestock and slaughtering company, Sadia’s activity impactson environmental issues, especially related to water resources pollution,animal treatment and deforestation. However, the Company takes all measures tocomply with the Brazilian environmental regulations.

Asa way of ensuring the sustainability of its activities, Sadia has strictpolicies and directives for reducing consumption of water and energy and alsouses biomass to substitute fuel oil and gas to generate thermal energy. All itsunits have wastewater treatment facilities to avoid the contamination of watertables and rivers near the units. The Company also strictly supervises theactivities taken by the poultry and hog outgrowers.

TheCompany utilizes firewood in its productive process under the Brazilianenvironmental legal requirements and authorized by the IBAMA (InstitutoBrasileiro do Meio Ambiente e dos Recursos Naturais Renovaveis), the BrazilianEnvironmental and Renewable Natural Resources Institute. This firewood comesfrom the Company’s owned forest land and from third parties, and is used asfuel to warm up the boilers.

Theonly environmental requirement for Sadia related to its owned forest land is tomaintain at least 20% of the Company’s forest land as native forest. Sadia isin compliance with such requirement.

Moreover,the Company has a program for being self sufficient in firewood, maintainingforest land for all of its manufacturing units. These areas total 18.2 thousandhectares and supply 58% of the Company’s current firewood requirements.

## **ITEM 4A. UNRESOLVED SEC STAFFCOMMENTS**

TheCompany has no unresolved comments from the staff of the U.S. Securities andExchange Commission in respect of its periodic reports under the Exchange Act.

## **ITEM 5. OPERATING AND FINANCIALREVIEW AND PROSPECTS**

Thefollowing discussion should be read in conjunction with the Company’sconsolidated financial statements and notes thereto, and other financialinformation included elsewhere in this annual report.

**Discussion on Critical Accounting Policies**

Criticalaccounting policies are those that are considered important, complex orsubjective by the Company’s management to the understanding of the Company’sfinancial condition and results, as well as estimates about the effect ofmatters that are uncertain.

*Allowance for Doubtful Accounts*

Thecollectibility of accounts receivable is based on a combination of factors. Incircumstances where management is aware of a specific customer’s inability tomeet its financial obligations, a specific allowance against amounts due isrecorded to reduce the net recognized receivable to an amount that is likely tobe collected. In addition, an allowance is recorded based on the length of timereceivables are past due and historical experiences.  In addition, Sadia records a provision inlight of past collection and write-off experience, as well as when significantpayment delays occur and the Company believes that it may not receive paymentin full.

Giventhe assumptions involved, such as the financial situation of the Company’sdebtors, commercial and economic trends, allowances for doubtful accounts aresubject to uncertainty and may be revised upward or downward depending on theactual performance of an account receivable.

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*Depreciation and Amortization*

Sadiarecognizes expenses related to the depreciation and amortization of itsproperty, plant and equipment and breeding stock based on the straight-line andestimated production cost methods, respectively. The useful life of assets andestimates for production is reviewed periodically based on existing facts andcircumstances. The determination of useful lives and estimates for productionrequires considerable judgment and is inherently uncertain, due to changes intechnology and industry competition, which could cause early obsolescence ofthe property, plant and equipment. If Sadia is required to materially changethe assumptions used, its depreciation and amortization expense, obsolescence write-offand the net book value of property, plant and equipment could be materiallydifferent.

*Impairment of Long-Lived Assets*

Sadia periodically assesses the need to performimpairment tests of long-lived assets (or asset groups) based on various indicatorssuch as the level of business profitability and technologicaldevelopments.  When necessary, upon theoccurrence of any negative triggering event such as a significant loss inmarket value of a property, plant and equipment or significant adverse changein the extent or manner in which a long-lived asset is being used, cash flowstudies are prepared to determine if the accounting value of the property,plant and equipment is recoverable through the profitability resulting from itsbusiness.  In order to estimate futurecash flows, Sadia makes various assumptions and estimates.  These assumptions and estimates can beinfluenced by different external and internal factors, such as economic andindustry trends, interest rates, foreign exchange rates, changes in thebusiness strategies and in the type of products offered to the market.

*Contingencies*

Sadiaestablishes provision for contingencies on its balance sheet when itdetermines, taking into consideration the opinion of its legal advisors, that aloss is probable, in one of the labor, tax or civil cases to which the Companyis party. Sadia continuously evaluates the estimates and assumptions used toestablish the provision for contingencies based on relevant facts andcircumstances that may have a material effect on the result of operations andstockholders’ equity. Even though management believes that the provisions arepresently adequate, the establishment of provisions for judicial proceedingsinvolves estimates that can result in the final amount being different than theprovisions as a result of uncertainties that are inherent to the establishmentof the provision. In case the amount of provisions for contingencies is lowerthan the amount actually due, an increase in provisions would be necessary.

*Deferred Tax Assets*

Sadia recognizes deferred tax assets andliabilities which do not expire, arising from tax loss carry-forwards,temporary add-backs and other procedures. Sadia periodically reviews thedeferred tax assets for recoverability and establishes a valuation allowance,as required, based on historical taxable income, projected future taxableincome, and the expected timing of the reversals of existing temporarydifferences. In the event the Company or one of its subsidiaries operates at aloss or are unable to generate sufficient future taxable income, or if there isa material change in the actual effective tax rates or time period within whichthe underlying temporary differences become taxable or deductible, Sadiaevaluates the need to establish a valuation allowance against all or asignificant portion of the Company’s deferred tax assets, resulting in anincrease in the effective tax rate, thereby decreasing net income. If Sadiadetermines that it can realize a deferred tax in excess of its net recordedamount, it decreases the valuation allowance, thereby increasing net income.Significant management judgment is required in determining any valuationallowance. The principal uncertainty relates to the likelihood of futuretaxable income from the subsidiary that generated the deferred tax asset. Achange in the Company’s projections of profitability could result in the needto record a valuation allowance against deferred tax assets, resulting in anegative impact of future results.

*Pension Benefits*

Sadiaaccounts for its defined pension plan using actuarial models. These models usean attribution approach, which assumes employees render services over theirservice lives on a relatively smooth basis and also presumes that the incomestatement effects of pension benefit plans should follow 

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the same pattern.Sadia accounts for its retirement plan based on actuarial recommendationsfollowing the applicable laws, income tax regulations, as well as in accordancewith the plan’s rules.

Netpension income or expense is determined using assumptions as of the beginningof each year. These assumptions are established at the end of the prior fiscalyear and include expected long term return rates of the plan assets, discountrates and compensation rate increases. The actual future amounts and experiencerelated to these assumptions will determine whether Sadia has createdsufficient reserves for accrued pension costs.

*Revenue recognition*

*The Company recognizes revenue when products are shipped andthe customer takes ownership and assumes risk of loss, collection of therelevant receivable is probable, persuasive evidence of an arrangement existsand the sales price is fixed or determinable. In addition, the Company offerssales and incentives and discounts through various programs to customers, whichare accounted for as a reduction of revenue in Sales deductions. Salesincentives include volume-based incentive programs and payments to customersfor performing marketing activities on our behalf.*

***Recently Issued Accounting Standards***

InJuly 2006, the FASB issued FIN 48, that clarifies the accounting foruncertainty in income taxes recognized in an enterprise’s financial statementsand prescribes a threshold of more-likely-than-not for recognition of taxbenefits of uncertain tax positions taken or expected to be taken in a taxreturn. FIN 48 also provides related guidance on measurement, derecognition,classification, interest and penalties, and disclosure. The provisions of FIN48 will be effective for the Company on January 1, 2007, with any cumulativeeffect of the change in accounting principle recorded as an adjustment toopening retained earnings. The Company is in the process of assessing theimpact of adopting FIN 48 on its results of operations and financial position.The Company does not expect that the adoption of FIN 48 will have a materialeffect on the Company’s financial position or results from operations.

InSeptember 2006, the FASB issued SFAS No. 157 — “Fair value measurements”, whichdefines fair value, establishes a framework for measuring fair value, andexpands disclosures about fair value measurements. This Statement applies underother accounting pronouncements that require or permit fair value measurements,the Board having previously concluded in those accounting pronouncements thatfair value is the relevant measurement attribute. Accordingly, this Statementdoes not require any new fair value measurements. This Statement will beeffective for de Company in 2008. The Company believes that such pronouncementwill not generate a material impact in the consolidated financial statements.

InFebruary 2007, the FASB issued SFAS 159 “The Fair Value Option for FinancialAssets and Financial Liabilities.” SFAS 159, that permits the measurement ofcertain financial instruments at fair value. Entities may choose to measureeligible items at fair value at specified election dates, reporting unrealizedgains and losses on such items at each subsequent reporting period. SFAS 159 iseffective for fiscal years beginning after November 15, 2007. The Company iscurrently evaluating the potential impact of the fair value option but it isnot expected to have a significant effect on reported financial position orstatements of income.

***Recently Adopted Accounting Standards***

InSeptember 2006, the FASB issued SFAS 158 - “Employers’ Accounting for DefinedBenefit Pension and Other Postretirement Plans — an Amendment of FASBStatements No. 87, 88, 106 and 132(R)” (“SFAS 158”), which became effective forthe Company on December 31, 2006. This standard requires the Company torecognize the overfunded or underfunded status of each of its defined benefitpension and other postretirement benefit plans as an asset or liability and toreflect changes in the funded status through “Accumulated other comprehensiveincome,” as a separate component of stockholders’ equity.

**Brazilian Economic Environment**

The Company’s results ofoperations and financial condition are dependent on Brazil’s general economiccondition and particularly on (i) economic growth and inflation and theirimpact on people’s 

 

41

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purchasing power, (ii) financing costs and theavailability of financing, and (iii) exchange rates between Brazilian andforeign currencies. The following table sets forth Brazilian Gross DomesticProduct (GDP) growth, inflation and the devaluation of Brazilian currencyagainst the U.S. dollar and interest rate changes for the periods shown.
| ** **                | ** ** | **Brazilian Selected Economic Indicators** | ** ** |
|---------------------------|------------|-----------------------------------------------------------|------------|
| ** **                | ** ** | ** **                                                | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                | ** ** | **2006**                                                  | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
| Real GDP Growth  (%)(1)   |       | 2.86                                                      |       | 2.28 |   | 4.94 |   | 0.54 |   | 193 |   |
| Inflation - IGP-M  (%)(2) |       | 3.85                                                      |       | 1.20 |   | 12.41 |   | 8.71 |   | 25.31 |   |
| R$/US$Exchange  Rate(2)   |       | 2.1380                                                    |       | 2.3407 |   | 2.6544 |   | 2.8892 |   | 3.5333 |   |
| TJLP (%)(3)               |       | 6.9                                                       |       | 9.8 |   | 9.8 |   | 11.0 |   | 10.0 |   |

----

*(1) Source: Ipeadata*

*(2) Source: Economatica*

*(3) Long-term interest rate, source: BNDES*

 

The Brazilian economy hasbeen affected by interventions on the part of the government, which has maderepeated changes in its monetary, credit, tariff and other policies, in orderto influence the direction of the national economy. The changes in policiesinvolving foreign exchange and tax rates could have a significant impact on theCompany ́s business and operating results, in the same way as inflation,currency devaluation, social instability and other political, economic anddiplomatic issues, and the reaction of the Brazilian government to theseissues.

*Inflation and Real Plan Effects*

Inflation hastraditionally had a negative effect on the Brazilian economy in general in pastyears, and on the Company ́s profitability and operating results in particular.In an attempt to control inflation, the government has at times imposed wageand price controls, and reduced its spending. Inflation and the measuresadopted by the government, combined with public speculation about its futuredecisions, have also contributed to periods of uncertainty in the economy, aswell as to increased volatility in the Brazilian securities markets. Inaddition, the government’s desire to control inflation and reduce budgetdeficits may cause it to take actions that slow Brazilian economic growth.

After the implementationof the *Real* Plan, which was basedon an exchange rate anchor (*reais*x U.S. dollar), inflation rates declined and stabilized at low levels. This neweconomic environment increased the purchasing power of part of the population,which was accustomed to high inflation levels and did not have access tofinancial instruments to reduce their monetary losses due to high inflation.Incomes rose, credit availability increased and consumption of consumer goodsgrew. According to the IGP-M Brazilian inflation amounted to 868.3% in 1994,15.2% in 1995, 9.2% in 1996, 7.7% in 1997, 1.8% in 1998, 20.1% in 1999, 9.9% in2000, 10.4% in 2001, 25.3% in 2002, 8.7% in 2003, 12.4% in 2004, 1.2% in 2005,and 3.9% in 2006.

*Exchange Rate Effects*

From March 1995 untilJanuary 1999, the Brazilian Central Bank managed a semi-fixed exchange ratepolicy based on the establishment of an annual exchange rate fluctuation targetat the beginning of each year, setting both a wide limit or “band”, and a muchnarrower band, in order to effect a gradual devaluation by means of thisexchange rate band system. The Central Bank bought or sold U.S. dollars in themarket in order to ensure that the exchange rate remained within establishedlimits.

In an attempt to stem theincreasing capital outflows and concerns about the commitment of certain stategovernments to the fiscal austerity proposal, on January 13, 1999, Brazilianmonetary authorities halted their intervention, abandoning the system ofexchange rate bands, and allowed the *real*’s value tobe determined by the foreign exchange markets, intervening only to limit wideswings in the value of the currency.

Since then, the exchangerate market has been operating under a floating rate regime and the CentralBank has implemented an inflation target policy, using local interest rates toadjust demand. A negative side-effect of this policy has been high interestrate levels, increasing cost of capital to the company and raising uncertaintyin the financial markets about the capacity of Brazil to pay its debts, 

 

42

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increasing the sovereign risk. These factors also tendto result in depreciation of the real against the dollar, with consequentlyhigher prices in real terms, reducing consumer demand and GDP growth.

Although Sadia uses *reais* as its functional currency, a relevant portion of itsassets, liabilities and revenues are dollar denominated. In December 2006,43.2% of the Company ́s gross revenues were mainly collected in foreigncurrency, coming from export proceeds, corresponding to R$3.4 million.

Considering that Sadiahas subsidiaries abroad, the volatility of the *real*creates foreign exchange gains and losses, which are included in the Company’sforeign currency exchange gain (loss), net account in results of operations. In2006, on a consolidated basis, the Company recorded foreign exchange gains(including gains from foreign currency swaps) of R$157.0 million compared toR$53.4 million in 2005.

### **A.Operating Results**

Thefollowing table summarizes certain selected financial data derived from theCompany ́s statements of income, expressed as percentages of net operatingrevenue, for the periods indicated, as shown.
| ** **                                                                    | ** ** | **Consolidated Income Statement**                                         | ** ** |
|-------------------------------------------------------------------------------|------------|-------------------------------------------------------------------------------------|------------|
| ** **                                                                    | ** ** | **Years Ended December 31, 2006, 2005 and 2004** | ** ** |
| ** **                                                                    | ** ** | **(%)**                                                                             | ** ** |
| ** **                                                                    | ** ** | ** **                                                                          | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                                                    | ** ** | **2006**                                                                            | ** ** | **2005** | ** ** | **2004** | ** ** |
|                                                                          |       |                                                                                |       |   |   |   |   |
| Net operating  revenue                                                        | ** ** | **100.0**                                                                           | ** ** | **100.0** | ** ** | **100.0** | ** ** |
| Cost of goods  sold                                                           |       | (76.3                                                                               | )          | (72.8 | ) | (70.3 | ) |
| Gross profit                                                                  | ** ** | **23.7**                                                                            | ** ** | **27.2** | ** ** | **29.7** | ** ** |
|                                                                          |       |                                                                                |       |   |   |   |   |
| Operating  expenses:                                                          |       |                                                                                |       |   |   |   |   |
| Selling                                                                       |       | (19.1                                                                               | )          | (17.0 | ) | (18.7 | ) |
| General and administrative                                                    |       | (1.4                                                                                | )          | (1.1 | ) | (0.9 | ) |
| Other operating income (expenses), net                                        |       | 1.2                                                                                 |       | 0.2 |   | 0.3 |   |
| Total operating  expenses                                                     |       | (19.3                                                                               | )          | (17.9 | ) | (19.3 | ) |
|                                                                          |       |                                                                                |       |   |   |   |   |
| Operating income                                                              | ** ** | **4.4**                                                                             | ** ** | **9.3** | ** ** | **10.4** | ** ** |
|                                                                          |       |                                                                                |       |   |   |   |   |
| Interest expense                                                              |       | (4.5                                                                                | )          | (4.3 | ) | (5.5 | ) |
| Interest income  and other, net                                               |       | 3.5                                                                                 |       | 3.4 |   | 4.1 |   |
| Foreign currency  exchange gain, net                                          |       | 2.3                                                                                 |       | 0.7 |   | 0.6 |   |
| Income before  income taxes, equity income of investees and minority interest |       |                                                                                |       |   |   |   |   |
|                                                                          | ** ** | **5.7**                                                                             | ** ** | **9.2** | ** ** | **9.6** | ** ** |
|                                                                          |       |                                                                                |       |   |   |   |   |
| Income tax  benefit (expense)                                                 |       |                                                                                |       |   |   |   |   |
| Current benefit (expense)                                                     |       | (0.2                                                                                | )          | (0.7 | ) | (0.5 | ) |
| Deferred tax benefit (expense)                                                |       | (0.3                                                                                | )          | (0.2 | ) | (1.0 | ) |
| Total income tax                                                              | ** ** | **(0.4**                                                                            | **)**      | **(0.9** | **)** | **(1.6** | **)** |
| Income before  equity income of investees and minority interest               |       | 5.3                                                                                 |       | 8.2 |   | 8.0 |   |
|                                                                          |       |                                                                                |       |   |   |   |   |
| **Net income**                                                                | ** ** | **5.3**                                                                             | ** ** | **8.2** | ** ** | **8.0** | ** ** |

 

43

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Thefollowing table sets forth components of Sadia ́s cost of goods sold, expressedas a percentage of total cost of goods sold for 2006, 2005, and 2004:
| ** **                   | ** ** | **Composition of Cost of Goods Sold (%)** | ** ** |
|------------------------------|------------|-------------------------------------------------------------------------|------------|
| ** **                   | ** ** | **December 31,**                                                   | ** ** |
| ** **                   | ** ** | **2006**                                                                | ** ** | **2005** | ** ** | **2004** | ** ** |
|                         |       |                                                                    |       |   |   |   |   |
| Raw Materials                |       | 72                                                                      |       | 76 |   | 78 |   |
| Labor                        |       | 13                                                                      |       | 12 |   | 11 |   |
| Depreciation                 |       | 4                                                                       |       | 3 |   | 2 |   |
| Other                        |       | 11                                                                      |       | 9 |   | 9 |   |
| **Total cost of goods sold** | ** ** | **100**                                                                 | ** ** | **100** | ** ** | **100** | ** ** |

 
| ** **                                                                    | ** ** | **Consolidated Income Statement**                                                               | ** ** |
|-------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------------------------------------|------------|
| ** **                                                                    | ** ** | **Years Ended December 31, 2006, 2005, 2004, 2003 and 2002** | ** ** |
| ** **                                                                    | ** ** | **(R$ Million)**                                                                                     | ** ** |
|                                                                          |       |                                                                                                      |       |   |   |   |   |   |   |   |   |
| ** **                                                                    | ** ** | **2006**                                                                                                  | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
|                                                                          |       |                                                                                                      |       |   |   |   |   |   |   |   |   |
| Gross operating  revenue                                                      | ** ** | **7,894.1**                                                                                               | ** ** | **8,327.4** | ** ** | **7,117.3** | ** ** | **5,717.5** | ** ** | **4,654.8** | ** ** |
|                                                                          |       |                                                                                                      |       |   |   |   |   |   |   |   |   |
| Value-added tax  on sales                                                     |       | (939.7                                                                                                    | )          | (914.2 | ) | (880.0 | ) | (535.3 | ) | (0.4 | ) |
| Sales deductions                                                              |       | (124.1                                                                                                    | )          | (95.3 | ) | (128.1 | ) | (100.5 | ) | (98.4 | ) |
| Net operating  revenue                                                        | ** ** | **6,830.3**                                                                                               | ** ** | **7,317.8** | ** ** | **6,109.2** | ** ** | **5,081.7** | ** ** | **4,139.1** | ** ** |
| Cost of goods  sold                                                           |       | (5,212.6                                                                                                  | )          | (5,324.4 | ) | (4,292.7 | ) | (3,673.0 | ) | (2,903.2 | ) |
| Gross profit                                                                  | ** ** | **1,617.7**                                                                                               | ** ** | **1,993.5** | ** ** | **1,816.6** | ** ** | **1,408.7** | ** ** | **1,235.9** | ** ** |
|                                                                          |       |                                                                                                      |       |   |   |   |   |   |   |   |   |
| Operating  expenses:                                                          |       |                                                                                                      |       |   |   |   |   |   |   |   |   |
| Selling                                                                       |       | (1,303.0                                                                                                  | )          | (1,245.9 | ) | (1,144.5 | ) | (916.7 | ) | (828.7 | ) |
| General and administrative                                                    |       | (96.5                                                                                                     | )          | (81.0 | ) | (52.5 | ) | (54.2 | ) | (49.1 | ) |
| Other operating income (expenses), net                                        |       | 84.0                                                                                                      |       | 14.3 |   | 15.4 |   | (36.8 | ) | (12.8 | ) |
| Total operating  expenses                                                     |       | (1,315.5                                                                                                  | )          | (1,312.6 | ) | (1,181.5 | ) | (1,007.7 | ) | (890.6 | ) |
|                                                                          |       |                                                                                                      |       |   |   |   |   |   |   |   |   |
| Operating income                                                              | ** ** | **302.2**                                                                                                 | ** ** | **680.9** | ** ** | **635.0** | ** ** | **401.0** | ** ** | **345.3** | ** ** |
|                                                                          |       |                                                                                                      |       |   |   |   |   |   |   |   |   |
| Interest expense                                                              |       | (310.6                                                                                                    | )          | (311.6 | ) | (336.8 | ) | (450.2 | ) | (317.8 | ) |
| Interest income  and other, net                                               |       | 240.0                                                                                                     |       | 248.0 |   | 249.8 |   | 459.8 |   | 266.5 |   |
| Foreign currency  exchange gain, net                                          |       | 157.0                                                                                                     |       | 53.4 |   | 39.1 |   | 61.0 |   | 2.7 |   |
| Income before  income taxes, equity income of investees and minority interest |       | **388.7**                                                                                                 |       | **670.7** |   | **587.1** | ** ** | **471.5** | ** ** | **296.7** | ** ** |
|                                                                          |       |                                                                                                      |       |   |   |   |   |   |   |   |   |
| Income tax  benefit (expense)                                                 |       |                                                                                                      |       |   |   |   |   |   |   |   |   |
| Current benefit (expense)                                                     |       | (11.0                                                                                                     | )          | (52.0 | ) | (33.0 | ) | (39.1 | ) | 34.6 |   |
| Deferred tax benefit (expense)                                                |       | (18.1                                                                                                     | )          | (16.4 | ) | (63.1 | ) | 40.1 |   | (46.8 | ) |
| Total income tax                                                              | ** ** | **(29.1**                                                                                                 | **)**      | **(68.4** | **)** | **(96.1** | **)** | **1.0** | ** ** | **(12.2** | **)** |
| Income before equity income of investees and  minority interest               |       |                                                                                                      |       |   |   |   |   |   |   |   |   |
|                                                                          |       | 359.6                                                                                                     |       | 602.2 |   | 491.0 |   | 472.6 |   | 284.6 |   |
|                                                                          |       |                                                                                                      |       |   |   |   |   |   |   |   |   |
| Equity income  (loss) of investees                                            |       | (0.2                                                                                                      | )          | 1.2 |   | (1.4 | ) | 0.4 |   | (0.7 | ) |
| Minority  interest                                                            |       | 1.1                                                                                                       |       | (0.2 | ) | (0.1 | ) | 0.3 |   | 0.3 |   |
| Income (loss)  before cumulative effect of accounting change                  |       | 360.6                                                                                                     |       | 603.3 |   | 489.5 |   | 473.3 |   | 284.3 |   |
| Cumulative  effect of accounting change, net of tax                           |       | —                                                                                                    |       | — |   | — |   | — |   | — |   |
| **Net income**                                                                | ** ** | **360.6**                                                                                                 | ** ** | **603.3** | ** ** | **489.5** | ** ** | **473.3** | ** ** | **284.3** | ** ** |

 

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**SADIAS.A.**

CONSOLIDATEDBALANCE SHEET

Years ended December31,2005, 2004, 2003, 2002, and 2001

(In thousands of *reais* - R$)
| ** **                                                   | ** ** | **2006**      | ** ** | **2005**      | ** ** | **2004**      | ** ** | **2003**      | ** ** | **2002**      | ** ** |
|--------------------------------------------------------------|------------|---------------|------------|---------------|------------|---------------|------------|---------------|------------|---------------|------------|
| ** **                                                   | ** ** | ** **    | ** ** | ** **    | ** ** | ** **    | ** ** | ** **    | ** ** | ** **    | ** ** |
| Cash and cash equivalents and available-for-sale  securities |       | 2,428,014     |       | 2,574,996     |       | 1,917,192     |       | 1,957,753     |       | 1,249,783     |       |
| Total Current  Assets                                        |       | 4,929,689     |       | 4,588,176     |       | 3,944,802     |       | 3,645,379     |       | 2,759,217     |       |
| Investments in  debt and available-for-sale securities       |       | 129,127       |       | 65,057        |       | 436,782       |       | 1,158,586     |       | 760,857       |       |
| Property, plant  and equipment, net                          |       | 2,154,980     |       | 1,523,309     |       | 1,055,240     |       | 910,010       |       | 918,320       |       |
| **Total  Assets**                                            | ** ** | **8,039,757** | ** ** | **6,707,284** | ** ** | **5,830,973** | ** ** | **6,149,453** | ** ** | **4,975,627** | ** ** |
| ** **                                                   | ** ** | ** **    | ** ** | ** **    | ** ** | ** **    | ** ** | ** **    | ** ** | ** **    | ** ** |
| Total Current  Liabilities                                   |       | 2,493,279     |       | 2,625,812     |       | 2,766,719     |       | 2,969,833     |       | 2,591,383     |       |
| Short-term debt  and current portion of long-term debt       |       | 1,441,275     |       | 1,484,342     |       | 1,738,835     |       | 2,026,752     |       | 2,052,068     |       |
| Long-term debt                                               |       | 2,670,969     |       | 1,704,184     |       | 1,031,375     |       | 1,366,836     |       | 1,205,160     |       |
| **Total Shareholders’ Equity**                          | ** ** | **2,592,643** | ** ** | **2,228,117** | ** ** | **1,838,364** | ** ** | **1,521,585** | ** ** | **1,057,759** | ** ** |

 

**Structureand Profitability of the Company’s Operations**

***Period ended December 31, 2006 comparedwith period ended December 31, 2005***

Thefollowing discussion presents a comparison of results of operations for thetwelve-month periods ended December 31, 2006 and 2005.

*Gross Operating Revenue*

Sadia’s gross operatingrevenues in 2006 amounted to R$7,894 million, the second highest in Sadia’shistory, although 5.2% less than gross operating revenues for 2005. Salesvolumes reached 1.9 million tons, a 3.4% increase when compared to 2005.

The performance of theindustry in 2006 was marked by the reduction of poultry consumption worldwidedue to the uncertainties caused by the possibility of a major worldwideoutbreak of the avian influenza, by the Russian embargo on Brazilian porkimports and by the appreciation of 10.1% of the Brazilian *real*in relation to the U.S. dollar.

These factors resulted ina drop in export revenues of 16.2% from 2005 levels and a shift to domesticsales and distribution, which drove an increase of 5.4% in domestic revenuesover 2005.

*Domestic Market*

In the domestic market,sales volume reached 928.6 thousand tons, a 12.8% increase over the prior year.Continuing the trend seen in 2005, processed products led domestic marketsales, in line with our strategy of focusing on more value added products.

Gross operating revenueswere R$4.5 billion in 2006, which represented a 5.4% increase over 2005.

The significant increasein revenues and volumes resulted mainly from a strategy based on thediversification of the sales channels, the release of new products bettersuited to the consumer’s purchasing power and improvement in leveraging theconsumer attraction of  Sadia’s brands.

45

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*Export Market*

Sales to the exportmarket dropped from 2005 to 2006 in terms of volumes and revenues. Shipmentstotaled 964.0 thousand tons, representing a decrease of 4.2%. Gross exportrevenues of R$3.4 billion in 2006 represented a decrease of 16.2% from 2006 levels.

In the Middle East, wemaintained our traditional presence in the main areas of the region, withmarket leadership and brand recognition. Middle Eastern countries primarilyconsume whole birds of low weight (up to 1.2 kg) and processed products. Exportsto Middle Eastern countries accounted for 23.0% of revenues in the exportmarket. Europe, which received 26.0% of exports, is a large purchaser ofpoultry cuts and processed products. With respect to Eurasia, which comprisesthe Caucasus region and Russia, Sadia exports were mainly pork and poultrycuts. This region represented 21.0% of all exports. The main exports to Asia,which accounted for 15.6% of all revenues from exports, are special poultrycuts, pork carcasses and cuts. In the Americas, sales are concentrated mainlyon processed products, poultry parts and whole birds. The Americas accountedfor 15.5% of export revenues.

*Processed Products*

Sales of processedproducts were the main driver in domestic revenue growth, representing 78.4% ofrevenues in the domestic market. This result reflects our efforts to adapt ourproduct portfolio, aiming to capture the demand for differentiated products andleadership across various products in our portfolio.  This strategy allowed an increase of 11.7% involumes and 6.8% in gross operating revenue. The average price of this segmentdropped 4.3% when compared to the average price in 2005, because of increasedbulk sales.

The volume of processedproducts in the export market totaled 76.5 thousand tons, representing a dropof 16.5% compared to 2005, while the decline in revenue from this segment wasof 12.3% (to R$361.6 million), reflecting an increase in average price in *reais* of this segment, which grew 5.0% (15.6% in U.S.dollars) compared to 2005. Revenue did not decline as sharply in proportion tothe decline in volume due to the increase in sales of higher value-addedproducts such as baked, grilled and breaded poultry products and the reductionin sales of lower margin products.

*Poultry*

With the redirection of aportion of poultry exports to the domestic market, the volumes sold in Brazilincreased 9.4% to 155.5 thousand tons in 2006. This segment represented 11.0%of total domestic revenues, a slight decline from the prior year. Increasedsupply in the domestic market as a result of allocation of customary exportproduction to that market drove the average price in this segment down 11.9%and resulted in revenues of R$492.3 million, a decline of 3.9% over the prioryear.

Poultry is our principalexport segment, accounting for 69.5% of total export revenues. Volumes ofpoultry exports declined 5.7% over the prior year, with 762.5 thousand tonsshipped. Revenues also declined 19.2% from the prior year, to R$2.4 billion.Weaker demand for poultry meat in the export market resulted in a decline of10.1% in the average price in*reais* of thesegment, which represents a stable price in U.S. dollar terms.

*Pork*

The pork segment alsorecorded a growth in volumes sold in the domestic market due to the redirectionof exports. Sales of pork in the domestic market rose 19.5% in 2006, to 41.0thousand tons. Despite the fall of 12.7% in the average price, the growth inthis segment’s revenues was of 4.2%. The share of pork in the total volume soldgrew from 4.2% in 2005 to 4.4% in 2006. The contribution of this segment tototal domestic revenues remained stable, at 3.5%.

Russia, Sadia’s majorpork export destination, after over a year still has not resumed purchasingproducts from all the states in which Sadia has pork operating units. Theembargo initially was enforced against all Brazilian states, ultimately beinglifted in respect of the state of Rio Grande do Sul.  The segment recorded a decline in sales of23.1% in the year, from 105.8 tons in 2005 to 81.4 thousand tons in 2006. Withlower demand from Brazil’s main buyer of pork as a result of Russia’s embargo,the average price of pork shipped had a higher decline in the period, of 18.5%(7.6% when measured in U.S. dollars). This resulted in a drop of 37.4% in thissegment’s revenue, to R$371.1 million.

46

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*Beef*

The beef segment, inwhich Sadia resumed production in the end of 2005, grew notably in 2006.

The volumes sold in thedomestic market of 9.0 thousand tons, led to the highest growth in grossoperating revenues to R$40.6 million.

In the export market, thebeef segment grew to R$254.7 million in gross revenues, and in volumes, to 43.6thousand tons.

*Sales Deductions and Tax on Sales*

Value-added tax on salesconsists of  ICMS, the SocialContribution on Sales (Cofins) and the contribution to the Social IntegrationProgram (PIS), amounted to R$939.7 million, a 2.8% increase over 2005. In 2006,total sales deductions increased 30.2% when compared to 2005, to R$124.1million. The ratio of sales deductions as a percentage of domestic sales was13.4% in 2006 and 11.2 % in 2005.

*Cost of Goods Sold*

Cost of goods solddecreased 2.1% compared with 2005 and the cost per ton sold dropped 5.5% whencompared to 2005. This is mainly due to a change in Sadia’s product portfoliomix. The rise in corn prices in 2006 due to demand in the international marketshad no impact on our costs of goods sold because we had purchased grains inadvance of the price increase.

*Selling Expenses*

The ratio of sellingexpenses over net operating revenue grew in 2006, reaching 19.1% as compared to17.0% for 2005. This was mainly due to a drop in net operating revenue andgrowth in selling expenses. There was an increase of R$ 57.1million, whichrepresents growth of 4.6% over the selling expenses of 2005, mainlyattributable to increased advertising costs and freight charges in the domesticmarket.

*Administrative and General Expenses*

The administrativeexpenses over net operating revenues reached 1.4% in 2006, as compared to 1.1%in 2005, with an absolute increase of R$15.5 million.

*Other Operating Income (Expenses), Net*

Other operational netresults accounted for a R$84.0 million gain in 2006 as compared to a R$14.3million gain in 2005. This increase was largely due to the October 26, 2006,final, unappealable decision of the appeals court in the COFINS proceedingsruling Law 9,718/98 unconstitutional. This ruling changed the basis for thecalculation of PIS and COFINS by including operating and financial income.  This matter was ruled unconstitutional by thelower courts on November 9, 2005. Sadia has been collecting the tax inaccordance with the contested legislation and, as a result of the favorableruling, recognized the tax credit in the amount of R$80.2 million, which, netof attorney’s fees, represented a gain of R$75.7 million.

*Interest Expense*

Interest expense in 2006amounted to R$310.6 million, 0.3% below the R$311.6 million accounted for in2005. The ratio interest expense to total debt fell from 9.3% in 2005 to 7.6%in 2006.

*InterestIncome and Other, Net*

Interest income in 2006amounted to R$240.0 million, 3.2% below the R$248.0 million accounted for in2005.

47

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*Foreign Currency Exchange Gain (Loss), Net*

Foreign exchange currencygain of R$ 157.0 million reported in 2006 was primarily attributable to gainsfrom hedges of sales of exports, resulting from the 10.1% average appreciationof Brazilian currency against the U.S. dollar for 2006 against 2005. Theforeign exchange currency gain of 2005 was R$ 53.4 million.

*Income Tax*

We reported an income taxand social contribution expense of R$29.1 million in 2006, against R$68.4million in 2005. This decrease is mainly the result of lower taxable income in2006 when compared to 2005.

*NetIncome*

Sadia’s net incomereached R$360.6 million in 2006 showing a reduction of 40.2% when compared tothe 2005 result as a consequence of adverse conditions in 2006, principally dueto lower volumes of poultry exports as a consequence of concerns surroundingthe possibility of a major worldwide outbreak of avian influenza and lowervolumes of pork exports to Russia as a result of the embargo.

***Period ended December 31, 2005 comparedwith period ended December 31, 2004***

Thefollowing discussion presents a comparison of results of operations for thetwelve-month period ended December 31, 2005 and 2004.

*Gross Operating Revenue*

The R$8,327.4 milliongross operating revenues represented an increase of 17.0% over 2004. Salesvolumes reached 1.8 million tons, a 14.9% increase as compared to the sameperiod last year.

This result reflectsgrowth in revenues of 20.1% in the international market and 14.2% in thedomestic market, despite the problems presented by foot and mouth disease inBrazil, the concerns over avian flu in Europe and Asia and the Braziliansanitary inspectors’ strike in the fourth quarter of 2005.

*Domestic Market*

In the domestic market,sales volume reached 823,573 tons, an 11.8% increase over the prior year.Continuing the trend seen in 2004, processed products led domestic marketsales, in line with the Company ́s strategy of focusing on more value addedproducts.

Gross operating revenueadded up to R$4.3 billion in 2005, which represented a 14.2% increase over2004.

The significant increasein revenues and volumes resulted mainly from a strategy based on thediversification of the sales channels, the release of new products bettersuited to the consumer’s purchasing power and improvement in managing theCompany’s brands. The strategy of reviewing the processed products portfolioand focusing on products with better margins compensated, in part, for theslackening of domestic demand.

*Export Market*

Strong export demand forSadia products in 2005 resulted in a 20.1% increase in revenues, to R$4.1billion. Sales volumes reached record levels, surpassing the 1.0 million tonmark for the year, representing a 17.6% increase over 2004 shipments.

Sadia’s performance wasdue to its ability to increase international prices, optimize logistics andimprove product mix. In dollar terms, these factors effectively offset the11.8% devaluation of the 

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average dollar for the twelve months ended December31, 2005 against the twelve months ended December 31, 2004.

In the Middle East, Sadiamaintains its traditional presence in the principal areas of the region, withmarket leadership and brand recognition. Middle Eastern countries primarilyconsume whole birds of low weight (up to 1.4 kg) and processed products.Exports to Middle Eastern countries accounted for 25.7% of revenues in theexport market. Europe, which received 24.0% of exports, is a large purchaser ofpoultry cuts and processed products. With respect to Eurasia, which comprisesthe Caucasus region and Russia, Sadia exports were mainly pork and poultrycuts. This region represented 21.4% of all exports. The main exports to Asia,which accounted for 15.6% of all revenues from exports, are special poultrycuts, pork carcasses and cuts. In the Americas, sales are concentrated mainlyon processed products, poultry parts and whole birds. The Americas accountedfor 13.3% of export revenues.

*Processed Products*

Sales of processedproducts were the principal driver in domestic revenue growth, representing78.6% of revenues in the domestic market. This result reflects the Company ́sefforts to adapt its product portfolio, aiming to capture the demand fordifferentiated products and leadership in several segments. This strategyallowed an increase of 11.3% in volumes and 11.6% in gross operating revenue.Despite the difficulty of passing on costs in the domestic market, Sadiamanaged to keep its average prices at the same levels as 2004.

With sales of processedproducts in the export market, Sadia obtained R$412.3 million, a 1.7% increaseas compared to 2004. This is equivalent to shipments of 91,600 tons, an 9.0%increase over 2004 volumes. The 7.4% increase in dollar term prices partiallyoffset the 11.8% devaluation of the dollar against the *real*for the year.

*Poultry*

The poultry segment inthe domestic market registered a 34.3% increase in volumes sold, leading to a23.3% increase in gross operating revenue. The acquisition of Só Frango, inJanuary 2005, contributed to this growth and to an increase in whole poultrysales. As whole poultry has lower prices per ton compared to poultry cuts,average prices in this segment fell 8.2% for the year.

In the external market,the highlight in gross operating revenues was achieved by the poultry segment,which registered R$2.9 billion, an increase of 18% over 2004. Export salesvolumes amounted to 808,636 tons, a 16.8% increase over 2004. The greaterparticipation of whole poultry in the portfolio of products sold, due to anincrease in sales to the Middle East and South America, resulted in a 1.0%increase in *real* average prices in this segment.Dollar prices increased 12.9% over 2004.

*Pork*

Limited supplies of porkproducts resulted in a 30.5% reduction in domestic volumes, and a 4.3%reduction in gross operating revenue, in order to supply export markets. Theshortage permitted a 37.8% increase in prices, partially offsetting the revenuedecline.

Export volumesconsiderably increased with the recovery of shipments to the Russian market,since Russia allowed unused import quotas to be filled in open market auctions,which permitted the Company to ship volumes in excess of the applicable quotas.In addition, throughout 2005, Sadia resumed previous levels of pork production,which had been reduced in 2004 as a consequence of the import quotasestablished by the Russian government. Annual sales of 105,800 tons,represented a 33.9% increase as compared to 2004 and generated R$592.4 millionin revenues, 37.8% more than domestic revenues. Average prices increased almost3.0% in local currency terms, a 15.2% increase in dollar terms.

*Sales Deductions and Tax on Sales*

Value-added tax on salesconsist of  ICMS, the Social Contributionon Sales (Cofins) and the contribution to the Social Integration Program (PIS),which amounted to R$914.2 million, a 3.9% increase over 2004. In 2005, totalsales deductions were R$95.0 million compared to R$128.0 million in 2004. Theratio of value-added tax on sales as a percentage of gross operating revenueswas at 11.0% in 

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2005 and 12.4% in 2004. This improvement was due to,among other factors, the optimization of value-added taxes which has allowedthe growth in net revenues to be greater than that in gross revenues.

*Cost of Goods Sold*

Cost of goods soldincreased 24.0% over 2004. Cost of goods sold as a percentage of net operatingrevenues increased to 72.8% in 2005 from 70.3% in 2004. This increase wasprincipally due to purchases in the first half of 2005 of higher-cost pork onthe spot market as a result of a supply shortage.

*Selling Expenses*

The ratio of sellingexpenses over net income showed a significant reduction in 2005, reaching 17.0%as compared to 18.7% for 2004. This reduction reflects the aggressive costcontainment efforts of management in 2005, with the implementation of several measures,such as the renegotiation of contracts and greater efficiency of logistics.

*Administrative and General Expenses*

The administrative andgeneral expenses over net operating revenues reached 1.1% in 2005, as comparedto 0.9% in 2004.

*Other Operating Income (Expenses), Net*

Other operational netresults accounted for a R$14.3 million income in 2005 as compared to a R$15.4million gain in 2004. There were no significant changes in 2005 in comparisonto 2004.

*Interest Expense*

Interest expense in 2005amounted to R$311.6 million, 7.5% below the R$336.8 million accounted for in2004. The ratio interest expense to total debt fell from 11.2% in 2004 to 9.3%in 2005. This decrease is primarily due to the one time loss of R$110.0 millionon the sales of Brazilian bonds in 2004.

*Interest Income and Other, Net*

Interest income in 2005amounted to R$248 million, 1% below the R$249.8 million accounted for in 2004.

*Foreign Currency Exchange Gain (Loss), Net*

Foreign exchange currencygain of R$ 53.4 million reported in 2005 was primarily attributable to gainsfrom hedges of sales of exports, resulting from the 17.3% average appreciationof Brazilian currency against the U.S. dollar for 2005 against 2004. Theforeign exchange currency gain of 2004 was R$ 39.1 million.

*Income Tax*

Sadia reported an incometax expense of R$ 68.4 million in 2005, against R$ 96.1 million in 2004. Thisis mainly because a larger portion of taxable income in 2004 was generated inBrazil while in 2005 the earnings were primarily generated abroad. Earningsgenerated abroad are non-taxable. Since achieving record net income in 2005,and thus, were able to make a large distribution of interest on capital anddividends, it was possible to deduct part of the amount distributed from theincome tax payable and contain tax expenses.

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*Net Income*

Sadia’s net incomereached a record R$ 603.3 million in 2005 surpassing by almost 23.2% the 2004result. This performance is in line with the company’s strategy of revenuegrowth, cost control and efficiency of results.

### **B.Liquidity and Capital Resources**

**Liquidityand Sources of Funding**

The Company’s main cashrequirements include: (i) debt repayment, (ii) investments in property, plantand equipment, raising efficiency levels and optimization of processes; and(iii) payment of dividends and interest on equity to shareholders. The Company’sprimary sources of liquidity have traditionally consisted of cash generatedfrom operations and short and long-term debt. Sadia believes that these sourcesof funds, together with its cash and cash equivalents will continue to beadequate to meet the Company’s currently anticipated capital requirements.

Sadia issuedUS$250,000,000 in eurobonds, with 6.85% yield and due in 2017 (10-yearmaturity). Sadia intends to use these proceeds principally to repay short-term,higher coupon debt and to finance capital investments budgeted for 2007.

The net cash generated byoperating activities totaled R$74.1 million, R$852.3 million, and R$307.2million for the years ended December 31, 2006, 2005, and 2004 respectively. Netcash used in investing activities amounted to R$844.3 million, R$1,236.2million, and R$ 639.4 million for the years ended December 31, 2006, 2005, and2004 respectively. Net cash provided by financing activities was R$813.2 millionin 2006, R$303.0 million in 2005, while a negative amount of R$721.7 millionwas used in 2004. Cash and cash equivalents at the end of the year was R$726.3million for 2006, R$683.3 million in 2005, and R$764.2 million in 2004.
| ** **                                           | ** ** | **Consolidated Cash Flow** | ** ** |
|------------------------------------------------------|------------|--------------------------------------|------------|
| ** **                                           | ** ** | **(R$Million)**                      | ** ** |
| ** **                                           | ** ** | ** **                           | ** ** |
| ** **                                           | ** ** | **2006**                             | ** ** | **2005** | ** ** | **2004** | ** ** |
| Net cash  provided by operating activities           |       | 74.1                                 |       | 852.3 |   | 307.2 |   |
| Net cash  provided by (used in) investing activities |       | (844.3                               | )          | (1,236.2 | ) | (639.4 | ) |
| Net cash  provided by (used in) financing activities |       | 813.2                                |       | 303.0 |   | (721.7 | ) |
| Cash and cash  equivalents at end of year            | ** ** | **726.3**                            | ** ** | **683.3** | ** ** | **764.2** | ** ** |

 

The changes that occurredin the net cash in 2006 in relation to 2005 were due to the following:

***Changesin 2006 relative to 2005****:*

*Net Cash Provided by OperatingActivities*

The net cash generated byoperating activities totaled R$74.1 million and R$852.3 million for the yearsended December 31, 2006 and December 31, 2005, respectively.

This variance was dueprimarily to the drop in net income resulting from weak demand due to outbreakin Avian Flu in Europe and and lower sales to Russia of pork due to the Russianembargo for this commodity.

Changes in Foreigncurrency exchange gain, net were due to the Company’s hedge results that areaimed to compensate for losses in Sadia’s export revenues and were influencedby the 10.1% average devaluation of the dollar against the real for 2006against 2005.

Increases in accounts andnotes receivable in the amount of R$202.9 million for the year ended December31, 2006 in relation to the previous year. This variation is because of theCompany ́s strategy to increase sales with the extension of payment datestowards the external market due to the low demand for poultry in Europe due tothe outbreak of Avian Flu.

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Increases in inventoriesin the amount of R$83.1 million for the year ended December 31, 2006 inrelation to the previous year due to a lower demand in poultry in Europe and alower demand in Russia for pork.

*Net Cash Provided or Used inInvesting Activities*

Changes in Purchase ofproperty, plant and equipment were due to the greater capital investitures theCompany incurred in 2006. In 2005 R$673.1 million were invested, while in 2006Sadia invested R$969.6 million.

*Net Cash Provided or Used inFinancing Activities*

Loans received and loansrepaid presented a total net increase of R$563.0 million in 2006 and a R$147.6million decrease on December 31, 2005.

Changes in Long-term debtissuances were due to greater financing incurred as the Company increased itsinvestments in 2006.

The changes that occurredin the net cash in 2005 in relation to 2004 were due to the following:

***Changesin 2005 relative to 2004****:*

*Net Cash Provided by OperatingActivities*

Changes in Foreigncurrency exchange gain, net were due to the Company’s hedge results that areaimed to compensate for losses in Sadia’s export revenues and were influencedby the 17.3% average devaluation of the dollar against the real for 2005against 2004.

Changes in Inventorieswere due to more efficient inventory management, which led to a decrease of theaverage inventory turnover from 90 days in 2004 to 66 days in 2005.

Changes in Accruedinterest, net were due to a greater amount paid in interest, as Sadia increasedits financing as a result of greater investments in 2005.

Changes in SocialCharges, Taxes Payable, Other Liabilities’ account were due to provisions onthe acquisition of Só Frango and marketing expenses.

*Net Cash Provided or Used inInvesting Activities*

Changes in Purchase ofproperty, plant and equipment were due to the greater capital investitures theCompany incurred in 2005. In 2004 R$324.9 million were invested, while in 2005Sadia invested R$742.4 million.

*Net Cash Provide or Used inFinancing Activities*

Changes in Long-term debtissuances were due to greater financing incurred as the Company increased itsinvestments in 2005.

**Indebtednessand Financial Strategy**

Sadia borrows fundsprincipally to finance exports and for investments in fixed assets, for themodernization and technological update of the plants, for working capital, and,depending on market conditions, for financial investments.

At the end of 2006, theCompany’s total interest-bearing debt stood at R$4,112 million, representing a29.0% increase as compared to the total debt of R$3,189 million on December 31,2005. In terms of the total debt maturity distribution, in 2006, 70.2% wasaccounted as long-term debt as compared to 75.2% in 2005.

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At the end of 2006, Sadia’stotal financial assets amounted to R$2,557.1 million a 5.4% decrease ascompared to R$2,695.7 thousand on December 31, 2005. Of the total investmentmaturity distribution, in 2005, 97.6% was accounted as short-term, as comparedto 95.0% in 2006.

TheCompany’s debt profile at December 31, 2006 and 2005 was as follows:

 

| R$ Million         | ** ** | **2006**   | ** ** | **2005**   | ** ** |
|-------------------------|------------|------------|------------|------------|------------|
| ** **              | ** ** | ** ** | ** ** | ** ** | ** ** |
| Short-term debt         |       | 1,226.6    |       | 790.2      |       |
| Long-term debt          |       | 2,885.7    |       | 2,398.4    |       |
| Total Debt              |       | 4,112.2    |       | 3,188.6    |       |
|                    |       |       |       |       |       |
| Short-term  investments |       | 2,493.6    |       | 2,630.7    |       |
| Long-term  investments  |       | 129.1      |       | 65.1       |       |
| Total Investments       |       | 2,622.7    |       | 2,695.7    |       |

 

On May 12, 2003, theCompany entered into an agreement to sell, from time to time, up to R$150.0million of its domestic receivables to a special purpose entity, organized asan investment fund. The receivables sold are subject to a discount rate thatshould not be lower than 95.0% of the average rate of Brazilian interbankcertificate deposits (13.16% p.a. at December 31, 2006). Through December 31,2006, the Company received cash proceeds of R$2.8 billion (R$2.6 billion in2005) from the sales of domestic receivables under this agreement and incurredinterest expenses of R$30.0 million for the year ended December 31, 2006(R$27.0 million in 2005). Based on the structure of this transaction, theagreement has been accounted for as a financing by the Company. As of December31, 2006, the accounts receivable for this debt, pledged as collateral wasR$242 million (R$190 million in 2005).

**Short-TermDebt**

Following the normalcourse of operations, the amounts maturing in the short run can be settled orre-negotiated for the next period. The Company uses trade finance for itsworking capital needs because it is available at a lower cost, since lendersperceive that the exchange risk is mitigated by the link to U.S. dollarexports.

Working capital fromcommercial banks primarily relates to export financing and pre-export advances,of which R$477.2 million in 2006 (R$432.1 million in 2005) were dollardenominated with a coupon at Libor (5.32%p.a. at December 31, 2006) plus aspread at the rate of 0.1% p.a. and fixed rate coupons of 6.5% p.a. in 2006(interest rate spread of 0.1% p.a. and fixed rate of 5.76% p.a. in 2005).

| R$ Million                                           | ** ** | **2006** | ** ** | **2005** | ** ** |
|-----------------------------------------------------------|------------|----------|------------|----------|------------|
|                                                      |       |     |       |     |       |
|  Working capital from commercial banks               |       | 708.9    |       | 545.4    |       |
|  Trade accounts receivable domestic credit  facility |       | 242.4    |       | 190.4    |       |
|  Bank borrowings, secured by accounts  receivable    |       | 275.3    |       | 54.4     |       |
| ** **                                                |       | 1,226.6  |       | 790.2    |       |

 

AtDecember 31, 2006 and 2005, the weighted average interest rates on short-termdebt was 5.36% p.a. and 6.90% p.a., respectively.

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**Long-TermDebt**
| ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    | ** ** | **Long-Term Debt - R$ thousand** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    | ** ** | ** **                                           | ** ** |
| ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    | ** ** | **2006**                                             | ** ** | **2005** | ** ** |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |       |                                                 |       |   |   |
| **Foreign  debt (denominated in U.S. dollars):**                                                                                                                                                                                                                                                                                                                                                                                                                                                                              | ** ** | ** **                                           | ** ** | ** ** | ** ** |
| ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    | ** ** | ** **                                           | ** ** | ** ** | ** ** |
| IFC-  International Finance Corporation funding in foreign currency for investment  in property, plant and equipment, which R$13,734 is subject to interest at  fixed rate of 9.05% p.a., guaranteed by promissory real estate mortgages                                                                                                                                                                                                                                                                                      |       | 13,734                                               |       | 23,325 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |       |                                                 |       |   |   |
| Export  financing, composed of prepayment, payable in amount of R$229,070 in  installments up to 2010, subject to LIBOR variation for 6 month deposits  (5.37% in December 2006 plus annual interest of 3.38% p.a, and a line focused  on the incentive for foreign trade in amount of R$1,675,171, subject to LIBOR  variation for 6 month plus interest of 2.20% p.a., guaranteed by promissory  notes or sureties.                                                                                                         |       | 1,904,241                                            |       | 1,584,893 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |       |                                                 |       |   |   |
| Financing  subject to LIBOR variation for 1 month deposits (4.39% in December 2005) plus  interest of 0.10% p.a., guaranteed by its own titles                                                                                                                                                                                                                                                                                                                                                                                |       | —                                               |       | 145,719 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |       |                                                 |       |   |   |
| BNDES (National  Bank for Economic and Social Development), payable from 2007 to 2013,  composed as follows: FINEM in the amount of R$17,193 subject to the weighted  average of the exchange variation of currencies traded by BNDES - UMBNDES and  fixed interest of 3.50% p.a. and FINAME in the amount of R$128,265 subject to  the weighted average of the exchange variation of currencies traded by BNDES  - UMBNDES and fixed annual interest of 3.5% p.a. guaranteed by mortgage bonds  and real estate mortgages    |       | 145,458                                              |       | 69,750 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |       |                                                 |       |   |   |
| ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    | ** ** | **2006**                                             | ** ** | **2005** | ** ** |
| **Local  debt (denominated in reais):**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       | ** ** | ** **                                           | ** ** | ** ** | ** ** |
| BNDES (National  Bank for Economic and Social Development), credit lines for investments and  exports, payable from 2006 to 2012, composed as follows: FINAME in the amount  of R$225,684 subject to the Long-Term Interest Rate -TJLP (9.75% p.a. in  December 2005) and interest of 4.45% p.a., FINAME-EXIM in the amount of  R$139,321 subject to TJLP and interest of 3.97% p.a. and FINEM in the amount  of R$37,654 subject to TJLP and interest of 3.50% p.a., guaranteed by  mortgage bonds and real estate mortgages |       | 651,537                                              |       | 402,659 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |       |                                                 |       |   |   |
| PESA - Special  Aid Program for Agribusiness payable in installments from 2005 to 2020,  subject to the — General Price Index —Market — IGP-M plus interest rate of  9.89% p.a., secured by investments in debt securities with a carrying value  of R$25,710 and sureties.                                                                                                                                                                                                                                    |       | 136,440                                              |       | 131,831 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |       |                                                 |       |   |   |
| Other subject to  interest rate from 4% to 14% p.a.                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |       | 34,267                                               |       | 40,187 |   |
| ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    | ** ** | ** **                                           | ** ** | ** ** | ** ** |
| ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |       | 2,885,677                                            |       | 2,398,364 |   |
| Less current  portion of long- term debt                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |       | -214,708                                             |       | -694,180 |   |
| **Long- term portion**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        | ** ** | **2,670,969**                                        | ** ** | **1,704,184** | ** ** |

** **

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At December 31, 2006, long-term debt maturities wereas follows:
| 2008       |       | 242.6       |       |
|------------|------------|-------------|------------|
| 2009       |       | 277.9       |       |
| 2010       |       | 1,141.7     |       |
| 2011       |       | 708.8       |       |
| Thereafter |       | 230.0       |       |
| ** ** | ** ** | **2,671.0** | ** ** |

 

### **C.Research and Development, patents and licenses**

Sadia invested R$12.4million, R$10.9 million and R$10.1 million for the years ended December 31,2006, 2005 and 2004, respectively, in research and development activities.

For each of the last fouryears, we have invested an average R$7.0 million in research and developmentactivities. Over the past five years, the R&D department has developedseven new product families (refrigerated pasta, pizzas, fish-based products,ready-made dishes, sweet pies, frozen desserts and breaded products), as wellas improvements to our existing products.

During 2006, we launched41 products mainly in the lines of ready to eat dishes, margarines, breadedchicken, hams and Miss Daisy Desserts.

Investments in R&Dhave also brought benefits to the area of animal breeding, achieving improvementsin the quality of meat, the production process, and reducing feed conversionrates. Between 1975 and 2006, the duration of the chicken production cycle wasreduced from 59.3 days to 35.8 days for each 1.7kg bird. During the sameperiod, chicken weight increased from 1.7kg to 2.0kg for slaughtering.  Similarly, the feed conversion rate decreasedfrom 2.4kg to 1.8kg per kg of chicken.

Between 1975 and 2006,the duration of the pork production cycle was reduced from 179 days to 147 daysfor each 100kg animal. During the same period, slaughtered swine weightincreased from 94kg to 116kg. In a similar way, the feed conversion ratedecreased from 3.6kg to 2.7kg of feed per kg of pork. During the same period,the percentage of pork per carcass increased from 46.0% to 58.0%.

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### **D.Trend Information**

This section discussesthe main concerns and trends that drove the Company’s strategic planning in2006 and those expected for 2007.

**Avian Flu**

Theperformance of the industry in 2006 was marked by the reduction of poultryconsumption worldwide due to the uncertainties caused by the possibility of amajor worldwide outbreak of the avian influenza.

Eventhough there has never been a case of H5N1 or any other highly pathogenic casesof poultry diseases of AI in Brazil, Sadia is aware of the risk, and is closelymonitoring its developments. The Company is working on this issue with theutmost priority, and adopting several preventive measures. Sadia’s poultryplants are spread throughout the country with 8 industrial units across 5different states. In addition to that, Brazil’s vast territorial extensionreduces substantially the risk of countrywide contamination. In order to avoidAI reaching its plants, Sadia has implemented a strict control on the access tothe animal producing farms. Visits to farms and poultry establishments arestrictly prohibited. In the event of visits from certifying companiesrepresentatives and genetic material suppliers, access must be limited to theCompany’s office after a 7-day quarantine in Brazil, without any kind ofcontact with other birds. As there is a serious threat of introduction of avianinfluenza through the exposure of the Company’s commercial flock to wild birds,especially waterfowl, all of Sadia’s integrated outgrowers have protected theirfarms water springs and most of them have put tighter mesh screens in order toblock the entry of smaller wild birds in their farms. The Company is alsoequipping its plants to cook, grill and bread the poultry meat, as according toFAO, the virus is destroyed in temperatures above 70°C, allowing these productsto be exported regardless of any sanitary related embargos. Sadia is alsoconstantly increasing the volumes of processed products in its productportfolio, which creates a natural hedge for the Company.

Moreover,the Brazilian government has established the National Plan for the Preventionand Control of Newcastle Disease and the Prevention of Avian Influenza (PlanoNacional de Controle e Prevenção da Doenca de Newcastle e de Prevenção deInfluenza Aviária) which conforms with OIE (World Organization for AnimalHealth) standards for zoning. These measures which are intended to assureinternational markets that Brazil maintains sanitary barriers between stateswill allow the country to petition for certain Brazilian states to beconsidered as autonomous regions, avoiding, thus, a generalized ban on exports.

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Itis important to mention that Sadia is already in full compliance with theNational Plan for the Prevention of the Avian Flu and the Prevention andControl of the Newcastle Disease.

Despitethese measures, no assurance can be given that Sadia will not be affected byAI, directly, or through limitations on exports imposed by importing countries.

Thefirst quarter of 2007 reflects consistent growth in the domestic market and arecovery in demand, and consequently in prices, in the export market. Theabsence of avian flu cases, a key factor for the success of Brazilian animalprotein producers, allowed Brazil to maintain its position as the mainworldwide exporter of poultry. This, together with the opening of new marketsand the expansion of existing markets resulted in strong international demand.

**ForeignMarket Protectionist Measures**

Consideringrecent developments in the Brazilian macro economic environment and thelivestock and processed food sector, Sadia expects to have its operationsaffected most significantly by the following factors:

·              Newregulations will continue to be issued by foreign importer countries to protecttheir local producers. Since a relevant part of our revenues comes from exportoperations, the raising of protectionist barriers can affect our operations.

·              InJuly 2002, the EU Sanitary Commission issued a new regulation increasing theduties for imported fresh chicken. During the second semester of 2002, 100% ofBrazilian chicken exported to Europe was required to be tested for the forbiddenantibiotic Nitrofuran, increasing export sales costs.

·              InNovember 2003, a panel was established in the World Trade Organization (WTO) onrequest of Brazil and Thailand against the change in classification of saltedpoultry made by the EU. With this change, Brazilian salted poultry wasclassified as frozen and, thus, had an increase of 15.4% ad valorem in its dutyrate. In August 2005, the final WTO decision favored Brazil and Thailand in thepanel. However, the WTO decision is characterized as only a recommendation tothe European Union, and there will not be an immediate application of theruling.

·              TheRussian government also introduced a quota regime for pork and poultry importsthat remained in effect through 2006. The quotas for 2007 have not yet beenestablished.

Theseinitiatives can reduce competitiveness of our products in such markets;however, the Brazilian government, associated with local and internationalentities, normally negotiates the terms of such measures in order to mitigatetheir negative effects.

### **E.Off- balance sheet arrangements**

TheCompany does not have any off-balance sheet arrangements that have or arereasonably likely to have a current or future effect on its financialcondition, changes in financial condition, revenues or expenses, results ofoperations, liquidity, capital expenditures or capital resources other than theone described below.

Sadiahas off-balance sheet arrangements consisting of guarantees granted in theamount of R$20.2 million (R$11.5 million in 2005) to banks under loans obtainedby certain out growers as part of a special development program in the centralregion of Brazil. The Company also has off-balance sheet arrangements relatedto the export receivables sold under the Insured Receivables Purchase Agreementin the amount of R$ 36.3 million.

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### **F.Tabular disclosure of contractual obligations**

The Company haslong term purchase contracts with suppliers that are oriented for productionpurposes (packing and industrial units). At December 31, 2006, the balance ofcontractual obligations were as follows: 
| ** **                                                                                                                     | ** ** | **Contractual Obligations — Payments Due By Period (Thousand R$)** | *** *** |
|--------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------------------------------------------|--------------|
| ** **                                                                                                                     | ** ** | ** **                                                                                                      | ** **   | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                                                                                                     | ** ** | **Less than 1  year**                                                                                 | ** **   | **1 - 3 years** | ** ** | **3 - 5 years** | ** ** | **More than 5  years** | ** ** | **Total** | ** ** |
| Long-Term Debt  Obligations                                                                                                    |       | 214,708                                                                                                         |         | 520,474 |   | 1,850,517 |   | 299,978 |   | 2,885,677 |   |
|                                                                                                                           |       |                                                                                                            |         |   |   |   |   |   |   |   |   |
| Capital  (Finance) Lease Obligations                                                                                           |       | —                                                                                                          |         | — |   | — |   | — |   | — |   |
|                                                                                                                           |       |                                                                                                            |         |   |   |   |   |   |   |   |   |
| Operating Lease  Obligations                                                                                                   |       | 65,200                                                                                                          |         | 29,000 |   | — |   | — |   | 94,200 |   |
|                                                                                                                           |       |                                                                                                            |         |   |   |   |   |   |   |   |   |
| Purchase  Obligations                                                                                                          |       | 25,000                                                                                                          |         | 44,000 |   | 15,000 |   |   |   | 84,000 |   |
|                                                                                                                           |       |                                                                                                            |         |   |   |   |   |   |   |   |   |
| Other Long-Term  Liabilities Reflected on the Company’s Balance Sheet under the GAAP of the  primary financial statements |       | —                                                                                                          |         | — |   | — |   | — |   | — |   |
| **Total**                                                                                                                      | ** ** | **304,908**                                                                                                     | ** **   | **593,474** | ** ** | **1,865,517** | ** ** | **299,978** | ** ** | **3,063,877** | ** ** |

 

Sadia does not have anycontractual purchase obligations associated with its animal feed requirements.

The long-term debtobligations incurred by the Company are basically intended to finance exports,investments in fixed assets and working capital. Purchase Obligations relatesto future acquisition of raw materials. Operating Lease Obligations are relatedto Sadia’s non-cancelable leasing agreements for industrial units that expireover the next three years.

### **G.Safe Harbor**

See “Forward-Looking Statements” in “General” onpage 4 of this Annual Report.

## **ITEM 6.DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES**

### **A.Directors and Senior Management**

**Executive Officers and Members of the Board ofDirectors**

The Company is managed bya Board of Directors and a Board of Executive Officers, formed by Braziliancitizens or a majority of Brazilian citizens domiciled in the country, whosepowers shall prevail in the decision-making.

The term of office of themembers of the Board of Directors and of the Executive Officers shall be forone year and shall be unified, extending up to the entry upon office of the newadministrators, reelection being permitted.

In 2005 Sadia acquired apolicy of directors and officers liability insurance (D&O), in order toprotect all its executives against legal actions that may arise from financialloss caused to third parties.

There are no pendinglegal proceedings, involving either board members or executive officers thatcould prevent any of these from carrying out their duties.

**Board of Directors**

Pursuantto Sadia’s By-laws, the board of directors is composed of a minimum of seven toa maximum of eleven members, all of them necessarily being shareholders andshall adopt an Internal Regulation to govern its own activities.

Inthe annual shareholder’s meeting, held on April 19, 2007 the new board memberswere elected. The board of directors is composed of four members who representthe controlling shareholder group, and seven independent members.

Certain members of the board are related. Mr.Eduardo Fontana d’Ávila, Mrs. Diva Helena Furlan, Mr. Marcelo Fontana and Mr. WalterFontana are cousins.

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| Name                                        | ** ** | **Birth Date** | ** ** | **Position**  |
|---------------------------------------------|------------|----------------|------------|---------------|
| Walter Fontana  Filho                       |       | 7/12/1953      |       | Chairman      |
| Alcides Lopes  Tápias                  |       | 9/16/1942      |       | Vice Chairman |
| Eduardo Fontana  d’Ávila          |       | 2/28/1954      |       | Vice Chairman |
| Diva Helena  Furlan                         |       | 6/29/1949      |       | Member        |
| Everaldo Nigro  dos Santos                  |       | 12/7/1939      |       | Member        |
| Francisco  Silverio Morales Cespede         |       | 6/21/1947      |       | Member        |
| José Marcos  Konder Comparato          |       | 9/27/1932      |       | Member        |
| Luiza Helena  Trajano Inácio Rodrigues |       | 9/10/1948      |       | Member        |
| Marcelo Fontana                             |       | 10/2/1961      |       | Member        |
| Norberto Fatio                              |       | 7/4/1944       |       | Member        |
| Vicente Falconi  Campos                     |       | 9/30/1940      |       | Member        |

 

Walter Fontana Filho.  Mr.Fontana Filho has been the Chairman of the board of directors since 2005. Hewas Chief Executive Officer of Sadia from 1994 to 2005, with previous experienceas Commercial Vice President Director and Domestic Commercial Director.  Mr. Fontana holds undergraduate and graduatedegrees in Economics from Pontificia Universidade Católica, with aspecialization in Business Marketing from Fundaçao Getúlio Vargas.

Eduardo Fontana d’Ávila.** **Mr. Fontana d’Avila is a member of the board of directors. He wasIndustrial Director until 2005. He joined the Company in 1977 and had alwaysworked in the industrial production department. Mr. D ́Ávila holds undergraduatedegree in Engineering from Mackenzie University and a graduate degree inBusiness Administration from Fundaçao Getúlio Vargas.

DivaHelena Furlan.  Mrs. Furlan has been a member of the board ofdirectors since April 2007. She was the Marketing Director of Bacco’s Comerciale Importadora Escocia Ltda.  In addition,she was the Vice-President of Associação Comercial de São Paulo from 2003 to2006.  Mrs. Furlan holds an undergraduatedegree in law from Pontificia Universidade Catolica São Paulo -PUC-SP.

Alcides Lopes Tápias.  Mr.Lopes Tapias has been a member of the board of directors since 2002.  Mr. Tapias served as Banco Bradesco’sExecutive Vice-President, President of FEBRABAN (Brazilian Bank Federation) andwas a member of the National Monetary Council. He also served as formerIndustry, Trade and Development Minister (July, 2001).  Mr. Lopes Tapias holds an undergraduatedegree in Business Administration from Universidade Mackenzie and a graduatedegree in law from Faculdades Metropolitanas Unidas.

Everaldo Nigro dos Santos*.*  Mr. Nigro dos Santos has been amember of the board of directors since 2004. Spent his career at Alcan Latin America. He was Chief Executive Officerof Alcan Mexico, Alcan Brasil and Alcan Latin America. Mr. Nigro dos Santosholds an undergraduate degree in engineering from Universidade Mackenzie and anMBA from the Centre d ́Études Industrielles.

FranciscoSilvério Morales Céspede.  Mr. Morales Céspede has been a member of theboard of directors since 2004.  He wasalso the Chief Financial Officer of São Paulo Alpargatas S.A., a member of theboard of Santista Têxtil S.A. and former Chief Financial Officer and member ofthe board of directors of Monsanto do Brasil. Mr. Morales Céspede holds an undergraduate and graduate degree inBusiness Administration from Fundação Getúlio Vargas.

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JoseMarcos Konder Comparato. *Mr. Comparato has been amember of the board of directors since 2006. Chairman of the Fiscal Committeeof Itaúsa — Investimentos Itaú S.A., former Executive Director of Banco Itaú S.A.and former Chief Executive Officer of Itaúsa Empreendimentos S.A.. Mr.Comparato holds an undergraduate degree in Civil Engineering from EscolaPolitecnica - Universidade de São Paulo.*

LuizaHelena Trajano Inácio Rodrigues*.  Mrs. Rodrigues has been a member of the boardof directors since 2006. She is CEO of Magazine Luiza and member of the boardof Grupo Algar. She holds an undergraduate degree in Business Administrationand Law from Faculdade de Direito de Franca.*

MarceloFontana.  Mr. Fontana has been a member of the board of directors since 2006. Mr. Fontana is the owner of AcemusicInportação e Exportação Ltda. He was a partner of the restaurant Rôti in SãoPaulo. He also was director and partner of Netmiles.com and MP3clube.com.br andowner of Netrewards Ltda, Netsav Informática e Telecomunicações Ltda, LumusicEquipamentos de Som Ltda, and other six music and video retail stores in SãoPaulo. He previously worked for Sadia as Technologies Manager at the DataProcessing department. Mr. Fontana holds an undergraduate degree in BusinessAdministration from Faculdade Campos Salles.

NorbertoFatio.  Mr. Fatio has been a member of the board of directors since 2004.  He has commercial and marketing executiveexperience at Unilever, Danone, Bunge Alimentos, Kibon, Fleischmann RoyalNabisco and Sé Supermercados.  Mr. Fatioreceived his undergraduate degree in Business Administration from FundaçãoGetúlio Vargas.

*Vicente Falconi Campos.*  Mr. Falconi Campos has been a member of theboard of directors since 2002. Founding partner of the Institute of ManagerialDevelopment (INDG). He was a consultant to the Brazilian government on theEnergy Crisis Committee and is a member of the Board of AmBev.  Mr. Falconi Campos holds an undergraduatedegree in engineering from Universidade Federal de Minas Gerais and a PhD fromColorado School of Mines.

**Executive****Officers******

TheCompany’s management team consists of professionals with extensive experiencein the Brazilian food sector. There are currently no members of the foundingfamily serving in executive capacities. The executive officers are responsiblefor the execution of decisions of the board of directors and day-to-daymanagement of the Company. Below is a short résumé of the key members of Sadia’sexecutive management team for the year of 2006: 

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| Name                                    | ** ** | **Birth Date** | ** ** | **Position**                                                                                    |
|-----------------------------------------|------------|----------------|------------|-------------------------------------------------------------------------------------------------|
| Gilberto Tomazoni                       |       | 8/28/1958      |       | Chief Executive Officer                                                                         |
| Adriano Lima Ferreira                   |       | 11/28/1969     |       | Finance Director                                                                                |
| Alexandre de Campos                     |       | 9/22/1970      |       | Europe Commercial Director                                                                      |
| Alfredo Felipe da Luz  Sobrinho         |       | 8/31/1945      |       | Corporate Relations and Legal Affairs Director                                                  |
| Antonio Paulo  Lazzaretti               |       | 7/24/1947      |       | Production and Products Technology                                                              |
| Artêmio Listoni                    |       | 7/22/1961      |       | Beef Activities Director                                                                        |
| Eduardo Nunes de  Noronha               |       | 7/29/1971      |       | Human Resources and Management Director                                                         |
| Ernest Sícoli Petty                |       | 7/4/1968       |       | Purchasing Director                                                                             |
| Flávio Luis Fávero            |       | 12/11/1963     |       | Regional Production Director                                                                    |
| Flávio Riffel Schmidt              |       | 3/23/1953      |       | Investment Projects Director                                                                    |
| Gilberto Meirelles  Xandó Baptista |       | 8/24/1965      |       | Commercial Exports Director                                                                     |
| Gilberto Pinto Sampaio  Junior*         |       | 12/27/1967     |       | Marketing Director                                                                              |
| Guillermo Henderson  Larrobla           |       | 3/11/1956      |       | International Operation Director                                                                |
| José Augusto Lima de Sá       |       | 6/14/1953      |       | International Relations Director                                                                |
| Osório Dal Bello                   |       | 7/1/1956       |       | Agribusiness Technology Director                                                                |
| Paulo Francisco  Alexandre Striker      |       | 10/23/1954     |       | Logistics Director                                                                              |
| Ricardo Fernando Thomas  Fernandez      |       | 10/25/1963     |       | Grain Purchase Director                                                                         |
| Roberto Banfi                           |       | 2/21/1947      |       | International Sales Director                                                                    |
| Ronaldo Kobarg Müller              |       | 11/11/1959     |       | Regional Production Director                                                                    |
| Sérgio Carvalho Mandin  Fonseca    |       | 9/12/1957      |       | Commercial Brazil Director                                                                      |
| Valmor Savoldi                          |       | 1/28/1954      |       | Integrated Operations and Planning Director                                                     |
| Welson Teixeira Junior                  |       | 2/22/1957      |       | Controller, Administrative and Information  Technology Director and Investor Relations Director |

 

*Gilberto Tomazoni.*Mr. Tomazoni is the Chief Executive Officer. His previousexperience within the Company includes industrial, sales (local and foreignmarkets) and marketing areas. Mr. Tomazoni holds an undergraduate degree inEngineering from Universidade Federal de Santa Catarina and a graduate degreein Management Development from Fundação de Ensino do Desenvolvimento.

*Adriano Lima Ferreira.*Mr. Ferreira is the FinanceDirector. He was previously Finance Manager at Sadia. He has also worked forAtento Telecomunicaciones — Telefonica in Spain, CCR — Odebrecht and LehmanBrothers in New York. He holds an undergraduate degree in Economics fromFaculdade Católica de Ciências Econômicas da Bahia and a graduate degree inFinance from Fundação Getúlio Vargas.

*Alexandre de Campos.* Mr. Campos is the Europe Commercial Director. He has previousexperience with foreign trade at General Electric and Perdigão. Mr. Camposholds an undergraduate degree in Business Administration from FaculdadesTibiriçá and a graduate degree in Marketing from Escola Superior de Propagandae Marketing.

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*Alfredo Felipe da Luz Sobrinho.*Mr. da Luz Sobrinho is the CorporateRelations and Legal Affairs Director. He previously was a member of the boardof directors and was Vice President of Marketing, Sales and Services ofTransbrasil. Mr. da Luz Sobrinho was former President of ABIPECS and Presidentof the Attílio Francisco Xavier Fontana Foundation. He holds an undergraduatedegree in Law from Centro de Ensino Universidade Brasília.

*Antonio Paulo Lazzaretti.* Mr. Lazzaretti is the Production and Products TechnologyDirector. He was the former industrial director and manager for the Company. Hepreviously worked for Renner Hermann. Mr. Lazzaretti holds an undergraduatedegree in Chemical Engineering from the Universidade Federal do Rio Grande doSul, with a specialization in Business Administration from Fundação CandidoMendes.

*Artêmio Listoni.*Mr. Listoni is the Beef ActivitiesDirector. He had worked for Sadia as the Chief of the Beef PurchasingDepartment in the 1980s and mid 1990s. He also worked for CooperativaIndustrial de Carnes e Derivados de Goiás and Friboi. Mr. Listoni is anagricultural technician from Escola Agrotécnica Federal de Concórdia-SC.

*Eduardo Nunes de Noronha.*Mr. Noronha is Sadia’sHuman Resources and Management Director. He previously worked for Coca Cola,AMBEV and Delphi Automotive Systems. Mr. Noronha holds an undergraduate degreein Mechanical Engineering from Universidade Federal de Minas Gerais and agraduate degree in QualityEngineering from Pontifícia Universidade Católica de Minas Gerais.

*Ernest Sícoli Petty.* Mr. Sícoli Petty is the Purchasing Director. He has previousexperience in the food and agribusiness sectors at Pepsico, Cargill and Seara. Mr. Sícoli Petty holds an undergraduatedegree in Agriculture Engineering from Universidade de São Paulo and anExecutive MBA in Business Administration from BSP/University of Toronto.

*Flávio Luis Fávero.* Mr. Fávero is the Regional Production Director. He has previousexperience within the Company as Total Quality Coordinator and ProductionManager.  Mr. Fávero holds an undergraduate degree in Chemical Engineeringfrom the Universidade do Sul and a graduate degree in Management Developmentfrom Universidade de Santa Catarina.

*Flávio Riffel Schmidt.* Mr. Riffel Schmidt is the Investment Projects Director.  He has previous experience in the finance,planning and control departments at the Company. Mr. Riffel Schmidt holds anundergraduate degree in Business Administration and Accounting fromUniversidade do Vale dos Sinos.

*Gilberto Meirelles Xandó Baptista.* Mr. Xandó Baptista is the Commercial ExportsDirector. He is the former Commercial — Domestic Market Director andMarketing Director with experience in the controlling, sales and marketingareas. Mr. Xandó Baptista holds an undergraduatedegree in Business Administration from Getúlio Vargas Foundation, with aspecialization in Business Administration from CEAG-FGV and Universidade de SãoPaulo.

*Gilberto Pinto SampaioJunior**. Mr. Sampaio resigned as Sadia’s Marketing Director in June,2007. Mrs. Fernanda César Oruê substituted Mr. Sampaio as Sadia’sInterim Marketing Director. She was previously Marketing Managerat Sadia. Mrs. Oruê holds an undergraduate degreein Food Engineering from Universidade de Campinas and a graduatedegree in Marketing and Management from Universidade deCampinas.

*Guillermo Henderson Larrobla.*  Mr. Henderson Larrobla is the InternationalOperation Director. He has previous experience with Seara Alimentos (BungeGroup).  Mr. Henderson Larrobla  holds an undergraduatedegree in Mechanical Engineering from Universidade Federal do Rio Grande do Suland a Marketing Management specialization from Universidade de Blumenau.

*José Augusto Lima de Sá.* Mr. Lima de Sá is the International Relations Director. He has experienceof more than 20 years in foreign trade. He is the former Chief ExecutiveOfficer and Chairman of Frangosul. Mr. Limade Sá holds an undergraduate degree in Business Administration fromFundação Getúlio Vargas with extension courses at Harvard and Wharton businessschools.

*Osório Dal Bello.*Mr. Dal Bello is the AgribusinessTechnology Director. He has worked for Sadia in the agricultural departmentsince 1980. Mr. Dal Bello holds and undergraduate degree in Agribusiness fromUniversidade Federal de Santa Maria — RS and a specialization in BusinessAdministration from Fundação Educacional Unificada do Oeste de Santa Catarina.

*Paulo Francisco Alexandre Striker.* Mr Striker is the Logistics Director.He is the former trade marketing manager and brand management/ strategicplanning manager. Mr. Striker holds an 

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undergraduate degree in Business Administration andCivil Engineering from Universidade Mackenzie and a specialization in BusinessAdministration from JUSE Institute (Japan) and Fundação Dom Cabral.

*Ricardo Fernando Thomas Fernandez.* Mr. Thomas Fernandez is the GrainPurchase Director. He has experience in grains and supply areas. Mr. ThomasFernandez holds an undergraduate degree in business administration fromUniversidade do Oeste de Santa Catarina and specialization in enterprisemanagement at Fundação Dom Cabral.

*Roberto Banfi.*Mr. Banfi is the International Sales Director. He has previousexperience includes working for Bonfiglioli - Cica, Cicatrade and Swift Armouras Director and served as Marketing Manager and Coordinator for Mercosur in thesales area of RMB-Refinações de Milho do Brasil. Mr. Banfi holds an undergraduatedegree in Accounting from H.E.C. Lausanne and an MBA from Stanford BusinessSchool.

*Ronaldo Kobarg Müller.* Mr. Müller is the Regional Production Director. He has experiencewithin the Company as Total Quality Coordinator and Production Manager.  Mr. Müllerholds an undergraduate degree in Chemical Engineering from FundaçãoEducacional da Região de Blumenau and a graduate degree in ManagementDevelopment from Universidade Federal de Santa Catarina.

*Sérgio Carvalho Mandin Fonseca.* Mr. Mandin Fonseca is the CommercialBrazil Director. He was the former retail director at the Martins Distributioncompany and has experience at La Fonte Metalurgy and Souza Cruz Cigarettecompany. Mr. Mandin Fonseca holds an undergraduate degree in ProductionEngineering from Universidade de São Paulo and an MBA from the University ofCalifornia

*Valmor Savoldi.*Mr Savoldi is the Integrated Operations and Planning Director. Hehas former experience within the Company including the areas of agriculture,production, poultry and pork processing, total quality and sales. Mr. Savoldiholds an undergraduate degree in Agricultural Engineering and a specializationin Management Development from Universidade Federal de Santa Catarina.

*Welson Teixeira Junior.*Mr.Teixeira is the Controller, Administrative and Information Technology Directoras well as Investor Relations Director. He previously was the Planning Directorand Financial and Investor Relations Director at Empresa Brasileira deCompressores — Embraco/Whirlpool Corporation. Mr. Teixeira holds anundergraduate degree in Economics from Fundação Armando Alvares Penteado andspecialization in Finance Administration form Fundação Getúlio Vargas, PGA —Advanced Management Program (INSEAD, France) and Strategic Management Program(IMD, Switzerland).

### **B.Compensation**

For the year ended December 31, 2006, the aggregatecompensation paid by Sadia to all members of the board of directors andexecutive officers for services in all areas was R$14.0 million, not includingrelated taxes or social security contributions. For the years ended December31, 2005 and 2004 the amount paid was approximately R$13.7 million and R$12.9million, respectively.

The Company has alsogranted health assistance and life insurance as benefits to its executiveofficers.

For the year 2003, theCompany developed a variable compensation program for officers and management  aimingto consolidate several challenging targets. This program, called GVS (SadiaValue Generation), uses value generation metrics considering, among otherthings, cost reduction, expense containment and revenue growth. The amount paid to each participant dependson the extent to which his performance indicators have been achieved. Inthe event of the termination of the mandate of a director or an executive officer,they are entitled only to statutory employment benefits under applicable law,without any special severance.

The Company sponsors adefined benefit pension plan that offers supplementary retirement benefits tothe employees, through Attílio Francisco Xavier Fontana Foundation. The pensionbenefit is generally defined as the difference between (i) the retiree’saverage salary during the last 12 months indexed to the date of retirement —until the limit of 80% of the last salary, and (ii) the value of the retirementpension paid by the Brazilian social security system. For retired employees theinitial pension payment is subsequently adjusted upwards to recognize cost ofliving increases. yuThe Company provides for the costs of pension benefits basedon a fixed percentage of remuneration, as recommended annually by independentactuaries. The accumulated benefit obligation related to this pension plan were

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R$686,175 and R$645,838 at December 31, 2006 and 2005,respectively. The Company expects to contribute approximately R$2,115 to theplan during fiscal year 2006.

The Company also providesfor other retirement benefits to its employees and certain employee executives.Such benefit plans generally provide benefits payable as a single lump sum toeligible employees upon retirement. The Company intends to fund these benefitsfrom its operations. The aggregate projected benefit obligation and theaggregate accumulated benefit obligation related to those other retirementbenefit were R$63,509 and R$57,244, respectively, at December 31, 2006 andR$58,579 and R$59,487, respectively, at December 31, 2005.

*Stock Option Plan*

In April 2005, theshareholders’ meeting approved the Executive Stock Option Plan. The plan isintended to grant to Company executives options to buy preferred, nominativeshares issued by the Company, available in the treasury, in accordance with CVMInstructions 10/1980 and 390/2003.

The objective of suchinitiative is to motivate plan participants, directing their behavior andlong-term vision, stimulating their sense of ownership and commitment to theorganization, in keeping with the interests of company shareholders.

The price for exercisingthe options does not include any discount and will be based on the averageprice of the shares in the last three trading days on the São Paulo StockExchange prior to the grant date, updated by the accumulated National ConsumerPrice Index (INPC) between the grant date and the date of exercise. There is athree year vesting period as from the option grant date. The participants willbe able to fully or partially exercise their right up to 2 years after thevesting period.

Under the planregulations, the preferred shares will be acquired and earmarked in treasuryfor this sole purpose.

The composition of theoptions granted is presented as follows:
| ** ** | ** ** | **Date**  | ** ** | ** **     | ** ** | **Price of shares**    | ** ** |
|------------|------------|-----------|------------|----------------|------------|----------------------------------|------------|
| **Cycle**  | ** ** | **Grant** | ** ** | **Expiration** | ** ** | **Quantity of shares** | ** ** | **Grant date** | ** ** | **Update —  INPC** | ** ** |
| 2005       |       | 6/24/05   |       | 6/24/10        |       | 2,200,000                        |       | 4.55 |   | 4.76 |   |
| 2006       |       | 9/26/06   |       | 9/26/11        |       | 3,520,000                        |       | 5.68 |   | 5.76 |   |

 

Consideringthe provisions of SFAS 123R, as the option price contains an inflation index(INPC) that is considered an other condition, the fair value of the option inthe amount of R$3.3 million (R$0.7 million in 2005) has been classified instock option, non-current liability and the compensation expense as general andadministration expense. The Company currently has shares in treasury,which are sufficient to cover future stock option exercises.

**C.Board Practices**

Sadia’sBoard of Directors established committees to support it in the decision makingprocess. These are made up exclusively of members of the Board, in charge ofensure quality in checking relevant information related to the Company’sbusiness and developing long-term strategies, as well as analyzing andproviding specific recommendations to each department.

**AuditCommittee**

Incompliance with the requirements of the Sarbanes-Oxley Act and the rules of theNew York Stock Exchange, this committee oversees financial reporting processesand compliance with corporate law, as well as supervising external and in-houseauditors to guarantee independence. The committee is made up of members of theBoard of Directors, one of which is necessarily a financial expert. All votingmembers of the audit committee satisfy the audit committee membershipindependence requirements set forth by the SEC and the NYSE. Francisco SilverioMorales Cespede has been determined by the board to be the audit committee “financialexpert” within the meaning of the rules adopted by the SEC relating to 

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the disclosure offinancial experts on audit committees in periodic filings pursuant to the U.S.Securities Exchange Act of 1934.

Members:Francisco Silverio Morales Cespede (coordinator), José Marcos Konder Comparatoand Alcides Lopes Tápias.

**Tax Planning Committee**

Thiscommittee is responsible to identify cost reduction opportunities through theevaluation of the tax regulations, its changes and impacts on the Company’soperations.

Members: Francisco Silverio Morales Cespede (coordinator), Diva HelenaFurlan, José Marcos Konder Comparato and Alcides Lopes Tápias.

**EthicsCommittee**

TheEthics Committee is comprised of members of the Board of Directors and Companymanagers, and is in charge of periodically reviewing the Company’s Code ofEthics; analyzing reports on violations of the Code of Ethics forwarded to itby the Ethics and Conduct Commission; examining most serious cases ofviolations of the Code of Ethics, and submitting it to the Board of Directorsfor decision; and deliberating on questions regarding the interpretation of theCode of Ethics text, as well as potential ethical dilemmas.

Members: Francisco Silverio Morales Cespede (coordinator), Diva HelenaFurlan, José Marcos Konder Comparato and Alcides Lopes Tápias.

**HumanResources**

This committee directs the strategic planning inpersonnel management and Sadia’s compensation policy. Its main responsibilitiesinclude: evaluating the performance of the executive team; developing trainingand hiring programs; salary policies, including variable compensation (bonuslinked to results and professional performance); and handling the successionprocess for the senior levels of management.

Members: Eduardo Fontana d’Avila (coordinator),Vicente Falconi Campos, Luiza Helena Trajano Inácio Rodrigues and NorbertoFatio.

**Financeand Investor Relations Committee**

This committee directs the Company’s financialstrategy and proposes medium and long-term solutions, pursuing the bestpractices in this area. It directs and develops hedging, project finance andcapital markets policies, and proposes the directives for the Company’s cashmanagement.

Members: Alcides Lopes Tápias (coordinator), WalterFontana Filho, Everaldo Nigro dos Santos and Marcelo Fontana.

**Strategy Committee**

This committee focuses on market strategies, aims tostrengthen the Company and make it more flexible and agile in taking decisions,in order to grow in a sustainable manner and continue with its internationalexpansion process.

Members:Everaldo Nigro dos Santos (coordinator),Walter Fontana Filho, Eduardo Fontana d’Avila and Vicente Falconi Campos.

**Sustainability and Environment Committee**

This committee proposes directives and spreads thestrategic concept of Sustainability and accompanies the Company’s environmentalperformance.

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Members: Walter Fontana Filho (coordinator), EduardoFontana d’Avila, Diva Helena Furlan and Norberto Fatio.

### **D.Employees**

At December 31, 2006,2005, and 2004 the Company had, respectively, 47,506, 45,381, and 40,637employees.

Sadia possesses anemployee Profit-Sharing Program which benefited more than 34,561 employees in2006. The total distributed under the program was R$ 21,480 million, or R$1,243 per year/employee. The Profit-Sharing Program was established throughnegotiations with the employee commission, in accordance with applicablelegislation.

Of the benefits offeredto employees, some of the most noteworthy include part-time and, at someplants, full-time daycare through a network of accredited, private providers;family health plan; funeral assistance; dental and medical care; loans; privatepension plan; and discounts on Company products.

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

On March 31, 2007 theboard members and executive directors of the Company (excluding those that arepart of the shareholders’ agreement) held, as a group, 12,473 common shares and13,148,608 preferred shares, corresponding to 0.0% and 3.1% of the amount ofoutstanding shares of each class, respectively.

For more details onownership and any relationship among major shareholders, see “Item 7. MajorShareholders.”

## **ITEM 7. MAJOR SHAREHOLDERS ANDRELATED PARTY TRANSACTIONS**

### **A.Major Shareholders**

**Share Position**

Sadiahas two types of shares, common and preferred, of which only the common sharescarry voting rights. The Company’s major shareholders do not have differentvoting rights.

Thefollowing tables contain certain information as of March 31, 2007 with respectto (i) any person known to the Company to be the beneficial owner of more than5% of the Company’s outstanding shares of voting common shares, (ii) any personknown to the Company to be the beneficial owner of more than 5% of the Company’soutstanding shares of preferred shares and (iii) the total number of theCompany’s voting common shares and preferred shares owned by the executive officersand directors of the Company as a group.

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| **Shareholders**                                          | ** ** | **Common Shares** | ** ** | **%**      | ** ** | **Preferred Shares** | ** ** | **%**      | ** ** | **Total**       | ** ** | **%**      | ** ** |
|-----------------------------------------------------------|------------|------------------------|------------|------------|------------|---------------------------|------------|------------|------------|-----------------|------------|------------|------------|
| Administradora e  Comercial Old Ltda                      |       | 25,661,658             |       | 9.99       | %          | 60,000                    |       | 0.01       | %          | 25,721,658      |       | 3.77       | %          |
| Sunflower  Participações S.A. (*)               |       | 35,964,747             |       | 13.99      | %          | —                    |       | 0.00       | %          | 35,964,747      |       | 5.27       | %          |
| Other  shareholders (*)                                   |       | 100,972,002            |       | 39.29      | %          | 28,622,376                |       | 6.72       | %          | 129,594,378     |       | 18.96      | %          |
| Fundação Attilio  F. X. Fontana                 |       | 24,998,558             |       | 9.73       | %          | —                    |       | 0.00       | %          | 24,998,558      |       | 3.66       | %          |
| PREVI — Caixa de  Prev. dos Func. do Banco do Brasil |       | 1,776,511              |       | 0.69       | %          | 59,359,870                |       | 13.93      | %          | 61,136,381      |       | 8.95       | %          |
| Dodge & Cox                                           |       | —                 |       | 0.00       | %          | 43,729,000                |       | 10.27      | %          | 43,729,000      |       | 6.40       | %          |
| Oppenheimer Funds  Inc. — Foreign Investment Fund    |       | —                 |       | 0.00       | %          | 37,755,145                |       | 8.86       | %          | 37,755,145      |       | 5.53       | %          |
| Other  shareholders                                       |       | 67,626,524             |       | 26.31      | %          | 250,549,321               |       | 58.82      | %          | 318,175,845     |       | 46.59      | %          |
| Treasury Stock                                            |       | —                 |       | 0.00       | %          | 5,924,288                 |       | 1.39       | %          | 5,924,288       |       | 0.87       | %          |
| **Total**                                                 | ** ** | **257,000,000**        | ** ** | **100.00** | **%**      | **426,000,000**           | ** ** | **100.00** | **%**      | **683,000,000** | ** ** | **100.00** | **%**      |

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(*)             Part of the Shareholders’ Agreement

Administradora eComercial Old Ltda is a company composed of several family members and is notpart of the shareholders’ agreement. The breakdown on March 31, 2007 is asfollows:

 
| **Shareholders**                         | ** ** | **Common Shares** | ** ** | **%**      | ** ** | **Preferred Shares** | ** ** | **%**      | ** ** | **Total**      | ** ** | **%**      | ** ** |
|------------------------------------------|------------|------------------------|------------|------------|------------|---------------------------|------------|------------|------------|----------------|------------|------------|------------|
| Luiz Fernando  Furlan                    |       | 5,147,728              |       | 20.06      | %          | 12,036                    |       | 20.06      | %          | 5,159,764      |       | 20.06      | %          |
| Leila Maria  Furlan da Silva Telles      |       | 5,140,030              |       | 20.03      | %          | 12,018                    |       | 20.03      | %          | 5,152,048      |       | 20.03      | %          |
| Lucila Maria  Furlan                     |       | 5,132,332              |       | 20.00      | %          | 12,000                    |       | 20.00      | %          | 5,144,332      |       | 20.00      | %          |
| Osório Henrique  Furlan Júnior |       | 5,132,332              |       | 20.00      | %          | 12,000                    |       | 20.00      | %          | 5,144,332      |       | 20.00      | %          |
| Diva Helena  Furlan                      |       | 5,109,236              |       | 19.91      | %          | 11,946                    |       | 19.91      | %          | 5,121,182      |       | 19.91      | %          |
| **Total**                                | ** ** | **25,661,658**         | ** ** | **100.00** | **%**      | **60,000**                | ** ** | **100.00** | **%**      | **25,721,658** | ** ** | **100.00** | **%**      |

 

Oppenheimer Fundsis a foreign investor fund. The breakdown on March 31, 2007 is as follows:

 
| **Shareholders**                                    | ** ** | **Common Shares** | ** ** | **%**      | ** ** | **Preferred Shares** | ** ** | **%**      | ** ** | **Total**      | ** ** | **%**      | ** ** |
|-----------------------------------------------------|------------|------------------------|------------|------------|------------|---------------------------|------------|------------|------------|----------------|------------|------------|------------|
| Oppenheimer  Developing Markets Fund                |       | —                 |       | —     |       | 29,544,000                |       | 78.25      | %          | 29,544,000     |       | 78.25      | %          |
| Pacific Select  Fund                                |       | —                 |       | —     |       | 4,560,336                 |       | 12.08      | %          | 4,560,336      |       | 12.08      | %          |
| TA Idex  Oppenheimer Emerging Markets               |       | —                 |       | —     |       | 1,232,000                 |       | 3.26       | %          | 1,232,000      |       | 3.26       | %          |
| OFI Trust Company                                   |       | —                 |       | —     |       | 632,100                   |       | 1.67       | %          | 632,100        |       | 1.67       | %          |
| Baring  OppenheimerFunds PLC                        |       | —                 |       | —     |       | 588,380                   |       | 1.56       | %          | 588,380        |       | 1.56       | %          |
| OFI Institutional  Emerging Markets Eq. Fund LP     |       | —                 |       | —     |       | 406,870                   |       | 1.08       | %          | 406,870        |       | 1.08       | %          |
| Stichting  Pensionenfonds Hoogovens                 |       | —                 |       | —     |       | 334,942                   |       | 0.89       | %          | 334,942        |       | 0.89       | %          |
| Raytheon Company  Master Trust                      |       | —                 |       | —     |       | 135,540                   |       | 0.36       | %          | 135,540        |       | 0.36       | %          |
| Altria Corp Serv  Master Retirement Trust           |       | —                 |       | —     |       | 173,977                   |       | 0.46       | %          | 173,977        |       | 0.46       | %          |
| Pacific Funds PF  Oppenheimer Emerging Markets Fund |       | —                 |       | —     |       | 147,000                   |       | 0.39       | %          | 147,000        |       | 0.39       | %          |
| **Total**                                           | ** ** | **—**             | ** ** | **—** | ** ** | **37,755,145**            | ** ** | **100.00** | **%**      | **37,755,145** | ** ** | **100.00** | **%**      |

 

SunflowerParticipações is a holding company composed of several family members and ispart of the shareholders’ agreement. The breakdown on March 31, 2007 is asfollows:

 
| **Shareholders**               | ** ** | **Common Shares** | ** ** | **%**      | ** ** | **Preferred Shares** | ** ** | **%**      | ** ** | **Total**      | ** ** | **%**      | ** ** |
|--------------------------------|------------|------------------------|------------|------------|------------|---------------------------|------------|------------|------------|----------------|------------|------------|------------|
| Maria Aparecida  Cunha Fontana |       | 14,084,143             |       | 39.16      | %          | —                    |       | —     |       | 14,084,143     |       | 39.16      | %          |
| Attilio Fontana  Neto          |       | 5,716,562              |       | 15.89      | %          | —                    |       | —     |       | 5,716,562      |       | 15.89      | %          |
| Walter Fontana  Filho          |       | 9,458,032              |       | 26.30      | %          | —                    |       | —     |       | 9,458,032      |       | 26.30      | %          |
| Vania Cunha  Fontana           |       | 6,706,010              |       | 18.65      | %          | —                    |       | —     |       | 6,706,010      |       | 18.65      | %          |
| **Total**                      | ** ** | **35,964,747**         | ** ** | **100.00** | **%**      | **—**                | ** ** | **—** | ** ** | **35,964,747** | ** ** | **100.00** | **%**      |

** **

Stocks inpossession of Sadia’s Controllers, Board of Directors, Officers and the FiscalCommittee on March 31, 2007

 
| ** **                      | ** ** | **Common Shares** | ** ** | **%**     | ** ** | **Preferred Shares** | ** ** | **%**    | ** ** | **Total**       | ** ** | **%**     | ** ** |
|---------------------------------|------------|------------------------|------------|-----------|------------|---------------------------|------------|----------|------------|-----------------|------------|-----------|------------|
| Controllng  shareholders        |       | 136,936,749            |       | 53.28     | %          | 28,622,376                |       | 6.72     | %          | 165,559,125     |       | 24.24     | %          |
| Board of  directors members (*) |       | 1                      |       | 0.00      | %          | 10,003,400                |       | 2.35     | %          | 10,003,401      |       | 1.46      | %          |
| Officers                        |       | 12,472                 |       | 0.00      | %          | 3,145,207                 |       | 0.74     | %          | 3,157,679       |       | 0.46      | %          |
| Fiscal Committee                |       | —                 |       | 0.00      | %          | 528                       |       | 0.00     | %          | 528             |       | 0.00      | %          |
| **Total**                       | ** ** | **136,949,222**        | ** ** | **53.29** | **%**      | **41,771,511**            | ** ** | **9.81** | **%**      | **178,720,733** | ** ** | **26.17** | **%**      |

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(*)             Excludes shareholders who are members ofthe controlling group.

(*)Part of the shareholders’ agreement

****Significant changes inpercentage of ownership held by major shareholders****

In conformity with paragraph 1 of the article 12 ofthe CVM instruction 358/02, which attends to the obligation of disclosure ofinformation about a relevant position of an individual, or group of persons,jointly acting or representing a common interest, reaching a participation thatcorresponds to 5.0% of one type or a class of shares .

As of closing day of February 15, 2006 OppenheimerFunds,Inc. and its clients possessed, 10.8% of the Company’s preferred shares. Thisparticipation did not affect the Company’s control. In March 2007,OppenheimerFunds, Inc. and its clients possessed, 8.9% of the Company’spreferred shares.

On May 17, 2006 Sadia informed that in accordance withthe letter sent to the Company by Dodge & Cox that they possessed 5.4% inADRs and on November 16, 2006 this participation increased to 10.2% ofpreferred shares (in ADRs).This participation did not affect the Company’scontrol.

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On December 28, 2006 Sadia informed that in accordancewith the letter sent to CVM by Old Participações Ltda, the shareholder OsórioHenrique Furlan, on December 1st, 2006, transferred his 14,948,969 commonshares to Old Participações Ltda., which from this date on consolidates25,661,658 common shares, representing 10.0% of the Company’s 257,000,000common shares.

**Shareholders Agreement**

Members of the family ofthe founder, Mr. Attilio Fontana, established a shareholders’ agreement in May1977, amended in May 2005, when it was extended until May 2010. The agreementstrives to regulate the relationship between the family groups regarding thepurchase and sale of shares between themselves and with third parties as wellas to establish principles and rules for the exercise of block voting rights,investment policy and remuneration of capital. The agreement is reviewed everyfive years. Any family member who wishes to dispose of his or her shareholdingmust provide a right of first refusal to all parties to the shareholders’agreement.

In December 2006, theCompany’s shareholders’ agreement was composed of 42 participants andcontrolled 53.3% of Sadia’s voting shares.

### **B.Related Party Transactions**

The Company has operatingtransactions with Sadia International and Wellax, which are both the Company’svehicles for sales outside Brazil. Wellax is also acting as a financing entityof the Company by obtaining export-financing loans from international banks andinvesting the proceeds in debt securities.

Concórdia CVMCC is abrokerage firm that is responsible for identifying the optimal alternatives ofinvestments for the cash surplus generated by the Company and its subsidiaries.

### **C.Interests of Experts and Counsel**

*Not Applicable.*

## **ITEM 8. FINANCIAL INFORMATION**

### **A.Consolidated Statements and Other Financial Information**

See“Item 18. Financial Statements”

**Legal Proceedings**

The Company is party tocertain legal proceedings arising in the normal course of business, and hasmade provisions based on its best estimate of the probable losses that willultimately be incurred. The Company believes that the provisions made aresufficient to cover probable losses. In connection with certain legalproceedings, the Company has made judicial deposits, which will only be releasedupon a favorable legal judgment.

The Company’s labor forceis represented by collective bargaining agreements. All collective bargainingagreements are re-negotiated annually.

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Contingencies classifiedas having a probable risk of loss, for which provisions are recorded underliabilities, have the following balances:
| **R$ million** | ** ** | **2006** | ** ** | **2005** | ** ** |
|---------------------|------------|----------|------------|----------|------------|
|                |       |     |       |     |       |
| Tax                 |       | 42.9     |       | 42.2     |       |
| Civil               |       | 9.0      |       | 13.3     |       |
| Labor               |       | 24.1     |       | 16.4     |       |
| **Total**           | ** ** | **76.0** | ** ** | **71.9** | ** ** |

 

***Taxlitigation***

The main taxcontingencies involve the following cases:

a)             Income and social contribution taxes on net income

Provision for income andsocial contribution taxes on net income amounting to R$16,018, of whichR$11,283 recorded on the acquisition of the subsidiary Granja Rezende(incorporated in 2002), R$3,852 on withholding income tax on investments ofGranja Rezende and R$883 for other provisions.

b)             State VAT (ICMS)

The Company is adefendant in several administrative cases involving ICMS, mainly in the Statesof São Paulo, Rio de Janeiro and Amazonas (SUFRAMA), totaling a probablecontingency estimated at R$18,499.

c)             Other tax contingencies

Several cases related topayment of IOF (Tax on Financial Operations), PIS (Social Integration ProgramTax), COFINS (Tax for Social Security Financing) and others totaling a probableloss of R$8,371.

The Company has other taxcontingencies where the claimed amount is R$327,278, that were assessed aspossible losses by the Company’s legal counsel and management and therefore noprovision was recorded.

***Civillitigation***

The amount providedrepresents principally proceedings involving claims for indemnification forlosses and damages, including pain and suffering, arising from work-relatedaccidents and consumer relations.

The Company has othercivil contingencies where the claimed amount is R$28,141, that were assessed aspossible losses by the Company’s legal counsel and management and therefore noprovision was recorded.

***Laborclaims***

There are approximately2,481 labor claims against the Company. These claims are mainly related to overtime,and health exposure or hazard premiums, none of the amounts provided involve asignificant amount on an individual basis. The total amount of such laborclaims amount to R$41,441 and a provision of R$24,116 has been provided in theaccompanying financial statements based on historical information andrepresents the Company’s best estimate of the ultimate loss that will beincurred.

**Dividends and Dividend Policy**

***Payment of Dividends***

In accordance withBrazilian corporate law, the Company is required to hold an annual shareholders’meeting by April 30 of each year, during which an annual dividend will bedeclared In addition, interim dividends may be declared by the board ofdirectors. According to Brazilian corporate law, dividends must generally be paidto the holders of the relevant shares within 60 days of the date of declarationof the same dividend, unless a resolution of shareholders establishes anotherdate of payment, which in both cases, must occur before the end of the fiscalyear in which the dividend was declared. The Company’s by-laws require that anannual general shareholders’ meeting be held within four months of 

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the end of each fiscal year. At this meeting, amongother things, an annual dividend may be declared by decision of the shareholdersand at the recommendation of the executive officers, as approved by the boardof directors. The payment of annual dividends is based on the financialStatements relating to the fiscal year ending December 31. According to theCompany’s by-laws, dividends will be paid to shareholders within 60 days of thedate of declaration of the dividend, which must be effected before the end ofthe fiscal year in which the same dividend was declared. The requirement formandatory dividends may be met through payments either in the form of dividendsor of interest on shareholders’ equity. The Company is not required to adjustthe amount of the dividend for inflation for the period from the end of thelast fiscal year to the date of declaration of the same dividend. It istherefore possible that the amount, expressed in r*eais*,of the dividends paid to holders of preferred shares or common shares will bereduced due to inflation. Shareholders have up to three years from the date ofpayment of the dividend to demand payment of these as they relate to sharesheld by the same party, after which time the Company will be free from anyobligation to make such payments.

Payments of cashdistributions by the Company relating to the preferred shares underlying thepreferred ADRs will be made in Brazilian currency to the custodian, in itscapacity as representative of the depositary, which will then convert suchproceeds into U.S. dollars and will then remit the same U.S. dollars to thedepositary for distribution to holders of the related ADRs (See “Description ofAmerican Depositary Receipts”). Dividends paid to shareholders that are notBrazilian residents, including holders of preferred ADRs, are exempt fromwithholding of Brazilian income tax at source, except with regard to incomeprovisioned before 1996, which is subject to retention of 15% in lieu ofBrazilian taxation.

Shareholders that are notresident within Brazil must register with the Brazilian Central Bank so thatthe dividends resulting from sales, or other amounts, may be remitted inforeign currency outside Brazil. The preferred shares underlying the ADRs aremaintained within Brazil by the custodian, which acts as agent for thedepositary, which appears in the Company’s register as the beneficial owner ofthe shares.

***Notional Interest Charge Attributed to Shareholders’ Equity***

Brazilian companies arepermitted to pay limited additional amounts to holders of equity securities andtreat such payments as an expense for Brazilian income tax purposes. The amountof any such interest payment to holders of equity securities is generallylimited in respect of any particular year to (i) retained earnings for suchyear plus 50.0% of the pre-tax profits for such year multiplied by (ii) the *Taxa de Juros de Longo Prazo*interest rate (Long-TermInterest Rate -TJLP), which is the official rate for governmental long-termloans. The additional payment may take the form of supplemental dividends toshareholders. A 15.0% withholding tax is payable by the Company upondistribution of the notional interest amount. In 1996, the withholding tax waspayable by the Company and was accrued and charged to income. In 1997, thewithholding tax was paid by the Company on behalf of the shareholders. Suchpayments are also deductible for social contribution purposes.

Under Brazilian law, theCompany is obliged to distribute to shareholders an amount sufficient to ensurethat the net amount received by shareholders after payment by the Company ofBrazilian withholding taxes in respect of the distribution of notionalinterest, is at least equal to the mandatory distribution.

***Mandatory Dividends***

As established in itsby-laws, Sadia is required to distribute to shareholders in lieu of dividendsrelative to each fiscal year ended December 31, an amount of no less than 28.0%of the distributable amount (the mandatory dividend) in any given fiscal year(an amount of which shall include any interest on shareholders’ equity paid).In addition to the mandatory dividend, the board of directors may recommend thepayment of dividends to shareholders from other legally available resources,according to the terms of such law. Any payment of interim dividends orinterest on shareholders’ equity will be deducted from the amount of themandatory dividend for the same fiscal year. In accordance with Braziliancorporate law, if the board of directors decides, prior to the annualshareholders’ meeting, that the payment of the mandatory dividends for thepreceding fiscal year is not advisable, due to the financial condition of theCompany, then there will be no requirement to pay such mandatory dividends.Such a decision must be reviewed by an audit committee, and reported toshareholders and to the CVM. If a mandatory dividend is not paid, any retainedearnings must be allocated to a special reserve account. If 

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the Company does not incur the expected losses thatled to the withholding of the mandatory dividend, then the Company will berequired to pay the proper mandatory dividend.

***Dividend Policy***

The Company currently plansto pay dividends or interest on shareholders’ equity on its preferred andcommon shares to the amount of the distributions required in any fiscal year,subject to the determination by the board of directors that such distributionsare inadvisable due to the financial condition of the Company. In accordancewith its policy, the Company pays dividends twice a year, although the law doesnot require it to do so.

***Dividends Distributed***

Thefollowing table sets out the gross amount of dividends paid to the Company’sshareholders since 2001 in Brazilian currency and converted into U.S. dollarsat the commercial exchange rate on the date of payment of the same dividends.

**GrossHistorical Dividend Payments**
| Period     | ** ** | **Description**      | ** ** | **Payment Date** | ** ** | **R$ per  1,000  Preferred  Shares** | ** ** | **US$ per  1,000  Common  Shares** | ** ** | **R$ per  1,000  Preferred  Shares** | ** ** | **US$ per  1,000  Common  Shares** | ** ** | **US$ per  100 ADRs** | ** ** |
|------------|------------|----------------------|------------|-----------------------|------------|-------------------------------------------|------------|-----------------------------------------|------------|-------------------------------------------|------------|-----------------------------------------|------------|---------------------------------|------------|
| **2001**   |       | Interests  on Equity |       | 8/22/2001             |       | 32.40                                     |       | 29.40                                   |       | 12.84                                     |       | 11.65                                   |       | 11.00                           |       |
|            |       | Interests  on Equity |       | 2/14/2002             |       | 89.29                                     |       | 81.18                                   |       | 36.82                                     |       | 33.48                                   |       | 31.33                           |       |
| ** ** |       | Dividends            |       | 8/16/2002             |       | 17.60                                     |       | 16.00                                   |       | 5.57                                      |       | 5.06                                    |       | 5.67                            |       |
| **2002**   |       | Interests  on Equity |       | 2/14/2003             |       | 74.71                                     |       | 67.92                                   |       | 20.42                                     |       | 18.57                                   |       | 17.24                           |       |
| ** ** |       | Interests  on Equity |       | 2/21/2003             |       | 23.97                                     |       | 21.79                                   |       | 6.64                                      |       | 6.03                                    |       | 5.60                            |       |
| **2003**   |       | Interests  on Equity |       | 8/15/2003             |       | 71.40                                     |       | 64.90                                   |       | 23.85                                     |       | 21.68                                   |       | 20.14                           |       |
|            |       | Interests  on Equity |       | 2/16/2004             |       | 156.80                                    |       | 142.54                                  |       | 53.95                                     |       | 49.04                                   |       | 45.16                           |       |
| **2004**   |       | Interests  on Equity |       | 8/17/2004             |       | 77.88                                     |       | 70.80                                   |       | 25.97                                     |       | 23.61                                   |       | 21.92                           |       |
| ** ** |       | Interests  on Equity |       | 2/16/2005             |       | 133.93                                    |       | 121.75                                  |       | 51.66                                     |       | 46.96                                   |       | 43.61                           |       |
| ** ** |       | Interests  on Equity |       | 3/14/2005             |       | 13.13                                     |       | 11.94                                   |       | 4.77                                      |       | 4.34                                    |       | 4.01                            |       |
|            |       | Interests  on Equity |       | 8/17/2005             |       | 84.90                                     |       | 77.18                                   |       | 36.14                                     |       | 32.85                                   |       | 30.53                           |       |
| **2005**   |       | Interests  on Equity |       | 2/16/2006             |       | 174.52                                    |       | 174.52                                  |       | 82.41                                     |       | 82.41                                   |       | 69.54                           |       |
|            |       | Dividends            |       | 3/16/2006             |       | 39.12                                     |       | 39.12                                   |       | 18.57                                     |       | 18.57                                   |       | 18.39                           |       |
| **2006**   |       | Interests  on Equity |       | 8/17/2006             |       | 73.48                                     |       | 73.48                                   |       | 34.39                                     |       | 34.39                                   |       | 28.94                           |       |
| ** ** |       | Interests on Equity  |       | 2/16/2007             |       | 101.79                                    |       | 101.79                                  |       | 48.67                                     |       | 48.67                                   |       | 41.19                           |       |

 

***Calculation of Distributable Amount***

At each annual generalshareholder’s meeting, the board of directors must recommend the manner ofallocation of the Company’s income from the preceding fiscal year. According toBrazilian corporate law, the net income of a company after deduction of incometax and social contributions relative to the same fiscal year, and net of anylosses accumulated in prior fiscal years, and amounts allocated to employee andmanagement profit-shares, will represent the net income of the Company,following (i) the deduction of amounts allocated to the constitution of thelegal reserve, (ii) the deduction of amounts allocated to the constitution ofother reserves, following the principles established by the Company and inaccordance with the applicable legislation (as hereinafter discussed), and(iii) the increase by the reversion of reserves constituted in previous fiscalyears. This net income will be available for distribution to shareholders (thusconstituting the adjusted net profit, designated here as the distributableamount) in any fiscal year.

*Legal Reserve*

According to Braziliancorporate law, the Company is required to maintain a legal reserve to which itmust allocate 5.0% of its net income in each fiscal year, until the amount ofthis reserve is equal 

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to 20.0% of the paid-in share capital, or until thesum of this reserve and all other capital reserves reaches 30.0% of the paid-inshare capital. Net losses, if any, may be debited against the legal reserve.

*Discretionary Reserve*

According to Braziliancorporate law, the Company may decide to assign on a discretionary basis aportion of the net income to the limit established in its by-laws (with suchreserves collectively designated as discretionary reserves). The Company’sby-laws established a special fund for research and development to which it mayallocate up to 15.0% of its net income per year, until the amount of this fundis equivalent to 10.0% of its paid-in share capital.

*Contingency Reserve*

According to Braziliancorporate law, the Company may also decide to assign a portion of the netincome to a contingency reserve against likely losses in future fiscal years.Any amount thus assigned in a previous year must be (i) reversed in the fiscalyear in which the loss was envisaged, if this loss does not effectively occur,or (ii) debited, if the foreseen event actually materializes. At the presenttime, Sadia has no contingency reserve. There are no clearly defined rules onthe extension of the future period for which a loss may be foreseen for thepurposes of constituting a contingency reserve. Its determination thus dependson circumstances and the nature of each particular event, and will be decidedat the discretion of the board of directors.

*Investment Project Reserve*

According to Braziliancorporate law, a portion of the net income may also be assigned for anydiscretionary appropriations for plant expansions or any other investmentprojects, the amount of which is based on the capital budget previouslypresented by management and approved by shareholders. Following the conclusionof the corresponding investment projects, the Company may withhold the relevantappropriation until the shareholders vote to transfer all or part of thecapital reserve or retained earnings. The Company’s by-laws effective as ofMarch 31, 2000, contains provisions for a special expansion reserve, to whichat least 15.0% and at most 60.0% of the net income (formerly 5.0% and 15.0%,respectively) must be allocated each year, until the amount of this reserve isequivalent to 70.0% of its paid-in share capital (from former 30.0%).

*Unrealized Income Reserve*

According to Braziliancorporate law, if the amount of unrealized income (according to the definitionbelow) in any fiscal year exceeds the allocated amount (i) of the legalreserve, (ii) of the discretionary reserves, (iii) of the contingency reserveand (iv) of the investment project reserve, the excess amount may be allocatedto an unrealized income reserve. Unrealized income in any fiscal year willrepresent the sum (i) of monetary correction of the balance sheet (until 1995)during the fiscal year, (ii) income from subsidiaries or associated companiesfor the fiscal year in question, (iii) income from installment sales to bereceived after the end of the subsequent fiscal year.

*Fiscal Incentive Investment Reserve*

According to the terms ofBrazilian tax legislation, a portion of net income may also be assigned to afiscal incentive investment reserve for amounts corresponding to the Company’sincome tax deductions generated by credits for certain investments that areapproved by the government. The reserve may only be used to acquire shares incompanies that are developing specific projects that are approved by thegovernment.

Brazilian corporate lawstates that all discretionary allocations of net income including discretionaryreserves, the contingency reserve, the unrealized income reserve and theinvestment project reserve, will be subject to approval by shareholders at theannual meeting, and may be transferred to the Company’s capital or used to paydividends in subsequent fiscal years. The fiscal incentive investment reserveand the legal reserve are also subject to approval by shareholders at the annualmeeting and may be transferred to the Company’s capital, but may not be used topay dividends in subsequent fiscal years.

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The calculation of thenet income of the Company, and the allocations to reserves in any fiscal year,are determined on the basis of financial statements prepared in accordance withBrazilian corporate law and Brazilian GAAP, which differs from the financialstatements prepared in accordance with United States generally acceptedaccounting principles. The financial statements presented herein were preparedin accordance with U.S. GAAP, and while the allocations to reserves and thedividends are reflected in these consolidated financial statements, investorswill not be able to calculate the amounts of these allocations, or of dividendsdue, on the basis of the same consolidated financial statements.

### **B.Significant Changes**

Nosignificant change has occurred since the date of the annual financialstatements included in this annual report.

## **ITEM 9. THE OFFER AND LISTING**

### **A.Offer and listing details**

OnDecember 31, 2006, the Company’s share capital consisted of 257,000,000 commonshares and 426,000,000 preferred shares.

Bothtypes of the Company’s shares are registered shares and are publicly traded inBrazil on the São Paulo Stock Exchange since 1971, under the ticker symbolsSDIA3 and SDIA4.

In June 2001, the Companyadhered to the “Level 1 of Corporate Governance Requirements” in Bovespa,certifying its commitment to transparency and fair disclosure of information.

To become a Level 1 company,an issuer must agree to:

·              ensure that shares of the issuerrepresenting 25% of its total capital are effectively available for trading;

·              adopt offering procedures thatfavor widespread ownership of shares whenever making a public offering;

·              comply with minimum quarterlydisclosure standards;

·              comply with the disclosure ofshareholders agreement and stock options programs;

·              provide an annual calendar withcorporate events

·              provide cash flow statements

·              follow stricter disclosurepolicies with respect to transactions made by controlling shareholders,directors and officers involving securities issued by the issuer;

In April 2001, theCompany listed its American Depositary Receipts (ADRs) program on the New YorkStock Exchange, providing investors an alternate channel to buy its stocks.Currently, one Sadia ADR [SDA] is equivalent to 10 preferred shares.

The Company’s preferredshares are also traded on the LATIBEX, under the ticker symbol XSDI sinceNovember 2004. The LATIBEX is an electronic market created in 1999 by theMadrid stock exchange in order to enable trading of Latin American equitysecurities in euro denomination.

In September 2005, due tothe improved liquidity of its preferred shares, Sadia became the first companyin its segment to be part of the theoretical portfolio of the São Paulo StockExchange Index (IBOVESPA).

In December 2005, Sadiagranted its preferred shareholders the right to be included in a publicoffering resulting from an eventual change of Sadia’s control (tag alongrights), and thus entitle their holders to receive a price equal to 80% of theamount paid per common share that is an integral part of the control block. Wealso eliminated the right to a dividend, per preferred share, 10.0% higher thanthat of each common share.

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In2006, the Company’s preferred shares represented 50.4% of the total volumetraded among the food sector stocks in Bovespa, with a daily average financialvolume of R$14.7 million, which represented a 51.7% increase as compared to the2005 financial volume.

In2006, Sadia’s ADRs had a daily average financial volume of US$1.9 million whilein 2005, Sadia’s ADRs had a daily average financial volume of US$686.9thousand. The number of shares traded in NYSE represented 16.3% of the totalnumber of Sadia’s preferred shares traded from 11.5% in 2005.

**Price Information**

Thetables below present, for the indicated periods, the minimum and maximum pricesfor the preferred shares on Bovespa in Brazilian *reais*.

|            | ** ** | **Preferred Share Price  (R$ per Share)** | ** ** |
|------------|------------|---------------------------------------------------------------|------------|
| ** ** | ** ** | **High**                                                      | ** ** | **Low** | ** ** |
| **2002**   |       | 1.36                                                          |       | 1.01 |   |
| **2003**   |       | 3.98                                                          |       | 1.13 |   |
| **2004**   |       | 5.98                                                          |       | 3.56 |   |
| **2005**   |       | 6.90                                                          |       | 3.56 |   |
| **2006**   |       | 7.6                                                           |       | 5.18 |   |

*Source: Economatica*

 

|                | ** ** | **Preferred Share Price  (R$ per Share)** | ** ** |
|----------------|------------|---------------------------------------------------------------|------------|
| ** **     | ** ** | **High**                                                      | ** ** | **Low** | ** ** |
| **2005**       |       |                                                          |       |   |   |
| First Quarter  |       | 5.95                                                          |       | 4.30 |   |
| Second Quarter |       | 4.62                                                          |       | 3.56 |   |
| Third Quarter  |       | 6.70                                                          |       | 4.46 |   |
| Fourth Quarter |       | 6.90                                                          |       | 5.02 |   |
| **2006**       |       |                                                          |       |   |   |
| First Quarter  |       | 7.60                                                          |       | 5.64 |   |
| Second Quarter |       | 6.52                                                          |       | 5.18 |   |
| Third Quarter  |       | 6.28                                                          |       | 5.27 |   |
| Fourth Quarter |       | 7.49                                                          |       | 6.05 |   |
| **2007**       |       |                                                          |       |   |   |
| First Quarter  |       | 8.27                                                          |       | 6.40 |   |

*Source: Economatica*

 

|            | ** ** | **Preferred Share Price  (R$ per Share)** | ** ** |
|------------|------------|---------------------------------------------------------------|------------|
| ** ** | ** ** | **High**                                                      | ** ** | **Low** | ** ** |
| **Dec-06** |       | 7.49                                                          |       | 6.67 |   |
| **Jan-07** |       | 7.41                                                          |       | 6.50 |   |
| **Feb-07** |       | 7.15                                                          |       | 6.40 |   |
| **Mar-07** |       | 8.27                                                          |       | 6.59 |   |
| **Apr-07** |       | 8.80                                                          |       | 7.60 |   |
| **May-07** |       | 9.87                                                          |       | 8.80 |   |

*Source: Economatica*

 

Thetables below present, for the indicated periods, the minimum and maximum pricesfor the Sadia’s ADR on the New York Stock Exchange in dollars.

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|            | ** ** | **ADR Share Price  (US$ per Share)** | ** ** |
|------------|------------|----------------------------------------------------------|------------|
| ** ** | ** ** | **High**                                                 | ** ** | **Low** | ** ** |
| **2002**   |       | 5.67                                                     |       | 2.66 |   |
| **2003**   |       | 13.92                                                    |       | 3.18 |   |
| **2004**   |       | 22.41                                                    |       | 11.35 |   |
| **2005**   |       | 30.50                                                    |       | 14.45 |   |
| **2006**   |       | 34.70                                                    |       | 23.45 |   |

*Source: Economatica*

 

|                | ** ** | **ADR Share Price  (US$ per Share)** | ** ** |
|----------------|------------|----------------------------------------------------------|------------|
| ** **     | ** ** | **High**                                                 | ** ** | **Low** | ** ** |
| **2005**       |       |                                                     |       |   |   |
| First Quarter  |       | 22.02                                                    |       | 15.94 |   |
| Second Quarter |       | 19.36                                                    |       | 14.45 |   |
| Third Quarter  |       | 29.69                                                    |       | 18.75 |   |
| Fourth Quarter |       | 30.50                                                    |       | 22.11 |   |
| **2006**       |       |                                                     |       |   |   |
| First Quarter  |       | 34.70                                                    |       | 25.42 |   |
| Second Quarter |       | 31.20                                                    |       | 23.45 |   |
| Third Quarter  |       | 29.13                                                    |       | 24.70 |   |
| Fourth Quarter |       | 34.54                                                    |       | 27.85 |   |
| **2007**       |       |                                                     |       |   |   |
| First Quarter  |       | 40.45                                                    |       | 30.43 |   |

*Source: Economatica*

 

|            | ** ** | **ADR Share Price  (US$ per Share)** | ** ** |
|------------|------------|----------------------------------------------------------|------------|
| ** ** | ** ** | **High**                                                 | ** ** | **Low** | ** ** |
| **Dec-06** |       | 34.54                                                    |       | 30.70 |   |
| **Jan-07** |       | 34.69                                                    |       | 30.66 |   |
| **Feb-07** |       | 34.01                                                    |       | 30.43 |   |
| **Mar-07** |       | 40.45                                                    |       | 31.08 |   |
| **Apr-07** |       | 43.01                                                    |       | 37.36 |   |
| **May-07** |       | 51.30                                                    |       | 43.85 |   |

*Source: Economatica*

 

**Share Rights**

Sadia’s shares areentitled to a compulsory minimum dividend of 28.0% of the net income for theyear, They shall participate equally in capital increases derived from netincome and reserves, revaluation of assets and yearly capital restatement.

Only common shares areentitled to vote the resolutions of the General Shareholders Meeting.

Preferred shares do nothave voting rights, but enjoy the following advantages:

·              priorityin the proportional, noncumulative receipt of 28.0% of the net income for theyear, as minimum dividend, competing in equal terms with common shares in anydividend allocated above that percentage;

·              rightto be included in the public offering for the disposal of the shareholdingcontrol under the conditions set forth in art. 254-A, with the wording given byLaw 10303, dated October 31, 2001, which 

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guarantees a price atleast equal to 80.0% of the amount paid per common share of the integral partof the control block;

·              priorityin capital reimbursement in case of liquidation of the Company.

Preferred shares may acquire voting rights if theCompany fails to pay, for at least three consecutive years, the minimumdividend to which they are entitled and such right shall continue up to thepayment of the first next dividend.

**Restrictions on Foreign Investment**

According to Sadia’sBylaws, 51.0% of the voting capital of the Company must be held by Braziliancitizens. The right to convert dividend payments and proceeds from the sale ofpreferred shares into foreign currency and to remit such amounts outside Brazilis subject to exchange control restrictions and foreign investment legislationwhich generally are subject to several mechanisms that permits a foreigninvestor to trade directly in Bovespa.

Until March 2000, thismechanism was known as the Annex IV Regulations, in a reference to Annex IV ofResolution No. 1,289 of the National Monetary Council (the “Annex IVRegulations”). Currently, this mechanism is regulated by Resolution No. 2,689,of January 26, 2000, of the National Monetary Council and by Instruction No.325, of January 27, 2000, of the CVM, as amended (the “2,689 Regulation”). The2,689 Regulation, which became effective on March 31, 2000, sets forth newrules concerning foreign portfolio investments in Brazil.

Foreign investmentsregistered under Annex IV Regulations had to be conformed to the 2,689Regulation by September 30, 2000. Such rules allow foreign investors to investin almost all of the financial assets and to engage in almost all transactionsavailable in the Brazilian financial and capital markets, if some requirementsare fulfilled.

In accordance with the2,689 Regulation, foreign investors are individuals, legal entities, mutualfunds and other collective investments resident, domiciled or headquarteredabroad. The 2,689 Regulation prohibits the offshore transfer or assignment ofthe title of the securities, except in the cases of (i) corporatereorganization effected abroad by a foreign investor or (ii) inheritance.

Pursuant to the 2,689Regulation, foreign investors must: (i) appoint at least one representative inBrazil with powers to perform actions relating to the foreign investment; (ii)fill in the appropriate foreign investor registration form; (iii) obtainregistration as a foreign investor with CVM; and (iv) register the foreigninvestment with the Central Bank.

The securities and otherfinancial assets held by the foreign investor pursuant to the 2,689 Regulationmust be registered or maintained in deposit accounts or under the custody of anentity duly licensed by the Central Bank or by the CVM or be registered inregister, clearing and custody systems authorized by the Central Bank or by theCVM. In addition, securities trading is restricted to transactions carried outin exchanges or organized over-the-counter markets licensed by the CVM.

All investments made by aforeign investor under the 2,689 Regulation will be subject to an electronicregistration with the Central Bank. Resolution No. 1,927 of the NationalMonetary Council, which is the Amended and Restated Annex V to Resolution No. 1,289(the “Annex V Regulations”), provides for the issuance of depositary receiptsin foreign markets in respect of shares of Brazilian issuers. The ADSs havebeen approved under the Annex V Regulations by the Central Bank and the CVM.Accordingly, the proceeds from the sale of the ADSs by ADR holders outsideBrazil are free of Brazilian foreign investment controls and holders of theADSs will be entitled to favorable tax treatment. According to the 2,689Regulation, foreign investments registered under Annex V Regulations may betransferred to the new investment system created by Resolution No. 2,689 andvice-versa, with due regard to the conditions set forth by the Central Bank andby the CVM.

Payments of dividends andother cash distributions by the Company relating to the preferred sharesunderlying the Preferred ADRs will be made in Brazilian currency to thecustodian, in its capacity as representative of the depositary, which will thenconvert such proceeds into U.S. dollars and will then remit such U.S. dollarsto the depositary for distribution to holders of the related preferred ADSs. Ifthe custodian is not immediately able to convert the dividends in Braziliancurrency to U.S. dollars, then the holders of the preferred ADSs may beadversely affected by devaluation or other fluctuations in exchange rates,before it is possible to convert and remit these dividends. Fluctuations in theexchange rate between 

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the *real*and the U.S. dollar may also affect the value in U.S. dollars, equivalent tothe price in *reais*, of the preferred sharestraded on Brazilian stock exchanges.

As of December 31, 2006 there were approximately 7U.S. beneficial owners of the ADSs (based on their addresses only),representing approximately 16.3 % of the total preferred shares**.**

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

Not Applicable.

### **C.Markets**

**Tradingon the Brazilian Stock Exchanges**

Of Brazil’s stock exchanges, *Bovespa*has been the most significant in recent years. During 2006, the Bovespaaccounted for almost the total of the trading value negotiated in Brazil.

Bovespa is a non-profit entity owned by its memberbrokerage firms. Trading on Bovespa is limited to member brokerage firms and alimited number of authorized non-members. There is also trading in theso-called after-market. Only shares that were traded during the regular tradingsession of the day may be traded in the after-market of the same day.

There are no specialists or market makers for theCompany’s shares on Bovespa. The CVM and Bovespa have discretionary authorityto suspend trading in shares of a particular issuer under certaincircumstances. Trading in securities listed on Bovespa may be effected off theexchange under certain circumstances, although such trading is very limited.

In December 2006, the aggregate market capitalizationof the companies listed on Bovespa Index was approximately US$ 552.2 billion.Although any of the outstanding shares of a listed company may trade onBovespa, in most cases less than half of the listed shares are actuallyavailable for trading by the public, the remainder being held by small groupsof controlling persons that rarely trade their shares. For this reason, datashowing the total market capitalization of Bovespa tend to overstate theliquidity of the Brazilian equity securities market. The Brazilian equitysecurities market is relatively small and illiquid compared to major worldmarkets.

Settlement of transactions is effected threebusiness days after the trade date without adjustment of the purchase price forinflation. Payment for shares is made through the facilities of a separateclearinghouse, named *Companhia Brasileira deLiquidação e Custódia*(CBLC),which maintains accounts for member brokerage firms. The seller is ordinarilyrequired to deliver the shares to the exchange on the second business dayfollowing the trade date. The CBLCis controlled by clearing agents, such as member brokerage firms and banks, andBovespa.

According to Bovespa, international investors areallowed to hold any asset class available to domestic investors in Brazil.

According to the CMN (Brazilian Monetary Council)Resolution 2,689, since international investors are not established or residentin the country, it is necessary to hire an institution to act as:

·              LegalRepresentative, who will responsible to present all the registrationinformation of the investor to the Brazilian authorities. When therepresentative is an individual or a non-financial corporation, the investormust indicate a financial institution duly authorized by the Central Bank thatwill be jointly and severally responsible for the representative’s obligation.

·              FiscalRepresentative, who will be responsible for taxes and fiscal issues on behalfof the investor before the Brazilian Authorities.

·              Custodian,who will be responsible to hold updated reports and control all the assets ofthe international investor in segregated accounts, and provide this informationanytime it is required, to the Authorities and to the investor.

The financial assets and securities traded as wellas other forms of financial applications must be registered, held in custody ormaintained in deposit accounts at an appropriated authorized institutionauthorized by the CVM or Central Bank.

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International investments in equity instruments aretax exempt on capital gains and on CPMF. Investments from countries that do nottax income or where tax rates are lower than 20% are taxed as domesticinvestors. There is no minimum permanence period requirement for theinvestments in Brazil.

More information can be found on the Bovespawebsite: www.bovespa.com.br.

**Regulationof Brazilian Securities Markets**

The Brazilian securities markets are regulated bythe CVM, which has authority over stock exchanges and the securities markets ingeneral, and by the Brazilian CentralBank, which has, among other powers, licensing authority over brokerage firmsand regulates foreign investment and foreign exchange transactions. TheBrazilian securities market is governed by Law no. 6,385 dated December 7,1976, as amended (Brazilian securities law) and the Brazilian corporate law(Law no. 6,404 dated December 15, 1976, as amended) (Brazilian corporate law).

Law 10,303 of October 31, 2001, amended Law no6,385/76 and Law no 6,404/76. The most important changes were (i) theconversion of CVM into an autonomous governmental agency linked to the Ministryof Finance, with legal independence and separate assets and liabilities; (ii)the requirement of greater disclosure by listed companies; (iii) the tag-alongright to minority common shareholders in the event of change in control of alisted company; (iv) the right of preferred shareholders with non-voting rightsor restricted voting rights representing at least 10% of the total stock of alisted company to elect one board member and his alternate; (v) the right ofthe minority common shareholders to also elect one board member; and (vi) thepreferred shares will only be traded in the stock market if they have at leastone of the rights mentioned below: (a) priority in the receipt of dividendscorresponding to at least 3% of the shares’ net worth based on the lastapproved balance sheet of the company; (b) the right to receive dividends atleast 10% higher than the dividend assigned to each common share; or (c) thetag-along right in the event of change in the control of the company.

Under the Brazilian corporate law, a company iseither listed, a *companhia aberta*, such as theCompany, or private, a *companhia fechada*.All listed companies are registered with the CVM and are subject to reportingrequirements. A company registered with the CVM may have its securities tradedeither on Bovespa or in the Brazilian over-the-counter markets (Brazilian OTC).The shares of a listed company, including the Company, may also be tradedprivately subject to certain limitations.

There are certain cases in which the disclosure ofinformation to the CVM, Bovespa, or even to the public is required. Theseinclude (i) the direct or indirect acquisition by an investor of at least 5%(five percent) of any class or type of shares representing the capital stock ofa listed company, (ii) the sale of shares which represents the transfer ofcontrol of a listed company and (iii) the occurrence of a material event to thecorporation.

CVM issued Instruction No 361, of March 5, 2002,which regulates tender offers mainly when the following events occur: (i)delisting of public companies; (ii) increase in the equity interest by thecontrolling shareholder; and (iii) transfer of control of a public company.

To be listed on Bovespa, a company must apply forregistration with the CVM and Bovespa. Once this exchange has admitted acompany to listing and the CVM has accepted its registration as a listedcompany, its securities may be traded in Bovespa, as long as the companycomplies with the minimum requirements of this exchange.

The Brazilian OTC consists of direct trades betweenindividuals in which a financial institution registered with the CVM serves asintermediary. No special application, other than registration with the CVM, isnecessary for securities of a listed company to be traded in the Brazilian OTC.The CVM requires that it be given notice of all trades carried out in theBrazilian OTC by the respective intermediaries.

Trading in securities on Bovespa may be suspended atthe request of a company in anticipation of the announcement of a materialevent. Trading may also be suspended on the initiative of the exchange or theCVM, among other reasons, based on or due to a belief that a company hasprovided inadequate information regarding a material event or has providedinadequate responses to the inquiries by the CVM or the exchange.

The Brazilian securities markets are governedprincipally by Brazilian securities law, by Brazilian corporate law and byregulations issued by the CVM and the *Conselho MonetárioNacional* (National Monetary Council). These laws and regulations,among others, provide for disclosure 

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requirements, restrictions on insider trading and price manipulation, andprotection of minority shareholders. Although many changes and improvementshave been introduced, the Brazilian securities markets are not as highlyregulated and supervised as the U.S. securities markets or markets in certainother jurisdictions.

### **D.Selling Shareholders**

Not Applicable.

### **E.Dilution**

Not Applicable.

### **F.Expenses of Issue**

NotApplicable.

## **ITEM10. ADDITIONAL INFORMATION**

### **A.Share capital**

Notapplicable.

### **B.Memorandum and Articles of Association**

Theinformation required for this item was included in the Registration Statementon Form 20-F filed on March 17, 2001 (Commission file number 0-31072).

### **C.Material Contracts**

Notapplicable.

### **D.Exchange Controls**

Priorto March 14, 2005, there were two principal foreign exchange markets in Brazil,in which rates were freely negotiated, but could be strongly influenced byCentral Bank intervention:

·              thecommercial rate exchange market, which was dedicated principally to trade andfinancial foreign exchange transactions, such as the buying and selling ofregistered investments by foreign entities; and

·              thefloating rate exchange market that was generally used for transactions notconducted through the commercial rate exchange market.

OnMarch 4, 2005, the National Monetary Council (Conselho Monetário Nacional)enacted Resolution No. 3,265, pursuant to which the commercial rate exchangemarket and the floating rate exchange market were unified into a sole exchangemarket, effective as of March 14, 2005. The new regulation allows, subject to certain procedures and specificregulatory provisions, the purchase and sale of foreign currency by individualsor legal entities, without limitation as to amount, provided that theunderlying transaction was legal and based on valid economic grounds.  Foreign currencies may only be purchased throughfinancial institutions domiciled in Brazil and authorized to operate in theexchange market.

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BetweenMarch 1995 and January 1999, the Central Bank permitted the gradual devaluationof the real against the U.S. dollar pursuant to an exchange rate policy thatestablished a band within which the real-U.S. dollar exchange rate couldfloat.  Responding to pressure on thereal, on January 13, 1999, the Central Bank widened the foreign exchange bandand on January 15, 1999, allowed the real to float.  As of April 17, 2007, the PTAX-800 exchange ratefor purchasing U.S. dollars was R$2.035 to US$1.00.

TheCompany will make all cash distributions on Preferred Shares in reais andconsequently exchange rate fluctuations may affect the U.S. dollar amountsreceived by the holders of Preferred ADRs on conversion by the Depositary.Fluctuations in the U.S. dollar/*real*exchangerate may also affect the U.S. dollar equivalent of the Preferred Share price in*reais* on the Brazilian stock exchanges.

### ****E. Taxation****

Thefollowing summary contains a description of the principal Brazilian and U.S.federal income tax consequences of the ownership and disposition of a preferredshare and a preferred ADS. It does not purport to be a comprehensivedescription of all the tax considerations that may be relevant to a decision topurchase those securities. In particular, this summary deals only with holdersthat will hold preferred shares or preferred ADSs as capital assets and doesnot address the tax treatment of a holder that may be subject to special taxrules (such as tax-exempt entities, banks or other financial institutions,insurance companies, broker-dealers, traders in securities that elect to use amark-to-market method of accounting for their securities holdings, regulatedinvestment companies, real estate investment trusts, certain former U.S.citizens or residents, investors that will hold preferred shares or preferredADSs as part of a straddle, hedge, conversion or constructive sale transactionor other integrated transaction for tax purposes, investors that have afunctional currency other than the U.S. dollar, investors liable foralternative minimum tax,  partnershipsand other pass-through entities, and investors that own or are treated asowning 10.0% or more of the voting shares of the company). Each prospectivepurchaser of a preferred share or preferred ADS should consult his own taxadvisers as to the personal tax consequences of his investment, which may varyfor investors in different tax situations.

Thesummary is based upon tax laws of Brazil and the United States and applicableregulations, judicial decisions and administrative pronouncements as in effecton the date hereof. Those authorities are subject to change or newinterpretations, possibly with retroactive effect. Although there is no incometax treaty between Brazil and the United States at this time, the taxauthorities of the two countries have had discussions that may culminate in atreaty. No assurance can be given, however, as to whether or when a treaty willenter into force or how it will affect the holders of preferred shares orpreferred ADSs. This summary is also based upon the representations of thedepositary and on the assumption that each obligation in the deposit agreementrelating to the preferred ADSs and any related documents will be performed inaccordance with its terms.

*Brazilian Tax Considerations*

Thefollowing discussion summarizes the material Brazilian tax consequences of theacquisition, ownership and disposition of preferred shares or preferred ADSs bya holder that is not domiciled in Brazil for purposes of Brazilian taxationand, in the case of a holder of preferred shares which has registered itsinvestment in such securities with the Central Bank as a U.S. dollar investment(in each case, a non-Brazilian holder). The following discussion does notspecifically address all of the Brazilian tax considerations applicable to anyparticular non-Brazilian holder, and each non-Brazilian holder should consulthis or her own tax advisor concerning the Brazilian tax consequences of aninvestment in any of such securities.

***Taxation of Dividends***

Dividendspaid with respect to income earned since January 1, 1996, including dividendspaid in kind (i) to the depositary in respect of the preferred sharesunderlying the preferred ADSs or (ii) to a non-Brazilian holder in respect ofpreferred shares, are not subject to any withholding tax in Brazil. The currenttax legislation eliminated the then existing 15.0% withholding tax on dividendspaid to companies, resident individuals or non-residents in Brazil.Accordingly, dividends with respect to profits generated on or after January 1,1996 are not subject to withholding tax in Brazil. Dividends related to profitsgenerated until December 31, 1993 will be subject to Brazilian withholding taxof 25.0%. 

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Dividends relatedto profits generated between January 1, 1994 and December 31, 1995 will besubject to Brazilian withholding tax of 15.0%,****if distributed expenses on dividends paid asinterest on equity, are neither deductible from the calculation basis ofcorporate income tax nor from the social contribution on income.****

***Taxation of Gains***

Gainsrealized outside Brazil, until December 31st, 2003, by a non-Brazilian holderon the disposition of Preferred ADSs to another non-Brazilian holder are notsubject to Brazilian tax. From January 1st, 2004 on, investments made inpermanent assets by non resident are subject to the payment of income tax overcapital gains. The gain will be charged at a 15.0% or 25.0% rate if thebeneficiary is a tax haven country resident or from on any jurisdiction wheretaxing rates are below 20.0%. The taxable capital gain is calculated on thedifference from the selling value of the asset and the declared value toBrazilian Central Bank (in foreign currency) by the time of registration. As ofJanuary 1, 2005 operations of stock, mercantile and future exchange aresubjected to a withholding tax at a rate of 0,005% according to Law nr. 11,033of December 21, 2004. This value is deductible from withholding tax paid uponcapital gains. Pursuant the same act stock operations held by an individualwith a monthly value up to R$ 20,000 will be exempt of the withholding tax.

Thewithdrawal of preferred shares in exchange for Preferred ADSs is not subject toBrazilian tax. The deposit of preferred shares in exchange for Preferred ADSsis not subject to Brazilian tax if the preferred shares are registered by theinvestor or its agent under the 2,689 Regulation. In the event the preferredshares are not so registered, the deposit of preferred shares in exchange forPreferred ADSs may be subject to Brazilian tax at the rate of 15.0% or 25.0%.On receipt of the underlying preferred shares, a non-Brazilian holder whoqualifies under the 2,689 Regulation will be entitled to register the U.S.dollar value of such shares with the Central Bank as described below.

Non-Brazilianholders are subject to tax in Brazil on gains realized on sales of preferredshares that occur abroad or on the proceeds of a redemption of, or aliquidating distribution with respect to, preferred shares. When the preferredshares are registered under the 2,689 Regulation, the non-Brazilian holdercannot transfer or assign them abroad. As a general rule, non-Brazilian holdersare subject to a withholding tax imposed at a rate of 15.0% or 25.0% on gainsrealized on sales or exchanges of preferred shares that occur in Brazil to orwith a resident of Brazil, outside of Bovespa. From January 2004, on thistaxation is also applicable to gains accrued in transactions conducted bynon-Brazilian holders. Non-Brazilian holders are subject to withholding tax atthe rate of 20.0% on gains realized on sales or exchanges in Brazil ofpreferred shares that occur on Bovespa unless such sale is made under the 2,689Regulation. Gains realized arising from transactions on Bovespa by an investorunder the 2,689 Regulation are not subject to tax (except as described below).The gain realized as a result of a transaction on Bovespa is the differencebetween the amount in Brazilian currency realized on the sale or exchange andthe acquisition cost measured in Brazilian currency, without any correction forinflation, of the shares sold. The gain realized as a result of a transactionthat occurs other than on Bovespa will be the positive difference between theamount realized on the sale or exchange and the acquisition cost of thepreferred shares, both such values to be taken into account in reais. There aregrounds, however, to hold that the gain realized should be calculated based onthe foreign currency amount registered with the Central Bank. There can be noassurance that the current preferential treatment for holders of preferred ADSsand for certain non-Brazilian holders of preferred shares under the 2,689Regulation will continue in the future or that such treatment will not bechanged in the future. As of January 1, 2000, the preferential treatment underthe 2,689 Regulation is no longer applicable if the non-Brazilian holder of thepreferred ADSs or preferred shares is resident of a tax haven, i.e., countrieswhich do not impose income tax or where such tax is imposed at a rate lowerthan 20% in accordance with Law No. 9,959, of January 27, 2000. In other words,gains realized by such holder on the sale or exchange in Brazil that occur inthe spot market of shares traded on a Brazilian stock exchange will be taxed ata rate of 20.0%. Any exercise of preemptive rights relating to the preferredshares will not be subject to Brazilian taxation. Any gain on the sale orassignment of preemptive rights relating to the preferred shares by thedepositary on behalf of holders of preferred ADSs will be subject to Brazilianincome taxation at the rate of 15.0% or 25.0%, unless such sale or assignmentis performed within Bovespa, and with the investments registered under 2,689Resolution or Annex V from Central Bank, in which the gains are exempt fromwithholding income tax. Any gain on the sale or assignment of preemptive rightsrelating to preferred shares, will be subject to Brazilian income tax at the samerate applicable to the sale or disposition of preferred shares. The maximumrate of such tax is currently 15.0%, except for non-resident holders domiciledin tax haven countries, where rates are 25.0%.

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***Notional Interest Charge Attributed toShareholder’s Equity***

Distributionsof interest on equity in respect of the preferred shares as an alternative formof payment to shareholders who are either Brazilian residents or non-Brazilianresidents, including holders of ADSs, are subject to Brazilian withholding taxat the rate of 15.0%. In case the non-Brazilian resident is a tax haven countryresident or is under the jurisdiction of a region where tax rate is below20.0%, he will be entitled to pay a rate of 25.0%. Since 1996, such paymentshave been tax deductible by the Company. Since 1997, the payments have alsobeen deductible in determining social contributions and income tax by theCompany as long as the payment of a distribution of interest is approved at theCompany’s general meeting. The board of directors of the Company alone maydetermine the distribution of interest on shareholders’ equity. No assurancecan be given that the board of directors of the Company will not determine thatfuture distributions of profits be made by means of interest on shareholders’equity instead of by means of dividends.

***Other Brazilian Taxes***

Thereare no Brazilian inheritance, gift or succession taxes applicable to theownership, transfer or disposition of preferred shares or preferred ADSs by anon-Brazilian holder except for gift and inheritance taxes which are levied bysome States of Brazil on gifts made or inheritances bestowed by individuals orentities not resident or domiciled in Brazil or domiciled within the state toindividuals or entities resident or domiciled within such state in Brazil.There are no Brazilian stamps, issue, registration or similar taxes or dutiespayable by holders of preferred shares or preferred ADSs.

Pursuantto Decree number, 2,219 of May 2, 1997, and Ordinance no. 5 of January 21,1999, issued by the Ministry of Finance, the amount in reais resulting from theconversion of the proceeds received by a Brazilian entity from a foreigninvestment in the Brazilian securities market (including those in connectionwith the investment in the preferred shares or preferred ADSs and those madeunder Regulation nr. 2,689, which substituted Annex IV Regulations) is subjectto a financial transaction tax (IOF), although at present the rate of such taxis 0.0%. The Minister of Finance is empowered to establish the applicable IOFtax rate. Under Law nr 8,894 of June 21, 1994, such IOF tax rate may beincreased at any time to a maximum of 25.0%, but any such increase will only beapplicable to transactions occurring after such increase becomes effective.

Pursuantto Law number, 9,311 of October 24, 1996, the Contribuição Provisória sobreMovimentação Financeira (CPMF) was levied at a rate of 0.2% on fund transfersin connection with financial transactions in Brazil. Pursuant to Law 9,539, theCPMF tax was payable until February 1999. Pursuant to Constitutional Amendment21, of March 18, 1999, the collection of the CPMF was extended for anadditional period of 36 months. This payment of the CPMF tax was required as ofJune 17, 1999. The CPMF tax rate was 0.38% during the first 12 months, andwould be 0.30% for the remaining period. But in December 2000, ConstitutionalAmendment number 31 increased the rate to 0.38% as of March 2001. By May 28,2002, Constitutional Amendment number 37 determined that CPMF must be chargeduntil December 31, 2004. Finally, the Constitutional Amendment number 42,approved in 2003, extended the CPMF tax until December 31, 2007.

Theresponsibility for the collection of the CPMF tax is borne by the financialinstitution that carries out the relevant financial transaction. Additionally,when the non-Brazilian holder remitted the proceeds from the sale or assignmentof preferred shares by means of foreign exchange transactions, the CPMF tax waslevied on the amount to be remitted abroad in Brazilian reais. However, sinceApril, 2002 this tax has not been charged on stock transactions. If it isnecessary to perform any exchange transaction in connection with Preferred ADSsor preferred shares, it will bear the CPMF tax.

***Registered Capital***

Theamount of an investment in preferred shares held by a non-Brazilian holder whoqualifies and registered with the CVM under the Annex IV Regulations which wasconverted into Annex of 2,689 Resolution as of June 2000, or in ADSs held bythe depositary representing such holder, as the case may be, is eligible forregistration with the Central Bank; such registration (the amount so registeredis referred to as Registered Capital) allows the remittance abroad of foreigncurrency, converted at the commercial exchange rate, acquired with the proceedsof distributions on, and amounts realized with respect to

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disposition of,such preferred shares. The registered capital for preferred shares purchased inthe form of a preferred ADSs, or purchased in Brazil and deposited with thedepositary in exchange for a preferred ADS, will be equal to their purchaseprice (in U.S. dollars) paid by the purchaser. The Registered Capital forpreferred shares that are withdrawn upon surrender of preferred ADSs, will bethe U.S. dollar equivalent of (i) the average price of the preferred shares onthe Brazilian stock exchange on which the greatest number of such preferredshares was sold on the day of withdrawal, or (ii) if no preferred shares weresold on such day, the average price of preferred shares that were sold in thefifteen trading sessions immediately preceding such withdrawal. The U.S. dollarvalue of the preferred shares is determined on the basis of the averagecommercial exchange rate quoted by the Central Bank on such date (or, if theaverage price of preferred shares is determined under clause (ii) of thepreceding sentence, the average of such average quoted rates on the samefifteen dates used to determine the average price of the preferred shares).

Anon-Brazilian holder of preferred shares may experience delays in effecting theregistration of registered capital, which may delay remittances abroad. Such adelay may adversely affect the amount, in U.S. dollars, received by thenon-Brazilian holder.

**UnitedStates Tax Considerations**

***US Federal Income Tax Considerations***

Thefollowing discussion summarizes the principal U.S. federal income taxconsiderations relating to the purchase, ownership and disposition of PreferredShares or Preferred ADSs.  This summarydoes not describe any state, local or non-U.S. tax law considerations, or anyaspect of U.S. federal income tax other than income taxation; investors areurged to consult their own tax advisors regarding such matters.

Asused below, a “U.S. holder” is a beneficial owner of a Preferred Share orPreferred ADS that is, for U.S. federal income tax purposes, (i) a citizen orresident alien individual of the United States, (ii) a corporation (or anentity treated as a corporation) organized under the law of the United States,any State thereof or the District of Columbia, (iii) an estate, the income ofwhich is subject to U.S. federal income tax without regard to its source, or(iv) a trust if (1) a court within the United States is able to exerciseprimary supervision over the administration of the trust, and one or more U.S.persons have the authority to control all substantial decisions of the trust,or (2) the trust has a valid election in effect under applicable U.S. TreasuryRegulations to be treated as a U.S. person. For purposes of this discussion, a “non-USholder” is a beneficial owner of a Preferred Share or Preferred ADS that is (i)a nonresident alien individual, (ii) a corporation (or an entity treated as acorporation) created or organized in or under the law of a country other thanthe United States or a political subdivision thereof or (iii) an estate ortrust that is not a U.S. holder. If a partnership (including for this purposeany entity treated as a partnership for U.S. federal tax purposes) is abeneficial owner of a Preferred Share or Preferred ADS, the U.S. federal taxtreatment of a partner in the partnership generally will depend on the statusof the partner and the activities of the partnership. A holder of a PreferredShare or Preferred ADS that is a partnership and partners in that partnershipshould consult their own tax advisers regarding the U.S. federal income taxconsequences of holding and disposing of Preferred Shares or Preferred ADSs.

***Nature of Preferred ADSs for U.S. Federal Income Tax Purposes***

Ingeneral, for U.S. federal income tax purposes, a holder of a Preferred ADS willbe treated as the owner of the underlying Preferred Shares. Accordingly, exceptas specifically noted below, the tax consequences discussed below with respectto Preferred ADSs will be the same for Preferred Shares in the Company, andexchanges of Preferred Shares for Preferred ADSs, and Preferred ADSs forPreferred Shares, generally will not be subject to U.S. federal income tax.

***Taxation of Dividends***

U.S.holders: In general, subject to the passive foreigninvestment company rules discussed below, a distribution on a Preferred ADS(including for this purpose a distribution of interest on shareholders’ equity)will constitute a dividend for U.S. federal income tax purposes to the extentthat it is made from the Company’s current or accumulated earnings and profitsas determined under U.S. federal

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income taxprinciples. If a distribution exceeds the Company’s current and accumulatedearnings and profits, it will be treated as a non-taxable reduction of basis tothe extent of the U.S. holder’s tax basis in the Preferred ADS on which it ispaid, and to the extent it exceeds that basis it will be treated as a capitalgain. For purposes of this discussion, the term “dividend” means a distributionthat constitutes a dividend for U.S. federal income tax purposes.

The gross amount of anydividend on a Preferred ADS (which will include the amount of any Braziliantaxes withheld) will be subject to U.S. federal income tax as foreign sourcedividend income. The amount of a dividend paid in Brazilian currency will beits value in U.S. dollars based on the prevailing spot market exchange rate ineffect on the day that the U.S. holder receives the dividend or, in the case ofa dividend received in respect of a Preferred ADS, on the date the Depositaryreceives it, whether or not the dividend is converted into U.S. dollars. A U.S.holder will have a tax basis in any distributed Brazilian currency equal to itsU.S. dollar amount on the date of receipt, and any gain or loss realized on aconversion or other disposition of the Brazilian currency generally will betreated as U.S. source ordinary income or loss. If dividends paid in Brazilian currency are converted into U.S. dollarson the date they are received by a U.S. holder or the Depositary or its agent,as the case may be, the U.S. holder generally should not be required torecognize foreign currency gain or loss in respect of the dividend income.

Subject to certainexceptions for short-term and hedged positions, any dividend that an individualreceives on a Preferred ADS in a taxable year beginning before January 1, 2011will be subject to a maximum tax rate of 15.0% if the dividend is a “qualifieddividend.” A dividend on a Preferred ADS will be a qualified dividend if (i)the Preferred ADSs are readily tradable on an established securities market inthe United States, and (ii) the Company was not, in the year prior to the yearthe dividend was paid, and is not, in the year the dividend is paid, a passiveforeign investment company. The Preferred ADSs are listed on the New York StockExchange and will qualify as readily tradable on an established securitiesmarket in the United States so long as they are so listed.  Based on existing guidance, it is notentirely clear whether a dividend on a Preferred Share will be treated as aqualified dividend, because the Preferred Shares themselves are not listed on aU.S. exchange.  Based on the Company’saudited financial statements and relevant market and shareholder data, as wellas the Company’s current and projected income, assets and activities, theCompany believes it was not a PFIC for U.S. federal income tax purposes for its2005 or 2006 taxable years, nor does it anticipate being classified as a PFICin 2007 or in future taxable years. Given that the determination of PFIC statusinvolves the application of complex tax rules, and that it is based on thenature of the Company’s income and assets from time to time, no assurances canbe provided that the Company will not be considered a PFIC for the current (orany past or future) taxable year.  TheU.S. Treasury has announced its intention to promulgate rules pursuant to whichholders of stock of non-U.S. corporations, and intermediaries through whom thestock is held, will be permitted to rely on certifications from issuers toestablish that dividends are treated as qualified dividends. Because thoseprocedures have not yet been issued, it is not clear whether the Company willbe able to comply with them. Special limitations on foreign tax credits applyto qualified dividends subject to the reduced rate of tax.  Holders of Preferred ADSs should consulttheir own tax advisers regarding the availability of the reduced dividend taxrate in the light of their own particular circumstances.

Any Brazilian withholdingtax will be treated as a foreign income tax eligible for credit against a U.S.holder’s U.S. federal income tax liability, subject to generally applicablelimitations under U.S. federal income tax law. For purposes of computing thoselimitations separately for specific categories of income, a dividend generallywill constitute foreign source “passive income” or, in the case of certainholders, “financial services income” for purposes of taxable years beginningbefore January 1, 2007. For taxable years beginning after December 31, 2006, “passiveincome” generally will be treated as “passive category income,” and “financialservices income” generally will be treated as “general category income.” A U.S.holder will be denied a foreign tax credit with respect to Brazilian income taxwithheld from dividends received with respect to the underlying PreferredShares represented by the Preferred ADSs to the extent the U.S. holder has notheld the Preferred ADSs for at least 16 days of the 30-day period beginning onthe date which is 15 days before the ex-dividend date or to the extent the U.S.holder is under an obligation to make related payments with respect tosubstantially similar or related property. Any days during which a U.S. holderhas substantially diminished its risk of loss on the Preferred ADSs are notcounted toward meeting the 16-day holding period required by the statute. Therules relating to the determination of the foreign tax credit are complex, andU.S. holders are urged to consult with their own tax advisers to determinewhether and to what extent they will be entitled to foreign tax credits as wellas with respect to the determination of the foreign tax credit limitation(including changes in the rules for taxable years beginning after December 31,2006).  Alternatively, any Brazilianwithholding tax may be taken as a deduction against taxable income, providedthe U.S. holder takes a deduction and not a credit

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for all foreign income taxes paid or accrued in thesame taxable year. A dividend will not be eligible for the corporate dividendsreceived deduction.

Non-U.S. holders:A dividend paid to a non-U.S. holder on a Preferred ADS will not be subject toU.S. federal income tax unless the dividend is effectively connected with theconduct of trade or business by the non-U.S. holder within the United States(and is attributable to a permanent establishment or fixed base the non-U.S.holder maintains in the United States if an applicable income tax treaty sorequires as a condition for the non-U.S. holder to be subject to U.S. taxationon a net income basis on income from the Preferred ADS). A non-U.S. holdergenerally will be subject to tax on an effectively connected dividend in thesame manner as a U.S. holder. A corporate non-U.S. holder may also be subjectunder certain circumstances to an additional “branch profits tax,” the rate ofwhich may be reduced pursuant to an applicable income tax treaty.

***Taxationof Capital Gains***

U.S. holders.Subject to the passive foreign investment company rules discussed below, on asale or other taxable disposition of a Preferred ADS, a U.S. holder willrecognize capital gain or loss in an amount equal to the difference between theU.S. holder’s adjusted basis in the Preferred ADS and the amount realized onthe sale or other disposition, each determined in U.S. dollars. Any gain a U.S.holder recognizes generally will be U.S. source income for U.S. foreign taxcredit purposes, and, subject to certain exceptions, any loss will generally bea U.S. source loss. If a Brazilian tax is withheld on a sale or otherdisposition of a Preferred ADS, the amount realized will include the grossamount of the proceeds of that sale or disposition before deduction of theBrazilian tax. The generally applicable limitations under U.S. federal incometax law on crediting foreign income taxes may preclude a U.S. holder fromobtaining a foreign tax credit for any Brazilian tax withheld on a sale of aPreferred ADS.

In general, any adjustednet capital gain of an individual in a taxable year beginning before January 1,2011 is subject to a maximum tax rate of 15%. In subsequent years, the maximumtax rate on the net capital gain of an individual will be 20%. Thedeductibility of capital losses is subject to limitations.

Non-U.S. holders.A non-U.S. holder will not be subject to U.S. federal income tax on a gainrecognized on a sale or other disposition of a Preferred ADS unless (i) thegain is effectively connected with the conduct of trade or business by thenon-U.S. holder within the United States (and is attributable to a permanentestablishment or fixed base that the non-U.S. holder maintains in the UnitedStates if an applicable income tax treaty so requires as a condition for thenon-U.S. holder to be subject to U.S. taxation on a net income basis on incomefrom the Preferred ADS), or (ii) in the case of a non-U.S. holder who is anindividual, the holder is present in the United States for 183 or more days inthe taxable year of the sale or other disposition and certain other conditionsapply. Any effectively connected gain of a corporate non-U.S. holder may alsobe subject under certain circumstances to an additional “branch profits tax”,the rate of which may be reduced pursuant to an applicable income tax treaty.

***PassiveForeign Investment Company Rules***

A special set of U.S.federal income tax rules applies to a foreign corporation that is a PFIC forU.S. federal income tax purposes. As noted above, based on the Company’saudited financial statements and relevant market and shareholder data, as wellas the Company’s current and projected income, assets and activities, theCompany believes it was not a PFIC for U.S. federal income tax purposes for its2005 or 2006 taxable years, nor does it anticipate being classified as a PFICin 2007 or in future taxable years. However, because the determination ofwhether the Company is a PFIC is based upon the composition of its income andassets from time to time, and because there are uncertainties in theapplication of the relevant rules, it is possible that the Company will becomea PFIC in a future taxable year (and no assurances can be provided that theCompany will not be considered a PFIC for the current (or any past) taxableyear).  If the Preferred ADSs were sharesof a PFIC for any taxable year, U.S. holders (including certain indirect U.S.holders) may be subject to adverse tax consequences, including thepossible  imposition of ordinary incometreatment on gains that would otherwise be taxed as capital gains, along withan interest charge on gains or “excess distributions” allocable to prior yearsin the U.S. holder’s holding period during which the Company was determined tobe a PFIC. If the Company is deemed to be a PFIC for a taxable year, dividendson a Preferred ADS would not constitute “qualified dividends” subject topreferential rates of U.S. federal income taxation. U.S. holders are urged toconsult their own tax advisers regarding the application of the PFIC rules.

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***InformationReporting and Backup Withholding***

Dividends paid on, andproceeds from the sale or other disposition of, a Preferred ADS to a U.S.holder, generally may be subject to information reporting requirements and maybe subject to backup withholding (currently at the rate of 28.0%) unless theU.S. holder provides an accurate taxpayer identification number or otherwisedemonstrates that they are exempt.  Theamount of any backup withholding collected from a payment to a U.S. holder willbe allowed as a credit against the U.S. holder’s U.S. federal income taxliability and may entitle the U.S. holder to a refund, provided that certainrequired information is submitted to the Internal Revenue Service.  A non-U.S. holder generally will be exemptfrom these information reporting requirements and backup withholding tax butmay be required to comply with certain certification and identificationprocedures in order to establish its eligibility for exemption.

### **F.Dividends and Paying Agents**

Not Applicable.

### **G.Statement of Experts**

Not Applicable.

### **H.Documents on Display**

The Company makes itsfilings in electronic form under the EDGAR filing system of the U.S. Securitiesand Exchange Commission. Its filings are available through the EDGAR system atwww.sec.gov. Sadia’s SEC filings, including this annual report and the exhibitsthereto, are also available for inspection and copying at the public referencefacilities maintained by the Securities and Exchange Commission. Informationcan be obtained either on the SEC website (www.sec.gov) or by phone1-800-SEC-0330. Company documents and statutory information are also availableat Sadia’s website (www.sadia.com). Information regarding legal issues can beobtained from the Company’s U.S. legal counsel, Greenberg, Traurig LLP, at1-212-801-9380.

The Company has, incompliance with New York Stock Exchange Corporate Governance Rule 303A.11,provided on its website a summary of how its corporate governance practicesdiffer from those followed by U.S. domestic companies under the New York StockExchange listing standards.

### **I.Subsidiary Information**

Not Applicable.

## **ITEM 11. QUANTITATIVE ANDQUALITATIVE DISCLOSURES ABOUT MARKET RISK**

**Quantitative information about market risk**

The main market risks theCompany faces are interest rate, exchange rate and commodity price risks whicharise from adverse changes in market conditions and could represent a potentialloss. Sadia mitigates some of these risks through the use of derivativesinstruments.

In the beginning of 2004,Sadia implemented a department to control overall exposure of financial assetsand liabilities; counterparty and credit risk; legal risk; and disseminate riskculture within the Company. The financial department has incorporated a Hedgingand Investment Policy which was reviewed and approved by the FinancialCommittee. These policies prohibit speculative trading and oblige the Companyto diversify its counterparties. Sadia periodically provides reports to seniormanagement about potential risks and actions taken to mitigate them.

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***ForeignCurrency Risk***

The Company’s exposure toforeign currency are mainly due to Sadia’s external revenues, that in 2006accounted for 43.0% of  the Company’stotal gross operating revenues, and its debt denominated in U.S. dollars, thaton December 31, 2006 accounted for 2,815.9million.

The percentage of theCompany’s dollar and reais denominated debt on December 31, 2006 were asfollows:

|                              | ** ** | **Debt Breakdown  (%)** | ** ** |
|------------------------------|------------|------------------------------|------------|
| **Short-term  debt**         | ** ** | ** **                   | ** ** |
| Denominated in  reais        |       | 32.9                         | %          |
| Denominated in  U.S. dollars |       | 52.2                         | %          |
| **Long  term debt:**         | ** ** | ** **                   | ** ** |
| Denominated in  reais        |       | 4.9                          | %          |
| Denominated in  U.S. dollars |       | 10.0                         | %          |
| **Total**                    | ** ** | **100.0**                    | **%**      |

 

The foreign currency swapcontracts that are entered by the Company are aimed to mitigate potentiallosses on the Company’s external revenues derived from the devaluation of thedollar. The Company does not use these swap contracts for trading orspeculative purposes. See note 3 of the consolidated financial Statements fordiscussion of the accounting policies for derivatives and other financialinstruments.

The table below providesinformation on Company’s foreign currency as of December 31, 2006.

**InstrumentsDenominated in U.S. Dollars**

 
| ** **                                                                               | ** ** | **2007**      | ** ** | **2008**    | ** ** | **2009**    | ** ** | **2010**      | ** ** | **2011**    | ** ** | **After 2012** | ** ** | **Total**     | ** ** | **Fair Value** | ** ** | **Average  Rate** | ** ** |
|------------------------------------------------------------------------------------------|------------|---------------|------------|-------------|------------|-------------|------------|---------------|------------|-------------|------------|---------------------|------------|---------------|------------|---------------------|------------|-------------------|------------|
| **Assets**                                                                               | ** ** | ** **    | ** ** | ** **  | ** ** | ** **  | ** ** | ** **    | ** ** | ** **  | ** ** | ** **          | ** ** | ** **    | ** ** | ** **          | ** ** | ** **        | ** ** |
| **Cash  and cash equivalents**                                                           |       | 265,667       |       | —      |       | —      |       | —        |       | —      |       | —              |       | 265,667       |       | 265,667             |       | 5.25              |       |
| **Investments  in debt securities**                                                      |       | 1,701,719     |       | —      |       | —      |       | —        |       | —      |       | —              |       | 1,701,719     |       | 1,701,719           |       | 8.37              |       |
| **Total**                                                                                | ** ** | **1,967,386** | ** ** | **—**  | ** ** | **—**  | ** ** | **—**    | ** ** | **—**  | ** ** | **—**          | ** ** | **1,967,386** | ** ** | **1,967,386**       | ** ** | ** **        | ** ** |
|                                                                                     |       |          |       |        |       |        |       |          |       |        |       |                |       |          |       |                |       |              |       |
| **Liabilities**                                                                          |       |          |       |        |       |        |       |          |       |        |       |                |       |          |       |                |       |              |       |
| **Short  term debt**                                                                     |       | 752,461       |       | —      |       | —      |       | —        |       | —      |       | —              |       | 752,461       |       | 752,691             |       | 1.09              |       |
| **Long  term debt**                                                                      |       | 143,948       |       | 113,268     |       | 156,968     |       | 1,025,730     |       | 594,552     |       | 28,967              |       | 2,063,433     |       | 2,101,839           |       | 3.98              |       |
| **Total**                                                                                | ** ** | **896,409**   | ** ** | **113,268** | ** ** | **156,968** | ** ** | **1,025,730** | ** ** | **594,552** | ** ** | **28,967**          | ** ** | **2,815,894** | ** ** | **2,854,530**       | ** ** | ** **        | ** ** |
|                                                                                     |       |          |       |        |       |        |       |          |       |        |       |                |       |          |       |                |       |              |       |
| Foreign currency and  interest rate swap contracts notional amount - reais to US dollars |       | 1,532,559     |       | 12,908      |       | 9,376       |       | —        |       | —      |       | —              |       | 1,554,843     |       | 113,286             |       |              |       |

 

Forthe interest rate swap contracts, the average paying rate in reais was 100%CDI, and the average receiving rate in US dollars was of 4.71%.

***Interest Rate Risk***

The Company’s exposure tointerest rate is basically due to the Company’s floating rate debt, thatamounted to R$3,270.9 million on December 31, 2006.

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Thepercentage of the Company’s debt subject to fixed and floating interest rateson December 31, 2006 were as follows:

|                              | ** ** | **Debt Breakdown (%)** | ** ** |
|------------------------------|------------|----------------------------------|------------|
| **Fixed rate**               |       |                             |       |
| Denominated in reais         |       | 17.2                             | %          |
| Denominated in U.S.  dollars |       | 21.5                             | %          |
| **Floating rate**            |       |                             |       |
| Denominated in reais         |       | 20.6                             | %          |
| Denominated in U.S.  dollars |       | 40.7                             | %          |
| **Total**                    | ** ** | **100.0**                        | **%**      |

 

Sadia’s floatinginterest rate exposure is primarily subject to the variations of Libor as itrelates to U.S. dollar denominated debt and to the variations of the TJLP, anannual long-term interest rate that includes an inflation factor and isdetermined quarterly by the Central Bank and other exchange variation. OnDecember 31, 2006, the TJLP was equivalent to 6.9% per year.

The table belowprovides information about Sadia’s significant interest rate sensitiveinstruments. For variable interest rate debt, the rate presented is theweighted average rate calculated as of December 31, 2006.

**Rate Sensitive InstrumentsR$ Thousand**
| ** **                         | ** ** | **2007**      | ** ** | **2008**    | ** ** | **2009**    | ** ** | **2010**      | ** ** | **2011**    | ** ** | **After 2012** | ** ** | **Total**     | ** ** | **Fair Value** | ** ** | **Average  Rate** | ** ** |
|------------------------------------|------------|---------------|------------|-------------|------------|-------------|------------|---------------|------------|-------------|------------|---------------------|------------|---------------|------------|---------------------|------------|-------------------|------------|
| **Assets**                         | ** ** | ** **    | ** ** | ** **  | ** ** | ** **  | ** ** | ** **    | ** ** | ** **  | ** ** | ** **          | ** ** | ** **    | ** ** | ** **          | ** ** | ** **        | ** ** |
| **Cash and cash equivalents**      |       |          |       |        |       |        |       |          |       |        |       |                |       |          |       |                |       |              |       |
| Denominated in reais               |       | 200,931       |       | —      |       | —      |       | —        |       | —      |       | —              |       | 300,931       |       | 200,931             |       | 0.00              |       |
| Denominated in reais               |       | 259,697       |       | —      |       | —      |       | —        |       | —      |       | —              |       | 259,697       |       | 259,697             |       | 15.80             |       |
| Denominated in U.S.  dollars       |       | 32,754        |       | —      |       | —      |       | —        |       | —      |       | —              |       | 32,754        |       | 32,754              |       | 0.00              |       |
| Denominated in U.S.  dollars       |       | 232,913       |       | —      |       | —      |       | —        |       | —      |       | —              |       | 232,913       |       | 232,913             |       | 5.25              |       |
|                               |       |          |       |        |       |        |       |          |       |        |       |                |       |          |       |                |       |              |       |
| **Investments in debt securities** |       |          |       |        |       |        |       |          |       |        |       |                |       |          |       |                |       |              |       |
| Denominated in reais               |       | —        |       | 45,286      |       | 53,992      |       | —        |       | —      |       | 29,849              |       | 129,127       |       | 129,127             |       | 7.68              |       |
| Denominated in U.S.  dollars       |       | 1,701,719     |       | —      |       | —      |       | —        |       | —      |       | —              |       | 1,701,719     |       | 1,701,719           |       | 8.37              |       |
|                               |       |          |       |        |       |        |       |          |       |        |       |                |       |          |       |                |       |              |       |
| **Total**                          | ** ** | **2,428,014** | ** ** | **45,286**  | ** ** | **53,992**  | ** ** | **—**    | ** ** | **—**  | ** ** | **29,849**          | ** ** | **2,557,141** | ** ** | **2,557,141**       | ** ** | ** **        | ** ** |
|                               |       |          |       |        |       |        |       |          |       |        |       |                |       |          |       |                |       |              |       |
|                               |       |          |       |        |       |        |       |          |       |        | ** ** | ** **          |       |          | ** ** | ** **          | ** ** | ** **        | ** ** |
| **Liabilities**                    | ** ** | ** **    | ** ** | ** **  | ** ** | ** **  | ** ** | ** **    | ** ** | ** **  | ** ** | ** **          | ** ** | ** **    | ** ** | ** **          | ** ** | ** **        | ** ** |
| **Short-term debt**                |       |          |       |        |       |        |       |          |       |        |       |                |       |          |       |                |       |              |       |
| ***Fixed  rate***                  |       |          |       |        |       |        |       |          |       |        |       |                |       |          |       |                |       |              |       |
| Denominated in reais               |       | 231,660       |       | —      |       | —      |       | —        |       | —      |       | —              |       | 231,660       |       | 231,660             |       | 8.75              |       |
| Denominated in U.S.  dollars       |       | 279,796       |       | —      |       | —      |       | —        |       | —      |       | —              |       | 279,796       |       | 279,796             |       | 1.09              |       |
| ***Floating  rate***               |       |          |       |        |       |        |       |          |       |        |       |                |       |          |       |                |       |              |       |
| Denominated in reais               |       | 242,446       |       | —      |       | —      |       | —        |       | —      |       | —              |       | 242,446       |       | 254,861             |       | 0.00              |       |
| Denominated in U.S.  dollars       |       | 472,665       |       | —      |       | —      |       | —        |       | —      |       | —              |       | 472,665       |       | 472,895             |       | 5.42              |       |
| **Total**                          | ** ** | **1,226,567** | ** ** | **—**  | ** ** | **—**  | ** ** | **—**    | ** ** | **—**  | ** ** | **—**          | ** ** | **1,226,576** | ** ** | **1,239,212**       | ** ** | ** **        | ** ** |
|                               |       |          |       |        |       |        |       |          |       |        |       |                |       |          |       |                |       |              |       |
| **Long term debt:**                |       |          |       |        |       |        |       |          |       |        |       |                |       |          |       |                |       |              |       |
| ***Fixed  rate***                  |       |          |       |        |       |        |       |          |       |        |       |                |       |          |       |                |       |              |       |
| Denominated in reais               |       | 16,447        |       | 7,701       |       | 7,701       |       | 2,762         |       | 1,070       |       | 135,026             |       | 170,707       |       | 170,707             |       | 9.41              |       |
| Denominated in U.S.  dollars       |       | 29,796        |       | 30,115      |       | 23,438      |       | 23,438        |       | 23,438      |       | 28,967              |       | 159,192       |       | 159,192             |       | 3.98              |       |
| ***Floating  rate***               |       |          |       |        |       |        |       |          |       |        |       |                |       |          |       |                |       |              |       |
| Denominated in reais               |       | 54,313        |       | 121,632     |       | 113,204     |       | 113,204       |       | 113,199     |       | 135,985             |       | 651,537       |       | 651,537             |       | 10.44             |       |
| Denomineted in U.S.  dollars       |       | 114,152       |       | 83,153      |       | 133,530     |       | 1,002,292     |       | 571,114     |       | —              |       | 1,904,241     |       | 1,942,647           |       | 8.94              |       |
| **Total**                          | ** ** | **214,708**   | ** ** | **242,601** | ** ** | **277,873** | ** ** | **1,141,696** | ** ** | **708,821** | ** ** | **299,978**         | ** ** | **2,885,677** | ** ** | **2,924,083**       | ** ** | ** **        | ** ** |
|                               |       |          |       |        |       |        |       |          |       |        |       |                |       |          |       |                |       |              |       |
| **Total debt**                     | ** ** | **1,441,275** | ** ** | **242,601** | ** ** | **277,873** | ** ** | **1,141,696** | ** ** | **708,821** | ** ** | **299,978**         | ** ** | **4,112,244** | ** ** | **4,163,295**       | ** ** | ** **        | ** ** |

 

***Credit risks***

The Company issubject to credit risks related to customer accounts receivable, financialinvestments and derivative contracts. Credit risks from accounts receivable areminimized by the pulverization of the customer portfolio, in which no group isresponsible for more than 10.0% of the Company’s consolidated revenues. Risksassociated with financial instruments are lessened by hiring

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first-linefinancial institutions, subject to the limitations pre-established by theCredit and Financial Committees.

***Grain purchase price risk***

TheCompany’s operations are exposed to the volatility of grain prices (corn andsoybean) used in the preparation of feed for its breeding stock and slaughterdestinated animals. These commodities price results from factors beyond thecontrol of management, such as climate, the size of the harvest, transport andstorage costs and government agricultural policies, among others.

TheCompany does not enter into future or options contracts to protect itselfagainst changes in the commodities prices but is in the process of elaboratinga Hedging Policy for Commodities for this purpose. Currently, Sadia maintains arisk management strategy based on its inventory policy through physicalcontrol, which includes acquisition of grains that guarantee future volumes andcosts.

## **ITEM12. DESCRIPTION OF THE SECURITIES OTHER THAN SECURITIES**

NotApplicable.

# **PART II**

## **ITEM 13. DEFAULTS, DIVIDENDSARREARAGES AND DELINQUENCIES**

NotApplicable.

## **ITEM 14.MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND********USE OF PROCEEDS**

NotApplicable.

## **ITEM 15. CONTROL AND PROCEDURES**

TheCompany has carried out an evaluation under the supervision of its management,including its Chief Executive Officer and Chief Financial Officer, of theeffectiveness of the design and operation of its disclosure controls andprocedures. There are inherent limitations to the effectiveness of any systemof disclosure controls and procedures, including the possibility of human errorand the circumvention or overriding of the controls and procedures.Accordingly, even effective disclosure controls and procedures can only providereasonable assurance that they will achieve their control objectives. Based onthat evaluation, the Company’s Chief Executive Officer and Chief Financial Officerconcluded that the design and operation of the Company’s disclosure controlsand procedures are effective to ensure that information required to bedisclosed in the reports that the Company files and submits under the ExchangeAct is (i) recorded, processed, summarized and reported within the time periodsspecified in Securities and Exchange Commission rules and forms, and (ii)accumulated and communicated to management, including the Chief ExecutiveOfficer and Chief Financial Officer, to allow timely decisions regardingrequired disclosure as of the end of the Company’s most recent fiscal year.

TheCompany has created a Disclosure Policy Committee composed of the Chairman ofthe Board of Directors, Walter Fontana, the Chief Executive Officer, GilbertoTomazoni, the Chief Financial Officer and Investor Relations Officer, WelsonTeixeira Júnior. This Committee oversees and reviews all materials for whichthere is a legal disclosure requirement, together with all data required tosupport the documents mentioned above. This committee meets at regularintervals in order to review all data.

Thecertifications required by this Item have been filed as Exhibits 12.01 and12.02.

A.            Management’s annual report oninternal control over financial reporting

Managementis responsible for establishing and maintaining adequate internal control overfinancial reporting for the Company. In order to evaluate the effectiveness ofinternal control over financial reporting, as required by Section 404 of theSarbanes-Oxley Act, management has conducted an

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assessment,including testing, using the criteria in Internal Control—Integrated Framework,issued by the Committee of Sponsoring Organizations of the Treadway Commission(COSO). The Company’s system of internal control over financial reporting isdesigned to provide reasonable assurance regarding the reliability of financialreporting and the preparation of financial statements for external purposes inaccordance with generally accepted accounting principles. Because of its inherentlimitations, internal control over financial reporting may not prevent ordetect misstatements. Also, projections of any evaluation of effectiveness tofuture periods are subject to the risk that controls may become inadequatebecause of changes in conditions, or that the degree of compliance with thepolicies or procedures may deteriorate.

Basedon its assessment, management has concluded that the Company maintainedeffective internal control over financial reporting as of December 31, 2006,based on criteria in Internal Control—Integrated Framework, issued by the COSO.Management’s assessment of the effectiveness of the Company’s internal controlover financial reporting as of December 31, 2006, has been audited by KPMGAuditores Independentes, an independent registered public accounting firm, asstated in their report which is included below.

B.             Attestationreport of the independent registered public accounting firm

# **Reportof Independent Registered Public Accounting Firm**

The Board ofDirectors and Shareholders of Sadia S.A.

Wehave audited management’s assessment, included in the accompanying Management’sAnnual Report on Internal Control over Financial Reporting*,*that Sadia S.A. (the “Company”)maintained effective internal control over financial reporting as of December31, 2006, based on criteriaestablished in Internal Control—Integrated Framework issued by the Committee ofSponsoring Organizations of the Treadway Commission (COSO).**Sadia S.A.’s management isresponsible for maintaining effective internal control over financial reportingand for its assessment of the effectiveness of internal control over financialreporting. Our responsibility is to express an opinion on management’sassessment and an opinion on the effectiveness of the Company’s internalcontrol over financial reporting based on our audit.

Weconducted our audit in accordance with the standards of the Public CompanyAccounting Oversight Board (United States). Those standards require that weplan and perform the audit to obtain reasonable assurance about whethereffective internal control over financial reporting was maintained in allmaterial respects. Our audit included obtaining an understanding of internalcontrol over financial reporting, evaluating management’s assessment, testingand evaluating the design and operating effectiveness of internal control, andperforming such other procedures as we considered necessary in thecircumstances. We believe that our audit provides a reasonable basis for ouropinion.

Acompany’s internal control over financial reporting is a process designed toprovide reasonable assurance regarding the reliability of financial reportingand the preparation of financial statements for external purposes in accordancewith generally accepted accounting principles. A company’s internal control over financial reporting includes thosepolicies and procedures that (1) pertain to the maintenance of records that, inreasonable detail, accurately and fairly reflect the transactions anddispositions of the assets of the company; (2) provide reasonable assurancethat transactions are recorded as necessary to permit preparation of financialstatements in accordance with generally accepted accounting principles, andthat receipts and expenditures of the company are being made only in accordancewith authorizations of management and directors of the company; and (3) providereasonable assurance regarding prevention or timely detection of unauthorizedacquisition, use, or disposition of the company’s assets that could have amaterial effect on the financial statements.

Becauseof its inherent limitations, internal control over financial reporting may notprevent or detect misstatements.  Also,projections of any evaluation of effectiveness to future periods are subject tothe risk that controls may become inadequate because of changes in conditions,or that the degree of compliance with the policies or procedures maydeteriorate.

Inour opinion, management’s assessment that Sadia S.A. maintained effectiveinternal control over financial reporting as of December 31, 2006, is fairlystated, in all material respects, based on criteria

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established inInternal Control—Integrated Framework issued by the Committee of SponsoringOrganizations of the Treadway Commission (COSO). Also, in our opinion, SadiaS.A. maintained, in all material respects, effective internal control overfinancial reporting as of December 31, 2006, based on criteria established inInternal Control—Integrated Framework issued by the Committee of Sponsoring Organizationsof the Treadway Commission (COSO).

Wealso have audited, in accordance with the standards of the Public CompanyAccounting Oversight Board (United States), the consolidated balance sheets ofSadia S.A. and subsidiaries as of December 31, 2006 and 2005, and the relatedconsolidated statements of income, shareholders’ equity and cash flows for eachof the years in the three-year period ended December 31, 2006, and our reportdated June 27, 2007 expressed an unqualified opinion on those consolidatedfinancial statements.

/s/ KPMG Auditores Independentes

KPMG AuditoresIndependentes

 

São Paulo, Brazil

June 27, 2007

 

C.             Changes in internal control overfinancial reporting.

Therewere no changes in our internal controls or in other factors that couldsignificantly affect these controls and procedures subsequent to the date ourchief executive officer and our chief financial officer completed theirevaluation, nor were there any significant deficiencies or material weaknessesin our internal controls and procedures requiring corrective actions.

## **ITEM 16**

### **A.Audit Committee Financial Expert**

TheBoard of Directors of the Company has determined that Francisco SilverioMorales Cespede is the audit committee financial expert within the meaning ofSarbanes-Oxley and related regulations. The audit committee is already fully incompliance with the requirements of Sarbanes-Oxley. See Item 6.C. BoardPractices-Audit Committee. The Company has, in compliance with New York StockExchange Corporate Governance Rule 303A.11, provided on its website a summaryof how its corporate governance practices differ from those followed by U.S.domestic companies under the New York Stock Exchange listing standards, atwww.sadia.com.

### **B.Code of Ethics**

TheCompany has adopted a Code of Ethics (called “Código de Ética”) that applies toall of the Company’s employees, including our principal executive officer,principal financial officer, principal accounting officer or controller. TheEnglish version of the Code can be downloaded at the Company’s website(www.sadia.com.br). Additionally, any person, upon request, can ask for a hardcopy or electronic file of such Code.  Ifthe Company makes any substantive amendment to the Code of Ethics or grants anywaivers, including any implicit waiver, from a provision of the Code of Ethics,it will disclose the nature of such amendment or waiver on its website.

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### **C.Principal Accountant Fees and Services**

**Audit and Non-Audit Fees**

Thefollowing table sets forth the fees billed to the Company by its independentauditors, during the fiscal years ended December 31, 2006 and 2005:

|                     | ** ** | **Audit Fees (Thousand R$)** | ** ** |
|---------------------|------------|---------------------------------------------|------------|
| ** **          | ** ** | **2006**                                    | ** ** | **2005** | ** ** |
| Audit fees          |       | 1,022                                       |       | 693 |   |
| Audit-related  fees |       | 64                                          |       | 105 |   |
| Tax-fees            |       | —                                      |       | — |   |
| **Total fees**      | ** ** | **1,086**                                   | ** ** | **798** | ** ** |

 

Auditfees in the above table are the aggregate fees billed by KPMG AuditoresIndependentes for 2006 and 2005, in connection with the audit of the Company’sannual financial statements and review of the Company’s quarterly financialinformation.

Audit-relatedfees in the above table are the aggregate fees billed by KPMG for providing duediligence services.

Taxfees in the above table are fees billed for tax compliance and tax advice.

**Audit Committee Pre-ApprovalPolicies and Procedures**

TheCompany’s Audit Committee has established pre-approval and procedures for theengagement of its independent auditors for audit and non-audit services.

TheAudit Committee reviews the scope of the services to be provided, before theircommencement, in order to ensure that there are no independence issues and theservices are not prohibited services as defined by Sarbanes-Oxley Act of 2002.

### **D.Exemptions from the Listing  Standardsand for Audit Committees**

NotApplicable

### **E.Purchases of Equity Securities by the Issuer and Affiliated Purchasers**

NotApplicable

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# **PART III**

| **ITEM 17. FINANCIAL STATEMENTS**                                                                          | ** ** |
|------------------------------------------------------------------------------------------------------------|------------|
|                                                                                                       |       |
| The Company has  responded to Item 18 in lieu of responding to this item.                                  |       |
|                                                                                                       |       |
| **ITEM  18. FINANCIAL STATEMENTS**                                                                         | ** ** |
|                                                                                                       |       |
| Reference is made to  Item 19 for a list of all financial Statements filed as part of this Annual  Report. |       |
|                                                                                                       |       |
| **ITEM  19. EXHIBITS**                                                                                     | ** ** |
|                                                                                                       |       |
| Report of Independent  Auditors                                                                            | F-3        |
|                                                                                                       |       |
| Consolidated Balance  Sheets as of December 31, 2006 and 2005                                              | F-4        |
|                                                                                                       |       |
| Consolidated Statements  of Income for the Years Ended December 31, 2006, 2005 and 2004                    | F-6        |
|                                                                                                       |       |
| Consolidated Statements  of Shareholders’ Equity for the Years Ended December 31, 2006, 2005 and 2004 | F-8        |
|                                                                                                       |       |
| Consolidated Statements  of Cash Flows for the Years Ended December 31, 2006, 2005 and 2004                | F-9        |
|                                                                                                       |       |
| Notes to Consolidated  Financial Statements                                                                | F-10       |
|                                                                                                       |       |
| **List of Exhibits**                                                                                       | ** ** |
|                                                                                                       |       |
| 1.01 Sadia By laws                                                                                         |       |

 

2.01Deposit Agreement dated as of December 30, 2002, by and among Sadia S.A., TheBank of New York as Depositary and the Owners and Holders of AmericanDepositary Receipts (such agreement is incorporated by reference to theRegistration Statement on Form F-6 relating to the ADSs (File No. 333-102013)filed with the Commission on December 19, 2002.

2.02The total amount of long-term debt of the Company authorized under anyinstrument does not exceed 10% of the total assets of the Company and itssubsidiaries, on a consolidated basis. The Company undertakes to furnish to the SEC all other instrumentsrelating to long-term debt of the Company and its subsidiaries upon request ofthe SEC.

12.01Certification by the Company’s Chief Executive Officer required by Item 15

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12.02Certification by the Company’s Chief Financial Officer required by Item 15

13.01Certification pursuant to 18 U.S.C. Section 1350.

13.02Certification pursuant to 18 U.S.C. Section 1350.

ConsolidatedFinancial Statements

**SIGNATURES**

TheCompany hereby certifies that it meets all of the requirements for filing onForm 20-F and that it has duly caused and authorized the undersigned to signthis Annual Report on its behalf.

**SADIA S.A.**

Date:June 29, 2007

 

 
| By:                             | /s/ GILBERTO  TOMAZONI |                               | By: | /s/ WELSON TEIXEIRA JÚNIOR |
|---------------------------------|-----------------------------|------------------------------------|-----|--------------------------------------|
| Name: Gilberto  Tomazoni        |                        | Name: Welson  Teixeira Júnior |
| Title: Chief  Executive Officer |                        | Title: Chief  Financial Officer    |

 

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**Exhibit1.01 Sadia Bylaws**

**SADIA S.A.**

# **BYLAWS**

**RESTATED AT THE EXTRAORDINARYSHAREHOLDERS MEETING HELD ON 12.15.2005 AND AMENDED BY THE EXTRAORDINARYSHAREHOLDERS MEETINGS HELD ON JANUARY 12, 2007 (01/12/2007) AND MARCH 01, 2007(03/01/2007)**

**CHAPTER I**

**THECOMPANY,  ITS HEADQUARTERS AND PURPOSE**

**ARTICLE 1**

SADIA S. A. is acompany governed by these Bylaws, by the Joint Stock Company Act and by allother Laws and Regulations applicable to the Company and its business purpose.

**ARTICLE 2**

The Company’sheadquarters is located at Rua Senador Attilio Fontana no 86, Centro, in theCounty of Concórdia, State of Santa Catarina, with jurisdiction in the samecounty.

**ARTICLE 3**

The duration ofthis Company is indefinite.

**ARTICLE 4**

The purpose ofthis Company is to engage in:

a)             Agricultural, industrial andcommercial activities related to food products, generally;

b)            The operation of slaughterhouses,tanneries, meat packing plants, factories producing preserves, whether or notcanned, meats, fats and dairy products, processing of vegetable oils, as wellas the operation of cold storage depots including meat warehousing,preservation, storage and classification;

c)             Meats, generally, byproducts andselected cuts;

d)            Processing and sale of wheat, othergrains and their by-products;

e)             Livestock farming (cattle, swine,sheep, goat and poultry);

f)             Lumber mills;

g)            Road transportation of own and thirdparty goods and rental of cold stores, silos and warehouses;

h)            All activities related toagriculture and agribusiness and marketing of grains and other primary and/orprocessed products in the domestic and foreign market;

i)              Processing and marketing ofsubstances and products, generally, for human food and animal feed;

j)              Processing and marketing ofchemical, sanitary and veterinary products for use in agriculture, poultry,cattle and swine raising, i.e., livestock, generally;

k)             Forestry and reforestationactivities;

l)              Any other agricultural, industrialand commercial activities correlated to the purposes of the Company;

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m)            Planning and development ofagricultural and engineering projects, under the responsibility ofprofessionals duly qualified by the appropriate bodies.

Sole clause —       Leasing cold storage chambers, silos anddepots, as described in letter “g” of this Article, does not fall under generalwarehouse activities as set out in Executive Order No. 1102, of 21/11/1903.

**CHAPTERII**

**CAPITALSTOCK**

 

**SECTION I**

**SUBSCRIBEDCAPITAL**

**ARTICLE 5**

Capital Stock isone billion and five hundred million reais (R$ 1,500,000,000.00), fullypaid-in, divided into six hundred and eighty-three million (683,000,000) no parvalue shares, of which two hundred and fifty-seven million (257,000,000) arecommon shares and four hundred and twenty-six million (426,000,000) arepreferred shares with no voting rights.

**SECTIONII**

**CAPITALINCREASE**

**ARTICLE 6**

The Company mayincrease the capital stock upon a resolution by the Shareholders Meeting,proposed by the Board of Directors, and after hearing the Audit Committee,using:

a)             The reserves, retained or suspendedearnings, surplus capital or special reserves resulting from monetaryrestatement;

b)            Annual restatement of the monetaryexpression of the capital stock, observing the provision in Article 7 of theBylaws;

c)             Issuance and placement of shares bysubscription.

Paragraph 1 —      The capital increases described in items “a”and “b” will observe the provision in Article 17, clause 4, of Law No. 6404/76.

Paragraph 2 —      Resolutions relating to capital stockincrease shall indicate the number and type of shares to be issued and shall betranscribed in the minutes of the Meeting.

Paragraph 3 —      The Executive Management Board shallsubmit the corresponding minutes of the Shareholders Meeting to the CommercialRegistry for annotation and filing, within 30 (thirty) days from the capitalincrease.

**ARTICLE 7**

Regardless ofhaving reached the limit contemplated in item I of Article 297 of Law No.6404/76, the Shareholders Meeting shall make a resolution in the year followingthat of its calling about the transfer of the capital reserve to the capitalstock as referred to in Article 167 of the same Law.

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**ARTICLE 8**

The followingconditions for subscription and payment shall be observed in the issuance andplacement of capital shares:

I. In increases bysubscription, the Shareholders Meeting shall indicate:

a)             Whether the payment shall be madein cash or in kind, on demand or by installments;

b)            The deadline for placing orsubscribing the issuance;

c)             The period of time for subscribingthe shares;

d)            The price of issuance of the shares.

II. Whenever theissuance of shares permits a term subscription or subscription by installments,the Subscription Bulletin shall specify the down amount, the number and amountof the installments and the respective payment dates as follows:

a)             A minimum payment of 10% (ten percent) of the subscribed amount must be paid at the time of subscription; thisamount may be received by the Company, whether or not by means of a bankdeposit;

b)            If the shareholder fails to make anypayment of the subscription installment on the due date, this shall imply,regardless of any notice:

b.1)         Accelerated maturity of all subsequentinstallments which shall become due by the shareholder;

b.2)         A default and, consequently, subject tointerest on arrears at the rate of one percent (1%) of the amount of theoverdue and unpaid installments plus restatement based on the nominal variationof the National Treasury Bonds (OTNs) or any other official index, at thediscretion of the Board of Directors;

b.3)         The Company’s right to file, at itsdiscretion, against the shareholder and joint debtors, an execution action tocollect the amounts due or to sell the shares at the Stock Exchange, at theShareholders’ account and risk, as permitted by Law.

III. Whenevercapital is increased by subscription, the COMPANY shall establish a period noshorter than thirty (30) days for the shareholders to exercise their preemptiverights.

**ARTICLE 9**

Upon a resolutionof the Board of Directors and observing the provisions of Article 30 of Law6404/76, the COMPANY may negotiate its own shares.

**CHAPTERIII**

**THESHARES**

 

**SECTION I**

**PROVISIONSAPPLYING TO SHARES**

**ARTICLE10**

The followingprovisions apply to Company shares:

I.              All company shares shall bebook-entry shares and remain in deposit accounts with BANCO BRADESCO S.A., onbehalf of their holders, no certificate being issued, pursuant to Articles 34and 35 of Law No.  6404/76, dated12/15/1976.

II.            Preferred and common shares areentitled to a compulsory minimum dividend of twenty-eight percent (28%) of thenet income for the year, established in accordance with Article 202, items I toIII, Law No. 6404/76, also observing the provisions of letter “b” of Article 12of these Bylaws.

III.           Ordinary and preferred shares shallparticipate equally in capital increases derived from net income and reserves,revaluation of assets and yearly capital restatement.

IV. In capitalincreases, classes of shares may be created or shares may be issued withoutobserving the previously existing proportional relation between classes andkinds of shares.

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V.            Provided that the maximum limitsestablished by the Brazilian Securities Exchange Committee are observed, themaintenance agreement relating to book-entry share services may authorize thefinancial institution to charge the shareholder a fee for assignment of thetitle of ownership to the shares.

**SECTIONII**

**COMMONSHARES**

**ARTICLE11**

Only COMMON sharesare entitled to vote the resolutions of the Shareholders Meeting.

Sole Paragraph —Fifty-one percent (51%) of the capital with voting rights shall be owned byBrazilian citizens.

**SECTIONIII**

**PREFERREDSHARES**

**ARTICLE12**

PREFERRED sharesare not entitled to vote and shall enjoy the following advantages:

a)             priority in the proportionalreceipt of twenty-eight percent (28%) of the net income for the year, as minimumnoncumulative dividend, competing in equal terms with common shares in anydividend allocated to them above that percentage;

b)            right to be included in the publicoffering for the disposal of the shareholding control under the conditions setforth in art. 254-A, with the wording given by Law 10303, dated 10.31.2001,with a guaranteed price at least equal to eighty percent (80%) of the amountpaid per share with voting right and which is an integral part of the controlblock ;

c)             priority in capital reimbursementin case of Company windup.

Sole Paragraph —Preferred shares with no voting right may acquire this right if the Companyfails to pay, for at least three (3) consecutive years, the minimum dividend towhich they are entitled and such right shall continue up to the payment of thefirst next dividend.

**ARTICLE13**

Shareholdersagreements on purchase and sale or preemptive rights on the acquisition ofshares or on exercising voting rights shall be valid, before the Company, onlyafter being filed in the Company’s headquarters.

**CHAPTERIV**

**THEMANAGEMENT**

**ARTICLE14**

The Company shallbe managed by a Board of Directors and an Executive Management Board, bothformed by Brazilian citizens or a majority of Brazilian citizens domiciled inthat country, whose powers shall prevail in decision-making.

Paragraph 1 — Theterm of office of the members of the Board of Directors and of the ExecutiveDirectors shall be unified and last one year, extending up to the entry uponoffice of the new administrators, reelection being permitted.

Paragraph 2 — Themembers of the Board of Directors and the Executive Directors shall enter uponoffice by signing the corresponding installation certificate or by subscribingthe minutes of the meeting of election in the corresponding books of minutes ofmeetings at which time a Declaration of Principles shall also be signed.

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**SECTION I**

**BOARD OFDIRECTORS**

**ARTICLE15**

The Board ofDirectors shall comprise a minimum of seven (7) to a maximum of eleven (11)members, all of them necessarily shareholders, and shall be governed by anInternal Regulation that will establish, among other matters deemed convenient,the operation of this body and of its subordinated Committees, the rights andduties of the Board members and the relationship of the Board of Directors withthe Executive Management Board and other corporate bodies.

Paragraph 1 — TheShareholders Meeting shall elect the Board Members and among them, the Chairmanand one or more Vice Chairman who, following the order of election, shallsubstitute for the Chairman in cases of absence, impediment or vacancy.

Paragraph 2 — If avacancy occurs whereby the number of Board Members is reduced below the minimumnumber fixed in these Bylaws, a Shareholders Meeting shall be called withinthirty (30) days to fill the vacant positions. The term of office of the newmembers of the Board of Directors, elected to fill the vacancies, shallcoincide with that of the other Board Members.

Paragraph 3 — Anyshareholder desiring to nominate one or more member(s) to the Board ofDirectors shall inform the Company  thename, qualification and full professional résumé of the candidates, thepositions that they occupy in other companies, as the case may be, and evidenceof compliance with the requirements of art 147, Paragraph 4, of Law No. 6404/76, and with the Brazilian SecuritiesExchange Committee — CVM regulations, confirming thereon that there are noimpediments to the election as contemplated in the aforementioned legalstatute, regulations and in these Bylaws. The Company will transmit immediatelyto CVM and to São Paulo Stock Exchange - BOVESPA, by electronic means, thecommunications received and their supporting documentation and, if received ontime, will inform the shareholders that all of the above are at their disposalat the company’s main address and in its Internet Site.

Paragraph 4 — Itshall be incumbent upon the shareholder that nominates candidates to the Boardof Directors to evaluate and, later, upon the Shareholders Meeting to consider,in making a resolution about the election of members to the Board of Directors,the adequacy of the candidates in the following situations in which theexistence of a conflict of interests may be presumed:

(i).                                 acandidate holding a job or function, particularly in the management, or inadvisory and audit committees, of other legal entities that may be consideredcompetitors of this Company in the market, or

(ii).                              acandidate that, cumulatively, (a) has been elected by a shareholder who hasalso been elected an administrator or Statutory or Audit member of a competingbusiness in the market and (b) cannot be characterized as an independent memberin relation to the shareholder(s) who elected that member, as per definition inParagraph 5 below).

Paragraph 5 — ABoard Member will be considered independent when the Member: (i) has norelationship with the Voting Shareholder, except interest in the capital; (ii)is not a controlling shareholder, spouse or relative up to the second degree ofthe Voting Shareholder or who has not had, in the last twelve (12) months, arelationship to, and/or has not been associated with a company or entityrelated to the Voting Shareholder (persons related to public educational and/orresearch institutions are excluded from this restriction); (iii) has not been,in the last twelve (12) month, an employee, administrator or member of thestatutory council of the Voting Shareholder, of the respective controllingshareholder or of the company controlled by them or associated to them; (iv)has not been a direct or indirect supplier or buyer of services and/or productsof the Voting Shareholder to a magnitude implying loss of independence; (v) hasnot been an employee or administrator of a Company or entity offering oracquiring services and/or products to and from the Voting Shareholder; (vi) isnot a spouse or relative up to the second degree of the administrator of theVoting Shareholder; (vii) does not receive other compensation from the VotingShareholder, its controlling shareholder or the entity controlled or sponsoredby it (cash income from interest in capital is excluded from this restriction).

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Paragraph 6 — Anyshareholder that nominates candidates to the Board of Directors shall inform,if applicable and at the time of election, after conducting the evaluationreferred to in the above paragraph 5, whether the candidate falls under any ofthe ineligibility or presumed conflict provisions contemplated in Law 6404/76,in CVM regulations or in these Bylaws, to enable the Shareholders Meeting toexamine whether a conflict exists in the actual case and whether to waive it.

Paragraph 7 — Forthe purposes of the provisions in article 115 of Law 6404/76, the vote  to elect a member to the Board of Directorsshall be considered abusive if cast by a Voting Shareholder who, aware of theexistence of a conflict of interest or reason for ineligibility, fails  to inform the Company as prescribed in theabove paragraph 6 and, later, the Shareholders Meeting, about the existence ofsuch reason for ineligibility or of facts that might lead to the presumption ofa conflict of interest on the part of the elected member.

Paragraph 8 — If,after the election of the Member, a fact falling under the same assumptionsleading to a presumption of conflict of interest as described in Para. 4occurs, it shall be incumbent upon the Board member to communicate such fact tothe Chairman of the Board of Directors. If the supervening fact is related tothe Voting Shareholders and is not personally related to the Board member, itshall be incumbent upon the Voting Shareholders to inform the fact to theChairman of the Board of Directors who, in turn, will submit the matter to theShareholders Meeting.

Paragraph 9 — Forthe purpose of Paragraphs 4, item (ii), letter (a) and 8 of this article,  a Board member shall be considered as havingbeen elected as such when (i) the shareholder who has done it did it on anindividual basis or (ii) the votes of that shareholder, if individuallyconsidered, were essential to complete the minimum percentage required byParagraph 4 of art. 141 of Law No. 6404/76 for exercising the right to aseparate election of the member of the Board of Directors of this Company.

Paragraph 10 — Nomember of the Board of Directors shall have access to information, participatein meetings of the Board of Directors or of any administrative bodies, vote orin any way intervene in matters in which, directly or indirectly, such memberis in a situation of conflicting interest with the company’s interests, inaccordance with Paragraph 4, item (ii), letter (a) of this article.

**ARTICLE16**

The ordinarymeetings of the Board of Directors will be held at least on a quarterly basis,on the dates fixed in advance in the annual calendar prepared by the Chairmanof the Board of Directors. The extraordinary meetings will be held wheneverrequired, upon a call made to its members made at least twenty-four (24) hoursin advance, indicating date, time and place of the meeting, with a briefdescription of the Order of Business.

Paragraph 1 — Noticesshall be given by the Chairperson of the Board of Directors or at the requestof three (3) of its members and, should the Chairperson fail to comply with itwithin five (5) days, those members may call the meeting directly, however, itshall be held at the same address of the Company’s Executive Management.

Paragraph 2 — Thequorum for the meetings of the Board of Directors shall be a minimum of six (6)of its members present in person.

Paragraph 3 — Inthe meetings of the Board of Directors, each member shall be entitled to one(1) vote.

Paragraph 4 — Savefor the provisions in the Sole Paragraph to Article 17, the decisions of theBoard of Directors shall be adopted, in any case, by the majority voting of themembers present and the Chairperson is entitled to the casting vote, withoutprejudice of his/her own vote.

Paragraph 5 — Themeetings of the Board of Directors shall be entered in the Book of Minutes ofMeetings of the Board of Directors and the resolutions destined to be effectivebefore third parties shall be transcribed as determined by the Board ofDirectors.

**ARTICLE17**

It is incumbent uponthe Board of Directors to:

I —         Establish and monitor the generaldirection of the Company’s business and of any other companies under itscontrol.

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II —        Establish and monitor all operational andadministrative Company regulations, particularly those related to:

a)             Personnel hiring and management,allocation, careers, levels, salaries and wages as well as fringe benefits ofthe Company’s employees;

b)            Controls, audit, accounting andstatistics;

c)             Acquisition, administration anddisposal of permanent assets.

III —       Elect and remove the Executive Directorsand define their titles and duties, scope of activities  and, in case an aggregate amount isestablished by the Shareholders Meeting, individual fees.

IV —       Make a resolution, at any time, about the distributionof interim dividends from interim balance sheet accounts, or Retained Earningsor Profit Reserve.

V —        Approve:

a)             The Company’s administrativestructure and respective positions, duties and salaries;

b)            The Strategic Plan;

c)             The Yearly Operational Plan and thecorresponding capital, investment and financial budgets as well asdivestitures;

d)            Interim balance sheets prepared bythe Company;

e)             The balance sheet, statements ofincome and annual report to be submitted to the Shareholders Meeting;

f)             The acquisition of assets underproperty, plant and equipment whenever, due to their nature and/or cost, theamount exceeds that contemplated in a specific project which is an integralpart of the Yearly Operational Plan;

g)            The disposal of assets underproperty, plant and equipment when, due to its nature and/or amount, they havenot been included in the Yearly Operational Plan;

h)            Interest in other Companies of anynature, as a shareholder or quota holder;

i)              Nomination of administrators forthe controlled, affiliate or associated companies; and

j)              Any operation exceeding the scopeof the Executive Management Board or which fails to meet the approved budgets,policies and rules of the Board of Directors.

VI —       Call the Shareholders Meetings when requiredby Law and by these Bylaws or whenever deemed convenient.

VII —     Approve proposals to be submitted to theShareholders Meetings and relating to:

a)             Amendment to the Bylaws;

b)            Modification of the Capital Stock;

c)             Merger with another Company,amalgamation into or of other Company;

d)            Creation of other statutoryreserves;

e)             Distribution of the profitsdetermined in the annual balance sheet.

VIII — Authorizethe Executive Management Board to:

a)             Waive Corporate rights, unlessthose rights are derived from the normal course of corporate businesses, and inthe case of donations aiming to provide support to social, philanthropic andsimilar projects and programs, provided that in this case the limit establishedin the Yearly Operational Plan, letters “g” and “h” to Article 23 of theseBylaws, is observed;

b)            Acquire and dispose of shares orquotas and encumber them, always observing the provisions of Article 36 ofthese Bylaws

c)             Offer collaterals, except in thecase of financial operations contemplated in the Yearly Operational Plan;

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d)            Assign, by means of an agreementwith a commercial purpose, and for a definite period of time, whether or notrenewable, the use of the trademark “SADIA”, logos, emblems, symbols and otherdistinct signs which identify the Company, as well as other trademarks,know-how, intellectual property works and patents which are, or may come to be,its property, except in the case of its use in relation to products which, eventhough processed by third parties, are destined to be exclusively marketed bythe Company, provided that observing Article 23, letter “f” of these Bylaws;and

e)             Dispose of, by means of adefinitive assignment, trademarks, patents, know-how, characters or any otherintellectual work owned by the Company.

IX —      Require, at any time, the examination ofspecific corporate matters or business and issue general rules or instructionsabout them to be observed by the Executive Management Board.

X —        Follow up the management and theperformance of the Executive Management Board.

XI —      Create, at any time, on a temporary orpermanent basis, committees or work groups, always presided by a member of theBoard of Directors and formed by administrators, employees or hiredprofessionals, for the specific purpose of preparing projects, carrying outanalysis and making recommendations on certain matters or following upactivities in any Corporate area.

XII —     Prepare and approve the Internal Regulationof the Board of Directors and the Company’s Code of Conduct.

XIII —    Evaluate formally the results achieved by theCompany.

Sole Paragraph —The matters referred to under numbers I, III, IV, letters “a”, “b”, “c”, “f”and “g”  of number V; under number VII,letters “a”  and  “c”  ofnumber VIII and under number XII may only be approved by the vote of at leasthalf plus one of the acting members of the Board of Directors.

XIV — Appoint andremove independent auditors for the Company.

**ARTICLE18**

It is incumbentupon the Chairperson of the Board of Directors:

I —         Comply with and enforce compliance withthese Bylaws, the Internal Regulation of the Board of Directors, the Company’sCode of Conduct, the resolutions of the Shareholders Meeting and of the Boardof Directors and keep abreast of the corporate operations.

II —        Safeguard, within the scope of itsduties, the effectiveness of the shareholders agreement filed in itsheadquarters.

III —       Formally convene the Shareholders Meetingsand chair them.

IV —       Call and chair the meetings of the Boardof Directors.

V —        Provide guidance to the ExecutiveManagement Board on resolutions approved by the Board of Directors.

**SECTIONII**

**AUDITCOMMITTEE**

**ARTICLE19**

The AuditCommittee is a technical permanent body whose duty is to assist the Board ofDirectors. It is formed by three (3) to five (5) members of the Board ofDirectors, elected by the Board of Directors for an annual unified term ofoffice. Three (3) of those members shall be compulsorily independent members asdefined in its Internal Regulation. At least one (1) of the independent membersshall have proven experience and knowledge of finance and controls, includingsome understanding of international accounting standards.

Paragraph 1 —      The Audit Committee shall have, among itsmembers, a Coordinator appointed by the Board of Directors at the same meetingthat formed it.

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Paragraph 2 —      The Internal Regulation of the AuditCommittee shall establish how it shall be called, the frequency of meetings andany other formalities regarding the participation of guests and the resolutionsto be made by this body.

Paragraph 3 —      The non-independent members of the AuditCommittee shall not be entitled to vote the collegiate resolutions of thisbody.

**ARTICLE20**

It is specificallyincumbent upon the Audit Committee, without prejudice of a better detailing ofits duties in its Internal Regulation:

a)             Monitor the effectiveness of theprocedures relating to the preparation of the annual and other regularfinancial reports of this Company;

b)            Verify the maintenance of efficientaccounting systems and internal controls, monitoring them on an ongoing basis;

c)             Monitor the risk management systemrelating to the internal control environment of this Company;

d)            Analyze in advance the reports to besubmitted to the Brazilian and to the U.S. Securities and Exchange Commission  (CVM and SEC);

e)             Select and refer external auditorsto be engaged, including their respective work proposals and fees, to the Boardof Directors, for approval;

f)             Approve in advance the engagement,by the Company, of all other services to be rendered by external auditors,particularly consulting services, ensuring compliance with the applicablelegislation;

g)            Establish procedures forinvestigating and taking action in cases of misconduct as well as in relationto receiving, handling and responding to accusations relating to accountingpractices, internal controls in the issuance of financial reports and internalaudit;

h)            Analyze, prior to submitting to theBoard of Directors, transactions with Related Parties, as referred to in thecurrent legislation;

i)              Submit a proposal to theChairperson of the Board of Directors, when preparing the operational plan, toinclude the required amount to fund the activities of the Audit Committee inthe annual budget of the Board of Directors ; and

j)              Supervise the services and preparea formal evaluation of the performance of the internal audit of this Company.

**SECTIONIII**

**THEEXECUTIVE MANAGEMENT BOARD**

**ARTICLE21**

The ExecutiveManagement Board  shall comprise aminimum of seven (07) and a maximum of twenty-five (25) members, whether or notshareholders, being one of them appointed Managing Director and the remainingappointed Directors, all of them elected by the Board of Directors. In theelection act, the Board of Directors shall also designate their titles and respectivefees.

**ARTICLE22**

The ExecutiveManagement Board  shall be convened atleast once a month, called by the Managing Director or, in his/her absence, byat least three (3) Directors jointly, whatever their titles, and the minutes ofsuch meetings shall be transcribed in the pertinent book.

Paragraph 1 — Themeetings of the Executive Management Board shall be presided by the ManagingDirector or, in his/her absence, by any Director, as provided for in Article23, letter “m”.

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Paragraph 2 — Thequorum for meetings of the Executive Management Board shall be at least seven(7) Directors and the resolutions shall be approved by majority voting.

**ARTICLE23**

With theobservance of the scope of duties of the Board of Directors, it shall beincumbent upon the Executive Management Board :

a)             Manage the corporate businessseeking to safeguard the Company’s interests, carrying out and enforcingcompliance with the laws, these Bylaws and the resolutions approved by theShareholders Meeting and by the Board of Directors.

b)            Submit to the Board of Directors thematters referred to under Article 17, item IV and V, letters “b”,  “c”,  “d”  and  “e”  of item VIII and item IX of these Bylaws.

c)             Approve or validate borrowing,financing and leasing operations;

d)            Approve the acquisition, disposaland renting of assets under property, plant and equipment, observing theprovisions of letters “f” and “g” of item V, Article 17 of these Bylaws;

e)             Approve the offer of collaterals infinancial operations contemplated in the Yearly Operational Plan as well as theprovision of guarantees and/or collaterals to its subsidiaries in borrowing,funding and leasing operations;

f)             Approve the assignment fortemporary use of trademarks, know-how, patents and intellectual property works,owned by the Company, provided that (1) this is made in connection withindustrial processing by third parties, of products to be marketed by theCompany on an exclusive basis; or (ii) authorization is granted for the use oftrademarks and intellectual property works solely for the purposes ofdissemination, not intended for commercial use;

g)            Waive Corporate rights, observingthe provisions in Article 17, item VIII, letter “a” of these Bylaws;

h)            Approve donations aiming to providesupport to social, philanthropic and similar projects and programs, providedthat the limit established in the Yearly Operational Plan is observed;

i)              import machines, equipment piecesand products for own use, transformation or resale;

j)              Approve the appointment of proxiesor attorneys-in-fact, representatives or agents in the Brazilian territory andabroad, observing the provisions in Article 24, item I, letter “e” of theseBylaws;

k)             Approve the setting up and windupof industrial, commercial and service units as well as branches and deposits;

l)              Designate to any of its member theduties of a Director in case of absence or incapacitation.

SoleParagraph —    Notwithstanding theprovisions in Paragraph 1 of Article 22, the meetings of the ExecutiveManagement Board for resolution on the matters referred to under letter “d”shall necessarily be presided by the Managing Director.

**ARTICLE24**

Except for theacts within the exclusive scope of the Executive Management Board, as acollective body, it shall be incumbent upon the Executive Directors:

I —         SEVERALLY

a)             Carry out and enforce compliancewith these Bylaws and the resolutions approved by the Shareholders Meeting andby the Board of Directors.

b)            Represent the Company before Courtsor third parties and Governmental, State and Municipal Authorities.

c)             Hire and dismiss technicians oremployees in any category, in accordance with letter “a”, item II of Article17;

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d)            Receive, release, issue, endorse,discount and accept trade bills, pay and redeem notes, promote collections,open accounts in banking establishments, endorse checks for deposits and makeinteraccount transfers of money on behalf of the Company;

e)             Sign instruments relating to theactions authorized by the Board of Directors, as referred to in item IX ofArticle 17, and those approved by the Board of Directors, as per letters “c” to“l” of Article 23 of these Bylaws;

f)             Practice all other acts requiredfor the development of corporate businesses which, according to law and theseBylaws, are not dependent upon a prior authorization by the ShareholdersMeeting or the Board of Directors or a decision by the Executive ManagementBoard .

II —        JOINTLY, UPON THE SIGNATURE OF TWODIRECTORS

a)             Issue and endorse Promissory Notesand accept Bills of Exchange;

b)            Issue checks or Rural PromissoryNotes;

Paragraph 1 — Thepowers under item I and letter “b” of item II may be granted through apower-of-attorney.

Paragraph 2 —Exceptionally, whenever issuing checks for payment of raw materials atindividual purchasing stations, these powers may, at the discretion of theExecutive Management Board, be exercised by one sole Director or by anattorney-in-fact.

Paragraph 3 — Inthe companies in which the Company is a shareholder, the Company may berepresented by any Director appointed in advance by the Executive ManagementBoard for this purpose or by an attorney-in-fact with special powers, asprovided for in Paragraph 1 of article 126 of Law No. 6404/76.

**SECTIONIV**

**ADVISORYCOUNCIL**

**ARTICLE25**

The AdvisoryCouncil shall comprise a minimum of seven (7) to a maximum of fifteen (15)members, whether or not shareholders, one of them being appointed Chairpersonand another Vice Chairperson, elected and removed at any time by the Board ofDirectors, for a term of office of one (1) year, reelection being permitted.

Paragraph 1 — Whenelecting the members to the Advisory Council, the Board of Directors shallappoint its Chairperson and Vice Chairperson.

Paragraph 2 — Exceptfor the Chairperson and Vice Chairperson of the Board of Directors — who shallbe native members of the Advisory Board — no other Management member ispermitted to be a member of this body.

Paragraph 3 — Themembers of the Advisory Council shall enter their respective offices by signingthe Installation Certificate, to be transcribed on the book of minutes ofmeetings of this body.

**ARTICLE26**

The AdvisoryCouncil shall convene ordinary meetings on a quarterly basis and, extraordinarymeetings whenever requested by the Board of Directors through its Chairperson.

Paragraph 1 — Itis incumbent upon the Chairperson of the Advisory Board or, in his/her absence,to the Vice Chairperson, to call, convene and chair the meetings of this body.

Paragraph 2 — Thequorum for the meetings of the Advisory Council shall be a minimum of half plusone of its acting members.

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**ARTICLE27**

It is incumbentupon the Advisory Council to issue an opinion on matters of relevant interestto the Company and, irrespective of any request, to keep the Board ofDirectors, informed about relevant matters which may come to the knowledge ofits members.

**CHAPTER V**

**SHAREHOLDERSMEETINGS**

**SECTION I**

**CONVENINGMEETINGS AND MAKING RESOLUTIONS**

**ARTICLE28**

A lawfully calledand convened Shareholders Meeting is the highest body of the Company, capableof resolving all matters and making any resolutions, including those relatingto amendments to these Bylaws.

**ARTICLE29**

ShareholdersMeetings are held, on an ordinary basis, within the four (4) months followingthe closing of the fiscal year, for the purposes contemplated in the Law and,on an extraordinary basis, whenever corporate interests so require.

**ARTICLE30**

Save for theexceptions contemplated in the Law, a Shareholders Meeting is constitutedwhenever, on a first call, shareholders representing a minimum of twenty-fivepercent (25%)  of the Capital Stock withvoting rights are present and, on a second call, any number of the shareholderspresent.

**ARTICLE31**

Regularly maderesolutions of the Shareholders Meetings shall bind all shareholders, in spiteof those absent or dissenting, as provided for by the Law and these Bylaws.

**ARTICLE32**

ShareholdersMeetings convened in accordance with the Law shall be chaired by theChairperson of the Board of Directors who will appoint one or more secretariesfrom among the shareholders present.

Sole Paragraph — Inthe absence of the Chairperson, the Shareholders Meeting shall be chaired byone of the Vice Chairpersons of the Board of Directors, observing the order ofelection and, in the absence of both, by a member of the Board of Directorsappointed by the shareholders.

**ARTICLE33**

In the event thatthe Shareholders Meeting cannot be held on the scheduled date, due to lack oflegal quorum, a second call shall be made in the same manner of the first,spaced by a minimum of eight (8) days between the first publication of theadvertisement and the date of the Shareholders Meeting which, in this case,shall be convened with any number of attendees.

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**SECTIONII**

**ORDINARYSHAREHOLDERS MEETINGS**

**ARTICLE34**

OrdinaryShareholders Meetings shall be held to:

I —         Receive the Management accounts andexamine, discuss and vote the financial statements;

II —        Make a resolution about the appropriationof net income for the year and the distribution of dividends.

III —       Elect the members of the Board ofDirectors and of the Audit Council, as the case may be.

IV —       Approve the restatement of the CapitalStock in the cases contemplated by Law No. 6404/76 and by these Bylaws.

V —        Fix the compensation of theadministrators and of the members of the Audit Council, when called.

 

**SECTIONIII**

**EXTRAORDINARYSHAREHOLDERS MEETINGS**

**ARTICLE35**

Whenever held onan extraordinary basis, a Shareholders Meeting shall make resolutions onlyabout the matters for which it was called.

**ARTICLE36**

It is incumbentupon the Shareholders Meeting to authorize the disposal or pledge of quotas orshares with voting rights of a legal entity whose control of the voting capitalis directly or indirectly owned by the Company whenever the disposal or pledgeimplies the risk of losing that control.

**CHAPTERVI**

**THE AUDITCOMMITTEE**

**ARTICLE37**

The AuditCommittee shall be permanent and have the powers  established in the Law, being formed by aminimum of three (3) and a maximum of five (5) permanent members and an equalnumber of substitutes, whether or not shareholders, elected by the ShareholdersMeeting for a one-year mandate.

Sole Paragraph —In addition to the persons referred to in Article 147 of Law No. 6404/76, asalready stated in Article 14 of these Bylaws, the persons referred to inArticle 162, Paragraph 2 of Law No. 6404/76 cannot be elected to the AuditCouncil.

**CHAPTERVII**

**THEFISCAL YEAR, THE BALANCE SHEET AND THE RESULTS**

 

**SECTION I**

**THEFISCAL YEAR AND THE BALANCE SHEET**

**ARTICLE38**

The fiscal yearshall end at December 31 of every year, when the Executive Management Boardshall prepare the Company ́s financial statements, based on the commercialaccounting of the Company and expressing clearly its situation and the changesoccurred in the year:

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I —         Balance Sheet;

II —        Statement of Year-to-Date net income andlosses or changes in shareholders equity;

III —       Statement of income for the year;

IV —       Statement of changes in financialposition.

**ARTICLE39**

The books andrecords of the Company shall be examined by an independent audit firm selectedby the Board of Directors.

**SECTIONII**

**DISTRIBUTIONOF NET INCOME**

** **

**ARTICLE40**

The ShareholdersMeeting shall make a resolution about the distribution of net income for theyear as determined by the balance sheet and proposed by the Board of Directors,accompanied by the opinion of the Audit Council, if active, observing thefollowing criteria:

I —         Five percent (5%) of the net income forthe Legal Reserve Fund, up to the amount established by the Law on CapitalStock.

II —        An amount equivalent to twenty-eightpercent (28%) of Net Income for the year as a portion required for the paymentof the minimum dividend of preferred and common shares, such net income beingreduced or increased by the amounts contemplated in items I, II and III,Article 202 of Law No. 6404/76, also observing the provisions of item “b” ofArticle 12 of these Bylaws.

III —       Up to ten percent (10%), after deductingany accumulated losses and the provision for income tax, as the participationof the administrators.

IV —       A minimum of fifteen percent (15%) and amaximum of sixty percent (60%) on net income, as Special Expansion Reserve,destined to fund the expansion plans of the Company, up to reaching seventypercent (70%) of the capital.

V —        Up to five percent (5%) to set up aSpecial Fund for Research and Development, up to reaching ten percent (10%) ofthe capital.

VI —       The remainder shall be destined asproposed by the administration bodies to the Shareholders Meeting.

Paragraph 1 — Theamount corresponding to the participation of the administrators shall bedistributed solely if the minimum dividend to the shareholders contemplated inthese Bylaws has been guaranteed.

Paragraph 2 — Thedistribution of dividends and bonuses shall observe the periods of time definedin the Law.

Paragraph 3 — Wheneverthe subscribed capital is increased, the dividends corresponding to that periodmay be distributed on a “pro rata tempore” basis from the paid-up capital.

Paragraph 4 — Theamounts paid from pre-existing Retained Earnings and/or Profit Reserves accountsare an integral part of the minimum dividend established in item II of thisarticle.

Paragraph 5 — Ifthe minimum dividend is paid from the pre-existing Retained Earnings and/orProfit Reserves accounts, a portion of the Net Income for the year, correspondingto the amount of the paid dividend, may be appropriated to reestablish thereserves used.

Paragraph 6 —      The Company may pay interest on theshareholders’ own capital as dividends.

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**CHAPTERVIII**

**COMPANYWINDUP**

**ARTICLE41**

The Company may beliquidated in the cases contemplated in the Law or upon a resolution of theShareholders Meeting.

SoleParagraph —    It is incumbent upon theShareholders Meeting to establish the liquidation mode and to elect theliquidators and the members of the Audit Council who will be active during theliquidation period.

 

**CHAPTERIX**

**MISCELLANEOUS**

**ARTICLE42**

In addition to theofficial gazette *Diário Oficial do Estado deSanta Catarina,* the publications required by the Law and by theseBylaws shall be made**on the samepress institution where the minutes or the abstract of the minutes of theShareholders Meeting approving these Bylaws have been published until anychange is advised to the shareholders for annotation in the minutes of theOrdinary Shareholders Meeting.

**I certifythat these Bylaws are a faithful copy of the text approved by the ExtraordinaryShareholders Meeting held on 12.15.2005, as entered and signed in the Book ofMinutes of the Shareholders Meetings No. 01 of this Company and amended by theExtraordinary Shareholders Meetings held on January 12, 2007 (01/12/2007) andMarch 01, 2007 (03/01/2007).**

**MAURO E.GUIZELINE/JOSE NESTOR C.HOPF/PAULO CEZAR ARAGÃO**

**Secretaries**

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***ConsolidatedFinancial Statements***

*** ***

***SadiaS.A.***

*** ***

***Yearsended December 31, 2006, 2005 and 2004***

#  

F-1

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# SADIA S.A.

## ***CONSOLIDATED FINANCIAL STATEMENTS***

**Contents**
| Report of Independent Registered  Public Accounting Firm                                                   |   | F-3    |
|------------------------------------------------------------------------------------------------------------|--------|--------|
| (KPMG  Auditores Independentes)                                                                            |   |   |
|                                                                                                       |   |   |
| Consolidated Balance Sheets as of December 31, 2006  and 2005                                              |   | F-4    |
|                                                                                                       |   |   |
| Consolidated Statements of Income for the Years Ended  December 31, 2006, 2005 and 2004                    |   | F-6    |
|                                                                                                       |   |   |
| Consolidated Statements of Shareholders’ Equity for  the Years Ended December 31, 2006, 2005 and 2004 |   | F-8    |
|                                                                                                       |   |   |
| Consolidated Statements of Cash Flows for the Years  Ended December 31, 2006, 2005 and 2004                |   | F-9    |
|                                                                                                       |   |   |
| Notes to Consolidated Financial Statements                                                                 |   | F-10   |

** **

F-2

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**REPORTOF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**

The Board of Directors and Shareholders of

SadiaS.A.

We have audited the accompanying consolidated**balance sheets of Sadia S.A. (the Company) and subsidiaries as of December 31,2006 and 2005, and the related consolidatedstatements of income, shareholders’ equity, and cash flows for each of theyears in the three-year period ended December 31, 2006. These consolidated financial statements arethe responsibility of the Company’s management. Our responsibility is toexpress an opinion on these consolidatedfinancial statements based on our audits.

We conducted our audits in accordance with the standards of the PublicCompany Accounting Oversight Board (United States). Those standards require thatwe plan and perform the audit to obtain reasonable assurance about whether thefinancial statements are free of material misstatement.  An audit includes examining, on a test basis,evidence supporting the amounts and disclosures in the financial statements. Anaudit also includes assessing the accounting principles used and significantestimates made by management, as well as evaluating the overall financialstatement presentation.  We believe thatour audits provide a reasonable basis for our opinion.

In our opinion, the consolidatedfinancial statements referred to above present fairly, in all materialrespects, the financial position of Sadia S.A. and subsidiaries as of December 31, 2006 and 2005, and theresults of their operations andtheir cash flows for each ofthe years in the three-year period ended December 31, 2006, in conformity withU.S. generally accepted accounting principles.

We also have audited, in accordance with the standards of the PublicCompany Accounting Oversight Board (United States), the effectiveness of SadiaS.A ́s internal control over financial reporting as of December 31, 2006, basedon criteria established in InternalControl—Integrated Framework issued by the Committee of SponsoringOrganizations of the Treadway Commission (COSO), and our report datedJune 27, 2007 expressed an unqualifiedopinion on management’s assessment of, and the effective operation of, internalcontrol over financial reporting.

As discussed in the Note3(r) to the consolidated financial statements, the Company adopted therecognition and disclosure provisions of Statement of Financial AccountingStandards No. 158,*Employers’ Accounting forDefined Benefit Pension and Other Postretirement Plans,* as ofDecember 31, 2006.
| /s/ KPMG Auditores Independentes |
|----------------------------------|
|                             |
| KPMG Auditores Independentes     |
|                             |
| São Paulo, Brazil           |
| June 27, 2007                    |

 

F-3

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**SADIA S.A.**

CONSOLIDATEDBALANCE SHEETS

December31, 2006 and 2005

(In thousands of Reais — R$,except share amounts)
| ** **                                                 | ** ** | **2006**  | ** ** | **2005**  | ** ** |
|------------------------------------------------------------|------------|-----------|------------|-----------|------------|
| Assets                                                     |       |      |       |      |       |
| Current assets:                                            |       |      |       |      |       |
| Cash and cash  equivalents                                 |       | 726,295   |       | 683,274   |       |
| Available-for-sale  securities                             |       | 1,701,719 |       | 1,891,722 |       |
| Foreign currency  futures and interest rate swap contracts |       | 65,597    |       | 55,656    |       |
| Accounts and  notes receivable, net                        |       | 921,044   |       | 718,132   |       |
| Inventories                                                |       | 1,065,032 |       | 981,941   |       |
| Recoverable  taxes                                         |       | 169,347   |       | 146,562   |       |
| Deferred income  taxes                                     |       | 37,867    |       | 22,039    |       |
| Other current  assets                                      |       | 242,788   |       | 88,850    |       |
| Total current assets                                       |       | 4,929,689 |       | 4,588,176 |       |
|                                                       |       |      |       |      |       |
| Property, plant and  equipment, net                        |       | 2,154,980 |       | 1,523,309 |       |
|                                                       |       |      |       |      |       |
| Other assets:                                              |       |      |       |      |       |
| Equity investees                                           |       | 400       |       | 4,135     |       |
| Available-for-sale  securities                             |       | 129,127   |       | 65,057    |       |
| Judicial  deposits                                         |       | 78,157    |       | 78,396    |       |
| Recoverable  taxes                                         |       | 162,229   |       | 120,024   |       |
| Deferred income  taxes                                     |       | —    |       | 27,054    |       |
| Intangible  assets other benefit                           |       | —    |       | 15,311    |       |
| Prepaid pension  plan                                      |       | 368,890   |       | 95,027    |       |
| Other intangible  assets                                   |       | 25,378    |       | 29,440    |       |
| Goodwill                                                   |       | 29,857    |       | 32,728    |       |
| Advances to  suppliers                                     |       | 73,358    |       | 34,229    |       |
| Other                                                      |       | 87,692    |       | 94,398    |       |
| Total other assets                                         |       | 955,088   |       | 595,799   |       |
|                                                       |       |      |       |      |       |
| Total assets                                               |       | 8,039,757 |       | 6,707,284 |       |

 

F-4

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| ** **                                                                                 | ** ** | **2006**   | ** ** | **2005**   | ** ** |
|--------------------------------------------------------------------------------------------|------------|------------|------------|------------|------------|
| Liabilities and Shareholders’ equity                                                  | ** ** | ** ** | ** ** | ** ** | ** ** |
| Current liabilities:                                                                       |       |       |       |       |       |
| Short-term debt                                                                            |       | 1,226,567  |       | 790,162    |       |
| Current portion of  long-term debt                                                         |       | 214,708    |       | 694,180    |       |
| Foreign currency  futures and interest rate swap contracts                                 |       | 76,630     |       | 158,692    |       |
| Suppliers                                                                                  |       | 503,230    |       | 495,330    |       |
| Salaries and social  charges payable and accrued vacation                                  |       | 112,433    |       | 99,225     |       |
| Taxes payable                                                                              |       | 63,348     |       | 38,648     |       |
| Dividends payable                                                                          |       | 59,420     |       | 128,210    |       |
| Accrued employee bonus                                                                     |       | 45,776     |       | 59,304     |       |
| Accrued marketing                                                                          |       | 32,566     |       | 43,999     |       |
| Accrued freight                                                                            |       | 21,486     |       | 29,394     |       |
| Other                                                                                      |       | 137,115    |       | 88,668     |       |
| Total current liabilities                                                                  |       | 2,493,279  |       | 2,625,812  |       |
|                                                                                       |       |       |       |       |       |
| Long-term liabilities                                                                      |       |       |       |       |       |
| Long-term debt                                                                             |       | 2,670,969  |       | 1,704,184  |       |
| Foreign currency and  interest rate swap contracts                                         |       | 6,649      |       | 10,331     |       |
| Accrual for legal  proceedings and labor claims                                            |       | 75,954     |       | 71,947     |       |
| Deferred income taxes                                                                      |       | 72,708     |       | —     |       |
| Accrued employee  benefit liability                                                        |       | 63,509     |       | 47,575     |       |
| Stock options                                                                              |       | 3,324      |       | 678        |       |
| Other                                                                                      |       | 59,758     |       | 16,824     |       |
| Total long-term liabilities                                                                |       | 2,952,871  |       | 1,851,539  |       |
|                                                                                       |       |       |       |       |       |
| Minority interest                                                                          |       | 964        |       | 1,816      |       |
|                                                                                       |       |       |       |       |       |
| Shareholders’ equity:                                                                 |       |       |       |       |       |
| Preferred shares, no  par value, 426,000,000 shares authorized and issued in 2006 and 2005 |       | 938,914    |       | 938,914    |       |
| Common shares, no par  value, 257,000,000 shares authorized and issued in 2006 and 2005    |       | 561,086    |       | 561,086    |       |
| Additional paid-in  capital                                                                |       | 289        |       | —     |       |
| Preferred shares in  treasury, at cost                                                     |       | (33,341    | )          | (10,377    | )          |
| Appropriated retained  earnings                                                            |       | 999,430    |       | 738,417    |       |
| Unappropriated  accumulated (loss) earnings                                                |       | (17,318    | )          | 2,055      |       |
| Accumulated other  comprehensive income (loss)                                             |       | 143,583    |       | (1,978     | )          |
| Total shareholders’ equity                                                            |       | 2,592,643  |       | 2,228,117  |       |
| Total liabilities and shareholders’ equity                                            |       | 8,039,757  |       | 6,707,284  |       |

 

Seenotes to the Consolidated Financial Statements.

F-5

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**SADIA S.A**

CONSOLIDATEDSTATEMENTS OF INCOME

Yearsended December 31, 2006, 2005 and 2004

(In thousands of Reais - R$,except numbers of shares and per share amounts)
| ** **                                                                            | ** ** | **2006**   | ** ** | **2005**   | ** ** | **2004**   | ** ** |
|---------------------------------------------------------------------------------------|------------|------------|------------|------------|------------|------------|------------|
|                                                                                  |       |       |       |       |       |       |       |
| Gross operating revenue                                                               |       | 7,894,054  |       | 8,327,372  |       | 7,117,318  |       |
|                                                                                  |       |       |       |       |       |       |       |
| Value-added tax on sales                                                              |       | (939,670   | )          | (914,219   | )          | (880,010   | )          |
| Sales deductions                                                                      |       | (124,084   | )          | (95,311    | )          | (128,083   | )          |
| Net operating revenue                                                                 |       | 6,830,300  |       | 7,317,842  |       | 6,109,225  |       |
| Cost of goods sold                                                                    |       | (5,212,566 | )          | (5,324,359 | )          | (4,292,650 | )          |
| Gross profit                                                                          |       | 1,617,734  |       | 1,993,483  |       | 1,816,575  |       |
|                                                                                  |       |       |       |       |       |       |       |
| Operating expenses:                                                                   |       |       |       |       |       |       |       |
| Selling                                                                               |       | (1,303,040 | )          | (1,245,892 | )          | (1,144,482 | )          |
| General and  administrative                                                           |       | (96,485    | )          | (80,959    | )          | (52,462    | )          |
| Other operating income,  net                                                          |       | 84,014     |       | 14,271     |       | 15,398     |       |
| Total operating expenses                                                              |       | (1,315,511 | )          | (1,312,580 | )          | (1,181,546 | )          |
|                                                                                  |       |       |       |       |       |       |       |
| Operating income                                                                      |       | 302,223    |       | 680,903    |       | 635,029    |       |
|                                                                                  |       |       |       |       |       |       |       |
| Interest expense                                                                      |       | (310,569   | )          | (311,626   | )          | (336,825   | )          |
| Interest income and other, net                                                        |       | 240,012    |       | 247,998    |       | 249,784    |       |
| Foreign currency exchange gain, net                                                   |       | 157,050    |       | 53,377     |       | 39,134     |       |
| Income before income tax, equity in income (loss) of investees and  minority interest |       | 388,716    |       | 670,652    |       | 587,122    |       |
|                                                                                  |       |       |       |       |       |       |       |
| Income tax expense                                                                    |       |       |       |       |       |       |       |
| Current                                                                               |       | (10,967    | )          | (52,028    | )          | (32,969    | )          |
| Deferred                                                                              |       | (18,117    | )          | (16,411    | )          | (63,130    | )          |
| Total income tax                                                                      |       | (29,084    | )          | (68,439    | )          | (96,099    | )          |
| Income before equity in income (loss) of investees and minority  interest             |       | 359,632    |       | 602,213    |       | 491,023    |       |
|                                                                                  |       |       |       |       |       |       |       |
| Equity in income (loss) of investees                                                  |       | (178       | )          | 1,219      |       | (1,385     | )          |
| Minority interest                                                                     |       | 1,106      |       | (164       | )          | (137       | )          |
|                                                                                  |       |       |       |       |       |       |       |
| Net income                                                                            |       | 360,560    |       | 603,268    |       | 489,501    |       |
|                                                                                  |       |       |       |       |       |       |       |
| Net income applicable to preferred shares                                             |       | 224,046    |       | 375,802    |       | 316,045    |       |
| Net income applicable to common shares                                                |       | 136,514    |       | 227,466    |       | 173,456    |       |
| Net income                                                                            |       | 360,560    |       | 603,268    |       | 489,501    |       |

 

F-6

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**SADIA S.A**

CONSOLIDATEDSTATEMENTS OF INCOME

Yearsended December 31, 2006, 2005 and 2004

(In thousands of Reais - R$, except numbers of shares and per shareamounts)
| ** **                                                     | ** ** | **2006**    | ** ** | **2005**    | ** ** | **2004**    | ** ** |
|----------------------------------------------------------------|------------|-------------|------------|-------------|------------|-------------|------------|
|                                                           |       |        |       |        |       |        |       |
| Basic earnings per thousands shares in R$:                     |       |        |       |        |       |        |       |
| Preferred                                                      |       | 531.18      |       | 885.08      |       | 742.42      |       |
| Common                                                         |       | 531.18      |       | 885.08      |       | 674.93      |       |
|                                                           |       |        |       |        |       |        |       |
| Weighted average number of shares outstanding:                 |       |        |       |        |       |        |       |
| Preferred                                                      |       | 421,785,712 |       | 424,595,712 |       | 425,695,712 |       |
| Common                                                         |       | 257,000,000 |       | 257,000,000 |       | 257,000,000 |       |
|                                                           |       |        |       |        |       |        |       |
| Diluted earning per thousands shares in R$                     |       |        |       |        |       |        |       |
| Preferred                                                      |       | 529.79      |       | 884.38      |       | 742.42      |       |
| Common                                                         |       | 529.79      |       | 884.38      |       | 674.93      |       |
|                                                           |       |        |       |        |       |        |       |
| Weighted average shares and diluted potential number of shares |       |        |       |        |       |        |       |
| Preferred                                                      |       | 423,568,114 |       | 425,137,363 |       | 425,695,712 |       |
| Common                                                         |       | 257,000,000 |       | 257,000,000 |       | 257,000,000 |       |

 

Seenotes to the Consolidated Financial Statements.

F-7

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**SADIA S.A.**

CONSOLIDATEDSTATEMENTS OF SHAREHOLDERS’ EQUITY

Yearsended December 31, 2006, 2005 and 2004

(In thousands of Reais -R$)
| ** **                                                                          | ** ** | **2006**  | ** ** | **2005**  | ** ** | **2004**  | ** ** |
|-------------------------------------------------------------------------------------|------------|-----------|------------|-----------|------------|-----------|------------|
| Preferred shares                                                                    |       |      |       |      |       |      |       |
| At the beginning  of the year (426,000,000 shares)                                  |       | 938,914   |       | 627,055   |       | 627,055   |       |
| Capital increase  without issue of shares                                           |       | —    |       | 311,859   |       | —    |       |
| At the end of  the year (426,000,000 shares)                                        |       | 938,914   |       | 938,914   |       | 627,055   |       |
| Common shares                                                                       |       |      |       |      |       |      |       |
| At the beginning  of the year (257,000,000 shares)                                  |       | 561,086   |       | 372,945   |       | 372,945   |       |
| Capital increase  without issue of shares                                           |       | —    |       | 188,141   |       | —    |       |
| At the end of  the year (257,000,000 shares)                                        |       | 561,086   |       | 561,086   |       | 372,945   |       |
| Treasury shares                                                                     |       |      |       |      |       |      |       |
| At the beginning  of the year (2,504,288 shares)                                    |       | (10,377   | )          | (198      | )          | (198      | )          |
| Purchase of  shares (3,420,000 shares)                                              |       | (23,427   | )          | (10,179   | )          | —    |       |
| Sales of shares  (100,000 shares)                                                   |       | 463       |       | —    |       | —    |       |
| At the end of  the year (2,200,304 shares)                                          |       | (33,341   | )          | (10,377   | )          | (198      | )          |
| Additional paid-in  capital                                                         |       |      |       |      |       |      |       |
| At the beginning  of the year                                                       |       | —    |       | —    |       | —    |       |
| Realized of  stock option plan                                                      |       | 289       |       | —    |       | —    |       |
| At the end of  the year                                                             |       | 289       |       | —    |       | —    |       |
| Retained earnings                                                                   |       |      |       |      |       |      |       |
| Appropriated  retained earnings                                                     |       |      |       |      |       |      |       |
| At the beginning  of the year                                                       |       | 738,417   |       | 767,441   |       | 470,450   |       |
| Used to increase  capital                                                           |       | —    |       | (475,068  | )          | —    |       |
| Transfer from  unappropriated retained earnings                                     |       | 261,013   |       | 446,044   |       | 296,991   |       |
| At the end of  the year                                                             |       | 999,430   |       | 738,417   |       | 767,441   |       |
| Unappropriated  accumulated (loss) earnings                                         |       |      |       |      |       |      |       |
| At the beginning  of the year                                                       |       | 2,055     |       | 71,121    |       | 26,922    |       |
| Used to increase  capital                                                           |       | —    |       | (24,932   | )          |      |       |
| Net income                                                                          |       | 360,560   |       | 603,268   |       | 489,501   |       |
| Transfer to  appropriated retained earnings                                         |       | (261,013  | )          | (446,044  | )          | (296,991  | )          |
| Dividends /  interest on capital                                                    |       |      |       |      |       |      |       |
| Preferred                                                                           |       | (73,781   | )          | (126,617  | )          | (95,756   | )          |
| Common                                                                              |       | (45,139   | )          | (74,741   | )          | (52,555   | )          |
| At the end of  the year                                                             |       | (17,318   | )          | 2,055     |       | 71,121    |       |
| Accumulated  other comprehensive income (loss)                                      |       |      |       |      |       |      |       |
| At the beginning  of the year                                                       |       | (1,978    | )          | —    |       | 24,411    |       |
| Adjustment to  unrealized gain (loss) on available-for sale securities, net of tax. |       | 12,221    |       | —    |       | (36,989   | )          |
| Excess of  additional liability on retirement indemnity                             |       |      |       | (2,996    | )          | —    |       |
| SFAS 158  transition amount                                                         |       | 202,028   |       | —    |       | —    |       |
| Income tax  benefit (expense)                                                       |       | (68,688   | )          | 1,018     |       | 12,578    |       |
| At the end of  the year                                                             |       | 143,583   |       | (1,978    | )          | —    |       |
| Total shareholders’ equity                                                     |       | 2,592,643 |       | 2,228,117 |       | 1,838,364 |       |

 
| **Comprehensive  income:**                                                                 |   |    |   |    |   |    |   |
|--------------------------------------------------------------------------------------------|--------|---------|--------|---------|--------|---------|--------|
| Net income                                                                                 |   | 360,560 |   | 603,268 |   | 489,501 |   |
| Unrealized gain (loss) on available-for-sale  securities, net of taxes (R$12,577 for 2004) |   | 12,221  |   | —  |   | (24,411 | )      |
| Excess of additional liability on retirement  indemnity, net of taxes (R$1,018 in 2005)    |   | —  |   | (1,978  | )      | —  |   |
| Reclassification adjustment for loss (gain) included  in net income.                       |   | —  |   | —  |   | 110,000 |   |
| Comprehensive income                                                                       |   | 372,781 |   | 601,290 |   | 575,090 |   |

 

Seenotes to the Consolidated Financial Statements.

F-8

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**SADIA S.A.**

CONSOLIDATEDSTATEMENTS OF CASH FLOWS

Yearsended December 31, 2006, 2005 and 2004

(In thousands of Reais -R$)

 
| ** **                                                                         | ** ** | **2006**   | ** ** | **2005**   | ** ** | **2004**   | ** ** |
|------------------------------------------------------------------------------------|------------|------------|------------|------------|------------|------------|------------|
| **Cash  flows from operating activities:**                                         | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net income                                                                         |       | 360,560    |       | 603,268    |       | 489,501    |       |
| Adjustments to reconcile net income to net cash  provided by operating activities: |       |       |       |       |       |       |       |
| Minority interest                                                                  |       | (852       | )          | 164        |       | 137        |       |
| Loss on sale of securities                                                         |       | —     |       | —     |       | 110,000    |       |
| Foreign currency exchange (gains), net                                             |       | (157,050   | )          | (53,377    | )          | (39,134    | )          |
| Equity income or loss of investees                                                 |       | 178        |       | 1,219      |       | 1,385      |       |
| Depreciation and amortization                                                      |       | 205,384    |       | 182,263    |       | 157,821    |       |
| Deferred income taxes                                                              |       | 18,117     |       | 16,411     |       | 63,130     |       |
| Pension plan                                                                       |       | (128,302   | )          | (45,711    | )          | (23,062    | )          |
| Provision for (reversal of) contingencies                                          |       | 4,007      |       | (2,611     | )          | (9,021     | )          |
| Loss from sale of property, plant and equipment                                    |       | (2,225     | )          | 51,897     |       | 21,777     |       |
| Changes in operating assets and liabilities:                                       |       |       |       |       |       |       |       |
| Accounts and notes receivable                                                      |       | (202,912   | )          | (89,012    | )          | (35,266    | )          |
| Inventories                                                                        |       | (83,091    | )          | 100,221    |       | (249,600   | )          |
| Recoverable taxes and other assets                                                 |       | (108,653   | )          | (73,018    | )          | (68,029    | )          |
| Judicial deposits                                                                  |       | 239        |       | (1,192     | )          | (2,126     | )          |
| Suppliers                                                                          |       | 7,900      |       | (3,407     | )          | 125,597    |       |
| Accrued interest, net                                                              |       | 63,569     |       | 130,546    |       | (58,984    | )          |
| Social charges, taxes payable, other liabilities                                   |       | 97,450     |       | 34,685     |       | (176,895   | )          |
| **Net  cash provided by operating activities**                                     |       | 74,319     |       | 852,346    |       | 307,231    |       |
| **Cash  flows from investing activities:**                                         |       |       |       |       |       |       |       |
| Proceeds from sale of property, plant and equipment                                |       | 14,967     |       | 3,400      |       | 2,857      |       |
| Purchase of property, plant and equipment                                          |       | (969,602   | )          | (673,098   | )          | (324,917   | )          |
| Acquisition, net of cash acquired of Só Frango                                |       | —     |       | (69,259    | )          | —     |       |
| Investment in equity investees                                                     |       | —     |       | —     |       | (1,088     | )          |
| Held-to-maturity investments:                                                      |       |       |       |       |       |       |       |
| Purchases                                                                          |       | —     |       | —     |       | (2,747     | )          |
| Maturities                                                                         |       | —     |       | —     |       | 36,447     |       |
| Available-for-sale debt securities:                                                |       |       |       |       |       |       |       |
| Purchases                                                                          |       | (2,397,950 | )          | (1,512,809 | )          | (1,893,844 | )          |
| Maturities and sales                                                               |       | 2,508,267  |       | 1,015,558  |       | 1,543,873  |       |
| **Net  cash used in investing activities**                                         |       | (844,318   | )          | (1,236,208 | )          | (639,419   | )          |
| **Cash  flows from financing activities:**                                         |       |       |       |       |       |       |       |
| Short-term debt                                                                    |       |       |       |       |       |       |       |
| Issuances                                                                          |       | 1,237,242  |       | 863,702    |       | 801,112    |       |
| Repayments                                                                         |       | (795,593   | )          | (994,557   | )          | (1,119,073 | )          |
| Long-term debt                                                                     |       |       |       |       |       |       |       |
| Issuances                                                                          |       | 1,397,295  |       | 1,490,109  |       | 675,703    |       |
| Repayments                                                                         |       | (833,089   | )          | (916,382   | )          | (948,196   | )          |
| Dividends/interest on capital paid                                                 |       | (169,871   | )          | (129,735   | )          | (131,234   | )          |
| Sale of treasury shares                                                            |       | 463        |       | —     |       | —     |       |
| Acquisition of treasury stock                                                      |       | (23,427    | )          | (10,179    | )          | —     |       |
| **Net  cash provided by (used in) financing activities**                           |       | 813,020    |       | 302,958    |       | (721,688   | )          |
|                                                                               |       |       |       |       |       |       |       |
| Net change in cash and cash equivalents                                            |       | 43,021     |       | (80,904    | )          | (1,053,876 | )          |
| Cash and cash equivalents at beginning of year                                     |       | 683,274    |       | 764,178    |       | 1,818,054  |       |
| Cash and cash  equivalents at end of year                                          |       | 726,295    |       | 683,274    |       | 764,178    |       |

 

Seenotes to Consolidated Financial Statements.

 

F-9

----

**SADIA S.A.**

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years ended December 31, 2006, 2005 and 2004

(In thousands of Reais - R$, unless otherwise indicated)

**1.****                 ****Operations**

SadiaS.A. (together with its consolidated subsidiaries, “Sadia” or “the Company”) isincorporated under the laws of the Federative Republic of Brazil. Sadia S.A.’sshares are traded on the São Paulo Stock Exchange (Bovespa) and on the MadridStock Exchange (Latibex) and its ADRs on the New York Stock Exchange (NYSE).

TheCompany’s principal business is the production and distribution of poultry andpork products. The Company’s operations include feed facilities, hatcheries,poultry farms for grandparent and parent stock, pork breeding centers, poultryand pork processing units, sales offices and distribution centers. PresentlySadia’s operations are organized into three main business segments: “ProcessedProducts” (sausage, ham, chicken nuggets, margarine, frozen meals, pizza andpasta among other similar products), “Poultry” (chickens and turkeys) and “Pork”.

Theexchange rate of the Brazilian real (“R$”) to the U.S. dollar wasR$2.6544=US$1.00 at December 31, 2004, R$2.3407=US$1.00 at December 31, 2005and R$2.1380=US$1.00 at December 31, 2006

**2.****                 ****Presentation of the ConsolidatedFinancial Statements**

a)   Basisof presentation

The consolidated financial statementshave been prepared in accordance with generally accepted accounting principlesin the United States of America (“US GAAP”), which differ in certain respectsfrom accounting practices adopted in Brazil (“Brazilian GAAP”), which theCompany uses to prepare its statutory consolidated financial statements asfiled with the Brazilian Securities Commission — CVM (“Comissão de ValoresMobiliários”).

b)   Consolidation procedures

Theconsolidated financial statements include the accounts of Sadia and itscontrolled subsidiaries (ownership interest greater than 50%). The portion ofequity and net income attributable to shareholders other than Sadia isreflected as minority interest in the consolidated financial statements.Investments in entities in which the Company does not control but hassignificant influence over, are accounted for on the equity method. Allsignificant intercompany accounts and transactions are eliminated inconsolidation.

F-10

----

 

**SADIA S.A.**

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years ended December 31, 2006, 2005 and 2004

(Inthousands of Reais - R$, unless otherwise indicated)

**2.****                 ****Presentation of the ConsolidatedFinancial Statements**(Continued)

b)   Consolidation procedures(Continued)

Thefollowing subsidiaries were included in the consolidated financial statementsfor the years ending December 31:

|                                                       | ** ** | **Ownership %** | ** ** |
|-------------------------------------------------------|------------|----------------------|------------|
| ** **                                            | ** ** | **2006**             | ** ** | **2005** | ** ** |
|                                                  |       |                 |       |   |   |
| **Sadia  International Ltd.**                         | ** ** | **100,00**           | **%**      | **100,00** | **%** |
| Sadia Uruguay S.A.                                    |       | 100,00               | %          | 100,00 | % |
| Sadia Alimentos S.A.                                  |       | 1,00                 |       | 1,00 | % |
| Sadia Chile S.A.                                      |       | 60,00                | %          | 60,00 | % |
| Sadia Alimentos S.A.                                  |       | 99,00                | %          | 99,00 | % |
| Concórdia Foods Ltd.                             |       | 100,00               | %          | 50,00 | % |
| Sadia UK. Ltd.                                        |       | 100,00               | %          | 100,00 | % |
| **Concórdia  S.A. C.V.M.C.C.**                   | ** ** | **99,99**            | **%**      | **99,99** | **%** |
| **Empresa  Matogrossense de Alimentos Ltda.**         | ** ** | **100,00**           | **%**      | **100,00** | **%** |
| **Intergen  Ltda.**                                   | ** ** | **100,00**           | **%**      | **—** | ** ** |
| **Rezende  Óleo Ltda.**                          | ** ** | **100,00**           | **%**      | **100,00** | **%** |
| Rezende Marketing e Comunicações Ltda.      |       | 0,09                 | %          | 0,09 | % |
| **Rezende  Marketing e Comunicações Ltda.** | ** ** | **99,91**            | **%**      | **99,91** | **%** |
| **Sadia  G.m.b.H.**                                   | ** ** | **100,00**           | **%**      | **100,00** | **%** |
| Wellax Food Logistics C. P. A. S. U. Lda.             |       | 100,00               | %          | 100,00 | % |
| Sadia Foods G.m.b.H.                                  |       | 100,00               | %          | 100,00 | % |
| Qualy B. V.                                           |       | 100,00               | %          | 100,00 | % |
| Sadia Panamá S.A                                 |       | 100,00               | %          | — |   |
| Sadia Japan Ltd.                                      |       | 100,00               | %          | 100,00 | % |

The Company consolidates the financial statementsof its wholly owned investment funds Concórdia Foreign Investment Fund Class Aand Taurus Fund Limited. These investment funds have the sole purpose ofcentralizing the Company ́s foreign investment fund portfolio. Theadministrative functions over the funds are delegated to a third party.

F-11

----

 

**SADIA S.A.**

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years ended December 31, 2006, 2005 and 2004

(Inthousands of Reais - R$, unless otherwise indicated)

**2.****                 ****Presentation of the ConsolidatedFinancial Statements** (Continued)

c)History of acquisitions

***Fiscal 2006 acquisitions***

OnJanuary 11, 2006 the Company acquired 100% of the quotas representing thecapital of Intergen Ltda. The acquired company’s business relates to pork’sgenetics. The acquisition price was R$1,000 and due to immateriality, pro-formainformation is not presented.

OnMay 26, 2006 Sadia acquired the remaining 50% equity interest in ConcórdiaFoods Ltd. for one real and due to immateriality, pro-forma information is notpresented.

***Fiscal 2005 acquisitions***

OnJanuary 3, 2005 Sadia acquired the all capital stock of Só Frango ProdutosAlimentícios Ltda. (primarily a producer and distributor of poultry) forR$69,259 in cash, (net of cash acquired of R$1,083). The operations of SóFrango Produtos Alimentícios Ltda. are included in the consolidated financialstatements from the date of acquisition. Through this acquisition, Sadiastrengthens its presence in the central region of Brazil close to raw materialproducers and to Brazil’s main centers of consumption.

F-12

----

 

**SADIA S.A.**

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years ended December 31, 2006, 2005 and 2004

(Inthousands of Reais - R$, unless otherwise indicated)

**  2.****           ****Presentation of the ConsolidatedFinancial Statements**(Continued)

Thevaluation of assets and liabilities was determined and the purchase price wasallocated as follows:

 

c)History of acquisitions—continued

| **Assets:**                              | ** ** | ** ** | ** ** |
|------------------------------------------|------------|------------|------------|
| Accounts receivable                      |       | 16,951     |       |
| Inventory                                |       | 13,731     |       |
| Recoverable taxes                        |       | 16,558     |       |
| Other current assets                     |       | 2,382      |       |
| Property, plant and equipment            |       | 32,531     |       |
| Amortizable intangible assets            |       | 32,148     |       |
| Other noncurrent assets                  |       | 5,764      |       |
| **Liabilities:**                         | ** ** | ** ** | ** ** |
| Short-term and long-term debt            |       | (32,837    | )          |
| Accounts payable and accrued liabilities |       | (38,257    | )          |
| Deferred income taxes liability          |       | (14,354    | )          |
| **Net  assets**                          | ** ** | **34,617** | ** ** |
|                                     |       |       |       |
| Purchase price,  net of cash acquired    |       | (69,259    | )          |
|                                     |       |       |       |
| Total Goodwill                           |       | 34,642     |       |

 

OnSeptember 2005 Sadia acquired all the capital stock of Empresa Matogrossense deAlimentos Ltda. by R$1,350. As this Company does not have operations, activecustomers, but only land, the excess amount paid over the net assets acquiredwas allocated to property, plant and equipment.

d) Pro formaresults

The following unaudited proforma financial information presents the combined results of operations of theCompany and Só Frango Produtos Alimentícios Ltda. (“Só Frango”) and EmpresaMatogrossense de Alimentos Ltda. as if the acquisitions had occurred at January1, 2004. The historical results of the Company for 2005 include the results ofSó Frango. The pro forma results for 2004 combine the historical results of theCompany for 2004 with the historical results for 2004 of Só Frango. Theunaudited pro forma financial information is not intended to represent or beindicative of the Company’s consolidated results of operations or financialcondition that would have been reported had the acquisition been completed asof the beginning of the periods presented and should not be taken as indicativeof the Company’s future consolidated results of operations or financialcondition. Pro forma adjustments are tax-effected at the Company’s statutorytax rate.

F-13

----

 

**SADIA S.A.**

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years ended December 31, 2006, 2005 and 2004

(Inthousands of Reais - R$, unless otherwise indicated)

**2.****                 ****Presentation of the ConsolidatedFinancial Statements**(Continued)

d) Pro formaresults—continued

|                                            | ** ** | **Unaudited  2004** | ** ** |
|--------------------------------------------|------------|---------------------|------------|
|                                       |       |                |       |
| Net operating  revenue                     |       | 6,301,452           |       |
| Net income                                 |       | 467,704             |       |
| Basic earnings  per thousand shares in R$: |       |                |       |
| Preferred                                  |       | 709.36              |       |
| Common                                     |       | 644.87              |       |

 

The pro forma effects in 2005 for net operating revenue, net income andbasic earnings per share would not be materially different from the actualresults. The pro forma net earnings for 2004 include R$3,564, of which R$2,708relates to the intangibles amortization and R$856 relates to the tangiblesamortization.

**3.****                 ****Significant Accounting Policies**

**a)   Use of estimates**

**Thepreparation of financial statements in accordance with**generally accepted accountingprinciples in the United States of America requires management to make estimates and assumptions thatdirectly affect the amounts reported in the consolidated financial statementsand accompanying notes. Significant items subject to such estimates and assumptionsinclude the carrying amount and recoverability of property, plant andequipment, valuation allowances for receivables, recoverability of deferredincome tax assets, provisions for contingencies, and determination of the fairvalue of derivatives and financial instruments and stock option valuation.Actual results could differ from those estimates.

**b) Cashand cash equivalents**

**Cash equivalents are highly liquid investments withmaturities of 90 days or less when purchased. For purpose of the consolidatedstatements of cash flow, the Company considers all highly liquid debtinstruments with original maturities of 90 days or less to be cash equivalents.**

F-14

----

 

**SADIA S.A.**

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years ended December 31, 2006, 2005 and 2004

(Inthousands of Reais - R$, unless otherwise indicated)

**3.****                 ****Significant Accounting Policies** (Continued)

c) Available-for-sale securities

**Management determines the appropriate classification of thedebt securities at the time of purchase and reevaluates such designation as ofeach balance sheet date. Available-for-sale securities are carried at fairvalue, with the unrealized gains and losses reported in other comprehensiveincome. Interest on securities classified as available-for-sale is included in interestincome and other, net. The specific identification method is used to determinethe cost of securities sold, with realized gains and losses included ininterest income and other, net.**

Indetermining if and when a decline in market value below amortized cost isother-than-temporary, management evaluates the market conditions, offeringprices and other key measures for the investments in debt securities. When sucha decline in value is deemed to be other-than-temporary, an impairment loss isrecognized in the operating results to the extent of the decline.

d) Accounts and notes receivable

Tradeaccounts receivable are recorded at the invoiced amount and do not bearinterest. The allowance for doubtful accounts is the Company’s best estimate ofthe amount of probable credit losses in the Company’s existing accountsreceivable. Account balances are charged off against the allowance after allmeans of collection have been exhausted and the potential for recovery isconsidered remote.

e)  Inventories

Processed products,livestock (excluding breeders), work-in-progress, raw materials and suppliesand other are valued at the lower of cost (average method) or market. Cost forfinished goods and work-in-progress includes purchased raw materials, labor andmanufacturing and production overhead, which are related to the purchase andproduction of inventories. Normal losses in hog stock and poultry areinventoried and abnormal losses in stock are expensed immediately as cost ofgoods sold.

F-15

----

 

**SADIA S.A.**

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years ended December 31, 2006, 2005 and 2004

(Inthousands of Reais - R$, unless otherwise indicated)

**3.****                 ****Significant Accounting Policies** (Continued)

f)    Property, plant andequipment

Property, plant andequipment are recorded at cost of acquisition, formation or construction,including the interest incurred on financing, during the period ofconstruction, modernization and expansion of the industrial units. Expendituresthat materially extend the useful lives of existing facilities and equipmentare capitalized. Depreciation is calculated using the straight-line method atrates that consider the estimated useful lives of the assets and Company’s workshifts. Accordingly, the depreciation rates used are 25 years for buildings, 5to 10 years for machinery and equipment, 10 years for installations and 4 yearsfor vehicles. Depletion of forestry resources is calculated based on theextraction of timber and the average costs of the forests.

Breeding stock is recordedat the cost of formation which includes the appropriation of costs of thebreeding hens, animal feed, medication and labor. These costs are accumulatedfor approximately six months until the breeding stock initiates the breedingcycle. From then on, the costs of the breeding stock begin to be amortized bythe estimated number of offspring for the poultry and straight line methods forhogs. The Company periodically reviews the estimated number of offspring to beproduced by the batch and revises its estimate accordingly. The amortization isallocated to poultry and hog production costs. The productive cycle ranges fromfifteen to thirty months.

g)   Accounting for theImpairment of Long-Lived Assets

TheCompany reviews its property, plant and equipment for possible impairment wheneverevents or changes in circumstances indicate that the carrying value of an assetor group of assets may not be recoverable on the basis of undiscounted futurecash flows. The reviews are carried out at the lowest level of groups of assetsto which the Company is able to attribute identifiable future cash flows. Ifthe carrying amount of an asset exceeds its estimated future cash flows, animpairment charge is recognized by the amount by which the carrying amount ofthe asset exceeds the fair value of the asset. These reviews to date have notindicated the need to recognize any impairment losses.

F-16

----

 

**SADIA S.A.**

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years ended December 31, 2006, 2005 and 2004

(Inthousands of Reais - R$, unless otherwise indicated)

**3.****                 ****Significant Accounting Policies** (Continued)

h)        Goodwill and Other Intangible Assets

The Company accounts forbusiness combinations and goodwill according to SFAS No.141, “BusinessCombinations,” and SFAS No.142, “Goodwill and Other Intangible Assets.” SFAS No.141requires that the purchase method of accounting be used for all businesscombinations and that certain acquired intangible assets be recognized asassets apart from goodwill. SFAS No.142 provides that goodwill should not beamortized but instead should be tested for impairment annually at the reportingunit level. The Company’s annual impairment test was performed in the fourthquarter of fiscal 2006. The results of this test indicated that goodwill wasnot impaired.

Other intangible assetsconsist of brand and client portfolio and amortization is on the straight-linebasis over the lives of the intangibles, which ranges from 5 to 10 years.

i)          Environmentalmatters

Ourproduction facilities and also our forestry activities are both subject toGovernment environmental regulations. We diminish the risks associated withenvironmental matters, through operating procedures and controls andinvestments in pollution control equipment and systems. We believe that noprovision for losses related to environmental matters is currently required,based on existing Brazilian laws and regulations.

j)          Interestattributed to shareholders’ equity

Brazilian corporations are permitted to attribute interest onshareholders’ equity, which is deductible for statutory income tax purposes.The Company elected to pay such interest to its shareholders on December 31,2006, 2005 and 2004 and accrued the amount due with a direct charge toshareholders’ equity in a manner similar to a dividend. The distribution to theshareholders is subject to withholding income tax at the rate of 15%, and theamount of interest on shareholders’ equity attributable to dividends must benet of such withholding income tax.

F-17

----

 

**SADIA S.A.**

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years ended December 31, 2006, 2005 and 2004

(Inthousands of Reais - R$, unless otherwise indicated)

**3.****                 ****Significant Accounting Policies** (Continued)

k)         Revenues and expenses

The Company recognizesrevenue when products are shipped and the customer takes ownership and assumesrisk of loss, collection of the relevant receivable is probable, persuasiveevidence of an arrangement exists and the sales price is fixed or determinable.In addition, the Company offers sales and incentives and discounts throughvarious programs to customers, which are accounted for as a reduction ofrevenue in Sales deductions. Sales incentives include volume-based incentiveprograms and payments to customers for performing marketing activities on ourbehalf.

Shipping and handling costsare classified as selling expenses and totaled R$370,014, R$544,364 andR$495,870 for the years ended December 31, 2006, 2005 and 2004, respectively.

Research and developmentcosts are charged to expense as incurred and totaled R$12,389, R$10,873 andR$10,130 for the years ended December 31, 2006, 2005 and 2004, respectively.

Thecost of advertising is expensed as incurred. The Company incurred advertisingexpenses of R$157,449, R$116,559 and R$121,435 during the years ended December31, 2006, 2005 and 2004, respectively.

l)            Foreign currencytransactions

Transactions in foreign currency are recorded atthe prevailing exchange rate at the time of the related transactions. Foreigncurrency denominated monetary assets and liabilities are translated using theexchange rate at the balance sheet date. Exchange differences are recognized inthe statements of income as they occur.

m)      Deferred income taxes

Deferred income taxes areaccounted for under the asset and liability method. Deferred income tax assetsand liabilities are recognized for the future income tax consequencesattributable to temporary differences between the financial statement carryingamounts of assets and liabilities and their respective income tax bases and foroperating loss and tax credit carryforwards. Deferred income tax assets andliabilities are measured using enacted tax rates expected to apply to taxableincome in the years in which those temporary differences, operating loss andtax credit carryforwards are expected to be recovered or settled. The effect ondeferred income tax assets and liabilities of a change in income tax rates isrecognized in income in the period that includes the enactment date.

F-18

----

 

**SADIA S.A.**

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years ended December 31, 2006, 2005 and 2004

(Inthousands of Reais - R$, unless otherwise indicated)

**3.****                 ****Significant Accounting Policies** (Continued)

n)   Earnings per share

Basicearnings per share were calculated in accordance with FASB Statement No. 128, *Earnings per Share.* The computation has been made as if thenet income for each year would be fully distributed. Earnings may be used toincrease capital or otherwise appropriated; consequently such earnings would nolonger be available as dividends. The unit of one thousand shares is usedbecause this is the basis for quotation and trading on the São Paulo StockExchange. Diluted net income per share amounts were computed by dividing netincome by weighted average number of common and preferred shares outstandingplus dilutive potential preferred shares calculated for stock options.

Until December 31, 2004, preferred and commonshareholders had different dividend and liquidation rights, thus basic earningsper share were calculated using “two-class” method taking into account that thepreferred shares were entitled to a dividend 10% greater than the commonshares. The “two-class” method is an earning allocation formula that determinesearnings per share for preferred and common shares according to the dividendsto be paid as required by the Company’s by-law and participation rights inundistributed earning.

As described in note 16, it was approved in a general extraordinaryshareholder’s meeting and ratified in a special meeting of preferredshareholders that the common and preferred are entitled to the same dividendsdistribution, therefore amending the Company’s by laws the payments of 10%greater to preferred than the common shareholders. As described in note 16, thecommon and preferred shareholders have agreed that, effective in 2005, thepreferred shareholders would no longer be entitled to a 10% dividend premium.Accordingly, the “two class” method of computing earnings per share is nolonger required for the year ended December 31, 2005.

F-19

----

 

**SADIA S.A.**

NOTESTO CONSOLIDATED FINANCIAL STATEMENTS

Yearsended December 31, 2006, 2005 and 2004

(In thousands of Reais - R$, unless otherwise indicated)

**3.****                ****Significant Accounting Policies** (Continued)

o)       Accounting for Derivative Instruments andHedging Activities

Inaccordance with SFAS No. 133, *“Accounting for DerivativeInstruments and Hedging Activities,”* as amended by SFAS No. 137, *“Accounting for Derivative Instruments and Hedging Activities —Deferral of the Effective Date of FASB Statement No. 133,”* and SFASNo. 138, *“Accounting for Certain Derivative Instruments andCertain Hedging Activitie*s*,”* the Companyrecords all foreign currency in the balance sheet as either assets orliabilities measured at fair value. Adjustments to fair value for foreign currency derivatives are includedin foreign currency exchange gain (loss), net on the statement of income.Adjustments to the fair value of non-fixed grain purchase derivatives areincluded in interest income and other, net on the statement of income. TheCompany has not designated any derivative as held for hedging purposes for anyperiods presented.

p)       Share based compensation 

EffectiveJanuary 31, 2005, the Company adopted the provisions of Statement of FinancialAccounting Standards (“SFAS”) No.123(R) (revised 2004), “Share-Based Payments”,or SFAS 123(R), recognizing expense related to the fair value of itsshare-based compensation awards. Shared based compensation expense for all share-based compensationawards granted is based on the grant-date fair value estimated in accordancewith the provisions of SFAS 123(R) where the compensation expense is recognizedon a straight-line basis over the requisite service period of the award.

q)       Recently Issued Accounting Standards

In July 2006, the FASBissued FIN 48, that clarifies the accounting for uncertainty in income taxesrecognized in an enterprise’s financial statements and prescribes a thresholdof more-likely-than-not for recognition of tax benefits of uncertain taxpositions taken or expected to be taken in a tax return. FIN 48 also providesrelated guidance on measurement, derecognition, classification, interest andpenalties, and disclosure. The provisions of FIN 48 will be effective for theCompany on January 1, 2007, with any cumulative effect of the change inaccounting principle recorded as an adjustment to opening retained earnings.The Company is in the process of assessing the impact of adopting FIN 48 on itsresults of operations and financial position. The Company does not expect thatthe adoption of FIN 48 will have a material effect on the Company’s financialposition or results from operations.

F-20

----

 

**SADIA S.A.**

NOTESTO CONSOLIDATED FINANCIAL STATEMENTS

Yearsended December 31, 2006, 2005 and 2004

(In thousands of Reais - R$, unless otherwise indicated)

**3.****                ****Significant Accounting Policies** (Continued)

q)       Recently Issued Accounting Standards (Continued)

In September 2006, the FASBissued SFAS No. 157 — “Fair value measurements”, which defines fair value,establishes a framework for measuring fair value, and expands disclosures aboutfair value measurements. This Statement applies under other accountingpronouncements that require or permit fair value measurements, the Board havingpreviously concluded in those accounting pronouncements that fair value is therelevant measurement attribute. Accordingly, this Statement does not requireany new fair value measurements. This Statement will be effective for deCompany in 2008. The Company believes that such pronouncement will not generatea material impact in the consolidated financial statements.

In February 2007, the FASBissued SFAS 159 “The Fair Value Option for Financial Assets and FinancialLiabilities.” SFAS 159, that permits the measurement of certain financialinstruments at fair value. Entities may choose to measure eligible items atfair value at specified election dates, reporting unrealized gains and losseson such items at each subsequent reporting period. SFAS 159 is effective forfiscal years beginning after November 15, 2007. The Company is currentlyevaluating the potential impact of the fair value option but it is not expectedto have a significant effect on reported financial position or statements ofincome.

r)          Recently Adopted Accounting Standards 

In September 2006, the FASBissued SFAS 158 - “Employers’ Accounting for Defined Benefit Pension and OtherPostretirement Plans — an Amendment of FASB Statements No. 87, 88, 106 and132(R)” (“SFAS 158”), which became effective for the Company on December 31,2006. This standard requires the Company to recognize the overfunded orunderfunded status of each of its defined benefit pension and otherpostretirement benefit plans as an asset or liability and to reflect changes inthe funded status through “Accumulated other comprehensive income,” as aseparate component of stockholders’ equity (see Note 21).

F-21

----

 

**SADIA S.A.**

NOTESTO CONSOLIDATED FINANCIAL STATEMENTS

Yearsended December 31, 2006, 2005 and 2004

(In thousands of Reais - R$, unless otherwise indicated)

**4.****                 ****Cash and Cash Equivalents**
|                                       | ** ** | **2006**   | ** ** | **2005**   | ** ** |
|---------------------------------------|------------|------------|------------|------------|------------|
|                                  |       |       |       |       |       |
| **Local  currency**                   | ** ** | ** ** | ** ** | ** ** | ** ** |
| Cash and bank accounts                |       | 200,931    |       | 149,323    |       |
| Investment funds of variable earnings |       | 259,697    |       | 401,931    |       |
| Others                                |       | —     |       | 98         |       |
|                                  |       | 460,628    |       | 551,352    |       |
| **Foreign  currency**                 |       |       |       |       |       |
| Cash and bank accounts                |       | 32,754     |       | 43,963     |       |
| Interest-bearing current account      |       | 232,913    |       | 87,959     |       |
|                                  |       | 265,667    |       | 131,922    |       |
|                                  |       | 726,295    |       | 683,274    |       |

 

**5.****                 ****Available-for-Sale Securities**

The following is a summaryof available-for-sale debt securities at December 31, 2006 and 2005:

 
|                         | ** ** | **Available-for-sale debt securities** | ** ** |
|-------------------------|------------|--------------------------------------------------|------------|
| ** **              | ** ** | **Amortized  Cost**                              | ** ** | **Gross  Unrealized  Gains** | ** ** | **Gross  Unrealized  Losses** | ** ** | **Estimated  Fair  Value** | ** ** |
| December 31,  2006      |       |                                             |       |   |   |   |   |   |   |
| Investment funds        |       | 1,743,490                                        |       | 19,013 |   | (6,792 | ) | 1,755,711 |   |
| National treasury notes |       | 75,135                                           |       | — |   | — |   | 75,135 |   |
| Total                   |       | 1,818,625                                        |       | 19,013 |   | (6,792 | ) | 1,830,846 |   |
|                    |       |                                             |       |   |   |   |   |   |   |
| December 31,  2005      |       |                                             |       |   |   |   |   |   |   |
| Investment funds        |       | 1,613,682                                        |       | — |   | — |   | 1,613,682 |   |
| National treasury notes |       | 65,057                                           |       | — |   | — |   | 65,057 |   |
| Austrian Bonds          |       | 278,040                                          |       | — |   | — |   | 278,040 |   |
| Total                   |       | 1,956,779                                        |       | — |   | — |   | 1,956,779 |   |

 

The investment fundportfolio in local currency is composed mainly of post-fixed Bank DepositCertificates, National Treasury Securities and investment funds. The investmentfund portfolio in foreign currency is composed mainly of investments in dualcurrency, which have differentiated profitability according to the strikenegotiated, and structured notes issued by first-tier American and Europeanbanks, pegged to securities of first-tier Brazilian companies and banks.

F-22

----

 

**SADIA S.A.**

NOTESTO CONSOLIDATED FINANCIAL STATEMENTS

Yearsended December 31, 2006, 2005 and 2004

(In thousands of Reais - R$, unless otherwise indicated)

**5.****                 ****Available-for-Sale Securities**(Continued)

The amortized cost andestimated fair value of available-for-sale securities at December 31, 2006, bycontractual maturity, are shown below:
|                            | ** ** | **Available for-sale-debt securities** | ** ** |
|----------------------------|------------|--------------------------------------------------|------------|
| **Maturity periods**  | ** ** | **Amortized  Cost**                              | ** ** | **Estimated  Fair Value** | ** ** |
| ** **                 |       |                                             |       |   |   |
| Due in less than  one year |       | 1,689,498                                        |       | 1,701,719 |   |
| Due in one to  three years |       | 99,278                                           |       | 99,278 |   |
| Due after five  years      |       | 29,849                                           |       | 29,849 |   |
| Total                      |       | 1,818,625                                        |       | 1,830,846 |   |

 

**6.****                 ****Accounts and Notes Receivable,Net**
|                                             | ** ** | **2006** | ** ** | **2005** | ** ** |
|---------------------------------------------|------------|----------|------------|----------|------------|
| Customer                                    |       |     |       |     |       |
| Domestic                                    |       | 544,501  |       | 469,150  |       |
| Export, mainly denominated in U. S. dollars |       | 391,477  |       | 259,573  |       |
| Allowance for  doubtful accounts            |       | (14,934  | )          | (10,591  | )          |
|                                        |       | 921,044  |       | 718,132  |       |

 

The changes in the allowance for doubtfulaccounts are as follows:
|                                       | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
|---------------------------------------|------------|----------|------------|----------|------------|----------|------------|
|                                  |       |     |       |     |       |     |       |
| Balance at the  beginning of the year |       | (10,591  | )          | (9,160   | )          | (33,628  | )          |
| Amounts charged  to expense           |       | (6,435   | )          | (4,234   | )          | (1,285   | )          |
| Write offs                            |       | 2,092    |       | 2,803    |       | 25,753   |       |
| Balance at the end of  the year       |       | (14,934  | )          | (10,591  | )          | (9,160   | )          |

 

During 2006, the Company and its subsidiariesabroad (Sadia International Ltd. and Wellax Food Comércio de ProdutosAlimentares Lda.) renewed and amended the Insured Receivables PurchaseAgreement selling its export receivables up to a limit of US$170 million, withinterest rate of 0.375% + LIBOR. Credit Insurance covering 90% of the value ofthe receivables was taken out with third parties and the beneficiaries in theevent of Default are the contracting financial institutions.

F-23

----

 

**SADIA S.A.**

NOTESTO CONSOLIDATED FINANCIAL STATEMENTS

Yearsended December 31, 2006, 2005 and 2004

(In thousands of Reais - R$, unless otherwise indicated)

**6.****                ****Accounts and Notes Receivable,Net** (Continued)

Under this agreement, theCompany retained servicing responsibilities, such as collection. At December31, 2006, the receivables sold under this agreement amounted to R$363,464(R$228,813 in 2005).

During the year endedDecember 31, 2006, the Company received cash proceeds of approximately R$1,910million (R$1,840 million in 2005) and incurred expenses of R$14 million (R$8million in 2005 and R$4 million in 2004) with respect to this agreement. TheCompany had no credit losses on the sale of the receivables under thisagreement for December 31, 2006, 2005 and 2004.

During 2006, 2005 and 2004,no single customer or group represented more than 10% of consolidated sales.

**7.****                ****Inventories**
|                                  | ** ** | **2006**  | ** ** | **2005** | ** ** |
|----------------------------------|------------|-----------|------------|----------|------------|
|                             |       |      |       |     |       |
| Finished goods                   |       | 353,434   |       | 352,117  |       |
| Live stock and  poultry          |       | 304,561   |       | 386,561  |       |
| Raw materials                    |       | 179,060   |       | 129,229  |       |
| Work in process                  |       | 159,297   |       | 38,646   |       |
| Packing material                 |       | 33,653    |       | 36,702   |       |
| Stock in transit                 |       | 10        |       | 9,341    |       |
| Supplies in  warehouse and other |       | 35,017    |       | 29,345   |       |
|                             |       | 1,065,032 |       | 981,941  |       |

 

**8.****                ****Recoverable Taxes**
|                                                        | ** ** | **2006** | ** ** | **2005** | ** ** |
|--------------------------------------------------------|------------|----------|------------|----------|------------|
|                                                   |       |     |       |     |       |
| Value-added  state sales tax — ICMS               |       | 150,063  |       | 162,060  |       |
| Federal excise  tax — IPI                         |       | 59,175   |       | 48,853   |       |
| Income tax  withheld at source and advanced income tax |       | 37,679   |       | 48,153   |       |
| PIS and COFINS                                         |       | 84,619   |       | 7,411    |       |
| Other                                                  |       | 40       |       | 109      |       |
| Total                                                  |       | 331,576  |       | 266,586  |       |
| Current portion                                        |       | (169,347 | )          | (146,562 | )          |
| Non current  portion                                   |       | 162,229  |       | 120,024  |       |

 

F-24

----

 

**SADIA S.A.**

NOTESTO CONSOLIDATED FINANCIAL STATEMENTS

Yearsended December 31, 2006, 2005 and 2004

(In thousands of Reais - R$, unless otherwise indicated)

**8.****                ****Recoverable Taxes** (Continued)

Value-added state sales tax —ICMS

Composed of creditsgenerated by the commercial operations and by the acquisition of property,plant and equipment, of a number of the Company’s units and can be offset withtaxes of the same nature.

PIS and COFINS

Composed of credits arisingfrom non-cumulative collection of PIS and COFINS, which can be compensated withother federal taxes.

Federal excise tax — IPI

Federal excise tax - IPIcredits includes the tax credit on packing and other material and the presumedIPI incentive on exports. IPI credits are recognized as a reduction of cost ofraw materials used in the production process of goods produced for export andare available to be utilized against other federal taxes payable.

Federal excise tax — IPI

Federal excise tax — IPIcredits includes the tax credit on packing and other material and the presumedIPI incentive on exports. IPI credits are recognized as a reduction of cost ofraw materials used in the production process of goods produced for export andare available to be utilized against other federal taxes payable.

Income tax withheld atsource

Income tax withheld atsource represents income tax paid upon redemption of certain investments and isavailable to be utilized against other federal income taxes payable.

F-25

----

 

**SADIA S.A.**

NOTESTO CONSOLIDATED FINANCIAL STATEMENTS

Yearsended December 31, 2006, 2005 and 2004

(In thousands of Reais - R$, unless otherwise indicated)

**9.****                ****Property, Plant and Equipment**
|                           | ** ** | **2006**   | ** ** | **2005**   | ** ** |
|---------------------------|------------|------------|------------|------------|------------|
|                      | ** ** | ** ** | ** ** | ** ** | ** ** |
| Land                      |       | 91,605     |       | 50,974     |       |
| Buildings                 |       | 688,288    |       | 554,962    |       |
| Machinery and  equipment  |       | 1,165,878  |       | 952,984    |       |
| Installations             |       | 321,594    |       | 220,704    |       |
| Breeding stock            |       | 315,769    |       | 219,159    |       |
| Vehicles                  |       | 19,713     |       | 12,896     |       |
| Timber and  reforestation |       | 27,524     |       | 19,659     |       |
| Other                     |       | 57,377     |       | 71,318     |       |
| Construction in  progress |       | 647,467    |       | 417,319    |       |
|                      |       | 3,335,215  |       | 2,519,975  |       |
| Accumulated depreciation  |       | (1,180,235 | )          | (996,666   | )          |
| Total                     |       | 2,154,980  |       | 1,523,309  |       |

 

Interest capitalized as partof property, plant and equipment was R$44,554, R$16,852 and R$11,206 for theyears ended December 31, 2006, 2005 and 2004, respectively.

OnNovember 16, 2006 a claim occurred, as a result of fire that destroyedcompletely the building where the factory of roasted products of the Toledounit was located. The amount of the assets damaged was estimated at R$120,000,which is totally covered by an insurance policy, with a coverage amountsufficient to comprehensively cover the material damage suffered. The inventoryof assets is in course and, due to this event, a provision reducing fixedassets was recorded, in comparison to the amounts receivable from insurance inother credits in current assets. The deductible of R$100, was provided for.

**10.****         ****Judicial Deposits**

Judicial deposits arerestricted assets of the Company placed on deposit with the court and held injudicial escrow relating to certain legal proceedings pending legal resolution.

F-26

----

 

**SADIA S.A.**

NOTESTO CONSOLIDATED FINANCIAL STATEMENTS

Yearsended December 31, 2006, 2005 and 2004

(In thousands of Reais - R$, unless otherwise indicated)

**11.****         ****Other Intangible Assets, Net**

Intangible assets consist of the following:
|                  | ** ** | **Amortizable cost  amount in 2005** | ** ** | **Amortization** | ** ** | **Amortizable cost  amount in 2006** | ** ** |
|------------------|------------|-----------------------------------------------------|------------|------------------|------------|-----------------------------------------------------|------------|
|             |       |                                                |       |             |       |                                                |       |
| Brand            |       | 7,342                                               |       | (1,694           | )          | 5,648                                               |       |
| Client portfolio |       | 22,098                                              |       | (2,368           | )          | 19,730                                              |       |
|             |       | 29,440                                              |       | (4,062           | )          | 25,378                                              |       |

 

No significant residual value is estimatedfor these intangible assets. The following table represents the total estimatedamortization of intangible assets for the next five succeeding years:
|            | ** ** | **Estimated  Amortization  Expenses** | ** ** |
|------------|------------|---------------------------------------|------------|
|       |       |                                  |       |
| 2007       |       | 4,062                                 |       |
| 2008       |       | 4,062                                 |       |
| 2009       |       | 4,062                                 |       |
| 2010       |       | 2,932                                 |       |
| 2011       |       | 2,368                                 |       |
| Thereafter |       | 7,892                                 |       |
|       |       | 25,378                                |       |

 

**12.****         ****Goodwill**

The change in carrying amount of goodwill isas follows:
| Goodwill relating to  acquisitions during 2005 |   | 34,642 |   |
|------------------------------------------------|--------|--------|--------|
| Tax benefit  allocated to reduce goodwill      |   | (1,914 | )      |
| Balance as of  December 31, 2005               |   | 32,728 |   |
| Tax benefit  allocated to reduce goodwill      |   | (2,871 | )      |
| Balance as of December  31, 2006               |   | 29,857 |   |

 

Goodwillrefers to the acquisition of Só Frango and the Company estimates its balancewill be deductible for tax purposes.

 

F-27

----

 

**SADIA S.A.**

NOTESTO CONSOLIDATED FINANCIAL STATEMENTS

Yearsended December 31, 2006, 2005 and 2004

(In thousands of Reais - R$, unless otherwise indicated)

**13.****         ****Short-term Debt**
|                                                     | ** ** | **2006**  | ** ** | **2005** | ** ** |
|-----------------------------------------------------|------------|-----------|------------|----------|------------|
|                                                |       |      |       |     |       |
| Working capital from  commercial banks              |       | 708,868   |       | 545,435  |       |
| Trade accounts  receivable domestic credit facility |       | 242,446   |       | 190,351  |       |
| Bank borrowings,  secured by accounts receivable    |       | 275,253   |       | 54,376   |       |
| ** **                                          |       | 1,226,567 |       | 790,162  |       |

 

Working capital fromcommercial banks primarily relates to export financing and pre-export advances,of which R$477,208 in 2006 (R$432,060 in 2005) are denominated in U.S. dollarswith interest at Libor (5.32% p.a. at December 31, 2006) plus a spread at therate of 0.10% p.a. and fixed rate coupons of 6.50% p.a. in 2006 (interest ratespread of 0.10% p.a. and fixed rate of 5.76% p.a. in 2005).

On May 12, 2003, the Companyentered into an agreement to sell, from time to time, up to R$150,000 of itsdomestic receivables to a special purpose entity, organized as an investment fund.The receivables sold are subject to a discount rate that should not be lowerthan 95% of the average rate of Brazilian interbank certificate deposits(13.16% p.a. at December 31, 2006). Through December 31, 2006, the Companyreceived cash proceeds of R$2,795,000 (R$2,626,000 in 2005) from the sales ofdomestic receivables under this agreement and incurred in interest expenses ofR$30,000 for the year ended December 31, 2006 (R$27,000 in 2005). Based on thestructure of this transaction, the agreement has been accounted for as afinancing by the Company. As of December 31, 2006, the accounts receivable forthis finance pledged as collateral were R$242,446 (R$190,351 on December 31,2005).

At December 31, 2006 and2005, the weighted average interest rates on short-term debt were 5.36% p.a.and 6.90% p.a., respectively.

F-28

----

 

**SADIA S.A.**

NOTES TO CONSOLIDATEDFINANCIAL STATEMENTS

Years ended December 31,2006, 2005 and 2004

(In thousands ofReais - R$, unless otherwise indicated)

**14.****         ****Long-term Debt**
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            | ** ** | **2006**  | ** ** | **2005**  | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------|------------|-----------|------------|
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |       |      |       |      |       |
| **Foreign  debt (denominated in U.S. dollars):**                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |       |      |       |      |       |
| Export  financing, composed of prepayment, payable in amount of R$229,070 in  installments up to 2010, subject to LIBOR variation for 6 month deposits  (5.37% in December 2006 plus annual interest of 3.38% p.a, and a line focused  on the incentive for foreign trade in amount of R$1,675,171, subject to LIBOR  variation for 6 month plus interest of 2.20% p.a., guaranteed by promissory  notes or sureties.                                                                                                      |       | 1,904,241 |       | 1,584,893 |       |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |       |      |       |      |       |
| Financing  subject to LIBOR variation for 1 month deposits (4.39% in December 2005) plus  interest of 0.10% p.a., guaranteed by its own titles                                                                                                                                                                                                                                                                                                                                                                             |       | —    |       | 145,719   |       |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |       |      |       |      |       |
| BNDES (National  Bank for Economic and Social Development), payable from 2007 to 2013, composed  as follows: FINEM in the amount of R$17,193 subject to the weighted average  of the exchange variation of currencies traded by BNDES - UMBNDES and fixed  interest of 3.50% p.a. and FINAME in the amount of R$128,265 subject to the  weighted average of the exchange variation of currencies traded by BNDES -  UMBNDES and fixed annual interest of 3.5% p.a. guaranteed by mortgage bonds  and real estate mortgages |       | 145,458   |       | 69,750    |       |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |       |      |       |      |       |
| IFC -  International Finance Corporation funding in foreign currency for investment  in property, plant and equipment, which R$13,734 is subject to interest at  fixed rate of 9.05% p.a., guaranteed by promissory real estate mortgages                                                                                                                                                                                                                                                                                  |       | 13,734    |       | 23,325    |       |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |       | 2,063,433 |       | 1,823,687 |       |

 

F-29

----

 

**SADIA S.A.**

NOTESTO CONSOLIDATED FINANCIAL STATEMENTS

Yearsended December 31, 2006, 2005 and 2004

(In thousands of Reais - R$, unless otherwise indicated)

**14.****         ****Long-term Debt**(Continued)
|                                                                                                                                                                                                                                                                                                                                                                                                                                           | ** ** | **2006**  | ** ** | **2005**  | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------|------------|-----------|------------|
| **Local  debt (denominated in reais):**                                                                                                                                                                                                                                                                                                                                                                                                   |       |      |       |      |       |
| BNDES (National  Bank for Economic and Social Development), credit lines for investments and  exports, payable from 2007 to 2013, composed as follows: FINAME in the amount  of R$630,803 subject to the Long-Term Interest Rate -TJLP (6.85% p.a. in  December 2006) and interest of 3.59% p.a. and FINEM in the amount of R$20,734  subject to TJLP and interest of 3.50% p.a., guaranteed by mortgage bonds and  real estate mortgages |       | 651,537   |       | 402,659   |       |
|                                                                                                                                                                                                                                                                                                                                                                                                                                      |       |      |       |      |       |
| PESA - Special  Aid Program for Agribusiness payable in installments from 2006 to 2020,  subject to the — General Price Index —Market — IGP-M plus interest rate of  9.89% p.a., secured by investments in debt securities with a carrying value  of R$29,849 and sureties.                                                                                                                                                |       | 136,440   |       | 131,831   |       |
|                                                                                                                                                                                                                                                                                                                                                                                                                                      |       |      |       |      |       |
| Other subject to  interest rate from 1% to 14% p.a.                                                                                                                                                                                                                                                                                                                                                                                       |       | 34,267    |       | 40,187    |       |
| ** **                                                                                                                                                                                                                                                                                                                                                                                                                                |       |      |       |      |       |
| ** **                                                                                                                                                                                                                                                                                                                                                                                                                                |       | 2,885,677 |       | 2,398,364 |       |
| Less current  portion of long- term debt                                                                                                                                                                                                                                                                                                                                                                                                  |       | (214,708  | )          | (694,180  | )          |
| Long - term portion                                                                                                                                                                                                                                                                                                                                                                                                                       |       | 2,670,969 |       | 1,704,184 |       |

 

AtDecember 31, 2006, long-term debt maturities were as follows:

 
| 2008       |   | 242,601   |   |
|------------|--------|-----------|--------|
| 2009       |   | 277,873   |   |
| 2010       |   | 1,141,696 |   |
| 2011       |   | 708,821   |   |
| Thereafter |   | 299,978   |   |
|       |   | 2,670,969 |   |

 

F-30

----

 

**SADIA S.A.**

NOTESTO CONSOLIDATED FINANCIAL STATEMENTS

Yearsended December 31, 2006, 2005 and 2004

(In thousands of Reais - R$, unless otherwise indicated)

**15.****         ****Commitments, Contingencies and Guarantees**

**Commitments**

The Company has entered intopurchase commitments for production purpose (packing) amounting toapproximately R$84,000 at December 31, 2006 and is payable until 2010.

*Leasing*

TheCompany has non-cancelable leasing agreements for industrial units that expireover the next two years. These leases are subject to renewal for 4 more yearsand do not require any penalty if the Company does not renew them. The Companydoes not pay execution costs, such as maintenance and insurance. The rentalexpenses totaled R$64,470 in 2006 (R$33,110 in 2005).

Thetable below shows the future payments related to the leasing agreement atDecember 31, 2006:
| 2007  |   | 65,200 |   |
|-------|--------|--------|--------|
| 2008  |   | 29,000 |   |
| Total |   | 94,200 |   |

 

**Contingencies**

The Company is party tocertain legal proceedings arising in the normal course of business, and hasmade provisions based on its best estimate of the probable losses that willultimately be incurred. The Company believes that the provisions made aresufficient to cover probable losses. In connection with certain legalproceedings, the Company has made judicial deposits, which will only bereleased upon a favorable legal judgment (see Note 10).

The Company’s labor force isrepresented by collective bargaining agreements. All collective bargainingagreements are re-negotiated annually.

 

F-31

----

 

**SADIA S.A.**

NOTESTO CONSOLIDATED FINANCIAL STATEMENTS

Yearsended December 31, 2006, 2005 and 2004

(In thousands of Reais - R$, unless otherwise indicated)

**15.****         ****Commitments, Contingencies and Guarantees** (continued)

**Contingencies****—**continued

Contingencies classified ashaving a probable risk of loss, for which provisions are recorded underliabilities, have the following balances:
|        | ** ** | **2006** | ** ** | **2005** | ** ** |
|--------|------------|----------|------------|----------|------------|
|   |       |     |       |     |       |
| Tax    |       | 42,888   |       | 42,217   |       |
| Civil  |       | 8,950    |       | 13,281   |       |
| Labor  |       | 24,116   |       | 16,449   |       |
|   |       | 75,954   |       | 71,947   |       |

 

*Taxlitigation*

Themain tax contingencies involve the following cases:

a)        Income and social contribution taxes on net income

Provision for income and social contributiontaxes on net income amounting to R$16,018, of which R$11,283 recorded on theacquisition of the subsidiary Granja Rezende (incorporated in 2002), R$3,852 onwithholding income tax on investments of Granja Rezende and R$883 for otherprovisions.

b)       State VAT (ICMS)

The Company is a defendant in severaladministrative cases involving ICMS, mainly in the States of São Paulo, Rio deJaneiro and Amazonas (SUFRAMA), totaling a probable contingency estimated atR$18,499.

c)        Other tax contingencies

Several cases related to payment of IOF (Taxon Financial Operations), PIS (Social Integration Program Tax), COFINS (Tax forSocial Security Financing) and others totaling a probable loss of R$8,371.

TheCompany has other tax contingencies where the claimed amount is R$327,278, thatwere assessed as possible losses by the Company’s legal counsel and managementand therefore no provision was recorded.

F-32

----

 

**SADIA S.A.**

NOTESTO CONSOLIDATED FINANCIAL STATEMENTS

Yearsended December 31, 2006, 2005 and 2004

(In thousands of Reais - R$, unless otherwise indicated)

**15.****         ****Commitments, Contingencies and Guarantees** (continued)

*Civil litigation*

Theamount provided represents principally proceedings involving claims forindemnification for losses and damages, including pain and suffering, arisingfrom work-related accidents and consumer relations.

The Company has other civil contingencies where theclaimed amount is R$28,141, that were assessed as possible losses by theCompany’s legal counsel and management and therefore no provision was recorded.

*Labor claims*

There are approximately 2,481 labor claims againstthe Company. These claims are mainly related to overtime, and health exposureor hazard premiums, none of the amounts provided involve a significant amounton an individual basis. The total amount of such labor claims amount toR$41,441 and a provision of R$24,116 has been provided in the accompanyingfinancial statements based on historical information and represents the Company’sbest estimate of the ultimate loss that will be incurred.

*Guarantees*

The Company providesguarantees for loans obtained by certain out growers located in the centralregion of Brazil as part of a special development program for that region. Suchloans are used to improve the out growers farms installations and will be repaidin 10 years. The loans guaranteed by the Company amount to R$20,245 (R$11,796in 2005) and based upon the provisions of FIN 45 the fair value of thenon-contingent obligation of such guarantees in the amount of R$457 has beenprovided for.

**16.****         ****Shareholders’ Equity**

Brazilian Corporate Lawpermits the use of appropriated and unappropriated retained earnings toincrease capital. Such a capital increase must be approved by the Company’sBoard of Directors. The allocation of the capital increase between preferredand common shares is proportional to the number of shares outstanding.

The preferred shareholdersmay not vote at shareholders’ meetings but have the right to receive priorityin repayment of their capital, in the case of liquidation.

F-33

----

 

**SADIA S.A.**

NOTESTO CONSOLIDATED FINANCIAL STATEMENTS

Yearsended December 31, 2006, 2005 and 2004

(In thousands of Reais - R$, unless otherwise indicated)

**16.****         ****Shareholders’ Equity** (Continued)

Subscribed and paid-in capital is representedby the following shares with no par value, at December 31, 2006, 2005 and 2004:
|                                    | ** ** | **2006**    | ** ** | **2005**    | ** ** | **2004**    | ** ** |
|------------------------------------|------------|-------------|------------|-------------|------------|-------------|------------|
|                               |       |        |       |        |       |        |       |
| Common shares                      |       | 257,000,000 |       | 257,000,000 |       | 257,000,000 |       |
| Preferred shares                   |       | 426,000,000 |       | 426,000,000 |       | 426,000,000 |       |
| Total shares authorized and issued |       | 683,000,000 |       | 683,000,000 |       | 683,000,000 |       |
| Preferred shares  in treasury      |       | (5,924,288  | )          | (2,504,288  | )          | (304,288    | )          |
| Total  outstanding shares          |       | 677,075,712 |       | 680,495,712 |       | 682,695,712 |       |

 

The Company’s by-lawsprovide to pay a mandatory dividend to common and preferred shareholders of atleast 28% of annual net distributable income determined in accordance withBrazilian Corporate Law. From 1997 to 2004, preferred shareholders wereentitled to receive a dividend per share 10% higher than common shareholders.

On December 15, 2005, in anextraordinary general shareholder’s meeting, the right for preferred shares tobe included in a potential public offering for sale of the Company’s control(Tag along) was approved, and the shareholders holding preferred shares wereguaranteed a minimum price equal to 80% of the amount paid for a share withvoting rights, which is part of the controlling block, substituting/excludingitem b) of article 12 of the by-laws that granted an advantage for receipt ofdividends by holders of preferred shares at least 10% higher than thoseattributed to the holders of common shares, therefore making equal theremunerations attributed to the common and preferred shares in terms ofdividends. This approval was ratified in a Special Meeting of Preferred Shareholdersby 57.12% of the total number of preferred shares holders.

Brazilian Corporate Lawpermits the payment of dividends only in *reais*, limitedto the amounts of research and development and expansion reserves ofappropriated retained earnings and unappropriated retained earnings in thefinancial statements prepared in accordance with Brazilian Corporate Law. AtDecember 31, 2006 and 2005 the Company had in its statutory books the followingamounts:
|                                  | ** ** | **2006** | ** ** | **2005** | ** ** |
|----------------------------------|------------|----------|------------|----------|------------|
| Appropriated  retained earnings: |       |     |       |     |       |
| Research and development reserve |       | 74,444   |       | 55,447   |       |
| Expansion  reserve               |       | 850,147  |       | 627,128  |       |

 

F-34

----

 

**SADIA S.A.**

NOTESTO CONSOLIDATED FINANCIAL STATEMENTS

Yearsended December 31, 2006, 2005 and 2004

(In thousands of Reais - R$, unless otherwise indicated)

**16.****         ****Shareholders’ Equity** (Continued)

Dividends paid per thousandshares in**R$ were as follows:
|           | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
|-----------|------------|----------|------------|----------|------------|----------|------------|
|      |       |     |       |     |       |     |       |
| Preferred |       | 287.12   |       | 231.96   |       | 234.68   |       |
| Common    |       | 287.12   |       | 210.87   |       | 213.34   |       |

 

Brazilian Corporate Law andthe Company’s by-laws require that annual appropriations be made to certainreserves (appropriated retained earnings). These comprise mainly (a) 5% of netincome (statutory accounts) must be transferred to a legal reserve until suchreserve reaches 20% of capital stock under Brazilian GAAP; (b) appropriation of15% to a research and development reserve which is general reserve for supportdevelopment of the Company’s operations; (c) appropriation from 15% to 60% to aexpansion reserve. The legal reserve cannot be used to distribute dividends toshareholders.

The components ofappropriated retained earnings at December 31, 2006 and 2005 were as follows:
|                                   | ** ** | **2006** | ** ** | **2005** | ** ** |
|-----------------------------------|------------|----------|------------|----------|------------|
|                              |       |     |       |     |       |
| Legal reserve                     |       | 74,839   |       | 55,842   |       |
| Research and  development reserve |       | 74,444   |       | 55,447   |       |
| Expansion  reserve                |       | 850,147  |       | 627,128  |       |
|                              |       | 999,430  |       | 738,417  |       |

 

**17.****         ****Stock Option Plan**

In the Ordinary andExtraordinary General Meeting of April 29, 2005 the stock option plan wasapproved in its first phase for the Company’s officers. The plan comprisesnominative preferred shares issued by the Company.

The price for exercising theoptions does not include any discount and will be based on the average value ofthe quotation for the share in the last three days of trading on the São PauloStock Exchange prior to the grant date, updated by the accumulated NationalConsumer Price Index (INPC) between the grant date and the exercise date of theoption. The vesting period, during which the participant cannot exercise theirrights to purchase the shares, will be three years as from the option grantingdate. The participants will be able to fully or partially exercise theirpurchase rights after the vesting period within a maximum period of 2 years,and only after this period has expired they will lose the right to the optionsnot exercised.

F-35

----

 

**SADIA S.A.**

NOTESTO CONSOLIDATED FINANCIAL STATEMENTS

Yearsended December 31, 2006, 2005 and 2004

(In thousands of Reais - R$, unless otherwise indicated)

**17.****         ****Stock Option Plan—**(continued)

Under the plan regulations,the preferred shares will be reacquired and earmarked in treasury for this solepurpose.

The composition of the options granted ispresented as follows:
|           | ** ** | **Date**  | ** ** | **Quantity of** | ** ** | **Price of shares** | ** ** |
|-----------|------------|-----------|------------|----------------------|------------|-------------------------------|------------|
| **Cycle** | ** ** | **Grant** | ** ** | **Expiration**       | ** ** | **Shares**                    | ** ** | **Grant date** | ** ** | **Update-INPC** | ** ** |
|      |       |      |       |                 |       |                          |       |   |   |   |   |
| 2005      |       | 06/24/05  |       | 06/24/10             |       | 2.200.000                     |       | 4.55 |   | 4.76 |   |
| 2006      |       | 09/26/06  |       | 09/26/11             |       | 3.520.000                     |       | 5.68 |   | 5.76 |   |

 

Considering the provisionsof SFAS 123R, as the option price contains an inflation index (INPC) that isconsidered an *other condition*, the fair valueof the option in the amount of R$3,324 (R$678 in 2005) has been classified instock option, non-current liability and the compensation expense as general andadministration expense.

The fair value ofstock-based awards was estimated based on the following assumptions for theyear ended December 31, 2006 and 2005:
|                                            | ** ** | **December, 31 2006** | ** ** | **December, 31 2005** | ** ** |
|--------------------------------------------|------------|---------------------------------|------------|---------------------------------|------------|
|                                       |       |                            |       |                            |       |
| Expected life  (in years)                  |       | 3                               |       | 3                               |       |
| Interest rate                              |       | 13                              | %          | 18                              | %          |
| Volatility                                 |       | 44.39                           | %          | 37.06                           | %          |
| Dividend yield                             |       | 3.5                             | %          | 4.8                             | %          |
| Expected  inflation                        |       | 11,64                           | %          | 12,12                           | %          |
| Weighted-average  fair value at grant date |       | R$2.77                          |       | R$2.84                          |       |

 

Expected Term — The Company’s expected term represents theperiod that the Company’s stock-based awards are expected to be outstanding andwas determined based on the assumption that the officers will exercise theiroptions upon the vesting period is over.

Expected Volatility — The Company uses the trading history andimplied volatility of its preferred stock in determining an estimatedvolatility factor when using the Black-Scholes option-pricing formula todetermine the fair value of options granted.

F-36

----

 

**SADIA S.A.**

NOTESTO CONSOLIDATED FINANCIAL STATEMENTS

Yearsended December 31, 2006, 2005 and 2004

(In thousands of Reais - R$, unless otherwise indicated)

**17.****         ****Stock Option Plan—**(continued)

Expected Dividend — The Company uses the payments history perstock dividends for the expected dividend value factor when using theBlack-Scholes option-pricing formula to determine the fair value of optionsgranted.

Estimated forfeitures — When estimating forfeitures, the Companyconsiders voluntary and involuntary termination behaviors as well as analysisof actual options forfeitures.

Risk-Free Interest Rate — The Company bases the risk-free interestrate used in the Black-Scholes valuation method on the implied yield currentlyavailable on Interbank Bank Certificated rate — CDI.

Inflation — Expected inflation determined based on theinformation available with BACEN (Brazilian Central Bank).

As of December 31, 2006 theamount of R$11,678 related to the unrecognized compensation cost related tostock options is expected to be recognized from 1.5 to 2.8 years. The Companycurrently has shares in treasury, which are sufficient to cover future stockoption exercises.

Stock option activity forthe years presented is as follows:
|                                      | ** ** | **Shares in  thousands** | ** ** | **Weighted-  average  expected  exercise price** | ** ** |
|--------------------------------------|------------|-------------------------------|------------|-------------------------------------------------------|------------|
|                                 |       |                          |       |                                                  |       |
| Outstanding as of December 31,2005   |       | —                        |       | —                                                |       |
| Grants of options                    |       | 2,200                         |       | 5.19                                                  |       |
| Exercises                            |       | —                        |       | —                                                |       |
| Forfeitures or  expirations          |       | —                        |       | —                                                |       |
| Outstanding as of December 31, 2005  |       | 2,200                         |       | 5.19                                                  |       |
| Grants of options                    |       | 3,520                         |       | 6.43                                                  |       |
| Exercises                            |       | (100                          | )          | 4.68                                                  |       |
| Forfeitures or  expirations          |       | (300                          | )          | —                                                |       |
| Outstanding as  of December 31, 2006 |       | 5,320                         |       | 6.31                                                  |       |

 

F-37

----

 

**SADIA S.A.**

NOTESTO CONSOLIDATED FINANCIAL STATEMENTS

Yearsended December 31, 2006, 2005 and 2004

(In thousands of Reais - R$, unless otherwise indicated)

**18.****         ****Net Income per share**

Therewere no adjustments to net income in calculating diluted net income per share.The table below reconciles basic weighted average outstanding to dilutedweighted average shares outstanding.
|                                                    | ** ** | **2006 ** | ** ** | **2005**      | ** ** |
|----------------------------------------------------|------------|----------------|------------|---------------|------------|
| ** **                                         | ** ** | **Common**     | ** ** | **Preferred** | ** ** | **Common** | ** ** | **Preferred** | ** ** |
|                                               |       |           |       |          |       |   |   |   |   |
| Basic weighted  average shares outstanding         |       | 257,000,000    |       | 421,785,712   |       | 257,000,000 |   | 424,595,712 |   |
| Effect of dilutive securities — stock options |       | —         |       | 1,782,402     |       | — |   | 541,651 |   |
| Diluted weighted  average shares outstanding       |       | 257,000,000    |       | 423,568,114   |       | 257,000,000 |   | 425,137,363 |   |

 

**19.****         ****Income Taxes**

Incomebefore provision for income taxes was as follows:
|          | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
|----------|------------|----------|------------|----------|------------|----------|------------|
|     |       |     |       |     |       |     |       |
| Domestic |       | 199,814  |       | 288,056  |       | 410,134  |       |
| Foreign  |       | 188,902  |       | 382,596  |       | 176,988  |       |
|     |       | 388,716  |       | 670,652  |       | 587,122  |       |

 

A break-down betweendomestic and foreign income and social contribution tax (expense) benefit forthe year is as follows:
|           | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
|-----------|------------|----------|------------|----------|------------|----------|------------|
| Domestic: |       |     |       |     |       |     |       |
| Current   |       | (10,519  | )          | (51,956  | )          | (32,057  | )          |
| Deferred  |       | (16,936  | )          | (14,691  | )          | (57,469  | )          |
|      |       | (27,455  | )          | (66,647  | )          | (89,526  | )          |
| Foreign:  |       |     |       |     |       |     |       |
| Current   |       | (448     | )          | (72      | )          | (912     | )          |
| Deferred  |       | (1,181   | )          | (1,720   | )          | (5,661   | )          |
|      |       | (1,629   | )          | (1,792   | )          | (6,573   | )          |
|      |       | (29,084  | )          | (68,439  | )          | (96,099  | )          |

 

Brazilian income taxesconsist of federal income tax and social contribution. The 2006, 2005 and 2004statutory rates for these taxes were as follows:

 
| Federal income tax       |   | 25.00 | % |
|--------------------------|--------|-------|---|
| Social  contribution tax |   | 9.00  | % |
| Combined statutory rate  |   | 34.00 | % |

 

F-38

----

 

**SADIA S.A.**

NOTESTO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Yearsended December 31, 2006, 2005 and 2004

(In thousands of Reais - R$, unless otherwise indicated)

**19.****         ****Income Taxes**(Continued)

Because the Company isengaged in rural activities, certain related investments can be depreciated fortax purposes on an accelerated basis and the resulting tax losses may be offsetagainst profits generated in other activities.

The reconciliation of incometax at the Brazilian statutory rates to income tax expense follows:
|                                                                                             | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
|---------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
|                                                                                        |       |     |       |     |       |     |       |
| Income before  income taxes                                                                 |       | 388,716  |       | 670,652  |       | 587,122  |       |
| Income tax expense, at Brazilian statutory taxes  rates                                     |       | (132,163 | )          | (228,022 | )          | (199,621 | )          |
| Tax-exempt income in foreign subsidiary                                                     |       | 63,046   |       | 128,291  |       | 65,277   |       |
| Non-taxable  (nondeductible) foreign currency exchange (loss)                               |       | 5,715    |       | (51,816  | )          | (17,231  | )          |
| Benefit from  deductibility of interest attributed to shareholders’ equity (Note 3 j)) |       | 41,869   |       | 59,411   |       | 49,883   |       |
| Exempted financial  results                                                                 |       | 3,432    |       | 13,699   |       | —   |       |
| Stock-options                                                                               |       | (900     | )          | (230     | )          | —   |       |
| Income tax contingency                                                                      |       | (4,124   | )          | —   |       | —   |       |
| Other permanent  differences                                                                |       | (5,959   | )          | 10,228   |       | 5,593    |       |
| Income tax  expense                                                                         |       | (29,084  | )          | (68,439  | )          | (96,099  | )          |

 

During 2002, the Companyestablished a new foreign subsidiary. Due to a current tax treaty, earningsgenerated by such subsidiary are taxed when actually distributed. As theCompany intends to permanently reinvest the earnings of this foreignsubsidiary, no income tax payment is required. At December 31, 2005, thissubsidiary had cumulative earnings of R$1,103 million that are not tax effected(R$902 million in 2005). If such cumulative earnings were to be distributed tothe Company, approximately R$165 million of taxes would be paid.

F-39

----

 

**SADIA S.A.**

NOTESTO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Yearsended December 31, 2006, 2005 and 2004

(In thousands of Reais - R$, unless otherwise indicated)

**19.****         ****Income Taxes**(Continued)

Deferred tax assets andliabilities are comprised of the following:
|                                                     | ** ** | **2006** | ** ** | **2005** | ** ** |
|-----------------------------------------------------|------------|----------|------------|----------|------------|
| Deferred tax  assets:                               |       |     |       |     |       |
| Employee bonus accrual                              |       | 15,564   |       | 20,163   |       |
| Accrued contingencies                               |       | 25,824   |       | 24,462   |       |
| Accrued employee benefit liability                  |       | 25,259   |       | 10,152   |       |
| Tax loss carryforwards                              |       | 37,834   |       | 9,861    |       |
| Property, plant and equipment                       |       | 47,314   |       | 51,801   |       |
| Deferred charges                                    |       | 32,354   |       | 15,608   |       |
| Other (mainly timing  differences for tax purposes) |       | 31,417   |       | 18,578   |       |
| Total deferred  income tax assets                   |       | 215,566  |       | 150,625  |       |
|                                                |       |     |       |     |       |
| Deferred tax  liabilities:                          |       |     |       |     |       |
| Property, plant and equipment                       |       | (106,270 | )          | (56,677  | )          |
| Pension plan                                        |       | (125,423 | )          | (32,309  | )          |
| Intangible assets                                   |       | (8,629   | )          | (10,010  | )          |
| Other                                               |       | (10,085  | )          | (2,536   | )          |
| Total deferred  tax liabilities                     |       | (250,407 | )          | (101,532 | )          |
| Net deferred tax  (liabilities) assets              |       | (34,841  | )          | 49,093   |       |
| Current assets  portion                             |       | 37,867   |       | 22,039   |       |
| Non current  (liabilities) assets portion           |       | (72,708  | )          | 27,054   |       |

 

In assessing therealizability of deferred tax assets, management considers whether it is morelikely than not that some portion or all of the deferred tax assets will not berealized. The ultimate realization of deferred tax assets is dependent upon thegeneration of future taxable income during the periods in which those temporarydifferences become deductible and tax loss carryforwards utilizable. Managementconsiders the scheduled reversal of deferred tax liabilities, projected futuretaxable income, and tax planning strategies in making this assessment. Basedupon the level of historical taxable income and projections for future taxableincome over the periods in which the deferred tax assets are deductible,management believes it is more likely than not that the Company will realizethe benefits of these deductible differences and tax loss carryforwards atDecember 31, 2006.

F-40

----

 

**SADIA S.A.**

NOTESTO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Yearsended December 31, 2006, 2005 and 2004

(In thousands of Reais - R$, unless otherwise indicated)

**19.****         ****Income Taxes**(Continued)

The Company has not provided a valuationallowance against the net deferred tax asset as of December 31, 2006 arisingout of temporary differences based upon management’s belief that it is morelikely than not that such deferred tax asset will be realized in the future throughreversal of the differences and the generation of taxable income by theCompany.

The totalamount of R$106,432 related to loss carryforwards have no expiration date andare available to offset up to 30% of future taxable income in any given year.

**20.****          ****Risk Management and FinancialInstruments**

The Company’s operations are exposed to marketrisks, principally in relation to exchange rate variations, credit risk andgrain purchase prices. These risks are monitored by the Risk Management Areathat uses a specific system to calculate the “VAR -Value at Risk”, andpermanently monitored by the finance committee, composed of members of theBoard of Directors and other finance executives of the Company, who areresponsible for defining the Board’s risk management strategy by determiningthe position and exposure limits.

a) Exchange rate and interest rate risk

The exchange rate risk forloans and financing and any other payables denominated in foreign currency ishedged by short term investments denominated in foreign currency and foreignreceivable from exports, which serves as a natural hedge and by derivativefinancial instruments.

The Company within its hedgestrategy uses foreign currency future contracts (U.S. dollar, Euro and Pound)as a form of mitigating exchange rate risk over operating and financial assetsand liabilities.

As from the last quarter of2006, by making a distinction at the inception of the contracts, the Companysegregated the results from derivatives related to its operating activities andthose related to its financial assets and liabilities. Consequently, R$45,935and R$38,625, respectively, were recorded in gross operating revenue andforeign currency exchange, net (a loss of R$15,765 and gain of R$39,254 in 2005and 2004, respectively, recorded in foreign currency exchange, net).

F-41

----

 

**SADIA S.A.**

NOTESTO CONSOLIDATED FINANCIAL STATEMENTS

Yearsended December 31, 2006, 2005 and 2004

(In thousands of Reais - R$, unless otherwise indicated)

**20.****          ****Risk Management and FinancialInstruments** (Continued)

a) Exchange rate and interest rate risk—continued

The Company also as a formof mitigating interest rate risk enter into rate swaps (Dollar to InterbankDeposit Certificate — CDI). The amount or R$15,726 (R$100,098 in 2005 andR$147,519 in 2004) was recorded in interest expense

b) Credit risk

TheCompany is potentially exposed to credit risk in relation to its trade accountsreceivable, long and short-term investments and derivative instruments. TheCompany limits the risk associated with these financial instruments bysubjecting them to the control of highly rated financial institutions thatoperate within the limits pre-established by the credit and financingcommittees.

Theconcentration of credit risk with respect to accounts receivable is minimizeddue to the spread of its client base, since the Company does not have anycustomer or group representing 10% or more of its consolidated revenues, aswell as granting credits for customers with solid financial and operationalratios. Generally, the Company does not require a guarantee for domesticaccounts receivable.

c) Grain purchase price

TheCompany’s operations are exposed to the volatility in prices of grain (corn andsoybean) used in the preparation of fodder for its breeding stock, where theprice variation results from factors beyond the control of management, such asclimate, the size of the harvest, transport and storage costs and governmentagricultural policies, among others. The Company does not enter into future or options contracts to hedgeagainst fluctuations in the price of the commodities, although certain ofpurchase contracts provide for the commodity pricing to be determines generallyat dates up to one year after purchase of the grains. The company has a graincommittee, composed of the chief executive officer and financial andoperational executives.

F-42

----

 

**SADIA S.A.**

NOTESTO CONSOLIDATED FINANCIAL STATEMENTS

Yearsended December 31, 2006, 2005 and 2004

(In thousands of Reais - R$, unless otherwise indicated)

**20.****          ****Risk Management and FinancialInstruments** (Continued)

d) Estimated market values

The Company used thefollowing methods and assumptions in estimating the fair value disclosures ofits financial instruments at December 31, 2006 and 2005:

*Cash and cash equivalents:* The carrying amounts reported in the balancesheet for cash and cash equivalents approximate their fair values.

*Investments in debtsecurities:* Themarket values of investments in debt securities were calculated based on themarket quotations of these securities when such information is not availablebased on their present value calculated through the future cash flows and usinginterest rates applicable to instruments of similar nature, terms and risk, orbased on the market quotations of these securities.

*Accounts and notesreceivable and accounts payable:* The carrying amounts reported in the balance sheet for accounts andnotes receivable and accounts payable approximate their fair values.

*Long and short-term debt:* The market values of loans and financingwere calculated based on their present value calculated through the future cashflows and using interest rates applicable to instruments of similar nature,terms and risks or based on the market quotation of these securities. Themarket value of BNDES financing are similar to the book values, since there areno similar instruments with comparable maturities and interest rates.

*Foreign currency andinterest rate swap contracts:* The fair values of foreign currency and interest rate swap contractswere estimated based on quoted market prices of comparable contracts. AtDecember 31, 2006 and 2005 the notional amounts of the outstanding contractswere R$1,554,843****and R$2,381,603****and the measurement of these contracts atfair values resulted in a loss of R$22,535 and R$93,659, respectively. TheCompany recognizes these contracts on the balance sheet at fair value andadjustments to fair value were recorded through income. The actual cashsettlements on the contracts occur at times specified in each agreement. TheCompany does not intend to terminate any of these contracts prior to maturity.

F-43

----

 

**SADIA S.A.**

NOTESTO CONSOLIDATED FINANCIAL STATEMENTS

Yearsended December 31, 2006, 2005 and 2004

(In thousands of Reais - R$, unless otherwise indicated)

**20.****          ****Risk Management and Financial Instruments** (Continued)

The following table presents the carryingamounts and estimated fair values of the Company’s financial instruments atDecember 31, 2006. The fair value of a financial instrument is the amount atwhich the instrument could be exchanged in a current transaction betweenwilling parties.
|                                     | ** ** | **2006**             | ** ** |
|-------------------------------------|------------|----------------------|------------|
| ** **                          | ** ** | **Carrying  amount** | ** ** | **Fair  value** | ** ** |
|                                |       |                 |       |   |   |
| Financial assets:                   |       |                 |       |   |   |
| Cash and cash  equivalents          |       | 726,295              |       | 726,295 |   |
| Available for sale  securities      |       | 1,818,625            |       | 1,830,846 |   |
| Accounts and notes  receivable, net |       | 921,044              |       | 921,044 |   |
| Financial liabilities:              |       |                 |       |   |   |
| Short-term debt                     |       | 1,226,567            |       | 1,226,797 |   |
| Suppliers                           |       | 503,230              |       | 503,230 |   |
| Long-term debt                      |       | 2,670,969            |       | 2,709,375 |   |

 

**21.****          ****Supplementary Retirement Plan**

The Company sponsors adefined benefit pension plan that offers supplementary retirement benefits tothe employees, through Attilio FranciscoXavier Fontana Foundation. The pension benefit is generally defined as thedifference between (i) the retiree’s average salary during the last 12 monthsindexed to the date of retirement — until the limit of 80% of the last salary,and (ii) the value of the retirement pension paid by theBrazilian social security system. For retired employees the initial pensionpayment is subsequently adjusted upwards to recognize cost of living increases.. The Company provides for the costs of pension benefits based on a fixedpercentage of remuneration, as recommended annually by independent actuaries.The accumulated benefit obligation related to this pension plan were R$686,175and R$645,838 at December 31, 2006 and 2005, respectively. The Company expectsto contribute approximately R$2,115 to the plan during fiscal year 2006

F-44

----

 

**SADIA S.A.**

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years ended December 31, 2006, 2005 and 2004

(Inthousands of Reais - R$, unless otherwise indicated)

**21.    Supplementary Retirement Plan**(Continued)

TheCompany also provides for other retirement benefits to its employees andcertain employee executives. Such benefit plans generally provide benefitspayable as a single lump sum to eligible employees upon retirement. The Companyintends to fund these benefits from its operations. The aggregate projected benefitobligation and the aggregate accumulated benefit obligation related to thoseother retirement benefit were R$63,509 and R$57,244, respectively, at December31, 2006 and R$58,579 and R$59,487, respectively, at December 31, 2005.

Informationregarding the plans follows:

|                                                                | ** ** | **Pension benefits** | ** ** | **Other benefits** | ** ** |
|----------------------------------------------------------------|------------|---------------------------|------------|-------------------------|------------|
| ** **                                                     | ** ** | **2006**                  | ** ** | **2005**                | ** ** | **2006** | ** ** | **2005** | ** ** |
| **Change in benefit obligation**                               |       |                      |       |                    |       |   |   |   |   |
| Benefit  obligation at beginning of year                       |       | 704,529                   |       | 580,504                 |       | 57,244 |   | 59,487 |   |
| Net service cost                                               |       | 19,589                    |       | 13,018                  |       | 4,905 |   | 4,912 |   |
| Interest cost                                                  |       | 77,995                    |       | 64,139                  |       | 6,299 |   | 6,495 |   |
| Participants  contributions (service cost)                     |       | 5,814                     |       | 5,424                   |       | — |   | — |   |
| Actuarial loss                                                 |       | (13,066                   | )          | 49,397                  |       | (3,558 | ) | (2,419 | ) |
| Benefits paid                                                  |       | (35,751                   | )          | (30,468                 | )          | (1,381 | ) | (4,141 | ) |
| Plan changes                                                   |       | —                    |       | 22,515                  |       | — |   | — |   |
| Curtailment                                                    |       | —                    |       | —                  |       | — |   | (7,090 | ) |
| Benefit  obligation at end of year                             |       | 759,110                   |       | 704,529                 |       | 63,509 |   | 57,244 |   |
| **Change in plan assets**                                      |       |                      |       |                    |       |   |   |   |   |
| Fair value of  plan assets at beginning of year                |       | 1,035,000                 |       | 904,695                 |       | — |   | — |   |
| Actual return on  plan assets                                  |       | 120,185                   |       | 152,442                 |       | — |   | — |   |
| Company  contributions                                         |       | 2,115                     |       | 6,295                   |       | — |   | — |   |
| Participant  contributions                                     |       | 6,451                     |       | 6,177                   |       | — |   | — |   |
| Benefits paid                                                  |       | (35,751                   | )          | (34,609                 | )          | — |   | — |   |
| Fair value of  plan assets at end of year                      |       | 1,128,000                 |       | 1,035,000               |       | — |   | — |   |
| **Funded status**                                              |       |                      |       |                    |       |   |   |   |   |
| Funded status at  end of year                                  |       | 95,027                    |       | 330,471                 |       | (32,264 | ) | (57,244 | ) |
| SFAS 158  transition amount                                    |       | 273,863                   |       | —                  |       | (31,245 | ) | — |   |
| Unrecognized  transition asset                                 |       | —                    |       | (3,766                  | )          | — |   | — |   |
| Unamortized  prior service cost                                |       | —                    |       | 22,515                  |       | — |   | 22,464 |   |
| Unrecognized net  actuarial gain                               |       | —                    |       | (254,193                | )          | — |   | 5,511 |   |
| Excess of  additional liability                                |       | —                    |       | —                  |       | — |   | (2,995 | ) |
| Net amount  recognized                                         |       | 368,890                   |       | 95,027                  |       | (63,509 | ) | (32,264 | ) |
| **Amounts recognized in the  statement of financial position** | ** ** | ** **                | ** ** | ** **              | ** ** | ** ** | ** ** | ** ** | ** ** |
| Intangible asset                                               |       | —                    |       | —                  |       | — |   | 15,311 |   |
| Prepaid pension  plan                                          |       | 368,890                   |       | 95,027                  |       | — |   | — |   |
| Accrued benefit  liability                                     |       | —                    |       | —                  |       | (63,509 | ) | (47,575 | ) |
| Net amount recognized                                          |       | 368,890                   |       | 95,027                  |       | (63,509 | ) | (32,264 | ) |

 

F-45

----

 

**SADIA S.A.**

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years ended December 31, 2006, 2005 and 2004

(Inthousands of Reais - R$, unless otherwise indicated)

**21.    Supplementary Retirement Plan**(Continued)

The following projectedbenefit payments, which reflect expected future service, as appropriate, areexpected to be paid:

|            | ** ** | **Pension benefits** | ** ** | **Other benefits** | ** ** |
|------------|------------|---------------------------|------------|-------------------------|------------|
|       |       |                      |       |                    |       |
| 2007       |       | 35,025                    |       | 5,759                   |       |
| 2008       |       | 37,844                    |       | 4,223                   |       |
| 2009       |       | 40,747                    |       | 1,679                   |       |
| 2010       |       | 43,748                    |       | 2,368                   |       |
| 2011       |       | 47,557                    |       | 3,386                   |       |
| 2012 -2015 |       | 304,166                   |       | 40,379                  |       |

 

The pension plan weighted-average assetallocation at December 31, 2006 and 2005, by asset category, is as follows:

|                    | ** ** | **2006**   | ** ** | **2005**   | ** ** |
|--------------------|------------|------------|------------|------------|------------|
| ** **         | ** ** | ** ** | ** ** | ** ** | ** ** |
| Debt securities    |       | 62         | %          | 57         | %          |
| Equity  securities |       | 29         | %          | 34         | %          |
| Real estate        |       | 8          | %          | 8          | %          |
| Others assets      |       | 1          | %          | 1          | %          |
|               |       | 100        | %          | 100        | %          |

 

The investment strategyadopted by Attilio Francisco Xavier Fontana Foundation for the pension planssponsored by the Company is to maximize the rates of return on plan assetswithin an acceptable level of risk aiming to minimize the cost of providingpension benefits while maintaining adequate funding levels. Such investmentstrategy is revised on an annual basis. The current strategic targets are tohave a pension asset portfolio comprising of 29% equity securities, 62% debtssecurities (substantially comprised of fixed and variable income investmentfunds) and 8% real estate. The plan asset portfolio does not include anyhedging, futures or derivative instruments.

Equity securities atDecember 31, 2006, are entirely represented by 24,998,558 common shares of theCompany (24,998,558 common shares at December 31, 2005) with an aggregate fairvalue of R$178,990 at December 31, 2006. During 2005, the plan sold 5,400,000preferred shares of the Company. Dividends paid by the Company on shares heldby the plan were R$4,391 for the year ended December 31, 2006 (R$7,571 in2005).

F-46

----

 

**SADIA S.A.**

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years ended December 31, 2006, 2005 and 2004

(Inthousands of Reais - R$, unless otherwise indicated)

**21.    Supplementary Retirement Plan**(Continued)

|                                   | ** ** | **2006**   | ** ** | **2005**   | ** ** |
|-----------------------------------|------------|------------|------------|------------|------------|
| **Weighted-average  assumptions** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Discount rate                     |       | 11.3       | %          | 11.3       | %          |
| Expected return on plan assets    |       | 12.4       | %          | 12.4       | %          |
| Rate of  compensation increase    |       | 7.1        | %          | 7.1        | %          |

 

The Company uses a December31 measurement date for its plans. In developing the expected rate of return onplan assets, the Company considered the actuarial assumptions recommended byits independent actuaries, which basically reflect expectations of futurereturns.

|                                             | ** ** | **Pension benefits** | ** ** | **Other benefits** | ** ** |
|---------------------------------------------|------------|---------------------------|------------|-------------------------|------------|
| ** **                                  | ** ** | **2006**                  | ** ** | **2005**                | ** ** | **2004** | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
| **Components of net periodic benefit cost** |       |                      |       |                    |       |   |   |   |   |   |   |   |   |
| Service cost                                |       | 19,589                    |       | 13,018                  |       | 16,515 |   | 4,905 |   | 4,912 |   | 4,295 |   |
| Interest cost                               |       | 77,995                    |       | 64,139                  |       | 62,004 |   | 6,299 |   | 6,495 |   | 5,734 |   |
| Expected return on plan assets              |       | (126,539                  | )          | (110,592                | )          | (92,401 | ) | — |   | — |   | — |   |
| Amortization of transition asset            |       | (1,882                    | )          | (1,882                  | )          | (1,882 | ) | — |   | — |   | — |   |
| Amortization of prior service cost          |       | 1,442                     |       | —                  |       | — |   | 2,128 |   | 2,397 |   | 2,397 |   |
| Recognized net actuarial gain               |       | (8,211                    | )          | (8,238                  | )          | (5,049 | ) | 581 |   | 558 |   | — |   |
| Net periodic  pension cost (credit)         |       | (37,606                   | )          | (43,555                 | )          | (20,813 | ) | 13,913 |   | 14,362 |   | 12,426 |   |

 

InSeptember 2006, the FASB issued SFAS 158 - “Employers’ Accounting for DefinedBenefit Pension and Other Postretirement Plans — an Amendment of FASBStatements No. 87, 88, 106 and 132(R)” (“SFAS 158”), which became effective forthe Company on December 31, 2006.  This standard requires the Companyto recognize the overfunded or underfunded status of each of its definedbenefit pension and other postretirement benefit plans as an asset or liabilityand to reflect changes in the funded status through “Accumulated othercomprehensive income,” as a separate component of stockholders’ equity.

F-47

----

 

**SADIA S.A.**

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years ended December 31, 2006, 2005 and 2004

(Inthousands of Reais - R$, unless otherwise indicated)

**21.    Supplementary Retirement Plan**(Continued)

The incremental effect ofapplying SFAS 158 on individual line items of the balance sheet as of December31, 2006 were as follows:

|                                                    | ** ** | **Before  application of  FAS 158** | ** ** | **FAS 158  Adoption  Adjustments** | ** ** | **After  application  of FAS 158** | ** ** |
|----------------------------------------------------|------------|-----------------------------------------------|------------|-----------------------------------------|------------|----------------------------------------------|------------|
|                                               |       |                                          |       |                                    |       |                                         |       |
| Prepaid pension  plan                              |       | 134,748                                       |       | 234,142                                 |       | 368,890                                      |       |
| Deferred tax (noncurrent)                          |       | (45,814                                       | )          | (79,608                                 | )          | (125,423                                     | )          |
| Accrued employee benefit liability                 |       | (41,799                                       | )          | (21,710                                 | )          | (63,509                                      | )          |
| Deferred tax (noncurrent)                          |       | 14,212                                        |       | 7,381                                   |       | 21,593                                       |       |
| Others liability                                   |       | (2,617                                        | )          | (13,399                                 | )          | (10,782                                      | )          |
| Deferred tax (noncurrent)                          |       | 890                                           |       | 4,556                                   |       | 3,666                                        |       |
| Accumulated other comprehensive income, net of tax |       | 1,978                                         |       | 131,362                                 |       | 133,340                                      |       |

 

**22. Other operating income**

OnOctober 26, 2006, the Company obtained recognition of the final, favorable,unappealable decision on the COFINS proceedings referring to theunconstitutionality of Law 9718/98, which changed the basis for the calculationof PIS and COFINS by including operating and financial income. This matter wasjudged and considered unconstitutional by the Superior court of Justice onNovember 9, 2005. The Company has been collecting the tax in accordance withlegislation and, based on the transit in rem judicatam of this proceeding,recognized in 2006 the tax credit in the amount of R$80,168, which, net ofattorneys’ fees, represented a gain of R$75,654.

F-48

----

 

**SADIA S.A.**

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years ended December 31, 2006, 2005 and 2004

(Inthousands of Reais - R$, unless otherwise indicated)

**23.Segment and Related Information**

Thefollowing information about segments is based upon information used by theCompany’s management to assess the performance of operating segments anddecides on the allocation of resources. This approach is required by FASBStatement No. 131 *Disclosure about Segments of an Enterpriseand Related Information*, and has been applied for all periodspresented.

TheCompany has three identifiable reportable segments: Processed products, Poultryand Pork.

TheCompany evaluates segment performance based on information generated from itsstatutory accounting records prepared in accordance with accounting principlesgenerally accepted in Brazil, which has been adjusted for US GAAP in thefollowing presentation:

a) Segment information

|                                       | ** ** | **2006**  | ** ** | **2005**  | ** ** | **2004**  | ** ** |
|---------------------------------------|------------|-----------|------------|-----------|------------|-----------|------------|
| **Net  operating revenue**            |       |      |       |      |       |      |       |
| Processed  products                   |       | 3,102,397 |       | 3,147,296 |       | 2,731,136 |       |
| Poultry                               |       | 2,872,845 |       | 3,199,246 |       | 2,951,897 |       |
| Pork                                  |       | 494,571   |       | 732,710   |       | 586,595   |       |
| Beef                                  |       | 309,353   |       | —    |       | —    |       |
| Other                                 |       | 97,535    |       | 239,186   |       | 37,845    |       |
| Adjustments for  US GAAP presentation |       | (46,401   | )          | (596      | )          | (198,248  | )          |
| Total net  operating revenue          |       | 6,830,300 |       | 7,317,842 |       | 6,109,225 |       |

 

Other net operating revenueis primarily attributable to grain and by-products and beef productsoperations.

|                                                    | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
|----------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| **Depreciation  expense**                          |       |     |       |     |       |     |       |
| Processed  products                                |       | (92,214  | )          | (60,863  | )          | (76,648  | )          |
| Poultry                                            |       | (100,080 | )          | (80,336  | )          | (77,476  | )          |
| Pork                                               |       | (15,223  | )          | (16,853  | )          | (20,647  | )          |
| Beef                                               |       | (11,660  | )          | —   |       | —   |       |
| Other                                              |       | (4,072   | )          | (7,294   | )          | (1,363   | )          |
| Total depreciation expense allocated to Segments   |       | (223,249 | )          | (165,346 | )          | (176,134 | )          |
| Depreciation  allocated to administrative expenses |       | (17,320  | )          | (12,829  | )          | (13,461  | )          |
| Adjustments for  US GAAP presentation              |       | 35,185   |       | (4,088   | )          | 31,774   |       |
| Total  depreciation expense                        |       | (205,384 | )          | (182,263 | )          | (157,821 | )          |

 

F-49

----

 

**SADIA S.A.**

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years ended December 31, 2006, 2005 and 2004

(Inthousands of Reais - R$, unless otherwise indicated)

**23.****          ****Segment and Related Information** (Continued)

a) Segment information(Continued)

|                                                                                       | ** ** | **2006**  | ** ** | **2005**  | ** ** | **2004**  | ** ** |
|---------------------------------------------------------------------------------------|------------|-----------|------------|-----------|------------|-----------|------------|
| **Segment  operating income**                                                         |       |      |       |      |       |      |       |
| Processed  products                                                                   |       | 194,494   |       | 273,684   |       | 274,197   |       |
| Poultry                                                                               |       | 100,204   |       | 269,766   |       | 260,393   |       |
| Pork                                                                                  |       | 35,489    |       | 94,586    |       | 70,902    |       |
| Beef                                                                                  |       | 11,482    |       | —    |       | —    |       |
| Other                                                                                 |       | 2,087     |       | 2,798     |       | (3,765    | )          |
| Adjustments for  US GAAP presentation                                                 |       | (41,533   | )          | 40,069    |       | 33,302    |       |
| Total operating income                                                                |       | 302,223   |       | 680,903   |       | 635,029   |       |
| Interest expense                                                                      |       | (310,442  | )          | (324,231  | )          | (413,461  | )          |
| Interest income  and other                                                            |       | 282,904   |       | 248,203   |       | 309,454   |       |
| Foreign currency  exchange gain (loss), net                                           |       | 104,219   |       | 159,602   |       | 20,672    |       |
| Adjustments for  US GAAP presentation                                                 |       | 9,812     |       | (93,825   | )          | 35,428    |       |
| Income before income taxes, equity income or loss of  investees and minority interest |       | 388,716   |       | 670,652   |       | 587,122   |       |
|                                                                                  |       |      |       |      |       |      |       |
| **Segment  assets**                                                                   |       |      |       |      |       |      |       |
| Processed  products                                                                   |       | 715,248   |       | 624,619   |       | 491,982   |       |
| Poultry                                                                               |       | 1,018,005 |       | 750,504   |       | 459,035   |       |
| Pork                                                                                  |       | 275,533   |       | 147,724   |       | 137,798   |       |
| Beef                                                                                  |       | 104,340   |       | —    |       | —    |       |
| Other                                                                                 |       | 220,312   |       | 143,359   |       | 76,910    |       |
| Adjustments for  US GAAP presentation                                                 |       | (178,458  | )          | (142,897  | )          | (110,485  | )          |
| Total property, plant and equipment                                                   |       | 2,154,980 |       | 1,523,309 |       | 1,055,240 |       |
|                                                                                  |       |      |       |      |       |      |       |
| Reconciling  items - corporate assets                                                 |       |      |       |      |       |      |       |
| Cash and cash equivalents                                                             |       | 2,550,602 |       | 2,663,689 |       | 2,406,125 |       |
| Accounts and notes receivable, net                                                    |       | 678,598   |       | 509,615   |       | 349,605   |       |
| Inventories                                                                           |       | 1,084,454 |       | 992,490   |       | 1,064,671 |       |
| Other corporate assets                                                                |       | 929,259   |       | 690,825   |       | 739,691   |       |
| Adjustments for  US GAAP presentation                                                 |       | 463,406   |       | 184,459   |       | 105,156   |       |
| Total  consolidated assets                                                            |       | 8,039,757 |       | 6,707,284 |       | 5,830,973 |       |
| ** **                                                                            |       |      |       |      |       |      |       |
| **Capital  expenditures**                                                             |       |      |       |      |       |      |       |
| Processed  products                                                                   |       | 302,648   |       | 194,587   |       | 93,220    |       |
| Poultry                                                                               |       | 367,581   |       | 372,761   |       | 146,606   |       |
| Pork                                                                                  |       | 143,032   |       | 26,982    |       | 40,145    |       |
| Beef                                                                                  |       | 7,786     |       | —    |       | —    |       |
| Other                                                                                 |       | 234,331   |       | 91,662    |       | 52,286    |       |
| Adjustments for  US GAAP presentation                                                 |       | (85,776   | )          | 56,365    |       | (7,340    | )          |
| Total segment  capital expenditures                                                   |       | 969,602   |       | 742,357   |       | 324,917   |       |

 

F-50

----

 

**SADIA S.A.**

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years ended December 31, 2006, 2005 and 2004

(Inthousands of Reais - R$, unless otherwise indicated)

**23.****          ****Segment and Related Information** (Continued)

b) Export sales byregion/market

|                                                                           | ** ** | **2006**  | ** ** | **2005**  | ** ** | **2004**  | ** ** |
|---------------------------------------------------------------------------|------------|-----------|------------|-----------|------------|-----------|------------|
|                                                                      |       |      |       |      |       |      |       |
| Europe                                                                    |       | 889,171   |       | 978,318   |       | 985,746   |       |
| Middle East                                                               |       | 787,838   |       | 1,047,615 |       | 802,935   |       |
| Asia                                                                      |       | 533,295   |       | 635,907   |       | 602,202   |       |
| South America                                                             |       | 528,453   |       | 542,151   |       | 387,130   |       |
| Emerging markets  (mainly Russia and other former Soviet Union countries) |       | 719,706   |       | 872,333   |       | 806,520   |       |
| Adjustments for  US GAAP presentation                                     |       | (46,426   | )          | (627      | )          | (191,869  | )          |
|                                                                      |       | 3,412,037 |       | 4,075,697 |       | 3,392,664 |       |

 

Revenuesare attributed to regions based upon where the products are shipped.

All long-lived operational assets are located in Brazil and assetslocated outside of Brazil consist of sales offices located in variouscountries.

Theadjustments for US GAAP presentation as demonstrated above comprise differencesbetween the Company’s statutory accounting records prepared in accordance withBrazilian GAAP and the consolidated financial statements prepared in accordancewith U.S. GAAP. The primary differences relate to:

a)                Elimination of assets, liabilities, revenues,costs and expenses of equity method accounted investees that are accounted forusing the proportional consolidation method under Brazilian GAAP;

b)               Reclassifications of certain assets,liabilities and income statement lines reported under Brazilian GAAP for thepresentation of accompanying consolidated financial statements in accordancewith US GAAP;

c)                Accounting for the transfer of receivables(as disclosed in Note 6) as a financing in the accompanying consolidatedfinancial statements rather than as a sale as accounted for under BrazilianGAAP.

F-51

----

 

**SADIA S.A.**

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years ended December 31, 2006, 2005 and 2004

(Inthousands of Reais - R$, unless otherwise indicated)

**24.Supplemental Disclosures of Cash Flow Information**

|                                               | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
|-----------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
|                                          |       |     |       |     |       |     |       |
| Income taxes  paid                            |       | 3,147    |       | 1,881    |       | 3,070    |       |
| Interest paid  (including exchange variation) |       | 188,065  |       | 227,389  |       | 228,922  |       |

 

**25. Supplemental Interest Expenseand Interest Income and Other**

|                                                                         | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
|-------------------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
|                                                                    |       |     |       |     |       |     |       |
| Interest  expenses                                                      |       |     |       |     |       |     |       |
| Interest and charges on*real*debt                                       |       | (53,072  | )          | (57,679  | )          | (124,565 | )          |
| Interest and charges on U.S. dollar debt                                |       | (192,994 | )          | (185,269 | )          | (52,271  | )          |
| Loss on sale of securities                                              |       | —   |       | —   |       | (110,000 | )          |
| Other                                                                   |       | (64,503  | )          | (68,678  | )          | (49,989  | )          |
|                                                                    |       | (310,569 | )          | (311,626 | )          | (336,825 | )          |
|                                                                    |       |     |       |     |       |     |       |
| Interest income  and other, net                                         |       |     |       |     |       |     |       |
| Interest income on cash equivalents and investments  in debt securities |       | 204,086  |       | 218,685  |       | 219,163  |       |
| Other                                                                   |       | 35.926   |       | 29,313   |       | 30,621   |       |
|                                                                    |       | 240,012  |       | 247,998  |       | 249,784  |       |

 

F-52

----