annual report 2005 - bourse · production sales and services vallourec has production facilities on...

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Annual Report

2005

Société Anonyme à Directoire

et à Conseil de Surveillance

Capital: 212 006 640 €

Registered Office: 130, rue de Silly

92100 Boulogne-Billancourt (France)

552 142 200 RCS Nanterre

Tel.: +33 (0)1 49 09 38 24

Fax: +33 (0)1 49 09 36 94

Internet: www.vallourec.com Dire

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2005key figures

Sales

€ 4,307.4million

59.3% in the energy sector(oil & gas, and power generation)

61.3% outside the European Union

30 industrial companies

organized in 6 divisionsby product or by market

45 production units

in10 countries

Approximately18,000 staff

1 Profile

2 Statement by the Chairmen

4 Corporate governance

6 2005, a year of positive momentum

8 Key figures

10 Shareholder information

12 The Group’s markets

21 Reference document

ProductionSales and services

Vallourec has productionfacilities on four continents.These are complementedby a worldwide network ofsales offices and numerousservice centres. The Grouptherefore has the majorcompetitive advantageof being able to offer itscustomers high-quality andlocal services throughoutthe world.

Vallourec, an integrated industrial group, controls the whole of its manufacturing process, from the productionof steel to the manufacture of finished products. It offers a portfolio of high value-added tubular products, originaland unique in its diversity. Indeed, Vallourec has specialized in particular in products for the most complex andhighly-demanding industrial applications (extreme temperature, pressure, corrosion, etc.), notably in the energysector (oil & gas, and power generation).

Thanks to its expertise gained over more than a century, solid industrial partnerships, ongoing R&D efforts anddecentralized organization, the Group has gradually established itself as the supplier of reference throughoutthe world. Vallourec combines the dynamism and flexibility of its various entities, which are strongly rooted intheir local industrial fabric (particularly in France, Germany, Brazil and the United States) with the advantagesassociated with a major Group of nearly 18,000 staff.

In 2005, the acquisition of full control of V & M TUBES represented a major step in the Group’s development.Vallourec is now well placed to continue building on its world leadership position in a buoyant market.

World leader in the productionof seamless steel tubesand specific tubular productsfor industrial applications

1Vallourec 2005 Annual Report

Jean-Paul Parayre Pierre Verluca

Dear Shareholders,

In all regards, 2005 proved to be a remarkable year for

Vallourec and the outlook for 2006 is excellent.

An excellent performance

In a climate that has remained highly favourable, Vallourec

produced a first-class performance in 2005, led by a

remarkable 42% increase in sales to a record €4.3 billion.

Driven in particular by the healthy state of the oil & gas and

power generation markets, demand for seamless steel

tubes remained buoyant. The quality of Vallourec’s

products and services enabled the Group to continue to

benefit from increases in its selling prices. Raw material

prices were generally stable. Moreover, the Group’s

production facilities were operating at full capacity and

Vallourec oriented its production towards high value-

added products.

Volume growth, the improved product mix and selling

price increases had a highly positive impact on the Group’s

operating performance, with EBITDA rising from 15% in

2004 (itself a record) to 25% of sales in 2005. Net income,

Group share has more than tripled.

An eventful year

In addition to the Group’s performance, the major event

of 2005 was undoubtedly the acquisition by Vallourec, for

€545 million, of the minority interest previously held by

Salzgitter/Mannesmann in V & M TUBES. The Group’s

principal subsidiary, formed in 1997 when the seamless

tubes activities of Vallourec and Mannesmann were

merged, V & M TUBES was 55%-held by Vallourec with

Mannesmannröhren-Werke holding the remaining 45%.

The world leader in seamless steel tubes, for eight years

V & M TUBES was not only the main contributor to

Vallourec’s earnings but also the driving force behind

its dynamic acquisition policy. Taking full control of

V & M TUBES therefore represented a considerable step

forward at both operating and financial level. Vallourec

now has sole control over the strategy of V & M TUBES.

Since 1 July 2005, Vallourec has been benefiting from

V & M TUBES’ entire net income, which has had a

positive impact on the Group’s earnings per share from

that date.

Vallourec also continued to manage actively its portfolio

of businesses in 2005. In early January, the Group sold its

non-strategic automotive components activities in South

America. In September, in line with its policy of developing

high value-added products, the Group acquired the assets

of OMSCO, a US company specialized in drill pipes,

thereby enabling Vallourec to become the world no. 2 in

this market.

The year 2005 was also notable for the increase in

production capacity at V & M do BRASIL and the start

of work on the construction of a new facility in China

for the machining of tubes for the power generation

sector.

Lastly, in spring 2006, Vallourec continued its development

in the energy sector with the acquisition of SMFI, a

company specialized in the manufacture of heavy-weight

drill pipes, and of CST, an Indian company manufacturing

stainless steel and titanium tubes for power plants. In

order to focus on its core activities, Vallourec also

announced the disposal of its only subsidiary operating in

the aerospace sector, Spécitubes.

Statement by the Chairmen

2 Vallourec 2005 Annual Report

“Our strategy continued to bear fruit in 2005 in a highlyfavourable market context”

Emphasis on investments

In 2005, despite an 85% increase in capital expenditure

by the Group and a total of €650 million spent on

acquisitions, Vallourec succeeded in maintaining a healthy

financial position and posted gearing (net debt to

shareholders’ equity) of just 13.6% at 31 December 2005.

The Group’s excellent visibility, particularly in the energy

sector, allows Vallourec to continue investing in and

developing high value-added products. This is reflected in

its sustained Research and Development efforts, and in

capital expenditure to increase the Group’s finishing

capacities, particularly in heat treatment.

Sharp increase in the dividend

In line with its pay-out policy, Vallourec wishes its

shareholders to benefit from the Group’s excellent

performance. Following payment of an interim dividend

of €4 per share in October 2005, Vallourec is submitting

a resolution for approval by the Annual General Meeting

on 1 June 2006 for payment of a total dividend in respect

of 2005 of €11.2 per share, 3.5 times higher than the

dividend paid in respect of 2004.

A significant change in the Group profile

Through its acquisitions and capital expenditure in recent

years, Vallourec’s profile has changed significantly. The

Group is now involved mainly in the energy markets

(oil & gas, and power generation), which represented

nearly 60% of sales in 2005 compared with barely 35%

in 2000. At the same time, the Group has expanded very

strongly internationally, with the proportion of sales

outside the European Union rising from a little over 40%

in 2000 to a little over 60% in 2005. Lastly, production

facilities were exclusively based in Europe in 2000 and are

now much better spread over four continents.

Renewed confidence in a buoyant environment

Strengthened by its marked change in profile, Vallourec

is well placed to continue building to the full on its

leadership position: the Group’s financial position is

extremely healthy, it intends to make the capital

expenditure required to continue its development in the

production of high-end products, and is ready to seize

acquisition opportunities enabling it to consolidate its

worldwide presence.

Pierre VerlucaChairman of the

Management Board

Jean-Paul ParayreChairman of the

Supervisory Board



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SECTION 8: SPECIFIC DOCUMENTS FOR THE ORDINARY GENERAL MEETING ON 1 JUNE 2006

8.1 MANAGEMENT BOARD REPORTS 161

8.1.1 Management report of the Management Board to the Ordinary General Meeting on 1 June 2006 161

■ Trends in the Vallourec Group’s markets 163

■ Research and Development 170

■ Information provided in accordance with Article L. 225-102, Section 4,of the French Code de Commerce:

– Information on the social implications of the Group’s activities 171

– Information on the environmental consequences of the Group’s activities 179

■ Consolidated financial statements 181

■ Vallourec (Holding Company) 182

■ Remuneration of Company officers 182

■ Information on the breakdown of capital 183

■ Regulated agreements 183

■ Allocation of net income 184

■ Supervisory Board 185

■ Statutory Auditors 185

■ Attendance fees 185

■ Share buy-back programme 185

■ Appendix to the Management Board’s management report: List of other positions held by Vallourec Company officers 186

8.1.2 Special report of the Management Board on options 203

8.2 REPORT OF THE CHAIRMAN OF THE SUPERVISORY BOARD 204

on the conditions governing the preparation and organization of the Supervisory Board’s work and on the internal control procedures

8.3 STATUTORY AUDITORS’ REPORTS 208

8.3.1 Statutory Auditors’ general report on the annual statutory accounts 208

8.3.2 Statutory Auditors’ special report on certain related party transactions 210

8.3.3 Statutory Auditors’ report on the consolidated financial statements 212

8.3.4 Statutory Auditors’ report on the report of the Chairman of the Supervisory Board on internal control procedures 214

8.4 SUPERVISORY BOARD REPORT 215

8.5 RESOLUTIONS PROPOSED BY THE MANAGEMENT BOARD 216

8.6 SUBSIDIARIES AND PARTICIPATING INTERESTS AS AT 31 DECEMBER 2005 220

8.7 COMPANIES CONTROLLED DIRECTLY OR INDIRECTLY AS AT 31 DECEMBER 2005 221

8.8 EVALUATION OF SECURITIES PORTFOLIO AS AT 31 DECEMBER 2005 222

8.9 FIVE-YEAR FINANCIAL SUMMARY 223

INFORMATION PUBLISHED OR MADE PUBLIC BY THE ISSUER DURING THE LAST 12 MONTHS

CROSS REFERENCES BETWEEN THE VALLOUREC REFERENCE DOCUMENTAND APPENDIX I OF THE EUROPEAN PROSPECTUS REGULATIONS

Since June 1994, Vallourec has been governed by a Management Board and a Supervisory Board, which together provide for balanced management thatsafeguards the shareholders’ best interests.

Corporate governance

Supervisory Board (at 1 January 2006)

Honorary Chairman: Arnaud Leenhardt

Chairman: Other main appointments:Jean-Paul Parayre Member of the Supervisory Board of PSA Peugeot-Citroën

and of the Board of Directors of Stena International

Vice-Chairman: Patrick Boissier Chairman and CEO of Chantiers de l’Atlantique

Members:

Luiz-Olavo Baptista Lawyer and Professor of International Law

Vincent Bolloré Chairman and CEO of Bolloré group

Wolfgang Eging Chairman of the Executive Board of Mannesmannröhren-Werke GmbH

Michel de Fabiani Director of BP France

Heinz Jörg Fuhrmann Member of the Executive Board and CFO of Salzgitter AG

Denis Gautier-Sauvagnac President and Managing Director of UIMM

François Henrot Managing Partner of Rothschild & Cie Banque and Rothschild & Cie

Wolfgang Leese Chairman of the Executive Board of Salzgitter AG

Jean-Claude Verdière Member of the Management Board of Vallourec until 30 June 2001

Société Financière de Sainte Marine,Represented by Thierry Marraud CFO of Bolloré group

Committees

The Supervisory Board has set up two committees: the

Finance Committee and the Appointments and Remuneration

Committee.

The Finance Committee met four times in 2005. Its main

tasks were to review the financial statements for 2004 and

for the first six months of 2005, the financing of the

acquisition of 45% of V & M TUBES, and the acquisition

of OMSCO.

The Appointments and Remuneration Committee met

twice in 2005.

The Supervisory Board and its Committees

The Supervisory Board met eight times in 2005. The participation rate in meetings was close to 100%. All decisions submitted

to a vote by the Supervisory Board were adopted unanimously in 2005.


Management Board (at 1 April 2006)

Since 1 April 2006, the Management Board has comprisedfive members:

Pierre VerlucaChairman of the Management Board

François FabreMember of the Management Board

Bertrand CantegritChairman, Automotive and Industry Division

Marco Antônio Castello BrancoChairman, Hot-Rolled Tubes DivisionChairman, V & M do BRASIL SA

Jean-Pierre MichelVice-President, Controlling, Marketing and PurchasingChairman, Oil & Gas activities

Executive Committee

The Executive Committee comprises the five members ofthe Management Board and the following four members:

Bert BecherChairman of the Management Board, V & M DEUTSCHLAND GmbH,

Vice-President Sales and Marketing, Hot-Rolled Tubes Division

Jean CharpentierVice-President, Human Resources

Alain HonnartChairman, Stainless Steel Division,Vice-President, Industrial Policy

Marc KarakoCFO: Finance, Legal and External Communication

The Executive Committee, from left to right: Alain Honnart, Bert Becher,Marco Antônio Castello Branco, François Fabre, Pierre Verluca, Jean-Pierre Michel, Bertrand Cantegrit, Marc Karako and Jean Charpentier.

Strategy Group

With a view to improving the focus and organization of the

various departments around its strategic objectives,

Vallourec has rounded out its management structure by

creating a Strategy Group comprising four members of the

Executive Committee and six members representing the

Group’s major functional departments. The main objective

of the Strategy Group is to support Vallourec’s decentralized

management approach in order to strengthen its cohesion.

Abderrazak BenyahiaVice-President, Marketing Department

Jean CharpentierVice-President, Human Resources

Alain DieulinVice-President, R&D Department

François FabreMember of the Management Board

Eddy de KerlandVice-President, Controlling Department

Jean-Louis MerveilleVice-President, Purchasing Department

Jean-Pierre MichelMember of the Management Board,Vice-President, Controlling, Marketing and Purchasing,Chairman, Oil & Gas activities

Christophe PrasserVice-President, Technology and Investments

Gérard TerneyreVice-President, Strategy and Development

Pierre VerlucaChairman of the Management Board

Management

Management of the Group is provided by the Management Board and the Executive Committee. At the initiative of the

Management Board, in July 2004 Vallourec established a restricted Executive Committee in order to enhance dialogue

between the Group’s various divisions, improve its flexibility and enable it to better adapt to the economic and geopolitical

climate.


2005, a year of positive momentum2005 was the year in which Vallourec acquired full control of V & M TUBES, a majorstep forward in changing the Group’s profile. Apart from this transaction, the Groupcontinued to implement a consistent strategy aimed at strengthening Vallourecwhile gaining in clarity: disposing of non-strategic activities, both increasingproduction capacities and making acquisitions in high value-added activities werelandmarks in a particularly dynamic year.

Highlights

January 2005

Disposal of the South American automotivecomponents activities

June 2005

Acquisition of full control of V & M TUBES for€545 million (purchase of Mannesmannröhren-Werke’s 45% holding)

July 2005

€125 million rights offering

July-August 2005

Investment in production capacity in Brazil(+100,000 tonnes)

September 2005

Acquisition of the assets of OMSCO for USD 120 million (oil drilling)

March 2006

Acquisition of SMFI for €40 million (oil drilling)

April 2006

Announcement of the disposal of Spécitubes(aerospace)

April 2006

Establishment of a presence in India (acquisitionof 75% of CST Ltd, power generation)

V & M TUBES at the heart of Vallourec’s development

The key event of 2005 proved to be the acquisition of

the 45% of V & M TUBES not previously held by

Vallourec. To properly understand the importance of

this transaction, one needs to look back eight years.

A fundamental step in the development of the

Vallourec Group was taken in 1997 with the merger

of the seamless tubes activities of Vallourec and

of Mannesmannröhren-Werke (MRW) into a joint

venture named VALLOUREC & MANNESMANN TUBES

(V & M TUBES), held 55% by Vallourec and 45% by

MRW.

V & M TUBES, world leader in seamless steel tubes

At the time of the formation of V & M TUBES in

1997, Vallourec was careful to combine the industrial,

financial and human conditions required for the

merger to be successful.

By creating a genuine “V & M TUBES culture” based

on a shared strategic vision and common ambitions,

the Vallourec and MRW teams were able to respect

their particular skills and implement the sharing of

experiences. Their pride in being involved in the

emergence of a world leader and the absence of

conflict in setting in place management structures

were major factors in this success.


Vallourec’s engine of growth

Vallourec made V & M TUBES the engine of its growth,

a strategy that in just a few years profoundly changed

the Group’s profile.

The first stage of this expansion was the purchase in

2000 by V & M TUBES of the Brazilian activities of

MRW, which were renamed V & M do BRASIL. This

made Vallourec the leading producer of seamless

steel tubes in Brazil. V & M do BRASIL employs more

than 5,000 staff and is now extremely profitable.

The second stage came in 2002, when V & M TUBES

bought the assets of North Star Steel for USD 380

million from Cargill and created V & M STAR, a

company in which Sumitomo (a long-standing partner

of Vallourec in the area of tubes for the oil industry)

took 19.5%. Vallourec thus became the no. 2 in the

United States in the production of seamless steel

tubes, reinforcing in a highly complementary manner

its activities in the oil & gas sector and successfully

integrating around 1,000 staff. In V & M STAR,

Vallourec also acquired an outstanding technical

capability and the productivity of the company’s

industrial facilities improved the Group’s margins.

V & M TUBES wholly-owned by Vallourec

At the end of June 2005, Vallourec acquired full

control of V & M TUBES by purchasing MRW’s

45% holding for € 545 million. On a stand-alone

basis, V & M TUBES represented 81% of Vallourec’s

consolidated sales and 86% of its EBITDA in

2004.

The V & M TUBES transaction is a major step in

the Group’s development. Vallourec now has full

control over implementation of its strategy

(acquisitions, capital expenditure, etc.) and the

Group’s structure is much more coherent: as the

sole owner of its industrial assets, Vallourec offers

much-improved clarity and visibility.

The transaction was financed using the Group’s

available cash, a bank loan and a € 125 million

rights offering. Consolidating 100% of the

earnings of V & M TUBES from the second half of

2005 has markedly enhanced Vallourec’s earnings

per share.

Formation of V & M TUBESA 55% Vallourec and 45% MRWjoint venture

A new dimension for Vallourec:world leader in seamless steeltubes

Acquisition of V & M do BRASIL100% owned

International expansion andimproved Group profitability

Acquisition ofV & M STAR80.5% V & M TUBES and 19.5% Sumitomo

Industrial presence in the United States and enhanced offer in oil & gas

Acquisition of the remaining45% interest in V & M TUBES

▲

1997 2000

2002

2005


Sales by market

Sales generated in the energy sector (tubes for exploration

and production in the oil & gas industry as well as tubes for

use in power plants) continued as the strong driving force

behind the Group’s growth in 2005. In 2005, the energy

sector represented 59.3% of Group sales (2004: 51.8%).

Key figures

Vallourec recorded exceptional growth in sales in 2005,

which rose by 41.8% to a new record of € 4.3 billion.

This strong increase was due essentially to a mix and price

effect. In a buoyant environment, the Group was able to

put through further selling price increases during the

year, particularly in Brazil and the United States, and to

substantially improve its product mix.

Sales by geographic region

Vallourec continued to internationalize its activities in

2005. The relative shares of sales in North America and Asia

increased substantially: sales outside the European Union

now represent 61.3% of the overall total (2004: 57.0%).

4,307

2,376

3,038

2,5502,500

2001 2003 2004 20052002

Oil & gas42.5%

Power generation16.8%

Other5.5%

Automotive11.2%

Chemicals and petrochemicals10.7%

Mechanical engineering13.3%

North America

25.9%

South America

11.6%

Asia and Middle East

19.5%

Germany

14.2%

France

9.5%

Other EU

15.0%

Rest of world

4.3%

(in € million)

• Consolidated data are presented in accordance with French GAAP until 2003and with IFRS from 2004.• The 2005 financial statements reflect the disposal, effective from 1 January 2005,of the automotive components activities in Brazil and Argentina (2004 sales:€71 million) and the inclusion with effect from 1 October 2005 of the assetsof OMSCO (4th quarter 2005 sales: € 28 million).

Consolidated sales

+41.8%

Vallourec posted record results in 2005. This remarkable performance was dueessentially to high levels of demand, ongoing selling price increases and continuingimprovements in the Group’s product mix.


SALES

€ 4,307.4 million

+41.8%

EBITDA

€ 1,060.6 million+133.3%

24.6% of sales

TOTAL NET INCOME

€ 632.4 million

+138.5%

14.7% of sales

EBITDA/Sales ratio

24.6%

15.0%

9.3%

13.6%14.0%

2001 2003 2004IFRS

2005IFRS

2002805

371

196251269

2001 2003 2004IFRS

2005IFRS

2002

843

10373

501

144

2001 2003 2004IFRS

2005IFRS

2002

205

73-55-4

106

2001 2003 2004IFRS

2005IFRS

2002

NET INCOME,GROUP SHARE

€ 473.0 million

+226.2%

Cash flow(in € million)

Net debt(in € million)

Investments(in € million)

At 24.6%, the ratio of EBITDA to sales also reached a record level in 2005, reflecting the

improved product mix and the Group’s capacity to pass on the rises in raw material costs

to selling prices.

Price rises and the trend towards higher value-added products enabled Vallourec to

substantially improve its cash flow, which more than doubled between 2004 and 2005

to reach €805 million.

The exceptionally high level of investment expenditure in 2005 resulted both from the

acquisitions made during the year (purchase of 45% of V & M TUBES and the assets of

OMSCO) and the growth in capital expenditure intended, in particular, to increase the

Group’s production capacities. The purchase of 45% of V & M TUBES for €545 million

was financed in part by a €125 million rights offering in July 2005.

Despite the exceptional level of acquisition and capital expenditure in 2005 (€+740 million),

and notwithstanding the payment of €114 million in dividends (including a €42 million interim

dividend payment in respect of 2005), the Group’s net debt rose by just €260 million in 2005,

with the Group moving from holding net cash of €55 million at 31 December 2004 to

having net debt of €205 million at 31 December 2005, representing gearing of 13.6%.


Shareholder information

Vallourec share

Listed on the Euronext Paris Eurolist (section A)Part of the deferred settlement section (SRD)ISIN code: FR0000120354Indices: Euronext 100, SBF 120 and CAC Mid 100FTSE classification: engineering and machineryMarket capitalization: €11.7 billion on 21 April 2006

Financial calendar

1 June 2006: Annual General Meeting27 July 2006: release of 2006 Q2 sales figures13 September 2006: release of 2006 first-half results25 October 2006: release of 2006 Q3 sales figures1 February 2007: release of 2006 Q4 sales figures

Number of shares at 31 December 2005: 10,600,332Number of identified shareholders: 20,716 (holding 100% of the capital)Number of voting rights published in BALO on 25 January 2006:12,162,388

The breakdown of Vallourec’s capital changed signifi-

cantly in 2005. Between January 2005 and January

2006, the number of shareholders increased by nearly

70%, from 12,300 to over 20,000.

47.6

4.2

14.3

6.79.3

11.2*

1.6 3.22.12.1

2001 2003 2004 20052002

2005 was notable for a further and very sharp rise in the Vallourec share priceand by significant changes in the Group’s shareholder structure.

Employeeshareholders

1.4% (1.2%)

Public71.4% (62.4%)

Bolloré group7.5% (6.5%)

Directly held by Vallourec2.5% (0%)

SalzgitterMannesmann GmbH17.2% (29.9%)

Capital breakdown

Sources: identifiable bearer shares and registered shares at 13 January2006, adjusted for the crossing of a share ownership threshold byBolloré group on 2 February 2006

As a % of capitalAs a % of voting rights

Pay-out ratio 23.1% 31.5% 39.2% 23.3% 25.1%

Group share of net income, per share (under French GAAP to 2004 and IFRS in 2005)Dividend per share

* Proposed dividend (of which, interim dividend of €4.0 paid on 12 October 2005 and acomplement of dividend of €7.2)

Dividend

On the recommendation of the Management Board,

the Supervisory Board has decided to propose to the

Annual General Meeting of 1 June 2006 a dividend of

€11.2 per share in respect of 2005, 3.5 times higher than

the dividend paid in respect of 2004 (€3.2 per share).

Taking into account the interim dividend paid on 12 October

2005 of € 4.0 per share, the final dividend amounts to

€7.2 per share. It will be paid on 5 July 2006.

Earnings per share and dividend(in euros)


Division of the nominal valueper share

A proposal will be submitted to the forthcoming Annual

General Meeting for approval to divide the nominal value

of each share by five. This would entail the allotment

of five new shares with a nominal value of €4 each

in exchange for each existing share with a nominal

value of €20. The split will take place from 18 July 2006.

Vallourec's share posted the largest increase in the SRD section in 2005. The share price was multiplied by a factor of

more than four during the year, rising 327% from €108.9 on 3 January 2005 to €465 on 30 December 2005, and

the market capitalization increased from €1.1 billion to €5.0 billion. Over the same period, the SBF index rose by 24%.

Since the start of 2006, the share price has continued to rise and stood at €1,100.5 on 21 April 2006.

0

120

240

360

480

600

720

840

960

1,080

1,200

Vallourec share price in euros

SBF 120 relative to Vallourec share price at 2 January 2004

01/2004

04/2004

07/2004

10/2004

01/2005

04/2005

07/2005

10/200504/2006

01/2006

At 2 January 2004 At 30 December 2005 Change At 21 April 2006

Vallourec: €66.0 Vallourec: €465.0 +604.5% Vallourec: €1,100.5

SBF 120: 2,539.2 SBF 120: 3,399.0 +33.9% SBF 120: 3,822.5

Share price

Shareholder and investorcontact

To better respond to the expectations of both individual

and institutional shareholders, Vallourec is committed to

improving the quality of its financial communications.

Shareholder contactHenri Redig, 130, rue de Silly, 92100 Boulogne-Billancourt, France Tel.: +33 (0)1 49 09 38 28 - Fax: +33 (0)1 49 09 36 94Email: [email protected]

www.vallourec.com

EARNINGS PER SHARE

€ 47.6+233% compared to 2004

DIVIDEND PER SHARE

€ 11.2+250% compared to 2004

SHARE PRICE

+327% in 2005

Vallourec

SBF 120

€1,100.5


Growth in drilling programmesin the rest of the world

In the rest of the world, oil companies also significantly

expanded their activities and prices were maintained at

a high level. Tube manufacturers extended their delivery

times. To be able to respond to the strong demand, the

Group organized its threading capabilities so that they

were in continuous operation and also used

subcontractors. At the beginning of 2006, the order

book stood at around 9 months.

A number of major contracts were finalized in 2005.

Thus, in Saudi Arabia the Group will deliver a major

order of close to 60,000 tonnes in 2006, virtually all of

which will be premium joints. Similarly, in India, which is

seeing early signs of higher demand for premium

products, Vallourec has recently signed a contract for

25,000 tonnes of high-quality steel tubes, mainly with

premium threads.

Vallourec no. 2 in the world drillpipe marketVallourec made a strategic investment in the drill pipe

sector in 2005 by acquiring OMSCO for USD 120 million,

enabling the Group to strengthen its presence in the high

value-added drill pipe market, particularly in North America

where it was not present at the time. Finalized in September

2005, the acquisition made Vallourec the no. 2 in the world

drill pipe market. This position was further strengthened in

early 2006 with the acquisition for €40 million of SMFI, a

company specialized in the manufacture of heavy weight

drill pipes and high technology products for oil & gas

drilling, and whose sales are generated in the rest of the

world, thus perfectly complementing OMSCO. Vallourec

expects significant synergies from these two acquisitions,

through the sharing of expertise and implementation of a

global marketing policy targeted at major international

drilling customers.

A high level of activity

Vallourec generated sales in the oil & gas sector in 2005

of more than €1.8 billion, representing very strong growth

of 65.4% compared with 2004. Excluding the acquisition

of OMSCO, sales growth would have been 62.8%. This

performance was achieved thanks to high volumes and a

material increase in selling prices, particularly for high

value-added products.

Continuing strong demand in North AmericaIn North America, which represents over 40% of

Vallourec’s oil & gas sales, demand continued to be very

strong throughout 2005. The total number of active

wells rose from around 1,700 in 2004 to 2,000 on

average during 2005, with gas wells forming the majority.

In this region of the world, the Group mainly supplies

independent companies. In this context, V & M STAR

and the threading subsidiaries were able to operate

at full production capacity and significantly increase

the Group’s market share for premium products in

2005.

Oil & gas

The Group’s markets

The tubes that Vallourec designs and develops for the oil & gasindustry are essentially seamless threaded tubes, called OilCountry Tubular Goods (OCTG). These tubes, together with thespecial joints also marketed by Vallourec, are used for drillingoperations and to equip oil and gas wells. Vallourec is theworldwide specialist in products for deep, difficult, corrosiveand deviated wells and especially for gas wells, requiring perfectlysealed casing, tubing and drill pipe. The Group also offers a rangeof related services to oil companies to assist in their explorationand production activities. Oil & gas activities represent more than40% of Group sales.


1,829

1,106

865

978

845

2001 2003 2004 20052002

Vallourec’s main products:

Oil Country Tubular Goods (casing and tubing)– API and Buttress threading– VAM® special joints

Drill products (drill collars and heavy weightdrill pipe)

Special line pipes

The integration of OMSCO is proceeding smoothly. The

excellent activity levels of the Group’s customers in the

drilling sector indicate that 2006 sales will be higher than

anticipated at the time of the acquisition. Following the

integration of OMSCO, and subsequently of SMFI, Vallourec’s

sales in the drill pipe sector are expected to represent around

10% of the Group’s oil & gas sales.

Promising outlook

Demand for oil & gas tubes and well equipment is being

sustained by the higher level of exploration and production

expenditure by oil companies and by the increasingly difficult

conditions under which wells are operated (deep, offshore,

deviated, etc. wells). In this context, the prices of products

destined for such markets are expected to remain high, or

even to rise further in the case of high value-added products

such as drill pipes. This trend was confirmed in early 2006,

with good activity levels in a market whose fundamentals

remain highly favourable.

To meet this strong demand, Vallourec decided to increase

its heat treatment and threading capacities.

Share of oil & gas in Vallourec’s 2005 sales

Sales trend: oil & gas (in € million)

42.5%

+65.4%


Very high activity levels linkedto strong demand

In 2005, sales by the power generation activity reached

€724 million, up 55% compared with 2004. Power

generation, which is now Vallourec’s second largest activity,

represents close to 17% of Group sales whereas in 2000 it

accounted for just 11%. The performance recorded in 2005

reflects the high level of demand, which remains very strong

in China and the rest of Asia and which is rising in Europe.

By way of example, during the year Vallourec delivered

alloy steel tubes for the superheaters and titanium condenser

tubes for the supercritical Waigaoqiao power plant in

Shanghai, the largest capacity and most modern ever built

in China.

Power generation


Vallourec supplies tubes capable of withstanding extremeconditions of temperature and pressure used in fossil fuel plants(both conventional and combined cycle) as well as in nuclearpower plants. The Group provides tubes of all sizes and in a rangeof materials: carbon steel, alloy steel, stainless steel, titanium,and nickel alloys.Vallourec is the only supplier in the world capable of providingthe full range of tubes used in a power plant. Present in all phasesof the industry, from the construction of new power plants to theupgrading and maintenance of existing plants, Vallourec is theworld leader in this sector, far ahead of its two main competitors.This activity represents close to 17% of Group sales.

Continued investment in production capacities

To be able to meet market demand, Vallourec is investing

actively in its production capacities.

The capacity of the big pipes Reisholz plant in Germany has

been doubled since 2000. The Group has also increased its

heat treatment capacities in a number of plants to accompany

the increased use of alloy steels in high-technology power

plants. A major modernization programme has been

launched at Valinox Nucléaire and a new production site is

being built at Changzhou, near Shanghai, to meet the

particularly strong demand in China for big pipes. Concerning

small condenser tubes, a plant has been set up in Xi’an for

titanium tubes and the stainless steel tube capacity of

Changzhou Valinox Great Wall has been tripled. Moreover,

in April 2006 Vallourec announced the establishment of a

presence in India through the acquisition of CST Ltd, an Indian

company supplying tubes for power plant condensers.

Innovation at the heart of development

To reduce carbon dioxide emissions into the atmosphere and

to minimize costs, the constructors of fossil-fuel thermal

power plants are developing increasingly efficient boilers.

Vallourec plays a major role in this innovation-led race for

efficiency. The latest innovation patented by the Group is

VM12 steel, a new 12% chrome grade produced exclusively

by Vallourec.

The first industrial order for this new steel was received in

early 2006, for the two new ultra supercritical 1,100 MW

units at the Neurath power plant in Germany, the largest

lignite units in the world which will be brought online in

2010. Several hundreds of tonnes of VM12 steel tubes

will be delivered by Vallourec between end-2006 and

mid-2007, in addition to the range of other steel tubes

required in the construction of this power plant that will also

be delivered by Vallourec.


724

467

281338315

2001 2003 2004 20052002


Carbon, alloy and stainless steel tubes for fossil fuel and nuclear power plants– Boilers– Feedwater heaters– Steam piping

Nickel alloy tubes for nuclear-powered steamgenerators

Welded titanium tubes for condensers

Finned stainless steel tubes for nuclear MSR(Moisters Separators Reheaters)

A buoyant market and positiveoutlook

Demand should remain buoyant in 2006. Volumes

produced are expected to exceed those of 2005, and

the Group should benefit from the full effect of the latest

round of selling price increases.

The Group sees no sign of a slowdown in the power

generation market over the medium term. On the contrary,

at the end of 2004 the IEA* raised its forecast for the

construction of new power plants in the period 2002 to

2030 and estimated that, worldwide, the replacement of

existing power plants and construction of new plants to

meet growing demand would represent capacity of around

4,800 GW over the period (current world capacity is

around 4,000 GW).

This potential in the power plant market represents a

genuine opportunity for Vallourec, particularly as the

demand is spread worldwide. Although China remains an

important market, it is expected to stabilize over the

medium term and its relative weight should decline as

strong growth will be experienced worldwide, driven in

particular by Europe and the United States. This growth

is expected to be reflected in a relative equilibrium

between the construction of conventional and combined

cycle power plants.

* International Energy Agency

Share of power generation in Vallourec’s 2005 sales

Sales trend: power generation (in € million)

16.8%

+55.0%



Sales by the mechanical engineering activity rose from

€428 million in 2004 to €573 million in 2005,

corresponding to growth of nearly 34%.

This performance was due mainly to changes in the

product mix favouring higher value-added products and

to higher selling prices.

Vallourec focuses on mechanical engineering products

with a high technical content, for which demand is

growing strongly from specialized industries and which

enable the Group to differentiate itself at the technical

level.

World growth is creating strong demand for raw

materials and energy, which is highly favourable to

Vallourec’s applications in the mechanical engineering

sector: mining industry, heavy-vehicle axles, mining

exploration tubes, offshore platforms, cranes and lifting

equipment.

In the lifting equipment field, Vallourec has perfected

new steel grades that allow for a substantial increase in

the lifting capacity of cranes without increasing the

weight of the equipment.

The Group intends to continue its R&D efforts in the

coming years in order to further accentuate its

technological lead in the mechanical engineering sector.

Demand in 2006, in terms of both volumes and prices,

remains buoyant.

Mechanical engineering

Vallourec is the world leader for all steel tube applications in themechanical engineering sector: machine tools, agriculturalmachinery, lifting equipment, etc. These applications are aspeciality of the European market, which represents 80% ofsales. Vallourec’s customers are world leaders who export alarge portion of their production.

Vallourec’s main products:Tubes in standard or specific grades, and standard or customized sizes– Hot-rolled– Cold-drawn

ApplicationsHigh-pressure hydraulic line tubingHollows for machiningTubes for hydraulicsParts and shafts for mechanical units and machinesDrill rodsCranes, lifting equipmentMining industry accessories

428

328344362

2001 2003 2004 20052002

573

13.3%

+33.9%

Share of mechanicalengineering in Vallourec’s2005 sales

Sales trend: mechanical engineering (in € million)


Following the disposal in January 2005 of the South

American automotive components businesses that were

considered to be non-strategic, Vallourec generated

sales of automotive products of €483 million in 2005.

At constant consolidation scope, this represents growth

of 12% compared with 2004.

Demand declined in the second half of the year as a result

of the lower number of new vehicle registrations in

Europe and a relatively poorer performance by the

Group’s main customers.

Nevertheless, the trend is for the increased use of tubes

in vehicles, notably influenced by changes in passive

safety standards, for which the tubes developed by

Vallourec are ideally suited.

For this reason, Vallourec’s activities in tubular

components with smart crash behaviour, which absorb

energy in the event of a frontal collision, continue to

develop well. A number of vehicles produced by PSA

Peugeot-Citroën are already equipped with this type of

product and another major carmaker has recently chosen

Vallourec to equip one of its flagship models with this

type of highly technical product.

At the same time, Vallourec is continuing to develop

speciality products such as tubes for airbags, with which

an ever increasing number of vehicles are being fitted,

and tubes for high pressure fuel injection lines. A number

of capital expenditure programmes are planned for

2006 to strengthen the Group’s positions in these rapidly

growing markets.

Automotive industry

Vallourec supplies automotive tubes to the main carmakers andparts manufacturers in Europe. The Group works with customers’research units to develop innovative and customized solutions.This activity represents 11% of Group sales.

501437

487

2001 2003 2004 20052002

Vallourec’s main products:Seamless tubesWelded tubesRings and components

ApplicationsChassis, suspension and transmission partsStructural and passive safety partsShock absorbersBearingsAirbagsHGV axles

+12.3%at constant consolidation scope

11.2%

483452

Sales trend: automotive products (in € million)

Share of automotiveproducts in Vallourec’s2005 sales


Sales recorded by the chemicals and petrochemicalsactivity rose by 38% to €461 million, compared with€334 million in 2004. This change was due mainly toselling price increases and to the sale of higher value-added products.

The recovery in capital expenditure in refining and thewidespread exploitation of gas fields lie behind thestrong growth in this market. Half of the sales by thechemicals and petrochemicals activity are made in theAmericas.

Demand remains buoyant for 2006, with a number ofmajor projects programmed in several geographic regions.Refineries, gas treatment plants and complementarypetrochemical units are being built in the Middle East.Canada is investing in processing bituminous schist. TheUnited States and Europe are modernizing refineriesthat no longer meet market requirements.

Vallourec is one of the rare players in the world capableof meeting this diversified demand by offering a fulland reliable range of tubular products. For this reason,the Group has recently been selected to equip a gascomplex in Iran, representing an order for nearly 15,000tonnes.

Moreover, the Group’s plants in Europe, the UnitedStates and Brazil, as well as its partnerships withspecialized distributors and engineering firms ensure itseffective global presence.

2006 is expected to continue along the same lines as2005, in terms of both volumes delivered and sellingprices.

Chemicals and petrochemicals


Vallourec develops an extensive range of products in carbon, alloyand stainless steel as well as in titanium. These products aremostly used in pipework in chemical and petrochemicalinstallations, particularly refineries. They are used worldwidefor both new plants and the maintenance of existing plants. Thisactivity represents nearly 11% of Group sales.


Line-pipes for refineriesFurnace tubesHeat exchanger tubesFittingsDished ends

Sales trend: chemicals and petrochemicals(in € million)

334301327

2001 2003 2004 20052002

461

273

Share of chemicals andpetrochemicals in Vallourec’s2005 sales

10.7%

+38.0%


237201178153165

2001 2003 2004 20052002

Vallourec recorded 18% growth in its other marketssales in 2005, from €201 million in 2004 to €237million.

In the construction sector, Vallourec supplies high-endtubular structures under the MSH brand for use in arange of architectural projects.

By way of example, the Group supplied tubes for twonew stadiums in Germany that will host the footballWorld Cup in 2006, the Allianz Arena stadium in Munichand the Schalke Arena stadium in Gelsenkirchen.Vallourec is also well known as a supplier of steel tubingfor roofs and columns in buildings such as airportterminals and stations. In 2005, the Group completed thedelivery of nearly 40,000 tonnes of tubes for the newBangkok international airport, one of the most modernin the world.

In close collaboration with architects and specializedengineers, the Group is currently working to develop fire-resistant steel. This new development is expected torepresent a major step forward in fire protection forbuildings.

In the context of strong demand in the oil & gas industry,Vallourec has also become the world leader in the supplyof specific fine-grained tubular products used in theconstruction of jack-up rigs and offshore platforms.

Other markets

Vallourec offers a wide range of specific products for variousindustrial applications. In the fields of architecture andconstruction, the steel solutions proposed by the Group helparchitects to realize increasingly audacious and aestheticallyappealing projects. In the desalination market, Vallourecproduces welded titanium tubes that are resistant to corrosionand extreme temperatures. These activities represent nearly 6%of Group sales.


Architecture and constructionStructural tubesMicro-pilesMSH structural hollow sectionsCentral heating booster linings

Desalination productsWelded titanium tubes

Schalke Arena stadium in Gelsenkirchen

Sales trend: other markets (in € million)

Share of other markets in Vallourec’s 2005 sales

5.5%

+17.9%



Ordinary General Meeting on 1 June 2006

The original version of this Reference Document (document de référence) in French was deposited

with the French financial markets authority (Autorité des Marchés Financiers - AMF)

on 27 April 2006

in accordance with Article 212-13 of its general regulations.

It may be used in connection with a financial transaction if completed by an Information notice authorized by the AMF.

VALLOUREC GROUP

This document is a translation of the Annual Report of the Vallourec Group for the year ended 31 December 2005.

Its purpose is to assist English speaking readers. The greatest attention has been paid to its preparation.

However, the only official document is the 2005 Annual Report in French,

filed with the French financial markets authority (Autorité des Marchés Financiers - AMF) on 27 April 2006.

Reference DocumentYear ended 31 December 2005


SECTION 1: PERSONS RESPONSIBLE FOR THE REFERENCE DOCUMENT AND FOR THE AUDIT

1.1 PERSON RESPONSIBLE FOR THE REFERENCE DOCUMENT 26

1.2 ATTESTATION BY THE PERSON RESPONSIBLEFOR THE REFERENCE DOCUMENT 26

1.3 PERSONS RESPONSIBLE FOR THE AUDIT 27

1.4 PERSON RESPONSIBLE FOR THE INFORMATION 27

SECTION 2: NOT APPLICABLE

SECTION 3: GENERAL INFORMATION ON VALLOUREC AND ITS CAPITAL

3.1 GENERAL INFORMATION ON VALLOUREC 28

3.1.0 Company name and registered office 28

3.1.1 Legal status 28

3.1.2 Applicable laws 28

3.1.3 Date of formation and dissolution 28

3.1.4 Objects 28

3.1.5 Trade and Companies Registry 28

3.1.6 Consultation of legal documents 28

3.1.7 Financial year 28

3.1.8 Mandatory allocation of net income 28

3.1.9 General Meetings 29

3.2 GENERAL INFORMATION CONCERNING THE CAPITAL 29

3.2.0 By-laws concerning changes to the capital and rights attached to shares 29

3.2.1 Share capital 29

3.2.2 Authorized capital not yet issued 29

3.2.3 Securities not representing capital 30

3.2.4 Securities giving access to capital: Share subscription options 30

3.2.5 Changes in capital over the last five years 31

Contents


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3.3 BREAKDOWN OF CAPITAL AND VOTING RIGHTS 31

3.3.1 Company’s shareholders 31

3.3.1.1 – Own shares held 32

3.3.2 Changes in breakdown of capital in the last three financial years 33

3.3.3 Other persons exercising control over Vallourec 33

3.3.4 Description of the Vallourec Group (Organization chart) 34

3.4 MARKET FOR THE COMPANY’S SHARES 35

3.4.1 Listing market 35

3.4.2 Other regulated markets 35

3.4.3 Volumes traded and share price performance 35

3.4.4 Pledging of shares of the Issuer 36

3.5 DIVIDENDS 37

SECTION 4: INFORMATION ON THE ACTIVITIES OF THE VALLOUREC GROUP

4.1 PRESENTATION OF VALLOUREC - COMPANY AND GROUP 38

4.1.0 Changes in the Vallourec Group’s structure in recent years 39

4.1.1 Description of main business activities 41

4.1.2 Production and production volumes 45

4.1.3 Sales by markets and geographic regions 46

4.1.4 Location of main establishments 47

4.1.5 Not applicable 47

4.1.6 Exceptional events influencing the information given in paragraphs 4.1.0 to 4.1.5 47

4.2 DEPENDENCY ON THE ECONOMIC, INDUSTRIAL AND FINANCIAL ENVIRONMENT 47

4.2.1 Breakdown of raw materials and consumable supplies 47

4.2.2 Main customers 47

4.3 CHANGE IN AVERAGE NUMBER OF GROUP EMPLOYEES 48

4.4 INVESTMENT POLICY 48

4.4.0 Research and Development 48

4.4.1 Main investments made 49

4.5 NOT APPLICABLE 50

4.6 NOT APPLICABLE 50

Contents

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4.7 RISKS 51

4.7.1 Market risks (interest-rate, exchange-rate, share-price, credit risk) 51

4.7.2 Legal risks 53

4.7.3 Industrial and environmental risks 53

4.7.4 Insurance - risk coverage 53

4.7.5 Other specific risks 54

SECTION 5: FINANCIAL STATEMENTS

5.1 CONSOLIDATED AND COMPANY FINANCIAL STATEMENTS 56

5.1.0 Consolidated financial statements of the Vallourec Group 56

5.1.1 Company financial statements of Vallourec SA 136

5.1.2 Total earnings per share 149

5.2 AUDITORS’ REMUNERATION 149

SECTION 6: CORPORATE GOVERNANCE

6.1 COMPOSITION AND OPERATION OF ADMINISTRATION,MANAGEMENT AND SUPERVISORY BODIES 150

6.1.0 Composition of Administration, Management and Supervisory bodies 150

6.1.0.1 – Management Board 150

6.1.0.2 – Supervisory Board 151

6.1.0.3 – Executive Committee 152

6.1.1 Operation of Administration, Management and Supervisory bodies 152

6.1.1.1 – Internal regulations of the Supervisory Board 152

6.1.1.2 – Meetings of the Supervisory Board during the year ended 31 December 2005 153

6.1.1.3 – Independent members and members associated with the Company 153

6.1.1.4 – Committees set up within the Supervisory Board 154

6.1.1.5 – Remuneration principles 155

6.1.1.6 – Corporate governance 155

6.2 MANAGERS’ INTERESTS 156

6.2.0 Remuneration and benefits in kind 156

6.2.1 Options granted over Vallourec shares 156

6.2.2 Transactions with members of the Administration, Management and Supervisory bodies 156

6.2.3 Loans and guarantees 156

6.3 EMPLOYEE PROFIT SHARING 156

6.3.1 Profit sharing and incentive plans 156

6.3.2 Options 157

6.3.3 Employee shareholding 157

SECTION 7: INFORMATION ON RECENT DEVELOPMENTS AND OUTLOOK 158

7.1 RECENT DEVELOPMENTS AND OUTLOOK 158

7.2 STATUTORY AUDITORS’ REPORT ON THE PROFIT FORECASTS 159


1.1 Person responsible for the Reference Document

Mr Pierre Verluca,

Chairman of the Management Board.

1.2 Attestation by the person responsible for the Reference Document

I attest, having taken all reasonable steps to ensure that such is the case, that the information given in this Reference Document is, to the

best of my knowledge, correct and that there are no omissions likely to change its import.

We have obtained from our Statutory Auditors an assignment completion letter in which they indicate that they have verified the

information relating to the Group’s financial situation and the financial statements included in this Reference Document and read the Reference

Document in its entirety.

Boulogne-Billancourt, 26 April 2006

Pierre Verluca

Chairman of the Management Board

Section 1Persons responsible for the Reference Documentand for the audit

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1.3 Persons responsible for the audit

■ Until the Ordinary General Meeting on 1 June 2006. ■ As from the Ordinary General Meeting on 1 June 2006, subject

to adoption of the 11th, 12th, 13th and 14th resolutions.

STATUTORY AUDITORS:

Barbier Frinault & Autres (Ernst & Young network) KPMG SA

Represented by Mrs Christine Staub and Mr Philippe Hontarrède Represented by Messrs Jean-Paul Vellutini and Philippe Grandclerc

41, rue Ybry 1, cours Valmy

92200 Neuilly-sur-Seine 92923 Paris-La Défense Cedex

Cabinet Calan, Ramolino et Associés (Deloitte network) Deloitte & Associés

Represented by Mr Bertrand de Florival Represented by Messrs Bertrand de Florival and Jean-Paul Picard

191, avenue Charles-de-Gaulle 185, avenue Charles-de-Gaulle

92200 Neuilly-sur-Seine 92524 Neuilly-sur-Seine

ALTERNATIVE AUDITORS:

Mr Jean-Marc Besnier SCP Jean-Claude André et Autres

41, rue Ybry Les hauts de Villiers - 2 bis, rue de Villiers

92200 Neuilly-sur-Seine 92300 Levallois-Perret

Alternative for Barbier Frinault & Autres Alternative for KPMG

Société BEAS Société BEAS

7-9, villa Houssaye 7-9, villa Houssaye

92524 Neuilly-sur-Seine Cedex 92524 Neuilly-sur-Seine Cedex

Alternative for Cabinet Calan, Ramolino et Associés Alternative for Deloitte & Associés

For a term of six years ending with the General Meeting called

to approve the financial statements for the financial year 2011.

1.4 Person responsible for the information

Mr Henri Redig

Corporate Secretary / Investor relations

VALLOUREC

130, rue de Silly

92100 Boulogne-Billancourt

Tel.: +33 (0) 1 49 09 38 24 / +33 (0) 1 49 09 38 15

Fax: +33 (0) 1 49 09 36 94

E-mail: [email protected]

Persons responsible for the Reference Document and for the audit

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3.1 General information on Vallourec

3.1.0 Company name and registered office

VALLOUREC

130, rue de Silly

92100 Boulogne-Billancourt

3.1.1 Legal status

A French limited liability company (Société Anonyme) having opted

on 14 June 1994 for a management structure comprising a

Management Board and a Supervisory Board.

3.1.2 Applicable laws

French.

3.1.3 Date of formation and dissolution

The Company was formed in 1899.

It will be dissolved on 17 June 2067, unless its life is extended or

dissolved early.

3.1.4 Objects (Article 3 of the By-laws)

The Company’s object, in any country either on its own account or

for a third party or directly or indirectly in partnership with third

parties, is to carry out all industrial and commercial transactions

relating to all methods of the preparation and manufacture, by all

processes known or that could be discovered subsequently, of

metals and any materials that may replace them in all their

applications, and, in general, all commercial, industrial and financial

transactions, and transactions in movable and fixed property, directly

or indirectly associated with the above object.

3.1.5 Trade and Companies Registry

The Company is registered with the Nanterre (Hauts-de-Seine)

Trade and Companies Registry under no. 552 142 200 - APE 741 J.

3.1.6 Consultation of legal documents

The By-laws, minutes of General Meetings and other Company

documents can be consulted at the registered office.

3.1.7 Financial year

The Company’s financial year covers a period of twelve months

from 1 January to 31 December.

3.1.8 Mandatory allocation of netincome (Article 15 of the By-laws)

The distributable net income, as defined by law, is allocated by a

General Meeting of shareholders.

Unless there is an exception resulting from legal requirements, it is

for the General Meeting to decide on how the net income should be

allocated.

A General Meeting may also decide to grant to each shareholder the

right to choose, for all or part of the dividend to be distributed,

between payment of the dividend in cash or in shares, in accordance

with the legal and regulatory requirements at the time.

Section 3General information on Vallourec and its capital


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3.1.9 General Meetings

Shareholders’ meetings are called in accordance with the conditions

provided for by law. A General Meeting is open to all shareholders,

irrespective of the number of shares held. Each shareholder attending

the General Meeting has as many votes as shares owned or

represented, unless there are legal requirements to the contrary.

However, fully paid-up shares duly registered in the name of the same

shareholder for four years have double the voting right conferred on

other shares (Article 12 paragraph 4 of the By-laws).

The object of the third resolution submitted to the Extraordinary

General Meeting on 1 June 2006 is to supplement Article 8 of the

By-laws by introducing an additional requirement to provide

information when thresholds are crossed other than those already

provided by the prevailing legislation.

“In addition to the declarations of crossing thresholds expressly

provided by Articles L. 233-7-I and II of the French Code de Commerce,

any shareholder (individual or corporate body) that acquires, directly

or indirectly by means of companies controlled by the shareholder

within the meaning of Article L. 233-3 of the French Code de

Commerce, acting singly or jointly, a number of the Company’s

bearer shares equal to or greater than three (3), four (4), six (6),

seven (7), eight (8), nine (9) and twelve and a half (12.5) per cent of

the total number of shares making up the share capital must, within

five (5) trading days of crossing said threshold, inform the Company

of the total number of shares it holds, by letter sent by recorded

delivery with advice of receipt to the Company’s registered office.

The information specified in the preceding clause must also be

given within the same timescale and under the same terms when a

shareholding falls under the thresholds referred to in said clause.”

The Company has the right to request the identification of holders

of securities granting an immediate or future right to vote in its

General Meetings and evidence of the quantities held, under the

provisions of current legislation (Article 8 of the By-laws).

General information on Vallourec and its capital

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3.2 General information concerning the capital

3.2.0 By-laws concerning changesto the capital and rightsattached to shares

An Extraordinary General Meeting may, within the provisions of the

law, increase or reduce the share capital or delegate to the

Management Board the necessary powers to do so (Article 7 of the

By-laws).

However, on the basis of the Company’s internal organization

(Article 9 section 3 of the By-laws), the Management Board may not

carry out the following transactions without previous authorization

from the Supervisory Board:

– any capital increase in cash or by incorporation of reserves

authorized by a General Meeting,

– any other issue of securities that could later give access to the

capital, authorized by a General Meeting.

The shares are freely tradable and transferable in accordance with

legislative and regulatory provisions.

3.2.1 Share capital

The fully paid-up subscribed capital amounted to € 212,006,640

as at 31 December 2005, divided into 10,600,332 shares of

€ 20 par value.

The object of the first resolution submitted to the Extraordinary

General Meeting on 1 June 2006 is to divide the nominal value of

the share by five (5), thereby reducing the nominal value to four (4)

euros. This division will be effective as from 18 July 2006.

The amount of the share capital will remain unchanged but be

divided into 53,001,660 shares.

3.2.2 Authorized capital not yet issued

The Extraordinary General Meeting held on 25 February 2005 (first

resolution) delegated to the Management Board, subject to prior

approval of the Supervisory Board (see 3.2.0 above), the powers

required to increase the share capital by issuing ordinary shares or

any other securities giving access to the Company’s capital, retaining

shareholders’ preferential subscription rights.


The maximum nominal value of shares that may be issued in this way

is limited to € 60 million and that of securities representing the

Company’s debt is limited to € 150 million. This authorization

was granted for a duration of 26 months ending on 24 June 2007.

It renders null and void the previous delegation resulting from the

first resolution of the Ordinary and Extraordinary General Meeting

held on 11 June 2003 which related to similar issues.

On 15 June 2005 the Management Board, with the prior authorization

of the Supervisory Board given on 20 January 2005, decided to

partially use this authorization and to increase the share capital in

cash by a nominal amount of € 14,126,240 (706,312 new shares)

and an issue premium of € 110,855,668.40 (€ 156.95 per share),

i.e. a total capital increase of € 124,981,908.40 on 13 July 2005.

Given this use of the authorization, the Management Board, subject

to prior approval of the Supervisory Board, is still authorized to

increase the nominal value of the share capital by € 45,873,760.

The authorization to issue securities representing the Company’s debt,

up to a maximum nominal value of € 150 million, has not as yet been

used.

The Management Board does not have any powers to implement

capital increases reserved for employees since the resolutions to this

effect submitted, in accordance with the prevailing legislation, to the

Ordinary and Extraordinary General Meeting held on 10 June 2004

(tenth resolution) and the Extraordinary General Meeting held on

25 February 2005 (second resolution) were rejected by the shareholders.

3.2.3 Securities not representing capital

At present there are no securities that do not represent capital

(such as founder’s shares, voting right certificates, etc.).

3.2.4 Securities giving access to capital:Share subscription options

The first resolution of the Extraordinary General Meeting held on

15 June 2000 authorized the Management Board to grant share

subscription options to certain Group employees, managers or

Company officers, if required, and up to a limit of 4% of the share

capital.

Under this authorization, which expired on 14 June 2005, a tranche

of options was granted on 15 June 2000 at a price of € 38 per share,

corresponding to 95% of the average of the last 20 prices quoted

during the 20 trading sessions before the date of granting the options,

for a total of 178,500 options, each giving the right to subscribe for

one Vallourec share, i.e. in total 1.92% of the total number of shares

making up the capital at that date (see 6.3.2 below).

These options, which cannot be exercised until after the end of a

holding period of four years, may be exercised during a period of three

years from 15 June 2004 to 14 June 2007 inclusive.

After taking into account the options cancelled (6,750) since the date

they were granted (the holders having left the Group), and options

exercised as from 15 June 2004, the number of share subscription

options outstanding at 31 December 2005 amounted to 8,174, i.e.

0.08% of the share capital at that date.This number of options takes

into account the adjustment (218 additional options) made in

accordance with the regulations of the plan to take into account the

dilution resulting from the capital increase in cash on 13 July 2005

(see 3.2.2 above). The exercise price was also adjusted accordingly

and is now set at € 37.43 per option.

In addition, a tranche of 193,000 share purchase options was granted

on 11 June 2003 at a price of € 53.65 per share, corresponding to

the average of the last 20 prices quoted during the 20 trading

sessions before the date of granting the options, not discounted, each

giving the right to purchase one Vallourec share (see 6.3.2. below).


holding period of four years, may be exercised during a period of three

years from 11 June 2007 to 10 June 2010 inclusive.After taking into

account the options cancelled (2,750) since the date they were

granted (the holders having left the Group), and the adjustment

(2,896 additional options) made to take into account the dilution

resulting from the capital increase in cash on 13 July 2005, the

number of share purchase options outstanding at 31 December 2005

amounted to 193,146, i.e. 1.82% of the share capital at that date.

The exercise price was also adjusted accordingly and is now set at

€ 52.85 per option.

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3.2.5 Changes in capital over the last five years

Transaction New shares created by: in euros Total dates Exercise of Subscriptions Capital Issue Share number

subscription options in cash increase premium capital of shares

01/01/2001 185,360,620 9,268,031

05/07/2001 (1) 462,195 9,243,900 10,450,229 194,604,520 9,730,226

31/12/2002 194,604,520 9,730,226

31/12/2003 194,604,520 9,730,226

31/12/2004 (2) 139,730 2,794,600 2,515,140 197,399,120 9,869,956

14/06/2005 (2) 18,415 368,300 331,470 197,767,420 9,888,371

13/07/2005 (3) 706,312 14,126,240 110,855,668 211,893,660 10,594,683

31/12/2005 (2) 5,649 112,980 98,462 212,006,640 10,600,332

(1) Transaction reserved for employees of the Group’s French and German subsidiaries (see 6.3.3 below).

(2) Exercise of subscription options (see 3.2.4.1 above).

(3) Capital increase in cash.

3.3 Breakdown of capital and voting rights

3.3.1 Company’s shareholders

A TPI (titres au porteur identifiable) identifiable bearer shares identification procedure was carried out on 13 January 2006. This enabled

20,894 shareholders, representing 100% of the share capital, to be identified.At that date, the breakdown of share capital and voting rights

was as follows:

Shareholders Shares Voting rightsNumber % Number %

Salzgitter Mannesmann GmbH 1,820,358 17.17 3,640,527 29.93

Bolloré group 1,674,402 15.80 1,674,402 13.77

Free float 6,684,163 63.06 6,695,799 55.05

Group employees 151,660 1.43 151,660 1.25

Directly held by Vallourec 269,749 2.54 - -

Total 10,600,332 100 12,162,388 100

The percentages of voting rights are calculated by reference to the number of voting rights published in the BALO dated 25 January 2006.

By means of a declaration of crossing a threshold on 2 February 2006, published on 7 February 2006, the Bolloré group declared that it

now holds only 7.47% of the share capital.

The analysis of identifiable bearer shares did not reveal any shareholders other than Salzgitter Mannesmann GmbH (formerly Mannesmannröhren-

Werke) and the Bolloré group with holdings in excess of 5% of the share capital or voting rights.

No shareholders’ pact has been declared to the French financial markets authority (Autorité des Marchés Financiers - AMF).

The holdings of Group employees have arisen as a result of a capital increase reserved for employees of the French and German

subsidiaries that took place on 5 July 2001 (see 6.3.3 below).


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The Company is not aware of any other holding that may be held

indirectly by employees.

As far as the Company is aware, at 31 December 2005:

■ Mr Jean-Paul Parayre, Chairman of the Supervisory Board, held

39,937 Vallourec shares (including 50 qualifying shares).

■ The other members of the Supervisory Board did not hold any

shares other than the 50 shares they must hold for the duration of

their appointment, in accordance with the provisions of Article 10

of the By-laws.

■ Messrs Pierre Verluca, Chairman of the Management Board, and

François Fabre, member of the Management Board, did not hold any

Vallourec shares. However, each is the holder of 15,227 Vallourec

share purchase options (one option = one share), which were

granted to them on 11 June 2003 and will be exercisable as from

11 June 2007 at the price of € 52.85 per option.

The list of attendees at the Ordinary and Extraordinary General

Meeting dated 7 June 2005 shows that 217 shareholders were

present or represented, or voted by correspondence; they owned

6,555,201 shares out of a total of 9,884,951 (66.31%), and

7,885,205 voting rights out of the total of 10,947,607 (72.03%).

This breakdown includes:

■ Salzgitter Mannesmann GmbH, which owned 2,235,490 shares,

representing 3,555,980 voting rights, i.e. respectively 34.10% of the

capital represented and 45.10% of the voting rights exercised.

■ The Bolloré group, which owned 2,482,527 shares, representing

the same number of voting rights, i.e. respectively 37.87% of the

capital represented and 31.48% of the voting rights exercised.

■ Other shareholders, which owned 1,837,184 shares, representing

1,846,698 voting rights, i.e. respectively 28.03% of the capital

represented and 23.42% of the voting rights exercised.

3.3.1.1 Own shares held

At 31 December 2005 and on the date on which the Reference

Document was prepared,Vallourec held directly 269,749 of its own

shares, which represented 2.54% of the share capital.

These shares were acquired on 5 July 2001 at a price of € 53.256

per share, representing a total cost of € 14,365,752.74. The shares

were acquired from Crédit Agricole Indosuez Cheuvreux (CAIC) in

accordance with a repurchase commitment given by Vallourec to CAIC

in connection with the offer, also made on 5 July 2001 (see 6.3.3 below)

to the Group’s employees in France and Germany of an employee

savings plan invested in Vallourec shares. Part of this transaction

involved a subscription formula enabling employees to benefit from

a leverage effect and a capital guarantee thanks to a financial

arrangement made with the assistance of CAIC.

Vallourec considered it was in its interest to act as the counterparty

for CAIC in the acquisition of the shares necessary for arranging the

coverage required, under conditions that ensured perfect neutrality

for the market in Vallourec shares. The average acquisition price of

€ 53.256 per share corresponds to the average of the opening share

prices listed during the 20 trading days prior to 30 January 2001,

the date of the Management Board’s decision to proceed with the

transaction.

No other shares have been purchased by Vallourec since 5 July 2001

within the context of the share buy-back authorizations respectively

approved by the Annual General Meetings held on 12 June 2001

(seventh resolution / information memorandum under COB certificate

no. 01-571), 11 June 2002 (ninth resolution / information memorandum

under COB certificate no. 02-593), 11 June 2003 (fifth resolution /

information memorandum under COB certificate no. 03-464),

10 June 2004 (ninth resolution / information memorandum under

AMF certificate no. 04-392) and 7 June 2005 (eighth resolution /

information memorandum under AMF certificate no. 05-396).

None of the shares has been cancelled.

In accordance with the new regulations that came into force on

13 October 2004 concerning share buy-back programmes, the

Management Board decided to allocate the 269,749 shares held by

the Company to cover share purchase options granted under the

option plan dated 11 June 2003 (i.e. 193,146 shares at 31 December

2005) and to allocate the remaining shares to cover future allocations

to certain Group employees, managers or Company officers, in

accordance with the procedures to be defined jointly by the

Management Board and the Supervisory Board and, in particular, an

allocation of free shares on 16 January 2006, the definitive quantity

of which will not be known until early in 2008.

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3.3.2 Changes in breakdown of capital in the last three financial years

Shareholders 31/12/2003 31/12/2004 31/12/2005shares % voting % shares % voting % shares % voting %

rights rights rights

Salzgitter Mannesmann GmbH 2,210,666 22.72 3,581,156 33.02 2,235,666 22.65 3,556,156 32.53 1,820,358 17.17 3,640,527 29.93

Bolloré group 2,176,429 22.37 2,176,429 20.07 2,482,527 25.15 2,482,527 22.71 1,874,402 17.69 1,874,402 15.41

Free float 4,896,051 50.32 4,911,405 45.28 4,716,849 47.79 4,728,747 43.25 6,484,011 61.17 6,495,647 53.41

Group employees 177,331 1.82 177,331 1.63 165,165 1.67 165,165 1.51 151,812 1.43 151,812 1.25

Directly held by Vallourec 269,749 2.77 - - 269,749 2.73 - - 269,749 2.54 - -

Total 9,730,226 100 10,846,321 100 9,869,956 100 10,932,595 100 10,600,332 100 12,162,388 100

The number of shares shown as held by Salzgitter Mannesmann GmbH was notified to us by that company.

The number of shares shown as held by the Bolloré group corresponds:

– at 31 December 2003, to the shares registered in Vallourec’s records,

– at 31 December 2004 and 31 December 2005, to the number of shares notified by Bolloré group.

3.3.3 Other persons exercising control over Vallourec

None.


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3.3.4 Description of the Vallourec Group (Organization chart as at 31/12/2005)

The percentage holdings shown represent the percentage of the capital held.

VALLOUREC

VALLOUREC & MANNESMANN TUBES ValTubes100100

Automotive and Industry

100 Vallourec Précision Etirage (France)

100 Vallourec Précision Soudage(France)

100 Vallourec ComposantsAutomobiles Vitry(France)

100 Escofier Technologie(France)

100 Interfit(France)

100 Valti(France)

Valti GmbH(Germany)

Stainless Steel

100 Spécitubes(France)

100 Valinox Nucléaire(France)

51 Valtimet(France)

Valtimet Inc.(USA)

Valinox Asia (France)

Changzhou Valinox(China)

Poongsan Valinox(Korea)

100 Cerec (France)

OCTG Europe

100 VALLOUREC MANNESMANNOIL & GAS FRANCE(France)

100 VALLOUREC MANNESMANNOIL & GAS GERMANY GmbH(Germany)

100 VALLOUREC MANNESMANNOIL & GAS UK Ltd (UK)

51 VAM Far East(Singapore)

25 P.T. Citra Tubindo (Indonesia)

7 Vietubes(Vietnam)

OCTG North America

100 OMSCO Inc.(USA)

100 Prinver(Mexico)

100 VAM P.C. Inc.(Canada)

81 V & M STAR(USA)

51 VAM PTS(USA)

Hot-rolled Seamless Tubes

100 V & M DEUTSCHLAND GmbH(Germany)

100 V & M FRANCE(France)

100 V & M CHANGZHOU(China)

20 Hüttenwerke KruppMannesmann GmbH(Germany)

Brazil

99 V & M do BRASIL SA(Brazil)

V & M FLORESTAL Ltda (Brazil)

V & M MINERAÇAO Ltda(Brazil)

TSA(Brazil)

100 V & M TUBES CORPORATION(USA)

100

21

100

100

21

Setval100

50

66

100

100


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3.4 Market for the Company’s shares

3.4.1 Listing market

The Company’s shares are part of the deferred settlement section of

the Euronext Paris Eurolist (ISIN code: FR0000120354-VK).

Vallourec’s shares form part of the SBF 120, CAC Mid 100 and

Euronext 100 indices. FTSE classification: engineering and machinery.

3.4.2 Other regulated markets

Not applicable.

3.4.3 Volumes traded and share priceperformance


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2001 2002 2003 2004 2005 20060

100

200

300

400

500

600

700

800

Vallourec share (in €) SBF 120 index

0

8,000

16,000

24,000

32,000

40,000

48,000

56,000

64,000

2001 2002 2003 2004 2005 20060

20,000

40,000

60,000

80,000

100,000

120,000

0

20,000

40,000

60,000

80,000

100,000

120,000

Vallourec share

SBF 120 index

Performance of the Vallourec share

compared to the SBF 120 index

at 31/03/2006

Source: Vallourec, based on Euronext data

Monthly average of volumes

traded per day

Source: Vallourec, based on Euronext data


In € 2001 2002 2003 2004 2005

Number of shares (at 31 December) 9,730,226 9,730,226 9,730,226 9,869,956 10,600,332

Highest price 74.00 71.40 66.30 112.10 465.00

Lowest price 38.15 43.80 43.45 63.60 99.01

Average (closing) price for the year 57.08 57.99 56.49 81.96 266.78

Year-end price 53.25 55.95 66.00 110.00 465.00

Market capitalization (at year-end price) 518,134,534 544,406,145 642,194,916 1,085,695,160 4,929,154,380

Source: Euronext.

VALLOUREC SHARESISIN Code: FR0000120354

Volume of transactionsPrice (in €) Monthly total Daily average

Highest Lowest Month end Number Capital Number Capitalof shares in € million of shares in € million

2004

October 99.50 93.80 96.90 424,563 41.17 20,217 1.96

November 105.00 96.70 104.00 267,940 27.18 12,179 1.24

December 112.10 103.50 110.00 341,744 36.95 14,858 1.61

2005

January 147.60 100.20 144.30 938,379 118.68 44,685 5.65

February 169.50 142.70 164.10 483,146 75.38 24,157 3.77

March 176.40 161.30 163.10 565,033 95.43 26,906 4.54

April 172.20 160.40 163.00 553,311 92.90 26,348 4.42

May 187.16 161.07 185.97 672,075 117.28 30,549 5.33

June 243.90 184.29 237.80 958,653 208.71 43,575 9.49

July 313.00 234.80 299.80 933,169 246.46 44,437 11.74

August 347.90 284.00 340.00 1,395,153 430.14 60,659 18.70

September 414.80 337.00 405.50 1,257,079 480.90 57,140 21.86

October 430.00 347.70 375.00 2,112,681 825.57 100,604 39.31

November 421.00 375.00 405.00 1,134,142 460.64 51,552 20.94

December 465.00 404.50 465.00 1,100,368 483.20 52,398 23.01

2006

January 590.50 454.80 577.00 1,980,538 996.15 90,024 45.28

February 679.00 567.50 656.50 2,009,468 1,235.15 100,473 61.76

March 809.00 650.50 797.00 2,030,063 1,522.45 88,264 66.19

Source: Euronext.

3.4.4 Pledging of shares of the Issuer

None.

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3.5 Dividends

The distributable net income is allocated by a General Meeting of shareholders, unless there is a requirement in the By-laws specifying the

distribution of a specific dividend.

The Ordinary and Extraordinary General Meeting held on 14 June 1994 introduced the possibility of paying the dividend in shares.

Dividends not claimed in the five-year period from the date of payment are forfeited to the State.

Over the past five financial years, dividends paid were:

In €/share Gross Tax credit* Net dividend

2000 1.95 0.65 1.30

2001 3.15 1.05 2.10

2002 3.15 1.05 2.10

2003 2.40 0.80 1.60

2004 3.20 néant 3.20

*For those shareholders not benefiting from the 50% tax credit in accordance with the tax regime in force during the years covered by the above table,in 2000 the gross dividend was € 1.63 with a tax credit (25%) of € 0.33, in 2001 the gross dividend was € 2.42 with a tax credit (15%) of € 0.32, in2002 the gross dividend was € 2.31 with a tax credit (10%) of € 0.21 and in 2003 the gross dividend was € 1.76 with a tax credit (10%) of € 0.16.

Vallourec’s dividend policy, as approved by the Supervisory Board at

its meeting on 17 April 2003, is, over the long-term, to distribute on

average 33% of its consolidated net income, Group share.

At the General Meeting held on 1 June 2006 (fourth resolution),

shareholders will be asked to approve the payment of a net dividend

of € 11.20 per share, corresponding to a payout ratio of 25.1% in

respect of the year ended 31 December 2005 and to an average

payout ratio of 25.8% in respect of the last five financial years.After

taking into account the interim dividend of € 4 per share paid on

12 October 2005, the balance of € 7.20 per share will be paid on

5 July 2006.


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4.1 Presentation of Vallourec - Company and Group

The Vallourec Group is over 100 years old, some of the companies

at the origins of the Group having been formed in the last decade

of the 19th century.The Group originated in two areas in France, both

with long industrial traditions, and in which the Group still has a signi-

ficant presence – the French northern region around Valenciennes and

Maubeuge and the Burgundy region around Montbard, in Côte-d’Or.

Since the formation of VALLOUREC & MANNESMANN TUBES

(V & M TUBES) in 1997 (infra, 4.1.0), and the acquisition of

V & M do BRASIL SA in 2000, the Group also has extensive

operations in the Düsseldorf area in North Rhineland-Westphalia

(Germany) and in the region of Belo Horizonte in the Brazilian

State Minas Gerais. The acquisition at the beginning of July 2002 by

V & M TUBES of the seamless steel tubes business of North Star Steel

Company, now named V & M STAR, supplemented in 2005 by the

acquisition of OMSCO Inc., significantly strengthened the Group’s

presence in the United States.

Although the name Vallourec first appeared in 1930 to designate a

company operating tube mills in VALenciennes and Denain, LOUvroil

and RECquignies, the present Vallourec Group has other much earlier

roots. The Group originated in Société Métallurgique de Montbard

formed in 1899 to take over Société Française de Fabrication des Corps

Creux, which had been operating a plant in Montbard since 1895.

Listed on the Paris Stock Exchange since its formation in 1899, in 1907

it was named Société Métallurgique de Montbard-Aulnoye and in

1937 Louvroil Montbard Aulnoye after the takeover of the company

Louvroil et Recquignies, itself a result of the merger between Société

Française pour la Fabrication des Tubes à Louvroil, formed in 1890,

and Société des Forges de Recquignies, founded in 1907.

In 1947, the name Vallourec was registered as a product name, but

it was not until 1957, when the Valenciennes plant was bought from

the company Denain Anzin, that Louvroil Montbard Aulnoye adopted

the name Vallourec (the company formed under that name in 1930

was renamed Sogestra).

The major events that took place between 1957 and 1996 were:

1967: Contribution by Usinor of the tubes business of Lorraine-

Escaut – a company Usinor had just taken over.

1975: Takeover of Compagnie des Tubes de Normandie.

1979: Contribution of the “small welded tubes” business to the

company Tubes de la Providence, which took the name of

Valexy (Vallourec 64%, Usinor 36%).

1982: Takeover of Entrepose, a 90%-owned subsidiary of Vallourec,

by Grands Travaux de Marseille, renamed GTM-Entrepose;

Vallourec, with a 41% holding in GTM-Entrepose, became

its main shareholder.

1985: Contribution to GTS Industries of the “large welded tubes”

business.

Withdrawal of Vallourec from the small welded tubes business

(Valexy) and large welded tubes business (GTS Industries) in

favour of Usinor, with Vallourec concentrating on seamless

tube production and downstream processing activities.

Sale of Société Industrielle de Banque (SIB).

1986: Vallourec, until then both a holding company and an industrial

company with many production units, became a pure holding

company, covering three business areas:

– the tubes businesses:Vallourec Industries, renamed Valtubes

in 1987,

– the other metallurgical businesses: Sopretac,

– the businesses associated with construction and civil

engineering, especially the participating interest in

GTM-Entrepose: Valinco.

Section 4Information on the activities of the Vallourec Group


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1988: Transfer of control of Valinco to the Dumez group, as activities

associated with construction and civil engineering were no

longer considered to be one of the Group’s main development

axes.

1991: Sale of the residual holding in Valinco to the Dumez group.

4.1.0 Changes in the Vallourec Group’sstructure in recent years

One of the major events in recent years was the formation

on 1 October 1997 of VALLOUREC & MANNESMANN TUBES

(V & M TUBES), a joint subsidiary of Vallourec (55%) and the

German company Mannesmannröhren-Werke (45%).As provided by

the initial agreement, this merger was completed in May 2000 by

V & M TUBES acquiring the Brazilian subsidiary Mannesmann SA, then

listed on the São Paulo Stock Exchange, in which Mannesmannröhren-

Werke held 76%. Thereafter named V & M do BRASIL SA, this

subsidiary is now almost wholly-owned by V & M TUBES after the

successful minority buy-out offer in October 2000.

The acquisition by V & M TUBES of the seamless steel tubes business

of North Star Steel Company (North Star Tubes) at the beginning of

July 2002 increased Vallourec’s share in the buoyant market for tubes

in the energy sector and significantly strengthened its presence in

the United States, the market of reference for tubes for oil & gas well

equipment. This asset purchase, for a total of USD 380 million

(€ 393.6 million), was carried out by a new entity created for

this purpose, called V & M STAR, which is 80.5%-controlled by

V & M TUBES and 19.5%-controlled by Sumitomo.

On 23 June 2005, Vallourec acquired full control of V & M TUBES

as a result of the acquisition, for € 545 million, of the 45% stake

held by Mannesmannröhren-Werke. This major transaction has

given Vallourec:

– full control over the implementation of V & M TUBES’s strategy

(acquisitions, capital expenditure, etc.),

– a more cohesive and clearer Group structure,

– full access to its subsidiary’s results and cash flow.

As a result of these acquisitions, the Vallourec Group is now the world

leader in seamless steel tubes (source: in-house and external

statistical data). 90.5% of 2005 consolidated sales were made

outside France.

In order to control its supplies,V & M TUBES operates three steel mills

(in France, Brazil and the United States) and owns a 20% stake

(at 31 December 2005) in the German steel mill HKM, as well as a

supply contract entitling it to a portion of this mill’s steel production.

With a view to continuing its expansion in the production of tubes

for the power generation market, in 2005 V & M TUBES created a

subsidiary,V & M CHANGZHOU Co. Ltd, located in Changzhou, China,

specializing in the cold finishing of large-diameter seamless alloy steel

tubes produced in Germany for power generation plants. This plant

is expected to produce its first tubes in the middle of 2006.

On 30 September 2005, V & M TUBES acquired the assets of the

Omsco division of ShawCor Ltd (Canada) and created OMSCO Inc.,

a company based in Houston, USA, which specializes in the

manufacture of drill pipes, drill collars and heavy weight drill pipes.

This acquisition enabled V & M TUBES to become the number two

in the world oil & gas drill pipe market.

Finally, in 2005, the subsidiary V & M do BRASIL SA acquired a stake

in the Brazilian company Tubos Soldados Atlântico (TSA), created to

produce large-diameter welded tubes and carry out the coating and

lining process. Europipe GmbH has a controlling interest in TSA.

The other acquisitions made in recent years have concerned the

Valtimet sub-group, a joint venture created in 1997, the same year

as V & M TUBES, in which Vallourec has a controlling (51.3%)

interest and is currently partnered by the US group Timet (43.7%)

and Sumitomo (5%). Details of these acquisitions are as follows:

■ In December 2002, Valtimet Inc., a wholly-owned subsidiary of

Valtimet, acquired the assets of the US company International

Tubular Products (ITP), the main US specialist in stainless steel

tubes for condensers.

■ In May 2004 Valtimet entered into a joint venture with the South

Korean company Poongsan to manufacture, in Bupyung, Incheon,

South Korea, welded stainless steel and titanium tubes designed

mainly for the power generation and seawater desalination

markets.

■ In November 2005,Valtimet entered into a joint venture agreement

with the Chinese company Baoti to create Xi’an Baotimet Valinox

Tubes Co. Ltd, in Xi’an, in the Chinese province of Shaan’xi.

During 2006, this company will start producing welded titanium

tubes for the Chinese electricity and chemicals markets.

Information on the activities of the Vallourec Group

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The following acquisitions of note have also been made since

January 2006:

■ The acquisition on 21 March 2006 by V & M TUBES of SMFI

(Société de Matériel de Forage International), located in Cosne-

sur-Loire, France, and specialized in the manufacture of heavy-

weight drill pipes and high-tech products for oil & gas drilling.

■ The acquisition by VALLOUREC MANNESMANN OIL & GAS FRANCE

on 1 February 2006 of a machine shop for these same products,

located in Tarbes, France.The machine shop was previously owned

by GIAT.

■ The acquisition by Valtimet, at the beginning of April 2006, of 75%

of CST Ltd.This Indian company, which was renamed CST Valinox Ltd,

is located in Hyderabad and specializes in the production of

tubes for power plant condensers for the Indian market.

As regards divestments, the main transactions in recent years have

been carried out by the two sub-holding companies Valtubes and

Sopretac and, as from 2005, by ValTubes, created as a result of the

merger of these two sub-holding companies.

■ The Industrial Parts division of Sopretac, made up of the companies

Métal Déployé SA, Krieg et Zivy Industries and their subsidiaries

Métal Déployé Belge, Cablofil Inc., Cablofil Ibérica and Cablofil

Italia, was sold in the first half of 2001 to the managers of this

division in association with investment funds Atria Capital

Partenaires and U.I. of the Crédit Agricole Indosuez group.

■ Jacot, part of Sopretac’s Automotive Components division and

specialized in manufacturing engine system tubes and parts for

power steering assemblies, was sold on 31 May 2002 to the

German company Schmitter Group AG for a nominal amount.

■ Having taken a majority (51%) shareholding in 1999 in Cefival,

a company in the Stainless Steel Tubes division specializing in the

extrusion of bars and sectioned shapes, the Italian company

Metallurgica Calvi bought a further 20% of the company’s shares

from Valtubes at the end of 2002.Valtubes’s holding subsequently

declined to 16.7% after a capital increase by Cefival in which

Valtubes did not participate.

■ TCVAL is a company specialized in marketing, in France and

elsewhere in Europe, stainless steel tubes and fittings for industrial

piping, in which Sopretac held 45%. The other 55% was owned

by Trouvay-Cauvin, which went into liquidation in December

2002. TCVAL itself went into liquidation in February 2003.

■ Sopretac’s 44% stake in NO-SAG, which specializes in the

manufacture of springs for car seats, was sold in July 2003 to a

company specializing in the same type of activity.

■ Valtubes’s participating interest (1/3) in D.M.V. Stainless B.V.

was sold in December 2003 for a nominal amount to its majority

(2/3) shareholder Mannesmannröhren-Werke, which already

assumed full responsibility for its management. This participating

interest, previously consolidated by the equity method, had been

deconsolidated as from 1 January 2002.

■ The subsidiary Vallourec do Brasil Autopeças Ltda, which specializes

in the assembly of rear axle units for Renault do Brasil and

Peugeot Citroën do Brasil, was sold to the German group Benteler

on 31 January 2005. In 2004, the company achieved sales of

BRL 203 million.

The subsidiary Vallourec Argentina, which specializes in the

machining of automotive parts and the assembly of rear axle units

for Renault Argentina, was sold to the local management on

8 February 2005 for a nominal price. In 2004 it achieved sales of

ARP 62 million.

These assembly activities were not part of Vallourec’s core business,

had not achieved the necessary critical size and no longer

presented any real strategic interest.

■ In addition, during the first half of 2006,ValTubes announced the

sale of its subsidiary Spécitubes, the only company in the Vallourec

Group operating in the aerospace sector, to one of Spécitubes’s

important customers, the German company Pfalz-Flugzeugwerke

GmbH (PFW). Spécitubes has two plants in France, employs about

160 staff and generated sales of € 27 million in 2005.The affiliation

with its new shareholder will enable Spécitubes to strengthen its

position, whilst developing complementary activities for major

aerospace customers.

Following the absorption in December 2004 of the sub-holding

company Valtubes (tubes businesses – other than those of

V & M TUBES – and the finishing of tube products) by the sub-holding

company Sopretac (other industrial metallurgical activities), which

changed its name to ValTubes, the organization of the Vallourec Group

is henceforth based on two sub-holding companies: V & M TUBES

on the one hand and ValTubes on the other.

■ V & M TUBES, now wholly-owned, groups the production of

carbon and alloy steel seamless tubes and the threading of these

products for the oil & gas industry.

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■ ValTubes, 100%-owned, groups the tubes activities (other than

those of V & M TUBES), the finishing of tube products and other

industrial metallurgical lines of business.

The Group organization chart shown in section 3.3.4 of this Reference

Document shows the detailed organization, including around

30 industrial companies grouped into six Divisions. The workforce at

31 December 2005 totalled 17,542 employees.

A certain number of marketing companies are also part of either

V & M TUBES (V & M TUBES CORPORATION) or ValTubes (various

trading and sales companies).

Central services and those common to the Group are grouped into

a company called Setval, held directly by Vallourec.

Parent company-subsidiary organization

■ Vallourec is a mixed holding company that:

– Manages its participating interests. Its income is mainly financial,

such as dividends, interest on long-term loans to subsidiaries and

investment income from cash and cash equivalents. It also bears the

cost of its debt;

– Bears operating and brand protection costs. In accordance with

the general Group policy, the image of the Group belongs to

Vallourec and ownership has not been transferred to the subsidiaries.

Vallourec charges royalties in exchange for the use of its brand by

its industrial subsidiaries and V & M TUBES.

– Does not carry out any industrial activity.

■ V & M TUBES is a mixed sub-holding company that manages its

participating interests and does not carry out any industrial

activity. Its income is mainly financial, such as dividends, interest

on long-term loans to subsidiaries and investment income from

cash and cash equivalents.

In addition, V & M TUBES bears the operating costs linked to its

brand. V & M TUBES charges royalties in exchange for the use of

its brand by its industrial subsidiaries.

■ ValTubes is a financial sub-holding company that does not carry

out any industrial activity.

■ Setval is the Vallourec Group’s analysis and management services

company. Its responsibilities are to make specialist expertise

available or provide know-how to Group companies through its

high level of professionalism. It works in a broad, varied sphere

and has considerable resources that often exceed the capacity of

a single company.

Setval has three sites in France: Boulogne (Hauts-de-Seine), which

provides Group management and administrative services, Saint-

Saulve (Nord), which provides IT services, and Aulnoye (Nord), the

Group’s research centre. Setval charges Group subsidiaries in France

and abroad for the services it provides.

Goods and services are provided at arm’s length between Group

companies and, consequently, are not affected by the provisions of

Article L. 225-86 of the French Code de Commerce.

4.1.1 Description of main business activities

V & M TUBES (100%)

The subsidiaries of the holding company V & M TUBES are organized

into four Divisions, plus a marketing company:

■ Hot-rolled tubes,

■ OCTG Europe,

■ OCTG North America,

■ Brazil,

■ A marketing company in the United States.

HOT-ROLLED TUBES DIVISION

This Division groups three subsidiaries:

■ V & M FRANCE - France

Comprising an electric steel mill at Saint-Saulve (Nord) and four tube

mills at Aulnoye-Aymeries (Nord), Déville-lès-Rouen (Seine-Maritime),

Montbard (Côte-d’Or) and Saint-Saulve (Nord), covering a wide range

of diameters and thicknesses produced on continuous process

rolling mills, Transval and Stiefel.

■ V & M DEUTSCHLAND GmbH - Germany

Comprising four tube mills in Mülheim, Düsseldorf-Rath, Düsseldorf-

Reisholz (North Rhineland-Westphalia) and Zeithain (Saxony). The

tube mills are equipped with continuous process rolling mills, Stiefel,

push bench, Erhardt press and Pilger rolling mills, making it possible

to cover the widest range of products in the world, both in terms of

diameter/thickness and grade.


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Most of the raw materials for the French and German tube mills are

supplied by the Saint-Saulve steel mill and the German steel mill

at Huckingen owned by Hüttenwerke Krupp Mannesmann (HKM),

of which V & M TUBES has owned 20% of the capital since 23 June

2005 (compared with 30% previously, 10% having been sold to

Mannesmannröhren-Werke in connection with the purchase of the

45% stake in V & M TUBES).

■ V & M CHANGZHOU Co. Ltd - China

V & M CHANGZHOU Co. Ltd was created in 2005 in order to

increase the Group’s machining capacity for large-diameter tubes hot-

rolled in Europe for the Chinese power generation market. Production

at the plant, which is in Changzhou, in the province of Jiangsu, will

start during 2006.

OCTG DIVISIONS (Oil Country Tubular Goods)

The two Divisions, OCTG Europe and OCTG North America, combine,

in two major geographical units, the worldwide oil & gas tube heat

treatment and threading works, which are located close to customers,

as well as manufacturing, heat treatment and machining facilities

for drilling products including drill pipes, drill collars and heavy

weight drill pipes. In addition, the OCTG North America Division

produces its own raw materials via V & M STAR whose facilities

include an electric steel mill and a rolling mill using some of the latest

technology.

The OCTG Europe and OCTG North America Divisions carry out all

types of API, Buttress and premium threading, particularly the VAM®

product line – patented threads developed by Vallourec since 1965

and ideally suited to the difficult conditions associated with operating

oil & gas wells.

In order to make VAM® the number one in “premium joints” with over

50% of the world market,Vallourec has concentrated the coordina-

tion of Research and Development services in respect of this line of

products within VALLOUREC MANNESMANN OIL & GAS FRANCE,

has set up a world network of licensees and has gradually created,

acquired or bought participating interests in many companies

throughout the world. The Group has also developed a worldwide

site service network operating from France, Scotland, the United

States and Singapore.

OCTG EUROPE DIVISION

■ VALLOUREC MANNESMANN OIL & GAS FRANCE - France

This company produces standard joints and the full VAM® range of

products, as well as drill pipes and tool-joints and welds them onto

tubes produced by V & M FRANCE and V & M DEUTSCHLAND GmbH

in order to supply the world market with oil drill pipes.

For this purpose, the company has a production unit at Aulnoye-

Aymeries (Nord) and a machining workshop in Tarbes (Hautes- Pyrénées,

France).

This company also coordinates OCTG Research and Development

activities throughout the world, assisted by the Vallourec Research

Centre at Aulnoye-Aymeries.

■ VALLOUREC MANNESMANN OIL & GAS GERMANY GmbH -

Germany

This company consists of sales and marketing teams responsible

for selling threaded products made by the threading works in

V & M DEUTSCHLAND GmbH’s Düsseldorf-Rath and Mülheim (North

Rhineland-Westphalia) plants.

■ VALLOUREC MANNESMANN OIL & GAS UK Ltd -

United Kingdom

Integrated into the Group since the beginning of 1994, this company

brings together installations specializing in heat treatment and

threading to meet, in particular, the needs of the North Sea market.

The company has been operating under a VAM® licence since 1970.

Production unit in Clydesdale, Bellshill (Scotland).

VALLOUREC MANNESMANN OIL & GAS UK Ltd has also set up a

significant services business for exploration platforms, based in

Aberdeen (Scotland).

The following companies, which operate in the same oil & gas

market, are, for the purposes of operational management, directly

attached to V & M TUBES and to the OCTG Europe Division:

■ VAM FAR EAST - Singapore (51%)

Formed in association with Sumitomo, this company has been

developing customer services and platform advice in South East Asia

and Oceania since 1992.

Its operational base is in Singapore.

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■ P.T. CITRA TUBINDO - Indonesia (25%)

This company carries out heat treatment on tubes and threading of

standard joints in Indonesia and has been producing VAM® joints

since 1985.

Production unit on the island of Batam.

■ VIETUBES - Vietnam (12.25%)

This participating interest is held both directly by the Group and

indirectly via P.T. Citra Tubindo.Vietubes carries out threading on tubes

and sleeves for the Vietnamese market.

Production unit in Vung Tau.

OCTG NORTH AMERICA DIVISION

■ V & M STAR - United States (80.5%)

V & M STAR is an integrated manufacturer of seamless tubes for the

oil & gas industries. Its facilities include an electric steel mill, a

rolling mill using some of the latest technology and a heat treatment

and threading unit. The annual production capacity of this business

is 500,000 tonnes, of which 80% is OCTG. Sumitomo is a partner

with a 19.5% stake in V & M STAR.

Production units in Youngstown (Ohio) and Houston (Texas).

■ OMSCO Inc. - United States

Formed in September 2005 following the acquisition of the assets

of the Omsco division of ShawCor Ltd (Canada), OMSCO Inc.

manufactures tubular products adapted to the needs of the oil & gas

drilling industry.These products comprise mainly drill pipes, drill collars

and heavy weight drill pipes.

Production unit in Houston (Texas).

■ PRINVER - Mexico

Specializes in threading high-quality joints and provides the Mexican

oil & gas industry with the complete range of VAM® products.

The Veracruz production unit in Mexico has been producing VAM®

joints under licence since 1981.

■ VAM PC - Canada

Has been producing and marketing VAM® products in Canada since

1983.

Production unit in Nisku, Alberta (Canada).

■ VAM PTS - United States (51%)

Formed in 1984 in association with the Sumitomo group, the VAM®

product line has enabled VAM PTS to become one of the leaders in

premium joints in the United States.

Production unit in Houston (Texas).

BRAZIL DIVISION

■ V & M do BRASIL SA - Brazil (99.4%)

This integrated unit groups together all production facilities, from the

steel mill, via the various hot-rolling mills, through to the finishing

lines for tubes and pipes. The company produces seamless tubes for

the oil & gas, automotive, petrochemical, power generation and

mechanical engineering sectors. Its production site is at Belo

Horizonte in the State of Minas Gerais, Brazil.

In addition, V & M do BRASIL has the following subsidiaries:

– V & M FLORESTAL Ltda, which owns around 240,000 hectares of

eucalyptus forest, of which 130,000 are in operation, for the produc-

tion of charcoal used in the blast furnaces of V & M do BRASIL.

– V & M MINERAÇAO Ltda, which provides the iron ore for the

V & M do BRASIL steel mill and for other Brazilian manufacturers.

– Tubos Soldados Atlântico (TSA), a company formed in 2005 to

produce large-diameter welded tubes and carry out the coating

and lining process.V & M do BRASIL SA has a 20.7% stake in this

company, which is controlled by Europipe GmbH.

MARKETING IN THE UNITED STATES: V & M TUBES CORPORATION - UNITED STATES

This company markets in the United States all the tubes produced

by V & M TUBES’s various subsidiaries. It also has a stock of tubes

for the oil & gas industry for American distributors, which usually

thread the tubes themselves according to the end customer’s

requirements. On behalf of Vallourec Inc, it is also responsible for the

United States marketing of products manufactured by ValTubes’s

subsidiaries (Vallourec Précision, Interfit, Cerec, etc.).

Offices: Houston (Texas) and Pittsburgh (Pennsylvania).

The Group’s stake in V & M TUBES CORPORATION was increased to

100% when Vallourec acquired full control of V & M TUBES in

2005.


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ValTubes (100%)

All of the companies associated with ValTubes are grouped within

two Divisions and a certain number of marketing companies:

■ the Automotive and Industry Division,

■ the Stainless Steel Division,

■ the marketing companies associated with ValTubes.

AUTOMOTIVE AND INDUSTRY DIVISION

This Division is composed of all of the companies specializing in the

manufacture of welded or seamless precision tubes or tube sections,

cold drawn or that have undergone various finishing operations, and

designed for various markets (automotive, mechanical engineering,

power generation, etc.).

Escofier Technologie, specialized in the design and manufacture of

machines for cold-rolling processes, is also part of this Division.

■ VALLOUREC PRECISION ETIRAGE - France

Specializes in the drawing of seamless and welded precision tubes,

both in carbon and alloy steel, which are used in all sectors of

industry, sold in long lengths or cut sections and machined or

formed for the Group’s internal or external customers.

Five production units in Saint-Florentin (Yonne), Vitry-le-François

(Marne), Rachecourt (Haute-Marne), La Charité-sur-Loire (Nièvre) and

Tonnerre (Yonne).

■ VALLOUREC PRECISION SOUDAGE - France

Produces carbon steel welded tubes for the automotive industry, in

long lengths or in sections, sold directly or through the Group’s

drawing companies to internal and external customers.

Two production units: Chevillon (Haute-Marne) and Hautmont (Nord).

■ VALLOUREC COMPOSANTS AUTOMOBILES VITRY - France

Specializes in the design, fabrication, assembly and machining of

chassis components (semi-rigid axles, rear axles, trailing arms etc.).

Production unit in Vitry-le-François (Marne).

■ INTERFIT - France

Manufactures and markets fittings (bends and reducers) for assembling

tubes to be used for fluid transfer (superheated water, steam, gas, oil

products, etc.).

Production unit in Maubeuge (Nord).

■ VALTI - France

Produces and markets seamless tubes and rings for bearing

manufacturers. Valti also cuts fixed-weight hollows (slugs).

Production units in Montbard (Côte-d’Or) and La Charité-sur-Loire

(Nièvre).

■ VALTI GmbH - Germany

This wholly-owned Valti subsidiary was formed at the beginning of

2000 to take over WRG (a subsidiary of Mannesmannröhren-Werke),

which has similar activities to Valti.

Production unit in Krefeld (North Rhineland-Westphalia).

Taken together,Valti and Valti GmbH now lead the European market

in tubing for bearings.

■ ESCOFIER TECHNOLOGIE - France

Specializes in the design and construction of machines for cold

forming of metal parts. In addition to its own range of machines,

Escofier Technologie designs and makes specially adapted equipment.

Production unit in Chalon-sur-Saône (Saône-et-Loire).

Vallourec do Brasil Autopeças Ltda, which specializes in the assembly

of rear axle units for Peugeot-Citroën do Brasil and Renault do Brasil,

and Vallourec Argentina, which specializes in the machining of

parts and the assembly of axle units for Renault Argentina, were sold

on 31 January 2005 and 8 February 2005 respectively.

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STAINLESS STEEL DIVISION

This Division groups the various companies that produce and market

stainless steel or special tubes and one company producing dished

ends.

■ VALTIMET (51.3%)

Valtimet is a joint venture in which Vallourec has the controlling

interest (51.3%). Its partners are the US group Timet (43.7%) and

Sumitomo (5%).

A world leader in the production of stainless steel and titanium

welded tubes for secondary systems in conventional and nuclear

power plants, Valtimet has expertise in manufacturing smooth or

finned tubes for feedwater heaters as well as titanium, stainless steel

or copper-alloy tubes for condensers. Valtimet is also present in the

desalination and chemical markets and provides thin tubing for

the automotive industry.

Production unit in Laumes (Côte-d’Or).

United States subsidiary:Valtimet Inc.; plant in Morristown (Tennessee).

Chinese subsidiaries: Changzhou Valinox Great Wall (66%-owned

via the sub-holding company Valinox Asia); plant in Changzhou

(province of Jiangsu), and Xi’an Baotimet Valinox Tubes (49%-owned

via various subsidiaries of Valtimet and Valtimet itself) and production

unit in Xi’an (province of Shaan’xi).

Subsidiary in Korea: Poongsan Valinox (50%), joint venture with the

Korean company Poongsan. Production unit in Bupyung, Incheon,

near to Seoul.

■ VALINOX NUCLEAIRE - France

Produces and markets stainless steel seamless tubes and fittings for

use in nuclear power stations and, in particular, long, U-bent tubes

for steam generators.

Production unit in Montbard (Côte-d’Or).

■ CEREC - France

Manufactures and markets dished ends used by piping and vessel

fabricators and tank makers. Cerec is the French number one in heavy

pressing and delivers its products throughout the world.

Production unit in Recquignies (Nord).

Subsidiary: Deutsche Cerec (Germany).

The subsidiary Spécitubes, the only company in the Vallourec Group

operating in the aerospace sector, has been sold to the German

company Pfalz-Flugzeugwerke GmbH (PFW). This sale will take

effect during the first half of 2006.

VALTUBES’S SALES COMPANIES:

Trading and sales companies associated with ValTubes are located

in:

– Belgium,

– Canada,

– China,

– Dubai,

– Germany

– Italy,

– Singapore,

– Sweden,

– the United Kingdom,

– the United States.

4.1.2 Production and production volumes

The Group’s wide range of products and the lack of suitable units

of measurement (other than financial) make it difficult to supply

meaningful quantitative information.


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Consolidated sales amounted to:

■ € 2,375 million in 2003, 84.4% of which outside France



i.e. an increase of 27.9% in 2004 compared with 2003 and an

increase of 41.8% in 2005 compared with 2004.

There were no significant changes in consolidation scope in 2003

and 2004. The changes in consolidation scope in 2005 were:

■ The disposal, effective as from 1 January 2005, of the automotive

components activities in Brazil and Argentina (2004 sales: € 71 million).

■ The consolidation as from 1 October 2005 of OMSCO’s assets

(2005 fourth-quarter sales: € 28 million).

4.1.3 Sales by markets and geographic regions

The breakdown of business activity by markets and geographic regions is only really meaningful from the point of view of the importance

of the integrated industrial processes and the development of downstream activities. This breakdown is as follows:

By region By market

2003

2004

2005

France

15.5%

Germany

17.4%

Rest of world

5.7%

North America

19.2%

South America

13.6%


13.7%Other EU*

14.9%*Based on 25-member EU


11.5%


13.8%

Power generation

11.8%Other

7.5%

Oil & gas

36.4%

Automotive

19.0%

France

12.7%

Germany

17.2%

Other EU (25)

13.1%

Rest of world

5.2%

North America

22.6%

South America

13.2%


16.0%


11.0%


14.1%

Power generation

15.4%Other

6.6%

Oil & gas

36.4%

Automotive

16.5%

France

9.5%

Germany

14.2%

Rest of world

4.3%

North America

25.9%

South America

11.6%


19.5%

Other EU (25)

15.0%


10.7%


13.3%

Power generation

16.8%Other

5.5%

Oil & gas

42.5%

Automotive

11.2%


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4.1.4 Location of main establishments

See 4.1.1 above.

4.1.5 Not applicable

4.1.6 Exceptional events influencingthe information givenin paragraphs 4.1.0 to 4.1.5

To date, there has not been any exceptional event likely to affect

substantially the business, results, assets or financial situation of the

Company or the Vallourec Group.


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4.2 Dependency on the economic, industrial and financial environment

The Group considers that at the present time there are no patents

or licences, no supply, industrial, commercial or financial contracts,

and no new manufacturing processes likely to have a significant

effect on its business and/or profitability.

4.2.1 Breakdown of raw materialsand consumable supplies

Purchases consumed during 2005 were as follows:

■ scrap metal (iron and iron alloys) € 326 million

■ round parts € 844 million (*)

■ flat products € 125 million

■ tubes € 100 million

■ pressed items € 13 million

■ others € 291 million

TOTAL € 1,699 million

(*) The above-mentioned tube round purchases were sourced mainly fromHKM’s German steel mill, in which the Group has a 20% stake (30% as fromthe formation of V & M TUBES in 1997 until the purchase of the 45% stakein 2005). Like its partners Thyssen Krupp AG and Salzgitter Mannesmann GmbH,V & M TUBES benefits from a cost-price based supply contract. Including theround parts produced by the integrated steel mills at Saint-Saulve in France(V & M FRANCE), Belo Horizonte in Brazil (V & M do BRASIL SA) andYoungstown in the United States (V & M STAR), in 2005 – a year in whichthe company enjoyed high levels of activity, as in 2004 – V & M TUBESproduced around 90% of its steel requirements.

4.2.2 Main customers

In 2005, the following customers accounted for sales greater than

€ 35 million (by sector and in alphabetical order):

■ Peugeot / Citroën Automotive

■ Alstom Power generation

■ China National Water Power generation

■ Dongfang Boiler Works Power generation

■ Harbin Boiler Works Power generation

■ Liaoning Power generation

■ Shanghai Boiler Works Power generation

■ Thyssen/Mannesmann Handel Trading

■ Champions Pipe & Supply Oil & Gas

■ China National Petroleum Company Oil & Gas

■ Pemex Oil & Gas

■ Petrobras Oil & Gas

■ Pipeco Oil & Gas

■ Premier Pipe Oil & Gas

■ Pyramid Oil & Gas

■ Groupe TOTAL Oil & Gas

■ Wilson Oil & Gas

■ INA-FAG Bearings


4.3 Change in average number of Group employees

2003 2004 2005

Workers 12,812 12,840 12,670

Technicians 3,414 3,449 3,452

Managers 1,185 1,169 1,163

TOTAL 17,411 17,458 17,285

4.4 Investment policy

4.4.0 Research and Development

Vallourec continuously devotes significant efforts to Research and

Development, particularly in fields associated with oil & gas, the

automotive industry and power generation. These efforts cover

three areas:

■ manufacturing processes (steel, steel tubing, forming and machining,

precisions tubes, welding and machining),

■ new products and product improvement,

■ services (customer assistance in designing and adapting tubing).

Vallourec’s R&D structure is centred on the specialists and teams

based in the Group’s various companies, close to customers and

products.

Vallourec’s research centre, CEV, provides all its expertise to the R&D

teams: metallurgy, heat treatment, non-destructive testing, corrosion,

surface treatment, product and process simulations, etc.

Other research centres are associated with this process:

■ In France, the United States and Japan, three test stations carry

out life-size tests on the behaviour of oil joints in well conditions,

■ The Mannesmann research centre in Germany (Salzgitter Mannesmann

Forschung GmbH) is actively involved in V & M TUBES’s R&D

programmes, carrying out research and testing and providing

expertise,

■ V & M do BRASIL SA also has its own teams carrying out research

and providing expertise,

■ Studies have been developed in close collaboration with external

research centres and university laboratories.

Innovation in the service of customers is a permanent objective of

the Group, and is supported by:

■ Customer-supplier technical partnerships,

■ A portfolio of coherent projects, integrated into the Group’s

permanent operations,

■ Continuous interaction between the production units to ensure that

“best practices” are developed within the Group.

This cross-functional interaction results in constant improvement of

the product range, based on reliable and flexible processes at

minimum cost.

The Vallourec Group is also developing R&D programmes in association

with partners at the forefront of their field of activity, particularly:

■ Sumitomo (Japan): cooperating since 1975 on the development of

premium joints for the oil & gas industry (VAM® product range).

■ Timet (US): developing applications for titanium, especially in

the automotive industry, since 1997.

■ Autobench: participating in the technology monitoring programme,

the aim of which is to evaluate new tubular designs for use in the

automotive industry.

■ Shell: developing tubes and connections for the oil & gas industry.

■ Weatherford: developing an innovative tubular solution on a

specific premium connection.

A staff of about 400 is involved in R&D activities within the Vallourec

Group. The annual R&D budget is around 1.3% of sales.


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4.4.1 Main investments made

In recent years, industrial investment programmes, which are mostly self-financed, have been directed mainly towards rationalizing

production equipment, reorganizing activities by business lines, improving quality, controlling processes, adapting product lines in

accordance with customers’ changing requirements and reducing production costs.

Over the last three financial years, investments were made as follows:

In € million 2003 2004 2005

Industrial investments (property, plant and equipment and intangible assets)

Europe 50.9 56.4 96.9

North America and Mexico (excl. OMSCO) 9.4 8.4 15.1

Central and South America 12.6 36.7 73.9

Asia 0.1 1.6 6.5

Total industrial investments 73.0 103.1 192.4

Acquisitions and financial investments - - 651(*)

(*) including the acquisition of the 45% stake in V & M TUBES for € 545 million and OMSCO for USD 120 million.

The most important programmes carried out during the period have

been:

In 2003:

■ Investment by V & M DEUTSCHLAND GmbH’s Reisholz plant in a

new tube machining lathe and heat-treatment furnace with a view

to increasing production capacity in respect of large boiler pipes

to meet the growing demands of the Chinese market.

■ Also in the context of the Chinese power generation market,

Changzhou Valinox Great Wall Co. Ltd increased its production

capacity as regards stainless steel condensers used in thermal

power generation plants by more than 20%.

■ Investment by Vallourec Composants Automobiles Vitry in

equipment to produce engine add-ons, the aim of which is to

improve the safety of the front section of the passenger

compartment.

■ The bringing into service at Spécitubes’s Samer plant of a new cold-

rolling mill designed to produce titanium tubes used by the

aerospace industry.

■ In the area of welded tubes, Vallourec Précision Soudage

(Hautmont plant) has installed a new coil-slitting plant. The entity

is thus no longer dependent on the services of outside suppliers,

capitalizing instead on its existing expertise. This investment was

carried out as part of the Group’s cost-reduction policy.

■ V & M do BRASIL SA improved the performance of its cold-

drawing plant by adapting its production lines to products and

increasing its drawing capacity by means of a new 80-tonne

drawing bench. At the end of 2003, the decision was taken to

launch, in 2004/2005, a capital expenditure programme with the

aim of increasing substantially the production capacity in respect

of hot-rolled tubes at V & M do BRASIL SA: installation of new

equipment, in particular a rotary furnace for heating billets and

modification of existing rolling and finishing equipment.

In 2004:

■ Among planned investments made in 2004, note should be

taken of the expenditure incurred in Europe aimed at increasing

production capacity in respect of boiler tubes, in particular at

V & M DEUTSCHLAND GmbH which, as well as continuing to

increase production facilities as in 2003, strengthened its internal

handling and storage facilities and increased its finishing capacity

in order to meet demand in the Chinese market. In addition,

V & M FRANCE improved the production capacity of the Saint-

Saulve steel mill by the acquisition of additional cooling and

oxygen injection facilities.

■ In the automotive sector, Vallourec Composants Automobiles

Vitry invested in equipment to produce engine add-ons notably

for the models replacing the Citroën Xsara and the Peugeot 206.

These add-ons improve the safety of the passenger compartment

in the event of front-end collisions.


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■ Commencement of work on the important project, to which

V & M do BRASIL SA committed itself at the end of 2003, to

increase substantially its production capacity of hot-rolled tubes.

At V & M FLORESTAL, the planting of highly-productive eucalyptus

clones was stepped up, thus improving the company’s ability to

meet demand for charcoal as from 2012.

■ Changzhou Valinox Great Wall Co. Ltd increased its capacity for

the production of stainless steel condenser tubes used in thermal

power generation plants: following the investment made in 2003,

in September 2004 it installed two new welding lines and a new

tube-bending machine, which were brought into use in October.

A new building was constructed to house these new facilities.

In 2005:

■ Further investment aimed at increasing V & M TUBES’s production

capacity, particularly in respect of boiler tubes and tubes for the

power generation and oil markets. The Group also continued to

invest in the maintenance and updating of its production facilities

with the aim of improving capacity utilization in periods of high

activity.

■ Demand in the Chinese market for boiler tubes resulted in the

Group forming a subsidiary named V & M CHANGZHOU Co. Ltd

in Eastern China to operate its facilities for the finishing of its

products. This investment was made with a view to continuing the

Group’s activities at the Reisholz plant. The civil engineering

work began in December 2005.

■ Replacement by V & M DEUTSCHLAND GmbH of machining

lathes for internal diameters and threading to reach a higher level

of precision of finished products and to optimize internal flows.

■ Improvement of work flows of V & M FRANCE by the installation

of more compact finishing lines and a new coating unit of a

type that will facilitate compliance with the environmental

standards and working conditions of the various sectors. The

steel mill replaced its primary filtration system for fume extraction

in the building housing the furnace and embarked on a project to

increase capacity for processing 9% and 13% chromium steel and

100 C6.

■ Commissioning by V & M do BRASIL SA of its new furnace for

heating billets. The modifications to the drilling machine and

downstream equipment were commissioned in August 2005.

Other investments were made to increase capacity, including

charcoal grinding equipment, thereby improving the performance

of the blast furnaces.

Increase in the production capacity in respect of cold drawn

tubes and commencement of a project to design a cold-forming

machine to produce axles for lorries.

■ Launching by VALLOUREC MANNESMANN OIL & GAS FRANCE

of a major project to improve work flows including the relocation

of the couplings workshop, the increase in its capacity and

improvement in its performance as well as the realignment of the

heat treatment unit and the purchase of a new trimming machine

capable of dealing with upseted tubes.

Ordering by the testing unit of new testing equipment with

capacity reaching 18” to enable the Group to comply with the

increasingly technical requirements concerning products supplied,

without the need to subcontract these operations.

■ In the stainless steel sector, Changzhou Valinox Great Wall Co. Ltd

once again increased its production capacity in respect of

condenser tubes by the commissioning of additional welding

machines. Other investments made to improve the performance

of the production sites have included equipment to improve

welding speed, yields and work flow organization.

More generally, the Group continued to invest with a view to

maintaining its production tools. Heavy, and sometimes old,

equipment needs to be overhauled on a regular basis.

4.5 Not applicable

4.6 Not applicable

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4.7 Risks

4.7.1 Market risks (interest-rate,exchange-rate, share-priceand credit risks)

Interest-rate risksDay-to-day treasury management in respect of the Group’s industrial

activities has been decentralized to the industrial companies.

Management of medium- and long-term financing within the

eurozone is centralized in Vallourec and the sub-holding companies

V & M TUBES and ValTubes.

31/12/2005 Bond Other Investments(In € million) loan loans

Fixed rate - 347.3 -

Variable rate - 398.4 541.3

Part of bank loans and other borrowings (€ 301.2 million) was

swapped to a fixed rate at an average rate of 3.35% (excluding

spread). € 100 million was swapped in 2003 and € 201.2 million

was swapped in 2005.

The Group is exposed to an interest-rate risk on its debt and cash.

Its bank debt exposed to changes in variable interest rates amounted

to about € 400 million (53% of total gross debt) at 31 December 2005.

The impact of a one-point rise in interest rates applied to the short-

term rates of the eurozone, to Brazilian rates and US money market

rates would result in a € 7.5 million increase in the Group’s annual

financial costs, based on the assumption that the level of debt

remained completely stable.

In addition, according to our simulations, the impact of a one-point

rise or fall in interest rates applied to all interest rate curves would

result in an approximately € 12 million change in the swaps in place

at 31 December 2005 (at Vallourec SA level).

Exchange-rate risksTranslation risk

The assets, liabilities, revenues and costs of the Group’s subsidiaries

are expressed in various currencies. The Group financial statements

are presented in euros. The assets, liabilities, revenues and costs

denominated in currencies other than the euro have to be translated

into euros at the applicable rate so that they can be consolidated.

If the euro rises (or falls) against another currency, the value in euros

of the various assets, liabilities, revenues and costs initially recognized

in that other currency will fall (or rise). Therefore, changes in the value

of the euro may have an impact on the value in euros of the assets,

liabilities, revenues and costs not denominated in euros, even if the

value of these items in their original currency has not changed.

In 2005, about 55.4% of the net income, Group share, was generated

by subsidiaries that prepare their financial statements in foreign

currencies (mainly in US dollars and Brazilian reals). A 10% change

in exchange rates would have an impact on net income, Group share,

of around € 28 million.

In addition, the Group’s sensitivity to the long-term exchange-rate

risk is reflected in the changes that have occurred in recent years in

the translation reserves booked to shareholders’ equity (€ 63.1 million

as at 31 December 2005) which, over the last two years, have

been linked mainly to movements in the US dollar and Brazilian real:

Translation reserve 31/12/2004 31/12/2005Group share

USD -12,019 20,001

GBP -118 52

MXN (Mexican peso) -790 2,243

ARS (Argentinean peso) -327 -

BRL (Brazilian real) 319 39,763

Others -260 1,013

-13,195 63,072


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Transaction risk

Vallourec is subject to exchange-rate risks due to its commercial

exposure linked to sales transactions entered into by some of its

subsidiaries in currencies other than their operating currency.

A significant proportion of Vallourec’s transactions is invoiced by the

Group’s European companies in US dollars (26.5% of sales in 2005).

Exchange-rate fluctuations between the euro and the US dollar

may therefore affect the Group’s operating margin. Their impact is,

however, very difficult to quantify for two reasons:

1. There is an adjustment phenomenon on selling prices denominated

in US dollars related to market conditions in the various sectors of

activity in which Vallourec operates.

2. Certain sales, even if they are denominated in euros, are influenced

by the level of the US dollar. They are indirectly and at some time in

the future affected by movements in the US currency.

The Group actively manages its exposure to exchange-rate risk in

order to reduce the sensitivity of its income to changes in rates by

implementing hedges as soon as the order is placed. Receivables,

payables, and operating cash flows are thus hedged with financial

instruments, which are mainly forward purchases and sales.

The procedures used and amounts involved are detailed in note 8

of the notes to the consolidated financial statements.

Vallourec does not hedge the financial assets and liabilities in

foreign currencies in its consolidated balance sheet.

Share-price risks

Vallourec holds 269,749 of its own shares (see 3.3.1.1 above)

acquired on 5 July 2001 at a price of € 53.256 per share.

These shares were transferred from marketable securities to

investments in the Vallourec company accounts as of 31 March 2003,

at their carrying amount of € 14,365,753 and are deducted from

shareholders’ equity in the consolidated financial statements.

As recommended by the Management Board, the Supervisory Board

decided at its meeting on 8 March 2005 to allocate these shares in

the following manner:

– 190,750 shares to cover share purchase options granted under

the option plan dated 11 June 2003.

– 78,999 shares to cover future allocations to certain Group

employees, managers or officers of the Company, in accordance

with the procedures to be defined jointly by the Management

Board and the Supervisory Board.

Counterparty risks

The Group enters into financial transactions only with leading

financial institutions.

Credit risks

In June 1996, Vallourec issued a 7.30% bond loan maturing in July

2004 for a total nominal amount of € 76.2 million (100,000 bonds

of € 762.25 nominal).

This loan was intended to cover the Group’s medium-term investment

requirements and to enhance its financial independence. It was

repaid in a single payment on maturity in July 2004.

This bond loan was refinanced in 2003 by means of a new five-year

€ 150 million credit facility from the Crédit Agricole group maturing

in September 2008.Vallourec has used hedging instruments (swaps)

to fix the rate of this loan. The loan facility documentation requires

the Group to maintain its ratio of consolidated net debt to consolidated

shareholders’ equity at less than 75%.

On 24 June 2002,VALLOUREC & MANNESMANN TUBES (V & M TUBES)

took out a five-year variable-rate bank loan of USD 110 million to

finance part of the purchase of the assets of North Star Steel Company

(V & M STAR). This loan was repaid early at the end of June 2005.

In March 2005, a seven-year € 460 million credit facility was made

available to Vallourec by a syndicate of banks to finance the

acquisition of the 45% stake in V & M TUBES.

This € 460 million facility requires Vallourec to maintain its ratio of

consolidated net debt to consolidated shareholders’ equity at less

than or equal to 75% calculated on 31 December each year and for

the first time on 31 December 2005.A change of control of Vallourec

could result in the repayment of the loan if so decided by a two-thirds

majority of the participating banks. It is also provided that the loan

would become immediately repayable if the Group failed to make

a repayment in respect of one of its other borrowings (“cross

default”), or if a significant event occurred affecting the Group’s

business or financial situation and ability to repay.

At 31 December 2005, the Group complied with its covenants.

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4.7.2 Legal risks

All of the French plants require an authorization to operate in

accordance with the provisions of Law no. 76-663 of 19 July 1976

on facilities subject to restrictions relating to environmental protection

and of Decree 77-1133 of 21 September 1977. Updated authorizations

are obtained from the local Regional Directorates for Industry,

Research and the Environment (Direction Régionale de l’Industrie,

de la Recherche et de l’Environnement – DRIRE) for major changes

at the sites (capital expenditure, expansion, restructuring, etc.).

As indicated in paragraph 4.2, in the Group’s opinion there are

currently no patents, licences or supply contracts of an industrial,

commercial or financial nature or new manufacturing processes

that are likely to have a significant influence on its business and/or

profitability.

The Group owns all the main assets necessary for its operations.

As far as the Group is aware, no significant pledges, mortgages or

guarantees have been given in respect of its intangible assets,

property, plant and equipment or investments.

There are currently no disputes likely to materially affect the business,

assets, earnings or financial position of the Company or the Vallourec

Group.

4.7.3 Industrial and environmental risks

To the Company’s knowledge there are currently no specific industrial

or environmental risks resulting from production processes or the use

or storage of substances needed for such processes that are likely

to have a significant impact on the assets, earnings or financial

position of the Company or the Vallourec Group (for further

information, see “Information on the environmental consequences

of the Group’s activities” in the Management Board’s management

report).

However, in the various countries in which the Group operates,

particularly in Europe and the United States, its production activities

are subject to a large number of regulations concerning environmental

matters, which are extensive and are constantly being updated.These

regulations concern, in particular, control over major accidents,

disposal of wastewater, disposal of special industrial waste, air and

water pollution and site protection. In future, the Group’s activities

could be subject to even more stringent regulations that would result

in the Group being required to incur expenditure in order to comply

with regulations or to pay taxes.

In addition, the regulatory authorities and courts may require the

Group to carry out investigations, clean-up operations, restrict its

activities or close its facilities, on a temporary or permanent basis.

In the case of several of the Group’s sites that are currently being

used or are no longer in use and that have for a long time been used

for industrial purposes, the soil or ground water may have been

contaminated and other instances of contamination may be

discovered or may occur in the future. In such a case,Vallourec could

be required to clean up the sites concerned. As regards its former

activities, the Group could be held responsible in the event of

damage to persons or property, which could adversely affect

Vallourec’s results. This could arise in the case of asbestos, which was

not directly used in its production processes but was sometimes used

for thermal insulation. Legal action has been instituted against

Vallourec in a limited number of cases linked to exposure to asbestos.

4.7.4 Insurance - risk coverage

The Group’s policy in terms of protection against accidental risks

focuses on prevention and the purchase of insurance cover.This policy

is co-ordinated by the Human Resources department in the case of

the safety of individuals and by the Risks and Insurance department

for all other aspects. The Management Board has ultimate

responsibility for these issues.

Although Vallourec considers that its insurances cover adequately the

risks incurred in connection with its normal activities (and, in

particular, the warranties offered by the Group), it could prove to be

insufficient in the event of certain losses resulting from exceptional

damage, which would have a negative impact on the Group’s

financial position.

Industrial risks insured within the Vallourec Group centre around two

main types of insurance taken out with first-rate insurers:

■ general insurance

■ third-party liability insurance.


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General insurance

This insurance covers all direct material damage to the Group’s

property, subject to specific exclusions, as well as any costs and

consequential losses.

The contractual indemnity limit is € 230 million in respect of

specified risks with, however, a large number of exclusions and

coverage limitations, particularly regarding supply shortages.

Third-party liability

The aim of third-party liability insurance is to ensure that the Group

is insured in respect of any liability arising as a result of injury or loss

caused to third parties either resulting from the Group’s operations

or after delivery of goods or services.The level of cover is € 80 million.

In respect of both general insurance and third-party liability insurance,

contracts consist of a main contract in France and local contracts in

other countries.The main contract prevails where terms or limits differ

from those of local contracts issued by the leading insurer. Some

subsidiaries are not covered by the Group contracts.

Insurance in respect of staff is taken out locally in accordance with

applicable legislation, in particular Employer’s liability and Workmen’s

compensation insurance.

Third-party liability of company officers

The aim of directors’ liability insurance is to cover the senior

management against risk resulting from claims made against them

that could result in them being held personally, jointly and severally

liable for loss suffered by third parties and which could be attributed

to a real or alleged professional error committed by them in the

course of the performance of their duties. The amount of cover is

€ 20 million.

4.7.5 Other specific risks

To the Company’s knowledge, there are currently no other specific

risks likely to affect the assets, earnings or financial structure of the

Company or the Vallourec Group.

However, we draw your attention to the following:

■ Cyclical nature of the tubes market

The tubes market is traditionally subject to cyclical trends due, in part,

to the influence of macro-economic conditions, linked, in particular,

to movements in the oil price, which influence demand for certain

of its products.

■ Tubes market

Some of the markets in which the Vallourec Group operates are highly

competitive. In the energy sector (oil & gas and power generation),

differentiation and innovation, as well as the quality of the products

and associated services, play a key role. In the case of low value-

added products, which account for a small proportion of sales,

competition from producers in the emerging countries could affect

the Group’s markets.

■ An industry that consumes raw materials and energy

Tube production consumes raw materials such as iron ore, coal, coke

and scrap metal. The Group has certain of its own sources of supply

and uses a variety of external sources of supply wherever possible.

In addition, raw materials and energy represent a significant item in

the Group’s financial statements. As a result, the volatility of raw

material prices creates some uncertainty as regards earnings.

■ Activities in emerging countries

A significant part of the Group’s business takes place in emerging

countries. The risks associated with operating in such countries

may include political, economic, social or financial instability and

increased exchange-rate risk. The Group may not be in a position to

take out insurance or hedge against such risks and may also

encounter problems in the performance of its activities in such

countries, which could have an impact on its earnings.

■ Maintaining high technology on key products

The tubes market is subject to technological change. It is not possible

as of now to predict how such change could affect the Group’s

activities.

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56

5.1.0 Consolidated financial statements of the Vallourec Group

Consolidated balance sheet in € thousand

ASSETS Notes 01/01/2004 31/12/2004 31/12/2005restated restated prepared

under IFRS under IFRS under IFRS(a) (a) (a)

NON-CURRENT ASSETS

Intangible assets, net 1 12,556 10,849 21,201

Goodwill 1 50,084 47,336 91,018

Gross property, plant and equipment 2 1,315,862 1,366,494 1,669,871

less: accumulated depreciation 2 -575,621 -632,984 -749,953

Property, plant and equipment, net 2 740,241 733,510 919,918

Investments in equity affiliates 3 51,429 52,055 48,191

Other non-current assets 4 38,018 33,532 31,494

Deferred tax assets 5 18,975 17,675 45,094

Total 911,303 894,957 1,156,916

CURRENT ASSETS

Inventories and work-in-progress 6 458,155 593,504 861,171

Trade and other receivables 7 459,198 639,874 906,178

Derivatives - assets 8 - - 1,846

Other current assets 9 115,180 137,187 116,885

Cash and cash equivalents 10 425,890 484,969 541,278

Total 1,458,423 1,855,534 2,427,358

TOTAL ASSETS 2,369,726 2,750,491 3,584,274

a) The opening balance sheet as at 1 January 2004 and the balance sheet as at 31 December 2004 under IFRS have been extracted from the note entitled“Consequences for the Vallourec Group of the transition to IFRS”, included in the Group’s Reference Document for the financial year 2004 (paragraph1.2.2 of section 5.3). This note is reproduced in section D of the notes to the 2005 IFRS financial statements. The assumptions and principles used in thepreparation of the opening IFRS balance sheet as at 1 January 2004 and the IFRS balance sheet as at 31 December 2004 have been described in that note,which also includes explanations of the variances between these balance sheets and the consolidated balance sheets prepared on those dates under FrenchGAAP. In the preparation of these balance sheets, the same accounting options and methods have been used as were used in the published 2005 half-year financial statements and in the 2004 IFRS comparative information previously prepared within the context of the transition to IFRS. No changes havebeen made to the methods of presentation used or the financial data given in the information previously disclosed within the context of the transitionto IFRS.

Vallourec 2005 Annual Report

5.1 Consolidated and Company financial statements

Section 5Financial statements

LIABILITIES AND SHAREHOLDERS’ EQUITY Notes 01/01/2004 31/12/2004 31/12/2005restated restated prepared

under IFRS under IFRS under IFRS(a) (a) (a)

SHAREHOLDERS’ EQUITY 11

Capital 194,605 197,399 212,007

Additional paid-in capital 94,914 97,428 206,533

Consolidated reserves 414,212 399,889 492,743

Reserves, financial instruments - - -42,883

Translation reserve - -13,195 63,072

Income (loss) for the financial year N/A 145,024 472,985

Own shares -13,686 -13,686 -13,514

Shareholders’ equity - Group share 690,045 812,859 1,390,943

Minority interests 13 432,462 499,681 112,153

Total shareholders’ equity 1,122,507 1,312,540 1,503,096

NON-CURRENT LIABILITIES

Bank loans and other borrowings 14 202,002 189,815 469,627

Employee benefits 16 194,258 198,880 209,750

Other provisions 15 1,251 3,370 4,307

Deferred tax liabilities 5 36,847 38,947 53,245

Other long-term liabilities 1,820 1,530 736

Total 436,178 432,542 737,665

CURRENT LIABILITIES

Provisions for liabilities and charges 15 56,764 64,959 66,484

Overdrafts and other short-term bank borrowings 14 297,262 240,614 276,337

Trade payables 250,737 402,753 496,605

Derivatives - liabilities 8 - - 102,301

Tax liabilities 44,265 78,803 102,529

Other current liabilities 17 162,013 218,280 299,257

Total 811,041 1,005,409 1,343,513

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY 2,369,726 2,750,491 3,584,274

It should be noted that, in accordance with the transitional provisions specifically provided for by IAS 32 “Financial Instruments: Disclosure andPresentation”, IAS 39 “Financial Instruments: Recognition and Measurement” and IFRS 1 “First-time Adoption of IFRS”, the Vallourec Group has chosen,in the preparation of the 2004 comparative information, to retain the recognition and presentation of financial instruments adopted under French GAAP.The IFRS relating to financial instruments have been applied only as from 1 January 2005. Therefore, the above balance sheets as at 31 December 2004and 31 December 2005 are not directly comparable. The most marked differences between the IFRS and French GAAP relate to hedge accounting(see paragraph 2.16 on accounting principles and methods and note 8).

In order to aid comparability, the 2003 and 2004 historical consolidated financial statements prepared under French GAAP have not been published inaddition to the 2005 IFRS financial statements: these financial statements are included in section 5.1.0 of the 2003 and 2004 Reference Documents filedwith the Autorité des Marchés Financiers (AMF) in France and are available on the Company’s website (www.vallourec.com).

Financial statements


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Consolidated income statement in € thousand

Notes 2004 2005restated prepared

under IFRS (a) under IFRS (a)

Sales 20 3,037,759 4,307,405

Production taken into inventory 65,059 147,778

Other operating revenues 21 26,069 24,046

Purchases consumed -1,242,293 -1,699,321

Taxes and duties 22 -47,806 -52,965

Payroll costs 23 -618,890 -716,424

Other operating costs and revenues -767,568 -948,460

Net provisions 24 2,277 -1,496

EBITDA 454,607 1,060,563

Depreciation and amortization 25 -89,047 -99,195

Impairment of assets and goodwill -264 173

Asset disposals and restructuring costs 26 -10,016 3,725

OPERATING INCOME 355,280 965,266

Financial income 17,351 19,327

Interest costs -18,913 -23,637

Net financial costs -1,562 -4,310

Other financial income and charges 9,945 -13,433

Other discounting costs -9,270 -8,846

FINANCIAL RESULT 27 -887 -26,589

INCOME BEFORE TAX 354,393 938,677

Income tax 28 -89,448 -307,450

Net income of equity affiliates 3 297 1,162

NET INCOME FROM CONTINUING OPERATIONS 265,242 632,389

Income (loss) from discontinued operations - -

CONSOLIDATED NET INCOME 265,242 632,389

Minority interests 120,218 159,404

Group share 145,024 472,985

Group share:

Earnings per share 12 15.2 47.6

Diluted earnings per share 12 15.1 46.8

a) The IFRS income statement for the financial year 2004 has been extracted from the note entitled “Consequences for the Vallourec Group of the transitionto IFRS”, included in the Group’s Reference Document for the financial year 2004 (paragraph 1.2.4 of section 5.3). This note is reproduced in section Dof the notes to the 2005 IFRS financial statements.

The assumptions and principles used in the preparation of the 2004 IFRS income statement have been described in that note and a reconciliation and noteshave been prepared to give all the information needed to understand the variances between that income statement and the income statement for theyear ended 31 December 2004 prepared under French GAAP. In the preparation of these income statements, the same accounting options and methodshave been used as were used in the published 2005 half-year financial statements and in the 2004 IFRS comparative information previously prepared withinthe context of the transition to IFRS. No changes have been made to the method of presentation used or the financial data given in the information previouslydisclosed within the context of the transition to IFRS.


(b)

In accordance with the transitional provisions specifically provided for by IAS 32 “Financial Instruments: Disclosure and Presentation”, IAS 39 “FinancialInstruments: Recognition and Measurement” and IFRS 1 “First-time Adoption of IFRS”, the Vallourec Group has chosen, in the preparation of the 2004 incomestatement, to retain the accounting methods adopted under French GAAP. The IFRS relating to financial instruments have been applied only as from 1 January2005. The most marked differences between the IFRS and French GAAP relate to hedge accounting (see 2.16 on accounting principles and methods and note 8).

b) The acquisition of the minority interests in VALLOUREC & MANNESMANN TUBES (V & M TUBES) and its subsidiaries was recognized by Vallourec onthe date of the legal transfer of the shares. Due to the proximity of this date to 30 June, the minority interests purchased have been consolidated intothe Vallourec Group’s income as from 1 July 2005 (see B - Consolidation scope).

In order to aid comparability, the 2003 and 2004 historical consolidated financial statements prepared under French GAAP have not been published inaddition to the 2005 IFRS financial statements: these financial statements are included in section 5.1.0 of the 2003 and 2004 Reference Documents filedwith the Autorité des Marchés Financiers (AMF) in France and are available on the Company’s website (www.vallourec.com).

Statement of changes in shareholders’ equity, Group share in € thousand

Capital Add- Consoli- Translation Reserves - Own Income Totalitional dated reserve changes shares (loss) share-paid-in reserves in fair value for the holders’capital of hedging financial equity -

instruments - year Groupnet of tax share

As at 1 January 2004 194,605 94,914 414,212 - N/A -13,686 N/A 690,045

Dividends paid - - -15,136 - - - - -15,136

2004 net income - - - - - - 145,936 145,936

Capital increase and premiums 2,794 2,514 - - - - - 5,308

Change in translation reserve - - - -13,195 - - - -13,195

Share-based payments - - 912 - - - -912 -

Other changes - - -99 - - - - -99

As at 31 December 2004 197,399 97,428 399,889 -13,195 - -13,686 145,024 812,859

Impact of first-time adoption

of IAS 32/39 - - -409 - 21,939 - - 21,530

Variance between minority interests

to be acquired and liabilities (put option) - - 30 - - - - 30

Shareholders’ equity restated as at 1 January 2005 197,399 97,428 399,510 -13,195 21,939 -13,686 145,024 834,419

2004 net income - - 145,024 - - - -145,024 -

Dividends paid - - -30,721 - - - - -30,721

Interim dividend paid by Vallourec - - -41,322 - - - - -41,322

2005 income before changes

in consolidation scope - - - - - - 477,708 477,708

Capital increase and premiums 14,608 109,105 - - - - - 123,713

Change in translation reserve - - 17 75,962 -17 - - 75,962

Financial instruments - - - - -47,954 - - -47,954

Financial instruments purchased from the

minority shareholders in V & M TUBES - - 16,851 - -16,851 - - -

Impact of purchase of 45%

stake in V & M TUBES - - 1,947 - - - -3,506 -1,559

Share-based payments - - 912 - - - -912 -

Change in own shares - - 525 - - 172 - 697

Other changes in consolidation scope - - - 305 - - -305 -

As at 31 December 2005 212,007 206,533 492,743 63,072 -42,883 -13,514 472,985 1,390,943



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Statement of changes in minority interests in € thousand

Consolidated Translation Reserves - Income Minorityreserves reserve changes (loss) interests

in fair value for theof hedging financial

instruments - yearnet of tax

As at 1 January 2004 432,462 - N/A N/A 432,462

2004 net income - - - 120,219 120,219

Dividends paid -33,856 - - - -33,856

Change in translation reserve - -16,104 - - -16,104

Other changes in consolidation scope -1,004 - - - -1,004

Other changes -2,036 - - - -2,036

As at 31 December 2004 395,566 -16,104 - 120,219 499,681

2004 net income 120,219 - - -120,219 -

Impact of first-time application of IAS 32/39 655 - 17,439 - 18,094

Reclassification of minority interests as liabilitiesin accordance with IAS 32 -426,233 10,374 -15,421 - -431,280

Shareholders’ equity restated as at 1 January 2005 90,207 -5,730 2,018 - 86,495

Dividends paid -42,620 - - - -42,620

2005 net income - - - 159,404 159,404

Financial instruments - - -34,431 - -34,431

Change in translation reserve - 56,642 - - 56,642

Reclassification of minority interests as liabilitiesin accordance with IAS 32 - movements -101,783 -43,820 32,273 - -113,330

Other changes -7 - - - -7

As at 31 December 2005 -54,203 7,092 -140 159,404 112,153


Cash flow statement reconciliation as at 31 December 2004 and 31 December 2005 in € thousand

2004 Restate- Reclassi- 2004 2005French GAAP ments fications IFRS IFRS

Net income of consolidated companies 254,436 10,640 166 265,242 632,389 Consolidated net income(including minority interests)

Net charges to amortization, depreciation and provisions 106,804 -8,531 - 98,273 99,762 Net charges to amortization, depreciation and provisions

Change in deferred taxes 1,840 2,304 -4,144 - -

Unrealized gains and losses from changes - - - - 6,156 Unrealized gains and losses linked to changesin fair value in fair value

Income and charges linked to share options - 912 - 912 912 Income and charges linked to share optionsand equivalent and equivalent

Capital gains and losses on disposals -3,879 1,638 - -2,241 -2,636 Capital gains and losses on disposals

Gross cash flow from consolidated companies 359,201

Share of income (loss) of equity affiliates - -132 -166 -298 -1,162 Share of income (loss) of equity affiliates

Dividends received from equity affiliates 438 - -1,285 -847 -938 Dividends received from equity affiliates

Cash flow from operating activities after cost - - - 361,041 734,483 Cash flow from operating activities after costof net debt and tax of net debt and tax

Cost of net debt - - 1,562 1,562 4,310 Cost of net debt

Tax charge (including deferred taxes) - - 89,448 89,448 307,450 Tax charge (including deferred taxes)

Cash flow from operating activities - - - 452,051 1,046,243 Cash flow from operating activitiesbefore cost of net debt and tax before cost of net debt and tax

Interest paid - - -21,745 -21,745 -22,884 Interest paid

Tax paid - - -76,920 -76,920 -237,609 Tax paid

Interest received - - 17,218 17,218 19,515 Interest received

Cash flow from operating activities - - - 370,604 805,265 Cash flow from operating activities

Change in operating working capital requirement -99,005 2,382 -8,394 -105,017 -279,200 Change in operating working capital requirement

NET CASH FLOW FROM 260,634 9,213 -4,260 265,587 526,065 NET CASH FLOW FROMOPERATING ACTIVITIES (1) OPERATING ACTIVITIES (1)

Cash outflows for acquisitions of property, -98,599 -9,012 - -107,611 -188,561 Cash outflows for acquisitions of property,plant and equipment and intangible assets plant and equipment and intangible assets

Cash inflows from disposals of property, 10,571 - - 10,571 6,665 Cash inflows from disposals of property,plant and equipment and intangible assets plant and equipment and intangible assets

Impact of acquisitions (changes in consolidation scope) -933 - - -933 -651,245 Impact of acquisitions (changes in consolidation scope)

Impact of disposals (changes in consolidation scope) - - - - 41,228 Impact of disposals (changes in consolidation scope)

Cash of subsidiaries sold (changes in consolidation scope) - - - - -6,062 Cash of subsidiaries sold (changes in consolidation scope)

Other cash flows from investing activities - - 1,121 1,121 1,169 Other cash flows from investing activities

NET CASH FLOW FROM INVESTING -88,961 -9,012 1,121 -96,852 -796,806 NET CASH FLOW FROM INVESTINGACTIVITIES (2) ACTIVITIES (2)

Increase and decrease in shareholders’ equity 1,192 - -5,308 -4,116 122,802 Increase and decrease in shareholders’ equity

Amounts received on exercise of share options - - 5,308 5,308 911 Amounts received on exercise of share options

Dividends paid during the year Dividends paid during the year

- Dividends paid to shareholders in the parent company -15,136 - - -15,136 -72,043 - Dividends paid to shareholders in the parent company

- Dividends paid to minority shareholders -33,645 - -361 -34,006 -41,610 - Dividends paid to minority shareholdersin consolidated companies in consolidated companies

Borrowings drawn down and loan repayments received 34,753 - 3,203 37,956 461,921 Cash drawn down renew loans

Borrowings repaid and loans granted -112,895 -201 -10,505 -123,601 -170,323 Repayments of borrowings

Change in loans, guarantees and advances granted - - 10,802 10,802 -1,249 Change in loans, guarantees and advances granted

CASH FLOW FROM FINANCING -125,731 -201 3,139 -122,793 300,409 CASH FLOW FROM FINANCINGACTIVITIES (3) ACTIVITIES (3)

Impact of changes in exchange rates (4) - - -6,471 -6,471 11,696 Impact of changes in exchange rates (4)

CHANGE IN CASH (1 + 2 + 3 + 4) 45,942 - -6,471 39,471 41,364 CHANGE IN CASH (1 + 2 + 3 + 4)

Opening net cash 225,001 - - 225,001 264,472 Opening net cash

Impact of changes in exchange rates 6,471 - -6,471 - - Impact of changes in exchange rates

Closing net cash 264,472 - - 264,472 305,836 Closing net cash

Change 45,942 - -6,471 39,471 41,364 Change



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Statement of changes in net debt 01/01/2004 Change 31/12/2004

Gross cash (1) 425,890 59,079 484,969

Bank current accounts in debit and overdrafts (2) 200,889 19,608 220,497

Cash (3) = (1) - (2) 225,001 39,471 264,472

Gross debt (4) 298,374 -88,442 209,932

Net debt (4) - (3) 73,373 -127,913 -54,540

Statement of changes in net debt 01/01/2005 Change 31/12/2005

Gross cash (1) 484,969 56,309 541,278

Bank current accounts in debit and overdrafts (2) 220,497 14,945 235,442

Cash (3) = (1) - (2) 264,472 41,364 305,836

Gross debt (4) 209,932 300,589 510,521

Net debt (4) - (3) -54,540 259,225 204,685

Transition from French GAAP provisionsto IFRS in 2004

Net cash flows from operating activities in 2004 amounted to € 266

million under IFRS compared with € 261 million under French

GAAP. 2004 consolidated net income under IFRS (including minority

interests) totalled € 265 million, € 11 million higher than the

consolidated income published under French GAAP (€ 254 million).

At the same time, the change in operating working capital require-

ment shows a net outflow of € 105 million under IFRS, € 6 million

higher than the change calculated under French GAAP (€ 99 million).

This change is mainly due to a reclassification of tax receivables and

payables, which are now shown on the line “Tax paid”.

As regards net cash flows from investing activities, there was an

outflow of € 97 million under IFRS compared with € 89 million

under French GAAP due to the component approach adopted in

respect of property, plant and equipment and the reclassification of

certain tools from inventory to property, plant and equipment.

As regards net cash flow from financing activities, there was a net

outflow of € 123 million under IFRS, compared with € 126 million

under French GAAP.

The change in cash for 2004 is the same under both systems, i.e. an

increase of € 39 million, including the impact of the change in

exchange rates on opening cash. Group cash totalled € 264 million

at 31 December 2004.

2005

The acquisitions (changes in consolidation scope) consist mainly of

the purchase of the 45% stake in V & M TUBES (€ 545 million) and

the acquisition (USD 120 million) of OMSCO’s assets (including

cash of USD 5 million).

The disposals (changes in consolidation scope) consist mainly of the

sales of 10% of HKM and the participating interests in Vallourec do

Brasil Autopeças and Vallourec Argentina, whose cash on the

disposal date totalled € 6.1 million.

At the same time, cash flow from operating activities enabled the Group

to limit the increase in long and medium-term debts to € 292 million.


A - CONSOLIDATION PRINCIPLES

1. Framework for the preparation andpresentation of financial statements

Pursuant to European Commission regulation 1606/2002 adopted

on 19 July 2002 for all listed companies in the European Union, the

consolidated financial statements for the year ended 31 December

2005 are the first consolidated financial statements prepared by

Vallourec in accordance with the International Financial Reporting

Standards (IFRS) issued by the International Accounting Standards

Board (IASB). The versions of the IFRS used are those applicable as

at 31 December 2005, as endorsed by the European Commission as

at the date the financial statements were prepared.

The consolidated financial statements for the year ended

31 December 2005, including the related notes to the consolidated

financial statements, were approved by the Vallourec Management

Board on 6 March 2006.

The consolidated financial statements for the financial year 2005

include comparative information in respect of the financial year

2004, restated in accordance with IFRS. In order to aid comparability,

the 2003 and 2004 historical consolidated financial statements

prepared under French GAAP have not been published in addition

to the 2005 IFRS financial statements: these financial statements are

included in section 5.1.0 of the 2003 and 2004 Reference Documents

filed with the Autorité des Marchés Financiers (AMF) in France and

are available on the Company’s website (www. vallourec.com).

Information relating to the first-timeapplication of IFRSThe principles and options used in the preparation of the opening

IFRS balance sheet as at 1 January 2004, the differences between

these principles and options and the French GAAP previously applied

by the Group and their financial impact on the opening balance sheet,

the balance sheet as at 31 December 2004 and the income statement

for the year ended 31 December 2004 were detailed in the note

entitled “Consequences for the Vallourec Group of the transition to

IFRS” in section 5.3 of the Reference Document filed by the Group

for the financial year 2004.

In accordance with the interim provisions provided for by IFRS 1

“First-time Adoption of IFRS” and by IAS 32 and IAS 39 on the

presentation, recognition and measurement of financial instruments,

the Vallourec Group has chosen to apply IAS 32 and IAS 39 only as

from 1 January 2005. The 2004 comparative information does not

therefore include the impact of these standards, the main

consequences of which are described in paragraph 2.16.

Also in accordance with IFRS 1, the Group has opted for the

following exemptions to the retrospective application of IFRS in its

opening balance sheet as at 1 January 2004:

■ business combinations that occurred before 1 January 2004 have

not been restated,

■ all actuarial gains and losses in respect of retirement commitments

not recognized and measured in accordance with IAS 19 “Employee

Benefits” have been booked to shareholders’ equity in the IFRS

balance sheet as at 1 January 2004,

■ the cumulative translation differences as at 1 January 2004 resulting

from the translation of the financial statements of foreign subsidiaries

have been written off by transfer to consolidated reserves, which

had no impact on shareholders’ equity,

■ the provisions of IFRS 2 “Share-based payments” were applied only

to those plans and options granted after 7 November 2002 and in

respect of which the rights had not been vested at 1 January 2005.

The other options available under IFRS 1 have not been adopted, in

particular the exemptions relating to the revaluation of property, plant

and equipment and intangible assets.

In the preparation of its published 2005 consolidated financial

statements, Vallourec has used the same accounting options and

methods as those used in its published 2005 half-year financial state-

ments and in the 2004 comparative information restated under IFRS

and disclosed within the context of the transition to IFRS (see above).

Notes to the consolidated financial statementsfor the year ended 31 December 2005in thousands of euros (€ thousand) unless stated otherwise



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Other options for the 2005 financialstatementsVallourec has chosen to apply early, as from 1 January 2005, the

IAS 39 amendment on intra group cash-flow hedging, which was

approved by the European Commission regulation 2106/2005. The

application of this amendment is mandatory for accounting periods

beginning on 1 January 2006 and application prior to this date is

encouraged.

In view of the restatement by the IASB of its IFRIC interpretation

“Emission rights” and the uncertainty surrounding the resulting

accounting treatment to be adopted by European industrial groups,

the Group has chosen not to recognize in its 2005 IFRS financial

statements any impact in respect of CO2 emission quotas. Those

quotas obtained free of charge by the Group at the beginning of the

financial year are recorded in the financial statements at nil value.

The Group has not purchased any additional quotas or sold any

quotas and had unused quotas at the end of the financial year.

Further qualitative and quantitative information is provided in the

notes to the financial statements.

2. Accounting principles

2.1 General valuation principlesThe Group’s consolidated financial statements are prepared in

accordance with the historical cost principle, with the exception of

financial derivatives, which are measured at fair value, and financial

assets, which are measured at fair value through profit or loss. The

carrying amount of assets and liabilities that are hedged is adjusted

to take account of changes in fair value on the basis of the closing

price.

2.2 Use of estimatesThe preparation of financial statements in accordance with IFRS

obliges Vallourec’s management to use estimates and to make

assumptions that affect the carrying amount of certain assets,

liabilities, revenues and costs, as well as the information disclosed

in certain notes to the financial statements.

Because of their uncertain nature, the outcome of such assumptions

may differ from the amounts shown in the financial statements. The

Group regularly reviews its estimates and assessments to enable it

to take into account past experience and prevailing economic

conditions.

Accounts and information that may be subject to the use of

significant estimates include property, plant and equipment, intangible

assets, goodwill, financial assets, financial derivatives, inventories and

work-in-progress, provisions for liabilities and charges and deferred

taxes.

2.3 Consolidation of subsidiariesThe consolidated financial statements of the Vallourec Group

comprise the financial statements of Vallourec and of its subsidiaries

covering the period from 1 January 2005 to 31 December 2005.

Subsidiaries controlled by Vallourec are fully consolidated as from the

date on which control is acquired. They cease to be consolidated

when control is transferred outside the Group. A subsidiary is

deemed to be controlled when the Group has the power to control,

directly or indirectly, its financial and operational policy in such a way

as to derive benefit from its activity. In general, controlled companies

are those in which Vallourec owns, directly or indirectly, more than

50% of the voting rights.

The consolidated financial statements include 100% of the assets,

liabilities, revenues and costs of the subsidiaries concerned. The

shareholders’ equity and income or loss are split between the

portion attributable to the Group and the portion attributable to the

minority shareholders.

The results of acquired companies are included in the consolidated

income statement as from the effective date of acquisition.The results

of companies disposed of are included up until the disposal date.

The impact on the balance sheet and income statement of intra Group

commercial and financial transactions is eliminated.

2.4 Investments in equity affiliatesThe Group’s investments in equity affiliates are accounted for in

accordance with the equity method. Equity affiliates are companies

over whose financial and operational policy the Group exerts

significant influence but does not have control. In general, equity

affiliates are companies in which the Group owns at least 20% of

the voting rights.

The value stated in the balance sheet of investments in equity

affiliates comprises the acquisition cost of the shares (including

goodwill), increased or reduced by changes in the Group’s share of

the net assets of the equity affiliate as from the date of acquisition.

The income statement reflects the Group’s share of the results of the

equity affiliate.


2.5 Foreign currency translation2.5.1 Translation of subsidiaries’ foreign-currency

denominated financial statements

Assets and liabilities, including goodwill, of foreign subsidiaries are

translated at the official exchange rates ruling on the balance sheet

date. The income statements of foreign subsidiaries are translated

at the weighted average exchange rate for the period.

Translation differences arising are booked to shareholders’ equity.

The Group’s share of such differences is included under the heading

“Translation reserve”.

However, in accordance with the option authorized by IFRS 1 “First-

time Adoption of IFRS”, the Vallourec Group has chosen to reclassify

under the heading “Consolidated reserves” the accumulated

“Translation reserve” as at 1 January 2004 resulting from the

process of translating the financial statements of foreign subsidiaries.

On the disposal of a foreign subsidiary, the translation differences

accumulated in the “Translation reserve” account since 1 January

2004 are transferred to the income statement as part of the profit

or loss on divestment.

2.5.2 Translation of foreign-currency denominated

transactions

Foreign-currency denominated transactions are translated into the

company’s functional currency. They are translated at the spot rate

of the hedging instrument when the transaction is hedged

(see 2.16.4) and at the exchange rate applicable on the transaction

date when the transaction is not hedged.

Foreign-currency denominated monetary assets and liabilities are

translated at the balance sheet date at the exchange rate applicable

on that date. Translation differences resulting from the difference

between this rate and the rate at which the transactions were

initially recorded are included in financial income or loss.

2.6 Property, plant and equipment2.6.1 Measurement at cost net of depreciation

and impairment losses

Other than when they are acquired on the acquisition of a company,

property, plant and equipment are recorded at acquisition or

production cost. They are not revalued. At each balance sheet date,

the acquisition cost is reduced by accumulated depreciation and any

provisions for impairment losses determined in accordance with

IAS 36 “Impairment of Assets” (see 2.10).

Costs of loans used to finance assets over a long period of

commissioning or manufacture are not capitalized as part of the cost

of the asset concerned. Instead, they are written off in the period in

which they are incurred.

2.6.2 Component approach

The main components of an item of property, plant and equipment

whose useful life is shorter than that of the main asset (furnaces,

heavy industrial equipment, etc.) have been identified by the

technical departments so that they may be depreciated over their own

specific useful lives.

Subsequent expenditure on the replacement of the component

(i.e. the cost of the new component) is capitalized provided that future

economic benefits are still expected to be derived from the main

asset.

The component approach is also applied to expenditure on major

overhauls that are planned and carried out at intervals of more than

one year. Such expenditure is identified as a component of the

acquisition price of the asset and depreciated over the period

between two overhauls.

2.6.3 Maintenance and repair costs

Recurring maintenance and repair costs that do not comply with the

criteria for the component approach are written off when incurred.

2.6.4 Depreciation

Depreciation of property, plant and equipment is calculated on a

straight-line basis over the useful lives summarized below. Land is

not depreciated.

Main categories Straight-line depreciation Useful life

Buildings

Administrative and commercial buildings 40

Industrial buildings / Infrastructure 30

Fixtures and fittings 10

Technical installations, equipment and tools

New industrial installations 25

Specific production equipment 20

Standard production equipment 10

Other (automatons, etc.) 5

Other

Motor vehicles 5

Office equipment and furniture 10

Computer equipment 3



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2.6.5 Property, plant and equipment acquired

as part of a business combination

Property, plant and equipment acquired as part of a business

combination are measured at fair value on the acquisition date

and depreciated on a straight-line basis over the residual useful life

as at the acquisition date.

2.6.6 Impairment

Property, plant and equipment are tested for impairment in

accordance with the provisions of IAS 36 “Impairment of Assets”

(see 2.10 below).

2.7 LeasesAssets financed by way of finance leases which transfer to the Group

substantially all of the risks and rewards of ownership are capitalized

as property, plant and equipment at the fair value of the leased asset

or, if lower, at the present value of the minimum lease payments. The

corresponding liability is recorded within financial liabilities.

Lease payments are apportioned between the financial charge and

the reduction of the outstanding liability so as to produce a constant

periodic rate of interest on the remaining balance of the liability.

Assets leased under finance leases are depreciated over the shorter

of their useful life in accordance with Group rules (see 2.6) and the

lease term. They are tested for impairment in accordance with

IAS 36 “Impairment of Assets” (see 2.10).

Leases under which the lessor retains substantially all of the risks and

rewards of ownership are operating leases. Lease payments under

operating leases are recognized as an expense on a straight-line basis

over the lease term.

2.8 GoodwillGoodwill represents the part not allocated to specific balance sheet

items of the difference between the acquisition price of consolidated

companies and the Group’s share in the assets and liabilities

acquired, measured at their fair value on the acquisition date.

In accordance with IFRS 3 “Business Combinations”, goodwill is not

amortized. In accordance with IAS 36 “Impairment of Assets”,

goodwill is tested for impairment at least once a year or more

frequently if there is evidence that the goodwill may be impaired.The

testing procedures aim to determine whether the recoverable

amount of the cash generating unit to which the goodwill is related

or allocated is at least equal to its carrying amount (see 2.10:

Impairment of property, plant and equipment and intangible assets).

If any impairment is noted, an irreversible provision is recognized on

a specific line within operating income or loss.

In accordance with the transitional measures authorized by IFRS 1

“First-time adoption of IFRS”, acquisitions and business combinations

recognized before 1 January 2004 have not been restated and

goodwill recognized as at that date has been stated in the opening

balance sheet as at 1 January 2004 at its amount net of amortization.

This amount has become the new carrying amount under IFRS.

Since IFRS 3 does not contain specific provisions on this matter, the

Group has chosen to recognize in shareholders’ equity the difference

between the price paid and the share of the minority shareholders

repurchased in companies previously controlled.

2.9 Intangible assets2.9.1 Research and Development costs

In accordance with IAS 38 “Intangible Assets”, research costs are

written off and development costs must be capitalized as intangible

assets as soon as the entity can demonstrate that:

■ it intends and has the financial and technical resources necessary

to complete the project,

■ it is probable that the future economic benefits attributable to the

development expenditure will flow to the enterprise,

■ it is able to measure reliably the cost of the asset during its

development phase.

The main Research and Development projects were reviewed on the

basis of the information available from the central departments

coordinating the work, in order to identify and analyze those projects

in progress that had entered their development phase as defined in

accordance with IAS 38.

As a result of this review, no major projects were identified as

being in their development phase during 2004 or 2005.The Group’s

development efforts, mainly in its activities associated with oil, the

automotive industry and power generation, the aim of which is to

improve product design and develop new or improved manufacturing

processes, fulfill the criteria for classification as assets under IAS 38

only at a very late stage. It is very difficult to prove the existence of

additional, long-term future economic benefits that can be clearly

distinguished from the normal expenditure on maintaining and

enhancing production facilities and products with a view to preserving

the Group’s technological and competitive advantages.

The Group therefore considered that it would be inappropriate to

capitalize any development costs in the financial statements for the


year ended 31 December 2005. The same treatment was adopted

in the financial statements for the year ended 31 December 2004

restated under IFRS.

2.9.2 Other intangible assets

Other than in the case of development costs (see above), internally

generated intangible assets are never capitalized but are written off

as expenses of the period in which they are incurred.

Intangible assets acquired separately are recognized at cost. Such

assets comprise mainly patents and trademarks, which are amortized

on a straight-line basis over their useful lives.

Intangible assets acquired as part of the acquisition of an activity are

recorded separately from the goodwill if their fair value may be

measured reliably at the time the assets and liabilities are initially

recognized. Intangible assets with finite useful lives are amortized

over the period during which they will be used by the entity.

Intangible assets with indefinite useful lives are not amortized.

2.9.3 Impairment

Intangible assets are tested for impairment in accordance with the

provisions of IAS 36 “Impairment of Assets” (see 2.10).

2.10 Impairment of property, plantand equipment and intangible assetsUnder IAS 36 “Impairment of Assets”, the value in use of property,

plant and equipment and intangible assets is tested as soon as there

is any evidence of impairment, such evidence being reviewed at each

balance sheet date. These tests are performed at least once a year

in the case of assets with an indefinite useful life, i.e. mainly goodwill

in the case of the Vallourec Group.

To carry out these tests, assets are grouped into cash generating units

(CGUs). These CGUs are uniform groups of assets whose continuing

use generates cash inflows that are largely independent of the

cash inflows generated by other groups of assets. The value in use

of these units is determined on the basis of the present value of net

future cash flows which will be generated by the assets tested. Cash

flows are discounted at a rate corresponding to the weighted

average cost of the Group’s capital, incorporating a market risk

premium and a risk premium specific to the sector. This rate is then

adjusted, where appropriate, by a risk premium to take into account

the geographical region concerned.

Where the value in use is less than the carrying amount of the CGU,

an impairment loss is recognized on a specific line within operating

income or loss.When a CGU includes goodwill, the impairment loss

generally reduces the goodwill first, i.e. before any write-down is

recognized in respect of any other of the CGU’s assets.

However, in some cases, the appearance of impairment factors that

relate to certain specific assets (linked to internal factors or events

or decisions that cast doubt on the continuing operation of a site,

for example) may be such that they prompt an impairment test to

be performed and justify a write-down of these assets independently

of the CGU to which they hitherto belonged.

The main CGUs within the Group’s current structure and organization

are V & M Europe,V & M do BRASIL,V & M North America, the CGU

comprising the Automotive and Industry activities, and the Stainless

steel activities. Those entities not part of these CGUs are tested on

the basis of their own cash flows.

2.11 Inventories and work-in-progressInventories are measured at the lower of cost and net realizable value.

Net realizable value is the estimated selling price in the ordinary

course of business less the estimated costs of completion and the

estimated costs necessary to make the sale.

The cost of raw materials, goods for resale and other supplies

comprises the purchase price excluding taxes, less discounts, rebates

and other payment deductions obtained, plus incidental costs of

purchase (transportation, unloading charges, customs duties, buying

commission, etc.). These inventories are measured in accordance with

the weighted average cost method.

The cost of work-in-progress and intermediate and finished goods

consists of the production cost, excluding financial charges.

Production cost comprises raw materials, supplies, factory labour and

direct and indirect industrial overheads that may be allocated to the

transformation and production process, on the basis of normal

capacity.Administrative and general expenses are excluded from this

measurement.

2.12 ProvisionsA provision is recognized when, at the balance sheet date, the

Group has a present obligation (legal or constructive) and it is

probable that an outflow of resources embodying economic benefits

will be required to settle the obligation.

Provisions are discounted to present values if the time value of

money is material (for example in the event of provisions for

environmental risks or for site clean up costs). The increase in the

provisions associated with the passage of time is recognized within

financial charges.



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In the case of a restructuring, a provision may only be recognized if,

at the balance sheet date, the company has announced the

restructuring, drawn up a detailed plan or started to implement the

plan.

Provisions must be booked in respect of disputes (technical,

guarantees, tax investigations, etc.) if the Group has an obligation

to a third party at the balance sheet date. Provisions are measured

on the basis of the best estimate of the expenditure likely to be

required to settle the obligation.

2.13 Retirement and similar commitments The Group participates in the financing of additional retirement

schemes or other long-term benefits for its employees, in accordance

with custom or legal requirements. The Group offers these benefits

by means of either defined benefit schemes or defined contribution

schemes.

In the case of defined contribution schemes, the Group’s only

obligation is the payment of premiums.The contributions paid to the

schemes are written off as expenses of the period in which they are

incurred. Where relevant, a provision is booked in respect of

contributions for the financial year remaining to be paid at the

balance sheet date.

Provisions are booked to cover retirement and similar commitments

in respect of defined benefit schemes.These provisions are measured

on the basis of an actuarial calculation carried out at least once a

year and usually by independent actuaries. The projected unit credit

method is applied: each period of service gives rise to an additional

unit of benefit entitlement, and each of these units is measured

separately to build up the Group’s commitment towards employees.

The calculations take into account the specific features of the

various schemes as well as the assumptions concerning retirement

date, career progression, salary increases and the probability of an

employee still being employed by the Group at retirement age

(staff turnover rates, mortality tables, etc.). The commitment is

discounted on the basis of the interest rates applicable to long-term

bonds of first-rate issuers.

The commitment is provided for net, where relevant, of plan assets

measured at their fair value.

Actuarial gains and losses are generated by changes in assumptions

or experience variances (difference between projected and actual)

in respect of commitments or plan financial assets. These variances

are recognized in the income statement in accordance with the

“corridor” method defined in IAS 19 “Employee Benefits”. The

part exceeding by more than 10% the larger of the following

values:

■ the discounted value of the commitment at the balance sheet date,

■ the fair value of the plan assets at the balance sheet date

is amortized over the employees’ expected remaining period of

service.

For the purposes of the preparation of the opening IFRS balance sheet

as at 1 January 2004, the Vallourec Group has used the option

available under IFRS 1 of booking to shareholders’ equity all actuarial

gains and losses at that date.

Net charges for retirement and similar commitments are recognized

in operating income with the exception of the charge for discounting

rights and income associated with the return on plan assets, which

are recognized within financial income or loss.

Retirement and similar commitments mainly relate to the Group’s

French subsidiaries and its subsidiaries in Germany, the United

Kingdom, the USA, Mexico and Brazil.

2.14 Share-based paymentCertain Group officers and employees benefit from share purchase

or share subscription plans that give them the right to buy an

existing share or to subscribe for a capital increase at an agreed price.

IFRS 2 “Share-based Payment” requires such plans to be measured

and recognized.

Options must be measured on the date they are granted.

In accordance with the transitional provisions specifically provided

for by IFRS 1 and IFRS 2, the Group has chosen to recognize only

those plans established after 7 November 2002 the rights of which

had not been vested by 1 January 2005: only one share purchase

option plan fell into this category. In accordance with the previously-

applied French GAAP, the pre-7 November 2002 plans are not

measured or recognized until the options are exercised.

The Group retrospectively measured, on the grant date, the share

purchase option plan that falls within the scope of IFRS 2, in

accordance with the Black & Scholes model. Changes in value

subsequent to the grant date do not affect the initial measurement

of the option.The number of options taken into account in measuring

the plan is adjusted at each balance sheet date to take account of


the probability that the beneficiaries will still be employed by the

Group at the end of the holding period.

The benefit measured in accordance with IFRS 2 is equivalent to

remuneration paid to the beneficiaries: it is therefore recognized

within payroll costs, on a straight-line basis over the vesting period,

the corresponding amount being booked as an increase in

shareholders’ equity.

2.15 Own sharesOwn shares held by the Group are stated at acquisition cost as a

deduction from shareholders’ equity. Proceeds from the sale of

own shares are booked directly as an increase in shareholders’

equity so that gains or losses on disposal do not affect consolidated

income.

2.16 Financial instruments Financial instruments comprise financial assets and liabilities and

derivatives.

The presentation of financial instruments is defined by IAS 32. The

measurement and recognition of financial instruments are governed

by IAS 39. The standards have been adopted by the European

Commission with the exception of certain provisions of IAS 39

concerning the application to financial liabilities of the fair value

option and the prohibition on the application of hedge accounting

to customer deposits with deposit-taking institutions. None of the

provisions of IAS 39 rejected in their current form by the European

Commission affects the Vallourec Group.

In accordance with the interim provisions contained in IFRS 1,

IAS 32 and IAS 39, the Vallourec Group has chosen to apply IAS 32

and IAS 39 only as from 1 January 2005. The 2004 comparative

information does not therefore reflect the impact of these standards.

The main consequences as from 1 January 2005 have related mainly

to the treatment in accordance with IAS 39 of hedging contracts

entered into by the Group in respect of its commercial purchase and

sale transactions in foreign currencies. Implementation of the

standard has necessitated the adaptation of the Group’s cash

management and invoicing systems to render hedging operations

eligible for hedge accounting in accordance with IAS 39. Contrary

to the position under French GAAP, changes in the fair value of

derivatives are systematically recognized in the financial statements.

Changes in the fair value of hedged instruments are also recognized

at each period end (see 2.16.4 below: Derivatives and hedge

accounting). The impact of the first-time application of hedge

accounting in accordance with IAS 32 and IAS 39, at the transition

date of 1 January 2005, is reflected in the table of changes in

shareholders’ equity presented for the period from 31 December 2004

to 31 December 2005.

Moreover, in accordance with IAS 32, the existence of a repurchase

(put) option that could be exercised by Mannesmannröhren-Werke,

a 45% shareholder in the VALLOUREC & MANNESMANN TUBES

(V & M TUBES) subgroup which is 55%-controlled by the Vallourec

Group, in the event of a third party obtaining control of Vallourec, has

resulted in the recognition at 1 January 2005 of a financial liability

of an amount equal to the discounted fair value of the repurchase

amount (€ 431 million). This financial liability was recognized by

deduction from the amount at which the minority interests in

V & M TUBES are recorded in shareholders’ equity in the IFRS

balance sheet as at 31 December 2004, and as a deduction from

shareholders’ equity – Group share, in the case of the portion of the

liability that exceeds said minority interests.

The purchase by Vallourec on 23 June 2005 of the 45% minority

stake in V & M TUBES held by Mannesmannröhren-Werke terminated

the put option (see section 3).

2.16.1 Financial assets

Financial assets comprise:

■ non-current financial assets: participating interests in non-

consolidated companies and associated receivables, construction

effort participating loans and guarantees,

■ current financial assets, including accounts receivable and other

trade receivables, short-term financial derivatives and cash and

cash equivalents (marketable securities).

Initial measurement

Financial assets are initially recorded at fair value, including

transaction costs, except for assets designated as fair value through

profit or loss, which exclude transaction costs.

In most cases, fair value on the transaction date is the historical cost,

i.e. the acquisition cost of the asset.



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Classification and measurement at the balance sheet date

Financial assets (excluding hedging derivatives) are classified by IAS 39 into one of the following four categories with a view to their balance

sheet measurement:

Category Measurement Method of accounting for changes in value

Financial assets measured at fair value through profit or loss Fair value Changes in fair value recognized in profit or loss

Held-to-maturity investments Amortized cost Not applicable

Loans and receivables Amortized cost Not applicable

Available-for-sale financial assets General principle: fair value Changes in fair value recognized in shareholders’ equity

But

Amortized cost for equity Not applicableinstruments for which the fair value can not be reliably determined (in particular, shares not listed on an active market)

Financial assets at fair value through profit or loss

This category of assets comprises:

■ assets held for trading purposes, i.e. acquired by the enterprise with

the aim of realizing a short-term gain,

■ derivative instruments that are not expressly designated as

hedging instruments.

In the Vallourec Group, the assets concerned are all cash assets

(marketable securities, cash and cash equivalents, etc.).

Marketable securities (French SICAV and FCP mutual funds, etc.) are

measured at their fair value at the balance sheet date and changes

in fair value are recognized in financial income or loss. They are not

therefore tested for impairment. Fair values are determined mainly

by reference to market quotations.

Loans and receivables

These are mainly non-derivative financial assets with fixed or

determinable payments that are not listed on an active market.

In the Vallourec Group, this category includes:

■ receivables associated with participating interests, long-term

loans and construction effort participating loans,

■ accounts receivable and other trade receivables.

The amortized cost of short-term receivables such as accounts

receivable is usually similar to their historical cost.

Staff loans are measured in accordance with the effective interest

rate method applied to estimated future cash flows until the maturity

dates of the loans (the contractual interest rate may be lower).

Held-to-maturity investments

These are non-derivative financial assets with fixed or determinable

payments and fixed maturity that the entity has the intention and

ability to hold to maturity, other than loans and receivables and

financial assets classified by the entity in the other two categories

(measured at fair value through profit or loss and available-for-sale).

In the Vallourec Group, the only assets in this category are guarantee

deposits and guarantees.

Available-for-sale financial assets

Available-for-sale financial assets are mainly those that have not been

classified in any of the other three categories.

In the Vallourec Group, the main assets in this category are non-

consolidated participating interests. These are generally unlisted

shares the fair value of which cannot be estimated reliably. They are

stated at cost and tested for impairment during the preparation of the

consolidated financial statements.


Impairment testing of financial assets

Financial assets carried at amortized cost and available-for-sale

financial assets measured at cost must be tested for impairment at each

balance sheet date if there is any evidence of impairment such as:

■ significant financial difficulties or a high probability that the

counterparty will suffer bankruptcy or restructuring,

■ a high risk of non-recovery of receivables,

■ the lender, for economic or legal reasons relating to the borrower’s

financial difficulties, granting to the borrower a concession not

initially provided for,

■ an effective breach of contract such as the failure to make a

payment (of interest, principal or both),

■ the disappearance of an active market for the financial asset

concerned.

In the case of assets carried at amortized cost, the amount of the

impairment is measured as the difference between the asset’s

carrying amount and the present value of the estimated future

cash flows, taking into account the counterparty’s situation and

determined on the basis of the financial instrument’s original

effective interest rate. The estimated cash flows of short-term assets

are not discounted.

The impairment loss thus determined is recognized in financial

income or loss of the period.

As regards “Held-to-maturity investments” and “Loans and

receivables”, if, during subsequent periods, the conditions that lead

to the impairment cease to exist, the impairment loss must be

reversed, although such reversal must not result in a carrying

amount that, on the date the impairment is reversed, exceeds what

the amortized cost would have been had the impairment not been

recognized.

As regards unlisted participating interests classified as “Available-for-

sale” whose fair value cannot be determined reliably, no impairment

loss previously recognized may be reversed in subsequent periods, even

in the event of an increase in the value of the securities concerned.

2.16.2 Cash and cash equivalents

This item consists of bank current account balances and units in short-

term cash UCITS.

The cash reconciliation in the cash flow statement is performed on

the basis of the above definition of cash, net of overdrafts and

other short-term bank borrowings.

2.16.3 Financial liabilities

The Group’s financial liabilities comprise interest-bearing bank

borrowings and derivative instruments.

Borrowings are broken down into current liabilities, which are those

amounts that must be repaid within twelve months after the balance

sheet date, and non-current liabilities, which are those amounts that

mature more than twelve months after the balance sheet date.

Interest-bearing borrowings are initially recorded at historical cost

less associated transaction costs. Such costs (loan-issuance charges

and premiums) are taken into account in the calculation of the

amortized cost in accordance with the effective interest rate method.

They are recognized in financial income or loss on an actuarial

basis over the life of the liability.

At each balance sheet date, in addition to the specific procedures

associated with hedge accounting (see below), financial liabilities are

then measured at amortized cost in accordance with the effective

interest rate method.

Variable-rate borrowings for which interest rate swaps have been

entered into are accounted for in accordance with the principles

applied to cash-flow hedges. Changes in the fair values of swaps,

linked to movements in interest rates, are recognized in shareholders’

equity to the extent that they relate to the effective portion.

Otherwise, they are recognized in financial income or loss.

2.16.4 Derivatives and hedge accounting

Group’s exposure to exchange-rate risks on commercial

transactions

In addition to the hedging of certain financial liabilities (see 2.16.3),

the Group mainly enters into hedging contracts with a view to

controlling its exposure to exchange-rate risks resulting from orders

received and sales by certain subsidiaries in currencies other than their

functional currency. In particular, significant portions of Vallourec’s

sales are invoiced by European companies in US dollars. Exchange

rate fluctuations between the euro and the dollar may therefore affect

the Group’s operating margin.

The Group manages its exposure to exchange-rate risk by

implementing hedges on the basis of regularly updated forecasts of

customer orders. Operating receivables and revenues that will be

generated by the orders are thus hedged by financial instruments,

mainly forward sales of currencies.

The Group also, to a lesser extent, enters into forward purchases of

currencies to hedge its foreign currency purchase commitments.



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Measurement and presentation of derivatives

Changes in the values of derivatives as compared with the values on

the date of implementation are measured at each balance sheet date.

The fair value of forward foreign exchange contracts is calculated on

the basis of market conditions and data. Since they hedge commercial

transactions, such derivatives are presented in the balance sheet

within current assets and current liabilities.

Hedge accounting

Hedging operations in respect of commercial transactions come

within the category of cash flow hedges.

The Group applies hedge accounting only in strict compliance with

the criteria of IAS 39:

■ Documentation of the hedging relationship: nature of the underlying

hedged item, term of the hedge, hedging instrument used, spot rate

of the hedge, forward points, etc.

■ Carrying out an effectiveness test on implementation of the

derivative and updating the test at least once a quarter, in the case

of cash flow hedges.

Hedge accounting within the Group is as follows:

At the balance sheet date, changes in the hedging instrument as

compared with its date of implementation are measured at fair

value and recognized in the balance sheet in derivative accounts

(asset or liability). The following are shown separately:

■ the change in the intrinsic value of the hedging instrument

(difference between the spot rate on the date of implementation of

the hedge and the spot rate on the valuation date, i.e. the balance

sheet date).

If the hedge is effective and as long as the sale (or purchase) hedged

is not recognized, changes in the intrinsic value are recognized in

shareholders’ equity, in accordance with the principles of cash-flow

hedge accounting,

If the hedging instrument is not effective (a rare occurrence given the

procedures introduced by the Group), the change in the intrinsic

value of the derivative is recognized in financial income or loss,

■ the change in the time value (premium/discount) is systematically

recognized in financial income or loss, since this component is not

included in the hedging relationship.

The sale (purchase) corresponding to the sales forecasts (purchase

orders) hedged is recognized at the spot rate of the hedging contract

(i.e. the spot rate on the date of implementation). The account

receivable (account payable) is initially recognized at this same

spot rate.

At each balance sheet date, hedged foreign currency accounts

receivable and accounts payable are measured and recognized at the

exchange rate ruling on the balance sheet date. The difference

between that rate and the rate used on initial recognition (spot rate

on the date of implementation of the hedge) or the rate ruling on the

last balance sheet date constitutes an exchange gain or loss

recognized in financial income or loss for the period.

As from the time the hedged item (foreign currency receivable or

payable) is recorded in the balance sheet, the change in the intrinsic

value of the hedging instrument previously recognized in

shareholders’ equity is transferred to financial income or loss.

Changes in the value of the hedging instrument and the underlying

then have a symmetrical impact on the Group’s income.

The effect of the premium/discount is recognized in financial income

or loss.

2.17 Tax Deferred tax is recognized, using the liability method, in respect of

temporary differences existing on the balance sheet date between

the tax base of the assets and liabilities and their carrying amount,

as well as in respect of tax losses, in accordance with the provisions

detailed below.

The main types of deferred tax recognized are:

■ long-term deferred tax assets (provisions for retirement

commitments - French companies) which are likely to be recovered

in the foreseeable future,

■ deferred tax assets for short-term recurring items (provision for paid

holidays, etc.) or non- recurring items (employee profit sharing,

provisions for liabilities and charges that are not deductible for tax

purposes, etc.) when they are likely to be recovered in the foreseeable

future,

■ deferred tax associated with the cancellation of entries made

solely for tax purposes in local financial statements (regulated

provisions, etc.) and restatements to ensure consistency with the

parent company or consolidated financial statements,

■ losses carried forward and long-term capital losses are recognized

only for companies and tax groups in which recovery in the

foreseeable future is probable.


A deferred tax liability is not recognized in respect of goodwill or

business goodwill with the exception of those amounts that give rise

to a tax deduction (e.g. by means of an amortization charge in the

local financial statements).

The rates used to calculate deferred tax are the tax rates known on

the date the financial statements are finalized.

Deferred tax balances are never discounted.

In the balance sheet, current tax assets and liabilities relating to the

same taxable entity (e.g. tax consolidation group) are offset.

Current and deferred tax charges are recognized as income or

expenditure in the income statement unless they relate to a

transaction or event that is recognized directly in shareholders’

equity (see in particular accounting for hedging instruments,

paragraph 2.16.4).

Deferred tax balances are shown under specific headings in the

balance sheet within non-current assets and non-current liabilities.

2.18 SalesRevenues from the sale of goods are recognized in the income

statement when the following conditions are satisfied:

■ the main risks and rewards of ownership have been transferred

to the buyer,

■ the seller retains neither managerial involvement to the degree

usually associated with ownership nor effective control over the goods

sold,

■ it is probable that the financial benefits associated with the sale

will flow to the enterprise,

■ the amount of the revenues and costs incurred (or due to be

incurred) as a result of the sale can be measured reliably.

Revenues from the provision of services are recognized in the

income statement pro rata to the stage of completion at the balance

sheet date.

Revenues are not recognized if there are significant uncertainties

regarding the collectibility of the consideration due or associated

costs, or if it is possible that the goods may be returned (e.g.: buy

back or return clause).

In the event of a sale with reservation of title, the sale is recognized

on delivery of the goods if the risks and rewards have been

transferred to the buyer (the main purpose of the reservation of title

clause is to protect the seller against the risks of non-collectibility).

Revenues are measured at the fair value of the consideration

received or receivable, as determined by the agreement entered into

between the enterprise and the customer, less any trade discounts

or volume rebates allowed by the enterprise.

Reference should be made to paragraphs 2.5.2 and 2.16.4 as

regards the procedures for accounting for sales denominated in

foreign currencies.

2.19 Determination of operating income (loss) The income statement format used by the Group employs a classifica-

tion based on the nature of expenses.

Operating income is calculated as the difference between pre-tax

revenues and costs other than those of a financial nature or relating

to the income or losses of equity affiliates, and excluding any

income or losses from activities that have been or are being

discontinued.

Employee profit sharing is included in payroll costs.

German tax (“Gewerbesteuer”) is recognized in income tax.

EBITDA is an important indicator for the Group, enabling it to

measure the Group’s recurring performance. It is calculated by

taking operating income before amortization and depreciation and

removing certain material operating revenues and expenses that are

unusual in nature or occur rarely, i.e.:

■ impairment provisions relating to goodwill, other intangible assets

or property, plant and equipment and identified during impairment

tests carried out in accordance with IAS 36 (see note 2.10),

■ material restructuring costs or costs associated with staff retraining

relating to events or decisions of major importance,

■ capital gains or losses on disposals,

■ revenues and costs that would result from major litigation or

significant roll-out or capital operations (e.g. costs of integrating a

new activity).

2.20 Earnings per shareEarnings per share is calculated by dividing the Group’s consolidated

net income by the weighted average number of shares in circulation

during the financial year.



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Diluted earnings per share is calculated by assuming the exercise of

all outstanding options in accordance with the “Treasury stock

method” defined in IAS 33 “Earnings per Share”.

3. Segment reporting

Given the fundamental organizational and management structure

of the Vallourec Group, the primary segment reporting format used

in accordance with the provisions of IAS 14 “Segment Reporting”

is based on the following two sectors of activity:

■ the V & M TUBES reporting format segment, which brings together

all the entities with production and marketing facilities dedicated to

the Group’s main activity, i.e. the production of hot-rolled seamless

carbon and alloy steel tubes, both smooth and threaded, for the oil

and gas industry. This activity is characterized by a highly-integrated

manufacturing process, from the production of the steel and the hot-

rolling right through to the final stages, facilitating the manufacture

of products that are suitable for a variety of markets (oil & gas, power

generation, chemicals and petrochemicals, automotive and mechanical

engineering, etc.);

■ the Automotive, Industry and Stainless Steel reporting segment,

which comprises the entities grouped around ValTubes. This segment

incorporates primarily the specific forming and machining activities

(in particular, the production of precision tubes and automotive

components), that exhibit certain similarities in terms of risks and

performance due to their business cycles. This segment also

incorporates a number of other activities, such as the production of

stainless steel tubes and forged products, whose characteristics

are very different from those described above, but which are not

presented separately due to their relative immateriality. Such

treatment is authorized by IAS 14.

The secondary segment reporting format is geographical and

distinguishes five geographical sectors, determined on the basis of

an analysis of the specific risks and rewards they present. The

segments are as follows:

■ the European Union,

■ North and Central America (USA, Mexico and Canada),

■ South America (Argentina and Brazil),

■ Asia,

■ the rest of the world (mainly the Middle East).

Business segments Note 29 shows, for each business segment, information about the

revenues and results as well as certain information on the assets,

liabilities and capital expenditure for the financial years 2004 and

2005.

Geographical segmentsNote 29 shows, by geographical segment, information about sales

(by geographical zone in which customers are located), capital

expenditure and certain information on the assets (by zone in which

they are located) for the financial years 2004 and 2005.


B - CONSOLIDATION SCOPE

Fully consolidated companies % interest % interest % interest % control01/01/2004 31/12/2004 31/12/2005 31/12/2005

Cerec 100.0 100.0 100.0 100.0

Changzhou Valinox Great Wall - China 32.4 33.8 33.8 100.0

Escofier Technologie 100.0 100.0 100.0 100.0

Interfit 100.0 100.0 100.0 100.0

OMSCO Inc. - United States - - 100.0 100.0

Prinver Peisa - Mexico 54.6 55.0 100.0 100.0

Setval 100.0 100.0 100.0 100.0

Spécitubes 100.0 100.0 100.0 100.0

Valinox Asia 32.4 33.8 33.8 65.8

Valinox Nucléaire 100.0 100.0 100.0 100.0

Valinox Welded 96.0 100.0 - -

Vallourec 100.0 100.0 100.0 100.0

Vallourec Argentina (formerly Perdriel) - Argentina 100.0 100.0 - -

Vallourec Composants Automobiles Hautmont 100.0 100.0 100.0 100.0

Vallourec Composants Automobiles Vitry 100.0 100.0 100.0 100.0

Vallourec do Brasil Autopeças - Brazil 100.0 100.0 - -

V & M Holdings Inc. - United States 55.0 55.0 100.0 100.0

Vallourec Inc. - United States 100.0 100.0 100.0 100.0

Vallourec Industries Inc. - United States 55.0 55.0 100.0 100.0

V & M FRANCE 55.5 55.5 100.0 100.0

V & M DEUTSCHLAND GmbH - Germany 54.5 54.5 100.0 100.0

V & M CHANGZHOU Co. Ltd - China - - 100.0 100.0

V & M do BRASIL SA - Brazil 54.7 54.7 99.4 99.4

V & M FLORESTAL Ltda - Brazil 54.7 54.7 99.4 100.0

V & M MINERAÇAO Ltda - Brazil 54.7 54.7 99.4 100.0

V & M ONE 55.0 55.0 100.0 100.0

V & M SERVICES 55.0 55.0 100.0 100.0

V & M STAR - United States 44.3 44.3 80.5 80.5

V & M TUBES 55.0 55.0 100.0 100.0

V & M TUBES CORPORATION - United States 36.7 36.7 100.0 100.0

VALLOUREC MANNESMANN OIL & GAS FRANCE 55.3 55.3 100.0 100.0

VALLOUREC MANNESMANN OIL & GAS UK - United Kingdom 55.3 55.3 100.0 100.0

VALLOUREC MANNESMANN OIL & GAS GERMANY - Germany 54.5 54.5 100.0 100.0

Vallourec Précision Etirage 100.0 100.0 100.0 100.0

Vallourec Précision Soudage 100.0 100.0 100.0 100.0

Vallourec Tubes Canada Inc. - Canada 100.0 100.0 100.0 100.0

Valti 100.0 100.0 100.0 100.0

Valti GmbH - Germany 100.0 100.0 100.0 100.0

Valtimet SAS 49.2 51.3 51.3 51.3

Valtimet Inc. - United States 49.2 51.3 51.3 100.0

ValTubes (formerly Sopretac: merger of Sopretac and Valtubes in 2004) 100.0 100.0 100.0 100.0

VAM Far East - Singapore 28.1 28.1 51.0 51.0

VAM PC - Canada 55.0 55.0 100.0 100.0

VAM PTS - United States 28.1 28.1 51.0 51.0

Equity affiliatesHüttenwerke Krupp Mannesmann (HKM) - Germany 16.5 16.5 20.0 20.0

Pacific Tubular Limited - Jersey 13.6 13.6 24.8 24.8

Poongsan Valinox - South Korea - 25.6 25.6 50.0

P.T. Citra Tubindo - Indonesia 13.8 13.8 25.0 25.0

Tubos Soldados Atlântico - Brazil - - 20.6 20.7

The Group does not control any special purpose entities.



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2004

■ On 1 January 2004, the German company Deutsche Cerec, which

was in the process of being liquidated, was deconsolidated.

■ On 2 August 2004, Poongsan Valinox, which is 50%-controlled

by Vallourec, was created in South Korea. The company specializes

in the field of welded stainless steel and titanium tubes. Exceptionally,

given the relatively immaterial amounts concerned (the Group’s

share of the company’s total assets amounted to € 5 million at

31 December 2005), this company was consolidated by the equity

method.

■ The sub-holding companies Sopretac and Valtubes merged on

16 December 2004 with retroactive effect to 1 January 2004. This

merger was carried out with a view to simplifying the Vallourec

Group structure by reducing the number of sub-holding companies.

Sopretac absorbed Valtubes and changed its name to “ValTubes”.

ValTubes owns the Vallourec Group subsidiaries whose activities come

within those included since June 2004 in the “Automotive and

Industry” and “Stainless Steel” divisions.

■ Since December 2004,ValTubes has exercised full control over its

subsidiary Valinox Welded, following the acquisition of the 4%

stake formerly held by minority shareholders.

The Group’s percentage shareholdings in Valinox Welded and its

subsidiaries (Valtimet SAS, Valtimet Inc., Valinox Asia, Changzhou

Valinox Great Wall and Poongsan Valinox) changed as a result.

■ Since December 2004,V & M TUBES has exercised full control over

its subsidiary Prinver, following the acquisition of the shares formerly

held by minority shareholders.

The Group’s percentage shareholding in Prinver changed as a result.

2005

■ On 31 January 2005, Vallourec sold to Benteler Automotive its

subsidiary Vallourec do Brasil Autopeças Ltda, which specializes in

the assembly of car rear axle units. In 2004, the company achieved

sales of 203 million Brazilian reals (€ 55.9 million).

■ On 8 February 2005, Vallourec signed an agreement for the sale

of Vallourec Argentina to a member of its senior management. The

company specializes in the machining of automotive parts and the

assembly of rear axle units for Renault Argentina. In 2004, it

achieved sales of 62 million Argentinian pesos (€ 17.1 million).

Vallourec Argentina’s business was severely affected by the slump

in Argentina.An exceptional write-down of € 3 million was booked

in 2004 before the sale.

These assembly activities were not part of Vallourec’s core business and

had not achieved the critical size necessary for their development.

■ On 23 June 2005, Vallourec acquired all of the shareholdings in

V & M TUBES1 held by Mannesmannröhren-Werke, a 100%

subsidiary of Salzgitter AG. The acquisition price fixed for this

transaction was € 545 million. This price includes the dividend due

in respect of 2004.

The transaction consisted of the linked and simultaneous acquisition:

i. By Vallourec of the 45% stake in V & M TUBES for € 534.4 million,

ii. By V & M TUBES of 1% of the capital of V & M DEUTSCHLAND

GmbH for € 3.6 million, and

iii. By V & M Holdings Inc., a subsidiary of V & M TUBES, of 33.33%

of the capital of V & M TUBES CORPORATION for € 7 million.

Following this transaction, Vallourec controls directly 100% of

V & M TUBES and indirectly 100% of V & M DEUTSCHLAND GmbH

and V & M TUBES CORPORATION.

In addition, Vallourec sold 10% of the shares in the HKM steel mill

(Germany) for € 22 million to Mannesmannröhren-Werke. Following

this sale,V & M TUBES retains a 20% stake in HKM, which continues

to be accounted for as an equity affiliate.

The acquisition was financed by the available cash of Vallourec,

V & M TUBES and V & M Holdings Inc. and by a bank loan of

€ 460 million taken out by Vallourec. Of this loan, € 311.2 million

had been drawn down by 31 December 2005, of which € 260 million

was used to finance this acquisition. Details of the loan, including

the main covenants, are provided in note 14.

In addition, a rights offering, the aim of which was to partially finance

this acquisition, was launched on 20 June 2005 (subscription period from

20 June to 1 July 2005 inclusive). € 123 million of the funds were paid

up on 13 July.

(1) The acquisition by Vallourec of the 45% stake in V & M TUBES terminatedthe joint venture agreement signed between Vallourec and Mannesmannröhren-Werke in 1997, and in particular the change of control clause (see note 33of Section 5 of the 2004 annual report).


Preferential subscription rights were granted to all Vallourec’s

shareholders.

The new shares (706,312 shares) were issued at a price of € 176.95

(nominal value of € 20 and premium of € 156.95) and were

admitted to trading on the Euronext Paris Eurolist on 13 July 2005.

Accounting impact The application of IAS 32 and IAS 39 resulted, on 1 January 2005,

in the reduction in minority interests and the recognition of a

liability to Mannesmannröhren-Werke (€ 431 million), reflecting

Vallourec’s option to buy the 45% stake in V & M TUBES (change

of control clause of the joint venture agreement signed in 1997).

The acquisition by Vallourec on 23 June 2005 of the minority

interests in V & M TUBES terminated this option.This acquisition was

deemed to have been completed on the date of the legal transfer

of the shares. Due to the proximity of this date to 30 June, the

minority interests purchased have been consolidated into the

Vallourec Group’s income as from 1 July 2005.

If the acquisition had been effective as at 1 January 2005, the net

income, Group share, of the Vallourec Group would have totaled

€ 576.7 million in 2005 instead of € 473.0 million with virtually no

change in the consolidated net income.

Goodwill in respect of the 45% stake in V & M TUBES

and its subsidiaries

Under IFRS, two treatments are allowed as regards the presentation

of the difference between the price paid and the share of the

interests acquired from the minorities in companies that are already

controlled: either in assets as “goodwill” or as a reduction in


Vallourec has opted to treat the difference as a deduction from

shareholders’ equity (€ 1.5 million).

The Group’s share in the assets and liabilities acquired as a result

of the transaction has not been revalued.

Sale of 10% of HKM

The sale by Vallourec of 10% of HKM generated a consolidated

capital gain of € 5.9 million.

■ In July 2005, V & M CHANGZHOU Co. Ltd, a subsidiary of

V & M TUBES, was created to invest in the construction of a new plant

in China, specializing in the cold finishing of large-diameter seamless

alloy steel tubes for power generation plants produced in Germany.

Production is planned to start in the first half of 2006.

■ On 30 September 2005, OMSCO Inc. (United States), a subsidiary

of V & M Holdings Inc. (United States), was formed to acquire the

Omsco division of ShawCor Ltd (Canada), which is based in Houston

and specializes in the manufacture of steel drill pipes adapted to the

needs of the oil & gas industry, including drill pipes, heavy weight

drill pipes and drill collars and other drilling equipment.

The acquisition price was USD 120 million. Following the independent

valuation at their fair value of Omsco’s assets, goodwill of USD 45.2

million was recognized.This goodwill reflects the unique opportunity

for the Group to strengthen its presence in the high value-added drill

pipe market, particularly in North America.

OMSCO Inc. contributed USD 33.3 million to consolidated sales for

the period from 1 October to 31 December 2005, the adjusted

2005 sales amounting to USD 107.6 million.



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C - NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (in € thousand)

Note 1 INTANGIBLE ASSETS AND GOODWILL

Concessions, Other Total Goodwillpatents, licences intangible intangibleand other rights assets assets

Gross values

At 01/01/2004 25,895 11,540 37,435 50,084

Acquisitions 1,441 1,179 2,620 -

Disposals -724 -34 -758 -

Impact of changes in exchange rates -381 -392 -773 -2,769

Other changes 400 -5 395 21

At 31/12/2004 26,631 12,288 38,919 47,336

Acquisitions 1,486 2,808 4,294 -

Acquisitions by OMSCO Inc. 1,014 8,809 9,823 38,064

Disposals -566 -17 -583 -

Impact of changes in exchange rates 1,672 853 2,525 5,735

Other changes 416 167 583 -117

At 31/12/2005 30,653 24,908 55,561 91,018

Amortization and impairment

At 01/01/2004 -17,007 -7,872 -24,879

Amortization charges for the year -2,741 -1,825 -4,566

Reversals of impairment losses 132 - 132

Disposals 629 34 663

Impact of changes in exchange rates 257 338 595

Other changes -7 -8 -15

At 31/12/2004 -18,737 -9,333 -28,070 -

Amortization charges for the year -2,744 -2,312 -5,056

Disposals 566 17 583

Impact of changes in exchange rates -1,229 -654 -1,883

Other changes 101 -35 66

At 31/12/2005 -22,043 -12,317 -34,360 -

Net values

At 01/01/2004 8,888 3,668 12,556 50,084

At 31/12/2004 7,894 2,955 10,849 47,336

At 31/12/2005 8,610 12,591 21,201 91,018

Intangible assets: intangible assets comprise mainly:

■ V & M TUBES’s right to benefit from the contract to purchase tube rounds produced by HKM. This right was capitalized for 1997 in an

amount of € 12,381 thousand and is being amortized over the period of the contract (12 years). At 31 December 2005, the residual value

amounted to € 3,868 thousand (€ 4,900 thousand at 31 December 2004 and € 5,932 thousand at 1 January 2004).

■ On the asset acquisition by OMSCO Inc. on 1 October 2005, the intangible assets were independently valued at € 9,823 thousand.They are

being amortized over a maximum period of 10 years.


Goodwill is tested at the level of the CGUs (cash generating units)

as defined in the Group’s current organizational structure. Impairment

testing of the CGUs is carried out and their value in use determined

in accordance with the discounted cash flow method (see para-

graph 2.10 of the Consolidation principles section).

On 30 September 2005, V & M TUBES signed a contract to acquire

the assets of the Omsco division of ShawCor Ltd (Canada), which

is based in Houston (United States) and specializes in the manufacture

of steel drill pipes. OMSCO Inc., a wholly-owned subsidiary of

V & M Holdings Inc., was formed to acquire this division.The goodwill

of the OMSCO division is the difference between the acquisition price

and the independent appraisal of the fair value on the acquisition

date of the identifiable assets and liabilities (€ 38,064 thousand).

This goodwill reflects the unique opportunity for the Group to strengthen

its presence in the high value-added drill pipe market, particularly

in North America. The division’s intangible assets were also valued

(see intangible assets above).

The Group has a period of 12 months expiring on 30 September 2006

to finalize the valuation of OMSCO Inc.’s assets and liabilities.

As at 31 December 2005, the main components of goodwill

(V & M STAR and OMSCO Inc.) are included within the intangible

assets of the US companies. The changes in the euro value of these

components of goodwill are due to changes in the EUR/USD

exchange rate. Their carrying amount has been compared with their

value in use, defined as the present value of future cash flows,

taken from the latest five-year forecasts. These forecasts have been

prepared taking into account cyclical variations that affect selling

prices, volumes and raw material costs. The extrapolation of the

forecasts for the last year, projected to infinity, was determined by

applying a growth rate of 1%, which is the same as that used for

the purposes of the previous year’s tests.

Cash flows were discounted at a rate corresponding to the weighted

average cost of the Group’s capital, incorporating a market risk

premium and a risk premium specific to the sector. A rate of 8.6%

was used in 2005 (9% in 2004).

The comparison of the carrying amounts of the CGU’s assets with

the corresponding discounted cash flows, calculated using these

assumptions, did not result in the making of any provisions for

impairment losses in respect of goodwill as at 1 January 2004,

31 December 2004 or 31 December 2005. The impairment tests

carried out at 31 December 2004 were simpler than those carried

out at 1 January 2004 due to the absence of any material change

in the assets comprising the CGUs and the absence of indications

of impairment during the year.At 31 December 2005, more specific

impairment tests were re-introduced in the case of the V & M North

America CGU due to the acquisition of OMSCO Inc.’s assets.

GoodwillAnalysis of net values

Cash generating unit (CGU) V & M Europe V & M North America V & M do BRASIL(see paragraph 2.10 of Consolidation principles section)

Entities V & M DEUTSCHLAND V & M STAR OMSCO Inc. V & M USA V & M do BRASIL TotalAcquisition date 1997 2002 2005 2000

At 01/01/2004 9,128 36,926 N/A 1,112 2,918 50,084

At 31/12/2004 9,128 34,258 N/A 1,032 2,918 47,336

At 31/12/2005 9,128 39,555 38,350 1,067 2,918 91,018



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Note 2 PROPERTY, PLANT AND EQUIPMENT

Land Buildings Technical Property, Other property, Totalinstallations, plant and plant and

equipment and equipment equipmentindustrial tools in progress

Gross values

At 01/01/2004 49,921 187,542 974,871 23,102 80,426 1,315,862

Acquisitions 67 2,473 42,133 49,070 6,763 100,506

Disposals -1,043 -1,504 -21,798 -584 -2,380 -27,309

Impact of changes in exchange rates -473 -2,720 -15,764 -237 -1,313 -20,507

Other changes -249 4,609 24,403 -32,560 1,739 -2,058

At 31/12/2004 48,223 190,400 1,003,845 38,791 85,235 1,366,494

Acquisitions 6,101 6,611 90,593 64,328 20,491 188,124

Acquisitions by OMSCO Inc. 241 2,572 16,574 179 305 19,872

Disposals -180 -4,096 -16,808 - -5,035 -26,119

Impact of changes in exchange rates 7,868 10,400 67,882 9,473 11,719 107,342

Other changes -723 1,358 60,637 -44,032 -3,082 14,158

At 31/12/2005 61,530 207,245 1,222,723 68,739 109,633 1,669,871

Depreciation and impairment

At 01/01/2004 -6,908 -78,902 -451,697 -573 -37,541 -575,621

Net depreciation charge for the year - -8,197 -66,045 - -8,339 -82,581

Impairment losses -1,900 -539 -1,255 -70 -4 -3,768

Reversals of impairment losses - - 583 603 160 1,346

Disposals 88 1,388 17,121 - 2,265 20,862

Impact of changes in exchange rates 70 666 3,569 - 479 4,784

Other changes 343 -754 1,999 - 406 1,994

At 31/12/2004 -8,307 -86,338 -495,725 -40 -42,574 -632,984

Net depreciation charge for the year - -8,449 -75,477 - -7,999 -91,925

Impairment losses -2,217 - -765 - - -2,982

Reversals of impairment losses - - 865 48 - 913

Disposals - 1,935 12,475 - 1,529 15,939

Impact of changes in exchange rates -2,177 -3,095 -21,292 -3 -2,457 -29,024

Other changes 124 -367 -13,842 -97 4,292 -9,890

At 31/12/2005 -12,577 -96,314 -593,761 -92 -47,209 -749,953

Net values

At 01/01/2004 43,013 108,640 523,174 22,529 42,885 740,241

At 31/12/2004 39,916 104,062 508,120 38,751 42,661 733,510

At 31/12/2005 48,953 110,931 628,962 68,647 62,424 919,918

In 2005, disposals of property, plant and equipment comprise a net amount of € 8,481 thousand (gross value € 13,506 thousand and

depreciation of € 5,025 thousand) corresponding to the disposal of Vallourec do Brasil Autopeças and Vallourec Argentina.

The lines “Other changes” correspond mainly to reclassifications between balance sheet headings.


The most important capital expenditure projects in progress or

finalized were as follows:

2004

In Europe, capital expenditure was incurred in order to increase

production capacity in respect of boiler tubes, in particular at

V & M DEUTSCHLAND GmbH which, as well as continuing the

expansion of its production facilities begun in 2003, strengthened

its internal handling and storage facilities and increased its finishing

capacity in order to meet demand in the Chinese market. In addition,

V & M FRANCE increased the production capacity of the Saint-Saulve

steel mill by the installation of cooling system and Pyrejet equipment.

In the automotive sector, Vallourec Composants Automobiles Vitry

invested in equipment to produce engine add-ons for the models

replacing the Citroën Xsara and Peugeot 206.These add-ons improve

the safety of the passenger compartment in the event of front-end

collisions.

At the end of 2003, V & M do BRASIL embarked on a project to

increase substantially the production capacity in respect of hot-rolled

tubes. In 2004, the Brazilian plant installed a new furnace for heating

billets and modified its existing hot-rolling and finishing equipment.

The new installations became operational at the end of 2005.

At V & M FLORESTAL, the planting of highly productive eucalyptus

clones was stepped up, thus improving the company’s ability to meet

demand for charcoal as from 2012.

Changzhou Valinox Great Wall increased its production capacity in

respect of stainless steel condenser tubes used in thermal power

generation plants and, following the investment made in 2003, in

September 2004 installed two new welding lines and a new tube-

bending machine, which were brought into use in October. A new

building was constructed to house these new facilities.

More generally, the Group continued to invest with a view to

maintaining its equipment and improving the performance of its

production facilities.

2005

In V & M TUBES’s business sector, capital expenditure was incurred

in 2005 to increase production capacity in Brazil: the Group continued

with the modifications, begun the previous year, to existing rolling

and finishing plants.

The Group also allocated significant resources to its plants that finish

tubes for the power generation and oil sectors. Demand from the

Chinese market for boilers has resulted in the Group deciding to

install a plant in Eastern China equipped with facilities for the

finishing of these products. This capital expenditure was carried

out as part of the continuing expansion of V & M DEUTSCHLAND’s

facilities. Civil engineering work began in December 2005.

In the stainless steel sector, boiler tube production capacity in China

was increased.

The Group continued to invest in the maintenance and updating of

its production facilities with the aim of ensuring sufficient capacity

in periods of high activity.

Impairment testingIn the specific case of the first-time adoption of IFRS, and in view of

the positive impact on shareholders’ equity in the opening IFRS

balance sheet as at 1 January 2004, depreciation schedules have been

amended (see note on transition to IFRS - section D) and impairment

tests conducted at the level of the main reporting entities (legal

entities), i.e. the lowest level at which detailed cash forecasts are

prepared, in order to test the recoverable amount of the various

property, plant and equipment and intangible assets (excluding

goodwill) that make up the Group’s production equipment. The

only exceptions related to the grouping of the following entities:

■ HKM and V & M DEUTSCHLAND, whose individual cash flows

cannot be separately identified;

■ V & M do BRASIL, V & M MINERAÇAO and V & M FLORESTAL,

whose cash flows are closely linked.

Please refer to note 1 for information on the impairment testing of

goodwill.

Capital expenditure

Industrial investments (property, plant and equipment and intangible assets) 2004 2005

Europe 56,327 96,946

North America and Mexico 8,382 44,777

South America 36,809 73,867

Asia 1,608 6,523

TOTAL 103,126 222,113



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The impairment tests did not identify any significant impairment losses

in 2004 or 2005.

Biological assetsThe Group’s Brazilian subsidiary V & M FLORESTAL cultivates eucalyptus

forests in order to produce charcoal used in V & M do BRASIL’s blast

furnaces.

As at 31 December 2004, the company was cultivating about

185,550 hectares of eucalyptus forests compared with 177,076 hectares

as at 31 December 2005.

In the absence of a benchmark market for V & M FLORESTAL,

which is fully integrated into the production cycle of V & M do BRASIL,

its main customer, the measurement at fair value required by IAS 41

“Agriculture” is not appropriate. Instead, in accordance with the

exemptions provided by IAS 41, the forest is recognized in the

consolidated financial statements at its fair value on the acquisition

date.

At 31 December 2005, the biological assets are included within

“Other property, plant and equipment” in an amount of

€ 17.3 million. V & M FLORESTAL achieved sales of € 31.5 million

in 2005.

Note 3 INVESTMENTS IN EQUITY AFFILIATESThe main equity affiliates (carrying amount greater than € 10 million) are listed below.

HKM P.T. Citra Tubindo Other TotalGermany Indonesia

At 01/01/2004 37,583 11,806 2,040 51,429

Capital increase - - 2,096 2,096

Impact of changes in exchange rates - -829 -113 -942

Dividends paid -12 -489 -295 -796

Contribution to net income of the period -31 211 117 297

Other changes - - -29 -29

At 31/12/2004 37,540 10,699 3,816 52,055

Changes in consolidation scope -11,264 - 5 -11,259

Capital increase - - 3,784 3,784

Impact of changes in exchange rates - 1,713 1,161 2,874

Dividends paid -17 -410 - -427

Contribution to net income of the period -1,267 1,322 1,107 1,162

Other changes - - 2 2

At 31/12/2005 24,992 13,324 9,875 48,191

The change in consolidation scope in 2005 resulted from the sale of the 10% shareholding in HKM (see paragraph A - Consolidation scope).

The capital increases relate to Poongsan Valinox in 2004 and Tubos Soldados Atlântico in 2005.

HKM’s contribution to consolidated net income of € -1,267 thousand in 2005 differs from the Group’s share of the company’s net income

due to the change in Vallourec’s percentage holding during 2005 (30% in the first half and 20% in the second half).


Key company financial data (in € thousand) Shareholders’ equity Sales Net income

P.T. Citra Tubindo - Indonesia 2005 35,258 84,640 3,638

2004 42,863 47,548 773

2003 47,225 60,483 1,394

HKM - Germany 2005 124,958 1,924,236 30

2004 125,132 1,627,341 55

2003 125,278 1,351,802 41

The contribution to consolidated net income of the equity affiliates is as follows: 2004 2005

P.T. Citra Tubindo 211 1,322

Pacific Tubular Ltd 209 -42

HKM -32 -1,267

Poongsan Valinox -91 834

Tubos Soldados Atlântico - 315

TOTAL 297 1,162

The stock market price of P.T. Citra Tubindo’s shares was 8,500 Indonesian rupees at 31 December 2005, giving a valuation of the company

of € 14.7 million.

Note 4 OTHER NON-CURRENT ASSETS

Non- Receivables associated Loans Other Totalconsolidated with non-consolidated financialinvestments participating interests investments

At 01/01/2004 2,736 405 15,779 19,098 38,018

Gross values 15,178 1,340 14,451 16,460 47,429

Provisions -12,407 -1,332 - -158 -13,897

At 31/12/2004 2,771 8 14,451 16,302 33,532

Gross values 5,155 1,240 9,906 19,301 35,602

Provisions -2,674 -1,232 - -202 -4,108

At 31/12/2005 2,481 8 9,906 19,099 31,494



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Main non-consolidated participating interests Cefival Impac technologie Finalourec

At 31/12/2004

Share of shareholders’ equity 636 - 1,077

Gross values 436 10,068 1,538

Net values 436 - 1,077

% control 16.7% 100.0% 100.0%

At 31/12/2005

Share of shareholders’ equity 478 - 863

Gross values 436 - 1,538

Net values 436 - 861

% control 16.7% - 100.0%

The reduction in non-consolidated participating interests (gross values and provisions) is due to the liquidation of Impac technologie during

2005.

Loans consist mainly of long-term construction effort participating loans. The reduction in these loans between 2004 and 2005 is the result

of the change in the measurement method associated with the application of IAS 39 on financial instruments as from 1 January 2005.These

loans are measured in accordance with the effective interest rate method applied to expected cash flows until the maturity dates of the

loans. The rate used at 31 December 2005 was 3.5% (compared with 4% at 1 January 2005).

Other financial investments consist mainly of interest-bearing security deposits in connection with tax disputes in Brazil (€ 11 million at

31 December 2004 and € 17 million at 31 December 2005, see note 15).

Maturities of other non-current assets Between 1 and 5 years Over 5 years Total

Gross values at 01/01/2004

Loans 4,662 11,117 15,779

Non-consolidated investments 33 17,625 17,658

Receivables associated with non-consolidated participating interests 4,413 - 4,413

Other financial investments 18,379 928 19,307

Total 27,487 29,670 57,157


Loans 5,119 9,332 14,451


Receivables associated with non-consolidated participating interests 1,340 - 1,340

Other financial investments 13,952 2,508 16,460

Total 20,555 26,874 47,429


Loans 4,274 5,632 9,906


Receivables associated with non-consolidated participating interests - 1,240 1,240

Other financial investments 16,274 3,027 19,301

Total 20,736 14,866 35,602


Note 5 DEFERRED TAXATIONThe main bases used in the calculation of deferred taxation are:

■ recurring items: provisions for paid holiday, solidarity social

security contributions, etc.

■ non-recurring items: cancellation of regulated provisions, employee

profit-sharing, non-tax deductible provisions for liabilities and charges

and any restatements to ensure the conformity of company or

consolidated accounts to Group practices.

■ long-term recurring items: non-tax deductible provisions for

retirement commitments.

The following items are recognized in accordance with the liability

method:

■ long-term deferred tax assets (provisions for retirement commitments-

French companies), deferred tax assets for recurring items (provision

for paid holidays, etc.) which are likely to be recovered in the

foreseeable future,

■ deferred tax liabilities,

■ deferred tax liabilities resulting from timing differences in the

treatment of provisions for impairment of securities between the tax

groups and the consolidated financial statements,

■ losses carried forward are recognized only for companies and tax

groups in which recovery in the foreseeable future is reasonably

certain.

The rates used are the recovery rates known at the date the accounts

are closed.

Amounts of deferred tax, per tax entity, are shown net in the

balance sheet either under assets or under liabilities.

The basic income tax rate applicable to companies in France is

33.33%. French Social Security Finance Act 99-1140 of 28 December

1999 introduced an additional tax charge of 3.3% of the basic tax

due, resulting, for French companies, in a 1.1% increase in the

statutory tax rate. Finance Act 2004-1484 of 30 December 2004

provided for the progressive withdrawal of the supplementary

contribution which had been fixed, since 2002, at 3% of the basic

tax due. This contribution was reduced to 1.5% on 1 January 2005

and will be withdrawn in 2006.

The amended Finance Act 2004-1485 of 30 December 2004 provided

for:

■ the reduction in the taxation of all long-term capital gains and

losses from 19% to15% as from 2005;

■ the progressive withdrawal of the taxation of long-term net capital

gains arising on the disposal of participating interests. This taxation

will be reduced to 8% in 2006 and withdrawn as from 2007.

Accordingly, the deferred tax rates used for the French companies

in 2005 are 34.43% for current tax and 15.72% for long-term capital

gains and losses.

The deferred tax rates used in 2005 are 39.9% for Germany, 34%

for Brazil and 39.8% for the United States.



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The following table provides an analysis of deferred tax assets and liabilities:

Assets Liabilities Net deferredtax liabilities

At 31/12/2004

Intangible assets - 1,677

Property, plant and equipment - 76,626

Other non-current assets 1,760 -

Current assets 12,312 -

Employee benefits 28,852 -

Other non-current liabilities - 15,603

Current provisions 2,964 -

Other current liabilities 7,338 -

Net balance 53,226 93,906 40,680

Recognition of tax losses 19,408 - -19,408

TOTAL 72,634 93,906 21,272

At 31/12/2005

Intangible assets - 2,659

Property, plant and equipment - 91,640

Other non-current assets 15,970 -

Derivatives - assets - 662

Current assets 29,908 -

Cash and cash equivalents 9 -

Bank loans and other borrowings - 209

Employee benefits 25,782 -

Other non-current liabilities - 25,213

Current provisions 2,799 -

Trade payables 558 -

Derivatives - liabilities 35,747 -

Other current liabilities - 1,928

Net balance 110,773 122,311 11,538

Recognition of tax losses 3,387 - -3,387

TOTAL 114,160 122,311 8,151


The following table provides an analysis of the Group’s deferred tax balances as at 31 December 2004 and 31 December 2005:

Gross Corresponding Deferred tax Deferred taxvalues deferred tax recognized not recognized

At 31/12/2004

Tax losses carried forward 66,937 24,178 19,408 4,770

Other tax credits (long-term capital losses) 27,885 5,552 - 5,552

Other tax assets 62,467 21,089 15,673 5,416

Reclassification of net liability position - - -17,406 -

Total tax assets - 50,819 17,675 15,738

Tax liabilities -157,052 -56,353 -56,353 -

Reclassification of net asset position - - 17,406 -

Total tax liabilities - -56 353 -38,947 -

TOTAL - - -21,272 15,738

At 31/12/2005

Tax losses carried forward 16,349 3,443 3,387 56

Other tax credits (long-term capital losses) 10,038 1,578 - 1,578

Other tax assets 115,715 41,707 41,707 -

Total tax assets 142,102 46,728 45,094 1,634

Tax liabilities -154,487 -53,245 -53,245 -

Total tax liabilities - -53,245 -53,245 -

TOTAL - - -8,151 1,634

The tax losses carried forward as at 31 December 2005 relate exclusively to the subsidiary V & M FLORESTAL and consist of BRL 19 million

of tax losses carried forward taxable at 9% and BRL 30 million of tax losses carried forward taxable at 25%.

The following table provides an analysis of the changes in deferred tax:

2004 2005

As at 1 January 17,872 21,272

Impact of changes in exchange rates -743 -1,518

Recognized in income 4,143 10,576

Recognized in reserves - -22,929

Change in consolidation scope and other - 750

AS AT 31 DECEMBER 21,272 8,151



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Note 6 INVENTORIES AND WORK-IN-PROGRESS

Raw materials, supplies Products in the course Finished and semi- Totaland goods for resale of production finished products

Gross values

At 01/01/2004 240,436 154,227 138,466 533,129

Changes in inventories recognized in the income statement 73,370 20,403 44,656 138,429

Impact of changes in exchange rates -2,594 -2,671 -2,303 -7,568

Other movements 1,056 -15 13 1,054

At 31/12/2004 312,268 171,944 180,832 665,044

Changes in inventories recognized in the income statement 81,830 78,110 62,616 222,556

Acquisitions by OMSCO Inc. 22,601 5,631 1,423 29,655

Other changes in consolidation scope -6,725 -151 -501 -7,377

Impact of changes in exchange rates 16,141 7,535 16,643 40,319

Other movements -30,538 - - -30,538

At 31/12/2005 395,577 263,069 261,013 919,659

Provisions

At 01/01/2004 -58,394 -8,894 -7,686 -74,974

Impact of changes in exchange rates 130 8 60 198

Charges to provisions -7,198 -1,445 -3,423 -12,066

Reversals of provisions 6,626 5,397 3,277 15,300

Other movements -350 - 352 2

At 31/12/2004 -59,186 -4,934 -7,420 -71,540

Impact of changes in exchange rates -977 -110 -590 -1,677

Charges to provisions -6,432 -4,000 -5,047 -15,479

Reversals of provisions 9,614 907 2,339 12,860

Other movements 17,348 - - 17,348

At 31/12/2005 -39,633 -8,137 -10,718 -58,488

Net values

At 01/01/2004 182,042 145,333 130,780 458,155

At 31/12/2004 253,082 167,010 173,412 593,504

At 31/12/2005 355,944 254,932 250,295 861,171

“Other changes in consolidation scope” in 2005 represent the disposal of Vallourec do Brasil Autopeças and Vallourec Argentina.

“Other movements” comprise € 30 million in the case of gross values and € 17 million in the case of provisions representing the amount

of inventories reclassified as property, plant and equipment in accordance with IAS 16.


Note 8 FINANCIAL INSTRUMENTS Financial assets and liabilities

Financial assets and liabilities are measured and presented in the

balance sheet in accordance with the various categories specified by

IAS 39.

Impact of IAS 32 and IAS 39 on shareholders’ equity

and income or loss

As explained in paragraph 2.16 of the consolidation principles

section, the main impact of IAS 32 and IAS 39 relates to the

accounting treatment of hedging contracts entered into by the

Group in respect of its commercial purchase and sale transactions

in foreign currencies.The Group has also swapped to a fixed rate part

of its variable-rate debt. The other effects of the transition to IAS 32

and IAS 39 have little impact on the financial statements

(measurement of housing loans granted to staff in accordance with

the effective interest rate method and measurement at fair value of

marketable securities).

The main effects of IAS 32 and IAS 39 on the opening balance sheet

as at 1 January 2005 and on the financial statements for the year

ended 31 December 2005 are detailed in the following table.

The impact on opening shareholders’ equity is € 39.7 million after

deferred taxes (€ -24.4 million). The impact on closing shareholders’

equity is € -82.4 million after deferred taxes (€ 49.2 million).

As regards exchange rate hedges, the hedging relationship is based

on the spot rate for the currency (i.e. the intrinsic value of forward

purchases and sales of currencies). The premium and discount of

derivatives are systematically regarded as ineffective and recognized

in the income statement (financial income or loss).

Similarly, currency receivables and payables at 1 January 2005 have

been revalued at the spot rate at 1 January 2005.

The exchange rate differences arising as a result of the change in

accounting method (€ 21.5 million) have been recognized in


Note 7 TRADE ACCOUNTS AND NOTES RECEIVABLE

Advances Accounts Provisions Totaland receivable

deposits paid (gross)on orders (*)

At 01/01/2004 2,865 474,378 -18,045 459,198

Impact of changes in exchange rates -5 -6,809 86 -6,728

Changes in gross values 1,467 187,042 - 188,509

Charges to provisions - - -3,084 -3,084

Reversals of provisions - - 2,002 2,002

Other movements -23 - - -23

At 31/12/2004 4,304 654,611 -19,041 639,874

Impact of IAS 32/IAS 39 - -21,999 - -21,999

Acquisitions by OMSCO Inc. 61 11,742 - 11,803

Other changes in consolidation scope -221 -5,632 33 -5,820

Impact of changes in exchange rates 662 46,198 -423 46,437

Changes in gross values 3,301 226,867 - 230,168

Charges to provisions - - -3,677 -3,677

Reversals of provisions - - 9,392 9,392

At 31/12/2005 8,107 911,787 -13,716 906,178

(*) Please refer to paragraph 2.16.1 of the consolidation principles section for details of the recognition and measurement methods.

The increase in “Accounts receivable” and “Advances and deposits paid on orders” is in line with the increase in the Group’s activity.

The provision reversals in 2005 relate mainly to receivables that have become irrecoverable during the year and revaluations of provisions.

The other changes in consolidation scope in 2005 represent the disposal of Vallourec do Brasil Autopeças and Vallourec Argentina.



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The position regarding hedging instruments changed from net assets

of € 89 million at 1 January 2005 to net liabilities of € 100 million

at 31 December 2005. This change is due mainly to the hedging of

commercial transactions entered into by the European subsidiaries

in US dollars. The appreciation of the US dollar against the euro

(EUR/USD rate of 1.36 at 31 December 2004 compared with

1.18 at 31 December 2005) generated a change of € 132 million

resulting from hedges in respect of currency purchase and sale

forecasts and € 43 million on hedges backed by receivables and

payables.

In view of the effectiveness of the hedges in accordance with the criteria

of IAS 39, the impact to be recognized in the income statement concerns

only the premium/discount, which is in fact a loss of € 13,758 thousand

in respect of the financial year 2005 (see note 28).

As regards interest rates, the Group fixed, by means of swaps, a part

of its variable-rate debt denominated in euros. At 31 December 2005,

the debt swapped to a fixed rate totalled € 301.2 million. On the same

date, the fair value of the swaps recognized in shareholders’ equity

was € -1.4 million.

Balance sheet items concerned At At Movements in 200501/01/2005 31/12/2005 Total Of which Of which

reserves income (loss)

1 - Derivatives recognized in the balance sheet, see note 9 (1)

Changes in the intrinsic value of forward sales of currencies and forwardpurchases(2) linked to order books and commercial bids 65,240 -66,993 -132,233 -132,233 -

Changes in the intrinsic value of forward sales of currencies (and forwardpurchases) associated with accounts receivable (and trade accounts payable (2)) 21,686 -21,721 -43,407 - -43,407

Recognition of premium/discount 2,612 -11,145 -13,757 1 -13,758

Recognition of changes in fair value of interest rate swaps -2,051 -1,398 653 653 -

Non-effective portion of hedging instruments 1,816 724 -1,092 - -1,092

Other 106 78 -28 - -28

Sub-total: Derivatives 89,409 -100,455 -189,864 -131,579 -58,285

Of which: derivatives - assets 93,355 1,846 - - -

Of which: derivatives - liabilities 3,946 102,301 - - -

2 - Accounts receivable (accounts payable(2)) hedged in currencies - forex gain/loss

Measurement at period-end exchange rate -21,450 20,280 41,730 - 41,730

Impact of hedging operations 67,959 -80,175 -148,134 -131,579 -16,555

3 - Measurement of construction loans at the effective interest rate -3,893 -3,660 233 - 233

4 - Measurement of marketable securities at fair value 1 34 33 - 33

5 - Deferred taxes (on exchange rate and interest rate hedges) -24,400 28,861 53,261 49,179 4,082

TOTAL 39,667 -54 940 -94,607 -82,400 -12,207

Impact - see table of changes in shareholders’ equity

Revaluation reserves - financial instruments 39,378 -43,023 - -82,400 -of which: Group share 21,939 -42,883 - -64,822 -

of which: minority interests 17,439 -140 - -17,579 -

Other consolidation reserves 289 290 - 1 -

Income (loss) - -12,207 - - -12,207

TOTAL 39,667 -54,940 - -82,400 -12,207

(1) Assets and liabilities offset in this table to give net position: + = net assets, - = net liabilities.(2) Amounts not material in relation to sales.


At 31 December 2005, the following amounts were outstanding under forward foreign exchange contracts to hedge foreign-currency-

denominated purchases and sales:

Hedging contracts in respect of commercial transactions - Exchange rate risk 2004 2005

Forward exchange contracts: forward sales 1,043,396 1,880,606

Forward exchange contracts: forward purchases 32,594 61,342

Foreign exchange options 2,000 -

Foreign exchange swaps - -

TOTAL 1,077,990 1,941,948

Contract maturities at 31 December 2005:

Contracts in respect of commercial transactions Total One year or less One to five years Over five years

Forward exchange contracts: forward sales 1,880,606 1,680,157 200,449 -

Forward exchange contracts: forward purchases 61,342 58,193 3,149 -

TOTAL 1,941,948 1,738,350 203,598 -

Forward sales correspond mainly to sales of US dollars (€ 1,758 million of the € 1,881 million total).

The contracts were at an average EUR/USD rate of 1.26.

They usually cover an average period of six to twelve months and are mainly used to hedge firm orders and foreign currency receivables.

The average EUR/USD rate for US dollar sales outside the Group in 2005 was 1.2516.

Management of market risk

The industrial companies manage their foreign exchange positions

in respect of foreign currency transactions with the aim of hedging

against exchange rate fluctuations.

The strategy generally adopted is that as soon as an order is

received, forward contracts are entered into.

Receivables, payables and operating cash flows are thus hedged with

financial instruments - mainly forward purchases and sales.

To be eligible for hedge accounting as defined in accordance with

IAS 39, the Vallourec Group has developed its cash management and

invoicing systems to facilitate the traceability of hedged transactions

throughout the duration of the hedging instruments.



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Note 9 OTHER CURRENT ASSETS

Amounts due Receivables Receivables Pre- Receivables Other Totalfrom staff re. taxes re. disposals payments re. income receivablesand social excluding of property, tax

security bodies income tax andequipment

At 01/01/2004 6,288 49,298 74 4,100 42,049 13,371 115,180

Impact of changes in exchange rates -3 17 11 -140 -292 -194 -601

Other movements 255 17,073 1,936 1,568 2,713 -937 22,608

At 31/12/2004 6,540 66,388 2,021 5,528 44,470 12,240 137,187

Impact of changes in exchange rates 171 2,438 730 595 4,543 706 9,183

Other movements 64 6,673 1,301 -690 -45,697 8,864 -29,485

At 31/12/2005 6,775 75,499 4,052 5,433 3,316 21,810 116,885

Changes in “Receivables re income tax” result from the reclassification of payments on account, which have been shown as a deduction

from the tax liability shown on the liabilities side of the balance sheet as at 31 December 2005.

Changes in “Receivables re taxes excluding income tax” are mainly due to the increase in taxes recoverable from the government (VAT).

Note 10 CASH AND CASH EQUIVALENTS

Marketable securities (gross) Cash Total

At 01/01/2004 345,388 80,502 425,890

Impact of changes in exchange rates -968 -5,201 -6,169

Other movements 4,133 61,115 65,248

At 31/12/2004 348,553 136,416 484,969

Impact of changes in exchange rates 27,394 7,071 34,465

Other movements 24,025 -2,181 21,844

At 31/12/2005 399,972 141,306 541,278

“Cash and cash equivalents” comprises cash in bank current accounts and marketable securities (shares in short-term cash UCITS and mutual

and investment funds) that are immediately available (not pledged) and risk-free.

No provisions for impairment have been booked in respect of marketable securities.


USD GBP Argentinean Peso Brazilian Real Mexican Peso Others Total

At 31/12/2004 -12,019 -118 -327 319 -790 -260 -13 195

Movements 32,020 170 327 39,444 3,033 1,273 76,267

AT 31/12/2005 20,001 52 - 39,763 2,243 1,013 63,072

It should be noted that, in accordance with the option offered by IFRS 1 (“First-time Adoption of IFRS”), the Vallourec Group chose, on

1 January 2004, to reclassify under the heading “Consolidated reserves” the translation reserve accumulated since the acquisition by the

Group of the foreign subsidiaries. Main exchange rates used (Euro/Currency): Translation of balance sheet items (closing rate) and income

statement items (average rate).

USD GBP Argentinean Peso Brazilian Real Mexican Peso

2003

Average rate 1.1309 0.6919 3.3376 3.4694 12.2166

Closing rate 1.2630 0.7048 3.6670 3.6263 14.1838

2004

Average rate 1.2439 0.6787 3.6736 3.6335 14.0422

Closing rate 1.3621 0.7051 4.0506 3.6137 15.1806

2005

Average rate 1.2441 0.6838 3.8345 3.0337 13.5567

Closing rate 1.1797 0.6853 - 2.7416 12.5358

Note 11 SHAREHOLDERS’ EQUITYCapital

Vallourec’s share capital comprised 10,600,332 ordinary shares with a

nominal value of € 20 per share fully paid up as at 31 December 2005

compared with 9,869,956 shares as at 31 December 2004. The

increase was due to the issue of 730,376 new shares as a result of

the transactions described in the following two paragraphs.

Firstly, the rights offering was launched on 20 June 2005 and was

paid up on 13 July in the amount of € 122.8 million, net of costs

deducted from the issue premium of € 2.1 million. The aim of the

rights offering was to partially refinance the acquisition of the 45%

stake in V & M TUBES. The new shares (706,312 shares) were

issued at the price of € 176.95 (nominal value of € 20 and premium

of € 156.95) and were admitted to trading on the Euronext Paris

Eurolist on 13 July 2005.

Secondly, the share subscription options exercised at € 38 after

1 January 2005 resulted in the issue of 24,064 new shares (compared

with 139,730 shares in 2004), i.e. an increase of € 914 thousand,

premium included.

The preferential subscription rights in respect of own shares held were

sold and the profit on disposal increased shareholders’ equity by

€ 697 thousand (see table of changes in shareholders’ equity). The

Company held 269,749 of its own shares as at 31 December 2005.

Reserves, financial instruments

In accordance with IAS 39 on financial instruments, postings to this

reserve account are made in respect of two types of transactions:

■ effective currency hedges in respect of the order book and

commercial bids. Changes in the intrinsic values at the period end

are recognized in shareholders’ equity.

■ variable-rate borrowings in respect of which interest rate swaps

(to a fixed rate) have been entered into. They are accounted for in

accordance with the cash flow hedge method. Changes in the fair

value of swap contracts, linked to interest rate movements, are

recognized in shareholders’ equity.

Translation reserve

The translation reserve arises as a result of the translation of the share-

holders’ equity of subsidiaries outside the euro zone. The movement

in the reserve corresponds to changes in exchange rates used to

translate the shareholders’ equity and income or loss for the year of

such subsidiaries. Components of the reserve may only be written

off to the income statement in the event of the disposal of a foreign

subsidiary.



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Note 12 EARNINGS PER SHAREBasic earnings per share is calculated by dividing the net income for the financial year attributable to the ordinary shareholders by the weighted

average number of ordinary shares in circulation during the financial year.

Diluted earnings per share is calculated by dividing the net income for the financial year attributable to the ordinary shareholders by the

weighted average number of ordinary shares in circulation during the financial year (adjusted for the effects of dilutive options).

Details of the earnings and numbers of shares used to calculate basic and diluted earnings per share are given in the following table:

2004 2005

Net income attributable to the ordinary shareholders for basic earnings per share 145,024 472,985

Weighted average number of ordinary shares for basic earnings per share 9,512,058 9,938,830

Effect of dilution - share purchase and share subscription options 83,061 161,911

Adjusted weighted average number of ordinary shares for diluted earnings per share 9,595,119 10,100,741

DILUTED EARNINGS PER SHARE 15.1 46.8

Note 13 MINORITY INTERESTS

Reserves Translation difference Net income Total

At 01/01/2004 432,462 - - 432,462

At 31/12/2004 395,566 -16,104 120,219 499,681

At 31/12/2005 -54,343 7,092 159,404 112,153

An analysis of minority interests is provided in the table of changes in shareholders’ equity. The difference between the position as at

31 December 2004 and that as at 31 December 2005 is due to the acquisition by Vallourec of the 45% minority interest in V & M TUBES;

the amounts as at 31 December 2005 represent the interests of the Sumitomo and Timet groups in the subsidiaries controlled by Vallourec.

Note 14 BANK LOANS AND OTHER BORROWINGSFinancial liabilities - Non-current liabilities

Bank Other bank Totalloans and similar

borrowings

At 01/01/2004 201,935 67 202,002

New borrowings taken out 25,995 48 26,043

Repayments -38,967 -131 -39,098

Impact of changes in exchange rates 40 -18 22

Other movements -1,782 2,628 846

At 31/12/2004 187,221 2,594 189,815

Reclassification of minority interests as liabilities in accordance with IAS 32 - 01/01/2005 - 431,280 431,280

Purchase of minority interests on 23 June 2005 - -436,627 -436,627

New borrowings taken out 303,786 147 303,933

Repayments -24,245 -741 -24,986

Impact of changes in exchange rates 5,629 794 6,423

Other movements -3,119 2,908 -211

At 31/12/2005 469,272 355 469,627


Financial liabilities - current liabilities

Bank Bank loans Accrued Other bank Totaloverdrafts (one year interest and similar

or less) borrowings(one year or less)

At 01/01/2004 200,889 92,714 3,550 109 297,262

Impact of changes in exchange rates 275 42 - 16 333

Other movements 19,266 -73,454 -2,793 - -56,981

At 31/12/2004 220,430 19,302 757 125 240,614

Impact of changes in exchange rates 22,769 2,372 - - 25,141

Other movements -7,798 16,952 556 872 10,582

At 31/12/2005 235,401 38,626 1,313 997 276,337

■ In 2003,Vallourec entered into a € 150 million credit facility with

the Crédit Agricole group maturing in September 2008.The borrowing

was initially at a variable rate, but was subsequently converted into

a fixed rate borrowing by the use of swaps.The loan contract requires

the Vallourec Group to maintain its ratio of consolidated net debt to

consolidated shareholders’ equity at less than or equal to 75%.

■ In March 2005, a seven-year € 460 million credit facility was made



This € 460 million facility requires Vallourec to maintain its ratio of

consolidated net debt to consolidated shareholders’ equity at less

than or equal to 75% calculated on 31 December each year and for

the first time on 31 December 2005.A change of control of Vallourec

could result in the repayment of the loan if so decided by a two-thirds





business or financial situation and ability to repay its borrowings.

The Group complied with these covenants as at 31 December 2005.

On 31 December 2005, tranches of € 260 million and USD 25 million

were drawn down for respectively seven and five years and are

included in non-current liabilities. A tranche of € 30 million was

drawn down for six months on 12 October 2005 and is included in

current liabilities.

■ At the end of June 2005,V & M TUBES repaid the balance of USD

48 million (equivalent to € 35 million) of the borrowing entered into

on the acquisition of V & M STAR (USD 16 million matured in 2005

and USD 32 million was repaid early).

■ In addition, as a result of the capital expenditure it incurred, the

subsidiary V & M do BRASIL needed to put in place several medium-

term financing lines denominated in BRL (comprising mainly BRL

99 million from BNDES and BRL 52 million from Banco do Nordeste).

The movements in “Other bank loans and similar borrowings”

consist mainly of the treatment of the “put option” exercisable by

Mannesmannröhren-Werke in connection with the implementation

of IAS 32 and IAS 39 as at 1 January 2005:

At 1 January 2005,a financial liability was recognized of an amount equal

to the discounted fair value of the purchase amount (€ 431 million).This

amount takes into account the acquisition price of € 545 million which

includes the net income until the acquisition date.This financial liability

was recognized by deduction from the amount at which the minority

interests in V & M TUBES were recorded in shareholders’ equity in the

IFRS balance sheet as at 31 December 2004, and as a deduction from

shareholders’ equity - Group share, in the case of the portion of the

liability that exceeds said minority interests.The costs directly associated

with the transaction have also been deducted from shareholders’ equity

- Group share.The purchase by Vallourec on 23 June 2005 of the 45%

stake in V & M TUBES held by Mannesmannröhren-Werke terminated

the put option (see information on consolidation scope - A).

A discounting charge in respect of the put option of € 5.3 million

is included in financial income (loss) (see note 27).



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Indebtedness by currency

USD EUR CAD BRL GBP Total

At 01/01/2004 - currency thousand 122,789 381,554 1,823 45,551 4,598 N/A

At 01/01/2004 - € thousand 97,502 381,554 1,123 12,561 6,524 499,264

At 31/12/2004 - currency thousand 131,606 313,208 - 69,774 642 N/A

Au 31/12/2004 - € thousand 96,620 313,208 - 19,690 911 430,429

At 31/12/2005 - currency thousand 162,471 562,234 1,632 122,875 - N/A

At 31/12/2005 - € thousand 137,722 562,234 1,189 44,819 - 745,964

Breakdown by maturity of non-current bank loans and other borrowings

> 1 year > 2 years > 3 years > 4 years 5 years or more Total

At 01/01/2004 16,080 15,660 15,054 151,709 3,499 202,002

At 31/12/2004 18,375 14,731 152,253 1,555 2,901 189,815

At 31/12/2005 4,418 156,096 6,805 6,512 295,796 469,627

Indebtedness over one year at the outset, by rate

The following table groups the current and non-current portions of bank loans and other bank and similar borrowings.

Rate < 3% Rate 3% to 6% Rate 6% to 10% Rate >10% Total

At 01/01/2004

Fixed rates 4,871 100,495 76,225 12,561 194,152

Variable rates - 100,673 - - 100,673

Total 4,871 201,168 76,225 12,561 294,825

At 31/12/2004

Fixed rates 3,987 100,217 6,088 13,602 123,894

Variable rates - 85,348 - - 85,348

Total 3,987 185,565 6,088 13,602 209,242

At 31/12/2005

Fixed rates 1,171 301,351 - 44,818 347,340

Variable rates 161,910 - - - 161,910

Total 163,081 301,351 - 44,818 509,250

Indebtedness contracted at a rate higher than 10% is for companies based in Brazil.


Reorganization measures

In its financial statements for the year ended 31 December 2004,

Vallourec Précision Etirage (VPE) booked a provision in respect of its

legal and contractual obligations regarding the collective redundancy

plan for the Laigneville site. This provision of € 8,055 thousand was

calculated on the basis of the most likely outcome, taking into account

redundancies already announced at 31 December 2004. It mainly

consists of estimated expenses to be incurred under the redundancy

scheme, i.e. € 7,445 thousand, the balance representing an estimate of

the costs to be incurred in connection with the closure of the site

including contract termination costs.This provision was partly used in 2005

and the remaining provision required was estimated at € 1,834 thousand

at 31 December 2005, to cover the estimated expenses for 2006.

Note 15 PROVISIONS FOR LIABILITIES AND CHARGES

Non-current liabilities Provisions for environmental risks

At 01/01/2004 1,251

Allocations for the year 1,988

Provisions used -81

Impact of changes in exchange rates -27

Other 239

At 31/12/2004 3,370

Allocations for the year 363

Provisions used -

Impact of changes in exchange rates 574

Other -

At 31/12/2005 4,307

This provision covers, in particular, the costs of soil treatment at two industrial sites: the full amount of the likely costs has been

provisioned.

The provision also covers the clean-up costs in respect of the mine in Brazil: amounts are provided as and when minerals are extracted,

based on the volumes extracted.

Current liabilities Commercial Orders Reorganization Tax risks Other Totaland other outstanding measures (duties,

disputes - losses on taxes, tax completion audits, etc.)

At 01/01/2004 13,908 7,883 9,422 19,742 5,809 56,764

Allocations for the year 10,707 3,486 9,607 3,470 6,419 33,689

Provisions used -5,461 -3,911 -5,163 -2,408 -239 -17,182

Other reversals -2,162 - -1,479 -1,643 -949 -6,233

Impact of changes in exchange rates -24 8 - 60 1 45

Other -726 - - -1,502 104 -2,124

At 31/12/2004 16,242 7,466 12,387 17,719 11,145 64,959

Allocations for the year 9,368 929 - 14,065 7,485 31,847

Provisions used -6,630 -5,096 -9,634 -8,856 -4,678 -34,894

Other reversals -2,205 - -261 - -1,098 -3,564

Impact of changes in exchange rates 2,194 40 - 6,125 653 9,012

Other -383 - - 6 -499 -876

At 31/12/2005 18,586 3,339 2,492 29,059 13,008 66,484



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In connection with this redundancy scheme,VPE has received a claim

for damages of € 40 thousand on behalf of 18 former employees.

Given the general conditions that necessitated implementation of the

scheme, we consider that there is no need to book any additional

provisions.

Provision for tax risks

This provision mainly relates to risks in connection with tax disputes

in Brazil and has given rise to the payment of security deposits

(see note 4).

Other current provisions

This heading comprises various provisions in respect of guarantees

as to liabilities, penalties for delay, disputes with employees, etc.

The legal proceedings instituted on 22 June 2001 in the Trenton (New

Jersey) court by two US companies, MTI and Net Shape Inc.,

concerning the sale of a licence by MPS, a 99.7%-owned subsidiary

of Vallourec, to Carpenter Technology ended in December 2004

when the judge ruled that the law suit filed against Vallourec was

inadmissible. No appeal has been lodged and the case is closed.

Note 16 EMPLOYEE BENEFITS

Germany France United Kingdom Other Total

At 31/12/2004

Discounted value of the commitment 141,152 37,349 58,674 11,389 248,564

Retirement 115,746 27,930 58,674 8,965 211,315

Early retirement commitments 13,754 4,618 - - 18,372

Long-service awards and medical benefits 11,652 4,801 - 2,424 18,877

Fair value of the plan assets - - -48,628 -1,969 -50,597

Actuarial gains and losses -79 1,423 1,064 -1,495 913

Provision 141,073 38,772 11,110 7,925 198,880

At 31/12/2005

Discounted value of the commitment 171,728 42,665 85,834 21,173 321,400

Retirement 141,524 34,787 85,834 17,885 280,030

Early retirement commitments 16,236 2,811 - - 19,047

Long-service awards and medical benefits 13,968 4,838 - 3,290 22,096

Fair value of the plan assets - -900 -59,969 -4,045 -64,914

Actuarial gains and losses -20,433 -4,324 -15,875 -5,877 -46,509

Provision 151,295 37,212 9,990 11,253 209,750


The main actuarial assumptions used to value the commitments of post-employment benefit schemes, given the duration of the schemes,

are as follows:

Germany France United Kingdom Other

At 31/12/2004

Discount rate 5.25% 4.75% 5.50% between 5.87% and 9.65%

Long-term return on plan assets N/A N/A 7.00% between 8.50% and 9.65%

Rate of salary increase 2.75% 2.75% 4.30% between 3.22% and 3.50%

At 31/12/2005

Discount rate 4.25% 4.00% 4.75% between 4.00% and 9.65%

Long-term return on plan assets N/A 4.00% 6.50% between 4.00% and 9.65%

Rate of salary increase 2.75% 2.75% 4.25% between 1.00% and 3.50%

The Vallourec Group participates in the financing of additional

retirement schemes or other long-term benefits for its employees, in

accordance with custom or legal requirements.

Some of these schemes are defined benefit schemes and the Group has

thereby entered into a long-term commitment towards its employees.

In 2003, an exhaustive review was carried out of the defined benefit

schemes in respect of all companies within the consolidation scope.

No significant amendments were made to these schemes during

2004 or 2005, the presentation in 2005 of the commitments in

Mexico corresponding to an accounting reclassification.

At 31 December 2004, as at 31 December 2003, the Group recognized

in its financial statements provisions for all material defined benefit

schemes on the basis of the CNC’s (the French Conseil National de

la Comptabilité) recommendations of April 2003. The process of

identifying and classifying retirement and similar benefit schemes did

not bring to light any additional commitments as defined by IAS 19

“Employee Benefits”.The methods used by the Vallourec Group under

French GAAP for measuring retirement and similar commitments do

not differ materially from the provisions of IAS 19.

As was the case previously under French GAAP, the commitments not

recognized in the balance sheet (mainly actuarial gains and losses)

correspond to changes in or the non-crystallization of assumptions,

the effect of which is amortized over time using the “corridor”

method. However, when preparing the opening IFRS balance sheet

as at 1 January 2004, the Vallourec Group decided to recognize all

actuarial gains and losses on that date as a reduction in shareholders’

equity. Material unrecognized actuarial surpluses and deficits are

amortized over the employees’ expected remaining period of service

in accordance with the corridor method as described in IAS 19

(Germany: 13 years, France: 14 years, United Kingdom: 18 years).

The amortization begins in the financial year following the year in

which the surpluses and deficits are ascertained.

For 2004 and 2005:

■ the value of payments into the plans was € 3,868 thousand in 2004

and € 5,849 thousand in 2005;

■ the return on plan investments was € 5,043 thousand in 2004

and € 9,278 thousand in 2005.

The commitments are valued by actuaries independent of the Group.

The assumptions used take account of the specific characteristics of

the schemes and companies concerned.

France

Commitments in France correspond to retirement gratuities and

long-service award schemes.

The main change in the assumptions used in 2005 is the reduction

in the discount rate to 4.0%.A sensitivity test was carried out on the

retirement gratuities and long-service awards: a 0.5% reduction in

the discount rate would result in a change of about € 1.7 million

in these commitments.

In France, the provision booked in respect of "CASA" agreements

(early retirement programmes for older employees) implemented

in 2002 amounted to € 4.6 million as at 31 December 2004 and

€ 2.9 million as at 31 December 2005.

Under the terms of the agreement entered into with the government,

the scheme has been closed since 28 February 2005, that being the

latest date on which employees were able to join the scheme.



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At 31 December 2005, 162 employees had entered into such

agreements compared with 186 at 31 December 2004.

On 14 September 2005, an additional retirement scheme with its own

plan assets was set up for senior management. A contribution of

€ 900 thousand was made to outsource the scheme to an insurance

company. Since this is a defined benefit scheme, it is valued on an

actuarial basis and recognized in accordance with IAS 19 until the

retirement date of the employee concerned. As a result of the

amortization of past service costs, this scheme has generated a

surplus of around € 720 thousand, which is recognized in the

balance sheet since it represents an actual future saving for the

Group. The past service cost not recognized amounted to

€ 3,397 thousand at 31 December 2005.

Germany

The Group’s employees in Germany benefit from a variety of schemes

(retirement, deferred compensation, long-service awards and early

retirement) which constitute long-term commitments for the Group.

The actuarial gains and losses are mainly associated with successive

reductions in the discount rates used: 5.25% at 31 December 2004

and 4.25% at 31 December 2005.

The main change in the assumptions used in 2005 is the reduction in

the discount rate to 4.25%. A sensitivity test was carried out on the

two main German pension plans: a 0.5% reduction in the discount rate

would result in a change of about € 10.9 million in these commitments.

The significant increase in these commitments is mainly due to the

reduction in the discount rate: the reduction from 5.25% to 4.25%

generated approximately € 23 million of actuarial losses out of a net

total of € 20.3 million.

United Kingdom

The Group participates in the financing of a defined benefit pension

scheme for Group employees.The commitments are carried off balance

sheet and managed by leading institutions in the financial markets.

Since 2004, a continuing improvement has been noted: during the

financial year 2005, the return on plan assets was € 9.3 million

(€ 4.8 million in 2004) compared with an expected return of

€ 3.5 million, i.e. an actuarial gain of € 5.9 million.

The discount rate was reduced to 4.75%. A sensitivity test was carried

out on this plan: a 0.5% reduction in the discount rate would result

in a change of about € 9.5 million in this commitment.

The increase in commitments in the United Kingdom (actuarial

gains and losses for the financial year of € 22.8 million) is due, on

the one hand, to the reduction in the discount rates (impact of around

17%, or € 10 million) and, on the other hand, to changes in mortality

rates (impact of around 23%, or € 13.5 million) following the

publication of new national tables.

Brazil

In Brazil, the employer participates in the financing of retirement

gratuities and long-service awards. The retirement gratuities are

partially carried off balance sheet in a pension fund with total assets

of € 482 thousand at 31 December 2004 and € 689 thousand at

31 December 2005. The amounts paid into the fund totalled

€ 279 thousand in 2004 and € 595 thousand in 2005.

Mexico

Mexico was not one of the countries included in the review as at

31 December 2004 since local standards were considered to be

similar to IFRS and any restatement deemed not material. This year,

valuations in accordance with IAS 19 were carried out and included

in the report. The Group’s commitments in Mexico, which amounted

to € 471 thousand, correspond mainly to retirement gratuities

which are partially financed.

United States

There is a retirement scheme under which benefits are not linked to

salary. Until 31 December 2004, it was assumed that benefits

would no longer increase in the future. Following two consecutive

years of increases, this assumption has been reviewed (change of

3%), which resulted in an increase in commitments of around

€ 2.7 million.

In addition, the reduction in the discount rate and a more significant

than forecast movement in salaries in respect of a limited number of

employees resulted in the generation of actuarial losses for the period.

The changes in the assumptions are deemed to have been made

during 2005 and the charge for retirement commitments amended

accordingly. As regards the assumption concerning the increase in

medical benefits, the rate used will reduce successively from 2005

to 2012 and then be fixed beyond 2012, i.e. from 10.4% to 5.9%

for active employees and from 12.2% to 6.5% for retired employees.

Other countries

Provisions are made in respect of commitments in other countries

in accordance with local standards. They are judged to be not

material at Group level.

The charges recognized during the year comprise additional rights

acquired in respect of an additional year’s service, the change in rights

existing at the beginning of the year due to discounting, the past


service cost recognized during the period, the expected return on plan

assets, the impact of reductions in or liquidations of plans and the

amortization of actuarial gains and losses. The portion relating to the

discounting of rights is now recognized within financial income or

loss and the return on plan assets is recognized within financial

income.

An analysis of these charges is provided in the following table:


At 31/12/2004

Cost of services provided 7,350 2,737 1,279 1,246 12,612

Interest charges on the commitment 6,849 1,760 3,124 601 12,334

Expected return on plan assets - - -2,976 -87 -3,063

Net actuarial gains/losses recognized during the period -579 -325 - -773 -1,677

Net charge recognized 13,620 4,172 1,427 987 20,206

Actual return on plan assets - - 4,801 242 5,043

At 31/12/2005

Cost of services provided 8,944 1,809 1,392 2,033 14,178

Interest charges on the commitment 7,184 1,530 3,261 961 12,936

Expected return on plan assets - - -3,510 -267 -3,777

Net actuarial gains/losses recognized during the period 1,537 -183 - 780 2,134

Past service costs - 74 - 5 79

Impact of any reduction or liquidation - - - -169 -169

Net charge recognized 17,665 3,230 1,143 3,343 25,381

Actual return on plan assets - - 9,341 -63 9,278

The changes in assets associated with these benefits are as follows:


At 01/01/2004

Value of the assets N/A N/A 43,451 555 44,006

Movements during the period N/A N/A 5,177 1,414 6,591

At 31/12/2004 N/A N/A 48,628 1,969 50,597

Value of the assets N/A - 48,628 1,969 50,597

Movements during the period N/A 900 9,961 1,488 12,349

Impact of changes in exchange rates N/A - 1,380 588 1,968

At 31/12/2005 N/A 900 59,969 4,045 64,914



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The movements during the year in the net liabilities recognized in the balance sheet are as follows:


Provision at 01/01/2004 134,361 39,034 11,907 8,956 194,258

Total charge for the period 13,620 4,172 1,427 987 20,206

Benefits or contributions to the funds -6,907 -4,951 -2,250 -1,681 -15,789

Impact of changes in exchange rates - - 26 -338 -312

Other - - - 517 517

Provision at 31/12/2004 141,074 38,255 11,110 8,441 198,880

Total charge for the period 17,665 3,230 1,143 3,343 25,381

Benefits or contributions to the funds -7,444 -4,679 -2,587 -1,982 -16,692

Impact of changes in exchange rates - - 324 1,913 2,237

Other (reclassifications, etc.) - -104 - 48 -56

Provision at 31/12/2005 151,295 36,702 9,990 11,763 209,750

Amounts written off as expenses in respect of defined contribution plans:

Workers Management and Totalsupervisory staff

At 31/12/2004

Employer’s share of retirement contributions 6,536 9,017 15,553

Life insurance paid by the employer 669 875 1,544

Other retirement contributions 1,536 160 1,696

TOTAL 8,741 10,052 18,793

At 31/12/2005

Employer’s share of retirement contributions 7,222 9,241 16,463

Life insurance paid by the employer 1,106 1,157 2,263

Other retirement contributions 29 119 148

TOTAL 8,357 10,517 18,874


Other employee benefits (options)

- Share subscription options

The Extraordinary General Meeting held on 15 June 2000 (first resolution) authorized the Management Board to grant subscription options

to managers and/or employees of the Group’s companies, for a duration of five years and up to a limit of 4% of Vallourec’s share capital.

A first tranche of options was granted under this authorization on 15 June 2000. The main characteristics of these options are shown in

the table below.

Plan

Date of General Meeting 15 June 2000

Date of Management Board meeting 15 June 2000

Total number of options granted 178,500

- of which number of options granted to those employees who were members of the Executive Committee as at 31 December 2005 31,000

- number of senior managers involved 7

- exercise price (*) € 38.00

- exercise price adjusted after rights offering on 13 July 2005 (note 11) € 37.43

Number of options cancelled since date granted (**) 6,750

Date from which options may be exercised 15 June 2004

Expiry date 14 June 2007

Number of shares subscribed as at 31/12/2004 (1 option = 1 share) 139,730

- of which number of shares subscribed by members of the Executive Committee 30,250

Number of options that could be exercised at 31/12/2004 32,020

- of which number of shares that could be exercised by members of the Executive Committee 750

Number of shares subscribed in 2005 (1 option = 1 share) 24,064

- of which number of shares subscribed by members of the Executive Committee 750

Adjustment in the number of options following the rights offering (note 11) 218

Number of options that could be exercised at 31/12/2005 8,174

- of which number of options that could be exercised by members of the Executive Committee -

(*) 95% of the average price for the 20 trading sessions preceding the grant date.(**) option holders who have left the Group.



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- Share purchase options

The second resolution of the Extraordinary General Meeting held on 15 June 2000 also authorized the Management Board, during a five-year

period and up to a limit of 10% of the share capital, to grant purchase options concerning existing shares that would first have to be bought

on the stock exchange in accordance with the share repurchase authorizations given by the Meeting.


the table below.

Plan



Total number of shares employees may purchase 193,000

- of which number of shares that those employees who were members of the Executive Committee as at 31 December 2005 may purchase 54,000





Number of shares that employees may purchase as at 31/12/2004 190,750

Options cancelled in 2005 500

Adjustment in the number of options following the rights offering (note 11) 2,896


- of which number of shares that those employees who were members of the Executive Committee as at 31 December 2005 may purchase 54,819





Number of shares purchased as at 31/12/2005 -

(*) average price for the 20 trading sessions preceding the grant date, not discounted.(**) option holders who have left the Group.

In accordance with the transitional provisions specifically provided for by IFRS 1 and IFRS 2, the Group has recognized and measured in

accordance with IFRS 2 only the share purchase option plan - see paragraph 2.14 of the consolidation principles section. This plan gave

rise to payroll costs of € 0.9 million as at 31 December 2004 and € 0.9 million as at 31 December 2005.


Note 17 OTHER CURRENT LIABILITIES

Social Tax Payables relating Deferred Other Totalsecurity liabilities to the acquisition income current

liabilities of property, liabilitiesplant and equipment

At 01/01/2004 132,892 - 7,072 6,677 15,372 162,013

Impact of changes in exchange rates -854 -481 - -1 -559 -1,895

Other movements 5,033 48,764 -1,798 2,696 3,467 58,162

At 31/12/2004 137,071 48,283 5,274 9,372 18,280 218,280

Impact of changes in exchange rates 9,361 2,691 15 5 1,287 13,359

Other movements 39,621 26,047 4,592 -3,819 1,177 67,618

At 31/12/2005 186,053 77,021 9,881 5,558 20,744 299,257

Social security liabilities were higher at 31 December 2005 due, in particular, to the increase in the liability in respect of employee profit sharing.

Note 18 INFORMATION ON RELATED PARTIES

The following transactions were entered into with related parties:

Sales Purchases Receivables due Payables due to related from related from related to related

parties parties parties parties

At 31/12/2004

Salzgitter AG Group 73,195 359,608 7,742 31,668

Rothschild & Cie - 1,150 - -

Timet Group 3,684 17,130 1,241 1,672

At 31/12/2005

Salzgitter AG Group 82,556 634,290 6,517 57,449

Rothschild & Cie - 750 - -

Timet Group 4,985 23,795 1,497 5,382

Sales to the Salzgitter AG Group concern sales of tube hollows to be drawn.

Purchases concern mainly the purchase of steel rounds from HKM, which is 30%-owned by the Salzgitter AG Group. These products are

used as raw materials in the manufacturing processes of the European rolling mills of V & M DEUTSCHLAND and V & M FRANCE.

The transactions carried out in 2004 and 2005 with Rothschild & Cie relate to the consultancy agreement to assist the Management Board

in the acquisition of the 45% stake in V & M TUBES finalized on 23 June 2005.

The transactions with the Timet Group represent mainly purchases of titanium coils used in the manufacture of welded tubes by Valtimet

and its subsidiaries.



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SUPERVISORY BOARD AND MANAGEMENT BOARD REMUNERATION

The total attendance fees paid to members of the Supervisory Board in 2005 was € 230 thousand compared with € 179 thousand in 2004.

The total remuneration paid to the Executive Committee (8 members) was as follows:

2004 2005

Remuneration and benefits in kind 1,965 2,419

Retirement commitments 432 550

Supplementary pension commitments N/A 1,956

As regards retirement benefits granted to senior management, there is no specific scheme and they benefit from the Vallourec Group’s

supplementary pension scheme (Article 39 type) introduced in 2005 (see note 16).

- Share subscription options (see note 16)

Number of shares subscribed as at 31 December 2004 (1 option = 1 share) by members of the Executive Committee 30,250

Number of shares subscribed in 2005 (1 option = 1 share) by members of the Executive Committee 750

Number of options that could be exercised as at 31/12/2005 -

- Share purchase options (see note 16)

Total number of shares that the members of the Executive Committee as at 31 December 2005 may purchase 54,819

As at 31 December 2005, no loans or guarantees had been granted to senior management by the parent company Vallourec or its subsidiaries.

Note 19 OFF-BALANCE-SHEET COMMITMENTSOn 24 May 2005, due to the nature of its business,V & M FRANCE was granted a greenhouse gas emission allowance. For 2005, this allowance

amounted to 92,855 tonnes of CO2. The market value as at 31 December 2005 was € 21.10 per tonne. The remaining balance of the

allowances granted for the financial year 2005 is 14,859 tonnes. The balance of the allowances due in respect of the current three-year

period which began in 2005 amounts to 185,710 tonnes.

2004 2005

Commitments received

Guarantees and commitments received 17,093 39,824

HKM supply contract 68,429 56,707

Other commitments received 21,313 19,344

TOTAL 106,835 115,875

Commitments given (excluding financial instruments) 214,616 335,403


Commitments given by maturity

2004 One year or less Over one year Over five years

Balance sheet

Long-term borrowings 209,242 19,427 186,914 2,901

Off-balance sheet

Market guarantees 62,131 38,665 22,517 949

Other security, mortgages and pledges given 46,025 9,283 13,454 23,288

Equipment leasing 58 29 15 14

Long-term leasing contract 11,482 2,592 7,246 1,644

HKM supply contract 68,429 14,406 54,023 -

Pensions and retirement benefits -913 N/D N/D -913

Other commitments 4,559 4,444 115 -

TOTAL 191,771 69,419 97,370 24,982

2005 One year or less Over one year Over five years

Balance sheet

Long-term borrowings 509,250 39,623 173,831 295,796

Off-balance sheet

Market guarantees 96,010 77,895 18,115 -

Other security, mortgages and pledges given 116,461 5,620 34,356 76,485

Long-term leasing contract 10,913 3,060 6,209 1,644

HKM supply contract 56,707 15,144 41,563 -

Pensions and retirement benefits 46,508 N/D N/D 46,508

Other commitments 8,804 8,804 - -

TOTAL 335,403 110,523 100,243 124,637

V & M TUBES and its subsidiaries benefit from a contract to purchase

tube rounds from the HKM (affiliated company) steel mill. In this

connection, commitments to collect the agreed tonnage throughout

the contract period are shown as an off-balance-sheet item. As a

counterpart, HKM’s commitment to deliver the tube rounds to the

V & M TUBES sub-group is shown under commitments received.

All material off-balance-sheet commitments, as per the accounting

standards currently in force, have been included in the above

breakdown.

In addition, in connection with its normal operations, the Group is

involved in a number of disputes and litigation which, in the

Management Board’s opinion, will not result in the Group bearing

significant costs nor will they have a material impact on its financial

situation, business or net income.



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The main exchange rates used are shown in note 11.

(income statement items are translated at the average rate)

Note 20 SALES

2004 2005

France 385,977 406,414

Germany 523,417 613,568

Other EU Member States 397,610 649,982

North America (NAFTA) 685,194 1,118,899

South America 400,089 496,098

Asia 486,241 838,103

Rest of the world 159,231 184,341

TOTAL 3,037,759 4,307,405

Note 21 OTHER OPERATING REVENUES

2004 2005

Fees for concessions and patents 8,537 12,449

Operating subsidies and other revenues 17,532 11,607

TOTAL 26,069 24,056

“Operating subsidies and other revenues” represent mainly subsidies and reimbursements received from third parties.

Note 22 TAXES AND DUTIES

2004 2005

Taxes on remuneration -6,708 -7,673

Business use tax -19,380 -24,488

Property tax -6,518 -6,431

Other taxes and duties -15,200 -14,373

TOTAL -47,806 -52,965


Note 23 PAYROLL COSTS AND AVERAGE NUMBER OF EMPLOYEES IN CONSOLIDATED COMPANIES

2004 2005

Payroll costs

Wages and salaries -441,215 -482,949

Employee profit sharing -18,782 -55,524

Charge in respect of share options -912 -912

Social security contributions -157,981 -177,039

TOTAL -618,890 -716,424

Average number of employees in consolidated companies

Executives 1,169 1,163

Supervisory, clerical and technical staff 3,449 3,452

Workers 12,840 12,670

TOTAL 17,458 17,285

Note 24 CHARGES TO PROVISIONS NET OF REVERSALS

2004 2005

Provisions for operating liabilities and charges -30,540 -45,454

Provisions against current assets -14,893 -19,412

Reversals of provisions for operating liabilities and charges 30,218 41,063

Reversals of provisions against current assets 17,492 22,307

TOTAL 2,277 -1,496

Note 25 AMORTIZATION AND DEPRECIATION

2004 2005

Amortization of intangible assets (see note 1) -4,566 -5,077

Depreciation of property, plant and equipment (see note 2) -84,481 -94,357

Reversals of depreciation and provisions on property, plant and equipment - 239

TOTAL -89,047 -99,195

Note 26 ASSET DISPOSALS AND RESTRUCTURING COSTS

2004 2005

Reorganization measures (net of expenses and provisions) -15,801 -1,175

Net capital gains on disposals of non-current assets 5,785 4,900

TOTAL -10,016 3,725

The capital gains on disposal correspond mainly to the disposal of consolidated participating interests (10% of HKM and all of

Vallourec do Brasil Autopeças in the first half of 2005) and the disposal of other non-current assets.



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Note 27 FINANCIAL INCOME (LOSS)

2004 2005

Financial income

Income from marketable securities 10,440 13,422

Income from disposal of marketable securities 6,911 5,905

Total 17,351 19,327

Interest charges -18,913 -23,637

Other financial income and charges

Income from securities 847 938

Income from loans and receivables 2,072 2,847

Exchange losses (-) or gains (+) 6,507 4,767

Charges to provisions, net of reversals 2,373 -205

Discounting of the put option on the 45% stake in V & M TUBES (until 23/06/2005) - (see note 14) N/A -5,347

Losses (-) or gains (+) on the change in the premium/discount (see note 8) N/A -13,758

Other financial income and charges -1,854 -2,675

Total 9,945 -13,433

Other discounting charges

Financial charges: discounting of retirement commitments (see note 16) -12,333 -13,306

Financial income: discounting of certain assets and liabilities - 310

Financial income from retirement plan assets (see note 16) 3,063 4,150

Total -9,270 -8,846

FINANCIAL RESULT -887 -26,589


Note 28 RECONCILIATION OF THEORETICAL AND ACTUAL TAX CHARGE

Breakdown of the tax charge 2004 2005

Current tax charge -85,305 -296,874

Deferred taxes (see note 5) -4,143 -10,576

Net charge -89,448 -307,450

Net income (loss) of consolidated companies 264,945 631,227

Tax charge -89,448 -307,450

Net income (loss) of consolidated companies, before tax 354,393 938,677

Statutory tax rate of consolidating company (see note 5) 35.43% 34.93%

Theoretical tax charge -125,561 -327,880

Impact of main losses carried forward 8,410 12,736

Impact of long-term capital gains or losses 11,379 5,579

Impact of permanent differences 9,362 20,944

Impact of temporary differences and other effects 1,502 -

Impact of differences in tax rates 5,460 -18,829

-89,448 -307,450

ACTUAL TAX RATE 25.24% 32.75%

The permanent differences consist mainly of the net income of the minority interests in V & M STAR taxed at Sumitomo group (partnership) level.

The differences in tax rates reflect mainly the diversity of tax rates applied in each country (France 34.93%, Germany 39.90%, the United States

41.19% and Brazil 34%) and, to a lesser extent, the changes in these rates from one year to the next (€ 3.3 million).



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Note 29 SEGMENT INFORMATION

Business segmentsThe following tables provide, for each business segment, information on the revenues and results as well as certain information on the assets,

liabilities and capital expenditure for the financial years 2004 and 2005.

Primary segment reporting format: by business segment

2005 V & M TUBES ValTubes Vallourec Inter-segment Totaland others (*) transactions

Income statement

Sales

Sales to external customers 3,568,842 671,267 67,296 - 4,307,405

Inter-segment sales 172,655 27,436 41,306 -241,397 -

Total 3,741,497 698,703 108,602 -241,397 4,307,405

Charges to amortization and depreciation -79,739 -17,624 -765 -1,067 -99,195

Operating income (loss) 909,603 59,019 -2,835 -521 965,266

Balance sheet

Non-current assets 994,933 144,475 1,079,720 -1,062,212 1,156,916

Current assets 1,610,336 292,501 37,749 -54,506 1,886,080

Cash and cash equivalents 432,617 94,534 14,127 - 541,278

TOTAL ASSETS 3,037,886 531,510 1,131,596 -1,116,718 3,584,274

Shareholders’ equity 1,542,768 257,339 614,917 -1,024,081 1,390,943

Minority interests 81,813 30,376 - -36 112,153

Non-current liabilities 295,349 31,516 431,122 -20,322 737,665

Current liabilities 1,117,956 212,279 85,557 -72,279 1,343,513

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY 3,037,886 531,510 1,131,596 -1,116,718 3,584,274

Cash flows

Capital expenditure: property, plant and equipment and intangible assets 203,354 17,716 1,043 - 222,113

Other information

Average no. of employees 13,604 3,391 290 - 17,285

Payroll costs 552,898 134,271 29,255 - 716,424

(*) Vallourec, Setval (Vallourec Group analysis and research services) and the marketing subsidiaries Vallourec Tubes Canada and Vallourec Inc.


2004 V & M TUBES ValTubes Vallourec Inter-segment Totaland others (*) transactions

Income statement

Sales

Sales to external customers 2,332,918 663,724 41,117 - 3,037,759

Inter-segment sales 142,246 26,173 36,170 -204,589 -

Total 2,475,164 689,897 77,287 -204,589 3,037,759

Charges to amortization and depreciation -67,574 -19,045 -1,396 -1,032 -89,047

Operating income (loss) 336,385 29,667 -8,320 -2,452 355,280

Balance sheet

Non-current assets 719,095 155,940 503,156 -483,234 894,957

Current assets 1,107,230 289,036 65,438 -91,139 1,370,565

Cash and cash equivalents 243,661 64,471 176,837 - 484,969

TOTAL ASSETS 2,069,986 509,447 745,431 -574,373 2,750,491

Shareholders’ equity 500,398 224,343 552,436 -464,318 812,859

Minority interests 480,708 19,893 - -920 499,681

Non-current liabilities 251,574 35,801 145,156 11 432,542

Current liabilities 837,306 229,410 47,839 -109,146 1,005,409

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY 2,069,986 509,447 745,431 -574,373 2,750,491

Cash flows

Capital expenditure: property, plant and equipment and intangible assets 84,882 17,381 863 - 103,126

Other information

Average no. of employees 13,272 3,893 293 - 17,458

Payroll costs 453,395 138,666 26,829 - 618,890

(*) Vallourec, Setval (Vallourec Group analysis and research services) and the marketing subsidiaries Vallourec Tubes Canada and Vallourec Inc.



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Geographical segmentsThe following tables provide, by geographical segment, information on sales (by geographical location of the Group’s customers) and capital

expenditure as well as certain information on assets (by location in which the companies have a presence).

Secondary segment reporting format: by geographical area

2005 Europe North South Asia Rest TotalAmerica America of the

and Mexico world

Sales

Sales to external customers 1,669,964 1,118,899 496,098 838,103 184,341 4,307,405

Balance sheet

Property, plant and equipment and intangible assets (net) 442,713 258,207 228,990 11,209 - 941,119

Cash flows

Capital expenditure: property, plant and equipment and intangible assets (*) 96,946 44,777 73,867 6,523 - 222,113

Other information

Average no. of employees 10,478 1,317 5,322 168 - 17,285

Payroll costs 518,880 100,843 95,570 1,131 - 716,424

(*) Cash flows in respect of capital expenditure in the “North America and Mexico” segment comprise the acquisition of the assets of OMSCO Inc., which,in the cash flow statement, are shown as a change in consolidation scope.

2004 Europe North South Asia Rest TotalAmerica America of the

and Mexico world

Sales

Sales to external customers 1,307,004 685,194 400,089 486,241 159,231 3,037,759

Balance sheet

Property, plant and equipmentand intangible assets (net) 399,908 205,854 134,353 4,244 - 744,359

Cash flows

Capital expenditure: property, plant and equipment and intangible assets 56,327 8,382 36,809 1,608 - 103,126

Other information

Average no. of employees 10,385 1,204 5,720 149 - 17,458

Payroll costs 470,423 71,145 76,370 952 - 618,890


Note 30 POST-BALANCE-SHEET EVENTSThe acquisition on 21 March 2006 by V & M TUBES of SMFI (Société

Matériel de Forage International), a company based in Cosne-sur-

Loire, France, and specialized in the manufacture of heavy-weight drill

pipes and high-tech products for oil & gas drilling.

The acquisition by VALLOUREC MANNESMANN OIL & GAS FRANCE

on 1 February 2006 of a machine shop for these same products,

located in Tarbes, France. The machine shop was previously owned

by GIAT.

During the first half of 2006, ValTubes announced the sale of its

subsidiary Spécitubes, the only company in the Vallourec Group

operating in the aerospace sector, to one of Spécitubes’s important

customers, the German company Pfalz-Flugzeugwerke GmbH (PFW).

Spécitubes has two plants in France, employs about 160 staff and

generated sales of € 27 million in 2005. The affiliation with its new

shareholder will enable Spécitubes to strengthen its position, whilst

developing complementary activities for major aerospace customers.

The acquisition by Valtimet, at the beginning of April 2006, of 75% of

CST Ltd.This Indian company, which has been renamed CSTValinox Ltd,

is located in Hyderabad and specializes in the production of tubes

for power plant condensers for the Indian market.

Vallourec will submit for approval to the General Meeting of the

shareholders to be held on 1 June 2006 the payment of a dividend of

€ 11.2 per share. This dividend is 3.5 times the 2004 dividend

(€ 3.2 per share). After taking into account the interim dividend

of € 4.0 per share already paid on 12 October 2005, the balance

remaining to be paid is € 7.2 per share, which will be paid on

5 July 2006.



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D - CONSEQUENCES FOR THE VALLOURECGROUP OF THE TRANSITION TO IFRS

Pursuant to European Commission regulation 1606/2002 adopted

on 19 July 2002 for all listed companies in the European Union, as

from the financial year commencing 1 January 2005, Vallourec will

prepare its consolidated financial statements in accordance with the

International Financial Reporting Standards (IFRS) issued by the

International Accounting Standards Board (IASB) and endorsed by

the European Commission.

The IFRS have thus become the framework for the preparation of

Vallourec’s consolidated financial statements, replacing French

GAAP, which was applied for the last time to the 2004 consolidated

financial statements.

This change represents a major transformation for the Group’s

internal organization and for all those – shareholders, institutional

investors, financial analysts, rating agencies and journalists – that

have a direct interest in the financial information published by the

Group.

The aim of this memorandum is to provide the necessary information

concerning the transition to IFRS (in accordance with the

recommendations of the CESR – the Committee of European

Exchange Securities Regulators – and the AMF – the French Financial

Markets Authority).

However, the Vallourec Group reserves the right, when it publishes

the final and definitive version of its first financial statements

prepared in accordance with IFRS, to amend certain accounting

policies and principles used in this memorandum.

This presentation memorandum was reviewed by Vallourec’s Executive

Board on 7 March 2005, and presented to the Finance Committee

on 2 March 2005 and to the Supervisory Board on 8 March 2005.

The information contained herein has been audited by Vallourec’s

Statutory Auditors who expressed a favourable opinion on the

information contained in this publication in their specific audit

report thereon.

1 Presentation of the quantitative impactof the transition to IFRS

1.1 Objective and content

1.2 Impact of transition to IFRS

1.2.1 Consolidated balance sheet reconciliation as at 1 January 2004

1.2.2 Consolidated balance sheet reconciliation as at 31 December 2004

1.2.3 Shareholders’ equity reconciliation as at 1 January 2004 and 31 December 2004

1.2.4 Consolidated income statement reconciliation for the period from 1 January to 31 December 2004

2 Recognition, measurement and presentationprinciples applied by the Group under IFRS

2.1 Preliminary comments

2.2 IFRS principles applied by Vallourec

2.3 Non-application of IAS 32 and IAS 39 to the 2004financial statements restated under IFRS

2.4 Principles used in the preparation of the opening IFRSbalance sheet as at 1 January 2004 and exemptionsto the general principle of retrospective application

2.5 Principles used by Vallourec in its IFRS financial statements:differences from French GAAP/IFRS options/Main impacts

2.5.1 Balance sheet presentation under IFRS

2.5.1.1 Presentation principles

2.5.1.2 Main reclassifications in the consolidated balance sheets as at 1 January and 31 December 2004

2.5.2 Income statement presentation under IFRS

2.5.3 Recognition and measurement principles

Note 1 Research and development costs

Note 2 Goodwill

Note 3 Property, plant and equipment

Note 4 Impairment of tangible and intangible assets

Note 5 Employee benefits

Note 6 Share-based payment (share options)

Note 7 Deferred taxation

Note 8 Investments in equity affiliates

Note 9 Other restatements

2.6 Levels of segment reporting used by the Vallourec Group

3 Main impact of the application of IAS 32 and IAS 39 starting 1 January 2005


1.1 Objective and content

The quantitative effects of the transition to IFRS detailed below

(see 1.2) relate to:

– the preparation of the opening IFRS balance sheet as at 1 January

2004,

– the impact on the presentation and measurement of the main

balance sheet items as at 31 December 2004 and income statement

items for the period from 1 January to 31 December 2004.

As the transition to IFRS will have only a very limited impact on the

presentation of the cash flow statement prepared under IFRS, this

report is not covered.

The aim of the following reconciliations is to highlight and explain

the main effects of the change of accounting framework on the

Group’s financial position and performance. This information is not

a substitute for the more detailed comparative presentation that will

be provided in respect of the consolidated financial statements for

the financial year ended 31 December 2005, including, in particular,

comprehensive comparative notes to the financial statements for both

2005 and 2004, which will comply with the requirements of the IFRS

framework.

In order to provide investors with consistent financial information in

respect of 2005, the Vallourec Group will publish half-year financial

statements using the same IFRS transaction measurement and

recognition rules as those that will be applied to the financial

statements for the year ended 31 December 2005, but will limit the

detail in the notes to the financial statements to that required

under French regulations. A comparative information under IFRS in

respect of the period from 1 January to 30 June 2004 and a reconcili-

ation with the financial statements for that same period previously

prepared under French GAAP will be presented together with the

half-year financial statements for the period ended 30 June 2005.

1.2 Impact of transition to IFRS

In accordance with IAS 1 “Presentation of financial statements”, the

presentation of Vallourec’s consolidated balance sheet complies

with the classification of assets and liabilities as current or non-current.

The assets and liabilities in the French GAAP balance sheet have been

reclassified in accordance with these criteria (see 2.5.1).

The main differences between the presentation of the income

statement under IFRS and under French GAAP are detailed in 2.5.2.

The differences in the recording and measurement methods and their

impact are described in notes 1 to 9 in 2.5.3.

1. Presentation of the quantitative impact of the transition to IFRS



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1.2.1 Consolidated balance sheet reconciliation as at 1 January 2004 The exemptions to retrospective application used in the preparation of the opening balance sheet as at 1 January 2004 are detailed in 2.4.

in € thousand

Notes Published Consolidated Other IFRS Consolidatedconsolidated balance sheet reclassi- restatements balance

balance under French GAAP fications that affect sheet under sheet under at 31/12/2003 - shareholders’ IFRS at

French GAAP IFRS presentation equity 01/01/2004at 31/12/2003 of current/

non-current items(see 2.5.1)

ASSETSNet intangible fixed assets 1 13,102 13,102 -1,196 650 12,556Goodwill 2 48,973 48,973 1,111 50,084Net tangible fixed assets 3/4 572,748 572,748 4,780 162,713 740,241Investments in equity affiliates 62,868 62,868 -11,439 51,429Other long-term investments 37,484Other non-current assets 38,018 38,018Deferred tax assets 7 29,190 3,734 -13,949 18,975

Fixed assets CRC reg. no. 99-02 / Total non-current assets IFRS 735,175 764,899 8,429 137,975 911,303

Inventories and work-in-progress 3 462,430 462,430 -3,972 -303 458,155Operating receivables 521,660Other receivables 83,773Trade receivables 459,198 459,198Other current assets 9 116,511 -1,331 115,180Cash and cash equivalents 425,890 425,890 425,890

Total current assets CRC reg. no. 99-02 / Total current assets IFRS 1,493,753 1,464,029 -3,972 -1,634 1,458,423

Assets held for sale

TOTAL ASSETS 2,228,928 2,228,928 4,457 136,341 2,369,726

LIABILITIES AND SHAREHOLDERS’ EQUITYCapital 194,605 194,605 194,605Additional paid-in capital 94,914 94,914 94,914Consolidated reserves 465,469 465,469 -123,227 71,970 414,212Translation reserve -123,227 -123,227 123,227 0Own shares -13,686 -13,686 -13,686

Shareholders’ equity - Group share 618,075 618,075 - 71,970 690,045

Total minority interests 414,429 414,429 - 18,033 432,462

Total shareholders’ equity 1,032,504 1 032,504 - 90,003 1,122,507

Borrowings and bank debt 499,063 202,002 202,002Post-employment and other long-term employee benefits 5 162,243 3,075 28,940 194,258Other provisions 7,038 402 -6,189 1,251Deferred tax liabilities 7 9,727 3,734 23,386 36,847Other long-term liabilities 1,820 1,820

Total non-current liabilities NA 382,830 7,211 46,137 436,178

Provisions for contingencies and losses 238,526 59,518 -2,754 56,764Bank overdrafts and other short-term borrowings 297,061 201 297,262Operating payables 390,864Trade payables 250,737 250,737Other liabilities 67,971Tax liabilities 44,265 44,265Other current liabilities 162,013 162,013

Total current liabilities NA 813,594 -2,754 201 811,041

Liabilities held for sale

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY 2,228,928 2,228,928 4,457 136,341 2,369,726


1.2.2 Consolidated balance sheet reconciliation as at 31 December 2004in € thousand

Notes Published Consolidated Other IFRS Consolidatedconsolidated balance sheet reclassi- restatements balance

balance under French GAAP fications that affect sheet under sheet under at 31/12/2004 - shareholders’ IFRS at

French GAAP IFRS presentation equity 31/12/2004at 31/12/2004 of current/

non-current items(see 2.5.1)

ASSETSNet intangible fixed assets 1 11,357 11,357 -1,031 523 10,849Goodwill 2 43,610 43,610 1,031 2,695 47,336Net tangible fixed assets 3/4 554,649 554,649 6,116 172,745 733,510Investments in equity affiliates 64,161 64,161 - -12,106 52,055Other long-term investments 29,145Other non-current assets 33,532 33,532Deferred tax assets 7 27,996 624 -10,945 17,675

Fixed assets CRC reg. no. 99-02 / Total non-current assets IFRS 702,922 735,305 6,740 152,912 894,957

Inventories and work-in-progress 3 600,221 600,221 -6,116 -601 593,504Operating receivables 716,787Other receivables 93,458Trade receivables 639,874 639,874Other current assets 9 137,988 -801 137,187Cash and cash equivalents 484,969 484,969 484,969

Total current assets CRC reg. no. 99-02 / Total current assets IFRS 1,895,435 1,863,052 -6,116 -1,402 1,855,534

Assets held for sale

TOTAL ASSETS 2,598,357 2,598,357 624 151,510 2,750,491

Capital 197,399 197,399 197,399Additional paid-in capital 97,428 97,428 97,428Consolidated reserves 450,221 450,221 -123,227 72,895 399,889Translation reserve -136,328 -136,328 123,227 -94 -13,195Net income (loss) for the financial year 135,720 135,720 9,304 145,024Own shares -13,686 -13,686 -13,686

Shareholders’ equity - Group share 730,754 730,754 - 82,105 812,859

Total minority interests 478,587 478,587 - 21,094 499,681

Total shareholders’ equity 1,209,341 1,209,341 - 103,199 1,312,540

Borrowings and bank debt 430,429 189,815 189,815Post-employment and other long-term employee benefits 5 171,743 27,137 198,880Other provisions 10,884 -7,514 3,370Deferred tax liabilities 7 9,635 624 28,688 38,947Other long-term liabilities 1,530 1,530

Total non-current liabilities NA 383,607 624 48,311 432,542

Provisions for contingencies and losses 257,221 64,959 64,959Bank overdrafts and other short-term borrowings 240,614 240,614Operating payables 601,972Trade payables 402,753 402,753Other liabilities 99,394Tax liabilities 78,803 78,803Other current liabilities 218,280 218,280

Total current liabilities NA 1,005,409 - - 1,005,409

Liabilities held for sale

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY 2,598,357 2,598,357 624 151,510 2,750,491



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1.2.3 Shareholders’ equity reconciliation as at 1 January 2004 and 31 December 2004

in € thousand

SHAREHOLDERS’ EQUITY - GROUP SHARE MINORITY TOTALNotes 1 Jan. Net Dividends Increase Other Translation 31 Dec. INTERESTS CONSOLIDATED

2004 income paid in capital/ difference 2004 SHARE-(loss) for add. paid-in HOLDERS’the year capital EQUITY

Shareholders’ equity under French GAAP 618,075 135,720 -15,136 5,308 -112 -13,101 730,754 478,587 1,209,341

Restatement of fixed assets, depreciation and amortization 3 110,447 5,780 -423 115,804 57,464 173,268

Restatement of retirement and similar benefits (actuarial gains and losses) 5 -17,007 1,114 -40 -15,933 -11,204 -27,137

Restatement of investments in equity affiliates 8 - -12,106 -12,106

Share option plans 6 -912 912 - -

Recognition of deferred tax offsettable against deferred tax liabilities 7 7,920 4,502 12,422 - 12,422

Other restatements 1,713 2,716 13 369 4,811 4,011 8,822

Total IAS/IFRS adjustments before tax 721,148 148,920 -15,136 5,308 813 -13,195 847,858 516,752 1,364,610

Tax impact on IAS/IFRS adjustments -31,103 -3,896 -34,999 -17,071 -52,070

Shareholders’ equity under IFRS 690,045 145,024 -15,136 5,308 813 -13,195 812,859 499,681 1,312,540


1.2.4 Consolidated income statement reconciliation for the period from 1 January to 31 December 2004in € thousand

2004 IFRS Total 2004Notes French Reclass. adjust. IFRS

GAAP

Sales 3,037,759 3,037,759 Sales

Change in finished goods 64,813 246 246 65,059 Change in finished goodsOther operating revenues 26,069 26,069 Other operating revenues

Purchases consumed 3 -1,245,525 3,232 3,232 -1,242,293 Purchases consumedTaxes and duties -65,290 17,484 17,484 -47,806 Taxes and dutiesPayroll costs 6 -615,006 -2,973 -911 -3,884 -618,890 Payroll costsOther operating costs -767,233 -3,433 3,098 -335 -767,568 Other operating costsProvisions, net of reversals -10,891 11,872 1,296 13,168 2,277 Provisions, net of reversals

EBITDA 424,696 22,950 6,961 29,911 454,607 EBITDA

Amortization and depreciation 3 -94,792 -2,602 8,347 5,745 -89,047 Amortization and depreciationImpairment of assets and goodwill -12 -252 -264 -264 Impairment of assets and goodwillAsset disposals and restructuring costs -8,061 -1,955 -10,016 -10,016 Disposals of assets and restructuring costs

OPERATING INCOME (LOSS) 329,904 12,275 13,101 25,376 355,280 OPERATING INCOME (LOSS)

Financial revenues 17,351 17,351 Financial revenuesInterest costs -18,625 -288 -288 -18,913 Interest costsNet financial costs -1,274 -288 -288 -1,562 Net financial costsOther financial revenues and costs 9,945 9,945 Other financial revenues and costsOther discounting costs 5 -9,270 -9,270 -9,270 Other discounting costs

FINANCIAL INCOME (LOSS) 8,671 -9,270 -288 -9,558 -887 FINANCIAL INCOME (LOSS)

INCOME (LOSS) BEFORE TAX INCOME (LOSS) BEFORE TAXAND EXTRAORDINARY ITEMS 338,575 3,005 12,813 15,818 354,393

EXTRAORDINARY INCOME (LOSS) -11,506 11,506 11,506 NA

Employee profit sharing -2,973 2,973 2,973Income tax -69,660 -17,484 -2,304 -19,788 -89,448 Income taxNet income (loss) of equity affiliates 166 131 297 297 Net income (loss) of equity affiliates

NET INCOME OF CONSOLIDATED NET INCOME (LOSS)COMPANIES 254,436 166 10,640 10,806 265,242 OF CONTINUING ACTIVITIES

Goodwill amortization (net) -2,758 2,758 2,758 NANet income (loss) of equity affiliates 166 -166 -166Net income (loss) of discontinued operations Net income (loss) of discontinued operations

CONSOLIDATED NET INCOME 251,844 13,398 13,398 265,242 CONSOLIDATED NET INCOME

Minority interests 116,124 4,094 4,094 120,218 Minority interests

Group share 135,720 9,304 9,304 145,024 Group share

Group share:Net income per share 14.3 15.2Diluted net income per share (1) 13.9 15.1

(1) For the purpose of calculating diluted earnings per share, the Vallourec Group has opted to use the “investment of funds” method under French GAAPand the “treasury stock” method under IFRS, in accordance with IAS 33.

The presentation rules applicable to the income statement under IFRS are detailed in 2.5.2.



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The effects of the transition to IFRS on the “consolidated net income” (Group share and minority interests) for the period from 1 January

to 31 December 2004 are as follows:

in € thousand

Net income (loss) under French GAAP for year ended 31 December 2004 251,844

Restatement of fixed assets, amortization and depreciation 10,484Restatement of retirement and similar benefits (actuarial gains and losses) 1,843Restatement of provisions for major repairs 1,021Restatement of leases 45Cancellation of goodwill amortization charge 2,758Share-based and similar payments -912Other restatements 479Deferred taxation -2,320

13,398

Net income (loss) under IFRS for year ended 31/12/2004 265,242

Net impact on “Consolidated net income” 13,398

of which Group share 9,304of which minority interests 4,094

2. Recognition, measurement and presentation principles applied by the Group under IFRS

2.1 Preliminary comments

The purpose of the recognition, measurement and presentation

principles applied by the Group under IFRS as described below is to:

– identify and summarize the differences compared with the

principles and methods applied by the Group under French GAAP

(see notes to the consolidated financial statements for the year

ended 31 December 2004 - section V paragraph 5.1.0 of the

Reference Document),

– inform the reader of the options made by the Group, as regards

both the options left open by certain IFRS and the specific

procedures proposed by IFRS 1 for the preparation of the opening

balance sheet as at 1 January 2004.

2.2 IFRS principles applied by Vallourec

The Vallourec Group has defined its IFRS accounting principles on the

basis of the IFRS framework that was approved by the IASB and is

mandatory for accounting periods beginning on or after 1 January

2005 (the so-called “stable platform”). This framework has been

transposed into the European Commission’s European Regulations

with the exception of certain provisions of IAS 39 “Financial Instruments:

Recognition and Measurement”, and of IFRS 4 “Insurance Contracts”

which do not affect the Vallourec Group.The following principles will

serve as a basis for the preparation of the 2005 IFRS financial

statements and have as a result been used as a basis for the

restatement of the opening balance sheet as at 1 January 2004 and

the comparative information as at 31 December 2004.

Vallourec has not applied early any standards or interpretations

approved up to now by the IASB that are mandatory for accounting

periods commencing after 1 January 2005.

However, the Vallourec Group reserves the right, when it publishes

the final and definitive version of its first financial statements

prepared in accordance with IFRS, to amend certain accounting

choices and principles used in this memorandum.


2.3 Non-application of IAS 32 and IAS 39to the 2004 financial statements restatedunder IFRS

In accordance with the interim provisions specifically provided for by

IAS 32 “Financial Instruments: Disclosure and Presentation”, IAS 39

“Financial Instruments: Recognition and Measurement” and IFRS 1

“First-time Adoption of IFRS”, the Vallourec Group must apply

IAS 32 and IAS 39 as from 1 January 2005, but is making no

restatements in accordance with these standards in the presentation

of its opening balance sheet as at 1 January 2004 and that of its

comparative 2004 financial statements.

As a result, the presentation and accounting treatment of financial

instruments and hedging transactions in the 2004 consolidated

financial statements restated under IFRS remain the same as that in

the financial statements prepared under French GAAP.

A qualitative assessment of the main effects expected by Vallourec

as a result of the application of IAS 32 and IAS 39 as from 1 January

2005 is provided in paragraph 3 below.

2.4 Principles used in the preparationof the opening IFRS balance sheet asat 1 January 2004 and exemptionsto the general principle of retrospectiveapplication

In accordance with IFRS 1, the Vallourec Group’s opening consolidated

balance sheet under IFRS, prepared on the transition date of

1 January 2004, enables an opening position to be established for

assets and liabilities that are recorded and measured in accordance

with IFRS and as if these standards had been applied from the time

the Group first prepared consolidated financial statements (excluding

the impact of financial instruments – see 2.3). All adjustments

required as a result of the retrospective application of the IFRS

framework are accounted for within shareholders’ equity as at

1 January 2004 in accordance with IFRS 1.

However, the Vallourec Group has made use of the following

exemptions authorized by IFRS 1:

■ All actuarial gains and losses calculated as at 1 January 2004 in

respect of retirement and similar commitments in accordance with

IAS 19 “Employee Benefits” have been booked to opening

shareholders’ equity as at 1 January 2004.

As a result, the provision for retirement commitments recognized in

the opening balance sheet corresponds to the amount of commit-

ments to employees, net of plan assets, measured in accordance with

IAS 19 as at 1 January 2004 (see note 5 on financial impact).

The recognition of residual actuarial gains and losses in the opening

balance sheet resulted in a reduction of € 29 million (before tax) in

shareholders’ equity as at 1 January 2004.

■ The accumulated “Translation reserve” as at 1 January 2004

resulting from the translation of the financial statements of foreign

operations in accordance with the closing-rate method has been

reclassified within “Consolidation reserves”.

The translation reserve thus reclassified is no longer transferred to

the income statement in the event of a disposal after 1 January 2004

of the foreign operations concerned.

The translation reserve reclassified as at 1 January 2004, which repre-

sented a net unrealized exchange loss, amounted to € 123 million.

■ Business combinations that occurred before 1 January 2004

have not been restated.

The main transactions covered by this exemption are:

– the contributions made by MRW (Mannesmannröhren-Werke)

when V & M TUBES (55%-owned by the Vallourec Group and

45%-owned by MRW) was created in 1997,

– the acquisition of V & M do BRASIL by V & M TUBES in May 2000,

– the acquisition of V & M STAR by V & M TUBES in July 2002.

The main consequences of this exemption are:

– the retention of the values assigned under French GAAP to the

assets and liabilities of these companies at the time of acquisition,

to the extent that the residual assets and liabilities at the transition

date are eligible to be recognized under IFRS,

– no effect on goodwill, other than in certain limited cases in

which the amounts involved are not material, from the

reclassification of certain business goodwill items as goodwill.

However, in accordance with the general principle of retrospective

application, a review was performed of the assets acquired and

liabilities assumed of the acquired companies on the transition

date to ensure that they are recognized and measured in accordance

with IFRS rules.



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In accordance with IFRS 2 “Share-based Payment”, only those

share subscription and share purchase option plans set up after

7 November 2002 and in respect of which the rights had not been

vested at 1 January 2005 have been restated.

As a result, only one share purchase option plan, set up by the Group

after 7 November 2002, was measured in accordance with IFRS 2.

The application of IFRS 2 had no impact on the opening balance

sheet. However, payroll costs in respect of this plan will be recognized

under IFRS as from the financial year 2004 (see note 6 for the financial

impact).

The impact of the legal revaluation of tangible fixed assets carried

out in 1976 by some French companies and the contribution values

of tangible fixed assets transferred by Vallourec to some Group

companies in 1986 and 1987 have been retained. These represent

exemptions to the general rule of recording fixed assets at acquisition

cost, applied retrospectively to property, plant and equipment in

accordance with the provisions of IAS 16.

No development expenditure has been capitalized in respect of

projects in progress at 1 January 2004, since the Group’s information

systems are not able to determine retrospectively as at 1 January

2004 those development costs that should have been capitalized in

accordance with IAS 38 “Intangible Assets” (see 2.5.3 note 1 below).

A qualitative review of the main Research and Development projects

in progress nevertheless revealed that no major projects met the

recognition criteria of IAS 38 at 1 January 2004.

2.5 Principles used by Vallourec in its IFRSfinancial statements: differences fromFrench GAAP/IFRS options/Main impacts

This analysis is organized by main topic and focuses on the standards

that will have the most material effect on the restatement of the 2004

financial statements under IFRS.

The foreseeable impact of IAS 32 and IAS 39, which will apply as from

1 January 2005, are dealt with separately (see 3).

2.5.1 Balance sheet presentation under IFRS

2.5.1.1 Presentation principles

In accordance with IAS 1 “Presentation of Financial Statements”, the

presentation of Vallourec’s consolidated balance sheet under IFRS

complies with the classification of assets and liabilities as current or

non-current. The assets and liabilities in the balance sheet prepared

under French GAAP have been reclassified according to these

criteria.

An asset is classified as current if it meets any of the following criteria:

– the realization, sale or consumption of the asset forms part of the

entity’s operating cycle;

– it is held primarily for trading purposes or for the short term and

is expected to be realized within twelve months after the balance

sheet date; or

– it is cash or a cash equivalent and there is no restriction on its

usage.

All other assets are classified as non-current.

A liability is classified as current if it satisfies either of the following

criteria:

– it is expected to be settled in the entity’s normal operating cycle;

or

– it is due to be settled within twelve months after the balance sheet

date.

All other liabilities are classified as non-current.


2.5.1.2 Main reclassifications in the consolidated balance sheets as at 1 January and 31 December 2004

For the purposes of IFRS presentation, assets have been analyzed as follows:

At 1 January 2004 in € thousand

CRC reg. no. 99-02 IFRSDescription Amount Description Classification Amount

Advances and deposits paid on orders 2,865

Trade receivables, net 456,333 Trade receivables, net Current 459,198

459,198 459,198

Other operating receivables, net 62,462 Other operating receivables, net Current 62,462

Operating receivables 521,660

Sundry receivables, net 49,151 Sundry receivables, net Current 49,151

Prepaid expenses 4,100 Prepaid expenses Current 4,100

Expenses to be amortized over several years 1,332 Expenses to be amortized over several years Current 1,332

Amounts reclassified as other non-current assets -534

Other current assets 116,511

Deferred tax assets 29,190 Deferred tax assets Non-current 29,190

Other receivables 83,773

At 31 December 2004 in € thousand


Advances and deposits paid on orders 4,304

Trade receivables, net 635,570 Trade receivables, net Current 639,874

639,874 639,874

Other operating receivables, net 76,913 Other operating receivables, net Current 76,913

Operating receivables 716,787

Sundry receivables, net 59,132 Sundry receivables, net Current 59,132

Prepaid expenses 5,528 Prepaid expenses Current 5,528

Expenses to be amortized over several years 802 Expenses to be amortized over several years Current 802

Amounts reclassified as other non-current assets -4,387

Other current assets 137,988

Deferred tax assets 27,996 Deferred tax assets Non-current 27,996

Other receivables 93,458



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For the purposes of IFRS presentation, liabilities have been analyzed as follows:



Borrowings and bank debts 499,063 Borrowings and bank debts (due in more than one year) Non-current 202,002

Bank overdrafts and other short-term borrowings Current 297,061

499,063

Provisions for contingencies and losses 238,526 Post-employment and other long-term employee benefits Non-current 162,243

Deferred tax liabilities Non-current 9,727

Long-term provisions Non-current 7,038

Other provisions (within the context of the Group’s normal operations) Current 59,518

238,526

Operating payables 390,864 Trade payables/advances and deposits Current 250,737

Other liabilities 67,971 Tax liabilities (income tax) Current 44,265

Other current liabilities (including those due to social bodies) Current 162,013

Non-current liabilities Non-current 1,820

458,835 458,835


CRC. reg. no. 99-02 IFRSDescription Amount Description Classification Amount

Borrowings and bank debts 430,429 Borrowings and bank debts (due in more than one year) Non-current 189,815

Bank overdrafts and other short-term borrowings Current 240,614

430,429

Provisions for contingencies and losses 257,221 Post-employment and other long-term employee benefits Non-current 171,743

Deferred tax liabilities Non-current 9,635

Long-term provisions Non-current 10,884

Other provisions (within the context of the Group’s normal operations) Current 64,959

257,221

Operating payables 601,972 Trade payables/advances and deposits Current 402,753

Other liabilities 99,394 Tax liabilities (income tax) Current 78,803

Other current liabilities (including those due to social bodies) Current 218,280

Non-current liabilities Non-current 1,530

701,366 701,366


2.5.2 Income statement presentation under IFRS

As in the French GAAP, the consolidated income statement format used

by the Group under IFRS employs a classification based on the nature

of expenses.

Operating income (loss) under IFRS is calculated differently from

operating income (loss) under French GAAP: it is the difference

between pre-tax revenues and costs other than those of a financial

nature or relating to the income or losses of equity affiliates, and

excluding any income or losses arising from operations that have been

or are being discontinued. Operating income (loss) under IFRS

comprises the majority of the items included in “Extraordinary income

(loss)” under French GAAP. “Employee profit sharing” has been

reclassified under IFRS within payroll costs.The “German tax” included

in “Taxes and duties (other than income tax)” in operating income (loss)

under French GAAP is included within income tax under IFRS.

EBITDA is an important indicator for the Group, since it enables its

recurring performance to be measured. It is calculated by deducting

from operating income (loss) before amortization and depreciation

certain operating revenues and costs that are of significant value and

that are also unusual in their nature or are not expected to occur

frequently, i.e.

■ impairment provisions relating to goodwill or fixed assets and

identified during impairment reviews,

■ material restructuring costs relating to events or decisions of major

importance,

■ capital gains and losses on disposals,

■ other revenues and costs such as those resulting from litigation

involving substantial amounts or significant roll-out or capital

operations (e.g. costs of integrating a new activity, etc.).

Financial income (loss) under IFRS incorporates the impact of the

discounting of retirement benefits and other similar costs (interest

payable) and revenues from the expected return on plan assets, which

are included in operating income (loss) under French GAAP.

2.5.3 Recognition and measurement principles

NOTE 1 Research and development costs

Principles applied under French GAAP

Research and development costs are written off in the year in

which they are incurred.

IFRS

In accordance with IAS 38 “Intangible Assets”, research costs are

written off and development costs must be capitalized as intangible

assets as soon as the entity can demonstrate:

– it intends and has the financial and technical resources necessary

to complete the project,

– it is probable that the future economic benefits attributable to the

development expenditure will flow to the enterprise,

– it is able to reliably measure the cost of the asset during its develop-

ment phase.

Impact on the Group financial statements

No impact has been recognized in the opening balance sheet as at

1 January 2004 (see 2.4 below).

In 2004, a review of the main research and development projects

was performed on the basis of the information available from the

central departments co-ordinating the projects, in order to identify

and analyze those projects in progress that had entered their

development phase as defined in accordance with IAS 38.

As a result of this review, no major projects were identified as

being in their development phase during 2004. The Group’s

development efforts, the aim of which is to improve product design

and develop new or improved manufacturing processes, fulfil the

criteria for classification as assets under IAS 38 only at a very late

stage. It is very difficult to prove the existence of additional, long-

term future economic benefits that can be clearly distinguished

from the normal expenditure on maintaining and enhancing

production facilities and products with a view to preserving the

Group’s technological and competitive advantage.

The Group therefore considered that it would be inappropriate to

capitalize any development costs at 31 December 2004.



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The Group has undertaken during 2005 to improve the consistency

and reliability of its project monitoring procedures with a view to:

– correctly assessing and categorizing the various phases (research/

development) of those projects identified as major by the Group’s

management,

– where relevant, measuring the associated development costs in

accordance with IAS 38.

NOTE 2 Goodwill


Goodwill represents the part not allocated to specific balance sheet

items of the difference between the acquisition price of consolidated

companies and the Group’s share in the assets and liabilities acquired,

measured at their fair value on the acquisition date.

Positive goodwill is amortized in the income statement in accordance

with an amortization schedule and over a useful life (of between five

and twenty years) estimated on the acquisition date. The criteria

used to validate the carrying amount of goodwill and the amortization

period depend on the characteristics of the company acquired: its

activity, the country in which it is located, the residual useful life of its

assets, its problems, profitability, etc.

If certain events are likely to result in goodwill becoming impaired, an

exceptional write-down must be made. The value in use of goodwill

is assessed by reference to discounted future cash flows.

IFRS

Under IFRS 3 “Business Combinations”, goodwill is no longer

amortized. In accordance with IAS 36 “Impairment of Assets”, an

impairment review of goodwill is performed at least once a year or

more frequently if there is evidence that the goodwill may be

impaired. The review procedures aim to determine whether the

recoverable amount of the cash-generating unit to which the

goodwill is related or allocated is at least equal to its net book value

(see note 4: Impairment of intangible and tangible fixed assets). If any

impairment is noted, an irreversible provision is recognized in the

income statement.


At 1 January 2004, goodwill (after reclassification within this

heading of € 1 million of business goodwill) is disclosed at its

value, net of amortization, of € 50 million, which becomes its new

carrying amount under IFRS.

The impairment reviews performed at 1 January 2004 and

31 December 2004 as required under IAS 36 “Impairment of Assets”

did not identify any impairment losses (see note 4).

The cancellation of the goodwill amortization charge resulted in a

positive impact of € 2.8 million on the 2004 income statement

restated under IFRS.

NOTE 3 Property, plant and equipment


Other than in certain specific cases detailed above (business

combinations, revaluations or certain internal transfers), property,

plant and equipment are recorded in the balance sheet at their

acquisition or production cost.

In most cases, maintenance and repair costs are written off. Provisions

for major repairs are only raised in respect of highly targeted

overhaul expenses incurred in connection with overhaul programmes

lasting several years (e.g. overhauls of blast furnaces).

The various categories of fixed assets are depreciated over periods

based on accepted practice and custom in France, using the straight-

line or reducing-balance method depending on the type of fixed asset

(see notes to the consolidated financial statements for the year ended

31 December 2004).

Additional, irreversible provisions are raised in respect of fixed

assets for which the value in use appears to be significantly less than

the net book value.

Fixed assets acquired under finance leases are not shown as an asset

on the balance sheet as the amounts concerned are not material.

IFRS

The implementation of IFRS has resulted in significant restatements

in respect of tangible fixed assets (see below for the financial

impact – Impact on the Group financial statements).


a. Leases

A review of leasing contracts in accordance with the criteria of

IAS 17 “Leases” resulted in the capitalization of certain leases

(of insignificant value) that were previously treated, under French

GAAP, as operating leases.

b. Measurement of tangible fixed assets at cost net

of depreciation and impairment losses

Tangible fixed assets continue to be recorded in the balance sheet

at acquisition or production cost. They are not revalued. At each

balance sheet date, the acquisition cost is reduced by the accumulated

depreciation and any provisions for impairment losses determined

in accordance with IAS 36 “Impairment of Assets” (see note 4).

c. Acquisition or production cost

The costs of loans used to finance assets over a long period of

commissioning or manufacture are not capitalized as part of the cost

of the fixed assets concerned. Instead, they are written off in the

period in which they are incurred (the same rule was applied in the

French GAAP financial statements).

The main differences between the determination of the acquisition

cost of fixed assets under IFRS compared with that under French

GAAP relate to the following elements that have been retrospectively

restated in the opening balance sheet as at 1 January 2004 and for

the purposes of IFRS 2004 comparative information:

– Application of the component approach

The main components of a fixed asset whose useful life is shorter than

that of the main asset (furnaces, heavy industrial equipment, etc.),

have been identified by the technical departments so that they

may be depreciated over their own specific useful lives.

Subsequent expenditure on the replacement of the component (i.e.

the cost of the new component) will now be capitalized provided that

future economic benefits are still expected to be derived from the

main asset.

The component approach is also applied to expenditure on major

overhauls that are planned and carried out at intervals of more than

one year. Such expenditure is identified as a component of the

acquisition price of the fixed asset and depreciated over the period

between two overhauls.

Expenditure incurred during major overhauls is capitalized provided

that economic benefits continue to be derived from the use of the

main asset. The overhaul costs identified at the outset are then

removed from fixed assets.

In practice, such expenditure is capitalized only on the basis of

historic information about earlier identified overhauls (e.g. for

furnaces) and documented by means of supplier invoices or estimates.

As a result of the use of the component approach, it is no longer

possible to raise provisions in respect of major repairs in keeping with

those booked by some subsidiaries and accepted under French

GAAP.

– Dismantling costs

Foreseeable dismantling and site renovation costs (in the mining

business, for example) must in future be added to the cost of the

tangible fixed asset with a corresponding liability being recorded to

reflect the obligation existing at the balance sheet date. Such

amounts are discounted if necessary. The cost thus identified is

depreciated over the useful life of the related asset. The capitalization

of dismantling costs did not, however, have a material impact on the

opening balance sheet at 1 January 2004 or on the 2004 financial

statements restated under IFRS.

d. Depreciation

As part of the component approach, a detailed review was performed

by the technical departments and the Investment Department of the

conditions of use and useful lives of fixed assets. This review resulted

in depreciation schedules being amended, in accordance with the

requirements of IAS 16 “Property, plant and equipment”: use of the

straight-line method has become the standard and new useful lives

have been defined by asset category.The new depreciation schedules,

which significantly increase the useful lives of certain groups of fixed

assets, have been applied retrospectively to the acquisition cost

determined in accordance with IAS 16 (see above) or to the fair value

recorded when control was assumed in respect of fixed assets

acquired as part of a business combination.



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The new useful lives under IFRS are summarized below. The impact is shown in the following table:

Main categories of fixed assets Straight-line depreciation - Useful life

BuildingsAdministrative and commercial buildings 40Industrial buildings/Infrastructure 30

Fixtures and fittings 10

Technical installations, equipment and toolsNew industrial installations 25Specific production equipment 20Standard production equipment 10Other (automatons, etc.) 5

Other tangible fixed assetsMotor vehicles 5Office equipment and furniture 10Computer equipment 3

Impairment tests have been performed in accordance with IAS 36 “Impairment of Assets” (see note 4) in order to ensure that the new carrying

values of fixed assets obtained under IFRS remain lower than the recoverable amounts. No provisions for impairment losses were

recognized at 1 January 2004 or 31 December 2004.


The main effects of the changes in the rules for the recognition and/or measurement of tangible fixed assets are detailed below, excluding

any tax effect.in € thousand

Impact at Impact at1 January 2004 31 December 2004

Capitalization of finance leases Fixed assets, net value 3,001 2,845Liabilities -201

Shareholders’ equity 2,800 2,845

of which Group share 2,800 2,845of which minority interests - -

Component approach/restatement of useful lives Fixed assets, net value 160,362 170,423


of which Group share 107,446 112,959of which minority interests 52,916 57,464

Reclassification of inventories as fixed assets (a) Fixed assets, net value 3,972 6,116Inventories, net value -3,972 -6,116

Cancellation of provisions for major repairs Provisions 6,317 7,338


of which Group share 3,450 4,007of which minority interests 2,867 3,331

(a) Within the context of the transition to IFRS, the accounting and presentation rules in respect of tools, spare parts and reserve parts have been clarifiedand harmonized, in accordance with the respective provisions of IAS 16 “Property, Plant and Equipment” and IAS 2 “Inventories”.

As a result, certain specific reserve parts and/or tools with a useful life of more than one year and which satisfy the criteria for classification as fixed assetshave been reclassified from inventories under French GAAP to the appropriate fixed asset categories under IFRS.


NOTE 4 Impairment of tangible and intangible assets


The rules relating to impairment of tangible assets and goodwill under

French GAAP have been summarized in notes 2 and 3.

In the case of intangible assets, if there is evidence of impairment

at the balance sheet date, an exceptional write-down must be

recognized if the net book value exceeds the carrying amount of the

asset (the higher of the market value and the value in use), equal to

the amount of the excess.

IFRS

Under IAS 36 “Impairment of Assets”, the value in use of tangible

and intangible assets is tested as soon as there is any evidence of

impairment, such evidence being reviewed at each balance sheet

date. This review is performed at least once a year in the case of

assets with an indefinite useful life, i.e. mainly goodwill in the case

of the Vallourec Group.

For this test, fixed assets are grouped into cash-generating units

(CGUs). These CGUs are uniform groups of assets whose continuing

use generates cash inflows that are largely independent of the

cash inflows generated by other groups of assets. The value in use

of these units is determined on the basis of the present value of net

future cash flows.

Where the value in use is less than the net book value of the CGU,

an impairment loss is recognized. When a CGU includes goodwill,

the impairment loss generally reduces the goodwill first, i.e. before

any write-down is recognized in respect of any other fixed assets of

the CGU.

However, in some cases, the appearance of impairment factors that

relate to certain specific assets (linked to internal factors or events

or decisions that cast doubt on the continuing operation of a site,

for example) may be such that they prompt an impairment review to

be performed and justify a write-down of these assets independently

of the CGU to which they hitherto belonged.

The main CGUs within the Group’s current structure and organization

are V & M Europe,V & M do BRASIL,V & M North America, the CGU

comprising the Automotive and Industry activities, Valtimet and

Valinox Nucléaire. Those entities not part of these CGUs are tested

on the basis of their own cash flows.


A precise methodology for determining values in use was established

by the Group within the context of the first-time application of IAS 36.

The impairment tests did not result in any additional write-downs

compared with the financial statements prepared under French

GAAP at both 1 January 2004 and 31 December 2004 (see also

notes 2 and 3).

NOTE 5 Employee benefits

Differences between IFRS and French GAAP

The process of identifying and classifying retirement and similar

benefit schemes did not bring to light any new obligations as defined

by IAS 19 “Employee Benefits”.

The methods used by the Vallourec Group under French GAAP for

measuring retirement and similar commitments did not identify any

material variance compared with the provisions of IAS 19 (see

note 13 of the notes to the consolidated financial statements for the

year ended 31 December 2004).

As is the case under French GAAP, the Group applies the “corridor”

approach, which results in the deferred recognition of actuarial

gains and losses. However, when preparing the opening balance sheet

as at 1 January 2004, the Vallourec Group decided to recognize all

actuarial gains and losses on that date as a reduction in shareholders’

equity (see 2.4).

The charges recognized during the financial year comprised:

– additional rights acquired in respect of an additional year’s service,

– the change in existing rights at the beginning of the year as a result

of discounting,

– past service costs recognized during the period,

– the expected return on plan assets,

– the effects of any plan curtailments or settlements,

– the amortization of actuarial gains and losses.

The total net charge for the year was included in operating costs under

French GAAP. In the IFRS financial statements, the part relating to the

discounting of rights is henceforth recorded in financial income

(loss) and the return on plan assets is recorded in financial revenues.



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Provisions for retirementand similar benefits

French GAAP 162,243

Recognition of actuarial gains and losses 28,940

Reclassification 3,075

IFRS 194,258

The recognition of all actuarial gains and losses excluding any tax

effect reduced consolidated shareholders’ equity by € 29 million at

1 January 2004, of which € 17 million was deducted from shareholders’

equity – Group share and € 12 million was deducted from minority

interests.


Provisions for retirementand similar benefits

French GAAP 171,743

Recognition of actuarial gains and losses 27,137

IFRS 198,880

The impact of the restatements and reclassifications made during the

financial year ended 31 December 2004 concerning the net charge

in respect of retirement and similar benefits is shown in the following

table:

Financial year 2004 in € thousand

French GAAP IFRS IFRSOperating Operating Financial

income income income(loss) (loss) (loss)

Charge for the period -22,141 -10,936 -9,270

The difference between the charges under French GAAP and the

charges under IFRS (€ 1.8 million) corresponds to the amortization

of the actuarial gains and losses recognized under French GAAP but

cancelled under IFRS.

The charge recognized in operating income (loss) under IFRS

represents rights acquired during the period.

The impact on the financial income (loss), i.e. a reduction of

€ 9.3 million, comprises:

– the discounting charge of € 12.3 million for the financial year 2004,

– revenues of € 3 million, being the expected return on plan assets.

NOTE 6 Share-based payment (share options)


Share purchase or share subscription plans that give their beneficiaries

the right to buy an existing share or to subscribe for a capital increase

at an agreed price are not measured and recognized under French GAAP.

Details of the existing share option plans are provided in the notes

to the consolidated financial statements.

IFRS

IFRS 2 “Share-based Payment” requires such plans to be measured

and recognized.

Under IFRS 2, options must be measured on the date they are

granted.

However, in the case of the first-time adoption of IFRS and in

accordance with the transitional provisions specifically provided

for by IFRS 1 and IFRS 2, the Group has chosen to restate only those

plans established after 7 November 2002 the rights of which had

not been vested by 1 January 2005: only one share purchase option

plan was therefore restated in the IFRS financial statements. The pre-

7 November 2002 plans are not measured or recognized, as was the

case under French GAAP, until the options are exercised.

The Group retrospectively measured, on the grant date, the share

purchase option plan that falls within the scope of IFRS 2, in

accordance with the Black & Scholes model. Changes in value

subsequent to the grant date do not affect the initial measurement

of the option.The number of options taken into account in measuring

the plan is adjusted at each balance sheet date to take account of

the probability that the beneficiaries will still be employed by the

Group at the end of the holding period.

The benefit measured in accordance with IFRS 2 is equivalent to

remuneration paid to the beneficiaries: it is therefore recognized

within payroll costs, on a straight-line basis over the vesting period,

the corresponding amount being booked as an increase in




Details of the share option plan restated in accordance with IFRS 2

are as follows:

– grant on 11 June 2003 of 193,500 share purchase options,

– one option gives the holder the right to acquire one Vallourec share,

– the exercise price of each option is € 53.65,

– the options may be exercised during the three years from 11 June

2007 to 10 June 2010, at the end of a four-year holding period

(vesting period).

The impact of the treatment of this plan in accordance with IFRS 2

is as follows:

in € million

Period Valuation Impact of recognition

From 11 June 2003

to 1 January 2004 0.5 None

From 1 January 2004 € 0.9 thousand increase in payrollto 31 December 2004 0.9 costs and shareholders’ equity

From 1 January 2005 Increase in payroll costs andto 11 June 2007 2.0 corresponding increase in shareholders’

equity for each accounting period

Total 3.4

NOTE 7 Deferred taxation


The main bases used in the calculation of deferred taxation are

temporary (timing) differences:

– of a recurring nature: provisions for paid holidays, solidarity social

security contributions, etc.,

– of a non-recurring nature: cancellation of regulated provisions,

employee profit sharing, non-tax deductible provisions for

contingencies and losses and any restatements to ensure the

conformity of company or consolidated accounts with Group

practices,

– that are long-term recurring differences: non-tax deductible

provisions for retirement commitments.

The following items are recognized in accordance with the liability

method:

– long-term deferred tax assets (provisions for retirement commit-

ments – French companies) which are likely to be recovered in the

foreseeable future,

– deferred tax assets for recurring items (provision for paid holidays,

etc.) which are likely to be recovered in the foreseeable future,

– deferred tax liabilities, notably temporary differences in the

treatment of provisions for diminution in value of securities

between tax groups and the consolidated financial statements.

Deferred tax liabilities are recognized except where there are

known deferred tax assets of the same maturity,

– losses carried forward, long-term capital losses and non-recurring

differences (provisions for losses on orders, etc.) are recognized

only for companies and tax groups in which recovery in the

foreseeable future is reasonably certain,

– the rates used are the recovery rates known at the date the

accounts are closed.

Deferred taxes other than those recognized on a discounted basis

have not been discounted to the extent that the timing of their

reversal cannot be determined with certainty.

Net amounts per tax entity of deferred tax assets and liabilities are

shown either under assets as “other receivables” or under liabilities

as “provisions for contingencies and losses”.

IFRS

The IFRS deferred tax recognition rules differ little from the rules

applied by Vallourec in its French GAAP consolidated financial

statements.

However, the restatements made in the IFRS financial statements (in

particular concerning the net value of tangible fixed assets) resulted

in the recognition of additional deferred tax liabilities compared with those

recognized in the French GAAP consolidated financial statements.

The possibility of recovering deferred tax assets (in particular those

linked to tax losses) was thus re-examined under IFRS, as a result of

their offsetting in particular against deferred tax liabilities of known

maturity.

Deferred tax balances are never discounted under IFRS, unless they

are calculated on a discounted basis (e.g. provisions for retirement

and similar benefits).

In the IFRS balance sheet, current tax assets and liabilities relating

to the same taxable entity (e.g. tax consolidation group) are offset.

Net deferred tax assets and net deferred tax liabilities are shown

under separate headings in the balance sheet, respectively within

non-current assets and non-current liabilities.



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in € million

1 January 2004 31 December 2004

Deferred tax assets under French GAAP 29.2 28.0

Deferred tax liabilities under French GAAP -9.7 -9.6

Net deferred tax 19.5 18.4

Deferred tax on provisions for retirement and similar benefits (see note 5) 10.4 9.7

Deferred tax on restatement of fixed assets – component approach, amortization,depreciation and leasing (see note 3) -54.4 -60.3

Recognition of deferred tax offsettable against deferred tax liabilities 7.9 12.4

Deferred tax on other restatements -1.2 -1.4

Deferred tax assets under IFRS 19.0 17.7

Deferred tax liabilities under IFRS -36.8 -38.9

Net deferred tax -17.8 -21.2


The reconciliation between the IFRS and French GAAP deferred tax

balances is given below.

In the 2004 consolidated income statement, the tax charge increased

from € 69.6 million under French GAAP (i.e. an effective tax rate of

21.5%) to € 89.4 million under IFRS (i.e. an effective tax rate of

25.2%).

NOTE 8 Investments in equity affiliates

Investments in equity affiliates held indirectly by minority shareholders

have been consolidated under IFRS at their share of the net assets of

such companies, not at their historical cost as was the case under

French GAAP.As a result, the value of investments in equity affiliates

decreased by € 11.4 million at 1 January 2004 and by € 12.1 million

at 31 December 2004, the corresponding amount being a reduction

in minority interests.

This new method did not have a material impact on the income

statement.

NOTE 9 Other restatements

Headings relating to expenses to be amortized over several years that

were acceptable in the French GAAP balance sheet represent mainly

the costs of starting up new businesses. However, such items have

been written-off under IFRS since they do not comply with the

definition of an asset.

The impact of this restatement is a € 1 million reduction in

shareholders’ equity at 1 January 2004 and a € 0.5 million increase

in net income for 2004 (elimination of the amortization charge).

2.6 Levels of segment reporting usedby the Vallourec Group

The application of IAS 14 “Segment Reporting” caused very little

change to the organization and analysis of the segment information

presented in the 2004 French GAAP consolidated financial statements

since primary and secondary segment reporting formats in these

financial statements are based respectively on the Group’s business

and the geographical areas in which the Group operates (see note 30

of the notes to the consolidated financial statements).

Given the fundamental organizational and management structure

of the Vallourec Group, the primary segment reporting format used

in accordance with the provisions of IAS 14 “Segment Reporting”

is based on the following two sectors of activity:

– the V & M TUBES reporting format segment, which brings together

all the entities with production and marketing facilities dedicated

to the Group’s main activity, i.e. the production of hot-rolled

seamless carbon and alloy steel tubes, both smooth and threaded,

for the oil and gas industry.This activity is characterized by a highly-

integrated manufacturing process, from the production of the steel

and the hot-rolling right through to the final stages, facilitating

production of products that are suitable for a variety of markets

(oil & gas, power generation, chemicals and petrochemicals,

automotive and mechanical engineering, etc.);


3. Main impact of the application of IAS 32 and IAS 39 starting 1 January 2005

The Group will apply IAS 32 and IAS 39 concerning the presentation

and recognition of financial assets and liabilities as from 1 January

2005. As a result, the financial statements for the year ended

31 December 2004, restated under IFRS, do not incorporate the

expected impact of the implementation of these standards. The

impact of IAS 32 and IAS 39 mainly concerns the effects of the

implementation of hedge accounting in respect of trade-related

purchases and sales in foreign currencies.

In this regard, the Group has decided to apply hedge accounting in

the following manner:

– hedging of future transactions (backlog and forecasts): application

of the Cash Flow Hedge method, with the recognition in

shareholders’ equity of changes in the fair value of the effective

portion of the hedging derivatives until the actual realization of

the transaction; on that date, changes in the fair value of the

derivatives are recognized in the income statement, either within

sales or purchases, depending on the nature of the hedged item,

– hedging of receivables and payables: application of the Fair Value

Hedge method, under which changes in the values of derivatives

are recognized directly in the income statement.

In addition, the Vallourec Group decided that the time and/or

interest components (premium and discounts) of the derivatives

would be systematically regarded as ineffective and thus recognized

directly in financial income (loss).

To be eligible for hedge accounting as defined in accordance with

IAS 39, the Vallourec Group has developed its cash management and

invoicing systems to facilitate the traceability of hedged transactions

throughout the duration of the hedging instruments.

These systems have been in operation since 1 January 2005. Specific

measures were implemented during the second half of 2004 so that

all hedging instruments in existence at 1 January 2005 could meet

the criteria for hedge accounting as defined in accordance with

IAS 39.

As a result, changes in the fair value of these instruments will be

recognized in shareholders’ equity at 1 January 2005.

– the Automotive, Industry and Stainless Steel reporting segment,

which comprises the entities grouped around ValTubes. This

segment incorporates primarily the specific forming and machining

activities (in particular, the production of precision tubes and

automotive components), that exhibit certain similarities in terms

of risks and performance due to their business cycles.This segment

also incorporates a number of other activities, such as the

production of stainless steel tubes and forged products, whose

characteristics are very different from those described above, but

which are not presented separately due to their relative

insignificance. Such treatment is authorized by IAS 14.

The secondary segment reporting format is geographical and

distinguishes four geographical sectors, determined on the basis of

an analysis of the specific risks and rewards they present. The four

segments are as follows:

– the European Union,

– North and Central America (USA, Mexico and Canada),

– South America (Argentina and Brazil),

The rest of the world (mainly the Middle East and Asia).



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5.1.1 Company financial statements of Vallourec SA

Balance sheet in € thousand

ASSETS 31/12/2003 31/12/2004 31/12/2005

NON-CURRENT ASSETS

Intangible assets 79 79 79

Property, plant and equipment 185 150 142

Participating interests 499,979 503,704 1,057,383

Own shares 14,366 14,366 14,194

Receivables, loans and other 56,705 39,393 21,192

Total I 571,314 557,692 1,092,990

CURRENT ASSETS

Trade receivables 168 263 229

Other receivables 3,148 909 6,211

Marketable securities 217,107 171,796 6,105

Cash and cash equivalents 91 116 344

Translation differences - - 412

Total II 220,514 173,084 13,301

TOTAL ASSETS (I+II) 791,828 730,776 1,106,291

LIABILITIES AND SHAREHOLDERS’ EQUITY 31/12/2003 31/12/2004 31/12/2005

SHAREHOLDERS’ EQUITY

Capital 194,605 197,399 212,007

Additional paid-in capital 98,603 101,118 210,223

Revaluation reserve 53 53 636

Reserves 186,031 226,507 184,528

Net income for the financial year 56,780 30,064 14,145

Total I 536,072 555,141 621,539

Provisions for liabilities and charges 957 315 319

Bank loans and other borrowings 229,466 150,617 462,394

Trade payables 1,586 3,088 2,055

Other payables 23,747 21,615 19,572

Translation differences - - 412

Total II 255,756 175,635 484,752

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY (I+II) 791,828 730,776 1,106,291


Income statement in € thousand

2003 2004 2005

Sales

Provision reversals and charges transferred 243 435 402

Other revenues 1,854 2,037 1,512

External services -3,624 -9,130 -9,283

Taxes, duties and similar payments -154 -179 -93

Payroll costs -748 -782 -788

Other operating costs -247 -276 -390

Amortization, depreciation and provisions -108 -62 -27

Operating income (loss) -2,784 -7,957 -8,667

Financial income 75,161 41,187 22,357

Participating interests 73,872 31,230 4,830

Other long-term securities and receivables 11 11 13

Other interest and similar income 48 89 256

Provision reversals and charges transferred 680 4,000 15,389

Exchange gains 6 3 4

Net income on disposal of marketable securities 544 5,854 1,865

Financial charges -19,547 -9,241 -10,158

Financial depreciation and provisions -11,980 -276 -136

Interest and similar charges -7,564 -8,933 -10,012

Exchange losses -3 -32 -10

Net charges on disposal of marketable securities - - -

Net financial income 55,614 31,946 12,199

Operating income (loss) before tax 52,830 23,989 3,532

Exceptional income 1,169 79,100 754

Exceptional charges -412 -78,852 -172

Net exceptional income 757 248 582

Income tax credit (charge) 3,193 5,827 10,031

NET INCOME 56,780 30,064 14,145



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Notes to the Company financial statementsfor the year ended 31 December 20051

In thousands of euros (€ thousand) unless stated otherwise

Notes to the balance sheet (before allocation) for the year ended

31 December 2005, which totals € 1,106.3 million, and to the

income statement, which shows net income of € 14.1 million.

The financial year covers a period of 12 months, from 1 January to

31 December.

Vallourec prepares consolidated financial statements.

I - SIGNIFICANT EVENTS, VALUATIONMETHODS AND COMPARABILITYOF FINANCIAL STATEMENTS

On 23 June 2005, Vallourec acquired all of the shareholdings in

VALLOUREC & MANNESMANN TUBES (V & M TUBES)2 held by

Mannesmannröhren-Werke, a 100% subsidiary of Salzgitter AG.The

acquisition price fixed for this transaction was € 545 million.This price

included the dividend due in respect of 2004.

The transaction consisted of the linked and simultaneous acquisition:

i. By Vallourec of the 45% stake in V & M TUBES for € 534.4 million,

ii. By V & M TUBES of 1% of the capital of V & M DEUTSCHLAND

GmbH for € 3.6 million, and

iii. By V & M Holdings Inc., a subsidiary of V & M TUBES, of 33.33%

of the capital of V & M TUBES CORPORATION for € 7 million.

Following this transaction, Vallourec controls directly 100% of

V & M TUBES and indirectly 100% of V & M DEUTSCHLAND GmbH

and V & M TUBES CORPORATION.

In addition, Vallourec sold 10% of the shares in the HKM steel mill

(Germany) for € 22 million to Mannesmannröhren-Werke. Following

this sale,V & M TUBES retains a 20% stake in HKM, which continues

to be accounted for as an equity affiliate.

The acquisition was financed by the available cash of Vallourec,

V & M TUBES and V & M Holdings Inc. and by a bank loan of

€ 460 million taken out by Vallourec. Of this loan, € 311.2 million

had been drawn down by 31 December 2005, of which € 260 million

was used to finance this acquisition. Details of the loan, including the

main covenants, are provided in the note entitled “Bank loans and

other borrowings”.

In addition, a rights offering, the aim of which was to partially

finance this acquisition, was launched on 20 June 2005 (subscription

period from 20 June to 1 July 2005 inclusive). Proceeds of the

rights issue of € 123 million were received on 13 July.

Preferential subscription rights were granted to all Vallourec’s

shareholders.

The new shares (706,312 shares) were issued at a price of € 176.95

(nominal value of € 20 and premium of € 156.95) and were admitted

to trading on the Euronext Paris Eurolist on 13 July 2005.

In addition, the measurement and presentation methods used in the

preparation of the financial statements for the financial year take into

account regulations CRC 2002-10, CRC 2003-07 and CRC 2004-06

applicable in France as from 1 January 2005, and the measurement

and recognition rules relating to assets and the rules relating to

amortization, depreciation and impairment have been amended.

This change in accounting method did not have a significant impact

on the financial statements.


1. The notes to the Company financial statements for the years ended31 December 2003 and 31 December 2004 figure in chapter 5.1.1 of the2003 and 2004 Reference Documents deposited with the French financialmarkets authority (AMF).

2. The acquisition by Vallourec of the 45% stake in V & M TUBES terminatedthe joint venture agreement signed between Vallourec and Mannesmannröhren-Werke in 1997, and in particular the change of control clause (see note 33of section 5 of the 2004 annual report).

II - ACCOUNTING PRINCIPLES

The annual financial statements are prepared in accordance with

current French accounting regulations (CRC regulation no. 99-3) and

the fundamental accounting concepts (true and fair view, comparability,

going concern, accuracy, reliability, prudence and consistency of

accounting methods).

Property, plant and equipment

Property, plant and equipment are valued at their acquisition cost.

Property, plant and equipment acquired before 31 December 1976

were legally revalued in 1977 and 1978.

Buildings are depreciated using the straight-line method over a

40-year period for all buildings allocated to non-operating activities.

Participating interests

The gross value of participating interests comprises their purchase

cost excluding associated expenses and the amount of any associated

capital increases.

Securities acquired in foreign currencies are recorded at their

acquisition price converted into euros at the rate applicable at the

date of the transaction.

Provisions for impairment of participating interests are normally

calculated with reference to their value to the Group, which takes

account of various criteria such as their consolidated net worth,

profitability, share price and the company’s growth prospects.

Own shares

Own shares are valued at the lower of acquisition cost and market

value (defined as the average price over the previous month).

They were acquired on 5 July 2001 as part of the Group’s strategy

of increasing the capital available for employees. At its meeting on

31 March 2003, the Management Board noted that the conditions

for the full or partial disposal of own shares held by the Company

had not been met since 5 July 2001 and accordingly it would not

exclude future recourse to alternative uses of these shares.

On 8 March 2005, the Supervisory Board approved the Management

Board’s proposal to allocate the 269,749 own shares held to share

option schemes for certain of the Group’s employees, managers and

corporate officers.

Receivables and payables

Receivables and payables are valued at their nominal value.

Provisions may be made against receivables to take account of

specific collection difficulties. Such provisions are assessed on a

case-by-case basis.

Marketable securities

Investment securities are valued at acquisition cost increased by

accrued income for the period, or at market value if lower.

Translation of foreign currency denominatedtransactions and financial instruments

Revenues and costs denominated in foreign currencies are recorded

using the exchange rate applicable on the transaction date. Foreign

currency denominated receivables, cash and cash equivalents and

payables at the balance sheet date are translated using the exchange

rate applicable at that date.

Unrealized losses resulting from the translation into euros are

shown, net of any associated foreign exchange cover, as a provision

for exchange risk.

The Company uses various financial instruments to reduce its

exchange rate and interest rate risk. All positions are taken by

means of instruments traded either on organized markets or on over-

the-counter markets and are valued at their market value and

recognized as off-balance-sheet items at each balance sheet date.

Provisions for liabilities and charges

Retirement pensionsPensions are paid by an external organization and the Company

therefore has no commitment in this respect.

Retirement gratuitiesCommitments in respect of gratuities paid to retiring employees are

based on an actuarial calculation and provided for as a liability in

the balance sheet.

The actuarial assumptions used vary depending on the specific

requirements of the applicable retirement plans and collective

agreements.



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The following assumptions have been used:

■ Discount rate of 4% (including inflation),

■ Inflation rate of 2%

■ Staff turnover rate variable in accordance with age and category,

■ INSEE98 mortality table.

Actuarial differences arising as from the financial year 2004 are

amortized using the “corridor” method over the average residual

period of service for employees.

Other provisionsAll disputes (technical, tax audit, etc.) and risks have been provided

against to the extent of the likely cost to be incurred estimated at

the year-end.

Share options

The options to subscribe for Vallourec shares (originally authorized

by the Extraordinary General Meeting held on 15 June 2000) that

were exercised in 2005 resulted in an increase in Vallourec’s share

capital and additional paid-in capital as a result of the funds paid

up by the subscribers.

Exceptional income and charges

In general, exceptional income and charges comprise those amounts

of an exceptional nature, i.e. those that fall outside the scope of the

Company’s ordinary activities.


III - NOTES TO THE BALANCE SHEET

Movements in non-current assets

Movements in the values of non-current assets

31/12/2004 Additions Disposals 31/12/2005 Of which Of whichCharge Reversals revaluation affiliated

reserve companies

Intangible assets 79 - - 79 - -

Trademarks 79 - - 79 - -

Property, plant and equipment 150 -8 - 142 26 -

Land 133 - - 133 26 -

Buildings 174 - - 174 - -

Depreciation of buildings -157 -8 - -165 - -

Investments 503,704 537,679 16,000 1,057,383 611 1,057,383

Participating interests 519,980 537,814 - 1,057,794 611 1,057,794

Provisions on participating interests -16,276 -135 16,000 -411 - -411

Own shares 14,366 - -172 14,194 - -

Receivables, loans, other 39,393 21,192 -39,393 21,192 - 21,192

Receivables and other 38,112 21,192 -38,112 21,192 - 21,192

Loans 1,281 - -1,281 - - -

TOTAL 557,692 558,863 -23,565 1,092,990 637 1,078,575

On 23 June 2005, Vallourec purchased the 45% stake in V & M TUBES for € 537.8 million including interim interest of € 3.4 million.

Movements in loans during 2005 correspond to the repayment by V & M TUBES in June of a loan of € 38.1 million and the setting in place

in September of a new interest-bearing loan of USD 25 million maturing in December 2010.

The provision for diminution in value of ValTubes’ shares (€ 16 million) was reversed in full due to the results of its subsidiaries.

Marketable securities

31/12/2004 31/12/2005 Valuation Unrealized 31/12/2005 gain

Mutual and investment funds 171,796 6,105 6,105 -

TOTAL 171,796 6,105 6,105 -

Cash is invested in risk-free money market funds. In addition,Vallourec only enters into financial transactions with first-rate financial institutions.



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Receivables and payables

Assets at 31/12/2005 Net Provision Gross Of which Gross Gross value value affiliated value value

companies -1 year +1 year

Receivables, loans and other financial investments 21,192 - 21,192 21,192 - 21,192

Trade receivables 229 1,062 1,291 - 229 1,062

Accounts receivable 3 1,062 1,065 - 3 1,062

Other trade receivables 226 - 226 - 226 -

Other receivables 6,211 - 6,211 6,211 6,211 -

Sundry receivables 6,211 - 6,211 6,211 6,211 -

TOTAL 27,632 1,062 28,694 27,403 6,440 22,254

Loans granted during the year: € 21,192 thousand

Loans repaid during the year: € 39,393 thousand

Receivables represented by commercial paper: nil.

Liabilities at 31/12/2005 Gross Of which Of which -1 year +1 year +5 yearsvalue accrued affiliated

payables companies

Bank loans and other borrowings 462,394 1,108 - 1,122 201,238 260,034

Bank borrowings 462,299 1,107 - 1,107 201,192 260,000

Other borrowings 95 1 - 15 46 34

Trade payables 2,055 1,171 466 2,055 - -

Accounts payable 1,752 969 466 1,752 - -

Tax and social liabilities 303 202 - 303 - -

Other liabilities 19,572 - 1,058 19,572 - -

Tax liabilities (income tax) 559 - - 559 - -

Sundry liabilities 19,013 - 1,058 19,013 - -

TOTAL 484,021 2,279 1,524 22,749 201,238 260,034

Loans drawn down during the year: € 434,192 thousand

(including € 123 million in respect of the rights offering refinancing, which was repaid in July 2005).

Loans repaid during the year: € 123,000 thousand

Liabilities represented by commercial paper: nil.

Accrued charges within “Bank borrowings” represent accrued interest at the period end.


Translation differences on foreign currency denominated receivables and payables

31/12/2004 31/12/2005 Of which offset Provisions for by exchange foreign exchange

rate hedge losses

UNREALIZED FOREX LOSSES - 412 412 -

UNREALIZED FOREX GAINS - 412 412 -

The unrealized forex gains and losses are set off between a financial receivable and a USD 25 million borrowing of the same amount and

maturity.

Bank loans and other borrowings

In 2003, the Company entered into a five-year € 150 million credit

facility with the Crédit Agricole group maturing in September 2008.

In order to convert this variable-rate borrowing into a fixed-rate

borrowing,Vallourec has used hedging instruments (swaps). The loan

contract requires the Group to maintain its ratio of consolidated net

debt to consolidated shareholders’ equity at less than 75%.

In March 2005, a seven-year € 460 million credit facility was made



This facility requires the Group to maintain its ratio of consolidated

net debt to consolidated shareholders’ equity at less than or equal

to 75% calculated on 31 December each year and for the first

time on 31 December 2005. A change of control of Vallourec could

result in the repayment of the loan if so decided by a two-thirds





business or financial situation and ability to repay its borrowing.

On 31 December 2005, tranches of € 260 million and USD 25 million

were drawn down for respectively seven and five years.A tranche of

€ 30 million was drawn down for six months on 12 October 2005.

Vallourec used hedging instruments (swaps) to hedge its variable-

rate borrowing at a fixed interest rate.

Information on interest rate risks

The fair value of interest rate hedges (swaps and caps) on the

bank loans and other borrowings of € 301.2 million amounted to

€ -1.3 million at 31 December 2005.



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Shareholders’ equityThe changes in shareholders’ equity are shown below:

Number Capital Profit (loss) Additional Shareholders’ of shares for the paid-in capital equity

financial year and reserves

As at 31/12/2003 9,730,226 194,605 56,780 284,687 536,072

Effects of actuarial surpluses on retirement benefits not recognized at 31 December 2003,recognized at 1 January 2004 - - - 230 230

Net income (loss) for 2003 - - -56,780 56,780 -

Share subscription options 139,730 2,794 - 2,516 5,310

2.5% exceptional tax on regulated long-term capital gains equity reserve - - - -1,398 -1,398

Dividend paid - - - -15,137 -15,137

Change 139,730 2,794 -56,780 42,991 -10,995

As at 31/12/2004 9,869,956 197,399 30,064 327,678 555,141

Net income (loss) for 2004 - - -30,064 30,064 -

Rights offering 706,312 14,127 - 108,674 122,801

Share subscription options 24,064 481 - 430 911

Revaluation reserve - - - 584 584

Dividend paid - - - -30,721 -30,721

Interim dividend - - - -41,322 -

Change 730,376 14,608 -30,064 67,709 93,575

AS AT 31/12/2005 10,600,332 212,007 14,145 395,387 621,539

Vallourec’s share capital comprised 10,600,332 ordinary shares

with a nominal value of € 20 per share fully paid up as at 31 December

2005 compared with 9,869,956 shares as at 31 December 2004.

The increase was due to the issue of 730,376 new shares as a result

of the transactions described in the following two paragraphs.

Firstly, the rights offering was launched on 20 June 2005 and paid

up on 13 July in the amount of € 122.8 million.The aim of the rights

offering was to partially refinance the acquisition of the 45% stake

in V & M TUBES. The new shares (706,312 shares) were issued at

the price of € 176.95 (nominal value of € 20 and premium of

€ 156.95) and were admitted to trading on the Euronext Paris

Eurolist on 13 July 2005. The capital increase costs amounting to

€ 2.2 million were deducted from the issue premium.

Secondly, the share subscription options exercised at € 38 after

1 January 2005 resulted in the issue of 24,064 new shares (compared

with 139,730 shares in 2004), i.e. an increase of € 911 thousand,

premium included.


Share subscription options

The Extraordinary General Meeting held on 15 June 2000 (first resolution) authorized the Management Board to grant subscription options

to managers and/or employees of the Group’s companies, for a period of five years and up to a limit of 4% of Vallourec’s share capital.


the table below.

Plan


Date of Management Board Meeting 15 June 2000


- of which number of options granted to the members of the ExecutiveCommittee (as at 31 December 2005) 31,000







Number of shates subscribed as at 31/12/2004 (1 option = 1 share) 139,730(of which number of shares subscribed by members of the Executive Committee) 30,250

Number of options that could be exercised at 31/12/2004 32,020(of which number of options that could be exercised by members of the Executive Committee) 750

Number of shares subscribed in 2005 (1 option = 1 share) 24,064(of which number of shares subscribed by members of the Executive Committee) 750

Adjustment in the number of options following the rights offering (note 11) 218

Number of options that could be exercised at 31/12/2005 8,174(of which number of shares subscribed by members of the Executive Committee) -

(*) 95% of the average price for the 20 trading sessions preceding the grant date.(**) option holders who have left the Group.



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Share purchase options

The second resolution of the Extraordinary General Meeting held on 15 June 2000 also authorized the Management Board, during a five-year

period and up to a limit of 10% of the share capital, to grant purchase options concerning existing shares that would first have to be bought

on the stock exchange in accordance with the share repurchase authorizations given by the General Meeting.

A first tranche of options was granted under this authorization on 11 June 2003, on the basis of one share for each option. The main

characteristics of these options are shown in the table below.

Plan




- of which number of shares that the members of the Executive Committee(as at 31 December 2005) may purchase 54,000



- exercise price adjusted after the rights offering on 13 July 2005 (note 11) € 52.85


Number of shares that employees may purchase, as at 31/12/2004 190,750

Options cancelled in 2005 500

Adjustment in the number of options following the rights offering (note 11) 2,896


- of which number of shares that those employees who were membersof the Executive Committee as at 31 December 2005 may purchase 54,819





Number of shares purchased as at 31/12/2005 -

(*) average price for the 20 trading sessions preceding the grant date, not discounted.(**) option holders who have left the Group.

Provisions for liabilities and charges

The change in provisions for liabilities and charges is shown below:

31/12/2004 Charge Reversals Reversals 31/12/2005used not used

Provisions for liabilities and charges 274 - - - 274

Provisions for retirement commitments 21 18 - - 39

Provisions for long-service awards 5 - - - 5

Other provisions for charges 15 - - -15 -

TOTAL 315 18 - -15 318


Provision for liabilities and charges

Disputes are provided for to the extent of the likely cost to be

incurred estimated at the year end, in application of CRC regulation

no. 2000-06 on liabilities.

The legal proceedings instituted on 22 June 2001 in the Trenton (New

Jersey) court by two US companies, MTI and Net Shape Inc.,

concerning the sale of a license by MPS, a 99.7%-owned subsidiary

of Vallourec, to Carpenter Technology ended in December 2004

when the judge ruled that the law suit filed against Vallourec was

inadmissible. No appeal has been lodged and the case is closed.

Retirement provisions

The total commitment in respect of retirement plans as at

31 December 2005 is € 122 thousand.

The provision recognized in the balance sheet amounted to

€ 39 thousand. The actuarial deficit not recognized therefore

totalled € 83 thousand. The commitments not recognized in the

balance sheet correspond to changes in or the non-crystallization of

assumptions, the effect of which is amortized over time using the

“corridor” method.

The main changes in relation to the valuations used in the previous

year’s financial statements concern the base salary used in the

calculation of retirement benefits and the discount rate.

IV - NOTES TO THE INCOME STATEMENT

Operating revenues

The Company invoices fees for the use of its brand name.This revenue

is included under “Other operating revenues” and amounted to

€ 1,494 thousand.

Financial charges and incomeconcerning affiliated companies

Financial charges:nil

Financial income: € 4,830 thousand

Net exceptional income

Net exceptional income for the year amounted to € 582 thousand.

This amount includes a profit on disposal of preferential subscription

rights in respect of the own shares held at the time of the rights

offering amounting to € 525 thousand.

V - OTHER INFORMATION

Average number of employees

The Company employs five people.

Tax

Tax groupSince 1 January 1988 the Company has been a member of a tax

group constituted under the provisions of article 223A of the CGI

(Code Général des Impôts – General tax code). This agreement

has been renewed automatically for five-year periods since 1999.

In 2005, the tax group comprised Vallourec, Setval, Assurval,

ValTubes, Cerec, Escofier Technologie, Interfit, Spécitubes, Starval, MPS,

Vallourec Précision Etirage, Vallourec Précision Soudage, Vallourec

Composants Automobiles Vitry, Vallourec Composants Automobiles

Hautmont, Valti, Valsept, Sopreneuf and Valinox Nucléaire.

The tax group agreement requires subsidiaries of the tax group to

record a tax charge equivalent to the amount they would have

borne in the absence of the tax group.

The saving resulting from the allocation to the combined income of

losses generated by subsidiaries, i.e. companies that pay their tax to

Vallourec, is not recognized in the income statement but as other

liabilities.

Any profits resulting from the tax group that are recorded by

Vallourec correspond mainly to the allocation to the combined

income of losses generated by Vallourec itself and tax losses carried

forward definitively belonging to Vallourec.



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In respect of 2005:

The net tax credit in the income

statement amounted to: € 10,031 thousand

It can be broken down as follows:

- Tax charge relating to Vallourec € 0 thousand

- Tax credit relating to the tax group € 10,031 thousand.

At 31 December 2005, the saving recognized by Vallourec against

tax due, which may become payable by the Group if the companies

in question return to profitability before their deficits are fully

utilized, amounted to € 17,949 thousand.

The Vallourec tax group is now in a profit-making situation and had

no losses available for carry forward at the end of 2005.

Vallourec itself has tax losses available for carry forward of

€ 24,406 thousand.

Increase and reduction in future tax liabilities

Nature of temporary difference Amount 31/12/2005 (base)

Increase -

Reductions

Provision for retirement commitments 39

Provision for paid holidays 40

Solidarity social security contribution provision 2

Unrealized gains on UCITS -

Breakdown of income tax between operating income (loss) and exceptional income (loss)

Income before tax Tax due Net income

Operating income (loss) 3,532 - 3,532

Exceptional income (loss) 582 - 582

Sub-total 4,114 - 4,114

Income relating to the tax group - 10,031 10,031

TOTAL VALLOUREC 4,114 10,031 14,145

The income relating to the tax group corresponds mainly to the loss generated by Vallourec, the head of the tax group, which constitutes

a tax saving realized for the financial year.

Remuneration of members ofadministrative and management bodies

Administrative bodiesBoard attendance fees paid during the year amounted to

€ 230 thousand.

Management bodiesThis information is not provided as it is not relevant in relation to the

assets and liabilities, financial position and net income of Vallourec.

Off-balance-sheet commitmentsOff-balance-sheet commitments are as follows:

Retirement gratuities: € 83 thousand (actuarial deficit).

The Company has not issued any form of collateral against its liabilities.


5.1.2 Total earnings per share

See 5.1.0 above (note 12).

Subsidiaries and participating interests as at 31 December 2005 are shown in section 8.6.

5.2 Auditors’ remuneration

in € thousand

2005 (*) (*)Ernst & Young Deloitte K.P.M.G.

Audit

Certification of the financial statements 1,218 150 374

Other services associated with the audit 180 97 39

Sub-total 1,398 247 413

Other services not associated with the audit 7 - 9

TOTAL 1,405 247 422

(*) Statutory auditors of the Group consolidated financial statements.

Auditors’ remuneration in respect of the financial year 2004 was as follows: in € thousand

2004 (*) (*)Ernst & Young Deloitte K.P.M.G.

Audit

Certification of the financial statements 1,457 204 379

Other services associated with the audit 97 60 7

Sub-total 1,554 264 386

Other services not associated with the audit 24 12 5

TOTAL 1,578 276 391

(*) Statutory auditors of the Group consolidated financial statements.



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6.1 Composition and operation of Administration,Management and Supervisory bodies

The Ordinary and Extraordinary General Meeting held on 14 June 1994 approved the adoption of a management structure with a

Management Board and a Supervisory Board.

6.1.0 Composition of Administration, Management and Supervisory bodies

6.1.0.1 Management Board

Year of birth Date of appointment Date on which to the Management Board appointment ceases

Chairman

Pierre Verluca 1944 12/12/2000 General Meeting2007 financial statements

Member

François Fabre 1941 12/12/2000 General Meeting2007 financial statements

On 10 June 2004,Vallourec’s Supervisory Board renewed the appointments of two members of the Management Board, Messrs Pierre Verluca

and François Fabre, for a period of four years, expiring at the close of the General Meeting called to approve the financial statements for

the financial year 2007. Mr Pierre Verluca, who had until that date been Executive Vice-President, was appointed Chairman of the

Management Board to replace Mr Jean-Claude Cabre who had reached the statutory age-limit under the provisions of Vallourec’s By-laws.

Mr François Fabre, who had until then been Executive Vice-President, was appointed a member on the same date.

On 7 March 2006, the Supervisory Board decided to appoint, with effect from 1 April 2006, Messrs Bertrand Cantegrit, Marco Antônio Castello

Branco and Jean-Pierre Michel as members of the Management Board in addition to the existing members Messrs Pierre Verluca and François

Fabre. The expiry of their terms of office is also set as the close of the General Meeting called to approve the financial statements for the

financial year 2007.

Section 6Corporate governance


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5

6.1.0.2 Supervisory Board

Year of birth Date of first Date on which Other main appointmentappointment appointment (as Director ceases

or Supervisory Board member)

Chairman

Jean-Paul Parayre 1937 13/06/1989 General Meeting ■ Member of the Supervisory Board 2005 financial statements of Peugeot SA and of the Board

of Directors of Stena International

Vice-Chairman

Patrick Boissier 1950 15/06/2000 General Meeting ■ Chairman and CEO of Chantiers2005 financial statements de l’Atlantique

Members

Luiz-Olavo Baptista 1938 11/06/2002 General Meeting ■ Lawyer and Professor of International Law2007 financial statements

Vincent Bolloré 1952 10/06/2004 General Meeting ■ Chairman and CEO of Bolloré group2009 financial statements

Wolfgang Eging 1949 08/03/2005 General Meeting ■ Chairman of the Executive Board 2005 financial statements of Mannesmannröhren-Werke GmbH

Michel de Fabiani 1945 10/06/2004 General Meeting ■ Director of BP FRANCE2009 financial statements

Heinz Jörg Fuhrmann (*) 1956 14/12/2005 General Meeting ■ Member of the Executive Board and CFO 2005 financial statements of Salzgitter AG

Denis Gautier-Sauvagnac 1943 07/02/1997 General Meeting ■ President and Managing Director of UIMM2005 financial statements

François Henrot 1949 08/06/1999 General Meeting ■ Managing Partner of Rothschild & Cie Banque2010 financial statements and Rothschild & Cie

Wolfgang Leese 1946 11/06/2002 General Meeting ■ Chairman of the Executive Board 2007 financial statements of Salzgitter AG

Jean-Claude Verdière 1938 01/07/2001 General Meeting ■ Member of the Management Board 2006 financial statements of Vallourec until 30 June 2001

Société Financière de Sainte-Marine represented by Mr Thierry Marraud 1946 10/06/2004 General Meeting ■ CFO of Bolloré group

2009 financial statements

(*) Mr Heinz Jörg Fuhrmann was appointed on 14 December 2005 to replace Mr Kunibert Martin who resigned due to his retirement. Mr Heinz Jörg Fuhrmann,Member of the Executive Board and CFO of Salzgitter AG, has spent his entire career in the steel industry.

The Annual General Meeting to be held on 1 June 2006 will be asked to approve the renewal of the appointments of Messrs Patrick Boissier,

Wolfgang Eging, Heinz Jörg Fuhrmann, Denis Gautier-Sauvagnac and Jean-Paul Parayre for a period of five years.


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6.1.0.3 Executive Committee As at 1 April 2006, the Executive Committee of the Vallourec Group comprised the following members:

Bert Becher Chairman of the Management Board, V & M DEUTSCHLAND GmbH,

Vice-President Sales & Marketing, Hot-Rolled Tubes Division

Bertrand Cantegrit Member of the Management Board

Chairman, Automotive and Industry Division

Marco Antônio Castello Branco Member of the Management Board,

Chairman, Hot-Rolled Tubes Division,

Chairman, V & M do BRASIL SA

Jean Charpentier Vice-President, Human Resources

François Fabre Member of the Management Board

Alain Honnart Chairman, Stainless Steel Division,

Vice-President, Industrial Policy

Marc Karako Chief Financial Officer: Finance, Legal and External Communication

Jean-Pierre Michel Member of the Management Board,

Vice-President, Controlling, Marketing and Purchasing,

Chairman, Oil & Gas activities

Pierre Verluca Chairman of the Management Board

The Executive Board meets each week.

6.1.1 Operation of Administration, Management and Supervisory bodies

6.1.1.1 Internal regulations of the Supervisory Board

During its meeting on 17 April 2003, the Vallourec Supervisory

Board drew up internal regulations designed to formalize its

operating rules and working methods.

The Supervisory Board meets at least four times a year.

In addition to the restrictions on the powers of the Management

Board as stipulated in Article 9, section 3 of the By-laws (see 3.2.0

above), it is also stipulated that the following actions must receive

the prior approval of the Supervisory Board:

■ the repurchase by the Company of its own shares and the granting

to employees of options to subscribe for or to purchase the

Company’s shares as authorized by the General Meeting.

■ any significant transaction of a type likely to modify substantially

the activity or financial structure of the Company and the Group

that it controls or the nature of the risks incurred.

Once a quarter, the Management Board, in accordance with the

provisions of section 4 of Article L. 255-68 of the French Code de

Commerce, submits a report to the Supervisory Board describing as

comprehensively as possible the Company’s current performance.

The Management Board consults the Supervisory Board about the

dividend to be proposed to the General Meeting of shareholders.At

the end of the year it submits the budget, forecast capital expenditure

programme and financing plan for the following year.

In the performance of its duties, the Supervisory Board is regularly

informed by the Management Board of any significant event

concerning the Group’s performance. It ensures that the latter keeps

it informed of all matters that it judges useful and necessary in the

exercise of its supervisory role. In order to ensure the process

operates correctly, the Chairman of the Supervisory Board, assisted

by all members of the Board, ensures that such information is

provided.The specific information required by each of the Committees

of the Supervisory Board is assembled by the Chairman of each of

the Committees in collaboration with the Management Board.

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In addition, each member of the Supervisory Board is required to:

■ have converted into registered form all of the Vallourec shares he

holds. The minimum holding requirement, as stipulated by the

By-laws, is fifty shares,

■ regard himself at all times as being in possession of insider

knowledge and as such, in particular, to comply with the provisions

agreed unanimously by the Supervisory Board at its meeting on

11 December 2001 concerning the periods during which members

in possession of insider knowledge may not buy, sell or take

positions in the Company’s shares, i.e. a period of 30 calendar days

preceding the publication of the annual and half-year results

and a period of 15 calendar days preceding the publication of the

quarterly sales figures,

■ comply with the regulations of the french financial markets

authority (Autorité des Marchés Financiers) published on

24 November 2004 as regards the obligation to disclose

transactions carried out by company officers on financial

instruments issued by the Company.

6.1.1.2 Meetings of the Supervisory Board duringthe year ended 31 December 2005

Eight meetings of the Supervisory Board were held in 2005. The

attendance rate was very high and members who were not able to

attend a meeting always appointed a proxy to represent them

(see 8.2 below).The average duration of meetings is about three hours.

6.1.1.3 Independent members and membersassociated with the Company

At its meeting on 17 April 2003, the Supervisory Board examined the

situation of each of its members individually with regard to the criteria

of the “Bouton report”. At its meeting on 2 March 2004, during

which it decided to propose that the General Meeting appoint

three new members, it also examined the situation of these new

members with regard to the same criteria. It based its examination

on the recommendations made by the Appointments and Remuneration

Committee (see 6.1.1.4 below).

As a result of these examinations, the Supervisory Board decided to:

■ consider as independent members Messrs Baptista, Boissier,

de Fabiani, Gautier-Sauvagnac and Henrot.

■ consider as members related to the Company:

– after taking account of the participating interest in Vallourec held by

Salzgitter AG through its subsidiary Salzgitter Mannesmann GmbH

(formerly Mannesmannröhren-Werke):

■ Mr Wolfgang Eging, Chairman of the Executive Board

of Mannesmannröhren-Werke GmbH

■ Mr Wolfgang Leese, Chairman of the Executive Board

of Salzgitter AG

■ Mr Heinz Jörg Fuhrmann, Member of the Executive Board

and CFO of Salzgitter AG.

– after taking account of the participating interest in Vallourec held

by the Bolloré group through its various subsidiaries:

■ Mr Vincent Bolloré, Chairman and CEO of Bolloré group

■ Mr Thierry Marraud, representing Société Financière

de Sainte-Marine and CFO of Bolloré group.

– Mr Jean-Paul Parayre, who was first appointed as a Director more

than 12 years ago, on 13 June 1989.

– Mr Jean-Claude Verdière, member of the Management Board

of Vallourec until 30 June 2001. Mr Verdière will be considered

as independent as from the end of June 2006.

Thus, only five out of the twelve members of the Supervisory Board

are currently regarded as being independent. This proportion is

slightly lower than 50% but the Board considered it important that

its composition should take account of the composition of the

shareholder structure – as the consolidated Vienot/Bouton report

recommends – and, in particular, the existence of two major

shareholders (Salzgitter and Bolloré). The same applies as regards

the composition of the Committees set up within the Board. The

Board has, in this regard, followed the recommendation of the

Appointments and Remuneration Committee.


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6.1.1.4 Committees set up withinthe Supervisory Board

The Supervisory Board has two Committees:

■ The Finance Committee

■ The Appointments and Remuneration Committee

The Strategy Committee, which was set up in 2000, was abolished

in 2002 since the Board considered that matters coming within this

domain should be examined at full meetings of the Board.

The Committees’ regulations were approved by the Supervisory

Board at its meeting on 17 April 2003.

Finance Committee:

The Finance Committee (formerly called the Audit Committee) was

set up on 5 March 2002. It advises the Supervisory Board on the

relevance and consistency of accounting methods adopted for the

preparation of Vallourec’s Company and consolidated financial

statements, particularly at the time of publication of the annual or

interim financial statements.

This Committee is informed of changes in the earnings, cash,

indebtedness, financial risks and corresponding forecasts for the

Company and its main subsidiaries. It is also kept informed on off-

balance sheet liabilities. More generally, the Finance Committee also

reviews the various elements of the Group’s financial strategy.

The Chairman of the Supervisory Board may decide to refer to the

Finance Committee any issue requiring the Board’s prior approval

(transactions affecting the share capital, the issue of convertible

bonds, bond or other loans, redemptions, etc.), as well as any

proposed acquisitions of significant value.

The Finance Committee supervises the selection of the Auditors, gives

its opinion as to the level of fees charged for the performance of the

statutory audit and submits the results of this selection process to

the Supervisory Board.

It reports to the Supervisory Board in respect of all its duties.

The Finance Committee is composed of Messrs Michel de Fabiani

(Chairman), Thierry Marraud, Jean-Claude Verdière and Heinz Jörg

Fuhrmann who replaced Mr Kunibert Martin on 14 December 2005.

The Finance Committee met four times in 2005. All members were

present at each meeting. One of its main duties was to review the

financial statements for the year ended 31 December 2004 and for

the half-year ended 30 June 2005.

The Statutory Auditors attended two Finance Committee meetings

(preparatory meetings concerning the annual and half-year financial

statements) in respect of the financial year 2005. They submitted a

report on the work performed in accordance with their commitment

to the Supervisory Board.

Among the important subjects examined in 2005, the Finance

Committee paid particular attention to the financing of the acquisition

of the 45% stake in V & M TUBES and its partial refinancing by a

rights offering in cash which was carried out in July, the financial

aspects of the acquisition of OMSCO, and, more generally, the

review of Vallourec’s financial structure and debt in the context of

the Group’s development policy. The Finance Committee also steered

the assessment process of candidates for the renewal of the

appointment as Statutory Auditors.

Appointments and Remuneration Committee:

The Remuneration Committee, set up in 1994 when Vallourec

adopted a management structure with a Management Board and

a Supervisory Board, was renamed the Appointments and Remuneration

Committee on 17 April 2003. Since 8 March 2005, it has been

composed of Messrs Jean-Paul Parayre (Chairman), Patrick Boissier,

Vincent Bolloré, Denis Gautier-Sauvagnac and Wolfgang Leese.

The duties of the Appointments and Remuneration Committee are

as follows:

■ Appointments:

– Preparation of the procedure used to select members of the

Supervisory Board and Management Board and the criteria to

be used.

– Drawing up proposals for appointments and reappointments.

The Committee’s choice of candidates for appointment as members

of the Board must be guided by the interests of the Company and

all its shareholders. It must take into account, in particular, the

desired balance of the composition of the Board in view of the

composition of, and changes in, the Company’s shareholder base.

■ Remuneration:

– Proposals concerning the amount and allocation of attendance

fees paid to Board members as well as the remuneration of

members of the Committees.

– Proposals concerning the remuneration of the Chairman of the

Supervisory Board.

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– Remuneration of members of the Management Board: the

Committee is responsible for recommending to the Board the

structure and level of the remuneration paid to each member

of the Management Board (fixed part, variable part and benefits

in kind).

– Share subscription and share purchase options for members of

the Management Board. To this effect, the Committee issues a

notice on the policy for granting share subscription and share

purchase options and reviews each plan that the Management

Board envisages implementing for the benefit of the Group’s

managers and/or employees.

In addition, as regards members of the Executive Committee, the

Committee is informed of their appointment, remuneration and

the arrangements for subsequent appointments.

The Committee met twice in 2005. Its main duties involved preparing

and reviewing information to aid the Supervisory Board take decisions

on the following matters:

■ Review of the composition of the Management Board and the

appointment of new members, in anticipation, in particular, of the

retirement of Mr François Fabre.

■ Revision of the remuneration packages of the members of the

Management Board.

■ Consideration of a draft additional pension scheme entitled

“income guarantee scheme for the retired employees of Vallourec

and Setval”, the aim of which is to supplement the retirement

income of the Group’s managerial staff (whether corporate

officers or not) and to reward their loyalty to the Group.

■ Approval of the implementation of a plan to allocate free shares

to the Group’s employees and corporate officers. This plan was

implemented by the Management Board on 16 January 2006.

6.1.1.5 Remuneration principles■ Remuneration of Management Board members:

The remuneration of Management Board members is composed of

a fixed part and a variable part. The variable part is calculated on the

basis of the consolidated net income (Group share) as adjusted for

exceptional items.The calculation is verified by the Statutory Auditors.

■ Remuneration of Supervisory Board members:

The maximum annual Board Members’ attendance fees for allocation

by the Supervisory Board is € 230,000 (eighth resolution of the

Ordinary General Meeting held on 11 June 2002). The Ordinary

General Meeting to be held on 1 June 2006 (fifteenth resolution) will

be asked to approve an increase in the amount of the annual

attendance fee budget to € 400,000 until further notice. This

increase is justified, in particular, by the fact that, since 2002,

membership of the Board has increased from 10 to 12 members, the

members of the Finance Committee receive an additional attendance

allowance and the position of Censeur (non-voting consulting

Director), which will be created this year (sixth resolution of the

Extraordinary General Meeting to be held on 1 June 2006), may be

remunerated.

The principle adopted is that the same amount is paid to each

Board member, calculated pro rata in the case of an appointment or

termination of an appointment during the year.

In addition to the attendance fees allocated to him, the Chairman

of the Supervisory Board receives remuneration, the amount of

which was increased by the Supervisory Board, as recommended by

the Appointments and Remuneration Committee, to € 85,000 per

year with effect from 1 January 2003.

■ Remuneration of Committee members:

Members of the Finance Committee receive additional attendance

fees set at € 4,700 for 2005.

Membership of the Appointments and Remuneration Committee is

not remunerated.

6.1.1.6 Corporate governanceIn view of the above, Vallourec considers that it complies fully with

the corporate governance provisions currently in force in France.


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6.2 Managers’ interests

6.2.0 Remuneration and benefits in kind

In accordance with the requirements of Article L. 225-102-1 of the

French Code de Commerce, the total of all remuneration and

benefits of any kind paid to each Company officer during the

financial year 2005, directly or indirectly, by Vallourec or by any

company in the Group, is shown in the Management Board’s

management report (“Remuneration of Company officers”), which

forms an integral part of this Reference Document.

6.2.1 Options granted over Vallourecshares

See 6.3.2. below and the special report on options prepared by the

Management Board in accordance with the requirements of Article

L. 225-184 of the French Code de Commerce.

6.2.2 Transactions with members ofthe Administration, Managementand Supervisory bodies

None.

6.2.3 Loans and guarantees

None.

6.3 Employee profit sharing

6.3.1 Profit sharing and incentive plans

Profit sharing

The amounts paid in respect of special reserves for profit sharing

during the last five financial years are as follows (in € million):

2001 2002 2003 2004 2005

6.40 7.24 1.89 2.97 11.28

Incentive plans

Most companies in the Group have incentive plans enabling employees’

compensation to be related to the company’s performance. Such

performance is determined as a function of operating income or loss

in relation to sales.

Amounts paid in this respect during the last five financial years are

as follows (in € million):

2001 2002 2003 2004 2005

9.07 8.95 5.41 15.8 44.25

Company savings plan:

In France, in 1989, the Vallourec Group formed a Company savings

plan to help employees build up capital over the medium and long

term. In 2005, these arrangements were supplemented by the

implementation, by agreement, of a group retirement savings plan

(Plan d’Epargne Retraite Collectif – PERCO).

Employees’ voluntary payments are topped up by the Company in

accordance with a scale updated each year in relation to the Group’s

performance.

The amounts paid by way of Company contributions over the last five

years were as follows (in € million):

2001 2002 2003 2004 2005 2005PEE PERCO

0.62(*) 0.79 0.61 0.48 0.56 0.93

(*) € 0.52 million in respect of voluntary payments and incentive plans and€ 0.10 million in respect of the employee shareholding plan.

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6.3.2 Options

■ Share subscription options

PlanDate of General Meeting 15 June 2000Date of Management Board Meeting 15 June 2000


■ of which number of options granted to those employeeswho were members of the Executive Committeeas at 31/12/2005 31,000

■ number of senior managers involved 7

■ exercise price (*) € 38

■ exercise price adjusted after rights offering on 13/07/2005 € 37.43


Adjustment in the number of options following the rights offering on 13/07/2005 218



Number of shares subscribed as at 31/12/2005(1 option = 1 share) 163,794

■ of which number of shares subscribed by members of the Executive Committee 31,000

Number of options that could be exercised as at 31/12/2005 8,174

(*) 95% of the average for the 20 trading sessions preceding the grant date.

(**) option holders who have left the Group.

■ Share purchase options

PlanDate of General Meeting 15 June 2000Date of Management Board Meeting 15 June 2003


■ of which number of shares that those employees who were members of the Executive Committee as at 31/12/2005 may purchase 54,000

■ number of senior managers involved 7

■ exercise price (*) € 53.65

■ exercise price adjusted after the rights offering on 13/07/2005 € 52.85


Adjustment in the number of options following the rightsoffering on 13/07/2005 2,896




Number of shares purchased as at 31/12/2005 ---

(*) average of the last 20 prices for the 20 trading sessions preceding thegrant date, not discounted.

(**) option holders who have left the Group.

6.3.3 Employee shareholding

The Extraordinary General Meeting held on 30 January 2001

authorized the Management Board to increase Vallourec’s share

capital on one or more occasions by issuing new shares reserved for

employees of the Group’s French and German companies, within the

framework of the Group savings plan and the legislation concerning

employee savings.

Under the same conditions, that General Meeting also authorized the

intervention of a financial institution, in this case Crédit Agricole

Indosuez Cheuvreux (CAIC), to offer employees the possibility of

benefiting from a leveraged plan.

The Management Board, in full agreement with the Supervisory

Board, decided on 30 January 2001 to use this authorization to

launch the capital increase, which took place on 5 July 2001.

The subscription price was set at € 42.61, corresponding to the

average of the opening Vallourec share prices for the 20 stock

exchange trading sessions prior to 30 January 2001, less a 20%

discount.

The transaction was the subject of a prospectus authorized by the

COB (former French stock exchange authority) on 30 April 2001 under

number 01-477.

The total number of shares subscribed to by employees, directly or

indirectly through company investment funds (FCPE), was 199,755,

i.e. 2.05% of the capital as at 5 July 2001 after the capital increase,

comprising 170,595 shares in France and 29,160 in Germany. The

total number of subscribers was 3,876, i.e. 36.4% of the potential

beneficiaries concerned, which may be considered entirely satisfactory

for a first transaction. In addition, in order to provide the leverage

effect in Germany and based on the number of subscriptions from

employees in that country, CAIC subscribed for 262,440 shares.

Accordingly, a total of 462,195 new Vallourec shares, i.e. 4.75% of

the capital as at 31 December 2001, were issued on 5 July 2001.

Except in the event of early redemptions as provided for by law, the

shares purchased are subject to a lock-up period of five years, until

5 July 2006.

As at 31 December 2005, 15,270 shares were the subject of early

redemptions and the number of shares held by employees, directly

or indirectly via company investment funds (FCPE), amounted to

181,759.


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7.1 Recent developments and outlook

The favourable environment from which the Group’s activities have

benefited over the last two years looks set to continue. This results,

in particular, in long order books in the oil & gas (excluding North

America) and power generation sectors. Fundamentals in these

markets remain very positive, sustained overall by energy consumption

requirements.

Within this context, Vallourec decided to increase its 2006 gross

capital expenditure budget by around 30% in order to boost

significantly its high value-added finishing capacity: the Group’s

heat treatment capacity is expected to increase eventually by 15%,

whilst production at the Changzhou plant in China (finishing of tubes

for power plants) will begin during the year.

The demand for drill pipes and well equipment is driven by the

increase in oil company exploration and production costs and by the

increasingly difficult well extraction conditions (deep wells, offshore,

deviated wells, etc.). Under these conditions, prices of products for

these markets are expected to remain high, or even be further

increased in the case of high value-added products such as drill pipes,

for example.

The strong demand for products for power plants reflects the

significant number of programmes to build new plants and refurbish

existing plants.

Consolidated sales for the first quarter of 2006 amounted to

€ 1,318.6 million, up 46.4% compared with sales for the first

quarter of 2005, which totalled € 900.8 million. At constant

consolidation scope, i.e. excluding the acquisition of OMSCO whose

results have been consolidated since 1 October 2005, the increase

in consolidated sales would be 43.6%.

Under these conditions, as compared with the first half of 2005,

consolidated sales in the first half of 2006 should continue to grow

at a rate close to the 41.8% annual growth achieved in 2005, and

the EBITDA / sales ratio for the first half of 2006 is expected to be

slightly higher than the 24.6% achieved for the full year 2005.

As regards the second half of 2006, demand currently remains

strong and sales are expected to remain at the high level achieved

in the first half of 2006.

Since the start of 2006, Vallourec has continued to manage its

portfolio of activities in a dynamic manner, announcing:

■ the acquisition of SMFI, which has enabled the Group, following

the purchase of OMSCO, to continue to strengthen its position in

the oil & gas drilling market. SMFI will be consolidated into the

financial statements of the Vallourec Group as from 1 April 2006

and its full-year 2006 sales are estimated at more than

€ 60 million.

■ the signing, on 31 March 2006, of a contract for the sale of its

subsidiary Spécitubes, the only company in the Vallourec Group

operating in the aerospace sector (sales of € 27 million in 2005).

■ the establishing of a presence in India via the acquisition, on

5 April 2006, of 75% of CST (estimated full-year sales of around

€ 15 million after the planned capital expenditure).

Section 7Information on recent developments and outlook



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7.2 Statutory Auditors’ report on the profit forecasts

This is a free translation into English of a report issued in the French language and is provided solely for the convenience of English speaking

readers. This report should be read in conjunction with, and construed in accordance with, French law and professional auditing

standards applicable in France.

To the Chairman of the Management Board,

In our capacity as Statutory Auditors of your Company and in accordance with EC Regulation no. 809/2004, we have prepared this report

on Vallourec’s profit forecasts included in section 7 of the Company’s Reference Document dated 26 April 2006.

These forecasts and the significant assumptions on which they were based are your responsibility, in accordance with the provisions of

EC Regulation no. 809/2004 and the CESR recommendations on profit forecasts.

It is our responsibility, on the basis of our procedures, to express an opinion, in accordance with the terms specified in appendix I, point 13.3

of EC Regulation no. 809/2004, as to whether said forecasts have been properly prepared.

We carried out our work in accordance with professional standards applicable in France.This work comprised an assessment of the procedures

implemented by Management for the preparation of the forecasts and the implementation of procedures to verify the consistency of the

accounting methods used with those adopted for the preparation of Vallourec’s historical information. Our procedures also included gathering

such information and explanations as we considered necessary in order to obtain reasonable assurance that the forecasts were properly

prepared on the basis of the assumptions as set out.

We would remind you that, since forecasts are, by their very nature, subject to uncertainties, actual results sometimes differ significantly

from the forecasts presented and that we do not express any opinion on the likelihood, or otherwise, of the actual results being in line with

these forecasts.

In our opinion:

■ the forecasts have been properly prepared in accordance with the basis indicated;

■ the accounting principles used in the preparation of these forecasts are consistent with the accounting policies applied by Vallourec.

This report is issued solely for the purposes of filing the Reference Document with the French financial markets authority (Autorité des Marchés

Financiers – AMF) and may not be used in any other context.

Neuilly-sur-Seine, 26 April 2006

The Statutory Auditors

BARBIER FRINAULT & AUTRES CALAN RAMOLINO et ASSOCIES

Ernst & Young

Philippe HONTARREDE Christine STAUB Bertrand de FLORIVAL Bernard SCHEIDECKER

Information on recent developments and outlook

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8.1 MANAGEMENT BOARD REPORTS 161

8.1.1 Management report of the Management Board to the Ordinary General Meeting on 1 June 2006 161

■ Trends in the Vallourec Group’s markets 163

■ Research and Development 170

■ Information provided in accordance with Article L. 225-102, Section 4,of the French Code de Commerce:

– Information on the social implications of the Group’s activities 171

– Information on the environmental consequences of the Group’s activities 179

■ Consolidated financial statements 181

■ Vallourec (Holding Company) 182

■ Remuneration of Company officers 182

■ Information on the breakdown of capital 183

■ Regulated agreements 183

■ Allocation of net income 184

■ Supervisory Board 185

■ Statutory Auditors 185

■ Attendance fees 185

■ Share buy-back programme 185

■ Appendix to the Management Board’s management report: List of other positions held by Vallourec Company officers 186

8.1.2 Special report of the Management Board on options 203

8.2 REPORT OF THE CHAIRMAN OF THE SUPERVISORY BOARD 204

on the conditions governing the preparation and organization of the Supervisory Board’s work and on the internal control procedures

8.3 STATUTORY AUDITORS’ REPORTS 208

8.3.1 Statutory Auditors’ general report on the annual statutory accounts 208

8.3.2 Statutory Auditors’ special report on certain related party transactions 210

8.3.3 Statutory Auditors’ report on the consolidated financial statements 212

8.3.4 Statutory Auditors’ report on the report of the Chairman of the Supervisory Board on internal control procedures 214

8.4 SUPERVISORY BOARD REPORT 215

8.5 RESOLUTIONS PROPOSED BY THE MANAGEMENT BOARD 216

8.6 SUBSIDIARIES AND PARTICIPATING INTERESTS AS AT 31 DECEMBER 2005 220

8.7 COMPANIES CONTROLLED DIRECTLY OR INDIRECTLY AS AT 31 DECEMBER 2005 221

8.8 EVALUATION OF SECURITIES PORTFOLIO AS AT 31 DECEMBER 2005 222

8.9 FIVE-YEAR FINANCIAL SUMMARY 223

Section 8Specific documents for the Ordinary General Meeting on 1 June 2006

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8.1 Management Board reports

8.1.1 Management report of the Management Board to the Ordinary General Meetingon 1 June 2006

After an excellent year 2004, 2005 was likewise a year that broke

all records, both in terms of activity and results. 2005 also saw the

achievement of an essential step in the Group’s development with

the acquisition of the 45% stake in V & M TUBES previously held by

Mannesmannröhren-Werke. Thanks to this acquisition, Vallourec

now has full control over the implementation of strategy in its main

subsidiary.

Consolidated sales for the year totalled € 4,307.4 million,

41.8% up on 2004 sales which were themselves at record levels.

At € 3,037.8 million, 2004 sales were up 27.9% compared with

2003 and, for the first time, broke through the symbolic € 3 billion

barrier.

Whilst in 2004 the rise reflected mainly an increase in volumes

(+14.6%), the 41.8% increase in 2005 was mainly due to a mix,

price and currency effect of 35.7%, the volume effect being limited

to 6%, with most of the Group’s production facilities operating at

full capacity since 2004. The scope effect was insignificant (-1.5%).

The mix, price and currency effect was mainly due to the fact that

Vallourec, benefiting from a favourable economic climate, was able

to continue to apply further selling price increases in 2005, particularly

in Brazil and the United States, and to constantly improve its product

mix, whilst the full effect of price increases negotiated in 2004

was felt throughout 2005.

In the oil & gas sector,Vallourec achieved very strong growth in 2005

in North America and the rest of the world thanks to high volumes

and a sharp rise in selling prices, particularly in the case of high value-

added products. Sales increased by 65.4% over the year as a whole

and were 35.7% higher in the second half than in the first. Sales in

the power generation sector were 55.0% higher in 2005 than in

2004, reflecting the strength of this market, particularly in China,

which continues to represent more than 50% of Vallourec’s sales in

this sector. In the rest of the world, sales also increased due to

renovation and maintenance programmes. Overall, oil & gas and

power generation activities together represented 59.3% of Vallourec’s

consolidated sales in 2005, illustrating the Group’s policy of focusing

increasingly on the energy sectors. By comparison, these activities

accounted for only 34.6% of total annual sales in 2000.

Mechanical engineering, which is essentially a European business,

benefited from the strong world demand for raw materials and

energy, which created a very favourable environment for our

applications. Over the year as a whole, sales in this sector increased

by 33.9% compared with 2004. In the chemicals and petrochemicals

sector, where Vallourec is becoming increasingly involved in major

projects, sales increased by 38.0% in 2005. Tubes and components

for the automotive industry, by contrast, suffered in 2005 from the

fact that the number of new cars registered in Western Europe

remained virtually stable (down 0.7%) and, more particularly, from

the fall in the number of vehicles sold by PSA and Renault, the

Group’s two main customers in this market.At constant consolidation

scope, Vallourec’s sales nevertheless grew by 12.3%.

In terms of geographic breakdown, the global character of the

Group’s activities is becoming more apparent each year. France’s share

of 2005 consolidated sales was less than 10% (9.5%) and sales

outside the enlarged, 25-member European Union represented

more than 60% (61.3%) of the total, due, in particular, to increases

in Asia and North America. Five years ago, in 2000, sales in France

accounted for 22.7% of consolidated sales and those outside the

Europe "of 15" accounted for only 41.6%.

Operating costs increased by 27.8%. This increase was due, on the

one hand, to a 36.8% rise in purchases of raw materials and, on the

other hand, to a 20.1% rise in all other operating costs. The increase

in purchases of raw materials, which was significantly greater than

the 14.6% increase in volumes, was due mainly to the sharp rise in

their prices. Even though they tended to stabilize this year, average

purchase prices were significantly higher than those of 2004.The rise

in other operating costs was due, in particular, to the increase in

transportation and energy costs.

The increase in selling prices and the enhanced product mix were the

main causes of growth in EBITDA, which increased by 133.3% to

€ 1,060.6 million compared with € 454.6 million in 2004. EBITDA

therefore achieved the record level of 24.6% of sales compared with

15.0% the previous year, which was itself a record.

Specific documents for the AGM on 1 June 2006

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The effective tax rate was 32.8% compared with 25.2% in 2004,

since the Group had already used up almost all of its tax credits.

Total consolidated net income for 2005 was € 632.4 million,

i.e. 14.7% of sales, compared with € 265.2 million, i.e. 8.7% of sales,

in 2004, representing an increase of 138.5% over the previous year.

Due, in particular, to the positive effect of the acquisition of the 45%

stake in V & M TUBES, which was effective as from 1 July 2005, net

income, Group share, more than tripled to € 473.0 million compared

with € 145.0 million in 2004. If the acquisition had taken place on

1 January 2005, Vallourec’s net income, Group share, would have

been € 576.7 million in 2005, instead of € 473.0 million, although

total net income would have remained almost unchanged.

In this context, it should be noted that the total amount of employee

profit sharing (both statutory and non-statutory profit sharing plans)

allocated to the Group’s employees rose sharply to € 55.5 million

this year compared with € 18.8 million in 2004.

Despite an increase in gross capital expenditure of 86% to

€ 192.4 million in 2005, and financial investments totalling

€ 651.3 million (acquisition of the 45% stake in V & M TUBES and

OMSCO’s assets), the Group’s total net debt grew by only

€ 259.3 million in 2005 because the rights offering in July 2005,

which generated a net amount of € 123 million, enabled the Group

to limit its recourse to debt.

The Group’s cash position thus changed from positive net cash of

€ 54.6 million at 31 December 2004 to net debt of € 204.7 million

at 31 December 2005, representing gearing (net debt / shareholders’

equity) of 13.6%. It is important to note that the preservation of a

sound financial structure is one of the key elements of Vallourec’s

strategy since it guarantees that the Group will be able, at all times,

to manage its development independently and, in particular, to

seize any opportunities for growth that may arise.

Capital expenditure in 2005 totalled € 192.4 million, up sharply

(+86%) compared with the € 103.1 million incurred in 2004.

The main items making up this total were as follows:

■ In Brazil, increases in production capacity in respect of steel and

tubes as a result of the modernization of the steel mill’s continuous

caster, the commissioning of a new furnace, modifications to the

piercer and the downstream equipment of the continuous rolling

mill and increases in drawing capacity.Additional resources were

also allocated to mining and forest cultivation.

■ As regards boiler tubes for the energy sector, the increase in

production capacity in Europe in respect of large and small tubes

and the commencement in China of construction work on a

machining and finishing workshop, which will become operational

as from mid-2006.

■ In the stainless steel sector, increases in Changzhou Valinox

Great Wall Co. Ltd’s capacity in respect of condenser tubes by the

commissioning of additional welding machines.

More generally, the very high utilization of the Group’s production

tools since 2004 has resulted in extremely significant levels of

expenditure on maintenance and upgrading at all plants.

The continuing improvements in safety and working conditions as

well as compliance with environmental standards has also resulted

in a material increase in expenditure in these areas.

Details of the main investments made during 2005 and the two

preceding financial years are provided in section 4, paragraph 4.4.1,

of the Reference Document for the financial year 2005, of which this

report is an integral part.

As regards 2006, a further strong rise in capital expenditure, of more

than 30%, is being considered, particularly in order to significantly

increase the finishing capacity in respect of high value-added

products.

As regards financial investments, in addition to the acquisition of full

control of V & M TUBES already detailed above, a significant strategic

investment was also made in 2006 with the acquisition of the

assets of OMSCO, a division of Shawcor Ltd (Canada), which is based

in Houston (USA) and specializes in the manufacture of steel drill

pipes for the oil & gas industry. The company OMSCO Inc. has been

consolidated into the financial statements of the Vallourec Group since

1 October 2005. This acquisition has enabled Vallourec to become

the world number two in this sector, a position further strengthened

by the acquisition, completed on 21 March 2006, of SMFI (Société

de Matériel de Forage Industriel), a company based in Cosne-sur-Loire

in France, which specializes in the manufacture of drill collars, heavy

weight drill pipes and high-tech products for oil & gas drilling.

V & M TUBES made these two acquisitions.

In November 2005,Valtimet entered into a joint-venture agreement with

the Chinese company Baoti to form Xi’an Baotimet Valinox Tubes Co. Ltd,

in Xi’an, in the Chinese province of Shaan’Xi. During 2006, this company

will start producing welded titanium tubes for the Chinese power and

chemicals markets.

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At the beginning of April 2006, Valtimet announced the acquisition

of 75% of CST Ltd, an Indian company located in Hyderabad, which

specializes in tubes for power plant condensers for the Indian market.

The company was renamed CST Valinox Ltd.

As regards divestments, of note is the disposal referred to above at

the beginning of 2005 of the automotive assembly and components

activities in the Mercosur region, which no longer formed part of

the Group’s long-term development strategy. At the end of March

2006 the sale was announced, to one of its main customers, of the

subsidiary Spécitubes, which specializes in tubes for the aerospace

sector. The affiliation with its new shareholder will enable Spécitubes

to strengthen its position as European leader, whilst developing

complementary activities for major aerospace customers.

TRENDS IN THE VALLOUREC GROUP’S MARKETS

■ Oil & gas

In 2005, the Group achieved sales in the oil & gas market of

€ 1,829.0 million compared with € 1,106.0 million in 2004, i.e.

an increase of 65.4%. Excluding the scope effect resulting from

the acquisition of OMSCO’s assets, which was effective as from

1 October 2005, the increase would have been 62.8%.This increase

was achieved as a result of high volumes and a significant increase

in selling prices, particularly for high value-added products. The oil

& gas market’s contribution to the Group’s total consolidated sales

has increased significantly: from 36.4% in 2004 to 42.5% in 2005,

clearly confirming that this remains the Group’s key market.

The tubes produced by Vallourec for the oil & gas industry are largely

threaded tubes designed for so-called “vertical” uses. They are used

in wells, either during drilling operations or for equipping and operating

the wells.These products are referred to as Oil Country Tubular Goods,

abbreviated to OCTG.Vallourec also supplies line pipes for collecting

and transporting petroleum products, especially offshore.

The whole of the petroleum industry has been, for the last two years,

and continues to be driven by an increased demand and the soaring

price of oil and natural gas. Having increased by 8.5% in 2004,

worldwide capital expenditure on hydrocarbon exploration and

production increased by nearly 13% in 2005, according to the

French Oil Institute (l’Institut Français du Pétrole - IFP). No significant

fall is expected in the short or medium term and 2006 will doubtless

be a similar year with, also according to the IFP’s projections, a further

8-10% increase in worldwide exploration/production expenditure.

During most of 2005, oil prices fluctuated between USD 55 and

USD 65 a barrel with historical highs of close to USD 70 or even

occasionally slightly above that level, depending on circumstances

(hurricanes in the United States or social or political tensions in,

notably, Iraq, Iran, Nigeria and Venezuela). At the beginning of

April 2006, tensions between the international community and

Iran concerning the latter’s nuclear policy once again sent oil prices

towards earlier record levels.

The price of gas has developed in a similar manner to that of oil and

has been increasing incessantly in recent years, to reach an average

of USD 8.99/Mbtu in 2005, up 45.4% compared with the average

price of USD 6.19/Mbtu in 2004. It was USD 5.50 in 2003 and

USD 3.36 in 2002.

Currently no expert, whether a pessimist or optimist depending on

the viewpoint one takes, thinks that oil prices will fall significantly

in the near future. Regardless of short-term tensions, this situation

is expected to last at least until the shortfall in investment in recent

years, in terms of both production and exploration, has been

made good.

In the case of exploration in particular, several factors lead one to

assume that activity could remain at the top of the cycle for a fairly

long period, contrary to past experience: the need to obtain additional

sources of supply and to reduce the dependency on production

zones considered to be at risk, the high level of oil & gas prices that


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make virtually all drilling programmes profitable and the need to

rebuild reserves, which are currently considered to be totally

insufficient to meet future needs. In this regard, the International

Energy Agency, in a study published recently, predicts that world

demand for oil will increase by 46% between 2003 and 2030 and

demand for natural gas by 76%. Including coal, in 2030 these

three sources are expected to still be supplying more than 80% of

the world’s energy. These requirements will result in colossal

investment, in terms of both production capacity and infrastructure.

To return to the present, the number of rigs in operation, which is

a significant indicator for Vallourec of the demand for its OCTG

products, significantly increased once again in 2005.

In this regard it is important to note – and this remark is valid for

the entire oil & gas market – that the rate of growth in demand for

OCTG products, in terms of both volumes and quality, is greater than

that for drilling products since growth in the activity is taking place

in conditions that are becoming increasingly difficult from a technical

point of view, in the case of both deep wells and off-shore. In

addition, a major part of the recent development in the activity has

concerned drilling for gas, which requires products that are more

technically advanced (in terms of resistance to leaking and corrosion)

in which Vallourec, through, in particular, its VAM® range, has

recognized expertise.At the beginning of 2006 in the United States,

around 85% of drilling was for gas.

In addition, as regards exploration, the discovery of new reserves

implies the implementation of increasingly extensive programmes and

this phenomenon can only become more pronounced with time.

Another way of boosting reserves is better exploitation of oil & gas

fields that have already been identified (enhanced recovery) or

improved effectiveness of the production process and the

development of increasingly sophisticated products, associated with

an increased frequency of risks of corrosion.

This being the case, the number of rigs in operation in the United

States (the benchmark zone) was on average 1,381 in 2005 compared

with 1,190 in 2004 (+16%), 1,031 in 2003 and 831 in 2002, a poor

year. In March 2006 the number of rigs in operation in this zone was

1,551, i.e. over double the low point of 750 in April 2002. The level

of drilling is also very high in Canada, with an average of 458 rigs

in operation in 2005, 24% higher than in 2004.

In the EAME region (Europe,Africa, the Middle East and the Far East,

excluding Iraq and on-shore China), drilling has continued to increase

steadily, although at a slower rate than in the North American

region.The number of rigs in operation was on average 592 in 2005,

8.6% higher than in 2004 (545).At the beginning of 2006 there were

640 in operation, close to the highest level during the last fifteen

years. There is, however, scope for improvement as regards our

OCTG products, as is illustrated, for example, by the targets for capital

expenditure on production equipment announced recently by Aramco.

It is important to note the strong performance of the North Sea

market which, after a catastrophic 2003 and an upturn in 2004,

experienced a record year in 2005 thanks to the increasing power

of the independents, which are increasingly replacing the large

companies in this mature market. 2006 is expected to be better still,

unless increased taxes imposed on the oil companies by the British

government have a negative impact on activity.

In Brazil, drilling continues to grow significantly, particularly deep

off-shore drilling, where world records are regularly beaten.

In total, the number of rigs in operation worldwide (excluding

on-shore China, Iraq and the former USSR) was on average 2,746

in 2005, compared with 2,395 in 2004 (+14.7%), 2,174 in 2003

and 1,829 in 2002. In February 2006, the number stood at 3,193,

and there is no indication of a fall in the near future.

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■ Power generation

The products manufactured by the Group in this sector include

carbon steel tubes, alloy and stainless steel or titanium tubes. These

products, which are designed for power generation plants, include

specialties for which there are few competitors, such as tubes for

nuclear steam generators and header pipes for classic thermal

power generation plants, the diameter of which may reach 1.5 m and

the thickness 30 cm. All these tubes have highly sophisticated

technical features and must, in particular, be capable of withstanding

the extreme temperatures, pressures and corrosion that are found

in all power generation plants.

In the field of electric power generation, whether conventional

(fossil fuel) or nuclear, the average construction period is several years

and our products are used in the second phase of the construction.

This explains why the consequences of changes in market trends are

lagged.After the low point reached in 2003, at which time the sector

was still suffering from the repercussions of the South-East Asian

monetary crisis in 1997 and the Enron affair, the energy sector has

enjoyed a significant upturn since 2004, driven by the enormous

worldwide requirements for energy, which are constantly increasing,

particularly in China. The International Energy Agency states that, in

order to be able to meet this growing demand, particularly in the

emerging countries, between now and 2030 additional power

generation capacity of around 4,700 GW will be required, in the form

of either new or refurbished plants. Current installed capacity is about

4,000 GW. As regards the capital expenditure in respect of this

additional capacity, approximately 75% will be allocated to

conventional thermal power generation plants, whether combined

cycle or nuclear, in which area Vallourec is directly involved, with the

remaining 25% being apportioned between hydroelectric, wind

and other alternative sources of power generation.

It should be noted that, in the case of electricity generation plants,

one of the main concerns of operators is, of course, to improve returns

and performance, which depend mainly on operating conditions that

are becoming increasingly difficult, in terms of both temperature and

pressure.Vallourec is very well placed to take advantage of this trend

due to its unique range of special, high-tech products (boiler pipes

in special alloys, header pipes and U-bent feedwater heaters) in which

the Group is indisputably the world number one with a significant

lead over its immediate competitors.

For a large number of products, the complexity of the technology,

industrial protection (patents) and the certification and accreditation

processes, particularly where lengthy performance testing is involved,

are significant barriers to their entry into the market.

In 2005, Vallourec’s sales in the power generation sector totalled

€ 724 million, 55% higher than in 2004 (€ 467 million). Sales in this

sector have been increasing since the end of 2003. Sales in the

second half of 2005 were 36.6% higher than in the first half and the

contribution of this sector to consolidated Group sales has continued

to rise, accounting for 16.8% in 2005 compared with 15.4% in 2004.

The market for boiler tubes has remained buoyant and continues to

be driven by Chinese demand.After the strong surge in 2004/2005,

Chinese demand in 2006 has remained at its extremely high level.

It should be noted that, in mid-2005, the Group approved the

construction, on the Changzhou site in China where Valtimet already

has a presence, of a plant specializing in the machining and cold

finishing of large-diameter tubes (steam headers) produced in

Germany for power generation plants.

Some other countries in the Middle East and Far East (South Korea,

Thailand, Burma and Japan, among others) also have high levels of

demand for electricity. The outlook as regards the Indian market, in

particular, is constantly improving. The Indian programme for the

construction of new thermal power plants within the 2007-2012

budget has been increased and now provides for the commissioning

during that period of additional capacity of 89 GW. This increase,

although not on the scale of that experienced in China, is nevertheless

significant in comparison with the previous budget.

In Europe and North America, the large number of moderately

significant projects concerning the maintenance or renovation of

combined-cycle power plants enabled activity levels in 2005 to

remain high.

The European market is improving constantly.V & M TUBES has just

been awarded the order to supply tubes for the power plant

constructed for RWE in Neurath, in Germany. Some of these tubes

will be manufactured in the new grade of steel (VM12) developed

and patented by V & M TUBES for the so-called “ultra supercritical”

power plants. V & M TUBES has also been nominated supplier for

the Lagisha project in Poland – the world’s largest “circulating

fluidized bed” power plant (injection of limestone into the coal for

sulphur capture).

The US market is also improving. One of the recent highlights was

the passing of the new law on energy, which, as regards electricity

production, provides finance and tax incentives designed to boost

the construction of plants using clean coal technology. After years

of waiting, this should facilitate the reappearance of fossil-fuelled

thermal power plants in the country.


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In the case of stainless steel and titanium tubes produced by

Valtimet for the power generation sector, demand also remained

buoyant in 2005, mainly as a result of the high requirements of the

Chinese market.Valtimet benefited significantly from its presence in

the country for nearly 10 years. In Changzhou, the additional capacity

commissioned at the end of 2004 was fully used from day one.

Installation is underway of a new production line that will increase

capacity by a further 15%. This new production line will be

operational shortly.

With the aim of strengthening further the Group’s presence in this

key market, at the end of 2005 Valtimet entered into a joint-venture

agreement with Baoti, the leader in the Chinese titanium market, to

manufacture in China welded titanium tubes for the local electricity

and chemicals markets. The company, which has been named

Xi’an Baotimet Valinox Tubes Co. Ltd, is 60%-controlled by Valtimet.

Production is planned to start during the second half of 2006.

The main difficulty Valtimet experienced in 2005 concerned titanium

supplies. The price of titanium soared in 2005 due to high demand

from the aerospace sector and the shortage of “sponge”, the first

stage in the processing of the ore. This situation is expected to last

at least until the end of 2006 – the timescale needed for the

commissioning of the additional production capacity currently being

generated. The renegotiation of supply contracts proved to be very

difficult but Valtimet was able to capitalize on its long-standing

relationships with suppliers to obtain the quantities it required and

therefore to gain a competitive advantage. Fortunately, the company

was able to pass on virtually all of the price increases, but, in view

of the levels of such prices, there is a risk that some customers may

seek to replace titanium with alternative products.

As regards nuclear power, the “renaissance” looks set to continue.

Due to the ecological preoccupations surrounding other types of

energy, nuclear power seems increasingly to be the only credible

economic and industrial solution that will facilitate a reduction in

greenhouse gas emissions. All market signals confirm that the

upturn in nuclear power is not a passing phenomenon and that

demand for tubes could continue to increase. The almost daily

emergence of new projects confirms this trend. It is now definite that

additional power plants will be built in the United States starting from

2010. In Asia and Europe, where new projects are already underway,

the momentum is continuing. In addition, the maintenance

requirements in respect of the equipment installed in the 1970s and

1980s and the postponement of planned closures of power plants

will also generate significant requirements over the long term.

As regards the immediate future, Valinox Nucléaire’s order book is

full until the end of 2007 and 60% of its significantly-increased

production capacity has already been reserved until 2010.

Finally, it is important to note that the “Pôle Nucléaire Bourgogne”

association chaired by Valinox Nucléaire, which comprises around fifty

companies within the sector including Framatome, EDF, DMV and

Eramet, has been designated a “competitiveness cluster” by the

French government. This recognition will make the Group eligible for

support in terms of Research and Development and training.

■ Mechanical engineering

This is Vallourec’s business line that is the most closely linked to the

general economic trend. It has a very strong European dimension -

about 80% of sales are made in Europe.

Sales are mainly associated, on the one hand, with industrial

investment in general for all products incorporating sophisticated

tubular parts that offer a technical advantage and, on the other hand,

with the automotive industry (requirements of sub-contractors

manufacturing mechanical components).

With a wide range of hot-finished or cold-drawn tubular products

from 5 to 1,500 millimetres, the Group is involved in all of the sector’s

applications, including mechanical engineering, mining, lorry axles,

mine drilling equipment, off-shore platforms, cranes, lifting equipment

and hydraulic circuits. In addition, in order to be able to meet its

customers’ needs, Vallourec has developed, under registered

trademarks (Mecaplus®and Ecoval®), a range of grades of

fine-grained micro-alloyed carbon steel that respond perfectly to the

problems specific to the sector and also facilitate bespoke solutions.

Vallourec is thus world leader in all tubular steel applications for the

mechanical engineering sector with customized products and

recognized quality.

2005 confirmed the significant recovery experienced in 2004, after

four years of continuously falling sales. In 2005, sales in the

mechanical engineering sector totalled € 573 million compared with

€ 428 million in 2004, i.e. an increase of 33.9% after the increase

of 30.5% already achieved the previous year. The contribution

made by the sector to the Group’s consolidated sales nevertheless

fell slightly, from 14.1% in 2004 to 13.3% in 2005, due to the

significant growth in the two markets linked to energy (oil & gas and

power generation), but was higher than that of the automotive

market, which suffered from both the mediocre European economic

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climate in this sector in 2005 and the disposal of the components

activities in the Mercosur region.

Demand for tubes for mechanical engineering, industry and general

uses remained buoyant in 2005 with the exception of a slowdown

in the middle of the year due to the prudent policy adopted by traders

and distributors fearing that increased energy costs would adversely

affect economic activity. However, the effects of this policy remained

limited since neither distributors nor end customers had excessively

high inventory levels, due to the curtailment measures adopted in

2004 and again at the beginning of 2005 because production

equipment was operating at full capacity. Nevertheless, sales in

the second half were slightly lower (6.5%) than those of the first half,

which was amplified by the summer seasonal effect.

Overall, taking 2005 as a whole, sales benefited from the strong

world demand for raw materials and energy that created a very

favourable environment for our applications with our European

customers who are major exporters. High levels of exports were made

to the North American market and major orders have been received

from the Chinese market, to meet, in particular, the needs of crane

builders. Finally, mining exploration tubes continued to be the

subject of strong demand, in a very favourable economic climate

boosted by high raw material prices.

At the beginning of 2006, demand overall was at a very satisfactory

level and the Group’s policy is to focus on high value-added products

without jeopardizing the comprehensive service provided to

customers.

■ Automotive

The Group’s sales in the automotive sector in 2005 totalled

€ 483 million compared with € 501 million in 2004, i.e. a fall of

3.6%. The contribution from the automotive activity to the Group’s

consolidated sales also fell from 16.5% in 2004 to 11.2% in 2005.

It should however be noted that the Group sold, with effect from

1 January 2005, its automotive components activities in the Mercosur

region (Vallourec do Brasil Autopeças Ltda in Brazil and Vallourec

Argentina in Argentina). The sales achieved by these two companies

totalled € 71 million in 2004. At comparable consolidation scope,

2005 sales in the automotive sector increased by 12.3%.

The Vallourec Group’s products for the automotive industry are

manufactured in Europe and Brazil and supplied almost exclusively

to these two markets, for reasons that relate mainly to the constraints

of the just-in-time methodology. Most of the products consist of

precision tubes (drawn or welded) used by carmakers or their parts

manufacturers and the rest consists of components or sub-assemblies

designed to be mounted directly onto vehicles.

In the European automotive market (26 countries), despite a general

fall of 0.7% compared with 2004, the number of new vehicles

registered in 2005 remained comfortably above the 15 million

barrier. With sales of passenger cars totalling 15.2 million in 2005,

it proved itself to be a mature market, without significant annual

increases but with a very sound base in terms of volume, despite

economic uncertainties. Without the countries that recently joined

the European Union, which have seen their activity slide overall by

10% entailed by the slump in the Polish market (down 26%

compared with 2004), the former Western Europe would have

recorded activity levels that remained more or less stable from one

year to the next.

The 2005 figures confirm the downturn experienced by the two

French carmakers that are also Vallourec’s main customers in this

activity. Renault saw its annual sales fall by 5.2%. The relaunch of

the Clio (version III) did not mask the problems surrounding the

Modus, sales of which were below even the most pessimistic targets,

and customers’ increasing disaffection with the Megan and its

spin-off, the Scenic, both of which are former flagship models that

have come to the end of their careers. The situation is rather more

mixed at PSA where Citroën’s good performance (+1.3%) has to

some small extent offset Peugeot’s sudden decline (-6%). For the year

as a whole, the PSA group recorded a downturn of 2.9%. It suffered

not only from the very disappointing sales of the 1007 but also from

a drop in sales of the 407 which, after a good start (1,000 vehicles

per day), fell to around 700, whilst average sales once production

was fully underway were budgeted at 1,200 per day.

Despite this unfavourable environment, the Group held up relatively

well thanks to its specialist products such as tubes for airbag

inflators, high-pressure injection beams, in respect of which Vallourec

has entered into three-year contracts with the main players in the

European market, and stainless steel products. The automotive

components activity benefited from the success of the new product,

the engine add-on, which consists of a tubular structure that offers

smart crash behaviour through programmed deformation placed in

the front of the engine cradle and designed to absorb energy in the

event of violent impact. This high-tech solution is already used in the

Peugeot 407 and Citroën C4, as well as the new 207 model.


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Renault, which until now has chosen to develop its own system, has

just begun using this product to equip one of its new models. The

outlook for this new product is extremely encouraging. Finally,

demand for suspension systems for the Peugeot 807/Citroën/Fiat

people carriers remains stable.

It is undoubtedly the case that Vallourec’s automotive business

suffered during the second half of the year as a result of the

problems of its two main customers: although, at comparable

consolidation scope, sales for 2005 as a whole grew by 12.3%, as

detailed above, sales for the second half were more than 15%

lower than those of the first half.

Trends in the bearing tubes market were similar to those in the

automotive activity.

In Brazil, after a record year in 2004, the automotive manufacturing

market (cars and lorries) remained buoyant in 2005, with growth of

around 5% as a result, in particular, of exports and in spite of the

strength of the domestic currency.The agricultural machinery market,

by contrast, suffered a significant downturn.

During the first quarter of 2006, the European automotive market

experienced a 3.4% increase in new car registrations. The French

carmakers continued to struggle but the PSA group fared a little

better with growth of 0.3% compared with the first quarter of

2004 whilst Renault suffered a 9.2% fall. Peugeot is placing a lot

of hope on the new 207, which it began to market at the beginning

of April 2006. The company intends to manufacture more than

600,000 models, i.e. 3 100 per day, a significantly higher volume than

that of its direct competitors in a segment that is crucial since it

represents one-third of the European market. Vallourec has a

considerable interest in the future of this vehicle, for which it

supplies the add-ons directly and the tubes for seats indirectly

through Faurecia.

■ Chemicals and petrochemicals

After years of stagnation, in 2005 the chemicals and petrochemicals

market clearly confirmed the upturn already seen in 2004, particularly

in the second half of the year.

The Group’s sales in the sector totalled € 461 million, i.e. an

increase of 38% compared with sales of € 334 million in 2004,

which were themselves 22.3% up on the preceding year. Sales in the

sector have been increasing for two years now, with each half year

recording higher sales than the one before, and sales in the second

half of 2005 were 14.4% higher than in the first half of the year.

The relative contribution of the chemicals and petrochemicals activity

to Group consolidated sales has nevertheless fallen slightly, to 10.7%

compared with 11% last year, due to the very good performance of

the oil & gas and power generation markets, as described above in

this Reference Document.

In this sector, the Vallourec Group is developing a wide range of

products in carbon steel, alloys or stainless steel and titanium that

meet the specific requirements for each type of use: low or high

temperatures, corrosive atmospheric conditions and particular

constraints. The most popular products are line pipes, smooth, riffled

or finned heat exchanger tubes, furnace tubes, and fittings used in

oil refineries and chemical and petrochemical production plants,

whether as new equipment or for maintenance.

Vallourec’s main outlet in this activity is the petrochemicals market.

It is also a world market. Sales in North and South America, where

the Group has two subsidiaries V & M STAR and V & M do BRASIL,

constitute about half of total sales, whilst sales in all other regions

(Europe, the Middle East, the Far East, North Africa and Southern

Africa, and Australasia) constitute the other half.

Although capital expenditure in the market has remained stagnant for

a number of years, despite the obvious need for such investment, 2005

seems to have marked a turning point, particularly in the petrochemicals

sector.The major problems associated with the excess of the demand

for energy over the available supplies in the long-term are not

regarded as straightforward economic problems but are now seen as

one of the main reasons for the current high prices of oil & gas products.

In the refining sector, world installed capacity is no greater today than

it was at the beginning of the 1980s whilst consumption of refined

products has continued to grow steadily during the intervening

period. In the United States, where no additional capacity has been

created for 30 years, hurricane Katrina was the catalyst (although none

should have been needed) that brought this inadequacy to public

attention.Work is due to begin on a significant number of projects in

the near future. These projects involve both the renovation and

updating of existing capacity and the construction of additional

capacity since the problems associated with the geographical location,

which had been one of the major obstacles, appear to have been

resolved. In the rest of the world there are a large number of projects

at the draft stage or in progress, particularly in the Middle East (Abu

Dhabi, Iran, etc.). For the same reasons, the significant maintenance

and upgrading programmes announced recently by the oil companies

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are expected to result in substantial investment in coming years,

particularly in Europe.

In addition, faced with the fear of a gradual depletion of conventional

oil supplies, the oil companies are focusing on “non-conventional”

crude oil (extra-heavy, tar sands, etc.) the exploitation of which is now

profitable given the surge in the oil price. The reserves in Canada are

huge but there are also reserves in Venezuela (Orinoco), Iran, Brazil,

China and Russia and their exploitation will necessitate significant

investment as regards both production and processing.

In view of the above, and since refining margins are higher than they

have been for 30 years, the upturn in demand experienced at the end

of 2004 looks set to continue and the outlook has every reason to

remain positive for the foreseeable future.

■ Others

This heading comprises mainly the construction and aerospace

markets. Their respective contributions to Vallourec’s consolidated

sales decreased from 6.6% in 2004 to 5.5% this year and is

expected to fall in 2006 with the disposal of Spécitubes, which is due

to take place during the first half of the year. Spécitubes is the

European leader in the production of stainless steel and titanium

tubes for the aerospace sector with sales of € 27 million in 2005.

The company is to be acquired by one of its main customers.

The affiliation with its new shareholder will enable Spécitubes to

strengthen its position as regards major customers in the aerospace

sector and develop its range of products for this sector. 2005 was

a very good year for the aerospace sector and nothing seems to

dampen the sector’s optimism in the short term.

In the case of construction, the Group provides a complete range of

very high quality structural tubes and sectioned shapes for large

construction projects. Such projects have become more numerous in

recent years and have led to buoyant demand for these types of

products. Steel is being used increasingly in modern architecture,

either on its own or in conjunction with other materials, especially

glass. The significant technological progress achieved as regards the

strength of steel now enables building projects to combine boldness

and aesthetics in a way that would previously have been impossible.

The Group’s products are being used in an increasing number of

impressive projects: Bangkok airport, the new central station in

Berlin, Wembley stadium in London, the Bernabeu stadium in

Madrid, covered football stadiums in Düsseldorf and Gelsenkirchen,

Swiss Re’s head office in London, etc.

In 2005, after a difficult start to the year due to some destocking and

the inclement winter weather, activity quickly returned to a buoyant

level. In addition to the traditional markets, demand for structural

tubes also benefited from the requirements for the construction of

the metal structures of oil rig platforms currently being built in

South East Asia. The projects associated with preparations for the

2008 Olympic Games in Beijing and the World Fair to be held in

Shanghai in 2010 are likewise generating growing volumes of

business.


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RESEARCH AND DEVELOPMENT

■ The development of technologies for oil & gas exploitation results in

the production of new types of steel and new threaded connections,

thereby strengthening V & M TUBES’ position as leader: deep sea

wells, deep drilling and highly corrosive environments.

A growing number of projects are underway in Brazil, the United

States, Africa and Indonesia.

VAM® Riser, designed for deep-sea applications, continues its

development and was used successfully in Brazil, the United States

and Indonesia.The fatigue constraints to which these products are

subject necessitate cutting edge technology and specific testing

procedures.

The interest of the main oil and gas drilling companies in the

expansion of columns of casing pipes in wells has become more

apparent. The connection specially designed for this high-tech

application, the VAM® ET, has been the subject of numerous

developments. This product enables engineering in wells to be

simplified and oil & gas production to be increased.

CLEANWELL® is a non-polluting coating developed for the

threaded connections that replaces the grease normally used,

whilst protecting effectively against corrosion. Demand for these

environmentally-friendly products is strong, particularly in the

North Sea.

The VAM® HTF joint enables the Group to offer its customers an

optimal solution under conditions of limited space, combined

loads and very high torque. The product line that has been

developed is now being marketed.

The drilling sector, which has recently been strengthened within

the Group, is pursuing innovative developments in partnership with

its customers.

■ In the automotive sector, the Group is continuing the development

of a significant number of tubular solutions for use especially for

chassis, suspension and car body structure. The large number of

uses, particularly in the field of safety, demonstrates the high

potential for steel and tubing in the automotive industry.

The development of tubular components with “smart” crash

behaviour (programmed deformation absorbing energy in the

event of a high-speed frontal collision) is continuing. These

tubular safety components are very innovative and competitive,

as can be seen from their use in a large number of vehicles.

The Group has experienced continuing growth in the use of

welded stainless steel for tank filler pipes and hydroformed

applications such as exhaust gas recirculation systems.

■ In the power generation sector, 2005 saw strong demand in

China for the construction of thermal power generation plants that

need significant quantities of tubes in a large variety of diameters

and grades. The Group is the world leader in these products.

The development for this sector of a new grade (12% chromium)

for use in power generation plants operating at high temperatures

is continuing with long-term trials. The exceptional hot steam

oxidation resistance of this steel is of particular interest to our

customers.

■ In the construction sector, the Group is winning an increasing

number of contracts throughout the world. Innovative solutions

applied to architectural design of major public buildings, such as

Bangkok airport and the stadiums in Düsseldorf and Munich, are

also being developed for smaller buildings, particularly in Brazil.

■ The significant requirements for steel have increased the interest

in the R&D programme in Brazil concerning the cast iron/charcoal

domains.The selection of trees, the improvement of forest nutrition

programmes and the optimization of charcoal carbonization are

the main development axes of a process that is both competitive

and environmentally friendly.

The 9% and 13% chromium steel and the steel for bearings

(100C6) are regularly produced at the Saint-Saulve steel mill

due to its vacuum treatment and forging equipment. Digital

simulation continues to be used in order to improve the production

process.

Vallourec Précision Soudage continues to develop tubes with

highly sophisticated mechanical properties and tubular profiles

designed for car safety applications. Its new welding line enables

it to guarantee the high quality needed due to the exacting

requirements of the uses to which its products are put, such as

hydroforming and safety equipment.

Process communities are being set up within the Group. These

enable rapid progress by sharing best practices for the Group’s main

processes. The threading of premium joints was the first process

community approach. Other applications are now involved: steel

making and casting, thermal process, etc.


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INFORMATION PROVIDED IN ACCORDANCE WITH ARTICLE L. 225-102, SECTION 4,OF THE FRENCH CODE DE COMMERCE

■ Information on the social implications of the Group’s activities

The employment-related indicators detailed below have been prepared on the basis of the companies fully consolidated and 100%-controlled

by the Vallourec Group.

These indicators are in accordance with the provisions of Decree no. 2002-221 of 20 February 2002.

I. WORKFORCE

At 31 December 2005, Vallourec had 17,542 permanent employees worldwide.

The Group’s production sites and sales premises are located in nine countries:

EUROPE MERCOSUR NAFTA ASIA

France 6,178 Brazil 5,256 Mexico 354 China 154

Germany 4,139 United States 1,145 Singapore 9

United Kingdom 273 Canada 34

The total workforce remained stable as compared with the previous year, but the consolidation scope changed: the automotive activities

based in Argentina and Brazil were sold and the Group’s presence in the United States strengthened by the purchase of OMSCO Inc.

The Vallourec Group now has more than 1,000 employees in the United States.

Change in workforce by geographical area

Workforce registered 2002 2003 2004 2005 Change Breakdownas at 31 December 2005/2002

Europe 10,781 10,476 10,400 10,590 -2% 60%

Mercosur 5,483 5,697 5,714 5,256 -4% 30%

Nafta 1,062 1,216 1,195 1,533 44% 9%

Asia 93 118 175 163 43% 1%

Total 17,419 17,507 17,484 17,542 0.7% 100%

Breakdown of workforce by socio-professional category

Vallourec comes within the labour-intensive industrial category:

■ workers represent 73% of the workforce,

■ office, technical and middle-management staff represent 20% of the workforce,

■ technical experts and senior managers represent 7% of the workforce.

Workforce registered as at 31 December 2004 2005 %

Workers 12,863 12,826 73

Technical and supervisory staff 3,464 3,533 20

Managerial staff 1,157 1,183 7

Total 17,484 17,542 100


Degree of flexibility

Due to the highly cyclical nature of the Group’s activities, Vallourec’s policy is to employ a stable nucleus of permanent staff so that it is

able to handle its on-going workload and adapt to changes in the economic climate. The Group uses overtime and temporary staff to cope

during periods of very high activity.

Workforce registered as at 31 December 2002 2003 2004 2005

Permanent staff 16,776 16,911 16,808 16,776

Staff employed on fixed-term contracts 643 596 676 766

Temporary staff 516 444 829 1,037

Degree of flexibility 7% 6% 9% 11%

Breakdown of the workforce by sex

Women make up 8% of the total workforce: 3% of the workers, 24% of the technical and supervisory staff and 13% of the managerial staff.

Women mostly occupy administrative and sales positions and are beginning to occupy positions of responsibility in management and research.

In decreasing order, the areas with the largest proportion of female employees are as follows:

Proportion of women In the workforce in 2005 Hired in 2005

Asia 40% 25%

France 10% 9%

Nafta 8% 8%

Rest of Europe 7% 10%

Mercosur 7% 17%

Total 8% 12%

New employees

The Group hired 1,401 new employees during 2005, i.e. about 8% of the current workforce. There were no hiring problems affecting the

Group as a whole although some problems were experienced concerning certain types of positions and certain geographical areas.

It should also be noted that 143 apprentices were recruited in 2005, in the following three countries:

■ in Germany, where apprentices represent 24% of hirings,

■ in France (9% of hirings),

■ in Brazil (7% of hirings).

Breakdown of new employees Number %

Europe 849 61

Mercosur 371 26

Nafta 161 12

Asia 20 1

Total 1, 401 100


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Employees leaving the Group

In 2005, the number of employees leaving the Group – 1,343 – was slightly lower than the number of employees joining the Group.

Their reasons for leaving break down as follows:

Retired Resigned Made redundant Dismissed End of contract Other Total

France 118 61 95 92 89 30 485

Europe other than France 24 17 1 36 79 18 175

Mercosur 90 26 30 254 63 3 466

Nafta 10 52 9 113 0 7 191

Asia 0 0 1 0 3 22 26

Total 242 156 136 495 234 80 1,343

Breakdown 18% 12% 10% 37% 17% 6% 100%

The redundancies in France were due to the closure of the Laigneville premises in the Oise region (Vallourec Précision Etirage). The job

preservation plan implemented by the Group enabled more than 70% of the employees concerned to be transferred within the Group, helped

to find employment elsewhere or, in the case of those aged over 57, given early retirement.

II. ORGANIZATION OF WORKING TIME

1. Work patterns – Specific arrangements

The Group’s policy is designed to provide the maximum flexibility so that work patterns can be adapted to customer demand.

The Group endeavours to reduce the strenuousness associated with employees’ working arrangements. The solutions adopted may vary

from country to country, since the notion of strenuousness is governed by cultural as well as physiological factors.

Due to the high level of activity during the year, more than 70% of workers worked in accordance with arrangements that enabled the Group’s

facilities to operate throughout the week and a significant amount of overtime was worked.

This policy must be considered in the context of national legislation and local conditions regarding dialogue between employers and employees.

2. Annual working hours – Production staff

In Brazil, Mexico and Asia, due to the amount of holiday, public holidays and the length of the ordinary working week, the number of hours

normally worked over the year exceeds 2,000.

In the United States, the normal limit is around 1,800 hours.

In Europe, the number of hours normally worked is about 1,600.

Maximum annual capacity Number of hours normally worked per year

Asia 2,840 2,016

Brazil 2,515 2,019

France 1,952 1,527

Germany 2,116 1,564

Mexico 2,732 2,264

United Kingdom 2,047 1,687

United States 2,480 1,856



3. Part-time in France

As at 31 December 2005, in France, 78 employees worked part-time for personal or health reasons (part-time working on health grounds).

The main patterns of part-time working are half time or four-fifths time (with Wednesday as a day off).

Due to the differences in working methods, this information cannot be consolidated for the Group as a whole: the concept of part-time is

typically French and has not been developed to any great extent elsewhere in the world.

4. Absenteeism

The rate of absenteeism is calculated by comparing the total of all paid leave (including paid leave for illness, maternity and accidents at

work or while travelling to and from work) with the total number of hours worked.

Rate of absenteeism

France 4%

Europe other than France 5%

Mercosur 2%

Nafta 3%

Asia 2%

Total 3%

III. REMUNERATION

1. Payroll costs

In 2005, the Group’s payroll costs, excluding temporary staff, were 16% higher than the previous year at € 716 million. This increase resulted

from both the payment of overtime due to the high levels of activity and increased profit sharing due to the Group’s good results. It also

reflects a currency effect which increased the payroll costs of countries outside the euro zone, in particular Brazil due to the rise in the real.

The Group’s total payroll costs of € 716 million break down as follows:

■ Salaries: € 483 million, i.e. an increase of 9% compared with last year

■ Profit sharing (including statutory amounts): € 55 million, i.e. nearly 3.5 times higher than last year

■ Social security charges: € 178 million, i.e. an increase of 12.6%.

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Total payroll costs can be broken down by country as follows:

2005 Breakdown of total payroll costs Breakdown of the workforce

Brazil 13.3% 30.8%

Canada 0.2% 0.2%

China 0.1% 1.0%

France 40.0% 35.7%

Germany 30.4% 23.5%

Mexico 1.2% 2.0%

United Kingdom 2.0% 1.4%

United States 12.6% 5.4%

Total 100% 100%

2. Average salaries

Vallourec’s remuneration policy is based on the principles of employee motivation and fairness (whilst taking into account the conditions

of the local employment market), including profit sharing and incentives.

2004 2005 % %Average salaries including Average salaries including increase 2005

profit sharing and profit sharing and 2005/2004 social social security charges social security charges security

(in euros) (in euros) charges

Brazil 13,400 17,960 34% 60%

Canada 45,900 51,660 12% 17%

China 3,200 4,330 35% 16%

France 41,300 46,410 12% 42%

Germany 51,100 53,700 5% 27%

Mexico 16,900 26,200 55% 23%

United Kingdom 47,600 58,340 22% 19%

United States 72,200 95,680 32% 32%

NB: all figures have been converted into euros. The percentage increase includes the currency effect.

3. Employee profit sharing

In 2005, profit sharing amounted to € 55 million and was paid to 13,025 employees (more than two-thirds of the workforce) in France,

the United Kingdom, Mexico, Brazil and the United States.

This amount, which represented 8% of the Group payroll costs, represented 11.5% of the total payroll costs of the recipients.


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IV. INDUSTRIAL RELATIONS –INTERNAL COMMUNICATION

■ Organization of the social dialogue

The system ensuring dialogue between employers and employees is

organized in each country in accordance with the applicable national

legislation.

In France, the Group Committee is the representative body for all

French companies.

It has 26 representatives, chosen by the trade unions from among

those elected by the works councils and meets twice a year in the

presence of the Group’s senior management. It is provided with

general information on the Group (review of financial statements,

activity, capital expenditure, etc). It is involved with the management

of provident and employee savings schemes.

In each company, the works councils, central works councils and

consultative committees, which are elected, are informed and

consulted about the economic affairs of the company or entity.

They participate in the management of budgets in respect of

employment-related matters.

The personnel representatives, who are elected by the employees of

each entity, present employees’ individual and collective claims in

respect of salaries and working regulations.

The shop stewards are appointed by each trade union and represent

employees in negotiations, in particular the statutory annual

negotiation which takes place each year concerning salaries, the

organization of working time and equal opportunities for men and

women.

When certain subjects for negotiation concern all the Group’s French

companies, a negotiation committee is set up at Group level in France.

Important negotiations concerning career development and training

were entered into in 2005 and are still underway.

In Germany, most of the workforce is governed by the provisions of

the act on co-determination in the mining and iron and steel

industries of 21 May 1951.

At European level, a European Committee gathers 30 French,

German and Scottish representatives from V & M TUBES. It is

informed about the activity, results and strategy of V & M TUBES in

Europe and the rest of the world. The European Committee meets

in full once a year; its executive board meets five times a year.

■ Internal communication

Vallourec ensures that its staff are informed on an on-going basis

of recent events concerning the Group: strategy, trends, products,

financial performance, staff changes, etc. This information is made

available to the staff concerned by means of the following

communication media:

– “Vallourec Info”: a magazine intended for all Group employees

worldwide. 20,000 copies are published, in four languages.

The magazine is published twice a year.

– “Bulletin des cadres”: a newsletter, published in three languages,

specifically for the Group’s 1,200 managerial staff. Eleven issues

are published each year.

– Corporate presentation support: slides presenting the Group’s

key figures are made available to managerial staff and updated

following the release of annual results.

In addition, the Group’s senior management presents at an annual

management meeting financial results and short, medium and

long-term strategic objectives and policies to the managerial staff.

■ Continuous improvement strategy

Vallourec endeavours to engage in active, transparent and on-going

dialogue between employers and employees at all levels of the Group,

in an atmosphere of mutual respect and consideration.

Employees throughout the Group, in all sectors and at all levels,

participate in the continuous improvement strategy. The Continuous

Improvement Teams are designed to involve employees in the

solution of problems covering the widest fields. Members of the teams

are appointed on a voluntary basis. The teams study the problems

concerned and propose and implement solutions. In 2005, there were

600 such teams in operation throughout the world.

V. HEALTH AND SAFETY CONDITIONS

A safe environment and defined working conditions are prerequisites

for stable growth, based on a strategy of risk analysis and on-

going prevention.

It is essential that staff are trained in and familiarized with safety

procedures on joining the Group and throughout their careers.

One-quarter of the total time spent on training is devoted to safety

training.


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The 2005 consolidated accident frequency rate (FR, which corresponds

to the number of notifiable accidents multiplied by 1,000,000 and

divided by the number of hours worked) across all Group companies

was 7.66 – a slightly better position than in 2004 (7.96).

The 2005 consolidated accident severity rate (SR: the number of

non-working days due to accidents multiplied by 1,000 and divided

by the number of hours worked) stayed at the same level as last

year (0.42).

The Group’s senior management has set companies as a target a

safety index (calculated by the formula FR + 30SR) of less than 15.

In 2005, of the Group’s 40 industrial sites, 24 met the target and,

at 8 plants, there were no accidents at all throughout the entire year.

No fatal industrial injuries occurred during 2005.

Each year, a safety trophy is awarded to the Group entity with the

best record in this area. In 2005, it was awarded to Vallourec

Composants Automobiles Vitry, for its excellent record and its

stringent safety procedures.

VI. PROFESSIONAL TRAINING

Vallourec needs staff that are well-trained, motivated and able to

adapt to changes in the Group’s business and markets.

The Group therefore endeavours to reconcile its changing requirements

with the individual aspirations of its employees by ensuring that all

employees benefit from proper career development.

The on-going training of all of the Group’s staff is entrusted to the

companies and entities, since they are most able to assess their own

staff’s changing needs. Each company prepares an annual training plan

that may be amended during the year if additional requirements arise.

In the case of workers, priority is given to safety and vocational

training. Training on technical issues is provided where relevant

(quality, non-destructive testing, etc.).

Technical and supervisory staff are trained in the basic techniques

(vocational adjustment) and in any new techniques implemented at

the sites. Supervisory staff are given training to manage their teams.

Staff in the administrative departments (sales, planning, etc.) receive

technical training tailored to their specific tasks, and often receive

language training in view of the Group’s international dimension.

Three types of training are offered to managerial staff:

■ During their first year, new recruits receive training to introduce

them to the Group (introductory seminars on strategic aspects of

policy - financial, employment matters, etc. - run by senior

management, visits to plants, introductions to the Group’s

manufacturing processes and presentations on the markets for the

Group’s various businesses).

■ Training to enable staff to perform the tasks of their specific

position is offered throughout their career.

■ Specific training (management, communication, etc.) aimed at

improving individual performance and/or facilitating the acquisition

of additional skills enabling staff to be promoted to other positions

within the Group.

Number of hours spent on training by category in 2005

(in hours) Workers Technical and Managerial Totalsupervisory staff staff

Number of hours spent on training 207,919 92,508 36,618 337,045

Average hours of training 18 28 34 21

The average number of training hours provided by geographical area

was as follows:

(in hours) Average

France 19

Rest of Europe 18

Mercosur 25

Nafta 25

Asia 15

Amounts spent on training in 2005

The amounts spent on training totalled € 9.6 million, and break down

as follows

■ € 4.6 million represented the salary costs paid while employees

were receiving training,

■ € 5 million represented the cost of the training courses.



VII. EMPLOYMENT AND INTEGRATION OF DISABLEDEMPLOYEES

Throughout the world, the Group directly employs 829 employees

who are registered as disabled under the provisions of their national

regulations, of which:

■ 336 are in France,

■ 249 are in the rest of Europe,

■ 241 are in the Mercosur region,

■ 3 are in the Nafta region.

VIII. WELFARE

In 2005, the Group’s welfare expenditure totalled € 22.7 million.

Welfare expenditure relates to the following:

■ Housing: amount spent on accommodation (either in subsidies or

mandatory contributions).

■ Food: amount spent on meals for employees (company restaurants).

■ Transport: collecting employees and bringing them to work by

buses subsidized by the company.

■ Cultural and sporting events: sponsorship undertaken by the

Group.

■ Health insurance: amount spent in the form of subsidies or contri-

butions to welfare plans, whether mandatory or voluntary.

■ Pension scheme: amount spent on contributions or other systems

implemented by the employer voluntarily (i.e. which the employer

was under no statutory obligation to fund).

Breakdown of welfare expenditure

Brazil has a very active welfare policy, which includes financing

and providing on-going support to a large number of facilities in the

fields of medicine, education, etc.

Breakdown of welfare expenditure

The significant proportion relating to the Mercosur region is due to

the financing by the Group of health and education benefits not

funded by the state.

IX. LEVELS OF SUB-CONTRACTING

Since the end of 2005, the Group Corporate Purchasing department

has implemented a programme of purchase audits for all companies

within the Vallourec Group. This process involves the systematic

questioning of the companies audited. It relates specifically to the

compliance by suppliers with national and international requirements

concerning safety, the environment and sustainable development.

The Group has used nearly 2,200 production sub-contractors at a

cost of nearly € 190 million.

Mercosur

68%

Asia

1%

Rest of Europe

6%

France

16%Nafta

9%

Pension scheme

7%

Other

28%

Housing

1%

Cultural and sporting events

2%

Food

20%

Transport

17%

Health insurance

25%


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■ Information on the environmental consequences of the Group’s activities

Vallourec has drafted its production policy with the aim of minimizing

the impact of its activities on the environment at all levels. Man and

his environment are at the heart of the Group’s policy, details of which

are given in the sustainable development charter published by the

Group.

Environment management

Pursuant to the management regulations applied to all aspects of

the Vallourec Group’s organization, each company’s environmental

policy is the responsibility of its management. The site manager is

responsible for implementing an effective environmental management

system, in accordance with local conditions and the nature of the

business. He must appoint an environment manager to be responsible

for all environmental matters.

In France, the Environment department, attached to the R&D and

Technology department and based at the Group’s Research Centre

in Aulnoye (Nord), is responsible for coordinating the Group’s

environmental policy. It relies on the environment managers at

each production site to communicate the Group’s policy and to

ensure that improvements continue to be made at the Group’s

offices and workshops.

Identical structures exist in Germany, Brazil and the United States:

thus, for the Group as a whole, more than 50 people at production

sites in each country specialize in environmental matters.

Communication between the various countries is improving, and

facilitates progress throughout the Group by means of the comparison

of the respective performances and solutions adopted by each.

The Environment department in France is also responsible for

coordinating and supervising this benchmarking, and, in particular,

for gathering and consolidating all the Group’s environmental data.

The environment report, which is circulated each year, summarizes

this data, measures changes in the data as compared with earlier

years in order to assess the progress achieved and highlights any

problems encountered and the solutions implemented. The report

presents by way of illustration “good examples” identified from

among Vallourec’s sites. For this purpose, all of the Group’s sites

worldwide are reviewed.

Audits and certifications

Environmental audits are organized regularly in each country, in order

to assess compliance with regulations, environmental performance

and environmental risks.

By the end of 2005, 13 of the Vallourec Group’s sites had obtained

ISO 14001 certification: Vallourec Composants Automobiles Vitry

(France),Vallourec Précision Etirage Vitry (France),V & M DEUTSCHLAND

in respect of its Mülheim, Rath, Reisholz and Zeithain plants

(Germany), V & M do BRASIL in respect of all of its facilities and

activities (mining, forestry, steel mills and pipe mills), V & M STAR

in respect of its two plants (Youngstown and Houston),VAM PTS in

Houston and VALLOUREC MANNESMANN OIL & GAS UK in respect

of its Bellshill plant (Scotland).

A certification programme covering the main French plants has

been implemented for the period 2005-2007, as a result of which

75% of Vallourec’s plants (accounting for 95% of total production)

will have ISO 14001 certification by the end of 2007.

Compliance with legislation

The compliance of the production sites’ activities with legislation and

regulations is regularly assessed, with the aid of audits.

In France, regulations are monitored by means of the intranet, via

an environment portal that can be accessed by all production sites.

The regular and systematic review of these provisions enables

regular action to be taken in terms of improvements, investment and

organization.

Environmental performance

The Group has been making sustained efforts over the past few years

to improve the use of resources (water, power and raw materials),

to optimize consumption, reduce the discharge of pollutants and the

volume of waste and ensure their systematic reprocessing and

recovery. In order to facilitate the measurement of progress, indicators

have been introduced at the various sites. The table below

summarizes some of the main indicators for 2002 to 2005 for the

Group as a whole.


Indicator 2002 2003 2004 2005

Water consumption 11,526,990 m3 10,614,854 m3 10,352,260 m3 10,306,547 m3

Effluent discharges 5,191,214 m3 4,717,774 m3 4,483,054 m3 4,741,881 m3

Electricity 1,472 gwh 1,479 gwh 1,680 gwh 1,713 gwh

Gas 3,250 gwh 3,099 gwh 3,633 gwh 3,817 gwh

Waste 356,680 tonnes 455,425 tonnes (*) 518,145 tonnes 520,287 tonnes

CO2 675,819 tonnes 644,748 tonnes 747,533 tonnes 772,224 tonnes

(*) V & M STAR as from 2003.

Among these natural resources, water occupies an important place

as far as the Group is concerned. Our industry is a major consumer

of water, but thanks to the significant efforts made at all sites to

reduce consumption, noticeable progress has been made: in terms

of relative value (i.e. water consumption in relation to tube production)

the Group’s consumption fell between 2000 and 2005 from

3.13 m3/tonne to 2.01 m3/tonne, as shown in the following chart:

Water consumption by Vallourec’s plants

Water consumption

Water consumption in m3/tonne of production

The significant progress also made in the area of carbon monoxide

(CO2) emissions is associated with the steel-making process

implemented by V & M do BRASIL SA: charcoal is used instead of coke

in its blast furnaces. In order to produce the charcoal needed for this

process, V & M do BRASIL SA currently cultivates 130,000 hectares

of eucalyptus forests which, while growing, consume carbon dioxide

(CO2) and produce oxygen. This process contributes directly to the

reduction of greenhouse gases: the steel mill’s emissions are exactly

equal to the amounts consumed by the forests and are therefore

consumed in full by the forests.

As regards the implementation of the European Directive on managing

CO2 emissions quotas, this has only affected the Saint-Saulve steel mill

in 2005, with quotas of 92,855 tonnes. 2005 emissions, which were

verified by the APAVE, totalled 77,996 tonnes. Part (75%) of the diffe-

rence is linked to lower production in the medium term (2005-2007)

and the remainder (25%) is linked to improved performance, due,

in particular, to the optimization of the furnace loading plans.

All measurements of discharges of pollutants into the environment

are below the current statutory levels, and, generally, have improved

steadily over the past three years.

As far as the French sites are concerned, the soil is the subject of risk

characterization studies in two main circumstances: if the plant

has been involved in metallurgical processes, even if such involvement

took place before it became part of the Group, or if it possesses

equipment that may cause pollution. No sites have been identified

as requiring decontamination.

Work is being carried out at Précision Etirage’s site at Laigneville

associated with the discontinuance of production, following the

closure of the site in 2005. Soil testing is underway. The site is

currently expected to be classified as category 2: site to be monitored.

No environmental accidents occurred during 2005.

Investment related to environmental protection

In 2005, capital expenditure by the Group directly related to

environmental protection amounted to € 17.4 million, i.e. 10.6% of

total consolidated capital expenditure. This expenditure related

mainly to the following:

– Bringing equipment up to standard (filters, oil separation systems,

retention basins, etc.) and costs related to the revision of operating

licenses

– Provision of effluent separation systems

– Water recycling

– Modernization of water treatment plants

– Closed circuits for water used in ultrasonic non-destructive testing

– Filtration systems for atmospheric emissions

– Programmes aimed at reducing emissions of Volatile Organic

Compounds (VOC): new facilities for varnishing

16.00

14.00

12.00

10.00

8.00

6.00

4.00

2.00

0.002000 2001 2002 2003 2004 2005

3.5

3.0

2.5

1.5

1.0

0.5

0.0

in millions of m3 in m3 per tonne produced

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– Site clearance and rehabilitation

– Optimization of performance of heat-treatment furnaces (new

burners, regulation, etc.)

– Site security

– Improvements to storage facilities, shavings recovery, waste

sorting area, waste disposal, etc.

Between 2000 and 2005, capital expenditure related to environmental

protection amounted to 10% of total capital expenditure, as shown

in the following chart:

Capital expenditure by the Vallourec Group related toenvironmental protection

Capital expenditure related to environmental protection

% related to environmental protection

Contribution of Vallourec’s productsto the environment

Vallourec has also, for several years, been developing new products

that are in line with trends in requirements associated with

sustainable development and that are not harmful to land, air or

water. An example of this trend is the VAM® threaded joint, the world

leader as regards the safety of offshore oil wells, or the use of tubing

in the automotive industry: since it has made vehicles lighter, it has

facilitated a reduction in their fuel consumption. Many other products

made by the Group are used in the production of clean energy or the

reduction in chemical pollution.

CONSOLIDATED FINANCIAL STATEMENTS

The Vallourec Group’s consolidated sales amounted to € 4,307.4 million

in 2005 compared with € 3,037.8 million in 2004, representing an

increase of 41.8%.

There were two changes in consolidation scope during 2005: the

disposal,with effect from 1 January 2005,of the automotive components

activities in Brazil and Argentina (2004 sales: € 71 million) and the

consolidation, as from 1 October 2005, of OMSCO’s assets (2004

fourth quarter sales: € 28 million). These changes generated a

negative scope effect of 1.5%.

Operating costs before amortization and depreciation amounted to

€ 3,418.7 million, up 27.8% compared with € 2,674.3 million in

2004.

This resulted in operating income of € 965.3 million after

amortization and depreciation of € 99.2 million, up by an impressive

172% compared with operating income of € 355.2 million after

amortization and depreciation of € 89.0 million recorded in 2004.

The Group recorded a net financial loss of € 26.6 million compared

with a net financial loss of € 0.9 million in 2004.This was due mainly

to the following:

■ the net financial costs (difference between interest income and

interest charges) on the net debt of € 4.3 million,

■ the discounting charges in respect of pensions amounting to

€ 8.8 million, and

■ the cost of hedging sales in foreign currencies amounting to

€ 13.8 million.

The employees’ profit share rose from € 3.0 million in 2004 to

€ 11.3 million in 2005. Including the discretionary employee

profit-share included in payroll costs, the total allocated for 2005

would amount to € 55.5 million, a very substantial increase over the

2004 amount of € 18.8 million.

The income tax charge rose sharply in absolute terms (from

€ 89.4 million in 2004 to € 307.5 million in 2005) and in terms of

the effective rate (from 25.5% in 2004 to 32.8% in 2005) since the

Group had already used virtually all of its tax credits.

To sum up, consolidated net income was a profit of € 632.4 million,

up 138.5% on the profit of € 265.2 million in 2004.

Consolidated net income, Group share, more than tripled to

€ 473.0 million compared with € 145.0 million in 2004, due, in

particular, to the positive effect of the acquisition of the 45% stake

in V & M TUBES as from 1 July 2005. If the acquisition had taken

place on 1 January 2005,Vallourec’s net income, Group share, would


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20,000

18,000

16,000

14,000

12,000

10,000

8,000

6,000

4,000

2,000

0

in € thousand

5.68%

6.27%

9.56%

14.52%

12.50%

10.58%

2000 2001 2002 2003 2004 2005

in %16

14

12

10

8

6

4

2

0


have been € 576.7 million in 2005, instead of € 473.0 million,

although the total net income would have remained almost

unchanged.

In the consolidated balance sheet, despite an increase in gross

capital expenditure of 86% to € 192.4 million in 2005 and financial

investments totalling € 651.3 million (acquisition of the 45% stake

in V & M TUBES and OMSCO’s assets), the Group’s total net debt

grew by only € 259.3 million in 2005 because the rights offering in

July 2005, which generated a net amount of € 123 million, enabled

the Group to limit its recourse to debt.

The Group’s cash position thus changed from positive net cash of

€ 54.6 million at 31 December 2004 to net debt of € 204.7 million

at 31 December 2005, representing a gearing ratio (net debt /

shareholders’ equity) of 13.6%.

VALLOUREC (HOLDING COMPANY)

The holding company Vallourec posted a loss of € 8.7 million

compared with a loss of € 8.0 million in 2004. This loss is not

meaningful since it is not comparable from one year to the next.

Net financial income (the difference between financial income and

financial costs) was € 12.2 million compared with € 31.9 million

in 2004.

The income tax charge was negative once again this year and

represents a net credit of € 10.0 million (€ 5.8 million in 2004) as

a result of the transfer of tax losses in consolidated companies to

Vallourec, the company heading the tax group.

Net income for the year was € 14.1 million compared with net

income of € 30.1 million in 2004.

On the liabilities side of the balance sheet, share capital increased

from € 197.4 million to € 212.0 million and additional paid-in capital

increased from € 101.1 million to € 210.2 million due to, on the

one hand, the capital increase in cash of € 123 million on 13 July 2005

and, on the other hand, to the exercise of 24,064 share subscription

options between 1 January and 31 December 2005.

Participating interests on the assets side of the balance sheet increased

from € 503.7 million to € 1,057.4 million, due, in particular, to the

acquisition of the 45% stake in V & M TUBES.Accordingly, bank loans

and other borrowings on the liabilities side of the balance sheet

increased from € 150.6 million to € 462.4 million. Details of these

changes are provided in the notes to the Company financial

statements.

REMUNERATION OF COMPANY OFFICERS

In accordance with the requirements of Article L. 225-102-1 of the

French Code de Commerce, we inform you that the total

remuneration and any benefits in kind paid to each Company officer

during the financial year, directly or indirectly, by Vallourec or by any

company in the Group, was as follows:

■ Supervisory Board

In 2005, each member of the Supervisory Board received attendance

fees of € 17,600. In respect of their membership of the Finance

Committee, Messrs Michel de Fabiani, Thierry Marraud, Kunibert

Martin and Jean-Claude Verdière each received additional attendance

fees of € 4,700.

Mr Parayre also received a gross annual payment of € 85,000 as

Chairman of the Supervisory Board.

■ Management Board

The gross amounts of the remuneration and any benefits in kind paid

to members of the Management Board during 2005 were as shown

in the table below:

In € thousand

Fixed First Balance Totalportion instalment of 2004 paid

of 2005 variable invariable portion 2005portion

Mr Verluca 400 100 88.9 588.9

Mr Fabre 315 78.8 77.1 470.9

The balance of the 2005 variable portion paid in 2006 amounted to

€ 100 thousand in the case of Mr Verluca and € 78.7 thousand in

the case of Mr Fabre.

The variable remuneration is calculated on the basis of the

consolidated net income, Group share, as adjusted in respect of

exceptional items. The calculation is checked by the Auditors.

The members of the Management Board also each had a Company

car.

As regards pension provision, there is no specific pension scheme for

members of the Management Board who are, instead, covered by

the supplementary pension scheme for the senior management of

Vallourec and Setval, which was approved by the Supervisory Board

at its meeting on 14 September 2005.


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INFORMATION ON THE BREAKDOWN OF CAPITAL

At 31 December 2005 the shareholders and their respective shareholdings were as follows:

Shareholders Shares Voting rightsNumber % Number %

Salzgitter Mannesmann GmbH 1,820,358 17.17 3,640,527 29.93

Bolloré group 1,874,402 17.69 1,874,402 15.41

Free float 6,484,011 61.17 6,495,647 53.41

Group employees 151,812 1.43 151,812 1.25

Directly held by Vallourec 269,749 2.54 - -

Total 10,600,332 100 12,162,388 100

As far as Vallourec is aware, the only two shareholders known and

declared to hold directly or indirectly more than 5% of the capital

and voting rights at this date were the German company Salzgitter

Mannesmann GmbH (formerly Mannesmannröhren-Werke), a wholly-

owned subsidiary of the German company Salzgitter AG, and the

Bolloré group.

At 31 December 2005:

■ The number of shares shown as held by Salzgitter Mannesmann GmbH

and the Bolloré group was notified to us by the two companies.

■ 1,831,805 shares registered for over four years, including

1,820,169 shares belonging to Salzgitter Mannesmann GmbH, are

entitled to double voting rights in accordance with the provisions

of Article 12 of Vallourec’s By-laws.

■ The only securities likely to give future access to Vallourec’s capital

that were in existence at 31 December 2005 were 8,174 share

subscription options granted in accordance with the conditions

described in paragraphs 3.2.4 and 6.3.2 of the Reference Document

for the financial year 2005, of which this management report forms

an integral part.

An analysis of identifiable bearer shares was carried out on

13 January 2006. The results are detailed in paragraph 3.3.1 of the

Reference Document.

REGULATED AGREEMENTS

1) Agreements authorized during the year

■ Regulated agreements

At its meetings on 20 January, 8 March, 18 April and 27 April 2005,

the Supervisory Board approved the progress and finalization of the

negotiations Vallourec held with Mannesmannröhren-Werke (MRW)

and Salzgitter AG, both of which are shareholders of Vallourec,

concerning the acquisition by Vallourec of the 45% interest held by

the two companies in the common subsidiary V & M TUBES.

The Supervisory Board gave its agreement, in particular, to the

acquisition price of the holding, set at € 545 million, and ratified the

fact that the completion of this transaction would result in the

termination of the joint venture agreement entered into by Vallourec

and MRW in 1997, and, in particular, the clauses of the contract

relating to “reserved matters” and change of control.

The Supervisory Board also gave its agreement to the parallel

disposal to Salzgitter Mannesmann of 10% of the shares in the HKM

German steel mill held by V & M TUBES, the latter retaining a 20%

holding in this steel mill as well as the rights attaching to the

holding concerning the steel produced by the mill.

The main provisions of this disposal were explained at the Annual

General Meeting held on 7 June 2005 and are disclosed in the 2004

Reference Document, in particular in section 4, paragraph 4.9

(“Agreement between Vallourec and Mannesmannröhren-Werke

concerning the acquisition of the 45% holding in V & M TUBES”) and

in the Management Board’s management report to the General Meeting.

In connection with the acquisition of the 45% holding in V & M TUBES,

the Supervisory Board also gave its agreement, at its meeting on

27 April 2005, to the signing of contracts relating to the processing

of a maximum annual volume of 132,000 tonnes of tube hollows

for drawing by Salzgitter Mannesmann, comprising a contract for

V & M TUBES to supply tube rounds to Salzgitter Mannesmann.

The contract to supply tube rounds, which expires on 31 December

2017, has a penalty clause under which V & M TUBES, in the event

of its failure to meet certain of its obligations, would be required to

pay a maximum amount of € 60 million, this amount decreasing as

from 2011.



The three members of Vallourec’s Supervisory Board who also hold

positions within the Salzgitter Mannesmann Group abstained from

voting on all the aforementioned transactions.

■ Supplementary pension scheme for seniormanagement

At its meeting on 14 September 2005,Vallourec’s Supervisory Board

examined and unanimously approved, on the basis of the report from

the Appointments and Remuneration Committee, a draft “income

guarantee scheme for the retired employees of Vallourec and Setval”.

The Supervisory Board has noted that the profit from this defined

benefit scheme (additional pension scheme) financed by the company

and in respect of which the vesting of rights is conditional on the

employee finishing his career at Vallourec and/or Setval, enables the

Group’s former managerial staff, under acceptable economic,

financial and social conditions, to supplement their income following

retirement. The Company undertakes to pay a lifetime annuity at a

predetermined level, directly proportional to the salary and in

accordance with the employee’s seniority and career development.

The annuity is capped at 20% of the average salary excluding

bonus of the last three years and limited to four times the annual

social security ceiling. The scheme is insured with AXA France Vie.

The regulation is established for an indefinite period but may be

terminated at any time.

The Supervisory Board noted that the members of Vallourec’s

Management Board are likely to benefit from rights if they work within

the Group until the end of their careers and ruled in accordance with

the provisions of Article L. 225.86 of the French Code de Commerce.

2) Agreements approved in prior years that continueto apply in the current year

■ Assistance agreement entered into with Rothschild & Cie

It should be noted that, on 20 January 2005,Vallourec’s Supervisory

Board approved the extension of the assistance agreement originally

entered into with Rothschild & Cie on 4 March 2003 until the

finalization of the acquisition of the 45% interest in V & M TUBES,

in return for the payment of an additional flat-rate commission of

€ 1,500,000, excluding taxes, half of which related to services

provided by Rothschild & Cie during the second half of 2004.

The balance of € 750,000, excluding taxes, was paid to Rothschild & Cie

in 2005.

ALLOCATION OF NET INCOME

The Management Board proposes the payment of a dividend of

€ 11.2 per share, which is much greater than the dividend paid in

respect of the financial year 2004 (€ 3.2 per share).

This dividend corresponds to a distribution rate of 25.1% of

consolidated net income, Group share. It is in accordance with the

distribution policy announced by the Group.

We therefore propose to appropriate, from the net income for the

financial year of € 14,144,934.26, € 1,460,752 to the legal reserve

and to appropriate the balance of € 12,684,182.26, increased

by an amount of € 106,039,536.14, of which € 101,916,198.73

will be deducted from retained earnings and € 4,123,337.41 will

be deducted from general reserves, to give a total amount of

€ 118,723,718.40, by way of dividend.

After taking into account the interim dividend of € 4.0 per share paid

on 12 October 2005, the balance remaining to be paid is € 7.20 per

share, which will be paid on 5 July 2006.

In addition, when the financial statements for the first half of 2006

are reviewed, consideration will be given to the possibility of paying,

during the second half of 2006, an interim dividend for the financial

year 2006.

We would like to remind you, in accordance with the provisions of

Article 47 of the law of 12 July 1965, that the dividends paid in

respect of the last three financial years were as follows:

Financial Number Net Tax Totalyear of shares dividend credit dividend

per share per share per share (in euros) (in euros) (in euros)

2002 9,730,226 2.10 1.05 (50%) 3.15

2003 9,730,226 1.60 0.80 (50%) 2.40

2004 9,869,956 3.20 None 3.20

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SUPERVISORY BOARD

We ask you to:

■ ratify the provisional appointment of Mr Heinz Jörg Fuhrmann

approved by the Supervisory Board at its meeting on 14 December

2005, to replace Mr Kunibert Martin. The appointment of

Mr Heinz Jörg Fuhrmann will come to an end, like that of his

predecessor, at the close of this General Meeting. Mr Heinz Jörg

Fuhrmann, who was born in 1956 and has a doctorate in

engineering from Berlin University of Technology, has spent his

entire career in the steel industry. He is a member of the Executive

Board and CFO of Salzgitter AG.

■ renew the appointments of Messrs Patrick Boissier,Wolfgang Eging,

Heinz Jörg Fuhrmann,Denis Gautier-Sauvagnac and Jean-Paul Parayre,

which expire at the end of this General Meeting, for a period of five

years ending at the close of the General Meeting called to approve

the financial statements for the financial year 2010.

STATUTORY AUDITORS

The appointments of the Statutory Auditors and the Alternative

Auditors expire at the close of this General Meeting.

We recommend that you appoint, for a term of six years expiring at

the close of the General Meeting called to approve the financial

statements for the financial year 2011:

As Statutory Auditors:

KPMG SA

Represented by Messrs Jean-Paul Vellutini and Philippe Grandclerc

1, Cours Valmy - 92923 Paris-La Défense Cedex

Deloitte & Associés

Represented by Messrs Bertrand de Florival and Jean-Paul Picard

185, avenue Charles de Gaulle - 92524 Neuilly-sur-Seine

As Alternative Auditors:

SCP Jean-Claude André et Autres

Les hauts de Villiers

2 bis, rue de Villiers - 92300 Levallois-Perret

Alternative for KPMG

Société BEAS

7-9, Villa Houssaye - 92524 Neuilly-sur-Seine Cedex

Alternative for Deloitte & Associés

ATTENDANCE FEES

The maximum annual Board Members’ attendance fees for allocation

by the Supervisory Board is currently set at € 230,000 euros (eighth

resolution of the Ordinary General Meeting held on 11 June 2002).

We ask you to approve an increase in the amount of the annual

attendance fee budget to € 400,000 until further notice.This increase

is justified, in particular, by the fact that, since 2002, membership of

the Board has increased from 10 to 12 members, the members of

the Finance Committee receive an additional attendance allowance

and the position of Censeur (non-voting consulting director), which

will be created this year (sixth resolution of the Extraordinary General

Meeting to be held on 1 June 2006), may be remunerated.

SHARE BUY-BACK PROGRAMME

The previous General Meeting held on 7 June 2005 invested all

powers in the Management Board to enable Vallourec, if need be,

to buy back its own shares under the terms and conditions specified

by law.

This authorization expires today. We believe it desirable to renew it

for a further period ending at the close of the next General Meeting.

The terms of this renewal are largely similar to those of the preceding

authorization except that, in view of the recent volatility of the

Company’s share price, it seems to us that it would be preferable to

set a maximum purchase price by reference to the value of the shares

at the close of the last trading session preceding the General

Meeting, increased by 50%, rather than setting the purchase price

at an absolute value. No minimum selling price is stipulated since

the setting of a minimum selling price is not mandatory.

Vallourec would be authorized to acquire a maximum of 10% of its

capital, i.e. 1,060,033 shares as at today’s date. Given that 269,749

shares (2.54%) are already held (see section 3, paragraph 3.3.1.1,

of the 2005 Reference Document) the buy-back would cover a

maximum of 790,284 shares (7.46%).

The maximum amount allocated to carrying out this programme is set

at € 750 million compared with the previous limit of € 40 million,

to take into account the increase in the share price in the intervening

period.


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APPENDIX TO THE MANAGEMENT BOARD’S MANAGEMENT REPORT-FINANCIAL YEAR 2005List of other positions held by Vallourec Company officers

■ Members of the Supervisory Board

Jean-Paul PARAYREDate of first appointment: 13 June 1989 (at which time Vallourec was managed by a Board of Directors)Date appointment most recently renewed: 15 June 2000Date of appointment as Chairman of the Supervisory Board: 15 June 2000Date on which appointment ceases: 31 December 2005 (General Meeting called to approve the financial statements for the financialyear 2005)Date of birth: 5 July 1937

Business address: None

Expertise and managerial experience– 1977-1984: Chairman of the Management Board of PSA Peugeot-Citroën– 1984-1990: COO then Chairman of the Management Board of Dumez– 1990-1992: Vice-President and COO of Lyonnaise des Eaux Dumez– 1994-1999: Vice-President and COO of Bolloré group– 1996-1999: CEO of Saga.

Positions held in 2005Positions and appointments held in French companies– Chairman of the Supervisory Board of Vallourec and Stena Maritime – Member of the Supervisory Board of Peugeot SA, Vallourec and Stena Maritime– Director of Bolloré Investissement and SNEF

Positions and appointments held in foreign companies– Member of the Advisory Board of V & M do BRASIL SA– Director of SDV Cameroun (until October 2005), Stena International BV and Stena Line (until June 2005)

Positions held in 2004Positions and appointments held in French companies– Chairman of the Supervisory Board of Vallourec and Stena Maritime – Member of the Supervisory Board of Peugeot SA, Vallourec and Stena Maritime– Director of Bolloré Investissement, Seabulk (until September 2004), Sea-invest France (until September 2004) and SNEF

Positions and appointments held in foreign companies– Member of the Advisory Board of V & M do BRASIL SA– Director of SDV Cameroun, Stena International BV, Stena Line and Carillion plc (until December 2004)

Positions held in 2003Positions and appointments held in French companies– Chairman of the Supervisory Board of Vallourec and Stena Maritime – Member of the Supervisory Board of Peugeot SA, Vallourec and Stena Maritime– Director of Bolloré Investissement, SNEF, Seabulk and Sea-invest France

Positions and appointments held in foreign companies– Member of the Advisory Board of V & M do BRASIL SA– Director of SDV Cameroun, Carillion plc, Stena International BV, Stena Line and Stena UK (until September 2003)

Positions held in 2002Positions and appointments held in French companies– Chairman of the Supervisory Board of Vallourec and Stena Maritime – Member of the Supervisory Board of Peugeot SA, Vallourec and Stena Maritime– Director of Bolloré Investissement, SNEF, Seabulk and Sea-invest France

Positions and appointments held in foreign companies– Member of the Advisory Board of V & M do BRASIL SA– Director of SDV Cameroun, SDV Congo, Carillion plc, Stena UK, Stena International BV and Stena Line

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Positions held in 2001Positions and appointments held in French companies– Chairman of the Supervisory Board of Vallourec– Member of the Supervisory Board of Peugeot SA and Vallourec – Director of Bolloré Investissement, SNEF, Seabulk and Sea-invest France

Positions and appointments held in foreign companies– Director of SDV Congo, SDV Cameroun, Carillion plc, Stena UK, Stena Line and Stena International– Member of the Advisory Board of Candover (until April 2001).

Patrick BOISSIERDate of first appointment: 15 June 2000Date of appointment as Vice-Chairman of the Supervisory Board: 18 April 2005Date on which appointment ceases: 31 December 2005 (General Meeting called to approve the financial statements for the financialyear 2005)Date of birth: 8 February 1950

Business address: Chantiers de l’Atlantique - Avenue Bourdelle - BP 61775 - 44617 Saint-Nazaire Cedex (France)

Expertise and managerial experience20 years’ managerial experience with industrial companies in the iron and steel, capital goods and shipbuilding sectors.

Positions held in 2005Positions and appointments held in French companies– Chairman and CEO of Chantiers de l’Atlantique, Alstom Leroux Naval and Ateliers de Montoir– Chairman of Chambre syndicale des Constructeurs de navires– Director of Société Nationale de Sauvetage en Mer (SNSM), Institut Français de la mer, école des Mines de Nantes and Stéria– Member of the Supervisory Board of Vallourec



Positions held in 2002Positions and appointments held in French companies– Chairman and CEO of Chantiers de l’Atlantique, Alstom Leroux Naval and Ateliers de Montoir– Chairman of Chambre syndicale des Constructeurs de navires– Director of Société Nationale de Sauvetage en Mer (SNSM), Institut Français de la mer, école des Mines de Nantes, Stéria and Kit Grimpe– Member of the Supervisory Board of Vallourec

Positions held in 2001Positions and appointments held in French companies– Chairman and CEO of Chantiers de l’Atlantique, Alstom Leroux Naval and Ateliers de Montoir– Chairman of Chambre syndicale des Constructeurs de navires– Director of Société Nationale de Sauvetage en Mer (SNSM), Institut Français de la mer, école des Mines de Nantes, Stéria and Kit Grimpe– Member of the Supervisory Board of Vallourec.


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Luiz-Olavo BAPTISTADate of first appointment: 11 June 2002 Date on which appointment ceases: 31 December 2007 (General Meeting called to approve the financial statements for the financialyear 2007)Date of birth: 24 July 1938

Business address: Avenue Paulista 1294, 8° Andar - 01310-915 São Paulo SP (Brazil)

Expertise and managerial experience – Professor of International Law, Barrister at the São Paulo bar and International Arbitrator (WTO, ICSID, UNCC, etc.)– Doctor of International Law at the Université de Paris I– Visiting Professor at the University of Michigan, the Université de Paris I and the Université de Paris X – Professor of Law and International Trade at the Faculty of São Paulo– Has published more than twenty books on International Law and Commercial Law.

Positions held in 2005Positions and appointments held in French companies– Member of the Supervisory Board of Vallourec

Positions and appointments held in foreign companies– Member of the Advisory Board of V & M do BRASIL SA– Chairman of the Board of Directors of Oxon Participaçoes S/A (until 31 October 2005)– Director of De La Ronce S/A, Guala Closures do Brasil S/A and Vale do Mogi S/A– Manager of Sofrel do Brasil Ltda– Member of the Management Board of VDM Trading Limited (Ometto group), Opacco Holding S/A, Tote Investments Holding S/A,

Bedford Investor C/V, Taro S/A, Phipe Holding S/A and Salorix Holding S/A– Legal Official of Eagle River Holdings Ltd


Positions and appointments held in foreign companies– Member of the Advisory Board of V & M do BRASIL SA– Chairman of the Board of Directors of Oxon Participaçoes S/A – Director of De La Ronce S/A, Guala Closures do Brasil S/A and Vale do Mogi S/A– Manager of Sofrel do Brasil Ltda– Member of the Management Board of VDM Trading Limited (Ometto group), Opacco Holding S/A, Tote Investments Holding S/A,



Positions and appointments held in foreign companies– Member of the Advisory Board of V & M do BRASIL SA– Chairman of the Board of Directors of Oxon Participaçoes S/A – Director of De La Ronce S/A, Guala Closures do Brasil S/A and Vale do Mogi S/A– Manager of Sofrel do Brasil Ltda– Member of the Management Board of VDM Trading Limited (Ometto group), Opacco Holding S/A, Tote Investments Holding S/A,



Positions and appointments held in foreign companies– Member of the Advisory Board of V & M do BRASIL SA– Chairman of the Board of Directors of Oxon Participaçoes S/A – Director of De La Ronce S/A, Guala Closures do Brasil S/A and Vale do Mogi S/A– Manager of Sofrel do Brasil Ltda

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– Member of the Management Board of VDM Trading Limited (Ometto group), Opacco Holding S/A, Tote Investments Holding S/A,Bedford Investor C/V, Taro S/A, Phipe Holding S/A and Salorix Holding S/A

– Legal Official of Eagle River Holdings Ltd


Positions and appointments held in foreign companies– Member of the Advisory Board of V & M do BRASIL SA– Chairman of the Board of Directors of Oxon Participaçoes S/A (since 25 April 2001)– Director of De La Ronce S/A, Guala Closures do Brasil S/A and Vale do Mogi S/A– Manager of Sofrel do Brasil Ltda– Member of the Management Board of VDM Trading Limited (Ometto group), Opacco Holding S/A, Tote Investments Holding S/A,

Bedford Investor C/V, Taro S/A, Phipe Holding S/A and Salorix Holding S/A– Legal Official of Eagle River Holdings Ltd.

Vincent BOLLOREDate of first appointment: 10 June 2004 Date on which appointment ceases: 31 December 2009 (General Meeting called to approve the financial statements for the financialyear 2009)Date of birth: 1 April 1952

Business address: Tour Bolloré - 31-32, quai de Dion-Bouton - 92811 Puteaux (France)

Expertise and managerial experience Industrialist. Chairman of Bolloré group since 1981.

Positions held in 2005Positions and appointments held in French companies– Chairman and CEO of Bolloré and Bolloré Participations – Chairman of the Board of Directors (dissociated management structure) of Bolloré Investissement, Financière de l’Odet, Bolloré Média

and Havas – Chairman of Bolloré Production (SAS) – COO of Omnium Bolloré, Financière V and Sofibol – Director of BatScap, Bolloré Investissement, Bolloré, Bolloré Participations, Bolloré Média, Compagnie des Glénans, Financière Moncey,

Financière de l’Odet, Havas and Natexis Banques Populaires– Member of the Supervisory Board of Vallourec– Bolloré Participations permanent representative on the Board of Directors of Société Anonyme Forestière et Agricole, Société des

Chemins de fer et Tramways du Var et du Gard, Société Industrielle et Financière de l’Artois, Société Bordelaise Africaine, Compagnie desTramways de Rouen and IER

– Bolloré Participations permanent representative on the Supervisory Board of Compagnie du Cambodge– Compagnie du Cambodge permanent representative on the Supervisory Board of Société Financière HR

Positions and appointments held in foreign companies– Chairman of Plantations des Terres Rouges SA– Vice-President of Nord Sumatra Investissements – Vice-President of SOGB and Bereby Finances– Director of BB Groupe SA, Centrages, Compagnie Internationale de Cultures, Financière Privée, Liberian Agricultural Company LAC,

Mediobanca, Plantations Nord Sumatra Limited, Plantations des Terres Rouges, Red Land Roses, SDV Gabon, SDV Sénégal, Socfin, Socfinaf,Socfinal, Socfinasia, Socfinco, Socfindo, Socfininter, Socfin Plantations Sendirian Berhad and Sogescol

– Bolloré Participations permanent representative on the Board of Directors of SDV Cameroun, SDV Congo, SDV Côte d’Ivoire andImmobilière de la Pépinière

– Bolloré permanent representative on the Conseil d’Afrique Initiatives

Positions held in 2004Positions and appointments held in French companies– Chairman and CEO of Bolloré and Bolloré Participations – Chairman of the Board of Directors (dissociated management structure) of Bolloré Investissement, Financière de l’Odet and Bolloré Média – Chairman of Bolloré Production (SAS)


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– COO of Omnium Bolloré, Financière V and Sofibol – Director of BatScap, Bolloré Investissement, Bolloré, Bolloré Participations, Bolloré Média, Compagnie des Glénans, Financière Moncey,

Financière de l’Odet, Generali France and Natexis Banques Populaires– Member of the Supervisory Board of Vallourec– Bolloré Participations permanent representative on the Board of Directors of Société Anonyme Forestière et Agricole, Société des

Chemins de fer et Tramways du Var et du Gard, Société Industrielle et Financière de l’Artois, Société Bordelaise Africaine, Compagnie desTramways de Rouen and IER

– Bolloré Participations permanent representative on the Supervisory Board of Compagnie du Cambodge– Compagnie du Cambodge permanent representative on the Supervisory Board of Société Financière HR

Positions and appointments held in foreign companies– Chairman of Plantations des Terres Rouges SA– Vice-President of Nord Sumatra Investissements – Vice-President of SOGB and Bereby Finances– Director of BB Groupe SA, Centrages, Compagnie Internationale de Cultures, Financière Privée, Liberian Agricultural Company LAC,

Mediobanca, Plantations Nord Sumatra Limited, Plantations des Terres Rouges, Red Land Roses, SDV Gabon, SDV Sénégal, Socfin, Socfinaf,Socfinal, Socfinasia, Socfinco, Socfindo, Socfininter, Socfin Plantations Sendirian Berhad and Sogescol

– Bolloré Participations permanent representative on the Board of Directors of SDV Cameroun, SDV Congo, SDV Côte d’Ivoire andImmobilière de la Pépinière


Positions held in 2003Positions and appointments held in French companies– Chairman and CEO of Bolloré and Bolloré Participations – Chairman of the Board of Directors (dissociated management structure) of Bolloré Investissement, Financière de l’Odet and Bolloré Média – Chairman of Bolloré Production (SAS) – COO of Omnium Bolloré, Financière V and Sofibol – Director of BatScap, Bolloré Investissement, Bolloré, Bolloré Participations, Bolloré Média, Compagnie des Glénans, Financière Moncey,

Financière de l’Odet and Tobaccor– Bolloré Participations permanent representative on the Boards of Société Anonyme Forestière Agricole, Compagnie des Chemins de fer

et Tramways du Var et du Gard, Société Industrielle et Financière de l’Artois, Société Bordelaise Africaine, Compagnie des Tramways deRouen, Compagnie du Cambodge and IER

– Compagnie du Cambodge permanent representative on the Board of Société Financière HR

Positions and appointments held in foreign companies– Chairman of Plantations des Terres Rouges and Selective East Asiatic – Vice-President of Nord Sumatra Investissements– Vice-President of SOGB and Bereby Finances– Director of BB Groupe SA, Centrages, Compagnie Internationale de Cultures, Financière Privée, Liberian Agricultural Company LAC,

Mediobanca, Plantations Nord Sumatra Limited, Red Land Roses, SDV Gabon, SDV Sénégal, Socfin, Socfinaf, Socfinal, Socfinasia,Socfinco, Socfindo, Socfininter, Socfin Plantations Sendirian Berhad and Sogescol

– Bolloré Participations permanent representative on the Boards of SDV Cameroun, SDV Congo, SDV Côte d’Ivoire and Immobilière de la Pépinière– Bolloré permanent representative on the Conseil d’Afrique Initiatives

Positions held in 2002Positions and appointments held in French companies– Chairman and CEO of Bolloré Participations, Bolloré and Bolloré Média– Chairman of the Board of Directors (dissociated management structure) of Bolloré Investissement and Financière de l’Odet – Chairman of Bolloré Production (SAS) – COO of Omnium Bolloré, Financière V, Sofibol and BB Investissement– Director of Compagnie des Glénans, Bolloré Investissement, Bolloré, Bolloré Participations, Bolloré Média, Financière Moncey, Financière

de l’Odet, BatScap, Seita and Tobaccor– Bolloré Participations permanent representative on the Boards of Société Anonyme Forestière Agricole, Compagnie des Chemins de fer

et Tramways du Var et du Gard, Société Industrielle et Financière de l’Artois, Société Bordelaise Africaine, Compagnie des Tramways deRouen, Compagnie du Cambodge and IER

– Compagnie du Cambodge permanent representative on the Board of Société Financière HR

Positions and appointments held in foreign companies– Chairman of Plantations des Terres Rouges, Selective East Asiatic and Socfindel Inc.– Vice-President of SOGB and Bereby Finances

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– Director of Siat, Société des Cigarettes gabonaises, Mabucig, Socfinasia, Sogescol, SDV Sénégal, SDV Gabon, Centrages, MTOA, SITAB,Socfininter, Financière Privée, Nord Sumatra Investissements, Red Land Roses, Socfin, Socfinco, Socfinaf Cy Ltd, Socfinal, Plantations NordSumatra Limited, Socfindo, Compagnie Internationale de Cultures, Socfin Plantations Sendirian Berhad, Socfin US Inc. and BB Groupe

– Bolloré Participations permanent representative on the Boards of SDV Cameroun, SDV Congo, SDV Côte-d’Ivoire, Immobilière de la Pépinièreand Liberian Agricultural Company LAC


Positions held in 2001Positions and appointments held in French companies– Chairman of Bolloré Investissement, Financière Moncey, Financière de l’Odet, Bolloré, Rivaud Loisirs Communication and Bolloré Participations– COO of Omnium Bolloré, Financière V, Sofibol, Société Anonyme Forestière Agricole, Société Industrielle et Financière de l’Artois and

BB Investissement– Director of Compagnie des Glénans, Bolloré Investissement, Bolloré, Bolloré Participations, Financière Moncey, Financière de l’Odet,

Omnium Bolloré, BatScap, Fiat France SA, Rivaud Loisirs Communication and Seita– Bolloré Participations permanent representative on the Boards of Société Anonyme Forestière Agricole, Compagnie des Chemins de fer

et Tramways du Var et du Gard, Société Industrielle et Financière de l’Artois, Société Bordelaise Africaine, Compagnie des Tramways deRouen, Compagnie du Cambodge, Compagnie des Caoutchoucs de Padang, IER and Société Financière des Terres Rouges

– Bolloré permanent representative on the Boards of Tobaccor and Coralma International– Compagnie du Cambodge permanent representative on the Supervisory Board of Société Financière HR

Positions and appointments held in foreign companies– Chairman of Plantations des Terres Rouges Holding, Selective East Asiatic and Socfindel Inc.– Vice-President of SOGB and Bereby Finances– Bolloré permanent representative on the Conseil d’Afrique Initiatives– Bolloré Participations permanent representative on the Boards of SDV Cameroun, SDV Congo, SDV Côte d’Ivoire, Immobilière de la Pépinière

and Liberian Agricultural Company LAC– Director of Siat, Société des Cigarettes Gabonaises, Mabucig, Socfinasia, Sogescol, SDV Sénégal, SDV Gabon, Centrages, MTOA, SAIT,

SITAR, Socfinaf, CAITA CI, Socfininter, Financière Privée, Nord Sumatra Investissements, Socfin, Socfinco, Socfinal, Société 3 I, PlantationsNord Sumatra Limited, Socfindo, Caisse Privée de Banque, Compagnie Internationale de Cultures, Socfin Plantations Sendirian Berhad,Socfin US Inc. and BB Groupe SA.

Wolfgang EGINGDate of first appointment: 8 March 2005Date on which appointment ceases: 31 December 2005 (General Meeting called to approve the financial statements for the financialyear 2005)Date of birth: 23 May 1949

Business address: Mannesmannröhren-Werke GmbH - Wiesenstrasse 36 - D-45473 Mülheim an der Ruhr (Germany)

Expertise and managerial experienceManagement, management control, finance and sales.

Positions held in 2005Positions and appointments held in French companies– Chairman of the Supervisory Board of DMV Stainless SAS– Member of the Supervisory Board of Vallourec SA– Member of the Board of Directors of VALLOUREC & MANNESMANN TUBES (until 23 June 2005)

Positions and appointments held in foreign companies– Chairman of the Executive Board of Mannesmannröhren-Werke GmbH – Chairman of the Supervisory Board and Member of the Partners Committee of Hüttenwerke Krupp Mannesmann GmbH– Chairman of the Supervisory Board of MHP Mannesmann Präzisrohr GmbH, DMV Stainless BV and Mannesmannröhren Mülheim GmbH– Chairman of the Advisory Board of Mannesmann Line Pipe GmbH– Vice-President of the Board of Directors of Borusan Mannesmann Boru Yatirim Holding AS– Member of the Executive Board of Salzgitter AG– Member of the Supervisory Board and Partners Committee of Europipe GmbH – Member of the Supervisory Board of Salzgitter Mannesmann Handel GmbH


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Positions held in 2004Positions and appointments held in French companies– Chairman of the Supervisory Board of DMV Stainless SAS– Member of the Board of Directors of VALLOUREC & MANNESMANN TUBES

Positions and appointments held in foreign companies– Chairman of the Executive Board of Mannesmannröhren-Werke AG– Member of the Supervisory Board and of the Partners Committee of Hüttenwerke Krupp Mannesmann GmbH– Chairman of the Supervisory Board of MHP Mannesmann Präzisrohr GmbH, DMV Stainless BV, Mannesmannröhren Mülheim GmbH and

Mannesmann Robur BV– Chairman of the Advisory Board of Mannesmann Line Pipe GmbH and Salzgitter Mannesmann Altersversorgung Service GmbH– Vice-President of the Board of Directors of Borusan Mannesmann Boru Yatirim Holding AS– Member of the Executive Board of Salzgitter AG– Member of the Supervisory Board and Partners Committee of Europipe GmbH – Member of the Supervisory Board of Salzgitter Mannesmann Handel GmbH, Salzgitter Mannesmann Forschung GmbH, BMB Vobarno Tubi

and Röhrenwerk Gebr. Fuchs GmbH

Positions held in 2003Positions and appointments held in French companies– Chairman of the Supervisory Board of DMV Stainless SAS– Member of the Board of Directors of VALLOUREC & MANNESMANN TUBES (since 1 July 2003)

Positions and appointments held in foreign companies– Member of the Executive Board of Mannesmannröhren-Werke AG (Vice-President since 1 April 2003)– Chairman of the Supervisory Board of MHP Mannesmann Präzisrohr GmbH, DMV Stainless BV, Mannesmannröhren Mülheim GmbH and

Mannesmann Robur BV– Chairman of the Advisory Board of Mannesmann Line Pipe GmbH– Vice-President of the Board of Directors of Borusan Mannesmann Boru Yatirim Holding AS– Member of the Executive Board of Salzgitter AG (since 1 October 2003)– Member of the Supervisory Board and Partners Committee of Europipe GmbH

Positions held in 2002Positions and appointments held in French companies– Chairman of the Supervisory Board of DMV Stainless SAS

Positions and appointments held in foreign companies– Member of the Executive Board of Mannesmannröhren-Werke AG– Chairman and CEO of MHP Mannesmann Präzisrohr GmbH– Chairman of the Supervisory Board of DMV Stainless BV and Mannesmann Robur BV– Vice-President of the Board of Directors of Borusan Mannesmann Boru Yatirim Holding AS– Member of the Supervisory Board and Partners Committee of Europipe GmbH

Positions held in 2001Positions and appointments held in foreign companies– Chairman and CEO of MHP Mannesmann Präzisrohr GmbH– Chairman of the Supervisory Board of Mannesmann Robur BV.

Michel de FABIANIDate of first appointment: 10 June 2004 Date on which appointment ceases: 31 December 2009 (General Meeting called to approve the financial statements for the financialyear 2009)Date of birth: 17 June 1945


Expertise and managerial experience – Chairman of BP France from 1995 to 2004– Vice-Chairman of BP Europe from 1997 to 2004– CEO joint-venture BP Mobil Europe from 1997 to 2001– CEO BP Europe from 1991 to 1995.

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Positions held in 2005Positions and appointments held in French companies– Member of the Supervisory Board of Vallourec– Member of the Board of Directors of BP France, Institut Français du Pétrole and Rhodia

Positions and appointments held in foreign companies– Member of the Board of Directors of Star Oil Mali, SEMS Maroc and EBTRANS Luxembourg

Positions held in 2004Positions and appointments held in French companies– Chairman of the Board of Directors of BP France– Member of the Supervisory Board of Vallourec (from 10 June 2004)– Member of the Board of Directors of Institut Français du Pétrole and Rhodia

Positions and appointments held in foreign companies– Member of the Board of Directors of Star Oil Mali

Positions held in 2003Positions and appointments held in French companies– Chairman of the Board of Directors of BP France– Member of the Board of Directors of Institut Français du Pétrole and Rhodia (from 1 May 2003)– Member of the Board of Directors or Supervisory Board of BP Europe’s subsidiaries

Positions held in 2002Positions and appointments held in French companies– Chairman of the Board of Directors of BP France– Member of the Board of Directors of Institut Français du Pétrole– Member of the Board of Directors or Supervisory Board of BP Europe’s subsidiaries

Positions held in 2001Positions and appointments held in French companies – Chairman of the Board of Directors of BP France– Member of the Board of Directors of Institut Français du Pétrole (from 1 May 2001)– Member of the Board of Directors or Supervisory Board of BP Europe’s subsidiaries.

Heinz Jörg FUHRMANNDate of first appointment: 14 December 2005Date on which appointment ceases: 31 December 2005 (General Meeting called to approve the financial statements for the financialyear 2005)Date of birth: 4 December 1956

Business address: SALZGITTER AG - Eisenhüttenstrasse 99 - D-38239 Salzgitter (Germany)

Expertise and managerial experience – Diploma in Engineering: Rheinisch-Westfälische Technische Hochschule Aachen (Metallurgy)– Doctorate in Engineering: Technische Universität Berlin (Dr.-Ing.)– 1983-1994: Klöckner-Werke AG, Duisburg– 1995-date: Preussag Stahl AG, now Salzgitter AG– 1996-date: Member of the Executive Board of Salzgitter AG (CFO since 2001).

Positions held in 2005Positions and appointments held in French companies– Chairman of the Supervisory Board of Ets Robert et Cie SAS (since 8 June 2005)– Member of the Supervisory Board of Vallourec– Member of the Board of Directors of VALLOUREC & MANNESMANN TUBES (until 23 June 2005)

Positions and appointments held in foreign companies– Member of the Executive Board of Salzgitter AG– Vice-President of the Supervisory Board of Salzgitter Mannesmann Handel GmbH– Member of the Supervisory Board of Mannesmannröhren-Werke GmbH, Salzgitter Stahl GmbH, Salzgitter Flachstahl GmbH, Öffentliche

Lebensversicherung Braunschweig, Öffentliche Sachversicherung Braunschweig, Hansaport Hafenbetriebsgesellschaft mbH and HSP HoeschSpundwand und Profil GmbH (since 27 May 2005)


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– Member of the Supervisory Board and Partners Committee of Europipe GmbH (since 9 September 2005)– Member of the Advisory Board of ThyssenKrupp Gft Bautechnik GmbH (since 17 May 2005)

Positions held in 2004Positions and appointments held in French companies– Member of the Supervisory Board of Ets Robert et Cie SAS– Member of the Board of Directors of VALLOUREC & MANNESMANN TUBES (since 1 April 2004)

Positions and appointments held in foreign companies– Member of the Executive Board of Salzgitter AG – Vice-President of the Supervisory Board of Salzgitter Mannesmann Handel GmbH– Member of the Supervisory Board of Mannesmannröhren-Werke GmbH, Salzgitter Stahl GmbH, Salzgitter Flachstahl GmbH,

Öffentliche Versicherung Braunschweig and Hansaport Hafenbetriebsgesellschaft mbH

Positions held in 2003Positions and appointments held in French companies– Member of the Supervisory Board of Ets Robert et Cie SAS

Positions and appointments held in foreign companies– Member of the Executive Board of Salzgitter AG– Vice-President of the Supervisory Board of Salzgitter Handel GmbH– Member of the Supervisory Board of Mannesmannröhren-Werke AG, Salzgitter Stahl GmbH, Salzgitter Flachstahl GmbH,

Öffentliche Versicherung Braunschweig and Hansaport Hafenbetriebsgesellschaft mbH – Member of the Advisory Board of Universal Eisen und Stahl GmbH (until 4 April 2003)

Positions held in 2002Positions and appointments held in French companies– Member of the Supervisory Board of Ets Robert et Cie SAS

Positions and appointments held in foreign companies– Member of the Executive Board of Salzgitter AG– Vice-President of the Supervisory Board of Salzgitter Handel GmbH– Member of the Supervisory Board of Mannesmannröhren-Werke AG, Salzgitter Stahl GmbH, Salzgitter Flachstahl GmbH,

HSP Hoesch Spundwand und Profil GmbH (until 20 June 2002) and Hansaport Hafenbetriebsgesellschaft mbH– Member of the Advisory Board of Universal Eisen und Stahl GmbH– Director of Wescol Group plc.

Positions held in 2001Positions and appointments held in French companies– Member of the Supervisory Board of Ets Robert et Cie SAS (since 30 January 2001)

Positions and appointments held in foreign companies– Member of the Executive Board of Salzgitter AG– Vice-President of the Supervisory Board of Salzgitter Handel GmbH– Member of the Supervisory Board of Mannesmannröhren-Werke AG, Salzgitter Stahl GmbH (since 23 August 2001), Salzgitter Flachstahl

GmbH (since 27 July 2001), HSP Hoesch Spundwand und Profil GmbH, Hansaport Hafenbetriebsgesellschaft mbH, Personal-, Produktions-und Servicegesellschaft mbH (until 31 December 2001), Verkehrsbetriebe Peine-Salzgitter GmbH (until 31 December 2001) andDeutsche Erz und Metall Union GmbH (until 31 December 2001)

– Member of the Advisory Board of Universal Eisen und Stahl GmbH, Hövelmann & Lueg GmbH & Co. KG (until 31 December 2001), PeinerHüttenstoffe GmbH (until 31 December 2001) and GESIS Gesellschaft für Informationssysteme mbH (from 22 January 2001 to 31 December 2001)

– Director of Steel Dynamics Inc. and Wescol Group plc.

Denis GAUTIER-SAUVAGNACDate of first appointment: 7 February 1997Date on which appointment ceases: 31 December 2005 (General Meeting called to approve the financial statements for the financialyear 2005)Date of birth: 28 May 1943

Business address: UIMM - 56, avenue de Wagram - 75017 Paris (France)

Expertise and managerial experience – Graduate of the École Nationale d’Administration (1967)– COO of an agri-food group (1979-1985) and CEO of the French subsidiary of a UK merchant bank (1990-1993).

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Positions held in 2005Positions and appointments held in French companies– President and Managing Director of UIMM – Chairman of the Board of Directors of UNEDIC – Chairman and CEO of Capitole Europe SA– Member of the Supervisory Board of France Conventions SA and Vallourec– Member of the Executive Board of MEDEF

Positions held in 2004Positions and appointments held in French companies– President and Managing Director of UIMM – Chairman of the Board of Directors of UNEDIC – Chairman and CEO of Capitole Europe SA– Member of the Supervisory Board of France Conventions SA and Vallourec– Member of the Executive Board of MEDEF– Chairman GPA Relations du Travail

Positions held in 2003Positions and appointments held in French companies– President and Managing Director of UIMM – Vice-President of the Board of Directors of UNEDIC – Chairman and CEO of Capitole Europe SA– Member of the Supervisory Board of France Conventions SA and Vallourec

Positions held in 2002Positions and appointments held in French companies– President and Managing Director of UIMM – Vice-President of the Board of Directors of UNEDIC – Chairman and CEO of Capitole Europe SA– Member of the Supervisory Board of France Conventions SA and Vallourec

Positions held in 2001Positions and appointments held in French companies– Chairman and CEO of Capitole Europe SA– Member of the Supervisory Board of Vallourec– Director of Sogeparc.

François HENROTDate of first appointment: 8 June 1999Date on which appointment ceases: 31 December 2005 (General Meeting called to approve the financial statements for the financialyear 2005) Date of birth: 3 July 1949

Business address: Banque Rothschild & Cie - 1, avenue de Matignon - 75008 Paris (France)

Expertise and managerial experience – COO then Chairman of the Management Board of Compagnie Bancaire (1985-1995)– Member of the Supervisory Board of Paribas and Chairman of the Supervisory Board of Crédit du Nord (1995-1997).

Positions held in 2005Positions and appointments held in French companies– Managing partner of Rothschild & Cie Banque and Rothschild & Cie– Director of Eramet– Member of the Supervisory Board of Cogedim and Vallourec

Positions held in 2004Positions and appointments held in French companies– Managing partner of Rothschild & Cie Banque and Rothschild & Cie– Director of Carrefour and Eramet– Member of the Supervisory Board of Cogedim, Pinault-Printemps-Redoute and Vallourec


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Positions held in 2003Positions and appointments held in French companies– Managing partner of Rothschild & Cie Banque and Rothschild & Cie– Director of Carrefour and Eramet– Member of the Supervisory Board of Cogedim, Pinault-Printemps-Redoute and Vallourec

Positions held in 2002Positions and appointments held in French companies– Managing partner of Rothschild & Cie Banque and Rothschild & Cie– Director of Carrefour, Eramet and Montupet– Member of the Supervisory Board of Cogedim, Pinault-Printemps-Redoute and Vallourec

Positions held in 2001Positions and appointments held in French companies– Managing partner of Rothschild & Cie Banque and Rothschild & Cie– Director of Carrefour, Eramet, Montupet, BP France and Teleimage International– Member of the Supervisory Board of Cogedim, Pinault-Printemps-Redoute and Vallourec

Wolfgang LEESEDate of first appointment: 11 June 2002Date on which appointment ceases: 31 December 2007 (General Meeting called to approve the financial statements for the financialyear 2007)Date of birth: 17 June 1946

Business address: SALZGITTER AG - Eisenhüttenstrasse 99 - D-38239 Salzgitter (Germany)

Expertise and managerial experience– Diploma in economics (management)– 33 years of professional experience.


Positions and appointments held in foreign companies– Chairman of the Executive Board of Salzgitter AG and Salzgitter AG Stahl und Technologie– Chairman of the Supervisory Board of Mannesmannröhren-Werke GmbH, Peiner Träger GmbH, HSP Hoesch Spundwand und Profil GmbH,

Salzgitter Flachstahl GmbH and Salzgitter Stahl GmbH– Member of the Executive Board of VDEh/Wirtschaftsvereinigung Stahl– Member of the Supervisory Board of MAN Nutzfahrzeuge AG – Member of the Advisory Board of Dresdner Bank AG and Norddeutsche Landesbank


Positions and appointments held in foreign companies– Chairman of the Executive Board of Salzgitter AG and Salzgitter AG Stahl und Technologie– Chairman of the Supervisory Board of Mannesmannröhren-Werke AG, Peiner Träger GmbH and Salzgitter Stahl GmbH– Member of the Executive Board of VDEh/Wirtschaftsvereinigung Stahl– Member of the Supervisory Board of MAN Nutzfahrzeuge AG – Member of the Advisory Board of Dresdner Bank AG and Norddeutsche Landesbank


Positions and appointments held in foreign companies– Chairman of the Executive Board of Salzgitter AG and Salzgitter AG Stahl und Technologie– Chairman of the Supervisory Board of Mannesmannröhren-Werke AG, Peiner Träger GmbH and Salzgitter Stahl GmbH– Member of the Executive Board of VDEh/Wirtschaftsvereinigung Stahl

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– Member of the Supervisory Board of MAN Nutzfahrzeuge AG – Member of the Advisory Board of Dresdner Bank AG and Norddeutsche Landesbank


Positions and appointments held in foreign companies– Chairman of the Executive Board of Salzgitter AG and Salzgitter AG Stahl und Technologie– Chairman of the Supervisory Board of Mannesmannröhren-Werke AG and Salzgitter Stahl GmbH– Member of the Executive Board of VDEh/Wirtschaftsvereinigung Stahl– Member of the Supervisory Board of MAN Nutzfahrzeuge AG – Member of the Advisory Board of Norddeutsche Landesbank

Positions held in 2001Positions and appointments held in foreign companies– Chairman of the Executive Board of Salzgitter AG Stahl und Technologie– Chairman of the Supervisory Board of Mannesmannröhren-Werke AG and Salzgitter Stahl GmbH– Member of the Executive Board of VDEh/Wirtschaftsvereinigung Stahl– Member of the Advisory Board of Norddeutsche Landesbank.

Thierry MARRAUDDate of first appointment: 10 June 2004Date on which appointment ceases: 31 December 2009 (General Meeting called to approve the financial statements for the financialyear 2009)Date of birth: 30 April 1942

Business address: Tour Bolloré - 31-32, quai de Dion-Bouton - 92811 Puteaux (France)

Expertise and managerial experience – 30 years at the Saint-Gobain Group: Group CFO and COO mechanical paper and packaging division– 5 years as Executive Member of Crédit Lyonnais (1995-2000), CEO of Marsh Mac Lennan France (2001-2002) and CFO of Bolloré

group since 2003.

Positions held in 2005Positions and appointments held in French companies– Member of the Supervisory Board of Vallourec, representing Société Financière de Sainte Marine– Member of the Supervisory Board of Emin Leydier– Director of Havas– Director of Bolloré Investissement and Financière V permanent representative– Bolloré permanent representative on the Board of Directors of SFDM– Compagnie du Cambodge permanent representative at IER– Financière de l’Odet permanent representative at Saga

Positions and appointments held in foreign companies– Director of Sorebol

Positions held in 2004Positions and appointments held in French companies– Chairman and CEO of Financière de Sainte Marine– Financière de l’Odet permanent representative at S.F.P.– Member of the Supervisory Board of Vallourec, representing Société Financière de Sainte Marine– Member of the Supervisory Board of Emin Leydier– Member of the Supervisory Board of Atria Capital Partenaires

Positions held in 2003Positions and appointments held in French companies– Member of the Supervisory Board of Emin Leydier– Member of the Supervisory Board of Atria Capital Partenaires


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Positions held in 2002Positions and appointments held in French companies– Member of the Supervisory Board of Emin Leydier– Member of the Supervisory Board of Atria Capital Partenaires

Positions held in 2001Positions and appointments held in French companies– Member of the Supervisory Board of Emin Leydier– Member of the Supervisory Board of Atria Capital Partenaires– Chairman of the Executive Board of Marsh Mac Lennan.

Jean-Claude VERDIEREDate of first appointment: 1 July 2001 Date on which appointment ceases: 31 December 2006 (General Meeting called to approve the financial statements for the financialyear 2006)Date of birth: 11 April 1938


Expertise and managerial experience – 40 years in the Vallourec Group, mainly in finance / management control– Member of the Management Board and COO of Vallourec from 1994 to 2001.

Positions held in 2005Positions and appointments held in French companies– Member of the Supervisory Board of Vallourec– Member of the Board of Directors of ValTubes

Positions held in 2004Positions and appointments held in French companies– Member of the Supervisory Board of Vallourec– Member of the Board of Directors of Valtubes and Sopretac



Positions held in 2001Positions and appointments held in French companies– Member of the Supervisory Board of Vallourec (as from 1 July 2001)– Member of the Management Board and COO of Vallourec (until 30 June 2001)– Member of the Board of Directors of Valtubes and Sopretac.

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■ Members of the Management Board

Pierre VERLUCADate of first appointment: 12 December 2000Date of appointment as Chairman of the Management Board: 10 June 2004Date on which appointment ceases: 31 December 2007 (General meeting called to approve the financial statements for the financialyear 2007)Date of birth: 22 January 1944

Business address: Vallourec - 130, rue de Silly - 92100 Boulogne (France)

Expertise and managerial experience – Head of production at Ugine Kuhlmann from 1967 to 1973– CFO of SADEC (Portugal) from 1973 to 1975– Member of the Management Board of Vallourec since December 2000.

Positions held in 2005Positions and appointments held in French companies (all Vallourec Group companies)– Chairman of the Management Board of Vallourec– Chairman of V & M FRANCE, VALLOUREC & MANNESMANN TUBES and ValTubes (formerly Sopretac)– Director of Valtimet and VALLOUREC MANNESMANN OIL & GAS FRANCE

Positions and appointments held in foreign companies (all Vallourec Group companies)– Chairman of the Supervisory Board of V & M DEUTSCHLAND GmbH– Chairman of the Advisory Board of V & M do BRASIL SA– Chairman of the Board of Directors of V & M Holdings, Vallourec Inc. and Vallourec Industries Inc.– Director of Finalourec– Director of V & M do BRASIL SA and Vallourec Tubes Canada– Member of the Executive Committee of V & M STAR

Positions held in 2004Positions and appointments held in French companies (all Vallourec Group companies)– Chairman of the Management Board of Vallourec (since 10 June 2004, a member prior to that date)– Chairman of V & M FRANCE (since 10 June 2004, Member of the Board prior to that date),VALLOUREC & MANNESMANN TUBES (since

11 June 2004, Member of the Board prior to that date), Sopretac (now ValTubes) (since 29 June 2004, Member and Director prior tothat date), Valtubes (from 29 June 2004 until 16 December 2004, Member and Director prior to that date)

– Director of Valtimet and VALLOUREC MANNESMANN OIL & GAS FRANCE

Positions and appointments held in foreign companies (all Vallourec Group companies)– Chairman of the Supervisory Board of V & M DEUTSCHLAND GmbH (since 25 June 2004, Member of the Board prior to that date)– Chairman of the Advisory Board of V & M do BRASIL SA (since 15 October 2004)– Chairman of the Board of Directors of V & M Holdings (since 10 June 2004, Director prior to that date), Vallourec Inc.

and Vallourec Industries Inc.– Director of Finalourec– Director of V & M do BRASIL SA and Vallourec Tubes Canada– Member of the Executive Committee of V & M STAR

Positions held in 2003Positions and appointments held in French companies (all Vallourec Group companies)– Member of the Management Board of Vallourec– Member and Director of Sopretac and Valtubes– Director of VALLOUREC & MANNESMANN TUBES,VALLOUREC MANNESMANN OIL & GAS FRANCE,Vallourec Composants Automobiles

Hautmont, Vallourec Composants Automobiles Vitry, Vallourec Précision Etirage, Vallourec Précision Soudage, Valti and Valinox Nucléaire(until 7 February 2003)

– Member of the Board of V & M FRANCE


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Positions and appointments held in foreign companies (all Vallourec Group companies)– Chairman of the Board of Directors of V & M do BRASIL SA– Director of Finalourec– Director of V & M Holdings, Vallourec Tubes Canada, VAM PC, Vallourec Industries Inc., Vallourec Inc.

and VALLOUREC MANNESMANN OIL & GAS UK– Member of the Supervisory Board of V & M DEUTSCHLAND GmbH– Member of the Executive Committee of V & M STAR

Positions held in 2002Positions and appointments held in French companies (all Vallourec Group companies)– Member of the Management Board of Vallourec– Member and Director of Sopretac and Valtubes– Director of VALLOUREC & MANNESMANN TUBES, Valinox Nucléaire, VALLOUREC MANNESMANN OIL & GAS FRANCE,

Vallourec Composants Automobiles Hautmont, Vallourec Composants Automobiles Vitry, Vallourec Précision Etirage,Vallourec Précision Soudage, Escofier and Valti


Positions and appointments held in foreign companies (all Vallourec Group companies)– Chairman of the Board of Directors of V & M do BRASIL SA – Director of Finalourec– Director of V & M Holdings, Vallourec Tubes Canada, VAM PC, Vallourec Industries Inc, Vallourec Inc.

and VALLOUREC MANNESMANN OIL & GAS UK– Member of the Supervisory Board of V & M DEUTSCHLAND GmbH– Member of the Executive Committee of V & M STAR (since 28 June 2002)

Positions held in 2001Positions and appointments held in French companies (all Vallourec Group companies)– Member of the Management Board of Vallourec– Member and Director of Sopretac (since 29 June 2001) and Valtubes (since 1 July 2001)– Director of VALLOUREC & MANNESMANN TUBES (since 5 June 2001), VALLOUREC MANNESMANN OIL & GAS FRANCE,

Vallourec Composants Automobiles Vitry (since 23 February 2001), Vallourec Composants Automobiles Hautmont,Vallourec Précision Etirage, Vallourec Précision Soudage, Escofier, Eurocamus, Jacot, Valti (since 16 February 2001)and Valinox Nucléaire (since 23 May 2001)


Positions and appointments held in foreign companies (all Vallourec Group companies)– Chairman of the Board of Directors of V & M do BRASIL SA– Director of Finalourec (since 18 June 2001)– Director of V & M Holdings, VAM PC, Vallourec Industries Inc. and VALLOUREC MANNESMANN OIL & GAS UK– Member of the Supervisory Board of V & M DEUTSCHLAND GmbH

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François FABREDate of first appointment: 12 December 2000Date on which appointment ceases: 31 December 2007 (General Meeting called to approve the financial statements for the financialyear 2007)Date of birth: 18 August 1941

Business address: Vallourec - 130, rue de Silly - 92100 Boulogne (France)

Expertise and managerial experience – 40 years in the Vallourec Group (IT, plant management and human resources)– Member of the Management Board since end-2000.

Positions held in 2005Positions and appointments held in French companies (all Vallourec Group companies)– Member of the Management Board of Vallourec– Chairman of V & M Services and Interfit (until 9 September 2005)– Director and COO of ValTubes (formerly Sopretac)– Member of the Supervisory Board of V & M FRANCE – Director of VALLOUREC & MANNESMANN TUBES, Escofier, Interfit, Valti, Vallourec Composants Automobiles Hautmont,

Vallourec Composants Automobiles Vitry, Vallourec Précision Etirage, Vallourec Précision Soudage and VALLOUREC MANNESMANN OIL & GAS FRANCE

Positions and appointments held in foreign companies (all Vallourec Group companies)– Chairman of the Supervisory Board of V & M DEUTSCHLAND GmbH– Director of V & M do BRASIL SA, V & M Holdings, Vallourec Industries Inc., Vallourec Inc. and Finalourec– Member of the Executive Committee of V & M STAR (until 15 March 2005)

Positions held in 2004Positions and appointments held in French companies (all Vallourec Group companies)– Member of the Management Board of Vallourec– Chairman of V & M Services and Interfit (since 28 May 2004)– Director and COO of Sopretac and Valtubes (until 16 December 2004)– Member of the Supervisory Board of V & M FRANCE (since 22 June 2004)– Director of VALLOUREC & MANNESMANN TUBES (since 11 June 2004), Escofier (since 28 May 2004), Valti (since 28 May 2004),

Vallourec Composants Automobiles Hautmont (since 28 May 2004), Vallourec Composants Automobiles Vitry (since 28 May 2004),Vallourec Précision Etirage (since 14 June 2004), Vallourec Précision Soudage (since 14 June 2004) and VALLOUREC MANNESMANN OIL & GAS FRANCE

Positions and appointments held in foreign companies (all Vallourec Group companies)– Chairman of the Supervisory Board of V & M DEUTSCHLAND GmbH (since 25 June 2004, manager prior to that date)– Director of V & M do BRASIL SA, V & M Holdings, Vallourec Industries Inc. (since 10 June 2004), Vallourec Inc. (since 10 June 2004)

and Finalourec– Member of the Executive Committee of V & M STAR

Positions held in 2003Positions and appointments held in French companies (all Vallourec Group companies)– Member of the Management Board of Vallourec– Chairman of V & M Services – Director and COO of Sopretac and Valtubes – Member of the Management Board of V & M FRANCE – Director of VALLOUREC MANNESMANN OIL & GAS FRANCE

Positions and appointments held in foreign companies (all Vallourec Group companies)– Manager of V & M DEUTSCHLAND GmbH– Director of V & M do BRASIL SA, V & M Holdings and Finalourec– Member of the Executive Committee of V & M STAR


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Positions held in 2002

Positions and appointments held in French companies (all Vallourec Group companies)– Member of the Management Board of Vallourec– Chairman of V & M Services – Director and COO of Sopretac and Valtubes – Member of the Management Board of V & M FRANCE – Director of VALLOUREC MANNESMANN OIL & GAS FRANCE and Cerec (until 13 November 2002)

Positions and appointments held in foreign companies (all Vallourec Group companies)– Manager of V & M DEUTSCHLAND GmbH– Director of V & M do BRASIL SA, V & M Holdings and Finalourec– Member of the Executive Committee of V & M STAR (since 28 June 2002)

Positions held in 2001Positions and appointments held in French companies (all Vallourec Group companies)– Member of the Management Board of Vallourec– Chairman of V & M Services – Director and COO of Sopretac and Valtubes – Member of the Management Board of V & M FRANCE – Director of VALLOUREC MANNESMANN OIL & GAS FRANCE and Cerec

Positions and appointments held in foreign companies (all Vallourec Group companies)– Manager of V & M DEUTSCHLAND GmbH– Director of V & M do BRASIL SA, V & M Holdings and Finalourec.

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In accordance with the requirements of Article L. 225-184 of the

French Code de Commerce, we inform you that no share purchase

or share subscription options were granted during the financial

year 2005.

We remind you that the Extraordinary General Meeting held on

15 June 2000 authorized the Management Board to grant share

subscription options (first resolution) and/or share purchase options

(second resolution), up to the respective limits of 4% and 10% of

Vallourec’s share capital, to managers and/or employees of Group

companies, for a period of five years that expired on 14 June 2005.

Under this authorization:

■ 178,500 share subscription options, each giving the right to

subscribe for one Vallourec share, were granted on 15 June 2000

to 144 beneficiaries at a price of € 38 per share, corresponding

to 95% of the average of the last 20 prices quoted before the date

the options were granted.

After a holding period of four years, these subscription options may

be exercised during a period of three years from 15 June 2004 to

14 June 2007 inclusive. After taking into account i) the options

exercised between 15 June 2004 and 31 December 2005, i.e.

163,794 options, of which 24,064 in 2005, ii) the options

cancelled (6,750) since the date they were granted (the holders

having left the Group) and iii) the adjustment resulting from the

capital increase in cash in July 2005, the number of subscription

options outstanding at 31 December 2005 amounted to 8,174,

i.e. 0.08% of the share capital at that date, and the adjusted

exercise price was then set at € 37.43 per share.

■ 193,000 share purchase options, each giving the right to purchase

one Vallourec share, were granted on 11 June 2003 to 148 bene-

ficiaries at a price of € 53.65 per share, corresponding to the

average of the last 20 prices quoted during the 20 trading

sessions preceding the date the options were granted, not

discounted.


holding period of four years, may be exercised during a period of

three years from 11 June 2007 to 10 June 2010 inclusive. After

taking into account i) the options cancelled (2,750) since the date

they were granted (the holders having left the Group) and ii) the

adjustment resulting from the capital increase in cash in July 2005,

the number of purchase options outstanding at 31 December 2005

amounted to 193,146, i.e. 1.82% of the share capital at that date,

and the adjusted exercise price was then set at € 52.85 per share.

The Extraordinary General Meeting to be held on 1 June 2006

(eleventh resolution) will be asked to approve a resolution

delegating to the Management Board the necessary authorization,

valid for a period of 38 months, to grant, where appropriate,

options to purchase Vallourec shares.

8.1.2 Special report of the Management Board on options - Financial year 2005


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8.2 Report of the Chairman of the Supervisory Boardon the conditions governing the preparation and organizationof the Supervisory Board’s work and the internal controlprocedures implemented by Vallourec

In accordance with the provisions of Article L. 225-68 of the French

Code de Commerce, introduced by law no. 2003-706 of 1 August

2003 on financial security, the Chairman of Vallourec’s Supervisory

Board presents this report to the shareholders, detailing the conditions

governing the preparation and organization of the Supervisory Board’s

work and the internal control procedures implemented by the Company.

A - CONDITIONS GOVERNINGTHE PREPARATION AND ORGANIZATIONOF THE SUPERVISORY BOARD’S WORK

The internal regulations of the Supervisory Board, the situation of the

Board members as regards the criteria of the Bouton report, the

composition and operation of the two Committees (Finance

Committee and Appointments and Remuneration Committee) set up

within the Supervisory Board and the remuneration principles are

detailed in section 6 of the Reference Document for the year ended

31 December 2005 dealing with Corporate Governance, of which this

report forms an integral part.

The number of meetings of the Board is normally set at four per year

but additional meetings may be organized where circumstances so

require. In 2005, the Board met eight times, in particular in connection

with the negotiations concerning the acquisition of the 45%

shareholding in V & M TUBES.The average length of Board meetings

is about three hours.

In order to ensure that Board members are able to attend meetings,

the timetable of regular meetings is prepared very far in advance.

For this reason, a meetings timetable for the following year is drawn

up in June and agreed at the Board meeting held in September. As

a result of the above procedures, the effective attendance rate of

Board members at meetings is very high: out of all the meetings held

in 2005, only five absences were noted. The absence rate of Board

members at exceptional meetings is a little higher, but still remains

low: as regards the four exceptional meetings in 2005, no more than

two or three members were absent at any meeting. Members who

were unable to attend were, however, represented at all meetings,

whether regular or exceptional. The members of the Management

Board attended all meetings.

The arrangements for the meetings are confirmed about a fortnight

in advance by means of a notice of the meeting to which is attached

the agenda and the draft minutes of the previous meeting. Board

members are invited to submit any comments they have in advance

of the Board meeting.

The Management Board endeavours to circulate documents of a

financial nature a few days in advance of Board meetings.At meetings,

a complete file incorporating all supporting documentation in

respect of the items on the agenda is given to each participant.

This file also contains the Management Board’s quarterly report to

the Supervisory Board on the Company’s performance, prepared in

accordance with the provisions of Article L. 225-68, section 4, of the

French Code de Commerce. Where necessary, the Board relies on

preliminary work carried out by the Finance Committee or the

Appointments and Remuneration Committee.

Meetings are conducted in French with a simultaneous translation

being provided for German members.

Meetings are chaired by the Supervisory Board Chairman who

ensures, in particular, that each member expresses his opinion on the

most important matters. In the unusual case of a Board member

having a personal interest in one of the matters under consideration

as specified in Article L. 225-86 of the French Code de Commerce,

he will be required to leave the meeting while the matter concerned

is being discussed.

In 2005, Vallourec’s Auditors attended those Supervisory Board

meetings at which the annual and half-year financial statements were

approved.

After the first assessment of the operation of the Board carried out

at the beginning of 2003, a further assessment was carried out in

March/April 2006 on the basis of an updated questionnaire. It

should be noted that, in order to comply with the request (made by

the majority of the Board members during the assessment of the

operation of the Board carried out at the beginning or 2003) for a

system of periodic site visits, a meeting was held in April 2005 at

Belo Horizonte (Brazil), which enabled the participants to visit all

V & M do BRASIL’s facilities (tube mill, steel mill, mine and forest).

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B - INTERNAL CONTROL PROCEDURES

1. Objectives of internal control

The aim of internal control is to provide reasonable assurance, by

means of a system of processes and procedures implemented by the

Vallourec Group’s staff, that the following three objectives may be

achieved:

– Optimization of operational efficiency,

– Accuracy of financial information,

– Compliance with the laws and regulations currently in force.

As is the case with any control system, the Group’s internal control

system cannot guarantee that all risk of error or fraud is fully

eliminated or controlled.

2. Description of internal controlprocedures

2.1 Internal control procedures adapted to thespecific characteristics of the Vallourec Group

The organization of the Vallourec Group has for many years been

based on the principle of decentralization.This approach is particularly

well suited to the Group’s international dimension, which was boosted

in 1997 by the formation of VALLOUREC & MANNESMANN TUBES.

Consequently, responsibility for the implementation of appropriate

internal control procedures governing risk management, financial

control and compliance with legislation is delegated to the managers

of each of the Group’s subsidiaries.

To ensure the consistency of Group procedures worldwide, senior

management relies on the functional departments to draw up the

procedures necessary for the proper operation of controls, issue

instructions regarding their implementation and ensure compliance

with the said instructions.

The key operations and the internal control procedures applicable to

them are as follows:

2.2 Internal control procedures in respectof financial and accounting information

2.2.1 Financial and accounting reporting

Financial and accounting information is prepared centrally on the

basis of the subsidiaries’ financial statements, adjusted to comply with

Group standards. The necessary data is collected and processed by

the new version of MAGNITUDE, which was installed in July 2004.

MAGNITUDE is a reporting and consolidation software application

that is used by all consolidated subsidiaries and is compatible with

the new IFRS accounting standards that Vallourec has adopted as

from 1 January 2005.

Reports are produced monthly, and prepared in the month following

the month to which they relate, whereas full accounting consolidations

are produced quarterly and prepared in the two months following

the end of the quarter to which they relate. The preparation of the

annual and half-yearly consolidations is the responsibility of senior

management under the control of the Finance Committee and the

Group’s Auditors.

The monitoring of off-balance-sheet commitments is an integral part

of the quarterly consolidation process.

2.2.2 External financial information

Financial communications to third parties consist, on a quarterly basis,

of the Group’s consolidated sales and, on a half-yearly basis, of the

financial statements prepared by the Management Board, submitted

to the Supervisory Board and reviewed by the Auditors.

2.2.3 Cash position and financing

Responsibility for cash management is delegated to the subsidiaries,

by means of well defined procedures and delegation.Any departure

from the general rules requires the prior authorization of the Group

Finance department.

The Group Finance department is also responsible for borrowings and

investments with a term of more than one year. Responsibility for

borrowings and investments with a term of less than one year is

delegated to the subsidiaries, which are required to comply with

specific Group procedures: quality of the banks involved, risk-free

investment and monitoring of financial guarantees given.

Transactions in foreign currencies and foreign exchange hedging are

also governed by rules issued by the Group Finance department.

Borrowings, investments and foreign exchange transactions are

monitored on a monthly basis by means of a report produced by the

Group treasurer and submitted to senior management.

2.2.4 Procedures and instructions

With the objective of producing high-quality financial and accounting

information, Vallourec has produced procedures and instructions

tailored to the French and foreign subsidiaries. These procedures are

grouped by topic and deal mainly with accounting, treasury and

reporting issues and, since 2004, with the IFRS framework.

Details of the procedures are available on an intranet site that can

be consulted by all of the Group’s finance staff.


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A self-assessment procedure to review accounting and financial

procedures was introduced at the end of 2003, using a questionnaire

based on the report of the COSO (Committee Of Sponsoring

Organizations of the Treadway Commission), the accepted framework

in the field of internal control. The enquiry carried out by the Group’s

Internal Audit department focused on the fully-consolidated

companies. All of the accounting cycles were analyzed: purchases

– trade payables, sales – trade receivables, inventories, cash and bank

balances, pay and property, plant and equipment.

Self-assessment procedures to review accounting controls were

carried out separately in respect of each subsidiary. Each received a

summary of the points for improvement and prepared an action plan

for each weakness identified and for which the risk of occurrence is

considered to be significant. The managers of the companies

concerned have been kept informed of these assessments and the

action plans drawn up at entity level.

Although the action points, the implementation of which began as

early as 2004, vary from one entity to the other, the most frequent

relate to the organization of a fixed assets inventory, the setting of

additional parameters regarding access to computer files (SAP) and

the description of internal control procedures in respect of accounting

information.

2.2.5 Internal audit

The Internal Audit and Financial Control department is attached to

the Group Finance department. It audits the subsidiaries in

accordance with an audit plan, particularly in order to assess and

improve the accuracy and reliability of the accounting and financial

information.

Vallourec also has a team based at V & M do BRASIL SA.The team’s

audit plan is validated by the Internal Audit department. Its responsi-

bilities relate mainly to internal control procedures.

External experts may be consulted in the case of one-off assignments.

The Internal Audit department also coordinates relations with the

external Auditors, who are mainly affiliated to international audit firms.

2.3 Other key processes analyzed

2.3.1 Industrial investment

The Group’s Investments and Technology department reports to

senior management. It reports on investments to a committee set

up in 2005 and composed of the Chairman of the Management

Board and senior management. It examines the content of investment

projects proposed by the sites as part of the divisions’ industrial and

marketing plans. After validation, the decisions are taken and

authorizations to proceed with a project are granted by the Board

of the subsidiary concerned.

A posteriori controls of expenses and profitability of acquisitions are

performed annually. The results of such tests and the performance

measurement of acquisitions are brought to the attention of the

division Chairmen.

Group procedures define the methods applicable to the preparation

of capital expenditure proposals and the selection of projects, the

requests for authorization, and the controls necessary to ensure

compliance with the budget, timetable and objectives. In 2005,

these procedures were supplemented by aspects concerning

technology and purchasing.

2.3.2 Quality

Vallourec has a Group Quality department, which has developed

quality management systems, described in the manuals, which

comply with the ISO 9000 standard.These systems are implemented

at all the production sites.

Compliance with quality procedures is checked by the Group’s

Quality Audit unit and by independent external bodies. The findings

of these audits are analyzed and the appropriate corrective action

taken.

2.3.3 Environment

Within the context of sustainable development, an Environment

department was formed in 2002, with responsibility for coordinating

and directing environmental matters. The department relies on local

environment managers to ensure compliance with regulations.

The Environment department carries out audits and establishes key

indicators that enable the main parameters to be periodically

monitored.

A sustainable development charter was published in 2004 and an

internal report on the environment is prepared each year.

At the end of 2005, thirteen sites had received certification under

ISO 14001: four in Germany, three in Brazil, three in the United States,

two in France and one in the United Kingdom.

In order to improve environmental management, the Group’s policy

is to obtain certification under ISO 14001 for as many sites as possible

between now and the end of 2007, concentrating initially on France.

In 2005, a French site implemented a CO2 emissions monitoring plan

in connection with the first-time application of the national quota

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allocation plan. Such emissions are the subject of an annual return

verified by an approved organization and validated by the Inspection

body for the classified facilities.

2.3.4 Research and Development

The Research and Development department has drawn up Group

procedures concerning the management of programmes for

developing new products and industrial processes.The processes thus

defined are applied in a consistent manner by the entities concerned.

These procedures include those aspects concerning industrial

property and their aim is the formalization of procedures in respect

of design and commercial production.

Each year, audits are carried out by the Group Quality department.

2.3.5 Purchasing

Since 2005, the Group Purchasing department’s role has been

extended to strengthen the department’s organization and improve

its performance. In conjunction with the Investments department, it

authorizes the more significant acquisitions and is usually involved

in negotiations concerning raw materials, energy and investments,

generally under the direct responsibility of the COO of each company.

The internal audit unit of the Group purchasing department performs

checks, circulates information about best practice and develops

procedures in this area.

2.3.6 Information systems

The Information Systems department is responsible for integrating

and ensuring the consistency of the software used.

In a significant number of subsidiaries, most data processing is

carried out by means of integrated software packages (SAP).

The information systems of all the French subsidiaries are managed

by means of a single entity: the Vallourec Information Technology

Centre (Centre des Techniques d’Information Vallourec - CTIV).

In 2005 CTIV continued the development of a contingency plan to

increase the security of information systems.

2.3.7 Human resources

The Group Human Resources department organizes career and

skills development for those positions requiring a high level of

responsibility or technical skills. It carries out comparative studies with

market practices in a certain number of sectors.

The department checks compliance with labour regulations and

the information relating to the workforce and to safety. It also

ensures that information for management reports is obtained and

circulated.

In each country, the human resources managers are responsible for

ensuring compliance with specific national regulations.

In Germany, most of the workforce is governed by the law on joint

management in the steel industry and mines of 21 May 1951.

2.3.8 Customer relations

With the aim of specifying and formalizing certain practices regarding

contractual relations with its customers, Vallourec has developed a

procedure for managing customer risk: limits in respect of credit and

delegation of authority, and credit insurance.

The Legal department has analyzed the legal provisions applicable

to sales contracts entered into between the subsidiaries and their

customers. These subsidiaries have standard documents defining the

conditions with which their sales contracts should comply in order

to reduce the level of risk. These standard documents are regularly

reviewed by the Legal department.

2.3.9 Insurance

Industrial risks are covered by two types of Group insurance: general

insurance (direct material damage to the Group’s property, subject

to specific exclusions, as well as any costs and consequential losses)

and third-party liability insurance (liability arising as a result of injury

or loss caused to third parties either resulting from the Group’s

operations or after delivery of goods or services).

3. Procedures to ensure continuousimprovement

Beginning with the last quarter of 2003, Vallourec decided to carry

out a self-assessment procedure to review internal control procedures

in respect of accounting and financial information, human resources,

the environment, purchasing, research and development, information

systems and the terms and conditions applicable to sales contracts

entered into between the subsidiaries and their customers.

These self-assessment procedures enabled action points to be

drawn up. Subsidiaries began to take action in respect of these points

in 2004, under the supervision of the functional departments.

This gradual process of improving internal control procedures was

continued in 2005 and will continue into 2006.


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8.3 Statutory Auditors’ reports

8.3.1 Statutory Auditors’ general report on the annual statutory accounts

This is a free translation into English of the Statutory Auditors’ report issued in the French language and is provided solely for the convenience

of English speaking readers. The Statutory Auditors’ report includes information specifically required by French law in all audit reports,

whether qualified or not, and this is presented below the opinion on the financial statements. This information includes an explanatory

paragraph discussing the Auditors’ assessments of certain significant accounting and auditing matters. These assessments were

considered for the purpose of issuing an audit opinion on the financial statements taken as a whole and not to provide separate assurance

on individual account captions or on information taken outside of the financial statements.

This report, together with the Statutory Auditors’ report addressing financial and accounting information in the Chairman’s report on internal

control, should be read in conjunction with, and construed in accordance with, French law and professional auditing standards applicable in France.

To the shareholders of Vallourec,

In accordance with our appointment as statutory auditors by your Annual General Meetings, we hereby report to you for the year ended

31 December 2005 on the following:

■ the audit of the accompanying annual financial statements of Vallourec,

■ the justification of our assessments,

■ the specific procedures and disclosures required by law.

The annual financial statements have been approved by the Management Board. Our role is to express an opinion on these annual financial

statements based on our audit.

I. Opinion on the annual financial statementsWe conducted our audit in accordance with professional standards applicable in France. Those standards require that we plan and

perform the audit to obtain reasonable assurance about whether the annual financial statements are free of material misstatement.An audit

includes examining, on a test basis, the evidence supporting the amounts and disclosures in the financial statements.An audit also includes

assessing the accounting policies used and significant estimates made by Management, as well as evaluating the overall financial

statements presentation. We believe that our audit provides a reasonable basis for the opinion expressed below.

In our opinion, the annual financial statements give a true and fair view of the Company’s financial position and its assets and liabilities

as of 31 December 2005 and of the results of its operations for the year then ended, in accordance with French accounting regulations.

Without qualifying the above opinion, we would draw your attention to the matter disclosed in note I to the annual financial statements

relating to the rules governing the measurement, recognition and presentation of the assets in accordance with regulations CRC 2002-10,

CRC 2003-07 and CRC 2004-06 applicable in France as from 1 January 2005.

II. Justification of our assessmentsIn accordance with the requirements of Article L. 823-9 of the French Company Law (Code de Commerce) relating to the justification of

our assessments, we draw to your attention the following matters:

The Management of Vallourec is required to make estimates and assumptions that affect the amounts in the annual financial statements

and accompanying notes. These assumptions are, by nature, subject to uncertainties, and actual results could differ from these estimates.


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In the context of our audit of the annual financial statements for the year ended 31 December 2005, we considered that, of those items

that are subject to significant accounting estimates, a justification of our assessments was required in the case of participating interests

and provisions for liabilities and charges:

■ We have assessed the information and assumptions on which the estimates used by Management were based and have reviewed the

calculations made by your Company as they relate to the principles adopted in respect of the valuation and calculation of the

impairment of participating interests described in note II to the annual financial statements.

■ The principles adopted in respect of providing for liabilities and charges are described in note II of the notes to the annual financial statements.

We have assessed the bases on which such provisions were made and the information concerning any significant contingencies of which the

Company was aware at the year end, and reviewed the appropriateness of the information disclosed in note III to the annual financial statements.

On the basis of the above, we assessed whether these estimates were reasonable.

The assessments on these matters were performed in the context of our audit approach for the annual financial statements taken as a whole,

and therefore contributed to enable us to express an unqualified opinion in the first part of this report.

III. Specific procedures and disclosuresWe have also performed the other procedures required by law in accordance with professional standards applicable in France.

We have no matters to report regarding the fair presentation and the consistency with the annual financial statements of the information

given in the management report of the Management Board, and in the documents addressed to the shareholders with respect to the financial

position and the annual financial statements.

Pursuant to the law, we have verified that the management report contains the appropriate disclosures as to the acquisition of participating

and controlling interests and as to the identity of shareholders (percentage of voting rights).



CALAN RAMOLINO ET ASSOCIES BARBIER FRINAULT & AUTRES

Ernst & Young

Bertrand de Florival Bernard Scheidecker Philippe Hontarrède Christine Staub


8.3.2 Statutory Auditors’ special report on certain related party transactions


of English speaking readers. This report should be read in conjunction and construed in accordance with French law and professional auditing

standards applicable in France and it should be understood that the agreements reported on are only those provided by the French Company

Law (Code de Commerce) and that the report does not apply to those related party transactions described in IAS 24 or other equivalent

accounting standards.


In accordance with our appointment as Statutory Auditors of your Company, we are required to report on certain related party transactions

which have been brought to our attention.

The terms of our engagement do not require us to identify such agreements, if any, but to communicate to you, on the basis of the information

provided to us, the principal terms and conditions of those agreements brought to our attention, without expressing an opinion on their

usefulness and appropriateness. It is your responsibility, pursuant to article 117 of the decree of 23 March 1967 to assess the interest involved

in respect of the conclusion of these agreements for the purpose of authorizing them.

Agreements authorized during the year

In accordance with Article L. 225-88 of the French Company Law (Code de Commerce), we have been informed of the following

agreements which received the prior authorization of your Supervisory Board.

With Salzgitter Mannesmann

Persons concerned: Messrs Wolfgang Eging, Kunibert Martin and Wolfgang Leese.

At its meetings on 20 January, 8 March, 18 April and 27 April 2005, your Supervisory Board monitored and approved the progress and

finalization of the negotiations Vallourec held with Mannesmannröhren-Werke GmbH (MRW) and Salzgitter AG, both of which are

shareholders of Vallourec, concerning the acquisition by Vallourec of the 45% interest held by the two companies in the common

subsidiary V & M TUBES.

The Supervisory Board gave its agreement, in particular, to the acquisition price of the investment, set at € 545 million, and ratified the

fact that the completion of this transaction would result in the termination of the joint venture agreement entered into by Vallourec and

MRW in 1997, and, in particular, the clauses of the contract relating to “reserved matters” and change of control.

At the same meeting on 27 April 2005, the Supervisory Board also gave its agreement to the parallel sale to Salzgitter Mannesmann of

10% of the shares in the HKM German steel mill held by V & M TUBES, the latter retaining a 20% holding in this steel mill as well as the

rights attached to the holding concerning the steel produced by the mill.

The main provisions of this sale were explained at the Annual General Meeting held on 7 June 2005 and are disclosed in the 2004 Reference

Document, in particular in section IV, paragraph 4.8 ("Agreement between Vallourec and Mannesmannröhren-Werke concerning the acquisition

of the 45% holding in V & M TUBES") and in the Management Board’s management report to the General Meeting.

In connection with the acquisition of the 45% holding in V & M TUBES, the Supervisory Board also gave its agreement, at its meeting on

27 April 2005, to the signing of contracts relating to the processing of a maximum annual volume of 132,000 tonnes of hollow tube rounds

for drawing by Salzgitter Mannesmann, comprising a contract for V & M TUBES to supply tube rounds to the Salzgitter Mannesmann group.

The contract to supply tube rounds, which expires on 31 December 2017, has a penalty clause under which V & M TUBES, in the event of its

failure to meet certain of its obligations, would be required to pay a maximum amount of € 60 million, this amount decreasing as from 2011.

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With Messrs Pierre Verluca and François Fabre, members of the Management Board

At its meeting on 14 September 2005, the Supervisory Board examined and approved, on the basis of the report from the Appointments

and Remuneration Committee, a draft “income guarantee scheme for the retired employees of Vallourec and Setval”, insured with

AXA France Vie.

Your Supervisory Board has noted that the profit from this defined benefit scheme financed by the Company and in respect of which the

vesting of rights is conditional on the employee finishing his career at Vallourec and/or Setval, enables the Group’s managerial staff, under

acceptable economic, financial and social conditions, to supplement their income following retirement. The Company undertakes to pay

to those concerned a lifetime annuity at a predetermined level, directly proportional to the salary and in accordance with the employee’s

seniority and career development. The annuity is capped at 20% of the average salary excluding bonus of the last three years and limited

to four times the annual social security ceiling.

The Board, noting that the members of Management Board of Vallourec are likely to benefit from rights if they work within the Group until

the end of their careers, ruled in accordance with the provisions of Article L. 225.86 of the French Company Law (Code du Commerce).

Agreements authorized in previous years having a continuing effect during the year

In addition, pursuant to the decree of 23 March 1967, we have been advised that the following related party transaction conducted and

authorized in previous years has had continuing effect during the year:

With Rothschild & Cie

Your Supervisory Board, at its meeting on 20 January 2005, authorized the extension of the assistance agreement initially entered into with

Rothschild & Cie by your Supervisory Board on 4 March 2003, until the finalization of the acquisition of the 45% interest in V & M TUBES,

in return for the payment of an additional flat-rate commission of € 1,500,000, excluding taxes, half of which related to services provided

during the second half of 2004. The fees borne by your Company in respect of the year ended 31 December 2005 thus totalled € 750,000,

excluding taxes.

We conducted our procedures in accordance with professional standards applicable in France; those standards require that we agree the

information provided to us with the relevant source documents.



BARBIER FRINAULT & AUTRES CALAN RAMOLINO et ASSOCIES

Ernst & Young

Philippe HONTARREDE Christine STAUB Bertrand de FLORIVAL Bernard SCHEIDECKER


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8.3.3 Statutory Auditors’ report on the consolidated financial statements


of English speaking readers. The Statutory Auditors’ report includes information specifically required by French law in all audit reports,

whether qualified or not, and this is presented below the opinion on the consolidated financial statements. This information includes an

explanatory paragraph discussing the Auditors’ assessments of certain significant accounting and auditing matters. These assessments

were considered for the purpose of issuing an audit opinion on the consolidated financial statements taken as a whole and not to provide

separate assurance on individual account captions or on information taken outside of the consolidated financial statements.

This report together with the Statutory Auditors’ report addressing financial and accounting information in the Chairman’s report on internal

control, should be read in conjunction with, and construed in accordance with, French law and professional auditing standards applicable in France.


In accordance with our appointment as statutory auditors by your Annual General Meetings, we have audited the accompanying

consolidated financial statements of Vallourec for the year ended 31 December 2005.

The consolidated financial statements have been approved by the Management Board. Our role is to express an opinion on these annual

financial statements based on our audit.These financial statements have been prepared for the first time in accordance with the IFRS framework

as adopted in the European Union. They comprise, by way of comparison, the data relating to the financial year 2004 restated in

accordance with the same rules with the exception of IAS 32 and IAS 39 which, in accordance with the option offered under IFRS 1, are

only applied by the Company as from 1 January 2005.

I. Opinion on the consolidated financial statementsWe conducted our audit in accordance with professional standards applicable in France. Those standards require that we plan and

perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement.

An audit includes examining, on a test basis, the evidence supporting the amounts and disclosures in the financial statements. An audit

also includes assessing the accounting principles used and significant estimates made by Management, as well as evaluating the overall

financial statements’ presentation. We believe that our audit provides a reasonable basis for the opinion expressed below.

In our opinion, the consolidated financial statements give a true and fair view of the financial position and assets and liabilities of the Group

as of December 31, 2005 and the results of its operations for the year then ended in accordance with the IFRS framework as adopted in

the European Union.

II. Justification of our assessmentsIn accordance with the requirements of Article L. 823-9 of the French Company Law (Code de Commerce) relating to the justification of

our assessments, we draw to your attention the following matters:

As specified in paragraph A-2.2 of the notes to the consolidated financial statements, the Management of Vallourec is required to make

estimates and assumptions that affect the amounts in the consolidated financial statements and accompanying notes. These assumptions

are, by nature, subject to uncertainties, and actual results could differ from these estimates. In the context of our audit of the consolidated

financial statements for the year ended 31 December 2005, we considered that, of those items that are subject to significant accounting

estimates, a justification of our assessments was required in the case of long-lived tangible and intangible assets, goodwill, provisions for

liabilities and charges, retirement benefit obligations and financial instruments:

■ The methods adopted in respect of the valuation of long-lived tangible and intangible assets and goodwill are described in

paragraphs A-2.6 to A-2.10 of the notes to the consolidated financial statements. We have assessed the information and assumptions

on which the estimates used by Management were based and have reviewed the calculations made by your Company as explained in

notes 1 and 2 to the consolidated financial statements.

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■ The principles adopted in respect of providing for liabilities and charges are described in paragraph A-2.12 of the notes to the

consolidated financial statements. We have assessed the bases on which such provisions were made and the information concerning

any significant contingencies of which the Company was aware at the year end, and reviewed the appropriateness of the information

disclosed in note 15 to the consolidated financial statements.

■ The principles adopted in respect of provisions for retirement obligations are described in paragraph A-2.13 of the notes to the consolidated

financial statements. These obligations have been measured by independent actuaries. We have examined the information used, assessed

the assumptions adopted and reviewed the appropriateness of the information disclosed in note 16 to the consolidated financial statements.

■ The principles adopted in respect of the recognition and presentation of financial instruments are described in paragraph A-2.16 of the

notes to the consolidated financial statements. We have assessed the documentation prepared by your Company justifying, in particular,

the classification of financial instruments, the hedging relationships as well as their effectiveness, and reviewed the appropriateness of

the information disclosed in note 8 o the consolidated financial statements.

On the basis of the above, we assessed whether these estimates were reasonable.

The assessments on these matters were performed in the context of our audit approach for the consolidated financial statements taken

as a whole, and therefore contributed to enable us to express an unqualified opinion in the first part of this report.

III. Specific procedures and disclosuresIn accordance with professional standards applicable in France, we have also verified the information given in the Group management report.

We have no matters to report regarding its fair presentation and conformity with the consolidated financial statements.




Ernst & Young



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8.3.4 Statutory Auditors’ report on the report of the Chairman of the Supervisory Boardon internal control procedures

STATUTORY AUDITORS’ REPORT, PREPARED IN ACCORDANCE WITH ARTICLE L.225-235 OF THE FRENCH COMPANY LAW

(CODE DE COMMERCE), ON THE REPORT PREPARED BY THE CHAIRMAN OF THE SUPERVISORY BOARD OF VALLOUREC, WITH

RESPECT TO THE INTERNAL CONTROL PROCEDURES RELATING TO THE PREPARATION AND TREATMENT OF THE FINANCIAL AND

ACCOUNTING INFORMATION.

This is a free translation into English of a report issued in the French language and is provided solely for the convenience of English speaking

readers. This report should be read in conjunction with, and construed in accordance with, French law and professional auditing

standards applicable in France.

To the Vallourec shareholders,

In our capacity as Statutory Auditors of Vallourec and in accordance with Article L. 225-235 of the French Company Law (Code de Commerce),

we hereby report to you on the report prepared by the Chairman of your Company in accordance with Article L. 225-68 of the French Company

Law (Code de Commerce) for the year ended 31 December 2005.

It is the Chairman’s responsibility to report, in his report, notably on the conditions of preparation and organization of the Supervisory Board’s

work and on the internal control procedures implemented in the Company.

It is our responsibility to report to you our observations on the information included in the Chairman’s report with respect to the internal

control procedures relating to the preparation and treatment of the financial and accounting information.

We have performed our work in accordance with the professional guidelines applicable in France. These guidelines require that we plan

and perform our procedures with a view to assessing whether the disclosures in the Chairman’s report on the internal control procedures

relating to the preparation and treatment of the financial and accounting information are true and fair.

These procedures include:

■ obtaining an understanding of the objectives and general organization of internal control, as well as the internal control procedures relating

to the preparation and treatment of financial and accounting information, as set out in the Chairman’s report;

■ obtaining an understanding of the work underlying the information thus set out in the report.

On the basis of the procedures we have performed, we have nothing to report with regard to the information concerning the internal control

procedures of the Company relating to the preparation and treatment of the financial and accounting information, as included in the report

of the Chairman of the Supervisory Board, prepared in accordance with the last paragraph of Article L. 225-68 of the French Company Law

(Code de Commerce).




Ernst & Young


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8.4 Supervisory Board report

Vallourec’s performance once again improved significantly in 2005:

consolidated sales rose by 42% to € 4,307 million, EBITDA rose by

133% to € 1,061 million and the EBITDA/Sales ratio reached a record

24.6%.

During 2005, the Group also achieved a major stage in its develop-

ment – the acquisition of full control of its subsidiary V & M TUBES.

Following this acquisition, Vallourec now has full control over the

company’s strategy.As already reported, this acquisition contributed

to the increase in net income, Group share, which more than tripled

to € 473 million, and would have reached € 577 million if the

additional 45% stake in V & M TUBES had been acquired on

1 January 2005.

The Supervisory Board congratulates the Management Board and,

via the Management Board, all Group employees for these truly

remarkable results, which illustrate the commitment and motivation

demonstrated throughout the Group.

The Supervisory Board has examined the Management Board’s

management report and the financial statements for the year ended

31 December 2005 as well as the various documents attached

thereto. The Supervisory Board considers that they accurately reflect

the position of the Company and of the Group and that no special

remarks are called for.

The Board has also reviewed the report of the Chairman of the

Supervisory Board on the conditions governing the preparation and

organization of the Supervisory Board’s work and the internal

control procedures implemented by the Company.

The Management Board proposes that you approve the payment of

a dividend of € 11.20 per share, up significantly on the dividend of

€ 3.20 per share paid last year, which was itself double the dividend

paid the year before. After taking into account the interim dividend

of € 4 per share already paid in October 2005, the balance of € 7.20

per share will be paid on 5 July 2006.When the financial statements

for the first half of 2006 are reviewed, consideration will be given

to the possibility of paying, during the second half of the year, an

interim dividend in respect of the financial year 2006.

One of the resolutions on which you will vote at the Annual General

Meeting asks you to approve the transactions referred to in the

Statutory Auditors’ report on certain related party transactions

entered into during 2005 or entered into in prior years and which

continue to apply in 2005. These transactions mainly relate to the

acquisition of the 45% stake in V & M TUBES from Salzgitter

Mannesmann. Three representatives from Salzgitter Mannesmann

sit on Vallourec’s Supervisory Board.

On 14 December 2005, Mr Kunibert Martin resigned from the

Supervisory Board due to his retirement. The Supervisory Board

would like to express its sincere thanks to Mr Martin for his

commitment to Vallourec, which began even before his appointment

to the Board in 2001 with his involvement in the initial studies

relating to the setting up of V & M TUBES in 1997. The Board

would also like to thank him for his contribution to the work of that

company, particularly as a member of the Finance Committee since

2002. The Board has appointed Mr Heinz Jörg Fuhrmann to replace

Mr Martin. Mr Fuhrmann has spent his entire career in the steel

industry and is a member of the Executive Board and CFO of

Salzgitter.

The appointments of Messrs Patrick Boissier, Wolfgang Eging,

Heinz Jörg Fuhrmann, Denis Gautier-Sauvagnac and Jean-Paul Parayre

as members of the Supervisory Board expire at the close of this

General Meeting. The Board proposes that you renew these

appointments for a period of five years expiring at the close of the

General Meeting called to approve the financial statements for the

financial year 2010.

The appointments of your Statutory Auditors have also expired.

Following a selection process supervised by the Finance Committee

of the Supervisory Board, the latter has decided to propose that you

renew the appointment of Deloitte & Associés (until now represented

by the firm Calan, Ramolino et Associés) and appoint KPMG SA as

new Statutory Auditors.

Finally, you are asked to renew the annual share buy-back

authorization. The terms of the authorization are in line with those

normally governing such authorizations.

The other resolutions you are asked to approve do not call for

particular comment and we invite you to approve them.

The Supervisory Board has also reviewed the resolutions presented

to the Extraordinary General Meeting called at the close of this Annual

General Meeting as well as the content of the Management Board’s

report to that Meeting. Although the Supervisory Board is not

required to report on any of the matters covered by the resolutions,

we confirm that we have examined the resolutions extremely

carefully and we invite you to approve them.


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8.5 Resolutions Ordinary General Meeting of 1 June 2006

FIRST RESOLUTION (Approval of the Statutory

Auditors’ special report on certain related party transactions)

The General Meeting, ruling under the conditions of quorum and

majority required for Ordinary General Meetings, having heard the

special report of the Auditors in respect of the agreements subject

to Article L. 225-86 of the French Code de Commerce, approves the

operations stated in that report and records, where relevant, the

continuation of agreements authorized previously during the year

under review.

SECOND RESOLUTION (Approval of the Company

financial statements and the management report of the

Management Board)



reports of the Management Board, the report of the Chairman of the

Supervisory Board on internal control, the report of the Supervisory

Board and the general report of the Auditors for the financial year

ended 31 December 2005, hereby approves the management report

of the Management Board and the Company financial statements

for the financial year 2005 as presented, which show net income of

€ 14,144,934.26.

THIRD RESOLUTION (Approval of consolidated financial statements)



reports of the Management Board, the Supervisory Board and the

Auditors, approves the consolidated financial statements for the year

ended 31 December 2005 as presented to it, which show net

income of € 632,389 thousand.

FOURTH RESOLUTION (Allocation of net income)


majority required for Ordinary General Meetings, hereby approves

the allocation of net income recommended by the Management

Board.

In so doing, it resolves to appropriate from the net income for the

financial year an amount of € 1,460,752 to the legal reserve and to

appropriate the balance of € 12,684,182.26, increased by the amount

of € 106,039,536.14, € 101,916,198.73 of which was deducted from

retained earnings and € 4,123,337.41 of which was deducted from

general reserves, to give a total of € 118,723,718.40, to the distribution

of dividends.

Shareholders are reminded that, at its meeting on 14 September 2005,

the Management Board had already decided to distribute an interim

dividend of € 4 per share (giving a total payment of € 41,322,332).

This interim dividend was paid on 12 October 2005.

Accordingly, the balance of € 7.20 shall be paid to each of the

10,600,332 shares representing the share capital at 31 December 2005,

corresponding to a total dividend paid to each share in respect of the

financial year 2005 of € 11.20.

The Meeting stipulates that the Company shall not receive any

dividend in respect of any of its own shares that it may hold on the

ex-dividend date. The corresponding amount shall be appropriated

to retained earnings. Accordingly, the Meeting authorizes the

Management Board, if necessary, to amend the final amount of

dividends actually distributed and the final amount appropriated to

retained earnings.

The dividend will be paid on 5 July 2006.

In accordance with the provisions of Article 158.3 (2°) of the French

General Tax Code (Code Général des Impôts), this dividend is

eligible for the 40% deduction designed to compensate individuals

domiciled in France for tax purposes for the abolition of the tax credit.

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The General Meeting notes that the dividends granted for the preceding three financial years were as follows:

Financial year Number Net dividend Tax credit Total income of shares per share per share per share

(in €) (in €) (in €)

2002 9,730,226 2.10 1.05 (50%) 3.15

2003 9,730,226 1.60 0.80 (50%) 2.40

2004 9,869,956 3.20 None 3.20

FIFTH RESOLUTION (Ratification of the appointment

of Mr Heinz Jörg Fuhrmann as a member of the Supervisory Board,

to replace Mr Kunibert Martin, who has resigned)


majority required for Ordinary General Meetings, ratifies, in

accordance with Article L. 225-78 of the French Code de Commerce,

the provisional appointment as a member of the Supervisory Board

of Mr Heinz Jörg Fuhrmann at the Supervisory Board meeting on 14

December 2005, to replace Mr Kunibert Martin, who resigned, for

the remainder of Mr Martin’s term of office, that is until the close of

this Ordinary General Meeting.

SIXTH RESOLUTION (Renewal of the term of office

of a member of the Supervisory Board, said term of office

having expired)


majority required for Ordinary General Meetings, resolves to renew

the appointment as a member of the Supervisory Board of Mr

Patrick Boissier for a term of five (5) years expiring at the end of the

Ordinary General Meeting called to approve the financial statements

for the year ended 31 December 2010.

SEVENTH RESOLUTION (Renewal of the term

of office of a member of the Supervisory Board, said term

of office having expired)



the appointment as a member of the Supervisory Board of Mr

Wolfgang Eging for a term of five (5) years expiring at the end of the



EIGHTH RESOLUTION (Renewal of the term of office


having expired)



the appointment as a member of the Supervisory Board of Mr Heinz

Jörg Fuhrmann for a term of five (5) years expiring at the end of the



NINTH RESOLUTION (Renewal of the term of office


having expired)



the appointment as a member of the Supervisory Board of Mr Denis

Gautier-Sauvagnac for a term of five (5) years expiring at the end of

the Ordinary General Meeting called to approve the financial

statements for the year ended 31 December 2010.

TENTH RESOLUTION (Renewal of the term of office


having expired)



the appointment as a member of the Supervisory Board of Mr Jean-

Paul Parayre for a term of five (5) years expiring at the end of the




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ELEVENTH RESOLUTION (Appointment of new

Statutory Auditors)


majority required for Ordinary General Meetings, notes the expiry of

the term of office as Statutory Auditors of the Company Barbier

Frinault & Autres and resolves not to renew its appointment.

The General Meeting, on the recommendation of the Supervisory

Board, resolves to appoint KPMG, domiciled at 1 Cours Valmy,

92923 Paris La Défense Cedex, as Statutory Auditors for a term of

six (6) financial years until the Ordinary General Meeting called to

approve the financial statements for the year ended 31 December

2011.

TWELFTH RESOLUTION (Appointment of new

Statutory Auditors)



the term of office as Statutory Auditors of the Firm Calan, Ramolino

et Associés and resolves not to renew its appointment.


Board, resolves to appoint Deloitte & Associés whose registered office

is at 185, avenue Charles de Gaulle, 92524 Neuilly Sur Seine, as

Statutory Auditors for a term of six (6) financial years until the



THIRTEENTH RESOLUTION (Appointment of new

Alternative Auditors)



the term of office as Alternative Auditor of Mr Jean-Marc Besnier and

resolves not to renew his appointment.


Board, resolves to appoint SCP Jean-Claude André & Autres, domiciled

at Les hauts de Villiers, 2 bis rue de Villiers, 92300 Levallois-Perret,

as Alternative Auditors to KPMG for a term of six (6) financial years

until the Ordinary General Meeting called to approve the financial

statements for the year ended 31 December 2011.

FOURTEENTH RESOLUTION (Renewal of the term

of office of Alternative Auditors)



the term of office as Alternative Auditors of BEAS Sarl and resolves

to renew its appointment as Alternative Auditors to Deloitte & Associés

for a term of six (6) financial years until the Ordinary General

Meeting called to approve the financial statements for the year ended

31 December 2011.

FIFTEENTH RESOLUTION (Modification

of attendance fees)


majority required for Ordinary General Meetings, fixes at € 400,000

the total maximum annual amount of attendance fees that may be

granted to members of the Supervisory Board for the financial year

2006 and each subsequent financial year until decided otherwise.

SIXTEENTH RESOLUTION (Authorization of share

buy-back programme)



reports of the Management Board and Supervisory Board, authorizes

the Management Board, in accordance with Articles L. 225-209 et

seq. of the French Code de Commerce and the conditions laid down

in Articles 241-1 to 241-8 of the general regulation of the Autorité

des Marchés Financiers and European Regulation no. 2273/2003

of 22 December 2003 implementing EC Directive 2003/6/EC of

28 January 2003, to purchase the Company’s shares with a view to:

■ their attribution or sale (i) in accordance with the provisions of

Articles L. 225-179 et seq. of the French Code de Commerce, or

(ii) within the context of a share ownership plan or company

savings plan, or (iii) in accordance with the provisions of Articles

L. 225-197-1 et seq. of the French Code de Commerce, or

■ an investment services provider stimulating the market for or

liquidity of the shares by means of a liquidity contract in accordance

with the code of business ethics recognized by the Autorité des

Marchés Financiers, or

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■ their subsequent use by way of exchange, payment or other use

in connection with any acquisition transaction, or

■ their use in connection with the exercise of rights attached to

transferable securities giving the right via the redemption,

conversion, exchange, presentation of a warrant or in any other

way to the attribution of shares in the Company, or

■ their cancellation, subject to a further authorization being given

by an Extraordinary General Meeting called and held subsequent

to this day,

■ implementing any market practice authorized by the Autorité

des Marchés Financiers, and more generally carrying out any

other transaction allowed by the prevailing legislation.

Purchases of Company shares may apply to a number of shares such

that the number of shares held by the Company subsequent to such

purchases does not exceed 10% of the Company’s share capital. Such

percentage shall apply to the share capital as adjusted for any

transactions that may affect the share capital subsequent to this

General Meeting.

The purchase, disposal, exchange or transfer of shares may be

carried out by the Management Board on one or more occasions, at

the times the Board considers appropriate, by any means on the stock

exchange or over-the-counter and notably through any intervention

on or off the market, public purchase or exchange offer, or the

purchase of blocks of shares, including through the use of financial

derivatives. The full amount of the repurchase programme may be

acquired, ceded, exchanged or transferred by means of blocks of

shares. Purchase, disposal, exchange or transfer transactions may take

place during the period of a public offering subject to the limits

authorized by the prevailing legal and regulatory requirements and

subject to the provisions of Article 631-6 of the general regulation

of the Autorité des Marchés Financiers relating to “black-out periods”.

The maximum purchase price of each share is set at the value of the

share at the close of the last stock exchange trading session

preceding this General Meeting, increased by 50%.

The General Meeting invests all power in the Management Board

to adjust the aforementioned purchase price in order to take account

of the impact of any financial transactions on the value of the

shares. In particular, in the event of any transactions in the Company’s

share capital, notably in the event of a stock split or reverse stock

split, a capital increase by means of the capitalization of reserves and

the attribution of bonus shares, the aforementioned prices shall be

multiplied by a coefficient equal to the ratio between the number of

shares comprising the share capital before the transaction and the

number after the transaction.

The General Meeting also resolves that, in the event of a public offer

for the Company’s shares to be settled entirely in cash, the Company

may continue to implement its share buy-back programme.

The maximum amount of funds earmarked for the share buy-back

programme is € 750 million.

The General Meeting invests all power in the Management Board

to carry out these operations and to decide on and implement this

authorization and, in particular, to place any stock exchange orders,

conclude any agreements, notably concerning the keeping of registers

of purchases and sales of shares, make any declarations to the

Autorité des Marchés Financiers or any other body and effect the

adjustment provided for under the prevailing regulations in the

event of the purchase of shares at a price higher than the stock

exchange price.

The Management Board is expressly authorized to delegate to its

Chairman, with the latter having the option to sub-delegate to a

person of his choice, the execution of decisions taken by the

Management Board in connection with this authorization.

This authorization is granted for a period of eighteen months from

today.

It cancels and replaces the authorization given by the Ordinary and

Extraordinary General Meeting held on 7 June 2005.


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8.6

Subs

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and

parti

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inte

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at 3

1 De

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in €

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8.7 Companies controlled directly or indirectly as at 31 December 2005 (Law L. 233-3 of the Code de Commerce)

I - Direct controlling interest:

Name % held Name % held

■ ASSURVAL 99.00■ SETVAL 100.00 ■ FINALOUREC (Luxembourg) 99.99■ VALSEPT 100.00 ■ VALLOUREC Inc. (USA) 100.00■ VALLOUREC & MANNESMANN TUBES 100.00 ■ VALLOUREC TUBES CANADA (Canada) 100.00■ ValTubes 100.00

II - Indirect controlling interest, through:

Name % held Name % held

ValTubes VALLOUREC & MANNESMANN TUBES■ CEREC 100.00 ■ OMSCO (USA) (via VALLOUREC & MANNESMANN HOLDING Inc.) 100.00■ ESCOFIER TECHNOLOGIE 100.00 ■ PEISA (Mexico) 100.00■ INTERFIT 100.00 ■ PRINVER (Mexico) 100.00■ METALS PROCESS SYSTEMS 99.70 ■ VALLOUREC INDUSTRIES Inc. (USA)■ SIDRO ROHRBOGEN GmbH (Germany) 100.00 (via VALLOUREC & MANNESMANN HOLDING Inc.) 100.00■ SOPRENEUF 100.00 ■ VALLOUREC ITALIANA Srl 50.00■ SPECITUBES 100.00 (other subsidiaries hold the remainder)■ VALINOX NUCLEAIRE 100.00 ■ VALLOUREC MANNESMANN OIL & GAS FRANCE 99.36■ VALLOUREC BENELUX (Belgium) 99.96 ■ VALLOUREC MANNESMANN OIL & GAS GERMANY GmbH■ VALLOUREC GmbH (Germany) 100.00 (Germany) (via V & M DEUTSCHLAND GmbH) 100.00■ VALLOUREC NORDEN (Sweden) 100.00 ■ VALLOUREC MANNESMANN OIL & GAS UK Ltd (GB) 99.37■ VALLOUREC COMPOSANTS ■ VALLOUREC & MANNESMANN HOLDING Inc. (USA) 100.00AUTOMOBILES HAUTMONT 100.00 ■ VALLOUREC & MANNESMANN TUBES CORP. (USA)

■ VALLOUREC COMPOSANTS (via VALLOUREC & MANNESMANN HOLDING Inc.) 100.00AUTOMOBILES VITRY 100.00 ■ V & M CHANGZHOU Co. Ltd (China) 100.00

■ VALLOUREC PRECISION ETIRAGE 100.00 ■ V & M do BRASIL SA (Brazil) 99.41■ VALLOUREC PRECISION SOUDAGE 100.00 ■ V & M FRANCE (other subsidiaries hold the remainder) 99.00■ VALLOUREC UK Ltd (GB) 100.00 ■ V & M DEUTSCHLAND GmbH (Germany) 100.00■ VALTI 100.00 ■ V & M SERVICES 100.00■ VALTIMET 51.30 ■ V & M ONE Sarl (via V & M SERVICES) 100.00

■ V & M STAR (via V & M ONE) 80.53■ VAM FAR EAST Pte Ltd (Singapore) 51.00■ VAM PREMIUM CONNECTIONS Inc. (Canada) 100.00■ VAM PTS (USA) (via Vallourec Industries Inc.) 51.00

VALINOX NUCLEAIRE■ VALINOX NUCLEAR (USA) 100.00

VALTIMET V & M do BRASIL SA■ VALINOX ASIA (via VALTIMET) 65.83 ■ V & M FLORESTAL Ltda 100.00■ VALTIMET Inc. (USA) (via VALTIMET) 100.00 ■ V & M MINERAÇÃO Ltda 100.00

VALINOX ASIA■ CHANGZHOU VALINOX GREAT WALL (China) 100.00

VALTI■ VALTI GmbH (Germany) 100.00

NONE OF THE ABOVE COMPANIES DIRECTLY HELD ANY OF ITS OWN SHARES AT 31 DECEMBER 2005


8.8 Evaluation of securities portfolio as at 31 December 2005

Name of company Number of securities and nominal value Carrying amount in € thousand

I - SHARES AND UNITS

a) French participating interests

Setval 399,998 units of € 15 6,098

ValTubes 6,688,181 shares of € 15 216,323

Valsept 2,500 shares of € 15 32

VALLOUREC & MANNESMANN TUBES 31,599,402 shares of € 15 833,982

b) Foreign participating interests

Finalourec 47,995 shares of € 4.58 39

Vallourec Tubes Canada 100,000 shares of no par value 604

Vallourec Inc. 1,000 shares of USD 50 298

c) Other participating interests

Assurval 495 units of € 20 8

Alberto Roca Deu SL 40 shares of € 6.01 -

II - BONDS AND SIMILAR SECURITIES none

Total 1,057,384


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8.9 Five-year financial summary in euros

2001 2002 2003 2004 2005

CAPITAL

Share capital 194,604,520 194,604,520 194,604,520 197,399,120 212,006,640

Number of ordinary shares in issue 9,730,226 9,730,226 9,730,226 9,869,956 10,600,332

Number of preference dividend shares (without voting rights) in issue

Maximum number of new shares to be issued:

- by conversion of bonds

- by exercise of subscription rights 178,500 172,250 171,750 32,020 8,174

- by redemption of bonds

OPERATIONS AND RESULTS FOR THE YEAR

Sales excluding tax - - - - -

Income (loss) before tax, employee profit sharing,amortization, depreciation and provisions 29,404,736 25,555,607 71,129,582 -58,687,367 -11,515,957

Income tax -2,026,370 -12,983,543 -3,192,803 -5,827,453 -10,031,246

Employee profit sharing in respect of the year

Income (loss) after tax, employee profit sharing,amortization, depreciation and provisions 39,457,204 19,058,711 56,780,396 30,064,061 14,144,934

Dividends distributed 20,433,473 20,433,475 15,568,362 31,583,859 118,723,718

PER SHARE DATA

Income (loss) after tax and employee profit sharing,but before amortization, depreciation and provisions 3.23 3.96 7.64 -5.36 -0.14

Income (loss) after tax, employee profit sharing,amortization, depreciation and provisions 4.06 1.96 5.84 3.05 1.33

Dividend allotted to each share 2.10 2.10 1.60 3.20 11.20

EMPLOYEES

Average number of employees during the financial year 4 6 5 5 5

Payroll for the financial year 452,178 422,011 530,257 594,460 573,987

Payroll-related costs (social security, employee benefits, etc.) 149,523 155,074 217,987 188,462 214,024


ANNUAL INFORMATION DOCUMENTArticle 221-1-1 of the general regulations of the French financial markets authority (Autorité des Marchés Financiers - AMF)

This document contains or refers to all the information published or made public by the issuer during the last 12 months

in order to comply with the legal and regulatory obligations in force during the period 1 January 2005 to 26 April 2006.

Year ended 31 December 2005

Publications in the BALO2006 Q1 consolidated sales http://balo.journal-officiel.gouv.fr 28/04/2006 Bulletin 51 Item 4925

Notice of Extraordinary General Meeting of 1 June 2006 http://balo.journal-officiel.gouv.fr 21/04/2006 Bulletin 48 Item 604324

Notice of Annual General Meeting of 1 June 2006 http://balo.journal-officiel.gouv.fr 21/04/2006 Bulletin 48 Item 604325

2005 Q4 consolidated sales (FY 2005) http://balo.journal-officiel.gouv.fr 03/02/2006 Bulletin 15 Item 298

Voting rights http://balo.journal-officiel.gouv.fr 25/01/2006 Bulletin 11 Item 8665


2005 Q3 consolidated sales http://balo.journal-officiel.gouv.fr 28/10/2005 Bulletin 129 Item 99216

2005 first half financial statements http://balo.journal-officiel.gouv.fr 12/10/2005 Bulletin 122 Item 98340

Approval of 2004 financial statements of the subsidiary V & M TUBES http://balo.journal-officiel.gouv.fr 12/09/2005 Bulletin 109 Item 96992

Approval of 2004 financial statements of the subsidiary ValTubes http://balo.journal-officiel.gouv.fr 12/09/2005 Bulletin 109 Item 96992




Approval of 2004 financial statements of the subsidiary Setval http://balo.journal-officiel.gouv.fr 20/06/2005 Bulletin 73 Item 91502

Approval of the 2004 financial statements and Statutory Auditors’ report http://balo.journal-officiel.gouv.fr 20/06/2005 Bulletin 73 Item 91435

Notice to shareholders – Capital increase (notice) http://balo.journal-officiel.gouv.fr 17/06/2005 Bulletin 72 Item 91385

Notice of Annual and Extraordinary General Meeting of 7 June 2005 http://balo.journal-officiel.gouv.fr 04/05/2005 Bulletin 53 Item 87328

2004 Company and consolidated financial statements http://balo.journal-officiel.gouv.fr 29/04/2005 Bulletin 51 Item 86076


Invitation to Extraordinary General Meeting of 25 February 2005 http://balo.journal-officiel.gouv.fr 09/02/2005 Bulletin 17 Item 81949

2004 Q4 consolidated sales (FY 2004) http://balo.journal-officiel.gouv.fr 02/02/2005 Bulletin 14 Item 81594

Notice of Extraordinary General Meeting of 25 February 2005 http://balo.journal-officiel.gouv.fr 26/01/2005 Bulletin 11 Item 81274


Publications in the Registry of the commercial court of NanterreDeeds in respect of the amendment of the share capital and By-laws(31/12/2005) http://www.infogreffe.fr 16/02/2006 File no. 5250

Deeds in respect of the change in the members of the Supervisory Board(14/12/2005) http://www.infogreffe.fr 16/02/2006 File no. 5249

Filing of 2004 Company and consolidated financial statements http://www.infogreffe.fr 11/07/2005 File no. 11983/11981

Deeds in respect of the amendment of the share capital and By-laws(13/07/2005) http://www.infogreffe.fr 02/11/2005 File no. 30164


Deeds in respect of the change in the members of the Supervisory Board(08/03/2005) http://www.infogreffe.fr 26/05/2005 File no. 14152



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Publications in the journals of legal noticesCapital increase of 31/12/2005 – appointment of a Director Affiches Parisiennes / La Vie Judiciaire 18/01/2006 No. 7 No. 8320

Capital increase of 13 July 2005 Affiches Parisiennes / La Vie Judiciaire 18/10/2005 No. 114 No. 2087

Approval of 2004 financial statements of the subsidiary V & M TUBES Affiches Parisiennes / La Vie Judiciaire 07/09/2005 No. 8283

Approval of 2004 financial statements of the subsidiary ValTubes Affiches Parisiennes / La Vie Judiciaire 07/09/2005 No. 8282

Notice of allocation of new shares subscribed in excess of shares allocatedin accordance with preferential subscription rights Petites Affiches/La Loi 13/07/2005 No. 138 No. 029140

Capital increase of 15/06/2005 Affiches Parisiennes / La Vie Judiciaire 28/06/2005 No. 72 No. 35987

Approval of 2004 financial statements of the subsidiary Setval Affiches Parisiennes / La Vie Judiciaire 15/06/2005 No. 3114

Invitation to Ordinary and Extraordinary General Meeting of 7 June 2005 Affiches Parisiennes / La Vie Judiciaire 23/05/2005 No. 1710

Invitation to Extraordinary General Meeting of 25 February 2005 Affiches Parisiennes / La Vie Judiciaire 09/02/2005 No. 4133

Capital increase of 31/12/2004 Affiches Parisiennes / La Vie Judiciaire 12/01/2005 No. 2317

Reference Document, financial transactions, AMF releasesCrossing of threshold 02/02/2006 http://www.amf-france.org 08/02/2006 No. 206C0256

Crossing of threshold 12/01/2006 http://www.amf-france.org 20/01/2006 No. 206C0126

Crossing of threshold 04/01/2006 and 06/01/2006 http://www.amf-france.org 12/01/2006 No. 206C0075

Declaration of intent following crossing of threshold 20/12/2005 http://www.amf-france.org 06/01/2006 No. 206C0038




Crossing of threshold 03/08/2005 and 05/08/2005 http://www.amf-france.org 11/08/2005 No. 205C1401

Issue and admission: Capital increase June 2005 (information notice) http://www.amf-france.org 15/06/2005 AMF authorizationno. 05-0556

Les Echos 20/06/2005 Page 44

Share buy-back programme http://www.amf-france.org 16/05/2005 AMF authorizationhttp://www.vallourec.com no. 05-0396http//www.euronext.comLes Echos 23/05/2005 Pages 47 & 48

Reference Document for the year ended 31 December 2004 http://www.amf-france.org 20/04/2005 No. D05-0497http://www.vallourec.com

Management reports, Statutory Auditors’ reports, report of the Chairman http://www.amf-france.org 20/04/2005 No. D05-0497on procedures etc. (see Reference Document) http://www.vallourec.com

Financial communications 2006 Q1 sales http://www.amf-france.org 26/04/2006

http://www.vallourec.comhttp//www.euronext.com

Notice of Extraordinary General Meeting of 1 June 2006 http://www.amf-france.org 14/04/2006http://www.vallourec.comhttp//www.euronext.com

Notice of Ordinary General Meeting of 1 June 2006 http://www.amf-france.org 14/04/2006http://www.vallourec.comhttp//www.euronext.com

Declarations of securities transactions by the management 17/03/2006 http://www.amf-france.org 04/04/2006


Statutory Auditors’ remuneration for the 2005 financial year http://www.amf-france.org 24/03/2006http://www.vallourec.com


2005 annual results http://www.amf-france.org 08/03/2006http://www.vallourec.comhttp//www.euronext.com


Financial communications (continued)


2005 Q4 sales (FY 2005) http://www.amf-france.org 01/02/2006http://www.vallourec.comhttp//www.euronext.com



2005 Q3 sales http://www.amf-france.org 27/10/2005http://www.vallourec.com


2005 first half results http://www.amf-france.org 15/09/2005http://www.vallourec.com



Declarations of securities transactions by the management 20/06/2005 and 01/07/2005 http://www.amf-france.org 13/07/2005

Capital increase http://www.amf-france.org 16/06/2005http://www.vallourec.com

Invitation to Ordinary and Extraordinary General Meeting of 7 June 2005 http://www.amf-france.org 20/05/2005http://www.vallourec.com

Notice of Ordinary and Extraordinary General Meeting of 7 June 2005 http://www.amf-france.org 03/05/2005http://www.vallourec.comhttp//www.euronext.com


2004 annual results http://www.amf-france.org 09/03/2005http://www.vallourec.com

Invitation to Ordinary and Extraordinary General Meeting http://www.amf-france.org 09/02/2005of 25 February 2005 http://www.vallourec.com

2004 Q4 sales (FY 2004) http://www.amf-france.org 02/02/2005http://www.vallourec.comhttp//www.euronext.com

Notice of Ordinary and Extraordinary General Meeting of 25 February 2005 http://www.amf-france.org 25/01/2005http://www.vallourec.comhttp//www.euronext.com

Securities transactions by the management second half 2004 http://www.amf-france.org 20/01/2005

Securities transactions by the management first half 2004 http://www.amf-france.org 20/01/2005

Other publicationsAcquisition of CST in India http://www.amf-france.org 07/04/2006

http://www.vallourec.com

Vallourec sells Spécitubes http://www.amf-france.org 03/04/2006http://www.vallourec.com

Completion of SMFI acquisition http://www.amf-france.org 22/03/2006http://www.vallourec.com

Slide presentation: 2005 results http://www.vallourec.com 08/03/2006

Financial notice: 2005 results Les Echos 08/03/2006- in German Rheinische Post (Germany) 09/03/2006

Le Revenu Hebdo 10/03/2006Investir Hebdo 11/03/2006

Acquisition of SMFI http://www.amf-france.org 30/01/2006http://www.vallourec.com

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Other publications (continued)

2006 Financial calendar http//www.euronext.comhttp://www.vallourec.com

Completion of acquisition of OMSCO http://www.amf-france.org 30/09/2005http://www.vallourec.com

Slide presentation: 2005 first half results http://www.vallourec.com 15/09/2005

Financial notice: 2005 first half results Les Echos 15/09/2005La Vie Financière 16/09/2005Investir Hebdo 17/09/2005

Acquisition of OMSCO’s assets (press release) http://www.amf-france.org 30/08/2005- press release and slide presentation http://www.vallourec.com

Success of € 125 million rights offering http://www.amf-france.org 13/07/2005http://www.vallourec.com

Completion of acquisition of full control of V & M TUBES http://www.amf-france.org 23/06/2005http://www.vallourec.com

General Meeting of 7 June 2005: forecast 2005 margin,plant in China (press release) http://www.amf-france.org 07/06/2005- press release and slide presentation http://www.vallourec.com

2004 dividend http://www.amf-france.org 19/04/2005http://www.vallourec.com

Slide presentation: 2004 results http://www.vallourec.com 09/03/2005

Financial notice: 2004 results Les Echos 09/03/2005La Vie Financière 11/03/2005

- in German Rheinische Post (Germany) 11/03/2005Investir Hebdo 12/03/2005

Vallourec signs Memorandum of Understanding with Salzgitterto acquire full control of V & M TUBES (press release) http://www.amf-france.org 21/01/2005- press release http//www.euronext.com- press release and slide presentation http://www.vallourec.com

Financial notice: Acquisition of full control of V & M TUBES Les Echos 24/01/2005La Vie Financière 28/01/2005Investir Hebdo 29/01/2005

2005 financial calendar http//www.euronext.com


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CROSS REFERENCES BETWEEN THE VALLOUREC REFERENCE DOCUMENTAND APPENDIX 1 OF THE EUROPEAN PROSPECTUS REGULATIONS

Appendix I of the European Prospectus Regulations Vallourec Reference Document

1. PERSONS RESPONSIBLE

1.1 Persons responsible for the information 1.1

1.2 Declaration by those responsible 1.2

2. STATUTORY AUDITORS 1.3

3. SELECTED FINANCIAL INFORMATION Sections 4, 5 and 8.1

4. RISK FACTORS 4.7

5. INFORMATION ABOUT THE ISSUER

5.1 History and development of the issuer 3.1 and 4.1.0

5.2 Investments 4.4.1

6. BUSINESS OVERVIEW 4.1.1 to 4.1.6

7. ORGANIZATIONAL STRUCTURE 3.3.4 and 4.1

8. PROPERTY, PLANTS AND EQUIPMENT 4.1.1

9. OPERATING AND FINANCIAL REVIEW 8.1

10. CAPITAL RESOURCES Section 5

11. RESEARCH AND DEVELOPMENT, PATENTS AND LICENCES 4.4.0 and 8.1.1

12. TREND INFORMATION Section 7

13. PROFIT FORECASTS OR ESTIMATES Section 7

14. ADMINISTRATIVE, MANAGEMENT AND SUPERVISORY BODIES AND SENIOR MANAGEMENT 6.1 and 6.2

15. REMUNERATION AND BENEFITS 6.2 and 8.1.1

16. BOARD PRACTICES 6.1 and 8.2

17. EMPLOYEES 4.3, 6.3 and 8.1

18. MAJOR SHAREHOLDERS 3.3 and 8.1.1

19. RELATED PARTY TRANSACTIONS Section 5 (note 18)

20. FINANCIAL INFORMATION CONCERNING THE ISSUER’S ASSETS AND LIABILITIES, Section 5FINANCIAL POSITION AND PROFITS AND LOSSES

21. ADDITIONAL INFORMATION 3.2

22. MATERIAL CONTRACTS N/A

23. THIRD PARTY INFORMATION AND STATEMENT BY EXPERTS AND DECLARATIONS OF ANY INTEREST N/A

24. DOCUMENTS ON DISPLAY 3.1.6

25. INFORMATION ON HOLDINGS 8.6, 8.7 and 8.8

An

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Annual Report

2005

Société Anonyme à Directoire

et à Conseil de Surveillance

Capital: 212 006 640 €

Registered Office: 130, rue de Silly

92100 Boulogne-Billancourt (France)

552 142 200 RCS Nanterre

Tel.: +33 (0)1 49 09 38 24

Fax: +33 (0)1 49 09 36 94

Internet: www.vallourec.com Dire

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