Valeo Business report FY2006

Business Highlights

Financial overview
in million Euros FY2006 *FY2005 Rate of change Remarks

Consolidated statement

Net sales 9,970 9,736 2.4

Changes in the scope of consolidation (mainly attributable to the full-year consolidation of Johnson Control Engine Electronics, Zexel Valeo Climate Control and the climate control and cooling business in Thailand, as well as the disposal of Zexel Logitec Company on June 30, 2006) had a positive impact of 1.5% on total operating revenues.

Operating Income 271 324 (16.4)

-

*Restated

Contracts
-The Company took part in the launch of the Peugeot 207, assembled at the Poissy site in France, Madrid in Spain, and Trnava in Slovakia. Twenty product lines from all three of the Group's Domains feature on this vehicle from the PSA Peugeot Citroen Group.

-A new contract for the Starter-Alternator Reversible System (StARS) technology was signed with a European manufacturer, and mass production is planned for 2007.

-A first order for front-end modules was taken in China, and orders for exhaust gas recirculation systems for coolers were registered in China and Brazil.

-Valeo Transmissions registered its first orders for dual mass flywheels in Asia and for torque converters in North America.

-The DKS compressor by Valeo Compressors was chosen by Nissan and Mazda in Japan and Ford in North America.

-Valeo Electronics & Connective Systems won wiring contracts for the replacement of a future vehicle in the Seat range, the replacement of a future utility vehicle by Renault and the replacement of new designs in the Logan range.

- In October 2006, the Company announced that its new Park4UTM parking assistance system would equip its first production vehicle-the VW Touran-in the first half of 2007.

- Valeo Security Systems won orders taken in China from Chinese manufacturers for mechanical and electronic steering column locks, and latch and handle collections, and also from the Japanese automaker Nissan for the supply of latches for a new program, with production planned at Wuxi (China). In addition, a first order for immobilizers was placed in India by an Indian manufacturer, and orders placed by Toyota in Japan rose sharply, particularly for collections of locks, remote controls, steering column locks and radio frequency receivers.

- Xenon technology was used on the new Nissan Altima in North America by Valeo Sylvania, a US-based joint venture in this product family.

- The year 2006 was marked by the launch of the first application of an electronically controlled front motor with integrated linkage for the front wiper system on the Citroen Picasso, which will be followed by 2009 by two other programs.

- Valeo Engine Management Systems was chosen to supply its dual-fuel engine management system to Iran Khodro, with mass production due to start in 2007. This major automaker controls 50% of the Iranian automotive market.

- Order-taking among major European automakers, for new engines that comply with the Euro 5 standards and for new markets such as: chokes for the Renault turbo diesel 1.9 liter engine in the future Renault Megane, Laguna and Espace, and the 2.0 liter for the future Renault Megane, Espace and Trafic; the EGR modules and dual chokes for the Euro 5 2.0 liter turbo diesel engines for PSA Peugeot Citroen / Ford, for the replacements of the Peugeot 607, 407, 308 and B58, the Citroen C4, C5, C6 and C4 Picasso, the Ford Mondeo and Cmax, and the Volvo S40, XC50 and V50; second generation EGR valves for Volkswagen's "common rail" 2.0 liter engines; EGR gas cooling modules for Nissan, notably for the 2.5 liter diesel engine in the Navara pick-up and the Pathfinder 4x4.

Acquisitions
On June 29, 2006, Valeo announced the creation of a 50/50 joint venture with its affiliate Ichikoh, one of the leaders in lighting systems in Japan, with a view, initially, to manufacturing lighting systems for Japanese automakers based in China. A new 34,000 m2 site in Foshan, near Guangzhou, will start production in April 2007. At full capacity it will employ a workforce of 400. This is the Group's thirteenth joint venture in China.
At the same time, in order to consolidate its operational facilities in lighting systems in China, the Group increased from 75% to 100% its shareholding in Hubei Valeo Auto Lighting Systems Co., its other lighting joint venture in this country. Valeo's lighting systems units in China benefit from the Wuhan R&D center, which employs 70 engineers.

-In December 2006, the Company signed a Memorandum of Understanding with Ford Motor Company to acquire their thermal systems facility, Sheldon Road, (Plymouth, Michigan). The facility currently employs around 1,250 employees and supplies air-conditioning units and radiators to Ford in North America. It has forecast sales in 2006 of around 450 million US dollars.


Divestitures
-In April 2006, Valeo Thermal Systems Japan Corporation signed an agreement with Vantec Corporation to dispose of Zexel Logitec Company and its subsidiaries, the Japanese logistics group which was acquired in 2000 as part of the Zexel transaction. Zexel Logitec Company generated for 2005 consolidated sales of 73 million euros and employs 345 people.

-Valeo Electronics & Connective Systems closed down its industrial activities at the Czechowice site in Poland.

-The closure plan for the Rochester site (Wiper Systems) in the United States was pursued, as defined and negotiated in 2005.

-An information / consultation procedure relating to the plan to dispose of the business of the joint venture Valeo Plastic Omnium in Douai was initiated, following Renault's decision to change the technical concept for the front-end of the vehicle replacing the current Megane and Scenic, leading to the elimination of the modular concept.

-The Reims site (Engine Cooling), the Abbeville site (Security Systems) and the Amiens site (foundry - Transmissions) in France underwent major restructuring.

-The four sites of the Motors & Actuators product family - Bietigheim (Germany), Santa Perpetua (Spain), Juarez (Mexico) and Zielonski (Poland) - were sold to Nidec. *

-The Diadema and Cantareira sites of Valeo Security Systems were closed, and their activities transferred to the Garulhos site in Brazil.

*-In November 2006, Valeo signed a contract for the sale of its Electric Motors & Actuators activity to the Japanese group NIDEC for an enterprise value of 165 million euros. In 2005 this activity generated total sales of 253 million euros and an operating income of 9 million euros. The transaction should be closed by December 31, 2006. The sale of the Electric Motors & Actuators activity is in line with Valeo's strategy to focus its offer on solutions in the Domains of Driving Assistance, Powertrain Efficiency and Comfort Enhancement.

R&D

R&D Expenditure

FY2006 FY2005 FY2004

(in million Euro)

661 646 585

-In 2006, research and development expenses represented 6.6% of sales, and over 562 new patents were filed.
-The table set forth below shows the breakdown of the R&D expenditures.

in million Euro FY2006 FY2005 FY2004
Driving Assistance 178 175 164
Powertrain Efficiency 216 209 180
Comfort Enhancement 232 225 199
Other 35 32 42
Total 661 646 585

R&D Structure
-At the end of 2006, the Group had 68 R&D centers in the world with approximately 7,000 employees. This includes sites in the developing countries in Casablanca (Morocco), Mexico City (Mexico), Prague (Czech Republic), Wuhan (China), Brazil and Poland. In 2006, Valeo announced the construction of a second R&D center in Shanghai in China. This technical center will design climate control systems for Chinese, Japanese and European car makers. When fully operational, the new technical center will accommodate up to 60 engineers and technicians.

-To reinforce its technological offering, Valeo forges partnerships with top specialists, who are leaders in their field. In 2006, these efforts focused predominantly on ongoing partnerships such as the association with Raytheon, the radar technologies specialist, Jabil Circuit concerning the production of printed circuit boards, Iteris for lane departure warning systems and IBM for the development of on-board software. Valeo also partners a variety of universities and academic institutions, such as France's Ecole des Mines, which develops on-board cameras and pedestrian detection within the Driving Assistance Domain.

Product Development
-In March 2007, the French Industrial Innovation Agency agreed to provide 61 million euros in funding for Valeo's research program LOwCO2MOTION(TM). The program focuses on two major innovations. The first is the camless system, in which the camshaft in engines is replaced by electromagnetic actuators that operate each valve independently. By controlling residual gases, minimizing pumping losses and deactivating cylinders and valves, this technology reduces fuel consumption and pollutant emissions by 20% for gasoline engines. It also provides enhanced performance and driving comfort due to an increase in low-end engine torque. The second major innovation is a next-generation mild hybrid based on Valeo's StARS+X technology. In addition to the Start-Stop function which cuts off the engine when the vehicle is at a standstill, this system features a regenerative braking function, where energy generated during braking is recovered.

-The Park4UTM park assist system, which enables drivers to park a car semi-automatically in under 15 seconds. Based on ultrasound technology, the system scans both sides of the road for parking spaces, which it calculates according to the vehicle length. Once a slot has been identified, the driver stops and puts the car in reverse. The system then calculates the trajectory and controls the vehicle steering. The driver, aided by ultrasound sensors on the front and rear of the car, controls the acceleration and braking during the maneuver. The maneuver can be interrupted at any time by braking or simply taking over the steering wheel.

-The UltimateCooling (TM) vehicle thermal architecture is a revolution in the thermal control of the various engine fluids and engine peripherals, based on the principle of a single heat transfer fluid. In addition to improving engine performance, this system can reduce the space required by the cooling module at the front of the vehicle by up to 40%. This more compact design allows for greater freedom in style and for the integration of pedestrian protection systems.

-New generation of hands-free cards: In addition to providing keyless locking, unlocking and ignition functions, the new identifier can remotely memorize and activate personal settings such as driving seat and rearview mirror positions, and provides, via a screen, a wide range of data such as fuel level, tire pressure and outside/inside temperature, which help ensure a safe journey.

- Environmentally-friendly air conditioning systems: By replacing the refrigerant HFC134a, which contributes to global warming, with an alternative fluid or a natural gas called R744, Valeo's systems represent a significant technological step forward, helping protect the environment and anticipating regulation due to come into force in 2011.

Investment Activities

Capital Expenditure

FY2006 FY2005 FY2004 FY2003

in million Euro

494 441 413 453

Overseas Investments
-Two sites were opened at SeongJu (Transmissions) in South Korea and at Changchun (Compressors) in China.

-In July 2006, the Company established a new research and development center in Shanghai, China. This technical center will design car air-conditioners for Japanese and European automakers as well as those for local markets. This is the company's second R&D center in China, following the one for automotive lighting systems. The new R&D center will also provide its local suppliers with technical support in order to reinforce its comprehensive capability in China and win more business. Valeo already has two plants each for manufacturing compressors and heating ventilation and air conditioning or HVAC systems in the country. The opening of the technical center will allow the company to establish a consistent structure that integrate all processes from R&D through production, strengthening its service capability. Valeo Thermal Systems Japan Corporation's technical center will also provide support to the group's operation in China and take partial charge of the operation so as to improve its development efficiency. The new R&D center plans to accommodate up to 60 engineers.


-A technical center (Switches & Detection Systems) of nearly 1,000 m2 employing more than 50 engineers and technicians was opened at Veszprem in Hungary, in August 2006.