Sequoia

Fund, Inc.

ANNUAL
REPORT

DECEMBER 31, 2006

SEQUOIA FUND, INC.
ILLUSTRATION OF AN ASSUMED INVESTMENT OF $10,000
With Income Dividends Reinvested and Capital Gains
Distributions Accepted in Shares

The table below covers the period from July 15, 1970 (the date Fund shares were first offered to the public) to December 31, 2006. This period was one of widely fluctuating common stock prices. The results shown should not be considered as a representation of the dividend income or capital gain or loss which may be realized from an investment made in the Fund today.

The total amount of capital gains distributions accepted in shares was $931,732, the total amount of dividends reinvested was $116,740.

No adjustment has been made for any taxes payable by shareholders on capital gain distributions, dividends reinvested in shares or sale of Fund shares.

To the Shareholders of Sequoia Fund, Inc.

Dear Shareholder:

Sequoia Fund's results for the quarter and year ended December 31, 2006 appear below along with comparable results for the market indexes:

The performance shown above represents past performance and does not guarantee future results. Current performance may be lower or higher than the performance information shown.

Comparison of a change in value of a $10,000 Investment in Sequoia Fund and the S&P 500 Index*

*The S&P 500 Index is an unmanaged, capitalization-weighted index of the common stocks of 500 major US corporations. The Dow Jones Industrial Average is an unmanaged, price-weighted index of 30 actively traded blue chip stocks. The performance data quoted represents past performance and assumes reinvestment of dividends. The investment return and principal value of an investment in the Fund will fluctuate so that an investor's shares, when redeemed, may be worth more or less than their original cost. Year to date performance as of the most recent month end can be obtained by calling DST Systems, Inc. at (800) 686-6884.

Sincerely,

THE RUANE, CUNNIFF & GOLDFARB INC./SEQUOIA FUND INC. ANNUAL INVESTOR DAY WILL BE HELD AT 10A.M., NEW YORK CITY TIME, ON FRIDAY, MAY 18, 2007 AT THE ST. REGIS HOTEL, TWO EAST 55TH STREET, NEW YORK, NEW YORK 10022

Management's Discussion of Fund Performance

The total return for Sequoia Fund was 8.34% for 2006, including the reinvestment of dividends. This compares with the 15.80% return of the S&P 500. As it has been for many years, our investment philosophy is to make concentrated commitments of capital in a limited number of companies that have superior long-term economic prospects and that sell at what we believe are attractive prices. Because Sequoia is deliberately not representative of the overall market, in any given year or years the performance of the Fund will often vary significantly from that of the broad market indices.

We are less concerned with the annual returns from each of the stocks we own than with their returns over time. We have a similar attitude towards earnings: we pay much more heed to earnings growth over a number of years rather than over a single year, much less a quarter.

The table below shows the twelve month stock total return for the Fund's major positions at the beginning of 2006:

The largest reasons for our underperformance versus the S&P 500 were the significant stock price declines at two of our largest holdings, Progressive Corp. and Mohawk Industries.

We believed that Progressive's stock price at the beginning of 2006 was justified by its historical record and long-term prospects together with its exceptional management. Although we worried that Progressive's profit margins were unsustainably high, we were confident the company would gradually reduce prices and grow policies and revenue at satisfactory levels. We did not expect that over the course of 2006 Progressive's revenue growth would decelerate to zero and policies-in-force would begin to decline. Nor did we expect margins to expand and earnings per share to grow 20%. Yet, that is what happened, although we do not believe it was management's goal to harvest extra earnings in 2006 at the expense of the future growth rate.

For most of its history, Progressive's aim has been to earn at least a 4% operating margin and grow as fast as possible. In 2006, it earned a 14% margin. This windfall occurred largely because of a number of structural changes that cumulatively have significantly reduced the frequency of automobile accidents.

When Progressive tested lower rates in recent years, it found little elasticity of demand. Therefore, at the risk of holding a pricing umbrella over less efficient competitors, the company opted to preserve higher margins. Although it anticipated that such pricing would reduce growth, it did not contemplate that the growth would cease altogether.

Looking ahead, Progressive may be forced to cut rates more aggressively to attract policyholders, as more surgical price cuts have not worked. This almost certainly will lead to lower profits for shareholders.

Progressive is an outstanding company that currently faces two great challenges: 1) increasing retention or policy lives through a number of measures; and 2) improving both its brand proposition and its marketing and advertising. Fortunately, management embraces change and the company could not have a better change agent than CEO Glenn Renwick.

Mohawk Industries' stock price fell 14% in 2006. Reported earnings rose 17% for the year, reflecting earnings accretion from the purchase of Unilin, a large European-based laminate flooring manufacturer, in late 2005. Absent the acquisition of Unilin, net income would have been flattish as lower interest expense from debt pay-down would have offset a modest decline in operating profits at Mohawk's business units. The decline in operating income reflected high oil prices, which increased the cost of the raw materials used to make flooring products, and a slump in both new home construction and home remodeling, which reduced demand for residential flooring. In this difficult environment, Mohawk successfully managed operating costs and the acquisition of Unilin. It also dramatically reduced the debt taken on to make the acquisition.

We do not know how long the housing slump will last, or how long raw materials prices will remain high. We do know Mohawk has been passing on raw

materials price increases for some time, which speaks to its position in the marketplace. At the end of 2006, Mohawk sold for less than 12 times forward earnings estimates, which strikes us as an attractive price for a business that has grown its earnings at a 17% compound average annual rate the last five years.

Berkshire Hathaway enjoyed a terrific year, though it received more than a little help from Mother Nature. After two years which saw multiple hurricanes wreak havoc on the Gulf Coast, writers of "supercat" reinsurance raised premiums significantly, then saw no major storms hit the U.S. mainland in 2006. This fortuitous circumstance helped Berkshire more than double its reported earnings per share through the first nine months of the year. As a major writer of "supercat" reinsurance, there will be years when Berkshire gets lucky, like 2006, and years when it pays out billions of dollars in claims, like 2004 and 2005. A prudent forecast for 2007 would include a more normalized level of catastrophe claims, and thus a lower level of earnings in the reinsurance business.

Berkshire's good performance was not simply a matter of good weather. GEICO is knocking the cover off the ball. The company's fantastic advertising, together with its very aggressive entry into New Jersey, are driving very satisfactory growth. Gen Re posted its best results in many years in 2006. NetJets showed improved results. Most pleasingly, through the first three quarters of the year Berkshire invested $14 billion in stock investments and acquisitions of private companies. The favorable economics of these investments gives us confidence that they will produce a very satisfactory return.

Based on Berkshire's 2006 performance, our decision to reduce our ownership position during the year could be second-guessed. It remains our single largest investment but, given Mr. Buffett's age and our level of concentration, we felt it prudent to reduce our exposure. We expect Mr. Buffett will continue to do a masterful job deploying Berkshire's vast capital and we intend to benefit from that performance over many years.

TJX reported a fine year that highlighted the inherent strength of its off-price business model. The company saw its earnings per share, absent one-time charges, grow by more than 20%. In recent years, TJX had committed a succession of gaffes, including the failed launch of a dot com business and the rapid expansion of several unproven start-up concepts. Finally, in late 2005 the board of directors tapped chairman of the board and founder Ben Cammarata to return as interim CEO. Cammarata achieved almost immediate results by re-focusing TJX on its core businesses, TJ Maxx, Marshall's and Winners, the TJ Maxx of Canada. He replaced a number of senior managers and closed stores that had little potential for earning a satisfactory return. Perhaps most importantly he lured long-time executive Carol Meyrowitz, who had left the business earlier in 2005, back to the company.

Meyrowitz, a respected apparel merchant, was instrumental in the turnaround and recently was appointed CEO. She should have a stronger supporting cast of senior managers than existed 18 months ago. We trimmed TJX in 2006 after the stock rose during the year, but it remains a large position and we are encouraged by the changes made over the past five quarters.

Other major holdings such as Brown & Brown, Expeditors, Fastenal, Idexx Labs, O'Reilly, Porsche and Walgreen turned in strong earnings years, with all of them growing net income at double-digit rates. Porsche shares rose 80% in U.S. dollars. The stock price performance of the other six companies was more mixed, but their earnings performance was on target. We are optimistic about the prospects for solid earnings growth at all seven businesses in 2007 and beyond.

We are pleased to report that we made a number of new investments in high-quality businesses in 2006. Our largest new investment was Bed, Bath & Beyond. This unusual company — management rarely speaks to Wall Street, does not belong to any industry trade groups and otherwise keeps its own counsel — was founded in the early 1970s and today is a very successful purveyor of kitchen, bath and home décor items. It is distinguished from its competitors by its breadth of product offering and superior financial returns. The company has a terrific balance sheet with an enormous amount of cash on hand and no debt.

Other new investments by the Fund in 2006 included Target, Lowe's, Knight Transportation, MasterCard and Apollo Group. During the year, the Fund sold its holdings in Gtech and IGT.

At the end of the year, Sequoia was 94.3% invested in stocks, compared to 95.2% a year earlier. In both years, the remainder of the Fund's assets was held in cash and cash equivalents.

Shareholder Expense Example

As a shareholder of the Fund, you incur ongoing costs, including management fees and other Fund expenses. This Example is intended to help you understand your ongoing costs (in dollars) of investing in the Fund and to compare these costs with the ongoing costs of investing in other mutual funds. The Example is based on an investment of $1,000 invested at the beginning of the period and held for the entire period (July 1, 2006 to December 31, 2006).

Actual Expenses

The first line of the table below provides information about actual account values and actual expenses. You may use the information in this line, together with the amount you invested, to estimate the expenses that you paid over the period. Simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.6), then multiply the result by the number in the first line under the heading entitled "Expenses Paid During Period" to estimate the expenses you paid on your account during this period.

Hypothetical Example for Comparison Purposes

The second line of the table below provides information about hypothetical account values and hypothetical expenses based on the Fund's actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Fund's actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period. You may use this information to compare the ongoing costs of investing in the Fund and other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of other funds.

Please note that the expenses shown in the table are meant to highlight your ongoing costs only and will not help you determine the relative total costs of owning different funds.

* Expenses are equal to the Fund's annualized expense ratio of 1.00%, multiplied by the average account value over the period, multiplied by 184/365 (to reflect the one-half year period).

SEQUOIA FUND, INC.
Schedule of Investments
December 31, 2006