2005 Annual report. Steel to shape the world

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1 2005 Annual report Steel to shape the world

2 introduction The Gerdau Group produces steel to change the world to bring people closer and improve quality of life. We do this through responsible attitudes and through respect for both individuals and the environment. The results of this work are presented in the 2005 Annual Report, which brings together information about our business performance, initiatives for the ongoing training of Gerdau professionals, community development programs and investments for our continued environmental protection.

3 GERDAU IN THE WORLD Steel Mills - 30 Downstream Operations - 21 Fabricated Reinforcing Steel Facilities - 49 Flat Steel Service Centers - 6 Comercial Gerdau Retail Stores - 68 Scrap Collection and Processing Units - 24 Solid Pig Iron Production Units - 2 Iron Ore Extraction Areas - 3 Private Port Terminals - 2 Equity investments - 2

4 GERDAU GROUP PROFILE Consolidate assets, cross boundaries, change the world. It was through these principles that the Gerdau Group became the 14th largest steelmaker on the planet, with plants in South America, North America and Europe. Throughout its 104 year history, Gerdau has always returned positive results and is now one of the fastest growing companies in the steel industry. In the last 20 years, it has expanded its physical sales by more than 7 times, against a world average of 1.5. The Group s positive performance reflects a posture characterized by professionalism, commitment and respect for people. These values are expressed in an attitude of responsibility in regard to its more than 27,000 employees the Gerdau Group s main competitive advantage. This responsibility extends to Gerdau s customers, shareholders, suppliers and communities. Initiatives such as transparent corporate governance, a commitment to seek above-market average profitability and investments in the environment and in people, make the Gerdau Group what it is today: an international player. Gross Revenues by Geographic Region R$ 25.5 billion Sales (in thousand metric tons) Brazil 51.8% Argentina, Chile, Colombia and Uruguay 5.7% Canada and the United States 42.5% ˆAdditional information available at

5 contents HIGHLIGHTS 04 Increased payments to shareholders CONSOLIDATED numbers 06 Financial, social and environmental performance MESSAGE FROM THE CHAIRMAN 08 A good result for 2005 and reduced debt levels CORPORATE GOVERNANCE 12 Management model in line with international standards RISK MANAGEMENT 21 Industrial, environmental, financial and other risk management practices PERSPECTIVES 24 An active role in consolidation BUSINESS 26 FINANCE CAPITAL MARKETS SALES AND MARKETS INVESTMENTS Growing sales in the Americas to meet market demand PEOPLE 52 EMPLOYEES COMMUNITY ENVIRONMENT 72 ENVIRONMENTAL MANAGEMENT TIMELINE 82 Commitment to the well-being of employees and communities Ongoing investment in improving environmental protection practices Growth over more than 100 years STEEL PRODUCTION 84 GLOSSARY 86 FINANCIAL STATEMENTS 90 Find out how steel is produced at Gerdau mills Definition of technical terms used in the report Details of the companies financial performance

6 HIGHLIGHTS net profit totals R$ 3.3 billion, virtually the same as in 2004, with gross revenues reaching R$ 25.5 billion, up 8.9%. net debt is down 51.9% to R$ 2.0 billion per year, while the average debt maturity is extended from four to nine years. Net debt is 0.4 times EBITDA, one of the lowest levels in the Group s history. This allows new investments to be made without compromising the Company s financial health. shareholder return from the Group s listed companies in Brazil grows substantially. Dividend payments total R$ million for Gerdau S.A. and R$ million for Metalúrgica Gerdau S.A. Gerdau Ameristeel, the company responsible for the Group s North American operations, begins paying dividends in 2005, to the sum of US$ 66.9 million. the project to expand installed capacity at Gerdau Açominas (state of Minas Gerais) from 3 to 4.5 million metric tons is underway. The investments in this project will total US$ 1.2 billion. Gerdau expands its presence in South America by concluding the acquisition of the Diaco Group and Sidelpa in Colombia and increasing its holdings in the Sipar rolling mill in Argentina, where Gerdau now holds majority control. These investments reinforce the strategy of continued growth in the region s long steel sector.

7 HIGHLIGHTS 5 the acquisition of 40% of the equity of Corporación Sidenor, Spain s largest producer of specialty steel, ensures the Group s entry into the European market and opens an important channel into the large international automobile manufacturers. The operation was announced at the end of 2005 and completed in the increase in annual production capacity at Gerdau Aços Especiais Piratini (state of Rio Grande do Sul) to 500,000 metric tons of finished products ensures that the requirements of the Brazilian automotive industry can be met in full. Gerdau São Paulo (state of São Paulo) begins operations with an annual production capacity of 900,000 metric tons of steel and, as of the second semester of 2006, 600,000 metric tons of rebar for civil construction. the Group s global investment program for the next three years totals US$ 3.8 billion, with resources allocated to the modernization and expansion of current industrial units. Gerdau Group social projects benefit 7.6 million people from throughout the Americas Environmental protection investments reach R$ million.

8 Numbers Metalúrgica Gerdau S.A Dividends (R$ per share) Gerdau S.A Dividends (R$ per share) Amounts adjusted to payments and calculated based on the current number of outstanding shares. Dividends paid on preferred shares. Amounts adjusted to payments and calculated based on the current number of outstanding shares. Dividends paid on preferred shares. Metalúrgica Gerdau S.A. Dividend yield (%) Gerdau S.A. Dividend yield (%) Dividend yield is the ratio between the dividend paid per share and the share price on the last day of the year. *Supplementary, non-recurring dividend. Dividend yield is the ratio between the dividend paid per share and the share price on the last day of the year. *Supplementary, non-recurring dividend. Metalúrgica Gerdau S.A. Average Annual Market Value (R$ million) Gerdau S.A. Average Annual Market Value (R$ million) Market value calculated as share price multiplied by the number of shares outstanding in the period. Market value calculated as share price multiplied by the number of shares outstanding in the period.

9 consolidated numbers 7 Metalúrgica Gerdau S.A. Gerdau S.A. Return on Equity (%) Return on Equity (%) Return on equity (ROE) is the ratio between consolidated net income and consolidated equity. Return on equity (ROE) is the ratio between consolidated net income and consolidated equity. Social Responsibility (R$ million) Total investment in social projects Quality education Education for entrepreneurship and competitiveness Environmental education Education through culture and sports Community action Environmental Management Reuse of industrial waters (% of total consumption) Emission of greenhouse gases (kg of CO 2 per metric ton of steel produced) Use of by-products internally or in other sectors of the economy (% of total volume generated) Exchange Rate Year R$ US$ ˆAdditional information available at

10 MESSAGE FROM THE CHAIRMAN A positive year for the Gerdau Group In 2005, the Gerdau Group once more returned positive results, reflecting a consistent strategy of seeking a balance between growth and profitability. Net profit was R$ 3.3 billion, matching the industry record set by the company in the previous year. Gross revenues reached R$ 25.5 billion (up 8.9%) with steel production at 13.7 million metric tons (up 1.7%). This performance is explained by the ongoing efforts to improve management processes and by the current positive phase in the steel sector. Global steel production again topped 1 billion metric tons, chiefly driven by international demand, especially from China. An active role in the consolidation of the sector In 2005, we expanded our presence to Europe through the acquisition of 40% of the equity of Sidenor Corporation, Spain s largest producer of cast, forged and specialty steel. The deal, completed in 2006, represents an investment of 340 million for the Gerdau Group, with the company s debt corresponding to US$ million. This investment means an increase in the production of specialty steel, a market sector with high added value. In recent years, we have become an important supplier of this input to the automotive industry, through Gerdau Aços Especiais Piratini (state of Rio Grande do Sul). This experience has led us to expand our specialty steel business beyond the Americas and to seek new opportunities. In addition, we finalized the acquisition of majority control of the Diaco Group and Sidelpa, Colombia s largest producer of long steel and sole specialty steelmaker, respectively. In Argentina, we also gained majority control of Sipar, a rolling mill operating in the long steel sector and in which we already had an equity investment.

11 message from the chairman 9 In the United States, much work was needed at Gerdau Ameristeel to integrate North Star Steel units, acquired at the end of The new mills, located in the states of Iowa, Minnesota, Texas, Kentucky and Tennessee, represented expanded geographical coverage and increased supply of Gerdau products. The Group s technological upgrade and expansion program is also worthy of note, totaling US$ 3.8 billion over the next three years. Of this, US$ 2.5 billion will be invested in Brazil, US$ 143 million in Argentina, Chile, Colombia and Uruguay, US$ 1.2 billion in Canada and the United States and US$ 35 million in Spain. Low indebtedness Net debt is currently 0.4 times EBITDA, well below the limit of 2.5 established as the Group s policy. In addition, the average maturity of long-term debt was extended from four to nine years. As a result, we have achieved greater flexibility to take on new steelmaking assets and expand our current industrial plants in the future. It is important to note that we seek a minimum annual return on investment of 15%, a target we have exceeded many times. Corporate governance: new Executive Committee President in 2007 The succession process in the Gerdau Group Corporate Executive Committee continued in At the beginning of 2007, I will leave the position of Executive Committee President, remaining as Chairman of the Board of Directors. The senior vice presidents Frederico Gerdau Johannpeter and Carlos J. Petry will also serve solely on the Board. This process is being carried out in an organized and structured manner, following strictly professional criteria, aiming for long-term business sustainability. The new Executive Committee President will be elected by the Board following technical evaluation processes. The succession process began in 2001 and relies on the assistance of international consultants as well as internal analyses. It is important to stress that the Gerdau Group has already successfully carried out four succession processes throughout its more than 100 years of history.

12 Responsibility with all our publics Increasingly, our work integrates the economic, social and environmental spheres, based on the concept of sustainability. We offer increasing dividends and seek to raise share liquidity by means of updating our corporate governance practices and listing companies in important world financial centers. In this fiscal year, shareholders in the listed companies in Brazil received R$ million from Metalúrgica Gerdau S.A. and R$ million from Gerdau S.A. Gerdau Ameristeel, the company responsible for the Group s operations in Canada and the United States, paid out a total of US$ 66.9 million in In addition, we are making ongoing investments in training employees at all levels. In 2005, a total of R$ 32.9 million was allocated for professional development, giving an annual average of two weeks training per employee. Workplace safety also deserves attention: we reached a rate of just 3.9 accidents with loss of work time per million hours worked, a reduction of 4.9% on the 2004 figure. Our challenge, however, is to have an entirely accident free workplace. In the environmental area, we invested R$ million in 2005, up 164.9% on the previous period. Our goal is to achieve ISO environmental certification for all of our industrial facilities. We also aim to reduce the environmental impact of our operations, mainly by developing new uses for by-products either in the steelmaking sector itself, or in other sectors of the economy. Currently, 80% of the by-products from our steelmaking processes are reused in some way. We also fulfill a fundamental role in society by recycling around 10 million metric tons of scrap per year, one of the main raw materials for Gerdau steel. This reduces the quantity of material sent to landfills and generates scrap collection jobs, through an extensive network of small and medium-sized entrepreneurs. Our work with the communities takes place in two main areas: education and volunteer work. In the educational field, we seek to improve the standard of teaching, especially in primary schooling in Brazil, by means of partnerships with public bodies and NGOs. For the Gerdau Group, education is not limited to school and university desks. It takes in a broader vision, including education for entrepreneurship, for scientific research, for total quality, for environmental conservation and for culture.

13 message from the chairman 11 We also offer aid to communities hit by natural disasters, such as hurricane Katrina in the United States, and help fight social problems, such as hunger in Brazil. The participation of our volunteers has been fundamental in many acts of solidarity. In 2006, a new project the Gerdau Volunteer Program will be implemented to consolidate all the volunteer activities promoted by the Group, first in Brazil and then in the operations abroad. The future: confidence in continued growth In the coming years, we will continue to participate in the consolidation of the steel sector through acquisitions and mergers. In long steel, our focus will remain in the Americas; in long specialty steel, the world. Many thanks I would like to express my gratitude for the dedication and diligence of our employees. I would also like to offer my deepest thanks to all who have been part of our development: our shareholders, our investors, our suppliers, our communities and especially our customers. Jorge Gerdau Johannpeter Chairman

14 CORPORATE GOVERNANCE The Gerdau Group s corporate governance structure includes the Board of Directors, the Officers coordinated by the Executive Committee together with its supporting bodies (Strategy Committee and Excellence Committees) and the Board of Auditors. The Board of Directors is in charge of establishing the Gerdau Group s strategies and following up on the execution of adopted policies. The Board members are also responsible for appointing the Officers and Executive Committee members. Issues of significant impact on the business and on the performance of its operations are subject to the Board s deliberation, as are any investments over US$ 5 million. The eight Board members four from the controlling group and four independent members meet at least four times a year. Although the regulations state that decisions may be reached by majority vote, in practice they have been reached by consensus. The management of the Gerdau Group is the responsibility of the Executive Committee, which coordinates and supervises the business operations so as to carry out the policies defined by the Board of Directors. The Executive Committee consists of ten people, one president and nine vice presidents, who meet at least fortnightly. Its responsibilities are divided into business operations and functional processes. Executive Committee members work in an integrated manner, seeking greater synergy between the operations, and individually, maximizing results by focusing on the management of each business and on the functional processes.

15 corporate governance 13 The business operations are: Long Steel Brazil, Specialty Steel, Açominas, South America (Argentina, Chile, Colombia and Uruguay) and North America. The processes include sales and marketing, industrial operations, logistics and transportation, raw materials, procurement, operational planning, human resources and organizational development, finance and investor relations, accounting and auditing, legal, management technology, strategic planning and management, information technology and institutional issues, corporate communications and public affairs and social responsibility. In 2005, a new member joined the Executive Committee: Mario Longhi, who is the President and CEO of Gerdau Ameristeel in North America. At the beginning of 2006, André B. Johannpeter, Executive Committee member and Gerdau Ameristeel Chief Operations Officer, moved to overseeing global corporate responsibilities in the areas of sales and marketing, raw materials, general procurement, logistics, human resources and organizational development. André continues to serve on the Gerdau Ameristeel Board of Directors. At the same time, Paulo Fernando Bins de Vasconcellos, who was a vice president at Gerdau Ameristeel returned to the Executive Committee as Executive Vice President for the Specialty Steel business operation. In carrying out its activities, the Executive Committee receives support from the Strategy Committee and the Excellence Committees. The Strategy Committee includes Executive Committee members, several Board members and heads of business operations, and puts forward long-term strategies to the Board of Directors. The role of the Excellence Committees is to stimulate debate and exchange of best practices within the organization. In April 2005, an important change was made in the Gerdau S.A. statute with the aim of meeting certain requirements of United States legislation. Based on an agreement established between the Brazilian Securities Commission (CVM) and the United States Securities and Exchange Commission (SEC), the Board of Auditors has undertaken the role of Audit Committee in addition to its previous tasks. Gerdau Ameristeel Corporation, within the standards of corporate governance practiced in the United States, also has an Audit Committee, linked to the Board of Directors.

16 corporate governance structure Board of Directors Board of Auditors Strategy Committee Officers Executive Committee Excellence Committees Functional Processes Business Operations Long Steel Brazil Specialty Steel Açominas North America South America Succession At the beginning of 2007, new changes to the Executive Committee will be implemented. The President of the Committee, Jorge Gerdau Johannpeter, and the Senior Vice Presidents, Frederico C. Gerdau Johannpeter and Carlos J. Petry, will cease their executive activities and serve solely on the Board of Directors. At a date yet to be determined, the new Executive Committee President will be appointed. The succession process began in 2001 and involves the assistance of international consultants as well as internal analyses. Throughout its 105 years, the Gerdau Group has already carried out four smooth succession processes. The decision about the future president will be made on the basis of a consensus among the members of the company s Board of Directors and will take into account the personal characteristics best suited to the overall leadership of the business.

17 corporate governance 15 Gerdau Companies Gerdau Group is the name used to describe the set of companies in different countries that make up the Gerdau economic group and are under the same shareholder control. The planned growth of the Group s activities in South America over the coming years was one of the factors that led the company to reorganize its operational and corporate structure in that continent in The changes sought to maximize the Gerdau Group s performance in the region a continuing process begun three years earlier, with the integration of the Brazilian operations of Gerdau S.A. and Aço Minas Gerais S.A., which led to the creation of Gerdau Açominas S.A. As a result of the steps taken in August 2005, five non-listed companies are now responsible for the Gerdau Group s operations in South America: Gerdau Aços Longos S.A. (Brazil), Gerdau Aços Especiais S.A. (Brazil), Gerdau Açominas S.A. (Brazil), Gerdau Comercial de Aços S.A. (Brazil) and Gerdau América do Sul Participações S.A. (Argentina, Chile, Colombia and Uruguay). The restructuring implemented in South America sought to enhance market transparency, increasing each sector s understanding of the Group s steelmaking activity. At the same time, it brought operational savings by achieving greater efficiency in the administrative processes. The Group s two listed companies in Brazil Gerdau S.A. and Metalúrgica Gerdau S.A. are classified as Level 1 on the São Paulo Stock Exchange (Bovespa) Corporate Governance program, and regulated according to special norms for differentiated conduct on the stock market. Gerdau S.A. shares are also traded on the New York Stock Exchange (NYSE) and the Madrid Stock Exchange (Latibex). In the United States and Canada, the company responsible for the Group s operations is Gerdau Ameristeel Corporation, whose shares are traded on the New York Stock Exchange (NYSE) and the Toronto Stock Exchange. The Gerdau Ameristeel Board of Directors (responsible for the Group s North American operations) consists of nine people and meets quarterly. Committees also exist to deal with specific areas, such as auditing, human resources, corporate governance, safety, health and the environment.

18 GERDAU GROUP STRUCTURE SUMMARY Metalúrgica Gerdau S.A. Banco Gerdau S.A. 99% 44.8% Gerdau S.A. 89.3% 66.5% 89.3% 89.3% 89.3% Gerdau Am. do Sul Participações S.A. 74.4% Sipar Aceros S.A. Gerdau Ameristeel Corp. 50.0% Gallatin Steel Gerdau Açominas S.A. Gerdau Aços Longos S.A. Gerdau Aços Especiais S.A. 40.0% Corporación Sidenor S.A. 89.3% Gerdau Comercial de Aços S.A. 100% Gerdau Laisa S.A. 100% Gerdau Aza S.A. 57.1% Gerdau Colômbia Ethical Guidelines Integrity is a word that defines the behavior that the Gerdau Group expects of each and every one of its employees in their dealings with all of the company s publics, including customers, shareholders, suppliers, communities and competitors. This behavior is specified in the Gerdau Ethical Guidelines, which are based on the Group s values. As with other employees, the members of the Board of Directors and the Executive Committee are bound by the Ethical Guidelines. In February 2006, the Gerdau Group reformulated its intranet channel in Brazil for the reporting of violations of the Ethical Guidelines in order to make it more responsive and effective. Here, an employee who identifies or suspects a possible violation of the Ethical Guidelines will find the appropriate means of obtaining advice on what to do. The Group

19 corporate governance 17 treats all complaints of inappropriate conduct with confidentiality and caution, regardless of the circumstances. Anonymity is completely assured, and employees need only identify themselves if they so wish. Within a maximum of 30 days, the person who chooses to identify him or herself will be advised of the treatment given to the complaint. At Gerdau Ameristeel there are two norms of conduct: the Code of Ethics and Business Conduct, observed by all employees, and the Code Ethics Applicable to Senior Executives, aimed specifically at employees working in senior executive positions. GERDAU BUSINESS SYSTEM (GBS) The rapid expansion of the Gerdau Group in recent years has demanded the implementation of an integrated management system capable of being adopted by all units in a short space of time. This management system is called the Gerdau Business System (GBS) and brings together internal best practices in all business processes, in addition to external benchmarks. In addition to best practices, the GBS standardizes the key process indicators at a global level, making it possible for each operation to follow-up and analyze results in an extremely objective manner. In 2005, a new tool was incorporated to the GBS to measure the practices of the Group s operations: GBS Global Assessment. By using this mechanism, the company can swiftly promote practices regarded as essential, accelerate the transfer of the management model to new businesses, obtain information regarding the development of action plans in line with its aims, measure adherence to the management model and its evolution and obtain internal benchmark information. This ensures the elimination of gaps and the fast implementation of an integrated model. The GBS Global Assessment application methodology provides for two distinct phases. In the first, managers and their teams carry out a self-evaluation and identify their developmental stage in relation to the Gerdau standards of excellence. In the second, a team made up of the Group s process leaders carries out the definitive evaluation. In order to develop GBS Global Assessment, the Gerdau Group used similar tools employed in other global companies as a model. In the past fiscal year, GBS Global Assessment was applied at Diaco (Colombia) and Gerdau Aços Especiais Piratini (state of Rio Grande do Sul), with great success.

20 BOARD OF DIRECTORS Jorge Gerdau Johannpeter Chairman Born in 1936, Jorge Gerdau Johannpeter graduated in Legal and Social Sciences from the Federal University of Rio Grande do Sul (UFRGS). He has worked for the Gerdau Group since 1954, having begun as an assistant. Executive President and Chairman of the Board of Directors since Germano H. Gerdau Johannpeter Vice Chairman Born in 1932, he studied Corporate Administration at the Getúlio Vargas Foundation (FGV). He has worked for the Gerdau Group since 1951 and is currently Vice President and Vice Chairman of the Board of Directors. Klaus Gerdau Johannpeter Vice Chairman Born in 1935, he graduated in Civil, Electrical and Mechanical Engineering from the Federal University of Rio Grande do Sul (UFRGS). He has worked for the Gerdau Group since 1954 and is currently Vice Chairman of the Board of Directors. Frederico C. Gerdau Johannpeter Vice Chairman Born in 1942, he graduated in Corporate Administration from the Federal University of Rio Grande do Sul (UFRGS) and has a Masters in Business, Finance, Costs and Investments from the University of Cologne, Germany. He has worked for the Gerdau Group since 1961, and is currently Vice Chairman of the Board of Directors and Senior Vice President of the Executive Committee.

21 corporate governance 19 André Pinheiro de Lara Resende Board member Born in 1951, he graduated in Economics from the Pontifical Catholic University of Rio de Janeiro (PUC-RJ), completed a Masters through the Getúlio Vargas Foundation (FGV) and holds a PhD from the Massachusetts Institute of Technology (MIT), USA. He was formerly President of the Brazilian Development Bank (BNDES), special adviser to the President of Brazil, chief negotiator of the country s foreign debt, Executive President of the steelmaker Siderúrgica Tubarão, Executive Vice President of Unibanco, Executive Partner of Banco Garantia and Director of the Public Debt and Open Market division of the Brazilian Central Bank, among other positions. Has been a member of the Gerdau Board of Directors since Affonso Celso Pastore Board member Born in 1939, he graduated in Economics from the University of São Paulo (USP), where he also completed his doctorate. He teaches at the Getúlio Vargas Foundation (FGV) in Rio de Janeiro and acts as an economic consultant. Was formerly Treasury Secretary for the State of São Paulo and President of the Brazilian Central Bank. Joined the Gerdau Group Board of Directors in Carlos J. Petry Board member Born in 1941, he graduated in Philosophy from the Federal University of Rio Grande do Sul (UFRGS). He has worked for the Gerdau Group since 1965, currently serving as Vice President of the Board of Directors and senior vice-president of the Executive Committee. Oscar de Paula Bernardes Neto Board member Born in 1946, he graduated in Chemical Engineering from the Federal University of Rio de Janeiro (UFRJ) and in Administration from the State University of Rio de Janeiro (UERJ). He is President and Director of the Latin America Internet Development Group and member of the advisory boards of Telesystem International Wireless and Bunge Alimentos S.A. in Brazil. He is also a member of the boards of RBS, CheckForte, Satipel and Alcoa in Brazil, and of Delphi Corp. in the USA. Was elected member of the Gerdau Group Board of Directors in 2002.

22 BOARD OF DIRECTORS CHAIRMAN Jorge Gerdau Johannpeter VICE CHAIRMEN Germano H. Gerdau Johannpeter Klaus Gerdau Johannpeter Frederico C. Gerdau Johannpeter BOARD MEMBERS André Pinheiro de Lara Resende Affonso Celso Pastore Carlos J. Petry Oscar de Paula Bernardes Neto SECRETARY GENERAL Expedito Luz GERDAU EXECUTIVE COMMITTEE PRESIDENT Jorge Gerdau Johannpeter SENIOR VICE PRESIDENTS Frederico C. Gerdau Johannpeter Carlos J. Petry EXECUTIVE VICE PRESIDENTS André B. Gerdau Johannpeter Claudio Gerdau Johannpeter Filipe Affonso Ferreira Mario Longhi Osvaldo B. Schirmer Paulo Fernando Bins de Vasconcellos Ricardo Gehrke SECRETARY GENERAL Expedito Luz ˆAdditional information available at

23 risk management 21 risk management TThe Gerdau Group is exposed to risks inherent to its operations and to the markets where it operates. The process of Integrated Risk Management (IRM) is one of Gerdau s corporate governance tools focused on improving the structure of internal controls. The IRM has the role of implementing the systematic evaluation and monitoring of risks and internal controls in the processes, on the basis of an internationally recognized methodology. The process meets the standards of the United States Sarbanes-Oxley Act, which seeks to increase transparency and commitment in relation to internal controls and disclosed information. All companies with shares traded on American stock exchanges must adhere to this legislation. With the IRM, Gerdau S.A. and Gerdau Ameristeel now meet these new legal requirements, as regulated by the Securities and Exchange Commission (SEC), the chief regulatory body of the United States stock market. INDUSTRIAl risks The Gerdau Group produces steel with calculated industrial risks. This means that the potential risks in a steel mill or downstream operation are known and dealt with so as to prevent their occurrence. Internal and external audits are carried out regularly so as to ensure the safety of people, our first priority in all facilities.

24 In order to achieve its zero-accident goal, the company has adopted the Total Workplace Safety System, consisting of a series of rigorous procedures, training activities and prevention programs, in addition to modern operating technology (see People and Teams). The main operating risks are frequently related to the high temperatures involved in the production processes. In terms of the use of scrap, an important raw material, the Gerdau Group uses advanced equipment to detect radioactivity, preventing contaminated materials from being included in the metal charged to electric arc furnaces. In relation to the use of energy inputs, high voltage electricity also requires rigorous protective procedures. Environmental Risks The Environmental Management System (EMS) consists of a set of preventive and proactive actions that guarantee the excellence of the Group s environmental protection practices. It involves the evaluation of industrial activities, from input collection to steel distribution, with the aim of continuing to reduce the company s impact on the environment (see Environmental Management). The Gerdau Group also adapts itself to the changing demands of local environmental legislation and of communities. Financial Risks The Gerdau Group uses tools to protect itself against fluctuations in interest rates, exchange rates and raw material prices, based on conservative forecasts. In this area, the company has a policy of negotiating high liquidity contracts on the futures and derivatives markets. These

25 risk management 23 instruments are registered according to the Financial Accounting Standards Board (FASB) statement 133 (US GAAP). As part of its growth strategy, the Gerdau Group has also established a natural hedge by obtaining revenues in strong currencies. This stems mainly from the significant cash generation resulting from steel production in the United States and Canada and from Brazilian exports. As of 2006, revenues will also be generated in Euros, as a result of the acquisition of a shareholding stake in Spain. Risks of Variation in Prices of Raw Materials Exposure to variations in the prices of raw materials is managed through medium and long-term supply contracts. In highly fragmented sectors, the Gerdau Group anticipates or postpones purchases in order to obtain the most favorable prices, by means of building inventories in areas such as scrap. The purchase of certain inputs, such as electricity, coal and iron ore, provides for the annual value revision of supply contracts. Insurance The Gerdau Group takes out insurance with the aim of covering risks to assets, loss of profits and civil liability, in line with the risk involved in each business. ˆAdditional information available at

26 PERSPECTIVES In forthcoming years, the Gerdau Group will maintain its strategy as a consolidating agent in the world steel sector, guided by the principle of investing in assets that generate added value and significant return for shareholders. Its strategic vision is to be a world-class international steelmaker, and it plans to keep the current growth rate. The continuity of the Group s expansion trajectory is based on the solid financial performance achieved over the years and on the positive experience of acquiring new assets and boosting productivity over a short period of time. This capacity to add knowledge and results to the operations is due chiefly to the use of the best management technologies and to investments in technological upgrades in the industrial units. In the Americas, the Gerdau Group is focused on the long steel market. In the specialty steel sector, however, the focus has become the world, with new assets in a number of continents being analyzed as business opportunities. An example of this is the acquisition of a 40% stake in Sidenor, Spain s main specialty steel producer, announced at the end of Expansion of Activities The future of the Gerdau Group as an international player is directly related to the expansion of its activities.

27 perspectives 25 Geographical expansion must necessarily involve the markets that currently represent the greatest challenges to the world steel sector, such as China and other Asian countries. In addition, Gerdau Açominas (state of Minas Gerais) will increase its production of slabs in the coming years, strengthening supply from Brazil to meet international demand. Gerdau Açominas is chiefly focused on exports. Steelmaking Sector The expansion of Gerdau Group businesses follows the irreversible trend towards consolidation in the world steel sector. Steelmaking is undergoing a process that has already taken place in other industrial sectors, such as mining, aluminum, cement and auto manufacturing. This movement is occurring at an extremely favorable moment for the sector. The result of this scenario has been an increase in the value of steelmaking assets, as most companies achieved good returns in Important raw materials, especially iron ore and coal, and international freight services have also increased substantially in price. The Gerdau Group will continue working to achieve new levels of efficiency and positive results in any scenario, as it has done for over one hundred years.

28 SHAPING THE WORLD, GENERATI

29 BUSINESS The Gerdau Group invests in the development of its businesses thereby generating quality jobs, distributing wealth and shaping the world. Gerdau also helps shape the world through its products, found in bridges, buildings and automobiles throughout five continents Finance 28 Capital markets 33 Sales and markets 40 Investments 47 NG GROWTH

30 FINANCE Results In 2005, Gerdau Group gross revenues rose 8.9% to R$ 25.5 billion. Net profit reached R$ 3.3 billion, close to the record level achieved in 2004, the best year in the history of steelmaking. The international scenario contributed significantly to this performance, especially due to the strong demand from China. World production reached 1.1 billion metric tons, up 6.1% on the previous year, encouraging the Gerdau Group to invest in the expansion of its operations. Margins and operating cash flow were affected this year by increased raw material costs, such as iron ore, coal and electricity. As a result, net margin the relation between net profit and net sales revenue was 15.4% and gross margin was 27%, compared to 17.1% and 31.9%, respectively, in the previous year. Operating cash flow (EBITDA) was R$ 4.9 billion, compared to R$ 5.5 billion in EBITDA margin the relation between EBITDA and net revenue was down from 28.1% to 23%. Sales expenses and general and administrative expenses totaled R$ 1.7 billion and represented 7.9% of net revenue for the year, slightly higher than the 7.7% recorded in This increase resulted from greater port service costs due to export growth and increased costs with long-term incentives for North American employees. In 2005, financial income (financial costs minus financial revenues) was positive, to the sum of R$ 42.2 million. This fiscal year, revenues resulting from the increased value of the Brazilian real against the US dollar in relation to foreign currency debts totaled R$ million and monetary fluctuation costs totaled R$ 19.8 million. Excluding these monetary and exchange rate variations, net financial costs totaled R$ million for the year, against R$ million in The effect of the exchange rate variation on Gerdau s foreign investments resulted in negative equity pickup, to the sum of R$ million for the year. This value also includes fiscal incentive reserves and goodwill amortized in the period.

31 finance 29 Net Sales Revenue (million R$) Net Profit (million R$) Indebtedness Net debt (gross debt less cash and cash equivalents) was reduced by 51.9% to R$ 2.0 billion in 2005, due to the cash flow generated during the year and the increased value of the real, which reduced the dollar portion of the debt contracted by the companies in Brazil, when converted into reais. Gross debt (loans and financing plus debentures) rose from R$ 6.1 billion to R$ 7.4 billion as a result of financial operations carried out during the year. Of the gross debt, 18.1% (R$ 1.4 billion) corresponds to short-term financing and 81.9% (R$ 6.0 billion) to long-term. The average debt maturity rose from four to nine years, thanks to the extension strategy adopted in Of the total debt, 19.5% is in Brazilian currency, 48.8% in US dollars contracted by the companies in Brazil and 31.7% was contracted in various currencies by the Group s companies outside Brazil. At the end of the fiscal year, net debt was 0.4 times EBITDA, well below the limit of 2.5 times established as the Group s indebtedness policy. At present, net debt corresponds to less than six months of the Company s cash flow, showing that the acquisition of new assets in the period did not compromise the Group s indebtedness.

32 Financial Indicators Dec 31, 2005 Dec 31, 2004 Net debt/total capitalization % 34.2% EBITDA/Net financial expenses (except monetary and exchange variation) 46.7x 21.8x Gross debt/ebitda 1.5x 1.1x Net debt/ebitda 0.4x 0.7x 1. Total capitalization = net equity + net debt. Main Financial Operations In the second semester of 2005, Gerdau S.A. carried out its first issue of Guaranteed Perpetual Senior Securities on the international financial market (see box: Demand for Perpetual Securities is Almost 12 Times Greater than Offer). In October, the company concluded the issue of Euro Commercial Paper, a short-term debt instrument, to the value of US$ 200 million, maturing on October 11, This operation continued a program begun in 2003 and renewed three times to date. DEMAND FOR PERPETUAL SECURITIES IS ALMOST 12 TIMES GREATER THAN OFFER In September, Gerdau S.A. concluded its first issue of Guaranteed Perpetual Senior Securities on the international financial market, at the value of US$ 600 million. Demand totaled US$ 3.5 billion, almost 12 times greater than the Company s initial offer of US$ 300 million. Perpetual Securities are debt instruments without a maturity date that, in the case of Gerdau S.A., can be redeemed as of September 2010 or, after that date, at each quarterly interest payment. The interest rate is 8.875% per year, the lowest recorded in any issue of perpetual securities by a Brazilian company. The purchasers of these papers were individuals and private banking managers in Asia (46%), Europe (32%), the United States (20%) and Brazil (2%). The operation was rated Ba1 (stable) by Moody s Investor Service Inc., BB- (stable) by Standard & Poor s, and BB- (stable) by Fitch Ratings.

33 finance 31 Since the first issue, the interest rates have shown a downward trend: 4.125% in 2003 (275 bps above one year LIBOR), 3.125% in 2004 (67 bps above one year LIBOR) and 5% in 2005 (45.5 bps above one year LIBOR). On October 31, 2005, Gerdau Ameristeel increased its line of working capital to US$ 650 million from US$ 350 million. In addition to extending the maturity of the operation from 2008 to 2010, the company also reduced its fund raising cost by an average of 1.25%. This line is guaranteed by the company s product stocks and accounts receivable. Another important operation that took place in the beginning of 2006 was the US$ million financing obtained by Gerdau Açominas to expand its production capacity. RATING In November 2005, the rating agency Standard & Poor s published its reclassification of foreign currency risk for certain Latin American, Asian and Pacific region companies. Gerdau S.A. moved up two levels on the classification scale, from BB- (stable) to BB+ (stable). More importantly, it is now just one level below investment grade, the rating for companies recommended for international investors. Distribution of Added Value R$ 10.4 billion Profit reinvestment 19.3% Dividends and interest on capital stock 12.1% Wages, benefits, profit sharing and training 23.6% Interest on financing 4.2% Taxes, contributions and social obligations 40.8% ˆAdditional information is available at

34 CONSOLIDATED CASH FLOW Metalúrgica Gerdau S.A. Company (in thousand R$) Net Income for Year 1,275,584 1,437,075 3,268,844 3,341,097 Equity Pickup (1,281,519) (1,342,842) 157, ,628 Provision for Credit Risk - - (12,339) 7,647 Gain (Loss) in Fixed Asset Disposal ,642 9,058 Gain (Loss) in Liquidation of Investments - (170,953) (317,827) (164,058) Monetary and Exchange Variation* 4,422 5,198 (77,587) (94,087) Depreciation and Amortization , ,819 Income Tax and Social Security Contribution (9,809) 47,393 43, ,551 Interest on Debt , ,152 Contingencies/Legal Escrow (372) (940) (67,216) 4,351 Changes in Trade Accounts Receivable ,287 (720,363) Changes in Inventories ,981 (1,402,408) Changes in Contractors (51) 58 (128,858) 477,292 Other Accounts in Operating Activities 1,233 (33,737) 134,564 (100,288) Net Cash Provided by Operating Activities (10,363) (57,825) 4,961,231 3,387,391 Fixed Assets Acquisition/Disposal - - (1,641,230) (1,173,491) Deferred Charges - - (27,905) (18,006) Investments Acquisition/Disposal (8,791) 155,144 (129,282) 362,905 Acquisition of Assets (924,457) Proceeds from Dividends/Interest on Capital Stock 434, , Cash Applied to Investments 425, ,028 (1,798,417) (1,753,049) Fixed Assets Suppliers - - (28,636) 144,573 Working Capital Financing (8,549) (7,778) 1,175,121 (133,006) Debentures - (586) 12,235 85,305 Proceeds from Fixed Assets Financing , ,766 Payments of Fixed Assets Financing - - (476,266) (677,357) Payment of Interest on Financing (4) - (426,284) (379,801) Inter-Company Loans (129) 2,839 11,590 35,944 Capital Increase/Treasury Stock (12,992) (14,441) 520, ,704 Payment of Dividends/interest on Capital Stock and Statutory Participations (439,816) (358,623) (1,102,601) (853,710) Net Cash Provided by Financial Activities (461,490) (378,589) 396,702 (563,582) Change in Cash Balance (46,488) 70,614 3,559,516 1,070,760 Cash Balance At the Beginning of the Period 95,800 25,186 2,003,945 1,015,726 Update of Initial Cash Balance - - (210,426) (82,541) Initial Balance of Companies in the Year ,428 - At the End of the Period 49,312 95,800 5,395,463 2,003,945 * Includes swap gains and/or losses.

35 CAPITAL MARKETS 33 CAPITAL MARKETS Gerdau Group company shares are listed in the São Paulo, New York, Toronto and Madrid stock exchanges. Their liquidity levels reflect the Group s ongoing efforts to add value for shareholders. The results of this policy, together with transparent practices, translate into attractive market dividends. Profitability of Shares (Steel Companies) ( ) Metalúrgica Gerdau S.A. and Gerdau S.A. In Brazil, the Gerdau Group owns two listed companies: Metalúrgica Gerdau S.A. and Gerdau S.A. In 2005, shareholders of Gerdau S.A. received R$ million in dividends, and those of Metalúrgica Gerdau S.A. received R$ million. This represents a dividend yield at December 31 of 6.1% for Metalúrgica Gerdau S.A. and 4.6% for Gerdau S.A. Payment of dividends is based on the net profit obtained in the fiscal year. Net profit totaled R$ 1.3 billion for Metalúrgica Gerdau S.A., yielding R$ per share, and R$ 2.8 billion for Gerdau S.A., or R$ 6.24 per share.

36 Since 1977, the Group s listed companies in Brazil have paid shareholders at least 30% of adjusted net profit each year, in the form of dividends and interest on capital stock. Holders of common and preferred shares have 100% tag along rights, meaning that all common and preferred shares have the right to be included in any public takeover offer. Minority shareholders are thus guaranteed the same price paid on common shares held by the controlling block. This benefit exceeds the requirements of the current legislation, which establishes a minimum of 80% as the price to be paid per voting share in the case of takeover. Shares in the two Gerdau Group companies listed on the São Paulo Stock Exchange (Bovespa) performed well in 2005, with Gerdau S.A. preferred shares up 33.4% and Metalúrgica Gerdau S.A. securities up 18.5%. Both are part of the virtual portfolio that determines the Bovespa Index, Brazil s most important stock market indicator. The number of transactions involving Metalúrgica Gerdau S.A. shares on the Bovespa practically doubled compared to 2004, up 95.2% to 123,361 trades. The financial volume traded was up 32.6% to R$ 2.7 billion. Daily trading volume for preferred shares averaged R$ 10.2 million. Gerdau S.A. share participation on the Bovespa was also significant. The number of trades was 345,572 (up 54.3%), moving R$ 9.1 billion (up 25.1%). For the year, average daily trading in preferred shares was R$ 34.8 million, representing a growth of 31.8% in relation to the R$ 26.4 million recorded in On the New York Stock Exchange (NYSE), Gerdau S.A. American Depositary Receipts (ADRs) moved a total of US$ 2.9 billion, an increase of 127.1% in relation to the previous year. Average daily trading of preferred shares was US$ 11.6 million. On the Madrid Stock Exchange (Latibex), shares totaling 19.5 million were traded in 2005, up 214.5% on In 2005, shareholders of Metalúrgica Gerdau S.A. and Gerdau S.A. received a 50% bonus on shares held at April 11, 2005, when the operation was carried out (see box: Incentive to Small Investors). In June and July, both companies also acquired their own shares to retain in treasury and for later cancellation. This had an impact on the market, resulting in greater share value and liquidity. Resources for these acquisitions came from existing profit reserves. Gerdau S.A. purchased 740,200 preferred shares and Gerdau S.A., 424,200.

37 CAPITAL MARKETS 35 Performance of Metalúrgica Gerdau S.A. Shares in Brazil (GOAU4) Performance of Gerdau S.A. Shares in Brazil (GGBR4) Performance of Gerdau SA. ADRs in the United States (GGB)

38 Gerdau Ameristeel Corp. Gerdau Ameristeel, the company responsible for the Group s North American operations, began to pay dividends in 2005, having distributed US$ 66.9 million. Shares in the company moved Cdn$ million on the Toronto Stock Exchange, up 38.4% on the 2004 figure. Average daily trading volume rose from Cdn$ 2 million to Cdn$ 2.8 million. On the New York Stock Exchange (NYSE), the company s shares moved a total of US$ million, giving a daily average of US$ 1.2 million. Accumulated net sales revenues for Gerdau Ameristeel (in US GAAP) totaled US$ 3.9 billion, up 29.5% on This was chiefly due to the consolidation of the facilities of North Star, acquired at the end of The company s net profit for the fiscal year was US$ million. Performance of Gerdau Ameristeel Corp. Shares in Canada (GNA.TO) Performance of Gerdau Ameristeel Corp. Shares in the U.S.A. (GNA)

39 CAPITAL MARKETS 37 SHAREHOLDER BASE % Metalúrgica Gerdau S.A. Gerdau S.A. Gerdau Ameristeel Corp. Brasil 89,40 75,30 66,50 North America 7,80 20,80 33,50 Europe 1,90 3,00 Other 0,90 0,90 Total 100,00 100,00 100,00 STOCK QUOTES Metalúrgica Gerdau S.A. (Bovespa) (In R$) High 49,55 40,98 18,49 7,04 3,76 Low 26,46 17,96 6,37 3,60 2,35 Year-end 48,50 40,98 18,40 7,04 3,47 Market Cap (R$ million) Gerdau S.A. - (Bovespa) (In R$) High 39,30 31,84 18,00 7,45 4,52 Low 20,23 15,07 6,26 4,26 2,41 Year-end 39,30 29,46 17,72 7,04 4,05 Market Cap (R$ million)

40 Gerdau S.A. ADR - New York Stock Exchange (NYSE) (In US$) High Low Year-end OO Gerdau S.A. DR - Madrid Stock Exchange (Latibex) (In ) * High Low Year-end * Quotes starting December 2 nd, Gerdau Ameristeel Corp. - New York Stock Exchange (NYSE) (In US$) * High Low Year-end Market Cap (Cdn$ million) 1,732 1,995 * Quotes starting October 15, Gerdau Ameristeel Corp. - Toronto Stock Exchange (In Cdn$) High Low Year-end Market Cap (Cdn$ million) 2,009 2,

41 CAPITAL MARKETS 39 Indicators per Share (In R$ million) Metalúrgica Gerdau S.A. Gerdau S.A. Dividend Paid Net Profit 1,276 2,781 Adjusted Net Profit 1,212 2,642 % Pay-out Yield In R$ Earnings per Share Equity Value per Share INCENTIVE TO SMALL INVESTORS In 2005, the Gerdau Group issued a stock dividend to shareholders of its two listed companies in Brazil, Metalúrgica Gerdau S.A. and Gerdau S.A. The operation consisted of the incorporation of capital stock reserves and the issue of new shares. For each lot of 100 shares, 50 bonus shares of the respective company were credited. The basis for the operation, discussed at the two companies Board meetings, was the capitalization of investment resources and working capital over previous fiscal years, resulting in capital stock increase for both companies from R$ 1.7 billion to R$ 2.5 billion in the case of Metalúrgica Gerdau S.A., and from R$ 3.5 billion to R$ 5.2 billion for Gerdau S.A. The operation allowed greater access to the companies shares by small investors, as the cost of a standard lot was reduced in the same proportion as the stock offering.

42 SALES AND MARKETS In 2005, the world steel industry maintained the excellent performance recorded during the previous year. According to the International Iron and Steel Institute (IISI), global steel production was up 6.1% to 1.1 billion metric tons. The growth in production levels continues to reflect the growth in international demand, led by the expansion of the Chinese economy. The Gerdau Group s sales performance is a result of this positive scenario and of its efforts to gain new markets in the areas where it operates. A total of 13.6 million metric tons of steel products were sold in 2005, up 7.9% on The Group also continued investing to obtain maximum industrial process operational efficiency in its units, with the aim of offering its customers outstanding product quality. In 2005, a total of 13.7 million metric tons of slabs, blooms and billets was produced, up 1.7% on the previous year. Rolled product output was 10.8 million metric tons, 5.2% higher than in In all countries where it operates, the Gerdau Group works to add value to its products and to its customers businesses, using downstream operations and rebar fabricating facilities, the latter being an increasingly important aspect of the steel sector. For the markets serviced, this work signifies greater productivity and reduced waste. Physical Sales by Geographic Region (thousand metric tons)

43 SALES AND MARKETS 41 Output of Slabs, Blooms and Billets (thousand metric tons) Output of Rolled Products (thousand metric tons) BraZil The year 2005 was characterized by an austere economic policy, with interest rates reaching 19.75% and ending the year at 18.5%. Inflation, at 5.7%, was similar to the previous year. Annual GDP grew 2.3%. In this context, the domestic demand for steel products contracted, but was partially compensated by exports. Gerdau Group s Brazilian plants sold 6.3 million metric tons, of which 3.5 million metric tons went to the domestic market, down 9.6% on Exports, on the other hand, were up 2.6%, to 2.8 million metric tons, generating US$ 1.2 billion in sales revenues. In an effort to increase product value, the Gerdau Group strengthened its activities in rebar fabricating facilities for civil construction, by expanding its existing Brazilian units. The Company currently has 25 such facilities, compared to 20 in By the end of 2006, the Group intends to open three additional rebar fabricating facilities. Fabricated rebar increases productivity and reduces losses at construction sites. In relation to its specific markets, Gerdau has three main competitive advantages: complete national coverage in Brazil, its guarantee of fast, on time delivery and its wide product range. It also seeks to be known for the quality of the products and services it offers to customers (see box: Customers Closer than Ever). The aim is to meet the specific needs of each customer, from fabrication to delivery, through the intensive effort of optimizing and simplifying our sales processes.

44 An important sales channel in Brazil is Comercial Gerdau, which distributes a complete line of long steel products made by Gerdau and flat products from other steelmakers. Through its 68 stores, the Company is able to service even the most remote regions of the country. The Company offers a range of products for civil construction, including rebar, structural profiles, welded wire mesh and truss frames. In 2005, Gerdau was part of important projects in the energy sector, supplying steel for the Irapé hydroelectric plant (state of Minas Gerais) and for wind farms in Rio do Fogo (Rio Grande do Norte) and Osório (Rio Grande do Sul). Gerdau steel was also used in five Petrobras oil platforms, the Salvador Shopping Mall (Bahia), the University of São Paulo and the São Paulo subway (São Paulo), among other projects. The combined use of Gerdau products and civil construction services has brought significant productivity gains to projects of national significance. For the bridge at Redinha (state of Rio Grande do Norte), for example, the use of truss frames and mesh delivered to the building site ready for use, resulted in direct savings of 10% in comparison with conventional solutions, in addition to significant time savings. In the industrial sector, sales of specialty steel products grew as a result of the expansion of the automotive market, with demand being met in full by the Gerdau Group. Gerdau Aços Especiais Piratini, the Group s mill dedicated to this sector, holds ISO TS certification, granted to organizations that meet global automotive industry quality system standards. Forecasts for 2006 indicate that Brazil s economy will grow at around 3.5%, which should have a positive impact on steel consumption. Destination of Exports from Brazil In 2005 Europe 11% Central America 13% Africa 8% North America 5% Asia 44% South America 19%

45 SALES AND MARKETS 43 CLOSER THAN EVER TO CUSTOMERS Part of the Gerdau Group s strategy is to stimulate the development of its customers businesses. With this aim, the Company held training programs in 2005 for around 30,000 people working in the civil construction, industrial and agricultural sectors in Brazil. The initiatives are aimed at professionals such as engineers, builders, welders, fencers and rural producers, in addition to small and micro business owners, such as metalworkers and cabinetmakers. The programs provide technical know-how regarding the most efficient use of products, and also offer tools for increasing the productivity of the business, perfecting financial management, strengthening marketing and safety concepts, and stimulating better customer service. INSTRUCTION SESSION on assembling a fence - Esteio, state of Rio Grande do Sul

46 Argentina, Chile, Colombia and Uruguay In 2005, the operations in Argentina, Chile, Colombia and Uruguay sold 801,800 metric tons, up 54.1% on the previous year. This growth reflects the expansion of the region s economy, together with the consolidation of Diaco and Sidelpa (Colombia) and Sipar (Argentina) as of the fourth quarter. These units supply steel mainly to the domestic markets of their respective countries: civil construction, industry and agriculture. Argentina s GDP grew 9.2% in 2005, driven by growth in civil construction, agriculture, financial services, transport and communications. The strong revitalization of both public and private projects in the country s interior also resulted in greater consumption of steel produced by Sipar, located in the province of Santa Fé. This year, the Timbúes grain port and the Corredor del Oeste highway were highlights. The growth in the demand for steel was also significant in the industrial sector. For 2006, the market predicts a slowdown in economic growth, which remains, however, at a significant level of around 7%, favoring Sipar sales. In Uruguay, economic growth reached 6%, with positive effects on product sales. The positive scenario for civil construction was fundamental to the performance of Gerdau Laisa. In 2005, the unit became the first Uruguayan company to receive the Ibero-American Quality Award, a management practices benchmark. Expectations for 2006 suggest a growth of approximately 4% in GDP. In the same period, Gerdau AZA (Chile) showed positive performance, driven by the country s 6.3% growth in GDP. Investment in the country s housing sector grew 8.7%, chiefly as a result of low interest rates, while the infrastructure sector experienced an 11.6% growth in investment, driven by public and private works in areas such as mining. Gerdau AZA steel was also used in the construction of shopping centers in Santiago, Antofagasta and Puerto Montt. For 2006, Chile is expected to see a 5.5% growth in GDP, according to international organizations. In Colombia, GDP grew by 5.1% and steel sales were driven chiefly by the civil construction sector, which rose around 23% in This expansion took place basically as a result of investments in housing, commercial centers and infrastructure. Supply of fabricated rebar, previously concentrated in the capital, spread to the countryside. Significant growth of 12% in the industrial sector was driven by the market for transmission networks and general metalwork.

47 SALES AND MARKETS 45 Canada and the United States In 2005, the Canadian economy grew 2.9% and the US economy grew 3.5% in comparison with the previous year, resulting in improved employment levels in the region. During the same period, Gerdau Ameristeel sales grew 18.7%, totaling 6.4 million metric tons, as a result of continued demand and the consolidation of North Star facilities. In relation to the market, Gerdau Ameristeel s incorporation of new facilities meant increased supply of products and broader geographic coverage. The challenge, therefore, was to build loyalty among former North Star customers through intense work with the new customer base. Furthermore, Gerdau Ameristeel made great efforts to reduce costs, which were impacted by the increased price of oil and by the hurricanes in the United States. In North America, cost control efforts are fundamental to maintaining competitiveness, due to the significant volume of steel imports. Civil construction, Gerdau Ameristeel s main market, remained active during the period, with special emphasis on residential construction projects, schools, hotels and hospitals, primarily in the Southeastern region of the United States. The industry is also experiencing a positive phase, which has generated increased demand for steel products, especially bars and profiles, specialty steel and special sections (see box: Gerdau Steel in the World s Tallest Buildings). On the other hand the wire rod segment, where imports accounted for nearly 50% of the volume sold, presented low profitability during the period. The expectation for the market in 2006 is that GDP growth will remain at levels similar to those recorded during 2005, which should drive steel consumption up. GERDAU STEEL IN THE WORLD S TALLEST BUILDINGS he world s tallest skyscraper contains Gerdau steel. Situated in Taipei, the capital of T Taiwan, the Taipei 101 tower uses elevator guide rails made with steel from Gerdau Ameristeel Manitoba. The mill, located in Selkirk, in the Canadian province of Manitoba, is the largest supplier of hot rolled elevator guide rails in North America and one of the biggest in the world. Taipei 101 is 508 meters tall and has 101 stories. It opened in 2004 and is inspired by bamboo, a material widely used in Chinese construction for its strength and flexibility. The two elevators are the fastest in the world, reaching speeds of 60 km/h going up and 36 km/h going down. Each elevator was around US$ 2 million. To prevent visitors from feeling discomfort due to pressure change, the air pressurization is computer controlled.

48 Gerdau Ameristeel Manitoba also supplied steel to the builders of the second tallest building in the world, the Petronas Towers. Located in Kuala Lumpur, capital of Malaysia, each tower stands 452 meters tall, with 88 stories and five underground levels. The Manitoba mill shipped about one thousand metric tons of steel to make the guides for 29 high-speed elevators in the twin towers one of the most important tourist attractions in Kuala Lumpur. The steel giant also contains 32,000 windows and a garden designed by Brazilian Burle Marx. THE HIGHEST building in the world, Taipei 101, has elevator guides made of steel manufactured at Gerdau Ameristeel Manitoba, in Canada

49 INVESTMENTs 47 investments The objective of Gerdau Group investments is growth and increased competitiveness in the international scenario. The Company also works to reduce risks in the markets in which it operates and obtain the best returns on capital. Gerdau s investments focus on the expansion and upgrading of industrial plants and the acquisition of assets in regions with potential for steel consumption. MAIN INITIATIVES IN 2005 During the year, global investments totaled US$ 858 million, 11.2% more than in Brazil received US$ million, with approximately 40% (US$ 227 million) allocated for the expansion of Gerdau Açominas (state of Minas Gerais), a project scheduled for completion by The plant, which serves primarily the international market, will have its installed capacity increased from 3 to 4.5 million metric tons per year. There were also significant investments during the year designed to increase supply to the Brazilian domestic market. Gerdau São Paulo, a new steel mill focused on the civil construction market, began operations at the end of The unit is equipped to produce up to 900,000 metric tons of steel per year. The rebar rolling mill, which will have an annual installed capacity of 600,000 metric tons, will also start operating during the second half of Investments in Facility Expansion and Upgrade (Capex) US$ million

50 The Group also completed its investments to increase the production capacity at Gerdau Aços Especiais Piratini (state of Rio Grande do Sul) to 500,000 metric tons of finished products per year (see box: Gerdau Steel Part of the Automotive Supply Chain). In Colombia, the Gerdau Group acquired control of the companies Diaco and Sidelpa as part of the staggered acquisition of shares from the previous controllers, the Mayagüez Group and Latinamerican Enterprise Steel Holding. The deal, announced in December 2004, involved a total sum of US$ million, with debt accounting for US$ 36.9 million. The Gerdau Group currently holds 57.1% of the capital stock at Diaco, Colombia s largest producer of steel for civil construction, and 98% of Sidelpa, the country s only specialty steel producer. The Gerdau Group plans to expand the production of the units over the next few years. It will also be investing in the implementation of new management technologies and employee training, designed to increase industrial productivity. Gerdau s presence in the Argentinean market also increased after the Group acquired an additional 36% of the Sipar rolling mill, raising its stake to 74.4% of Sipar s equity. The deal meant a US$ 40.5 million investment over the next three years. Located in Perez, province of Santa Fé, Sipar is the second largest long steel supplier in Argentina, with an annual production capacity of 240,000 metric tons. In Canada, Gerdau Ameristeel Whitby (Ontario) was the focus of major investments with the refurbishing project in the continuous casting area and improvements in the rolling mill and in the storing and shipping areas. In the United States, the highlight was the installation of a new billet reheating furnace at Gerdau Ameristeel Sayreville (New Jersey), which has simultaneously reduced costs and increased production capacity from 550,000 to 650,000 metric tons. In Cartersville (Georgia), the Group installed a new profile finishing area to increase the capacity by 100,000 metric tons to 580,000 metric tons per year. FUTURE INVESTMENTS ( ) The Gerdau Group plans to invest US$ 3.8 billion in the Americas over the next three years. Of this total, US$ 2.5 billion will be spent in Brazil and US$ 143 million on the units in Argentina, Chile, Colombia and Uruguay. The industrial plants in North America will receive US$ 1.2 billion and the Spanish company Sidenor, US$ 35 million (see box: Gerdau Enters Europe with Sidenor).

51 investments 49 GERDAU ENTERS EUROPE WITH SIDENOR At the end of 2005, the Gerdau Group gained a footing on European soil when it announced its acquisition of 40% of the equity of Corporación Sidenor S.A., Spain s main specialty long steel producer. Sidenor is also one of the country s largest manufacturers of forged and cast products. The deal, totaling US$ million, was in partnership with Santander Bank, which acquired 40% of Sidenor s share capital, while Sidenor s Spanish executives retained 20%. The operation was finalized in January 2006 and Corporación Sidenor s figures were therefore included in the Gerdau Group consolidated financial statements from this date forward, in proportion to its shareholding. Sidenor primarily serves the European market, focusing on the automotive industry. It has three steel mills in northern Spain Reinosa, Basauri and Vitória and two forging units in Madrid and Elgeta. In Reinosa, the company produces rolling mill cylinders and large specialty cast parts in addition to the specialty long rolled products. Sidenor also has a 58.44% stake in the Brazilian steel company Aços Villares, which has mills in the towns of Mogi das Cruzes, Pindamonhangaba and Sorocaba. Together, Sidenor s mills have an annual production capacity of 1.9 million metric tons of steel. This new situation has allowed the Gerdau Group to advance its growth strategy, primarily in the specialty long steel sector, in overseas markets where the automotive industry is present. SIDENOR UNIT at Basauri, Spain: the Gerdau Group aqcuired 40% of Sidenor s capital stock in 2005.

52 GERDAU STEEL PART OF THE AUTOMOTIVE SUPPLY CHAIN Gerdau Group specialty steel travels the world. It can be found in automobiles, trucks and agricultural machinery and equipment sold from Brazil to all continents in the form of parts, components, engines and steering, transmission and suspension systems. It can be found in vehicles manufactured by Volkswagen, Fiat, General Motors, Peugeot, Ford, Mercedes-Benz, Toyota, Citroën, Agrale, Volvo, New Holland, Scania, Caterpillar, AGCO and Komatsu, among others. In Brazil, 80% of Gerdau Aços Especiais Piratini production is destined for the automotive industry. The mill produces high value-added steel products to meet the specific needs of each customer. It sells its products primarily to the forging and auto parts sectors. In 2005, the Group increased the mill s installed capacity from 400,000 to 500,000 metric tons of finished products. The steel production capacity also grew to 400,000 metric tons per year. The first Brazilian steel mill to receive the National Quality Award in 2002, Gerdau Aços Especiais Piratini s history has been characterized by innovation. Besides developing projects in partnership with universities and research centers in Brazil, it has product and process technology transfer agreements with companies in Japan, Germany and the United States. The idea is to work with customers, improving processes and developing new types of steel in order to find solutions that raise the competitiveness of auto part and automobile manufacturers. In the melt shop, the unit produces 150 different grades. Through its rolling mill and mechanical transformation activities, the mill produces some 10,000 different items. The steel quality is determined by factors such as chemical composition, cleanliness and heat treatments. In 2005, 9% of Gerdau Aços Especiais Piratini s production related to products developed over the past three years. It also finalized 29 new projects during the year, including specific studies on heat treatments and physical and mathematical modeling programs in the melt shop. More investments are planned for the unit over the next few years to further consolidate its position as a world class supplier for the global automotive supply chain.

53 investments 51 GERDAU GROUP specialty steel is found in cars from more than 15 different manufacturers

54 VALUING SHAPING THE WORLD,

55 PEOPLE The Gerdau Group invests in its professionals and in the communities surrounding its facilities. This is a reflection of the Group s belief that a better world is only possible through improving people s quality of life Employees 54 Communities 63 PEOPLE

56 EMPLOYEES The Gerdau Group pays close attention to the personal development of its professionals. We develop ongoing strategies to attract and retain talent, build teams, and recognize and reward good performance. Our employees are challenged to act in a proactive fashion in the consolidation of the Group as a world-class international company. Gerdau s human resources management is focused on the globalization of policies and guidelines in all operations. The actions taken are aimed at promoting new behaviors and attitudes, encouraging leaders and their teams to achieve the highest levels of performance, and generating results for employees, customers, shareholders and communities. At the end of 2005, the Gerdau Group had 25,300 employees. Mainly as a result of the consolidation of the company s stake in Sidenor, this number now exceeds 27,500. Employees by Region 25,253 people Background of Employees 25,253 people Brazil 65.1% Argentina, Chile, Colombia and Uruguay 9% Local 98.3% Foreigners 1.7% Canada and the United States 25.9%

57 Employees 55 Cultural integration As an organization that brings together different cultures, the Group adopts a position of sensitivity and flexibility in making the adjustments necessary to respect the practices of local markets. At the same time, the Company keeps its ethical core intact in every location: its basic values, policies and guidelines. Focus on similarities rather than differences: that is the attitude behind the construction of a common project for all of the Group s employees (see box: Helping Hurricane Victims). Organizational climate The Company s organizational climate allows it to meet business challenges: growth and profitability, customer satisfaction and high team performance. At the same time, this climate must encourage the fulfillment of employees aspirations in relation to personal development, opportunities, career, compensation and recognition. An annual organizational climate survey, carried out with employees to evaluate whether the Company s Human Resource Management practices are meeting expectations and creating the expected results has demonstrated synergy between the Gerdau Group s targets and those of its professionals. In 2005, the general satisfaction index in Brazil achieved the impressive level of 90%, with the percentage of favorable responses reaching 80%. Human development The Gerdau Group s training investments grow each year. In 2005, the company invested R$ 33 million in professional development programs, up 17.7% on the previous year. In the same period, 1.7 million hours of training were carried out throughout the Group s units, representing a 5.9% increase in relation to These training and development programs are focused on different fields of professional activity, including essential contents and approaches that stimulate self-improvement. Employees in the production area, for example, take part in the Industrial Training System. In sales, the Commercial Training System develops customer service skills. Leaders have a specific system aimed at developing competencies, with a focus on team management and success. Full scholarships are offered for MBA and Master s programs.

58 Leaders also take part in exchanges between Gerdau operations in different countries. This provides an opportunity to swap experiences, get to know new cultures and hone management practices. Exchanges also contribute to the diffusion of the Gerdau values and culture, as well as best practices adopted in the Group s various units (see box: People: Gerdaus Competitive Edge). Training and Development Investments (R$ million) Training hours (million) Training hours per employee* *Except Gerdau Ameristeel and part of Diaco Gerdau Corporate University Developed in 2005, the Gerdau Corporate University project will be implemented in 2006, with the aim of managing all of the Group s training and development programs. For this initiative, the Group s business competencies were identified by means of 23 interviews carried out with senior executives. These will guide the creation of the university s programs and course modules. A matrix will store the Company s knowledge about management at different levels of complexity. Attracting talent Preparing people to meet the new demands that result from the Gerdau Group s growth strategy is one of the priorities of the organization. This task is in line with the concept of training global leaders, which forms part of the vision of a world-class international company. The training program for new talents brought together 1,400 interns and trainees in 2005, to be prepared in an accelerated and coherent manner to take on new positions in the Company (see box: Tomorrow s Leaders). Compensation Employee compensation consists of two elements: one fixed, in line with best market practices, and the other variable, reflecting the achievement of goals and results by teams in all the operations. Variable compensation for leaders is influenced by the results of the Business Operation and the unit in which each executive works, and by their personal performance. This last item takes into account success in meeting planned targets and achievements in relation to plans for personal development, teams and succession.

59 Employees 57 Benefits The aim of the Gerdau Group s benefits program is to contribute to the health and well-being of the employees and their families. It is adjusted to the particularities of each country and business operation and seeks to develop professionals and strengthen their relationship with the organization. The benefits offered by the Company include retirement plans, medical, dental and pharmaceutical assistance, housing and educational loans, and funding for university scholarships, among others, according to the needs of employees in each geographical region. Benefits (R$ million) Meals Transportation Profit sharing Private pension Health Total safety No emergency, production situation, or result can justify jeopardizing the safety of our employees or service providers. That is the philosophy that guides the Gerdau Group s safety activities. Besides making ongoing investments in protection gear and equipment for the industrial plants, the Company undertakes significant activities to develop the culture of an accident-free workplace. For this reason, it seeks the commitment of its leaders and the involvement of all of its professionals through ongoing training and awareness-raising activities (see Risk Management). The Total Workplace Safety System the set of practices adopted in all the units uses safety management methodology based on internationally recognized standards of excellence and is audited regularly by an external consultant and internal teams.

60 Workplace Safety Investment (R$ million) Accident Frequency Rate* * Lost time accident rate per million hours worked. Accident Frequency Rate* * Lost time accident rate per million hours worked. Employee communications The Gerdau Group s Employee Communication system aims to offer employees the information they need to be able to act in line with the self-management model. In this model, each operator understands their process and fulfills their role according to the concept of autonomous management. The rapid growth of the Group and its aim to be a world-class international steel company led to the creation of a new Employee Communication system in The evolution towards this new system involved four dimensions: Corporate Employee Communication (from the Group to its operations and units); Local Employee Communication (from the units to their internal public); Direct Employee Communication (face-to-face communication); Specific Employee Communication (reinforcement campaigns and temporary campaigns).

61 Employees 59 One of the channels of Corporate Communication with the internal public is the magazine Gerdau Connection, launched in 2005 to transmit important information about the Company to its employees throughout the world. Another example is the Steel Market bulletin, aimed for leaders in Brazil, with information on the steel sector in language that is accessible to all middle and upper management levels. The internal communication system also includes acts of recognition and celebration, which seek to strengthen employees sense of pride in being part of the Gerdau Group. These actions take place to celebrate results achieved, records broken, awards won, personal achievements, outstanding professionals, and other highlights worthy of celebration. Staff No. of employees 25,253 24,148 No. of service providers 11,747 9,468 No. of trainees and interns 1,467 1,241 No. of dependents 38,293 41,259 Schooling % with primary school 12.4% 14.2% % with high school 68.2% 68.2% % with college education 19.4% 17.6% No. of women working at the company 1,347 1,657 % of leadership positions occupied by women 11.6% 10.9% Average age of employees (years)* 38 N.A.** % of employees over 45 years old 17.8% 29.0% Average time with the company 10 years 12 years *Except part of Diaco. **Not available. ˆAdditional information available at

62 REBUILDING COMMUNITIES HIT BY HURRICANES The Gerdau Group and its employees worked together to help colleagues in the United States who were affected by Hurricane Katrina. Katrina reached category five, the highest level of the Saffir-Simpson Scale, causing the death of around a thousand people and damage totaling US$ 2 billion. Eighty-four Gerdau Ameristeel employees who live in the New Orleans region were struck by the hurricane, losing their homes, cars and other belongings. In order to help the victims, the Gerdau Institute created the Gerdau Professionals Public Emergency Fund. With this initiative, employees from units in Brazil and the United States donated resources to be used in rebuilding their colleagues homes. The sense of community had a powerful effect: a total of US$ 632,800 was donated and distributed by a committee organized by the Company. NORTH AMERICAN employees help rebuild a colleague s home hit by Katrina

63 Employees 61 TRAINEES at Gerdau Ameristeel Perth Amboy were selected among hundreds of candidates TOMORROW S LEADERS he Gerdau Group invests in young leaders in order to guarantee the long-term T sustainability of its businesses, with the trainee program as its main initiative for the development of new talent. Throughout the training period, these young university graduates absorb new knowledge while taking an active part in projects and processes and working alongside experienced professionals. With the rapid growth experienced by the Gerdau Group in recent years, especially as a result of internationalization, the development of new talent is essential in order to prepare them to take on strategic positions in the future. The trainee program targets the strategic needs of the organization, giving the participants the chance to acquire a broad vision of the business together with an understanding of behaviors and attitudes appropriate for a world-class company. The candidates are chosen based on the skills, competences and potential required for the activities that they will perform, as well as for their ability to adhere to the Group s values, culture and management systems. In 2005, around 15,000 candidates competed for 149 positions in Brazil. In North America, the program began in 2005 with the hiring of 32 people.

64 PEOPLE: THE GERDAU GROUP S COMPETITIVE ADVANTAGE For two days, around 60 human resources professionals discussed the Gerdau Group s challenges and possible solutions regarding people for the coming years. The first edition of the Annual Human Resources Forum brought managers from all of the Company s Business Operations to Porto Alegre in order to continue the global standardization of people management policies and guidelines. The meeting discussed the team s adjustment to the strategic demands of the business, the promotion of internal best practices, the validation of people management policies and guidelines and the required profile for HR professionals in the Gerdau Group. All these activities have the same aim: to add value to the business, by means of teams and leaders with a commitment to superior performance. The second edition of the Forum took place in March 2006, with the participation of 80 people. GERDAU PROFESSIONALS discuss the Group s future challenges at the 1st Human Resources Forum in Porto Alegre, state of Rio Grande do Sul

65 COMMUNITY 63 COMMUNITY The Gerdau Group believes that the success of an organization is not built alone, but must involve communities of satisfied people with a good quality of life. To achieve this, it makes ongoing investments in the sustainable development of the populations near its mills. Such initiatives focus on education and community building, in line with the specific needs of each location, in every country where the Group operates. In 2005, the Company supported 506 social projects, benefiting 7.6 million people in the Americas up 17.3% on the previous year. These are children, students, teachers, community leaders, public administrators, scientific researchers, athletes, artists and cultural producers and owners of small and very small businesses, all of whom have, in some way, been given new opportunities through the social initiatives undertaken by the Gerdau Group. Investments in this area were 7.9% greater than in 2004, totaling R$ 41.7 million. The company also encourages individual responsibility in its employees through volunteer activities, bringing together 1,600 people in The Gerdau Institute was created in March 2005, with the aim of coordinating the Gerdau Group s social responsibility policies and guidelines. As well as optimizing use of resources and encouraging partnerships with other private and public organizations, the Gerdau Institute works to make the projects self-sustaining. Its activities in the 2005 fiscal year were restricted to Brazil, but it is planned to extend these to all Gerdau Group operations in Investments in Social Projects (R$ million) Education is the main focus of investments, because it enhances the capacity of people to transform and generates sustainable social and economic development. ˆAdditional information available at

66 THE GERDAU GROUP supports the Junior Achievement initiative in several countries to foster an entrepreneurial spirit in young students A new generation of entrepreneurs The Gerdau Group invests in developing new generations of entrepreneurs by supporting Junior Achievement, a non-profit organization that trains elementary, high school and university students for the world of business. The initiative is aimed at awakening the entrepreneurial spirit in young people who are still at school, encourage personal development, create a sense of the importance of business activity and ease access into the job market. It offers theoretical programs and practical experience through partnerships between schools and volunteers who are employees from partner companies. An example is the Mini- Company Program, where high school students form a company with the help of Gerdau professionals. Over a series of 15 meetings, the Mini-Companies sell shares raising the resources necessary to begin operations create a product, market it, pay taxes (the value of these are usually donated to charity) and distribute the profits among the shareholders. The Gerdau Group supports Junior Achievement in Brazil and Canada. Gerdau Group Chairman, Jorge Gerdau Johannpeter, also serves on the organization s Board of Councilors in Brazil. Junior Achievement is the oldest organization in the world focused on practical education in business and economics. Financed by corporations, foundations and private citizens, it has contributed to the development of young people throughout the world for nearly 90 years.

67 COMMUNITY 65 Art for all the senses In 2005, more than 850,000 people visited the 5th edition of the Mercosur Biennial of Visual Arts, the largest exhibition of contemporary Latin-American art in the world. With the theme Stories of Art and Space, the exhibition brought together 597 works by 167 artists from Argentina, Brazil, Bolivia, Chile, Mexico, Paraguay and Uruguay, together with four non Latin-American artists. The works were shown across 24,000 square meters in Porto Alegre, Brazil, with free entry. Ninety percent of the works had never been shown before, having been created especially for the exhibition. The featured artist in 2005 was Amilcar de Castro, one of Brazil s most important sculptors. The Educational Action project, which helped 153,400 students from 2,500 schools, encouraged reflection on issues related to the language of the visual arts. The Mercosur Biennial of Visual Arts Foundation trained 1,600 teachers. Seven books were published covering the exhibits on display. One of the highlights of the event was the siting of four important permanent art works in the city of Porto Alegre, by the artists Mauro Fuke, José Resende, Waltércio Caldas and Carmela Gross. The Gerdau Group has supported the Mercosur Biennial since it was first held in 1997, reflecting a vision of social responsibility and entrepreneurialism. MORE THAN 150,000 students visited the 5th Mercosur Biennial, the largest Latin- American art exhibition in the world

68 EMPLOYEES at Gerdau Ameristeel Knoxville collected clothes and served food to people in need American volunteers help the homeless Around 90 volunteers from Gerdau Ameristeel Knoxville, in the U.S. state of Tennessee, made every effort to help people in need. In 2005, employees from the mill took part in activities organized by the Knox Area Rescue Ministries (KARM), an institution that has existed for over 45 years. They serve food to the homeless and help with KARM s Annual Clothing Drive by collecting and delivering clothes to help keep out the cold during the winter months. During the Thanksgiving holiday, volunteers also made food baskets to distribute to people in need. The network spread to the employees families, who joined in the activities.

69 COMMUNITY 67 Canadian employees act to preserve nature Employees from Gerdau Ameristeel Cambridge in Canada have decided to roll up their sleeves and help nature. Together with their families, they collect trash from a 2.4 kilometer stretch of a regional highway that has been adopted by the group. The Cambridge volunteers are not alone in protecting the environment. Another example is the team of employees of Gerdau Ameristeel Recycling, in Whitby, also in Canada, who work in the recycling and processing area. They have called on the community to look after a lake close to the mill. GERDAU PROFESSIONALS clean the shores of Lake Ontario

70 STUDENTS from the Janusz Korczak school received information about 5S tools Uruguayan children learn about Total Quality How can 10 or 11-year-old students learn about the organizational rules defined by the 5S quality tool and apply them in a school context? Since 2002, Gerdau Laisa, in Uruguay, has promoted the 5S in School project. In 2005, the project involved 300 5th grade students in four schools located close to the Montevideo mill. Volunteers from Gerdau Laisa met with the school principals, teachers and students. At these meetings, the employees explained how 5S works at the mill and the importance of the program. The aim is to encourage the students to use 5S tools in simple ways during their daily routine. At the end of the meetings, students receive a book and a backpack so as to reinforce the benefits of organization in school life. They also visit Laisa s industrial plant. In 2006, the initiative will include students from the 6th grade.

71 COMMUNITY 69 SIPAR SUPPORTS RECYCLING PROJECT One of the environmental initiatives of Sipar, in Argentina, is the Home Plastic Waste Management Program, started in December The project involves the donation of PET bottle collecting containers for a neighborhood of Perez, in the province of Santa Fé, where the unit is based. The initiative will help about 500 people. The containers will be sited at different points in the neighborhood, including schools, public squares and churches. The community will convert the money collected from the sale of the bottles into social benefits, such as the purchase of books for the local library. The project is part of the Neighborhood Improvement Program developed by the federal government. The initiative includes the paving of streets, building of low-income housing and creation of public squares, which will also be supported by Sipar. RESOURCES from the sale of PET bottles will be invested in social initiatives

72 THE SALE of crafts is an alternative source of income for Colombian women For a better quality of life in Colombia oncern for the quality of life of its employees and their families, as well as the communities C that live near the mills, is a focus of Diaco in Colombia. Evidence of this is the Integrated Development Program for Women and Families, which helps employees wives and children and women in the community. They are trained in setting up very small businesses, thereby having the opportunity of generating income. One of the highlights of the initiative is the launching of the first cooperative resulting from the program Coopasumerce, which sells handicrafts. The project, developed at the Tuta and Duitama units, involved 85 people in 2005.

73 COMMUNITY 71 Students learn about recycled steel in Chile Fun learning: that is how 150,000 Chilean students studied steel production from recycled scrap at an exhibition created by Gerdau AZA. The show took place at the Mirador Interactive Museum (MIM) in Santiago. The young visitors watched a 3D film with images of the Colina plant, located in the city s metropolitan region, and computer animated sequences. The film explained the environmental benefits of recycling scrap and the exhibition also gave the children the opportunity to take part in a recycling workshop, reinforcing the ideas from the film. This was not Gerdau AZA s first environmental education initiative. In 2004, the unit launched a recycling guide for school students in Santiago. Interest in the publication was so great that the edition sold out in less than a month. In May 2005 a second, more complete, edition was released. HERMANN VON MÜHLENBROCK, General Manager at Gerdau AZA, and students from Santiago, Chile, take part in the inauguration of a project to stimulate environmental awareness in youngsters

74 SHAPING THE WORLD, SHOWING

75 ENVIRONMENT The Gerdau Group protects nature because we believe that respect for the environment is crucial in making the world a better place to live. At Gerdau, this is achieved through continually upgrading air, water and soil protection technologies and through projects focused on increasing environmental awareness Environmental management 74 RESPECT

76 ENVIRONMENTAL MANAGEMENT The Gerdau Group invests increasingly in reducing the environmental impact of its operations, by reducing waste generation and encouraging the use of by-products in other sectors of the economy. The Company also promotes continuous upgrades to the air, water and soil protection technologies at its industrial plants, an initiative that received investments totaling R$ million in In addition, the Group supports environmental education projects for employees and communities close to Gerdau units. Environmental Management System The Environmental Management System involves the analysis of over a thousand industrial activities, from raw material collection to the distribution of steel products. It evaluates the possible environmental impacts of each activity and defines procedures to be adopted so that possible damage to the environment can be avoided. The system also lays down necessary procedures so that monitoring can be carried out in an appropriate, ongoing manner. For this reason, it involves all employees and encourages the forwarding of suggestions via the intranet, broadening the commitment to positive results in the environmental area. Distribution of Environmental Investments by Geographic Region R$ million Brazil 78.1% Argentina, Chile, Colombia and Uruguay 7.1% Distribution of Environmental Investments by Subject R$ million Various 18.9% ISO % Soil 13.6% Canada and the United States 14.8% Air 50.9% Water 15.7%

77 environmental management 75 ISO In 2005, two Gerdau Group plants demonstrated the consistency of their environmental management by receiving ISO certification: Gerdau Aços Especiais Piratini and Gerdau Riograndense (both in the state of Rio Grande do Sul). This certification consists of a set of environmental norms set out by the International Standards Organization. At the beginning of 2006, Gerdau Açonorte (state of Pernambuco) and Gerdau Cotia (state of São Paulo) also obtained environmental certification. The Group currently has a total of 16 certified units. The target is for all units to achieve ISO certification. To date, around 40% of the Group s employees and service providers work in plants with environmental certification. Raw materials The Gerdau Group is the second largest recycler in the Americas, using scrap as one of the main inputs in its industrial activity. This input accounted for around 68.6% of its regional production in During this period, around 10 million metric tons of scrap was transformed into new steel products. In 2005, the use of shredders in scrap processing was expanded in Brazil. This equipment is used to shred and separate raw materials in order to obtain a cleaner metallic charge for the furnace, leading to greater energy efficiency and reduced particle emissions. This was also one of the reasons for the installation of scrap collection centers in Chile, outside the Colina industrial plant. In 2005, two new centers were opened, with a further three planned for Reuse of By-Products (%)

78 Water The use of water is fundamental in steel production. It is used mainly for the cooling of equipment and products, as a result of the extreme temperatures reached during the industrial process. Given that water is an increasingly scarce resource, the Gerdau Group has invested in water reuse. At 96.8%, the recirculation level at Gerdau units is now among the best in the international steel sector, drastically reducing the need for water intake. In addition, some Gerdau units also have rainwater collection systems. Water Consumption 1.4 billion cubic meters Captured water 3.2% Recirculated water 96.8% Air The preservation of air quality is achieved mainly by means of continuous maintenance and technological upgrading of the dust removal systems. These are equipment assemblies capable of highly efficient solid particle filtration from the gases produced in the steelmaking process (see box: Technology Boosts Efficiency of Dust Removal Systems). In 2005, 99.4 thousand metric tons of particulate material were collected, not including the North American plants. The carbon dioxide emission index for the Group s units is kg per metric ton of steel produced. This indicator refers to the consolidated average of all Gerdau Group steel mills, and is better than the world steel sector average of 1,700 kg per metric ton, according to International Iron and Steel Institute (IISI) data. An example of the initiatives adopted in 2005 to preserve air quality is the increased use of environmentally friendly fuels in the reheating process, such as natural gas in place of oil. This procedure allows reduced emissions of carbon dioxide (CO 2 ), the most relevant to the steel sector of the gases dealt with in the Kyoto Treaty.

79 environmental management 77 Soil Each year, the volume of by-products reused either by the steel sector or by other economic sectors shows significant growth. In 2005, 80% of by-products generated by the Gerdau Group were recycled, compared to 66.3% in the previous year, thereby reducing the extraction of natural resources. These by-products consist of a range of materials mainly slag, scale and carbon compounds used in dozens of applications such as road paving, cement manufacturing, aluminum, plastics, solvents, paints and pigments. The materials that are not reused are disposed of in appropriate storage centers, in accordance with rigid quality standards. Gerdau Açominas (state of Minas Gerais) stands out for its use of coal fines (reuse of coal dust in the productive process) and iron ore fines (powdered iron ore) in the blast furnace, materials that were once not used in the production process. Gerdau Aza, in Chile, is another example of a unit that has invested heavily in projects for the reuse of slag, a material resulting from the melting of scrap and from steel refining. Energy The steel sector is known for its intensive use of energy. For this reason, the Gerdau Group invests in programs to reduce consumption and in equipment that allows for better energy performance, reusing gases from the industrial processes and making use of alternative energy sources (see box: Old Tires Used As Alternative Energy Source in the United States). At Gerdau Açominas (state of Minas Gerais), for example, 98% of the energy from the gases produced in the steelmaking process is currently recovered, providing an internal energy source that meets around 75% of the mill s operational needs. Another feature is the major initiative at Gerdau Ameristeel Cambridge, in Canada, which uses methane gas from an organic waste landfill in place of natural gas (see box: Sustainable Energy for Canadian Mill). In 2005, the increase in specific energy consumption was due to the reduction in production levels. The period of adaptation to the new production levels saw a greater use of this input.

80 Energy consumption 2005 Oxygen (mnm 3 ) 812,373 Specific Consumption of Electricity (KWh per metric ton of steel produced) Natural gas (mnm 3 ) 635,621 Diesel (m 3 ) 9,826 Lubricants and greases (t) * 1,555 * Except Gerdau Ameristeel and Gerdau AZA. Biodiversity Preserving the greenbelts around its mills is part of the Gerdau Group s commitment to sustainable development and quality of life for the community. Out of a total area of 17,100 hectares, the Company devotes 3,300 to the maintenance of native forests. A further 429 hectares corresponds to legal reserves or permanent protection areas. Environmental education The Gerdau Group invests heavily in environmental education with the aim of encouraging its employees in the practice of nature preservation. In 2005, approximately 18,000 employees and service providers took part in events such as lectures and courses with an environmental focus. The total time involved in environmental training of employees and service providers totaled Environmental Education (training hours for employees and service providers) 100,000 60,000 20,000 8,873 79,552 80,087 80,100 hours

81 environmental management 79 GERDAU SÃO PAULO uses quenching tower technology from day one TECHNOLOGY INCREASES EFFICIENCY OF DUST REMOVAL SYSTEMS The Gerdau Group continually invests in atmospheric protection. Some of the highlights in this area are the dust removal systems with quenching towers installed in 2005 at Gerdau Cosigua (state of Rio de Janeiro), Gerdau São Paulo (São Paulo) and Gerdau AZA (Chile). The quenching tower at Gerdau Cosigua has increased the efficiency of the gas cooling process in the electric arc furnaces by 70%. Compared to other cooling technologies, the new equipment consumes a third less water. This is due to a characteristic of this cooling system, which works through direct contact between the water and the hot gases, unlike the previous model, in which the contact was indirect. The Gerdau Group s quenching towers are up to 40 meters in height and five meters in diameter. The strength of the equipment gives the furnace exhaust system greater flexibility. In the case of increased steel production, for example, the equipment can easily be adjusted to the new level of gas generation.

82 Mill in Tennessee relies on alternative energy sources OLD TIRES USED AS ALTERNATIVE ENERGY SOURCE IN THE UNITED STATES In 2005, Gerdau Ameristeel Jackson, in Tennessee, U.S.A., began to use old tires as an alternative energy source for steel production. They provide a cleaner burning fuel and produce, for example, 25% more heat than coal. The result is a reduced need for other forms of energy, such as natural gas, electricity and coal. Steel, present in the tires, is also recycled. This process of reusing old tires also benefits the environment and human health. Old tires do not decompose, and when stored inappropriately may attract insects and rodents, resulting in the transmission of diseases to humans. According to the US Environmental Protection Agency (EPA), there are at least 275 million old tires in deposits around the country.

83 environmental management 81 SUSTAINABLE ENERGY FOR CANADIAN MILL The rolling mill reheating furnace at the Gerdau Ameristeel Cambridge steel mill in Canada is powered by a different kind of energy: methane gas, which is produced from decomposing organic waste in a landfill. Used in place of natural gas, it provides 45% of the energy required to operate the furnace. The mill is located in the province of Ontario and has specialized technology to extract, pressurize, clean and transport the gas through a pipeline to the equipment. This transfer line is only 800 meters long, as the landfill is located close to Gerdau Ameristeel Cambridge. The use of the gas represents savings of Cdn$ 6,000 per day, and the amount invested was recovered in just one year after the system started operating in Currently, over 3,000 cubic meters of methane gas are supplied per hour. Billets produced at Gerdau Ameristeel Cambridge, Canada

84 Timeline Curt Johannpeter, German immigrant João Gerdau and his son Hugo start the first Gerdau Group unit with the Pontas de Paris Nail Factory in the city of Porto Alegre, state of Rio Grande do Sul. Hugo s son-in-law, leads Gerdau through a decisive stage in the expansion of the company s business. In 1947, Gerdau becomes a limited liability company listed on the Porto Alegre Stock Exchange. The Group develops its social responsibility culture by creating the Gerdau Foundation, with health, education, housing and social assistance programs for employees and their family members. Gerdau heads toward the Northeastern region of Brazil with the Açonorte mill in the state of Pernambuco. The Gerdau Group s process of internationalization begins with the acquisition of the Laisa steel mill in Uruguay The business started by João Gerdau is divided into two independent companies: Hugo manages the Pontas de Paris Nail Factory and his brother, Walter, takes charge of the furniture manufacturing business, Móveis Gerdau, also in Porto Alegre. Later, in 1930, the two brothers take part in the founding of the Manufacturing Industry Center of Rio Grande do Sul, which later becomes the Federation of Industries of Rio Grande do Sul (FIERGS). The Gerdau Group enters the steelmaking business with the Group s Riograndense steel mill in Porto Alegre. The Riograndense mill pioneers the technological concept of the minimill, employing scrap metal as raw material and focusing operations on regional marketing and sales, which translates into more competitive operating costs. The company s expansion route reaches the Southeastern region of Brazil, with the acquisition of the São Judas Tadeu wire factory, a nail and wire manufacturer in the state of São Paulo. Construction of the Cosigua mill begins in the city of Rio de Janeiro, as part of a joint venture with the German group August Thyssen Huette. This is also the year in which the Gerdau Group enters the steel distribution business, with the first Comercial Gerdau store in São Paulo.

85 timeline 83 International growth advances into North America with the acquisition of Courtice Steel, currently Gerdau Ameristeel Cambridge, in the province of Ontario (Canada). In 1995, Gerdau strengthens its position in Canada through the acquisition of a second industrial plant, MRM Steel, in the province of Manitoba. In Argentina, Gerdau becomes a shareholder of the Sipar Aceros S.A. rolling mill. In 2005, the Group acquires control of Sipar. The Gerdau Group completes 100 years of activity, reaching an annual production capacity of 8.4 million metric tons and R$ 551 million in net profit. Year of expansion in the Americas. In Colombia, the Group announces an agreement for the acquisition of shareholder control of Diaco and Sidelpa. In North America, Gerdau acquires the assets of North Star Steel. Gerdau Ameristeel shares are listed on the NYSE The Group acquires control of the AZA steel mill in Chile, currently Gerdau AZA. The Group launches the GG 50 rebar, the first in the country to bear a brand name and a guarantee of quality. Gerdau starts to produce steel in the United States with the acquisition of Ameristeel. In the same year, the shares of Gerdau S.A., one of the Group s public companies in Brazil, are listed on the New York Stock Exchange (NYSE). The Group merges its North American operations with Co-Steel. The move results in the creation of Gerdau Ameristeel, with 11 steel mills and 29 service centers. The Group expands its participation in the global market and enters Europe by acquiring interest in the Spanish steelmaker Sidenor. In Brazil, the Gerdau São Paulo steel mill starts operations.

86 STEEL PRODUCTION

87 STEEL PRODUCTION 85 Raw Material Melt Shop Rolling Drawing Nail Factory Gerdau Products

88 Glossary A BONUS SHARE components of charcoal. board of directors, Amortization DISTRIBUTION CAPITAL STOCK Sum of executive board, Accounting procedure Distribution to all resources, goods and independent auditors by which the original shareholders of shares stocks used by partners and fiscal council. cost value of an asset resulting from increases in constituting Good corporate with limited life, or in capital stock a company. governance practices of an intangible through incorporation COACHING Interpersonal are aimed at increasing asset, is gradually of reserves or issuance relationship based on the value of a written off as an of new shares. an affective bond company s shares, expense against BASIS POINTS (BPS) through which one facilitating results. In the case of Interest rate measured person acts to identify the access of companies fixed assets, the term as points. 100 basis and maximize the to capital resources used is depreciation points correspond to 1%. potential and and contributing and for natural BY-PRODUCT Desirable performance of an to their continuity resources the term or undesirable secondary individual or team in (Brazilian Institute exhaustion is product of the search of personal for Corporate employed. Both mean, industrial process. and professional growth. Governance definition). essentially, amortization. BILLET Steel section DIVIDEND Amount CONTINUOUS CASTING ASSETS Any goods or (usually square) resulting distributed to Process during which property with from continuous casting shareholders in cash, liquid steel is solidified. commercial or exchange or rolling of larger proportional to the Steel may be cast into value belonging to a sections. Used as raw number of shares various shapes and society, institution material for the owned. Dividends are gauges to produce or individual. B BLAST FURNACE A large scale furnace lined with production of long steel products. C COKE A raw material usually paid from the profit obtained by a company in the current or previous billets, slabs or blooms, for example. D DUST REMOVAL A highly refractory brick used in the blast fiscal year. efficient system for used in integrated furnace to produce pig CORPORATE filtering the tiny solid steel mills to produce iron. Coke is produced GOVERNANCE System by particles resulting from pig iron from charcoal which corporations are steel making. from iron ore. through a process managed and supervised, DRAWING Cold process BENCHMARK Standard of known as coking. Coking involving the relationship by which wire rod is excellence. removes the volatile between shareholders, transformed into wire.

89 glossary 87 DRAWN PRODUCT of revenue that L M Product obtained by drawing rolled bars or wire rod. E EBITDA Earnings Before results in EBITDA. F FLAT STEEL Product category for steel including plates LONG STEEL Steel product in which one dimension (length) is predominant. Includes bars, profiles, wire rod, MELT SHOP In a steel mill, the area where steel is produced. MAJORITY SHAREHOLDER Individual Interest Rates, Taxes, and strip. Flat steel is rebar, structural or group holding a Depreciation and used in car exteriors, shapes and wires. sufficient number Amortization. It is home appliances, etc. Long steel is Gerdau s of voting shares to calculated as gross FASB 133 North American main product line. control a company. profit minus sales, general and administrative expenses accounting standard. G GROSS DEBT Amount LIBOR London Inter-Bank Offer Rate. Reference interest rate in the Also called controlling shareholder. MINORITY SHAREHOLDER plus depreciation referring to bank loans United States. Individual or group and amortization. plus issued debentures. LIQUIDITY Ability of an holding a number of EQUITY PICKUP GROSS REVENUES Total asset to be converted shares that is not Realization of equity sales before cost of into cash quickly. sufficient to control changes in a controlled materials and services. LEVEL 1 CORPORATE the company. or subsidiary company GROSS MARGIN GOVERNANCE, BOVESPA MARKET MILLS Steel in the results of the Equivalent to gross Set of conduct rules for mills focused on parent company. income divided by net companies, managers purchasing raw EURO COMMERCIAL sales revenues. Gross and controlling material and selling PAPER Short or margin is expressed shareholders, which their production in medium term as a percentage contribute to the the same region in securities that are issued by companies in international representing the amounts (in different currencies) of net sales appreciation of shares and other assets issued which they are based. N NET DEBT Gross debt financial markets. revenues that produced by a company. minus cash and financial EBITDA Margin Equal to EBITDA divided by total revenue and expressed gross income. H HOLDING COMPANY Level 1 Companies are mainly committed to improving disclosure applications. NET PROFIT Earnings in a given period as a percentage. The Company that to the market of time, determined by percentage represents controls a group of and shareholding subtracting a the amount of each dollar companies. dispersion. company s total

90 expenses from total PIG IRON Produced in the ROLLED PRODUCT such as in the revenue. blast furnace, pig iron Product resulting from automotive, oil, tool, NET MARGIN Equivalent results from the the rolling process, in machinery and to net income divided by chemical reduction which raw material equipment industries. net sales revenues. of iron ore with is successively SCALE Substance Net margin is charcoal or coke compressed until resulting from iron expressed as a PAPERS (STOCK MARKET) acquiring the desired oxidation on the surface percentage Negotiable securities shape and dimensions. of steel. Scale is formed representing the representing the smallest RECYCLING Process during the hot rolling amounts (in different part of the capital through which iron process or when steel is currencies) of a limited liability scrap is re-used to exposed to high of net sales corporation. produce steel. temperatures. revenues that PRODUCTIVITY Ratio RIBBED REINFORCING SLAG A mixture of produced net income. between what is MESH Grid frame made metallic and non-metallic NET SALES REVENUE produced and the of ribbed rebar used in oxides formed on the Gross revenues necessary resources the construction of surface of steel during minus sales taxes, for producing it in a concrete slabs. the production process. freight and discounts. P given time. In the steel industry, one REBAR A steel rod with ridges for use in STIRRUP Product made of CA-60 ribbed steel, PREFERRED SHARE Securities representing the smallest portion of capital stock in a corporation, providing of the most widely used productivity indicators is ton/man/year. R ROLLING BLOCK Rolling reinforced concrete. S STEEL An iron and carbon alloy with carbon content not exceeding 1.5%, which fabricated in various shapes and used to manufacture columns and beams for small constructions. privileges in terms equipment, including a may also contain other STRUCTURAL PROFILES of dividend distribution set of cages assembled chemical elements aimed Category of steel and/or reimbursement as a single structure, at improving its product including I and of capital in the used in the high-speed properties. H beams, wide flange case of dissolution. In production of high SPECIALTY LONG STEEL beams and general, preferred stock quality wire rod. Steel product in which sheet piles. Used in holders do not enjoy ROLLING Cold or hot one dimension (length) is buildings, industrial voting rights. mechanical process predominant. In addition, installations, bridge PUBLIC COMPANY that changes the this type of steel is reinforcements, etc. Company whose cross-sectional produced with specific SLAB A steel product shares are dimensions or shape physical and metallurgical that serves as the basis registered with stock of steel produced characteristics required for the production of market regulating bodies. in the melt shop. for special applications, plates and strips.

91 glossary 89 SARBANES-OXLEY A law enacted by the U.S. Congress to protect investors from accounting fraud in corporations. The rules and regulations of the Sarbanes-Oxley Act amend and supplement the preexisting laws ruling publicly traded companies. SCRAP Iron material that is reprocessed for steel production. SUSTAINABILITY Sustainability (or sustainable development) is the balance between economic, environmental and social aspects to avoid compromising the future growth of a company. SINTERING Clustering of iron ore fines in a mixture containing approximately 5% of finely separated charcoal. Heating this mixture results in bonding of iron ore particles, producing a uniform and porous matter known as sinter. SWAP Hedge operation designed to protect a company from financial risks such as interest and exchange rates. T TRAINEE Recent university graduate who is being consistently and rapidly prepared to assume a position in a company. TRUSS FRAMES Triangular-shaped frame made of CA-60 ribbed steel. Found in prefabricated slabs used in buildings, bridges and overpasses and in floor and slab spacers, among other applications. W WORKING CAPITAL Portion of the capital used to finance current assets and which ensures a safety margin for operating activities. WORLD-CLASS COMPANY A company that adopts international excellence standards, providing proactive and innovative solutions, achieving outstanding results and being considered as a benchmark for other companies. WIRE ROD Round steel product obtained from the rolling process. Wire rod is usually drawn and used in the production of wire, screws and nails. Y YIELD The annual rate of return on a share expressed as dividends or interest on capital stock. It refers to the relationship between annual dividends and interest on capital stock and the price of a share at the end of a specific period.

92 Financial Statements metalúrgica gerdau s.a. 92 gerdau s.a. 140 perfo rmance

93 METALÚRGICA GERDAU S.A. METALÚRGICA GERDAU S.A. 93 METALÚRGICA GERDAU S.A. BALANCE SHEET AT DECEMBER 31 (In thousands of reais) ASSETS Company CURRENT ASSETS Cash and cash equivalents... note 5 49,312 95,800 5,395,463 2,003,945 Trade accounts receivable... note ,101,137 2,564,192 Inventories... note ,018,629 4,236,642 Tax credits... note 8 6,181 11, , ,858 Deferred income tax and social contribution on net income... note , ,797 Dividends receivable... note 11 80, , Other accounts receivable... 1,969 3, , ,058 total current assets , ,356 12,178,168 9,653,492 LONG-TERM RECEIVABLES Related parties... note ,231 Tax credits... note ,792 69,992 Deposit for future investment in subsidiary... note , ,158 Deferred income tax and social contribution on net income... note 9 14,819 9, , ,722 Judicial deposits and other... note 10 2,725 3, , ,983 total long-term receivables... 17,544 12, ,740 1,063,086 PERMANENT ASSETS Investments... note 11 3,925,401 3,018, , ,547 Fixed assets... note 12 1,448 1,593 8,694,958 7,928,973 Deferred charges... note ,041 33,858 total permanent assets... 3,926,849 3,019,614 8,869,215 8,075,378 total assets... 4,082,018 3,263,861 21,963,123 18,791,956 LIABILITIES AND SHAREHOLDERS EQUITY Company CURRENT LIABILITIES Suppliers ,665,862 1,921,424 Loans... note ,329,651 2,027,865 Debentures... note ,719 2,986 Taxes and contributions payable... note , , ,185 Related parties... note Deferred income tax and social contribution on net income... note , ,166 Salaries payable , , ,919 Dividends payable... note 24 85, , , ,972 Other accounts payable... 13,582 10, , ,741 total current liabilities... 99, ,798 4,203,474 5,345,258 LONG-TERM LIABILITIES Loans... note ,352,420 3,490,374 Debentures... note , ,504 Provision for contingencies... note , ,964 Deferred income tax and social contribution on net income... note 9 86,619 85, , ,119 Post-employment benefits... note , ,478 Other accounts payable... note 23 35,890 40, , ,664 total long-term liabilities , ,029 7,384,746 5,591,103 MINORITY INTEREST ,515,335 4,894,561 SHAREHOLDERS EQUITY Capital... note 24 2,496,000 1,664,000 2,496,000 1,664,000 Capital reserves... 10,842 10,842 10,842 10,842 Revenue reserves... 1,352,166 1,285,632 1,352,166 1,285,632 Retained earnings total shareholders equity... 3,859,568 2,961,034 3,859,568 2,961,034 SHAREHOLDERS EQUITY INCLUDING MINORITY INTEREST ,374,903 7,855,595 total liabilities and shareholders equity... 4,082,018 3,263,861 21,963,123 18,791,956 The accompanying notes are an integral part of these financial statements. The accompanying notes are an integral part of these financial statements.

94 METALÚRGICA GERDAU S.A. METALÚRGICA GERDAU S.A. 95 STATEMENT OF INCOME YEARS ENDED DECEMBER 31 (In thousands of reais) STATEMENT OF CHANGES IN FINANCIAL POSITION YEARS ENDED DECEMBER 31 (In thousands of reais) Company SALES REVENUES ,485,818 23,407,573 Taxes on sales (2,642,225) (2,456,568) Freight and discounts (1,597,845) (1,353,743) NET SALES REVENUES... note ,245,748 19,597,262 COST OF SALES (15,519,861) (13,352,238) GROSS PROFIT ,725,887 6,245,024 SELLING EXPENSES (514,443) (455,175) FINANCIAL INCOME... note 17 7,360 10, , ,261 FINANCIAL EXPENSES... note 17 (4,893) (6,852) (441,080) (397,642) GENERAL AND ADMINISTRATIVE EXPENSES Management fees... (2,248) (3,168) (34,624) (50,654) General expenses... (9,647) (28,891) (1,132,456) (1,000,299) EQUITY IN THE EARNINGS (LOSSES) OF SUBSIDIARIES... note 11 1,281,519 1,342,842 (157,903) (344,628) OTHER OPERATING INCOME (EXPENSES), NET... note 27 4, , ,043 OPERATING PROFIT... 1,276,775 1,314,266 4,068,995 4,436,930 NON-OPERATING INCOME (EXPENSES), NET... note , , ,102 PROFIT BEFORE TAXES AND PROFIT SHARING... 1,276,775 1,485,219 4,373,733 4,581,032 PROVISION FOR INCOME TAX AND SOCIAL CONTRIBUTION ON NET INCOME... note 9 Current... (2,982) (2,624) (932,420) (957,000) Deferred... 4,038 (42,352) (142,882) (238,405) MANAGEMENT PROFIT SHARING... note 25 (2,247) (3,168) (29,587) (44,530) NET INCOME BEFORE MINORITY INTEREST... 1,275,584 1,437,075 3,268,844 3,341,097 MINORITY INTEREST... (1,993,260) (1,904,022) NET INCOME FOR THE YEAR... 1,275,584 1,437,075 Net income per share - R$ Net equity per share - R$ Company FINANCIAL RESERVES WERE PROVIDED BY Operations net income for the year... 1,275,584 1,437,075 3,268,844 3,341,097 expenses/income not affecting working capital depreciation and amortization , ,819 Cost of permanent asset disposals ,158 38, ,816 equity in the (earnings) losses of subsidiaries... note 11 (1,281,519) (1,342,842) 157, ,628 Gain on change in shareholding... - (125,969) (305,839) - Monetary and exchange variations on long-term liabilities , ,343 (131,822) Monetary and exchange variations on long-term receivables (526) From operations... (5,790) 51,274 4,239,343 4,681,012 Third parties Capital increase/changes in treasury shares... note 24 (12,992) (14,441) 520, ,704 Contributions to capital reserve ,666 29,785 16,246 Increase (decrease) of long-term liabilities... (3,855) 183 1,735, ,045 net working capital of consolidated subsidiaries ,965 - foreign exchange offset on working capital of foreign subsidiaries (282,861) (86,946) Working capital - purchase of assets , ,445 dividends not included in income for the year... note , ,325 3,964 - total funds provided , ,007 6,380,596 6,499,506 FINANCIAL RESERVES WERE USED FOR Investments... 8,638 3,214 64,313 41,619 Purchase of assets ,457 fixed assets ,641,230 1,262,707 deferred charges ,905 18,654 Increase (reduction) of long-term receivables... 4,653 (5,254) 27,453 (13,500) dividends/interest on own capital... note , , , ,119 total funds used , ,839 2,714,136 3,200,056 INCREASE (DECREASE) IN WORKING CAPITAL... (17,210) 42,168 3,666,460 3,299,450 Working capital at the beginning of the year... 55,558 13,390 4,308,234 1,008,784 at the end of the year... 38,348 55,558 7,974,694 4,308,234 INCREASE (DECREASE) IN WORKING CAPITAL... (17,210) 42,168 3,666,460 3,299,450 The accompanying notes are an integral part of these financial statements. The accompanying notes are an integral part of these financial statements.

95 METALÚRGICA GERDAU S.A. METALÚRGICA GERDAU S.A. 97 STATEMENT OF CHANGES IN SHAREHOLDERS EQUITY YEARS ENDED DECEMBER 31 (In thousands of reais) STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31 (In thousands of reais) Capital Reserves Revenue Reserves Premium Investments Total on and working Retained shareholders Capital shares Others Total Legal capital Total earnings equity At December 31, Net income for the year Capital increase... Note ( ) ( ) - - Investment subsidy Treasury shares... Note (14.441) (14.441) - (14.441) Distributions proposed for the Annual General Meeting: Legal reserve... Note (71.855) - Reserve for investments and working capital ( ) - Dividend/interest on own capital... Note ( ) ( ) At December 31, Net income for the year Capital increase... Note ( ) ( ) - - Treasury shares... Note (12.991) (12.991) - (12.991) Distributions proposed for the Annual General Meeting: Legal reserve... Note (63.778) - Reserve for investments and working capital ( ) - Dividend/interest on own capital... Note ( ) ( ) At December 31, The accompanying notes are an integral part of these financial statements. Company Net income for the year Equity in the (earnings) losses of subsidiaries... note 11 ( ) ( ) Provision for credit risks (12.339) Gain on disposal of fixed assets Gain (loss) on disposal/merger of investments... - ( ) ( ) ( ) Monetary and exchange variations (1) (77.587) (94.087) Depreciation and amortization Income tax and social contribution on net income... (9.809) Interest on loans Contingencies/judicial deposits... (372) (940) (67.216) Changes in trade accounts receivable ( ) Changes in inventories ( ) Changes in suppliers... (51) 58 ( ) Changes in operating activity accounts (33.737) ( ) Net cash provided by (used in) operating activities... (10.363) (57.825) Purchase/disposal of fixed assets ( ) ( ) Increase in deferred charges (27.905) (18.006) Acquisition/disposal of investments... (8.791) ( ) Purchase of assets ( ) Receipt of dividends/interest on own capital Net cash provided by (used in) investing activities ( ) ( ) Suppliers of fixed assets (28.636) Loans for working capital... (8.549) (7.778) ( ) Debentures... - (586) Receipt of loans for permanent assets Payment of loans for permanent assets ( ) ( ) Payment of loan interest... (4) - ( ) ( ) Loans with related parties... (129) Capital increase/changes in treasury shares... note 24 (12.992) (14.441) Payment of dividend/interest on own capital and profit sharing... ( ) ( ) ( ) ( ) Net cash provided by (used in) financing activities... ( ) ( ) ( ) Increase (decrease) in cash and cash equivalents... (46.488) Cash and cash equivalents At the beginning of the year... note Changes in cash and cash equivalents opening balance ( ) (82.541) Opening balance of companies consolidated in the year At the end of the year... note (1) Includes gain and/or loss on swaps The accompanying notes are an integral part of these financial statements.

96 METALÚRGICA GERDAU S.A. METALÚRGICA GERDAU S.A. 99 NOTES TO THE FINANCIAL STATEMENTS AT DECEMBER 31, 2005 AND 2004 (All amounts in thousands of reais unless otherwise indicated) 1 - OPERATIONS Metalúrgica Gerdau S.A., with Head Office in the city of Porto Alegre, Brazil, is a holding company in the Gerdau Group, which is principally dedicated to the production of common and special steel rods and sale of general steel products (plates and rods), in plants located in Brazil, Uruguay, Chile, Canada, Colombia, Argentina and the United States of America. The Gerdau Group has an installed capacity of 16.5 million tons of crude steel per year, producing steel in electrical furnaces from scrap and pig iron purchased, for the most part, in the region near each plant (mini-mill concept). Gerdau also operates plants which are capable of producing steel from iron ore (through blast furnaces and direct reduction) and has a unit used exclusively to produce special steels. It is the largest scrap recycling group in Latin America and is among the largest in the world. The industrial sector is the most important market, including manufacturers of consumer goods such as vehicles and household and commercial equipment that basically use profiled steel in various available specifications. The next most important market is the civil construction sector, which demands a high volume of bars and wires for concrete. There are also numerous customers for nails, staples and wires, commonly used in the agribusiness sector. 2 - PRESENTATION OF THE FINANCIAL STATEMENTS The financial statements have been prepared and are presented in accordance with accounting practices adopted in Brazil, which are based on the provisions of Brazilian Corporate Law, together with the rules established by the Brazilian Securities Commission (CVM). 3 - SIGNIFICANT ACCOUNTING PRACTICES a) Cash and cash equivalents - financial investments are recorded at cost plus income accrued up to the balance sheet date, applying the interest rates agreed with the financial institutions, and do not exceed market value; b) Trade accounts receivable - are stated at realizable values, and accounts receivable from foreign customers are adjusted based on the exchange rates effective at the balance sheet date. The provision for credit risks is calculated based on a credit risk analysis, which includes the history of losses, the individual situation of each customer and the economic group to which it belongs, the collateral and guarantees and the legal advisors opinion, and is considered sufficient to cover any losses on realization; c) Inventories - are stated at the lower of market value and average production or purchase cost; d) Investments - are recorded on the equity method of accounting and the equity in the earnings or loss is recorded in an income statement account. Capital gains or losses resulting from changes in the percentage ownership in subsidiaries are recorded as non-operating income or loss. e) Fixed assets - are recorded at cost, net of depreciation. Depreciation is calculated on the straight-line basis at the rates stated in Note 12, which take into consideration the estimated useful lives of the assets. Interest on loans obtained to finance construction in progress is added to the cost of the constructions; f) Deferred charges - amortization is calculated on the straight-line basis at rates determined based on the production of the implemented projects in relation to their installed capacities; g) Loans - are stated at the contract value plus the contracted charges, including interest and monetary or foreign exchange variations. Swap contracts, which are linked to the loan agreements, are classified together with the related loans; h) Income tax and social contribution on net income - current and deferred income tax and social contribution on net income are calculated in conformity with current legislation; i) Post-employment benefits - the actuarial liabilities relating to the pension benefits and retirement plans and actuarial liabilities relating to the healthcare plan are provided according to procedures established by the CVM Deliberation 317/00, on the basis of an actuarial calculation made every year by an independent actuary, using the projected unit credit method, net of the assets that guarantee the plan, when applicable, and the costs associated to the increase of the present value of the liabilities resulting from the service rendered by the employee, is recognized over the employees working lives. The projected unit credit method considers each period of service as the generating factor of an additional unit of benefit, which are accumulated to calculate the total liabilities. Other actuarial assumptions are also used, such as estimates of the increase of healthcare costs, biological and economic hypotheses and, also, the historical experience of costs incurred and the employee contributions. j) Other current and long-term assets and liabilities - are recorded at their realizable amounts (assets) and at their known or estimated amounts plus accrued charges and indexation adjustments (liabilities), when applicable; k) Related parties - loan agreements between Brazilian companies are restated by the weighted average interest rate for market funding. The agreements with foreign companies are restated by charges (LIBOR plus 3% p.a.) plus foreign exchange variation. Sales and purchases of inputs and products are made under terms and conditions similar to those of unrelated third parties; l) Determination of the results of operations - the results of operations are determined on the accrual basis of accounting; m) Use of estimates - the preparation of financial statements requires estimates to record certain assets, liabilities and other transactions. The financial statements therefore include various estimates related to the useful lives of fixed assets, provisions for contingent liabilities, for income taxes and other similar matters. Actual results may differ from those estimated; n) Environmental investments - expenses related to compliance with environmental regulations are considered as cost of production or capitalized when incurred; o) Translation of foreign currency balances - asset and liability balances of transactions in foreign currency are translated to local currency (R$) at the foreign exchange rate effective at the balance sheet date and at the quarterly average rate for income statement accounts; p) Additional information to the financial statements - the statement of cash flows is being presented, prepared in accordance with the Accounting Rule and Procedure - NPC 20 issued by the Institute of Independent Auditors of Brazil (IBRACON), in order to provide additional information.

97 METALÚRGICA GERDAU S.A. METALÚRGICA GERDAU S.A CONSOLIDATED FINANCIAL STATEMENTS a) The consolidated financial statements at December 31, 2005 and 2004 were prepared in accordance with accounting practices adopted in Brazil, based on the provisions of Corporate Law and the regulations issued by the Brazilian Securities Commission. They include the financial statements of Meralúrgica Gerdau S.A. and its directly or indirectly controlled subsidiaries listed below: Percentage Shareholders Percentage ownership company Consolidation equity Total capital Voting capital Gerdau S.A ,042, Gerdau Ameristeel Corporation e subsidiaries (*) ,747, Gerdau Internacional Empreendimentos Ltda. - Grupo Gerdau 100 3,229, Gerdau GTL Spain S.L ,227, Gerdau Açominas S.A ,094, Gerdau Aços Longos S.A ,494, Gerdau Steel Inc ,245, ,00 Gerdau América do Sul Participações S.A , Axol S.A , Gerdau Chile Inversiones Ltda , Indústria Del Acero S.A. - Indac , Santa Felicidade Com. Imp. e Exp. de Produtos Siderúrgicos Ltda , Gerdau Comercial de Aços S.A , Gerdau Aza S.A , , Gerdau Aços Especiais S.A , Diaco S.A. e subsidiaries (**) , Seiva S.A. - Florestas e Indústrias , Itaguaí Com. Imp. e Exp. Ltda , Aramac S.A , GTL Equity Investments Corp , Sipar Aceros S.A , Sipar Gerdau Inversiones S.A , Margusa - Maranhão Gusa S.A , Gerdau Laisa S.A , Banco Gerdau S.A , Açominas Com. Imp. Exp. S.A. - Açotrading , Salomon Sack S.A , Gerdau Açominas Overseas Ltd , Siderúrgica Del Pacífico S.A , Distribuidora Matco S.A , Armacero Industrial y Comercial S.A , Aceros Cox Comercial S.A , Siderco S.A , Florestal Itacambira S.A , GTL Financial Corp , Gerdau Hungria Holdings Limited Liability Company GTL Trade Finance Inc Dona Francisca Energética S.A (4,753) (*) Subsidiaries: Gerdau Ameristeel MRM Special Sections Inc., Gerdau USA Inc., AmeriSteel Bright Bar Inc., Gerdau AmeriSteel US Inc., Gerdau Ameristeel Perth Amboy Inc., Gallatin Steel Company (50%) and Gerdau Ameristeel Sayreville Inc. (**) Subsidiaries: Ferrer Ind. Corporation, Laminados Andinos S.A., Laminadora Diaco S.A. and Ferrofigurados Lasa S.A. (55%). b) The more significant accounting practices used in preparing the consolidated financial statements are as follows: I) Metalúrgica Gerdau S.A. and its subsidiaries adopt consistent practices to record their transactions and value their assets and liabilities. The financial statements of foreign subsidiaries were translated using the exchange rate in effect at the balance sheet date and were adjusted to conform with accounting practices adopted in Brazil. The income statement accounts were translated by the average exchange rate every quarter; II) Asset, liability and income statement balances arising from transactions between consolidated companies have been eliminated; and III) Holdings of minority shareholders in subsidiaries are shown separately. c) The following transactions occurred during the year ended December 31, 2005: I) As part of the corporate reorganization of the Gerdau companies, the Extraordinary General Meeting of shareholders the subsidiary Gerdau Açominas S.A. held on May 9, 2005 approved the merger of Gerdau Participações S.A. The shareholders equity, adjusted in accordance with CVM Instruction No. 349/01, corresponding to the assets and liabilities transferred to Gerdau Açominas S.A., was R$ 1,224,646 comprised as follows: ASSETS CURRENT ASSETS ,136 PERMANENT ASSETS Investments Gerdau Internacional Empreendimentos Ltda % ,401 Other Investments... 1,195 total permanent assets ,596 total assets... 1,224,732 LIABILITIES LONG-TERM LIABILITIES Total liabilities TOTAL ADJUSTED NET ASSETS (*)... 1,224,646 (*) The merged net assets are adjusted the investment held by Gerdau Participações S.A. in Gerdau Açominas S.A.. II) Up to July 28, 2005, Gerdau Açominas S.A. was the company that carried out the steel operations in Brazil, in addition to holding 22.8% of the capital of Gerdau Internacional Empreendimentos Ltda. On July 29, 2005, certain assets and liabilities of Gerdau Açominas S.A. were spun off into four new companies: Gerdau Aços Longos S.A., Gerdau Aços Especiais S.A., Gerdau Comercial de Aços S.A. and Gerdau América do Sul Participações S.A. As a result, these assets and liabilities were grouped in separate companies in accordance with the lines of business of each company, as follows: Company Gerdau Açominas S.A.... Gerdau Aços Longos S.A... Gerdau Aços Especiais S.A... Gerdau Comercial de Aços S.A... Gerdau América do Sul Participações S.A... Business Production of steel at the Ouro Branco plant Production of long steel at the other plants in Brazil Production of special steel in Brazil Distribution of steel products in Brazil Investment in 22.8% of the capital of Gerdau Internacional Empreendimentos Ltda. The assets and liabilities of Gerdau Açominas S.A that were spun off into other companies are still recorded at their original purchase/formation cost, and no gain or loss arose as a result of this transaction.

98 METALÚRGICA GERDAU S.A. METALÚRGICA GERDAU S.A. 103 III) On September 15, 2005, the Gerdau Group signed an agreement for the acquisition of 35.98% of the shares issued by Sipar Aceros S.A., a steel rod rolling mill located in Province of Santa Fé, Argentina. This investment, when added to the 38.46% already owned by Gerdau, represents 74.44% of the share capital of Sipar Aceros. The disbursement for this additional investment will be R$ 94,800 (equivalent to US$ 40.5 million) payable over the next three years. Goodwill of R$ 59,367 arose on this acquisition, based on expected future profitability, to be amortized in 10 years. Also, as a result of this acquisition, Sipar Aceros S.A. is being fully included in the consolidated financial statements as from September 30, Shareholders of Sipar Aceros S.A., holders of approximately 14.4% of its capital, have the right of sale of this investment to the Gerdau Group (sale option) for a period of up to two years, as from September 2005, and for a fixed price subject to restatement. IV) On September 30, 2005, in continuity of the agreement with the Mayaguez Group and with The Latinamerican Enterprise Steel Holding, the Gerdau Group completed the acquisition of a 57.11% holding in Diaco S.A., the largest manufacturer of steel and rods in Colombia, for R$ 124,367, paid through an advance made in A negative goodwill of R$ 27,469 was recorded on the transaction, as a result of the overvaluation of Diaco S.A. s fixed assets, to be amortized proportionally to the depreciation of the assets that originated the negative goodwill, over an estimated period of 10 years. In accordance with the agreement, the Gerdau Group must purchase in up to 8 years, 40.27% of the capital of Diaco S.A. still in possession of the Mayaguez Group, for US$ 51,795 thousand (equivalent to R$ 121,236 at December 31, 2005), restated as defined in the agreement. Also, in view of this purchase, an advance was made to the vendors of US$ 14,825 thousand (equivalent to R$ 34,703 at December 31, 2005) recorded in long-term receivables as a deposit for future investment in subsidiary. V) On November 15, 2005, the Gerdau Group signed, together with two Spanish companies, a contract for the purchase of all the shares of Corporación Sidenor, S.A. (Sidenor), located in Spain. The ownership of the capital of Corporación Sidenor, S.A. will be as follows: 40% will belong to Gerdau Hungria Holdings Limited Liability Company, 40% to Carpe Diem Salud, SL, (Carpe Diem), a company of the Santander Group, and 20% to Bogey Holding Company Spain, S.L., a holding company of the Sidenor executives. The contracted value for the purchase of all the shares is 443,820 thousand (equivalent to R$ 1,228,960 at December 31, 2005) plus a variable portion to be calculated in the future, estimated at 19,500 thousand (equivalent to R$ 53,996 at December 31, 2005), to be paid by Gerdau Hungria Holdings Limited Liability Company. Each shareholder will pay the amount corresponding to its investment from its own funds. Carpe Diem has the right to sell its investment in Sidenor to the Gerdau Group after a 5-year period (sale option), for a fixed price subject to restatement. When and if Carpe Diem exercises this option, Gerdau shall have the right, if it sees fit, to indicate a third party to purchase this investment. Corporación Sidenor, S.A. is a holding company that controls Sidenor Industrial, S.L., the largest manufacturer of special steel rods and forged and cast parts in Spain, as well as one of the major manufacturers in Spain of die forged products. Sidenor Industrial has three steel production units, located in Basauri, Vitoria and Reinosa. In 2004, the company sold 688 thousand tons of finished products. Sidenor Industrial also has the subsidiary Forjanor, S.L. for the production of forged steel for die forging, with plants in Madrid and Elgeta. In 2004, Forjanor sold 25 thousand tons of products. Corporación Sidenor, S.A., in Brazil, by means of its subsidiary Sidenor International, S.L., has a 58,44% interest in the capital of Aços Villares S.A., producer of special steel rods and rolling cylinders, with units in Mogi das Cruzes, Pindamonhangaba and Sorocaba, all of them in the state of São Paulo, having sold 646 thousand tons of finished products in This transaction was completed in January 2006 when the shares were transferred to the buyers. The financial statements of Corporaciõn Sidenor S.A. and its subsidiaries will be included in the consolidated financial statements of the Gerdau Group (proportional consolidation) as from that date. VI) On December 19, 2005, the Gerdau Group completed the purchase of 97.01% of the capital of Siderúrgica del Pacífico S.A. - Sidelpa, the only special steel producer in Colombia. This transaction resulted in a negative goodwill of R$ 30,605 as a result of the overvaluation of Sidelpa s fixed assets, to be amortized proportionally to the depreciation of the assets that originated the negative goodwill, over an estimated period of 10 years. d) The consolidated financial statements also include the financial statements of the jointly-owned subsidiary Dona Francisca Energética S.A. consolidated proportionally to the direct interest, and of the jointly-owned subsidiaries Armacero Industrial y Comercial Ltda. and Gallatin Steel Company, proportionally to the indirect interest of the parent company in the capital of the subsidiaries. As a result of the increased investment in Sipar Aceros S.A. as stated in c) III) above, the results of operations of this company, up to September 30, 2005, were consolidated proportionally to the interest previously held. The principal financial statement balances of these companies, on which the corresponding consolidation percentage is applied, are as follows: Sipar Armacero Dona Francisca Gallatin Aceros S.A. Ind. Com. Energética S.A. Steel Company (*) Ltda. (**) Assets Current assets , , , , ,251 29,952 Long-term receivables , , ,437 Permanent assets , , , ,762-18,929 37,816 Total assets , , ,704 1,198, ,180 69,205 Liabilities Current liabilities... 40,817 29, , ,580-80,787 27,348 Long-term liabilities , ,006 47,512 54,190-4,356 20,725 Shareholder s equity... (4,753) (16,349) 738,528 1,013,098-78,037 21,132 Total liabilities and equity , , ,704 1,198, ,180 69,205 Income statement Net sales revenues... 46,326 42,780 1,948,736 2,372, , ,605 87,437 Cost of sales... (19,647) (19,424) (1,456,182) (1,626,650) (220,105) (285,566) (80,761) Gross profit... 26,679 23, , ,200 64,015 65,039 6,676 General, administrative and selling expenses... (1,739) (2,110) (25,832) (51,234) (25,040) (24,863) (5,365) Other financial income (expenses)... (7,506) (17,882) (86,095) (14,030) (4,801) (8,101) (17) Other operating income (expenses), net (71) (76) 695 Operating profit (loss)... 17,434 3, , ,936 34,103 31,999 1,989 Non-operating income, net , Provision for income tax and social contribution on net income... (5,841) (1,249) (237) (797) (11,290) (10,188) (366) Net income for de year... 11,597 2, , ,364 23,049 22,570 1,623 (*) Includes the subsidiary Siderco S.A.. (**) Company included in the consolidation in 2005.

99 METALÚRGICA GERDAU S.A. METALÚRGICA GERDAU S.A. 105 e) The Company and its direct and indirect subsidiaries have goodwill and negative goodwill, which are amortized as the 5 - CASH AND CASH EQUIVALENTS assets that generated them are realized or based on the realization of the projected future profits, limited to ten years, as follows: Amortization period Goodwill included in the investment accounts Balance at December 31, 2004 (based on projected future profitability)... 52,854 (+) Foreign exchange adjustment... 2,774 (+) Sipar Aceros S,A (Note 4c - III)... 59,367 (-) Amortization during the year years (23,341) Balance at December 31, 2005 (based on projected future profitability)... 91,654 Analysis of the goodwill by subsidiary Margusa - Maranhão Gusa S.A... 8,242 Dona Francisca Energética S.A... 17,074 Distribuidora Matco S.A... 5,368 Sipar Aceros S.A. (Note 4c - III)... 60,970 91,654 Company Cash , ,767 Financial investment fund... 2,743-3,328, ,102 Fixed income securities... 46,559 95,702 1,736,105 1,101,388 Equities ,171 37,688 49,312 95,800 5,395,463 2,003,945 The financial investments are, basically, in federal public securities and bank certificates of deposit (CDB) at market prices and rates, and are adjusted according to the income accrued proportionally up to the financial statement date, not exceeding their respective market values. Of the existing balance, R$ 2,238,294 - (R$ 1,004,550 - in 2004), refer to investments in foreign currency, principally in U.S. dollars. Amortization period Goodwill included in the fixed asset accounts Balance at December 31, 2004 (based on undervaluation of assets) ,959 (-) Foreign exchange adjustment... (17,131) (-) Amortization during the year years (20,315) Balance at December 31, 2005 (based on undervaluation of assets) ,513 The goodwill resulted from the assets of the subsidiary Gerdau Ameristeel US Inc. Negative goodwill included in the fixed asset accounts Balance at December 31, 2004 (based on undervaluation of assets)... (243,277) (-) Foreign exchange adjustment years 26,897 (+) Diaco S.A. (Note 4c - IV)... (27,469) (+) Siderúrgica del Pacífico S.A. (Note 4c - VI)... (30,605) Balance at December 31, (274,454) 6 - TRADE ACCOUNTS RECEIVABLE Customers in Brazil , ,557 Brazilian export receivables , ,954 Receivables from customers of foreign subsidiaries... 1,223,317 1,232,095 Provision for credit risks... (82,168) (92,414) 2,101,137 2,564, INVENTORIES The negative goodwill at December 31, 2004 mainly resulted from the assets of the subsidiary Gerdau Açominas S.A.. The goodwills based on future profitability were supported by projections of profits of each subsidiary, calculated on the discounted cash flow method and at an average interest rate equivalent to the TJLP (Long-term Interest Rate), for a period of 10 years. The equity accounting loss in the consolidated statement of income refers, basically, to the effects of foreign exchange rate variations on the foreign investments, to goodwill amortization and the tax incentive reserves arising from the reduction of income tax on the exploitation profit of the subsidiaries Gerdau Açominas S.A. and Margusa - Maranhão Gusa S.A., both located in the Northeastern region of Brazil, as well as to benefits arising from state tax financing Finished products... 1,656,123 1,728,652 Products in progress , ,167 Raw materials ,800 1,112,467 Storeroom material , ,892 Advances to suppliers... 76,391 66,464 4,018,629 4,236,642 The inventories are insured against fire and overflow. Cover is determined based on the amounts and the risks involved.

100 METALÚRGICA GERDAU S.A. METALÚRGICA GERDAU S.A TAX CREDITS Company Current ICMS - Value-added tax on sales and services ,291 99,819 COFINS - Social Contribution on Revenues ,921 56,302 PIS - Social Integration Program ,307 36,730 IPI - Excise tax ,367 3,310 Income tax and social contribution on net income... 6,119 11,232 68,156 46,396 IVA - Value-added tax ,861 Others ,370 7,440 6,181 11, , ,858 Long-term PIS e COFINS ,349 - ICMS credits on purchases of fixed assets ,375 69,992 Others , ,792 69,992 Total tax credits... 6,181 11, , , INCOME TAX AND SOCIAL CONTRIBUTION ON NET INCOME a) Analysis of the income tax (IR) and social contribution on net income (CS) expense: Company IR CS Total IR CS Total Profit before income share and social contribution, after statutory profit sharing... 1,274,528 1,274,528 1,274,528 1,482,051 1,482,051 1,482,051 Standart rates tax... 25% 9% 34% 25% 9% 34% Income tax and social security expense at statutory rates... (318,632) (114,708) (433,340) (370,513) (133,385) (503,898) Tax adjustment on: - equity in earnings of subsidiaries , , , , , ,567 - interest own capital... (865) (311) (1,176) (685) (247) (932) - gain on change in investment ownership... 1, , permanent differences (net)... (2,227) (267) (2,494) 2, ,287 Income tax and social contribution expense ,056 (33,190) (11,786) (44,976) Current... (2,287) (695) (2,982) (2,070) (554) (2,624) Deferred... 2,670 1,368 4,038 (31,120) (11,232) (42,352) IR CS Total IR CS Total Profit before income share and social contribution, after statutory profit sharing... 4,344,146 4,344,146 4,344,146 4,536,502 4,536,502 4,536,502 Standard rates of tax... 25% 9% 34% 25% 9% 34% Income tax and social security expense at statutory rates... (1,086,037) (390,973) (1,477,010) (1,134,126) (408,285) (1,542,411) Tax effects on: - tax rate differences for foreign subsidiaries... (41,091) 127,983 86,892 (96,019) 91,649 (4,370) - equity in lease of subsidiaries... (39,476) (14,211) (53,687) (86,157) (31,017) (117,174) - interest own capital... 40,846 14,704 55,550 90,350 32, ,876 - recovery of deferred tax assets... 44,536 14,336 58, ,770 48, ,879 - gain on change in investment ownership... 78,187 28, , amortization of deferred charges - CVM ,273 49, , permanent differences (net)... (27,492) (11,452) (38,944) (4,602) 31,397 26,795 Income tax and social contribution expense... (893,254) (182,048) (1,075,302) (959,784) (235,621) (1,195,405) Current... (782,240) (150,180) (932,420) (789,638) (167,362) (957,000) Deferred... (111,014) (31,868) (142,882) (170,146) (68,259) (238,405) b) Analysis of the deferred income tax and social contribution on net income assets and liabilities, at the standard rates of tax: Assets... Company IR CS Total IR CS Total IR CS Total IR CS Total Income tax losses... 2,565-2,565 3,572-3, , , , ,440 Social contribution losses ,725 4,725-5,023 5,023-16,171 16,171-69,255 69,255 Provision for contingencies ,382 20,905 79,287 48,846 17,465 66,311 Benefits to employees ,095-91, , ,474 Commissions/others ,049 4, , ,345 2, ,688 Amortized goodwill... 5,419 1,951 7, ,889 7,881 29,770 7,391 2,319 9,710 Provision for losses ,830 27, ,483 87,595 29, ,641 8,101 6,718 14,819 4,637 5,065 9, ,983 76, , , , ,519 Current ,675 16, , ,204 58, ,797 Long-term... 8,101 6,718 14,819 4,637 5,065 9, ,308 60, , ,887 61, ,722 Liabilities... Company IR CS Total IR CS Total IR CS Total IR CS Total Accelerated depreciation , , , ,999 Amortized negative goodwill... 69,696 16,923 86,619 68,903 16,637 85, ,910 31, , ,116 31, ,381 Defered unrealized foreign exchange gains ,787 21,884 82, ,934 33, ,905 69,696 16,923 86,619 68,903 16,637 85, ,602 54, , ,226 66, ,285 Current ,349 20,530 86, ,195 33, ,166 Long-term... 69,696 16,923 86,619 68,903 16,637 85, ,253 33, , ,031 32, ,119

101 METALÚRGICA GERDAU S.A. METALÚRGICA GERDAU S.A. 109 The tax benefits recognized on income tax and social contribution losses, as well as on the provision for losses, both in the Company and, are supported by projections of future taxable income adjusted to present values based on technical feasibility studies prepared annually for Board of Director approval. These studies, which consider the history of the Company s and its subsidiaries profitability and the maintenance of the current profitability in the future, permitted the recognition of credits over a period not exceeding ten years. The other credits based on temporary differences, mainly on provisions for tax contingencies, were maintained according to their estimate of realization. c) Estimated recovery of the deferred income tax and social contribution assets and liabilities: Assets Company Until , , ,283 65, ,490-70,640 86, ,490 4,297 62, , ,490 5,405 72, , to , ,659 99, to , ,212-14,819 9, , ,519 Liabilities Company , ,879 9, ,042 19, ,350 28, ,151 44, to , , to , ,767 from 2015 on... 86,619 85, , ,532 86,619 85, , , JUDICIAL DEPOSITS AND OTHER Company Judicial ,364 30,767 Receivables under contract... 1,934 2,397 36,822 49,893 Income tax contract ,230 10,230 Assets not for use ,456 45,779 Prepaid finance expenses ,051 36,141 Federal Power Company (Eletrobrás) loans ,305 10,584 Others ,429 2,589 2,725 3, , , INVESTIMENTS Company Controlled Companies Other Total Total Gerdau Gerdau Santa Felicidade Banco Gerdau Gerdau Aços Gerdau Aços Comercial América Com. Imp Exp. Gerdau S.A. Gerdau S.A. Açominas S.A. Longos S.A. Especiais S.A. de Aços S.A. do Sul S.A. Prod. Sid. Ltda. Others Investment Investment Investment Investment Investment Investment Investment Investment Investment Opening balance... 2,596,105 33, , ,018,021 2,029,479 Purchase... 13, ,630 1,712 Premium on investment purchase ,502 Barter... (10,934) - 13,379 (2,240) (389) (505) 6, ,837 - Equivalence (1)... 1,185,151 10,108 5,455 1, ,134 78, ,281,519 1,342,842 Disposal... (10,829) (10,829) (79,158) Split (note 4c -II) (10,828) 6,409 1,101 1,503 1, Profit on stock sale by controlled company ,969 Dividends... (342,422) (3,251) (1,902) (417) (98) (85) - (34,602) - - (382,777) (404,325) Closing balance... 3,430,701 40,134 6,104 4, ,046 9, , ,925,401 3,018,021 Capital stock... 5,206,968 21,700 1,654,160 2,207, , , , ,893 Adjusted shareholders equity... 8,042,186 40,539 3,094,596 2,494, , , , ,798 Net income for the year... 2,781,340 10,151 1,313, ,293 83,892 41, ,238 78,101 Share in the full capital (%) % 99.00% 0.20% 0.20% 0.20% 0.20% 1.29% % Share in voting capital (%) % 99.00% 0.20% 0.20% 0.20% 0.20% 1.29% % Ordinary shares held ,928,964 1,352, , , , ,249 2,313, ,893,875 Preference shares held... 73,547,865 1,352, Stock exchange price... 6,337, Proposed dividends , , ,480 39,569 35, Dividends receivable... 79, (1) Includes amortization of goodwill. Margusa Dona Maranhão Franscisca Armacero Industrial y MRS Sipar Gerdau Investment Gusa S.A. Energética S.A. Comercial Ltda. Distribuidora Matco S.A. Salomon Sack S.A. Logística S.A. Inversiones S.A. company Others Total Goodwill Goodwill Investment Goodwill Investment Goodwill Investment Goodwill Investment Goodwill Investment Investment Balance on December 31, ,728 19,512 9, ,400 6,066 17,873 2,091 4,772-10,036 4, ,547 Foreign exchange adjustment (21) - (276) - (95) - 3, ,774 Amortization of investment... (16,486) (2,438) - (436) - (422) - (1,996) - (1,563) - - (23,341) Acquisition of investment , ,572 64,313 Dividends (3,964) - (3,964) Equity in earnings ,031-1,031 Investment consolidated in the year (9,871) - (12,400) - (17,873) (40,144) Balance on December 31, ,242 17, , ,772 60,970 7,477 9, ,216

102 METALÚRGICA GERDAU S.A. METALÚRGICA GERDAU S.A FIXED ASSETS Annual depreciation/ Accumulated depreciation depletion rate % Cost and depletion Net Net Land, buildings and structures... 0 a 4 4,919 (3,471) 1,448 1,593 4,919 (3,471) 1,448 1,593 Annual depreciation/ Accumulated depreciation depletion rate % Cost and depletion Net Net Land,buildings and structures... 0 a 10 3,466,847 (1,190,478) 2,276,369 2,232,444 Machinery, equipment and installations... 5 a 10 8,599,988 (4,467,396) 4,132,592 4,326,483 Furniture and fixtures... 5 a ,078 (76,851) 58,227 40,797 Vehicles a 33 69,152 (35,095) 34,057 10,566 Electronic data equiment/rights/licences a ,139 (221,927) 110,212 96,724 Construction in progress ,889,512-1,889,512 1,065,583 Forestation/reforestation... felling plan 250,528 (56,539) 193, ,376 14,743,244 (6,048,286) 8,694,958 7,928,973 a) Insured amounts - the assets are insured against fire, electrical damage and explosion. The cover is based on the amounts and risks involved. The plants of the North and South American subsidiaries and the subsidiary Gerdau Açominas S.A. are also insured against loss of profits. The total cover amounts to R$ 18,548,459 at December 31, b) Capitalization of interest and financial charges - financial income was credited during 2005 totaling R$ 10,070 - (R$ 2,021 - in 2004) as a result of the appreciation of the Brazilian real against the U.S. dollar. c) Guarantees offered - fixed assets were pledged as collateral for loans of R$ 837,996 - (R$ 688,034 - in 2004). d) Summary of changes in fixed assets: Company Balance at the beginning of the year... 1,593 1,738 7,928,973 7,380,838 ( + ) Purchases/sales for the year ,698,794 1,167,022 ( - ) Depreciation and depletion in cost of sales (756,386) (692,609) ( - ) Depreciation and depletion in administrative expenses... (145) (145) (82,374) (69,594) ( + ) Companies consolidated in the year ,280 - ( + ) Purchase of North Star and others ,948 ( - ) Foreign exchange rate effect on fixed assets of foreign subsidiaries (346,329) (124,632) Balance at end of the year... 1,448 1,593 8,694,958 7,928, DEFERRED CHARGES The deferred charges () comprise pre-operating expenses in the construction of a hydroelectric plant, reforestation projects and research, development and reorganization projects LOANS Annual Current loans stated in reais charges (*) Current loans stated in reais Working capital... CDI (**) 20,903 60,197 Investment ,500 Fixed assets financing Current loans stated in foreign currency Working capital (US$) % 592,887 1,174,094 Fixed assets and others (US$) % 34,676 1,387 Export advances (US$) % 3,082 43,891 Working capital (Clp$) % 50,133 31,905 Working capital (Cop$) % 11,810 - Working capital (PA$) % 4,880 19, ,371 1,336,376 Plus: current portion of long-term loans , ,489 Current loans... 1,329,651 2,027,865 Long-term loans in reais Working capital... TJLP + 3,50% 124,125 52,625 Fixed assets... TJLP + 3,50% 812, ,668 Investment... IGP - M + 8,50% 22,510 42,686 Long-term loans in foreign currency Working capital (US$) % 226, ,795 Bearer Bonds (Perpetual Bonds and Senior Notes) (US$) % 2,337,845 1,056,486 Açominas Export Notes (US$) % 543, ,908 Export advances (US$) % 761, ,258 Investments (US$) % 162, ,943 Fixed assets and others % 844, ,092 Fixed assets (Cdn$) % 5,606 3,485 Working capital (Clp$) % 19,495 16,254 Fixed assets (Clp$) ,000 Working capital (Cop$) % 102,300 - Working capital(pa$) % 126 1,663 5,963,700 4,181,863 Minus: current portion... (611,280) (691,489) Long-term loans... 5,352,420 3,490,374 Total loans... 6,682,071 5,518,239 (*) Weighted average rate at December 31, (**) CDI - Interbank Deposit Certificate interest rate. The loans stated in reais are indexed by the TJLP (Long-term Interest Rate), established by the Brazilian Government and used for restatement of long-term loans granted by BNDES (National Bank for Economic and Social Development), determined quarterly, or by the IGP-M (General Price Index - Market): Brazilian inflation rate, calculated by the Getúlio Vargas Foundation).

103 METALÚRGICA GERDAU S.A. METALÚRGICA GERDAU S.A. 113 Summary of loans by currency: Real (R$) , ,121 American dollar (US$)... 5,507,492 4,637,855 Canadian dollar (Cdn$)... 5,606 3,485 Colombion peso (Clp$) ,110 - Argentinean peso (PA$)... 5,006 21,619 Chilean peso (Clp$)... 69,628 75,159 6,682,071 5,518,239 Maturity of long-term loans: , , , , ,126,736 After ,679,801 5,352,420 a) Events during the year I) Gerdau S.A. concluded the private issue of Guaranteed Perpetual Notes (Notes) on September 15, 2005 in the total amount of US$ 600 million with annual interest of 8.875%. These Notes are guaranteed by the Brazilian operating companies Gerdau Açominas S.A., Gerdau Aços Longos S.A., Gerdau Aços Especiais S.A. and Gerdau Comercial de Aços S.A. The Notes have no maturity but may become due in certain specific circumstances (as defined in the terms of the Notes), which are not under total control of the Company. The Company has the option of redeeming these Notes after 5 years of their issue, the first option for redemption therefore being in September Interest is payable quarterly and each quarterly payment date after September 2010 is also a redemption option date. II) The third issue of Euro commercial paper was concluded on December 12, 2005 in the amount of US$ 200 million, with final maturity on October 11, 2006 and interest of 5.0% p.a.. b) Guarantees The loans contracted under the FINAME/BNDES program (financing for the purchase of machinery and equipment through the BNDES) are guaranteed by the financed assets, in the amount of R$ 469,708. The other loans are guaranteed by the controlling companies, on which the Company pays a fee of 1% p.a. on the amount guaranteed. c) Covenants In replacement of the tangible guarantees usually required, the loans are being contracted with certain financial covenants, as follows: I) interest coverage ratio - measures the debt service payment capacity in relation to EBITDA (Earnings before Interest, Taxes, Depreciation and Amortization), as described in Note 28; II) leverage ratio - measures the debt coverage capacity in relation to EBITDA, as described in Note 28; III) Required Minimum Net Worth - measures the minimum net worth required in financial agreements; and IV) Current Ratio (current liquidity ratio) - measures the capacity to pay current liabilities. All the covenants mentioned above are calculated on a consolidated basis, except for item IV which refers to the parent company Metalúrgica Gerdau S.A., and have been complied with. The penalty for non-compliance is the prepayment of the contracts. d) Credit lines In October 2005, the subsidiaries Gerdau Açominas S.A., Gerdau Aços Longos S.A., Gerdau Aços Especiais S.A. and Gerdau Comercial de Aços S.A. obtained a pre-approved credit line from BNDES - National Bank for Economic and Social Development of R$ 900,000 for the purchase of equipment and for expenses. These funds will be provided as the subsidiaries carry out their own investment plans and submit proof of expenditures to BNDES. At December 31, 2005, this line had not yet been used and the applicable interest rates will be the ones in force on the dates the funds are released. The contracts are guaranteed by Indac - Ind. Adm. e Comércio S.A. and by financial covenants offered by Metalurgica Gerdau S.A. The subsidiary Gerdau Açominas S.A. also has the following credit lines: US$ 240 million (R$ 561,768 at December 31, 2005) from ABN AMRO Bank N.V., The Bank of Tokyo-Mitsubishi and UFJ Bank Limited, whose guarantee was given by Nippon Export and Investment Insurance (NEXI), with a term of seven years, of which two are the grace period and the remaining five for payment. At December 31, 2005, US$ 32,7 million (R$ 76,541) of this credit line had been drawn down. The funds will be used for the modernization of the Ouro Branco plant and there is no relation to imports or export receivables. US$ 69 million (R$ 161,508 at December 31, 2005) from Export Development Canada, whose guarantee was given by KFW IPEX - Bank and by Gerdau S.A., with a term of six years, of which two are the grace period and the remaining four for payment. At December 31, 2005, US$ million (R$ 78,788) of this credit line had been drawn down. The interest rate is 7.02 % per year. The funds will be applied in the supply of blooms continuous casting and beam blank. US$ 50 million (R$ 117,035 at December 31, 2005) from BNP Paribas Brasil, whose guarantee was given by Gerdau S. A., with a term of five years, of which three are the grace period and the remaining two for payment. At December 31, 2005, US$ 50 million of this credit line had been drawn down. The interest rate is 5.93% p.a. The funds will be used to finance 15% of the supply plus the Credit Insurance of the blast furnace, coking mill and sintering facilities. US$ 201 million (R$ 470,480 at December 31, 2005) from BNP Paribas - France (50%) and the Industrial and Commercial Bank of China (50%), whose guarantee was given by SINOSURE (China Export & Credit Insurance Corporation), credit agency for Chinese exports, and by Gerdau S. A., with a term of 12 years, for which three are the grace period and the remaining nine for payment. At December 31, 2005, there had been no use of funds from this credit line. The interest rate is 6.97% p.a. The funds will be used to finance 85% of the supply for the blast furnace, coking mill and sintering facilities. The North American subsidiaries have a credit line in the amount of US$ 650 million, equivalent to R$ 1,521,455 at December 31, 2005, falling due in October 2010, which can be drawn in U.S. dollars (at the LIBOR rate plus interest of between 2.25% and 2.75% p.a. or US Prime/FED Funds plus interest of 0.5% p.a.) or in Canadian dollars (at the Bankers Acceptance (BA) rate plus interest of between 2.35% and 2.85% p.a., or Canadian Prime plus interest of 1.00% p.a.). The distribution of this credit line among the companies is made in proportion to the working capital of each North American subsidiary. This credit line had not been used up to December 31, The inventories and accounts receivable of subsidiaries were given as guarantee for this credit line.

104 METALÚRGICA GERDAU S.A. METALÚRGICA GERDAU S.A. 115 The subsidiary Gerdau Aza S.A. has a line of credit for working capital of Clp$ 40.9 billion (R$ 186,388 at December 31, 2005), bearing interest of 3.60% p.a., and a credit line for fixed assets of Clp$ 146 million (R$ 674 at December 31, 2005) bearing interest of 6.12% p.a. This line was not being used at December 31, DEBENTURES Number General In Annual Issue Meeting Issued portfolio Maturity rate Gerdau S.A. 3ª - A e B... 05/27/ ,000 60,250 06/01/2011 CDI 160, ,387 7ª... 07/14/ ,400 36,192 07/01/2012 CDI 74, ,068 8ª... 11/11/ ,964 25,774 05/02/2013 CDI 234, ,878 9ª... 06/10/ ,640 57,528 09/01/2014 CDI 158, ,954 11ª - A e B... 06/29/ ,000 78,270 06/01/2020 CDI 158,258 98,189 Gerdau Ameristeel Corp... 04/23/ ,000-04/30/ % 228, ,618 1,015, ,094 Debentures held by consolidated subsidiaries... (286,938) (252,982) Debentures in possession of the company... (46,479) (95,622) , ,490 Current... 2,719 2,986 Long-term , ,504 Debentures issued by Gerdau S.A. The debentures are stated in reais, with variable interest at a percentage of the CDI (Interbank Deposit Certificate) rate. The nominal annual interest rate was 18.99% and 16.17% for the years ended December 31, 2005 and 2004, respectively. Debentures issued by Gerdau Ameristeel Corp. The debentures of Gerdau Ameristeel Corporation are convertible into common shares of the subsidiary at a conversion price of Cdn$ per share, up to their maturity. The controlling shareholders hold, directly or indirectly, R$ 543,383 at December 31, 2005 (R$ 523,546 at December 31, 2004) of the outstanding debentures FINANCIAL INSTRUMENTS a) General comments - Metalúrgica Gerdau S.A. and its subsidiaries enter into transactions with financial instruments whose risks are managed by means of financial positions and exposure limit controls. All instruments are fully recorded in the books of account and mainly relate to the instruments listed below: - financial investments - are recorded at their redemption value as of the financial statement date and are explained and presented in Note 5; - investments - are explained and presented in Note 11; - related parties - are explained and presented in Note 21; - loans - are explained and presented in Note 14; - debentures - are explained and presented Note 15; and - financial derivatives - in order to minimize the effects of fluctuations in foreign exchange rates on their liabilities, the subsidiaries Gerdau Açominas S.A. and Dona Francisca Energética S.A. entered into swap contracts that were converted into Brazilian reais on the contract date and linked to changes in the CDI interest rate and the General Market Price Index (IGP-M), plus additional interest. The subsidiaries Gerdau Açominas S.A and Gerdau Ameristeel Corporation also entered into swap contracts linked to LIBOR. The swap contracts are listed below: Amount - Contract date Purpose US$ thousand Annual rate Maturity to Prepayment 7, % to 92.80% of the CDI to fixed assets 5,263 IGP-M % p.a to fixed assets 11, % to % of the CDI to to Bank notes 200,000 LIBOR % to 6.13% interest fixed assets 240, % fixed assets 40, % fixed assets 43, % b) Market value - the market values of the financial instruments are as follows: Company Book Market Book Market value value value value Financial investments... 49,302 49,302 95,702 95,702 Investments... 3,925,401 6,832,003 3,018,021 5,979,482 Related parts (liabilities) Treasury stock - note ,481 70,189 21,490 45, Book Market Book Market value value value value Financial investments... 5,122,178 5,122,178 1,666,178 1,666,178 Securitization financing , , , ,908 Importation financing , , , ,883 Prepayment financing , , , ,724 Resolution 2770 financing , ,585 Resolution 4131 financing ,893 20,755 Bank Notes Financing ,361 1,049,893 1,050,835 1,260,376 Fixed Assets... 41,393 41,592 45,837 45,686 Perpetual bonuses... 1,407,190 1,439, Others financing... 2,130,623 2,130,623 2,080,840 2,080,840 Debentures , , , ,490 Investments , , , ,547 Related parties (assets) ,231 1,231 Stock options (liabilities) - note ,241-13,663 Swap contracts - fixed assets (assets... 5,462 5, Swap contracts - investment (liabilities) ,500 4,500

105 METALÚRGICA GERDAU S.A. METALÚRGICA GERDAU S.A. 117 The market values of the swap contracts of subsidiaries in Brazil were obtained based on future income projections 17 - FINANCIAL INCOME/EXPENSES for each contract, calculated based on the present value of the forward U.S. dollar plus coupon rates (assets) and CDI/ IGPM future rates (liabilities) and adjusted to present value on the financial statement date using the projected future CDI/IGPM rate for each maturity. The same methodology is applied for the calculation of the market values of the swap contracts of the subsidiary Gerdau Ameristeel Corporation, using the LIBOR rate. Swap contracts related to financing contracts are classified together with the related financing, as a contra entry to the Financial expenses/income, net account, and are stated at cost plus accrued charges up to the financial statement date. Contracts not linked to such financing have been recorded at their market value under the heading Judicial deposits and other (assets) and Other accounts payable (liabilities). The Company and its subsidiaries believe that the balances of the other financial instruments, which are recognized in the books at net contracted values, are substantially similar to those that would be obtained if they were negotiated in the market. However, because the markets for these instruments are not active, differences could exist if they were settled in advance. c) Risk factors that could affect the Company s and its subsidiaries business Price risk: this risk is related to the possibility of price variations of the products that the subsidiaries sell or in the raw material prices and other inputs used in the production process. Since the subsidiaries operate in a commodity market, their sales revenues and cost of sales may be affected by the changes in the international prices of their products or materials. In order to minimize this risk, the subsidiaries constantly monitor the price variations in the local and international markets. Interest rate risk: this risk arises as a result of the possibility of losses (or gains) due to fluctuations in interest rates relating to its assets invested and liabilities raised in the market. In order to minimize possible impacts resulting from interest rate fluctuations, the Company and its subsidiaries have adopted a policy of diversification, alternating between fixed rates and variable rates (such as LIBOR and the CDI) and periodically renegotiating contracts to adjust them to market. Exchange rate risk: this risk is related to the possibility of fluctuations in foreign exchange rates affecting financial expenses (or income) and the liability (or asset) balance of contracts denominated in a foreign currency. In addition to the foreign investments which are a natural hedge, the Company and its subsidiaries use hedge instruments, usually swap contracts, as described in item a above, to manage the effects of these fluctuations. Credit risk: this risk arises from the possibility of the subsidiaries not receiving amounts arising from sales or investments with financial institutions. In order to minimize this risk, the subsidiaries adopt the procedure of analyzing in detail the financial and equity position of their customers, establishing a credit limit and constantly monitoring their balances. In relation to financial investments, the Company and its subsidiaries invest solely in institutions with low credit risk, as assessed by rating agencies. In addition, each institution has a maximum limit for investment, determined by the Credit Committee. Company Financial income Financial investments... 6,030 1, , ,413 Interests ,684 29,934 Monetary variation ,161 3,327 Foreign exchange variation (12,636) (34,671) Foreign exchange swap ,915 Other financial income... 1,313 8,996 71, ,343 Total income... 7,360 10, , ,261 Expenses Interest on loans... (4) (844) (459,936) (417,041) Monetary variations... (4,422) (5,147) (27,387) (22,983) Foreign exchange variations , ,607 Foreign exchange swap (57,222) (44,127) Interest rate swap (681) - Others financial expenses... (467) (861) (132,226) (111,098) Total expenses... (4,893) (6,852) (441,080) (397,642) 18 - TAXES AND SOCIAL CONTRIBUTIONS PAYABLE Company Income tax and social contribution on net income , ,962 Social charges on payroll ,830 49,368 ICMS - Value-added tax on sales and services ,355 32,131 COFINS - Tax for social security Financing ,014 19,266 33,622 IPI - Excise Tax ,599 14,114 PIS - Social Integration Program ,193 6,903 Withholding income tax and social contribution ,320 8,211 Tax payable in installments ,196 11,819 Others ,305 32, , , , SPECIAL INSTALLMENT PAYMENT PROGRAM (PAES) The proportionally consolidated (52%) subsidiary Dona Francisca Energética S.A. enrolled in the PAES, established by Law 10684/03, at the Federal Revenue Secretariat, to settle Corporate Income Tax (IRPJ), Social Contribution on Net Income (CSLL), Social Integration Program (PIS) and Social Contribution on Revenues (COFINS) liabilities. The balances of these tax liabilities are recorded in Taxes and contributions payable, in current liabilities, and in Other accounts payable, in long-term liabilities. The balances of the renegotiated taxes, which were divided into 180

106 METALÚRGICA GERDAU S.A. METALÚRGICA GERDAU S.A. 119 installments of which 149 are not yet due, are restated by the Long-term Interest Rate (TJLP) and are as follows at the year end: Principal Interest Total Principal Interest Total IRPJ... 18,790 4,756 23,546 20,303 3,160 23,463 CSLL... 6,812 1,724 8,536 7,360 1,145 8,505 PIS COFINS... 3, ,857 3, ,844 29,346 7,428 36,774 31,709 4,935 36,644 Current... 2, ,962 2, ,732 Long-term... 26,983 6,829 33,812 29,345 4,567 33,912 Dona Francisca Energética S.A. pays its taxes, contributions and other liabilities on their due dates, which is a basic requirement to remain eligible for the PAES program PROVISION FOR CONTINGENCIES The Company and its subsidiaries are parties to labor, civil, and tax lawsuits. Based on the opinion of its legal advisors, management believes that the provision for contingencies is sufficient to cover probable and reasonably estimable losses from unfavorable court decisions, and that the final decisions will not have significant effects on the financial position of the Company at December 31, The balances of the contingencies, net of the corresponding judicial deposits, are: I) Contingent liabilities provided Company a) Tax Contingencies Value-added tax on sales and services (ICMS)... (a.1) ,879 17,300 Social contribution on net income... (a.2) - - 7,333 7,333 Corporate income tax... (a.3) ,993 19,993 National Institute of Social Security (INSS)... (a.4) ,924 24,900 Social Integration Program (PIS)... (a.5) ,373 2,372 Social Contribution on Revenues (COFINS)... (a.5) - - 6,910 6,935 Compulsory loans Eletrobrás... (a.6) ,456 Social Investment Fund (FINSOCIAL)... (a.6) ,898 Emergency capacity charge... (a.7) ,896 25,563 Extraordinary reposition... (a.7) ,675 13,037 Government Severance Indemnity Fund for Employee (FGTS) and other... (a.8) ,503 Import Tax/IPI - Drawback... (a.9) ,402 - ( - ) Judicial deposits... (a.10) - - (93,848) (73,938) , ,352 b) Labor Contingencies... (b.1) ,101 49,798 ( - ) Judicial deposits... (b.2) - - (10,899) (10,538) ,202 39,260 c) Civil Contingencies... (c.1) , ,559 ( - ) Judicial deposits... (c.2) - - (1,074) (1,207) ,133 99,352 Total liabilities provided , ,964 a) Tax Contingencies a.1) Lawsuits relating to value-added tax on sales and services (ICMS), the majority of which relates to credit rights, mostly under judgment by the Finance Secretariat and the Courts of First Instance of the State of Minas Gerais. A provision for R$ 28,483 was recorded in 2005 by the subsidiary Gerdau Aços Longos S.A. to cover possible losses in the motion seeking to reverse a final and irrevocable judgment in a tax assessment brought by the State of Minas Gerais to collect tax on shipments of merchandise to an exclusively exporting company. The company understands that the judgment breached a provision of law and that there was also a refusal of judgment in the decision. Although the company understands that ICMS is not payable on shipments to an exporting company, this provision was recorded in an amount considered to be sufficient to cover the entire alleged liability and additional fines and interest. a.2) Social Contribution on Net Income. The amounts refer to challenges of the constitutionality of the contribution in 1989, 1990 and Some of these lawsuits are pending judgment, most of them in the Higher Courts. a.3) Matters concerning Corporate Income Tax (IRPJ) in discussion at the administrative level. a.4) Social security contributions due to the INSS, with lawsuits for annulment by the subsidiary Gerdau S.A., with judicial deposits of practically the whole amount involved, in progress in the Federal Court of the First Instance in the state of Rio de Janeiro. In the financial statements, the additional provision refers to lawsuits questioning the position of the INSS charging INSS contributions on profit sharing payments made by the subsidiary Gerdau Açominas S.A., as well as on payments for services rendered by third parties, in which the INSS calculated charges for the last ten years and assessed the company because it understands that it is jointly liable. The assessments were maintained at the administrative level, and Gerdau Açominas S.A. filed annulment actions with the judicial deposit of the corresponding amount, based on the understanding that the right to assess part of the charge had prescribed and that there is no such liability. a.5) Contributions to the Social Integration Program (PIS), and the Social Contribution on Revenues (COFINS) in connection with lawsuits challenging the constitutionality of Law no 9,718, which changed the calculation basis of these contributions. These lawsuits are in progress at the Federal Regional Court of the 2nd Region and the Federal Supreme Court. a.6) Tax contingencies relating to the Eletrobrás compulsory loan (R$ 50,456) and Finsocial (R$ 6,891) were reversed by the subsidiary Gerdau S.A. in 2005, considering, respectively, the implementation by Eletrobrás of the 3rd conversion in shares of the compulsory loans and the closing of the respective lawsuits. a.7) Emergency Capacity Charge (ECE) and Extraordinary Tariff Recomposition (RTE), charges included in the electric energy bills of the plants of the Company s subsidiaries. According to the Company, these charges are of a tax nature and, as such, are incompatible with the National Tax System provided in the Federal Constitution. For this reason, the constitutionality of these charges is being challenged in court. The lawsuits are in progress in the Federal Justice of the First Instance of the states of Pernambuco, Ceará, Minas Gerais, Rio de Janeiro, São Paulo, Paraná, and Rio Grande do Sul, as well as in the Federal Regional Courts of the 1st, 2nd and 5th Regions. The companies have fully deposited in court the amounts of the disputed charges. a.8) The provision recorded by Gerdau Açominas S.A. relating to the increased charges for FGTS, arising from the changes introduced by Complementary Law No. 110/01, was eliminated since the legal dispute referred to in the corresponding Injunction was finally and irrevocably judged against the company, following the judgment by the Federal Supreme Court in a similar case. There was a subsequent discussion since, at the time of payment of the principal as a result of the decision

107 METALÚRGICA GERDAU S.A. METALÚRGICA GERDAU S.A. 121 of the Injunction, Caixa Econômica Federal insisted on charging a fine. Consequently, the company deposited the principal in a Court Payment and the amount of the fine in a Judicial Appeal. The principal was drawn by the Caixa Econômica Federal and the dispute about the fine is pending judgment of the appeal brought by the company. a.9) The provision made in the last quarter of 2005 by the subsidiary Gerdau Açominas S.A is intended to cover amounts requested by the Federal Revenue authorities for Import Tax, Excise Tax and resulting additional charges on transactions made under a drawback granted which was subsequently annulled by the Foreign Trade Operations Department (DECEX). The company does not agree with the administrative decision that annulled the grant and defends the legality of the transactions made. The matter is the object of a Request for Injunction under consideration in the Superior Court of Justice (STJ). a.10) The judicial deposits relate to amounts deposited and maintained in court by the Company and its subsidiaries until the resolution of the related litigation. The balances of these credits are classified as a reduction of the provision for tax contingencies. b) Labor Contingencies: b.1) The Company s subsidiaries are also parties to labor claims. None of these claims involve significant amounts and the lawsuits mainly involve overtime pay, health and danger hazards, among others. b.2) The judicial deposits relate to amounts deposited and maintained in court until the resolution of the related litigation and are classified as a reduction of the provision for labor contingencies. c) Civil Contingencies c.1) The Company and its subsidiaries are also a party to civil claims arising in the normal course of their operations, including claims arising from work accidents, which total at December 31, 2005 the amount shown as the contingent liability for these matters. Certain provisions were reversed in 2005 because of changes in the prospect of loss and/or closing of the lawsuits. c.2) The judicial deposits are classified as a reduction of the provision for civil contingencies. II) Contingent liabilities not provided a) Tax contingencies a.1) The subsidiary Gerdau S.A. is a defendant in assessments filed by the state of Minas Gerais demanding ICMS tax payments arising mainly from the sales of products to commercial exporters. The restated amount of the lawsuits totals R$ 32,425. The Company has not made any provision for contingency in relation to these claims since it considers that this tax is not payable, because products for export are exempted from ICMS. a.2) The subsidiaries Gerdau S.A. and Gerdau Açominas S.A. are defendants in assessments filed by the state of Minas Gerais which demand ICMS tax payments on the export of semi-finished manufactured products. The subsidiary Gerdau Açominas S.A. has also filed a lawsuit for the annulment of an action of the same nature. The total amount demanded is R$ 271,997. The companies have not recorded any provision for contingency in relation to these claims since they consider that this tax is not payable because the products cannot be considered semi-finished manufactured products as defined by the federal complementary law and, therefore, are not subject to ICMS. a.3) On December 6, 2000, the subsidiary Gerdau S.A. enrolled in the Tax Recovery (REFIS) Program to pay the Social Integration Program (PIS) and the Social Contribution on Revenues (COFINS) contributions in installments. The constitutionality of the use of credits of R$ 40,118 acquired from third parties to settle the company s own interest and penalties is being challenged in court. This occurred because the Federal Revenue authorities understand that tax credits must first be used to offset the assignor s own debts, only transferring the excess to the assignee. This understanding, based solely on a REFIS Management Committee Resolution, edited subsequent to the company s enrollment in the Program, does not have a legal basis. In fact, the law which established the Program authorized, with no conditions, the purchase of third party tax credits for offset against own liabilities. b) Civil Contingencies b.1) Antitrust lawsuit involving the subsidiary Gerdau S.A. brought by two civil construction unions in the state of São Paulo alleging that Gerdau S.A. and other long steel producers in Brazil share customers among them, violating the antitrust legislation. After investigations carried out by the National Secretariat of Economic Law (SDE) and based on public hearings, the SDE is of the opinion that a cartel exists. This conclusion was also supported by an earlier opinion by the Secretariat for Economic Monitoring (SEAE). The lawsuit was therefore forwarded to the Administrative Council for Economic Defense (CADE) for judgment. However, its course was suspended from May 2004 to August 16, 2005 due to a legal protection granted within a new lawsuit brought by Gerdau S.A. with the purpose of annulling the administrative proceeding grounded on formal irregularities found in its discovery. The annulment of the legal protection by the Federal Regional Court occurred as a result of appeals brought by CADE and the Federal Government. CADE, regardless of the request for submission of negative evidence of cartel made by Gerdau S.A., judged the merits of the administrative proceedings on September 23, 2005 and, by a majority of votes, fined the company and other long steel producers an amount equivalent to 7% of their revenues in the year before the Administrative Proceeding was commenced, excluding taxes, for formation of a cartel. A request for amendment of judgment was made regarding this decision, which is still pending judgment. Despite the CADE decision, the legal action through by Gerdau S.A. follows its normal course and, at present, awaits judgment in the lower court. In the event the processual irregularities alleged by Gerdau S.A. are recognized by the court, the CADE decision may be annulled. It should be noted that just prior to the CADE decision, the Federal Public Ministry of the state of Minas Gerais issued a judgment on a Public Civil Action, based on the above mentioned SDE decision, and, without mentioning any new elements, alleged that the company was involved in activities which contravened the antitrust legislation. Gerdau S.A. contested this allegation on July 22, The company denies having engaged in any type of anti-competitive conduct and believes, based on information available, including the opinion of its legal advisors, that the administrative process until now includes many irregularities, some of which are impossible to resolve. In relation to the merit, Gerdau S.A. is sure that It did not practice the alleged conduct and, in this regard, its convictions are supported by renowned experts and the company, consequently, believes in the possibility of its conviction being reversed. b.2) A civil lawsuit has been filed against Gerdau Açominas S.A. regarding the termination of a contract for the supply of slag and indemnities for losses and damages. At December 31, 2005, the lawsuit amounted to approximately R$ 47,954. Gerdau Açominas S.A. contested all bases for the lawsuit and filed a counterclaim for termination of the contract and indemnity for breach of contract. The judge declared the contract to be terminated, since this demand was common to both parties. With regards to the remaining discussion, the judge understood that both parties were at fault and judged the requests for indemnity unfounded. This decision was maintained by the Court of Civil Appeals of the State of Minas Gerais (TAMG), and the court decision is based on expert evidence and interpretation of the contract.

108 METALÚRGICA GERDAU S.A. METALÚRGICA GERDAU S.A. 123 As regards the termination and the fact that the indemnity claimed by the supplier is not payable, the Court of Civil Appeals of the state of Minas Gerais confirmed the termination of the contract and granted the appeal by Gerdau Açominas to charge the supplier for the costs of removal of the slag, maintaining that the latter s claim has no grounds. A Special Appeal was initially brought against TAMG s decision, whose continuation was denied, against which a Bill of Review was filed in which the Superior Court of Justice (STJ) determined TAMG to complement the judgment challenged, which occurred in In this judgment, the previous decision was maintained and a new Special Appeal filed, which was also denied. A new Bill of Review was filed, which was denied by the STJ in a decision published on October 18, Gerdau Açominas has not been notified of any subsequent appeal. The company believes that any loss is remote since it is of the opinion that any change in judgment is unlikely, as the judgment was based on the analysis of evidence and interpretation of the contract, which practically precludes the chances of success of the Itabira appeals, which has been confirmed by the successive judgments against Itabira. b.3) A civil lawsuit has been filed by Sul AmericaAmérica Cia. Nacional de Seguros against Gerdau Açominas S.A. and Ban Westdeustsche Landesbank Girozentrale, New York Branch (WestLB), for the payment of R$ 34,383 to settle an indemnity claim, which has been deposited in court. The insurance company pleads doubt in relation to whom the payment should be made and alleges that the subsidiary is resisting in receiving and settling the amount. The lawsuit was challenged both by the Bank (which claims to have no right over the amount deposited, which resolves the doubt raised by Sul América) and by the subsidiary (which claims that there is no such doubt and that there is justification to refuse payment since the amount owed by Sul América is higher than the amount involved). Subsequently, Sul América claimed fault on the Bank s representation, and this matter is therefore already settled, which resulted in the withdrawal in December 2004 of the amount deposited. The process should enter the expert evidence phase, mainly for calculation of the amount due. Based on the opinion of its legal advisors, the subsidiary expects a loss to be remote and that the sentence will declare the amount payable within the amount stated in the pleading. Also, Gerdau Açominas S.A. filed, prior to this lawsuit, a lawsuit for the payment of the amount recognized by the insurance companies. The lawsuits are pending. The subsidiary expects a favorable outcome in this lawsuit. The civil lawsuits arise from an accident on March 23, 2002 with the blast furnace regenerators of the Ouro Branco steel plants, which resulted in the stoppage of several activities, with material damages to the steel mill equipment and loss of profits. The equipment, as well as the loss of profits arising from the accident, was covered by an insurance policy. The report on the event, as well as the loss claim, was filed with IRB - Brasil Resseguros, and an advance payment of R$ 62,000 was received in In 2002, a preliminary and conservative estimate of indemnities related to the coverage of loss of profits and material damages, in the total amount of approximately R$ 110,000, was recorded based on the amount of fixed costs incurred during the period of partial stoppage of the steel mill activities and the immediate expenses to be incurred to recover the equipment temporarily. This estimate approximates the advance amount received (R$ 62,000) plus the amount proposed by the insurance company as a complement to settle the indemnity (R$ 34,383). Subsequently, new amounts were added to the dispute as stated in the subsidiary s plea, although not yet recorded. In addition to these amounts, the subsidiary also incurred other costs for the recovery of the damage resulting from the accident, as well as other related losses that were listed in its challenge to the lawsuit in progress and which will be confirmed during the discovery phase, when they will be recorded. Based on the opinion of its legal advisors, the Company considers that losses from other contingencies that may affect the results of operations or the Company s consolidated financial position are remote. III) Contingent gains not recorded a) Tax contingencies a.1) The Company believes that the realization of certain contingent gains is possible. Among them is a court-order debt security issued in 1999 in the amount of R$ 26,580 in favor of the subsidiary Gerdau S.A., arising from an ordinary lawsuit against the state of Rio de Janeiro for non-compliance with the Loan Agreement for Periodic Execution in Cash under the Special Industrial Development Program (PRODI). Due to the default by the state of Rio de Janeiro and the non-regulation of Constitutional Amendment 30/00 (which granted the government a ten-year moratorium for payment of securities issued to cover court-order debts not related to food), the realization of this credit is not expected in 2005 and following years. For this reason, this gain is not recorded in the financial statements. a.2) A final and irrevocable favorable decision was granted on December 7, 2005 against the restatement of the calculation basis of the half-yearly PIS under Complementary Law 07/70, as a result of the decision of unconstitutionality of Decree Laws 2445/88 and 2449/88, in the last lawsuit of the subsidiary Gerdau S.A. still under examination. Accordingly, the company has recorded the corresponding credit, in December 2005, which, added to the credits recorded in the first quarter of the year relating to the same lawsuit, totaled R$ 70,332. a.3) Also, the subsidiaries Gerdau S.A., Gerdau Açominas S.A. and Margusa - Maranhão Gusa S.A. expect to recover IPI premium credits. Gerdau S.A. and the subsidiary Margusa Maranhão Gusa S.A. have filed administrative appeals for recovery, which are pending judgment. With regards to the subsidiary Gerdau Açominas S.A., the proceedings were judged unfavorably. Currently, the process awaits judgment of the appeal filed by the subsidiary. The Company estimates the credits at R$ 394,002 () but no accounting recognition has been made thereof because of uncertainty as to their realization RELATED PARTIES a) Analysis of loan balances Company Gerdau Açominas S.A (381) - - Gerdau Aços Longos S.A... (137) Fundação Gerdau ,305 Gerdau S.A Florestal Rio Largo Ltda (119) - Sipar Aceros S.A. e outras (74) Others (4) - (137) (266) 171 1,231 Net financial income (expenses)... - (817) 27,874 19,638 b) Commercial transactions - the Company entered into transactions with its parent company Indac - Ind. Adm. e Comércio S.A. Such transactions were the payment (R$ 466) and receipt (R$ 4,500) of guarantees received and given as collateral in contracts. The Company also made payments for the use of the Gerdau brand to the associated company Grupo Gerdau Empreendimentos Ltda., of R$ 300 (R$ 300 on 2004). c) Guarantees granted - The Company is the guarantor of the subsidiary GTL Financial Corp., in the amount of US$ 50,000, equivalent to R$ 117,035 at December 31, The Company is also guarantor of its parent company Indac - Ind. Adm e Comércio S.A. in contracts totaling R$ 660,249. The subsidiary Gerdau S.A is the guarantor of loan agreements of the

109 METALÚRGICA GERDAU S.A. METALÚRGICA GERDAU S.A. 125 jointly-owned subsidiary Dona Francisca S.A. in the amount of R$ 90,489, corresponding 51,82% of the joint agreement. Gerdau S.A. is also the guarantor of the Euro Commercial Paper program of the subsidiary GTL Trade Finance Inc., of US$ 200 million, equivalent to R$ 468,140 at December 31, This subsidiary is also the guarantor of the securitization operations of the subsidiary Gerdau Açominas Overseas Ltda., of US$ thousand, equivalent to R$ 535,107 on December 31, The subsidiaries Gerdau Açominas S.A. and Gerdau Comercial de Aços S.A. are the guarantors of the vendor financing loan agreements of the associated company Banco Gerdau S.A., in the amounts of R$ 17,097 and R$ 15,440, respectively POST-EMPLOYMENT BENEFITS Considering all the benefits granted to employees by the Company and its subsidiaries, the assets and liabilities on December 31 are as follows: Company Actuarial liabilities with pension plan-defined benefit , ,199 Actuarial liabilities with post-employment helth benefits , ,283 Liabilities with retirement and severance benefits ,395 9,996 Total do liabilities , ,478 Unrecorded actuarial assets... 1,539 1, , ,510 a) Pension plan - defined benefit The Company and other Group subsidiaries in Brazil are the co-sponsors of defined benefit pension plans that cover substantially all employees in Brazil ( Açominas Plan and Gerdau Plan ). The Açominas Plan is managed by Fundação Açominas de Seguridade Social - Aços, a closed supplementary pension entity to complement the social security benefits of employees and retired employees of the Ouro Branco unit of Gerdau Açominas S.A. The assets of the Açominas Plan mainly comprise investments in bank deposit certificates, federal public securities, marketable securities and properties. The Gerdau Plan is managed by Gerdau - Sociedade de Previdência Privada, a closed supplementary pension entity to complement the social security benefits of employees and retired employees of the Company, of the other units of Gerdau Açominas S.A. and of other subsidiaries in Brazil. The assets of the Gerdau Plan comprise investments in bank deposit certificates, federal public securities and marketable securities. Also, the Canadian and American subsidiaries sponsor defined benefit plans (Canadian Plan and American Plan) that cover substantially all of their employees. The Canadian and American plans are managed by CIBC Mellon and Wells Fargo, respectively, to complement the social security benefits of employees of Gerdau Ameristeel Corporation and its subsidiaries. The assets of the Plans mainly comprise marketable securities. The sponsors contributions to these pension plans were R$ 6 in 2005 (R$ 13 in 2004) for the Company and R$ 67,157 in 2005 (R$ 68,288 in 2004). The current expense of the defined benefit pension plans is as follows: Company Cost of current service ,452 49,884 Interest cost , ,054 Return expected from the plan s assets... (238) (204) (223,818) (162,001) Amortization of unrecognized liability Amortization of past service costs , Amortization of (gain) loss... (31) (18) 12,483 2,550 Contribution expected from employees (5,997) (4,383) Pension plan net costs (benefits), net... (82) (59) (14,025) 12,344 The reconciliation of the assets and liabilities of the plans is as follows: Company Total liabilities... (4,182) (7,065) (1,953,332) (1,790,639) Fair value of plan assets... 9,545 14,993 2,041,184 1,867,506 Net assets... 5,363 7,928 87,852 76,867 Unrecorded gain (losses)... (3,824) (5,964) (40,904) (96,827) Past service costs ,910 26,342 Others ,033 4,929 Total net assets... 1,539 1,964 75,891 11,311 Actuarial assets... 1,539 1, , ,510 Pension plan liability recorded in the books of accounts (135,695) (154,199) Net assets... 1,539 1,964 75,891 11,311 The changes in plan assets and actuarial liabilities were as follows: Company Changes in benefit liabilities Benefit liabilities at the beginning of the year... 7,065 6,223 1,790,639 1,623,000 Cost of service ,452 49,884 Interest cost , ,054 Actuarial loss (gain)... (1,551) ,754 88,360 Payment of benefits... (123) (115) (62,115) (69,534) Past service due to change in the plan ,516 Foreign exchange effect on foreign subsidiaries (110,173) (45,000) Transfer of participants... (1,392) Initial liability rcognition adjustment ,050 8,359 Benefit liabilities at the end of the year... 4,182 7,065 1,953,332 1,790,639 Change in plan assets Fair value of the plan assets at the beginning of the year... 14,993 12,366 1,867,506 1,663,567 Return on plan assets... (2,195) 2, , ,043 Contributions from sponsors ,157 68,288 Contributions from participants ,045 5,202 Payment of benefits... (123) (115) (62,115) (69,534) Transfer of participants... (3,136) Foreign exchange effect on foreign subsidiaries (85,648) (32,060) Fair value of the plan assets at the beginning of the year... 9,545 14,993 2,041,184 1,867,506

110 METALÚRGICA GERDAU S.A. METALÚRGICA GERDAU S.A. 127 The amount of the actuarial gains and losses to be recognized as income or expense is the unrecognized amount that exceeds, in each period, the higher of the following limits: (i) 10% of the present value of the total actuarial liability of the defined benefit plan and (ii) 10% of the fair value of the plan assets. The resulting amount will be amortized annually based on the average remaining years of service estimated for the employees that participate in the plan. The table below shows a summary of the assumptions made to calculate and record the defined benefit plan for both the Company and : Gerdau Plan Açominas Plan North American Plan Average discount rate % 11.30% 5.00% % Increase in composition % 8.68% 2.50% % Expected rate of return on assets % 12.35% 7.50% % Mortality chart... GAM 83 (-1 year) at-2000 GAM 83 Disabled mortality chart... rrb 1944 at-2000 rrb 1977 Turnover rate... Based on service null Based on age and and salary level service (plan experience) b) Pension plan - defined contribution The Company and its subsidiaries in Brazil are also the co-sponsors of a defined contribution pension plan administered by Gerdau - Sociedade de Previdência Privada. Contributions are based on a percentage of the compensation of the employees. The foreign subsidiary Gerdau AmeriSteel US Inc. has a defined contribution plan, the contributions to which are equivalent to 50% of the amount paid by the participants, limited to 4% of salary. The other companies do not have this type of pension plan. The total cost of this plan was R$ 22 in 2005 (R$ 55 in 2004) for the Company and R$ 16,742 in 2005 (R$ 12,005 in 2004). c) Other post-employment benefits The Company estimates that the amount payable to executives on their retirement or discharge totals R$ 8,396 () on December 31, 2005 (R$ 9,996 in ). The American Plan includes, in addition to pension benefits, specific health benefits for employees who retire after a certain age and with a certain number of years of service. The American subsidiary has the right to change or eliminate these benefits, and the contributions are based on amounts actuarially calculated. The status of the fund for post-employment health benefits is as follows: Plan assets at market value Projected benefit liabilities... (139,400) (130,559) Fund status... (139,400) (130,559) Unrecorded gains and losses, net... 30,960 8,101 Past service costs... (11,247) (7,825) Liabilities for post-employment health benefits recorded in the financial statements... (119,687) (130,283) The changes in plan assets and actuarial liabilities were as follows: Change in projected benefit liabilities Projected benefit liabilities at the beginning of the years , ,390 Purchase of North Star ,136 Cost of service... 3,394 3,007 Interest cost... 6,404 5,715 Contributions of participants... 2,160 1,946 Actuarial cost... 19,671 4,759 Benefits and administrative expenses paid... (5,215) (6,639) Foreign exchange effect... (12,642) (4,364) Initial liability recognition adjustment... (4,931) (8,391) Projected benefit liabilities at the end of the year , , Changes in plan assets... Plan assets at the beginning of the year Contributions from sponsors... 3,055 4,693 Contributions from participants... 2,160 1,946 Benefits and administrative expenses paid... (5,215) (6,639) Plan assets at the end of the year The assumptions adopted in the accounting for post-employment health benefits were as follows: The composition of the net periodic cost for the post-employment health benefits is as follows: Cost of service... 3,394 3,007 Interest cost... 6,404 5,715 Amortization of past service costs... (770) (563) Amortization of loss Net-expense for post-employment benefits... 9,257 8,239 North American Plans Average discount rate % % Health treatment - assumed rate for next year % % Health treatment - assumed cost decline rate to be reached in the years from 2010 to % 23 - OTHER ACCOUNTS PAYABLE (LONG-TERM) Other accounts payable in the company s long-term liabilities refers to the debt with the National Treasury arising from the privatization project.

111 METALÚRGICA GERDAU S.A. METALÚRGICA GERDAU S.A SHAREHOLDERS EQUITY a) Capital Stock - The Board of Directors may, regardless of changes to the by-laws, issue new shares (authorized capital), including the capitalization of profits and reserves up to the authorized limit of 100,000,000 common shares (50,000,000 at December 31, 2004) and 200,000,000 preferred shares (100,000,000 at December 31, 2004), all of them with no par value, in accordance with the amendment approved by the Extraordinary General Meeting of shareholders held on April 4, The right of preference shall be exercised before the deadline for prescription of 30 days, except in the case of a public offer, when the deadline for prescription shall not be less than 10 days. On April 11, 2005, as approved in a meeting of the Board of Directors held on March 31, 2005, Metalúrgica Gerdau S.A. increased capital by R$ 832,000 through the capitalization of the reserve for investments and working capital, with a bonus of 50% on the share position on April 11, 2005, date of capitalization of the reserve, representing 41,584,395 new shares (13,861,465 common shares and 27,722,930 preferred shares). At December 31, 2005, 41,584,395 common shares (27,722,930 at December 31, 2004) and 83,168,790 preferred shares (55,445,860 at December 31, 2004) are subscribed and paid up, totaling a paid up capital of R$ 2,496,000 (R$ 1,664,000 at December 31, 2004). Preferred shares do not have voting rights and cannot be redeemed, but have the same rights as common shares in terms of profit sharing. b) Legal reserve - Under Brazilian legislation, Metalúrgica Gerdau is required to transfer 5% of the annual net income determined in accordance with corporate legislation to legal reserve until this reserve is equivalent to 20% of the paid up capital. The legal reserve can be used to increase capital or to absorb losses, but cannot be used for payment of dividends. c) Statutory reserve - The Board of Directors may propose to the shareholders the transfer of at least 5% of the net income of each year to a statutory reserve (Reserve for Investments and Working Capital). The reserve is created only if it does not affect the minimum dividend requirement and its balance cannot exceed the total paid up capital. The reserve can be used to absorb losses, if necessary, and for capitalization, payment of dividends or repurchase of shares. d) Treasury shares - at December 31, 2005 the Company had 1,447,200 preferred shares (682,000 preferred shares at December 31, 2004) held in treasury, totaling R$ 34,481 (R$ 21,490 at December 31, 2004), of which 1,023,000 shares related to the share repurchase program announced on November 17, 2003, and 424,200 shares to the share repurchase program announced on May 30, 2005, to be held in treasury for subsequent cancellation. The average cost of these shares is R$ 23.83, the lowest purchase price being R$ and the highest R$ During 2005, 424,200 shares were purchased at an average cost of R$ e) Dividends and interest on own capital - the shareholders have the right to receive, each year, a minimum mandatory dividend of 30% of the adjusted net income. In 2004, the Company calculated interest on own capital in accordance with the terms established by Law 9249/95. The corresponding amount was recorded as a financial expense for tax purposes. For presentation purposes, this amount was recorded as a dividend, not affecting net income. The related tax benefit through the reduction of the income tax and social contribution on net income charge for 2004 was R$ 55,250. The dividends credited in 2005 amounted to R$ 364,059, shown as follows: Net income for the year... 1,275,584 1,437,075 Legal reserve constitution... (63,778) (71,855) Adjusted net income... 1,211,80 1,365,220 Payments during the year Period Nature R$/share Credit Payment st quarter... Interest ,368 Dividends /13/ /24/ ,086-2 nd quarter... Interest ,142 Dividends /15/ /24/ ,412 37,944 3 rd quarter... Interest ,990 Dividends /18/ /30/ ,479 75,061 4 th quarter... Dividends /17/ /02/ , ,374 Interest on own capital and dividends , ,879 % interest/dividends paid or credited... 30% 32% Amount per share (R$) Shares in circulation ,306 82,487 The remaining income for the year was transferred to the statutory reserve for investments and working capital in accordance with the by-laws PROFIT SHARING a) The management profit sharing is limited to 10% of net income for the year, after income tax and management fees, as stated in the Company s by-laws; b) The employees profit sharing is linked to the attainment of operating goals and was charged to cost of production and general and administrative expenses, as applicable LONG-TERM INCENTIVE PLANS I) Metalúrgica Gerdau S.A. The Extraordinary General Meeting of shareholders held on April 30, 2003 decided, based on a plan approved at the meeting and within the limit of the authorized capital, to grant options for the purchase of preferred shares to management, employees or persons who render services to the Company or its subsidiaries, and approved the formation of the Long- Term Incentive Program that represents a new form of compensation of the strategic executives of the Company. Although the plan was approved, no options have been granted to date. II) Gerdau S.A. The Extraordinary General Meeting of shareholders held on April 30, 2003 decided, based on a previously agreed plan and within the limit of the authorized capital, to grant options for the purchase of preferred shares to management, employees or persons who render services to the Company or its subsidiaries, and approved the formation of the Long- Term Incentive Program that represents a new form of compensation of the strategic executives of the Company. The options should be exercised in a maximum of five years after the grace period.

112 METALÚRGICA GERDAU S.A. METALÚRGICA GERDAU S.A. 131 a) Summary of changes in the plan: Grant (Quantity of shares) Total Opening balance on 12/31/ , ,680 4, , ,715,246 Grants , , ,464 Stock bonuses on 04/11/ , ,086 2, , , ,668 1,096,714 Cancelled... (8,259) (5,513) - (21,504) (5,806) (3,600) (44,682) Exercised... (28,171) (18,781) - (7,353) - - (54,305) Final balance on 12/31/ ,169, ,472 7, , , ,404 3,209,437 Price for exercise in R$ Grace period... 3 years 5 years 3 years 5 years 3 years 5 years At December 31, 2005, the company has a total of 3,045,695 preferred shares in treasury. These shares may be used for this plan. b) Plan status at December 31, 2005: Grant Average Total granted shares purchase options... 1,984, , ,289 Price of exercise - R$ (adjusted by bonuses) Fair value of options on the grant date - R$ per option (*) Average option exercise period on grant date (years) (*) calculated considering the Black-Scholes model The percentage of dilution of interest that the current shareholders may experience if all options are exercised is approximately 0.7%. III) Gerdau Ameristeel Corporation - ( Gerdau Ameristeel ) Gerdau Ameristeel Corporation and its subsidiaries have stock compensation plans for their employees, as follows: a) Former Co-Steel Plan According to the terms of the Co-Steel Plan, the Stock-Based Option Plan, the company was authorized to grant purchase options to employees and directors up to the limit of 3,041,335 common shares. The exercise price was based on the closing price of the common shares in the market on the day prior to the issue of the option. The options have a maximum term of ten years and are granted during various periods, as determined by the administrator of the plan at the date of the grant, up to April 13, b) Gerdau AmeriSteel US Inc. ( AmeriSteel ) Plans According to the terms of the Transaction Agreement relating to the acquisition of Co-Steel, the minority shareholders of AmeriSteel exchanged their shares and stock options for shares and stock options of Ameristeel at the ratio of 9,4617 shares and stock options for each share or stock option of AmeriSteel. This exchange occurred on March 31, b.1) AmeriSteel Plan AmeriSteel has a long-term incentive plan for the executive officers (the AmeriSteel Plan) to ensure that the interests of the AmeriSteel senior management are in line with those of the AmeriSteel shareholders. The awards are determined by a formula based on the return on employed capital of AmeriSteel in a given year of the plan. The awards are granted and paid over a period of four years. The participants may choose payment in cash or in shares of AmeriSteel and Gerdau, for which a premium of 25% is given, if chosen. Expenses related to the benefits for the years ended December 31, 2005 and 2004 totaled US$ 6,000 thousand (R$ 14,044) and US$ 1,300 thousand (R$ 3,450), respectively. b.2) 2004 Stakeholder Plan For the year ended December 31, 2004, the Gerdau Ameristeel Human Resources Committee established the longterm incentive plan of 2004 (the 2004 Stakeholder Plan ) based on the AmeriSteel Plan. The 2004 Stakeholder Plan was designed to award the executive officers with a share in the profits of Gerdau AmeriSteel. The awards earned are granted and paid over a period of four years, based on the closing price of the Gerdau Ameristeel Shares in the New York Stock Exchange. A total award of approximately US$ 14,000 thousand (equivalent to R$ 37,161) was calculated at December 31, 2004 and was granted on March 1, This award is being provided for in accordance with the payment term established in the plan. b.3) 2005 Stakeholder plan For the year beginning January 1, 2005, the Human Resources Committee established the 2005 long-term incentive plan (the 2005 Stockholder plan). The 2005 Stockholder plan was established to award employees with bonuses based on attaining goals related to the return of capital invested. The bonuses will be granted at the end of the year in cash and/or options. The payment of the cash portion option will be made in the form of shares (phantom stock). The number of shares will be determined by the market price of the common share on the date of grant, based on the average negotiation price on the New York Stock Exchange. The shares will be paid in April each year at the ratio of 25% in a period of 4 years. The number of options granted to the participants is determined by dividing the portion of the bonus not paid in cash by the market value of the common share on the date of grant and indexed by a factor determined by the option value on the same date (the option value is determined by the Committee based on the Black Scholes model or other method). The options may be exercised at the rate of 25% p.a. during four years from the date of grant and prescribe after 10 years. The maximum number of options that will be granted based on this plan is 6,000,000. b.4) SAR Plan In July 1999, the Board of Directors of AmeriSteel approved the SAR/Shares Purchase Plan (SAR Plan) available to basically all employees. The SAR Plan authorizes the sale of 946,170 common shares to the employees during three offer periods, from July to September in 1999, 2002 and The employees who purchase the shares are rewarded with stock appreciation rights (SARs) equal to four times the number of shares purchased. SARs at market value were granted at the date of grant, determined on the basis of an independent appraisal at the end of the prior year. SARs can be exercised at 25% annually as from the date of grant, and may be exercised in up to ten years from the date of grant. The SARs are recorded as liabilities and the benefits recorded as costs based on this plan for the years ended December 31, 2005 and 2004 amounted to US$ 1,500 thousand (R$ 3,511) and US$ 6.4 million (R$ 16,985), respectively. In July 2002, the Board of Directors of AmeriSteel approved the issue of new purchase options under the SAR Plan, which were granted to the executive directors, with the exercise price determined by the fair value at the date of grant. A total of 6,244,722 SARs were authorized and issued. One-third of all awarded options and common shares are vested two years as from the date of grant, and one-third after each subsequent two-year period. The options may be exercised in up to ten years after the date of grant. At December 31, 2005, the expense related to this plan, recorded in the financial statements, was US$ 1,500 thousand, equivalent to R$ 3,511 (US$ 14,300 thousand, equivalent to R$ 37,952 in 2004). b.5) Equity ownership In September 1996, the Board of Directors of AmeriSteel approved the Equity Ownership Plan of AmeriSteel Corporation (the Equity Ownership Plan), which grants common shares, purchase options for common shares and SARs. The maximum

113 METALÚRGICA GERDAU S.A. METALÚRGICA GERDAU S.A. 133 number of shares that may be issued under this plan is 4,152,286. AmeriSteel granted 4,667,930 incentive stock options and 492,955 common shares under the Equity Ownership Plan up to December 31, One-third of all options and common shares issued become vested two years from the date of the grant, and one-third after each subsequent twoyear period. All grants were carried out at the market value of the common shares at the date of grant, determined on the basis of an independent appraisal at the end of the prior year. The options may be exercised for ten years as from the date of the grant. b.6) Purchase plan In May 1995, the Board of Directors of AmeriSteel approved an option/purchase plan (the Purchase Plan ), available to essentially all employees. The employees who purchased shares were rewarded with options for six times the number of shares purchased. A total of 356,602 shares were sold under the Purchase Plan at a purchase price of US$ 1.12 per share. The options were granted at market value at the date of the grant, determined on the basis of an independent appraisal at the end of the prior year. A total of 2,139,612 options were granted under the Purchase Plan. No options are available for future grant. All options granted can already be exercised, which may occur for ten years as from the date of the grant. A summary of the Gerdau Ameristeel plans is as follows: The effect on net income for the year and shareholders equity would have been as follows had the expenses for the option plans of Gerdau S.A. and Gerdau Ameristeel Corporation been recorded: Shareholders Net income equity Balances according to the financial statements (*)... 3,268,844 3,859,568 Expense (**)... (3,125) (11,040) Pro forma balances... 3,265,719 3,848,528 (*) Net income includes minority interest. (**) Applying the fair value method (Black Scholes model) OTHER OPERATING INCOME Other operating income refers mainly to the amount of R$ 70,332 (Company and ) recorded following the favorable outcome of the litigation for incorrect payment of PIS (Social Integration Program), according to Note 20.III item a.2, and reversals and new provisions for contingencies commented in Note Average Average Number exercise price Number exercise price of shares US$ R$ of shares US$ R$ Available at the beginning of the year... 2,833, ,606, Options exercised... (443,371) (375,261) Options cancelled... (26,341) (76,321) Options expired... (99,000) (321,700) Available at the end of the year... 2,264, ,833, Exercisable shares... 2,128,241 2,350,378 The table below summarizes the information on the purchase options of Gerdau Ameristeel shares available on December 31, 2005: 28 - NON-OPERATING INCOME Non-operating income refers mainly to the gain on change in percentage ownership of R$ 305,839 (), resulting from the merger of Gerdau Participações S.A. by Gerdau Açominas S.A CALCULATION OF EBITDA Gross profit... 5,725,887 6,245,024 Selling expenses... (514,443) (455,175) General and administrative expenses... (1,167,080) (1,050,953) Depreciation and amortization , ,819 EBITDA... 4,883,124 5,505,715 Number Number Average Average exercisable at Exercise price available grace period exercise price December 31,2005 US$ R$ US$ 1.32 to US$ 1.43 (R$ 3.09 to R$ 3.35) , ,482 US$ 1.80 to US$ 1.90 (R$ 4.21 to R$ 4.45) , ,034 US$ 2.11 to US$ 2.96 (R$ 4.94 to R$ 6.93) , ,725 US$ to US$ (R$ to R$ 43.75) , ,500 US$ to US$ (R$ to R$ 47.65) , ,500 2,264,576 2,128,241

114 METALÚRGICA GERDAU S.A. METALÚRGICA GERDAU S.A INFORMATION BY GEOGRAPHICAL AREA AND BUSINESS SEGMENT Geographical Area Brazil South America (*) North America Net sales revenues... 9,997,575 9,975,760 1,194, ,865 10,054,084 8,857,637 21,245,748 19,597,262 Cost of sales... (6,211,632) (5,668,217) (831,440) (488,120) (8,476,789) (7,195,901) (15,519,861) (13,352,238) Gross profit... 3,785,943 4,307, , ,745 1,577,295 1,661,736 5,725,887 6,245,024 Selling expenses... (447,342) (400,317) (33,395) (7,079) (33,706) (47,779) (514,443) (455,175) General and administrative expenses... (776,605) (751,200) (79,902) (45,934) (310,573) (253,819) (1,167,080) (1,050,953) Financial income (expenses), net ,867 33,673 (22,836) (4,491) (124,881) (177,563) 42,150 (148,381) Operating profit... 2,790,631 3,022, , ,272 1,056,166 1,194,708 4,068,995 4,436,930 Net income (**)... 2,417,389 2,270, , , , ,309 3,268,844 3,341,097 EBITDA (***)... 3,110,287 3,657, , ,983 1,480,407 1,597,232 4,883,124 5,505,715 (*) Does not include Brazilian operations. (**) Net income for the year before minority interest. (***) Profit before financial expenses, income tax and social contribution on net income, depreciation and amortization as shown in Note 28. The segments shown below correspond to the business units through which the Gerdau Executive Committee manages its operations: Aços Longos Brasil, Açominas (corresponding to the operations of the plants located in Ouro Branco, Minas Gerais), Aços Especiais, South America (excluding Brazilian operations) and North America (Gerdau Ameristeel): Business Segments Açominas South Longos Brasil Ouro Branco Aços Especiais America (*) North America Net sales revenues... 6,246,464 6,456,351 2,681,077 2,646,752 1,070, ,657 1,194, ,865 10,054,084 8,857,637 21,245,748 19,597,262 Identifiable assets (**)... 3,999,504 3,916,049 3,735,219 3,482, , ,370 1,349, ,351 5,192,457 6,131,526 14,814,724 14,660,813 Capital expenditures , , , ,851 78,427 36, ,068 27, ,017 1,156,660 1,937,139 2,097,948 Depreciation/amortization , , , ,707 29,155 26,899 43,078 28, , , , ,819 (*) Does not include Brazilian operations. (**) Identifiable assets: Accounts receivable, inventories and fixed assets.

115 METALÚRGICA GERDAU S.A. METALÚRGICA GERDAU S.A. 137 Conselho de Administração Diretoria Presidente JORGE GERDAU JOHANNPETER Vice-Presidentes GERMANO H. GERDAU JOHANNPETER KLAUS GERDAU JOHANNPETER CARLOS JOÃO PETRY Conselheiros AFFONSO CELSO PASTORE ANDRÉ PINHEIRO DE LARA RESENDE OSCAR DE PAULA BERNARDES NETO Secretário-Geral EXPEDITO LUZ Comitê Executivo Diretor Presidente JORGE GERDAU JOHANNPETER Diretores Vice-Presidentes FREDERICO C. GERDAU JOHANNPETER, Vice-Presidente Sênior CARLOS JOÃO PETRY, Vice-Presidente Sênior ANDRÉ BIER JOHANNPETER CLAUDIO JOHANNPETER FILIPE AFFONSO FERREIRA MÁRIO LONGHI FILHO OSVALDO BURGOS SCHIRMER RICARDO GEHRKE Secretário-Geral EXPEDITO LUZ Diretores EXPEDITO LUZ GERALDO TOFFANELLO PAULO FERNANDO BINS DE VASCONCELLOS GERALDO TOFFANELLO Contador CRC RS nº O-5 CPF nº

116 METALÚRGICA GERDAU S.A. METALÚRGICA GERDAU S.A. 139 Report of Independent Auditors Opinion of the Statutory Audit Board To the Board of Directors and Stockholders Metalúrgica Gerdau S.A. 1. We have audited the accompanying balance sheets of Metalúrgica Gerdau S.A. and the consolidated balance sheets of Metalúrgica Gerdau S.A. and its subsidiaries as of December 31, 2005 and 2004, and the related statements of income, of changes in stockholders equity and of changes in financial position of Metalúrgica Gerdau S.A., as well as the related consolidated statements of income and of changes in financial position for the years then ended. These financial statements are the responsibility of the Company s management. Our responsibility is to express an opinion on these financial statements. The audits of the financial statements of the jointly-owned indirect subsidiary Gallatin Steel Company and of the indirect subsidiaries Diaco S.A. and its subsidiaries and of Siderúrgica del Pacífico S.A. were conducted by other independent auditors and our report, insofar as it relates to the income derived from these companies, equivalent to 5.74% of the profit before taxes of Metalúrgica Gerdau S.A. and 4.41% of the profit before taxes and minority interest of Metalúrgica Gerdau S.A. and its subsidiaries for the year ended December 31, 2005, and to the consolidated assets as of that date equivalent to 4.97% of the total consolidated assets, is based solely on the reports of these other auditors. The Statutory Audit Board of Metalúrgica Gerdau S.A., in compliance with legal and statutory provisions, has examined the Management Report and the Financial Statements for the year ended December 31, Based on the examinations made and also considering the opinion of the independent auditors - PricewaterhouseCoopers Auditores Independentes, dated February 21, 2006, as well as the information and explanations received during the year, the Statutory Audit Board is of the opinion that the these documents are suitable for presentation to the Annual General Meeting of shareholders. Porto Alegre, February 21, 2006 DOMINGOS MATIAS URROZ LOPES CARLOS ROBERTO SCHRÖDER MARIO MAGALHÃES DE SOUSA 2. We conducted our audits in accordance with approved Brazilian auditing standards, which require that we perform the audit to obtain reasonable assurance about whether the financial statements are fairly presented in all material respects. Accordingly, our work included, among other procedures: (a) planning our audit taking into consideration the significance of balances, the volume of transactions and the accounting and internal control systems of the companies, (b) examining, on a test basis, evidence and records supporting the amounts and disclosures in the financial statements, and (c) assessing the accounting practices used and significant estimates made by management, as well as evaluating the overall financial statement presentation. 3. In our opinion, based on our audits and on the reports of the other auditors, the financial statements audited by us present fairly, in all material respects, the financial position of Metalúrgica Gerdau S.A. and of Metalúrgica Gerdau S.A. and its subsidiaries at December 31, 2005 and 2004, and the results of operations, the changes in stockholders equity and the changes in financial position of Metalúrgica Gerdau S.A., as well as the consolidated results of operations and of changes in financial position, for the years then ended, in accordance with accounting practices adopted in Brazil. 4. Our audits were conducted for the purpose of forming an opinion on the basic financial statements, taken as a whole. The statement of cash flows is presented for purposes of additional analysis and is not a required part of the basic financial statements. This information has been subjected to the auditing procedures applied in the audit of the basic financial statements and, in our opinion, is fairly presented in all material respects in relation to the financial statements taken as a whole. Porto Alegre, February 21, 2006 Auditores Independentes CRC 2SP000160/O-5 F rs Carlos Alberto Sousa accountant CRC 1RJ056561/O-0 S RS

117 GERDAU S.A. GERDAU S.A. 141 Gerdau S.A. BALANCE SHEET AT DECEMBER 31 (In thousand of reais) ASSETS Company CURRENT ASSETS Cash and cash equivalents... note 5 1,275,965 15,709 5,464,694 2,041,967 Trade accounts receivable... note ,059,806 2,496,808 Inventories... note ,018,629 4,236,642 Tax credits... note 8 39,449 32, , ,462 Deferred income tax and social contribution on net income... note , ,464 Dividends receivable... note , , Other accounts receivable... 32,353 1, , ,922 total current assets... 1,535, ,987 12,129,178 9,556,265 LONG-TERM RECEIVABLES Related parties... note ,448 Tax credits... note 8 81, ,792 69,992 Deposit for future investment in subsidiary... note , ,158 Deferred income tax and social contribution on net income... note 9 33,878 42, , ,931 Judiciary deposits and other... note 10 39,096 34, , ,790 total long-term receivables ,757 76, ,798 1,034,319 PERMANENT ASSETS Investments... note 11 8,943,730 7,100, , ,017 Fixed assets... note ,693,501 7,927,363 Deferred charges... note ,041 33,858 total permanent assets... 8,943,730 7,100,464 8,867,210 8,073,238 total assets... 10,634,287 7,373,150 21,879,186 18,663,822 LIABILITIES AND SHAREHOLDERS EQUITY Company CURRENT LIABILITIES Suppliers ,675,464 1,935,953 Loans... note 14 2,770-1,327,248 1,968,397 Debentures... note ,719 2,986 Taxes and contributions payable... note 18 1,397 6, , ,238 Related parties... note , , Deferred income tax and social contribution on net income... note , ,166 Salaries payable... 1, , ,418 Dividends payable... note , , , ,771 Other accounts payable... 11,183 4, , ,739 total current liabilities , ,267 4,189,108 5,247,668 LONG-TERM LIABILITIES Loans... note 14 1,404,420-5,352,420 3,490,374 Debentures... note , , , ,086 Provision for contingencies... note 20 42,130 94, , ,300 Deferred income tax and social contribution on net income... note 9 54,669 54, , ,707 Post-employment benefits... note , ,478 Other accounts payable , ,162 total long-term liabilities... 2,287, ,027 7,549,558 5,803,107 MINORITY INTEREST ,098,334 1,539,191 SHAREHOLDERS EQUITY... note 23 Capital... 5,206,969 3,471,312 5,206,969 3,471,312 Capital reserves , , , ,672 Revenue reserves... 2,458,533 2,225,872 2,458,533 2,225,872 total shareholders equity... 8,042,186 6,073,856 8,042,186 6,073,856 SHAREHOLDERS EQUITY INCLUDING MINORITY INTEREST ,140,520 7,613,047 total liabilities and shareholders equity... 10,634,287 7,373,150 21,879,186 18,663,822 The accompanying notes are an integral part of these financial statements. The accompanying notes are an integral part of these financial statements.

118 GERDAU S.A. GERDAU S.A. 143 STATEMENT OF INCOME YEARS ENDED DECEMBER 31 (In thousand of reais) STATEMENT OF CHANGES IN FINANCIAL POSITION YEARS ENDED DECEMBER 31 (In thousands of reais) Company SALES REVENUES ,485,818 23,407,573 Taxes on sales (2,642,225) (2,456,568) Freight and discounts (1,597,845) (1,353,743) NET SALES REVENUES... note ,245,748 19,597,262 COST OF SALES (15,519,861) (13,352,238) GROSS PROFIT ,245,024 SELLING EXPENSES (514,443) (455,175) FINANCIAL INCOME... note 17 66,705 42, , ,846 FINANCIAL EXPENSES... note 17 (211,598) (49,329) (482,896) (385,952) GENERAL AND ADMINISTRATIVE EXPENSES Management fees... (898) (1,261) (28,356) (43,562) General expenses... (32,283) (42,681) (1,111,908) (960,264) EQUITY IN THE EARNINGS (LOSSES) OF SUBSIDIARIES... note 11 2,527,731 2,836,486 (131,195) (343,116) OTHER OPERATING INCOME (EXPENSES), NET... note ,787 28, , ,866 OPERATING PROFIT... 2,486,444 2,813,598 4,041,495 4,454,667 NON-OPERATING INCOME(EXPENSES), NET... note ,839 (1,065) 292,755 (24,930) PROFIT BEFORE TAXES AND PROFIT SHARING... 2,792,283 2,812,533 4,334,250 4,429,737 PROVISION FOR INCOME TAX AND SOCIAL CONTRIBUTION ON NET INCOME... note 9 Current... (1,627) 4 (915,043) (951,201) Deferred... (8,418) 20,063 (146,628) (202,286) MANAGEMENT PROFIT SHARING... note 24 (898) (1,261) (27,339) (41,363) NET INCOME BEFORE MINORITY INTEREST... 2,781,340 2,831,339 3,245,240 3,234,887 MINORITY INTEREST... (463,900) (403,548) NET INCOME FOR THE YEAR... 2,781,340 2,831,339 Net income per share - R$ Net equity per share - R$ Company FINANCIAL RESERVES WERE PROVIDED BY Operations net income for the year... 2,781,340 2,831,339 3,245,240 3,234,887 expenses/income not affecting working capital depreciation and amortization , ,665 Cost of permanent asset disposals ,796 38, ,585 equity in the (earnings) losses of subsidiaries... note 11 (2,527,731) (2,836,486) 131, ,116 Gain on change in shareholding... note 27 (305,839) - (305,839) - Monetary and exchange variations on long-term liabilities ,365 44, ,343 (138,490) Monetary and exchange variations on long-term receivables (526) From operations , ,591 4,188,877 4,331,237 Third parties Capital increase/changes in treasury shares... note 23 (16,607) (27,036) 533, ,145 Contributions to capital reserve ,785 16,246 Increase (decrease) of long-term liabilities... 1,271, ,245 1,721,439 1,055,900 net working capital of consolidated subsidiaries ,965 - foreign exchange offset on working capital of foreign subsidiaries - - (282,861) (54,312) Working capital - purchase of assets , ,446 dividends not included in income for the year... note , ,271 3,964 - Total funds provided... 2,371,937 1,226,071 6,329,380 6,484,662 FINANCIAL RESERVES WERE USED FOR Investments... 4, ,734 64,295 35,395 Purchase of assets ,457 Fixed assets ,641,230 1,262,707 Deferred charges ,905 18,654 Increase (reduction) of long-term receivables... 78,058 12,602 23,162 (12,039) Dividends/interest on own capital... note , , , ,872 Total funds used ,233 1,712,179 2,697,907 3,168,046 INCREASE (DECREASE) IN WORKING CAPITAL... 1,492,704 (486,108) 3,631,473 3,316,616 Working capital at the beginning of the year... (261,280) 224,828 4,308, ,981 at the end of the year... 1,231,424 ( ) 7,940,070 4,308,597 INCREASE (DECREASE) IN WORKING CAPITAL... 1,492,704 (486,108) 3,631,473 3,316,616 The accompanying notes are an integral part of these financial statements. The accompanying notes are an integral part of these financial statements.

119 GERDAU S.A. GERDAU S.A. 145 STATEMENT OF CHANGES IN SHAREHOLDERS EQUITY (In thousands of reais) SUPPLEMENTARY INFORMATION STATEMENT OF CASH FLOWS YEARS ENDED DECEMBER 31 (In thousands of reais) Capital reserves Revenue reserves Special Investments Total Investment Law and working Retained shareholders Capital incentives 8,200/91 Other Total Legal capital Total earnings equity At December 31, ,735, ,910 21,487 12, , ,429 1,831,639 2,016,068-4,128,396 Net income for the year ,831,339 2,831,339 Capital increase... note 23 1,735, (1,735,656) (1,735,656) - - Treasury shares... note (27,036) (27,036) - (27,036) Distributions proposed for the Annual General Meeting: Legal reserve... note , ,567 (141,567) - Reserve for investments and working capital... note ,830,929 1,830,929 (1,830,929) - Dividend/interest on own capital.. note (858,843) (858,843) At December 31, ,471, ,910 21,487 12, , ,996 1,899,876 2,225,872-6,073,856 Net income for the year ,781,340 2,781,340 Capital increase... note 23 1,735, (1,735,657) (1,735,657) - - Treasury shares... note (16,619) (16,619) - (16,619) Gain on the sale of treasury shares note Distributions proposed for the Annual General Meeting: Legal reserve... note , ,067 (139,067) - Reserve for investments and working capital... note ,845,870 1,845,870 (1,845,870) - Dividend/interest on own capital.. note (796,403) (796,403) At December 31, ,206, ,910 21,487 12, , ,063 1,993,470 2,458,533-8,042,186 The accompanying notes are an integral part of these financial statements. Company Net income for the year... 2,781,340 2,831,339 3,245,240 3,234,887 Equity in the (earnings) losses of subsidiaries... note 11 (2,527,731) (2,836,486) 131, ,116 Provision for credit risks (12,792) 7,323 Gain on disposal of fixed assets ,642 9,058 Gain (loss) on disposal/merger of investments... (305,839) 1,065 (305,844) 4,382 Monetary and exchange variations ( 1 )... 33,033 (9,556) (82,009) (99,284) Depreciation and amortization , ,665 Income tax and social contribution on net income... (5,467) (34,703) 50, ,938 Interest on loans ,094 53, , ,534 Contingencies/judicial deposits... (66,351) (110) (66,845) 5,295 Changes in trade accounts receivable ,687 (687,562) Changes in inventories ,981 (1,402,408) Changes in suppliers (133,785) 490,458 Changes in operating activity accounts... (95,119) (42,524) 147,852 (56,428) Net cash provided by (used in) operating activities... (19,611) (37,626) 4,955,019 3,485,974 Purchase/disposal of fixed assets (1,641,230) (1,173,491) Increase in deferred charges (27,905) (18,006) Acquisition/disposal of investments... (4,772) (802,735) (97,679) (37,686) Purchase of assets (924,457) Receipt of dividends/interest on own capital , , Net cash provided by (used in) investing activities ,010 30,391 (1,766,814) (2,153,640) Suppliers of fixed assets (28,636) 144,574 Loans for working capital... 1,362,782-1,239,550 (136,783) Debentures... (38,697) 411,560 (91,117) 399,120 Receipt of loans for permanent assets , ,766 Payment of loans for permanent assets (476,266) (677,357) Payment of loan interest... (31,628) - (420,528) (372,676) Loans with related parties... (53,553) 196,195 11,808 32,872 Capital increase/changes in treasury shares... note 23 (16,607) (27,036) 533, ,145 Payment of dividend/interest on own capital and profit sharing... (889,440) (735,459) (1,077,179) (843,493) Net cash provided by (used in) financing activities ,857 (154,740) 402,520 (224,832) Increase (decrease) in cash and cash equivalents... 1,260,256 (161,975) 3,590,725 1,107,502 Cash and cash equivalents At the beginning of the year... note 5 15, ,684 2,041,967 1,017,006 Changes in cash and cash equivalents balance (210,426) (82,541) Opening balance of companies consolidated in the year ,428 - At the end of the year... note 5 1,275,965 15,709 5,464,694 2,041,967 ( 1 ) Includes gain and/or loss on swaps The accompanying notes are an integral part of these financial statements.

120 GERDAU S.A. GERDAU S.A. 147 NOTES TO THE FINANCIAL STATEMENTS AT DECEMBER 31, 2005 AND 2004 (ALL AMOUNTS IN THOUSANDS OF REAIS UNLESS OTHERWISE INDICATEC) 1 - OPERATIONS Gerdau S.A., with Head Office in the city of Rio de Janeiro, Brazil, is a holding company in the Gerdau Group, which is principally dedicated to the production of common and special steel rods and sale of general steel products (plates and rods), in plants located in Brazil, Uruguay, Chile, Canada, Colombia, Argentina and the United States of America. The Gerdau Group has an installed capacity of 16.5 million tons of crude steel per year, producing steel in electrical furnaces, from scrap and pig iron purchased, for the most part, in the region near each plant (mini-mill concept). Gerdau also operates plants which are capable of producing steel from iron ore (through blast furnaces and direct reduction) and has a unit used exclusively to produce special steels. It is the largest scrap recycling group in Latin America and is among the largest in the world. The industrial sector is the most important market, including manufacturers of consumer goods such as vehicles and household and commercial equipment that basically use profiled steel in various available specifications. The next most important market is the civil construction sector, which demands a high volume of bars and wires for concrete. There are also numerous customers for nails, staples and wires, commonly used in the agribusiness sector. 2 - PRESENTATION OF THE FINANCIAL STATEMENTS The financial statements have been prepared and are presented in accordance with accounting practices adopted in Brazil, which are based on the provisions of Brazilian Corporate Law, together with the rules established by the Brazilian Securities Commission (CVM). 3 - SIGNIFICANT ACCOUNTING PRACTICES a) Cash and cash equivalents - financial investments are recorded at cost plus income accrued up to the balance sheet date, applying the interest rates agreed with the financial institutions, and do not exceed market value; b) Trade accounts receivable - are stated at realizable values, and accounts receivable from foreign customers are adjusted based on the exchange rates effective at the balance sheet date. The provision for credit risks is calculated based on a credit risk analysis, which includes the history of losses, the individual situation of each customer and the economic group to which they belong, the collateral and guarantees and the legal advisors opinion, and is considered sufficient to cover any losses on realization; c) Inventories - are stated at the lower of market value and average production or purchase cost; d) Investments - are recorded on the equity method of accounting and the equity in the earnings or loss is recorded in an income statement account. Capital gains or losses resulting from changes in the percentage ownership in subsidiaries are recorded as non-operating income or loss. e) Fixed assets - are recorded at cost, net of depreciation. Depreciation is calculated on the straight-line basis at the rates stated in Note 12, which take into consideration the estimated useful lives of the assets. Interest on loans obtained to finance construction in progress is added to the cost of the constructions; f) Deferred charges - amortization is calculated on the straight-line basis at rates determined based on the production of the implemented projects in relation to their installed capacities; g) Loans - are stated at the contract value plus the contracted charges, including interest and monetary or foreign exchange variations. Swap contracts, which are linked to the loan agreements, are classified together with the related loans; h) Income tax and social contribution on net income - current and deferred income tax and social contribution on net income are calculated in conformity with current legislation; i) Post-employment benefits - the actuarial liabilities relating to the pension benefits and retirement plans and actuarial liabilities relating to the healthcare plan are provided according to procedures established by the CVM Deliberation 317/00, on the basis of an actuarial calculation made every year by an independent actuary, using the projected unit credit method, net of the assets that guarantee the plan, when applicable, and the costs associated to the increase of the present value of the liabilities resulting from the service rendered by the employee, is recognized over the employees working lives. The projected unit credit method considers each period of service as the generating factor of an additional unit of benefit, which are accumulated to calculate the total liabilities. Other actuarial assumptions are also used, such as estimates of the increase of healthcare costs, biological and economic hypotheses and, also, the historical experience of costs incurred and the employee contributions. j) Other current and long-term assets and liabilities - are recorded at their realizable amounts (assets) and at their known or estimated amounts plus accrued charges and indexation adjustments (liabilities), when applicable; k) Related parties - loan agreements between Brazilian companies are restated by the weighted average interest rate for market funding. The agreements with foreign companies are restated by charges (LIBOR plus 3% p.a.) plus foreign exchange variation. Sales and purchases of inputs and products are made under terms and conditions similar to those of unrelated third parties; l) Determination of the results of operations - the results of operations are determined on the accrual basis of accounting; m) Use of estimates - the preparation of financial statements requires estimates to record certain assets, liabilities and other transactions. The financial statements therefore include various estimates related to the useful lives of fixed assets, provisions for contingent liabilities, for income taxes and other similar matters. Actual results may differ from those estimated; n) Environmental investments - expenses related to compliance with environmental regulations are considered as cost of production or capitalized when incurred; o) Translation of foreign currency balances - asset and liability balances of transactions in foreign currency are translated to local currency (R$) at the foreign exchange rate effective at the balance sheet date and at the quarterly average rate for income statement accounts; p) Additional information to the financial statements - the statement of cash flows is being presented, prepared in accordance with the Accounting Rule and Procedure - NPC 20 issued by the Institute of Independent Auditors of Brazil (IBRACON), in order to provide additional information.

121 GERDAU S.A. GERDAU S.A CONSOLIDATED FINANCIAL STATEMENTS a) The consolidated financial statements at December 31, 2005 and 2004 were prepared in accordance with accounting practices adopted in Brazil, based on the provisions of Corporate Law and the regulations issued by the Brazilian Securities Commission (CVM). They include the financial statements of Gerdau S.A. and its directly or indirectly controlled subsidiaries listed below: Percentage Shareholders Percentage ownership company equity Total capital Voting capital Gerdau Ameristeel Corporation and subsidiaries (*) ,747, Gerdau Internacional Empreendimentos Ltda. - Grupo Gerdau 100 3,229, Gerdau GTL Spain S.L ,227, Gerdau Açominas S.A ,094, Gerdau Aços Longos S.A ,494, Gerdau Steel Inc ,245, Gerdau América do Sul Participações S.A , Axol S.A , Gerdau Chile Inversiones Ltda , Indústria Del Acero S.A. - Indac , Gerdau Comercial de Aços S.A , Gerdau Aza S.A , Gerdau Aços Especiais S.A , Diaco S.A. and subsidiaries (**) , Seiva S.A. - Florestas e Indústrias , Itaguaí Com. Imp. e Exp. Ltda , Aramac S.A , GTL Equity Investments Corp , Sipar Aceros S.A , Sipar Gerdau Inversiones S.A , Margusa - Maranhão Gusa S.A , Gerdau Laisa S.A , Açominas Com. Imp. Exp. S.A. - Açotrading , Salomon Sack S.A , Florestal Rio Largo Ltda , Gerdau Açominas Overseas Ltd , Distribuidora Matco S.A , Armacero Industrial y Comercial S.A , Aceros Cox Comercial S.A , Siderco S.A , Florestal Itacambira S.A , GTL Financial Corp , Gerdau Hungria Holdings Limited Liability Company Dona Francisca Energética S.A (4,753) (*) Subsidiaries: Gerdau Ameristeel MRM Special Sections Inc., Gerdau USA Inc., AmeriSteel Bright Bar Inc., Gerdau AmeriSteel US Inc., Gerdau Ameristeel Perth Amboy Inc., Gallatin Steel Company (50%) and Gerdau Ameristeel Sayreville Inc.. (**) Subsidiaries: Ferrer Ind. Corporation, Laminados Andinos S.A., Laminadora Diaco S.A. e Ferrofigurados Lasa S.A. (55%). b) The more significant accounting practices used in preparing the consolidated financial statements are as follows: I) Gerdau S.A. and its subsidiaries adopt consistent practices to record their transactions and value their assets and II) Asset, liability and income statement balances arising from transactions between consolidated companies have been eliminated; and III) Holdings of minority shareholders in subsidiaries are shown separately. c) The following transactions occurred during the year ended December 31, 2005: I) As part of the Corporate Reorganization of the Gerdau companies, the Extraordinary General Meeting of the subsidiary Gerdau Açominas S.A. held on May 9, 2005 approved the merger of Gerdau Participações S.A. The shareholders equity, adjusted in accordance with CVM Instruction No. 349/01, corresponding to the assets and liabilities transferred to Gerdau Açominas S.A., was R$ 1,224,646 comprised as follows: ASSETS CURRENT ASSETS ,136 PERMANENT ASSETS Investments Gerdau Internacional Empreendimentos Ltda % ,401 other Investments... 1,195 Total permanent assets ,596 Total assets... 1,224,732 LIABILITIES LONG-TERM LIABILITIES Total liabilities TOTAL ADJUSTED NET ASSETS (*)... 1,224,646 (*) The merged net assets are adjusted the investment held by Gerdau Participações S.A. in Gerdau Açominas S.A. II) Up to July 28, 2005, Gerdau Açominas S.A. was the company that carried out the steel operations in Brazil, in addition to holding 22.8% of the capital of Gerdau Internacional Empreendimentos Ltda. On July 29, 2005, certain assets and liabilities of Gerdau Açominas S.A. were spun off into four new companies: Gerdau Aços Longos S.A., Gerdau Aços Especiais S.A., Gerdau Comercial de Aços S.A. and Gerdau América do Sul Participações S.A. As a result, these assets and liabilities were grouped in separate companies in accordance with the lines of business of each company, as follows: Company Business Gerdau Açominas S.A.... Gerdau Aços Longos S.A... Gerdau Aços Especiais S.A... Gerdau Comercial de Aços S.A... Gerdau América do Sul Participações S.A.... Production of steel at the Ouro Branco plant Production of long steel at the other plants in Brazil Production of special steel in Brazil Distribution of steel products in Brazil Investment in 22.8% of the capital of Gerdau Internacional Empreendimentos Ltda. liabilities. The financial statements of foreign subsidiaries were translated using the exchange rate in effect at the balance sheet date and were adjusted to conform with accounting practices adopted in Brazil. The income statement accounts were translated by the average exchange rate every quarter; The assets and liabilities of Gerdau Açominas S.A that were spun off into other companies are still recorded at their original purchase/formation cost, and no gain or loss arose as a result of this transaction.

122 GERDAU S.A. GERDAU S.A. 151 III) On September 15, 2005, the Gerdau Group signed an agreement for the acquisition of 35.98% of the shares issued by Sipar Aceros S.A., a steel rod rolling mill located in Province of Santa Fé, Argentina. This investment, when added to the 38.46% already owned by Gerdau, represents 74.44% of the share capital of Sipar Aceros. The disbursement for this additional investment will be R$ 94,800 (equivalent to US$ 40.5 million) payable over the next three years. Goodwill of R$ 59,367 arose on this acquisition, based on expected future profitability, to be amortized in 10 years. Also, as a result of this acquisition, Sipar Aceros S.A. is being fully included in the consolidated financial statements as from September 30, Shareholders of Sipar Aceros S.A., holders of approximately 14.4% of its capital, have the right of sale of this investment to the Gerdau Group (sale option) for a period of up to two years, as from September 2005, and for a fixed price subject to restatement. IV) On September 30, 2005, in continuity of the agreement with the Mayaguez Group and with The Latinamerican Enterprise Steel Holding, the Gerdau Group completed the acquisition of a 57.11% holding in Diaco S.A., the largest manufacturer of steel and rods in Colombia, for R$ 124,367, paid through an advance made in A negative goodwill of R$ 27,469 was recorded on the transaction, as a result of the overvaluation of Diaco S.A. s fixed assets, to be amortized proportionally to the depreciation of the assets that originated the negative goodwill, over an estimated period of 10 years. In accordance with the agreement, the Gerdau Group must purchase in up to 8 years, 40.27% of the capital of Diaco S.A. still in possession of the Mayaguez Group, for US$ 51,795 thousand (equivalent to R$ 121,236 at December 31, 2005), restated as defined in the agreement. Also, in view of this purchase, an advance was made to the vendors of US$ 14,825 thousand (equivalent to R$ 34,703 at December 31, 2005) recorded in long-term receivables as a deposit for future investment in subsidiary. V) On November 15, 2005, the Gerdau Group signed, together with two Spanish companies, a contract for the purchase of all the shares of Corporación Sidenor, S.A. (Sidenor), located in Spain. The ownership of the capital of Corporación Sidenor, S.A. will be as follows: 40% will belong to Gerdau Hungria Holdings Limited Liability Company, 40% to Carpe Diem Salud, SL, (Carpe Diem), a company of the Santander Group, and 20% to Bogey Holding Company Spain, S.L., a holding company of the Sidenor executives. The contracted value for the purchase of all the shares is 443,820 thousand (equivalent to R$ 1,228,960 at December 31, 2005) plus a variable portion to be calculated in the future, estimated at 19,500 thousand (equivalent to R$ 53,996 at December 31, 2005), to be paid by Gerdau Hungria Holdings Limited Liability Company. Each shareholder will pay the amount corresponding to its investment from its own funds. Carpe Diem has the right to sell its investment in Sidenor to the Gerdau Group after a 5-year period (sale option), for a fixed price subject to restatement. When and if Carpe Diem exercises this option, Gerdau shall have the right, if it sees fit, to indicate a third party to purchase this investment. Corporación Sidenor, S.A is a holding company that controls Sidenor Industrial, S.L., the largest manufacturer of special steel rods and forged and cast parts in Spain, as well as one of the major manufacturers in Spain of die forged products. Sidenor Industrial has three steel production units, located in Basauri, Vitoria and Reinosa. In 2004, the company sold 688 thousand tons of finished products. Sidenor Industrial also has the subsidiary Forjanor, S.L. for the production of forged steel for die forging, with plants in Madrid and Elgeta. In 2004, Forjanor sold 25 thousand tons of products. Corporación Sidenor, S.A., in Brazil, by means of its subsidiary Sidenor International, S.L., has a 58.44% interest in the capital of Aços Villares S.A., producer of special steel rods and rolling cylinders, with units in Mogi das Cruzes, Pindamonhangaba and Sorocaba, all of them in the state of São Paulo, having sold 646 thousand tons of finished products in This transaction was completed in January 2006 when the shares were transferred to the buyers. The financial statements of Corporaciõn Sidenor S.A. and its subsidiaries will be included in the consolidated financial statements of the Gerdau Group (proportional consolidation) as from that date. VI) On December 19, 2005, the Gerdau Group completed the purchase of 97.01% of the capital of Siderúrgica del Pacífico S.A. - Sidelpa, the only special steel producer in Colombia. This transaction resulted in a negative goodwill of R$ 30,605 as a result of the overvaluation of Sidelpa s fixed assets, to be amortized proportionally to the depreciation of the assets that originated the negative goodwill, over an estimated period of 10 years. d) The consolidated financial statements also include the financial statements of the jointly-owned subsidiary Dona Francisca Energética S.A. consolidated proportionally to the direct interest, and of the jointly-owned subsidiaries Armacero Industrial y Comercial Ltda. and Gallatin Steel Company, proportionally to the indirect interest of the parent company in the capital of the subsidiaries. As a result of the increased investment in Sipar Aceros S.A. as stated in c) III) above, the results of operations of this company, up to September 30, 2005, were consolidated proportionally to the interest previously held. The principal financial statement balances of these companies, on which the corresponding consolidation percentage is applied, are as follows: Dona Francisca Gallatin Sipar Aceros S.A. Armacero Energética S.A. Steel Company (*) Ind. Com. Ltda. (**) Assets Current assets , , , , ,251 29,952 Long-term receivables , , ,437 Permanent assets , , , ,762-18,929 37,816 total assets , , ,704 1,198, ,180 69,205 Liabilities Current liabilities... 40,817 29, , ,580-80,787 27,348 Long-term liabilities , ,006 47,512 54,190-4,356 20,725 Shareholders equity... (4,753) (16,349) 738,528 1,013,098-78,037 21,132 total liabilities and equity , , ,704 1,198, ,180 69,205 Income statement Net sales revenues... 46,326 42,780 1,948,736 2,372, , ,605 87,437 Cost of sales... (19,647) (19,424) (1,456,182) (1,626,650) (220,105) (285,566) (80,761) Gross profit... 26,679 23, , ,200 64,015 65,039 6,676 General, administrative and selling expenses... (1,739) (2,110) (25,832) (51,234) (25,040) (24,863) (5,365) Other financial income (expenses)... (7,506) (17,882) (86,095) (14,030) (4,801) (8,101) (17) Other operating income (expenses), net (71) (76) 695 Operating profit (loss)... 17,434 3, , ,936 34,103 31,999 1,989 Non-operating income, net , Provision for income tax and social contribution on net income... (5,841) (1,249) (237) (797) (11,290) (10,188) (366) Net income for de year... 11,597 2, , ,364 23,049 22,570 1,623 (*) Includes the subsidiary Siderco S.A. (**) Company included in the consolidation in 2005.

123 GERDAU S.A. GERDAU S.A. 153 e) The Company and its direct and indirect subsidiaries have goodwill and negative goodwill, which are amortized as the assets that generated them are realized or based on the realization of the projected future profits, limited to ten years, as follows: Amortization period Company Goodwill included in the investment accounts Balance at December 31, 2004 (based on projected future profitability)... 19,512 52,854 (+) Foreign exchange adjustment ,774 (+) Sipar Aceros S.A. (Note 4c - III) ,367 (-) Amortization during the year years (2,438) (23,341) Balance at December 31, 2005 (based on projected future profitability)... 17,074 91,654 Analysis of the goodwill by subsidiary Margusa - Maranhão Gusa S.A ,242 dona Francisca Energética S.A ,074 17,074 distribuidora Matco S.A ,368 sipar Aceros S.A. (Note 4c - III) ,970 17,074 91, CASH AND CASH EQUIVALENTS Company Cash , , ,720 Financial investment fund... 1,273,360 12,373 3,410, ,745 Fixed income securities... 2,362 1,989 1,725,255 1,098,814 Equities ,171 37,688 1,275,965 15,709 5,464,694 2,041,967 The financial investments are, basically, in federal public securities and bank certificates of deposit (CDB) at market prices and rates, and are adjusted according to the income accrued proportionally up to the financial statement date, not exceeding their respective market values. Of the existing balance, R$ 2,238,294 - (R$ 1,004,550 - in 2004), refer to investments in foreign currency, principally in U.S. dollars. Amortization period Company Goodwill included in the fixed asset accounts Balance at December 31, 2004 (based on undervaluation of assets) ,959 (-) Foreign exchange adjustment... - (17,131) (-) Amortization during the year years - (20,315) Balance at December 31, 2005 (based on undervaluation of assets) ,513 The goodwill resulted from the assets of the subsidiary Gerdau Ameristeel US Inc. Negative goodwill included in the fixed asset accounts Balance at December 31, 2004 (based on undervaluation of assets)... - (243,277) (-) Foreign exchange adjustment years - 26,897 (+) Diaco S.A. (Note 4c - IV)... - (27,469) (+) Siderúrgica del Pacífico S.A. (Note 4c - VI)... - (30,605) Balance at December 31, (274,454) The negative goodwill at December 31, 2004 mainly resulted from the assets of the subsidiary Gerdau Açominas S.A.. The goodwills based on future profitability were supported by projections of profits of each subsidiary, calculated on the discounted cash flow method and at an average interest rate equivalent to the TJLP (Long-term Interest Rate), for a period of 10 years. The equity accounting loss in the consolidated statement of income refers, basically, to the effects of foreign exchange rate variations on the foreign investments, to goodwill amortization and the tax incentive reserves arising from the reduction of income tax on the exploitation profit of the subsidiaries Gerdau Açominas S.A. and Margusa - Maranhão Gusa S.A., both located in the Northeastern region of Brazil, as well as to benefits arising from state tax financing. 6 - TRADE ACCOUNTS RECEIVABLE Customers in Brazil , ,420 Brazilian export receivables , ,954 Receivables from customers of foreign subsidiaries... 1,223,317 1,232,095 Provision for credit risks... (80,962) (91,661) 2,059,806 2,496, INVENTORIES Finished products... 1,656,123 1,728,652 Products in progress , ,167 Raw materials ,800 1,112,467 Storeroom materials , ,892 Advances to suppliers... 76,391 66,464 4,018,629 4,236,642 The inventories are insured against fire and overflow. Cover is determined based on the amounts and the risks involved.

124 GERDAU S.A. GERDAU S.A TAX CREDITS Company IR CS Total IR CS Total Current ICMS - Value- added tax on sales and services ,284 99,803 COFINS - Social Contribution on revenues ,921 56,302 PIS - Social Integration Program... 15,686 24,621 20,307 36,730 IPI - Excise tax ,367 3,310 Income tax and social contribution on net income... 23,689 7,386 61,275 35,023 IVA - Value-added tax ,861 Others ,308 7,433 39,449 32, , ,462 Long-term PIS and COFINS... 81, ,349 - ICMS credits on purchases of fixed assets ,375 69,992 Others ,068-81, ,792 69,992 Total tax credits ,232 32, , ,454 Profit before income share and social contribution, after statutory profit sharing... 4,306,911 4,306,911 4,306,911 4,388,374 4,388,374 4,388,374 Standard rates of tax... 25% 9% 34% 25% 9% 34% Income tax and social security expense at statutory rates... (1,076,728) (387,622) (1,464,350) (1,097,094) (394,954) (1,492,048) Tax effects on: - tax rate differences for foreign subsidiaries... (41,091) 127,983 86,892 (96,019) 91,649 (4,370) - equity in lease of subsidiaries... (32,799) (11,808) (44,607) (85,779) (30,880) (116,659) - interest own capital... 2, ,997 90,100 32, ,536 - recovery of deferred tax assets... 44,536 14,336 58, ,770 48, ,879 - gain on change in investment ownership... 76,460 27, , amortization of deferred charges - CVM ,273 49, , permanent differences (net)... 7, ,848 (10,823) 28,998 18,175 Income tax and social contribution expense... (882,898) (178,773) (1,061,671) (928,845) (224,642) (1,153,487) Current... (769,429) (145,614) (915,043) (785,225) (165,976) (951,201) Deferred... (113,469) (33,159) (146,628) (143,620) (58,666) (202,286) 9 - INCOME TAX AND SOCIAL CONTRIBUTION ON NET INCOME a) Analysis of the income tax (IR) and social contribution on net income (CS) expense: Company IR CS Total IR CS Total Profit before income share and social contribution, after statutory profit sharing... 2,791,385 2,791,385 2,791,385 2,811,272 2,811,272 2,811,272 Standard rates tax... 25% 9% 34% 25% 9% 34% Income tax and social security expense at statutory rates... (697,846) (251,225) (949,071) (702,818) (253,014) (955,832) Tax adjustment on: - equity in earnings of subsidiaries , , , , , ,406 - interest own capital... (18,482) (6,653) (25,135) 15,669 5,641 21,310 - gain on change in investment ownership... 76,460 27, , permanent differences (net) (7,340) (2,477) (9,817) Income tax and social contribution expense... (7,463) (2,582) (10,045) 14,633 5,434 20,067 Current... - (1,627) (1,627) 4-4 Deferred... (7,463) (955) (8,418) 14,629 5,434 20,063 b) Analysis of the deferred income tax and social contribution on net income assets and liabilities, at the standard rates of tax: ASSETS Company IR CS Total IR CS Total IR CS Total IR CS Total Income tax losses... 8,797-8,797 8,655-8, , , , ,986 Social contribution losses ,059 3,059-3,758 3,758-9,092 9,092-60,651 60,651 Provision for contingencies... 11,594 4,175 15,769 12,918 4,651 17,569 58,119 20,810 78,929 48,673 17,403 66,076 Benefits to employees ,095-91, , ,474 Commissions/others ,790 3, , ,148 2, ,420 Amortized goodwill... 1, ,488 1, ,659 9,345 3,365 12,710 2, ,147 Provision for losses... 2, ,765 9, ,655 76,830 27, ,483 87,595 29, ,641 24,994 8,884 33,878 32,457 9,839 42, ,838 64, , , , ,395 Current ,231 16, , ,959 58, ,464 Long-term... 24,994 8,884 33,878 32,457 9,839 42, ,607 48, , ,231 51, ,931

125 GERDAU S.A. GERDAU S.A. 157 Accelerated LIABILITIES Company IR CS Total IR CS Total IR CS Total IR CS Total depreciation , , , ,999 Amortized negative goodwill... 40,198 14,471 54,669 40,198 14,471 54,669 50,341 14,628 64,969 50,341 14,628 64,969 Deferred unrealized foreign exchange gains ,787 21,884 82, ,934 33, ,905 40,198 14,471 54,669 40,198 14,471 54, ,033 37, , ,451 49, ,873 Current ,349 20,530 86, ,195 33, ,166 Long-term... 40,198 14,471 54,669 40,198 14,471 54, ,684 16, , ,256 15, ,707 The tax benefits recognized on income tax and social contribution losses, as well as on the provision for losses, both in the Company and, are supported by projections of future taxable income adjusted to present values, based on technical feasibility studies prepared annually for Board of Director approval. These studies, which consider the history of the Company s and its subsidiaries profitability and the maintenance of the current profitability in the future, permitted the recognition of credits over a period not exceeding ten years. The other credits based on temporary differences, mainly on provisions for tax contingencies, were maintained according to their estimate of realization. LIABILITIES Company , ,879 9, ,042 19, ,350 28, ,151 44, to , , to , ,767 from 2015 on... 54,669 54, , , JUDICIAL DEPOSITS AND OTHERS 54,669 54, , ,873 Company Deposits in court... 29,151 15,550 42,674 28,052 Debtors under contract ,888 47,496 Income tax incentives... 9,945 9,945 10,122 10,122 Assets not for use ,456 45,779 Prepaid expenses ,051 36,143 Eletrobrás Loans ,908 1,305 10,212 Others ,429 4,986 39,096 34, , ,790 c) Estimated recovery of the deferred income tax and social contribution assets and liabilities: ASSETS Company , ,678 65, ,154 1,839 67,974 65, ,154 2,298 59,913 71, ,154 18,948 69, , to ,154 14, , , to ,262 4, ,502 99,852 33,878 42, , ,395

126 GERDAU S.A. GERDAU S.A INVESTMENTS Company Subsidiaries Other Total Total Gerdau Itaguai Gerdau Gerdau Gerdau Gerdau Gerdau Gerdau Internacional Com. Imp. Aços Aços Comercial América Participações Açominas Empreend. e Export. Longos Especiais de Aços do Sul Dona Francisca S.A. S.A. Ltda. (1) Ltda. S.A. S.A. S.A. S.A. Energética S.A. Others Provision Investment Investment Investment Investment Investment Investment Investment Investment for loss Premium Investment Opening balance... 4,887,726-2,007, , (8,472) 19, ,100,464 4,248,312 Merger (Note 4 c - I)... (5,302,180) 5,302, (38,801) Equity in the earnings (losses) , , ,086 46, ,222 96,685 42,969 99,392 67,252 (2,438) (3) - 2,527,731 2,836,486 Dividends... (133,000) (615,174) (15,992) (15,975) (147,546) (35,293) (32,096) (995,076) (748,271) Capital gain (Note 27) , ,839 - Spin-off (Note 4 c - II)... - (3,333,027) - - 1,972, , , , Acquisition ,772 4, ,164 Sale (33,308) Goodwill on acquisition ,882 Closing balance ,550,265 2,327, ,654 2,228, , , ,019 58,780 17, ,815 8,943,730 7,100,464 Capital ,654,160 2,663, ,110 2,207, , , ,184 66,600 Adjusted shareholders equity ,854,117 3,229, ,654 2,494, , , , ,431 Adjusted net income total capital ,313, ,259 46, ,293 83,892 41, , ,780 Holding in total capital (%) % 72.08% % 89.35% 89.35% 89.36% 89.36% 51.82% Holding in voting capital (%) % 72.08% % 89.36% 89.36% 89.36% 89.36% 51.82% Common shares/quotas held ,711,825 1,919,769, ,109, ,711, ,711, ,711, ,711, ,109,212 Proposed dividends ,863 22,186 15, ,480 39,569 35, Dividends receivable , ,463 17,678 19, (1) Company holder of the investments in foreign subsidiaries. (2) Includes amortization of goodwill. Margusa Dona Maranhão Franscisca Armacero Industrial y Distribuidora MRS Sipar Gerdau Investment Gusa S.A. Energética S.A. Comercial Ltda. Matco S.A. Salomon Sack S.A. Logística S.A. Inversiones S.A. company Others Total Goodwill Goodwill Investment Goodwill Investment Goodwill Investment Goodwill Investment Goodwill Investment Investment Balance on December 31, ,728 19,512 9, ,400 6,066 17,873 2,091 4,772-10,036 4, ,017 Foreign exchange adjustment (21) - (276) - (95) - 3, ,774 Amortization of investment... (16,486) (2,438) - (436) - (422) - (1,996) - (1,563) - - (23,341) Acquisition of investment , ,554 64,295 Dividends (3,964) - (3,964) Equity in earnings ,031-1,031 Investment consolidated in the year (9,871) - (12,400) - (17,873) (40,144) Balance on December 31, ,242 17, , ,772 60,970 7,477 8, , FIXED ASSETS Annual depreciation/ Accumulated depreciation depletion rate % Cost and depletion Net Net Land, buildings and structures... 0 to 10 3,461,928 (1,187,007) 2,274,921 2,230,851 Machinery, equipment and installations... 5 to 10 8,599,989 (4,467,397) 4,132,592 4,326,483 Furniture and fixtures... 5 to ,014 (76,796) 58,218 40,780 Vehicles to 33 69,152 (35,095) 34,057 10,566 Electronic data equipment/rights/licenses to ,139 (221,927) 110,212 96,724 Construction in progress ,889,512-1,889,512 1,065,583 Forestation/reforestation... felling plan 250,528 (56,539) 193, ,376 14,738,262 (6,044,761) 8,693,501 7,927,363 a) Insured amounts - the assets are insured against fire, electrical damage and explosion. The cover is based on the amounts and risks involved. The plants of the North and South American subsidiaries and the subsidiary Gerdau Açominas S.A. are also insured against loss of profits. The total cover amounts to R$ 18,548,459 at December 31, b) Capitalization of interest and financial charges - financial income was credited during 2005 totaling R$ 10,070 - (R$ 2,021 - in 2004) as a result of the appreciation of the Brazilian real against the U.S. dollar. c) Guarantees offered - fixed assets were pledged as collateral for loans of R$ 837,996 - (R$ 688,034 - in 2004). d) Summary of changes in fixed assets: Balance at the beginning of the year... 7,927,363 7,378,725 ( + ) Purchases/sales of the year... 1,698,793 1,167,372 ( - ) Depreciation and depletion in cost of sales... (756,385) (692,610) ( - ) Depreciation and depletion in administrative expenses... (82,221) (69,440) ( + ) Companies consolidated in the year ,280 - ( + ) Purchase of North Star and others ,948 ( - ) Foreign exchange rate effect on fixed assets of foreign subsidiaries... (346,329) (124,632) Balance at the end of the year... 8,693,501 7,927,363

127 GERDAU S.A. GERDAU S.A DEFERRED CHARGES The deferred charges () comprise pre-operating expenses in the construction of a hydroelectric plant, reforestation projects and research, development and reorganization projects. Summary of loans by currency Company LOANS Annual Company charges (*) Current loans stated in reais Working capital... CDI (**) ,500 1,174 Gerdau Ameristeel Corporation and subsidiaries (*) ,500 Fixed assets financing Current loans stated in foreign currency ,887 1,174,096 Working capital (US$) % ,676 1,387 Fixed assets and others (US$) % - - 3,082 43,890 Export advances (US$) % ,133 31,905 Working capital (Clp$) % ,810 - Working capital (Cop$) % - - 4,880 19,956 Working capital (PA$) % ,968 1,276,908 2, , ,489 Plus: current portion of long-term loans... 2,770-1,327,248 1,968,397 Current loans Long-term loans in reais ,125 52,625 Working capital... TJLP % , ,669 Fixed assets... TJLP % ,510 42,686 Investment... IGP - M % Long-term loans in foreign currency , ,795 Working capital (US$) % 1,407,190-2,337,845 1,056,486 Bearer Bonds (Perpetual Bonds and Senior Notes) (US$) % , ,908 Açominas Export Notes (US$) % , ,258 Export advances (US$) % , ,943 Investments (US$) % , ,091 Fixed assets and others % - - 5,606 3,485 Fixed assets (Cdn$) % ,495 16,254 Working capital (Clp$) % ,000 Fixed assets (Clp$) ,300 - Working capital (Cop$) % ,663 Working capita (PA$) % 1,407,190-5,963,700 4,181,863 (2,770) - (611,280) (691,489) Minus: current portion... 1,404,420-5,352,420 3,490,374 Long-term loans Total loans... 1,407, (*) Weighted average rate at December 31, (**) CDI - Interbank Deposit Certificate interest rate. The loans stated in reais are indexed by the TJLP (Long-term Interest Rate), established by the Brazilian Government and used for restatement of long-term loans granted by BNDES (National Bank for Economic and Social Development), determined quarterly, or by the IGP-M (General Price Index - Market): Brazilian inflation rate, calculated by the Getúlio Vargas Foundation). Brazilian real (R$) , ,654 U.S. dollar (US$)... 1,407,190-5,507,492 4,637,854 Canadian dollar (Cdn$) ,606 3,485 Colombian peso (Cop$) ,110 - Argentine peso (PA$) ,006 21,619 Chilean peso (Clp$) ,628 75, Maturity of long-term loans: Company , , , , ,126,736 After ,404,420 1,679,801 1,404,420 5,352,420 a) Events during the year I) Gerdau S.A. concluded the private issue of Guaranteed Perpetual Notes (Notes) on September 15, 2005 in the total amount of US$ 600 million with annual interest of 8.875%. These Notes are guaranteed by the Brazilian operating companies Gerdau Açominas S.A., Gerdau Aços Longos S.A., Gerdau Aços Especiais S.A. and Gerdau Comercial de Aços S.A. The Notes have no maturity but may become due in certain specific circumstances (as defined in the terms of the Notes), which are not under total control of the Company. The Company has the option of redeeming these Notes after 5 years of their issue, the first option for redemption therefore being in September Interest is payable quarterly and each quarterly payment date after September 2010 is also a redemption option date. II) The third issue of Euro commercial paper was concluded on December 12, 2005 in the amount of US$ 200 million, with final maturity on October 11, 2006 and interest of 5.0% p.a.. b) Guarantees The loans contracted under the FINAME/BNDES program (financing for the purchase of machinery and equipment through the BNDES) are guaranteed by the financed assets, in the amount of R$ 469,708. The other loans are guaranteed by the controlling companies, on which the Company pays a fee of 1% p.a. on the amount guaranteed. c) Covenants In replacement of the tangible guarantees usually required, the loans are being contracted with certain financial covenants, as follows: I) interest coverage ratio - measures the debt service payment capacity in relation to EBITDA (Earnings before Interest, Taxes, Depreciation and Amortization), as described in Note 28; II) leverage ratio - measures the debt coverage capacity in relation to EBITDA, as described in Note 28;

128 GERDAU S.A. GERDAU S.A. 163 III) Required Minimum Net Worth - measures the minimum net worth required in financial agreements; and IV) Current Ratio (current liquidity ratio) - measures the capacity to pay current liabilities. All the covenants mentioned above are calculated on a consolidated basis, except for item IV which refers to the parent company Metalúrgica Gerdau S.A., and have been complied with. The penalty for non-compliance is the prepayment of the contracts. d) Credit lines In October 2005, the subsidiaries Gerdau Açominas S.A., Gerdau Aços Longos S.A., Gerdau Aços Especiais S.A. and Gerdau Comercial de Aços S.A. obtained a pre-approved credit line from BNDES - National Bank for Economic and Social Development of R$ 900,000 for the purchase of equipment and for expenses. These funds will be provided as the subsidiaries carry out their own investment plans and submit proof of expenditures to BNDES. At December 31, 2005, this line had not yet been used and the applicable interest rates will be the ones in force on the dates the funds are released. The contracts are guaranteed by Indac - Ind. Adm. e Comércio S.A. The subsidiary Gerdau Açominas S.A. also has the following credit lines: US$ 240 million (R$ 561,768 at December 31, 2005) from ABN AMRO Bank N.V., The Bank of Tokyo-Mitsubishi and UFJ Bank Limited, whose guarantee was given by Nippon Export and Investment Insurance (NEXI), with a term of seven years, of which two are the grace period and the remaining five for payment. At December 31, 2005, US$ 32,7 million (R$ 76,541) of this credit line had been drawn down. The funds will be used for the modernization of the Ouro Branco plant and there is no relation to imports or export receivables. US$ 69 million (R$ 161,508 at December 31, 2005) from Export Development Canada, whose guarantee was given by KFW IPEX - Bank and by Gerdau S.A., with a term of six years, of which two are the grace period and the remaining four for payment. At December 31, 2005, US$ million (R$ 78,788) of this credit line had been drawn down. The interest rate is 7.02% per year. The funds will be applied in the supply of blooms continuous casting and beam blank. US$ 50 million (R$ 117,035 at December 31, 2005) from BNP Paribas Brasil, whose guarantee was given by Gerdau S. A., with a term of five years, of which three are the grace period and the remaining two for payment. At December 31, 2005, US$ 50 million of this credit line had been drawn down. The interest rate is 5.93% p.a. The funds will be used to finance 15% of the supply plus the Credit Insurance of the blast furnace, coking mill and sintering facilities. US$ 201 million (R$ 470,480 at December 31, 2005) from BNP Paribas - France (50%) and the Industrial and Commercial Bank of China (50%), whose guarantee was given by SINOSURE (China Export & Credit Insurance Corporation), credit agency for Chinese exports, and by Gerdau S.A., with a term of 12 years, for which three are the grace period and the remaining nine for payment. At December 31, 2005, there had been no use of funds from this credit line. The interest rate is 6.97% p.a. The funds will be used to finance 85% of the supply for the blast furnace, coking mill and sintering facilities. The North American subsidiaries have a credit line in the amount of US$ 650 million, equivalent to R$ 1,521,455 at December 31, 2005, falling due in October 2010, which can be drawn in U.S. dollars (at the LIBOR rate plus interest of between 2.25% and 2.75% p.a. or US Prime/FED Funds plus interest of 0.5% p.a.) or in Canadian dollars (at the Bankers Acceptance (BA) rate plus interest of between 2.35% and 2.85% p.a., or Canadian Prime plus interest of 1.00% p.a.). The distribution of this credit line among the companies is made in proportion to the working capital of each North American subsidiary. This credit line had not been used up to December 31, The inventories and accounts receivable of subsidiaries were given as guarantee for this credit line. The subsidiary Gerdau Aza S.A. has a line of credit for working capital of Clp$ 40.9 billion (R$ 186,388 at December 31, 2005), bearing interest of 3.60% p.a., and a credit line for fixed assets of Clp$ 146 million (R$ 674 at December 31, 2005) bearing interest of 6.12% p.a. This line was not being used at December 31, DEBENTURES General Number Annual Issue Meeting Issued In portfolio Maturity rate rd - A and B... 05/27/ ,000 60,250 06/01/2011 CDI 160, ,387 7 th... 07/14/ ,400 36,192 07/01/2012 CDI 74, ,068 8 th... 11/11/ ,964 25,774 05/02/2013 CDI 234, ,878 9 th... 06/10/ ,640 57,528 09/01/2014 CDI 158, , th - A and B... 06/29/ ,000 78,270 06/01/2020 CDI 158,258 98,189 Company , ,476 Gerdau Ameristeel Corp... 04/23/ ,000-04/30/ % 228, ,618 Debentures held by consolidated subsidiaries... (43,560) (7,022) , ,072 Current... 2,719 2,986 Long-term , ,086 Debentures issued by Gerdau S.A. The debentures are stated in reais, with variable interest at a percentage of the CDI (Interbank Deposit Certificate) rate. The nominal annual interest rate was 18.99% and 16.17% for the years ended December 31, 2005 and 2004, respectively. Debentures issued by Gerdau Ameristeel Corp. The debentures of Gerdau Ameristeel Corporation are convertible into ordinary shares of the subsidiary at a conversion price of Cdn$ per share, up to their maturity. The controlling shareholders hold, directly or indirectly, R$ 543,383 at December 31, 2005 (R$ 523,546 at December 31, 2004) of the outstanding debentures FINANCIAL INSTRUMENTS a) General comments - Gerdau S.A. and its subsidiaries enter into transactions with financial instruments whose risks are managed by means of financial positions and exposure limit controls. All instruments are fully recorded in the books of account and mainly relate to the instruments listed below: - financial investments - are recorded at their redemption value as of the financial statement date and are explained and presented in Note 5;

129 GERDAU S.A. GERDAU S.A investments - are explained and presented in Note 11; - related parties - are explained and presented in Note 21; - loans - are explained and presented in Note 14; - debentures - are explained and presented in Note 15; and - financial derivatives - in order to minimize the effects of fluctuations in foreign exchange rates on their liabilities, the subsidiaries Gerdau Açominas S.A. and Dona Francisca Energética S.A. entered into swap contracts that were converted into Brazilian reais on the contract date and linked to changes in the CDI interest rate and the General Market Price Index (IGP-M), plus additional interest. The subsidiaries Gerdau Açominas S.A. and Gerdau Ameristeel Corporation also entered into swap contracts linked to LIBOR. The swap contracts are listed below: Amount - Contract date Purpose US$ thousand Annual rate Maturity 07/16/2001 to 07/18/2001 Prepayment 7, % to 92.80% of the CDI 01/13/2006 to 03/01/ /17/2003 fixed assets 5,263 IGP-M % p.a. 05/15/2006 to 11/16/ /17/2003 fixed assets 11, % to % of the CDI 05/15/2006 to 11/16/ /30/2003 to 11/03/2003 Bank notes 200,000 LIBOR + interest de 6.09% to 6.13% interest 07/15/ /31/2005 fixed assets 240, % 11/30/ /22/2005 fixed assets 40, % 12/15/ /22/2005 fixed assets 43, % 08/18/2008 b) Market value - the market values of the financial instruments are as follows: Company Book Market Book Market value value value value Financial investments... 1,275,722 1,275,722 14,362 14,362 Debentures , , , ,476 Investments... 8,943,730 8,943,730 7,100,464 7,100,464 Related parties (liabilities) , , , ,549 Share purchase option (liabilities) - note ,651-8,096 Treasury shares - note , ,696 44,139 74,727 Perpetual bonuses... 1,407,190 1,439, Book Market Book Market value value value value Financial investments... 5,193,295 5,193,295 1,708,247 1,708,247 Securitization financing , , , ,908 Import financing , , , ,883 Prepayment financing , , , ,724 Resolution 2770 financing , ,585 Resolution 4131 financing ,893 20,755 Bank Notes financing ,361 1,049,893 1,050,835 1,260,376 Fixed assets financing... 41,393 41,592 45,837 45,686 Perpetual bonuses... 1,407,190 1,439, Financing - other... 2,130,623 2,130,623 2,021,372 2,021,372 Debentures , , , ,072 Investment , , , ,017 Related parties (assets) ,448 1,448 Share purchase option (liabilities) - note ,261-13,663 Swap operations fixed assets (assets)... 5,462 5, Swap operations fixed investment (liabilities) ,500 4,500 The market values of the swap contracts of subsidiaries in Brazil were obtained based on future income projections for each contract, calculated based on the present value of the forward U.S. dollar plus coupon rates (assets) and CDI/ IGPM future rates (liabilities) and adjusted to present value on the financial statement date using the projected future CDI/IGPM rate for each maturity. The same methodology is applied for the calculation of the market values of the swap contracts of the subsidiary Gerdau Ameristeel Corporation, using the LIBOR rate. Swap contracts related to financing contracts are classified together with the related financing, as a contra entry to the Financial expenses/income, net account, and are stated at cost plus accrued charges up to the financial statement date. Contracts not linked to such financing have been recorded at their market value under the heading Judicial deposits and other (assets) and Other accounts payable (liabilities). The Company and its subsidiaries believe that the balances of the other financial instruments, which are recognized in the books at net contracted values, are substantially similar to those that would be obtained if they were negotiated in the market. However, because the markets for these instruments are not active, differences could exist if they were settled in advance. c) Risk factors that could affect the Company s and its subsidiaries business Price risk: this risk is related to the possibility of price variations of the products that the subsidiaries sell or in the raw material prices and other inputs used in the production process. Since the subsidiaries operate in a commodity market, their sales revenues and cost of sales may be affected by the changes in the international prices of their products or materials. In order to minimize this risk, the subsidiaries constantly monitor the price variations in the local and international markets.

130 GERDAU S.A. GERDAU S.A. 167 Interest rate risk: this risk arises as a result of the possibility of losses (or gains) due to fluctuations in interest rates relating to its assets/investments and liabilities invested/raised in the market. In order to minimize possible impacts resulting from interest rate fluctuations, the Company and its subsidiaries have adopted a policy of diversification, alternating between fixed rates and variable rates (such as LIBOR and the CDI) and periodically renegotiating contracts to adjust them to market. Exchange rate risk: this risk is related to the possibility of fluctuations in foreign exchange rates affecting financial expenses (or income) and the liability (or asset) balance of contracts denominated in a foreign currency. In addition to the foreign investments which are a natural hedge, the Company and its subsidiaries use hedge instruments, usually swap contracts, as described in item a above, to manage the effects of these fluctuations. Credit risk: this risk arises from the possibility of the subsidiaries not receiving amounts arising from sales or 18 - TAXES AND SOCIAL CONTRIBUTIONS PAYABLE Company Income Tax and Social Contribution on Net Income , ,862 Payroll charges ,302 48,822 ICMS - Value-added tax on sales and services ,355 32,131 COFINS - Tax for Social Security Financing ,019 32,609 IPI - Excise Tax ,599 14,114 PIS - Employees Profit Participation Program ,139 6,683 Withholding Income Tax and Social Contribution... 1, ,232 7,349 Tax paid in installments ,459 4,196 11,819 Others ,940 31,849 1,397 6, , ,238 investments at financial institutions. In order to minimize this risk, the subsidiaries adopt the procedure of analyzing in detail the financial and equity position of their customers, establishing a credit limit and constantly monitoring their balances. In relation to financial investments, the Company and its subsidiaries invest solely in institutions with low credit risk, as assessed by rating agencies. In addition, each institution has a maximum limit for investment, determined by the Credit Committee FINANCIAL INCOME/EXPENSES Company Financial income Financial investments... 61,056 18, , ,394 Interests ,684 29,928 Monetary variation ,144 3,325 Foreign exchange variation (12,636) (34,671) Foreign exchange swap ,915 Other financial expenses... 5,586 23,288 31,665 65,955 Total income... 66,705 42, , ,846 Expenses Interest on the debt... (166,096) (53,662) (506,641) (411,365) Monetary variation... (2,217) (743) (22,964) (17,836) Exchange variation... (30,816) 10, , ,607 Exchange swap (57,222) (44,127) Interest swap (681) - Other financial expenses... (12,469) (5,260) (131,760) (110,231) Total expenses... (211,598) (49,329) (482,896) (385,952) 19 - Special Installment Payment Program (PAES) The proportionally consolidated (52%) subsidiary Dona Francisca Energética S.A. enrolled in the PAES, established by Law 10684/03, at the Federal Revenue Secretariat, to settle Corporate Income Tax (IRPJ), Social Contribution on Net Income (CSLL), Social Integration Program (PIS) and Social Contribution on Revenues (COFINS) liabilities. The balances of these tax liabilities are recorded in Taxes and contributions payable, in current liabilities, and in Other accounts payable, in longterm liabilities. The balances of the renegotiated taxes, which were divided into 180 installments of which 149 are not yet due, are restated by the Long-term Interest Rate (TJLP) and are as follows at the year end: Principal Interest Total Principal Interest Total IRPJ... 18,790 4,756 23,546 20,303 3,160 23,463 CSLL... 6,812 1,724 8,536 7,360 1,145 8,505 PIS COFINS... 3, ,857 3, ,844 29,346 7,428 36,774 31,709 4,935 36,644 Current... 2, ,962 2, ,732 Long-term... 26,983 6,829 33,812 29,345 4,567 33,912 Dona Francisca Energética S.A. pays its taxes, contributions and other liabilities on their due dates, which is a basic requirement to remain eligible for the PAES program PROVISION FOR CONTINGENCIES The Company and its subsidiaries are parties to labor, civil, and tax lawsuits. Based on the opinion of its legal advisors, management believes that the provision for contingencies is sufficient to cover probable and reasonably estimable losses from unfavorable court decisions, and that the final decisions will not have significant effects on the financial position of the Company at December 31, 2005.

131 GERDAU S.A. GERDAU S.A. 169 The balances of the contingencies, net of the corresponding judicial deposits, are: I) Contingent liabilities provided a) Tax Contingencies Company Value-added tax on sales and services (ICMS)... (a.1) 1,099 1,099 44,879 17,300 Social contribution on net income... (a.2) 7,216 7,216 7,333 7,333 Corporate Income tax... (a.3) 19,993 19,993 19,993 19,993 National Institute of Social Security (INSS)... (a.4) 12,963 12,963 29,924 24,900 Social Integration Program (PIS)... (a.5) 1,831 1,831 1,904 1,903 Social Contribuition on Revenues (COFINS)... (a.5) 6,363 6,387 6,910 6,935 Compulsory loans - Eletrobrás... (a.6) - 50,456-50,456 Social Investment Fund (FINSOCIAL)... (a.6) - 6,891-6,898 Emergency capacity charge... (a.7) 9,302 9,368 33,896 25,563 Extraordinary recomposition... (a.7) 5,349 5,283 19,675 13,037 Government Severance Indemnity Fund for Employee (FGTS) and other tax contingencies... (a.8) ,503 Import Tax/IPI - Drawback... (a.9) ,402 - ( - ) Jucidial deposits... (a.10) (29,901) (34,818) (93,848) (73,938) 34,222 86, , ,883 b) Labor Contingencies... (b.1) 10,963 16,257 49,517 49,573 ( - ) Jucidial deposits... (b.2) (3,055) (8,349) (10,315) (10,313) 7,908 7,908 39,202 39,260 c) Civil Contingencies... (c.1) - - 6, ,364 ( - ) Jucidial deposits... (c.2) - - (1,074) (1,207) - - 4,938 99,157 Total liabilities provided... 42,130 94, , ,300 a) Tax Contingencies a.1) Lawsuits relating to value-added tax on sales and services (ICMS), the majority of which relates to credit rights, mostly under judgment by the Finance Secretariat and the Courts of First Instance of the State of Minas Gerais. A provision for R$ 28,483 was recorded in 2005 by the subsidiary Gerdau Aços Longos S.A. to possible cover losses in the motion seeking to reverse a final and irrevocable judgment in a tax assessment brought by the State of Minas Gerais to collect tax on shipments of merchandise to an exclusively exporting company. The company understands that the judgment breached a provision of law and that there was also a refusal of judgment in the decision. Although the company understands that ICMS is not payable on shipment to an exporting company, this provision was recorded in an amount considered to be sufficient to cover the entire alleged liability and additional fines and interest. a.2) Social Contribution on Net Income. The amounts refer to challenges of the constitutionality of the contribution in 1989, 1990 and Some of these lawsuits are pending judgment, most of them in the Higher Courts. a.3) Matters concerning Corporate Income Tax (IRPJ) in discussion at the administrative level. a.4) Social security contributions due to the INSS, with lawsuits for annulment by the company, with judicial deposits of practically the whole amount involved, in progress in the Federal Court of the First Instance in the state of Rio de Janeiro. In the financial statements, the additional provision refers to lawsuits questioning the position of the INSS charging INSS contributions on profit sharing payments made by the subsidiary Gerdau Açominas S.A., as well as on payments for services rendered by third parties, in which the INSS calculated charges for the last ten years and assessed the company because it understands that it is jointly liable. The assessments were maintained at the administrative level, and Gerdau Açominas S.A. filed annulment actions with the judicial deposit of the corresponding amount, based on the understanding that the right to assess part of the charge had prescribed and that there is no such liability. a.5) Contributions to the Social Integration Program (PIS), and the Social Contribution on Revenues (COFINS) in connection with lawsuits challenging the constitutionality of Law no 9,718, which changed the calculation basis of these contributions. These lawsuits are in progress at the Federal Regional Court of the 2nd Region and the Federal Supreme Court. a.6) Tax contingencies relating to the Eletrobrás compulsory loan (R$ 50,456) and Finsocial (R$ 6,891) were reversed in 2005, considering, respectively, the implementation by Eletrobrás of the 3rd conversion in shares of the compulsory loans and the closing of the respective lawsuits. a.7) Emergency Capacity Charge (ECE) and Extraordinary Tariff Recomposition (RTE), charges included in the electric energy bills of the Company s plants. According to the Company, these charges are of a tax nature and, as such, are incompatible with the National Tax System provided in the Federal Constitution. For this reason, the constitutionality of these charges is being challenged in court. The lawsuits are in progress in the Federal Justice of the First Instance of the states of Pernambuco, Ceará, Minas Gerais, Rio de Janeiro, São Paulo, Paraná, and Rio Grande do Sul, as well as in the Federal Regional Courts of the 1st, 2nd and 5th Regions. The Company has fully deposited in court the amounts of the disputed charges. a.8) The provision recorded by Gerdau Açominas S.A. relating to the increased charges for FGTS, arising from the changes introduced by Complementary Law No. 110/01, was eliminated since the legal dispute referred to in the corresponding Injunction was finally and irrevocably judged against the company, following the judgment by the Federal Supreme Court in a similar case. There was a subsequent discussion since, at the time of payment of the principal as a result of the decision of the Injunction, Caixa Econômica Federal insisted on charging a fine. Consequently, the company deposited the principal in a Court Payment and the amount of the fine in a Judicial Appeal. The principal was drawn by the Caixa Econômica Federal and the dispute about the fine is pending judgment of the appeal brought by the company. a.9) The provision made in the last quarter of 2005 by the subsidiary Gerdau Açominas S.A is intended to cover amounts requested by the Federal Revenue authorities for Import Tax, Excise Tax and resulting additional charges on transactions made under a drawback granted which was subsequently annulled by the Foreign Trade Operations Department (DECEX). The company does not agree with the administrative decision that annulled the grant and defends the legality of the transactions made. The matter is the object of a Request for Injunction under consideration in the Superior Court of Justice (STJ). a.10) The judicial deposits relate to amounts deposited and maintained in court until the resolution of the related litigation. The balances of these credits are classified as a reduction of the provision for tax contingencies.

132 GERDAU S.A. GERDAU S.A. 171 b) Labor Contingencies: b.1) Company and its subsidiaries are also parties to labor claims. None of these claims involve significant amounts and the lawsuits mainly involve overtime pay, health and danger hazards, among others. b.2) The judicial deposits relate to amounts deposited and maintained in court until the resolution of the related litigation and are classified as a reduction of the provision for labor contingencies c) Civil Contingencies c.1) The subsidiaries are also a party to civil claims arising in the normal course of their operations, including claims arising from work accidents, which total at December 31, 2005 the amount shown as the contingent liability for these matters. Certain provisions were reversed in 2005 because of changes in the prospect of loss and/or closing of the lawsuits. c.2) The judicial deposits are classified as a reduction of the provision for civil contingencies. II) Contingent liabilities not provided a) Tax contingencies a.1) The company is a defendant in assessments filed by the state of Minas Gerais demanding ICMS tax payments arising mainly from the sales of products to commercial exporters. The restated amount of the lawsuits totals R$ 32,425. The Company has not made any provision for contingency in relation to these claims since it considers that this tax is not payable, because products for export are exempted from ICMS. a.2) The company and the subsidiary Gerdau Açominas S.A. are defendants in assessments filed by the state of Minas Gerais which demand ICMS tax payments on the export of semi-finished manufactured products. The subsidiary Gerdau Açominas S.A. has also filed a lawsuit for the annulment of an action of the same nature. The total amount demanded is R$ 271,997. The companies have not recorded any provision for contingency in relation to these claims since they consider that this tax is not payable because the products cannot be considered semi-finished manufactured products as defined by the federal complementary law and, therefore, are not subject to ICMS. a.3) On December 6, 2000, the Company enrolled in the Tax Recovery (REFIS) Program to pay the Social Integration Program (PIS) and the Social Contribution on Revenues (COFINS) contributions in installments. The constitutionality of the use of credits of R$ 40,118 acquired from third parties to settle the Company s own interest and penalties is being challenged in court. This occurred because the Federal Revenue authorities understand that tax credits must first be used to offset the assignor s own debts, only transferring the excess to the assignee. This understanding, based solely on a REFIS Management Committee Resolution, edited subsequent to the Company s enrollment in the Program, does not have a legal basis. In fact, the law which established the Program authorized, with no conditions, the purchase of third party tax credits for offset against own liabilities. b) Civil Contingencies b.1) Antitrust lawsuit involving Gerdau S.A. brought by two civil construction unions in the state of São Paulo alleging that Gerdau S.A. and other long steel producers in Brazil share customers among them, violating the antitrust legislation. After investigations carried out by the National Secretariat of Economic Law (SDE) and based on public hearings, the SDE is of the opinion that a cartel exists. This conclusion was also supported by an earlier opinion by the Secretariat for Economic Monitoring (SEAE). The lawsuit was therefore forwarded to the Administrative Council for Economic Defense (CADE) for judgment. However, its course was suspended from May 2004 to August 16, 2005 due to a legal protection granted within a new lawsuit brought by Gerdau S.A. with the purpose of annulling the administrative proceeding grounded on formal irregularities found in its discovery. The annulment of the legal protection by the Federal Regional Court occurred as a result of appeals brought by CADE and the Federal Government. CADE, regardless of the request for submission of negative evidence of cartel made by Gerdau S.A., judged the merits of the administrative proceedings on September 23, 2005 and, by a majority of votes, fined the Company and other long steel producers an amount equivalent to 7% of their revenues in the year before the Administrative Proceeding was commenced, excluding taxes, for formation of a cartel. A request for amendment of judgment was made regarding this decision, which is still pending judgment. Despite the CADE decision, the legal action through by Gerdau S.A. follows its normal course and, at present, awaits judgment in the lower court. In the event the processual irregularities alleged by Gerdau are recognized by the court, the CADE decision may be annulled. It should be noted that just prior to the CADE decision, the Federal Public Ministry of the state of Minas Gerais issued a judgment on a Public Civil Action, based on the above mentioned SDE decision, and, without mentioning any new elements, alleged that the Company was involved in activities which contravened the antitrust legislation. Gerdau S.A. contested this allegation on July 22, The Company denies having engaged in any type of anti-competitive conduct and believes, based on information available, including the opinion of its legal advisors, that the administrative process until now includes many irregularities, some of which are impossible to resolve. In relation to the merit, Gerdau is sure that It did not practice the alleged conduct and, in this regard, its convictions are supported by renowned experts and the Company, consequently, believes in the possibility of its conviction being reversed. b.2) A civil lawsuit has been filed against Gerdau Açominas S.A. regarding the termination of a contract for the supply of slag and indemnities for losses and damages. At December 31, 2005, the lawsuit amounted to approximately R$ 47,954. Gerdau Açominas S.A. contested all bases for the lawsuit and filed a counterclaim for termination of the contract and indemnity for breach of contract. The judge declared the contract to be terminated, since this demand was common to both parties. With regards to the remaining discussion, the judge understood that both parties were at fault and judged the requests for indemnity unfounded. This decision was maintained by the Court of Civil Appeals of the State of Minas Gerais (TAMG), and the court decision is based on expert evidence and interpretation of the contract. As regards the termination and the fact that the indemnity claimed by the supplier is not payable, the Court of Civil Appeals of the state of Minas Gerais confirmed the termination of the contract and granted the appeal by Gerdau Açominas to charge the supplier for the costs of removal of the slag, maintaining that the latter s claim has no grounds. A Special Appeal was initially brought against TAMG s decision, whose continuation was denied, against which a Bill of Review was filed in which the Superior Court of Justice (STJ) determined TAMG to complement the judgment challenged, which occurred in In this judgment, the previous decision was maintained and a new Special Appeal filed, which was also denied. A new Bill of Review was filed, which was denied by the STJ in a decision published on October 18, Gerdau Açominas has not been notified of any subsequent appeal. The company believes that any loss is remote since it is of the opinion that any change in judgment is unlikely, as the judgment was based on the analysis of evidence and interpretation of the contract, which practically precludes the chances of success of the Itabira appeals, which has been confirmed by the successive judgments against Itabira.

133 GERDAU S.A. GERDAU S.A. 173 b.3) A civil lawsuit has been filed by Sul América Cia. Nacional de Seguros against Gerdau Açominas S.A. and Westdeustsche Landesbank Girozentrale, New York Branch (WestLB), for the payment of R$ 34,383 to settle an indemnity claim, which has been deposited in court. The insurance company pleads doubt in relation to whom the payment should be made and alleges that the subsidiary is resisting in receiving and settling the amount. The lawsuit was challenged both by the Bank (which claims to have no right over the amount deposited, which resolves the doubt raised by Sul América) and by the subsidiary (which claims that there is no such doubt and that there is justification to refuse payment since the amount owed by Sul América is higher than the amount involved). Subsequently, Sul América claimed fault on the Bank s representation, and this matter is therefore already settled, which resulted in the withdrawal in December 2004 of the amount deposited. The process should enter the expert evidence phase, mainly for calculation of the amount due. Based on the opinion of its legal advisors, the subsidiary expects a loss to be remote and that the sentence will declare the amount payable within the amount stated in the pleading. Also, Gerdau Açominas S.A. filed, prior to this lawsuit, a lawsuit for the payment of the amount recognized by the insurance companies. The lawsuits are pending. The subsidiary expects a favorable outcome in this lawsuit. The civil lawsuits arise from an accident on March 23, 2002 with the blast furnace regenerators of the Ouro Branco steel plants, which resulted in the stoppage of several activities, with material damages to the steel mill equipment and loss of profits. The equipment, as well as the loss of profits arising from the accident, was covered by an insurance policy. The report on the event, as well as the loss claim, was filed with IRB - Brasil Resseguros, and an advance payment of R$ 62,000 was received in In 2002, a preliminary and conservative estimate of indemnities related to the coverage of loss of profits and material damages, in the total amount of approximately R$ 110,000, was recorded, based on the amount of fixed costs incurred during the period of partial stoppage of the steel mill activities and the immediate expenses to be incurred to recover the equipment temporarily. This estimate approximates the advance amount received (R$ 62,000) plus the amount proposed by the insurance company as a complement to settle the indemnity (R$ 34,383). Subsequently, new amounts were added to the dispute as stated in the subsidiary s plea, although not yet recorded. In addition to these amounts, the subsidiary also incurred other costs for the recovery of the damage resulting from the accident, as well as other related losses that were listed in its challenge to the lawsuit in progress and which will be confirmed during the discovery phase, when they will be recorded. Based on the opinion of its legal advisors, the Company considers that losses from other contingencies that may affect the results of operations or the Company s consolidated financial position are remote. III) Contingent gains not recorded a) Tax contingencies a.1) The Company believes that the realization of certain contingent gains is possible. Among them is a court-order debt security issued in 1999 in the amount of R$ 26,580, arising from an ordinary lawsuit against the state of Rio de Janeiro for non-compliance with the Loan Agreement for Periodic Execution in Cash under the Special Industrial Development Program (PRODI). Due to the default by the state of Rio de Janeiro and the non-regulation of Constitutional Amendment 30/00 (which granted the government a ten-year moratorium for payment of securities issued to cover court-order debts not related to food), the realization of this credit is not expected in 2005 and following years. For this reason, this gain is not recorded in the financial statements. a.2) A final and irrevocable favorable decision was granted on December 7, 2005 against the restatement of the calculation basis of the half-yearly PIS under Complementary Law 07/70, as a result of the decision of unconstitutionality of Decree Laws 2445/88 and 2449/88, in the last lawsuit of the Company still under examination. Accordingly, the Company has recorded the corresponding credit, in December 2005, which, added to the credits recorded in the first quarter of the year relating to the same lawsuit, totaled R$ 70,332. a.3) Also, the Company and its subsidiaries Gerdau S.A., Gerdau Açominas S.A. and Margusa - Maranhão Gusa S.A. expect to recover IPI premium credits. Gerdau S.A. and the subsidiary Margusa Maranhão Gusa S.A. have filed administrative appeals for recovery, which are pending judgment. With regards to the subsidiary Gerdau Açominas S.A., the proceedings were judged unfavorably. Currently, the process awaits judgment of the appeal filed by the subsidiary. The Company estimates the credits at R$ 394,002 () but no accounting recognition has been made thereof because of uncertainty as to their realization RELATED PARTIES a) Analysis of loan balances Company Fundação Gerdau ,304 Sipar Aceros S.A. e outros (122) Metalúrgica Gerdau S.A (115) Gerdau Açominas S.A... - (51,245) - - GTL Financial Corp... (101,144) (113,189) - - Gerdau Aços Longos S.A... (227) Florestal Rio Largo Ltda (119) - Santa Felicidade Ltda (6) - Others (4) - (101,371) (164,549) 302 1,448 Financial income (expenses), net... 9,625 5,890 27,874 20,448 b) Commercial transactions Company Company Income Accounts Income Accounts (expenses) receivable (expenses) receivable Banco Gerdau S.A , ,962 Indac - Ind. Adm. e Comércio S.A. (*)... (6,145) - (3,345) - Grupo Gerdau Empreend. Ltda. (**)... (600) - (600) - (*) Payments of guarantesees of loans. (**) Payment for use of the Gerdau brand name.

134 GERDAU S.A. GERDAU S.A. 175 c) Guarantees granted - The Companhy is the guarantor of the jointly-owned subsidiary Dona Francisca S.A. in the amount of R$ 90,489 at the balance sheet date, corresponding its participation of 51.82% solitaire guarantee and the guarantor of the Euro Commercial Paper program of the subsidiary GTL Trade Finance Inc., of US$ 200 million, equivalent to R$ 468,140 at the balance sheet date. The Companhy is also the guarantor securitization operations of the subsidiary Gerdau Açominas Overseas Ltda., of US$ thousand, equivalent to R$ 535,107 on the balance sheet date. The subsidiaries Gerdau Açominas S.A. and Gerdau Comercial de Aços S.A. are the guarantor of the vendor financing loan agreement of the associated company Banco Gerdau S.A., in the amount of R$ 17,097 and R$ 15,440, respectively. The sponsors contributions to these pension plans were R$ 50 in 2005 (R$ 40 in 2004) for the Company and R$ 67,133 in and R$ 67,133 (R$ 68,288 in 2004). The current expense of the defined benefit pension plans is as follows: Company Cost of current service ,346 49,798 Interest cost , , POST-EMPLOYMENT BENEFITS Considering all the benefits granted to employees by the Company and its subsidiaries, the assets and liabilities on December 31 are as follows: Company Actuarial liabilities with pension plan-defined benefit , ,199 Actuarial liabilities with post-employment health benefits , ,283 Liabilities with retirement and severance benefits ,396 9,996 Total liabilities , ,478 Unrecorded actuarial assets , ,928 a) Pension plan - defined benefit The Company and other Group subsidiaries in Brazil are the co-sponsors of defined benefit pension plans that cover substantially all employees in Brazil ( Açominas Plan and Gerdau Plan ). The Açominas Plan is managed by Fundação Açominas de Seguridade Social - Aços, a closed supplementary pension entity to complement the social security benefits of employees and retired employees of the Ouro Branco unit of Gerdau Açominas S.A. The assets of the Açominas Plan mainly comprise investments in bank deposit certificates, federal public securities, marketable securities and properties. The Gerdau Plan is managed by Gerdau - Sociedade de Previdência Privada, a closed supplementary pension entity to complement the social security benefits of employees and retired employees of the Company of the other units of Gerdau Açominas S.A. and other subsidiaries in Brazil. The assets of the Gerdau Plan comprise investments in bank deposit certificates, federal public securities and marketable securities. Also, the Canadian and American subsidiaries sponsor defined benefit plans (Canadian Plan and American Plan) that cover substantially all of their employees. The Canadian and American plans are managed by CIBC Mellon and Wells Fargo, respectively, to complement the social security benefits of employees of Gerdau Ameristeel Corporation and its subsidiaries, The assets of the Plans mainly comprise marketable securities. Expected return on plan assets... (789) (569) (223,284) (161,554) Amortization of unrecognized liability Amortization of past service costs , Amortization (gain) loss... (103) (49) 12,553 2,589 Contribution expected from employees (5,997) (4,383) Pension plan net costs (benefits), net... (269) (162) (13,841) 12,472 The reconciliation of the assets and liabilities of the plans is as follows: Company Total liabilities... (50,979) (50,196) (1,944,197) (1,779,443) Fair value of plan assets , ,988 2,021,909 1,844,817 Net assets... 61,533 58,792 77,712 65,374 Unrecorded gain (losses)... (63,570) (58,491) (31,920) (87,897) Past service costs... 2, ,789 26,323 Others ,033 4,929 Total net assets ,614 8,729 Actuarial assets , ,928 Pension plan liability recorded in the books of accounts (135,695) (154,199) Net assets ,614 8,729

135 GERDAU S.A. GERDAU S.A. 177 The changes in plan assets and actuarial liabilities were as follows: Changes in benefit liabilities Company Benefit liabilities at the beginning of the year... 50,196 44,164 1,779,443 1,613,516 Cost of service ,346 49,798 Interest cost , ,782 Actuarial loss... 4,021 8, ,711 86,910 Payment of benefits... (3,165) (2,960) (61,992) (69,419) Past service cost due to change in the plans ,497 Foreign exchange effect on foreign subsidiaries (110,173) (45,000) Transfer of participants... (682) - 1,392 - Initial liability recognition adjustment ,050 8,359 Benefit liabilities at the end of the year... 50,979 50,196 1,944,197 1,779,443 Change in plan assets Fair value of the plan assets at the beginning of the year ,988 64,759 1,844,817 1,645,528 Return on plan assets... 7,688 47, , ,308 Contributions from sponsors ,133 68,258 Contributions from participants ,045 5,202 Payment of benefits... (3,165) (2,960) (61,992) (69,419) Transfer of participants... (1,057) - 3,136 - Foreign exchange effect on foreign subsidiaries (85,648) (32,060) Fair value of the plan assets at the beginning of the year , ,988 2,021,909 1,844,817 The amount of the actuarial gains and losses to be recognized as income or expense is the unrecognized amount that exceeds, in each period, the higher of the following limits: (i) 10% of the present value of the total actuarial liability of the defined benefit plan and (ii) 10% of the fair value of the plan assets. The resulting amount will be amortized annually based on the average remaining years of service estimated for the employees that participate in the plan. The table below shows a summary of the assumptions made to calculate and record the defined benefit plan for both the Company and : Gerdau Plan Açominas Plan North American Plan Average discount rate % 11.30% 5.00% % Increase in composition % 8.68% 2.50% % Expected rate of return on assets % 12.35% 7.50% % Mortality chart... GAM 83 (-1 year) at-2000 GAM 83 Disabled mortality chart... rrb 1944 at-2000 rrb 1977 Turnover rate... Based on service null Based on age and service and salary level (plan experience) b) Pension plan - defined contribution The Company and its subsidiaries in Brazil are also the co-sponsors of a defined contribution pension plan administered by Gerdau - Sociedade de Previdência Privada. Contributions are based on a percentage of the compensation of the employees. The foreign subsidiary Gerdau AmeriSteel US Inc. has a defined contribution plan, the contributions to which are equivalent to 50% of the amount paid by the participants, limited to 4% of salary. The other companies do not have this type of pension plan. The total cost of this plan was R$ 198 in 2005 (R$ 149 in 2004) for the Company and R$ 16,627 (R$ 11,892 in 2004). c) Other post-employment benefits The Company estimates that the amount payable to executives on their retirement or discharge totals R$ 8,396 () on December 31, 2005 (R$ 9,996 in ). The American Plan includes, in addition to pension benefits, specific health benefits for employees who retire after a certain age and with a certain number of years of service. The American subsidiary has the right to change or eliminate these benefits, and the contributions are based on amounts actuarially calculated. The composition of the net periodic cost for the post-employment health benefits is as follows: Cost of service... 3,394 3,007 Interest cost... 6,404 5,715 Amortization of past service costs... (770) (563) Amortization of loss Net expense for post-employment health benefits... 9,257 8,239 The status of the fund for post-employment health benefits is as follows: Plan assets at market value Projected benefit liabilities... (139,400) (130,559) Fund status... (139,400) (130,559) Unrecorded gains and losses, net... 30,960 8,101 Past service costs... (11,247) (7,825) Liabilities for post-employment health benefits recorded in the financial statements... (119,687) (130,283)

136 GERDAU S.A. GERDAU S.A. 179 The changes in plan assets and actuarial liabilities were as follows: Change in projected benefit liabilities Projected benefit liabilities at the beginning of the year , ,390 Purchase of North Star ,136 Cost of service... 3,394 3,007 Interest cost... 6,404 5,715 Contributions of participants... 2,160 1,946 Actuarial loss... 19,671 4,759 Benefits and administrative expenses paid... (5,215) (6,639) Foreign exchange effect... (12,642) (4,364) Initial liability recognition adjustment... (4,931) (8,391) Projected benefit liabilities at the beginning of the year , , Changes in plan assets Plan assets at the beginning of the year Contributions from sponsors... 3,055 4,693 Contributions from participants... 2,160 1,946 Benefits and administrative expenses paid... (5,215) (6,639) Plan assets at the end of the year The assumptions adopted in the accounting for post-employment health benefits were as follows: North American Plan Average discount rate % % Health treatment - rate for next year % % Health treatment - rate for reductions to be obtained from 2010 to % 23 - SHAREHOLDERS EQUITY a) Capital Stock - The Board of Directors may, regardless of changes to the by-laws, issue new shares (authorized capital), including the capitalization of profits and reserves up to the authorized limit of 400,000,000 common shares (240,000,000 at December 31, 2004) and 800,000,000 preferred shares (480,000,000 at December 31, 2004), all of them with no par value, in accordance with the amendment approved by the Extraordinary General Meeting of shareholders held on December 30, The right of preference shall be exercised before the deadline for prescription of 30 days, except in the case of a public offer, when the deadline for prescription shall not be less than 10 days. On April 11, 2005, as approved in a meeting of the Board of Directors held on March 31, 2005, Gerdau S.A. increased capital by R$ 1,735,657 through the capitalization of the reserve for investments and working capital, with a bonus of 50% on the share position on April 11, 2005, date of capitalization of the reserve, representing 148,354,011 new shares (51,468,224 common shares and 96,885,787 preferred shares). At December 31, 2005, 154,404,672 common shares (102,936,448 at December 31, 2004) and 290,657,361 preferred shares (193,771,574 at December 31, 2004) are subscribed and paid up, totaling a paid up capital of R$ 5,206,969 (R$ 3,471,312 at December 31, 2004). Preferred shares do not have voting rights and cannot be redeemed, but have the same rights as common shares in terms of profit sharing. b) Legal reserve - Under Brazilian legislation, Gerdau is required to transfer 5% of the annual net income determined in accordance with corporate legislation to legal reserve until this reserve is equivalent to 20% of the paid up capital. The legal reserve can be used to increase capital or to absorb losses, but cannot be used for payment of dividends. c) Statutory reserve - The Board of Directors may propose to the shareholders the transfer of at least 5% of the net income of each year to a statutory reserve (Reserve for Investments and Working Capital). The reserve is created only if it does not affect the minimum dividend requirement and its balance cannot exceed the total paid up capital. The reserve can be used to absorb losses, if necessary, and for capitalization, payment of dividends or repurchase of shares. d) Treasury stock - at December 31, 2005 the Company had 3,045,695 preferred shares (1,573,200 preferred shares at December 31, 2004) held in treasury, totaling R$ 60,254 (R$ 44,139 at December 31, 2004), of which 2,305,495 shares related to the share repurchase program announced on November 17, 2003, and 740,200 shares to the share repurchase program announced on May 30, The average cost of these shares is R$ 19.78, the lowest purchase price being R$ and the highest R$ These shares will be held in treasury for subsequent cancellation or to meet the Company s Long-term Incentive Program. During 2005, 740,200 shares were purchased at an average cost of R$ and 54,305 shares were sold with gains and losses recorded as capital reserve and reserve for investments and working capital, respectively. e) Dividends and interest on own capital - the shareholders have the right to receive, each year, a minimum mandatory dividend of 30% of the adjusted net income. In 2004, the company calculated interest on own capital in accordance with the terms established by Law 9249/95. The corresponding amount was recorded as financial expenses for tax purposes. For presentation purposes, this amount was recorded as dividends, not affecting net income. The related tax benefit through the reduction of the income tax and social contribution on net income charge for 2004 was R$ 114,395. The dividends credited in 2005 amounted to R$ 796,403, shown as follows: Net income for the year... 2,781,340 2,831,339 Gerdau Ameristeel Corporation and subsidiaries (*)... (139,067) (141,567) Adjusted net income... 2,642,273 2,689,772

137 GERDAU S.A. GERDAU S.A. 181 Revenue for the year Period Natures R$/share Credit Payment st quarter... Interest ,443 Dividends /13/ /24/ ,217-2 nd quarter... Interest ,249 Dividends /15/ /24/ ,142 85,589 3 rd quarter... Interest ,762 Dividends /18/ /30/ , ,422 4 th quarter... Dividends /17/ /02/ , ,378 Interest on own capital and Dividends , ,843 % Interest/Dividends paid or credited... 30% 32% Credit per share (R$) Shares in circulation , ,135 The remaining income for the year was transferred to the statutory reserve for investments and working capital in accordance with the by-laws PROFIT SHARING a) The management profit sharing is limited to 10% of net income for the year, after income tax and management fees, as stated in the Company s by-laws; b) The employees profit sharing is linked to the attainment of operating goals and was charged to cost of production and general and administrative expenses, as applicable LONG-TERM INCENTIVE PLANS I) Gerdau S.A. The Extraordinary General Meeting of shareholders held on April 30, 2003 decided, based on a previously agreed plan and within the limit of the authorized capital, to grant options for the purchase of preferred shares to management, employees or persons who render services to the Company or its subsidiaries, and approved the formation of the Long- Term Incentive Program that represents a new form of compensation of the strategic executives of the Company. The options should be exercised in a maximum of five years after the grace period. a) Summary of changes in the plan: Grant (Number of shares) Total Opening balance at December 31, , ,680 4, , ,715,246 Grants , , ,464 Share bonus on April 11, , ,086 2, , , ,668 1,096,714 Cancelled... (8,259) (5,513) - (21,504) (5,806) (3,600) (44,682) Exercised... (28,171) (18,781) - (7,353) - - (54,305) Closing balance at December 31, ,169, ,472 7, , , ,404 3,209,437 Exercise price in R$ Grace period... 3 years 5 years 3 years 5 years 3 years 5 years As mentioned in Note 23b, at December 31, 2005 the Company has a total of 3,045,695 preferred shares in treasury. These shares may be used for this plan. b) Plan status at December 31, 2005: Grant Average Total share options granted... 1,984, , ,289 Exercise price - R$ (adjusted by bonus) Fair value of options on the date of the grant - R$ per option (*) Average term of option to be exercised on the date of grant (years) (*) Calculated using the Black-Scholes model. The percentage of dilution of interest that the current shareholders may experience if all options are exercised is approximately 0.7%. II) Gerdau Ameristeel Corporation - ( Gerdau Ameristeel ) Gerdau Ameristeel Corporation and its subsidiaries have stock compensation plans for their employees, as follows: a) Former Co-Steel Plan According to the terms of the Co-Steel Plan, the Stock-Based Option Plan, the company was authorized to grant purchase options to employees and directors up to the limit of 3,041,335 common shares. The exercise price was based on the closing price of the common shares in the market on the day prior to the issue of the option. The options have a maximum term of ten years and are granted during various periods, as determined by the administrator of the plan at the date of the grant, up to April 13, b) Gerdau AmeriSteel US Inc. ( AmeriSteel ) Plans According to the terms of the Transaction Agreement relating to the acquisition of Co-Steel, the minority shareholders of AmeriSteel exchanged their shares and stock options for shares and stock options of Ameristeel at the ratio of shares and stock options for each share or stock option of AmeriSteel. This exchange occurred on March 31, b.1) AmeriSteel Plan AmeriSteel has a long-term incentive plan for the executive officers (the AmeriSteel Plan) to ensure that the interests of the AmeriSteel senior management are in line with those of the AmeriSteel shareholders. The awards are determined by a formula based on the return on employed capital of AmeriSteel in a given year of the plan. The awards are granted and paid over a period of four years. The participants may choose payment in cash or in shares of AmeriSteel and Gerdau, for which a premium of 25% is given, if chosen. Expenses related to the benefits for the years ended December 31, 2005 and 2004 totaled US$ 6,000 thousand (R$ 14,044) and US$ 1,300 thousand (R$ 3,450), respectively. b.2) 2004 Stakeholder Plan For the year ending December 31, 2004, the Gerdau Ameristeel Human Resources Committee established the longterm incentive plan of 2004 (the 2004 Stakeholder Plan ) based on the AmeriSteel Plan. The 2004 Stakeholder Plan was designed to award the executive officers with a share in the profits of Gerdau AmeriSteel. The awards earned are granted and paid over a period of four years, based on the closing price of the Gerdau Ameristeel Shares in the New

138 GERDAU S.A. GERDAU S.A. 183 York Stock Exchange. A total award of approximately US$ 14,000 thousand (equivalent to R$ 37,161) was calculated at December 31, 2004 and was granted on March 1, This award is being provided for in accordance with the payment term established in the plan. b.3) 2005 Stakeholder plan For the year beginning January 1, 2005, the Human Resources Committee established the 2005 long-term incentive plan (the 2005 Stockholder plan). The 2005 Stockholder plan was established to award employees with bonuses based on attaining goals related to the return of capital invested. The bonuses will be granted at the end of the year in cash and/or options. The payment of the cash portion option will be made in the form of shares (phantom stock). The number of shares will be determined by the market price of the common share on the date of grant, based on the average negotiation price on the New York Stock Exchange. The shares will be paid in April each year at the ratio of 25% in a period of 4 years. The number of options granted to the participants is determined by dividing the portion of the bonus not paid in cash by the market value of the common share on the date of grant and indexed by a factor determined by the option value on the same date (the option value is determined by the Committee based on the Black Scholes model or other method). The options may be exercised at the rate of 25% p.a. during four years from the date of grant and prescribe after 10 years. The maximum number of options that will be granted based on this plan is 6,000,000. b.4) SAR Plan In July 1999, the Board of Directors of AmeriSteel approved the SAR/Shares Purchase Plan (SAR Plan) available to basically all employees. The SAR Plan authorizes the sale of 946,170 common shares to the employees during three offer periods, from July to September in 1999, 2002 and The employees who purchase the shares are rewarded with stock appreciation rights (SARs) equal to four times the number of shares purchased. SARs at market value were granted at the date of grant, determined on the basis of an independent appraisal at the end of the prior year. SARs can be exercised at 25% annually as from the date of grant, and may be exercised in up to ten years from the date of grant. The SARs are recorded as liabilities and the benefits recorded as costs based on this plan for the years ended December 31, 2005 and 2004 amounted to US$ 1,500 thousand (R$ 3,511) and US$ 6.4 million (R$ 16,985), respectively. In July 2002, the Board of Directors of AmeriSteel approved the issue of new purchase options under the SAR Plan, which were granted to the executive directors, with the exercise price determined by the fair value at the date of grant. A total of 6,244,722 SARs were authorized and issued. One-third of all awarded options and common shares are vested two years as from the date of grant, and one-third after each subsequent two-year period. The options may be exercised in up to ten years after the date of grant. At December 31, 2005, the expense related to this plan, recorded in the financial statements, was US$ 1,500 thousand, equivalent to R$ 3,511 (US$ 14,300 thousand, equivalent to R$ 37,952 in 2004). b.5) Equity ownership In September 1996, the Board of Directors of AmeriSteel approved the Equity Ownership Plan of AmeriSteel Corporation (the Equity Ownership Plan), which grants common shares, purchase options for common shares and SARs. The maximum number of shares that may be issued under this plan is 4,152,286. AmeriSteel granted 4,667,930 incentive stock options and 492,955 common shares under the Equity Ownership Plan up to December 31, Onethird of all options and common shares issued become vested two years from the date of the grant, and one-third after each subsequent two-year period. All grants were carried out at the market value of the common shares at the date of grant, determined on the basis of an independent appraisal at the end of the prior year. The options may be exercised for ten years as from the date of the grant. b.6) Purchase plan In May 1995, the Board of Directors of AmeriSteel approved an option/purchase plan (the Purchase Plan ), available to essentially all employees. The employees who purchased shares were rewarded with options for six times the number of shares purchased. A total of 356,602 shares were sold under the Purchase Plan at a purchase price of US$ 1.12 per share. The options were granted at market value at the date of the grant, determined on the basis of an independent appraisal at the end of the prior year. A total of 2,139,612 options were granted under the Purchase Plan. No options are available for future grant. All options granted can already be exercised, which may occur for ten years as from the date of the grant. A summary of the Gerdau Ameristeel plans is as follows: Average Average Number exercise price Number exercise price of shares US$ R$ of shares US$ R$ Available at the beginning of the year 2,833, ,606, Options exercised... (443,371) (375,261) Opitions cancelled... (26,341) (76,321) Options expired... (99,000) (321,700) Available at the beginning of the year 2,264, ,833, Exercisable shares... 2,128,241 2,350,378 The table below summarizes the information on the purchase options of Gerdau Ameristeel shares available on December 31, 2005: Average exercise Number Average grace at December Number exercisable Exercise price availble period 31, 2005 at December 31, 2005 US$ R$ US$ 1.32 to US$ 1.43 (R$ 3.09 to R$ 3.35) , ,482 US$ 1.80 to US$ 1.90 (R$ 4.21 to R$ 4.45) , ,034 US$ 2.11 to US$ 2.96 (R$ 4.94 to R$ 6.93) , ,725 US$ to US$ (R$ to R$ 43.75) , ,500 US$ to US$ (R$ to R$ 47.65).. 295, ,500 2,264,576 2,128,241

139 GERDAU S.A. GERDAU S.A. 185 The effect on net income for the year and shareholders equity would have been as follows had the expenses for the option plans of Gerdau S.A. and Gerdau Ameristeel Corporation been recorded: Company Net Shareholder s Net Shareholder s Income equity Income (**) equity Balances according to financial statements... 2,781,340 8,042,186 3,245,240 8,042,186 Expense (*)... (2,874) (5,779) (3,125) (11,040) Pro forma balances... 2,778,466 8,036,407 3,242,115 8,031,146 (*) Applying the fair value method (Black Scholes model). (**) Net income includes minority interest OTHER OPERATING INCOME Other operating income refers mainly to the amount of R$ 70,332 (Company and ) recorded following the favorable outcome of the litigation for incorrect payment of PIS (Social Integration Program), according to Note 20.III item a.2, and reversals and new provisions for contingencies commented in Note NON-OPERATING INCOME Non-operating income refers mainly to the gain on change in percentage ownership of R$ 305,839 (), resulting from the merger of Gerdau Participações S.A. by Gerdau Açominas S.A CALCULATION OF EBITDA Gross profit... 5,725,887 6,245,024 Salling expenses... (514,443) (455,175) General and administrative expenses... (1,140,264) (1,003,826) Depreciation and amortization , ,665 EBITDA... 4,909,786 5,552, INFORMATION BY GEOGRAPHICAL AREA AND BUSINESS SEGMENT Geographical area Brazil South America (*) North America Net sales revenues... 9,997,575 9,975,760 1,194, ,865 10,054,084 8,857,637 21,245,748 19,597,262 Cost of sales... (6,211,632) (5,668,217) (831,440) (488,120) (8,476,789) (7,195,901) (15,519,861) (13,352,238) Group profit... 3,785,943 4,307, , ,745 1,577,295 1,661,736 5,725,887 6,245,024 Selling expenses... (447,342) (400,317) (33,395) (7,079) (33,706) (47,779) (514,443) (455,175) General and administrative expenses... (749,789) (704,073) (79,902) (45,934) (310,573) (253,819) (1,140,264) (1,003,826) Financial income (expenses), net ,802 5,948 (22,836) (4,491) (124,881) (177,563) (29,915) (176,106) Operating profit... 2,763,131 3,040, , ,272 1,056,166 1,194,708 4,041,495 4,454,667 Net income (**)... 2,393,785 2,164, , , , ,309 3,245,240 3,234,887 EBITDA (***)... 3,136,949 3,704, , ,983 1,480,407 1,597,232 4,909,786 5,552,688 ( * ) Does not include Brazilian operations. ( ** ) Net income for the year before minority interest. (***) Profit before financial expenses, income tax and social contribution on net income, and depreciation and amortization as shown in Note 28. The segments shown below correspond to the business units through which the Gerdau Executive Commitee manages its operations: Aços Longos Brasil, Açominas (corresponding to the operations of the plants located in Ouro Branco, Minas Gerais), Aços Especiais, South America (excluding Brazilian operations) and North America (Gerdau Ameristeel): Business Segment Longos Açominas South North Brazil Ouro Branco Aços Especiais America (*) America Net sales revenues... 6,246,464 6,456,351 2,681,077 2,646,752 1,070, ,657 1,194, ,865 10,054,084 8,857,637 21,245,748 19,597,262 Identifiable assets (**)... 3,956,716 3,916,049 3,735,219 3,482, , ,370 1,349, ,351 5,192,457 6,131,526 14,771,936 14,660,813 Capital expenditures , , , ,851 78,427 36, ,068 27, ,017 1,156,660 1,937,139 2,097,948 Depreciation/amortization , , , ,707 29,155 26,899 43,078 28, , , , ,665 ( * ) Does not include Brazilian operations. (**) Identifiable assets: Accounts receivable, inventories and fixed assets.

140 GERDAU S.A. GERDAU S.A. 187 Conselho de Administração Diretoria Presidente JORGE GERDAU JOHANNPETER Vice-Presidentes GERMANO H. GERDAU JOHANNPETER KLAUS GERDAU JOHANNPETER FREDERICO C. GERDAU JOHANNPETER Conselheiros AFFONSO CELSO PASTORE ANDRÉ PINHEIRO DE LARA RESENDE OSCAR DE PAULA BERNARDES NETO Secretário-Geral EXPEDITO LUZ Comitê Executivo Diretor Presidente JORGE GERDAU JOHANNPETER Diretores Vice-Presidentes FREDERICO C. GERDAU JOHANNPETER, Vice-Presidente Sênior CARLOS JOÃO PETRY, Vice-Presidente Sênior ANDRÉ BIER JOHANNPETER CLAUDIO JOHANNPETER FILIPE AFFONSO FERREIRA MÁRIO LONGHI FILHO OSVALDO BURGOS SCHIRMER RICARDO GEHRKE Secretário-Geral EXPEDITO LUZ Diretores DIRCEU TARCÍSIO TOGNI EXPEDITO LUZ FRANCESCO SAVERIO MERLINI MÁRCIO PINTO RAMOS PAULO FERNANDO BINS DE VASCONCELLOS SIRLEU JOSÉ PROTTI JOSÉ FERNANDO VEDANA Contador CRC RS nº S - 7 CPF nº

141 GERDAU S.A. GERDAU S.A. 189 Report of Independent Auditors Opinion of the Statutory Audit Board To the Board of Directors and Stockholders Gerdau S.A. 1. We have audited the accompanying balance sheets of Gerdau S.A. and the consolidated balance sheets of Gerdau S.A. and its subsidiaries as of December 31, 2005 and 2004, and the related statements of income, of changes in stockholders equity and of changes in financial position of Gerdau S.A., as well as the related consolidated statements of income and of changes in financial position for the years then ended. These financial statements are the responsibility of the Company s management. Our responsibility is to express an opinion on these financial statements. The audits of the financial statements of the jointly-owned indirect subsidiary Gallatin Steel Company and of the indirect subsidiaries Diaco S.A. and its subsidiaries and of Siderúrgica del Pacífico S.A. were conducted by other independent auditors and our report, insofar as it relates to the income derived from these companies, equivalent to 4.48% of the profit before taxes of Gerdau S.A. and 5.55% of the profit before taxes and minority interest of Gerdau S.A. and its subsidiaries for the year ended December 31, 2005, and to the consolidated assets as of that date equivalent to 4.99% of the total consolidated assets, is based solely on the reports of these other auditors. 2. We conducted our audits in accordance with approved Brazilian auditing standards, which require that we perform the audit to obtain reasonable assurance about whether the financial statements are fairly presented in all material respects. Accordingly, our work included, among other procedures: (a) planning our audit taking into consideration the significance of balances, the volume of transactions and the accounting and internal control systems of the companies, (b) examining, on a test basis, evidence and records supporting the amounts and disclosures in the financial statements, and (c) assessing the accounting practices used and significant estimates made by management, as well as evaluating the overall financial statement presentation. 3. In our opinion, based on our audits and on the reports of the other auditors, the financial statements audited by us present fairly, in all material respects, the financial position of Gerdau S.A. and of Gerdau S.A. and its subsidiaries at December 31, 2005 and 2004, and the results of operations, the changes in stockholders equity and the changes in financial position of Gerdau S.A., as well as the consolidated results of operations and of changes in financial position, for the years then ended, in accordance with accounting practices adopted in Brazil. 4. Our audits were conducted for the purpose of forming an opinion on the basic financial statements, taken as a whole. The statement of cash flows is presented for purposes of additional analysis and is not a required part of the basic financial statements. This information has been subjected to the auditing procedures applied in the audit of the basic financial statements and, in our opinion, is fairly presented in all material respects in relation to the financial statements taken as a whole. The Statutory Audit Board of Gerdau S.A., in compliance with legal and statutory provisions, has examined the Management Report and the Financial Statements for the year ended December 31, Based on the examinations made and also considering the opinion of the independent auditors - PricewaterhouseCoopers Auditores Independentes, dated February 21, 2006, as well as the information and explanations received during the year, the Statutory Audit Board is of the opinion that the these documents are suitable for presentation to the Annual General Meeting of shareholders. Rio de Janeiro, February 21, 2006 Carlos Roberto Schröder Egon Handel Pedro Carlos de Mello Porto Alegre, February 21, 2006 Auditores Independentes CRC 2SP000160/O-5 F RJ Carlos Alberto de Sousa Contador CRC 1RJ056561/O-0

142 Services to Analysts and investors Investment analysts and capital market institutions may obtain additional information and copies of this report by contacting the Office of Investor Relations at: Av. Farrapos, 1811 CEP Porto Alegre, RS Brazil Phone: +55 (51) Fax:+55 (51) Website: Analysts and investors at Gerdau Ameristeel Corp. must contact the Office of Investor Relations at the following address: 4221 W. Boy Scout Blvd. - Suite 600 Tampa, FL USA Phone: +1 (813) Website: ir@gerdauameristeel.com

143 contacts 191 Shareholder services Book-entry shares issued by the listed companies are held at Banco Itaú S.A. at the following address: Superintendência de Serviços para Empresas Av. Engenheiro Armando de Arruda Pereira, 707 9º Andar Torre Eudoro Villela Jabaquara CEP São Paulo, SP Brazil Phone: +55 (11) Fax: +55 (11) For the purposes of exercising rights or obtaining information concerning the status of shares, please refer to any branch of the Depositary Institution (Banco Itaú) or contact Shareholder Relations at Gerdau: Av. Farrapos, 1811 CEP Porto Alegre, RS Brazil Phone: +55 (51) Fax: +55 (51) Toll free:

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