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2006

Reference document

Key figures

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ACTiViTy

History TheGroup Geographicalpresence

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CORpORATE gOVERNANCE

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Competitivecontext

Keyeventsin2006

RapportoftheChairmanoftheBoard ofDirectorsrelatingtotheconditions ofpreparationandorganization oftheBoard'swork,thepossiblelimitations tothepowersoftheChiefExecutiveOfficer andtheinternalcontrolprocedures putinplacebytheValeoGroup p.130 CompositionoftheBoardofDirectors atDecember31,2006 StatutoryAuditors'Report onthereportoftheChairman oftheBoardofDirectors

Recenteventsandoutlook

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MANAgEMENT REpORT

Accountingmethods Statementofincome Maininvestments overthepastthreeyears Changeinstockholders'equity provisions Cashflowsanddebt Commitments Remunerationofcorporate officersanddirectors Risksanduncertainties Informationlikelytobeimpacted byapublictenderoffer Claimsandlitigation Outlook Subsequentevents parentcompanyfinancialstatements EnvironmentalIndicators SocialIndicators

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iNFORMATiON ON ThE COMpANy AND iTs CApiTAL

Generalinformationabouttheissuer FeespaidbythegrouptotheAuditors andmembersoftheirnetworks Generalinformationabout theCompany'scapital Currentownershipstructure MarketfortheCompany'ssecurities Investorrelations Informationonsubsidiaries andaffiliates personresponsible fortheregistrationdocument

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CONsOLiDATED FiNANCiAL sTATEMENTs 2006

Consolidatedstatementsofincome Consolidatedbalancesheets Consolidatedstatementsofcahflows Statementsofrecognized incomeandexpenses Statementofchanges instockholders'equity Notestoconsolidated financialstatements StatutoryAuditors'report onthe2006IFRSconsolidated financialstatements

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2006 Reference document

Group profile

Fully focused on the design, production and sale of components, systems and modules for automobiles and trucks, both on the original equipment market and the aftermarket Valeo is an independent and international industrial group. It is one of the world's leading automotive suppliers. The Group employs 69,800 people representing 91 nationalities in 129 production sites, 68 Research & Development centers and 9 distribution platforms in 29 countries. Valeo applies its profitable growth strategy in line with a policy of sustainable development.

This "document de référence" was filed with the Autorité des Marchés Financiers (AMF) on March 29, 2007 , pursuant to article 212-13 of the AMF's General Regulations. It may only be used in connection with a financial transaction if it is accompanied by a memorandum approved by the AMF. In accordance with article 28 of European Regulation No. 809/2004 dated April 29, 2004, the reader is asked to refer to previous "documents de référence" containing the following specific information: 1. The management report, consolidated financial statements, parent company financial statements, Statutory Auditors' reports on the consolidated financial statements and parent company financial statements for the year ended December 31, 2005, and the Statutory Auditors' special report on regulated agreements relating to 2005, included in the "document de référence" filed with the Autorité des Marchés Financiers on April 3, 2006 under No. D. 06-0209. 2. The management report, consolidated financial statements, parent company financial statements, Statutory Auditors' reports on the consolidated financial statements and parent company financial statements for the year ended December 31, 2004, and the Statutory Auditors' special report on regulated agreements relating to 2004, included in the "document de référence" filed with the Autorité des Marchés Financiers on March 29, 2005 under No. D. 05-0290.

2006 Reference document - VALEO

Key figures

Key figures

SaleS by region

In million euros and in % of sales

9,018 3% 10% 16%

9,736 5% 12% 14%

9,970 5% 13% 13%

71%

69%

69%

2004*

Europe North America

2005*

Asia and others

2006

South America

* In accordance with IFRS, all 2004 and 2005 figures are restated mainly to account for non strategic activities

SaleS by market (2006)

In % of sales

18%

Aftermarket

82%

OEM

2

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Key figures

groSS margin

In % of sales

17.2%

16.0%

17.3% 15.4%

17.1%

16.3%

15.8%

15.9%

14.9%

2004*

2005*

2006

S1-2004*

S2-2004*

S1-2005*

S2-2005*

S1-2006

S2-2006

* In accordance with IFRS, all 2004 and 2005 figures are restated mainly to account for non strategic activities

* In accordance with IFRS, all 2004 and 2005 figures are restated mainly to account for non strategic activities

operating income

In % of total operating revenues

4.4%

3.5%

3.3% 2.7%

2.7%

3.2%

3.3%

3.2% 2.1%

2004*

2005*

2006

S1-04*

S2-04*

S1-05*

S2-05*

S1-06

S2-06

* In accordance with IFRS, all 2004 and 2005 figures are restated mainly to account for non strategic activities

* In accordance with IFRS, all 2004 and 2005 figures are restated mainly to account for non strategic activities

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Key figures

reSearch and development

In % of total operating revenues

6.4%

6.5%

6.6%

2004*

2005*

2006

* In accordance with IFRS, all 2004 and 2005 figures are restated mainly to account for non strategic activities

net income

baSic earningS per Share

In million euros and in % of total operating revenues

In euros

240**

2.92 2.10 1.80

142

161

2.6%

1.4%

1.6%

2004*

2005*

2006

2004*

2005*

2006

* In accordance with IFRS, all 2004 and 2005 figures are restated mainly to account for non strategic activities ** Including an exceptional tax gain of 83 million euros

* In accordance with IFRS, all 2004 and 2005 figures are restated mainly to account for non strategic activities

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Key figures

net financial debt

In million euros and in % of equity

1,080 968

497 27% 63% 55%

01/01/2005

12/31/2005

12/31/2006

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History The Group

1. Description and organization ......................................................................................................................... 10 2. Domains and Product Families ...................................................................................................................... 11 3. Aftermarket products and services .............................................................................................................. 15 4. Functions ............................................................................................................................................................... 17

Geographical presence Competitive context Key events in 2006

1. Commercial success ........................................................................................................................................... 26 2. Technological innovations ............................................................................................................................... 27 3. Strategic operations .......................................................................................................................................... 29 4. Operational excellence ..................................................................................................................................... 29

Recent events and outlook

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ACTiviTy

History

History

The Group's origins date back to the creation, in 1923, of Société Anonyme Française du Ferodo (SAFF), which operated out of a workshop in Saint-Ouen near Paris. SAFF started by distributing, then manufacturing, brake linings and clutch facings under the Ferodo license. In 1932, SAFF was listed on the Paris Bourse. For SAFF, the 1960s and 1970s were a time of development, both through diversification into new sectors (brake systems in 1961, thermal systems in 1962, lighting systems in 1970 and electrical systems in 1978) and through international growth (Spain in 1963, Italy in 1964 and Brazil in 1974). On May 28, 1980, at its Annual General Meeting of Shareholders, SAFF adopted the name Valeo, a Latin word meaning "I am well". By the 1980s, Valeo had become a global Group, developing through acquisitions around the world:

Throughout the 1990s

The Group implemented a powerful strategy based on: · A new industrial culture: the Group adopted its "5 Axes" methodology in 1991 (see paragraph 4.3, Industrial Functions, "The Group"); · A sustained Research & Development drive: in 1992, the Group set up an electronics research center in Créteil (France) and an electronic module production site at Meung-sur-Loire (France). In 1993, Valeo opened R&D centers for lighting systems in Bobigny and for clutches in Saint-Ouen (France); · increasing international growth: the first production sites in Mexico and Wales (climate control) and Italy (lighting systems) opened in 1993, and in 1994 the first joint ventures in China were created for wiper systems, climate control, lighting systems and electrical systems. The Group's external growth continued throughout the decade:

1987

· Acquisition of Neiman (security systems) and its Paul Journée subsidiary (wiper systems). · Acquisition of Chausson's heat exchanger business.

1995

· Acquisition of Siemens' thermal business in Germany.

1988

· Acquisition of Clausor and Tibbe (security systems in Spain and Germany). · Creation of Valeo Pyeong Hwa (clutches and ring gears in Korea), Valeo Transtürk (clutches in Turkey), and Valeo Eaton (clutches for heavy-duty trucks in the United States). · Creation of the Valeo/Acustar Thermal Systems Inc. joint venture (climate control, United States).

1996

· Acquisition of a stake in Mirgor (thermal systems in Argentina. · Acquisition of Fist Spa and a division of Ymos AG (security systems in Italy and Germany). · Acquisition of Klimatizacni Systemy Automobilu (thermal systems in the Czech Republic).

1989

· Acquisition of Delanair (climate control in the UK). · Acquisition of Blackstone (engine cooling in the United States with businesses in Mexico, Canada, Sweden, Italy and Spain). This drive for growth was accompanied by the refocusing of the Group's activities around a number of core businesses, and the sale of non-strategic activities (brake linings, ignition, horns) in 1990.

1997

· Creation of clutches joint ventures in India and China and a friction materials joint venture in India. · Acquisition of Univel (security systems in Brazil). · Acquisition of the Osram Sylvania's automobile business to create Valeo Sylvania (lighting systems) in the United States.

1998

· Acquisition of the Electrical Systems activity of ITT Industries.

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History

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1999

· Acquisition of a division of Mando (electrical systems in South Korea).

families in terms of R&D and the marketing of innovative new products. · The second lever of development is in terms of marketing, both through regional growth and through boosting the Group's presence in the aftermarket. In geographical terms, the Group will increase its presence in North America and Asia: close relations with all manufacturers and the development of world platforms are strategic advantages. With the creation of Valeo Service, the Group now benefits from an effective organizational structure that will enable it to win a greater share of the aftermarket worldwide · The third lever of development is the enhancement of operational excellence through the optimization of production facilities and the supply chain. The objective is to offer total quality to all customers on all markets. · The fourth lever of development is organizational.

2000

· Creation of a joint venture with Unisia Jecs (transmissions in Japan). · Acquisition of a stake in Zexel (thermal systems). · Strategic alliance with Ichikoh (lighting systems in Japan). · Acquisition of Labinal's automotive business (Argentina, Eastern Europe, France, India, Italy, North Africa, Portugal, Spain).

The first years of the new millennium

In March 2001, Thierry Morin was appointed Chairman of the Board of Directors of Valeo. The Group launched a program to streamline its business and give itself greater room for maneuver: · industrial rationalization with production reorganized across fewer sites, and a greater portion of sites in low-cost regions; · selective disposals of non-strategic businesses; · accelerated integration of recently acquired businesses, notably the redeployment of the US facility at Rochester acquired from ITT; · partnership approach with a select number of suppliers; · intensification of R&D efforts coupled with improved productivity; · a revitalized marketing approach based on the concept of Domains, which facilitate transversal synergies; · creation of technological partnerships with experts in various fields, including International Rectifier, Iteris, Raytheon and Ricardo, to introduce new technologies into the automotive industry and accelerate the development of new products. This program resulted in the gradual improvement of Valeo's margins between 2001 and 2003, and boosted confidence among the Group's customers.

in 2005

Guided by its strategic objectives and its financial position, Valeo has implemented a policy of targeted acquisitions designed to reinforce its three Domains and increase its organic growth potential. · The Group significantly developed its structure, notably by increasing the role of the three innovation Domains, grouping together the product families into one operational structure, and strengthening functional teams, particularly the Technical Department · Valeo acquired the Engine Electronics division of Johnson Controls (JCEED), which designs and produces complete engine management systems, electronic control units and electronic motor drives as well as engine components. 2005 also saw a number of other deals which increased the Group's presence in Asia, especially China: · Acquisition of shares held by Bosch in the Group's Climate Control businesses in Asia (Zexel Valeo Climate Control and Valeo Zexel China Climate Control). This gave Valeo control of all the share capital of its climate control activities and compressor production. · Following this transaction, Valeo increased its holding in two Thai companies - Siam Zexel Co. Ltd. and Zexel Sales Thailand Co. Ltd. ­ by 35.9% and 14.3% respectively, giving Valeo 74.9% ownership of each of these two companies specializing in automotive climate control. · In April, Valeo concluded a new joint venture with FAWER, the automotive supply branch of FAW, one of the main Chinese automakers. The new entity, 60% owned by Valeo, develops and manufactures compressors for climate control systems aimed at the Chinese market and at export. Its plant is located in Changchun in the north east of China.

in 2004

Following this rationalization campaign, Valeo embarked on a new phase of development as part of "Valeo 2010", its strategic project. The Group is establishing a platform from which to emerge as a global leader in its businesses according to future developments in the automotive equipment industry. · The first lever of development is the expansion of its technological offering in order to provide solutions that incorporate systems and services from three Domains: Driving Assistance, Powertrain Efficiency and Comfort Enhancement. Further synergies have been generated between product

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· Valeo announced the creation of a joint venture with Hangshen Electronics, a Chinese Tier One automotive supplier, for the production of ultrasonic park assist systems. Valeo owns a 75% share in this joint venture. · Valeo increased its stake in Ichikoh--the Japanese manufacturer of automotive lighting systems and mirrors--from 22.7% to 28.2%.

in 2006

· Valeo pursued its strategy to rationalize its portfolio, resulting in the sale of its Electric Motors & Actuators business to the Japanese Group Nidec, the sale of the bluetooth specialist Parrot, and the sale of Logitec, a logistics business in Japan. · Valeo also acquired a 50% share in Threestar, one of the leading radiator manufacturers in South Korea. This new entity, of which the other 50% is held by Samsung Climate Control Group, is called Valeo Samsung Thermal Systems.

The Group

1. Description and organization

Valeo is an industrial group fully focused on the design, production and sale of components, systems and modules for automobiles and trucks, both on the original equipment and the aftermarket. The Group's sole sector of activity is "Automotive Supply". On 31.12.06, the Group employed 69,800 people, of 91 different nationalities at 129 production sites, 68 Research & Development centers and nine distribution platforms. their networks, and independent distributors (including trading groups). Valeo Service provides shared marketing and logistics services for both activities.

1.3. Domains

Since the Valeo 2010 strategic plan was launched in 2004, the Group has adopted a transversal approach to develop new solutions. It promotes innovations involving several Product Families. The Domains are responsible for the Research & Development and Marketing of innovations. Their work centers around three strategic areas, in line with customers' fundamental requirements: respecting the environment (Powertrain Efficiency Domain), safety (Driving Assistance Domain) and comfort (Comfort Enhancement Domain). Each Domain is in charge of its own budget. When the innovations designed and developed by the Domains reach the marketing stage, they are transferred to one or several Divisions which take charge of commercial negotiations, final development and production.

1.1. Organization: Original Equipment

The Group is organized into one hundred or so decentralized and autonomous Divisions, and it is at Division level that resources are allocated and performance is evaluated. The Divisions enjoy the backing of Valeo's functional networks and Branches, which oversee the coherence of the Group's Product Families; they also exploit synergies with the Innovation Domains, and are coordinated by National Directorates. Valeo's Industrial Divisions are responsible for running business relating to OE production and sales from the various Product Families for specific geographical areas.

1.4. Product Families 1.2. Organization: Aftermarket

The industrial Divisions are also responsible for the production and part of the distribution of Aftermarket products on behalf of the Valeo Service structure, which handles the sale of products and services relating to the aftermarket. Valeo Service comprises two activities, one for each major distribution channel: automakers and Valeo has eleven product families which are, in alphabetical order: · Climate Control; · Compressors; · Electrical Systems; · Electronics & Connective Systems;

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· Engine Cooling; · Engine Management Systems; · Lighting Systems; · Security Systems; · Switches & Detection Systems; · Transmissions; · Wiper Systems. Since May 2005, product families have been overseen by a single Department: the Operations Department. This Department was created to accelerate the deployment of best practices and the implementation of synergies between Product Families. It carries out operational control of the performance of individual Divisions.

according to geographic region, with a Country Director for each major region (North America, Japan-Korea-South Asia, China, Brazil, Germany, Spain-Portugal, Italy); · Research and Development, under the functional responsibility of the Product Family R&D centers and the operational responsibility of Domains and Product Marketing; · Human Resources, also in charge of Ethics within the Group; · Risks, Insurance, Environment, Health and Safety, which coordinates all actions in its domains; · all Finance, Legal and Strategic operations:

- the Financial Control network guarantees the reliability of financial reporting and certain physical indicators. Along with the teams in the Operations Department, it oversees the implementation of action plans, - the central Accounts teams define and apply rules relating to the risk management of external financing and of market risks relating to changes in interest rates, currency values and raw material costs, - decisions regarding transfers, acquisitions and the creation of joint ventures are coordinated centrally by a specialized team, supported, where necessary, by expertise from individual Product Families and Divisions, - Financial Communications;

1.5. Functional networks

The main functional networks are as follows: · technical networks, under the responsibility of the Group's Technical Director since May 2005: Quality, Purchasing, Industrial, Programs and Projects, Logistics, Information Systems, Real Estate, and "5 Axes" ­ Valeo's deployment and audit system; · International Affairs, structured according to customer business, with a Client Director dedicated to each major automaker, and

· the centralized Communication function defines communication plans and coordinates internal and external communication networks within the Product Families and Divisions.

2. Domains and Product Families

The purpose of the Domains is to foster innovation in order to offer the market comprehensive solutions relating to the issues of safety, the environment and comfort (see paragraph 1.3 above). The Domains work in synergy with the various Product Families in order to offer innovative solutions bringing together the Group's different fields of expertise. and ease of use, the technologies and systems developed allow drivers to "keep their eyes on the road and their hands on the wheel", for maximum safety and driving comfort. In 2006, contributions from the Switches and Detection Systems Product Family in the Driving Assistance Domain particularly focused on: · Ultrasonic Park Assist Systems which facilitate parking maneuvers; · 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;

2.1. Driving Assistance

The Driving Assistance Domain designs and produces solutions for monitoring the vehicle perimeter, providing the driver and other road users with information about the vehicle's immediate environment and initiating necessary corrective actions. Three Product Families contribute in particular to developing innovations for this Domain: Switches & Detection Systems, Lighting Systems and Wiper Systems.

2.1.1. Switches and Detection Systems

The Switches & Detection Systems Product Family designs and manufactures products to improve the driver's control of the vehicle's immediate environment. Notable for their efficiency

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· the lane departure warning system, LanevueTM, which alerts the driver of unintentional lane departures via an audible or vibrating signal; · blind spot radar detection systems, enabling drivers to detect the presence of vehicle in their rearward blind spots; · the front and rear OptiveoTM system: at the front of the vehicle, a state-of-the-art, highly sensitive compact camera positioned behind the rearview mirror provides a permanent view of the road and fulfils several functions, notably the automatic switching between full-beam and dipped headlamps, the lane departure warning system, infrared night vision and the automatic detection of speed restrictions, which recognizes all speed restriction signs and informs the driver of current speed limits via an eye-level display. At the rear, the camera is integrated into the tailgate handle and provides wide-angle images of the area behind the vehicle. The camera, combined with park assist sensors, enables the system to display distances between the vehicle and any obstacles. The system is equipped with an integrated heating and cleaning module and operates under all weather conditions. Switches & Detection Systems develop and manufacture the following product ranges: Detection systems: · ultrasound sensors; · radars; · cameras positioned at the front or rear of the vehicle. Switches: · window-lift and seat adjustment controls and console switches; · top column modules. Engine sensors: · temperature sensors (coolant or gearbox); · engine and transmission position sensor; · oil management sensors. Steering and top column sensors: · angle sensors; · torque sensors.

· the night vision system, XtravueTM, which offers drivers three times the level of standard visibility without a dazzling effect, using infrared technology; this infrared active night vision system enables drivers to drive using dipped headlamps while enjoying visibility equivalent to driving with full-beam headlamps; · LED front and rear lighting and signaling technologies, which offer high-performance solutions and innovative designs at the front and rear of the vehicle; · XLEDTM adaptive headlamps: xenon directional lighting associated with LED modules featuring directional lighting functions and automatic additional lighting on highways, to offer optimal visibility (up to 90% better than halogen lamps) depending on driving conditions. As well as their low energy consumption and record lifespan, LEDs contribute to innovative vehicle design; · Adaptive rear lights with MicroOpticsTM technology: the uniform light surfaces achieved using this LED technology offers not only optimal visibility but also a wide range of design options. The warning signals for each situation (fog, sudden braking, reversing, oncoming vehicles, opening doors) inform drivers in following vehicles and help prevent accidents. The Lighting Systems range also covers: · main headlamps (halogen, xenon and LED); · foglights; · DRL daytime lamps; · leveling devices and lamp wipers; · rear lighting including LED rear lamps and center high-mounted stop lamps; · cigar lighters.

2.1.3. Wiper Systems

As a contributor to the Driving Assistance Domain, the Wiper Systems Product Family offers windshield and rear window wiping solutions to give the driver perfect visibility in all weather conditions, for both the original equipment sector and the aftermarket. These solutions combine the latest innovations in terms of technology and design. In 2006, Valeo Wiper Systems continued to develop new products including: · front and rear ultra-flat wipers: the ultra-flat wiper systems combine elegance and exceptional performance. Their unique design, optimal aerodynamic form and light weight are a triedand-tested combination that is greatly in demand; · a new generation of XL ultra-flat blades, which provide excellent wiping quality on large windshields and are increasingly fitted on MPVs, was launched during the year; · these wipers, using electronic front motors, are simple to fit and allow great freedom of design for automakers;

2.1.2. Lighting Systems

The role of the Lighting Systems Product Family is to improve driver visibility and clearly indicate vehicle position and changes in vehicle direction or speed, in all weather conditions. Headlamps and rear lamps are also key design features, playing an increasingly important role in automakers' efforts to differentiate the styling of their new models. In 2006, Lighting Systems contributed the following innovative systems to the Driving Assistance Domain: · directional lighting, which greatly improves visibility in bends by adjusting the headlamp beam (fixed or moving);

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· a new rear motor using a technology that reduces mass, improves acoustic performance and reduces costs, was also developed in 2006; · heated wash systems. The Wiper Systems Product Family includes: · arms; · blades; · linkages; · motors; · washing systems; · front and rear wiping systems integrating other functions such as stop lights and latches.

· engine control units; · electric motor drives; · emission control systems and components; · ignition components; · injectors; · sensors.

2.2.2. Electrical Systems

The role of the Electrical Systems Product Family involves the generation and management of electrical energy, from starting the engine to vehicle powertrain, for enhanced comfort, reduced fuel consumption and pollutant emissions. · In 2004, it launched the StARS micro-hybrid system on the market; this system stops the engine when the vehicle comes to a halt and restarts it immediately and silently when the driver releases the brake, giving fuel savings of up to 20% in urban situations. This system was later developed further, notably with the addition of the function to recover kinetic energy during braking, which improves fuel savings by a further 5-10%. Other products in the Electrical Systems Family include: · starters; · alternators; · electrical energy management systems; · renovated alternators, starters, and compressors for the aftermarket; · electromagnetic retarders for trucks and buses.

2.2. Powertrain Efficiency

This Domain devises systems for enhancing vehicle performance and driving pleasure while minimizing fuel consumption and pollutant emissions. Five Product Families contribute in particular to developments in this Domain: Engine Management Systems, Electrical Systems, Engine Cooling, Compressors and Transmissions.

2.2.1. Engine Management Systems

This Product Family was created following Valeo's takeover of the Johnson Controls' Engine Electronics Division (JCEED) in March 2005. By improving the specific performances of the engine, electronic management systems reduce the environmental impact of vehicles while enhancing the driving experiencing and enriching the Powertrain Efficiency Domain offering. Valeo Engine Management Systems focused particularly on the following areas in 2006: · in the emissions control domain, a compact exhaust gas recirculation system, integrated at the intake stage, for Euro 6 gasoline and diesel engines, is currently being developed using an innovative architecture. This system reduces fuel consumption in turbo gasoline engines and very significantly reduces the emission of pollutant gases by diesel engines; · the development of Smart valve Actuation technology, also known as the "Camless engine", which was pursued and supported by several major automakers. The technology used in this system represents a considerable advance in gasoline engines as it reduces consumption by 15-20% in mixed driving cycles, and also reduces pollutant emissions. The system also offers users an improved performance and a more comfortable driving experience. Other key products in the Engine Management Systems Product Family are as follows: · complete engine management systems for gasoline and diesel engines;

2.2.3. Engine Cooling

This Product Family develops and manufactures components and modules for a full range of engine and transmission cooling functions, with a view to reducing pollution and fuel consumption, and enhancing passenger comfort. In 2006, the Engine Cooling team focused on the following innovations in particular: · the UltimateCoolingTM concept, based on the principle of a single coolant system instead of running all fluids to exchangers at the front end of the vehicle, which both improves engine performance and reduces fuel consumption. Valeo has undertaken several development projets on this architecture in partnership with vehicle manufacturers in Europe, the United States and Japan; · in the run-up to phase 2 of the "pedestrian protection" regulation in Europe, due to come into force in 2010, specific solutions have been developed in terms of impact and energy absorption. Combined with UltimateCoolingTM, these enable automakers to adapt to the new regulations without needing to change the vehicle style; · with regard to the new European regulation prohibiting the use of the refrigerant gas R134A on vehicles entering production as of 2011, a new range of exchangers compatible with

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the new CO2 refrigerant fluid (replacing R134A) has been developed. In addition, Valeo is assessing alternative refrigerants and their impact on current systems; · ThemisTM, the electronic engine cooling system, is in development for the first mass production applications, with the expansion of the valve range to cover all engine types. The advantages of this system in terms of reduced consumption and improved comfort have been recognized by manufacturers; · the development of engine intake modules integrating turbo exchangers, now water cooled, directly into the engine intake collectors, with the benefit of improved acceleration and engine performance. Further Engine Cooling products include: · thermal management systems for powertrains; · cooling modules; · condensors; · evaporators; · heater cores; · charge air coolers; · fuel coolers; · exchangers of oil; · fan/motor systems; · charge air cooler modules; · front end modules.

when using the clutch and which make changing gear tiresome; in 2006, Valeo Transmissions worked towards developing a system that could also be made available to the aftermarket. · G5 clutch facings, the first range of "green" clutch facings, which anticipate developments to European environmental legislation and enable Valeo production sites to considerably reduce atmospheric emissions and improve working conditions. Other products produced by the Transmissions Family include: · cover assemblies; · discs; · clutch facings; · release bearings; · hydraulic clutch actuators; · flexible flywheels; · systems for automated manual transmissions; · torque converters; · lock-up range.

2.3. Comfort Enhancement

The Comfort Enhancement Domain aims to facilitate vehicle use and improve vehicle comfort. This covers all phases of vehicle use: approach, access, ignition, driving and exiting. The four Product Families which work in synergy to develop solutions for this Domain are Security Systems, Switches & Detection Systems, Climate Control, and Electronics & Connective Systems.

2.2.4. Compressors

The role of this Product Family, developed in 2005 following the purchase by Valeo of the remaining 50% share in the Zexel Valeo Climate Control joint venture, is to develop and produce compressors for domestic air-conditioning systems. · The R744 Compressor is a key component in the next generation of air-conditioning systems which will use the natural and environmentally-friendly CO2 coolant. This Product Family also develops and produces the following products: · pallet compressors; · fixed-cylinder compressors; · variable-cylinder compressors.

2.3.1. Security Systems

This Product Family develops and manufactures systems that guarantee authorized, secure and comfortable access to vehicles in all circumstances, while ensuring maximum protection against theft. It also offers ergonomic solutions for the Comfort Enhancement Domain. During 2006, Security Systems launched: · the Smart Car Key, a new generation of hands-free card. This intelligent and interactive identifier offers drivers greater comfort, with totally new features. In addition to keyless locking, the user can now view real-time vehicle data (e.g. fuel level, tire pressure, cabin temperature, headlamp status) on an LCD or organic LED screen, and can also remotely activate the cabin ventilation system, automatically transfer useful data such as destination details and MP3 files from a home computer to the vehicle, and memorize and activate personal settings such as driving seat and rearview mirror positions; · the 'Tuning' business developed with handles and matching keys enables the user to personalize their vehicle in a completely new way, in terms of patterns and colors, without altering shapes or original materials

2.2.5. Transmissions

This Product Family works on behalf of the Powertrain Efficiency Domain to develop and produce systems that transfer engine power to the transmissions of passenger cars and industrial vehicles. The solutions it offers incorporate innovative systems that dampen noise, vibrations and harshness. This Product Family is present in all major markets in both the original equipment and aftermarket segments. The Transmissions Product Family contributes to the Powertrain Efficiency Domain through innovations such as: · the dual mass flywheel, which improves driving comfort and minimizes nuisance caused by sound and vibrations created

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Security Systems also develops and produces the following ranges: · keyless entry and start system; · powered opening/closure systems (for sliding doors and liftgates); · radio-frequency remote controls and receivers; · transponder-based immobilizer systems; · steering column locks (mechanical and electrical); · handles; · keys and locks; · latch sets.

major advantage of eliminating the recycling of the fluid at the end of the vehicle's lifetime; · the Thermeo thermal comfort module for rear passengers integrates thermo-electric technology to provide air conditioning and heating to the rear seats. The installation of this module, located in the overhead light, is simple, and can be done by local dealers because there are no refrigerant pipes to be installed; · low consumption air conditioning system, software module for optimizing the performance of new generation air-conditioning systems and reducing energy consumption; · Valeo Climate Control developed a whole new range of air quality products for the OEM and the aftermarket, aimed at protecting passengers notably from ultrafine diesel particles, and improving their wellbeing with, for example, the antiallergen filter, the vitamin C filter and products to eliminate bad odors associated with air conditioning. Valeo also developed cabin purification modules based on ionization technology. The Climate Control Product Family comprises around four product lines: · HVAC systems and modules; · cabin comfort controls (control panels); · decentralized interior comfort modules (rear air-conditioning device, booster, additional comfort modules); · air quality products (air filtration and purification systems).

2.3.2. Switches & Detection Systems

This Product Family, which contributes to the Driving Assistance Domain (see paragraph 2.1.1), also develops solutions for Comfort Enhancement: · e-media is a multifunctional control interface that reduces the number of switches on the center console and improves ergonomics for the driver; · "Fixed cushion" steering wheel controls is a system which brings all controls for comfort enhancement and driving assistance within easy reach, on the edge of a fixed central cushion, thus improving cockpit ergonomics and reinforcing the effectiveness of the driver airbag.

2.3.3. Climate Control

This Product Family offers intelligent heating, ventilation and air conditioning (HVAC) systems that enhance individual comfort for vehicle occupants, in all circumstances, while limiting energy consumption. In 2006, Climate Control developments were particularly focused on the following systems and technologies: · by replacing the refrigerant HFC134a with a natural gas called R744, the new climate control systems developed by Valeo are kinder to the environment and anticipate European regulations due to come into force in 2011, which will impose the use of environmentally-friendly refrigerants for all new vehicle types. With a much lower impact on global warming than systems using HFC134a, the new solutions represent a significant technological advance. The system using R744 also offers the

2.3.4. Electronics & Connective Systems

This Product Family contributes to the Comfort Enhancement Domain by developing and producing electrical and electronic distribution systems and related components. Innovations developed include solutions for optimizing battery management, including compact current sensors or power switches. The range covered by this Product Family includes: · wiring harnesses for power and data transmission; · body controllers; · electric distribution controllers under the engine cover; · electric distribution boxes; · electrical energy management components. This Product Family also provides support for the Driving Assistance and Powertrain Efficiency Domains.

3. Aftermarket products and services

Valeo Service consists of two activities whose roles are to supply original equipment spares to automakers and universal market spares to the independent aftermarket (see paragraph 1.2 Organization: Aftermarket). It offers Aftermarket customers a wide range of products and services designed to increase the effectiveness of repair specialists. The offering responds to increased customer demands, going beyond simply supplying parts, to include ever more comprehensive and optimized services and technical skills (catalogues, training, diagnostic and sales tools).

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In 2006 Valeo Service focused its efforts on improving customer satisfaction through the following objectives: · the organization of valeo Service into 5 transversal markets, each covering a different area of expertise to better reflect customer business: repair, maintenance, crash, post-equipment, and heavy duty; · logistics excellence through improved service levels: working in partnership with customers allows proximity stocks in each country and improved stock coverage using flexible delivery methods. · the total quality of products and services: with its valeorigin label, Valeo Service guarantees the quality and origin of original equipment spares, thanks to the expertise and know-how of Valeo in the OEM. Total quality also relates to services: great flexibility in order taking to reflect customer needs, telephone technical support, comprehensive training programs and computerized sales tools. Valeo Service extended and expanded its range of products and services in 2006 through: · the launch of more than 2,500 new product references, increasing the coverage for all product lines, with a particular emphasis on condensers and radiators; · doubling the number of references for the 4-part clutch kit; · the geographic extension of the wiper blade range under the Michelin license to six additional European countries; · reinforcement of the diagnostic tool range (Climtest 2, Airtest, Clim On Line); · the speeding up of product availability for the OEM to make them more rapidly available on the original equipment spares market; · optimization of the support service for the Valeo Clim Service network; · continual updating of paper (more than 20 new editions in 2006), multimedia and online catalogues; · the development of Internet services to improve customer service (downloadable price lists, customer Extranet) and the launch of a new website in Eastern Europe, Russia and Portugal in local languages; · geographical expansion of the eXponentia training program, which keeps repair professionals continually up-to-date with ever more numerous and complex developments in current vehicle technologies; · improved sales efficiency: the French and Spanish Divisions have introduced a Sales Force Automation service that tracks sales in real time and accelerates the launch of promotional drives;

· Valeo Service also updated its packaging in 2006. In addition to the new design, this packaging offers innovative functions to fight counterfeiting and incorporates indelible ink. The Valeorigin quality label appears on all boxes. They are easier to use, and feature standardized labels with an easier to read reference number and clearer diagrams. Valeo Service offers 176 product ranges covering 12 product functions for light, commercial and industrial vehicles and trucks. It is organized as follows: · wiper systems: blades, arms, linkages and front and rear wiper motors, positioned according to brand (Valeo Marchal, PJ, SWF, Cibié, MDD, ...); · transmissions: traditional 2 and 3 piece kits, four-piece kits with rigid flywheel, hydraulic components (three-piece kit with hydraulic release bearings as well as hydraulic release bearings available separately); dual mass flywheel, flexible flywheel; · lighting and signaling: main headlamps, Xenon headlamps, auxiliary headlamps, (including Xenon long-range and fog lamps), daytime running lights, rear direction indicators, lamps, work lamps; · climate control: products belonging to the Air Quality range (cabin filters Clim Filter, ClimPur), compressors, condensers, filter driers, heaters and blowers, diagnostic and maintenance tools, Climtest 2 diagnostic and maintenance tools, AirTest, CLIMFILL, regulation parts; · engine cooling: heat exchangers, water pumps, thermocontacts, thermostats, EGR valves, cooling fluids, particle filter exchangers; · electrical systems: starters and alternators (new and renovated), a wide range of spare parts; · retrofit lighting: park assist systems (beep&park), lighting tuning (laser engraved motifs for front and rear lights, headlamps with color masks, phosphorescent masks, LED rear lights), fuel caps; · electrical accessories: window lifts, comfort and pre-heating timers, relays, cigar lights and multifunctional sockets; · security systems: steering column locks, keys, locks, and fuel caps; · switches & detection systems: steering column controls and switches, door handles, actuators; · brake products: brake pads, discs and shoes, rear brake kits, hydraulic components, brake fluid; · ignition: pencil ignition coils, ignition rails, integrated ignition modules, spark and glow plugs and a wide range of spare parts for ignition systems.

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4. Functions

4.1. Human Resources function

The Valeo HR function adopts a proactive approach to accompany the Group's global growth, by developing universal guidelines which take into account specific local features and the market context. With an overall HR policy based on empowering its 69,800 employees in the Group (at December 31, 2006) working in 26 different countries, the Group strives to provide all staff with the same learning opportunities so that they can enhance their efficiency, operational performance and development potential. Valeo is evolving in a particularly competitive market: involving all employees and updating and developing their skills are essential to the Group's progress. Valeo is particularly attentive to all factors that contribute to motivating employees in their work and sustaining dynamic collaboration between the teams. The Group offers each of its employees genuine career prospects. Internal mobility is a key factor in developing Valeo's own top quality future leaders. In 2006, Valeo recruited 15,674 employees throughout the world, including 2,129 engineers and managers, bringing new skills to the Group. the key messages to communicate to applicants, is the main element of the recruitment kit. By offering a standard recruitment policy based on objective selection criteria, the Recruitment Guide helps to promote diversity at Valeo and to eliminate all forms of discrimination. Valeo has also continued and strengthened its relations with higher education institutes, in particular by developing partnerships with foreign universities and schools recognized at an international level. In 2006, the Group took part in many events to make contact with future graduates of these establishments, for example the ATUGE forum in France and Tunisia, the Franco-German forum in Strasbourg, the Best forum in Krakow (Poland), "Careers in Europe" in Berlin (Germany), Yes-Expo in Detroit (United States), the ATHENS forum in Paris (France) and special day events organized with universities in Wuhan, Nanjing and Changchun (China). In France, Valeo has intensified relations with a number of partner schools and universities, such as the Ecole Centrale de Paris, Supélec, Université de Technologie de Compiègne (UTC), Ecoles des Mines de Douai, ENSIETA in Brest and ECE, and has concluded a framework agreement with ESIGELEC. In addition, Valeo sponsors the "Elles Bougent" association which promotes transport careers for female secondary school students. Finally, in 2006 Valeo sponsored the UTC promotion and helped create a postgraduate DESS degree in logistics at IHEC Tunis (Tunisia). 4.1.1.2. internal mobility and personal development To offer attractive career prospects to the 12,000 engineers and managers employed by Valeo, the Group's policy demands that at least 3 out of 4 positions are filled internally. These career prospects are formalized through the creation, each year, of a Succession & Development Plan to identify the next stages in the career development of each engineer and manager. The plan is implemented via a review committee responsible for making decisions regarding internal job applications. In order to prepare employees for success in the next stage of their career, Valeo standardized in 2006 an "individual development plan" format comparing skills acquired with skills required for the next stage, allowing very detailed individual development plans to be drawn up. The plan is based on the "3 E" approach, which favors structured experience and first-hand knowledge in addition to more traditional training and education. Using these tools, more than 2,000 engineers and managers benefited from career development actions in 2006. To encourage the spread of policies, cultures and methodologies, and to offer international opportunities, the Group must be able to expatriate around 100 experienced managers every year. In order to be effective, Valeo's international policy must be both

4.1.1. Management development

The skills management system is a comprehensive range of procedures and tools available to managers to drive the effective development of Valeo employees. These systems are used to recruit, develop and motivate the necessary human resources, not just in their day-to-day work but also to achieve the Group's strategic objectives. The three major constituents of the management development strategy are external recruitment, which also includes relations with educational establishments, internal mobility and personal development, and lastly, remuneration and benefits. 4.1.1.1. Recruitment and relations with schools and universities Recruiting the best talent is a key factor of Valeo's success. Qualified teams ensure Valeo can offer its customers around the world value-added services in terms of innovation, total quality and competitive solutions and services. To ensure that recruitment, both internal and external, is managed coherently and professionally, all managers are trained using a recruitment kit made available to them. This kit, created in 2006, brings together in a single document all the existing tools, such as the Employer Brand, developed in 2002, the Internal Mobility Charter and the Valeo Competences system, launch in 2004. A Recruitment Guide explaining the Group's operating culture and

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competitive on the employment market and must also contribute to cutting costs. In 2006, following research on the best practice on the market, Valeo's policy was completely overhauled in order to meet the needs of employees and their families and in the general context of cost cutting. 4.1.1.3. Remuneration and benefits The Group constantly monitors the employment market in order to remain competitive so that it can motivate and retain its talent and adapt its practices as required. With its global presence, which is constantly evolving and encompassing new territories, such as Russia and Iran, Valeo needs to understand the relevant local practices rapidly and propose the appropriate remuneration in order to build up local teams. In 2006, for example, the Group introduced a long-term reward system to retain its key managers and engineers in China. A rigorous method to ensure that the Group remains competitive on the volatile employment market in Mexico, Poland, the Czech Republic and Thailand, was also rolled out in 2006.

own modules. The Programs and Projects, R&D and Intellectual Property departments have all created online courses, which can be accessed at any time by any member of their networks, irrespective of the country in which they work. A growing number of versions of these basic training modules (e.g. 5 Axes, Valeo Project Management Basics) have been developed, in German, Chinese, Japanese, Polish and Portuguese. The Training Department has software that enables it to rapidly produce content in-house.

4.1.3. Code of Ethics

Valeo joined the UN Global Compact Program in 2003 and fully supports its principles of social and corporate responsibility. In 2006, Valeo continued its efforts in this area, by further reinforcing its Code of Ethics. Regulations included in the Code must be followed by all Group employees, even where commitments exceed the requirements of local legislation in certain areas, e.g. child labor. The Code of Ethics has been translated into the 19 languages used by the Group and can be accessed by all individuals working at Valeo, whether Group employees or not, who are required to follow all the regulations, without exception. The new Code of Ethics underlines the respect for fundamental rights, covering issues such as child labor, disabled workers, discrimination, harassment and health and safety in the workplace. It also demonstrates the Group's commitment to sustainable development: the environment, human resources, social dialogue and freedom of expression, as well as each employee's individual development. It covers the Group's commitments to society (professional training, new employment assistance, reindustrialization), business conduct and professional conduct. Finally, the Code states that Valeo service-providers, consultants and subcontractors are obliged to act in accordance with the ethical rules outlined by the Group.

4.1.2. Training

Training plays a major role in the successful integration of new entities and organizational changes. It enables individuals to acquire the fundamental principles of Valeo culture: in-house terminology, working methods and shared working tools. Moreover, in the spirit of the recent training reforms in France, Valeo encourages each employee to take a proactive role in developing their professional skills. During a career appraisal (compulsory in France and extended to all countries in which the Group operates), each employee is given an opportunity for a valuable discussion with their line manager. Above and beyond essential training activity for their current position, the objective is to gain a long-term vision, clarify the employee's career goals and their potential to satisfy Group requirements. This exchange allows us to define the steps and resources for implementation, including the French individual training entitlement (DIF, or Droit Individuel à la Formation). In 2006, 13% (2,184) of employees with the right to DIF applied for the scheme, and were accepted. 2% of demands (53 employees) were refused or had to re-apply in 2007. To provide a more effective and personalized solution, Valeo prioritizes training which combines different learning methods: conventional class-based training, skills appraisals, coaching, role play and computer-assisted self-training. For the latter category, [email protected], the Group's online university, is open to all staff. Employees are able to access training at their own pace, with assistance from HR staff or tutors. Training covers a wide variety of areas including languages, office systems, management, and personal efficiency, as well as the Valeo culture, products and technical processes. In 2006, 14,700 employees (compared to 13,000 in 2005) received around 68,600 hours of online training (compared to 60,000 in 2005). Several functional departments have adopted this training method and are developing their

4.1.4. Industrial Relations

Valeo is firmly committed to a forward-looking employment and skills management policy. In view of the ongoing necessity to rationalize its industrial base, the Group actively seeks solutions which will provide alternative jobs for employees affected: transfers within the Group, individual and collective external redeployment, new employers to take over sites in question, the reindustrialization of employment regions and local economic development initiatives. Employee representatives are regularly informed and consulted on these operations. The Group's social indicators can be consulted in the "Social indicators" section in Chapter 2 of the Management Report.

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4.2. Risk Management, insurance, Environment, Health and Safety

4.2.1. Risk management and Insurance

Valeo's risk management policy is founded on the basis of rigorous procedures and management systems for improving performance. The Valeo approach, applied systematically at all Valeo sites, can be summarized as follows: respecting obligations imposed by national legislation as well as those defined by Group policy (which exceed the requirements of national regulations in many areas), as well as identifying risks, evaluating their impacts, setting objectives and implementing action plans to reduce ­ or where possible to eliminate ­ risks. All procedures regarding health and safety, building security, the environment and the protection of knowledge and expertise are detailed in the Risk Management Manual, which is updated on a regular basis. The Group also produces an Insurance Manual, updated on an annual basis, providing comprehensive information on risk coverage and managing insurance programs. Clearly identified risks for each site. To achieve its objectives and bring risk levels down to zero, Valeo requires continuous visibility. Each site is subject to a full audit every three years at most, covering the environment, health, safety at work and the protection and security of buildings. This audit is carried out by external consultants, in accordance with local obligations, Group policy and good practice. It provides useful, detailed information--especially with regard to environmental concerns--on site activity, the surrounding area and the natural environment: geology, seismic risks, flood plains, etc. Actions to be implemented and associated action plans are established on the basis of these audits. Site action plans are communicated twice yearly at the Group level, providing the Risk, Insurance and Environment Department with precise and comprehensive information for evaluating the performance of individual sites. Each site is graded on an annual basis, based on factual criteria.

management of the product at the end of its life. Since 1998, a group of experts in environmental matters and research and development from different Valeo Product Families have been working together to reduce the environmental impacts of processes and products over their entire lifecycle. This research group meets regularly to discuss specific topics such as the elimination of banned and restricted substances or the use of recycled plastic, for example. At the end of 2006, and to be pursued in 2007, this working group initiated a process aimed at coming into line with the 2006 deadlines set by REACH (Registration Evaluation and Authorization of Chemicals), which requires manufacturers and importers to produce and offer to the market substances with no harmful effects on human health or the environment. · Valeo has also created a reference database of substances that are banned or restricted in the automotive industry. Updated again in 2006, this database details the regulations applicable in the different countries where Valeo operates and the requirements of its automaker customers concerning over 600 substances used in the composition of parts and in manufacturing and repair processes. · To fulfill its progress objectives, Valeo bases its environmental policy on performance as well as the implementation of a management system which leads to regularly renewed certification. This is the case with iSO 14001 certification, the international standard in terms of environmental management systems. At the end of 2006, 127 of the Group's sites had iSO 14001 certification, compared to 117 at the end of 2005 and 106 at the end of 2004. The aim is for all Valeo sites to be certified. Newly acquired sites are immediately integrated into this certification system. · The Generic plant is also a concept developed by Valeo, based on the work of the HQE (High Quality Environment) association, the US Green Building and World Bank recommendations. All new plant construction and refurbishment projects are carried out according to very detailed specifications. These cover site selection, plant architecture and construction, employee working conditions, plant operation, application of regulations, Valeo risk prevention standards, optimized energy consumption, and the reduction of emissions and waste. All building and renovation specifications involving safety, security, health and the environment are outlined in the Valeo Factory Design Guide.

4.2.2. Environment

Environmental protection demands a number of initiatives which are, by definition, long-term. Valeo has been applying such initiatives for more than 15 years. The objective is of course to prevent environmental pollution, but also to protect the environment by reducing consumption of energy and raw materials, reducing or even eliminating the consumption of dangerous products, reducing waste and achieving maximum recyclability of all products, and offering an industrial environment that is both safe and pleasant to work in. · Valeo innovations systematically incorporate an environmental dimension into their design. This applies to a product throughout its lifetime: from design to production and use, right up to the

4.2.3. Health and Safety

As regards health and safety in the workplace, Valeo has begun a process for obtaining certification in accordance with the OHSAS 18001 international standard. Launched in mid-May 2005, the project aims to obtain certification for all Group sites and in 2006 was a key project for the Group in this domain. At the end of 2006, 72 sites were certified, compared to 18 at the end of 2005 and three at the end of 2004. Like the ISO system, this

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health and safety management system is based on continuous improvement. The Group's environmental indicators can be consulted in the "Environmental Indicators" section in Chapter 2 of the Management Report.

THE 5 AXES

4.3. industrial Functions

Operational excellence is of critical importance to Valeo. The controlled expansion of the Group's business requires the daily implementation of a basic principle: obtaining cost-effective total quality first-time, whether this involves methods, manufacture, projects or purchasing. The new Technical Department, which brings together the Quality, Purchasing, Industrial, Projects, Logistics, Information Systems and Real Estate Departments was set up in 2005 to assist the Group in pursuing its plan of reducing costs and optimizing quality, as well as fostering cooperation between these seven functions. Its objective is to ensure that the 5 Axes are applied in a strict and disciplined manner. The 5 Axes methodology is applied around the world, by all Group employees, in order to deliver "zero defects" to the customer. The 5 Axes are: involvement of Personnel: this implies recognizing skills, enhancing them through training and giving people the means to carry out their responsibilities. Employees are particularly encouraged to make suggestions for improvement and participate actively in the work of autonomous teams. valeo Production System (vPS): the VPS is designed to improve the productivity and quality of products and systems. It is a "pullflow" system based on the flexibility of production resources, the elimination of all non-productive operations and stopping production at the first non-quality incident. Constant innovation: to design innovative, easy-to-manufacture, high-quality and cost-effective products while reducing development time, Valeo has set up an organization based on project teams and the simultaneous engineering of products and processes. Supplier integration: allows Valeo to take advantage of suppliers' ability to innovate and develop productivity plans with them to improve quality. Valeo sets up close and mutually-beneficial relationships with a limited number of world-class suppliers and sustains these relationships in the long term. Total Quality: in order to meet customer demands in terms of product and service quality, Total Quality is required throughout the Group and from its suppliers.

Constant Innovation

Total Quality

Supplier Integration

Production System

Involvement of Personnel

FOR CUSTOMER SATISFACTION

The 5 Axes were revised in 2005 and several additions were made to the previous version, which dated back to 2000. Tools were devised by the networks in the interim, which have now been included in the 5 Axes, in particular: · the Quick Response Quality Control (QRQC) approach: any problem which arises is immediately identified and analyzed on the spot by the parties involved. Corrective action is defined and implemented within 24 hours. This approach applies to all domains: production, quality, purchasing, logistics and risk management. The latest strategy, launched in 2005, is to apply the QRQC approach to projects. The idea is to detect potential problems before projects have even been launched; · the "pull-flow" industrial method allows Valeo to reduce stocks, improve the productivity of the direct workforce and optimize deployment of resources and investments, in accordance with actual customer demand; · the notion of "Kosu": Kosu is a measure of the resources required to manufacture a part, which can can be used to indicate cost performance and for schedule monitoring.

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For the past ten years internal audits have been used to evaluate the results of the 5 Axes approach and Valeo has developed its own standards to analyze and improve the application of each of the 5 Axes. In 2005, a new set of reference standards, the v 5000, was launched and deployed at all Valeo sites from the start of 2006. The standards include in particular a list of ten obligatory requirements. The standards should ensure that all Valeo sites focus on the same key priorities.

4.3.1. Purchasing

The role of Valeo's Purchasing team is to reduce supply costs through increased sourcing in competitive-cost countries, implement rigorous selection processes for new suppliers, apply the total quality and innovation approach to suppliers and sub-contractors and establish close partnerships with the most innovative and best performing suppliers. The Group's goal is to use its purchasing strategy to gain competitive edge. · The Purchasing network covers all activities linked to supplier integration. Suppliers are divided into purchase families for products and services from raw materials to electronic, mechanical and plastic components, etc. The eleven Valeo Product Families each have their own purchasing networks and there is a separate purchasing team for every Valeo site. The different Product Families are coordinated by Group Lead Buyers (based at the sites, these buyers coordinate and harmonize the purchasing policies of the different Valeo Divisions for which a given supplier works) and Group Commodity Leaders, lead buyers who are responsible for strategy, as well as a panel of suppliers for each purchase family. · Valeo deploys resources to help its suppliers improve their own quality processes. The Group's QRQC approach continues to be implemented to assist suppliers in achieving zero defects. In 2006, 524 suppliers were thus trained in this method. · "Supplier Relationship Management" (SRM) is an essential tool in the relationship between Valeo and its suppliers. SRM is a secure extranet resource. Modules such as the incident Management System and Supplier QCD (reporting back to suppliers on their performance in terms of quality, cost and delivery) can be accessed on the extranet, enabling Valeo and its suppliers to work closely together and share standardized processes, for example, in order to identify and process quality incidents rapidly. · By working with fewer suppliers, Valeo is better able to support them in their quality strategies. The Group has thus retained the best suppliers in terms of quality, technology and productivity. Despite the addition of suppliers due to the change in consolidation scope in 2006 (see Highlights ­ Strategic Operations section), the Group optimized the number of its suppliers by 277 in 2006. · In 2006 Valeo pressed ahead with Convergence, a program designed to engineer a dramatic cost reduction while

improving the quality of products produced by our suppliers. The system uses a specific monitoring tool, the Scorecard which provides a visual indication of quality performance and cost reductions implemented. It also provides three-year visibility of developments and areas of potential productivity, as well as indicating where such areas have not yet been identified. Each supplier Scorecard is monitored by a Group Lead Buyer (see above). In 2006, the Convergence program involved 276 Valeo suppliers, representing 58% of Group purchasing. The program is complementary to the VIP program launched in 1999. · Valeo Integrated Partners (VIP) program, covered 98 suppliers in 2006, including suppliers from competitive-cost countries. All of the Group's VIP suppliers were brought together during a special convention held in Paris in January 2006 to present the strategies, new products and technologies, business opportunities and the objectives and priorities for 2006. · In exchange for an undertaking from its suppliers to continuously improve operational performance, Valeo offers these partners greater volumes and business opportunities. With the launch of its new Code of Ethics, Valeo further tightened the requirements imposed on its suppliers in terms of labor rights and environmental protection. · Innovating and designing products using different materials and new architectures can also help reduce costs. Presentations to identify supplier innovations are organized on a regular basis. In 2006, contracts relating to innovation and development were signed with key suppliers. · valeo increased purchasing in low-cost countries. These purchases represented 33% of total production purchases in 2006 (compared to 26% in 2005). This result was achieved with the contribution of all Valeo teams as well as those of Valeo's APO (Asian Purchasing Office) in Shanghai, which was significantly strengthened in 2006.

4.3.2. The Valeo Production System and logistics

The role of the Valeo Production System (VPS) is to improve product quality while at the same time reducing production costs and long-term assets. At the heart of this strategy lie the optimization of the industrial footprint and the deployment of a Total Quality Culture. · In 2006, Valeo continued to implement both its plan to standardize processes and equipment, using the Kosu approach to measure the resources required to manufacture a part, and also its investment optimization strategies. These operational standards make it possible to capitalize on experience, cut product development lead times, stabilize new production lines quickly while avoiding start-up problems, and cut costs at every stage of the process. All activities are now carried out using standards that supervisors must ensure are respected and improved. On the shop floor, performance is monitored in real time through a concrete analysis of what really happens on the production line. Problems are identified, immediately processed and turned into opportunities for improvement. Each operation

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is assessed for its contribution to the added-value of products, and operations lacking in this respect are eliminated. · The involvement of employees in the process of optimizing investments was also crucial this year. This approach has enabled the Group to define new standards, while emphasizing flexibility and versatility. · The ergonomic design of workstations continued to be improved. Each workstation is organized around the needs of operators, who have made significant contributions to improving their comfort and safety at work. This approach is part of Valeo's Occupational Health and Safety policy (see also paragraph 4.2.3 Health & Safety) and helps reduce the number of accidents at the Group's production sites. · The specific features of the aftermarket are also taken into account at Valeo. This market imposes certain limitations on industrial operations. Products are mainly manufactured using the same production machines as for original equipment parts. If necessary, simplified lines designed for small volumes with low levels of automation can meet the requirements of this market. Servicing and maintenance of these specific machines are already in place. · In order to optimize logistics, each Valeo plant is organized according to product flow. Responsiveness and flexibility with regard to customers' requirements are fundamental. In particular, Valeo employs pull-flow methods to reduce stocks and simultaneously improve customer service levels. The daily measuring of service levels is a rule which, little by little, is extending to our suppliers.

- the Production Quality Manager ensures that quality-specific tools are properly implemented within the manufacture process and coordinates the deployment of control plans as well as instructions for work. He/she also acts as the "voice of the customer" for all quality incidents to ensure the customer's total satisfaction.

· Valeo has also implemented a program of resident engineers, to provide optimal customer support. Engineers are no longer simply assigned to a given customer; they actually go and work at the customer's premises. As soon as a problem is detected, the engineer communicates it to the appropriate people at Valeo, so that actions can be defined immediately to protect the customer. At the end of 2006, the Group had 56 resident engineers; 39 in Europe, 10 in North America, 3 in South America and 4 in Asia. Among these 56 people, a program of warranty resident engineers was also deployed, whereby 10 resident engineers joined the customer teams, either at the head offices or in their warranty management centers. Reinforcing the Valeo culture involves the mobilization of all employees, at all levels and is based on: · the San Gen Shugi approach, inspired by Japanese best practices and based on a concrete analysis of what actually happens on the shop floor. San Gen Shugi is based on reality: Genba (where and when a problem arises) Gen-butsu (using the actual parts involved, whether above or below standard), Genjitsu (with measurable facts). This attitude is founded on both individual responsibility and teamwork; · the QRQC approach (Quick Response Quality Control) is also essential. When a problem occurs it is immediately identified and analyzed by the parties involved. Corrective action is defined immediately and implemented within 24 hours. In the event of a quality incident, meetings are held on the spot, to identify the root cause of the incident and eliminate it for good. These meetings involve employees from various functions as required: production, logistics, maintenance, etc.; · in the automotive industry, non-quality of products is expressed in ppm (the number of defective parts per million parts produced). In five years, Valeo has reduced the number of defective parts by a factor of 9. In 2006, non-quality of products improved by 53% compared to 2005, to reach 15 ppm at the end of 2006 (compared to 32 at the end of 2005). 63 Valeo sites (compared to 48 at the end of 2005) were already below 10 ppm at the end of 2006.

4.3.3. Quality

Quality is a key demand from consumers and automakers. The cornerstone of Valeo's 5 Axes methodology, it is an integral part of the Group's culture. Total Quality is not just a question of methodology; it is above all a state of mind. It therefore it requires the involvement of everyone at all times and in all circumstances. At Valeo, this approach is the responsibility of all 69,800 Group employees. · The role of the Quality network is to ensure that everyone is aware of and understands their individual responsibilities. It also consists of evaluating problems and requirements in terms of training support, and of training, supporting and validating lessons to be retained and shared to avoid any recurrence. · The Valeo Quality network functions on the basis of a decentralized network and involves each of the 5 Axes.

- the Quality System Manager validates internal procedures, checks that they are applied properly, and updates them to ensure that they are in line with both internal and external quality standards; - the Project Quality Manager ensures that the quality methodology is duly applied to projects and checks that projects are covered for their entire duration, in accordance with Valeo standards; - the Supplier Quality Manager manages the quality of components delivered, from the project phase right through the product's lifecycle and assists supplier progress through the implementation of improvement plans;

4.3.4. Projects

Valeo set up a Projects Department towards the end of 2005 in order to promote good project management practices, allowing for the launch of reliable products, free of quality problems and with guaranteed lifetimes. The role of this function is therefore to ensure that all Group projects are launched successfully, in terms of quality, deadlines and cost by implementing rigorous methods and applying them to the Group's entire Project network.

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· The Project function covers all domains for developing new applications, from standard products through to advanced development projects. Directors, project managers and all members of their teams work on development projects for the full spectrum of automakers. Project teams consist of buyers, sales staff and employees specializing in R&D, quality and processes. · The methodologies implemented by the Projects function are taken from the 5 Axes approach. There are four project categories at Valeo: P3 (creativity), P2 (generic standards), P1 (customer application) and P0 (changes during the production phase). This policy sets out in detail the innovation process at Valeo. In 2006 the Valeo project portfolio featured around 690 P0 projects, 1,849 P1 projects and around 600 P2 and P3 projects, giving a total of 3,139 projects. It covers a wide variety of products from simple sensors, to highly sophisticated systems or complex integrated modules. The project management method is described in a document entitled Constant Innovation Policy. · It also covers Group best practice and details the organization of teams, resource management guidelines and the development of systems and modules. Lean Investment techniques are also used to minimize production costs and maximize team outputs. The QRQC approach has been adapted to suit the Projects function and its deployment is currently underway.

Surveys are carried out to gain a better understanding of driver requirements and tests evaluate how new products are perceived. These tools thus enable Valeo to measure the extent to which innovations are accepted. The ultimate goal is to quickly develop and implement innovations which are useful to the driver and generate growth for Valeo. · To reinforce its technological offering, Valeo also 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 École des Mines, which develops on-board cameras and pedestrian detection within the Driving Assistance Domain. The Group also works on simulation techniques and fluid mechanics with Stanford University in the United States. A framework agreement was also reached with ESIGELEC (in France) for the electronics. · Finally, Valeo proposed projects for competitive centers on themes relating to energy, powertrains, mechatronics, software and complex systems, but also invested in the governance of some of these centers (MOVEO, MTA, [email protected]), which enables Valeo to help bring universities, industry and research closer together. · valeo R&D centers are located throughout the world. The Group had 68 at the end of 2006, employing nearly 7,000 people. Very high level R&D centers have also been opened in the developing countries: Valeo has sites dedicated to R&D in Casablanca (Morocco), Mexico City (Mexico), Prague (Czech Republic), Wuhan (China), Brazil and Poland. Teams working at these centers contribute to projects for both the local market and Group-wide projects. · In 2006, Valeo announced the construction of a second R&D center in Shanghai in China. This technical center will design advanced climate control systems for Chinese, Japanese and European car makers. When fully operational, the new technical center will accommodate up to 60 highly qualified engineers and technicians.

4.4. Research and Development

Designing the automobile of tomorrow, creating technologies and products in accordance with the market, while anticipating its expectations and driving the market through innovation: these are the fundamental principles of Valeo's Research & Development strategy. Innovation is, more than ever before, at the heart of the Group's development strategy. Valeo engineers seek to anticipate automakers' demand for solutions that offer real added-value for drivers: increased comfort, performance and respect for the environment. In 2006, research and development expenses represented 6.6% of sales, and over 562 new patents were filed. · Faced with an ever more demanding market in terms of new products, Valeo has developed the processes necessary for reducing design lead times for new products. Thus, the Group works upstream to improve the in-house efficiency of projects, ensuring the appropriateness of actions scheduled and checking that existing competences correspond to those required. (see also paragraph 4.3.4 Projects). Major efforts are made to reduce the cost of research and development, in order to satisfy market expectations. · Since an innovation's success is closely linked to its effectiveness and close conformance to drivers' expectations, Valeo deploys a large range of tools, market research, forecasts and testing.

4.5. international Affairs

valeo develops, produces and commercializes original equipment and aftermarket products and systems for all car and truck manufacturers. The Group's commercial policy extends well beyond everyday commercial relations and involves forging very close partnerships and accompanying their customers in developing their markets, throughout the world.

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The Group

4.5.1. Automaker customers

The Group aims to supply all automakers. Valeo's top five OEM customers, representing a total 64.4% of Group sales are (in alphabetical order) DaimlerChrysler, General Motors, PSA PeugeotCitroën, Renault-Nissan, and Volkswagen. The Group's biggest customer represents just over 17% of Valeo's sales. Its main original equipment customers are (in alphabetical order): · BMW; · Chery; · DaimlerChrysler; · Fiat (including Iveco); · Ford Motor Company; · General Motors; · Honda; · Hyundai; · Man; · Mitsubishi; · Navistar; · Paccar; · Porsche; · PSA Peugeot-Citroën; · Renault Nissan; · Scania; · Tata Motors; · Toyota; · Volkswagen Group; · Volvo Trucks.

in these regions, establish close relationships with the key customers in the regions and to resolve locally any legal or social problems, where necessary. · Group Customer Directors are the Commercial Directors responsible for major automaker customers. They number nine, and each represents Valeo in dealings with a given manufacturer and coordinate relations with the customer on a Group-wide basis, for all Product Families. · The Sales and Business Development network, consisting of eleven Sales Directors each of whom is linked to a Group Product Family, defines the commercial strategy and is responsible for day-to-day customer relations. · To underline Valeo's role with regard to automaker customers and showcase the Group's innovations at an early stage in the vehicle development process, Valeo organizes technical presentations at the customer's premises and also "Ride & Drive" events. These operations give Valeo an opportunity to demonstrate its latest innovations grouped together into the various Domains and give guests the chance to test them for themselves at the wheel of Valeo's specially-equipped demonstration vehicles. The events bring together different stakeholders in a private setting at the automaker's premises, including business sector and platform managers, directors of research & development, product marketing and purchasing. Valeo is also present at the major international motor shows, with the goal of developing commercial relations with its customers. · Valeo has developed a certain number of tools to ensure that commercial relations with its customers foster a context of profitable growth and drive markets: the Customer Development Plan, for example, is a veritable tool for promoting the Group's commercial strategy. Customer satisfaction surveys are also carried out on a regular basis. · Valeo has also developed an entire training module dedicated to improving the effectiveness of its sales force: the valeo Sales Academy.

4.5.2. Operational structure of International Affairs

International Affairs consists of three networks: · National Directorates, which act as veritable ambassadors for Valeo in given geographical areas. There are nine National Directorates, based in Germany, North America, South America, South Korea, China, Spain, Italy, Japan and Poland. The role of these National Directorates is to promote the Valeo brand

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Geographical presence

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Geographical presence

The Group optimizes its industrial footprint on an ongoing basis in relation to customer demand, markets and labor costs. In 2006, Valeo continued the deployment of its sites in Asia, as part of its globalization strategy and approach to accompanying

Valeo presence by region at 31/12/2006

Production plants Western Europe Germany, Belgium, Spain, France, United Kingdom, italy, Portugal, Sweden, Netherlands Eastern Europe Hungary, Poland, Czech Republic, Romania, Slovakia, Turkey North America USA, Mexico South America Argentina, Brazil Asia China, South Korea, india, Japan, Thailand, Malaysia, indonesia, iran Africa South Africa, Morocco, Tunisia, Egypt 12 6 6 00 26 11 7 500 10 1 3 600 56 R&D centers 42 Distribution platforms 6 Number of employees 31 540

its automaker customers. Valeo now has production facilities in each of the world's major vehicle assembly regions and new sites based in countries offering the most competitive production costs.

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10 160

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7 200

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9 700

As part of normal operations, the capacity of some sites is currently being expanded. At December 31, 2006, the Group's real estate portfolio (land and buildings) had a net book value of 565 million euros. It is largely composed of production sites, mostly wholly owned. The Group's equipment is largely made up of technical facilities, materials and tools. At December 31, 2006, they were stated as

having a net value of 1,016 million euros excluding fixed assets under construction (see Chapter 3, note 4.3 on Fixed Assets). Environmental constraints result from the regulations applicable in this area to all Group establishments (see Environment p. 20, Industrial and Environmental Risks p. 43 and Environmental Indicators p. 48).

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Competitive context

Competitive context

The market for automotive components and systems is subject to fierce competition, in terms of cost, quality, service and technology. For some product lines supplied by the Group on the original equipment market, Valeo is consistently one of three to five major suppliers who together represent more than half of the market (in sales), the remainder being made up of a large number of regional suppliers: · in several product lines, Valeo competes against the four largest international automotive suppliers (in alphabetical order): Robert Bosch, Delphi, Denso and Visteon; · for certain product lines, such as transmissions, thermal systems and lighting systems, the leading suppliers include companies that are smaller or more geographically concentrated, such as Behr, Hella and Luk, etc.; · the following Product Families are among the world leaders in each segment (in sales): Transmissions, Climate Control, Engine Cooling, Wiper Systems, Lighting Systems, and Electrical Systems. In addition, several products in Switches & Detection Systems, Electronics & Connective Systems and Security Systems enjoy other European or regional leadership positions (source: Valeo).

Key events in 2006

1. Commercial success

valeo won several new contracts in 2006, which have helped achieve the goal of increasing the number of valeo products per vehicle. OE orders came to 1.3 times sales, the highest level since 2001. · As a leading supplier, Valeo 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 an European manufacturer, and mass production is planned for 2007. The FG alternators and FS starters were a commercial success, resulting in substantial order-taking from major automakers on all continents. · Valeo Climate Control increased its market share with most of its customers, notably with the renewal of a platform for a French automaker, a rear ventilation system for a German customer and the supply of several complete air conditioning systems to Asian customers. Lastly, a world first: Valeo fitted Luc Alphand's Corvette at the Le Mans 24 Hour Race with an air conditioning system adapted to the race conditions in order to reduce driver fatigue. · Valeo Engine Cooling registered major orders for exchangers and engine cooling modules from a US automaker in Europe and in North America. Also, in the light of the tightening of standards on pollutant emissions, this product family developed an innovative water cooling system, integrated into an air intake module, in partnership with a German manufacturer. When the time came to update one of the main models by a French manufacturer, Valeo Engine Cooling also won all orders for its exchangers and engine cooling modules. 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, Valeo announced that its new Park4UTM parking assistance system would equip its first production vehicle--the VW Touran--in the first half of 2007. This is a world first. Valeo Switches & Detection Systems also significantly increased its order-taking with Japanese manufacturers. It also registered

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Key events in 2006

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new orders for the blind spot detection system, with a US automaker. · At the same time as orders from French manufacturers were increasing, Valeo Security Systems stepped up its international development, particularly in Asia, with 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. In Europe, Valeo Security Systems reached a record level of orders taken with a major European automaker for handles, locks and latches. · For Valeo Lighting Systems, 2006 was notably marked by a major order for daytime lighting using innovative LED technology, from a major European automaker. Xenon technology was used on the new Nissan Altima in North America by Valeo Sylvania, a US-based joint venture in this product family. Finally, this product family boosted its order intake among various Japanese manufacturers and a German automaker. · 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. A new order for engine-control calculators for the 1.6 liter atmospheric engine by the Renault-Nissan partnership destined for the Renault platforms was registered by this product family. · In addition, in terms of emissions control, 2006 was a good year for 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. · Thanks to an improved service level, a long-term contract was signed between Valeo Service and a French automaker for the development of new technologies in wiper systems, transmissions and engine cooling for the aftermarket. Valeo Service also signed other contracts to supply lighting products in the Accessories range and LED technology for front and rear lighting to major manufacturers. · An innovative approach with the development of a customerspecific range saw Valeo Service signing a contract for wiper blades with Halfords, a major UK chain selling replacement parts.

2. Technological innovations

Throughout 2006, Valeo consolidated its position as a major driver of automotive progress, and demonstrated its ability to introduce innovations through its three Domains. · The Blind Spot Detection System contributes to reducing collisions with unseen vehicles during lane change maneuvers. This system monitors the blind spot on both sides of the vehicle. If a moving obstacle, such as another overtaking vehicle, is present in the blind spot, the driver is alerted through a visible icon on the outside rearview mirror. This system combines two areas of expertise: the short-range radar expertise of Valeo and the in-depth knowledge of radar systems from Raytheon. This system has been selected as a finalist for the 2007 Automotive News PACE ("Premier Automobile Suppliers Contributions to Excellence") Awards in its product innovation category. · The LanevueTM lane departure system, co-developed with Iteris, comprises a miniature video camera, which uses algorithms to monitor the lane markings ahead of the vehicle. If the driver leaves the lane without indicating, the system alerts the driver so that (s)he can take corrective action.

2.1. Domains

The Domains were established to promote innovation using technology and synergies between product families, leading to the commercialization of global solutions in the fields of safety (Driving Assistance), the environment (Powertrain Efficiency), and well-being (Comfort Enhancement).

2.1.1. Driving Assistance

· The Park4UTM automatic park assist system automatically parks a car in less than 15 seconds. Using ultrasound technology, it makes city driving safer and more comfortable.

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Key events in 2006

· valeo actively promoted its v360 demonstrator, a vehicle equipped with a range of innovative driving assistance systems. This vehicle demonstrates the successful integration of different technologies designed to inform, alert, assist, and control. This role is controlled by systems using various technologies, including radar, cameras, LEDs, infra-red vision, ultrasound, and control and power electronics.

2.2. Recognition of valeo's R&D prowess

The Group's potential for technological innovation continued to benefit from wide recognition among market players. · The StARS micro-hybrid (Starter-Alternator Reversible System) won a "Premier Automobile Suppliers Contribtion to Excellence" (PACE) Award 2006 in the European products category. The PACE Awards honor "superior innovation through technological advancement and business performance among automotive suppliers." The prizes are awarded in partnership with Automotive News, Microsoft, SAP and the Transportation Research Center. This micro-hybrid system is currently available on the Citroën C2 and C3 Stop&Start, the only one currently available on the market. · In July, Valeo Climate Control's air quality system received the Nissan Global Supplier Award for Innovation. · Valeo won an Automechanika Innovation Award for its Power Line Communication system in the "Systems" category. The innovative technology makes it possible to integrate new equipment while simplifying a vehicle's electrical architecture. Electrical power and data are simultaneously transmitted on 12V cables for "plug & play" integration. This prize was presented to Valeo during an award ceremony at the opening of the Automechanika trade show, in September 2006 in Frankfurt. · In its Powertrain Efficiency Domain, Valeo is involved in PSA Peugeot Citroen's hybrid/diesel project, one of six projects approved and financed by the French Innovation Agency, a governmental organization created in August 2005 with a total investment budget of 1.7 billion euros in the automotive domain. The Industrial Innovation Agency also agreed to invest 61 million euros in the LowCO2Motion research project : a 211.6 million euros project over the period 2007-2011, supporting the joint development of camless technology and micro-hybrid with regenerative braking technology.

2.1.2. Powertrain Efficiency

· The StARS micro-hybrid is the first step towards hybridisation. The system is based on a reversible fan-driven 14V starteralternator which acts as both starter and alternator. It consists of a reversible machine and electronics, which puts the engine on standby when the vehicle is at a standstill, and when the driver releases the brake it starts the engine quickly and silently. This system won a 2006 PACE Award in the European Products category. Subsequent stages towards hybridization are in development, notably with the recovery of kinetic energy by storing energy in super-capacitors when the vehicle slows down. This innovative solution is being promoted using a demonstration Volvo V70 turbo diesel fitted with this technology. · The Smart valve Actuation (SVA) system replaces the conventional mechanical operation of engine valves with the cam belt, camshaft and hydraulic cam followers. It reduces fuel consumption by around 15-20%, and also restricts pollutant emissions. · The UltimateCoolingTM 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.

2.1.3. Comfort Enhancement

· Valeo has developed a 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. · Valeo designs 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. Valeo's product families have made other contributions to the three Domains and are covered in more more detail (see Chapter 2. Domains and Product Families, The Group).

2.3. Collaborations and partnerships

· The policy of forming partnerships with the best specialists in each sector in order to speed up the introduction of new technologies in automobiles continued, as in previous years: with Raytheon, the radar expert, Jabil Circuit for the production of electronic cards, Iteris for lane departure surveillance systems and IBM for on-board software. · 2006 was also the first of a three-year partnership between Valeo and the French rally racer Luc Alphand, for the AllTerrain Rally World Cup and the Le Mans Endurance Series. This partnership is designed to allow Valeo to promote its image as an innovative company looking for big challenges. There is a technical aspect to the partnership, Valeo develops lighting systems, wiping systems, and air-conditioning for the vehicles in the Mitsubishi Motor Sports Team and Luc Alphand Aventures. This year of partnership was marked by several Luc

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Key events in 2006

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Alphand victories in all-terrain rallies: he won Dakar 2006 in Africa, the "Por las Pampas" in Argentina, and in the UAE, the

Dubai Desert Challenge; he was also in winning positions for the Le Mans Endurance Series.

3. Strategic operations

The acquisitions/disposals strategy is designed to reinforce its three Domains and increase the organic growth potential of the Group. · In this context, 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. · The strategy of focusing on three Domains has resulted in the disposal of Logitec, a logistic business in Japan which was acquired in 2000 with the climate control businesses of Zexel, and also in the disposal of Valeo's entire 14.8% stake in Parrot for a sum of 38 million euros. · Valeo sold its Motors & Actuators business, considered non-strategic, to the Japanese group Nidec, for a sum of 142 million euros.

4. Operational excellence

4.1. Optimizing industrial facilities

Valeo continued to optimize its industrial facilities in order to support its customers and ensure it has a competitive cost base. · 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. The deal signed with the IUE-CWA union Local 509 for the reduction of headcount until closure of the Wiping Systems plant on July 31, 2008. 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 frontend 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. · Two sites were opened at SeongJu (Transmissions) in South Korea and at Changchun (Compressors) in China. An R&D center (Climate Control) was opened in China in July 2006 and 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.

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Key events in 2006

4.2. Supplier integration

In the difficult context of inflation in raw material prices in 2006, Valeo continued to pursue its policy of selecting and integrating suppliers as far upstream as possible, to make them preferred partners in the long term, and to help reduce costs and allow Valeo to communicate its quality standards to suppliers. · The Group demonstrated great resistance to the record inflation in raw material prices by increasing the use of all purchasing resources available and pursuing its program to reduce the number of its suppliers. The panel fell by 277 to around 2,728 at end December 2006, while purchasing volume stood at around 5.1 billion euros. Valeo also pressed ahead with Convergence, a program designed to engineer a dramatic cost reduction while improving the quality of products produced by our suppliers. This program currently includes almost 276 suppliers, i.e. almost 10% of the Group's suppliers, and 58% of purchasing volume. The VIP (Valeo integrated partners) program continued in 2006, with 98 VIP suppliers at the end of the year. · The Group also continued to increase the share of supplies originating from low-cost countries, which grew from 26% in 2005 to 33% in 2006. · The online purchasing system (reverse bidding) used by Valeo that allows it to optimize purchasing prices and withstand price increases, represented a record amount of more than 1 billion euros in reverse bidding in 2006 (compared to 631 million euros in 2005).

· Valeo won two Superior Awards for Quality from Toyota Europe in recognition of the excellent performance of Valeo Lighting and Valeo Transmissions. · The US Auto Division of Valeo Engine Cooling won Honda's Supplier Performance Award. · The Heavy-Duty Division of Valeo Engine Cooling in Jamestown, USA, received Ford's Silver World Excellence Award for its performance in terms of quality, costs and delivery. · The Mexican plant at San Luis Potosi (Engine Cooling) received a prize from the Volkswagen Group in the Excellence in Development category. · Valeo Climate Control in Japan was named Best Supplier of the Year 2005 by Fuji Heavy Industry. · Group Auto Union International awarded its Silver Prize for the Best Supplier to Valeo Service. · The Engine Cooling and Lighting Systems product families were named among the 22 best suppliers of the year 2005 by Volvo Cars. · Hyundai-Kia Motors gave its Management Innovation Supplier Award to the Korean Division of Valeo Electrical Systems, which demonstrated industrial excellence through achieving a quality level of 0 ppm (defective parts per million) in 2006. FVW gave Valeo Electrical Systems Shanghai in China the 2006 FVW Excellent Quality Award. The same division was also named a 2006 Excellent Supplier by Liuzhou Wuling Liuji Dynamical Co. Ltd. · Valeo Engine Cooling and Valeo Climate Control in Itatiba (Brazil) were named Best Company To Work For, for the sixth consecutive time, by Exame magazine. · Valeo Climate Control received the Nissan Aftermarket Product Development Award for the development of its anti-allergy filter kit for the aftermarket. · The Front-End Division of Valeo Engine Cooling in Camaçari in Brazil was named Supplier of the Year by Ford. · The MAIS Award in the Evolution category went to Valeo Service Brazil as the best manufacturer of replacement parts. · Valeo Service's "beep & park" park assist system was selected Product of the Year in the Car category in France. · The Eastern Europe Division of Valeo Service has achieved superior levels of quality and service for its customer Inter Cars (members of the ATR group in Poland).

4.3. Awards

The quality of Valeo's products and services was recognized by its customers and institutional partners, testifying to the Group's operational excellence. · The third biggest Chinese manufacturer of heavy-duty trucks, CNHTC, gave its Strategic Partner Award and its Best Product Quality Award to NVCC, the Valeo Transmissions Division in Nanjing. · The Transmissions Division in Bursa (Turkey) won the Best Supplier Award from Ford Otosan Turkey. · PSA Peugeot Citroen awarded an EcoTech prize for reducing technical costs to Valeo Electronics & Connective Systems and its quality prize to Valeo Climate Control for its complete air conditioning system and control panels.

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Recent events and outlook

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Recent events and outlook

· In December 2006, Valeo announced the signing of a draft agreement with Ford Motor Company for the acquisition of the Sheldon Road site in Plymouth, Michigan, which specializes in the production of climate control systems. This acquisition is conditional on a new competition agreement being signed with the United Auto Workers Union. · On March 5, Valeo announced that the French Agency for Industrial Innovation (AII) had agreed to fund its LOwCO2MOTIONTM research program to improve the efficiency of automobile engines and reduce their CO2 emissions, to the tune of 61 million euros. The AII funding depends on obtaining approval from the European Commission. · Also on March 5, 2007, the Pardus European Special Opportunities Master Fund LP announced that on February 27, 2007 it exceeded the 10% threshold of voting rights, and at March 1, 2007, held 10.57% of the capital and 10.36% of the voting rights in the Company. In its declaration of intent, the Pardus European Special Opportunities Master Fund LP declared it was not acting in concert with any third party and had no immediate plans to take over Valeo, whilst reserving its right to continue buying and selling Valeo shares depending on market opportunities, and to request the appointment of one or several persons to Valeo's Board of Directors. · Then, in a letter dated March 21, 2007, the Pardus European Special Opportunities Master Fund LP declared it had exceeded, on that date, the threshold of 12% of the Company's capital and voting rights. · Finally, the Board of Directors' meeting held on March 22, 2007 announced that it had received notice of interest from an investment fund targeting the Company's capital. The Board believed it was in the Group's interest to give it preliminary and non-exclusive consideration, whilst at the same time examining other strategic options.

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P. 34 P. 36 P. 37 P. 38 P. 39 P. 39 P. 39 P. 41 P. 43 P. 44 P. 44 P. 45 P. 45 P. 45 P. 55

Accounting methods Statement of income Main investments over the past three years Change in stockholders' equity Provisions Cash flows and debt Commitments Remuneration of corporate officers and directors Risks and uncertainties Information likely to be impacted by a public tender offer Claims and litigation Outlook Subsequent events Parent company financial statements Environmental Indicators Social indicators

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Accounting methods

1. Accounting methods

Pursuant to European Union regulation 1606/2002 of July 19, 2002, the consolidated financial statements have been prepared in conformity with International Financial Reporting Standards (IFRS) approved by the European Union. The Group has elected for early application, respectively as of January 1, 2004 and 2005, of the two following amendments to IFRS that are obligatorily applicable as from January 1, 2006: · the amendment to IAS 19 introducing the option to recognize actuarial gains and losses on defined benefit pension plans in reserves; · the amendment to IAS 39 relating to hedge accounting of forecast inter-company transactions. New accounting standards that are not yet obligatorily applicable, that have not been adopted early and that may have an impact on the Group's financial statements are as follows: · IFRS 7 "Financial Instruments: Disclosures", applicable as from January 1, 2007; · IFRS 8 "Operating Segments"; this standard, which has not yet been approved by the European Union, is obligatorily applicable as from 2009. The potential impacts of these two standards on the Group's financial statements are currently being analyzed.

2. Statement of income

Unless otherwise indicated, the comments given below refer to the data for 2004 and 2005, adjusted as of December 31, 2006 for the contribution of Valeo Motors & Actuators, a non-strategic activity as defined in note 1.19 of the consolidated financial statements.

2.1. Review of operations

total operating revenues for the consolidated Group increased by 2.6% to 10,086 million euros in 2006 from 9,834 million euros in 2005. 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. Changes in exchange rates made a positive contribution of 0.6%. On a like-for-like basis (constant Group structure and exchange rates), total operating revenues rose 0.5% over the year, as compared with an estimated 1.2% rise in the Group's automotive production benchmark (1). Full-year net sales reached 9,970 million euros, comprising 8,214 million euros from the original equipment segment (82% of the total) and 1,756 million euros from the aftermarket (18%), compared to 8,003 million euros (82%) and 1,733 million euros (18%), respectively, in 2005. Full-year sales generated in Europe were up 2.3% in 2006 to 6,862 million euros, representing 69% of consolidated sales by market (unchanged from 2005). Like-for-like sales edged up 0.9%, while light vehicle production in the region advanced by 2.7% (source: J.D. Power). At 1,325 million euros, Group sales in north America contracted by 2.9% compared to 2005. On a like-for-like basis, North American sales retreated 2.7%, consistent with local light vehicle production (source: J.D. Power). North America accounted for 13% of consolidated sales in 2006, down from 14% in 2005. Asia and the Middle East registered sales of 1,246 million euros, up 7.6% compared to 2005. In Asia, like-for-like sales growth came in at 3.6%, while local automotive production surged 8.8%

(1) Change in the production of light vehicles in Europe, North America, South America and Asia, estimated by J.D. Power and weighted by each region's contribution to consolidated sales.

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Statement of income

2

on the back of strong performances in China (up 26.8%) and Japan (up 6.1%). Asia and the Middle East contributed 13% of Group sales, as against 12% in 2005. Sales generated in South America totaled 468 million euros, up 9.1% compared to 2005. Like-for-like sales remained stable

year-on-year, while local automotive production grew by 7.7% (source: J.D. Power). In 2006, South America represented 5% of consolidated sales (4% in 2005).

2.2 Results

Consolidated gross margin amounted to 1,539 million euros in 2006, down 1.3% on the prior-year figure, and represented 15.4% of sales versus 16.0% in 2005. Further increases in raw material prices (notably non-ferrous metals and plastics) accounted for the equivalent of 0.7% of net sales. Research and development expenditure (1) reached 661 million euros (6.6% of total operating revenues) compared to 640 million euros (6.5%) in 2005. Excluding other operating revenues (mainly customer contributions to development expenditure), these expenses represented 5.4% of total operating revenues, down 0.1 percentage point on 2005. The three Domains (2) accounted for 626 million euros or 94.7% of R&D expenditure (2.8% higher than in 2005), breaking down between Driving Assistance (178 million euros, up 1.7%), Powertrain Efficiency (216 million euros, up 3.3%) and Comfort Enhancement (232 million euros, up 3.1%). Selling and administrative expenses totaled 195 million euros (up 2.1% year-on-year) and 458 million euros (up 1.3%), respectively. The proportion of selling and administrative expenses to total operating revenues remained stable. Taking into account other operating revenues, which amounted to 116 million euros (98 million euros in 2005), operating margin (3) came in at 341 million euros, down 8.8% on the 2005 figure (374 million euros). In 2006, operating margin represented 3.4% of total operating revenues, compared to 3.8% in the previous year. Other income and expenses amounted to an net expense of 70 million euros (including 61 million euros in restructuring costs and asset impairments, and a 14 million euro gain on the disposal of Zexel Logitec Company), compared to net other expenses of 50 million euros in 2005 (including restructuring costs and asset impairments totaling 34 million euros). As a result, consolidated operating income for the year came in at 271 million euros (2.7% of total operating revenues) compared to 324 million euros (3.3%) in 2005. The cost of net debt went from 52 million euros in 2005 to 57 million euros in 2006. net other financial expenses amounted to 9 million euros in 2006 (52 million in 2005), and include a 24 million euro gain on the disposal of the Group's interest in Parrot following its stock market listing. Income before income taxes came out at 205 million euros in 2006, which was 6.8% lower than the previous year. Income tax expense was 75 million euros, representing an effective Group tax rate of 36.6%, compared to 66 million euros and 30.0%, respectively, in 2005. Including income from non-strategic activities (36 million euros, including a post-tax disposal gain of 41 million euros) and minority interests (5 million euros), net attributable income totaled 161 million euros, compared to 142 million euros one year earlier. Basic earnings per share, computed based on net attributable income, was 2.10 euros (including 0.47 euro attributable to income from non-strategic activities) compared with 1.80 euro in 2005 (including a 0.15 euro loss attributable to non-strategic activities). Diluted earnings per share for the year amounted to 2.09 euros, compared with 1.79 euro in 2005.

(1) Figures for 2004 to 2006 are now presented net of research tax credits previously recorded under "income taxes" (see note 3.3 to the consolidated financial statements). (2) The objective of the Domains of Innovation is to foster and support innovation by bringing together different technologies and product

groups in order to propose comprehensive solutions based on safety (Driving Assistance), the environment (Powertrain Efficiency), and comfort (Comfort Enhancement). (3) Operating income before other income and expenses.

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Main investments over the past three years

3. Main investments over the past three years

3.1. 2006

In 2006, investments in property, plant and equipment totaled 494 million euros, representing 4.9% of total operating revenues. Investments in intangible assets ­ mainly capitalized development expenditure ­ amounted to 165 million euros (1.6% of total operating revenues). Changes in the scope of consolidation (essentially the disposals of Zexel Logitec Company and the Valeo Motors & Actuators business) had a 124 million euro net impact on income. These disposals fall within the Group's strategy of sharpening its focus on businesses having reached critical mass in the three Domains.

3.2. 2005

In 2005, investments in property, plant and equipment amounted to 441 million euros, or 4.5% of total operating revenues. Investments in intangible assets ­ mainly capitalized development expenditure ­ totaled 145 million euros (1.5% of total operating revenues). Acquisition-led growth over the year absorbed 466 million euros. Valeo implemented targeted strategic operations aimed at boosting the technological offer of its Domains and increasing the organic growth potential of its Product Families. In particular, the acquisition of Johnson Controls Engine Electronics (effective March 1, 2005) for 316 million euros considerably boosted the potential of the Group's Powertrain Efficiency Domain. Similarly, the acquisition (effective April 1, 2005) of the remaining shares held by Bosch in the climate control and engine cooling businesses in Asia, enhanced the growth potential of the Group's related activities in the promising Asian markets, and strengthened its expertise in climate control compressors, one of the main components of climate control systems. In 2005, the Group also increased its shareholding in Ichikoh, one of Japan's leading players in lighting systems, from 22.7% to 28.2%.

3.3. 2004

In 2004, Valeo spent a total of 413 million euros, or 4.5% of the year's total operating revenues, on acquiring property, plant and equipment, while investments in intangible assets ­ mainly capitalized development expenditure ­ totaled 122 million euros (1.3% of total operating revenues). Changes in the scope of consolidation led to net disbursements of 73 million euros. In line with its strategic objectives of consolidating its footprint in Asia, Valeo took control of Shanghai Valeo Automotive Electrical Systems in China and also increased its shareholdings in its Chinabased motors and clutches operations.

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Change in stockholders' equity

2

4. Change in stockholders' equity

4.1. Stockholders' equity

At December 31, 2006, stockholders' equity including minority interests increased 35 million to 1,752 million euros, compared to 1,717 million euros at December 31, 2005, reflecting: · deductions: the payment of 84 million euros in dividends relating to 2005 and translation adjustments for 69 million euros; · additions: net income for the year of 166 million euros.

4.2. Share capital

4.2.1. Changes in share capital

The company's share capital went from 77,510,357 shares with a par value of 3 euros each at December 31, 2005 to 77,580,617 shares with a par value of 3 euros each at December 31, 2006 following the exercise of 69,555 stock subscription options granting entitlement to 70,260 shares (1). At December 31, 2006, a maximum of 3,744,050 shares could be issued on exercise of stock options awarded to the Group's employees and corporate officers. At that date, all of the OCEANE bonds were outstanding and were convertible and/or exchangeable for 10,105,439 shares (2). On the date the liquidity contract was signed, 220,000 Valeo shares and a sum of 6,600,000 euros were allocated to its implementation. At December 31, 2006, 69,000 shares and 2,075,401 euros were allocated to the implementation of the liquidity contract. Through the investment services provider, in 2006 Valeo acquired 1,178,396 shares at an average price of 29.53 euros, and sold 1,299,396 shares at an average price of 29.72 euros. In 2006, trading and transaction fees incurred within the scope of the liquidity contract totaled 264,715 euros, compared to 271,615 euros in the previous year. Market operations were carried out in accordance with the fifth resolution adopted by shareholders at the General Meeting of May 17, 2006. They were carried out under the terms of the liquidity contract set up with an investment services provider, with a view to boosting the liquidity of Valeo shares and stabilizing their listed price.

4.2.2. treasury shares

At year-end, Valeo held 686,704 of its own shares (0.89% of the share capital) with a unit value (based on the purchase price) of 33.74 euros. At December 31, 2005, Valeo held 807,704 of its own shares (1.04% of the share capital). The number of treasury shares at December 31, 2006 includes: (i) 617,704 shares to be allocated on the exercise of stock options; and (ii) 69,000 shares to be used in connection with the liquidity contract signed with an investment services provider on April 22, 2004, and as required by the French Association of Investment Companies (Association Française des Entreprises d'Investissement) code of ethics.

4.2.3. Employee shareholdings

At December 31, 2006, employees held 1,041,149 shares (1.34% of the share capital) under the terms of the Group's savings plans, either directly or through two investment funds. At the 2005 year-end, employees held 1,418,375 shares, representing 1.83% of the share capital at that date.

(1) Following the public share buyback offer and simplified public tender offer carried out in May and June 2005, which resulted in Valeo purchasing its own shares at an amount higher than the publicly quoted price, the allocation ratio for stock subscription and purchase options stood at 1.01 share per option.

(2) Following the public share buyback offer and simplified public tender, and in accordance with applicable regulations and the contract governing the OCEANE bond issue, the conversion/exchange ratio applicable to the bonds was amended from 1 share per bond to 1.013 share per bond.

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Provisions

4.2.4. transactions carried out by senior executives involving Company shares

The Company was not informed of any transactions falling within the scope of article L.621-18-2 of the French Monetary and Financial Code (Code monétaire et financier) in 2006.

4.3. Dividends

Dividends per share paid out for the last three years are analyzed in the table below:

Year 2003 gross dividend per share

(In euros)

net dividend per share

(In euros)

tax credit/allowance

(In euros)

total excluding tax credit

(In millions of euros)

1,57

1,05

2004 2005

na na

1.10 1.10

tax credit of 0.525* Eligible for the 50% tax allowance provided for in article 158-3-2 of the French general tax Code (Code générale des impôts).

86

91 84

*

Applicable to shareholders eligible for the 50% tax credit.

5. Provisions

The balance sheet at December 31, 2006 showed total provisions of 1,355 million euros (including a non-current portion of 955 million euros), versus 1,554 million euros (including a non-current portion of 1,123 million euros) at the previous year-end. Total provisions for reorganization expenses fell 5 million euros on the year-earlier period, to 176 million euros. Provisions for pensions and other employee benefits totaled 748 million euros at the year-end, 135 million euros lower than at December 31, 2005. The decrease in this item reflects (i) the recognition in equity of actuarial gains and losses for an amount of 27 million euros; (ii) changes in the scope of consolidation for 27 million euros; and (iii) translation adjustments for 34 million euros. Other provisions decreased from 490 million euros at end-2005 to 431 million euros at December 31, 2006.

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Commitments

2

6. Cash flows and debt

In 2006, net cash provided by operating activities amounted to 680 million euros (717 million euros in gross operating cash flows) compared with 820 million euros one year earlier (778 million euros in gross operating cash flows). Excluding the impact of changes in the scope of consolidation, net cash used in investing activities during the year totaled 610 million euros (165 million euros relating to intangible assets and 494 million relating to property, plant and equipment), compared to 548 million euros in 2005 (145 million euros relating to intangible assets and 441 million euros relating to property, plant and equipment). Changes in the scope of consolidation resulted in a net inflow of 124 million euros, compared with a net outflow of 466 million euros in 2005. Financing activities generated cash outflows of 643 million euros (including 553 million euros in repayments of long-term debt) compared to cash inflows of 297 million euros in 2005, which included a 252 million euro share buyback. The net decrease in cash and cash equivalents for 2006 amounted to 448 million euros, compared to a net increase of 131 million euros one year earlier. net debt ­ which is the sum of debt, net current financial liabilities, short-term loans and bank overdrafts, less cash and cash equivalents ­ totaled 968 million euros at the year-end, compared to 1,080 million euros at December 31, 2005. The consolidated gearing ratio is therefore 55% at December 31, 2006, compared to 63% at December 31, 2005.

7. Commitments

The Group's main commitments break down as follows at December 31:

(In millions of euros)

2006 76 29 72 101 278

2005 79 30 57 66 232

2004 74 33 58 49 214

Lease commitments guarantees and deposits non-cancelable purchase commitments for fixed assets Other commitments TOTAL

These commitments are described in note 5.3 to the consolidated financial statements.

8. Remuneration of corporate officers and directors

8.1. Corporate officers

The remuneration paid by Valeo to Mr Thierry Morin, Chairman and CEO, is set by the Board of Directors based on recommendations provided by the Remuneration Committee. In 2006 the gross fixed remuneration for the year paid by Valeo to Mr Morin amounted to 1,519,538 euros (compared to 1,302,395 euros in 2005), including gross remuneration of 1,500,288 euros (1,284,000 euros in 2005) and benefits in kind of 19,251 euros (18,395 euros in 2005). Thierry Morin did not receive any variable compensation in 2006. Thierry Morin also earned directors' fees of 35,000 euros in his capacity as director of Valeo, the same amount as in 2005.

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Remuneration of corporate officers and directors

The gross remuneration received by Mr Morin from companies controlled by Valeo (within the meaning of article L. 233-16 of the French Commercial Code) totaled 120,883 euros (118,758 euros in 2005), made up of directors' fees of 45,750 euros (unchanged from 2005) and a contribution of 75,133 euros to a pension fund (73,008 euros in 2005). Thierry Morin did not receive any benefits in kind in 2006 from companies controlled by Valeo. In view of the prohibited periods set down by French stock exchange regulations, the Board did not award any stock options or free shares to Mr Morin in 2005. The award was deferred until March 2006, and comprised 150,000 stock options and 50,000 free shares granted under the following conditions: · the Board set the purchase price for the shares underlying the stock options at 33.75 euros, it being specified that (i) 50% of the options awarded to Mr Morin are exercisable from March 3, 2008, and all of the options from March 3, 2009, and that the shares obtained on exercise of the options may not be sold before March 3, 2010; and (ii) options not exercised will become null and void on March 2, 2014; · the definitive vesting date for free shares was set by the Board of Directors at June 3, 2008 on condition that: (i) Thierry Morin continues to hold an employment contract or a corporate officer's position within the Valeo Group at that date; and (ii) the vesting of 30,000 of the shares awarded are subject to performance criteria specifying operating margin targets for 2006 and 2007. In 2006, Mr Morin did not exercise any options awarded in previous years.

Mr Morin continues to benefit from the supplementary pension scheme set up for senior executives who were formerly members of the Management Board, as agreed by the Supervisory Board on October 17, 2002. This scheme is designed to top up existing pension benefits (Social Security, Arrco, Agirc, etc.) to enable beneficiaries to acquire benefits representing 2% of their final salary per year of service with the Group. The total amount of pension benefits may not exceed 60% of a beneficiary's final salary. The scheme only applies to beneficiaries who have a minimum of 15 years' service in the Valeo Group when they retire and for whom Valeo or one of its subsidiaries was their last employer at their retirement date. Finally, should Mr Morin leave the Company following a decision of the Board of Directors or of his own volition in the event of a difference of opinion concerning the strategy pursued by the Board further to a public tender offer, his termination benefits are set at three times his most recent annual salary, excluding bonuses. These benefits are not payable in the event that the Board's decision is taken on the grounds of gross misconduct in the performance of his duties.

8.2. Directors

Directors receive directors' fees, which are paid every six months. However, these fees are not paid if directors attend fewer than half the Board meetings or, if applicable, meetings of committees formed within the Board of which they are a member, over the six-month period.

Directors' fees are allocated to members of the Board of Directors as follows: 20,000 euros for each director and an additional 15,000 euros for those participating in one of the aforementioned committees. Total directors' fees paid to Board members in 2006 were 305,000 euros (301,250 euros in 2005), as follows:

(In euros)

thierry Morin Carlo De Benedetti Pierre-Alain De Smedt François grappotte Philippe guédon Erich Spitz Alain Minc Véronique Morali Jean-Bernard Lafonta Yves-André Istel Daniel Camus Jérôme Contamine

35,000 35,000 35,000 35,000 27,500 35,000 27,500 35,000 20,000 10,000 10,000

In 2006, no Board member apart from Thierry Morin (see pages 160 and 161) and Yves-André Istel received any other remuneration or benefit. Directors were not awarded stock

subscription or purchase options or free shares, and none of them hold stock subscription options.

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Risks and uncertainties

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9. Risks and uncertainties

9.1. Industrial and environmental risks

9.1.1. Dependence on the automotive sector

The Group's sales are dependent on the level of automotive production, especially in Europe and North America. Production itself is affected by a number of factors, especially vehicle stock levels, consumer confidence, employment trends, disposable income and interest rates. The volume of production is also influenced by government initiatives, especially those designed to encourage vehicle acquisition, sales agreements, new regulations and social issues such as strikes and walkouts. Valeo's four main customers account for almost 60% of its OE sales. In decreasing order of sales these are Renault-Nissan, PSA Peugeot Citroën, Volkswagen and DaimlerChrysler, each of which account for between 10% and 20% total sales. Supply contracts take the form of open orders for all or part of the equipment needs of a vehicle model, with no volume guarantee. They are granted directly for the vehicle's individual functions and generally last for the model's lifespan. Valeo's sales and results can therefore be impacted by a model's commercial failure and/or by the Group not being selected to work on the production of a new range of vehicles. The risks are however broadly diversified, with Valeo's wide range of products and services used in the production of a very large number of vehicles.

9.1.2. Environmental risks

In the various countries in which it operates, the Group's business is subject to diverse and evolving environmental regulations which constantly raise the standard of environmental protection. Valeo's environmental policy is described in the activity report, and is designed to control and minimize environmental risks as far as possible.

9.2. Market risks

The Group operates in an international environment in which it is confronted with market risks, specifically foreign currency risk, price risk and interest rate risk. It uses derivatives to manage and reduce its exposure to changes in foreign exchange rates, raw materials prices and interest rates. In general, foreign currency risks, price risks in respect of base metals and interest rate risks for all Group companies are managed centrally by Valeo. The Group is also exposed to foreign currency risk through its investments in foreign subsidiaries, particularly to risks of a movement in the exchange rate of a subsidiary's currency against the Group's functional currency. The Group can decide on a case-by-case basis to hedge the net investment. No derivative instrument relating to hedging of a net investment is recognized in the Group balance sheet at December 31, 2006.

9.2.1. Foreign currency risk

Group entities may bear transaction risk in respect of purchases or sales transacted in currencies other than their functional currency. Hedging of subsidiaries' current and future trading and investments transactions is generally performed for durations of less than six months. Subsidiaries principally hedge their transactions with Valeo, the parent company, which hedges net Group positions with external counterparts. Based on the net foreign currency position at year-end, a movement in exchange rates would only have a minor impact on the Group's consolidated financial statements.

9.2.2. Metals risk

The Group's industrial activity requires the use of metals, particularly non-ferrous metals. The Group hedges its future purchases of base metals over a period which is generally less than six months. However, the Group may occasionally contract hedges for periods longer than six months, or it may cease hedging certain metals altogether. The raw materials currently hedged (aluminum, processed aluminum, copper, zinc and tin) are quoted on official markets. The Group favors hedging instruments which do not involve the physical delivery of the underlying commodity. At December 31, 2006, the

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Risks and uncertainties

Group's balance sheet shows an unrealized gain of 6 million euros with respect to cash flow hedges.

9.2.4. Equity risk

At December 31, 2006, the Group's balance sheet shows cash and cash equivalents of 618 million euros, (949 million euros at December 31, 2005). Cash equivalents are comprised of marketable securities of 97 million euros, including money market mutual funds invested in very short-term securities with no capital risk, in line with the Group's cash management policy. In accordance with applicable accounting standards, these instruments are measured at market value, which approximates their carrying amount. Under IAS 32, treasury stock is deducted from stockholders' equity at the date of acquisition. Changes in the value of treasury stock are not recorded. On disposal, stockholders' equity is adjusted in the amount of the fair value of the shares sold. The disposal of 121,000 treasury shares in 2006 led to a year-on-year increase of 4 million euros in stockholders' equity.

9.2.3. Interest rate risk

The Group uses interest rate swaps to convert exchange rates on its debt into either a variable or a fixed rate, either as from origination or during the term of the loan. At December 31, 2006, 82% of long-term debt is at a fixed rate (83% at December 31, 2005) and the Group's financing rate is 4.5%, down by 0.1% on 2005. For fixed-rate debt, a 1% fall in interest rates would lead to changes in the fair value of the net position of approximately 45 million euros.

9.3. Legal risks

9.3.1. Intellectual property risk (patents)

As far as possible and when necessary, Valeo's industrial expertise and innovations generated by the Group's research are covered by patents designed to protect intellectual property. Valeo files a large number of patents in its field, which constitute an effective weapon in the fight against counterfeiting. The Group also holds patent licenses from third parties within the scope of its day-to-day activities.

9.3.2. Product and service liability

Valeo is exposed to warranty or liability claims by customers with respect to the products and services it sells. Valeo may also be exposed to liability claims for damage caused by defective products or services sold by the Group. To protect itself from this risk, Valeo has taken out an insurance policy to cover the financial impact of these claims. However, it is uncertain whether this insurance policy would be adequate to cover the full financial impact of such claims.

9.4. Other risks

9.4.1. Counterpart risk

In the context of financial markets transactions entered into for the purposes of risk management and treasury management, the Group is exposed to counterpart risk. Limits have been set by counterpart, taking account of the ratings of the counterparts with ratings agencies. This also has the effect of avoiding excessive concentration of market transactions with a limited number of banks.

9.4.2. Liquidity risk

The Group targets maximization of its operating cash flows in order to be in a position to finance both the investments required for its development and growth and the dividend paid to its stockholders. In addition, the strategy followed aims to ensure that the Group has the cash resources necessary to honor its commitments and meet investment needs. Thus, in 2005 the Group issued 600 million euros worth of Euro Medium Term Notes maturing in 2013. It also took out two syndicated loans for a total of 225 million euros maturing in 2012. Valeo also has several confirmed bank credit lines available for an average period of three years in a total amount of 1.3 billion euros. None of these

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Information likely to be impacted by a public tender offer

2

credit lines were used at December 31, 2006. The Group also has a short-term commercial paper financing program capped at 1.2 billion euros. At December 31, 2006, the debt/equity ratio was well within the limits stipulated by the covenants. Non-compliance with this ratio causes the credit lines to be suspended and leads to early reimbursement of prior drawdowns. The Euro Medium Term Notes include an option granted to the bondholders who can request early redemption of their bonds in the case of a change in control of Valeo leading to a downgrade in the bond's rating to below investment grade.

Valeo works with all automakers in the sector. At December 31, 2006, 20% of the Group's accounts and notes receivable correspond to one of Valeo's four largest customers. Approximately 7% of this line relate to the two largest American automakers, Ford and General Motors. The downturn in the automobile sector business environment in recent years has led the Group to strengthen control of customer risks and settlement periods which may, on a case-by-case basis, be subject to bilateral negotiations with customers. The average settlement period at December 31, 2006 is 69 days. Valeo also generates 7% of its net sales in the aftermarket. The Group's large, dispersed customer base in this market is constantly monitored and the risk of default is covered by a credit insurance policy. These customers represent slightly more than 7% of Group accounts and notes receivable at December 31, 2006.

9.4.3. Credit risk

Valeo is exposed to credit risk, particularly to risk of default by its automotive customers.

10. Information likely to be impacted by a public tender offer

10.1 Direct or indirect shareholdings in the Company, brought to the Company's attention (articles L. 233-7 and 233-12 of the French Commercial Code)

As far as the Company is aware, the following shareholders held more than 2% of the Company's capital or voting rights at February 12, 2007:

Shareholders Caisse des Dépôts the Boston Company Asset Management LLC Brandes Investment Partners (USA) Pardus European Special Opportunities Master Fund LP Franklin Resources Inc, (USA) tocqueville Finance S.A. Wyser Pratte Management Company, Inc. M&g Investment Management Ltd % ownership 6.5% 5.4% 5.3% 5.2% 4.8% 2.8% 2.4% 2.2% % voting right 9.0% 5.3% 5.2% 5.1% 4.7% 2.8% 2.3% 2.2%

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Outlook

10.2 Agreements entered into by the Company that would change or terminate if there were a change in control of the Company, with the exception of those agreements whose disclosure would seriously harm its interests (except in the event of a legal obligation to disclose)

As specified in section 9.4.2 above, the 2013 Euro Medium Term Notes program for an amount of 600 million euros includes an option granted to the bondholders who can request early redemption of their bonds in the case of a change in control of Valeo leading to a downgrade in the bond's rating to below investment grade. Some of Valeo's customers have a clause in their general purchasing conditions allowing them to terminate the contract with Valeo in the event of a change in control.

10.3 Agreements providing for indemnities payable to employees or members of the Board of Directors if they resign or are dismissed without real or serious cause or if their employment contract is terminated as a result of a public tender offer

As specified in section 8.1 above, Thierry Morin, Chairman of the Board of Directors, is entitled to termination benefits set at three times his most recent annual salary (excluding bonuses) if he should leave the Company following a decision of the Board of Directors or of his own volition in the event of a difference of opinion concerning the strategy pursued by the Board further to a public tender offer. These benefits are not payable in the event of gross misconduct in the performance of his duties.

11. Claims and litigation

Known claims and litigation involving Valeo or its subsidiaries were reviewed as of December 31, 2006 and all necessary provisions made to cover the estimated contingencies and potential losses.

12. Outlook

Automotive production in the Group's key markets is not expected to stabilize before the second half of 2007. Against this background, and assuming stable raw materials prices, Valeo is aiming to improve operating profitability on the back of increased efforts in terms of competitiveness.

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Environmental Indicators

2

13. Subsequent events

On December 4, 2006, the Group signed a memorandum of understanding with Ford regarding the acquisition of the Sheldon Road site (Plymouth, Michigan) specialized in the production of climate control systems. This acquisition is contingent on the signature of a new competitive agreement with the UAW (United Auto Workers) union. To the best of Valeo's knowledge, no other event has occurred since December 31, 2006 that is likely to have a material impact on the business, financial position, results or assets and liabilities of the Group.

14. Parent company financial statements

Following the creation of subsidiaries for industrial activities in 2002, Valeo SA is now the Group's holding and cash management company. Valeo's net financial income for the year amounted to 47 million euros compared with 66 million euros in 2005. This decrease is mainly due to a 203 million euro increase in write-downs of equity investments, partially offset by a 159 million euro increase in dividends and a 25 million euro rise in other financial income. Net exceptional loss stood at 3 million euros in 2006, compared with net exceptional income of 1 million in 2005. Corporate income tax yielded a tax credit of 35 million euros compared with a tax credit of 28 million euros in 2005. Valeo's net income amounted to 74 million euros, compared to 88 million euros in 2005. Valeo's stockholders' equity stood at 3,232 million euros at December 31, 2006 compared with 3,240 million euros a year earlier. This change mainly reflects net income for the year less dividends.

15. Environmental Indicators

1. Introduction

This section provides an analysis of Valeo's undertakings and performance in terms of protecting the environment and natural resources ­ two issues that underpin the very concept of sustainable development. In 2003, the Valeo Group joined the UN Global Compact ­ a set of principles based on the Rio Declaration on Environment and Development under which companies undertake to: · support a precautionary approach to environmental challenges; · undertake initiatives to promote greater environmental responsibility; and · encourage the development and diffusion of environmentally friendly technologies. For Valeo, this means: · designing and creating innovative products enabling it to reduce the environmental impact of vehicles throughout their entire life cycle and improve passenger safety; · preserving the environment during production at Group sites.

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Environmental Indicators

Valeo's sustainable development commitments are formally documented in the Group's Environment Charter and form the basis of numerous procedures in its Risk Management Manual. These procedures apply equally to all Group sites irrespective of

local particularities and reflect the strategic approach adopted by Valeo for over 15 years. This approach is rooted in a constant quest to enhance the Group's processes, backed by regular assessments carried out by external consultants to track performance.

2. Environmental indicators

2.1. Presentation

In the majority of cases, indicators are expressed in terms of both quantity of products consumed or emitted per million euros and total quantity. Quantity per million euros is calculated by dividing the total quantity by the total sales from the sites that responded. Comparative data have been provided for 2004 and 2005. The extent to which the indicators are representative is expressed by dividing the sales from each site that responded by the total sales figure of all the sites included in the report. In 2006, the Group decided to report environmental indicators on a quarterly basis rather than annually as was previously the case, in order to use them as a tool for managing the environmental performance of the Group's sites. Given the adaptation period required for this quarterly reporting system, certain responses were imprecise. In order to maintain a high level of reliability of published data, these responses have not been taken into account. Representativeness for 2006 is therefore sometimes slightly below that for 2005. As in previous years, all responses from sites were validated by an external body in order to ensure quality and representativeness. Valeo Motors and Actuators, which was sold to NIDEC at the end of December 2006, was also included in the 2006 scope, with the exception of recycled plastic and research and development expenditure, for which data could not be obtained. The scope of environmental indicators concerns all sites. A reconciliation is carried out between the financial data reported by the Group (sales, research and development expenditure, etc.) and those reported by the individual sites. This report was produced in compliance with the recommendations of the Global Reporting Initiative (GRI).

ReseaRch and development (R&d) expendituRe

646 661

585

2004

2005

2006

R&D expenditure in milllions of euros

2.2. Scope

The environmental data published in this report concern all Valeo production and distribution sites worldwide, except for the Group's minority interests. A total of 138 sites are included in the scope of environmental indicators for 2006, including 12 "advanced supplier sites", eight Valeo Service sites and two storage sites, it being specified that: · the advanced supplier sites are manufacturing sites located at an automaker; · sites dedicated exclusively to research and development, or to office work, as well as sites that were acquired, sold or closed during the year have not been included; · companies that are 50% controlled by Valeo are taken into account at a rate of 50%. Companies over which Valeo exercises more than 50% control are included on a 100% basis. Valeo Engine Management Systems was included within the scope of environmental indicators in 2006.

2.3. Internal environmental management organization

The Risk, Insurance and Environment Department works hand-inhand with all Group departments, and is assisted by coordinators assigned within each Product Family. These coordinators provide technical support to Health, Safety, Security and Environment (HSSE) managers at each site and report their findings to the Risk Management Committee, which is the central oversight body of the Risk, Insurance and Environment Department. The HSSE managers provide expert advice to each site manager. They are responsible for ensuring that procedures are correctly applied, and perform internal audits to verify compliance with both applicable regulations and Valeo's standards.

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2.4. Compliance of operations with applicable regulations and group standards

Valeo's risk management policy is set out in the Group's Risk Management Manual as well as in application guidelines intended for each Group site. The related procedures are focused on ensuring that operations comply with Group standards and the regulations in force in each country. A major feature of this policy is the Valeo audit program, introduced in 1991. This entails regular audits carried out every one to three years by external independent consultants, at the request of the Risk, Insurance and Environment Department, in order to ensure that the Group's risk management policy has been correctly applied. The audits help to track progress at the sites and provide Group Management with a good overview of risks. During each audit, the sites' level of performance and progress is appraised in relation to: · the environment; · occupational health and safety;

· safety of buildings and equipment; · security of equipment and data. Action plans are subsequently established by the sites, based on observations resulting from the audit and prioritization of risks. A status report on the action plans is provided every six months to the Risk, Insurance and Environment Department.

exteRnal audits

115 116 110

71 42 42 51 59 58 46 46 42

2004 Environment

2005 Occupational health and safety

2006 Safety of equipment Security

3. Committing to the ongoing improvement of environmental performance and occupational health and safety through an internationally-recognized certification process.

To demonstrate of its focus on continually reducing its environmental impact and improving the health and safety of its employees, the Valeo Group has committed to two certification processes: ISO 14001 for environmental management and OHSAS 18001 for occupational health and safety. The ISO 14001 certification process began in 1998, and by December 31, 2006 substantially all the Group's sites had been certified. The recently opened sites at Mioveni in Romania and Kosice in Slovakia were among those that obtained certification in 2006. The Group started to roll out its OHSAS 18001 certification process in 2005 and obtaining this certification was one of its key projects in 2006. By the end of the year, 72 sites had passed the certification audit. Implementing these management systems has enabled the Group to improve its environmental performance and occupational health and safety level, thus limiting any adverse impact of its operations. An integral component of the overall management system is employee training, which Valeo provides on an ongoing basis and which helps to change attitudes not only in the workplace but also within daily life in general. The Group uses its intranet site to make the relevant tools available. For the roll-out of OHSAS 18001, for example, the Group provided each site with a self-analysis and tracking tool. A regulatory monitoring tool was also made available to the French sites. The Group's main objectives for 2007 are to: · obtain ISO 14001 certification at all of its sites; · extend the OHSAS 18001 certification process to all sites; · set up a risk management self-assessment tool for the sites; · consolidate efforts to reduce risks within the Group; · seek new opportunities to reduce the environmental impact of its operations through targeted studies on key issues such as transport-related CO2 emissions.

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numbeR of iso 14001 and ohsas 18001 ceRtified sites

127

total numbeR of houRs of enviRonmental tRaining

38 979 36 938 37 386

117 102 85 67 48 27 2 1998 10 1999 2000 2001 2002 2 2003 6 2004 15 2005

72

2006

2004

2005

2006

ISO 14001

OSHAS 18001

4. Optimizing water and energy use

For several years the Group has made significant efforts to preserve water resources, notably by ceasing to use open-loop cooling systems. The measures implemented led to a 45% decrease in the Group's water consumption in proportion to sales between 2001 and 2005. Consumption stabilized in 2006, with the Group using approximately 250 liters of water per day per employee. By way of comparison, the average consumption of a four-person family in Europe is 440 liters per day (source: Veolia Eau). Valeo plays an active role in cutting vehicle energy consumption through the design of its products, mainly by decreasing the weight of components but also by developing specific products enabling energy consumption to be reduced (see section on these areas in this document). Group energy consumption at site level has been stable for several years, amounting to approximately 30,000 KWh per year per employee compared with 40,000 KWh consumed by a fourperson family occupying a 120 sq.m. house in Europe (source: Greenpeace). The Valeo Factory Design Guide, which defines the Group's siteconstruction principles, includes a generic plant concept with a section on energy optimization. The thermal aspects of the building, ventilation, lighting and energy integration of procedures and utilities are now addressed at design stage to ensure that operating energy output is properly controlled. In China, for example, redesigning a plant's heating and ventilation system should result in energy savings of around 40%. Several plants were audited in 2006 with a view to identifying means of improving energy consumption. Heat recuperation systems have already been integrated into certain manufacturing equipment such as VOC combustion systems. A pilot project is in progress within the Valeo Engine Cooling Product Family aimed at developing a generic methodology for all of the Group's plants. The Group is also continuing to promote the use of thermal energy sources such as natural gas, which have a relatively low environmental impact.

WateR consumption

5 032 3 262 3 463

514 2004

303 2005

3

341 2006

Total volume of water consumed/sales (m /millions of euros) Total volume of water consumed (m3 thousands) Representativeness: 2004: 98.0% 2005: 99.7% 2006: 96.9%

Figures for 2004 and 2005 have been rectified on the above graph following the discovery of a reporting error by a site.

eneRgy consumption

1 814 1 868

1 739

179

171

185

2004

2005

2006

Total energy consumption/sales (MWh/millions of euros) Total energy consumption (GWh) Representativeness: 2004: 97.1% 2005: 98.7% 2006: 96.2%

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bReakdoWn of eneRgy consumption

3% 6% 33% 1% 2% 34%

2% 34%

58%

63%

64%

2004 Electricity

2005 Gas Fuel oil

2006 Other

5. Reducing consumption of non-renewable raw materials

One of the Group's objectives is to preserve raw materials and diminish waste production. This applies to products and product design processes alike. For example, the Valeo Electronics & Connective Systems Product Family has significantly reduced the number of electric wires required to make the full set of a vehicle's components work. At the same time, through its starter and alternator remanufacturing activity Valeo Electrical Systems provides the aftermarket with over one million parts each year, thus doubling the lifespan of these products. Packaging materials also use up raw materials and generate waste. With this in mind, for the past several years the Group has progressively implemented measures to replace single-use packaging by multi-use packaging. One of the first steps was to use specific packing boxes, usually made from plastic, for transporting products between Group sites, customers and suppliers. The Group's current priority is to use recyclable plastic. In 2006, a survey was carried out at all Group sites on the quality of packaging materials purchased. Responses to this survey showed that: · one third of all materials purchased are used several times; · most sites only use recycled plastic boxes. Only a few sites still use mainly PVC boxes; · over half of all Valeo's sites have made requests to their suppliers regarding the volume and/or nature of packaging used. The Group's consumption of packaging materials decreased slightly between 2005 and 2006, and certain sites carried out specific studies in this area. The Pedreira site in Brazil, for example, put in place an action plan in conjunction with its customers and suppliers that enabled it to reduce its packaging materials purchases by 45% in 2006.

5 503 6 741 6 669

In 2007, pilot sites will be selected in each Product Family in order to conduct studies in this domain with the aim of drawing up action plans that could subsequently be deployed Group-wide.

use of Recycled plastic

(in tonnes)

6 219 5 198

6 150

2004

2005

2006

use of packaging mateRials

67 239 48 606 63 248

2004

2005

2006

Total packaging materials used/sales (tonnes/millions of euros) Total packaging materials used (tonnes) Representativeness: 2004: 80.1% 2005: 92.5% 2006: 90.4%

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bReakdoWn of packaging mateRials used

1% 44% 29% 1% 32%

53% 48% 8% 2004 Plastics 17% 2005 Cardboard Wood

57%

10% 2006 Other

6. Reducing the consumption of hazardous products

The main raw materials used by the Group in the manufacture of its products are metals (ferrous metals, steel and aluminum in particular) and plastics. Continuously reduced quantities of halogenated solvents, including trichloroethylene, and heavy metals (mainly lead) are used in manufacturing processes. Between 2001 and 2006 product substitution efforts enabled the Group to reduce heavy metal use by over 90% and chlorinated solvent use by 70% in proportion to sales. In the interests of improving reporting on carcinogenic, mutagenic and reprotoxic (CMR) substances, and as the classification of such substances can vary from country to country, Valeo decided in 2006 that substances classified as CMR in Europe should be recorded as such in every country. This resulted in a slight increase in the quantity of CMR substances recorded for 2006 compared with 2005.

use of chloRinated solvents

1 469 1 171 1 096 107 153 109 107 2004 2004 2005 2006 2005 2006 98 111 28 28 29

use of heavy metals

296 274 294

2004

2005

2006

Use of heavy metals/sales (kg/millions of euros) Use of heavy metals (tonnes) Representativeness: 2004: 97.2% 2005: 99.6% 2006: 97.5%

use of caRcinogenic, mutagenic and RepRotoxic (cmR) substances

1 062 1 049 1 138

Use of CMR substances/sales (kg/millions of euros) Use of CMR substances (tonnes) Representativeness: 2004: 94.9% 2005: 98.8% 2006: 98.2%

Use of chlorinated solvents/sales (kg/millions of euros) Use of chlorinated solvents (tonnes) Representativeness: 2004: 95.8% 2005: 99.3% 2006: 98.2%

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7. Reducing emissions of hazardous substances

To preserve the natural surroundings close to its sites, the Group is firmly committed to reducing the emission of hazardous substances into the air and water. Between 2001 and 2006 the volume of industrial effluents handled on site and discharged into the natural environment decreased by 70% in proportion to sales. Reducing the use of hazardous substances and enhancing processes has enabled a significant number of sites to improve the quality of their emissions, which can then be processed by the local waste water treatment infrastructure. For example, the quantity of heavy metals in industrial effluent has decreased by 90% over the last six years in proportion to sales. Equally encouraging results have been achieved as regards air emissions. The following decreases (as a percentage of sales) have been achieved: · almost 50% for Volatile Organic Compounds (VOCs) between 2001 and 2006; · 65% for Trichloroethylene (TCE) between 2003 and 2006; and · 80% for lead between 2003 and 2006. Valeo's day-to-day manufacturing processes do not have an impact in terms of ground pollution, mainly because any processes that could potentially damage the ground are carried out on waterproof coverings.

volume of industRial effluent tce atmospheRic emissions

1 009 695 748 536 465 327 102 2004 65 2005 76 54 2006 2004 44 2005 32 2006

heavy metal content in effluent

365 278 208

0,04 2004

0,02 2005

0,03 2006

Heavy metal content in effluent/sales (kg/millions of euros) Heavy metal content in effluent (kg) Representativeness: 2004: 98.8% 2005: 99.3% 2006: 93.9%

voc atmospheRic emissions

1 708 1 489 1 242

143

162

153

2004

2005

2006

VOC atmospheric emissions/sales (kg/millions of euros) VOC atmospheric emissions (tonnes) Representativeness: 2004: 86.9% 2005: 97.6% 2006: 92.6%

Volume of industrial effluent emissions/sales (m³/millions of euros) Volume of industrial effluent emissions* (m³ thousands) Representativeness: 2004: 98.8% 2005: 99.4% 2006: 94.1%

TCE atmospheric emissions/sales (kg/millions of euros) TCE atmospheric emissions (tonnes) Representativeness: 2004: 96.5% 2005: 99% 2006: 96.6%

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lead atmospheRic emissions

130

72 52

13 2004

7 2005

5 2006

Lead atmospheric emissions/sales (g/millions of euros) Lead atmospheric emissions (kg) Representativeness: 2004: 90.8% 2005: 99.0% 2006: 96.6%

8. Reducing waste production

The Group's main waste products, in descending order of volume, are metal, wood and plastics. Almost all metal waste (98%) is sold for recycling. 75% of wood is recycled and the remainder is used for heating. Two-thirds of plastics are sold for recycling. The Group's waste production has been stable over the past few years, fluctuating between 12 and 14 tonnes per million euros of sales since 2001.

Waste pRoduced

123 216 132 725 138 772

type of Waste

83%

83%

83%

17% 2004 Hazardous waste

17% 2005

17% 2006 Non-hazardous waste

13

12

14

Waste Re-use Rate

2004

2005

2006

Total quantity of waste produced/sales (tonnes/millions of euros) Total quantity of waste produced (tonnes) Representativeness: 2004: 98.5% 2005: 99.9% 2006: 97.4%

59% 71% 72%

2004

2005 2005: 99.4%

2006 2006: 96.8%

Representativeness: 2004: 95.4%

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9. Combating climate change

Carbon dioxide (C02) is currently considered to be one of the main contributors to the greenhouse gas effect that causes climate change. It is the main greenhouse gas generated by the Valeo Group, and is principally produced by the combustion of fossil fuel and the Group's means of transport. Valeo has developed technologies that aim to significantly reduce the energy consumption of vehicles and, consequently, their C02 emissions. In 2001 the Group took steps to quantify emissions caused by the combustion of fossil fuels. C02 emissions were calculated based on energy consumption using the emission coefficients of the Intergovernmental Panel on Climate Change. The quantity of C02 emitted by the Group per million euros of sales decreased by 25% between 2001 and 2006, but remained stable over the last three years at approximately 12 tonnes per million euros. Some facts and figures: · the Group emits two tonnes of C02 per employee per year, which is equivalent to that generated in one year by a French car driver (source: French Environment and Energy Management Agency - ADEME - and the French Institute for the Environment - Ifen);

2004 2005 2006 Greenhouse gas emissions/sales (tonnes equiv C02/millions of euros) Greenhouse gas emissions (tonnes equiv C02) Representativeness: 2004: 94.7% 2005: 100% 2006: 96.9%

· annually, the entire Valeo Group emits the equivalent of less than 5% of the C02 emissions allocation of a French thermal power station. These results confirm that the Valeo Group's contribution to the greenhouse effect is only minor. To date, none of the Group's sites have been implicated by regulations concerning quotas of greenhouse gas emissions. Nevertheless, Valeo wishes to move forward in this domain and has scheduled to undertake a review in 2007 of its CO2 transport-related emissions.

co2 atmospheRic emissions

112 195 121 157 123 971

12

11

12

10. Reducing pollution

Minimizing all forms of pollution is another of the Group's ongoing objectives. This concerns both the performance of products developed by the Group and the processes implemented to create such products. The Group has developed a starter-alternator that allows an engine to be stopped and restarted instantly and silently, resulting in a notable reduction in noise pollution in urban areas. In accordance with the recommendations of the Valeo Factory Design guide, the visual impact of sites is taken into account at the time of their construction, and a large section of each site is given over to green spaces. The architectural design of a Valeo site is a far cry from most people's image of a manufacturing plant, with particular priority being given to transparent surfaces. Valeo's activities are not especially noisy and sites are generally located quite far from residential areas. Odor pollution can be particularly unpleasant for local residents and is usually caused by the emission of Volatile Organic Compounds. Procedures have been put in place to reduce the use and emission of such compounds at source, including the replacement of solvent-based paints by water-based paints and the elimination of trichloroethylene in the manufacture of clutch facings. The Valeo sites concerned are equipped with systems for treating these compounds in order to keep odor pollution below the perception threshold. Such systems include biofiltration, absorption, condensation and incineration, with incineration being the most frequently used. A generic study is in progress to find ways to link up VOC incineration equipment and energy recuperation systems. In 2006, a complaint was lodged by a neighbor regarding odor pollution at Valeo's Daegu site, in Korea. Although the site was equipped with a VOC treatment system, its emissions still posed a problem. Following this complaint the Group employed an external expert to analyze the situation on-site and draw up an action plan. The first step was to establish a communication process between the plaintiff and the site managers. The Group is particularly vigilant not to damage the health of local residents. In 2005 it compiled a Directive on legionella bacteria. This Directive is based on French law, which is one of the strictest in this domain, and is applicable at all Valeo sites worldwide.

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Under this Directive, the sites must: · where possible replace wet cooling towers by dry towers; · implement preventative treatment systems to avoid the proliferation of legionella bacteria; and · carry out frequent controls to ensure the effectiveness of treatments in place.

In 2006, Valeo's head office, which is located in a particularly sensitive urban environment, applied this Directive by replacing the wet cooling towers for the building's air conditioning system with dry towers.

11. Managing the life cycle of a site

A site's life cycle consists of finding a location, building the site, operating the site and ultimately closing or selling it. Valeo has set up particularly rigorous regulations with respect to these phases. · The sites are very often located near customer sites, in industrial zones that already exist or are under construction, in order to benefit from local infrastructure and qualified sub-contractors. When choosing its locations, the Group systematically performs audits to check (i) if there are any potential environmental liabilities such as ground or ground water pollution, (ii) if the surrounding area is hazardous or particularly sensitive and (iii) if there is a risk of natural disasters such as floods or earthquakes. · Sites are constructed or rehabilitated in accordance with the generic plant concept developed by the Group in the Valeo Factory Design manual. Over and above the constraints and specifications set out in this manual (architectural, environmental, organizational, etc.), the key issue is the creation of a "project team", which from the outset includes specialists capable of addressing certain concerns, particularly regarding the environment and equipment safety. This project team is tasked with applying the best possible sustainable development solutions at each stage of a site's life (construction, operation, extension, closure). For example, the Group's new plants in Poland (Chrzanow, Skawina and Czechowice) as well as China (Nanjing and Wuhan) have set up retention systems by using parking lots or unloading docks to contain accidental spillages of products and fire extinction water. · The operational phase of each site is governed by Group Directives concerning employee health and safety, the environment, equipment safety and general security. If ground or groundwater pollution is suspected during this phase it is investigated and an appropriate solution is put in place. · When a business is sold or terminated, Valeo systematically performs an audit, usually along with an investigation of the ground and subsurface water, to determine if any damage has been caused during the operational phase. If any pollution is discovered it is treated immediately. All the information gathered during the audit and subsequent phases is disclosed in all transparency to the buyer of the site and, where applicable, to the Authorities. If a site is closed without there being an immediate buyer, all the waste, raw materials, products and equipment are removed and maintenance of the site is ensured until a buyer is found.

12. Ensuring the safety of operations and equipment

There could be no sustainable development at Valeo if all sites were not protected from natural disasters and technological risks. The Group's policy in this respect has always been to ensure the highest possible levels of protection at its sites. For this reason: · most of Valeo's sites are classified HPR (Highly Protected Risk) and have an automatic sprinkler system to protect against fire, as well as teams trained to deal with all kinds of risk situations; · all sites located in seismic risk zones have been constructed or renovated in compliance with the most recent seismic regulations; · where possible, Valeo's sites are located in areas not liable to flooding or are equipped with means of protecting against floods; · new Valeo sites are located far from sites posing potentially significant risk (Seveso sites, etc.), which could have a domino effect and endanger Valeo's sites; · the Risk Management Manual contains a specific Directive dealing with the prevention of emergency situations as well as situation-specific emergency plans. This Directive requires each site to implement an emergency plan with a view to preventing potential incidents. Valeo is currently working on a

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project to provide all Group sites in 2007 with a tool called Valeo Emergency and Recovery Management (VERM) to help them design and implement emergency and crisis management plans as well as procedures for restarting equipment.

VERM will enable each emergency plan to share a common structure and content, will encourage employee involvement, and will ensure that the plans are rapidly implemented.

13. Financial data

2004 Scope number of fines and compensation awards Representativeness as a % of sales Amount of fines and compensation Representativeness as a % of sales Provisions and guarantees for environmental risks Representativeness as a % of sales Costs incurred by corporate departments to prevent any adverse environmental impacts of the business Representativeness as a % of sales Investments made (excluding pollution elimination costs) to prevent any adverse environmental impacts of the business Representativeness as a % of sales Specific pollution elimination costs Representativeness as a % of sales 5 98% 25 98% 7,580 92% 14,140 97% 5,624 96% 869 96%

2005

2006

Value (In thousands of euros)

5 100% 16 100% 8,054 94% 13,861 99% 7,205 98% 1,467 99%

3 99% 4 99% 3,091 99% 16,417 97% 4,244 98% 1,240 97%

16. Social indicators

This social indicators report is based on the obligations and recommendations set out in the French New Economic Regulations Law (NRE) of May 15, 2001 and decree No. 2022-221 of February 20, 2002. The Valeo Group has chosen to base its social indicators on data from all of its companies worldwide. There are some exceptions to this, which are listed on a case-by-case basis. Valeo continued the step-by-step improvement of its indicators system in 2006 in all 12 of its Product Families and holding companies, representing a total of 129 production sites, 68 R&D centers and nine distribution platforms in 27 countries.

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1. Employment

1.1. number of employees

1.1.1. Changes in number of employees over three years

2004 Engineers and managers Administrative staff, technicians and supervisors Operators Registered headcount Agency temporary staff TOTAL hEAdCOunT including: · Permanent staff · temporary staff 55,540 11,736 58,976 11,329 59,969 9,695 11,249 11,477 40,593 63,319 3,957 67,276 2005 11,953 11,514 41,499 64,966 5,338 70,304 2006 * 12,134 11,198 41,126 64,458 5,206 69,663

*

Excluding VMA (with the exception of its Chinese division).

At December 31, 2006, the Group employed 69,663 people worldwide, down 0.9% on 2005 but up 3.4% on 2004. This reduction is attributable to the sale of the Valeo Motors and Actuators Product Family on December 27, 2006. Overall temporary staffing levels (fixed-term contracts and agency temporary personnel) decreased by a further 14% on the back of the Group's efforts to increase job security. In 2006, temporary staff represented 14% of the Group's total employees, compared with 16% in 2005 and 17% in 2004.

total headcount excl. fRance

The percentage of engineers and managers edged up once again in 2006, to 18.8% of headcount versus 18.4% in 2005 and 17.8% in 2004.

1.1.2. Internationalization of Group headcount

The Group's global expansion has given rise to an increasingly international staff. 73% of employees currently work in countries other than France, compared with 47.8% in 1995.

1995 14,125

2000 50,002

2005 50,273

2006* 50,867

*

Excluding VMA (with the exception of its Chinese division).

Western Europe total headcount at December 31, 2006* 31,368 45.0 %

Eastern Europe 10,209 14.7 %

Africa 9,699 13.9 %

north America 7,181 10.3 %

South America 3,550 5.1 %

Asia 7,656 11.0 %

*

Excluding VMA (with the exception of its Chinese division).

In line with changes in the world's automotive markets, the Group has reduced the proportion of its staff based in Western Europe and the United States (from 58.7% in 2005 to 55.3% in 2006) and increased the weighting of other regions in its total headcount (from 41.3% in 2005 to 44.7% in 2006).

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1.1.3. Generational turnaround

peRmanent WoRkfoRce by age bRacket*

14,625

13,406

5,350 4,078

7,632

2,853 2,395

2,735 2,789

79 531

1,086 1,791

4,780

<20 years

20/29 years

30/39 years

40/49 years

50/59 years

>60 years

I&C**

ATAM***

Operators

** I&C: Ingineers & Managers *** ATAM: Technicians, Supervisors & Administative Staff

*

Excluding VMA with the exception of its Chinese division.

At December 31, 2006, the Group's permanent workforce broke down as follows: · 31.8% under 30; · 35.4% between 30 and 39; · 20.4% between 40 and 39; · 12.4% over 50. The high number of new staff recruited each year generates significant generational turnaround.

1.2. Recruitment

Apart from certain highly localized difficulties concerning positions requiring advanced specialization or specific language skills, thanks to its corporate image and experience, the Group did not encounter any particular problems in relation to recruitment during the year.

1.2.1. Permanent contracts

numbeR of neW hiRes on peRmanent contRacts

2004 Engineers and managers technicians, supervisors and administrative staff Operators TOTAL 1,475 844 3,306 5,625 2005 1,772 757 4,029 6,558 2006 * 1,890 849 5,581 8,320

*

Including VMA hires.

In 2006, Valeo stepped up its efforts to reduce the use of temporary contracts, thus increasing the number of new hires on permanent contracts by 27% across all socio-professional categories. Engineers and managers accounted for 23% of these new hires (27% in 2004 and 26% in 2003). Although this percentage is lower

than previous years, in volume terms new hires in this category are still increasing. The lower proportion of new hires of engineers and managers reflects the considerably increased weighting of production operators in the total number of recruitments, up from 59% in 2004 to 61% in 2005 and 67% in 2006.

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bReakdoWn of neW hiRes on peRmanent contRacts by geogRaphical aRea*

Western Europe Permanent contracts 2006* 1,394 16.8% Eastern Europe 2,059 24.7% Africa 481 5.8% north America 2,624 31.5% South America 771 9.3% Asia 991 11.9%

*

Including VMA.

The Group focused its recruitment efforts during the year on Eastern Europe and North America.

1.2.2. Fixed-term contracts

numbeR of neW hiRes fixed-teRm contRacts

2004 Engineers and managers technicians, supervisors and administrative staff Operators TOTAL 241 273 7,924 8,438 2005 258 380 7,655 8,293 2006* 239 239 6,876 7,354

*

Including VMA.

7,354 fixed-term contracts were signed during the year, down 11.3% on 2005 and 12.8% on 2004. Employees on fixed-term contracts occupied 4,489 posts at December 31, 2006, compared with 5,991 in 2005 and 7,779 in 2004.

bReakdoWn of neW hiRes on fixed-teRm contRacts by geogRaphical aRea

Western Europe Fixed-term contracts 2006* 2,984 40.6% Eastern Europe 1,112 15.1% Africa 2,320 31.5% north America 581 7.9% South America 0 0.0% Asia 357 4.9%

*

Including VMA.

1.3. Departures

2004 Contract terminations of which redundancies Early retirement Retirement 3,454 1,661 367 606 2005 3,143 993 462 420 2006* 3,153 1,017 162 640

*

Including VMA.

Valeo terminated 3,153 contracts in 2006, representing 5.3% of the permanent workforce (5.3% in 2005 and 6.2% in 2004). As in 2005, redundancies accounted for less than one third of total contract terminations in 2006, compared with one-half in 2004.

Early retirement and retirement represented the equivalent of 1.3% of the permanent headcount (1.5% in 2005 and 1.8% in 2004).

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Asia 18

bReakdoWn of 2006 depaRtuRes by geogRaphic aRea

Western Europe Redundancies Dismissals Resignations Early retirement Retirement 473 46.5% 265 12.4% 851 18.0% 144 89.2% 312 48.8% Eastern Europe 62 6.1% 237 11.1% 871 18.4% 0 0.0% 17 2.7% Africa 39 3.8% 317 14.8% 1,196 25.3% 0 0.0% 2 0.3% north America 425 41.8% 800 37.5% 1,341 28.4% 1 0.6% 258 40.3% South America 0 0.0% 491 23.0% 141 3.0% 0 0.0% 4 0.6%

1.8% 26 1.2% 323 6.8% 17 10.2% 47 7.3%

*

Including VMA

Information on rightsizing and employment protection plans, transfer, rehiring and assistance measures Valeo is firmly committed to a forward-looking employment and skills management policy. During restructuring operations the Group regularly consults with employee representatives and explores all possible avenues to finding alternative employment for staff, including internal transfers, outplacements, initiatives aimed at finding buyers for divested operations and reindustrialization of employment catchment areas. Rightsizing programs launched in 2006 involved six of the Group's 13 Product Families (10 in 2005), and a total of 727 employees (1,640 in 2005). The six Product Families concerned were: Valeo Climate Control, Valeo Engine Cooling, Valeo Compressors, Valeo

Lighting Systems, Valeo Wiper Systems, and Valeo Electronics & Connective Systems. In respect of programs completed in 2006, 173 out of a total of 175 employees found new employment, a rate of 98.9% (compared with 79.1% in 2005). Internal transfers accounted for 56.1 points of this figure and outplacements for 5.8 points. Early retirement and retirement made up another 3.5 points, resignations accounted for 8.1 points, and alternative transfer solutions represented 26.6 points. In addition, during the year the Czechowice site in Poland, which was part of the Valeo Electronics & Connective Systems Product Family, was able to transfer its entire activity along with all 225 of its employee posts to Valeo Electrical Systems ­ also in Czechowice ­ without having to implement a redundancy plan.

2. Organization of the working week

2.1. Working hours/days

Full-time employees The work of employees within the Group's 129 production sites, 68 R&D centers and nine distribution platforms is based on statutory working time, which varies between 35 and 48 hours per week depending on the country in question. The most widespread statutory working time is 40 hours per week.

In France, the agreement on the reduction in working time, signed with trade unions on April 20, 2000, sets the applicable working time as follows:

Engineers and managers technicians, supervisors and administrative staff Employees without paid overtime hours Operators 215 days per year 35 hrs 37.5 hrs 35 hrs

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Part-time employees As part-time work is defined as any work schedule lower than the standard working hours of a particular entity, the average working time for part-time employees varies between 10 and 38 hours per week, depending on the country and socio-professional category concerned.

2.2. Shift patterns

employee bReakdoWn by shift patteRns in %

2004 Day workers two 8-hour shifts three 8-hour shifts night workers Weekend workers 41% 32% 21 5% 1% 2005 45% 27% 21% 5% 2% 2006* 43% 30% 20% 5% 2%

*

Excluding VMA (with the exception of its Chinese division).

Most production employees work two or three shifts or nights in order to optimize plant utilization. In 2006, the number of shift workers increased by 2%.

2.3. Overtime

In 2006, 6,554,338 hours of overtime were paid (as compared with 7,248,369 in 2005 and 19,930,387 in 2004). 81% of this was paid to production employees (79% in 2005, 74% in 2004).

2.4. Part-time work

In 2006, 1,241 of the Group's employees worked part-time, representing 1.9% of the permanent workforce, in line with the 2005 figure and down from 2.5% in 2004. Women accounted for 75.2% of the Group's part-time workers. Part-time numbers break down as follows: engineers and managers: 6.1%; technicians, supervisors and administrative staff: 16.9%; and operators: 77%. In certain countries the percentage of part-time employees was much higher than the Group average. This was particularly the case in Germany (12.1%), Belgium (9.1%), Spain (5%), Italy (2.5%) and France (2.1%).

2.5. Absenteeism

Absenteeism, expressed as the number of hours absent over the possible number of working hours, fell once again in 2006 coming in at 2.7%, down 0.1 percentage point on 2005 and 0.2 percentage point on 2004. Absenteeism recorded during the year was due to sickness (74.8%), work-related accidents (3.9%), strikes (3.3%), unauthorized absences (5.2%), suspensions (0.8%), authorized absences such as unpaid leave (7.6%) and other reasons (4.3%). The sustained reductions in absenteeism rates from 2.9% in 2004 and 3.4% in 2003 were achieved thanks to action plans implemented across the Group. The absenteeism rates recorded in 2006 varied from 0.3% in Japan to 4.9% in the Czech Republic, with France coming halfway in the ranking with a rate of 2.7%.

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3. Equality between men and women in the workplace

3.1. Male-female breakdown

Valeo places great importance on equality between men and women in the workplace, in terms of career development, training possibilities, salaries and rank within the company. Valeo draws up a comparative, male-female status report for the Group's French companies every year. This report is used as

bReakdoWn of Women by socio-pRofessional categoRy

2004 Engineers and managers technicians, supervisors and administrative staff Operators 16.0% 26.9% 45.6% 2005 17.1% 28.3% 44.4% 2006* 17.1% 26.5% 46.0%

a basis for annual negotiations between labor and management on targets for equality in the workplace and on the measures required to achieve these targets. The percentage of women employed by the Group is once again on an upward trend, climbing to 37.2% in 2006 (36.9% in 2004 and 36.6% in 2005).

*

Excluding VMA (with the exception of its Chinese division).

peRcentage of Women hiRed undeR peRmanent contRacts oveR thRee yeaRs

Engineers and managers Women 2004 2005 2006* 286 369 414 % 19.4% 20.8% 21.9% Technicians, supervisors and administrative staff Women 209 157 184 % 24.8% 20.7% 21.7% Women 1,209 1,470 2,268 Operators % 36.6% 36.5% 40.6% Women 1,703 1,996 2,866 Total % 30.3% 30.4% 34.4%

*

Including VMA.

3.2. Diversity

The Valeo Group has sites in 27 countries and is thus highly diversified. In 2006 the Group's workforce was comprised of employees of 91 nationalities. The most prevalent nationalities in the Group are French, German, Italian, Spanish and Chinese.

The countries with the most internationalized workforces are France (59 nationalities), Germany (41 nationalities), the United States (29 nationalities), Spain (20 nationalities) and Italy (20 nationalities). The Group's most diversified Division is the Valeo Wiper Systems Product Family in Germany, with 27 nationalities within a workforce of 1,439 employees.

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4. Labor relations and collective bargaining agreements

Valeo has developed an active contractual policy in respect of labor relations. In 2006, a total of 359 agreements were signed in 21 countries, compared with 315 in 2005 and 232 in 2004, in various areas and in accordance with the terms and conditions stipulated under different national legislations. Among these agreements, 128 (35.7%) related to working time, 108 (30.1%) to salaries, 21 (5.8%) to profit-sharing and incentive schemes, and 30 (8.4%) to premiums or bonuses. In certain countries such as France, Italy, Germany, Tunisia and Japan, a large number of meetings took place with trade unions, which led not only to formal and informal exchanges but also to the signature of numerous agreements, including: Western Europe · France: agreement on the length of terms of office held by employee representatives, 2006 wage agreements, agreements on forward-looking employment and skills management and the organization of working time and leave, pre-election agreements, method agreements, and labor law provisions in company bylaws. · Italy: agreements on the organization of working time and leave, performance bonuses and unemployment benefits. · Germany: agreements on personal safety equipment, corporate diversity and social cohesion, and retirement. · Spain: wage agreements. Eastern Europe · Czech Republic: collective bargaining agreements and wage agreements. Africa · Tunisia: agreements on the organization of working time and leave, personal safety equipment, the classification of staff, and wages. · Morocco: wage agreement. north America · Mexico: wage agreements and agreements on the organization of working time and leave. South America · Brazil: wage agreements, collective bargaining agreements and agreements on employee profit-sharing, incentive schemes and time savings accounts (épargne-temps). · Argentina: wage agreements. Asia · Japan: agreements on the payment of premiums and bonuses, and on the organization of working time and leave. · Thailand: agreements on retirement age and welfare cover. The European Works Committee includes representatives from Germany, Belgium, Spain, France, Hungary, Italy, Poland, Portugal, the Czech Republic, Slovakia and Sweden. The Committee met six times in 2006. The countries in which employees are fully or partially covered by a collective bargaining agreement are France, Spain, Portugal, Italy, Germany, Sweden, the Czech Republic, Slovakia, Hungary, Romania, Tunisia, the United States, Mexico, Brazil, Argentina, South Korea, Japan and India.

5. Health and safety in the workplace

The Group's target in terms of health and safety is to intensify its approach to work-related accident prevention and reach a "Zero Accident" rate. Health and safety at work is a clear priority for Valeo. Systematic audits are performed by external consultants to assess and control risks, and Valeo has implemented Group-wide standards. In 2006, Valeo pushed ahead with its endeavors to optimize health and safety in the workplace, drawing up a roadmap to help the Group achieve world-class standards. As part of this process, Valeo has set up a formal procedure for responding to and analyzing accidents, and the related information system can be used to share best practices and ensure their implementation with a view to eradicating risk. In addition to the systematic audits and indicators already in place (frequency rate and gravity rate), Valeo has instigated a physical indicator which is monitored on a monthly basis for each site. This new indicator measures all workplace accidents, regardless of whether or not they lead to absence, as well as incidents involving a potential risk of personal injury. In 2006, there were 763 accidents leading to absence, compared with 693 in 2005. The Group has, however, stopped keeping track of the number of days without accidents.

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5.55 0.15

gRoup

2004 Frequency rate* gravity rate** 7.21 0.16 2005 5.07 0.16 2006

* **

Frequency rate: number of accidents leading to absence per million hours worked. Gravity rate: number of days lost because of work-related accidents per thousand hours worked.

fRance

2004 Frequency rate gravity rate 13.02 0.38 2005 12.74 0.33 2006 11.35 0.28

In France the frequency and gravity rates for work-related accidents are lower by 56% and 75% respectively than the industry average (source: UIMM 2004 - latest survey). In general, the main causes of accidents leading to absence were machines and processes (45.3%) and ergonomics (20.3%).

10.8% of the training hours provided within the Group in 2006 were dedicated to safety, up 0.7 point on 2005.

6. Remuneration

6.1. Changes in remuneration and social charges

(In millions euros)

2004(1) 1,698 566 2,264 33.3%

2005 1,616 515 2,131 31.9%

2006(2) 1,675 594 2,269 35.46%

Payroll excluding social charges Social charges total payroll Charge rate

(1) (2)

Figures restated following the application of the new International Financial Reporting Standard. Including VMA.

(In millions euros)

2004(1) 2,286 24.8%

2005 2,296 23.1%

2006(2) 2,426 23.9%

Personnel costs (including temporary staff) % of sales

(1) (2)

Figures restated following the application of the new International Financial Reporting Standard. Including VMA.

bReakdoWn by geogRaphic aRea in 2006*

(In millions euros)

France 664 307 971 46.2%

Europe (excl. France) 548 157 705 28.6%

Outside Europe 463 130 593 28.1%

Payroll excluding social charges Social charges total payroll Charge rate

*

Including VMA

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France has the highest headcount, with over 17,000 employees. Overall wages went up an average of 2.4% in 2006, with inflation standing at 1.5%. 17 wage agreements were signed in the Group's 17 French companies with employee representative bodies and unions. Of these agreements, 11 (65%) were signed by the majority of the representative unions, including nine (53%) that were agreed unanimously.

6.2.3. Employee savings

Group savings scheme Employees can invest sums of money from profit-sharing and incentive schemes in a Group savings scheme set up on November 13, 2001, under a collective agreement signed by Group Management and four trade union organizations. Voluntary payments can also be made with top-up payments of between 0% and 75% by Valeo. This scheme only applies to French companies. At December 31, 2006, 11,758 employees were members of Valeo's Employee Savings Plan (PEG) (up 12.3% on the previous year), representing 68.6% of the total French headcount (59.6% in 2005), and a total amount of 33.2 millions euros split between six investment funds. Employee stock ownership In late 2004, the Group set up an employee shareholders plan entitled Valeorizon, which was subscribed to by 14% of employees in 16 of the countries in which Valeo has operations. 1.3% of Valeo's capital is now held by its employees, making them one of the Company's main shareholder groups. No new employee shareholding schemes were launched in 2006.

6.2. Profit-sharing, incentive schemes and employee savings schemes

6.2.1. Profit-sharing

In 2006, 4,241,000 euros was set aside in a special profit-sharing reserve by four out of the Group's 17 companies in France.

6.2.2. Incentive schemes

1,302,000 euros was paid out under incentive schemes to employees from four of the Group's 17 companies in France in 2006.

7. training

Trends in training over the last 3 years The overall cost of training in 2006 amounted to 31,249,239 euros, the equivalent of 1.9% of payroll excluding social charges. The Group also took on 1,294 interns in 2006, 34% of whom were women. Work placement schemes and apprenticeships also play an important role, with 1,126 young people taken on in this capacity in 2006, 34% of whom were women.

2004 number of employees trained number of training hours given training costs 51,008 1,603,593 33,381,376 2004 52,692 1,508,698 31,752,527 2006* 56,116 1,696,645 31,249,239

343 young trainees were taken on as part of the international internship program (VIE), 27% of whom were women. In 2006, 85% of employees participated in at least one training course, as part of the Group's skills development policy, compared with 81.1% in 2005.

*

Including VMA.

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bReakdoWn of houRs by type of tRaining in 2006

5.80%

Company culture

9.50%

Integration

24.90%

Other

9.50%

Languages

1.50%

Environment

5.20%

Management

2.00%

Communication

2.90%

Office systems

10.80% 27.80%

Technical - Product Safety

peRcentage of employees tRained peR socio-pRofessional categoRy

2004 Engineers and managers technicians, supervisors and administrative staff Operators TOTAL 91.1% 82.1% 77.2% 80.6% 2005 87.3% 81.8% 79.1% 81.1% 2006* 90.4% 87.5% 82.7% 85%

*

Including VMA.

aveRage numbeR of tRaining houRs peR socio-pRofessional categoRy

2004 Engineers and managers technicians, supervisors and administrative staff Operators TOTAL 48 43 23 31 2005 48 38 20 29 2006* 44 33 25 30

*

Including VMA.

A total of 1,696,645 hours of training were provided to 56,116 employees during the year, at a cost of 31,249,239 euros. The number of employees trained is increasing steadily, particularly among non-managerial staff, with the 2006 figure 5% higher than in 2004. With a view to providing training for its entire workforce (85% in 2006 compared with 81% in 2005), the Group continued to train and certify internal trainers, thus increasing the volume of internal and external training hours given by 12.5% in respect of both specialist operational training and cross-disciplinary skills. Thanks to the development of its online university [email protected], the Group is able to create more tailor-made programs and combine different training methods such as online and classroom-based training, as well as on-the-job coaching. In turn, this enables Valeo to step-up the efficiency of its learning tools while controlling the related costs, as illustrated by the 1.6% reduction in costs for 2006 despite a 7.7% increase in the number of employees trained.

Valeo [email protected] offers all employees access to training ­ at their own pace and with the possibility of assistance from tutors ­ in areas including languages and office systems, as well specific modules such as "Valeo's 5 Axes" or "Our products and processes". The offering is enhanced by internally-developed modules on quality systems and methods. As a complement to existing career plans, management also worked on formalizing Individual Career Development Plans in 2006, based on a three-pronged approach ­ training, practical application and experience. These new plans are expected to further boost internal mobility. A training and preparation plan for the role of supervisor has also been developed for production workers. Finally, the Group continued with the specialist-training approach launched in 2004 for staff working in the Training unit within the Human Resources department. Staff responsible for drawing up and monitoring training plans have also been provided with methodological tools and experience sharing systems.

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8. Disabled employees

Valeo amended its Code of Ethics in 2004, further strengthening its commitment to promote the respect of people's dignity and value in the workplace as well as equal rights for workers. Consequently, the Valeo Group participates in measures to promote the employment and training of disabled workers. At December 31, 2006, 1,027 disabled employees worked for the Group, 10% less than in 2005. In France there were 608 disabled employees at December 31, 2006 (652 at end-2005 and 510 at end-2004), representing 3.5% of the total headcount. The number of subcontracting and service contracts set up with centers promoting the employment of disabled workers represented almost 3.4 million euros in 2006 (3.7 million euros in 2005).

9. Social and cultural activities

In most of the countries in which it has operations the Group makes financial contributions to sports, educational, cultural or charity organizations. 34.8 million euros was spent on social benefits programs in 2006, representing 2.1% of total payroll excluding social charges. Valeo dedicated 11.8 million euros, or 0.7% of total payroll excluding social charges, to social benefits programs in France in 2006 (11 million euros in 2005 and 12 million euros in 2004).

10. Subcontracting

Valeo is particularly vigilant in ensuring that its subsidiaries comply with the fundamental principles of national and international labor law in all their dealings with subcontractors, and that subcontractors and suppliers apply the provisions of the Valeo Code of Ethics relating to fundamental human rights. Subcontracting costs amounted to 175 million euros in 2006, covering services such as security, cleaning, maintenance and IT and administrative support. This figure represented 10.4% of total payroll excluding charges. Subcontracting costs in France amounted to 98 million euros.

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11. the group's role in youth training and employment

11.1. International outlook

In order to assist with its recruitment requirements, Valeo has entered into a number of partnerships with technical schools, higher education establishments and universities in the regions where it operates. It also participates in numerous forums and open days in order to present the Group's activities to students and future graduates. During 2006, Valeo took part in the Atuge forum in Tunisia and France, the "Best" forum in Krakow (Poland), the Franco-German forum in Strasbourg, the international employment forum in Paris (VIE), the Careers in Europe forum in Berlin, and open days or forums in the universities of Wuhan, Nanjing and Changchun in China. In the United States, Valeo took part in the Yes-Expo Program in Detroit, attended by more than 13,000 students, in order to promote the Group's technological innovations among the student community. · ENSIETA (Brest), by participating in the graduation ceremony for students sponsored by Thierry Morin; · ESTACA, by sponsoring the activities of "Elles Bougent", an association that promotes careers in engineering for women; · CENTRALE Paris, through participating in meetings with students concerning the Year In Industry program and by organizing a tour of the Nevers site. At the same time, Valeo formed a new partnership with INSA Lyon in the plastics processing field and played an active role in various college and university forums, including those organized by ENSAM, UTC, Supélec, Centrale Paris, Mines de Paris, Mines de Douai, ESEO Angers, Ecole des Pétroles et Moteurs, ESO, HEC, ESSEC, ESCP-EAP Sciences Po Paris and EM Lyon. Valeo also participated , in the Ouest Avenir forum in Brest, the Rencontre forum in Lille, and the engineers' trade fair organized by the French employment organization Apec in Paris. In addition, with a view to diversifying the profile of its new recruits and making the automotive industry more attractive to female high school students, Valeo became one of the sponsors of the "Elles Bougent" association. It also took part in the "Women in Leadership" forum in Paris to promote the Group's businesses among potential candidates. Finally, Valeo strengthened its relations with the ParisTech network by participating in two meetings relating to the ATHENS European exchange program, open to non-French students from leading Paris engineering schools.

11.2. In France

In order to assist with its recruitment requirements in France, Valeo has strengthened its partnerships with educational establishments, including: · Supélec, in connection with the PERCI program for teaching and research in cooperation with industry; · ESIGELEC, through the signature of a framework collaboration agreement; · UTC (Compiègne), thanks to Thierry Morin's sponsorship of the graduate year and the development of scientific partnerships;

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consolidated financial statements 2006

3

P. 71 P. 72 P. 73 P. 74 P. 75 P. 76 P. 126

Consolidated statements of income

Consolidated balance sheets

Consolidated statements of cash flows

Statements of recognized income and expenses

Statement of changes in stockholders' equity

Notes to consolidated financial statements

Statutory Auditors' report on the 2006 IFRS consolidated financial statements

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CoNSolIdAted FINANCIAl StAtemeNtS 2006

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Consolidated statements of income

3

Consolidated statements of income

2006

(In millions of euros)

Notes 3.1

9,970 116 10,086 (8,431)

(2)

2005 Restated (1) 9,736 98 9,834 (8,177) 1,559 16.0% (640) (191) (452) (50) 324 3.3% (52) (52) 220 (66) 6 160 1.6% (12) 148 (6) 142 1.4%

2004 Restated (1) 9,018 62 9,080 (7,467) 1,551 17.2% (580) (182) (431) (98) 322 3.5% (32) (37) 253 (18) 5 240 2.6% 8 248 (8) 240 2.6%

NET SALES other operating revenues TOTAL OpERATiNg REVENuES Cost of sales gROSS MARgiN % of net sales Research and development expenditure Selling expenses Administrative expenses other income and expenses OpERATiNg iNCOME % of total operating revenues Cost of net debt other financial income and expenses iNCOME BEFORE iNCOME TAXES Income taxes equity in net earnings of associates iNCOME FROM CORE ACTiViTiES % of total operating revenues Non-strategic activities

(3)

1,539 15.4%

3.3

(661) (195) (458)

3.4

(70) 271 2.7%

3.5 3.6 3.7

(57) (9) 205 (75) 130 1.3% 36 166 (5) 161 1.6%

NET iNCOME FOR THE pERiOD minority interests Net income attributable to equity holders of the company % of total operating revenues income from core activities attributable to equity holders of the company · Basic earnings per share (in euros) · diluted earnings per share (In euros) Net income attributable to equity holders of the company · Basic earnings per share (in euros) · diluted earnings per share (In euros)

(1) (2) (3)

1.62 1.62

1.95 1.93

2.82 2.63

3.8.1 3.8.2

2.10 2.09

1.80 1.79

2.92 2.71

The statements of income for 2004 and 2005 have been restated from those published on February 9, 2006, as described in notes 2.1 and 3.3. Gross margin represents net sales (excluding other operating revenues) less cost of sales. See note 2.1.

The notes are an integral part of the consolidated financial statements.

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Consolidated balance sheets

Consolidated balance sheets

2006

(In millions of euros)

Notes 4.1 4.2 4.3 4.4 4.5 4.6 4.7 4.8

1,415 528 1,918 103 24 96 4,084 647 1,834 311 64

2005 Restated (1)

2004 Restated (1)

ASSETS Goodwill other intangible assets Property, plant and equipment Investments in associates Non-current financial assets deferred tax assets Non-current assets Inventories Accounts and notes receivable other current assets taxes recoverable other current financial assets Assets held for sale Cash and cash equivalents Current assets TOTAL ASSETS LiABiLiTiES AND EquiTy Share capital Additional paid-in capital Retained earnings Stockholders' equity minority interests Stockholders' equity including minority interests Provisions - non-current portion long-term debt deferred tax liabilities Non-current liabilities Accounts and notes payable Provisions - current portion taxes payable other liabilities Current maturities of long-term debt other current financial liabilities Short-term debt Current liabilities TOTAL LiABiLiTiES AND EquiTy

(1)

1,484 522 2,041 116 28 100 4,291 654 1,906 243 51 24 11 949 3,838 8,129

1,158 281 1,945 96 14 83 3,577 565 1,726 228 58 868 3,445 7,022

5.2.5 4.3 4.11

10 20 618 3,504 7,588

233 1,387 94 1,714 38

233 1,385 56 1,674 43 1,717 1,123 1,303 9 2,435 1,925 431 82 792 581 9 157 3,977 8,129

251 1,617 (87) 1,781 57 1,838 1,000 1,027 13 2,040 1,685 298 83 715 188 175 3,144 7,022

4.9 4.10 4.11 4.6

1,752 937 1,274 1 2,212 1,955

4.10

418 76 836

4.11 5.2.5 4.11

54 11 274 3,624 7,588

The balance sheets for 2004 and 2005 have been restated from those published on February 9, 2006, as described in note 6.

The notes are an integral part of the consolidated financial statements.

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Consolidated statements of cash flows

3

Consolidated statements of cash flows

(In millions of euros)

Notes

(1)

2006

2005

2004

CASH FLOwS FROM OpERATiNg ACTiViTiES Net income for the period equity in net earnings of associates Net dividends received from associates expenses (income) with no cash effect Cost of net debt Income taxes (current and deferred) gross operating cash flows Income taxes paid Changes in working capital

166 4

148 (6) 4 518 54 60 778 (65) 107 820

248 (5) 3 516 33 17 812 (28) 45 829

4.12

411 59 77 717 (85)

4.12

48 680

Net cash provided by operating activities CASH FLOwS FROM iNVESTiNg ACTiViTiES

(1)

outflows relating to acquisitions of intangible assets outflows relating to acquisitions of property, plant and equipment Inflows relating to disposals of property, plant and equipment Net change in non-current financial assets Impact of changes in scope of consolidation Net cash used in investing activities CASH FLOwS FROM FiNANCiNg ACTiViTiES

(1)

(165) (494) 17 32

(145) (441) 41 (3) (466) (1,014)

(122) (413) 19 (73) (589)

2.6

124 (486)

dividends paid to parent company stockholders dividends paid to minority interests in consolidated subsidiaries equalization tax on dividends Issuance of share capital Sale (purchase) of treasury shares Issuance of long-term debt Grants and contributions received Net outflows related to capital reductions Net interest paid Repayment in long-term debt Net cash provided by (used in) financing activities Effect of exchange rate changes on cash NET CHANgE iN CASH AND CASH EquiVALENTS Cash and cash equivalents at beginning of year Cash and cash equivalents at end of year of which : · Cash and cash equivalents · Short-term debt

(1) (2)

(84) (5) 4 4 3 48 (60) (553) (643) 1 (448) 792 344 618 (274)

(91) (5) 1 8 826 39 (252) (33) (196) 297 28 131 661 792 949 (157)

(2)

(85) (5) (101) 33 26 26 (28) (36) (170) (1) 69 624 693 (2) 868 (175)

The impact of the sale of the Electric Motors & Actuators business is described in note 2.1. The difference between net cash and cash equivalents at December 31, 2004 and at January 1, 2005 is due to the application of IAS 32 at January 1, 2005 (treasury shares are now deducted from stockholders' equity).

The notes are an integral part of the consolidated financial statements.

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Statements of recognized income and expenses

Statements of recognized income and expenses

2006

(In millions of euros)

2005 Restated (1) 135 (50)

2004 Restated (1) 6 (42)

exchange differences on translation of foreign operations Actuarial gains (losses) on defined benefit plans Cash flow hedges: · Gains (losses) taken to equity · transferred to profit and loss for the period Net investment hedges: · Gains (losses) taken to equity Remeasurement of available-for-sale financial assets Income taxes on items recognized directly in equity income and expenses recognized directly through equity Net income for the period Total recognized income and expenses for the period Attributable to: · equity holders of the company · minority interests Corrections of errors Attributable to: · equity holders of the company · minority interests

(1)

(69) 27

7 (19)

23 (8)

-

(1) (55) 166 111

(3) 5 102 148 250

1 (35) 248 213

109 2 -

240 10 -

208 5 (9)

(2)

-

-

(9) -

(2)

The statements of recognized income and expenses for the periods to December 31, 2004 and December 31, 2005 have been restated from those published on February 9, 2006, as described in note 6. See note 6.

The notes are an integral part of the consolidated financial statements.

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Statement of changes in stockholders' equity

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Statement of changes in stockholders' equity

Share capital Number of shares Additional paid-in capital Transl- Retained Stockholders' ation earnings equity adjustment Minority interests Stockholders' equity including minority interests 1,842 (92) (101) 33 5 (35) 248 (62) 1,838 27 1,865 (96) 8 (252) 9 102 148 (67) 1,717 (88) 4 1 13 (55) 166 (6) 1,752

(In millions of euros)

Stockholders' equity at 82,133,728 January 1, 2004 (Restated) (1) dividends equalization tax on dividends 1,575,296 employee share issue Share-based payments Income and expenses recognized directly through equity Net income other movements Stockholders' equity at 83,709,024 December 31, 2004 (Restated) (1) Total impact of financial (1,037,804) instruments (iAS32, iAS39) Stockholders' equity at 82,671,220 January 1, 2005 (Restated)

(3) (2)

246 5 251 251 -

1,589 28 1,617 1,617 (233) 1 1,385 2 1,387

9 9 9 131 140 (66) 74

(90) (85) (101) 5 (41) 240 (24) (96) 27 (69) (91) 8 7 (33) 142 (48) (84) (84) 4 11 14 161 (2) 20

1,745 (85) (101) 33 5 (32) 240 (24) 1,781 27 1,808 (91) 8 (252) 9 98 142 (48) 1,674 (84) 4 13 (52) 161 (2) 1,714

97 (7) (3) 8 (38) 57 57 (5) 4 6 (19) 43 (4) 1 (3) 5 (4) 38

dividends 230,100 treasury stock (6,250,000) Capital reduction

(4)

(19) 1 233 233

51,333 Share-based payments Income and expenses recognized directly through equity Net income other movements (3) Stockholders' equity at 76,702,653 December 31, 2005 (Restated) (1) dividends 121,000 treasury stock Capital increase 70,260 Share-based payments Income and expenses recognized directly through equity Net income other movements Stockholders' equity at 76,893,913 December 31, 2006

(1)

(2)

(3)

(4)

Stockholders' equity at January 1, 2004, December 31, 2004 and December 31, 2005 has been restated from the amounts published on February 9, 2006, as described in note 6. This item includes: - 18 million euros in equalization tax relating to dividends paid in 2004; - 83 million euros in equalization tax which became due (on dividends paid in 2001 and 2002) further to the corporate income tax rebate obtained in 2004. This item includes the impact of minority interest buyouts relating to Valeo Climatisation in 2004, as well as to Valeo Zexel China Climate Control and Valeo Thermal Systems Japan Corp. in 2005. Capital reduction carried out following the purchase by Valeo of around 7.5% of its own shares, in connection with a public share buyback offer and a simplified public tender offer.

The notes are an integral part of the consolidated financial statements.

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Notes to consolidated financial statements

1 - Accounting policies .......................................................................................................................................................................... p. 77 2 - Changes in the scope of consolidation ......................................................................................................................................... p. 83 3 - Notes to the statement of income ................................................................................................................................................ p. 85 4 - Notes to the balance sheet ............................................................................................................................................................. p. 89 5 - Additional disclosures ................................................................................................................................................................... p. 108 6 - Restatement of 2004 and 2005 financial information .......................................................................................................... p. 118 7 - list of consolidated companies ................................................................................................................................................... p. 119

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1 - Accounting policies

The consolidated financial statements of the Valeo Group for the year ended December 31, 2006 include the accounts of Valeo, its subsidiaries and the Group's share of associates and jointly controlled entities. Valeo is an independent Group fully focused on the design, production and sale of components, systems and modules for the automobile sector. It is one of the world's top automotive suppliers. Valeo is a French legal entity, listed on the Paris Stock Exchange, whose head office is located at 43, rue Bayen, 75017 Paris. Valeo's consolidated accounts were authorized for issue by the Board of Directors on February 12, 2007. They will be submitted for approval to the Annual General Meeting of shareholders which will be convened on May 21, 2007. In addition they have been prepared in accordance with the principal assumptions of IFRS: · true and fair view; · going concern; · accrual basis of accounting; · consistency of preparation; · materiality and aggregation. Preparation of the financial statements requires Valeo to make estimates and assumptions which could have an impact on the amounts at which assets, liabilities, income and expenses are stated. These estimates, and the assumptions underlying them, have been made on the basis of past experience and of other factors considered to be reasonable in the circumstances. They thus serve as the basis for the judgment made in determining the carrying amounts of assets and liabilities which could not be determined directly from other sources. The definitive amounts that will be stated in Valeo's future financial statements may be different from the amounts currently estimated. These estimates and assumptions are reviewed on a continuous basis.

1.1 - Accounting standards applied

Under European Union regulation 1606/2002 of July 19, 2002, the consolidated financial statements have been prepared in conformity with International Financial Reporting Standards (IFRS) approved by the European Union. The Group has elected for early application, respectively as of January 1, 2004 and 2005, of the two following amendments to IFRS that are obligatorily applicable as from January 1, 2006: · the amendment to IAS 19 introducing the option to recognize actuarial gains and losses on defined benefit pension plans in reserves; · the amendment to IAS 39 relating to hedge accounting of forecast inter-company transactions. New accounting standards that are not yet obligatorily applicable, that have not been adopted early and that may have an impact on the Group's financial statements are as follows: · IFRS 7 "Financial Instruments: Disclosures", applicable as from January 1, 2007; · IFRS 8 "Operating Segments"; this standard, which has not yet been approved by the European Union, is obligatorily applicable as from 2009. The potential impacts of these two standards on the Group's financial statements are currently being analyzed.

1.3 - Consolidation methods

The consolidated financial statements include the accounts of Valeo and companies under its direct and indirect control. The proportionate consolidation method is used when the contractual arrangements for control of a company specify that it is under the joint control of the two venturers. Companies of this type are called joint ventures. In this case, the Group's share of each asset and liability and each item of income and expense is aggregated, line-by-line, with similar items in its consolidated financial statements. All significant inter-company transactions are eliminated (for joint ventures the elimination is performed to the extent of the Group's ownership interest in the company), as are gains on inter-company disposals of assets, inter-company profits included in inventories and inter-company dividends. Companies over which Valeo has the power to exercise significant influence are accounted for by the equity method. Valeo is considered to exercise significant influence over companies in which the Group owns more than 20% of the voting rights. This method consists of replacing the book value of the investments by the Group's equity in the associate's underlying net assets, including goodwill. Companies acquired during the year are consolidated as from the date at which the Group exercises (sole or joint) control or significant influence.

1.2 - Basis of preparation

The financial statements are presented in euros and are rounded to the closest million.

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Notes to consolidated financial statements

1.4 - Foreign currency translation

Each Group company maintains its accounting records in its functional currency. A company's functional currency is the currency of the principal economic environment in which it operates, generally being the local currency. Transactions carried out in a currency other than the company's functional currency are translated using the rate prevailing at the transaction date. Monetary assets and liabilities denominated in foreign currency are translated at the year-end exchange rate. Non-monetary assets and liabilities denominated in foreign currency are recognized at the historical exchange rate prevailing at the transaction date. Differences arising from the translation of foreign currency transactions are recognized in income, with the exception of differences relating to loans and borrowings which are in substance an integral part of the net investment in a foreign subsidiary. These are recorded, for their amount net of tax, in consolidated stockholders' equity under translation reserves until such time as the net investment is disposed of, at which time they are recognized in income. The financial statements of foreign subsidiaries whose functional currency is not the euro are translated into euros as follows: · assets and liabilities are translated at the year-end exchange rate; · income statement accounts are translated into euros at the exchange rates applicable at the transaction dates or, in practice, at the average exchange rate for the period, as long as this is not rendered inappropriate as a basis for translation by major fluctuations in exchange rates during the period; · unrealized gains or losses arising from the translation of the financial statements of foreign subsidiaries are recorded through stockholders' equity.

appropriate and are taken to income over the period of sale of the corresponding products, over a maximum of 4 years.

1.6 - Gross margin and operating income

Gross margin is defined as the difference between net sales and cost of sales. Cost of sales primarily corresponds to the cost of goods sold. Operating income includes all income and expenses other than: · cost of net debt; · other financial income and expenses; · income taxes; · equity in net earnings of associates; · income from non-strategic activities. In order to facilitate interpretation of the statement of income and of Group performance, unusual items that are material to the consolidated financial statements are separately presented within operating income under "Other income and expenses".

1.7 - Financial income and expenses

Financial income and expenses are comprised, firstly, of the cost of net debt and, secondly, of other financial income and expenses. The cost of net debt corresponds to interest paid on debt less interest earned on cash and cash equivalents. Other financial income and expenses notably include: · foreign exchange gains and losses, including the impact of derivative instruments used as hedges; · charges to provisions for credit risk as well as the cost of credit insurance; · the effect of unwinding discount on provisions, including discount on provisions for pensions and other employee benefits; · and the expected return on pension and other post-employment benefit plan assets.

1.5 - operating revenues

Operating revenues are comprised of net sales and other operating revenues. Net sales primarily include sales of finished goods and also include all tooling revenues. Sales of finished goods and tooling revenues are recognized at the date on which the Group transfers substantially all the risks and rewards related to ownership to the buyer and is no longer involved in the management or in the effective control of the goods sold. In cases where the Group retains control of the future risks and rewards related to tooling, any customer contributions are recognized over the duration of the project, over a maximum of 4 years. Other operating revenues consist of all revenues for which the associated costs are recorded below the gross margin line. They mainly comprise sales of prototypes and contributions received from customers to development costs. Such contributions are deferred as

1.8 - earnings per share

Basic earnings per share are calculated by dividing consolidated net income by the weighted average number of shares outstanding during the year, excluding the average number of shares held in treasury stock. Diluted earnings per share are calculated by including potentially dilutive instruments such as stock options or convertible bonds, when such instruments have a dilutive effect, which is particularly the case for stock subscription options when their exercise price is below the market price (average Valeo share price over the

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year). When funds are received on the exercise of these rights (such as on the subscription of shares), they are deemed to be allocated in priority to the purchase of shares at market price. This calculation method ­ known as the treasury stock method ­ serves to determine the "unpurchased" shares to be added to the shares of common stock outstanding for the purposes of computing the dilution. When funds are received at the date of issue of dilutive instruments (such as for convertible bonds), net income is adjusted for the net of tax interest savings which would result from the conversion of the bonds into shares.

Intangible assets with indefinite useful lives are subject to an impairment test in accordance with the methodology set out in note 1.12. Intangible assets which are not yet in use at year-end are also subject to such impairment tests.

1.11 - Property, plant and equipment

Property, plant and equipment are carried at cost, excluding interest expense, less accumulated depreciation and impairment losses. Material revaluations, recorded in accordance with laws and regulations applicable in countries in which the Group operates, have been eliminated in order to ensure the consistency of valuation method of all fixed assets in the Group. Tooling which is specific to a given project is subjected to an economic analysis of contractual relations with the automaker in order to determine which party has control over the future risks and rewards relating to the specific tooling. When Valeo has such control, tooling is capitalized in the balance sheet. In the event that Valeo does not have control, it is included in inventories until sold. Any resulting loss on the tooling contract (corresponding to the difference between the automaker's contribution and the cost of the tooling) is provided for as soon as the amount of the loss is known. When the terms of a lease, entered into by the Group as lessee, transfer substantially all risks and rewards inherent in ownership to the Group, the corresponding asset is recognized in property, plant and equipment in the Group's balance sheet at a cost equal to the lesser of its fair value and the present value of future minimum lease payments. Such assets are subject to depreciation and, if necessary, provisions for impairment. The corresponding obligation is recorded as a liability. Depreciation is calculated on a straight-line basis over the estimated useful lives of the assets concerned: · buildings · fixtures and fittings · machinery and equipment · other fixed assets Land is not depreciated. Capital grants received are recognized in liabilities and are written back to income proportionately to the recognition of depreciation of the corresponding assets. 20 years 8 years 4 to 8 years 3 to 8 years

1.9 - Business combinations

All identifiable assets acquired and liabilities and contingent liabilities assumed, are recognized at their fair value at the date of transfer of control to the Group (acquisition date), independently of recognition of any minority interests. The cost of a business combination is equal to the acquisition price, plus any costs directly attributable to the acquisition. Any excess of the acquisition cost over the fair value of the net assets acquired and liabilities and contingent liabilities recognized, is recorded in assets as goodwill. Goodwill is not amortized but is rather subject to an impairment test at least once a year.

1.10 - Intangible assets

Innovation can be analyzed as either research or development. Research is planned investigation undertaken with the prospect of gaining new scientific or technical knowledge and understanding. Development is the application of research findings with a view to creating new products, before the start of commercial production. Research costs are recognized in expenses in the year they are incurred. Development expenditure is capitalized where the Group can demonstrate: · that it has the intention, and the technical and financial resources to complete the development; · that the intangible asset will generate future economic benefits; · and that the cost of the intangible asset can be measured reliably. Capitalized development costs are then amortized over a maximum period of 4 years from the start of volume production. Impairment losses may, as required, be recognized in respect of capitalized development costs. Other intangible assets are carried at cost less any amortization and impairment losses recognized. They are amortized on a straight-line basis over their expected useful lives.

1.12 - Impairment of assets

At each balance sheet date, the Group assesses whether there is an indication that an asset (other than a financial asset), a cash generating unit (CGU ­ as defined by IAS 36), or a group of CGUs may be impaired. CGUs are autonomous management entities at the level of which the resource allocation process is performed and results

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Notes to consolidated financial statements

are analyzed. They generally correspond to production sites or to groups of production sites. Intangible assets with indefinite useful lives are systematically subjected to an impairment test at least once a year. If the asset's carrying amount is greater than its recoverable amount, it is written down to its recoverable amount. The recoverable amount of an asset or a CGU is the higher of its fair value less costs to sell and its value in use. The method applied is the discounted present value of future cash flows expected to derive from an asset or a CGU. The discount rate used is the rate that reflects both the current assessment of the time value of money and risks specific to the asset (or group of assets) for which future cash flows estimates have not been adjusted. Impairment losses are allocated to CGU assets in the following order: firstly to the goodwill allocated to the CGU and then to the other CGU assets in proportion to their carrying amounts. Impairment losses recognized on goodwill balances are never reversed. For other assets, when an indicator shows that the asset may no longer be impaired, the impairment loss previously recognized is reversed in an amount so that the new carrying amount is the lesser of the recoverable amount and the carrying amount that the asset would have had if the impairment had not been recognized in the first place.

Accounts receivable can be subject to provisions for impairment in value. If an event of loss is identified during the financial year subsequent to initial recognition of the receivable, the required provision will be calculated by comparing the estimated future cash flows to the carrying amount in the balance sheet. Provisions are recognized through other financial expenses if they are related to a risk of insolvency of the debtor.

1.13.3 - Non-current financial assets

Non-current financial assets include investments and loans and other long-term financial assets: · investments are available-for-sale financial assets. They are initially recognized on origination at fair value. Any subsequent change in fair value is recognized through stockholders' equity or through income in the event of a prolonged decline in value; · long-term loans are held-to-maturity financial assets. They are initially recognized at fair value on origination and are subsequently valued on an amortized cost basis; · other non-current financial assets are securities with maturities greater than 3 months. These securities are recognized in noncurrent financial assets at fair value, with changes in fair value being recognized through income. Such securities can be easily sold and are risk-free.

1.13 - Financial assets and liabilities

Financial assets include non-consolidated investments, loans, accounts and notes receivable, derivatives and cash and cash equivalents. Financial liabilities include debt, accounts and notes payable, derivatives and short-term bank debt. Recognition and measurement principles in respect of financial assets and liabilities are defined in IAS 32 and IAS 39. Valeo has elected to apply these standards with effect from January 1, 2005. The impact of the change in accounting policy was recorded in equity at that date.

1.13.4 - Debt

Bonds and other loans

Bonds and loans are valued at amortized cost. The amount of interest recognized in financial expenses is calculated by applying the loan's effective interest rate to its carrying amount. Any difference between the expense calculated using the effective interest rate and the actual interest payment impacts the value at which the loan is recognized. Hedge accounting is generally applied to financial debt hedged by interest rate swaps. Such loans are revalued to their fair value, which is related to changes in interest rates.

1.13.1 - Financial assets at fair value through income

Cash and cash equivalents are comprised of marketable securities such as money-market funds, deposits, and very short-term riskfree securities which can be easily sold or converted into cash as well as cash at bank. Such investments are generally held to be sold within a short timeframe.

OCEANE

Bonds convertible into new shares or exchangeable for new or existing shares (OCEANE) grant bearers an option for conversion into common shares of Valeo. They constitute a compound financial instrument which, under IAS 32, must be split into its two components: · the value of the debt component is calculated by discounting the future contractual cash flows at the market rate applicable at the date of issue of the bond (taking account of credit risk at the date of issue) for a similar instrument with the same characteristics but without a conversion option; · the value of the equity component is calculated as the difference between the proceeds of the bond issue and the amount of the debt component.

1.13.2 - Trading receivables and payables

Trading receivables and payables are initially recognized at fair value. The fair value of accounts receivable and accounts payable is deemed to be their nominal amount in view of the fact that periods to payment are generally less than 3 months. Such trading receivables and payables are subsequently valued at amortized cost.

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Short-term bank debt

This caption mainly includes credit balances with banks and commercial paper issued by Valeo for its short-term financing needs. Commercial paper has a maximum maturity of 3 months and is valued at amortized cost.

derivatives are recognized in other financial income and expenses for the period. In certain cases, interest rate derivatives are not designated as hedging instruments in the meaning ascribed to that term by IAS 39. In such cases changes in fair value are recognized in other financial income and expenses for the period.

1.13.5 - Recognition and measurement of derivatives

Derivatives are recognized in the balance sheet at fair value under the other current financial assets and other current financial liabilities captions. The accounting impact of changes in fair value of derivatives differs depending on whether hedge accounting is applied or not. When hedge accounting is applied: · for fair value hedges of recognized assets and liabilities, the hedged portion of these items is stated at fair value. Changes in this fair value are recognized through income and offset, for the effective portion, the symmetrical changes in the fair value of the derivatives; · for cash flow hedges, the effective portion of the change in the fair value of the derivative is recognized directly through equity and the ineffective portion is taken to other financial income and expenses; · for hedges of net investments in foreign subsidiaries, the change in fair value of the hedging instruments is taken to equity (for the effective portion) until the disposal of the net investment. In cases where hedge accounting is not applied, changes in the fair value of derivatives are recognized in other financial income and expenses.

1.14 - Inventories

Inventories are stated at the lower of cost or net realizable value. Cost includes the cost of raw materials, labor and other direct manufacturing costs on the basis of normal activity levels. These costs are determined by the "First in-First out" (FIFO) method which, due to the rapid inventory turnover rate, approximates the latest purchase cost at the balance sheet date. A provision for impairment in value is recorded by comparison to net realizable value.

1.15 - Income taxes

Income tax expense includes current income taxes and deferred taxes of consolidated companies. Deferred taxes are accounted for using the liability method on all temporary differences between the tax base and the carrying amount of assets and liabilities in the consolidated financial statements and on all tax loss carry forwards. The main temporary differences relate to provisions for pensions and other employee benefits and other temporarily non-deductible provisions. Deferred tax assets and liabilities are calculated using enacted, or virtually enacted, tax rates that will be in force at the time of reversal of the temporary differences. Deferred tax assets are only recognized to the extent that it appears probable that the Valeo Group will generate future taxable profits against which these tax assets will be able to be recovered. The Group reviews the probability of future recovery of deferred tax assets on a periodic basis. This review can, if necessary, lead the Group to no longer recognize deferred tax assets that it had recognized in prior years. Taxes payable and tax credits receivable on planned dividend distributions by subsidiaries are recorded in the statement of income.

Foreign currency derivatives

Changes in the value of derivatives are generally recognized in financial income and offset, as applicable, by changes in the fair value of the underlying receivables and payables. In certain cases, the Group applies hedge accounting for highly probable future flows as from the inception of the hedging relationship: changes in the fair value of the derivatives are then recognized through equity for the effective component of the hedge. Amounts that flowed through equity are subsequently taken to operating income when the underlying hedged item affects operating income. The ineffective portion is recognized in other financial income and expenses.

Metals derivatives

The Group applies cash flow hedge accounting. The effective portion of the hedge is reclassified from equity to operating income when the hedged position affects income. The ineffective portion is recognized in other financial income and expenses.

1.16 - Share-based payments

Employee stock option plans and plans for granting free shares and Stock Appreciation Rights (SARs) to employees lead to recognition of a personnel expense. This expense corresponds to the fair value of the instrument issued. It is recognized over the rights' vesting period. Fair value is estimated on the basis of valuation models adapted to the characteristics of the instruments

interest rate derivatives

The Group generally applies fair value hedge accounting. Changes in the fair value of debt, related to changes in interest rates, and symmetrical changes in the fair value of the interest rate

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(Black-Scholes-Merton model for options, Monte Carlo method for SARs, etc.).

Provision is made for estimated product warranty costs at the time of sale of the products. The corresponding expense is recognized in cost of sales. When the effect of the time value of money is material, the amount of the provision is discounted using the risk free rate applicable to the corresponding country and maturity. The increase in the provision related to the passage of time (termed "unwinding") is recognized through income in other financial income and expenses.

1.17 - Pensions and other employee benefits

Pensions and other employee benefits cover two categories of employee benefits: · post-employment benefits which include statutory retirement bonuses, supplementary pension benefits and coverage of certain medical costs for retirees and early retirees; · other long-term benefits payable (during employment), corresponding primarily to long-service bonuses. These benefits are broken down into: · defined contribution plans, under which the employer pays fixed contributions on a regular basis and has no legal or constructive obligation to pay further contributions; · defined benefit plans, under which the employer guarantees a future level of benefits. The provision for pensions and other employee benefits (including long-term benefits) is equal to the present value of Valeo's future benefit obligation less, where appropriate, the fair value of plan assets in funds allocated to finance such benefits. The calculation of this provision is based on valuations performed by independent actuaries using the projected unit credit method and final salaries. These valuations incorporate both financial assumptions (discount rate, expected rate of return on plan assets, salary increases, rise in medical costs) and demographic assumptions, including rate of employee turnover, retirement age and life expectancy. The effects of differences between previous actuarial assumptions and what has actually occurred (experience adjustments) and the effect of changes in actuarial assumptions (assumption adjustments) give rise to actuarial gains and losses. Such actuarial gains and losses arising on long-term benefits during employment are fully recognized in the income statement at each balance sheet date. However as regards post-employment benefits, actuarial gains and losses are recognized directly through equity in the financial year in which they arise, in application of the option provided by IAS 19 as amended in December 2004.

1.19 - Assets held for sale and non-strategic operations

When the Group expects to recover the value of an asset, or a group of assets, through sale rather than through use, such assets are presented separately under the "Assets held for sale" caption in the balance sheet. Any liabilities related to such assets are also presented under a separate caption in balance sheet liabilities. Assets classified as held for sale are valued at the lower of their carrying amount and their estimated sale price "less costs to sell". Such assets are thus no longer subject to depreciation and amortization. Any impairment losses and the result of sale of these assets are recognized through Group operating income. In accordance with IFRS 5, non-strategic operations represent a major line of business of the Group, an operation that forms part of a single coordinated plan to dispose of a line of business or a company acquired solely with a view to resale. Classification as a non-strategic operation occurs at the date of sale or at a prior date if the business meets the criteria to be recognized as an asset held for sale. The results of these operations, as well as any capital gains or losses on disposal, are presented, net of tax, under a separate income statement caption.

1.20 - Segment reporting

According to IAS 14, segment reporting should be provided at two levels ­ a primary and secondary level. The choice of segments and of levels of disclosure depends on the differences in terms of risk and return and on the organizational structure of the Group. The Group's risks and returns are based on the nature of its products or services, of its production processes, the type of clients to whom the products or services are to be sold, the methods used to distribute the products or provide the services and the nature of the regulatory environment. They also depend on the countries in which the Group operates and markets its products, raw material costs used in the production cycle and the Group's capacity to innovate in order to offer its clients products that meet market expectations. Analysis of these factors demonstrates that they are common to the Group's business as a whole and different business segments cannot be separately identified within the meaning of IAS 14.

1.18 - Provisions

A provision is recognized when the Group has a legal or constructive obligation resulting from a past event, where it is probable that future outflows of resources embodying economic benefits will be necessary to extinguish the obligation and where the obligation can be estimated reliably. Commitments resulting from restructuring plans are recognized when the detailed plans have been prepared and when commencement of implementation, or an announcement, has created a reasonable expectation among the individuals concerned.

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The Group is organized in a multi-dimensional manner: · the Group is decentralized into autonomous Divisions in which the allocation of resources and performance measurement are carried out. However, as there are approximately one hundred such divisions, none of them can be considered to be material within the meaning of IAS 14; · the Divisions benefit from the support of Valeo's functional networks and Branches, which oversee the coherence of the Group's Product Families; they also exploit synergies with the Innovation Domains, and are coordinated by National Directorates. In 2006, the Group's organization was unchanged from 2005, which saw the strengthening of the role of the three Innovation

Domains and the grouping together of all the industrial branches under a single management team. Analysis of this organizational structure does not allow any specific dimension of the Group's business to be favored over others from the perspective of IAS 14. In consequence, the above matters lead: · to the conclusion that the Group as a whole operates as a single business segment ("Automotive equipment"); · to the provision, for the secondary level of segment reporting, of disclosures by geographical area, supplemented by information in respect of the most appropriate criteria for understanding of the Group's business.

2 - Changes in the scope of consolidation

2.1 - Sale of electric motors & Actuators business

In December 2006, Valeo sold its Electric Motors & Actuators business to the Japanese group Nidec. The sale price for this business was 142 million euros. This transaction generated a capital gain of 46 million euros before tax and 41 million euros after tax. This positive impact is recognized in the statement of income for 2006 under "Non-strategic activities". The Electric Motors & Actuators business was already classified in "Non-strategic activities" in the interim financial statements published at June 30, 2006, in accordance with the criteria set out

in IFRS 5. The profit after tax of the Electric Motors & Actuators business for the three financial years 2004, 2005 and 2006 is thus presented in aggregate under "Non-strategic activities" in the statement of income. In accordance with IFRS 5, all assets and liabilities of this business are not aggregated under specific balance sheet captions at December 31, 2004 and 2005. In 2006, at the date of disposal of the Electric Motors & Actuators business, the assets and liabilities related to this business exited the Group's consolidated balance sheet.

the components of the income statement caption "Non-strategic activities" are as follows:

(In millions of euros)

2006 (4) 46 (1) (5) 36

2005 (12) (12)

2004 12 (4) 8

Income of non-strategic activities before income taxes Pre-tax capital gain on disposal of non-strategic activities Income taxes on income of non-strategic activities Income taxes on capital on disposal of non-strategic activities Net income of non-strategic activities

Income from non-strategic activities attributable to equity holders of the company is analyzed as follows:

(In millions of euros)

2006

2005

2004

income from non-strategic activities attributable to equity holders of the company · Basic earnings per share (In euros) · diluted earnings per share (In euros) 0.47 0.47 (0.15) (0.14) 0.10 0.09

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Notes to consolidated financial statements

Cash flows from non-strategic activities are analyzed as follows:

(In millions of euros)

2006 4 (6) 19 17

2005 12 (10) 5 7

2004 15 (13) 24 26

Cash flows from operating activities - non-strategic activities Cash flows used in investing activities - non-strategic activities Cash flows from financing activities - non-strategic activities Change in net cash

The impacts of the disposal of the Electric Motors & Actuators business on consolidated net sales and on the Group consolidated balance sheet are analyzed respectively in paragraphs 3.1 and 2.6.

euros to Group sales in 2006 for the period from January 1 to June 30. It contributed 53 million euros to Group sales in 2005. The capital gain recognized by the Group in the year in "Other income and expenses" amounted to 14 million euros.

2.2 - Sale of Parrot

In the context of Parrot's IPO, Valeo decided to sell its 14.8% interest in the company. The capital gain on the sale of this non-consolidated investment was recognized in "Other financial income and expenses" for an amount of 24 million euros.

2.5 - other transactions carried out in 2006

2.5.1 - ichikoh

Valeo raised its interest in Ichikoh, one of the largest Japanese lighting systems suppliers, from 28.2% at December 31, 2005 to 29.4% at December 31, 2006. Ichikoh is accounted for by the equity method.

2.3 - Investment in threestar, a Korean company

In February 2006, Valeo acquired 50% of Threestar, the leading Korean manufacturer of automobile radiators. Valeo Samsung Thermal Systems, created through this agreement, was proportionally consolidated from January 1, 2006, with the remaining 50% of the capital being owned by the Samsung Climate Control Group. This company contributed 9 million euros to Group sales in 2006.

2.5.2 - Valeo Raytheon Systems inc.

Valeo continued to invest in Raytheon Systems Inc., increasing its stake from 73.1% at December 31, 2005 to 77.2% at December 31, 2006. Valeo owns Raytheon Systems Inc. jointly with the Raytheon Group, and accounts for its interest by the proportional consolidation method because of the characteristics of the partnership agreement.

2.5.3 - investments in China

In the first half of 2006, Valeo created a Chinese joint-venture with Ichikoh and increased its interest in the Chinese company Hubei Valeo Auto Lighting Systems Co. Ltd. from 75% to 100%. These two transactions did not have material impacts on Group sales in 2006.

2.4 - disposal of Zexel logitec

Valeo sold Zexel Logitec on June 30, 2006, and the company was deconsolidated as of that date. Zexel Logitec contributed 30 million

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2.6 - Impact of changes in scope of consolidation on the consolidated balance sheet

the assets, liabilities and contingent liabilities that have been acquired or sold in 2006, 2005 and 2004, measured at their date of entry into the Group or exit from the Group, are analyzed below and reconciled with the corresponding cash flows:

2006 Disposal of Electric Motors & Actuators (23) (10) (58) (2) (56) (50) 1 33 43 (122) (122) (122) Other Total 2005 2004

(In millions of euros)

Goodwill related to businesses sold other intangible assets Property, plant and equipment Investments in associates deferred tax assets Current assets Stockholders' equity long-term debt other non-current liabilities Current liabilities Net assets acquired (sold) minority interests Total net assets acquired (sold) after minority interests Goodwill on entities acquired impact of changes in scope of consolidation

(3) (3) 2 3 (5) (13) 5 (14) 4 (10) 8 (2)

(26) (13) (56) 3 (2) (61) (63) 1 33 48 (136) 4 (132) 8 (124)

198 150 8 1 298 48 (54) (218) (244) 187 19 206 260 466

1 5 (1) 9 24 (2) (3) (6) 27 38 65 8 73

The impact of changes in scope of consolidation in 2006 amounts to 124 million euros, after deducting costs paid on the sale of the Electric Motors & Actuators business. The impact of the changes in the scope of consolidation on Group cash in 2005 (466 million euros) is mainly due to the following two transactions: · acquisition of the Engine Electronics business of Johnson Controls Inc. for a total cost of 321 million euros; and

· acquisition of the remainder of the shares of ZVCC (Zexel Valeo Climate Control) and VZCCC (Valeo Zexel China Climate Control) for a total cost of 104 million euros. In 2004, Group cash was notably impacted by the following changes in the scope of consolidation: · buyout of the remaining minority interests in Valeo Climatisation; · the increase in Valeo's interest in Shanghai Valeo Automotive Electrical Systems Co. Ltd. from 30% to 50%.

3 - Notes to the statement of income

3.1 - Net sales

Group net sales amounted to 9,970 million euros in 2006 versus 9,736 million euros in 2005, an increase of 2.4% on the comparable prior-year period. Changes in Group structure and changes in exchange rates had positive impacts of 1.5% and 0.5%, respectively. Consolidated net sales remained stable between 2005 and 2006 on a comparable Group structure and exchange rate basis. As indicated in note 2.1, these amounts do not include net sales of the Electric Motors & Actuators business, which is included under the "Non-strategic activities" income statement caption for the three financial years presented. Net sales of the Electric Motors & Actuators business amounted respectively to 224, 253 and 267 million euros for the 2006, 2005 and 2004 financial years.

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Notes to consolidated financial statements

The increase in net sales in 2005 compared to 2004 is principally due to the following two transactions: · the acquisition of the Engine Electronics business of Johnson Controls Inc. on March 1, 2005, which had a favorable impact of 365 million euros on net sales; and

· the increase of Valeo's interest in a Japanese company, Valeo Thermal Systems Japan Corp., from 50% to 100% on April 1, 2005. This additional investment contributed 255 million euros to Group net sales.

3.2 - Personnel expenses

2006 total employees (excluding non-strategic activities)

(1)

2005 68,600

2004 64,500

(1)

69,700

Including temporary staff.

The increase in the number of employees between 2004 and 2005 is due to the two main acquisitions carried out in 2005, as described in note 3.1. the statement of income presents operating expenses by function. operating expenses include the following personnelrelated expenses:

(In millions of euros)

2006 1,794 421 11 115

2005 1,739 392 7 126

2004 1,634 391 5 136

Wages and salaries (1) Social charges Share-based payments Pension expenses in respect of defined contribution schemes

(1)

Including temporary staff

Pension costs under defined benefit plans are set out in note 4.10.2.

3.3 - Research and development expenditure

In 2006, research and development expenditure amounted to 661 million euros after deduction of 15 million euros corresponding to research tax credits granted in connection with these research and development costs. In the previously published 2005 and 2004 statements of income, research and development tax credits were recognized under

"income taxes". Research and development expenditure relating to these years has been restated in a manner comparable to 2006. Such expenditure amounted to 640 and 580 million euros for 2005 and 2004, respectively, after deduction of research tax credits of 6 and 5 million euros. This reclassification of research tax credits did not modify either stockholders' equity or net income for 2005 and 2004.

3.4 - other income and expenses

(In millions of euros)

2006 (13) (61) 4 (70)

2005 (16) (34) (50)

2004 (9) (74) (15) (98)

Claims and litigation Restructuring and asset impairment Goodwill impairment other Other income and expenses

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3.4.1 - Claims and litigation

In 2006, this account mainly includes costs relating to commercial and labor disputes in progress. The Group recognized income of 23 million euros in 2005 following the favorable completion of an industrial property dispute. The balance on this account notably includes costs related to the resolution in the year of customer claims.

identical to those that would be obtained from applying pre-tax rates to non-taxed cash flows. These tests led the Group to recognize an exceptional impairment loss of 14 million euros in 2006 and 11 million euros in 2005 on a CGU in the lighting systems product group.

Restructuring

Restructuring expenses of 46 million euros were recognized in 2006, comprising costs relating to the rationalization and closure of industrial sites, mainly in Western Europe.

3.4.2 - Restructuring and asset impairment losses

Asset impairment losses

Asset impairment losses of 15 million euros were recognized in other income and expenses in 2006, compared with 27 million euros in 2005. These impairment losses mainly result from impairment tests carried out in accordance with the following methodology: The recoverable amounts of groups of CGUs is calculated using fiveyear cash flow projections prepared on the basis of the budgets and medium-term plans of the Group's divisions. The forecasts are based on past experience, macroeconomic data in respect of the automobile market, order backlogs and products under development. After five years, cash flows are extrapolated using a growth rate of 1%. This growth rate does not exceed the average long-term growth rate of the Group's business sector. A post-tax discount rate of 7.5% is applied to the cash flows in 2006 (7% in 2005, 8% in 2004), on the basis of the Group's weighted average cost of capital. The use of after tax rates leads to the calculation of recoverable amounts

3.4.3 - goodwill impairment

Goodwill is allocated to cash generating units (CGUs) on the basis of the product groups to which the goodwill is related. Such goodwill is subject to impairment tests at least once a year, following the same method as that used for the CGUs (see note 3.4.2). These tests did not give rise to recognition of any goodwill impairment in 2006 and 2005; however they led to recognition of an impairment loss of 15 million euros at December 31, 2004.

3.4.4 - Other

In 2006, this caption notably includes the capital gain on the disposal of Zexel Logitec Company for an amount of 14 million euros. The balance on this account notably includes costs relating to strategic transactions.

3.5 - Cost of net debt

(In millions of euros)

2006 (78) 21 (57)

2005 (72) 20 (52)

2004 (49) 17 (32)

Interest expense (1) Interest income Cost of net debt

(1)

The application of IAS 39 on financial instruments at January 1, 2005 led to a year-on-year increase in interest expense of 7 million euros compared to 2004, mainly on OCEANE bonds.

3.6 - other financial income and expenses

(In millions of euros)

2006 (49) 19 1 (4) 27 (3) (9)

2005 (56) 17 (8) (6) 1 (52)

2004 (52) 14 (1) 2 (37)

Interest expense on unwinding of discount on pension obligations (1) expected returns on pension plan assets Currency gains and losses - net Charges to provisions for credit risk Gain (loss) on disposal of financial assets miscellaneous Other financial income and expenses

(1)

(1)

See note 4.10.2.

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Notes to consolidated financial statements

"Charges to provisions for credit risk" notably include an impairment provision of 2 million euros relating to a second tier customer, as well as the costs of credit insurance.

The "Gain (loss) on disposal of financial assets" caption mainly includes the income related to the sale of Parrot, for an amount of 24 million euros (see note 2.2).

3.7 - Income taxes

3.7.1 - income tax expense

(In millions of euros)

2006 (84) 9 (75)

2005 (71) 5 (66)

2004 6 (24) (18)

Current taxes deferred taxes income tax expense

3.7.2 - Effective tax rate

The Group's average weighted tax rate for 2006 was 37% as against 30% in 2005 and 7% in 2004. The net tax charge for 2004 included an 83 million euro tax rebate received from the

(% of income before tax)

French tax authorities in respect of tax paid in 2001 on the gain from the disposal of the Group's 50% interest in LuK (an initial rebate of 88 million euros was received in 2003).

2006 (34.4)

2005 (34.9)

2004 (35.4)

Standard tax rate in France Impact of: · income taxed at other rates · unused tax losses (current year) and unrecognized deferred tax assets · use of prior-year tax losses · permanent differences between book income and taxable income · tax credits Effective group tax rate

8.5 (27.6) 5.7 7.4 3.8 (36.6)

6.8 (24.4) 5.4 6.3 10.8 (30.0)

1.7 (16.1) 3.8 3.0 35.9 (7.1)

3.8 - earnings per share

3.8.1 - Basic earnings per share

2006 Net income attributable to equity holders of the company (In millions of euros) Average number of shares outstanding (In thousands) Basic earnings per share (In euros) 161 76,795 2.10 2005 142 79,320 1.80 2004 240 82,202 2.92

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3.8.2 - Diluted earnings per share

2006 Net income attributable to equity holders of the company (In millions of euros) Interest expense on convertible bonds (1) Average number of shares outstanding (In thousands) Stock options (In thousands) oCeANe convertible bonds Average number of shares used for the calculation of diluted earnings per share

(1)

2005 142 79,320 330 79,650 1.79

2004 240 11 82,202 200 10,105 92,507 2.71

161 76,795 199 76,994 2.09

(In thousands)

Diluted earnings per share (In euros)

(1)

Not taken into account in 2005 and 2006, in view of the potentially anti-dilutive impact of this adjustment (see note 1.8).

4 - Notes to the balance sheet

4.1 - Goodwill

(In millions of euros)

2006 1,484 8 (26) (51) 1,415 (32)

2005 1,158 260 66 1,484 (33)

2004 1,185 5 3 (20) (15) 1,158 (33)

Net goodwill, January 1 Acquisitions during the year Purchase price payments in respect of acquisitions made in previous years disposals translation adjustments Impairment

(1)

Net goodwill, December 31 Accumulated impairment losses at december 31

(1)

See note 3.4.3..

In 2006, the change in goodwill excluding the effect of foreign currency movements is mainly due to the sale of the Electric Motors & Actuators business (see note 2.1). In 2005, Valeo notably carried out the following transactions: · acquisition of the Engine Electronics business of Johnson Controls Inc.; · purchase of the entire share capital of Japanese company Valeo Thermal Systems Japan Corp.;

· increase of its interest in two Thai companies, Valeo Siam Thermal Systems Co. Ltd. and Valeo Thermal Systems Sales Thailand Co. Ltd. Following identification and measurement of the assets acquired and liabilities assumed, goodwill relating to these 2006 acquisitions amounted to 260 million euros at December 31, 2005.

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Notes to consolidated financial statements

the main goodwill balances are broken down by group of CGUs as follows:

At december 31

(In millions of euros)

2006 221 213 209 170 181 421 1,415

2005 236 217 223 175 181 452 1,484

2004 216 214 175 167 386 1,158

Wiper Systems electronics and Connective Systems Climate Control Switches and detection Systems engine management Systems other TOTAL

4.2 - other intangible assets

At december 31 2006 Amortization and impairment losses (97) (54) (258) (17) (426) 2005 Net value 2004 Net value

gross value

(In millions of euros)

Net value

Software Patents and licenses Capitalized development expenditure other Intangible assets

132 85 550 187 954

35 31 292 170 528

32 56 279 155 522

29 11 222 19 281

Other intangible assets include customer relationship intangibles, mainly purchased in the context of 2005 acquisitions. In addition, patents and licenses include assets relating to technology intangibles acquired. Changes in other intangible assets over 2004, 2005 and 2006 are analyzed below:

2004 Software

(In millions of euros)

patents and licenses 39 (25) 14 3 (1) (6) 1 11

Capitalized development expenditure 233 (50) 183 97 (3) (6) (47) (1) (1) 222

Other intangible assets 28 (14) 14 13 (1) 1 (2) (6) 19

Total

gross at January 1, 2004 Accumulated amortization and impairment Net at January 1, 2004 Acquisitions disposals Changes in scope of consolidation Impairment losses Amortization translation adjustments Reclassifications Net at December 31, 2004

75 (52) 23 9 2 (14) 9 29

375 (141) 234 122 (3) 1 (6) (69) (1) 3 281

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2005 Software

(In millions of euros)

patents and licenses 41 (30) 11 2 (1) 53 (10) (1) 2 56

Capitalized development expenditure 325 (103) 222 118 3 (7) (65) 8 279

Other intangible assets 27 (8) 19 13 (3) 141 (1) (7) (1) (6) 155

Total

gross at January 1, 2005 Accumulated amortization and impairment Net at January 1, 2005 Acquisitions disposals Changes in scope of consolidation Impairment losses Amortization translation adjustments Reclassifications Net at December 31, 2005

94 (65) 29 12 2 1 (19) 1 6 32

487 (206) 281 145 (2) 198 (8) (101) 7 2 522

2006 Software

(In millions of euros)

patents and licenses 96 (40) 56 4 (2) (9) (1) (17) 31

Capitalized development expenditure 458 (179) 279 128 (2) (8) (10) (85) (4) (6) 292

Other intangible assets 171 (16) 155 19 (1) (8) (1) 6 170

Total

gross at January 1, 2006 Accumulated amortization and impairment Net at January 1, 2006 Acquisitions disposals Changes in scope of consolidation Impairment losses Amortization translation adjustments Reclassifications Net at December 31, 2006

119 (87) 32 13 (2) (19) (1) 12 35

844 (322) 522 164 (2) (13) (10) (121) (7) (5) 528

4.3 - Property, plant and equipment

At december 31 2006 Depreciation and impairment losses (10) (552) (2,452) (1,023) (370) (4,407) 2005 Net of which carrying finance amount leases 167 458 933 155 123 205 2,041 15 5 9 6 35 2004 Net of which carrying finance amount leases 145 456 880 152 120 192 1,945 1 12 4 7 8 32

gross carrying amount

(In millions of euros)

Net carrying amount 146 419 870 146 98 239 1,918

of which finance leases 6 4 3 5 18

land Buildings Plant and equipment Specific tooling other Non-current assets in progress property, plant and equipment

156 971 3,322 1,169 468 239 6,325

Property, plant and equipment pledged as security amounted to 24 million euros at December 31, 2006.

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Notes to consolidated financial statements

Changes in property, plant and equipment over 2004, 2005 and 2006 are analyzed below:

Land

(In millions of euros)

Buildings 895 (449) 446 37 (6) 2 (48) 1 24 456

plant and equipment 2,927 (1,972) 955 110 (2) 3 (8) (274) (3) 99 880

Specific tooling 1,000 (812) 188 42 (4) (3) (112) 41 152

Other 475 (353) 122 40 (2) (57) 17 120

Fixed assets in progress 197 197 200 (11) 1 (195) 192

Total 5,650 (3,594) 2,056 431 (25) 5 (12) (491) (3) (16) 1,945

gross at January 1, 2004 Accumulated depreciation and impairment Net at January 1, 2004 Capital expenditure disposals Changes in scope of consolidation Impairment losses depreciation translation adjustments Reclassifications Net at December 31, 2004

156 (8) 148 2 (1) (2) (2) 145

2005 Land

(In millions of euros)

Buildings 934 (478) 456 19 (13) (9) 20 (2) (50) 20 17 458

plant and equipment 2,977 (2,097) 880 154 (8) 71 (12) (286) 40 94 933

Specific tooling 1,021 (869) 152 65 (2) 4 (2) (113) 9 42 155

Other 489 (369) 120 43 7 (9) (55) 6 11 123

Fixed assets in progress 192 192 165 (12) 18 7 (165) 205

Total 5,768 (3,823) 1,945 447 (45) (11) 150 (26) (504) 88 (3) 2,041

gross at January 1, 2005 Accumulated depreciation and impairment Net at January 1, 2005 Capital expenditure disposals Available-for-sale assets (1) Changes in scope of consolidation Impairment losses depreciation translation adjustments Reclassifications Net at December 31, 2005

(1)

155 (10) 145 1 (10) (2) 30 (1) 6 (2) 167

In the context of application of IFRS 5, buildings for which the Group is actively seeking buyers are classified in Assets held for sale.

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2006 Land

(In millions of euros)

Buildings 1,012 (554) 458 24 (1) (9) (17) (50) (6) 20 419

plant and equipment 3,346 (2,413) 933 179 (1) (20) (5) (284) (13) 81 870

Specific tooling 1,155 (1,000) 155 63 (2) (4) (1) (103) (3) 41 146

Other 538 (415) 123 33 (3) (3) (1) (46) (3) (2) 98

Fixed assets in progress 205 205 191 (8) (4) (6) (139) 239

Total 6,434 (4,393) 2,041 492 (15) (9) (56) (8) (484) (39) (4) 1,918

gross at January 1, 2006 Accumulated depreciation and impairment Net at January 1, 2006 Capital expenditure disposals Available-for-sale assets (1) Changes in scope of consolidation Impairment losses depreciation translation adjustments Reclassifications Net at December 31, 2006

(1)

178 (11) 167 2 (8) (1) (1) (8) (5) 146

In the context of application of IFRS 5, buildings for which the Group is actively seeking buyers are classified in Assets held for sale.

4.4 - Investments in associates

Changes in the "Investments in associates" caption can be analyzed as follows:

(In millions of euros)

2006 116 (4) 3 (13) 1 103

2005 96 6 (4) 8 7 3 116

2004 99 5 (3) (1) (4) 96

investments in associates at January 1 Share of profit in associates dividend payments Impacts of changes in the scope of consolidation translation adjustments other investments in associates at December 31

At december 31 Ownership interest

(%)

Equity in net assets

(In millions of euros)

2006 Ichikoh Faw Valeo Climate Control other investments in associates 29.4 36.5 -

2005 28.2 36.5 -

2004 22.7 36.5 -

2006 72 23 8 103

2005 80 25 11 116

2004 64 21 11 96

Ichikoh is a company listed on the Tokyo Stock Exchange. At December 31, 2006, the market capitalization of the shares held by the Valeo Group was 58 million euros. The carrying amount of the investment is supported by its value in use.

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Notes to consolidated financial statements

Summarized financial data in respect of associates are set out below:

(In millions of euros)

2006 703 483 950 (3)

2005 754 509 1,011 20

2,004 776 490 1,228 20

total assets total liabilities total operating revenues Net income for the period

4.5 - Non-current financial assets

Non-current financial assets are broken down as follows:

At december 31

(In millions of euros)

2006 2 16 3 3 24

2005 9 12 3 4 28

2004 8 2 2 2 14

Non-consolidated investments long-term loans Security deposits other Non-current financial assets

4.6 - deferred taxes

Deferred tax assets and liabilities are offset when a legal right of offset of current tax assets and liabilities exists and the deferred tax assets and liabilities concern income taxes levied by the same tax authority. In France, Valeo elected for tax consolidation for the years 2003 to 2007. The tax group includes the parent company and its principal French subsidiaries that are eligible for tax consolidation. Valeo also elected for tax consolidation for its subsidiaries in other countries whose legislation permits it (Germany, Spain, Italy, the United Kingdom and the United States).

At december 31 2004

(In millions of euros)

2005

Recognized through income 9 (14) 4 (10) 7 (1) 9 5 9

Other movements (1) 12 4

2006

loss carry forwards (2) Capitalized development expenditure Pensions and other employee benefits other provisions Inventories Provisions for reorganization expenses tooling Non-current assets other Total deferred taxes of which: · deferred tax assets · deferred tax liabilities

(1)

17 (69) 53 42 13 14 9 (5) (4) 70 83 (13)

12 (82) 63 62 15 11 8 (4) 6 91 100 (9)

33 (92) 67 65 15 20 7 (1) (19) 95 96 (1)

13 2

(6) (30) (5)

(2)

Other movements comprise (1) million euros of deferred taxes relating to actuarial gains and losses recognized through stockholders' equity, (2) million euros related to the impact of changes in the scope of consolidation and (2) million euros related to translation adjustments. In addition, reclassifications have been made between the different types of deferred taxes. Deferred tax assets are recognized in respect of tax loss carry forwards to the extent that it is probable that future profits will be available against which they may be offset.

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3

47 212 287 546 232 778

At december 31, 2006, deferred tax assets not recognized by the Group are broken down as follows:

(In millions of euros)

Base 137 632 839 1,608 1,608

potential tax saving

tax loss carry forwards - expiration date 2007 to 2010 tax loss carry forwards - expiration date 2010 and beyond tax loss carry forwards - available indefinitely Current tax loss carry forwards Unrecognized deferred tax assets on temporary differences Total unrecognized deferred tax assets

4.7 - Inventories

At december 31, 2006, inventories are broken down as follows:

2006

(In millions of euros)

2005 Net 231 74 342 647 Net 221 81 352 654

2004 Net 189 71 305 565

gross 275 80 401 756

provisions (44) (6) (59) (109)

Raw materials Work-in-progress Finished goods, supplies and specific tooling inventories - net

Provisions for impairment in the value of inventories amounted to 109 million euros at December 31, 2006 (130 millions euros at December 31, 2005), including an allowance of 26 million euros in the year. In 2005, allowances to provisions for impairment amounted to 35 million euros.

The cost of inventories recognized in cost of sales (excluding the Electric Motors & Actuators business) was 8,166 million euros in 2006 as against 7,923 million euros in 2005 and 7,230 million euros in 2004.

4.8 - Accounts and notes receivable

At december 31

(In millions of euros)

2006 1,864 (30) 1,834

2005 1,938 (32) 1,906

2004 1,748 (22) 1,726

Accounts and notes receivable less provisions Accounts and notes receivable - net

Allowances to provisions against accounts and notes receivable are recognized in "Other financial income and expenses" where such a provision results from a risk of client default (see note 3.6) and in administrative expenses in other cases.

4.9 - Stockholders' equity

4.9.1 - Share capital

At December 31, 2006, Valeo's share capital totaled 233 million euros, represented by 77,580,617 shares of common stock with a par value of 3 euros each, all fully paid-up. Shares that have been registered in the name of the same holder for at least four years carry double voting rights (2,215,541 at December 31, 2006). Valeo's potential share capital would amount to 274 million euros, representing 91,430,106 shares, in the event of: · the exercise of stock subscription options granted to Valeo Group employees; · the conversion of bonds issued as part of the OCEANE program into new shares (see note 4.11.2).

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Notes to consolidated financial statements

the following employee stock option plans and free share plans approved by the Annual General meeting were in progress at december 31, 2006:

Terms and conditions of stock subscription plans

year in which the plan was set up Number of shares subject to options Exercise price of options (1)

(In euros)

Number of options outstanding at December 31, 2006 (2) 419,673 80,800 303,000 301,808 241,188 353,248 506,817 580,273 957,243 3,744,050

Expiry date

2000 2001 2001 2001 2002 2002 2003 2003 2004 TOTAL

(1)

1,300,000 80,000 600,000 442,875 420,000 600,000 700,000 780,000 1,123,200 6,046,075

48.00 55.82 42.48 42.69 43.84 28.30 23.51 32.91 28.46

2008 2009 2009 2009 2010 2010 2011 2011 2012

(2)

Exercise price equal to 100% of the average Valeo share price over the 20 trading days preceding the meeting of the Board of Directors or Management Board granting the stock subscription options. The number of shares includes the impact of the public share buyback offer and simplified public tender offer, which increased the share allocation ratio to 1.01 Valeo share from 1 Valeo share.

Terms and conditions of stock option plans

year in which the plan was set up Number of shares subject to options Exercise price of options (1)

(In euros)

Number of options outstanding at December 31, 2006 (2) 371,457 240,370 596,380 187,000 1,309,250 2,704,457

Expiry date

2003 2004 2005 2006 2006 TOTAL

(1)

500,000 280,800 650,000 187,000 1,309,250 2,927,050

32.91 32.74 32.32 33.75 32.63

2011 2012 2013 2014 2014

(2)

Exercise price equal to 100% of the average Valeo share price over the 20 trading days preceding the meeting of the Board of Directors or Management Board or 100% of the average purchase price of treasury stock held if this is greater than the Valeo quoted share price. The number of shares includes the impact of the public share buyback offer and simplified public tender offer, applicable to grants prior to 2005, which increased the share allocation ratio to 1.01 Valeo share from 1 Valeo share.

Terms and conditions of free share awards

year in which plan was set up Number of free shares granted 600,000 (1) 63,000 100,000 763,000

(2)

Number of shares not yet issued at December 31, 2006 541,870 63,000 100,000 704,870

year of vesting

2005 2006 2006 TOTAL

(1) (2)

2008 2008 2009

Including 300,000 shares granted subject to the Group achieving certain profitability criteria. Including 36,500 shares granted subject to the Group achieving certain profitability criteria

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Notes to consolidated financial statements

3

movements on the stock option plans can be analyzed as follows:

2004 2004 Number of options weighted average and free shares exercise price 5,524,925 1,404,000 (393,700) (58,250) 6,476,975 3,288,725 40.92 29.32 39.91 67.40 38.23 46.75

Options not exercised at January 1, 2004 options granted/free shares to be issued options cancelled options expired options exercised Options not exercised/free shares not issued on December 31 Options which can be exercised on December 31, 2004 2005

2005 weighted average Number of options and free shares exercise price 6,476,975 1,250,000 (748,200) (485,250) (51,120) 6,442,405 3,099,668 38.23 16.81 37.67 70.32 25.69 31.82 39.50

Options not exercised at January 1, 2005 options granted/free shares to be issued options cancelled options expired options exercised Options not exercised/free shares not issued on December 31 Options which can be exercised on December 31, 2005 2006

2006 Number of options weighted average and free shares exercise price 6,442,405 1,659,250 (490,575) (432,125) (69,555) 7,109,400 3,759,575 31.82 29.55 29.49 50.01 25.88 30.50 35.21

Options not exercised at January 1, 2006 options granted/free shares to be issued options cancelled options expired options exercised Options not exercised/free shares not issued on December 31 Options which can be exercised on December 31, 2006

Taking account of the impact of the public share buyback offer and the simplified public tender offer, the 7,109,400 stock options and free shares in circulation at December 31, 2006 carry rights

to 7,153,377 Valeo shares. The 69,555 options exercised in 2006 carried rights to 70,260 Valeo shares.

the principal data and assumptions underlying the valuation of equity instruments at fair value can be analyzed as follows:

2006 type Share price at date of grant (Euros) expected volatility (%) Risk-free rate (%) dividend rate (%) duration of the option (Years) Fair value of the equity instrument (Euros) March Free shares and purchase option 31.79 - and 24.6 3.3 and 3.5 3.2 2.25 and 4 29.28 and 4.92 November Free shares and purchase option 30.16 - and 29.0 3.9 3.2 3 and 4 26.32 and 5.54

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Notes to consolidated financial statements

2005 Free shares and purchase option 31.46 - and 26.4 2.9 and 3.1 3.1 2.25 and 4

2004 Subscription option and purchase option 29.77 25.8 3.1 3.4 4

2003 Subscription option 32.63 and 20.21 31.7 and 36.6 3.7 and 3.2 3.4 4

Share price at date of grant (Euros) expected volatility (%) Risk-free rate (%) dividend rate (%) duration of the option (Years)

Expected volatility is determined as being the implicit volatility at the date of grant of the plan. The maturity of four years used for stock option plans corresponds to the period for which the availability of options is restricted by tax legislation, which is estimated to correspond to the duration of the option. Given an employee turnover assumption of 5%, an expense of 11 million euros was recognized in respect of 2006, as against an expense of 7 million euros for 2005. An expense of 2 million euros was recognized in 2004 reflecting recognition of a liability in respect of SARs (Share Appreciation Rights) granted in the context of an employee share plan. A derivative used to hedge the corresponding commitment was recognized on January 1, 2005 in an amount of 2 million euros on first time application of IAS 39. At December 31, 2006, the liability and the derivative are both recognized in the Group's financial statements in an amount of 1 million euros. As rights related to the SARs ("Share Appreciation Rights") were not vested at the year-end their intrinsic value is nil.

4.9.4 - Retained earnings

Consolidated retained earnings include net income for the year amounting to 161 million euros (before appropriation of the dividend to be proposed at the Annual General Meeting). The balance of the parent company's distributable retained earnings amounts to 1,589 million euros, before appropriation of 2006 net income (respectively 1,593 and 1,596 million euros in 2005 and 2004).

4.9.5 - Dividends per share

Dividends paid in 2006 amounted to 84,391 thousand euros, being 1.10 euro per share, as against 91,276 euros (1.10 euro per share) in 2005 and 85,307 thousand euros (1.05 euro per share) in 2004. A dividend of 1.10 euro per share for the year ended December 31, 2006 will be proposed to the Annual General Meeting. This distribution is not recognized in accrued liabilities in the financial statements at December 31, 2006.

4.9.6 - Treasury stock

At December 31, 2006, Valeo owns 686,704 of its own shares, representing 0.89% of share capital, as against 807,704 shares (1.04%) at December 31, 2005 and 1,037,804 shares (1.24%) at December 31, 2004.

4.9.2 - Additional paid-in capital

Additional paid-in capital represents the net amount received, either in cash or in assets, in excess of the par value on issuance of Valeo shares.

4.9.3 - Translation adjustment

The translation adjustment reserve at December 31, 2006 primarily includes gains and losses arising from the translation of the net assets of Valeo's Tunisian, Turkish, Mexican, US, Brazilian, Japanese, South Korean and Chinese subsidiaries.

4.9.7 - Minority interests

Changes in minority interests can be analyzed as follows:

(In millions of euros)

2006 43 5 (4) (3) (3) 38

2005 57 6 (5) 4 (19) 43

2004 97 8 (7) (3) (38) 57

Minority interests at January 1 equity in net earnings dividends paid translation adjustment Changes in the scope of consolidation Minority interests at December 31

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4.10 - Provisions

Changes in provisions can be analyzed as follows:

provisions for reorganization expenses 224 (102) (3) (6) 57 (5) 165 (103) 10 10 (6) 108 1 (4) 181 (82) (3) (10) 42 55 4 (11) 176 89

(2)

(In millions of euros)

provisions for pensions and other employee benefits 870 (112) 1 (30) 6 39 40 42 856 (89) 15 62 13 89 39 (152) 50 883 (62) (27) (33) (41) 28 30 (3) (27) 748 73

Other provisions 265 (57) 2 (1) (1) 100 (31) 277 (91) 192 13 (6) 154 (49) 490 (107) (3) (6) 3 105 (51) 431 256

Total

provisions at January 1, 2004 Amounts used during the year Impacts of changes in the scope of consolidation translation adjustments Reclassification Additions Unwinding of discount Reversals Actuarial gains and losses recognized through equity provisions at December 31, 2004 Amounts used during the year Impacts of changes in the scope of consolidation translation adjustments Reclassification Additions Unwinding of discount Reversals Actuarial gains and losses recognized through equity provisions at December 31, 2005 Amounts used during the year Impacts of changes in the scope of consolidation translation adjustment Reclassification (1) Additions Unwinding of discount Reversals Actuarial gains and losses recognized through equity provisions at December 31, 2006 of which current portion (< 1 year)

(1)

1,359 (271) 3 (34) (1) 196 40 (36) 42 1,298 (283) 217 85 1 351 40 (205) 50 1,554 (251) (33) (49) 4 188 34 (65) (27) 1,355 418

(2)

Releases of provisions for pension and other employee benefits include an amount of (127) million euros relating to amendments to the healthcare insurance plan in the United States and an amount of (20) million euros in connection with the reduction in benefit entitlement due to the closure of the Rochester site. Including, in 2006, a reclassification of 41 million euros from provisions for pensions to provisions for reorganization expenses in connection with healthcare plans for early retirees in the United States.

4.10.1 - provisions for reorganization expenses

Provisions for reorganization expenses correspond to a series of measures adopted by the Group as part of an industrial streamlining plan aimed at more closely tailoring Valeo's industrial base to customer requirements, in terms of cost competitiveness and geographical location.

The provisions include costs relating primarily to: · continued rightsizing and production streamlining measures; · and specific severance payments (CATS) applicable at certain French sites, in accordance with the industry agreement signed in March 2001.

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Notes to consolidated financial statements

4.10.2 - provisions for pensions and other employee benefits

Description of the plans in force within the group

The Group's commitments in relation to pensions and other employee benefits primarily concern the following defined benefit plans: · termination benefits (France, Italy, Mexico, South Korea); · supplementary pension benefits (United States, Germany, United Kingdom, Japan and France) which top up the statutory pension schemes in force in those countries. These plans are generally externally funded, with the exception being in Germany; · the payment of certain medical and life insurance costs for retired employees (United States),

· certain of the above-mentioned benefits granted specifically under early retirement schemes (United States, Germany and France), · other long-term benefits (long-service bonuses in France and Germany). The costs relating to all of these benefits are accounted for in accordance with the accounting policy described in note 1.17.

Actuarial assumptions

The actuarial assumptions used by the Group to calculate its obligations relating to pensions and other employee benefits take into account the specific demographic and financial conditions of each country in which the Group operates and each Group company. Discount rates are determined by reference to market yields at the valuation date on high quality corporate bonds with a term consistent with that of the employee benefits concerned.

In 2006, the average discount rates used in the countries representing the Group's most significant obligations were as follows:

At december 31 2006 (%) France Germany United Kingdom Italy United States mexico Japan South Korea 4.5 4.4 5.0 4.3 5.9 9.3 2.1 5.3 2005 (%) 4.3 4.1 4.8 4.0 5.6 8.5 1.8 5.8 2004 (%) 4.5 4.8 5.3 4.0 5.7 10.2 2.0 4.5

The discount rates for early retirement plan obligations are lower than the rates set out above, as the obligations have shorter terms than for pensions. the expected long-term return on plan assets has been calculated taking into account the structure of the investment portfolio in each country. the rates are as follows for the principal funds invested by the Group:

At december 31 2006 (%) United States United Kingdom Japan South Korea 8.5 6.4 2.7 4.5 2005 (%) 8.5 6.7 2.0 4.5 2004 (%) 8.5 7.0 2.0 5.0

The weighted average rate of long-term salary increases was 3.5% at December 31, 2006, unchanged compared to December 31, 2005. It was 3.6% at December 31, 2004.

The rate of increase for medical costs in the United States used to value the Group's obligations was 10% at December 31, 2006, 2005 and 2004, reducing by one percentage point a year from 2010 to reach 5% in 2014.

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Breakdown of obligations

At december 31, 2004 France

(In millions of euros)

Other European countries 248 58 (37) 269 269

North America 303 230 (148) 385 8 393

Other countries 37 30 (25) 42 42

Total

Present value of unfunded obligations Present value of funded obligations market value of plan assets Deficit Unrecognized past service cost provisions recognized at December 31, 2004

168 19 (1) 186 (34) 152

756 337 (211) 882 (26) 856

At december 31, 2005 France

(In millions of euros)

Other European countries 286 73 (42) 317 317

North America 201 325 (197) 329 20 349

Other countries 44 56 (52) 48 48

Total

Present value of unfunded obligations Present value of funded obligations market value of plan assets Deficit Unrecognized past service cost provisions recognized at December 31, 2005

179 24 (3) 200 (31) 169

710 478 (294) 894 (11) 883

At december 31, 2006 France

(In millions of euros)

Other European countries 266 77 (45) 298 298

North America

Other countries

Total

Present value of unfunded obligations Present value of funded obligations market value of plan assets Deficit Unrecognized past service cost provisions recognized at December 31, 2006

181 27 (5) 203 (26) 177

142 287 (205) 224 1 225

47 47 (46) 48 48

636 438 (301) 773 (25) 748

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Notes to consolidated financial statements

Movements in provisions

France

(In millions of euros)

Other European countries 254 14 (18) (1) (1)

North America 436 18 (68) 10 (30)

Other countries 32 5 (5) 1

Total

provisions at January 1, 2004 Actuarial gains and losses recognized through equity Amounts used during the year

(1)

148 5 (21) (3) -

870 42 (112) 1 6 (30)

Impacts of changes in the scope of consolidation Reclassification pensions/reorganization expenses translation adjustments Provisions for the year (expense): · service cost · interest expense · past service cost · expected return on plan assets · other items provisions at December 31, 2004 Actuarial gains and losses recognized through equity Amounts used during the year

(1)

1

10 8 7 (2) 152 7 (19) 5 -

9 13 (2) 1 269 40 (14) 1 1

12 31 (6) (11) 1 393 15 (49) 2 13 54

7 2 (1) 42 (12) (7) 7 7

38 54 1 (14) 856 50 (89) 15 13 62

Impacts of changes in the scope of consolidation Reclassification pensions/reorganization expenses translation adjustments Provisions for the year (expense): · service cost · interest expense · past service cost · expected return on plan assets · other items provisions at December 31, 2005 Actuarial gains and losses recognized through equity Amounts used during the year (1) Impacts of changes in the scope of consolidation Reclassification pensions/reorganization expenses translation adjustments Provisions for the year (expense): · service cost · interest expense · past service cost · expected return on plan assets · other items provisions at December 31, 2006 of which current portion (< 1 year)

(1) (2) (3)

10 8 6 169 3 (22) -

10 14 (2) (2) 317 (4) (14) (25) 1 1

10 31 (127) (14) 21 349 (28) (18) (1) (42) (32)

(3) (2)

9 3 (1) 48 2 (8) (1) (2)

39 56 (121) (17) 19 883 (27) (62) (27) (41) (33)

17 8 5 (3) 177 20

10 14 (2) 298 17

7 25 (19) (16) 225 31

8 2 (1) 48 5

42 49 (14) (19) (3) 748 73

Including benefits paid directly to beneficiaries or contributions paid to external funds, depending on the plan concerned. Corresponds to changes in retiree medical plans. Of which (20) million euros in connection with the reduction in benefit entitlement and the 41 million euro effect of acceleration of rights in the context of the closure of the Rochester site.

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Movements in obligations

France

(In millions of euros)

Other European countries 281 9 13 (18) 12 3 6 306 10 14 (15) 43 (1) 1 1 359 10 14 (15) (4) (25) 2 2 343

North America 550 11 31 (42) 25 (42) 533 10 31 (42) 16 (116) 4 13 77 526 7 25 (10) (28) (19) (1) (18) (53) 429

Other countries 59 8 2 (7) 4 1 67 9 3 (10) (7) 31 7 100 8 2 (10) 2 (1) (7) 94

Total

Obligations at January 1, 2004 Service cost Interest expense Benefits paid Actuarial gains and losses Plan amendments Impacts of changes in the scope of consolidation other translation adjustments Obligations at December 31, 2004 Service cost Interest expense Benefits paid Actuarial gains and losses Plan amendments Impacts of changes in the scope of consolidation other translation adjustments Obligations at December 31, 2005 Service cost Interest expense Benefits paid Actuarial gains and losses Plan amendments Impacts of changes in the scope of consolidation other translation adjustments Obligations at December 31, 2006

165 10 8 (21) 2 26 (3) 187 10 8 (18) 9 2 5 203 17 8 (21) 3 (2) 208

1,055 38 54 (88) 43 29 1 3 (42) 1,093 39 56 (85) 61 (115) 41 13 85 1,188 42 49 (56) (27) (19) (27) (18) (58) 1,074

Movements in plan assets

France

(In millions of euros)

Other European countries 33 2 2 37

North America 116 11 31 (5) 7 (12) 148

Other countries 28 1 2 (4) (1) (1) 25

Total

plan assets at January 1, 2004 expected return on plan assets Contributions paid to external funds Benefits paid Actuarial gains and losses Impacts of changes in the scope of consolidation other translation adjustments plan assets at December 31, 2004

2 1 (1) (1) 1

179 14 36 (10) 5 (13) 211

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Notes to consolidated financial statements

France

(In millions of euros)

Other European countries 37 2 (1) 3 1 42

North America 148 14 13 (6) 3 25 197

Other countries 25 1 4 (7) 5 23 1 52

Total

plan assets at January 1, 2005 expected return on plan assets Contributions paid to external funds Benefits paid Actuarial gains and losses Impacts of changes in the scope of consolidation other translation adjustments plan assets at December 31, 2005

1 2 (1) 1 3

211 17 19 (15) 9 26 27 294

France

(In millions of euros)

Other European countries 42 2 1 (1) 1 45

North America 197 16 9 (1) 1 5 (22) 205

Other countries 52 1 3 (5) (5) 46

Total

plan assets at January 1, 2006 expected return on plan assets Contributions paid to external funds Benefits paid Actuarial gains and losses Impacts of changes in the scope of consolidation other translation adjustments plan assets at December 31, 2006

3 2 5

294 19 15 (7) 1 5 (26) 301

Breakdown of plan assets

France

(In millions of euros)

Other European countries 28 5 4 37 29 7 6 42

North America

Other countries

Total

Cash at bank Shares Government bonds Corporate bonds Breakdown of plan assets at December 31, 2004 Cash at bank Shares Government bonds Corporate bonds Breakdown of plan assets at December 31, 2005 Cash at bank Shares Government bonds Corporate bonds Breakdown of plan assets at December 31, 2006

1 1 2 1 3 3 2 5

3 125 13 7 148 5 163 22 7 197 6

22 3 25 4 19 25 4 52 8 15 23 46

25 154 18 14 211 9 213 54 18 294 14 229 46 12 301

44 1 45

167 22 10 205

Contributions of 15 million euros were paid to external funds in 2006. Contributions in 2007 are estimated at 30 million euros. The effective return on plan assets amounted to 31 million euros in 2006, as against 26 million euros in 2005 and 21 million euros in 2004.

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Notes to consolidated financial statements

3

the effects of a change of one point in the rate of increase in medical costs in the United States are as follows:

2006

(In millions of euros)

2005 Decrease (2) increase 2 3 Decrease (2) (3)

2004 increase 2 29 Decrease (2) (23)

increase 2

effect on service cost and interest expense effect on obligations

4.10.3 - Other provisions

At december 31

(In millions of euros)

2006 180 251 431

2005 226 264 490

2004 108 169 277

Provisions for product warranties other

(1)

Other provisions

(1)

Other provisions mainly concern contractual, labor, environmental or tax risks and litigation.

At December 31, 2005, movements of 125 million euros in this account caption arise as a result of changes in the scope of consolidation in that year.

4.11 - debt

4.11.1 - gross debt

At december 31, 2006, the Group's gross debt can be analyzed as follows:

(In millions of euros)

2006 1,274 54 274 1,602

2005 1,303 581 157 2,041

2004 1,027 188 175 1,390

long-term debt (note 4.11.2) Current maturities of long-term debt (note 4.11.2) Short-term debt (note 4.11.3) gross debt

4.11.2 - Long-term debt

Analysis of long-term debt

At december 31

(In millions of euros)

2006 595 427 216 15 49 26 1,328

2005 1,094 419 221 25 86 39 1,884

2004 500 463 127 28 72 25 1,215

Bond issues oCeANe (1) Syndicated loans lease obligations other borrowings Accrued interest Long-term debt

(1)

The carrying amount of the OCEANE was reduced from 463 million euros to 419 million euros following application of IAS 32 at January 1, 2005.

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Notes to consolidated financial statements

Long-term debt includes: · 600 million euros worth of eight-year fixed rate bonds issued by Valeo on June 24, 2005. The interest rate on these bonds is 3.75% of the nominal amount. These bonds were issued in the context of the Euro Medium Term Note program. The effective interest rate on these bonds is 3.89%; · 463 million euros worth of bonds convertible for new shares or exchangeable for existing shares (OCEANE) issued on August 4, 2003, representing 9,975,754 bonds with a nominal value of 46.4 euros each. The interest on these bonds is 2.375% per annum payable in arrears on January 1 of each year. Bearers of the bonds can at any time request conversion and/or exchange into common stock on the basis of 1.013 Valeo shares for one bond. In addition, Valeo has a call option that may be exercised between January 31, 2007 and December 31, 2010 if the

Valeo share is valued at an average price of 60 euros. The effective interest rate of the OCEANE amounts to 4.54% (4.46% excluding the call); · two seven-year syndicated loans for a total amount of 225 million euros issued on July 29, 2005, hedged by two interest rate swaps which are perfectly matched in both amount and duration. These loans and the related hedges have the following characteristics:

- the first loan is at a variable rate and incorporates a cap which limits the interest rate to a maximum of 4.735%. It is hedged by a derivative which offsets the option incorporated in the loan, - the second loan is at a fixed rate of 3.62% and incorporates a swap option that enables the Group to opt for a variable rate in 2009. It is hedged by a derivative which has identical characteristics to those of the option incorporated in the loan.

The 500 million euro bond issued by Valeo in 2001 was redeemed on maturity on July 13, 2006.

Maturities of long-term debt

At december 31 2013 and beyond 595 2 14 611

(In millions of euros)

2008 3 2 5

2009 2 2 4

2010 1 3 4

2011 427 4 431

2012 216 3 219

Total 595 427 216 8 28 1,274

Bond issues oCeANe Syndicated loans lease obligations other borrowings TOTAL

4.11.3 - Short-term debt

At december 31

(In millions of euros)

2006 140 134 274

2005 157 157

2004 50 125 175

Commercial paper Short-term loans and overdrafts Short-term debt

4.11.4 - Cash and cash equivalents

At december 31

(In millions of euros)

2006 97 521 618

2005 454 495 949

2004 488 380 868

marketable securities Cash Cash and cash equivalents

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4.11.5 - Net debt

Net debt is defined as all long-term debt (including current maturities thereof) and short-term debt, less loans, other non current financial assets and cash and cash equivalents.

Net debt at January 1, 2005

Application of IAS 32 and IAS 39 at January 1, 2005 had the effect of reducing the Group's net debt by 23 million euros, mainly related to adjustments to the OCEANE and treasury stock.

Breakdown of net debt

(In millions of euros)

2006 1,274 54 (16) 1,312 274 (618) (344) 968

2005 1,303 581 (12) 1,872 157 (949) (792) 1,080

January 1, 2005 972 188 (2) 1,158 175 (836) (661) 497

2004 1,027 188 (2) 1,213 175 (868) (693) 520

long-term debt (note 4.11.2) Current maturities of long-term debt (note 4.11.2) loans and other long-term financial assets Total long-term debt Short-term debt (note 4.11.3) Cash and cash equivalents (note 4.11.4) Net cash and cash equivalents Net debt

4.11.6 - Analysis of net debt by currency

Net debt can be analyzed as follows by currency:

At december 31

(In millions of euros)

2006 1,151 (52) 34 (22) (59) (24) (60) 968

2005 1,179 (64) 110 (25) (44) (21) (55) 1,080

2004 612 (44) 66 (15) (47) (23) (29) 520

euro US dollar Yen Brazilian Real Korean Won Chinese Yuan other currencies TOTAL

4.12 - Notes to the cash flow statement

4.12.1 - Expenses (income) with no cash effect

(In millions of euros)

2006

2005

2004

Expenses (income) with no cash effect depreciation, amortization and provisions for impairment Net charges to/(reversals from) provisions Customer contributions losses (gains) on sale of non-current assets expenses related to share-based payment other expenses (income) with no cash effect TOTAL 623 (96) (51) (74) 11 (2) 411 639 (99) (35) 6 7 593 (84) (13) 11 7 2 516

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Notes to consolidated financial statements

4.12.2 - Changes in working capital

(In millions of euros)

2006 (17) 5 88 (28) 48

2005 3 53 30 21 107

2004 (5) 21 51 (22) 45

Changes in working capital Inventories Accounts and notes receivable Accounts and notes payable other receivables and payables TOTAL

5 - Additional disclosures

5.1 - Segment reporting

The Valeo Group comprises a single business segment ("Automotive equipment"). The Group's secondary reporting level ­ geographical areas ­ corresponds to production areas. Additional information is included in order to provide a more relevant analysis of the Group's business. Balance sheet and statement of income items relating to "Nonstrategic activities" are restated as indicated in note 2.1.

5.1.1 - Reporting by geographical area

(In millions of euros)

Net sales by market

Net sales by production area

Total assets

Capital expenditure for the period (1)

Number of employees

2006 europe North America South America Asia eliminations TOTAL 2005 europe North America South America Asia eliminations TOTAL 2004 europe North America South America Asia eliminations TOTAL

(1)

6,931 1,325 468 1,246 9,970

7,327 1,263 454 1,238 (312) 9,970

3,966 539 210 754 (147) 5,322

437 86 39 87 (2) 647

51,400 7,200 3,600 7,500 69,700

6,785 1,364 429 1,158 9,736

7,163 1,296 402 1,134 (259) 9,736

4,048 575 195 759 (149) 5,428

436 67 35 59 (5) 592

51,400 6,800 3,400 7,000 68,600

6,501 1,356 320 841 9,018

6,795 1,284 302 808 (171) 9,018

3,802 498 131 444 (70) 4,805

437 59 17 47 (7) 553

49,700 6,900 3,200 4,700 64,500

Capital expenditure in 2006 do not include those related to the Electric Motors & Actuators business which was sold in 2006.

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Notes to consolidated financial statements

3

total segment assets reconcile to total Group assets as follows:

(In millions of euros)

2006 5,322 755 96 1,415 7,588

2005 5,428 1,117 100 1,484 8,129

2004 4,805 976 83 1,158 7,022

total segment assets Financial assets deferred tax assets Goodwill TOTAL

Goodwill balances cannot be broken down by geographical area as they are allocated to groups of CGUs which belong to several such areas.

5.1.2 - Research and development expenditure by Domain of innovation and sales by product group

The objective of the Domains of Innovation is to enhance and support innovation by bringing together different technologies and product groups in order to propose overall solutions to the market based on the themes of comfort, safety and the environment.

(In millions of euros)

2006 178 216 232 35 661

2005 (1) 175 209 225 37 646

2004 (1) 164 180 199 42 585

driving Assistance Propulsion efficiency Comfort enhancement other TOTAL

(1)

Before taking into account the restatement related to research tax credits (see note 3.3).

the domains of Innovation aim to assist development of sales of the product portfolio, production and sale of which is placed under the responsibility of the Group's divisions. the product portfolio is broken down into the following product groups:

(In millions of euros)

2006 761 1,546 1,550 1,189 1,084 1,027 719 829 594 430 352 (111) 9,970

2005 742 1,510 1,475 1,151 1,041 1,056 676 833 606 398 366 (118) 9,736

2004 693 1,397 1,435 1,071 985 1,163 661 878 672 190 (127) 9,018

transmissions Climate Control engine Cooling lighting Systems electrical Systems Wiper Systems Security Systems Switches & detection Systems electronics & Connective Systems Compressors engine management Systems other and eliminations TOTAL

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Notes to consolidated financial statements

5.2 - Risk management policy

In the context of its industrial and sales activity, the Group operates in an international environment in which it is confronted with market risks, specifically foreign currency risk, price risk and interest rate risk. It uses derivatives to manage and reduce its exposure to changes in foreign exchange rates, raw materials prices and interest rates. In general, foreign currency risks, price risks in respect of base metals and interest rate risks for all Group companies are managed centrally by Valeo. In addition to market risks, the Group is also exposed to liquidity risk, financial instrument counterpart risk and to credit risk in respect of its accounts and notes receivable.

transactions. Hedging of subsidiaries' current and future trading and investment transactions is generally performed for durations of less than six months. Subsidiaries principally hedge their transactions with Valeo, which hedges net Group positions with external counterparts. The principal hedging instruments that the Group uses are forward firm purchases and sales of foreign currencies, swaps and options. Not all derivatives used by the Group to hedge its foreign currency risk qualify as hedging instruments in the meaning ascribed to that term by IAS 39. In certain cases, however, the Group applies hedge accounting for highly probable future flows as from the date that the derivatives are put in place. The unrealized loss of less than 1 million euros recognized in equity at December 31, 2005 was fully reclassified into operating income for the year. No foreign currency derivative is recognized as a hedging instrument, in the meaning ascribed to that term by IAS 39, in the Group balance sheet at December 31, 2006.

5.2.1 - Market risks

Foreign currency risk

transaction risk Group subsidiaries may bear transaction risk in respect of purchases or sales transacted in currencies other than their functional currency, whether such transactions are already recognized in the balance sheet or are simply forecast future

At december 31, 2006, the Group's net position in its principal currencies excluding functionnal currencies of entities is as follows:

At december 31

(In millions of euros)

uSD 228 (31) 197 (189) 18 (171) 26

Jpy 82 (21) (61) (80) 30 (50) 11

gBp 4 (11) (7) (8) 17 9 2

Euro 414 (542) (128) (7) 35 28 (100)

total assets total liabilities Net balance sheet position before risk management Forward sales Forward purchases Risk management Net position after risk management

Net investment risk The Group is also exposed to foreign currency risk through its investments in its foreign subsidiaries, particularly to risks of a movement in the exchange rate of the currency of the country in which a subsidiary is located against the euro, which is the Group's functional currency. Such movements can impact Group stockholders' equity. The Group can thus decide, on a case-by-case basis, to hedge the net investment. Any gain or loss resulting from such a hedge will be deferred by being recognized through stockholders' equity until such time as the foreign investment is wholly or partly sold. No derivative instrument relating to hedging of a net investment is recognized in the Group balance sheet at December 31, 2006.

over a period which is generally less than six months. The raw materials currently hedged (aluminum, processed aluminum, copper, zinc, and tin) are quoted on official markets. The Group favors hedging instruments which do not involve physical delivery of the underlying commodity: swaps and options on the average monthly price. Base metals derivatives used by the Group are designated as cash flow hedges under IAS 39. An unrealized gain of 6 million euros related to hedges in place at December 31, 2006 has been recognized through Group stockholders' equity. The unrealized gain of 22 million euros recognized in stockholders' equity at December 31, 2005 was in respect of hedges on raw materials purchases in second-half 2005 and was thus fully taken to operating income in the first half of 2006.

Metal price risk

In order to reduce its exposure to changes in prices of non-ferrous metals, the Group hedges its future purchases of base metals

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Notes to consolidated financial statements

3

the unrealized gain of 6 million euros at december 31, 2006 is broken down as follows by type of metal:

At december 31

(In millions of euros)

2006 4 2 6

2005 10 2 7 3 22

Aluminum Processed aluminum Copper tin Zinc TOTAL

64% of the unrealized gain of 6 million euros relates to purchases of raw materials denominated in euros and 36% to purchases denominated in US dollars.

interest rate risk

The Group uses interest rate swaps to convert exchange rates on its debt into either a variable or a fixed rate, either as from origination or during the term of the loan. The interest rate derivatives used by the Group to hedge against changes in value of its fixed-rate debt are designated as fair value hedges under IAS 39. These derivatives are recorded at fair value in the balance sheet with changes in fair value being taken to Fixed-rate position

At december 31

income. The impact on income is offset, for the effective portion, by a symmetrical revaluation of the hedged component of the debt. The interest rate derivatives used by the Group to hedge its variable-rate debt are not designated as hedging instruments in the meaning ascribed to that term by IAS 39. The Group's financing rate was 4.5% in 2006 (4.6% in 2005). At December 31, 2006, 82% of long-term debt is at a fixed rate (83% at December 31, 2005)

Less than 1 year

(In millions of euros)

1 to 5 years 440 440 440

More than 5 years 830 830 (225) 605

total assets at fixed rate total liabilities at fixed rate Net fixed-rate position before risk management Risk management Net position after risk management

53 53 53

A decrease in interest rates of 1% would result in a change in the fair value of the net position of about 45 million euros. Variable-rate position

At december 31 Less than 1 year

(In millions of euros)

1 to 5 years (16) 2 (14) (14)

More than 5 years 1 1 1

total assets at variable rate total liabilities at variable rate Net variable-rate position before risk management Risk management Net position after risk management

(618) 276 (342) (2) (344)

An increase of 1% in interest rates would lead to an increase in interest income of about 4 million euros.

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Notes to consolidated financial statements

5.2.2 - Counterpart risk

In the context of financial markets transactions entered into for the purposes of risk management and treasury management, the Group is exposed to counterpart risk. Limits have been set by counterpart, taking account of the ratings of the counterparts with ratings agencies. This also has the effect of avoiding excessive concentration of market transactions with a limited number of banks.

drawdowns. At December 31, 2006, the Group's ratio is well below this level. The Euro Medium Term Notes include an option granted to the bondholders who can request early redemption of their bonds in the case of a change of control of Valeo which leads to a downgrade in the bond's rating to below investment grade. Such a change of control is deemed to occur if a stockholder, or several stockholders acting together, acquire(s) more than 50% of Valeo's share capital or come(s) to hold more than 50% of voting rights.

5.2.3 - Liquidity risk

The Group targets maximization of its operating cash flows in order to be in a position to finance both the investments required for its development and growth and the dividend paid to its stockholders. In addition, the strategy followed aims to ensure that the Group has the cash resources necessary to meet all circumstances. For these reasons, the Group borrows long-term funds when market conditions are favorable, either from banks or by accessing public debt markets. Thus, in 2005, Valeo issued 600 million euros worth of Euro Medium Term Notes maturing in 2013. It also took out two syndicated loans for a total amount of 225 million euros maturing in 2012. Valeo also has several confirmed bank credit lines available for an average period of three years in a total amount of 1.3 billion euros. None of these credit lines were used at December 31, 2006. The Group also has a short-term commercial paper financing program in a maximum amount of 1.2 billion euros and a medium- and long-term Euro Medium Term Notes financing program in a maximum amount of 2 billion euros.

5.2.4 - Credit risk

Through its sales, Valeo is exposed to credit risk, particularly to risk of default by its customers. Valeo only operates in the automobile sector and is thus dependent on the sector's performance, principally in Europe and North America. In 2006, a provision of 2 million euros, in respect of defaults by second tier customers, was recognized against accounts receivable. Valeo works with all automakers in the sector. At December 31, 2006, 20% of the Group's accounts and notes receivable correspond to one of Valeo's four largest customers. Approximately 7% of this line relate to the two largest American automakers. The downturn in the automobile sector business environment in recent months has led the Group to strengthen control of customer risks and settlement periods which may, on a case-by-case basis, be subject to bilateral renegotiations with customers. The average settlement period at December 31, 2006 is 69 days. Valeo also generates more than 7% of its net sales in the aftermarket. The Group's numerous, dispersed customer base in this market is constantly monitored and the risk of default is covered by a credit insurance policy. These customers represent slightly more than 7% of Group accounts and notes receivable at December 31, 2006.

Covenants: existing credit lines have an early repayment clause related to the Group's debt/equity ratio. This requires that the Group's net debt should not exceed 120% of stockholders' equity. Non-compliance with this ratio causes the credit lines to be suspended and leads to early reimbursement of prior

5.2.5 - Financial instruments

Fair value of financial instruments

At december 31 2006

(In millions of euros)

Carrying amount 24 1,834 618

Fair value 24 1,834 618

ASSETS Non-current financial assets Accounts and notes receivable Cash and cash equivalents

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3

2006

(In millions of euros)

Carrying amount 595 427 216 90 1,955 274

Fair value 564 422 218 90 1,955 274

LiABiLiTiES Bonds oCeANe (debt component) Syndicated loans other long-term debt Accounts and notes payable Short-term debt

The fair values of bonds presented above are calculated on the basis of listed prices on active markets. For the debt component of the OCEANE and for the syndicated loans, fair value is estimated by discounting future cash flows at the market rate applicable at year-end, taking account of an issuer spread for the Group estimated at 0.549% for the OCEANE and at 0.60% for the syndicated loans.

Fair value of derivatives

Foreign currency derivatives

At december 31 2006

(In millions of euros)

Nominal 24 (48) (120) (144) 33 (30) (22) (19) -

Fair value 1 1 2 (1) (1) 1

Forward foreign currency purchases Forward foreign currency sales Currency swaps Total assets Forward foreign currency purchases Forward foreign currency sales Currency swaps Total liabilities Net impact

The fair value of foreign currency derivatives is calculated using the following valuation method: future cash flows are calculated using forward exchange rates at year-end and are discounted using the interest rate of the valuation currency.

Metals derivatives

At december 31 2006

(In millions of euros)

Nominal 81 (2) 79 36 (3) 33 -

Fair value 7 7 (1) (1) 6

Swaps ­ Purchases Swaps ­ Sales Total assets Swaps ­ Purchases Swaps ­ Sales Total liabilities Net impact

The fair value of metal derivatives is calculated using the following valuation method: future cash flows are calculated using forward raw materials prices and forward exchange rates at year-end and are then discounted using the interest rate of the valuation currency.

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Notes to consolidated financial statements

interest rate derivatives

At december 31 2006

(In millions of euros)

Nominal 227 227

Fair value (9) (9)

Interest rate swaps TOTAL LiABiLiTiES

The fair value of interest rate swaps is calculated by discounting future cash flows at market interest rates at year-end.

5.3 - Commitments given

To the best of Valeo's knowledge, no other significant commitments exist or exceptional events have occurred, other than those disclosed in the notes to the financial statements, that are likely to have a material impact on the business, financial position, results or assets and liabilities of the Group.

5.3.1 - Lease commitments

Future minimum lease commitments existing at december 31, 2006 (excluding capital leases) are as follows:

At december 31

(In millions of euros)

2006 34 33 9 76

2005 38 31 10 79

2004 36 29 9 74

less than 1 year 1 to 5 years more than 5 years TOTAL

lease rentals recognized in expenses in the year were as follows:

(In millions of euros)

2006 53

2005 56

2004 52

Rent

lease commitments in respect of capital leases are as follows:

At december 31

(In millions of euros)

2006

2005

2004

Future minimum lease payments less than 1 year 1 to 5 years more than 5 years TOTAL FuTuRE MiNiMuM LEASE pAyMENTS of which interest charges present value of future lease payments less than 1 year 1 to 5 years more than 5 years TOTAL pRESENT VALuE OF FuTuRE LEASE pAyMENTS 8 6 2 16 14 9 2 25 13 13 2 28 8 7 2 17 (2) 15 10 3 28 (3) 14 15 2 31 (3)

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Notes to consolidated financial statements

3

5.3.2 - Other commitments given

Valeo has also given the following commitments:

(In millions of euros)

2006 29 72 101 202

2005 30 57 66 153

2004 33 58 49 140

Guarantees given Non-cancellable purchase commitments for fixed assets other commitments given TOTAL

Other commitments correspond to warranties granted by Valeo in the context of sale transactions. the following items, recognized in assets in the Group's balance sheet, have been pledged as security:

At december 31

(In millions of euros)

2006 24 12 36

2005 84 12 96

2004 49 13 62

Property, plant and equipment Financial assets TOTAL

5.3.3 - Claims and litigation

Known claims and litigation involving Valeo or its subsidiaries have been reviewed as of the date of these financial statements. Based on the advice of counsel, all necessary provisions have been made to cover the estimated contingencies and potential losses.

5.4 - Commitments received

When Valeo purchased the Engine Electronics business of Johnson Controls Inc. on March 1, 2005, the latter company granted a warranty concerning the division's liabilities, including in particular a four-year warranty in respect of quality and product liability claims related to the activities of this division.

5.6 - French statutory training entitlement

Under the French law of May 4, 2004 relating to professional training, each French employee of the Group, irrespective of qualifications, obtained a statutory training entitlement which can be accumulated and used at the employee's initiative, subject to agreement of the employer. Thus, according to the law, each employee has a new entitlement to at least 20 hours' training per year. The cumulative volume of training hours corresponding to Group employees' vested rights under the statutory training entitlement is 875,000 hours for 2004, 2005 and 2006.

5.5 - Contingent liabilities

The Group has contingent liabilities relating to legal proceedings arising in the normal course of its business. The Group does not expect these items to give rise to material liabilities other than those that have already been recognized in its financial statements.

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Notes to consolidated financial statements

5.7 - Related party transactions

5.7.1 - Management and Directors' remuneration

management and directors are comprised of the members of the Group's management Committee and its Board of directors. Remuneration paid during the year is broken down as follows:

(In millions of euros)

2006 12 12

2005 12 12

2004 13 2 15

Salaries and other short-term benefits Contract termination payments TOTAL

In addition, the Group recorded expenses related to pension obligations in an amount of 2 million euros in 2006 (2 million euros in 2005). It also recorded expenses in relation to stock option and free share plans in an amount of 3 million euros in 2006 (2 million euros in 2005).

At December 31, 2006, provisions included in the Group balance sheet in respect of these pension obligations amounted to 14 million euros (13 million euros at December 31, 2005).

5.7.2 - Transactions with Associates

The consolidated financial statements include transactions carried out in the normal course of business between the Group and its associates. These transactions are carried out at market prices.

(In millions of euros)

2006 17 (7) 3

2005 13 (18) 4

2004 3 (17) 3

Sales of goods and services Purchases of goods and services Interest and dividends received

At december 31

(In millions of euros)

2006 4 1

2005 4 1

2004 4 3

operating receivables operating payables

5.7.3 - Transactions with Joint ventures

The consolidated financial statements include transactions carried out in the normal course of business between the Group and its joint ventures. These transactions are carried out at market prices.

(In millions of euros)

2006 28 (11) 2

2005 25 (9) 4

2004 20 (12) 9

Sales of goods and services Purchases of goods and services Interest and dividends received

At december 31

(In millions of euros)

2006 13 5

2005 10 4

2004 10 5

operating receivables operating payables

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Notes to consolidated financial statements

3

5.8 - Joint ventures

the following amounts are recorded in the Group's consolidated financial statements in respect of joint ventures consolidated under the proportionate method of consolidation:

At december 31

(In millions of euros)

2006 70 101 12 88 251 244

2005 51 86 15 75 334 321

2004 163 207 67 242 681 642

Non-current assets Current assets Non-current liabilities Current liabilities total operating revenues total operating expenses

5.9 - Subsequent events

On December 4, 2006, Valeo signed a Memorandum of Understanding with Ford Motor Company for the acquisition of the Sheldon Road site (Plymouth, Michigan) specialized in the production of heating systems. This acquisition is subject to the

signature of a new competitive agreement with the United Auto Workers Union. This site, which employs approximately 1,250 employees, supplies climate control systems and radiators to Ford's North American factories. Its forecast net sales for 2006 are 350 million euros.

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Notes to consolidated financial statements

6 - Restatement of 2004 and 2005 financial information

IFRS requires that previously published comparative periods be restated in the following situations: · activities meeting IFRS 5 criteria; · business combinations (recognition of the definitive fair value of assets acquired and liabilities and contingent liabilities incurred or assumed when this fair value was estimated on a provisional basis at the previous balance sheet date); · changes in accounting policies (subject to the transitional provisions for first-time application of new standards); and · corrections of prior period errors. Consequently, certain previously published financial data have been modified. Such restatements are described below.

the corresponding impacts (after tax) on stockholders' equity including minority interests as published on december 31, 2005 and december 31, 2004 are as follows:

(In millions of euros)

As originally reported 1,850 (35) 249 (217) 1,847 27 1,874 102 147 (374) 1,749

Business combinations 1 (24) (23)

Other (8) (1) (9) (9) (9)

As restated 1,842 (35) 248 (217) 1,838 27 1,865 102 148 (398) 1,717

Stockholders' equity at January 1, 2004 Income and expenses recognized directly through equity Net income for the period other movements Stockholders' equity at December 31, 2004 Impact of financial instruments (IAS32, IAS39) Stockholders' equity at January 1, 2005 Income and expenses recognized directly through equity Net income for the period other movements Stockholders' equity at December 31, 2005

6.1 - Business combinations

The impact on stockholders' equity at December 31, 2005 of restatements related to business combinations corresponds to remeasurements, in a total amount of 24 million euros, of provisions relating to: · the interest previously held in Valeo Thermal Systems Japan Corp. (previously Zexel Valeo Climate Control); · the interest previously held in Siam Zexel Co. and Valeo Thermal Systems Sales Thailand Co. Ltd. (previously Zexel Sales Thailand Co).

On the other hand, remeasurements of the interests acquired in these companies in 2005 have no impact on stockholders' equity as they gave rise to a simultaneous adjustment to goodwill (cf. note 4.1).

6.2 - other

Other restatements to stockholders' equity at December 31, 2004 and December 31, 2005 correspond notably to adjustments relating to pension obligations not previously identified, which have been recognized as corrections of errors in accordance with IAS 8.

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3

7 - list of consolidated companies

2006 Companies Valeo SA (Parent company) EuROpE Cablea (merged with Valeo Câblage) dAV equipement 11 equipement 7 Valeo Câblage (ex-Cablea and Financière Cablea) SC2N Société de Participations Valeo telma Valeo Bayen Valeo electronique et Systèmes de liaison Valeo embrayages Valeo equipements electriques moteur Valeo Finance Valeo Four Seasons Valeo Furukawa Wiring Systems (2)

(2)

2005 % interest % voting rights % interest

2004 % voting rights % interest

Countries France

% voting rights

France France France France France France France France France France France France France France France France France France France France France France France France France France France France

100 100 100 100 100 100 100 100 100 100 100 100 50 50 100 100 100 50 100 100 100 100 100 100 100 100 100

100 100 100 100 100 100 100 100 100 100 100 100 50 50 100 100 100 50 100 100 100 100 100 100 100 100 100

100 100 100 100 100 100 100 100 100 100 100 100 50 50 100 100 100 50 100 100 100 100 100 100 100 100 100

100 100 100 100 100 100 100 100 100 100 100 100 50 50 100 100 100 50 100 100 100 100 100 100 100 100 100

100 100 100 100 100 100 100 100 100 100 100 100 100 50 50 100 100 100 50 100 100 100 100 100 100 100 100

100 100 100 100 100 100 100 100 100 100 100 100 100 50 50 100 100 100 50 100 100 100 100 100 100 100 100

Valeo liaisons electriques Valeo management Services Valeo matériaux de Friction Valeo Plastic omnium S.N.C. (2) Valeo Sécurité Habitacle Valeo Service Valeo Switches & detection Systems -- VSdS Valeo Systèmes de Contrôle moteur Valeo Systèmes d'essuyage Valeo Systèmes thermiques Valeo thermique Habitacle Valeo Ventures Valeo Vision Valeo Zexel China Climate Control (merged with Valeo Systèmes thermiques)

(1) (2) (3) (4) (5) (6) (7)

France

-

-

-

-

60

60

Company accounted for by the equity method. Company accounted for on a proportional basis. Company accounted for on a proportional basis on 2004 and fully consolidated since 2005. Company accounted for by the equity method in 2004 and fully consolidated since 2005. Company fully consolidated in 2004 and accounted on a proportional basis since 2005. Company sold in 2005. Company sold in 2006.

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Notes to consolidated financial statements

2006 Companies Valeo Componentes Automoviles (7) Valeo españa, S.A. telma Retarder españa, S.A. Valeo Climatización, S.A. Valeo Iluminación, S.A. Valeo materiales de Fricción, S.A. Valeo Plastic omnium S.l.

(2)

2005 % interest 100 100 100 99.8 100 50 100 100 100 100 100 100 100 100 100 99.9 99.9 100 99.9 100 99.9 100 100 100 100 100 100 100 100 % voting rights 100 100 100 100 99.8 100 50 100 100 100 100 100 100 100 100 100 99.9 99.9 100 100 100 100 100 100 100 100 100 100 100 % interest 100 100 100 100 99.8 100 50 100 100 100 100 100 100 100 100 100 99.9 99.9 100 99.9 100 100 100 100 100 100 100 100 100

2004 % voting rights 100 100 100 100 99.8 100 50 100 100 100 100 100 100 100 100 100 99.9 99.9 100 100 100 100 100 100 100 100 100 100 100 % interest 100 100 100 100 99.8 100 50 100 100 100 100 100 100 100 100 100 99.9 99.9 100 99.9 100 100 100 100 100 100 100 100 100

Countries

% voting rights 100 100 100 99.8 100 50 100 100 100 100 100 100 100 100 100 99.9 99.9 100 100 100 99.9 100 100 100 100 100 100 100 100 -

Spain Spain Spain Spain Spain Spain Spain Spain Spain Spain Spain Spain Portugal Portugal Italy Italy Italy Italy Italy Italy Italy Italy Germany Germany Germany Germany Germany Germany Germany Germany Germany

Valeo Service españa, S.A. Valeo Sistemas de Conexion electrica, S.l. Valeo Sistemas de Seguridad y de Cierre, S.A. Valeo Sistemas electricos, S.l. Valeo termico, S.A. Cablagens do Ave Valeo Viana Cablauto, S.r.l. Cavisud, S.r.l. Valeo Service Italia, S.p.a. Valeo, S.p.a. Valeo Cablaggi e Commutazione, S.p.a. Valeo Sicurezza Abitacolo, S.p.a. Valeo Sistemi di Climatizzazione, S.r.l. Valeo Communitazione S.r.l. Valeo Auto electric GmbH Valeo Auto-electric Beteiligungs GmbH Valeo Germany Holding GmbH Valeo Holding deutschland GmbH Valeo Grundvermogen Verwaltung GmbH Valeo Beleuchtung deutschland GmbH Valeo Klimasysteme GmbH Valeo Klimasysteme Verwaltung SAS & Co. KG Valeo motoren und Aktuatoren GmbH (7)

(1) (2) (3) (4) (5) (6) (7)

Company accounted for by the equity method. Company accounted for on a proportional basis. Company accounted for on a proportional basis on 2004 and fully consolidated since 2005. Company accounted for by the equity method in 2004 and fully consolidated since 2005. Company fully consolidated in 2004 and accounted on a proportional basis since 2005. Company sold in 2005. Company sold in 2006.

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Notes to consolidated financial statements

3

2006 Companies Valeo Schalter und Sensoren GmbH Valeo Service deutschland GmbH Valeo Sicherheitssysteme GmbH Valeo Verwaltungsbeteiligungs GmbH & Co. KG Valeo Wischersysteme GmbH Valeo Compressor europe GmbH (ex-Zexel Valeo Compressor europe GmbH) (3) Valeo UK ltd labauto ltd telma Retarder ltd Valeo Climate Control ltd Valeo engine Cooling UK ltd (ex-Valeo Security Systems ltd) Valeo Service UK ltd Valeo Vision Belgique Valeo Service Belgique Coreval Valeo Holding Netherland B.V. Valeo International Holding B.V. Valeo Service Benelux B.V. Valeo Vymeniky tepla S.r.o. Sylea tchequia S.r.o. Valeo Autoklimatizace S.r.o. Valeo Compressor europe S.r.o. (3) Valeo Slovakia S.r.o. Valeo Autosystemy Sp.zo.o. Valeo Service eastern europe Sp.zo.o. Valeo electric and electronic Systems Sp.zo.o. Valeo Auto electric Hungary Spare Parts Production llC Valeo Kabli, d.o.o. Valeo Cablaje S.r.l. (ex-Valeo electronice si Sisteme de Conectare Romania)

(1) (2) (3) (4) (5) (6) (7)

2005 % interest 100 100 100 100 100 % voting rights 100 100 100 100 100 % interest 100 100 100 100 100

2004 % voting rights 100 100 100 100 100 % interest 100 100 100 100 100

Countries

% voting rights 100 100 100 100 100

Germany Germany Germany Germany Germany

Germany United Kingdom United Kingdom United Kingdom United Kingdom United Kingdom United Kingdom Belgium Belgium luxembourg Netherlands Netherlands Netherlands Czech Republic Czech Republic Czech Republic Czech Republic Slovakia Poland Poland Poland Hungary Slovenia

100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100

100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100

100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100

100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100

50 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 50 100 100 100 100 100 100

50 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 50 100 100 100 100 100 100

Romania

100

100

100

100

100

100

Company accounted for by the equity method. Company accounted for on a proportional basis. Company accounted for on a proportional basis on 2004 and fully consolidated since 2005. Company accounted for by the equity method in 2004 and fully consolidated since 2005. Company fully consolidated in 2004 and accounted on a proportional basis since 2005. Company sold in 2005. Company sold in 2006.

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Notes to consolidated financial statements

2006 Companies Valeo electrical Connective Systems S.r.l. Cablea tunisie, S.A. dAV tunisie Société tunisienne de Câblages S.t.C. Valeo mateur (ex-Sylea tunisie) Valeo embrayages tunisie S.A. Valeo Bouskoura (ex-Cabelec) Valeo Ain Sebaa (ex-Cablea maroc) Cablinal maroc, S.A. Valeo Bouznika Nursan ed

(1)

2005 % interest 100 100 100 100 100 100 100 100 100 100 40 40 100 100 100 51 % voting rights 100 100 100 100 100 100 100 100 100 100 40 40 100 100 51 % interest 100 100 100 100 100 100 100 100 100 100 40 40 100 100 51

2004 % voting rights 100 100 100 100 100 100 100 100 100 40 40 100 100 51 % interest 100 100 100 100 100 100 100 100 100 40 40 100 100 51

Countries

% voting rights 100 100 100 100 100 100 100 100 100 100 40 40 100 100 100 51

Romania tunisia tunisia tunisia tunisia tunisia morocco morocco morocco morocco turkey turkey turkey turkey egypt South Africa

Nursan oK (1) Valeo otomotiv dagitim A.S. Valeo otomotiv Sistemleri endustrisi A.S. Valeo Interbranch Automotive Software (egypt) Valeo Systems South Africa (Proprietary) ltd NoRtH AmeRICA Valeo Aftermarket, Inc. Valeo electrical Systems, Inc. Valeo Investment Holdings, Inc. Valeo Raytheon Systems, Inc. (5) Valeo Compressor North America, Inc. (ex-Selective technology, Inc.) (3) telma Retarder Inc. Valeo Acustar thermal Systems, Inc. Valeo Climate Control Corp. Valeo Friction materials, Inc. Valeo, Inc. Valeo Switches & detection Systems, Inc. Valeo Sylvania, llC Valeo Sylvania Services, S de Rl de CV (2)

(2)

United States United States United States United States

100 100 100 77.2

100 100 100 77.2

100 100 100 73.1

100 100 100 73.1

100 100 100 66.6

100 100 100 66.6

United States United States United States United States United States United States United States United States mexico mexico mexico

100 100 51 100 100 100 100 50 50 100 100

100 100 51 100 100 100 100 50 50 100 100

100 100 51 100 100 100 100 50 50 100 100

100 100 51 100 100 100 100 50 50 100 100

50 100 51 100 100 100 100 50 50 100 100

50 100 51 100 100 100 100 50 50 100 100

Valeo termico, SA de CV delmex de Juarez S de Rl de CV

(1) (2) (3) (4) (5) (6) (7)

Company accounted for by the equity method. Company accounted for on a proportional basis. Company accounted for on a proportional basis on 2004 and fully consolidated since 2005. Company accounted for by the equity method in 2004 and fully consolidated since 2005. Company fully consolidated in 2004 and accounted on a proportional basis since 2005. Company sold in 2005. Company sold in 2006.

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Notes to consolidated financial statements

3

2006 Companies telma Retarder de mexico, SA de CV Valeo Automotive electrical Systems de mexico, SA de CV Valeo Sistemas electricos, SA de CV Valeo Sistemas electricos Servicios, S de Rl de CV Valeo Sistemas electronicos, S de Rl de CV Valeo Sylvania Iluminaciòn, S de Rl de CV (2) Valeo termico, SA de CV Valeo termico Servicios, S de Rl de CV Valeo Climate Control de mexico, SA de CV Valeo Climate Control de mexico Servicios, S de Rl de CV Valeo materiales de Fricciòn de mexico, SA de CV SoUtH AmeRICA Valeo Climatizacao Brasil (merged with Valeo Sistemas Automotivos ltda) Valeo Sistemas Automotivos ltda Cibié Argentina, SA dAV Argentina, SA (merged with Cibié Agentina, SA) emelar Sociedad Anonima Il tevere

(6) (6)

2005 % interest 100 100 100 100 100 50 100 100 100 % voting rights 100 100 100 100 100 50 100 100 100 % interest 100 100 100 100 100 50 100 100 100

2004 % voting rights 100 100 100 100 100 50 100 100 100 % interest 100 100 100 100 100 50 100 100 100

Countries

% voting rights 100 100 100 100 100 50 100 100 100

mexico mexico mexico mexico mexico mexico mexico mexico mexico

mexico mexico

100 100

100 100

100 100

100 100

100 100

100 100

Brazil Brazil Argentina Argentina Argentina Argentina Argentina Argentina Argentina Argentina

100 100 100 100 100

100 100 100 100 100

100 100 100 100 100

100 100 100 100 100

100 100 100 100 100 50 50 50 68 100

100 100 100 100 68 50 26 26 68 100

Interclima (6) mirgor Valeo embragues Argentina, SA Valeo termico Argentina, SA ASiA Valeo Armco engine Cooling Co. (2) Valeo Compressor (thailand) Co. ltd (ex-Zexel Valeo Compressors) (3) Valeo Compressor Clutch (thailand) Co. ltd (ex-Zexel Clutches Co. ltd) (3) Valeo Siam thermal Systems Co.ltd (ex-Siam Zexel Co. ltd) (4) Valeo thermal Systems Sales (thaïland) (ex-Zexel Sales thailand) (4)

(1) (2) (3) (4) (5) (6) (7)

Iran

51

51

51

51

-

-

thailand

98.5

98.5

98.5

98.5

50

48.1

thailand thailand

97.3 74.9

97.3 74.9

97.3 74.9

97.3 74.9

50 39

48.1 19.5

thailand

74.9

74.9

89.9

74.9

7,8

7.8

Company accounted for by the equity method. Company accounted for on a proportional basis. Company accounted for on a proportional basis on 2004 and fully consolidated since 2005. Company accounted for by the equity method in 2004 and fully consolidated since 2005. Company fully consolidated in 2004 and accounted on a proportional basis since 2005. Company sold in 2005. Company sold in 2006.

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Notes to consolidated financial statements

2006 Companies Valeo electrical Systems Korea ltd Valeo Pyeong Hwa Co. ltd (2) Valeo Pyeong Hwa distribution Co. ltd (2) Valeo Samsung thermal Systems (2) Valeo Compressor Korea Co. ltd (ex-Zexel Valeo Climate Control Korea Co. ltd) (3) dae myong Precision Corporation (3) Konno Sangyo Co. ltd Zexel logistics Company (Butsuryu) (7)

(7)

2005 % interest 100 50 50 50 % voting rights 100 50 50 % interest 100 50 50 -

2004 % voting rights 100 50 50 % interest 100 50 50 -

Countries

% voting rights 100 50 50 50

South Korea South Korea South Korea South Korea

South Korea South Korea Japan Japan Japan Japan Japan Japan

100 100 29.4 100 66

100 100 29.4 100 66

100 100 100 100 100 28.2 100 66

100 100 100 100 100 28.2 100 66

50 50 50 50 50 22.7 100 66

50 50 50 50 50 22.7 100 66

Zexel logitec Company

(7)

Ichikoh Industries limited (1) Valeo engine Cooling Japan Co. ltd Valeo Unisia transmissions K.K. Valeo thermal Systems Japan Corp. (ex-Zexel Valeo Climate Control Corporation) (3) Valeo Automotive transmissions Systems (Nanjing) Co. ltd Hubei Valeo Autolighting Company ltd Valeo Automotive Air Conditioning Hubei Co. ltd Faw Valeo Climate Control System (1) Huada Automotive Air Conditioner Co. ltd (1) Valeo lighting Hubei technical center Co. ltd Nanjing Valeo Clutch Co. ltd Shanghai Valeo Automotive electrical Systems Company ltd (2) Valeo Shanghai Automotive electric motors & Wiper Systems Co. ltd taizhou Valeo-Wenling Automotive Systems Co. ltd telma Vehicle Braking System (Shanghai) Co. ltd Shenzhen Valeo Hangsheng Automotive Switches & detection Syst. Co. ltd Valeo Automotive Security Systems (Wuxi) Co. ltd

(2)

(1) (2) (3) (4) (5) (6) (7)

Japan

100

100

100

100

50

50

China China China China China China China China

100 100 55 36.5 30 100 55 50

100 100 55 36.5 30 100 55 50

75 55 36.5 30 100 55 50

75 55 36.5 30 100 55 50

75 55 36.5 30 100 50 50

75 33 21.9 15 100 50 50

China China China

55 100 70

55 100 70

55 55 70

55 55 70

55 55 -

55 55 -

China China

75 100

75 100

75 100

75 100

-

-

Company accounted for by the equity method. Company accounted for on a proportional basis. Company accounted for on a proportional basis on 2004 and fully consolidated since 2005. Company accounted for by the equity method in 2004 and fully consolidated since 2005. Company fully consolidated in 2004 and accounted on a proportional basis since 2005. Company sold in 2005. Company sold in 2006.

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2006 Companies Valeo Fawer Compressor (Changchun) Co. ltd (2) Valeo management (Beijing) Co. ltd Foshan Ichikoh Valeo Auto lighting Systems Co. ltd (2) Valeo engine Cooling (Shashi) Co. ltd Pt Valeo AC Indonesia (1) Valeo engineering Center (India) Private limited Amalgamations Valeo Clutch Private limited (2) Valeo Friction materials India limited

(1) (2) (3) (4) (5) (6) (7)

2005 % interest 60 100 50 100 49 100 50 60 % voting rights 60 49 50 60 % interest 60 49 50 60

2004 % voting rights 49 50 60 % interest 24.5 50 60

Countries

% voting rights 60 100 50 100 49 100 50 60

China China China China Indonesia India India India

Company accounted for by the equity method. Company accounted for on a proportional basis. Company accounted for on a proportional basis on 2004 and fully consolidated since 2005. Company accounted for by the equity method in 2004 and fully consolidated since 2005. Company fully consolidated in 2004 and accounted on a proportional basis since 2005. Company sold in 2005. Company sold in 2006.

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Statutory auditors' report on the 2006 IFRS consolidated financial statements

Statutory auditors' report on the 2006 IFRS consolidated financial statements

Year ended december 31, 2006

This is a free translation into English of the statutory auditors' report issued in French and is provided solely for the convenience of English speaking users. The statutory auditors' report includes information specifically required by French law in such reports, whether modified or not. This information is presented below the opinion on the consolidated financial statements and 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 should be read in conjunction with, and construed in accordance with, French law and professional auditing standards applicable in France.

Following our appointment as statutory auditors by your Annual General Meeting, we have audited the accompanying consolidated financial statements of Valeo (the Company) for the year ended December 31, 2006, as presented on pages 71 to 125. The consolidated financial statements have been approved by the Board of Directors. Our role is to express an opinion on these consolidated financial statements based on our audit.

opinion on the consolidated financial statements

We 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, 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 presentation of the financial statements. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the consolidated financial statements give a true and fair view of the assets and liabilities and of the financial position of the consolidated group as at December 31, 2006 and of the results of its operations for the year then ended in accordance with IFRSs as adopted by the European Union.

Justification of our assessments

In accordance with the requirements of article L. 823-9 of the French Commercial Code (Code de commerce) relating to the justification of our assessments, we bring to your attention the following matters: The Company records provisions related to pensions and other post-employment benefits in accordance with the policy described in note 1.17 to the consolidated financial statements. Such obligations have generally been determined with the assistance of independent

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actuaries. We have reviewed the data and assumptions used and the calculations completed. We have not identified any item that could affect the amounts and methods used to account for pensions and other post-employment benefits. The Company performs at the end of each year impairment tests of the amounts recorded as goodwill and also assesses whether indicators point to a lasting impairment of fixed assets in accordance with the policy described in note 1.12 to the consolidated financial statements. We have reviewed the methods and assumptions used by the Company in preparing the accounts and we have verified that such assumptions were reasonable. These assessments were made in the context of our audit of the consolidated financial statements taken as a whole, and therefore contributed to the opinion which is expressed in the first part of this report.

Specific verification

In accordance with professional standards applicable in France, we have also verified the information given in the group's management report. We have no matters to report as to its fair presentation and its consistency with the consolidated financial statements. Paris La Défense and Neuilly-sur-Seine, February 12, 2007

the Statutory Auditors Salustro Reydel member of KPmG International Jean-Pierre Crouzet emmanuel Paret PricewaterhouseCoopers Audit Serge Villepelet Jean-Christophe Georghiou

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P. 130 P. 139 P. 142

Report of the Chairman of the Board of Directors relating to the conditions of preparation and organization of the Board's work, the possible limitations to the powers of the Chief Executive Officer and the internal control procedures put in place by the Valeo Group

Composition of the Board of Directors at December 31, 2006

Statutory Auditors' Report on the report of the Chairman of the Board of Directors

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Report of the Chairman of the Board of Directors relating to the conditions of preparation and organization of the Board's work, the possible limitations to the powers of the Chief Executive Officer and the internal control procedures put in place by the Valeo Group

1. Preparation and organization of the work of the Board of Directors

On March 31, 2003, the Board of Directors adopted Internal Rules in line with the recommendations of the Bouton Report on corporate governance, aimed at precisely defining the operating procedures of the Board, in addition to legal and regulatory requirements and the provisions of the Company's bylaws. These Internal Rules were amended on July 24, 2006 in order to authorize Directors to participate in Board meetings by videoconference, or by any other telecommunication means that enables them to be identified and ensures that they actually participate in the meeting. On December 14, 2006 the Internal Rules were further amended following the merger of the Nomination and Remuneration Committees, and the dissolution of the Strategy Committee (see "Committees created by the Board" below). Group's management that may compromise his or her ability to exercise freedom of judgment. In particular, a Director is presumed to be independent if he/she: · is not an employee or a corporate officer of the Company, or an employee or Director of one of its consolidated subsidiaries, and has not been in such a position for the previous five years; · is not a corporate officer of a company in which the Company holds a directorship, either directly or indirectly, or in which an employee appointed in that role, or a corporate officer of the Company (currently in office or having held such office in the past five years), is a Director; · is not a customer, supplier, investment banker or commercial banker that is material for the Company or Group, or for which the Company or Group represents a significant portion of the business of the Director concerned; · is not related by close family ties to a corporate officer; · has not been an auditor of the Company in the past five years; · has not been a Director of the Company for more than twelve years on the date when he/she was appointed to his/her current term of office. For Directors holding in excess of 10% of the Company's capital and/or voting rights, or representing a business that holds such a stake, the classification as independent takes into account the Company's ownership structure and any potential conflict of interests. In application of these criteria, the Board of Directors noted that: · one Director is both Chairman and Chief Executive Officer of the Company: Thierry Morin; · three Directors have been members of the Board of Directors (and previously the Supervisory Board) for over twelve years: Yves-André Istel, Alain Minc, and Erich Spitz;

1.1. Rules specific to the functioning and organization of the Board and their application

1.1.1. Composition of the Board of Directors

The bylaws provide that the Board of Directors must have between 3 and 18 members. Following the appointment of Daniel Camus and Jérôme Contamine as Directors at the General Shareholders' Meeting held on May 17, 2006 and the resignation of Carlo De Benedetti effective from July 13, 2006, the Board currently has 11 members. Details concerning the composition of the Board of Directors are set out in the appendix to this report. In accordance with the independence criteria set out in the Board's Internal Rules, the Board of Directors has reviewed whether or not its members continue to classify as independent. Under these rules, independent Directors are those who have no relations whatsoever with the Company, the Group or the

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· seven Directors are independent with respect to the criteria set forth in the Internal Rules and in accordance with the recommendations set out in the Bouton Report on corporate governance: Pierre-Alain De Smedt, François Grappotte, Philippe Guédon, Jean-Bernard Lafonta and Véronique Morali, as well as Daniel Camus and Jérôme Contamine, following their appointment by the General Shareholders' Meeting on May 17, 2006.

1.2. Directors' access to information

1.2.1. Directors' access to information

Each Director is given all the information required to perform his or her duties and can ask for any document he or she deems useful. The Chairman provided this information within a sufficient timeframe in 2006.

1.1.2. verage period of notice for calling A Board meetings

In accordance with the Internal Rules, each Director is notified of the dates of Board meetings at the beginning of each fiscal year at the latest. The average period of notice for calling Board of Directors' meetings is approximately two weeks.

1.2.2. Guests of the Board

During the year, the Group Financial Control Director attended all Board meetings except those held on March 3, 2006 and November 20, 2006 which were attended by the Financial Controller of the Industrial Branches. The lawyers and bankers representing Valeo as well as the Vice-President, Financial Affairs participated in the Board meeting held to review the merger between Valeo and Visteon.

1.1.3. Representation of Directors

A Director may be represented at meetings of the Board of Directors by another Director. The proxy must be given in writing. During the 2006 fiscal year, eight Directors used the possibility of being represented at Board meetings.

1.1.4. Chairman of Board meetings

The Board meetings are chaired by the Chairman of the Board or, in his/her absence, by a Vice-Chairman or a Director designated by the Board of Directors. All ten Board meetings held during the 2006 fiscal year were chaired by the Chairman.

1.3. Frequency of Board meetings and average attendance rates of the Directors

In accordance with the Internal Rules of the Board, the Board of Directors meets at least four times a year. The Board of Directors met on ten occasions in 2006. The average attendance rate of the members of the Board of Directors (in person or via proxy) during 2006 was 92%. The average attendance rate of the members of the Board of Directors in person during 2006 was 80%.

1.1.5. Directors' participation in Board meetings

Following the General Shareholders' Meeting held on May 17, 2006, article 16 of the Company's bylaws and the Internal Rules were amended in order to authorize Directors to participate in Board meetings by any telecommunication technology that enables them to be identified and ensures that they actually participate in the meeting. Accordingly, Directors who take part in Board meetings through such means are deemed to be present for the purposes of calculating the quorum and majority, except at meetings dedicated to the preparation of the annual Company and consolidated financial statements and the related management reports (as provided for in articles L. 232-1 and L. 233-16 of the French Commercial Code). The Chairman is required to state in the relevant notice of meeting if these methods can be used for certain meetings. Directors wishing to participate in a Board meeting by these methods must contact the Board Secretary at least 2 (two) working days before the meeting date (except in an emergency situation) in order to ensure that the relevant technical information can be exchanged and tests performed before the meeting takes place.

1.4. Role of the Board

The principal role of the Board of Directors is to determine the business strategies of the Company and oversee their implementation. In 2006 the Board of Directors analyzed the 2005 financial statements of the Company and the Group, assessed the performance of the Board, reviewed whether the Directors were still classified as independent in accordance with the criteria set out in the Board's Internal Rules, examined the management forecasts and budget for 2006, reviewed the Group's strategic transactions (particularly disposals and acquisitions), heard the reports on the work carried out by the various Board Committees, merged the Nomination and Remuneration Committees, dissolved the Strategy Committee, authorized the Chairman to issue bonds (either under a renewed EMTN program or otherwise) and granted stock options and consideration-free shares to the employees and corporate officers who had been the most directly involved in the Group's development.

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1.5. Committees created by the Board

In 2003, the Board created four committees to improve its functioning and provide effective assistance for preparing its decisions: the Strategy Committee, the Audit Committee, the Remuneration Committee and the Nomination Committee. At the Board meeting of December 14, 2006, the Nomination Committee was merged with the Remuneration Committee and the Strategy Committee was dissolved. The Board therefore currently has two standing committees ­ the Audit Committee and the Nomination and Remuneration Committee. The work of the Strategy, Audit, Remuneration and Nomination Committees was presented to the Board of Directors throughout the year in the form of reports and is summarized below.

The Audit Committee's work was conducted in line with its objectives. The Statutory Auditors and the Group Financial Controller (or, where applicable, the Financial Controller of the Industrial Branches) attended all of the meetings held in 2006. The Committee was also assisted by the work carried out by the Internal Audit Department. The presentations made by the Statutory Auditors mainly related to the findings of their audit of the annual financial statements of the Company and the Group and their limited review of the interim financial statements. The Audit Committee did not have any reservations concerning the annual consolidated and Company financial statements or the interim financial statements presented to it.

1.5.2. Nomination and Remuneration Committee

The Nomination Committee and the Remuneration Committee ­ which were set up in 2003 ­ were merged on December 14, 2006 and renamed the Nomination and Remuneration Committee. The work carried out by the separate committees during 2006 is set out below. 1.5.2.1. the work of the Remuneration Committee in 2006 Prior to its merger with the Nomination Committee, the Remuneration Committee had three members appointed by the Board of Directors, including a Chairman and two Directors classified as independent in accordance with the criteria in the Internal Rules: Alain Minc (Chairman), François Grappotte and Philippe Guédon. The Remuneration Committee met on two occasions in 2006, with a 100% attendance rate. The roles and responsibilities of this Committee were: · to study and make recommendations concerning compensation paid to corporate officers; · to recommend to the Board the rules for allocating attendance fees; and · to examine any issues submitted to it by the Chairman, including plans to launch employee share issues. During its meetings, the Committee drew up proposals relating to the compensation to be paid to the Chairman and Chief Executive Officer and recommended to the Board that Thierry Morin should be granted 150,000 stock options and 50,000 shares free of consideration (see "Compensation paid to the Chairman and Chief Executive Officer"). This recommendation was approved by the Board of Directors on March 3, 2006. During its meeting of November 20, 2006 the Board also approved the proposal by the Remuneration Committee to grant a total of 1,309,250 stock options to the employees and corporate officers who had been the most directly involved in the Group's development and 100,000 consideration-free shares to high potential junior managers.

1.5.1. Audit Committee

The Audit Committee has four members including a Chairman, appointed by the Board of Directors. All members of the Audit Committee are independent Directors as defined by the criteria in the Internal Rules. The members of the Audit Committee are Pierre-Alain De Smedt, François Grappotte, Jean-Bernard Lafonta and Daniel Camus (since November 20, 2006). The Audit Committee is chaired by PierreAlain De Smedt. The Committee's roles and responsibilities are: · to ensure the relevance and due application of the accounting and financial methods adopted to prepare the consolidated financial statements, as well as the appropriate accounting treatment of transactions at both product-family and Group level; · to check that internal procedures are defined for compiling and controlling financial and accounting information in order to ensure its reliability and guarantee rapid reporting, to review the Group's internal audit plan and Management's related comments, and to keep informed of the Group's internal and external audits and Management's related comments; · to express an opinion on the choice of Statutory Auditors or the renewal of their terms of office; · to review any financial or accounting matter referred to it by the Chairman of the Board of Directors as well as any conflict of interest issue of which it is aware. The Audit Committee met four times in 2006 with a 66% attendance rate. During these meetings, the Committee reviewed the consolidated financial statements for the year ended December 31, 2005 and the interim financial statements for firsthalf 2006. The Committee particularly focused on the application of International Financial Reporting Standards (IFRS) which were adopted for the first time in 2005, as well as the restatement of 2004 data. The members of the Audit Committee also reviewed the operations carried out by the Internal Audit Department in 2006 as well as the methodology used for risk mapping and the internal audit work schedule for 2007.

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1.5.2.2. the work of the nomination Committee in 2006 Prior to its merger with the Remuneration Committee on December 14, 2006, the Nomination Committee had five members appointed by the Board of Directors, including a Chairman and three Directors classified as independent in accordance with the criteria in the Internal Rules: Alain Minc (Chairman), François Grappotte, Philippe Guédon, Thierry Morin and Véronique Morali. The Nomination Committee met twice in 2006, with a 90% attendance rate. During the year, the Committee examined whether the Directors were still classified as independent in accordance with the criteria set out in the Board's Internal Rules. It also reviewed the composition of the Company's corporate governance bodies and recommended to the Board that Daniel Camus and Jérôme Contamine should be put forward as directorship candidates at the General Shareholders' Meeting of May 17, 2006. 1.5.2.3. Merger of the nomination Committee and the Remuneration Committee into a single nomination and Remuneration Committee At its December 14, 2006 meeting, the Board of Directors decided to merge the separate Nomination and Remuneration Committees into a single Nomination and Remuneration Committee. The members of this new committee are Alain Minc (Chairman), François Grappotte, Philippe Guédon and Véronique Morali. According to its Internal Rules, the roles and responsibilities of the Nomination and Remuneration Committee include the following: · Concerning remuneration:

- studying and making recommendations concerning the compensation paid to corporate officers (particularly in relation to the variable portion of their compensation), - recommending to the Board an aggregate amount of attendance fees payable to Directors and the individual amounts payable to each Director, - providing recommendations to the Board of Directors on the Group's general stock option policy and specific stock option grants;

(Chairman), Jean-Bernard Lafonta, Alain Minc, Thierry Morin and Erich Spitz. The roles and responsibilities of the Strategy Committee were: · to express an opinion to the Board concerning the strategic goals of the Company and the Group and any other major strategic issue referred to the Committee by the Board or the Chairman; · to analyze annual budgets and interim reviews, as well as the medium- and long-term strategic development plans of the Group. The Committee's role also included examining and expressing an opinion to the Board on issues submitted to it concerning major transactions including acquisitions, disposals, financing and debt. The Strategy Committee met three times during 2006 with a 93% attendance rate. During its meetings, the Committee reviewed the Group's results, studied certain planned acquisitions and reviewed the strategy, roles and responsibilities of each of Valeo's three Domains. At its December 14, 2006 meeting, the Board of Directors decided that strategic issues concerning the Group will henceforth be discussed in full Board meetings and tasked Philippe Guédon with carrying out any preparatory work required to facilitate such discussions during these meetings.

1.6. Evaluation of the Board of Directors

In accordance with the Internal Rules, the Board carries out a self-assessment to review its modus operandi and to ensure that its meetings are properly organized. In 2006, this assessment was performed with the assistance of an external firm during the last quarter of the year. A detailed questionnaire was sent to all Directors concerning their assessment of the way in which the Board operates and suggestions for improvement. The topics covered included the operation and composition of the Board, Directors' access to information, the choice of issues discussed, as well as the quality of the discussions and the general functioning of the Board Committees. The Directors' replies were analyzed and the findings presented at the meeting of the Board held on February 12, 2007. The vast majority of the Directors stated that the organization of the Board's work and the quality of its discussions had improved since the last evaluation, enabling members of the Board to be involved in all key decisions relating to the Group's future. They did however put forward a number of recommendations on how to improve the way the Board operates.

· Concerning selections and nominations:

- preparing the composition of the Company's corporate governance bodies by making recommendations for the appointment of corporate officers and Directors, - reviewing the position of each Director in relation to the independence criteria set out in paragraph 1.2(b) of the Board's Internal Rules.

1.5.3. Strategy Committee

Before it was dissolved on December 14, 2006, the Strategy Committee had five members appointed by the Board of Directors, including a Chairman and two independent Directors as defined by the criteria set forth in the Internal Rules: Philippe Guédon

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1.7. Shareholdings and securities transactions

Each Director must hold at least 100 Valeo shares during his or her entire term of office. On accepting their position, members of the Board of Directors and the Executive Management of the Group agreed to a Code of Conduct in relation to trading in the Company's securities. This Code was updated twice by the Board of Directors in 2006. Under the terms of the Code, Directors must declare to the Group's General Counsel any transactions that they have entered into involving the Company's securities, within a maximum of five trading days following the transaction. In accordance with applicable regulations, this information must then be disclosed to the French securities regulator (Autorité des Marchés Financiers) and subsequently made public.

1.10. General management of the Company and limitations on the powers of the Chief Executive Officer

The Company's Board of Directors has chosen to combine the positions of Chairman of the Board of Directors and Chief Executive Officer. The Board of Directors has not imposed any specific limits on the powers of the Chief Executive Officer. The Chairman and Chief Executive Officer therefore has the widest possible powers to act in any circumstances in the Company's name. He exercises his powers within the scope of the Company's corporate purpose and subject to the powers that the law specifically grants to Shareholders' Meetings or the Board of Directors. The Chairman and Chief Executive Officer represents the Company in its relations with third parties.

1.8. Agreements governed by Article L. 225-38 of the French Commercial Code

At its meeting of October 18, 2004, the Board of Directors authorized a number of transactions governed by the procedures concerning regulated, related-party agreements. The agreements concerned ­ which were entered into between the Company and its Spanish subsidiaries as part of the implementation of the 2004 Valeorizon international employee stock ownership plan ­ remained in force during 2006. The agreements authorized by the Board of Directors at its December 15, 2005 meeting ­ which were entered into between the Company and the Group's operating subsidiaries in connection with trademark royalties agreements ­ also remained in force during the year. At its meeting of October 6, 2006 the Board of Directors authorized the signature of a consulting agreement with Yves-André Istel, covering assistance and advisory services provided in connection with the study group's possible merger with Visteon.

1.11. Compensation paid to the Chairman and Chief Executive Officer

1.11.1. Compensation paid during 2006

Acting on the recommendation of the Remuneration Committee, at its February 9, 2006 meeting the Board of Directors approved the principles for calculating the compensation and benefits-inkind granted to the Chairman and Chief Executive Officer. Fixed compensation The total gross fixed compensation paid to Thierry Morin for 2006 was set at 1,519,538 euros, breaking down as 1,500,288 euros in gross compensation (including travel expenses), and 19,251 euros in benefits-in-kind. Exceptional bonus Thierry Morin did not receive any exceptional compensation in 2006 for 2005. At its meeting of February 9, 2006, the Board of Directors decided that any exceptional bonus to be awarded to the Chairman and Chief Executive Officer for 2006 would be exclusively contingent on the level of gross margin and operating margin achieved by the Group, and would be subject to a ceiling set by the Board. Attendance fees

1.9. Authorization granted regarding sureties, endorsements and guarantees governed by Article L. 225-35 of the French Commercial Code

During the year the Board of Directors authorized the Chairman, who is entitled to delegate this authority, to issue sureties, endorsements and guarantees in the Company's name up to a maximum amount of 23 million euros, and to maintain in effect the sureties, endorsements and guarantees previously issued. This authorization, which was granted for a 12-month period, expires on February 9, 2007. No new commitments were given by the Chairman under this authorization during 2006.

In 2006, Thierry Morin received 35,000 euros in attendance fees in his capacity as a Director of Valeo. Compensation paid by companies controlled by Valeo In 2006 Thierry Morin received total gross compensation of 120,883 euros from companies controlled by Valeo (as defined in article L. 233-16 of the French Commercial Code). This total was made up of 45,750 euros in attendance fees and 75,133 euros in contributions to a pension fund. Thierry Morin did not receive any benefits in kind in 2006 from companies controlled by Valeo.

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Stock options and shares awarded free of consideration (share awards) · In view of the prohibited periods set down by French stock exchange regulations, the Board of Directors did not grant any stock options or share awards to Thierry Morin during 2005. At its March 3, 2006 meeting, the Board granted Thierry Morin 150,000 stock options and 50,000 shares free of consideration, in accordance with the following terms and conditions:

- the purchase price of the shares to be issued on exercise of the options is set at 33.75 euros. Half of the options granted may be exercised as from March 3, 2008 and all of the options may be exercised as from March 3, 2009. The shares obtained on exercise of the options may not be sold before March 3, 2010. If the options are not exercised they will be forfeited on March 2, 2014; - the vesting date for the shares awarded free of consideration was set by the Board of Directors at June 3, 2008 subject to the following conditions: (i) Thierry Morin must still hold an employment contract or a corporate officer's position within the Valeo Group at June 3, 2008, and (ii) the achievement of certain performance criteria concerning operating margin targets for 2006 and 2007 (applicable to the vesting of 30,000 of the total shares awarded).

1.11.2. Pension scheme

Thierry Morin is still a member of the supplementary pension scheme set up for executives who were formerly members of Valeo's Management Board, as approved by the Supervisory Board on October 17, 2003. This system is designed to top up existing pension benefits (statutory pension, ARRCO, AGIRC, etc.) to enable beneficiaries to acquire benefits representing 2% of their final salary per year of service with the Group. The total amount of pension benefits may not exceed 60% of a beneficiary's final salary and the scheme will only apply to beneficiaries who have a minimum of 15 years' service in the Valeo Group when they retire and for whom Valeo or one of its subsidiaries was their last employer at their retirement date.

1.11.3. Termination benefits

In the event that Thierry Morin leaves the Company, either by way of a decision of the Board of Directors, or at his own initiative following a difference of opinion concerning the strategy implemented by the Board further to a public tender offer, the amount of his termination benefits will represent three times his last annual compensation, excluding bonuses. Such termination benefits will not be payable in the event of gross misconduct (faute grave).

· In 2006, Thierry Morin did not exercise any options granted in previous years.

2. Internal control procedures

This report was presented to the Audit Committee on February 12, 2007.

2.1. Definition and aims of internal control procedures

Internal control as defined by the Valeo Group is the process implemented by Management and employees to provide reasonable assurance regarding the achievement of objectives in the following categories: · reliability of financial and management data; · compliance with laws and regulations; · safeguarding of assets; · effectiveness and efficiency of operations. Valeo has adopted a definition of internal control in line with that provided by the COSO (Committee Of Sponsoring Organization of the Treadway Commission), the findings of which were published in 1992 in the United States. As with any control system, Valeo's internal control procedures can only provide reasonable assurance ­ and not an absolute guarantee ­ that the Group's objectives will be achieved and that risks will be avoided. The objective of the system put in place by Valeo is to reduce the probability of risks occurring.

2.2. the components of Valeo's internal control procedures

Valeo's internal control procedures are based on the following five interrelated components defined in the COSO framework.

Control Environment

The control environment sets the tone of an organization, influencing the level of awareness of its people to be need for controls. Valeo's decentralized structure enables it to respond swiftly and locally to customer needs, which in turn enables the Group to expand in its markets. Against this backdrop, the Group has set up operating principles and rules applicable in all of its companies. One example is the Code of Conduct, which is sent out to all of the Group's managers and sets out principles on how employees are required to act and behave. This Code is available on the Intranet and forms the basis of detailed procedures which must be applied by all of the Group's companies. It was updated in 2004 to include new processes relating to human resources management.

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Risk Assessment

Risk assessment is the identification and analysis of risks that may impact the objectives set by the Group, forming a basis for determining how the risks should be managed. The Group's main risks are described in section 9 of the Management Report ("Risks and uncertainties).

enables the Group to monitor best practices and explore avenues for improvement. Valeo has launched a certification program for its manufacturing sites in accordance with the ISO 14001 standard relating to environmental management and the OHSAS 18001 standard concerning occupational health and safety. At December 31, 2006, these two standards had been awarded to 125 and 71 sites respectively, out of a total of 129 sites.

Control Activities

Control activities are the policies and procedures that help ensure management directives are carried out. They occur throughout the organization, at all levels and in all functions. In this context, the Group's Administrative and Financial Manual has been the benchmark for Valeo's financial and management operations for over 15 years. The manual is used on a daily basis by all operational staff and comprises two parts: · part one concerns the rules governing management and internal control; · part two defines how the main items of the balance sheet and statement of income should be measured and presented. Every year, the Director and Financial Control Director of each Division sign a letter of representation in which they undertake to ensure compliance with the manual's rules. Specific rules and procedures have also been put in place by the Group's various corporate divisions, in line with the Administrative and Financial Manual. These include: · the Constant Innovation Charter, which provides a strict definition of the management principles applicable to development projects; · marketing procedures and sales practices; · human resources procedures; · purchasing procedures, aimed at reducing the number of listed suppliers in order to facilitate quality control; · the Risk Management Manual and implementation guides in relation to security, safety and the environment, together with the Insurance Manual. Valeo has undertaken to comply with local regulations concerning safety and the environment at a minimum and, in certain cases, to comply with even higher standards; · legal procedures that set down the principles with which the Group must comply. These mainly concern the laws and regulations applicable in the countries where the Group operates as well as respecting contractual obligations and protecting the Group's intellectual property. Substantially all of the information concerning these rules and procedures is accessible on the Group's Intranet by the staff concerned. In terms of quality, Valeo has set its own benchmarks ­ Valeo 1000 and Valeo 5000. In addition, the QRQC (Quick Response Quality Control) method ensures the prompt implementation of corrective action, and the Lesson Learned Card (LLC) process

Information and Communication

Pertinent information must be identified, captured and communicated in a form and timeframe that enable all of the Group's people to carry out their responsibilities and perform the controls required of them. Group Financial Control is responsible for preparing the financial statements of the Company and the Group, and reports to the Chairman and Product Family Directors on this process. The budget and monthly reporting procedure is a critical tool for Valeo in managing its operations. Any variances can be identified, analyzed and dealt with during the year, thereby increasing the reliability of the interim and annual accounts closing process. The same information system is used for the consolidation and reporting processes, thus ensuring that the Group has constant control over the preparation and processing of financial information. The Group has put in place an integrated software application, which is gradually being rolled out to all of its operating units. As well as providing a structured framework, this software application enables user profiles to be defined and access controls to be monitored, enabling the Group to comply with regulations concerning the segregation of tasks.

Monitoring internal control procedures

The Group's General Management team oversees the internal control system and delegates responsibility to the Financial Control, and Risk, Insurance and Environment Departments as well as to the individual Product Families for the management of issues within their remit. The internal control system is audited by the Valeo Internal Audit Department, whose task is to carry out assignments within the Group to ensure that the procedures set up function properly. Based on observations made during these assignments, recommendations are put forward to the audited operating units, which are subsequently required to implement appropriate action plans. The Internal Audit team is also called upon at regular intervals to carry out audits of performance indicators at various manufacturing sites and Divisions, and to coordinate the updates to the Group's financial and management procedures. The application of Valeo's quality standards is regularly checked via "VAQ" (Valeo Assurance Quality) audits, and the environmental and safety aspects are overseen by the Risk, Insurance and Environment Department.

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2.3. Review of work carried out in previous years

Valeo carried out the following tasks at Group level in previous years: · an analysis of the existing internal control procedures in light of the five main components defined in the COSO Framework (control environment, risk assessment, control activities, information and communication, and monitoring); · a preliminary mapping of major risks and processes based on interviews with the Group's main operational and administrative managers; · the identification of material accounts and their interaction with the processes, as well as an inventory of existing internal control procedures relating to the preparation of the financial statements. The Group has put in place a specific project designed to improve internal control in relation to the reliability of financial information. Over the long term, Valeo's aim is to be able to assess the relevance and correct implementation of its internal control procedures in relation to the reliability of financial information. In order to achieve this, 132 key control points have been identified in relation to the seven processes set out below: · sales, receivables management and payments received; · procurement, payables management and payments made; · monitoring of assets; · monitoring of inventory; · payroll; · cash flow; · accounts closing policies. Rules relating to documentation and testing ­ particularly regarding the size of the sample used ­ have been defined to ensure uniformity between the sites. The process was initially implemented at a number of pilot sites in order to enable the approach to be validated, forecasts of required resources to be finetuned, and documentation and testing for all the sites to be standardized. The approach was then rolled out to the Group's other operating units. A specific database of best internal control practices has been created and posted on the Group's Intranet. In addition, Valeo has set up a new tool for reporting the findings of its internal control self-assessment procedures, in order to centralize documentation relating to the controls and tests performed in connection with the French Financial Security Act (LSF project). This tool, which is overseen by the Internal Audit team, is also used by the Group's financial controllers to monitor in real time the action plans implemented to enhance the internal control system. In parallel, Valeo has set up a procedure aimed at reviewing the user profiles and access controls for the SAP software, which has been progressively rolled out to all the Group's main sites. The underlying aim of this process is to establish consistent internal

control practices across all of the operating units. On the basis of matrices showing incompatibilities for each of the processes, optimized standard user profiles have been identified. SAP user profiles and access controls have been deployed at 18 of the Group's most important sites. The LSF project also included the "Corporate" functions, and the internal control procedures for the Valeo Internal Bank (BIV) were documented as part of this process. The Group's standards on quality, manufacturing, project management and safety have been updated as part of the Valeo 5000 quality certificate.

2.4. Work carried out in 2006

During 2006 the Group continued its twin objectives of improving internal control in relation to the relevance of financial information and applying a self-assessment approach in all of its operating units. The Internal Audit team continued to implement its quality controls in relation to documentation and tests performed at the operating units. The Group's Statutory Auditors also carried out a review of the work performed by certain divisions. SAP user profiles and access controls have now been rolled out to substantially all of the Group's operating units, with accompanying manuals and incompatibility matrices drawn up by Internal Audit in conjunction with each division. During the year the Group also carried out a centralized review of the SAP automatic and manual controls, as well as management procedures for the corresponding access rights. At the same time, it reviewed the security of its information systems. As part of its risk assessment process the Group updated and enriched its risk mapping process. The risks concerned were assessed in terms of their impact and how they are controlled by the Group's main operating and administrative managers. The Group also identified the people responsible for controlling its main risks, monitoring corrective action and performing independent reviews of the coverage of the risks concerned. The risk mapping process formed a major component of the work undertaken to prepare the audit plan, which was presented to the Audit Committee in November 2006.

2.5. Outlook for 2007 and 2008

A two-year audit plan (2007/2008) has been drawn up for the Group's main risks, based on the findings from the risk mapping process and the work conducted by the Internal Audit team. The plan covers both cross-business and technical risks. The key controls, user documentation, test procedures and the internal control reporting system will be reviewed and updated in order to factor in changes in the Group and its accounting policies.

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Report of the Chairman of the Board of Directors

A specific review will be carried out on the access controls and user profiles of sites that do not use SAP and reporting tools and , monitoring procedures will be put in place. The central review performed concerning the Group's internal control procedures and the security of the SAP application will be supplemented by a review within each operating unit. This review will include an analysis of how the centrally defined key controls are applied at a local level and a verification of the manual controls performed by local users. A documentation plan will be drawn up for the "Corporate" functions, together with a definition of the applicable key controls and a test plan based on defined samples, notably for

specific holding company processes and for financial consolidation procedures. On a general level, the Group will pursue its ongoing efforts to improve its internal control procedures, with the underpinning aim of constantly adapting its management and control tools in line with changes in the Group's structure and its objectives. These efforts are wholly supported by the Group's General Management team. Thierry Morin Chairman of the Board of Directors

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Composition of the Board of Directors at December 31, 2006

4

Composition of the Board of Directors at December 31, 2006

Name

First appointed

End of term of office

Main position held within the Company

Main position held outside the Company

Other directorships and positions held in all companies in 2006 · Chairman of Société de Participations Valeo, Valeo Bayen, Valeo Service, Valeo Finance, Valeo thermique Habitacle, Valeo España, S.A., Valeo SpA, Valeo Japan Co. Ltd, and Valeo (UK) Limited · Legal Manager of Valeo Management Services, Valeo Auto-Electric Beteiligungs GmbH, Valeo Germany Holding GmbH, Valeo Grundvermögen Verwaltung GmbH, and Valeo Holding Deutschland GmbH · Director of Valeo Électronique & Systèmes de Liaison, Valeo Service España S.A., Valeo Iluminacion, S.A., and Valeo termico, S.A. · Director of CEDEP and Arkema Cofide-CIR Group · Chairman of the Board of Directors of Cofide SpA and CIR SpA · Director of Gruppo Editoriale L'Espresso SpA and Sogefi SpA Outside the Cofide-CIR Group · Chairman of the Board of Directors of CDB Web tech SpA · Chairman of the Supervisory Board of M&C Management & Capitali SpA · Director of Pirelli SpA and Banca Intermobiliare SpA EDF Group · Chairman of the Board of Directors of EDF Energy (United Kingdom) and EDF International · Director of Edison (Italy) and transalpina di Energia (Italy) · Member of the Supervisory Board of EnBW (Germany) Outside the EDF Group · Member of the Supervisory Board of Dalkia and Morphosys (Germany) Veolia Group · Director of VE Services-Ré, Veolia transport, Veolia Propreté, Veolia Environmental Services Plc (United Kingdom), Veolia ES Holdings Plc (United Kingdom), and Veolia UK (United Kingdom) · Member of the Supervisory Board of Veolia Eau and Dalkia France · Member of Dalkia's A and B Supervisory Boards Outside the Veolia Group · Chairman of Venao (United States) · Director of Rhodia and Venac (United States)

Thierry Morin March 31, 2001

General Shareholders' Meeting to be called to approve the 2006 financial statements

Chairman and Chief Executive Officer

Carlo De Benedetti (until July 13, 2006) July 4, 1986

July 13, 2006

Chairman of the Board of Directors of CIR SpA Chief Operating Officer in charge of finance and international development in the EDF Group

Daniel Camus May 17, 2006

General Shareholders' Meeting to be called to approve the 2009 financial statements

Jérôme Contamine

May 17, 2006

General Shareholders' Meeting to be called to approve the 2009 financial statements

Senior Executive VicePresident of Veolia Environnement

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Name

CORPORAtE GOVERnAnCE

Composition of the Board of Directors at December 31, 2006

First appointed

End of term of office

Main position held within the Company

Main position held outside the Company Chairman of FEBIAC (the Belgian Federation of the Car and two-wheeler Industries) and director of various companies in Belgium

Other directorships and positions held in all companies in 2006

Pierre-Alain De Smedt

March 7, 2005

General Shareholders' Meeting to be called to approve the 2006 financial statements

· Director of Belgacom, C.n.P. (Compagnie nationale à Portefeuille/A. Frère Group), Deceuninck Plastics, and Alcopa · Member of the Executive Committee and Director of FEBIAC (Belgian Federation of the Car and two-wheeler Industries) · Member of the Management Committee of FEB (Belgian Business Federation) Legrand Group · Chairman of Legrand S.A.S., Lumina Management S.A.S., and Legrand S.A. · Director and Chief Executive Officer of Legrand Holding S.A. and Lumina Parent (Luxembourg) · Director of B. ticino (Italy) and Legrand Española (Spain) Outside the Legrand Group · Director of BnP Paribas · Member of the Supervisory Board of Michelin · Member of the Banque de France Consultative Committee, the Administrative Board of F.I.E.E.C. (Fédération des Industries Électriques, Électroniques et de Communication), the Administrative Board of Gimelec (Groupement des industries de l'équipement électrique, du contrôle-commande et des services associés), and the Board of Promotelec (Promotion de l'installation électrique dans les bâtiments neufs et anciens)

François Grappotte

March 31, 2003

General Shareholders' Meeting to be called to approve the 2006 financial statements General Shareholders' Meeting to be called to approve the 2006 financial statements General Shareholders' Meeting to be called to approve the 2006 financial statements

Honorary Chairman of Legrand S.A.

Philippe Guédon

March 31, 2003

Managing Partner of Espace Développement

Yves-André Istel

January 29, 1992

Senior Advisor to Rothschild, Inc.

· Director of Compagnie Financière Richemont AG, Imperial Sugar Company, and tiedemann trust Company

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Name

First appointed

End of term of office

Main position held within the Company

Main position held outside the Company

Other directorships and positions held in all companies in 2006 Wendel Group · Chairman of the Supervisory Board of Editis Holding · Chairman of the Supervisory Board of Bureau Veritas · Member of the Supervisory Board of Oranjenassau Groep B.V. · Director of Legrand Holding and Legrand S.A. Outside the Wendel Group · Chairman of the Board of Directors of Winvest S.A. (Luxembourg) · Legal Manager of Granit (SARL), JBMn (Luxembourg), and Winvest Conseil (Luxembourg)

Jean-Bernard December 7, Lafonta 2001

General Shareholders' Meeting to be called to approve the 2006 financial statements General Shareholders' Meeting to be called to approve the 2006 financial statements General Shareholders' Meeting to be called to approve the 2006 financial statements

Chairman of the Management Board of Wendel Investissement

Alain Minc

July 4, 1986

Chairman of A.M. Conseil

· Chairman of the Supervisory Board of Le Monde · Director of Fnac and Vinci Fimalac Group · Sole Director of FCBS GIE · Member of the Board of Fimalac Inc., Fitch Ratings, Inc., and Fitch Risk Management, Inc. Outside the Fimalac Group · Director of Eiffage, Club Méditerranée, and Algorithmics (Canada) Thales Group · Chairman of thales Avionics Lcd · Director of thales Corporate Ventures Outside the Thales Group · Chairman of the Supervisory Board of novaled and Riber · Member of the Management Board of ERA · Correspondent member of the Académie des Sciences · Member of the Académie des technologies · Honorary Chairman of European Industrial Research Management Association (EIRMA)

Véronique Morali

March 31, 2003

Director and Chief Operating Officer of Fimalac

Erich Spitz

June 24, 1987

General Shareholders' Meeting to be called to approve the 2006 financial statements

Advisor to thales

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Statutory Auditors' Report

Statutory Auditors' Report prepared in accordance with article L.225-235 of the French Commercial Code (Code de commerce) on the report of the Chairman of the Board of Directors on internal control procedures relating to the preparation and processing of financial and accounting information

Year ended December 31, 2006 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. This report should be read in conjunction with, and construed in accordance with, French law and professional auditing standards applicable in France.

Valeo 43, rue de Bayen 75017 Paris To the Shareholders, In our capacity as statutory auditors of Valeo, and in accordance with article L. 225-235 of the French Commercial Code (Code de commerce), we hereby report to you on the report prepared by the Chairman of your Company in accordance with article L. 225-37 of the French Commercial Code for the year ended December 31, 2006. It is for the Chairman to give an account, in his report, notably of the conditions in which the duties of the Board of Directors are prepared and organized and of the internal control procedures in place within the company. It is our responsibility to report to you our observations on the information set out in the Chairman's report on the internal control procedures relating to the preparation and processing of financial and accounting information. We performed our procedures in accordance with professional guidelines applicable in France. These require us to perform procedures to assess the fairness of the information set out in the Chairman's report on the internal control procedures relating to the preparation and processing of financial and accounting information. These procedures notably consisted of: · obtaining an understanding of the objectives and general organization of internal control, as well as the internal control procedures relating to the preparation and processing of financial and accounting information, as set out in the Chairman's report; · obtaining an understanding of the work performed to support the information given in the report. On the basis of these procedures, we have no matters to report in connection with the information given on the internal control procedures relating to the preparation and processing of financial and accounting information, contained in the report of the Chairman of the Board, prepared in accordance with the last paragraph of article L. 225-37 of the French Commercial Code. Neuilly-sur-Seine and Paris, February 12, 2007 The Statutory Auditors Salustro Reydel Member of KPMG International PricewaterhouseCoopers Audit

Jean-Pierre Crouzet

Emmanuel Paret

Serge Villepelet

Jean-Christophe Georghiou

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InfoRmatIon on the company and Its capItal

General information about the issuer

P. 146

5

1. Legal provisions and Company bylaws ..............................................................................................................146 2. Corporate governance structure ..........................................................................................................................148 3. Compensation paid to senior managers and members of the Board of Directors......................................160 4. Related party transactions ...................................................................................................................................164 5. Governmental, legal and arbitration proceedings ...........................................................................................164 6. Insurance and risk coverage ................................................................................................................................164

Fees paid by the Group to the Auditors and members of their networks General information about the Company's capital

P. 166 P. 167

1. Changes in Valeo's share capital .........................................................................................................................167 2. Authorized, unissued capital ...............................................................................................................................168 3. Share equivalents ..................................................................................................................................................169 4. Other securities ......................................................................................................................................................169

Current ownership structure

P. 172

1. Changes in ownership structure since 2004......................................................................................................172 2. Disclosure thresholds ............................................................................................................................................174 3. Shareholder identification....................................................................................................................................174

Market for the Company's securities

P. 176

1. Share performance over 18 months...................................................................................................................176 2. Share buyback program and cancellation of treasury shares.........................................................................176 3. Dividends ................................................................................................................................................................177

Investor relations

P. 178

1. Individual shareholder relations .........................................................................................................................178 2. Institutional shareholder relations......................................................................................................................178 3. Ownership structure ..............................................................................................................................................179 5. Per share data........................................................................................................................................................180 6. Share price from January 1, 2002 through December 31, 2006 ....................................................................180 7. Monthly trading volumes .....................................................................................................................................181

Information on subsidiaries and affiliates Person responsible for the registration document

P. 181 P. 184

Person responsible for the information provided in the registration document .............................................184 Declaration by the person responsible for the registration document..............................................................184

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General information about the issuer

General information about the issuer

1. Legal provisions and Company bylaws

Corporate name and registered office

The name of the Company is Valeo. Its registered office is at 43, rue Bayen, 75017 Paris, France (tel.: +33 (0) 1 40 55 20 20).

Registration particulars

The Company is registered at the Paris Companies Registry under number 552 030 967.

Legal form and governing law ­ Corporate governance

Valeo is a joint-stock company ("société anonyme") with a Board of Directors. It is governed by French law, notably the provisions of Section II of the French Commercial Code and Decree 67-236 dated March 23, 1967. With a view to increasing the transparency of information disclosed to the public, the Company has set up a number of procedures to ensure that it complies with best corporate governance practices. Further information is provided on page 131 in the report of the Chairman of the Board of Directors on the conditions for preparing and organizing the work conducted by the Board and internal control procedures.

Fiscal year

The Company's fiscal year covers a twelve-month period from January 1 to December 31.

Consultation of documents

The Company's press releases and annual registration documents filed with the AMF (including historical financial information relating to the Company and the Group), as well as any updates thereto can be accessed on the Company's website at www.valeo. com. Copies are also available on request from the Company's head office. The bylaws, minutes of Shareholders' Meetings, Statutory Auditors' reports and all other corporate documents can be consulted at Valeo's head office in accordance with the law and the Company's bylaws.

Date of incorporation and term

The Company was incorporated on February 10, 1923 and its term was extended for a further 99 years on February 10, 1972.

Auditors

Statutory Auditors

· PricewaterhouseCoopers Audit SA, represented by Serge Villepelet and Jean-Christophe Georghiou ­ 63, rue de Villiers, 92200 Neuilly-sur-Seine, France. - Member of the Compagnie régionale des Commissaires aux comptes de Versailles. - First appointed on March 31, 2003. - Current term of office began on April 5, 2004 and expires at the close of the General Shareholders' Meeting to be held to approve the financial statements for the year ending December 31, 2009. · Salustro Reydel, Member of KPMG International, represented by Jean-Pierre Crouzet and Emmanuel Paret ­ Immeuble Le Palatin ­ 3, cours du Triangle, 92939 Paris La Défense Cedex, France. - Member of the Compagnie régionale des Commissaires aux comptes de Versailles.

Corporate purpose

The Company's corporate purpose is as follows (Article 3 of the bylaws): The research and development, manufacture, sale, trading or supply of any products, equipment or services for industry and business purposes which may be manufactured, finished or developed by the Company or other Valeo Group companies or which may interest their customers; Operations of any nature ­ including industrial, commercial, financial and investing activities, or acquisitions and divestments ­ which are directly or indirectly related to the corporate purpose or designed to facilitate the development or realization thereof.

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- First appointed on May 27, 1998. - Current term of office began on April 5, 2004 and expires at the close of the General Shareholders' Meeting to be held to approve the financial statements for the year ending December 31, 2009.

representing all or part of the dividend, or interim dividend, as provided for by law. Dividends unclaimed after a period of five years from the date they were made payable are paid to the French government.

Alternate Statutory Auditors

· Yves Nicolas ­ 63, rue de Villiers, 92200 Neuilly-sur-Seine, France. - Member of the Compagnie régionale des Commissaires aux comptes de Versailles. - First and current term of office began on April 5, 2004 and expires at the close of the General Shareholders' Meeting to be held to approve the financial statements for the year ending December 31, 2009. · Philippe Arnaud ­ 198, boulevard Malesherbes, 75017 Paris, France. - Member of the Compagnie régionale des Commissaires aux comptes de Paris. - First and current term of office began on April 5, 2004 and expires at the close of the General Shareholders' Meeting to be held to approve the financial statements for the year ending December 31, 2009. · Yves Nicolas and Philippe Arnaud were appointed as Alternate Statutory Auditors on April 5, 2004. Philippe Arnaud replaced Jean-Louis Mullenbach, who had been appointed by the General Shareholders' Meeting of May 27, 1998 for a six-year term.

Liquidation surpluses

Liquidation surpluses are allocated between the shareholders in proportion to their interests in the Company's capital.

General Shareholders' Meetings

Ordinary and Extraordinary General Shareholders' Meetings are called and conduct business in accordance with the conditions set down by law. In accordance with Article 136 of Decree 67-236 dated March 23, 1967, as amended by Decree 2006-1566 of December 11, 2006, shareholders may participate in General Meetings subject to submitting evidence of ownership of their shares. Share ownership is evidenced by an entry in Valeo's share register in the name of the shareholder (or of the intermediary acting on their behalf) or in the register of bearer shares held by an accredited intermediary. Such entries must be recorded by 0 hours (Paris time) on the third working day preceding the date of the Meeting. In the case of bearer shares, the accredited intermediary shall provide a participation certificate for the shareholders concerned, which must be attached to the corresponding postal voting or proxy form or to the admission card made out in the name of the shareholder or in the name of the registered intermediary representing the shareholder. Subject to the above-mentioned conditions, all shareholders are entitled to attend General Meetings provided they have settled all capital calls related to their shares. Shareholders who are unable to attend a meeting in person may give proxy to their spouse or another shareholder or may cast a postal vote. Alternatively, they may return the signed form of proxy to the Company without naming a person to represent them, in accordance with the applicable laws and regulations. In compliance with the conditions set down by the applicable law and regulations, shareholders may send proxy and postal voting forms for General Meetings either in paper format or, if authorized by the Board of Directors in the notice of meeting, in electronic form. Minutes of shareholders meetings are drawn up, and copies and extracts thereof are certified and delivered, in accordance with the law.

Dividends

Each share entitles its holder to a proportion of income equal to the proportion of capital represented by the share. Distributable income is composed of net income for the year less any prior year losses and amounts appropriated to the legal reserve, plus any income carried forward. Subject to the provisions of the law, shareholders in a General Meeting may decide to distribute amounts taken from available reserves and/or retained earnings. In this case, the related resolution approved by the shareholders must clearly specify the reserve account from which the distributed amounts are to be taken. Shareholders may resolve to pay out a dividend only after approving the financial statements for the year and noting that amounts are available for distribution. Shareholders or the Board of Directors set the applicable conditions for any dividend payments. The Board of Directors may decide to pay an interim dividend before the financial statements are approved, subject to the conditions set down by law. At the General Meeting called to approve the financial statements, shareholders may decide to offer a stock dividend alternative

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General information about the issuer

Double voting rights

Each shareholder has a number of votes corresponding to the number of shares held or represented by proxy. However, since the General Shareholders' Meeting of June 16, 1992, article 23 of the Company's bylaws provides that double voting rights are attached to all fully-paid shares that have been registered in the name of the same holder for at least four years. In the case of a capital increase paid up by capitalizing reserves, income or share premiums, the new registered shares allocated to a shareholder in respect of existing shares with double voting rights will also carry double voting rights from the date of issue. Double voting rights are automatically stripped from any registered shares that are converted into bearer shares or sold. However, registered shares are not stripped of voting rights and the above four-year qualifying period continues to run following the transfer of shares

included in the estate of a deceased shareholder, or in connection with the settlement of the marital estate, or a donation inter vivos to a spouse or relative in the direct line of succession. Double voting rights may be removed at an Extraordinary Shareholders' Meeting, subject to the approval of the shareholders entitled to double voting rights, obtained at a special meeting held for the purpose.

Changes in share capital and rights attached to shares

Any changes in the Company's share capital or voting rights attached to shares are subject to the applicable law as the bylaws do not contain any specific provisions in relation to such operations.

2. Corporate governance structure

2.1. executive Management

The Group's Executive Management team includes the Chairman and Chief Executive Officer, and Valeo's Functional and Operational Directors. Chairman and Chief Executive Officer: Thierry Morin Term of office started on March 31, 2003 and expires at the General Shareholders' Meeting to be called to approve the 2006 financial statements. At its meeting of March 31, 2003, Valeo's Board of Directors elected to combine the roles of Chairman of the Board of Directors and Chief Executive Officer. In his capacity as Chairman and Chief Executive Officer, Thierry Morin has the broadest ranging powers to act in any circumstances in the Company's name. He exercises these powers within the limits of the Company's corporate purpose and subject to the powers that the law specifically grants to Shareholders' Meetings or to the Board of Directors. Thierry Morin represents the Company in its relations with third parties.

Functional Directors

Michel Boulain Vice-President, Human Resources Robert Charvier Financial Controller, Industrial Products Bernard Clapaud Vice-President, Strategy France Curis Taxation Director Jean-Luc Di Paola-Galloni Chairman's Delegate Rémy Dumoulin Investor Relations Director André Gold Technical Senior Vice-President Martin Haub Vice-President, Research & Development and Product Marketing

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Kazuo Kawashima Quality Director Hans-Peter Kunze Senior Vice-President, Sales and Business Development Géric Lebedoff General Counsel Serge Le Berre Industrial Vice-President Vincent Marcel Vice-President, Financial Affairs and Strategic Operations Kate Philipps Communications Director Xavier Véret Financial Control Director

Orazio Ragni Vice-President, Electrical Systems Product Family Michael Schwenzer Vice-President, Transmissions Product Family Michel Serre Vice-President, Security Systems Product Family Henri Trintignac Vice-President, Engine Management Systems Product Family Robert de la Serve Senior Vice-President, Valeo Service Activity Léonard de la Seiglière Vice-President, Independent Aftermarket Branch Dirk Strothmann Vice-President, Original Equipment Spares Branch

Operational Directors

Luc Blériot Chief Operating Officer Antoine Doutriaux Vice-President, Electronics & Connective Systems Product Family Pierre Ensch Vice-President, Engine Cooling Product Family Michel Giannuzzi Vice-President, Wiper Systems Product Family Claude Leïchlé Vice-President, Lighting Systems Product Family Alain Marmugi Vice-President, Climate Control Product Family Christian Marsais Vice-President, Compressors Product Family Christophe Périllat-Piratoine Vice-President, Switches & Detection Systems Product Family

2.2. Board of Directors

2.2.1. Composition of the Board of Directors

The following table includes the names of the members of Valeo's Board of Directors at the filing date of this registration document, together with their age, the date on which they were first appointed, and the start and end dates of their current terms of office. Information is also provided on the main positions that they hold outside the Company and other directorships and positions that they have held in companies other than Valeo subsidiaries during the past five years. The current directorships and positions set out below are those held at January 31, 2007 except for Helle Kristoffersen for whom the information is based on the date she was appointed as a Director by the Board to fill the seat left vacant by Véronique Morali.

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General information about the issuer

Name/ business address

Number of Valeo shares held 4,300

First Start of term appointed of office

End of term of office

Main Main positions position held outside held the Company within the Company Chairman and Chief executive Officer Management positions and directorships in several Valeo Group subsidiaries (see p. 140)

Other directorships and positions held in companies other than Valeo subsidiaries during the past five years · Chairman of Valeo's Management Board from May 9, 2001 to March 2003 when the Company changed its corporate governance structure to a company governed by a Board of Directors · Director of CeDeP* and Arkema* EDF Group · Chairman of the Board of Directors of eDF energy (United Kingdom)* and eDF International* · Director of edison (Italy)*, transalpina di energia (Italy)*, and eDF trading (United Kingdom) · Member of the Supervisory Board of enBW (Germany)* Outside the EDF Group · Director of Aventis Pharma, Inc. (United States) · Member of the Management Board of hoechst Marion Roussel AG (Germany) and Aventis Pharma AG (Germany) · Chairman of the Supervisory Board of Aventis Pharma Gmbh (Germany) · Member of the Supervisory Board of Dalkia*, Morphosys (Germany)*, and Aventis Pharma SA

Thierry Morin Aged 55 Valeo 43, rue Bayen ­ 75017 Paris France

March 21, 2001

March 31, General 2003 Shareholders' Meeting to be called to approve the 2006 financial statements

Daniel Camus Aged 55 eDF ­ Direction Finance 22-30 avenue de Wagram ­ 75382 Paris Cedex 08 France

200

May 17, 2006

May 17, General 2006 Shareholders' Meeting to be called to approve the 2009 financial statements

Chief Operating Officer in charge of finance and international development in the eDF group

*

Current directorships and positions.

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Name/ business address

Number of Valeo shares held 2,000

First Start of term appointed of office

End of term of office

Main Main positions position held outside held the Company within the Company Senior executive Vice-President of Veolia environnement

Other directorships and positions held in companies other than Valeo subsidiaries during the past five years Veolia Group · Chairman of the Board of Directors of Ve Services-Ré · Director of Veolia transport*, Veolia Propreté*, Ve ServicesRé, Veolia UK (United Kingdom), Veolia environmental Services Plc (United Kingdom)*, and Veolia eS holdings Plc (United Kingdom)* · Member of the Managing Board of Vivendi environnement · Member of the Supervisory Board of Veolia eau* and Dalkia France* · Member of Dalkia's A and B Supervisory Boards* Outside the Veolia Group · President and Chairman of VenAO (United States)* · Director of Rhodia*, VenAC (United States)*, Statoil (norway), FCC espagne, and Cementos Portland espagne · executive Vice-President of Renault SA · Director of Belgacom*, C.n.P. (Compagnie nationale à Portefeuille/A. Frère Group)*, Deceuninck Plastics*, and Alcopa* · Member of the executive Committee and Director of FeBIAC (the Belgian Federation of the Car and twowheeler Industries)* · Member of the Management Committee of FeB (the Belgian Business Federation)

Jérôme Contamine Aged 49 Veolia environnement 38, avenue Kléber ­ 75116 Paris France

May 17, 2006

May 17, General 2006 Shareholders' Meeting to be called to approve the 2009 financial statements

Pierre-Alain De Smedt Aged 63 Résidence Château d'Issan hofstraat 31 B ­8400 Oostende Belgium

200

March 7, 2005

March 7, General 2005 Shareholders' Meeting to be called to approve the 2006 financial statements

Chairman of FeBIAC (the Belgian Federation of the Car and two-wheeler Industries) and director of various companies in Belgium

* Current directorships and positions.

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Name/ business address

Number of Valeo shares held 500

First Start of term appointed of office

End of term of office

Main Main positions position held outside held the Company within the Company honorary Chairman of Legrand S.A.

Other directorships and positions held in companies other than Valeo subsidiaries during the past five years Legrand Group · Chairman and Chief executive Officer of Legrand S.A. · Chairman of Legrand S.A.S., Lumina Management S.A.S., B. ticino (Italy), and FIMAF S.A.S. · Chief executive Officer of Legrand holding S.A., FIMeP S.A., and Lumina Parent (Luxembourg) · Director of Legrand holding S.A.*, Legrand S.A.*, Legrand France*, B. ticino (Italy), Bufer elektrik (turkey), eltas elektrik (turkey), Legrand española (Spain), Lumina Parent (Luxembourg), Pass & Seymour (United States), the Wiremold Company (United States), and FIMeP S.A. Outside the Legrand Group · Director of BnP Paribas* and France telecom · Member of the Supervisory Board of Michelin* and Galeries Lafayette · Member of the Banque de France Consultative Committee*, the Administrative Board of F.I.e.e.C. (Fédération des Industries electriques, electroniques et de Communication), the Administrative Board of Gimelec (Groupement des industries de l'équipement électrique, du contrôlecommande et des services associés), and the Board of Promotelec (Promotion de l'installation électrique dans les bâtiments neufs et anciens)

François Grappotte Aged 71 Legrand 128, avenue du Maréchal de Lattre de tassigny ­ 87045 Limoges Cedex France

March 31, 2003

March 31, General 2003 Shareholders' Meeting to be called to approve the 2006 financial statements

* Current directorships and positions.

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Name/ business address

Number of Valeo shares held 100

First Start of term appointed of office

End of term of office

Main Main positions position held outside held the Company within the Company Managing Partner of espace Développement

Other directorships and positions held in companies other than Valeo subsidiaries during the past five years · Chairman and Chief executive Officer of Matra · Chairman of the Supervisory Board of Matra Automobile

Philippe Guédon Aged 73 espace Développement 16, rue troyon 92316 Sèvres France Yves-André Istel Aged 71 Rothschild, Inc. 1251 Avenue of the Americas, 51 floor new york, ny 10020, USA

st

March 31, 2003

500

January 29, 1992

March 31, General 2003 Shareholders' Meeting to be called to approve the 2006 financial statements March 31, General 2003 Shareholders' Meeting to be called to approve the 2006 financial statements

Senior Advisor to Rothschild, Inc.

Helle Kristoffersen** Aged 43 Alcatel-Lucent 54 rue La Boétie 75008 Paris France

-

March 22, 2007

March 22, General 2007 Shareholders' Meeting to be called to approve the 2006 financial statements

Vice President, Corporate Strategy Alcatel-Lucent

Rothschild Group · Vice-Chairman of Rothschild, Inc. · Director of Banque Rothschild & Cie Outside the Rothschild Group · Director of Compagnie Financière Richemont AG*, Imperial Sugar Company*, Chalone Wine Group, and tiedemann trust Company · Member of the Supervisory Board of Valeo · Vice President, economic Analysis of the Alcatel group

* Current directorships and positions. ** Appointed to fill the seat left vacant by Véronique Morali.

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Name/ business address

Number of Valeo shares held

First Start of term appointed of office

End of term of office

Main Main positions position held outside held the Company within the Company Chairman of the Management Board of Wendel Investissement

Other directorships and positions held in companies other than Valeo subsidiaries during the past five years Wendel Group · Chairman of the Supervisory Board of editis holding* · Vice-Chairman and Chairman* of the Supervisory Board of Bureau Veritas · Chief executive Officer of Compagnie Générale d'Industrie et de Participations - CGIP · executive VicePresident of Wendel Investissement · Member of the Supervisory Board of Oranje-nassau Groep B.V.* · Director of Legrand holding*, Legrand S.A.*, Lumina Parent, Wendel Investissement, and Bureau Veritas · Permanent representative of Sofu on the Supervisory Board of Bureau Veritas Outside the Wendel Group · Chairman of Banque Directe · Chairman of the Board of Directors of Winvest S.A. (Luxembourg)* · Legal Manager of Granit (SARL)*, JBMn (Luxembourg)*, and Winvest Conseil (Luxembourg)* · Member of the General Management Committee of BnP Paribas · Member of the Supervisory Board of Valeo · Director of Cap Gemini

Jean-Bernard Lafonta Aged 45 Wendel Investissement 89, rue taitbout 75009 Paris France

100 December 7, 2001

March 31, General 2003 Shareholders' Meeting to be called to approve the 2006 financial statements

* Current directorships and positions.

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Name/ business address

Number of Valeo shares held 500

First Start of term appointed of office

End of term of office

Main Main positions position held outside held the Company within the Company Chairman of A.M. Conseil

Other directorships and positions held in companies other than Valeo subsidiaries during the past five years · Chairman of the Supervisory Board of Le Monde* · Chairman of Société des Lecteurs du Monde · Director of Fnac*, Vinci*, and yves Saint-Laurent S.A. · Member of the Supervisory Board of Valeo · Member of the Supervisory Board of Pinault-PrintempsRedoute Thales Group · Chairman of thales Avionics Lcd* · Director of thales Corporate Ventures* Outside the Thales Group · Chairman of the Supervisory Board of novaled* and Riber* · Member of the Management Board of eRA · Member of the Supervisory Board of Valeo · Correspondent member of the Académie des Sciences* · Member of the Académie des technologies* · honorary Chairman of the european Industrial Research Management Association (eIRMA)*

Alain Minc Aged 58 A.M. Conseil 10, avenue George V 75008 Paris France

July 4, 1986

March 31, General 2003 Shareholders' Meeting to be called to approve the 2006 financial statements

Erich Spitz Aged 76 thales RD 128 ­ 91767 Palaiseau Cedex France

144

June 24, 1987

March 31, General 2003 Shareholders' Meeting to be called to approve the 2006 financial statements

Advisor to thales

* Current directorships and positions.

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thierry Morin joined the Valeo Group in 1989 as Finance Director of the Clutches Branch. He then became Finance Director of the Engine Cooling Branch and subsequently Group Financial Control Director. In 1997, he was appointed Deputy Managing Director and Director of Financial and Strategic Operations. On June 5, 2000 he was appointed Senior Vice-President in charge of Finance, Strategic Operations and Information Systems and became a member of the Management Committee. He was named Chairman of the Board of Directors on March 21, 2001, Chairman of the Management Board on May 9, 2001 and on March 31, 2003 was appointed as Valeo's Chairman and Chief Executive Officer. Before joining Valeo, Thierry Morin was Assistant Director of the ISD Division at Thomson Consumer Electronics in Los Angeles. He also held various financial positions during ten years spent with Schlumberger. Thierry Morin has a Masters degree in Management from the University of Paris-IX Dauphine. Daniel Camus is Chief Operating Officer in charge of finance and international development in the EDF group. He joined the EDF group in 2002 after working in the chemicals and pharmaceuticals industry for 25 years as part of the Hoechst-Aventis group in Germany, the United States, Canada and France. He is a graduate of the Paris Political Studies Institute (Institut d'Études Politiques de Paris) and holds a doctorate in Economics. He is also an Associate Professor in Management Sciences. Jérôme Contamine joined Veolia in 2000 as Executive VicePresident, Finance, before becoming Executive Vice President responsible for cross-functional activities in 2002 and Senior Executive Vice-President in 2003. Between 1988 and 2000, he held several posts within the Elf Group including Financing and Treasury Director (1991 to 1994), Assistant Director, Europe and the USA for the Exploration and Production Division, CEO of Elf Norway (1995-1998), and Head of Continental European and Central Asian Operations for the Exploration and Production Division (2000). Jérôme Contamine graduated from École Polytechnique and École Nationale d'Administration and is a special adviser to the French Audit Commission (Cour des Comptes). Pierre-Alain De Smedt is qualified as a Sales Engineer and holds a Commercial and Financial Sciences degree from the Université Libre de Bruxelles in Belgium. He began his career in 1966 in the IT Department of Solvay before joining Bosch Belgium in 1971 as Financial Director responsible for Purchasing, Logistics, Organization and IT. He was appointed to the same position within the Volkswagen group in 1973 and in 1985 was nominated Chairman of the Board of Directors of the Volkswagen subsidiary responsible for logistics, purchasing, organization and IT. In 1988, he became a Director of Tractebel and Chairman of the Executive Committee of the electricity companies Ebes, Intercom and Unerg.

In 1991, Pierre-Alain De Smedt was appointed Managing Director of Autolatina ­ the leading Latin American private company and a joint venture between Volkswagen and Ford ­ and in 1997 he was named Chairman of Seat, a subsidiary of the Volkswagen group. In 1999, he joined Renault as Executive Vice-President, Industry and Technology and is currently a member of the Executive Committee of the Renault Group and of the Renault/Nissan Alliance Board. In 2006, he also took on the role of Chairman of the FEBIAC (the Belgian Federation of the Car and Two-wheeler Industries). François Grappotte is Honorary Chairman of Legrand S.A. He joined Legrand S.A. in 1983 and went on to become Chief Executive Officer and subsequently Chairman and CEO, a position he held until December 31, 2003. He then served as Chairman of the company until March 17, 2006. After seven years at the French Ministry of Industry and Ministry of Finance and the Economy from 1963 through 1970, François Grappotte joined Rothschild Bank as a Deputy Director. He was subsequently appointed Assistant Director and then Director (1970-1972) before taking up the position of General Secretary at La Compagnie Electromécanique (CEM) in 1973. He went on to become the Chief Executive Officer of CEM, a position which he held until 1983. François Grappotte has a degree in law and post-graduate diplomas in political economics and economic and financial sciences from the Law Faculty of the University of Paris. He also graduated from the Paris Political Studies Institute (Institut d'Études Politiques de Paris) and École Nationale d'Administration (ENA). Philippe Guédon has been Managing Partner of Espace Développement since 2003. He joined Simca in 1956 as an After-Sales Service Engineer and went on to become a Research Engineer until 1965. He then joined Matra, where he also held the post of Research Engineer, and in 1983 took on the position of Technical Director. In that year he was appointed as Chairman and Chief Executive Officer of Matra ­ a post he occupied until 2003. Philippe Guédon was the designer of the Matra 530, the Bagheera, the Rancho, the Murena, the Espace and the Avantime. He graduated as an engineer from the Arts et Métiers school in Angers, France in 1956. yves-André Istel is currently Senior Advisor to Rothschild Inc. in New York. From 1964 to 1983 he was a Partner and Director of Kuhn, Loeb Inc. and subsequently Lehman Bros. He then held the position of Co-Chairman of First Boston International between 1984 and 1988 before taking up the post of Chairman of International Wasserstein Perella between 1988 and 1992. He was then appointed as ViceChairman of Rothschild Inc., a position he held from 1993 to 2002. Yves-André Istel graduated from the University of Princeton in 1957.

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Jean-Bernard Lafonta is currently the Chairman of the Management Board of Wendel Investissement. He began his career as an engineer and held various public functions between 1986 and 1992, including within Ministerial cabinets. In 1993 he joined the M&A team of Lazard Bank as Deputy Managing Director in Paris. In 1996 he joined BNP as Strategy Director working with Michel Pébéreau who in the same year requested him to take responsibility for all of the Bank's capital markets activities. In 2000, he became a member of BNP Paribas' General Management Committee and was appointed Chairman of Banque Directe before joining the Wendel Investissement Group as Director and Executive Vice-President in September 2001. Jean-Bernard Lafonta graduated from École Polytechnique and has an engineering degree from Corps des Mines de Paris. Alain Minc has been the Chairman of A.M. Conseil since April 1991. Earlier in his career, he held the following positions: Finance Director of Compagnie de Saint-Gobain (1979-1986); Chairman of the Orient-Gestion SICAV fund (1984-1985); Chairman of Sofimatique (1979-1983); Chairman and CEO of Air Industrie (19821984), then Director, Vice-Chairman and CEO and subsequently Chairman of Cochery Bourdin et Chaussé (1985-1986); Chairman of La Société des Lecteurs du Monde (1985-2003); CEO of Société Générale d'Entreprises (1985-1986); Director and CEO (19861989) and subsequently Vice-Chairman and CEO (1989) of Cerus; Vice-Chairman and CEO of Dumenil Leblé S.A., renamed Cerus (1989-1991). Alain Minc graduated as a civil engineer (Ingénieur Civil des Mines) and has post-graduate diplomas from the Paris Political Institute (Institut d'Études Politiques de Paris) ­ Major 1971 ­ and École Nationale d'Administration (ENA) (Major ­ Economic Administration ­ Léon Blum class 1975). erich Spitz joined Compagnie Générale de TSF in 1958 (since renamed Thomson-CSF). He began his career with the company as Director of the Central Research Laboratory before becoming Research and Development Director of the Thomson Group from 1983 to 1994. Eric Spitz graduated from Prague Polytechnic University and holds a doctorate in science. On March 22, 2007 helle Kristoffersen was appointed by the Board to fill the seat left vacant by Véronique Morali who has stepped down. Shareholders are expected to be asked to ratify Helle Kristoffersen's appointment at the next General Shareholders' Meeting. Helle Kristoffersen is Vice President of Corporate Strategy and Secretary of the Strategy Committee of the Alcatel-Lucent group. She joined what was previously the Alcatel group in 1994 as Head of Financial Operations. Between 1989 and 1991 she worked as an analyst in the mergers and acquisitions department at Banque Lazard & Cie before joining

the Bolloré group where she held the following positions: Deputy Financial Director responsible for mergers and acquisitions, Head of Operational Strategy for the Maritime Division and Head of Mergers and Acquisitions reporting to the Chairman and CEO. Helle Kristoffersen is a graduate of Ecole Normale Supérieure and of Ecole Nationale de la Statistique et de l'Administration Economique (ENSAE). She also holds a Masters degree in Econometrics from Sorbonne University Paris I.

2.2.2. Declarations concerning members of the Board of Directors

As far as the Company is aware, there are no family relationships between the members of the Board of Directors. As far as the Company is aware, in the past five years, (i) none of the members of the Board of Directors has received any convictions for fraudulent offences, (ii) none of the members of the Board of Directors has been involved in any bankruptcies, receiverships or liquidations, (iii) no official public incriminations and/or sanctions have been issued against any member of the Board of Directors by statutory or regulatory authorities (including designated professional bodies), and (iv) none of the members of the Board of Directors has been disqualified by a court of law from acting as a member of the administrative, management or supervisory bodies of an issuer or from acting in the management or conduct of the affairs of any issuer. To the best of the Company's knowledge there are no potential conflicts of interest between the duties of the members of the Board of Directors of Valeo and their private interests and/or any other duties. As far as the Company is aware, none of the members of the Board of Directors has agreed to any restrictions concerning the disposal of their holdings in the Company's securities within a certain period of time, other than the restrictions set down by law or the Company's bylaws or in the Company's stock option, stock grant or employee share ownership plans, under which certain members of the Board of Directors have acquired shares. To the best of the Company's knowledge there are no arrangements or understandings with major shareholders, customers or suppliers pursuant to which any member of the Board of Directors was selected as a Director or member of Valeo's Executive Management.

2.2.3. Service contracts between the members of the Board of Directors and the Company or any of its subsidiaries

No service contracts have been entered into between the members of the Board of Directors and the Company or any of its subsidiaries providing for benefits upon termination of employment.

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2.3. Organization and operation of the Board of Directors

On March 31, 2003, the Company's Board of Directors adopted a set of Internal Rules of Operation in line with the recommendations set out in the Bouton report on promoting better corporate governance in French listed companies. These internal rules set out the Board's modus operandi and the procedures to be followed when appointing Board members. They are applied alongside the provisions set down by law, the applicable regulations and the Company's bylaws.

Group's management that may compromise his or her ability to exercise freedom of judgment. In particular, independence is presumed to exist when a Director: (i) is not currently and has not been in the past five years, an employee or a corporate officer of Valeo, or an employee or Director of a company consolidated by Valeo; (ii) is not a corporate officer in a company in which the Company directly or indirectly holds a directorship, or in which an employee appointed in that role or a corporate officer of the Company (current or having been so in the past five years) holds a directorship; (iii) is not a customer, supplier, investment banker or commercial banker which is material for the Company or the Group, or for which the Company or Group represents a material proportion of the entity's activity; (iv) does not have any close family ties with a corporate officer of the Company; (v) has not been an auditor of the Company in the past five years; (vi) has not been a Director of the Company for more than twelve years on the date on which they were appointed to their current term of office. For Directors holding at least 10% of the Company's capital or voting rights, or representing a legal entity that holds such a stake, the classification as independent takes into account the Company's ownership structure and any potential conflict of interests. In application of these criteria, at its meeting of November 20, 2006, the Board of Directors noted that: · one Director holds the positions of Chairman and Chief Executive Officer of the Company: Thierry Morin; · three Directors have been members of the Board of Directors (and previously the Supervisory Board) for over twelve years: Alain Minc, Yves-André Istel and Erich Spitz; · seven directors are independent based on the criteria set out in the Board's Internal Rules of Operation: Daniel Camus, Jérôme Contamine, Pierre-Alain De Smedt, François Grappotte, Philippe Guédon, Jean-Bernard Lafonta and Véronique Morali.

2.3.1. Composition of the Board and appointment of Directors

The Company's bylaws provide that the Board of Directors must be made up of at least three and no more than eighteen members (subject to any amendments in line with the applicable law). The Board of Directors currently has eleven members. There are no Directors elected by employees or any non-voting Directors. Directors are appointed by shareholders in a General Meeting on the recommendation of the Board of Directors, which in turn receives proposals from the Nomination and Remuneration Committee. Members of the Board are appointed for renewable four-year terms which expire at the close of the Annual Shareholders' Meeting called to approve the accounts for the year in which their terms expire. Where one or more seats on the Board become vacant due to the death or resignation of any member or members, the Board of Directors may appoint new members on a temporary basis until the next Shareholders' Meeting, in accordance with the applicable legislation. The term of office of the Chairman may not exceed his term of office as a Director. The proportion of Board members over the age of 70 may not exceed one third. This age limit provision applies both to individuals and to permanent representatives of legal entities holding directorships. The Chairman's term of office expires at the latest at the close of the General Shareholders' Meeting held to approve the accounts for the year in which he reaches his seventieth birthday. Directors may be removed from office by shareholders in a General Meeting at any time.

2.3.3. Roles and responsibilities of the Board of Directors

The Board of Directors represents all shareholders. It determines the Company's overall business strategies and oversees their implementation. Subject to the powers expressly reserved for Shareholders' Meetings and within the limits of the corporate purpose, the Board of Directors deals with any issues relating to the efficient functioning of the Company and makes any and all decisions relating thereto. The Board devotes one meeting per year to reviewing the Group's overall industrial and financial strategies.

2.3.2. Independent Directors

In accordance with its Internal Rules of Operation, each year prior to the publication of the Annual Report, the Board of Directors assesses the position of each Director with respect to the independence criteria set out in the Internal Rules of Operation, in line with the recommendations of the Bouton report. Under these rules, independent Directors are those who do not have any relations whatsoever with the Company, the Group or the

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The Chairman convenes meetings of the Board as often as required in the general interest of the Company and at least once a quarter. The dates for the quarterly meetings are issued at the beginning of each fiscal year at the latest. In 2006, the Board of Directors held ten meetings with a 92% average attendance rate (in person or by proxy). Board meetings are chaired by the Chairman of the Board or, in his absence, by any Director who has been temporarily authorized to chair Board meetings, a Vice-Chairman or a Director appointed for the role by the Board of Directors. Board meetings are only validly constituted if at least half of the members are present or deemed present (in accordance with the law and the Company's bylaws), excluding members attending by proxy. Decisions are taken based on a majority vote of the members present, deemed present, or represented, in accordance with the law and the Company's bylaws. Each member who is present or represented has one vote and each member present may only represent one other member. In the case of a split decision, the Chairman has the casting vote. Minutes are drawn up after each Board Meeting, which are signed by the Chairman and one other Director. In accordance with its Internal Rules of Operation, the Board of Directors includes an assessment of Board performance on the agenda of one meeting per year. In 2006, this assessment was performed with the assistance of an external firm during the last quarter of the year. A detailed questionnaire was sent to all Directors concerning their assessment of the way in which the Board operates and suggestions for improvement. The topics covered included the operation and composition of the Board, Directors' access to information, the choice of issues discussed, the quality of the discussions, and the general running of the Board Committees. The Directors' replies were analyzed and the findings presented at the meetings of the Board held on February 12, 2007 and March 22, 2007. The results of this assessment are provided on page 131 in the report of the Chairman of the Board of Directors on the conditions for preparing and organizing the work conducted by the Board and internal control procedures.

out their duties. To this end, the Chairman provides Directors with the data and documents required in order for them to fully perform their duties. As compensation for the work carried out by Directors, shareholders in a General Meeting may grant an annual fixed amount of attendance fees which may be freely allocated by the Board among its members. The Board may also grant Directors exceptional compensation for specific assignments or tasks entrusted to them. The Board of Directors is responsible for setting the Chairman's compensation. Article 14 of the Company's bylaws stipulates that each Director must hold at least 100 Valeo registered shares throughout his or her term of office. On accepting their position, each member of the Board of Directors and the Group's Executive Management team agrees to a Code of Conduct in relation to transactions involving the Company's securities. This Code sets out the legal and regulatory provisions applicable to them in relation to declaring transactions concerning those securities. It also specifies the periods during which members of the Board and the Group's Executive Management team are prohibited from trading in the Company's securities and recalls the fact that they may not carry out any such transactions based on insider information.

2.4. Board Committees

The Board of Directors has set up committees in order to enhance its operation and to provide assistance with preparing its decisions. The following standing committees were originally created: the Audit Committee, the Strategy Committee, the Nomination Committee and the Remuneration Committee. Each of the Board Committees is governed by a set of internal rules approved by the Board of Directors. At the Board meeting of December 14, 2006, the Nomination Committee was merged with the Remuneration Committee and the Strategy Committee was dissolved. The Board therefore currently has two standing committees ­ the Audit Committee and the Nomination and Remuneration Committee. Further details relating to the composition and running of these standing committees are provided on page 131 in the report of the Chairman of the Board of Directors on the preparation and organization of the Board's work and internal control procedures.

2.3.4. Directors' rights and duties - Compensation

The Board's Internal Rules of Operation impose certain duties on Directors in order to ensure that they are aware of the rules and regulations applicable to them, that conflicts of interest are avoided, that they dedicate the necessary time and attention to their function and that they respect the applicable law relating to multiple directorships. Members of the Board of Directors are also responsible for ensuring that they have all the necessary information to carry

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3. Compensation paid to senior managers and members of the Board of Directors

The Nomination and Remuneration Committee plays a central role in determining the compensation paid to Valeo's corporate officers and members of the Board of Directors. It reviews the compensation paid to corporate officers and makes recommendations, especially in relation to the variable portion. The Committee defines the rules used to set this variable portion, taking into account the officers' performance over the year and the medium-term strategy of the Company and the Group. It is also responsible for ensuring that these rules are applied. In addition, the Nomination and Remuneration Committee provides recommendations to the Board of Directors on the Group's general stock option policy and specific stock option grants, as well as on pensions granted to corporate officers and all other forms of benefits. The Nomination and Remuneration Committee's tasks also encompass recommending to the Board an overall amount of attendance fees payable to Directors to be submitted to shareholders for approval, as well as rules relating to the allocation of these fees and the individual amounts payable to each Director based on their attendance record at meetings of the Board, and where appropriate, Board Committees. Finally, the Nomination and Remuneration Committee is informed of the compensation policy applicable to the senior managers of the Company and other Group companies who are not corporate officers.

in kind which break down as follows: 12,401 euros for the use of a company car and 6,850 euros in contributions to the business leaders social welfare fund (Garantie Sociale des Chefs d'Entreprise). Variable compensation Thierry Morin did not receive any variable compensation in 2006. Attendance fees paid by the Company In 2006, Thierry Morin received 35,000 euros in attendance fees in his capacity as a Director of Valeo. Compensation paid by controlled companies Thierry Morin received total gross compensation of 120,883 euros from companies controlled by Valeo (as defined in article L. 23316 of the French Commercial Code). This total was made up of 45,750 euros in attendance fees and 75,133 euros in contributions to a pension fund. Thierry Morin did not receive any benefits in kind in 2006 from companies controlled by Valeo. Stock options and shares awarded free of consideration (share grants) In view of the prohibited periods set down by French stock exchange regulations, the Board of Directors did not allocate any stock options or share grants to Thierry Morin during 2005. This allocation was deferred until March 2006, and comprised 150,000 stock options and 50,000 shares free of consideration, in accordance with the following terms and conditions: · the purchase price of the shares to be issued on exercise of the options is set at 33.75 euros. Half of the options granted may be exercised as from March 3, 2008 and all of the options may be exercised as from March 3, 2009. The shares obtained on exercise of the options may not be sold before March 3, 2010. If the options are not exercised they will be forfeited on March 2, 2014; · the vesting date for the shares awarded free of consideration was set by the Board of Directors as June 3, 2008 subject to the following conditions: (i) Thierry Morin must still hold an

3.1. executive Management

3.1.1. Compensation paid to the Chairman and Chief Executive Officer

The Board of Directors sets the compensation paid by Valeo to Thierry Morin, the Company's Chairman and Chief Executive Officer, based on recommendations provided by the Nomination and Remuneration Committee. Fixed compensation and benefits in kind The total gross fixed compensation paid to Thierry Morin in 2006 came to 1,519,538 euros, including 19,251 euros in benefits

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employment contract or a corporate officer's position within the Valeo Group at June 3, 2008, and (ii) the achievement of certain performance criteria concerning operating margin targets for 2006 and 2007 (applicable to the vesting of 30,000 of the total shares granted). For the same reasons as those described above, at its March 7, 2007 meeting, the Board of Directors granted Thierry Morin 200,000 stock options in relation to 2006, in accordance with the following terms and conditions: · the purchase price of the shares to be issued on exercise of the options is set at 36.97 euros. Half of the options granted may be exercised as from March 7, 2009 and all of the options may be exercised as from March 7, 2010. The shares obtained on exercise of the options may not be sold before March 7,

2011. If the options are not exercised they will be forfeited on March 6, 2015; · in accordance with French Act no. 2006-1770 issued on December 30, 2006 relating to the promotion of employee profit-sharing and share ownership, if Thierry Morin exercises the stock options granted to him he will be required to hold, in registered form, at least 75% of the number of shares issued on exercise of said options until such time as he leaves his position. The calculation of this 75% holding will be made after the sale of the number of shares necessary to finance the exercise of the options and pay the related taxes and transaction costs. In 2006, Thierry Morin did not exercise any options granted in previous years.

Compensation paid to the Chairman and Chief executive Officer over the last three years The table below provides a breakdown of the total gross compensation and benefits paid to Thierry Morin over the last three years.

Compensation paid by the Company Fixed portion 1,272,760 1,284,000 1,519,538 Variable portion 150,000 0 0 Attendance fees 35,000 35,000 35,000 Benefits in kind 17,892 18,395 19,251 Compensation paid by Total gross controlled compensation companies and benefits 116,922 118,758 120,883 1,592,574 1,456,153 1,694,672

(In euros)

2004 2005 2006

Pension scheme Thierry Morin is still a member of the supplementary pension scheme set up for members of the former Management Board, as approved by the Supervisory Board on October 17, 2002. This system is designed to top up existing pension benefits (statutory pension, ARRCO, AGIRC, etc.) to enable beneficiaries to acquire benefits representing 2% of their final salary per year of service with the Group. The total amount of pension benefits may not exceed 60% of a beneficiary's final salary and the scheme will only apply to beneficiaries who have a minimum of 15 years' service in the Valeo Group when they retire, and for whom Valeo or one of its subsidiaries was their last employer at their retirement date. termination benefits In the event that Thierry Morin leaves the Company, either by way of a decision of the Board of Directors, or at his own initiative in the event of a difference of opinion concerning the strategy implemented by the Board further to a public tender offer, the amount of his termination benefits will correspond to three times his last annual compensation, excluding bonuses. Such termination benefits will not be payable in the event of misconduct.

3.1.2. Total compensation paid to other Group executive managers

The total gross compensation paid to Valeo's Functional and Operational Directors in 2006 amounted to 10,820,943 euros, compared with 10,438,062 euros in 2005 and 10,895,652 euros in 2004. Of the 2006 total, 9,240,726 euros corresponded to fixed compensation, 1,199,687 euros to variable compensation, 240,606 euros to benefits in kind, 45,735 euros to attendance fees, and 94,189 euros to profit-sharing. During the year, the Group's Functional and Operating Directors (excluding corporate officers) also received a total of 288,000 stock options.

3.2. Members of the Board of Directors

Directors receive attendance fees, which are paid every six months. These fees are not, however, paid to Directors if their average attendance at Board Meetings, or where applicable, at Committee meetings is lower than 50% during the six months in question.

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The General Shareholders' Meeting of March 31, 2003 set the aggregate annual total of attendance fees paid to Directors at 450,000 euros, an amount which has remained unchanged since that date.

In 2006, attendance fees were allocated as follows by the Board of Directors: 20,000 euros to each Director and an additional 15,000 euros for each Director who is a member of one of the Board Committees.

Total attendance fees paid by the Company to members of the Board of Directors amounted to 305,000 euros in 2006 (301,250 euros in 2005), breaking down as follows:

Amount in euros thierry Morin Daniel Camus Jérôme Contamine Pierre-Alain De Smedt François Grappotte Philippe Guédon erich Spitz Alain Minc Véronique Morali Jean-Bernard Lafonta yves-André Istel 2006 35,000 10,000 10,000 35,000 35,000 35,000 27,500 35,000 27,500 35,000 20,000 2005 35,000 18,750 35,000 35,000 35,000 35,000 35,000 35,000 27,500 2004 35,000 35,000 35,000 35,000 35,000 10,000 35,000 25,000

Apart from Thierry Morin (see pages 160 and 161) and Yves-André Istel, no other compensation or benefits were paid to members of the Board of Directors during the year. Other than Thierry Morin,

no Directors hold stock options or were awarded share grants during the year.

3.3. Information concerning stock options and share grants

3.3.1. Stock options granted and exercised during the year

No stock options were granted to Directors in 2006 apart from to Thierry Morin. In addition, no Board members exercised any stock options during the year.

Weighted average exercise price

Stock options granted to and exercised by members of the Board of Directors Options granted in 2006 by Valeo* and/or other Group companies Options exercised in 2006

Number of options granted/ exercised 150,000 stock purchase options** none

Expiry date

Date of Board Meeting March 3, 2006

33.75 March 2, 2014

* No Group company other than Valeo issued stock options during the year. ** In view of the prohibited periods under the applicable French stock exchange regulations, in 2005 the Board of Directors did not grant any stock options to Thierry Morin in relation to that year. The 150,000 stock options with an exercise price of 33.75 euros set out in the table above were therefore allocated on March 3, 2006 in relation to 2005. For the same reasons, at its March 7, 2007 meeting the Board of Directors granted Thierry Morin 200,000 stock purchase options for 2006 (see page 161).

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Stock options granted to and exercised by the ten employees with the highest number of options Options granted in 2006 by Valeo* and/or other Group companies to the ten employees of Valeo or other Group companies receiving the highest number of options Options exercised in 2006 by the ten employees of Valeo or other Group companies exercising the highest number of options

* No Group companies other than Valeo issued stock options during the year. ** Out of a total of 1,309,250 stock options allocated. ***Thirteen beneficiaries received the same number of shares in second position.

Number of options granted/ exercised 175,000 ** stock purchase options (16 beneficiaries***) 26,500 stock subscription options

Weighted average exercise price

Expiry date

Date of Board meeting

32.63

nov. 19, 2014

nov. 20, 2006

27.31

-

-

3.3.2.

Share grants

No share grants were made to members of the Board of Directors other than Thierry Morin in 2006.

Number of shares received free of consideration 50,000*

Share grants to members of the Board of Directors Shares granted free of consideration in 2006 by Valeo and/or other Group companies

*

Date of Board of Directors' meeting March 3, 2006

In view of the prohibited periods under the applicable stock exchange regulations, in 2005 the Board of Directors did not grant any shares free of consideration to Thierry Morin relating to that year. The 50,000 shares concerned were therefore granted on March 3, 2006. The vesting date for these shares was set by the Board of Directors as June 3, 2008 subject to the following conditions: (i) Thierry Morin must still hold an employment contract or a corporate officer's position within the Valeo Group at that date, and (ii) the achievement of performance criteria concerning operating margin targets for 2006 and 2007 applicable to the vesting of 30,000 of the total shares granted.

In accordance with the authorization granted in the fifteenth resolution of the May 3, 2005 General Shareholders' Meeting, on November 20, 2006 the Board of Directors granted 100,000

Valeo shares free of consideration to a restricted number of highpotential managers, excluding corporate officers.

Share grants to the ten employees receiving the highest number of shares without consideration Shares granted free of consideration in 2006 to the ten employees of Valeo or related entities as defined in article L. 225-197-2 of the French Commercial Code, who received the highest number of such shares

Number of shares received free of consideration

Date of Board of Directors' meeting

18,500

nov. 20, 2006

The vesting date for these shares was set by the Board of Directors as November 20, 2009 (i.e. three years from the Board meeting at which the share grants were decided), provided that the beneficiaries hold an employment contract or a corporate officer's position within the Valeo Group at that date. Provided the above-mentioned condition is met, the beneficiaries will become the owners of the shares granted free of consideration on the vesting date and will have the same rights in relation

thereto as all other shareholders. They may not, however, sell the shares received for a period of two years as from the vesting date. In addition, at its March 7, 2007 meeting, the Board of Directors granted 100,000 shares free of consideration to some one hundred high-potential managers (excluding corporate officers), in accordance with the same terms and conditions as above. The vesting date for these shares was set as March 7, 2010.

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General information about the issuer

3.4. Pensions and other post-employment benefits

At December 31, 2006, the total amount of provisions set aside by Valeo and its subsidiaries for the payment of pensions and other post-employment benefits to members of the Board of Directors

and other members of the Group's Executive Management team came to 14 million euros, versus 13 million euros one year earlier. In 2006, the total expense recorded by Valeo and its subsidiaries for the payment of these benefits to former Board members and other Group executive managers came to 84,154.97 euros.

4. Related party transactions

4.1. transactions carried out during 2006

At its meeting of October 6, 2006 the Board of Directors authorized the signature of a consulting agreement with Yves-André Istel, covering assistance and advisory services provided in connection with the Group's merger with Visteon. Also during the year, Valeo carried out further transactions with its Spanish subsidiaries as part of the implementation of the 2004 Valeorizon international employee stock ownership plan. These transactions were authorized by the Board of Directors at its meeting of October 18, 2004. In addition, the brand licensing agreements entered into between the Company and several of the Group's operating subsidiaries ­ which were authorized by the Board of Directors on December 15, 2005 (see opposite) ­ remained in force in 2006.

4.2. transactions carried out during 2004 and 2005

At its meeting of December 15, 2005, the Board of Directors authorized the signature of brand licensing agreements between the Company and several of the Group's operating subsidiaries. On October 18, 2004 the Board of Directors authorized Valeo España SA, Valeo Service España SA, Valeo Iluminacion SA and Valeo Termico SA, to grant stock options exercisable for Valeo shares under the 2004 Valeorizon international employee stock ownership plan. Further details on these transactions can be found in the Statutory Auditors' special reports on regulated agreements relating to 2004 and 2005 and incorporated by reference in this registration document.

5. Governmental, legal and arbitration proceedings

To the best of Valeo's knowledge, during the past twelve months there were no governmental, legal or arbitration proceedings, including proceedings in process, pending or expected, that may have, or have had in the recent past, a significant impact on the financial position or profitability of the Company or the Group.

6. Insurance and risk coverage

The Group's insurance strategy is strongly rooted in risk prevention and protection, and is aimed at covering the major risks to which Valeo is exposed. The Group self-insures recurring risks with a view to optimizing insurance costs. All Group companies have taken out insurance policies with first-rate insurance companies for all major risks which could have a material impact on their business, results or assets and liabilities. The risks covered include property damage, business interruption, merchandise and equipment transportation, third party liability, and occupational illnesses and accidents.

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The table below provides details of the coverage limits by type of risk:

Type of insurance Property damage/business interruption General liability and product and environmental liability Merchandise and equipment transportation Directors' and Officers' liability employee-related liability claims Coverage limit

(In euros)

1 billion 200 million 4,575 million 60 million 50 million

Property damage cover is based on replacement value and business interruption cover on the margin lost over one year. In 2006, insurance premiums paid out by the Group in connection with its insurance coverage totaled 12.1 million euros.

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Fees paid by the Group to the Auditors and members of their networks

Fees paid by the Group to the Auditors and members of their networks

2006 (In millions of euros) AuDIT Issuer Consolidated subsidiaries Statutory audit and contractual audits Issuer Consolidated subsidiaries Audit-related services Sub-total ­ Audit OTHER SERVICES PROVIDED BY MEMBERS OF THE AuDITORS' NETWORKS TO CONSOLIDATED SuBSIDIARIES Legal and tax advisory services Other Sub-total ­ Other services TOTAL

PricewaterhouseCoopers (4.7) (4.7) (1.6) (1.6) (6.3)

%

KPMG (2.7) (2.7) (0.7) (0.7)

%

88%

(3.4)

89%

(0.9) (0.9) (7.2) 12%

(0.4) (0.4) (3.8) 11%

2005 (In millions of euros) AuDIT Issuer Consolidated subsidiaries Statutory audit and contractual audits Issuer Consolidated subsidiaries Audit-related services Sub-total ­ Audit OTHER SERVICES PROVIDED BY MEMBERS OF THE AuDITORS' NETWORKS TO CONSOLIDATED SuBSIDIARIES Legal and tax advisory services Other Sub-total ­ Other services TOTAL

PricewaterhouseCoopers (5.1) (5.1) (2.9) (2.9) (8.0)

%

KPMG (2.2) (2.2) (0.5) (0.5)

%

92%

(2.7)

90%

(0.7) (0.7) (8.7) 8%

(0.3) (0.3) (3.0) 10%

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General information about the Company's capital

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General information about the Company's capital

1. Changes in Valeo's share capital

At December 31, 2006, Valeo's share capital totaled 232,741,851 euros, represented by 77,580,617 common shares with a par value of 3 euros each, all in the same class and all fully paid-up. The Valeo share is quoted on the Eurolist market of Euronext. To the best of the Company's knowledge, none of these shares have been pledged.

Changes in capital since December 31, 2002 are as follows:

Changes

(In millions of euros)

Par Value Year 2002 Type of operation Issuance of shares on exercise of stock options Capital reduction by cancellation of treasury stock employee share issue Issuance of shares on exercise of stock options Capital reduction further to public tender offers Issuance of shares on exercise of stock options

Prermium

Total

Number of shares 277,125 1,200,000 1,575,296 51,333 (6,250,000) 70,260

Total number of shares 83,333,728 82,133,728 82,133,728 83,709,024

1 (4) 5 (19) -

11 (47) 28 1 (233) 2

12 (51) 33 1 (252) 2

2003 2004 2005

77,510,357 77,580,617

2006

In 2004, Valeo set up an international employee stock ownership plan entitled "Valeorizon 2004" and carried out an employee share issue under an authorization given at the Annual Shareholders' Meeting of April 5, 2004. The issue was described in an information memorandum registered with the French securities regulator (Autorité des marchés financiers - AMF) on August 27, 2004 under number 04-738. As a result of this operation, on December 16, 2004, Valeo placed on record a capital increase through the issue of 1,575,296 new shares, including 400,653 subscribed by Société Générale in order to offer employees of subsidiaries in certain countries outside France a leveraged formula equivalent to that offered through a corporate mutual fund. The shares were issued without pre-emptive subscription rights for existing shareholders, at a price of 23.65 euros per share, representing a 20% discount

to the average of the opening prices quoted for Valeo shares over the twenty trading days preceding the Board of Directors' decision setting the opening date of the offer period. During 2005, Valeo bought back 6,250,000 shares from the Company's shareholders, at a price of 40 euros each, representing approximately 7.5% of the Company's capital. The shares were purchased under a public share buyback offer and a simplified public tender offer, described in an information memorandum registered with the AMF on April 28, 2005 under number 05-323. The offer period ended on June 3, 2005 and on June 20, 2005 the Board of Directors canceled the acquired shares and reduced the Company's capital by 18,750,000 euros, representing the par value of the shares.

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General information about the Company's capital

2. Authorized, unissued capital

Securities concerned Date of Shareholders' Meeting (duration and expiry of authorization) Maximum amount of issue Maximum capital increase utilizations of authorizations during the year

Issues with pre-emptive subscription rights for existing shareholders Issuance of shares and/or share equivalents (A) AGM 1.52 billion euros worth of of May 3, 2005 ­ eighth resolution (authorization debt securities(A)+(C)+(G) given for a maximum of 2 months, expiring on July ceiling = 2 billion euros 3, 2007) Capital increase paid up by capitalizing income, retained earnings or additional paid-in capital (B) AGM of May 3, 2005 ­ eleventh resolution (authorization given for a maximum of 26 months, expiring on July 3, 2007)

6

76.22 million euros (A)+(B)+(C)+(D)+(e)+(F)+ (G) ceiling = 180 million euros 76.22 million euros (A)+(B)+(C)+(D)+(e)+(F)+ (G) ceiling = 180 million euros 76.22 million euros (A)+(B)+(C)+(D)+(e)+(F)+ (G) ceiling = 180 million euros 10% of the Company's share capital(A)+(B)+(C)+ (D)+(e)+(F)+ (G) ceiling = 180 million euros 2.1 million euros (A)+(B)+(C)+(D)+(e)+(F)+ (G) ceiling = 180 million euros

none

none

Issues without pre-emptive subscription rights for existing shareholders Issuance of shares and/or share equivalents (C) AGM 1.52 billion euros worth of of May 3, 2005 ­ ninth resolution (authorization given debt securities(A)+(C)+(G) for a maximum of 26 months, expiring on July 3, ceiling = 2 billion euros 2007) Issuance of shares for the purpose of stock-for-stock exchanges. AGM of May 3, 2005 ­ tenth resolution (authorization given for a maximum of 26 months, expiring on July 3, 2007) Issuance of shares to members of the employee stock ownership plan (e) AGM of May 3, 2005 ­ thirteenth resolution (authorization given for a maximum of 26 months, expiring on July 3, 2007) Employee stock options and share grants Options to purchase new shares AGM of April 5, 2004 ­ twelfth resolution (authorization given for a maximum of 38 months, expiring on June 5, 2007) Share grants (F) AGM of May 3, 2005 ­ fifteenth resolution (authorization given for a maximum of 26 months, expiring on July 3, 2007) 1,500,000 shares*

none

none

none

none

the number of new or existing shares granted free of consideration may not exceed 10% of the Company's capital.

(A)+(B)+(C)+(D)+(e)+(F)+ (G) ceiling = 180 million euros (A)+(B)+(C)+(D)+(e)+(F)+ (G) ceiling = 180 million euros

163,000 existing shares granted free of consideration none

Issues with or without pre-emptive subscription rights for existing shareholders Issuance of shares under a greenshoe option, with or Issue capped at 15% without pre-emptive subscription rights for existing of the initial issue 1.52 shareholders (G) AGM of May 3, 2005 ­ twelfth billion euros worth of resolution (authorization given for a maximum of 26 debt securities(A)+(C)+(G) months, expiring on July 3, 2007) ceiling = 2 billion euros

* * The twelfth resolution of the Combined Annual and Extraordinary Shareholders' Meeting of April 5, 2004 authorized the Board of Directors to grant stock purchase and/or subscription options. At the Combined Annual and Extraordinary Shareholders' Meeting of May 3, 2005, the authorization to grant stock purchase options was renewed. The 1,500,000 ceiling mentioned in the table above applies to the aggregate amount of shares allocated on the exercise of either stock purchase options or stock subscription options. The 2004 authorization was used during that year to grant 1,123,200 stock subscription options and 280,800 stock purchase options.

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3. Share equivalents

3.1. Bonds convertible into new shares and/or exchangeable for existing shares (OCeAnes)

Under the terms of the authorization granted by the General Shareholders' Meeting of June 10, 2002 (and confirmed on March 31, 2003 when the Company's management structure was changed), on July 25, 2003 Valeo issued 9,975,754 bonds convertible into new shares and/or exchangeable for existing shares (OCEANEs) with a nominal value of 46.40 euros each, representing an aggregate nominal value of 462,874,985.60 euros. These bonds ­ which mature on January 1, 2011 ­ are quoted on the Eurolist market of Euronext. They bear interest at 2.375% per annum and since August 4, 2003 may be exercised at any time. The bond issue is described in detail in the prospectus registered with the Commission des Opérations de Bourse on July 25, 2003 under number 03-707. On June 20, 2005, the Board of Directors adjusted the exercise conditions of the OCEANE bonds following the public share buyback offer and simplified public tender offer carried out in May and June 2005, which resulted in Valeo purchasing its own shares at an amount higher than the publicly quoted price. This adjustment was made in order to maintain the rights of the bondholders in accordance with article 242-11 of the March 23, 1967 Decree and with the OCEANE bond issue contract. Consequently, the conversion/exchange ratio applicable to the OCEANE bonds was amended from 1 share for 1 bond to 1.013 shares for 1 bond. At March 15, 2007, all of the OCEANE bonds were outstanding and were convertible and/or exchangeable for 10,105,439 shares, taking into account the adjustment due to the public share buyback offer and simplified public tender offer.

3.2. Stock option plans

The table on page 171 and 172 presents the stock option plans put in place since 2000. In accordance with article 174-9-A of the Decree dated March 23, 1967, following the public share buyback offer and simplified public tender offer, on June 20, 2005 the Board of Directors adjusted the number of shares underlying the Company's stock options. As a result, the exercise ratio was raised from 1 share to 1.01 shares for 1 stock option, with the number of shares to be allocated on the exercise of options rounded up to the nearest whole number. At December 31, 2006, 2,698,217 stock purchase options were outstanding, exercisable for 2,704,457 existing shares (including 6,240 related to the public share buyback offer and simplified public tender offer), and 3,706,313 stock subscription options were outstanding, exercisable for 3,744,050 new shares (including 37,737 related to the public share buyback offer and simplified public tender offer).

4. Other securities

Under the terms of the authorization granted by the General Shareholders' Meeting of May 27, 1998, Valeo issued 500 million euros worth of bonds on July 13, 2001 maturing on July 13, 2006, with a fixed annual interest rate of 5.625%. These bonds were redeemed at maturity. The General Shareholders' Meeting of June 10, 2002 granted the Management Board a five-year authorization in its sixth resolution to issue bonds subject to a ceiling of 2 billion euros. This authorization ­ which was confirmed on March 31, 2003 at the time of the change in Valeo's management structure ­ expires on June 10, 2007. The Board of Directors used the above authorization to set up a Euro Medium Term Notes (EMTN) program in October 2002, which has been regularly renewed since. Under the program set up on March 11, 2005, Valeo issued 600 million euros worth of notes on June 24, 2005. The notes have an eight-year term and bear fixed interest of 3.75%.

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General information about the Company's capital

Stock option and Share grant planS in force at december 31, 2006

Date of Shareholders' Meeting 05/27/98

No. of Exercice No. of No. of options Term Date (1) price grantees options Stock subscription option plans in force at December 31, 2006

500,000 6 years 04/12/00 05/25/00 54.52 60.70 1 1 37,500 50,000 122,875 05/25/99 05/25/00 500,000 800,000 6 years 8 years 03/21/01 12/07/01 05/09/01 1,000,000 8 years 12/10/01 06/10/02 1,500,000 8 years 07/01/02 11/25/02 03/31/03 03/31/03 1,500,000 8 years 11/06/03 04/05/04 1,500,000 8 years 11/08/04 32.91 28.46 1,005 780,000 42.69 43.84 28.30 23.51 213 699 229 755 442,875 420,000 600,000 700,000 55.82 42.48 2 5 10/17/00 48.00 1,084 500,000 677,125 80,000 600,000

O/w O/w granted granted to to Executive corporate man. excl officers corp. officers 35,625 50,000 0 0 0 80,000 600,000 210,000 0 0 0 0

O/w granted to top ten grantees (2) 0 0

Conditional options 35,625 0 0 0

Impact of tender offers (56,330 at June 21, 2005) 357 500

8,287

154,000 0 0

0 0 300,000 800 3,000

0 0 0 160,000

140,000 2,500 159,500 52,750

118,000 96,700 107,500 44,000

0 0 0 0

3,455 2,724 4,568 6,022

61,000 160,000 1,146,625

117,766 169,600 852,116

77,395 134,400 731,995

0 0 335,625

7,185 10,682 47,580

1,094 1,123,200 6,133,575

TOTAL STOCK SuBSCRIPTION PLANS

Stock purchase option plans in force at December 31, 2006

03/31/03 04/05/04 05/03/05 1,500,000 1,500,000 4,500,000 8 years 8 years 8 years 11/06/03 11/08/04 11/17/05 03/03/06 11/20/06 TOTAL STOCK PuRCHASE PLANS 32.91 32.74 32.32 33.75 32.63 1,005 1,094 1,082 2 500,000 280,800 650,000 187,000 39,000 40,000 0 150,000 0 229 000 75,484 42,400 94,300 37,000 251,000 500,184 49,605 33,600 48,900 0 175,000 307,105 0 0 0 0 0 0 7,050 4,263 2,787

1,298 1,309,250 2,927,050

Share grant plans in force at December 31, 2006

05/03/05 4,500,000 11/17/05 Price at 02/17/08 1,082 600,000 0 141,450 73,350 300,000

03/03/06

Price at 06/03/08

2

63,000

50,000

13,000

0

36,500

11/20/06 TOTAL SHARE GRANT PLANS

(1) (2)

Price at 11/20/09

116

100,000 763,000

0 50,000

0 154,450

18,500 91,850

0 336,500 0

Date of board of Directors/Supervisory Board/Management Board meeting. Including Directors who are not corporate officers. On March 7, 2007, the Board of Directors granted 250,000 stock purchase options with an exercise price of 36.97 euros, including 200,000 granted to Thierry Morin that are subject to lock-up provisions as described in paragraph 3.1.1 on page 161, and 50,000 to another of the Group's executive managers (non-corporate officer). On the same date, the Board also granted 100,000 shares free of consideration to a limited number of high-potential managers.

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Start date of exercise period 100% conditional 100% immediately

No. of Options Options Options shares to be Options Options exercised at Options cancelled at outstanding subscribed Expiry out at exercised in 12/31/2006 cancelled in 12/31/2006 at or Residual date 12/31/2005 2006 (aggregate) 2006 (aggregate) 12/31/2006 purchased grantees 04/11/06 05/24/06 10/16/06 35,625 357 50,000 500 0 360,000 442,500 8,115 80,000 800 300,000 3,000 12/09/09 06/30/10 11/24/10 03/30/11 331,800 3,340 264,000 2,640 434,705 4,348 571,425 5,789 628,193 6,932 1,033,360 10,339 4,531,608 46,160 0 0 30,455 305 35,300 362 0 0 3,800 38 69,555 705 0 0 0 0 0 0 0 1,310,797 6,810 0 0 0 0 0 53,750 385 63,125 495 0 0 3,800 38 120,675 918 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 35,625 357 50,000 500 0 360,000 27,000 3,942 0 0 0 0 33,000 332 25,200 252 54,500 545 34,375 360 54,240 612 81,800 818 755,740 7,718 34,760 356 20,450 214 53,620 0 0 108,830 570 58,130 37,500 357 50,000 500 122,875 500,000 261,625 4,114 0 0 300,000 0 144,075 447 181,200 336 196,500 685 135,125 460 206,047 865 171,640 1,161 2,183,712 8,925 132,303 503 42,910 307 53,620 0 0 228,833 810 58,130 0 0 0 0 0 0 415,500 4,173 80,000 800 300,000 3,000 298,800 3,008 238,800 2,388 349,750 3,498 501,750 5,067 573,953 6,320 947,760 9,483 3,706,313 37,737 367,697 3,760 237,890 2,480 596,380 187,000 1,309,250 2,698,217 6,240 541,870 301,808 241,188 353,248 506,817 130 474 153 549 0 0 0 0 0 0 419,673 80,800 303,000 2 5 0 0 0 594

50%-2 years; 100%-3 years

10/16/06 10/16/08

100% immediately 50% immediately; 50% conditional

03/20/09 12/06/09

50%-2 years; 100%-3 years 50%-2 years; 100%-3 years 50%-2 years; 100%-3 years 50%-2 years; 100%-3 years

50%-2 years; 100%-3 years 50%-2 years; 100%-3 years

11/05/11 11/07/12

580,273 957,243 3,744,050

748 907

50%-2 years; 100%-3 years 50%-2 years; 100%-3 years 50%-2 years; 100%-3 years 50%-2 years; 100%-3 years 50 %-2 ans ; 100 %-3 ans

11/05/11 11/07/12 11/16/13 03/02/14 11/19/14

402,457 4,116 258,340 2,694 650,000

371,457 240,370 596,380 187,000 1,309,250 2,704,457

748 907 1,028 2 1,298

Vesting period: 2 years 3 mths 50% cond (½ based on 2006 perf.; ½ based on 2007 perf.*) Vesting period: 2 years 3 mths 50% cond (½ based on 2006 perf.; ½ based on 2007 perf.*) Vesting period: 3 years

600,000

541,870

1,028

0

0

0

0

0

63,000

63,000

2

0 600,000

0 0

0 0

0 58,130

0 58,130

100,000 704,870

100,000 704,870

116

* 2006 performance: the Group's consolidated operating margin before non-recurring expenses as a % of total income from operations 4.5% * 2007 performance: the Group's consolidated operating margin before non-recurring expenses as a % of total income from operations 5%. Public share buyback/simplified public tender offer.

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Current ownership structure

1. Changes in ownership structure since 2004

Pardus European Special Franklin Opportunities Resources, Master Fund Inc. LP

Wendel Investissements Group December 31, 2004 number of shares % number of voting rights* % December 31, 2005 number of shares % number of voting rights* % December 31, 2006 number of shares % number of voting rights* % 592,072 0.76 592,072 0.75 1,012,072 1.31 1,012,072 1.28 8,186,045 9.78 8,816,045 10.44

The Boston Company Asset Caisse des Dépôts Management et consignations** LLC

Brandes Investment Partners LP

Employees

Treasury stock

Other

5,367,080 6.41 6,982,835 8.27

3,075,521 3.67 3,075,521 3.64

602,105 0.72 602,105 0.71

8,465,610 10.11 8,465,610 10.02

1,575,296 1.88 1,575,296 1.87

1,037,804 1.24 0 0

55,399,56 66.19 54,933,725 65.05

5,061,559 6.53 7,128,860 9.03

4,124,213 5.32 4,124,213 5.23

3,996,838 5.16 3,996,838 5.06

8,323,865 10.74 8,323,865 10.55

1,418,375 1.83 1,418,375 1.80

807,704 1.04 0 0

52,765,731 68.07 52,918,450 67.05

5,061,559 6.52 7,128,860 9.01

4,208,278 5.42 4,208,278 5.32

4,120,338 5.31 4,120,338 5.21

3,752,183 4.84 3,752,183 4.74

3,450,000 4.45 3,450,000 4.36

1,041,149 1.34 1,041,149 1.32

686,704 0.89 0 0

54,668,334 70.47 54,816,574 69.29

* Shares registered in the name of the same shareholder for a minimum of 4 years carry double voting rights (see page 148). * * Caisse des Dépôts et consignations interest held in its own account. Caisse des Dépôts et consignations is the only shareholder owning over 5% of the capital that has double voting rights.

1.1. Major shareholders

To the best of the Company's knowledge, the only shareholders directly or indirectly holding 5% or more of the Company's capital or voting rights at December 31, 2006 were Caisse des Dépôts et consignations, The Boston Company Asset Management LLC and Brandes Investment Partners LP . As far as the Company is aware, the only shareholders directly or indirectly holding 2% or more of the Company's capital or voting rights at December 31, 2006 were Caisse des Dépôts et consignations, The Boston Company Asset Management

LLC, Brandes Investment Partners LP, Pardus European Special Opportunities Master Fund LP Franklin Resources, Inc., Tocqueville , Finance S.A., and M&G Investment Management Ltd. On April 24, 2006, M&G Investments Management Ltd. declared that it had increased its interest to above the 2% disclosure threshold provided in the Company's bylaws and that it held 2.10% of the Company's capital and 2.06% of the voting rights. On September 11, 2006, Franklin Resources, Inc. declared that it had reduced its interest to below the statutory 10% disclosure threshold and the 2% threshold provided in the Company's

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bylaws, and that it held 7.38% of the Company's capital and 7.26% of the voting rights. On October 25, 2006, Franklin Resources, Inc. declared that it had reduced its interest to below the statutory 5% disclosure threshold and the 2% threshold provided in the Company's bylaws, and that it held 4.84% of the Company's capital and 4.74% of the voting rights. On November 27, 2006, Pardus European Special Opportunities Master Fund LP declared that it had increased its interest to beyond the 2% disclosure threshold provided in the bylaws in relation to the Company's capital and voting rights. On December 21, 2006, Pardus European Special Opportunities Master Fund LP declared that it had increased its interest to beyond the 2% disclosure threshold provided in the bylaws and that it held 4.45% of the Company's capital and 4.36% of the voting rights. In early 2007, Pardus European Special Opportunities Master Fund LP declared that it had increased its interest to beyond the 5% disclosure threshold on January 10, 2007 and that it held 5.16% of the Company's capital and 5.07% of the voting rights. Pardus European Special Opportunities Master Fund LP subsequently declared that it had increased its interest to beyond the 10% disclosure thresholds both in relation to the Company's capital (on February 21, 2007) and voting rights (on February 27, 2007), and that it held 10.57% of Valeo's capital and 10.36% of its voting rights. In its statement of intention, Pardus European Special Opportunities Master Fund LP stated that it was not acting in concert with any third party and it had no immediate plans to take over control of Valeo although it did reserve the right to continue to purchase or sell Valeo shares based on market opportunities and to request the appointment of one or more persons of its choosing as members of Valeo's Board of Directors. Finally, on March 21, 2007, Pardus European Special Opportunities Master Fund LP declared that at that date it had increased its interest in the Company to beyond the disclosure threshold of 12% of the capital and voting rights.

stock options and 69,000 shares were allocated for use under a liquidity contract that complies with the Code of Ethics issued by the AFEI (French Association of Investment Companies), signed with an investment services provider on April 22, 2004. At the signature date of this contract 220,000 Valeo shares and an amount of 6,600,000 euros were allocated for use under this liquidity agreement. The total resources earmarked for this purpose at December 31, 2006 represented 69,000 shares and 13,039,863 euros During the year, Valeo acquired, through an investment services provider, 1,178,396 shares at an average price of 29.53 euros, and sold 1,299,396 shares at an average price of 29.72 euros. Trading fees as well as the fees relating to the liquidity contract with the investment services provider totaled 264,712 euros, compared with 271,615 euros in 2005. Market transactions were carried out under the authorizations granted under the sixth resolution of the General Shareholders' Meeting of May 3, 2005 and the fifth resolution of the General Shareholders' Meeting of May 17, 2006, in accordance with a liquidity contract entered into with an investment services provider in order to provide a liquid market for the Company's shares and stabilize the share price.

1.3. Directors' interests

As part of the employee share issue carried out in 2004 (see page 168), Thierry Morin, Chairman and Chief Executive Officer of Valeo, subscribed to 153,617 units in the Valeorizon mutual fund, corresponding to 153.62 Company shares, and 921,702 units in the Valeorizon+ mutual fund, entitling him to 7,373.62 shares as a result of the applicable leverage effect. Thierry Morin's total investment in these funds came to 25,431.30 euros, representing 23.65 euros per unit. At December 31, 2006, Thierry Morin and other members of the Board of Directors held less than 1% of Valeo's capital and voting rights in a personal capacity.

1.2. treasury stock

At December 31, 2006, Valeo directly or indirectly held 686,704 of its own shares, representing 0.89% of the Company's share capital, with a unit value of 32.53 euros per share based on their purchase price. At December 31, 2005, Valeo held 807,704 of its own shares (1.04% of the share capital). Out of the total number of treasury shares held at December 31, 2006, 617,704 were earmarked for allocation on the exercise of

1.4. employee stock ownership

At December 31, 2006, employees held a total of 1,041,149 shares under Group employee stock ownership plans, directly or through two corporate mutual funds, representing 1.34% of the Company's capital. At December 31, 2005 employees held 1,418,375 shares, representing 1.83% of the capital.

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1.5. Change in control

To the best of the Company's knowledge, there are no shareholder pacts or agreements that could lead to a change in control of the Company. There are no provisions in the Company's bylaws or internal rules that may delay, postpone or prevent a change in the Company's control.

1.6. Capital under option

At the date of this registration document, no capital of any member of the Group was under option or agreed conditionally or unconditionally to be put under option.

2. Disclosure thresholds

In accordance with article L. 233-7 of the French Commercial Code, any individual or legal entity, acting alone or in concert that holds a number of shares representing over 5%, 10%, 15%, 20%, 25%, 33-1/3%, 50%, 66-2/3%, 90% or 95% of the Company's capital or voting rights, is required to disclose to the Company and the AMF by letter that the related disclosure threshold has been exceeded. Said disclosure must be made within five trading days from the date when the threshold is exceeded and must also state the total number of shares and voting rights held by the shareholder concerned. The AMF subsequently publishes the disclosures. This disclosure obligation also applies when an interest in the Company's capital and/or voting rights is reduced to below the above-mentioned thresholds. If any shareholder fails to comply with these disclosure requirements, the shares in excess of the relevant threshold will be stripped of voting rights at any and all General Shareholders' Meetings held within the two-year period from the date when the omission is remedied. Since the General Shareholders' Meeting of March 31, 2003, article 9 of the Valeo bylaws states that, in addition to the applicable statutory disclosure thresholds, any individual or legal entity, acting alone or in concert, that raises or reduces its interest in the Company's capital or voting rights to above or below 2% respectively (or any multiple thereof), is required to disclose to the Company by registered letter with return receipt requested that the relevant disclosure threshold has been crossed. Said disclosure must be made within 15 days from the date when the threshold is crossed and the shareholder concerned must state their own identity as well as that of any parties acting in concert with the shareholder. In accordance with the seventh paragraph of article L. 228-1 of the French Commercial Code, this disclosure obligation also applies to shares held through an intermediary. Non-compliance with the above obligations is subject to the penalties set out in article L. 233-14 of the French Commercial Code, at the request of one or several shareholders together holding at least 2% of the Company's capital or voting rights, as recorded in the minutes of the General Shareholders' Meeting.

3. Shareholder identification

Registered and bearer shares are recorded in shareholders' accounts in accordance with applicable laws and regulations. However, a bank, broker or other intermediary may register on behalf of shareholders who are domiciled outside France in accordance with article 102 of the French Civil Code. This registration may be made in the form of a joint account or several individual accounts, each corresponding to one shareholder. Any such intermediary must inform the Company or the intermediary managing the Company's account that it is holding the shares on behalf of another party. The Company is entitled to identify all holders of shares and other securities redeemable, exchangeable, convertible or otherwise exercisable for shares carrying rights to vote at General Shareholders' Meetings, in accordance with the procedure provided for in article L. 228-2 et seq. of the French Commercial Code. In order to identify holders of bearer shares, in accordance with the applicable laws and regulations, the Company is entitled to request, at any time, from the central depository responsible for its securities issues account, in exchange for a fee, the name ­ or, in the case of corporate shareholders, the company name -, nationality, year of birth ­ or, in the case of corporate shareholders, the year of incorporation - and address of holders of bearer shares and other securities redeemable, exchangeable, convertible or otherwise exercisable for shares carrying rights to vote at General Shareholders' Meetings, together with details of the number of

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shares held by each such shareholder and of any restrictions applicable to the securities concerned. Based on the list provided by the above-mentioned organization, where the Company considers that shares may be held on behalf of third parties, it may request, in accordance with the same conditions, either through the organization or directly from the parties mentioned on the list, the same information concerning the holders of the shares. If one of the parties mentioned on the list is a bank, broker or other intermediary, it must disclose the identity of the shareholders for whom it is acting. The information is provided directly to the financial intermediary managing the Company's share account, which shall pass on said information either to the Company or the above-mentioned central depositary, as applicable. For registered shares and other securities redeemable, exchangeable, convertible or otherwise exercisable for shares, any intermediary holding the securities on behalf of a third party must disclose the identity of the person or entity for whom it is acting as well as the number of shares held by each, upon simple request by the Company or its representative, which may be made at any time.

The Company may also request from any corporate shareholder holding over 2.5% of the Company's capital or voting rights, information concerning the identity of persons or companies holding either directly or indirectly over one third of the corporate shareholder's capital or voting rights. If an individual or corporate shareholder is asked to provide information in accordance with the above conditions and fails to provide it by the applicable deadline, or provides incomplete or incorrect information, the shares or other securities redeemable, exchangeable, convertible or otherwise exercisable for shares recorded in the shareholder's account shall be stripped of voting rights for all General Shareholders' Meetings held until the identification request has been fulfilled, and the payment of any corresponding dividends shall also be deferred until that date. In addition, if an individual or company registered in the Company's shareholders' account deliberately ignores their obligations, the Company or one or more shareholders holding at least 5% of the Company's capital may apply to the court of the place in which the Company's registered office is located to obtain an order to totally or partially strip the shares concerned of their voting rights and the corresponding dividend, for a maximum period of five years.

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Market for the Company's securities

Market for the Company's securities

1. Share performance over 18 months

Price (In euros) Date September 2005 October 2005 november 2005 December 2005 January 2006 February 2006 March 2006 April 2006 May 2006 June 2006 July 2006 August 2006 September 2006 October 2006 november 2006 December 2006 January 2007 February 2007

Source : Euronext Paris.

High 35.14 35.14 32.07 32.26 33.49 34.75 35.40 34.88 34.56 30.06 29.18 29.08 29.08 31.30 31.20 32.25 36.77 38.55

Low 32.99 30.50 30.68 30.50 31.28 32.90 31.58 32.90 29.46 26.73 25.00 27.11 26.35 26.52 28.81 29.26 31.35 34.91

Closing (average) 33.73 32.73 31.41 31.64 32.33 33.82 33.15 34.09 31.85 28.18 26.91 27.97 27.81 27.98 30.09 31.31 34.24 36.88

Trading volume (no. of shares) 14,434,933 12,923,368 6,620,180 7,733,743 9,304,957 9,615,280 12,008,779 12,088,063 11,416,718 10,950,165 15,883,516 11,942,198 17,235,513 24,508,984 15,424,406 13,152,450 18,429,439 14,875,097

Trading volume (In millions of euros) 489.14 424.15 208.34 246.93 301.22 324.81 400.94 412.42 361.92 309.46 429.02 335.11 477.23 691.80 464.32 410.19 637.83 550.19

2. Share buyback program and cancellation of treasury shares

2.1. Share buyback program

In the fifth resolution of the Combined Annual and Extraordinary Shareholders' Meeting held on May 17, 2006, in accordance with articles L. 225-209 et seq. of the French Commercial Code, the Company's shareholders granted the Board of Directors an eighteen-month authorization from the date of said Meeting to trade in the Company's shares, including by delegation. This authorization may be used for the following purposes: (i) to allocate shares further to the exercise of stock options, (ii) to award shares to employees by way of profit-sharing bonuses and in connection with company savings plans, (iii) to grant shares free of consideration (subject to an annual ceiling of 1% of the Company's capital), (iv) to attribute shares on redemption, conversion, exercise or exchange of share equivalents, (v) to purchase shares with a view to canceling some or all of them, (vi) to attribute shares in exchange for shares in another entity in connection with acquisitions, (vii) to ensure liquidity in the secondary market for the Company's shares in accordance with a liquidity contract entered into with an investment services provider, and (viii) to enable an investment services provider to carry out share purchases, sales or transfers, including through off-market transactions. The number of shares that may be acquired under this authorization may not represent over 10% of the Company's capital. The purchase price may not exceed 70 euros per share. This authorization, given for an eighteen-month period as of the Shareholders Meeting held on May 17, 2006, superseded, for the unexpired period, the unused portion of the authorization granted

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in the sixth resolution of the Combined Annual and Extraordinary Shareholders' Meeting held on May 3, 2005. A description of the 2006 renewal of the Company's share buyback program was drawn up in accordance with articles 241-1 et seq. of the AMF's General Regulations and published on both Valeo's and the AMF's website on May 16, 2005. In 2006 Valeo carried out a number of share sale and purchase transactions under the above mentioned share buyback program, as well as the program authorized by shareholders at the General Meeting of May 3, 2005. During the year the Company purchased 1,178,396 shares at an average price of 29.53 euros and sold 1,299,396 shares at an average price of 29.72 euros. All of these transactions were carried out under the liquidity contract signed on April 22, 2004 with an investment services provider which complies with the Code of Ethics of the AFEI (French Association of Investment Companies). At the year-end, Valeo held 686,704 treasury shares representing 0.89% of Company's capital, with a unit value of 32.53 euros based

on their purchase price. At December 31, 2005, the Company held 807,704 treasury shares, representing 1.04% of its capital. The number of shares held in treasury at December 31, 2006 broke down as 617,704 to be allocated on the exercise of stock options and 69,000 to be used in connection with the abovementioned liquidity contract.

2.2. Cancellation of treasury shares

In the fifteenth resolution of the Combined Annual and Extraordinary Shareholders' Meeting held on May 3, 2005, shareholders confirmed the authorization granted to the Board of Directors by the Combined Annual and Extraordinary Shareholders' Meeting of April 5, 2004 to reduce the Company's share capital by canceling treasury shares. The number of shares cancelled in any given twenty-four month period may not exceed 10% of the Company's capital.

3. Dividends

Dividends per share over the past three years were as follows:

2003 Gross dividend per share (in euros) net dividend per share (in euros) tax credit/allowance (in euros) total dividend (excluding tax credit/allowance) - (in millions of euros)

* For shareholders entitled to a 50% tax credit. ** This amount is eligible for the 50% tax allowance provided for in article 158-3-2 of the French General Tax Code. ***This amount is eligible for the 40% tax allowance provided for in article 158-3-2 of the French General Tax Code.

2004 na 1.10 ** 91

2005 na 1.10 *** 84

1.57 1.05 0.525* 86

In view of the Group's results in 2006, at the General Shareholders' Meeting to be held to approve the accounts for the year, the Board of Directors will recommend a net dividend of 1.10 euros per share.

As the dividend distribution rate is not fixed, future dividend payments will depend on the Group's results as well as the financing required to drive future growth. The Company cannot guarantee the amount of dividends to be paid for any particular year.

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Investor relations

Investor relations

Valeo aims to provide a steady flow of exhaustive and detailed real-time information to its diverse financial community, comprising current and prospective private and institutional shareholders, as well as financial analysts.

1. Individual shareholder relations

Based on the Company's estimates, individual shareholders control approximately 5% of Valeo's share capital. These shareholders, who are mostly domiciled in France, have access to the following communication tools: · A toll-free line (0 800 814 045) available to individual shareholders in France since 1998. In 2006, this service dealt with approximately 200 requests relating to Valeo's share price, communications strategy, shareholder rights, and news and outlook relating to the Group. · The valeo.com website which is aimed at providing information to all shareholders. The Finance section of the site provides realtime stock market and shareholder information, including the latest share prices, ownership structure, dividends, and AGM documents. Financial publications can also be consulted on-line, such as annual and interim reports and financial presentations, as well as all press releases and prospectuses. In addition, visitors to the site can submit financial questions to the Group's spokesperson. Since November 2003, users who register their details on-line receive a periodical newsletter providing relevant information for those interested in monitoring the Group's progress. At the end of the year some 3,300 people were subscribers to the newsletter. · The share registrar service provided by Société Générale since the end of 2000. This service, used by more than 3,000 shareholders at December 31, 2006 ­ mainly individual shareholders ­ provides a share information line (0825 820 000), available only in France, for questions concerning dividends, tax issues and placing orders.

2. Institutional shareholder relations

Valeo's senior management team maintained frequent contacts with investors and analysts over the course of the year. In total, more than 800 shareholder representatives or advisors were put in touch with the senior management team or the Investor Relations Director in 2006. Meetings were organized in major financial centers in Europe, North America and Asia. These took various forms, including one-on-one meetings, group events, conference calls, themed or general investor conferences, and site visits. The objective of the Group's Investor Relations Department is to serve as an interface between the Group and investors and analysts, in order to keep them informed of the Group's strategy, products, key events and financial performance. Contact: Rémy Dumoulin Investor Relations Director Valeo 43, rue Bayen F-75848 Paris Cedex 17 France Tel: +33 (0) 1 40 55 20 39 Fax: +33 (0) 1 40 55 20 40 E-mail: [email protected] Provisional financial communication calendar · First-quarter 2007 results: April 24, 2007. · First-half 2007 results: July 26, 2007. · Third-quarter 2007 results: October 17, 2007. · Full-year 2007 results: first half of February 2008.

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3. Ownership structure

3.1. Ownership structure at December 31, 2006

% capital (% voting rights)

5.31 % (5.21 %)

Brandes Investment Partners LP

3.2. Ownership structure at March 15, 2007

% capital (% voting rights)

4.84 % (4.74 %) 4.84 % (4.74 %)

Franklin Resources, Inc. Franklin Resources, Inc.

5.42 % (5.32 %)

The Boston Company Asset Management LLC

5.31 % (5.21 %)

Brandes Investment Partners LP

6.52 % (9.01 %)

Caisse des Dépôts et consignations (CDC)*

4.45 % (4.36 %)

Pardus European Special Opportunities Master Fund LP

6.52 % (9.01 %)

Caisse des Dépôts et consignations (CDC)*

10.57 % (10.36 %)

Pardus European Special Opportunities Master Fund LP

73.46 %** (71.36 %)

Autres

Number of shares: 77,580,617 Number of voting rights: 79,109,454

* Own account ** Including 686,704 treasury shares (0.89 %)

72.76 %** (70.68 %)

Autres

Number of shares: 77,580,617 Number of voting rights: 79,153,315

* Own account ** Including 639,504 treasury shares (0.82 %)

4.

Stock market data

2006 Market capitalization at year-end

(in billions of euros)

2005 2.43 77,510,357 38.20 30.25 33.79 31.41

2004 2.58 83,709,024 38.35 27.22 32.47 30.80

2003 2.61 82,133,728 36.40 19.75 29.27 31.75

2002 2.46 82,133,728 53.00 23.00 40.14 29.90

2.45 77,580,617 35.40 25.00 30.58 31.53

number of shares highest share price (in euros) Lowest share price (in euros) Average share price (in euros) Share price at end of year (in euros)

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Investor relations

5. Per share data

IFRS

(In euros)

2006 2.10 1.10* n.a.**

2005

(1)

2004

(1)

2004 2.93 1.10 n.a.**

earnings per share (based on the average number of shares) net dividend Gross dividend**

1.80 1.10 n.a.**

2.92 1.10 n.a.**

* 1.10 euro dividend subject to approval by shareholders at the General Shareholders' Meeting to be held to approve the 2006 financial statements. ** Amounts eligible for the tax allowance provided for in article 158-3-2 of the French General Tax Code ­ 50% for 2004 and 40% for 2005 and 2006. (1) The data for 2005 and 2004 have been restated, primarily in relation to non-strategic operations.

6. Share price from January 1, 2002 through December 31, 2006

60

50

40

30

20

10

0 J A J 2002 Valeo CAC 40 O J A J 2003 O J A J 2004 O J A J 2005 O J A J 2006 O

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7. Monthly trading volumes

30,000,000

25,000,000

20,000,000

15,000,000

10,000,000

5,000,000

0 J A J 2002 Volume O J A J 2003 O J A J 2004 O J A J 2005 O J A J 2006 O

Information on subsidiaries and affiliates

Following the creation of subsidiaries for industrial activities in 2002, Valeo is now the Group's holding and treasury management company. As such, Valeo centralizes the management of market risks to which its operating subsidiaries are exposed, including changes in interest rates as well as fluctuations in exchange rates and quoted commodities prices. Valeo also centralizes the financing requirements of these subsidiaries and is generally the sole counterparty of the financial institutions that provide the funding to cover these requirements. The related assets (cash and marketable securities) and liabilities (external debt) are included in Valeo's balance sheet. Valeo is also responsible for upholding the image of the Valeo brand. To this end, it has entered into brand licensing agreements with certain of its operating subsidiaries (see related party transactions on page 165). Groupwide control and support functions, encompassing accounting, legal counsel, information technology, procurement, real-estate management and supply-chain management, are performed by Valeo Management Services, which bills a fee to the French subsidiaries. The Group's operating assets and liabilities are carried by its 172 subsidiaries, mainly by the industrial and commercial entities listed on page 183. A list of consolidated companies ­ including their geographic location ­ is provided in Note 7 to the consolidated financial statements on pages 120-126.

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Information on subsidiaries and affiliates

Industrial Commercialization

European Union France Germany Belgium, UK, Netherlands, Sweden VALEO VISION BELGIQUE 100 VALEO SERVICE BELGIQUE 100 TELMA RETARDER LIMITED (UK) 100 VALEO SERVICE UK LIMITED (UK) 100 VALEO ENGINE COOLING UK Ltd (UK) 100 VALEO SERVICE BENELUX B.V. (Netherlands) 100 VALEO ENGINE COOLING A.B. (Sweden) 100 Italy, Spain, Portugal VALEO S.p.a. (Italy) 99.9 VALEO SICUREZZA ABITACOLO S.p.a. (Italy) 99.9 VALEO SISTEMI DI CLIMATIZZAZIONE S.p.a. (Italy) 100 VALEO CABLAGGI E COMMUTAZIONE S.r.l. (Italy) 100 CABLAUTO S.r.l. (Italy) 100 CAVISUD S.r.l. (Italy) 100 VALEO COMMUTAZIONE S.r.l (Italy) 100 VALEO SERVICE ITALIA S.p.a. 99.9 VALEO ESPAÑA S.A. 100 VALEO MATERIALES DE FRICCIÓN S.A. (Spain) 100 VALEO TERMICO S.A. (Spain) 100 VALEO ILUMINACIÓN S.A. (Spain) 99,8 VALEO PLASTIC OMNIUM S.L. 50 TELMA RETARDER ESPAÑA S.A. 100 VALEO SISTEMAS ELECTRICOS S.L. (Spain) 100 VALEO SISTEMAS DE SEGURIDAD Y DE CIERRE S.A. (Spain) 100 VALEO CLIMATIZACIÓN S.A. (Spain) 100 VALEO SISTEMAS DE CONEXION ELECTRICA S.L. (Spain) 100 VALEO SERVICE ESPAÑA S.A 100 VALEO VIANA (Portugal) 100 CABLAGENS DO AVE (Portugal) 100 Other European Countries Hungary, Poland, Turkey, Czech Republic, Romania Slovakia VALEO AUTO-ELECTRIC VALEO OTOMOTIV HUNGARY SPARE SISTEMLERI PARTS PRODUCTION LLC ENDUSTRISI A.S. (Hungary) (Turkey) 100 100 VALEO ELECTRIC AND VALEO OTOMOTIV ELECTRONIC SYSTEMS DAGITIM A.S. Sp.zo.o. (Poland) (Turkey) 100 100 VALEO SERVICE NURSAN ED EASTERN EUROPE (Turkey) Sp.zo.o. (Poland) 100 40 VALEO NURSAN OK AUTOSYSTEMY (Turkey) Sp.zo.o. (Poland) 100 40 VALEO VYMENIKY VALEO CABLAJE S.r.l. TEPLA S.r.o. (Romania) (Czech Republic) 100 100 VALEO AUTOKLIMATIZACE S.r.o. VALEO ELECTRICAL CONNECTIVE SYSTEMS (Czech Republic) S.r.l. (Romania) 100 100 VALEO COMPRESSOR EUROPE S.r.o. (Czech Republic) 100 VALEO SLOVAKIA S.r.o. (Slovakia) 100 Africa Morocco, Tunisia, South Africa VALEO BOUSKOURA (Morocco) 100 VALEO AIN SEBAA (Morocco) 100 VALEO BOUZNIKA (Morocco) 100 CABLEA TUNISIE S.A. 100 SOCIETE TUNISIENNE DE CABLAGES - "STC" 100 VALEO MATEUR (Tunisia) 100 VALEO EMBRAYAGES TUNISIE SA 100 DAV TUNISIE

Main Industrial and Direct and indirect stakes

North America United States

VALEO EMBRAYAGES 100

VALEO BELEUCHTUNG DEUTSCHLAND GmbH 100

VALEO, INC. 100 VALEO FRICTION MATERIALS, INC. 100 VALEO INVESTMENT HOLDINGS, INC. 100 VALEO ELECTRICAL SYSTEMS, INC. 100 VALEO CLIMATE CONTROL CORP. 100 VALEO SYLVANIA LLC 50 TELMA RETARDER INC. 100 VALEO AFTERMARKET, INC. 100 VALEO SWITCHES & DETECTION SYSTEMS, INC. 100 VALEO RAYTHEON SYSTEMS, INC. 77.2 VALEO COMPRESSOR NORTH AMERICA, INC. 100

VALEO MATERIAUX DE VALEO SCHLATER UND FRICTION SENSOREN GmbH 100 VALEO SWITCHES & DETECTION SYSTEMS-VSDS 100 VALEO EQUIPEMENTS ELECTRIQUES MOTEUR 100 VALEO SECURITE HABITACLE 100 VALEO SYSTEMES D'ESSUYAGE 100 VALEO PLASTIC OMNIUM S.N.C. 50 VALEO VISION 100 VALEO ELECTRONIQUE ET SYSTEMES DE LIAISON 100 DAV 100 VALEO LIAISONS ELECTRIQUES 100 SC2N 100 VALEO CABLAGE 100 VALEO FOUR SEASONS 50 TELMA 100 VALEO SERVICE 100 VALEO SYSTEMES THERMIQUES 100 VALEO FURUKAWA WIRING SYSTEMS 50 VALEO SYSTEMES DE CONTRÔLE MOTEUR 100 100 VALEO WISCHERSYSTEME GmbH 100 VALEO SICHERHEITSSYSTEME GmbH 100 VALEO KLIMASYSTEME GmbH 100 VALEO COMPRESSOR EUROPE GmbH 100 VALEO SERVICE DEUTSCHLAND GmbH 100

100 VALEO SYSTEMS SOUTH AFRICA (Proprietary) Limited 51

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InFORMAtIOn On the COMPAny AnD ItS CAPItAL

Information on subsidiaries and affiliates

5

Commercial Entities by country (% of interest 12.31.2006)

North America Mexico South America Brazil, Argentina VALEO SISTEMAS AUTOMOTIVOS Ltda (Brazil) 100 VALEO EMBRAGUES ARGENTINA S.A. 100 EMELAR Sociedad Anonima (Argentina) 100 CIBIE ARGENTINA S.A. 100 Iran South Korea China Asia Japan India Thailand, Indonesia

VALEO MATERIALES DE FRICCION DE MEXICO SA de CV 100 VALEO SISTEMAS ELECTRICOS SA de CV 100 VALEO TERMICO SA de CV 100 DELMEX DE JUAREZ S. de R.L. de CV 100 VALEO SISTEMAS ELECTRONICOS S. de R.L. de CV 100 VALEO CLIMATE CONTROL DE MEXICO SA de CV 100 VALEO SYLVANIA ILUMINACIÓN S. de R.L. de CV 50 TELMA RETARDER DE MEXICO SA de CV 100

VALEO ARMCO ENGINE COOLING VALEO ELECTRICAL SYSTEMS KOREA Ltd Co. 51 100

TAIZHOU VALEO-WENLING AUTOMOTIVE SYSTEMS Company Limited 100

VALEO ENGINE COOLING JAPAN Co. Ltd 100

VALEO FRICTION MATERIALS INDIA LIMITED

VALEO THERMAL SYSTEMS SALES (Thailand) Co. Ltd 74.9 VALEO SIAM THERMAL SYSTEMS Co. Ltd (Thailand) 74.9 VALEO COMPRESSOR (Thailand) Co. Ltd 98.5 VALEO COMPRESSOR CLUTCH (Thailand) Co. Ltd 97.3 PT VALEO AC INDONESIA 49

60 AMALGAMATIONS VALEO CLUTCH LIMITED 50 100 66 50 VALEO ENGINEERING VALEO PYEONG HWA VALEO AUTOMOTIVE AIR VALEO THERMAL CENTER (INDIA) DISTRIBUTION Co. Ltd CONDITIONING HUBEI Co. Ltd SYSTEMS JAPAN CORP. PRIVATE LIMITED 100 50 55 100 VALEO PYEONG HWA HUBEI VALEO AUTO LIGHTING Co. Ltd COMPANY LTD VALEO UNISIA TRANSMISSIONS K.K. VALEO SAMSUNG FAW-VALEO CLIMATE CONTROL ICHIKOH INDUSTRIES THERMAL SYSTEMS SYSTEMS Co. Ltd LIMITED Co. Ltd 36.5 29.4 50 NANJING VALEO CLUTCH Co. Ltd VALEO COMPRESSOR 55 KOREA Co. Ltd VALEO SHANGHAI AUTOMOTIVE 100 ELECTRIC MOTORS & WIPER SYSTEMS Co. Ltd 55 SHANGHAI VALEO AUTOMOTIVE ELECTRICAL SYSTEMS Company Limited 50 HUADA AUTOMOTIVE AIR CONDITIONER Co. Ltd 30 VALEO LIGHTING HUBEI TECHNICAL CENTER Co. Ltd 100 TELMA VEHICLE BRAKING SYSTEM (SHANGHAI) Co. Ltd 70 SHENZHEN VALEO HANGSHENG AUTOMOTIVE SWITCHES AND DETECTION SYSTEMS Co. Ltd 75 VALEO AUTOMOTIVE SECURITY SYSTEMS (WUXI) Co. Ltd 100 VALEO FAWER COMPRESSOR (CHANGCHUN) Co. Ltd 60 VALEO ENGINE COOLING (SHASHI) Co. Ltd 100 FOSHAN ICHIKOH VALEO AUTO LIGHTING SYSTEMS Co. Ltd 50 VALEO AUTOMOTIVE TRANSMISSIONS SYSTEMS (NANJING) Co. Ltd 100

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5

InFORMAtIOn On the COMPAny AnD ItS CAPItAL

Person responsible for the registration document

Person responsible for the registration document

Person responsible for the information provided in the registration document

Thierry Morin, Chairman and Chief Executive Officer of Valeo.

Declaration by the person responsible for the registration document

I hereby declare that, having taken all reasonable care to ensure that such is the case, the information contained in the registration document is, to the best of my knowledge, in accordance with the facts and contains no omission likely to affect its import. I obtained a statement from the Statutory Auditors at the end of their engagement affirming that they have read the whole "document de référence" (registration document), of which this document is a free translation from the original, and examined the information about the financial position and the accounts contained therein. The Statutory Auditors issued an observation in their report on the consolidated financial statements for the year ended December 31, 2004, presented on page 103 of the registration document filed with the Autorité des marchés financiers on March 29, 2005 under number D.05-0290. This observation concerned the change in method of accounting for retirement commitments presented in Note 1.2 to the consolidated financial statements. Paris, March 29, 2007

Thierry Morin Chairman and Chief Executive Officer

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The English language version of this report is a free translation from the original, which was prepared in French. All possible care has been taken to ensure that the translation is an accurate presentation of the original. However, in all matters of interpretation, views or opinions expressed in the original language version of the document in French take precedence over the translation.

43, rue Bayen - 75848 Paris cedex 17, France Tel. : 33 (0)1 40 55 20 20 - Fax : 33 (0)1 40 55 21 71 Valeo French "Société Anonyme" with a capital of 232,741,851 euros - 552 030 967 RCS Paris Valeo.com

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