**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

**WASHINGTON,D.C. 20549**

 

**FORM 20-F**

 

**(MarkOne)**

 

| **o**      | **REGISTRATION STATEMENT PURSUANT  TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934** |
|------------|--------------------------------------------------------------------------------------------------------------------|
| ** ** | ** **                                                                                                         |
| **OR**     |
| ** ** | ** **                                                                                                         |
| **x**      | **ANNUAL REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**                |
| ** ** | **For the fiscal year ended  December 31, 2007**                                                                   |
| ** ** | ** **                                                                                                         |
| **OR**     |
| ** ** | ** **                                                                                                         |
| **o**      | **TRANSITION REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**            |
| ** ** | ** **                                                                                                         |
| **OR**     |
| ** ** | ** **                                                                                                         |
| **o**      | **SHELL COMPANY REPORT PURSUANT  TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**         |

 

Dateof event requiring this shell company report . . . . . . . . . . . . . . . . ... .

 

**For the transition period from                      to                        **

 

Commissionfile number  1-15184

 
| **SADIA S.A.**                                                                                    |
|---------------------------------------------------------------------------------------------------|
| (Exact name of Registrant as specified in its charter)                                            |
|                                                                                              |
| **N/A**                                                                                           |
| (Translation of Registrant’s name into English)                                              |
|                                                                                              |
| **Federative Republic of Brazil**                                                                 |
| (Jurisdiction of incorporation or organization)                                                   |
|                                                                                              |
| **Rua Fortunato Ferraz, 659**

**Vila Anastácio, São Paulo, SP**

**05093-901, Brazil** |
| (Address of principal executive offices)                                                          |

 

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

 

| Title of each  class                           |   | Name of each  exchange on which registered |
|------------------------------------------------|--------|--------------------------------------------|
| Preferred Shares, no par value per share,      |   | New York Stock Exchange                    |
| each represented by American Depositary Shares |   |                                       |

 

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

 
| **None**         |
|------------------|
| (Title of Class) |
|             |
| ** **       |
| (Title of Class) |

 
| SEC  1852 (02-08) | **Persons  who respond to the collection of information contained in this form are not  required to respond unless the form displays a currently valid OMB control  number.** |
|-------------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

----

 

Securitiesfor which there is a reporting obligation pursuant to Section 15(d) ofthe Act.

 
| **None**         |
|------------------|
| (Title of Class) |

 

Indicatethe number of outstanding shares of each of the issuer’s classes of capital orcommon stock as of the close of the period covered by the annual report.
|   | 257,000,000  Common Shares, no par value per share    |
|--------|-------------------------------------------------------|
|   | 426,000,000  Preferred Shares, no par value per share |

 

Indicateby check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405of the Securities Act.

x Yes   o No

 

Ifthis report is an annual or transition report, indicate by check mark if theregistrant is not required to file reports pursuant to Section 13 or 15(d) ofthe Securities Exchange Act of 1934.

o Yes   x No

 

Note— Checking the box above will not relieve any registrant required to filereports pursuant to Section 13 or 15(d) of the Securities ExchangeAct of 1934 from their obligations under those Sections.

 

Indicateby check mark whether the registrant (1) has filed all reports required tobe filed by Section 13 or 15(d) of the Securities Exchange Act of1934 during the preceding 12 months (or for such shorter period that the registrantwas required to file such reports), and (2) has been subject to suchfiling requirements for the past 90 days.

x Yes   o No

 

Indicateby check mark whether the registrant is a large accelerated filer, anaccelerated filer, or a non-accelerated filer. See definition of “acceleratedfiler and large accelerated filer” in Rule 12b-2 of the Exchange Act.(Check one):

 

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

 

Indicate by check markwhich basis of accounting the registrant has used to prepare the financialstatements included in this filing:
| x U.S. GAAP | o International Financial Reporting  Standards as issued   by the International Accounting Standards Board | o Other |
|-------------|------------------------------------------------------------------------------------------------------------|---------|

 

Indicateby check mark which financial statement item the registrant has elected tofollow.

o Item 17   o Item 18

 

Ifthis is an annual report, indicate by check mark whether the registrant is ashell company (as defined in Rule 12b-2 of the Exchange Act).

o Yes   x No

 

(APPLICABLEONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PAST FIVE YEARS)

 

Indicateby check mark whether the registrant has filed all documents and reportsrequired to be filed by Sections 12, 13 or 15(d) of the SecuritiesExchange Act of 1934 subsequent to the distribution of securities under a planconfirmed by a court.

 

o Yes   o No

 

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

 

----

 

**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***                                    | ***35***     |
| *** ***                                                         | *** *** |
| ***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***                            | ***50***     |
| *** ***                                                         | *** *** |
| ***C. Research  and Development, patents and licenses***             | ***54***     |
| *** ***                                                         | *** *** |
| ***D. Trend  Information***                                          | ***55***     |
| *** ***                                                         | *** *** |
| ***E. Off-  balance sheet arrangements***                            | ***56***     |
| *** ***                                                         | *** *** |
| ***F. Tabular  disclosure of contractual obligations***              | ***56***     |
| *** ***                                                         | *** *** |
| ***G. Safe Harbor***                                                 | ***57***     |
| *** ***                                                         | *** *** |
| ***ITEM 6.  DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES***            | ***57***     |
| *** ***                                                         | *** *** |
| ***A. Directors  and Senior Management***                            | ***57***     |
| *** ***                                                         | *** *** |
| ***B. Compensation***                                                | ***62***     |
| *** ***                                                         | *** *** |
| ***C. Board Practices***                                             | ***63***     |
| *** ***                                                         | *** *** |
| ***D. Employees***                                                   | ***65***     |

 

1

----

 
| ***E. Share Ownership***                                                   | ***65***     |
|----------------------------------------------------------------------------|--------------|
| *** ***                                                               | *** *** |
| ***ITEM 7. MAJOR  SHAREHOLDERS AND RELATED PARTY TRANSACTIONS***           | ***65***     |
| *** ***                                                               | *** *** |
| ***A. Major Shareholders***                                                | ***65***     |
| *** ***                                                               | *** *** |
| ***B. Related  Party Transactions***                                       | ***67***     |
| *** ***                                                               | *** *** |
| ***C. Interests  of Experts and Counsel***                                 | ***67***     |
| *** ***                                                               | *** *** |
| ***ITEM 8.  FINANCIAL INFORMATION***                                       | ***67***     |
| *** ***                                                               | *** *** |
| ***A.  Consolidated Statements and Other Financial Information***          | ***67***     |
| *** ***                                                               | *** *** |
| ***B. Significant Changes***                                               | ***72***     |
| *** ***                                                               | *** *** |
| ***ITEM 9. THE  OFFER AND LISTING***                                       | ***72***     |
| *** ***                                                               | *** *** |
| ***A. Offer and  listing details***                                        | ***72***     |
| *** ***                                                               | *** *** |
| ***B. Plan of Distribution***                                              | ***76***     |
| *** ***                                                               | *** *** |
| ***C. Markets***                                                           | ***76***     |
| *** ***                                                               | *** *** |
| ***D. Selling Shareholders***                                              | ***78***     |
| *** ***                                                               | *** *** |
| ***E. Dilution***                                                          | ***78***     |
| *** ***                                                               | *** *** |
| ***F. Expenses of Issue***                                                 | ***78***     |
| *** ***                                                               | *** *** |
| ***ITEM 10.  ADDITIONAL INFORMATION***                                     | ***78***     |
| *** ***                                                               | *** *** |
| ***A. Share capital***                                                     | ***78***     |
| *** ***                                                               | *** *** |
| ***B. Memorandum  and Articles of Association***                           | ***79***     |
| *** ***                                                               | *** *** |
| ***C. Material Contracts***                                                | ***79***     |
| *** ***                                                               | *** *** |
| ***D. Exchange Controls***                                                 | ***79***     |
| *** ***                                                               | *** *** |
| ***E. Taxation***                                                          | ***79***     |
| *** ***                                                               | *** *** |
| ***F. Dividends  and Paying Agents***                                      | ***88***     |
| *** ***                                                               | *** *** |
| ***G. Statement of Experts***                                              | ***88***     |
| *** ***                                                               | *** *** |
| ***H. Documents on Display***                                              | ***89***     |
| *** ***                                                               | *** *** |
| ***I. Subsidiary Information***                                            | ***89***     |
| *** ***                                                               | *** *** |
| ***ITEM 11.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK*** | ***89***     |
| *** ***                                                               | *** *** |
| ***ITEM 12.  DESCRIPTION OF THE SECURITIES OTHER THAN SECURITIES***        | ***92***     |
| *** ***                                                               | *** *** |
| ***PART II***                                                         | ***92***     |
| *** ***                                                               | *** *** |
| ***ITEM 13.  DEFAULTS, DIVIDENDS ARREARAGES AND DELINQUENCIES***           | ***92***     |

 

2

----

 
| ***ITEM 14.  MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS*** | ***92***            |
|----------------------------------------------------------------------------------------------|---------------------|
| *** ***                                                                                 | *** ***        |
| ***ITEM 15.  CONTROL AND PROCEDURES***                                                       | ***92***            |
| *** ***                                                                                 | *** ***        |
| ***Report of Independent  Registered Public Accounting Firm***                               | ***93***            |
| *** ***                                                                                 | *** ***        |
| ***ITEM 16A.  Audit Committee Financial Expert***                                            | ***94***            |
| *** ***                                                                                 | *** ***        |
| ***ITEM 16B Code of Ethics***                                                                | ***94***            |
| *** ***                                                                                 | *** ***        |
| ***ITEM 16C  Principal Accountant Fees and Services***                                       | ***94***            |
| *** ***                                                                                 | *** ***        |
| ***ITEM 16D.  Exemptions from the Listing Standards and for Audit Committees***              | ***95***            |
| *** ***                                                                                 | *** ***        |
| ***ITEM 16E. Purchases  of Equity Securities by the Issuer and Affiliated Purchasers***      | ***95***            |
| *** ***                                                                                 | *** ***        |
| ***PART III***                                                                          | ***96***            |
| *** ***                                                                                 | *** ***        |
| ***ITEM 17.  FINANCIAL STATEMENTS***                                                         | ***96***            |
| *** ***                                                                                 | *** ***        |
| ***ITEM 18.  FINANCIAL STATEMENTS***                                                         | ***96***            |
| *** ***                                                                                 | *** ***        |
| ***ITEM 19. EXHIBITS***                                                                      | ***96***            |
| *** ***                                                                                 | *** ***        |
| ***Consolidated Financial Statements***                                                      | ***F-1***           |
| *** ***                                                                                 | *** ***        |
| ***BYLAWS***                                                                                 | ***Exhibit 1.01***  |
| *** ***                                                                                 | *** ***        |
| ***Exhibit 12.01  Certification by the Company’s CEO***                            | ***Exhibit 12.01*** |
| *** ***                                                                                 | *** ***        |
| ***Exhibit 12.02  Certification by the Company’s CFO***                            | ***Exhibit 12.02*** |
| *** ***                                                                                 | *** ***        |
| ***Exhibit 13.01  Certification pursuant to 18 U.S.C. Section 1350.***             | ***Exhibit 13.01*** |
| *** ***                                                                                 | *** ***        |
| ***Exhibit 13.02  Certification pursuant to 18 U.S.C. Section 1350.***             | ***Exhibit 13.02*** |

 

***3***

----

 

# **GENERAL**

# ** **

*Unlessotherwise indicated, all references contained herein, to the “Company”, to “Sadia”,or to “Sadia Group” are references to Sadia S.A., a corporation organized underthe laws of the Federative Republic of Brazil (“Brazil”), and its consolidatedsubsidiaries: Sadia International Ltd; Big Foods Ind. de Produtos AlimentíciosLtda.; Sadia GmbH; Rezende Marketing e Comunicação Ltda., Rezende Óleo Ltda.,Sadia Overseas Ltd. and Concórdia Holding Financeira.*

* *

*Presentationof Certain Financial Information*

* *

References to “preferredshares” and “common shares” refer to the Company’s authorized and outstandingpreferred stock and common stock, designated as “ações preferenciais” and “açõesordinárias”, respectively, each without par value. All references herein to the“real,” “reais” or “R$” are to the real, the official currency of Brazil since July 1,1994. All references to (i) “U.S. dollars”, “dollars” or “US$” refer toUnited States dollars, (ii) “km” to kilometers, and (iii) “tons” tometric tons.

 

*Forward-LookingStatements*

* *

This annual reportcontains certain forward-looking statements as defined in Section 21E ofthe U.S. Securities Exchange Act of 1934 with respect to the financialcondition, results of operations and business achievements/ performance ofSadia and 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.This annual report also contains forward-looking statements attributed tocertain third parties relating to their estimates regarding the growth ofmarkets and demand for products. By their nature, forward-looking statementsinvolve risk and uncertainty because they reflect the Company’s current expectationsand assumptions as to future events and circumstances that may not proveaccurate: the factors discussed in Item 3. Key Information — Risk Factors,among others, could cause the Company’s actual financial condition, results ofoperations and business achievements/ performance to differ materially from theestimates made or implied in such forward-looking statements.

 

# **PART I**

# ** **

## **ITEM 1. IDENTITY OF DIRECTORS, SENIORMANAGEMENT AND ADVISERS**

## ** **

Not applicable.

 

## **ITEM 2. OFFER STATISTICS AND EXPECTEDTIMETABLE**

## ** **

Not applicable.

 

## **ITEM 3. KEY INFORMATION**

## ** **

### **A. Selected Financial Data**

### ** **

U.S. GAAP Presentation

 

The selected financialinformation for the Company included in the following table should be read inconjunction with, and is qualified in its entirety by reference to, the U.S.GAAP financial statements of the Company and “Operating and Financial Reviewand Prospects” appearing elsewhere herein. The consolidated financial data forthe Company as of December 31, 2007, 2006, 2005, 2004 and 2003 are derivedfrom the audited U.S. GAAP financial statements, which differ in certainrespects from 

 

4

----

 

accounting practicesadopted in Brazil (defined as Brazilian GAAP). Brazilian GAAP is determined bythe 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.

 

**SADIAS.A.**

SELECTED FINANCIALDATA

Years ended December 31,2007, 2006, 2005, 2004 and 2003 (In thousands of *reais*-R$, except numbers of shares and per share amounts)

 
| ** **                                     | ** ** | **2007**    | ** ** | **2006**    | ** ** | **2005**    | ** ** | **2004**    | ** ** | **2003**    | ** ** |
|------------------------------------------------|------------|-------------|------------|-------------|------------|-------------|------------|-------------|------------|-------------|------------|
| ** **                                     | ** ** | ** **  | ** ** | ** **  | ** ** | ** **  | ** ** | ** **  | ** ** | ** **  | ** ** |
| Net Operating Revenue                          |       | 8,754,076   |       | 6,830,300   |       | 7,317,842   |       | 6,109,225   |       | 5,081,717   |       |
| Operating Income                               |       | 869,242     |       | 302,223     |       | 680,903     |       | 635,029     |       | 401,009     |       |
| Net income                                     |       | 841,977     |       | 360,560     |       | 603,268     |       | 489,501     |       | 473,268     |       |
|                                           |       |        |       |        |       |        |       |        |       |        |       |
| Basic earnings per thousand shares in R$:      |       |        |       |        |       |        |       |        |       |        |       |
| Preferred                                      |       | 1,247.54    |       | 531.18      |       | 885.08      |       | 742.42      |       | 717.80      |       |
| Common                                         |       | 1,247.54    |       | 531.18      |       | 885.08      |       | 674.93      |       | 652.54      |       |
|                                           |       |        |       |        |       |        |       |        |       |        |       |
| Diluted earnings per thousand share in R$:     |       |        |       |        |       |        |       |        |       |        |       |
| Preferred                                      |       | 1,239.11    |       | 529.79      |       | 884.38      |       | 742.42      |       | 717.80      |       |
| Common                                         |       | 1,239.11    |       | 529.79      |       | 884.38      |       | 674.93      |       | 652.54      |       |
|                                           |       |        |       |        |       |        |       |        |       |        |       |
| Dividends paid per thousand shares in R$:      |       |        |       |        |       |        |       |        |       |        |       |
| Preferred                                      |       | 189.61      |       | 287.12      |       | 231.96      |       | 234.68      |       | 170.08      |       |
| Common                                         |       | 189.61      |       | 287.12      |       | 210.87      |       | 213.34      |       | 154.61      |       |
|                                           |       |        |       |        |       |        |       |        |       |        |       |
| Total Current Assets                           |       | 5,037,322   |       | 4,929,689   |       | 4,588,176   |       | 3,944,802   |       | 3,645,379   |       |
| Total Assets                                   |       | 9,457,887   |       | 8,039,757   |       | 6,707,284   |       | 5,830,973   |       | 6,149,453   |       |
|                                           |       |        |       |        |       |        |       |        |       |        |       |
| Total Current Liabilities                      |       | 2,653,285   |       | 2,493,279   |       | 2,625,812   |       | 2,766,719   |       | 2,969,833   |       |
| Total Liabilities                              |       | 5,924,923   |       | 5,447,114   |       | 4,479,167   |       | 3,992,609   |       | 4,627,868   |       |
| Total Shareholders’ Equity                |       | 3,532,964   |       | 2,592,643   |       | 2,228,117   |       | 1,838,364   |       | 1,521,585   |       |
|                                           |       |        |       |        |       |        |       |        |       |        |       |
| Weighted average number of shares outstanding: |       |        |       |        |       |        |       |        |       |        |       |
| Preferred                                      |       | 417,908,212 |       | 421,785,712 |       | 424,595,712 |       | 425,695,712 |       | 425,695,712 |       |
| Common                                         |       | 257,000,000 |       | 257,000,000 |       | 257,000,000 |       | 257,000,000 |       | 257,000,000 |       |

 

The exchange rates of *real* amounts into U.S. dollars for the years ended December 31, 2003, 2004, 2005, 2006, 2007 and January 2008through May 2008 are shown in the table below:

 
| ** **                                 | ** ** | **Reais per U.S. Dollar** | ** ** |
|--------------------------------------------|------------|------------------------------------------|------------|
| **Year Ended December 31,** | ** ** | **High**                                 | ** ** | **Low** | ** ** | **Average** | ** ** | **End of Period** | ** ** |
| 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 |   |
| 2007                                       |       | 2.1556                                   |       | 1.7325 |   | 1.9483 |   | 1.7713 |   |

 

5

----

 

| ** **            | ** ** | **Reais per U.S.  Dollar** | ** ** |
|-----------------------|------------|--------------------------------------|------------|
| **Months Ended** | ** ** | **High**                             | ** ** | **Low** | ** ** |
| January 2008     |       | 1.8301                               |       | 1.7414 |   |
| February 2008    |       | 1.7681                               |       | 1.6715 |   |
| March 2008       |       | 1.7491                               |       | 1.6700 |   |
| April 2008       |       | 1.7534                               |       | 1.6575 |   |
| May 2008         |       | 1.6949                               |       | 1.6294 |   |

 

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

### ** **

Not applicable

 

### **C. Reasons for the offer and use ofproceeds**

### ** **

Not applicable

 

### **D. Risk Factors**

### ** **

**Risks Relating to Brazil**

** **

***Brazilianpolitical and economic conditions, and the Brazilian government’s economic andother policies, may negatively affect demand for Sadia ́s products as well asnet sales and overall financial performance.***

*** ***

The Brazilian economy has been characterized by frequent andoccasionally extensive intervention by the Brazilian government. The Braziliangovernment has often changed monetary, taxation, credit, tariff and otherpolicies to influence the course of Brazil’s economy. The Brazilian government’sactions to control inflation and implement other policies have involvedinterest rate increases, wage and price controls, currency devaluations,freezing of bank accounts, capital controls and limits on imports.

 

Sadia’s results of operations and financial condition may be adverselyaffected by the following factors and governmental reaction to them:

 

·                                           fluctuations in exchange rates;

 

·                                           interest rates;

 

·                                           inflation;

 

·                                           tax policies;

 

·                                           exchange controls;

 

·                                           energy shortages;

 

·                                           liquidity of domestic capital and lendingmarkets; and

 

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

 

Uncertainty over whether the Brazilian government will change policiesor regulations affecting these or other factors may contribute to economicuncertainty in Brazil and to heightened volatility in the Brazilian capitalmarkets. These and other developments in the Brazilian economy and governmentalpolicies may adversely affect the Company and its business.

 

6

----

 

***Inflation and government actions to combatinflation may contribute significantly to economic uncertainty in Brazil andcould adversely affect the Company’s business.***

*** ***

Historically, Brazil has experienced highrates of inflation. Inflation, as well as certain government efforts to combatinflation, has had significant negative effects on the Brazilian economy.Inflation rates were 25.31% in 2002, 8.71% in 2003, 12.41% in 2004, 1.21% in2005, 3.86% in 2006, 7.75% in 2007 and 2.38% in the first quarter of 2008, asmeasured 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.

 

If Brazil experiences high levels ofinflation in the future, the rate of growth of the Brazilian economy may beslowed, which would lead to reduced demand for the Company’s products inBrazil. Inflation also is likely to increase some of Sadia’s costs andexpenses, which the Company may not be able to pass on to its customers and, asa result, may reduce profit margins and net income. In addition, high inflationgenerally leads to higher domestic interest rates, and, as a result, the costsof 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 Brazilianreal and the US dollar may raise the cost of servicing our foreign currencydenominated debt and adversely affect our overall financial performance.***

*** ***

The Company’s results of operations areaffected by exchange-rate fluctuations between the Brazilian *real*and the U.S. dollar.

 

The *real*appreciated 13.4% in 2005, 9.5% in 2006, 20.5% in 2007 and 1.3% in the firstthree months of 2008 against the dollar. On March 31, 2008, the U.S.dollar/*real* exchange rate wasUS$1.00 per R$1.7491.

 

Devaluation of the *real*relative to the U.S. dollar could result in additionalinflationary pressures in Brazil by generally increasing the price of importedproducts and services and requiring recessionary government policies to curb demand.In addition, a devaluation of the *real*couldweaken investor confidence in Brazil. On the other hand, appreciation of the *real*against the U.S. dollar may lead to adeterioration of the country’s current account and the balance of payments andmay dampen export-driven growth. A significant devaluation of the *real*in relation to the U.S. dollar orother currencies could reduce the Company’s ability to meet debt servicerequirements of its foreign currency-denominated obligations.

 

Export revenues and the Company’s margins arealso 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, fluctuations in the value of the*real* relative to the U.S. dollar canaffect the market value of the ADSs. Devaluation of the *real*may reduce the U.S. dollar value of distributions and dividends on the ADSs andmay also reduce the market value of the preferred shares and the ADSs.

 

***Restrictions on the movement of capital out ofBrazil may hinder investors’ ability to receive dividends and otherdistributions as well as the proceeds of any sale of preferred shares.***

*** ***

The Brazilian government may impose temporaryrestrictions on the conversion of Brazilian currency into foreign currenciesand on the remittance to foreign investors, of proceeds from investments inBrazil. Brazilian law permits the government to impose these restrictionswhenever there is a serious imbalance in Brazil’s balance of payments orreasons to foresee a serious imbalance.

 

Government restrictions on capital outflowmay hinder or prevent the custodian in Brazil, or if investors have exchangedADSs for the underlying preferred shares, from converting the proceeds 

 

7

----

 

relating to the preferred shares into U.S. dollarsand remitting 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 to remit the proceeds ofdistributions on, and gains with respect to, the preferred shares to the U.S.,the depositary must register with the Central Bank the amount invested bynon-Brazilians in the preferred shares underlying the ADSs. The depositary willregister its interest in the preferred shares as a foreign investment with theCentral Bank. The Central Bank will issue a certificate of foreign capitalregistration in the name of the depositary, under which the custodian will,assuming the continued availability of foreign exchange, be able to convertdividends and other Brazilian currency-denominated distributions from theCompany into U.S. dollars and remit such U.S. dollars abroad to the depositaryfor distribution to the foreign investor.

 

***Developments in other emerging markets may adversely affect the marketprice of the preferred shares and ADSs***

*** ***

The market price or the preferred shares andADSs may be adversely affected by declines in the international financialmarkets and world economic conditions. The Brazilian securities market is, tovarying degrees, influenced by economic and market conditions in other emergingmarket countries, especially those in Latin America. Although economicconditions may differ in each country, investors’ reaction to developments inone country can have an effect on the securities markets and the securities ofissuers in other countries, including Brazil.

 

Accordingly, adverse developments in emergingmarket countries could lead to a reduction in both demand and the market pricefor the preferred shares and ADSs. These events may discourage internationalinvestment in Brazil and, more directly, may hurt the market price of theCompany’s preferred shares and ADSs.

 

***Enforcement of civil liabilities may be difficult***

*** ***

The Company is organized under the laws ofBrazil. Most of the Company’s directors and officers and many of its advisorsreside in Brazil and substantially all of the assets of these persons and ofthe Company are located in Brazil. As a result, it may not be possible toeffect service of process upon these persons within the United States or otherjurisdictions outside of Brazil. Similarly, it may not be possible to enforce,judgments of non-Brazilian courts, including judgments predicated on civilliability under the U.S. securities laws against the Company or its directorsand officers.

 

Brazilian counsel has advised the Companythat Brazilian courts will enforce judgments of U.S. courts for civilliabilities predicated on the U.S. securities laws only if the judgmentsatisfies certain requirements imposed by the Brazilian federal supreme 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;

 

8

----

 

·              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.

 

**Risks Relating to the Company’sBusiness**

** **

***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 operations involve raisinganimals, which is subject to a variety of risks, including disease,contamination, consumer health concerns and adverse weather conditions. Meat issubject to contamination during processing and distribution. Contaminationduring processing could affect a large number of the Company’s products andtherefore could have a significant impact on its operations. The Company’ssales are dependent on consumer preferences, and the loss of consumerconfidence in the products sold by Brazilian producers because of disease orcontamination 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 foods industry, like theprocessed foods industry in other countries, has been characterized by cyclicalperiods of higher prices and profitability, followed by overproduction, leadingto periods of lower prices and lower profitability. The Company believes thatdomestic prices and export prices for its product line are likely to remainvolatile and subject to cyclical variation. There can be no assurance that theCompany’s results will not be adversely affected by future downturns in marketprices. The largest single component of the Company’s cost of sales is the costof ingredients used in the preparation of feed. The price of most of theCompany’s feed ingredients is subject to significant volatility resulting fromweather, the size of harvests, transportation and storage costs, governmentalagricultural policies, currency exchange rates and other factors. Sadia may notbe successful in addressing the effects of cyclicality and volatility on costsand expenses and its overall financial performance.

 

***Environmental issues and new regulationrequirements can affect costs***

*** ***

Brazilian food producers, including theCompany, are subject to stringent federal, state and local environmental lawsand regulations concerning, among other things, human health, the handling anddisposal of wastes and discharges of pollutants to the air and water. In viewof the possibility of unanticipated regulatory or other developments,particularly as environmental laws become more stringent both in Brazil andworldwide, the amount and timing of future expenditures required to maintaincompliance could vary substantially from their current levels and couldadversely affect the availability of funds for other capital expenditures andother purposes.

 

***Competition in both domestic and foreignlivestock and food processing sector is very strong and the Company’sperformance may be adversely affected by increased competition***

*** ***

The Company faces significant competitionfrom other Brazilian producers in the domestic markets in which it sells itsproducts, and from world producers in the export markets in which it sells itsproducts. Other major vertically integrated Brazilian producers compete withthe Company. To varying degrees, these companies have substantial financialresources and strengths in particular product lines and regions. The Companyexpects that it will continue to face strong competition in every market andthat existing or new competitors are likely to broaden their product lines andto extend their geographic scope. Accordingly, there can be no assurance thatthe Company’s performance will not be adversely affected by increasedcompetition.

 

9

----

 

***Protectionist measures could restrictCompany exports affecting thereby the Company’s sales performance***

*** ***

Due to the growing share of the Brazilianlivestock, pork and poultry sector in the international market, companies areincreasingly being affected by measures taken by importing countries in orderto protect local producers. Because of the competitiveness of Braziliancompanies, certain countries have raised several restrictions to prevent theentrance of Brazilian livestock products. Outcomes such as quota restrictionsor import suspensions in a certain country or region, can affect substantiallythe sector’s export volumes and consequently the Company’s export performanceas well as the results of its operations.

 

***FMD Cases in Brazil can indirectly affect pork and beef sales andadversely impact the results of the Company***

*** ***

Although the detected Foot and Mouth Disease(FMD) cases in the northeast region of Brazil in the past have affected onlycattle, swine can also be contaminated. Cases of FMD have been identified inthe states of Mato Grosso and Paraná. Sadia has animal breeding facilitieslocated in the states of Santa Catarina and Minas Gerais, internationallyrecognized FMD free regions. An outbreak of FMD could have an effect on livestockowned by Sadia, the availability of livestock for purchase by Sadia, consumerperception of certain protein products or Sadia’s ability to access certainmarkets.

 

***An outbreak of Avian Influenza could require the destruction of asignificant portion of the Company’s flocks***

*** ***

Outbreaks of a highly pathogenic strain ofavian influenza (“AI”) virus, known as H5N1, have been reported in Europe andAsia. Earlier outbreaks were reported during late 2003 and early 2004 in eightcountries in Asia. At that time, more than 100 million birds in the affectedcountries either died from the disease or were destroyed in order to try tocontrol the outbreak. The virus, which is believed to be spread from region toregion by infected wild birds, represents a significant risk to flocks, whichif infected must be destroyed to assure containment of the virus. No AI hasbeen detected in Brazil and climatic conditions and distance from previousoutbreaks reduce the likelihood of any outbreak. In 2003, through a joint effortof the Brazilian Ministries of Agriculture, Health and Environment, Brazilimplemented a program to monitor and test birds with potential to carry theAvian Influenza virus from the South Pole.

 

In addition to the animal healthrequirements, which are part of the Brazilian National Poultry Health Program,Brazil has adopted a range of measures intended to limit the possibility of anoutbreak of AI, including: tightened controls at ports and airports fortravelers arriving from Asia; a prohibition on the imports of paddy rice fromAsia; restrictions on visits to Brazilian poultry farms by travelers from Asia;and restrictions on the importation of poultry genetics.

 

Additional preventative measures have beendiscussed and the Brazilian government has proposed and approved the adoptionof a National Plan for the Prevention and Control of Newcastle Disease and thePrevention of Avian Influenza (*Plano Nacional de Controlee Prevenção da Doenca de Newcastle e de Prevenção de Influenza Aviária)*whichwill conform with OIE (World Organization for Animal Health) standards. Thesemeasures are intended to assure international markets that Brazil maintainssanitary barriers between states. Specific measures include regulation ofanimal transportation, traceability, blood tests, designated laboratories andother controls to monitor production conditions on a regional basis. Thesemeasures are intended to permit the early detection of contamination in oneregion and to prevent the spread of that contamination to other regions withinBrazil. Because the virus that causes AI is destroyed by cooking, it isgenerally agreed that the consumption of contaminated poultry does not presenta threat to human health.

 

Despite measures adopted by the Company, theBrazilian government, and other poultry producers, no assurance can be giventhat the Company will not be affected by AI, either directly or throughlimitations on exports imposed by importing countries.

 

10

----

 

**Risks relating to Sadia S.A.**

** **

***The Company is controlled by a Group ofShareholders and the interests of the controlling group may conflict with thoseof other shareholders***

*** ***

The Company is controlled by a group ofshareholders under the Company’s shareholders’ agreement. The preferred sharesand the ADSs are not entitled to vote at shareholders’ meetings, except inlimited circumstances. This means, among other things, that preferredshareholders are not entitled to vote on corporate transactions, includingmergers or consolidations of the Company with other companies. In addition, thecontrolling 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”.

 

***If the Company loses any of its largestclients, or if they significantly reduce the amount they purchase from theCompany, its revenue and operating income could be materially adverselyaffected***

*** ***

The Company’s ten largest customers in 2007accounted for approximately 22% of total domestic sales and the ten largestinternational customers in 2007 accounted for approximately 36% of our totalexport sales.While the Company has been developing new client-oriented policiesto reduce the concentration of revenues, if it loses any of its ten largestcustomers or if they reduce significantly the amount they purchase from the Company,revenues and operating income could be materially adversely affected.

 

***The Company’s ability to export could beadversely affected by port labor disputes and disruptions and by importrestrictions***

*** ***

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 is subject to the requirements of Law No. 6,404, datedDecember 15th, 1976, as amended by Law 9,457/97 (BrazilianCorporate Law), and the rules and regulations of the *Comissão deValores Imobiliários* – CVM, the Brazilian Securities Commission.

 

Sadiais Brazil’s leading refrigerated and frozen protein products company, operatingin the processed product, poultry, pork and beef segments. The Company believesthat its brand name and distinctive logotype are among the most widelyrecognized and admired in Brazil and in the foreign markets in which it sellsits products, associated with quality, tradition and value. The Company’scentral administrative headquarters are located at Rua Fortunato Ferraz, 659,Vila Anastácio, São Paulo, state of São Paulo, Zip Code 05093-901, Brazil,telephone number (55 11) 2113-3302, and the Company’s website iswww.sadia.com.br or www.sadia.com and e-mail address is ri@sadia.com.br.Materials posted on the website are not deemed incorporated by reference intothis annual report nor made a part hereof.

 

SadiaS.A. began in 1944, with the acquisition by Attilio Fontana of the meatpackerConcórdia Ltda., located in the municipality of the same name, in the Westernpart of the state of Santa Catarina, Brazil. At the time, the Company consistedof a wheat mill and an unfinished slaughterhouse for hogs.

 

Atthe end of the 1980s and early 1990s, the Company’s policy of expansion gaveway to rationalization of management and cost structures through reduction bymerging a number of companies 

 

11

----

 

inthe Sadia Group. Sadia began the 1990s having controlling ownership in 21companies, and began to concentrate its operations in the production ofprocessed meat products.

 

In1997, the Company sold its cattle slaughterhouse in Barra do Garças, state ofMato Grosso, four soybean processing facilities (crushing and refining), 12grain purchasing and warehousing centers, and also transformed its VárzeaGrande slaughterhouse, state of Mato Grosso, into a plant for the production ofprocessed meat products. In addition, product transportation, which had beenmade by a fleet of owned vehicles, was outsourced to specialized transportationcompanies.

 

InJuly 1998 Sadia was created by the merger of Sadia Concórdia S.A. intoSadia Frigobrás S.A., consolidating its operations in a single public company,simplifying its corporate structure, emphasizing the Company ́s brand, andreducing administrative expenses.

 

InDecember 1999, Sadia acquired the capital stock of Granja Rezende S.A.(primarily a producer and distributor of poultry and pork products) and itswholly owned subsidiaries Rezende Alimentos Ltda., Rezende Óleo Ltda. andRezende Marketing Comunicações Ltda. Immediately following the acquisition ofGranja Rezende, the Company decided to sell Granja Rezende’s soybean crushingand oil manufacturing plant and administrative complex.

 

During2000, the subsidiary Rezende Alimentos Ltda. was converted from a limitedliability company into a corporation and the subsidiary’s name was changed toSadia Alimentos S.A. On December 29, 2000, the then parent was merged intoSadia Alimentos S.A., whose name was then changed to Sadia S.A. The purpose ofthe merger was to permit an operational and administrative rationalization, andthe utilization of tax loss carry forwards. In August 2002, Granja RezendeS.A. was merged into Sadia, aiming at cost reduction both throughstandardization and through rationalization of the administrative andoperational activities as well as by resulting reflections of financial and fiscalnature.

 

InApril 2001, the Company listed its American Depositary Receipts (ADRs)program on the New York Stock Exchange, providing investors an alternatechannel to buy its stocks. In June 2001, the Company adhered to Bovespa’sLevel One of corporate governance, certifying its commitment to transparencyand fair disclosure of information.

 

InAugust 2001, Sadia opened a distribution center (DC) in Jundiaí, SãoPaulo, to supply the São Paulo state region, considered the largest market inBrazil. The Jundiaí DC, is a technological milestone for the Company with20,000 square meters of area.

 

SadiaGmbH was created in December 2001, and its subsidiary, Laxness F.C.P.A.Lda. (Laxness), was incorporated in April 2002, with the aim of leveragingexports to the European market. In February 2005, Laxness changed its nameto Wellax Food Logistics C.P.A.S.U. Ltd (Wellax).

 

In2004 Sadia began the expansion of the Uberlândia unit in order to improve thefacility and make it one of the Company’s most modern facilities in Brazil. In November 2004,the Company opened a distribution center in Ponta Grossa, state of Paraná,giving Sadia greater capacity and efficiency in its export processes.

 

Alsoin November 2004, Sadia’s preferred shares were authorized to be traded onthe Madrid Stock Exchange, by the International Latin American Market, Latibex,ender the symbol “XSDI”.

 

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

 

InNovember 2005, Sadia decided to return to the beef segment due to thebelief that it represents a complementary business to the Company’s activities.Sadia’s strategy in this segment is to concentrate sales towards the exportmarket; for the domestic market the Company will focus its efforts on premiumbeef 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.

 

12

----

 

In2007, Sadia invested R$ 1.1 billion, distributed among processed products;poultry, pork and beef production; information technology and logisticsprojects. As a strategy to remain competitive and reduce the risk in itsoperations, Sadia invested in the expansion of its product portfolio,particularly of breaded chicken products and processed pork products. In December 2007,to strengthen the Company in the segment of frozen processed products, Sadiaacquired Big Foods, an industrial complex located in Tatuí, SP, specialized inthe production of ready-to-eat sandwiches, lasagnas, pizzas, breads, rolls,cheese breads and other pastry items. Sadia also built its first industrialunit outside of Brazil in the city of Kaliningrad, Russia, based on a jointventure made with a local partner.

 

**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 2007 with a firm commitment to growth and focuson its core business and the potential for international growth. Sadia ended2007 with investments of R$1.1 billion. Out of this total, R$ 196.0 millionwere destined to the production of processed products (18.1%); R$ 614.7 millionto poultry production (56.6%); R$ 136.4 million to pork production (12.6%); R$44.4 million to beef production (4.1%) and the remaining R$ 93.4 million (8.6%)were destined, mostly, to information technology and logistics projects. In December 2007,Sadia acquired Big Foods, an industrial complex located in Tatuí, SP,specialized in the production of processed food, for R$ 53.5 million. Theannual production capacity of Big Foods is 20 thousand tons of processedproducts.

 

The works for the expansion of the Uberlândia unit,which became one of the most modern units among the 15 operated by the group inBrazil, were completed in 2007. The investment in this project totaled R$ 400million, distributed among the years of 2004/2007,

 

The investment in the Russia plant which wasfinalized by the beginning of 2008 comprises a meat processing unit, developedin partnership with a Sadia distributor in that country. This plant consumedR$150 million of total investments, of which approximately R$ 92 million wasinvested by Sadia .

 

A portion of the resources contemplated in 2007 werealso used to expand the Brasília unit, to modernize the Concórdia and Chapecó(SC) units and to improve internal technological processes.

 

In2006, Sadia invested R$969,6 million, including R$85.0 million for the Jundiaíand Uberlândia distribution centers and R$60.0 million for the Uberlândiamargarine plant. The investments in 2006 were directed towards poultry (38%),processed products (31%), pork (15%), beef (1%) and the projects at Lucas doRio Verde and Russia (15%).

 

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% ofSó Frango Produtos Alimentícios Ltda. (“Só Frango”), for R$70.3 million. SóFrango was active in poultry slaughtering and processing as well as in theproduction of animal feed meal. Its product line ranges from whole chicken,special frozen and chilled cuts to sausages and cold cut meats. With 1,700employees, Só Frango generated R$220 million in gross revenues in 2004 and hada slaughtering capacity of 150,000 chickens per day. In April 2005, SóFrango was merged into Sadia S.A.. Sadia is expanding this capacity over thenext five years to 300,000 chickens per day, which should generate 2,000 newdirect jobs and around 12,000 indirect jobs. All operations with out growersand suppliers, as well as Só Frango’s job positions, have been maintained.Through this acquisition, the Company strengthened its presence in the centralregion of Brazil, close to raw material producers and to main centers ofconsumption.

 

13

----

 

***Investment Plans***

*** ***

Plans for 2008 contemplate investments of R$1.6billion, which will be destined to processed products (R$556 million),expansion in pork and poultry capacity mainly in the Lucas do Rio Verde unit(R$558 million), towards the beef segment (R$70 million), breeding stock (R$150million), the Pernambuco distribution center (R$60 million) and to variousexpansion and enlargement projects, IT and infrastructure.

 

The most significant investment, in the period from2006 to 2009, is destined to the agroindustrial Site of Lucas do Rio Verde, inMato Grosso. 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 thesecond semester of 2008. Out of the total estimated amount, R$ 800 millionshall come from the company and the remaining R$700 million shall come from thegroup of integrated farmers. They will be indirectly financed by the NationalEconomic and Social Development Bank (BNDES) to build the aviaries and poultryfarms that will feed the agroindustrial plant. The amount will be directedtowards the construction of a poultry slaughter house, with a slaughtercapacity of 114 million heads per year; a slaughter and industrialization hogunit, with slaughter capacity of 1.25 millions animals per year, oneprocessing unit and a feed mill factory.

 

Additionalinformation on this investment plan are as follow:

 

· For the secondsemester of 2008, the poultry slaughter houses will operate with 20% ofcapacity. In 2009, it is expected that these units will operate with 100% ofcapacity.

 

· The porkslaughter houses will operate in the first quarter of 2009 with 40% ofcapacity. In 2010, it is expected that these units will operate with 100% ofcapacity;

 

· The expectedadditional annual revenue for poultry is R$600 million by end of 2009, and theexpected additional revenue for the hog unit is R$400 million by end of 2009;

 

· The tax incentiveswill be similar to those obtained in other states in the Midwest and betterthan those obtained in the southern states of Brazil.

 

In 2008, Sadia will construct another plant abroad.With the aim of increasing market share in the Middle East, this unit, whichwill be set up in the Arab Emirates to produce poultry and beef processedproducts, will receive investments of US$ 100 million.

 

### **B. BusinessOverview**

### ** **

Sadiais the leader in almost every segment in which it is present within Brazil (see“Market Share”), with a product portfolio of over 1,000 products. According tothe Brazilian Chicken Exports Association (ABEF), the Company was the largestBrazilian slaughterer and exporter of poultry in 2007. According to theBrazilian Pork Production and Export Association (ABIPECS) Sadia was thelargest brazilian pork slaughterer and exporter in 2007. Sadia is also thelargest domestic distributor of frozen and refrigerated meat-based products(according to AC Nielsen), and leader in the Brazilian market for margarine. Asof December 31, 2007, the Sadia Group had 52,422 employees, one of thelargest employers in Brazil. In 2007, Sadia sold 1,012.8 thousand tons ofpoultry, 152.7 thousand tons of pork, 57.2 thousand tons of beef and 924.0thousand tons of processed products, including frozen and refrigeratedmeat-based products and margarine, generating gross operating revenues ofR$10.0 billion and net income of R$842.0 million.

 

TheCompany’s high degree of vertical integration ensures control at all stages ofproduction and distribution of products. Sadia’s operations include breedingfarms for poultry and hog grandparent and parent stock, hatcheries, porkbreeding centers, slaughterhouses, processing units, animal feed productionplants, representative offices and distribution centers. The Company pioneeredthe vertical integration of poultry and hog breeding in Brazil, initially inthe state 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.

 

Sadiaexports around 1,000 different products to approximately 100 countries. Itcurrently produces a range of products that includes: frozen, refrigerated,salted and smoked pork cuts, lard, bacon, ingredients for “feijoada” (aBrazilian pork and bean stew); frozen and refrigerated pork and chicken 

 

14

----

 

giblets;whole frozen and seasoned chickens; frozen and refrigerated poultry cuts and parts;marinated and partially cooked chicken parts; whole frozen and seasonedturkeys; frozen and seasoned turkey cuts and parts; breaded chicken parts; raw,cooked and smoked hams; “tender” gammons, hams, cold cuts and related products;“Parma-type” hams; smoked chickens and turkeys; cooked and smoked turkey hamsand turkey-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.

 

Sadiaowns 15 plants within 8 different states in Brazil and one plant abroad, inKaliningrado, Russia. Sadia distributes its product line of over 1,000 itemsthrough distribution and sales centers located throughout Brazil, LatinAmerica, the Middle East, Asia and Europe.

 

**Business Strategy**

** **

Sadia’sbusiness strategy is designed to give continuity to the Company’s growth andincrease its profitability. The Company believes that with the recognition ofits brand name as a symbol of quality, tradition and value—Sadia means “healthy”in Portuguese — an unequaled domestic distribution network supported byexcellent logistics, attention to customer needs across the product line and inall distribution channels and highly favorable production economics in Brazil,the Company will be able to achieve both increased growth and increasedprofitability, while maintaining its commitment to its employees, outgrowers,suppliers and residents of the communities in which it does business. Theprincipal elements of this strategy are as follows:

 

·              **Increase domestic market penetration through expandeddistribution**. Sadia has an extensive distribution network, supportedby an outsourced transportation fleet, superior knowledge of wholesale, retailand institutional sales channels, integrated logistics planning andstrategically located distribution centers, trans-shipment points andfacilities. The Company plans to continue to develop and improve itsdistribution network and systems in every product category.

 

·              **Focus on retail sales, institutional and food servicesales channels for domestic business**. Sadia has increased, and plansto continue focusing on meeting the needs of retail sales outlets,institutional and food service sales channels, such as restaurants, rather thanconcentrating on wholesale outlets, such as large supermarkets anddistributors.

 

·              **Continue to increase service and market responsiveness**.Sadia intends to remain the leader in Brazil in the markets that it serves bymaintaining high standards of customer service and continuing to be responsiveto the changing needs of varying market segments. As part of this strategy, ithas structured its operations,distribution and logistics so that it can fillorders of varying sizes depending on the particular demands of the marketsegment. In export markets, the Company seeks to provide raw and processedproducts. It intends to remain close to its customer base, providingdecentralized and rapid order fulfillment and personalized service, includingattention to refrigeration quality in customers’ facilities.

 

·              **Maintain low-cost product and operating efficiency**.The natural advantages of operating in Brazil—grains, labor, weather,out-grower and related costs—added to the Company’s operating efficiency,permit it to compete in international markets. Sadia intends to continue to beamongst the lowest cost producers and distributors of protein products in theBrazilian and international markets. The Company’s vertically integratedoperations and attention to operating efficiencies, permit quality and costcontrol throughout the entire production process.

 

·              **Continued brand differentiation**. Sadia hasdeveloped its brand across the entire product line both in the domestic andinternational markets, and that is amongst its most valuable assets. TheCompany intends to continue to invest in the development of  branded products, through shipping,packaging, advertising campaigns, with a view to continue to develop brandloyalty and the perception of premium quality that is associated with the Sadiaproducts.

 

·              **Increase production, through organic growth, investmentin production capacity and acquisitions.** Sadia ́s goal is to expand production capacityat its existing facilities and to build new plants, while also continuing tofocus on its core business.

 

15

----

 

·              **Maintain exports and domestic sales volumesapproximately equal**. The competitiveness of the production ofpoultry and pork gives the Company access to international markets, economiesof scale and low-cost export financing. Sadia has had success in increasingsales in foreign markets, such as Russia, where it previously did not have apresence, and increasing the number of markets in which the Company is presentand the products that it sells. Sales to international markets and domesticmarkets, in substantially equal amounts, provides an important hedge againstvolatility in any particular market.

 

·              **Invest in environmentally sound projects andinitiatives**. Sadia has been increasingly active in seeking to assurethat its business is environmentally sound, beyond mere compliance withregulations, and it intends to invest significantly in this aspect of  the business, an example is the  “3S Program” - Sadia Sustainable SwineProduction Program, which will consist in selling carbon certified emissionreductions under the Clean Development Mechanism signed at the Kyoto Treaty tofinance social initiatives in the outgrowers area.

 

·              **Expand product portfolio, with emphasis on highervalue-added processed products**. Sadia believes that continuousproduct innovation is essential to meet the needs of customers and consumers.As the market for frozen ready to eat products has grown, both domestically andinternationally, Sadia has sought to meet the challenge by increasing emphasisfrom poultry and pork production to production of processed food products,including a product portfolio that now numbers over 700 products.

 

**The Company’s Operation**

 

TheCompany’s operations are organized into four segments: “processed products”(frozen and refrigerated products and margarines), “poultry” (chickens andturkeys), “pork” and “beef”.

 

In2007, 46.6% of total gross operating revenue was derived from the processedproducts segment, poultry 38.6%, pork 6.8%, beef 3.3% and 4.9% from otheractivities. Of the Company’s total gross operating revenue in 2006, 49.0% oftotal gross operating revenue was derived from the processed products segment,poultry 36.3%, pork 6.7%, beef 3.7% and 4.2% from other activities, such thegrain and by-products segment, hog and poultry breeding, boiled beef,beef-parts and resale of products. In 2005, 44.5% was derived from theprocessed products segment, poultry 41.4%, pork 8.9%, and 5.2% from otheractivities.

 

Activitiesrelated to the grains and by-products currently consist of the crushing of soyto obtain the meal used as a raw material in the production of feed for thecompany’s stock and that of the integrated producers.

 

Thefollowing tables present sales volumes and gross operating revenue (preparedand presented in accordance with US GAAP) for the years ended 2007, 2006 and2005, as shown:

 

**Sales Volumes (ton)**

 

| ** **          | ** ** | **2007**      | ** ** | **2006**      | ** ** | **2005**      | ** ** |
|---------------------|------------|---------------|------------|---------------|------------|---------------|------------|
| ** **          | ** ** | ** **    | ** ** | ** **    | ** ** | ** **    | ** ** |
| **Domestic Market** | ** ** | **998,426**   | ** ** | **928,626**   | ** ** | **823,573**   | ** ** |
| Processed Products  |       | 813,057       |       | 723,086       |       | 647,062       |       |
| Poultry             |       | 132,004       |       | 155,485       |       | 142,177       |       |
| Pork                |       | 43,767        |       | 41,022        |       | 34,334        |       |
| Beef                |       | 9,598         |       | 9,033         |       | —        |       |
|                |       |          |       |          |       |          |       |
| **Export Market**   | ** ** | **1,148,302** | ** ** | **963,959**   | ** ** | **1,006,047** | ** ** |
| Processed Products  |       | 110,975       |       | 76,470        |       | 91,593        |       |
| Poultry             |       | 880,790       |       | 762,479       |       | 808,636       |       |
| Pork                |       | 108,928       |       | 81,382        |       | 105,818       |       |
| Beef                |       | 47,609        |       | 43,628        |       | —        |       |
|                |       |          |       |          |       |          |       |
| **Consolidated**    | ** ** | **2,146,728** | ** ** | **1,892,585** | ** ** | **1,829,620** | ** ** |
| Processed Products  |       | 924,032       |       | 799,556       |       | 738,655       |       |
| Poultry             |       | 1,012,794     |       | 917,964       |       | 950,813       |       |
| Pork                |       | 152,695       |       | 122,404       |       | 140,152       |       |
| Beef                |       | 57,207        |       | 52,661        |       | —        |       |

 

16

----

 

**Gross Operating Revenue (R$ Million)**

 

| ** **          | ** ** | **2007**    | ** ** | **2006**    | ** ** | **2005**    | ** ** |
|---------------------|------------|-------------|------------|-------------|------------|-------------|------------|
| ** **          | ** ** | ** **  | ** ** | ** **  | ** ** | ** **  | ** ** |
| **Domestic Market** | ** ** | **5,319.9** | ** ** | **4,482.0** | ** ** | **4,251.7** | ** ** |
| Processed Products  |       | 4,149.8     |       | 3,513.5     |       | 3,289.1     |       |
| Poultry             |       | 559.4       |       | 492.3       |       | 512.1       |       |
| Pork                |       | 190.4       |       | 154.5       |       | 148.3       |       |
| Beef                |       | 56.0        |       | 40.6        |       | —      |       |
| Other               |       | 364.3       |       | 281.1       |       | 302.2       |       |
|                |       |        |       |        |       |        |       |
| **Export Market**   | ** ** | **4,636.0** | ** ** | **3,412.0** | ** ** | **4,075.7** | ** ** |
| Processed Products  |       | 477.5       |       | 361.6       |       | 412.3       |       |
| Poultry             |       | 3,281.5     |       | 2,373.0     |       | 2,937.6     |       |
| Pork                |       | 484.1       |       | 371.1       |       | 592.4       |       |
| Beef                |       | 272.5       |       | 254.7       |       | —      |       |
| Other               |       | 120.4       |       | 51.6        |       | 133.4       |       |
|                |       |        |       |        |       |        |       |
| **Consolidated**    | ** ** | **9,955.9** | ** ** | **7,894.0** | ** ** | **8,327.4** | ** ** |
| Processed Products  |       | 4,627.3     |       | 3,875.1     |       | 3,701.4     |       |
| Poultry             |       | 3,840.9     |       | 2,865.3     |       | 3,449.7     |       |
| Pork                |       | 674.5       |       | 525.6       |       | 740.7       |       |
| Beef                |       | 328.5       |       | 295.3       |       | —      |       |
| Other               |       | 484.7       |       | 332.7       |       | 435.6       |       |

 

----

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

 

Thefollowing table presents the breakdown of gross operating revenue in percentageterms by segment, for the years ended 2007, 2006 and 2005, as shown:

 

**Gross Operating Revenue by Segment (%)**

 

| ** **         | ** ** | **2007**   | ** ** | **2006**   | ** ** | **2005**   | ** ** |
|--------------------|------------|------------|------------|------------|------------|------------|------------|
| ** **         | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Processed Products |       | 46         |       | 49         |       | 44         |       |
| Poultry            |       | 39         |       | 36         |       | 41         |       |
| Pork               |       | 7          |       | 7          |       | 9          |       |
| Beef               |       | 3          |       | 4          |       | —     |       |
| *Other (*)*        |       | 5          |       | 4          |       | 5          |       |

* *

----

*(*) Other: Grains andby-products, boiled beef parts, pig and chicken breeding and resale of products*

 

Thefollowing information about segments is based upon information used by theCompany’s management to assess the performance of operating segments and decideon the allocation of resources and has been prepared and presented inaccordance with Brazilian GAAP that is adjusted for US GAAP presentation. TheCompany has four identifiable reportable segments: Processed Products, Poultry,Pork and Beef.

 

| **(R$ Thousand)**               | ** ** | **2007**  | ** ** | **2006**  | ** ** | **2005**  | ** ** |
|--------------------------------------|------------|-----------|------------|-----------|------------|-----------|------------|
| **Net operating revenue**            |       |      |       |      |       |      |       |
| Processed products                   |       | 3,745,713 |       | 3,102,397 |       | 3,147,296 |       |
| Poultry                              |       | 3,774,731 |       | 2,872,845 |       | 3,199,246 |       |
| Pork                                 |       | 624,117   |       | 494,571   |       | 732,710   |       |
| Beef                                 |       | 334,995   |       | 309,353   |       | —    |       |
| Other (*)                            |       | 143,635   |       | 97,535    |       | 239,186   |       |
| Adjustments for US GAAP presentation |       | 130,885   |       | (46,401   | )          | (596      | )          |
| Total net operating revenue          |       | 8,754,076 |       | 6,830,300 |       | 7,317,842 |       |

* *

----

*(*) Other net operatingrevenue is primarily attributable to grains and by-products.*

 

17

----

 

 

| **(R$ Thousand)**                             | ** ** | **2007** | ** ** | **2006** | ** ** | **2005** | ** ** |
|----------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| **Depreciation expense**                           |       |     |       |     |       |     |       |
| Processed products                                 |       | (116,679 | )          | (92,214  | )          | (60,863  | )          |
| Poultry                                            |       | (131,053 | )          | (100,080 | )          | (80,336  | )          |
| Pork                                               |       | (21,358  | )          | (15,223  | )          | (16,853  | )          |
| Beef                                               |       | (14,059  | )          | (11,660  | )          | —   |       |
| Other                                              |       | (5,555   | )          | (4,072   | )          | (7,294   | )          |
| Total depreciation expense allocated to  Segments  |       | (288,704 | )          | (223,249 | )          | (165,346 | )          |
| Depreciation allocated to administrative  expenses |       | (17,451  | )          | (17,320  | )          | (12,829  | )          |
| Adjustments for US GAAP presentation               |       | 59,175   |       | 35,185   |       | (4,088   | )          |
| Total depreciation expense                         |       | (246,980 | )          | (205,384 | )          | (182,263 | )          |

 
| **(R$ Thousand)**                                                                | ** ** | **2007**  | ** ** | **2006**  | ** ** | **2005**  | ** ** |
|---------------------------------------------------------------------------------------|------------|-----------|------------|-----------|------------|-----------|------------|
| **Segment operating income**                                                          |       |      |       |      |       |      |       |
| Processed products                                                                    |       | 362,257   |       | 194,494   |       | 273,684   |       |
| Poultry                                                                               |       | 248,286   |       | 100,204   |       | 269,766   |       |
| Pork                                                                                  |       | 46,862    |       | 35,489    |       | 94,586    |       |
| Beef                                                                                  |       | 3,635     |       | 11,482    |       | —    |       |
| Other                                                                                 |       | 8,690     |       | 2,087     |       | 2,798     |       |
| Adjustments for US GAAP presentation                                                  |       | 199,512   |       | (41,533   | )          | 40,069    |       |
| Total operating income                                                                |       | 869,242   |       | 302,223   |       | 680,903   |       |
| Interest expense                                                                      |       | (332,378  | )          | (310,442  | )          | (324,231  | )          |
| Interest income and other                                                             |       | 241,735   |       | 282,904   |       | 248,203   |       |
| Foreign currency exchange gain (loss), net                                            |       | 54,056    |       | 104,219   |       | 159,602   |       |
| Adjustments for US GAAP presentation                                                  |       | 139,884   |       | 9,812     |       | (93,825   | )          |
| Income before income taxes, equity income  or loss of investees and minority interest |       | 972,539   |       | 388,716   |       | 670,652   |       |
|                                                                                  |       |      |       |      |       |      |       |
| **Segment assets**                                                                    |       |      |       |      |       |      |       |
| Processed products                                                                    |       | 713,064   |       | 715,248   |       | 624,619   |       |
| Poultry                                                                               |       | 1,498,736 |       | 1,018,005 |       | 750,504   |       |
| Pork                                                                                  |       | 390,458   |       | 275,533   |       | 147,724   |       |
| Beef                                                                                  |       | 134,616   |       | 104,340   |       | —    |       |
| Other                                                                                 |       | 283,912   |       | 220,312   |       | 143,359   |       |
| Adjustments for US GAAP presentation                                                  |       | (123,378  | )          | (178,458  | )          | (142,897  | )          |
| Total property, plant and equipment                                                   |       | 2,897,408 |       | 2,154,980 |       | 1,523,309 |       |
|                                                                                  |       |      |       |      |       |      |       |
| Reconciling items - corporate assets                                                  |       |      |       |      |       |      |       |
| Cash and cash equivalents                                                             |       | 2,369,309 |       | 2,550,602 |       | 2,663,689 |       |
| Accounts and notes receivable, net                                                    |       | 523,558   |       | 678,598   |       | 509,615   |       |
| Inventories                                                                           |       | 1,168,936 |       | 1,084,454 |       | 992,490   |       |
| Other corporate assets                                                                |       | 1,098,791 |       | 929,259   |       | 690,825   |       |
| Adjustments for US GAAP presentation                                                  |       | 1,399,885 |       | 641,864   |       | 327,356   |       |
| Total consolidated assets                                                             |       | 9,457,887 |       | 8,039,757 |       | 6,707,284 |       |
|                                                                                  |       |      |       |      |       |      |       |
| **Capital expenditures**                                                              |       |      |       |      |       |      |       |
| Processed products                                                                    |       | 195,969   |       | 302,648   |       | 194,587   |       |
| Poultry                                                                               |       | 614,660   |       | 367,581   |       | 372,761   |       |
| Pork                                                                                  |       | 136,417   |       | 143,032   |       | 26,982    |       |
| Beef                                                                                  |       | 44,442    |       | 7,786     |       | —    |       |
| Other                                                                                 |       | 93,442    |       | 234,331   |       | 91,662    |       |
| Adjustments for US GAAP presentation                                                  |       | (134,678  | )          | (85,776   | )          | 56,365    |       |
| Total segment capital expenditures                                                    |       | 950,052   |       | 969,602   |       | 742,357   |       |

 

18

----

 

*Processed Products*

* *

Asa result of the Company’s strategy of concentrating on higher value-added,higher margin products, the processed products segment results increasedsignificantly as from the second half of the 1990s. Average volumes soldincreased 11.7% per year since 1998. Sales of processed products accounted for46.5% of the Company’s gross operating revenues in 2007.

 

Sadiaowns ten plants in Brasil that manufacture processed products, eight of whichare dedicated to meat processing, two to margarine and two to pizza, pasta anddesserts production. These plants are located close to their suppliers of rawmaterials or to the main domestic centers of consumption.

 

Theprocessed products segment comprises a wide range of products, including:frozen products (hamburgers, breaded products, ready-to-eat dishes and pizzas),refrigerated products (hams, sausages, frankfurters, bolognas, salamis, coldcuts, product portions, refrigerated pasta and desserts) and margarine, themajority of which are sold under the Sadia brand.

 

Processedproducts in the domestic market, accounted for 89.7% of the total gross salesof this segment, with the remaining 10.3% directed towards exports. The totalsales from this segment grew 19.4% as compared to 2006.

 

Mostof the raw materials used derive from poultry and pork produced by the company.By contrast, selected suppliers, who are subject to inspection by the FederalAgriculture Ministry, produce all beef that is processed by the Company.

 

TheCompany believes that the use of chicken meat as a raw material for processedproducts should grow substantially for two reasons: (i) the increase inthe range of chicken-based products such as breaded products, and (ii) anincreasing share for this kind of meat in the composition of other processedproducts, such as sausages, frankfurters and bolognas. Moreover, thedevelopment of specialized products (boiled and roasted products) for theinstitutional and foreign markets should also contribute to the increase inchicken production.

 

Thefollowing table presents gross operating revenue from sales of processedproducts in 2007, 2006 and 2005:

 

**Gross Operating Revenue (R$ Million)**

 

| ** **             | ** ** | **2007**    | ** ** | **2006**    | ** ** | **2005**    | ** ** |
|------------------------|------------|-------------|------------|-------------|------------|-------------|------------|
| **Processed Products** | ** ** | **4,627.3** | ** ** | **3,875.1** | ** ** | **3,701.4** | ** ** |
| Refrigerated           |       | 3,721.9     |       | 3,224.7     |       | 3,084.7     |       |
| Frozen                 |       | 905.4       |       | 650.4       |       | 616.7       |       |

 

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                                              |       | 43.3 |   | October/November-06 |   |
| Refrigerated Processed Products |       | 1st                                              |       | 31.1 |   | November/December-06 |   |
| Margarine                       |       | 1st                                              |       | 45.4 |   | October/November-06 |   |

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

 

In order to maintain market share, Sadia willcontinue to concentrate on launchings of higher value-added products. In 2007,the Company launched 25 products, against 41 products in 2006and 76 products in 2005.

 

*Poultry, Pork and  Beef*

* *

In2007, sales of non-processed products reached R$4,843.9 million, and accountedfor 48.7% of the Company’s total gross operating revenue. In 2006, sales ofnon-processed products reached R$3,686.3 million, and accounted for 46.7% ofthe Company’s total gross operating revenue. In 2005, sales of 

 

19

----

 

non-processedproducts reached R$4,190.4 million, and accounted for 50.3% of Sadia’s totalgross operating revenue. In 2007, poultry, pork and beef sales accounted forapproximately 87.1% of total export revenue, in 2006 for approximately 87.9%and in 2005, 86.6%.

 

Sadiaowns nine 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. Thetable below shows slaughtering volumes of the Company for the years ended December 31,2007, 2006, and 2005, in millions of units:

 

**Slaughtering Volumes (Million Heads)**

 

| ** ** | ** ** | **2007** | ** ** | **2006** | ** ** | **2005** | ** ** |
|------------|------------|----------|------------|----------|------------|----------|------------|
| Poultry    |       | 751.8    |       | 666.9    |       | 650.1    |       |
| Hogs       |       | 4.4      |       | 4.0      |       | 3.8      |       |
| Beef       |       | 0.23     |       | 0.25     |       | 0.07     |       |

 

Thefollowing table shows gross operating revenue from non-processed products, forthe years of 2007, 2006 and 2005:

 

**Gross Operating Revenue (R$ Million)**

 

| ** **  | ** ** | **2007**    | ** ** | **2006**    | ** ** | **2005**    | ** ** |
|-------------|------------|-------------|------------|-------------|------------|-------------|------------|
| ** **  | ** ** | ** **  | ** ** | ** **  | ** ** | ** **  | ** ** |
| **Poultry** | ** ** | **3,840.9** | ** ** | **2,865.3** | ** ** | **3,449.7** | ** ** |
| Whole       |       | 1,618.4     |       | 1,239.8     |       | 1,492.9     |       |
| Parts       |       | 2,037.7     |       | 1,491.2     |       | 1,811.0     |       |
| By-products |       | 184.8       |       | 134.3       |       | 145.8       |       |
| **Pork**    | ** ** | **674.5**   | ** ** | **525.6**   | ** ** | **740.7**   | ** ** |
| **Beef**    | ** ** | **328.5**   | ** ** | **295.3**   | ** ** | **—**  | ** ** |
| **Total**   | ** ** | **4,843.9** | ** ** | **3,686.2** | ** ** | **4,190.4** | ** ** |

 

In2007, Sadia had a 15.1% share of chicken production in Brazil, in terms of tonsand a 23.5% share of the Brazilian poultry export market. This compares withresults for 2006 and 2005, when the Company had a 14.7% and 10.3% share ofdomestic chicken production and a 25.9% and 25.8% share of the Brazilianpoultry export market, respectively. Sadia introduced turkey production to theBrazilian market in 1973, when its consumption was virtually non-existent. Thismarket is shared with other competitors, but the Company was still in theleadership position, with 57.7% of total slaughter in 2007, as compared with63.2% of total slaughter in 2006 and 65.6% for 2005.

 

Approximately70.0% of the Company’s pork production is used in its processed productssegment. The remainder is sold as fresh meat cuts in the domestic andinternational markets. According to the Brazilian Pork Producers Association(ABIPECS), in 2007, Sadia had a 12.4% share of Brazilian pork production, and a18.3% share of the Brazilian pork export market. This compares with results for2006 and 2005, when the Company had a 12.1% and 14.2% share of Brazilian porkproduction and a 14.5% and 14.2% share of the Brazilian pork export market,respectively.

 

In November 2005, Sadia decided to resume its beef operationsbecause it believes that it represents a complementary business to the Company’sactivities. Sadia’s strategy in this sector is to concentrate sales towards theexport market; for the domestic market the Company will focus its efforts onpremium beef cuts. In 2007, it accounted for 6.8% of total Gross OperatingRevenues. In 2006, it accounted for 3.7% of total Gross Operating Revenues.

 

**ProductionProcess**

** **

*Processed Products*

* *

TheCompany uses special cuts of beef, pork, chicken and turkey, as well asselected and shaped fragments for the production of hams, sausages,frankfurters, bologna, hamburgers, pressed ham and related products. Seasoningsand secondary raw materials are applied to each product type or line, 

 

20

----

 

accordingto established formulas, in order to ensure consistency, color, texture andflavor. The presentation of final products is achieved by shaping, casing,cooking and freezing in special machines. Products are then subjected toquality controls and distributed to the consumer market after having beenpackaged, labeled and boxed.

 

Theraw material for margarine is crude soybean oil, which is subjected to refiningand bleaching processes. Fats are obtained by hydrogenating bleached oil. Bothof these materials are deodorized in order to prepare the “blend”. The processis completed by the preparation of an emulsion, the cooling and crystallizationof the product, placing into containers, and the packing of these into boxes.

 

*Poultry*

* *

Theproduction process for poultry consists of four stages. The first two entaildirect investment by the Company in grandparent and parent stock. The thirdrelates to the commercial stock of birds, and involves the direct participationof integrated outgrower farmers, and the last is the slaughtering process.

 

TheCompany imports grandparent stock from the United States in the form of eggsthat are hatched in its hatcheries and then raised on company-owned farms.These birds produce parent stock that are also raised on Company-owned farms,and that in turn produce eggs. The operation involves twelve hatchery centers,eight of which produce “one-day-chicks” and four “one-day-turkeys”. The “one-day-chicks”are supplied 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 outgrowerswho are responsible for raising the birds. Sadia has contracts withapproximately 6,300 outgrowers, to which the Company provides feed, technicaland veterinary assistance to allow such outgrowers the outgrowing process up tothe time the birds reach slaughtering age, which for chickens is normally 34days (at a weight of 2.0 kg). There are no employment agreements between theCompany and the outgrowers, who generally carry out this activity in order tosupplement their income. Most outgrowers farm on a small scale and raise sixflocks per year (each flock consists of approximately 14,000 chickens). TheCompany remains the owner of the birds, and at the end of each productioncycle, pays a commission fee based on a performance index that is calculated asa function of indicators such as bird mortality, feed to meat conversion ratioand average weight. The fee paid to the integrated farmers covers theoutgrowing costs, raw materials, labor and their net profit.

 

Poultryare slaughtered through a process by which they are electrically stunned. Theyare then bled by puncturing of major blood vessels. After heating to atemperature of 55/60oC, they are plucked and gutted by automaticmachines. The gutting process is subject to health control and inspection. Thecarcasses are then moved for cooling or freezing at respective temperatures of6oC and –12/-18oC, and are then packaged according to therequired 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*

* *

The Company produces grandparent, parent and pigletstock 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.

 

Thehogs are slaughtered through a process in which they are bled after beingstunned electrically. After heating to a temperature of 60/64oC,their bristles are removed by automatic machines. The animals are then dried,flamed, brushed and gutted, which process is subject to health inspection.After cooling to a temperature of 5oC, the carcasses are cut up andprocessed.

 

21

----

 

Beef

* *

Sadiaacquires cattle for slaughter at our Várzea Grande unit from producers in thestate of Mato Grosso, within a limited radius of our facility, whose cattlehave been branded at birth and therefore are of verifiable origin. Currentlythe Company is able to slaughter almost 2,000 heads of cattle per day.

 

**Principal markets where the Company competes**

** **

In2007, Sadia had an average of 46.6% of its gross operating revenues providedfrom exports. This ratio was 43.2% for 2006 and 48.9% 2005. 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 with Brazilian GAAP and is adjusted for U.S. GAAP. Refer to Note23 of the consolidated financial statements for details on the primary differencesbetween Brazilian GAAP and U.S. GAAP.

 

**Exports Gross Operating Revenues (R$ Thousand)**

** **
| ** **                                                                | ** ** | **2007**  | ** ** | **2006**  | ** ** | **2005**  | ** ** |
|---------------------------------------------------------------------------|------------|-----------|------------|-----------|------------|-----------|------------|
|                                                                      |       |      |       |      |       |      |       |
| Europe                                                                    |       | 1,256,325 |       | 889,171   |       | 978,318   |       |
| Middle East                                                               |       | 986,240   |       | 787,838   |       | 1,047,615 |       |
| Asia                                                                      |       | 691,273   |       | 533,295   |       | 635,907   |       |
| South America                                                             |       | 643,770   |       | 528,453   |       | 542,151   |       |
| Emerging markets (mainly Russia and other  former Soviet Union countries) |       | 946,428   |       | 719,706   |       | 872,333   |       |
| Adjustments for US GAAP presentation                                      |       | 111,955   |       | (46,426   | )          | (627      | )          |
| Total                                                                     |       | 4,635,990 |       | 3,412,037 |       | 4,075,697 |       |

 

Revenuesare attributed to regions based upon where the products are shipped. Alllong-lived operational assets are located in Brazil and in Kaliningrad as wellas sales offices located in various countries.

 

Europeis a large purchaser of poultry cuts and processed products. Sadia maintains atraditional presence in the Middle East, with market leadership and strongbrand recognition. Middle Eastern countries primarily consume whole birds oflow weight (up to 1.4 kilograms) and processed products. With respect toEurasia, which comprises the Caucasus region and Russia, the Company exportsmainly pork and poultry cuts and processed products. The main exports to Asiaare special poultry cuts, pork carcasses and cuts. In the Americas, sales areconcentrated primarily in processed products, poultry parts and whole birds.Secondary markets include regions with great potential for growth in the mediumterm.

 

Seventysix percent of the Company’s exports in 2007 were to investment gradecountries.

 

**Market Overview – Domestic and InternationalMarkets**

** **

Thepotential growth of the Brazilian market for processed food, poultry, pork andbeef, and Brazil’s low production costs are attractive to internationalcompetitors. The main barrier to such companies has nevertheless been the needto build a wide ranging refrigerated distribution chain, and a network ofintegrated producers.

 

Thefollowing analysis was prepared based on information mainly gathered from: TheUSDA (United States Department of Agriculture), CONAB (Brazilian NationalSupply Company), ABEF (Brazilian Poultry Exporters Association) and ABIPECS(Brazilian Pork Meat Exporters Association) and AC Nielsen reports.

 

**BrazilianProcessed Products Market**

** **

Consumptionof processed products is influenced by several factors, including the increasein consumer income, and efforts related to the development of products, with aview to meeting consumer demand for more sophisticated products.

 

22

----

 

Theprocessed products segment is divided into three categories: frozen products,refrigerated products and margarines.

 

*FrozenProcessed Products*

* *

In2007, the Brazilian market for frozen processed products accounted for sales ofR$1,454.4 million. Approximately 79.7% of this total is attributable to the twolargest companies, Sadia and Perdigão.

 

| ** **             | ** ** | **2007** | ** ** | **2006** | ** ** | **2005** | ** ** |
|------------------------|------------|----------|------------|----------|------------|----------|------------|
| Sales (R$million)      |       | 1,454.4  |       | 1,286.3  |       | 1,214.3  |       |
| Change %               |       | 13.1     | %          | 5.9      | %          | 10.3     | %          |
| Volume (thousand tons) |       | 171.8    |       | 157.1    |       | 143.4    |       |
| Change %               |       | 9.3      | %          | 9.5      | %          | 8.5      | %          |

 

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

 

Dueto the characteristics of frozen processed products with productionconcentrated among a small number of companies, and supply aimed at a morerestricted group of consumers, Sadia believes that volume sales of frozenprocessed products will maintain their trend of around 9.8% annual averagegrowth registered between 2005 and 2007. In any case, since the market forfrozen processed products is still far from mature in Brazil, the Companybelieves that medium and long-term prospects for this segment are highlypositive based on the trend over the preceding years.

 

*RefrigeratedProcessed Products*

* *

In2007, the Brazilian market for refrigerated processed products accounted forsales of R$6,752.4 million. The two largest companies in this market togetheraccounted for approximately 50.6% of net sales, according to AC Nielsen, withthe remaining share being split among a large number of small companies.

 

| ** **             | ** ** | **2007** | ** ** | **2006** | ** ** | **2005** | ** ** |
|------------------------|------------|----------|------------|----------|------------|----------|------------|
| Sales (R$million)      |       | 6,752.4  |       | 6,163.0  |       | 5,094.9  |       |
| Change %               |       | 9.6      | %          | 21.0     | %          | 16.2     | %          |
| Volume (thousand tons) |       | 973.2    |       | 893.5    |       | 744.0    |       |
| Change %               |       | 8.9      | %          | 20.1     | %          | 10.1     | %          |

 

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

 

*Margarine*

* *

In2007, the Brazilian market for margarine accounted for sales of R$1,541.0million. The three largest producers (including Sadia as the largest) accountedfor 83.7% of the market.

 

| ** **             | ** ** | **2007** | ** ** | **2006** | ** ** | **2005** | ** ** |
|------------------------|------------|----------|------------|----------|------------|----------|------------|
| Value (R$million)      |       | 1.540,5  |       | 1,541.0  |       | 1,527.5  |       |
| Change %               |       | 0,0      | %          | 0.9      | %          | 1.8      | %          |
| Volume (thousand tons) |       | 324,3    |       | 326.8    |       | 302.3    |       |
| Change %               |       | -0,8     | %          | 8.1      | %          | 5.7      | %          |

 

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

 

**Poultry**

** **

*DomesticMarket*

* *

TheBrazilian poultry market is a complex sector where a few large companies sharethe market with small producers. According to UBA’s 2008 annual report, thefour largest chicken producers in 

 

23

----

 

Brazilaccounted for 38.5% of Brazilian production in 2007. The low concentration inthe market increases competitive pressure in the segment. Prices are subject tosupply and demand imbalances.

 

Manyof these small producers operate under low quality standards because of thelarge number of producers and government difficulties to inspect producers on aregular basis. Additionally, there is widespread belief that tax evasionpractices among these producers reduce their costs as compared to producerssuch as Sadia that comply with applicable regulations.

 

Growthin Brazilian per capita consumption of poultry over the last four years isexpected to continue as the UBA forecasts a 1.6% growth for 2008 as compared to2007.

 

 

(p) preliminary; (f) forecast

Source: USDA / ABEF

 

Inthe local market, poultry export business in Brazil has grown more rapidlysince the mid 1990s. This can be explained by the production shift of largeBrazilian companies’ exports, as well as by the competitiveness of Brazilianpoultry. Sanitary problems in the main producing countries such as the BovineSpongiform Encephalophy (“BSE”) cases in Europe, avian influenza problems inThailand and both BSE and avian influenza cases in the United States havechanged the world broiler trade dynamics. The reduced competition from majorexporting countries affected by sanitary issues and the competitive cost ofBrazilian poultry favors Brazil as the most competitive exporter of qualitypoultry cuts and mechanically de-boned chicken meat. Additionally, several newmarkets in Europe, Africa and the Middle East have opened to Brazilian chicken,and the number of markets which Brazil has access was 142 in 2007, according toABEF.

 
| ** **    | ** ** | **Brazilian Broiler Exports Destination (thousand tons)** | ** ** |
|---------------|------------|------------------------------------------------------------------------------------|------------|
| ** **    | ** ** | **2007**                                                                           | ** ** | **07 V.A.%** | ** ** | **2006** | ** ** | **06 V.A.%** | ** ** | **06/05 %** | ** ** |
| Middle East   |       | 984                                                                                |       | 30 | % | 748 |   | 29 | % | 32 | % |
| Asia          |       | 810                                                                                |       | 25 | % | 738 |   | 29 | % | 10 | % |
| Africa        |       | 262                                                                                |       | 8 | % | 289 |   | 11 | % | -9 | % |
| EU            |       | 561                                                                                |       | 17 | % | 243 |   | 9 | % | 131 | % |
| Russia        |       | 194                                                                                |       | 6 | % | 182 |   | 7 | % | 7 | % |
| South America |       | 174                                                                                |       | 5 | % | 132 |   | 5 | % | 32 | % |
| Other         |       | 302                                                                                |       | 9 | % | 255 |   | 10 | % | 18 | % |
| **Total**     |       | 3,287                                                                              |       | 100 | % | 2,587 |   | 100 | % | 220 | % |

 
| *Source: ABEF* |   |   |   |   |   |   |   |   |   |   |   |
|----------------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|

 

For2008, the USDA has revised upwards the projected Brazilian broiler productionto 4.0% higher than the 2007 10.2 million tons production. The projectedincrease in production reflects the firm domestic demand derived from higheremployment rates and consumer purchasing power as the economy improves andcontinues to boost demand for animal proteins. In addition to that, expansionin the export 

 

24

----

 

marketwill likely continue in view of higher world demand for broilers due to thereduction of the concern over Avian Influenza, estimated increase in exports totraditional markets due to the Brazilian products competitiveness and effortsby Brazilian poultry exporters in new markets.

 

Accordingto the UBA Report, whole broiler exports in 2007 reached nearly 1.2 milliontons, compared to the 0.9 million tons in 2006 and 1.0 million tons in 2005.Exports of broiler parts reached 1.8 million tons, up 12.4% over 2006.Brazilian broiler exporters’ strategy is to increase profitability by focusingon higher value products, such as broiler parts and further processed products,which increased significantly in 2007 by 22.1% in volume, reaching 155,341tons.

 

TheEuropean Union was, in 2007, the largest market for Brazilian broiler exports,mostly broiler parts. The increase in broiler exports to the European Unionalso reflects a significant increase in exports of processed broilers. TheEuropean Union market accounted for nearly 80% of all processed broiler exportsfrom Brazil.

 

In2007, Hong Kong was the second largest market for Brazil’s broiler exports,mostly broiler parts.

 

SaudiArabia, traditionally Brazil’s largest single export market for poultry, nowranks third. Saudi Arabia accounted for nearly 39% of all Brazilian broilerexports to the Middle East.

 

Japanwas the fourth largest Brazilian destination of broilers in 2007, also mostlybroiler parts.

 

*InternationalPoultry Market*

* *

Expansionin the export market is expected, in view of the reduction of the concern overAvian Influenza (“HPAI”). According to the FAO, properly cooked poultry is safeto consume a conventional cooking temperatures at or above 70°C in all parts ofa food item) will inactivate the H5N1 virus. Moreover, there is noepidemiological evidence to indicate that people have been infected with theH5N1 virus following consumption of properly cooked poultry or eggs. It is thusexpected that as consumers become more aware of the true dangers of HPAI, thelevel of poultry consumption will not be affected.

 

Accordingto the USDA, world economic growth is projected to increase at a 3.5% averageannual rate between 2008 and 2017, after averaging 2.9% annual average between2001 and 2007. Strong economic growth in developing countries, particularlyimportant for growth in global food demand, is projected at 5.8% percentannually for 2008-17. Macroeconomic stability and growth in low and somemiddle-income countries may result in higher consumption of red meat andpoultry, providing new growth opportunities for domestic producers and worldsuppliers. The forecast economic environment will promote investment in meatproduction and processing capacity in many major livestock and poultryproducing countries.

 

Moreover,increases in worldwide real per capita GDP in 2006 and 2007 continued to fuelrising livestock and poultry consumption and hence production. Asian economiesparticularly China, Hong Kong, Taiwan, and Thailand are forecast to experiencegrowth, likely fostering meat consumption as consumers will have moredisposable income.

 

Accordingto USDA, Broiler production is bound to slightly decline in late 2008 and early2009 due to high feed costs, recovering later in the second half of 2009, whenlivestock and poultry prices are generally forecast higher due to lower meatsupplies.

 

Accordingto FAO, per capita consumption of poultry in developed countries is more thanthree times that of developing countries. This difference is even moreaccentuated for certain countries. In 2007, for instance, while India isexpected to have consumed 1.8kg poultry per capita, United States are expectedto consume more than 25 times that amount with 45.4kg.

 

Acordingto the USDA, China and the European Union are expected to be net broiler meatimporters again in 2008 on the basis of continued strong demand, higherdomestic prices, and strengthening currencies. China imports are expected togrow about 10% in 2008,while EU imports are expected to be unchanged.

 

Accordingto the USDA, broiler meat exports by major traders are forecast to reach 7.7million tons in 2008. The 2007 increase of 11.4% in broiler meat exports is theresult of increased trade by a number of countries including Brazil, Argentina,China, Thailand, and the United States.

 

Accordingto the USDA, in 2007, Russian poultry production is expected to increase by anadditional 11.1% in 2008, as the sector continues to benefit from heavyinvestment. Despite these 

 

25

----

 

investments,Russia will continue to be the worldwide leader in poultry imports with aforecast 1.2 million tons for 2008.

 

Japan’stotal broiler consumption in 2008 is projected to stay flat from the levelachieved last year at 1.9 million tons. The USDA also expects a slight decreaseof 0.8% in the Japanese poultry imports, as a consequence of the weaker outlookfor food service demand.

 

SaudiArabia poultry imports for 2008 are expected to reach about 490,000 tons, an4.3% increase compared to 2006 volumes.

 

Sadiabelieves there is a great potential market in the Middle East. In seeking newopportunities, Sadia was the first Brazilian food company to enter the Egyptianmarket.

 

TheUSDA projects that the European Union broiler meat consumption will have aslight increase of 1.3%, reaching 8.2 million tons. Imports on the other hand,are expected to increase by 1.6%, to 650,000 tons in 2008.

 

In2008, Chinese broiler meat imports are projected to reach 600,000 tons, a 24.5%increase from the previous year. The United States continues to be the onlycountry that can sell poultry products for direct consumption in China’s retailsector.

 

| ** **    | ** ** | **World Broiler Balance (thousand tons)** | ** ** |
|---------------|------------|---------------------------------------------------------------|------------|
| ** **    | ** ** | **2007**                                                      | ** ** | **2008 (f)** | ** ** |
| ** **    | ** ** | **Production**                                                | ** ** | **Consumption** | ** ** | **Exports** | ** ** | **Production** | ** ** | **Consumption** | ** ** | **Exports** | ** ** |
| China         |       | 11,500                                                        |       | 10,585 |   | 358 |   | 12,500 |   | 11,570 |   | 390 |   |
| Brazil        |       | 10,305                                                        |       | 7,120 |   | 2,922 |   | 10,895 |   | 7,450 |   | 3,100 |   |
| EU            |       | 8,111                                                         |       | 7,490 |   | 623 |   | 8,200 |   | 7,940 |   | 700 |   |
| Mexico        |       | 2,730                                                         |       | 3,148 |   | — |   | 2,825 |   | 3,146 |   | — |   |
| India         |       | 2,300                                                         |       | 2,200 |   | — |   | 2,400 |   | 2,400 |   | — |   |
| Russia        |       | 1,350                                                         |       | 1,184 |   | 59 |   | 1,500 |   | 2,680 |   | — |   |
| Argentina     |       | 1,280                                                         |       | 2,400 |   | — |   | 1,400 |   | 1,249 |   | 155 |   |
| Japan         |       | 1,241                                                         |       | 1,915 |   | — |   | 1,225 |   | 1,913 |   | — |   |
| Thailand      |       | 1,050                                                         |       | — |   | 297 |   | — |   | — |   | — |   |
| Iran          |       | 1,153                                                         |       | 1,194 |   | 139 |   | 1,150 |   | — |   | — |   |
| United States |       | 16,211                                                        |       | 13,901 |   | 2,524 |   | 16,536 |   | 14,005 |   | 2,524 |   |
| **Total**     | ** ** | **57,231**                                                    | ** ** | **51,137** | ** ** | **6,922** | ** ** | **58,631** | ** ** | **52,353** | ** ** | **6,869** | ** ** |

 

----

| (f) forecast |   |   |   |   |   |   |   |   |   |   |   |   |   |
|-------------------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|
| * *          |   |   |   |   |   |   |   |   |   |   |   |   |   |
| *Source: USDA*    |   |   |   |   |   |   |   |   |   |   |   |   |   |

 
| ** **                | ** ** | **World Broiler Imports** | ** ** |
|---------------------------|------------|-------------------------------------|------------|
| ** **                | ** ** | **2007**                            | ** ** | **2008 (f)** | ** ** |
| ** **                | ** ** | **Volume**                          | ** ** | **%** | ** ** | **Volume** | ** ** | **%** | ** ** |
| China                     |       | 482                                 |       | 6.9 | % | 600 |   | 8.3 | % |
| EU                        |       | 640                                 |       | 9.2 | % | 650 |   | 8.9 | % |
| Mexico                    |       | 400                                 |       | 5.7 | % | 400 |   | 5.5 | % |
| Russia                    |       | 1,222                               |       | 17.5 | % | 1240 |   | 17.1 | % |
| Japan                     |       | 696                                 |       | 10.0 | % | 690 |   | 9.5 | % |
| South Africa, Republic of |       | 239                                 |       | 3.4 | % | 244 |   | 3.4 | % |
| Saudi Arabia              |       | 470                                 |       | 6.7 | % | 490 |   | 6.7 | % |
| United Arab Emirates      |       | 238                                 |       | 3.4 | % | 260 |   | 3.6 | % |
| Hong Kong                 |       | 215                                 |       | 3.1 | % | 245 |   | 3.4 | % |
| United States             |       | 28                                  |       | 0.4 | % | 27 |   | 0.4 | % |
| Others                    |       | 2,354                               |       | 33.7 | % | 2,418 |   | 33.3 | % |
| **Total**                 | ** ** | **6,984**                           | ** ** | **100** | **%** | **7,264** | ** ** | **100.0** | **%** |

 

----

| (f) forecast |   |   |   |   |   |   |   |   |   |
|-------------------|--------|--------|--------|--------|--------|--------|--------|--------|--------|
|              |   |   |   |   |   |   |   |   |   |
| *Source: USDA*    |   |   |   |   |   |   |   |   |   |

 

26

----

 

**Pork**

** **

*DomesticMarket*

* *

Porkcompanies are subject to the same problems as those in the poultry market,including unfair competition with small and low quality producers. Althoughthese problems influence product quality, there is a failure on the part of theconsumer to perceive the quality risks involved and price dumping is widelypracticed. According to ABIPECS 2007 annual report, the four largest porkproducers in Brazil were responsible for 34.7% of Brazilian pork production in2007.

 

 

(p) preliminary;(f) forecast

Source: USDA / ABIPECS

 

Brazilianpork breeding and slaughtering continues to increase the efficiency ofproduction. Measured by the average birth rate of piglets, productivity doubledsince the 1970s, and the birth rate reached 24 animals per female. At 160 daysold, animals weigh 100 kg on average, and are ready to be slaughtered. Researchdevelopments have also contributed to help reduce fat by 31%, cholesterol by10% and calories by 14% in pork produced in Brazil. This enhancement allows forbetter productivity of prime cuts, more meat per carcass and more nutritiousand healthier meat. Besides, the production increase was also due to bettergenetics potential on breeders. In the last three years, the number of animalsslaughetered by breeder increased 12.5%, from 19.2 to 21.6 animals per breederand per year.

 

Brazilianpork exports increased by 14.8% in volume in 2007 to 606,513 tons, from 528,195tons in 2006. In terms of market value, pork exports increased to more thanUS$1.2 billion in 2006 from almost US$1.0 billion in 2006, an increase of18.7%.

 
| ** **           | ** ** | **Brazilian Pork Exports** | ** ** |
|----------------------|------------|--------------------------------------|------------|
| ** **           | ** ** | **Tons**                             | ** ** | **Thousand US$** | ** ** |
| ** **           | ** ** | **2007**                             | ** ** | **%** | ** ** | **2006** | ** ** | **%** | ** ** | **2007** | ** ** | **%** | ** ** | **2006** | ** ** | **%** | ** ** |
| Russia               |       | 278,724                              |       | 46.0 |   | 267,689 |   | 50.7 | % | 667,528 |   | 54.2 |   | 622,249 |   | 60.0 | % |
| Hong Kong            |       | 106,224                              |       | 17.5 |   | 73,908 |   | 14.0 | % | 169,100 |   | 13.7 |   | 95,917 |   | 9.2 | % |
| Ukraine              |       | 54,747                               |       | 9.0 |   | 50,469 |   | 9.6 | % | 93,854 |   | 7.6 |   | 75,158 |   | 7.2 | % |
| Singapore            |       | 31,914                               |       | 5.3 |   | 25,254 |   | 4.8 | % | 68,893 |   | 5.6 |   | 54,359 |   | 5.2 | % |
| Argentina            |       | 29,726                               |       | 4.9 |   | 19,176 |   | 3.6 | % | 55,204 |   | 4.5 |   | 35,011 |   | 3.4 | % |
| Angola               |       | 16,882                               |       | 2.8 |   | — |   | — |   | 23,851 |   | 1.9 |   | — |   | — |   |
| Albania              |       | 13,794                               |       | 2.3 |   | — |   | — |   | 22,068 |   | 1.8 |   | — |   | — |   |
| Uruguai              |       | 11,533                               |       | 1.9 |   | — |   | — |   | 21,818 |   | 1.8 |   | — |   | — |   |
| United Arab Emirates |       | 6,973                                |       | 1.1 |   | — |   | — |   | 19,416 |   | 1.6 |   | — |   | — |   |
| Moldovia             |       | 10,383                               |       | 1.7 |   | 20,792 |   | 3.9 | % | 12,597 |   | 1.0 |   | 41,764 |   | 4.0 | % |
| Other                |       | 45,613                               |       | 7.5 |   | 70,908 |   | 13.4 | % | 76,639 |   | 6.2 |   | 112,730 |   | 10.9 | % |
| **Total**            | ** ** | **606,513**                          | ** ** | **100.0** | ** ** | **528,195** | ** ** | **100,0** | **%** | **1,230,968** | ** ** | **100.0** | ** ** | **1,037,187** | ** ** | **100** | **%** |

 
| *Source: Abipecs* |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|-------------------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|

 

27

----

 

Russiaremains Brazil’s major destination as demand growth exceeds Russian meatproducers’ ability to respond. Russia accounted for 50.7% of total Brazilianexports volumes in 2006, declining to 46.0% in 2007. Brazil retains itsfavorable cost position enabling it to be competitive in Russia and other pricesensitive markets in spite of its strong currency. Brazil has been affectedless than its competitors by the sharp rise in the price of soymeal and corn asits large processing companies have built large new facilities in the midwestwhere soy and corn are more cost competitive than in traditional meat-producingstates in the southern part of Brazil.

 

HongKong is the second largest Brazilian market for pork exports with a 17.5%volumes market share, followed by Ukraine, the third largest market forBrazilian pork exports, with 9.0% of market share in volumes.

 

Porkproduction in Brazil is expected to keep the same growth rate of 2007 (nearly1.9%) in 2008, achieving 3.0 million tons.

 

*InternationalMarket*

* *

Porkvolumes are still recovering after a year of supply shortfalls due to largescale outbreaks of blue ear disease, higher feed prices, and lower sowinventories. Pork inventories are forecast to expand as sow inventory isrebuilt. However, slaughter rates may remain relatively low, as producers holdback female stock. The world pork production is forecast at 93 million tons in2008.

 

Thereis an increasing awareness that meat trade flows are becoming largely dictatedby sanitary conditions and regulations. Exporters worry that market access,driven by trade policy, as well as veterinary and food safety controls, couldbecome easily susceptible to non-tariff trade barriers, especially when thosecontrols are not based on technical criteria. In this very uncertainenvironment, exporting countries are trying to maintain a competitive positionin lucrative markets. At the same time, importing countries are seeking toensure fairness for their domestic producers, while also safeguarding thehealth and economic needs of their consumers.

 

Similarto poultry, it is projected that in the coming years most of the growth in porkconsumption will derive 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 46.1% of world consumption in 2007 andit ́s expected to account for 46.0% in 2008. The EU’s share of pork consumptionis forecast to decrease from 22.3% in 2007 to 22.0% in 2008.

 

EUpork production is expected to marginally fall as producers respond to higherfeed prices. As production declines, high EU prices are expected. Exports areprojected to grow 1,4% The European Union retains the second position in exports and is forecast to account for23.7% of total pork exports.

 

TheUnited States market is currently signaling producers to expand production. Productionin recent years has been export driven. While only 8.2% of U.S. pork productionwas exported in 2002, 15.9% of American pork production is expected to beexported in 2008. In 2008, U.S. pork exports are forecast to reach 1.7 milliontons.

 

In2003, the Russian government published the resolutions that established poultryquota and beef and pork tariff rate quotas (“TRQ”). The Russian TRQ establishescountry specific quotas for the EU, Paraguay, United States and a general quotafor all other countries. As processed pork, unlike other types of pork, is notunder the TRQ, imports of processed pork have increased.

 

Porkmeat bans were introduced by Russia at the end of 2005 (affecting Brazil andPoland) and in the beginning of 2006 (affecting Ukraine) which created a stateof uncertainty for importers looking to fill their TRQ allocations. In 2006,Russia partially lifted the ban for the states of Mato Grosso, São Paulo andRio Grande do Sul and remained in this situation throughout 2007. In 2008, Brazil had no changes concerning the referred status. Efforts to asure sanitarywarranty are being made by the Brazilian Government to lift the ban in Parana,Santa Catarina and introduce Minas Gerais as a eligible state to export toRussia.

 

28

----

 
| ** **         | ** ** | **World Pork Balance (thousand tons)** | ** ** |
|--------------------|------------|------------------------------------------------------------|------------|
| ** **         | ** ** | **2007**                                                   | ** ** | **2008 (f)** | ** ** |
| ** **         | ** ** | **Production**                                             | ** ** | **Consumption** | ** ** | **Exports** | ** ** | **Production** | ** ** | **Consumption** | ** ** | **Exports** | ** ** |
| China              |       | 44,200                                                     |       | 44,048 |   | 350 |   | 44,700 |   | 44,580 |   | 330 |   |
| EU                 |       | 22,600                                                     |       | 21,257 |   | 1,282 |   | 22,500 |   | 21,315 |   | 1,300 |   |
| Brazil             |       | 2,990                                                      |       | 2,260 |   | 730 |   | 3,110 |   | 2,340 |   | 770 |   |
| Russia             |       | 1,910                                                      |       | 2,803 |   | — |   | 2,030 |   | 2,939 |   | — |   |
| Vietnam            |       | 1,832                                                      |       | 1,855 |   | 19 |   | 1,850 |   | 1,861 |   | 19 |   |
| Canada             |       | 1,850                                                      |       | 984 |   | 1,033 |   | 1,790 |   | 969 |   | 1,010 |   |
| Philippines        |       | 1,245                                                      |       | 1,270 |   | — |   | 1,250 |   | 1276 |   | — |   |
| Japan              |       | 1,250                                                      |       | 2,472 |   | — |   | 1,240 |   | 2,504 |   | — |   |
| Mexico             |       | 1,150                                                      |       | 1,514 |   | 81 |   | 1,180 |   | 1,540 |   | 90 |   |
| Korea, Republic of |       | 1,043                                                      |       | 1,506 |   | 13 |   | 1,085 |   | 1,550 |   | 15 |   |
| United States      |       | 9,962                                                      |       | 8,964 |   | 1,424 |   | 10,684 |   | 9,384 |   | 1,694 |   |
| Other              |       | 5,626                                                      |       | 6,581 |   | 220 |   | 5,711 |   | 6,666 |   | 253 |   |
| **Total**          | ** ** | **95,658**                                                 | ** ** | **95,514** | ** ** | **5,152** | ** ** | **97,130** | ** ** | **96,924** | ** ** | **5,481** | ** ** |

 

*Source: USDA*

 

Accordingto the USDA, Japan is expected to remain the world’s largest pork importer in2008, importing 1,250 thousand tons, 3.3% above the 2007 volumes.

 
| ** **         | ** ** | **World Pork Imports** | ** ** |
|--------------------|------------|----------------------------------|------------|
| ** **         | ** ** | **2007**                         | ** ** | **2008 (f)** | ** ** |
| ** **         | ** ** | **Volume**                       | ** ** | **%** | ** ** | **Volume** | ** ** | **%** | ** ** |
| Japan              |       | 1,210                            |       | 23.8 | % | 1,250 |   | 24.1 | % |
| Russian Federation |       | 894                              |       | 17.6 | % | 910 |   | 17.6 | % |
| Korea, Republic of |       | 447                              |       | 8.8 | % | 460 |   | 8.9 | % |
| Mexico             |       | 445                              |       | 8.8 | % | 450 |   | 8.7 | % |
| Hong Kong          |       | 302                              |       | 5.9 | % | 310 |   | 6.0 | % |
| China              |       | 198                              |       | 3.9 | % | 210 |   | 4.1 | % |
| Canada             |       | 171                              |       | 3.4 | % | 185 |   | 3.6 | % |
| Australia          |       | 141                              |       | 2.8 | % | 160 |   | 3.1 | % |
| Singapore          |       | 97                               |       | 1.9 | % | 97 |   | 1.9 | % |
| Ukraine            |       | 82                               |       | 1.6 | % | 65 |   | 1.3 | % |
| United States      |       | 439                              |       | 8.6 | % | 420 |   | 8.1 | % |
| Other              |       | 656                              |       | 12.9 | % | 666 |   | 12.8 | % |
| **Total**          | ** ** | **5,082**                        | ** ** | **100.0** | **%** | **5,183** | ** ** | **100.0** | **%** |

 

----

(f) forecast

 

*Source: USDA*

** **

**Beef**

** **

Accordingto the USDA Annual Report, the world supply of beef continues to be tight dueto the negative impacts of bovine spongiform encephalopathy (BSE), foot andmouth disease (FMD)-related trade restrictions and to the drought in 2007(mainly in Australia), which was responsible for several losses. Total beefproduction by major traders is forecast to stay flat in 2008, at 54.6 milliontons. Brazil and China are the only leading producers forecast to present aproduction growth. Brazilian production is expected to increase by 3%, to arecord of 9.7 million tons in 2008. China production is forecast to expandnearly 3%, to 7.7 million tons.

 

29

----

 
| ** **    | ** ** | **World Beef Balance (thousand tons)** | ** ** |
|---------------|------------|------------------------------------------------------------|------------|
| ** **    | ** ** | **2007 (f)**                                          | ** ** | **2008** | ** ** |
| ** **    | ** ** | **Production**                                             | ** ** | **Consumption** | ** ** | **Exports** | ** ** | **Production** | ** ** | **Consumption** | ** ** | **Exports** | ** ** |
| United States |       | 12,096                                                     |       | 12,830 |   | 649 |   | 12,171 |   | 12,828 |   | 687 |   |
| Brazil        |       | 9,470                                                      |       | 7,311 |   | 2,189 |   | 9,710 |   | 7,540 |   | 2,200 |   |
| EU-27         |       | 8,175                                                      |       | 8,674 |   | 139 |   | 8,125 |   | 8,575 |   | 100 |   |
| China         |       | 7,480                                                      |       | 7,404 |   | — |   | 7,730 |   | 7,682 |   | — |   |
| Argentina     |       | 3,200                                                      |       | 2,673 |   | 532 |   | 3,170 |   | 2,640 |   | 535 |   |
| India         |       | 2,500                                                      |       | 1,765 |   | 735 |   | 2,655 |   | 1,855 |   | 800 |   |
| Mexico        |       | 2,200                                                      |       | 2,568 |   | — |   | 2,225 |   | 2,603 |   | — |   |
| Australia     |       | 2,197                                                      |       | — |   | 1,400 |   | 2,075 |   | — |   | 1,360 |   |
| Russia        |       | 1,370                                                      |       | 2,392 |   | — |   | 1,340 |   | 2,462 |   | — |   |
| Canada        |       | 1,310                                                      |       | 1,099 |   | 457 |   | 1,230 |   | 1,035 |   | 450 |   |
| Pakistan      |       | 1,089                                                      |       | 1,119 |   | — |   | 1,100 |   | 1,130 |   | — |   |
| Other         |       | 9,336                                                      |       | 12,150 |   | 1,504 |   | 9,375 |   | 12,189 |   | 1,524 |   |
| **Total**     | ** ** | **60,423**                                                 | ** ** | **59,985** | ** ** | **7,605** | ** ** | **60,906** | ** ** | **60,539** | ** ** | **7,656** | ** ** |

 

----

(f) forecast

 

*Source: USDA*

 

Beefexports in selected countries are expected to reach 7.7 million tons. EuropeanUnion restrictions on Brazilian exports, continuing BSE-related restrictions onNorth-America beef and continuing drought in Australia negatively impact theforecast.

 

Accordingto USDA, Brazilian beef exports are forecast to increase only 0,5% , as aresult of European Union restrictions on Brazilian exports due to sanitaryconcerns. Although Russia is Brazil ́s largest market, the UE accounts for asignificant portion of Brazilian sales. Brazilian exports to the European Unionwill decline in 2008 although processed meat is not subject to the restrictionsand a number of farms have already been approved to ship. Brazilian exporterswill make up for this loss through increased sales to other markets in Asia(Hong Kong and Philippines), the United States (processed meat), Africa andMiddle East (Iran and Egypt).

 

 

(p) Preliminary; (f) forecast

Source: USDA

 

Accordingto the USDA, Japanese beef imports are forecast to decrease 5.2% in 2008, asAustralian exportable supplies of grain-fed beef and continuing restrictions onU.S. beef may constrain import demand.

 

30

----

 

Accordingto the USDA, the United States continues to struggle in its quest for marketaccess in important Asian markets after the initial discovery of BSE in December 2003.However, U.S. beef exports are forecast to increase over 5 percent in 2008 toaround 687,000 tons due to continued opportunities in the NAFTA neighborhood.U.S. beef maintains strong sales to Canada and Mexico.

 

**Seasonal Nature of Business**

** **

*Chicken, Pork and Beef*

* *

Notseasonal in nature.

 

*Turkey*

* *

Turkeyproduction activities are seasonal in nature with respect to “whole turkeys”,whose production is concentrated in the second half of the year, with a highervolume of sales in the fourth quarter because of Christmas holidays.

 

*Processed products*

 

Processedproducts are seasonal only in the celebration products, with a higher volume ofsales in the fourth quarter.

 

***Raw Materials***

*** ***

Sadiaowns eleven animal feed plants with an installed capacity of 5.5 million tonsper year, a volume sufficient to supply all the animal feed requirements of itsbreeding operations. The basic raw materials used in animal feed production arecorn and soybeans, in a mix that contains preservatives and micronutrients. TheCompany supplies the basic animal feed to its outgrowers and sells theremainder on the spot market.

 

TheCompany purchases corn and soybeans from rural producers, small merchants,cooperatives, large scale traders and through auctions organized by theBrazilian government, as well as occasionally from Argentina. Most of theproduction of these raw materials are concentrated in the states of SantaCatarina, Paraná, Rio Grande do Sul, Goiás and Mato Grosso. Grains are receivedin sacks or in bulk, and are then weighed. A sample is taken to measurehumidity and impurities in the grain. After approval, the grain is unloadedinto a hopper for cleaning and drying. Grain is then sieved in order toeliminate the residues that accompany it. After selection and cleaning, thegrain is milled and mixed with the other ingredients of the feed.

 

Sadiaacquires beef for the production of frozen and refrigerated processed products,and boiled beef parts. Other inputs, such as seasonings and other ingredients,cardboard boxes, plastic bags (for packaging and labels), and veterinarymedicines (for poultry and hog breeding), are acquired from many differentsources, both at home and abroad.

 

**Costs and Operating Expenses**

** **

Sadia’sprincipal costs of production are incurred in *reais*and consist of grains, corn and soybeans, packaging, and labor. While inputcosts are *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 sixteen 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 which are broadly used to reduce bottlenecks during the productionprocess.

 

31

----

 

*Corn*

* *

Brazil’scorn prices used to be determined only by domestic supply. Production wasmainly on relatively small properties and had a low level of mechanization.However, since 2002, due to the *real* currencydepreciation and the improvement of several local producers, part of their cropwas shifted to the international market. Therefore, Brazilian corn prices arenow better adjusted to international prices.

 

InBrazil, corn prices tend to be influenced by local supply, but internationalprices also influence local quotes, according to crop expectations among themain world producers (U.S.A., China and Argentina) and the level ofinternational storage in the main consuming countries (Europe and Japan).

 

Thefollowing chart sets forth the market ́s average monthly buying price of cornfor the regions of Santa Catarina, Parana, Brasilia, Mato Grosso and Rio Grandedo Sul for the period between January~~,~~ 1998 and December 31, 2007:

 

**AVERAGE CORN PRICER$ per 60 Kg Bag**

 

 

Accordingto CONAB’s May 2008 Report, it is expected that the 2007/08 Brazilian corncrop production will increase 12.7% compared to last year’s production,reaching approximately 57.9 million tons. This increase is mainly due toinvestments in technology; increase in planted area (3,9%); and favorableclimate on planted areas.

 

*Soybean*

* *

Soybeanproducers in Brazil have been increasing their productivity during the lastseveral years and Brazil has become the second largest producer in the world.Soybean production is substantially mechanized and grains are cultivated onlarge properties. Producers are well organized and production is oriented tothe export market. Production is also spread over several regions among thesouthern, southeastern and central region of the country, and prices are regionallygiven by local supply. However, international prices tend to influence localprices when foreign demand and supply are unbalanced.

 

CONAB expects the Brazilian soybeanplanted area for 2007/08 to increase around 2.6% in comparison to the lastcrop, from 20.7 to 21.2 million hectares. CONABalso forecasts that the production for 2007/08 crop will be equivalent to 59.5million tons, a 1.9% increase as compared to the 2006/07 crop.

 

Thefollowing chart sets forth the market ́s average monthly buying price ofsoybeans in the regions of Parana and Brasilia for the period between January 1998and December 31, 2007.

 

32

----

 

**AVERAGESOYBEAN PRICESR$ per 60 kg Bag**

** **

 

**Marketing**

** **

Sadia’sbrand name is considered one of the Company’s most valuable assets. The Companymaintains an active marketing program using both electronic and printed media.

 

TheCompany incurred advertising expenses of R$ 184.5 million, R$157.4 million, andR$116.6 million during the years ended December 31, 2007, 2006, and 2005respectively.

 

Marketingexpenses are related to investments in advertising of specific campaigns forthe launch of higher value-added products and for the reinforcement of Sadia’sbrand name.

 

**Logistics**

** **

TheCompany’s logistics system and distribution channels are two of its principalcompetitive advantages. Sadia has taken many initiatives to sustain itsleadership, which includes partnerships, information technology investments andthe development of new processes for optimization of logistics, both domesticand export-related.

 

**Distribution**

** **

Withinthe Brazilian market, Sadia sells its finished products to wholesale and retailoutlets, as well as to institutional clients. For the year ended December 31,2007, the Company sold to approximately 108,000 customers throughout Brazil.Sadia ́s distribution strategy is based on the importance of direct sales tocustomers, thereby avoiding concentration among a few large customers.

 

Sadiamaintains sales representation offices in Germany, England, Russia, Japan,China, the United Arab Emirates, Argentina, Uruguay, Chile, Panama and Turkey.In 2007, it sold to approximately 645 foreign clients.

 

In 2007, 36.0% 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.

 

33

----

 

**Transport**

** **

*Transport*

* *

Sadia uses trucks as the primary method ofdistributing its products in Brazil. The Company’s distribution system ishandled by a network of approximately 2,000 refrigerated hired vehicles forboth long and short range deliveries, which service customers directlythroughout Brazil.

 

Distribution by truck is made by refrigeratedvehicles, given the perishable nature of the food products, whose shelf lifevaries from 12 days refrigerated chicken to 540 days frozen turkey. In the caseof stoppage of transport by virtue of a general strike, the result wouldbe a complete loss of the products in transit and lack of supply for the pointsof sale if the period of interruption is greater than 30 days, an outcome theCompany considers remote. As an alternative to highway transport, supply couldbe transported by air, although this would increase the freight cost by morethan 20 times. In the case of a sector strike, the impact would be minimizedbecause the Company has manufacturing units producing the same products locatedin different regions of the country.

 

Sadia uses railways to transport refrigeratedand  frozen products, currentlyaround  6.5% of Sadia ́s total volumes aretransported by trains. A 62.1% growth in railway transported volumes isexpected for 2008 in comparison to 2007, what leads to significant reduction inlogistics costs for the routes where railways are used.

 

*Shipment of Exports*

* *

The Company ships 57.0% of its exportsthrough the ports of Paranaguá and Antonina, both in the State of Paraná, 39.0%through the ports of São Francisco do Sul, Itajaí and Imbituba, in the state ofSanta Catarina and the remaining 4.0% from other ports (Santos, SP; Rio deJaneiro, RJ; Rio Grande, RS).

 

In the port of Paranaguá, the Company has tworefrigerated warehouses, capable of receiving two thousand tons per day perwarehouse and to load two thousand tons per day onto pallets. These warehouseshave a “drive in” storage system and only operate with palleted cargoes. Sinceone of the warehouses is located in the wharf area, the Company has priority inthe mooring of ships arriving at the port of Paranaguá, thereby avoidingpossible cost increases due to delays in loading its cargo. These refrigeratedwarehouses have a storage capacity of 13.5 thousand tons.

 

The Company also has a fully automatedwarehouse in Ponta Grossa, in the state of Paraná, with storage capacity of11.0 thousand tons, and is able to receive and expedite one thousand tons perday.

 

The Company ships its cargoes in “fullcontainer” or conventional “reefer” vessels for palleted cargo.

 

**Sales**

** **

Sadiahas adapted its sales structure and commercial policies to include the largechain, wholesale (cash and carry), regional mid-size clients, traditionalretail (small retail), institutional and distributor channels. The Companysales force has been unified in a single management group, making it possiblefor the big retail chains to be serviced by an account manager, with thesupport of coordinators, promoters and re-stockers. For medium and smallretailers, Sadia has instituted a telemarketing service, which complements themarket work of the sales force and also relies to a limited extent on localdistributors.

 

**Brazilian Food Sector Regulation**

** **

TheBrazilian Ministry of Agriculture, through the *Secretariade Defesa Agropecuária* (SDA), Agricultural and Cattle BreedingDefense Secretary, under the Animal Products Inspection Department (DIPOA),regulates Sadia’s activities. The latter department is responsible for theissuance of regulations, conduct of inspections and legal support in respect tothe livestock, animal breeding, food processing and any other activityinvolving animal related affairs in the Brazilian territory.

 

34

----

 

**Sustainability and Environment**

** **

Brazilian environmental regulations havetheir principles established in the Federal Constitution, with concurrentjurisdiction among the Brazilian federal government, the states and themunicipalities to regulate the subject. The public administration at each suchlevel of government is responsible for the supervision and control of pollutionin any form, as well as for the preservation of forests, hydraulic resourcesand the fauna and flora. The integration of all of the federal, state andmunicipal agencies responsible for the protection and improvement ofenvironmental quality is undertaken by the National Environmental System(SISNAMA).

 

As a producer of foods using a wide range ofindustrial processes, especially its meat product lines which require slaughterof animals, Sadia is subject to compliance with all of the legal requirements,covering environmental risks that are customary in these processes, such as rules governingtreatment of Green House Gases, liquid effluents, solid organic waste, particlesuspension and odors. The Company is careful to respect the environment at allstages of the production chain, including its activities in the field, thedesign of packaging (developed with a view to reducing the quantity of rawmaterials used) and adapting the same to recycling processes. In addition tosimplify treating residues, Sadia invests in minimizing the generation of suchresidues by optimizing processes and adopting stringent procedures forcontrolling the emission of wastes and effluents. The Company’s expendituresrelated to meeting environmental requirements and in process optimizationamounted to approximately R$ 26.0 million in 2007, R$12.5 million in 2006 andR$10.1 million in 2005.

 

### **C.Organizational Structure**

### ** **

 

The Sadia Group is currently composed of twenty companies, as shown inthe chart above.

 

The Company concentrates all production, slaughtering, distribution andproduct sales activities within Brazil. Sadia International Ltd. is one of thecompany’s smaller vehicles for sales outside Brazil. Big Foods is anindustrial complex located in Tatuí, SP, specialized in the production ofready-to-eat processed products.Rezende Óleo and Rezende Mkt. e ComunicaçõesLtda. are non-operational. Sadia GmbH. is a holding that controls WellaxFood Logistics C.P.A.S.U. Lda., an offshore company responsible for the largestpart of Sadia’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 

 

35

----

 

products in their respective countries. Nordfin Holding Limited owns40% of Sadia Chile. Concórdia Holding Financeira is a financialcompany. 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**

### ** **

In2007, Sadia owned sixteen plants, including nine units for poultryslaughtering, five units for pork, one for beef, eleven units for animal feed,two units for the crushing of soybeans and eleven units for processed products(ten in Brazil and one abroad). Some plants are multi-operational, includingseveral integrated activities. Sadia owns twenty one distribution andcommercial centers and eleven representative offices and distribution centersabroad.

 

**Operating Units**

** **

Thetable below lists Sadia’s operating units and their principal activities:

 
| **Country** | ** ** | **State** | ** ** | **City**                         | ** ** | **Principal activity**                                                                        |
|-------------|------------|-----------|------------|----------------------------------|------------|-----------------------------------------------------------------------------------------------|
| **Brazil**  | ** ** | **DF**    |       | Brasília                    |       | Raising  and slaughtering chicken, processed products and animal feed                         |
| **Brazil**  | ** ** | **MG**    |       | Uberlândia                  |       | Raising  and slaughtering chickens, turkeys and hogs, processed products and animal  feed     |
| **Brazil**  | ** ** | **MT**    |       | Lucas do Rio Verde               |       | Pork  Genetics and animal feed                                                                |
| **Brazil**  | ** ** | **MT**    |       | Várzea Grande / Campo Verde |       | Raising  and slaughtering chickens, processed products and animal feed. Beef  slaughterhouse. |
| **Brazil**  | ** ** | **PR**    |       | Dois Vizinhos                    |       | Raising  and slaughtering chickens; animal feed and soybean crushing                          |
| **Brazil**  | ** ** | **PR**    |       | Francisco Beltrão           |       | Raising  and slaughtering chickens and turkeys and animal feed                                |
| **Brazil**  | ** ** | **PR**    |       | Paranáguá              |       | Margarine                                                                                     |
| **Brazil**  | ** ** | **PR**    |       | Ponta Grossa                     |       | Pizzas  and pasta, Miss Daisy, processed products                                        |
| **Brazil**  | ** ** | **PR**    |       | Toledo                           |       | Raising  and slaughtering chickens and hogs; processed products; animal feed and soy  oil     |
| **Brazil**  | ** ** | **RJ**    |       | Duque de Caxias                  |       | Processed  products                                                                           |
| **Brazil**  | ** ** | **RS**    |       | Três Passos                 |       | Raising  and slaughtering hogs and animal feed                                                |
| **Brazil**  | ** ** | **SC**    |       | Chapecó                     |       | Raising  and slaughtering chickens and turkeys, animal feed and processed products            |
| **Brazil**  | ** ** | **SC**    |       | Concórdia                   |       | Raising  and slaughtering chickens and hogs, processed products and animal feed               |
| **Brazil**  | ** ** | **SC**    |       | Faxinal dos Guedes               |       | Raising  and slaughtering chicken and animal feed                                             |
| **Brazil**  | ** ** | **SP**    |       | Tatuí                       |       | Processed  products                                                                           |
| **Russia**  | ** ** | **-**     |       | Kaliningrado                     |       | Processed  products                                                                           |

 

36

----

 

*Leased Operating Units*

* *

The table below lists Sadia’s leased operating unitsand their principal activities. In the cities of Cascavel and Nova Araçá (PR),the local production is made under the Sadia brand, on a *Façon*type of partnership, in which the legal nature of the agreement is that of a “serviceprovision”, which means that Sadia engages the processing services of a thirdparty processing company solely to manufacture a certain product to Sadiaspecifications. In this case, Sadia provides such partner with all rawmaterials needed, including packaging. The third party processing company usessolely its labor and manufacturing facilities (machinery, power, etc.). Theproduct of such manufacturing process becomes automatically Sadia’s property.

 
| **State** | ** ** | **City**        | ** ** | **Principal activity**                                                      |
|-----------|------------|-----------------|------------|----------------------------------------------------------------------------------|
| **PR**    |       | Cascavel        |       | Raising and slaughtering poultry and animal feed                                 |
| **PR**    |       | Nova Araça |       | Raising and slaughtering poultry and porks,  industrial products and animal feed |
| **RS**    |       | Lajeado         |       | Raising and slaughtering poultry and animal feed                                 |
| **RS**    |       | Garibaldi       |       | Raising and slaughtering poultry and animal feed                                 |

 

**Distributionand Commercial Centers**

** **

The table below lists Sadia’s distribution andcommercial centers and the corresponding 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                   |
| **MG**    |       | Uberlândia |       | 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                   |

 

37

----

 
| **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 |

** **

**Production Capacity**

** **

Sadia’s consolidated production capacity is as follow:

 
| ** **                                  | ** ** | **Production Capacity** | ** ** |
|---------------------------------------------|------------|------------------------------|------------|
| ** **                                  | ** ** | **2007**                     | ** ** | **2006** | ** ** |
| ** **                                  | ** ** | **Capacity**                 | ** ** | **Production** | ** ** | **Production** | ** ** |
| Poultry Slaughtering (Million heads/year)   |       | 776.0                        |       | 751.8 |   | 666.8 |   |
| Hog Slaughtering (Million heads/year)       |       | 5.0                          |       | 4.4 |   | 4.0 |   |
| Beef Slaughering (Thousand heads/year)      |       | 300.0                        |       | 234,0 |   | 250,0 |   |
| Processed Products (thousands of tons/year) |       | 1,086                        |       | 877.6 |   | 773.2 |   |
| Animal Feed (thousands of tons/year)        |       | 5,515.4                      |       | 5,242.7 |   | 4,745.8 |   |

 

**Environmental issues affecting the Company’sactivities**

** **

As a poultry and hog livestock and slaughteringcompany, Sadia’s activity impacts on environmental issues, especially relatedto water resources pollution, animal treatment and deforestation. However, theCompany takes all measures to comply with the Brazilian environmentalregulations.

 

As a way of ensuring the sustainability of itsactivities, Sadia has strict policies and directives for reducing consumptionof water and energy and also uses biomass as a possible substitute fuel oil andgas to generate thermal energy. All its units have wastewater treatmentfacilities to avoid the contamination of water tables and rivers near theunits. The Company also strictly supervises the activities taken by the poultryand hog outgrowers. The company also adopt specific indicators of operationalcontrol efficiency related to aspects such as consumption of inputs and rawmaterials, waste disposal, waste treatment, energy use among other aspects,depending on the nature of the operations carried out in each Production Unit.The energy consumption ratio per ton produced reduced by 0.47% in relation to2006 and the water consumption, reduced by 0.56%.

 

The Company has environmental Management Committeesthat are responsible to manage the environmental risks related to its status,as well as to developed accident-prevention actions and elaborate emergencyplans

 

The Company utilizes firewood in its productiveprocess under the Brazilian environmental legal requirements and authorized bythe IBAMA (Instituto Brasileiro do Meio Ambiente e dos Recursos NaturaisRenovaveis), the Brazilian Environmental and Renewable Natural ResourcesInstitute. This firewood comes from the Company’s owned forest land and fromthird parties, and is used as fuel to warm up the boilers.

 

38

----

 

The only environmental requirement for Sadia relatedto its owned forest land is to maintain at least 20% of the Company’s forestland as native forest. Sadia is in compliance with such requirement.

 

Moreover, the Company has a program for being selfsufficient in firewood, maintaining forest land for all of its manufacturingunits. These areas total 18.2 thousand hectares and supply 58% of the Company’scurrent firewood requirements.

 

## **ITEM 4A. UNRESOLVED SEC STAFF COMMENTS**

## ** **

The Company has no unresolved comments from the staffof the U.S. Securities and Exchange Commission in respect of its periodic reportsunder the Exchange Act.

 

## **ITEM 5. OPERATING AND FINANCIAL REVIEW ANDPROSPECTS**

## ** **

The following discussionshould be read in conjunction with the Company’s consolidated financialstatements and notes thereto, and other financial information included elsewherein this annual report.

 

**Discussionon Critical Accounting Policies**

** **

Critical accounting policiesare those that are considered important, complex or subjective by the Company’smanagement to the understanding of the Company’s financial condition andresults, as well as estimates about the effect of matters that are uncertain.

 

*Allowancefor Doubtful Accounts*

* *

The collectibility ofaccounts receivable is based on a combination of factors. In circumstanceswhere management is aware of a specific customer’s inability to meet itsfinancial obligations, a specific allowance against amounts due is recorded toreduce the net recognized receivable to an amount that is likely to becollected. In addition, an allowance is recorded based on the length of time receivablesare past due and historical experiences. In addition, Sadia records a provision in light of past collection andwrite-off experience, as well as when significant payment delays occur and theCompany believes that it may not receive payment in full.

 

Given the assumptionsinvolved, such as the financial situation of the Company’s debtors, commercialand economic trends, allowances for doubtful accounts are subject touncertainty and may be revised upward or downward depending on the actual performanceof an account receivable.

 

*Depreciationand Amortization*

* *

Sadia recognizes expensesrelated to the depreciation and amortization of its property, plant andequipment and breeding stock based on the straight-line and estimatedproduction cost methods, respectively. The useful life of assets and estimatesfor 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.

 

*Impairmentof Long-Lived Assets*

* *

Sadia periodically assessesthe need to perform impairment tests of long-lived assets (or asset groups)based on various indicators such as the level of business profitability andtechnological developments.  Whennecessary, upon the occurrence of any negative triggering event such as asignificant loss in market value of a property, plant and equipment orsignificant adverse change in the extent or manner in which a long-lived assetis being used, cash flow studies are prepared to determine if the accountingvalue of the property, plant and equipment is recoverable through theprofitability 

 

39

----

 

resulting from its business.  In order to estimate future cash flows, Sadiamakes various assumptions and estimates. These assumptions and estimates can be influenced by different externaland internal factors, such as economic and industry trends, interest rates,foreign exchange rates, changes in the business strategies and in the type ofproducts offered to the market.

 

*Contingencies*

* *

Sadia establishes provisionfor contingencies on its balance sheet when it determines, taking into considerationthe opinion of its legal advisors, that a loss is probable, in one of thelabor, tax or civil cases to which the Company is party. Sadia continuouslyevaluates the estimates and assumptions used to establish the provision forcontingencies based on relevant facts and circumstances that may have amaterial effect on the result of operations and stockholders’ equity. Eventhough management believes that the provisions are presently adequate, theestablishment of provisions for judicial proceedings involves estimates thatcan result in the final amount being different than the provisions as a resultof uncertainties that are inherent to the establishment of the provision. Incase the amount of provisions for contingencies is lower than the amount actuallydue, an increase in provisions would be necessary.

 

*DeferredTax Assets*

* *

Sadia recognizes deferredtax assets and liabilities which do not expire, arising from tax losscarry-forwards, temporary add-backs and other procedures. Sadia periodicallyreviews the deferred tax assets for recoverability and establishes a valuationallowance, as required, based on historical taxable income, projected futuretaxable income, 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.

 

*PensionBenefits*

* *

Sadia accounts for its defined pension plan usingactuarial models. These models use an attribution approach, which assumesemployees render services over their service lives on a relatively smooth basisand also presumes that the income statement effects of pension benefit plansshould follow the same pattern. Sadia accounts for its retirement plan based onactuarial recommendations following the applicable laws, income taxregulations, as well as in accordance with the plan’s rules.

 

Net pension income or expense is determined usingassumptions as of the beginning of each year. These assumptions are establishedat the end of the prior fiscal year and include expected long term return ratesof the plan assets, discount rates and compensation rate increases. The actualfuture amounts and experience related to these assumptions will determinewhether Sadia has created sufficient reserves for accrued pension costs.

 

*Revenuerecognition*

* *

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.

 

40

----

*** ***

***Recently Issued Accounting Standards***

*** ***

In February 2007, the FASB issued SFAS permitsthe measurement of certain financial instruments at fair value. Entities maychoose to measure eligible items at fair value at specified election dates,reporting unrealized gains and losses on such items at each subsequentreporting period. SFAS 159 is effective for fiscal years beginning after November 15,2007. The Company does not expect any significant impact to its consolidatedfinancial statements.

 

In December 2007, the FASB issued SFAS 141-R,which will become effective for business combination transactions having anacquisition date on or after January 1, 2009. This standard requires theacquiring entity in a business combination to recognize the assets acquired,the liabilities assumed, and any noncontrolling interest in the acquire at theacquisition date to be measured at their respective fair values. SFAS 141-R changesthe accounting treatment for the following items: acquisition-related costs andrestructuring costs to be generally expensed when incurred; in-process researchand development to be recorded at fair value as an indefinite-lived intangibleasset at the acquisition date; changes in deferred tax asset valuationallowances and income tax uncertainties after the acquisition to be generallyrecognized in income tax expense; acquired contingent liabilities to berecorded at fair value at the acquisition date and subsequently measured ateither the higher of such amount or the amount determined ‘under existingguidance for non-acquired contingencies. SFAS 141-R also includes a substantialnumber of new disclosures requirements. The impact on the application of SFAS141-R in the consolidation financial statements will depend on the businesscombinations arising during 2009 and thereafter.

 

In December 2007, the FASB issued SFASestablishes new accounting and reporting standards for the noncontrollinginterest in a subsidiary and for the deconsolidation of a subsidiary. SFAS 160requires the recognition of a noncontrolling interest (minority interest) asequity in the consolidated financial statements and separate from the parent’sequity. The amount of net income attributable to the noncontrolling interestwill be included in consolidated net income on the face of the incomestatement. Certain changes in a parent’s ownership interest are to be accountedfor as equity transactions and when a subsidiary is deconsolidated, anynoncontrolling equity investment in the former subsidiary is to be initiallymeasured at fair value. SFAS 160 also includes expanded disclosure requirementsregarding the interests of the parent and its noncontrolling interest and iseffective for fiscal years, and interim periods within those fiscal years,beginning on or after December 15, 2008. The Company does not expect anysignificant impact to its consolidated financial position.

 

In February 2008, the FASB issued FSP 157-1,which became effective for the Company on January 1, 2008. This FSPexcludes FASB Statement No. 13, Accounting for Leases, and its relatedinterpretive accounting pronouncements from the provisions of SFAS 157, exceptfor leasing transactions arising from business combinations. The Company doesnot expect any significant impact to its consolidated financial statements.

 

In February 2008, the FASB issued FSP 157-2,which delays the company’s January 1, 2008, effective date of FAS 157 forall non financial assets and non financial liabilities, except those recognizedor disclosed at fair value in the financial statements on a recurring basis (atleast annually), until January 1, 2009. The Company does not expect anysignificant impact to its consolidated financial statements.

 

***Recently Adopted Accounting Standards***

*** ***

In July 2006, the FASB issued FIN 48, whichbecame effective for the Company on January 1, 2007 (see Item 18 FinancialStatements).

 

**Brazilian EconomicEnvironment**

** **

The Company’s results of operations and financial condition aredependent on Brazil’s general economic condition and particularly on (i) economicgrowth and inflation and their impact on people’s purchasing power, (ii) financingcosts and the availability of financing, and (iii) exchange rates betweenBrazilian and foreign currencies. The following table sets forth BrazilianGross Domestic Product (GDP) growth, inflation and the devaluation of Braziliancurrency against the U.S. dollar and interest rate changes for the periodsshown.

 

41

----

 
| ** **               | ** ** | **Brazilian Selected Economic Indicators** | ** ** |
|--------------------------|------------|-----------------------------------------------------------|------------|
| ** **               | ** ** | **2007**                                                  | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
| Real GDP Growth (%)(1)   |       | 5.42                                                      |       | 2.86 |   | 2.28 |   | 4.94 |   | 0.54 |   |
| Inflation - IGP-M (%)(2) |       | 7.75                                                      |       | 3.85 |   | 1.20 |   | 12.41 |   | 8.71 |   |
| R$/US$Exchange Rate(3)   |       | 1.7713                                                    |       | 2.1380 |   | 2.3407 |   | 2.6544 |   | 2.8892 |   |
| TJLP (%)(3)              |       | 6.3                                                       |       | 6.9 |   | 9.8 |   | 9.8 |   | 11.0 |   |

 

----

*(1) Source: Ipeadata*

*(2) Source: Economatica*

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

 

The Brazilian economy has been affected by interventions on the part ofthe government, which has made repeated changes in its monetary, credit, tariffand other policies, in order to influence the direction of the nationaleconomy. The changes in policies involving foreign exchange and tax rates couldhave a significant impact on the Company ́s business and operating results, inthe same way as inflation, currency devaluation, social instability and otherpolitical, economic and diplomatic issues, and the reaction of the Braziliangovernment to these issues.

 

*Inflationand Real Plan Effects*

* *

Inflation has traditionally had a negative effect on the Brazilianeconomy in general in past years, and on the Company ́s profitability andoperating results in particular. In an attempt to control inflation, thegovernment has at times imposed wage and price controls, and reduced itsspending. Inflation and the measures adopted by the government, combined withpublic speculation about its future decisions, have also contributed to periodsof uncertainty in the economy, as well as to increased volatility in theBrazilian securities markets. In addition, the government’s desire to controlinflation and reduce budget deficits may cause it to take actions that slowBrazilian economic growth.

 

After the implementation of the *Real*Plan, which was based on an exchange rate anchor (*reais* x U.S. dollar), inflation rates declined andstabilized at low levels. This new economic environment increased thepurchasing power of part of the population, which was accustomed to highinflation levels and did not have access to financial instruments to reducetheir monetary losses due to high inflation. Incomes rose, credit availabilityincreased and consumption of consumer goods grew. According to the IGP-MBrazilian 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% in 2000, 10.4% in 2001, 25.3%in 2002, 8.7% in 2003, 12.4% in 2004, 1.2% in 2005, 3.9% in 2006 and 7.8% in2007.

 

*ExchangeRate Effects*

* *

From March 1995 until January 1999, the Brazilian CentralBank managed a semi-fixed exchange rate policy based on the establishment of anannual exchange rate fluctuation target at the beginning of each year, settingboth a wide limit or “band”, and a much narrower band, in order to effect agradual devaluation by means of this exchange rate band system. The CentralBank bought or sold U.S. dollars in the market in order to ensure that theexchange rate remained within established limits.

 

In an attempt to stem the increasing capital outflows and concerns aboutthe commitment of certain state governments to the fiscal austerity proposal,on January 13, 1999, Brazilian monetary authorities halted theirintervention, abandoning the system of exchange rate bands, and allowed the *real*’s value to be determined by the foreign exchangemarkets, intervening only to limit wide swings in the value of the currency.

 

Since then, the exchange rate market has been operating under afloating rate regime and the Central Bank has implemented an inflation targetpolicy, using local interest rates to adjust demand.

 

Although Sadia uses *reais* as itsfunctional currency, a relevant portion of its assets, liabilities and revenuesare dollar denominated. In December 2007, 46.6% of the Company ́s grossrevenues were mainly collected in foreign currency, coming from exportproceeds, corresponding to R$4.6 billion.

 

Considering that Sadia has subsidiaries abroad, the volatility of the *real* creates foreign exchange gains andlosses, which are included in the Company’s foreign currency exchange gain(loss), net account 

 

42

----

 

in results of operations. In 2007, on a consolidatedbasis, the Company had foreign exchange gains (including gains from foreigncurrency swaps) of R$28.9 million compared to R$157.0 million in 2006.

 

### **A. Operating Results**

### ** **

The following table summarizes certain selectedfinancial data derived from the Company ́s statements of income, expressed aspercentages of net operating revenue, for the periods indicated, as shown.

 

The following table sets forth components of Sadia ́scost of goods sold, expressed as a percentage of total cost of goods sold for2007, 2006 and 2005:

 

| ** **                   | ** ** | **Composition of Cost of Goods  Sold (%)** | ** ** |
|------------------------------|------------|---------------------------------------------------------------------|------------|
| ** **                   | ** ** | **December 31,**                                               | ** ** |
| ** **                   | ** ** | **2007**                                                            | ** ** | **2006** | ** ** | **2005** | ** ** |
|                         |       |                                                                |       |   |   |   |   |
| Raw Materials                |       | 72                                                                  |       | 72 |   | 76 |   |
| Labor                        |       | 13                                                                  |       | 13 |   | 12 |   |
| Depreciation                 |       | 4                                                                   |       | 4 |   | 3 |   |
| Other                        |       | 11                                                                  |       | 11 |   | 9 |   |
| **Total cost of goods sold** | ** ** | **100**                                                             | ** ** | **100** | ** ** | **100** | ** ** |

 
| ** **                                                                    | ** ** | **Consolidated Income Statement**                                                           | ** ** |
|-------------------------------------------------------------------------------|------------|-------------------------------------------------------------------------------------------------------|------------|
| ** **                                                                    | ** ** | **Years Ended December 31, 2007, 2006, 2005, 2004 and  2003** | ** ** |
| ** **                                                                    | ** ** | **(R$ Million)**                                                                                 | ** ** |
| ** **                                                                    | ** ** | **2007**                                                                                              | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                                                                    | ** ** | ** **                                                                                            | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Gross operating revenue                                                       | ** ** | **9,955.9**                                                                                           | ** ** | **7,894.1** | ** ** | **8,327.4** | ** ** | **7,117.3** | ** ** | **5,717.5** | ** ** |
| ** **                                                                    | ** ** | ** **                                                                                            | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Value-added tax on sales                                                      |       | (1,092.1                                                                                              | )          | (939.7 | ) | (914.2 | ) | (880.0 | ) | (535.3 | ) |
| Sales deductions                                                              |       | (109.6                                                                                                | )          | (124.1 | ) | (95.3 | ) | (128.1 | ) | (100.5 | ) |
| Net operating revenue                                                         | ** ** | **8,754.2**                                                                                           | ** ** | **6,830.3** | ** ** | **7,317.8** | ** ** | **6,109.2** | ** ** | **5,081.7** | ** ** |
| Cost of goods sold                                                            |       | (6,325.5                                                                                              | )          | (5,212.6 | ) | (5,324.4 | ) | (4,292.7 | ) | (3,673.0 | ) |
| Gross profit                                                                  | ** ** | **2,428.7**                                                                                           | ** ** | **1,617.7** | ** ** | **1,993.5** | ** ** | **1,816.6** | ** ** | **1,408.7** | ** ** |
| ** **                                                                    | ** ** | ** **                                                                                            | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Operating expenses:                                                           |       |                                                                                                  |       |   |   |   |   |   |   |   |   |
| Selling                                                                       |       | (1,477.7                                                                                              | )          | (1,303.0 | ) | (1,245.9 | ) | (1,144.5 | ) | (916.7 | ) |
| General and administrative                                                    |       | (99.7                                                                                                 | )          | (96.5 | ) | (81.0 | ) | (52.5 | ) | (54.2 | ) |
| Other operating income (expenses), net                                        |       | 18.0                                                                                                  |       | 84.0 |   | 14.3 |   | 15.4 |   | (36.8 | ) |
| Total operating expenses                                                      |       | (1,559.4                                                                                              | )          | (1,315.5 | ) | (1,312.6 | ) | (1,181.5 | ) | (1,007.7 | ) |
|                                                                          |       |                                                                                                  |       |   |   |   |   |   |   |   |   |
| Operating income                                                              | ** ** | **869.3**                                                                                             | ** ** | **302.2** | ** ** | **680.9** | ** ** | **635.0** | ** ** | **401.0** | ** ** |
| ** **                                                                    | ** ** | ** **                                                                                            | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Interest expense                                                              |       | (338.3                                                                                                | )          | (310.6 | ) | (311.6 | ) | (336.8 | ) | (450.2 | ) |
| Interest income and other, net                                                |       | 412.6                                                                                                 |       | 240.0 |   | 248.0 |   | 249.8 |   | 459.8 |   |
| Foreign currency exchange gain, net                                           |       | 28.9                                                                                                  |       | 157.0 |   | 53.4 |   | 39.1 |   | 61.0 |   |
| Income before income taxes, equity income of investees and minority  interest |       | **972.6**                                                                                             | ** ** | **388.7** | ** ** | **670.7** | ** ** | **587.1** | ** ** | **471.5** | ** ** |
| ** **                                                                    | ** ** | ** **                                                                                            | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Income tax benefit (expense)                                                  | ** ** | ** **                                                                                            | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Current benefit (expense)                                                     |       | (76.6                                                                                                 | )          | (11.0 | ) | (52.0 | ) | (33.0 | ) | (39.1 | ) |
| Deferred tax benefit (expense)                                                |       | (55.0                                                                                                 | )          | (18.1 | ) | (16.4 | ) | (63.1 | ) | 40.1 |   |
| Total income tax                                                              | ** ** | **(131.6**                                                                                            | **)**      | **(29.1** | **)** | **(68.4** | **)** | **(96.1** | **)** | **1.0** | ** ** |
| Income before equity income of investees and minority interest                |       | 840.9                                                                                                 |       | 359.6 |   | 602.2 |   | 491.0 |   | 472.6 |   |
|                                                                          |       |                                                                                                  |       |   |   |   |   |   |   |   |   |
| Equity income (loss) of investees                                             |       | —                                                                                                |       | (0.2 | ) | 1.2 |   | (1.4 | ) | 0.4 |   |
| Minority interest                                                             |       | 1.0                                                                                                   |       | 1.1 |   | (0.2 | ) | (0.1 | ) | 0.3 |   |
| Income (loss) before cumulative effect of accounting change                   |       | —                                                                                                |       | 360.6 |   | 603.3 |   | 489.5 |   | 473.3 |   |
| Cumulative effect of accounting change, net of tax                            |       | —                                                                                                |       | — |   | — |   | — |   | — |   |
| **Net income**                                                                | ** ** | **841.9**                                                                                             | ** ** | **360.6** | ** ** | **603.3** | ** ** | **489.5** | ** ** | **473.3** | ** ** |

 

43

----

 

**SADIA S.A.**

CONSOLIDATED BALANCE SHEET

Yearsended December 31, 2007, 2006, 2005, 2004, and 2003

(Inthousands of *reais* - R$)

 

| ** **                                                  | ** ** | **2007**      | ** ** | **2006**      | ** ** | **2005**      | ** ** | **2004**      | ** ** | **2003**      | ** ** |
|-------------------------------------------------------------|------------|---------------|------------|---------------|------------|---------------|------------|---------------|------------|---------------|------------|
| ** **                                                  | ** ** | ** **    | ** ** | ** **    | ** ** | ** **    | ** ** | ** **    | ** ** | ** **    | ** ** |
| Cash and cash equivalents and available-for-sale securities |       | 2,363,145     |       | 2,428,014     |       | 2,574,996     |       | 1,917,192     |       | 1,957,753     |       |
| Total Current Assets                                        |       | 5,037,322     |       | 4,929,689     |       | 4,588,176     |       | 3,944,802     |       | 3,645,379     |       |
| Investments in debt and available-for-sale securities       |       | 500,516       |       | 129,127       |       | 65,057        |       | 436,782       |       | 1,158,586     |       |
| Property, plant and equipment, net                          |       | 2,897,408     |       | 2,154,980     |       | 1,523,309     |       | 1,055,240     |       | 910,010       |       |
| **Total Assets**                                            | ** ** | **9,457,887** | ** ** | **8,039,757** | ** ** | **6,707,284** | ** ** | **5,830,973** | ** ** | **6,149,453** | ** ** |
| ** **                                                  | ** ** | ** **    | ** ** | ** **    | ** ** | ** **    | ** ** | ** **    | ** ** | ** **    | ** ** |
| Total Current Liabilities                                   |       | 2,653,285     |       | 2,493,279     |       | 2,625,812     |       | 2,766,719     |       | 2,969,833     |       |
| Short-term debt and current portion of long-term debt       |       | 1,328,090     |       | 1,441,275     |       | 1,484,342     |       | 1,738,835     |       | 2,026,752     |       |
| Long-term debt                                              |       | 2,688,115     |       | 2,670,969     |       | 1,704,184     |       | 1,031,375     |       | 1,366,836     |       |
| **Total Shareholders’ Equity**                         | ** ** | **3,532,964** | ** ** | **2,592,643** | ** ** | **2,228,117** | ** ** | **1,838,364** | ** ** | **1,521,585** | ** ** |

 

**Structure andProfitability of the Company’s Operations**

** **

***Period ended December 31, 2007 compared with periodended December 31, 2006***

*** ***

The following discussion presents a comparison ofresults of operations for the twelve-month periods ended December 31, 2007and 2006.

 

*GrossOperating Revenue*

* *

Sadia’s gross operating revenues in 2007 amounted to R$9,955.9 million,the highest in Sadia’s history, 26.1% higher than gross operating revenues for2006. Sales volumes reached 2.1million tons, a 13.4% increase when compared to 2006.

 

The performance of the industry in 2007 was marked by the increase ofpoultry consumption worldwide, by the Russian embargo on Brazilian porkimports, by the depreciation of 11.0% of the Brazilian *real*in relation to the U.S. dollar, and by a strong domestic demand,

 

44

----

 

These factors resulted in an increase in export revenues of 35.9% from2006 levels and an increase of 18.7% in domestic revenues in 2007, incomparison to the previous year.

 

*DomesticMarket*

* *

In the domestic market, sales volume reached 998.4 thousand tons, a7.5% increase over the prior year. Continuing the trend seen in 2006, processedproducts led domestic market sales, in line with our strategy of focusing onmore value added products.

 

Gross operating revenues were R$5.3 billion in 2007, which representeda 18.7% increase over 2006.

 

The significant increase in revenues and volumes resulted mainly from astrategy based on the continuation of diversification of the sales channels,the release of new products better suited to the consumer’s purchasing powerand improvement in leveraging the consumer attraction of  Sadia’s brands.

 

*ExportMarket*

* *

Sales to the export market increased from 2006 to 2007 in terms ofvolumes and revenues. Shipments totaled 1,148.3 thousand tons, representing anincrease of 19.1%. Gross export revenues of R$4.6 billion in 2007 representedan increase of 35.9% from 2006 levels.

 

In the Middle East, we maintained our traditional presence in the mainareas of the region, with market leadership and brand recognition. MiddleEastern countries primarily consume whole birds of low weight (up to 1.2 kg)and processed products. Exports to Middle Eastern countries accounted for 21.3%of revenues in the export market. Europe, which was responsible for 27.1% ofexports revenues, is a large purchaser of poultry cuts and processed products.With respect to Eurasia, which comprises the Caucasus region and Russia, Sadiaexports were mainly pork and poultry cuts and processed products, this regionrepresented 20.4% of all exports. The main exports to Asia, which accounted for14.9% of all revenues from exports, are special poultry cuts, pork carcassesand cuts. In the Americas, sales are concentrated mainly on processed products,poultry parts and whole birds. The Americas accounted for 13.9% of exportrevenues.

 

*ProcessedProducts*

* *

Sales of processed products were the main driver in domestic revenuegrowth, representing 78.0% of revenues in the domestic market. This resultreflects our efforts to adapt our product portfolio, aiming to capture thedemand for differentiated products and leadership across various products inour portfolio.  This strategy allowed anincrease of 12.4% in volumes and 18.1% in gross operating revenue. The averageprice of this segment increased 5.0% when compared to the average price in2006, due to an effort to pass through prices.

 

The volume of processed products in the export market totaled 111.0thousand tons, representing a n increase of 45.1% compared to 2006, while theincrease in revenue from this segment was of 32.1% (to R$477.5 million),reflecting a 9.0% decrease in average price in *reais*of this segment compared to 2006. Revenue did not increase as sharply inproportion to the increase in volume due to the devaluation of the US dollar tothe Real which was of 11.0% in relation to 2006.

 

*Poultry*

* *

With the redirection of the poultry production to the internationalmarket, the volumes sold in Brazil decreased 15.1% to 132.0 thousand tons in2007. This segment represented 10.5% of total domestic revenues, a slightdecline from the prior year. Lower supplies directed towards the domesticmarket drove the average price in this segment up 33.8% and resulted inrevenues of R$559.4 million, an increase of 13.6% over the prior year.

 

Poultry is our main export segment, accounting for 70.8% of totalexport revenues. Volumes of poultry exports increased 15.5% over the prioryear, with 880.8 thousand tons shipped. Revenues also increased 38.3% from theprior year, to R$3.3 billion. Stronger demand for poultry meat in the exportmarket resulted in a raise of 19.7% in the average price in*reais*of the segment.

 

45

----

* *

*Pork*

* *

The pork segment also recorded a growth in volumes sold in the domesticmarket due to the redirection of exports. Sales of pork in the domestic marketrose 6.7% in 2007, to 43.8 thousand tons. The growth in this segment’s revenueswas of 23.2%, as the average prise increased 28.1%. The share of pork in thetotal volume sold in 2007 remained at 4.4%, as in 2006. The contribution ofthis segment to total domestic revenues remained stable, at 3.6%.

 

Russia, Sadia’smajor pork export destination, in 2007 still had not resumed purchasing fromall the states in which Sadia has pork operating units. The embargo initiallywas enforced against all Brazilian states in 2005, ultimately being lifted inrespect of the state of Rio Grande do Sul, São Paulo, Mato Grosso and MinasGerais. In 2007, the segment recorded an increase in sales of 33.8%, from 81.4thousand tons in 2006 to 108.9 thousand tons. The average price of pork shippedhad a slight decline in the period of 2.5% (13.8% when measured in U.S.dollars). This resulted in an increase of 30.5% in this segment’s exportsrevenue, to R$484.1 million.

 

*Beef*

* *

The beef segment, in which Sadia resumed production in the end of 2005,grew notably in 2007, in comparison to 2006.

 

The volumes sold in the domestic market of 9.6 thousand tons, led tothe highest growth in gross operating revenues to R$56.0 million.

 

In the export market, the beef segment grew to R$272.5 million in grossrevenues, and in volumes, to 47.6 thousand tons.

 

*SalesDeductions and Tax on Sales*

* *

Value-added tax onsales consists of  ICMS, the SocialContribution on Sales (Cofins) and the contribution to the Social IntegrationProgram (PIS), amounted to R$1,092.1 million, a 16.2% increase over 2006. In2007, total sales deductions decreased 11.7% when compared to 2006, to R$109.6million. The ratio of sales deductions and value-added tax on sales as apercentage of gross sales was 12.1% in 2007 and 13.4% in 2006.

 

*Cost ofGoods Sold*

* *

Cost of goods soldincreased 21.4% compared with 2006 and the cost per ton sold increased 7.0%when compared to 2006. This is mainly due to the increase in the prices of cornand soy in the Brazilian market, the main components of Sadia’s cost structure.

 

*SellingExpenses*

 

The ratio of selling expenses over net operating revenue in 2007reached 16.9% as compared to 19.0% for 2006. This was mainly due to a increasein net operating revenue which diluted the selling expenses.

 

*Administrativeand General Expenses*

* *

The administrative expenses over net operating revenues reached 1.1% in2007, as compared to 1.4% in 2006, with an absolute increase of R$3.2 million.

 

*OtherOperating Income (Expenses), Net*

* *

Other operational net results accounted for a R$18.0 million gain in2007 as compared to a R$84.0 million gain in 2006.

 

In 2007, the Companyobtained recognition of the final, favorable, unappealable decision on twoprocesses filed against the State, questioning the charge of Funrural on itspoultry production, between 

 

46

----

 

January 1983 and November 1988.The Company recognized the tax credit for the amount of R$26,545, which, net ofthe legal council fees, represented by gain of R$22,032.

 

*InterestExpense*

* *

Interest expensein 2007 amounted to R$338.3 million, 8.9% above the R$310.6 million accountedfor in 2006. The main reason for this increase was the higher amount of debt inBNDES.

 

*InterestIncome and Other, Net*

* *

Interest income in2007 amounted to R$412.6 million, 71.9% above the R$240.0 million accounted forin 2006. The main reason for this increase was the gain from the sale of  shares of the IPO of the Bovespa and BM&Fwhich represented a gain of R$ 165.7 million.

 

*ForeignCurrency Exchange Gain (Loss), Net*

* *

Foreign exchangecurrency gain of R$ 28.9 million reported in 2007 was primarily attributable togains from hedges of sales of exports, resulting from the 11.0% averageappreciation of Brazilian currency against the U.S. dollar for 2007 against2006.

 

*IncomeTax*

* *

We reported an income tax and social contribution expense of R$131.6million in 2007, against R$29.1 million in 2006. This increase is mainlyresulted of higher taxable income in 2007 when compared to 2006.

 

*NetIncome*

* *

Sadia’s net income reached R$842.0 million in 2007 showing an increaseof 133.5% when compared to the 2006 result as a consequence of principallyhigher volumes of poultry exports as a consequence of world demand and a focuson selling higher value added products both in the domestic market as well asin the eport market.

 

***Period ended December 31, 2006 compared with periodended December 31, 2005***

*** ***

The following discussion presents a comparison ofresults of operations for the twelve-month periods ended December 31, 2006and 2005.

 

*GrossOperating Revenue*

* *

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

 

The performance of the industry in 2006 was marked by the reduction ofpoultry consumption worldwide due to the uncertainties caused by thepossibility of a major worldwide outbreak of the avian influenza, by theRussian embargo on Brazilian pork imports and by the appreciation of 10.1% ofthe Brazilian *real* in relation to the U.S.dollar.

 

These factors resulted in a drop in export revenues of 16.2% from 2005levels and a shift to domestic sales and distribution, which drove an increaseof 5.4% in domestic revenues over 2005.

 

*DomesticMarket*

* *

In the domestic market, sales volume reached 928.6 thousand tons, a12.8% increase over the prior year. Continuing the trend seen in 2005,processed products led domestic market sales, in line with our strategy offocusing on more value added products.

 

Gross operating revenues were R$4.5 billion in 2006, which representeda 5.4% increase over 2005.

 

47

----

 

The significant increase in revenues and volumes resulted mainly from astrategy based on the diversification of the sales channels, the release of newproducts better suited to the consumer’s purchasing power and improvement inleveraging the consumer attraction of Sadia’s brands.

 

*ExportMarket*

* *

Sales to the export market dropped from 2005 to 2006 in terms of volumesand revenues. Shipments totaled 964.0 thousand tons, representing a decrease of4.2%. Gross export revenues of R$3.4 billion in 2006 represented a decrease of16.2% from 2006 levels.

 

In the Middle East, we maintained our traditional presence in the mainareas of the region, with market leadership and brand recognition. MiddleEastern countries primarily consume whole birds of low weight (up to 1.2 kg)and processed products. Exports to Middle Eastern countries accounted for 23.0%of revenues in the export market. Europe, which received 26.0% of exports, is alarge purchaser of poultry cuts and processed products. With respect toEurasia, which comprises the Caucasus region and Russia, Sadia exports weremainly pork and poultry cuts. This region represented 21.0% of all exports. Themain exports to Asia, which accounted for 15.6% of all revenues from exports,are special poultry cuts, pork carcasses and cuts. In the Americas, sales areconcentrated mainly on processed products, poultry parts and whole birds. TheAmericas accounted for 15.5% of export revenues.

 

*ProcessedProducts*

* *

Sales of processed products were the main driver in domestic revenuegrowth, representing 78.4% of revenues in the domestic market. This resultreflects our efforts to adapt our product portfolio, aiming to capture thedemand for differentiated products and leadership across various products inour portfolio.  This strategy allowed anincrease of 11.7% in volumes and 6.8% in gross operating revenue. The averageprice of this segment dropped 4.3% when compared to the average price in 2005,because of increased bulk sales.

 

The volume of processed products in the export market totaled 76.5thousand tons, representing a drop of 16.5% compared to 2005, while the declinein revenue from this segment was of 12.3% (to R$361.6 million), reflecting anincrease in average price in *reais* of thissegment, which grew 5.0% (15.6% in U.S. dollars) compared to 2005. Revenue didnot decline as sharply in proportion to the decline in volume due to theincrease in sales of higher value-added products such as baked, grilled andbreaded poultry products and the reduction in sales of lower margin products.

 

*Poultry*

* *

With the redirection of a portion of poultry exports to the domesticmarket, the volumes sold in Brazil increased 9.4% to 155.5 thousand tons in2006. This segment represented 11.0% of total domestic revenues, a slightdecline from the prior year. Increased supply in the domestic market as aresult of allocation of customary export production to that market drove theaverage price in this segment down 11.9% and resulted in revenues of R$492.3million, a decline of 3.9% over the prior year.

 

Poultry is our principal export segment, accounting for 69.5% of totalexport revenues. Volumes of poultry exports declined 5.7% over the prior year,with 762.5 thousand tons shipped. Revenues also declined 19.2% from the prioryear, to R$2.4 billion. Weaker demand for poultry meat in the export marketresulted in a decline of 10.1% in the average price in*reais*of the segment, which represents a stable price in U.S. dollar terms.

 

*Pork*

* *

The pork segment also recorded a growth in volumes sold in the domesticmarket due to the redirection of exports. Sales of pork in the domestic marketrose 19.5% in 2006, to 41.0 thousand tons. Despite the fall of 12.7% in theaverage price, the growth in this segment’s revenues was of 4.2%. The share ofpork in the total volume sold grew from 4.2% in 2005 to 4.4% in 2006. Thecontribution of this segment to total domestic revenues remained stable, at3.5%.

 

Russia, Sadia’s major pork export destination, after over a year stillhas not resumed purchasing products from all the states in which Sadia has porkoperating units. The embargo initially was enforced 

 

48

----

 

against all Brazilian states, ultimately being liftedin respect of the state of Rio Grande do Sul. The segment recorded a decline in sales of 23.1% in the year, from 105.8tons in 2005 to 81.4 thousand tons in 2006. With lower demand from Brazil’smain buyer of pork as a result of Russia’s embargo, the average price of porkshipped had a higher decline in the period, of 18.5% (7.6% when measured inU.S. dollars). This resulted in a drop of 37.4% in this segment’s revenue, toR$371.1 million.

 

*Beef*

* *

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

 

The volumes sold in the domestic market of 9.0 thousand tons, led tothe highest growth in gross operating revenues to R$40.6 million.

 

In the export market, the beef segment grew to R$254.7 million in grossrevenues, and in volumes, to 43.6 thousand tons.

 

*SalesDeductions and Tax on Sales*

* *

Value-added tax onsales consists 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 ofGoods 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.

 

*SellingExpenses*

 

The ratio of selling expenses over net operating revenue grew in 2006,reaching 19.1% as compared to 17.0% for 2005. This was mainly due to a drop innet operating revenue and growth in selling expenses. There was an increase ofR$ 57.1million, which represents growth of 4.6% over the selling expenses of2005, mainly attributable to increased advertising costs and freight charges inthe domestic market.

 

*Administrativeand General Expenses*

* *

The administrative expenses over net operating revenues reached 1.4% in2006, as compared to 1.1% in 2005, with an absolute increase of R$15.5 million.

 

*OtherOperating Income (Expenses), Net*

* *

Other operational net results accounted for a R$84.0 million gain in2006 as compared to a R$14.3 million gain in 2005. This increase was largelydue to the October 26, 2006, final, unappealable decision of the appealscourt in the COFINS proceedings ruling Law 9,718/98 unconstitutional. Thisruling changed the basis for the calculation of PIS and COFINS by includingoperating and financial income.  Thismatter was ruled unconstitutional by the lower courts on November 9, 2005.Sadia has been collecting the tax in accordance with the contested legislationand, as a result of the favorable ruling, recognized the tax credit in theamount of R$80.2 million, which, net of attorney’s fees, represented a gain ofR$75.7 million.

 

49

----

* *

*InterestExpense*

* *

Interest expensein 2006 amounted to R$310.6 million, 0.3% below the R$311.6 million accountedfor in 2005. The ratio interest expense to total debt fell from 9.3% in 2005 to7.6% in 2006.

 

*InterestIncome and Other, Net*

* *

Interest income in2006 amounted to R$240.0 million, 3.2% below the R$248.0 million accounted forin 2005.

 

*ForeignCurrency Exchange Gain (Loss), Net*

* *

Foreign exchangecurrency gain of R$ 157.0 million reported in 2006 was primarily attributableto gains from hedges of sales of exports, resulting from the 10.1% averageappreciation of Brazilian currency against the U.S. dollar for 2006 against2005. The foreign exchange currency gain of 2005 was R$ 53.4 million.

 

*IncomeTax*

* *

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

 

*NetIncome*

* *

Sadia’s net income reached R$360.6 million in 2006 showing a reductionof 40.2% when compared to the 2005 result as a consequence of adverseconditions in 2006, principally due to lower volumes of poultry exports as aconsequence of concerns surrounding the possibility of a major worldwideoutbreak of avian influenza and lower volumes of pork exports to Russia as aresult of the embargo.

 

### **B. Liquidity andCapital Resources**

### ** **

**Liquidity and Sources of Funding**

** **

The Company’s main cash requirements include: (i) debt repayment, (ii) investmentsin property, plant and equipment, raising efficiency levels and optimization ofprocesses; and (iii) payment of dividends and interest on equity toshareholders. The Company’s primary sources of liquidity have traditionallyconsisted of cash generated from operations and short and long-term debt. Sadiabelieves that these sources of funds, together with its cash and cashequivalents will continue to be adequate to meet the Company’s currentlyanticipated capital requirements.

 

Sadia issued US$250,000,000 in Eurobonds in 2007, with 6.875% couponand due in 2017 (10-year maturity). Sadia used these proceeds principally torepay short-term, higher coupon debt and to finance capital investmentsbudgeted for 2007.

 

The net cash generated by operating activities totaled R$1,074.5million, R$74.1million and R$852.3 million for the years ended December 31, 2007, 2006,and 2005 respectively. Net cash used in investing activities amounted toR$826.7 million, R$844.3 million and R$1,236.2 million for the years ended December 31,2007, 2006, and 2005 respectively. Net cash provided by financing activitieswas R$126.7 million in 2007, R$813.2 million in 2006 and R$303.0 million in2005. Cash and cash equivalents at the end of the year was R$1,100.9 millionfor 2007, R$726.3 million for 2006 and R$683.3 million for 2005.

 

50

----

 
| ** **                                          | ** ** | **Consolidated Cash Flow** | ** ** |
|-----------------------------------------------------|------------|--------------------------------------|------------|
| ** **                                          | ** ** | **(R$ Million)**                | ** ** |
| ** **                                          | ** ** | **2007**                             | ** ** | **2006** | ** ** | **2005** | ** ** |
| Net cash provided by operating activities           |       | 1,074.6                              |       | 74.1 |   | 852.3 |   |
| Net cash provided by (used in) investing activities |       | (826.7                               | )          | (844.3 | ) | (1,236.2 | ) |
| Net cash provided by (used in) financing activities |       | 126.8                                |       | 813.2 |   | 303.0 |   |
| Cash and cash equivalents at end of year            | ** ** | **1,100.9**                          | ** ** | **726.3** | ** ** | **683.3** | ** ** |

 

The changes that occurred in the net cash in 2007 in relation to 2006were due to the following:

 

***Changes in 2007 relative to 2006****:*

* *

*Net Cash Provided by Operating Activities*

* *

The net cash generated by operating activities totaled R$1,074.5million and R$74.1 million for the years ended December 31, 2007 and December 31,2006, respectively.

 

This variance was due primarily to the increase in net income resultingfrom strong world demand in poultry and high demand for processed products bothdomestically and abroad.

 

Changes in Foreign currency exchange gain, net were due to the Company’shedge results that are aimed to compensate for losses in Sadia’s exportrevenues and were influenced by the 11.0% average devaluation of the dollaragainst the real for 2007 against 2006.

 

Decreases in accounts and notes receivable in the amount of R$97.4million for the year ended December 31, 2007 in relation to the previousyear. This variation is because of the Company ́s strategy to increase itsreceivable purchase agreement to a limit of USD200MM.

 

Increases in inventories in the amount of R$75.1 million for the yearended December 31, 2007 in relation to the previous year due to anincrease of the prices of grain increased the price of inventories.

 

*Net Cash Provided or Used in Investing Activities*

 

Changes in available for sale debt securities of R$60.6 million wherecompensated by the acquisition of Big Foods in the value of R$51.2 million.

 

*Net Cash Provided or Used in Financing Activities*

* *

Loans received and loans repaid presented a total net decrease ofR$721.0 million in 2007.

 

Changes in Short and Long-term debt repayments were due to a highercash generation in 2007 in relation to 2006.

 

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

 

***Changes in 2006 relative to 2005****:*

* *

*Net Cash Provided by Operating Activities*

* *

The net cash generated by operating activities totaled R$74.1 millionand R$852.3 million for the years ended December 31, 2006 and December 31,2005, respectively.

 

This variance was due primarily to the drop in net income resultingfrom weak demand due to outbreak in Avian Flu in Europe and and lower sales toRussia of pork due to the Russian embargo for this commodity.

 

Changes in Foreign currency exchange gain, net were due to the Company’shedge results that are aimed to compensate for losses in Sadia’s exportrevenues and were influenced by the 10.1% average devaluation of the dollaragainst the real for 2006 against 2005.

 

51

----

 

Increases in accounts and notes receivable in the amount of R$202.9million for the year ended December 31, 2006 in relation to the previousyear. This variation is because of the Company ́s strategy to increase saleswith the extension of payment dates towards the external market due to the lowdemand for poultry in Europe due to the outbreak of Avian Flu.

 

Increases in inventories in the amount of R$83.1 million for the yearended December 31, 2006 in relation to the previous year due to a lowerdemand in poultry in Europe and a lower demand in Russia for pork.

 

*Net Cash Provided or Used in Investing Activities*

 

Changes in Purchase of property, plant and equipment were due to thegreater capital investitures the Company incurred in 2006. In 2005 R$673.1 millionwere invested, while in 2006 Sadia invested R$969.6 million.

 

*Net Cash Provided or Used in Financing Activities*

* *

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

 

Changes in Long-term debt issuances were due to greater financingincurred as the Company increased its investments in 2006.

 

**Indebtedness and Financial Strategy**

** **

Sadia borrows funds principally to finance exports and for investmentsin fixed assets, for the modernization and technological update of the plants,for working capital, and, depending on market conditions, for financialinvestments.

 

At the end of 2007, the Company’s total interest-bearing debt stood atR$4,016.1 million, representing a 2.3% decrease as compared to the total debtof R$4,112.2 million on December 31, 2006. In terms of the total debtmaturity distribution, in 2007, 72.5% was accounted as long-term debt ascompared to 70.2% in 2006.

 

At the end of 2007, Sadia’s total financial assets amounted toR$2,863.6 million, a 12.0% increase as compared to R$2,557.1 million on December 31,2006. Of the total investment maturity distribution, in 2007, 82.5% wasaccounted as short-term, as compared to 95.0% in 2006.

 

The Company’s debt profile at December 31, 2007and 2006 was as follows:

 

| **R$ Million**    | ** ** | **2007**   | ** ** | **2006**   | ** ** |
|------------------------|------------|------------|------------|------------|------------|
| ** **             | ** ** | ** ** | ** ** | ** ** | ** ** |
| Short-term debt        |       | 1,102.5    |       | 1,226.6    |       |
| Long-term debt         |       | 2,913.6    |       | 2,885.7    |       |
| Total Debt             |       | 4,016.1    |       | 4,112.2    |       |
|                   |       |       |       |       |       |
| Short-term investments |       | 2,363.1    |       | 2,428.0    |       |
| Long-term investments  |       | 500.5      |       | 129.1      |       |
| Total Investments      |       | 2,863.6    |       | 2,557.1    |       |

 

On May 12,2003, the Company entered into an agreement to sell, from time to time, up toR$150.0 million of its domestic receivables to a special purpose entity,organized as an investment fund. The receivables sold are subject to a discountrate that should not be lower than 95.0% of the average rate of Brazilianinterbank certificate deposits (11.12% p.a. at December 31, 2007). ThroughDecember 31, 2007, the Company received cash proceeds of R$3.4 billion(R$2.8 billion in 2006) from the sales of domestic receivables under thisagreement and incurred interest expenses of R$28.0 million for the year ended December 31,2007 (R$30.0 million in 2006). Based on the structure of this transaction, the 

 

52

----

 

agreement has beenaccounted for as a financing by the Company. As of December 31, 2007, theaccounts receivable for this debt, pledged as collateral was R$348 million(R$242 million in 2006).

 

**Short-Term Debt**

** **

Following the normal course of operations, the amounts maturing in theshort run can be settled or re-negotiated for the next period. The Company usestrade finance for its working capital needs because it is available at a lowercost, since lenders perceive that the exchange risk is mitigated by the link toU.S. dollar exports.

 

Working capital from commercial banks primarily relates to exportfinancing and pre-export advances, of which R$449.9 million in 2007 (R$477.2million in 2006) were dollar denominated with a coupon at Libor (4.6%p.a. at December 31,2007) plus a spread at the rate of 0.15% p.a. and fixed rate coupons of  7.5% to 12.0% p.a. in 2007 (interest ratespread of 0.1% p.a. and fixed rate of 6.5% p.a. in 2006).

 

| **R$ thousand**                                    | ** ** | **2007**  | ** ** | **2006**  | ** ** |
|---------------------------------------------------------|------------|-----------|------------|-----------|------------|
|                                                    |       |      |       |      |       |
| **Working capital from commercial banks**               |       | 696,116   |       | 708,868   |       |
| **Trade accounts receivable domestic credit  facility** |       | 347,763   |       | 242,446   |       |
| **Bank borrowings, secured by accounts receivable**     |       | 58,688    |       | 275,253   |       |
|                                                    |       | 1,102,567 |       | 1,226,567 |       |

 

At December 31, 2007 and 2006, the weightedaverage interest rates on short-term debt was 6.30% p.a. and 5.36%  p.a., respectively.

 

**Long-Term Debt**

 
| **R$ thousand**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      | ** ** | **2007**  | ** ** | **2006**  | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------|------------|-----------|------------|
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |       |      |       |      |       |
| **Foreign debt (denominated in U.S. dollars):**                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |       |      |       |      |       |
| Export financing, composed of prepayment, payable in amount of  R$178,367 in installments up to 2012, subject to LIBOR variation for 6 month  deposits (4.60% in December 2007 plus annual interest of 0.50% p.a, and  a line focused on the incentive for foreign trade in amount of R$1,096,112,  subject to LIBOR variation for 6 month plus interest of 1.40% p.a.,  guaranteed by promissory notes or sureties.                                                                                                 |       | 1,274,479 |       | 1,904,241 |       |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |       |      |       |      |       |
| Funds raised on the international capitals market through the  issuance of bonds to be paid in 2017 with interest of 6.88% per annum,  guaranteed by endorsement.                                                                                                                                                                                                                                                                                                                                                         |       | 445,869   |       | —    |       |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |       |      |       |      |       |
| BNDES (National Bank for Economic and Social Development), payable  from 2008 to 2015, composed as follows: FINEM in the amount of R$6,501  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$144,579 subject to the weighted average of the exchange variation  of currencies traded by BNDES - UMBNDES and fixed annual interest of 3.50%  p.a. guaranteed by mortgage bonds and real estate mortgages |       | 151,080   |       | 145,458   |       |

 

53

----

 
| 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                                                                                                                                                                                                     |   | 6,312     |   | 13,734    |   |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-----------|--------|-----------|--------|
|                                                                                                                                                                                                                                                                                                                                                                                                                                         |   | 1,877,740 |   | 2,063,433 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                         |   | 2007      |   | 2006      |   |
| **Local debt (denominated in reais):**                                                                                                                                                                                                                                                                                                                                                                                                       |   |      |   |      |   |
| BNDES (National Bank for Economic and Social Development), credit  lines for investments and exports, payable from 2008 to 2015, composed as  follows: FINAME in the amount of R$865,550 subject to the Long-Term Interest  Rate -TJLP (6.25% p.a. in December 2007) and interest of 3.55% p.a. and  FINEM in the amount of R$8,320 subject to TJLP and interest of 3.50% p.a.,  guaranteed by mortgage bonds and real estate mortgages |   | 873,870   |   | 651,537   |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                         |   |      |   |      |   |
| PESA - Special Aid Program for Agribusiness payable in installments  from 2008 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$35,568 and sureties.                                                                                                                                                    |   | 144,935   |   | 136,440   |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                         |   |      |   |      |   |
| Other subject to interest rate from 1% to 14% p.a.                                                                                                                                                                                                                                                                                                                                                                                           |   | 17,093    |   | 34,267    |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                         |   |      |   |      |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                         |   | 2,913,638 |   | 2,885,677 |   |
| Less current portion of long- term debt                                                                                                                                                                                                                                                                                                                                                                                                      |   | (225,523  | )      | (214,708  | )      |
| Long- term portion                                                                                                                                                                                                                                                                                                                                                                                                                           |   | 2,688,115 |   | 2,670,969 |   |

 

At December 31, 2007,long-term debt maturities were as follows:

 

| 2009       |   | 262,907   |   |
|------------|--------|-----------|--------|
| 2010       |   | 550,373   |   |
| 2011       |   | 619,066   |   |
| 2012       |   | 447,759   |   |
| Thereafter |   | 808,010   |   |
|       |   | 2,688,115 |   |

 

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

### ** **

Sadia invested R$11.1 million, R$12.4 million and R$10.9million for the years ended December 31, 2007, 2006 and 2005, respectively, in research anddevelopment activities. During 2007, we launched in the Brazilianmarket  25 new products mainly in the lines of ready to eatdishes,  hot-pockets, microwave pizzas, margarines, breaded chicken,hams and sweet desserts, as well as improvements to our existing products andprocess. Similar concept products have also been developted or adaptedfor the export market.

 

In harmony with sustainability program we accomplished a packagingproject to reduce consumption of paper board in about 20% by the automation offorming corrugated boxes.

 

Sadia owns three patents in Brazil with extention to ten overseascountries and also ten granted industrial drawing with extention to oneoverseas country.

 

Stock breeding R&D brought benefits to the area ofanimal production achieving improvements in the quality of meat, theproduction process, and reducing feed conversion rates. Between 1975 and 

 

54

----

 

2007,the duration of the chicken production cycle was reduced from 59.3 days to 34.0days for each 1.7kg bird. During the same period, chicken weight increased from1.7kg to 2.0kg for slaughtering. Similarly, the feed conversion rate decreased from 2.4kg to 1.7kg per kgof chicken.

 

Between 1975 and 2007, the duration of the porkproduction cycle was reduced from 179 days to 144 days for each 100kg animal.During the same period, slaughtered swine weight increased from 94kg to126.8kg. In a similar way, the feed conversion rate decreased from 3.6kg to2.5kg of feed per kg of pork. During the same period, the percentage of porkper carcass increased from 46.0% to  60.0%.

 

### **D. Trend Information**

### ** **

This section discusses the main concerns andtrends that drove the Company’s strategic planning in 2007 and those expectedfor 2008.

 

**Avian Flu**

** **

Even though there has never been a case of H5N1 or anyother highly pathogenic cases of poultry diseases of AI in Brazil, Sadia isaware of the risk, and is closely monitoring its developments. The Company isworking on this issue with the utmost priority, and adopting several preventivemeasures. Sadia’s poultry plants are spread throughout the country with 9industrial units across 5 different states. In addition to that, Brazil’s vastterritorial extension reduces substantially the risk of countrywidecontamination. In order to avoid AI reaching its plants, Sadia has implementeda strict control on the access to the animal producing farms. Visits to farmsand poultry establishments are strictly prohibited. In the event of visits fromcertifying companies representatives and genetic material suppliers, accessmust be limited to the Company’s office after a 7-day quarantine in Brazil,without any kind of contact with other birds. As there is a serious threat ofintroduction of avian influenza through the exposure of the Company’scommercial flock to wild birds, especially waterfowl, all of Sadia’s integratedoutgrowers have protected their farms water springs and most of them have puttighter mesh screens in order to block the entry of smaller wild birds in theirfarms. The Company is also equipping its plants to cook, grill and bread thepoultry meat, as according to FAO, the virus is destroyed in temperatures above70°C, allowing these products to be exported regardless of any sanitary relatedembargos. Sadia is also constantly increasing the volumes of processed productsin its product portfolio, which creates a natural hedge for the Company.

 

Moreover, the Brazilian government has established theNational Plan for the Prevention and Control of Newcastle Disease and thePrevention of Avian Influenza (Plano Nacional de Controle e Prevenção da Doencade Newcastle e de Prevenção de Influenza Aviária) which conforms with OIE(World Organization for Animal Health) standards for zoning. These measureswhich are intended to assure international markets that Brazil maintainssanitary barriers between states will allow the country to petition for certainBrazilian states to be considered as autonomous regions, avoiding, thus, ageneralized ban on exports.

 

It is important to mention that Sadia is already infull compliance with the National Plan for the Prevention of the Avian Flu andthe Prevention and Control of the Newcastle Disease.

 

Despite these measures, no assurance can be given thatSadia will not be affected by AI, directly, or through limitations on exportsimposed by importing countries.

 

**Foreign Market Protectionist Measures**

** **

Considering recent developments in the Brazilian macroeconomic environment and the livestock and processed food sector, Sadia expectsto have its operations affected most significantly by the following factors:

 

·                                          New regulations will continue to beissued by foreign importer countries to protect their local producers. Since arelevant part of our revenues comes from export operations, the raising ofprotectionist barriers can affect our operations.

 

·                                          In July 2002, the EU SanitaryCommission issued a new regulation increasing the duties for imported freshchicken. During the second  of 2002, 100%of Brazilian chicken exported to Europe was required to be tested for theforbidden antibiotic Nitrofuran, increasing export sales costs.

 

55

----

 

·              In November 2003, a panel wasestablished in the World Trade Organization (WTO) on request of Brazil andThailand against the change in classification of salted poultry made by the EU.With this change, Brazilian salted poultry was classified as frozen and, thus,had an increase of 15.4% ad valorem in its duty rate. In August 2005, thefinal WTO decision favored Brazil and Thailand in the panel. However sincethem, the EU has imposed quotas on imports of brazilian poultry.

 

·              The Russian government also introduced aquota regime for pork and poultry imports that remained in effect through 2007.

 

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$229.7 million (R$20.2 million in 2006) to banks under loansobtained by certain out growers as part of a special development program in thecentral region 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$35.4 million.

 

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

### ** **

TheCompany has long term purchase contracts with suppliers that are oriented forproduction purposes (packing and industrial units). At December 31, 2007,the balance of contractual 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                                                                                                     |       | 225,523                                                                  |       | 813,280 |   | 1, 066,825 |   | 808,010 |   | 2, 913,638 |   |
|                                                                                                                           |       |                                                                     |       |   |   |   |   |   |   |   |   |
| Capital (Finance) Lease Obligations                                                                                            |       | —                                                                   |       | — |   | — |   | — |   | — |   |
|                                                                                                                           |       |                                                                     |       |   |   |   |   |   |   |   |   |
| Operating Lease Obligations                                                                                                    |       | 181,200                                                                  |       | 313,100 |   | 263,800 |   | — |   | 758,100 |   |
|                                                                                                                           |       |                                                                     |       |   |   |   |   |   |   |   |   |
| Purchase Obligations                                                                                                           |       | 22,000                                                                   |       | 37,000 |   |   |   |   |   | 59,000 |   |
|                                                                                                                           |       |                                                                     |       |   |   |   |   |   |   |   |   |
| Other Long-Term Liabilities Reflected on  the Company’s Balance Sheet under the GAAP of the primary financial  statements |       | —                                                                   |       | — |   | — |   | — |   | — |   |
| **Total**                                                                                                                      | ** ** | **428,723**                                                              | ** ** | **1,163,380** | **** **** | ****1,**** ****330,625**** | ** ** | **808,010** | **** **** | ****3,**** ****730,738**** | **** **** |

 

Sadiadoes not have any contractual purchase obligations associated with its animalfeed requirements.

 

Thelong-term debt obligations incurred by the Company are basically intended tofinance exports, investments in fixed assets and working capital. PurchaseObligations relates to future acquisition

 

56

----

 

ofraw materials. Operating Lease Obligations are related to Sadia’snon-cancelable leasing agreements for industrial units that expire over thenext three years.

 

### **G.Safe Harbor**

### ** **

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

 

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

## ** **

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

### ** **

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

** **

TheCompany is managed by a Board of Directors and a Board of Executive Officers,formed by Brazilian citizens or a majority of Brazilian citizens domiciled inthe country, whose powers shall prevail in the decision-making.

 

Theterm of office of the members of the Board of Directors and of the ExecutiveOfficers shall be for one year and shall be unified, extending up to the entryupon office of the new administrators, reelection being permitted.

 

In2005 Sadia acquired a policy of directors and officers liability insurance(D&O), in order to protect all its executives against legal actions thatmay arise from financial loss caused to third parties.

 

Thereare no pending legal proceedings, involving either board members or executiveofficers that could 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 17, 2008  the new board members were elected. The boardof directors is composed of eleven members. Certain members of the board arerelated. Mr. Eduardo Fontana d’Ávila, Mrs. Diva Helena Furlan, and Mr. WalterFontana are cousins.

 
| **Name**                                   | ** ** | **Birth Date** | ** ** | **Position**   |
|--------------------------------------------|------------|----------------|------------|----------------|
| Walter  Fontana Filho                      |       | 7/12/1953      |       | Chairman       |
| Eduardo  Fontana d’Avila              |       | 2/28/1954      |       | Vice  Chairman |
| Cassio  Casseb Lima                        |       | 8/8/1955       |       | Member         |
| 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         |

 

57

----

 
| Norberto  Fatio         |   | 7/4/1944  |   | Member |
|-------------------------|--------|-----------|--------|--------|
| Roberto  Faldini        |   | 9/6/1948  |   | Member |
| Vicente  Falconi Campos |   | 9/30/1940 |   | Member |

 

**Walter Fontana Filho. **Mr. Fontana Filho has been the Chairman of the board of directorssince 2005. He was Chief Executive Officer of Sadia from 1994 to 2005, withprevious experience as Commercial Vice President Director and DomesticCommercial Director.  Mr. Fontanaholds undergraduate and graduate degrees in Economics from PontificiaUniversidade Católica, with a specialization in Business Marketing fromFundaçao Getúlio Vargas.

 

**Eduardo Fontana d’Avila.**** **Mr. Fontana d’Avilais the Vice-Chairman of the board of directors. He was Industrial Directoruntil 2005. He joined the Company in 1977 and had always worked in theindustrial production department. Mr. D ́Ávila holds undergraduate degreein Engineering from Mackenzie University and a graduate degree in BusinessAdministration from Fundaçao Getúlio Vargas.

 

**CássioCasseb Lima.****Mr. Lima has been amember of the board of directors since April 2008. He graduated inEngineering from Escola Politécnica da Universidade de São Paulo (1978), hestarted his career at Bank Boston. He also worked for Banco Francês &Brasileiro (Credit Lyonnais) as Account Officer, Financial Director in Braziland Commercial Director for the Northwestern Region. He served as FinancialVice President at Banco Mantrust SRL (a joint venture of Manufacturers Hannoverwith local professionals) and at Citibank (Treasurer). He was a Member of theBoards of ANDIMA – the National Association of Financial Market Institutionsand of IBCB – the Brazilian Institution of Banking Science. He also served aspresident of Credicard S.A.(1997); member of the Board of Directors ofMasterCard, Vicunha, Banco Fibra and Solpart (Brasil Telecom); Advisor toTelecom Italy in Brazil and a Consultant on industrial, corporate and financialrestructuring and strategy. In 2003 he was appointed President of Banco doBrasil S.A. He was also a member of the Boards of Brasilprev, Aliança doBrasil, Localiza S.A. and of the Strategic Board of Corporate Governance of theAmerican Chamber of Commerce – AMCHAM. At present, he is a Member of theCoca-Cola Retail Research Board and an Advisor to the Board of PrincipalFinancial Group.**

** **

**DivaHelena Furlan.**  Mrs. Furlan has been a member of theboard of directors since April 2007. She was the Marketing Director ofBacco’s Comercial e Importadora Escocia Ltda. In addition, she was the Vice-President of Associação Comercial de SãoPaulo from 2003 to 2006.  Mrs. Furlanholds an undergraduate degree in law from Pontificia Universidade Catolica SãoPaulo -PUC-SP.

 

**Everaldo Nigro dos Santos***.*  Mr. Nigro dos Santos hasbeen a member of the board of directors since 2004.  He spent his career at Alcan Latin Americawhere he was Chief Executive Officer of Alcan Mexico, Alcan Brasil and AlcanLatin America. Mr. Nigro dos Santos holds an undergraduate degree inengineering from Universidade Mackenzie and an MBA from the Centre d ́ÉtudesIndustrielles.

 

**FranciscoSilverio Morales Cespede. **Mr. Morales Cespede has been a member of the board of directorssince 2004.  He is also the ChiefFinancial Officer of São Paulo Alpargatas S.A., a member of the board of TavexAlgodonera S.A. and former Chief Financial Officer and member of the board ofdirectors of Monsanto do Brasil.  Mr. MoralesCéspede holds an undergraduate and graduate degree in Business Administrationfrom Fundação Getúlio Vargas.

 

**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 ItaúS.A. and former Chief Executive Officer of Itaúsa Empreendimentos S.A..****Mr. Comparato holds an undergraduatedegree in Civil Engineering from Escola Politecnica - Universidade de SãoPaulo.**

** **

**Luiza Helena Trajano Inácio Rodrigues****. ****Mrs. Rodrigueshas been a member of the board of directors since 2006. She is CEO of MagazineLuiza and member of the board of Grupo Algar. She holds an undergraduate degreein Business Administration and Law from Faculdade de Direito de Franca.**

** **

**NorbertoFatio. **Mr. Fatio has been a member of the board of directors since2004.  He has commercial and marketingexecutive experience at Unilever, Danone, Bunge Alimentos, Kibon, FleischmannRoyal Nabisco and Sé Supermercados.  Mr. Fatioreceived his undergraduate degree in Business Administration from FundaçãoGetúlio Vargas.

 

58

----

 

*Roberto Faldini.*Graduated in Business Administration from EASP-FGV (1972), withspecialization in Advanced Management from Fundação Dom Cabral and INSEAD andin Entrepreneurship from Babson College. He is a co-founder and associatedmember of IBGC – the Brazilian Institute of Corporate Governance, of IBEF – theBrazilian Institute of Finance Executives, of IEF – the Institute ofFamily-Owned Companies and of FBN – the Family Business Network. Heparticipates in Amcham-SP Corporate Governance and Business Committees. He wasa shareholder of the controlling group, an Executive Director and a member ofthe Board of Directors of Metal Leve S.A. and President of CVM – the BrazilianSecurities and Exchange Commission. Presently, he is the Managing Partner oftFaldini Participações, Adm. e Investimentos Ltda.. and Member of the Boards ofDirectors and Advisory Councils of: Inpar S.A.; KlicKNet S.A.; Construtora Tedesco Ltda.; Grupo Cegil;Emibra Ind. Gráficas and  Director of theFundação Cultural Ema Gordon Klabin; VentureCorp and of Endeavor Brazil.

 

*Vicente Falconi Campos.*  Mr. Falconi Campos has been a member ofthe board of directors since 2002. Founding partner of the Institute ofManagerial Development (INDG). He was a consultant to the Brazilian governmenton the Energy Crisis Committee and is a member of the Board of AmBev.  Mr. Falconi Campos holds anundergraduate degree in engineering from Universidade Federal de Minas Geraisand a PhD from Colorado 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 on April 2008:

 
| **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      |       | International  Sales 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             |
| Amaury  Magalhães Maciel Filho        |       | 05/06/1964     |       | Agribusiness  Operations 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                   |
| Gilberto  Meirelles Xandó Baptista    |       | 8/24/1965      |       | International  Sales Director                   |
| Guillermo  Henderson Larrobla              |       | 3/11/1956      |       | International  Sales Director                   |
| Hélio Rubens Mendes dos Santos Junior |       | 06/28/1963     |       | Industrial  Technology Director                 |

 

59

----

 
| 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                                                                              |
| Ralf  Piper                          |   | 09/18/1968 |   | Quality  Control 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 |

* *

*GilbertoTomazoni.*Mr. Tomazoni is the Chief ExecutiveOfficer.His previous experience within the Company includes industrial, sales (localand foreign markets) and marketing areas. Mr. Tomazoni holds anundergraduate degree in Engineering from Universidade Federal de Santa Catarinaand a graduate degree in Management Development from Fundação de Ensino doDesenvolvimento.

 

*Adriano**Lima Ferreira.*Mr. Ferreira is the Finance Director. He was previouslyFinance Manager at Sadia. He has also worked for Atento Telecomunicaciones -Telefonica in Spain, CCR - Odebrecht and Lehman Brothers in New York. He holdsan undergraduate degree in Economics from Faculdade Católica de CiênciasEconômicas da Bahia and a graduate degree in Finance from Fundação GetúlioVargas.

 

*Alexandrede Campos.* Mr. Campos is the International Sales Director. He has previous experience with foreigntrade at General Electric and Perdigão. Mr. Campos holds an undergraduatedegree in Business Administration from Faculdades Tibiriçá and a graduatedegree in Marketing from Escola Superior de Propaganda e Marketing.

 

*Alfredo Felipe da Luz Sobrinho.*Mr. da Luz Sobrinho is the Corporate Relations and Legal AffairsDirector. He previously was a member of the board of directors and was VicePresident of Marketing, Sales and Services of Transbrasil. Mr. da LuzSobrinho was former President of ABIPECS and President of the Attílio FranciscoXavier Fontana Foundation. He holds an undergraduate degree in Law from Centrode Ensino Universidade Brasília.

 

*Amaury Magalhães Maciel Filho*. Mr. Macielis the Agribusiness OperationsDirector. He graduated at Universidadedo Paraná in 1985, as Veterinary Doctor. He is specialized in RuralAdministration.  Admitted to Sadia in1985 as Veterinary Doctor, from 1990 to 1993 he held the position of Head ofthe Swine Breeder Farms and from 1993 to 1997, he was appointed Head of theAgricultural Production Department. In 1997, he assumed the position of SwineProduction Manager and, in 1999, the position of Poultry Production Manager inDois Vizinhos, becoming the Unit Leader. From 2002 to 2004, he was appointed to the position of Pork ProductionManager and he became the Leader of Toledo Unit. In 2004, he was appointedGeneral Production Manager. In 2007, he took on responsibility for aStrategic Project of the Company and, in October, he assumed the Division ofAgricultural Operations.

 

*AntonioPaulo Lazzaretti.* Mr. Lazzaretti isthe Productionand Products Technology Director. He was the former industrial director andmanager for the Company. He previously worked for Renner Hermann. Mr. Lazzarettiholds an undergraduate degree in Chemical Engineering from the UniversidadeFederal do Rio Grande do Sul, with a specialization in Business Administrationfrom Fundação Candido Mendes.

 

60

----

 

*EduardoNunes de Noronha.*Mr. Noronha is Sadia’s Human Resources andManagement Director. He previously worked for Coca Cola, AMBEV and DelphiAutomotive Systems. Mr. Noronha holds an undergraduate degree inMechanical Engineering from Universidade Federal de Minas Gerais and a graduatedegree in Quality Engineeringfrom Pontifícia Universidade Católica de Minas Gerais.

 

*ErnestSícoli Petty.* Mr. Sícoli Petty isthe PurchasingDirector. He has previous experience in the food and agribusiness sectors atPepsico, Cargill and Seara. Mr. SícoliPetty holds an undergraduate degree in Agriculture Engineering fromUniversidade de São Paulo and an Executive MBA in Business Administration fromBSP/University of Toronto.

 

*FlávioLuis Fávero.* Mr. Fávero is theRegional Production Director. He has previous experience within the Company asTotal Quality Coordinator and Production Manager.  Mr. Fáveroholds an undergraduate degree in Chemical Engineering from theUniversidade do Sul and a graduate degree in Management Development fromUniversidade de Santa Catarina.

 

*GilbertoMeirelles Xandó Baptista.* Mr. XandóBaptista is International SalesDirector. He is the former Commercial- Domestic Market Director and Marketing Director with experience in thecontrolling, sales and marketing areas. Mr. XandóBaptista holds an undergraduate degree in Business Administration fromGetúlio Vargas Foundation, with a specialization in Business Administrationfrom CEAG-FGV and Universidade de São Paulo.

 

*GuillermoHenderson Larrobla.*  Mr. Henderson Larrobla is the International Sales Director. He has previous experience with SearaAlimentos (Bunge Group).  Mr. Henderson Larrobla  holds an undergraduate degree inMechanical Engineering from Universidade Federal do Rio Grande do Sul and aMarketing Management specialization from Universidade de Blumenau.

 

*HélioRubens Mendes dos Santos Junior***.**  Mr. dos Santos is the Industrial Technology Director. He graduated at Universidade de Rio Grandein 1985,as a Food Engineer. He is also a Chemical Engineer. He attended to anMBA in Corporate Management, Unicamp, in 2005. Admitted to Sadia in1988, as Food Engineer and in 1991, he was appointed to the position of ProductionSupervisor. From 1993 to 1997, he was the Head of the Production Department inChapecó-SC. In 2005, he assumed the Management of the Duque de Caxias-RJ Unit.In 2007, he was relocated to Concórdia, where he assumed a Strategic Projectand in October he was elected Technology Director (R&D).

 

*José Augusto Lima de Sá.*  Mr. Lima de Sá isthe International Relations Director. He has experience of more than 20 years in foreigntrade. He is the former Chief Executive Officer and Chairman of Frangosul. Mr. Lima de Sá holds an undergraduatedegree in Business Administration from Fundação Getúlio Vargas with extensioncourses at Harvard and Wharton business schools.

 

*OsórioDal Bello.*Mr. Dal Bello is the Agribusiness Technology Director. He hasworked for Sadia in the agricultural department since 1980. Mr. Dal Belloholds and undergraduate degree in Agribusiness from Universidade Federal deSanta Maria - RS and a specialization in Business Administration from FundaçãoEducacional Unificada do Oeste de Santa Catarina.

 

*PauloFrancisco Alexandre Striker.* Mr Striker is theLogisticsDirector. He is the former trade marketing manager and brand management/strategic planning manager. Mr. Striker holds an undergraduate degree inBusiness Administration and Civil Engineering from Universidade Mackenzie and aspecialization in Business Administration from JUSE Institute (Japan) andFundação Dom Cabral.

 

*Ralf Piper*. Mr. Piperis the Quality Control Director. He graduated at Universidade Federal do Paranáin 1991, as a Veterinary Doctor. He also has the following titles/courses:Master in Production Engineering, Universidade Federal de Santa Catarina, 2004;specialization in Managerial Development, Unioeste, in 1993; Refresher Coursein Administration in 1997; MBA in  2000and Sadia MBA in 2004.  He joined Sadiain 1991, in Toledo, as a Veterinary Doctor. In 1995, he was relocated toFrederico Westphalen, to the position of Departmental Head of the Pork PackingPlant, position occupied from 1996 to 1998. In 1999, he assumed the position ofProduction Manager of the Poultry Production in Toledo; from 2004 to 2007, heoccupied the positions of Functional Integration Manager, Planning Manager andManager of Worldwide Poultry Processed Products. In October 2007, heassumed the current position.

 

*RicardoFernando Thomas Fernandez.* Mr. ThomasFernandez is the Grain Purchase 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.

 

61

----

 

*RobertoBanfi.* Mr. Banfi is the InternationalSales Director. He has previous experience includes working for Bonfiglioli -Cica, Cicatrade and Swift Armour as Director and served as Marketing Managerand Coordinator for Mercosur in the sales area of RMB-Refinações de Milho doBrasil. Mr. Banfi holds an undergraduate degree in Accounting from H.E.C.Lausanne and an MBA from Stanford Business School.

 

*RonaldoKobarg Müller.* Mr. Müller is the Regional Production Director. He has experience within the Company asTotal Quality Coordinator and Production Manager.  Mr. Müller holds an undergraduate degree in Chemical Engineering fromFundação Educacional da Região de Blumenau and a graduate degree in ManagementDevelopment from Universidade Federal de Santa Catarina.

 

*SérgioCarvalho Mandin Fonseca.* Mr. Mandin Fonsecais 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

 

*ValmorSavoldi.*Mr Savoldi is the Integrated Operations andPlanningDirector. He has former experience within the Company including the areas ofagriculture, 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 Director as well as InvestorRelations Director. He previously was the Planning Director and Financial andInvestor Relations Director at Empresa Brasileira de Compressores -Embraco/Whirlpool Corporation. Mr. Teixeira holds an undergraduate degreein Economics from Fundação Armando Alvares Penteado and specialization inFinance Administration form Fundação Getúlio Vargas, PGA - Advanced ManagementProgram (INSEAD, France) and Strategic Management Program (IMD, Switzerland).

 

### **B.Compensation**

### ** **

For the year ended December 31, 2007, theaggregate compensation paid by Sadia to all members of the board of directorsand executive officers for services in all areas was approximately R$16.4million, not including related taxes or social security contributions. For theyears ended December 31, 2006 and 2005 the amount paid was approximatelyR$14.0 million and R$13.7 million, respectively.

 

TheCompany has also granted health assistance and life insurance as benefits toits executive officers.

 

Forthe year 2003, the Company developed a variable compensation program for officers and management  aiming to consolidate severalchallenging targets. This program, called GVS (Sadia Value Generation), usesvalue generation metrics considering, among other things, cost reduction,expense containment and revenue growth. Theamount paid to each participant depends on the extent to which his performanceindicators have been achieved. In the event of the termination of themandate of a director or an executive officer, they are entitled only to statutoryemployment benefits under applicable law, without any special severance.

 

TheCompany sponsors a defined benefit pension plan that offers supplementaryretirement benefits to the employees, through Attílio Francisco Xavier FontanaFoundation. The pension benefit is generally defined as the difference between (i) theretiree’s average salary during the last 12 months indexed to the date ofretirement – until the limit of 80% of the last salary, and (ii) the valueof the retirement pension paid by the Brazilian social security system. Forretired employees the initial pension payment is subsequently adjusted upwardsto recognize cost of living increases. The Company provides for the costs ofpension benefits based on a fixed percentage of remuneration, as recommendedannually by independent actuaries. The accumulated benefit obligation relatedto this pension plan were R$799,627 thousand and R$686,175 thousand at December 31,2007 and 2006, respectively. The Company expects to contribute approximatelyR$2,105 thousand to the plan during fiscal year 2007.

 

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 projectedbenefit obligation and the aggregate accumulated benefit obligation related tothose

 

62

----

 

otherretirement benefit were R$66,229 thousand and R$52,702 thousand respectively,at December 31, 2007 and R$63,509 thousand and R$57,244 thousandrespectively, at December 31, 2006.

 

*StockOption Plan*

* *

Inthe Ordinary and Extraordinary General Meeting of April 29, 2005 the stockoption plan was approved for the Company’s officers. The plan comprisesnominative preferred shares issued by the Company.

 

Theprice for exercising the options does not include any discount and will bebased on the average price of the shares in the last three trading days on theSão Paulo Stock Exchange prior to the grant date, updated by the accumulatedNational Consumer Price Index (INPC) between the grant date and the date ofexercise. There is a three year vesting period as from the option grant date.The participants will be able to fully or partially exercise their right up to2 years after the vesting period.

 

Underthe plan regulations, the preferred shares will be acquired and earmarked intreasury for this sole purpose.

 

Thecomposition of the options granted is presented as follows:

 
| ** ** | ** ** | **Date**  | ** ** | **Quantity of** | ** ** | **Price of shares** | ** ** |
|------------|------------|-----------|------------|----------------------|------------|-------------------------------|------------|
| **Cycle**  | ** ** | **Grant** | ** ** | **Expiration**       | ** ** | **Shares**                    | ** ** | **Grant date** | ** ** | **Update-INPC** | ** ** |
|       |       |      |       |                 |       |                          |       |   |   | At 12/31/2008 |   |
| 2005       |       | 06/24/05  |       | 06/24/10             |       | 2.200.000                     |       | 4.55 |   | 5.00 |   |
| 2006       |       | 09/26/06  |       | 09/26/11             |       | 3.520.000                     |       | 5.68 |   | 6.06 |   |
| 2007       |       | 09/27/07  |       | 09/27/10             |       | 5.000.000                     |       | 10.03 |   | 10.23 |   |

 

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$14,763 thousand (R$3,324 thousand in 2006) has beenclassified in stock option, non-current liability and the compensation expenseas general and administration expense. Compensation expense is charge to profitand loss on straight line basis over the vesting period of the options. Thecompensation expense amount to R$12,788 thousand in 2007,R$2,930 thousand in 2006 and R$678 thousand in 2005.

 

### **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 ofthe New York Stock Exchange, this committee oversees financial reportingprocesses and compliance with corporate law, as well as supervising externaland in-house auditors to guarantee independence. The committee is made up ofmembers of the Board of Directors, one of which is necessarily a financialexpert. All voting members 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 thedisclosure of financial experts on audit committees in periodic filingspursuant to the U.S. Securities Exchange Act of 1934.

 

Membersin 2007: Francisco Silvério Morales Céspede (coordinator), José Marcos KonderComparato and Alcides Lopes Tápias.

 

63

----

 

**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 in 2007:  FranciscoSilverio Morales Cespede (coordinator), Diva Helena Furlan, José Marcos KonderComparato and Alcides Lopes Tápias.

 

**EthicsCommittee**

** **

The Ethics Committeeis comprised of members of the Board of Directors and Company managers, and isin charge of periodically reviewing the Company’s Code of Ethics; analyzingreports on violations of the Code of Ethics forwarded to it by the Ethics andConduct Commission; examining most serious cases of violations of the Code ofEthics, and submitting it to the Board of Directors for decision; anddeliberating on questions regarding the interpretation of the Code of Ethicstext, as well as potential ethical dilemmas.

 

Members in 2007:  FranciscoSilverio Morales Cespede (coordinator), Diva Helena Furlan, José Marcos KonderComparato 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 in 2007:Eduardo Fontana d’Avila (coordinator), Vicente Falconi Campos, Luiza HelenaTrajano Inácio Rodrigues and Norberto Fatio.

 

**Financeand Investor Relations Committee**

** **

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

 

Members in 2007:Alcides Lopes Tápias (coordinator), Walter Fontana Filho, Everaldo Nigro dosSantos 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 in2007:Everaldo Nigro dos Santos (coordinator), Walter Fontana Filho, EduardoFontana 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.

 

Members in 2007:Walter Fontana Filho (coordinator), Eduardo Fontana d’Avila, Diva Helena Furlanand Norberto Fatio.

 

64

----

### ** **

### **D.Employees**

### ** **

AtDecember 31, 2007, 2006 and 2005 the Company had, respectively, 52,422,47,506 and 45,381 employees.

 

Sadiapossesses an employee Profit-Sharing Program which benefited more than  36,064 employees in 2007. The totaldistributed under the program was R$ 33.6 million or R$ 931.33 peryear/employee. The Profit-Sharing Program was established through negotiationswith the employee commission, in accordance with applicable legislation.

 

Ofthe benefits offered to employees, some of the most noteworthy includepart-time and, at some plants, full-time daycare through a network ofaccredited, private providers; family health plan; funeral assistance; dentaland medical care; loans; private pension plan; and discounts on Companyproducts.

 

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

### **** ****

On March 31, 2007 the board members andexecutive directors of the Company (excluding those that are part of theshareholders’ agreement) held, as a group, 12,472 common shares and 10,477,937preferred shares, corresponding to 0.0% and 3.4% of the amount of outstandingshares of each class, respectively.

 

Formore details on ownership and any relationship among major shareholders, see “Item7. Major Shareholders.”

 

## **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, 2008 withrespect to (i) any person known to the Company to be the beneficial ownerof more than 5% of the Company’s outstanding shares of voting common shares, (ii) anyperson known to the Company to be the beneficial owner of more than 5% of theCompany’s outstanding shares of preferred shares and (iii) the totalnumber of the Company’s voting common shares and preferred shares owned by theexecutive officers and directors of the Company as a group.

 
| **Shareholders**                                    | ** ** | **Common  Shares** | ** ** | **%**      | ** ** | **Preferred  Shares** | ** ** | **%**      | ** ** | **Total**       | ** ** | **%**      | ** ** |
|-----------------------------------------------------|------------|--------------------|------------|------------|------------|-----------------------|------------|------------|------------|-----------------|------------|------------|------------|
| Old  Participações Ltda                   |       | 26,721,658         |       | 10.40      | %          | —                |       | 0.00       | %          | 26,721,658      |       | 3.91       | %          |
| Sunflower  Participações S.A.             |       | 36,288,959         |       | 14.12      | %          | —                |       | 0.00       | %          | 36,288,959      |       | 5.31       | %          |
| Other  shareholders (*)                             |       | 134,782,937        |       | 52.44      | %          | 20,101,797            |       | 4.72       | %          | 154,884,734     |       | 22.67      | %          |
| PREVI - Caixa de Prev. dos Func. do Banco do Brasil |       | 1,199,311          |       | 0.47       | %          | 57,435,370            |       | 13.48      | %          | 58,634,681      |       | 8.58       | %          |
| Dodge &  Cox                               |       | —             |       | 0.00       | %          | 48,399,210            |       | 11.36      | %          | 48,399,210      |       | 7.09       | %          |
| Other  shareholders                                 |       | 58,007,135         |       | 22.57      | %          | 289,804,335           |       | 68.04      | %          | 347,811,470     |       | 50.92      | %          |
| Treasury  Stock                                     |       | —             |       | 0.00       | %          | 10,259,288            |       | 2.41       | %          | 10,259,288      |       | 1.50       | %          |
|                                                |       |               |       |       |       |                  |       |       |       |            |       |       |       |
| **Total**                                           | ** ** | **257,000,000**    | ** ** | **100.00** | **%**      | **426,000,000**       | ** ** | **100.00** | **%**      | **683,000,000** | ** ** | **100.00** | **%**      |

 

----

*(*) Part of the Shareholders’ Agreement*

 

65

----

 

*Old Participações Ltda.*is a company composed of several family members and is part of theshareholders’ agreement. The breakdown at March 31, 2008 is as follows:

 
| **Partners**                             | ** ** | **Participation** | ** ** | **%**      | ** ** |
|------------------------------------------|------------|-------------------|------------|------------|------------|
| Luiz  Fernando Furlan                    |       | 3,009,069         |       | 20.06      | %          |
| Leila Maria Furlan da Silva Telles       |       | 3,005,500         |       | 20.04      | %          |
| Lucila Maria  Furlan                     |       | 2,999,098         |       | 19.99      | %          |
| Osório  Henrique Furlan Júnior |       | 2,998,493         |       | 19.99      | %          |
| Diva Helena  Furlan                      |       | 2,987,840         |       | 19.92      | %          |
| **TOTAL**                                | ** ** | **15,000,000**    | ** ** | **100.00** | **%**      |

 

*Sunflower Participações*is a company composed of several family members and is part of theshareholders’ agreement. The breakdown at March 31, 2008 is as follows:

 
| **Shareholders**               | ** ** | **Common  Shares** | ** ** | **%**      | ** ** | **Preferred  Shares** | ** ** | **%**    | ** ** | **Total**      | ** ** | **%**      | ** ** |
|--------------------------------|------------|--------------------|------------|------------|------------|-----------------------|------------|----------|------------|----------------|------------|------------|------------|
| Maria  Aparecida Cunha Fontana |       | 14,084,143         |       | 38.81      | %          | —                |       | 0.00     | %          | 14,084,143     |       | 38.81      | %          |
| Attilio  Fontana Neto          |       | 5,716,562          |       | 15.75      | %          | —                |       | 0.00     | %          | 5,716,562      |       | 15.75      | %          |
| Walter  Fontana Filho          |       | 9,782,244          |       | 26.96      | %          | —                |       | 0.00     | %          | 9,782,244      |       | 26.96      | %          |
| Vania Cunha  Fontana           |       | 6,706,010          |       | 18.48      | %          | —                |       | 0.00     | %          | 6,706,010      |       | 18.48      | %          |
| **TOTAL**                      | ** ** | **36,288,959**     | ** ** | **100.00** | **%**      | **—**            | ** ** | **0.00** | **%**      | **36,288,959** | ** ** | **100.00** | **%**      |

 

Stocks in possession of Sadia’s Controllers,Board of Directors, Officers and the Fiscal Committee on March 31, 2008

 
| ** **                     | ** ** | **Common  Shares** | ** ** | **%**    | ** ** | **Preferred  Shares** | ** ** | **%**    | ** ** | **Total**       | ** ** | **%**    | ** ** |
|--------------------------------|------------|--------------------|------------|----------|------------|-----------------------|------------|----------|------------|-----------------|------------|----------|------------|
| Controllng shareholders        |       | 171,071,896        |       | 66.56    | %          | 20,101,797            |       | 4.72     | %          | 191,173,693     |       | 27.99    | %          |
| Board of directors members (*) |       | —             |       | 0.00     | %          | 10,005,300            |       | 2.35     | %          | 10,005,300      |       | 1.46     | %          |
| Officers                       |       | 12,472             |       | 0.00     | %          | 472,637               |       | 0.11     | %          | 485,109         |       | 0.07     | %          |
| Fiscal Committee               |       | —             |       | 0.00     | %          | 528                   |       | 0.00     | %          | 528             |       | 0.00     | %          |
| **Total**                      | ** ** | **171,084,368**    | ** ** | **66.6** | **%**      | **30,580,262**        | ** ** | **7.18** | **%**      | **201,664,630** | ** ** | **29.5** | **%**      |

 

----

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

 

****Significant changes in percentage of ownership held by majorshareholders****

 

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, 2006OppenheimerFunds, Inc. and its clients possessed, 10.8% of the Company’spreferred shares. This participation did not affect the Company’s control. In March 2007,OppenheimerFunds, Inc. and its clients possessed, 8.9% of the Company’spreferred shares. In August 2007, OppenheimerFunds, Inc. and itsclients possessed 5.3%. In September 2007, OppenheimerFunds, Inc. andits clients possessed less than 5% of the Company’s preferred shares.

 

In May 17, 2006 Sadia informed that inaccordance with the letter sent to the Company by Dodge & Cox thatthey possessed 5.4% in preferred shares in the form of ADRs and on November 16,2006 this participation increased to 10.2%. On March 2008, thisparticipation was 11.4% of preferred shares in the form of ADRs . Thisparticipation did not affect the Company’s control.

 

66

----

 

On December 28, 2006 Sadia informed that inaccordance with the letter sent to CVM by Old Participações Ltda, theshareholder Osório Henrique Furlan, on December 1st, 2006, transferred his14,948,969 common shares to Old Participações Ltda., which from this date onconsolidates 25,661,658 common shares, representing 10.0% of the Company’s257,000,000 common shares. In March 2008, Old Participações Ltda. had10.4% of common shares.

 

**Shareholders Agreement**

** **

Membersof the family of the founder, Mr. Attilio Fontana, established ashareholders’ agreement in May 1977, amended in May 2005, when it wasextended until May 2010. The agreement strives to regulate therelationship between the family groups regarding the purchase and sale ofshares between themselves and with third parties as well as to establishprinciples and rules for the exercise of block voting rights, investmentpolicy and remuneration of capital. The agreement is reviewed every five years.Any family member who wishes to dispose of his or her shareholding must providea right of first refusal to all parties to the shareholders’ agreement.

 

InMarch 2008, the Company’s shareholders’ agreement was composed of 70participants and controlled 66.6% of Sadia’s voting shares.

 

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

### ** **

TheCompany has operating transactions with Sadia International and Wellax, whichare both the Company’s vehicles for sales outside Brazil. Wellax is also actingas a financing entity of the Company by obtaining export-financing loans frominternational banks and investing the proceeds in debt securities.

 

### **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 and its subsidiaries have several ongoing claims of a labor, civil and tax nature, resulting from its normalbusiness activities. The respective provisions for contingencies wereconstituted based on the opinion of the Company’s legal counsel, whichconsidered that unfavorable outcomes are likely.

 

Based on management estimates, the provision forcontingencies provided for, net of the respective legal deposits, as presentedbelow, is sufficient to cover possible losses with legal proceedings.

*** ***
| **R$ Thousand** | ** ** | **2007** | ** ** | **2006** | ** ** |
|----------------------|------------|----------|------------|----------|------------|
|                 |       |     |       |     |       |
| Tax                  |       | 26,908   |       | 31,605   |       |
| Civil                |       | 15,046   |       | 8,950    |       |
| Labor                |       | 31,772   |       | 24,116   |       |
|                 |       | 73,726   |       | 64,671   |       |

 

67

----

 

***Tax litigation***

*** ***

Themain tax contingencies involve the following cases:

 

a)Withholding income tax

 

Provisionfor withholding income tax on investments of Granja Rezende amounting toR$4,075 thousand and R$985 thousand for other provisions.

 

b)State VAT (ICMS)

 

TheCompany is a defendant in several administrative cases involving ICMS, mainlyin the States of São Paulo, Rio de Janeiro and Paraná totaling a probablecontingency estimated at R$12,471 thousand.

 

c)Other tax contingencies

 

Severalcases related to payment of Social security contribution, PIS (SocialIntegration Program Tax), Import Duty and others totaling a provision of R$9,377thousand.

 

TheCompany has other contingencies of a tax nature in the amount of R$903,729thousand in December 31, 2007, which was evaluated as representing apossible loss by the legal advisors and by Company management, therefore, noprovision has been recorded. These contingencies refers mainly to questionsraised regarding ICMS credits in the amount of R$297,136 thousand, IPI Creditpremium, in the amount of R$297,345 thousand, and payment of social securitycontributions, in the amount of R$173,804 thousand.

 

***Civil litigation***

*** ***

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$59,606 thousand, that wereassessed as possible losses by the Company’s legal counsel and management andtherefore no provision was recorded.

 

***Labor claims***

*** ***

There are approximately2,205 labor claims against the Company. These claims are mainly related toovertime, and health exposure or hazard premiums, none of the amounts providedinvolve a significant amount on an individual basis. The total amount of suchlabor claims amount to R$53,491 thousand and a provision of R$31,772 thousandhas been provided in the accompanying financial statements based on historicalinformation and represents the Company’s best estimate of the ultimate lossthat will be incurred.

 

**Dividends and Dividend Policy**

** **

***Payment of Dividends***

*** ***

Inaccordance with Brazilian corporate law, the Company is required to hold anannual shareholders’ meeting by April 30 of each year, during which anannual dividend will be declared In addition, interim dividends may be declaredby the board of directors. According to Brazilian corporate law, dividends mustgenerally be paid to the holders of the relevant shares within 60 days of thedate of declaration of the same dividend, unless a resolution of shareholdersestablishes another date of payment, which in both cases, must occur before theend of the fiscal year in which the dividend was declared. The 

 

68

----

 

Company’sby-laws require that an annual general shareholders’ meeting be held withinfour months of the end of each fiscal year. At this meeting, among otherthings, an annual dividend may be declared by decision of the shareholders andat the recommendation of the executive officers, as approved by the board ofdirectors. The payment of annual dividends is based on the financial Statementsrelating to the fiscal year ending December 31. According to the Company’sby-laws, dividends will be paid to shareholders within 60 days of the date ofdeclaration of the dividend, which must be effected before the end of thefiscal 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.

 

Paymentsof 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 the same U.S.dollars to the depositary for distribution to holders of the related ADRs (See “Descriptionof American 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.

 

Shareholdersthat are not resident within Brazil must register with the Brazilian CentralBank so that the dividends resulting from sales, or other amounts, may beremitted in foreign currency outside Brazil. The preferred shares underlyingthe ADRs are maintained within Brazil by the custodian, which acts as agent forthe depositary, which appears in the Company’s register as the beneficial ownerof the shares.

 

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

*** ***

Braziliancompanies are permitted to pay limited additional amounts to holders of equitysecurities and treat such payments as an expense for Brazilian income taxpurposes. The amount of any such interest payment to holders of equitysecurities is generally limited in respect of any particular year to (i) retainedearnings for such year plus 50.0% of the pre-tax profits for such yearmultiplied by (ii) the *Taxa de Juros de LongoPrazo*interest rate (Long-Term Interest Rate -TJLP), which is theofficial rate for governmental long-term loans. The additional payment may takethe form of supplemental dividends to shareholders. A 15.0% withholding tax ispayable by the Company upon distribution of the notional interest amount. In1996, the withholding tax was payable by the Company and was accrued andcharged to income. In 1997, the withholding tax was paid by the Company onbehalf of the shareholders. Such payments are also deductible for socialcontribution purposes.

 

UnderBrazilian law, the Company is obliged to distribute to shareholders an amountsufficient to ensure that the net amount received by shareholders after paymentby the Company of Brazilian withholding taxes in respect of the distribution ofnotional interest, is at least equal to the mandatory distribution.

 

***Mandatory Dividends***

*** ***

Asestablished in its by-laws, Sadia is required to distribute to shareholders inlieu of dividends relative to each fiscal year ended December 31, anamount of no less than 28.0% of the distributable amount (the mandatorydividend) in any given fiscal year (an amount of which shall include anyinterest on shareholders’ equity paid). In addition to the mandatory dividend,the board of directors may recommend the payment of dividends to shareholdersfrom other legally available resources, according to the terms of such law. Anypayment of interim dividends or interest on shareholders’ equity will bededucted from the amount of the mandatory dividend for the same fiscal year. Inaccordance with Brazilian corporate law, if the board of directors decides,prior to the annual shareholders’ meeting, that the payment of the mandatorydividends for the preceding fiscal year is not advisable, due to the financialcondition of the Company, then there will be no requirement to pay suchmandatory dividends. Such a decision must be reviewed by an audit committee,and reported to shareholders and to the CVM. If a mandatory dividend is notpaid, any retained earnings must be allocated to a special reserve account. If 

 

69

----

 

theCompany does not incur the expected losses that led to the withholding of themandatory dividend, then the Company will be required to pay the propermandatory dividend.

 

***Dividend Policy***

*** ***

TheCompany currently plans to pay dividends or interest on shareholders’ equity onits preferred and common shares to the amount of the distributions required inany fiscal year, subject to the determination by the board of directors thatsuch distributions are inadvisable due to the financial condition of theCompany. In accordance with its policy, the Company pays dividends twice ayear, although the law does not 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.

 

**Gross Historical Dividend Payments**

 
| **Period** | ** ** | **Description**      | ** ** | **Payment Date** | ** ** | **R$ per  1,000  Preferred  Shares** | ** ** | **R$ per  1,000  Common  Shares** | ** ** | **US$ 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                  |       |
| **2002**   | ** ** | Dividends            |       | 8/16/2002             |       | 17.60                                     |       | 16.00                                  |       | 5.57                                       |       | 5.06                                    |       | 5.67                   |       |
|       |       | 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                   |       |
| **2005**   | ** ** | Interests on  Equity |       | 8/17/2005             |       | 84.90                                     |       | 77.18                                  |       | 36.14                                      |       | 32.85                                   |       | 30.53                  |       |
|       |       | 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                  |       |
| **2007**   | ** ** | Interests on  Equity |       | 8/17/2007             |       | 87.82                                     |       | 87.82                                  |       | 178.94                                     |       | 178.94                                  |       | 24.78                  |       |
|       |       | Interests on  Equity |       | 2/15/2008             |       | 144.80                                    |       | 144.80                                 |       | 254.00                                     |       | 254.00                                  |       | 82.51                  |       |
|       |       | Dividends            |       | 2/15/2008             |       | 73.39                                     |       | 73.39                                  |       | 128.73                                     |       | 128.73                                  |       | 12.54                  |       |

 

***Calculation of Distributable Amount***

*** ***

Ateach annual general shareholder’s meeting, the board of directors must recommendthe manner of allocation of the Company’s income from the preceding fiscalyear. According to Brazilian corporate law, the net income of a company afterdeduction of income tax and social contributions relative to the same fiscalyear, and net of any losses accumulated in prior fiscal years, and amountsallocated to employee and management profit-shares, will represent the netincome of the Company, following (i) the deduction of amounts allocated tothe constitution of the legal reserve, (ii) the deduction of amountsallocated to the constitution of other reserves, following the principlesestablished by the Company and in accordance with the applicable legislation(as hereinafter discussed), and (iii) the increase by the reversion ofreserves constituted in previous fiscal years. This net income will beavailable 

 

70

----

 

fordistribution to shareholders (thus constituting the adjusted net profit,designated here as the distributable amount) in any fiscal year.

 

*Legal Reserve*

 

Accordingto Brazilian corporate law, the Company is required to maintain a legal reserveto which it must allocate 5.0% of its net income in each fiscal year, until theamount of this reserve is equal to 20.0% of the paid-in share capital, or untilthe sum of this reserve and all other capital reserves reaches 30.0% of thepaid-in share capital. Net losses, if any, may be debited against the legalreserve.

 

*Discretionary Reserve*

* *

Accordingto Brazilian corporate law, the Company may decide to assign on a discretionarybasis a portion of the net income to the limit established in its by-laws (withsuch reserves 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*

* *

Accordingto Brazilian corporate law, the Company may also decide to assign a portion ofthe net income to a contingency reserve against likely losses in future fiscalyears. Any amount thus assigned in a previous year must be (i) reversed inthe fiscal year in which the loss was envisaged, if this loss does noteffectively occur, or (ii) debited, if the foreseen event actuallymaterializes. At the present time, Sadia has no contingency reserve. There areno clearly defined rules on the extension of the future period for which aloss may be foreseen for the purposes of constituting a contingency reserve.Its determination thus depends on circumstances and the nature of eachparticular event, and will be decided at the discretion of the board ofdirectors.

 

*Investment Project Reserve*

* *

Accordingto Brazilian corporate law, a portion of the net income may also be assignedfor any discretionary appropriations for plant expansions or any otherinvestment projects, the amount of which is based on the capital budgetpreviously presented by management and approved by shareholders. Following theconclusion of the corresponding investment projects, the Company may withholdthe relevant appropriation until the shareholders vote to transfer all or partof the capital reserve or retained earnings. The Company’s by-laws effective asof March 31, 2000, contains provisions for a special expansion reserve, towhich at least 15.0% and at most 60.0% of the net income (formerly 5.0% and15.0%, respectively) must be allocated each year, until the amount of thisreserve is equivalent to 70.0% of its paid-in share capital (from former30.0%).

 

*Unrealized Income Reserve*

* *

Accordingto Brazilian corporate law, if the amount of unrealized income (according tothe definition below) in any fiscal year exceeds the allocated amount (i) ofthe legal reserve, (ii) of the discretionary reserves, (iii) of thecontingency reserve and (iv) of the investment project reserve, the excessamount may be allocated to an unrealized income reserve. Unrealized income inany fiscal year will represent the sum (i) of monetary correction of thebalance sheet (until 1995) during the fiscal year, (ii) income fromsubsidiaries or associated companies for the fiscal year in question, (iii) incomefrom installment sales to be received after the end of the subsequent fiscalyear.

 

*Fiscal Incentive Investment Reserve*

* *

Accordingto the terms of Brazilian tax legislation, a portion of net income may also beassigned to a fiscal incentive investment reserve for amounts corresponding tothe Company’s income tax deductions generated by credits for certain investmentsthat are approved by the government. The reserve 

 

71

----

 

mayonly be used to acquire shares in companies that are developing specificprojects that are approved by the government.

 

Braziliancorporate law states that all discretionary allocations of net income includingdiscretionary reserves, the contingency reserve, the unrealized income reserveand the investment project reserve, will be subject to approval by shareholdersat the annual meeting, and may be transferred to the Company’s capital or usedto pay dividends in subsequent fiscal years. The fiscal incentive investmentreserve and the legal reserve are also subject to approval by shareholders atthe annual meeting and may be transferred to the Company’s capital, but may notbe used to pay dividends in subsequent fiscal years.

 

Thecalculation of the net income of the Company, and the allocations to reservesin any fiscal year, are determined on the basis of financial statementsprepared in accordance with Brazilian corporate law and Brazilian GAAP, whichdiffers from the financial statements prepared in accordance with United Statesgenerally accepted accounting principles. The financial statements presentedherein were prepared in accordance with U.S. GAAP, and while the allocations toreserves and the dividends are reflected in these consolidated financialstatements, investors will not be able to calculate the amounts of theseallocations, or of dividends due, on the basis of the same consolidatedfinancial statements.

 

### **B.Significant Changes**

### ** **

Published on December 28, 2007, Law No. 11,638/07has brought a series of alterations to Brazil’s Law of Corporations (Law No. 6,404/76),especially in what concerns the accounting control systems for activitiesundertaken by corporations. The main innovation brought is the substitution ofthe Statement of Origin and Utilization of Resources (“DOAR”) to the Statementof Cash Flows (“DFC”).

 

Additionally,the new legislation has brought new criteria in the evaluation of assets andliabilities in an attempt to update the accounting control within the realityof the market. Of all the alterations, one is worthy of particular attention.Those elements of the assets and liabilities arising from long term operationsshould be adjusted to the current value.

 

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

## ** **

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

### ** **

OnDecember 31, 2007, the Company’s share capital consisted of 257,000,000common shares 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.

 

InJune 2001, the Company adhered to the “Level 1 of Corporate GovernanceRequirements” in Bovespa, certifying its commitment to transparency and fairdisclosure of information.

 

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

 

·              ensure that shares of the issuer representing25% of its total capital are effectively available for trading;

 

·              adopt offering procedures that favorwidespread ownership of shares whenever making a public offering;

 

·              comply with minimum quarterly disclosurestandards;

 

·              comply with the disclosure of shareholdersagreement and stock options programs;

 

·              provide an annual calendar with corporateevents

 

·              provide cash flow statements

 

·              follow stricter disclosure policies withrespect to transactions made by controlling shareholders, directors andofficers involving securities issued by the issuer;

 

72

----

 

InApril 2001, the Company listed its American Depositary Receipts (ADRs)program on the New York Stock Exchange, providing investors an alternatechannel to buy its stocks. On February 6, 2008, the ratio changed from theformer one ADR to 10 preferred shares to the new ratio of one ADR to 3preferred shares.

 

TheCompany’s preferred shares are also traded on the LATIBEX, under the tickersymbol XSDI since November 2004. The LATIBEX is an electronic marketcreated in 1999 by the Madrid stock exchange in order to enable trading ofLatin American equity securities in euro denomination.

 

InSeptember 2005, due to the improved liquidity of its preferred shares,Sadia became the first company in its segment to be part of the theoreticalportfolio of the São Paulo Stock Exchange Index (IBOVESPA).

 

InDecember 2005, Sadia granted its preferred shareholders the right to beincluded in a public offering resulting from an eventual change of Sadia’scontrol (tag along rights), and thus entitle their holders to receive a priceequal to 80% of the amount paid per common share that is an integral part ofthe control block. We also eliminated the right to a dividend, per preferredshare, 10.0% higher than that of each common share.

 

In2007, the company was listed in the BOVESPA Corporate Sustainability Index(ISE) as one of the 32 publicly-held companies with the best performance incorporate Sustainability practices.

 

In2007, the Company’s preferred shares had a daily average financial volume ofR$18.7 million, which represented a 27.2% increase as compared to the 2006financial volume.

 

In2007, Sadia’s ADRs had a daily average financial volume of US$8.4 million whilein 2006, Sadia’s ADRs had a daily average financial volume of US$5.2 million.The number of shares traded in NYSE represented 21.1% of the total number ofSadia’s preferred shares traded from 16.3% in 2006.

 

**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** | ** ** |
| **2003**   |       | 3.98                                                          |       | 1.13 |   |
| **2004**   |       | 5.98                                                          |       | 3.56 |   |
| **2005**   |       | 6.9                                                           |       | 3.56 |   |
| **2006**   |       | 7.6                                                           |       | 5.18 |   |
| **2007**   |       | 12.00                                                         |       | 6.40 |   |

 

*Source: Economatica*

 
| ** **     | ** ** | **Preferred Share  Price (R$ per Share)** | ** ** |
|----------------|------------|---------------------------------------------------------------|------------|
| ** **     | ** ** | **High**                                                      | ** ** | **Low** | ** ** |
| **2006**       |       |                                                          |       |   |   |
| First Quarter  |       | 7.6                                                           |       | 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 |   |
| Second Quarter |       | 10.00                                                         |       | 7.60 |   |
| Third Quarter  |       | 10.43                                                         |       | 8.00 |   |
| Fourth Quarter |       | 12.00                                                         |       | 9.90 |   |
| **2008**       |       |                                                          |       |   |   |
| First Quarter  |       | 11.15                                                         |       | 8.68 |   |

 

*Source: Economatica*

 

 

73

----

 
| ** ** | ** ** | **Preferred Share  Price (R$ per Share)** | ** ** |
|------------|------------|---------------------------------------------------------------|------------|
| ** ** | ** ** | **High**                                                      | ** ** | **Low** | ** ** |
| **Dec-07** |       | 11.49                                                         |       | 10.12 |   |
| **Jan/08** |       | 10.49                                                         |       | 8.68 |   |
| **Feb-08** |       | 10.20                                                         |       | 9.12 |   |
| **Mar/08** |       | 11.15                                                         |       | 9.67 |   |
| **Apr-08** |       | 12.15                                                         |       | 9.79 |   |
| **May-08** |       | 14.09                                                         |       | 12.04 |   |

 

*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.

 
| ** ** | ** ** | **ADR Share Price  (US$ per Share)** | ** ** |
|------------|------------|-----------------------------------------------------|------------|
| ** ** | ** ** | **High**                                            | ** ** | **Low** | ** ** |
| **2003**   |       | 13.92                                               |       | 3.18 |   |
| **2004**   |       | 22.41                                               |       | 11.35 |   |
| **2005**   |       | 30.5                                                |       | 14.45 |   |
| **2006**   |       | 34.7                                                |       | 23.45 |   |
| **2007**   |       | 70.26                                               |       | 30.43 |   |

 

*Source: Economatica*

 
| ** **        | ** ** | **ADR Share Price  (US$ per Share)** | ** ** |
|-------------------|------------|-----------------------------------------------------|------------|
| ** **        | ** ** | **High**                                            | ** ** | **Low** | ** ** |
| **2006**          |       |                                                |       |   |   |
| First Quarter     |       | 34.7                                                |       | 25.42 |   |
| Second Quarter    |       | 31.2                                                |       | 23.45 |   |
| Third Quarter     |       | 29.13                                               |       | 24.7 |   |
| Fourth Quarter    |       | 34.54                                               |       | 27.85 |   |
| **2007**          |       |                                                |       |   |   |
| First Quarter     |       | 40.45                                               |       | 30.43 |   |
| Second Quarter    |       | 52.44                                               |       | 37.36 |   |
| Third Quarter     |       | 56.75                                               |       | 39.00 |   |
| Fourth Quarter    |       | 70.26                                               |       | 53.72 |   |
| **2008**          |       |                                                |       |   |   |
| First Quarter (1) |       | 64.28                                               |       | 49.60 |   |

 

*Source: Economatica*

* *

----

*(1) Adjusted, as the rate of PreferredShares per ADR was altered from 10 to 3 in Feb/2008*

 

74

----

 
| ** **    | ** ** | **ADR Share Price  (US$ per Share)** | ** ** |
|---------------|------------|----------------------------------------------------------|------------|
| ** **    | ** ** | **High**                                                 | ** ** | **Low** | ** ** |
| **Dec/07**    |       | 65.02                                                    |       | 56.28 |   |
| **Jan/08**    |       | 59.78                                                    |       | 49.6 |   |
| **Feb/08**(1) |       | 61.05                                                    |       | 50.59 |   |
| **Mar/08**(1) |       | 64.28                                                    |       | 56.50 |   |
| **Apr/08**(1) |       | 72.53                                                    |       | 58.31 |   |
| **May/08**(1) |       | 25.84                                                    |       | 21.27 |   |

 

*Source: Economatica*

* *

----

*(1) Adjusted, as the rate of PreferredShares per ADR was altered from 10 to 3 in Feb/2008*

* *

**ShareRights**

** **

Sadia’sshares are entitled to a compulsory minimum dividend of 28.0% of the net incomefor the year, They shall participate equally in capital increases derived fromnet income and reserves, revaluation of assets and yearly capital restatement.

 

Onlycommon shares are entitled to vote the resolutions of the General ShareholdersMeeting.

 

Preferredshares do not have voting rights, but enjoy the following advantages:

 

·              priority in the proportional, noncumulativereceipt of 28.0% of the net income for the year, as minimum dividend, competingin equal terms with common shares in any dividend allocated above thatpercentage;

 

·              right to be included in the public offering forthe disposal of the shareholding control under the conditions set forth in art.254-A, with the wording given by Law 10303, dated October 31, 2001, whichguarantees a price at least equal to 80.0% of the amount paid per common shareof the integral part of the control block;

 

·              priority in capital reimbursement in case ofliquidation of the Company.

 

Preferred shares may acquirevoting rights if the Company fails to pay, for at least three consecutiveyears, the minimum dividend to which they are entitled and such right shall continueup to the payment of the first next dividend.

 

**Restrictions on Foreign Investment**

** **

Accordingto Sadia’s Bylaws, 51.0% of the voting capital of the Company must be held byBrazilian citizens. The right to convert dividend payments and proceeds from thesale of preferred shares into foreign currency and to remit such amountsoutside Brazil is subject to exchange control restrictions and foreigninvestment legislation which generally are subject to several mechanisms thatpermits a foreign investor to trade directly in Bovespa.

 

UntilMarch 2000, this mechanism was known as the Annex IV Regulations, in areference to Annex IV of Resolution No. 1,289 of the National MonetaryCouncil (the “Annex IV Regulations”). Currently, this mechanism is regulated byResolution No. 2,689, of January 26, 2000, of the National MonetaryCouncil and by Instruction No. 325, of January 27, 2000, of the CVM,as amended (the “2,689 Regulation”). The 2,689 Regulation, which becameeffective on March 31, 2000, sets forth new rules concerning foreignportfolio investments in Brazil.

 

Foreigninvestments registered under Annex IV Regulations had to be conformed to the2,689 Regulation by September 30, 2000. Such rules allow foreigninvestors to invest in almost all of the financial assets and to engage inalmost all transactions available in the Brazilian financial and capitalmarkets, if some requirements are fulfilled.

 

Inaccordance with the 2,689 Regulation, foreign investors are individuals, legalentities, mutual funds and other collective investments resident, domiciled orheadquartered abroad. The 2,689 Regulation 

 

75

----

 

prohibitsthe offshore transfer or assignment of the title of the securities, except inthe cases of (i) corporate reorganization effected abroad by a foreigninvestor or (ii) inheritance.

 

Pursuantto the 2,689 Regulation, foreign investors must: (i) appoint at least onerepresentative in Brazil with powers to perform actions relating to the foreigninvestment; (ii) fill in the appropriate foreign investor registrationform; (iii) obtain registration as a foreign investor with CVM; and (iv) registerthe foreign investment with the Central Bank.

 

Thesecurities and other financial assets held by the foreign investor pursuant tothe 2,689 Regulation must be registered or maintained in deposit accounts orunder the custody of an entity duly licensed by the Central Bank or by the CVMor be registered in register, clearing and custody systems authorized by theCentral Bank or by the CVM. In addition, securities trading is restricted totransactions carried out in exchanges or organized over-the-counter marketslicensed by the CVM.

 

Allinvestments made by a foreign investor under the 2,689 Regulation will besubject to an electronic registration with the Central Bank. Resolution No. 1,927of the National Monetary Council, which is the Amended and Restated Annex V toResolution No. 1,289 (the “Annex V Regulations”), provides for theissuance of depositary receipts in foreign markets in respect of shares ofBrazilian issuers. The ADSs have been approved under the Annex V Regulations bythe Central Bank and the CVM. Accordingly, the proceeds from the sale of theADSs by ADR holders outside Brazil are free of Brazilian foreign investmentcontrols and holders of the ADSs will be entitled to favorable tax treatment.According to the 2,689 Regulation, foreign investments registered under Annex VRegulations may be transferred to the new investment system created byResolution No. 2,689 and vice-versa, with due regard to the conditions setforth by the Central Bank and by the CVM.

 

Paymentsof dividends and other cash distributions by the Company relating to thepreferred shares underlying the Preferred ADRs will be made in Braziliancurrency to the custodian, in its capacity as representative of the depositary,which will then convert such proceeds into U.S. dollars and will then remitsuch U.S. dollars to the depositary for distribution to holders of the relatedpreferred ADSs. If the custodian is not immediately able to convert thedividends in Brazilian currency to U.S. dollars, then the holders of thepreferred ADSs may be adversely affected by devaluation or other fluctuationsin exchange rates, before it is possible to convert and remit these dividends.Fluctuations in the exchange rate between 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, 2007 there were 4 U.S.beneficial owners of the ADSs (based on their addresses only)**.**

** **

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

### ** **

Not Applicable.

 

### **C.Markets**

### ** **

**Trading on the Brazilian Stock Exchanges**

** **

Of Brazil’s stock exchanges, *Bovespa*has been the most significant in recent years.

 

Bovespa was a non-profit entity owned by its memberbrokerage firms until 2007 when it realized its IPO (Initial Public Offering).Trading on Bovespa is limited to member brokerage firms and a limited number ofauthorized non-members. There is also trading in the so-called after-market.Only shares that were traded during the regular trading session of the day maybe 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 2007, the aggregate marketcapitalization of the companies listed on Bovespa Index was approximately US$996.4 billion.

 

76

----

 

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:

 

·              Legal Representative, who will responsible topresent all the registration information of the investor to the Brazilianauthorities. When the representative is an individual or a non-financialcorporation, the investor must indicate a financial institution duly authorizedby the Central Bank that will be jointly and severally responsible for therepresentative’s obligation.

 

·              Fiscal Representative, who will beresponsible for taxes and fiscal issues on behalf of the investor before theBrazilian Authorities.

 

·              Custodian, who will be responsible to holdupdated reports and control all the assets of the international investor insegregated accounts, and provide this information anytime it is required, tothe 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.

 

International investments in equity instruments aretax exempt on capital gains. Investments from countries that do not tax incomeor where tax rates are lower than 20% are taxed as domestic investors. There isno minimum permanence period requirement for the investments in Brazil.

 

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

 

**Regulation of 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 corporatelaw).

 

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) therequirement 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-votingrights or restricted voting rights representing at least 10% of the total stockof a listed company to elect one board member and his alternate; (v) theright of the 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 ofdividends corresponding to at least 3% of the shares’ net worth based on thelast approved balance sheet of the company; (b) the right to receivedividends at least 10% higher than the dividend assigned to each common share;or (c) the tag-along right in the event of change in the control of thecompany.

 

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 least5% 

 

77

----

 

(five percent) of any class or type of sharesrepresenting the capital stock of a listed company, (ii) the sale ofshares which represents the transfer of control of a listed company and (iii) theoccurrence of a material event to the corporation.

 

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

 

Published on December 28, 2007, Law No. 11,638/07has brought a series of alterations to Brazil’s Law of Corporations (Law No. 6,404/76),especially in what concerns the accounting control systems for activitiesundertaken by corporations. Article 3 of the mentioned statute, thought,extended to large companies (*Sociedades de grande porte*),even if they are not formed as corporations, the rules provided by lawconcerning the necessity for bookkeeping and preparation of financialstatements, and the obligation to carry out independent auditing. On thispoint, it should be made clear that a “large company” is a company or group ofcompanies under common control which have total assets during the previousfinancial year of over R$240 million or gross annual income of over R$300million.

 

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 requirements, restrictions on insidertrading and price manipulation, and protection of minority shareholders.

 

### **D.Selling Shareholders**

### ** **

Not Applicable.

 

### **E.Dilution**

### ** **

Not Applicable.

 

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

### ** **

NotApplicable.

 

## **ITEM10. ADDITIONAL INFORMATION**

## ** **

### **A.Share capital**

### ** **

Notapplicable.

 

78

----

 

### **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 number0-31072).

** **

### **C.Material Contracts**

### ** **

Notapplicable.

 

### **D.Exchange Controls**

### ** **

Prior to March 14, 2005, there were two principal foreign exchangemarkets in Brazil, in which rates were freely negotiated, but could be stronglyinfluenced by Central 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.

 

On March 4, 2005, the National Monetary Council (ConselhoMonetário Nacional) enacted Resolution No. 3,265, pursuant to which thecommercial rate exchange market and the floating rate exchange market wereunified into a sole exchange market, effective as of March 14, 2005.  The new regulation allows, subject to certainprocedures and specific regulatory provisions, the purchase and sale of foreigncurrency by individuals or legal entities, without limitation as to amount,provided that the underlying transaction was legal and based on valid economicgrounds.  Foreign currencies may only bepurchased through financial institutions domiciled in Brazil and authorized tooperate in the exchange market.

 

Between March 1995 and January 1999, the Central Bankpermitted the gradual devaluation of the real against the U.S. dollar pursuantto an exchange rate policy that established a band within which the real-U.S.dollar exchange rate could float. Responding to pressure on the real, on January 13, 1999, theCentral Bank widened the foreign exchange band and on January 15, 1999,allowed the real to float.  As of April 17,2007, the PTAX-800 exchange rate for purchasing U.S. dollars was R$2.035 toUS$1.00.

 

The Company will make all cash distributions on Preferred Shares inreais and consequently exchange rate fluctuations may affect the U.S. dollaramounts received by the holders of Preferred ADRs on conversion by theDepositary. 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****

### ** **

The following summary contains a description of the principal Brazilianand U.S. federal income tax consequences of the ownership and disposition of apreferred share 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 tax rules (suchas tax-exempt entities, banks or other financial institutions, insurancecompanies, 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, partnerships and other pass-through entities, andinvestors that own or are treated as owning 10.0% or more of the voting sharesof the company). Each prospective purchaser of a preferred share or preferredADS should consult his own tax advisers as to the personal tax consequences ofhis investment, which may vary for investors in different tax situations.

 

79

----

 

The summary is based upon tax laws of Brazil and the United States andapplicable regulations, judicial decisions and administrative pronouncements asin effect on 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*

* *

The following discussion summarizes the material Brazilian taxconsequences of the acquisition, ownership and disposition of preferred sharesor preferred ADSs by a holder that is not domiciled in Brazil for purposes ofBrazilian taxation and, in the case of a holder of preferred shares which hasregistered its investment in such securities with the Central Bank as a U.S.dollar investment (in each case, a non-Brazilian holder). The followingdiscussion does not specifically address all of the Brazilian taxconsiderations applicable to any particular non-Brazilian holder, and eachnon-Brazilian holder should consult his or her own tax advisor concerning theBrazilian tax consequences of an investment in any of such securities.

 

***Taxation of Dividends***

 

Dividendspaid with respect to income earned since January 1, 1996, includingdividends paid in kind (i) to the depositary in respect of the preferredshares underlying the preferred ADSs or (ii) to a non-Brazilian holder inrespect of preferred shares, are not subject to any withholding tax in Brazil.The current tax legislation eliminated the then existing 15.0% withholding taxon dividends paid to companies, resident individuals or non-residents inBrazil. 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 withholdingtax of 25.0%. Dividends related to profits generated between January 1,1994 and December 31, 1995 will be subject to Brazilian withholding tax of15.0%,****if distributed expenses on dividends paid as interest on equity, areneither deductible from the calculation basis of corporate income tax nor fromthe social contribution on income.****

 

***Taxation of Gains***

 

Gains realized outside Brazil, until December 31st, 2003, by anon-Brazilian holder on the disposition of Preferred ADSs to anothernon-Brazilian holder are not subject to Brazilian tax. From January 1st,2004 on, investments made in permanent assets by non resident are subject tothe payment of income tax over capital gains. The gain will be charged at a15.0% or 25.0% rate if the beneficiary is a tax haven country resident or fromon any jurisdiction where taxing rates are below 20.0%. The taxable capitalgain is calculated on the difference from the selling value of the asset andthe declared value to Brazilian Central Bank (in foreign currency) by the timeof registration. As of January 1, 2005 operations of stock, mercantile andfuture exchange are subjected to a withholding tax at a rate of 0,005%according to Law nr. 11,033 of December 21, 2004. This value is deductiblefrom withholding tax paid upon capital gains. Pursuant the same act stockoperations held by an individual with a monthly value up to R$ 20,000 will beexempt of the withholding tax.

 

The withdrawal of preferred shares in exchange for Preferred ADSs isnot subject to Brazilian tax. The deposit of preferred shares in exchange forPreferred ADSs is not subject to Brazilian tax if the preferred shares areregistered by the investor or its agent under the 2,689 Regulation. In theevent the preferred shares are not so registered, the deposit of preferredshares in exchange for Preferred ADSs may be subject to Brazilian tax at therate of 15.0% or 25.0%. On receipt of the underlying preferred shares, a non-Brazilianholder who qualifies under the 2,689 Regulation will be entitled to registerthe U.S. dollar value of such shares with the Central Bank as described below.

 

Non-Brazilian holders are subject to tax in Brazil on gains realized onsales of preferred shares that occur abroad or on the proceeds of a redemptionof, or a liquidating distribution with respect to, 

 

80

----

 

preferred shares. When the preferred shares are registered under the2,689 Regulation, the non-Brazilian holder cannot transfer or assign themabroad. As a general rule, non-Brazilian holders are subject to a withholdingtax imposed at a rate of 15.0% or 25.0% on gains realized on sales or exchangesof preferred shares that occur in Brazil to or with a resident of Brazil,outside of Bovespa. From January 2004, on this taxation is also applicableto gains accrued in transactions conducted by non-Brazilian holders.Non-Brazilian holders are subject to withholding tax at the rate of 20.0% ongains realized on sales or exchanges in Brazil of preferred shares that occuron Bovespa unless such sale is made under the 2,689 Regulation. Gains realizedarising from transactions on Bovespa by an investor under the 2,689 Regulationare not subject to tax (except as described below). The gain realized as aresult of a transaction on Bovespa is the difference between the amount inBrazilian currency realized on the sale or exchange and the acquisition costmeasured in Brazilian currency, without any correction for inflation, of theshares sold. The gain realized as a result of a transaction that occurs otherthan on Bovespa will be the positive difference between the amount realized onthe sale or exchange and the acquisition cost of the preferred shares, bothsuch values to be taken into account in reais. There are grounds, however, tohold that the gain realized should be calculated based on the foreign currencyamount registered with the Central Bank. There can be no assurance that thecurrent preferential treatment for holders of preferred ADSs and for certainnon-Brazilian holders of preferred shares under the 2,689 Regulation willcontinue in the future or that such treatment will not be changed in thefuture. As of January 1, 2000, the preferential treatment under the 2,689Regulation is no longer applicable if the non-Brazilian holder of the preferredADSs or preferred shares is resident of a tax haven, i.e., countries which donot impose income tax or where such tax is imposed at a rate lower than 20% inaccordance 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 thesame rate applicable to the sale or disposition of preferred shares. Themaximum rate of such tax is currently 15.0%, except for non-resident holdersdomiciled in tax haven countries, where rates are 25.0%.

 

***Notional Interest Charge Attributedto Shareholder’s Equity***

 

Distributions of interest on equity in respect of the preferred sharesas an alternative form of payment to shareholders who are either Brazilianresidents or non-Brazilian residents, including holders of ADSs, are subject toBrazilian withholding tax at the rate of 15.0%. In case the non-Brazilianresident is a tax haven country resident or is under the jurisdiction of aregion where tax rate is below 20.0%, he will be entitled to pay a rate of25.0%. Since 1996, such payments have been tax deductible by the Company. Since1997, the payments have also been deductible in determining social contributionsand income tax by the Company as long as the payment of a distribution ofinterest is approved at the Company’s general meeting. The board of directorsof the Company alone may determine the distribution of interest on shareholders’equity. No assurance can be given that the board of directors of the Companywill not determine that future distributions of profits be made by means ofinterest on shareholders’ equity instead of by means of dividends.

 

***Other Brazilian Taxes***

 

 There are no Brazilian inheritance, gift or succession taxesapplicable to the ownership, transfer or disposition of preferred shares orpreferred ADSs by a non-Brazilian holder except for gift and inheritance taxeswhich are levied by some States of Brazil on gifts made or inheritancesbestowed by individuals or entities not resident or domiciled in Brazil ordomiciled within the state to individuals or entities resident or domiciledwithin such state in Brazil. There are no Brazilian stamps, issue, registrationor similar taxes or duties payable by holders of preferred shares or preferredADSs.

 

 Pursuant to Decree number, 2,219 of May 2, 1997, andOrdinance no. 5 of January 21, 1999, issued by the Ministry of Finance,the amount in reais resulting from the conversion of the proceeds received by aBrazilian entity from a foreign investment in the Brazilian securities market(including those in connection with the investment in the preferred shares orpreferred ADSs and those made under 

 

81

----

 

Regulation nr. 2,689, which substituted Annex IV Regulations) issubject to a financial transaction tax (IOF), although at present the rate ofsuch tax is 0.0%. The Minister of Finance is empowered to establish theapplicable IOF tax rate. Under Law nr 8,894 of June 21, 1994, such IOF taxrate may be increased at any time to a maximum of 25.0%, but any such increasewill only be applicable to transactions occurring after such increase becomeseffective.

 

 Pursuant to Law number, 9,311 of October 24, 1996, theContribuição Provisória sobre Movimentação Financeira (CPMF) was levied at arate of 0.2% on fund transfers in connection with financial transactions inBrazil. Pursuant to Law 9,539, the CPMF tax was payable until February 1999.Pursuant to Constitutional Amendment 21, of March 18, 1999, the collectionof the CPMF was extended for an additional period of 36 months. This payment ofthe CPMF tax was required as of June 17, 1999. The CPMF tax rate was 0.38%during the first 12 months, and would be 0.30% for the remaining period. But inDecember 2000, Constitutional Amendment number 31 increased the rate to0.38% as of March 2001. By May 28, 2002, Constitutional Amendmentnumber 37 determined that CPMF must be charged until December 31, 2004.Finally, the Constitutional Amendment number 42, approved in 2003, extended theCPMF tax until December 31, 2007.  The responsibility for thecollection of the CPMF tax is borne by the financial institution that carriesout the relevant financial transaction. Additionally, when the non-Brazilianholder remitted the proceeds from the sale or assignment of preferred shares bymeans of foreign exchange transactions, the CPMF tax was levied on the amountto be remitted abroad in Brazilian reais. However, since April, 2002 this taxhas not been charged on stock transactions. If it is necessary to perform anyexchange transaction in connection with Preferred ADSs or preferred shares, itwill bear the CPMF tax.

 

The extension of the CPMF was not approved in 2008. In parallel, anadditional rate was created for the IOF – Tax on Financial Transactions. Bothamendments shall be valid solely as of 2008. In accordance with Decree 6339/08,the amendments to the IOF consisted of an increase from 0.0041% to 0.0082% inthe credit operations contracted by individuals and an additional rate of 0.38%on various credit operations contracted by individuals and corporate legalentities. It is observed that this additional rate applies to credit operationsregardless of their term, differently from the generic rates of 0.0082% forindividuals and 0.0041% for corporate legal entities, which are daily rates. Inthe case of current account loans, the additional IOF rate (0,38%) is alsolevied on the monthly sum of the daily increases of debit balances. Variouscredit operations which were not subject to the IOF are now subject to theadditional IOF rate of 0.38%. Such operations include, among other, foreignexchange operations related to services imports; other operations not listed inart. 15, Para. 1 of the RIOF - IOF Regulations; exports and support toproduction or incentive to exports; operations relating to advance on foreignexchange exports contracts; deferment of the redemption of individual lifeinsurance and of special savings instruments; transactions conducted  by cooperatives and between cooperatives andtheir members; rural credit destined to investment, costing and marketing;precious stones, jewels and other objects in pawn; National Treasury funds tofinance buffer stocks; operations using Finame-Government Agency for Machineryand Equipment Financing and BNDES-National Bank for Economic and SocialDevelopment funds; credit supported by the Minimum Price Guarantee Policy;operations guaranteed by government bonds; transfer of assets in chattelmortgage with third party subrogation on the rights and obligations of thedebtor;  equity or interest in a company,under the National Privatization Program; public funds related to the publicissue of securities; federal, state and municipal programs for the generationof jobs and income. The IOF rates levied on the operations below were alsoincreased as follows: inflow of funds resulting from or destined to currencyloans with minimum average terms up to ninety days: increase from 5% to 5.38%;foreign exchange operations destined to settle the obligations of credit cardadministrators or commercial or multiple banks in the capacity of credit cardissuers, arising from the acquisition of foreign goods and services abroad bytheir users – increase from 2% to 2.38%; life insurance and similar or relatedoperations, personal accident and worker’s compensation insurance, includingcompulsory insurance for personal injury caused by land motor vehicles andwatercrafts, or their cargo, passengers or other and excluding comprehensivecivil liability insurance paid by air carriers: 0.38%; private health careinsurance operations: 2.38%; other insurance operations not listed in art. 22,Para. 1 of the RIOF – IOF Regulation: 7.38%.

 

***Registered Capital***

 

 The amount of an investment in preferred shares held by anon-Brazilian holder who qualifies and registered with the CVM under the AnnexIV Regulations which was converted into Annex of 2,689 Resolution as of June 2000,or in ADSs held by the depositary representing such holder, as the case may be,is eligible for registration with the Central Bank; such registration (theamount so registered is referred 

 

82

----

 

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 disposition of, suchpreferred shares. The registered capital for preferred shares purchased in theform 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 preferredshares on the Brazilian stock exchange on which the greatest number of suchpreferred shares was sold on the day of withdrawal, or (ii) if no preferredshares were sold on such day, the average price of preferred shares that weresold in the fifteen trading sessions immediately preceding such withdrawal. TheU.S. dollar value of the preferred shares is determined on the basis of theaverage commercial exchange rate quoted by the Central Bank on such date (or,if the average price of preferred shares is determined under clause (ii) ofthe preceding sentence, the average of such average quoted rates on the samefifteen dates used to determine the average price of the preferred shares).

 

 A non-Brazilian holder of preferred shares may experience delaysin effecting the registration of registered capital, which may delayremittances abroad. Such a delay may adversely affect the amount, in U.S.dollars, received by the non-Brazilian holder.

 

**UnitedStates Tax Considerations**

** **

***US Federal Income TaxConsiderations***

 

Thefollowing summary describes the material U.S. federal income tax consequencesof the purchase, ownership and disposition of our Preferred Shares andPreferred ADSs as of the date hereof. Except where noted, this summary dealsonly with U.S. Holders (as defined below) that hold our Preferred Shares orPreferred ADSs as capital assets for U.S. federal income tax purposes(generally, property held for investment). As used in this summary, the term “U.S.Holder” means a beneficial holder of our Preferred shares or Preferred ADSsthat is for U.S. federal income tax purposes:

 

·                  an individual citizen or resident of theUnited States;

 

·                  a corporation (or other entity treated as acorporation for U.S. federal income tax purposes) created or organized in orunder the laws of the United States, any State thereof or the District of Columbia;

 

·                  an estate the income of which is subject toU.S. federal income taxation regardless of its source; or a trust if it (1) issubject to the primary supervision of a court within the United States and oneor more United States persons have the authority to control all substantialdecisions of the trust or (2) has a valid election in effect underapplicable United States Treasury regulations to be treated as a United Statesperson.

 

Forpurposes of this discussion, a “non-U.S. Holder” means a beneficial holder of our Preferred shares or PreferredADSs that is neither a U.S. Holder nor a partnership or other pass-throughentity for U.S. federal income tax purposes.

 

Thissummary does not represent a detailed description of the U.S. federal incometax consequences applicable to you if you are subject to special treatmentunder the U.S. federal income tax laws, including if you are:

 

·                  a broker-dealer;

 

·                  a bank or other financial institution;

 

·                  a regulated investment company;

 

·                  a real estate investment trust;

 

83

----

 

·                  an insurance company;

 

·                  a tax-exempt organization;

 

·                  a person holding our Preferred shares orPreferred ADSs as part of a straddle, hedge, conversion or constructive saletransaction or other integrated transaction;

 

·                  a trader in securities that has elected themark-to-market method of accounting for your securities;

 

·                  a person liable for alternative minimum tax;

 

·                  certain former citizens and residents of theUnited  States;

 

·                  a person who owns or is deemed to own 10% ormore of our voting stock;

 

·                  a partnership or other pass-through entityfor U.S. federal income tax purposes; or

 

·                  a person whose “functional currency” for U.S.federal income tax purposes is not the U.S. dollar.

 

Thediscussion below is based upon the provisions of the Internal Revenue Code of1986, as amended (the “Code”), and Treasury regulations, and rulings andjudicial decisions thereunder as of the date hereof, and such authorities maybe replaced, revoked or modified so as to result in U.S. federal income taxconsequences different from those discussed below. In addition, this summary isbased, in part, upon representations made by the depositary to us and assumesthat the deposit agreement, and all other related agreements, will be performedin accordance with their terms.

 

Ifa partnership holds our Preferred shares or Preferred ADSs, the tax treatmentof a partner will generally depend upon the status of the partner and theactivities of the partnership. If you are a partner of a partnership holdingour Preferred shares or Preferred  ADSs,you should consult your tax advisors.

 

Thissummary does not contain a detailed description of all the U.S. federal incometax consequences to you in light of your particular circumstances and does notaddress the effects of any state, local or non- United States tax laws. If youare considering the purchase, ownership or disposition of our Preferred sharesor Preferred ADSs, you should consult your own tax advisors concerning the U.S.federal income tax consequences to you in light of your particular situation,as well as any consequences arising under the laws of any other taxingjurisdiction.

 

***Nature of Preferred ADSsfor U.S. Federal Income Tax Purposes***

*** ***

If you hold Preferred ADSs,for U.S. federal income tax purposes, you generally will be treated as theowner of the underlying Preferred shares that are represented by the PreferredADSs. Accordingly, deposits or withdrawals of Preferred shares for PreferredADSs will not be subject to U.S. federal income tax.

 

***Taxation of Dividends***

*** ***

U.S.Holders. Subject to the discussion under “—Passive Foreign Investment CompanyRules” below, the gross amount of distributions on the Preferred ADSs or ourPreferred shares (including amounts withheld to reflect Brazilian withholdingtaxes and distributions of interest on shareholders’ equity, as described aboveunder “—Brazilian Tax Considerations”) will be taxable as dividends, to theextent paid out of our current or accumulated earnings and profits, asdetermined under U.S. federal income tax principles. Such income (includingwithheld taxes) will be includable in your gross income as ordinary income onthe day actually or constructively received by you, in the case of ourPreferred shares, or by the depositary, in the case of Preferred ADSs. Suchdividends will not be eligible for the dividends received deduction allowed tocorporations under the Code. With respect to non-corporate United Statesinvestors, certain dividends received before January 1, 2011 from aqualified foreign corporation may be subject to reduced rates of taxation.Subject to certain limitations, a foreign corporation is treated as a 

 

84

----

 

qualifiedforeign corporation with respect to dividends received from that corporation onshares (or ADSs backed by such shares) that are readilytradable on an established securities market in the United States, providedthat the corporation was not, inthe year prior to the year the dividend was paid, and is not, in the year thedividend is paid, a passive foreign investment company. The Preferred ADSs are listed on the New York Stock Exchange andwill qualify as readily tradable on an established securities market in theUnited States, so long as they are so listed. We cannot assure you that the PreferredADSs will be considered readily tradable on an established securities market inlater years. Based on existing guidance, it is not entirely clear whether adividend on a Preferred share will be treated as a qualified dividend, becausethe Preferred shares themselves are not listed on a U.S. exchange. Based on ouraudited financial statements, relevant market and shareholder data, and theprojected composition of our income and valuation of our assets, includinggoodwill, for 2008, we do not believe that we would be classified as a passiveforeign investment company for U.S. federal income tax purposes for our 2006 or2007 taxable years and we do not anticipate being classified as a passiveforeign investment company for our 2008 taxable year.  Given that the determination of passiveforeign investment company status involves the application of complex taxrules, and that it is based on the nature of our income and assets from time totime, no assurances can be provided that we will not be considered a PFIC forthe current (or any past or future) taxable year.  Non-corporateholders that do not meet a minimum holding period requirement during which theyare not protected from the risk of loss or that elect to treat the dividendincome as “investment income” pursuant to Section 163(d)(4) of theCode will not be eligible for the reduced rates of taxation regardless of ourstatus as a qualified foreign corporation. In addition, the rate reduction willnot apply to a dividend if the recipient of the dividend is obligated to makerelated payments with respect to positions in substantially similar or relatedproperty. This disallowance applies even if the minimum holding period has beenmet. TheU.S. Treasury Department has announced its intention to promulgate rules pursuantto which holders of stock of non-U.S. corporations, and intermediaries throughwhom the stock is held, will be permitted to rely on certifications fromissuers to establish that dividends are treated as qualified dividends. Becausethose procedures have not yet been issued, it is not clear whether we will beable to comply with them. Special limitations on foreign tax credits apply toqualified dividends subject to the reduced rate of tax. You should consult your own tax advisorsregarding the application of the qualified dividend rules given yourparticular circumstances.

 

Theamount of any dividend paid in reais will equal the U.S. dollar value of thereais received calculated by reference to the exchange rate in effect on thedate the dividend is received by you, in the case of Preferred shares, or bythe depositary, in the case of Preferred ADSs, regardless of whether the reaisare converted into U.S. dollars. If the reais received as a dividend are notconverted into U.S. dollars on the date of receipt, you will have a basis inthe reais equal to their U.S. dollar value on the date of receipt. Any gain orloss realized on a subsequent conversion or other disposition of the reais willbe treated as U.S. source ordinary income or loss.

 

Subjectto certain conditions and limitations, any Brazilian withholding taxes ondividends will be treated as foreign taxes eligible for credit against yourU.S. federal income tax liability. For purposes of calculating the foreign taxcredit, dividends paid on the Preferred ADSs or our Preferred shares will betreated as income from sources outside the United States and will generallyconstitute passive category income. In addition, in certain circumstances, ifyou:

 

·                  have held Preferred ADSs or Preferred sharesfor less than a specified minimum period during which you are not protectedfrom risk of loss; or

 

·                  are obligated to make payments related to thedividends, you will not be allowed a foreign tax credit for foreign taxesimposed on dividends paid on the Preferred ADSs or Preferred shares. The rules governingthe foreign tax credit are complex. You are urged to consult your tax advisorsregarding the availability of the foreign tax credit under your particular circumstances.Instead of claiming a credit, you may, at your election, deduct such otherwisecreditable Brazilian withholding taxes in computing your taxable income,subject to generally applicable limitations under U.S. law.

 

Tothe extent that the amount of any distribution (including amounts withheld toreflect Brazilian withholding taxes and distributions of interest onshareholders’ equity, as described above under “—Brazilian Tax Considerations”)exceeds our current and accumulated earnings and profits for a taxable year, asdetermined under U.S. federal income tax principles, the distribution willfirst be treated as a tax-free return of capital, causing a reduction in theadjusted basis of the Preferred ADSs or Preferred shares 

 

85

----

 

(therebyincreasing the amount of gain, or decreasing the amount of loss, to berecognized by you on a subsequent disposition of the Preferred ADSs orPreferred shares), and the balance in excess of adjusted basis will be taxed ascapital gain recognized on a sale or exchange (as discussed below under “—Taxationof Capital Gains”). Consequently, any distributions in excess of our currentand accumulated earnings and profits would generally not give rise to incomefrom sources outside the United States and you would generally not be able touse the foreign tax credit arising from any Brazilian withholding tax imposedon such distributions unless such credit could be applied (subject toapplicable limitations) against U.S. federal income tax due on other incomefrom sources outside the United States in the appropriate category for foreigntax credit purposes. However, we do not expect to calculate earnings andprofits in accordance with U.S. federal income tax principles. Therefore, youshould assume that a distribution will generally be treated as a dividend (asdiscussed above).

 

Non-U.S.Holders. A dividend paid to a Non-U.S. Holder on a Preferred ADS or Preferredshare will not be subject to U.S. federal income tax unless the dividend iseffectively connected with the conduct of trade or business by the Non-U.S.Holder within the United States (and is attributable to a permanentestablishment or fixed base the Non-U.S. Holder maintains in the United Statesif an applicable income tax treaty so requires as a condition for the Non-U.S.Holder to be subject to U.S. taxation on a net income basis on income from thePreferred ADS or Preferred share).  ANon-U.S. Holder generally will be subject to tax on an effectively connecteddividend in the same manner as a U.S. holder. A corporate Non-U.S. Holder may also be subject under certaincircumstances to an additional “branch profits tax,” the rate of which may bereduced pursuant to an applicable income tax treaty.

 

***Taxation of Capital Gains***

*** ***

U.S.Holders. For U.S. federal income tax purposes and subject to the discussionunder “—Passive Foreign Investment Company Rules” below, you will recognizetaxable gain or loss on any sale, exchange or redemption of Preferred shares orPreferred ADSs in an amount equal to the difference between the amount realizedfor the Preferred shares or Preferred ADSs and your tax basis in the Preferredshares or Preferred ADSs, both determined in U.S. dollars. Ifa Brazilian tax is withheld on asale or other disposition of a Preferred share or Preferred ADS, the amountrealized for U.S. federal income tax purposes will include the gross amount ofthe proceeds of that sale or disposition before deduction of the Braziliantax.   Such gain or loss will generally be capital gain or loss. Capital gainsof non-corporate holders derived with respect to capital assets held for morethan one year are eligible for reduced rates of taxation. The deductibility ofcapital losses is subject to limitations. Any gain or loss recognized by youwill generally be treated as U.S. source gain or loss. Consequently, yougenerally will not be able to use the foreign tax credit arising from anyBrazilian tax imposed on the disposition of our Preferred shares or PreferredADSs.

 

Non-U.S.holders.  A Non-U.S. Holder will not besubject to U.S. federal income tax on a gain recognized on a sale or otherdisposition of a Preferred ADS or Preferred share unless (i) the gain iseffectively connected with the conduct of trade or business by the Non-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 Preferred share), or (ii) in the case of aNon-U.S. Holder who is an individual, the holder is present in the UnitedStates for 183 or more days in the taxable year of the sale or otherdisposition and certain other conditions apply. 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.

 

***Passive Foreign Investment Company Rules***

*** ***

Aspecial set of U.S. federal income tax rules applies to U.S. Holders thathold shares in a passive foreign investmentcompany (“PFIC”).  As noted above, basedon our audited financial statements, relevant market and shareholder data, andthe projected composition of our income and valuation of our assets for 2008,we do not believe that we would be classified as a PFIC for U.S. federal incometax purposes for our 2006 or 2007 taxable years and we do not anticipate beingclassified as a PFIC for our 2008 taxable year. Given that the determination ofpassive foreign investment company status involves the application of complextax rules, and that it is based on the nature of our income and 

 

86

----

 

assetsfrom time to time, no assurances can be provided that we will not be considereda PFIC for the current (or any past or future) taxable year.

 

Ingeneral, we will be a PFIC for any taxable year in which:

 

·                  at least 75% of our gross income is passiveincome, or

 

·                  at least 50% of the value (determined on aquarterly basis) of our assets is attributable to assets that produce or areheld for the production of passive income.

 

Forthis purpose, cash is a passive asset and passive income generally includesdividends, interest, royalties and rents (other than royalties and rentsderived in the active conduct of a trade or business and not derived from arelated person). If we own at least 25% (by value) of the stock of anothercorporation, we will be treated, for purposes of the PFIC tests, as owning ourproportionate share of the other corporation’s assets and receiving ourproportionate share of the other corporation’s income.

 

Thedetermination of whether we are a PFIC must be made annually. Accordingly, itis possible that we may become a PFIC in the current or any future taxable yeardue to changes in our income or asset composition. In addition, the compositionof our income and assets will be affected by how, and how quickly, we investthe proceeds from any past or future equity or debt offerings.  If we are a PFIC for any taxable year duringwhich you hold our Preferred ADSs or Preferred shares, you will be subject tospecial tax rules discussed below.

 

Ifwe are a PFIC for any taxable year during which you hold our Preferred ADSs orPreferred shares, U.S. Holders will be subject to special tax rules withrespect to any “excess distributions” received and any gain realized from asale or other disposition, including a pledge, of Preferred ADSs or Preferredshares. Distributions received in a taxable year that are greater than 125% ofthe average annual distributions received during the shorter of the threepreceding taxable years or your holding period for the Preferred ADSs orPreferred shares will be treated as excess distributions. Under these specialtax rules:

 

·                  the excess distribution or gain will beallocated ratably over your holding period for the Preferred ADSs or Preferredshares,

 

·                  the amount allocated to the current taxableyear, and any taxable year prior to the first taxable year in which we were aPFIC, will be treated as ordinary income, and

 

·                  the amount allocated to each other year willbe subject to tax at the highest tax rate in effect for that year and theinterest charge generally applicable to underpayments of tax will be imposed onthe resulting tax attributable to each such year.

 

Inaddition, non-corporate U.S. Holders will not be eligible for reduced rates oftaxation on any dividends received from us prior to January 1, 2011, if weare a PFIC in the taxable year in which such dividends are paid or in thepreceding taxable year. You will be required to file Internal Revenue Service Form 8621if you hold our Preferred ADSs or Preferred shares in any year in which we areclassified as a PFIC.

 

Ifwe are a PFIC for any taxable year and any of our foreign subsidiaries is alsoa PFIC, a U.S. Holder would be treated as owning a proportionate amount (byvalue) of the shares of the lower-tier PFIC for purposes of the application ofthese rules. You are urged to consult your tax advisors about the applicationof the PFIC rules to any of our subsidiaries.

 

Incertain circumstances, in lieu of being subject to the excess distribution rules discussedabove, you may make an election to include gain on the stock of a PFIC asordinary income under a mark-to-market method, provided that such stock isregularly traded on a qualified exchange. Under current law, the mark-to-marketelection may be available to holders of Preferred ADSs because the PreferredADSs are listed on the NYSE, which constitutes a qualified exchange, althoughthere can be no assurance that the Preferred ADSs will be “regularly traded”for purposes of the mark-to-market election. It should also 

 

87

----

 

benoted that only the Preferred ADSs and not the Preferred shares are listed onthe NYSE. Our Preferred shares are listed on a foreign exchange, which mustmeet certain trading, listing, financial disclosure and other requirements tobe treated as a qualified exchange under applicable Treasury regulations forpurposes of the mark-to-market election, and no assurance can be given that thePreferred shares will be “regularly traded” for purposes of the mark-to-marketelection.

 

Ifyou make an effective mark-to-market election, you will include in each year asordinary income the excess of the fair market value of your Preferred ADSs orPreferred shares at the end of the year over your adjusted tax basis in thePreferred ADSs or Preferred shares. You will be entitled to deduct as anordinary loss each year the excess of your adjusted tax basis in the PreferredADSs or Preferred shares over their fair market value at the end of the year,but only to the extent of the net amount previously included in income as aresult of the mark-to-market election.

 

Youradjusted tax basis in the Preferred ADSs or Preferred shares will be increasedby the amount of any income inclusion and decreased by the amount of anydeductions under the mark-to-market rules. If you make a mark-to-marketelection it will be effective for the taxable year for which the election ismade and all subsequent taxable years unless the Preferred ADSs or Preferredshares are no longer regularly traded on a qualified exchange or the InternalRevenue Service consents to the revocation of the election. You are urged toconsult your tax advisor about the availability of the mark-to-market election,and whether making the election would be advisable in your particularcircumstances.

 

U.S.Holders of shares in a PFIC can sometimes avoid the rules described aboveby electing to treat the PFIC as a “qualified electing fund” under Section 1295of the Code. This option would not available to you unless we provide theinformation necessary to permit you to make this election. No determination hasbeen made whether we would provide such information in the event we areclassified as a PFIC in any taxable year. You are urged to consult your taxadvisors concerning the United States federal income tax consequences ofholding Preferred ADSs or Preferred shares if we are considered a PFIC in anytaxable year.

 

***Information Reporting andBackup Withholding***

*** ***

U.S.Holders. In general, information reporting will apply to dividends in respectof Preferred shares or Preferred ADSs and the proceeds from the sale, exchangeor redemption of Preferred shares or Preferred ADSs that are paid to you withinthe United States (and in certain cases, outside the United States), unless youare an exempt recipient such as a corporation. Backup withholding (currently atthe rate of 28%) may apply to such payments if you fail to provide a taxpayeridentification number or certification of other exempt status or fail to reportin full dividend and interest income.

 

Anyamounts withheld under the backup withholding rules will be allowed as arefund or a credit against your U.S. federal income tax liability provided therequired information is furnished to the Internal Revenue Service.

 

Non-USHolders. You will generally be exempt from these information reportingrequirements and backup withholding tax but may be required to comply withcertain certification and identification procedures in order to establish youreligibility for exemption.

 

### **F. Dividendsand Paying Agents**

### ** **

NotApplicable.

 

### **G. Statement ofExperts**

### ** **

NotApplicable.

 

88

----

### ** **

### **H. Documents onDisplay**

### ** **

The Company makes its filings in electronicform under the EDGAR filing system of the U.S. Securities and ExchangeCommission. Its filings are available through the EDGAR system at www.sec.gov.Sadia’s SEC filings, including this annual report and the exhibits thereto, arealso available for inspection and copying at the public reference facilitiesmaintained by the Securities and Exchange Commission. Information can beobtained either on the SEC website (www.sec.gov) or by phone 1-800-SEC-0330.Company documents and statutory information are also available at Sadia’swebsite (www.sadia.com). Information regarding legal issues can be obtainedfrom the Company’s U.S. legal counsel, Greenberg, Traurig LLP, at1-212-801-9380.

 

The Company has, in compliance with New YorkStock Exchange Corporate Governance Rule 303A.11, provided on itswebsite a summary of how its corporate governance practices differ from thosefollowed by U.S. domestic companies under the New York Stock Exchange listingstandards.

 

### **I.Subsidiary Information**

### ** **

NotApplicable.

 

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

## ** **

**Quantitative information about market risk**

** **

Themain market risks the Company faces are interest rate, exchange rate andcommodity price risks which arise from adverse changes in market conditions andcould represent a potential loss. Sadia mitigates some of these risks throughthe use of derivatives instruments.

 

Inthe beginning of 2004, Sadia implemented a department to control overallexposure of financial assets and liabilities; counterparty and credit risk;legal risk; and disseminate risk culture within the Company. The financialdepartment has incorporated a Hedging and Investment Policy which was reviewedand approved by the Financial Committee. These policies prohibit speculativetrading and oblige the Company to diversify its counterparties. Sadiaperiodically provides reports to senior management about potential risks andactions taken to mitigate them.

 

***Foreign Currency Risk***

*** ***

TheCompany’s exposure to foreign currency are mainly due to Sadia’s externalrevenues, that in 2007 accounted for 46.6% of the Company’s total gross operating revenues, and its debt denominatedin U.S. dollars, that on December 31, 2007 accounted for 2,386.3 million.

 

Thepercentage of the Company’s dollar and reais denominated debt on December 31,2007 were as follows:

 
| ** **                  | ** ** | **Debt Breakdown** | ** ** |
|-----------------------------|------------|-------------------------|------------|
| ** **                  | ** ** | **(%)**                 | ** ** |
| **Short-term debt**         |       |                    |       |
| Denominated in reais        |       | 14.79                   | %          |
| Denominated in U.S. dollars |       | 12.66                   | %          |
| **Long term debt:**         |       |                    |       |
| Denominated in reais        |       | 25.79                   | %          |
| Denominated in U.S. dollars |       | 46.75                   | %          |
| **Total**                   | ** ** | **100.00**              | **%**      |

 

Theforeign currency swap contracts that are entered by the Company are aimed tomitigate potential losses on the Company’s external revenues derived from thedevaluation of the dollar. The 

 

89

----

 

Companydoes not use these swap contracts for trading or speculative purposes. See note3 of the consolidated financial Statements for discussion of the accountingpolicies for derivatives and other financial instruments.

 

Thetable below provides information on Company’s foreign currency as of December 31,2007.

 
| **Instruments  Denominated in U.S.  Dollars**                                  | ** ** | **2008**      | ** ** | **2009**    | ** ** | **2010**    | ** ** | **2011**    | ** ** | **2012**    | ** ** | **After  2012** | ** ** | **Total**     | ** ** | **Fair  Value** | ** ** | **Average  Rate** | ** ** |
|------------------------------------------------------------------------------------------|------------|---------------|------------|-------------|------------|-------------|------------|-------------|------------|-------------|------------|-----------------|------------|---------------|------------|-----------------|------------|-------------------|------------|
| **Assets**                                                                               | ** ** | ** **    | ** ** | ** **  | ** ** | ** **  | ** ** | ** **  | ** ** | ** **  | ** ** | ** **      | ** ** | ** **    | ** ** | ** **      | ** ** | ** **        | ** ** |
| **Cash and cash equivalents**                                                            |       | 480,684       |       | —      |       | —      |       | —      |       | —      |       | —          |       | 480,684.0     |       | 480,684         |       | 5.35              |       |
| **Investments in debt securities**                                                       |       | 1,211,583     |       | —      |       | —      |       | —      |       | —      |       | —          |       | 1,211,583.0   |       | 1,211,583       |       | 9.86              |       |
| **Total**                                                                                | ** ** | **1,692,267** | ** ** | **—**  | ** ** | **—**  | ** ** | **—**  | ** ** | **—**  | ** ** | **—**      | ** ** | **1,692,267** |       | 1,692,267       |       |              |       |
|                                                                                     |       |          |       |        |       |        |       |        |       |        |       |            |       |          |       |            |       |              |       |
| **Liabilities**                                                                          |       |          |       |        |       |        |       |        |       |        |       |            |       |          |       |            |       |              |       |
| **Short term debt**                                                                      |       | 508,606       |       | —      |       |        |       | —      |       | —      |       | —          |       | 508,606       |       | 508,606         |       | 4.85              |       |
| **Long term debt**                                                                       |       | 58,659        |       | 112,547     |       | 385,041     |       | 455,376     |       | 287,482     |       | 578,635         |       | 578,635       |       | 1,887,267       |       | 6.05              |       |
| **Total**                                                                                | ** ** | **567,265**   | ** ** | **112,547** | ** ** | **385,041** | ** ** | **455,376** | ** ** | **287,482** | ** ** | **578,635**     | ** ** | **1,087,241** |       | 2,395,873       |       |              |       |
|                                                                                     |       |          |       |        |       |        |       |        |       |        |       |            |       |          |       |            |       |              |       |
| Foreign currency and interest rate swap  contracts notional amount - reais to US dollars |       | 1,011,548     |       | 0           |       | —      |       | —      |       | —      |       | —          |       | 1,011,548     |       | 59,981          |       | CDI /  US$        |       |

 

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***

*** ***

TheCompany’s exposure to interest rate is basically due to the Company’s floatingrate debt, that amounted to R$2,851.3 million on December 31, 2007.

 

Thepercentage of the Company’s debt subject to fixed and floating interest rateson December 31, 2007 were as follows:

 
| ** **                  | ** ** | **Debt Breakdown** | ** ** |
|-----------------------------|------------|-------------------------|------------|
| ** **                  | ** ** | **(%)**                 | ** ** |
| **Fixed rate**              |       |                    |       |
| Denominated in reais        |       | 10.16                   | %          |
| Denominated in U.S. dollars |       | 18.84                   | %          |
| **Floating rate**           |       |                    |       |
| Denominated in reais        |       | 30.42                   | %          |
| Denominated in U.S. dollars |       | 40.58                   | %          |
| **Total**                   | ** ** | **100.00**              | **%**      |

 

Sadia’sfloating interest rate exposure is primarily subject to the variations of Liboras it relates to U.S. dollar denominated debt and to the variations of theTJLP, an annual long-term interest rate that includes an inflation factor andis determined quarterly by the Central Bank and other exchange variation. On December 31,2007, the TJLP was equivalent to 6.25% per year.

 

90

----

 

Thetable below provides information about Sadia’s significant interest ratesensitive instruments. For variable interest rate debt, the rate presented isthe weighted average rate calculated as of December 31, 2007.

 
| **Rate Sensitive Instruments  R$ Thousand** | ** ** | **2008**      | ** ** | **2009**    | ** ** | **2010**    | ** ** | **2011**    | ** ** | **2012**    | ** ** | **After  2012** | ** ** | **Total**     | ** ** | **Fair  Value** | ** ** | **Average  Rate** | ** ** |
|------------------------------------------------------------|------------|---------------|------------|-------------|------------|-------------|------------|-------------|------------|-------------|------------|-----------------|------------|---------------|------------|-----------------|------------|-------------------|------------|
| **Assets**                                                 | ** ** | ** **    | ** ** | ** **  | ** ** | ** **  | ** ** | ** **  | ** ** | ** **  | ** ** | ** **      | ** ** | ** **    | ** ** | ** **      | ** ** | ** **        | ** ** |
| **Cash and  cash equivalents**                             |       |          |       |        |       |        |       |        |       |        |       |            |       |          |       |            |       |              |       |
| Denominated in  reais                                      |       | 196,920       |       | —      |       | —      |       | —      |       | —      |       | —          |       | 196,920       |       | 196,920         |       | 0                 |       |
| Denominated in  reais                                      |       | 423,290       |       | —      |       | —      |       | —      |       | —      |       | —          |       | 423,290       |       | 423,290         |       | 11.15             |       |
| Denominated in  U.S. dollars                               |       | 123,108       |       | —      |       | —      |       | —      |       | —      |       | —          |       | 123,108       |       | 123,108         |       | 0                 |       |
| Denominated in  U.S. dollars                               |       | 357,576       |       | —      |       | —      |       | —      |       | —      |       | —          |       | 357,576       |       | 357,576         |       | 5.35              |       |
|                                                       |       |          |       |        |       |        |       |        |       |        |       |            |       |          |       |            |       |              |       |
| **Investments  in debt securities**                        |       |          |       |        |       |        |       |        |       |        |       |            |       |          |       |            |       |              |       |
| Denominated in  reais                                      |       | 50,668        |       | 364,474     |       | 100,474     |       | —      |       | —      |       | 35,568          |       | 551,184       |       | 551,184         |       |              |       |
| Denominated in  U.S. dollars                               |       | 1,211,583     |       | —      |       | —      |       | —      |       | —      |       | —          |       | 1,211,583     |       | 1,211,583       |       |              |       |
|                                                       |       |          |       |        |       |        |       |        |       |        |       |            |       |          |       |            |       |              |       |
| **Total**                                                  | ** ** | **2,363,145** | ** ** | **364,474** | ** ** | **100,474** | ** ** | **—**  | ** ** | ** **  | ** ** | **35,568**      | ** ** | **2,863,661** |       | **2,863,661**   |       |              |       |
|                                                       |       |          |       |        |       |        |       |        |       |        |       |            |       |          |       |            |       |              |       |
|                                                       |       |          |       |        |       |        |       |        |       |        | ** ** | ** **      |       |          | ** ** | ** **      | ** ** | ** **        | ** ** |
| **Liabilities**                                            | ** ** | ** **    | ** ** | ** **  | ** ** | ** **  | ** ** | ** **  | ** ** | ** **  | ** ** | ** **      | ** ** | ** **    | ** ** | ** **      | ** ** | ** **        | ** ** |
| **Short-term  debt**                                       |       |          |       |        |       |        |       |        |       |        |       |            |       |          |       |            |       |              |       |
| ***Fixed  rate***                                          |       |          |       |        |       |        |       |        |       |        |       |            |       |          |       |            |       |              |       |
| Denominated in  reais                                      |       | 246,198       |       | —      |       | —      |       | —      |       | —      |       | —          |       | 246,198       |       | 246,198         |       | 6.84              |       |
| Denominated in  U.S. dollars                               |       | 153,388       |       | —      |       | —      |       | —      |       | —      |       | —          |       | 153,388       |       | 153,388         |       | 4.85              |       |
| ***Floating  rate***                                       |       |          |       |        |       |        |       |        |       |        |       |            |       |          |       |            |       |              |       |
| Denominated in  reais                                      |       | 347,763       |       | —      |       | —      |       | —      |       | —      |       | —          |       | 347,763       |       | 347,763         |       | 0                 |       |
| Denominated in  U.S. dollars                               |       | 355,218       |       | —      |       | —      |       | —      |       | —      |       | —          |       | 355,218       |       | 355,218         |       | 4.74              |       |
| **Total**                                                  | ** ** | **1,102,567** | ** ** | **—**  | ** ** | **—**  | ** ** | **—**  | ** ** | **—**  | ** ** | **—**      | ** ** | **1,102,567** | ** ** | **1,102,567**   | ** ** | ** **        | ** ** |
|                                                       |       |          |       |        |       |        |       |        |       |        |       |            |       |          |       |            |       |              |       |
| **Long  term debt:**                                       |       |          |       |        |       |        |       |        |       |        |       |            |       |          |       |            |       |              |       |
| ***Fixed  rate***                                          |       |          |       |        |       |        |       |        |       |        |       |            |       |          |       |            |       |              |       |
| Denominated in  reais                                      |       | 12,696        |       | 6,569       |       | 1,642       |       | —      |       | 2,287       |       | 138,834         |       | 162,028       |       | 162,028         |       | 9.32              |       |
| Denominated in  U.S. dollars                               |       | 36,489        |       | 23,982      |       | 30,781      |       | 31,399      |       | 28,236      |       | 452,374         |       | 603,261       |       | 603,261         |       | 6.05              |       |
| ***Floating  rate***                                       |       |          |       |        |       |        |       |        |       |        |       |            |       |          |       |            |       |              |       |
| Denominated in  reais                                      |       | 154,168       |       | 143,792     |       | 163,690     |       | 163,690     |       | 157,990     |       | 90,540          |       | 873,870       |       | 873,870         |       | 9.80              |       |
| Denomineted in  U.S. dollars                               |       | 22,170        |       | 88,565      |       | 354,260     |       | 423,977     |       | 259,246     |       | 126,261         |       | 1,274,479     |       | 1,284,006       |       | 55,644,254        |       |
| **Total**                                                  | ** ** | **225,523**   | ** ** | **262,908** | ** ** | **550,373** | ** ** | **619,066** | ** ** | **447,759** | ** ** | **808,009**     | ** ** | **2,913,638** | ** ** | **2,923,165**   |       |              |       |
|                                                       |       |          |       |        |       |        |       |        |       |        |       |            |       |          |       |            |       |              |       |
| **Total  debt**                                            | ** ** | **1,328,090** | ** ** | **262,908** | ** ** | **550,373** | ** ** | **619,066** | ** ** | **447,759** | ** ** | **808,009**     | ** ** | **4,016,205** | ** ** | **4,025,732**   |       |              |       |

 

***Credit risks***

*** ***

TheCompany is subject to credit risks related to customer accounts receivable,financial investments and derivative contracts. Credit risks from accountsreceivable are minimized by the 

 

91

----

 

pulverizationof the customer portfolio, in which no group is responsible for more than 10.0%of the Company’s consolidated revenues. Risks associated with financialinstruments are lessened by hiring first-line financial institutions, subjectto the limitations pre-established by the Credit 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 as of the beginning of 2008 has decided to enter into future or optionscontracts to protect itself against changes in the commodities prices and haselaborated a Hedging Policy for Commodities for this purpose. Currently, Sadiamaintains a risk management strategy based on both its inventory policy throughphysical control, which includes acquisition of grains that guarantee futurevolumes and costs and financial hedging.

 

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

## ** **

NotApplicable.

 

# **PART II**

# ** **

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

## ** **

NotApplicable.

 

## **ITEM14. 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 FinancialOfficer concluded that the design and operation of the Company’s disclosurecontrols and 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 timeperiods specified in Securities and Exchange Commission rules and forms,and (ii) accumulated and communicated to management, including the ChiefExecutive Officer and Chief Financial Officer, to allow timely decisionsregarding required disclosure as of the end of the Company’s most recent fiscalyear.

 

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.

 

The certifications required by this Item have been filed as Exhibits12.01 and 12.02.

 

A.            Management’s annualreport on internal control over financial reporting

 

92

----

 

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 ofthe Sarbanes-Oxley Act, management has conducted an assessment, includingtesting, using the criteria in Internal Control—Integrated Framework, issued bythe Committee of Sponsoring Organizations of the Treadway Commission (COSO).The Company’s system of internal control over financial reporting is designedto 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 itsinherent limitations, internal control over financial reporting may not preventor detect misstatements. Also, projections of any evaluation of effectivenessto future 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 31,2007, based on criteria in Internal Control—Integrated Framework, issued by theCOSO. The Company’s internal control over financial reporting as of December 31,2007, has been audited by KPMG Auditores Independentes, an independentregistered public accounting firm, as stated in their report which is includedbelow.

 

B.                                      Attestation report of the independentregistered public accounting firm

 

# **Report of Independent Registered Public Accounting Firm**

#  

TheBoard of Directors and Shareholders

SadiaS.A.:

 

Wehave audited Sadia S.A’s internal control over financial reporting as of December 31,2007, based on criteria established in*Internal Control - Integrated Framework*issued by the Committee of Sponsoring Organizations of the Treadway Commission(COSO)*.*Sadia S.A.’smanagement is responsible for maintaining effective internal control overfinancial reporting and for its assessment of the effectiveness of internalcontrol over financial reporting, included in the accompanying Management’sAnnual Report on Internal Control over Financial Statements. Our responsibilityis to express an opinion on the Company’s internal control over financialreporting 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, assessing the risk that a material weaknessexists, and testing and evaluating the design and operating effectiveness ofinternal control based on the assessed risk. Our audit also included performingsuch other procedures as we considered necessary in the circumstances. Webelieve that our audit provides a reasonable basis for our opinion.

 

A company’s internal control over financial reporting is a processdesigned to provide reasonable assurance regarding the reliability of financialreporting and the preparation of financial statements for external purposes inaccordance with generally accepted accounting principles.  A company’s internal control over financialreporting includes those policies and procedures that (1) pertain to themaintenance of records that, in reasonable detail, accurately and fairlyreflect the transactions and dispositions of the assets of the company; (2) providereasonable assurance that transactions are recorded as necessary to permitpreparation of financial statements in accordance with generally acceptedaccounting principles, and that receipts and expenditures of the company arebeing made only in accordance with authorizations of management and directorsof the company; and (3) provide reasonable assurance regarding preventionor timely detection of unauthorized acquisition, use, or disposition of thecompany’s assets that could have a material 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 may deteriorate.

 

93

----

 

Inour opinion, Sadia S.A. maintained, in all material respects, effectiveinternal control over financial reporting as of December 31, 2007, basedon criteria established in *Internal Control - Integrated Framework*issued by the Committee of Sponsoring Organizations of the Treadway Commission*.*

* *

Wealso have audited, in accordance with the standards of the Public CompanyAccounting Oversight Board (United States), the consolidated balance sheets of Sadia S.A. and subsidiaries as ofDecember 31, 2007 and 2006, and the related consolidated statements of income, shareholders’ equity, andcash flows for each of the years in the three-year period ended December 31,2007, and our report dated June 20, 2008**expressed an unqualifiedopinion on those consolidated financial statements*.*

* *

/s/ KPMG Auditores Independentes

 

KPMG Auditores Independentes

* *

SãoPaulo, Brazil

June 20,2008

 

C.             Changes in internalcontrol over financial 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.

 

### **ITEM16A. 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 asummary of how its corporate governance practices differ from those followed byU.S. domestic companies under the New York Stock Exchange listing standards, atwww.sadia.com.

 

### **ITEM 16B. Codeof 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.

 

### **ITEM16 C. Principal Accountant Fees and Services**

### ** **

**Audit andNon-Audit Fees**

** **

Thefollowing table sets forth the fees billed to the Company by its independentauditors, during the fiscal years ended December 31, 2007 and 2006:

 

94

----

 

**Audit Fees (Thousand R$ )**

 

| ** **         | ** ** | **2007**  | ** ** | **2006**  | ** ** |
|--------------------|------------|-----------|------------|-----------|------------|
| Audit fees         |       | 1,261     |       | 1,022     |       |
| Audit-related fees |       | 258       |       | 64        |       |
| Tax-fees           |       | —    |       | —    |       |
| **Total fees**     | ** ** | **1,519** | ** ** | **1,086** | ** ** |

 

Auditfees in the above table are the aggregate fees billed by KPMG AuditoresIndependentes for 2007 and 2006, 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.

 

**AuditCommittee Pre-Approval Policies 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.

 

### **ITEM16 D. Exemptions from the Listing Standards and for Audit Committees**

### ** **

NotApplicable

 

### **ITEM16 E. Purchases of Equity Securities by the Issuer and Affiliated Purchasers**

### ** **

Sadiaannounced to its shareholders and to the market that, to implement the StockOption Plan for its officers, as approved by the Extraordinary Shareholders’Meeting of April 29, 2005, the Board of Directors decided to authorize theacquisition of the Company ́s preferred shares, as follows:

 

a)acquisition of 4,400,000 preferred shares within the limit of 10% of the total381,724,044 outstanding preferred shares;

 

b)the time frame for such realization will be up to 365 days counted as from September 27,2007;

 

c)the operations will be conducted by Concórdia S.A. Corretora de ValoresMobiliários, Câmbio e Commodities.

 

95

----

** **

# **PART III**

# ** **

## **ITEM 17. FINANCIAL STATEMENTS**

## ** **

TheCompany has responded to Item 18 in lieu of responding to this item.

 

## **ITEM 18. FINANCIAL STATEMENTS**

## ** **

Referenceis made to Item 19 for a list of all financial Statements filed as part of thisAnnual Report.

 

## **ITEM 19. EXHIBITS**

## ** **

| Report of  Independent Auditors                                                                                  |   | F3     |
|------------------------------------------------------------------------------------------------------------------|--------|--------|
|                                                                                                             |   |   |
| Consolidated  Balance Sheets as of December 31, 2007 and 2006                                               |   | F4     |
|                                                                                                             |   |   |
| Consolidated  Statements of Income for the Years Ended December 31, 2007, 2006 and  2005                    |   | F6     |
|                                                                                                             |   |   |
| Consolidated  Statements of Shareholders’ Equity for the Years Ended December 31,  2007, 2006 and 2005 |   | F7     |
|                                                                                                             |   |   |
| Consolidated  Statements of Cash Flows for the Years Ended December 31, 2007, 2006 and  2005                |   | F8     |
|                                                                                                             |   |   |
| Notes to  Consolidated Financial Statements                                                                      |   | F9     |

 

**List of Exhibits**

** **

1.01 Sadia By laws

 

2.01 Deposit Agreement dated as of December 30, 2002, by and amongSadia S.A., The Bank of New York as Depositary and the Owners and Holders ofAmerican Depositary 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.

 

2.02 The total amount of long-term debt of the Company authorized underany instrument 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.

 

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

 

96

----

 

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

 

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

 

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

 

Consolidated Financial Statements

 

**SIGNATURES**

** **

The Company hereby certifies that it meets all of the requirements forfiling on Form 20-F and that it has duly caused and authorized theundersigned to sign this Annual Report on its behalf.

 

**SADIA S.A.**

** **

** **

Date: June 20, 2008

 

 
| By:                             | /s/ Gilberto  Tomazoni |                               | By: | /s/ Welson  Teixeira Júnior |
|---------------------------------|------------------------|------------------------------------|-----|----------------------------------|
| Name:  Gilberto Tomazoni        |                   | Name: Welson  Teixeira Júnior |
| Title: Chief  Executive Officer |                   | Title: Chief  Financial Officer    |

 

97

----

# *** ***

# ***ConsolidatedFinancial Statements***

*** ***

***Sadia S.A.***

*** ***

***Years ended December 31, 2007, 2006 and2005***

 

F-1

----

#  

# SADIA S.A.

#  

## ***CONSOLIDATEDFINANCIAL STATEMENTS***

## *** ***

### **Contents**

### ** **

| Report of Independent Registered Public  Accounting Firm (KPMG Auditores Independentes)                          |   | F-3    |
|------------------------------------------------------------------------------------------------------------------|--------|--------|
|                                                                                                             |   |   |
| Consolidated Balance Sheets as of  December 31, 2007 and 2006                                               |   | F-4    |
|                                                                                                             |   |   |
| Consolidated Statements of Income for the  Years Ended December 31, 2007, 2006 and 2005                     |   | F-6    |
|                                                                                                             |   |   |
| Consolidated  Statements of Shareholders’ Equity for the Years Ended December 31,  2007, 2006 and 2005 |   | F-7    |
|                                                                                                             |   |   |
| Consolidated  Statements of Cash Flows for the Years Ended December 31, 2007, 2006 and  2005                |   | F-8    |
|                                                                                                             |   |   |
| Notes to  Consolidated Financial Statements                                                                      |   | F-9    |

 

F-2

----

** **

**REPORT OF INDEPENDENT REGISTERED PUBLICACCOUNTING FIRM**

 

The Board of Directors and Shareholders of

Sadia S.A.

 

We have audited the accompanying consolidated**balance sheets of Sadia S.A. (the Company) and subsidiaries as of December 31,2007 and 2006, and the related consolidatedstatements of income, shareholders’ equity, and cash flows for each of theyears in the three-year period ended December 31, 2007. 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 requirethat we plan and perform the audit to obtain reasonable assurance about whetherthe financial statements are free of material misstatement.  An audit includes examining, on a test basis,evidence supporting the amounts and disclosures in the financial statements. 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, 2007 and 2006, and theresults of their operations andtheir cash flows for each ofthe years in the three-year period ended December 31, 2007, in conformitywith U.S. generally accepted accounting principles.

 

We also have audited, in accordance with the standards of the PublicCompany Accounting Oversight Board (United States), Sadia S.A ́s internalcontrol over financial reporting as of December 31, 2007, based on criteria established in InternalControl—Integrated Framework issued by the Committee of SponsoringOrganizations of the Treadway Commission (COSO), and our report dated June 20,2008 expressed an unqualified opinionon the effectiveness  of the Company’sinternal control over financial reporting.

* *

As discussed in the Note 3(r) to theconsolidated financial statements, the Company adopted the recognition anddisclosure provisions of FASB interpretation No 48,*Accounting for Uncertainty in Income Taxes an Interpretation of FASBStatement 109 (FIN 48),* as of January 1, 2007.

 

/s/ KPMG Auditores Independentes

 

KPMG Auditores Independentes

 

São Paulo, Brazil

June 20,2008

 

F-3

----

### ** **

### **SADIA S.A.**

### ** **

CONSOLIDATEDBALANCE SHEETS

December 31, 2007 and 2006

(In thousands of Reais – R$, except shareamounts)

 
| ** **                                                 | ** ** | **2007**  | ** ** | **2006**  | ** ** |
|------------------------------------------------------------|------------|-----------|------------|-----------|------------|
| Assets                                                     |       |      |       |      |       |
| Current assets:                                            |       |      |       |      |       |
| Cash and cash equivalents                                  |       | 1,100,894 |       | 726,295   |       |
| Available-for-sale securities                              |       | 1,262,251 |       | 1,701,719 |       |
| Foreign currency futures and interest rate  swap contracts |       | 185,846   |       | 65,597    |       |
| Accounts and notes receivable, net                         |       | 834,349   |       | 921,044   |       |
| Inventories                                                |       | 1,143,976 |       | 1,065,032 |       |
| Recoverable taxes                                          |       | 325,868   |       | 169,347   |       |
| Deferred income taxes                                      |       | 23,553    |       | 37,867    |       |
| Other current assets                                       |       | 160,585   |       | 242,788   |       |
| Total current assets                                       |       | 5,037,322 |       | 4,929,689 |       |
|                                                       |       |      |       |      |       |
| Property, plant and equipment, net                         |       | 2,897,408 |       | 2,154,980 |       |
|                                                       |       |      |       |      |       |
| Other assets:                                              |       |      |       |      |       |
| Equity investees                                           |       | —    |       | 400       |       |
| Available-for-sale securities                              |       | 500,516   |       | 129,127   |       |
| Judicial deposits                                          |       | 68,696    |       | 78,157    |       |
| Recoverable taxes                                          |       | 165,225   |       | 162,229   |       |
| Prepaid pension plan                                       |       | 603,128   |       | 368,890   |       |
| Other intangible assets                                    |       | 35,744    |       | 25,378    |       |
| Goodwill                                                   |       | 50,563    |       | 29,857    |       |
| Advances to suppliers                                      |       | 61,753    |       | 73,358    |       |
| Other                                                      |       | 37,532    |       | 87,692    |       |
| Total other assets                                         |       | 1,523,157 |       | 955,088   |       |
|                                                       |       |      |       |      |       |
| Total assets                                               |       | 9,457,887 |       | 8,039,757 |       |

 

F-4

----

 
| ** **                                                                                 | ** ** | **2007**   | ** ** | **2006**   | ** ** |
|--------------------------------------------------------------------------------------------|------------|------------|------------|------------|------------|
| Liabilities and Shareholders’ equity                                                  | ** ** | ** ** | ** ** | ** ** | ** ** |
| Current liabilities:                                                                       |       |       |       |       |       |
| Short -term debt                                                                           |       | 1,102,567  |       | 1,226,567  |       |
| Current portion of long-term debt                                                          |       | 225,523    |       | 214,708    |       |
| Foreign currency futures and interest rate  swap contracts                                 |       | 105,445    |       | 76,630     |       |
| Suppliers                                                                                  |       | 593,951    |       | 503,230    |       |
| Salaries and social charges payable and  accrued vacation                                  |       | 132,500    |       | 112,433    |       |
| Taxes payable                                                                              |       | 65,859     |       | 63,348     |       |
| Dividends payable                                                                          |       | 135,666    |       | 59,420     |       |
| Accrued employee bonus                                                                     |       | 82,346     |       | 45,776     |       |
| Accrued marketing                                                                          |       | 30,872     |       | 32,566     |       |
| Accrued freight                                                                            |       | 23,512     |       | 21,486     |       |
| Other                                                                                      |       | 155,044    |       | 137,115    |       |
| Total current liabilities                                                                  |       | 2,653,285  |       | 2,493,279  |       |
|                                                                                       |       |       |       |       |       |
| Long-term liabilities                                                                      |       |       |       |       |       |
| Long-term debt                                                                             |       | 2,688,115  |       | 2,670,969  |       |
| Foreign currency and interest rate swap  contracts                                         |       | —     |       | 6,649      |       |
| Accrual for legal proceedings and labor  claims                                            |       | 73,726     |       | 64,671     |       |
| Income and social contribution taxes  payables                                             |       | 19,760     |       | 11,283     |       |
| Deferred income taxes                                                                      |       | 306,708    |       | 72,708     |       |
| Accrued employee benefit liability                                                         |       | 57,234     |       | 63,509     |       |
| Stock options                                                                              |       | 14,763     |       | 3,324      |       |
| Other                                                                                      |       | 76,733     |       | 59,758     |       |
| Total long-term liabilities                                                                |       | 3,237,039  |       | 2,952,871  |       |
|                                                                                       |       |       |       |       |       |
| Minority interest                                                                          |       | 34,599     |       | 964        |       |
|                                                                                       |       |       |       |       |       |
| Shareholders’ equity:                                                                 |       |       |       |       |       |
| Preferred shares, no par value, 426,000,000  shares authorized and issued in 2007 and 2006 |       | 1,250,774  |       | 938,914    |       |
| Common shares, no par value, 257,000,000  shares authorized and issued in 2007 and 2006    |       | 749,226    |       | 561,086    |       |
| Additional paid-in capital                                                                 |       | 1,650      |       | 289        |       |
| Preferred shares in treasury, at cost                                                      |       | (84,118    | )          | (33,341    | )          |
| Appropriated retained earnings                                                             |       | 980,828    |       | 999,430    |       |
| Unappropriated accumulated (loss) earnings                                                 |       | 136,682    |       | (17,318    | )          |
| Accumulated other comprehensive income                                                     |       | 497,922    |       | 143,583    |       |
| Total shareholders’ equity                                                            |       | 3,532,964  |       | 2,592,643  |       |
| Total liabilities and shareholders’ equity                                            |       | 9,457,887  |       | 8,039,757  |       |

 

See notes to the Consolidated FinancialStatements.

 

F-5

----

** **

**SADIA S.A**

** **

CONSOLIDATEDSTATEMENTS OF INCOME

Years ended December 31, 2007, 2006 and2005

(In thousands of Reais - R$, except numbersof shares and per share amounts)

 
| ** **                                                                            | ** ** | **2007**    | ** ** | **2006**    | ** ** | **2005**    | ** ** |
|---------------------------------------------------------------------------------------|------------|-------------|------------|-------------|------------|-------------|------------|
|                                                                                  |       |        |       |        |       |        |       |
| Gross operating revenue                                                               |       | 9,955,908   |       | 7,894,054   |       | 8,327,372   |       |
|                                                                                  |       |        |       |        |       |        |       |
| Value-added tax on sales                                                              |       | (1,092,149  | )          | (939,670    | )          | (914,219    | )          |
| Sales deductions                                                                      |       | (109,683    | )          | (124,084    | )          | (95,311     | )          |
| Net operating revenue                                                                 |       | 8,754,076   |       | 6,830,300   |       | 7,317,842   |       |
| Cost of goods sold                                                                    |       | (6,325,458  | )          | (5,212,566  | )          | (5,324,359  | )          |
| Gross profit                                                                          |       | 2,428,618   |       | 1,617,734   |       | 1,993,483   |       |
|                                                                                  |       |        |       |        |       |        |       |
| Operating expenses:                                                                   |       |        |       |        |       |        |       |
| Selling                                                                               |       | (1,477,698  | )          | (1,303,040  | )          | (1,245,892  | )          |
| General and administrative                                                            |       | (99,669     | )          | (96,485     | )          | (80,959     | )          |
| Other operating income, net                                                           |       | 17,991      |       | 84,014      |       | 14,271      |       |
| Total operating expenses                                                              |       | (1,559,376  | )          | (1,315,511  | )          | (1,312,580  | )          |
|                                                                                  |       |        |       |        |       |        |       |
| Operating income                                                                      |       | 869,242     |       | 302,223     |       | 680,903     |       |
|                                                                                  |       |        |       |        |       |        |       |
| Interest expense                                                                      |       | (338,256    | )          | (310,569    | )          | (311,626    | )          |
| Interest income and other, net                                                        |       | 412,642     |       | 240,012     |       | 247,998     |       |
| Foreign currency exchange gain, net                                                   |       | 28,911      |       | 157,050     |       | 53,377      |       |
| Income before income tax, equity in income  (loss) of investees and minority interest |       | 972,539     |       | 388,716     |       | 670,652     |       |
|                                                                                  |       |        |       |        |       |        |       |
| Income tax expense                                                                    |       |        |       |        |       |        |       |
| Current                                                                               |       | (76,581     | )          | (10,967     | )          | (52,028     | )          |
| Deferred                                                                              |       | (54,997     | )          | (18,117     | )          | (16,411     | )          |
| Total income tax                                                                      |       | (131,578    | )          | (29,084     | )          | (68,439     | )          |
| Income before equity in income (loss) of  investees and minority interest             |       | 840,961     |       | 359,632     |       | 602,213     |       |
|                                                                                  |       |        |       |        |       |        |       |
| Equity in income (loss) of investees                                                  |       | —      |       | (178        | )          | 1,219       |       |
| Minority interest                                                                     |       | 1,016       |       | 1,106       |       | (164        | )          |
|                                                                                  |       |        |       |        |       |        |       |
| Net income                                                                            |       | 841,977     |       | 360,560     |       | 603,268     |       |
|                                                                                  |       |        |       |        |       |        |       |
| Earnings per thousands shares – preferred  and common in R$:                     |       |        |       |        |       |        |       |
| Basic                                                                                 |       | 1,247.54    |       | 531.18      |       | 885.08      |       |
| Diluted                                                                               |       | 1,239,11    |       | 529.79      |       | 884.38      |       |
|                                                                                  |       |        |       |        |       |        |       |
| Weighted average number of shares outstanding:                                        |       |        |       |        |       |        |       |
| Basic:                                                                                |       |        |       |        |       |        |       |
| Preferred                                                                             |       | 417,908,212 |       | 421,785,712 |       | 424,595,712 |       |
| Common                                                                                |       | 257,000,000 |       | 257,000,000 |       | 257,000,000 |       |
|                                                                                  |       |        |       |        |       |        |       |
| Diluted:                                                                              |       |        |       |        |       |        |       |
| Preferred                                                                             |       | 422,501,871 |       | 423,568,114 |       | 425,137,363 |       |
| Common                                                                                |       | 257,000,000 |       | 257,000,000 |       | 257,000,000 |       |

 

See notes to the Consolidated FinancialStatements.

 

F-6

----

** **

**SADIA S.A.**

** **

CONSOLIDATEDSTATEMENTS OF SHAREHOLDERS’ EQUITY

Years ended December 31, 2007, 2006 and2005

(In thousands of Reais -R$)

 
| ** **                                                                                        | ** ** | **2007**  | ** ** | **2006**  | ** ** | **2005**  | ** ** |
|---------------------------------------------------------------------------------------------------|------------|-----------|------------|-----------|------------|-----------|------------|
| Preferred shares                                                                                  |       |      |       |      |       |      |       |
| At the beginning of the year (426,000,000  shares)                                                |       | 938,914   |       | 938,914   |       | 627,055   |       |
| Capital increase without issue of shares                                                          |       | 311,860   |       | —    |       | 311,859   |       |
| At the end of the year (426,000,000 shares)                                                       |       | 1,250,774 |       | 938,914   |       | 938,914   |       |
| Common shares                                                                                     |       |      |       |      |       |      |       |
| At the beginning of the year (257,000,000  shares)                                                |       | 561,086   |       | 561,086   |       | 372,945   |       |
| Capital increase without issue of shares                                                          |       | 188,140   |       | —    |       | 188,141   |       |
| At the end of the year (257,000,000 shares)                                                       |       | 749,226   |       | 561,086   |       | 561,086   |       |
| Treasury shares                                                                                   |       |      |       |      |       |      |       |
| At the beginning of the year (2,504,288  shares)                                                  |       | (33,341   | )          | (10,377   | )          | (198      | )          |
| Purchase of shares (4,435,000 shares)                                                             |       | (51,240   | )          | (23,427   | )          | (10,179   | )          |
| Sales of shares (100,000 shares)                                                                  |       | 463       |       | 463       |       | —    |       |
| At the end of the year (2,200,304 shares)                                                         |       | (84,118   | )          | (33,341   | )          | (10,377   | )          |
| Additional paid-in capital                                                                        |       |      |       |      |       |      |       |
| At the beginning of the year                                                                      |       | 289       |       | —    |       | —    |       |
| Used to increase capital                                                                          |       | (5        | )          | —    |       | —    |       |
| Exercise of stock option plan                                                                     |       | 1,366     |       | 289       |       | —    |       |
| At the end of the year                                                                            |       | 1,650     |       | 289       |       | —    |       |
| Retained earnings                                                                                 |       |      |       |      |       |      |       |
| Appropriated retained earnings                                                                    |       |      |       |      |       |      |       |
| At the beginning of the year                                                                      |       | 999,430   |       | 738,417   |       | 767,441   |       |
| Used to increase capital                                                                          |       | (499,995  | )          | —    |       | (475,068  | )          |
| Transfer from unappropriated retained  earnings                                                   |       | 481,393   |       | 261,013   |       | 446,044   |       |
| At the end of the year                                                                            |       | 980,828   |       | 999,430   |       | 738,417   |       |
| Unappropriated accumulated (loss) earnings                                                        |       |      |       |      |       |      |       |
| At the beginning of the year                                                                      |       | (17,318   | )          | 2,055     |       | 71,121    |       |
| Used to increase capital                                                                          |       |      |       | —    |       | (24,932   | )          |
| Net income                                                                                        |       | 841,977   |       | 360,560   |       | 603,268   |       |
| Transfer to appropriated retained earnings                                                        |       | (481,393  | )          | (261,013  | )          | (446,044  | )          |
| Dividends / interest on capital                                                                   |       |      |       |      |       |      |       |
| Preferred                                                                                         |       | (127,665  | )          | (73,781   | )          | (126,617  | )          |
| Common                                                                                            |       | (78,919   | )          | (45,139   | )          | (74,741   | )          |
| At the end of the year                                                                            |       | 136,682   |       | (17,318   | )          | 2,055     |       |
| Accumulated other comprehensive income  (loss)                                                    |       |      |       |      |       |      |       |
| At the beginning of the year                                                                      |       | 143,583   |       | (1,978    | )          | —    |       |
| Adjustment to unrealized gain on  available-for sale securities.                                  |       | 334,491   |       | 12,221    |       | —    |       |
| Excess of additional liability on  retirement indemnity                                           |       | —    |       | —    |       | (2,996    | )          |
| SFAS 158 transition amount                                                                        |       | —    |       | 202,028   |       | —    |       |
| Postretirement benefit reserves adjustments                                                       |       | 208,682   |       | —    |       | —    |       |
| Income tax benefit (expense)                                                                      |       | (188,834  | )          | (68,688   | )          | 1,018     |       |
| At the end of the year                                                                            |       | 497,922   |       | 143,583   |       | (1,978    | )          |
| Total shareholders’ equity                                                                   |       | 3,532,964 |       | 2,592,643 |       | 2,228,117 |       |
| Comprehensive income:                                                                        |       |      |       |      |       |      |       |
| Net income                                                                                        |       | 841,977   |       | 360,560   |       | 603,268   |       |
| Unrealized gain on available-for-sale  securities, net of taxes (R$117,882 in 2007, none in 2006) |       | 216,609   |       | 12,221    |       | —    |       |
| Postretirement benefit reserves adjustment,  net of tax (R$70,952)                                |       | 137,730   |       | —    |       | —    |       |
| Excess of additional liability on  retirement indemnity, net of taxes (R$1,018 in 2005)           |       | —    |       | —    |       | (1,978    | )          |
| Comprehensive income                                                                              |       | 1,196,316 |       | 372,781   |       | 601,290   |       |

 

See notes to the Consolidated FinancialStatements.

 

F-7

----

#  

# SADIA S.A.

#  

CONSOLIDATEDSTATEMENTS OF CASH FLOWS

Years ended December 31, 2007, 2006 and2005

(In thousands of Reais -R$)

 
| ** **                                                                         | ** ** | **2007**   | ** ** | **2006**   | ** ** | **2005**   | ** ** |
|------------------------------------------------------------------------------------|------------|------------|------------|------------|------------|------------|------------|
| **Cash flows from operating activities:**                                          | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net income                                                                         |       | 841,977    |       | 360,560    |       | 603,268    |       |
| Adjustments to reconcile net income to net  cash provided by operating activities: |       |       |       |       |       |       |       |
| Minority interest                                                                  |       | 33,635     |       | (852       | )          | 164        |       |
| Foreign currency exchange (gains), net                                             |       | (28,911    | )          | (157,050   | )          | (53,377    | )          |
| Equity income or loss of investees                                                 |       | —     |       | 178        |       | 1,219      |       |
| Depreciation and amortization                                                      |       | 246,980    |       | 205,384    |       | 182,263    |       |
| Deferred income taxes                                                              |       | 54,997     |       | 18,117     |       | 16,411     |       |
| Pension plan                                                                       |       | (96,508    | )          | (128,302   | )          | (45,711    | )          |
| Provision for (reversal of) contingencies                                          |       | 12,179     |       | 4,007      |       | (2,611     | )          |
| Loss (gain) from sale of property, plant  and equipment                            |       | (19,703    | )          | (2,225     | )          | 51,897     |       |
| Changes in operating assets and  liabilities:                                      |       |       |       |       |       |       |       |
| Accounts and notes receivable                                                      |       | 97,364     |       | (202,912   | )          | (89,012    | )          |
| Inventories                                                                        |       | (75,088    | )          | (83,091    | )          | 100,221    |       |
| Recoverable taxes and other assets                                                 |       | (6,598     | )          | (108,653   | )          | (73,018    | )          |
| Judicial deposits                                                                  |       | 9,461      |       | 239        |       | (1,192     | )          |
| Suppliers                                                                          |       | 83,972     |       | 7,900      |       | (3,407     | )          |
| Accrued interest, net                                                              |       | (153,197   | )          | 63,569     |       | 130,546    |       |
| Social charges, taxes payable, other  liabilities                                  |       | 74,035     |       | 97,450     |       | 34,685     |       |
| **Net cash provided by operating activities**                                      |       | 1,074,595  |       | 74,319     |       | 852,346    |       |
| **Cash flows from investing activities:**                                          |       |       |       |       |       |       |       |
| Proceeds from sale of property, plant and  equipment                               |       | 3,636      |       | 14,967     |       | 3,400      |       |
| Purchase of property, plant and equipment                                          |       | (950,052   | )          | (969,602   | )          | (673,098   | )          |
| Acquisition, net of cash acquired                                                  |       | (51,238    | )          | —     |       | (69,259    | )          |
| Available-for-sale debt securities:                                                |       |       |       |       |       |       |       |
| Purchases                                                                          |       | (2,528,376 | )          | (2,397,950 | )          | (1,512,809 | )          |
| Maturities and sales                                                               |       | 2,699,282  |       | 2,508,267  |       | 1,015,558  |       |
| **Net cash used in investing activities**                                          |       | (826,748   | )          | (844,318   | )          | (1,236,208 | )          |
| **Cash flows from financing activities:**                                          |       |       |       |       |       |       |       |
| Short-term debt                                                                    |       |       |       |       |       |       |       |
| Issuances                                                                          |       | 1,103,128  |       | 1,237,242  |       | 863,702    |       |
| Repayments                                                                         |       | (1,214,872 | )          | (795,593   | )          | (994,557   | )          |
| Long-term debt                                                                     |       |       |       |       |       |       |       |
| Issuances                                                                          |       | 1,494,855  |       | 1,397,295  |       | 1,490,109  |       |
| Repayments                                                                         |       | (1,098,843 | )          | (833,089   | )          | (916,382   | )          |
| Dividends/interest on capital paid                                                 |       | (106,756   | )          | (169,871   | )          | (129,735   | )          |
| Sale of treasury shares                                                            |       | 480        |       | 463        |       | —     |       |
| Acquisition of treasury stock                                                      |       | (51,240    | )          | (23,427    | )          | (10,179    | )          |
| **Net cash provided by financing activities**                                      |       | 126,752    |       | 813,020    |       | 302,958    |       |
|                                                                               |       |       |       |       |       |       |       |
| Net change in cash and cash equivalents                                            |       | 374,599    |       | 43,021     |       | (80,904    | )          |
| Cash and cash equivalents at beginning of  year                                    |       | 726,295    |       | 683,274    |       | 764,178    |       |
| Cash and cash equivalents at end of year                                           |       | 1,100,894  |       | 726,295    |       | 683,274    |       |

 

See notes to Consolidated Financial Statements.

 

F-8

----

#  

# SADIA S.A.

#  

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years ended December 31, 2007, 2006 and2005

(In thousands of Reais - R$, unless otherwiseindicated)

 

**1.****                  Operations**

** **

Sadia S.A. (together with its consolidated subsidiaries, “Sadia” or “theCompany”) is incorporated under the laws of the Federative Republic of Brazil.Sadia S.A.’s shares are traded on the São Paulo Stock Exchange (Bovespa) and onthe Madrid Stock Exchange (Latibex) and its ADRs on the New York Stock Exchange(NYSE).

 

The Company’s principal business is theproduction and distribution of poultry and pork products. The Company’soperations include feed facilities, hatcheries, poultry farms for grandparentand parent stock, pork breeding centers, poultry and pork processing units,sales offices and distribution centers. Presently Sadia’s operations areorganized into three main business segments: “Processed Products” (sausage,ham, chicken nuggets, margarine, frozen meals, pizza and pasta among othersimilar products), “Poultry” (chickens and turkeys) and “Pork”.

*** ***

The exchange rate of the Brazilian *real* (“R$”) to the U.S. dollar was R$2.3407=US$1.00 at December 31,2005, R$2.1380=US$1.00 at December 31, 2006 and R$1.7713=US$1.00 at December 31,2007.

* *

**2.****                  Presentationof the Consolidated Financial Statements**

** **

a)   Basisof presentation

 

The consolidated financial statements have been prepared in accordance withgenerally accepted accounting principles in the United States of America (“USGAAP”), which differ in certain respects from accounting practices adopted inBrazil (“Brazilian GAAP”), which the Company uses to prepare its statutoryconsolidated financial statements as filed with the Brazilian SecuritiesCommission – CVM (“Comissão de Valores Mobiliários”).

 

b)   Consolidationprocedures

 

The consolidated financial statements include the accounts of Sadia andits controlled subsidiaries (ownership interest greater than 50%). The portionof equity 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 has significantinfluence over, are accounted for on the equity method. All significantintercompany accounts and transactions are eliminated in consolidation.

 

F-9

----

#  

# SADIA S.A.

#  

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years ended December 31, 2007, 2006 and2005

(In thousands of Reais - R$, unless otherwiseindicated)

 

**2.****                  Presentationof the Consolidated Financial Statements** (Continued)

 

b)        Consolidationprocedures (Continued)

 

The following subsidiaries were included in the consolidated financialstatements for the years ending December 31:

 
| ** **                                                      | ** ** | **Ownership %** | ** ** |
|-----------------------------------------------------------------|------------|----------------------|------------|
| ** **                                                      | ** ** | **2007**             | ** ** | **2006** | ** ** |
|                                                            |       |                 |       |   |   |
| **Sadia International Ltd.**                                    | ** ** | **100,00**           | **%**      | **100,00** | **%** |
| Sadia  Uruguay S.A.                                             |       | 100,00               | %          | 100,00 | % |
| Sadia  Alimentos S.A.                                           |       | —               |       | 1,00 | % |
| Sadia Chile  S.A.                                               |       | 60,00                | %          | 60,00 | % |
| Sadia  Alimentos S.A.                                           |       | 95,00                | %          | 99,00 | % |
| Concórdia  Foods Ltd.                                      |       | 100,00               | %          | 100,00 | % |
| Sadia UK.  Ltd.                                                 |       | 100,00               | %          | 100,00 | % |
| **Concórdia  S.A. C.V.M.C.C. (e)**                         | ** ** | **—**           | ** ** | **99,99** | **%** |
| **Big  Foods Indústria de Produtos Alimentícios (b)** | ** ** | **100,00**           | **%**      | **—** | ** ** |
| **Empresa  Matogrossense de Alimentos Ltda. (a)**               | ** ** | **—**           | ** ** | **100,00** | **%** |
| **Intergen  Ltda. (a)**                                         | ** ** | **—**           | ** ** | **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 Overseas Ltd. (c)**                                     | ** ** | **100,00**           | **%**      | **—** | ** ** |
| **Concórdia Holding Financeira S.A. (d)**                  | ** ** | **100,00**           | **%**      | **—** | ** ** |
| Concórdia  S.A. C.V.M.C.C. (d)                             |       | 99,99                | %          | — |   |
| **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               | %          | 100,00 | % |
| Sadia Japan Ltd.                                                |       | 100,00               | %          | 100,00 | % |
| Investeast Ltd. **(f)**                                         |       | 60,00                | %          | — |   |
| Concórdia Ltd **(f)**                                      |       | 100,00               | %          | — |   |

 

----

| (a) | Investment merged with Sadia S.A. on January 12, 2007 |
|-----|------------------------------------------------------------|
| (b) | Acquired controlling on December 3,  2007             |
| (c) | Company established on May 15, 2007.                  |
| (d) | Company established on June 27, 2007.                 |
| (e) | Shareholding control changed on August 27, 2007.      |
| (f) | Company established  on October 29, 2007              |

 

F-10

----

#  

# SADIA S.A.

#  

NOTES TOCONSOLIDATED FINANCIAL STATEMENTS

Years ended December 31, 2007, 2006 and2005

(In thousands of Reais - R$, unless otherwiseindicated)

 

**2.****                  Presentationof the Consolidated Financial Statements** (Continued)

 

b)       Consolidationprocedures (Continued)

 

The Company consolidates the financialstatements of its wholly-owned investment fund Concórdia Foreign InvestmentFund Class A. This investment fund has the sole purpose of centralizingthe foreign investment fund portfolio. The administrative functions over thefunds are delegated to a third party.

 

On January 12, 2007 the Extraordinary General Meeting approved theBoard’s proposal to incorporate the wholly-owned subsidiaries EmpresaMatogrossense de Alimentos Ltda. and Intergen Ltda., in order to obtainoperating and corporate synergies. This will result in reduction ofadministrative expenses due to rationalization of administrative and operatingactivities.

 

On January 31, 2007, the Company closed down Churrascaria BeijingBrasil Co. Ltd., in Peking, a joint venture between Sadia International Ltd.and the Chinese government. On the same day it approved the opening of acommercial agency office of the subsidiary Wellax Food Logistic Comércio deProdutos Alimentares Sociedade Unipessoal Ltd. in Shanghai. The liquidationprocess did not generate any losses for the Company as the book value of R$480was reimbursed.

 

On May 15, 2007 Sadia Overseas Ltd. was established with the objectiveof raising and passing on the funds obtained from the issuing of bonds on theinternational market. The Company was established with capital of US$1thousand, which was totally paid in by Sadia S.A.

 

On June 27, 2007 the establishment of Concórdia Holding FinanceiraS.A. was approved by the Company’s Board of Directors to operate in thefinancial and similar segments. The company was established with initialpaid-in capital of R$10 thousand, and 99.7% of its capital was paid in by SadiaS.A. and the remaining 0.03% by individuals.

 

F-11

----

#  

# SADIA S.A.

#  

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years ended December 31, 2007, 2006 and2005

(In thousands of Reais - R$, unless otherwiseindicated)

 

**2.****                  Presentationof the Consolidated Financial Statements** (Continued)

 

b)        Consolidationprocedures (Continued)

 

On August 27, 2007, Concórdia Holding Financeira S.A. increasedits capital with the issue ordinary, nominative shares, with no par value,which were subscribed in full by Sadia S.A., through the exchange of 999,990shares it owned, of the capital in Concórdia S.A. Corretora de ValoresMobiliários, Câmbio e Commodities.

 

On October 29, 2007, the wholly-owned subsidiary Sadia GmbHacquired 60% of the quotas from the capital in Investeast Ltd., for the amountof US$17 thousand. On November 8, 2007, Investeast Ltd. increased itscapital with the issue of 23,666,666 quotas, of which Sadia GmbH contributedwith 60% corresponding to its investment interest, for the amount of US$14,200thousand. Investeast Ltd. holds 100% of the capital in Concórdia Ltd., anindustrial unit, located in the Russian city of Kaliningrado inaugurated in December 2007,with the start of trade operations forecasted for January 2008.

 

c)   History of acquisitions

 

***Fiscal2007 acquisitions***

*** ***

On December 3, 2007Sadia acquired all capital stock of Big Foods Indústria de ProdutosAlimentícios Ltda. (primarily a producer and distributor of processed products)for R$53,500 in cash, (net of cash acquired of R$2,262). The operations of BigFoods Indústria de Produtos Alimentícios Ltda. are included in the consolidatedfinancial statements from the date of acquisition.

 

The valuation of assetsand liabilities was determined and the purchase price was allocated as follows:

 

F-12

----

#  

# SADIA S.A.

#  

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years ended December 31, 2007, 2006 and2005

(In thousands of Reais - R$, unless otherwiseindicated)

 

**2.****                  Presentationof the Consolidated Financial Statements** (Continued)

 

c)   History of acquisitions—continued

 
| **Assets:**                              |       |       |       |
|------------------------------------------|------------|------------|------------|
| Accounts receivable                      |       | 10,669     |       |
| Inventory                                |       | 3,856      |       |
| Recoverable taxes                        |       | 811        |       |
| Other current assets                     |       | 506        |       |
| Property, plant and equipment            |       | 23,289     |       |
| Amortizable intangible assets            |       | 14,428     |       |
| Other non-current assets                 |       | 302        |       |
| **Liabilities:**                         |       |       |       |
| Short-term and long-term debt            |       | (3,464     | )          |
| Accounts payable and accrued liabilities |       | (15,381    | )          |
| Deferred income taxes liability          |       | (7,353     | )          |
| **Net assets**                           | ** ** | **27,662** | ** ** |
|                                     |       |       |       |
| Purchase price, net of cash acquired     |       | (51,238    | )          |
|                                     |       |       |       |
| Total Goodwill                           |       | 23,576     |       |

 

***Fiscal2006 acquisitions***

*** ***

On January 11, 2006 the Company acquired100% of the quotas representing the capital of Intergen Ltda. The acquiredcompany’s business relates to pork’s genetics. The acquisition price wasR$1,000 and due to immateriality, pro-forma information is not presented.

 

On May 26, 2006 Sadia acquired theremaining 50% equity interest in Concórdia Foods Ltd. for one real and due toimmateriality, pro-forma information is not presented.

 

F-13

----

#  

# SADIA S.A.

#  

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years ended December 31, 2007, 2006 and2005

(In thousands of Reais - R$, unless otherwiseindicated)

 

**2.****                  Presentationof the Consolidated Financial Statements** (Continued)

 

d)   Pro forma results

 

The following unaudited pro forma financial information presents thecombined results of operations of the Company and Big Foods ProdutosAlimentícios Ltda. (“Big Foods”) as if the acquisition had occurred at January 1,2006. The historical results of the Company for 2007 include the results of BigFoods. The pro forma results for 2007 and 2006 combine the historical resultsof the Company for 2007 and 2006 with the historical results for 2007 and 2006of Big Foods. The unaudited pro forma financial information is not intended torepresent or be indicative of the Company’s consolidated results of operationsor financial condition that would have been reported had the acquisition beencompleted as of the beginning of the periods presented and should not be takenas indicative of the Company’s future consolidated results of operations orfinancial condition. Pro forma adjustments are tax-effected at the Company’sstatutory tax rate.

 
| ** **                                | ** ** | **Unaudited  2007** | ** ** | **Unaudited  2006** | ** ** |
|-------------------------------------------|------------|---------------------|------------|---------------------|------------|
|                                      |       |                |       |                |       |
| Net operating revenue                     |       | 8,830,372           |       | 6,886,867           |       |
| Net income                                |       | 836,392             |       | 357,575             |       |
| Basic earnings per thousand shares in R$: |       |                |       |                |       |
| Preferred                                 |       | 1,239.27            |       | 529.81              |       |
| Common                                    |       | 1,239.27            |       | 529.81              |       |

 

**3.****                  SignificantAccounting Policies**

** **

a)   Use of estimates

 

**Thepreparation of financial statements in accordance with**generally accepted accounting principles inthe United States of America requires management tomake estimates and assumptions that directly affect the amounts reported in theconsolidated financial statements and accompanying notes. Significant itemssubject to such estimates and assumptions include the carrying amount andrecoverability of property, plant and equipment, valuation allowances forreceivables, recoverability of deferred income tax assets, provisions forcontingencies, and determination of the fair value of derivatives and financialinstruments and stock option valuation. Actual results could differ from thoseestimates.

 

F-14

----

#  

# SADIAS.A.

#  

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years ended December 31, 2007, 2006 and 2005

(In thousands of Reais - R$, unless otherwise indicated)

 

**3.****                 ****Significant Accounting Policies** (Continued)

** **

**b)**        Cash and cash equivalents

** **

Cash equivalents are highly liquid investments withmaturities of 90 days or less when purchased. For purposes 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.

 

c)         Available-for-sale securities

 

**Managementdetermines the appropriate classification of the debt securities at the time ofpurchase and reevaluates such designation as of each balance sheet date.Available-for-sale securities are carried at fair value, with the unrealizedgains and losses reported in other comprehensive income. Interest on securitiesclassified as available-for-sale is included in interest income and other, net.The specific identification method is used to determine the cost of securitiessold, with realized gains and losses included in interest 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

 

Trade accounts receivableare recorded at the invoiced amount and do not bear interest. The allowance fordoubtful accounts is the Company’s best estimate of the amount of probablecredit losses in the Company’s existing accounts receivable. Account balancesare charged off against the allowance after all means of collection have beenexhausted and the potential for recovery is considered 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

----

#  

# SADIAS.A.

#  

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years ended December 31, 2007, 2006 and 2005

(In thousands of Reais - R$, unless otherwise indicated)

 

**3.****                 ****Significant Accounting Policies** (Continued)

** **

f)           Property, plant and equipment

 

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 by theestimated 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 the Impairment ofLong-Lived Assets

 

The Company reviews its property, plantand equipment for possible impairment whenever events or changes in circumstancesindicate that the carrying value of an asset or group of assets may not berecoverable on the basis of undiscounted future cash flows. The reviews arecarried out at the lowest level of groups of assets to which the Company isable to attribute identifiable future cash flows. If the carrying amount of anasset exceeds its estimated future cash flows, an impairment charge isrecognized by the amount by which the carrying amount of the asset exceeds thefair value of the asset. These reviews to date have not indicated the need torecognize any impairment losses.

 

F-16

----

#  

# SADIAS.A.

#  

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years ended December 31, 2007, 2006 and 2005

(In thousands 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.” SFASNo.141 requires 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 2007. 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)            Environmental matters

 

Our production facilitiesand also our forestry activities are both subject to Government environmentalregulations. We diminish the risks associated with environmental matters,through operating procedures and controls and investments in pollution controlequipment and systems. We believe that no provision for losses related toenvironmental matters is currently required, based on existing Brazilian lawsand regulations.

 

j)            Interest attributed to shareholders’equity

 

Brazilian corporations are permitted to attributeinterest on shareholders’ equity, which is deductible for statutory income taxpurposes. The Company elected to pay such interest to its shareholders on December 31,2007, 2006 and 2005 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

----

#  

# SADIAS.A.

#  

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years ended December 31, 2007, 2006 and 2005

(In thousands 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$555,478, R$502,409 andR$544,364 for the years ended December 31, 2007, 2006 and 2005,respectively.

 

Research and developmentcosts are charged to expense as incurred and totaled R$11,127, R$12,389 andR$10,873 for the years ended December 31, 2007, 2006 and 2005,respectively.

 

Thecost of advertising is expensed as incurred. The Company incurred advertisingexpenses of R$184,478, R$157,449 and R$116,559 during the years ended December 31,2007, 2006 and 2005, respectively.

 

l)            Foreigncurrency transactions

 

Transactionsin foreign currency are recorded at the prevailing exchange rate at the time ofthe related transactions. Foreign currency denominated monetary assets andliabilities are translated using the exchange rate at the balance sheet date.Exchange differences are recognized in the 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

----

#  

# SADIAS.A.

#  

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years ended December 31, 2007, 2006 and 2005

(In thousands of Reais - R$, unless otherwise indicated)

 

**3.****                 ****Significant Accounting Policies** (Continued)

** **

n)        Earnings per share

 

The Company computes basicand diluted earnings per multiples of one thousand of its preferred and commonoutstanding shares to conform to the basis for quoting and trading on the SãoPaulo stock exchange. Basic earnings per one thousand preferred and commonshares is calculated by dividing net income by the sum of the weighted averagenumber of preferred and common shares outstanding during the period*.* The computation has been made as if the net income foreach year would be fully distributed. Earnings may be used to increase capitalor otherwise appropriated; consequently such earnings would no longer beavailable as dividends. Diluted earnings per one thousand preferred and commonshares is computed by dividing net income by the sum of the weighted averagenumber of common and preferred shares outstanding adjusted for the dilutiveeffect derived from the stock option plan.

 

**o)**        Accounting for Derivative Instruments and Hedging Activities

 

In accordance with SFAS No. 133,*“Accounting for Derivative Instruments and HedgingActivities,”* as amended by SFAS No. 137, *“Accountingfor Derivative Instruments and Hedging Activities – Deferral of the EffectiveDate of FASB Statement No. 133,”* and SFAS No. 138, *“Accounting for Certain Derivative Instruments and Certain HedgingActivitie*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.

 

F-19

----

#  

# SADIAS.A.

#  

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years ended December 31, 2007, 2006 and 2005

(In thousands of Reais - R$, unless otherwise indicated)

 

**3.****                 ****Significant Accounting Policies** (Continued)

** **

p)        Share based compensation

 

EffectiveJanuary 31, 2005, the Company adopted the provisions of Statement ofFinancial Accounting Standards (“SFAS”) No.123(R) (revised 2004), “Share-BasedPayments”, or SFAS 123(R), recognizing expense related to the fair value of itsshare-based compensation awards. Shared based compensationexpense for all share-based compensation awards granted is based on thegrant-date fair value estimated in accordance with the provisions of SFAS 123(R) wherethe compensation expense is recognized on a straight-line basis over therequisite service period of the award.

 

q)        Recently Issued Accounting Standards

 

In February 2008, theFASB issued FSP 157-1, which became effective for the Company on January 1,2008. This FSP excludes FASB Statement No. 13, Accounting for Leases, andits related interpretive accounting pronouncements from the provisions of SFAS157, except for leasing transactions arising from business combinations. TheCompany does not expect any significant impact to its consolidated financialstatements.

 

In February 2008, theFASB issued FSP 157-2, which delays the company’s January 1, 2008,effective date of FAS 157 for all non financial assets and non financialliabilities, except those recognized or disclosed at fair value in thefinancial statements on a recurring basis (at least annually), until January 1,2009. The Company does not expect any significant impact to its consolidatedfinancial statements.

 

In February 2007, theFASB issued SFAS permits the measurement of certain financial instruments atfair value. Entities may choose to measure eligible items at fair value atspecified election dates, reporting unrealized gains and losses on such itemsat each subsequent reporting period. SFAS 159 is effective for fiscal yearsbeginning after November 15, 2007. The Company does not expect anysignificant impact to its consolidated financial statements.

 

F-20

----

#  

# SADIAS.A.

#  

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years ended December 31, 2007 2006 and 2005

(In thousands of Reais - R$, unless otherwise indicated)

 

**3.****                 ****Significant Accounting Policies** (Continued)

** **

q)        Recently Issued Accounting Standards (Continued)

 

In December 2007, theFASB issued SFAS 141-R, which will become effective for business combinationtransactions having an acquisition date on or after January 1, 2009. Thisstandard requires the acquiring entity in a business combination to recognizethe assets acquired, the liabilities assumed, and any noncontrolling interestin the acquire at the acquisition date to be measured at their respective fairvalues. SFAS 141-R changes the accounting treatment for the following items:acquisition-related costs and restructuring costs to be generally expensed whenincurred; in-process research and development to be recorded at fair value asan indefinite-lived intangible asset at the acquisition date; changes indeferred tax asset valuation allowances and income tax uncertainties after theacquisition to be generally recognized in income tax expense; acquiredcontingent liabilities to be recorded at fair value at the acquisition date andsubsequently measured at either the higher of such amount or the amountdetermined ‘under existing guidance for non-acquired contingencies. SFAS 141-Ralso includes a substantial number of new disclosures requirements. The impacton the application of SFAS 141-R in the consolidation financial statements willdepend on the business combinations arising during 2009 and thereafter.

 

In December 2007, theFASB issued SFAS establishes new accounting and reporting standards for thenoncontrolling interest in a subsidiary and for the deconsolidation of asubsidiary. SFAS 160 requires the recognition of a noncontrolling interest(minority interest) as equity in the consolidated financial statements andseparate from the parent’s equity. The amount of net income attributable to thenoncontrolling interest will be included in consolidated net income on the faceof the income statement. Certain changes in a parent’s ownership interest areto be accounted for as equity transactions and when a subsidiary isdeconsolidated, any noncontrolling equity investment in the former subsidiaryis to be initially measured at fair value. SFAS 160 also includes expandeddisclosure requirements regarding the interests of the parent and itsnoncontrolling interest and is effective for fiscal years, and interim periodswithin those fiscal years, beginning on or after December 15, 2008. The Companydoes not expect any significant impact to its consolidated financial position.

 

r)           Recently Adopted Accounting Standards

 

In July 2006, the FASB issued FIN 48, whichbecame effective for the Company on January 1, 2007 (see Note 19).

 

F-21

----

#  

# SADIAS.A.

#  

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years ended December 31, 2007 2006 and 2005

(In thousands of Reais - R$, unless otherwise indicated)

 

**4.****                 ****Cashand Cash Equivalents**

 
| ** **                            | ** ** | **2007**   | ** ** | **2006**   | ** ** |
|---------------------------------------|------------|------------|------------|------------|------------|
|                                  |       |       |       |       |       |
| **Local currency**                    | ** ** | ** ** | ** ** | ** ** | ** ** |
| Cash and bank accounts                |       | 196,920    |       | 200,931    |       |
| Investment funds of variable earnings |       | 420,239    |       | 259,697    |       |
| Others                                |       | 3,051      |       | —     |       |
|                                  |       | 620,210    |       | 460,628    |       |
| **Foreign currency**                  |       |       |       |       |       |
| Cash and bank accounts                |       | 123,108    |       | 32,754     |       |
| Interest-bearing current account      |       | 357,576    |       | 232,913    |       |
|                                  |       | 480,684    |       | 265,667    |       |
|                                  |       | 1,100,894  |       | 726,295    |       |

 

**5.****                 ****Available-for-SaleSecurities**

 

Thefollowing is a summary of available-for-sale debt securities at December 31,2007 and 2006:

 
| ** **              | ** ** | **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, 2007  |       |                                             |       |   |   |   |   |   |   |
| Investment funds        |       | 1,312,057                                        |       | — |   | — |   | 1,312,057 |   |
| Investment in Stocks    |       | 17,762                                           |       | 346,712 |   | — |   | 364,474 |   |
| National treasury notes |       | 86,236                                           |       | — |   | — |   | 86,236 |   |
| Total                   |       | 1,416,055                                        |       | 346,712 |   | — |   | 1,762,767 |   |

 

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

----

#  

# SADIAS.A.

#  

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years ended December 31, 2007, 2006 and 2005

(In thousands of Reais - R$, unless otherwise indicated)

 

**5.****                 ****Available-for-SaleSecurities**(Continued)

 

Theamortized cost and estimated fair value of available-for-sale securities at December 31,2007, by contractual maturity, are shown below:

 
| ** **                | ** ** | **Available for-sale-debt securities** | ** ** |
|---------------------------|------------|--------------------------------------------------|------------|
| **Maturity periods** | ** ** | **Amortized  Cost**                              | ** ** | **Estimated Fair  Value** | ** ** |
|                      |       |                                             |       |   |   |
| Due in less than one year |       | 1,262,251                                        |       | 1,262,251 |   |
| Due in one to three years |       | 118,236                                          |       | 464,948 |   |
| Due after five years      |       | 35,568                                           |       | 35,568 |   |
| Total                     |       | 1,416,055                                        |       | 1,762,767 |   |

 

**6.****                 ****Accountsand Notes Receivable, Net**

 
| ** **                                  | ** ** | **2007** | ** ** | **2006** | ** ** |
|---------------------------------------------|------------|----------|------------|----------|------------|
| Customer                                    |       |     |       |     |       |
| Domestic                                    |       | 606,037  |       | 544,501  |       |
| Export, mainly denominated in U. S. dollars |       | 235,424  |       | 391,477  |       |
| Allowance for doubtful accounts             |       | (7,112   | )          | (14,934  | )          |
|                                        |       | 834,349  |       | 921,044  |       |

 

Thechanges in the allowance for doubtful accounts are as follows:

 
| ** **                           | ** ** | **2007** | ** ** | **2006** | ** ** | **2005** | ** ** |
|--------------------------------------|------------|----------|------------|----------|------------|----------|------------|
|                                 |       |     |       |     |       |     |       |
| Balance at the beginning of the year |       | (14,934  | )          | (10,591  | )          | (9,160   | )          |
| Amounts charged to expense           |       | (2,359   | )          | (6,435   | )          | (4,234   | )          |
| Write offs                           |       | 10,181   |       | 2,092    |       | 2,803    |       |
| Balance at the end of the year       |       | (7,112   | )          | (14,934  | )          | (10,591  | )          |

 

The Company and itssubsidiaries abroad (Sadia International Ltd. and Wellax Food Comércio deProdutos Alimentares Lda.) entered and amended the Insured Receivables PurchaseAgreement selling its export receivables up to a limit of US$200 million, withinterest rate of 0.26% + 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

----

#  

# SADIAS.A.

#  

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years ended December 31, 2007 2006 and 2005

(In thousands of Reais - R$, unless otherwise indicated)

 

**6.****                 ****Accountsand Notes Receivable, Net** (Continued)

 

Under this agreement, theCompany retained servicing responsibilities, such as collection. At December 31,2007, the receivables sold under this agreement amounted to R$354,260(R$363,464 in 2006).

 

During the year ended December 31,2007, the Company received cash proceeds of approximately R$3,578 million(R$1,910 million in 2006) and incurred expenses of R$16 million (R$14 millionin 2006 and R$8 million in 2005) with respect to this agreement. The Companyhad no credit losses on the sale of the receivables under this agreement for December 31,2007, 2006 and 2005.

 

During 2007, 2006 and 2005,no single customer or group represented more than 10% of consolidated sales.

 

**7.****                 ****Inventories**

 
| ** **                      | ** ** | **2007**  | ** ** | **2006**  | ** ** |
|---------------------------------|------------|-----------|------------|-----------|------------|
|                            |       |      |       |      |       |
| Finished goods                  |       | 336,180   |       | 353,434   |       |
| Live stock and poultry          |       | 291,521   |       | 304,561   |       |
| Raw materials                   |       | 208,216   |       | 179,060   |       |
| Work in process                 |       | 226,669   |       | 159,297   |       |
| Packing material                |       | 44,945    |       | 33,653    |       |
| Stock in transit                |       | 308       |       | 10        |       |
| Supplies in warehouse and other |       | 36,138    |       | 35,017    |       |
|                            |       | 1,143,976 |       | 1,065,032 |       |

 

**8.****                 ****RecoverableTaxes**

 
| ** **                                            | ** ** | **2007** | ** ** | **2006** | ** ** |
|-------------------------------------------------------|------------|----------|------------|----------|------------|
|                                                  |       |     |       |     |       |
| Value-added state sales tax- ICMS                     |       | 233,079  |       | 145,978  |       |
| Value-added tax - IVA                                 |       | 65,966   |       | 4,085    |       |
| PIS and COFINS                                        |       | 95,906   |       | 84,619   |       |
| Federal excise tax – IPI                         |       | 43,916   |       | 59,175   |       |
| Income tax withheld at source and advanced income tax |       | 25,629   |       | 37,679   |       |
| INSS                                                  |       | 26,545   |       | —   |       |
| Other                                                 |       | 52       |       | 40       |       |
| Total                                                 |       | 491,093  |       | 331,576  |       |
| Current portion                                       |       | (325,868 | )          | (169,347 | )          |
| Non current portion                                   |       | 165,225  |       | 162,229  |       |

 

F-24

----

 

# SADIA S.A.

#  

NOTES TO CONSOLIDATED FINANCIALSTATEMENTS

Years ended December 31,2007 2006 and 2005

(In thousands of Reais - R$,unless otherwise indicated)

 

**8.      Recoverable Taxes**(Continued)

 

Value-added state sales tax- ICMS

 

Composed of credits generated by thecommercial operations and by the acquisition of property, plant and equipment,of a number of the Company’s units and can be offset with taxes of the samenature.

 

Value-added tax - IVA

 

Composed of credits generated by thecommercial operations in the foreign subsidiaries, which will be compensatedwith taxes of the same nature or cash reimbursements.

 

PIS and COFINS

 

Composed of credits arising fromnon-cumulative collection of PIS and COFINS, which can be compensated withother federal taxes.

 

Federal excise tax - IPI

 

Federal excise tax - IPI credits includes thetax credit on packing and other material and the presumed IPI incentive onexports. IPI credits are recognized as a reduction of cost of raw materialsused in the production process of goods produced for export and are availableto be utilized against other federal taxes payable.

 

Income tax withheld at source

 

Income tax withheld at source representsincome tax paid upon redemption of certain investments and is available to beutilized against other federal income taxes payable.

 

National Institute of Social Security - INSS

 

As reported in note 20, the balance relates tocredits originated from the Funrural charge on operations related to theproduction of poultry, which can be compensated with contributions of the samenature.

 

F-25

----

 

# SADIA S.A.

#  

NOTES TO CONSOLIDATED FINANCIALSTATEMENTS

Years ended December 31,2007 2006 and 2005

(In thousands of Reais - R$,unless otherwise indicated)

 

**9.      Property, Plant and Equipment**

 
| ** **               | ** ** | **2007**   | ** ** | **2006**   | ** ** |
|--------------------------|------------|------------|------------|------------|------------|
|                     | ** ** | ** ** | ** ** | ** ** | ** ** |
| Land                     |       | 96,236     |       | 91,605     |       |
| Buildings                |       | 991,810    |       | 688,288    |       |
| Machinery and equipment  |       | 1,462,205  |       | 1,165,878  |       |
| Installations            |       | 480,467    |       | 321,594    |       |
| Breeding stock           |       | 463,122    |       | 315,769    |       |
| Softwares                |       | 92,584     |       | 67,469     |       |
| Vehicles                 |       | 17,831     |       | 19,713     |       |
| Timber and reforestation |       | 36,251     |       | 27,524     |       |
| Other                    |       | 1,163      |       | 353        |       |
| Construction in progress |       | 686,548    |       | 647,467    |       |
|                     |       | 4,328,217  |       | 3,345,660  |       |
| Accumulated depreciation |       | (1,430,809 | )          | (1,190,636 | )          |
| Total                    |       | 2,897,408  |       | 2,154,980  |       |

 

Interest capitalized as part of property,plant and equipment was R$53,620, R$44,554 and R$16,852 for the years ended December31, 2007, 2006 and 2005, respectively.

 

**10.    Judicial Deposits**

 

Judicial deposits are restricted assets ofthe Company placed on deposit with the court and held in judicial escrowrelating to certain legal proceedings pending legal resolution.

 

**11.       Other Intangible Assets, Net**

** **

Intangible assets consist of the following:

 
| ** **       | ** ** | **Amortizable  cost amount  in 2006** | ** ** | **Acquisition  in 2007** | ** ** | **Amortization** | ** ** | **Amortizable  cost amount in  2007** | ** ** |
|------------------|------------|-------------------------------------------------|------------|-------------------------------|------------|------------------|------------|-------------------------------------------------|------------|
|             |       |                                            |       |                          |       |             |       |                                            |       |
| Brand            |       | 5,648                                           |       | —                        |       | (1,694           | )          | 3,954                                           |       |
| Client portfolio |       | 19,730                                          |       | 14,428                        |       | (2,368           | )          | 31,790                                          |       |
|             |       | 25,378                                          |       | 14,428                        |       | (4,062           | )          | 35,744                                          |       |

 

F-26

----

 

# SADIA S.A.

#  

NOTES TO CONSOLIDATED FINANCIALSTATEMENTS

Years ended December 31,2007 2006 and 2005

(In thousands of Reais - R$,unless otherwise indicated)

 

**11.       Other Intangible Assets, Net**(Continued)

** **

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** | ** ** |
|------------|------------|---------------------------------------|------------|
|       |       |                                  |       |
| 2008       |       | 5,505                                 |       |
| 2009       |       | 5,505                                 |       |
| 2010       |       | 4,375                                 |       |
| 2011       |       | 3,811                                 |       |
| 2012       |       | 3,811                                 |       |
| Thereafter |       | 12,737                                |       |
|       |       | 35,744                                |       |

 

**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 |   |
| Tax benefit allocated to reduce goodwill       |   | (2,871 | )      |
| Goodwill relating to acquisition during  2007  |   | 23,577 |   |
| Balance as December 31,2007               |   | 50,563 |   |

# ** **

# **Goodwill refers to the acquisitions of SóFrango in 2005 and Big Foods in 2007 and the Company estimates its balance willbe deductible for tax purposes.**

 

F-27

----

 

# SADIA S.A.

#  

NOTES TO CONSOLIDATED FINANCIALSTATEMENTS

Years ended December 31,2007 2006 and 2005

(In thousands of Reais - R$,unless otherwise indicated)

 

**13.    Short-term Debt**

 
| ** **                                          | ** ** | **2007**  | ** ** | **2006**  | ** ** |
|-----------------------------------------------------|------------|-----------|------------|-----------|------------|
|                                                |       |      |       |      |       |
| Working capital from commercial banks               |       | 696,116   |       | 708,868   |       |
| Trade accounts receivable domestic credit  facility |       | 347,763   |       | 242,446   |       |
| Bank borrowings, secured by accounts  receivable    |       | 58,688    |       | 275,253   |       |
|                                                |       | 1,102,567 |       | 1,226,567 |       |

 

Working capital from commercial banksprimarily relates to export financing and pre-export advances, of whichR$449,918 in 2007 (R$477,208 in 2006) are denominated in U.S. dollars withinterest at Libor (4.60% p.a. at December 31, 2007) plus a spread at therate of 0.15% p.a. and fixed rate coupons of 7.60% p.a. in 2007 (interest ratespread of 0.10% p.a. and fixed rate of 6.50% p.a. in 2006).

 

On May 12, 2003, the Company enteredinto an agreement to sell, from time to time, up to R$150,000 of its domesticreceivables to a special purpose entity, organized as an investment fund. Thereceivables sold are subject to a discount rate that should not be lower than95% of the average rate of Brazilian interbank certificate deposits (11.12%p.a. at December 31, 2007). Through December 31, 2007, the Companyreceived cash proceeds of R$3,447,000 (R$2,795,000 in 2006) from the sales ofdomestic receivables under this agreement and incurred in interest expenses ofR$28,000 for the year ended December 31, 2007 (R$30,000 in 2006). Based onthe structure of this transaction, the agreement has been accounted for as afinancing by the Company. As of December 31, 2007, the accounts receivablefor this finance pledged as collateral were R$347,763 (R$242,446 on December 31,2006).

 

At December 31, 2007 and 2006, theweighted average interest rates on short-term debt were 6.30% p.a. and 5.36%p.a., respectively.

 

F-28

----

#  

# SADIA S.A.

#  

NOTES TO CONSOLIDATED FINANCIALSTATEMENTS

Years ended December 31,2007 2006 and 2005

(In thousands of Reais - R$,unless otherwise indicated)

 

**14.    Long-term Debt**

 
| ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 | ** ** | **2007**  | ** ** | **2006**  | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------|------------|-----------|------------|
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |       |      |       |      |       |
| **Foreign debt (denominated in U.S. dollars):**                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |       |      |       |      |       |
| Export financing, composed of prepayment,  payable in amount of R$178,367 in installments up to 2012, subject to LIBOR  variation for 6 month deposits (4.60% in December 2007 plus annual  interest of 0.50% p.a, and a line focused on the incentive for foreign trade  in amount of R$1,096,112, subject to LIBOR variation for 6 month plus  interest of 1.40% p.a., guaranteed by promissory notes or sureties.                                                                                                  |       | 1,274,479 |       | 1,904,241 |       |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |       |      |       |      |       |
| Funds raised on the international capitals  market through the issuance of bonds to be paid in 2017 with interest of  6.88% per annum, guaranteed by endorsement.                                                                                                                                                                                                                                                                                                                                                          |       | 445,869   |       | —    |       |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |       |      |       |      |       |
| BNDES (National Bank for Economic and  Social Development), payable from 2008 to 2015, composed as follows: FINEM in  the amount of R$6,501 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$144,579 subject to the weighted average of  the exchange variation of currencies traded by BNDES - UMBNDES and fixed  annual interest of 3.50% p.a. guaranteed by mortgage bonds and real estate  mortgages |       | 151,080   |       | 145,458   |       |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |       |      |       |      |       |
| 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                                                                                                                                                                                                                                                                                   |       | 6,312     |       | 13,734    |       |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |       | 1,877,740 |       | 2,063,433 |       |

 

F-29

----

 

# SADIA S.A.

#  

NOTES TO CONSOLIDATED FINANCIALSTATEMENTS

Years ended December 31,2007 2006 and 2005

(In thousands of Reais - R$,unless otherwise indicated)

 

**14.    Long-term Debt**(Continued)

 
| ** **                                                                                                                                                                                                                                                                                                                                                                                                                                    | ** ** | **2007**  | ** ** | **2006**  | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------|------------|-----------|------------|
| **Local debt (denominated in reais):**                                                                                                                                                                                                                                                                                                                                                                                                        |       |      |       |      |       |
| BNDES (National Bank for Economic and  Social Development), credit lines for investments and exports, payable from  2008 to 2015, composed as follows: FINAME in the amount of R$865,550 subject  to the Long-Term Interest Rate -TJLP (6.25% p.a. in December 2007) and  interest of 3.55% p.a. and FINEM in the amount of R$8,320 subject to TJLP and  interest of 3.50% p.a., guaranteed by mortgage bonds and real estate  mortgages |       | 873,870   |       | 651,537   |       |
|                                                                                                                                                                                                                                                                                                                                                                                                                                          |       |      |       |      |       |
| PESA - Special Aid Program for Agribusiness  payable in installments from 2008 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$35,568 and  sureties.                                                                                                                                                    |       | 144,935   |       | 136,440   |       |
|                                                                                                                                                                                                                                                                                                                                                                                                                                          |       |      |       |      |       |
| Other subject to interest rate from 1% to  14% p.a.                                                                                                                                                                                                                                                                                                                                                                                           |       | 17,093    |       | 34,267    |       |
|                                                                                                                                                                                                                                                                                                                                                                                                                                          |       |      |       |      |       |
|                                                                                                                                                                                                                                                                                                                                                                                                                                          |       | 2,913,638 |       | 2,885,677 |       |
| Less current portion of long- term debt                                                                                                                                                                                                                                                                                                                                                                                                       |       | (225,523  | )          | (214,708  | )          |
| Long- term portion                                                                                                                                                                                                                                                                                                                                                                                                                            |       | 2,688,115 |       | 2,670,969 |       |

 

At December 31,2006, long-term debt maturities were as follows:

 
| 2009       |   | 262,907   |   |
|------------|--------|-----------|--------|
| 2010       |   | 550,373   |   |
| 2011       |   | 619,066   |   |
| 2012       |   | 447,759   |   |
| Thereafter |   | 808,010   |   |
|       |   | 2,688,115 |   |

 

F-30

----

 

# SADIA S.A.

#  

NOTES TO CONSOLIDATED FINANCIALSTATEMENTS

Years ended December 31,2007 2006 and 2005

(In thousands of Reais - R$,unless otherwise indicated)

 

**15.    Commitments, Contingencies and Guarantees**

** **

**Commitments**

 

The Company has entered into purchasecommitments for production purposes (packing) amounting to approximatelyR$59,000 at December 31, 2007 and is payable until 2010.

 

*Leasing*

 

The Company has non-cancelable operating leaseagreements for industrial units that expire over the next five years. Theseleasing are subject to renewal for 1 more year and do not require any penaltyif the Company does not renew them. The Company does not pay execution costs,such as maintenance and insurance. The rental expenses totaled R$ 118,743 in2007 (R$ 64,470 in 2006).

 

The table below shows the future paymentsrelated to the leasing agreement at December 31, 2007:

 
| 2008  |   | 181,200 |   |
|-------|--------|---------|--------|
| 2009  |   | 181,200 |   |
| 2010  |   | 131,900 |   |
| 2011  |   | 131,900 |   |
| 2012  |   | 131,900 |   |
| Total |   | 758,100 |   |

 

**Contingencies**

 

The Company is party to certain legalproceedings arising in the normal course of business, and has made provisionsbased on its best estimate of the probable losses that will ultimately beincurred. The Company believes that the provisions made are sufficient to coverprobable losses. In connection with certain legal proceedings, the Company hasmade judicial deposits, which will only be released upon a favorable legaljudgment (see Note 10).

 

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

 

F-31

----

#  

# SADIA S.A.

#  

NOTES TO CONSOLIDATED FINANCIALSTATEMENTS

Years ended December 31,2007 2006 and 2005

(In thousands of Reais - R$,unless otherwise indicated)

 

**15.    Commitments, Contingencies and Guarantees** (Continued)

** **

**Contingencies** (Continued)

 

Contingencies classified as having a probablerisk of loss, for which provisions are recorded under liabilities, have thefollowing balances:

 
| ** ** | ** ** | **2007** | ** ** | **2006** | ** ** |
|------------|------------|----------|------------|----------|------------|
|       |       |     |       |     |       |
| Tax        |       | 26,908   |       | 31,605   |       |
| Civil      |       | 15,046   |       | 8,950    |       |
| Labor      |       | 31,772   |       | 24,116   |       |
|       |       | 73,726   |       | 64,671   |       |

 

*Tax litigation*

 

The main tax contingencies involve thefollowing cases:

 

a)   Withholdingincome tax

 

Provision for withholding income tax oninvestments of Granja Rezende amounting to R$4,075 and R$985 for otherprovisions.

 

b)   StateVAT (ICMS)

 

The Company is a defendant in severaladministrative cases involving ICMS, mainly in the States of São Paulo, Rio deJaneiro and Paraná totaling a probable contingency estimated at R$12,471.

 

c)   Othertax contingencies

 

Several cases related to payment of Socialsecurity contribution, PIS (Social Integration Program Tax), Import Duty andothers totaling a provision of R$9,377.

 

The Company has other contingencies of a taxnature in the amount of R$903,729 in December 31, 2007, which wasevaluated as representing a possible loss by the legal advisors and by Companymanagement, therefore, no provision has been recorded. These contingenciesrefers mainly to questions raised regarding ICMS credits in the amount ofR$297,136, IPI Credit premium, in the amount of R$297,345, and payment ofsocial security contributions, in the amount of R$173,804.

 

F-32

----

 

# SADIA S.A.

#  

NOTES TO CONSOLIDATED FINANCIALSTATEMENTS

Years ended December 31,2007 2006 and 2005

(In thousands of Reais - R$, unlessotherwise indicated)

 

**15.    Commitments, Contingencies and Guarantees** (Continued)

** **

*Civil litigation*

 

The amount provided represents principallyproceedings involving claims for indemnification for losses and damages,including pain and suffering, arising from work-related accidents and consumerrelations.

 

The Company has other civil contingencies where the claimed amount isR$59,606, that were assessed as possible losses by the Company’s legal counseland management and therefore no provision was recorded.

 

*Labor claims*

 

There are approximately 2,205 labor claims against the Company. Theseclaims are mainly related to overtime, and health exposure or hazard premiums,none of the amounts provided involve a significant amount on an individualbasis. The total amount of such labor claims amount to R$53,491 and a provisionof R$31,772 has been provided in the accompanying financial statements based onhistorical information and represents the Company’s best estimate of theultimate loss that will be incurred.

 

**Guarantees**

 

The Company provides guarantees for loansobtained by certain out growers located in the central region of Brazil as partof a special development program for that region. Such loans are used toimprove the out growers farms installations and will be repaid in 10 years. Theloans guaranteed by the Company amount to R$229,700 (R$20,245 in 2006) andbased upon the provisions of FIN 45 the fair value of the non-contingentobligation of such guarantees in the amount of R$6,335 has been provided 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 shareholders may not vote atshareholders’ meetings but have the right to receive priority in repayment oftheir capital, in the case of liquidation.

 

F-33

----

 

# SADIA S.A.

#  

NOTES TO CONSOLIDATED FINANCIALSTATEMENTS

Years ended December 31,2007 2006 and 2005

(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, 2007, 2006 and2005:

 
| ** **                         | ** ** | **2007**    | ** ** | **2006**    | ** ** | **2005**    | ** ** |
|------------------------------------|------------|-------------|------------|-------------|------------|-------------|------------|
|                               |       |        |       |        |       |        |       |
| 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       |       | (10,259,288 | )          | (5,924,288  | )          | (2,504,288  | )          |
| Total outstanding shares           |       | 672,740,712 |       | 677,075,712 |       | 680,495,712 |       |

 

The Company’s by-laws provide to pay amandatory dividend to common and preferred shareholders of at least 28% ofannual net distributable income determined in accordance with BrazilianCorporate Law. From 1997 to 2004, preferred shareholders were entitled toreceive a dividend per share 10% higher than common shareholders.

 

On December 15,2005, in an extraordinary general shareholder’s meeting, the right forpreferred shares to be included in a potential public offering for sale of theCompany’s control (Tag along) was approved, and the shareholders holdingpreferred shares were guaranteed a minimum price equal to 80% of the amountpaid for a share with voting rights, which is part of the controlling block,substituting/excluding item b) of article 12 of the by-laws that granted anadvantage for receipt of dividends by holders of preferred shares at least 10%higher than those attributed to the holders of common shares, therefore makingequal the remunerations attributed to the common and preferred shares in termsof dividends. This approval was ratified in a Special Meeting of PreferredShareholders by 57.12% of the total number of preferred shares holders.

 

Brazilian Corporate Law permits the paymentof 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. At December 31,2007 and 2006 the Company had in its statutory books the following amounts:

 
| ** **                       | ** ** | **2007** | ** ** | **2006** | ** ** |
|----------------------------------|------------|----------|------------|----------|------------|
| Appropriated retained earnings:  |       |     |       |     |       |
| Research and development reserve |       | 71,843   |       | 74,444   |       |
| Expansion reserve                |       | 836,747  |       | 850,147  |       |

 

F-34

----

 

# SADIA S.A.

#  

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years ended December 31, 2007 2006 and2005

(In thousands of Reais - R$, unless otherwiseindicated)

 

**16.****          Shareholders’Equity** (Continued)

 

Dividends paid per thousand shares in**R$were as follows:

 
| ** ** | ** ** | **2007** | ** ** | **2006** | ** ** | **2005** | ** ** |
|------------|------------|----------|------------|----------|------------|----------|------------|
|       |       |     |       |     |       |     |       |
| Preferred  |       | 189.61   |       | 287.12   |       | 231.96   |       |
| Common     |       | 189.61   |       | 287.12   |       | 210.87   |       |

 

Brazilian Corporate Law and the Company’s by-laws require that annualappropriations be made to certain reserves (appropriated retained earnings). Thesecomprise mainly (a) 5% of net income (statutory accounts) must betransferred to a legal reserve until such reserve reaches 20% of capital stockunder Brazilian GAAP; (b) appropriation of 15% to a research anddevelopment reserve which is general reserve for support development of theCompany’s operations; (c) appropriation from 15% to 60% to a expansionreserve. The legal reserve cannot be used to distribute dividends toshareholders.

 

The components of appropriated retained earnings at December 31, 2007and 2006 were as follows:

 
| ** **                       | ** ** | **2007** | ** ** | **2006** | ** ** |
|----------------------------------|------------|----------|------------|----------|------------|
|                             |       |     |       |     |       |
| Legal reserve                    |       | 72,238   |       | 74,839   |       |
| Research and development reserve |       | 71,843   |       | 74,444   |       |
| Expansion reserve                |       | 836,747  |       | 850,147  |       |
|                             |       | 980,828  |       | 999,430  |       |

 

**17.****          StockOption Plan**

 

In the Ordinary and Extraordinary General Meeting of April 29,2005 the stock option plan was approved for the Company’s officers. The plancomprises nominative preferred shares issued by the Company.

 

The price for exercising the options does not include any discount andwill be based on the average value of the quotation for the share in the lastthree days of trading on the São Paulo Stock Exchange prior to the grant date,updated by the accumulated National Consumer Price Index (INPC) between thegrant date and the exercise date of the option. The vesting period, duringwhich the participant cannot exercise their rights to purchase the shares, willbe three years as from the option granting date. The participants will be ableto fully or partially exercise their purchase rights after the vesting periodwithin a maximum period of 2 years, and only after this period has expired willlose the right to the options not exercised.

 

F-35

----

 

# SADIA S.A.

#  

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years ended December 31, 2007 2006 and2005

(In thousands of Reais - R$, unless otherwiseindicated)

 

**17.****          StockOption Plan**(Continued)

 

Under the plan regulations, the preferred shares will be reacquired andearmarked in treasury for this sole purpose.

 

The composition of the options granted ispresented as follows:

 
| ** ** | ** ** | **Date**  | ** ** | **Quantity of** | ** ** | **Price of shares** | ** ** |
|------------|------------|-----------|------------|----------------------|------------|-------------------------------|------------|
| **Cycle**  | ** ** | **Grant** | ** ** | **Expiration**       | ** ** | **Shares**                    | ** ** | **Grant date** | ** ** | **Update-INPC** | ** ** |
|       |       |      |       |                 |       |                          |       |   |   |   |   |
|       |       |      |       |                 |       |                          |       |   |   | At 12/31/2008 |   |
| 2005       |       | 06/24/05  |       | 06/24/10             |       | 2.200.000                     |       | 4.55 |   | 5.00 |   |
| 2006       |       | 09/26/06  |       | 09/26/11             |       | 3.520.000                     |       | 5.68 |   | 6.06 |   |
| 2007       |       | 09/27/07  |       | 09/27/10             |       | 5.000.000                     |       | 10.03 |   | 10.23 |   |

 

Considering the provisions of SFAS 123R, as the option price containsan inflation index (INPC) that is considered an *othercondition*, the fair value of the option in the amount of R$14,763(R$3,324 in 2006) has been classified in stock option, non-current liabilityand the compensation expense as general and administration expense.Compensation expense is charge to profit and loss on straight line basis overthe vesting period of the options. The compensation expense amount to R$12,788in 2007, R$2,930 in 2006 and R$678 in 2005.

 

The fair value of stock-based awards was estimated based on thefollowing assumptions for the year ended December 31, 2007, 2006 and 2005:

 
| ** **                                | ** ** | **December,  31 2007** | ** ** | **December,  31 2006** | ** ** | **December,  31 2005** | ** ** |
|-------------------------------------------|------------|-----------------------------|------------|-----------------------------|------------|-----------------------------|------------|
|                                      |       |                        |       |                        |       |                        |       |
| Expected term (in years)                  |       | 5                           |       | 5                           |       | 5                           |       |
| Interest rate                             |       | 9.9                         | %          | 13                          | %          | 18                          | %          |
| Volatility                                |       | 43,61                       |       | 44.39                       | %          | 37.06                       | %          |
| Dividend yield                            |       | 3.3                         | %          | 3.5                         | %          | 4.8                         | %          |
| Expected inflation                        |       | 12.36                       | %          | 11.64                       | %          | 12.12                       | %          |
| Weighted-average fair value at grant date |       | R$                          | 3.51       |                        | R$         | 2.77                        |       | R$ | 2.84 |   |
|                                           |            |                             |            |                             |            |                             |            |  |  |  |

 

Expected Term - TheCompany’s expected term represents the period that the Company’s stock-basedawards are expected to be outstanding and was determined based on theassumption that the officers will exercise their options the vesting period isover.

 

Expected Volatility –The Company uses the trading history and implied volatility of its preferredstock in determining an estimated volatility factor when using theBlack-Scholes option-pricing formula to determine the fair value of optionsgranted.

 

F-36

----

 

# SADIA S.A.

#  

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years ended December 31, 2007 2006 and2005

(In thousands of Reais - R$, unless otherwiseindicated)

 

**17.****          StockOption Plan** (Continued)

 

Expected Dividend –The Company uses the payments history per stock dividends for the expecteddividend value factor when using the Black-Scholes option-pricing formula todetermine the fair value of options granted.

 

Estimated forfeitures– When estimating forfeitures, the Company considers voluntary and involuntarytermination behaviors as well as analysis of actual options forfeitures.

 

Risk-Free Interest Rate- The Company bases the risk-free interest rate used in the Black-Scholesvaluation method on the implied yield currently available on Interbank BankCertificated rate – CDI.

 

Inflation – Expectedinflation determined based on the information available with BACEN (BrazilianCentral Bank).

 

As of December 31, 2007 the amount of R$27,958 related to theunrecognized compensation cost related to stock options is expected to berecognized from 1.0 to 2.8 years. The Company currently has shares in treasury,which are sufficient to cover future stock option exercises.

 

Stock option activity for the years presented is as follows:

 
| ** **                               | ** ** | **Shares in  thousands** | ** ** | **Weighted-  average expected  exercise price** | ** ** |
|------------------------------------------|------------|-------------------------------|------------|-----------------------------------------------------------|------------|
|                                     |       |                          |       |                                                      |       |
| 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                                                      |       |
| Grants of options                        |       | 5,000                         |       | 11.43                                                     |       |
| Exercises                                |       | (100                          | )          | 4.80                                                      |       |
| Forfeitures or expirations               |       | (265                          | )          | —                                                    |       |
| Outstanding as of December 31, 2007 |       | 9,955                         |       | 8.74                                                      |       |

 

None of the outstanding shares was exercisable at 2007, 2006 and 2005.

 

F-37

----

 

**SADIA S.A.**

** **

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years ended December 31, 2007 2006 and2005

(In thousands of Reais - R$, unless otherwiseindicated)

 

**18.****          NetIncome per share**

 

The tablebelow reconciles basic weighted average outstanding to diluted weighted averageshares outstanding.

 
| ** **                                          | ** ** | **2007**    | ** ** | **2006**      | ** ** | **2005**    | ** ** |
|-----------------------------------------------------|------------|-------------|------------|---------------|------------|-------------|------------|
| ** **                                          | ** ** | **Common**  | ** ** | **Preferred** | ** ** | **Common**  | ** ** | **Preferred** | ** ** | **Common** | ** ** | **Preferred** | ** ** |
|                                                |       |        |       |          |       |        |       |   |   |   |   |   |   |
| Basic weighted average shares outstanding           |       | 257,000,000 |       | 417,908,212   |       | 257,000,000 |       | 421,785,712 |   | 257,000,000 |   | 424,595,712 |   |
| Effect of dilutive securities – stock  options |       | —      |       | 4,593,659     |       | —      |       | 1,782,402 |   | — |   | 541,651 |   |
| Diluted weighted average shares outstanding         |       | 257,000,000 |       | 422,501,871   |       | 257,000,000 |       | 423,568,114 |   | 257,000,000 |   | 425,137,363 |   |

 

**19.****          IncomeTaxes**

 

Income before provision for income taxes wasas follows:

 
| ** ** | ** ** | **2007** | ** ** | **2006** | ** ** | **2005** | ** ** |
|------------|------------|----------|------------|----------|------------|----------|------------|
|       |       |     |       |     |       |     |       |
| Domestic   |       | 423,291  |       | 199,814  |       | 288,056  |       |
| Foreign    |       | 549,248  |       | 188,902  |       | 382,596  |       |
|       |       | 972,539  |       | 388,716  |       | 670,652  |       |

 

A break-down between domestic and foreignincome and social contribution tax (expense) benefit for the year is asfollows:

 
| ** ** | ** ** | **2007** | ** ** | **2006** | ** ** | **2005** | ** ** |
|------------|------------|----------|------------|----------|------------|----------|------------|
| Domestic:  |       |     |       |     |       |     |       |
| Current    |       | (77,477  | )          | (10,519  | )          | (51,956  | )          |
| Deferred   |       | (48,581  | )          | (16,936  | )          | (14,691  | )          |
|       |       | (126,058 | )          | (27,455  | )          | (66,647  | )          |
| Foreign:   |       |     |       |     |       |     |       |
| Current    |       | 896      |       | (448     | )          | (72      | )          |
| Deferred   |       | (6,416   | )          | (1,181   | )          | (1,720   | )          |
|       |       | (5,520   | )          | (1,629   | )          | (1,792   | )          |
|       |       | (131,578 | )          | (29,084  | )          | (68,439  | )          |

 

F-38

----

 

**SADIA S.A.**

** **

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

Years ended December 31, 2007 2006 and2005

(In thousands of Reais - R$, unless otherwiseindicated)

 

**19.****           Income Taxes**(Continued)

 

Brazilian income taxes consist of federal income tax and socialcontribution. The 2007, 2006 and 2005 statutory rates for these taxes were asfollows:

 
| Federal income tax      |   | 25.00 | % |
|-------------------------|--------|-------|---|
| Social contribution tax |   | 9.00  | % |
| Combined statutory rate |   | 34.00 | % |

 

Because the Company is engaged in rural activities, certain relatedinvestments can be depreciated for tax purposes on an accelerated basis and theresulting tax losses may be offset against profits generated in other activities.

 

The reconciliation of income tax at the Brazilian statutory rates toincome tax expense follows:

 
| ** **                                                                                  | ** ** | **2007** | ** ** | **2006** | ** ** | **2005** | ** ** |
|---------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
|                                                                                        |       |     |       |     |       |     |       |
| Income before income taxes                                                                  |       | 972,539  |       | 388,716  |       | 670,652  |       |
| Income tax expense, at Brazilian statutory  taxes rates                                     |       | (330,663 | )          | (132,163 | )          | (228,022 | )          |
| Tax-exempt income in foreign subsidiary                                                     |       | 180,329  |       | 63,046   |       | 128,291  |       |
| Non-taxable (nondeductible) foreign  currency exchange (loss)                               |       | (33,883  | )          | 5,715    |       | (51,816  | )          |
| Benefit from deductibility of interest  attributed to shareholders’ equity (Note 3 j)) |       | 53,453   |       | 41,869   |       | 59,411   |       |
| Exempted financial results                                                                  |       | —   |       | 3,432    |       | 13,699   |       |
| Stock-options                                                                               |       | (4,348   | )          | (900     | )          | (230     | )          |
| Realized income tax contingency charged to  income tax expense                              |       | —   |       | (4,124   | )          | —   |       |
| Tax incentive                                                                               |       | 6.967    |       | —   |       | —   |       |
| Other permanent differences                                                                 |       | (3,433   | )          | (5,959   | )          | 10,228   |       |
| Income tax expense                                                                          |       | (131,578 | )          | (29,084  | )          | (68,439  | )          |

 

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, 2007, thissubsidiary had cumulative earnings of R$1,467 million that are not tax effected(R$1,103 million in 2006). If such cumulative earnings were to be distributedto the Company, approximately R$220 million of taxes would be paid.

 

F-39

----

 

**SADIA S.A.**

** **

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

Years ended December 31, 2007 2006 and2005

(In thousands of Reais - R$, unless otherwiseindicated)

 

**19.****           Income Taxes**(Continued)

 

Deferred tax assets and liabilities arecomprised of the following:

 
| ** **                                    | ** ** | **2007** | ** ** | **2006** | ** ** |
|-----------------------------------------------|------------|----------|------------|----------|------------|
| Deferred tax assets:                          |       |     |       |     |       |
| Employee bonus accrual                        |       | 27,998   |       | 15,564   |       |
| Accrued contingencies                         |       | 31,785   |       | 25,824   |       |
| Accrued employee benefit liability            |       | 22,518   |       | 25,259   |       |
| Tax loss carryforwards                        |       | 8,844    |       | 37,834   |       |
| Property, plant and equipment                 |       | 42,521   |       | 47,314   |       |
| Deferred charges                              |       | 28,074   |       | 32,354   |       |
| Other                                         |       | 33,805   |       | 31,417   |       |
| Total deferred income tax assets              |       | 195,545  |       | 215,566  |       |
| Valuation allowance for deferred tax assets   |       | (6,580   | )          | —   |       |
| Total deferred tax assets, net                |       | 188,965  |       | —   |       |
|                                          |       |     |       |     |       |
| Deferred tax liabilities:                     |       |     |       |     |       |
| Property, plant and equipment                 |       | (131,649 | )          | (106,270 | )          |
| Pension plan                                  |       | (205,064 | )          | (125,423 | )          |
| Fair value of available-for-sale  investments |       | (117,882 | )          |     |       |
| Intangible assets                             |       | (12,153  | )          | (8,629   | )          |
| Other                                         |       | (5,372   | )          | (10,085  | )          |
| Total deferred tax liabilities                |       | (472,120 | )          | (250,407 | )          |
| Net deferred tax (liabilities) assets         |       | (283,155 | )          | (34,841  | )          |
| Current assets portion                        |       | 23,553   |       | 37,867   |       |
| Non current  (liabilities) assets portion     |       | (306,708 | )          | (72,708  | )          |

 

The valuation allowance for deferred taxassets established during 2007 relates to certain subsidiary loss carryforwardsthat may not be realized based upon the Company’s current year estimate offuture taxable income of these subsidiaries and analysis of the likelihood ofrealizing these loss carryforwards.

 

Subsequently recognized tax benefits relatedto the valuation allowance of deferred tax assets as of December 31, 2007will reduce goodwill in the amount of R$4,018 related to Big Foods andallocated to income tax benefit that would be reported in the consolidatedstatements of income R$2,562 related to Concordia Ltd.

 

F-40

----

 

**SADIA S.A.**

** **

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

Years ended December 31, 2007 2006 and2005

(In thousands of Reais - R$, unless otherwiseindicated)

 

**19.****           Income Taxes**(Continued)

 

In assessingthe of deferred tax assets, management considers whether it is more likely thannot that some portion or all of the deferred tax assets will not be realized. Theultimate realization of deferred tax assets is dependent upon the generation offuture taxable income during the periods in which those temporary differencesbecome deductible and tax loss carryforwards utilizable. Management considersthe scheduled reversal of deferred tax liabilities, projected future taxableincome, and tax planning strategies in making this assessment. Based upon thelevel of historical taxable income and projections for future taxable incomeover the periods in which the deferred tax assets are deductible, managementbelieves it is more likely than not that the Company will realize the benefitsof these deductible differences and tax loss carryforwards at December 31,2007.

 

The Company has not provided avaluation allowance against the net deferred tax asset as of December 31,2007 and 2006, except for the subsidiary tax loss carryforwards, arising out of temporary differences based uponmanagement’s belief that it is more likely than not that such deferred taxasset will be realized in the future through reversal of the differences andthe generation of taxable income by the Company.

 

The total amount of R$26,012 related to loss carryforwards have noexpiration date and are available to offset up to 30% of future taxable incomein any given year.

 

In July, 2006, the Financial Accounting StandardBoard (FASB) issued FASB Interpretation No 48 “Accounting for UncertaintyIncome Taxes, an interpretation of FASB Statement 109” (FIN 48). FIN 48provides guidance on recognition, classification and disclosure concerninguncertain income tax liabilities. The evaluation of a tax position requiresrecognition of a tax liability if it is more likely than not that a taxposition will not be stained upon examination. The Company adopted FIN 48 on January 1,2007.

 

F-41

----

 

**SADIA S.A.**

** **

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

Years ended December 31, 2007 2006 and2005

(In thousands of Reais - R$, unless otherwiseindicated)

 

**19.****           Income Taxes**(Continued)

 

As a result ofthe implementation of FIN 48, the Company reclassified R$11,283 as of December 31,2006 from Accrual for legal proceedings and labor claims to Income and socialcontribution taxes payable (long-term liabilities). The adoption of FIN 48 didnot result in a cumulative adjustment to retained earnings. The Income andsocial contribution taxes (long-term) is composed for R$9,938 (R$11,283 in 2006) recorded on theacquisition of the subsidiary Granja Rezende (incorporated in 2003), R$7,222 ofincome tax and R$2,600 on contribution taxes of Concórdia S.A. CVMCC.

 

A reconciliation of the beginning and ending amount of totalunrecognized tax benefits is as follows:

* *
| Balance at January 1, 2007                 |   | 4,125  |   |
|-------------------------------------------------|--------|--------|--------|
| Increase related to current year tax  positions |   | 9,822  |   |
| Decrease related to prior year tax positions    |   | — |   |
| Settlements                                     |   | (332   | )      |
| Balance at December 31, 2007               |   | 13,615 |   |

 

It is possible that the amount of unrecognized tax benefits will changein the next twelve months, however, an estimated of the range of the possiblechange cannot be made at this time due to the long time to reach a settlementagreement on decision with the taxing authorities.

 

If recognized, the total amount of R$13,615 of unrecognized taxbenefits would have an impact on Company’s effective tax rate.

 

Interest income recognized related to uncertain tax positions amountedto R$1,013 in 2007. Total accrued interest and penalties as of December 31,2007 and December 31, 2006 was R$6,145 and R$7,158, respectively, and wereincluded in Income and social contribution tax payable (Long-term liabilities).

 

The Company records interest related to unrecognized tax benefit infinancial expenses and penalties in other operating expenses.

 

The Company and its subsidiaries file income tax returns in Brazil andforeign jurisdictions. The table below shows tax years for which Sadia issubject to income tax examinations by tax authorities:

 
| ** **        | ** ** | **Open tax years** | ** ** |
|-------------------|------------|------------------------------|------------|
|              |       |                         |       |
| Europe (Portugal) |       | 2003-2007                    |       |
| Russia            |       | 2005-2007                    |       |
| Brazil            |       | 2003-2007                    |       |

 

F-42

----

 

**SADIA S.A.**

** **

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years ended December 31, 2007 2006 and2005

(In thousands of Reais - R$, unless otherwiseindicated)

 

**20.****           Risk Management andFinancial Instruments**

** **

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 for loans and financing and any other payablesdenominated in foreign currency is hedged by short term investments denominatedin foreign currency and foreign receivable from exports, which serve as naturalhedge and by derivative financial instruments.

 

The Company within its hedge strategy uses foreign currency futurecontracts (U.S. dollar, Euro and Pound) as a form of mitigating exchange raterisk over operating and financial assets and liabilities.

 

The Company by making a distinction at the inception of the contracts,the Company segregated the results from derivatives related to its operatingactivities and those related to its financial assets and liabilities.Consequently, a gain of R$206.599 and R$24.446, respectively, were recorded ingross operating revenue and foreign currency exchange, net in 2007 (R$45,935and R$38,625 in 2006 respectively).

 

F-43

----

 

**SADIA S.A.**

** **

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years ended December 31, 2007 2006 and2005

(In thousands of Reais - R$, unless otherwiseindicated)

 

**20.****           Risk Management andFinancial Instruments** (Continued)

 

a) Exchange rate and interest rate risk(Continued)

 

The Company also as a form of mitigating interest rate risk enter intorate swaps (Dollar to Interbank Deposit Certificate – CDI). The amount ofR$9,293 (R$15,726 in 2006 and R$100,098 in 2005) was recorded in interestexpense

 

b)Credit risk

 

The Company is potentially exposed to creditrisk in relation to its trade accounts receivable, long and short-terminvestments and derivative instruments. The Company limits the risk associatedwith these financial instruments by subjecting them to the control of highlyrated financial institutions that operate within the limits pre-established bythe credit and financing committees.

 

The concentration of credit risk with respectto accounts receivable is minimized due to the spread of its client base, sincethe Company does not have any customer or group representing 10% or more of itsconsolidated revenues, as well as granting credits for customers with solidfinancial and operational ratios. Generally, the Company does not require aguarantee for domestic accounts receivable.

 

c)Grain purchase price

 

The Company’s operations are exposed to thevolatility in prices of grain (corn and soybean) used in the preparation offodder for its breeding stock, where the price variation results from factorsbeyond the control of management, such as climate, the size of the harvest,transport and storage costs and government agricultural policies, among others.The Company does not enter into futures or options contracts tohedge against fluctuations in the price of the commodities, although certainpurchase contracts provide for the commodity pricing to be determined 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-44

----

 

**SADIA S.A.**

** **

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years ended December 31, 2007 2006 and2005

(In thousands of Reais - R$, unless otherwiseindicated)

 

**20.****           Risk Management andFinancial Instruments** (Continued)

 

d)Estimated market values

 

The Company used the following methods and assumptions in estimatingthe fair value disclosures of its financial instruments at December 31,2007 and 2006:

 

*Cash and cash equivalents:*The carrying amounts reported in the balance sheet for cash and cashequivalents approximate their fair values.

 

*Investments in debt securities:*The market values of investments in debt securities were calculated based onthe market quotations of these securities when such information is notavailable, the fair value is based on their present value calculated throughthe future cash flows and using interest rates applicable to instruments ofsimilar nature, terms and risk, or based on the market quotations of thesesecurities.

 

*Accounts and notes receivable and accountspayable:* The carrying amounts reported in the balancesheet for accounts and notes receivable and accounts payable approximate theirfair values.

 

*Long and short-term debt:*The market values of loans and financing were calculated based on their presentvalue calculated through the future cash flows and using interest ratesapplicable to instruments of similar nature, terms and risks or based on themarket quotation of these securities. The market value of BNDES financing aresimilar to the book values, since there are no similar instruments withcomparable maturities and interest rates.

 

*Foreign currency and interest rate swapcontracts:* The fair values of foreign currency andinterest rate swap contracts were estimated based on quoted market prices ofcomparable contracts. At December 31, 2007 and 2006 the notional amountsof the outstanding contracts were R$2,251,459****and R$1,554,843****and themeasurement of these contracts at fair values resulted in a gain of R$59,249and loss of R$22,535, respectively. The Company recognizes these contracts onthe balance sheet at fair value and adjustments to fair value were recordedthrough income. The actual cash settlements on the contracts occur at timesspecified in each agreement. The Company does not intend to terminate any ofthese contracts prior to maturity.

 

F-45

----

 

**SADIA S.A.**

** **

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years ended December 31, 2007 2006 and2005

(In thousands of Reais - R$, unless otherwiseindicated)

 

**20.****           Risk Management andFinancial Instruments** (Continued)

 

Thefollowing table presents the carrying amounts and estimated fair values of theCompany’s financial instruments at December 31, 2007. The fair value of afinancial instrument is the amount at which the instrument could be exchangedin a current transaction between willing parties.

 
| ** **                         | ** ** | **2007**             | ** ** |
|------------------------------------|------------|----------------------|------------|
| ** **                         | ** ** | **Carrying  amount** | ** ** | **Fair  value** | ** ** |
|                               |       |                 |       |   |   |
| Financial assets:                  |       |                 |       |   |   |
| Cash and cash equivalents          |       | 1,100,894            |       | 1,100,894 |   |
| Available for sale securities      |       | 1,416,066            |       | 1,762,767 |   |
| Accounts and notes receivable, net |       | 834,349              |       | 834,349 |   |
| Financial liabilities:             |       |                 |       |   |   |
| Short-term debt                    |       | 1,102,567            |       | 1,102,567 |   |
| Current portion of long-term debt  |       | 225,523              |       | 225,523 |   |
| Suppliers                          |       | 593,951              |       | 593,951 |   |
| Long –term debt               |       | 2,688,115            |       | 2,697,642 |   |

 

**21.    SupplementaryRetirement Plan**

 

The Company sponsors a definedbenefit pension plan that offers supplementary retirement benefits to theemployees, through Attilio Francisco Xavier FontanaFoundation. The pension benefit is generally defined as the difference between (i) theretiree’s average salary during the last 12  months indexed to the dateof retirement – until the limit of 80% of the last salary, and(ii) the value of the retirement pension paid by the Brazilian socialsecurity system. For retired employees the initial pension payment issubsequently adjusted upwards to recognize cost of living increases. TheCompany provides for the costs of pension benefits based on a fixed percentageof remuneration, as recommended annually by independent actuaries. Theaccumulated benefit obligation related to this pension plan were R$799,627 andR$686,175 at December 31, 2007 and 2006, respectively. The Company expectsto contribute approximately R$2,105 to the plan during fiscal year 2007.

 

F-46

----

 

**SADIA S.A.**

** **

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years ended December 31, 2007 2006 and2005

(In thousands of Reais - R$, unless otherwiseindicated)

 

**21.****           SupplementaryRetirement Plan**(Continued)

 

The Company also provides for otherretirement benefits to its employees and certain employee executives. Suchbenefit plans generally provide benefits payable as a single lump sum toeligible employees upon retirement. The Company intends to fund these benefits fromits operations. The aggregate projected benefit obligation and the aggregateaccumulated benefit obligation related to those other retirement benefit wereR$66,229 and R$52,702, respectively, at December 31, 2007 and R$63,509 andR$57,244, respectively, at December 31, 2006.

 

Information regarding the plans follows:

 
| ** **                                                     | ** ** | **Pension benefits** | ** ** | **Other benefits** | ** ** |
|----------------------------------------------------------------|------------|---------------------------|------------|-------------------------|------------|
| ** **                                                     | ** ** | **2007**                  | ** ** | **2006**                | ** ** | **2007** | ** ** | **2006** | ** ** |
| **Change in benefit obligation**                               |       |                      |       |                    |       |   |   |   |   |
| Benefit obligation at beginning of year                        |       | 759,110                   |       | 704,529                 |       | 63,509 |   | 57,244 |   |
| Net service cost                                               |       | 19,154                    |       | 19,589                  |       | 5,830 |   | 4,905 |   |
| Interest cost                                                  |       | 83,993                    |       | 77,995                  |       | 6,860 |   | 6,299 |   |
| Participants contributions (service cost)                      |       | 5,927                     |       | 5,814                   |       | — |   | — |   |
| Actuarial (gain) loss                                          |       | 42,592                    |       | (13,066                 | )          | (13,876 | ) | (3,558 | ) |
| Benefits paid                                                  |       | (42,069                   | )          | (35,751                 | )          | (5,089 | ) | (1,381 | ) |
| Benefit obligation at end of year                              |       | 868,707                   |       | 759,110                 |       | 57,234 |   | 63,509 |   |
| **Change in plan assets**                                      |       |                      |       |                    |       |   |   |   |   |
| Fair value of plan assets at beginning of  year                |       | 1,128,000                 |       | 1,035,000               |       | — |   | — |   |
| Actual return on plan assets                                   |       | 377,325                   |       | 120,185                 |       | — |   | — |   |
| Company contributions                                          |       | 2,105                     |       | 2,115                   |       | — |   | — |   |
| Participant contributions                                      |       | 6,475                     |       | 6,451                   |       | — |   | — |   |
| Benefits paid                                                  |       | (42,069                   | )          | (35,751                 | )          | — |   | — |   |
| Fair value of plan assets at end of year                       |       | 1,471,836                 |       | 1,128,000               |       | — |   | — |   |
| **Funded status**                                              |       |                      |       |                    |       |   |   |   |   |
| Funded status at end of year                                   |       | 368,890                   |       | 95,027                  |       | (63,509 | ) | (32,264 | ) |
| SFAS 158 transition amount                                     |       | —                    |       | 273,863                 |       | — |   | (31,245 | ) |
| Accumulated other comprehensive income                         |       | 189,058                   |       | —                  |       | 16,156 |   | — |   |
| Net periodic pension cost                                      |       | 43,075                    |       | —                  |       | (14,970 | ) | — |   |
| Company contributions                                          |       | 2,105                     |       | —                  |       | 5,089 |   | — |   |
| Net amount recognized                                          |       | 603,128                   |       | 368,890                 |       | (57,234 | ) | (63,509 | ) |
|                                                           |       |                      |       |                    |       |   |   |   |   |
| **Amounts recognized in the statement of  financial position** | ** ** | ** **                | ** ** | ** **              | ** ** | ** ** | ** ** | ** ** | ** ** |
| Prepaid pension plan                                           |       | 603,128                   |       | 368,890                 |       | — |   | — |   |
| Accrued benefit liability                                      |       | —                    |       | —                  |       | (57,234 | ) | (63,509 | ) |
| Net amount recognized                                          |       | 603,128                   |       | 368,890                 |       | (57,234 | ) | (63,509 | ) |

 

F-47

----

 

**SADIA S.A.**

** **

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years ended December 31, 2007 2006 and2005

(In thousands of Reais - R$, unless otherwiseindicated)

 

**21.****           SupplementaryRetirement Plan**(Continued)

 

The following projected benefit payments, which reflect expected futureservice, as appropriate, are expected to be paid:

 
| ** ** | ** ** | **Pension benefits** | ** ** | **Other benefits** | ** ** |
|------------|------------|---------------------------|------------|-------------------------|------------|
|       |       |                      |       |                    |       |
| 2007       |       | 38,227                    |       | 6,603                   |       |
| 2008       |       | 41,226                    |       | 1,472                   |       |
| 2009       |       | 45,166                    |       | 2,017                   |       |
| 2010       |       | 49,293                    |       | 2,193                   |       |
| 2011       |       | 53,854                    |       | 5,237                   |       |
| 2012 -2015 |       | 349,333                   |       | 40,573                  |       |

 

The pension plan weighted-average asset allocation at December 31,2007 and 2006, by asset category, is as follows:

 
| ** **        | ** ** | **2007** | ** ** | **2006** | ** ** |
|-------------------|------------|----------|------------|----------|------------|
|              |       |     |       |     |       |
| Debt securities   |       | 57       | %          | 62       | %          |
| Equity securities |       | 34       | %          | 29       | %          |
| Real estate       |       | 8        | %          | 8        | %          |
| Others assets     |       | 1        | %          | 1        | %          |
|              |       | 100      | %          | 100      | %          |

 

The investment strategy adopted by Attilio Francisco Xavier FontanaFoundation for the pension plans sponsored by the Company is to maximize therates of return on plan assets within an acceptable level of risk aiming tominimize the cost of providing pension benefits while maintaining adequatefunding levels. Such investment strategy is revised on an annual basis. Thecurrent strategic targets are to have a pension asset portfolio comprising of34% equity securities, 57% debts securities (substantially comprised of fixedand variable income investment funds) and 8% real estate. The plan assetportfolio does not include any hedging, futures or derivative instruments.

 

Part of equity securities at December 31, 2007, was entirelyrepresented by 11,944,848 common shares and 12,688,198 preferred shares of theCompany (24,998,558 common shares at December 31, 2006) with an aggregatefair value of R$271.456 at December 31, 2007. Dividends paid by theCompany on shares held by the plan were R$7.538 for the year ended December 31,2007 (R$4,391 in 2006).

 

F-48

----

 

**SADIA S.A.**

** **

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years ended December 31, 2007 2006 and2005

(In thousands of Reais - R$, unless otherwiseindicated)

 

**21.****           SupplementaryRetirement Plan**(Continued)

 
| ** **                       | ** ** | **2007** | ** ** | **2006** | ** ** |
|----------------------------------|------------|----------|------------|----------|------------|
| **Weighted-average assumptions** |       |     |       |     |       |
| Discount rate                    |       | 10.8     | %          | 11.3     | %          |
| Expected return on plan assets   |       | 12.4     | %          | 12.4     | %          |
| Rate of compensation increase    |       | 7.1      | %          | 7.1      | %          |

 

The Company uses a December 31 measurement date for its plans. Indeveloping the expected rate of return on plan assets, the Company consideredthe actuarial assumptions recommended by its independent actuaries, whichbasically reflect expectations of future returns.

 
| ** **                                  | ** ** | **Pension benefits** | ** ** | **Other benefits** | ** ** |
|---------------------------------------------|------------|---------------------------|------------|-------------------------|------------|
| ** **                                  | ** ** | **2007**                  | ** ** | **2006**                | ** ** | **2005** | ** ** | **2007** | ** ** | **2006** | ** ** | **2005** | ** ** |
| **Components of net periodic benefit cost** |       |                      |       |                    |       |   |   |   |   |   |   |   |   |
| Service cost                                |       | 19,154                    |       | 19,589                  |       | 13,018 |   | 5,830 |   | 4,905 |   | 4,912 |   |
| Interest cost                               |       | 83,993                    |       | 77,995                  |       | 64,139 |   | 6,860 |   | 6,299 |   | 6,495 |   |
| Expected return on plan assets              |       | (137,839                  | )          | (126,539                | )          | (110,592 | ) | — |   | — |   | — |   |
| Amortization of transition asset            |       | (1,882                    | )          | (1,882                  | )          | (1,882 | ) | — |   | — |   | — |   |
| Amortization of prior service cost          |       | 1,442                     |       | 1,442                   |       | — |   | 2,128 |   | 2,128 |   | 2,397 |   |
| Recognized net actuarial gain               |       | (7,943                    | )          | (8,211                  | )          | (8,238 | ) | 152 |   | 581 |   | 558 |   |
| Net periodic pension cost (credit)          |       | (43,075                   | )          | (37,606                 | )          | (43,555 | ) | 14,970 |   | 13,913 |   | 14,362 |   |

 

In September 2006, the FASB issued SFAS158 - “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 shareholders’ equity.

 

F-49

----

 

**SADIA S.A.**

** **

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years ended December 31, 2007 2006 and2005

(In thousands of Reais - R$, unless otherwiseindicated)

 

**21.****           SupplementaryRetirement Plan**(Continued)

 

The incremental effect of applying SFAS 158 on individual line items ofthe balance sheet as of December 31, 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 operatingincome**

 

During 2007, the Company obtained recognitionof the final, favorable, unappealable decision on two processes filed againstthe State, questioning the charge of Funrural on its poultry production,between January 1983 and November 1988. The Company recognized thetax credit for the amount of R$26,545, which, net of the legal council fees,represented by gain of R$22,032.

 

On October 26, 2006, the Companyobtained recognition of the final, favorable, unappealable decision on theCOFINS proceedings referring to the unconstitutionality of Law 9718/98, whichchanged the basis for the calculation of PIS and COFINS by including operatingand financial income. This matter was judged and considered unconstitutional bythe Superior court of Justice on November 9, 2005. The Company has beencollecting the tax in accordance with legislation and, based on the favorabledecision of this proceeding, recognized in 2006 the tax credit in the amount ofR$80,168, which, net of attorneys’ fees, represented a gain of R$75,654.

 

F-50

----

 

**SADIA S.A.**

** **

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years ended December 31, 2007 2006 and2005

(In thousands of Reais - R$, unless otherwiseindicated)

 

**23. Segment and Related Information**

** **

The following information about segments is based upon information usedby the Company’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 Segmentsof an Enterprise and Related Information*, and has been applied forall periods presented.

 

The Company has four identifiable reportable segments: Processedproducts, Poultry, Pork and beef.

 

The Company evaluates segment performance based on informationgenerated from its statutory accounting records prepared in accordance withaccounting principles generally accepted in Brazil, which has been adjusted forUS GAAP in the following presentation:

 

a) Segment information

 
| ** **                           | ** ** | **2007**  | ** ** | **2006**  | ** ** | **2005**  | ** ** |
|--------------------------------------|------------|-----------|------------|-----------|------------|-----------|------------|
| **Net operating revenue**            |       |      |       |      |       |      |       |
| Processed products                   |       | 3,745,713 |       | 3,102,397 |       | 3,147,296 |       |
| Poultry                              |       | 3,774,731 |       | 2,872,845 |       | 3,199,246 |       |
| Pork                                 |       | 624,117   |       | 494,571   |       | 732,710   |       |
| Beef                                 |       | 334,995   |       | 309,353   |       | —    |       |
| Other                                |       | 143,635   |       | 97,535    |       | 239,186   |       |
| Adjustments for US GAAP presentation |       | 130,885   |       | (46,401   | )          | (596      | )          |
| Total net operating revenue          |       | 8,754,076 |       | 6,830,300 |       | 7,317,842 |       |

 

Other net operating revenue is primarily attributable to grain andby-products and beef products operations.

 
| ** **                                         | ** ** | **2007** | ** ** | **2006** | ** ** | **2005** | ** ** |
|----------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| **Depreciation expense**                           |       |     |       |     |       |     |       |
| Processed products                                 |       | (116,679 | )          | (92,214  | )          | (60,863  | )          |
| Poultry                                            |       | (131,053 | )          | (100,080 | )          | (80,336  | )          |
| Pork                                               |       | (21,358  | )          | (15,223  | )          | (16,853  | )          |
| Beef                                               |       | (14,059  | )          | (11,660  | )          | —   |       |
| Other                                              |       | (5,555   | )          | (4,072   | )          | (7,294   | )          |
| Total depreciation expense allocated to  Segments  |       | (288,704 | )          | (223,249 | )          | (165,346 | )          |
| Depreciation allocated to administrative  expenses |       | (17,451  | )          | (17,320  | )          | (12,829  | )          |
| Adjustments for US GAAP presentation               |       | 59,175   |       | 35,185   |       | (4,088   | )          |
| Total depreciation expense                         |       | (246,980 | )          | (205,384 | )          | (182,263 | )          |

 

F-51

----

 

**SADIA S.A.**

** **

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years ended December 31, 2007 2006 and2005

(In thousands of Reais - R$, unless otherwiseindicated)

 

**23.****           Segmentand Related Information**(Continued)

 

a) Segment information (Continued)

 
| ** **                                                                            | ** ** | **2007**  | ** ** | **2006**  | ** ** | **2005**  | ** ** |
|---------------------------------------------------------------------------------------|------------|-----------|------------|-----------|------------|-----------|------------|
| **Segment operating income**                                                          |       |      |       |      |       |      |       |
| Processed products                                                                    |       | 362,257   |       | 194,494   |       | 273,684   |       |
| Poultry                                                                               |       | 248,286   |       | 100,204   |       | 269,766   |       |
| Pork                                                                                  |       | 46,862    |       | 35,489    |       | 94,586    |       |
| Beef                                                                                  |       | 3,635     |       | 11,482    |       | —    |       |
| Other                                                                                 |       | 8,690     |       | 2,087     |       | 2,798     |       |
| Adjustments for US GAAP presentation                                                  |       | 199,512   |       | (41,533   | )          | 40,069    |       |
| Total operating income                                                                |       | 869,242   |       | 302,223   |       | 680,903   |       |
| Interest expense                                                                      |       | (332,378  | )          | (310,442  | )          | (324,231  | )          |
| Interest income and other                                                             |       | 241,735   |       | 282,904   |       | 248,203   |       |
| Foreign currency exchange gain (loss), net                                            |       | 54,056    |       | 104,219   |       | 159,602   |       |
| Adjustments for US GAAP presentation                                                  |       | 139,884   |       | 9,812     |       | (93,825   | )          |
| Income before income taxes, equity income  or loss of investees and minority interest |       | 972,539   |       | 388,716   |       | 670,652   |       |
| ** **                                                                            |       |      |       |      |       |      |       |
| **Segment assets**                                                                    |       |      |       |      |       |      |       |
| Processed products                                                                    |       | 713,064   |       | 715,248   |       | 624,619   |       |
| Poultry                                                                               |       | 1,498,736 |       | 1,018,005 |       | 750,504   |       |
| Pork                                                                                  |       | 390,458   |       | 275,533   |       | 147,724   |       |
| Beef                                                                                  |       | 134,616   |       | 104,340   |       | —    |       |
| Other                                                                                 |       | 283,912   |       | 220,312   |       | 143,359   |       |
| Adjustments for US GAAP presentation                                                  |       | (123,378  | )          | (178,458  | )          | (142,897  | )          |
| Total property, plant and equipment                                                   |       | 2,897,408 |       | 2,154,980 |       | 1,523,309 |       |
|                                                                                  |       |      |       |      |       |      |       |
| Reconciling items - corporate assets                                                  |       |      |       |      |       |      |       |
| Cash and cash equivalents                                                             |       | 2,369,309 |       | 2,550,602 |       | 2,663,689 |       |
| Accounts and notes receivable, net                                                    |       | 523,558   |       | 678,598   |       | 509,615   |       |
| Inventories                                                                           |       | 1,168,936 |       | 1,084,454 |       | 992,490   |       |
| Other corporate assets                                                                |       | 1,098,791 |       | 929,259   |       | 690,825   |       |
| Adjustments for US GAAP presentation                                                  |       | 1,399,885 |       | 641,864   |       | 327,356   |       |
| Total  consolidated assets                                                            |       | 9,457,887 |       | 8,039,757 |       | 6,707,284 |       |
|                                                                                  |       |      |       |      |       |      |       |
| **Capital expenditures**                                                              |       |      |       |      |       |      |       |
| Processed products                                                                    |       | 195,969   |       | 302,648   |       | 194,587   |       |
| Poultry                                                                               |       | 614,660   |       | 367,581   |       | 372,761   |       |
| Pork                                                                                  |       | 136,417   |       | 143,032   |       | 26,982    |       |
| Beef                                                                                  |       | 44,442    |       | 7,786     |       | —    |       |
| Other                                                                                 |       | 93,442    |       | 234,331   |       | 91,662    |       |
| Adjustments for US GAAP presentation                                                  |       | (134,678  | )          | (85,776   | )          | 56,365    |       |
| Total segment capital expenditures                                                    |       | 950,052   |       | 969,602   |       | 742,357   |       |

 

F-52

----

 

**SADIA S.A.**

** **

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years ended December 31, 2007 2006 and2005

(In thousands of Reais - R$, unless otherwiseindicated)

 

**23.****           Segmentand Related Information**(Continued)

 

b) Export sales by region/market

 
| ** **                                                                | ** ** | **2007**  | ** ** | **2006**  | ** ** | **2005**  | ** ** |
|---------------------------------------------------------------------------|------------|-----------|------------|-----------|------------|-----------|------------|
|                                                                      |       |      |       |      |       |      |       |
| Europe                                                                    |       | 1,256,325 |       | 889,171   |       | 978,318   |       |
| Middle East                                                               |       | 986,240   |       | 787,838   |       | 1,047,615 |       |
| Asia                                                                      |       | 691,273   |       | 533,295   |       | 635,907   |       |
| South America                                                             |       | 643,770   |       | 528,453   |       | 542,151   |       |
| Emerging markets (mainly Russia and other former  Soviet Union countries) |       | 946,428   |       | 719,706   |       | 872,333   |       |
| Adjustments for US GAAP presentation                                      |       | 111,955   |       | (46,426   | )          | (627      | )          |
|                                                                      |       | 4,635,990 |       | 3,412,037 |       | 4,075,697 |       |

 

Revenues are attributed to regions based uponwhere the products are shipped.

 

Alllong-lived operational assets are located in Brazil and assets located outsideof Brazil consist of sales offices located in various countries.

 

The adjustments for US GAAP presentation asdemonstrated above comprise differences between the Company’s statutory accountingrecords prepared in accordance with Brazilian GAAP and the consolidatedfinancial statements prepared in accordance with U.S. GAAP. The primarydifferences relate to:

 

a)                Elimination ofassets, liabilities, revenues, costs and expenses of equity method accountedinvestees that are accounted for using the proportional consolidation methodunder Brazilian GAAP;

 

b)               Reclassificationsof certain assets, liabilities and income statement lines reported underBrazilian GAAP for the presentation of accompanying consolidated financialstatements in accordance with US GAAP;

 

c)                Accounting for thetransfer of receivables (as disclosed in Note 6) as a financing in theaccompanying consolidated financial statements rather than as a sale asaccounted for under Brazilian GAAP.

 

F-53

----

 

**SADIA S.A.**

** **

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years ended December 31, 2007 2006 and2005

(In thousands of Reais - R$, unless otherwiseindicated)

 

**24. Supplemental Disclosures of Cash FlowInformation**

 
| ** **                                    | ** ** | **2007** | ** ** | **2006** | ** ** | **2005** | ** ** |
|-----------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
|                                          |       |     |       |     |       |     |       |
| Income taxes paid                             |       | 67.934   |       | 3,147    |       | 1,881    |       |
| Interest paid (including exchange  variation) |       | 243.870  |       | 188,065  |       | 227,389  |       |

 

**25. Supplemental Interest Expense and Interest Income and Other**

 
| ** **                                                              | ** ** | **2007** | ** ** | **2006** | ** ** | **2005** | ** ** |
|-------------------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
|                                                                    |       |     |       |     |       |     |       |
| Interest expenses                                                       |       |     |       |     |       |     |       |
| Interest and charges on*real debt*                                      |       | (81,798  | )          | (53,072  | )          | (57,679  | )          |
| Interest and charges on U.S. dollar debt                                |       | (175,359 | )          | (192,994 | )          | (185,269 | )          |
| Other                                                                   |       | (81,099  | )          | (64,503  | )          | (68,678  | )          |
|                                                                    |       | (338,256 | )          | (310,569 | )          | (311,626 | )          |
|                                                                    |       |     |       |     |       |     |       |
| Interest income and other, net                                          |       |     |       |     |       |     |       |
| Interest income on cash equivalents and  investments in debt securities |       | 186,491  |       | 204,086  |       | 218,685  |       |
| Gain from the sales shares                                              |       | 165,682  |       | —   |       | —   |       |
| Other                                                                   |       | 60,469   |       | 35.926   |       | 29,313   |       |
|                                                                    |       | 412,642  |       | 240,012  |       | 247,998  |       |

 

The Concórdia S.A. Corretora de Valores Mobiliários, Câmbio eCommodities shareholders’ meetings held on September 27, 2007 and October 26,2007 authorized, respectively, the sale of 3,827,551 shares, from a total of7,655,102 ordinary shares of Bovespa Holding S.A. and the sale of 5,168,674shares of BM&F S.A., originated from the demutualization process andinitial public offer for the secondary offer by these institutions.

 

The wholly owned subsidiary Concórdia S.A. Corretora de ValoresMobiliários, Câmbio e Commodities recorded a gain from the sale of theseshares, in the amount of R$165,682 (R$107,568 net of taxes and commission, inthe amount of R$55,414 and R$2,700, respectively of which R$53,222 related tothe sale of Bovespa’s shares and R$54,346 related to the BM&F’s shares),which was recorded as interest income on cash equivalents and investments indebt securities.

 

On December 31, 2007, the wholly owned subsidiary Concórdia S.A.Corretora de Valores Mobiliários Câmbio e Commodities had recorded asinvestments in stocks 3,827,551 shares of Bovespa at cost, in the amount ofR$8,163 and 9,598,966 shares of BM&F at cost, in the amount of R$9,599, andthe market value of those shares amounts respectively, R$127,955 and R$236,519.

 

F-54

----

 

**26. Subsequent Events**

** **

***a.******    Pis Gain***

*** ***

On February 13, 2008, the Company obtained recognition of thefinal, favorable unappeable decision on the PIS proceeding contesting theconstitutionality of Law 9718/98, which amended the PIS and Cofins calculationbase, including operating and financial revenue. Based on the transit in remjudicatam of this proceeding the Company recognized in February 2008 thetax credit in the amount of R$14.628, which net of attorney’s fees in theamount R$878, represented a gain net of R$13,750.

 

***b. Business Combinations***

*** ***

On February 14, 2008 the Company acquired 100% of the quotas fromthe capital in Avícola Industrial Buriti Alegre Ltda. – Goiaves, for the amountof R$53.868. Avícola Industrial Buriti Alegre Ltda. – Goiaves, is located inthe municipal of Buriti Alegre, State of Goiás.

 

On January 18, 2008, the Company announced that it had signed apurchase and sale agreement, with the shareholders of Baumhardt Comércio eParticipações Ltda. Baumhardt Comércio e Participações Ltda. (“Baumhardt”), islocated in the municipal of Santa Cruz do Sul, State Rio Grande do Sul and thepurchase and sale agreement involves the purchase of 73.93% of its shares.Baumhardt is the parent company of Excelsior Alimentos S.A., in which it holds80.1% of the voting capital and 43.67% of the total capital. The purchase pricewill be defined after the results of the due diligence that will be performed.

 

F-55

----