Grendene - Annual Report 2006

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I - MESSAGE FROM THE MANAGEMENT

II - MAIN INDICATORS

III - COMPANY PROFILE

IV - GRENDENE: TIMELINE

V - CORPORATE GOVERNANCE

VI - MANAGEMENT ANALYSIS AND DISCUSSION (MD&A)

VII - AUDITED FINANCIAL STATEMENTS

VIII - SOCIAL AND ENVIRONMENTAL BALANCE

IX - GENERAL INFORMATION

01. Get to know02. Products and brands 03. Strategy and market04. Risk management

01. The Novo Mercado 02. Corporate governance best practices evolution 03. Corporate facts and subsequent events 04. Achievements in 2006

01. Gross income from sales and services02. Net income from sales03. Cost of products and services sold04. Gross profit05. Selling and administrative expenses06. Adjusted EBTIDA07. Net financial income08. Other operating income (expenses)09. Adjusted net income10. International Financial Reporting Standards (IFRS): Reconciliation11. Debt12. Investments13. Independent auditors – Instruction CVM 381/0314. Adjusted cash flow

01. Balance sheets02. 03. Statement of shareholders' equity04. Statement of changes in financial position05. Cash flow statement06. Notes to financial statement07. Report of the independent auditors

Statements of income

01. Human resources02. Community 03. Added value04. Social balance05. Environmental responsibility and sustainable design

01. Corporate information02. Information to shareholders03. Credits

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itself in order to circumvent the difficulties and overcome its own limits. In 2006, we built what we called Demanding Culture. The purpose: to hit more – not only do more of the same, but to demand more from the same and the new – and improve the best that we have: the end product with Grendene's innovation DNA.

The first step was a severe management

discipline, cutting costs and expenses, beginning by reducing the number of launched products, which went from 450 in 2005 to 400 in 2006. Such reduction has

The Management of Grendene S.A., in compliance with not entailed loss of quality. On the contrary, with a smaller

the legislation and the Corporate Bylaws, submits for your portfolio, but greater added value in its product mix,

consideration the Management Report, along with the Grendene concentrated on Research & Development and

financial statements of the Company and consolidated increased the demand on this range of products, not only

financial statements, including the operations of its regarding design and use of alternative materials, but

subsidiaries and, beginning in this business year, by the also by conducting researches with groups of customers

method of harmonization of international accounting and consumers before launching these products, seeking

standards, presenting the reconciliation of the differences better validation, thus increasing the probability of

between the Brazilian practices and those of the IFRS – confirmation after launch.

International Financial Reporting Standards, with the report of the Independent Auditors for the year ended The Marketing department created new ways of on December 31st 2006. The company's economic, giving exposure to the company and its products, by financial and operating information presented in the means of campaign projects and by making use of performance comments are consolidated and were alternative media, focused on specific market niches, and prepared based on adjusted financial information in also by means of efforts aimed at traders (salespeople in million of Reais, with the respective explanatory notes. shoe stores or retailers who have contact with the end

consumer). The television ads were concentrated in In 2006 there was a repetition of most of the

some products with greater volume leverage potential. previous year's problems for the Brazilian Such actions make the marketing efforts more effective footwear industry. A new decline of the dollar, worth with no need for increasing the annual advertising R$ 2.3407 at the end of December 2005 and falling to R$ budget, which remained within the historical participation 2.1380 at the end of 2006, was harmful to the industry. range in the net sales. Apart from a nationwide contract, Add to that the Asian competition and the outcome was a Grendene has also entered into an international contract new drop of 5.4% in exports in 2006 and an 8.8% with top model Gisele Bündchen for the sale of the increase in imports according to DECEX. In the domestic Ipanema GB line to foreign markets, as part of a growth market, according to IBGE figures, there was a 5.3% drop strategy through the globalization of some brands. And in the production of Brazilian shoes in 2006, which was of those elected to represent the company abroad were approximately 690 million pairs, and a 4.8% reduction in Melissa, beginning in 2005, and Ipanema GB, beginning apparent consumption, which totaled 525 million pairs in 2006. within the period.

The sales division expanded its structure by The macroeconomic results were also below engaging one more sales manager and six regional expectation. The Brazilian Gross Domestic Product had supervisors and defining regions of action with the new a 2.85% growth, a similar percentage to 2005 but below representatives. The division was also improved by the government's growth prediction, which was 3.5%. In means of the program "Improving Commercial spite of an increase in the salary mass as a result of the Management", using methods and tools to improve lower inflation rate as measured by the IPCA (Amplified results, with the implementation of a new goals and Consumer Price Index) which was 3.14% in 2006 (5.69% action plan. The division also got closer to the retail in 2005) according to IBGE, the interest rate reduction in department, with actions focused on the point of sale, economy, as measured by Selic, ended the year at where the turnover of Grendene products was increased 13.25% (18% in 2005) and led the retail business to an as a result of the design – quality – comfort triad. expressive increase of consumer durables sales, because

of accessible and less costly credit. On the other hand, the In spite of a difficult scenario for the footwear

consumption in the apparel and footwear industry grew industry, the combination of product – marketing only 2%, also according to IBGE. – sales and management discipline resulted in

greater figures from those obtained in 2005, with growing Faced with this scenario, Grendene that profits and market estimates having been entirely celebrates 35-year-old decided once more to reinvent fulfilled. The company had a 2.9% growth in gross

To our Shareholders,

I - Message From The Management

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revenue, totaling R$ 1,392.4 million, and a 1.3% increase the world this year, and the increasing appreciation and in sales volume, which reached 132 million pairs. consolidation of the Melissa brand abroad; results-Grendene's average prices were 1.5% higher than the oriented management; the expected growth both for the previous year, as a result of a product-prices policy of domestic and foreign market; and the increase in the greater added value in the point of sale. liquidity of shares, with supply expected to reach a free

thfloat of 25% until October 28 2007, shall lead Grendene One of the highlights of the year was the 380bp

to a route of sustainability, becoming even more recovery in the 2006 Ebitda margin, with a growth

profitable in the future, as the adopted strategic actions of 19%. The Ebitda totaled R$ 317.3 million (R$ 266.7

have a clear long-term view. million in 2005), with a margin of 28.8% (25% in 2005), which is mostly explained by a gain in the gross margin, Finally, we would like to thank our workers for their which reached 44.7%. devotion and our suppliers, customers and shareholders

and members of the Board of Directors for their trust and There was also an important increase of 490bp in support, which contributed for our performance and the adjusted net profit in 2006, which grew achievement of our goals in 2006. 31.3%, with a margin of 18.3% to 23.2%, reaching R$

256.1 million (R$ 195.1 million in 2005), which is explained by the revenue and volume recovery, keeping the growing profitability trend, with an important recovery of the gross, Ebitda and net margins.

Another important measure of Grendene's

performance was a market share gain of 290bp in exports of Brazilian footwear in 2006 (17.5% compared to 14.6% in 2005) and 50pb in the Brazilian domestic

market of footwear (19.1% in 2006 against 18.6% in 2006), in a scenario of greater competition on a sector and macroeconomic level according to figures disclosed by DECEX and IBGE.

None of this would have been possible without the

people – our workers. 2006 was also the year of consolidating our values and creating the Grendene Academy, apart from implementing a new people management model based on competences with the introduction of parameters and metrics that start from a macro-level (the Company), going down to each worker's individual level, establishing goals and an evaluation method, which will be a further step for the consolidation of a result-oriented management model, which was begun in 2005. The Academy appeared as an effort for internal alignment of the Development, but also with an assertive stance regarding the challenges arising from the new status of the company resulting from its registration as a publicly held company since the 4th quarter of 2004.

In 2007, the Grendene Academy intends to work

in the development of the gaps identified in the evaluation of leaderships and demands from each business fields. To prepare Grendene for the challenges of an increasingly competitive market and for the future – this has been the mission of the Grendene Academy.

2007 will also be the year to improve even more

the Demanding Culture in all our actions. This promises to be a great year: a lot of inspiration for new collections; new licensing agreements; new marketing and sales actions; the international expansion strategy through the globalization of brands, with the project with Ipanema Gisele Bündchen Y Ikatu Xingu, which will reach

The Management

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tropreI - Message From The Management

II - Main Indicators

Source: ABICALÇADOS, DECEX AND IBGE. *CAGR – Compound average growth rate **Abicalçados (figures from 2001-2005) and IBGE (production figures from 2006). ***DECEX

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Grendene was founded in 1971 and today is one of the largest manufacturers of synthetic footwear in the world and leader in several segments of the Brazilian market. The company owns exclusive proprietary technology for the production of injected thermoplastic PVC (Polyvinyl Chloride) and EVA (Ethylene Vinyl Acetate)-based footwear. The manufacturing process is entirely vertical, starting with company-owned molding plant and factories, up to distribution logistics reaching from The Company sells its products via commercial agents, distributors to traditional and non-traditional retailers distributors, direct exports and foreign subsidiaries, throughout the domestic territory and abroad. namely Grendha Shoes (EUA) and Saddle Calzados

(Argentina), reaching approximately 20 thousand points of The company owns renowned, successful brands such sale abroad and 60 thousand in the Brazilian market, as Melissa, Rider, Grendha, Ipanema Gisele besides a dedicated sales and selective distribution division Bündchen, Ipanema, Grendene Kids and Grendene for the Melissa brand. Baby; in July 2005, it introduced yet another brand –

Ilhabela, which in 2006 consolidated itself as a product The competitive advantages are based on Grendene dedicated to a young 18 to 25 year-old female audience. In values such as:addition, the company operates in the footwear production of 34 different licenses related to celebrities, characters Profit is essential and irreplaceable for keeping from the child and teenager universe, and cartoons. Grendene in operation and maintaining jobs.

Grendene is fully integrated, with total installed Increased productivity – costs and capacity of 176 million pairs per year at its six Industrial expenses under revision and constant reduction.Units comprising 12 footwear factories. There also are a

Proactively handling molding plant and a PVC factory with manufacturing difficulties, innovating and doing the best.capability of 51 thousand tons/year for internal

consumption in the footwear production. Integrity, Respect and Transparency – Think,

Speak, and Act.The Industrial Units are distributed as follows: (i) State of Ceará, in the cities of Sobral (1993),

Grendene’s main competitive advantages are its tangible headquarters and largest plant with seven footwear

and intangible assets – the “Grendene DNA” – which factories responsible for 87% of the total footwear

translate into:production; Fortaleza (1990), two PVC footwear and components factories; Crato (1997), one EVA footwear and components factory; (ii) State of Rio Grande do Sul, in the cities of Farroupilha (1971), two footwear factories and administrative office; and Carlos Barbosa (1980), molding plant; and (iii) State of Bahia, one Unit under implementation in the city of Teixeira de Freitas, scheduled to start operating as of September 2007, capacity of turning out 9 million pairs/year, especially lower value-added products in an effort to obtain more competitive prices at major Southeast consumer centers.

By the 2006, Grendene counted 21,444 employees and registered gross revenue in the amount of R$ 1.4 billion, 86.5% derived from the domestic market and 13.5%, abroad. The volume of 132 million pairs sold was distributed 76.1% for the domestic market and 23.9% for export operations. Grendene combines countless competitive advantages that in 2006 ensured the company ended the year with a 19.1% participation in the Brazilian footwear market and 17.5% of the Brazilian export operations in the industry.

PROFIT:

COMPETITIVENESS

INNOVATION AND AGILITY:

ETHICS:

BRAND STRENGTH

INNOVATION CAPABILITIES

AGGRESSIVE MARKETING

UNIQUE PRODUCTION PROCESS

PROPRIETARY TECHNOLOGY

RESEARCH AND DEVELOPMENT

VERTICALIZATION

PRODUCTION SCALE

GLOBAL COMPETITIVE COST

PRODUCT QUALITY

LOGISTICS

LEVEL OF CORPORATE GOVERNANCE

FINANCIAL SOUNDNESS

Grendene closed 2006 with a 19.1% participation in the Brazilian footwear market and 17.5% of the Brazilian export operations in the industry.

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01. Get to know

Besides innovative, quality products, Grendene has expert Fashion Week - SPFW. For the other lines, launching takes management and talented people researching trends and place at different forums: the Fall-Winter Collection at capable of interpreting, translating, creating and launching Couromoda, held every January, and the Spring-Summer fashion on a global level, producing and controlling costs Collection at Francal, always in July. Both of them are and expenses. All of this with the purpose of maximizing considered the largest and most important international shareholders return in a sustainable way and enforcing our footwear fairs held in Brazil. Besides the two collections social and environmental commitment. Everything duly there are other launchings in different segments during the acknowledged by the countless awards we have been whole year.granted along our 35 year-long history, manufacturing and

Grendene’s product portfolio is divided into four segments: selling design. men’s, women’s, children’s and mass, each carrying their own brands.

synonymous with after sports flip-flops, it is

dedicated to the male audience and was released in August 1986, comprising segmentation in three archetypes according to occasion and customer preference. For the Rider brand, the highlights were: (i) in the casual line, with the release of models Rider Roots, Terra and Dunas, comfortable, with sole massage and fashion appeal for the male segment; and (ii) the sneaker-sandal line of enclosed high-technology Grendene’s intangible assets and core values become products, one being casual and the other sports - innovative products that position the company as a fashion Rider Movie Casual and Rider Movie Sports products and accessories manufacturer. The number of collections for the second quarter in 2007.new launchings has been decreasing throughout the years

as part of a strategy to decrease the number of products. The main models of the 2006/2007 collection are Sports,

The goal is to focus more on pre- and post-launching Beach and Adventure:

research, design, comfort and cost reduction, dedicated to a higher value-added product portfolio and higher value perception by customers.

An important Grendene differentiator is the R&D – Research and Development – division with approximately 110 employees researching local and international fashion references, behavior and material utilization to create new products or maintenance of the lines, as a way to build barriers against the entrance of competitors by means of planned obsolescence, employing creativity and self-sustainable processes to translate and transform information into business design, seeking cutting-edge elements in Brazil and the world.

Besides Grendene’s own brands, the company creates for third-party brands and operates heavily through licenses of celebrity names, characters and icons of children’s universe, the strategy being the creation of emotionally appealing products that increase sales both for their playful side as well as their aspirational side.

Grendene has always focused on launching new products especially on commemorative dates and at footwear fairs. The Melissa line, the most conceptual one, has its Fall-Winter Collection released in January and the Spring-Summer Collection in July of every year at the São Paulo

Rider Line:

02. Products and brands

Men’s segment

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Other Brands:

Melissa Line:

besides manufacturing competitions, will be present i t s o w n b r a n d s , G r e n d e n e at the PAN 2007 with the manufactures third-party brands such best athletes in Brazilian as Bad Boy, Red Nose, Guga swimming – the SPEEDO Kuerten and Mormaii, and more ELITE TEAM. Speedo recently the company has obtained the products are showcased in

over 12 thousand points of licensing of the Speedo brand. The sale and present at 90% of highlight is product Guga Impacto, health clubs and swimming launched with the OX system enabling schools.higher strap oxygenation. A new color

swatch was released at Couromoda in January 2007 for products of brand Mormaii Gamboa, hiking sandals and flip-flops that remain in the market considering their sales success since the last Francal in July 2006. The promotional campaign with retailers called “Na Onda com Mormaii” synonymous with plastic sandals worldwide. (Hanging ten with Mormaii) started in Top of line and entirely conceptual as a fashion and design 2006 and ran until February 2007, product, it is sold in specific channels such as boutiques, distributing over 1,500 prizes such as fashion-specialized stores and even design stores, aiming motorcycles, glasses, watches, at higher appreciation for the brand and the full-plastic sneakers and back packs as shoe genre. There are partnerships with important and encouragement to retailer salespeople, renowned brand names, including fashion designers; and evaluated on their sales performance. designers from other fields not necessarily connected to

fashion that create models for the Melissa line.

Because Melissa is not a shoe but a design object that goes beyond shape and content, reaching the message it seeks to convey: plastic as an option. After all, plastic is the material representing its DNA and its way to live life looking for alternatives, innovations, transformation, modernity, creativity, technology and sustainability – concepts that guide people who have a youthful attitude, who are aware, casual, irreverent, democratic and sweetly subversive. Melissa turned 26 experimenting at all times. In and out of the country, it surrendered to the talent of designers like Jean Paul Gaultier, Thierry Muegler, Alexandre Herchcovitch and Marcelo Sommer, of plastic artists like Romero Brito, stylist and art director Judy Blame and of designers like Patrick Cox, J.Maskrey, the Campana brothers, and more recently, Karim Rashid.

Another hallmark in the brand’s history is the opening of the Melissa Gallery on Oscar Freire, at the heart of the São The major highlight of the January Paulo fashion circuit, in August 2005. The multidisciplinary 2007 Couromoda in the men’s space is the meeting point for the Melissa universe, segment was the release of a new collections created by the brand’s partners with total brand licensed by Grendene, exclusivity, releases of special products and exhibits Speedo, launching a unique connected to topics such as design, photography, fashion, product with bold design and innovative technology – the beauty and technology. Imposing for its super-colorful Hidrofast sole system – flip-flop Speedo Dry – coming to facade and constantly renewed, the Gallery takes after stores in February 2007. Speedo is the worldwide leader in Melissa: dynamic, updated and always after innovations to, equipment and products for water sports and fitness and is by so doing, build its history in plastic.the most appreciated brand in Brazil. It currently enjoys

high visibility and renowned preference among youngsters and adults inspired by this life style. Speedo, celebrated in world swimming with over 80% of victories in global

Women’s segment

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Gisele Bündchen Ipanema Line:

Grendha Line:

a

line released in July 2002 sponsored by top model Gisele Bündchen with dedicated advertising support. After a 4-year partnership with top model Gisele Bündchen, via licensing of her name for the Ipanema brand of flip-flops and sandals in the domestic market, Grendene sought to top the release of previous collections with the GB 2006 Ipanema Collection - Y Ikatu Xingu (“Save the Good Water of Xingu”) – bringing two important features: (i) the execution of a contract in September 2006 for the international sale of the collection in the next two years; and (ii) environmental engagement via the ISA – Instituto

Socioambiental (Social Environmental Institute) – NPO supporting the Y IKatu Xingu project. The projects seeks to recover and protect water springs and river-edge forests of the Xingu, an important river in the Amazon basin – one of the longest in Brazil with 2,700 Km and responsible for a rich

a line oriented towards the female biodiversity – which has been suffering from demographics released in July 1994, it comprises four excessive deforestation in the area. Located in segments according to archetypes and positioning. Mato Grosso, the Xingu National Park is home to 14 Grendene utilizes aggressive marketing, especially for indigenous tribes that have been facing a difficult promotional products employing celebrities, via TV situation caused by pollution and destruction of advertising with high emotional appeal. river edges.

Grendha Casual – classic models Both Grendene’s and Gisele’s commitment aims at drawing attention to the relevance of the issue, contributing to raise awareness among the population.

Grendha Fashion – trendy / innovative models

Grendha Summer – basic sandals – beach

Grendha promotional – celebrity sponsorship / advertising support

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Ilhabela Line:

Grendene Kids:

Baby:

In the female child segment, the two highlights were sandals Barbie Fluffy with a purse and Hello kitty Clock Mania with watches, released at Francal in July 2006.

For Christmas, Grendene innovated both in terms of product as well as communication-wise through the release of roller sneakers Barbie Hits and Hot Wheels

The major Extreme. Both products, equipped with wheels and leds, feature was the two releases of had their performance communicated distinctly to each the brand, models Jelly audience – child female and male. For the Barbie Roller, (platform) and Tutty (flat). the strategy was to use a choreography on wheels through Ilhabela came to the market a 2-minute video clip, and for the Hot Wheels Extreme, bringing innovation and providing the choice was the theme radical maneuvers on wheels, opportunities for “assertive” girls. broadcast via an 18-episode reality show.It is a reasonably young brand by Grendene (released at Francal in July 2005), oriented Boystowards the young fashion audience.

Ilhabela has innovated in its communication via brand repositioning, teenage language and strong interactive trend: the Ilhabela website represents the reality of this universe.

The brand’s official site was released with the purpose of establishing direct and permanent communication with the teenage

Ilhabela customers. Creating a close relationship with this audience an becoming a tool generating information / content related to this universe for Grendene.

Girls

a line oriented towards the child and pre-

teen audience sold since 1984. Under the umbrella of the Grendene Kids brand, products are sold via licensing contracts utilizing brand names, names of TV hostesses, singers, performers, cartoon characters, and characters from the child and teenage universe, adding emotional appeal and playfulness to products.

The two licenses standing out in 2006 for the fever they generated in children were: (i) Rebelde (Rebel) – originally from a soap opera broadcast on TV

a line directed towards the infant audience which channel SBT; and (ii) Homem Aranha (Spider Man) also carrying an umbrella of licenses similar to the – a license from Marvel. For both, Grendene staged Grendene Kid’s line.releases that made all the difference.

Other two releases that were also important for the male child audience were Hot Wheels Running, a sports sneaker introduced at Couromoda and the hiking sandal Homem Aranha Vision with glasses inspired by the arachnid character, whose release took place at Francal, both in 2006.

Children’s segment

Strategy:

Ipanema Line:

Market:

a line released in July 2001 to operate in Every Grendene strategy in the course of its 35 years of the flip-flop, slide and sandal unisex market, oriented innovation in plastic design in footwear is based on an towards the mass consumer audience at competitive prices important tripod:and focus on the distribution strategy. We sell from the

1) Verticalization and integration throughout its basic line up to lines bringing themed female and male entire production chain with proprietary

soles. In five years, we have reached nearly 20% of the technology. The company manufactures PVC, at the

market previously heavily dominated by two competitors. Sobral (CE) factory, from the acquisition of raw materials

For the sandal and flip-flop Ipanema line, new products such as PVC resin and plasticizing oils, resulting in over 80

were:different formulas according to the hardness or malleability degree required by the plastic. It is responsible for the product molds made at the Carlos Barbosa (RS) factory. It manufactures the PVC and EVA injected and expanded footwear at factories in RS and CE. And also answers for the logistics system enabling national and international distribution in different sales channels.

2) Innovation and design. A significant competitive advantage for the company, the strategy is to maintain a research and development division focused on constant

Basic – basic / classic modelsproduct innovation done with quality, comfort, fashion appeal and unique design, all in the context of sustainable design, versatility, and competitive prices;

3) Segmented and differentiated brand

positioning, marketing and sales. Combining aggressive marketing with emotional appeal, licensing, celebrities and accessories, strong brands, TV publicity and advertising, and alternative media directed at each Themes – femaleaudience target, the marketing area has been employing alternative media entirely focused on the language of each brand, brand and consumer audience, in addition to a more aggressive marketing action aimed at the international insertion of some brands. Brand communications with different target audience has been constantly improved. Project-campaigns have been introduced into the strategy in an effort to add value to products by means of

Themes – male sustainability-related issues – economic, environmental and social results – and those related to Grendene’s institutional image. Sales are also segmented and directed specifically to female, male, child and mass audiences, both domestically and abroad, promoting risk minimization by product and market.

Themes – Rebelde fun Domestic Market Growth: answers for 86% of gross revenues and 76% of the sales volume, with strong presence throughout the domestic territory in over 60 thousand points of sale. The domestic market has been experiencing an increasingly fierce competition especially due to increased import levels favored by currency exchange rates. Quick responses to changes in the domestic backdrop, the brand-segmentation strategy, and

(i) expansion of Ipanema with anatomic sole to other segments besides women’s, given the success with customers due to the shapes and curves molding themselves to feet, providing higher comfort and protection when walking; (ii) the female Ipanema Bliss line, with strap appliqués; (iii) the male Ipanema Brasil Surf line, with side graphics another innovation by Grendene; and (iv) another of the year’s success stories was the release of Ipanema Rebelde Fun.

Mass segment03. Strategy and market

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marketing communications by niche and specific actions Among the main risk factors and the solutions being have ensured a 50bp market share gain in the domestic adopted are the following:market and leadership in most of our operational segments

Operational. Grendene’s manufacturing structure (men’s, women’s, children’s and mass consumption). There

distributed in four different cities decreases the risk of a is still room for Grendene to expand its market participation

general production standstill. Our own molding and PVC given the growth perspectives for domestic sales, and

production also prevent such event. Occasional power growth of actual income and consumption in classes D and

supply problems are avoided by company-owned E.

generators. Grendene has insurance covering its facilities and equipment against fire, replacements and natural Foreign Market Growth: answers for 14% of gross disasters. revenues and 24% of the sales volume. Despite currency

exchange rates not very favorable to export operations, we Market. Both domestically and abroad, Grendene and the have managed to remain internationally competitive via a footwear industry as a whole face disloyal competition and strong discipline in terms of cost and expense piracy. Constant investments in innovation, design and management. In 2006, we have gained 290bp in market quality contribute to uphold the brand’s referential status in share over Brazilian footwear exports. Catering to the industry. In addition, our sales segmented into different approximately 60 countries and 20 thousand points of sale target audience and income ranges, and the wide abroad, we operate via three distinct strategies: (i) diversification of products and planned obsolescence keep exporting our own top of line brand Melissa, which customer interest high. has its unique design and selective distribution; (ii)

exporting its own brands Grendha, Rider, Ipanema, Raw Materials. The company’s main raw materials are Ilhabela, Ipanema Gisele Bündchen and children’s PVC resin and plasticizing oils. Because they are licensing, which have their unique design and commodities, they are subject to international price distribution in the traditional retail market, fluctuations depending on supply and demand, oil prices footwear stores, department stores and and currency exchange behavior. Grendene keeps contact distributors; (iii) exporting third-party brands, with with major suppliers for the purchase of large product their own design and sales through client’s own volumes in an effort to obtain competitive prices.channel. Melissa’s selective distribution strategy,

adopted as of January 2005, has been consolidating Tax Benefits. The units located in the State of Ceará itself in 2006, when it increased from 70 to 300 count on tax benefits ensured by long-term contracts with points of sale abroad, contributing to Grendene’s the state government. There are two versions: 1) Provin, increased export operations. Other initiatives VAT tax benefit reducing in 75% the tax over domestic consolidating themselves are the increased export market sales; 2) Proapi, tax benefit on the exported FOB operations to the Andean Pact, Africa and Middle amount, as 11% of exports credit on revenues. The main East, besides other already traditional countries.

th factories’ VAT tax benefit terms have been extended for Another important initiative, starting from the 4 another ten years beforehand, going from 2009 to 2019 in quarter in 2006, was the execution of an Sobral; from 2012 to 2022 in Crato; and from 2015 to 2025 international contract with top model Gisele in Fortaleza, which ensures by contract their long Bündchen for the sales of the Ipanema GB brand maintenance terms. The company fulfills all the abroad, which is expected to ensure the requirements associated to these benefits and estimates maintenance of our increasing export operations. that there is no risk of their being suspended, given the size of the company, the quality of the projects and the fact that Grendene is the largest private employer in the State of Ceará.

As a consumption goods company, Grendene is subject to On a federal level, the company counts on a tax benefit the same risks inherent to any companies operating in the granted by the federal government reducing the Income industry. Macroeconomic factors such as currency rate Tax in 75%. This benefit’s term is ten years, extended until volatility, interest rates, inflation levels, average income, 2012 for the Sobral Unit, until 2010 for the Fortaleza Unit, and commodity raw material prices, and microeconomic and has been recently extended until 2016 for the Crato such as production and information technology, illegality, Unit.default payments and tax benefits are the main domestic

and foreign risk factors influencing the company’s business. However, the demanding culture present in the company, starting at the production line and reaching points of sale, contributes to decrease their impact on Grendene results.

04. Risk management

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1986 - We start operating in the men’s market

1971 - Genie of the bottle1990 - Setting foot in Ceará

1993 - New house

1979 - A step away from success

1994 - Catering to all styles

1996 - And Melissa won’t stand still

1980 - Company-owned molding plant

1997 -One more factory

1983 - Treading the world

1998 - Fashion Vocation1984 - Tuned-in kids

commercial licenses such as Barbie, Hot Wheels and Disney, leveraging to a great extent the emotional and entertaining appeal of shoes with accessories that express children’s universe.

With a differentiated design giving top priority to comfort, Grendene introduces the Rider line aimed at male customers. The after-sports sandal is still a hit 20 years later, and is sold in 70 countries.

Aware of the opportunities offered by plastic, Grendene Establishment in Fortaleza of the first manufacturing unit in

starts manufacturing nettings for gallons of wine produced the state of Ceará, called Grendene do Nordeste S.A., with

in the Rio Grande do Sul mountain range that would replace current production capabilities reaching 5 million pairs/per

the wicker pieces in use at that time. From then onwards, year.

no other packaging has ever embraced the beverage so properly. Grendene did not stop there: it was the first company to employ polyamide as raw material for shoe

Opening of the factory in Sobral, also in the state of Ceará, components. Thus, it gave its first steps towards fulfilling its called Grendene Sobral S.A. Tax benefits, lower labor costs fashion vocation.and strategic location to access international markets motivated the transfer of manufacturing operations until then located in Farroupilha.

By studying strap sandals worn by French Riviera fishermen, Pedro Grendene Bartelle had the revolutionary idea that turned the company and fashion around: Melissa

Thinking about the female diversity, the company launches Aranha (Spider) was born. Much more than injected-plastic the Grendha line offering options for all styles. More classic shoes, the brand became a fashion symbol. And kicked off models share space with the beach, casual and fashion footwear merchandising in soap operas: from the feet of lines. Headlining the new products, celebrities like Ivete Júlia, Sonia Braga’s character in Dancing Days, Melissa got Sangalo, from Bahia.hold of millions of other feet throughout Brazil.

After two years without launching new products, Melissa innovates once again and brings top model Claudia Schiffer to Brazil to promote the brand’s new products. At the time, top models coming to the country was not an ordinary

Opening of the molding plant in Carlos Barbosa, state of Rio thing, and Claudia’s presence was a whirlwind.

Grande do Sul, to manufacture the company’s own molds for plastic footwear production.

The third unit located in Ceará starts operating in the city of Crato, and was called Indústria de Calçados Grendene

The successful collaboration between Melissa and the Ltda., with current production capabilities reaching 12

greatest designers in the world started that year, with the million annual pairs of EVA (Ethylene Vinyl Acetate)

creations by Jean-Paul Gaultier, Thierry Mugler, Jacqueline products.

Jacobson and Elisabeth De Seneville.

Grendene creates a division dedicated only to the Melissa Grendene won over girl’s feet when Melissinha was

brand name to walk into the 2000s as a fashion icon.launched, always featuring a complimentary gift. From then onwards, the company’s Kid’s line has never ceased to expand. The company bets on making the most of

The 70`s The 90`s

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tropre

The 80`s

IV - Grendene: Timeline

2001 - Absolutely summer

2002 - With the Gisele’s face

2003 - Melissa takes over the world

2004/2005 - A new phase

2005/2006 - The future is now

To take over the beach line, Grendene launches Ipanema. With women’s and men’s flip-flops at competitive prices, the company indubitably established asserted its hold on the feet of Brazilians. That same year, the company conducted corporate restructuring, with the incorporation of Indústria de Calçados Grendene Ltda. By Grendene Calçados S.A.

To name a Grendene product, there is nothing like a celebrity who is synonymous with fashion. The line inspired by – and named after – Gisele Bündchen includes sandals and flip-flops with a unique design – Ipanema GB is born. That same year, Melissa debuted ate the São Paulo Fashion Week with models designed by renowned plastic artist Romero Britto.

Definitely a fashion icon, Melissa gets designs by Alexandre Herchcovitch, Sommer and Cavalera at the São Paulo Fashion Week. From then on, the sky was the limit: the shoe is displayed in windows of concept-stores such as Colette, in Paris, and Dover Street Market, in London. That same year, Grendene Calçados S.A. was incorporated to Grendene S.A., as part of the company’s going public preparation process. The company went from being a holding to being an operational society with only one wholly-owned subsidiary, the Saddle Corporation established in Uruguay, which controls two wholly-owned subsidiaries: Grendha Shoes, in the United States, and Saddle Calzados, in Argentina.

By going public on October 29th 2004, Grendene started having common shares negotiated at the New Stock Market in

thSão Paulo. Melissa’s 25 anniversary was celebrated with an exhibit at the Museum of Modern Art in Rio de Janeiro named Plasticorama and the re-launching of Melissa Aranha (Spider). In this period, Grendene enters into new partnerships, such as the one with the Campana brothers and the Melissa model with Swarovski crystals, by designer J. Maskrey.

With a very high-tech décor, the Melissa Gallery is opened on Oscar Freire, one of the most expensive locations in São Paulo. The store is not limited to the sale of Melissa products. It also carries art and design works, and tells the history of one of the most popular shoes in the country, constantly refreshed at each collection. In 2005 there was the launching of a new brand, Ilhabela. The corporate restructuring with Saddle Corporation and Saddle Calzados also took place, making them direct subsidiaries of Grendene S.A.

The 2000`s

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tropreIV - Grendene: Timeline

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tropreV - Corporate governance

thOn October 29 2004 , Grendene became a publicly held company, with registration in the Novo Mercado of BOVESPA – the São Paulo Stock Exchange, which characterizes the high level of Corporate Governance in the Brazilian Capital Market. There are 100 million common shares outstanding, where one share is equal to one vote and for Grendene shareholders there are the following advantages:

(i) 100% of tag-along rights (in case of a change in the controlling interest, the minority shareholders must receive the same amount as the controlling shareholders);

(ii) Board of directors with independent directors;

(iii) aggressive dividend policy (100% of distributable net income);

(iv) joining the BOVESPA Arbitration Chamber;

(v)pPreparation of the Financial Statements' reconciliation by international standards (IFRS) with 2006 basis and compared to 2005; and

(vi) a minimum percentage of 25% shares in circulation (there are currently 19.9%), which shall be thachieved until October 28 , 2007.

Considering the changes both in the domestic and foreign capital market laws implemented in 2000, when different levels of Corporate Governance were created, BOVESPA changed the listing regulation of the Novo Mercado, which entered

thinto force on February 6 2006. The new regulation introduced the definition of and minimum percentage of 20% for independent directors and an extension of the term of up to two years; the concept of diffuse control and shares outstanding; and changes in the arbitration chamber and inclusion of the Commitment Clause; among the major changes.

The Company is already compliant with these rules. Grendene's Board of Directors is composed of six members, convened five times in 2006 and already has the required number of independent directors.

Commitment Clause. The Company, its shareholders, management and members of the Audit Committee undertake to settle, by means of arbitration, any and all dispute or controversy that may arise among them, especially those related to or originated from the enforcement, validity, effectiveness, violation and effects thereof, of the provisions contained in Law no. 6.404/76, in the company's By Laws, in the rules enacted by the National Monetary Council, by the Central Bank of Brazil and by the Securities Exchange Commission, as well as other rules that may apply to the general operation of the capital market, apart from those appearing in the Listing Regulation of the Novo Mercado, the Participation in the Novo Mercado Agreement and the Arbitration Regulation of the Market's Arbitration Chamber.

The following table presents the shareholders composition down to individual level up to 5% for the dates of December st31st 2006 and December 31 2005:

01. The Novo mercado

Shareholders

Others (*)

Grendene Bartelle

Total

# Nominalcommon Shares


o

S.A.

S.A.

S.A.

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• The definition of shares outstanding is in accordance with the provision of section 4, § 2 of Law 6,404/76.

• The amount of shares in outstanding was computed according to the provision of Bovespa's Listing Regulation, which has been in force since February 6th 2006 and states that shares held by Board of Directors member, Directors or Executive officers cannot be computed as shares in circulation.

In 2006, there was a 23.5% increase in the average batch and 17.8% in the average traded amount. The main trading and liquidity indicators of Grendene's common shares in 2006 are presented in the table below:

stThe graphic below shows the behavior of Grendene's nominal common considering as basis = 100 on December 31 2005 st compared to the BOVESPA, IGC and ITAG indexes until December 31 2006. The highlight of the year was the performance

thof shares in the 4 quarter, when there was a 37.5% appreciation compared to IBOVESPA's 22%, IGC's 23.6% and ITAG's 21%.

Performance of shares



Institutional investors

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(i) Creation of the Grendene Academy. Although it was created in the second half of 2005 with the purpose of being the second corporate project for People Development in Grendene, it was in 2006 that the actions of the Academy were continued in the phase for returning the evaluation results and preparation of a Development Plan for each of the employees. Before this project, the training initiatives were dealt with locally, meeting the demands of each Unit. The Academy appeared as an effort for internal alignment of the Development, but also with an assertive stance regarding the challenges arising from the new status of the company resulting from its registration into a publicly held company in 2004. It was established that the working focus of the Academy would be to achieve synergy in the training actions of all units, apart from mapping the education and competences of the intermediate management level, supervisors, coordinator, assistants, among other positions. The essential competences were defined for this type of employee, aligned with the company's strategy, and evaluations were conducted among 420 people who held such positions. In this contact with the leaders, Grendene's Letter of Values was also written and widely divulged among stakeholders. During 2006, there was also the Letter of Values Consolidation, when a series of four events was promoted, each about one of the company's values. The events were planned by the Human Resources department in collaboration with the Executive Officers and Managers. Once the communication format for each value was established, the events were then replicated in each unit, for an average audience of 500 people. There were eight large-scale events disseminating Grendene's values in 2006. In 2007, the Grendene Academy intends to work in the development of the gaps identified in the evaluation of leaderships and demands from each business fields. To prepare Grendene for the challenges of an increasingly competitive market and for the future – this has been the mission of the Grendene Academy.

(ii) Introduction of a people management model by competences. After the introduction of the Values and the Grendene Academy, we went one step further in the improvement of the Company's management model in 2006. It was decided to engage the services of a consulting company for the implementation of a new management model defining not only a new title and salary structure for the company, but also the competences of each position, with the introduction of parameters and metrics that start from a macro-level (the Company), going down to each worker's individual level, establishing goals and an evaluation method, which will be a further step for the consolidation of a result-oriented management model, which was begun in 2005.

(iii) Creation of the Grendene Newsletter. The newsletter aims at promoting Grendene's intangible and non-financial assets to all concerned parties (stakeholders) by means of articles and new involving the Company:

02. Corporate governance best practices evolution

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st rd1 issue of May 3 , 2006. Topic: Corporate Governance

nd 2 issue of June 26, 2006. Topic: Sustainability through education and environment preservation

rd3 issue October 24, 2006. Topic: Business responsibility / environment preservation and social responsibility.Read more on the website www.grendene.com.br/www/ri

(iv) beginning of disclosure of financial statements according to international standards. The preparation of st stthe FSs for the business year ended on December 31 2006, compared to the year ended on December 31 2005, was

based on BOVESPA'S Novo Mercado listing regulation, Section VI – Periodical and Occasional information that must be provided, item 6.2, subsection (ii),the deadline for compliance therewith was two years, considering the list

thon October 29 2004. Grendene opted for the IFRS – International Financial Reporting Standards – international accounting harmonization methods, which are international accounting rules enacted by the International Accounting Standards Board, with the respective explanatory note of reconciliation of statements of income for the year and shareholders' equity with the main differences between BR GAAP and IFRS, accounting criteria used and the report of the independent auditors.

(V) Public offer for compliance with 25% minimum free float rule. According to BOVESPA'S Novo Mercado listing regulation, Section III – Authorization for negotiation in the Novo Mercado , 3.1, subsection (v), observing the provision of Section VII – Public Distributions, item 7.3 and Section VIII – Transfer of Control, item 8.5, Grendene has a deadline of up to three years to reach the minimum mandatory percentage of 25% for free float, for which reason there will be a secondary distribution of 5.1% of the capital

th until October 28 2007, the public offer of which will be made to the market by the controlling shareholders.

thDividends (BDM of March 6 2006): Approval in a Board of Directors meeting of a proposition by the Executive Board of distribution of dividends in the order of R$ 81.2 million (R$ 0.81181 per common share) for the accumulated profit in the business year ended on December 31st 2005. We stress that there was an interim payment of dividends in 2005 in the amount of R$ 38,000,000.00 (R$ 0.38 per common share) according to approval in a Board of Directors meeting of

thOctober 28 2005, confirmed by the Shareholder General Meeting that examined the balance sheet and financial thstatements for the year of 2005. The payment of the dividend balance of R$ 0.43 per common share began on April 26

th2006. Shareholders registered in the Company records on the date of the Meeting held on April 10 2006 were entitled to threceive the dividend balance for the year of 2005, the ex-dividend date being April 11 2006.

rdrdAPIMEC – Public Meeting with Analysts – April 3 2006: 2006 APIMEC meeting held on April 3 2006 at 5:00 pm at stthe Abelardo Vergueiro César auditorium, in BOVESPA – São Paulo Stock exchange at Rua XV de Novembro 275, 1 floor,

São Paulo, SP.

Ordinary General Meeting/Extraordinary General Meeting of April 10th, 2006: Approval of the financial statements for the year of 2005, of the payment of dividends; of the management compensation; of the appropriation of reserves originating from tax incentives; of the amendment to the By Laws in order to comply with Bovespa's Novo Mercado regulation, and the election of Grendene's Board of Directors until the next Ordinary General Meeting in 2008.

stthBDM of May 4 , 2006: Approval of the financial statements of the 1 quarter of 2006, allotment of the management compensation and other subjects of interest to the company.

thFrancal 2006 – Announcement to the Market July 4 , 2006: Informing about the new products to be presented in the Fair and about the campaign project of the Ipanema Gisele Bündchen – Y Ikatu Xingu – preserve the good waters of the Xingu River – and Indian reserve area, a project with joint support of Grendene and the top model.

ndthBDM of August 9 , 2006: Approval of the financial statements of the 2 quarter and first half of 2006 and approval of the payment of interim dividends to be confirmed by the Shareholders General Meeting that examines the balance sheet

thand financial statements for the year of 2006, concerning the period until June 30 2006, in the amount of R$ 39 million or R$ 0.39 per common share, which represents 100% of the Company's distributable net income.

Highlights

03. Corporate facts and subsequent events

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thNew Factory in BA – Announcement to the Market September 11 , 2006: Decision to begin the works for the construction of a new factory in the town of Teixeira de Freitas, in the south of the State of Bahia, with implementation scheduled for the next twelve months. The project will take advantage of existing tax benefits in the State of Bahia.

th thth4 GRI (Global Reporting Initiative) meeting – October, 2006: From October 17 to 20 2006, Grendene received the Apparel & Footwear workgroup in Fortaleza, in a visit to its largest factory, for the completion of the sustainability indicators supplement.

thHedging Griffo – Announcement to the Market November 6 , 2006: It announced to the market and to Grendene that its investment funds, assets under management and non-resident investors legally represented by this Institution achieved a 5.3% participation in common shares issued by Grendene S.A., from then on holding 5,304,670 common shares and has not entered in to any agreement or contract governing the exercise of voting rights or the purchase of sale of securities issued by the Company.

rdthBDM of November 9 , 2006: Approval of the financial statements of the 3 quarter and nine months of 2006 and approval of the payment of interim dividends to be confirmed by the Shareholders General Meeting that examines the balance sheet and financial statements for the year of 2006, concerning the period until September 30th 2006, in the amount of R$ 41 million or R$ 0.41 per common share, which represents approximately 100% of the Company's

thdistributable net income, which will be paid beginning on November 29 2006. Those who were shareholders on th thNovember 13 2006 will be entitled to the dividends the ex-dividend date being November 14 2006. On

th stAugust 30 2006 R$ 39 million (R$ 0.39 per common share) were paid as a 1 advance of dividends for the year of st th nd th2006. The amount of dividends considering the 1 , interim (August 30 2006) and 2 interim (November 29

2006) will total R$ 80 million, based on the results obtained in the first nine months of 2006. In both cases, according to our Dividend Distribution Policy of distributable profit (after deduction of legal reserves).

thTax Incentives – Crato contract renewal: On November 20 2006, the company obtained from ADENE (Agency for the Development of the Northeast), by means of the Constitutive Report no. 238/2006, a 75% reduction on Corporate Tax for 10 years, beginning in the business year of 2007 and ending in the business year of 2016 for the branch located in Crato – CE.

Depreciation Criteria is changed: Considering that, in 2006, Grendene began to disclose the reconciliation of the shareholders' equity and net income for the year, prepared according to practices adopted in Brazil and international accounting rules (IFRS - International Financial Reporting Standards), the company revised in December 2006 the useful life of its property, plant and equipment, having changed just the depreciation criteria for its machines and equipment to ten years, since the other assets had depreciation rates were already compliant with the IFRS criteria. This change will begin to produce effect in the financial statements prepared according to accounting practices adopted in Brazil beginning

ston January 1 2007. However, for IFRS purposes, the change of useful life was applied retrospectively, with the accumulated depreciation being recalculated considering the useful life ever since the purchase of each asset.

thAnnouncement to the Market of December 7 , 2006: Grendene, focusing on the best practices of Corporate Governance, proposed to its shareholders, subject to approval by the Extraordinary General Meeting held on December

th18 2006, the replacement of Ana Dolores Moura Carneiro de Novaes – considering her resignation from office for personal reasons, pursuant to section 17 of the Company's By Laws. The new independent director, Walter Janssen Neto, was elected for a term ending in April 2008. Walter Janssen Neto is Brazilian, 50 years old, a graduate in Economics and Accounting; with postgraduate education in Industrial Economics from the Federal University of Santa Catarina and MBA Executive from the Pennsylvania University Wharton School. He had a Professional Director Certificate from the NACD (National Association of Corporate Directors) of the United States, having specialized in Corporate Governance at the Stanford University Law School, Chicago Business School and Wharton School and is a member of the IBGC – Brazilian Institute of Corporate Governance. He worked as an Executive of the WEG Group in Santa Catarina for 31 years, where he had the chance to hold several executive offices in the Supply, Finance and Sales Department. He was Superintendent Officer of the Business Unit, HR and Corporate Marketing Officer and recently President of operation of the WEG group in the United States, apart from being a member of the Board of Directors of several Brazilian companies.

thExtraordinary General Meeting of December 18 , 2006: Election of a member of the Board of Directors replacing ththe member Ana Dolores Moura Carneiro de Novaes, pursuant to resignation notice dated November 27 2006 and

thannounced to the market on November 28 2006, Mr. WALTER JANSSEN NETO, Brazilian, married, a graduate in Economics and Accounting, postgraduate education in Industrial Economics and MBA Executive, for a term ending on the next Ordinary General Meeting of 2008, according to section 16 of the By Laws, already inducted into office upon signing the management' Agreement Instrument as provided for in sections 13 and 17, § 1 of the Articles of Incorporation.

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ththBDM of March 15 , 2007: Approval of the financial statements for the 4 quarter and business year of 2006. Resolution subject to approval of the Ordinary General Meeting that examines the balance sheet and the financial statements for the business year of 2006 about the allotment of the net income for the year and payment of dividends for the business year of 2006, as proposed by the Executive Officers. Election of the officers and allotment of the remuneration among Directors and Executive Officers and other matters of interest to the company.

According to the By Laws, the minimum mandatory dividend is computed on the basis of 25% of the net income remaining for the year, after the reserves required by law are set aside. However, we maintain our dividend policy of distributing up to 100% of the distributable net income. In 2006, we paid two interim dividends as advances and the unpaid balance for the year will be subject to approval of the next Shareholders General Meeting.

As for the unpaid balance of dividends for the year of 2006 , shareholders registered in the books of the Company ston the date of the Meeting that approves the financial statements for the business year ended on December 31 2006,

thwhich will be held on April 16 2007, will be entitled to receive it. The Company shares will be ex-dividend counting from th thApril 17 2007, with payment to be made beginning on May 9 2006.

stThe advanced and paid dividends, as well as the unpaid balance for the year ended on December 31 2006 were as follows:

The work of Grendene was recognized by several local, national and international institutions for its performance in several fields.

For the second consecutive year Grendene was elected Wal-Mart supplier of the year in the footwear field. Some of the criteria for the choice of supplier of the year are: product quality, delivery, presale and post-sale services. Wal-Mart is an American chain store, the largest retailer in the world, which analyzes its suppliers in a careful selection. Grendene was the only Latin American company to receive this award.

Dividend policy

Wal-Mart Supplier of the Year

04. Achievements in 2006

th(*) Subject to approval Ordinary General Meeting of April 16 2006.

st

nd

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IR Magazine Brazil Awards 2006

th19 Most Admired Company in Brazil Award – Carta Capital Magazine / TNS Interscience

th10 Class Trophy – Sobral Radio Stations

Social Responsibility Certificate - IESC

Open Doors Trophy

Delmiro Gouveia Award

Grendene was chosen as the company with "Best Investor Relations Evolution". The criteria that led Grendene to such achievement were proaction, communication improvement, focus on results and transparency.

For the second consecutive year, Grendene was the leading company in the shoe category upon the analysis of 11 items: consumer respect, product and service quality, notoriety, ethics, innovation, social responsibility, HR commitment, management quality, financial solidity, commitment to the country and global competition.

Every year Grendene gets recognition from the society, by means of a telephone survey that takes votes from listeners for several categories.

To celebrate the Administrator's Day, the Higher Learning Institute of Ceará – IESC expresses its recognition to companies that stood out for their social actions in other categories. Grendene, for its "high Social Responsibility actions", received the Social Responsibility Certificate from IESC.

A company committed to the inclusion of handicapped people, young people from 16 to 24, workers older than 40 and prisoners or ex-convicts. The Social Responsibility Stamp for Inclusive Company was received ever since the creation of this award, and as a Prominent Company in 2006.

An award was given by the newspaper O Povo and Bovespa – Fortaleza Unit, for entrepreneurial excellence to the 10 best companies in Ceará for their economic, financial and social performance. The award is divided into five categories, four of them related to companies. The categories are: (i) "Best Companies, Economical and Financial Performances; (ii) "Best Companies" Social Performances; (iii) "Greatest Companies", considering the most prominent enterprises regarding: net sales, shareholders' equity, total adjusted assets, final net income, tax imposed and amount of employees, a category in which Grendene got the 2nd position; (iv) "Sebrae Highlight", for small and medium companies with best results; and (v) Honored Accountants.

Guidance for 2006 was fully met: Gross revenue was within the company's guidance of “slightly higher growth” than in 2005, with an increase of 2.9%, while the guidance for sales volume, “in line with 2005”, was exceeded, with growth of 1.3%.

Gross revenue was R$ 1,392.4 million 2006 (vs. R$ 1,352.9 million 2005), 86.5% from the domestic market, and 13.5% from exports – both in 2006 and 2005. Sales volume in 2006 was 131.9 million pairs (vs. 130.3 million pairs in 2005), 76.1% to the domestic market (78.8% in 2005) and 23.9% exported (21.2% in 2005) with average total price per pair of R$ 10.55 per pair, 1.5% more than in 2005 (R$ 10.39 per pair)

These charts show the breakdown of sales revenue and volume for the domestic market and exports in 2005 and 2006:

01. Gross revenue

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tropreVI - Management discussion and analysis (MD&A)

In 2006 our domestic market sales reversed their downtrend: There was strong growth of 22.9% in gross revenue from the domestic market, year-on-year, in 4Q06, providing 35% of the gross revenue of the year and 33% of the year's total volume. Gross revenue from the domestic market was R$ 1,204 million 2006, 2.9% higher than in 2005, on sales of 100.4 million pairs, 2.1% lower, and average price 5.2% higher (at R$ 11.99 per pair). The main factors in this performance arose from the company's strategy: (i) reduction of costs and expenses generating greater competitiveness; (ii) reduction in the number of launches; (iii) more concentrated use of the media, with new types of marketing action and greater segmentation by niche in which the brands and licenses operate; (iv) greater focus on research and confirmation of models by the R&D department; (v) products with a higher-added-value mix; (vi) the "triumvirate" of our success – design, quality and comfort – earning the success of the spring-summer collection with consumers; and (vii) strategic postponement of the launch of some products, contributing to sales being more concentrated in 4Q06, reaping benefits from the hotter weather, which was lacking in 3Q06.

... exports and the domestic market contributed equally to total sales growth in 2006: Gross revenue from exports, in dollars, was 15% higher, at US$ 86.6 million (US$ 75.3 million in 2005), with growth of 2.8% in Reais (R$ 188.4 million), in a year in which the US dollar depreciated by 10.6% from 2005. We sold 31.5 million pairs, an increase of 13.9%, with average price in dollars 1.1% higher, at US$ 2.75 per pair (9.8% lower in Reais at R$ 5.98 per pair). This result reflected the following factors: (i) the successful strategy for Melissa, begun in January 2005, of moving to selected distribution in the international market, on efforts to add value to and consolidate the brand; (ii) successful expansion in new markets including the Andean countries, the Middle East, Oceania and Africa; (ii) growth in the traditional markets due a highest consumption; and (iv) reduction of costs and expenses making the company more competitive, even at the present level of the exchange rate.

The contribution of exports to our total sales revenue remained stable at 13.5% from 2005 to 2006, while by volume their proportion grew to 23.9%, from 21.2% in 2005. This chart shows the trends over the last six years:

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Our share of total Brazilian footwear exports in 2006 increased by 290bp (to 17.5%, from 14.6% in 2005), according to Decex, while our Brazilian domestic footwear market share increased to 19.1% in comparison to 18.6% in 2005, in spite of domestic apparent consumption (production – exports + imports) being 4.8% lower, according to IBGE data for footwear production in 2006.

Autumn-winter and spring-summer – are clearly marked in the seasonality of Grendene's figures, as clearly shown in the seasonality of contributions to the annual result by the different quarters – as shown in the chart below. New strategic movements are under study to minimize seasonality and to make the best use of our installed capacity.

Our 2006 net sales totaled R$ 1,103.0 million, 3.3% more than in 2005 (R$ 1,068.0 million), almost exactly in line with the proportionate growth in gross revenue.

02. Net sales

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Average price per pair, lower, on lower raw material costs. Our COGS was 3.3% lower in 2006, at R$ 4.63 per pair, vs. R$ 4.79 in 2005. This was basically due to raw material cost per pair 8% lower, resulting from productivity gains and also less use of raw materials per pair – allied with rigid cost reduction discipline, making it possible to bring down both total costs and costs per pair.

This table shows the components of COGS for the periods indicated, with their percentage variations:

COGS as a percentage of net sales was reduced from 58.5% in 2005, to 55.3% in 2006.

The chart below shows movement of market prices in dollars (ICIS-LOR), converted to Reais, of the raw materials and the change in the level of Grendene's average cost per pair, for the quarters of 2004 up to 2006:

03. Cost of goods sold:

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Gross margin was 320bp higher in 2006; and gross profit was also 11.1% higher, at R$ 493 million, compared with R$ 443.6 million in 2005. Gross margin increased from 41.5% in 2005 to 44.7% of net sales in 2006. It was explained by net sales 3.3% (R$ 34.8 million) higher, and COGS 2.3% (R$ 14.6 million) lower.

04. Gross profit: increase of 320 basis points, sustaining profitability

05. Selling, general & administrative expenses (SG&A) Selling expenses

General and administrative expenses (G&A):

In 2006, our selling expenses were 5.4% higher, up from 24.7% of net sales in 2005 (R$ 263.7 million) to 25.2% (R$ 277.9 million) an increase of 50bp, or R$ 14.2 million, on: (i) a one-off expense of R$ 12 million for rescissions of contracts with commercial representatives, made up of R$ 2.8 million in June 2006 and R$ 9.2 million in December 2006; (ii) R$ 2.2 million increase in sundry expenses; and (iii) proportional increase in freight charges and commissions on sales. Without the cancellations of the representatives' contracts, selling expenses would have remained stable in 2006, at 24.1%, of net sales, lower than their percentage in 2005 (24.7%).

One of the principal items in selling expenses is advertising, which were reduced in 2006 to R$ 90.8 million, 8.2% of net sales, from R$ 94.4 million, 8.8% in 2005. This brings our advertising spend back to its level of 2004 (as a percentage of net sale), as shown in the chart below, with more concentrated use of media, focused on certain products, and use of alternative media as part of a new marketing strategy.

Advertising spend approximates to historic percentage of net

sales in 2006: The strategic delay in the launch of Ipanema GB increasing the advertising spend in the fourth quarter (the Y Ikatu Xingu Project only began to be aired on television on October 7); and the high summer launches, resulted in a higher concentration in the fourth quarter of 2006, more similar to the seasonal advertising spending break-down of 2004 than 2005. As well as this campaign, the main new products we launched with concentrated TV commercial support were: (i) the new Ivete Sangalo collection; (ii) Hot Wheels brand roller-sneakers for boys, Barbie brand for girls; and (iii) the advertisements of the licencings lines; and (iv) promotional campaign for Grendha, being the last one in the year, starring by Cléo Pires. We will keep advertising spend in line with the same average percentages of net sales in 2007, again placing the highest concentration of spending in the last quarter of the year as happened in 2004 and 2006.

Our G&A expense in 2006 was R$ 45.3 million, 7.6% (4.1% of net sales) lower than in 2005 at R$ 49.1 million (4.6% of net sales). The decrease of 50bp was the result of the policy of rationalization and reduction of expenses.

Our adjusted Ebitda in 2006, R$ 317.3 million, was 19% higher than in 2005 (R$ 266.7 million). Adjusted Ebitda margin increased from 28.8% of net sales in 2006, from 25% in 2005. The 380bp increase mainly reflected the increase of 320bp in gross margin.

2006 Ebitda includes a one-off expense, arising from rescissions of contracts with various commercial representatives, as mentioned before. Without this expense 2006 Ebitda would have been R$ 329.3 million and Ebitda margin (on net sales) would have been 30% (a gain of 500bp).

We posted net financial income of R$ 22.5 million in 2006, mainly arising from increase in cash investments, which compares with net financial expenses of R$ 0.15 million in 2005. As well as the increase in cash investment, the result of FX variation and other financial income was positive in 2006.

This table shows the breakdown of financial income and expenses in 2006 and 2005:

06. Adjusted Ebitda: approximately 20% higher in 2006

07. Net financial income (expenses)

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In 2006 the item Other operational income totaled R$ 14.4 million, and other operational expenses R$ 0.3 million. The income in 2006 included two non-recurring items: (i) recovery, in the Courts, of PIS and COFINS tax totaling R$ 7.3 million, in June 2006; and (ii) recovery of INSS contributions (also in the Courts) in the amount of R$ 5.6 million, obtained in December 2006.

2006 adjusted net margin was 23.2%, up from 18.3% in 2005 – an increase of 490bp, on adjusted net

income 31.3% higher at R$ 256.1 million (R$ 195.1 million in 2005). This reflects top-line growth (both sales revenue and volume), maintaining the trend to increasing profitability, on growth of Gross, Ebitda and Net margins.

Since the revenues from the tax incentive systems are posted directly to stockholders' equity, in the Tax incentive reserves line – without appearing in the statement of income, we show below a reconciliation of the adjusted net income for December 31st 2006 and 2005:

As required by the Regulations of the Bovespa Novo Mercado, a reconciliation of Stockholders' equity and Net income between Brazilian GAAP and IFRS (International Financial Reporting Standards) was prepared, and is presented in Explanatory Note 21 to the financial statements. The main differences are in: the manner of recognizing proposed dividends; depreciation; deferred income tax and Social Contribution; the Provin and Proapi tax incentives; and operational profit.

In 2006, consolidated stockholders' equity under IFRS was higher, at R$ 1,050 million, compared to R$ 979 million in BR GAAP, and was also greater under IFRS in 2005 at R$ 916 million, compared to R$ 851 million in BR GAAP.

We highlight the fact that in 2006 consolidated net income under IFRS was R$ 258 million (vs. R$ 256 million in BR GAAP)

08. Other operational income (expenses)

09. Adjusted net income

10. International Financial Reporting Standards (IFRS): Reconciliation

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Adjusted net income (R$`000)

and in 2005 R$ 197 million (vs. R$195 million in BR GAAP), similar to the adjusted net income, since under IFRS the tax incentive amounts are included in the statement of income.

This table shows the calculation of Ebitda in 2006 by the IFRS method, based only on the reconciliation presented, including the difference in depreciation.

stOn December 31 2006, consolidated cash, cash equivalents and cash investments were R$ 658 million, and short-term and long-term loans and financings were R$ 278.8 million. Net cash on the same date was R$ 379.3 million, 10.5% lower

th stthan on September 30 2006 (R$ 424 million), and 14% higher than net cash on December 31 2005 (R$ 332.7 million). th th The reduction from September 30 2006 was mainly due to payment of R$ 41 million in dividends on November 29 2006.

The breakdown of debt and its cost is shown as follows:

This table gives total debt, cash, cash equivalents and cash investments, and net debt (cash) for the periods indicated:

11. Debt

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BR GAAP

Our capital expenditure in 2006 totaled R$ 12.2 million. This contrasts with R$ 40.6 million in 2005, when the expansion at Sobral was completed (in June), with construction of our number 7 plant and acquisition of new machinery and equipment.

There was little need for capital expenditure in 2006, since capacity utilization averaged 75% – total installed capacity was 176 million pairs / year, for production and sales of 132 million pairs in 2006. Our estimate of capital expenditure in 2007 remains at R$ 10 million – including construction of the new industrial unit at Teixeira de Freitas (Bahia State).

12. Capital expenditure (CAPEX)

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Our policy on contracting of other services complies with the principles of preserving the independence and objectivity of our auditors in relation to the auditing of our financial statements. In 2006 the company did not contract, nor did it receive, any services from Ernst & Young Auditores Independentes S/S that were not related to external auditing

13. Independent Auditors – Security Exchange Comission Instruction 381/03 (CVM)

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stThe table below shows the closing positions on December 31 2006 and 2005: net cash and equivalents generated by operational activities was 37.5% lower, primarily due to the reduction in accounts receivable, from R$ 291.3 million on

st st st December 31 2005 to R$ 182.1 million on December 31 2006. Total cash and cash equivalents on December 31 2006 stwere R$ 147.4 million vs. R$ 178 million on December 31 2005, a reduction of 17.2%, reflecting interim payments of

dividends and the lower variation in accounts receivable from clients.

14. Adjusted cash flow

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VII - Audited Financial StatementsGRENDENE S.A. AND SUBSIDIARIES

December 31, 2006 and 2005

A free translation from Portuguese into English of financial statements prepared in accordance with accounting practices adopted in Brazil

BALANCE SHEETS (In thousands of reais)

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1,206,355 927,882 1,244,818 970,105

5,488 5,968 5,488 5,968

204,994 223,087 167,097 183,367

VII - Audited Financial Statements

.

See accompanying notes.

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268,328

169,845 150,850 169,845 150,850

979,884 852,567 979,029 851,170


STATEMENTS OF INCOME (In thousands of reais, except per share information)


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1,088,865 1,056,393 1,102,878 1,068,046


STAT

EMEN

TS O

F SH

AR

EHO

LDER

S’ E

QU

ITY

(In t

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)

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ote

s.

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tropreVII - Audited Financial Statements

STATEMENTS OF CHANGES IN FINANCIAL POSITION (In thousands of reais)


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140,612 140,612

140,456 140,439


CASH FLOW STATEMENTS (In thousands of reais)


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(12,195)

(20,599)


NOTES TO FINANCIAL STATEMENTS(In thousands of reais)

01. Operations

Grendene S.A. was founded in 1971 with the following corporate purposes: (i) manufacture, marketing, exports and imports of (a) footwear and clothing in general; (b) components and parts for footwear products and clothing in general; (c) casts and moulds for footwear products, clothing and plastics in general; d) PVC, resin, plastifying agents, EVA and other raw materials and feedstock items used in footwear manufacture in general; (e) accessories, gifts and promotional materials associated with the products manufactured by the business; (ii) rendering of services, including in the information technology field, related to the activities specified in item (i); (iii) imports of industrial machinery and related accessories, as well as of equipment, special tools and apparatuses in connection with the Company’s corporate purposes; (iv) holding investments in other companies, locally and abroad, as partner, member or shareholder, using its own funds or under tax incentives; and (v) other activities directly related to items (i) and (iv) above.

The financial statements were prepared in accordance with the accounting practices adopted in Brazil and in conformity with the provisions in Brazil’s Corporation Law and rules established by the Brazilian Securities Commission (CVM).

Authorization to conclude the preparation of the accompanying financial statements was obtained in a Board meeting held on January 26, 2007.

The preparation of the financial statements in conformity with said accounting practices requires management to make estimates that affect the amounts reported in the financial statements and accompanying notes. These accounting estimates were based on the Company management’s judgment for determining the adequate amounts to be recorded in the financial statements. Significant items subject to these estimates and assumptions include selection of useful lives and recoverability of property, plant and equipment, credit risk analysis in determining the allowance for doubtful accounts, as well as the analysis of other risks in determining other provisions, including provision for contingencies and measurement of financial instruments and other assets and liabilities at the date of the financial statements. Actual results could differ from those estimates.

The provision for income and social contribution taxes was calculated in accordance with current legislation at the date of the financial statements.

The financial statements and accompanying notes are stated in thousands of reais, except as otherwise indicated.

Assets and liabilities are classified as current whenever their realization or settlement is likely to occur within the following twelve months. Otherwise, they are stated as noncurrent. Monetary assets and liabilities denominated in foreign currencies were converted into reais at the rate of exchange of the balance sheet closing date. Currency translation differences were recognized in the statement of income. For foreign subsidiaries, their assets and liabilities were translated into reais at the rate of exchange of the balance sheet closing date and their results of operations were calculated at the average rate for the year.

02. Basis of Preparation and Presentation of Financial Statements

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Company and its subsidiaries have the same fiscal years and the accounting policies have been adopted uniformly in the consolidated companies, and are consistent with those adopted in the prior year.

Significant consolidation procedures are:

• Elimination of the balances of assets and liabilities deriving from transactions between consolidated companies;• Elimination of equity investments, reserves and retained earnings in consolidated companies; and,• Elimination of the balances of revenues and expenses, as well as unearned income, deriving from business transactions between the consolidated companies.

Reconciliation between net income and shareholders’ equity (Company and consolidated) comprise the following:

The Company is also presenting, as supplemental information, cash flow statements (Company and consolidated), prepared in accordance with Accounting Standards and Procedures (NPC) – 20 established by the Institute of Independent Auditors of Brazil (IBRACON).

Revenues and expenses are recorded on the accrual basis. Revenue from sales of goods is recognized when all risks and rewards of ownership of products are transferred to the buyer. Revenue is not recognized if there is significant uncertainty as to its collectability.

Short-term investments are stated at investment cost plus earnings to the balance sheet date, not exceeding market value.

This allowance, recorded as a reduction of trade accounts receivable and notes receivable, is set up to the limit considered sufficient to cover possible losses on realization of trade accounts receivable and other receivables.

Set up at discount amounts that are estimated to be granted in relation to trade accounts receivable, for payments made at the respective due dates, and matched against financial expenses.

a) Operating result

b) Short-term investments

c) Allowance for doubtful accounts

d) Provision for prompt payment discount

03. Summary of Significant Accounting Practices

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134,983 85,401 979,029 851,170


The consolidated financial statements include the operations of Company and its following subsidiaries, whose ownership structure at the balance sheet date is summarized below:

e) Inventories

f) Investments

g) Property, plant and equipment

h) Intangible assets

i) Liabilities

j) ICMS tax related loans (Proapi and Provin)

k) Taxation

Inventories of finished products and work in process are valued at the tax criterion which determines that finished products should be stated at 70% of the cash sales price at the balance sheet date, whereas work in process should be stated at 80% of the finished products value, as previously computed. In order to adjust these inventories to their probable average production cost, a provision for devaluation is recorded as mentioned in Note 6.

Inventories of raw materials, packaging materials, goods for resale and other inventories are stated at average acquisition cost.

In both cases the cost should not exceed market value.

Investments in subsidiaries are stated by the equity pickup method. Other investments are stated at acquisition cost and adjusted to market value, whenever applicable.

Stated at acquisition, construction or revaluation cost, adjusted by accumulated depreciation calculated by the straight-line method at rates that take into consideration the estimated useful life of assets, as mentioned in Note 9.

Recorded at acquisition and building cost, less amortization, which is calculated by the straight-line method, at the rates mentioned in Note 10.

Liabilities are recognized in the balance sheet when the Company has a legal or constructive obligation arising from past events, the settlement of which is expected to result in an outflow of economic benefits. Certain liabilities due to uncertainty with respect to the timing and amount of the outflow of economic benefits required for their settlement are estimated as incurred and recorded as a provision. Provisions are recorded reflecting the best estimates of the risk involved.

Represented by loan installments granted to the Company for purposes of settling ICMS tax debts, not entitled to incentives and which should be paid on different due dates. The loan installments subject to incentives (see Note 12) are directly recorded as credit in the shareholders’ equity account, under tax incentives sub-account, at the time the referred loans (which are considered investment grants) are obtained.

Selling revenues are subject to the following taxes and contributions, at the following rates:

These charges are shown as sales deductions in the statement of income. Tax credits arising from non-cumulative taxation by PIS/COFINS are recorded as a deduction of cost of sales in the statement of income.

Tax rates

State Value-Added Tax (ICMS) 7.00% and 17.00%Social Contribution Tax on Gross Revenue for Social Security Financing (COFINS) 7.60%Social Contribution Tax on Gross Revenuefor Social Integration Program (PIS) 1.65%

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Income taxes comprise both income and social contribution taxes. Income tax is calculated at a rate of 15%, plus a surtax of 10% on taxable profit exceeding R$ 240 over 12 months, whereas social contribution tax is computed at a rate of 9%, both recognized on an accrual basis, therefore additions to book income deriving from temporarily non-deductible expenses, or exclusions from temporarily non-taxable income, upon determination of current taxable profit, generate deferred tax assets or liabilities.

Grendene S.A. is entitled to income tax incentives due to its establishment in the northeast of the country. These incentives are granted via exemption or reduction of the tax amounts due, calculated based on the result of the activities subject to said incentives, and are directly recorded as credit in the shareholders’ equity account, under tax incentives sub-account. The Supplemental Qualification Report issued by the Agency for Development of the Northeast (ADENE), whereby the Company is granted said income tax reduction, with maturities in calendar years 2010, 2013 and 2016 for the establishments in Fortaleza, Sobral and Crato, respectively.

These mainly represent variable interest investments remunerated, on average, by 100% of the CDI variation. Investments are maintained with first-rate banks, have several maturities and may be redeemed at any one time.

04. Short-term Investments

05. Trade Accounts Receivable

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433,398 347,307 438,483 354,930


06. Inventories

07. Recoverable Taxes

a) Prepaid income and social contribution taxes

b) Withholding income tax

c) ICMS and IPI recoverable

d) PIS

This corresponds to income and social contribution tax prepayments to be offset at the end of the year against the respective federal taxes and contributions calculated through the annual tax income return.

This corresponds to withholding income tax on financial investments, offset against federal taxes and contributions.

Balances came from commercial operations and may be offset against the same type of taxes.

In 2006, the Company recognized as operating income, in the statement of income, the amount of R$245 (financial income accounting for R$128 and other operating income for R$117), referring to a PIS credit recognized by an unappealable court ruling regarding the unconstitutionality of Law 9718/98, against the Federal Government, aiming to refund tax overpayments.

44

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24,999 26,030


e) COFINS

f) INSS

a) Direct subsidiaries (consolidated)

In 2006, the Company recognized as operating income, in the statement of income, the amount of R$12,895 (financial income corresponding to R$5,641 and other operating income to R$7,254), referring to a COFINS credit recognized by an unappealable court ruling, regarding the unconstitutionality of Law 9718/98, against the Federal Government, aiming to refund tax overpayments.

Under this heading, the Company also recorded the amount of R$216, which corresponds to COFINS credits to be offset against federal taxes and contributions.

In 2006, the Company recorded as other operating income, in the statement of income, the amount of R$5,620, referring to a credit recognized by an unappealable court ruling handed down on a tax claim against the Federal Government, with a view to refunding INSS overpayments relating to Sick Pay and the National Institute for Rural Settlement and Agrarian Reform (INCRA).

Management believes the realization of these credits will occur, substantially, over the next year, and no loss is anticipated thereon.

At December 31, 2006 and 2005, Company investments were as follows:

Investments in subsidiaries comprise the following:

Equity pickup at December 31, 2006 in subsidiaries Saddle Corporation S.A. and Saddle Calzados S.A. includes a negative amount of R$3,263 (negative amount of R$ 5,293 in 2005) concerning effects of foreign exchange rate change caused by converting into reais the subsidiaries’ financial statements originally prepared in U.S. dollars and pesos, respectively. The effect of the foreign exchange rate change on investments shown in the consolidated statement of income is recorded under financial income (expenses).

08. Investments

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39,991 42,067 1,743 1,746

(2,055) 38,248 (6,864) 40,303


09. Property, Plant and Equipment

(*) At December 31, 2006, the Company revised the useful life of its machinery and equipment, which will be depreciated at a rate of 10% per year. The effects of this change will be recognized prospectively beginning January 2007.

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The investments account movement comprises the following:

39,991 1,743

339,854 157,413

340,984


b) Indirect subsidiary

Through subsidiary Saddle Corporation S.A., Company also holds the following indirect investment:

’

10. Intangible Assets

In prior years, the Company’s property, plant and equipment assets were revalued based on appraisal reports issued by qualified appraisers. The balances related to these revaluations are summarized as follows:

11. Financial Institutions

The guarantees linked to loans and financing are as follows: a) statutory lien over purchased machinery and equipment; b) land; and c) personal sureties provided by Company directors.

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10,433 10,433

15,927 7,192 14,147 7,099

14,480

70,678 72,621


Long-term installments are classified as per maturity year:

Company is entitled to tax incentives granted by the State Government of Ceará up to 2019 due to the activities carried out in that Brazilian state through loans obtained from Banco do Estado do Ceará S.A. These loans are based on the ICMS (State VAT) tax due and partly on the amount on exports, as computed monthly. Loans must be settled within a period ranging from 36 to 60 months after granting and, according to the respective granting clauses, amounts due will be reduced by 75% to 99% in relation to the total borrowed, depending on the contract terms.

Management believes that recording the benefit at the time the loans are obtained reflects the accrual method of accounting for the year more adequately, as the cost derived from ICMS tax on the operations subject to incentives is also being concomitantly recorded with the benefits.

At the year end December 31, 2006, the Company recorded an equity increase due to the incentive portion of such financing amounting to R$88,604 (R$83,963 in 2005).

At December 31, 2006, the non-incentive amounts of such financing amounting to R$18,867 (R$15,940 in 2005) and R$101,118 (R$89,512 in 2005), respectively, are recorded in current and noncurrent liabilities.

Company has been involved as Defendant in several labor claims. Based on its legal counsel’s opinion, whereby chances of unfavorable outcome are assessed as probable, Company recorded a provision to cover probable losses resulting from these cases.

The Extraordinary Shareholders’ Meeting held on April 10, 2006 approved the increase in capital, with reserves, in the amount of R$109,664.

At December 31, 2006, fully paid-in capital comprised 100,000,000 common shares at par value of R$8.4345 (100,000,000 at par value of R$7.3378 in 2005). Capital shares are of a sole class regarding the nature of the respective holders’ rights and are all voting, under legal conditions.

Legal reserveThe legal reserve is computed based on 5% of the net income for the year ended December 31, 2006, limited to 20% of Capital, in the amount of R$14,445 (R$7,723 in 2005).

Unearned income reserveIt corresponds to the unearned income from transactions with subsidiaries in the amount of R$855 (R$1,397 in 2005), which is released to retained earnings upon effective collection.

a) Capital

b) Income reserves

12. ICMS Tax Related Loans (Proapi and Provin)

13. Provision for Contingencies

14. Shareholders’ Equity

no li nl eaunna


Maturity R$2008200920102011

31,36714,94414,9447,472

68,727

48

c) Dividends

a) Current income and social contribution taxes

As per Company’s by-laws, minimum compulsory dividends are computed based on 25% of the remaining net income for the year, once reserves required by law have been set up.

From income for the year ended December 31, 2006 and based on the Company’s ability to generate cash flow through its operations, management has proposed to Shareholders’ General Meeting the distribution of dividends, calculated as follows:

The Board of Directors approved the payment of interim dividends in the amount of R$80,000, out of which R$39,000 (R$0.39 per share) was paid on August 9, 2006, and R$41,000 (R$0.41 per share) was paid on November 9, 2006. In addition, management has proposed, at December 31, 2006, a complementary payment of R$48,261 (R$0.48 per share), reaching total dividends of R$128,261, i.e. 100% of the net income for the year ended December 31, 2006, after the legal and statutory deductions.

Income and social contribution taxes payable are recorded in current liabilities under the heading taxes, charges and contributions, net of offsets made in the period and tax incentives, as set out below:

15. Income and Social Contribution Taxes

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Based on management’s estimates, deferred income and social contribution taxes are expected to be substantially offset within 12 months.

Income and social contribution taxes, calculated at official rates, have been reconciled to the amounts recorded as income and social contribution tax expenses, as follows:

c) Reconciliation of tax expenses to official rates

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b) Deferred income and social contribution taxes Deferred income and social contribution taxes are as follows:

8,558 6,357 8,996 6,657

3,089 2,297 3,089 2,297


In 2006 the Company recorded as operating income, in the statement of income, the amount of R$12,991 referring to credits recognized by an unappealable court rulings regarding certain tax claims, as described in Note 7.

16. Financial Income, Net

17. Other Operating Income

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143,914 110,102 145,489 112,096


Company has certain operations that may be directly construed as “Financial Instruments,” as recorded in assets and liabilities.

Hedge transactions are undertaken on forward US dollar contracts in the São Paulo Mercantile and Futures Exchange (BM&F) aimed to leverage the US dollar price of the products exported. The Company does not engage in any other operations that may be featured as derivatives. Up to December 31, 2006 the Company recorded gains of R$19,569 (R$19,034 in 2005) on these transactions, net of costs.

Company’s financial instruments and criteria for assessing their fair market value are as follows:

• Cash and cash equivalents – amounts stated in the balance sheet are formed by amounts available in the current account at the date of the balance sheet and they are thus posted at their fair market value.

• Accounts receivable and payable – amounts stated in the balance sheet are close to their fair market value, when considering the allowances set up, and the lack of monetary adjustment for the portion of accounts receivable that has already become due.

• Short-term investments – short-term operations that do not consider the possibility of losses for the Company. Interest rates used are similar to those in similar operations.

• Loans and Financing – as shown in Note 11, charges are recognized on a daily pro rata basis to the balance sheet date. These operations do not pose additional risk to the Company.

• Other accounts – Management is unaware of any other account that might translate into material differences between the amounts recorded and fair market value at December 31, 2006. To date management is also unaware of any material fact or subsequent event that might significantly impact amounts recorded.

At December 31, 2006, Company carried out the following transactions with its related parties:

18. Financial Instruments

19. Related Party Transactions

52

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6,591

16,309 16,463


Related party purchases and sales are carried out at the same prices and terms as those with third parties.

The Company stands as guarantor for certain loan agreements entered into by Vulcabrás do Nordeste S.A., which is controlled by a shareholder of Grendene S.A. The agreements expire between 2005 and 2011 and amount to R$28,215 at December 31, 2006. To guarantee these loans, shareholders Alexandre Grendene Bartelle and Pedro Grendene Bartelle entered into Counter-Guarantee Agreement dated July 29, 2004, whereby Grendene S.A. will be indemnified if the debtor, Vulcabrás do Nordeste S.A., shall fail to honor its financial obligation thereunder.

The Company uses the services provided by an air travel agency owned by a related party. At December 31, 2006, these agency services accounted for approximately 0.03 % of the Company’s general expenses.

The Company’s policy consists of taking out insurance in amounts deemed sufficient to cover disasters in its industrial plants, if any. Given their nature, risk assumptions adopted are not within the scope of an audit of financial statements, consequently, they have not been audited by our independent auditors.

Reconciliation between shareholders’ equity and net income for the year prepared in accordance with accounting practices adopted in Brazil and International Financial Reporting Standards (IFRS), pursuant to New Market Listing Regulation, item 6.2, (ii), compliance therewith to be implemented within two years, considering the listing dated October 29, 2004, is shown as follows:

20. Insurance (unaudited)

21. Reconciliation to International Financial Reporting Standards (IFRS)

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As shown above, the carrying balances measured under IFRS differ in certain aspects from those measured in accordance with accounting practices adopted in Brazil followed by the Company in preparing its financial statements. Significant differences between IFRS and BR GAAP are as follows:

In 2006, the Company recognized dividends to be paid in its financial statements prepared in accordance with accounting practices adopted in Brazil based on the proposed dividends suggested by management (yet to be approved by the shareholders). Under IFRS, dividends are maintained in shareholders’ equity until their payment is approved.

The calculation methodology for depreciation and useful lives of property, plant and equipment is the same per accounting practices adopted in Brazil and under IFRS. At December 31, 2006, the Company revised the useful life of its machinery and equipment, as described in Note 9. This change will have significant effect on the financial statements prepared in accordance with accounting practices adopted in Brazil beginning January 1, 2007. However, under IFRS, the change in useful life has been applied retroactively, which required accumulated depreciation to be recalculated, taking into consideration current useful life as from the acquisition of each asset.

This refers to the effects of deferred income and social contribution taxes, arising from differences between carrying balances measured in accordance with accounting practices adopted in Brazil and those measured under IFRS.

This refers to state and federal tax incentives due to the Company’s operations established in the northeast of the country (Notes 3, 12 and 15). The amounts subject to incentives are directly recorded as credit in the shareholders’ equity account, under tax incentives sub-account, regarded as investment subsidies. Under IFRS, such incentives are presented in net income for the year.

a) Dividends

b) Depreciation

c) Deferred Taxes

d) Tax Incentives

54

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The Board of Directors and ShareholdersGrendene S.A.

1.

2.

3.

4.

5.

Fortaleza, February 2, 2007.

ERNST & YOUNGAuditores Independentes S.S.

CRC-2 SP 15.199/O-6/F/CE

Américo F. Ferreira NetoAccountant CRC1SP192685/O-9/S-CE

We have audited the balance sheets of Grendene S.A. and the consolidated balance sheets of Grendene S.A. and

subsidiaries as of December 31, 2006 and 2005, and the related statements of income, shareholders’ equity and changes in financial position for the years then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements. The audit of the financial statements of the indirect subsidiary Grendha Shoes Corp. for the years ended December 31, 2006 and 2005 were conducted by other independent auditors. Our opinion insofar as it relates to the amount of this investment amounting to R$8,778 thousand (R$9,864 thousand at December 31, 2005) and the negative equity pickup arising therefrom, amounting to R$236 (R$3,971 thousand negative in the year ended December 31, 2005), is based solely on the reports issued by these independent auditors.

We conducted our audits in accordance with generally accepted auditing standards in Brazil, which comprised: (a) the

planning of our work, taking into consideration the materiality of balances, the volume of transactions and the accounting and internal control systems of the Company and subsidiaries; (b) the examination, on a test basis, of documentary evidence and accounting records supporting the amounts and disclosures in the financial statements; and (c) an assessment of the accounting practices used and significant estimates made by management, as well as an evaluation of the overall financial statement presentation.

In our opinion, based on our examinations and on the opinion issued by other independent auditors, as mentioned in

paragraph one above, the financial statements referred to above present fairly, in all material respects, the financial position of Grendene S.A. and the consolidated financial position of Grendene S.A. and subsidiaries at December 31, 2006 and 2005, the results of their operations, changes in their shareholders’ equity and changes in their financial position for the years then ended, in accordance with accounting practices adopted in Brazil.

We conducted our audit with the objective of expressing an opinion on the financial statements referred to paragraph

one above. The cash flow statements (Company and consolidated), for the years ended December 31, 2006 and 2005, presented to provide additional information on the Company and its subsidiaries, are not required as part of the basic financial statements. This information was submitted to the audit procedures described in paragraph 2 above, and, in our opinion, is presented fairly, in all material respects, in relation to the financial statements taken as a whole.

The accounting practices adopted in Brazil differ in certain significant aspects from the accounting policies in accordance

with international accounting standards. The information regarding the nature and the effect of these differences is provided in Note 21 to the financial statements.

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REPORT OF INDEPENDENT AUDITORS

In 2006, Grendene had an average personnel of 18,212 active workers. Most employees perform operating functions. Concerned in bringing the Brazilian diversity into the company, Grendene has workers of all races in its personnel, apart from people with special needs.

In this period, the education level rose in the Grendene units: the number of workers with incomplete Elementary Learning had a 27% reduction. At the same time, the number of workers who completed High School grew 17%. The quantity of masters and workers with postgraduate education grew 22%.

One of our key actions in HR in 2006 was the consolidation of the Grendene Academy, which had emerged as a movement in line with the human development initiatives. Its actions aim to strengthen the company's values which, together with the technical knowledge and the process for continuous learning, are the foundations of this corporate university.

We held speech and lecture events, assessments of potential and Individual Development Panning Sessions (PDIs), for all supervisors. More than 2,000 training sessions were given, including speeches in the areas of management, technical skills, medical, social and motivational subjects. On average, each of the employees received 33 hours of training, compared with 28 in the previous year.

Support was also given for the total or partial cost of our employees' external training for professional improvement.

Participants in our Internal Accident Prevention Committee (CIPA), with representatives of the employees and the employer, carried out several educational campaigns on health and safety of the company's employees. Twelve campaigns, totaling 4,801 hours of training, were held in 2006.

Highlights were the training sessions on safety, and NR-10 training sessions, for a total of 8 separate groups; educational campaigns to prevent accidents; and the study of new ergonomic methods in the workplace.

Grendene also has the advantage of support from its Specialized Safety and Medicine in the Workplace Service (SESMT), which is made up of work safety engineers, work clinicians, work safety technicians, nurses and assistant nurses. This specialized group is working daily to prevent accidents and occupational diseases.

To guarantee the health of its employees and their families, Grendene maintains a series of programs to promote employees' well-being:

Family planning program – This is a partnership with BEMFAM, an NGO (Bem-Estar Familiar do Brasil - 'Brazilian Family Wellbeing'), operated by Grendene's Social Service Department, through professional nurses, clinical doctors and gynecologists. Service is confidential and individual, with a register of people assisted being kept and their progress monitored. The program's main tool is individual counseling, and also educational activities for groups of women and men. Oriented access to birth control methods regulated by the Health Ministry is made available. Gynecological illnesses are diagnosed and treated, or the employee is sent to specialized external health institutions.

Training and human development

Safety

Health

01. Human resources

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tropreVIII - Social and environmental balance

Dental care service – The dentistry team and the assistants that share themselves between strategically located offices.

Hearing conservation program – HCP – In this program for employees' hearing, Grendene makes available the services of speech and hearing professional for external examination and preventive orientation.

Internal clinics – First-aid 24 hours a day. Services are provided for making appointments for medical consultation internally or externally in case of specializations that are not available within the company, sending collected material for laboratory examination, checking temperature, arterial pressure, dressing, sending to specialized doctors and medication administration, according to medical prescription.

Other agreements – Other agreements are provided with ophthalmologic clinics, optical stores and pharmacies, with discount prices for products and consultations.

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FoodFive restaurants serve three meals a day, which cost is 95% funded by Grendene

Every month the company gives “basic food baskets”, with basic food and household products, to all employees.

Other BenefitsPersonal loans. Granted to employees from their third month of admission. Grendene subsidizes credits to employees in adverse situation regarding housing, health and education.

Bank branch. In a partnership with Bradesco, Grendene provides bank branches and ATMs in strategic locations within the company.

Nursery and preschool. Grendene provides children from zero to six and children of working mothers with access to nurseries and schools by special agreement.

When a company as large as Grendene comes to town, it affects the lives of a lot of people. When the company arrived in the city of Sobral, in 1993, the town had a low City Human Development Rate. In the early 90's, the Human Development Rate was 0.581.

Ten years later, a lot has changed. The city's per capita income grew 46.35%, going from R$ 103.57 in 1991 to R$ 151.57 in 2000. Poverty, measured by the rate of people with per capita household income lower than R$ 75.50, had a 19.09% reduction, going from 68.7% in 1991 to 55.6% in 2000. In the 1991-2000 period, Sobral's Human Development Rate grew 20.31%, rising to 0.699 in 2000.

The variable that most contributed to such growth was Education, with 45.8%.

02. Community

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The situation wasn't much different when the company arrived in Crato, also in Ceará, in 1997. In the early 90's, the city's Human Development Rate was 0.616, according to figures from the Human Development Atlas in Brazil.

In three years, several of the city's indicators were improved. In the 1991-2000 period, the infant mortality rate had a 33.81% reduction, going from 61,43 (per thousand live births) in 1991 to 40.66 (per thousand live births) in 2000. The city's per capita income grew 46.55%, going from R$ 114.67 in 1991 to R$ 168.05 in 2000. Crato's Human Development Rate grew 16.23%, going from 0.616 in 1991 to 0.716 in 2006. The variable that most contributed for this growth was Education, with 44.8%. Grendene is proud to be a part of this history.

Ayrton Senna Institute - Seninha – The Ayrton Senna Institute is a non-governmental, non-profit organization doing business all over Brazil to provide children and young people with opportunities for human development by means of quality education in and out of school. Grendene is the company with the greatest licensing for the brand, with 100% of the royalties allotted to actions of the Institute.

Sine – IDT – Grendene promotes the insertion of people in the labor market by special agreement with Sine-IDT, which is responsible for recruiting and sending people to be selected by our company.

Ceará State Government – Between the years of 2003 and 2006, the company donated 3 million pairs of shoes to children in public schools of the State of Ceará, through the Social Action and Education Secretariat.

São João Square Maintenance (Sobral) – Grendene maintains all the gardening in the square, one of the most important places in town.

Casa da Mamãe (Mama's House) Project (Santa Casa in Sobral) – The company contributes monthly with basic food baskets for the maintenance of Casa da Mamãe. This project has the purpose of providing lodging to needing mothers from Sobral and other places whose babies are undergoing long-term treatment in Santa Casa and must be breastfed. In 2006, 84 baskets were donated, corresponding to 2,011.8 kg of food.

Positive Support Network – Support House Madre Ana Rosa Gattorno (Sobral) – In 2006, Grendene donated 862.2 kg of food to HIV-positive patients in the institution.

Good Samaritan House and City Lodging House (Sobral) – The institutions receive food from Monday to Friday from Nutrinor, an outsourcing company that manages Grendene's restaurants. In 2006, 13,100 liters of soup were donated.

Congregation of the Josephine Sisters of the Dom José District (Sobral) – The company collaborates with food supplement for the needing families in the Dom José district. In a partnership with Nutrinor, 13,200 liters of soup were donated in 2006.

Main Actions

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Added value, an indicator of wealth added to the society by the Company in its economic activity, totaled R$ 713 million in 2006 (R$ 636.6 million in 2005). This value is represented by the difference between the earned revenue (R$ 1,350.9 million) and costs associated to the purchase of products and services from third parties (R$ 757.7 million).

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03. Added value

04. Social balance

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, the company

05. Environmental responsibility and sustainable design

The word sustainability ceased to be a concept and became a reality in everyday life of companies. And Grendene is one of the pioneers in the use of research and innovation to reduce the environmental impact of its production.

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Industrial waste. The PVC and coverline (synthetic leather) waste produced in the manufacturing process of shoes and accessories of our brand is fully reused; the EVA (Ethylene Vinyl Acetate) waste is reprocessed and product packages are reused by the company and recycled by third parties. In painting cabins, where air exhaust and cleaning systems are maintained, all waste is reused by manufacturers of glue and paint, and the acetone is recycled and used in washing molds.

Other waste The waste from Grendene's restaurants is stored in cooled chambers, collected daily and used as animal feed. Only organic waste from the sweeping of industrial floors and offices and from the employees' personal hygiene is taken to landfills. Material such as empty cans, metal drums and paper and cardboard packages are sent for recycling.

Water. Water could not be out of Grendene's concerns with environment. In the factories, such resource appears in the production process only for the cooling of some equipment. Even so, the company adopts a close circuit for use of the natural resource, thus reducing the need for acquisition and limiting waste.

In 2006, water preservation was one of the main flags held by Grendene. By means of the Y Ikatu Xingu ("Save the Good Water of Xingu") project in partnership with top model Gisele Bündchen seeks to recover and protect the sources and forests of Xingu, an important river of the Amazon Basin and one of the largest in Brazil, which has been suffering with the region's deforestation (which has doubled in the last ten years). Part of the revenue from the sale of the Gisele Bündchen 2006 collection is allotted to the project. The commercial music and the collection's graphic patterns were created by the Kisêdjê indians and licensed by Grendene.

Read more at www.yikatuxingu.org.br.

Apart from that, the company has its own sewerage treatment system in the plants of Crato and Sobral (CE). The system has anaerobic filters, digestion decantation, stabilization pool, water aeration system and chlorination tanks. Laboratory testing of the products is often performed for formulation control.

Sustainable Design. All these actions make up the tool to make more with less, one of Grendene's propositions. More than a concept, sustainable design is everyday experience instilled into the company's DNA. Based on the Business-Society-Environment triad, the purpose is to create synergy that all parts of this triad can benefit from.

The traditional way of manufacturing shoes requires the use of dozens of components, making it unfeasible to grind and recycle the entirety of its raw material. In Grendene: the process is the opposite: the technology employed for PVC development is the most sustainable and ecologically correct in the world market.

And the concept continues to permeate the brand's products outside the factory door. PVC shoes are not disposable and last an average of three years. When disposed of, they can be entirely recycled, burned for recovery of energy or even sent to landfills, since they do not contaminate the soils or water tables. The product ultimately works as a geomembrane applied in landfills.

Grendene also tries to do its duty in this regard. During the São Paulo Fashion Week event, in January 2007, the Melissa lounge collected 300 old pairs of shoes and traded them for models of the new collection. The Melissa shoes received were sent to Mana Bernardes, the Rio de Janeiro plastic artist who specializes in recycled material, who will build an installation art piece with the products.

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Environmental licenses. The company has environmental licenses valid for all its industrial units and strictly complies with the terms of the granting bodies. The factories in Sobral, Fortaleza and Crato (CE) are licensed by the State Environment Superintendence (Semace) of Ceará and the units in Farroupilha and Carlos Barbosa (RS), by the Henrique Luis Roessler State Foundation for Environmental Protection (Fepam) of Rio Grande do Sul. The company works according to a management plan of solid residue and sends to Semace and Fepam control reports from every unit bimester.

BOARD OF DIRECTORS

EXECUTIVE OFFICERS

HEADQUARTERS

ADMINISTRATIVE CENTER

DIRECTORS AND EXECUTIVE OFFICERS

through the years, was one of the people responsible for redirecting the Company's line of business by developing innovative concepts, products and designs, and deciding to transfer the main industrial unit to the State of Ceará. He has an interest in other businesses in Brazil and abroad,

Alexandre Grendene Bartelleincluding Telasul S.A. producer of tubular furniture; Única

Chairman of the Board of DirectorsIndústria de Móveis Ltda, manufacturer of kitchens and wooden closets, Agropecuária Jacarezinho Ltda, a refinery

Pedro Grendene Bartelleand agricultural enterprise, and Reebok Chile, a company in

Vice-Chairman of the Board of Directorsthe footwear business.

Members of the BoardPedro Grendene Bartelle. Vice-chairman of the board of

Maílson Ferreira da Nóbregadirectors and vice-chief executive officer, 57 years old. He

Oswaldo de Assis Filhowas one of the people responsible for redirecting the

Renato OchmanCompany's line of business by developing innovative

Walter Janssen Netoconcepts, products and designs, and deciding to transfer the main industrial unit to the State of Ceará. He has an interest in other businesses in Brazil and abroad, including

Alexandre Grendene Bartelle Vulcabrás and Vulcabrás do Nordeste, footwear Chief Executive Officer manufacturers, in which he holds the positions of chief

executive officer and chairman of the Board of Directors; Pedro Grendene Bartelle Agropecuária Manacá Ltda, a refinery and agricultural Vice Chief Executive Officer enterprise, and Reebok Chile, a company in the footwear

business. Gelson Luis RostirollaAdministrative and Controlling Officer Mailson Ferreira da Nóbrega - Director, 64 years old. A

graduate in Economics from the Brasília University Center Alexandre Grendene Bartelle (CEUB), he began his career in Banco do Brasil S.A. as head Chief Financial Officer and Investor Relations Director of the rural and industrial credit department for branches in

Pernambuco. After nine years in Banco do Brasil, he took Rudimar Dall’Onder office as head of Counsel for Economic Affairs of the Industrial and Commercial Officer Ministry of Industry and Commerce and, subsequently, of

the Counsel for Economic Affairs of the Ministry of Finance. Luiz Carlos Schneider He held the position of general secretary of the Ministry of Accountant – CRC/CE – SEC – 70.520/O-5 Finance twice and, between 1988 and 1990, he was

ministry of Finance and president of the National Monetary Council, of the National Foreign Trade Council (CACEX), the

Avenida Pimentel Gomes, 214 National Private Insurance Council, the Federal Sobral - CE Denationalization Council and Financial Policy Council. He CEP 62040-050 is currently a member of Tendências Consultoria Integrada Telephone: 55 88 3613-1001 and participates in several social and entrepreneurial Fax: 55 88 3613-1002 organizations, being a member of the Board of Directors of

a number of companies in Brazil and abroad, apart from the Brazilian Institute of Geography and Statistics, the Brazil-Holland Chamber of Commerce, the editorial advisory Avenida Pedro Grendene, 131board of the newspaper O Estado de São Paulo and the Farroupilha – RSHigher Council of Economics of the São Paulo Federation of CEP 95180-000Industries (Fiesp). He also worked as a representative of Telephone: 55 54 2109-9000the Brazilian government in a number of international Fax: 55 54 2109-9991events and committees and is the author of several books www.grendene.com.brand articles about Brazilian economics, published in Brazil and abroad.

Alexandre Grendene Bartelle – Chairman of the Board Oswaldo de Assis Filho – Director, 57-years old. He of Directors, Chief Executive Director, Finance and Investor graduated in electronic engineering in 1973 from the Relations Officers, 57-years old. Bachelor of Laws from the Aeronautics Technological Institute (ITA) and has a University of Caxias do Sul. In 1971, together with his master's degree in Economics from the São Paulo grandfather Pedro Grendene, he founded Grendene and,

01. Corporate information

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tropreIX - General information

University Economics and Administration School. From his career in 1972 as the Administrative and Financial 1978 and 1983, he was executive officer of Banco Mercantil manager of Letícia Avícola S.A, a company dealing in the de São Paulo. Between 1984 and 1991, he was a member aviculture business. He is the vice chief executive officer of of Planibanc Corretora de Valores and between 1992 and Saddle Corp, and a member of the Board of Directors of 1994 he was a member of Convenção Corretora de Valores. Vulcabrás do Nordeste. In 1994, he took office as vice-president of Banco Itamarati, a position he held until 1996. Between 1996 and Rudimar Dall`Onder - Industrial and commercial officer, 1997, he was vice-president of Banco de Crédito Nacional 50 years old. A graduate in mechanical engineering from (BCN) and in 1998 he became a member of Banco Pactual the University of Caxias do Sul, he joined the Company in S.A. until 2006. Currently he is Vice Chairman at UBS 1979 as computer department manager and in 1987 he Pactual. It is also Febraban´s director for the period from took office as Industrial and Commercial Officer, a position 2007 up 2010. he holds to this day.

Renato Ochman – Director, 47-years old. Attorney-at-law, a law graduate from the Pontifical Catholic University of Rio Grande do Sul, has a master's degree in commercial law from the Pontifical Catholic University of São Paulo (PUC/SP) and postgraduate education in commercial law Alexandre Grendene Bartelle – CFO and IRD from the same institution. He began working as an Doris Wilhem – Investor Relations Officerassistant professor of civil law in PUC/SP, having taught in Alexandre Vizzotto and Lenir Zatti Baretta – Analyststhe Getúlio Vargas Foundation between 1989 and 1993, Telephone: 55 54 2109-9000 and again between 2001 and 2003. He is a member of the Fax: 55 54 2109-9991office Carvalhosa, Eizirik, Ochman e Real Amadeo E-mail: [email protected], specializing in corporate law and capital market. He participates in business and entrepreneurial organizations, currently working as a member of the Board São Paulo Stock Exchange (Bovespa) of Directors of Ultrapar Participações S.A., member of the Corporate Governance Level: New marketboard of São Paulo Graded School and a member of the Code: GRND3Audit Committee of the Association for Assistance to Handicapped Children, apart from being the author of several legal articles published in specialized papers and

Banco Itaú S.A. - Custody Department / Shares Without magazines.

Certificates Service

Walter Janssen Neto – Director, 50 years-old, a Brasília

graduate in Economics and Accounting; with postgraduate Contact: Constancia Maria S de Oliveira

education in Industrial Economics from the Federal SCS Quadra 3 – Edif. D´Angela, 30, Bloco A, Sobreloja

University of Santa Catarina and MBA Executive from the CEP 70300-500

Pennsylvania University Wharton School. He has a Centro - Brasília/DF

Professional Director Certificate from the NACD (National Telephone: 55 61 3316-4850

Association of Corporate Directors) of the United States, having specialized in Corporate Governance at the Stanford

Belo Horizonte University Law School, Chicago Business School and

Contact: Jussara Maria Miranda de SouzaWharton School and is a member of the IBGC – Brazilian

Av. João Pinheiro 195, TérreoInstitute of Corporate Governance. He worked as an

Centro - Belo Horizonte/MGExecutive of the WEG Group in Santa Catarina for 31 years,

CEP 30130-180where he had the chance to hold several executive offices

Telephone: 55 31 3249-3524in the Supply, Finance and Sales Department. He was Superintendent officer of the Business Unit, HR and

Curitiba Corporate Marketing officer and recently president of

Contact: Marcia Regina de N Machadooperation of the WEG group in the United States, apart

Rua João Negrão 65, Sobrelojafrom being a member of the Board of Directors of several

Centro - Curitiba/PRBrazilian companies.

CEP 80010-200Telephone: 55 41 3320-4128

Gelson Luis Costirolla - Administrative and controlling officer, 54 years old. He is a graduate in Business

Porto Alegre Administration and Accounting from Oeste Catarinense

Contact: Sandra Ferreira da SilvaUniversity. He joined the Company in 1980 as a financial

Rua Sete de Setembro, 746, Térreomanager and in 1985 he took office as a Financial officer, a

Centro - Porto Alegre/RSposition he held until April 2006. He currently holds the

CEP 90010-190position of Administrative and Controlling officer. He began

Telephone: 55 51 3210-9150

INVESTOR RELATIONS DEPARTMENT

STOCK EXCHANGE

SHAREHOLDERS' DEPARTMENT

02. Information to shareholders

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Rio de Janeiro:Contact. Mônica Lopes Carvalho RodriguesRua Sete de Setembro, 99, SubsoloCentro - Rio de Janeiro/RJCEP 20050-005Telephone: 55 21 2508-8086

São Paulo Contact: Claudia A Germano VasconcellosRua Boa Vista, 176, 1º SubsoloCentro - São Paulo/SPCEP 01092-900Telephone: 55 11 3247-3139

SalvadorContact: Watson Carlos Passos BarretoAv. Estados Unidos (Ed. Sesquicentenário), 50, 2º andarComércio - Salvador/BACEP 40020-010Telephone: 55 71 3319-8010

Ernst & Young Auditores Independentes S.S.Rua Hilário Ribeiro, 202 – 8º andarPorto Alegre - RS – 90510-040Telephone: 55 51 2104-2050 /2058Fax: 55 51 2104-2141

Diário Oficial do Estado do Ceará, O Povo and Valor Econômico.

Preparation: Investor Relations TeamGeneral Coordination: Doris Wilhelm – Investor Relations OfficerText: Clarissa Barreto, journalist – MTb 10.120Translation: Stephen B.Fry e TraduzcaWeb creation and technology: W3Haus www.w3haus.com.brPhotographs:

This report was prepared for the on-line (Internet) version - www.grendene.com.br/www/ri

INDEPENDENT AUDITORS

NEWSPAPERS WHERE INFORMATION IS PUBLISHED

Grendene´s Archives

03. Credits

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Grendene - Annual Report 2006

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