EX-99.1 2 v119747_ex99-1.htm Unassociated Document
Exhibit 99.1

GERDAU S.A. AND SUBSIDIARIES
CONSOLIDATED INTERIM FINANCIAL STATEMENTS
AS OF MARCH 31, 2008 AND 2007
Prepared in accordance with the International Financial Reporting Standards (“IFRS”) as issued by the International Accounting Standards Board – IASB, and with Instruction No. 457 of July 13, 2007 as issued by the Brazilian Securities Commission (CVM).
 
 
(Convenience Translation into English from the Original Previously Issued in Portuguese)
INDEPENDENT ACCOUNTANTS’ REVIEW REPORT

To the Shareholders and Board of Directors of
Gerdau S.A.
Rio de Janeiro – RJ
 
1.
We have performed a special review of the accompanying consolidated interim financial statements of Gerdau S.A. and subsidiaries (“the Company”), consisting of the consolidated balance sheet as of March 31, 2008, the consolidated statements of income, changes in shareholders’ equity, and cash flows for the quarter then ended, the related notes to the consolidated interim financial statements and the performance report, all expressed in Brazilian reais and prepared in accordance with international accounting standards issued by the International Accounting Standards Board (IASB) under the responsibility of the Company’s management.
 
2.
Our review was conducted in accordance with specific standards established by the Brazilian Institute of Independent Auditors (IBRACON), together with the Federal Accounting Council, and consisted principally of: (a) inquiries of and discussions with certain officials of the Company who have responsibility for accounting, financial and operating matters about the criteria adopted in the preparation of the consolidated interim financial statements, and (b) review of the information and subsequent events that had or might have had material effects on the financial position and results of operations of the Company.
 
3.
Based on our special review, we are not aware of any material modifications that should be made to the aforementioned consolidated interim financial statements for them to be fairly stated, in all material respects, in accordance with international accounting standards issued by the International Accounting Standards Board (IASB).
 
4.
The consolidated statements of income, changes in shareholders’ equity, and cash flows for the quarter ended March 31, 2007, presented for comparative purposes, were reviewed by us in accordance with the procedures mentioned in paragraph 2 and, based on our review, we are not aware of any material modifications that should be made to those consolidated financial statements for them to be fairly stated, in all material respects, in accordance with international accounting standards issued by the International Accounting Standards Board (IASB).
 
5.
Brazilian accounting practices differ, in certain material respects, from international accounting standards issued by the International Accounting Standards Board (IASB). Information related to the nature and effect of these differences is presented in note 28 to the consolidated interim financial statements.
 
6.
We had previously audited the consolidated balance sheet as of December 31, 2007, which was prepared in accordance with international accounting standards issued by the International Accounting Standards Board (IASB) and is presented for comparative purposes, and issued an unqualified opinion thereon, dated February 12, 2008.
 
7.
The accompanying consolidated interim financial statements have been translated into English for the convenience of readers outside Brazil.

Rio de Janeiro, May 12, 2008

DELOITTE TOUCHE TOHMATSU
Fernando Carrasco
Auditores Independentes
Engagement Partner
 
 
(Convenience Translation into English from the Original Previously Issued in Portuguese)

GERDAU S.A. and subsidiaries
CONSOLIDATED BALANCE SHEET
In thousands of Brazilian reais (R$)

   
Note
  
03/31/2008*
  
12/31/2007
  
CURRENT ASSETS
              
Cash and cash equivalents
    
4
   
2,079,378
   
2,026,096
 
Temporary cash investments
                    
Trading securities
          
1,765,214
   
2,836,903
 
Available-for-sale securities
          
239,223
   
276,374
 
Trade accounts receivable
    
5
   
3,678,196
   
3,172,316
 
Inventories
   
6
   
6,483,776
   
6,056,661
 
Tax credits
   
7
   
547,700
   
598,317
 
Prepaid expenses
          
108,187
   
108,690
 
Unrealized gains on derivatives
    
15
   
8,833
   
14
 
Other receivables
          
247,213
   
237,602
 
           
15,157,720
   
15,312,973
 
                     
NON CURRENT ASSETS
                    
Tax credits
   
7
   
579,299
   
594,894
 
Deferred income taxes
   
8
   
946,775
   
933,851
 
Unrealized gains on derivatives
    
15
   
40,950
   
1,553
 
Prepaid expenses
          
103,626
   
110,207
 
Escrow deposits
   
17
   
230,128
   
223,735
 
Other receivables
          
292,728
   
290,783
 
Prepaid pension cost
    
19
   
433,285
   
417,723
 
Investments accounted for under the equity method
    
10
   
870,312
   
613,112
 
Other investments
    
10
   
33,983
   
33,753
 
Goodwill
    
11
   
6,210,576
   
6,043,396
 
Intangible assets
    
12
   
1,036,667
   
1,073,715
 
Property, plant and equipment, net
   
9
   
16,065,331
   
15,827,944
 
           
26,843,660
   
26,164,666
 
                     
TOTAL ASSETS
           
42,001,380
   
41,477,639
 

The accompanying notes are an integral part of these Consolidated Interim Financial Statements
*Reviewed by independent auditors to the extent described in the report dated May 12, 2008
 
 
(Convenience Translation into English from the Original Previously Issued in Portuguese)

GERDAU S.A. and subsidiaries
CONSOLIDATED BALANCE SHEET
In thousands of Brazilian reais (R$)

   
Nota
  
03/31/2008*
  
12/31/2007
  
CURRENT LIABILITIES
              
Trade accounts payable
          
2,768,765
   
2,586,634
 
Loans and financing
    
13
   
2,047,467
   
2,500,985
 
Debentures
    
14
   
94,744
   
38,125
 
Taxes payable
    
16
   
734,233
   
462,311
 
Payroll
          
427,064
   
518,098
 
Dividends payable
          
70,847
   
392
 
Unrealized losses on derivatives
    
15
   
12,359
   
1,964
 
Other payables
          
404,179
   
478,639
 
           
6,559,658
   
6,587,148
 
                     
NON CURRENT LIABILITIES
                    
Loans and financing
    
13
   
12,384,762
   
12,461,128
 
Debentures
    
14
   
902,125
   
903,151
 
Deferred income and social contribution taxes
   
8
   
2,310,720
   
2,315,771
 
Unrealized losses on derivatives
    
15
   
40,116
   
16,106
 
Reserve for contingencies
   
17
   
431,156
   
489,103
 
Employees benefits
    
19
   
816,603
   
794,125
 
Minority interest put options
    
15-f
    
1,072,866
   
889,440
 
Other payables
          
386,325
   
379,589
 
           
18,344,673
   
18,248,413
 
                     
SHAREHOLDERS' EQUITY
   
21
             
Capital
          
7,810,453
   
7,810,453
 
Treasury stocks
          
(126,451
)
  
(106,667
)
  Valuation adjustments
          
10,160
   
13,723
 
Legal reserve
          
273,525
   
278,713
 
Retained earnings
          
6,325,749
   
5,765,616
 
Cumulative translation adjustment
          
(938,996
)
  
(1,049,333
)
PARENT COMPANY'S INTEREST
          
13,354,440
   
12,712,505
 
                     
MINORITY INTEREST
          
3,742,609
   
3,929,573
 
                     
SHAREHOLDERS' EQUITY
          
17,097,049
   
16,642,078
 
                     
TOTAL LIABILITIES AND SHAREHOLDER'S EQUITY
          
42,001,380
   
41,477,639
 
 
The accompanying notes are an integral part of these Consolidated Interim Financial Statements
*Reviewed by independent auditors to the extent described in the report dated May 12, 2008
 
 
(Convenience Translation into English from the Original Previously Issued in Portuguese)

GERDAU S.A. and subsidiaries
CONSOLIDATED STATEMENT OF INCOME
In thousands of Brazilian reais (R$)

   
Note
  
03/31/2008*
  
03/31/2007*
  
               
NET SALES
    
23
   
8,944,510
   
7,335,141
 
Cost of sales
    
27
   
(6,812,177
)
  
(5,566,401
)
GROSS PROFIT
          
2,132,333
   
1,768,740
 
Selling expenses
    
27
   
(151,483
)
  
(142,818
)
General and administrative expenses
    
27
   
(505,866
)
  
(434,877
)
Other operating income (expenses), net
          
26,243
   
10,093
 
INCOME FROM OPERATIONS
          
1,501,227
   
1,201,138
 
Equity in subsidiaries
          
60,833
   
35,056
 
INCOME BEFORE FINANCIAL INCOME (EXPENSES) AND TAXES
         
1,562,060
   
1,236,194
 
Financial income
          
119,719
   
244,374
 
Financial expenses
          
(353,544
)
  
(236,273
)
Exchange variations, net
          
43,622
   
177,841
 
Gain and losses on derivatives, net
          
25,906
   
59,927
 
INCOME BEFORE TAXES
          
1,397,763
   
1,482,063
 
Provision for income and social contribution taxes
                    
Current
    
8
   
(333,872
)
  
(294,129
)
Deferred
    
8
   
26,226
   
(9,869
)
           
(307,646
)
  
(303,998
)
NET INCOME
          
1,090,117
   
1,178,065
 
ATTRIBUTED TO:
                    
Parent company's interest
          
874,382
   
996,913
 
Minority interests
          
215,735
   
181,152
 
           
1,090,117
   
1,178,065
 
                     
Basic earnings per share - preferred and common
    
22
   
1.32
   
1.50
 
                     
Diluted earnings per share - preferred and common
    
22
   
1.32
   
1.49
 
 
The accompanying notes are an integral part of these Consolidated Interim Financial Statements
*Reviewed by independent auditors to the extent described in the report dated May 12, 2008
 
 
(Convenience Translation into English from the Original Previously Issued in Portuguese)

GERDAU S.A. and subsidiaries
In thousands of Brazilian reais (R$)

                           
Minority
  
Total
  
   
Attributed to controlling shareholder's interest
  
Interest
  
Shareholder's Equity
  
   
Capital
stock
  
Treasury
Stock 
  
Valuation
adjustments
  
Legal
Reserve
  
Retained
earnings
  
Cumulative
translation
adjustment
          
Balance as of December 31, 2006
    
7,810,453
   
(109,609
)
  
-
    
159,109
   
3,030,459
   
(259,130
)
  
3,556,934
   
14,188,216
 
Net income
   
-
    
-
    
-
    
-
    
996,913
   
-
    
181,152
   
1,178,065
 
Stock option expenses recognized in the period
    
-
    
-
    
-
    
-
    
1,267
   
-
    
-
    
1,267
 
Stock option exercised during the period
    
-
    
713
   
-
    
-
    
494
   
-
    
-
    
1,207
 
Dividends/interest on capital
    
-
    
-
    
-
    
-
    
(73,996
)
  
-
    
-
    
(73,996
)
Cumulative translation adjustments
    
-
    
-
    
-
    
-
    
-
    
(188,485
)
  
(114,882
)
  
(303,367
)
Minority interest over fair value alocation
    
-
    
-
    
-
    
-
    
-
    
-
    
25,998
   
25,998
 
Minority interested consolidated entities
    
-
    
-
    
-
    
-
    
4,777
   
-
    
(73,730
)
  
(68,953
)
Balance as of March 31, 2007
    
7,810,453
   
(108,896
)
  
-
    
159,109
   
3,959,914
   
(447,615
)
  
3,575,472
   
14,948,437
 
                                                           
Balance as of December 31, 2007
    
7,810,453
   
(106,667
)
  
13,723
   
278,713
   
5,765,616
   
(1,049,333
)
  
3,929,573
   
16,642,078
 
Net income
   
-
    
-
    
-
    
-
    
874,382
   
-
    
215,735
   
1,090,117
 
Stock option expenses recognized in the period
   
-
    
-
    
-
    
-
    
1,695
   
-
    
-
    
1,695
 
Stock options exercised during the period
    
-
    
29,918
   
-
    
-
    
(7,732
)
  
-
    
-
    
22,186
 
Dividends/interest on capital
    
-
    
-
    
-
    
-
    
(250,336
)
  
-
    
(114,176
)
  
(364,512
)
Allocation of funds porposed to Shareholder's Meeting
    
-
    
-
    
-
    
(5,188
)
  
5,188
   
-
    
-
    
-
  
Cumulative translation adjustments
    
-
    
-
    
-
    
-
    
-
    
110,337
   
(82,442
)
  
27,895
 
Minority interest over fair value allocation
    
-
    
-
    
-
    
-
    
-
    
-
    
7,496
   
7,496
 
Minority effect in consolidated entities
    
-
    
-
    
-
    
-
    
(63,064
)
  
-
    
(55,453
)
  
(118,517
)
Minority interest put options
    
-
    
-
    
-
    
-
    
-
    
-
    
(150,939
)
  
(150,939
)
Treasury stock
    
-
    
(49,702
)
  
-
    
-
    
-
    
-
    
-
    
(49,702
)
Unrealized losses on derivatives
    
-
    
-
    
(10,604
)
  
-
    
-
    
-
    
(5,892
)
  
(16,496
)
Unrealized gains on avaible-for-sale securities
    
-
    
-
    
7,041
   
-
    
-
    
-
    
(1,293
)
  
5,748
 
Balance as of March 31, 2008*
    
7,810,453
   
(126,451
)
  
10,160
   
273,525
   
6,325,749
   
(938,996
)
  
3,742,609
   
17,097,049
 
 
The accompanying notes are an integral part of these Consolidated Interim Financial Statements
*Reviewed by independent auditors to the extent described in the report dated May 12, 2008
 
 
(Convenience Translation into English from the Original Previously Issued in Portuguese)

GERDAU S.A. and subsidiaries
CONSOLIDATED STATEMENT OF INCOME
In thousands of Brazilian reais (R$)
 
   
Note
  
03/31/2008*
  
03/31/2007*
  
               
Cash flows from operating activities
              
Net income (including minority interest)
          
1,090,117
    
1,178,065
  
Adjustments to reconcile net income to net cash provided by operating activities:
                    
Depreciation and amortization
          
422,542
    
286,216
  
Equity in subsidiaries
          
(60,833
)
  
(35,056
)
Exchange variation
          
(43,622
)
  
(184,652
)
Gains on derivatives, net
          
(25,906
)
  
(59,927
)
Post-employment benefits and stock-based compensation
          
(1,921
)
  
31,869
  
Deferred income and social contribution taxes
          
(26,226
)
  
9,869
  
Loss on disposal of property, plant and equipment and investments
          
(5,399
)
  
2,697
  
Provision for losses on avaible-for-sale securities
          
39,647
    
-
  
Allowance for doubtful accounts
          
3,467
    
4,529
  
Reserve for contingencies
         
(58,947
)
  
105,227
  
Distributions from joint ventures
          
18,197
    
42,578
  
Interest income
          
(85,419
)
  
(217,069
)
Interest expense
          
238,784
    
167,159
  
           
1,504,481
    
1,331,505
  
Changes in assets and liabilities:
                    
Increase in trade accounts receivable
         
(423,272
)
  
(460,826
)
Increase (decrease) in inventories
          
(251,201
)
  
163,084
  
Increase in trade accounts payable
          
135,600
    
220,417
  
Decrease of other receivables
          
190,822
    
172,641
  
Decrease of other payables
          
(207,136
)
  
(38,171
)
Trading securities
          
(1,363,558
)
  
(1,920,112
)
Redemption of trading securities
          
2,437,386
    
2,394,561
  
Cash provided by operating activities
          
2,023,122
    
1,863,099
  
                     
Interest paid on loans and financing
          
(272,504
)
  
(165,405
)
Income and social contribution taxes paid
          
(130,514
)
  
(89,339
)
Net cash provided by operating activities
          
1,620,104
    
1,608,355
  
                     
Cash flows from investing activities
                    
Additions to property, plant and equipment
          
(470,275
)
  
(735,332
)
Payments for business acquisitions
    
3.6
    
(369,861
)
  
(532,047
)
Interest received on cash investments
          
33,745
    
194,317
  
Net cash used in investing activities
          
(806,391
)
  
(1,073,062
)
                     
Cash flows from financing activities
                    
Dividends and interest on capital paid
          
(319,047
)
  
(415,094
)
Borrowings
          
368,353
    
452,579
  
Repayment of loans and financing
          
(834,585
)
  
(739,000
)
Intercompany loans, net
          
(7,110
)
  
18,171
  
Net cash provided by (used in) financing activities
          
(792,389
)
  
(683,344
)
                     
Exchange variation on cash and cash equivalents
          
31,958
    
(86,940
)
                     
Increase in cash and cash equivalents
          
53,282
    
(234,991
)
Cash and cash equivalents at beginning of period
          
2,026,096
    
1,070,524
  
Cash and cash equivalents at end of period
          
2,079,378
    
835,533
  

The accompanying notes are an integral part of these Consolidated Interim Financial Statements
*Reviewed by independent auditors to the extent described in the report dated May 12, 2008
 
GERDAU S.A. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED INTERIM FINANCIAL STATEMENTS AS OF MARCH 31, 2008 AND 2007
(Amounts in thousands of Brazilian reais - R$, unless otherwise indicated)
Reviewed by independent auditors to the extent described in the report dated May 12, 2008
(Convenience Translation into English from the Original Previously Issued in Portuguese)

NOTE 1 - GENERAL INFORMATION

Gerdau S.A. is a publicly traded corporation with its head office in the city of Rio de Janeiro, Brazil, and is a holding company in the Gerdau Group. The Company is engaged in the production and sale of steel products in general from plants located in Brazil, Argentina, Chile, Colombia, Mexico, Peru, Dominican Republic, Uruguay, Venezuela, United States, Canada, Spain, and India.

The Gerdau Group has an installed capacity of 25.9 million tons of crude steel per year, producing steel in electric furnaces using scrap and pig iron that are mostly purchased in the region in which each plant operates (mini-mill concept). Gerdau also produces steel from iron ore (through blast furnaces and direct reduction) and has units used exclusively to produce specialty steels. It is the largest scrap recycling group in Latin America and is among the largest in the world.

The industrial sector is the most important market, where manufacturers of consumer goods, such as vehicles and equipment for commercial and home use, basically use merchant bars available in various specifications. The next most important market is the civil construction sector, which demands a high volume of rebar and wires for concrete. There are also numerous customers for nails, staples and wires, commonly used in the agribusiness sector.

The Consolidated Interim Financial Statements of Gerdau S.A and Subsidiaries (collectively referred to as the“Company”) were approved by the Disclosure Committee on May 8, 2008.

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING PRACTICES

2.1 - Basis of Presentation

The Company's Consolidated Interim Financial Statements for the 3-month period ended March 31, 2008 have been prepared in accordance with International Accounting Standards (IAS) No. 34, that specifies the content of an interim financial report. The Consolidated Interim Financial Statements have been prepared in accordance with the International Financial Reporting Standards (IFRS) and with the interpretations of the International Financial Reporting Interpretations Committee (IFRIC) that were in effect on March 31, 2008.

The preparation of the Consolidated Interim Financial Statements in accordance with IAS 34 requires Management to make accounting estimates. The areas that involve judgment or use of estimates relevant to the Consolidated Interim Financial Statements are stated in note 2.18. The Consolidated Interim Financial Statements have been prepared using the historical cost as its basis, except for the valuation of certain noncurrent assets and financial instruments.

The Company adopted all rules, revision of rules and interpretations issued by IASB and that were applicable on March 31, 2008.

2.2 – Translation of Foreign Currency Balances

a) Functional and Reporting Currency

The Financial Statements of each subsidiary included in the Company's consolidation and those used as a basis for accounting for investments under the equity method are prepared using the functional currency of each entity. The functional currency of an entity is the currency of the primary economic environment where it operates. By defining the functional currency of each subsidiary, Management considered which currency significantly influences the sales price of its products and services and the currency in which most of the cost of its production inputs is paid or incurred. The Consolidated Interim Financial Statements are presented in Brazilian reais (R$), which is the functional and reporting currency of Gerdau S.A..


GERDAU S.A. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED INTERIM FINANCIAL STATEMENTS AS OF MARCH 31, 2008 AND 2007
(Amounts in thousands of Brazilian reais - R$, unless otherwise indicated)
Reviewed by independent auditors to the extent described in the report dated May 12, 2008
(Convenience Translation into English from the Original Previously Issued in Portuguese)

b) Transactions and Balances

The transactions in foreign currency are converted to the functional currency using the exchange rate in effect on the transaction date. The gains and losses resulting from the difference between the conversion of assets and liabilities in foreign currency at the year-end and the conversion of the transaction amounts are recognized in the statement of income.

c) Group Companies

The results of operations and financial position of all subsidiaries included in the consolidated financial statements and investments accounted for under the equity method (none of which are located in hyperinflationary economies) that have the functional currency different from the reporting currency are converted into the reporting currency as shown below:

i) Assets and liabilities are converted at the exchange rate in effect at the date of the Consolidated Interim Financial Statements;

ii) Income and expenses are converted using the average exchange rate for the month; and

iii)  Differences resulting from the conversion of exchange rates are recognized in shareholders' equity in the account named "Cumulative translation adjustments".

2.3 - Financial Assets

a) Cash and cash equivalents

Cash and cash equivalents include cash, banks and short-term, highly liquid investments with original maturities of 90 days or less and low risk of variation in market value and are stated at cost plus accrued interest.

b) Cash investments

The Company classifies its cash investments into the following categories: held-to-maturity securities, available-for-sale securities, and trading securities, reported at fair value with gains and losses included in income (trading securities). The classification depends on the purpose for which the investment was acquired. When the investment purpose is to earn short-term gains, then they are classified as trading securities. When the purpose is to hold the investment until maturity, then they are classified as held-to-maturity securities, provided that Management has the positive intent and financial condition to hold the investment until maturity. When the purpose is none of the two options above, investments are classified as available-for-sale securities.

Held-to-maturity securities are reported at acquisition cost plus interest, monetary adjustment, and exchange variation, less impairment losses, when applicable, incurred through the Consolidated Interim Financial Statement date.

Trading securities are stated at fair value. Interest, monetary adjustment, and exchange variation, when applicable, as well as variations arising from adjustment to fair value are recognized in income when incurred.

Available-for-sale securities are stated at fair value. Interest, monetary adjustment, and exchange variation, when applicable, are recognized in income when incurred. The variations arising from adjustment to fair value, except for impairment losses, are recognized as a specific component of shareholders' equity when incurred. Gains and losses recorded in shareholders’ equity are recognized in income for the year when these investments are sold or considered unrecoverable.

c) Trade Accounts Receivable

Trade accounts receivable are stated at realizable values, and accounts receivable from foreign customers are adjusted based on exchange rates in effect at the date of the Consolidated Interim Financial Statements. The allowance for doubtful accounts is calculated based on a risk assessment, which considers the history of losses, individual situation of each customer and the situation of the economic group to which they belong, collateral and guarantees and legal counsel’s opinion, and is considered sufficient to cover any losses on uncollectible receivables. Information on the breakdown of current and past-due trade accounts receivable with the allowance for doubtful accounts is provided in note 5.


GERDAU S.A. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED INTERIM FINANCIAL STATEMENTS AS OF MARCH 31, 2008 AND 2007
(Amounts in thousands of Brazilian reais - R$, unless otherwise indicated)
Reviewed by independent auditors to the extent described in the report dated May 12, 2008
(Convenience Translation into English from the Original Previously Issued in Portuguese)

d) Impairment of Financial Assets

Financial assets are assessed at each balance sheet date for evidence of impairment.
They are considered impaired when there is evidence that one or more events occurred after the initial recognition of the financial asset and such event or events had an impact on the estimated future cash flows of the investment.

2.4 – Inventories

Inventories are stated at the lower of net realizable value (estimated sale value in the normal course of business minus estimated cost of sale) and average production or acquisition cost. Provisions for slow-moving or obsolete inventory are recorded when considered necessary by Management. The Company determines the cost of its inventory using the absorption method based upon its weighted average cost.

2.5 - Property, Plant and Equipment

Property, plant and equipment are stated at historical cost monetarily adjusted when applicable in accordance with IAS 29, less depreciation, except for land which is not depreciated. The Company recognizes monthly as part of the acquisition cost of the property, plant and equipment in progress the interest incurred on loans and financing considering the following capitalization criteria: (a) the capitalization period occurs when the property, plant and equipment item is under construction and the capitalization of interest is ceased when the asset is available for use; (b) interest is capitalized considering the weighted average rate of loans existing on the capitalization date; (c) interest capitalized monthly does not exceed the interest expenses calculated in the period of capitalization; and (d) capitalized interest is depreciated considering the same criteria and useful life determined for the property, plant and equipment item to which it was capitalized.

Depreciation is calculated under the straight-line method at rates that take into consideration the estimated useful lives of the assets.

Subsequent costs are added to the residual value of property, plant and equipment or recognized as a specific item, as appropriate, only if the economic benefits associated to these items are probable and the amounts can be reliably measured. The residual value of the replaced item is written off. Other repairs and maintenance are recognized directly in income when incurred.

The residual value and useful life of the assets are reviewed and adjusted, if necessary, at the fiscal year-end.

The residual value of property, plant and equipment is written off immediately at their recoverable value when the residual value exceeds the recoverable value (note 2.7).

2.6 – Intangible Assets

Intangible assets are stated at acquisition cost, less accumulated amortization and impairment losses, when applicable. Intangible assets consist of carbon emission reduction certificates and goodwill, which represent the capacity to add value of acquired companies based on the history of relationship with customers. Intangible assets with definite useful life are amortized taking into consideration their effective use or a method that reflects their economic benefit. The residual value of intangible assets is written off immediately at their recoverable value when the residual value exceeds the estimated recoverable value (note 2.7).

2.7 – Provision for Recovery of Long-Lived Assets

There are specific rules to assess the recovery of long-lived assets, especially property, plant and equipment and goodwill. On the date of each Financial Statement, the Company performs an analysis to determine if there is evidence that the carrying amount of an asset cannot be recovered. If such evidence is identified, the recoverable value of the assets is estimated by the Company.


GERDAU S.A. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED INTERIM FINANCIAL STATEMENTS AS OF MARCH 31, 2008 AND 2007
(Amounts in thousands of Brazilian reais - R$, unless otherwise indicated)
Reviewed by independent auditors to the extent described in the report dated May 12, 2008
(Convenience Translation into English from the Original Previously Issued in Portuguese)

The recoverable value of an asset is determined as the higher of (a) its fair value minus the estimated costs of sale and (b) its value in use. The value in use is equal to the discounted cash flows (before taxes) derived from the continuous use of the asset until the end of its useful life.

Regardless of whether or not there is any indication that the carrying amount of the asset may not be recovered, the balances of goodwill arising from business combination and intangible assets with indefinite useful life are tested for impairment at least once a year.

When the residual carrying value of the asset exceeds its recoverable value, the Company recognizes a reduction in this asset’s book balance (impairment).

For assets recorded at cost, the reduction in recoverable value must be recorded in income for the period. If the recoverable value of an asset is not determined individually, an analysis is performed to assess the recoverable value of the cash generating unit to which the asset belongs.

Except for the reduction in goodwill value, a reversal of previously recorded losses is allowed. Reversal in these circumstances is limited to the depreciated balance of the asset at the date of the reversal, assuming that the reversal has not yet been recorded.

2.8 – Investments

a) Investments in Subsidiaries

The Company classified its investments into investments accounted for under the equity method and other investments. Investments are measured and recorded as described in note 3.

The Company fully consolidated the Financial Statements of all its subsidiaries. The Company considers that it has control when it directly or indirectly holds a majority of the voting rights in the Shareholders' Meeting or has the power to determine the financial and operational policies in order to obtain benefits from its activities. In situations in which the Company in essence holds control of other entities established for a specific purpose, even though it does not control a majority of the voting rights, these entities are consolidated under the full consolidation method.

Third parties’ interest in shareholders' equity and in net income of subsidiaries is reported separately in the consolidated balance sheet and in the consolidated statement of income, respectively, under the caption "Minority Interest".

For companies acquired after January 1, 2006, which is the Company's transition date to IFRS, the assets, liabilities, and contingent liabilities of a subsidiary are reported at respective fair value on the date of acquisition. Any excess of the acquisition cost over the fair value of the identifiable net assets acquired is recorded as goodwill. When the acquisition cost is less than the fair value of the net assets identified, the difference is recorded as a gain in the statement of income for the year in which the acquisition took place. The minority interest is presented based on the proportion of the fair value of the assets and liabilities identified.

Net income of the subsidiaries acquired or sold during the year is included in the statement of income from the acquisition date or until the sale date, respectively. Significant intercompany transactions and balances were eliminated in consolidation. The surplus resulting from the transactions between companies of the Gerdau Group are also annulled.

Adjustments are made to the Financial Statements of the subsidiaries whenever necessary in order to conform the respective accounting practices to the IFRS applied by the Company.

b) Investments in Jointly-Owned Subsidiaries and Joint Ventures

Jointly-owned subsidiaries and joint ventures are those in which the control is held jointly by the Company and one or more partners. Investments in jointly-owned subsidiaries are recognized under the equity method from the date the joint control is acquired. According to this method, investments in jointly-owned subsidiaries are recognized in the consolidated balance sheet at acquisition cost and are adjusted periodically based on the Company's share in earnings and other variations in shareholders’ equity of these companies. Additionally, the balance of the investments can be reduced due to impairment losses.


GERDAU S.A. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED INTERIM FINANCIAL STATEMENTS AS OF MARCH 31, 2008 AND 2007
(Amounts in thousands of Brazilian reais - R$, unless otherwise indicated)
Reviewed by independent auditors to the extent described in the report dated May 12, 2008
(Convenience Translation into English from the Original Previously Issued in Portuguese)

Losses in jointly-owned subsidiaries in excess of the investment in these entities are not recognized, except when the Company has agreed to cover these losses.

Any excess of the acquisition cost of an investment over the net fair value of the assets, liabilities and contingent liabilities of the jointly-owned subsidiary on the respective acquisition date of the investment is recorded as goodwill. The goodwill is added to the value of the respective investment and its recovery is analyzed annually as an integral part of the investment. When the acquisition cost is less than the fair value of the net assets identified, the difference is recorded as a gain in the statement of income for the year in which the acquisition took place.

Furthermore, dividends received from these companies are recorded as a reduction in the value of the investments.

Gains and losses on transactions with jointly-owned subsidiaries are eliminated proportionately to the Company's interest, against the value of the investment in these jointly-owned subsidiaries.

c) Investments in Affiliates

An affiliated company is an entity over which the Company exercises significant influence by participating in the decisions related to its financial and operational policies, but that does not have control or joint control over its policies.

Investments in affiliated companies are recorded under the equity method. According to this method, investments in affiliates are recognized in the consolidated balance sheet at cost and are adjusted periodically for the share in their earnings against gains and losses on financial assets and other variations in net assets acquired. Additionally, investments can be adjusted for the recognition of impairment losses.

Losses on affiliates in excess of the investment in these entities are not recognized, except when the Company has agreed to cover these losses.

Any excess of the acquisition cost of an investment over the net fair value of the assets, liabilities, and contingent liabilities of the affiliated company on the respective acquisition date of the investment is recorded as goodwill. The goodwill is added to the value of the respective investment and its recovery is analyzed annually as an integral part of the investment. When the acquisition cost is less than the fair value of the net assets identified, the difference is recorded as a gain in the statement of income for the year in which the acquisition took place.

Furthermore, dividends received from these companies are recorded as a decrease in the value of the investments.

Gains and losses on transactions with affiliated companies are eliminated proportionately to the Company's interest, against the value of the investment in these affiliated companies.

2.9 Financial Liabilities and Equity Instruments

a) Classification as Debt or Equity

Debt or equity instruments are classified in accordance with the substance of the financial instrument.

b) Loans and Financing

Loans and financing are stated at contract values plus related charges, including interest and monetary or exchange variations.

When applicable, loans and financing are stated at fair value, net of transaction costs, and are subsequently measured at the amortized cost using the effective interest rate method.


GERDAU S.A. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED INTERIM FINANCIAL STATEMENTS AS OF MARCH 31, 2008 AND 2007
(Amounts in thousands of Brazilian reais - R$, unless otherwise indicated)
Reviewed by independent auditors to the extent described in the report dated May 12, 2008
(Convenience Translation into English from the Original Previously Issued in Portuguese)

c) Equity Instruments

An equity instrument is defined as the residual interest in the entity’s assets after deducting its liabilities.
 

d) Financial Guarantees

Financial guarantees are initially recognized at fair value and are subsequently measured at the greater of the liability amount determined in the contract and the amount initially recognized less, where appropriate, accumulated amortization.

2.10 – Current and Deferred Income and Social Contribution Taxes

Current income and social contribution tax expense is calculated in conformity with current tax laws in effect at the date of the Financial Statements in the countries where the Company's subsidiaries and affiliates operate and generate taxable income. Periodically Management assesses the positions it has taken in relation to tax issues that are subject to interpretation and records a provision when income and social contribution taxes are expected to be paid.

Deferred income and social contribution taxes are recognized over all the differences between assets and liabilities recognized for tax purposes and related amounts recognized in the Consolidated Interim Financial Statements. However, deferred income and social contribution taxes are not recognized if they arise at the initial recognition of assets and liabilities from operations that do not affect the tax bases, except business combination operations. Deferred income and social contribution taxes are determined based on the tax rates and laws in effect at the date of the Consolidated Interim Financial Statements and applicable when the respective income and social contribution taxes are paid.

Deferred income and social contribution tax assets are recognized only to the extent that it is probable that there will be a taxable income for which temporary differences and tax losses can be utilized.

2.11 – Employee Benefits

The Company has several employee benefit plans including pension and retirement plans, health care benefits, profit sharing, bonus, and stock-based payment, as well as other retirement and termination benefits. The main benefit plans granted to the Company's employees are described in notes 19 and 24.

The actuarial obligations related to the pension and retirement benefits and the actuarial obligations related to the health care plan are recorded based on actuarial calculation performed every year by an independent actuary, using the projected unit credit method, net of the assets that fund the plan, when applicable, and the related costs are recognized over the employees' vesting period. Any employee benefit plan surpluses are also recognized up to the probable amount of reduction in future contributions of the plans’ sponsor.

The projected unit credit method considers each period of service as a triggering event of an additional benefit unit, which is accrued to calculate the total obligation. Other actuarial assumptions are also used such as estimates of the increase of healthcare costs, biological and economic hypotheses and, also, historical costs and employee contributions.

Actuarial gains and losses arising from adjustments and changes in actuarial assumptions of the pension and retirement benefit plans and actuarial obligations related to the health care plan are recognized in income according to the corridor approach as described in note 19.

2.12 - Other Current and Noncurrent Assets and Liabilities

They are recorded at their realizable amounts (assets) and at their known or estimated amounts plus accrued charges and monetary adjustments (liabilities), when applicable.

2.13 – Related-Party Transactions

Loan agreements between Brazilian companies are adjusted using the monthly variation of the CDI (interbank deposit rate). The agreements with foreign companies are subject to charges (LIBOR + 3% per year) plus exchange variation, when applicable. Sales and purchases of inputs and products are made under terms and conditions similar to those for transactions with unrelated parties.


GERDAU S.A. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED INTERIM FINANCIAL STATEMENTS AS OF MARCH 31, 2008 AND 2007
(Amounts in thousands of Brazilian reais - R$, unless otherwise indicated)
Reviewed by independent auditors to the extent described in the report dated May 12, 2008
(Convenience Translation into English from the Original Previously Issued in Portuguese)

2.14 – Dividend Payment

Dividend payment is recognized as liabilities at the time dividends are approved by the shareholders of Gerdau S.A. The bylaws of Gerdau S.A. specifies dividends of not less than 30% of the annual income; therefore, Gerdau S.A. records a provision at the year-end for the minimum dividend amount that has not yet been paid during the year up to the limit of the mandatory minimum dividend described above.

2.15 - Recognition of Sales Revenues

Sales revenues are presented net of taxes and discounts. Taxes on sales are recognized when sales are invoiced and discounts on sales are recognized when known. Revenues from sales of products are recognized when the sales amount is reliably measured, the Company no longer has the control over the goods sold or any other responsibility related to its ownership, the costs incurred or that will be incurred related to the transaction can be reliably measured, when it is probable that the economic benefits will be received by the Company, and the risks and benefits of the products were fully transferred to the buyer. The freight costs are included in cost of sales.

2.16 - Investments in Environmental Protection

Expenditures related to compliance with environmental regulations are considered as cost of production when they refer to routine or usual expenses or capitalized as incurred, when they refer to long-term projects that will generate return after more than one year.

2.17 – Lease Contracts

Lease contracts under which a relevant portion of the risks and property rights rests with the lessor are classified as operating lease. Payments made on operational lease contracts are charged to income on a straight-line basis over the period of the lease.

2.18 - Use of Estimates

The preparation of the Consolidated Interim Financial Statements requires estimates to record certain assets, liabilities and other transactions. To make these estimates, Management used the best information available on the date of preparation of the Consolidated Interim Financial Statements and the experience of past and/or current events, also considering assumptions related to future events. The Consolidated Interim Financial Statements include, therefore, estimates of useful lives of property, plant and equipment (note 9), estimate of the recoverable value of long-lived assets, reserves for contingencies (note 17), provisions for income taxes (note 8), determination of the fair value of financial instruments (assets and liabilities), and other instruments (note 15). Actual results could differ from those estimates.

2.19 - Application of Judgment and Critical Accounting Policies when Preparing Consolidated Interim Financial Statements

Critical accounting policies are those that are both (a) important to present of the financial position and results of operations and (b) require management’s most difficult, subjective or complex judgments, often as a result of the need to make estimates that impact matters that are inherently uncertain. As the number of variables and assumptions affecting the possible future resolution of the uncertainties increases, those judgments become even more subjective and complex. In the preparation of the Consolidated Interim Financial Statements, the Company has relied on variables and assumptions derived from historical experience and various other factors that it deems reasonable and relevant. Although these estimates and assumptions are reviewed by the Company in the normal course of business, the statement of its financial position and results of operations often requires making judgments regarding the effects of inherently uncertain matters on the carrying value of its assets and liabilities. Actual results may differ from estimates based on different variables, assumptions or conditions. In order to provide an understanding of how the Company forms its judgments about future events, including the variables and assumptions underlying the estimates, comments have been included that relate to each critical accounting policy described below:
 

GERDAU S.A. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED INTERIM FINANCIAL STATEMENTS AS OF MARCH 31, 2008 AND 2007
(Amounts in thousands of Brazilian reais - R$, unless otherwise indicated)
Reviewed by independent auditors to the extent described in the report dated May 12, 2008
(Convenience Translation into English from the Original Previously Issued in Portuguese)

a) Deferred Income Tax
 
The liability method of accounting (according to the concept described in IAS 12) for income taxes is used for deferred income taxes arising from temporary differences between the book value of assets and liabilities and their tax bases. The amount of the deferred income tax asset is revised at each Financial Statement date and reduced by the sum that is no longer realizable based on future taxable income. Deferred income tax assets and liabilities are calculated using tax rates applicable to taxable income in the years in which those temporary differences are expected to be realized. Future taxable income may be higher or lower than estimates made when determining whether it is necessary to record a tax asset and the amount to be recorded.
 
b) Pension and Post-Employment Benefits
 
The Company recognizes its obligations related to employee benefit plans and related costs, net of plan assets, in accordance with the following practices:
 
i)
The cost of pension and other post-employment benefits provided to employees is actuarially determined using the projected unit credit method and management’s best estimate of expected investment performance for funded plans, salary increase, retirement age of employees and expected health care costs. The discount rate used for determining future benefit obligations is an estimate of the interest rate in effect at the balance sheet date on high-quality fixed-income investments with maturities that match the expected maturity of obligations.
ii)
Pension plan assets are stated at fair value.
iii)
Past service costs arising from plan adjustments are amortized on a straight-line basis over the remaining service period of active employees at the date of the adjustment.
iv)
Net actuarial gain or loss that exceeds 10% of the greater between the benefit obligation value and the fair value of plan assets is amortized over the remaining service period of active employees.
v)
A plan curtailment results from significant changes in the expected service period of active employees. A net curtailment loss is recognized when the event is probable and can be estimated, while a net curtailment gain is deferred until realized.
 
In accounting for pension and post-retirement benefits, several statistical and other factors that attempt to anticipate future events are used to calculate plan expenses and liabilities. These factors include discount rate assumptions, expected return on plan assets, future increases in health care costs, and rate of future compensation increases. In addition, actuarial consultants also use subjective factors such as withdrawal, turnover, and mortality rates to estimate these factors. The actuarial assumptions used by the Company may differ materially from actual net income due to changing market and economic conditions, regulatory events, judicial rulings, higher or lower withdrawal rates, or longer or shorter participant life spans.
 
c) Environmental Liabilities
 
The Company records provisions for environmental liabilities based on best estimates of potential clean-up and remediation costs for known environmental sites. The Company has a staff of experts to manage all phases of its environmental programs and uses outside experts where needed. These professionals develop estimates of liabilities at these sites based on projected and known remediation costs. This analysis requires the Company to make significant estimates and changes in facts and circumstances may result in material changes in environmental provisions.
 
d) Derivative Financial Instruments
 
The Company values the derivative financial instruments considering quotations obtained from market participants, which are the fair value of the financial instruments on the date of the Financial Statements. Intense volatility in the foreign exchange and interest rate markets in Brazil has caused, in certain periods, significant changes in forward rates and interest rates over very short periods of time, generating significant changes in the fair value of swaps over a short period of time. The fair value recognized in its Consolidated Interim Financial Statements may not necessarily represent the amount of cash that the Company would receive or pay, as applicable, if the Company would settle the transactions on the Consolidated Interim Financial Statements date.
 

GERDAU S.A. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED INTERIM FINANCIAL STATEMENTS AS OF MARCH 31, 2008 AND 2007
(Amounts in thousands of Brazilian reais - R$, unless otherwise indicated)
Reviewed by independent auditors to the extent described in the report dated May 12, 2008
(Convenience Translation into English from the Original Previously Issued in Portuguese)

e) Useful Lives of Long-Lived Assets
 
The Company recognizes depreciation of its long-lived assets based on estimated useful lives, which are based on industry practices and prior experience and reflect economic lives of long-lived assets. Nevertheless, actual useful lives can vary based on technological update of each unit. Useful lives of long-lived assets also affect impairment tests of those long-lived assets, when required.
 
f) Fair Value of Unquoted Derivative Financial Instruments
 
The Company has entered into financial instruments in connection with some of the acquisitions, which involve commitments to acquire shares from minority shareholders of the acquired companies, or grant of put options to some minority shareholders to sell to the Company their shares. Such derivatives are recorded on the Company's balance sheet in the account “Stock Options” (note 15.f), and the determination of this value involves a series of estimates that can significantly impact its final result. The Company estimates the fair value of the companies whose shares the Company is committed to acquire using EBITDA (Earnings before Interest, Taxes, Depreciation and Amortization) multiples of market traded similar companies. The Company believes such criteria are appropriate and in line with practices observed in the market for estimating fair value of unquoted instruments.
 
g) Valuation of Assets Acquired and Liabilities Assumed in Business Combinations
 
During the last years the Company has made some business combinations as described in note 3. According to IFRS 3, the Company should allocate the cost of the purchased entity to the assets acquired and liabilities assumed based on their fair value estimated on the date of acquisition. Any difference between the cost of the purchased entity and the fair value of the assets acquired and liabilities assumed is recorded as goodwill. The Company exercises significant judgment in the process of identifying tangible and intangible assets and liabilities, valuing these assets and liabilities, and estimating their remaining useful life. The Company generally engages external appraisal firms to assist in asset and liability valuation, especially when this appraisal requires a high technical qualification. The valuation of these assets and liabilities is based on assumptions and criteria that, in some cases, include estimates of future cash flow discounted at the appropriate rates. The use of valuation assumptions includes discounted cash flows estimates or discount rates and may result in estimated values that are different than the assets acquired and liabilities assumed.
 
h) Business Relationship Assessment for Companies Acquired for Full Consolidation Purposes
 
The Company makes judgments in order to assess the business relation of the company to be acquired when the Company is not the major shareholder with voting rights. Therefore, it takes into consideration the analysis of the main risks and benefits with the purpose of determining if the Company is the primary beneficiary, i.e., if the acquired company is a Special Purpose Entity - SPE as defined by SIC Interpretation 12 Consolidation - Special Purpose Entities of the IASB.
 
i) Goodwill Impairment Test

Assets that have an indefinite useful life, such as goodwill, are not amortized but are tested annually in order to identify potential impairment through a methodology known as impairment test. For goodwill impairment purposes, goodwill must be proportionately allocated to each of the acquirer’s cash-generating units, which are the smallest identifiable group of assets. Goodwill is recognized at cost less cumulative impairment losses. Goodwill impairment losses are recorded in income for the current year and cannot be reversed in a subsequent period, even though the impairment conditions cease to exist. 

2.20 - New IFRS and Interpretations of the IFRIC (International Financial Reporting Interpretations Committee)

Some new IFRIC accounting procedures and interpretations were published and must be adopted beginning January 1, 2008. The Company's assessment of the impact of these new procedures and interpretations is as follows:

IAS 23 – Borrowing costs

In March 2007, IASB issued a revised version of IAS 23, which prescribes the accounting treatment for borrowing costs that are directly attributable to the acquisition, construction or production of a qualifying asset. An entity shall apply this standard for annual periods beginning on/or after January 1, 2009. The Company is currently evaluating the impacts from applying this standard on its consolidated financial statements.


GERDAU S.A. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED INTERIM FINANCIAL STATEMENTS AS OF MARCH 31, 2008 AND 2007
(Amounts in thousands of Brazilian reais - R$, unless otherwise indicated)
Reviewed by independent auditors to the extent described in the report dated May 12, 2008
(Convenience Translation into English from the Original Previously Issued in Portuguese)
 
IAS 1 – Presentation of Financial Statements

In September 2007, IASB changed IAS 1 again. Such change is effective for annual periods beginning on or after January 1, 2009. The review of this standard deals especially with the way to disclose the dividends and the presentation of the comprehensive income statement. The Company is assessing the effects of the change in this standard on its Consolidated Interim Financial Statements.

IAS 27 – Consolidated and Separate Financial Statements

In January 2008, IASB issued a revised version of IAS 27. The changes are effective for annual periods beginning on or after July 1, 2009. The Company is currently evaluating the impacts from applying this standard on its Consolidated Interim Financial Statements.

IFRS 8 – Operating segments

In November 2006, IASB issued IFRS 8, which specifies disclosure requirements for operating segments in the annual financial information and amends IAS 34 "Interim Financial Information", which requires that an entity reports selected financial information about its operating segments in interim financial information. This statement defines an operating segment as components of an entity about which segregated financial information is made available and is assessed by the person responsible for managing the business with respect to how to allocate resources and evaluate performance. This statement also specifies requirements for disclosures related to products and services, geographical areas, and main customers and is effective for annual periods beginning on/or after January 1, 2009. The Company believes that the adoption of IFRS 8 will not have significant impacts on the disclosure of its Consolidated Interim Financial Statements.

IFRS 3 – Business Combinations

In January 2008, IASB issued a revised version of IFRS 3. The changes are effective for the annual period beginning on/or after July 1, 2009. The Company is currently evaluating the impacts of applying this standard.

IFRIC 12 – Service concession arrangements

In November 2006, IFRIC issued Interpretation 12, which provides guidance as to the accounting for service concessions. This Interpretation defines the main principles for recognizing and measuring the obligations and rights related to the service concession contracts and focuses on the following items: (a) treatment of the rights of the operator to the infrastructure, (b) recognition and measurement of the concession values, (c) construction or improvement services, (d) operating services, (e) financing costs, (f) subsequent accounting for financial asset and intangible asset, and (g) items provided by the operator to the concession grantor. The entity should apply this standard to annual periods beginning on/or after January 1, 2008. The Company believes that the adoption of this Interpretation does not impact its Consolidated Interim Financial Statements.

IFRIC 13– Customer Loyalty Programs

In July 2007, IFRIC issued Interpretation 13, which addresses how entities should account for loyalty programs to provide their customers with incentives to buy goods or services by providing “award credits” as part of a sales transaction. An entity shall apply this standard for annual periods beginning on or after July 1, 2008. The Company believes that the adoption of this Interpretation does not impact its Consolidated Interim Financial Statements.
 
IFRIC 14– IAS 19 The limit on a defined benefit asset, minimum funding requirements and their interaction

In July 2007, IFRIC issued Interpretation 14, which addresses the measurement of defined benefit assets and the measurement at present value of economic benefits available. An entity shall apply this standard for annual periods beginning on or after January 1, 2008. The Company believes that the adoption of this Interpretation does not impact its Consolidated Interim Financial Statements.


GERDAU S.A. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED INTERIM FINANCIAL STATEMENTS AS OF MARCH 31, 2008 AND 2007
(Amounts in thousands of Brazilian reais - R$, unless otherwise indicated)
Reviewed by independent auditors to the extent described in the report dated May 12, 2008
(Convenience Translation into English from the Original Previously Issued in Portuguese)

NOTE 3 - CONSOLIDATED INTERIM FINANCIAL STATEMENTS

The Consolidated Interim Financial Statements include Gerdau S.A. and the subsidiaries in which it holds controlling interest, and interests in entities in which the Company is considered the primary beneficiary, i.e., holder of the main benefits and risks (even if the Company does not control a majority of the voting shares). 

3.1 - Subsidiaries

Listed below are the equity interests in consolidated subsidiaries:

         Equity Interests 
Consolidated company
  
Country
  
Total capital (*)
  
Voting capital
       
March 31, 2008
  
December 31, 2007
  
March 31, 2008
  
December 31, 2007
                     
Gerdau GTL Spain S.L.
 
Spain
  
100.00
  
100.00
  
100.00
  
100.00
Gerdau Internacional Empreendimentos Ltda. - Gerdau Group
 
Brazil
  
100.00
  
100.00
  
100.00
  
100.00
Gerdau Steel North America Inc.
 
Canada
  
100.00
  
100.00
  
100.00
  
100.00
Gerdau Ameristeel Corporation and subsidiaries (1)
  
USA/Canada
  
66.45
  
66.45
  
66.45
  
66.45
Gerdau Açominas S.A. and subsidiaries (2)
  
Brazil
  
91.82
  
92.16
  
91.83
  
92.16
Gerdau Aces Logos S.A. and subsidiaries (3)
  
Brazil
  
91.82
  
92.16
  
91.83
  
92.16
Gerdau Steel Inc.
 
Canada
  
100.00
  
100.00
  
100.00
  
100.00
Paraopeba - Fundo de Investimento Renda Fixa (4)
  
Brazil
  
93.30
  
97.00
  
93.30
  
97.00
Corporación Sidenor S.A. and subsidiaries (5)
  
Spain
  
40.00
  
40.00
  
40.00
  
40.00
Gerdau América Latina Participações S.A.
  
Brazil
  
89.35
  
89.35
  
89.36
  
89.36
Axol S.A.
  
Uruguay
  
100.00
  
100.00
  
100.00
  
100.00
Gerdau Aces Especiais S.A.
  
Brazil
  
91.82
  
92.16
  
91.83
  
92.16
Gerdau Chile Inversiones Ltda. and subsidiaries (6)
  
Chile
  
99.99
  
99.99
  
99.99
  
99.99
Gerdau Hungria Holdings Limited Liability Company
  
Hungary
  
98.75
  
98.75
  
98.75
  
98.75
Gerdau Comercial de Aces S.A.
  
Brazil
  
91.82
  
92.16
  
91.83
  
92.16
Aramac S.A. and subsidiaries (7)
  
Uruguay
  
100.00
  
100.00
  
100.00
  
100.00
Empresa Siderúrgica del Perú S.A.A. - Siderperú
  
Peru
  
83.28
  
83.28
  
83.28
  
83.28
Disco S.A. and subsidiaries (8)
  
Colombia
  
98.67
  
57.83
  
98.67
  
57.83
Gerdau GTL México, S.A. of C.V. and subsidiaries (9)
  
Mexico
  
100.00
  
100.00
  
100.00
  
100.00
Seiva S.A. - Florestas e Indústrias
 
Brazil
  
97.06
  
97.06
  
99.73
  
99.73
Itaguaí Com. Imp. e Exp. Ltda.
 
Brazil
  
100.00
  
100.00
  
100.00
  
100.00
Gerdau Laisa S.A.
 
Uruguay
  
99.90
  
99.90
  
99.90
  
99.90
Sipar Gerdau Inversiones S.A. and subsidiaries (10)
  
Argentina
  
92.75
  
92.75
  
92.75
  
92.75
Siderúrgica del Pacífico S.A.
  
Colombia
  
98.19
  
98.19
  
98.19
  
98.19
Sizuca - Siderúrgica Zuliana, C. A.
  
Venezuela
  
100.00
  
100.00
  
100.00
  
100.00
GTL Financial Corp.
 
Netherlands
  
100.00
  
100.00
  
100.00
  
100.00
GTL Trade Finance Inc.
  
British Virgin Islands
  
100.00
  
100.00
  
100.00
  
100.00

(*) The equity interest reported represents the ownership percentage directly and indirectly held by the investor in the subsidiary.
(1) Subsidiaries: Gerdau Ameristeel MRM Special Sections Inc., Gerdau USA Inc., Ameristeel Bright Bar Inc., Gerdau Ameristeel US Inc., Gerdau Ameristeel Perth Amboy Inc., Sheffield Steel Corporation, Gerdau Ameristeel Sayreville Inc., Pacific Coast Steel, and Chaparral Steel Company.
(2) Subsidiary: Gerdau Açominas Overseas Ltd..
(3) Subsidiaries: Aplema Comércio de Produtos Agroflorestais e Empreendimentos Ltda. and Florestal Itacambira S.A..
(4) Fixed-rate investment fund managed by Banco Gerdau S.A.
(5) Subsidiaries: Sidenor Industrial S.L., Aços Villares S.A., Sidenor y Cia,, Sociedad Colectiva, Sidenor I+D S.A., Forjanor S.L. and Trefilados de Urbina, S.A..
(6) Subsidiaries: Indústria del Acero S.A., Industrias del Acero Internacional S.A., Gerdau Aza S.A., Distribuidora Matco S.A., Aceros Cox Comercial S.A, Salomon Sack S.A., and Matco Instalaciones Ltda.
(7) Subsidiary: GTL Equity Investments Corp.
(8) Subsidiary: Ferrer Ind. Corporation.
(9) Subsidiaries: Siderúrgica Tultitlán, S.A., Ferrotultitlán, S.A., Arrendadora Valle de México, S.A.A. and GTL Servicios Administrativos México, S.A..
(10) Subsidiaries: Sipar Aceros S.A. and Siderco S.A. 

As a result of the put option described in note 15.f, since the acquisition date the Company recognizes a 80% interest in Corporación Sidenor instead of 40% as described in the table above.
 

GERDAU S.A. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED INTERIM FINANCIAL STATEMENTS AS OF MARCH 31, 2008 AND 2007
(Amounts in thousands of Brazilian reais - R$, unless otherwise indicated)
Reviewed by independent auditors to the extent described in the report dated May 12, 2008
(Convenience Translation into English from the Original Previously Issued in Portuguese)

3.2 - Jointly-Owned Subsidiaries and Joint Ventures
 
Listed below are the equity interests in jointly-owned subsidiaries:

       
Equity Interests
  
Jointly-owned subsidiaries
  
Country
  
Total capital (*)
  
Voting capital
  
       
March 31, 2008
  
December 31, 2007
  
March 31, 2008
  
December 31, 2007
  
Gallatin Steel Company
    
USA
    
50.00
    
50.00
    
50.00
   
50.00
 
Bradley Steel Processors
    
Canada
    
50.00
    
50.00
    
50.00
   
50.00
 
MRM Guide Rail
    
Canada
    
50.00
    
50.00
    
50.00
   
50.00
 
Estructurales Corsa, S.A.P.I de C.V
    
Mexico
    
50.00
    
-
   
50.00
   
-
 

(*) The equity interest reported represents the ownership percentage directly and indirectly held by the investor in the joint venture. 

The condensed financial statements of the jointly-controlled entities Gallatin Steel Company, Bradley Steel Processors, MRM Guide Rail, and Estructurales Corsa, S.A.P.I. de C.V., accounted for under the equity method, are presented below on a consolidated basis:

   
Joint ventures
  
   
March 31, 2008
  
December 31, 2007
  
Assets
              
Current
    
548,077
   
404,275
 
Non-current
    
327,437
   
316,001
 
Total assets
    
875,514
   
720,276
 
               
Liabilities
              
Current
    
228,040
   
139,468
 
Non-current
    
8,045
   
8,493
 
Adjusted shareholders' equity
    
639,429
   
572,315
 
Total liabilities and shareholders' equity
    
875,514
   
720,276
 
 
 
    
March 31, 2008
    
March 31, 2007
  
Statement of income
              
Net sales revenue
    
513,398
   
486,601
 
Cost of sales
    
(447,227
)
  
(410,710
)
Gross profit
    
66,171
   
75,891
 
Selling, general and administrative expenses
    
(8,460
)
  
(6,907
)
Other operating expenses/income
    
559
   
(1,901
)
Income before financial income (expenses) and taxes
    
58,270
   
67,083
 
Financial (expenses) income
    
(852
)
  
69
 
Income before taxes
    
57,418
   
67,152
 
Provision for income and social contribution taxes
    
(1,026
)
  
(1,848
)
Net income
    
56,392
   
65,304
 
 
 3.3 – Affiliates

Listed below are the equity interests in affiliated companies:

       
Equity Interests 
  
Affiliated Companies
  
Country
  
Total capital (*)
  
Voting capital
  
       
March 31, 2008
  
December 31, 2007
  
March 31, 2008
  
December 31, 2007
  
Dona Francisca Energética S.A.
 
Brazil
    
51.82
    
51.82
   
51.82
   
51.82
 
Armacero Industrial y Comercial S.A.
  
Chile
    
50.00
    
50.00
   
50.00
   
50.00
 
Multisteel Business Holdings Corp. and subsidiaries (1)
  
Dominican Rep.
    
49.00
    
49.00
   
49.00
   
49.00
 
Corsa Controladora, S.A. de C.V. (2)
  
Mexico
    
49.00
    
-
   
49.00
   
-
 
 

GERDAU S.A. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED INTERIM FINANCIAL STATEMENTS AS OF MARCH 31, 2008 AND 2007
(Amounts in thousands of Brazilian reais - R$, unless otherwise indicated)
Reviewed by independent auditors to the extent described in the report dated May 12, 2008
(Convenience Translation into English from the Original Previously Issued in Portuguese)

(1) Subsidiaries: Industrias Nacionales C. by A. (Rep. Dominicana), Steelchem Trading Corp. , NC Trading e Industrias Nacionales C. x A., S.A. (Costa Rica). 
(2) Subsidiaries: Júpiter Direccional S.A. de C.V., Aceros Ticomán, S.A. de C.V., Centro Técnico Joist, S.A. de C.V., Aceros Corsa, S.A. de C.V., Aceros Ticoregios, S.A. de C.V..
(*) The equity interest reported represents the ownership percentage directly and indirectly held by the investor in the affiliated company.

Although the Company owns more than 50% of Dona Francisca Energética S.A., it does not consolidate the Financial Statements of this affiliate because of the protection rights granted to minority shareholders that prevent the Company from fully implementing the decisions on conducting of the affiliate's business.

The condensed financial statements of the affiliates Dona Francisca Energética S.A., Armacero Industrial y Comercial S.A., Multisteel Business Holdings Corp. and subsidiaries, and Corsa Controladora, S.A. de C.V, accounted for under the equity method, are shown below: 

   
Affiliated Companies
  
   
March 31, 2008
  
December 31, 2007
  
Assets
              
Current
    
841,659
   
508,736
 
Non-current
    
528,552
   
434,995
 
Total assets
    
1,370,211
   
943,731
 
               
Liabilities
              
Current
    
513,640
   
286,300
 
Non-current
    
252,606
   
214,252
 
Shareholders' equity
    
603,965
   
443,179
 
Total liabilities and shareholders' equity
    
1,370,211
   
943,731
 
 
   
March 31, 2008
  
March 31, 2007
  
Statement of income
              
Net sales revenue
    
399,640
   
35,353
 
Cost of sales
    
(303,817
)
  
(25,286
)
Gross profit
    
95,823
   
10,067
 
Selling, general and administrative expenses
    
(22,090
)
  
(2,219
)
Other operating expenses/income, net
    
1,923
   
225
 
Income before financial income and taxes
    
75,656
   
8,073
 
Net financial income (expenses)
    
(7,321
)
  
(2,133
)
Income before taxes
    
68,335
   
5,940
 
Provision for income tax and social contribution taxes
    
(8,931
)
  
(2,341
)
Net income
    
59,404
   
3,599
 

3.4 - Goodwill

Goodwill represents the excess of the acquisition cost over the net fair value of the assets acquired, liabilities assumed, and identifiable contingent liabilities of a subsidiary, jointly-owned subsidiary, or affiliated company at the respective date of acquisition.

Goodwill related to investments in foreign companies is reported in the functional currency of the party acquiring these subsidiaries and converted to Brazilian reais (the Company's reporting currency) at the exchange rate in effect at the balance sheet date. The exchange rate differences arising from this conversion are recorded under the caption "Cumulative translation adjustments" in shareholders’ equity after the date of transition to IFRS.


GERDAU S.A. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED INTERIM FINANCIAL STATEMENTS AS OF MARCH 31, 2008 AND 2007
(Amounts in thousands of Brazilian reais - R$, unless otherwise indicated)
Reviewed by independent auditors to the extent described in the report dated May 12, 2008
(Convenience Translation into English from the Original Previously Issued in Portuguese)

Goodwill is recorded as an asset and included in the caption "Investments accounted for under the equity method" and "Goodwill". The goodwill is not amortized and subject to impairment tests annually or whenever there are indications of impairment. Any impairment loss is immediately recorded as a cost in the statement of income and cannot be reversed later.

At the time of selling a subsidiary, jointly-owned subsidiary or affiliated company, goodwill is included in the determination of gain or loss.

3.5 - Acquisitions of companies (subsidiaries, jointly-owned subsidiaries, and affiliates)

a) Diaco S.A.

On January 14, 2008, the Company acquired from minority shareholders an additional stake of 40.2% in the capital of Diaco S.A. for US$ 107.2 million (R$ 188.7 million on the acquisition date). At the end of this operation, the Company came to hold, indirectly, 98.67% of the capital of Diaco S.A.

b) Century Steel, Inc.

On February 12, 2008, the Company, through its subsidiary Pacific Coast Steel (PCS), announced the acquisition of Century Steel, Inc. (“CSI”), a manufacturer of rebars and structural steels, specialized in the manufacture and installation of rebar fabricating products and structural steels, for approximately $151.5 million. Concomitantly with the acquisition of CSI, the Company will pay approximately US$ 68.0 million to increase its stake in PCS to nearly 84%. Such transactions are expected to be concluded in the second quarter of 2008.

c) Cleary Holdings Corp.

On February 21, 2008, the Company signed a purchase agreement for the acquisition of 50.9% of Cleary Holdings Corp., a controlling company of production units of coking coal and reserves of coking charcoal in Colombia with a current production capacity of coking coal of 1.0 million tons per year and the reserves of coking charcoal are estimated at 20 million tons. The amount of US$ 59 million will be disbursed for this purchase and is subject to approval of the regulatory agencies in Colombia.

d) Corsa Controladora, S.A. de C.V.

On February 27, 2008, the Company concluded the acquisition of a 49% stake in Corsa Controladora, S.A. de C.V., which holds 100% of the capital of Aceros Corsa, S.A. de C.V. and also controls two distributors of steel and iron products. Aceros Corsa, situated in the city of Tlalnepantla, metropolitan region of Mexico City, is a mini-mill that produces long steel (light merchant bars) with an installed capacity of 150 thousand tons of crude steel and 300 thousand tons of rolled products per year. The amount of US$110.7 million (R$186.3 million on the purchase date) will be disbursed in this transaction. The Company and the shareholders of Corsa Controladora, S.A. de C.V. also established a joint venture called Estructurales Corsa S.A.P.I. de C.V. with the purpose of implementing a project for the production of structural shapes in Mexico. The new unit will have an installed capacity of 1.0 million tons of crude steel and 700 thousand tons of rolled products per year and will involve an estimated investment of US$ 400 million. The industrial plant will start to operate in 2010. By March 31, 2008 the amount disbursed in this joint venture totalized R$ 23.6 million. This investment is recorded under the equity method.

e) Gerdau GTL México, S.A. de C.V. (Grupo Feld S.A. de C.V.)

In March 2008, the Company concluded the assessment of the fair value of the assets and liabilities of Gerdau GTL México, S.A. de C.V. resulting in the recognition of an additional goodwill of R$ 7,468.

The table below presents the calculation of the fair value of the assets and liabilities for the purchase of Gerdau GTL Mexico on the purchase date:

 
GERDAU S.A. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED INTERIM FINANCIAL STATEMENTS AS OF MARCH 31, 2008 AND 2007
(Amounts in thousands of Brazilian reais – R$, unless otherwise indicated)
Reviewed by independent auditors to the extent described in the report dated May 12, 2008
(Convenience Translation into English from the Original Previously Issued in Portuguese)
 
   
Book Value
  
Acquisition Adjustments
  
Fair value as of acquisition
  
Net assets (liabilities) acquired
                    
Current assets
    
90,478
   
3,612
   
94,090
 
Non-current assets
    
233,193
   
(11,080
)
  
222,113
 
Goodwill
    
22,667
   
243,628
   
266,295
 
Current liabilities
    
(43,081
)
  
-
   
(43,081
)
Non-current liabilities
    
(2,873
)
  
-
   
(2,873
)
     
300,384
   
236,160
   
536,544
 
                     
Purchase price
                
536,544
 

3.6 - Total Purchase Price Considered for the Acquisitions in the Period
 
Acquired companies
  
March 31, 2008
  
December 31, 2007
  
Diaco S.A.
    
188,693
       
Corsa Controladora, S.A de C.V.
    
186,284
       
Estructurales Corsa S.A.P.I. de C.V.
    
23,566
       
Chaparral Steel Company
          
7,792,394
 
Gerdau Aços Longos S.A., Gerdau Açominas S.A., Gerdau Aços Especiais S.A. and Gerdau Comercial de Aços S.A.
          
653,825
 
Grupo Feld S.A. de C.V.
          
536,544
 
Multisteel Business Holdings Corp.
          
217,200
 
Siderúrgica Zuliana C.A.
          
176,185
 
Enco Materials Inc.
          
84,900
 
Trefilados de Urbina, S.A. - Trefusa
          
46,524
 
Other acquisitions
    
 
    
32,001
 
Total purchase price
    
398,543
   
9,539,573
 
Less: Cash and cash equivalents of acquired companies
    
(28,682
)
  
(1,013,842
)
     
369,861
   
8,525,731
 
 
NOTE 4 -CASH AND CASH EQUIVALENTS

   
March 31, 2008
  
December 31, 2007
  
Cash
    
303,724
   
356,446
 
Banks and short-term investments
    
1,775,654
   
1,669,650
 
Cash and cash equivalents
    
2,079,378
   
2,026,096
 
 
NOTE 5 -TRADE ACCOUNTS RECEIVABLE
 
   
March 31, 2008
  
December 31, 2007
  
Trade accounts receivable - in Brazil
    
1,020,420
   
1,163,417
 
Trade accounts receivable - exports from Brazil
    
452,095
   
406,160
 
Customer accounts receivable - foreign subsidiaries
    
2,259,025
   
1,653,895
 
(-) Allowance for doubtful accounts
   
(53,344
)
  
(51,156
)
     
3,678,196
   
3,172,316
 
 
The Company's maximum credit risk exposure is the amount of the accounts receivable listed above.

 
GERDAU S.A. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED INTERIM FINANCIAL STATEMENTS AS OF MARCH 31, 2008 AND 2007
(Amounts in thousands of Brazilian reais – R$, unless otherwise indicated)
Reviewed by independent auditors to the extent described in the report dated May 12, 2008
(Convenience Translation into English from the Original Previously Issued in Portuguese)
 
The credit risk results from the possibility of the Company not receiving amounts arising from sales operations.  In order to minimize this risk, the Company adopts the procedure of carefully analyzing the financial position of its customers, establishing a credit limit, and constantly monitoring customers’ balances. The allowance for doubtful accounts is calculated based on a credit risk assessment, which considers the history of losses, individual situation of each customer and the economic group to which they belong, collateral and guarantees and legal counsel’s opinion, and is considered sufficient to cover any losses on uncollectible receivables.

The aging list of trade accounts receivable is as follows:
 
   
March 31, 2008
  
December 31, 2007
  
Current
    
3,310,998
   
2,798,225
 
Past-due:
              
Up to 30 days
    
304,940
   
330,709
 
From 31 to 60 days
    
68,856
   
49,792
 
From 61 to 90 days
    
9,583
   
12,798
 
From 91 to 180 days
    
9,752
   
12,674
 
From 181 to 360 days
    
15,792
   
7,859
 
Above 360 days
    
11,619
   
11,415
 
(-) Allowance for doubtful accounts
   
(53,344
)
  
(51,156
)
     
3,678,196
   
3,172,316
 
 
The changes in the allowance for doubtul accounts are as follows:
 
Balance as of December 31, 2006
    
(72,371
)
Accrued receivables during the period
    
(18,001
)
Recoveries in the period
    
2,885
 
Write-offs
   
35,883
 
Exchange variation
    
2,934
 
Acquisitions
    
(2,486
)
Balance as of December 31, 2007
    
(51,156
)
Accrued receivables during the period
    
(3,774
)
Recoveries in the period
    
300
 
Write-offs
   
2,411
 
Exchange variation
    
(1,125
)
Balance as of March 31, 2008
    
(53,344
)
 
NOTE 6 - INVENTORIES

   
March 31, 2008
  
December 31, 2007
  
Finished products
    
2,302,981
   
2,274,955
 
Work in progress
    
1,519,729
   
1,357,559
 
Raw materials
    
1,421,612
   
1,280,241
 
Storeroom supplies
    
898,194
   
883,002
 
Advances to suppliers
    
112,595
   
73,353
 
Imports in transit
    
274,584
   
228,418
 
(-) Provision for obsolescence and market value adjustment
    
(45,919
)
  
(40,867
)
     
6,483,776
   
6,056,661
 
 
 
GERDAU S.A. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED INTERIM FINANCIAL STATEMENTS AS OF MARCH 31, 2008 AND 2007
(Amounts in thousands of Brazilian reais – R$, unless otherwise indicated)
Reviewed by independent auditors to the extent described in the report dated May 12, 2008
(Convenience Translation into English from the Original Previously Issued in Portuguese)
 
The changes in the provision for obsolescence and adjustment to market value are as follows:
 
Balance as of December 31, 2006
    
(45,602
)
Write-offs
   
11,501
 
Provision for the period
    
(10,917
)
Exchange variation
    
4,151
 
Balance as of December 31, 2007
    
(40,867
)
Write-offs
   
4,994
 
Provision for the period
    
(8,543
)
Exchange variation
    
(1,503
)
Balance as of March 31, 2008
    
(45,919
)
 
Inventories are insured against fire and overflow. The insurance coverage is based on the amounts and risks involved.
 
During the 3-month periods ended March 31, 2008 and 2007 the amounts R$ 6,812,177 and R$ R$ 5,566,401 were recognized, respectively, as cost of sales and freight. The cost of sales includes the amounts R$ 4,994 (R$ 11,501 as of March 31, 2007) referring to permanently written off inventories and R$ 8,543 (R$ 10,917 as of March 31, 2007) referring to the recognition of a provision for obsolescence and market value adjustment.
 
NOTE 7 -TAX CREDITS
 
   
March 31, 2008
  
December 31, 2007
  
Current
         
ICMS - Imposto sobre Circulação de Mercadorias e Serviços
   
153,474
   
154,386
 
COFINS - Contribuição para o Financiamento da Seguridade Social
   
81,152
   
95,963
 
PIS - Programa de Integração Social
   
20,482
   
19,477
 
IPI - Imposto sobre Produtos Industrializados
   
46,839
   
63,671
 
IRRF (withholding income tax)
   
171,918
   
192,245
 
IVA - Imposto sobre Valor Agregado
   
50,094
   
52,977
 
Outros
   
23,741
   
19,598
 
     
547,700
   
598,317
 
               
Non-current
             
ICMS - Imposto sobre Circulação de Mercadorias e Serviços
   
170,752
   
184,551
 
PIS - (tax on revenue)
   
22,603
   
23,946
 
COFINS (tax on revenue)
   
104,946
   
109,032
 
IPI - Imposto sobre Produtos Industrializados
   
-
   
7,968
 
IRRF (withholding income tax)
   
280,998
   
269,397
 
     
579,299
   
594,894
 
     
1,126,999
   
1,193,211
 
 
The estimate of realization of noncurrent tax credits is as follows:
 
   
March 31, 2008
  
December 31, 2007
  
2009
    
311,890
   
310,488
 
2010
    
125,905
   
138,620
 
2011
    
85,462
   
92,540
 
After 2011
    
56,042
   
53,246
 
     
579,299
   
594,894
 
 
 
GERDAU S.A. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED INTERIM FINANCIAL STATEMENTS AS OF MARCH 31, 2008 AND 2007
(Amounts in thousands of Brazilian reais – R$, unless otherwise indicated)
Reviewed by independent auditors to the extent described in the report dated May 12, 2008
(Convenience Translation into English from the Original Previously Issued in Portuguese)
 
NOTE 8 -INCOME AND SOCIAL CONTRIBUTION TAXES

 a) Reconciliation of income and social contribution taxes:
 
   
March 31, 2008
  
March 31, 2007
  
   
IR
  
CS
  
Total
  
IR
  
CS
  
Total
  
Income before income taxes
    
1,397,763
   
1,397,763
   
1,397,763
   
1,482,063
   
1,482,063
   
1,482,063
 
Statutory tax rates
    
25
%
  
9
%
  
34
%
  
25
%
  
9
%
  
34
%
Income and social contribution taxes at statutory rates
    
(349,441
)
  
(125,799
)
  
(475,240
)
  
(370,516
)
  
(133,386
)
  
(503,902
)
Tax adjustment with respect to:
                                      
- Difference in tax rates in foreign companies
   
(98,947
)
  
63,437
   
(35,510
)
  
(2,711
)
  
63,106
   
60,395
 
- Equity in subsidiaries
    
15,208
   
5,475
   
20,683
   
8,764
   
3,155
   
11,919
 
- Interest on capital
    
23,604
   
6,681
   
30,285
   
-
   
-
   
-
 
- Tax incentives
    
20,156
   
-
   
20,156
   
14,087
   
-
   
14,087
 
- Tax deductible goodwill recorded in statutory books
    
52,901
   
19,044
   
71,945
   
51,478
   
18,532
   
70,010
 
- Permanent differences (net)
    
42,897
   
17,138
   
60,035
   
41,178
   
2,315
   
43,493
 
Income and social contribution taxes
    
(293,622
)
  
(14,024
)
  
(307,646
)
  
(257,720
)
  
(46,278
)
  
(303,998
)
Current
                
(333,872
)
              
(294,129
)
Deferred
                
26,226
               
(9,869
)
 
The differences between the tax bases of the assets and liabilities included in the financial statements prepared in accordance with IFRS have been recognized as temporary differences for purposes of deferred taxes and recorded as expense (or income) in the statement of income.

The Company's subsidiaries in Brazil received R$ 8,169 as of March 31, 2008 (R$ 6,721 as of March 31, 2007) of tax incentives in the form of income tax reduction, related to technological innovation, funds for the rights of children and adolescents, PAT (Workers’ Meal Program), and cultural and artistic activities. The units of the subsidiary Gerdau Aços Longos S.A., located in the northeast region of Brazil, will receive until 2013 a 75% reduction in income tax on operating profit, which represented R$ 11,988 as of March 31, 2008 (R$ 7,366 as of March 31, 2007). The respective tax incentives were recorded directly in the income and social contribution tax accounts on the statement of income.

b) Deferred income and social contribution taxes at statutory rates:
 
   
Balance on
  
Recognized
  
Exchange
  
Balance on
  
   
December 31,
2007
  
in income
  
variation
  
March 31,
2008
  
Non-current assets
                          
                           
Tax losses
    
133,923
   
2,887
   
(613
)
  
136,197
 
Offset of tax losses
    
19,123
   
5,090
   
-
   
24,213
 
Provision for contingencies
    
128,962
   
(18,244
)
  
-
   
110,718
 
Benefits granted to employees
    
182,058
   
(14,723
)
  
(788
)
  
166,547
 
Other
    
322,361
   
15,884
   
(1,596
)
  
336,649
 
Amortized goodwill
    
17,171
   
16,512
   
-
   
33,683
 
Property, plant and equipment
    
-
   
14,067
   
-
   
14,067
 
Provision for losses
    
130,253
   
(5,552
)
  
-
   
124,701
 
                           
Total Non-current assets
    
933,851
   
15,921
   
(2,997
)
  
946,775
 
                           
Non-current liabilities
                          
                           
Property, plant and equipment
   
1,447,387
   
(10,780
)
  
10,211
   
1,446,818
 
Intangible assets
    
418,402
   
(12,521
)
  
(4,957
)
  
400,924
 
Amortized negative goodwill
    
67,726
   
536
   
-
   
68,262
 
Benefits granted to employees
    
141,162
   
5,291
   
-
   
146,453
 
Inflation/foreign exchange effect
    
170,596
   
(2,749
)
  
-
   
167,847
 
Other
    
70,498
   
9,918
   
-
   
80,416
 
                           
Total Non-current liabilities
    
2,315,771
   
(10,305
)
  
5,254
   
2,310,720
 
                           
Total net
    
(1,381,920
)
  
26,226
   
(8,251
)
  
(1,363,945
)
                           
Effect in the income of the year
          
26,226
             

 
GERDAU S.A. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED INTERIM FINANCIAL STATEMENTS AS OF MARCH 31, 2008 AND 2007
(Amounts in thousands of Brazilian reais – R$, unless otherwise indicated)
Reviewed by independent auditors to the extent described in the report dated May 12, 2008
(Convenience Translation into English from the Original Previously Issued in Portuguese)
 
   
Balance on
December 31,
2006
  
Company
acquisition
  
Recognized
in income
  
Exchange
variation
 
 
Balance on
December 31,
2007
  
Non-current assets
                                
                                 
Tax losses
    
93,167
   
-
   
55,369
   
(14,613
)
  
133,923
 
Offset of tax losses
    
4,349
   
-
   
14,774
   
-
   
19,123
 
Provision for contingencies
    
100,727
   
-
   
28,235
   
-
   
128,962
 
Benefits granted to employees
    
193,058
   
557
   
10,988
   
(22,545
)
  
182,058
 
Investment credits
    
33,843
   
-
   
(33,843
)
  
-
   
-
 
Other
    
300,236
   
(121,630
)
  
185,221
   
(41,466
)
  
322,361
 
Amortized goodwill
    
16,341
   
-
   
830
   
-
   
17,171
 
Property, plant and equipment
    
6,916
   
-
   
(6,916
)
  
-
   
-
 
Provision for losses
    
167,128
   
9,707
   
(46,582
)
  
-
   
130,253
 
                                 
Total Non-current assets
    
915,765
   
(111,366
)
  
208,076
   
(78,624
)
  
933,851
 
                                 
Non-current liabilities
                                
                                 
Property, plant and equipment
    
1,214,291
   
313,398
   
84,096
   
(164,398
)
  
1,447,387
 
Intangible assets
    
16,649
   
401,753
   
-
   
-
   
418,402
 
Amortized negative goodwill
    
65,598
   
-
   
2,128
   
-
   
67,726
 
Benefits granted to employees
    
103,440
   
-
   
37,722
   
-
   
141,162
 
Inflation/foreign exchange effect
    
72,203
   
-
   
98,393
   
-
   
170,596
 
Other
    
2,750
   
-
   
67,748
   
-
   
70,498
 
                                 
Total Non-current liabilities
    
1,474,931
   
715,151
   
290,087
   
(164,398
)
  
2,315,771
 
                                 
Total net
    
(559,166
)
  
(826,517
)
  
(82,011
)
  
85,774
   
(1,381,920
)
                                 
Effect in the income of the year
                
(82,011
)
            
 
The tax credits arising from tax loss carryforwards are supported by projections of taxable income based on technical feasibility studies submitted annually to the Company's Board of Directors. These studies consider the history of profitability of the Company and its subsidiaries and the expectation of continuous profitability and estimated the recovery of credits over a period not exceeding ten years. The other tax credits arising from temporary differences, mainly tax contingencies, and provision for losses, were recognized according to their estimate of realization.
 
 
GERDAU S.A. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED INTERIM FINANCIAL STATEMENTS AS OF MARCH 31, 2008 AND 2007
(Amounts in thousands of Brazilian reais – R$, unless otherwise indicated)
Reviewed by independent auditors to the extent described in the report dated May 12, 2008
(Convenience Translation into English from the Original Previously Issued in Portuguese)
 
c) Estimated recovery of income and social contribution tax credits:
 
   
March 31,
2008
  
December 31,
2007
  
2008
    
191,678
   
200,944
 
2009
    
160,231
   
163,552
 
2010
    
139,594
   
143,531
 
2011
    
167,989
   
197,520
 
2012
    
106,301
   
99,684
 
After 2013
    
180,982
   
128,620
 
     
946,775
   
933,851
 
 
   
March 31, 2008
  
December
31, 2007
  
2008
    
217,057
   
223,273
 
2009
    
210,910
   
208,040
 
2010
    
138,731
   
139,786
 
2011
    
139,723
   
140,778
 
2012
    
137,655
   
138,981
 
After 2013
    
1,466,644
   
1,464,913
 
     
2,310,720
   
2,315,771
 
 
d) Unrecognized tax assets
 
As of March 31, 2008, the Company has total tax losses arising from its operations in Brazil of R$ 207,719 from income tax (R$ 255,115 as of December 31, 2007) and R$ 218,256 from social contribution tax (R$ 214,251 as of December 31, 2007), representing a deferred tax asset of R$ 78,679 (R$ 67,188 as of December 31, 2007). The Company believes that the amounts will be realized based on the combination of future taxable income, except for a portion of R$ 76,925 (R$ 76,925 as of December 31, 2007) due to the lack of an opportunity to use the tax losses in one of its subsidiaries. These tax losses can be carried forward indefinitely.
 
As of March 31, 2008, Gerdau Ameristeel recognized a deferred tax asset in the amount of R$ 98,599 (R$ 99,850 as of December, 31, 2007). Gerdau Ameristeel has tax losses not arising from capital loss in the amount of R$ 140,978 for Canadian tax purposes (R$ 142,767 as of December 31, 2007), which expire between 2008 and 2027. Gerdau Ameristeel also has net operating losses of approximately R$ 861,957 for North American tax purposes (R$ 872,897 as of December 31, 2007), which expire between 2010 and 2027. Gerdau Ameristeel believes that the net deferred tax asset of its Canadian operations, which as of March 31, 2008 totaled R$ 16,442 (R$ 18,953 as of December 31, 2007), will be realized based on the combination of future taxable income and various tax planning strategies that will be implemented, if necessary. During 2008, Gerdau Ameristeel recorded a provision for loss of R$ 15,462 (R$ 3,011 as of December 31, 2007), against certain state tax assets arising from tax losses and recycling credits. The Company believes that the realization of these deferred tax assets is not probable.
 
 
GERDAU S.A. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED INTERIM FINANCIAL STATEMENTS AS OF MARCH 31, 2008 AND 2007
(Amounts in thousands of Brazilian reais – R$, unless otherwise indicated)
Reviewed by independent auditors to the extent described in the report dated May 12, 2008
(Convenience Translation into English from the Original Previously Issued in Portuguese)
 
NOTE 9 -PROPERTY, PLANT AND EQUIPMENT

a) Summary of changes in property, plant and equipment:
 
 
 
Lands and
 
Machines, equipment,
 
Furniture and
 
 
 
Data electronic
 
Foresting/ 
 
Fixed assets under
 
 
 
 
 
Buildings
 
and installations
 
Appliances
 
Vehicles
 
Equipment
 
reforesting
 
construction
 
Total
 
                                   
Gross cost of the property, plant, and equipment
                                  
Balance on December 31, 2006
    
4,190,834
    
11,924,043
    
162,652
    
116,718
    
447,270
    
317,718
    
2,737,467
    
19,896,702
  
Foreign exchange effect
    
(151,071
)
  
(631,799
)
  
(14,393
)
  
(8,181
)
  
(6,962
)
  
-
    
(68,415
)
  
(880,821
)
Acquisitions/sales of companies
    
357,507
    
963,668
    
539
    
3,502
    
17,098
    
(26,342
)
  
128,122
    
1,444,094
  
Addition
    
230,362
    
717,627
    
21,203
    
21,606
    
41,539
    
137,684
    
1,980,073
    
3,150,094
  
Transfers
    
120,045
    
2,080,857
    
14,089
    
1,939
    
66,295
    
-
    
(2,283,225
)
  
-
  
Disposal
    
(17,217
)
  
(298,808
)
  
(7,110
)
  
(3,601
)
  
(12,047
)
  
(21,222
)
  
(121,666
)
  
(481,671
)
Balance on December 31, 2007
    
4,730,460
    
14,755,588
    
176,980
    
131,983
    
553,193
    
407,838
    
2,372,356
    
23,128,398
  
                                                   
Foreign exchange effect
    
35,926
    
62,198
    
1,601
    
1,944
    
3,909
    
-
    
21,215
    
126,793
  
Acquisitions/sales of companies
    
-
    
(33,569
)
  
-
    
-
    
-
    
-
    
-
    
(33,569
)
Addition
    
19,309
    
30,480
    
14,876
    
2,545
    
8,816
    
20,543
    
378,436
    
475,005
  
Transfers
    
12,888
    
198,974
    
2,268
    
1,043
    
(11,520
)
  
-
    
(203,653
)
  
-
  
Disposal
    
(5,430
)
  
(22,043
)
  
(636
)
  
(514
)
  
(969
)
  
-
    
(2,063
)
  
(31,655
)
Balance on March 31, 2008
    
4,793,153
    
14,991,628
    
195,089
    
137,001
    
553,429
    
428,381
    
2,566,291
    
23,664,972
  
                                                   
Accumulated depreciation
                                                  
                                                   
Balance on December 31, 2006
    
(1,289,867
)
  
(4,750,563
)
  
(86,044
)
  
(52,225
)
  
(272,368
)
  
(72,092
)
  
-
    
(6,523,159
)
Foreign exchange effect
    
15,660
    
176,843
    
6,512
    
2,956
    
11,822
    
-
    
-
    
213,793
  
Acquisitions/sales of companies
    
2,334
    
13,014
    
283
    
209
    
218
    
2,689
    
-
    
18,747
  
Depreciation, amortization and depletion
    
(153,278
)
  
(997,880
)
  
(16,563
)
  
(19,084
)
  
(89,023
)
  
(19,271
)
  
-
    
(1,295,099
)
Transfers
    
3,599
    
9,332
    
(12,673
)
  
(1,962
)
  
1,704
    
-
    
-
    
-
  
Disposal
    
7,089
    
246,433
    
4,237
    
2,387
    
10,818
    
14,300
    
-
    
285,264
  
Balance on December 31, 2007
    
(1,414,463
)
  
(5,302,821
)
  
(104,248
)
  
(67,719
)
  
(336,829
)
  
(74,374
)
  
-
    
(7,300,454
)
                                                   
Foreign exchange effect
    
(4,874
)
  
(9,658
)
  
(857
)
  
(1,232
)
  
(1,444
)
  
-
    
-
    
(18,065
)
Acquisitions/sales of companies
    
-
    
-
    
-
    
-
    
-
    
-
    
-
    
-
  
Depreciation, amortization and depletion
    
(38,861
)
  
(231,280
)
  
(4,140
)
  
(5,138
)
  
(20,115
)
  
(3,144
)
  
-
    
(302,678
)
Transfers
    
155
    
530
    
(537
)
  
(148
)
  
-
    
-
    
-
    
-
  
Disposal
    
3,602
    
16,365
    
305
    
366
    
918
    
-
    
-
    
21,556
  
Balance on March 31, 2008
    
(1,454,441
)
  
(5,526,864
)
  
(109,477
)
  
(73,871
)
  
(357,470
)
  
(77,518
)
  
-
    
(7,599,641
)
                                                   
Net property, plant and equipment
                                                  
Balance on December 31, 2006
    
2,900,967
    
7,173,480
    
76,608
    
64,493
    
174,902
    
245,626
    
2,737,467
    
13,373,543
  
Balance on December 31, 2007
    
3,315,997
    
9,452,767
    
72,732
    
64,264
    
216,364
    
333,464
    
2,372,356
    
15,827,944
  
Balance on March 31, 2008
    
3,338,712
    
9,464,764
    
85,612
    
63,130
    
195,959
    
350,863
    
2,566,291
    
16,065,331
  
 
The following useful lives are used to calculate depreciation, amortization, and depletion:

   
Useful lives of
property, plant and
equipment
  
Buildings
    
20 to 33 years
  
Machines, equipment, and installations
    
10 to 20 years
  
Furniture and fixtures
   
5 to 10 years
  
Vehicles
    
3 to 5 years
  
Electronic data equipment
    
2.5 to 6 years
  
Foresting/reforesting
    
Cutting plan
  
 
b) Insured amounts – property, plant and equipment are insured against fire, electrical damage and explosion. The insurance coverage is based on the amounts and risks involved. The plants of the North and Latin American subsidiaries (except Brazil), Spanish subsidiaries and the subsidiaries Gerdau Açominas S.A. and Aços Villares S.A. are also insured against loss of profits.
 
c) Capitalized interest and financial charges – financial charges capitalized during the 3-month period ended March 31, 2008 totaled R$ 26,845 (R$ 18,428 as of March 31, 2007).
 
d) Guarantees - fixed assets were pledged as collateral for loans and financing in the amount of R$ 1,915,436 as of March 31, 2008 (R$ 1,869,540 as of December 31, 2007). 
 
 
GERDAU S.A. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED INTERIM FINANCIAL STATEMENTS AS OF MARCH 31, 2008 AND 2007
(Amounts in thousands of Brazilian reais – R$, unless otherwise indicated)
Reviewed by independent auditors to the extent described in the report dated May 12, 2008
(Convenience Translation into English from the Original Previously Issued in Portuguese)
 
NOTE 10 -INVESTMENTS

a) Investments accounted for under the equity method
 
 
  
 
  
 
  
 
  
 
  
 
  
 
  
 
  
 
  
Estructurales
  
 
  
 
  
Dona Francisca
  
Armacero
  
Joint Ventures
  
Grupo Multisteel Business
  
 
  
 
  
Corsa, S.A.P.I de
  
 
  
 
  
Energética S.A.
  
Ind. Com. Ltda.
  
North America
  
Holdings Corp.
  
Corsa Controladora, S.A. de C.V.
  
C.V
  
Total
  
 
  
Investment
  
Goodwill
  
Investment
  
Investment
  
Investment
  
Goodwill
  
Investment
  
Goodwill
  
Investment
  
 
  
Balance on December 31, 2006
    
65,793
    
17,074
    
7,717
    
359,496
    
-
    
-
    
-
    
-
    
-
    
450,080
  
Equity in earnings of unconsolidated companies
    
8,793
    
-
    
(1,279
)
  
92,550
    
25,676
    
-
    
-
    
-
    
-
    
125,740
  
Exchange variation
    
-
    
-
    
(318
)
  
(55,930
)
  
(9,206
)
  
(5,116
)
  
-
    
-
    
-
    
(70,570
)
Dividends
    
-
    
-
    
-
    
(109,959
)
  
-
    
-
    
-
    
-
    
-
    
(109,959
)
Acquisition/disposal of investment
    
-
    
-
    
-
    
-
    
136,233
    
81,588
    
-
    
-
    
-
    
217,821
  
Balance on December 31, 2007
    
74,586
    
17,074
    
6,120
    
286,157
    
152,703
    
76,472
    
-
    
-
    
-
    
613,112
  
Equity in earnings of unconsolidated companies
    
2,190
    
-
    
956
    
28,697
    
11,625
    
-
    
13,946
    
-
    
(781
)
  
56,633
  
Other equity variations
    
-
    
-
    
-
    
3,089
    
-
    
-
    
-
    
-
    
-
    
3,089
  
Exchange variation
    
-
    
-
    
859
    
(3,599
)
  
(1,534
)
  
(927
)
  
9,351
    
-
    
783
    
4,933
  
Dividends
    
-
    
-
    
-
    
(18,197
)
  
-
    
-
    
-
    
-
    
-
    
(18,197
)
Acquisition/disposal of investment
    
-
    
-
    
-
    
-
    
-
    
892
    
52,250
    
134,034
    
23,566
    
210,742
  
Balance on December 31, 2008
    
76,776
    
17,074
    
7,935
    
296,147
    
162,794
    
76,437
    
75,547
    
134,034
    
23,568
    
870,312
  
 
b) Other investments
 
   
MRS Logística S.A.
  
Eletrobrás
Centrais 
Elétricas
Brasileiras S.A.
  
Other
  
Total
  
   
Investment
  
Investment
  
Investments
  
 
  
Balance as of December 31, 2006
    
4,772
   
-
   
26,816
   
31,588
 
Equity in subsidiaries
    
-
   
-
   
(7,341
)
  
(7,341
)
Acquisition/disposal of investment
    
-
   
13,851
   
(4,345
)
  
9,506
 
Balance as of December 31, 2007
    
4,772
   
13,851
   
15,130
   
33,753
 
Equity in subsidiaries
    
-
   
-
   
4,200
   
4,200
 
Acquisition/disposal of investment
    
-
   
-
   
(3,970
)
  
(3,970
)
Balance as of March 31, 2008
    
4,772
   
13,851
   
15,360
   
33,983
 
 
 

GERDAU S.A. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED INTERIM FINANCIAL STATEMENTS AS OF MARCH 31, 2008 AND 2007
(Amounts in thousands of Brazilian reais – R$, unless otherwise indicated)
Reviewed by independent auditors to the extent described in the report dated May 12, 2008
(Convenience Translation into English from the Original Previously Issued in Portuguese)
 
NOTE 11 - GOODWILL

Balance as of December 31, 2006
    
437,838
 
(-) Foreign exchange variation
   
(231,613
)
(+) Gerdau GTL Mexico, S.A. de C.V.
    
258,827
 
(+) Valley Placers, Inc.
    
5,015
 
(+) Siderúrgica Zuliana, C.A.
    
111,934
 
(+) D&R Steel, LLC
    
5,229
 
(+) Re-Bars Inc.
    
2,039
 
(+) Chaparral Steel Company
    
5,076,371
 
(+) Gerdau Açominas S.A.
    
170,129
 
(+) Gerdau Aços Longos S.A.
    
167,726
 
(+) Gerdau Aços Especiais S.A.
    
34,209
 
(+) Gerdau Comercial de Aços S.A.
    
27,368
 
 
    
53,965
 
(+) Trefilados de Urbina, S.A. - Trefusa
    
19,672
 
(+) Enco Materials Inc.
    
45,276
 
(-) Corporación Sidenor, S.A.
    
(11,081
)
(-) GSB Acero, S.A.
   
(129,508
)
Balance as of December 31, 2007
    
6,043,396
 
(-) Foreign exchange variation
   
(69,591
)
(+) Sheffield Steel Corporation
    
11,018
 
(+) Gerdau Açominas S.A.
    
1,609
 
(+) Gerdau Aços Longos S.A.
    
1,587
 
(+) Gerdau Aços Especiais S.A.
    
324
 
(+) Gerdau Comercial de Aços S.A.
    
259
 
(+) Diaco S.A.
    
232,991
 
(-) Enco Materials Inc.
    
(11,017
)
Balance as of March 31, 2008
    
6,210,576
 
 
Goodwill by subsidiary:
 
   
March 31, 2008
  
December 31, 2007
 
Sipar Gerdau Inversiones S.A.
    
19,757
   
20,008
 
Distribuidora Matco S.A.
    
4,876
   
4,334
 
Sheffield Steel Corporation
    
123,430
   
114,058
 
Pacific Coast Steel Inc.
    
115,467
   
117,151
 
Gerdau GTL México, S.A. de C.V.
    
231,748
   
228,724
 
Valley Placers, Inc.
    
4,606
   
4,664
 
Siderúrgica Zuliana, C.A.
    
102,565
   
104,094
 
D&R Steel, LLC
    
4,693
   
4,752
 
Re-Bars Inc.
    
1,874
   
1,898
 
Chaparral Steel Company
    
4,854,715
   
4,926,315
 
Gerdau Açominas S.A.
    
171,738
   
170,129
 
Gerdau Aços Longos S.A.
    
169,313
   
167,726
 
Gerdau Aces Especiais S.A.
    
34,533
   
34,209
 
Gerdau Comercial de Aces S.A.
    
27,627
   
27,368
 
Aplema Comércio de Produtos Agroflorestais e Empreendimentos Ltda.
    
53,965
   
53,965
 
Diaco S.A.
    
236,180
   
-
 
Trefilados de Urbina, S.A. - Trefusa
    
21,162
   
19,997
 
Enco Materials, Inc.
    
32,327
   
44,004
 
     
6,210,576
   
6,043,396
 
 
 
GERDAU S.A. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED INTERIM FINANCIAL STATEMENTS AS OF MARCH 31, 2008 AND 2007
(Amounts in thousands of Brazilian reais – R$, unless otherwise indicated)
Reviewed by independent auditors to the extent described in the report dated May 12, 2008
(Convenience Translation into English from the Original Previously Issued in Portuguese)
 
Goodwill impairment assessment

The Company evaluates every year the recoverability of the goodwill on investments and uses common market practices to do so, especially in relation to the cash flow discounted from its units that have allocated goodwill. The recoverability of goodwill is evaluated quarterly to analyze and identify facts or circumstances which could require advancing the annually performed test. No impairment loss was identified for the Company's goodwill in the period.
 
NOTE 12 - INTANGIBLE ASSETS

Intangible assets refer basically to goodwill arising from the acquisition of companies:
 
   
Pacific Coast Steel
Inc.
  
Corporación
Sidenor, S.A.
  
Chaparral
Steel Company
  
Enco Materials,
Inc.
  
Other
  
Total
  
   
Trade Fund
  
Carbon Emission Reduction Certificates
  
Fund
Commerce
  
Fund
Commerce
  
 
      
Balance as of December 31, 2006
    
17,322
   
18,648
   
-
   
-
   
9,411
   
45,381
 
Exchange variation
    
(2,646
)
  
(1,666
)
  
(39,983
)
  
43
   
(488
)
  
(44,740
)
Acquisition
    
1,628
   
5,472
   
1,112,808
   
14,917
   
4,156
   
1,138,981
 
Disposal
    
(831
)
  
(15,890
)
  
-
   
-
   
(264
)
  
(16,985
)
Amortization
   
(2,684
)
  
-
   
(42,514
)
  
(991
)
  
(2,733
)
  
(48,922
)
Balance as of December 31, 2007
    
12,789
   
6,564
   
1,030,311
   
13,969
   
10,082
   
1,073,715
 
Exchange variation
    
(160
)
  
1,303
   
(13,335
)
  
(183
)
  
130
   
(12,245
)
Acquisition
    
-
   
18,803
   
-
   
-
   
80
   
18,883
 
Disposal
    
(8
)
  
(1,583
)
  
-
   
-
   
(289
)
  
(1,880
)
Amortization
   
(717
)
  
-
   
(40,169
)
  
(752
)
  
(168
)
  
(41,806
)
Balance as of March 31, 2008
    
11,904
   
25,087
   
976,807
   
13,034
   
9,835
   
1,036,667
 
Estimated useful lives
    
5 years
    
Undefined
    
15 years
    
5 years
    
5 years
        
 
 
GERDAU S.A. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED INTERIM FINANCIAL STATEMENTS AS OF MARCH 31, 2008 AND 2007
(Amounts in thousands of Brazilian reais – R$, unless otherwise indicated)
Reviewed by independent auditors to the extent described in the report dated May 12, 2008
(Convenience Translation into English from the Original Previously Issued in Portuguese)
 
NOTE 13 - LOANS AND FINANCING
 
Loans and financing are as follows:
 
   
Annual
      
 
  
charges
 (*) 
March 31, 2008
  
December 31, 2007
  
Short term financing in Brazilian reais
                    
Working capital
    
6.25
%
  
11,585
   
534,718
 
Short term financing in foreign currency
                    
Working capital (US$)
   
7.41
%
  
233,896
   
508,510
 
Working capital (EUR)
    
5.61
%
  
154,191
   
156,894
 
Working capital (Clp$)
    
5.19
%
  
18,654
   
29,523
 
Working capital (Cop$)
   
8.39
%
  
43,641
   
13,428
 
Working capital (PA$)
   
10.65
%
  
27,961
   
54,113
 
Financing of investment (US$)
    
7.06
%
  
285,101
   
72,935
 
Financing of fixed assets and other (US$)
         
-
   
1,787
 
           
775,029
   
1,371,908
 
Plus current portion of long-term loans and financing
          
1,272,438
   
1,129,077
 
Short term financing plus current portion
          
2,047,467
   
2,500,985
 
                     
Long-term financing in Brazilian reais
                    
Working capital
    
10.28
%
  
120,060
   
105,345
 
Financing of fixed assets
    
8.29
%
  
1,393,260
   
1,412,516
 
Financing of investment
    
10.96
%
  
762,402
   
744,325
 
Long-term financing in foreign currency
                    
Working capital (US$)
   
7.77
%
  
466,520
   
395,548
 
Working capital (EUR)
    
5.61
%
  
800,580
   
702,379
 
Bearer bonds(Perpetual bonds and Senior Notes) (US$)
    
9.75
%
  
1,759,869
   
1,772,751
 
Açominas exports receivables (US$)
          
-
   
-
 
Advances on export contracts (US$)
    
5.83
%
  
434,687
   
508,687
 
Financing of investment (US$)
    
6.80
%
  
6,352,415
   
6,400,934
 
Financing of fixed assets and other (US$)
   
7.48
%
  
1,567,407
   
1,547,720
 
           
13,657,200
   
13,590,205
 
Less: current portion
          
(1,272,438
)
  
(1,129,077
)
Long term financing minus current portion
          
12,384,762
   
12,461,128
 
Total financing
          
14,432,229
   
14,962,113
 
 
(*) Weighted average tax on March 31, 2008
 
Loans and financing denominated in Brazilian reais are indexed to the TJLP (long-term interest rate, which is established quarterly by the Federal Government for adjusting long-term loans granted by the BNDES - National Bank for Economic and Social Development), or to the IGP-M (general market price index, a Brazilian inflation rate measured by Fundação Getúlio Vargas). 
 
Summary of loans and financing by currency:
 
   
March 31, 2008
  
December 31, 2007
  
Real (R$)
    
2,287,307
   
2,796,904
 
U.S. Dollar (US$)
    
11,099,895
   
11,208,872
 
Euro (EUR)
    
954,771
   
859,273
 
Colombian Peso (Cop$)
    
43,641
   
13,428
 
Argentine Peso (PA$)
    
27,961
   
54,113
 
Chilean Peso (Clp$)
    
18,654
   
29,523
 
     
14,432,229
   
14,962,113
 

 
GERDAU S.A. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED INTERIM FINANCIAL STATEMENTS AS OF MARCH 31, 2008 AND 2007
(Amounts in thousands of Brazilian reais – R$, unless otherwise indicated)
Reviewed by independent auditors to the extent described in the report dated May 12, 2008
(Convenience Translation into English from the Original Previously Issued in Portuguese)
 
Maturity of long-term loans and financing:
 
2009
    
1,097,834
 
2010
    
1,114,634
 
2011
    
2,753,897
 
2012
    
2,801,348
 
After 2012
    
4,617,049
 
     
12,384,762
 
 
a) Guaranteed Perpetual Notes and Senior Notes
 
Gerdau S.A. concluded the private issue of Guaranteed Perpetual Notes (Notes) on September 15, 2005 in the total amount of US$ 600 million (R$ 1,049,460 as of March 31, 2008). These Notes are guaranteed by the Brazilian operating companies Gerdau Açominas S.A., Gerdau Aços Longos S.A., Gerdau Aços Especiais S.A. and Gerdau Comercial de Aços S.A. The Notes have no maturity but may become due in certain specific circumstances (as defined in the terms of the Notes), which are not under total control of the Company. The Company has the option of redeeming these Notes after 5 years of their issue, i.e., the first option for redemption is in September 2010. Interest is payable quarterly and each quarterly payment date after September 2010 is also a redemption option date. The subsidiary Gerdau Ameristeel Corporation has a private issue of Senior Unsecured Notes in the amount of US$ 405 million (R$ 708,386 as of March 31, 2008), at the cost of 10.375% per year, with maturity in 2011. 
 
b) Bridge Loan Facility and Term Loan Facility

On September 14, 2007, the subsidiary Gerdau Ameristeel Corp. financed the acquisition of Chaparral Steel Company with a Bridge Loan Facility in the amount of US$ 1.15 billion (R$ 2,011,465 as of March 31, 2008) and with a Term Loan Facility in the amount of US$ 2.75 billion (R$ 4,810,025 as of March 31, 2008).

The Bridge Loan Facility was completely paid off. The Term Loan Facility has installments due between 5 and 6 years from the acquisition closing and is subject to Libor + between 1% and 1.25%.

The Bridge Loan Facility and the Term Loan Facility are not collateralized by assets of Gerdau Ameristeel or its subsidiaries. Gerdau S.A. and its Brazilian operating subsidiaries (Gerdau Aços Longos S.A., Gerdau Aços Especiais S.A., Gerdau Açominas S.A., and Gerdau Comercial de Aços S.A.) have guaranteed the liabilities with respect to both credit lines.

c) Ten-Year Bonds 

On October 22, 2007, the subsidiary GTL Trade Finance Inc. concluded the placement of Ten-Year Bonds in the total in the amount of US$ 1 billion (R$ 1,749,100 as of March 31, 2008). Such Bonds, which mature on October 20, 2017, are subject to interest of 7.25% per year, payable semiannually in the months of April and October, beginning April 2008, and are guaranteed by Gerdau S.A., Gerdau Açominas S.A., Gerdau Aços Longos S.A., Gerdau Aços Especiais S.A., and Gerdau Comercial de Aços S.A.

d) Guarantees 

The loans contracted under the FINAME/BNDES program, totaling R$ 1,459,674 on the date of the Financial Statements, are guaranteed by the financed assets. Other loans are guaranteed by the controlling shareholders’ collateral signatures, on which the Company pays a rate of 1% per year.

e) Covenants

 As a way of monitoring the financial condition of the Company, the banks involved in the financing agreements use restrictive covenants, as described below:
I) Consolidated Interest Coverage Ratio - measures the debt service payment capacity in relation to EBITDA (Earnings before Interest, Taxes, Depreciation and Amortization). The contractual index indicates that the EBITDA for the last 12 months should represent at least 3 times the debt service of the same period. As of March 31, 2008 such covenant represents R$ 1,850,715 and is around 10.9.
 
 
GERDAU S.A. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED INTERIM FINANCIAL STATEMENTS AS OF MARCH 31, 2008 AND 2007
(Amounts in thousands of Brazilian reais – R$, unless otherwise indicated)
Reviewed by independent auditors to the extent described in the report dated May 12, 2008
(Convenience Translation into English from the Original Previously Issued in Portuguese)
 
II) Consolidated Leverage Ratio - measures the debt coverage capacity in relation to EBITDA (Earnings before Interest, Taxes, Depreciation and Amortization). The contractual index indicates that the debt coverage level should not surpass 4 times the EBITDA for the last 12 months. As of March 31, 2008 such covenant represents R$ 26,844,792 and is around 2.3 times the EBITDA for the last 12 months.
III) Required Minimum Net Worth - measures the minimum net worth required in financing agreements. The contractual index indicates that the Net Worth must be greater than R$ 3,759,200.
IV) Current Ratio - measures the capacity to pay current liabilities. The contractual index indicates that the current ratio must be greater than 0.8. As of March 31, 2008 the current ratio is 3.7.

All the covenants mentioned above are calculated based on the Consolidated Interim Financial Statements under IFRS of Gerdau S.A., except item IV, which refers to Metalúrgica Gerdau S.A., and have been complied with. Pursuant to the agreements, the penalty for non-compliance with such covenants is the possibility of a default statement by the banks and acceleration of maturity of loans.
 
f) Credit lines
 
In October 2005, the subsidiaries Gerdau Açominas S.A., Gerdau Aços Longos S.A., Gerdau Aços Especiais S.A. and Gerdau Comercial de Aços S.A. obtained a pre-approved credit line from the BNDES (National Bank for Economic and Social Development) in the amount of R$ 900,000 for the purchase of equipment and for expenses. The funds are provided as the subsidiaries implement their investment plans and submit proof of expenditures to the BNDES. As of March 31, 2008, R$ 683,523 of this credit line had been drawn down. The contracted interest rate was TJLP (long-term interest rate) + 2.5% per year. The contracts are guaranteed by Indac – Ind. Adm. e Comércio S.A. and are subject to the compliance with financial covenants by Metalúrgica Gerdau S.A.
 
In August 2006, the subsidiary Gerdau Açominas S.A. obtained an approval from the BNDES for a loan of R$ 344,749 for increasing the production capacity of liquid steel at the unit in Ouro Branco, Minas Gerais state, from the present 3 million metric tons a year to 4.5 million metric tons a year by making investments in a new coke plant, new sintering facilities, and a new blast furnace, as well as for implementing social projects to be carried out by the company itself or in partnership with public or private nonprofit institutions that are directly involved in the local community. The contracted interest rate was TJLP (long-term interest rate) + 2% per year. The contracts are guaranteed by Indac – Ind. Adm. e Comércio S.A. and are subject to the compliance with financial covenants by Metalúrgica Gerdau S.A. As of March 31, 2008, the total resources of this credit line had been drawn down.
 
In November 2006, Gerdau S.A. closed a Senior Liquidity Facility operation in order provide the management of its liabilities with one more tool that will make it possible to better manage short-term risks. The operation contributed to reduce the Company's level of exposure in the case of liquidity reduction in the financial and capital markets and is part of the Liability Management process being implemented by the Company. The Senior Liquidity Facility amounts to US$ 400 million (R$ 699,640 as of March 31, 2008) and the borrower will be the subsidiary GTL Trade Finance Inc., with guarantees provided by the following companies: Gerdau S.A., Gerdau Açominas S.A., Gerdau Aços Longos S.A., Gerdau Aços Especiais S.A., and Gerdau Comercial de Aços S.A.. The program has a 3-year cash period with 2 years for payment from the time each disbursement is made. The costs are a Facility Fee of 0.27% per year and Libor + 0.30% to 0.40% per year in the case of disbursement. No amounts have been withdrawn against this credit line as of March 31, 2008.
 
The subsidiary Gerdau Açominas S.A. has the following credit lines:
 
· US$ 267 million (R$ 467,010 as of March 31, 2008) with a group of banks led by Citibank, N.A, Tokyo Branch, whose credit insurance was given by Nippon Export and Investment Insurance (NEXI) and guarantee by Gerdau S.A. The operation has a term of ten years, of which two are the grace period and the remaining eight for payment. The contracted interest rate was LIBOR + 0.3% per year (equivalent to an all-in cost of 7.27% per year on the contract date). As of March 31, 2008, all of the amounts under the credit line had been drawn down. The resources are being used to finance part of the project to increase the production capacity to 4.5 million metric tons, including the following sub-projects: Raw Material Yards, Ladle Furnace, Billet Inspection Line, Transportation and Railroads, Water and Gas Piping Systems, Firefighting, Turbogenerator Blower, Boiler, Information Technology, Management and Technical Assistance.
 
 
GERDAU S.A. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED INTERIM FINANCIAL STATEMENTS AS OF MARCH 31, 2008 AND 2007
(Amounts in thousands of Brazilian reais – R$, unless otherwise indicated)
Reviewed by independent auditors to the extent described in the report dated May 12, 2008
(Convenience Translation into English from the Original Previously Issued in Portuguese)
 
Together with the contracting of this line of credit, Gerdau performed a swap operation for protection against foreign exchange exposure of the Japanese yen against the US dollar (note 15).
 
· US$ 69 million (R$ 120,688 as of March 31, 2008) from Export Development Canada, whose credit insurance was given by KfW and guarantee by Gerdau S.A. The operation has a term of six years, of which two are the grace period and the remaining four for payment. The operation had an all-in cost of 7.22% per year on the contract date. As of March 31, 2008, US$ 32 million (R$ 55,971 as of March 31, 2008) under this credit line had been drawn down. The funds are being used to finance part of the Continuous Casting of Blooms project.
 
· US$ 201 million (R$ 351,569 as of March 31, 2008) from BNP Paribas (50%) and the Industrial and Commercial Bank of China - ICBC (50%), whose credit insurance was given by China Export & Credit Insurance Company (Sinosure) and guarantee by Gerdau S. A. The operation has a term of twelve years, for which three are the grace period and the remaining nine for payment. The operation had an all-in cost of 6.97% per year on the contract date. As of March 31, 2008, US$ 174 million (R$ 304,343) of this credit line had been drawn down. The funds are being used to finance 85% of the costs of new Blast Furnaces, Coke Plant, and sintering facilities at the Ouro Branco Plant. 
 
Together with the contracting of this line of credit, Gerdau entered into a commercial loan operation for the total of US$ 50 million (R$ 87,455 as of March 31, 2008) with BNP Paribas. This line has already been fully used. The funds were used to finance 15% of the costs of new Blast Furnaces, Coke Plant, and sintering facilities at the Ouro Branco Plant as well as 100% of the Sinosure credit insurance associated with the projects.
 
The North American subsidiaries have a credit line in the amount of US$ 650 million (R$ 1,136,915 as of March 31, 2008) falling due in October 2010, which can be drawn in U.S. dollars (Libor + 1% to 2% per year or US Prime/FED Funds + -0.5% to +0.5% per year) or in Canadian dollars (at the Bankers Acceptance (BA) rate plus 1% to 2% per year, or Canadian Prime plus 0% to 1% per year). The distribution of this credit line among the companies is made in proportion to the working capital of each North American subsidiary. No amounts have been withdrawn against this credit line as of March 31, 2008. The inventories and accounts receivable of subsidiaries were given as guarantee for this credit line.
 
In November 2006, the subsidiary Gerdau Ameristeel US Inc. obtained a credit line from KfW in the amount of US$ 75 million (R$ 131,183 as of March 31, 2008) with a maturity in November 2008. The contracted interest rate for ECA Loans was Libor plus 0.3% to 0.6% per year and for Commercial Loans was Libor plus 1.6% to 2.2% per year. As of March 31, 2008, US$ 15 million (R$ 26,237 as of March 31, 2008) of this credit line had been drawn down. The funds will be used to finance the acquisitions of fixed assets. The equipment to be financed will be given as guarantee for this line.
 
The subsidiary Gerdau Aza S.A. has a line of credit of Clp$ 48.4 billion (R$ 193,789 as of March 31, 2008), bearing interest of 6.96% per year. This line was not being used as of March 31, 2008.
 
NOTE 14 - DEBENTURES
 
   
General
  
Quantity as of March 31, 2008
                  
Issuance
  
Meeting
  
 Issued on
  
Portfolio
  
Maturity
  
Annual charges
  
March 31, 2008
  
December 31, 2007
  
3rd - A and B
    
May 27, 1982
    
144,000
   
80,780
   
June 1, 2011
    
CDI
    
158,937
    
165,970
 
7th
    
July 14, 1982
    
68,400
   
23,103
   
July 1, 2012
    
CDI
    
139,114
    
152,606
 
8th
    
November 11, 1982
    
179,964
   
37,002
   
May 2, 2013
    
CDI
    
286,872
    
257,961
 
9th
    
June 10, 1983
    
125,640
   
21,923
   
September 1,2014
    
CDI
    
318,530
    
252,086
 
11th - A and B
    
June 29, 1990
    
150,000
   
97,898
   
June 1,2020
    
CDI
    
151,697
    
131,147
 
                                   
1,055,150
    
959,770
 
Aços Villares S.A.
    
September 1, 2005
    
28,500
   
-
   
September 1, 2010
    
104.5% DI
    
308,495
   
308,028
 
Debentures held by subsidiaries
                                  
(366,776
)
  
(326,522
)
Total Consolidated
                                  
996,869
   
941,276
 
Current
                                  
94,744
   
38,125
 
Non-current
                                  
902,125
   
903,151
 
 
 
GERDAU S.A. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED INTERIM FINANCIAL STATEMENTS AS OF MARCH 31, 2008 AND 2007
(Amounts in thousands of Brazilian reais – R$, unless otherwise indicated)
Reviewed by independent auditors to the extent described in the report dated May 12, 2008
(Convenience Translation into English from the Original Previously Issued in Portuguese)
 
Maturities of long-term amounts are as follows:
 
   
March 31, 2008
  
 December 31, 2007
  
2009
    
106,875
   
142,500
 
2010
    
106,875
   
127,403
 
2011
    
158,937
   
165,970
 
2012
    
139,114
   
152,606
 
After 2012
    
390,324
   
314,672
 
     
902,125
   
903,151
 
 
Debentures issued by Gerdau S.A.
 
The debentures are denominated in Brazilian reais, are not convertible into shares and have variable interest at a percentage of the CDI (Interbank Deposit Rate). The nominal annual interest rate was 11.33% and 11.82% on March 31, 2008 and December 31, 2007, respectively.
 
Debentures issued by Aços Villares S.A.
 
The debentures of Aços Villares S.A. are registered, single series, unsecured, and not convertible into shares. A total of 28,500 debentures were issued and placed on the market with a face value of R$ 10 totaling R$ 285,000. The debentures have a term of five years and mature on September 1, 2010. They pay interest equivalent to 104.5% of the DI (interbank deposit) rate on a quarterly basis. The principal will be paid in eight equal, quarterly and consecutive installments, beginning on December 1, 2008.
 
NOTE 15 - FINANCIAL INSTRUMENTS

a) General considerations - Gerdau S.A. and its subsidiaries enter into transactions with financial instruments whose risks are managed by means of strategies and exposure limit controls. All financial instruments are recorded in the accounting books and consist mainly of:
- Cash and cash equivalents - are presented in note 4.
- Trade accounts receivable - are presented in note 5.
- Cash investments - are recorded at their redemption value at the date of the Consolidated Interim Financial Statements.
- Related-party transactions - are described in note 18;
- Loans and financing - are presented in note 13.
- Debentures - are presented in note 14.

b) Fair value – the fair value of the aforementioned financial instruments, calculated as per methodologies mentioned in note 2.19, is as follows:
 
 
GERDAU S.A. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED INTERIM FINANCIAL STATEMENTS AS OF MARCH 31, 2008 AND 2007
(Amounts in thousands of Brazilian reais – R$, unless otherwise indicated)
Reviewed by independent auditors to the extent described in the report dated May 12, 2008
(Convenience Translation into English from the Original Previously Issued in Portuguese)
 
   
March 31, 2008
  
December 31, 2007
  
   
Book
  
Market
  
Book
  
Market
  
   
value
  
value
  
value
  
value
  
Cash and cash equivalents
    
2,079,378
   
2,079,378
   
2,026,096
   
2,026,096
 
Short-term investments
    
2,004,437
   
2,004,437
   
3,113,277
   
3,113,277
 
Trade accounts receivable
    
3,678,196
   
3,678,196
   
3,172,316
   
3,172,316
 
Imports financing
    
1,574,295
   
1,574,295
   
1,541,315
   
1,541,315
 
Pre-payment financing
    
433,688
   
433,688
   
460,074
   
460,074
 
Bank notes financing (Senior Notes)
    
722,912
   
754,275
   
716,792
   
757,850
 
Treasury stock
   
126,451
   
260,674
   
106,667
   
268,696
 
Perpetual bonds
    
1,051,530
   
1,114,589
   
1,064,876
   
1,107,534
 
Other financing
    
10,649,804
   
10,649,804
   
11,179,056
   
11,179,056
 
Debentures
    
996,869
   
996,869
   
941,276
   
941,276
 
Related parties (assets)
    
10,905
   
10,905
   
17,100
   
17,100
 
Related parties (liabilities)
    
2,089
   
2,089
   
563
   
563
 
Unrealized gains on derivatives
    
49,783
   
49,783
   
1,567
   
1,567
 
Unrealized gains on derivatives
    
52,475
   
52,475
   
18,070
   
18,070
 
Dividends payable
    
70,847
   
70,847
   
392
   
392
 
Other accounts receivable
    
529,036
   
529,036
   
511,285
   
511,285
 
Other accounts payable
    
788,415
   
788,415
   
857,665
   
857,665
 
Long-term incentive plan (note 24)
    
-
   
42,218
   
-
   
33,445
 
Put options on minority interest (note 15.f)
    
1,072,866
   
635,501
   
889,440
   
471,477
 
 
The Company and its subsidiaries believe that the other financial instruments, which are recognized in the Consolidated Interim Financial Statements at their carrying amount, are substantially similar to those that would be obtained if they were traded in the market. However, because there is no active market for these instruments, differences could exist if they were settled in advance.

c) Risk factors that could affect the Company’s and its subsidiaries’ business:

Price risk: this risk is related to the possibility of changes in prices of the products sold by the subsidiaries or in prices of raw materials and other inputs used in the production process. Since the subsidiaries operate in a commodity market, their sales revenues and cost of sales may be affected by changes in the international prices of their products or materials. In order to minimize this risk, the subsidiaries constantly monitor the price variations in the domestic and international markets.

Interest rate risk: this risk is originated in the interest rates fluctuations in the several countries where the Company operates. Such activities in the interest rates may generate gains or losses on liabilities and assets (cash investments) that the Company holds. In order to minimize possible impacts resulting from such fluctuations, the Company looks into balancing its exposures between fixed rates and variable rates, adopting a corporate policy intending to comply with the maximum/minimum proportion of 65% and 35% between the rate modalities. In order to meet such balance, the Company may contract in the financial market operations of interest rate derivatives, in order to comply with such corporate policies.

Exchange rate risk: such risk arises from exchange rate fluctuations in the countries where the Company operates. This risk can be easily observed in countries where the revenue is in local currency and the costs are in foreign currency, therefore generating a mismatching of cash flows. In order to measure the foreign exchange exposure, the Company considers the assets and liabilities it has in dollars, reaching a net foreign exchange exposure, called Net Exposure, which is the real exposure. If necessary, the Company may contract operations of foreign exchange rate derivatives, to protect itself against such exposure. Additionally, as a corporate policy, the units must not generate debts in a currency other than that of its cash generation. Should this happen, the unit must contract a Hedge to protect itself against such exposure.  

Credit risk: this risk arises from the possibility of the subsidiaries not receiving amounts arising from sales or investments at financial institutions. In order to minimize this risk, the subsidiaries adopt the procedure of analyzing in detail the financial position of their customers, establishing a credit limit and constantly monitoring their balances. In relation to cash investments, the Company and its subsidiaries invest solely in financial institutions with low credit risk, as assessed by rating agencies. In addition, each financial institution has a maximum limit for investment, determined by the Company’s Credit Committee.
 

GERDAU S.A. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED INTERIM FINANCIAL STATEMENTS AS OF MARCH 31, 2008 AND 2007
(Amounts in thousands of Brazilian reais – R$, unless otherwise indicated)
Reviewed by independent auditors to the extent described in the report dated May 12, 2008
(Convenience Translation into English from the Original Previously Issued in Portuguese)
 
Capital management risk: this risk comes from the Company's choice in adopting a financing structure for its operations. The Company manages its capital structure, which consists of a ratio between the financial debts and its own capital (shareholders' equity, retained earnings, and profit reserves) based on internal policies and benchmarks. The BSC (Balance Scorecard) methodology was used in the last 5 years to elaborate strategic maps with objectives and indicators of the main processes. The KPI's (Key Performance Indicators) related to the objective "Capital Structure Management" are: WACC (Weighted Average Cost of Capital), Total Indebtedness/EBITDA, Interest Coverage Ratio, and Indebtedness/Shareholders' Equity Ratio. The Total Debt is composed of loans and financing (note 13) and debentures (note 14). The Company can change its capital structure depending on economic-financial conditions in order to optimize its financial leverage and its debt management. At the same time, the Company tries to improve its ROCE (Return on Capital Employed) by implementing a working capital management process and an efficient fixed asset investment program. In the last years, the key indicators of the capital structure management process have been as follows:

WACC
    
between 10% to 13% a year
  
Gross debt/EBITDA
    
between 2 and 3 times
  
Interest Coverage Ratio
    
greater than 7 times
  
Debt/Shareholders' Equity Ratio
    
between 25%-75% and 50%-50
%
 
Foreign currency sensitivity analysis: the Company is exposed to variations in foreign currency, especially in loans and financing. The sensitivity analysis made by the Company considers the effects of an increase or a reduction of 0.1% between the Brazilian real and the foreign currencies on such outstanding loans and financing on the date of the Consolidated Interim Financial Statements. The impact calculated considering such variation in the foreign exchange rate totals R$ 12,145 as of March 31, 2008 (R$ 12,165 as of December 31, 2007). The net amounts of accounts receivable and accounts payable denominated in foreign currency do not present relevant risks of impacts from the occillation of the exchange rate.

Interest rate sensitivity analysis: The Company is exposed to interest rate risks in its loans, financing and debentures. The sensitivity analysis made by the Company considers the effects of an increase or a 0.1% reduction between the Brazilian real and the foreign currencies on such outstanding loans, financing and debentures on the date of the Consolidated Interim Financial Statements. The impact calculated considering this variation in the interest rate totals R$ 60,463 as of March 31, 2008 (R$ 59,419 as of December 31, 2007).

 
GERDAU S.A. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED INTERIM FINANCIAL STATEMENTS AS OF MARCH 31, 2008 AND 2007
(Amounts in thousands of Brazilian reais – R$, unless otherwise indicated)
Reviewed by independent auditors to the extent described in the report dated May 12, 2008
(Convenience Translation into English from the Original Previously Issued in Portuguese)
 
d) Financial Instruments per Category

Summary of the financial instruments per category:

March 31, 2008
Assets
  
Loans and
receivables
  
Assets at fair value with gains and losses recognized in income
  
Hedging financial instruments
  
Available for sale
  
Total
  
Cash investments
    
-
   
1,765,214
   
-
   
239,223
   
2,004,437
 
Derivatives
    
-
   
49,783
   
-
   
-
   
49,783
 
Trade accounts receivable and other receivables
    
4,218,137
   
-
   
-
   
-
   
4,218,137
 
Cash and cash equivalents
    
2,079,378
   
-
   
-
   
-
   
2,079,378
 
Total
    
6,297,515
   
1,814,997
   
-
   
239,223
   
8,351,735
 


Liabilities
  
Liabilities at market
value with gains and
losses recognized in
the result
  
Hedging financial instruments
  
Other financial
liabilities
 
Total
 
Loans and Financing
    
-
   
-
   
17,489,766
   
17,489,766
 
Derivative financial instruments
   
52,475
   
16,496
   
-
   
52,475
 
Total
    
52,475
   
16,496
   
17,489,766
   
17,542,241
 


December 31, 2007
Assets
  
Loans and
receivables
  
Assets at fair value
with gains and losses recognized in income
  
Available for sale
  
Total
  
Cash investments
    
-
   
2,836,903
   
276,374
   
3,113,277
 
Derivatives
    
-
   
1,567
   
-
   
1,567
 
Trade accounts receivable and other receivables
    
3,700,701
   
-
   
-
   
3,700,701
 
Cash and cash equivalents
    
2,026,096
   
-
   
-
   
2,026,096
 
Total
    
5,726,797
   
2,838,470
   
276,374
   
8,841,641
 

Liabilities
  
Liabilities at market
value with gains and
losses recognized in
the result
  
Other financial
liabilities
 
Total
 
Loans and Financing
    
-
   
16,868,676
   
16,868,676
 
Derivative financial instruments
   
18,070
   
-
   
18,070
 
Total
    
18,070
   
16,868,676
   
16,886,746
 
 
Except for an instrument classified as cash flow hedge, which has its unrealized loss classified directly in shareholders’ equity, all derivatives are interest rate swaps and were recorded at fair value, and realized and unrealized losses are presented as "Net gains (losses) on derivatives" in the consolidated statement of income.

e) Operations with derivative financial instruments
 
Derivative financial instruments include interest rate swap agreements, mainly for exchanging variable-rate debt based on the CDI (interbank deposit rate) denominated in Brazilian reais for fixed-rate debt based on the Brazilian reference rate, swapping fixed interest rate debts in US dollars for variable rate debts based on the Japanese Libor, as well as a reverse swap in which the Company receives a variable rate based on the Japanese Libor and pays a fixed interest rate in US dollars.
 
Gerdau Açominas S.A. entered into interest rate swap contracts whereby it receives a variable interest rate based on Libor and pays a fixed interest rate in US dollars. These contracts have a nominal value of R$ 481,221 and a maturity date between June 15, 2010 and November 30, 2011. The fair value of these contracts, which represents the amount that would be received if the contracts were finalized on March 31, 2008, is a net loss of R$ 16,393 (a net gain of R$ 7,466 as of March 31, 2007).
 

GERDAU S.A. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED INTERIM FINANCIAL STATEMENTS AS OF MARCH 31, 2008 AND 2007
(Amounts in thousands of Brazilian reais – R$, unless otherwise indicated)
Reviewed by independent auditors to the extent described in the report dated May 12, 2008
(Convenience Translation into English from the Original Previously Issued in Portuguese)

Gerdau Açominas S.A. also entered into a reverse swap contract whereby it receives a fixed interest rate in US dollars and pays a variable interest rate based on the Japanese Libor in Japanese yens with a nominal value of R$ 467,010. This swap matures on March 24, 2016. The fair value of this contract, which represents the amount that would be received if the contract were finalized on March 31, 2008, is a net gain of R$ 39,220 (net gain of R$ 6,578 as of March 31, 2007).

Gerdau Açominas S.A. also entered into a swap contract whereby it receives a variable interest rate based on Libor in Japanese yens and pays a fixed interest rate in US dollars with a nominal value of R$ 392,737. This swap matures on March 31, 2015. The fair value of this contract, which represents the amount to be received if the contract were finalized on March 31, 2008, is a net gain of R$ 1,712 (net loss of R$ 337 as of March 31, 2007).

For Gerdau Aços Longos S.A., there was no swap outstanding as of March 31, 2008. The nominal value of these contracts was R$ 194,999 as of March 31, 2007. There are no unrealized gains or losses as of March 31, 2008 and unrealized net gains were R$ 685 as of March 31, 2007.

For GTL Equity Investments Corp. there was no swap or put option on currency exchange outstanding as of March 31, 2008. The nominal value of these contracts was R$ 66,853 as of March 31, 2007. There are no unrealized gains or losses as of March 31, 2008 and unrealized net gains totaled R$ 4,700 as of March 31, 2007.

The Company was committed to purchase an additional stake in Diaco S.A. This option was exercised by the counterparty during the 1st quarter of 2008, resulting in a payment made by the Company in the amount of US$ 107.2 million on January 10, 2008 and represented an increase of 40.2% in the stake of Diaco S.A.

Empresa Siderúrgica del Peru S.A.A. - Siderperu - entered into an interest rate swap contract, whereby it receives a variable interest rate based on Libor and pays a fixed interest rate in US dollars. This contract has a nominal value of R$ 131,183 and maturity date of April 30, 2014. The fair value of this contract, which represents the amount to be received if the contract were finalized on March 31, 2008, is a net loss of R$ 7,202.

During March 2008, Gerdau Ameristeel entered into interest rate swap contracts, qualified as cash flow hedges, in order to reduce its exposure to the variation based on Libor of the Term Loan Facility (note 13.b). The contracts have a nominal value of R$ 1,749,100; the fixed interest rates for such swaps are between 3.3005% and 3.7070% and have maturities between March 2012 and September 2013. If added to the spread over Libor related to the tranche B of the Term Loan Facility, the interest rate for these swaps would be between 4.5505% and 4.9570%. The fair value of these swaps, which represents the amount to be paid if the contract were finalized on March 31, 2008, is a net loss of R$ 16,496, which is recorded as a specific component of shareholders’ equity.

In order to reduce its exposure to changes in the fair value of its Senior Notes, Gerdau Ameristeel entered into interest rate swaps, which are qualified as fair value hedges, subsequent to the refinancing of its debt. These contracts have a notional value of R$ 349,820, expiring on July 15, 2011. Gerdau Ameristeel receives a fixed interest rate and pays a variable interest rate based on Libor. The fair value of the interest rate contract, which represents the amount to be paid if the contract were finalized on March 31, 2008, is a net gain of R$ 8,958 (net loss of R$ 5,374 as of March 31, 2007).

Additionally, Gerdau Ameristeel has interest rate option (known as caps and floor or collars), related to the hedge of the fair value mentioned above, in order to minimize its exposure to the interest rate variation on Libor. The fair value, which represents the amount to be paid if the contracts were finalized on March 31, 2008, is a net loss of R$ 12,503.


GERDAU S.A. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED INTERIM FINANCIAL STATEMENTS AS OF MARCH 31, 2008 AND 2007
(Amounts in thousands of Brazilian reais – R$, unless otherwise indicated)
Reviewed by independent auditors to the extent described in the report dated May 12, 2008
(Convenience Translation into English from the Original Previously Issued in Portuguese)

f) Share purchase obligations
 
On January 10, 2006, the Company completed its acquisition of 40% of Corporación Sidenor S.A. (“Sidenor”), a Spanish steel producer with operations in Spain and Brazil. The Santander Group, the Spanish financial conglomerate, and an entity owned by executives of Sidenor, purchased simultaneously 40% and 20% of Sidenor, respectively. The acquisition price of 100% of Sidenor consists of a fixed installment of € 443,820 thousand plus a contingent variable installment to be paid only by the Company. The fixed price paid by the Company on January 10, 2006 for its stake of 40% in Sidenor was 165,828 euros (R$ 432,577). The Santander Group has the option to sell its interest in Sidenor to the Company 5 years after the purchase at a fixed price with a fixed interest rate and Sidenor has the right of preference to purchase these shares and also may at any time during the period of the put option validity to require that the Santander Group exercises the put option before the expiration date. Furthermore, the Company consented to guarantee to pay to the Santander Group an agreed amount (the same as the fixed price of the put option mentioned above plus interest accrued using the same fixed interest rate) at any time up to 6 years after exercising the option in the event that Santander Group has not sold the shares acquired up to that date. In this case, if the Santander Group requires payment of the guarantee, the Company has the right to acquire Sidenor's shares or to indicate a third party to acquire the shares. The amount received for the sale of shares and dividends paid by Sidenor to the Santander Group should be reimbursed to the Company. The potential commitment of the Company to purchase from the Santander Group its 40% interest in Sidenor was recorded as a noncurrent liability under “Minority interest put options”. As a result of the recognition of this potential obligation, the Company has recognized since the acquisition date 80% of Sidenor as its investment. As of March 31, 2008, such potential commitment totaled R$ 503,964 (R$ 471,477 as of December 31, 2007).
 
During 2007, the subsidiary Gerdau Aços Especiais S.A. entered into a contract with BNDES Participações S.A. (“BNDESPAR”), which is the largest minority shareholder (together with other third parties) of the indirect subsidiary Aços Villares S.A. ("Villares"). This contract gives BNDESPAR the option to sell to the Company its stake of 28.8% in Villares for a certain price. This price was determined to be the higher of (a) the bid price included in the tender offer for the acquisition of Sidenor that took place last year plus TJLP (long-term interest rate) + 4% p.a., minus some dividend paid by Villares capitalized at the same interest, or (b) the tender offer price per share divided by 130% of the price of Gerdau S.A. shares, which results in a total quantity of options for BNDESPAR. At the end of the fifth year of the contract, BNDESPAR has the higher of the options (a) and (b) above. Between the fifth and seventh year, the option is still open, but the price is only that described in item (a) above. On December 31, 2007 the value of this put option is zero, since the value of the shares held by the bank is higher than the option’s value. According to IAS 32 (Presentation of Financial Instruments), the Company reclassified the exercise price of the put option from “Minority interests” to a noncurrent liability under “Minority interest put options”, even though the shares held by the bank have a value higher than the exercise price of the option and, as a result, there is a remote likelihood of BNDESPAR exercising this put option. If at the maturity date of put option BNDESPAR has not exercised its option, the reclassification will be reversed and the amount of the interest held by BNDESPAR will once again be recognized as a minority interest. As of March 31, 2008, the amount recognized as potential obligation is R$ 437,365 (R$ 417,963 as of December 31, 2007).
 
Gerdau Ameristeel has the call option for 45% of the remaining stake in PCS, which can be exercised after 5 years from the purchase date. Additionally, the minority shareholders also have the option to sell the remaining 45% stake in PCS to Gerdau Ameristeel, for the established price and also after 5 years from the date of transaction. The established price was set as the EBITDAs average for the 5 last years ended before the option exercise, multiplied by 5. If Gerdau Ameristeel does not exercise the call option, then the minority shareholders are entitled to exercise the option to sell their remaining stake to Gerdau Ameristeel. In case the call/put option is exercised, the other party is obligated to sell/purchase the remaining stake. As established by IAS 32 (presentation of financial instruments), the Company performed the reclassification of the exercise value of the put option from the account (minority interests” to noncurrent liabilities under the account “minority interest put options”. By the end of the term established in the put and call option and in case none of the involved parties exercise it, the reclassification will be reversed and the amount of the stake held by PCS minority shareholders, on the date of the Financial Statements, will be recognized as a minority interest. As of March 31, 2008 the amount recorded as potential obligation is R$ 131,537.


GERDAU S.A. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED INTERIM FINANCIAL STATEMENTS AS OF MARCH 31, 2008 AND 2007
(Amounts in thousands of Brazilian reais – R$, unless otherwise indicated)
Reviewed by independent auditors to the extent described in the report dated May 12, 2008
(Convenience Translation into English from the Original Previously Issued in Portuguese)

NOTE 16 - TAXES PAYABLE

   
March 31, 2008
  
December 31, 2007
  
Income and social contribution taxes
   
232,061
    
92,548
  
Payroll charges
   
98,163
    
96,895
  
ICMS (state VAT)
    
60,433
    
33,310
  
COFINS (tax on revenue)
    
41,345
    
21,667
  
IPI (federal VAT)
    
43,498
    
40,207
  
PIS (tax on revenue)
    
9,112
    
4,546
  
Withholding income tax
   
61,574
    
30,121
  
Taxes in installments
    
57,766
    
30,566
  
Value-added tax
    
48,482
    
41,602
  
Other
    
81,799
    
70,849
  
     
734,233
    
462,311
  

NOTE 17 - OBLIGATIONS AND RESERVES

The Company and its subsidiaries are parties to judicial and administrative proceedings involving labor, civil, and tax matters. Based on the opinion of its legal counsel, Management believes that the reserve for these judicial and administrative proceedings is sufficient to cover probable and reasonably estimable losses from unfavorable court decisions, and that the final decisions will not have significant effects on the financial position of the Company and its subsidiaries as of March 31, 2008.

The balances of the reserves are as follows:

I) Reserves

 
      
March 31, 2008
  
December 31, 2007
  
a) Tax contingencies
              
ICMS (state VAT)
    
(a.1
)
  
32,220
    
89,454
  
CSLL (social contribution tax)
    
(a.2
)
  
5,804
    
5,903
  
IRPJ - Corporate Income Tax
    
(a.3
)
  
12,760
    
13,098
  
INSS (social security contribution)
    
(a.4
)
  
47,518
    
46,671
  
ECE (Emergency Capacity Charge)
    
(a.5
)
  
33,996
    
33,996
  
RTE (Extraordinary Tariff Adjustment)
    
(a.5
)
  
21,612
    
21,612
  
II (import tax)/IPI (excise tax) Drawback
    
(a.6
)
  
89,599
    
89,018
  
Other tax contingencies
    
(a.7
)
  
82,530
    
83,021
  
           
326,039
    
382,773
  
b) Labor contingencies:
    
(b.1
)
  
92,613
    
93,800
  
c) Civil contingencies
    
(c.1
)
  
12,504
    
12,530
  
           
431,156
    
489,103
  

a) Reserve for Tax Contingencies

a.1) ICMS (state VAT) proceedings, the majority of which relating to credit rights. Most of the proceedings under judgment by the Finance Department of the States of Mato Grosso, Maranhão, Amazonas, Bahia and Rio de Janeiro and by the State Courts of Pernambuco and Paraná. The contingencies were properly updated, as established by legislation. The reduction of the amount is due to the inclusion of debts in the Special Installment Payment Program for ICMS, established by Law No. 17247 of December 27, 2007, and Decrees No. 44695 of December 28, 2007 and No. 44704 of January 15, 2008, in the State of Minas Gerais.

a.2) CSLL - The lawsuit refers to the constitutionality of the tax and the tax basis.

a.3) IRPJ- under discussion at the administrative level.


GERDAU S.A. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED INTERIM FINANCIAL STATEMENTS AS OF MARCH 31, 2008 AND 2007
(Amounts in thousands of Brazilian reais – R$, unless otherwise indicated)
Reviewed by independent auditors to the extent described in the report dated May 12, 2008
(Convenience Translation into English from the Original Previously Issued in Portuguese)

a.4) Lawsuits related to INSS in the lower and appellate courts of Minas Gerais, Rio de Janeiro, Espírito Santo, and Pernambuco. The consolidated balance refers to lawsuits related to SAT (Occupational Accident Insurance), as well as several tax delinquency notices for INSS on outside services relating to the last 10 years for which the National Institute of Social Security understands that Gerdau Açominas S.A. is jointly liable. The assessments were maintained at the administrative level and Gerdau Açominas S.A. filed annulment actions with escrow deposits for the amount under discussion based on the understanding that the right to assess part of the charge has prescribed and that there is no joint liability.

a.5) Emergency Capacity Charge (ECE) and Extraordinary Tariff Adjustment (RTE) are charges required in the electricity bills of the industrial units of the Company. According to the Company, these charges are of a tax nature and, as such, are incompatible with the National Tax System set forth in the Federal Constitution. For this reason the constitutionality of these charges is being challenged in court. Lawsuits are in progress in the Federal Courts of Sao Paulo and Rio Grande do Sul, as well as in the Federal Regional Courts and the Superior Court of Justice. The Company has fully deposited in escrow the amounts of the charges under discussion.

a.6) The reserve recorded by the subsidiary Gerdau Açominas S.A. is intended to cover amounts required by the Federal Revenue Service for Import Tax, IPI (federal VAT) and applicable charges on transactions made under a drawback that was subsequently annulled by the Foreign Trade Operations Department (DECEX). The Company does not agree with the administrative decision that annulled the drawback and defends the legality of the transactions made. This issue is under litigation that currently awaits judgment in the Federal Supreme Court (STF).

a.7) The reserve was recorded, considering the legal counsel’s and management’s opinion, for lawsuits assessed as probable loss, in an amount sufficient to cover expected losses. 

b) Reserve for Labor Contingencies

b.1) The Company and its subsidiaries are also a party to labor claims, which include indemnity claims for occupational accidents and diseases. None of these claims involve significant amounts and refer mainly to overtime pay, health hazard premium, and hazardous duty premium, among others.

c) Reserve for Civil Contingencies

c.1) The Company and its subsidiaries are also a party to civil lawsuits arising in the normal course of business, which totaled as of March 31, 2008 the amount shown as contingent liabilities.

II) Unaccrued Contingent Liabilities

a) Tax Contingencies

a.1) The Company is a defendant in a tax collection action filed by the state of Minas Gerais demanding ICMS tax payments mainly on sales of products to commercial exporters. The updated amount of the action is R$ 49,766. The Company did not record any reserve for contingencies for such action since it believes that this tax payment is undue, because products for export are exempted from ICMS (state VAT).

a.2) The Company is a defendant in debt foreclosures filed by the States of Minas Gerais and Pernambuco to demand ICMS credits arising mainly from exports of semi-finished processed products. Currently, the total amount demanded is R$ 45,502. The Company has not made any reserve for such claims since it believes that this tax is not applicable, the products do not fall under the definition of semi-finished processed products as established in federal complementary law and, therefore, are not subject to ICMS.

a.3) On December 6, 2000, the Company adhered to the Tax Debt Refinancing Program (REFIS) to pay PIS and COFINS in 60 months. The last installment was paid on May 31, 2005. Despite the payment of all installments, the balance of R$ 20,766 remains in the REFIS account, which was contested. After the pending issues of the administrative proceeding are resolved with the REFIS Committee, the Company believes that there will be no outstanding installment.


GERDAU S.A. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED INTERIM FINANCIAL STATEMENTS AS OF MARCH 31, 2008 AND 2007
(Amounts in thousands of Brazilian reais – R$, unless otherwise indicated)
Reviewed by independent auditors to the extent described in the report dated May 12, 2008
(Convenience Translation into English from the Original Previously Issued in Portuguese)

a.4) The Company and its subsidiaries, Gerdau Açominas S.A., Gerdau Aços Longos S.A. and Gerdau Comercial de Aços S.A., have other lawsuits concerning ICMS, related principally to credit right and rate differences, in the total of R$ 125,065. No reserve has been recorded for such claims since they were assessed as possible loss by the legal counsel.

a.5) The Company and its subsidiary Gerdau Aços Longos S.A. are parties to the lawsuits relating to IPTU, Import Tax and IPI. The total amount of these lawsuits is R$ 51,940. No reserve has been recorded for these lawsuits since they were assessed as possible loss by the legal counsel.

b) Civil Contingencies

b.1) Antitrust proceeding involving the Company brought by two civil construction unions in the state of São Paulo alleging that Gerdau S.A. and other long steel producers in Brazil share customers, thus violating the antitrust legislation. After investigations carried out by the Economic Law Department (SDE) and based on public hearings, the SDE was of the opinion that a cartel existed. This conclusion was also supported by an earlier opinion by the Secretariat for Economic Monitoring (SEAE). The proceeding was therefore forwarded to the Administrative Council for Economic Defense (CADE) for judgment.
However, the proceeding was suspended from May 2004 to August 16, 2005 due to a legal protection granted within a new lawsuit filed by Gerdau S.A. with the purpose of annulling the administrative proceeding grounded on formal irregularities found in its discovery. The annulment of the legal protection by the Federal Regional Court occurred as a result of appeals filed by CADE.
CADE, regardless of the request for submission of negative evidence of cartel made by Gerdau S.A., judged the merits of the administrative proceedings on September 23, 2005 and, by a majority of votes, fined the Company and other long steel producers an amount equivalent to 7% of gross revenues in the year before the Administrative Proceeding was commenced, excluding taxes, for formation of a cartel. The content of this decision proved to be contradictory, forcing Gerdau to seek, at two different moments, clarifications through the Amendment of Judgment – a procedural instrument that does not seek to reexamine the merits of a decision, but rather provide an explanation for the “obscurity,” “contradiction” or “omission” contained in the decision. Both Amendments were judged, disclosed and provided, respectively, on March 29, 2006 and May 24, 2006.
It is important to point out that there was no reexamination of the merits of the decision in these judgments, nor do the decisions in the fundamental principal of “Amendments” correspond to new convictions or judgments in a higher court.
Despite the CADE decision, the legal action filed by Gerdau S.A. follows its normal course and, at present, awaits judgment in the lower court. In the event the processual irregularities alleged by Gerdau are recognized by the court, the CADE decision may be annulled.
Furthermore, to reverse the terms of the decision by CADE, Gerdau appealed to the Judiciary on July 26, 2007 by bringing a new ordinary suit that not only ratifies the terms of the first suit, but also points out the irregularities found during the course of the administrative proceeding with CADE. The Federal Judge in charge of analyzing the action decided on August 30, 2006, for legal protection purposes, to suspend the effects of CADE's decision until the Judge's final decision. The judicial guarantee was performed by a bank guarantee corresponding to 7% on the gross income before taxes calculated in 1999 (R$ 245,070). For clarity purposes it should be pointed out that because of the current norms for civil lawsuits, this ordinary action is linked to the suit originally proposed. An order was announced on June 28, 2007, which made the parties aware of the decision from the lower court judge about the maintenance of the legal protection granted, after contested by CADE.
It should be noted that just prior to the CADE decision, the Public Prosecution Office of the state of Minas Gerais filed a Public Civil Action, based on the above-mentioned SDE decision, and, without mentioning any new elements, alleged that the Company was involved in activities which violated the antitrust legislation. Gerdau S.A. contested this allegation on July 22, 2005.
The Company denies any type of anti-competitive conduct and believes, based on information available, including the opinion of its legal counsel, that the administrative proceeding until now has irregularities, some of which are impossible to resolve. In relation to the merit, Gerdau is sure that it did not practice the alleged conduct and, supported by the opinion of renowned experts, believes that it is possible to reverse its conviction.


GERDAU S.A. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED INTERIM FINANCIAL STATEMENTS AS OF MARCH 31, 2008 AND 2007
(Amounts in thousands of Brazilian reais – R$, unless otherwise indicated)
Reviewed by independent auditors to the extent described in the report dated May 12, 2008
(Convenience Translation into English from the Original Previously Issued in Portuguese)

b.2) A civil lawsuit has been filed by Sul América Cia. Nacional de Seguros against Gerdau Açominas S.A. and Westdeustsche Landesbank Girozentrale, New York Branch (WestLB), for the payment of R$ 34,383 to settle an indemnity claim, which has been deposited in court.
The insurance company pleaded doubt in relation to whom payment should be made and alleged that the subsidiary is resisting receiving the payment and settling the matter. The lawsuit was challenged both by the Bank (which claims to have no right to the amount deposited, which settles the doubt raised by Sul América) and by the subsidiary (which claims that there is no such doubt and justification to refuse payment since the amount owed by Sul América is higher than the amount involved). Subsequently, Sul América claimed fault in the Bank’s representation, a matter that has already been settled, and the escrow deposit was withdrawn in December 2004.
Based on the opinion of its legal counsel, the subsidiary assesses the risk of loss as remote and that the sentence will declare the amount payable within the amount stated in the pleading. Also, Gerdau Açominas S.A. filed, prior to this lawsuit, a collection lawsuit for the amounts recognized by the insurance companies. The lawsuits are pending. The subsidiary expects a favorable outcome in this lawsuit.
The civil lawsuits arise from an accident on March 23, 2002 with the blast furnace regenerators of the Ouro Branco steel plants, which resulted in the stoppage of several activities, with damages to the steel mill equipment and loss of profits. The equipment and the loss of profits arising from the accidents were covered by an insurance policy. The report on the events and the loss claim for prompt payment were filed with IRB – Brasil Resseguros, and an advance payment of R$ 62,000 was received in 2002.
In 2002, a preliminary and conservative estimate of indemnities related to the coverage of loss of profits and property damages, in the total amount of approximately R$ 110,000, was recorded based on the amount of fixed costs incurred during the period of partial stoppage of the steel mill activities and the immediate expenses to be incurred to recover the equipment temporarily. This estimate approximates the advance received (R$ 62,000) plus the amount proposed by the insurance company as a complement to settle the indemnity (R$ 34,383). Subsequently, new amounts were added to the dispute as stated in the subsidiary’s answer, although not yet recorded. In addition to these amounts, the Company incurred other costs for the recovery of the damage resulting from the accident, as well as other related losses that were listed in its challenge to the lawsuit in progress and which will be confirmed during the discovery phase, when they will be recorded. The case is still in progress with the engineering and accounting experts, who will judicially demonstrate the amounts stated by Gerdau Açominas S.A.

Based on the opinion of its legal counsel, Management considers that the risk of losses from other contingencies affecting the results of operations or the consolidated financial position of the Company is remote.

III) Unaccrued contingent assets

a) Tax Contingencies

a.1) The Company believes that the realization of certain contingent assets is possible. Among them is a court-order debt security issued in 1999 in the amount of R$ 26,580, arising from an ordinary lawsuit against the state of Rio de Janeiro for non-compliance with the Loan Agreement for Periodic Execution in Cash under the Special Industrial Development Program (PRODI). Due to the default by the state of Rio de Janeiro and the non-regulation of Constitutional Amendment 30/00 (which granted the government a ten-year moratorium for payment of securities issued to cover court-order debts not related to food), the realization of this asset is not expected in 2008 and following years. For this reason, this asset is not recorded in the Financial Statements.

a.2) Also, the Company and its subsidiary Gerdau Açominas S.A. expect to recover IPI premium credits. Gerdau S.A. has filed administrative requests for reimbursement, which are pending judgment. With regards to the subsidiary Gerdau Açominas S.A., the proceeding was judged unfavorably. Currently, the proceeding awaits judgment of the appeal filed by the subsidiary. The Company estimates the credits at R$ 326,502 (consolidated). Due to the uncertainty as to its realization, the credit is not recorded.

The changes in the reserve for contingencies are shown below:

   
March 31, 2008
  
December 31, 2007
  
Balance at the beginning of the period
   
489,103
    
402,795
  
(+) Amounts accrued against income
   
1,892
    
86,834
  
(-) Reversal of amounts against income
   
(60,839
)
  
(42,427
)
(+) Foreign exchange effect on provisions in foreign currency
   
1,000
    
311
  
(+) Company acquisitions
   
-
    
41,590
  
Balance at the end of the period
   
431,156
    
489,103
  


GERDAU S.A. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED INTERIM FINANCIAL STATEMENTS AS OF MARCH 31, 2008 AND 2007
(Amounts in thousands of Brazilian reais – R$, unless otherwise indicated)
Reviewed by independent auditors to the extent described in the report dated May 12, 2008
(Convenience Translation into English from the Original Previously Issued in Portuguese)

IV) Escrow deposits

The Company has escrow deposits related to tax, labor and civil lawsuits as listed below:

   
March 31, 2008
  
December 31, 2007
  
           
Tax
    
192,872
    
188,268
  
Labor
    
24,835
    
23,913
  
Other
    
12,421
    
11,554
  
     
230,128
    
223,735
  

NOTE 18 - RELATED-PARTY TRANSACTIONS

a)
Intercompany loans

   
 March 31, 2008
  
December 31, 2007
  
Assets
           
Controlling shareholders
           
Metalúrgica Gerdau S.A.
    
-
    
86
  
Santa Felicidade Ltda.
    
14
    
15
  
               
Affiliated Companies
              
Armacero Ind. Com. Ltda.
    
12
    
10
  
               
Jointly-owned subsidiaries
              
Estructurales Corsa, S.A.P.I de C.V
    
6,033
    
-
  
               
Other
              
Fundação Gerdau
    
4,763
    
16,971
  
Other
    
83
    
18
  
     
10,905
    
17,100
  
               
Liabilities
              
Controlling shareholders
              
Metalúrgica Gerdau S.A.
    
(1,969
)
  
-
  
               
Jointly-owned subsidiaries
              
Joint Ventures North America
    
(122
)
  
(499
)
               
Other
    
2
    
(64
)
     
(2,089
)
  
(563
)
     
8,816
    
16,537
  
               
Net financial income (expenses)
    
498
    
14,800
  
Loans and advances to executive officers
    
522
    
2,090
  


GERDAU S.A. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED INTERIM FINANCIAL STATEMENTS AS OF MARCH 31, 2008 AND 2007
(Amounts in thousands of Brazilian reais – R$, unless otherwise indicated)
Reviewed by independent auditors to the extent described in the report dated May 12, 2008
(Convenience Translation into English from the Original Previously Issued in Portuguese)

b)
Guarantees granted

The Company has guaranteed the financing contracts of the subsidiaries Gerdau Açominas S.A. and Gerdau Aços Longos S.A in the amounts of R$ 1,228,731 and R$ 50,893, respectively. The Company is a guarantor for the subsidiary Empresa Siderúrgica del Perú S.A.A. - Siderperú for a secured loan of up to US$ 150 million, equivalent to R$ 262,365 as of March 31, 2008. Gerdau S.A. guarantees loans to GTL Spain in the amount of R$ 7,112. The Company is the guarantor of the jointly-owned subsidiary Dona Francisca S.A. for financing contracts in the amount of R$ 71,662, corresponding to a joint liability of 51.82% of the amount. The subsidiaries Gerdau Açominas S.A., Gerdau Comercial de Aços S.A., Gerdau Aços Especiais S.A., Gerdau Aços Longos S.A. and Florestal Rio Largo Ltda. are the guarantors of the vendor financing loan agreement of the affiliate Banco Gerdau S.A., in the amounts of R$ 5,113, R$ 33,963, R$ 32,202, R$ 1,408 and R$ 354, respectively. The Company and the subsidiaries Gerdau Açominas S.A., Gerdau Aços Longos S.A., Gerdau Aços Especiais S.A., and Gerdau Comercial de Aços S.A are guarantors for the Senior Liquidity Facility of the subsidiary GTL Trade Finance Inc. in the amount of US$ 400,000, equivalent to R$ 699,640 as of March 31, 2008. The Company and the subsidiaries Gerdau Aços Longos S.A., Gerdau Aços Especias S.A., Gerdau Açominas S.A., Gerdau Comercial de Aços S.A., Gerdau Açominas Overseas, Ltd. and Gerdau Ameristeel Corporation are jointly liable for the subsidiary of Gerdau Ameristeel Corporation, GNA Partners, in financing contracts in the amount of US$ 2.6 billion, equivalent to R$ 4,547,660 as of March 31, 2008. The Company and the subsidiaries Gerdau Aços Longos S.A., Gerdau Aços Especiais S.A., Gerdau Açominas S.A and Gerdau Comercial de Aços S.A are guarantors for GTL Trade Finance Inc. for the issuance of bonus with a maturity of 10 years (10-year bond) in the amount of US$ 1.5 billion, equivalent to R$ 2,623,650 as of March 31, 2008.

c)
Debentures

The controlling shareholders hold, directly or indirectly, R$ 398,042 as of March 31, 2008 (R$ 360,535 as of December 31, 2007) of the outstanding debentures.

d)
Price and charge conditions

Loan agreements between Brazilian companies are adjusted by the monthly variation of the CDI (interbank deposit rate), which was 2.57% as of March 31, 2008. The agreements with foreign companies are adjusted by LIBOR plus 3% p.a. plus exchange variation, when applicable. Sales and purchases of inputs and products are made under terms and conditions similar to those for transactions with unrelated parties.

e)
Management Compensation

Gerdau S.A. paid its management salaries and variable compensation for a total R$ 37,133 as of March 31, 2008 (R$ 37,930 as of March 31, 2007).

As of March 31, 2008 the contributions of Metalúrgica Gerdau S.A. to management’s pension plans totaled R$ 20 – Defined Benefit Plan, and R$ 66 – Defined Contribution Plan (R$ 17 and R$ 57 as of March 31, 2007, respectively).

The stock option grant to management members is as follows:

     Stock options  
                               
Accumulated
options
  
Beginning of vesting period
    
dec/03
    
dec/04
    
dec/04
    
dec/05
    
dec/06
    
dec/07
    
dec/07
        
Exercise from:
    
Jan-09
    
Jan-10
    
Jan-08
    
Jan-11
    
Jan-12
    
Jan-13
    
Jan-13
        
Exercise until:
    
dec/13
    
dec/14
    
dec/14
    
dec/15
    
dec/16
    
dec/17
    
dec/17
        
Exercise price per share (R$):
    
13.56
    
21.16
    
21.16
    
25.72
    
35.00
    
52.38
    
52.38
        
Total granted to Board members
    
353,146
    
305,246
    
143,183
    
642,367
    
490,721
    
345,120
    
10,299
    
2,290,082
  
Exercised options
    
-
    
-
    
143,183
    
-
    
-
    
-
    
-
    
143,183
  

f)
Investment funds administration

The Company maintains marketable securities in investment funds administered by Banco Gerdau. Such marketable securities consist of time deposits and debentures issued by the main Brazilian banks, as well as treasury bills issued by the Brazilian Federal Government.


GERDAU S.A. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED INTERIM FINANCIAL STATEMENTS AS OF MARCH 31, 2008 AND 2007
(Amounts in thousands of Brazilian reais – R$, unless otherwise indicated)
Reviewed by independent auditors to the extent described in the report dated May 12, 2008
(Convenience Translation into English from the Original Previously Issued in Portuguese)

NOTE 19 - EMPLOYEE BENEFITS

Considering all the benefits granted to employees by the Company and its subsidiaries, assets and liabilities as of March 31, 2008 are as follows:

   
March 31, 2008
  
December 31, 2007
  
Actuarial assets – defined benefit pension plan
    
395,118
      
379,556
  
Actuarial assets – defined contribution pension plan
    
38,167
    
38,167
  
Total assets
    
433,285
    
417,723
  
               
Actuarial liabilities – defined benefit pension plan
    
300,761
    
278,283
  
Acturial liabilities - Post-employment health care benefit
    
223,336
    
223,336
  
Retirement and termination liabilities with benefit
    
292,506
    
292,506
  
Total liabilities
   
816,603
    
794,125
  

a) Post-employment defined benefit pension plan

The Company and other subsidiaries in Brazil are the co-sponsors of defined benefit pension plans for almost all employees (“Açominas Plan” and “Gerdau Plan”).
The Açominas Plan is managed by Fundação Açominas de Seguridade Social – Aços, a pension entity that provides benefits that supplement the social security benefits of employees and retirees of the Ouro Branco Unit of Gerdau Açominas S.A. The assets of the Açominas Plan are comprised mainly of investments in bank certificates of deposit, federal government securities, marketable securities, and real estate.
The Gerdau Plan is managed by Gerdau - Sociedade de Previdência Privada, a pension entity that provides benefits that supplement the social security benefits of employees and retirees of the Company and subsidiaries in Brazil. The assets of the Gerdau Plan consist of investments in bank certificates of deposit, federal government securities and marketable securities.
Also, the Canadian and American subsidiaries sponsor defined benefit plans (Canadian Plan and American Plan) that cover substantially all of their employees.
The Canadian and American plans are managed by CIBC Mellon and Wells Fargo, respectively, to provide benefits that supplement the retirement benefits of the employees of Gerdau Ameristeel Corporation and its subsidiaries. The assets of the Plans are comprised mainly of marketable securities.

Brazilian plans

The current expense of the defined benefit pension plans is as follows:

   
March 31, 2008
  
March 31, 2007
  
Cost of current service
   
10,115
    
8,622
  
Cost of interests
   
26,002
    
23,044
  
Expected return on plan assets
    
(48,693
)
  
(42,305
)
Amortization of (gain) loss
   
(364
)
  
(111
)
Expected contribution from employees
   
(2,627
)
  
(1,471
)
Net pension benefit
   
(15,567
)
  
(12,221
)



GERDAU S.A. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED INTERIM FINANCIAL STATEMENTS AS OF MARCH 31, 2008 AND 2007
(Amounts in thousands of Brazilian reais – R$, unless otherwise indicated)
Reviewed by independent auditors to the extent described in the report dated May 12, 2008
(Convenience Translation into English from the Original Previously Issued in Portuguese)

North American Plans

The current expense of the defined benefit pension plans is as follows:

   
March 31, 2008
  
March 31, 2007
  
Cost of current service
   
5,920
    
6,170
  
Cost of interests
   
9,485
    
8,463
  
Expected return on plan assets
    
(9,999
)
  
(9,262
)
Amortization of (gain) loss
   
(15
)
  
(162
)
Net cost of pension plan
   
5,391
    
5,209
  

b) Post-employment defined contribution pension plan

The Company and its subsidiaries in Brazil are also the co-sponsors of a defined contribution pension plan managed by Gerdau – Sociedade de Previdência Privada. Contributions are based on a percentage of the compensation of the employees. The foreign subsidiary Gerdau Ameristeel Corporation has a defined contribution plan, the contributions to which are equivalent to 50% of the amount paid by the participants, limited to 4% of their salary.

The Company and its subsidiaries in Brazil maintain a defined contribution plan to which contributions are made by the sponsor in a proportion of the contribution made by its exercising employees. This employee benefit plan has an actuarial surplus made up by the portion that is not part of the account balance of the participants that opted out of the employment contract with the employer before eligibility of a benefit by the plan, which may be used to compensate future contributions from the sponsors.

c) Post-employment health care benefit plan

The American Plan includes, in addition to pension benefits, specific health care benefits for employees who retire after a certain age and with a certain number of years of service. The American subsidiary has the right to change or eliminate these benefits, and the contributions are actuarially calculated.

The net periodic cost of post-employment health care benefits is as follows:

   
March 31, 2008
  
March 31, 2007
  
Cost of current service
   
704
    
738
  
Cost of interests
   
1,793
    
1,566
  
Amortization of (gain) loss
   
6
    
(11
)
Net cost of pension plan
   
2,503
    
2,293
  

d) Other retirement and termination benefits

The Company estimates that the amount payable to executives upon their retirement or termination is R$ 292,506 as of March 31, 2008 (R$ 292,506 as of December 31, 2007).

These amounts refer principally to the "Social Plan" sponsored by Corporación Sidenor and its subsidiaries and approved by the representatives of the employees. The plan allows a productivity increase by reducing jobs, which is made possible by an investment plan in technological improvements.

The objective of the Plan is to promote the rejuvenation of the work force by contracting younger employees as older employees retire.

The benefits of this plan include a salary supplement up to retirement date, a living allowance, and other benefits as a result of termination and retirement of the employees.


GERDAU S.A. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED INTERIM FINANCIAL STATEMENTS AS OF MARCH 31, 2008 AND 2007
(Amounts in thousands of Brazilian reais – R$, unless otherwise indicated)
Reviewed by independent auditors to the extent described in the report dated May 12, 2008
(Convenience Translation into English from the Original Previously Issued in Portuguese)

NOTE 20 - ENVIRONMENT

The steel industry uses and generates substances that may damage the environment. The Company’s management performs frequent surveys with the purpose of identifying potentially impacted areas and records in the accounts “Other payables – current liabilities” and “Other payables – noncurrent liabilities”, based on best cost estimate, the amounts estimated for investigation, treatment and cleaning of potentially affected sites, totaling R$ 55,728 as of March 31, 2008 (R$ 3,805 in current liabilities and R$ 51,923 in non-current liabilities). Of this total, R$ 29,316 corresponds to the Brazilian subsidiaries (R$ 29,282 as of December 31, 2007) and R$ 26,412 to the North American subsidiaries (R$ 27,514 as of December 31, 2007). The Company used assumptions and estimates for determining the estimated amount, which may vary in the future depending on the final investigations and determination of the actual environmental impact.
The Company and its subsidiaries believe they are compliant with all the applicable environmental regulations in the countries where they operate.

NOTE 21 - SHAREHOLDER’S EQUITY – PARENT COMPANY GERDAU S.A.

a) Capital - the Board of Directors may, regardless of changes to the bylaws, issue new shares (authorized capital), including the capitalization of profits and reserves up to the authorized limit of 400,000,000 common shares and 800,000,000 preferred shares, without par value. In the case of capital increase by subscription of new shares, the right of preference shall be exercised before the deadline of 30 days, except in the case of a public offering, when the deadline shall not be less than 10 days.

As of March 31, 2008 and December 31, 2007, 231,607,008 common shares and 435,986,041 preferred shares were subscribed and paid, totaling a paid-in capital of R$ 7,810,453. The shares are distributed as follows:

   
March 31, 2008
  
December 31, 2007
  
Shareholders
  
Common
  
%
  
Pref.
  
%
  
Total
  
%
  
Common
  
%
  
Pref.
  
%
  
Total
  
%
  
Metalúrgica Gerdau S.A and subsidiary
    
173,459,857
    
74.9
    
123,739,519
    
28.4
    
297,199,376
    
44.5
    
173,459,857
    
74.9
    
123,739,519
    
28.4
    
297,199,376
    
44.5
  
Brazilian institutional investors
    
9,916,288
    
4.3
    
78,834,837
    
18.1
    
88,751,125
    
13.3
    
9,212,976
    
4.0
    
72,585,471
    
16.6
    
81,798,447
    
12.3
  
Foreign institutional investors
    
13,526,933
    
5.8
    
134,877,381
    
30.9
    
148,404,314
    
22.2
    
13,434,276
    
5.8
    
139,838,327
    
32.1
    
153,272,603
    
23.0
  
Other shareholders
    
34,703,930
    
15.0
    
93,715,932
    
21.5
    
128,419,862
    
19.3
    
35,499,899
    
15.3
    
94,856,073
    
21.8
    
130,355,972
    
19.5
  
Treasury stock
    
-
   
-
   
4,818,372
    
1.1
    
4,818,372
    
0.7
    
-
   
-
   
4,966,651
    
1.1
    
4,966,651
    
0.7
  
     
231,607,008
    
100.0
    
435,986,041
    
100.0
    
667,593,049
    
100.0
    
231,607,008
    
100.0
    
435,986,041
    
100.0
    
667,593,049
    
100.0
  

Preferred shares do not have voting rights and cannot be redeemed but have the same rights as common shares in the distribution of dividends.

b) Treasury shares - changes in treasury shares are as follows:

   
March 31, 2008
  
December 31, 2007
  
   
Preferred shares
  
R$
  
Preferred shares
  
R$
  
Opening balance
    
4,966,651
    
106,667
    
5,103,344
    
109,609
  
Repurchases
    
1,000,000
    
49,702
    
-
    
-
  
Exercise of stock options (note 24)
    
(1,148,279
)
  
(29,918
)
  
(136,693
)
  
(2,942
)
Closing balance
    
4,818,372
    
126,451
    
4,966,651
    
106,667
  

Of the total treasury shares, 349,372 shares are related to the share buyback program authorized on November 17, 2003, 1,110,300 shares are related to the share buyback program authorized on May 30, 2005, and 2,358,700 shares are related to the share buyback program authorized on May 25, 2006 and 1,000,000 shares are related to the share buyback program authorized on January 8, 2008. The average acquisition cost of these shares is R$ 26.24, with the lowest purchase price being R$ 14.36, and the highest price R$ 51.60. These shares will be held in treasury for subsequent cancellation or for the Company's "Long-term Incentive Program". During the first quarter of 2008, the Group used 1,148,279 shares in order to meet the stock options in the year with losses of R$ 21,830 recorded as reserve for investments and working capital.

 
GERDAU S.A. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED INTERIM FINANCIAL STATEMENTS AS OF MARCH 31, 2008 AND 2007
(Amounts in thousands of Brazilian reais – R$, unless otherwise indicated)
Reviewed by independent auditors to the extent described in the report dated May 12, 2008
(Convenience Translation into English from the Original Previously Issued in Portuguese)

c) Valuation Adjustments – include unrealized gains on available-for-sale securities, which represent variations arising from adjustment to the fair value until the time such securities are sold. This caption also includes unrealized losses on derivatives until they are realized.

d) Legal reserve - under Brazilian Corporate Law, the Company shall transfer 5% of the annual net income determined in the corporate books in accordance with Brazilian accounting practices to the legal reserve until this reserve equals 20% of the paid-in capital. The legal reserve can be utilized to increase capital or to absorb losses, but cannot be used for dividend purposes.

e) Retained earnings and reserves - consist of earnings not distributed to the shareholders and include the reserves required by the Company's bylaws. The Board of Directors may propose to the shareholders the transfer of at least 5% of the net income for each year determined in its corporate books in accordance with Brazilian accounting practices to a reserve (Reserve for Investments and Working Capital). The reserve is recorded only after the minimum dividend requirements are met and its balance cannot exceed the amount of paid-in capital. The reserve can be used to absorb losses, if necessary, capitalization, payment of dividends or repurchase of shares.

f) Cumulative translation adjustments – the Company recognizes in this caption the accumulated effect of the conversion of the financial statements of its subsidiaries that maintain accounting records in a functional currency different from the reporting currency. These effects began to be recognized after the IFRS implementation date. This accumulated effect will be reversed to income for the year as a gain or loss only in the case of disposal or write-off of the investment.
 
NOTE 22 -
EARNINGS PER SHARE (EPS)

In compliance with IAS No. 33, Earnings per Share, the following tables reconcile the net income to the amounts used to calculate the basic and diluted earnings per share.

Basic
 
   
March 31, 2008
  
March 31, 2007
  
   
Common
  
Preferred
 
Total
  
Common
  
Preferred
 
Total
  
   
(In thousands, except shares and per share data)
  
(In thousands, except shares and per share data)
  
Basic numerator
                                      
Net income available to common and preferred shareholders
    
305,691
    
568,691
    
874,382
    
348,510
    
648,403
    
996,913
  
                                       
Basic denominator
                                      
Weighted average of shares, after the retroactive effect of the stock splits and deducting average of shares in treasury.
    
231,607,008
    
430,869,439
          
231,607,008
    
430,904,695
        
                                       
Earnings per share (in R$) - Basic
    
1.32
    
1.32
          
1.50
    
1.50
        
 

GERDAU S.A. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED INTERIM FINANCIAL STATEMENTS AS OF MARCH 31, 2008 AND 2007
(Amounts in thousands of Brazilian reais – R$, unless otherwise indicated)
Reviewed by independent auditors to the extent described in the report dated May 12, 2008
(Convenience Translation into English from the Original Previously Issued in Portuguese)
 
Diluted

   
March 31, 2008
  
March 31, 2007
  
Diluted numerator
              
Net income available to common and preferred shareholders
              
Net income available to preferred shares
    
568,691
    
648,403
  
Plus:
              
Adjustment to the net income allocated to preferred shareholders in respect to the potential increase in number of preferred shares outstanding, as a result of options granted to acquire stock of Gerdau, option to settle in shares the purchase price of additional interest on Diaco and option granted to minority shareholders of Sipar to sell their interest to Gerdau.
    
859
    
3,659
  
     
569,550
    
652,062
  
               
Net income available to common shares
    
305,691
    
348,510
  
Less:
              
Adjustment to the net income allocated to preferred shareholders in respect to the potential increase in number of preferred shares outstanding, as a result of options granted to acquire stock of Gerdau, option to settle in shares the purchase price of additional acquirement on Diaco and option granted to minority shareholders to sell their interest share to Gerdau.
    
(859
)
  
(3,659
)
               
     
304,832
    
344,851
  
               
Diluted denominator
              
Weighted-average number of shares outstanding
              
Common Shares
    
231,607,008
    
231,607,008
  
Preferred Shares
              
Weighted-average number of preferred shares outstanding
    
430,869,439
    
430,904,695
  
Potential increase in number of preferred shares outstanding in respect of stock option plan
   
1,866,544
    
1,707,023
  
Potential issuabble preferred shares with respect to option to settle acquisition of additional interest in Diaco with shares of the Company
    
-
    
4,149,538
  
               
Option granted to minority shareholders of Sipar to sell their interest to Gerdau.
    
-
    
1,173,249
  
Total
   
432,735,983
    
437,934,505
  
               
Earnings per share (in R$) - Diluted (common and preferred shares)
   
1.32
    
1.49
  

NOTE 23 -
NET SALES REVENUES

The net sales revenues for the period are composed of:

   
March 31, 2008
  
March 31, 2007
  
Gross sales
    
10,015,584
    
8,090,852
  
Taxes on sales
    
(889,474
)
  
(631,419
)
Discounts
    
(181,600
)
  
(124,292
)
Net sales
    
8,944,510
    
7,335,141
  
 
NOTE 24 -
 LONG-TERM INCENTIVE PLANS

I) Gerdau S.A.

The Extraordinary Shareholders’ Meeting held on April 30, 2003 decided, based on a previously approved plan and within the limit of the authorized capital, to grant preferred stock options to management, employees, or persons who render services to the Company or its subsidiaries, and approved the development of the Long-Term Incentive Program that represents a new method of compensation of the strategic officers of the Company. The options should be exercised in a maximum of five years after the grace period.


GERDAU S.A. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED INTERIM FINANCIAL STATEMENTS AS OF MARCH 31, 2008 AND 2007
(Amounts in thousands of Brazilian reais – R$, unless otherwise indicated)
Reviewed by independent auditors to the extent described in the report dated May 12, 2008
(Convenience Translation into English from the Original Previously Issued in Portuguese)
 
a) Summary of changes in the plan:
 
               
Quantity of shares
  
Year of grant
  
   Exercise
price - R$
  
Vesting
period
  
Average market price in
the quarter
  
Initial balance on 
December 31,
2007
  
Granted
  
Cancelled 
  
Exercised
  
End balance on
March 31, 2008
  
                                   
2003
    
5.31
    
5years
    
50.91
    
1,154,287
    
-
    
(14,102
)
  
(1,021,071
)
  
119,114
  
2004
    
13.56
    
5years
    
50.91
    
676,918
    
-
    
(14,420
)
  
-
    
662,498
  
2005
    
21.16
    
3years
    
50.91
    
404,306
    
-
    
-
    
-
    
404,306
  
2005
    
21.16
    
5years
    
50.91
    
586,321
    
-
    
(11,244
)
  
(124,776
)
  
450,301
  
2006
    
25.72
    
5years
    
50.91
    
929,278
    
-
    
(15,487
)
  
-
    
913,791
  
2007
    
35.00
    
5years
    
50.91
    
751,702
    
-
    
(7,816
)
  
-
    
743,886
  
2008
    
52.38
    
5years
    
50.91
    
-
    
585,480
    
(774
)
  
-
    
584,706
  
                       
4,502,812
    
585,480
    
(63,843
)
  
(1,145,847
)
  
3,878,602
  

Year of grant
  
   Exercise
price - R$
  
Vesting
period
  
Initial balance on
December 31, 2006
  
Granted
  
Cancelled 
  
Exercised
  
End balance on
December 31, 2007
  
                               
2003
    
5.31
    
5years
    
1,209,566
    
-
    
-
    
(55,279
)
  
1,154,287
  
2004
    
13.56
    
3years
    
10,929
    
-
    
-
    
(10,929
)
  
-
  
2004
    
13.56
    
5years
    
706,975
    
-
    
(7,361
)
  
(22,696
)
  
676,918
  
2005
    
21.16
    
3years
    
451,923
    
-
    
(35,594
)
  
(12,023
)
  
404,306
  
2005
    
21.16
    
5years
    
620,692
    
-
    
(20,241
)
  
(14,130
)
  
586,321
  
2006
    
25.72
    
5years
    
962,949
    
-
    
(21,661
)
  
(12,010
)
  
929,278
  
2007
    
35.00
    
5years
    
-
    
778,239
    
(16,911
)
  
(9,626
)
  
751,702
  
                                             
                 
3,963,034
    
778,239
    
(101,768
)
  
(136,693
)
  
4,502,812
  
 
As mentioned in note 21, as of March 31, 2008 the Company has a total of 4,818,372 preferred shares in treasury. These shares may be used for said plan.
The exercise of the options before the grace period end was due to etirement and/or death.

b) Status of the plan as of March 31, 2008:

   
Grant
      
   
2003
  
2004
  
2005
  
2006
  
2007
  
2008
  
Average
  
Total options granted
    
119,114
    
662,498
    
854,607
    
913,791
    
743,886
    
584,706
        
Exercise price- R$ (adjusted for stock split)
    
5.31
    
13.56
    
21.16
    
25.72
    
35.00
    
52.38
    
27.81
  
Fair value of options on the granting date - R$ per option (*)
    
2.48
    
5.77
    
5.20
    
8.66
    
15.30
    
21.22
    
10.38
  
Average exercise period on the grant date (years)
    
4.70
    
5.00
    
5.00
    
5.00
    
4.90
    
4.89
    
4.96
  

(*) Calculated considering the model of Black-Scholes.

c) Economic assumptions used to recognize costs of employee compensation:

The Company recognizes costs of employee compensation based on the fair value of the options granted to the employees, considering their fair value on the date of granting. The Company uses the Black-Scholes model for determining the fair value of the options. To determine fair value, the Company used the following economic assumptions:

   
Grant 2008 
  
Grant 2007
  
Grant 2006
  
Grant 2005
  
Grant 2004
  
Expected Dividend yield
    
2.81
%
  
4.32
%
  
9.99
%
  
7.90
%
  
7.03
%
Stock price volatility
    
37.77
%
  
38.72
%
  
41.51
%
  
39.00
%
  
43.31
%
Risk-free rate of return
    
14.04
%
  
12.40
%
  
12.80
%
  
8.38
%
  
8.38
%
Expected period until maturity
    
4.9 years
   
4.9 years
   
4.9 years
   
4.7 years
   
4.95 years
  
 
The Company settles this employee benefit plan by delivering shares it has issued, which are kept in treasury until the exercise of the options by the employees.


GERDAU S.A. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED INTERIM FINANCIAL STATEMENTS AS OF MARCH 31, 2008 AND 2007
(Amounts in thousands of Brazilian reais – R$, unless otherwise indicated)
Reviewed by independent auditors to the extent described in the report dated May 12, 2008
(Convenience Translation into English from the Original Previously Issued in Portuguese)
 
II) Gerdau Ameristeel Corporation – (“Gerdau Ameristeel”)

Gerdau Ameristeel Corporation and its subsidiaries have long-term incentive plans that are designed to award employees with bonuses based on attaining goals related to the return on capital invested. The bonuses will be granted at the end of the year in cash, stock appreciation rights (SAR's), and/or options. The payment of the cash bonus will be made in the form of shares (phantom stock). The number of shares will be determined by dividing the value of the bonus in cash by the market value of the common share on the date of grant, based on the average negotiation price of common shares on the New York Stock Exchange. Phantom Stock and SAR's may be exercised at the rate of 25% during each one of the first four anniversaries of the date of grant. The Phantom Stock will be paid in cash, when exercised. The number of options granted to the participants is determined by dividing the portion of the bonus not paid in cash by the market value of the common share on the date of grant. The option value is determined by the Human Resources Committee of Senior Management based on the Black-Scholes model or other method. The options may be exercised at the rate of 25% per year during four years from the date of grant and prescribe after 10 years. The maximum number of options that will be granted under this plan is 6,000,000. A premium of approximately US$ 8.3 million (equivalent to R$ 14.5 as of March 31, 2008) was granted to the employees in 2007 and of approximately US$ 6.6 million (equivalent to R$ 11.5 million as of March 31, 2008) was granted to the employees in 2006. Under this plan, 379,564 options were issued on February 28, 2008. These premiums are being provided for in accordance with the payment term established by the plan.

During the quarter ended March 31, 2008 the costs related to the long-term incentive plans for the options granted in 2007 and 2008 were immaterial. As of March 31, 2008, the cost of long-term incentive plans not yet recorded related to the grants still in the grace period was approximately US$ 2.7 million (equivalent to R$ 4.72 thousand as of March 31, 2008) and the average period for recognition of these costs was 3.3 years.

A summary of Gerdau Ameristeel stock option plans is as follows:

     March 31, 2008     December 31, 2007  
   
Number of shares
  
Avarege price of
the year 
  
Number of shares
  
 Avarege price of
the year
 
       
US$
 
R$
 
 
  
 US$
 
R$
 
Available at the beginning of the year
    
1,287,669
    
5.92
    
10.35
    
1,418,511
    
5.37
    
9.51
  
Options granted
   
385,556
    
15.86
    
27.74
    
454,497
    
10.90
    
19.31
  
Options exercised
    
(144,736
)
  
2.46
    
4.30
    
(360,788
)
  
3.46
    
6.13
  
Options cancelled
    
-
          
-
    
(25,051
)
  
9.15
    
16.21
  
Options expired
    
-
          
-
    
(199,500
)
  
22.77
    
40.33
  
Available at the end of the year
    
1,528,489
    
8.75
    
15.30
    
1,287,669
    
5.92
    
10.49
  
                                       
Shares exercised
    
762,238
                
760,837
              
 
The subsidiary Gerdau Ameristeel uses the Black-Scholes pricing method to determine the fair value of options and stock appreciation rights, recognizing the stock compensation cost as services are provided. The subsidiary used the following economic assumptions to recognize the fair value of these instruments:

   
2008
  
2007
  
Expected Dividend yield
    
3.08
%
  
4.00
%
Stock price volatility
    
49.10
%
  
50.50
%
Risk-free rate of return
    
3.01
%
  
4.51
%
Expected period until maturity
    
6.25 years
   
6.25 years
 
 
NOTE 25 -
SEGMENT REPORTING

The Gerdau Executive Committee, which is composed of most of the senior officers of the Company, is responsible for managing the business.

The segments shown below are in compliance with the requirements of IAS 14 - Segment Reporting and refer to the business units through which the Gerdau Executive Committee manages its operations, namely: Long Steel Brazil, Specialty Steel Brazil and Europe, Gerdau Açominas (refers to the operations of the mill located in Ouro Branco, Minas Gerais State), Latin America (which excludes the operations in Brazil), and North America.


GERDAU S.A. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED INTERIM FINANCIAL STATEMENTS AS OF MARCH 31, 2008 AND 2007
(Amounts in thousands of Brazilian reais – R$, unless otherwise indicated)
Reviewed by independent auditors to the extent described in the report dated May 12, 2008
(Convenience Translation into English from the Original Previously Issued in Portuguese)

   
Business Segments
  
   
Long Steel Brazil
 
Açominas Ouro Branco
 
Specialty Steels
 
Latin America (1)
 
   
March 31, 2008
  
March 31, 2007
  
March 31, 2008
  
March 31, 2007
  
March 31, 2008
  
March 31, 2007
  
March 31, 2008
  
March 31, 2007
  
Net sales revenue
    
2,248,491
    
1,686,920
    
1,060,678
    
797,054
    
1,579,287
    
1,517,503
    
949,569
    
686,848
  
Net income (2)
    
347,483
    
201,150
    
84,406
    
185,761
    
162,378
    
152,515
    
94,931
    
123,353
  
Depreciation / Amortization
    
80,255
    
70,049
    
107,262
    
76,313
    
59,744
    
80,469
    
26,563
    
4,516
  
Identifiable assets (3)
    
5,820,386
    
4,822,414
    
6,769,069
    
5,027,810
    
5,522,549
    
5,479,608
    
3,536,460
    
2,633,580
  
Identifiable liabilities(4)
    
1,741,974
    
2,058,274
    
2,956,555
    
3,013,811
    
2,113,943
    
2,048,997
    
919,619
    
453,309
  
 
 
 
Business Segments
 
 
 
North America
 
Eliminations and Adjustments
 
Consolidated
 
   
March 31, 2008
  
March 31, 2007
  
March 31, 2008
  
March 31, 2007
  
March 31, 2008
  
March 31, 2007
  
Net sales revenue
    
3,509,244
    
2,830,721
    
(402,759
)
  
(183,905
)
  
8,944,510
    
7,335,141
  
Net income (2)
    
309,730
    
306,907
    
91,189
    
208,379
    
1,090,117
    
1,178,065
  
Depreciation / Amortization
    
130,042
    
55,453
    
18,676
    
(584
)
  
422,542
    
286,216
  
Identifiable assets (3)
    
13,017,110
    
5,560,418
    
(1,191,028
)
  
(672,469
)
  
33,474,546
    
22,851,361
  
Identifiable liabilities(4)
    
6,164,830
    
1,710,476
    
4,300,942
    
2,684,682
    
18,197,863
    
11,969,549
  
 
(1) Does not include operations in Brazil.
(2) Net income in the period before minority interest.
(3) Identifiable assets: trade accounts receivable, inventories, property, plant and equipment, goodwill and intangible assets.
(4) Identifiable liabilities: trade accounts payable, loans and financing (current and long-term), debentures (current and long term).
 
The main products by business segment are:
Long Steels Brazil: rebars, bars, wire rod, shapes and drawn products.
Gerdau Açominas Ouro Branco: billets, blooms, slabs, wire rod and structural shapes.
Special Steels: stainless steel, round, square and flat bars, wire rod.
Latin America: rebars, bars and drawn products.
North America: rebars, bars, wire rod, light and heavy structural shapes.

The column of eliminations and adjustments includes the elimination of sales between segments applicable to the Company in the context of the Consolidated Interim Financial Statements.

The Company's geographic information with revenues classified according to the geographical region where the products were shipped is as follows:
 
 
  
Geographic Area
  
 
  
Brazil
  
Latin America (1)
  
North America
  
Europe
  
Consolidated
  
 
  
March 31, 2008
  
March 31, 2007
  
March 31, 2008
  
March 31, 2007
  
March 31, 2008
  
March 31, 2007
  
March 31, 2008
  
March 31, 2007
  
March 31, 2008
  
March 31, 2007
  
Net sales revenue
    
3,679,469
    
2,932,260
    
949,569
    
686,848
    
3,509,244
    
2,830,721
    
806,228
    
885,312
    
8,944,510
    
7,335,141
  
Cost of sales
    
(2,525,715
)
  
(2,049,707
)
  
(768,153
)
  
(525,347
)
  
(2,865,243
)
  
(2,293,658
)
  
(653,066
)
  
(697,689
)
  
(6,812,177
)
  
(5,566,401
)
Gross profit
    
1,153,754
    
882,553
    
181,416
    
161,501
    
644,001
    
537,063
    
153,162
    
187,623
    
2,132,333
    
1,768,740
  
Sales expenses
    
(115,726
)
  
(106,021
)
  
(22,084
)
  
(14,363
)
  
(7,904
)
  
(11,331
)
  
(5,769
)
  
(11,103
)
  
(151,483
)
  
(142,818
)
General and administrative expenses
    
(299,135
)
  
(253,036
)
  
(57,160
)
  
(34,110
)
  
(115,158
)
  
(99,256
)
  
(34,413
)
  
(48,475
)
  
(505,866
)
  
(434,877
)
Operating income
    
761,815
    
530,572
    
99,401
    
114,147
    
523,807
    
427,924
    
116,204
    
128,495
    
1,501,227
    
1,201,138
  
Net financial income
    
(30,460
)
  
243,095
    
(7,013
)
  
35,643
    
(95,439
)
  
(18,153
)
  
(31,385
)
  
(14,716
)
  
(164,297
)
  
245,869
  
Accrued net profit (2)
    
622,620
    
670,542
    
94,931
    
123,353
    
309,730
    
306,907
    
62,836
    
77,263
    
1,090,117
    
1,178,065
  
Capital expenses
    
239,657
    
520,652
    
109,598
    
54,108
    
45,385
    
101,533
    
20,103
    
59,039
    
414,743
    
735,332
  
 
(1) Does not include operations in Brazil.
(2) Net income in the period before minority shareholders' holdings.
 
NOTE 26 -
INSURANCE (not reviewed)

The subsidiaries have insurance coverage determined based on specialists’ advice, taking into consideration the nature and the level of risk, in amounts considered sufficient to cover significant losses on their assets and/or liabilities. The main types of insurance are as follows:

Type
  
Scope
  
March 31, 2008
  
December 31, 2007
  
Equity
    
Inventories and property, plant and equipment items are insured against fire, electrical damage, explosion, machine breakage and overflow (leakage of material in fusion state).
    
22,323,635
    
21,332,603
  
Business Interruption
    
Net income plus fixed expenses
   
6,349,951
    
5,809,162
  
Civil Liability
    
Industrial operations
    
8,746
    
8,857
  
 
NOTE 27 -
EXPENSES BY NATURE

The Company opted to present its Consolidated Statement of Income by function. As required by IFRS, the Consolidated Statement of Income by nature of expenses is as follows:


GERDAU S.A. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED INTERIM FINANCIAL STATEMENTS AS OF MARCH 31, 2008 AND 2007
(Amounts in thousands of Brazilian reais – R$, unless otherwise indicated)
Reviewed by independent auditors to the extent described in the report dated May 12, 2008
(Convenience Translation into English from the Original Previously Issued in Portuguese)
 
   
March 31, 2008
  
March 31, 2007
  
Depreciation and amortization
    
(422,542
)
  
(286,216
)
Personnel Expenses
    
(940,674
)
  
(861,981
)
Raw material and materials and consumption material
    
(4,927,931
)
  
(4,068,576
)
Freight
    
(442,498
)
  
(342,441
)
Other expenses
    
(709,638
)
  
(574,789
)
     
(7,443,283
)
  
(6,134,003
)
               
Classified as:
              
Cost of sales
    
(6,812,177
)
  
(5,566,401
)
Selling expenses
    
(151,483
)
  
(142,818
)
General and administrative expenses
    
(505,866
)
  
(434,877
)
Other operating expenses
    
26,243
    
10,093
  
     
(7,443,283
)
  
(6,134,003
)
 
NOTE 28 -
SUPPLEMENTAL INFORMATION – RECONCILIATION OF SHAREHOLDERS' EQUITY AND NET INCOME OF GERDAU S.A. (NOT REQUIRED BY IFRS)

In compliance with CVM Instruction No. 457/07 of July 13, 2007, we present the reconciliation of shareholders' equity and net income of Gerdau S.A. calculated in accordance with Brazilian Corporate Law and Brazilian accounting practices and consolidated shareholder's equity and net income according to the International Financial Reporting Standards (IFRS):

   
March 31, 2008
  
December 31, 2007
  
Shareholders' equity - BRGAAP (Including Instruction CMV 469)
    
12,061,584
   
11,352,010
 
               
IFRS Adjustments
              
Capitalized interest over property, plant and equipment adjustment, net
    
75,601
   
76,377
 
Reversal of deferred charges
    
(37,189
)
  
(35,760
)
Employee benefits adjustment, net
    
194,012
   
183,672
 
Amortization and impairment of goodwill, net
    
259,407
   
190,261
 
Sidenor proportional consolidation and stock sale and/or purchase, net
    
674,858
   
650,694
 
Dividends not declared adjustment
    
-
   
182,715
 
Donations and investment incentives
    
33,821
   
-
 
Other adjustments, net
    
92,346
   
112,536
 
     
1,292,856
   
1,360,495
 
               
Shareholders' equity - IFRS
    
13,354,440
   
12,712,505
 
               
Minority interest in IFRS
    
3,742,609
   
3,929,573
 
               
Shareholders' equity - IFRS (including minority interest)
    
17,097,049
   
16,642,078
 
 
   
March 31, 2008
  
March 31, 2007
  
Net income - BRGAAP (Including CVM Instruction No. 469)
    
818,809
   
689,731
 
               
IFRS Adjustments
              
Capitalized interest on property, plant and equipment adjustment, net
    
(2,877
)
  
(2,811
)
Reversal of deferred charges, net
    
(1,429
)
  
3,080
 
Employee benefits, net
    
4,048
   
(805
)
Amortization and impairment of goodwill, net
    
79,761
   
37,147
 
Sidenor's proportional consolidation and stock put and/or call option, net
    
61,137
   
95,607
 
Foreign currency translation
    
(86,563
)
  
175,645
 
Donations and investment incentives
    
33,821
   
-
 
Other adjustments, net
    
(32,325
)
  
(681
)
     
55,573
   
307,182
 
               
Net income - IFRS
    
874,382
   
996,913
 
               
Minority interest under IFRS
    
215,735
   
181,152
 
               
Net income - IFRS (including minority interest)
    
1,090,117
   
1,178,065
 
 

GERDAU S.A. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED INTERIM FINANCIAL STATEMENTS AS OF MARCH 31, 2008 AND 2007
(Amounts in thousands of Brazilian reais – R$, unless otherwise indicated)
Reviewed by independent auditors to the extent described in the report dated May 12, 2008
(Convenience Translation into English from the Original Previously Issued in Portuguese)
 
NOTE 29 -
SUBSEQUENT EVENTS

I) On May 7, 2008, the Executive Board prepared a proposal, which will be submitted to the Board of Directors on May 12, 2008, to pay dividends out of the income for the first quarter of this year in the form of interest on capital, which will be calculated and credited based on the positions of the shareholders as of May 21, 2008 (R$ 0.41 per common and preferred share) with payment set for June 3, 2008 and which will represent the early payment of the mandatory minimum dividend.

II) In April 2008, the Company concluded the acquisition of MacSteel from Quanex Corporation, the second largest US specialty steel producer. The acquisition price was US$ 1.46 billion, in addition to the assumption of debts and some liabilities, making the Gerdau Group the world leader in specialty long steel production for the automotive industry.

III) In April 2008, the Company formalized a strategic alliance with the controlling shareholders of the holding company Corporación Centroamericana del Acero S.A., which holds steelmaking assets in Guatemala and Honduras, and distribution in El Salvador, Nicaragua and Belize. As a result of this alliance, the Gerdau Group took over a 30% share in the company and agreed to invest US$ 180 million in the Central America area.

IV) In April 2008, the Company concluded the public offering of common and preferred shares in the amount of up to R$ 2.9 billion. As a result of such public offering, the Company’s capital is R$10,710,705, represented by 248,293,247 common shares and 467,396,866 preferred shares.

V) In April 2008, the Company concluded the acquisition of Century Steel, Inc., by means of Pacific Coast Steel, a joint venture mostly controlled by the subsidiary Gerdau Ameristeel. The acquisition of Century Steel, Inc., specialized in the manufacture of structural steel, amounted to approximately US$ 151.5 million.
Concomitantly with the acquisition of Century Steel Inc., the subsidiary Gerdau Ameristeel paid approximately US$ 68 million to increase its interest in Pacific Coast Steel to approximately 84%.

VI) In April 2008, the Company, by means of its subsidiary GTL Trade Finance Inc., concluded a Bridge Loan operation, in the total amount of US$ 1 billion. The Bridge Loan has a maturity of 6 months and is subject to Libor set on April 16, 2008 plus 0.85% p.a. The funds were used to pay part of the acquisition of MacSteel.

VII) In April 2008, the Company, by means of its subsidiary Gerdau US Financing Inc., concluded a Bridge Loan operation, in the total amount of US$ 540 million, of which US$ 140 million has already been paid. The Bridge Loan has a maturity of 45 days and is subject to Libor set on April 16, 2008 plus 1.25% p.a. These funds were used to pay part of the acquisition of MacSteel.

VIII) In May 2008, the Company concluded the reopening of the Bond, with maturity in 2017, by means of the subsidiary GTL Trade Finance Inc., in the amount of US$ 500 million, at a yield of 6.875% p.a. The new issuance will be incorporated to the issuance of October 2007 and is subject to interest of 7.25% per year to be paid semiannually (in April and October). These funds will be used to amortize the Bridge Loan of US$ 1 billion taken by this subsidiary on April 16, 2008.

********************************
 
 
GERDAU S.A. AND ITS SUBSIDIARIES
INFORMATION NOT REQUIRED BY IFRS
STATEMENT OF VALUE ADDED FOR THE QUARTERS ENDED ON MARCH 31, 2008 AND 2007
(In thousands of Brazilian Reais unless otherwise indicated)
Not reviewed by independent auditor
(Convenience Translation into English from the Original Previously Issued in Portuguese)
 
   
Brazil
  
Foreign
  
Total
  
 
  
03/31/2008
 
%
  
03/31/2007
 
% 
  
03/31/2008
  
% 
  
03/31/2007
 
% 
  
03/31/2008
 
% 
  
03/31/2007
 
% 
  
REVENUES
                                                                          
Sale of products, services and other (1)
    
4,570,627
          
3,570,098
          
5,298,727
          
4,407,223
          
9,869,354
          
7,977,321
        
EXPENSES
                                                                          
Raw materials and consumption materials
    
(2,711,347
)
        
(2,168,388
)
        
(3,701,722
)
        
(2,964,510
)
        
(6,413,069
)
        
(5,132,898
)
      
Outside services
    
(122,229
)
        
(96,219
)
        
(113,580
)
        
(117,482
)
        
(235,809
)
        
(213,701
)
      
                                                                           
GROSS VALUE ADDED
    
1,737,051
          
1,305,491
          
1,483,425
          
1,325,231
          
3,220,476
          
2,630,722
        
(-) DEPRECIATION/AMORTIZATION
    
(237,814
)
        
(181,423
)
        
(184,728
)
        
(104,793
)
        
(422,542
)
        
(286,216
)
      
NET VALUE ADDED
    
1,499,237
          
1,124,068
          
1,298,697
          
1,220,438
          
2,797,934
          
2,344,506
        
RECEIVED IN TRANSFERS
                                                                          
Equity in subsidiaries
    
(2,285
)
        
(11,117
)
        
63,118
          
46,173
          
60,833
          
35,056
        
Financial income (2)
    
94,905
          
235,848
          
58,957
          
60,505
          
153,862
          
296,353
        
Revenue from rentals
    
519
          
535
          
(321
)
        
231
          
198
          
766
        
     
1,592,376
    
100
%
  
1,349,334
    
100
%
  
1,420,451
    
100
%
  
1,327,347
    
100
%
  
3,012,827
    
100
%
  
2,676,681
    
100
%
DISTRIBUTION OF VALUE ADDED
                                                                          
Government
    
480,399
    
30.1
%
  
398,149
    
29.5
%
  
287,154
    
20.2
%
  
284,225
    
21.4
%
  
767,553
    
25.5
%
  
682,374
    
25.5
%
Federal taxes
    
221,870
    
13.9
%
  
266,512
    
19.7
%
  
201,883
    
14.2
%
  
208,872
    
15.8
%
  
423,753
    
14.1
%
  
475,384
    
17.7
%
Payroll taxes
    
75,053
    
4.7
%
  
63,415
    
4.7
%
  
60,837
    
4.3
%
  
57,616
    
4.3
%
  
135,890
    
4.5
%
  
121,031
    
4.5
%
State taxes
    
168,683
    
10.6
%
  
57,825
    
4.3
%
  
55
    
0.0
%
  
8
    
0.0
%
  
168,738
    
5.6
%
  
57,833
    
2.2
%
Municipal taxes
    
14,793
    
0.9
%
  
10,397
    
0.8
%
  
24,379
    
1.7
%
  
17,729
    
1.3
%
  
39,172
    
1.3
%
  
28,126
    
1.1
%
                                                                           
Employees
    
363,992
    
22.9
%
  
287,890
    
21.3
%
  
473,006
    
33.3
%
  
477,868
    
36.0
%
  
836,998
    
27.8
%
  
765,758
    
28.6
%
Salaries
    
245,281
    
15.4
%
  
189,378
    
14.0
%
  
349,872
    
24.6
%
  
338,645
    
25.5
%
  
595,153
    
19.8
%
  
528,023
    
19.7
%
Benefits
    
43,994
    
2.8
%
  
38,753
    
2.9
%
  
64,882
    
4.6
%
  
65,751
    
5.0
%
  
108,876
    
3.6
%
  
104,504
    
3.9
%
Training
    
4,911
    
0.3
%
  
4,776
    
0.4
%
  
3,253
    
0.2
%
  
3,200
    
0.2
%
  
8,164
    
0.3
%
  
7,976
    
0.3
%
Profit sharing
    
69,806
    
4.4
%
  
54,983
    
4.0
%
  
54,999
    
3.9
%
  
70,272
    
5.3
%
  
124,805
    
4.1
%
  
125,255
    
4.7
%
                                                                           
Financial institutions (2)
    
125,365
    
7.9
%
  
(7,247
)
  
-0.5
%
  
192,794
    
13.6
%
  
57,731
    
4.3
%
  
318,159
    
10.5
%
  
50,484
    
1.9
%
Shareholders (3)
    
439,557
    
27.6
%
  
245,799
    
18.2
%
  
68,502
    
4.8
%
  
110,006
    
8.4
%
  
508,059
    
16.9
%
  
355,805
    
13.3
%
Profit reinvestment
   
183,063
    
11.5
%
  
424,743
    
31.5
%
  
398,995
    
28.1
%
  
397,517
    
29.9
%
  
582,058
    
19.3
%
  
822,260
    
30.7
%
                                                                           
TOTAL
    
1,592,376
          
1,349,334
          
1,420,451
          
1,327,347
          
3,012,827
          
2,676,681
        
                                                                           
           
31
%
        
33
%
        
17
%
        
17
%
        
23
%
        
23
%

(1) includes discounts granted and other operating revenues
(2) includes exchange and monetary variations
(3) includes resolution to pay interest on capital for the first quarter of 2008. See note 29.

The accompanying notes are an integral part of these consolidated interim financial statements