Rossi Residencial S/A and subsidiaries
Balance Sheets
as of December 31, 2007 and 2006
(In thousands of Reais)

Rossi Residencial S/A and subsidiaries
Statements of income
for the years ended December 31, 2007 and 2006
(In thousands of Reais, except for the net income per share)

Rossi Residencial S/A and subsidiaries
Statements of changes in shareholders’ equity (parent company)
for the years ended December 31, 2007 and 2006
(In thousands of Reais)

Rossi Residencial S/A and subsidiaries
Statements of changes in financial position
for the years ended December 31, 2007 and 2006
(In thousands of Reais, except for the amounts per shares or when otherwise referred)

 

Rossi Residencial S/A and subsidiaries
Statements of cash flow
for the years ended December 31, 2007 and 2006 supplementary sheet
(In thousands of Reais, except for the amounts per share or when otherwise referred)

Rossi Residencial S/A and subsidiaries
Notes to the financial statements
for the years ended December 31, 2007 and 2006
(Amounts expressed in thousands of Reais, except for amounts per share or when expressly mentioned the contrary)

1. OPERATIONS

The operations of Rossi Residencial S/A (Company) comprise the development, building, sale of residential and commercial properties, land subdivision and civil engineering services, through own operations, interest in Special Purpose Entities (SPE) and consortiums.

2. PRESENTATION OF THE FINANCIAL STATEMENTS AND MAIN PRACTICES

The financial statements were prepared and presented pursuant to the accounting practices adopted in Brazil, and to the regulations and instructions set forth by the Securities and Exchange Commission of Brazil (CVM).

a) Financial investments
These are represented by bank deposit certificates, debentures and savings accounts, shown at acquisition cost accrued of income earned until the closing dates of the years.

b) Real estate to be sold
These are appraised at building or acquisition cost, which are lower than the market value. The classification between short and long term is based on the expectation of launchings of real estate projects.

c) Allowance for doubtful accounts
The allowance for doubtful accounts is established based on the risk assessment of realization of accounts receivable in an amount deemed sufficient by the management to cover possible losses estimated in the realization of such credits.

d) Investments
The equity interest in subsidiaries and affiliated companies as a whole is assessed by the equity accounting method. Other investments are appraised by the acquisition cost. Costs derived from goodwill ascertained in investment acquisitions are amortized according to the realization of the project’s result, in compliance with the appraisal reports.

e) Property, plant and equipment
This is assessed at the acquisition cost, net of depreciation, recorded by the straight-line method, taking into account the rates mentioned in Note 9.

f) Intangible assets
Intangible assets are represented by expenditures related to the acquisition and development of software and expenses referring to projects under development. The amortization occurs by the straight-line method within five years, as from the moment when the benefits start to be generated.

g) Determination of development income and sale of real estate
On credit sale of housing unit built, the income is appropriated when sale is materialized, regardless of the term to receive the contractual amount.

Pre-fixed interest rates are appropriated to income observing the accrual basis of accounting, regardless of their collection.

On sales of housing units not yet concluded, the income is appropriated according to the criteria set forth by Resolution 963/03 of the Federal Accounting Board (CFC), detailed as follows:

(i) Costs derived from units sold, including land cost, are fully appropriated to the result;
(ii) Revenues from sales, bank loans interest for building and selling expenses inherent to respective developments, represented, substantially, by promotional expenses and sales kiosks are appropriated to income, by using the method of conclusion percentage of each development, and this percentage is measured in view of the cost incurred in relation to the total cost budgeted for respective developments;
(iii) Revenues from sales verified as per item (ii), including the monetary restatement, net of installments already received, are accounted as accounts receivable, or as advances from clients in view of the ratio between revenues recorded and amounts received;
(iv) Said commercial expenses and the bank loan interest for building (item (ii)) are compounded as cost of real estate to be sold, in case of units in stock, or at prepaid expenses, in case of real estate already sold. They are also appropriated to income, using the conclusion percentage of each project.

h) Other current and non-current assets and liabilities
Assets are stated by the lower of their costs (including incurred yields) and market value and liabilities by known or estimated values, including the corresponding yields or financial charges, when applicable.

i) Income tax and social contribution
Income tax and social contribution are determined at the 15% regular rates (plus an additional 10%), for income tax and 9% for social contribution applied over taxable income, in compliance with the criteria established by the tax legislation. Some subsidiary companies have chosen the “presumed profit system” (taxable income computed based on a percentage of gross sales), whose calculation basis for income tax is determined at the rate of 8% for real-estate sales income and for social contribution at the rate of 12% over gross sales (100%, for both taxes, in case the revenue earned comes from financial revenues), over which there is application of the regular rates of the respective tax and contribution.

j) Contingent assets and liabilities and legal liabilities
The accounting practices for recording and disclosing contingent assets and liabilities and legal liabilities are the following:
i) Contingent assets are recognized only when there are actual guarantees or favorable final and unappealable court decisions. Contingent assets likely to be successful are only disclosed in explanatory notes;
ii) Contingent liabilities are provisioned when the losses are deemed as probable and the amounts involved are measurable with sufficient safety. Contingent liabilities deemed as being of remote losses are neither provisioned nor disclosed;
iii) Legal liabilities are recorded as payable, regardless of the assessment on possibilities of success, of lawsuits in which the Company questioned the unconstitutionality of taxes.

k) Accounting estimates
In the preparation of financial statements, it is necessary to use estimates to account for specific assets, liabilities and other operations. The financial statements include, therefore, several estimates related to the selection of useful lives of fixed assets, provisions needed for contingent liabilities, determination of tax provisions, budgeted costs, appropriation of sales expenses, goodwill amortization and similar operations; actual results may differ from the estimates.

Income per share

The income per share is calculated based on the number of shares outstanding on the balance sheet dates.

l) Cash fl ow statement (supplementary information)
Aiming at providing additional information, the Company is presenting the cash fl ow statements, prepared in compliance with NPC no. 20 issued by the Institute of Independent Auditors of Brazil (IBRACON).

3. CONSOLIDATION CRITERIA

The consolidated financial statements were prepared pursuant to the consolidation practices arising from the Brazilian Corporate Law and CVM Instruction 247/96 and comprise Rossi Residencial S/A and investees (individually or under common control, created for the specific purpose of real estate development), listed in Note 8.

The accounting practices are consistently applied in all consolidated companies.

At the consolidation, investments in Subsidiaries and associated companies, as well as balances receivable and payable, revenues, expenses and unrealized profits resulting from intercompany transactions are eliminated.

Considering that the control of investees companies is shared, they are consolidated proportionally.

4. FINANCIAL INVESTMENTS

The financial investments represent the amounts invested in private securities (bank deposit certificates and debentures) issued by financial institutions; those having mean return equivalent to 98% - 104% of DI CETIP "CDI". The debentures represent purchase and sale commitments, recorded in CETIP, and are not subject to credit risks of the respective issuers.

5. ACCOUNTS RECEIVABLE

These are represented by:

a) Clients by real estate development
The amounts related to accounts receivable from real estate are monetarily restated according to contractual clauses, as follows:

• Until surrender of keys of real estate sold, by the variation of Home-Building Brazilian Index (INCC);
  
  
• After surrender of keys of real estate sold, by the variation of IGP-M (General Market Price Index), with 12% interest p.a. ("Price" table).

b) Unearned income
Unearned income represents the portion of accounts receivable related to interest rates to be appropriated in future periods, in accordance with the accrual basis of years.

c) Allowance for doubtful accounts
The Company has delinquent clients in its portfolio, to which amounts such as allowance for doubtful accounts were accounted, and the Management deems them as sufficient to cover related loss risks.

The balances receivable considered were those related to conditional sales with guarantees on promissory notes and monetary restatements of overdue accounts receivable.

6. REAL ESTATE TO BE SOLD

These are represented by the historical costs of apartments, houses and commercial blocks to be sold, either concluded or under construction, land for future developments and materials to be used in works, distributed as follows:

7. OTHER RECEIVABLES

These are represented by:

Related to operations with partners in SPEs (Note 15), the balance of accounts receivable refers to investments carried out in larger amounts than the Company’s interest in the projects, which are offset throughout the execution of said ventures.

Clients on-lending refers to funds or amortization to be released derived from bank financings.

8. INVESTIMENTS

a) The main investment information on December 31, 2007 is summarized below:

b) In 2007, changes in investments may be presented as follows:

As sociedades de propósitos específicos (SPE) e demais sociedades investidas têm como propósito específico a realização de empreendimentos imobiliários relativos à construção e à comercialização de imóveis residenciais e comerciais, sob modalidade similar à Companhia.

9. PROPERTY, PLANT AND EQUIPMENT

This is represented by:

 

10. INTANGIBLE ASSETS

This is represented by:

11. LOANS AND FINANCING

This is represented by:

a) Housing credits
These correspond to financing for building real estate, subject to interest rates ranging from 11% to 12% p.a., indexed by Reference Rate (TR), to be paid in installments with maturity until 2010. Such financing is guaranteed by mortgages of respective real estate.

b) Consolidated schedule of maturities
The following table shows the schedule of maturities of loans and financing outstanding on December 31, 2007:

12. ACCOUNTS PAYABLE BY ACQUISITION OF LAND

These refer to acquisitions of land in stock for the real estate development projects, whose disbursement flow is as follows:

Out of a total of R$52,363 (R$382,257 - consolidated), the amount of R$10,206 (R$80,072 - consolidated) shall be paid by means of contribution to development revenues entered in respective land. The remaining R$42,157 (R$302,185 - consolidated) shall be paid in cash, monetarily restated, as per fl ow. These accounts payable are guaranteed by promissory notes, sureties or by the own real estate.

13. OTHER ACCOUNTS PAYABLE

These are represented by:

14. PROVISION FOR CONTINGENCIES

a) Civil and labor matters
The Company is responsible for certain proceedings before several courts, mainly deriving from solidarity towards certain contractors, whose controls used for reducing exposure are monitored by the Company, which also makes contractual retentions for provisions to such disbursements. In conformity with the evaluation of its legal counsels and with the contractual retentions, the Company performs complements for provisions for risks of probable losses. In 2007, complements amounting to R$1,500 were carried out.

b) Tax matters
The Company challenges in court the constitutionality of federal taxes in relation to the Contribution for Social Security Financing (COFINS) and Social Integration Program (PIS), specifically as to the extension of basis and triggering of said taxes over revenues earned on sale of real estate, prior to Law 9718/98, to which a court deposit exists.

A summary of the constituted provisions and court deposits performed is presented below:

The Company is also involved with other civil and labor proceedings which arose during the normal course of its business, which, in the opinion of the Management and its legal counsels, have an expectation of loss classified as possible. Consequently, no provision was constituted in order to eventually face unfavorable decisions. The amounts of these proceedings, as of December 31, 2007, are: civil R$8,294 and labor R$949.

15. RELATED PARTIES

a) Checking accounts with partners in ventures
The Company participates in real estate development projects along with other partners in a direct way, through joint-ventures or related parties, by means of shareholding interest (normally in SPEs) or through consortiums.

The management structure of these ventures and the cash management are centralized in the company leading the project, which supervises the evolution of the construction works and the budgets, being able to ensure that the necessary investments are made and allocated according to the plan.

The changes in financial position of the venture are refl ected in these balances, observing the respective interest percentage, which are not subject to restatement or financial charges and do not have a pre-determined maturity.

The average term for the development and conclusion of the ventures in which the funds have been invested is three years, always based on the physical and financial projects and schedules for each work. Thus, the allocation of funds allows the conditions for negotiation settled with each partner and in each of the projects to be concentrated in specific structures, more adequate to its characteristics.

The balances are presented as follows:

b) Operations
In November 2007, the Company executed a commercial property lease agreement, corresponding to 246.56 square meters, for the expansion of its administrative headquarters located at Condomínio América Business Park, along with company Paradiso Administração e Participações Ltda., owned by a controlling shareholder. The agreement was executed under normal market conditions, the monthly value being R$13.6 thousand, with clause of annual restatement by IGP-M (General Market Price Index) for the term of 60 months.

On December 2007, the Company sold real estate units of the Praça Capital project, located in the city of Campinas, to companies owned by controlling shareholders. The total operation amounted to R$2.3 million. The sale value per square meter follows the same conditions as the remaining units of the project traded during the year. These units are leased to the Company for it to operate its branch in the city of Campinas.

16. DEBENTURES

On July 25, 2007, the first issuance of thirty thousand (30,000) simple debentures, non convertible into shares, of unsecured type, in a single series, excluding possibilities of renegotiation, with unit face value of ten thousand eighty reais and twentyfour centavos (R$10,080.24), and valid through seven years as of the issuance date, in the total amount of R$302,407, was settled with remuneration that will earn interest equivalent to 106.6% of daily average rates of one day Interbank Deposits (DI) one day, extra-group expressed on a percentage basis per annum (252 business days), calculated and disclosed by CETIP.

The debentures yield must be paid on a semiannual basis, and the first maturity date was January 2008, the balance of which on December 31, 2007 amounted to R$17,417, classified under current liabilities.

The issuance expenses amounted to R$1,747, recorded in non-operating income.

Covenant contractual clauses

The private instrument of deed of the first issuance of simple debentures has restrictive clauses determining maximum levels of indebtedness and leverage, as well as minimum levels of coverage of outstanding installments and costs to be incurred.

There are other financial commitments in addition to these, among which are:

• non-renewal of authorizations and licenses, including environmental ones;
  
  
• transformation into a limited-liability company;
  
  
• non-compliance with final and unappealable court decisions ;
  
  
• reduction of the capital stock not destined to absorb losses;
  
  
• transfers or assignments of share control;
  
  
• changes in the shareholding structure, such as mergers, spin-offs and incorporations in transactions exceeding 10% of shareholders’ equity;

These contractual clauses were fully complied with in the year ended on December 31, 2007.

17. SHAREHOLDERS’ EQUITY

a) Capital stock
The capital stock is R$445,117 on December 31, 2007 and 2006, represented by 78,851,814 registered common shares. The authorized capital stock is 100,000,000 common shares.

In the first quarter of 2006, the Company went public by means of the issue of 30,500,000 non-par, registered common shares at an issue value of R$25 per share, of which R$214,385 was destined to capital stock and R$548,115 to capital reserves, in a share premium account. The cost to place these shares on the market was R$49,876, classified under nonoperating expenses.

b) Treasury Shares
On December 31, 2007, 756,100 common shares had been acquired and remained in treasury, in the amount of R$17,269. The minimum weighted average and maximum cost per share are, respectively, R$15.96, R$23.60 and R$25.32 and the market value of such shares was R$45.50 per registered common share as of December 31, 2007.

c) Appropriation of the net income for the year
The year’s net income, after compensations and deductions set forth by Law and pursuant to the statutory provision, will be allocated as follows:

• 5% to the legal reserve, up to the limit of 20% of the paid-up capital stock;
  
  
• 25% of the balance, after allocation to the legal reserve, will be allocated to the payment of minimum mandatory
  dividends to all shareholders.

A legal reserve of R$6,566 was established, equivalent to 5% of the year’s net profit, in conformity with legal and statutory provisions.

The calculation of proposed dividends corresponding to 2007 is as follows:

The Company’s Board of Directors will propose the Annual General Meeting to approve the allocation of retained earnings, in the amount of R$93,561, to retain profits for reinvestment in its operations, according to the investment plan.

18. DEFERRED TAXES AND CONTRIBUTIONS

Deferred taxes and contributions (parent company and consolidated) derive from balances of tax losses and social contribution negative basis, and from temporary non-deductible expenses at assets, and difference in the practice of recognition of profits in the real estate activity for tax purposes (cash basis) and accounting purposes (accrual basis) in liabilities. The management of the Company and of its subsidiaries, based on the future results projections, estimate realization within five years.

The balances of assets and liabilities are presented below:

The Company’s management prepared an estimate for the generation of future results, which shall be taxed, based on the expected result of operations, discounted at present value at the rate of 1% per month for the next years. Said technical study is approved by the Executive Board and the Board of Directors and presupposes the realization of deferred income tax and social contribution in the following years:

The amounts of income tax and social contribution stated in the result present the following conciliation in their values at nominal rate:

The Company appropriated R$8,239 (R$22,379 - consolidated) to the 2007 results related to deferred PIS and COFINS.

19. REAL ESTATE DEVELOPMENT AND SALE OPERATIONS

The Company and its subsidiaries have adopted the procedures and rules set forth by CFC Resolution no. 963 for accounting recognition of income earned from real estate operations. As a result, the balances of budgeted costs of units sold and the income from unearned real estate sales, in addition to the full balance of accounts receivable from sale agreements, derived from the projects, are not recorded at the financial statements:

a) Amounts receivable from clients

b) Costs budgeted to be incurred

c) Income from real estate sales to appropriate

20. FINANCIAL INSTRUMENTS

The Company and its subsidiaries participate in operations involving financial instruments with a view to finance its activities or apply its available funds. The management of such risks is carried out by defining conservative strategies, aiming liquidity, profitability and safety. The control policy consists of permanently following-up rates contracted versus those prevailing in the market. Operations involving financial instruments with speculation purposes are not carried out.

The financial instruments are recorded in equity accounts and are represented by financial investments (Note 4), accounts receivable from clients (Note 5), loans and financing (Note 11), debentures (Note 16) and treasury shares (Note 17), whose estimated market values are substantially similar to their respective book values.

On December 31, 2007, there are no current agreements related to derivative and hedge operations in the Company.

21. EMPLOYEES AND MANAGERS’ PROFIT SHARING

Employees’ profit sharing, pursuant to the provisions of the legislation in force, may occur based on spontaneous programs maintained by the companies or in agreements with the employees or union entities and was resolved at a Board of Executive Officers’ meeting.

Managers’ profit sharing shall be purpose of resolutions at the General Meeting, pursuant to the provisions in item XV of article 21 of the Company’s Bylaws.

Thus, in 2007, the Company provisioned R$9,505 of employees and managers’ profit sharing.

22. INSURANCE

The Company and its subsidiaries adopted the policy of taking out insurance coverage for assets subject to risks at amounts deemed as sufficient by the management to cover eventual claims, taking into consideration its activity. The policies are effective and the premiums were duly paid. We consider we have a risk management program with a view to setting out risks, seeking on the market coverage compatible with our size and operations, and our insurance coverage is consistent with other similar sized-companies operating in the industry. Below, the insurance coverage:

Engineering risks - (R$758,570)

i) Civil liability - coverage for property and bodily damage involuntarily caused to third parties resulting from the execution of work, facilities and setting up at the site, purpose of insurance;
ii) Physical damages to real estate (housing credit) - coverage for damages, losses and property damage derived from sudden and unforeseen accidents to real estate.

Fire - (R$57,569) lightning and explosion at headquarters and regional offices.

Building conclusion insurance - (R$115,003) it ensures the surrender of building to committed purchasers.

The assumptions of risks adopted, given their nature, are not included in the scope of audit of the financial statements, and therefore they were not audited by our independent auditors.

23. SUBSEQUENT EVENTS

a) Changes in the Brazilian Corporate Law
On December 28, 2007, Law 11,638/07 was enacted, which amends certain provisions of the Brazilian Corporate Law (Law 6,404, as of December 15, 1976). In general terms, the new Law requires the harmonization of the accounting practices adopted in Brazil with certain international accounting standards derived from rules issued by the IASB - International Accounting Standard Board, with effect as of January 1, 2008.

Among the amendments required in the accounting practices adopted in Brazil are the following: substitution of the statement of changes in financial position for the statement of cash fl ows, the addition of the value-added statement, the creation of new account subgroups, the segregation of tax and market records and the introduction of new criteria for the classification and assessment of financial instruments, appreciation of certain assets at market value, and the concept of adjustment to present value for long-term operations with assets and liabilities, and for material short-term operations.

The Company chose to present the statement of cash fl ows as supplementary information to these fi nancial statements, and is analyzing possible impacts of the other changes introduced by Law 11,638/07 to its fi nancial statements, which, if necessary, will be recognized throughout 2008, and in connection with normative rulings to be issued by CVM, as per its Technical Notice on January 14, 2008.

b) Primary public offering of common shares

On January 15, 2008, the company registered at CVM the requirement of primary public offering of common shares issued by the Company ("Offering"). The Offering shall be carried out in the Brazilian non-organized over-the-counter market pursuant to CVM Instruction no. 400/03 and, also, with efforts for placements abroad based on registration exemptions determined by the U.S. Securities Act of 1933, as amended. No registry of the Offering or of the Shares will be submitted to agencies or regulatory bodies of any country’s capital markets other than Brazil. The share issue price shall be settled by means of a bookbuilding procedure, pursuant to article 44 of CVM Instruction no. 400/03. The implementation of the offering is subject to the favorable conditions of the domestic and international capital markets.

When current conditions are maintained, a notice to the market shall be timely disclosed, pursuant to the provisions in article 53 of CVM Instruction no. 400/03, containing information on: (i) other characteristics of the Offering; (ii) places where to obtain the preliminary prospect; (iii) the estimated dates and places for the disclosure of the Offering; and (iv) the conditions, the procedure, the reserves period and the bookbuilding period. The Offer shall take force after the appropriated registry is granted by CVM.