BRF (BRFS) 20-F/A 2010 FY Annual report (foreign) (amended)

U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

Amendment No. 1 to

FORM 20-F

¨       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, 2010

OR

¨       TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

OR

¨       SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission file number 001-15148

BRF – BRASIL FOODS 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)

1400 R. Hungria, 5^th Floor – Jd
América-01455000-São Paulo – SP, Brazil

(Address of principal executive offices)

Leopoldo Viriato Saboya, Chief Financial Officer and Investor Relations Officer

Tel. 011-5511-2322-5003, Fax 011-5511-232257400

1400 R. Hungria, 5^th Floor – Jd
América-01455000-São Paulo – SP, Brazil

(Name, Telephone, E-mail and/or Facsimile number and Address of Company Contact Person)

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

Title of Each Class	Name of Each Exchange on which Registered
Common Shares, no par value per share, each represented by American Depositary Shares	New York Stock Exchange

Securities registered pursuant to Section 12(g) of the Act:

None

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

None

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

At December 31, 2010 871,692,074 shares of common stock

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

If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.  Yes¨   Nox

Note- Checking the box above will not relieve any registrant required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 from their obligations under those Sections.

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yesx No¨ 

Indicate by check mark whether the registrant was submitted electronically and posted on its corporate website, if any, every interactive data filed required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 203.405 of this chapter) during the preceding 12 months (or for such other period that the registrant was required to submit and post such files)Yes¨ No¨ 

Note: Not required for registrant.

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

Large accelerated filer x  Accelerated filer¨  Non-accelerated filer¨ 

Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:

¨  U.S. GAAP x   International Financial Reporting Standards as issued by the International Accounting Standards Board ¨  Other

If  “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow.

Item 17¨   Item 18x. 

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

Yes¨   Nox 

Explanatory Note

BRF – Brasil Foods S.A. (the “Company”) is filing this Amendment No. 1 (the “Amendment”) to its Annual Report on Form 20-F (the “Annual Report”) for the year ended December 31, 2010, previously filed with the Securities and Exchange Commission (the “SEC”) on April 29, 2011 (the “Original Filing”), to replace the audit report in the Original Filing with a new audit report that includes a specific reference to International Financial Reporting Standards “as issued by the International Accounting Standards Board.”  Because the Company is filing the Amendment to include the new audit report, the Company has added a cross-reference to the penultimate paragraph ofNote 7 (Business Combination), and has updated Note 38 (Subsequent Events) and Note 39 (Approval of the Annual Financial Statements).  The remainder of the consolidated financial statements contained in the Original Filing are unchanged.

Except for Part III, including the consolidated financial statements and auditor’s report, no other information included in the Annual Report as originally filed is being repeated in this Amendment, and this Amendment should be read together with the Annual Report as originally filed, except for Part III, including the consolidated financial statements and auditor’s report. Cross references within this Amendment to items other than those in Part III are references to those items in the Original Filing. This Amendment does not otherwise update the disclosures, including forward-looking information, set forth in the Annual Report for the year ended December 31, 2010, as originally filed, and does not otherwise reflect events occurring after the original filing of the Annual Report on April 29, 2011. Such events include, among others, events described in our reports under the Securities Exchange Act of 1934, as amended, filed with the SEC since April 29, 2011.

Exhibits 12.01, 12.02, 13.01 and 13.02 are being included in this Amendment and have been dated as of the date of this filing but are otherwise unchanged.

PART III		155
ITEM 17.	FINANCIAL STATEMENTS	155
ITEM 18.	FINANCIAL STATEMENTS	155
ITEM 19.	EXHIBITS	155

INDEX TO FINANCIAL STATEMENTS

1

PART III

ITEM 17.FINANCIAL STATEMENTS

The Company has responded to Item 18 in lieu of responding to this Item.

ITEM 18.FINANCIAL STATEMENTS

See our consolidated financial statements beginning at page F-1.

ITEM 19.EXHIBITS 

The agreements and other documents filed as exhibits to this Annual Report on Form 20-F are not intended to provide factual information or other disclosure other than with respect to the terms of the agreements or other documents themselves, and you should not rely on them for that purpose. In particular, any representations and warranties made by us in these agreements or other documents were made solely within the specific context of the relevant agreement or document and for the benefit of the other parties to the agreements and they may not describe the actual state of affairs as of the date they were made or at any other time.

Exhibit Number	Description
1.01	Amended and Restated Bylaws of the Registrant (incorporated by reference to Exhibit 99.2 to the Report of Foreign Private Issuer on Form 6-K, filed April 5, 2010, SEC File No. 001-15148).
2.01	Form of Deposit Agreement among Perdigão S.A., The Bank of New York Mellon, as depositary, and the owners and beneficial owners of American Depositary Shares, dated as of July 17, 1997, as amended and restated as of June 26, 2000, as amended and restated as of September 28, 2000, as amended and restated as of July 6, 2009 (incorporated by reference to Exhibit 1 to the Registration Statement on Form F-6, filed June 24, 2009, SEC File No. 333-160191).
2.02	Form of American Depositary Receipt (incorporated by reference to the prospectus filed pursuant to Rule 424(b)(3) under the Securities Act on April 7, 2010, SEC File No. 333-160191).
4.01	Merger Agreement, dated May 19, 2009, among Perdigão S.A., HFF Participações S.A., Sadia S.A. and the shareholders of the Registrant and Sadia S.A. named therein (incorporated by reference to Exhibit 4.01 to the Annual Report of Foreign Private Issuer on Form 20-F, filed June 30, 2009, SEC File No. 001-15148).
4.02	Shareholders’ Voting Agreement of Perdigão S.A., dated March 6, 2006, among certain shareholders of the Registrant and the Registrant (incorporated by reference to Exhibit 99.1 to the Report of Foreign Private Issuer on Form 6-K, filed March 7, 2006, SEC File No. 001-15148).
4.03	Purchase Option Plan or Application for Shares (incorporated by reference to Exhibit 99.5 to the Report of Foreign Private Issuer on Form 6-K/A, filed March 24, 2010, SEC File No. 001-15148).
4.04	Stock Options Program (incorporated by reference to Exhibit 99.4 to the Report of Foreign Private Issuer on Form 6-K/A, filed March 24, 2010, SEC File No. 001-15148).
8.01	Subsidiaries of the Registrant. *
12.01	Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
12.02	Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
13.01**	Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
13.02**	Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

*      Previously filed. 

**   This certification will not be deemed “filed” for purposes of Section 18 of the Exchange Act (15 U.S.C. 78r), or otherwise subject to the liability of that section. Such certification will not be deemed to be incorporated by reference into any filing under the Securities Act or the Exchange Act, except to the extent that the Registrant specifically incorporates it by reference.

The total amount of long-term debt of the Company authorized under any instrument does not exceed 10% of the total assets of the Company and its subsidiaries on a consolidated basis. The Company undertakes to furnish to the SEC all other instruments relating to long-term debt of the Company and its subsidiaries upon request by the SEC.

2

SIGNATURES

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

BRF – BRASIL FOODS S.A.

By:/s/José Antonio do Prado Fay     

Name: José Antonio do Prado Fay

Title: Chief Executive Officer

By:/s/Leopoldo Viriato Saboya          

Name: Leopoldo Viriato Saboya

Title: Chief Financial Officer

Date: June 17, 2011

Report of Independent Registered Public Accounting Firm

The Board of Directors and Shareholders

BRF - Brasil Foods S.A.

We have audited the accompanying consolidated balance sheets of BRF - Brasil Foods S.A.and subsidiaries (the “Company”) as of December 31, 2010, 2009 and January 1, 2009, and the related consolidated statements of income, changes in shareholders’ equity, comprehensive income and cash flows for each of the years in the two-year period ended December 31, 2010. We also have audited the Company’s internal control over financial reporting as of December 31, 2010, based on criteria established inInternal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on these consolidated financial statements and an opinion on the Company’s internal control over financial reporting based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the consolidated financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.

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

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the BRF - Brasil Foods S.A. and subsidiaries as of December 31, 2010, 2009 and January 1, 2009, and the results of their operations, cash flows, changes in their shareholders’ equity and comprehensive income for each of the years in the two-year period ended December 31, 2010, in conformity with International Financial Reporting Standards, as issued by the International Accounting Standards Board. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2010, based on criteria established inInternal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.

As discussed in notes 7 and 38, on July 8, 2009, the Company acquired Sadia S.A. This transaction is under analysis of the Administrative Counsel for Economic Defense (“CADE”) and involved the execution of an Agreement for the Preservation of the Operation Reversibility (“APRO”), until the implementation of the final decision by CADE.

/s/ KPMG Auditores Independentes

São Paulo, Brazil
June 17, 2011

CONSOLIDATED BALANCE SHEETS
December 31, 2010 and 2009 and January 1, 2009
(Amounts expressed in millions of Brazilian reais)

Assets	Note	12.31.10	12.31.09	01.01.09
Current assets
Cash and cash equivalents	8	2,310.6	1,898.2	1,233.5
Marketable securities	9	863.8	2,345.5	742.5
Trade accounts receivable, net	10	2,565.0	2,140.7	1,378.0
Inventories	11	2,135.8	2,255.5	1,285.4
Biological assets	12	900.7	865.5	427.4
Recoverable taxes	14	695.9	745.6	576.3
Assets held for sale	13	62.2	47.9	5.8
Other financial assets	22	98.6	27.6	79.2
Other current assets		219.4	351.4	189.2
Total current assets		9,852.0	10,677.9	5,917.3
Non-current assets
Marketable securities	9	377.7	676.7	0.2
Trade accounts receivable, net	10	7.0	12.8	11.6
Credit notes	10	93.1	92.6	54.9
Recoverable taxes	14	767.4	653.1	147.5
Deferred income tax	15	2,487.6	2,426.4	550.8
Judicial deposits	16	234.1	135.9	56.1
Biological assets	12	377.7	391.2	158.8
Other current assets		223.3	149.2	30.5
Investments	17	17.5	17.2	1.0
Property, plant and equipment, net	18	9,066.8	8,874.2	2,747.8
Intangible assets	19	4,247.3	4,276.5	1,557.6
Total non-current assets		17,899.5	17,705.8	5,316.8
Total assets		27,751.5	28,383.7	11,234.1

See accompanying notes to the consolidated financial statements.

F-1

BRF - BRASIL FOODS S.A.

CONSOLIDATED BALANCE SHEETS
December 31, 2010 and 2009 and January 1, 2009
(Amounts expressed in millions of Brazilian reais)

Liabilities	Note	12.31.10	12.31.09	01.01.09
Current liabilities
Short-term debt	21	2,227.7	3,200.6	1,574.7
Debentures	21	-	2.1	4.2
Trade accounts payable	20	2,059.2	1,905.4	1,083.4
Payroll and related charges		387.3	341.2	173.2
Tax payable		210.8	183.6	66.6
Interest on shareholders' equity	27	193.1	92.6	23.3
Management and employees profit sharing		111.3	75.4	17.9
Other financial liabilities	22	82.2	87.1	146.7
Provision for tax, civil and labor	26	65.1	91.3	38.9
Other current liabilities		349.5	379.9	70.1
Total current liabilities		5,686.2	6,359.2	3,199.0
Non-current liabilities
Long-term debt	21	4,975.2	5,853.5	3,719.7
Social and tax payable		64.2	6.0	20.1
Provision for tax, civil and labor	26	1,053.7	940.3	180.2
Deferred income tax	15	1,635.7	1,456.4	73.3
Employee benefit plan	25	274.5	249.7	84.2
Share based payments	24	1.3	-	-
Other non-current liabilities		424.0	522.9	32.3
Total non-current liabilities		8,428.6	9,028.8	4,109.8
Shareholders' equity	27
Capital		12,460.5	12,461.8	3,445.0
Capital reserves		69.4	62.8	-
Profit reserves		1,064.7	727.6	731.5
Accumulated deficit		-	(186.1)	(213.0)
Treasury shares		(0.7)	(27.6)	(0.8)
Other comprehensive income (loss)		35.2	(47.5)	(38.1)
Parent company shareholders' equity		13,629.1	12,991.0	3,924.6
Non-controlling interest		7.6	4.7	0.7
Shareholders' equity		13,636.7	12,995.7	3,925.3
Total liabilities and shareholders'equity		27,751.5	28,383.7	11,234.1

See accompanying notes to the consolidated financial statements.

F-2

BRF - BRASIL FOODS S.A.

CONSOLIDATED STATEMENTS OF INCOME
Years ended December 31, 2010 and 2009
(Amounts expressed in millions of Brazilian reais, except earnings per share data)

	Note	12.31.10	12.31.09
Net sales	30	22,681.3	15,905.8
Cost of sales	35	(16,951.2)	(12,728.9)
Gross profit		5,730.1	3,176.9
Operating income (expenses)
Sales	35	(3,523.1)	(2,577.1)
General and administrative	35	(332.9)	(222.2)
Other operating expenses	33	(393.9)	(302.8)
Equity interest in income of subsidiaries	17	4.3	2.5
Operating income		1,484.5	77.3
Financial expenses	34	(1,363.3)	(1,262.6)
Financial income	34	880.2	1,525.1
Income before taxes and participation of non-controlling shareholders		1,001.4	339.8
Income and social contribution tax expense	15	(130.6)	(80.2)
Deferred income and social contribution tax expense	15	(65.9)	(141.0)
Net income		804.9	118.6
Attributable to:
BRF shareholders		804.1	123.0
Non-controlling shareholders		0.8	(4.4)
Weighted average shares outstanding at the end of the year (thousands) - basic		870,887,093	604,119,958
Earnings per share - basic	28	0.92	0.20
Weighted average shares outstanding at the end of the year (thousands) - diluted		875,538,749	606,044,378
Earnings per share - diluted	28	0.92	0.20

See accompanying notes to the consolidated financial statements.

F-3

BRF - BRASIL FOODS S.A.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
Years ended December 31, 2010 and 2009
(Amounts expressed in millions of Brazilian reais)

	12.31.10	12.31.09
Net income	804.9	118.6
Gain (loss) in foreign currency translation adjustments	(5.2)	19.6
Unrealized gain (loss) in available for sale marketable securities,
net of income taxes (R$0.3) in 2010 and R$0.4 in 2009.	0.9	(1.2)
Unrealized gains (loss) in cash flow hedge,
net of income taxes (R$53.5) in 2010 and R$2.4 in 2009.	103.9	(4.7)
Actuarial loss,
net of income taxes R$8.7 in 2010 and R$11.9 in 2009.	(16.8)	(23.1)
Net income (loss) recorded directly in the shareholders' equity	82.8	(9.4)
Comprehensive income	887.7	109.2
Attributable to:
BRF shareholders	886.9	113.6
Non-controlling shareholders	0.8	(4.4)

See accompanying notes to the consolidated financial statements.

F-4

BRF - BRASIL FOODS S.A.

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
Years ended December 31, 2010 and 2009
(Amounts expressed in millions of Brazilian reais, except interest on own capital per share data)

	Attributed to interest of controlling shareholders
		Capital reserve		Profit reserves			Other comprehensive income
	Capital	Capital reserve	Treasury shares	Legalreserve	Reserve for expansion	Reserve for capital increases	Accumulate d foreign currencytranslation adjustments	Availablefor sale marketable securities	Actuarial gains (losses)	Accumulated deficit	Non- controlling interest	Total shareholders' equity
BALANCES AT JANUARY 1st, 2009	3,445.0	-	(0.8)	66.2	505.0	160.3	(1.0)	(37.1)	-	(213.0)	0.7	3,925.3
Comprehensive income:
Gain in foreign currency translation adjustments	-	-	-	-	-	-	19.6	-	-	-	8.4	28.0
Unrealized loss in available for sale marketable securities	-	-	-	-	-	-	(1.2)	-	-	-	-	(1.2)
Unrealized loss in cash flow hedge	-	-	-	-	-	-	-	(4.7)	-	-	-	(4.7)
Actuarial gain (loss)	-	-	-	-	-	-	-	-	(23.1)	-	-	(23.1)
Net income (loss) for the year	-	-	-	-	-	-	-	-	-	123.0	(4.4)	118.6
TOTAL COMPREHENSIVE INCOME	-	-	-	-	-	-	17.4	(41.8)	(23.1)	(90.0)	4.7	4,042.9
Capital increase	9,108.5	-	-	-	-	-	-	-	-	-	-	9,108.5
Appropriation of income (loss):
Interest on shareholders' equity - R$ 0.229985 per
outstanding share at the end of the year	-	-	-	-	-	-	-	-	-	(100.0)	-	(100.0)
Legal reserve	-	-	-	4.8	-	-	-	-	-	(4.8)	-	-
Reserve for expansion	-	-	-	-	(8.7)	-	-	-	-	8.7	-	-
Valuation of shares	-	62.8	-	-	-	-	-	-	-	-	-	62.8
Cost of shares issuance	(91.7)	-	-	-	-	-	-	-	-	-	-	(91.7)
Treasury shares	-	-	(26.8)	-	-	-	-	-	-	-	-	(26.8)
BALANCES AT DECEMBER 31, 2009	12,461.8	62.8	(27.6)	71.0	496.3	160.3	17.4	(41.8)	(23.1)	(186.1)	4.7	12,995.7
Comprehensive income:
Gain (loss) in foreign currency translation adjustments	-	-	-	-	-	-	(5.2)	-	-	-	2.1	(3.1)
Unrealized gain in available for sale marketable securities	-	-	-	-	-	-	0.9	-	-	-	-	0.9
Unrealized gains in cash flow hedge	-	-	-	-	-	-	-	103.9	-	-	-	103.9
Actuarial gain	-	-	-	-	-	-	-	-	(16.8)	(18.5)	-	(35.3)
Net income for the year	-	-	-	-	-	-	-	-	-	804.1	0.8	804.9
TOTAL COMPREHENSIVE INCOME	-	-	-	-	-	-	13.1	62.1	(39.9)	599.5	7.6	13,867.0
Appropriation of income (loss):	-	-	-	-	-	-
Interest on shareholders' equity - R$ 0.30166 per
outstanding share at the end of the year	-	-	-	-	-	-	-	-	-	(262.5)	-	(262.5)
Legal reserve	-	-	-	40.2	-	-	-	-	-	(40.2)	-	-
Reserve for expansion	-	-	-	-	176.9	-	-	-	-	(176.9)	-	-
Reserve for capital increase	-	-	-	-	-	119.9	-	-	-	(119.9)	-	-
Share-based payments	-	6.6	-	-	-	-	-	-	-	-	-	6.6
Cost of shares issuance	(1.3)	-	-	-	-	-	-	-	-	-	-	(1.3)
Treasury shares	-	-	26.9	-	-	-	-	-	-	-	-	26.9
BALANCES AT DECEMBER 31, 2010	12,460.5	69.4	(0.7)	111.2	673.2	280.2	13.1	62.1	(39.9)	-	7.6	13,636.7

See accompanying notes to the consolidated financial statements.

F-5

BRF - BRASIL FOODS S.A.

CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, 2010 and 2009
(Amounts expressed in millions of Brazilian reais)

	12.31.10	12.31.09
Operating activities:
Net income for the year	804.1	123.0
Adjustments to reconcile net income to net cash provided by operating activities:
Non-controlling shareholders	0.9	(4.4)
Depreciation, amortization and depletion	840.4	544.6
Equity interest in income of subsidiaries	(4.3)	(2.5)
Loss in disposal of permanent assets	87.3	45.0
Deferred income tax	65.9	141.0
Provision (reversal) for tax, civil and labor risks	194.6	(14.9)
Other provisions (reversals)	(89.8)	20.2
Exchange rate variations and interest	236.5	(533.8)
Changes in operating assets and liabilities:
Investment in trading securities	(2,809.7)	(9,448.8)
Redemption of trading securities	4,553.8	8,480.0
Investment in available for sale	(980.7)	(239.3)
Redemption of available for sale	1,170.7	69.0
Other financial assets and liabilities	(75.9)	(8.0)
Trade accounts receivable	(401.5)	118.9
Inventories	167.7	244.7
Trade accounts payable	154.8	(28.9)
Payment of provisions for tax, civil and labor risks	(91.3)	(30.1)
Interest paid	(545.6)	(438.6)
Interest in shareholders' equity received	4.0	-
Payroll and related charges	(50.3)	(30.9)
Net cash provided by (used) operating activities	3,231.6	(993.8)
Investing activities:
Investment in marketable securities	-	(0.4)
Redemption in marketable securities	-	251.7
Additional acquisition costs	-	99.2
Other investments, net	-	(58.8)
Additions to property, plant and equipment	(697.8)	(693.2)
Additions to biological assets	(376.1)	(225.9)
Proceeds from disposals of property, plant and equipement	38.0	66.4
Business acquisition, net of cash	-	511.3
Additions to intangible	(64.7)	-
Net cash used in investing activities	(1,100.6)	(49.7)
Financing activities:
Proceeds from debt issuance	2,928.7	2,604.6
Repayment of debt	(4,357.5)	(5,923.1)
Capital increase through issuance of shares	-	5,290.0
Interest on shareholders' equity paid	(153.2)	(24.8)
Cost of shares issuance	(1.3)	(91.7)
Net cash (used in) provided by financing activities	(1,583.3)	1,855.0
Effect of exchange rate variation on cash and cash equivalents	(135.3)	(146.8)
Net increase in cash	412.4	664.7
Cash at the beginning of the year	1,898.2	1,233.5
Cash at the end of the year	2,310.6	1,898.2
Cash flow supplementary information	412.4	664.7
Cash paid during the year for:
Income tax and social contribution	78.1	19.8
Shares exchange due to business combination net of acquired cash and cash equivalent in the amount of R$511.3.	-	3,369.8
	78.1	3,389.6

See accompanying notes to the consolidated financial statements.

F-6

BRF – Brasil Foods S.A.

Notes to Consolidated Financial Statements – (Continued)

Years ended December 31, 2010 and 2009

(Amounts expressed in millions of Brazilian reais, unless otherwise stated)

1.COMPANY’S OPERATIONS

Founded in 1934, in the State of Santa Catarina, BRF – Brasil Foods S.A. (“BRF”), formerly known as Perdigão S.A., and its subsidiaries (collectively “the Company”) is one of Brazil’s largest companies in the food industry. With a focus on raising, producing and slaughtering of poultry, pork and beef, processing and/or sale of fresh meat, processed products, milk and dairy products, pasta, frozen vegetables and soybean derivatives, among which the following are highlighted:

• Frozen whole chicken and chicken, turkey, pork and beef cuts;
• Ham products, sausages, bologna, frankfurters and other smoked products;
• Hamburgers, breaded meat products, kibes and meatballs;
• Lasagnas, pizzas, vegetables, cheese breads, pies and frozen pastries;
• Milk, dairy products and desserts;
• Juices, soy milk and soy juices;
• Margarine; and
• Soy meal and refined soy flour, as well as animal feed.

The Company's activities are segregated into 2 operating segments: domestic and foreign markets.

Currently, the Company operates 44 meat processing plants, 15 milk and dairy products processing plants, 3 margarine processing plants, 4 pasta processing plants, 1 dessert processing plant, and 1 soybean crushing plant, all of them located near to the Company’s raw material suppliers or to the main consumer centers. In the foreign market, the Company has subsidiaries in the United Kingdom, Italy, Austria, Hungary, Japan, The Netherlands, Russia, Singapore and United Arab Emirates, Portugal, France, Germany, Turkey, China, Cayman Islands, Venezuela, Uruguay, Chile and 1 cheese processing plant in Argentina.

The wholly-owned subsidiary Plusfood Groep B.V. operates 2 meat processing plants located in the United Kingdom and The Netherlands.

The table below summarizes the direct and indirect ownership interests of the Company, as well as the activities in which these companies are engaged in:

F-7

BRF – Brasil Foods S.A.

Notes to Consolidated Financial Statements – (Continued)

Years ended December 31, 2010 and 2009

(Amounts expressed in millions of Brazilian reais, unless otherwise stated)

1.1.Interest in subsidiaries:

Subsidiary	Main activity	Country	12.31.10	12.31.09	01.01.09
Perdigão Agroindustrial S.A.	Industrialization and commercialization of products	Brazil	-	-	100.00%
PSA Laboratório Veterinário Ltda. (k)	Veterinary activities	Brazil	88.00%	10.00%	10.00%
Sino dos Alpes Alimentos Ltda.	Industrialization and commercialization of products	Brazil	99.99%	99.99%	99.99%
PDF Participações Ltda	Holding	Brazil	1.00%	1.00%	1.00%
Sino dos Alpes Alimentos Ltda	Industrialization and commercialization of products	Brazil	0.01%	0.01%	0.01%
Vip S.A. Emp.Part.Imobiliárias (i)	Commercialization of owned real estate	Brazil	65.00%	100.00%	100.00%
Estab. Levino Zaccardi y Cia. S.A.	Processing of dairy products	Argentine	10.00%	10.00%	10.00%
Avipal Nordeste S.A. (l)	Raising of poultry for slaughtering	Brazil	-	100.00%	100.00%
Avipal S.A. Construtora e Incorporadora (a)	Construction and comercialization of real estate	Brazil	100.00%	100.00%	100.00%
Avipal Centro-oeste S.A. (a)	Industrialization and comercialization of milk	Brazil	100.00%	100.00%	100.00%
Estab. Levino Zaccardi y Cia. S.A.	Processing of dairy products	Argentine	90.00%	90.00%	90.00%
UP Alimentos Ltda	Industrialization and commercialization of products	Brazil	50.00%	50.00%	50.00%
Perdigão Trading S.A. (a)	Holding	Brazil	100.00%	100.00%	100.00%
PSA Laboratório Veterinário Ltda (k)	Veterinary activities	Brazil	12.00%	90.00%	90.00%
PDF Participações Ltda	Holding	Brazil	99.00%	99.00%	99.00%
Perdigão Export Ltd. (a)	Import and export of products	Cayman Island	100.00%	100.00%	100.00%
Crossban Holdings GmbH	Holding	Austria	100.00%	100.00%	100.00%
Perdigão Europe Ltd. (r)	Import and export of products	Portugal	100.00%	100.00%	100.00%
Perdigão International Ltd	Import and export of products	Cayman Island	100.00%	100.00%	100.00%
BFF International Ltd	Unrestricted activities	Cayman Island	100.00%	100.00%	100.00%
Highline International (a)	Unrestricted activities	Cayman Island	100.00%	100.00%	100.00%
Perdigão UK Ltd	Marketing and logistics services	United Kingdom	100.00%	100.00%	100.00%
Plusfood Germany GmbH (c)	Import and export of products	Germany	100.00%	-	-
Perdigão France SARL	Import and export of products	France	100.00%	100.00%	100.00%
Perdigão Holland B.V.	Administrative services	The Netherlands	100.00%	100.00%	100.00%
Plusfood Groep B.V.	Holding	The Netherlands	100.00%	100.00%	100.00%
Plusfood B.V. (n)	Import and export of products	The Netherlands	100.00%	100.00%	100.00%
Plusfood Wrexham (n)	Import and export of products	United Kingdom	100.00%	-	-
Plusfood Constanta SRL (m)	Meat processsing	Italy	-	100.00%	100.00%
Plusfood Finance UK Ltd	Financial fund-raising	United Kingdom	100.00%	100.00%	100.00%
Fribo Foods Ltd (n)	Import and export of products	United Kingdom	-	100.00%	100.00%
Plusfood France SARL (p)	Import and export of products	France	-	100.00%	100.00%
Plusfood Iberia SL	Distribution of food products	Spain	100.00%	100.00%	100.00%
Plusfood Italy SRL	Import and export of products	Italia	67.00%	67.00%	67.00%
BRF Brasil Foods Japan KK (q)	Import and export of products	Japão	100.00%	100.00%	100.00%
Brasil Foods PTE Ltd. (g)	Marketing and logistics services	Singapura	100.00%	100.00%	100.00%
Plusfood Hungary Trade and Service LLC.(h)	Import and export of products	Hungria	100.00%	100.00%	100.00%
Plusfood UK Ltd	Marketing and logistics services	United Kingdom	100.00%	100.00%	100.00%
Acheron Beteiligung-sverwaltung GmbH (b)	Holding	Austria	100.00%	100.00%	100.00%
Xamol Consul. Serv. Ltda (a)	Import and export of products	Portugal	100.00%	100.00%	100.00%
HFF Participações S.A. (l)	Holding	Brazil	-	100.00%	-
Sadia S.A. (l)	Industrialization and commercialization of products	Brazil	-	33.15%	-
Sadia S.A.	Industrialization and commercialization of products	Brazil	100.00%	66.85%	-
Sadia International Ltd.	Import and export of products	Cayman Island	100.00%	100.00%	-
Sadia Uruguay S.A.	Import and export of products	Uruguay	100.00%	100.00%	-
Sadia Chile S.A.	Import and export of products	Chile	60.00%	60.00%	-
Sadia Alimentos S.A.	Import and export of products	Argentine	95.00%	95.00%	-
Sadia U. K. Ltd.	Commercialization of real estate and others	United Kingdom	100.00%	100.00%	-
Concórdia Foods Ltd.	Commercialization of real estate and others	United Kingdom	100.00%	100.00%	-
Vip S.A. Emp.Part.Imobiliárias (i)	Commercialization of owned real estate	Brazil	35.00%	100.00%	-
Estelar Participações Ltda (a)	Holding	Brazil	99.90%	-	-
Sadia Industrial Ltda.	Industrialization and commercialization of commodities	Brazil	99.90%	100.00%	-
Estelar Participações Ltda (a)	Holding	Brazil	0.10%	99.99%	-
Rezende Marketing e Comunicações Ltda. (e)	Advertising agency	Brazil	-	0.09%	-
Big Foods Ind. de Produtos Alimentícios Ltda. (d)	Manufacture of bakery products	Brazil	-	100.00%	-
Rezende Marketing e Comunicações Ltda. (e)	Advertising agency	Brazil	-	99.91%	-
Sadia Overseas Ltd.	Financial fund-raising	Cayman Island	100.00%	100.00%	-
Sadia GmbH	Holding	Austria	100.00%	100.00%	-
Wellax Food Logistics C.P.A.S.U. Lda.	Import and export of products	Portugal	100.00%	100.00%	-
Sadia Foods GmbH	Import and export of products	Germany	100.00%	100.00%	-
Qualy B. V. (b)	Import and export of products	Netherlands	100.00%	100.00%	-
Sadia Japan KK.	Import and export of products	Japan	100.00%	100.00%	-
Concórdia Ltd. (o)	Holding	Russia	-	100.00%	-
Badi Ltd.  (j)	Import and export of products	Arab Emirates	100.00%	80.00%	-
AL-Wafi (f)	Import and export of products	Saudi Arabia	75.00%	-	-
Baumhardt Comércio e Participações Ltda.	Consulting	Brazil	73.94%	73.94%	-
Excelsior Alimentos S.A.	Slaughterhouse for pork	Brazil	25.10%	25.10%	-
Excelsior Alimentos S.A.	Slaughterhouse for pork	Brazil	46.01%	46.01%	-
K&S Alimentos S.A.	Industrialization and commercialization of products	Brazil	49.00%	49.00%	-

F-8

BRF – Brasil Foods S.A.

Notes to Consolidated Financial Statements – (Continued)

Years ended December 31, 2010 and 2009

(Amounts expressed in millions of Brazilian reais, unless otherwise stated)

(a) Dormant subsidiaries.

(b) The wholly-owned subsidiary Acheron Beteiligung-sverwaltung GmbH owns 100 direct subsidiaries in Madeira Island, Portugal, with an investment of R$0.6, and the wholly-owned subsidiary Qualy B.V. owns 48 subsidiaries in the Netherlands, and the amount of this investment, as of December 31, 2010, is represented by a net capital deficiency of R$8.9, the purpose of these two subsidiaries is to operate in the European market to increase the Company’s share of this market, which is regulated by a system of poultry and turkey import quotas.  

(c) Establishment of the wholly-owned subsidiary Plusfood Germany GmbH, in Germany, on September 8, 2010.

(d) Merger of 100% of the equity units of the wholly-owned subsidiary Big Foods Ind. de Produtos Alimentícios Ltda. into Sadia in August 31, 2010.

(e) The activities of the wholly-owned subsidiary Rezende Marketing e Comunicações Ltda. were discontinued in August 27, 2010.

(f) Establishment of the wholly-owned subsidiary AL-Wafi in Saudi Arabia in August 2010.

(g) The name of the wholly-owned subsidiary Perdigão Asia PTE Ltd. was changed to Brasil Foods PTE Ltd. in August 2010.

(h) The name of the wholly-owned subsidiary Plusfood Hungary Kft. was changed to Plusfood Hungary Trade and Service LLC.

(i) The name of the wholly-owned subsidiary Avipal S.A. Alimentos was changed to Vip S.A. Empreendimentos e Participações Imobiliárias on January 4, 2010. From August 8, 2010 the wholly-owned subsidiary Sadia holds 35% of the interest in Vip S.A. Empreendimentos e Participações which used to be BRF’s direct wholly-owned subsidiary.

(j) In the second half of 2010, the wholly-owned subsidiary Sadia GmbH acquired 20% of the shares of Badi Ltd, becoming the holder of 100% of the investment for US$0.6.

(k) The change in the ownership interest of Perdigão Trading S.A. and BRF - Brasil Foods S.A. in PSA Laboratório Veterinário Ltda. arises from the corporate restructuring process carried out by management.

(l) Company merged on March 31, 2010, the ownership interests held by this company was transferred to the parent company on this date.

(m) Disposal of ownership interest on March 31, 2010.

(n) The shares of Plusfood Wrexham Ltd.  (new name of Fribo Foods Ltd.), which were fully held by the wholly-owned subsidiary Plusfood Finance UK Ltd., were transferred to the wholly-owned subsidiary Plusfood Groep B.V. on June 7, 2010.

(o) Disposal of ownership interest on September 19, 2009.

(p) Activities discontinued on October 22, 2010.

(q) The name of the wholly-owned subsidiary Perdigão Nihon K.K. was changed to Brasil Foods Japan K.K. on November 1, 2010

(r) The name of the wholly-owned subsidiary Perdix was changed to Perdigão Europe on March 18, 2009.

The Company has an advanced distribution system and uses 38 distribution centers, delivering its products to supermarkets, retail stores, wholesalers, food service stores and other institutional customers of the domestic market andexporting to more than 145 countries.

F-9

BRF – Brasil Foods S.A.

Notes to Consolidated Financial Statements – (Continued)

Years ended December 31, 2010 and 2009

(Amounts expressed in millions of Brazilian reais, unless otherwise stated)

BRF has a large number of brands, the principal of which are the following: Batavo, Claybon, Chester®, Confiança, Delicata, Doriana, Elegê, Fazenda, Nabrasa, Perdigão, Perdix,in addition to licensed brands such as Turma da Mônica. The main brands of the subsidiary Sadia are the following:Fiesta, Hot Pocket, Miss Daisy, Nuggets, Qualy, Rezende, Sadia, Speciale Sadia, Texasand Wilson.

In April 2006, the Company’s shares were listed on theNovo Mercado corporate governance (“New Market of the São Paulo Stock Exchange”).

The Extraordinary Shareholders' Meeting held on July 8, 2009 approved that the shares issued by the Company started to be traded on the São Paulo Securities, Futures and Commodities Exchange (“BM&FBOVESPA”) under the new symbol “BRFS3” and on the New York Stock Exchange (“NYSE”) under the new symbol “BRFS,” which replaced the former symbols “PRGA3” and “PDA,” respectively.

1.2.Corporate restructuring

The Company has been following its sustainable growth plan since mid-2005, which is based on the acquisition of various companies and entry into new businesses.

As a result of these acquisitions, the Company grew and diversified its businesses, increasing its market share in the poultry and pork markets and entering the dairy, margarine and beef markets.

The companies acquired were as follows:

Company	Activity	Acquisition Year	Status
Sadia	Meat	2009	Wholly-owned subsidiary
HFF Participações	Holding	2009	Merged on 03.31.10
Eleva Alimentos	Dairy/meat	2008	Merged on 04.30.08
Cotochés	Dairy	2008	Merged on 12.31.08
Plusfood	Meat	2008	Wholly-owned subsidiary
Batávia S.A.	Dairy	2006/2007	Merged on 12.31.08
Paraíso Agroindustrial	Meat	2007	Merged on 08.01.07
Ava Comércio e Representação	Margarines	2007	Merged on 08.01.07
Sino dos Alpes	Meat	2007	Wholly-owned subsidiary
Mary Loize	Meat	2005	Merged on 12.31.08
Incubatório Paraíso	Meat	2005	Merged on 07.03.06
Perdigão Agroindustrial	Meat	-	Merged on 03.09.09

Within this growth process, the Company carried out a comprehensive corporate and business restructuring actions, aimed at maintaining the sustainability of itsbusinesses by streamlining its corporate structure, reducing operating, tax and finance costs, and reorganizing its operating activities.

F-10

BRF – Brasil Foods S.A.

Notes to Consolidated Financial Statements – (Continued)

Years ended December 31, 2010 and 2009

(Amounts expressed in millions of Brazilian reais, unless otherwise stated)

2.MANAGEMENT’S STATEMENT, BASIS OF PREPARATION AND PRESENTEATION OF FINANCIAL STATEMENTS

The Company’s consolidated financial statements are in accordance with the International Financial Reporting Standards (“IFRS”) as issued by the International Accounting Standards Board (“IASB”).

For the first time the Company prepared its consolidated financial statements according to the IFRS, the transition date adopted was January 1, 2009.

The effects of adopting the new accounting rules on the previously reported shareholders’ equity and net income are presented in note 3.

The Company’s consolidated financial statements are expressed in thousands of Brazilian reais, and the amount of other currencies disclosed in the consolidated financial statements, when applicable, are also expressed in thousands.

The preparation of the Company’s consolidated financial statements requires management to make judgments, use estimates and adopt assumptions that affect the reported amounts of revenues, expenses, assets and liabilities, as well as the disclosures of contingent liabilities, as of the reporting date as disclosed in note 4.30. However, the uncertainty inherent to these judgments, assumptions and estimates could lead to results requiring a material adjustment to carrying amount of the affected asset or liability in future periods.

The settlement of the transactions involving these estimates can result in amounts that significantly differ from those recorded in the consolidated financial statements due to the lack of precision inherent to the estimation process. The Company reviews its judgments, estimates and assumptions on a quarterly basis.

The consolidated financial statements were prepared based on the historical cost except for the following material items recognized in the balance sheet:

·derivative financial instruments measured at fair value;

·derivative financial instruments measured at fair value through the statement of income ;

·financial assets available for sale measured at fair value; and

·assets and liabilities of acquired companies from January 1, 2009, recordedinitially at fair value.

F-11

BRF – Brasil Foods S.A.

Notes to Consolidated Financial Statements – (Continued)

Years ended December 31, 2010 and 2009

(Amounts expressed in millions of Brazilian reais, unless otherwise stated)

3.FIRST-TIME ADOPTION OF THE INTERNATIONAL ACCOUNTING STANDARDS

As from December 31, 2007, the Brazilian agencies responsible for accounting matters started to regulate Brazilian accounting practices in order to conform to the IFRS. The convergence process occurred in two stages: (1) in 2008, the Brazilian Accounting Pronouncement Committee (“CPC”) issued accounting pronouncements CPC 01 to CPC 14, which were applied by the Company to its consolidated financial statements as of December 31, 2008; and (2) in 2009, with the issuance of accounting pronouncements CPC 15 to CPC 41 and 43 (except for CPC 34 – not yet issued), besides Technical Interpretations CPCs (“ICPCs”) and Technical Guidances CPCs (“OCPCs”), all of which were approved and also adopted by the Brazilian Securities Commission (“CVM”).

The new accounting practices provided for in technical accounting pronouncements CPC 15 to CPC 41 and 43 were initially adopted by the Company in the fiscal year ended December 31, 2010, and retrospectively applied to all the periods presented for comparative purposes. The transition date adopted by the Company was January 1, 2009, the date on which the opening balance sheets were prepared in accordance with the new accounting practices.

Management acknowledges that the pronouncements issued by CPC and approved by CVM conform to IFRS. The following is a list of the new technical pronouncements adopted by the Company:

·CPC 15 – Business Combinations, approved by CVM Deliberation No. 580/09 corresponding to IFRS 3;

·CPC 16 (R1) – Inventories, approved by CVM Deliberation No. 575/09 corresponding to IAS 2;

·CPC 20 – Borrowing Costs, approved by CVM Deliberation No. 577/09 corresponding to IAS 23;

·CPC 21 – Interim Financial Reporting, approved by CVM Deliberation No. 581/09 corresponding to IAS 34 and IFRIC 20;

·CPC 22 – Segment Reporting, approved by CVM Deliberation No. 582/09  corresponding to IFRS 8;

·CPC 23 – Accounting policies, Changes in Accounting Estimates and Errors, approved by CVM Deliberation No. 592/09 corresponding to IAS 8;

F-12

BRF – Brasil Foods S.A.

Notes to Consolidated Financial Statements – (Continued)

Years ended December 31, 2010 and 2009

(Amounts expressed in millions of Brazilian reais, unless otherwise stated)

·CPC 26 – Presentation of Financial Statements, approved by CVM Deliberation No. 595/09 corresponding to IAS 21;

·CPC 27 – Property, Plant and Equipment, approved by CVM Deliberation No. 583/09 corresponding to IAS 16;

·CPC 29 – Biological Assets and Agricultural Products, approved by CVM Deliberation No. 596/09 corresponding to IAS 41;

·CPC 32 – Income Taxes, approved by CVM Deliberation No. 599/09 corresponding to IAS 12 and SIC 21;

·CPC 33 – Employee Benefits, approved by CVM Deliberation No. 600/09 corresponding to IAS 19 and IFRIC 14;

·CPC 37 (R1) – First-time adoption of International Financial Reporting Standards (IFRS), approved by CVM Deliberation No. 609/09 corresponding to IAS 27;

·CPC 41 – Earnings per Share, approved by CVM Deliberation No. 636/10 corresponding to IAS 33;

·CPC 43 (R1) - First-time adoption of Technical Pronouncements 15 to 40, approved by CVM Deliberation No. 610/09;

·ICPC 09 - Individual, Separate and Consolidated Financial Statements and Application of the Equity Method;

·ICPC 10 – Clarifications on CPC 27 and CPC 28; and

·ICPC 12 – Changes in Existing Decommissioning, Restoration and Similar Liabilities.

As a result of the convergence process, the Company, as of the transition date, applied certain voluntary exemptions provided for in the standards issued by IFRS, as follows:

• Business combinations: the Company applied the exemption referring to business combinations, electing not to restate the business combinations carried out before the transition date. Goodwill calculated prior to the transition date was maintained and is subject to impairment testing every year.

• Use of deemed cost for property, plant and equipment: the Company elected not to measure property, plant and equipment at fair value as deemed cost taking into consideration that: (i) the cost method, net of a provision for losses, is the best method to value the Company’s PP&E; (ii) the Company’s property, plant and equipment (“PP&E”) is divided into well-defined classes of assets related to its operating activities; (iii) in 2009, the Company reviewed the estimated useful lives of its PP&E; and (iv) the Company has efficient controls over PP&E items that enable the identification of losses and changes in estimated useful lives.

F-13

BRF – Brasil Foods S.A.

Notes to Consolidated Financial Statements – (Continued)

Years ended December 31, 2010 and 2009

(Amounts expressed in millions of Brazilian reais, unless otherwise stated)

• Actuarial gains and losses: the Company’s management recognized the actuarial gains and losses immediately through other comprehensive income, with immediate effect in the shareholders equity in the retained earnings. If an asset is determined in the end of the fiscal year and if this asset is above the asset ceiling, it will be recorded in shareholders equity through other comprehensive income at the transition date no asset was recognized by the Company.

The mandatory exemptions provided for in IFRS were in accordance with the accounting practices previously adopted by the Company, and, therefore, had no impact on the consolidated financial statements.

The amendments to the accounting practices applied in the preparation of the Company’s consolidated financial statements, previously disclosed, were as follows:

Reconciliation of shareholders’ equity

		12.31.10	01.01.09
Consolidated shareholders' equity disclosed according to prior accounting practices		13,134.6	4,110.6
Reversal of deferred assets	(a)	(201.9)	(172.1)
Other employees benefits	(b)	(112.2)	(84.2)
Transfer freight	(c)	(15.9)	(25.5)
Business combination	(d)	111.6	-
Effect of income taxes on the above adjustments	(e)	74.8	95.8
Shareholders' equity disclosed according to IFRS		12,991.0	3,924.6

Reconciliation of income for the year    

		12.31.09
Consolidated net income disclosed according to prior accounting practices		120.4
Reversal of deferred assets	(a)	60.9
Other employees benefits	(b)	(21.0)
Transfer freight	(c)	9.6
Business combination	(d)	(22.9)
Effect of income taxes on the above adjustments	(e)	(24.0)
Net income disclosed according to IFRS		123.0

F-14

BRF – Brasil Foods S.A.

Notes to Consolidated Financial Statements – (Continued)

Years ended December 31, 2010 and 2009

(Amounts expressed in millions of Brazilian reais, unless otherwise stated)

(a)Deferred charges: upon first-time adoption of the CPC’s, the Company’s Management elected to maintain the balance of deferred charges until its full realization, subject to analysis of its recovery. In 2010, in order for prior accounting practices to conform to IFRS, Management elected to change the accounting policy for deferred charges and wrote off the total balance against the retained earnings account of January 1, 2009, as presented in the table above.

(b)Other employee benefits: mainly comprised of benefits upon termination, such as medical plan, Government Severance Indemnity Fund For Employees (“F.G.T.S.”) penalty, termination compensation and supplementary retirement plan, being mandatory the recognition of actuarial gains and losses directly in the specific account in the shareholders’ equity and cost of prior service recognized directly in the statement of income.

(c)Transfer freight:  transfer freight expenditures, previously recorded as prepaid expenses, have been reclassified to inventories. The costs related to storage and distribution centers have been reclassified to the statement of income within selling expenses aiming to standardize accounting practices between the entities included in the consolidation.

(d)Business combination: according to the previous accounting practice, goodwill represented the difference between the amount paid and the carrying amount attributed to the net assets acquired; however, goodwill is the difference calculated between the net fair value of the assets acquired and liabilities assumed, including intangible assets, and, as a consequence, the business combination with Sadia, carried out on July 8, 2009, has been remeasured to comply with the prevailing legislation (see note 7).

(e)Effect of deferred income tax and social contribution on the adjustments described in items (a) to (d) above.

Additionally to the adjustments presented above and in order to attend the new accounting requirements, the Company made some reclassifications in the balance sheet and the statement of income as presented below:

• Judicial deposits previously presented within the balance of provision for tax, civil and labor risks were reclassified to the non-current assets;

• The balance related to live animals for slaughtering previously classified as inventories was reclassified to the biological assets group in the current assets;

• The balance related to breeding animals previously classified as property, plant and equipment was reclassified to the biological assets group in the non-current assets;

F-15

BRF – Brasil Foods S.A.

Notes to Consolidated Financial Statements – (Continued)

Years ended December 31, 2010 and 2009

(Amounts expressed in millions of Brazilian reais, unless otherwise stated)

• The balance related to derivatives transactions previously classified as loans and financing was reclassified to the other financial assets or liabilities;

• The assets available for sale previously classified as other assets were reclassified to assets held for sale;

• The non-controlling interest previously classified as a mezzanine item  between liabilities and the shareholders’ equity was reclassified to the shareholders’ equity; and

• For fiscal years presented for comparison purposes, the transaction related to assigned receivables in the domestic market made by the wholly-owned subsidiary Sadia as of September 30, 2010, was reclassified from accounts receivable in current assets to loans and financing in current liabilities.

4.SUMMARY OF SIGNIFICANT ACCOUNTING PRACTICES

4.1.Consolidation: includes the BRF’s financial statements and the financial statements of the direct and indirect subsidiaries where BRF has control. All transactions and balances between BRF and its subsidiaries have been eliminated upon consolidation, as well as the unrealized profits or losses arising from transactions between the Company and its subsidiaries, and the related charges and taxes. Non-controlling interest is presented separately.

In the preparation of the consolidated financial statements, the Company applied IAS 21, related to Effects of Changes in Foreign Exchange Rates and Translation of Financial Statements. Pursuant to this accounting standard, the Company must apply the following criteria for the consolidation of foreign subsidiaries:

·Functional currency: the financial statements of each subsidiary included in the Company’s consolidated financial statements are prepared using the currency of the main economic environment where it operates.  The foreign subsidiaries adopted the real as their functional currency, except for the subsidiary Plusfood Groep B.V. and its subsidiaries, which adopted the euro as their functional currency;

·Investments: investments in affiliates are accounted for under the equitymethod. The financial statements of foreign subsidiaries are translated into Brazilian reais in accordance with their functional currency using the following criteria:

F-16

BRF – Brasil Foods S.A.

Notes to Consolidated Financial Statements – (Continued)

Years ended December 31, 2010 and 2009

(Amounts expressed in millions of Brazilian reais, unless otherwise stated)

Functional currency - Euro

·Assets and liabilities are translated at the exchange rate at the end of the period.

·Statement of income accounts are translated at the exchange rate obtained from the monthly average rate of each month.

·The cumulative effects of gains or losses upon translation are directly recognized in the shareholders’ equity.

Functional currency – Brazilian reais

·Non-monetary assets and liabilities are translated at the historical rate of the transaction.

·Monetary assets and liabilities are translated at the exchange rate effective at the end of the period.

·Statement of income accounts are translated at the exchange rate obtained from the monthly average rate of each month.

·The cumulative effects of gains or losses upon translation are directly recognized in the statement of income.

The subsidiary Sadia consolidated the financial statements of a foreign investment fund named Concórdia Foreign Investment Fund Class A. Sadia is the sole unit holder of this fund (exclusive fund). This investment fund has the specific purpose of centralizing the portfolio of investments abroad, allowing Sadia to outsource the administrative functions.

The accounting practices have been consistently applied in all subsidiaries included in the consolidated financial statements.

4.2.Business combinations: business combinations are accounted for using the acquisition method. The cost of an acquisition is the sum of the consideration transferred, valued based on the fair value at acquisition date, and the amount of any non-controlling interests in the acquiree. For each business combination, the Company recognizes any non-controlling interest in the acquiree either at fair value or at the non-controlling interest’s proportionateshare of the acquiree’s net assets. Costs directly attributable to the acquisition must be accounted for as an expense when incurred.

F-17

BRF – Brasil Foods S.A.

Notes to Consolidated Financial Statements – (Continued)

Years ended December 31, 2010 and 2009

(Amounts expressed in millions of Brazilian reais, unless otherwise stated)

When acquiring a business, Management evaluates the assets acquired and the liabilities assumed in order to classify and allocate them pursuant to the terms of the agreement, economic circumstances and the conditions at acquisition date.

Goodwill is initially measured as the excess of the consideration transferred over the fair value of the net assets acquired (net assets identified and liabilities assumed). If the consideration is lower than the fair value of the net assets acquired, the difference is recognized as a gain in the statement of income.

After initial recognition, goodwill is measured at cost, net of any accumulated impairment losses. For purposes of impairment testing, the goodwill acquired in a business combination, as from the acquisition date, is allocated to each of the Company’s cash generating units expected to be benefit from the synergies of the combination, regardless of whether other assets or liabilities of the acquiree are attributed to these units.

4.3.Segment information: an operating segment is a Company’s component that carries out business activities from which it can obtain revenues and incur expenses. The operating segments reflect how the Company’s management reviews financial information to make decisions and for which individual financial information is available. The Company’s management identified two segments operations for disclosure, the domestic and the foreign markets, which meet the quantitative and qualitative disclosure parameters. The segments identified for disclosure represent geographical sales areas, and, accordingly, information according to the characteristics of the products is also presented, based on their nature, as follows: meat and dairy, prepared and processed products. Products of other nature were grouped as “other,” since they do not meet the quantitative parameters, nor do they have qualitative importance to the periods presented. 

4.4.Cash and cash equivalents: includes cash on hand, bank deposits and highly liquid investments in fixed-income funds and/or securities with maturities, upon acquisition, of 90 days or less, which are readily convertible into known amounts of cash and subject to immaterial risk of change in value.   The investments classified in this group, due to their nature, are measured at fair value through the statement of income.

4.5.Financial instruments: Financial assets and liabilities are classified based on the purpose for which they were acquired, and their classification isdetermined at the initial recognition of the financial instruments. Financial assets and liabilities include: financial investments; loans; receivables; derivatives; and other.

F-18

BRF – Brasil Foods S.A.

Notes to Consolidated Financial Statements – (Continued)

Years ended December 31, 2010 and 2009

(Amounts expressed in millions of Brazilian reais, unless otherwise stated)

4.5.1.Financial investments are financial assets that comprise public and private fixed-income securities, and are classified and recorded based on the purpose for which they were acquired, in accordance with the following:

·Trading securities: acquired for sale or repurchase in the short term, initially recorded at fair value plus its variations, with a corresponding entry directly recorded in the statement of income for the year within interest income or expense;

·Held to maturity:when the Company has the intention and financial ability to hold the instrument to maturity, the investments are recorded at cost, plus interest, inflation adjustment and exchange rate changes, when applicable, and recognized in the statement of income when incurred, within interest income or expense; and

·Available for sale:this category is for all the financial assets that are not classified any of the categories above, which are measured at fair value, with variations recorded in the shareholders’ equity within other comprehensive income, net of taxes. Interest, inflation adjustments and exchange rate changes, when applicable, are recognized in the statement of income when incurred within interest income or expense.

4.5.2.Derivatives measured at fair value: these are derivatives actively traded on organized markets, and their fair value is determined based on the amounts quoted on the market at the balance sheet date. These financial instruments are designated at initial recognition, classified as other financial assets and/or liabilities, with a corresponding entry in the statement of income within finance income or expense or cash flow hedge, which are recorded in shareholders’ equity net of taxes.

4.5.3.Hedge transactions: derivatives used to hedge exposures to risks or change the characteristics of financial assets and liabilities, unrecognized firm commitments, highly probable transactions or net investments in transactions abroad, and which: (i) are highly correlated as regards changes in their fair value in relation to the fair value of the hedged item, both at inception and throughout the life of the contract (effectiveness from 80% to 125%); (ii) are supported by documents that identify the transaction, the hedged risk, the risk management process and themethodology used to assess effectiveness; and (iii) are considered as effective in the mitigation of the risk associated with the hedged exposure.  The accounting follows IAS 39 “Financial Instruments – Recognition and Measurement”, which allows the application of the hedge accounting methodology with the effects of measurement at fair value recognized in equity and their realization in the statement of income under a caption corresponding to the hedged item. The Company elected to apply this methodology to its hedge transactions that meet the criteria described above (see note 5.4).

F-19

BRF – Brasil Foods S.A.

Notes to Consolidated Financial Statements – (Continued)

Years ended December 31, 2010 and 2009

(Amounts expressed in millions of Brazilian reais, unless otherwise stated)

4.5.4.Loans and receivables: these are financial assets with fixed or determinable payments which are not quoted on an active market. Such assets are initially recognized at fair value plus any attributable transaction costs. After initial recognition, loans and receivables are measured at amortized cost under the effective interest rate method, less any impairment losses.

4.6.Adjustment to present value: the Company and its subsidiaries measure the adjustment to present value of outstanding balances of trade receivables, other rights, trade payables, social obligations and other long-term obligations. The Company adopts the weighted average of the cost of funding on the domestic and foreign markets to determine the adjustment to present value to the assets and liabilities previously mentioned, which corresponds to 6.33% p.a. (6.13% p.a. as of December 31, 2009). The subsidiary Sadia calculated and recorded the adjustment to present value of trade receivables based on the rate used in each transaction, which corresponds to 4.5% per month, and for trade payables it used 100% of the Interbank Certificate of Deposit (“CDI”) that on December 31, 2010, corresponded to 9.75% p.a.

4.7.Trade receivables and other receivables: are recorded at the invoiced amount and adjusted to present value, when applicable, net of estimated losses on doubtful receivables.

The Company adopts procedures and analyses to establish credit limits and generally does not require collateral from customers. In the event of default, collection attempts are made, which includes direct contact with customers and collection through third parties. Should these efforts not prove successful, court measures are considered and the notes are reclassified to non-current at the same time an estimated loss on doubtful receivables is recorded (see note 10).

4.8.Inventories: are stated at average cost, not exceeding market value or net realizable value.  The cost of finished products includes raw materials, labor, cost of production, transport and storage, all of which are related to makingthe products ready for sale. Provisions for obsolescence, adjustments to net realizable value, impaired items and slow-moving inventories are recorded when necessary. Production losses are recorded and are an integral part of the production cost of the respective month, whereas unusual losses, if any, are recorded directly as an expense for the year (see note 11).

F-20

BRF – Brasil Foods S.A.

Notes to Consolidated Financial Statements – (Continued)

Years ended December 31, 2010 and 2009

(Amounts expressed in millions of Brazilian reais, unless otherwise stated)

4.9.Biological assets: pursuant to IAS 41 “Biological Assets”, agricultural activity is the management of the biological transformation of biological assets (living animals and/or plants) for sale, into agricultural produce, or additional biological assets.

The Company classifies living poultry and pigs as biological assets. The Company recognizes biological assets when it controls these assets as a result of a past event and it is probable that future economic benefits associated with these assets will flow to the Company and fair value can be reliably estimated.

Pursuant to IAS 41, biological assets should be measured at fair value less selling expenses at the time they are initially recognized and at the end of each accrual period, except for cases in which fair value cannot be reliably estimated.

In Company’s management’s opinion, the fair value of biological assets is substantially represented by cost, mainly due to the short life span of the animals and the fact that a significant share of the profits from our products arises from the manufacturing process rather than from the obtaining of fresh meat (raw material/ slaughter readiness). This opinion is supported by a fair value appraisal report prepared by an independent expert, which calculated a negligible difference between the two methodologies. As a consequence, management continued to record biological assets at cost.

4.10.Assets held for sale: the assets included in this subgroup are those identified as unusable by the Company and whose sale has been authorized by Company’s management; accordingly, there is a firm commitment to find a purchaser and conclude the sale are readily available at a reasonable price and unlikely changes in the sell plan . These assets are measured at carrying amount or fair value, whichever is lower, net of selling costs and are not depreciated or amortized.

4.11.Property, plant and equipment: stated at cost of acquisition or construction, less accumulated depreciation and impairment losses, when applicable. The costs of capitalized borrowings are recorded as an integral part of construction in progress.

F-21

BRF – Brasil Foods S.A.

Notes to Consolidated Financial Statements – (Continued)

Years ended December 31, 2010 and 2009

(Amounts expressed in millions of Brazilian reais, unless otherwise stated)

Depreciation is recognized based on the estimated economic useful life of each asset on the straight-line basis. The estimated useful life, residual values and depreciation methods are annually reviewed and the effects of any changes in estimates are accounted for prospectively. Land is not depreciated.

The Company prepares an analysis of the recoverability of all the items included in this subgroup whenever there is an indication of impairment, since no item should remain recorded at an amount that exceeds realizable value, either by sale or use. The Company performed a recoverability test in the last quarter of 2010 and did not identify any items requiring adjustments.

Gains and losses on disposals are calculated by comparing the sales value with the residual book value and recognized in the statement of income.

4.12.Intangible assets: are identifiable non-physical assets, under the Company’s control and which generate future economic benefits.

Intangible assets acquired are measured at cost at the time they are initially recognized. The cost of intangible assets acquired in a business combination corresponds to the fair value at acquisition date. After initial recognition, intangible assets are stated at cost less accumulated amortization and impairment losses, when applicable. Internally-generated intangible assets, excluding development costs, are not capitalized and expenditure is recognized in the statement of income for the year in which it was incurred.

The useful life of intangible assets is assessed as finite or indefinite.

Intangible assets with a finite life are amortized over the economic useful life and reviewed for impairment whenever there is an indication of a reduction in the economic value of the asset. The amortization period and method for an intangible asset with a finite useful life are reviewed at least at the end of each fiscal year. The amortization of intangible assets with a finite useful life is recognized in the statement of income as an expense consistently with the use of the intangible asset.

Intangible assets with an indefinite useful life are not amortized, but are tested annually for impairment on an individual basis or at the cash generating unit level. The Company records together in intangible assets the goodwill balance.

The recoverability of goodwill was tested in the last quarter of 2010 and no adjustments to reflect an impairment loss were identified.  Such test involved the adoption of assumptions and judgments, as detailed in note 19.

F-22

BRF – Brasil Foods S.A.

Notes to Consolidated Financial Statements – (Continued)

Years ended December 31, 2010 and 2009

(Amounts expressed in millions of Brazilian reais, unless otherwise stated)

4.13.Income taxes and social contributions: in Brazil, these comprise income tax (“IRPJ”) and social contribution (“CSLL”), which are monthly calculated on taxable income, at the rate of 15% plus 10% surtax for IRPJ and of 9% for CSLL, considering the offset of tax loss carryforwards, up to the limit of 30% of taxable income.

The income from foreign subsidiaries is subject to taxation in their home countries, pursuant to the local tax rates and standards (see note 15).

Deferred taxes represent credits and debits on IRPJ and CSLL tax losses, as well as temporary differences between the tax basis and the carrying amount. Deferred income tax and social contribution assets and liabilities are classified as non-current; when it is probable that these credits will not be used in the future, a provision is established for non-recovery of deferred taxes.

Deferred tax assets and liabilities are offset if a legally enforceable right exists to set off current tax assets against current tax liabilities and they relate to income taxes levied by the same tax authority on the same taxable entity. In the consolidated financial statements, the Company’s tax assets and liabilities can be offset against the tax assets and liabilities of the subsidiaries if, and only if, these entities have a legally enforceable right  to make or receive a single net payment and intend to make or receive this net payment, or recover the assets and settle the liabilities simultaneously; therefore, for presentation purposes, the balances of tax assets and tax liabilities are being disclosed separately (see note 15).

4.14.Accounts payable and trade accounts payable: are initially recognized at fair value and subsequently increased, if applicable, with the accrued charges, monetary and exchange variations incurred until the closing dates of the financial statements.

4.15.Provision for tax, civil and labor risks and contingent liabilities: provisions are established when the Company has a present obligation (legal or not formalized) as a result of a past event, it is probable that an outflow of resources will be required to settle the obligation and the amount of the obligation can be reliably estimated.

The Company is a party to various lawsuits and administrative proceedings. The assessment of the likelihood of an unfavorable outcome in these lawsuits and proceedings includes the analysis of the evidence available, the hierarchy of the laws, available former court decisions, as well as the most recent court decisions and their importance to the Brazilian legal system, as well as the opinion of external legal counsel. The provisions are reviewedand adjusted to reflect changes in the circumstances, such as the applicable statute of limitation, conclusions of tax inspections or additional exposures identified based on new matters or court decisions (see note 26).

F-23

BRF – Brasil Foods S.A.

Notes to Consolidated Financial Statements – (Continued)

Years ended December 31, 2010 and 2009

(Amounts expressed in millions of Brazilian reais, unless otherwise stated)

A contingent liability recognized in a business combination is initially measured at fair value and subsequently measured at the higher of:

·the amount that would be recognized in accordance with the accounting policy for the provisions above; or

·the amount initially recognized less, if appropriate, cumulative amortization recognized in accordance with the revenue recognition policy.

As a result of the business combination with Sadia, the Company recognized contingent liabilities related to tax, civil and labor matters, as described in notes 7 and 26.

Costs incurred with disposal of assets are accrued based on the present value of the costs expected to settle the obligation using estimated cash flows, and are recognized as an integral part of the corresponding asset, or as a production cost, when incurred.

4.16.Leases: lease transactions in which the risks and rewards of ownership are substantially transferred are classified as finance leases. When there is no significant transfer of the risks and rewards of ownership, lease transactions are classified as operating leases.

Finance lease agreements are recognized in property, plant and equipment and in liabilities at the lower of the present value of the minimum mandatory installments of the agreement and the fair value of the asset, including, when applicable, the initial direct costs incurred in the transaction. The amounts recorded in property, plant and equipment are depreciated and the underlying interest is recorded in the statement of income in accordance with the term of the lease agreement.

Operating lease agreements are recognized as expenses throughout the lease period (see note 23).

4.17.Share based payment: the Company provides share based payment for its executives, which are settled with Company shares. The Company, recognizes as an expense, on the straight-line basis, the fair value of the options granted, over the length of service required by the plan, with a corresponding entry to equity and/or liabilities. The fair value of the options isupdated on a quarterly basis, in accordance with the assumptions available on the market (see note 24).

F-24

BRF – Brasil Foods S.A.

Notes to Consolidated Financial Statements – (Continued)

Years ended December 31, 2010 and 2009

(Amounts expressed in millions of Brazilian reais, unless otherwise stated)

4.18.Actuarial assets and liabilities on employee benefits: The Company and its subsidiaries recognize actuarial assets and liabilities related to employee benefits (medical plan, F.G.T.S. penalties and compensation for termination and retirement) in accordance with the criteria provided for in IAS 19 “Employees Benefits”. Actuarial gains and losses are recognized in other operating income based on the actuarial report (see note 25).

The contributions made by the sponsors are recognized as an expense for the year.

The plan assets are at the disposal of the Company’s creditors and cannot be directly paid to the Company. Fair value is based on information on the market price and, in the case of quoted securities, on the purchase price disclosed. The value of any defined benefit asset recognized is restricted to the sum of any past service costs not yet recognized and the fair value of any economic benefit available in the form of reductions in the plan’s future employer contributions.

4.19.Capital: common shares are classified as equity. Additional costs directly attributable to issue of shares are recognized as a deduction from equity, after any tax effects.

4.20.Repurchase of shares (treasury shares): when the capital recognized as equity is repurchased, the amount of compensation paid, which includes directly attributable costs, net of any tax effects, is recognized as a deduction from equity. The repurchased shares are classified as treasury shares and are presented as a deduction from total equity. When treasury shares are subsequently sold or reissued, the value received is recognized as an increase in shareholders' equity and surplus or deficit arising is transferred to retained earnings.

4.21.Earnings per share: basic earnings per share is calculated by dividing the profit attributable to equity holders of the company by the weighted average number of ordinary shares in issue during the year. Diluted earnings per share are calculated by dividing the profit attributable to the holders of ordinary shares of the company by the weighted average number of ordinary shares in issue during the year, plus the weighted average number of ordinary shares that would be issued on conversion of all potentially dilutive ordinary shares (see note 28).

4.22.Determination of income: results from operations are recorded on the accrual basis.

F-25

BRF – Brasil Foods S.A.

Notes to Consolidated Financial Statements – (Continued)

Years ended December 31, 2010 and 2009

(Amounts expressed in millions of Brazilian reais, unless otherwise stated)

4.23.Revenues: are recognized when the ownership and risks inherent to the product are substantially transferred to the customer, when the sales price is fixed and determinable, when there is evidence of a sales contract and when collection is reasonably assured. Revenues are not recognized when there is substantial uncertainty as to their realization (see note 30).

Revenue is presented net of sales taxes, returns, rebates and discounts in the consolidated financial statements and also net of eliminations of sales between the Company and its subsidiaries.

In addition, the Company and its subsidiaries have incentive programs and sales discounts, which are accounted for as deductions from sales or selling expenses, based on their nature. These programs include discounts to customers for a good sales performance based on volumes and marketing actions carried out at the sales points.

4.24.Employee and management profit sharing: employees are entitled to profit sharing based on certain targets agreed upon on an annual basis, whereas managers are entitled to profit sharing based on the provisions of the by-laws. Profit sharing is proposed by the Board of Directors and approved by the stockholders. The profit sharing amount is recognized in the statement of income for the period in which the targets are attained (see note 29 b and note 32).

4.25.Research and development: expenditures on research activities, undertaken with the opportunity to gain knowledge and understanding of science or technology, are recognized in income as incurred. Development activities are aimed at producing new or significantly improved plans or projects. The development costs are capitalized only if development costs can be reliably measured, if the product or process is technically and commercially viable if the future economic benefits are probable, and if the Company has the intention and the resources to complete the development and use or sell the asset. The expenditures capitalized include the cost of materials, labor, manufacturing costs that are directly attributable to preparing the asset for its intended use, other development expenditures are recognized in income as incurred.

The capitalized development expenditures are measured at cost less accumulated amortization and loss on the impairment.

4.26.Financial revenues: include interest earnings on amounts invested (including available for sale financial assets), dividend income (except for dividends received from equity investees evaluated by the Company), gains on disposal of available for sale financial assets, changes in fair value offinancial assets measured at fair value through income and gains on hedging instruments that are recognized in income. Interest income is recognized in earnings through the effective interest method. The dividend income is recognized in the statement of income on the date that the Company's right to receive payment is established. The distributions received from investees that are recorded under equity reduce the value of the investment.

F-26

BRF – Brasil Foods S.A.

Notes to Consolidated Financial Statements – (Continued)

Years ended December 31, 2010 and 2009

(Amounts expressed in millions of Brazilian reais, unless otherwise stated)

4.27.Subsidies and tax incentives: the Company has Value-added Tax on Sales and Services (“ICMS”) benefits for investments mainly granted by the governments of the states of Santa Catarina, Goiás, Pernambuco, Mato Grosso, São Paulo, Minas Gerais, Bahia and the Federal District. These tax incentives are directly linked to the operation of production units, creation of jobs and social and economic development in the respective states, and are directly recorded in the statement of income in the amount of R$23.1 as of December 31, 2010 (R$21.6 as of December 31, 2009). If the tax incentives generate future obligations, these obligations are recognized at their initial fair value and recorded in the statement of income as fulfilled, with a corresponding entry to the tax benefits received.

The subsidiary, Sadia, received as a donation a plot of land located in the state of Pernambuco, whose fair value as of December 31, 2009 is R$4.1. The donation is conditioned on the construction of a production unit, which will create jobs and contribute to the economic and social development of the region. The fair value of the land, obtained through appraisals carried out by real estate agencies in the region, was recognized in PP&E with a corresponding entry to long-term obligations. The value of the land will be recognized in the statement of income as the production unit is depreciated.

4.28.Dividends and interest on capital:  the proposal for payment of dividends and interest on capital made by the Company’s Management which is within the portion equivalent to the mandatory minimum dividend is recorded in current liabilities, for it is regarded as a legal obligation provided for in the by-laws; the dividends that exceed the mandatory minimum dividend, declared by Management before the end of  the accounting period covered by the financial statements, not yet approved by the shareholders, is recorded as additional dividend proposed in shareholders’ equity.

For financial statement presentation purposes, interest on capital is stated as an allocation of income directly in shareholders’ equity (see note 27 d).

4.29.Translation of foreign-currency denominated assets and liabilities:  As mentioned in item 4.1 above, the balances of assets and liabilities of foreign subsidiaries are translated into Brazilian reais using the exchange rates ineffect at the balance sheet date and statement of income accounts are translated at the monthly rates in effect.

F-27

BRF – Brasil Foods S.A.

Notes to Consolidated Financial Statements – (Continued)

Years ended December 31, 2010 and 2009

(Amounts expressed in millions of Brazilian reais, unless otherwise stated)

The exchange rates in Brazilian reais in effect at the date of the balance sheets translated were as follows:

Final rate	12.31.10	12.31.09	01.01.09
U.S. dollar (US$)	1.6662	1.7412	2.3370
Euro (€)	2.2280	2.5073	3.2382
Pound sterling (£)	2.5876	2.8241	3.4151
Average rates
U.S. dollar (US$)	1.7593	1.9935	1.8375
Euro (€)	2.3315	2.7631	2.6698
Pound sterling (£)	2.7172	3.1092	3.3308

4.30.Accounting judgments, estimates and assumptions: As mentioned in note 2, in the process of applying the Company’s accounting policies, Management made the following judgments which have a material impact on the amounts recognized in the consolidated financial statements:

·impairment of non-financial assets;

·share-based payment transactions;

·loss on the reduction of recoverable value of taxes;

·retirement benefits;

·measurement at fair value of items related to business combinations;

·fair value of financial instruments;

·provision for tax, civil and labor risks;

·estimated losses on doubtful receivables;

·biological assets; and

·useful lives of property, plant and equipment.

The Company reviews estimates and underlying assumptions used in its accounting estimates at least on a quarterly basis. Revisions to accounting estimates are recognized in the consolidated financial statements in the period in each the estimates are revised.

5.FINANCIAL INSTRUMENTS AND RISK MANAGEMENT

5.1.Overview 

In the normal course of its business, the Company is exposed to market risks related mainly to the fluctuation of interest rates, foreign exchange rates andcommodity prices. The Company utilizes hedging instruments to mitigate its exposure to these risks, based on a Financial Risk Management Policy (“Risk Policy”) under the management of the Financial Risk Management Committee, Board of Executive Officers and Board of Directors.

F-28

BRF – Brasil Foods S.A.

Notes to Consolidated Financial Statements – (Continued)

Years ended December 31, 2010 and 2009

(Amounts expressed in millions of Brazilian reais, unless otherwise stated)

The Company has policies and procedures for the administration of such exposures and can use hedging instruments, provided they are approved by the Board of Directors, to reduce the impacts of these risks. Such policies and procedures include the monitoring of the levels of exposure to each market risk and its measurement, including an analysis based on the accounting exposure and forecast of future cash flows, besides setting limits for decision making. All the instruments used by the Company are aimed at: (i) protection of the foreign exchange exposure of its debt and cash flow; (ii) exposure of interest rates; and (iii) exposure of price variation of some commodities.

The Board of Directors plays a crucial role in the financial risk management structure as responsible for approval of the Risk Policy prepared by the Financial Risk Management Committee and for the supervision of the performance of this policy, verifying if the established limits are being respected. Moreover, the Board of Directors defines the limits of tolerance of the different risks identified as acceptable for the Company on behalf of its shareholders.

The Board of Directors is in charge of the evaluation of the Company’s positioning for each risk identified, according to the guidelines enacted by the Board of Directors. In addition, it is responsible for the approval of: (i) the action plans defined for the alignment of risks with the defined tolerance; (ii) the performance indicators to be used in risk management; (iii) the overall limits; and (iv) the evaluation of suggestions for refinements in the policy.

The Financial Risk Management Committee is in charge of the execution of the Company���s Risk Policy. It is this committee that supervises the risk management process, plans and verifies the impact of the decisions implemented, evaluates and approves hedging alternatives, monitors and keeps track of the levels of exposure and the fulfillment of the policy, keeps track of the performance of hedging operations through reports and evaluates the scenarios to be applied in the operations, in the cash flow and in the indebtedness of the Company, in conformity with the established policy.

The Company’s Risk Policy determines the strategies to be adopted, and  the Company’s management contracts hedging instruments that are approved within the delegation of authority levels. The Board of Directors, Board of Executive Officers and Financial Risk Committee have different levels of  authority where each one acts within the limits pre-established in this Policy.

F-29

BRF – Brasil Foods S.A.

Notes to Consolidated Financial Statements – (Continued)

Years ended December 31, 2010 and 2009

(Amounts expressed in millions of Brazilian reais, unless otherwise stated)

The Policy does not authorize the Company to contract leveraged transactions in derivative markets, and determines that individual hedge operations (notional) must be limited to 2.5% of the Company’s shareholders’ equity.

The inclusion and updating of transactions are recorded in the Company’s operating systems, with proper segregation of duties in the reconciliations with the counterparties, with validation by the back-office and daily monitoring by the financial area.

Given the objective of utilizing hedging transactions to mitigate the risks and the uncertainties to which the Company is exposed, the results obtained in the period meet the established objectives.

The Company applies hedge accounting rules to its derivative instruments classified as cash flow hedge, as determined in its Risk Policy. The cash flow hedge consists of hedging exposure against variability of the cash flow that (i) is attributable to a particular risk associated with a recognized asset or liability, or (ii) a highly probable predicted transaction, and (iii) could affect profit and loss.

One of the purposes of the Risk Policy is to determine parameters of use of financial instruments, including derivatives, which are designed to protect the operating and financial assets and liabilities, exposed to foreign exchange rate, and commodity price variation. The finance department is responsible for the fulfillment of the Risk Policy.

5.2.Interest rate risk management

The interest rate risk is the risk of the Company suffering economic losses due to adverse changes in the interest rates, which may be caused by factors related to economic crises and/or alteration of monetary policy in the domestic and foreign market, etc. This exposure refers mainly to changes in the market interest rates that affect Company liabilities and assets indexed by the LIBOR, TJLP (long-term interest rate), UMBNDES (monetary unit of the Brazilian Development Bank) or CDI (interbank deposit certificate) rate, besides possible derivative transactions involving fixed rate positions against one of the above mentioned indexes that could give rise to unrealized and/or realized losses  originated by the determination of the fair market value (mark to market).

The Company’s Risk Policy does not restrict exposure to the different interest rates and does not establish limits between fixed and floating rates either.

The Company continually monitors market interest rates, aiming to evaluate the potential need to enter in contracts to serve as hedge against the volatility of these rates. These transactions are basically characterized by changing from floatingrate to fixed rate. Such transactions were designated by the Company as cash flow hedge.

F-30

BRF – Brasil Foods S.A.

Notes to Consolidated Financial Statements – (Continued)

Years ended December 31, 2010 and 2009

(Amounts expressed in millions of Brazilian reais, unless otherwise stated)

The Company seeks to maintain a stable correlation between its current and non-current term indebtedness, maintaining a higher portion in the non-current term.

The Company’s indebtedness is essentially tied to the LIBOR, fixed coupon (“R$ and USD”), TJLP and UMBNDES rates. In the event of adverse changes in the market that result in LIBOR hikes, the cost of the floating indebtedness rises and on the other hand, the cost of the fixed indebtedness decreases in relative terms. The same consideration is also applicable to the TJLP.

With regards to the Company's cash and equivalents, the main index is the CDI for investments in the domestic market and fixed coupon for investments in the foreign market. In the event of a CDI increase, impacts become favorable, while in the event of a CDI decrease, results become unfavorable.

The table below summarizes the changes in the interest rates and the impacts for the Company.

Interest fixed rate risk				Interest floating rate risk
Index	Exposure	Variation	Impact	Index	Exposure	Variation	Impact
CDI	Cash and cash equivalents	+	-	CDI	Cash and cash equivalents	+	+
CDI	Cash and cash equivalents	-	+	CDI	Cash and cash equivalents	-	-
CDI	Liabilities	+	+	CDI	Liabilities	+	-
CDI	Liabilities	-	-	CDI	Liabilities	-	+
LIBOR/Coupon USD	Cash and cash equivalents	+	-	TJLP	Liabilities	+	-
LIBOR/Coupon USD	Cash and cash equivalents	-	+	TJLP	Liabilities	-	+
LIBOR/Coupon USD	Liabilities	+	+	LIBOR	Liabilities	+	-
LIBOR/Coupon USD	Liabilities	-	-	LIBOR	Liabilities	-	+

During 2010, the Monetary Policy Committee (“COPOM”) started a basic interest rate hiking cycle, bringing it up from 8.75% p.a. to 10.75% p.a. Accordingly, the financial income originating from investments subject to CDI variation increased. On the other hand, with the expectation of maintenance of interest rates in other markets, LIBOR remained at historically low levels, reducing the financial expenses associated to this indicator.

The results obtained in relation to the objectives proposed by the Company concerning exposure to interest rates were attained in the year 2010.

5.3.Foreign exchange risk management

Foreign exchange risk is the risk of fluctuations of foreign currency exchange rates causing the Company to incur unexpected losses, leading to a reduction of the values of assets or an increase of the amounts of obligations. The main exposures, to which the Company is subject, as regards foreign exchangevariations, refer to the fluctuation of the US dollar and also of the euro and of the british pound sterling in relation to the Brazilian real.

F-31

BRF – Brasil Foods S.A.

Notes to Consolidated Financial Statements – (Continued)

Years ended December 31, 2010 and 2009

(Amounts expressed in millions of Brazilian reais, unless otherwise stated)

The aim of the Company’s Risk Policy is the prevention from excessive exposure to the risks of foreign exchange variations by balancing its assets not denominated in Brazilian reais against its obligations also not denominated in Brazilian reais, thus protecting the Company’s balance sheet. For this purpose, the Company can make use of over-the-counter transactions (swaps) and transactions on the futures exchange.

The subsidiary Sadia does not have outstanding derivative contracts.

5.3.1.Breakdown of the balances of exposure in foreign currency

Foreign currency-denominated assets and liabilities are shown as follows:

	12.31.10	12.31.09	01.01.09
Cash and cash equivalents and marketable securities	2,493.0	2,234.3	1,205.2
Trade accounts receivable - third parties	951.0	666.3	708.5
Accounts receivable from subsidiaries	-	-	-
Swap agreements	-	(78.8)	826.5
Dollar futures agreements	121.3	122.8	327.5
Forward Contracts (NDF)(a)	(241.7)	(211.2)	-
Loans and financing	(4,016.1)	(4,484.4)	(4,072.6)
Pre-payment exports designated as hedge accounting	804.0	-	-
Other operating assets and liabilities, net(b)	15.5	(5.1)	154.7
	127.0	(1,756.1)	(850.2)
Foreign exchange exposure in R$	127.0	(1,756.1)	(850.2)
Foreign exchange exposure in US$	76.2	(1,008.6)	(363.8)

(a) Offshore non-deliverable forwards (“NDFs”) not designated as hedge accounting, impacting financial result and not shareholders' equity.

(b) Basically refers to the acquisition of inventories and suppliers.

The Company's total foreign exchange exposure is US$76.2 and is within the limit established by the Risk Policy.

Moreover, the Company’s Risk Policy aims to protect the operating revenues and costs that involve operations resulting from the business activity, such as estimates of exports and purchases of raw materials. For this purpose, theCompany uses hedge instruments, approved in the Risk Policy, focused mainly on the protection of its foreign currency denominated projected cash flow.

F-32

BRF – Brasil Foods S.A.

Notes to Consolidated Financial Statements – (Continued)

Years ended December 31, 2010 and 2009

(Amounts expressed in millions of Brazilian reais, unless otherwise stated)

On December 31, 2010, the Company had Non-Deliverable Forward (“NDF”) transactions, purchase of dollar put options in the amount of US$480.0 and export prepayments (“PPEs”) in the amount of US$482.5, designated as effective hedge accounting (unrealized gains or losses deferred in shareholders’ equity up to the maturity date, where results will be fully allocated in the operating revenue group. On the same date, the Company held short positions of EUR187.0 and GBP43.5.

With the intention of performing active management and following the Risk Policy, the Company performs daily monitoring, through reports issued by the financial area and validated by the back-office area, on cash flow needs and foreign exchange exposure.

5.3.2.Breakdown of the balances of derivative financial instruments

The positions of outstanding derivatives as of December 31, 2010 and 2009 and January 1, 2009 are as follows:

12.31.10
Instrument	Subject to hedge	Maturity	Receivable	Payable	Reference value (notional)	Market value (1)
NDF	Exchange rate	From 01/2011 to 11/2011	R$ (Pre - 9.66%)	US$ (EV)	716.5	54.5
NDF	Exchange rate	From 01/2011 to 11/2011	R$ (Pre - 9.49%)	EUR (EV)	416.6	23.0
NDF	Exchange rate	From 01/2011 to 11/2011	R$ (Pre - 9.40%)	GBP (EV)	112.6	7.9
NDF	Exchange rate	From 01/2011 a 06/2011	R$ (Pre - 8.21%)	US$ (EV)	241.7	11.1
NDF	Exchange rate	03/2011	US$ (Pre - 0.23%)	EUR (EV)	100.3	(1.7)
Swap	Exchange rate	07/2013	US$ (EV) + 7%	R$ (76% of the CDI)	56.1	(0.8)
Swap	Exchange rate	From 01/2011 to 12/2013	US$ (EV) + LIBOR 3M + 3.83%	R$ (97.50% of CDI)	330.8	(42.8)
Swap	Interest rate	From 01/2010 to 08/2013	US$ (EV) + LIBOR 3M + 0.25%	US$ (EV) +2.37%	172.2	(4.0)
Swap	Interest rate	05/2012	US$ (EV) + LIBOR 3M + 3.85%	US$ (EV) + 5.78%	62.8	(0.9)
Swap	Interest rate	From 01/2011 to 08/2013	US$ (EV) + LIBOR 6M + 0.80%	US$ (EV) + 3.77%	838.8	(23.8)
Swap	Interest rate	11/2012	US$ (EV) + LIBOR 12M + 0.71%	US$ (EV) + 3.70%	198.0	(7.0)
Options	Exchange rate	01 and 02/2011	R$	US$ (EV)	85.5	2.1
Options	Live cattle	From 08 to 11/2011	R$	R$	44.0	(0.2)
Futures contracts	Exchange rate	02/2011	US$ (EV)	R$	121.3	(1.1)
Futures contracts	Live cattle	From 01 to 10/2011	R$	R$	4.4	0.1
						16.4

F-33

BRF – Brasil Foods S.A.

Notes to Consolidated Financial Statements – (Continued)

Years ended December 31, 2010 and 2009

(Amounts expressed in millions of Brazilian reais, unless otherwise stated)

12.31.09
Instrument	Subject to hedge	Maturity	Receivable	Payable	Reference value (notional)	Market value (1)
NDF	Exchange rate	06/2010	R$ 8.39% p.y.	US$	786.7	20.9
NDF	Exchange rate	06/2010	R$ 6% p.y.	US$	211.3	2.7
Swap	Exchange rate	From 01/2010 to 07/2013	US$ + 7%	76% of CDI	56.1	0.3
Swap	Exchange rate	09/2011	118.5% of CDI	US$ + 83% CDI	86.1	2.5
Swap	Exchange rate	12/2011	US$ + LIBOR 3M + 3.83%	97.83% of CDI	330.8	(51.2)
Swap	Interest rate	08/2012	US$ + LIBOR 3M + 1.76%	US$ + 4.74%	146.3	(4.7)
Swap	Interest rate	08/2013	US$ + LIBOR 6M + 0.70%	US$ + 3.77%	838.7	(24.7)
Swap	Interest rate	12/2012	US$ + LIBOR 12M + 0.71%	US$ + 3.69%	198.0	(5.3)
Future contract	Exchange rate	02/2010	US$	R$	122.8	-
						(59.5)
						01.01.09
Instrument	Subject to hedge	Maturity	Receivable	Payable	Reference value (notional)	Market value (1)
Swap	Interest rate	07/2009	9.31% p.y.	93.72% of CDI	11.9	(0.1)
Swap	Exchange rate	From 01/2009 to 09/2009	US$ + 4.75%	100% of CDI	613.8	60.5
Swap	Exchange rate	02/2009	16.09% p.y.	US$	8.4	(2.9)
Swap	Exchange rate	From 07/2009 to 12/2011	US$ + 7%	76% CDI	56.1	5.7
Swap	Exchange rate	From 03/2009 to 09/2011	118.5% CDI	US$ + 83% CDI	86.1	(19.1)
Swap	Exchange rate	From 04/2009 to 01/2013	US$ + LIBOR 6M + 3.61%	96.67% CDI	215.5	(31.6)
Swap	Interest rate	From 02/2009 to 08/2013	US$ 4.08 %	US$ (LIBOR) + 0.62%	554.2	(34.9)
Swap	Exchange rate	From 01/2009 to 02/2009	US$	US$	51.1	7.7
NDF	Exchange rate	From 01/2009 to 06/2009	15.31% p.y.	US$	382.9	(37.4)
NDF	Exchange rate	From 02/2008 to 03/2009	13.52% p.y.	Euro	26.7	(5.3)
Future contract	Exchange rate	02/2009	US$	R$	327.5	(10.1)
						(67.5)

(1)The market value determination method used by the Company consists of calculating the future value based on the contracted conditions and determining the present value based on market curves, extracted from the database of Bloomberg and BM&F.

The Company contracted swap operations, NDF and futures contracts with the objective of minimizing the effects of the changes in the exchange rates and for protection against the interest rate variations.

The Company’s management understands that the results obtained with these derivative operations are in full compliance with the Risk Policy adopted by the Company.

5.4.Gains and losses of derivative financial instruments for hedge

The amounts of realized and unrealized gains and losses of financial instruments recorded in the year affected the Company’s net income in the accounts of financial income or expenses as well as shareholders’ equity, as shown below:

F-34

BRF – Brasil Foods S.A.

Notes to Consolidated Financial Statements – (Continued)

Years ended December 31, 2010 and 2009

(Amounts expressed in millions of Brazilian reais, unless otherwise stated)

	12.31.10	12.31.09	01.01.09	12.31.10	12.31.09
	Shareholders' equity	Shareholders' equity	Shareholders' equity	Income (loss)	Income (loss)
Derivatives intended for protection
Exchange risks	46.0	(27.5)	-	(2.1)	-
Interest rate risk	(28.8)	(34.7)	(57.8)	(5.9)	-
Subtotal	17.2	(62.2)	(57.8)	(8.0)	-
Derivatives intended for financial results
Interest rate risk	-	-	-	(0.9)	-
Exchange risks	-	-	1.6	8.4	(2.7)
Market risk of live cattle	-	-	-	(0.2)	-
Subtotal	-	-	1.6	7.3	(2.7)
Total	17.2	(62.2)	(56.2)	(0.7)	(2.7)

5.4.1Breakdown of the balances of financial instruments by category – except derivatives:

	12.31.10
	Loans and receivables	Available for sale	Trading securities	Held to maturity	Financial liabilities	Total
Assets
Amortized cost
Marketable securities	-	-	-	280.6	-	280.6
Trade accounts receivable	2,706.8	-	-	-	-	2,706.8
Credit notes	134.8	-	-	-	-	134.8
Fair value
Marketable securities	-	337.3	623.5	-	-	960.8
Liabilities
Amortized cost
Loans and financing
Local currency	-	-	-	-	(3,216.0)	(3,216.0)
Foreign currency	-	-	-	-	(3,986.9)	(3,986.9)
Debentures	-	-	-	-	-	-
Total	2,841.6	337.3	623.5	280.6	(7,202.9)	(3,119.9)

F-35

BRF – Brasil Foods S.A.

Notes to Consolidated Financial Statements – (Continued)

Years ended December 31, 2010 and 2009

(Amounts expressed in millions of Brazilian reais, unless otherwise stated)

	12.31.09
	Loans and receivables	Available for sale	Trading securities	Held to maturity	Loans	Total
Assets
Amortized cost
Marketable securities	-	-	-	223.5	-	223.5
Trade accounts receivable	2,153.5	-	-	-	-	2,153.5
Credit notes	125.8	-	-	-	-	125.8
Fair value
Marketable securities	-	543.7	2,255.0	-	-	2,798.7
Liabilities
Amortized cost
Loans and financing
Local currency	-	-	-	-	(4,569.7)	(4,569.7)
Foreign currency	-	-	-	-	(4,484.4)	(4,484.4)
Debentures	-	-	-	-	(2.1)	(2.1)
Total	2,279.3	543.7	2,255.0	223.5	(9,056.2)	(3,754.7)

	01.01.09
	Loans and receivables	Available for sale	Trading securities	Held to maturity	Loans	Total
Assets
Amortized cost
Marketable securities	-	-	-	0.3	-	0.3
Trade accounts receivable	1,389.6	-	-	-	-	1,389.6
Credit notes	103.6	-	-	-	-	103.6
Fair value
Marketable securities	-	82.3	660.1	-	-	742.4
Liabilities
Amortized cost
Loans and financing
Local currency	-	-	-	-	(1,221.8)	(1,221.8)
Foreign currency	-	-	-	-	(4,072.6)	(4,072.6)
Debentures	-	-	-	-	(4.1)	(4.1)
Total	1,493.2	82.3	660.1	0.3	(5,298.5)	(3,062.6)

5.5.Breakdown of the balances of financial instruments designated for cash flow hedge accountingand export revenues

The Company executed the formal designation of its operations for hedge accounting treatment for the derivative financial instruments to protect cash flows and export revenues, documenting: (i) the relationship of the hedge, (ii) the objective and risk management strategy of the Company in executing the hedge, (iii) the identification of the financial instrument, (iv) the hedge object or transaction, (v) the nature of the risk to be hedged, (vi) the description of the hedge relationship, (vii) the demonstration of correlation between the hedgetransaction and the hedge object, when applicable, and (viii) prospective demonstration of the effectiveness of the hedge.

F-36

BRF – Brasil Foods S.A.

Notes to Consolidated Financial Statements – (Continued)

Years ended December 31, 2010 and 2009

(Amounts expressed in millions of Brazilian reais, unless otherwise stated)

Hedged items for which Company designates hedge accounting are highly probable and present almost a perfect combination with the hedge transaction in terms of effectiveness. In other words the consolidated statements of income and comprehensive income reflect matching results consistent with initial coverage intention.

The Company recorded the unrealized results in the shareholders’ equity of the designated derivatives for interest rates and exchange rates risks.

F-37

BRF – Brasil Foods S.A.

Notes to Consolidated Financial Statements – (Continued)

Years ended December 31, 2010 and 2009

(Amounts expressed in millions of Brazilian reais, unless otherwise stated)

The impacts referring to the interest swap positions are shown below:

12.31.10
				Swap accrual balance (amortized cost)		Swap (MTM) balance
Hedge instrument	Hedged object	Protected risk	Maturity date	Asset	Liability	Asset	Liability
Swap contract of US$65,000 (assets Libor 6 months +1.75%/ liabilities 4.22%)	Debt of US$65,000 interest of Libor 6 months + overlibor 1.75%	Libor post x Pre fixed rate	07.25.12	0.9	(1.6)	216.2	(218.1)
Swap contract of US$75,000 (assets Libor 6 months/ liabilities 4.06%)	Debt of US$75,000 interest of Libor 6 months + overlibor 0.9%	Libor post x Pre fixed rate	07.22.13	0.3	(1.8)	367.1	(373.0)
Swap contract of US$30,000 (assets Libor 6 months +0.8%/ liabilities 4.31%)	Debt of US$30,000 interest of Libor 6 months + overlibor 0.8%	Libor post x Pre fixed rate	08.23.13	0.2	(0.7)	195.8	(198.4)
Swap contract of US$20,000 (assets Libor 6 months +0.8%/ liabilities 4.36%)	Debt of US$20,000 interest of Libor 6 months + overlibor 0.8%	Libor post x Pre fixed rate	07.19.13	0.2	(0.6)	130.9	(132.7)
Swap contract of US$10,000 (assets Libor 3 months +0.5%/ liabilities 3.96%)	Debt of US$10,000 interest of Libor 3 months + overlibor 0.5%	Libor post x Pre fixed rate	08.20.12	-	(0.1)	114.3	(115.1)
Swap contract of US$20,000 (assets Libor 3 months +0.5%/ liabilities 3.96%)	Debt of US$20,000 interest of Libor 3 months + overlibor 0.5%	Libor post x Pre fixed rate	08.15.12	-	(0.2)	228.7	(230.3)
Swap contract of US$20,000 (assets Libor 3 months +0.5%/ liabilities 3.96%)	Debt of US$20,000 interest of Libor 3 months + overlibor 0.5%	Libor post x Pre fixed rate	08.10.12	-	(0.2)	228.8	(230.4)
Swap contract of US$20,000 (assets Libor 6 months / liabilities 3.82%)	Debt of US$20,000 interest of Libor 6 months + overlibor 1.45%,	Libor post x Pre fixed rate	03.20.13	-	(0.4)	98.0	(99.5)
Swap contract of US$30,000 (assets Libor 6 months / liabilities 3.79%)	Debt of US$30,000 interest of Libor 6 months + overlibor 1.45%,	Libor post x Pre fixed rate	02.13.13	0.1	(0.7)	147.4	(149.6)
Swap contract of US$25,000 (assets Libor 6 months +1.65%/ liabilities 4.15%)	Debt of US$25,000 interest of Libor 6 months + overlibor 1.65%	Libor post x Pre fixed rate	05.10.13	0.1	(0.2)	123.0	(124.0)
Swap contract of US$50,000 (assets Libor 6 months +0.6%/ liabilities 2.98%)	Debt of US$50,000 interest of Libor 6 months + overlibor 0.60%	Libor post x Pre fixed rate	12.19.12	0.5	(1.2)	407.8	(411.0)

F-38

BRF – Brasil Foods S.A.

Notes to Consolidated Financial Statements – (Continued)

Years ended December 31, 2010 and 2009

(Amounts expressed in millions of Brazilian reais, unless otherwise stated)

12.31.10
				Swap accrual balance (amortized cost)		Swap (MTM) balance
Hedge instrument	Hedged object	Protected risk	Maturity date	Asset	Liability	Asset	Liability
Swap constract of US$50,000 (assets Libor 6 months +0.6%/ liabilities 2.99%)	Debt of US$50,000 interest of Libor 6 months + overlibor 0.60%	Libor post x Pre fixed rate	11.26.12	-	(0.1)	324.7	(327.2)
Swap contract of US$50,000 (assets Libor 6 months +1.55%/ liabilities 3.55%)	Debt of US$50,000 interest of Libor 6 months + overlibor 1.55%	Libor post x Pre fixed rate	07.02.12	0.8	(1.2)	166.7	(167.7)
Swap contract of US$50,000 (assets Libor 12 months +0.71%/ Liabilities 3.57%)	Debt of US$50,000 interest of Libor 12 months + overlibor 0.71%	Libor post x Pre fixed rate	11.19.12	0.1	(0.3)	162.7	(166.0)
Swap contract of US$50,000 (assets Libor 12 months +0.71%/ Liabilities 3.82%)	Debt of US$50,000 interest of Libor 12 months + overlibor 0.71%	Libor post x Pre fixed rate	11.26.12	0.1	(0.2)	162.6	(166.3)
Swap contract of US$50,000 (assets Libor 3 months / liabilities 0.78%)	Debt of US$50,000 interest of Libor 3 months + overlibor 2.75%	Libor post x Pre fixed rate	08.03.12	-	(0.1)	571.3	(571.4)
Swap contract of US$35,000 (assets 7%p.y. / liabilities 76%CDI )	Debt of US$35,000 interest of 7%p,y, (USD)	Cupom USD X CDI	07.15.13	1.9	(2.0)	12.0	(12.7)
Swap contract of US$50,000 (assets Libor 3 months + overlibor 2.50% / liabilities 92.5%CDI )	Debt of US$50,000 interest of Libor 3 months + overlibor 2.50%	Libor X CDI	10.01.13	0.6	(2.2)	5.5	(18.2)
Swap contract of US$100,000 (assets Libor 3 months + overlibor 4.50% / liabilities 100%CDI )	Debt of US$100,000 interest of Libor 3 months + overlibor 4.5%	Libor X CDI	12.23.13	0.2	(0.6)	17.8	(47.9)
				6.0	(14.4)	3,681.3	(3,759.5)

F-39

BRF – Brasil Foods S.A.

Notes to Consolidated Financial Statements – (Continued)

Years ended December 31, 2010 and 2009

(Amounts expressed in millions of Brazilian reais, unless otherwise stated)

The impacts referring to the NDF positions are shown below:

12.31.2010
NDF	R$ x USD				R$ x EUR				R$ x GBP
Maturities	Curve	MTM(1)	Notional	Average USD	Curve	MTM(1)	Notional	Average EUR	Curve	MTM(1)	Notional	Average GBP
January 2011	13.7	14.0	75.0	1.8564	2.7	2.8	23.0	2.3542	1.3	1.3	6.5	2.8031
February 2011	9.3	9.7	55.0	1.8570	2.7	2.8	22.0	2.3765	1.3	1.3	6.0	2.8405
March 2011	7.2	7.5	50.0	1.8413	2.4	2.6	23.0	2.3766	1.0	1.0	5.0	2.8390
April 2011	6.2	6.5	40.0	1.8692	3.0	3.0	24.0	2.4073	0.8	0.8	4.5	2.8298
May 2011	4.7	4.9	35.0	1.8594	2.4	2.6	21.5	2.4162	0.9	0.9	4.5	2.8751
June 2011	3.8	4.1	45.0	1.8231	2.2	2.3	16.5	2.4572	0.7	0.7	4.0	2.8817
July 2011	2.9	3.1	40.0	1.8225	2.5	2.6	17.0	2.4910	0.7	0.7	4.0	2.8883
August 2011	1.6	1.6	25.0	1.8215	1.4	1.5	16.0	2.4436	0.4	0.4	3.0	2.8537
September 2011	1.1	1.1	25.0	1.8128	1.5	1.4	11.0	2.5011	0.4	0.3	2.5	2.8998
October 2011	1.0	0.9	20.0	1.8294	1.1	1.1	8.0	2.5311	0.5	0.4	2.5	2.9509
November 2011	0.8	1.0	20.0	1.8494	0.2	0.2	5.0	2.4410	0.1	0.1	1.0	2.9303
TOTAL	52.3	54.4	430.0	1.8434	22.1	22.9	187.0	2.4212	8.1	7.9	43.5	2.8581

(1) Mark to market. 

F-40

BRF – Brasil Foods S.A.

Notes to Consolidated Financial Statements – (Continued)

Years ended December 31, 2010 and 2009

(Amounts expressed in millions of Brazilian reais, unless otherwise stated)

For the put options, the Company designates only their intrinsic value as a hedge instrument (hedge accounting), opting to recognize the time value in the financial result (statement of income). If the hedge is not effective and the option is lost due to devaluation of the Brazilian real, the losses related to the time value of the options will be registered in the financial result.

The time value of an option can be calculated by the difference between the fair value of the option on the measurement date (quotation of the option that represents the fair value of premium) and the intrinsic value of the option on the measurement date. When the quotation of the option is not available in an active market, the fair value will be based on an option pricing model (Black-Scholes or Binomial).

This type of foreign exchange hedge using the put option consists of designating the variation of the intrinsic value of the put option only in the case of appreciation of the Brazilian real (“one-sided risk”).

The impacts referring to the PUT positions are shown below:

12.31.10
PUT	R$ x USD
Maturities	Curve	MTM	Notional	Average USD
January 2011	0.9	0.9	22.0	1.7090
February 2011	1.2	1.2	28.0	1.7094
TOTAL	2.1	2.1	50.0	1.7092

The Company will use the variations of the spot exchange rates of the PPE agreements as an instrument to hedge the foreign exchange variation risk suffered by its highly probable future export sales in foreign currency. Thus, the foreign exchange variations derived from such PPE contracts will be recorded in the shareholders’ equity.

The Company adopted as a methodology for performance of the retrospective effectiveness test the comparison of the foreign exchange variation arising from the PPE agreement (variation of the fair value of the hedging instrument), measured by the variation of the spot exchange rates, with the variation of the fair value of highly probable future export revenues (variation of the fair value of the hedged item), measured by the variation of the spot exchange rates (Spot-to-Spot rate method).

F-41

BRF – Brasil Foods S.A.

Notes to Consolidated Financial Statements – (Continued)

Years ended December 31, 2010 and 2009

(Amounts expressed in millions of Brazilian reais, unless otherwise stated)

Position of PPEs designated as hedge accounting as of December 31, 2010 are shown below:

					12.31.10
Hedge instrument	Subject to hedge	Type of risk hedged	Maturity	Notional (USD)	MTM
PPE	Sales ME	USD (E.V.)	From 01/2011 to 08/2013	482.5	804.0

5.6.Determination of the fair value of financial instruments

The Company discloses its financial assets and liabilities at fair value, based on the pertinent accounting pronouncements that define fair value, which refers to concepts of valuation and practices, and requires certain disclosures on the fair value.

Specifically as regards disclosure, the Company applies hierarchy requirements, which involves the following aspects:

·Definition of the fair value as the price that should be received in the sale of an asset or paid in the transfer of a liability in a regular transaction between market players on the measurement date, and establishment of assumptions for the fair value measurement; and

·Hierarchy on 3 levels for measurement of the fair value, according to observable inputs for the valuation of an asset or liability on the date of its measurement.

Valuation on 3 levels of hierarchy for measurement of the fair value is based on observable and non-observable inputs. Observable inputs reflect market data obtained from independent sources, while non-observable inputs reflect the Company’s market assumptions. These two types of input create the hierarchy of fair value presented below:

·Level 1 - Prices quoted for identical instruments in active markets;

·Level 2 - Prices quoted in active markets for similar instruments, prices quoted for identical or similar instruments in non-active markets and evaluation models for which inputs are observable; and

·Level 3 - Instruments whose significant inputs are non-observable. 

The Company’s management understands that due to the short-term cycle, balances of cash and cash equivalents, accounts receivable and accounts payableare close to their fair value recognition. In relation to loans and credit facilities the book value is close to the fair value in a major portion of the total gross debt. That is justified by floating BNDES interest rates credit lines (“TJLP”) and floating trade finance interest rates loans (“LIBOR, CDI”). The Company is subject to differences between book value and fair value only in the capital markets transactions (“bonds”). On December 31, 2010, fair value negative adjustment for bond BRFSBZ amounted to R$95.2.

F-42

BRF – Brasil Foods S.A.

Notes to Consolidated Financial Statements – (Continued)

Years ended December 31, 2010 and 2009

(Amounts expressed in millions of Brazilian reais, unless otherwise stated)

The comparison between book value and fair value of financial assets and liabilities is presented below:

	12.31.10		12.31.09		01.01.09
	Book value	Fair value	Book value	Fair value	Book value	Fair value
Cash and cash equivalents	2,310.6	2,310.6	1,898.2	1,898.2	1,233.5	1,233.5
Marketable securities:
Available for sales	390.3	390.3	543.7	543.7	82.3	82.3
Trading securities	623.5	623.5	2,255.0	2,255.0	660.1	660.1
Held to maturity	227.7	236.1	223.5	235.8	0.3	0.3
Trade accounts receivables, net	2,572.0	2,572.0	2,153.5	2,153.5	1,389.6	1,389.6
Short and long term debt	(7,232.1)	(7,327.4)	(9,054.0)	(9,070.6)	(5,294.4)	(5,294.4)
Trade accounts payable	(2,059.2)	(2,059.2)	(1,905.4)	(1,905.4)	(1,083.4)	(1,083.4)
Other financial assets	98.6	98.6	27.6	27.6	79.2	79.2
Other financial liabilities	(82.2)	(82.2)	(87.1)	(87.1)	(146.7)	(146.7)
	(3,150.8)	(3,237.7)	(3,945.0)	(3,949.3)	(3,079.5)	(3,079.5)

The table below presents the financial assets and liabilities of the consolidated balance sheet, and the general classification of these instruments according with the valuation hierarchy:

F-43

BRF – Brasil Foods S.A.

Notes to Consolidated Financial Statements – (Continued)

Years ended December 31, 2010 and 2009

(Amounts expressed in millions of Brazilian reais, unless otherwise stated)

		12.31.10				12.31.09				01.01.09
		Level 1	Level 2	Level 3	Total	Level 1	Level 2	Level 3	Total	Level 1	Level 2	Level 3	Total
Assets
Financial assets:
Available for sale
Purchase and sale commitments	(b)	-	129.2	-	129.2	-	-	-	-	-	-	-	-
Bank deposit certificates	(b)	-	74.8	-	74.8	-	64.5	-	64.5	-	-	-	-
Brazilian Foreign Debt Securities	(a)	61.3	-	-	61.3	59.1	-	-	59.1	82.3	-	-	82.3
Exclusive investment funds		-	45.7	-	45.7	-	51.4	-	51.4	-	-	-	-
Investment funds	(a)	24.7	-	-	24.7	151.7	-	-	151.7	-	-	-	-
Shares	(a)	1.7	-	-	1.7	2.0	-	-	2.0	-	-	-	-
Held for trading:
Bank deposit certificates	(b)	-	560.5	-	560.5	-	2,154.6	-	2,154.6	-	660.1	-	660.1
Financial treasury bills	(a)	63.0	-	-	63.0	100.4	-	-	100.4	-	-	-	-
Other financial assets
Derivatives designated ashedge	(c)	-	87.4	-	87.4	-	24.7	-	24.7	-	68.5	-	68.5
Derivatives not designated ashedge	(c)	-	11.2	-	11.2	-	2.9	-	2.9	-	10.7	-	10.7
Total assets		150.7	908.8	-	1,059.5	313.2	2,298.1	-	2,611.3	82.3	739.3	-	821.6
Liabilities
Financial liabilities:
Other financial liabilities
Derivatives designated ashedge	(c)	-	(78.3)	-	(78.3)	-	(87.0)	-	(87.0)	-	(136.6)	-	(136.6)
Derivatives not designated ashedge	(c)	-	(3.9)	-	(3.9)	-	(0.1)	-	(0.1)	-	(10.1)	-	(10.1)
Total liabilities		-	(82.2)	-	(82.2)	-	(87.1)	-	(87.1)	-	(146.7)	-	(146.7)

F-44

BRF – Brasil Foods S.A.

Notes to Consolidated Financial Statements – (Continued)

Years ended December 31, 2010 and 2009

(Amounts expressed in millions of Brazilian reais, unless otherwise stated)

We present below a description of the valuation methodologies used by the Company for financial instruments measured at fair value:

a) Investments in financial assets in the categories of Brazilian foreign debt securities, national treasury certificates, financial treasury notes, financial investment fund and shares are classified at Level 1 of the fair value hierarchy, as the market prices are available in an active market.

b) Investments in financial assets in the categories of CDB (Bank Deposit Certificates), and repurchase agreements backed by debentures are classified at Level 2, since the method of valuation at fair value occurs through the price quotation of similar financial instruments in non-active markets.

c) Derivatives are valued through existing pricing models very well accepted by financial market based on public market inputs such as interest rate forecasts, volatility factors and foreign currency rates. We classify these instruments at level 2 of the valuation hierarchy. Such instruments include swaps, NDFs and options.

The valuation model used by the Company for derivatives considers its own performance risk. Although during 2009, there has been a deterioration of the global credit market, without full recovery, the Company’s management believes that there is a low risk of non-performance as of December 31, 2010.

5.7.Credit management

The Company is potentially subject to the credit risk related to trade accounts receivable, financial investments and derivative contracts. The Company limits its risk associated with these financial instruments, allocating them to financial institutions selected by the criteria of rating and percentage of maximum concentration by counterparties.

The credit risk concentration of accounts receivable is minimized due to the diversification of the customer portfolio and concession of credit to customers with sound financial and operational conditions. The Company does not normally require collateral for credit sales, yet it has a contracted credit insurance policy for specific markets.

On December 31, 2010 , the Company maintained financial investments above R$10.0 at the following financial institutions: Santander, Itaú Unibanco, Banco do Brasil, Bradesco, Votorantim, Deutsche Bank, Safra, Credit Suisse, Standard, BTG Pactual, HSBC, Caixa Econômica Federal, Banco do Nordeste and Citibank.

F-45

BRF – Brasil Foods S.A.

Notes to Consolidated Financial Statements – (Continued)

Years ended December 31, 2010 and 2009

(Amounts expressed in millions of Brazilian reais, unless otherwise stated)

The Company also held derivative contracts with the following financial institutions: Santander, Citibank, HSBC, Credit Suisse, Banco do Brasil, Itaú BBA, Rabobank, Merrill Lynch, Votorantim, Bradesco, JP Morgan, Banco Espírito Santo, BNP, Barclays, Pactual and Morgan Stanley.

5.8.Liquidity risk management

Liquidity risk management aims to ensure adequate readily-available resources to meet all Company’s obligations on time and at all times. With this objective, this policy aims to reduce the impacts caused by events which may create material volatility to the Company’s cash flow.

The Company has identified market risk factors which are linked to future cash flow and may jeopardize its liquidity. It also calculates the Cash Flow at Risk (“CFAR”) on a twelve-month basis targeting to verify possible cash flow forecast deviations. The Company established a minimum amount of cash and cash equivalents to be considered based on to the average monthly turnover and LTM EBITDA, among other aspects.

Derivatives transactions may demand payment of cyclical variations (“deposit margins”). Currently, the Company holds only BM&F operations with daily variations. The control of variations is conducted through the Value at Risk (VAR) methodology, which measures with statistical accuracy of the probable maximum variation to be paid on a 1- to 21-day interval. The Company then assesses such VAR with its policy.

With regards to the investments, the Company presents conservative allocation principles focusing on liquidity, diversification (avoiding counterparty concentration) and profitability.

The Company’s also considers its refinancing risks. The current leverage profile and debt maturity schedule allow the Company to maintain a satisfactory level of refinancing risks given the credit and capital markets environment and the Company’s operating performance, Given the internal targets, the majority of the Company’s financial debt is allocated in the long term. On December 31, 2010, the long-term debt portion accounted for 69% of total debt, presenting an average term of higher than 3 years.

F-46

BRF – Brasil Foods S.A.

Notes to Consolidated Financial Statements – (Continued)

Years ended December 31, 2010 and 2009

(Amounts expressed in millions of Brazilian reais, unless otherwise stated)

The table below summarizes the commitments and contractual obligations that may impact Company’s liquidity as of December 31, 2010:

	12.31.10
	Book value	Cash flow contracted	Up to 6 months	6 to 12 months	2012	2013	2014	2015	After 5 years
Non derivatives financial liabilities
Loans and financing	5,543.2	(6,088.8)	(828.4)	(1,451.3)	(2,228.4)	(756.3)	(252.5)	(135.3)	(436.6)
Bonds BRF	1,269.5	(2,110.3)	(45.3)	(45.3)	(90.6)	(90.6)	(90.6)	(90.6)	(1,657.3)
Bonds Sadia	419.4	(604.6)	(14.4)	(14.4)	(28.7)	(28.7)	(28.7)	(28.7)	(461.0)
Trade accounts payable	2,059.2	(2,059.2)	(2,059.2)	-	-	-	-	-	-
Capital lease	9.7	(10.4)	(3.0)	(3.0)	(3.3)	(0.9)	(0.2)	(0.1)	-
Operational lease	263.3	(263.2)	(81.2)	(81.3)	(99.2)	(1.1)	(0.3)	(0.1)	-
	-	-	-	-	-	-	-	-	-
Derivatives financial liabilities	-	-	-	-	-	-	-	-	-
Designated as hedge accounting	-	-	-	-	-	-	-	-	-
Interest rate derivatives	78.3	(92.9)	(20.6)	(23.5)	(35.0)	(13.7)	-	-	-
	-	-	-	-	-	-	-	-	-
Not designated as hedge accounting	-	-	-	-	-	-	-	-	-
Currency derivatives	2.8	13.9	13.9	-	-	-	-	-	-
Commodities derivatives	0.2	(1.1)	-	(1.0)	-	-	-	-	-
Interest rate derivatives	0.9	(1.2)	(0.4)	(0.4)	(0.4)	-	-	-	-

F-47

BRF – Brasil Foods S.A.

Notes to Consolidated Financial Statements – (Continued)

Years ended December 31, 2010 and 2009

(Amounts expressed in millions of Brazilian reais, unless otherwise stated)

5.9.Commodity price risk management

In the normal course of its operations, the Company purchases commodities, mainly corn, soymeal and live hog, which are some of the individual components of production cost.

Corn and soymeal prices are subject to volatility resulting from weather conditions, crop yield, transportation costs, storage costs,agricultural policy of the government, foreign exchange rates and the prices of these commodities on the international market, among others factors. The prices of hog acquired from third parties are subject to market conditions and are influenced by internal availability and levels of demand in the international market, among other aspects.

The Risk Policy establishes limits for hedging the corn and soymeal purchase flow, aiming to diminish the impact of a price increase of these raw materials, with the possibility of using derivative instruments or inventory management for this purpose. Currently the management of inventory levels is used exclusively as a hedging instrument.

During 2010, the Company’s management decided to hedge the exposure to live cattle directly linked to the different business categories within the scope of the Beef Division. The following categories are contemplated: (i) forward purchase of cattle, (ii) contracting of own cattle confinement, (iii) contracting of cattle confinement with partnership and (iv) spot purchase of cattle aiming to guarantee the off-season scale of slaughtering.

The contracts are recorded at their fair value by means of the financial result, regardless of the expiration month of the contract.

The Company held a short position at BM&F of 137 futures contracts on December 31, 2010, maturing in January, February and October 2011, not having contracted this category of derivatives in previous years.

Additionally, on December 31, 2010, through the use of options strategies, the Company held a short position of 700 lots, as presented in table 5.3.2.

5.10.Sensitivity analysis chart

The Company has loans, payables and receivables in foreign currency, and in order to mitigate the risks incurred through foreign exchange exposure and it contracts derivative financial instruments.

The Company understands that the present interest rate fluctuations do not significantly affect its financial result since it opted to change to fixed rate aconsiderable part of its floating interest rates debts by using derivative transactions (interest rates swaps). Company designates such derivatives as hedge accounting and therefore adopts special accounting treatment proving the effectiveness of the hedge transaction.

F-48

BRF – Brasil Foods S.A.

Notes to Consolidated Financial Statements – (Continued)

Years ended December 31, 2010 and 2009

(Amounts expressed in millions of Brazilian reais, unless otherwise stated)

Five scenarios are considered for 2011 in the table below, considering the percentage variations of the quotes of parity between the Brazilian reais and U.S. dollar, Brazilian reais and the euro, and Brazilian reais and British pound sterling, whereas the most likely scenario is that adopted by the Company. The remaining scenarios are based on quoted prices from the Brazilian Central Bank as of December 31, 2010. The amount of exports analyzed corresponds to the total value of derivative financial instruments increased by the flow of amortization of the PPEs of the next 12 months designated as hedge accounting. 

F-49

BRF – Brasil Foods S.A.

Notes to Consolidated Financial Statements – (Continued)

Years ended December 31, 2010 and 2009

(Amounts expressed in millions of Brazilian reais, unless otherwise stated)

Parity - Brazilian Reais x U.S. Dollar		1.7000	1.4996	1.2497	2.0828	2.4993
Transaction/Instrument	Risk	Scenario I	Scenario II	Scenario III	Scenario IV	Scenario V
		(probable)	(10% appreciation)	(25% appreciation)	(25% devaluation)	(50% devaluation)
NDF (hedge accounting)	Devaluation of R$	61.7	147.8	255.3	(102.9)	(282.0)
Options - Currencies	Devaluation of R$	(1.1)	9.0	21.4	(1.5)	(1.5)
Export pre-payment	Devaluation of R$	100.9	262.0	463.0	(206.8)	(541.7)
Exports	Appreciation of R$	(79.4)	(203.1)	(357.4)	159.1	416.2
Net effect		82.2	215.8	382.4	(152.2)	(409.1)
Statement of income		(1.5)	(1.5)	(1.5)	19.3	40.1
Shareholders' equity		83.7	217.3	383.9	(171.5)	(449.2)
Parity - Brazilian Reais x Euro		2.2100	2.0052	1.6710	2.7850	3.3420
Transaction/Instrument	Risk	Scenario I	Scenario II	Scenario III	Scenario IV	Scenario V
		(probable)	(10% appreciation)	(25% appreciation)	(25% devaluation)	(50% devaluation)
	Devaluation of R$	39.5	77.8	140.3	(68.0)	(172.2)
Exports	Appreciation of R$	(39.5)	(77.8)	(140.3)	68.0	172.2
Net effect		-	-	-	-	-
Statement of income		-	-	-	-	-
Shareholders' equity		-	-	-	-	-
Parity - Brazilian Reais x Pound		2.6000	2.3288	1.9407	3.2345	3.8814
Transaction/Instrument	Risk	Scenario I	Scenario II	Scenario III	Scenario IV	Scenario V
		(probable)	(10% appreciation)	(25% appreciation)	(25% devaluation)	(50% devaluation)
NDF GBP	Devaluation of R$	11.2	23.0	39.9	(16.4)	(44.5)
				-
Exports	Appreciation of R$	(11.2)	(23.0)	(39.9)	16.4	44.5
Net effect		-	-	-	-	-
Statement of income		-	-	-	-	-
Shareholders' equity		-	-	-	-	-

F-50

BRF – Brasil Foods S.A.

Notes to Consolidated Financial Statements – (Continued)

Years ended December 31, 2010 and 2009

(Amounts expressed in millions of Brazilian reais, unless otherwise stated)

6.SEGMENT INFORMATION

The operating segments are reported consistently with the management reports provided to the chief operating decision-makers (Board of Directors and Officers) for purposes of appraising the performance of each segment and allocating resources.

The reportable segments identified primarily observe the division by geographical region of sales of the Company: domestic market; and foreign market. In turn, these segments are subdivided according to the nature of the products whose characteristics are described below:

·Fresh (in natura): involves the production and trade of whole birds and poultry cuts as well as pork and beef cuts.

·Prepared and processed: involves the production and trade of processed poultry, pork and beef derivative foods, margarines and soy vegetarian products.

·Dairy: involves the production and trade of pasteurized and UHT milk as well as milk derivatives, including flavored milk, yogurts, fruit juices, soy-based beverages, cheeses and desserts.

·Others: involves the production and trade of animal feed, soymeal and refined soy flour.

The net sales for each of the reportable operating segments are presented below:

	12.31.10	12.31.09
Net sales - domestic market:
In natura products	1,930.1	942.0
Processed products	6,738.4	4,835.2
Dairy products	2,291.7	2,139.3
Other	2,555.0	1,453.5
	13,515.2	9,370.0
Net sales - foreign market:
In natura products	7,361.3	5,186.4
Processed products	1,689.7	1,258.8
Dairy products	19.8	22.0
Other	95.2	68.5
	9,166.0	6,535.7
Total	22,681.2	15,905.7

F-51

BRF – Brasil Foods S.A.

Notes to Consolidated Financial Statements – (Continued)

Years ended December 31, 2010 and 2009

(Amounts expressed in millions of Brazilian reais, unless otherwise stated)

The operating results before financial income (expenses) and others for each of the reportable operating segments are presented below:

	12.31.10	12.31.09
Operating income (loss) before financial income (loss) and others:
Domestic market	1,142.5	385.3
Foreign market	342.1	(307.9)
	1,484.6	77.4

No customer was individually responsible for more than 5% of the total net sales earned in the year ended December 31, 2010.

Net export revenues by region are presented below:

	12.31.10	12.31.09
Export net income per region:
Europe	1,742.1	1,400.2
Far East	1,916.5	1,267.3
Middle East	2,919.7	2,075.5
Eurasia (including Russia)	1,040.1	734.6
America / Africa / Other	1,547.6	1,058.1
	9,166.0	6,535.7

The goodwill originating from the expectation of future profitability, as well as the intangible assets with indefinite useful life (trademarks and patents), were allocated to the reportable operating segments, taking into account the nature of the products manufactured in each segment (cash-generating unit), and the allocation is presented below:

	Domestic market			Foreign market			Total
	12.31.10	12.31.09	01.01.09	12.31.10	12.31.09	01.01.09	12.31.10	12.31.09	01.01.09
Goodwill	1,896.4	1,896.4	1,070.7	936.5	936.5	475.0	2,833.0	2,833.0	1,545.7
Trademarks	1,065.5	1,065.5	-	190.5	190.5	-	1,256.0	1,256.0	-
Patents	5.3	5.3	-	-	-	-	5.3	5.3	-
Total	2,967.2	2,967.2	1,070.7	1,127.0	1,127.0	475.0	4,094.3	4,094.3	1,545.7

Information referring to the total assets by reportable segments is not being presented, as it does not compose the set of information made available to the Company’s Executive Directors, which, in turn, makes investment decisions on a consolidated basis.

F-52

BRF – Brasil Foods S.A.

Notes to Consolidated Financial Statements – (Continued)

Years ended December 31, 2010 and 2009

(Amounts expressed in millions of Brazilian reais, unless otherwise stated)

7.BUSINESS COMBINATION

As mentioned in note 3, the Company adopted the exemption pertaining to the merger opting not to re-measure the mergers occurred before January 1, 2009.

7.1.Business combination – Sadia

On July 8, 2009, the shareholders of BRF approved in a special meeting of shareholders the merger of all 226,395,405 shares issued by HFF Participações S.A. (former parent company of Sadia) based on the economic value in the amount of R$1,482.9, through the exchange of 37,637,557 new shares of common stock, registered, in book-entry format and without par value, issued by BRF, for the issue price of thirty-nine Brazilian Reais and forty cents (R$39.40) per share.

On August 18, 2009, the merger of Sadia’s common and preferred shares was approved by BRF shareholders, at an extraordinary shareholders’ general meeting, excluding shares indirectly owned by the Company, through the issuance of 25,904,595 common shares and 420,650,712 preferred shares issued by Sadia, according to its economic value, in the amount of R$2,335.5, through the issuance of 59,390,963 new common registered shares, with no par value issued by BRF, for thirty-nine Brazilian Reais and thirty-two cents (R$39.32) per share. On the date hereof, Sadia became a wholly-owned subsidiary of BRF.

The schedule below shows the assessment of the cost of acquisition:

Number of shares exchanged on July 8, 2009	37,637,557
Number of shares exchanged on August 18, 2009	59,390,963
Total stock	97,028,520
Quoted BRF stock (lots of 1,000) on July 8, 2009	40
Cost of acquisition at fair value	3,881.1
Net assets acquired at fair value	(2,587.3)
Goodwill	1,293.8

The costs related to the transaction are represented by commissions, fees of counsel and auditors, among others, and amount to R$44.0, were included in the results for the year ended on December 31, 2009 in the item of other operating results.

The identifiable assets acquired and liabilities assumed that were recognized on the date of acquisition and the corresponding fair value, on the date of acquisition, July 8, 2009, are presented below:

F-53

BRF – Brasil Foods S.A.

Notes to Consolidated Financial Statements – (Continued)

Years ended December 31, 2010 and 2009

(Amounts expressed in millions of Brazilian reais, unless otherwise stated)

	Net assets acquired	Fair value adjustments		Net assets acquired at fair value
Cash equivalents	1,759.7	-		1,759.7
Trade accounts receivable and other receivables	609.8	-		609.8
Inventories	1,193.0	0.8	(a)	1,193.9
Biological assets	465.6	-		465.6
Others	546.6	-		546.6
Total current assets	4,574.7	0.8		4,575.6
Long-term assets	1,421.2	1,155.8	(g)	2,577.0
Biological assets	221.5	-		221.4
Investments	14.7	-		14.7
Property, plant and equipment	4,034.7	2,057.1	(b)	6,091.8
Intangible	58.6	1,393.0	(c)	1,451.6
Total non-current assets	5,750.7	4,605.9		10,356.5
Total assets	10,325.4	4,606.7		14,932.1
Loans and financing	4,425.1	(34.5)	(d)	4,390.6
Trade accounts payable	889.3	-		889.3
Taxes and contribution	80.0	-		80.0
Dividends payable	0.8	-		0.8
Provisions	286.3	139.2	(e)	425.5
Others	391.7	-		391.7
Total current liabilities	6,073.2	104.7		6,177.9
Loans and financing	3,503.6	-		3,503.6
Provisions	337.2	630.2	(f)	967.4
Others	286.4	1,409.5	(g)	1,695.9
Total non-current liabilities	4,127.2	2,039.7		6,166.9
Shareholders’ equity	125.0	2,462.3	(h)	2,587.3
Total liabilities	10,325.4	4,606.7		14,932.1

(a)Refers to the adjustment to the fair value of the inventories realized in full in year 2009 in the amount of R$0.8;

(b)Refers to the adjustment to the fair value of the fixed assets according to an appraisal report prepared by an external expert, which is being realized by its economic useful life (refer to note 18). The accumulated depreciation of the fair value as of December 31, 2010 corresponds to approximately R$87.5 (R$32.8 as of December 31, 2009);

(c)Refers to the fair value of the brands whose useful lives are indefinite and to the fair value of assets of definite useful life, such as relationship with suppliers and patents. The realization of the fair value occurs by means of rates that vary from 25% to 48% p.a. The accumulated amortization of the fair value of the intangibles with definite useful life as of December 31, 2010 corresponds to approximately R$84. 4 (R$28.1 as of December 31, 2009);

F-54

BRF – Brasil Foods S.A.

Notes to Consolidated Financial Statements – (Continued)

Years ended December 31, 2010 and 2009

(Amounts expressed in millions of Brazilian reais, unless otherwise stated)

(d)Refers to the adjustment to the fair value of the loans and financing realized according to their maturity dates. The accumulated realization as of December 31, 2010 corresponds to approximately R$5.3 (R$1.3 as of December 31, 2009);

(e)Refers to the fair value of the guarantees granted by Sadia and deferred revenue related to the sale of employee banking relationships realized according to the maturity dates. The accumulated realization as of December 31, 2010 corresponds to approximately R$30.9 (R$15.8 as of December 31, 2009);

(f)Refers to the fair value of the contingent tax, civil and employment liabilities. The fair value of the contingent tax liabilities was determined, at first, based on the appraisal of external consultants, who attributed to these processes an average probability of loss. Then, Management measured the contingencies considering the premises of the programs of fiscal recovery promoted from time to time by the State and Federal Governments, which is the amount that the counterparties would be willing to liquidate from the existing debts. On December 31, 2010, there was no balance of accumulated realization for such liabilities;

(g)Refers to the effect of the deferred taxes on the adjustments (a) through (f) presented above and the effect of the deferred taxes on the difference between the accounting and tax goodwill; and

(h)Refers to the corresponding entry of the adjustments (a) through (g) in the shareholders’ equity.

The remaining goodwill generated in the relation of exchange of shares with Sadia includes, in addition to the controlling goodwill, the future benefits expected from the synergy of the transactions of the companies. 

The goodwill for tax purposes, generated in the operation, corresponds to R$3,594.5. The Company’s management believes that the goodwill originating from that acquisition is deductible for tax purposes.

Sadia contributed net revenue of R$5,241.6 and net income of R$313.5 as from the date of acquisition until December 31, 2009. If the merger had occurred on January 1, 2009, the Company estimates that consolidated net revenue would have been approximately R$20,937.6 and net income for the fiscal year ended December 31, 2009 would have been approximately R$225.3.

The Company recorded in the result of the year ended on December 31, 2010, the portion corresponding to the depreciation of the surplus in the value of the fixedassets in the amount of R$54.7 (R$32.9 from July 8, 2009 to December 31, 2009), in cost of sales.

F-55

BRF – Brasil Foods S.A.

Notes to Consolidated Financial Statements – (Continued)

Years ended December 31, 2010 and 2009

(Amounts expressed in millions of Brazilian reais, unless otherwise stated)

The business combination with Sadia is still being reviewed by the Administrative Council for Economic Defense (“CADE"). On July 7, 2009, the Company’s management and that of Sadia entered into a Transaction Reversibility Preservation Agreement ("APRO") for the purpose of ensuring the reversibility of the operation until the final decision to be stated by CADE, by means of actions that maintain the competition during the assessment of the competitive effects of the merger. The results of Sadia was consolidated as from the date of the merger.

The consolidated financial statements of the fiscal year ended on December 31, 2010, do not reflect impacts on possible corporate reorganizations, which can only be assessed after the approval by CADE.

On June 29, 2009, the Commission of the European Communities (“European antitrust authority”) approved the transaction.

On September 19, 2009, CADE authorized the coordination of the activities of the Companies aimed for the foreign market in the segment of unprocessed meat. 

On January 20, 2010, CADE authorized the Company and its subsidiary Sadia to carry out joint transactions pertaining to the acquisition of unprocessed bovine meat and sale of the output of unprocessed meat in general, in Brazil and abroad, and the negotiation and acquisition of inputs and services.

As disclosed in the Relevant Fact notice of June 30, 2010, the Economic Monitoring Office ( “SEAE”), of the Ministry of Finance, published the opinion that deals with the corporate transaction involving the Company and its subsidiary Sadia, and recommended to CADE that the merger should be approved with restriction, suggesting two alternatives that could be accepted by CADE or not. (see note 38). 

In connection with the association between Sadia and the Company, there was a primary public distribution of 115,000,000 shares with a supplementary lot of 17,250,000 according to note 27.3.

F-56

BRF – Brasil Foods S.A.

Notes to Consolidated Financial Statements – (Continued)

Years ended December 31, 2010 and 2009

(Amounts expressed in millions of Brazilian reais, unless otherwise stated)

8.CASH AND CASH EQUIVALENTS

	Average rate p.a. %
		12.31.10	12.31.09	01.01.09
Cash and bank accounts:
U.S. dollar		70.3	46.3	-
Brazilian reais		81.4	40.2	65.6
Euro		0.8	5.9	11.9
Others		4.7	1.2	0.9
		157.2	93.6	78.4
Highly liquid investments:
In Brazilian reais:
Investment fund	10.7	9.9	8.7	44.9
		9.9	8.7	44.9
In U.S. dollar:
Interest bearing account	0.2	345.7	497.0	410.0
Fixed term deposit	1.2	1,651.7	1,198.7	559.8
Overnight	0.1	64.4	100.2	140.4
In Euro:		-	-	-
Deposit account		74.3	-	-
Overnight	0.1	3.1	-	-
Other Currencies:		-	-	-
Deposit account		4.3	-	-
		2,143.5	1,795.9	1,110.2
		2,310.6	1,898.2	1,233.5

Financial investments classified as cash and cash equivalents are considered financial assets with the possibility of immediate redemption and are subject to an insignificant risk of change of value. Financial investments in foreign currencies refer mainly to overnight and time deposits, and bear interest at a prefixed rate.

F-57

BRF – Brasil Foods S.A.

Notes to Consolidated Financial Statements – (Continued)

Years ended December 31, 2010 and 2009

(Amounts expressed in millions of Brazilian reais, unless otherwise stated)

9.MARKETABLE SECURITIES

			Average interest rate p.y.%
	WAMT (*)	Currency
				12.31.10	12.31.09	01.01.09
Available for sale:
Purchase and sale commitments(a)	0.50	R$	10.81	129.2	-	-
Bank deposit certificates(b)	3.85	R$	10.69	74.8	64.5	-
Brazilian foreign debt securities(c)	3.19	US$	10.23	61.3	59.1	82.3
Brazilian financial treasury bill(e)	2.26	R$	9.66	52.9	215.1	-
Exclusive investment funds(h)	-	R$		45.7	51.4	-
Investment funds(d)	-	US$	10.64	24.7	151.7	-
Shares	-	R$		1.7	1.9	-
				390.3	543.7	82.3
Held for trading:
Bank deposit certificates(b)	0.89	R$	8.79	560.5	2,154.6	660.1
Financial treasury bills(e)	3.74	R$	8.65	63.0	100.4	-
				623.5	2,255.0	660.1
Held to maturity:
Credit linked notes(f)	4.05	US$	4.75	166.7	174.2	-
National treasury certificates (g)	9.79	R$	12.00	61.0	49.3	-
Special savings bonds	0.09	R$	5.19	-	-	0.3
				227.7	223.5	0.3
Total				1,241.5	3,022.2	742.7
Total current				863.8	2,345.5	742.5
Total non-current				377.7	676.7	0.2

(*) Weighted average maturity in years.

(a)Repurchase agreements backed by debentures.

(b)Bank deposit certificate (“CDB”) investments are denominated in Brazilian Reais and remunerated at rates varying from 98% to 104% of the interbank deposit certificate (“CDI”).

(c)Brazilian foreign debt securities are denominated in Brazilian Reais and remunerated by pre- and post-fixed rates.

(d)The foreign currency investment fund has a credit linked note issued by a first-class bank that pays periodic interest (LIBOR + spread) and contemplates the Brazil risk and Sadia risk.

(e)Financial treasury bills (“LFT”) are remunerated at the rate of the SpecialSystem for Settlement and Custody (“SELIC”).

F-58

BRF – Brasil Foods S.A.

Notes to Consolidated Financial Statements – (Continued)

Years ended December 31, 2010 and 2009

(Amounts expressed in millions of Brazilian reais, unless otherwise stated)

(f)The credit linked note is a structured operation with a first-class financial institution abroad that pays periodic interest (LIBOR + spread) and corresponds to a credit note that contemplates the Company’s risk.

(g)The national treasury certificates classified as held to maturity subgroup are pledged as a guarantee of the loan obtained by means of the Special Program for Asset Recovery (“PESA”) (see note 21).

(h)The portfolio of financial operations of exclusive fund in foreign currency is shown below:

	12.31.10	12.31.09
Structured notes	43.2	49.0
Money market	2.5	1.9
Subtotal	45.7	50.9
Other accounts (payable) receivable	(7.0)	0.5
	38.7	51.4

On December 31, 2010, of the total financial investments, R$27.5 was pledged as collateral for futures contract operations in U.S. dollars and live cattle, traded on the Futures and Commodities Exchange (“BM&F”). On December 31, 2009, the guarantees corresponded to R$39.0.

On December 31, 2010, the maturities of the financial investments from non-current assets in the consolidated balance sheet have the following composition:

Maturities
2012	153.2
2013	102.0
2014	40.8
2015 and thereafter	81.7
Total	377.7

The Company conducted an analysis of sensitivity to foreign exchange rate. (note 5.10)

F-59

BRF – Brasil Foods S.A.

Notes to Consolidated Financial Statements – (Continued)

Years ended December 31, 2010 and 2009

(Amounts expressed in millions of Brazilian reais, unless otherwise stated)

10.TRADE ACCOUNTS RECEIVABLE AND OTHER 

	12.31.10	12.31.09	01.01.09
Current
Local third parties	1,636.7	1,514.6	683.5
Local related parties	-	(0.3)	-
Third parties abroad	948.3	662.6	705.6
(-) Estimated losses with doubtful accounts	(20.0)	(36.2)	(11.1)
	2,565.0	2,140.7	1,378.0
Credit notes	41.7	33.2	48.7
	41.7	33.2	48.7
	2,606.7	2,173.9	1,426.7
Non-current
Local third parties	48.0	42.7	29.2
Third parties abroad	2.7	3.7	2.8
(-) Adjustment to present value	(0.9)	(1.2)	(0.3)
(-) Estimated losses with doubtful accounts	(42.8)	(32.4)	(20.1)
	7.0	12.8	11.6
Credit notes	93.1	92.6	54.9
	93.1	92.6	54.9
	100.1	105.4	66.5

The movements of estimated losses from doubtful accounts are as follows:

	12.31.10	12.31.09
Beginning balance	68.6	31.2
Exchange variation	0.2	(0.7)
Provision	41.3	38.7
Increase (business combination)	-	17.0
Reversal	(20.2)	(7.9)
Write-off	(27.1)	(9.7)
Ending balance	62.8	68.6

The expense of the estimated losses on doubtful accounts was recorded under selling expenses in the statement of income. When efforts to recover accounts receivable prove fruitless, the amounts credited to estimated losses on doubtful accounts are generally reversed against the permanent write-off of the invoice.

The breakdown by maturity of amounts overdue and not included in estimated losses on doubtful accounts are as follows:

F-60

BRF – Brasil Foods S.A.

Notes to Consolidated Financial Statements – (Continued)

Years ended December 31, 2010 and 2009

(Amounts expressed in millions of Brazilian reais, unless otherwise stated)

	12.31.10	12.31.09
60 to 90 days	9.3	0.6
90 to 120 days	1.4	0.6
120 to 180 days	2.8	3.8
180 to 360 days	0.3	0.3
More than 360 days	2.8	2.3
Total	16.6	7.6

The invoices excluded from allowance for estimated losses on doubtful accounts are secured by letters of credit issued by financial institutions and by credit insurance contracted with insurance companies.

The breakdown of accounts receivable by maturity is as follows:

	12.31.10	12.31.09	01.01.09
Amounts falling due	2,377.7	2,008.7	975.2
Overdue:
From 01 to 60 days	182.0	137.9	288.1
From 61 to 120 days	17.8	11.9	116.9
From 121 to 180 days	6.9	7.9	19.1
From 181 to 360 days	6.9	16.8	5.4
Above 360 days	44.4	46.4	28.2
(-) Adjustment to present value	(0.9)	(7.4)	(12.1)
(-) Estimated losses with doubtful accounts	(62.8)	(68.7)	(31.2)
	2,572.0	2,153.5	1,389.6

F-61

BRF – Brasil Foods S.A.

Notes to Consolidated Financial Statements – (Continued)

Years ended December 31, 2010 and 2009

(Amounts expressed in millions of Brazilian reais, unless otherwise stated)

11.INVENTORIES  

	12.31.10	12.31.09	01.01.09
Finished goods	1,159.1	1,376.0	935.6
Goods for resale	20.5	16.0	2.3
Work in process	123.3	120.4	41.1
Raw materials	466.3	496.8	116.5
Packaging materials	85.5	90.4	51.8
Secondary materials	58.8	56.1	76.8
Warehouse	118.5	121.4	85.5
Goods in transit	60.9	11.4	-
Imports in transit	22.2	19.4	15.8
Advances to suppliers	50.9	37.7	7.8
(-) Provision for adjustment to market value	(14.6)	(69.0)	(35.3)
(-) Provision for inventory losses deteriorated	(10.6)	(17.7)	(10.3)
(-) Provision for obsolescence	(5.0)	(3.4)	(2.2)
	2,135.8	2,255.5	1,285.4

The amount of inventories recognized in cost of sales on December 31, 2010 totaled R$16,951.1 (R$12,728.8 as of December 31, 2009), whereas this amount involves the additions and reversals of inventory reductions to net realizable value presented in the table below:

F-62

BRF – Brasil Foods S.A.

Notes to Consolidated Financial Statements – (Continued)

Years ended December 31, 2010 and 2009

(Amounts expressed in millions of Brazilian reais, unless otherwise stated)

	01.01.09	Business combination	Additions	Reversals	Write-offs	Exchange rate variation	12.31.09	Additions	Reversals	Write-offs	Exchange rate variation	12.31.10
Provision for inventory losses(a)	(35.3)	(10.3)	(28.1)	0.3	-	4.4	(69.0)	(34.7)	84.5	3.5	1.1	(14.6)
Provision for inventory losses deteriorated	(10.3)	(3.2)	(22.3)	5.9	12.2	-	(17.7)	(23.3)	30.2	0.2	-	(10.6)
Provision for obsolescence	(2.2)	(3.0)	(2.9)	0.5	4.2	-	(3.4)	(3.6)	1.8	0.2	-	(5.0)
	(47.8)	(16.5)	(53.3)	6.7	16.4	4.4	(90.1)	(61.6)	116.5	3.9	1.1	(30.2)

(a) Reversals occurred on account of the recovery of the sale price of inventories.

Additionally, on December 31, 2010, there were write-offs of inventories in the amount of R$45.2 (R$31.6 as of December 31, 2009), recorded under selling expenses referring to items that were deteriorated.

The Company’s management expects inventories to be recovered in a period of less than 12 months.

On December 31, 2010, the amount corresponding to R$30.5 of the balance of inventories, was pledged as collateral for rural credit operations.

F-63

BRF – Brasil Foods S.A.

Notes to Consolidated Financial Statements – (Continued)

Years ended December 31, 2010 and 2009

(Amounts expressed in millions of Brazilian reais, unless otherwise stated)

12.BIOLOGICAL ASSETS

The group of biological assets of the Company is composed of living animals separated by the categories: poultry, swine and bovine. These animals were separated into consumable and for production.

The animals classified in the subgroup of consumables are those intended for slaughtering to produce unprocessed meat and/or manufactured and processed products; while they do not reach the weight adequate for slaughtering, they are considered to be immature. The processes of slaughtering and production occur in sequence over a short time period, and so only the living animals transferred for slaughtering in refrigerators are classified as mature.

The animals classified in the subgroup of production (matrixes) are those that have the function of producing other biological assets; while they do not reach the age of reproduction they are classified as immature, and when they are able to initiate the reproductive cycle, they are classified as mature.

In the measurement of the biological assets at fair value, the Company adopted the model of discounted cash flow. At first, the rate of discount used was the weighted average cost of capital (“WACC”), which was then adjusted to reflect the specific risk of the asset in question, by means of a mathematical model of average return on assets (“WARA”), as follows:

	12.31.10	12.31.09	01.01.09
Cost of nominal owners' equity	11.10	11.54	12.37
Projected inflation rate USA	1.85	1.99	2.27
Cost of actual owners' equity	9.08	9.37	9.88
Actual WACC	6.93	6.94	6.83
WARA discount rate:
Animals for slaughter	6.00	5.75	6.10
Animals for production	6.90	7.30	6.70

In the opinion of the Company’s management, the fair value of the biological assets is substantially represented by the cost of formation especially due to the short life cycle of the animals and due to the fact that a significant portion of the profitability of our products derives from the manufacturing process, not from the obtainment of unprocessed meat (raw materials / slaughter). This opinion is supported by a report of appraisal of fair value prepared by an independent specialist, which assessed an immaterial difference between the two methodologies. Therefore, the Company maintained the registration of the biological assets at formation cost.

The quantities and the accounting balances per category of biological asset arepresented below:

F-64

BRF – Brasil Foods S.A.

Notes to Consolidated Financial Statements – (Continued)

Years ended December 31, 2010 and 2009

(Amounts expressed in millions of Brazilian reais, unless otherwise stated)

	12.31.10		12.31.09		01.01.09
	Quantity	Value	Quantity	Value	Quantity	Value
Consumable biological assets:
Immature poultry	187,101	394.7	166,872	352.6	88,827	202.6
Mature poultry	483	1.6	1,012	4.1	-	-
Immature pork	4,155	479.2	3,960	493.6	1,413	223.0
Mature pork	-	-	5	1.2	-	-
Mature bovine	24	25.2	14	14.0	2	1.8
Total current assets	191,763	900.7	171,863	865.5	90,242	427.4
Immature poultry	7,372	88.2	7,275	99.1	3,707	49.6
Mature poultry	11,559	140.5	11,260	130.9	5,094	61.1
Immature pork	169	22.6	173	26.3	-	-
Mature pork	386	126.4	381	134.9	144	48.1
Total non-current assets	19,486	377.7	19,089	391.2	8,945	158.8
	211,249	1,278.4	190,952	1,256.7	99,187	586.2

The movements of biological assets during the years are presented below:

	Current				Non-current
	Poultry	Pork	Beef	Total	Poultry	Pork	Total
Balance as of 01.01.09	202.6	223.0	1.8	427.4	110.7	48.1	158.8
Business Combination	205.3	298.1	-	503.4	111.3	109.0	220.3
Increase by acquisition	46.8	358.4	28.3	433.5	22.1	34.3	56.4
Increase by reproduction	621.7	300.4	-	922.1	236.4	20.4	256.8
Consumption of ration, medication and remuneration of partnership, net of accumulated depreciation	2,732.4	834.2	-	3,566.6	(71.8)	(15.2)	(87.0)
Transfer between current and noncurrent assets	178.8	35.4	-	214.2	(178.7)	(35.4)	(214.1)
Reduction due to slaughtering	(3,630.9)	(1,554.7)	(16.1)	(5,201.7)	-	-	-
Balance as of 12.31.09	356.7	494.8	14.0	865.5	230.0	161.2	391.2
Increase by acquisition	89.3	339.6	65.7	494.6	26.1	43.7	69.8
Increase by reproduction	1,282.8	684.0	(1.2)	1,965.6	270.9	35.4	306.3
Consumption of ration, medication and remuneration of partnership, net of accumulated depreciation	3,060.2	947.3	-	4,007.5	(142.6)	(45.9)	(188.5)
Transfer between current and noncurrent assets	155.7	45.4	-	201.1	(155.7)	(45.4)	(201.1)
Reduction due to slaughtering	(4,548.4)	(2,031.9)	(53.3)	(6,633.6)	-	-	-
Balance as of 12.31.10	396.3	479.2	25.2	900.7	228.7	149.0	377.7

The costs of the breeding animals are depreciated using the straight-line method for a period from 15 to 30 months.

The acquisitions of biological assets of (non-current) production occur when there is the expectation that the production plan cannot be met with its own assets and, as a rule, this is the acquisition of immature animals in the beginning of the life cycle.

The acquisitions of biological assets for slaughtering (poultry and pork) are represented by poultry of one day and pork of up to 22 kilos, which are subject tothe management of a substantial part of the agricultural activity by the Company.

F-65

BRF – Brasil Foods S.A.

Notes to Consolidated Financial Statements – (Continued)

Years ended December 31, 2010 and 2009

(Amounts expressed in millions of Brazilian reais, unless otherwise stated)

The increase by reproduction of the biological assets classified in the current assets is related to eggs from assets of production.

13.ASSETS HELD FOR SALE 

The Board of Directors of the Company, on February 19, 2010, approved a plan of disposal of assets that were not being used in the operations. 

Additionally, it approved the plan of sale of a real estate located in the city of São Paulo with its corresponding buildings. The accounting balance of that group of assets corresponds to R$45.4. The Company’s management believes that the sale will occur in the next fiscal year.

F-66

BRF – Brasil Foods S.A.

Notes to Consolidated Financial Statements – (Continued)

Years ended December 31, 2010 and 2009

(Amounts expressed in millions of Brazilian reais, unless otherwise stated)

The balances of assets held for sale are presented below:

	01.01.09	Transfers of property, plant and equipment	Business combination	Write-offs	Exchange rate variation	12.31.09	Transfers of property, plant and equipment	Transfers to property, plant and equipment	Write-offs	Exchange rate variation	12.31.10
Land	0.8	0.8	0.3	(1.2)	-	0.7	42.9	-	(0.2)	-	43.4
Buildings and improvements	-	0.4	44.5	(0.4)	-	44.5	15.1	(43.9)	(1.1)	-	14.6
Machine and equipment	4.9	0.4	1.1	(3.8)	-	2.6	0.1	-	(1.2)	-	1.5
Facilities	-	-	-	-	-	-	2.2	-	-	-	2.2
Others	0.1	0.1	-	(0.1)	-	0.1	0.4	-	-	-	0.5
	5.8	1.7	45.9	(5.5)	-	47.9	60.7	(43.9)	(2.5)	-	62.2

The items transferred to the fixed assets refer to the houses built in the city of Lucas do Rio Verde, in the State of Mato Grosso. The initial plan of the Company’s management was to dispose of those units to employees of the Company. Subsequently, because of the turnover of personnel and to guarantee the availability of housing in the region, the Company’s management decided to cancel the plan of sale. 

F-67

BRF – Brasil Foods S.A.

Notes to Consolidated Financial Statements – (Continued)

Years ended December 31, 2010 and 2009

(Amounts expressed in millions of Brazilian reais, unless otherwise stated)

14.RECOVERABLE TAXES

	12.31.10	12.31.09	01.01.09
ICMS	647.0	600.7	225.2
Income and social contribution taxes	257.1	208.7	148.5
PIS/COFINS	577.9	623.0	359.0
Import duty	9.1	11.9	25.0
IPI	58.7	47.2	5.6
Other	6.6	7.7	1.9
(-) Provision for losses	(93.1)	(100.5)	(41.4)
	1,463.3	1,398.7	723.8
Total current	695.9	745.6	576.3
Total non-current	767.4	653.1	147.5

The movements of provisions are presented below:

	01.01.09	Business combination	Additions	Reversals	12.31.09	Additions	Reversals	Write-offs	12.31.10
Provision for ICMS loss	(22.0)	(39.4)	(10.9)	2.3	(70.0)	(8.4)	0.1	-	(78.3)
Provision for IR/CS loss	(17.1)	(1.5)	-	-	(18.6)	-	13.4	5.2	-
Provision for PIS/COFINS loss	-	(2.6)	(4.8)	-	(7.4)	-	4.7	-	(2.7)
Provision for IPI loss	(2.3)	(2.4)	(2.1)	2.3	(4.5)	(7.6)	-	-	(12.1)
	(41.4)	(45.9)	(17.8)	4.6	(100.5)	(16.0)	18.2	5.2	(93.1)

14.1.ICMS – Value-added tax:

Due to its export activity, domestic sales and investments in fixed assets are subject to reduced tax rates and, the Company accumulates credits that are offset with debits generated in sales in the domestic market or transferred to third parties.

The Company has ICMS credit in the states of Mato Grosso do Sul, Paraná, Santa Catarina, Minas Gerais and Rio Grande do Sul, for which Management understands that realization is uncertain and, therefore, formed full provision for loss of these credits as shown in the table above.

14.2.Income tax and social contribution:

These correspond to withholdings at source on financial investments, prepayments of income tax and social contribution, and on the reception of interest on shareholders’ equity by the parent company, realizable through offsetting with federal taxes and contributions payable.

F-68

BRF – Brasil Foods S.A.

Notes to Consolidated Financial Statements – (Continued)

Years ended December 31, 2010 and 2009

(Amounts expressed in millions of Brazilian reais, unless otherwise stated)

14.3.PIS and COFINS:

PIS (“Contribution to the Social Integration Program”) and COFINS (“Contribution for Funding of Social Welfare Programs”) basically originate from credits on purchases of raw materials used in the production of exported products or of products whose sale is taxed at the zero rate, such as those of UHT and pasteurized milk and sales to the Manaus Free Zone. The recovery of these receivables can be achieved by means of offsetting with domestic sale operations of taxed products, with other federal taxes or compensation claims.

For the accumulated PIS and COFINS credits, the Company adopts the procedure of legal action aimed at accelerating the analysis process of applications for repayment of these contributions already filed, which are under supervision for the release of new amounts.

The Company’s management has been conducting studies for the development of plans that allow the use of the other credits in the operations and there is no expectation of losses in their recovery.

F-69

BRF – Brasil Foods S.A.

Notes to Consolidated Financial Statements – (Continued)

Years ended December 31, 2010 and 2009

(Amounts expressed in millions of Brazilian reais, unless otherwise stated)

15. INCOME TAX AND SOCIAL CONTRIBUTION

15.1Deferred income tax and social contribution composition:

	12.31.10	12.31.09	01.01.09
Assets:
Tax losses carryforwards (corporate income tax)	564.7	568.7	207.0
Negative calculation basis (social contribution on Net Profits)	216.7	211.2	74.0
Temporary differences:
Provision for contingencies	151.6	90.5	64.2
Provision for doubtful accounts	8.7	9.1	6.9
Provision for attorney's fees	4.8	9.8	3.4
Provision for property, plant and equipment losses	3.6	7.0	-
Provision for tax credits realization	31.7	54.0	8.3
Provision for others obligations	57.2	17.6	1.5
Employees' profit sharing	35.8	17.4	4.9
Provision for inventories	5.7	15.4	10.0
Employees' benefits plan	93.3	72.2	28.6
Amortization of fair value of business combination	10.9	14.5	10.6
Business combination - Sadia	1,129.9	1,149.0	-
Provision for contractual indemnity	3.4	3.6	17.3
Unrealized losses on derivatives	2.9	-	17.3
Unrealized losses on inventories	1.5	4.8	13.9
Adjustments relating to the transition tax regime	139.6	167.7	79.3
Provision for losses	11.6	5.2	-
Other temporary differences	14.0	8.7	3.6
	2,487.6	2,426.4	550.8
Liabilities:
Temporary differences:
Revaluation reserve	0.6	3.2	-
Depreciation on rural activities	76.6	94.2	64.2
Adjustments relating to the transition tax regime	401.0	185.9	4.4
Business combination - Sadia	1,124.5	1,164.5	-
Unrealized gains on derivatives	28.0	7.6	3.4
Other temporary differences	5.0	1.0	1.3
	1,635.7	1,456.4	73.3

15.2 Estimated time of realization:

Deferred tax assets related to provisions for contingencies will be realized as the lawsuits are resolved and there are no estimates for the expected time of realization; thus, they are classified as non-current. The Company’s management considers that deferred tax assets resulting from temporary differences of employee benefits will be realized at the payment of the projected obligations.

The deferred tax assets originating from tax losses carryforward and negativebasis of social contribution are expected to be realized as set forth below:

F-70

BRF – Brasil Foods S.A.

Notes to Consolidated Financial Statements – (Continued)

Years ended December 31, 2010 and 2009

(Amounts expressed in millions of Brazilian reais, unless otherwise stated)

Year
2011	79.4
2012	84.6
2013	91.0
2014	97.0
2015	100.7
2016 and thereafter	328.8
	781.5

In assessing the likelihood of the realization of deferred tax assets, the Company’s management considers whether it is more likely than not that some or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets depends on the generation of future taxable income during the periods in which those temporary differences are deductible.

The Company’s management considers the scheduled reversal of deferred tax liabilities, projected taxable income and tax-planning strategies in making this assessment. Based on the level of historical taxable income and projections for future taxable income, management believes that it is more likely than not that the Company will realize the benefits of these deductible differences. The amount of the deferred tax asset considered realizable, however, could be reduced in the near term if estimates of future taxable income during the carryforward period are reduced.

F-71

BRF – Brasil Foods S.A.

Notes to Consolidated Financial Statements – (Continued)

Years ended December 31, 2010 and 2009

(Amounts expressed in millions of Brazilian reais, unless otherwise stated)

15.3 Income and social contribution taxes reconciliation:

	12.31.10	12.31.09
Income (loss) before taxes and participations	1,001.4	339.8
Nominal tax rate	34.0%	34.0%
Tax (expense) benefit at nominal rate	(340.5)	(115.5)
Adjustment of taxes and contributions on:
Equity pick up	1.5	(0.9)
Exchange rate fluctuation on investments abroad	(32.7)	(97.4)
Difference of tax rates on foreign earnings from	99.0	124.3
Subsidiaries abroad	(3.5)	(1.0)
Transfer pricing adjustment	(0.8)	(17.6)
Interest on shareholders' equity	89.3	34.0
Staturory profit sharing	(4.6)	6.4
Profit sharing	-	(11.6)
Donations	(3.1)	(0.9)
Penalties	(7.0)	(4.0)
Write-off deffered income tax and social contribution	(3.8)	(132.0)
Other adjustments	9.7	(5.0)
	(196.5)	(221.2)
Current income tax	(130.6)	(80.2)
Deferred income tax	(65.9)	(141.0)

Gains (losses) on cash flow hedge excluded from shareholders’ equity and included in income, net of taxes of R$76.33 in 2010 and R$48.6 in 2009.

The taxable income, current and deferred income tax from subsidiaries abroad is presented below:

	12.31.10	12.31.09
Pre-tax book income from foreign subsidiaries	134.7	135.3
Current income taxes benefit (expense) of subsidiaries abroad	(13.9)	(4.3)
Deferred income taxes benefit (expense) of subsidiaries abroad	0.8	7.6

The Company determined that the total profit recorded in the books of its wholly-owned subsidiary Crossban will not be redistributed. Such resources will be used for investments in the subsidiary, and thus no deferred income taxes were recognized. The total of undistributed earnings corresponds to R$928.9 as of December 31, 2010 (R$898.1 as of December 31, 2009).

As a result of the merger of the wholly-owned subsidiary Perdigão Agroindustrial S.A. on March 9, 2009, the Company recorded a loss of R$132.0 related to deferred tax assets (associated to tax losses carryforward and negative base of social contribution).

F-72

BRF – Brasil Foods S.A.

Notes to Consolidated Financial Statements – (Continued)

Years ended December 31, 2010 and 2009

(Amounts expressed in millions of Brazilian reais, unless otherwise stated)

The Brazilian income tax returns are subject to a 5-year statute of limitation period, during which the tax authorities might audit and assess the company for additional taxes and penalties, in these cases where inconsistencies are found. Subsidiaries located abroad are taxed in their respective jurisdictions, according to local regulations.

16.JUDICIAL DEPOSITS

These represent restricted assets of the Company and are restricted to sums deposited and held in escrow pending deliberation of the disputes to which they are related.

The movements of the judicial deposits held by the Company are represented below:

	01.01.09	Bus comb	Additions	Reversals	Writ-offs	FX variation	12.31.09	Additions	Reversals	Writ-offs	FX variation	12.31.10
Tax	12.5	51.4	4.0	(1.9)	(13.0)	-	53.0	31.6	-	(5.3)	-	79.3
Labor	36.2	20.1	32.0	(8.0)	(12.0)	-	68.3	60.1	(14.8)	(11.9)	-	101.7
Civil, commercial and other	7.4	2.5	5.3	-	(0.2)	(0.4)	14.6	47.0	(0.2)	(9.3)	1.0	53.1
	56.1	74.0	41.3	(9.9)	(25.2)	(0.4)	135.9	138.7	(15.0)	(26.5)	1.0	234.1

The increase of the balance of 2009 results from the business combination with Sadia.

17.INVESTMENTS  

17.1.Investment breakdown

	12.31.10	12.31.09	01.01.09
Investment in subsidiaries	16.5	16.1	-
Fair value of acquired assets, net	-	-	-
Goodwill based on the expectation of future profitability	-	-	-
Advance for future capital increase	-	-	-
Other investments	1.0	1.1	1.0
	17.5	17.2	1.0

F-73

BRF – Brasil Foods S.A.

Notes to Consolidated Financial Statements – (Continued)

Years ended December 31, 2010 and 2009

(Amounts expressed in millions of Brazilian reais, unless otherwise stated)

17.2.Investments in affiliates

	UP!			K&S
	12.31.10	12.31.09	01.01.09	12.31.10	12.31.09
Current assets	22.7	16.3	21.0	15.0	20.3
Noncurrent assets	-	-	0.2	17.3	13.8
Current liabilities	(11.3)	(8.3)	(10.3)	(9.7)	(9.3)
Noncurrent liabilities	-	-	-	(0.6)	-
Net assets	11.4	8.0	10.9	22.0	24.8
Net revenues	91.2	79.0	71.7	69.4	51.3
Net income (loss)	11.4	8.0	10.8	(2.8)	(1.6)

On June 30, 2009, the Company and Unilever Brasil, members of UP! Alimentos Ltda, entered into an amendment to the shareholders’ agreement valid as from July 1, 2009. The members decided to change certain rules of governance of the corporation, thereby conferring on Unilever Brasil certain additional rights and obligations. Therefore, in spite of the maintenance of a share of 50% in UP!, the Company failed to share the control in the investee and, in consequence, started to measure the investment using the equity method, thereby abandoning the practice of proportional consolidation. The consolidated balances presented in the fiscal year ended on January 1, 2009 include the balances of the investee.

K&S Alimentos S.A. results from a joint venture between the subsidiary Sadia and Kraft Foods Brasil and, therefore, became an indirect subsidiary of the Company as from July 8, 2009. For this reason, no comparative balance was presented on January 1, 2009.

F-74

BRF – Brasil Foods S.A.

Notes to Consolidated Financial Statements – (Continued)

Years ended December 31, 2010 and 2009

(Amounts expressed in millions of Brazilian reais, unless otherwise stated)

18.PROPERTY, PLANT AND EQUIPMENT

The movement of fixed assets is presented below:

	Rate p.a.%	12.31.09	Acquisitions	Write-offs	Transfers	Transfer to held for sale	Transfer from held for sale to fixed assets	Exchange rate variation	12.31.10
Cost
Land		674.6	14.6	(12.6)	(0.3)	(58.7)	-	(0.1)	617.5
Buildings and improvements		4,382.0	7.7	(68.3)	313.8	(8.1)	43.9	(1.6)	4,669.4
Machinery and equipment		5,068.6	22.6	(164.6)	319.4	(9.3)	-	(4.3)	5,232.4
Facilities		1,234.4	1.7	(30.3)	101.4	2.8	-	(0.1)	1,309.9
Furniture		78.4	1.3	(5.0)	7.6	(0.3)	-	(0.7)	81.3
Vehicles and aircrafts		33.0	0.5	(7.1)	3.0	-	-	(0.8)	28.6
Others		146.9	15.1	(3.6)	16.4	(0.2)	-	-	174.6
Construction in progress		424.8	593.7	(11.6)	(757.2)	-	-	(0.6)	249.1
Advances to suppliers		24.6	40.7	(5.0)	(12.9)	-	-	-	47.4
		12,067.3	697.9	(308.1)	(8.8)	(73.8)	43.9	(8.2)	12,410.2
Depreciation
Buildings and improvements	3.00	(953.7)	(124.7)	43.0	(7.0)	4.1	-	1.8	(1,036.5)
Machinery and equipment	5.17	(1,849.2)	(204.3)	136.0	5.0	5.9	-	3.8	(1,902.8)
Facilities	3.41	(315.4)	(34.7)	19.0	1.7	2.3	-	-	(327.1)
Furniture	5.74	(38.7)	(2.6)	3.9	(0.5)	(0.9)	-	0.6	(38.2)
Vehicles and aircrafts	14.41	(17.3)	(6.8)	5.5	1.6	1.7	-	0.4	(14.9)
Others		(18.8)	(7.2)	2.1	-	-	-	-	(23.9)
		(3,193.1)	(380.3)	209.5	0.8	13.1	-	6.6	(3,343.4)
Net balance		8,874.2	317.6	(98.6)	(8.0)	(60.7)	43.9	(1.6)	9,066.8

F-75

BRF – Brasil Foods S.A.

Notes to Consolidated Financial Statements – (Continued)

Years ended December 31, 2010 and 2009

(Amounts expressed in millions of Brazilian reais, unless otherwise stated)

	Rate p.a.%	01.01.09	Acquisitions	Write-offs	Business combination	Transfers	Transfer to held for sale	Exchange rate variation	12.31.09
Cost
Land		166.9	-	(7.0)	514.4	1.2	(0.7)	(0.2)	674.6
Buildings and improvements		1,404.5	8.9	(55.1)	2,780.2	252.2	(0.9)	(7.8)	4,382.0
Machinery and equipment		2,091.2	40.0	(116.7)	2,632.2	440.3	(1.0)	(17.4)	5,068.6
Facilities		242.2	2.8	(193.1)	1,077.0	115.0	-	(9.5)	1,234.4
Furniture		47.3	1.4	(5.6)	28.2	9.6	(0.1)	(2.4)	78.4
Vehicles and aircrafts		22.1	0.9	(3.5)	13.4	1.0	(0.1)	(0.8)	33.0
Others		62.4	5.0	(3.8)	56.3	27.2	-	(0.2)	146.9
Construction in progress		250.5	472.3	(0.2)	475.7	(769.7)	-	(3.8)	424.8
Advances to suppliers		30.5	113.2	(17.7)	37.4	(138.0)	-	(0.8)	24.6
		4,317.6	644.5	(402.7)	7,614.8	(61.2)	(2.8)	(42.9)	12,067.3
Depreciation
Buildings and improvements	2.95	(428.9)	(49.4)	19.2	(487.6)	(12.6)	0.5	5.1	(953.7)
Machinery and equipment	5.20	(994.1)	(56.8)	55.8	(865.0)	(2.1)	0.5	12.5	(1,849.2)
Facilities	3.39	(96.7)	3.5	14.9	(254.0)	19.2	-	(2.3)	(315.4)
Furniture	5.43	(24.8)	(3.7)	3.8	(15.0)	(0.6)	-	1.6	(38.7)
Vehicles and aircrafts	14.57	(12.2)	(1.6)	1.8	(6.5)	0.9	-	0.3	(17.3)
Others		(13.1)	(4.9)	1.6	(4.9)	2.5	-	-	(18.8)
		(1,569.8)	(112.9)	97.1	(1,633.0)	7.3	1.0	17.2	(3,193.1)
Net balance		2,747.8	531.6	(305.6)	5,981.8	(53.9)	(1.8)	(25.7)	8,874.2

F-76

BRF – Brasil Foods S.A.

Notes to Consolidated Financial Statements – (Continued)

Years ended December 31, 2010 and 2009

(Amounts expressed in millions of Brazilian reais, unless otherwise stated)

The increases related to construction in progress are represented substantially by expansion projects of industrial units, mainly in Lucas do Rio Verde, Uberlândia, Toledo, Vitória do Santo Antão and Carambeí plants in the amount of  R$301.0 and R$311.3 in 2010 and 2009, respectively.  The remaining investments are concentrated in productive improvements.

During the year ended December 31, 2010, the Company capitalized interests in the amount of R$18.4 (R$56.6 in December 31, 2009). The interest rate utilized to determine the amount to be capitalized was 7.74%.

The decreases in property, plant and equipment are related to disposals of properties, mainly farms, decreases by obsolescence and adjustments related to the acquired company.

On December 31, 2010 and 2009, the Company had no commitments assumed related to acquisition and/or construction of properties.

The fixed assets that are held as collateral of transactions of different natures are presented below:  

		12.31.10	12.31.09	01.01.09
	Type of collateral	Book value of assets pledged as collateral	Book value of assets pledged as collateral	Book value of assets pledged as collateral
Land	Financial/Labor/Tax/Civil	187.2	171.3	26.4
Buildings and improvements	Financial/Labor/Tax/Civil	1,926.3	1,708.2	79.0
Machine and equipment	Financial/Labor/Tax	2,028.7	1,806.9	29.2
Facilities	Financial/Labor/Tax	701.0	599.2	8.0
Furniture	Financial/Labor/Tax/Civil	17.5	14.2	1.3
Vehicles and aircrafts	Financial/Tax	1.3	1.4	0.7
Others	Financial/Labor/Tax/Civil	148.6	112.8	27.1
		5,010.6	4,414.0	171.7

The Company is not permitted to assign these assets as security for other transactions or to sell them.

F-77

BRF – Brasil Foods S.A.

Notes to Consolidated Financial Statements – (Continued)

Years ended December 31, 2010 and 2009

(Amounts expressed in millions of Brazilian reais, unless otherwise stated)

19.INTANGIBLE ASSETS

Intangible assets are comprised of the following items:

	Rate p.a.%	Cost	Accumulated amortization	12.31.10	12.31.09	01.01.09
Software	20.00	223.2	(122.8)	100.4	76.9	11.7
Relationship with suppliers	42.00	135.0	(84.2)	50.8	106.9	-
Patents	10.00	5.6	(0.3)	5.3	1.9	-
Brands	-	1,256.0	-	1,256.0	1,256.0	-
Outgrowers fidelization	-	1.8	-	1.8	-	-
Goodwill	-	2,833.0	-	2,833.0	2,834.8	1,545.9
Total		4,454.6	(207.3)	4,247.3	4,276.5	1,557.6

F-78

BRF – Brasil Foods S.A.

Notes to Consolidated Financial Statements – (Continued)

Years ended December 31, 2010 and 2009

(Amounts expressed in millions of Brazilian reais, unless otherwise stated)

The movement of intangible assets is presented below:

	01.01.09	Additions	Business combination	Amortization	Transfers	Write- offs	Exchange rate variation	12.31.09	Additions	Amortization	Transfers	Write- offs	Exchange rate variation	12.31.10
Software	11.7	6.4	57.9	(0.3)	1.3	(0.1)	-	76.9	62.5	(40.8)	2.0	(0.2)	-	100.4
Relationship with suppliers	-	-	135.0	(28.1)	-	-	-	106.9	-	(56.1)	-	-	-	50.8
Patents	-	-	2.0	(0.1)	-	-	-	1.9	0.4	(0.2)	3.2	-	-	5.3
Trademarks	-	-	1,256.0	-	-	-	-	1,256.0	-	-	-	-	-	1,256.0
Outgrowers fidelization	-	-	-	-	-	-	-	-	1.8	-	-	-	-	1.8
Goodwill:	1,545.9	-	1,293.7	-	-	-	(4.8)	2,834.8	-	-	-	-	(1.8)	2,833.0
Sadia	-	-	1,293.7	-	-	-	-	1,293.7	-	-	-	-	-	1,293.7
Eleva Alimentos	1,273.3	-	-	-	-	-	-	1,273.3	-	-	-	-	-	1,273.3
Batávia	133.2	-	-	-	-	-	-	133.2	-	-	-	-	-	133.2
Ava	49.4	-	-	-	-	-	-	49.4	-	-	-	-	-	49.4
Cotochés	39.6	-	-	-	-	-	-	39.6	-	-	-	-	-	39.6
Paraíso Agroindustrial	16.8	-	-	-	-	-	-	16.8	-	-	-	-	-	16.8
Plusfood	21.2	-	-	-	-	-	(4.8)	16.4	-	-	-	-	(1.8)	14.6
Perdigão Mato Grosso	7.6	-	-	-	-	-	-	7.6	-	-	-	-	-	7.6
Sino dos Alpes	4.1	-	-	-	-	-	-	4.1	-	-	-	-	-	4.1
Incubatório Paraíso	0.7	-	-	-	-	-	-	0.7	-	-	-	-	-	0.7
Total	1,557.6	6.4	2,744.6	(28.5)	1.3	(0.1)	(4.8)	4,276.5	64.7	(97.1)	5.2	(0.2)	(1.8)	4,247.3

F-79

BRF – Brasil Foods S.A.

Notes to Consolidated Financial Statements – (Continued)

Years ended December 31, 2010 and 2009

(Amounts expressed in millions of Brazilian reais, unless otherwise stated)

Amortizations of loyalty of integrated businesses and relationship with suppliers are recognized in net income in the cost of sales, while software amortization is recorded according to its use, where the alternatives are cost of sales, administrative or business expenses.

Trademarks in intangible assets derive from the business combination with Sadia and are considered assets with indefinite useful life as they are expected to contribute toward the Company’s cash flows indefinitely.

The goodwill presented above is supported by appraisal report, after allocation in the assets in use identified.

The value of goodwill and the value of intangible assets with indefinite useful life (trademarks and patents) allocated by cash-generating unit, are presented in  note 6.

The Company conducted the test of reduction to the recoverable value of assets based on fair value in use that was determined by a discounted cash flow model, in accordance with level of allocation of goodwill and intangibles to the group of cash generating units.

Discounted cash flows were prepared with a basis on the multi-annual budget (2011-2015) of the Company and growth projections up to 2020 (9% p.a. up to 16% p.a.), which in turn, is based on historical experiences and market projections of government agencies and associations, such as the United States Department of Agriculture (“USDA”), the Brazilian Association of the Pork Production and Exportation Industry (“ABIPECS”), the Brazilian Pullet Producer Association (“APINCO”) and others. In the opinion of Management, the use of periods that exceed those quoted (5 years) in the preparation of discounted cash flows is adequate, as it reflects the estimated time of use of the groups of assets.

The Company’s management adopted the assumptions presented in the table below in the preparation of the discounted cash flows:

	2011	2012	2013	2014	2015	2016 - 2020
GDP Brazil - CENTRAL BANK	4.20%	4.80%	4.80%	4.30%	4.20%	4.00%
Global GDP - IMF	3.40%	3.60%	3.70%	3.70%	3.70%	3.50%
IPCA	4.70%	4.60%	4.60%	4.60%	4.60%	4.60%
CPI - FMI	1.00%	1.40%	1.60%	1.70%	1.80%	2.50%
SELIC	11.79%	10.20%	8.80%	8.50%	8.50%	8.50%
Cost of own capital	15.00%	-	-	-	-	-
Nominal WACC	12.80%	-	-	-	-	-
Real WACC	7.80%	-	-	-	-	-

F-80

BRF – Brasil Foods S.A.

Notes to Consolidated Financial Statements – (Continued)

Years ended December 31, 2010 and 2009

(Amounts expressed in millions of Brazilian reais, unless otherwise stated)

Based on the Company’s management analyses performed during the fourth quarter of 2010, no adjustments for reduction of the balances of the assets to recoverable value were identified.

The rates presented above do not consider any tax effect (pre-tax).

In addition to the above mentioned recovery analysis, the Company’s management drew up a sensitivity analysis considering the variations in the EBITDA margin and in the nominal Weighted Average Cost of Capital (“WACC”) as presented below:

	Changes
EBITDA margin	-3.00%	-1.50%	-	-
WACC	-	-	11.30%	14.30%

In none of the scenarios considered did the company determine the need for formation of provision for recoverable value of the intangible assets with indefinite useful life.

20.TRADE ACCOUNTS PAYABLE

	12.31.10	12.31.09	01.01.09
Domestic suppliers
Third parties	1,952.1	1,714.6	932.1
Related parties	1.3	1.7	0.2
Foreign suppliers
Third parties	105.8	189.1	151.1
	2,059.2	1,905.4	1,083.4

Accounts payable to suppliers are not subject to the incidence of interest and are generally settled within 36 days.

The information on accounts payable involving related parties is presented in  note 29.

F-81

BRF – Brasil Foods S.A.

Notes to Consolidated Financial Statements – (Continued)

Years ended December 31, 2010 and 2009

(Amounts expressed in millions of Brazilian reais, unless otherwise stated)

21.CURRENT AND NON-CURRENT LOANS AND FINANCING

	Charges (% p.a.)	Average interest rate (p.a.)	Weighted average maturity (*)	Short term	Long term	Balance 12.31.10	Balance 12.31.09	Balance 01.01.09
Local currency (R$)
Working capital	6.75% (TR / 7.71% on 12.31.09)	6.81%	0.8	869.6	11.5	881.1	973.1	220.2
BNDES, FINEM, credit facilities of development banks and other secured debts	TJLP / 2.86% (TJLP / 2.79% on 12.31.09)	8.45%	5.8	577.8	1,356.4	1,934.2	2,101.4	538.3
Export credit facility	TJLP / CDI  4.42% (TJLP / CDI  3.6% on 12.31.09)	10.42% (10.14% on 12.31.09)	1.7	89.0	298.8	387.8	1,137.4	-
Tax incentives	IGPM / 1.40% (IGPM / 1% on 12.31.09)	3.00% (0.97% on 12.31.09)	5.6	-	12.9	12.9	4.4	463.3
FIDIC	-	-	-	-	-	-	353.4	-
Total local currency				1,536.4	1,679.6	3,216.0	4,569.7	1,221.8
Foreign currency
Advances on exchange contracts	5.29%  e.v. (USD on 12.31.09)	5.29% + e.v.(USD on 12.31.09)	-	-	-	-	53.5	443.7
Bonds	7.13%	7.13%	8	41.6	1,647.3	1,688.9	419.1	-
Working capital	EURIBOR + 1.20 %	0.41 % + e.v. (US$)	-	-	-	-	-	49.6
Export credit facility	LIBOR /  / CDI  2.24% (LIBOR /  / CDI  2.35% on 12.31.09)  e.v. (US$ and other currencies)	2.30% (2.77% on 12.31.09) + e.v. (US$ and other currencies)	2	593.0	1,515.3	2,108.3	3,719.4	3,494.0
BNDES, FINEM, credit facilities of development banks and other secured debts	-	-	-	56.7	133.0	189.7	292.4	85.3
Total foreign currency				691.3	3,295.6	3,986.9	4,484.4	4,072.6
Total indebtedness				2,227.7	4,975.2	7,202.9	9,054.1	5,294.4

(*)Weighted average maturity date in years.

F-82

BRF – Brasil Foods S.A.

Notes to Consolidated Financial Statements – (Continued)

Years ended December 31, 2010 and 2009

(Amounts expressed in millions of Brazilian reais, unless otherwise stated)

21.1.Working capital

Rural credit: The Company and its subsidiaries have rural credit facilities with several commercial banks that, according to a Federal Government program, offer loans as an incentive to rural activities. The funds originating from this financing facility are used as working capital.

PROCER – Credit facilities of BNDES: Through PROCER, BNDES grants operating credit facilities to help Brazilian agribusiness companies and agricultural companies.

Industrial credit notes: We issue Industrial Credit Notes, receiving credits from official funds (“Fundo de Amparo ao Trabalhador”) and from the Fundo Constitucional de Financiamento do Centro-Oeste. The notes have maturity periods of up to five years, maturing between 2011 and 2014. These notes are guaranteed by a pledge of machinery and equipment and real estate mortgages.

21.2.BNDES, FINEM, loan facilities of development banks and another secured debts

The Company and its subsidiaries have various outstanding obligations with the BNDES. The loans were executed for the acquisition of machinery, equipment and expansion of productive facilities. The principal and the interest of the FINEM loans are paid in monthly installments, maturing between 2011 and 2015, and are guaranteed by a pledge of equipment and facilities and mortgage on the property owned by the Company. The amounts of these loans are indexed by the UMBNDES basket of currencies, which is composed of the currencies in which BNDES obtains its resources. The impact of interest reflects the daily fluctuation of the currencies that form the basket.

PESA: Sadia has a loan facility obtained through the Special Program for Asset Recovery subject to the variations of the IGPM plus interest of 9.89% p.a., guaranteed by endorsements and liens of government debt securities.

21.3.Fiscal incentives

State Programs for Financing with Fiscal Incentive: Under the terms of these programs, we were granted credit proportional to the payment of ICMS generated by investments in the construction or expansion of industrial facilities in these states. The credit facilities have a term of 20 years and fixed or variable interest rates based on the IGPM plus a margin.

F-83

BRF – Brasil Foods S.A.

Notes to Consolidated Financial Statements – (Continued)

Years ended December 31, 2010 and 2009

(Amounts expressed in millions of Brazilian reais, unless otherwise stated)

21.4.Export credit facilities

Pre-payment of exports: Generally denominated in US dollars, maturing between 2011 and 2013. The export prepayment credit facilities are pegged to the LIBOR of three and six months plus spread. Under the terms of each one of these credit facilities, the Company receives loans guaranteed by accounts receivable relating to exports of our products to specific customers. The credit facilities are generally guaranteed by the Company. The main obligations of these contracts include limitations of guarantees, takeovers, and in a number of cases, financial obligations.

Business loan facilities: Indebtedness under the terms of these credit facilities is denominated in US dollars and maturities range from one to four years. Business loan facilities yield interest at the LIBOR rate plus a margin with quarterly, semi-annual and annual payments. Under the terms of each one of these credit facilities, the Company receives loans used in raw material imports and in other working capital requirements. The credit facilities are generally guaranteed by BRF - Brasil Foods S.A. The main obligations under the terms of these contracts include limitations on takeovers and sales of assets.

Credit facilities of BNDES - Exim: The Company has some credit facilities provided by BNDES for export financing with several commercial banks acting as intermediaries. These resources are pegged to the TJLP with maturity in 2012. Settlement occurs in the local currency without the risk associated with foreign exchange rate variation.

Advances on exchange contracts: Advances on exchange contracts (“ACCs”) are obligations with commercial banks, where the principal is settled through exports of products, as shipped. Interest is paid in the settlement of the foreign exchange and the contracts are guaranteed by the actual exported goods. When the export documents are delivered to the financing banks, these obligations start to be called advances against draft presentations (“ACEs”) and are written off only upon the final payment by the overseas customer. The regulation of the Brazilian Central Bank allows companies to obtain short-term financing under the terms of the ACCs with maturity in up to 360 days from the date of scheduled shipment of the exports, or short-term financing under the terms of the ACEs with maturity in up to 180 days from the date of the effective shipment of the exports, in each case at banks in Brazil, although they refer to loans denominated in US dollars. On December 31, 2010, the Company did not have any open ACC or ACE contract.

21.5.Bonds  

BFF notes: On January 28, 2010, BFF International Limited issued senior notes in the total value of US$750.0. The notes are guaranteed by BRF and by Sadia, witha nominal interest rate of 7.25% p.a. and effective rate of 7.31% p.a., maturing on January 28, 2010.

F-84

BRF – Brasil Foods S.A.

Notes to Consolidated Financial Statements – (Continued)

Years ended December 31, 2010 and 2009

(Amounts expressed in millions of Brazilian reais, unless otherwise stated)

Sadia Bonds: In the total value of US$250.0. The bonds are guaranteed by BRF and by Sadia, with an interest rate of 6.88% p.a. and maturing on May 24, 2017.

21.6.Debentures  

BRF issued 81,950 simple debentures, fully subscribed between June 30, 1998 and November, 21, 2010, to BNDES, with a unit nominal value of one real (R$ 1) and redemption period between June 15, 2001 and June 15, 2010, having been redeemed up to June 15, 2010 in full.

21.7.Long term debt maturity

The schedule of maturities of long term debts is presented below:

2012	2,030.1
2013	661.7
2014	195.4
2015	100.4
2016 to 2045	1,987.6
	4,975.2

Until September 30, 2010, the subsidiary Sadia operated with assignment of receivables in the domestic market issued by Sadia itself to Fundo de Investimentos em Direitos Creditórios (“FIDC”), these credit receivables investment fund was administrated by Concórdia S.A. Corretora de Valores Mobiliários, Câmbio e Commodities.

In the year ended December 31, 2010, Sadia received resources of R$3,138.1 for the sale of the above mentioned receivables (R$2,475.0 from July 8, 2009 to December 31, 2009), and incurred financial expenses of R$18.7 (R$17.1 from July 8, 2009 to December 31, 2009).

F-85

BRF – Brasil Foods S.A.

Notes to Consolidated Financial Statements – (Continued)

Years ended December 31, 2010 and 2009

(Amounts expressed in millions of Brazilian reais, unless otherwise stated)

21.8.Guarantees 

	12.31.10	12.31.09
Balance of financing	7,202.9	9,054.0
Mortgage guarantees:	1,668.1	2,042.8
Linked to FINEM-BNDES	1,438.8	1,852.2
Linked to FNE-BNB	165.5	165.5
Linked to tax incentives and other	63.8	25.1
Guarantees by means of fiduciary assignment of assets acquired under financing:	11.2	20.2
Linked to FINEM-BNDES	10.8	19.2
Linked to FINAME-BNDES	0.4	0.9
Linked to tax incentives and other	-	0.1

The subsidiary Sadia is the guarantor of a loan obtained by Instituto Sadia de Sustentabilidade at the National Bank for Economic and Social Development (“BNDES”). This loan is aimed at the implementation of biodigesters on the properties of the rural producers taking part in the Sadia integration system, targeting the mechanism of clean development and reduction of greenhouse gas emission. The value of these guarantees as of December 31, 2010 totaled R$ 83.9 (R$82.9 as of December 31, 2009).

Sadia is guarantor of loans related to a special program, which aimed the development of outgrowers in the central region of Brazil. The proceeds of such loans shall be utilized to improve farm conditions and will be paid in 10 years. The actual collateral is the land and equipment acquired by the outgrowers. The total of guarantee as of December 31, 2010 amounted R$562.4 (R$546.8 as of December 31, 2009).

The Company contracted guarantees in the amount of R$456.7 offered mainly in litigation which were discussed the use of tax credits. These guarantees have a average cost of 1.19% p.a.

21.9.Commitments 

In the normal course of business, the Company enters into regular agreements with third parties for the purchase of raw materials, mainly corn, soymeal and pork, where the agreed prices can be fixed or to be fixed. On December 31, 2010, these firm purchase commitments totaled R$1,819.1 in the consolidated statement (R$1,809.3 as of December 31, 2009), considering the market value of the commodities on the date of these financial statements.

21.10.Covenants 

The Company has foreign currency export prepayment financing agreement with habitual default clauses for these types of operation and that, if not complied with, may cause their due dates to be brought forward. On December 31, 2010, allthese conditions were met by the Company.

F-86

BRF – Brasil Foods S.A.

Notes to Consolidated Financial Statements – (Continued)

Years ended December 31, 2010 and 2009

(Amounts expressed in millions of Brazilian reais, unless otherwise stated)

Restrictive clauses (indicators to be achieved)	Indicator achieved
Net debt / shareholders' equity lower than 1.5	0.267
Net debt / EBITDA lower than 3.5	1.379
Minimum current liquidity of 1.1	1.750
Total liabilities less shareholders' equity / shareholders' equity  equal to or less than 2.2	0.855

22.OTHER FINANCIAL ASSETS AND LIABILITIES

	12.31.10	12.31.09	01.01.09
Derivative financial instruments
Cash flow hedge:
Assets:
Currency forward contracts (NDF)	85.4	22.1	-
Currency option contracts	2.1	-	-
Swap / currency contracts	-	2.7	68.5
	87.5	24.8	68.5
Liabilities:
Currency forward contracts (NDF)	-	(1.1)	-
Swap / currency contracts	(78.3)	(85.9)	(90.8)
	(78.3)	(87.0)	(90.8)
Derivatives not designated as hedge:
Assets:
Currency forward contracts (NDF)	11.1	2.8	10.7
Live cattle option contracts	-	-	-
Future contracts for dollars	-	-	-
	11.1	2.8	10.7
Liabilities:
Currency forward contracts (NDF)	(1.7)	(0.1)	(45.8)
Live cattle option contracts	(0.2)	-	-
Swap contracts	(0.9)	-	-
Future contracts for dollars	(1.1)	-	(10.1)
Future contracts for live cattle	-	-	-
	(3.9)	(0.1)	(55.9)
Current assets	98.6	27.6	79.2
Current liabilities	(82.2)	(87.1)	(146.7)

The collateral given in the transaction presented above are disclosed in note 9.

F-87

BRF – Brasil Foods S.A.

Notes to Consolidated Financial Statements – (Continued)

Years ended December 31, 2010 and 2009

(Amounts expressed in millions of Brazilian reais, unless otherwise stated)

23.LEASING  

The Company is lessee in many contracts, which can be classified as operating or financial lease.

23.1.Operating lease

The minimum future payments of operating lease agreements not cancelable, in total and for each of the following years, is presented below:

2011	162.6
2012	99.2
2013	1.1
2014	0.3
2015 and thereafter	0.1
	263.3

The payments of lease agreements recognized as expense amount to R$258.4 as of December 31, 2010 (R$178.7 as of December 31, 2010).

23.2.Financial  

The Company maintained control of the assets leased, reflected in the item of machines and equipment, whose amounts have the following balances:

	12.31.10	12.31.09	01.01.09
Cost	19.5	14.8	17.4
Accumulated depreciation (*)	(11.3)	(5.0)	(8.5)
Residual	8.2	9.8	8.9

(*) The leased assets are depreciated using the rate defined in note 18 for machinery and equipment or according to the duration of the contract, whichever is lower.

F-88

BRF – Brasil Foods S.A.

Notes to Consolidated Financial Statements – (Continued)

Years ended December 31, 2010 and 2009

(Amounts expressed in millions of Brazilian reais, unless otherwise stated)

The minimum mandatory future payments below are separated by categories and were entered in the balance sheet as other obligations:

	Present value of minimum payments 12.31.10	Interest 12.31.10	Minimum future payments 12.31.10
2011	5.6	0.4	5.9
2012	3.1	0.2	3.3
2013	0.8	0.1	0.9
2014	0.2	-	0.2
2015 and thereafter	-	-	0.1
	9.7	0.7	10.4

The Company does not have the option to acquire the leased assets after the expiration of the duration of the lease. Some contracts have clauses of renewal practiced in the market and there is no clause of contingent payment.

24.SHARE-BASED PAYMENTS

On March 30, 2010, the participants of a general meeting of shareholders approved the share option plan for officers of the Company and of its subsidiaries, consisting of two instruments: (i) share option plan, granted annually to the beneficiary and (ii) additional share option plan, optional for the beneficiary, who may adhere with part of their profit-sharing money. The basis of the vesting conditions will be the attainment of effective results and valuation of the Company’s business.

The plan includes shares issued by the Company up to the limit of 2% of the total stock, and its purpose is to: (i) attract, retain and motivate the beneficiaries; (ii) create value for shareholders; and (iii) encourage the view of entrepreneur of the business.

The plan is managed by the Board of Directors, within the limits established in the general guidelines of the plan and in the applicable legislation, which are disclosed in detail in the Company’s “Reference Form”.

The strike price of the options is determined by the Board of Directors and is equivalent to the average amount of the closing price of the share at the last twenty trading sessions of the Sao Paulo Stock Exchange, prior to the grant date, restated monthly by the variation of the Amplified Consumer Price Index (“IPCA”) between the grant date and the month prior to the remittance of the option exercise notice by the beneficiary.

The vesting period during which the participant cannot exercise the purchase ofthe shares is 3 years and will observe the following deadlines from the grant date of the option:

F-89

BRF – Brasil Foods S.A.

Notes to Consolidated Financial Statements – (Continued)

Years ended December 31, 2010 and 2009

(Amounts expressed in millions of Brazilian reais, unless otherwise stated)

i.up to 1/3 of the total options may be exercised after one year;

ii.up to 2/3 of the total options may be exercised after two years; and

iii.all the options may be exercised after three years.

After the vesting period and within no more than five days from the grant date, the beneficiary will lose the right to the unexercised options.

To satisfy the exercise of the options, the Company may issue new shares or use shares held in treasury.

The breakdown of the options granted in the period is shown below:

		Date	Quantity of granted shares	Fair value of granted option		Strike price	Quotation
Granted	Start	Final			Grant date	Updated by IPCA	Share as of 12.31.10
05.03.10	05.02.11	05.02.15	1,540,011	7.77	23.44	24.19	27.24
07.01.10	06.30.11	06.30.15	36,900	7.93	24.75	25.43	27.24

The weighted average of strike prices of the options is twenty-four Brazilian reais and twenty-one cents (R$24.21), and the weighted average of the remaining contractual term is 53.8 months.

On December 31, 2010, the Company recognized in shareholders’ equity the fair value of the options in the amount of R$4.8 and the same amount as expense in the statement of income.

The fair value of the stock options was measured indirectly using the Black-Scholes pricing model, based on the following assumptions:

	12.31.10
Expected maturity of the option:
Exercise in the 1st year	3.0 years
Exercise in the 2nd year	3.5 years
Exercise in the 3rd year	4.0 years
Risk-free interest rate	6.6%
Volatility	41.0%
Expected dividends over shares	1.1%
Expected inflation rate	5.0%

F-90

BRF – Brasil Foods S.A.

Notes to Consolidated Financial Statements – (Continued)

Years ended December 31, 2010 and 2009

(Amounts expressed in millions of Brazilian reais, unless otherwise stated)

24.1.Expected period

The lifetime of the option expected by the Company, representing the period in which it is believed that the options will be exercised and was determined under the assumption that the beneficiaries will exercise their options at the limit of the maturity period.

24.2.Risk-free interest rate

The Company uses as a risk-free interest rate the NTN-B (“National Treasury Bond”) available on the date of calculation and with maturity equivalent to the life of the option.

24.3.Volatility 

The estimated volatility took into account the weighting of the trading history of the Company and of similar companies in the market, considering the unification of Perdigão and Sadia under code “BRFS3.”

24.4.Expected dividends

The percentage of dividends used was obtained with a basis on the average payment of dividends per share in relation to the market value of the shares, for the past four years.

24.5.Expected inflation rate

The expected inflation rate is determined based on estimated INPC by Central Bank of Brazil, accumulated between the closing date of financial statements and the exercise date of the vested options.

On March 31, 2010, the shareholders of BRF - Brasil Foods S.A. approved, under the terms of the Association Agreement and of the stock option plan of Sadia, the migration of the options granted and not yet exercised by executives, before the association, to a new plan assumed by the Company, and that will maintain all the characteristics and conditions of the previous plan.

The breakdown of the options granted and outstanding as of December 31, 2010  of this plan is shown below:

	Date			Quantity based on BRF’ shares		Price of shares based on BRF’ shares		Quotation
Cycles	Granted	Start	Final	Granted options	Outstanding options	Grant date	Updated by INPC	Share on 12.31.10
2006	09.26.06	09.26.09	09.26.11	936,306	262,007	21.35	26.95	27.24
2007	09.27.07	09.27.10	09.27.12	1,329,980	658,340	37.70	45.33	27.24

F-91

BRF – Brasil Foods S.A.

Notes to Consolidated Financial Statements – (Continued)

Years ended December 31, 2010 and 2009

(Amounts expressed in millions of Brazilian reais, unless otherwise stated)

The pricing modal adopted and the assumptions related to definition of expected term, volatility of the share, expected dividends and inflation are the same adopted by the parent company.

The weighted average of strike prices of the options is R$37.74 (thirty seven Brazilian reais and seventy-four cents) and the weighted average of the remaining contractual period is 15.1 months. On December 31, 2010, all 920,317 outstanding stock options are exercisable.

The subsidiary Sadia recognized the fair value of the options in the amount of R$1.2 (R$3.8 as of December 31, 2009) in the account of other noncurrent liabilities on December 31, 2010.

The offsetting cost was recognized in net income for the period, under the heading of administrative expenses, totaling reversal of expense of R$2.5 in the period ended December 31, 2010 (R$4.3 of reversal of expense in the period from July 8, 2009 to December 31, 2009).

Also during the second half of 2010, the executives of Sadia exercised the right acquired referring to share options previously granted, in the total quantity of 79,800 shares, for the total amount of R$1.7, with average price of R$21.47 (twenty one Brazilian reais and forty-seven cents). Consequently the company recorded a write-off of R$0.1 of treasury shares and recorded an increase of R$1.6 in capital reserve.

25.SUPPLEMENTARY PLAN OF RETIREMENT AND OTHER BENEFITS TO EMPLOYEES

The Company offers supplementary retirement plans and other benefits to their employees.

The assets and actuarial liabilities and the movement of the obligations and rights related are presented below:

F-92

BRF – Brasil Foods S.A.

Notes to Consolidated Financial Statements – (Continued)

Years ended December 31, 2010 and 2009

(Amounts expressed in millions of Brazilian reais, unless otherwise stated)

	12.31.10		12.31.09
	PSPP	FAF	PSPP	FAF
Conciliation of assets and liabilities
Present value of actuarial obligations	(9.1)	(1,164.9)	(7.3)	(939.0)
Fair value of the assets	11.3	1,769.0	9.1	1,570.3
Net value of the (gains) losses	-	-	-	-
Surplus not acknowledged	(2.2)	(604.1)	(1.8)	(631.3)
(Liability)/net asset	-	-	-	-
Transfer of the net actuarial asset (liability)
Net asset (liability) of the plan on December 31, 2009	1.8	631.3	1.2	570.8
Revenue (expense) acknowledged in the income	0.3	82.7	-	37.6
Cost of service	-	(22.9)	-	(10.6)
Benefits paid	-	-	-	-
Contributions of the sponsor	-	-	-	-
Gain (loss) acknowledged via DRA	0.1	(87.1)	0.6	32.5
Net asset (liability) of the plan on December 31, 2010	2.2	604.0	1.8	630.3
Transfer of actuarial obligations
Present value of actuarial obligations on December 31, 2009	(7.3)	(939.0)	(5.7)	(904.3)
Interest on actuarial obligations	(0.8)	(108.3)	(0.7)	(52.8)
Cost of service	-	(22.9)	-	(10.6)
Benefits paid	0.6	54.7	0.6	28.1
Contributions of the sponsor	-	-	-	(2.7)
Actuarial gain (loss)	(1.7)	(149.5)	(1.4)	3.3
Present value of actuarial obligations on December 31, 2010	(9.2)	(1,165.0)	(7.2)	(939.0)
Transfer of the assets of the plan
Fair value of the assets of the plan on December 31, 2009	9.0	1,570.3	6.9	1,475.1
Expected yield of the plan	1.0	191.0	0.7	90.4
Cost of service	-	-	-	-
Benefits paid	(0.6)	(54.7)	(0.6)	(28.1)
Contributions of the sponsor	-	-	-	3.7
Actuarial gain (loss)	1.8	62.4	2.0	29.2
Fair value of the assets of the plan on December 31, 2010	11.2	1,769.0	9.0	1,570.3
Expenses and revenues realized
Cost of interest	(0.8)	(108.3)	(0.7)	(52.8)
Actuarial gain (loss)	-	-	-	-
Cost of service	-	(22.9)	-	(10.6)
Expected yield of the plan asset	1.0	191.0	0.7	90.4
Contributions/others	-	-	-	1.0
Total	0.2	59.8	-	28.0
Projected expenses and revenues
Cost of service	-	(28.1)	-	(22.9)
Cost of interest	(1.0)	(116.0)	-	(108.3)
Expected yield of the plan asset	1.5	195.9	-	191.0
Total	0.5	51.8	-	59.8
Actuarial premises
Economic hypothesis
Discount rate	11.78% p.y.	11.78% p.y.	11.19% p.y.	11.83% p.y.
Projected return on the assets	13.72% p.y.	13.72% p.y.	11.91% p.y.	12.35% p.y.
Inflation rate	5.65% p.y.	5.65% p.y.	4.50% p.y.	5.00% p.y.
Rate of salary growth	0.00% p.y.	0.00% p.y.	0.00% p.y.	6.58% p.y.
Demographic hypotheses
Mortality schedule	AT-2000	AT-2000	AT-1983	AT83
Schedule of mortality of the disabled	RRB-1983	RRB-1983	RRB-1983	IAPC

F-93

BRF – Brasil Foods S.A.

Notes to Consolidated Financial Statements – (Continued)

Years ended December 31, 2010 and 2009

(Amounts expressed in millions of Brazilian reais, unless otherwise stated)

25.1.Supplementary retirement plan

25.1.1.PSPP 

Perdigão Sociedade de Previdência Privada (“PSPP”) was created in April 1997, sponsored by the Company and its subsidiaries (except for Sadia). 

The purpose of PSPP is the management of supplementary plans of benefits of retirement for the employees of the sponsors. PSPP manages two retirement plans. Plan I, which is closed to new adhesions, and Plan II, which has been in operation since April 1, 2009.

In both plans, the contributions are made on a 1-to-1 basis (the contributions of the sponsor are equal to the basic contributions of the participants), and the actuarial calculations are made by independent actuaries, on a yearly basis, according to the rules in force. 

Should the participant end the employment relationship with the sponsor, the balance formed by the contributions of the sponsor not used for the payment of benefits, will form a fund of overage of contributions that may be used to compensate the future contributions of the sponsor. The asset presented in the balance of the fund of reversion amounts to R$4.1 (R$0.3 as of December 31, 2009) and was recorded by the Company in the ‘other rights’ item.

Although the plans offered by PSPP are basically of defined contribution, there is a small portion of defined benefits, as presented in the schedule above. The demographic data of the plan are presented below:

	Plan I	Plan II	Plan I	Plan II
	12.31.10		12.31.09
Number of active participants	2,344	11,735	2,758	12,604
Number of self-sponsored participants	19	85	96	3
Number of participants in deferred proportional benefit	9	30	48	3
Number of beneficiary participants	50	6	49	2
Contributions of the sponsor	276	6,649	3,791	2,234

The composition of the investment portfolios of the PSPP plans are presented below:

	PSPP
	12.31.10		12.31.09		01.01.09
Fund portfolio composition
Fixed income	133.7	73.7%	112.7	69.7%	107.9	83.5%
Variable income	47.8	26.3%	49.0	30.3%	21.4	16.5%
	181.5	100.0%	161.7	100.0%	129.3	100.0%

Note:  Fixed income lines up with 133.7 
        Variable income lines up with 47.8

F-94

BRF – Brasil Foods S.A.

Notes to Consolidated Financial Statements – (Continued)

Years ended December 31, 2010 and 2009

(Amounts expressed in millions of Brazilian reais, unless otherwise stated)

	PSPP
	12.31.10		12.31.09		01.01.09
Fixed income
Treasury obligations	25.9	19.3%	26.2	23.3%	18.5	17.1%
Treasury notes	68.1	51.0%	38.0	33.7%	45.4	42.1%
Bank deposit certificates	13.1	9.8%	12.1	10.7%	8.6	7.9%
Financial letters - CDI	14.5	10.8%	1.6	1.4%	-	-
Debentures	9.6	7.2%	3.6	3.2%	4.9	4.5%
Committed transactions	1.2	0.9%	30.7	27.2%	17.2	15.9%
Treasury bills	-	-	-	0.0%	12.3	11.3%
Others	1.3	1.0%	0.4	0.4%	1.2	1.1%
	133.7	100.0%	112.6	100.0%	108.1	100.0%
	PSPP
	12.31.10		12.31.09		01.01.09
Variable income
Stock	47.8	100.0%	48.9	99.8%	21.4	100.0%
Options	-	-	0.1	0.2%	-	-
Others	-	-	-	0.0%	-	-
	47.8	100.0%	49.0	100.0%	21.4	100.0%

The real return on assets of the plans in the fiscal year ended on December 31, 2010, was 5.5%.

25.1.2.FAF 

The subsidiary Sadia sponsors a plan of social-security benefits, in the modality of defined benefit, intended for its employees and administered by the Attilio Francisco Xavier Fontana Foundation (the “Foundation”).

The benefit of supplementary retirement is defined as the difference between (i) the benefit salary (updated average of the last 12 updated salaries of participation, capped at 80% of the last participation salary) and (ii) the value of the retirement paid by the official social-security regime. The benefit of supplementation is adjusted on a yearly basis at the National Consumer Price Index (“INPC”).

The actuarial regime adopted is that of capitalization for supplementation of retirements and pensions and simple sharing for the supplementations of sick pay.  The contribution of Sadia is made through a percentage that applies to the payroll of the active participants, according to the cost plan prepared on yearly basis by independent actuaries and approved by the Deliberative Council of the Foundation.

According to the bylaws of the Foundation, the sponsoring company is severally liable for the obligations contracted by the entity with its participants and dependents. 

As from January 1, 2003, the subsidiary Sadia started to offer a benefit plan in the modality of defined contribution managed by an open-ended entity ofsupplementary social security, for all the employees admitted by Sadia and its subsidiaries. The funding of the plan is proportional in relation to the basic monthly contribution (mandatory), whose portion of the subsidiary is equal to that made by the employee according to a scale of contribution based on salary ranges, which vary from 1.5% to 6% of the respective remuneration, in accordance with the ceiling of contribution that is updated every year.  The contributions made by Sadia in the fiscal year ended on December 31, 2010 amounted to R$2.6 (R$1.4 since July 8, 2009 until December 31, 2009), on that date the plan had 1,501 participants 1,566 participants on December 31, 2009).

F-95

BRF – Brasil Foods S.A.

Notes to Consolidated Financial Statements – (Continued)

Years ended December 31, 2010 and 2009

(Amounts expressed in millions of Brazilian reais, unless otherwise stated)

As demonstrated in the schedules above, the plans of PSPP and of FAF had assets in the fiscal years ended on December 31, 2010 and on December 31, 2009, and in the fiscal years starting on January 1, 2009, however, an asset could only be acknowledged if it is clearly evidenced that such asset could actually reduce the contributions of the sponsor or that it will be reimbursable in the future, based on the actuarial appraisals of these same year, the Company could not benefit from the surplus of the plans, therefore the assets appraised were not acknowledged in the consolidated financial statements. 

The demographic data of the plan is presented below:

	FAF
	12.31.10	12.31.09
Number of active participants	11,472	12,258
Number of self-sponsored participants	869	788
Number of participants in deferred proportional benefit	37	-
Number of beneficiary participants	4,563	4,369
Contributions of the sponsor	1,255	1,999

The composition of the investment portfolios of the FAF plans are presented below:

	FAF
	12.31.10		12.31.09
Fund portfolio composition
Fixed income	1.4	78.6%	1.3	80.5%
Variable income	0.2	12.5%	0.2	12.5%
Structured investments	-	0.6%	-	-
Real estate	0.1	7.6%	0.1	6.4%
Transactions with participants	-	0.6%	-	0.6%
	1.7	100.0%	1.6	100.0%

F-96

BRF – Brasil Foods S.A.

Notes to Consolidated Financial Statements – (Continued)

Years ended December 31, 2010 and 2009

(Amounts expressed in millions of Brazilian reais, unless otherwise stated)

	FAF
	12.31.10		12.31.09
Fixed income
Brazilian financial treasury bill	0.1	4.9%	0.1	7.0%
Brazilian treasury notes	0.6	43.2%	0.5	41.4%
Brazilian treasury certificates	0.1	4.4%	0.1	5.8%
Financial bill	-	2.5%	-	-
Time deposits	-	0.7%	-	-
Investment funds	-	1.0%	-	0.8%
Exclusive fund	0.6	43.3%	0.6	45.0%
	1.4	100%	1.3	100%
	FAF
	12.31.10		12.31.09
Variable income
Shares	0.1	27.4%	0.1	25.3%
Investment funds	-	4.4%	-	-
Exclusive fund	0.2	68.2%	0.2	74.7%
	0.3	100%	0.3	100%
	FAF
	12.31.10		12.31.09
Real estate
For own use	-	1.4%	-	1.1%
Leased to sponsors	0.1	92.2%	0.1	89.9%
Leased to others	-	3.8%	-	2.1%
Rights on the sale of properties	-	2.5%	-	6.9%
	0.1	100%	0.1	100%

The real return on assets of the plans in the fiscal year ended on December 31, 2010, was 6.67%.

25.2.Other benefits

The transfers of the assets and actuarial liabilities related to other benefits, prepared according to the actuarial report, are presented below:

F-97

BRF – Brasil Foods S.A.

Notes to Consolidated Financial Statements – (Continued)

Years ended December 31, 2010 and 2009

(Amounts expressed in millions of Brazilian reais, unless otherwise stated)

	12.31.10
	Award for length of service	Medical plan	FGTS penalty	Others
Conciliation of assets and liabilities
Present value of actuarial obligations	(47.3)	(67.2)	(137.9)	(22.0)
Fair value of the assets	-	-	-	-
Net value of the (gains) losses	-	-	-	-
Surplus not acknowledged	-	-	-	-
(Liability)/net asset	(47.3)	(67.2)	(137.9)	(22.0)
Transfer of the net actuarial asset (liability)
Net asset (liability) of the plan on January 1, 2010	(40.9)	(56.9)	(129.4)	(22.5)
Revenue (expense) acknowledged in the income	(4.6)	(6.5)	(14.4)	(2.4)
Cost of service	(4.4)	(2.4)	(12.1)	(1.4)
Benefits paid	-	-	1.8	-
Contributions of the sponsor	4.0	1.5	4.3	6.6
Gain (loss) acknowledged via DRA	(1.4)	(2.9)	11.9	(2.3)
Net asset (liability) of the plan on December 31, 2010	(47.3)	(67.2)	(137.9)	(22.0)
Transfer of actuarial obligations
Present value of actuarial obligations on January 1, 2010	(40.9)	(56.9)	(129.4)	(22.5)
Interest on actuarial obligations	(4.6)	(6.5)	(14.4)	(2.4)
Cost of service	(4.4)	(2.4)	(12.1)	(1.4)
Benefits paid	4.0	1.5	6.1	6.6
Contributions of the sponsor	-	-	-	-
Actuarial gain (loss)	(1.4)	(2.9)	11.9	(2.3)
Present value of actuarial obligations on December 31, 2010	(47.3)	(67.2)	(137.9)	(22.0)
Transfer of the assets of the plan
Fair value of the assets of the plan on January 1, 2010	-	-	-	-
Expected yield of the plan	-	-	-	-
Cost of service	-	-	-	-
Benefits paid	(4.0)	(1.5)	(4.3)	(6.6)
Contributions of the sponsor	4.0	1.5	4.3	6.6
Actuarial gain (loss)	-	-	-	-
Fair value of the assets of the plan on December 31, 2010	-	-	-	-
Expenses and revenues realized
Cost of interest	(4.6)	(6.5)	(14.4)	(2.5)
Actuarial gain (loss)	(1.1)	-	-	-
Cost of service	(4.7)	(2.4)	(12.1)	(1.4)
Expected yield of the plan asset	-	-	-	-
Contributions/others	-	-	-	-
Total	(10.4)	(8.9)	(26.5)	(3.9)
Projected expenses and revenues
Cost of service	(3.0)	(1.3)	(6.3)	(1.4)
Cost of interest	(3.1)	(4.3)	(6.6)	(2.2)
Expected yield of the plan asset	-	-	-	-
Total	(6.1)	(5.6)	(12.9)	(3.6)
Actuarial premises
Economic hypothesis
Discount rate	10.24% p.y.	10.24% p.y.	10.24% p.y.	10.24% p.y.
Projected return on the assets	-	N/A	N/A	N/A
Inflation rate	4.00% p.y.	4.00% p.y.	4.00% p.y.	4.00% p.y.
Rate of salary growth	6.08% p.y.	6.08% p.y.	6.08% p.y.	6.08% p.y.
Demographic hypotheses
Mortality schedule	N/A	N/A	N/A	N/A
Schedule of mortality of the disabled	N/A	N/A	N/A	N/A

F-98

BRF – Brasil Foods S.A.

Notes to Consolidated Financial Statements – (Continued)

Years ended December 31, 2010 and 2009

(Amounts expressed in millions of Brazilian reais, unless otherwise stated)

	12.31.09
	Award for length of service	Medical plan	FGTS penalty	Others
Conciliation of assets and liabilities
Present value of actuarial obligations	(41.0)	(56.8)	(129.3)	(22.6)
Fair value of the assets	(1.1)	-	-	-
Net value of the (gains) losses	-	-	-	-
Surplus not acknowledged	-	-	-	-
(Liability)/net asset	(42.1)	(56.8)	(129.3)	(22.6)
Transfer of the net actuarial asset (liability)
Net asset (liability) of the plan on January 1, 2009	(36.6)	(58.3)	(107.5)	(21.0)
Revenue (expense) acknowledged in the income	(2.9)	(4.5)	(9.7)	(1.2)
Cost of service	(2.7)	(1.8)	(7.6)	(0.6)
Benefits paid	1.1	-	-	-
Contributions of the sponsor	1.4	1.2	4.6	11.7
Gain (loss) acknowledged via DRA	(2.4)	6.6	(9.1)	(11.5)
Net asset (liability) of the plan on December 31, 2009	(42.1)	(56.8)	(129.3)	(22.6)
Transfer of actuarial obligations
Present value of actuarial obligations on January 1, 2009	(36.6)	(58.3)	(107.5)	(21.0)
Interest on actuarial obligations	(2.9)	(4.5)	(9.7)	(1.2)
Cost of service	(2.7)	(1.8)	(7.6)	(0.6)
Benefits paid	2.5	1.2	4.6	4.0
Contributions of the sponsor	-	-	-	7.7
Actuarial gain (loss)	(1.3)	6.6	(9.1)	(11.5)
Present value of actuarial obligations on December 31, 2009	(41.0)	(56.8)	(129.3)	(22.6)
Transfer of the assets of the plan
Fair value of the assets of the plan on January 1, 2009	-	-	-	-
Expected yield of the plan	-	-	-	-
Cost of service	-	-	-	-
Benefits paid	(1.4)	(1.2)	(4.6)	(4.0)
Contributions of the sponsor	1.4	1.2	4.6	4.0
Actuarial gain (loss)	(1.1)	-	-	-
Fair value of the assets of the plan on December 31, 2009	(1.1)	-	-	-
Expenses and revenues realized
Cost of interest	(2.9)	(4.5)	(9.7)	(1.2)
Actuarial gain (loss)	(0.3)	-	-	-
Cost of service	(3.6)	(1.8)	(7.6)	(0.6)
Expected yield of the plan asset	-	-	-	-
Contributions/others	(3.1)	-	-	7.8
Total	(9.9)	(6.3)	(17.3)	6.0
Projected expenses and revenues
Cost of service	(2.7)	(1.2)	(5.5)	(1.4)
Cost of interest	(3.2)	(4.3)	(6.3)	(2.5)
Expected yield of the plan asset	-	-	-	-
Total	(5.9)	(5.5)	(11.8)	(3.9)
Actuarial premises
Economic hypothesis
Discount rate	-	11.83% Yearly rate	11.83% p.y	11.83% p.y.
Projected return on the assets	-	N/A	N/A	N/A
Inflation rate	-	5.00% p.y.	5.00% p.y.	5.00% p.y.
Rate of salary growth	-	N/A	7.00% p.y.	7.00% p.y.
Demographic hypotheses
Mortality schedule	-	AT83	AT83	AT83
Schedule of mortality of the disabled	-	IAPC	N/A	N/A

F-99

BRF – Brasil Foods S.A.

Notes to Consolidated Financial Statements – (Continued)

Years ended December 31, 2010 and 2009

(Amounts expressed in millions of Brazilian reais, unless otherwise stated)

25.2.1.Medical plan

The Company registered the obligations resulting from Law No. 9.656 and Deliberation of the Council of Supplementary Health No. 21/99, which guarantees to the retired employee that contributed to the health plan by reason of employment relationship, for at least 10 years, the right of maintenance as beneficiary, on the same conditions of coverage enjoyed when the employment contract was in force, provided that they assume full payment.

If there was a variation of 1% in the tendency of evolution of the expenses with health care costs trend (HCCT), the corresponding liability would suffer the following impacts:

	12.31.10
	1%	-1%
Variation of the actuarial obligation	14.2	11.3

25.2.2.F.G.T.S. fine at the time of retirement of the employee

As settled by the Regional Labor Court (“TRT”) on April 20, 2007, retirement does not affect the employment contract between the Company and its employees, and so by means of actuarial calculation and based on the practices of discharge that the Company acknowledged the related liability.

25.2.3.Award for length of service

The Company usually rewards employees that attain at least 10 years of services rendered, the actuarial liability resulting from that practice was recorded in the balance sheet.

25.2.4.Severance pay

The executive officers discharged on the initiative of the Company, in addition to full pay, are eligible to receive a compensation equivalent to 0.5 salary in force at the time of discharge, for each year or fraction of year worked for Sadia.  The grant of this benefit is subject to an assessment of the career, performance and length of service of the beneficiary, actuarial liability resulting from that practice was recorded in the balance sheet.

25.2.5.Retirement compensation

By deliberation of the Company, the employee that works for at least 10 years will receive a bonus, the actuarial liability resulting from this practice was recorded in the balance sheet.

F-100

BRF – Brasil Foods S.A.

Notes to Consolidated Financial Statements – (Continued)

Years ended December 31, 2010 and 2009

(Amounts expressed in millions of Brazilian reais, unless otherwise stated)

The expenses incurred with all the benefits presented above were acknowledged in the statement of income in the item ‘other operating revenues (expenses)’ and include:  interest paid, actuarial gain (loss), cost of the service and revenue expected from the asset of the plan. 

The actuarial gains and losses acknowledged in other comprehensive results are presented below:

	12.31.10	12.31.09
At the beginning of the year	(23.1)	-
Rollforward	(16.8)	(23.1)
At the end of the year	(39.9)	(23.1)

26.Provision for tax, civil and labor

The Company and its subsidiaries are involved in certain legal proceedings arising from the regular course of business, which include civil, administrative, tax, social insurance and labor lawsuits.

The Company classifies the risk of adverse decisions in the legal suits as “remote”, “possible” or “probable”. The provisions recorded by the Company in its consolidated financial statements relating to such proceedings fairly reflect the probable losses as determined by the Company’s management, based on legal advice and for which the amount of probable losses is known or can be reasonably estimated.

The Company is involved in certain judicial proceedings for which the amount of probable losses is not known or cannot reasonably be estimated, especially in the civil area. The Company, with the assistance of its legal counsel, monitors the course of these claims and classifies the probability of losses in such cases as possible or remote.

The Company’s management believes that the recorded provision for contingencies, according to IAS 37 is sufficient to cover eventual losses related to its legal proceedings.

F-101

BRF – Brasil Foods S.A.

Notes to Consolidated Financial Statements – (Continued)

Years ended December 31, 2010 and 2009

(Amounts expressed in millions of Brazilian reais, unless otherwise stated)

26.1.Contingencies for probable losses

The provision for tax, labor and legal contingencies is summarized below:

	01.01.09	Business combination	Additions	Reversions	Payments	Price index update	12.31.09	Additions	Reversions	Payments	Price index update	12.31.10
Tax	153.2	102.7	34.0	(89.2)	(7.9)	11.8	204.6	105.8	(26.0)	(12.1)	8.8	281.1
Labor	51.6	46.3	44.6	(20.1)	(28.3)	4.6	98.7	82.5	(14.3)	(68.4)	11.7	110.2
Civil, commercial and other	14.3	80.2	23.6	(20.4)	(2.8)	3.1	98.0	48.2	(41.9)	(10.9)	3.8	97.2
Contingent liabilities	-	630.3	-	-	-	-	630.3	-	-	-	-	630.3
	219.1	859.5	102.2	(129.7)	(39.0)	19.5	1,031.6	236.5	(82.2)	(91.4)	24.3	1,118.8
Current	38.9						91.3					65.1
Non-current	180.2						940.3					1,053.7

26.1.1.Tax  

The tax contingencies classified as probable losses involve the main legal proceedings:

Income tax and social contribution: the subsidiary Sadia registered a R$23.2 provision (R$21.7 as of December 31, 2009) related to (i) R$15.3 (R$14. 2 as of December 31, 2009) relating to a tax assessment notice challenging the correctness of Granja Rezende’s taxable income (merged in 2002); (ii) R$6.3 (R$6.1 as of  December 31, 2009) relating to a tax assessment notice alleging undue offsetting of income tax withheld on Granja Rezende’s financial investments; and (iii) R$1.6 (R$1.4 as of  December 31, 2009) relating to other provisions.

CPMF over export revenues:BRF registered a provision for contingency in the amount of R$14.0 (R$22.7 as of December 31, 2009) regarding a judicial proceeding for the non-payment of the provisory contributions on financial activities (“CPMF”) charged on the income from exports. The Company’s lawsuit is currently at the Third Region Federal Court of Appeals (“TRF”), pending decision of an appeal.

F-102

BRF – Brasil Foods S.A.

Notes to Consolidated Financial Statements – (Continued)

Years ended December 31, 2010 and 2009

(Amounts expressed in millions of Brazilian reais, unless otherwise stated)

ICMS:BRF is mainly involved in administrative and judicial tax disputes associated with the register of ICMS tax credits on certain transactions, such as the acquisition of consumption materials and the register of tax credits with monetary correction. The provision amounts to R$34.1 (R$34.1 as of December 31, 2009).

The subsidiary Sadia is involved in several administrative proceedings regarding ICMS, in a total amount of R$32.6 (R$30.4 as of December 31, 2009), mainly associated to customs clearance processes, debits arising from accessory obligations and register of credits on consumption materials.

PIS and COFINS:BRF is involved in an administrative proceeding regarding the utilization of tax credits to offset federal taxes, in the amount of R$34.1 (R$33.6 as of December 31, 2009).

Other tax contingencies: the subsidiary Sadia registered other provisions related to the payment of social security contributions, PIS tax, duties and other taxes in a total amount of R$41.2 (R$39.7 as of December 31, 2009).

26.1.2.Labor 

The Company is defendant in several labor claims in progress, mainly related to overtime and salary inflation adjustments for periods prior to the introduction of the Brazilian real, illnesses allegedly contracted at work and work-related injuries and others. The labor suits are mainly in the lower courts, and for the majority of the cases a decision for the dismissal of the pleadings has been granted. None of these suits are individually significant. The Company recorded a provision based on past history of payments. Based on the opinion of the Company’s management and its legal counsel, the provision is sufficient to cover probable losses.

26.1.3.Civil, commercial and others:

Civil contingencies are mainly related to lawsuits referring to traffic accidents, moral and property damage, physical casualties and others. The civil actions are mostly in the lower courts, in the evidentiary phase, depending on confirmation or absence of the Company’s guilt.

26.2.Contingencies and possible losses:

The Company is involved in other tax, civil, labor and social security contingencies, for which losses have been assessed as possible, based on the analysis of Company’s management and its legal counsels.

The tax contingencies amounted to R$3,523.6 (R$2,896.4 as of December 31,

2009), of which R$578.5 (R$578.5 as of December 31, 2009) relate to the corresponding fair value estimate resulting from the business combination with Sadia (see note 7), according to paragraph 23 of IFRS 3. The most relevant aspects associated to the matter are listed below:

F-103

BRF – Brasil Foods S.A.

Notes to Consolidated Financial Statements – (Continued)

Years ended December 31, 2010 and 2009

(Amounts expressed in millions of Brazilian reais, unless otherwise stated)

Profits earned abroad:On October 3, 2008, the subsidiary Perdigão Agroindustrial S.A. (merged on March 9, 2009) was assessed by the Brazilian Internal Revenue Service which alleges the lack of collection of income tax and social contribution on profits earned by subsidiaries established abroad in 2003 and 2004, in the total amount of R$164.8 as of December 31, 2009 (R$155.8 as of December 31, 2008). The probability of loss related to this case has been assessed as possible based on the fact that the subsidiary abroad is subject to full taxation in the country in which it is based and this determination is protected by the treaty signed between Brazil and Austria to avoid double taxation. A temporary favorable decision was granted to the Company, thus the estimated outcome is still considered possible.

ICMS: the Company is involved in several administrative and judicial proceedings related to ICMS tax credits on the acquisition of essential products with a reduced tax burden (“cesta básica”) in the amount of R$388.9 (R$255.8 as of December 31, 2009); register of ICMS tax deemed credits in the amount of R$10.8 (R$82.0 as of December 31, 2009); ICMS tax benefits granted by certain states (“Guerra fiscal”) in the amount of R$1,057.3 (R$877.1 as of December 31, 2009) and R$564.9 (R$350.7 as of December 31, 2009) related to other cases.  Company believes that the related leading-case related to essential products can be settled during year 2011.

PIS and COFINS on payment of interest on shareholder’s equity: the Company has filed a lawsuit to challenge the levy of the PIS and COFINS taxes on the payment of interest on shareholders’ equity with respect to the 2002-2008 period for the PIS tax and to the 2004-2008 period for the COFINS tax at a total amount of R$43.9 (R$41.4 as of December 31, 2009). The Company’s management and its outside counsel classify the chances of loss as possible, thus no provision has been recorded.

IPI Premium Credit: the subsidiary Sadia is a defendant in a tax foreclosure in the amount of R$387.3 (R$364.6 as of December 31, 2009), related to the offset of IPI tax premium credits against other federal taxes. The subsidiary has offset the taxes based on a final and non appealable favorable decision.

Other tax contingencies: the subsidiary Sadia has other pending administrative and judicial cases in the amount of R$473.9 (R$400.6 as of December 31, 2009) related to social security contributions (R$121.9 and 115.4 as of December 31, 2009), income tax, social contribution and withholding income tax (R$158. 5 and 119.7 as of December 31, 2009), PIS and COFINS taxes (R$104.3 and R$83.5 asof December 31, 2009), IPI in the amount of R$54.9 (R$27.5 as of December 31, 2009) and others in the amount of R$34.1 (R$54.4 as of December 31, 2009).

F-104

BRF – Brasil Foods S.A.

Notes to Consolidated Financial Statements – (Continued)

Years ended December 31, 2010 and 2009

(Amounts expressed in millions of Brazilian reais, unless otherwise stated)

Civil lawsuits: As of September 30, 2010, the subsidiary Sadia has other civil contingencies in the amount of R$70.6 (R$76.7 as of December 31, 2009) which were evaluated as possible losses by the Company’s management and legal advisors, and, therefore, no provision was recorded.

The subsidiary Sadia and some of its current and former executives were named as defendant in five class actions suits arising from investors of American Depositary Receipts (“ADRs”) issued by Sadia and acquired between April 30, 2008 and September 26, 2008 (Class Period). These claims were filed in the Southern District of New York federal court in the United States of America, seeking remediation in accordance with U.S. Securities Exchange Act of 1934 arising from losses on foreign exchange derivative contracts. By order of the U.S. court, the five class actions suits were consolidated into a single case (class action) on behalf of the Sadia’s investors group. Considering the current stage of the action it is not possible to determine the probability of loss and the related amount and, therefore, no provision was recorded. The Company’s management has not disclosed additional information related to this suit because doing so would impair its defense in the court.

27.SHAREHOLDERS’ EQUITY 

27.1.Capital stock

On December 31, 2010, the capital subscribed and paid by the Company is R$12,553,417,953.36 (twelve billion, five hundred and fifty-three million, four hundred and seventeen thousand, nine hundred and fifty-three Brazilian reaisand thirty-six cents), composed of 872,473,246 book-entry shares of common stock without par value.  The realized value of the capital stock in the balance sheet is net of the expenses with public offering in the amount of R$92.9.

The Company is authorized to increase the capital stock, irrespective of amendment to the bylaws, up to the limit of 1,000,000,000 shares of common stock, in book-entry form, and without par value.

On March 31, 2010, the Board of Directors approved a split of shares of the Company at the ratio of 100% with a issuance of one-for-one of shares currently existing and also promoted a change in the proportion of the ADR program, equating the ADRs to the same proportional basis, so that each share corresponds to one ADR.

F-105

BRF – Brasil Foods S.A.

Notes to Consolidated Financial Statements – (Continued)

Years ended December 31, 2010 and 2009

(Amounts expressed in millions of Brazilian reais, unless otherwise stated)

27.2.Composition of the capital stock by nature

	12.31.10	12.31.09	01.01.09
Common shares (thousands)	872,473,246	872,473,246	413,916,206
Treasury shares (thousands)	(781,172)	(2,452,180)	(860,970)
Outstanding shares	871,692,074	870,021,066	413,055,236

27.3.Transfer of capital stock

	Quantity of shares (thousands)	Capital amount
Capital subscribed in 01.01.09	206,958,103	3,445.0
Issuance for shares exchange as of July 8, 2009	37,637,557	1,482.9
Issuance for fund-raising as of July 27, 2009	115,000,000	4,600.0
Issuance for shares exchange as of August 18, 2009	59,390,963	2,335.5
Issuance for fund-raising as of August 20, 2009	17,250,000	690.0
Shares issuance costs	-	(91.6)
Capital subscribed in 12.31.09	436,236,623	12,461.8
Split of shares	436,236,623	-
Completion of issuance costs	-	(1.3)
Capital subscribed in 12.31.10	872,473,246	12,460.5

F-106

BRF – Brasil Foods S.A.

Notes to Consolidated Financial Statements – (Continued)

Years ended December 31, 2010 and 2009

(Amounts expressed in millions of Brazilian reais, unless otherwise stated)

27.4.Shareholders’ remuneration

	12.31.10	12.31.09
Net income	804.1	123.0
Adjustment to IFRSs	-	(26.9)
Net income recorded according to previous criteria	804.1	96.1
Legal reserve (5%)	(40.2)	(4.8)
Dividends calculation base	763.9	91.3
Distribution of dividends:
Interest on shareholders' equity	(262.5)	(100.0)
Withholding income tax on shareholders' equity	(17.6)	(8.5)
Total of distribution of dividends	(280.1)	(108.5)
Percentage of calculation base	34.83%	88.17%
Interest on shareholders' equity	(209.3)	(100.0)
	(209.3)	(100.0)
Dividends paid per share	0.30166	0.22999

27.5. Profit distribution

	Limit on capital %	Income appropriation		Reserve balances
		2010	2009	2010	2009
Adjustment to IFRSs		204.6	26.8	-	-
Interest on shareholders' equity	-	262.5	100.0	-	-
Legal reserve	20	40.2	4.8	111.2	71.0
Reserve for capital increase	20	119.9	-	280.1	160.2
Reserve for expansion	80	176.9	(8.6)	673.3	496.4
		804.1	123.0	1,064.6	727.6

Legal reserve: Five percent (5%) towards the establishment of the Legal Reserve, which shall not exceed twenty percent (20%) of the capital stock.

Reserve for capital increase: Twenty percent (20%) towards the establishment of reserves for capital increase, which shall not exceed twenty percent (20%) of the capital stock.

Reserve for expansion: up to 50% (fifty per cent) for the constitution of the reserve for expansion, this reserve not to exceed 80% (eighty per cent) of the capital stock.

27.6.Treasury share

The Company has 781,172  treasury shares (after the share split mentioned in

item (a) above), acquired in previous fiscal years with funds from appropriated retained earnings, at the average cost of 95 cents ofreal (R$0.95) per share, for future disposal or cancellation.  The decrease in the number of shares of treasury stock took place because of the exercise of the stock options of Sadia executives.

F-107

BRF – Brasil Foods S.A.

Notes to Consolidated Financial Statements – (Continued)

Years ended December 31, 2010 and 2009

(Amounts expressed in millions of Brazilian reais, unless otherwise stated)

Additionally, on July 7, 2010, as set forth in the association contract between the BRF subsidiary Sadia, Concórdia Holding Financeira SA exercised the share option of 1,507,210 shares issued by the BRF.

27.7.Breakdown of the capital by owner

The shareholding position of the largest shareholders, management, members of the Board of Directors and Audit Committee of the Company is presented below (unaudited):

	2010		2009			2008
Shareholders	Quantity	%	Quantity	%		Quantity	%
Major shareholders
Shareholders who constitute the voting agreement	244,567,498	28.03	246,131,222	28.21		149,180,354	36.04
Tarpon	61,106,290	7.00	-	-	��	-	-
Fundo Bird	-	-	30,031,734	3.44		30,031,734	7.26
Managers:
Board of directors	14,313,032	1.64	14,301,584	1.64		613,390	0.15
Executives	646	-	646	-		646	-
Treasury shares	781,172	0.09	2,452,180	0.28		860,970	0.20
Other shareholders	551,704,608	63.24	579,555,880	66.43		233,229,112	56.35
	872,473,246	100.00	872,473,246	100.00		413,916,206	100.00
Outstanding shares	551,704,608	63.24	579,555,880	66.43		233,229,112	56.35

The shareholding position of the controlling shareholders that belong to the voting agreement and/or holders of more than 5% of the voting stock is presented below:

	2010		2009		2008
Shareholders	Quantity	%	Quantity	%	Quantity	%
Brasil (¹)	110,846,320	12.70	119,087,140	13.65	58,610,522	14.16
Petros(¹)	87,560,126	10.04	79,694,726	9.13	49,848,526	12.04
Fundação Sistel de Seguridade Social(¹)	13,127,812	1.50	13,317,982	1.53	16,569,864	4.00
Fundação Vale do Rio Doce de Seg. Social - Valia (¹)	25,828,036	2.96	25,998,170	2.98	15,390,704	3.72
FPRV1 Sabiá FIM Previdenciário(³)	7,205,204	0.83	8,033,204	0.92	4,573,124	1.10
Tarpon	61,106,290	7.00	-	-	-	-
Fundo Bird (²)	-	-	30,031,734	3.44	30,031,734	7.26
Real Grand.Fund. de Prev.Assist.Social(¹)	-	-	-	-	4,187,614	1.02
	305,673,788	35.03	276,162,956	31.65	179,212,088	43.30
Others	566,799,458	64.97	596,310,290	68.35	234,704,118	56.70
	872,473,246	100.00	872,473,246	100.00	413,916,206	100.00

(1) The pension funds are controlled by employees that participate in the respective companies.

(2) Is not a party to the voting agreement signed by the Pension Funds, belonging to the Shan Ban Shun family.

(3) Investment fund held solely by theFundação de Assistência e Previdência Socialof BNDES-FAPES. The shares of common stock currently held by this fund are tied to the voting agreement signed by the Pension Funds.

The Company is associated with the arbitration of the Arbitration Chamber of the

Market, according to the Arbitration Clause inserted in its Bylaws.

F-108

BRF – Brasil Foods S.A.

Notes to Consolidated Financial Statements – (Continued)

Years ended December 31, 2010 and 2009

(Amounts expressed in millions of Brazilian reais, unless otherwise stated)

28.EARNINGS PER SHARE

	12.31.10	12.31.09
Basic numerator:
Net income for the year attributable to BRF shareholders	804.1	123.0
Basic denominator:
Ordinary shares	872,473,246	872,473,246
Weighted average number of outstanding shares (except treasury shares)	870,887,093	604,119,958
Net earnings per share - basic - R$	0.92	0.20
	12.31.10	12.31.09
Diluted numerator:
Net income for the year attributable to BRF shareholders	804.1	123.0
Diluted denominator:
Weighted average number of outstanding shares (except treasury shares)	870,887,093	604,119,958
Weighted average number of potential shares	2,078,063	2,025,071
Net earnings per share - diluted - R$	0.92	0.20

On December 31, 2010, the total quantity of 658,340 common stock options (1,155,752 on December 31, 2009) was not considered in the calculation of the diluted earnings per share due to the fact that the strike price was higher than the average market price of the common shares during the year and, therefore, the effect could not be diluted.

F-109

BRF – Brasil Foods S.A.

Notes to Consolidated Financial Statements – (Continued)

Years ended December 31, 2010 and 2009

(Amounts expressed in millions of Brazilian reais, unless otherwise stated)

29.RELATED PARTIES 

During its operations, rights and obligations are contracted between related parties, resulting from transactions of purchase and sale of products, transactions of loan agreed on normal conditions of market for similar transactions, based on contract.

The Company entered into loans agreements with its subsidiaries. A summary of the balances and interest rates charged, for transactions above R$10.0, on the closing date of the financial statements is presented below: 

Counterparty
Creditor	Debtor	12.31.10	Interest rate
BFF International	Perdigão International	714.6	1.8% p.a. + E.R. - US$
BFF International	Wellax Food Comércio	487.5	8.0% p.a. + E.R. - US$
Crossban Holdings	Perdigão International	178.0	Eurolibor + E.R. - EURO
Perdix International Foods	Perdigão Holland BV	36.4	8.0% p.a. + E.R. - EURO
Perdigão Holland BV	Plusfood BV	17.8	6.0% p.a. + E.R. - EURO

29.1.Other related parties

The wholly-owned subsidiary Sadia entered into an operational leasing agreement with FAF. The total rent expense for the three month period ended December 31, 2010 amounted R$12.1 (R$12.7 as of December 31, 2009), the lease monthly payments were established in an arms-length transaction basis.

29.2.Management remuneration 

The key personnel of management include the directors and officers, members of the executive committee and the chief of internal audit, on December 31, 2010, were 41 professionals and on December 31, 2009, were 67 professionals. 

The total remuneration and benefits paid to these professionals are demonstrated below:

F-110

BRF – Brasil Foods S.A.

Notes to Consolidated Financial Statements – (Continued)

Years ended December 31, 2010 and 2009

(Amounts expressed in millions of Brazilian reais, unless otherwise stated)

Pay of principal executives:
	12.31.10	12.31.09
Salary and profit sharing	41.0	32.8
Short-term benefits of employees (a)	1.5	1.3
Post-employment benefits	0.2	0.5
Severance benefits	3.2	8.8
Stock-based payment	1.3	-
	47.2	43.4

(a) Include: medical care, education expenses and others.

The value of the participation in the results paid to each officer in any fiscal year is related especially to the net income of the Company and to the assessment of the performance of the director during the fiscal year by the Board of Directors. 

The supplementary members of the Board of Directors and of the Audit Committee are compensated for each meeting that they attend to.  The members of the Board of Directors and Audit Committee have no employment connection with the Company or provide services of any kind. 

When the management and employees attain the age of 61 years, retirement is mandatory.

30.SALES REVENUE

	12.31.10	12.31.09
Revenue:
Domestic sales	16,606.6	11,618.6
Foreign sales	9,426.8	6,749.0
	26,033.4	18,367.6
Sales deductions:
Sales tax	(2,758.8)	(2,059.0)
Refunds and rebates	(593.3)	(402.8)
	22,681.3	15,905.8

31.RESEARCH AND DEVELOPMENT COSTS

Consisting of expenditures with internal research and development of new products; recognized when incurred in the statement of income. The total expenditure with research and development in the year ended December 31, 2010 is R$20.7 (R$17.4 for the year ended December 31, 2009).

32.EXPENSES WITH EMPLOYEE’S REMUNERATION 

F-111

BRF – Brasil Foods S.A.

Notes to Consolidated Financial Statements – (Continued)

Years ended December 31, 2010 and 2009

(Amounts expressed in millions of Brazilian reais, unless otherwise stated)

	12.31.10	12.31.09
Salaries and social charges	2,221.8	2,014.8
Social security cost	532.3	491.5
F.G.T.S.	148.1	137.1
Medical and outpatient assistance	125.2	115.5
Supplementary retirement plan	12.6	12.5
Profit sharing	44.8	40.4
Other benefits	354.6	321.1
Provision for contingencies	85.9	22.5
	3,525.3	3,155.4

33.OTHER OPERATING REVENUES (EXPENSES), NET

	12.31.10	12.31.09
Revenues:
Net gains from the disposal of property, plant and equipment	-	24.4
Net gains from the disposal of investments	-	60.6
Insurance indemnity	9.0	141.8
Benefit plan	31.9	-
Expenses recovery	35.3	-
Scrap sales	19.9	-
Other revenues	11.4	16.4
	107.5	243.2
Expenses:
Net losses from the disposal of fixed assets	(26.3)	4.9
Idleness costs	(144.3)	(133.9)
Insurance claim losses	(8.5)	(185.6)
Employee participation	(142.6)	(66.4)
Project cancellation	(3.1)	(11.1)
Contract indemnification	(26.5)	(11.5)
Other employee benefits	(46.0)	(14.7)
Provision for tax risks	(73.9)	(74.0)
Other expenses	(30.2)	(53.7)
	(501.4)	(546.0)
Other operating expenses, net	(393.9)	(302.8)

F-112

BRF – Brasil Foods S.A.

Notes to Consolidated Financial Statements – (Continued)

Years ended December 31, 2010 and 2009

(Amounts expressed in millions of Brazilian reais, unless otherwise stated)

34.FINANCIAL INCOME (EXPENSES), NET 

	12.31.10	12.31.09
Financial income:
Interest on financial investments:	16.5	27.5
Foreign-exchange variation on financial investments	31.3	42.9
Interest on assets	42.6	34.4
Foreign-exchange variation on assets	62.0	56.0
Interest of financial assets classified as:
Available for sale	32.1	33.9
Held for negotiation	112.1	133.5
Held until the maturity	20.3	2.7
Gains from transactions with derivatives	24.5	19.5
Revenue from the interest on loans to related parties	9.8	1.7
Gains from the conversion of investments abroad	64.0	41.0
Present value adjustments	85.7	34.6
Revenue from foreign-exchange variation on loans	70.8	585.3
Revenue from foreign-exchange variation on other liabilities	218.8	451.5
Financial revenues from the acquisition of raw materials	3.8	12.6
Amortization of fair value of others	23.2	21.3
Other revenues	62.7	26.7
	880.2	1,525.1
Financial expenses:
Interest on loans	(509.8)	(447.8)
Foreign-exchange variation on loans.	(127.4)	(93.6)
Interest on liabilities	(25.7)	(19.9)
Foreign-exchange variation on liabilities	(156.0)	321.2
Financial expenses on the acquisition of raw materials	(27.5)	(21.5)
Losses from transactions with derivatives	(83.2)	(315.6)
Losses from the conversion of investments abroad	(160.2)	(298.9)
Present value adjustments	(110.2)	(34.9)
Expense from foreign-exchange variation on investments	(37.6)	(21.6)
Expense from foreign-exchange variation on other assets	(50.8)	(196.2)
Other expenses	(74.9)	(133.8)
	(1,363.3)	(1,262.6)
Net financial (expense) income, net	(483.1)	262.5

F-113

BRF – Brasil Foods S.A.

Notes to Consolidated Financial Statements – (Continued)

Years ended December 31, 2010 and 2009

(Amounts expressed in millions of Brazilian reais, unless otherwise stated)

35.STATEMENT OF INCOME BY NATURE

The Company presents its statement of income by function and thus is presented below the statement of income by nature:

	12.31.10	12.31.09
Cost of sales:
Costs of inventories	12,392.6	9,089.0
Depreciation	616.0	395.5
Amortization	17.5	10.5
Salaries and benefits to employees	2,162.9	1,614.4
Others	1,762.2	1,619.5
	16,951.2	12,728.9
General and administrative expenses:
Depreciation	3.4	9.0
Amortization	6.9	1.1
Salaries and benefits to employees	139.5	124.4
Others	183.1	87.7
	332.9	222.2
Sales expenses:
Depreciation	21.0	9.4
Amortization	17.0	0.1
Salaries and benefits to employees	703.7	464.0
Others	2,781.4	2,103.6
	3,523.1	2,577.1

F-114

BRF – Brasil Foods S.A.

Notes to Consolidated Financial Statements – (Continued)

Years ended December 31, 2010 and 2009

(Amounts expressed in millions of Brazilian reais, unless otherwise stated)

36.INSURANCE COVERAGE

The Company adopts the policy of contracting insurance coverage for assets subject to risks in amounts sufficient to cover any claims, considering the nature of its activity. The assumptions and risks adopted, given their nature, are not part of the scope of an audit and, therefore, were not audited by our independent accountants.

		12.31.10
		Unaudited
Insured property	Coverage	Values at risk	Amount of coverage
Inventories and fixed assets	Fire, lightning, explosion, windstorm, deterioration of refrigerated products, breakdown of machinery, loss of profit, and others	20,431.0	1,356.0
National transport	Road risk and civil liability of cargo carrier	23,604.9	10,290.3
International transport exports	-	2,375.2	1,308.5
International transport imports	-	358.0	395.6
General civil liability and for directors and officers	Third party claims	48,969.6	224.6
Credit	Client default	4,504.5	10,392.7

37.NEW RULES AND PRONOUCEMENTS NOT ADOPTED

The interpretations and amendments to the rules existent below, applicable to the following accounting periods, were published by IASB and its application to the financial statements of the Company to be filed with CVM (the Brazilian Securities Commission) only if there is a Deliberation by that agency, therefore, there was no anticipated adoption of these rules. 

IAS 12, Deferred Taxes: 

On December 2010, IASB issued a review of rule IAS 12. The amendment addresses aspects related to the determination of the manner expected of recovery of the deferred income tax when the ownership of the investment is measured by the model of fair value of IAS 40.  This rule is effective for the fiscal years starting on or after January 1, 2012. The Management of the Company does not predict impacts resulting from the adoption of that amendment to its financial statements.

IFRS 9, Financial Instruments: 

On October 2010, IASB issued a review of rule IFRS 9. The amendment to rule IFRS 9 introduced new requirements for the classification and measurement of financial assets.  The rule will apply as from January 1, 2013. The company is assessing the effects of the application of that rule and possible differences in relation to IAS 39. 

F-115

BRF – Brasil Foods S.A.

Notes to Consolidated Financial Statements – (Continued)

Years ended December 31, 2010 and 2009

(Amounts expressed in millions of Brazilian reais, unless otherwise stated)

IFRIC 19, Termination of the Financial Liabilities with Property Instruments:  

On November 2009, IFRIC issued interpretation 19. The interpretation explained the recording by an entity when the periods for a financial liability are renegotiated and result in the issuance by the entity of property instruments to a creditor of the entity to terminate all or part of the financial liability (conversion of the debt).  This requires that a gain or loss must be acknowledged in the result, which is measured as the difference between the book value of the financial liability and the fair value of the property instruments issued.  If the fair value of the financial instruments issued cannot be measured in a reliable manner, the property instruments must be measured to reflect the fair value of the terminated financial liability.   The Company is assessing the possible effects that may result from the adoption of this statement and one does not expect the existence of a significant impact on the statements of the Company or controller.  This statement will apply to the financial statements for the fiscal years initiated on or after July 1, 2010.

IFRIC 14, Pre-payments of Applications of Minimum Investments:

On November 2009, IFRIC issued amendments to interpretation 14. The amendments sought to permit the acknowledgment as an asset of some voluntary anticipated payments to minimum contributions to funds.  The Company is assessing the possible effects that may result from the adoption of this statement and one does not expect the existence of a significant impact on the statements of the Company.  The amendments apply to the financial statements for the fiscal years initiated on or after January 1, 2011.

IFRS 7, Disclosures of Transfers of Financial Assets: 

On January 2010, IASB issued changes to IFRS 1 and IFRS 7, which address aspects of disclosure of comparative information of financial instruments.  These amendments are effective for yearly periods initiated on/or after July 1, 2010. The Management of the Company understands that the amendments to this interpretation will not affect the financial statements.

IAS 32, Classification of Issuance of Rights: 

On October 2009, IASB issued a review of rule IAS 32, which deals with contracts that will be or may be liquidated by means of property instruments of the entity and establish that rights, options or guarantees to acquire a fixed quantity of shares of an entity for a fixed amount of some currency are property instruments.  The amendment to this rule is effective for yearly periods initiated on/or after February 1, 2010. The amendments to this rule shall not impact the financial statements of the Company. 

F-116

BRF – Brasil Foods S.A.

Notes to Consolidated Financial Statements – (Continued)

Years ended December 31, 2010 and 2009

(Amounts expressed in millions of Brazilian reais, unless otherwise stated)

Improvements on IFRSs 2010:

In May 2010, IASB issued a review of rules IFRS 1, IFRS 3, IFRS 7, IAS 1, IAS 27, IAS 34 and IFRIC 13. The amendment to rule IFRS 3 is effective for the yearly periods starting on/or after July 1, 2010. The other changes to the rules are effective for yearly periods starting on/or after January 1, 2011. The Company is assessing the impacts of the adoption of these changes of rules on its financial statements.

38.SUBSEQUENT EVENTS

(i) As of March 5, 2011, a small fire broke out at the slaughterhouse located in Nova Mutum in Mato Grosso state. The production of the unit will be temporarily absorbed by other BRF’s plants, to avoid compromising the delivery of services to customers and consumers. The Nova Mutum unit slaughters 230,000 chickens a day and its production is earmarked for the domestic and foreign markets.

The Company has fire insurance and the causes of the incident are being investigated by the engineering and technical specialist teams.

Company management does not expect any significant impacts resulting from this casualty in the financial statements.

(ii)On May 10, 2011, as disclosed inthe announcement to the marketissued by the Company, the Federal Government Attorney’s Office at the CADE published a report, (PROCADE 8012.004423/2009-18) (the “Report”), on the business combination transaction involving Sadia and BRF (formerly known as Perdigão).

PROCADE suggested to the CADE that the business combination be approved, subject to certain restrictions,considering the following:

(a)   permitting a third economic entity to counter-balance the market power generated by BRF and/or

(b)   allowing BRF toshare withconsumers the efficiencies resulting from the business combination.

According to the Report, the business combination should be rejected only if no alternative is found that complies with the foregoing conditions.

The Report is neither final nor binding and is only a supporting document to the final ruling on the business combination to be issued by CADE, which is not limited to the terms of the Report.

At an ordinary session of CADE on June 8, 2011, the counselor in charge for the process expressed his vote by not approving the business combination. Immediately after the vote, another counselorof the CADErequested a further review of the process. As a result, the final decision is postponed until a new date for the continuation of the session is defined by the counselor whorequested a further review. Therefore, there is no final decision to date fromtheCADE regarding the business combination, and four counselors have yet to express their formal votes.BRF will keep the market informed about developments relating to this matter.

On June 15, 2011,theCADE decided to postpone the final ruling to a date to be determined.

39.APPROVAL OF THE ANNUAL FINANCIAL STATEMENTS

The annual financial statements were approved and its disclosure authorized by the Board of Directors on June17, 2011.

F-117