20-F 1 u49956e20vf.htm FORM 20-F e20vf
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As filed with the Securities and Exchange Commission on March 15, 2006.
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 20-F
o    REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE
SECURITIES EXCHANGE ACT OF 1934
OR
þ    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the year ended December 31, 2005
OR
o    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
OR
o    SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission file number 1-14400
METSO CORPORATION
(Exact name of Registrant as specified in its charter)
The Republic of Finland
(Jurisdiction of incorporation or organization)
P.O. Box 1220
FI-00101 Helsinki
Finland

(Address of principal executive offices)
Securities registered or to be registered pursuant to Section 12(b) of the Act:
     
Title of each class:   Name of each exchange on which registered:
Shares, nominal value 1.70 each,
represented by American Depositary Shares
  New York Stock Exchange, Inc.
Securities registered or to be registered pursuant to Section 12(g) of the Act: None
Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act: None
Number of shares, nominal value 1.70 each, outstanding on December 31, 2005: 141,654,614
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes þ  No o
If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.
Yes o  No þ
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorted period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes þ  No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer.
         
Large accelerated filer þ   Accelerated filer o   Non-accelerated filer o
Indicate by check mark which financial statement item the registrant has elected to follow.
Item 17 o  Item 18 þ
If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes o  No þ
 
 

 


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 EXHIBIT 1.1
 EXHIBIT 8.1
 EXHIBIT 12.1
 EXHIBIT 12.2
 EXHIBIT 13.1
 EXHIBIT 13.2

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INTRODUCTION
     In this annual report, the “Company,” “Metso Corporation,” “Metso,” “Group,” “we,” “us” and “our” refer to Metso Corporation or Metso Corporation and its consolidated subsidiaries, as the context may require. As used herein, the term “Finnish State” refers to the Republic of Finland.
CURRENCY PRESENTATION
     We have published our consolidated financial statements in euro for periods beginning on or after January 1, 1999. As used in this annual report:
    “euro,” “ ” or “EUR” means the lawful currency of the member states of the European Union (the “EU”) participating in the EU’s Economic and Monetary Union;
 
    “U.S. dollar,” “U.S.$” or “USD” means the lawful currency of the United States of America;
 
    “pound sterling” or “GBP” means the lawful currency of the United Kingdom of Great Britain and Northern Ireland;
 
    “Canadian dollar” or “CAD” means the lawful currency of Canada;
 
    “South African rand” or “ZAR” means the lawful currency of the Republic of South Africa; and
 
    “Swedish krona” or “SEK” means the lawful currency of the Kingdom of Sweden.
     Unless otherwise stated, euro amounts have been translated into U.S. dollars at the noon buying rate in New York City for cable transfer in foreign currencies as certified for customs purposes by the Federal Reserve Bank of New York (the “noon buying rate”) on December 30, 2005, which was 1.00 = U.S.$1.1842 (U.S.$1.00 = 0.8445). On March 14, 2006, the noon buying rate for the euro was 1.00 = U.S.$0.8316 (U.S.$1.00 = 1.2025).
FINANCIAL AND OTHER INFORMATION
     Our consolidated financial statements are prepared in accordance with International Financial Reporting Standards as adopted by the EU (herein referred to as “IFRS”), which differ in certain significant respects from generally accepted accounting principles in the United States (“U.S. GAAP”). For a discussion of the principal differences between IFRS and U.S. GAAP, see Note 40 to our audited consolidated financial statements as of and for the years ended December 31, 2004 and 2005, included elsewhere in this annual report. See also “Item 3. Key Information — Selected Financial Data” and “Item 5. Operating and Financial Review and Prospects — Principal Differences between IFRS and U.S. GAAP.”
     The financial information set forth in a number of tables herein has been rounded to the nearest whole number. Accordingly, in certain instances, the sum of the numbers in a column may not conform exactly to the total figure given for that column.
     As used herein, “Nordic countries” refers to Denmark, Finland, Iceland, Norway and Sweden. As used herein, “North America” refers to the United States and Canada. As used herein, “South America” refers to all countries in the American continents excluding the United States and Canada.
     We own or otherwise have rights to a substantial number of trademarks that we use in conjunction with our business. Some of these trademarks are referred to in this annual report.

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FORWARD-LOOKING STATEMENTS
     Certain statements in this annual report, including but not limited to certain statements set forth under the captions “Item 3. Key Information,” “Item 4. Information on the Company,” “Item 5. Operating and Financial Review and Prospects,” “Item 8. Financial Information” and “Item 11. Quantitative and Qualitative Disclosures about Market Risk” and elsewhere are based upon the beliefs of our management as well as assumptions made by and information currently available to our management, and such statements may constitute “forward-looking statements” within the meaning of the Section 27A of the U.S. Securities Act of 1933, as amended, and Section 21E of the U.S. Securities Exchange Act of 1934, as amended (the “Exchange Act”). Potential investors should note that many factors, some of which are discussed elsewhere in this annual report, could affect our future operations and future financial results and could cause future operations and future financial results to differ materially from those expressed in such forward-looking statements. Some of these factors are:
    operating factors, such as the continued success of our manufacturing activities and the achievement of efficiencies therein, continued success of product development, acceptance of new products or services by our targeted customers, success of the existing and future collaboration arrangements, changes in business strategy or development plans or targets, changes in the degree of protection created by our patents and other intellectual property rights, the availability of capital on acceptable terms,
 
    success of future acquisitions and restructuring and changes in our business strategy,
 
    industry conditions, such as strength of product demand, intensity of competition, prevailing and future global market prices for our products and the pricing pressures thereto, financial condition of the customers and competitors, the potential introduction of competing products and technologies by our competitors, and
 
    general economic conditions, such as rates of economic growth in our principal geographic markets or fluctuations in exchange and interest rates, and various other factors both referenced and not referenced in this annual report.
     Should one or more of these factors materialize, or should any assumptions of the management underlying such forward-looking statements prove to be incorrect, our actual operating results or financial condition and prospects could differ materially from those described herein as anticipated, believed, estimated or expected.

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PART I
Item 1. Identity of Directors, Senior Management and Advisers.
     Not applicable.
Item 2. Offer Statistics and Expected Timetable.
     Not applicable.
Item 3. Key Information.
Selected Financial Data
     Our consolidated financial statements are prepared in accordance with IFRS, as adopted by the EU, which differs in certain significant respects from U.S. GAAP. There are no differences between IFRS applied by Metso, and IFRS as adopted by the International Accounting Standards Board (“IASB”). Until December 31, 2004, our consolidated financial statements were prepared in accordance with the Finnish Generally Accepted Accounting Principles (“FAS” or “Finnish GAAP”). When preparing our first financial statements under IFRS for the year ended December 31, 2005, we adjusted certain accounting and valuation methods applicable under Finnish GAAP in order to comply with IFRS. The comparative figures for the year ended December 31, 2004 reconciled to reflect these adjustments, except for certain exemptions as permitted by IFRS 1 “First time adoption of IFRS.” A reconciliation of IFRS to U.S. GAAP is set forth in Note 40 to our consolidated financial statements included elsewhere in this document. For a discussion of the principal differences between IFRS and U.S. GAAP, see also “Item 5. Operating and Financial Review and Prospects—Principal Differences between IFRS and U.S. GAAP.” Our shares are traded on the New York Stock Exchange in the form of American Depository Shares (“ADSs”). Each ADS represents one of our shares. Per share data has been translated into U.S. dollars per ADS where appropriate.
     The selected financial data set forth below as of and for the years ended December 31, 2004 and 2005 is a summary derived from our consolidated financial statements and should be read together with our consolidated financial statements and the notes thereto.
                 
    For the year ended December 31,  
    2004     2005  
    EUR     EUR  
    (in millions, except per share data)  
INCOME STATEMENT DATA
               
Amounts in Accordance with IFRS
               
Net sales
    3,602       4,221  
Operating profit
    199       335  
Financial income and expenses, net
    (59 )     (43 )
 
           
Profit on continuing operations before tax
    140       292  
Income taxes on continuing operations
    18       (72 )
 
           
Profit on continuing operations
    158       220  
(Loss) Profit on Discontinued Operations, net of taxes
    (14 )     17  
 
           
Profit
    144       237  
 
               
Profit attributable to minority interests
    1       1  
 
           
Profit attributable to equity shareholders
    143       236  
 
           
Profit
    144       237  
 
           
 
               
Earnings per share from Continuing Operations (1)
               
Basic
    1.16       1.57  
Diluted
    1.16       1.57  
 
               
Earnings per share from Discontinued Operations(1)
               
Basic
    (0.11 )     0.12  
Diluted
    (0.11 )     0.12  

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    For the year ended December 31,  
    2004     2005  
    EUR     EUR  
Earnings per share from Continuing and Discontinued operations (1)    (in millions, except per share data)  
Basic
    1.05       1.69  
Diluted
    1.05       1.69  
 
               
BALANCE SHEET DATA
               
Amounts in Accordance with IFRS
               
Total assets
    3,570       3,904  
Cash and cash equivalents
    372       323  
Net interest bearing liabilities
    495       289  
Equity attributable to shareholders
    990       1,285  
 
               
OTHER DATA
               
Amounts in Accordance with IFRS
               
Net cash provided by (used in) operating activities
    261       164  
Net cash provided by (used in) investing activities
    312       (90 )
Net cash provided by (used in) financing activities
    (332 )     (136 )
Capital expenditures on fixed assets(2)
    89       104  
Cash dividends declared and paid per share (EUR )(3)
    0.35       1.40  
Cash dividends declared and paid per share (U.S.$)(3)(4)
    0.47       1.66  
                                         
    As of and for the year ended December 31,  
    2001     2002     2003     2004     2005  
    EUR     EUR     EUR     EUR     EUR  
            (in millions, except per share data)          
INCOME STATEMENT DATA
                                       
Amounts in Accordance with U.S. GAAP
                                       
Income (loss) from continuing operations
    127       3       (196 )     57       178  
Income (loss) from Discontinued Operations
    0       19       (39 )     17       1  
(Loss) Gain on disposal of Discontinued Operations
                      (72 )     18  
 
                             
Profit (loss)
    127       22       (235 )     2       197  
 
                             
Basic and diluted earnings (loss) per share from continuing operations (1)
    0.93       0.02       (1.44 )     0.42       1.27  
Basic and diluted earnings (loss) per share from Discontinued Operations (1)
    0.00       0.14       (0.29 )     (0.41 )     0.14  
 
                                       
BALANCE SHEET DATA
                                       
Amounts in Accordance with U.S. GAAP
                                       
Total assets
    5,275       4,520       3,996       3,697       4,055  
Long-term liabilities
    1,553       1,334       1,256       1,231       990  
Shareholders’ equity
    1,503       1,326       998       978       1,239  
 
(1)   The average numbers of shares used in calculating this amount were as follows:
                 
    Number of shares issued   Number of diluted shares
Year ended December 31,   and outstanding   issued and outstanding
 
2001
    136,135,223       136,135,223  
2002
    136,189,704       136,189,704  
2003
    136,189,704       136,189,704  
2004
    136,189,704       136,192,037  
2005
    139,639,425       139,665,197  
 
(2)   Excluding business acquisitions.
 
(3)   Dividends are generally paid after the decision by the annual general meeting held in the year following the year for which they are attributed to. The dividend for the year ended December 31, 2005 is the proposal of our Board of Directors to the annual general meeting to be held on April 4, 2006.
 
(4)   Amounts in euro have been converted into U.S. dollars at the noon buying rate on December 30 or 31, as the case may be, of the respective year solely for the reader’s convenience.
Exchange Rates
     We present our financial statements in euro. A portion of our revenues and expenses is denominated in euro and a portion is denominated in currencies other than the euro. The first table below sets forth, for the periods and dates indicated, the average, high, low and period-end noon buying rates for the euro expressed in euro per U.S. dollar. The second table below sets forth, for the periods and dates indicated, the average, high, low and period-end noon buying rates for the U.S. dollar expressed in U.S. dollars per euro.

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     The average noon buying rates have been calculated based on the noon buying rate for the last business day of each month or portion of a month during the relevant period. We are providing this information solely for the reader’s convenience. These are not necessarily the rates we used in the preparation of the financial statements, and we make no representation that euro could have been converted into U.S. dollars at the rates shown or at any other rate for such periods or at such dates.
     The following tables set forth the noon buying rate for the euro for each of the previous five years, the period from the beginning of the year 2006 until the latest practicable date and for each of the last six months (expressed in euro per one U.S. dollar):
Euro per U.S. Dollar
                                 
Year   Average   High   Low   Period End
2001
    1.1711       1.1947       1.0488       1.1235  
2002
    1.0531       1.1636       0.9537       0.9537  
2003
    0.8782       0.9652       0.7938       0.7938  
2004
    0.8014       0.8474       0.7339       0.7387  
2005
    0.8064       0.8571       0.7421       0.8445  
2006 (through March 14)
    0.8308       0.8432       0.8139       0.8316  
                 
Calendar Period   Low   High
2005
               
September
    0.7976       0.8326  
October
    0.8232       0.8393  
November
    0.8287       0.8571  
December
    0.8305       0.8548  
 
               
2006
               
January
    0.8139       0.8347  
February
    0.8264       0.8432  
March (through March 14)
    0.8314       0.8413  

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     The following tables set forth the noon buying rate for the U.S. dollar for each of the previous five years, and the period from the beginning of the year 2006 until the latest practicable date and for each of the last six months (expressed in U.S. dollars per one euro).
U.S. Dollars per Euro
                                 
Year   Average   High   Low   Period End
2001
    0.8952       0.9535       0.8370       0.8901  
2002
    0.9492       1.0485       0.8594       1.0485  
2003
    1.1411       1.2597       1.0361       1.2597  
2004
    1.2478       1.3625       1.1801       1.3538  
2005
    1.2400       1.3476       1.1667       1.1842  
2006 (through March 14)
    1.2036       1.2287       1.1860       1.2025  
                 
Calendar Period   High   Low
2005
               
September
    1.2538       1.2011  
October
    1.2148       1.1914  
November
    1.2067       1.1667  
December
    1.2041       1.1699  
 
               
2006
               
January
    1.2287       1.1980  
February
    1.2100       1.1860  
March (through March 14)
    1.2028       1.1886  
     Our shares are traded on the Helsinki Stock Exchange in euro. Fluctuations in the exchange rate between the euro and the U.S. dollar affect the U.S. dollar equivalent of the euro price of the shares on the Helsinki Stock Exchange and, as a result, are likely to affect the market price of our ADSs, which are traded on the New York Stock Exchange. We declare cash dividends in euro and then convert this amount to U.S. dollars for ADS holders. Therefore, exchange rate fluctuations will affect the U.S. dollar amounts that ADS holders receive.
     For a discussion of the effects of exchange rate movements on our operations, see “Item 5. Operating and Financial Review and Prospects—Foreign Currency Fluctuations.”
     Our foreign exchange risk management policy is focused on hedging foreign currency exposures related to firm sale and purchase commitments as well as net investments in foreign subsidiaries to the extent practicable. We have, to some extent, hedged our foreign currency denominated net assets of foreign subsidiaries through borrowings and currency derivatives. Apart from forward foreign exchange contracts, options and currency swaps, as of December 31, 2005, we were not party to any other derivative foreign currency instruments. For a discussion of our foreign exchange risk management policy, see “Item 11. Quantitative and Qualitative Disclosures about Market Risk—Exchange Rates and Foreign Currency Exposure.”
Risk Factors
     The following describes the business risks, financial risks, operational risks and hazard risks that we have identified as being the most significant for our operations. We monitor these risks actively and seek to improve our procedures to minimize or mitigate any negative impact that these or other risk factors may have on our business, financial condition or results of operations.
     Effective internal controls are necessary for us to provide reliable financial reports. We devote significant attention to maintaining and improving procedures and controls in adherence with laws and regulatory requirements of jurisdictions where we operate. Our financial reporting is affected by changes in these regulations and the interpretations thereof.

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     Despite our actions to manage and limit the effects of various risks, there can be no assurance that such risks, if materialized, will not have a material adverse effect on our business, financial condition or results of operations, or on the value of our shares and other securities.
Business Risks
Business Development Risks
     The long-term development of our business is affected by business development risks that are related to new markets and business potential and also involve risks related to the Metso brand and values. The planning and implementation of our business operations seeks to take into account development opportunities, new products and technological solutions, as well as different life cycle stages of our and our customers’ products and production plants.
     Business development risks also include risks related to mergers and acquisitions, which we seek to take into account by using “Metso Acquisition Process” (MAP), which was approved in the beginning of 2006 by our Executive Team, and through our due diligence process. The business to be acquired has to have the potential to fulfil both strategic and financial targets within a reasonable time after the acquisition. We also seek to take into account the risks related to the business to be acquired, including product liabilities, environmental responsibilities, and risks related to the reputation and personnel of the businesses to be acquired. Additionally, business development risks include the risks related to the supply and availability of natural resources, raw materials and power.
     The development of personnel competence and the utilization of personnel potential are critical for our business development. Therefore, we annually carry out an evaluation related to management resources, in which we assess Metso’s key executives, their possible deputies, successors and any necessary new management resources. We also monitor the age structure of our personnel to avoid risks related to people retiring. Our management is currently not aware of any risks related to the personnel’s age or scheduled retirement that would be material for Metso’s business development.
     While our management believes that our procedures relating to business development, mergers and acquisitions, and management resource evaluations are effective, there can be no assurance that such procedures are successful. The success of any merger or acquisition is also dependent on our management’s ability to successfully integrate such companies to our existing operations. Therefore, any failure in our processes described above could have a material adverse effect on our business, financial condition or results of operations.
Business Environment Risks
     Business cycles in the global economy and our customer industries influence the demand for our products, our financial condition and results of operations, especially in the short-term. Metso Paper and Metso Automation are affected by the development of the pulp and paper industry. In addition, Metso Automation is also affected by the energy, oil and gas industry cycles. Metso Minerals’ operations are dependent on the development of the mining, construction and civil engineering industries. Within the construction and civil engineering industries, the level of infrastructure investments is most significant for Metso Minerals. Our management believes that, in the long-term, the effects of business cycles are reduced by the geographical diversity of our operations and by the range of customer industries served. Also, new equipment orders tend to be more affected by business cycles than the demand for rebuilds and process improvements as well as aftermarket operations, for which our large global installed base offers a strong platform. Although we have actively striven to reduce the risks presented by business cycles through increasing our process life cycle-related operations and long-term cooperation with our customers, as well as increasing the flexibility of our cost base through outsourcing and focusing in our own operations on the assembly and manufacture of core components, there can be no assurance that business cycles will not continue to significantly affect the demand for our products, our business, financial condition or results of operations. See “Item 5. Operating and Financial Review and Prospects—Business Overview.”
Market Risks
     Changes in customers’ demand affect our operations. Such changes may, among other things, relate to changes of customer companies’ strategy, product development and requirements, and environmental aspects of

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their operations. For example, certain of Metso Paper’s customers are increasingly focusing on their core competence areas, such as the production of pulp, paper or board, and are outsourcing the mill service business to other companies. Metso Paper’s objective is to conclude long-term service agreements with these customers, whereby the main responsibility for process service is transferred to Metso Paper.
     Our competitors vary by business area and product. We aim to differentiate ourselves from competitors through quality, reliability, local presence and availability, as well as through providing high level of technological competence and long-term commitment to our customers. We aim for competitive advantage through continuous product development based on research and cooperation with our customers. In addition, we seek to operate flexibly and cost-efficiently in an effort to ensure our competitiveness.
     In order to serve our new customers better, we aim to increase our own manufacturing and assembly capacity of components in fast growing market areas, such as China, India and Brazil. In these areas, the products and services developed by new local competitors are also observed closely. Although our main competitors are still European and North American companies, certain Asian suppliers are providing solutions that are able to compete with their low prices. We seek to protect our products and intellectual property rights related to our business through patents and trademarks.
     While our management believes that our product and service range will keep pace with developing technologies and changing customer needs, there can be no assurance that new or enhanced products and technologies developed by current or future competitors will not reduce the competitiveness of our products, which could have a material adverse effect on our business, financial condition or results of operations. See “Item 4. Information on the Company—Business Summary” for a description of our significant competitors in each of our business areas.
Technology Risks
     Our technology risks are related to technological competence and research and technology development. In research and technology development, we utilize a project management model called “Metso Innovation Process,” in which a business plan is created for a new product or concept and its profitability is evaluated at different stages of the development process. The business plan defines responsibilities and roles for all elements of product development and launch, such as service, sales, industrial design and marketing, from the very beginning of the development process. The intellectual property rights and environmental aspects related to the product are also taken into account.
     Use of new technology may also increase our quality related costs (i.e., costs related to rework, scrap etc.) The quality related costs of Metso Paper represent approximately three to four percent of the business area’s net sales. Our objective for the 2006-2008 period is to further improve the quality of our operational processes and deliveries and to reduce these costs by 50 percent.
     While our management believes that our procedures relating to research and technology development activities are effective and sufficient in light of our operations and strategy, there can be no assurance that the new or enhanced products and technologies will improve our competitiveness or that we manage to reduce the quality related costs within Metso Paper as planned, or that the risks, if materialized, would not have a material adverse effect on our business, financial condition or results of operations.
Political, Economic, Cultural and Legislative Development Trends
     Both our operations and the operations of our customers are geographically widespread. Global political development, political unrest, terrorism and armed conflicts constitute risks to our operations. Our operations are also affected by cultural and religious factors, and by legislation – particularly different countries’ environmental legislation.
     Revision of the environmental legislation in various countries can often take a long time. We monitor laws that are under preparation and make an effort to anticipate their effects on our own business and that of our customers. However, unanticipated legislative changes may have adverse effects on our operations. This situation may arise, if, for example, a raw material that we use in our production or that is contained in subcontracted components is prohibited. In such cases, production costs may increase due to the development of alternative solutions. Tighter environmental legislation may also increase our manufacturing costs. However, it

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may also provide opportunities for us to offer our customer industries new solutions that meet more stringent environmental standards.
     We have our own manufacturing and supplier networks in many developing countries. Also, the demand for our new machinery and equipment is increasingly coming from countries in Asia and South and Central America. Sudden political, economic and/or legislative changes in these countries could have a material adverse effect on our business, financial condition or results of operations. For example, China has a significant direct and indirect effect on our net sales and, hence, any sudden political, economic or legislative changes in China could, especially in the short-term, have a material adverse effect on our business, financial condition or results of operations. Our management believes that the risks related to these developing countries are reduced by our wide geographical and industry coverage as well as our more stable aftermarket operations in Europe and North America.
Phenomena Related to Climate Change and Environment
     We believe that emissions from our own production units are in compliance with the set permit limits. The risks related to climate change are accounted for in the planning of our power consumption and raw materials for our products. Our research and technology development aims to give appropriate consideration to increases in energy prices, and our goal is to reduce the energy consumption of our new products. Furthermore, in order to control disease-related risks, we provide our personnel with vaccinations.
     Procedures to ensure compliance with applicable environmental protection laws and regulations as well as ISO 14001 compliant environmental systems are key tools in our environmental management. Although our management is not aware of any current environmental matters that could reasonably be expected to have a material adverse effect on our business, financial condition or results of operations, there can be no assurance that continued compliance with the existing or future environmental laws, and the costs associated therewith, will not have a material adverse effect on our business, financial condition or results of operations. See “Item 4. Information on the Company—Governmental Regulation and Environmental Matters.”
Financial Risks
Liquidity
     We use cash and committed revolving credit facilities to protect our short-term liquidity. We manage our liquidity and financing costs by balancing the proportion of short-term and long-term loans. We also manage risks in the availability of funds and pricing in the long-term by diversifying funding between the money and capital markets and banks. Credit rating agencies assess our business and publish credit ratings. A lowering of our credit ratings could raise the financing costs of possible new loans taken, which could have a material adverse effect on our business, financial condition or results of operations. See “Item 5. Operating and Financial Review and Prospects—Liquidity and Capital Resources” for a discussion of the possible impact of credit ratings downgrades.
Interest Rate Risks
     Changes in market interest rates and interest margins may influence our financing costs, returns on financial investments and valuation of derivative contracts. We manage interest rate risks through the ratio of floating-rate to fixed-rate loans and the average length of interest rate periods. Additionally, we may use interest rate swaps and other derivative contracts. Although management believes that the measures we have taken to limit our exposure to interest rate risks are currently adequate, there can be no assurance that interest rate fluctuations will not have a material adverse effect on our business, financial condition or results of operations. See “Item 11. Quantitative and Qualitative Disclosures about Market Risk—Exchange Rates and Foreign Currency Exposure.”
Currency Risks
     Exchange rate changes affect our business, although the geographical diversity of our operations decreases the significance of any individual currency. Exchange rate variations can have a direct effect on the prices of raw materials and production commodities purchased in non-domestic currencies and in the prices of end products for export, in which the invoicing currency is different from the currency of the manufacturing costs (transaction effect). More than one-half of our net sales originate from outside the euro zone. Alongside

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the euro, the most important currencies used in invoicing are the U.S. dollar and the Swedish krona. When the net sales and results of our subsidiaries outside the euro zone are translated into euro, they may increase or decrease because of exchange rate changes even though no real change in such net sales or results has occurred (translation effect). Exchange rate movements may also affect our competitive position by weakening the cost competitiveness of our products as against those of our competitors’ products manufactured in another currency area.
     In accordance with our treasury policy, our operating units are required to hedge in full the currency exposures that arise from firm delivery and purchase agreements. In addition, the units can hedge anticipated foreign currency denominated cash flows by taking into account the significance of such cash flows, the competitive situation and other possibilities to adjust. We have operations in countries in which currency regulation affects the hedging of risks. The most important of these are Brazil and China. We conduct hedging operations in a centralized fashion through our corporate treasury. We have set upper limits on the open currency exposures of the corporate treasury, calculated on the basis of their potential profit impact. These limits cover net exposures from transfers between units and items arising from financing activities. Future foreign currency cash flows are hedged for periods, which do not normally exceed two years. Accordingly, the majority of future foreign currency cash flows related to the order backlog is hedged.
     The equity of our subsidiaries outside the euro zone is affected by exchange rate risks, which may lead to translation differences in our consolidated equity. We hedge these risks with respect to essential currencies in accordance with our treasury policy by using non-euro denominated loans and forward exchange agreements. Although our management believes that the measures we have taken to hedge our exposure to exchange rate fluctuations are currently adequate, there can be no assurance that exchange rate fluctuations will not have a material adverse effect on our business, financial condition or results of operations. For a discussion of our foreign exchange risk management policy, see “Item 11. Quantitative and Qualitative Disclosures about Market Risk—Exchange Rates and Foreign Currency Exposure.”
     In addition, a non-euro investors’ base currency return on an investment in our shares may be affected by any change of the euro against the investor’s functional currency. The value of dividends and other distributions paid in euro and the value of the shares quoted on the Helsinki Stock Exchange in euro could increase or decline as a result.
Credit Risks and Other Counterparty Risks
     Our operating units are primarily responsible for credit risks pertaining to sales activities. Our business areas determine the guidelines for delivery and payment terms granted to customers, their supervision and enforcement, which are then implemented at the business line and operating unit level. Large projects also require corporate level handling. Our corporate treasury provides centralized services related to customer financing and seeks to ensure that the principles of our treasury policy are adhered to with respect to terms of payment and the required collateral.
     When investing cash assets and making derivative contracts, our corporate treasury only accepts counterparties that fulfill the credit rating criteria defined in our treasury policy or counterparties separately approved in advance by our Board of Directors. With respect to investments, derivative contracts and borrowing, we have set counterparty-specific limits to avoid large risk concentrations.
     We have agreed on extended payment terms with selected customers. In establishing credit arrangements, our management is required to assess the creditworthiness of the customer and the timing of cash flows expected to be received under the arrangement. However, should the actual financial position of our customers or general economic conditions differ from our assumptions, we may be required to re-assess the ultimate collectibility of such trade receivables, which could result in a write-off of these balances in future periods and could have a material adverse effect on our business, financial condition or results of operations.
     Our ability to manage our trade receivables exposure, customer financing, risk concentrations and financial counterparty-related risks depends on a number of factors, including our capital structure, market conditions affecting our counterparties and our ability to mitigate exposure on acceptable terms. The risks related to individual customers or other counterparties are generally not significant compared to the magnitude of our business, and we aim to reduce customer risks by exact sales contracts, payment terms and collateral arrangements, as well as by effective bid/quotation control procedures. However, there can be no assurance that we will be successful in managing the risks connected with our trade receivables exposure, customer financing,

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risk concentrations and financial counterparties, which could have a material adverse effect on our business, financial condition or results of operations.
Internal Controls
     Effective internal controls are necessary for us to provide reliable financial reports and effectively prevent and detect fraud. If we cannot provide reliable financial reports or prevent fraud, our financial results could be negatively affected.
     We devote significant attention to establishing and maintaining effective internal controls. We are in the process of documenting, reviewing and, where appropriate, improving our internal controls and procedures in connection with the implementation of Section 404 of the Sarbanes-Oxley Act of 2002, which requires annual management assessments of the effectiveness of our internal controls over financial reporting and a report by our independent auditors addressing these assessments as from the financial year ending December 31, 2006. We are also in the process of testing our internal controls in connection with Section 404 requirements. We already have, as part of these processes, identified a number of areas for further attention and improvement. The analysis and evaluation is currently underway, but we are not yet in a position to determine the magnitude of the deficiencies that may be identified.
     We cannot be certain that these measures will ensure that we implement and maintain adequate controls over our financial reporting processes and related Section 404 reporting requirements. Any failure to implement the required new or improved controls, or difficulties encountered in their implementation, could harm our financial results or cause us to fail to meet our reporting obligations. Any such failure could also adversely affect our assessment of the effectiveness of our “internal control over financial reporting” that will be required when Section 404 requirements become applicable to us. Inferior internal controls could also cause investors to lose confidence in our reported financial information, which could have a negative effect on the market price of our shares and other securities.
Profitability Risks
     One of our key targets is to conduct profitable business. In large-scale projects and equipment transactions, there can be a risk, however, that the actual costs of the transaction cannot be estimated accurately enough in the offer stage, and, therefore, it may not be possible to determine the appropriate transaction price for us or to assess whether the market price level or our cost competitiveness are sufficient to conclude the transaction.
     To manage risks related to pricing, our businesses apply various quality systems, operating guidelines and profitability analyses that take into account, among other things, the product to be sold, the customer and the payment terms. We also utilize internal approval procedures in which pricing authorizations are linked with transaction values are in project and product pricing.
     While our management believes that our procedures to mitigate such risks are adequate, there can be no assurance that the risks, if materialized, will not have a material adverse effect on our business, financial condition or results of operations.
Business Interruption Risks
     Risks related to the management of raw materials, suppliers and subcontractors are significant for us. The delivery problems of raw material producers can influence the price and availability of the raw materials used in our products. Thus, procurement costs may increase and delivery lead-times lengthen.
     Critical raw materials include steel and scrap iron, for which the prices and availability may fluctuate and have an adverse effect on our operations. The global coverage of our businesses and suppliers is expected to reduce the effect of any local disturbances. We aim to make long-term supply contracts to reduce the effects of short-term price volatility or availability issues. In addition, whenever possible, we seek to identify replacement suppliers in order to manage risks related to a single supplier. However, this is not always possible. For example, a raw material used by Metso Minerals in manufacturing wear parts for crushers is virgin manganese for which the supply is mainly limited to South Africa. Delivery problems facing local producers or political or legislative changes in South Africa can affect the availability of manganese, which may have an adverse effect

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on the wear parts business of Metso Minerals. We seek to manage this risk by maximizing the use of recycled manganese.
     Indirectly, changes in the prices of electricity, oil and metals may have a material adverse effect on our business, financial condition or results of operations, if they decrease our customers’ willingness to invest. See “Item 4. Information on the Company—Raw Materials.”
     Our risks related to the purchase of raw materials have decreased in recent years because we have increasingly focused on manufacturing core components only and assembly. On the other hand, outsourcing increases the importance of and risks related to our suppliers and subcontractors. We purchase the majority of product components from suppliers, for whom it is not necessarily possible to find alternative suppliers at short notice. The delivery problems of our subcontractors may also adversely affect our customer relationships and business. For example, Metso Paper has identified, with respect to its Finnish units, alternative subcontractors and raw material suppliers for all key components, and has also identified business bottlenecks. In 2005, these bottlenecks were mainly related to the capacity of the foundries. Corresponding identification was started in all our other business areas in 2005. Although we have continued to build a global supplier network and signed long-term contracts with our major raw material suppliers and subcontractors in an attempt to limit the purchasing risks related to availability and pricing of product components, there can be no assurance that such risks, if materialized, will not have a material adverse effect on our business, financial condition or results of operations.
Project Activity Risks
     Our operations consist partly of large project deliveries to the pulp and paper industry and the mining industry. These deliveries can involve project-specific risks concerning delivery schedules as well as equipment start-up, capacity and end product quality. In some cases, project-specific risks may also arise from new technology included in the deliveries. The risks of individual projects are generally not significant compared to the entire scope of our business. Although we aim to reduce project-specific risks by assessing risk potential already at the offer stage, and by preparing for risks through the use of detailed terms and conditions in sales contracts and through quality management, there can be no assurance that such risks, if materialized, will not have a material adverse effect on our business, financial condition or results of operations.
Contract and Product Liability Risks
     We are occasionally involved in product liability claims typical for companies in comparable industries. These claims are covered by an insurance policy with coverage of up to EUR 100 million per year, subject to applicable insurance conditions. We aim to minimize product liability risks by improving product safety through research and development investments, automation and customer training, and by detailed sales contract terms.
     Although our management believes that our insurance coverage is currently adequate to cover the liability risks, we may be held responsible for damages beyond the scope of our insurance coverage, which could have a material adverse effect on our business, financial condition or results of operations.
Hazard Risks
     Hazard risks include occupational health and safety-related risks, personnel security risks, environmental risks, fire and other disasters, natural events and premises security risks.
     We have taken precautions against hazard risks by means of occupational health and safety guidelines, certification principles, travel safety instructions, rescue planning and premises security instructions. We have also sought to take into account the existence of such risks in our insurance program. However, there can be no assurance that these risks, if materialized, would not have a material adverse effect on our business, financial condition or results of operations.
Major Shareholders May Exercise Their Influence to Detriment of Other Shareholders
     See “Item 7. Major Shareholders and Related Party Transactions—Major Shareholders” for a discussion of the impact of the ownership interest of the Finnish State in the Company.

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Item 4. Information on the Company.
Organization
     Metso Corporation is a stock corporation organized in the Republic of Finland under the Finnish Companies Act. Metso Corporation’s registered office is located at Fabianinkatu 9A, P.O. Box 1220, 00101 Helsinki, Finland; telephone +358-20-484-100. Our agent for the U.S. federal securities law purposes is Metso USA, Inc., located at 2900 Courtyards Drive, Norcross, Georgia 30071, the United States.
History and Development of the Company
     Metso was created as the result of the merger of Valmet and Rauma in July 1999. The new combined company was initially given the name Valmet-Rauma Corporation. The name was changed to Metso Corporation in August 1999.
     Valmet traces its origins back to the industrial plants established in the 1920s and 1930s to meet the needs of the Finnish Armed Forces. These industrial plants were joined to form a conglomerate, which was formally incorporated as a limited liability company in 1950. During the 1950s, it began to broaden its product range to accommodate the demands of a market economy. Valmet delivered its first paper machine in 1953. From its establishment in 1950 until its initial public offering in 1988, Valmet was wholly owned by the Finnish State and other Finnish State entities. As of March 14 2006, the Finnish State owned 11.1 percent of the outstanding share capital of Metso Corporation.
     Rauma’s business groups were formed from a number of companies with long operating histories brought together as a result of a series of strategic acquisitions by a Finnish engineering group Rauma-Repola Oy. In 1990, Rauma-Repola merged with United Paper Mills, a Finnish forest products company. The new company was called Repola Oy and was one of the largest industrial conglomerates in Finland. Its engineering division was organized as Rauma and its forest products division was organized as UPM. In 1996, Repola and Kymmene Corporation, a Finnish forest products company, merged to create a new company called UPM-Kymmene. As a result, Rauma became a majority owned subsidiary of UPM-Kymmene. In 1997, following a secondary offering of Rauma shares, distribution of shares as dividends, and the redemption of shares by Rauma, UPM-Kymmene’s ownership in Rauma was reduced to 34.5 percent. In March 2005, UPM-Kymmene sold the remainder of the shares of Metso Corporation held by it.
     In September 2001, Metso Corporation acquired Svedala, a global supplier of products and services for the rock and mineral processing industry based in Sweden. Svedala was integrated in the Metso Minerals business area. A public offer to acquire all the shares in Svedala was made in June 2000, and the acquisition was completed on September 14, 2001 after the competition authorities of the European Union and the United States gave their approval to the acquisition.
     For a discussion of recent developments, see “Item 5. Operating and Financial Review and Prospects—Recent Acquisitions and Divestments.”
Strategy
     In August 2005, we launched a new strategy of profitable growth for the years 2006-2008, and announced our related financial targets. Based on this new strategy, our management focus is shifting from restructurings to profitable growth.
     Our purpose, engineering customer success, combines our strong engineering know-how and our customers’ success. Customer satisfaction is the prerequisite for our growth. Our customers are industrial companies that expect their machinery and equipment suppliers to show long-term commitment and to assume responsibility for delivered processes. Our customers’ investments are typically large and have long life cycles. Investments should yield a sufficient return on capital, which can be enhanced by cooperation between Metso and its customers throughout the process life cycle. Our customers operate globally and expect their suppliers to be present locally. Our strong network enables us to serve our customers on all continents. We strive to produce increasingly competitive and efficient solutions, equipment and services, based on close customer cooperation, technology and process expertise. Our strengths also include well-known product brands and a good reputation. Our vision is to become the industry benchmark. This challenges each of our employees to reflect what he or she can personally do to meet the expectations of our customers, colleagues and shareholders better. For us,

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becoming the industry benchmark means that our solutions meet the customer needs the best, we are the market and technology leader in our target markets, we are the leading company in operational excellence, we are the preferred employer and we generate the best shareholder value in our peer group.
     Our strategic goals are based on our purpose statement, values and ethical principles. Strategic goals form the roadmap that guides us towards our vision. The strategic goals relate to customer satisfaction and operational excellence. Customer satisfaction includes solutions that meet the needs of our customer the best throughout the process life cycle, a customer-oriented approach in all operations and a strong local presence globally as well as leading technology. Operational excellence includes continuous improvement in productivity and quality, world-class business, management and people processes, profitability and growth exceeding our peers and providing a great place to work. The strategic goals form a permanent foundation on which our short-term management agenda is built.
Management Agenda
     Our management agenda defines the focus areas and priorities in customer satisfaction development and operational excellence, which are required to attain profitable growth. Our growth will support the sustainable profitability development and strengthen our market leadership position.
     The key focus areas in customer satisfaction are: to strengthen our leading position in all our market areas, to complement life cycle offering both through our own development and by complementary acquisitions, and to develop closer customer relationships by bringing sales, purchasing and manufacturing closer to our customers. This is especially true in the emerging markets of Asia, South America and Russia.
     Our key focus area in operational excellence is continuous improvement of productivity and quality. Our focus will, in particular, be in the development of world-class global business processes and systems enabling organic growth. Another focus area is to develop supply chain management to improve flexibility, cost competitiveness and quality.
     In implementing the management agenda, we will rely on hands-on leadership and the results will be regularly monitored. We will also ensure that we have the right people in the right tasks, and that the competences and knowledge are constantly developed. All our business areas have their own specific management agenda which forms a basis for the concrete business area, business line and unit level action plans and programs.
Financial Targets for the 2006-2008 Strategy Period
     Our progress in implementing the profitable growth strategy is reflected against the financial targets, among other indicators. The key indicators of our financial performance in the 2006-2008 strategy period are: growth in net sales, return on capital employed (ROCE-%) and operating profit margin (EBIT-%). Inasmuch as the level of capital employed varies between our business areas, it is important to monitor both ROCE-% and EBIT-% simultaneously when evaluating our financial performance.
     In the 2006-2008 strategy period, we target approximately ten percent annual growth in net sales. We expect to attain approximately one-half of the growth organically, and the remainder through complementary acquisitions. Our profitability target is a nine percent operating profit margin at the end of the strategy period. Moreover, we seek a return on capital employed exceeding 15 percent regardless of the business cycle. In case of a favorable demand situation, we target our annual return on capital employed to clearly surpass 15 percent.
     It is strategically important for us to regain and retain a solid investment grade credit rating status. Consequently, gearing (i.e., the ratio of net interest bearing liabilities to shareholders’ equity) and free cash flow (calculated as operating cash flow minus capital expenditures on fixed assets plus proceeds from sale of fixed assets) among others, are monitored. The business area-specific operating profit margin targets towards the end of the strategy period in 2008 are: over eight percent for Metso Paper, over 11 percent for Metso Minerals and over 12 percent for Metso Automation. No medium-term operating profit margin target has been set for Metso Ventures. We expect to reach our strategic and financial targets through implementing hundreds of operational measures, programs and action plans.
     At Metso Paper, for instance, determined efforts to halve quality related costs are under way. At present, quality costs account for three to four percent of Metso Paper’s net sales. The forming of a separate

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Service business line as of the beginning of 2006 enables a more focused range of aftermarket products and services to be developed. See “–Corporate Structure” below for a more detailed discussion. Our aim is to increase the net sales of the aftermarket business by over EUR 100 million in the 2006–2008 strategy period. Production and purchasing are being strengthened in the rapidly growing Asian and South American markets. For example, in China, Metso Paper is planning to strengthen its presence by acquiring Shanghai-Chenming Paper Machinery Co. Ltd, a Chinese manufacturer of paper machines. An agreement concerning the proposed acquisition was signed in February 2006, and the finalization of the transaction is subject to the approval by the Chinese authorities.
     In February 2006, Metso Paper and Aker Kvaerner signed a letter of intent concerning the proposed acquisition by Metso of Aker Kvaerner’s Pulping and Power business. If completed, the transaction would expand our product offering within the fiber business. Furthermore, our Tissue business line has been going through a major restructuring and product range renewal. As a result of these restructurings, one key goal for Metso Paper in 2006 is to have the Tissue business line reach a break even level.
     Metso Minerals is developing global procurement and logistics to enable its global network to serve customers as efficiently as possible. By providing new life cycle services, the payback period of customer investments is expected to be reduced and the production capacity utilization rate and the quality of the end product will be improved.
     In order to improve the productivity and to strengthen Metso Minerals’ principal production plants, we aim to expand both our in-house production and our subcontractor networks. Capitalizing on a good market situation also requires more efficient management of the sales process. Metso Minerals is also actively searching for potential complementary acquisitions.
     Metso Automation’s good, sustained profitability level is now being utilized in an effort to achieve future growth. We intend to recruit approximately 100 new employees primarily in Asia, Russia and South America in sales and service duties during 2006. Growth will also be sought in these regions by enhancing the use of local partners in both engineering and maintenance. Investments supporting growth are estimated to weaken Metso Automation’s operating profit margin to some extent in 2006, as their effects will not be immediate. Metso Automation is also actively seeking potential complementary acquisitions.
     Achieving the corporate-level operating profit margin target of nine percent towards the end of the 2006–2008 strategy period, requires that our business areas successfully complete their ongoing development programs and that the market demand is at least as favorable as in 2005. We are also continuing efforts to decrease the negative impact of cyclicality on our financial performance. During low stages of the business cycle, our target is that our operating profit margin is at least six percent.
Financial Targets for 2006
     Based on our strong order backlog and the currently favorable market situation, we estimate that, in 2006, Metso Corporation’s net sales will grow by over ten percent and operating profit will clearly surpass the operating profit in 2005. Metso Paper will continue its efforts to improve its operational excellence and the business area’s operating profit margin target is six percent for the year 2006. The operating profit margin target for Metso Minerals is ten percent for the year 2006. Inasmuch as Metso Automation aims to scale up its investments in growth in 2006, the operating profit margin target for Metso Automation for the year 2006 is 11 percent. Metso Ventures’ operating profit margin target for the year 2006 is six percent.
Corporate Structure
     We are a global engineering and technology corporation headquartered in Helsinki, Finland. We serve our customers in the pulp and paper industry, rock and minerals processing, the energy industry and selected other industries. Our business areas are global in scope with operations in over 50 countries. Our principal production plants are located in Brazil, China, Finland, France, Germany, India, Italy, South Africa, Sweden, the United Kingdom and the United States. As of December 31, 2005, approximately 38 percent of our employees were based in Finland.

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     Our operations are currently organized into the following four business areas:
    Metso Paper designs, develops and delivers processes, machinery, equipment and related know-how and aftermarket services to the pulp and paper industry. Metso Paper’s offering extends over the entire life cycle of the process covering new lines, rebuilds and various services. It operates under five business lines: Fiber, Paper & Board, Finishing, Tissue and Service.
 
    Metso Minerals designs, develops and manufactures equipment and total solutions as well as aftermarket solutions for rock and minerals processing industries through its four business lines: Crushing and Screening, Minerals Processing, Wear Protection and Conveying and Recycling.
 
    Metso Automation designs, develops and supplies both process automation and field solutions for automation and information management in selected process industries through its two business lines: Process Automation Systems and Field Systems. All Metso Automation’s operations in North America are conducted by a separate North American business unit. Metso Automation’s operations cover the three principal areas of process automation: (1) automation and information management application networks and systems and life cycle services, (2) flow control solutions, automated and manual control valves, and (3) process measurement solutions and analyzers.
 
    Metso Ventures main businesses are Metso Panelboard, Foundries, Metso Powdermet and Valmet Automotive. Metso Panelboard develops and supplies complete production lines for the panelboard industry. Foundries manufacture castings for various engineering industry needs. Metso Powdermet develops materials technology and component solutions for our customer industries and us. Valmet Automotive is an independent contract manufacturer of specialty cars.
     The chart below depicts the current structure consisting of the four business areas described above:
(FLOW CHART)
     Our current corporate structure is a result of the restructurings described below: In November 2002, the Converting business, previously part of Metso Paper, was transferred under Discontinued Operations after a memorandum of understanding regarding its sale was signed. The divestment was completed in January 2004. In March 2004, after Chemical Pulping line and Mechanical Pulping business lines were combined into one Fiber business line, Metso Paper’s operations were divided into four business lines: Fiber, Paper, Tissue and Board. Since the beginning of 2006, Service and Finishing businesses were separated into own business lines, and Metso Paper currently operates under five business lines: Fiber, Paper & Board, Finishing, Tissue and Service. The purpose of the change is to strengthen customer service and to clarify decision-making with special focus on engineering, production, procurement and high-quality management of customer projects.
     In September 2003, Metso Minerals’ operations were divided into six business lines: Crushing and Screening, Minerals Processing, Wear Protection and Conveying, Compaction & Paving, Recycling, and

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Drilling. In June 2004, we divested the Compaction & Paving business and, in December 2004, the Drilling business. As a result, Metso Minerals currently consists of four business lines.
     Since August 2002, the Metso Automation business area has consisted of two business lines: Process Automation Systems and Field Systems, which are supported by a separately managed North American business unit.
     Prior to the transfer of Metso Panelboard into Metso Ventures in 2002, the business area was comprised of Metso Engineering and Valmet Automotive. Since the transfer, the business area was reconstructured to comprise of four businesses: Metso Panelboard, Metso Drives, Metso Powdermet and Valmet Automotive. Metso Drives and Metso Powdermet were formerly part of Metso Engineering, similarly to Metso Works and Metso Hydraulics, which have now been sold. In October 2003, three foundries, two of which were formerly part of Metso Paper and one of Metso Minerals, were transferred to the Metso Ventures business area, creating a fifth business within the business area, called Foundries. After that Metso Ventures comprised of five businesses: Metso Panelboard, Metso Drives, Foundries, Metso Powdermet and Valmet Automotive. On April 8, 2005, we sold Metso Drives to the funds managed by private equity investor CapMan of Finland.
     The financial information as of and for the year ended December 31, 2005 discussed in this annual report has been restated to reflect the changes in our structure described above. The Converting business has been reported as a separate segment under Discontinued Operations until its final divestment to Bobst Group SA of Switzerland in January 2004. We completed the divestiture of our Compaction & Paving business to Altor, a Nordic private equity investor in June 2004 and our Drilling business to Terex Corporation of the United States in December 2004. In April 2005, we completed the divestiture of Metso Drives to the CapMan funds. These divested businesses are also reported under Discontinued Operations.
     As a part of the 2005 strategy process, we studied various alternative corporate structures, including the potential separation of Metso Minerals. In August 2005, our Board of Directors decided to commission a more detailed feasibility study to assess these alternatives.
     In February 2006, our Board of Directors decided that the current structure of Metso would be kept intact. The principal reasons for the decision of the Board of Directors were the rapid sales and profitability growth in Metso Minerals and Metso Automation together with good growth opportunities provided by a favorable market outlook, as well as the ongoing positive development of Metso Paper including the potential acquisition of Aker Kvaerner’s Pulping and Power business. Our Board of Directors considered it important that our management focuses on the execution of the profitable growth strategy launched in August 2005. Our Board of Directors continues to believe that the current Metso structure provides for now the best potential for further creation of shareholder value. In addition to internal resources, our Board of Directors was advised by Goldman Sachs and other external advisors.
Business Summary
Net Sales by Geographic Area
     In 2005, we had total net sales of EUR 4,221 million (USD 4,999 million), of which approximately 92 percent were accounted for by exports from Finland and sales by international operations, and an operating profit of EUR 335 million (USD 397 million). As of December 31, 2005, our total assets amounted to EUR 3,904 million (USD 4,623 million), and we had 22,178 employees worldwide.

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     The following table sets forth our total net sales by geographic area for the two most recent years:
                 
    Year ended December 31,  
    2004     2005  
    (EUR in millions)  
Finland
    312       352  
Other Nordic countries
    301       484  
Other European countries
    888       1,064  
North America
    757       889  
South and Central America
    286       485  
Asia-Pacific
    829       735  
Rest of the world
    229       212  
 
           
Total
    3,602       4,221  
 
           
Metso Paper
     Metso Paper is one of the world’s leading suppliers of equipment and machinery for the pulp and paper industry. Metso Paper provides machines for the production of paper of all printing grades, board and tissue. We develop and deliver, rebuild and service paper, board and tissue machines, paper finishing machines and related air systems. We also develop and deliver equipment and designs plants for the production of chemical and mechanical pulp and recycled fiber as well as provide service to the plants. Spare and wear parts supply, process improvements and optimization are central to our aftermarket activities. Process improvements are expected to be an increasingly important source of revenue as pulp and paper mills strive to enhance process efficiency and meet higher environmental standards. Our customer service activities include start-up assistance, training, corrective, preventive and predictive maintenance programs as well as operations support.
     The following table sets forth certain financial data regarding Metso Paper for the two most recent years:
                 
    As of and for the year ended December 31,
    2004   2005
    (EUR in millions, except personnel data)
Net sales(1)
    1,559       1,702  
Operating profit(2)
    48       91  
Capital employed
    323       329  
Gross capital expenditure
    33       34  
Research and development
    50       51  
Order backlog
    946       1,267  
Personnel
    8,660       8,201  
 
(1)   Includes net sales to Metso’s other business areas of EUR 9 million and EUR 10 million for the years ended December 31, 2004 and 2005, respectively.
 
(2)   Includes a reversal of Finnish pension liability of EUR 39.8 million and EUR 3.2 million for the years ended December 31, 2004 and 2005, respectively.
Products and Services
     Fiber. Metso Paper delivers environmentally sound fiber lines, processes and production equipment as well as related aftermarket activities for both the chemical and mechanical pulping technologies. Chemical pulp is used for high-quality paper products primarily due to its strength, printability and ability to maintain brightness. Mechanical pulp is used primarily for newsprint and magazine papers and certain paperboard grades. Metso Paper has the capability and product offering for utilization of all different kind of recycled fibers for paper, board or tissue making. Metso Paper’s Fiber business line includes process equipment and service necessary for complete fiber plants. Metso Paper offers fiber producers technologies that significantly reduce the environmental impact of their operations.
     Paper & Board. Metso Paper delivers new paper and board machines and production equipment as well as offers machine rebuilds and service. The products also include new machines, machine rebuilds and

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service for coating, calendering, winding and roll handling, and chemical handling equipment for paper mills. Coaters and calenders are used to give base papers certain properties, such as gloss or matt finishes and opacity. Winders are used to cut large paper rolls to smaller sizes to fit printing machines. Roll handling machines consist of roll wrapping and conveyor systems. Paper machines delivered by Metso Paper are among the largest and fastest in the world. A typical paper machine costs between EUR 50 million and EUR 100 million and produces from 200,000 to more than 400,000 tons of paper per year. These machines are designed to meet specific customer needs and are used to produce fine paper (for office stationery), newsprint, supercalendered and coated paper (for magazines and similar publications) and coated base papers (for brochures and art purposes). Metso Paper supplies board-making machines for all board and packaging grades, the most important grades being corrugated board, linerboard, folding boxboard and liquid packaging board. A typical board machine costs between EUR 30 million and EUR 100 million and produces from 200,000 to more than 600,000 tons of board per year. Some very extensive delivery scopes and subsequent contract prices may substantially exceed the amounts described above.
     Finishing. Metso Paper supplies surface treatment systems, air systems and roll finishing systems for paper and board manufacturing. The product range includes new equipment, rebuilds and process improvements.
     Tissue. Metso Paper delivers new tissue machines and production equipment as well as offers machine rebuilds and service. Metso Paper produces machines for manufacturing various types of tissue papers and continues to be a leading supplier of Thru-Air ™ technology for tissue production. During the past two years, Metso Paper has also successfully launched a more cost competitive Advance DCT product concept for smaller tissue paper operations. A typical tissue machine costs between EUR 7 million and EUR 35 million and produces from 10,000 to more than 70,000 tons of tissue paper per year.
     Service. Metso Paper provides a full portfolio of services and specialist support to the pulp and papermaking industry. The service includes spare part consumables, roll services, mill site services and mill maintenance. The aim is to support customer mills in maintaining production line competitiveness throughout the lifetime of the machinery.
Markets and Customers
     The following table sets forth the breakdown of Metso Paper’s net sales by geographic area for the two most recent years:
                 
    Year ended December 31,  
    2004     2005  
    (Percent of total net sales)  
Finland
    12       12  
Other Nordic countries
    10       20  
Other European countries
    17       19  
North America
    19       19  
South and Central America
    5       7  
Asia-Pacific
    32       21  
Rest of the world
    5       2  
 
           
Total
    100       100  
 
           
     Metso Paper’s products and services are sold to the pulp and paper industry throughout the world. Worldwide sales are handled through a network of our own sales companies, offices and local representatives. Orders typically require substantial down payments with the balance paid in installments. Project delivery times depend on the size and nature of the project and may be as long as two years.
     Metso Paper’s customers are located in a number of countries. In recent years, new paper machinery market has been the most active in China and pulp mill market in South America. Metso Paper has major production facilities in Finland and Sweden and a joint venture in China. We also have an assembly facility in Brazil, and in February 2006, we made an agreement to acquire a paper machinery factory in China. The finalization of the transaction is subject to approval by the Chinese authorities.
     As a major supplier to the pulp and paper industry, most of the significant pulp and paper producers are Metso Paper’s customers. Customers include large North American-based international groups, such as

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Georgia-Pacific, International Paper, Kimberly-Clark, Procter & Gamble and Weyerhaeuser; European producers, such as M-real Corporation, Norske Skog, SCA, Stora Enso and UPM-Kymmene; and South American producers, such as Arauco and Suzano; as well as various companies located in Asia, such as April, Asian Pulp and Paper, Daishowa Paper, Hansol Oji, Shandong Chenming Paper Holding, Shandong Huatai Paper and Sun Paper Industry Group.
Marketing
     Customer agreements for Metso Paper products are generally the result of extensive negotiation and coordination with our customers. Service and component sales are made on a continuous basis by regional service locations. Metso Paper has an extensive network of sales companies and sales representatives in the Nordic countries, Western Europe, North America, South America, Asia and Australia. In addition, a marketing and sales team supports sales activities and develops marketing strategies in line with our customers’ needs.
Competition
     In the paper machine industry, machinery is designed to meet specific customer needs. Paper, board and tissue machines are sold on the basis of machine technology, availability of reference machines for comparative purposes, delivery time, price and service ability. Metso Paper competes for machine sales based on these five factors. Our management believes that, based upon aggregate production capacity of paper machines sold, Metso Paper has been the world’s leading producer of large paper machines. Our management also believes that we occupy a strong position in the large paper machine rebuild markets as a result of our large installed base, advanced technologies and leading position in the new paper machine market. Metso Paper’s principal competitor in large paper machines and board making machine lines is the other major producer, Voith Paper Group of Germany. Mitsubishi of Japan is also a competitor but mainly in unit machines rather than total larger production lines. In tissue machines, the competitors include Andriz Corporation of Austria, Voith, Toscotec and Celli of Italy.
     Metso Paper’s principal competitors in the pulping industry are Andritz Corporation and Aker Kvaerner’s Pulping and Power business of Norway. In February 2006, Metso and Aker Kvaerner signed a letter of intent concerning the proposed acquisition by Metso of Aker Kvaerner’s Pulping and Power business. See “—Recent Developments” below and “Item 5. Operating and Financial Review and Prospects — Recent Acquisitions and Divestments” for more details. Competition within the pulping industry focuses on fiber quality and energy efficiency and recently also increasingly on complete plant delivery capability. In addition, environmental concerns affect competition as principal suppliers attempt to meet the increasing demand for environmentally friendly fiber. Within chemical pulping, the environmental focus is on totally chlorine-free and elemental chlorine-free production processes whereas in mechanical pulping focus is on recycled fiber production processes. Market leaders in the area of recycled fiber pulping technology include Voith and Black Clawson of the United States.
     In the Finishing business, i.e., in the delivery of calenders, coaters and air systems, the main competitors include Voith and Kusters of Germany.
     Competition in the aftermarket and service business comes partly from the principal global competitors Voith and Andritz but mainly from numerous smaller local or regional service providers such as Stowe Woodward of the United States. Customers also partly employ their own personnel to take care of the service activities. Service, for example initial spare parts, is often sold in conjunction with new paper and board machines or major rebuilds. Our management believes that Metso Paper’s service operations benefit greatly from synergies with other Metso Paper business lines which have the process and product knowledge.
Recent Developments
     In February 2006, Metso Paper made an agreement to acquire the entire share capital of Shanghai-Chenming Paper Machinery Co. Ltd, a Chinese manufacturer of paper machines. The company is currently owned by Shandong Chenming and Shanghai Heavy Machinery, and it is located in the Shanghai area in Jiading, China. The finalization of the transaction is subject to approval by the Chinese authorities. The transaction value will be published after the finalization of the transaction.
     In February 2006, Metso and Aker Kvaerner signed a letter of intent concerning the proposed acquisition by Metso of Aker Kvaerner’s Pulping and Power business. The acquisition is subject to, among

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other things, completion of the due diligence process conducted by us, and signing of a final sale and purchase agreement. The parties aim to sign the final agreement by mid-April 2006. The final closing of the proposed transaction will require relevant regulatory approvals. The agreed cash and interest bearing debt free enterprise value is EUR 335 million, which is subject to closing adjustments.
Metso Minerals
     As a result of our restructurings described under “— Corporate Structure” above and the acquisition of Svedala in 2001 and its subsequent integration with Metso Minerals, Metso Minerals’ operations are today divided into four business lines: Crushing and Screening, Minerals Processing, Wear Protection and Conveying, and Recycling.
     Metso Minerals is globally a leading supplier of rock and minerals processing solutions and metal recycling systems. Aftermarket operations form an important part of Metso Minerals’ business, because crushing and processing rock and minerals require spare and wear parts continuously. In addition, we provide different types of aftermarket services for the life cycle of the equipment. Products are sold either through Metso Minerals’ own global sales organization or, in some product lines or markets, through a third party distributor network.
     Currently, the principal production plants of Metso Minerals are located in Brazil, China, Finland, France, Germany, India, South Africa, Sweden and the United States.
     The following table sets forth certain financial data regarding Metso Minerals, continuing operations (excluding the Compaction & Paving business and the Drilling business divested in 2004) for the two most recent years:
                 
    As of and for the year ended December 31,
    2004   2005
    (EUR in millions, except personnel data)
Net sales(1)
    1,366       1,735  
Operating profit(2)
    105       177  
Capital employed
    712       895  
Gross capital expenditure
    24       55  
Research and development
    9       11  
Order backlog
    560       852  
Personnel
    8,048       8,521  
 
(1)   Includes net sales to Metso’s other business areas of EUR 1 million and EUR 2 million for the years ended December 31, 2004 and 2005, respectively.
 
(2)   Includes a reversal of Finnish pension liability of EUR 4.9 million and EUR 0.4 million for the years ended December 31, 2004 and 2005, respectively.
Products and Services
     Metso Minerals offers total solutions for customers in the aggregates, mining, minerals processing, civil engineering, cement, metal recycling and bulk materials handling industries as well as related aftermarket services through its four business lines. The product offering includes a wide variety of products with a large number of variations, types and models.
     Crushing and Screening. Metso Minerals’ Crushing and Screening business line offers equipment and solutions for rock and minerals’ crushing and classifying. It specializes in the design of entire crushing and screening plants, supplying not only stationary plants but also an increasing number of track and wheel-mounted mobile units. In addition, it supplies individual crushers, screens, feeders and conveyors as well as wear and spare parts. Furthermore, its offering includes complete, stationary or mobile recycling plants that are focused on retreating demolition and building debris, as well as old concrete and pavement materials. Within the aggregates industry, quarries and crushing contractors are among our key customer groups. Mining industry is also an increasingly important customer segment because the whole minerals liberation process is initiated by rock size reduction through crushing and screening.
     Minerals Processing. Metso Minerals’ Minerals Processing business line offers minerals liberation processes for the mining and minerals industries as well as related products, such as grinding mills, enrichment

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and pyro processing equipment and slurry pumps. The business line also offers equipment for bulk materials handling, such as stackers and reclaimers, and other products needed in loading and unloading barges, ships and railcars. Furthermore, its offering includes aftermarket services, such as expertise in optimizing existing plants through automation, plant audits, plant upgrades, replacement parts and maintenance.
     Wear Protection and Conveying. Metso Minerals’ Wear Protection and Conveying business line’s products include grinding mill linings, screening media and other wear, impact, dust and noise protection products as well as conveyer belts and components. The products are primarily used for wear protection of products sold by our Crushing and Screening and Minerals Processing business lines.
     Recycling. Metso Minerals’ Recycling business line offers equipment and solutions needed for the recycling and sorting of scrap metals, such as metal shredders, shears, scrap shears and scrap baling presses.
Markets and Customers
     The following table sets forth the breakdown of net sales of Metso Minerals’ continuing operations (excluding the Compaction & Paving business and the Drilling business divested in 2004) by geographic area for the two most recent years:
                 
    Year ended December 31,  
    2004     2005  
    (Percent of total net sales)  
Finland
    2       3  
Other Nordic countries
    9       7  
Other European countries
    29       25  
North America
    23       23  
South and Central America
    13       19  
Asia-Pacific
    14       15  
Rest of the world
    10       8  
 
           
Total
    100       100  
 
           
     Metso Minerals’ customers include quarries, crushing contractors, civil engineering companies and the mining and cement industries as well as metal recycling operations. Recycle crushing represents a new and growing sector due to the worldwide increase of legislation regulating the disposal of construction debris. The price of rock crushing plants typically ranges from EUR 1 million to EUR 5 million, although it may be as high as EUR 15 million. The price of individual rock crushers ranges from EUR 15,000 to EUR 1 million. The price of a typical complete minerals processing plant delivery to the mining industry ranges from EUR 30 million to EUR 100 million.
Marketing
     In order to service our local markets and customers, Metso Minerals’ marketing is divided into eight market areas: Europe, Southern Africa, North America, South America, Asia-Pacific, China, India, and International. Metso Minerals has a number of sales companies in Europe, South America, Africa, Asia and Australia. Metso Minerals’ sales network offers the full range of products to the customer industries. In North America, Metso Minerals supports its sales operations through a network of local third party distributors.
Competition
     Competition in Metso Minerals’ business is fragmented, with few global manufacturers and numerous small, regional and local manufacturers. We believe that our competitive advantages include our global operations network, which allows us to meet the increasingly global needs of our customers, and the wide technologically advanced product range we offer. In crushing and screening, our major competitors are Astec of the United States, Extec of the United Kingdom, Sandvik of Sweden and Terex of the United States. In minerals processing, our major competitors include FLSmidth of Denmark, Krupp of Germany and Outokumpu Technology of Finland, depending on the product line and particular industry segment. In wear protection products and conveyor belts, our major competitors include Goodyear and Rubber Engineering of the United States and Isenmann Siebe of Germany. In recycling, our major competitors include Henschel and SWB of Germany and Newell-Riverside of the United States.

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Recent Developments
     In January 2006, Metso Minerals’ industrial and office facility in Colorado Springs, Colorado, the United States, was sold to Charter Holdings Inc.
     In October 2005, the rubber manufacturing operation in Keokuk, Iowa, the United States, was discontinued and the facility was sold to the local management.
     In August 2005, we acquired Texas Shredder, Inc., a supplier of metal shredder products located in San Antonio, Texas, the United States. The sellers were a group of private investors led by Capital Southwest Corporation, a venture capital investment company. The acquisition price was approximately EUR 14 million.
     In November 2004, Metso Minerals’ Crushing and Screening business line decided to centralize its North American warehouse, logistics and customer service operations to Columbia, South Carolina and to strengthen its manufacturing capabilities in the United States. The decision will bring a modernization and expansion to the production facility opened in 1965. The value of the total investment is approximately EUR 5 million. In addition to a service center, the Columbia facility will also include an assembly line for mobile screens and crushing plants. The renewed plant consists of 203,000 square feet of production and office space on 40 acres of land and will be fully operational during 2006.
Metso Automation
     Metso Automation business area operates through two business lines: Process Automation Systems and Field Systems and a separate North American business unit. See “—Corporate Structure” above for a further explanation of our corporate restructurings.
     Metso Automation designs, develops, manufactures and maintains a wide range of technologically advanced process industry field devices and analyzers as well as process automation and information management applications and solutions. Metso Automation’s products are used to measure, monitor and control industrial processes in the pulp and paper as well as power, energy, and oil and gas industries. Metso Automation also specializes in several industry-specific automation applications and provides system integration services. Metso Automation is also one of the world’s leading manufacturers and suppliers of control and automated valves for the process industries in a large and fragmented global market. Metso Automation’s devices, applications, solutions and services are designed to improve customer process performance and profitability by increasing productivity, quality, process availability and eco-efficiency.
     Metso Automation has production plants in Finland and the United States as well as a manufacturing joint venture in China. Metso Automations’ four supply centers are located in Finland, France, Brazil and China. Metso Automation’s global sales operations are handled through a worldwide distribution network including local distributors and Metso Automation sales companies in 34 countries.
     The following table sets forth certain financial data regarding Metso Automation for the two most recent years:
                 
    As of and for the year ended December 31,
    2004   2005
    (EUR in millions, except personnel data)
Net sales(1)
    535       584  
Operating profit(2)
    69       81  
Capital employed
    135       125  
Gross capital expenditure
    6       11  
Research and development
    31       29  
Order backlog
    176       179  
Personnel
    3,267       3,169  
 
(1)   Includes net sales to Metso’s other business areas of EUR 42 million and EUR 39 million for the years ended December 31, 2004 and 2005, respectively.
 
(2)   Includes a reversal of Finnish pension liability of EUR 13.7 million and EUR 0.8 million for the years ended December 31, 2004 and 2005, respectively.

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Products and Services
     Metso Automation’s Process Automation Systems business line provides automation and information management application networks and systems and supporting life cycle services. The Field Systems business line provides various industries with flow control solutions, automated and manual control valves and positioners as well as specialty analyzers.
  Process Automation Systems
     The Process Automation Systems business line develops and maintains process automation technology for the pulp and paper industry as well as the power, energy, and oil and gas industries. The business line’s principal product is metsoDNA, or Dynamic Network of Applications. The metsoDNA solution offers flexible scalability and easy integration and compatibility with a plant’s other systems. MetsoDNA is based on the free networking of knowledge and information, control automation and embedded field control applications. The concept was first introduced in 1999, and it is constantly being developed by adding new industry and user-specific applications for process and information management, quality management, production tracking and asset management.
     In addition, key products of the Process Automation Systems business line are Sensodec systems for paper machine runnability and condition monitoring, and the PaperIQ Plus and PaperLab systems for paper quality management as well as IQInsight for paper machine wet end moisture measurement and DNAforesight for web break management system. In 2005, Metso Automation launched IQCaliper-L, a new optical caliper sensor that provides accurate paper profiles without the risk of paper sheet break or marking.
  Field Systems
     The Field Systems business line develops field systems for various industries, including pulp and paper, power, oil and gas, as well as smart, embedded measurement and control solutions, sensors and analyzers for special applications.
     The product offering of the Field Systems business line in the area of flow control valves covers a range of valves, including simple shut-off valves to complex control and automated valves and intelligent valve controllers. The business line also supplies industrial ball valves, butterfly valves and actuators, serving the process industries, commercial heating, ventilation and air conditioning, and original equipment manufacturer markets. The product names used for our valves are Neles and Jamesbury. The Field Systems business line also develops and manufactures intelligent digital positioners and actuators. A positioner transmits information to an actuator, which in turn operates a valve. Positioners and actuators are key components of control valves, and Metso Automation typically sells these components with their associated valves as a single unit.
     The product offering of the Field Systems business line for the pulp and paper industry includes Kajaani analyzers, sensors and sampling devices for sophisticated fiber and stock property measurements for a paper machine wet end management, and a wide selection of shear force, microwave and optical transmitters and sampling devices for pulp consistency measurements. Metso Automation is a leading global supplier of pulp and paper specialty analyzers, consistency transmitters and control valves. In 2005, the Field systems business line introduced kajaaniRotary, a new consistency transmitter based on an extremely sensitive torque-induced phase shift measurement, and kajaaniMAP Platform for multi-point, online analysis of freeness, fiber dimensions and shives content of mechanical, chemical or recycled pulps.
Customer Support Services
     Metso Automation has customer service units in 34 countries. These units, together with local representatives, form an extensive global service network that is also supplemented with remote control solutions. Integration of customers’ systems through communication networks with Metso’s global online service systems enables operations in accordance with our life cycle business concept. The expert center in Tampere, Finland, which was opened in 2001, can monitor online the performance of customers’ pulp and paper mills. In addition to fast diagnosis and problem solving, the service is designed to improve process availability and performance, resulting in higher efficiency and product quality. In 2002, the second expert center was opened in Atlanta, Georgia, the United States. The third expert center for power and process industry customers was opened in Tampere, Finland, in 2003.

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Markets and Customers
     The following table sets forth the breakdown of Metso Automation’s net sales by geographic area for the two most recent years:
                 
    Year ended December 31,  
    2004     2005  
    (Percent of total net sales)  
Finland
    19       20  
Other Nordic countries
    4       4  
Other European countries
    27       25  
North America
    28       28  
South and Central America
    4       4  
Asia-Pacific
    14       15  
Rest of the world
    4       4  
 
           
Total
    100       100  
 
           
     The principal customers of the Process Automation Systems business line and the Field Systems business line are in the pulp and paper industry as well as in the power, energy, and oil and gas industries. In the pulp and paper industry, the customers of the Metso Automation business area and the Metso Paper business area are, in many cases, the same pulp and paper companies and mills.
Marketing
     Metso Automation’s devices, applications and solutions are sold individually, as upgrades and add-ons to existing systems, as integrated systems and as parts of the new machinery or process equipment installations. Automation applications and solutions are primarily sold by Metso Automation’s own worldwide sales organization. Metso Automation also markets conventional valve technology through distributors in North America.
     Management believes that the Metso Automation business area is well positioned to develop innovative, technologically advanced and competitively priced products for customers within the pulp and paper industry through its coordinated operations with Metso Paper. In certain cases, particularly when customers purchase complete pulp or paper machine lines, Metso Automation’s systems are sold jointly with Metso Paper. However, in many cases, pulp and paper machinery customers purchase automation systems, measurement devices and control valves separately.
Competition
     The process automation industry is highly competitive throughout the world. The principal competitors of Metso Automation are large and diversified multinational process automation and control system companies, such as ABB of Switzerland, Emerson and Honeywell of the Unites States, Invensys of the United Kingdom, Siemens AG of Germany, Voith and Yokogawa of Japan. The principal factors affecting competition include device and system reliability and availability, application expertise, technological advancement, ease of configuration and customization, engineering support, price and life cycle costs, customer support availability, reputation and references. Our management believes that Metso Automation is among the leading suppliers worldwide of special measurement and automation systems for the pulp and paper industry.
     Competition in the field systems area, especially in valve industry, is characterized by a large number of participants, many of which specialize in limited niche areas. Key competitors include Emerson and Flowserve of the United States. Our management believes that Metso Automation has a leading position in the supply of control valves to the pulp and paper industry worldwide.
Recent Developments
     In August 2005, Metso Automation closed its valve manufacturing factory in Chihuahua, Mexico.

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Metso Ventures
     The Metso Ventures business area comprises four business lines: Metso Panelboard, Foundries, Metso Powdermet and Valmet Automotive. See “—Corporate Structure” above for a further explanation of our corporate restructurings.
  Metso Panelboard
     Metso Panelboard designs and supplies both entire production lines and individual equipment for the panelboard industry for producing medium density fiberboard (MDF), particle board and oriented strand board (OSB) as well as supporting aftermarket services. Products are developed to use a wide mixture of wood and fiber raw materials. The industry trend is to increasingly use low cost industrial wood residues, such as sawdust and recycled wood, as the main raw material source and, in some cases, non-wood natural fibers can replace wood fibers.
     Metso Panelboard is seeking growth in developing markets, such as China, Eastern Europe, Russia and South America. It is also aiming to increase the relative share of its aftermarket operations, particularly in Europe and North America, where it has a large base of installed machinery.
     The following table sets forth certain financial data regarding Metso Panelboard for the two most recent years:
                 
    As of and for the year ended December 31,
    2004   2005
    (EUR in millions, except personnel data)
Net sales(1)
    104       112  
Operating loss(2)
    (1 )     (3 )
Capital employed
    (14 )     16  
Gross capital expenditure
    1       1  
Research and development
    3       3  
Order backlog
    32       50  
Personnel
    264       281  
 
(1)   Includes net sales to Metso’s other business areas of EUR 1 million and EUR 1 million for the years ended December 31, 2004 and 2005, respectively.
 
(2)   Includes a reversal of Finnish pension liability of EUR 0.7 million for the year ended December 31, 2004.
  Competition
     Metso Panelboard’s main competitors in complete production lines are G. Siempelkamp Group and Dieffenbacher-Group of Germany. Significant competitors in equipment supplies also include Andritz of Austria and Pallmann of Germany.
  Markets and Customers
     Metso Panelboard’s manufacturing operations are located in Finland, Sweden and Germany and products are sold globally. The main markets are Europe and Asia-Pacific, followed by South America as well as North America. Metso Panelboard has supplied its customers with over 900 panelboard production lines. Customers are panelboard manufacturers for the furniture and construction industry. Approximately 70 percent of the panelboard produced with equipment supplied by Metso Panelboard is used for furniture production. The main customers include Finsa Group of Mexico, Masonite Vanachai of Thailand, Krono Group of Switzerland, Masisa S.A. of Argentina, and Sonae Group of Portugal.

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     The following table sets forth the breakdown of Metso Panelboard’s net sales by geographic area for the most recent two years:
                 
    Year ended December 31,  
    2004     2005  
    (Percent of total net sales)  
Finland
    0       0  
Other Nordic countries
    2       4  
Other European countries
    35       57  
North America
    4       5  
South and Central America
    5       5  
Asia-Pacific
    51       29  
Rest of the world
    3       0  
 
           
Total
    100       100  
 
           
  Marketing
     Products are marketed globally through Metso Panelboard’s sales network and sales agents. Our management believes that our ability to supply complete lines and our large installed base of machinery provide an advantage in the wood-based panel industry.
  Foundries
     Foundries within Metso Ventures consist of three foundries: two iron foundries, located in Jyväskylä, Finland and Karlstad, Sweden, which were previously a part of Metso Paper, and one steel foundry, located in Tampere, Finland, which was previously a part of Metso Minerals. Foundries manufacture castings for customers in several engineering industry segments.
     The following table sets forth certain financial data regarding Foundries for the two most recent years:
                 
    As of and for the year ended December 31,
    2004   2005
    (EUR in millions, except personnel data)
Net sales(1)
    75       82  
Operating profit(2)
    7       5  
Capital employed
    25       30  
Gross capital expenditure
    3       6  
Research and development
    0       0  
Order backlog
    28       45  
Personnel
    587       618  
 
(1)   Includes net sales to Metso’s other business areas of EUR 34 million and EUR 32 million for the years ended December 31, 2004 and 2005, respectively.
 
(2)   Includes a reversal of Finnish pension liability of EUR 3.3 million and EUR 0.2 million for the years ended December 31, 2004 and 2005, respectively.
  Products and Services
     Foundries’ main products are castings, such as cylinders and rolls, ship’s engine blocks, crusher frames, crusher wear parts and consumables, wind turbine gear parts and propeller hubs.
     The combined annual capacity of Foundries is approximately 50,000 tons of steel and iron castings. Metso Paper and Metso Minerals also have foundries as part of their own operational structure and these foundries are mainly specialized on casted wear parts or consumables.
  Markets and Customers
     Foundries have operations in Finland and Sweden where their principal market is. The key customers include various engineering companies as well as wind and hydro turbine manufacturers. Major customers also

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include Metso Paper and Metso Minerals. Approximately 40 percent of Foundries’ net sales are derived from customers within Metso.
     The following table sets forth the breakdown of Foundries’ net sales by geographic area for the most recent two years:
                 
    Year ended December 31,  
    2004     2005  
    (Percent of total net sales)  
Finland
    70       72  
Other Nordic countries
    17       17  
Other European countries
    7       3  
North America
    3       4  
South and Central America
    1       1  
Asia-Pacific
    2       3  
Rest of the world
    0       0  
 
           
Total
    100       100  
 
           
  Marketing
     Industrial castings are sold both by our own sales people and by sales agents.
  Competition
     The demand for the products of Foundries is dependent on equipment sales of its customers for which the castings are used. There is a wide range of competing foundries both in the Nordic countries and continental Europe. Competition comes also partly from foundries located elsewhere in the world, increasingly in lower-cost countries. As a result, Foundries are increasingly focusing on technologically more demanding castings.
  Valmet Automotive
     Valmet Automotive is an independent contract manufacturer of high-quality specialty cars with production facilities in Uusikaupunki, Finland. The production facilities consist of a body shop, paint shop, assembly shop and product development center. The production is done on a consignment basis, and Valmet Automotive is compensated for the assembly of each vehicle. Valmet Automotive is not required to purchase inventory, and its customers are billed partially in advance so as to limit Valmet Automotive’s working capital requirements. Our management estimates that the Uusikaupunki facilities have the capacity, given certain modifications and increased manpower, to assemble up to 100,000 cars per year.
     The following table sets forth certain financial data regarding Valmet Automotive for the two most recent years:
                 
    As of and for the year ended December 31,
    2004   2005
    (EUR in millions, except personnel and vehicle data)
Net sales
    40       78  
Operating profit(1)
    (13 )     6  
Capital employed
    24       30  
Gross capital expenditure
    12       8  
Research and development
    2       1  
Approximate number of vehicles assembled
    10,051       21,233  
Personnel
    763       1,068  
 
(1)   Includes a reversal of Finnish pension liability of EUR 10.4 million and EUR 0.4 million for the years ended December 31, 2004 and 2005, respectively.

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  Products and Services
     Valmet Automotive produces and develops demanding specialty cars and can supply total niche car projects to OEMs (original equipment manufacturers).
  Markets and Customers
     Valmet Automotive’s current products are the Porsche Boxster and the Porsche Cayman cars for Dr. Ing.h.c.F.Porsche AG of Germany. Valmet Automotive’s current contract with Dr. Ing.h.c.F.Porsche AG is based on a frame agreement signed on October 24, 2001, with car production expected to continue at least until 2011 unless terminated by either party for certain specific reasons set forth in the frame agreement. Valmet Automotive continuously seeks a new car model to add to its production line to improve the capacity utilization of the plant.
  Competition
     Specialty cars of the type produced by Valmet Automotive are designed for very limited customer segments and production is to an increasing extent subcontracted to external manufacturers. Valmet Automotive is one of the principal manufacturers of convertibles and contract manufacturers of specialty cars in Europe. Valmet Automotive’s principal competitors are Karmann of Germany, Magna Steyr of Austria, and Bertone and Pininfarina of Italy.
     Management believes that Valmet Automotive’s principal competitive advantages are its high-quality and cost-efficiency, the competence of its personnel and its good readiness to manufacture new products. In December 2003, Valmet Automotive was granted one of the first ISO/TS 16949 quality certificates in the car industry.
  Recent Developments
     Due to the expiration of an agreement with Saab Automobile in April 2003 that provided for a second car model to be produced at the factory, Valmet Automotive did not have a sufficient order backlog to employ its entire personnel in 2003-2004. Manufacture of new generation of Porsche Boxster cars commenced in the third quarter of 2004. As a result, car-making volumes started to increase in the fourth quarter of 2004, and some of the personnel previously laid off were called back to work. At the end of 2004, slightly more than 750 persons were working and approximately 400 continued to be temporarily laid off. During 2005, Valmet Automotive started to manufacture Porsche Cayman in addition to Porsche Boxter. As a result, there were no employees temporarily laid off as of the end of 2005.
  Metso Powdermet
     Metso Powdermet designs, subcontracts the manufacture of and delivers machine parts based on powder metallurgy and other corresponding advanced manufacturing techniques. It also advises our other businesses in issues related to materials technology. Metso Powderment’s current main external project involves supplying powder metallurgy parts for the particle accelerator of the European Organization for Nuclear Research, or CERN, located in Switzerland. The need for new material solutions has grown since increased process speeds and efficiencies are placing more stringent demands in the strength and durability of machine parts. Additionally, new kind of wear and spare part solutions that are more durable and cost-efficient are being developed for the needs of the service and aftermarket business.
     Metso Powdermet’s net sales totaled EUR 11 million and EUR 14 million in 2004 and 2005, respectively. As of December 31, 2005, Metso Powdermet had 26 employees.
Discontinued Operations
     On April 8, 2005, we completed the divestiture of Metso Drives to private equity investor CapMan. Metso Drives, previously part of Metso Ventures, is reported as a separate entity under Discontinued Operations.

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     On June 30, 2004, we completed the divestiture of our Compaction & Paving business, Dynapac, to Altor, a Nordic private equity investor. Dynapac was reclassified from Metso Minerals to Discontinued Operations.
     On December 31, 2004, the Drilling business of Metso Minerals, Reedrill, was divested and transferred to Terex Corporation of the United States. The business line was excluded from Metso Minerals and was reported as a separate entity under Discontinued Operations for the year ended December 31, 2004.
     In November 2002, we signed a memorandum of understanding with Bobst Group SA of Switzerland concerning the divestment of our Converting business. After the required competition authority approvals were received, the sale was completed on January 30, 2004. Converting business was excluded from Metso Paper in 2002 and was reported as a separate entity under Discontinued Operations for the year 2004 until its sale. See “—Corporate Structure” above for a further discussion of our corporate restructurings.
     The following table sets forth certain financial data regarding Discontinued Operations for the two most recent years:
                 
    As of and for the year ended December 31,
    2004   2005
    (EUR in millions, except personnel data)
Net sales
    397       26  
Operating profit(1)
    3       17  
Capital employed
    80        
Gross capital expenditure
    6       0  
Research and development
    10       1  
Order backlog
    53        
Personnel
    897        
 
(1)   Includes losses on disposals of EUR 29 million and gain on disposals of EUR 17 million for the years ended December 31, 2004 and 2005, respectively.
Drives
     The products of Metso Drives included power transmission solutions and gears for paper, pulp, minerals processing as well as for wind turbine and other industries. In addition to new equipment, it also provided expert services, spare parts and consumables.
Dynapac
     The products in the Compaction & Paving business, under the Dynapac product brand, included pavers, planers, rollers, light compaction equipment and concrete machinery. In addition to new equipment, the business also provided expertise through services, such as spare and wear parts as well as maintenance.
Drilling
     The Drilling business, under the Reedrill and Texoma product brands, offered equipment and services for drilling. The offering included track- and wheel-mounted drills and rotary drills for surface mining and excavation, multi-boom jumbo-drills for underground excavation and soil drilling equipment.
Converting
     Converting consisted of operations of Italian Valmet Rotomec (“Rotomec”) and UK based Atlas Converting plc (“Atlas”). Converting offered a wide range of machines for the packaging and printing industries.
     Rotomec specialized in rotogravure and flexo printing machines and special coating and laminating machines for packaging. Rotomec produced packaging industry machines for various materials, such as paper, board, aluminum and plastic sheets. Rotomec also produced printing machines for the production of wallpaper and interior furnishing materials. Atlas specialized in slitter rewinders and vacuum-metallizing equipment for the treatment of paper, film and aluminum foil for the converting industry. Its products were mainly used in the film and packaging industries.

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Raw Materials
     Each of our business areas procures the raw materials and subcomponents required for its operations from a network of multiple subcontractors and suppliers. We typically have long-term relationships with our network of suppliers, although long-term supply agreements are primarily used for certain key raw materials. No business area is dependent on a single supplier, and we emphasize the need to identify and monitor replacement suppliers in the event that a particular supplier is unable to meet our requirements. We manufacture internally many core components that are required for our operations.
     The types of raw materials and subcomponents that we use vary widely within each of our business areas. The most important include various mechanical and electrical components, subassemblies for Metso Paper and Metso Minerals as well as hardware, software and computer applications for Metso Automation. In addition, steel and other metals and minerals are required for Metso Paper’s and Metso Minerals’ operations. We have long-term supply agreements for the delivery of these key materials, with pricing terms following the prevailing market prices. However, we are not dependent on any single supplier and may procure these raw materials and subcomponents from multiple sources, including the open market. In addition, certain of our business areas require special raw materials. For example, Metso Paper requires rubber, polyurethane, composite and hard coatings in the production of paper machines, including roll covers. Also, Metso Minerals requires manganese, which is a mineral of limited global supply, in the production of castings for various wear parts. Also, Foundries within Metso Ventures requires scrap iron. No individual supplier or supply agreement is material.
     See “Item 3. Key Information—Risk Factors” for a discussion of the risks associated with our reliance on suppliers and subcontractors to procure raw materials and subcomponents.
Seasonality
     Seasonal variations affect, to a relatively limited extent, our net sales. This limited impact is mainly due to seasonality in our customers’ operations. Due to the timing and purchasing decisions in certain of our customer segments, deliveries and sales to such customer segments are typically higher in the fourth quarter than during the other quarters of the year. This applies to all of our business areas. However, large projects, which for us are pulp and paper or mining related, tend to have long delivery timetables and are recognized as sales each quarter based on the percentage of completion. Weather conditions provide an additional reason for some seasonality especially in our Metso Minerals’ Crushing and Screening business line. As customers in the northern hemisphere make required machinery investments to construct roads in the region’s summer months, this typically increases deliveries in the second quarter of the year.
Dependence on Intellectual Property
     We aim to create value through our ownership of intellectual property rights, which include Metso brand, patents, utility models, design protections, trademarks, copyrights and domain names. We emphasize our systematic intellectual property management and harmonized, corporate-wide practices. Attention is also paid to avoid infringements of the intellectual property rights of others.
     We seek to manage our intellectual property rights portfolios in a way that supports both competitiveness and technology leadership in our businesses. For example, our patent portfolio, including nearly 8,000 patents and over 3,100 pending applications, is regularly evaluated, screened and developed with current and future business needs and possibilities in mind to raise the value/cost ratio of the portfolio.
     In 2005, our employees filed approximately 660 invention disclosures. We sought protection in the form of patents for more than 160 new inventions relating to the products and services of all our business areas.
Governmental Regulation and Environmental Matters
     Our operations are subject to various local laws of the countries in which we operate, including the United States federal, state and local environmental laws and regulations. Under various environmental laws, including the U.S. Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended (“CERCLA”), a current or former owner or operator of property may become liable for the costs of remediation or removal of certain hazardous substances on its property, regardless of whether the owner or operator knew of, or was responsible for, the release of such substances. In addition, a generator of hazardous

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substances may be responsible for all or a portion of remedial and investigation costs at offsite disposal locations.
     Metso Minerals Industries, Inc. or its predecessors (“MMII”) have been named, together with a number of other parties, as a potentially responsible party (“PRP”) for the remediation of two Wisconsin landfills (Hunt and Muskego), which have been designated as superfund sites under CERCLA. As a PRP, MMII is jointly and severally liable for the clean-up costs of such sites. With respect to Hunt landfill site, MMII, together with the other named PRPs, has entered into a consent decree with the United States government pursuant to which MMII and such other parties have agreed to pay the clean-up costs. MMII has a 6.3 percent share of the clean-up costs and has paid USD 406,250 for its share. Construction of the selected remedy for the Hunt site was completed in 1996. Remaining obligations at the site relate to maintenance and monitoring of the selected remedy. Based on advise from environmental consultants and amounts remaining in applicable generator trusts and related accounts, no additional contribution is contemplated. The U.S. Environmental Protection Agency (“EPA”) is currently conducting a five-year review of the Hunt site. With respect to the Muskego site, there is an administrative order in place, and no activities at the Muskego site have occurred since 1996. Management estimates that Metso Minerals’ maximum remaining liability, including remediation liability, with respect to the Hunt and Muskego sites will not exceed the currently established reserve of USD 267,000.
     MMII also has three sites at which it is undertaking environmental investigations and/or clean up under applicable U.S. State law and regulatory oversight.
     Metso Minerals has three sites with certain outstanding environmental matters. The first is a former manufacturing site in Mt. Olive, New Jersey in the United States. With the closing of manufacturing operations in 1987, the New Jersey Industrial Site Recovery Act triggered an environmental assessment. Both soil and groundwater contamination was identified. To date, all known contaminated soil has been removed and the State of New Jersey Department of Environmental Protection (“NJDEP”) has issued a “No Further Action” letter regarding the soil contamination. MMII sold the site in December 2003. However, liabilities for ground water contamination issues were retained by MMII. In addition to the prior remediation activities at the site, MMII conducted a baseline ecological evaluation of the property as required by the NJDEP. The basic purpose of such evaluation was to determine whether site-related contamination presents a risk to or has impacted environmentally sensitive areas within or adjacent to the property. Such evaluation, together with a recommendation that no further ecological evaluation or testing be conducted at the site, was submitted to the NJDEP by an environmental consultant retained by us. NJDEP has yet to respond and there can be no assurance that the NJDEP agrees with such recommendation. However, taking into account (i) that we have purchased a pollution legal liability insurance policy for the site, which generally covers, subject to standard exclusions, clean-up costs, bodily injury and property damage for pre-existing and unknown pollution conditions, and (ii) that extensive prior remediation activities at the site have already been conducted, we do not anticipate any liability arising out of the final evaluation to be material. The estimated reserve required for the remediation measures relating to the ground water contamination and the completion of the baseline evaluation is USD 440,000.
     The second site is a former manufacturing property in Danville, Pennsylvania. Both soil and groundwater are contaminated with various contaminants from the historic manufacturing processes. In conjunction with the state of Pennsylvania, an approved remediation plan was developed and some soil was remediated. However, two additional areas of concern are being investigated and possibly remediated. USD 1 million has been reserved for estimated remediation costs.
     The third site is MMII’s former manufacturing facility in Pittsburg, Kansas. The Kansas Department of Health and Environment (“KDHE”) has advised MMII that the soil and groundwater at the site and soil at a nearby foundry sand disposal location allegedly used by an MMII predecessor contains various contaminants. MMII has reviewed the KDHE consultant report on the manufacturing site and disputes the findings with regard to the concentrations of contaminants. Nevertheless, in lieu of an enforcement action by the KDHE, MMII has applied to participate in a KDHE voluntary cleanup program relative to the manufacturing site, which will initially involve an investigation by consultants retained by MMII. No action has yet been taken with regard to the foundry sand site. A total of USD 325,000 has been reserved for estimated legal fees and investigation costs.
     MMII, through its Reedrill business that was divested on December 31, 2004, was earlier identified as a PRP in two CERCLA sites. At one of the sites, liability has been assumed by a predecessor company. Regarding the other site, MMII has responded in March 2000 to an EPA request for information and identified predecessor companies as the potentially responsible parties. To date, no response by EPA has been received.

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     The MMII industrial and office facility in Colorado Springs, Colorado, was sold on January 31, 2006. Environmental assessments were made and purchaser contractually assumed all environmental liability related to the facility and has also purchased a pollution legal liability policy where MMII is also named as insured.
     On November 15, 2005, the MMII Keokuk, Iowa office and manufacturing facility was sold. The purchaser contractually assumed responsibility for all environmental liability related to the property. This includes current and future liability to the Iowa Department of Natural Resources for current monitoring and future enhanced remediation activities relative to contaminated groundwater. Further, the individual owners of the purchaser entity indemnified MMII against claims for failure of the purchaser to satisfy its obligations under the sales contract.
     Metso Panelboard, part of the Metso Ventures business area, has previously owned a site with certain environmental concerns. The site, located in Belgium, was owned by Constructiewerkhuizen De Mets N.V., a company divested in 2001. Pursuant to the sale agreement, we are required to provide the purchaser with an environmental certificate by the Belgian authorities, to the effect that the soil at the so-called New Workshop site has not been contaminated. Consequently, a third party conducted environmental studies and assessed the site. OVAM (Belgian environmental authority) accepted the descriptive soil study in the fall of 2005. The study included 13 phases in total and indicated that groundwater has been polluted by chlorinated hydrocarbons but that soil has not been polluted. The use of the chemicals found in the groundwater ended at site in 1989. The precautionary measures to prevent the spreading of this historical pollution with the flow of ground water started in January 2005. A cleaning plan will be presented for acceptance to OVAM in the spring of 2006. In accordance with the conditions of the sale agreement, we have estimated that our remaining responsibility for remediation costs will be limited to the currently established reserve of EUR 0.7 million.
     We strive to help our customers to achieve better environmental performances with our products and services. Our product development aims to also anticipate the changing environmental requirements in our customer industries. Best practices for life cycle design and environmental design support these development projects. The environmental impacts of our own production operations are limited.
     In June 2000, we signed the International Chamber of Commerce (“ICC”) Business Charter for sustainable development, which compliments the environmental management principles of our own environmental policy. We expect that our most significant production sites will comply with ISO14001 environmental management systems in the future. In 2005, the ISO14001 certification was granted to three Metso sites, and the current amount of sites with the certification is 36. By the end of 2005, the ISO14001 systems covered 50 percent of the sales volume of our production facilities. When systems currently under development will be certified, 67 percent of our production activity will be covered. In 2005, we were selected a component in the European Dow Jones Sustainability Index, DJSI STOXX for the period of 2005-2006. We were also reselected for FTSE4Good corporate social responsibility index in 2005. In addition, we have been included in several other sustainability indices.
     We are committed to full compliance with all applicable national and international laws, regulations and generally accepted practices. Our environmental reporting procedure covers operating sites with significant environmental impacts. To our best knowledge, overall compliance with site-level permit conditions was proper in 2005. No major non-compliance situations were observed. Minor clean up, monitoring or investigation activities are being carried out at several sites as indicated above. However, our management anticipates that these cases do not result in material financial consequences for us and is not aware of any other current environmental matters that could reasonably be expected to have a material adverse effect on our business, financial condition or results of operations.
Property, Plants and Equipment
     Our principal executive offices are located at Fabianinkatu 9 A, Helsinki, Finland.

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     As of December 31, 2005, our principal office and manufacturing facilities included the following:
                 
    Owned or        
Location of Facility   Leased   Size (sq.ft)   Principal Activities
Metso Corporation
               
Helsinki, Finland
  Owned     86,920     Corporate head office
 
               
Metso Paper
               
Jyväskylä, Finland
  Owned     1,009,683     Large-sized Paper Machines
Järvenpää, Finland
  Owned     622,596     Paper Finishing Machines
Valmet-Xian, Xi’an, China(1)
  Leased     533,890     Paper and Board Machines, Foundry, Air Drying Systems
Sundsvall, Sweden
  Owned     424,417     Pulping Machinery
Karlstad, Sweden
  Owned     421,224     Board and Tissue Machines
Laem Chabang, Thailand
  Owned     312,524     Service Center
Valkeakoski, Finland
  Owned     230,921     Mechanical Pulping, Refiner Segments, Stock Preparation Equipment and Systems
Appleton, Wisconsin, United States
  Owned     166,000     Finishing Products, Roll Service
Turku, Finland
  Leased     155,252     Air Drying Systems
Columbus, Mississippi, United States
  Owned     149,079     Roll Covering
Aiken, South Carolina, United States
  Owned     124,400     Roll Covering
Turku, Finland
  Leased     118,403     Air Drying Systems
Neenah, Wisconsin, United States
  Owned     111,360     Roll Covering
Cernay, France
  Leased     110,312     Roll Covering
Clarks Summit, Pennsylvania, United States
  Owned     110,000     Roll Covering
Como, Italy
  Leased     96,835     Paper and Board Machine Rebuilds
Pfungstadt, Germany
  Owned     95,488     Service Center
Tampere, Finland
  Leased     91,386     Roll Factory
Gorizia, Italy
  Owned     89,179     Air Drying Systems
Biddeford, Maine, United States
  Owned     88,000     Tissue Air Drying Systems, Tissue Process Services for Paper Machines
Beloit, Wisconsin, United States
  Leased     86,800     Service Center
Oulu, Finland
  Owned     82,258     Roll Covering
Hollola, Finland
  Owned     77,149     Roll Handling
Hagfors, Sweden
  Owned     70,865     Refiner Segments
Järvenpää, Finland
  Leased     68,049     Paper Finishing Machines
Federal Way, Washington, United States
  Owned     62,683     Roll Covering
Como, Italy
  Leased     54,311     Paper and Board Machine Rebuilds
Thunder Bay, Canada
  Leased     50,908     Air Drying Systems
Wuxi, China
  Owned     50,388     Service Center
Melbourne, Australia
  Owned     49,060     Service Center
Corbehem, France
  Leased     48,450     Roll Covering
Montreal, Canada
  Leased     45,000     Service Center, Components
Shanghai, P.R. China
  Leased     43,670     Logistics Center
Sorocaba, São Paulo, Brazil
  Owned     43,011     Service Center
Florence, Alabama, United States
  Owned     40,000     Woodhandling
Valkeakoski, Finland
  Leased     32,832     Mechanical Pulping, Refiner Segments, Stock Preparation Equipment and Systems
Darmstadt, Germany
  Leased     9,149     Service Center
 
Metso Minerals
               
Sorocaba, São Paulo, Brazil
  Owned     740,260     Rock Crushers, Vibrating Equipment,
Castings, Rubber manufacturing
Isithebe, South Africa
  Leased     602,140     Manganese Wear Parts
Viña del Mar, Chile
  Owned     538,000     Wear Protection and Conveyors
Mâcon, France
  Owned     532,723     Rock Crushers and Vibrating Equipment
Tampere, Finland
  Owned     510,990     Rock Crushers, Mobile Crushing Equipment

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    Owned or        
Location of Facility   Leased   Size (sq.ft)   Principal Activities
Düsseldorf, Germany
  Owned     420,223     Metal Recycling Machines
Vereeniging, South Africa
  Owned     330,386     Rock Crushers, Pave parts
Ahmedabad, India
  Owned     63,399     Castings and Parts for Rock Crushers and Pumps
Bawal, India
  Owned     41,979     Rock Crushers, Vibrating Equipment and Pumps
Sala, Sweden
  Owned     247,570     Slurry Pumps and Process Equipment
Trelleborg, Sweden
  Leased     242,100     Rubber Manufacturing
Columbia, South Carolina, United States
  Owned     203,000     Vibrating Equipment and Spare Parts
Gastonia, North Carolina, United States(2)
  Owned     168,000     Vibrating Equipment
Warrenton, Missouri, United States
  Owned     150,000     Wire Screen Media Manufacturing
Clarksdale, Mississippi, United States
  Leased     138,400     Conveyor Component Manufacturing
Newcastle, Australia
  Owned     132,500     Vibrating Equipment and Spare Parts
York, Pennsylvania, United States
  Owned     131,965     Mill Equipment and Parts
Kongsvinger, Norway
  Leased     107,639     Conveyor Belts
Tampere, Finland
  Owned     96,875     Conveyor Belts
Ersmark, Sweden
  Owned     95,800     Rubber Manufacturing
Vicálvaro, Spain
  Owned     80,000     Rock Crusher Spare Parts and Vibrating Equipment
Portland, Oregon, United States
  Owned     70,968     Rock Crusher Service and Spare Parts
Matamata, New Zealand
  Owned     62,400     Rock Crushers and Spare Parts
Belleville, Canada
  Owned     58,000     Idler Manufacturing
Dungannon, Northern Ireland
  Owned     56,000     Mobile Screens
North Bay, Canada
  Owned     55,000     Rubber Manufacturing
Perth, Australia
  Owned     48,438     Rubber Manufacturing
Moers, Germany
  Owned     47,361     Conveyor Belts
Tianjin, China
  Owned     46,466     Rock Crushers
Evergem, Belgium
  Leased     46,285     Conveyor Belts
San Antonio, Texas, United States
  Owned     40,000     Office, Metal Recycling Machines
 
Metso Automation
               
Helsinki, Finland
  Leased     442,400     Office, Valve and Accessories Manufacturing and Testing
Tampere, Finland
  Owned     323,300     Office, Automation Systems Manufacturing and Testing
Shrewsbury, Massachusetts, United States
  Owned     175,000     Valve and Accessories Manufacturing
Shanghai, China(1)
  Leased     173,000     Valve Manufacturing
Lansdale, Pennsylvania, United States
  Leased     84,700     Office, Control Systems Manufacturing
Kajaani, Finland
  Leased     73,800     Office, Specialty Analyzers Manufacturing and Testing
 
Metso Ventures
               
Uusikaupunki, Finland
  Owned     1,216,000     Car Assembly
Hannover, Germany
  Leased     41,441     Office, Energy plants, dryers
Sundsvall, Sweden
  Leased     10,700     Office, MDF line machines
Nastola, Finland
  Leased     35,572     Office, Particleboard and OSB linemachines
Jyväskylä, Finland
  Owned     394,000     Foundry
Tampere, Finland
  Owned     288,020     Foundry
Karlstad, Sweden
  Owned     526,258     Foundry
 
(1)   Joint Venture, see “ —Associated Companies” below.
 
(2)   Scheduled to be closed during 2006.
     Our management believes that the production capacity of each of our production plants is adequate and suitable for our current business needs and that suitable additional or alternative space would be available in the future, if necessary, on commercially reasonable terms.

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Significant Subsidiaries
     The majority of our operating assets in Finland and outside of Finland are held through regional or divisional subsidiaries. As of December 31, 2005, our significant subsidiaries, as defined in Rule 1-02(w) of Regulation S-X, were as follows, each of which is wholly owned by Metso Corporation:
     
Company Name   Country of Incorporation
Metso Paper Oy
  Finland
Metso Minerals Oy
  Finland
Metso Minerals Holding AB
  Sweden
Metso USA Inc.
  United States
Associated Companies
     We currently own 35.8 percent of Allimand S.A., which, as of December 31, 2005, had an equity value of approximately EUR 5 million; 48.3 percent of Valmet-Xian Paper Machinery Co. Ltd., which had an equity value of approximately EUR 8 million; 50.0 percent of Shanghai Neles-Jamesbury Valve Co. Ltd., which had an equity value of approximately EUR 4 million; and 48.2 percent of Avantone Oy, which had an equity value of approximately EUR 1 million.
Item 4A. Unresolved Staff Comments.
     Not applicable.
Item 5. Operating and Financial Review and Prospects.
     The following discussion and analysis by our management concerning the financial condition and the results of operations of Metso should be read together with the consolidated financial statements included in this annual report. Our consolidated financial statements have been prepared in accordance with IFRS, which differs in certain significant respects from U.S. GAAP. A reconciliation of the amounts of net income and shareholders’ equity reported under IFRS to the amounts determined under U.S. GAAP, and a discussion of the principal differences between IFRS and U.S. GAAP are set out in Note 40 to our consolidated financial statements, included elsewhere in this annual report.
Business Overview
  Our Customers
     Our main customer industries are pulp and paper, rock and minerals processing as well as energy, oil and gas industries. Certain important trends apply to these industries, which have an effect on our operations. Service, refurbishment and rebuilds business, which is driven by the installed base of machinery and equipment, has been growing especially in Europe and North America, where our customers have been focusing more on efficiency improvements for their existing processes rather than investing on new machinery or equipment. Demand for new machinery and equipment focuses on areas with strong economic growth and/or good availability of raw materials required, which supports demand for pulp and paper as well as rock and minerals processing investments. Such areas include Asia and South America. Accordingly, we are in the process of adapting our own organization in Europe and North America by cutting new machine related resources and strengthened aftermarket and process service related resources, while, in the growing markets of Asia and South America, we have increased our new machine related resources.
  Business Drivers
     Paper consumption growth is the key driver for pulp and paper investments. Shorter-term capacity utilization rates and changes in pulp, paper and board prices have an effect on investment activity of Metso Paper’s customers. Also changes in environmental legislation have an impact on their investment activity. Within the paper industry, new papermaking capacity has mostly been built in Asia, mainly China, during the past few years. The demand in the Chinese market has been supported by economic growth that, in turn, has increased paper consumption significantly. The equipment demand has been increasing for high-grade paper products, which has increased the investments of Metso Paper’s customers in high-speed and high-quality machinery and equipment. Most of Metso Paper’s net sales still originate from Nordic countries, Western

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Europe and North America, while demand for paper and board is increasing faster than average in Eastern Europe, Asia, South America and Africa. South American customers have in the recent years been active in investing in new pulping capacity due to the good availability of fast growing wood resources, such as eucalyptus, in the region. Our management expects that this competitive advantage will continue to support demand for pulp equipment in South America during the next several years as well. Asia is also a growing market for pulping lines. Our customers in the European pulp and paper industry have in the past few years focused on machine rebuilds and process improvements even though some major new capacity investments have also been made. As demand for paper products in Europe is not expected to increase significantly, the current investment level could continue for a few years. In North America, investment activity in the pulp and paper industry has been low. In packaging board, the consumption is estimated to grow especially in China, because various packaging intense export industries have moved there from the Western countries and Japan. Packaging board is also becoming lighter. This trend is clear in Europe, where machines are being developed to produce lighter grades. Development of the converting and printing methods related to packaging materials has led to stricter quality requirements, which is reflected in the demand for board machine rebuilds. An increase in the demand for daily consumer goods in the emerging markets requires an increase in the production of interior packaging materials in these areas. Our management expects the demand for tissue machines to grow especially in the emerging markets, most of all in Asia. In these markets, demand has been greatest for small and less expensive machines. Our management expects also the demand for the larger tissue machines to pick up gradually in North America.
     Metso Minerals’ business environment is dependent on the demand in the civil engineering, mining and metal recycling industries. Development of the civil engineering industry is affected especially by the amount of infrastructure investments, which is reflected directly in the demand for aggregates. The mining industry’s willingness to invest is affected by changes in the demand for and price of metals. Aggregates demand is forecasted to grow especially in China, India, Russia, the United States and Eastern Europe. Aggregates production is increasing in the United States, due to the fact that, in July 2005, the United States Congress approved a new Transportation Equity Act (SAFETEA-LU), allocating almost USD 300 billion for the development of the country’s transportation infrastructure until 2009. This is a 30 percent increase compared to the amount that was reserved for the development of the country’s transportation infrastructure for the previous six-year period. Our management believes that this bill will have a positive effect on Metso Minerals’ business, especially during the first three years. Road construction projects in Eastern Europe supported by the EU are also expected to increase the demand for Metso Minerals’ aggregates production equipment. In North America and Europe, demand for our products in the mining industry is weighted towards the aftermarket and service business. New mining projects are being started mainly in the southern hemisphere. The most significant factor affecting demand for minerals has been the rapid growth of the Chinese economy, making China the world’s leading consumer of metals. Customers’ high capacity utilization during a favorable price and demand situation has also increased demand for Metso Minerals’ products. Mining companies have tried to respond to higher demand especially by increasing their material handling capacity. However, the lack of resources, and especially of experienced project managers and engineering personnel, is expected to level out demand in the coming years, and investment project schedules have, in some cases, been lengthened. The demand for scrap metal is expected to remain strong in the next few years. Steel companies are using increasingly more scrap metal for production instead of virgin iron ore.
     Approximately one-half of Metso Automation’s net sales are derived from the pulp and paper industry, and the apparent trends in that industry affect the business environment of Metso Automation. Most of the remaining sales are derived from the energy, oil and gas industries where customer investment activity reflects both the demand for and price of oil and energy. New pulp and paper industry investments are focused mainly in Asia and South America. The aging machine and equipment base in Europe and North America is increasing the demand for performance-enhancing solutions and services. This is estimated to increase the significance of automation solutions, such as preventive condition monitoring. Demand for oil has outpaced the producers’ ability to boost their capacity, and nowadays oil refining capacity is insufficient in relation to the demand for end products. The resulting sharp rise in the price of crude oil and petroleum products is expected to lead to the construction of new refining capacity and the modernization of existing production plants. Since the demand for oil and petroleum products is greater than the supply, the demand for valves is expected to increase and the valve market is expected to remain good. Moreover, the energy and process industry is expected to increase its investments in automation systems.
Key Management Issues
     In 2005, the key issues in our management were to secure continued positive profitability improvement in all our business areas as a result of restructuring actions taken in 2003-2004 and to simultaneously exploit the

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favorable development in the market environment. In Metso Paper, we still continued our restructuring actions mainly during the first half of the year while in the other business areas the focus was clearly moved from restructuring to continuous improvement. In August 2005, we launched our new profitable growth strategy for the 2006-2008 strategy period and started consequently to move more focus to growth issues including also potential complementary acquisitions. For a discussion of our strategy, see “Item 4. Information on the Company — Strategy.”
     Going forward, we aim to target annual net sales growth of approximately ten percent at the Metso level to support sustainable profit development and to strengthen our market leadership positions. All our business areas will also continue their efforts to further improve their competitiveness, productivity and quality as well as enhance customer satisfaction. We will complement our life cycle product and service offering both through own development as well as through complementary acquisitions. We will also put special emphasis to strengthen our sales, customer service, sourcing and manufacturing closer to our customers in emerging markets, such as China, India and South America.
Metso Paper’s Business Concept Renewal Program of 2004
     In 2005, we continued our actions to strengthen Metso Paper’s competitiveness by finalizing the execution of the Metso Paper’s restructuring program, MP50, launched in June 2004. Actions in 2005 covered mainly the Tissue business line. In 2005, nonrecurring costs of EUR 7 million were recorded relating to the business concept renewal program in addition to EUR 24 million recognized already in 2004. The annual savings generated by the business concept renewal program are estimated at more than EUR 43 million of which three-fourths materialized already in 2005.
Efficiency Improvement Program of 2003
     In 2003, our Board of Directors adopted an efficiency improvement program designed mainly to cut fixed costs. The efficiency improvement program was completed in all our business areas during 2004. The program is estimated to have resulted in annual savings of slightly over EUR 100 million, which is in line with the original target. As a result of the efficiency improvement program, our personnel was reduced by approximately 2,000 persons. The costs of the program were approximately EUR 93 million.
     In Metso Paper, the annual cost savings through the efficiency improvement program have been slightly above EUR 30 million. The organization of Metso Paper was streamlined and Metso Paper’s workforce was reduced in Finland, Sweden, Italy and North America. In addition, part of our in-house manufacturing capacity in Finland was outsourced.
     In Metso Minerals, the annual cost savings through the efficiency improvement program were just over EUR 50 million. Operational efficiency was improved through the reduction of personnel in factories as well as in the global sales and service network. As part of the program, we closed down the production plant for mining crushers in Milwaukee, Wisconsin, the United States, a plant for mining industry process equipment and pumps in Colorado Springs, Colorado, the United States, a foundry in Vereeniging, South Africa, a rubber wear part factory in Keokuk, Iowa, the United States, and a plant for mining and crushing screens in Ketsch, Germany. We also adjusted our wear protection business in two Swedish units during 2004.
     In Metso Automation, the annual cost savings through the efficiency improvement program were approximately EUR 8 million. The organization was streamlined and the workforce was reduced in Finland and North America and in the global sales network by mid-2004. As part of the efficiency improvement program, Metso Automation also divested CPS Electronics Inc., a contract manufacturer of electronics, in September 2003.
     Smaller annual cost savings materialized in Metso Ventures and in our corporate head office in Finland. Within Metso Ventures, two Metso Panelboard units in Germany were combined as part of the efficiency improvement program. At the corporate head office, some personnel reductions were made.
Recent Acquisitions and Divestments
     The most significant development since the formation of Metso through the merger of Valmet and Rauma was our acquisition of Svedala in 2001 in order to build ourselves into a globally leading player in rock and minerals processing, alongside our similar position in the pulp and paper industry. In 2002-2003, we have

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focused on developing our corporate structure further by divesting several businesses that were not considered integral parts of Metso. Following the launch of our new profitable growth strategy in August 2005, we have actively been looking for growth also through complementary acquisitions.
     In February 2006, Metso Paper entered into an agreement to acquire the entire share capital of Shanghai-Chenming Paper Machinery Co. Ltd, a Chinese manufacturer of paper machines. The company is currently owned by Shandong Chenming and Shanghai Heavy Machinery, and it is located in the Shanghai area in Jiading, China. The finalization of the transaction is subject to approval by the Chinese authorities. The value of the transaction will be published after the transaction has been finalized.
     In February 2006, Metso and Aker Kvaerner signed a letter of intent concerning the proposed acquisition by Metso of Aker Kvaerner’s Pulping and Power business. The acquisition is subject to, among other things, the completion of the due diligence process conducted by us and signing of a final sale and purchase agreement. The parties aim to sign the final agreement by mid-April 2006. The final closing of the proposed transaction will require relevant regulatory approvals. The agreed cash and interest bearing debt free enterprise value is EUR 335 million, which is subject to closing adjustments.
     In August 2005, we acquired Texas Shredder, Inc., a supplier of metal shredder products located in San Antonio, Texas, the United States. The sellers were a group of private investors led by Capital Southwest Corporation, a venture capital investment company. The acquisition price was approximately EUR 14 million.
     In April 2005, we sold Metso Drives to the funds managed by private equity investor CapMan of Finland. The debt-free price of the divestment was approximately EUR 98 million.
     In December 2004, we sold our Drilling business to Terex Corporation of the United States. Drilling had net sales of EUR 75 million in 2004 and approximately 280 employees. The divestment value, which was based on the net asset value at closing, was approximately EUR 29 million.
     In June 2004, we divested our Compaction & Paving business that operated under the Dynapac brand name to Altor, a Nordic private equity investor. Dynapac had net sales of EUR 322 million in 2003 and approximately 1,800 employees. The transaction price was EUR 291 million net of cash sold.
     In January 2004, we sold the Converting business to Bobst S.A. of Switzerland. Converting had net sales of EUR 183 million in 2003 and approximately 800 employees. The final transaction price was EUR 68 million net of cash sold.
Critical Accounting Policies
     The preparation of our consolidated financial statements in accordance with IFRS requires our management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. We believe our estimates and assumptions to be reasonable. However, actual results and the timing of the recognition of such amounts could differ from those estimates. We have identified the following critical accounting policies and estimates utilized by our management in the preparation of our consolidated financial statements.
     In some instances, accounting policies followed in accordance with U.S. GAAP (as reported in Note 40 to the financial statements) differ from those policies followed in accordance with IFRS. Where the difference in accounting policy is material and contains significant critical estimates, we have included a separate discussion of those policies below.
Trade Receivables
     Our policy is to maintain an allowance for bad debt based on the best estimate of the amounts that are potentially uncollectable at the balance sheet date. The estimates are based on a systematic, on-going review and evaluation performed as part of the credit risk evaluation process. As part of this evaluation, we take into account the history of collections, the size and compositions of the receivable balances, current economic events and conditions and other pertinent information.
     We believe that the accounting estimate related to the establishment of a reserve for credit losses is a critical accounting estimate because:

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     (1) the evaluation is inherently judgmental, and requires the use of significant assumptions about expected customer default amounts that may be susceptible to significant change; and
     (2) changes in the estimates regarding the allowance for bad debts could have a significant impact on our financial statements.
Allowance for Slow-Moving and Obsolete Inventory
     Our policy is to maintain an allowance for slow moving and obsolete inventory based on the best estimate of such amounts at the balance sheet date. The estimates are based on a systematic, on-going review and evaluation of inventory balances. As part of this evaluation, we also consider the composition and age of the inventory as compared to anticipated future needs.
     We believe that the accounting estimate related to the establishment of inventory obsolescence reserves is a critical accounting estimate because:
     (1) the evaluation is inherently judgmental, and requires the use of significant assumptions about the expected future sales composition, that may be susceptible to significant change; and
     (2) changes in the estimates regarding the allowance for inventory obsolescence could have a material impact on our financial statements.
Revenue Recognition
     We deliver complete installations to our customers, where the moment of signing a sales contract (firm commitment) and the final reception of a delivery by the customer can take place in different financial periods. In accordance with our accounting principles, we apply the percentage of completion method (“POC method”) for recognition of such long-term delivery contracts. In 2005, of our net sales amounting to EUR 4,221 million approximately 30 percent were recognized under the POC method, which is based on pre-determined milestones and where the revenue is recognized based on the estimated realized value added or on the cost-to-cost method. A projected loss on a firm commitment is recognized in income, when a contract becomes binding. The estimated revenue, the costs and profit, together with the planned delivery schedule of the projects are subject to regular revisions as the contract progresses to completion. Revisions in profit estimates are charged to income in the period in which the facts that give rise to the revision become known. Although we have significant experience using the POC method, the total costs estimated to be incurred on projects may change over time due to changes in the underlying project costs structures, which may ultimately affect the revenue recognized. As the reliability of cost estimates is based on our experience in manufacturing and delivering paper machines, pulp making lines, process automation solutions, panelboard lines and minerals processing equipment, the POC method is not applied for sales where the final outcome of the project and related costs cannot be pre-established reliably.
Accounting for Income Taxes
     As part of the process of preparing our consolidated financial statements, we are required to estimate the income taxes in each of the jurisdictions and countries in which we operate. This process involves estimating the actual current tax exposure together with assessing temporary differences resulting from differing treatment of items, such as deferred revenue and cost reserves, for tax and accounting purposes. These differences result in deferred tax assets and liabilities, which are included in the consolidated balance sheet. We assess the likelihood that our deferred tax assets will be recovered from future taxable income, and to the extent the recovery is not considered likely, the deferred asset is adjusted accordingly.
     Significant management judgement is required in determining the provision for income taxes and the deferred tax assets. We have recorded net deferred tax assets of EUR 143 million as of December 31, 2005, net of unrecorded amount of EUR 140 million for uncertainties related to our ability to utilize some of our deferred tax assets, primarily consisting of operating losses carried forward and deductible temporary differences for certain foreign subsidiaries and the final outcome of tax audits in some subsidiaries. The adjustment is based on our estimates of taxable income by country in which we operate, and the period over which the deferred tax assets will be recoverable based on estimated future taxable income. In the event that actual results differ from these estimates, the deferred tax asset may need to be adjusted in coming financial years.

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Allocation of Excess Purchase Price to Acquired Assets
     In accordance with our accounting principles, we have allocated excess purchase price to acquired property, plant and equipment and intangible assets and liabilities. Whenever feasible, we have used as a basis for such allocations readily available market values to determine the fair value basis. However, when this has not been possible, as often is the case with non-current intangible assets and certain assets with no active markets or available price quotations, the valuation has been based on past performance of such asset and its intended future use in the acquirer’s business. The appraisals, which have been based on current replacement costs, discounted cash flows and estimated selling prices depending on the underlying asset, require management to make estimates and assumptions of the future use of these assets and their impact on our financial position. Any change in our future business priorities and orientations may affect the planned outcome of initial appraisals.
Valuation of Property, Plant and Equipment and Intangible Assets and Goodwill
     The carrying value of identifiable intangible assets with indefinite economic life and goodwill is tested annually, or more frequently if events or changes in circumstances indicate that such carrying value may not be recoverable. The carrying values of property, plant and equipment and intangible assets, subject to depreciation and amortization, are reviewed for impairment whenever there are indications that their carrying values could exceed their value in use or disposal value if disposal is considered as a possible option. Triggering events for impairment reviews include the following:
    material permanent deterioration in the economic or political environment of our customers or of our own activity;
 
    significant under-performance relative to expected historical or projected future performance; and
 
    significant changes in Metso’s strategic orientations affecting the business plans and previous investment policies.
     The accounting policy related to the impairment tests is based on numerous estimates. The valuation is inherently judgmental and highly susceptible to change from period to period because it requires us to make assumptions about future supply and demand related to our individual business units, future sales prices and what cost savings will be achievable. The value of the benefits and savings expected to be realized as a result of the efficiency improvement program are inherently subjective. The fair value of the reporting units is determined using a derived weighted average cost of capital as the rate to discount estimated future cash flows. This rate may not be indicative of actual rates obtained in the market. A one percent increase in the discount rates applied for determining the fair values of the cash generating units would have reduced the total fair value of units tested by approximately ten percent and would not have indicated any impairment needs.
     Our accounting policy related to the annual impairment test for goodwill and other indefinite-lived intangibles is based on numerous estimates. We believe that the accounting estimates related to the recoverability of the carrying value of goodwill and intangible assets are critical accounting estimates because:
     (1) the valuation is inherently judgmental and highly susceptible to change from period to period because it requires us to make assumptions about future supply and demand related to our individual business units, future sales prices and what cost savings will be achievable;
     (2) the value of the benefits and savings that we expect to realize as a result of the efficiency improvement program are inherently subjective;
     (3) we determine the fair value of the reporting units using a weighted average cost of capital as the rate to discount estimated future cash flows. This rate may not be indicative of actual rates obtained in the market, if incremental borrowings are necessary; and
     (4) the impact of an impairment charge could be material to our financial statements.
     If we fail to meet our forecasted sales levels, fail to achieve our anticipated cost reductions, or if weak economic conditions prevail in our primary markets, the estimated fair values of our reporting units may be adversely affected, resulting in impairment charges.

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U.S. GAAP
     Under U.S. GAAP, as a result of the adoption of SFAS 141 and SFAS 142, goodwill and certain intangible assets having indefinite lives are no longer subject to amortization. Their book values are tested annually for impairment, or more frequently, if facts and circumstances indicate the need. Fair value measurement techniques, such as the discounted cash flow method, are utilized to assess potential impairments. The testing is performed on the reporting unit level, which can be either a reportable segment or one level below reportable segment. In the discounted cash flow method, we discount forecasted performance plans to their present value. The discount rate utilized is the weighted average cost of capital for the reporting unit, calculated as the opportunity cost to all capital providers weighted by their relative contribution to the reporting unit’s total capital and the risk associated with the cash flows and the timing of the cash flows. Comparison methods (e.g., peer comparables) and other estimation techniques are used to verify the reasonableness of the fair values derived from the discounted cash flow assessments.
     U.S. GAAP requires the impairment test to be performed in two stages. If the first stage does not indicate that the carrying values of the reporting units exceed the fair values, the second stage is not required. In the opposite case, the company has to go through the second stage of the impairment test and compare the implied fair value of the reporting units’ goodwill to the corresponding carrying value of goodwill.
Reserve for Warranty Costs
     The warranty reserve is based on the history of past warranty costs and claims for machines and equipment under warranty. The typical warranty period is 12 months from the date of customer acceptance of the delivered equipment. For larger projects, the average warranty period is two years. For sales involving new technology and long-term delivery contracts, additional warranty reserves can be established on a case by case basis to take into account the potentially increased risk.
Restructuring Costs
     At times, we record restructuring provisions as a result of programs that are implemented throughout our operations. These provisions are recorded in order for us to summarize the impacts of the programs and separate these costs from our recurring operations. When the preliminary decisions are made to undertake restructuring activities, our management develops a formal plan and presents this to our Board of Directors for approval. Once the plan is approved, our management raises a valid expectation in those affected that it will carry out the restructuring by starting to implement that plan or announcing its main features to those affected by it. The costs included in a provision for restructuring are only those costs that are either incremental and incurred as a direct result of the plan, or are the result of a continuing contractual obligation with no continuing economic benefit to us, or a penalty incurred to cancel the contractual obligation. These costs are estimated based on numerous significant assumptions including, but not limited to, the following assumptions:
     (1) approximate termination costs for specific contracts, leases, etc.; and
     (2) estimated write-downs of asset values based on revised future cash flow projections.
     We believe that the calculation of the amount recorded as a restructuring cost is a critical accounting policy because:
    although management has devised a formal plan, the plan has not yet been fully implemented at the time the expense is recorded. There could be significant changes to the plan and associated costs upon completion of the measures included in the plan;
 
    the estimated reduction in capacity for specific manufacturing plants is based on our management’s anticipated future levels of production based on estimated future order intake. Final outcome could differ from projected amounts due to changes in the overall market conditions; and
 
    estimated write-downs of asset values are based on calculations that are inherently subjective. These calculations include assumptions of future cash flows to be generated from the assets, estimated growth rates and estimated discount rate of the future cash flows, as well as an overall assurance regarding the intended use of these assets.

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     Under U.S. GAAP, a liability for a cost associated with an exit or disposal activity is recognized when the liability is incurred, and can be measured at fair value. These costs include, but are not limited to, one-time benefits provided to current employees who are involuntary terminated and costs to terminate contracts that are not capital leases. If employees are required to render service until they are terminated in order to receive the termination benefits, the cost under U.S. GAAP is recognized ratably over the future service period.
Pensions
     In accordance with IAS19, the pension benefit expense is based on assumptions that include the following:
    A weighted average expected return on plan assets. Actual return on plan assets may differ significantly based on market activity;
 
    An assumed discount rate to be used in the calculation of the current year pension expense and pension liability balance. This rate may not be indicative of actual rates realized in the market; and
 
    Estimated rates of future pay increases. Actual increases may not reflect actual future increases. Based on the significant changes in the Company’s structure and the uncertainty of the global market place, these estimates are difficult to project.
     The actuarial experience that differs from the assumptions and changes in the assumptions can result in gains and losses that are not yet recognized in the consolidated financial statements. We recognize amortization of any unrecognized gain or loss as a component of the pension expense if, as of the beginning of the year, such unrealized net gain or loss exceeds ten percent of the greater of (1) the projected benefit obligation or (2) the market-related value of the plan’s assets. In such case, the amount of amortization expense recognized is the resulting excess, divided by the average remaining service period of active employees expected to receive benefits under such plan. A one percent increase in the expected return on plan assets would have reduced pension benefit expense by approximately EUR 2 million, and a one percent decrease in the expected return on plan assets would have increased pension benefit expense by approximately EUR 2 million for the year ended December 31, 2005.
Results of Operations
     Our reportable segments are Metso Paper, Metso Minerals, Metso Automation and Metso Ventures. In addition, we report divested businesses under Discontinued Operations. In January 2004, we sold the Converting business, previously part of Metso Paper. In June 2004, we divested our Compaction & Paving business, previously part of Metso Minerals. In December 2004, we sold the Drilling business, previously part of Metso Minerals, and in April 2005, we sold Drives, previously part of Metso Ventures. These four businesses are reported separate under Discontinued Operations. See “Item 4. Information on the Company—Corporate Structure” for a more detailed description of our corporate restructurings, which are reflected in the financial information discussed below.
     The table below sets forth our net sales by business area for the two most recent years:
                 
    Year ended December 31,
    2004   2005
    (EUR in millions)
Metso Paper
    1,559       1,702  
Metso Minerals
    1,366       1,735  
Metso Automation
    535       584  
Metso Ventures
    230       284  
Intra Metso net sales
    (88 )     (84 )
 
               
Metso total
    3,602       4,221  
 
               

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     The table below sets forth our operating profit (loss) by business area for the two most recent years:
                 
    Year ended December 31,  
    2004(1)     2005(2)  
    (EUR in millions)  
Metso Paper
    48       91  
Metso Minerals
    105       177  
Metso Automation
    69       81  
Metso Ventures
    (6 )     11  
Corporate Office and Other
    (17 )     (25 )
 
           
Metso total
    199       335  
 
           
 
(1)   The operating profit includes nonrecurring income resulting from reversal of Finnish pension liability as follows: Metso Paper EUR 39.8 million, Metso Minerals EUR 4.9 million, Metso Automation EUR 13.7 million, Metso Ventures EUR 14.6 million and Corporate Office and Other EUR 2.3 million.
 
(2)   The operating profit includes nonrecurring income resulting from reversal of Finnish pension liability of EUR 5 million.
Results of Operations for the Year Ended December 31, 2005 compared to the Year Ended December 31, 2004
Net Sales for Continuing Operations
     The Group. In 2005, our total consolidated net sales were EUR 4,221 million, compared to net sales of EUR 3,602 million in 2004, representing an increase of EUR 619 million, or 17 percent. The growth in net sales was almost entirely organic and resulted from the favorable market situation, improved competitiveness and our strengthened customer focus. All of our business areas increased their deliveries. Growth was strongest at Metso Minerals, which recorded a growth in net sales of 27 percent. Metso Paper accounted for 39 percent, Metso Minerals 40 percent, Metso Automation 14 percent and Metso Ventures 7 percent of our net sales in 2005. Both in 2005 and 2004, 92 percent of our net sales were derived from exports and international operations. Our order intake in 2005 amounted to EUR 4,745 million, representing an increase of EUR 756 million, or 19 percent, from EUR 3,989 million in 2004. Metso Paper’s order backlog strengthened by 34 percent and Metso Minerals by 52 percent during 2005. The order backlog of Metso Automation remained at the same level as at the end of 2004. Our order backlog from continuing operations as of December 31, 2005 was EUR 2,350 million, representing an increase of EUR 645 million, or 38 percent, from EUR 1,705 million as of December 31, 2004.
     Metso Paper. In Metso Paper’s markets, the demand for rebuilds and aftermarket operations was good. The demand for new paper and board machines was strongest in Asia. Tissue machine markets clearly picked up during the first half of 2005, and the demand remained good for the remainder of the year. The demand for new fiber lines was excellent in South America and good in Asia. In Europe, fiber line demand was focused on rebuilds.
     In 2005, net sales of Metso Paper amounted to EUR 1,702 million, compared to net sales of EUR 1,559 million in 2004, representing an increase of EUR 143 million, or 9 percent. The growth was due to an increase in paper machinery and fiber line deliveries. The most significant delivery was a newsprint line to Stora Enso’s Kvarnsveden mill in Sweden. Share of the aftermarket operations remained at the same level as in 2004 and accounted for 35 percent of Metso Paper’s net sales.
     Metso Paper’s order intake in 2005 amounted to EUR 1,993 million, representing an increase of EUR 267 million, or 15 percent, over EUR 1,726 million in 2004. Metso Paper’s largest orders in 2005 were paper making lines for the Czech Republic, Indonesia and China, board machines for Turkey and China and the world’s largest pulp drying line for Brazil. Compared to 2004, the growth was proportionately the largest for the Tissue and Fiber business lines’ orders. A number of orders were received for deliveries of the new Advantage DCT 100 machine concept tissue machines. Metso Paper’s order backlog as of December 31, 2005 totaled to EUR 1,267 million, representing an increase of EUR 321 million, or 34 percent, over EUR 946 million as of December 31, 2004.
     Metso Minerals. Active investments in the mining industry supported the demand for Metso Minerals’ mining equipment to an excellent level throughout the year 2005. The strong demand for iron ore also boosted orders for bulk materials handling systems in countries of major iron ore producers, such as Brazil, Australia and China. Due to important road network development projects and other ongoing infrastructure investments in

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Europe, North America and, for example, in India, the demand for Metso’s crushing and screening equipment was good. The price of scrap iron, which remained high throughout 2005, assisted in maintaining the demand for metal recycling equipment at an excellent level.
     In 2005, net sales of Metso Minerals were EUR 1,735 million representing an increase of EUR 369 million, or 27 percent, compared to net sales of EUR 1,366 million in 2004. Due to good demand, deliveries increased in all of Metso Mineral’s business lines. Aftermarket operations accounted for 46 percent of Metso Mineral’s net sales in 2005, compared to 51 percent in 2004. Since project and equipment deliveries increased significantly, the relative proportion of the aftermarket operations was lower than in 2004. However, measured in euro, the volume of the aftermarket operations increased by 15 percent.
     Metso Minerals’ order intake in 2005 amounted to EUR 1,936 million, representing an increase of EUR 370 million, or 24 percent, from EUR 1,566 million in 2004. Metso Minerals’ largest orders included bulk materials handling systems for Brazil, an extensive cable belt conveying system for Australia, grinding mills for Brazil and lime calcination plants for China. The largest relative increase, almost 30 percent, was achieved in orders for the Recycling business line. The growth was partly attributable to Texas Shredder, acquired during the third quarter of 2005. The orders for the Minerals Processing and the Crushing and Screening business lines increased by approximately 25 percent from 2004. Metso Minerals’ order backlog as of December 31, 2005 amounted to EUR 852 million, representing an increase of EUR 292 million, or 52 percent, from EUR 560 million as of December 31, 2004.
     Metso Automation. The high price of power and crude oil was reflected in investment growth and kept the demand for Metso Automation’s field equipment needed at power plants and refineries at an excellent level, and the demand for automation systems at a good level. In the pulp and paper industry, high capacity utilization rates kept the demand for field equipment at a good level, but, due to weak new investment activity the demand for automation systems was satisfactory.
     In 2005, net sales of Metso Automation were EUR 584 million, compared to net sales of EUR 535 million in 2004, representing an increase of EUR 49 million, or 9 percent. Growth was mainly due to increased field equipment deliveries to the energy, oil and gas industries. Aftermarket operations accounted for 24 percent of net sales, compared to 25 percent in 2004. However, measured in euro, the volume of the aftermarket operations rose by five percent.
     Despite the good market situation, the value of new orders received by Metso Automation remained at the previous year’s level, totaling EUR 580 million in 2005. This represented an increase of EUR 10 million, or 1.8 percent, from EUR 570 million in 2004. More orders were received for field equipment than for automation systems. Metso Automation has started measures to strengthen its sales and service network by hiring approximately 100 employees during 2006 to secure future growth. Metso Automation’s order backlog as of December 31, 2005 amounted to EUR 179 million, representing an increase of EUR 3 million, or 2 percent, from EUR 176 million as of December 31, 2004.
     Metso Ventures. In 2005, net sales of Metso Ventures were EUR 284 million, compared to net sales of EUR 230 million in 2004, representing an increase of EUR 54 million, or 23 percent. This growth was mainly due to Valmet Automotive doubling its production volumes from the previous year, as the manufacturing of a second Porsche model began. Other factors contributing to the increase in Metso Ventures’ net sales were the good delivery situation of the Foundries throughout the year and the increase in the deliveries of Metso Panelboard in the fourth quarter of 2005.
     Metso Ventures’ order intake in 2005 amounted to EUR 324 million, representing an increase of EUR 111 million, or 52 percent, from EUR 213 million in 2004. Metso Ventures’ order backlog amounted to EUR 104 million as of December 31, 2005, representing an increase of EUR 38 million, or 58 percent, from EUR 66 million as of December 31, 2004.
Net Sales for Discontinued Operations
     Discontinued Operations. In 2005, net sales of Discontinued Operations were EUR 26 million, compared to net sales of EUR 397 million in 2004. Discontinued Operations include the Drives business, previously part of Metso Ventures, sold in April 2005; the Converting business, previously part of Metso Paper,

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sold in January 2004; the Compaction & Paving business, previously part of Metso Minerals, sold in June 2004; and the Drilling business, previously part of Metso Minerals, sold in December 2004.
Operating Profit/(Loss) for Continuing Operations
     The Group. In 2005, our consolidated operating profit was EUR 335 million, compared to an operating profit of EUR 199 million in 2004, representing an improvement of EUR 136 million. The operating profit in 2004 was increased by a nonrecurring income of EUR 75 million from the reversal of pension liability, resulting from the changes made in the Finnish TEL (employees’ pension) system in December 2004 while the corresponding income in 2005 amounted to EUR 5 million. Furthermore, the 2004 operating profit included EUR 24 million of restructuring expenses related to Metso Paper’s MP50 efficiency improvement program, whereas the 2005 result only included similar expenses of EUR 7 million. In 2005, cost of goods sold amounted to EUR 3,110 million, which represented 73.7 percent of net sales in 2005, compared to EUR 2,673 million in 2004, or 74.2 percent of net sales in 2004. Sales, general and administration costs in relation to net sales decreased from 22.2 percent in 2004 to 18.8 percent in 2005, which had a clear positive impact on operating profit. Our operating profit margin improved to 7.9 percent in 2005 from 5.5 percent in 2004. All our business areas improved their profitability. Strong performance of Metso Minerals and Metso Automation was due to increased delivery volumes, more streamlined cost structure and improved productivity. Metso Paper’s profitability improved as a result of higher deliveries, the implemented efficiency improvement measures and a trimmed cost structure.
     Metso Paper. In 2005, the operating profit of Metso Paper was EUR 91 million, compared to an operating profit of EUR 48 million in 2004, representing an increase of EUR 43 million, or 90 percent. Metso Paper’s operating profit margin improved to 5.3 percent in 2005 from 3.1 percent in 2004. The operating profit of 2004 was increased by a nonrecurring income from the reversal of EUR 39.8 million pension liability, resulting from the changes made in the Finnish TEL (employees’ pension) system in December 2004 while the corresponding reversal in 2005 amounted to EUR 3.2 million. Growth in deliveries, the efficiency improvement measures and a streamlined cost structure clearly improved profitability. All business lines improved their profitability on the comparison year. Proportionally, the largest profitability improvement was achieved in the Fiber business line due to the good market situation. The Tissue business line’s operating result for the year was a clear loss, but due to the restructuring measures implemented and an improved market situation, the loss for the second half of 2005 was substantially smaller than for the first half of the year. In 2004, Metso Paper’s operating profit was burdened by EUR 15 million of costs recorded for the delay and possible cancellation of the Papiers Gaspésia project in Chandler, Quebec, Canada. The operating profit in 2004 was further burdened by nonrecurring expenses of EUR 24 million booked relating to Metso Paper’s business concept renewal program launched in June 2004. In 2005, the above-mentioned Papiers Gaspésia project was brought to conclusion by its previous owners, the city of Chandler and the creditors, including Metso. In connection with the arrangement, Metso Paper received a payment of approximately EUR 4 million, which was recorded in the operating profit in 2005. Metso Paper has no remaining obligations relating to the project. The operating profit in 2005 also included nonrecurring expenses of EUR 7 million booked relating to Metso Paper’s business concept renewal program launched in June 2004.
     Metso Minerals. In 2005, the operating profit of Metso Minerals was EUR 177 million, compared to an operating profit of EUR 105 million in 2004, representing an improvement of EUR 72 million. The operating profit of 2004 was increased by a nonrecurring income from the reversal of EUR 4.9 million pension liability resulting from the changes made in the Finnish TEL (employees’ pension) system in December 2004 while the corresponding reversal in 2005 amounted to EUR 0.4 million. Metso Minerals’ operating profit margin increased to 10.2 percent in 2005 from 7.7 percent in 2004. Profitability improved significantly in all business lines due to higher volumes, the good capacity utilization rate, a streamlined cost structure and a more efficient supply chain. Measured in euro, the largest improvement in operating profit was achieved in the Crushing and Screening business line. In relative terms, the Minerals Processing business line’s operating profit improved the most.
     Metso Automation. In 2005, the operating profit of Metso Automation was EUR 81 million, compared to an operating profit of EUR 69 million in 2004, representing an increase of EUR 12 million, or 17 percent. The operating profit in 2004 was increased by a nonrecurring income from the reversal of EUR 13.7 million pension liability resulting from the changes made in the Finnish TEL (employees’ pension) system in December 2004 while the corresponding reversal in 2005 amounted to EUR 0.8 million. All business lines improved their profitability, with the biggest improvement recorded in the Field Systems business line. Improvement in the Field Systems business line was mainly due to increased volumes and higher portion of day-to-day business instead of

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projects. Metso Automation’s operating profit margin increased to 13.8 percent in 2005 from 13.0 percent in 2004.
     Metso Ventures. In 2005, the operating profit of Metso Ventures was EUR 11 million, compared to an operating loss of EUR 6 million in 2004, representing an improvement of EUR 17 million. The operating loss of 2004 was reduced by a nonrecurring income of EUR 14.6 million resulting from the changes made in the Finnish TEL (employees’ pension) system in December 2004. The remaining reversal of the Finnish TEL pension liability in 2005 amounted to EUR 0.6 million. Valmet Automotive’s operating profit turned positive from the heavy loss incurred in 2004. The profitability of the Foundries clearly improved from the comparison year. As in 2004, Metso Panelboard recorded a small operating loss in 2005 due to cost overruns in certain projects and other cost contingencies made for certain previously delivered projects. Metso Ventures’ operating profit margin was 3.8 percent in 2005, compared to negative 2.7 percent in 2004.
Operating Profit for Discontinued Operations
     In 2005, the operating profit of Discontinued Operations was EUR 17 million, compared to an operating profit of EUR 3 million in 2004. The operating profit includes a loss on disposal of EUR 29 million and gain on disposal of EUR 17 million for the years ended December 31, 2004 and 2005, respectively. The results of the Discontinued Operations, which are reported separate from Continuing Operations, are included in the consolidated financial statements up to their date of disposal, which were as follows: Converting end of January 2004, Compaction & Paving end of June 2004, Drilling end of December 2004 and Drives beginning of April 2005.
Profit on Continuing Operations Before Tax
     In 2005, our profit on Continuing Operations before tax was EUR 292 million, compared to a profit before tax of EUR 140 million in 2004.
     Financial income for 2005 amounted to EUR 20 million, compared to EUR 13 million for 2004, representing an increase of EUR 7 million. This increase resulted from a higher level of cash and liquid assets. Financial expenses for 2005 amounted to EUR 63 million, compared to EUR 72 million in 2004. This improvement of EUR 9 million was due to a decrease in interest bearing liabilities, which started already in 2004, but was effective the whole year 2005. In 2005, financial expenses included a one time expense of EUR 5 million due to early repayment of loans. Our net interest bearing liabilities amounted to EUR 289 million as of December 31, 2005, compared to EUR 495 million as of December 31, 2004. The decrease in interest bearing liabilities was generated through positive cash flow from operations, cash flow from disposals and increase in share capital resulting from exercised share options.
Profit Attributable to Equity Shareholders and Earnings per Share from Continuing and Discontinued Operations
     Income Taxes. Income tax expenses on Continuing Operations were EUR 72 million in 2005, compared to income tax benefits of EUR 18 million in 2004. Our tax rate was 24.6 percent in 2005. In 2005, as the result of our U.S. operations clearly turned positive, we were able to utilize tax loss carry forwards from prior years, for which we had not recognized any deferred tax assets.
     Profit Attributable to Equity Shareholders and Earnings per share. In 2005, our profit attributable to equity shareholders was EUR 236 million, compared to a profit of EUR 143 million in 2004. In 2005, our diluted earnings per share from Continuing and Discontinued Operations were EUR 1.69 (basic EUR 1.69), compared to diluted earnings per share from Continuing and Discontinued Operations of EUR 1.05 (basic EUR 1.05) in 2004. The diluted earnings per share from Continuing Operations in 2005 and 2004 were EUR 1.57 and EUR 1.16, respectively. The diluted earnings per share from Discontinuing Operations in 2005 and 2004 were EUR 0.12 and negative EUR 0.11, respectively.
Principal Differences between IFRS and U.S. GAAP
     Our consolidated financial statements are prepared in accordance with IFRS.

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     Our profit attributable to equity shareholders in 2005, under IFRS, amounted to EUR 236 million, compared to a profit of EUR 143 million in 2004. Under U.S. GAAP, Metso would have reported net income of EUR 197 million in 2005 and net income of EUR 2 million in 2004.
     The principal differences between IFRS and U.S. GAAP that affect our net profit, as well as our shareholders’ equity, relate to the business combination of Valmet and Rauma consummated in 1999, the acquisition of Svedala realized in 2001 and the classification differences of certain pension plans. See Note 40 to our consolidated financial statements included elsewhere in this annual report for a description of the principal differences between IFRS and U.S. GAAP.
Liquidity and Capital Resources
     In 2005, net cash provided by operating activities amounted to EUR 164 million, compared to EUR 261 million in 2004. Although the cash flow in 2005 was strengthened through improved profitability, the growth in net sales and orders received caused an increase in working capital.
     Net cash used in investing activities amounted to EUR 90 million in 2005, compared to net cash provided by investing activities of EUR 312 million in 2004. The net cash used in investing activities in 2005 included capital expenditures of EUR 121 million offset by the proceeds from disposals of EUR 144 million. Cash generated through business disposals totaled EUR 95 million while cash from sale of long-lived assets and available-for-sale equity investments totaled EUR 49 million. These proceeds from disposals were of non-recurring nature and we estimate similar cash generation to reduced in the future.
     Net cash used in financing activities amounted to EUR 136 million in 2005, compared to EUR 332 million in 2004. Dividends paid amounted to EUR 48 million in 2005 and to EUR 27 million in 2004. Net cash used in financing activities in 2005 was positively affected by a share capital increase of EUR 72 million arising from stock option programs. Our net interest bearing liabilities (interest bearing liabilities less cash and cash equivalents and other interest bearing financial assets) amounted to EUR 289 million as of December 31, 2005, compared to EUR 495 million as of December 31, 2004. The positive net cash provided by operating activities and proceeds from sale of businesses and long-lived assets helped to reduce interest bearing liabilities substantially and, hence, to strengthen our financial position.
     Our cash and cash equivalents (excluding investments in available-for-sale financial assets) amounted to EUR 323 million as of December 31, 2005, compared to EUR 372 million as of December 31, 2004.
     Our funding is mainly of a long-term nature and long-term debt accounted for 75 percent of our total interest bearing debt at the end of 2005. The long-term debt, consisting primarily of bonds and loans from financial institutions, amounted to EUR 593 million as of December 31, 2005 and EUR 885 as of December 31, 2004. The bonds consisted principally of three bond loans with the principal outstanding amounts of USD 109 million (EUR 92 million), EUR 156 million and EUR 257 million. The U.S. dollar denominated bond was issued in the United States in December 1997 and registered with the U.S. Securities and Exchange Commission (the “SEC”). It matures in 2007 and bears a fixed annual interest rate of 6.875 percent. In December 2000, we established a Euro Medium Term Note Program of EUR 1 billion, under which initially a EUR 500 million bond loan was issued in December 2001. The bond loan matures in 2006 and carries a fixed interest rate of 6.25 percent. In spring 2004, EUR 88 million worth of the bonds were exchanged into bonds with maturities of five to seven years through private placements. In November 2004, we completed an offer to exchange the remaining bonds to new euro-denominated bonds maturing in 2011. EUR 256 million of existing bonds were validly submitted and accepted for exchange. EUR 274 million of new bonds were issued and they carry a fixed interest rate of 5.125 percent. As a result, the remaining outstanding amount of the bond loan maturing in 2006 is EUR 156 million.
     Our loans from financial institutions consist of international bank borrowings with either fixed or variable interest rates. The majority of the loans are either U.S. dollar or SEK denominated. The interest rates vary from 1.0 percent to 14.5 percent, and the loans have maturities ranging from 2006 to 2014.
     In June 2003, we entered into a new five-year revolving credit facility agreement of EUR 450 million with a syndicate of 14 banks. It replaced two earlier revolving credit facilities: EUR 230 million credit facility from 1998 and a EUR 400 million credit facility from 2000, while extending the maturity of the credit commitments until 2008. In May 2005, we agreed to decrease the amount of this credit facility from EUR 450 million to EUR 300 million. As of December 31, 2005 and as of December 31, 2004, the facility was undrawn.

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     In May 2004, we signed an EUR 135 million ten-year research and development loan agreement with the European Investment Bank. Under the loan facility, funds could initially be drawn within 18 months from signing. The overall loan period will be ten years with installment payments starting three years from each draw down. The draw-down period was extended in 2005 and it will end in November 2006. As of December 31, 2005, the facility was undrawn.
     As of December 31, 2005, the undrawn committed long-term credit facilities of Metso totaled EUR 300 million and the undrawn committed short-term credit facilities amounted to EUR 100 million.
     We have a short-term euro commercial paper program of EUR 150 million and a domestic commercial paper program amounting to EUR 300 million with a group of Finnish and international banks in each case. As of December 31, 2005, both programs were unused. Management believes that our financial situation is stable, inasmuch as interest bearing debt is mainly long-term debt and there are adequate long-term and short-term financing reserves and facilities for our current scope of operations. Cash reserves and lines of credit are sufficient to cover fluctuations in the cash flows of the businesses.
     The ratio of our net interest bearing liabilities to equity (i.e., gearing) was 22.4 percent as of December 31, 2005, compared to 49.7 percent as of December 31, 2004. We have made considerable progress in reducing our gearing, which was an important target for both 2005 and 2004. This improvement was a result of divestments and improved profitability of our operations as well as proceeds from stock option program related equity issue.
     As of December 31, 2005, the shareholders’ equity, distributable funds and total assets of the parent company of the Group amounted to EUR 1,070 million, EUR 464 million and EUR 2,548 million, respectively. As of December 31, 2005, the shareholders’ equity, distributable funds and total assets of Metso Corporation, including its consolidated subsidiaries, amounted to EUR 1,285 million, EUR 744 million and EUR 3,904 million, respectively.
     Moody’s Investors Service confirmed our existing long-term Ba1 credit rating and changed the rating outlook from stable to positive on December 13, 2005. Standard & Poor’s Ratings Services has confirmed our existing long-term BB+ corporate rating, the BB rating on bonds issued and the EMTN program, as well as the B rating on short-term credits, and has kept the rating outlook as stable. There are no prepayment covenants in our financial contracts that would be triggered by changes in our credit ratings.
Disclosure about Contractual Obligations and Commercial Commitments
     The table below sets forth aggregated information about our contractual obligations and commercial commitments as of December 31, 2005.
                                         
            Payments Due by Period
            Less than 1                   More than
    Total   year   1-3 years   3-5 years   5 years
    (EUR in millions)
Contractual Obligations
                                       
Long-term debt, incl. short-term portion
    732       157       121       105       349  
Capital lease obligations
    21       3       6       5       7  
Operating leases
    125       37       47       26       15  
 
                                       
Total contractual cash obligations
    878       197       174       136       371  
 
                                       

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    Total   Amount of Commitment
    amounts   Less than 1                   More than
    committed   year   1-3 years   3-5 years   5 years
    (EUR in millions)
Other Commercial Commitments
                                       
Guarantees
    5       5       0       0        
Standby repurchase obligations
    6       3       2       1       0  
Purchase commitments
    254       250       4       0        
Other commitments
    6       4       2       0        
 
                                       
Total commercial commitments
    271       262       8       1       0  
 
                                       
     We have various pension schemes pursuant to local conditions and practices of the countries in which we operate. Most of these programs are defined benefit pension schemes with retirement, disability, death and termination income benefits. The retirement income benefits are generally a function of years of employment and of salary with Metso, and are usually coordinated with local national pension plans. The schemes are generally funded through payments to insurance companies or to trustee-administered funds as determined by periodic actuarial calculations. The net liability recognized for the defined benefit obligations amounted to EUR 168 million and EUR 157 millions for the years ended December 31, 2004 and 2005, respectively. We also maintain some multi-employer pension arrangements, insured plans and defined contribution pension arrangements. Contributions to these plans amounted to approximately EUR 84 million and EUR 77 million for the years ended December 31, 2004 and 2005, respectively.
Capital Expenditure
     Our gross capital expenditures, excluding acquisitions, amounted to EUR 107 million in 2005, compared to EUR 97 million in 2004. The gross capital expenditure, including acquisitions, totaled EUR 121 million in 2005. Our capital expenditure in 2005 was mainly focused on maintenance due to the implementation of various measures under our efficiency improvement program. For the preceding two years, our capital expenditures have consisted principally of maintenance, development and expansion of existing production capacity, office and service facilities as well as information technology. In 2006, our capital expenditures, excluding acquisitions, are projected to be approximately EUR 120 million, which will mainly be related to improvements and expansions of existing capacity and facilities and renewal of our Enterprise Resource Planning systems. We expect to finance the expenditure with cash flow from operations. See “Item 4. Information on the Company – Strategy” for a discussion of our growth strategy pursuant to which our management focus is shifting from restructurings to profitable growth and pursuant to which we may seek to attain growth in our net sales through compementary acquisitions.
     The table below summarizes our gross capital expenditures by region, excluding acquisitions, for the periods indicated:
                 
    Year ended December 31,
    2004   2005
    (EUR in millions)
Finland
    54       49  
Other Nordic countries
    10       9  
Other European countries
    11       13  
North America
    9       15  
South and Central America
    8       14  
Asia-Pacific
    4       5  
Rest of the world
    1       2  
 
               
Total
    97       107  
 
               
Research and Development
     Our research and technology development is focused, in line with our strategy, on applications to improve the operational efficiency of processes to be delivered by us and to strengthen our life cycle business. Rather than just buying machines and equipment, customers are increasingly investing in competitiveness based

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on processes that function optimally throughout their life cycle. Products and services being developed for the process industry benefit, to a large extent, from the latest information technology and automation solutions.
     We invested EUR 96 million in research and development activities in 2005 or 2.3 percent of net sales, compared to EUR 96 million in 2004, or 2.7 percent of net sales. At the end of 2005, we had a total of 867 employees working in the area of research and development, representing a decrease of nine percent from the end of 2004. Of those employees, 47 percent, 12 percent, 36 percent, and five percent worked in Metso Paper, Metso Minerals, Metso Automation and Metso Ventures, respectively. In 2005, our personnel submitted approximately 660 invention disclosures, which led to over 160 new priority patent applications. In 2004, our personnel submitted approximately 620 invention disclosures, which led to 220 new priority patent applications. As of December 31, 2005, our patent portfolio included approximately 2,700 inventions.
     Geographically, our research and development activities are concentrated in Finland and Sweden, although we have significant research and development units in North America and Central Europe as well.
     Following is a summary of our significant research and development activities by business area:
Metso Paper
     Metso Paper’s research and development focuses on developing whole processes and supporting aftermarket solutions for all the main paper, tissue, board and pulp grades. A key target is to improve the competitiveness of customer processes. Metso Paper is allocating an amount approximating three to four percent of its annual net sales to research and development. Customer oriented research and development is conducted in close cooperation with customers, Metso Automation, research institutes and universities.
     In 2005, Metso Paper spent approximately EUR 51 million on research and development, compared to EUR 50 million in 2004. In accordance with our strategy, research and development became in 2005 more focused on the products and services needed in service, process improvements and machine rebuilds.
     In 2005, Metso Paper’s most significant fiber technology product launches included SuperKit, which was developed to enhance the continuous cooking process and includes a number of new equipment solutions. At Shandong Bohui Paper’s mill in China, the world’s largest production line based on single-line refining was started, producing bleached chemi-thermomechanical pulp (BCTMP) with poplar as the raw material. In the second quarter of 2005, an OptiConcept production line delivered by Metso Paper was started ahead of schedule at the UPM Changshu mill in China. The new line represents the latest paper making technology and is the largest and fastest uncoated fine paper production line in the world. Likewise in China, the first headboxes representing the cost-efficient Val product range were successfully introduced on a coated board production line. At the end of 2005, Metso Paper launched the first new-generation OptiLoad TwinLine multinip calenders that improve the printing qualities of printing paper.
     Metso Paper has 12 technology centers that are located in Finland, Sweden, the United States and Italy.
Metso Minerals
     During 2005, the product development at Metso Minerals focused on modernizing cone crushers and mobile devices and developing related automation systems. In addition, Metso Minerals launched portable metal shears, which are suited primarily for small metal recycling operations. The screen media product range was expanded with modular screen solutions that are compatible with almost all the screen systems on the market without welding or cutting.
     Metso Minerals spent approximately EUR 11 million on research and development in 2005, compared to EUR 9 million in 2004.
     Technology centers of Metso Minerals are located in Brazil, Canada, Finland, France, Germany, New Zealand, Sweden and the United States.

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Metso Automation
     Metso Automation develops automation and field system solutions for chosen process industry needs. Metso Automation’s future success will require continuous investments in new products, services and business innovations. In 2005, Metso Automation spent approximately EUR 29 million, which is five percent of its net sales, in developing new products and applications, and new technology. In the previous year, the research and development costs amounted to approximately EUR 31 million. Metso Automation launched several new products in 2005, of which the most significant were the kajaaniROTARY pulp consistency transmitter, the kajaaniMAP online-analyzer to measure the freeness, fiber dimensions and shives content of mechanical, chemical and recycled fiber pulp, and the IQCaliper-L measurement device that scans paper caliper.
     Of the approximately 300 people working in Metso Automation’s research and development, the majority is located in Finland while other locations are in Canada and the United States.
Metso Ventures
     Metso Ventures consists of Metso Panelboard, Foundries, Metso Powdermet and Valmet Automotive.
     Metso Panelboard’s research and development is focused on improving the competitiveness of its machinery systems and processes for wood-based panel industries: medium-density fiberboard, particleboard and oriented-strand board.
     Metso Powdermet focuses on developing new material solutions, since increased process speeds and efficiencies are placing more stringent demands on the strength and durability of machine parts. Additionally, new kinds of wear and spare parts solutions that are more durable and cost-efficient are being developed for the needs of our service and aftermarket business.
     Valmet Automotive’s research and development activities focused on the development of a prototype car equipped with a folding hard top to present its competence in automotive shows and at various carmakers.
     Metso Ventures spent approximately EUR 5 million on research and development in 2005, compared to EUR 6 million in 2004.
Foreign Currency Fluctuations
     Exchange rate movements generally affect us through the translation of foreign subsidiary revenues, costs, profits and losses into our consolidated financial statements expressed in euro and through their transaction impact on the amount of the net sales with respect to foreign currency revenues from export sales of our various operations. Exchange rate movements also have certain competitive effects on our sales.
     Both our production and sales activities are distributed throughout various geographic regions creating exposure to currency risks. The principal currencies that we are exposed to are the U.S. dollar, the euro and the Swedish krona. In general, appreciation of the euro relative to the U.S. dollar has an adverse effect on our sales and operating profit, while its depreciation has a positive effect. A majority of our sales in the United States have been supplied by our U.S. production and aftermarket facilities or sourced locally, which reduces the direct impact of euro – U.S. dollar fluctuations on our profitability in that market. However, Metso Paper, Metso Automation and Metso Minerals all have part of their U.S. sales based on exports from Europe. Some of these sales face competitors with costs in a different currency, typically U.S.-based competitors. See “Item 3. Key Information—Exchange Rates.”
     Our foreign currency risk management policy is focused on hedging the foreign currency exposures arising from firm sales and purchase commitments. See “Item 11. Quantitative and Qualitative Disclosures about Market Risk—Exchange Rates and Foreign Currency Exposure.” We hedge our currency risks with forward exchange contracts and options.
     In 2005, trade flow related foreign exchange gains and losses included in operating profit resulted in a net gain of EUR 1 million, compared to a net gain of EUR 9 million in 2004. Foreign exchange gains and losses related to financing and included in financial income and expenses amounted to a net gain of EUR 4 million in 2005, compared to a net loss of EUR 1 million in 2004.

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     Exchange rate movements also impact our assets and liabilities denominated in currencies other than the euro. We use loans, currency swaps and forward exchange contracts to hedge our equity investments in foreign subsidiaries denominated in non-euro currencies, with maturities ranging from less than one year to six years. We have also made long-term U.S. dollar and pound sterling denominated loans to certain foreign subsidiaries. We hedge the associated currency risk through cross-currency swaps and forward exchange contracts. Foreign exchange contracts are used to hedge our foreign currency risk arising from the short-term borrowings. The principal currency for our short-term borrowings is currently the euro.
Inflation
     Inflation in Finland as measured by the change in the consumer price index was 0.9 percent in 2005 and 0.2 percent in 2004. Inflation in Finland did not have a significant impact on our operating results. However, a major portion of our operations, sales and production is performed in countries with rates of inflation higher or lower of that in Finland. Changes in exchange rates or interest rates may or may not reflect differences in inflation rates. Quantifying the individual or combined effects of these factors on our reported income is therefore not possible.
New Accounting Standards
IFRS
IFRS 7
     In August 2005, IASB issued IFRS 7 “Financial Instruments: Disclosures,” which requires the company to disclose information enabling users of its financial statements to evaluate the significance of financial instruments for its financial position and performance. We do not expect the new disclosure requirements to have a material impact to our financial statements.
     We will apply the standard as well as related amendments of IAS 1 for the financial year beginning on January 1, 2007.
IAS 39
     In 2005, IASB issued two amendments to IAS 39 “Financial Instruments: Recognition and Measurements”:
  1)   Cash flow hedge accounting of forecast intra-group transactions, which extends the application of hedge accounting to certain type of internal foreign currency denominated transactions provided these generate a currency risk that is not eliminated in the consolidated financial statements, and
 
  2)   “Fair value option,” which allows the designation of financial instruments at fair value through profit and loss under certain circumstances.
     Both amendments became applicable for financial years beginning as of January 1, 2006, earlier adoption is permitted. We have applied the first amendment to our financial statements beginning on January 1, 2005. We will adopt the second amendment in the financial year beginning on January 1, 2006. It is not expected to have a material impact on our financial statements.
U.S. GAAP
     In December 2004, the Financial Accounting Standards Board (“FASB”) issued FASB Statement No. 123 (Revised 2004), Share Based Payment (“SFAS 123R”), which replaces SFAS 123, Accounting for Stock Based Compensation, and supersedes APB Opinion 25, Accounting for Stock Issued to Employees. SFAS 123 R requires all sharebased payments to employees, including grants of employee stock options, to be recognized in the financial statements based on their fair values. In April 2005, the SEC released a final rule, “Amendment to rule 4-01(a) of Regulation S-X regarding the compliance date for Statement of Financial Accounting Standards No. 123 (Revised 2004), Share Based Payment,” which delayed the implementation date of SFAS 123 R until the first annual period beginning after June 15, 2005. The pro forma disclosures previously permitted under SFAS 123 will no longer be an alternative to financial statement recognition. Under SFAS

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123R, the Company must determine the appropriate fair value model to be used for valuing share based payments, the amortization method for compensation cost and the transition method to be used at the date of adoption. During 2005, the FASB issued FSP FAS 123 (R)-1, FSP FAS 123(R)-2 and FSP FAS 123 (R)-3, which provide additional considerations for companies transitioning to FAS 123(R) and practical application guidance. We are currently evaluating what impact the pronouncement will have on our consolidated financial statements.
     In March 2005, the FASB issued Financial Interpretation No. 47 (“FIN 47”), Accounting for Conditional Asset Retirement Obligations, which clarifies that the term “conditional asset retirement obligation,” as used in SFAS 143, refers to a legal obligation to perform asset retirement activity in which the timing and (or) method of settlement are conditional on a future event that may or may not be within the control of the entity. FIN 47 also clarifies when an entity would have sufficient information to reasonably estimate the fair value of an asset retirement obligation. This interpretation is effective no later than the end of the financial years ending after December 15, 2005. We have determined that the adoption of this pronouncement had an immaterial effect on our consolidated financial statements.
     In May 2005, the FASB published FAS 154 Accounting changes and error corrections as a replacement of APB Opinion No. 20 Accounting changes and FASB Statement No. 3 Reporting Accounting Changes in Interim Financial Statements, which has to be applied for financial years beginning on or after December 15, 2005. It requires a company to recognize changes in accounting principles retrospectively, instead of including the effect in net income of the period as was prescribed by APB Opinion No. 20. We will apply the standard to the financial year beginning on January 1, 2006. The adoption of the pronouncement is not expected to have a material effect on our consolidated financial statements.
     In November 2005, the FASB issued Staff Position No. (FSP) 115-1 and FAS 124-1 The Meaning of Other-Than-Temporary Impairment and its Application to Certain Investments. FSP 115-1 and FAS 124-1 provide accounting guidance for identifying and recognizing other-than-temporary impairments of debt and equity securities, as well as cost method investments in addition to disclosure requirements. FSP 115-1 and FAS 124-1 are effective for reporting periods beginning after December 15, 2005. We do not expect the adoption of the pronouncement to have a material effect on our consolidated financial statements.
Off-Balance Sheet Arrangements
     There are no off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition (except those discussed in Item 11 in relation to derivative instruments), changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to investors.
Item 6. Directors, Senior Management and Employees.
     Pursuant to the Finnish Companies Act and our articles of association, our control and management is divided among our shareholders, Board of Directors, and President and Chief Executive Officer (CEO). In addition, we have a corporate Executive Team, which assists our President and Chief Executive Officer in the day-to-day management of Metso. Shareholders can contact us, our management and Board of Directors through our Investor Relations department.
     The business address for our directors and executive management is P.O. Box 1220, FI-00101 Helsinki, Finland.
Board of Directors
     Our Board of Directors and our President and CEO are responsible for the management of Metso Corporation. Other executives have an assisting and supporting role. Our Board of Directors seek to ensure that good corporate governance practice is applied within our company.
     Our Board of Directors supervises the operations and management of Metso and decides on significant matters relating to strategy, investments, organization and finance. The main duties of our Board of Directors include the approval of our long-term goals and strategy, the annual business and other major action plans, the organizational structure and the main principles for our incentive systems. The duties of our Board of Directors

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also cover the nomination of our President and CEO, our business area presidents and the members of our Executive Team as well as the monitoring and evaluation of the President and CEO’s performance and deciding upon his remuneration and benefits. Our Board of Directors also approves our corporate policies in key management areas, decides on matters that it delegates to the President and CEO for decision, seeks to ensure that the supervision of the accounting and financial matters is properly organized and interim and annual financial statements are properly prepared. It also seeks to ensure the adequacy of planning, information and control systems for monitoring the bookkeeping and handling of financial matters and risk management. Our Board of Directors also convenes and makes proposals to the annual general meeting or any extraordinary meeting of shareholders, decides upon other matters that do not belong to our day-to-day operations and are of major importance, such as major investments, acquisitions and divestures, and major joint ventures and loan agreements. Our Board of Directors also decides upon guarantees given by Metso Corporation and other matters in accordance with the provisions in the Finnish Companies Act.
     Our Board of Directors is composed of at least five and no more than eight members. Our Board of Directors currently consists of six members, each of whom was elected by the shareholders at the annual general meeting of our shareholders held on April 4, 2005, for a term ending at the following annual general meeting. Our next annual general meeting is scheduled to be held on April 4, 2006. The members of our Board of Directors may be appointed or removed only by a shareholders’ resolution at a general meeting. The following table lists the names of the members of our current Board of Directors, possible principal occupation or employment and their year of birth:
             
Name   Position   Year of Birth
Matti Kavetvuo
  Chairman of the Board of Directors     1944  
Jaakko Rauramo
  Vice Chairman of the Board of Directors     1941  
Svante Adde
  Director; Managing Director of Compass Advisers     1956  
Maija-Liisa Friman
  Director; President and Chief Executive Officer of Aspocomp Group Oyj     1952  
Satu Huber
  Director; Director of Finance and Head of Finance Division in the Finnish State Treasury     1958  
Juhani Kuusi
  Director     1938  
     Matti Kavetvuo has been the Chairman of our Board of Directors since 2003. He was President and Chief Executive Officer of Pohjola Insurance Group until 2001, when he retired. Previously, he was President and Chief Executive Officer of Valio Ltd. in 1992-1999, and President and Chief Executive Officer of Orion Corporation in 1985-1991. Mr. Kavetvuo was employed by Instrumentarium Corporation in 1971-1984, where he served as President in 1979-1984. Mr. Kavetvuo is also Chairman of the Boards of Directors of Orion Corporation and Suominen Corporation. He is Vice Chairman of the Boards of Directors at Alma Media Corporation and Kesko Corporation. He is also a member of the Boards of Directors of KCI Konecranes International Plc, Marimekko Corporation and Perlos Corporation. Mr. Kavetvuo holds a Master of Science degree in Engineering and a Master of Science degree in Economics. He is a Finnish citizen.
     Jaakko Rauramo has been a member of our Board of Directors since 1999 and Vice Chairman since 2004. He served as President and Chief Executive Officer of SanomaWSOY in 1999-2001 and President of Sanoma Corporation in 1984-1999. Mr. Rauramo is the Chairman of the Board of Directors of SanomaWSOY Corporation since 2001. He is also a member of the Board of the Foundation of the Confederation of Finnish Industry and Employers, European Publishers’ Council and Stiftelsen Svenska Dagbladet. He is a member of the International Council of the Museum of Television & Radio in New York. He is a Trustee of Reuters Founders Share Company Limited and Chairman of National Board of Economic Defence. Mr. Rauramo holds a Master of Science degree in Engineering. He is a Finnish citizen.
     Svante Adde has been a member of our Board of Directors since 2005. He has been a Managing Director of Compass Advisers, London office, since May 2005. Previously, he has worked as Chief Financial Officer of Ahlstrom Group, 2003–2005, and as Managing Director and Head of Nordic Corporate Finance at Lazard, a global investment bank. Before Lazard, Mr. Adde worked at Citigroup. Mr. Adde is a member of the Boards of Directors of KCI Konecranes International Plc and Brammer plc. He holds a Bachelor of Science degree in Economics and Business Administration. He is a Swedish citizen.
     Maija-Liisa Friman has been a member of our Board of Directors since 2003. Ms. Friman has been President and Chief Executive Officer of Aspocomp Group Oyj since April 2004. In 2000-2004, she was Managing Director of Vattenfall Oy and, in 1993-2000, President of Gyproc Oy. Ms. Friman is a member of the Boards of Directors of Sponda Plc, SYK Ltd., Ilmarinen Mutual Pension Insurance Company and the Finnish

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Medical Foundation. Ms. Friman holds a Master of Science degree in Engineering. She is a Finnish citizen.
     Satu Huber has been a member of our Board of Directors since 2004. Ms. Huber has been Director of Finance and Head of Finance Division in the Finnish State Treasury since 1997. In 1995-1997, she was First Vice President of Merita Investment Banking, her latest responsibilities being in Global sales & Scandinavian money and bond markets. In 1992-1995, she was Vice President of Treasury Sales of the Union Bank of Finland. Ms. Huber is a member of the Board of Ekonomiska Samfundet i Finland rf. Ms. Huber holds a Master of Science degree in Economics and Business Administration. She is a Finnish citizen.
     Juhani Kuusi has been a member of our Board of Directors since 2000. Mr. Kuusi was Senior advisor in Sitra (The Finnish National Fund for Research and Development) in 2004-2005. He served as Senior Vice President of Technology Strategy in Nokia Corporation before his retirement, in 2003, and Senior Vice President, head of Nokia Research Center from 1995 to 2002. Before that, Mr. Kuusi was Director General of the National Technology Agency of Finland (Tekes) in 1983-1995, Director of Reactor Laboratory of the Technical Research Center of Finland (VTT) in 1980-1983, and Research Director of Oy Finnatom Ab in 1975-1979. Mr. Kuusi holds a Doctorate degree in Technology. He is a Finnish citizen.
     In accordance with the Finnish law on personnel participation, a personnel representative participates in the meetings of our Board of Directors as an invited expert. The representative does not have voting rights, nor is she or he legally responsible for the decisions of the Board of Directors. The representative is elected by Metso’s Finnish personnel groups for the same term as that of the members of the Board of Directors. The personnel representative in our Board of Directors is Pentti Mäkinen, born 1952. Mr. Mäkinen is currently Coordinator, Vocational Competence Development, in Metso Paper in Jyväskylä, Finland. He has been working for Metso since 1969, and he was member of our Board of Directors in 2000-2005. Mr. Mäkinen is the Chairman of the National Council of the Finnish Metal Workers’ Union. Mr. Mäkinen is a plate-welder by education, and he is a Finnish citizen.
     On January 31, 2006, Metso’s nomination committee set by the annual general meeting of shareholders in 2005, consisting of representatives of our four largest shareholders on December 1, 2005 announced that they will propose to the annual general meeting of shareholders convening on April 4, 2006, that the number of members of our Board of Directors be increased from six to seven. The nomination committee proposes Christer Gardell, Managing Partner of Cevian Capital, and Professor Yrjö Neuvo to be elected as new members to our Board of Directors. Moreover, the committee proposes that the current members of our Board of Directors, Svante Adde, Maija-Liisa Friman, Satu Huber, Matti Kavetvuo, and Jaakko Rauramo, be re-elected. Matti Kavetvuo is proposed to continue as Chairman of the Board of Directors and Jaakko Rauramo as Vice Chairman. Juhani Kuusi, who is currently a member of our Board of Directors, has announced that he will not be available for re-election.
     Christer Gardell, MBA, is the founder and Managing Partner of Cevian Capital, a Swedish asset management company. He is currently Chairman of the Board of Directors of AB Lindex, a Swedish clothing retailer. Professor Yrjö Neuvo, Ph.D. (EE), held the position of Chief Technology Officer, and member of the Group Executive Board in Nokia in 1993-2005. Mr. Neuvo retired from his position on January 1, 2006. Previously, he was a Professor at the Tampere University of Technology and a National Research Professor at the Academy of Finland.
     The nomination committee proposes to the annual general meeting of shareholders convening on April 4, 2006 that the following annual fees to be paid: Chairman of the Board of Directors EUR 80,000, Vice Chairman of the Board of Directors and Chairman of the Audit Committee EUR 50,000, and other members of the Board of Directors EUR 40,000. In addition, a fee of EUR 500 per meeting is paid to all members for meetings of the Board of Directors and its committees they attend.
Chief Executive Officer and Our Executive Team
     Our Board of Directors nominates a President and CEO, who is in charge of the management of Metso’s businesses in accordance with the provisions of the Finnish Companies Act and the instructions given by the Board of Directors.
     The President and CEO reports to the Board of Directors and keeps it sufficiently informed about our business environment, such as customers, competition and markets, as well as our financial position and other significant matters. The President and CEO prepares the matters on the agenda of the Board of Directors and its committees and implements the decisions made by the Board of Directors and its committees if not decided

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otherwise by the Board of Directors. The President and CEO also guides and supervises the operations of Metso and its business areas. The President and CEO also acts as the chairman for our Executive Team and the Boards of Directors of the business areas.
     The President and CEO and other members designated by the Board of Directors form our Executive Team. Our Executive Team assists the President and CEO in the preparation of matters such as Metso’s business plans, strategy, policies and other matters of joint importance within our business areas and our Company. Our Executive Team will convene when called by the President and CEO.
     The following table lists the names of the current members of the our Executive Team, their current responsibilities within Metso and their year of birth:
             
Name   Position   Year of Birth
Jorma Eloranta
  President and Chief Executive Officer     1951  
Olli Vaartimo
  Executive Vice President and Chief Financial Officer, deputy to the President and Chief Executive Officer     1950  
Risto Hautamäki
  President, Metso Paper     1945  
Vesa Kainu
  President, Metso Ventures     1947  
Matti Kähkönen
  President, Metso Automation     1956  
Bertel Langenskiöld
  President, Metso Minerals     1950  
     Jorma Eloranta has been our President and Chief Executive Officer since March 1, 2004. Before that, Mr. Eloranta was President and Chief Executive Officer of Kvaerner Masa-Yards Inc. in 2001-2004. He has also served as President and Chief Executive Officer of Patria Industries Group in 1997-2001, as Deputy Chief Executive of Finvest Group and Jaakko Pöyry Group in 1996-1997 and as President of Finvest Ltd in 1985-1995. Mr. Eloranta is the Chairman of the Board of Directors of Oy Center-Inn Ab and a member of the Supervisory Board of Ilmarinen Mutual Pension Insurance Company. He is also a member of the Boards of Directors of Uponor Corporation and Technology Industries of Finland. Mr. Eloranta holds a Master of Science degree in Engineering. He is a Finnish citizen.
     Olli Vaartimo has been our Executive Vice President, Chief Financial Officer, and Deputy to the President and Chief Executive Officer since April 22, 2003. He served as President and Chief Executive Officer of Metso and as Chairman of the Metso’s business area Boards from September 2003 to March 2004, after which he returned to his duties as Metso’s Executive Vice President and CFO and Deputy to the President. Mr. Vaartimo has previously served as President of Metso Minerals in 1999-2003 and President and Chief Executive Officer of Nordberg in the Rauma Corporation in 1993-1999. From 1991 to 1998, he was also Executive Vice President of Rauma Corporation. Mr. Vaartimo joined Rauma in 1974. Mr. Vaartimo holds a Master of Science degree in Economics and Business Administration. He is a Finnish citizen.
     Risto Hautamäki has been President of Metso Paper since April 1, 2005. Previously, he was the President and CEO of Tamfelt Corporation in 1995-2005. In 1990-1994, he was President and CEO of Valmet Paper Machinery Inc. and Executive Vice President and Chief Operating Officer in 1989-1990. Mr. Hautamäki was a member of Metso’s Board of Directors and Compensation Committee in 2004-2005 until he started in his current position. Mr. Hautamäki is a member of the Board of Directors of Wärtsilä Corporation. Mr. Hautamäki holds a Master of Science degree in Engineering. He is a Finnish citizen.
     Vesa Kainu has served as President of Metso Ventures since 2003. In 2001-2003, he served as Executive Vice President of Metso Minerals, and in 1999-2001, he was President of Metso Paper Service. Prior to that, he headed Valmet’s Service business line from 1994. He joined the Company in 1971. Mr. Kainu is a member of the Boards of Directors of Exel Oyj and Tamfelt Oyj Abp. Mr. Kainu holds a Bachelor of Science degree in Technology. He is a Finnish citizen.
     Matti Kähkönen has served as President of Metso Automation since 2001. Prior to that, he headed Metso Automation’s Field Systems business line in 1999-2001, and served as Division President of Neles Controls in Rauma Corporation from 1993. Mr. Kähkönen joined Rauma in 1980. Mr. Kähkönen holds a Master of Science degree in Engineering. He is a Finnish citizen.
     Bertel Langenskiöld has served as President of Metso Minerals since 2003. Previously, he was President and Chief Executive Officer of Fiskars Corporation in 2001-2003, and president of Tampella

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Power/Kvaerner Pulping, Power Division in 1994-2000. Mr. Langenskiöld is a member of the Boards of Directors at Wärtsilä Corporation and Cidron International Oy (Outokumpu Copper Products Oy). Mr. Langenskiöld holds a Master of Science degree in Engineering. He is a Finnish citizen.
Compensation of Directors and Officers
     For the year ended December 31, 2005, fees totaling EUR 307,427 were paid to the eight members of our Board of Directors. This includes the six current members listed above and Risto Hautamäki and Pentti Mäkinen, who served on the Board of Directors until the annual general meeting of shareholders held on April 4, 2005. The annual fees paid were as follows: Chairman of the Board of Directors EUR 60,000, Vice Chairman EUR 40,000, and other members of the Board of Directors EUR 30,000. In addition, a fee of EUR 500 per meeting was paid to all members of the Board of Directors for the meetings they attended. Compensation for traveling expenses and daily allowances were paid in accordance with Metso’s general travel policy.
     For the year ended December 31, 2005, salaries and bonuses totaling EUR 2,135,121 were paid to seven executives who were members of our Executive Team in 2005. This amount also included performance bonuses of EUR 383,000 for 2004. In addition to the current members of our Executive Team listed above, the previous President of Metso Paper, Bertel Karlstedt, was a member of our Executive Team between January 1 and March 31, 2005. The salaries of all members of our Executive Team comprise a fixed basic salary and a bonus based on the result of the Corporation and/or of the business area in question. The bonus may also be based on other development objectives central to our operations.
     We also pay premiums to a pension insurance company to provide for a supplemental group pension insurance covering our Executive Team and certain senior executives, which enables a retirement of the age of 60. In 2005, the amount of such pension insurance premium payments totaled approximately EUR 1.4 million.
     President and Chief Executive Officer Jorma Eloranta’s salary in 2005 was EUR 460,101. In addition, he received in 2005 a performance bonus of EUR 82,000 in respect of 2004 and benefits in the form of a car and a telephone. According to his service contract, Jorma Eloranta’s age of retirement is 60 years, and his full pension equals 60 percent of the annual salary serving as the basis for the pension calculation. If Mr. Eloranta terminates his contract for a reason for which Metso is responsible, or if his contract is terminated by Metso, he is entitled to compensation corresponding to 24 months’ salary and benefits.
     As of December 31, 2005, there were no loans outstanding to any members of our Board of Directors or our Executive Team.
Audit Committee and Compensation Committee
     Audit Committee. The Audit Committee consists of a chairman and two members elected by our Board of Directors from among its independent members. As from April 4, 2005, the Audit Committee has consisted of Maija-Liisa Friman (chairman), Satu Huber and Svante Adde (financial expert).
     The duties of the Audit Committee include a review of financial reporting by assessing Metso’s draft financial statements, draft interim reports, accounting policies, significant or exceptional business transactions and management estimates. The Audit Committee assesses compliance with laws and provisions and with our internal instructions. It assesses the adequacy of our internal control and risk management, approves the internal audit plan and follows up on internal audit reporting. The Audit Committee is responsible for matters related to preparing for the election of auditors, assessing the audit plan and costs, studying the auditor’s reports and discussing them with the auditors, and assessing the quality and scope of the audit.
     Each year, the Audit Committee draws up a working order for itself. In 2005, the Audit Committee met six times.
     Compensation Committee. The Compensation Committee consists of a chairman and two members, who are all elected by the Board of Directors from among its members. Since April 4, 2005, the Compensation Committee has consisted of Matti Kavetvuo (chairman), Jaakko Rauramo and Juhani Kuusi. The Compensation Committee reviews and monitors the competitiveness of the remuneration and incentive systems within Metso, prepares and makes proposals to the Board of Directors for the remuneration and benefits of our President and CEO and decides upon the remuneration and benefits of the officers reporting to the President and CEO. The Compensation Committee may authorize its chairman to decide upon the remuneration and benefits of these

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officers. Pursuant to the Finnish Companies Act, the shareholders determine the amount of compensation for the Board of Directors at their annual general meeting. In 2005, the Compensation Committee met five times.
Home Country Practices
     Foreign private issuers listed on the New York Stock Exchange must disclose any significant ways in which their corporate governance practices differ from those followed by U.S. domestic companies under the listing standards of the New York Stock Exchange (the “NYSE listing standards”).
     As a result of a comparison of our corporate governance practices to those requirements of Section 303A of the NYSE listing standards that are currently applicable to U.S. domestic companies, the following significant differences have been identified:
    The annual general meeting of our shareholders held on April 4, 2005 established a nomination committee, which consisted of the representatives of our four biggest shareholders on December 1, 2005 along with the Chairman of our Board of Directors as an expert member. The nomination committee has prepared proposals in respect of the composition of our Board of Directors and the director remuneration for the following annual general meeting of our shareholders, which is scheduled for April 4, 2006. Pursuant to Section 303A.04 of the NYSE listing standards, domestic companies listed on the New York Stock Exchange must have a nominating or corporate governance committee composed entirely of independent directors.
 
    Our Compensation Committee makes recommendations to our Board of Directors with respect to the compensation of our President and Chief Executive Officer. In accordance with the Finnish Companies Act, the compensation of our President and CEO is approved by our entire Board of Directors. Section 303A.05 of the NYSE listing standards requires that the compensation committee of a company must determine and approve the compensation of the chief executive officer.
 
    Under the Finnish Companies Act, a general meeting of shareholders of a Finnish company appoints the independent auditor(s) of the company. Similarly, only a general meeting of shareholders can remove the independent auditor(s) and appoint their successor. Section 303.06 of the NYSE listing standards requires, pursuant to Rule 10A-3 of the U.S. Securities Exchange Act of 1934, that the audit committee of a company must be directly responsible for the appointment and retention of the independent auditor of the company.
 
    Finnish laws and regulations do not mandatorily require companies to have an internal audit function, which is required by the Section 303.07 of the NYSE listing standards. Metso has internal audit function and has additionally covered this requirement by comprehensive risk management and internal control processes.
Employees
     As of December 31, 2005, the total number of Metso’s employees was 22,178, compared to 22,802 at year-end 2004. At the end of 2005, our continuing operations employed 22,178 people, which was 273 persons more than at the end of 2004. The number of personnel has increased at Metso Minerals and at Valmet Automotive, which is part of Metso Ventures, due to substantial growth in their business volume. In recent years, we have reduced our own production resources by outsourcing non-core activities. On the other hand, both production and aftermarket operations have been strengthened in the fast developing market areas, such as Asia and South America. More personnel have been employed, particularly in the service business and in the customer interface. We believe that we have good relations with our employees and labor unions.
     The following two tables set forth the number of employees by business area and by region as of December 31, 2004 and 2005.

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    As of December 31,   Percentage of
    2004   2005   Group
Employees by business area
                       
Metso Paper
    8,660       8,201       37  
Metso Minerals
    8,048       8,521       39  
Metso Automation
    3,267       3,169       14  
Metso Ventures
    1,637       1,993       9  
Corporate Office and Shared Services
    293       294       1  
 
                       
Continuing Operations
    21,905       22,178       100  
Discontinued Operations
    897              
 
                       
Metso total
    22,802       22,178       100  
 
                       
                         
    As of December 31,   Percentage of
    2004   2005   Group
Employees by geographic area
                       
Finland
    9,089       8,340       38  
Other Nordic countries
    2,622       2,491       11  
Other European countries
    2,902       2,959       13  
North America
    3,557       3,526       16  
South and Central America
    1,950       2,070       9  
Asia-Pacific
    1,366       1,498       7  
Rest of the world
    1,316       1,294       6  
 
                       
Total
    22,802       22,178       100  
 
                       
Share Ownership
     As of March 14, 2006, the members of our Board of Directors and our Executive Team held 25,174 shares of Metso Corporation in total, for which they held sole voting or investment power, representing less than one percent of our total issued and outstanding share capital. As of March 14, 2006, members of our Board of Directors and our Executive Team held in the aggregate 100,000 Metso 2003A options.
     The following table sets forth the total number of shares and options of Metso Corporation beneficially held by each of our directors and members of our Executive Team as of March 14, 2006:
                                 
    Sole Voting   Beneficially   Number of   Number of Shares
    or   Shared   Metso   allocated based on
    Investment   Voting   2003A   the 2006 Share
    Power   Power   options   Ownership Plan
Board of Directors
                               
Matti Kavetvuo(1)
          94              
Jaakko Rauramo
    4,205                    
Svante Adde
                       
Maija-Liisa Friman
    1,500                    
Satu Huber
    500                    
Juhani Kuusi
    10,000                    
 
                               
Metso Executive Team
                               
Jorma Eloranta
    3,300             100,000       5,000  
Olli Vaartimo
    1,144                   4,000  
Risto Hautamäki
    2,000                   3,700  
Vesa Kainu
    60                   2,000  
Matti Kähkönen(2)
          871             3,500  
Bertel Langenskiöld
    1,500                   3,700  
 
(1)   Includes 94 shares held by Mr. Kavetvuo’s spouse.

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(2)   Includes 871 shares held by Mr. Kähkönen’s spouse.
     We currently have one option program that was launched in 2003. Our Board of Directors has also reduced the year 2003 option program, after which that program gives the right to subscribe for a maximum of 300,000 new shares. On May 26, 2004, the Board of Directors reserved 100,000 year 2003A options and 100,000 year 2003C options for future needs. A total of 100,000 year 2003A options have been granted to our President and CEO, Jorma Eloranta. The share subscription price for the 2003A options is EUR 10.10, and for the 2003C options the trade-weighted average price of the Metso share on the Helsinki Stock Exchange during January 1-March 31, 2006. Paid dividends are deducted from the subscription price. The share subscription period for the 2003A options is April 1, 2006 — April 30, 2009 and for the 2003C options April 1, 2008 — April 30, 2011.
     In December 2005, our Board of Directors approved a share ownership plan for the 2006-2008 strategy period. The plan will form a part of the remuneration and commitment program for the management of Metso and its business areas. The 2006 share ownership plan will cover a maximum total of 360,000 shares of our treasury shares. If the value of Metso’s share exceeds EUR 38, the number of grantable shares will be decreased in a corresponding ratio.
     The year 2006 share ownership plan is directed to a total of 55 Metso’s managers, including all members of our Executive Team. The potential reward from the plan is based on the achieved operating profit of Metso Corporation and its business areas in 2006. The incentive will consist of both shares and cash, with cash dedicated to cover possible taxes and tax-related payments. The 2006 share ownership plan consists of at most 120,000 of our treasury shares. Our Executive Team’s share of this total amount of 21,900 shares. Payment of the potential rewards will be decided during the first quarter of 2007. During 2006, our Board of Directors will decide on the repurchase of Metso’s own shares for the incentive plan.
Authorizations for Board of Directors
     The annual general meeting of out shareholders, held on April 4, 2005, authorized our Board of Directors to decide on raising the share capital of Metso Corporation by a rights offering, a convertible bonds issue and/or an issue of share options. The authorization expires one year from the annual general meeting. No more than 12,500,000 new shares with a nominal value of EUR 1.70 may be subscribed for as a result of the rights offering, convertible bond issue or issue of share options. The Company’s share capital may be raised in total by no more than EUR 21,250,000, which represents 8.82 percent of the share capital and votes.
     The authorization allows a deviation from the shareholders’ pre-emptive subscription rights, provided that there are substantial financial grounds from the Company’s perspective, such as financing acquisitions, enabling joint operation arrangements or other development of the Company’s business operations.
     The annual general meeting of our shareholders, held on April 4, 2005 also authorized our Board of Directors to resolve to repurchase the Company’s shares within one year from the annual general meeting using funds available for the distribution of profits, provided that the combined par value of the shares thus acquired and the total par value of own shares held by the Company correspond to no more than five percent of the Company’s total share capital at the moment of repurchasing. The authorization entitles the Board of Directors to repurchase the Company’s shares for use as consideration in acquisitions or in financing investments, as incentives for key persons, or to be disposed of in other ways or to be cancelled.
     The annual general meeting of our shareholders, held on April 4, 2005 authorized our Board of Directors, within one year of the annual general meeting, to resolve to dispose of the Company’s shares acquired by the Company. The authorization will cover the disposal of all shares repurchased on the basis of the authorizations given to the Board of Directors. The authorization will entitle the Board of Directors to resolve to whom and in which order the shares are disposed. The Board of Directors may dispose of the shares as consideration in acquisitions or in financing investments as incentive for key persons or dispose of the shares through public trading.
     The Board of Directors had not exercised these authorizations by the date of this annual report. Similar authorizations to our Board of Directors for a one-year period are proposed to the annual general meeting scheduled to be held on April 4, 2006.

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Item 7. Major Shareholders and Related Party Transactions.
Major Shareholders
     The Finnish State currently owns 11.1 percent of our total shares and votes. There has been no change in the Finnish State’s ownership since 1999 when Metso Corporation was established. Fidelity Management Research Corp. has announced that it held together with its subsidiaries a total of 7,123,900 Metso shares on December 19, 2005. This corresponds to 5.0 percent of the paid up share capital and voting rights of Metso Corporation. Fidelity International Limited has announced that it held together with its subsidiaries a total of 7,082,803 Metso shares on September 14, 2005. This corresponds to 5.0 percent of the paid up share capital and voting rights of Metso Corporation.
     Neither the Finnish State, Fidelity Management Research Corp., Fidelity International Limited nor any other shareholder has any special voting rights. However, the Finnish State, Fidelity Management Research Corp., Fidelity International Limited may, through their share ownership, continue to have substantial influence in deciding matters submitted for a vote of shareholders, such as approval of the annual financial statements, declarations of annual reserves and dividends, capital increases, amendments to our articles of association and the election and removal of members of our Board of Directors.
     The following table lists, as of March 14, 2006, the total number of our shares owned by the Finnish State, Fidelity Management Research Corp., Fidelity International Limited, the only persons or entities known to us be the beneficial owner of more than five percent of our shares, as well as shares owned by members of our Board of Directors:
                     
        Number of    
Title of Class   Identity of Person or Group   Shares   Percent
Shares, nominal value
     EUR 1.70 each
  The Finnish State     15,695,287       11.08  
Shares, nominal value
     EUR 1.70 each
  Fidelity Management Research Corp.     7,123,900       5.03  
Shares, nominal value
     EUR 1.70 each
  Fidelity International Limited     7,082,803       5.00  
Shares, nominal value
     EUR 1.70 each
  Members of our Board of Directors     16,299       0.02  
Ownership of Our Securities in the United States
     As of March 14, 2006, the most recent practicable date, approximately 2,195,353 shares, or 1.55 percent of the total number of our issued and outstanding shares were held by approximately 30 record holders with addresses in the United States.
Related Party Transactions
     There have been no material transactions during the last financial year or during the current financial year up to the date of this annual report to which any director or executive officer or any ten percent shareholder or any relative or spouse of any of them was a party. There is no significant outstanding indebtedness owed to Metso by any director or executive officer or ten percent shareholder.
     There have been no material transactions during the last financial year or during the current financial year up to the date of this annual report with enterprises controlling, controlled by or under common control with Metso or an associate of Metso.

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Item 8. Financial Information.
Consolidated Financial Statements
     See “Item 18. Financial Statements.”
Export Sales
     The value of exports by Metso, including sales to unaffiliated customers and intra-Group sales, from Finland by destination were as follows for the two most recent years:
                 
    Year ended December 31,
    2004   2005
    (EUR in millions)
Other Nordic countries
    210       353  
Other European countries
    420       523  
North America
    141       158  
South and Central America
    75       96  
Asia-Pacific
    526       331  
Rest of the world
    23       31  
 
               
Total
    1,395       1,492  
 
               
     In 2005, without elimination of intra-Group sales, the value of goods exported from Finland, Sweden, and the United States totaled approximately EUR 1,492 million or 25 percent of our total sales, EUR 403 million or seven percent of our total sales, and EUR 252 million or four percent of our total sales, respectively.
Legal Proceedings
     We have extensive worldwide operations and are involved in several legal proceedings in the ordinary course of our business. While the results of these proceedings cannot be predicted with certainty, we do not expect them to result in liabilities that would have a material effect on our business, financial position or results of operations.
     Several actions raising product liability claims are pending against us in the United States. However, we do not believe that the outcome of these actions, individually or in the aggregate, will have a material adverse effect on our business, financial condition or results of operations. We further believe that the risks of legal disputes concerning deliveries and the taxation of our export delivery projects are customary in our fields of operation and are not material as a whole.
     As of March 10, 2006, there had been a total of 381 complaints alleging asbestos injuries filed in the United States in which a Metso entity is one of the named defendants. Where a given plaintiff has named more than one viable Metso unit as a defendant, the cases are counted by the number of viable Metso defendants. Of these claims, 59 are still pending and 322 cases have been closed. Of the closed cases, 32 were by summary judgment, 220 were dismissed and 70 were settled. For the 70 cases settled, the average compensation has been USD 499 per case. The outcome of the still pending cases is not expected to materially deviate from the outcome of the previous claims. Hence, our management believes that Metso has no material asbestos related liability in the United States.
     Metso Panelboard Oy is the defendant in arbitration proceedings being carried out in accordance with the ICC rules of arbitration in Singapore, in which Metso’s Chinese customer, Sichuan Guodong Construction Co. Ltd., is claiming compensation on account of an alleged delay and alleged errors in the delivery of equipment for a chipboard line. The plaintiff’s total claim amounts to approximately EUR 54 million, of which approximately EUR 43 million concern indirect damages. In the opinion of Metso Panelboard Oy, the claim is entirely without merit. The delivery agreement also contains a clause limiting indirect damages. Metso Panelboard Oy has presented a counterclaim amounting to approximately EUR 2.8 million in order to collect the last installment according to the agreement and to pay for additional works related to the delivery. A provision of EUR 1.5 million has been established as a consequence of the claim. See “Item 4. Information on the Company—Governmental Regulation and Environmental Matters” for a discussion on certain pending environmental issues with possible legal implications.

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Dividend Policy
     We pay annual dividends to our shareholders based on a longer-term outlook for our consolidated profitability and financial position. The timing and amount of future dividend payments, if any, will depend on our results of operations, cash flows, working capital and investment requirements, estimated future earnings, financial condition, and other factors that our Board of Directors considers relevant. The objective of our dividend policy, that was renewed in August 2005, is to distribute an annual dividend equivalent to at least 40 percent of the earnings per share. Previously, our objective was to distribute annual dividends equivalent to at least one-third of the average earnings per share over five years.
     For companies domiciled in Finland and incorporated under the Finnish law, dividends on shares are generally only paid annually after shareholder approval of both the company’s financial statements and of the amount of dividend proposed by the Board of Directors. Under the Finnish law, the amount of any dividend is limited to the amount of profits and other distributable equity available at the end of the preceding financial year on a consolidated or unconsolidated basis, whichever is lower. Subject to certain exceptions relating to the right of the minority shareholders to request otherwise, the dividend may not exceed an amount recommended by the Board of Directors. As of December 31, 2005, our parent company’s distributable equity was EUR 464 million (USD 549 million) and our consolidated distributable equity was EUR 744 million (USD 881 million). The difference between our parent company’s distributable equity of EUR 464 million and our consolidated distributable equity of EUR 744 million is caused by earnings related to our parent company’s subsidiaries that are reflected in our consolidated accounts but not in the accounts of our parent company.
     Dividends paid to holders of ADSs who are non-residents of Finland will generally be subject to the Finnish withholding tax at a rate of 28 percent. Such ADS holders may, however, be subject to a lower withholding tax rate and may be allowed an imputation tax credit to reduce the tax on dividends where there is a double taxation treaty with Finland that contains appropriate provisions. The current convention between the United States and Finland for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income and on Capital does not contain provisions that extend such imputation credits to U.S. holders of our shares or ADSs. See “Item 10. Additional Information—Taxation.”
     Our Board of Directors will propose to the annual general meeting of our shareholders scheduled to be held on April 4, 2006 that a dividend of EUR 1.40 per share be paid for the financial year ended December 31, 2005. This contains a dividend of EUR 0.70 in line with our dividend policy and in addition an extra dividend of EUR 0.70. Any dividend decided upon by the annual general meeting of our shareholders is scheduled to be paid on April 20, 2006 to shareholders entered in the register of shareholders on April 7, 2006.
Significant Changes
     Except as otherwise disclosed in this annual report, no significant change has occurred in our business or financial condition since December 31, 2005.

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Item 9. The Offer and Listing.
Nature of Trading Market
     The principal trading market for our shares is the Helsinki Stock Exchange, where our shares are traded under the symbol “MEO1V.” Our shares are also traded in the United States on the New York Stock Exchange under the symbol “MX” in the form of ADSs. Each ADS represents one share. The depositary for Metso’s ADSs is the Bank of New York.
     The table below sets forth, for the periods indicated, the reported high and low quoted prices for our shares on the Helsinki Stock Exchange based on its Daily Official List and the high and low quoted prices for our ADSs as reported in the New York Stock Exchange — Composite Transactions.
                                 
    Helsinki Stock Exchange   New York Stock Exchange
    Price per Share   Price per ADS
    High   Low   High   Low
    (EUR)   (U.S.$)
Annual
                               
 
                               
2001
    14.10       7.81       11.30       7.68  
2002
    15.15       7.73       14.26       7.81  
2003
    11.41       7.52       12.77       8.31  
2004
    12.89       9.12       16.49       11.10  
2005
    24.46       11.31       28.44       14.70  
2006 (through March 14)
    32.00       23.21       38.04       27.84  
 
                               
Quarterly
                               
 
                               
2004
                               
First Quarter
    11.47       9.60       14.37       12.21  
Second Quarter
    11.72       9.12       14.04       11.10  
Third Quarter
    11.05       9.90       13.53       12.27  
Fourth Quarter
    12.89       10.27       16.49       12.72  
 
                               
2005
                               
First Quarter
    14.90       11.31       20.00       14.70  
Second Quarter
    18.12       13.22       22.11       17.20  
Third Quarter
    21.95       17.67       26.58       21.03  
Fourth Quarter
    24.46       19.00       28.44       23.15  
 
                               
2006
                               
First Quarter (through March 14)
    32.00       23.21       38.04       27.84  
 
                               
Monthly
                               
 
                               
2005
                               
September
    21.95       19.86       26.58       24.81  
October
    21.74       19.00       26.04       23.15  
November
    22.60       21.50       26.62       25.20  
December
    24.46       22.13       28.44       26.27  
 
                               
2006
                               
January
    27.20       23.21       32.90       27.84  
February
    32.00       25.80       38.04       32.15  
March (through March 14)
    29.37       28.55       34.81       34.47  

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Trading and Settlement on the Helsinki Stock Exchange
     Trading in, and clearing of, securities on the Helsinki Stock Exchange, part of the OMX Exchanges, takes place in euro, with the minimum tick size for trading quotations being one euro cent. All price information is produced and published only in euro.
     The trading system of the Helsinki Stock Exchange is based on an electronic trading system SAXESS™ (“Saxess”). Saxess is an order-based system in which orders are matched to trade when price and volume match. Trading is conducted on the basis of trading lots, which are fixed separately for each share series.
     The trading phases consist of a pre-trading session, continuous trading and a post-trading session. For shares, pre-trading begins at 8:30 a.m. and ends at 9:45 a.m. at the prices established during the previous trading day. Trading with calls and continuous trading takes place from 9:45 a.m. to 6:30. p.m. Opening call begins at 9:45 a.m. and ends at 10:00 a.m. Round lot orders entered during the pre-trading session and existing orders with several days’ validity are automatically transferred into the opening call. Continuous trading begins sequentially after the opening call ends at 10:00 a.m. when the first share is assigned its opening price and then becomes subject to continuous trading. After approximately ten minutes, the opening prices for all the shares have been established and trading continues at prices based on market demand until 6:20 p.m. when the closing call is initiated. The closing call ends at approximately 6:30 p.m. when the closing prices are determined. Post-trading, during which only contract transactions for shares can be registered at the prices established during the trading day, takes place from 6:40 p.m. to 7:00 p.m.
     Trades are normally cleared in the Finnish Central Securities Depository’s (the “FCSD”) automated clearing and settlement system on the third banking day after the trade date unless otherwise agreed by the parties.
Regulation of the Finnish Securities Market
     The Finnish Financial Supervision Authority supervises the securities market in Finland. The principal statute governing the securities market is the Finnish Securities Market Act of 1989, which contains regulations with respect to company and shareholder disclosure obligations, admission to listing and trading of listed securities and public tender offers and insider obligations, among other things. The Finnish Financial Supervision Authority monitors compliance with these regulations.
     The Finnish Securities Market Act specifies minimum disclosure requirements for Finnish companies applying for listing on the Helsinki Stock Exchange or making a public offering of securities in Finland. The information provided must be sufficient to enable investors to make a sound evaluation of the securities being offered and the issuing company. Finnish listed companies have a continuing obligation to publish regular financial information, and to inform the market of any matters likely to have a material impact on the value of their securities.
     A shareholder is required, without undue delay, to notify a Finnish listed company and the Finnish Financial Supervision Authority when its voting participation in, or its percentage ownership of, the issued share capital of such Finnish listed company reaches, exceeds or falls below five percent, ten percent, 15 percent, 20 percent, 25 percent, 331/3 percent, 50 percent or 662/3 percent, calculated in accordance with the Finnish Securities Market Act, or when it enters into an agreement or other arrangement that, when effective, has such consequence. If a Finnish listed company receives information indicating that a voting interest or ownership interest has reached, exceeded or fallen below these thresholds, it must disclose such information to the public and to the Helsinki Stock Exchange.
     Pursuant to the Finnish Securities Market Act, a shareholder whose holding in a Finnish listed company increases above two-thirds of the total voting rights attached to the shares of the listed company, calculated in accordance with the Finnish Securities Market Act, after the commencement of a public quotation of such shares must offer to purchase the remaining shares and other securities entitling their holders to shares of such company for fair market value. Under the Finnish Companies Act, a shareholder holding shares representing more than 90 percent of all the share capital in a company and more than 90 percent of the shares and the votes entitled to be cast at a general meeting of shareholders has the right to require the minority shareholders to sell the remaining shares of such company to such shareholder for fair market value. In addition, any minority shareholder that possesses shares that may be so purchased by a majority shareholder is entitled to

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require such majority shareholder to purchase its shares. Detailed rules apply for the calculation of the above proportions of shares and votes.
     The Finnish Criminal Code also contains provisions relating to breach of disclosure requirements, misuse of privileged or inside information and market manipulation. Breach of these provisions constitutes a criminal offense.
The Finnish Book-Entry Securities System
General
     Finland has made a gradual changeover from a certificated securities system to a book-entry securities system since August 1, 1991, when the relevant legislation came into effect. Use of the book-entry securities system is mandatory for shares listed on the Helsinki Stock Exchange. Our shares were entered into the Finnish book-entry system on May 2, 1996.
     The Finnish book-entry securities system is centralized at the Finnish Central Securities Depositary “FCSD”), which provides national clearing and registration services for securities. The FCSD maintains a central book-entry securities system for both equity and debt securities.
     The FCSD maintains a register of the shareholders of listed companies and book-entry accounts for shareholders who do not wish to utilize the services of a commercial account operator. The issuers participating in the Finnish book-entry securities system and the account operators pay for the expenses incurred by the FCSD in connection with maintaining the central book-entry securities system. The account operators, which consist of credit institutions, investment service companies and other institutions licensed to act as account operators by the FCSD (each, an “Account Operator”), are entitled to make entries in the book-entry register and administer the book-entry accounts.
Registration
     In order to effect entries in the Finnish book-entry securities system, a security holder or its nominee must establish a book-entry account with the FCSD or an Account Operator or register its securities through nominee registration. Finnish shareholders may not register their securities through nominee registration. For shareholders who have not transferred their shares into book-entries, a joint book-entry account shall be opened with the FCSD, the registered holder of which shall be the issuing company. All transactions in securities registered with the Finnish book-entry securities system are executed as computerized book-entry transfers. The Account Operator confirms book-entry transfers by sending notifications of transactions to the holder of the respective book-entry account. The account holders also receive an annual statement of their holdings as of the end of each calendar year.
     Each book-entry account is required to contain specified information with respect to the account holder or the custodian administering the assets of a nominee account. Such information includes the type and number of book-entry securities registered and the rights and restrictions pertaining to the account and to the book-entry securities registered in the account. A possible nominee account is identified as such on the entry. The FCSD and the Account Operators are required to observe strict confidentiality, although certain information (for example the name, nationality and address of each account holder) contained in the register of shareholders maintained by the FCSD must be made available to the public by the FCSD and the issuer, except in the case of nominee registration.
     Each Account Operator is strictly liable for errors and omissions on the registers maintained by it and for any unauthorized disclosure of information. However, if an account holder has suffered a loss as a result of a faulty registration or an amendment to, or deletion of, rights with respect to registered securities and the Account Operator is unable to compensate for such loss, such account holder is entitled to receive compensation from the FCSD. To cover for this contingency, the FCSD maintains a statutory registration fund. The capital of the fund must be at least 0.000048 percent of the average of the total market value of the book-entries kept in the Finnish book-entry securities system during the last five calendar years, and it must not be less than EUR 20 million. The compensation to be paid to one injured party shall be equal to the amount of damages suffered by such injured party from a single Account Operator subject to a maximum amount of EUR 25,000. Furthermore, the liability of the registration fund is limited to EUR 10 million per incident.

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Custody of the Shares and Nominees
     A non-Finnish shareholder may appoint an account operator (or certain non-Finnish organizations approved by the FCSD) to act as a custodial nominee account holder on its behalf. A nominee shareholder is entitled to receive dividends and exercise all share subscription rights and other financial and administrative rights attached to the shares, such as the right to attend and vote at general meetings of the company. A beneficial owner wishing to attend and vote at a general meeting must seek a temporary registration and be registered in the register of shareholders not later than ten days prior to the relevant general meeting. A custodial nominee account holder is required to disclose to the Finnish Financial Supervision Authority and the relevant company upon request the name of the beneficial owner of any shares registered in the name of such custodial nominee account holder, where the beneficial owner is known, as well as the number of shares owned by such beneficial owner. If the name of the beneficial owner is not known, the custodial nominee account holder is required to disclose said information on the representative acting on behalf of the beneficial owner and to submit a written declaration to the effect that the beneficial owner of the shares is not a Finnish natural person or legal entity.
     Finnish Depositories for both Clearstream Banking S.A., Luxembourg and Euroclear Bank, S.A./N.V., as operator of the Euroclear System, have nominee accounts within the Finnish book-entry securities system and, accordingly, non-Finnish shareholders may hold their shares through their accounts with Clearstream Banking or Euroclear.
     Shareholders who wish to hold their shares in the Finnish book-entry securities system in their name and who do not maintain a book-entry account in Finland, are required to open a book-entry account at an authorized account operator in Finland and a convertible euro account at a bank operating in Finland.
Item 10. Additional Information.
Articles of Association
Organization and Register
     Metso Corporation is incorporated as a stock corporation (osakeyhtiö) and is organized under the laws of the Republic of Finland. We are registered in the Trade Register maintained by the National Board of Patents and Registration of Finland under the business identity code 1538032-5.
Purpose and Object
     Pursuant to Section 2 of our articles of association, we globally design, develop, sell and manufacture products and systems for the engineering, mechanical, vehicle, electronics and automation industries, as well as provide spare parts and maintenance services relating to these, either directly or through our subsidiary or affiliate companies. As the parent company, we may also attend to the organization, financing and purchases of the Group and to other joint tasks of the same kind, and we may own real estate, stocks and shares and carry on securities trading and other investment business.
Share Capital and Shares
     Pursuant to Section 3 of our articles of association, our minimum share capital is EUR 170 million, and the maximum share capital is EUR 680 million. Within these limits, our share capital may be increased or decreased without amending our articles of association. Pursuant to Section 4 of our articles of association, the number of shares we issue may not be less than 100 million shares or exceed 400 million shares. The par value of each share is EUR 1.70.
Corporate Governance
     In our corporate governance, we follow the guidelines issued by the Helsinki Stock Exchange, the Finnish Central Chamber of Commerce and the Confederation of Finnish Industry and Employers relating to the governance of publicly quoted companies with the exception that we do not have a nomination committee established by our Board of Directors, but rather have one established by our shareholders at the annual general meeting of shareholders on April 4, 2005. We further comply with the guidelines for insiders published by the Helsinki Stock Exchange.

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     In addition to being listed on the Helsinki Stock Exchange, our shares are also listed on the New York Stock Exchange and we are a SEC-registered company. We follow the requirements of the New York Stock Exchange and U.S. securities market legislation concerning foreign private issuers, when these do not conflict with the Finnish law.
     Our corporate governance system also observes the rules and corporate governance recommendations of the New York Stock Exchange concerning listed companies that are foreign private issuers, and the U.S. Sarbanes-Oxley Act of 2002. Our general operating principles and responsibility relationships are described in our corporate governance policy. Our values and ethical principles create the foundation for our corporate governance, personnel and management actions and cooperation with our key stakeholders.
     The general meeting of shareholders is our supreme decision-making body and it meets at least once a year. The annual general meeting decides on the matters stipulated in the Finnish Companies Act, such as the acceptance of the financial statements and proposed dividend, the release from liability of members of the Board of Directors and the President and CEO. The annual general meeting also elects the members of our Board of Directors and our Auditors, and decides on the compensation paid to them.
     Our Board of Directors and our President and CEO are responsible for the management of Metso. The Board of Directors supervises the operations and management of Metso and decides on significant matters relating to strategy, investments, organization and finance. The main duties of our Board of Directors include the approval of our long-term goals and strategy, the annual business and other major action plans, the organizational structure and the main principles for our incentive systems. The duties of the Board of Directors also cover the nomination of the President and CEO, the business area presidents and the members of our Executive Team as well as the monitoring and evaluation of the President and CEO’s performance and deciding upon his remuneration and benefits. The Board of Directors also approves our corporate policies in key management areas, decides on matters it delegates to the President and CEO for decision, seek to ensure that the supervision of the accounting and financial matters is properly organized, and that our interim and annual financial statements are properly prepared. It seeks to ensure the adequacy of planning, information and control systems for monitoring the bookkeeping and handling of financial matters and risk management. The Board of Directors also makes proposals for and to convene the annual general meeting, decides upon other matters that do not belong to day-to-day operations and are of major importance, such as major investments, acquisitions and divestures, and major joint ventures and loan agreements. The Board of Directors also decides upon guarantees given by Metso and other matters in accordance with the provisions in the Finnish Companies Act. The annual general meeting elects the members of the Board of Directors for a term of one year. In accordance with our articles of association, the Board of Directors consists of at least five and no more than eight members. A person who has reached the age of 68 years cannot be elected as a member of the Board of Directors.
     Pursuant to the Finnish Companies Act, members of our Board of Directors are prohibited from participating in the negotiation or performance, or otherwise having an involvement in connection with, a contract between themselves and Metso. This prohibition also includes contracts between Metso and a third party if such director would receive a material benefit in conflict with the interests of Metso. With certain limitations, the Finnish Companies Act permits members of our Board of Directors to borrow money from Metso, so long as such loan is secured and is within the limits of our distributable equity.
     For information relating to our Board of Directors and our Executive Team, see also “Item 6. Directors, Senior Management and Employees.”
Preemptive Rights
     Under Finnish law, existing shareholders of Finnish companies have preferential rights to subscribe, in proportion to their shareholdings, in new shares of such companies as well as for issues of subscription warrants or debt instruments convertible into shares or carrying warrants to subscribe for shares, unless the corporate resolution approving such issue provides otherwise. Under the Finnish Companies Act, a resolution waiving preemptive rights must be approved by at least two-thirds of all votes cast and all shares represented at the general meeting of shareholders.
General Meeting of Shareholders
     Under the Finnish Companies Act, shareholders exercise their power to decide on corporate matters at general meetings of shareholders. Our articles of association require that an annual general meeting be held

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annually before the end of June on a date decided by our Board of Directors. An annual general meeting decides upon the approval of our income statement and balance sheet and measures warranted by the profit or loss, discharges from liability, emoluments for the members of our Board of Directors and remuneration of auditors, number and the members of our Board of Directors and auditors, as well as matters raised by individual shareholders. Extraordinary general meetings of shareholders in respect of specific matters are held when considered necessary by the Board of Directors, or when requested in writing by an auditor of the Company or by shareholders representing at least one-tenth of all the issued shares.
     Under our articles of association, a shareholder must give notice to the Company of his or her intention to attend a general meeting no later than the date and time specified by the Board of Directors in the notice of the general meeting, which may not be earlier than ten days before the general meeting. Under our articles of association, notices of general meetings must be given not earlier than two months prior to, and not later than 17 days before, the meeting by publishing an announcement of the meeting in at least two Finnish newspapers published regularly in the Helsinki area in Finland as designated by the Board of Directors at its discretion or by some other verifiable way.
     Inasmuch as our shares have been transferred to the Finnish book-entry securities system, in order to have the right to attend and vote at a general meeting of shareholders, a shareholder must be registered not later than ten days prior to the relevant general meeting in the register of shareholders kept by the FCSD in accordance with the Finnish Companies Act and the Finnish Act on the Book-Entry Securities System. See “Item 9. The Offer and Listing—The Finnish Book-Entry Securities System—Registration.” Voting rights may not be exercised by a shareholder if such shareholder’s shares are registered in the name of a nominee. A beneficial owner wishing to exercise such rights should seek a temporary registration in the register of shareholders not later than ten days prior to the relevant general meeting. There are no quorum requirements for general meetings in the Finnish Companies Act or our articles of association. Hence, it is possible that, depending on the attendance at any particular shareholders’ meeting, a relatively limited number of shareholders may approve resolutions put forward at such meetings.
Voting
     A shareholder may attend and vote at a general meeting of shareholders in person or through an authorized representative. Shareholders that have not transferred their shares to the FCSD may also attend and vote at general meetings if they were registered in the share register maintained by the Company before the date on which the shares should have been transferred to the book-entry securities system at the latest and provide evidence of their ownership of shares on the date of the general meeting.
     Each share is entitled to one vote at a general meeting of shareholders. While resolutions are usually passed by a majority of the votes cast, certain resolutions, such as a resolution to amend our articles of association, a resolution to issue shares not subject to shareholders’ preferential subscription rights and, in certain cases, a resolution regarding a merger or liquidation of the Company, require a majority of at least two-thirds of the votes cast and the shares represented at the general meeting of shareholders. Further, if an amendment of our articles of association would diminish the rights of an entire class of shares, the resolution, in addition to the above majority requirement, requires the consent of shareholders representing at least one-half of all the shares of such class and a majority of two-thirds of the shares of such class represented at the general meeting of shareholders. Any amendment to the purchase obligation provisions of our articles of association (described below) requires at least three-fourths of the votes cast and the shares represented at the meeting.
Liquidation
     If the Company were to be liquidated, any liquidation proceeds remaining after all of its liabilities were paid would be distributed to its shareholders in proportion to their shareholdings.
Purchase Obligations
     Our articles of association contain a clause according to which a shareholder or a group of related shareholders who or which has acquired either 331/3 percent or 50 percent of the total ordinary shares or of the total voting power of the Company, at the minimum, is obligated to purchase the shares of all other shareholders who request such purchase. Our articles of association specify that the purchase price of such shares shall be the higher of the following:

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     (a) The weighted average trading price of the ordinary shares of the Company on the Helsinki Stock Exchange during the ten business days prior to the day on which the shareholder obligated to purchase ordinary shares of the Company in accordance with this provision informed the Company that the above-mentioned percentage of ownership of ordinary shares or votes has been reached or exceeded or, in the event that no such notification is provided to the Company, or such notification is provided after the expiration of the period of time set forth in our articles of association, then during the ten business days prior to the day on which our Board of Directors is informed in any other manner; or
     (b) The weighted average price per share, which the shareholder obligated to purchase ordinary shares of the Company in accordance with this provision has paid for the ordinary shares that he/she has procured or obtained in some other way over the 12 months preceding the date defined in paragraph (a) above.
     In addition, such shareholder is also obligated to purchase any subscription rights, warrants or convertible bonds issued by the Company if so requested by the holder or holders thereof.
     Pursuant to the Securities Market Act, a shareholder who acquires in excess of two-thirds of the total voting rights of the shares of a company after the commencement of a public quotation of the shares must offer to purchase the remaining shares.
Material Contracts
     Neither Metso nor any of its consolidated subsidiaries has entered into any contracts in the last two years outside of the ordinary course of business that have had or may reasonably be expected to have a material effect on our business.
Exchange Controls
     Our share may be bought by non-residents of Finland on the Helsinki Stock Exchange without any separate Finnish exchange control consent. Non-residents may receive dividends without separate Finnish exchange control consent, the transfer out of Finland being subject to payment by the Company of withholding taxes. Non-residents that have acquired our shares may receive shares pursuant to a bonus issue or through participation in a new issue without a separate Finnish exchange control consent. Shares may be sold in Finland by non-residents, and the proceeds of such sale may be transferred out of Finland in any convertible currency. There are no Finnish exchange control regulations applying to the sale of shares of the Company by non-residents to other non-residents.
Control of Foreign Ownership
     Restrictions on foreign ownership of Finnish companies were abolished as of January 1, 1993. However, under the Act on the Control of Foreigners’ Acquisition of Finnish Companies of 1992, clearance by the Finnish Ministry of Trade and Industry would be required if a foreign person or entity, other than a person or entity from another member state of the European Economic Area or the Organization for Economic Cooperation and Development, or a Finnish entity controlled by one or more such foreign persons or entities, were to acquire a holding of one-third or more of the voting power of the Company. The Ministry of Trade and Industry could refuse clearance where the acquisition would jeopardize important national interests, in which case the matter would be referred to the government of Finland.
Taxation
     The following description is based on tax laws of Finland and the United States as in effect on the date of this annual report and is subject to changes in the Finnish and U.S. law, including changes that could have retroactive effect. Prospective investors should consult their professional advisors as to the tax consequences of the purchase, ownership and disposition of shares or ADSs, including, in particular, the effect of tax laws of any other jurisdiction.
Finnish Taxation
     The following is a description of the material Finnish income tax consequences of the purchase, ownership, and disposition of shares or ADSs by a holder who is not a resident of Finland (a “non-resident”). It

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does not purport to be a complete analysis of all potential Finnish tax consequences to holders of the shares and ADSs. Prospective investors should consult their own advisers as to the consequences of the purchase, ownership, and disposition of shares or ADSs in light of their particular circumstances, including the effect of any foreign, state, or local tax laws. Statements regarding Finnish tax laws set forth below are based on the laws in force and as interpreted by the relevant taxation authorities as of the date hereof and are subject to any changes in Finnish law, or in the interpretation thereof by the relevant taxation authorities.
     A beneficial owner of an ADS should be treated as the owner of the underlying share for purposes of the current Convention between the Government of the United States of America and the Government of the Republic of Finland for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income and on Capital and for Finnish tax purposes. Accordingly, the Finnish tax consequences to owners of shares discussed below apply also to beneficial owners of ADSs.
Companies
     Finnish companies are subject to national corporate income tax on their worldwide income. With effect from January 1, 2005, the rate of such tax has been 26 percent.
Shareholders and Holders of ADSs
  Tax Credit on Dividends
     The Finnish avoir fiscal system has been abolished as of January 1, 2005. The taxation of dividends distributed by a company listed on the Helsinki Stock Exchange varies depending on whether a shareholder that is a resident in Finland is a company listed on the Helsinki Stock Exchange, a privately held company or a natural person. When the shareholder is a company listed on the Helsinki Stock Exchange, dividends received by such shareholder are 75 percent taxable in case the underlying shares are included in the investment assets of the shareholder. If the dividend is paid based on shares that are not included in the investment assets of the shareholder (listed company), the dividend income is not taxable income. If the shareholder is a privately held company, dividends received by such shareholder are 75 percent taxable in case the underlying shares are included in the investment assets of the shareholder. If the shares are not part of the investment assets of the respective shareholder, only 75 percent of the dividends received is taxable income, provided that the respective shareholder does not directly own at least ten percent of the share capital of the distributing company. If the ten percent ownership threshold is met, the dividend income is not treated as taxable income of the respective shareholder (privately held company). If the shareholder is a natural person, 70 percent of the dividends received by such shareholder is taxable as capital income.
     The applicable tax rate is 28 percent. The rest of the dividend income received by such a shareholder from a listed company is not treated as taxable income. Year 2005 serves as a transition period and lower percentages than those described above shall be used in the taxation of dividends. If the shareholder is a privately held company or if the underlying shares are included in the investment assets of the shareholder, 60 percent (instead of 75 percent) of the dividends received by such shareholder will be taxable income in such shareholder’s taxation in tax year 2005. Similarly, if the shareholder is a natural person, 57 percent (instead of 70 percent) of the dividends received by such shareholder will be taxable as capital income in such shareholder’s taxation of year 2005.
  Withholding Tax on Dividends
     Non-residents of Finland are subject to Finnish withholding tax on dividends paid by a Finnish company. In the absence of any applicable treaty, the rate of withholding tax is 28 percent as from January 1, 2005. Finland has entered into double taxation treaties with many countries pursuant to which the withholding tax is reduced on dividends paid to persons entitled to the benefits under such treaties, unless the shares from which such dividends derive are effectively connected with a permanent establishment or a fixed base in Finland, in which case Finnish income taxes are levied on the dividends so derived. In the case of the treaty with the United States, the withholding tax rates are reduced to 15 percent. The Finnish company paying the dividend is responsible for deducting any applicable Finnish withholding tax.
     A reduction of such withholding tax rate can be obtained at source upon the submission of a Source Tax Card or the required information (name, date of birth and address) to the payer prior to the payment of dividends. If such a Source Tax Card or such information is not submitted in a timely manner, a refund of tax withheld in excess of the applicable treaty rate can be obtained upon application to the local tax authority. The

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Bank of New York as Depositary for the ADSs has agreed to use reasonable efforts to make and maintain arrangements enabling holders to receive tax credits, reduction in Finnish withholding tax or other benefits (pursuant to treaty or otherwise) relating to dividend payments on the ADSs at the time the dividend is paid.
     No withholding tax is levied under Finnish law on dividends paid to corporate entities that reside in the EU and directly hold at least 20 percent of the capital of the distributing Finnish company. In addition, due to the abolishment of the Finnish avoir fiscal system the requirement of a minimum tax relating to avoir fiscal shall no longer apply.
  Finnish Transfer Tax
     There is no transfer tax payable in Finland on share transfers made on the Helsinki Stock Exchange. If the transfer is not made on the Helsinki Stock Exchange, a transfer tax at the rate of 1.6 percent of the relevant sales price is payable by the buyer. However, if the buyer is neither a resident of Finland nor a Finnish branch of a foreign credit institution nor a Finnish branch of a foreign brokerage firm, the seller must collect the tax from the buyer. If neither the buyer nor the seller is a resident of Finland or a Finnish branch of a foreign credit institution or a Finnish branch of a foreign brokerage firm and it is not a question of transfer of shares in a housing or real estate company, the transfer of shares will be exempt from Finnish transfer tax. No transfer tax is payable in connection with newly issued shares.
  Finnish Capital Gains and Other Taxes
     Shareholders who are not resident in Finland, and who do not engage in trade or business through a permanent establishment or fixed base in Finland which could be regarded as the holder of the relevant shares or ADSs, will normally not be subject to Finnish taxes on capital gains realized on the transfer of shares. Transfers of shares by a non-resident of Finland by way of gift or by reason of the death of the owner are subject to Finnish gift or inheritance tax respectively if either the transferor or the transferee was a resident of Finland at the time of death or when the gift was given, unless Finland has waived its rights in a tax treaty to impose tax.
U.S. Federal Income Taxation
General
     The following is a summary of the principal U.S. federal income tax consequences that may be relevant with respect to the acquisition, ownership and disposition of shares or ADSs, which are evidenced by American Depositary Receipts. This summary addresses only the U.S. federal income tax considerations of holders that are initial purchasers of the shares or ADSs at the initial issue price and that will hold shares or ADSs as capital assets. This summary does not address tax considerations applicable to holders that may be subject to special tax rules, such as financial institutions, insurance companies, real estate investment trusts, grantor trusts, regulated investment companies, dealers or traders in securities or currencies, tax-exempt entities, persons that received shares or ADSs as compensation for the performance of services, certain former citizens or long-term residents of the United States, persons that will hold shares or ADSs as part of a “hedging” or “conversion” transaction or as a position in a “straddle” for U.S. federal income tax purposes, persons that have a “functional currency” other than the U.S. dollar or holders that own (or are deemed to own) ten percent or more (by voting power or value) of the stock of the Company. This summary does not address any state, local or non-U.S. tax consequences of the acquisition, ownership and disposition of shares or ADSs.
     Moreover, this summary does not address the U.S. federal estate and gift or alternative minimum tax consequences of the acquisition, ownership and disposition of shares or ADSs. This summary is based (i) on the Internal Revenue Code of 1986, as amended (the “Code”), U.S. Treasury Regulations and judicial and administrative interpretations thereof, in each case as in effect and available on the date hereof, and (ii) in part, on the representations of the depositary and the assumption that each obligation in the deposit agreement and any related agreement will be performed in accordance with its terms. All of the foregoing are subject to change, which change could apply retroactively and could affect the tax consequences described below.
     For purposes of this summary, a “U.S. Holder” is a beneficial owner of shares or ADSs that, for U.S. federal income tax purposes, is: (i) a citizen or resident of the United States, (ii) a partnership or corporation created or organized in or under the laws of the United States or any state thereof (including the District of Columbia), (iii) an estate the income of which is subject to U.S. federal income taxation regardless of its source, or (iv) a trust, if such trust validly elects to be treated as a U.S. person for U.S. federal income tax purposes or if (A) a court within the United States is able to exercise primary supervision over its administration and (B) one

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or more U.S. persons have the authority to control all of the substantial decisions of such trust. A “Non-U.S. Holder” is a beneficial owner of shares or ADSs that is not a U.S. Holder.
     If a partnership (or any other entity treated as a partnership for U.S. federal income tax purposes) holds shares or ADSs, the tax treatment of the partnership or a partner in such partnership generally will depend on the status of the partner and the activities of the partnership. Such partner or partnership should consult its own tax advisor as to its tax consequences.
Ownership of ADSs in General
     For U.S. federal income tax purposes, a holder of ADSs generally will be treated as the owner of the shares represented by such ADSs.
     The U.S. Treasury Department has expressed concern that depositaries for American Depositary Receipts, or other intermediaries between the holders of shares of an issuer and the issuer, may be taking actions that are inconsistent with the claiming of U.S. foreign tax credits by U.S. holders of such receipts or shares. Accordingly, the analysis regarding the availability of a U.S. foreign tax credit for Finnish taxes and sourcing rules described below could be affected by future actions that may be taken by the U.S. Treasury Department.
Distributions
     The gross amount of any distribution by the Company of cash or property (other than certain distributions, if any, of shares or ADSs distributed pro rata to all shareholders of the Company including holders of ADSs) with respect to shares or ADSs, before reduction for any Finnish taxes withheld therefrom, will be includible in income by a U.S. Holder as dividend income to the extent such distributions are paid out of the current or accumulated earnings and profits of the Company as determined under U.S. federal income tax principles. Non-corporate U.S. Holders may be taxed on such dividends at the lower rates applicable to long-term capital gains (i.e., generally, gains from the sale or exchange of capital assets held for more than one year) for taxable years beginning on or before December 31, 2008. A U.S. Holder’s eligibility for such preferential rate would be subject to certain holding period requirements and the non-existence of certain risk reduction transactions with respect to the shares. However, such dividends will not be eligible for the dividends received deduction generally allowed to corporate U.S. Holders. To the extent, if any, that the amount of any distribution by the Company exceeds the Company’s current and accumulated earnings and profits as determined under U.S. federal income tax principles, it will be treated first as a tax-free return of the U.S. Holder’s adjusted tax basis in the shares or ADSs and thereafter as capital gain. The Company does not maintain calculations of its earnings and profits under U.S. federal income tax principles.
     Any such dividend paid in euro (or any currency other than U.S. dollars) will be included in the gross income of a U.S. Holder in an amount equal to the U.S. dollar value of the euro (or, if not euro, the currency in which the dividend was paid) on the date of receipt, which in the case of ADSs, is the date they are received by the depositary. The amount of any distribution of property other than cash will be the fair market value of such property on the date of distribution. Any gain or loss realized by a U.S. Holder that subsequently sells or otherwise disposes of euro (or, any currency other than U.S. dollars) will be ordinary gain or loss.
     Dividends received by a U.S. Holder with respect to shares or ADSs will be treated as foreign source income, which may be relevant in calculating such holder’s foreign tax credit limitation. Subject to certain conditions and limitations, any Finnish tax withheld on dividends may be deducted from taxable income or credited against a U.S. Holder’s U.S. federal income tax liability. The limitation on foreign taxes eligible for credit is calculated separately with respect to specific classes of income. For this purpose, dividends distributed by the Company generally will constitute “passive income,” or, in the case of certain U.S. Holders, “financial services income.”
     U.S. Holders should note that recently enacted legislation eliminates the “financial services income” category will be eliminated with respect to taxable years beginning after December 31, 2006. Thereafter, the foreign tax credit limitation categories would be limited to “passive category income” and “general category income”.
     Subject to the discussion below under “Backup Withholding Tax and Information Reporting Requirements,” a Non-U.S. Holder of shares or ADSs generally will not be subject to U.S. federal income or

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withholding tax on dividends received on shares or ADSs, unless such income is effectively connected with the conduct by such Non-U.S. Holder of a trade or business in the United States.
Sale or Exchange of Shares or ADSs
     A U.S. Holder generally will recognize gain or loss on the sale or exchange of shares or ADSs equal to the difference between the amount realized on such sale or exchange and the U.S. Holder’s adjusted tax basis in the shares or ADSs. Such gain or loss will be capital gain or loss. In the case of a non-corporate U.S. Holder, the maximum marginal U.S. federal income tax rate applicable to such gain will be lower than the maximum marginal U.S. federal income tax rate applicable to ordinary income (other than certain dividends) if such U.S. Holder’s holding period for such shares or ADSs exceeds one year. Gain or loss, if any, recognized by a U.S. Holder generally will be treated as U.S. source income or loss for U.S. foreign tax credit purposes. The deductibility of capital losses is subject to limitations.
     The initial tax basis of shares or ADSs to a U.S. Holder will be the U.S. dollar value of the euro denominated purchase price determined on the date of purchase. If the shares or ADSs are treated as traded on an “established securities market,” a cash basis U.S. Holder (or, if it elects, an accrual basis U.S. Holder) will determine the dollar value of the cost of such shares or ADSs by translating the amount paid at the spot rate of exchange on the settlement date of the purchase. The conversion of U.S. dollars to euro and the immediate use of that currency to purchase shares or ADSs generally will not result in taxable gain or loss for a U.S. Holder.
     With respect to the sale or exchange of shares or ADSs, the amount realized generally will be the U.S. dollar value of the payment received determined on (i) the date of receipt of payment in the case of a cash basis U.S. Holder and (ii) the date of disposition in the case of an accrual basis U.S. Holder. If the shares or ADSs are treated as traded on an “established securities market,” a cash basis taxpayer (or, if it elects, an accrual basis taxpayer) will determine the U.S. dollar value of the amount realized by translating the amount received at the spot rate of exchange on the settlement date of the sale.
     Subject to the discussion below under “Backup Withholding Tax and Information Reporting Requirements,” a Non-U.S. Holder of shares or ADSs generally will not be subject to U.S. federal income or withholding tax on any gain realized on the sale or exchange of such shares or ADSs unless (i) such gain is effectively connected with the conduct by such Non-U.S. Holder of a trade or business in the United States or (ii) in the case of any gain realized by an individual Non-U.S. Holder, such holder is present in the United States for 183 days or more in the taxable year of such sale or exchange and certain other conditions are met.
Backup Withholding Tax and Information Reporting Requirements
     U.S. backup withholding tax and information reporting requirements generally apply to certain payments to certain noncorporate holders of stock. Information reporting generally will apply to payments of dividends on, and to proceeds from the sale or redemption of, shares or ADSs made within the United States, or by a U.S. payor or U.S. middleman, to a holder of shares or ADSs (other than an “exempt recipient,” including a corporation, a payee that is not a U.S. person that provides an appropriate certification, and certain other persons). A payor will be required to withhold backup withholding tax from any payments of dividends on, or the proceeds from the sale or redemption of, shares or ADSs within the United States, or by a U.S. payor or U.S. middleman, to a holder (other than an “exempt recipient”) if such holder fails to furnish its correct taxpayer identification number or otherwise fails to comply with, or establish an exemption from, such backup withholding tax requirements. The backup withholding tax rate is 28 percent through 2010.
     In the case of such payments made within the United States to a foreign simple trust, foreign grantor trust or foreign partnership (other than a payment to a foreign simple trust, foreign grantor trust or foreign partnership that qualifies as a “withholding foreign trust” or a “withholding foreign partnership” within the meaning of the applicable U.S. Treasury Regulations and a payment to a foreign simple trust, foreign grantor trust or foreign partnership that is effectively connected with the conduct of a trade or business in the United States), the beneficiaries of the foreign simple trust, the persons treated as the owners of the foreign grantor trust or the partners of the foreign partnership, as the case may be, will be required to provide the certification discussed above in order to establish an exemption from backup withholding tax and information reporting requirements. Moreover, a payor may rely on a certification provided by a payee that is not a U.S. person only if such payor does not have actual knowledge or a reason to know that any information or certification stated in such certificate is incorrect.

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     The above description is not intended to constitute a complete analysis of all tax consequences relating to acquisition, ownership and disposition of shares or ADSs. You should consult your own tax advisor concerning the tax consequences of your particular situation.
Documents on Display
     We are subject to the informational requirements of the Exchange Act. In accordance with these requirements, we file reports and other information with the SEC. These materials, including this annual report and the exhibits thereto, may be inspected and copied at the SEC’s Public Reference Room at 100 F Street, N.E., Washington D.C. 20549. The public may obtain information on the operation of the SEC’s Public Reference Room by calling the SEC in the United States at 1-800-SEC-0330. The SEC also maintains a web site at http://www.sec.gov that contains any reports, statements and other information that have been filed electronically with the SEC. We have made electronic filings with the SEC since October 30, 2002.
Item 11. Quantitative and Qualitative Disclosures about Market Risk.
     The task of our corporate treasury is to manage financial risks in accordance with our treasury policy reviewed and approved by our Board of Directors, and to safeguard the availability of equity and debt capital under competitive terms. The corporate treasury functions as the counterparty to the operating units, centrally manages external funding and is responsible for the management of financial assets and appropriate hedging measures. Our financial operations are conducted to support business purposes within the framework of corporate operating policies and guidelines.
     Market risk refers to the risk of loss arising from adverse changes in exchange rates, interest rates, and other relevant market prices, such as equity or commodity prices. In order to manage our exposures to market risk, we continually assess our market exposures and attempt to hedge such risks through financial operations to reduce the adverse effects on our profitability.
     Our business units seek to identify the financial risks connected with their business operations and minimize their impact on our financial results. To control financial risks within limits, we use different derivative and non-derivative instruments, such as forward contracts, currency and interest rate swaps, options and foreign currency denominated balance sheet items. Derivatives are used only to support the underlying businesses (i.e., for hedging purposes only). Currently, we do not hold derivatives for trading (speculative) purposes and we do not use high-risk derivative instruments such as written options on a sole basis or leveraged instruments. For additional information on the derivative financial instruments we use, see Note 32 to our audited consolidated financial statements. Since January 1, 2005, we have applied hedge accounting in accordance with IAS 39 “Financial instruments: Recognition and Measurement” to certain foreign currency denominated transactions and to manage interest rate volatility.
     We do not anticipate any material adverse effect on our consolidated financial condition, results of operations or cash flows, resulting from the use of derivative financial instruments.
     We use sensitivity analysis techniques to measure exchange rate, interest rate, equity price and electricity price risk. The estimated amounts generated from the sensitivity analysis are forward-looking statements of market risk, assuming certain adverse market conditions occur. Actual results in the future may differ materially from the projected results. The method expresses the potential change in future earnings, cash flows or fair values for a specified period resulting from selected hypothetical variations in foreign currency exchange rates, interest rates, equity prices or electricity prices.
Exchange Rates and Foreign Currency Exposure
     In accordance with our treasury policy, under the direction of our corporate treasury department, the business units hedge in full the currency exposures that arise from firm sales and purchase agreements. In addition, the units can hedge anticipated foreign currency denominated cash flows by taking into account the significance of such cash flows, the competitive situation and other opportunities to adapt. The business units’ hedging practices are monitored regularly by our corporate treasury department.

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     Hedging operations are centralized through our treasury department. Upper limits have been set on the open currency exposures of the corporate treasury, calculated on the basis of their potential profit impact. These limits cover net exposures from transfers between units and items arising from financing activities. Future foreign currency net cash flows are hedged for periods, which do not normally exceed two years. Accordingly, the majority of future cash flows related to the order backlog are hedged.
     We have, to some extent, hedged our foreign currency denominated net assets of foreign subsidiaries through borrowings and currency derivatives. As of December 31, 2005, apart from forward foreign exchange contracts, options and currency swaps, we were not a party to any other derivative foreign currency instruments.
     We had hedged approximately 95 percent of our net foreign currency exposure at the end of 2005, arising primarily from long-term contracts, net of any expected matching foreign currency payments. In addition, as of December 31, 2005, we had hedged, net of tax effect, 41 percent of our Swedish krona, 93 percent of our U.S. dollar and 54 percent of our Canadian dollar denominated net investments in subsidiaries through borrowings and forward exchange contracts.
     In 2005, foreign exchange gains related to operations amounted to EUR 1 million, the negative result impact arising from realized and unrealized derivatives, not qualifying for hedge accounting under IAS 39 “Financial Instruments: Recognition and Measurement,” amounted to EUR 6 million in 2005. Foreign exchange gains and losses related to financing and included in financial income and expenses amounted to a net gain of EUR 4 million in 2005, compared to a net loss of EUR 1 million in 2004.
     The basis for our sensitivity analysis to measure foreign exchange risk is an aggregate corporate-level currency exposure, which is composed of future expected cash flows in foreign currencies. The aggregate foreign exchange exposure is composed of all our assets and liabilities denominated in foreign currencies, excluding items, which have been hedged. Such items include net investments, projected cash flows for unrecognized firm commitments, both short- and long-term sales and purchase contracts, anticipated cash flows and derivative financial instruments acting as their hedges.
     The sensitivity analysis assumes an instantaneous ten percent change in foreign currency rates against the euro from their level as of December 31, 2005, with all other variables held constant. If the euro appreciates or depreciates ten percent against all other currencies, the impact on our cash flows derived from the year-end 2005 net exposure is a corresponding decrease or increase of EUR 3 million during future years, compared to approximately EUR 1 million as of December 31, 2004.
     These assumptions above are hypothetical and the actual results may differ substantially from the projected figures.
Interest Rate Risk
     We are exposed to variations in interest rates primarily on euro and U.S. dollar denominated debt and investments, which may affect the amounts of future interest income or expenses (reinvestment risk or cash flow risk) and also cause changes in the values of interest bearing liabilities and assets, which are already in the balance sheet (price risk). To manage interest rate risk, we have set limits for the ratio of floating-rate to fixed-rate loans and the average duration. Interest rate risks can also be managed by interest rate swaps and other derivative contracts.
     We use sensitivity analysis techniques to measure and assess our interest rate risk. The basis for the sensitivity analysis is an aggregate corporate level interest rate exposure, composed of interest bearing investments, interest bearing debts and financial derivatives, such as interest rate swaps, which are used to hedge the above items.
     The sensitivity analysis assumes a one percent (100 basis points) parallel move in interest rates for all maturities from their levels as of December 31, 2005, with all other variables held constant. A one percent move upwards or downwards in all interest rates would lead to a corresponding decrease or increase of approximately EUR 1 million on net interest expenses on the outstanding balances as of December 31, 2005, compared to increase or decrease of EUR 1 million as of December 31, 2004.

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Equity Price Risk
     The market value of the shares in publicly traded companies owned by us as of December 31, 2005, was EUR 6 million. If the prices of the shares had decreased by ten percent, the market value of the investments at the end of 2005 would have declined by less than EUR 1 million in comparison to EUR 1 million at the end of 2004. We have not contracted any derivative instruments to hedge our equity investments.
Commodity Price Risk
     We are exposed to variations in prices of raw materials and supplies including energy. In order to manage risks related to prices of electricity in certain regions, we have since August 2003 used forward contracts to hedge part of these exposures. Hedging is focused on the estimated energy consumption for the next 12-month period with some contracts extended to approximately three years.
     We use sensitivity analysis techniques to measure and assess risk on electricity forward contracts. The basis for the sensitivity analysis is the net aggregate amount of energy bought by the forward contracts.
     The sensitivity analysis assumes a ten percent parallel move in electricity price for all maturities from their levels as of December 31, 2005. A ten percent move upwards or downwards in all prices would lead to a corresponding increase or decrease in net assets of approximately EUR 2 million on fair values of electricity forward contracts outstanding as of December 31, 2005, compared to approximately EUR 1 million as of December 31, 2004.
     Other commodity risks are not managed through financial derivative instruments.
Item 12. Description of Securities Other than Equity Securities.
     Not applicable.

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PART II
Item 13. Defaults, Dividend Arrearages and Delinquencies.
     None.
Item 14. Material Modifications to the Rights of Security Holders and Use of Proceeds.
     None.
Item 15. Controls and Procedures.
     Our President and CEO and our Executive Vice President and Chief Financial Officer, after evaluating the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) under the Exchange Act) as of December 31, 2005, have concluded that, as of such date, our disclosure controls and procedures were effective.
     During the year ended December 31, 2005, we implemented additional internal controls related to the reporting of our U.S. GAAP financial information, which materially affected our internal controls over financial reporting. Our management, at the direction of our Board of Directors, worked actively during the year to improve the control environment and to implement specific controls and procedures to improve our understanding of U.S. GAAP and to ensure the integrity of our reporting in relation to U.S. GAAP. Specifically during the year ended December 31, 2005, we:
    expanded our control procedures to include additional analysis and other post-closing procedures;
 
    implemented the preparation of a full U.S. GAAP balance sheet as part of our reconciliation process from our IFRS balance sheet to U.S. GAAP;
 
    implemented the entry of our U.S. GAAP adjustments into our financial reporting system to produce system generated U.S. GAAP balance sheets and income statements;
 
    implemented training related to enhancing and improving the level of knowledge of U.S. GAAP at each of our significant operating subsidiaries as well as at our corporate office; and
 
    enhanced our understanding of U.S. GAAP during our transition from Finnish GAAP to IFRS.
     There are inherent limitations to the effectiveness of any system of disclosure controls and procedures, including the possibility of human error and the circumvention or overriding of such controls and procedures. Accordingly, even effective disclosure controls and procedures can only provide reasonable assurance of achieving their control objectives. Acknowledging this, we have designed our disclosure controls and procedures to provide such reasonable assurance.
     Other than as discussed above, there were no changes in the Company’s internal control over financial reporting that occurred during the fiscal year ended December 31, 2005 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
Item 16. [Reserved].
Item 16A. Audit Committee Financial Expert.
     Our Board of Directors has determined that Mr. Svante Adde is an Audit Committee financial expert as defined in the instructions to Item 16A of Form 20-F. He is an independent director as defined in Section 303A.02 of the New York Stock Exchange’s Listed Company Manual. Both other members of our Audit Committee, Ms. Maija-Liisa Friman and Ms. Satu Huber, are independent directors as defined in Section 303A.02 of the New York Stock Exchange’s Listed Company Manual.

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Item 16B. Code of Ethics.
     In 2002, we adopted a code of ethics that applies to our President and Chief Executive Officer, our Chief Financial Officer and our principal accounting officer. The code of ethics can be viewed on our Internet pages at www.metso.com -> About us -> Values -> Ethical Principles.
Item 16C. Principal Accountant Fees and Services.
Audit Fees
     PricewaterhouseCoopers Oy has served as our independent public auditor for both of the financial years ended December 31, 2004 and 2005, for which audited financial statements appear in this annual report on Form 20-F. The auditor is elected annually by the annual general meeting of shareholders. During the financial years ended December 31, 2004 and December 31, 2005, we incurred aggregate expenses of EUR 3.1 million and EUR 2.9 million, respectively, for services rendered by our principal auditor, PricewaterhouseCoopers for the audit of our annual financial statements and services rendered in connection with statutory and regulatory filings including the review of documents filed with the SEC.
Audit-Related Fees
     During the financial years ended December 31, 2004 and December 31, 2005, we incurred aggregate expenses of EUR 1.5 million and EUR 1.3 million, respectively, for services rendered by our principal auditor, PricewaterhouseCoopers for assurance and related services. Audit-related fees consist of fees incurred for assurance and related services that are reasonably related to the performance of the audit or review of the Company’s financial statements or that are traditionally performed by the external auditor, and include consultations concerning financial accounting and reporting standards; internal control reviews; advice and assistance in connection with local statutory accounting requirements; due diligence reviews related to acquisitions; employee benefit plan audits and reviews; and miscellaneous reports in connection with grant applications.
Tax Fees
     During the financial years ended December 31, 2004 and December 31, 2005, we incurred aggregate expenses of EUR 1.5 million and EUR 2.1 million, respectively, for tax services rendered by our principal auditor, PricewaterhouseCoopers. Tax fees include fees incurred for tax compliance services, including the preparation of original and amended tax returns and claims for refund; tax consultations, such as assistance in connection with tax audits, tax advice related to mergers and acquisition, transfer pricing, and requests for rulings or technical advice from taxing authorities; tax planning services; and expatriate tax compliance, consultation and planning services.
All Other Fees
     During the financial year ended December 31, 2004, we incurred aggregate expenses of EUR 0.1 million for services rendered by our principal auditor, PricewaterhouseCoopers for occasional training services. No such expenses have been incurred for the year ended December 31, 2005.
Audit Committee Pre-Approval Policies and Procedures
     Our Audit Committee has adopted a policy requiring pre-approval of audit, audit-related, tax and other non-audit services provided by our independent auditors. Under this policy, the Audit Committee annually pre-approves an audit plan containing the types of services to be performed by our principal auditor, including an estimate of fees grouped by the type of service, based on a schedule prepared together by Metso and our principal auditor. The appendices to the policy set out the services that have been pre-approved by the Audit Committee without specific advance consideration, subject to an annual review.
     Any proposed engagement that does not fit within the definition of a pre-approved service may be presented to the Audit Committee for consideration at its next meeting. The Audit Committee has also delegated to the chairman of the Audit Committee the authority to pre-approve audit-related and non-audit services not prohibited by law to be performed by Company’s independent auditors provided that the chairman shall report any decisions to pre-approve such services and fees to the full Audit Committee at its next regular meeting.

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     All of the services described in “Audit-Related Fees, “Tax Fees” and “All Other Fees,” were approved by the Audit Committee in accordance with the Company’s formal policy on auditor independence.
Item 16D. Exemptions from the Listing Standards for Audit Committees.
     Not applicable.
Item 16E. Purchases of Equity Securities by the Issuer and Affiliated Purchasers.
     No equity securities were purchased by the issuer or affiliated purchasers during 2005.

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PART III
Item 17. Financial Statements.
     Not applicable.
Item 18. Financial Statements.
     See financial statements beginning on page F-1.

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Item 19. Exhibits.
    Documents filed as exhibits to this annual report:
 
1.1   Articles of Association of Metso Corporation.
 
2.1   Not applicable.*
 
4.1   Service contract for Jorma Eloranta, president and chief executive officer of Metso Corporation, dated November 30, 2003.**
 
6.1   See Note 10 to our consolidated financial statements included in this annual report for information on how earnings per share information was calculated.
 
8.1   Subsidiaries of Metso Corporation.
 
12.1   Certification of Jorma Eloranta, president and chief executive officer of Metso Corporation, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
 
12.2   Certification of Olli Vaartimo, executive vice president and chief financial officer of Metso Corporation, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
 
13.1   Certification of Jorma Eloranta, president and chief executive officer of Metso Corporation, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 
13.2   Certification of Olli Vaartimo, executive vice president and chief financial officer of Metso Corporation, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 
*   The total amount of long-term debt securities authorized under any instrument does not exceed ten percent of the total assets of the Group on a consolidated basis.
 
**   Incorporated by reference to our annual report on Form 20-F for the financial year ended December 31, 2003, filed with the SEC on March 25, 2004.

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SIGNATURES
     The registrant hereby certifies that it meets all of the requirements for filing on Form 20-F and that it has duly caused and authorized the undersigned to sign this annual report on its behalf.
         
     Date: March 15, 2006   METSO CORPORATION
 
 
  By:   /s/ JORMA ELORANTA    
    Name:   Jorma Eloranta   
    Title:   President and Chief Executive Officer  
 
         
     
  By:   /s/ OLLI VAARTIMO    
    Name:   Olli Vaartimo   
    Title:   Executive Vice President and Chief Financial Officer   
 

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METSO
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of
Metso Corporation:
In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of income, of cash flows and of changes in shareholders’ equity present fairly, in all material respects, the financial position of Metso Corporation and its subsidiaries at December 31, 2005 and December 31, 2004, and the results of their operations and their cash flows for each of the two years in the period ended December 31, 2005 in conformity with International Financial Reporting Standards as adopted by the EU. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
As discussed in Notes 1, 13 and 33 to the consolidated financial statements, Metso Corporation changed their accounting for financial instruments and non current assets held for sale and discontinued operations effective January 1, 2005.
International Financial Reporting Standards as adopted by the EU vary in certain significant respects from accounting principles generally accepted in the United States of America. Information relating to the nature and effect of such differences is presented in Note 40 to the consolidated financial statements.
Helsinki, Finland
March 15, 2006
PricewaterhouseCoopers Oy
Authorized Public Accountants

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METSO
Consolidated Statements of Income
(in millions, except for per share amounts)
                     
        Year ended December 31,  
    Note   2004     2005  
             
Net sales
  35     3,602       4,221  
 
                   
Cost of goods sold
  8,9     (2,673 )     (3,110 )
 
               
 
                   
Gross profit
        929       1,111  
 
                   
Selling, general and administrative expenses
  4,8,9     (798 )     (794 )
Other operating income and expenses, net
  5,35     (11 )     12  
Share in profits and losses of associated companies
  16,35     4       1  
Reversal of Finnish pension liability
  7,29,35     75       5  
 
               
 
                   
Operating profit
  35     199       335  
 
                   
Financial income and expenses, net
  10     (59 )     (43 )
 
               
 
                   
Profit on continuing operations before tax
        140       292  
 
                   
Income taxes on continuing operations
  11     18       (72 )
 
               
 
                   
Profit on continuing operations
        158       220  
 
                   
Profit (loss) on discontinued operations, net of taxes
  13     (14 )     17  
 
               
 
                   
Profit
        144       237  
 
               
 
                   
Profit attributable to minority interests
        1       1  
Profit attributable to equity shareholders
        143       236  
 
               
Profit
        144       237  
 
               
 
                   
Earnings per share from continuing operations
                   
Basic,
  14     1.16       1.57  
Diluted,
  14     1.16       1.57  
 
                   
Earnings per share from discontinued operations
                   
Basic,
  14     (0.11 )     0.12  
Diluted,
  14     (0.11 )     0.12  
 
                   
Earnings per share from continuing and discontinued operations
                   
Basic,
  14     1.05       1.69  
Diluted,
  14     1.05       1.69  
The accompanying Notes form an integral part of these consolidated financial statements.

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METSO
Consolidated Balance Sheets
(in millions)
                         
            As at December 31,  
    Note     2004     2005  
                 
ASSETS
                     
 
Non-current assets Intangible assets
    15                  
Goodwill
            491       498  
Other intangible assets
            94       99  
 
                   
 
            585       597  
 
                   
 
                       
Property, plant and equipment
    15                  
Land and water areas
            70       58  
Buildings and structures
            253       220  
Machinery and equipment
            307       286  
Assets under construction
            19       17  
 
                   
 
            649       581  
 
                   
 
                       
Financial and other assets
                       
Investments in associated companies
    16       17       20  
Available-for-sale equity investments
    17       10       12  
Treasury stock
            1        
Loan and other interest bearing receivables
    20       12       5  
Available-for-sale financial assets
    20       3       34  
Deferred tax asset
    11       159       163  
Other non-current assets
    20       37       39  
 
                   
 
            239       273  
 
                   
 
                       
Total non-current assets
            1,473       1,451  
 
                   
 
                       
Current assets
                 
Inventories
    19       692       888  
 
                   
 
                       
Receivables
                       
Trade and other receivables
    20       766       918  
Costs and earnings of projects under construction in excess of advance billings
    18       190       173  
Loan and other interest bearing receivables
    20       2       2  
Available-for-sale financial assets
    20       51       135  
Tax receivables
    11       24       14  
 
                   
 
            1,033       1,242  
 
                   
 
                       
Cash and cash equivalents
    21       372       323  
 
                   
 
                       
Total current assets
            2,097       2,453  
 
                   
 
                       
Assets held for sale
                   
 
                   
 
                       
Total assets
            3,570       3,904  
 
                   
The accompanying Notes form an integral part of these consolidated financial statements.

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METSO
Consolidated Balance Sheets -- Continued
(in millions)
                         
            As at December 31,  
    Note     2004     2005  
                 
SHAREHOLDERS’ EQUITY AND LIABILITIES
                       
 
                       
Equity
    22                  
Share capital
            232       241  
Share premium reserve
            14       76  
Cumulative translation adjustments
            (48 )     (9 )
Fair value and other reserves
            431       424  
Retained earnings
            361       553  
 
                   
Equity attributable to shareholders
            990       1,285  
 
                   
 
                       
Minority interests
            5       7  
 
                   
 
                       
Total equity
            995       1,292  
 
                   
 
                       
Mortgages and contingent liabilities
    30              
 
                   
 
                       
Liabilities
                       
Non-current liabilities
                       
Long-term debt
    24       885       593  
Post employment benefit obligations
    29       171       157  
Deferred tax liability
    11       16       20  
Provisions
    26       31       33  
Other long-term liabilities
            6       7  
 
                   
Total non-current liabilities
            1,109       810  
 
                   
 
                       
Current liabilities
                       
Current portion of long-term debt
    24       19       160  
Short-term debt
    27       31       35  
Trade and other payables
    28       873       925  
Provisions
    26       160       191  
Advances received
            227       312  
Billings in excess of cost and earnings of projects under construction
    18       124       146  
Tax liabilities
    11       32       33  
 
                   
Total current liabilities
            1,466       1,802  
 
                   
 
                       
Liabilities held for sale
                   
 
                   
 
                       
Total liabilities
            2,575       2,612  
 
                   
 
                       
Total shareholders’ equity and liabilities
            3,570       3,904  
 
                   
The accompanying Notes form an integral part of these consolidated financial statements.

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METSO
Consolidated Statements of Cash Flows
(in millions)
                     
        Year ended December 31,  
    Note   2004     2005  
             
Cash flows from operating activities:
                   
Profit
        144       237  
Adjustments to reconcile profit to net cash provided by operating activities:
                   
Depreciation and amortization
  9     115       102  
Change of provisions related to restructuring programs
  6     (11 )     (12 )
Gain on sale of fixed assets
  5     (11 )     (18 )
Loss (gain) on sale of subsidiaries and associated companies
  13     29       (17 )
Gain on sale of available-for-sale equity investments
  5     (9 )     (2 )
Share of profits and losses of associated companies
  16     (4 )     (1 )
Interests and dividend income
        52       39  
Income taxes
        (4 )     72  
Other non-cash items
        (21 )     24  
Change in net working capital, net of effect from business acquisitions and disposals
        63       (170 )
Interest paid
        (60 )     (55 )
Interest received
        6       13  
Dividends received
        3       2  
Taxes paid
        (31 )     (50 )
 
               
Net cash provided by (used in) operating activities
        261       164  
 
                   
Cash flows from investing activities:
                   
Capital expenditures on fixed assets
  15     (89 )     (104 )
Proceeds from sale of fixed assets
        39       46  
Business acquisitions, net of cash acquired
  12     (2 )     (14 )
Proceeds from sale of businesses, net of cash sold
  13     389       95  
Investments in associated companies
  16     (1 )     (2 )
Proceeds from sale of associated companies
        1        
Investments in available-for-sale equity investments
        (7 )     (1 )
Proceeds from sale of available-for-sale equity investments
        27       3  
Investments in available-for-sale financial assets
        (47 )     (166 )
Proceeds from sale of available-for-sale financial assets
        7       52  
Increase in loan receivables
        (6 )     (2 )
Decrease in loan receivables
        6       3  
Other items
        (5 )      
 
               
Net cash provided by (used in) investing activities
        312       (90 )
 
                   
Cash flows from financing activities:
                   
Share options exercised
  22           72  
Dividends paid
        (27 )     (48 )
Hedging of net investment in foreign subsidiaries
        11       (2 )
Net borrowings (payments) on short-term debt
        (258 )     (2 )
Proceeds from issuance of long-term debt
        454       6  
Principal payments of long-term debt
        (485 )     (156 )
Principal payments of finance leases
        (4 )     (6 )
Other items
        (23 )      
 
               
Net cash provided by (used in) financing activities
        (332 )     (136 )
 
                   
Net increase (decrease) in cash and cash equivalents
        241       (62 )
Effect of changes in exchange rates on cash and cash equivalents
        1       13  
Cash and cash equivalents at beginning of year
        130       372  
 
               
Cash and cash equivalents at end of year
        372       323  
 
               
The accompanying Notes form an integral part of these consolidated financial statements.

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METSO
Consolidated Statements of Cash Flows — Continued
(in millions)
                 
    Year ended December 31,  
    2004     2005  
         
Change in net working capital, net of effect from business acquisitions and disposals:
               
(Increase) decrease in assets and increase (decrease) in liabilities:
               
Inventory
    (129 )     (178 )
Trade and other receivables
    (87 )     (139 )
Percentage of completion: recognized assets and liabilities, net
    113       42  
Trade and other payables
    166       105  
 
           
Total
    63       (170 )
 
           
 
               
Supplemental cash flow information:
               
 
               
Revolving credit facility activity
               
Borrowings
    50        
Payments
    116        
 
               
Non-cash exchange of bonds
               
New bonds issued
    274        
Bonds redeemed
    256        
The accompanying Notes form an integral part of these consolidated financial statements.

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METSO
Consolidated Statements of Changes in Shareholders’ Equity
(in millions)
                                                                 
                                            Equity              
            Share     Cumulative     Fair value             attributable              
    Share     premium     translation     and other     Retained     to     Minority     Total  
    capital     reserve     djustments     reserves     earnings     shareholders     interests     equity  
                                 
Balance at January 1, 2004
    232       14       (50 )     431       252       879       7       886  
 
                                                               
Translation differences
                (11 )                 (11 )           (11 )
Transfer of translation differences
                8             (8 )                  
Deferred tax asset
                5                   5             5  
Other
                            1       1       (3 )     (2 )
 
                                               
Net income (expense) recognized directly in equity
                2             (7 )     (5 )     (3 )     (8 )
 
                                                               
Profit
                            143       143       1       144  
 
                                               
Total recognized income for 2004
                2             136       138       (2 )     136  
 
Dividends
                            (27 )     (27 )           (27 )
 
                                               
 
                                                               
Balance at December 31, 2004
    232       14       (48 )     431       361       990       5       995  
 
                                                               
Effects of adopting IAS 32 Treasury stock
                      (2 )     1       (1 )           (1 )
Effects of adopting IAS 39 Cash flow hedges, net of taxes
                      4             4             4  
Available-for-sale equity investments, net of taxes
                      2             2             2  
Other
                      0       2       2             2  
 
                                               
 
                                                               
Balance at January 1, 2005
    232       14       (48 )     435       364       997       5       1,002  
 
                                                               
Cash flow hedges, net of taxes
                      (11 )           (11 )           (11 )
Available-for-sale financial assets, net of taxes
                      0             0             0  
Net investment hedge effects, net of taxes
                (21 )                 (21 )           (21 )
Translation differences
                60                   60             60  
Other
                      0       1       1       1       2  
 
                                               
Net income (expense) recognized directly in equity
                39       (11 )     1       29       1       30  
 
                                                               
Profit
                            236       236       1       237  
 
                                               
Total recognized income for 2005
                39       (11 )     237       265       2       267  
 
                                                               
Dividends
                            (48 )     (48 )           (48 )
Share options exercised
    9       62                         71             71  
 
                                               
 
                                                               
Balance at December 31, 2005
    241       76       (9 )     424       553       1,285       7       1,292  
 
                                               
The accompanying Notes form an integral part of these consolidated financial statements.

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METSO
Notes to Consolidated Financial Statements
Note 1. Accounting principles
Description of businesses
          Metso is a global technology corporation, which designs, develops and produces systems, automation solutions, machinery and equipment for process industries. The main customer industries are the pulp and paper, mining, construction and energy industries. Metso’s operations are divided into four business areas: Metso Paper, Metso Minerals, Metso Automation and Metso Ventures. Metso Ventures is comprised of Metso Panelboard, Foundries, Metso Powdermet and Valmet Automotive.
          In January 2004, Metso divested its Converting Equipment group to a Swiss company, Bobst Group. In June 2004, Metso divested its Compaction and Paving business line (Dynapac), previously part of Metso Minerals, to Altor, a Nordic private equity investor. In December 2004, Metso divested its Drilling business line (Reedrill), previously part of Metso Minerals, to the U.S. company Terex Corporation. In April 2005, Metso Drives, previously reported under Metso Ventures, was sold to CapMan, a Finnish private equity investor. Divested businesses mentioned above are presented as Discontinued operations separate from Continuing operations.
Basis of presentation
          The consolidated financial statements, prepared in accordance with International Financial Reporting Standards as adopted by the EU (herein referred to as “IFRS”), include the financial statements of Metso Corporation (the “Parent Company”) and its subsidiaries (together with the Parent Company, “Metso” or the “Company”). There are no differences between IFRSs as adopted by the EU, as applied by Metso and IFRS as written by the IASB. Metso Corporation was formed in 1999 as a result of the merger of Rauma Corporation and Valmet Corporation. The merger was consummated on July 1, 1999 and is accounted for by the pooling-of-interests method.
          Accounting principles set out below have been consistently applied to all the years presented, except for those relating to the classification and measurement of financial instruments. Metso has applied IFRS 1 “First-time adoption of International Financial Reporting Standards” in preparing these consolidated financial statements, and used the exemption to only apply IAS 32 “Financial instruments: disclosure and presentation” and IAS 39 “Financial instruments: recognition and measurement” from January 1, 2005 onwards. The principles applied to financial instruments for 2004 and 2005 are disclosed separately below.
          Until December 31, 2004, the consolidated financial statements have been prepared in accordance with the Finnish Generally Accepted Accounting Principles (“FAS” or “Finnish GAAP”), which differ in certain respects from IFRS. When preparing the 2005 financial statements of Metso, the management adjusted certain accounting and valuation methods applicable in Finnish GAAP to comply with IFRS. The comparative figures of 2004 have been restated to reflect these adjustments, except as described in the accounting principles.
Use of estimates
          The preparation of financial statements, in conformity with IFRS, requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Accounting convention
          The financial statements are prepared under the historical cost convention, except for assets and liabilities classified as derivatives and available-for-sale equity investments and financial assets, which are recognized at fair value.
Principles of consolidation
Subsidiaries
          The consolidated financial statements include the financial statements of the Parent Company and each of those companies in which it owns, directly or indirectly through subsidiaries, over 50 percent of the voting

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METSO
Notes to Consolidated Financial Statements — (Continued)
rights or in which it is in a position to govern the financial and operating policies of the entity. The companies acquired during the financial period have been consolidated from the date Metso acquired control. Subsidiaries sold have been included up to their date of disposal.
          All intercompany transactions are eliminated as part of the consolidation process. Minority interests are presented in the consolidated balance sheets within equity, separately from the equity attributable to shareholders. Minority interests are separately disclosed in the consolidated statements of income.
          Acquisitions of companies are accounted for using the purchase method. The cost of an acquisition is measured at fair value over the assets given up, shares issued or liabilities incurred or assumed at the date of acquisition including any costs directly attributable to the acquisition. The excess acquisition cost over the fair value of net assets acquired is recognized as goodwill (see also intangible assets). If the cost of acquisition, even after a reassessment of the fair values of the acquired assets, liabilities and contingent liabilities, still is less than the fair value of the group’s share of the net assets acquired, the difference is recognized directly through profit and loss.
     Associated companies
          The equity method of accounting is used for investments in associated companies in which the investment provides Metso the ability to exercise significant influence over the operating and financial policies of the investee company. Such influence is presumed to exist for investments in companies in which Metso’s direct or indirect ownership is between 20 and 50 percent of the voting rights. Investments in associated companies are initially recognized at cost. Under the equity method, the share of profits and losses of associated companies is presented separately in the consolidated statements of income. Metso’s share of post-acquisition retained profits and losses of associated companies is reported as part of investments in associated companies in the consolidated balance sheets.
Foreign currency translation
          The financial statements are presented in euros, which is the functional currency of the Parent Company.
          Transactions in foreign currencies are recorded at the rates of exchange prevailing at the date of the transactions. At the end of the accounting period, unsettled foreign currency transaction balances are valued at the rates of exchange prevailing at the balance sheet date. Trade flow related foreign currency exchange gains and losses are recorded in other operating income and expenses, net, unless the foreign currency denominated transactions have been subject to hedge accounting, in which case the related exchange gains and losses are recorded in the same line item as the hedged transaction. Foreign exchange gains and losses associated with financing are entered as a net amount under financial income and expenses, net.
          The statements of income of foreign subsidiaries (i.e., outside the Euro area) are translated into euro at the average exchange rates for the financial year and the balance sheets are translated at the exchange rate of the balance sheet date. The resulting translation differences are recorded as a separate item to equity. When Metso hedges the equity of its foreign subsidiaries with foreign currency loans and with financial derivatives, the translation difference is adjusted by the currency effect of hedging instruments and recorded in equity, net of taxes. When a foreign entity is disposed of accumulated exchange differences are recognized in the consolidated statements of income as part of the gain or loss on the sale.
Derivative financial instruments
     Accounting principles applicable to derivative financial instruments before January 1, 2005
          Both standards, IAS 39 “Financial instruments: recognition and measurement” and IAS 32 “Financial instruments: disclosure and presentation” became applicable to Metso prospectively on January 1, 2005. The previous year comparative data has not been restated in compliance with these standards. It has been measured and presented in accordance to principles applicable under Finnish GAAP.
          Finnish GAAP did not require recognition of financial derivatives prior to recognition of the underlying hedged transaction, but allowed hedge accounting for a wider range of transactions without specific

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METSO
Notes to Consolidated Financial Statements — (Continued)
documentation and hedge effectiveness testing requirements. In addition, as Finnish GAAP did not require presentation of derivatives at fair value on the balance sheet, they were reported either at fair value or on accrual basis as part of the hedged transaction.
     Accounting principles applicable to derivative financial instruments after January 1, 2005
          Metso uses a variety of derivative financial instruments, mainly forward exchange contracts, and a limited number of interest rate, currency and cross-currency swaps as well as currency options, interest rate futures and commodity contracts, as part of its overall risk management policy. These instruments are used to reduce the foreign currency, interest rate and price risks relating to existing assets, liabilities, firm commitments, forecasted sales and estimated consumption of raw materials.
          Metso does not hold nor issue derivative financial instruments for trading purposes.
          Hedging currency risk
          Metso uses principally forward exchange contracts to mitigate the currency risk on certain commercial assets (receivables) and liabilities (payables) and firm commitments (orders). The financial derivatives are designated at inception either as hedges of forecast transactions or firm commitments (cash flow hedge), or as fair value hedges of assets or liabilities, or as financial derivatives not meeting the hedge accounting criteria (economic hedge). Derivatives are initially recognized in the balance sheet at cost and subsequently measured at their fair value on each balance sheet date.
          The currency portion of derivatives qualifying for hedge accounting is designated at inception as a hedge with respect to the hedged item or group of items with similar characteristics. The hedge effectiveness is tested quarterly both prospectively and retrospectively. The effective currency portion of the derivatives is recognized in the hedge reserve of equity and recorded through profit and loss concurrently with the underlying transaction being hedged. The interest portion of the derivatives is reported under other operating income and expenses, net. Should a hedged transaction no longer be expected to occur, any cumulative gain or loss previously recognized under equity is reversed through profit and loss.
          Derivatives not qualifying for hedge accounting, which have been contracted to mitigate risk arising from the commercial activity, are recognized at fair value in other operating income and expenses, net.
          Metso hedges its net foreign investments in certain currencies to reduce the effect of exchange rate fluctuations. The hedging instruments are mainly foreign currency loans and forward exchange contracts, and to some extent cross-currency swaps. The exchange gains and losses measured on these instruments are recorded, net of taxes, in a separate component of equity against the translation differences arising from consolidation to the extent that these hedges are effective. Their effectiveness is tested quarterly both prospectively and retrospectively. The interest portion of derivatives qualifying as hedges of net investment is recognized under financial income and expenses, net.
          Hedging interest rate risk
          Metso’s exposure to interest rate risks, arising from interest bearing receivables and loans, is managed mainly through interest rate swaps. When these instruments are designated as hedging instruments, Metso applies either cash flow hedge accounting or fair value hedge accounting as appropriate. The effective portion of changes in the fair value of derivatives that are designated and qualify as cash flow hedges are recognized in the hedge reserve as of the balance sheet date. Changes in the fair value of derivatives that are designated and qualify as fair value hedges are recorded in financial income and expenses, net, together with any changes in the fair value of the hedged asset or liability that are attributable to the hedged interest rate risk.
          Hedging commodity risk
          Metso has entered into electricity forwards to reduce its exposure to the volatility of electricity prices in units located in Finland and Sweden. Prior to April 1, 2005, after which Metso started to apply hedge accounting to commodity forwards, the forwards were fair valued quarterly and the change in fair value was recognized in other operating income and expenses, net. Since April 1, 2005, the change in fair value of the forwards is recognized in the hedge reserve, the gain or loss relating to an ineffective portion of the instruments is

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METSO
Notes to Consolidated Financial Statements — (Continued)
recognized in other operating income and expenses, net. Amounts accumulated in equity are recognized through profit and loss concurrently with the corresponding electricity procurement.
          Fair value estimation
          The fair value of the forward exchange contracts is determined using forward exchange market rates at the balance sheet date. The fair value of the interest rate swaps is calculated as the present value of the estimated future cash flows. The fair value of the electricity forwards is based on quoted market prices at the balance sheet date. The fair value of options is determined using Black-Scholes valuation model.
Employee benefits
     Share-based payments
          Share-based payments granted to Metso’s key personnel are fair valued as of the grant date and recognized as an employee benefit expense with corresponding entry in other reserves of the equity. The fair value of instruments granted is expensed over their vesting period with corresponding increase in other reserves under equity. When the options are exercised, the proceeds received, net of transaction costs, are recognized in the share capital at nominal value and the excess in the share premium reserve.
     Pensions and coverage of pension liabilities
          Metso has several different pension schemes in accordance with local conditions and practices in countries where it operates. In certain countries, the pension schemes are defined benefit plans with retirement, disability, death, other post retirement benefits, such as health services, and termination income benefits. The retirement benefits are usually based on the number of service years and the salary levels of the last service years. The schemes are generally funded through payments to insurance companies or to trustee-administered funds as determined by periodic actuarial calculations.
          In addition, certain companies within Metso have multi-employer pension arrangements and defined contribution pension schemes. The contributions to defined contribution plans and to multi-employer and insured plans are charged to profit and loss concurrently with the payment obligations.
          In the case of defined benefit plans, the liability arising from the plan is the present value of the defined benefit obligation as of the balance sheet date, adjusted by the fair value of the plan assets and by the unamortized portion of the actuarial gains and losses and of past service cost. Independent actuaries calculate the defined benefit obligation, which is based on the projected unit credit method and is discounted to present value of the estimated future cash flows using the interest rates approximating the terms of the pension engagement. The cost of providing retirement and other post retirement benefits to the personnel is charged to profit and loss concurrently with the service rendered by the personnel. Actuarial gains and losses arising from experience adjustments, changes in actuarial assumptions and amendment to plans are recognized over the average remaining service years of the employees.
Revenue recognition
          Revenues from goods and services sold are recognized, net of sales taxes and discounts, when substantially all the risks and rewards of ownership are transferred to the buyer, or when legal title of the goods and responsibility for shipment has transferred to the buyer. The transfer of risk takes place either when the goods are shipped or made available to the buyer for shipment, depending on the delivery terms clause of the contract. The credit worthiness of the buyer is verified before engaging into a sale. However, should a risk of non-payment arise after revenue recognition, an allowance for non-collectibility is established.
     Percentage-of-completion method
          Sales and anticipated profits under engineering and construction contracts are recorded on a percentage-of-completion basis. The stage of completion is determined either by units of delivery, which are based on predetermined milestones based on realized value added (contract value of the work performed to date) or by the cost-to-cost method of accounting. Estimated contract profits are recorded in earnings in proportion to recorded sales. In the cost-to-cost method, sales and profits are recorded after considering the ratio of accumulated costs to estimated total costs to complete each contract. In certain cases, subcontractor materials,

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METSO
Notes to Consolidated Financial Statements — (Continued)
labor and equipment, are included in sales and costs of goods sold when management believes that Metso is responsible for the ultimate acceptability of the project. Changes to total estimated contract costs are recognized in the period in which they are determined. Probable losses on a contract are recognized as an expense immediately.
     Sales with repurchase commitments
          If the conditions of a sales contract with repurchase commitment indicate that the transfer of risks and rewards has not taken place at initial delivery of equipment and transfer of ownership, the revenue is deferred. The income on the transaction is recognized as a lease until the expiry of the resale right.
     Trade-ins
          Sales, against which trade-ins are accepted, are recorded at contract price. Any reduction between the agreed trade-in price and its recorded value in the inventory is recognized in cost of goods sold concurrently with the sale.
Government grants
          Government grants relating to acquisition of property, plant and equipment are deducted from the acquisition cost of the asset and recognized in profit and loss as a reduction the depreciation charge of the related asset. Other government grants are deferred and recognized through profit and loss concurrently with the costs they intend to compensate.
Shipping and handling costs
          Metso includes shipping fees billed to customers in revenues and shipping costs incurred in cost of goods sold.
Advertising costs
          Advertising costs are expensed as incurred.
Other operating income and expenses, net
          Other operating income and expenses, net comprise income and expenses, which do not directly relate to the operative activity of businesses within Metso. Such items include gains and losses on disposal of assets, other than those, which qualify as discontinued operations, costs related to significant restructuring programs, and foreign exchange gains and losses, excluding those, which qualify for hedge accounting and those, which are reported under financial income and expenses, net.
Income taxes
          Income taxes presented in the consolidated statements of income consist of current and deferred taxes. Current taxes include estimated taxes corresponding to the results for the financial year of the companies, and adjustments of taxes for previous years.
          A deferred tax liability or asset has been determined for all temporary differences between the tax bases of assets and liabilities and their amounts in financial reporting, using the enacted tax rates effective for the future years. The deferred tax liabilities are recognized in the balance sheet in full, and the deferred tax assets are only recognized when it is probable that there will be sufficient taxable profit against which the asset can be utilized.
          No deferred tax liability has been recognized for undistributed earnings of domestic subsidiaries (i.e., Finnish) since such earnings can be transferred to the Parent Company without tax consequences. Metso does not provide deferred income taxes on undistributed earnings of foreign subsidiaries, except in situations where Metso has elected to distribute earnings, which become subject to additional non-recoverable taxes triggered by a distribution.

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METSO
Notes to Consolidated Financial Statements — (Continued)
Earnings per share
     Basic earnings per share are calculated by dividing the profit attributable to equity shareholders of the Company by the weighted average number of ordinary shares in issue during the year, excluding treasury stock.
     The diluted earnings per share are calculated by applying the “treasury stock” method, under which earnings per share data is computed as if the warrants and options were exercised at the beginning of the period, or on the issuance of warrants and options, if that occurs later during the period, and as if the funds obtained thereby were used to purchase common stock at the average market price during the period. In addition to the weighted average number of ordinary shares outstanding, the denominator includes the incremental shares obtained through the assumed exercise of the warrants and options. The warrants and options have a dilutive effect only when the average market price of the common stock during the period exceeds the exercise price of the warrants and options.
Intangible assets
     Intangible assets, which comprise mainly goodwill, trademarks, patents and licences, are stated at historical cost less accumulated amortization and impairment loss, if any. Intangible assets having indefinite useful life, such as goodwill and trademarks, are not amortized, but tested annually for impairment.
  Amortization of intangible assets
     Amortization of intangible assets having defined economic life is calculated on a straight-line basis over the expected economic lives of the assets as follows:
     
Patents and licenses
  5 – 10 years
Computer software
  3 – 5 years
Other intangibles
  3 – 12 years
     Expected useful lives are reviewed at each balance sheet date and if they differ significantly from previous estimates, the remaining amortization periods are adjusted accordingly.
     The carrying value of intangible assets subject to amortization is reviewed for impairment whenever events and changes in circumstances indicate that the carrying amount of an asset may not be recoverable. A previously recognized impairment loss may be reversed if there is a significant improvement to the circumstances having initially caused the impairment, however not to an extent higher than the carrying amount, which would have been recorded had there been no impairment in prior years.
  Impairment of intangible assets with indefinite useful life
     The carrying value of goodwill for each business area and other intangible assets with indefinite useful life is reviewed annually or, more frequently for impairment, if the facts and circumstances, such as declines in sales, operating profit or cash flows or material adverse changes in the business climate, suggest that its carrying value may not be recoverable. The testing of goodwill is performed at the cash generating unit level, whereas the testing of an intangible asset with indefinite useful life is either performed as part of a cash generating unit or separately if the asset generates independent cash flows. The annual testing may be performed using previous year’s recoverable amounts of the cash generating units if there has not been significant changes to the assets and liabilities of the cash generating unit, if in the previous testing the recoverable value clearly exceeded the carrying values tested, or if the likelihood that the current recoverable value would be less than the current carrying value of the cash generating unit is remote. Metso uses discounted cash flow analysis to assess the fair value of intangible assets subject to testing. A previously recognized impairment loss on goodwill is not reversed even if there is a significant improvement in circumstances having initially caused the impairment, whereas an impairment loss on an intangible asset with indefinite life may be reversed should there be a significant improvement to cash flows compared to the projections having generated the impairment loss in the first place. However, the impairment loss may not be reversed to an extent higher than the carrying amount, which would have been recorded had there been no impairment in prior years.

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METSO
Notes to Consolidated Financial Statements — (Continued)
  Research and development
     Research and development costs are mainly expensed as incurred. Research and development costs comprise salaries, administration costs, depreciation and amortization of tangible and intangible fixed assets. Development costs meeting certain capitalization criteria under IAS 38 “Intangible assets” are capitalized and amortized during the expected economic life of the underlying technology.
Property, plant and equipment
     Property, plant and equipment are stated at historical cost, less accumulated depreciation and impairment loss, if any. Land and water areas are not depreciated.
     Depreciation and amortization is calculated on a straight-line basis over the expected useful lives of the assets as follows:
     
Buildings and structures
  15 – 40 years
Machinery and equipment
  3 – 20 years
     Expected useful lives are reviewed at each balance sheet date and if they differ significantly from previous estimates, the remaining depreciation periods are adjusted accordingly.
     Subsequent improvement costs related to an asset are included in the carrying value of such asset or recognized as a separate asset, as appropriate, only when the future economic benefits associated to the costs are probable and the related costs can be separated from normal maintenance costs.
     Metso reviews property, plant and equipment to be held and used by the company for impairment whenever events and changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Impairments of property, plant and equipment and capital gains and losses on their disposal are included in other operating income and expenses, net. A previously recognized impairment on property, plant and equipment is reversed only if there has been a significant change in the estimates used to determine the recoverable amount, however not to an extent higher than the carrying amount, which would have been recorded had there been no impairment in prior years.
  Capitalization of interest expenses
     The interest expenses of self-constructed investments are capitalized in Metso’s financial statements. The capitalized interest expense is amortized over the estimated useful life of the underlying asset.
  Leases
     Leases for property, plant and equipment where Metso has substantially all the risks and rewards of ownership are classified as finance leases. Finance leases are capitalized at the inception of the lease at the lower of the fair value of the leased property or the present value of the minimum lease payments. Each lease payment is allocated between the liability and finance charges. The corresponding rental obligations, net of finance charges, are included in long-term debt, and the interest element is charged to the profit and loss over the lease period. Property, plant and equipment acquired under finance leases are depreciated over the useful life of the asset or over the lease period.
     Leases of property, plant and equipment, where the lessor retains a significant portion of the risk and rewards, are classified as operating leases. Lease costs are recognized straight line over the lease period.
Financial investments
     Financial investments are classified into available-for-sale equity investments, available-for-sale financial assets and loan and other interest bearing receivables. The classification is determined at the time of the purchase depending on the purpose for which the assets were acquired.

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METSO
Notes to Consolidated Financial Statements — (Continued)
Purchases and sales of financial investments are recognized on the settlement date and the cost of purchase includes the transaction costs. Metso assesses at each balance sheet date whether there is objective evidence that a financial asset or a group of financial assets is impaired. In the case of investments classified as available-for-sale, a significant or prolonged decline in the fair value of the security below its cost is considered in determining whether the investment is impaired.
  Available-for-sale equity investments
     Available-for-sale equity investments include mainly shares in listed companies. For presentation purposes, equity investments, which qualify as available-for-sale and which are reported at their historical acquisition price at December 31, 2004, have been reclassified in the consolidated balance sheets to conform to current presentation.
     From January 1, 2005 onwards, upon adoption of IAS 39 “Financial instruments: recognition and measurement”, available-for-sale equity investments are carried at fair value, based on quoted closing prices as of the respective balance sheet date. Unrealized gains and losses arising from changes in fair value are recognized in the fair value reserve of equity. Gains and losses at disposal and potential impairment are recorded in the profit and loss and the accumulated change in fair value previously recorded in the fair value reserve of equity is reversed. The fair values of unlisted shares are determined by using applicable valuation techniques.
  Available-for-sale financial assets
     For presentation purposes, financial assets, which qualify as available-for-sale financial assets and which have not been measured at fair value at December 31, 2004, have been reclassified in the consolidated balance sheets to conform to current presentation.
     Non-current available-for-sale financial assets
     Available-for-sale financial assets, which are reported under non-current assets, comprise investments into financial instruments e.g. bonds, commercial papers and time deposits with maturities exceeding one year at acquisition or with undefined maturity and which the company plans to hold more than one year. From January 1, 2005 onwards, the instruments are fair valued quarterly and the change in fair value is recognized in the fair value reserve of equity. Gains and losses at disposal and potential impairment are recorded in the profit and loss and the accumulated change in fair value previously recorded in the fair value reserve of equity is reversed.
     Current available-for-sale financial assets
     Available-for-sale financial assets, which are reported under current assets, comprise highly liquid investments, which have been contracted as part of the cash management of Metso and which do not qualify as cash and cash equivalents. From January 1, 2005 onwards, they are fair valued quarterly and the change in fair value is recognized in the fair value reserve of equity. Gains and losses at disposal and potential impairment are recorded in the profit and loss and the accumulated change in fair value previously recorded in the fair value reserve of equity is reversed.
  Loan and other interest bearing receivables
     Loan and other interest bearing receivables comprise interest bearing trade and loan receivables. They are presented as non-current when their maturity, at the time of their inception, exceeds one year.
     Loan and other interest bearing receivables are recorded at cost and discounted to the present value. They are subject to regular and systematic review as to collectibility. If a loan receivable is estimated to be partly or totally unrecoverable, a provision is made for the shortfall between the carrying amount and the present value of the expected cash flows. Interest income on loan and other interest bearing receivables is included in financial income and expenses, net.

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METSO
Notes to Consolidated Financial Statements — (Continued)
Inventories
     Inventories are stated at the lower of historical cost calculated on an “average cost” basis or net realizable value. Costs include purchase costs as well as transportation and processing costs. The costs of finished goods include direct materials, wages and salaries plus social costs, subcontracting and other direct costs. In addition, production costs include an allocable portion of production and project administration overheads. Net realizable value is the estimated amount that can be realized from the sale of the asset in the normal course of business after allowing for the costs of realization.
     Inventories are shown net of a reserve for obsolete and slow-moving inventories. A reserve is established and a corresponding charge is taken to profit and loss in the period in which the loss occurs based upon an assessment of technological obsolescence and related factors.
     Trade-in equipment received is recorded as inventory at the lower of cost or net realizable value.
Trade receivables and securitization
     Trade receivables are recognized at original invoice amount to customers, net of allowance for doubtful receivables. The allowance is recorded on the basis of periodic reviews of potential non-recovery of receivables by taking into consideration individual customer credit risk, economic trends in customer industries and changes in payment terms. Bad debts are written off when official announcement of receivership, liquidation or bankruptcy is received confirming that the receivable will not be honored.
     If extended payment terms, exceeding one year, are offered to customers, the invoiced amount is discounted to its present value and interest income is recognized over the credit term.
     Metso sells certain receivables through arrangements with third party financial institutions. The transfer of such financial asset qualify for derecognition when substantially all the risks and rewards of ownership, including legal isolation of the financial asset from the Company, and the control over the asset have been transferred. A gain or loss on sale of the receivables is recorded at derecognition.
Cash and cash equivalents
     Cash and cash equivalents consist of cash in banks and other liquid investments with original maturity of three months or less.
Assets classified as held-for-sale
     Non-current assets and discontinued operations are classified as held-for-sale and stated at the lower of carrying amount and fair value less cost to sell, if their carrying amount is recovered principally through a sale transaction rather than through a continuing use.
     A discontinued operation results from the management’s decision and commitment to dispose of a separate business for which the related assets, liabilities and operating results can be distinguished both operationally and for financial reporting purposes. When specific criteria for the held-for-sale classification has been met, the non-current assets are recorded at lower of carrying value or fair value less cost to sell, and non-current assets subject to depreciation or amortization are no longer amortized. The assets and liabilities of a disposal group classified as held-for-sale are presented in the balance sheet separate from assets and liabilities related to continuing operations as of the date the operation qualified as discontinued. The results of discontinued operations, net of taxes and the gain or loss on their disposal are presented for all periods separate from continuing operations in the consolidated statements of income. Balance sheet data from periods preceding the qualifying disposal decision is not reclassified.
Treasury stock
     In 2004, treasury stock held by Metso is valued at the historical acquisition price in a separate caption under financial assets and in equity.

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METSO
Notes to Consolidated Financial Statements — (Continued)
     On January 1, 2005, upon adoption of IAS 32 “Financial instruments: disclosure and presentation”, treasury stock is valued at historical acquisition price and has been deducted from equity. Should such shares be subsequently sold or reissued, the consideration received, net of any directly attributable transaction costs and related income tax, is recorded in the equity.
Long-term debt
     In 2004, long-term debt was initially recognized at fair value. The transaction costs were capitalized to financial assets and amortized on a straight-line basis over the borrowing period.
     From January 1, 2005 onwards, long-term debt is initially recognized at fair value, net of transaction costs incurred. Debt is classified as current liability unless the Company has an unconditional right to defer settlement of the liability for at least 12 months after the balance sheet date.
  Capitalization of transaction costs related to issuance of debt instruments
     Transaction costs arising from issuance of debt instruments are included in the book value of the debt, and amortized using the effective yield method over the borrowing period of the respective liability.
  Capitalization of transaction costs related to exchange of debt instruments
     Transaction costs arising from exchange of debt instruments are included in the book value of the debt and amortized using the effective yield method over the remaining period of the modified liability provided the new conditions obtained through the exchange do not substantially differ from those of the original debt. The assessment of whether the conditions are substantially different is based on a comparison of the discounted present value of the cash flows under the new terms and the present value of the remaining cash flows of the original financial liability.
Provisions
     Provisions, for which settlement is expected to occur more than one year after the initial recognition, are discounted to their present value and adjusted in subsequent closings for the time effect.
  Restructuring costs
     A provision for restructuring is recognized only after management has developed and approved a formal plan to which it is committed. Employee termination benefits are only recognized when the representatives of employees or individual employees have been informed of the intended measures in detail and the related compensation packages can be reliably measured. The costs included in a provision for restructuring are those costs that are either incremental and incurred as a direct result of the plan or are the result of a continuing contractual obligation with no continuing economic benefit to Metso or a penalty incurred to cancel the contractual obligation. Restructuring costs also include other costs incurred as a result of the plan, which are recorded under other operating income and expenses, net, such as asset write-downs, environmental liabilities and costs to transfer operations to new locations.
  Environmental remediation costs
     Metso accrues for losses associated with environmental remediation obligations when such losses are probable and can be estimated reliably. Accruals for estimated losses from environmental remediation obligations generally are recognized no later than completion of the remedial feasibility study. Such accruals are adjusted as further information develops or circumstances change. Recoveries of environmental remediation costs from other parties are recorded as assets when their receipt is deemed probable.
  Warranty costs
     An accrual is made for expected warranty costs. The adequacy of this accrual is reviewed periodically based on an analysis of historical experience and anticipated probable warranty liabilities.

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METSO
Notes to Consolidated Financial Statements — (Continued)
Note 2. Financial risk management
     Metso’s business activities are exposed to a variety of financial risks which are explained in detail below. Metso’s overall risk management function aims to minimize potential adverse effects of the financial risks to its financial performance.
     Metso’s financial risk management is carried out by a central treasury department (Corporate Treasury) under the Treasury policy approved by the Board of Directors. Corporate Treasury identifies, evaluates and hedges financial risks in close co-operation with the operating units.
Foreign currency risk management
     Exchange rate changes affect the businesses, although the geographical diversity of operations decreases the significance of any individual currency. More than one-half of Metso’s net sales originate from outside the euro zone, the main currencies being USD, € and SEK.
     Metso measures and monitors foreign currency risk using sensitivity analysis. The consolidated net exposures in different currencies are continuously controlled and the risk is mitigated through different financial instruments, including derivatives, as required by the Treasury policy.
Trade flow related derivatives
     In accordance with the Treasury Policy, the operating units are required to hedge in full the currency exposures that arise from firm sales and purchase commitments. Future currency cash flows are hedged for periods, which do not normally exceed two years. Accordingly, the majority of future currency cash flows relate to the foreign currency denominated order backlog and qualify for hedge accounting. Operating units use internal forward exchange contracts, transacted with the Corporate Treasury to hedge these transactions denominated in a currency other than the functional currency of the unit. The Corporate Treasury is responsible to enter in corresponding external forward agreements. In addition, the units can hedge highly probable forecast foreign currency denominated cash flows.
     Metso documents at inception of the transaction the relationship between the hedging instruments and hedged items according to its risk management strategy and objectives. Metso also documents the hedge effectiveness both at hedge inception and at each balance sheet date, regardless of the forward contracts used in hedging transactions have been effective or not.
Foreign currency denominated equity
     The equity of subsidiaries that have a functional currency different than presentation currency is exposed to foreign currency translation risk. Metso hedges its major equity exposures such as USD, SEK and CAD denominated net investments to reduce the effect of exchange rate fluctuations. The hedging instruments are foreign currency loans and forward exchange contracts. Both realized and unrealized exchange gains and losses measured on these instruments are recorded, net of taxes, in a separate component of equity against the translation differences arising from consolidation. The forwards are designated as hedges of net investments at inception and their effectiveness is measured quarterly. The interest component of forwards is fair valued and the change in fair value is recognized in the income statement.
Foreign currency denominated loans
     Metso has granted medium-term, mainly USD denominated, loans to its foreign subsidiaries. The resulting currency risk has been hedged with cross-currency swaps and forward exchange contracts.
Short-term funding and liquidity management
     Cash and committed revolving credit facilities are used to protect short-term liquidity. Liquidity is managed by balancing the proportion of short-term and long-term loans as well as the average remaining maturity of long-term loans.

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METSO
Notes to Consolidated Financial Statements — (Continued)
     Forward exchange contracts are used to mitigate foreign currency risk arising from short-term borrowing and liquidity management. Such forwards are fair valued through profit and loss quarterly.
Interest rate management
     Changes in market interest rates and interest margins may influence financing costs, returns on financial investments and valuation of derivative contracts. Interest rate risks are managed through the ratio of floating-rate to fixed-rate loans and the average length of interest rate periods. Additionally, Metso uses both interest rate and cross-currency swaps and interest rate futures contracts to mitigate the risks arising from interest bearing receivables and debt. The interest rate risk is measured using sensitivity analysis and controlled by the Corporate Treasury.
Commodity risks
     Metso has extended its risk management policy to include its exposure to volatility in electricity prices of its units located in Finland and in Sweden. The exposure is reduced with electricity forwards.
Credit risks and other counterparty risks
     Metso has no significant concentrations of credit risk. Metso’s operating units are primarily responsible for credit risks pertaining to sales activities. Metso’s Corporate Treasury provides centralized services related to customer financing and seeks to ensure that the principles of the Treasury policy are adhered to with respect to terms of payment and required collateral. Counterparty specific limits have been set to avoid risk concentrations.
Note 3. Critical accounting estimates and judgements
     The preparation of the consolidated financial statements requires management to make estimates and judgements affecting the amounts reported in the consolidated financial statements and accompanying notes. These estimates and judgements, based on historical evidence and plausible future scenarios, are continually evaluated. The following assets and liabilities include a high degree of management estimates and assumptions and the carrying values can therefore materially differ from their current values within the next financial year.
Trade receivables
     Metso’s policy is to maintain an allowance for bad debt based on the best estimate of the amounts that are potentially uncollectable at the balance sheet date. The estimates are based on a systematic, on-going review and evaluation performed as part of the credit-risk evaluation process. As part of this evaluation, Metso takes into account the history of collections, the size and compositions of the receivable balances, current economic events and conditions and other pertinent information.
Allowance for slow-moving and obsolete inventory
     Metso’s policy is to maintain an allowance for slow moving and obsolete inventory based on the best estimate of such amounts at the balance sheet date. The estimates are based on a systematic, on-going review and evaluation of inventory balances. As part of this evaluation, Metso also considers the composition and age of the inventory as compared to anticipated future needs.
Revenue recognition
     Metso delivers complete installations to its customers, where the moment of signing a sales contract (firm commitment) and the final reception of a delivery by the customer can take place in different financial periods. In accordance with its accounting principles, Metso applies the percentage of completion method (“POC method”) for recognition of such long-term delivery contracts. In year 2005, approximately 30 percent of the net sales were recognized under the POC method, which is based on predetermined milestones and where the revenue is recognized based on the estimated realized value added or on the cost-to-cost method. A projected loss on a firm commitment is recognized in income, when a contract becomes binding. The estimated revenue, the costs and profit, together with the planned delivery schedule of the projects are subject to regular revisions as the contract progresses to completion. Revisions in profit estimates are charged to income in the

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METSO
Notes to Consolidated Financial Statements — (Continued)
period in which the facts that give rise to the revision become known. Although Metso has significant experience using the POC method, the total costs estimated to be incurred on projects may change over time due to changes in the underlying project costs structures, which may ultimately affect the revenue recognized. As the reliability of cost estimates is based on Metso’s experience in manufacturing and delivering paper machines, pulp making lines, panelboard lines and mining equipment, the POC method is not applied for sales where the final outcome of the project and related costs cannot be pre-established reliably.
Accounting for income taxes
     As part of the process of preparing its consolidated financial statements, Metso is required to estimate the income taxes in each of the jurisdictions and countries in which it operates. This process involves estimating the actual current tax exposure together with assessing temporary differences resulting from differing treatment of items, such as deferred revenue and cost reserves, for tax and accounting purposes. These differences result in deferred tax assets and liabilities, which are included in the consolidated balance sheet. The likelihood for the recovery of deferred tax assets from future taxable income is assessed, and to the extent the recovery is not considered likely the deferred asset is adjusted in accordance.
     Significant management judgement is required in determining the provision for income taxes and the deferred tax assets. Metso has recorded net deferred tax assets of €143 million as of December 31, 2005, net of unrecorded amount of €140 million for uncertainties related to its ability to utilize some of the deferred tax assets, primarily consisting of operating losses carried forward and deductible temporary differences for certain foreign subsidiaries and the final outcome of tax audits in some subsidiaries. The adjustment is based on Metso’s estimates of taxable income by country in which it operates, and the period over which the deferred tax assets will be recoverable based on estimated future taxable income. In the event that actual results differ from these estimates, the deferred tax asset may need to be adjusted in coming financial years.
Allocation of excess purchase price to acquired assets
     In accordance with the accounting principles, excess purchase price has been allocated to acquired property, plant and equipment and intangible assets and liabilities. Whenever feasible, Metso has used as a basis for such allocations readily available market values to determine the fair value basis. However, when this has not been possible, as often is the case with non-current intangible assets and certain assets with no active markets or available price quotations, the valuation has been based on past performance of such asset and its intended future use in the acquirer’s business. The appraisals, which have been based on current replacement costs, discounted cash flows and estimated selling prices depending on the underlying asset, require management to make estimates and assumptions of the future use of these assets and their impact on the financial position. Any change in our future business priorities and orientations may affect the planned outcome of initial appraisals.
Valuation of property, plant and equipment and intangible assets and goodwill
     The carrying value of identifiable intangible assets with indefinite economic life and goodwill is tested annually, or more frequently if events or changes in circumstances indicate that such carrying value may not be recoverable. The carrying values of property, plant and equipment and intangible assets, subject to depreciation and amortization are reviewed for impairment whenever there are indications that their carrying values could exceed their value in use or disposal value if disposal is considered as a possible option. Triggering events for impairment reviews include the following:
    material permanent deterioration in the economic or political environment of the customers or of own activity;
 
    significant under-performance relative to expected historical or projected future performance; and
 
    significant changes in Metso’s strategic orientations affecting the business plans and previous investment policies.
     The accounting policy related to the impairment tests is based on numerous estimates. The valuation is inherently judgmental and highly susceptible to change from period to period because it requires Metso to make assumptions about future supply and demand related to its individual business units, future sales prices and what

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METSO
Notes to Consolidated Financial Statements — (Continued)
cost savings will be achievable. The value of the benefits and savings expected to be realized as a result of the efficiency improvement programs, is inherently subjective. The fair value of the reporting units is determined using a derived weighted average cost of capital as the rate to discount estimated future cash flows. This rate may not be indicative of actual rates obtained in the market. A one percent increase in the discount rates applied for determining the fair values of the cash generating units would have reduced the total fair value of units tested by about 10% and would not have indicated any impairment needs.
Reserve for warranty costs
     The warranty reserve is based on the history of past warranty costs and claims for machines and equipment under warranty. The typical warranty period is 12 months from the date of customer acceptance of the delivered equipment. For larger projects, the average warranty period is two years. For sales involving new technology and long-term delivery contracts, additional warranty reserves can be established on a case by case basis to take into account the potentially increased risk.
Pensions
     In accordance with IAS 19, the pension benefit expense is based on assumptions that include the following:
    a weighted average expected return on plan assets. Actual return on plan assets may differ significantly based on market activity.
 
    an assumed discount rate to be used in the calculation of the current year pension expense and pension liability balance. This rate may not be indicative of actual rates realized in the market.
 
    estimated rates of future pay increases. Actual increases may not reflect actual future increases. Based on the significant change in the Company’s structure and the uncertainty of the global market place, these estimates are difficult to project.
     The actuarial experience that differs from the assumptions and changes in the assumptions can result in gains and losses that are not yet recognized in the consolidated financial statements. Metso recognizes amortization of any unrecognized gain or loss as a component of the pension expense if, as of the beginning of the year, such unrealized net gain or loss exceeds ten percent of the greater of (1) the projected benefit obligation or (2) the market-related value of the plan’s assets. In such case, the amount of amortization expense recognized is the resulting excess, divided by the average remaining service period of active employees expected to receive benefits under such plan. A one percent increase in the expected return on plan assets would have reduced pension benefit expense by approximately €2 million, and a one percent decrease in the expected return on plan assets would have increased pension benefit expense by approximately €2 million for the year ended December 31, 2005.
Note 4. Selling, general and administrative expenses
     Selling, general and administrative expenses consist of the following:
                 
    Year ended December 31,
    2004   2005
    ( € in millions)
Marketing and selling expenses
    (443 )     (435 )
Research and development expenses, net
    (92 )     (89 )
Administrative expenses
    (263 )     (270 )
 
               
Total
    (798 )     (794 )
 
               

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METSO
Notes to Consolidated Financial Statements — (Continued)
     Research and development expenses, net, consist of the following:
                 
    Year ended December 31,
    2004   2005
    (€ in millions)
Research and development expenses, total
    (96 )     (96 )
Capitalized development costs
    2       0  
Capital expenditure
    4       6  
Grants received
    8       8  
Depreciation and amortization
    (10 )     (7 )
 
               
Research and development expenses, net
    (92 )     (89 )
 
               
Note 5. Other operating income and expenses, net
     Other operating income and expenses consist of the following:
                 
    Year ended December 31,
    2004   2005
    (€ in millions)
Gain on sale of fixed assets (1)
    11       15  
Gain on sale of available-for-sale equity investments
    9       2  
Rental income
    5       3  
Foreign exchange gains (2)
          12  
Change in fair value of derivatives (3)
          3  
Other income
    8       11  
 
               
Other operating income, total
    33       46  
 
               
Nonrecurring expenses related to 2003 restructuring program (4)
    (14 )     3  
Nonrecurring expenses related to 2004 restructuring program (4)
    (24 )     (7 )
Write-downs on fixed assets
          (8 )
Foreign exchange losses (2)
          (11 )
Change in fair value of derivatives (3)
          (10 )
Other expenses
    (6 )     (1 )
 
               
Other operating expenses, total
    (44 )     (34 )
 
               
 
               
Other operating income and expenses, net
    (11 )     12  
 
               
 
(1)   Gains on sale of fixed assets were €11 million and €18 million for the years ended December 31, 2004 and 2005, respectively. In 2005, €3 million resulted from the sale of assets related to outsourcing and they have been included in the Metso 2003 restructuring program.
 
(2)   Includes foreign exchange gains and losses resulting from trade receivables and payables and related derivatives.
 
(3)   For more information on derivative instruments, see Notes 32 and 33.
 
(4)   For more information on restructuring programs, see Note 6.
Note 6. Restructuring costs
  2003 Program
     In June 2003, Metso launched its group wide efficiency improvement program aiming to reach substantial costs savings. The plan included streamlining of sales and administrative organizations and closing down of sites both in the United States and in Europe. As a result of the efficiency improvement program, Metso’s personnel reduced by some 2,000 persons.

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METSO
Notes to Consolidated Financial Statements — (Continued)
     The total costs for the 2003 program were €93 million, of which €14 million was recorded in the income statement for 2004. The efficiency improvement program was completed during 2004.
     The provisions related to the 2003 program were as follows:
                 
    As at December 31,
    2004   2005
    (€ in millions)
Pensions and postretirement benefits(1)
    7       6  
Employee termination and exit costs
    7       2  
Restructuring expenses
    1       0  
Other expenses
    1       0  
 
               
Total
    16       8  
 
               
 
(1)   As at December 31, 2004 and 2005, accrued pensions comprised long-term liabilities of €6 million and of €5 million, respectively.
  2004 Program
     In June 2004, Metso announced a program for the renewal of Metso Paper’s business concept, which targeted to streamline the cost structure. The main locations affected by the measures were in the Finnish, Swedish and North American operations. The measures comprised personnel reductions in certain administrative and production functions, disposal of non-core sites and global reorganization of the tissue business line. The program was completed by the end of 2005.
     The costs recognized under the 2004 program amounted to the following:
                 
    Year ended December 31,
    2004   2005
    (€ in millions)
Pensions and postretirement benefits
    (6 )     (1 )
Employee termination and exit costs
    (8 )     (4 )
Write-downs on fixed assets
    (10 )     (3 )
Other expenses
    0       1  
 
               
Total
    (24 )     (7 )
 
               
     The provisions related to the 2004 program amounted to the following:
                 
    As at December 31,
    2004   2005
    (€ in millions)
Pensions and postretirement benefits (1)
    4       4  
Employee termination and exit costs
    6       3  
Other expenses
    0       0  
 
               
Total
    10       7  
 
               
 
(1)   As at December 31, 2004 and 2005, accrued pensions comprised long-term liabilities of €4 million and of €4 million, respectively.

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METSO
Notes to Consolidated Financial Statements — (Continued)
     The provisions related to restructuring programs have changed as follows during the financial year 2005:
                                                 
    Balance at   Impact of   Additions   Reversal           Balance
    beginning   exchange   charged   of excess   Realized   at end of
    of year   rates   to expense   reserve   reserve   year
                    (€ in millions)                
Pension and postretirement benefits
    11             1             (2 )     10  
Employee termination and exit costs
    13       1       4       (1 )     (12 )     5  
Restructuring expenses
    1                         (1 )     0  
Other expenses
    1                         (1 )     0  
 
                                               
Total
    26       1       5       (1 )     (16 )     15  
 
                                               
Note 7. Reversal of Finnish pension liability (TEL)
     Under FAS, the Finnish TEL (Employees’ pension plan) was regarded as a defined contribution plan. As of the transition date January 1, 2004, under IFRS, the disability portion of the TEL was considered as a defined benefit plan requiring an actuarial valuation of the liability.
     Due to certain changes introduced in 2004, the disability portion of Finnish TEL is no longer regarded as a defined benefit plan. This change in classification resulted in a reversal of €57 million, net of taxes of €23 million of TEL disability liability being recorded as non-recurring income in the last quarter of 2004.
     Of the Finnish pension liability reversal of €80 million before taxes, €75 million was related to continuing operations and €5 million to the discontinued operations, i.e. Metso Drives. Metso Drives was disposed of in April 2005.
     The remaining liability of €4 million, net of taxes of €1 million, was recorded as income during 2005.
     Please see Note 35, Business area and geographic information, for the reversal of the Finnish pension liability by business area and Note 29, Post employment benefit obligations for further information on pension expenses and liabilities.

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METSO
Notes to Consolidated Financial Statements — (Continued)
Note 8. Personnel expenses and the number of personnel
  Personnel expenses:
                 
    Year ended December 31,
    2004   2005
    (€ in millions)
Salaries and wages
    (881 )     (854 )
Pension costs, defined contribution plans
    (84 )     (77 )
Pension costs, defined benefit plans (1)
    (5 )     (10 )
Reversal of Finnish pension liability (TEL), gross amount (2)
    80       5  
Other post-employment benefits
    (3 )     (3 )
Share-based payments
          0  
Other indirect employee costs
    (167 )     (143 )
 
               
Total
    (1,060 )     (1,082 )
 
               
 
(1)   For more information on pension costs, see Note 29.
 
(2)   For more information on reversal of Finnish pension liability (TEL), see Note 7.
  Board remuneration:
                 
    Year ended December 31,
    2004   2005
    (€ in thousands)
Serving board members in 2005:
               
Matti Kavetvuo
    (69 )     (73 )
Jaakko Rauramo
    (47 )     (50 )
Svante Adde
          (31 )
Maija-Liisa Friman
    (42 )     (47 )
Satu Huber
    (32 )     (40 )
Juhani Kuusi
    (39 )     (40 )
Pentti Mäkinen(1)
    (36 )     (18 )
Former board members:
               
Risto Hautamäki
    (31 )     (8 )
Heikki Hakala
    (9 )      
Mikko Kivimäki
    (10 )      
 
               
Total
    (315 )     (307 )
 
               
 
(1)   Starting from April 4, 2005, has attended meetings as a personnel representative invited by the Board.
     According to a decision of the Annual General Meeting of April 4, 2005, annual fees were as follows: Chairman of the Board €60,000, Vice Chairman and Chairman of the Audit Committee €40,000, and other members €30,000. In addition, a fee of €500 per meeting is paid to all members for meetings of the Board and its Committees they attend. Compensation for traveling expenses and daily allowances are paid in accordance with Metso’s travel policy.

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METSO
Notes to Consolidated Financial Statements — (Continued)
     Chief Executive Officer and Executive Team remuneration:
                 
    Year ended December 31,
    2004   2005
    (€ in thousands)
Salaries and short-term employee benefits
    (2,170 )     (2,382 )
Termination benefits
           
Pension insurance premiums
    (342 )     (299 )
Other long-term benefits
           
Share-based payments
          (215 )
 
               
Total
    (2,512 )     (2,896 )
 
               
     Metso also pays premiums to a pension insurance company to provide for a supplemental group pension insurance covering our corporate Executive Team and some senior executives, which enables a retirement age of 60. For the years ended December 31, 2004 and 2005, the amount of such pension insurance premiums payments totaled approximately €1.5 million and €1.4 million, respectively.
     President and CEO Jorma Eloranta’s annual salary was €438,000 and €460,101 for the years ended December 31, 2004 and 2005. In addition he also receives benefits in the form of a car and a telephone. He has also been granted a total of 100,000 Metso 2003A option rights. According to his contract, Jorma Eloranta’s age of retirement is 60 years, and the full pension is 60 percent of his annual salary. If his contract is terminated, he is entitled to a compensation corresponding to 24 months’ salary.
  Number of personnel at end of year:
                 
    2004   2005
Metso Paper
    8,660       8,201  
Metso Minerals
    8,048       8,521  
Metso Automation
    3,267       3,169  
Metso Ventures
    1,637       1,993  
Corporate Office and Shared Services
    293       294  
 
               
Continuing operations
    21,905       22,178  
Discontinued operations
    897        
 
               
Metso total
    22,802       22,178  
 
               
  Average number of personnel during the period:
                 
    2004   2005
Metso Paper
    9,021       8,451  
Metso Minerals
    8,178       8,283  
Metso Automation
    3,294       3,247  
Metso Ventures
    1,598       1,768  
Corporate Office and Shared Services
    263       297  
 
               
Continuing operations
    22,354       22,046  
Discontinued operations
    2,009       359  
 
               
Metso total
    24,363       22,405  
 
               

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METSO
Notes to Consolidated Financial Statements — (Continued)
Note 9. Depreciation and amortization
     Depreciation and amortization expenses on fixed assets consist of the following:
                 
    Year ended December 31,
    2004   2005
    (€ in millions)
Intangible assets
    (15 )     (16 )
Property, plant and equipment
       
Buildings and structures
    (23 )     (22 )
Machinery and equipment
    (77 )     (64 )
 
               
Total
    (115 )     (102 )
 
               
     Depreciation and amortization charged against operations by activity are as follows:
                 
    Year ended December 31,
    2004   2005
    (€ in millions)
Cost of goods sold
    (70 )     (60 )
Selling, general and administrative expenses
       
Marketing and selling
    (7 )     (9 )
Research and development
    (10 )     (7 )
Administrative
    (28 )     (26 )
 
               
Total
    (115 )     (102 )
 
               
Note 10. Financial income and expenses, net
     The following table provides a summary of financial income and expenses:
                 
    Year ended December 31,
    2004   2005
    (€ in millions)
Financial income
               
Dividends received
    3       1  
Interest income
    10       14  
Other financial income
    1       1  
Net gain (loss) from foreign exchange
    (1 )     4  
 
               
Financial income total
    13       20  
 
               
 
Financial expenses
               
Interest expenses
    (63 )     (52 )
Interest expenses on financial leases
    0       (1 )
Other financial expenses
    (9 )     (10 )
 
               
Financial expenses total
    (72 )     (63 )
 
               
 
Financial income and expenses, net
    (59 )     (43 )
 
               

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Table of Contents

METSO
Notes to Consolidated Financial Statements — (Continued)
Note 11. Income taxes
          The components of income taxes are as follows:
                 
    Year ended December 31,
    2004   2005
    (€ in millions)
Current tax (expense) benefit
    (24 )     (61 )
Deferred tax (expense) benefit
    42       (11 )
 
               
Income taxes, total
    18       (72 )
 
               
          The Finnish corporate income tax rate was 29% for the year ended December 31, 2004. As of January 1, 2005, the enacted rate was reduced to 26%, thus impacting the deferred tax amounts presented in the table below for the year ended December 31, 2004. The differences between income tax expense (benefit) computed at Finnish statutory rates and income tax expense (benefit) provided on earnings are as follows:
                 
    Year ended December 31,
    2004   2005
    (€ in millions)
Income before taxes
    140       292  
Income tax (expense) benefit at Finnish statutory rate
    (41 )     (76 )
Income tax for prior years
    8       (1 )
Difference between Finnish and foreign tax rates
    (6 )     (11 )
Write-down of subsidiary shares (1)
    53        
Benefit of operating loss carryforward
    10       22  
Operating losses with no current tax benefit (2)
    (4 )     (1 )
Non-deductible expenses and tax exempt income
    (1 )     (2 )
Change in tax rates and tax legislation
    (3 )      
Other
    2       (3 )
 
               
Income tax (expense) benefit
    18       (72 )
 
               
 
(1)   The tax benefit of €53 million for the year ended December 31, 2004, relates to a write-down recorded in 2003.
 
(2)   Operating losses with no current tax benefit relate to current year losses for which no deferred tax asset has been recognized.

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Table of Contents

METSO
Notes to Consolidated Financial Statements — (Continued)
          Reconciliation of deferred tax balances:
                                                 
                    Charged to                
    Balance at   Charged to   share-           Acquisitions    
    beginning   income   holders’   Translation   and   Balance at
    of year   statement   equity   differences   disposals   end of year
                    (€ in millions)                
2004
                                               
Deferred tax assets
                                               
Tax losses carried forward
    65       39                         104  
Fixed assets
    7                               7  
Inventory
    12       (2 )