Notes to the Income Statement

(1) Sales

in T€	FY 2005	FY 2004
Breakdown according to product categories
Flat rolled products	3,378,866	3,012,553
Sections	793,251	794,175
Pipes	1,908,016	1,283,921
Other	1,071,446	850,873
	7,151,579	5,941,522
Breakdown according to regions
Domestic	3,214,496	2,819,171
Other EU	1,680,663	1,454,141
Other Europe	289,073	236,433
America	691,732	587,893
Other	1,275,615	843,884
	7,151,579	5,941,522

The breakdown of sales includes an additional presentation by product category which does not correspond to the reporting by segment.

(2) Increase or Decrease in Finished Goods and Work in Progress and Other own Work Capitalized

in T€	FY 2005	FY 2004
Changes in the inventory of finished goods and work in progress	156,558	37,501
Own work capitalized	3,360	4,057
	159,918	41,558

Changes in inventories include effects from the discontinuation of the Lifo method pursuant to IAS 2 amounting to € 43.8 million (2004: € 34.6 million). By the reporting date, moreover, higher inventories from the Tubes Division had to be included in the balance sheet for accounting reasons.

(3) Other Operating Earnings

in T€	FY 2005	FY 2004
Income from disposal of fixed assets	172,812	16,747
Reversal of provisions and allowances	59,357	30,108
Income from the valuation of financial derivates and foreign currency positions	45,460	26,766
Income from changes in exchange rates	4,222	5,515
Ancillary operating income	11,348	8,802
Income from amortized receivables	6,369	9,226
Rental, leasing and licensing income	3,855	3,656
Subsidies	2,480	2,299
Insurance compensation	2,123	7,878
Charged-on costs	1,676	3,925
Refunds from previous years	1,385	2,077
Amortization of negative goodwill from capital consolidation	−	60,429
Other income	21,711	27,200
Other operating earnings	332,798	204,628

In the course of the fourth quarter of 2005, 575,000 shares in Vallourec S.A., Boulogne-Billancourt, were gradually sold, reducing the shareholding in the company from 22.65% to 17.17%. The sale resulted in a book profit of € 163 million.

Other operating earnings include earnings unrelated to the accounting period totaling € 53 million (2004: € 51 million) that consisted mainly of income from the disposal of assets, the liquidation of provisions for non-recurring obligations, insurance compensation payments and reimbursements of costs for previous years.

(4) Cost of Materials

in T€	FY 2005	FY 2004
Cost of raw materials, consumables, supplies and purchased goods	4,667,384	3,745,181
Cost of purchased services	198,809	261,362
Cost of materials	4,866,193	4,006,543

The cost of raw materials, consumables and supplies relates primarily to expenses for materials used, consumables and supplies, spare parts and plant equipment.

The cost of purchased services refers essentially to sales-related contract processing and intra-company transport costs.

As far as the cost of materials was concerned, the discontinuation of the Lifo method pursuant to IAS 2 had a positive effect of € 46.1 million (2004: € 0.4 million). The remainder of the increase can be attributed mainly to increases in the cost of raw materials and energy.

(5) Personnel Expenses

in T€	FY 2005	FY 2004
Wages and salaries	809,335	745,704
Social security, pension and other benefits	184,704	180,230
of which pension commitments	[85,281]	[78,810]
Personnel expenses	994,039	925,934

In the financial year 2005, the defined contribution plan payments in the Salzgitter Group totaled € 72.8 million (2004: € 68.4 million). Allocations to the pension provisions amounting to € 12.5 million (2004: € 10.4 million) are reported as costs for defined benefit plans. The allocations to provisions include only ongoing pension costs for employees' earned pension expectancies in the reporting year. The costs for retirement pensions do not include the compounding of the pension provisions that are shown in the financial result.

Average number of employees (excl. employees in non-active age-related part-time employment)	FY 2005	FY 2004
Wage labor	11,414	11,520
Salaried employees	5,770	5,801
Group core workforce	17,184	17,321

(6) Amortization and Depreciation

The amortization of intangible assets and the depreciation of tangible fixed assets were carried out according to schedule in the reporting year and are shown in the consolidated fixed assets. The following expenses resulting from diminutions in value (write-downs) were also taken into account:

in T€	FY 2005	FY 2004
Intangible assets	1	407
Land, similar rights and buildings, including buildings on land owned by others	2,512	3,695
Plant equipment and machinery	2,842	97,869
Other equipment, factory and office equipment/ equipment under construction	3,704	8,026
Write-downs	9,059	109,997

The value diminution expenses are calculated in accordance with the provisions of IAS 36. They were amortized on the basis of value in use or the higher net realizable value.

An impairment test is carried out at least once a year for goodwill and intangible assets with indeterminate useful lives. In the case of other intangible assets with limited useful lives, however, such a test is carried out only on specific grounds. In the Salzgitter Group, the value of goodwill and intangible assets with indeterminate useful lives is basically determined by their value in use. This calculation is based on the current plans prepared by the management for the years 2006 to 2008. The premises of the plans are derived from the current state of knowledge. The value in use is calculated using the discounted cash flow method based on an interest rate spread of 6.6 to 8.0% p.a. This led to value diminution expenses of € 9.1 million (2004: 110.0 million).

(7) Other Operating Expenses

in T€	FY 2005	FY 2004
External services including provisioning	253,328	216,534
Selling expenses	226,495	220,261
Administrative expenses including insurance costs, fees, charges	67,507	70,071
Income from the valuation of financial derivatives and foreign currency positions	46,018	25,581
Loss from disposal of assets	30,948	8,351
Advertising/Information and travel expenses	22,708	21,492
Rents and leases	18,368	21,145
EDP costs	12,448	13,035
Other welfare-related personnel and non-personnel expenses	11,027	11,308
Allowances for doubtful accounts	8,534	21,646
Exchange losses	7,968	6,097
Financial/Monetary transfer expenses	7,097	5,733
Loss on the disposal of current assets	198	7,030
Other expenses	27,154	4,633
Other operating expenses	739,798	652,917

Losses in the amount of € 24.4 million from plant disposals were accounted for by the sale of the shares in Vallourec & Mannesmann Tubes S.A., Boulogne-Billancourt, Vallourec & Mannesmann Tubes Corporation, Houston, and V&M Deutschland GmbH to Vallourec S.A. and its subsidiaries. This book loss contains exchange rate differences of € 103.4 million that had previously been booked against Group shareholders' equity and with no effect on income.

Other operating expenses include expenses unrelated to the accounting period totaling € 15.3 million (2004: € 51.9 million).

(8) Income from Shareholdings

in T€	FY 2005	FY 2004
Earnings from profit transfer agreements	418	602
of which affiliated companies	[418]	[546]
Income from shareholdings	4,618	4,851
of which affiliated companies	[55]	[1]
Expenses from the transfer of losses	847	−
of which affiliated companies	[563]	[−]
Income from shareholdings	4,189	5,453

(9) Income from Associated Companies

in T€	FY 2005	FY 2004
Income from associated companies	185,063	124,317

Income from associated companies essentially derives from Vallourec & Mannesmann Tubes S.A., Boulogne-Billancourt, and Vallourec S.A., Boulogne-Billancourt. The shares in Vallourec & Mannesmann Tubes S.A., Boulogne-Billancourt, were sold at the end of June 2005. The income from associated companies contains this company's pro rata semi-annual result.

(10) Write-downs on Financial Assets

in T€	FY 2005	FY 2004
Write-downs on financial assets	9,789	8,206

The write-downs on financial assets in the financial year under review consist solely of write-downs on the fair value of shareholdings in affiliated companies (2004: € 0.1 million on affiliated companies and € 8.1 million on shareholdings).

(11) Financing Income/Financing Expenses

in T€	FY 2005	FY 2004
Income from loans from financial assets	260	273
Other interest earned and similar income	30,684	15,694
of which affiliated companies	[521]	[892]
Financing income	30,944	15,967

in T€	FY 2005	FY 2004
Interest and similar expenses	107,477	104,290
of which affiliated companies	[584]	[400]
Financing expenses	107,477	104,290

The interest component included as part of the allocations to pension provisions is reported at € 78.4 million (2004: € 81.4 million) under interest expenses.

(12) Taxes

in T€	FY 2005	FY 2004
Income taxes
Current tax expense/tax income (+/−)	143,453	48,449
Deferred tax expense/tax income (+/−)	−58,151	16,374
	85,302	64,823
of which unrelated to the accounting period	[−4,110]	[3,952]
Other taxes	13,608	11,214
Total	98,910	76,037

Income taxes amounting to € 85.3 million affect the result from ordinary activities after deduction of other taxes. The income taxes unrelated to the accounting period mainly concern deferred tax income for previous years.

Other taxes essentially comprise the costs of real property taxes in Germany and abroad and property acquisition tax in Germany.

In relation to results, but also in consideration of the “minimum taxation” applicable to profits earned within Germany, current income tax expenses increased to € 143.5 million. € 129.0 million of this sum was accounted for by domestic income taxes. The deferred tax income of € 58.2 million results essentially from the capitalization of losses carried forward that were recognized for the first time and from other asset-side deferred tax savings.

Future dividend payments have no consequences for taxes on income. Deferred taxes amounting to € 30.7 million (2004: € 51.9 million) were recorded for business transactions that had a direct impact on equity in the financial year under review. All in all, deferred taxes on changes not posted to income were included in equity in the amount of € 82.1 million (2004: € 51.4 million) as of the end of the financial year.

The following deferred tax assets/liabilities reported in the balance sheet are recognized in respect of the differences between reported book values and attributed tax valuations:

in T€	31/12/2005		31/12/2004
	Assets	Liabilities	Assets	Liabilities
Intangible assets	7,165	30	7,188	93
Tangible fixed assets	3,257	178,454	3,039	157,469
Financial assets	6,908	1,864	77	65
Current assets	5,739	74,360	4,483	31,576
Pension provisions	164,817	90	98,838	−
Other provisions	32,617	12,594	19,156	2,886
Special item including reserves	−	10,845	−	11,361
Liabilities	31,092	1,135	10,791	12
Other items	671	2	796	1,594
Total	252,266	279,374	144,368	205,056

Summary of the tax benefits from losses carried forward:

in T€	31/12/2005	31/12/2004
Corporate income tax	73,829	17,413
Trade tax	1,653	2,786
Capitalized tax savings	75,482	20,199

Development of the capitalized tax saving from losses carried forward that may be realized in the future:

in T€	FY 2005	FY 2004
Capitalized tax savings January 1	20,199	36,245
Changes to the consolidated group	−	−221
Capitalization of tax savings from losses carried forward	212,304	36,272
Use of losses carried forward	−87,041	− 42,879
Value adjustments from losses carried forward	−69,980	−9,218
Capitalized tax savings December 31	75,482	20,199

As a result of the “minimum taxation” that was introduced in Germany in 2004, the tax loss carry-forwards are offset against the ongoing tax result fully up to the amount of € 1 million but only up to 60% thereafter.

The change in the capitalized tax savings on tax loss carryforwards amounting to € 55.3 million resulted essentially from the tax loss carryforwards at a German subsidiary that were recognized for the first time. As of the beginning of the financial year, € 136.7 million of this sum was accounted for by deferred tax income, offset by € 79.6 million in deferred tax expenses for the simultaneous utilization of these loss carryforwards.

In connection with this tax savings on deductible temporary differences in previous years that were assessed as unusable were recognized for the first time; these amounted to € 43.3 million.

The potential tax savings for the tax loss carryforwards at several companies amounting to € 122.8 million as of December 31, 2004, that had already existed or had emerged for the first time during the financial year were not recorded in the balance sheet, as the possibility of using them appears improbable at present.

The capitalization of deferred taxes for temporary differences amounting to € 3.7 million was also dispensed with due to a lack of value. Tax loss carryforwards previously not included led to a reduction of € 1.0 million in the actual tax expenses in the financial year under review.

Transition from anticipated to actual income tax expenses:

in T€	FY 2005	FY 2004
Consolidated net income for the year before income tax	927,297	311,557
Expected income tax expenditure (tax rate 39.0%)	361,646	121,507
Tax share for:
differences between tax rates	−326	−530
tax-free income	−134,205	−52,943
reversal of neg. goodwill/amortization on goodwill	−	−23,154
non-deductible tax expenditures and other permanent differences	26,852	3,214
temporary differences excluding deferred taxes	4,902	18,946
effects of temporary differences and losses
adjustment in the value of capitalized benefits	9,260	12,760
application of benefits not previously capitalized	−3,254	−20,701
capitalization of previously unreported advantages from losses carried forward and temporary differences	−179,988	−
tax expenses and income unrelated to the accounting period	−4,110	3,952
other deviations	4,525	1,772
Actual income tax expenses	85,302	64,823

The actual income tax expenses of € 85.3 million diverge by € 276.3 million from the expected income tax expenses of € 361.6 million. This results primarily from the effects of tax-free earnings and from the capitalization of losses carried forward (€ 136.7 million) recognized as valuable for the first time and temporary differences (€ 43.3 million).

(13) Minority Interests

in T€	FY 2005	FY 2004
Minority interests in consolidated net income for the year	−93	2.235

Minority interests in the net income for the year are accounted for by the following companies:

• Hansaport Hafenbetriebsgesellschaft mbH, Hamburg,
• Salzgitter Automotive Engineering Beteiligungsgesellschaft mbH, Wolfsburg (including its subsidiaries),
• Hövelmann & Lueg GmbH, Schwerte.

(14) Earnings per Share

The undiluted earnings per share are determined in accordance with IAS 33 as the ratio between the Group net income for the financial year to which the shareholders of Salzgitter AG are entitled and the weighted average number of individual bearer share certificates in circulation during the financial year. Earnings per share according to IAS 33 are € 14.09.

The earnings per share would be diluted if the average number of shares were increased by adding the issue of potential shares from option and conversion rights. There were no such rights as of the reporting date, however. For that reason, the diluted earnings per share also amount to € 14.09.

	Shares issued	Own shares	Shares in circulation
Beginning of financial year	62,938,400	1,129,497	61,808,903
Purchase of own shares		5,192,031
Issue of new shares	280,000
End of financial year	63,218,400	6,321,528	56,896,872
Weighted number of shares	63,134,450	3,371,890	59,762,560

Earnings per share		FY 2005	FY 2004
Consolidated net income for the year	in T€	841,995	246,735
Minority interests	in T€	−93	2,235
Consolidated net income due to Salzgitter AG shareholders	in T€	842,088	244,500
Earnings per share	in €	14.09	3.99