Mobarakeh Steel Company Public Joint-Stock The Report made by an Independent Auditor and Legal Inspector Attached with Financial Statements for the Fiscal Year ending 20 March 2006 Mobarakeh Steel Company of Isfahan (Public Joint-Stock) Table of Contents Titles Page # - The Report made by an Independent Auditor and a Legal Inspector 1 to 5 - Financial Statements and Explanatory Notes 1 Appendix Islamic Republic of Iran (IRI) IRI Emblem Ministry of Finance and Economic Affairs Audit Firm The Report made by an Independent Audit & Legal Inspector Submitted to the Stockholders' Regular General Meeting of Mobarakeh Steel Company - Public Joint Stock 1. The balance-sheet of Mobarakeh Steel Company (Private Joint-Stock) on 20 March, 2006 and the profit and loss accounts statements, and the statement of liquid capital ending on the above date attached with explanatory notes Nos. 1-41 were audited by this organization. The board of directors of the company shall be responsible for the financial statements and this organization shall be responsible for expressing opinions on the said financial statements on the audit made by this organization and for submitting a report on the non- compliance with the legal requirements stipulated in the Commercial Code of Iran, as amended, and in the articles of association of the company. 2. The audit has been made by this firm on the basis of audit standards. The said standards require this organization to make, plan and carry out the auditing services with no important deviation or fault in the financial statements with reasonable reliance and confidence. The audit consists of the typical analysis of the evidences and documents supporting the amounts and information contained in the financial statements. This process of auditing is carried out in such a way that it will provide a reasonable foundation on which the audit opinion is based for the financial statements. 3. In the opinion of this audit firm the above-mentioned financial statements shows a good view of the financial situation of Mobarakeh Steel Company (Public Joint-Stock) and the results of the cash flow and transactions in the fiscal year ending 20 March of 2006 in all aspects according to the Accounting Standards. 4. This is to draw the attention of the shareholders to other matters as described below: 4.1. The executive regulations of the Budget Law of 1384 (21/03/2005-20/03/2006) of the companies, affiliated to the Ministry of Industries and Mine and the subsidiary companies, which have not been observed yet are as follows: 4.1.1. During the fiscal year, reported by the board of directors, the company has taken action to ratify and executive the regulations of the method of audit of the allowance of management and allowance for special skills and expertise. According to article 4 of the above-mentioned implementing regulations, any increase in salary, wage and allowances in the 1384 (21/03/2005-20/03/2006) fiscal year, which is more than that of the law of Payment coordinating system, is forbidden. 4.1.2. Contrary to clause A of article 8 of the implementing regulations the company has taken action to invest the amount of Rls105.3 billion out of the capital of the company in some business including of the amount of Rls100 billion for selling Bagh-Ferdos cultural and sport complex and the amount of Rls5.3 billion for completing phase 2 of villas construction in Chadegan. 4.1.3. According to clause C of article 8 of the implementing regulations, the costs for personnel sport shall be paid according to the Sports Development for Government Personnel. The amount of Rls100 billion has been considered in the budget of the company in the regard. The amount of money considered in the accounts is Rls71.5 billion which clouds the amount of Rls52.6 billion for cultural and sport club of Sepahan Mobarakeh Steel Co. and the amount of Rls18.9 billion for personnel sport. It should be noted that the payment for sport clubs has not been considered in the regulations. 4.2. During the fiscal year, reported by the company, in addition to payment of pension to the pensioner's fund of Mobarakeh Steel Company (20 percentage of the company's share and 10% of personnel's share) the company has taken action to pay the costs of medical treatment and health for the personnel and their dependents, which was paid by the contractor of the company in the first 9 months of fiscal year, according to the tariffs of Higher Medical Commission of the Organization of Development and Reconstruction of Mines and Mineral Industries of Iran. These tariffs are more than the tariffs of the board of minister plus 22% of overhead; the amount of Rls4,015.5 million for the fix costs for the contractor or directly paid by the company according to the mentioned above tariffs in the final 3 months of the fiscal year, reported according to the contract made between the company and Dana Insurance Company for payment of the amount of Rls120,000.00 for any individual insured. It should be noted that the payment at the complementary insurance services, which are more than that of tariffs of the board of Ministers is forbidden according to the Budget Law of 1384 (21/03/2005- 20/03/2006). 4.3. In reference to the resolution dated 2 Aug., 2006 of Transfer Committee and the next amendment, the subject of clause "T", note # 8 of Budget Law of 1384 (21/03/2005- 20/03/2006), 10 percent of the company's share has been transferred during the fiscal year reported, according to explanation # 24 of financial statements. In spite of the termination of the determined time mentioned in the above resolution, and the share transfer in Share Register Book, the financial statements have not been amended. 4.4. The cases can be mentioned about the transactions of the company are as follows: 4.4.1. No document has been submitted to Planning and Management Organization regarding the observation of article 88 of Development Act (authenticated in article 42 of Development Act) for inviting the Iranian contractors in all transactions in ranking frame work of Planning and Management Organization. 4.4.2. No evidences have been submitted on the observation of note # 2 of article # 2 as well as article # 3 of the regulation of maximum use of domestic technical, engineering, production, industrial and executive power, in execution of the projects and providing facilities for giving services ratified on 3 March, 1997, on sending the list of different types of technologies, equipment and raw matters, to Iranian organization of Scientific and Industrial Researches, 6 month before the bid was held, and on receiving the permit for providing foreign contractors with consultant engineering and contractual services, from Economic Council to the Organization. 4.4.3. Part 2 of clause "B" of article # 4 and article # 26 of the regulation of holding the bids for determining the limitation in holding the public bid by submitting the reasons according to the diagnosis and responsibility of the highest authority of the company and for using the lists of the competent bidders introduced by the competent government authorities and the short list of competent bidders which shall be made, at most 2 years earlier, according to articles # 12, 4 and 13 of the regulations mentioned above, have not been observed. 4.4.4. According to letter # 4047965 dated 18 Feb., 2004 of deputy of production affairs of the ministry of Industries and Mines to the Minister of this Ministry and according to decision made in the meeting dated 27 April, 2004 of the performance of the steel companies in steel stock Exchanges, it has been determined that Isfahan Mobarakeh Steel Company deliver 30% of its products for price decrease through Steel Stock Exchanges and record 70% of its products in chamber of transactions of the main hall after discovering the price and selling. According to the investigation made, the selling amount through Steel Stock Exchange, the selling amount out of Metals Stock Exchange (recorded in the chamber of transaction) and the selling amount, out of the network of Metals Stock Exchange (without being recorded) in the chamber of transactions are 19%, 71% and 10% respectively. It should be noted that the delivery amount of the products in Metals Stock Exchange, approved by the organization of Metals Stock Exchange, has not been submitted to this organization. It should also be noted that the amount of Rls21.3 billion of the charges sells and the amount of Rls1.1 billion of the charges of purchases recorded in the chamber of transactions has been reflected in the accounts. 4.5. The statutory obligations of appropriate deduction and on time payment of tax as well as deducted charges in previous years in the account of competent authorities have not been completely observed. 4.6. Article 87 of government financial regulations ratified on 16 Jan., 2002 for taking a permit from Economic Council for investment, out of domestic financial resources of the company has not been completely observed in the projects of more that the amount of Rls8 billion. 4.7. The actions taken by the board of directors on the duties of ordinary general meeting dated 29 June, 2005 held on transfer the title deeds of lands and building of the office in Isfahan, title deed of personnel cooperative company in Mobarakeh, dealing with the liabilities with other people (Rls32.2 billion), inventory, stagnant and unobtainable goods (Rls89.7 billion) as well as managing the warehouses for scrap ironware's and ferroalloy (wit an official value of Rls658 billion) have been without result.