SGL CARBON Aktiengesellschaft is organized as a stock corporation under the laws of the Federal Republic of Germany. In this annual report on Form 20-F, we refer to SGL CARBON Aktiengesellschaft and (unless the context requires otherwise) its consolidated subsidiaries as the “SGL Group” or the “Group” or the “Company”. References to “SGL” are to SGL CARBON Aktiengesellschaft without its consolidated subsidiaries. We refer to the ordinary bearer shares, no par value, of SGL as the “Shares”.

The following abbreviated references to the Business Areas of the SGL Group will also be used in this Annual Report: CG for the “Carbon and Graphite” Business Area, S for the “Specialties” Business Area (formerly GS – Graphite Specialties) and SGL T or T for the “SGL Technologies” Business Area. In January 2005 we sold the surface protection business of the former “Corrosion Protection” Business Area (CP). The remaining business of CP was transferred to and is included in the results of the Specialties Business Area. The term “Business Area” is used for reporting purposes, whereas the term “Business Unit” is used in business-related discussions within this ocument and both terms define the above reporting units of SGL Group.

We realigned our business areas with effect from February 1, 2007 creating a new structure consisting of two business areas “Performance Products” and “Advanced Materials” encompassing three business units: “Performance Products,” “Graphite Materials & Systems” and “Carbon Fibers & Composites.” Performance Products corresponds to the former Carbon and Graphite business area and contains the new business unit Performance Products. Advanced Materials comprises the former Specialties and SGL Technologies business areas which have been re-grouped into the two remaining business units, Graphite Materials & Systems and Carbon Fibers & Composites. Graphite Materials & Systems comprises the activities of the former Specialties business area as well as the expanded natural graphite business line which was previously part of the former SGL Technologies business area, while Carbon Fibers & Composites encompasses the carbon fiber and composites activities of the former SGL Technologies business area.

This annual report contains forward-looking statements and information relating to the SGL Group. Words such as “anticipate”, “believe”, “estimate”, “expect”, “intend”, “plan”, “project” and similar expressions identify forward-looking statements. These statements reflect the current belief of our management as well as assumptions made by, and information currently available to, the SGL Group.

Forward-looking statements are subject to risks and uncertainties. If these risks and uncertainties materialize, or if our assumptions prove incorrect, our actual results, performance or achievements could differ materially from any future results, performance or achievements expressed or implied by our forward-looking statements. Factors that could cause our forward-looking statements to prove incorrect include changes in general economic and business conditions, changes in currency exchange rates and interest rates, introduction of competing products by other companies, lack of acceptance of new products or services by the SGL Group’s targeted customers, changes in business strategy and various other factors. See Item 3, “Key Information–Risk Factors” for a discussion of risks that we believe particularly significant to the Group and our business. We do not intend, and do not assume any obligation, to update these forward-looking statements.

Not applicable.

Not applicable.

We prepare our Consolidated Financial Statements in accordance with International Financial Reporting Standards (IFRS). Since 2002, IFRS is the term for the entire body of accounting standards issued by the International Accounting Standards Board, replacing the earlier IAS, or International Accounting Standards. Individual accounting standards that the IASB issued prior to this change in terminology continue to use the prefix “IAS”. The SGL Group prepared the Consolidated Financial Statements in accordance with IFRS for all years presented.

We derived the following selected financial data for each of the years in the five-year period ended December 31, 2006 from our Consolidated Financial Statements. We prepared this information in accordance with IFRS or, where indicated, in accordance with U.S. generally accepted accounting principles (U.S. GAAP). IFRS differs in certain significant respects from U.S. GAAP. See Item 5, “Operating and Financial Review and Prospects-Significant Differences Between IFRS and U.S. GAAP” as well as Note 35 to the Consolidated Financial Statements contained elsewhere in this annual report for a discussion of these differences.

Until December 31, 2004, 18 subsidiaries and two joint ventures were excluded from consolidation and accounted for at cost, since these were deemed to be not material as whole. In the Consolidated Financial Statements as of December 31, 2005 we changed our accounting policy, and as a result these subsidiaries have been included in consolidation and the joint ventures have been accounted for using the equity method. In this context, the opening balances of assets, liabilities and equity as of January 1, 2003, as well as the Consolidated Balance sheet as of December 31, 2004 and the Consolidated Income Statement and Cash Flow Statement, for the years presented, have been restated retrospectively.

IFRS 2 “Share-based payment” is effective for annual periods beginning on or after January 1, 2005. The IFRS is to be applied retrospectively on all share-based payments granted since November 7, 2002, that still existed when the standard became effective and requires comparable information to be restated. This also includes a restatement to the opening balances of the retained earnings in the earliest period presented.

The revised IAS 1 “Presentation of financial statements” defines a presentation of current and non-current assets and liabilities as separate groups in the Consolidated Balance Sheets. The standard must be used for reporting periods of a fiscal year beginning on January 1, 2005 or later. The Company’s Consolidated Balance Sheet was structured accordingly and the previous years’ figures were restated.

As indicated in their reports that appear elsewhere in this annual report, Ernst & Young Aktiengesellschaft, Wirtschaftsprüfungsgesellschaft Steuerberatungsgesellschaft, Eschborn, Germany, independent auditors, have audited our IFRS Consolidated Financial Statements for the years ended December 31, 2006, 2005 and 2004. See details in our Consolidated Financial Statements – Report of Independent Registered Public Accounting Firm – F-2.

The following table shows the high, low, average and period-end euro-dollar exchange rates for the five years ended December 31, 2006 and the high and low euro-dollar exchange rates for the six months ended May 31, 2007. Up to November 30, 2005 these rates are based on the noon buying rates published by Deutsche Bank. Starting December 2005 we use the reference exchange rates published by the European Central Bank (ECB). The reference rates of the ECB are based on the regular daily concertation procedure between central banks within and outside the European System of Central Banks, which normally takes place at 2.15 p.m. ECB time (CET).

At June 25, 2007 the euro dollar exchange rate, based on the noon buying rate published by the European Central Bank was $1.3461 = €1.00. Fluctuations in the euro-dollar exchange rate will affect the dollar equivalent of the Share price in euros on the Frankfurt Stock Exchange and, as a result, are likely to affect the market price of the American Depositary Shares on the New York Stock Exchange as well as the amount of any dividends received by holders of American Depositary Receipts.

SGL did not declare dividends for the fiscal years 1998-2006.

Except as described herein, holders of ADRs are entitled to receive dividends on the Shares represented by the ADRs evidenced by such ADRs. SGL will pay any cash dividends payable to such holders to Deutsche Bank (up to 2007: JPMorgan Chase Bank), as depositary, in euro; subject to certain exceptions, the depositary will convert these payments into dollars. Dividends paid on Shares

Not applicable.

Not applicable.

Potential investors should carefully consider the following specific risk factors along with the other information contained in this annual report before deciding to invest in the SGL Shares. Each of the risks described below could have a material adverse effect on our financial condition and results of operations. In addition, each of these risks could cause our share price to decline, and investors could lose all or part of their investment. Additional risks not known to us or that we currently consider immaterial may also impair our business operations. The order in which the following risk factors are presented is not an indication of the likelihood of their occurrence.

Conditions in domestic and global economies have a strong impact on our business operations. Numerous factors, such as global or regional political conflicts, have a continuous impact on macroeconomic parameters and the international capital markets. The uncertainty of economic and political conditions can have a direct impact on the demand for our products and can also influence our planning and forecasting ability. This is particularly the case for our products where we operate under global market conditions, such as graphite electrodes for the steel industry, cathodes for the aluminum industry, carbon electrodes for the silicon-metal industry, graphite specialties supplied to the semiconductor industry and industrial applications including carbon-ceramic brake discs supplied to the automotive industry, process equipment for the chemical industry and structural parts and carbon fibers supplied to the aviation thermoplast and windmill industry.

We operate more than 38 manufacturing facilities, which are located in Europe, North America and Asia and sell our products in approximately 80 countries. In 2006, sales revenue of our products outside Germany accounted for approximately 85% of our total sales revenue. As a result, we are subject to risks associated with operating in foreign countries, including fluctuations in currency exchange rates, declines in regional or global economic activity, limitations, if any, on the conversion of foreign currencies into euro, and the possible imposition of investment and other restrictions by governments. In addition, our business is subject to changes in the public policies of individual countries or states, including potential increases in taxes and tax rates.

We must comply with a broad range of regulatory controls on the testing, manufacture and marketing of our products. In some countries, including the United States and member states of the European Union, regulatory controls have become increasingly demanding. We expect that this trend will continue. The new EU regulation concerning the registration, evaluation, authorization and restriction of chemicals (“REACH”), imposes a new regulatory framework for the manufacture, importation and use of chemical substances in the EU which may entail a significant increase in the testing and assessment of basic chemicals and chemical intermediates, leading to increased costs and reduced operating margins for these products. This new regulatory regime became effective on June 1, 2007. We cannot assure you that changes in policies or regulations will not harm our operating results or financial condition in the future.

In 2006, we derived approximately 48% of our sales revenue from the sale of graphite electrodes, our core business. We sell our graphite electrodes primarily to the electric arc furnace

The market for graphite electrodes, particularly in Europe and North America, is mature and expands in line with overall economic growth and with an increase in the proportion of EAF steel to total steel production. In addition, demand for our graphite electrodes sold to the EAF steel industries may be adversely affected by technological improvements in those electrodes as well as in the manufacturing operations of our customers, which reduce the rate of consumption or use of our electrodes for a given level of production. Since the early 1980s there has been a steady gradual decrease in “specific consumption” — the quantity of graphite electrodes consumed per metric ton of steel produced — due to improved efficiency in EAF steelmaking processes and equipment design. Since the mid-1990s, increased EAF steel production has offset the decrease in specific consumption, resulting in steady to slightly increasing demand for graphite electrodes. Despite the overall long-term trend, the year-to-year fluctuations in the demand for graphite electrodes have been significant. We cannot assure you that future improvements in steelmaking processes and technology or a decline in EAF steel production will not result in a net decrease in demand for graphite electrodes. A significant drop in demand for our graphite electrodes could have a material adverse effect on our financial condition and results of operations.

Raw materials are the largest component of our cost of sales, followed by personnel costs and energy costs. We are exposed to commodity price risks through our dependence on various raw materials, such as petroleum coke, coal tar pitch, petroleum pitch, anthracite coal PAN-based precursor and natural graphite flakes as well as energy supplies. The availability of high-quality raw materials is limited, and the market for our primary raw material petroleum coke, in particular needle coke, is dominated by a small number of large suppliers with substantial market power, which may undergo further consolidation. Most of our procurement agreements with key suppliers have a term of only one year, with prices being renegotiated upon renewal. Where we have supply agreements with a term of more than one year, prices are variable and depend on the development of specified parameters, including our suppliers’ raw material prices. In addition, the availability and price of raw materials and energy may be affected by new regulations, suppliers’ allocations, interruptions in production by suppliers, general market conditions and natural disasters. There can be no assurance that the raw materials we require will remain available in adequate quantities. We also face risks arising from rising raw material costs. Our raw material costs increased on average by approximately 15% in 2006 compared with 2005. High energy prices also continue to significantly influence our costs of production. We cannot assure you that we will be able to mitigate any future price increases for raw materials and energy through increased efficiency or cost-savings. A substantial increase in raw material or energy prices, or a continued interruption in raw material or energy supplies, could substantially harm our financial condition and results of operations.

The industries in which we operate are highly consolidated and, thus, competitive. Competition is based primarily on price, product quality and customer service. Most of our production process is capital intensive, which results in high fixed costs. The pricing pressure thus has a direct impact on our results. In addition, price decreases can be aggravated by temporary imbalances in supply and demand, with an oversupply in stagnating markets. In 2006, the average price of our graphite electrodes increased by 10% in the markets where graphite electrodes are priced in euro and 22% in markets where they are priced in U.S. dollars compared to 2005. The increases in 2005 compared to

Continuing competition could either prevent us from raising prices, as necessary to offset higher production costs, force price reductions, or reduce our sales volumes and revenues. It could also require us to spend more for sales, marketing and research and development. Any of these developments could substantially harm our financial condition and results of operations.

The manufacturing of carbon and graphite products, such as graphite electrodes, requires significant capital expenditures for the purchase and set-up of specific machinery and equipment. Any new equipment must initially run through a start-up and qualification process in order to reach standard operating procedures required by us and our customers. In addition, day-to-day operations require continuing maintenance programs to keep plants and machinery in full operation. Such capital expenditures and maintenance programs require significant amounts of cash. The failure of manufacturing equipment could cause significant problems for a plant and could result in our inability to deliver products in the required quality or at the required time to our customers, which could in turn adversely affect our financial condition and result of operations.

In line with our product portfolio diversification, we have entered into new businesses — in particular with our high technology business unit Carbon Fiber & Composites — in which we have little experience and which are subject to rapid product developments and changes. In recent years we have made substantial investments in our Carbon Fiber & Composites business unit, with the aim of increasing the share of our revenues that we generate through our Advanced Materials business area. We anticipate continued increases in our research and development expenses arising from these investments in 2007 and 2008. For the past three years, the sales revenue of our former SGL Technologies business area (now largely corresponding to our new Carbon Fiber & Composites business unit) have fluctuated, and we have incurred net operating losses in recent years, due to significant start-up expenses and commissioning costs.

Our ability to effectively compete in this and other new business areas will depend on our successfully developing, customizing, and producing innovative products and designs at competitive prices, and on gaining market acceptance for these products and designs. Any growth in sales and any increase in profitability in the Advanced Materials business area will depend largely on whether and how fast our newly developed products will be able to prevail in the market. Our competitors in these new business areas may have greater technological expertise and superior research and development infrastructure than we do, or may be more innovative in responding to changing technologies and customer needs. There can be no assurance that we will be able to successfully compete in these new markets. Thus, there can be no assurance that we will be able to generate a satisfactory return on the investments in our Carbon Fiber & Composites business unit.

Intellectual property rights are important for the development of the business, in particular in our Advanced Materials business area. In 2006, approximately one third of the revenues in our former Specialties business area was generated by products that were developed in the previous four years. The new product lines that we are developing in our Carbon Fibers & Composites business unit also rely to a significant extent on such proprietary rights and information. We cannot assure you that any patents or trademarks that we obtain will adequately protect the covered products and technologies. Nor can we assure you that our confidentiality covenants and agreements will

The conditions of our €200.0 million senior secured facility (the “Senior Facility”), as well as the conditions of the €200.0 million senior floating rate notes (the “Corporate Bonds”) limit our financial and operating flexibility. In particular, these agreements (see detailed description in Item 10, “Additional Information — Material Contracts”) place limits on our ability to incur new debt, grant security to third persons, dispose of material assets, take organizational measures such as mergers, changes of corporate form, joint ventures or similar transactions, or to enter into transactions with related parties. Other limitations generally concern the payment of dividends and the repurchase of own shares. In addition, we must meet certain financial covenants in the context of our financing agreements. Our substantial debt and our compliance with the covenants contained in our financing agreements could have a material adverse impact on our financial condition and results of operations.

Furthermore, we continue to require significant funds for our operations. We cannot assure you that we will be able to generate or obtain sufficient funds needed for our future operations and our other cash requirements, or that we will meet all loan covenants and other obligations in connection with our present financing arrangements. We also cannot assure you that we will be able to refinance our financial liabilities as they mature or that we will be able to negotiate the same or better terms in future loan agreements. In addition, we cannot assure you that we will not have to incur additional debt in the future. Incurring such additional debt could further increase the risks regarding our debt and financing arrangements.

For a detailed description of our debt, you should read the discussion in Item 5, “Operating and Financial Review and Prospects.”

Our ability to make payments on or repay our debt and to fund our working capital requirements depends on the availability of financial resources. Our ability to generate cash will depend on our future operating performance, as well as on general economic, financial, competitive, market and other factors, many of which are beyond our control. In particular, our ability to generate adequate cash will depend at least in part on:

We cannot assure you that our business will generate sufficient cash flows from operations or that future borrowings will be available to us in an amount sufficient to enable us to pay our debts as they become due or to fund our other liquidity requirements.

In the past several years, we have faced various court actions and investigations in connection with antitrust violations and have been assessed substantial fines by the U.S. Department of Justice, the Canadian antitrust authorities and the European Commission for price fixing in the graphite

Despite intensive internal legal training and establishing compliance policies, we cannot assure you that we or certain of our subsidiaries or affiliates will not become subject to antitrust investigations by the relevant authorities and will not be required to pay additional fines or be subject to claims for damages from third parties for violations of applicable antitrust laws. An unfavorable result in any of these future or current proceedings could have a material adverse effect on our financial condition and results of operations.

We are obligated to pay our employees certain benefits, including retirement payments, life insurance and medical insurance following the termination of their employment. These benefit plans consist of both defined contribution and defined benefit plans and vary based on the country in which we maintain such plans.

Changes and movements in the equity, fixed income, real estate and other markets could significantly change the valuation of the assets of our plans. A change in the yield assumptions used also has an impact on the calculation of the discounted present value of our pension obligations. In addition, changes in pension and retirement benefit plan assumptions, such as rates for compensation increase, retirement rates, mortality rates, health care cost trends and other factors can lead to significant increases or decreases in our pension or post-retirement benefit obligations. This would affect the reported funded status of our plans and therefore could also negatively affect net periodic pension cost, future cash contributions and equity. For further details on the funding status of pensions and other retirement benefit obligations see Note 21 to our Consolidated Financial Statements.

We cannot assure you that any future expenses or cash contributions that become necessary under our pension or retirement benefit plans will not have a material adverse effect on our financial condition and results of operations.

Our operations are subject to various risks associated with manufacturing, including the related storage and transportation of raw materials, products and wastes. We are also subject to numerous domestic and foreign laws and regulations relating to the storage, handling, generation, treatment, emission, release, discharge and disposal of potentially hazardous substances and wastes (see Item 4, “Information on the Company — Government Regulation”). Environmental and health laws and regulations could lead to the possibility of substantial fines, revocation of applicable permits or orders for environmental cleanup. Any violations of these laws or regulations, or any adjustments to comply with changing laws or regulations, could result in significant expenditures. Environmental laws in particular have continuously been tightened in the past several years. As a result, we cannot assure you that a known, previously unknown or future contamination event, or any new, more stringent regulations or their enforcement by the relevant authorities will not increase our environmental costs in the future. A significant increase in environmental liabilities or costs could materially harm our financial condition and results of operations.

Approximately two-thirds of our workforce is covered by collective bargaining agreements. Although we believe that we have satisfactory relations with our works councils and unions, we cannot assure you that we will reach new agreements on satisfactory terms when existing collective bargaining agreements expire. Nor can we assure you that we would reach such new agreements

We generate a significant portion of our sales revenue in U.S. dollars. As a result, a decline in the value of the U.S. dollar compared to the euro will have a negative impact on our sales revenue, which are recorded in euro. Compared to the sales revenue that we generate in U.S. dollars, we incur a relatively small portion of our cost of sales in U.S. dollars. As a result, a U.S. dollar that is weak compared to the euro will have a negative impact on our gross profit and therefore on our results. A medium- to long-term decline in the value of the U.S. dollar relative to the euro and other currencies could also weaken our competitive position as compared to competitors who incur a relatively larger portion of their cost of sales in U.S. dollars. After the value of the dollar declined relative to the euro during 2004, reaching a low-point at the end of 2004, the U.S. dollar strengthened against the euro in 2005, weakened again in 2006. We cannot predict any trends for the future. We have entered into hedging arrangements for the majority of our U.S. dollar transaction exposure in Europe for 2007 to reduce the risk of fluctuations in currency exchange rates. However, these hedging arrangements can protect us only to a limited extent against a long-term decline of the U.S. dollar. See also Item 5, “Operating and Financial Review and Prospects — Overview — Currency exchange exposure.”

We operate in a large number of countries and therefore are subject to different tax laws and regulations. Changes in tax laws or regulations and results from tax audits by fiscal authorities could result in higher tax expenses and cash payments. Furthermore, changes in tax laws or regulations could impact our tax liabilities as well as our deferred tax assets and deferred tax liabilities.

Based upon a draft version of a Corporate Tax Reform Act 2008 by the German Ministry of Finance dated March 14, 2007, debt financing of companies which are subject to German tax would be limited by a so-called modified interest barrier rule (modifizierte Zinsschranke). As a general rule, the deduction of interest expenses exceeding interest income is limited to 30% of taxable income as increased by interest expense and as reduced by interest income (unless, inter alia, such interest expenses exceed interest income by less than €1.0 million). Non-deductible interest expenses would be carried forward and would generally be deductible in subsequent fiscal years, subject to limitations similar to those applicable in the current year. There apply certain exceptions, e.g. a test which relates to the overall group’s equity ratio (so-called escape clause) and which is still under discussion.

It remains unclear whether and in which form the envisaged legislative changes will ultimately become effective and what impact they may have on the Issuer’s tax position. The new provisions are presently intended to apply from 2008 onwards unless specific other dates apply. However, this is merely a tentative date and further amendments may be made to the draft bill, including on short notice.

In any event, if this draft bill, or an amended version of this bill, becomes law, it could have a material adverse effect on our financial condition and results of operations.

We aim to cover foreseeable material risks by insurance. Our insurance coverage, however, may prove inadequate to fully cover the risks to which the SGL Group is exposed. For certain risks, adequate insurance coverage may not be available on the market or at reasonable conditions. Our sales revenues are exposed to credit default risks. For this reason and insofar as possible, we cover this risk through insurance to a certain extent (which is limited, for example, in the United States). We use a variety of instruments for this purpose, such as pre-payment, payment guarantees, confirmed letters of credit and credit insurance. We cannot assure you that payment shortfalls from customers (particularly in the steel industry) will not occur in the future.

SGL CARBON Aktiengesellschaft is incorporated as a stock corporation for unlimited duration under the laws of the Federal Republic of Germany. SGL’s registered office is at Rheingaustrasse 182, D-65203 Wiesbaden, Germany, telephone number +49-611-60-29-0. Our English-language home page on the World Wide Web is at www.sglcarbon.com/index.html; this annual report does not incorporate information found on our web site. Our fiscal year ends on December 31 of each year.

Our corporate origins lie in the second half of the 19th century. Two of the earliest industrial manufacturers of carbon products, Gebrüder Siemens & Co. (founded 1872) and the Plania Werke (founded 1896) merged in 1928 into the Siemens Plania Werke Aktiengesellschaft für Kohlefabrikate. This company and its successors underwent a series of international mergers and acquisitions, becoming Sigri Great Lakes Carbon GmbH, SGL’s immediate predecessor company, in 1992. At that time, Hoechst AG was the majority shareholder of Sigri Great Lakes.

On December 21, 1994, Sigri Great Lakes Carbon GmbH became SGL CARBON Aktiengesellschaft through a change in corporate form (Umwandlung). In April 1995, SGL’s initial public offering took place on the Frankfurt Stock Exchange. SGL became fully independent of Hoechst in June 1996, when Hoechst divested substantially all of its ownership in SGL in a global placement of approximately 10.5 million shares. Approximately 40% of that issue was placed in North America in the form of American Depositary Receipts (“ADRs”) which were listed on the New York Stock Exchange (the “NYSE”) under the symbol “SGG until they were voluntarily delisted by SGL effective June 22, 2007. SGL terminated its ADR program on June 25, 2007.”

On May 25, 2007 SGL announced that it would voluntarily delist its ADRs from the NYSE effective June 22, 2007 and terminate its ADR program effective June 25, 2007. In addition, SGL intends to deregister from its reporting obligations under the U.S. Securities Exchange Act of 1934 (the “Exchange Act”) as soon as provided for under new Securities and Exchange Commission (“SEC”) rules.

We have completed several acquisitions and divestitures as part of our strategy to enhance what we believe, based on 2006 revenue, is our position as one of the world’s largest producers of carbon and graphite products and to concentrate our business on areas where we see growth opportunities. The following are the significant acquisitions, divestitures and corporate changes that the SGL Group has made over the past three years:

In the fiscal years ended December 31, 2006, 2005 and 2004, we made capital expenditures and investments totaling €66.6 million, €47.0 million and €47.1 million, respectively. Capital expenditures for property, plant and equipment were €61.4 million in 2006, €39.4 million in 2005 and €37.7 million in 2004. Capital expenditures relating to intangible assets were €3.8 million in 2006 (mainly for internally developed software and the capitalization of development costs), €5.3 million in 2005 and €8.8 million in 2004. Payments for non-current financial assets were €1.4 million in 2006, €2.3 million in 2005 and €0.8 million in 2004.

Capital expenditures in 2006 were primarily related to normal maintenance, cost reduction and efficiency improvements of operating facilities. The main areas of investment included automation of individual processing steps, replacement and expansion of existing equipment, environmental and safety investments as well as investments for relocating production activities from Italy and Germany to our facilities in Poland. Capital expenditure has also been used to fund strategic organic growth, such as the construction of a new processing center in Meitingen, Germany, preparatory work for the construction of the new production plant in Malaysia, and expansion of our capacities for carbon fibers in Inverness, UK, and for isostatic graphite in Bonn, Germany. Capital expenditures during 2005 were related to normal maintenance and efficiency improvements of the SGL Group’s operating facilities. Major capital expenditures in 2004 were related to replacement and maintenance of our plants in Germany, the United States, Poland and Italy.

We expect that expenses for expanding our capacities and upgrading our equipment will be significantly higher in 2007 than in previous years arising from measures taken to realize the opportunities to expand into Southeast and East Asia, and on the basis of new product launches. For the fiscal year 2007, we plan to make capital expenditures (excluding financial investments) totaling approximately €105 million. Of this amount, we had made capital expenditures totaling approximately €14.4 million as of March 31, 2007. For the construction of our new plant in Malaysia, capital expenditures of around €50 million are planned over a period of three years. We anticipate financing the capital expenditures largely through cash flow from our operations.

The SGL Group is one of the world’s leading carbon companies. It has a comprehensive product portfolio ranging from carbon and graphite electrodes and cathodes through custom-made graphite-based products to innovative materials, products and solutions on the basis of carbon fibers. Our customers are located throughout the industrialized world and operate in a wide range of industries, the most important being the steel, aluminum, chemical, energy, semi-conductor, aerospace and defense as well as automotive industries. We provide our customers with a global distribution network for our products and services covering more than 80 countries in 2006. As of the December

Until February 1, 2007, the date on which our business realignment described below became effective, the SGL Group’s organizational structure consisted of three business areas: “Carbon and Graphite,” “Specialties” and “SGL Technologies”:

The former Carbon and Graphite (now Performance Products) business area develops, manufactures and markets graphite electrodes for steel production in electric arc furnaces, carbon electrodes for use in melting processes for other metallurgic applications, cathodes for use in aluminum production, and furnace linings for pig iron production in blast furnaces. In 2006, sales revenue for the Carbon and Graphite business area amounted to €716.1 million (60.1% of total sales revenue).

The former Specialties and SGL Technologies business areas are now combined in the new Advanced Materials business area. The former Specialties business area (now part of the new Graphite Materials & Systems business unit, which also includes the expanded graphite carbon activities of the former SGL Technologies business unit, as described under “—Business Realignment” below) develops, manufactures and markets a wide selection of custom-made products based on fine-grain graphites for a large number of industrial sectors, primarily for customers in the chemical, energy (specifically energy generation, energy management, and energy efficiency) and semiconductor industries. Products include specialty graphites for heaters for the semiconductor industry, graphite parts for LED and solar cells production, as well as graphite for lithium-ion batteries and for particle filters for diesel engines. In 2006, sales revenue for the Specialties business area amounted to €301.1 million (representing 25.3% of total sales revenue).

The former SGL Technologies business area (now part of the new Carbon Fibers & Composites business unit, except for the expanded graphite carbon activities of the former SGL Technologies as described under “—Business Realignment” below) develops, manufactures and markets innovative materials, products and solutions on the basis of composite components and materials made from carbon fibers for a wide variety of applications, including energy and industrial applications, as well as products for the aerospace and defense industry and the automotive industry. Products include carbon fibers for high-temperature applications and for the reinforcement of cement and plastic, as well as carbon ceramic brake discs. SGL Technologies covers the entire value chain for carbon fiber-based composites, from carbon fibers through composites to components. We believe that we are the only European competitor in this market that can cover such a broad product portfolio. In 2006, sales revenue for the SGL Technologies business area amounted to €171.3 million (representing 14.4% of total sales revenue).

We realigned our business areas with effect from February 1, 2007 creating a new structure consisting of two business areas “Performance Products” and “Advanced Materials” encompassing three business units: “Performance Products,” “Graphite Materials & Systems” and “Carbon Fibers & Composites.” Performance Products corresponds to the former Carbon and Graphite business area and contains the new business unit Performance Products. Advanced Materials comprises the former Specialties and SGL Technologies business areas which have been re-grouped into the two remaining business units, Graphite Materials & Systems and Carbon Fibers & Composites. Graphite Materials & Systems comprises the activities of the former Specialties business area as well as the expanded natural graphite business line which was previously part of the former SGL Technologies business area, while Carbon Fibers & Composites encompasses the carbon fiber and composites activities of the former SGL Technologies business area.

The following graph illustrates our business realignment:

The Performance Products business area serves established markets that are characterized by stable growth patterns, including the steel, aluminum and other metallurgic industries. By contrast, the Advanced Materials business area serves a wide range of manufacturing industries with a growing demand for carbon- and graphite-based products for an increasing number of innovative applications and has a high growth and earnings potential.

We undertook this restructuring of our business areas to align our business structure with current trends in the industries we serve. A number of factors, including rising raw material and energy prices, as well as supply shortages, environmental considerations and government regulation, are leading to increasing demand from our customers for substitutes for conventional materials. Carbon- and graphite-based products have a number of attributes, such as the ability to withstand high temperatures and extreme loads while being lightweight, that make them an attractive replacement for other materials, in particular, for steel. We therefore expect demand for carbon- and graphite-based products to increase further over the coming years, in particular in the market for “green technologies” applications in connection with wind and solar energy generation, improvement of fuel and energy efficiency, environmental protection and innovative applications in the aircraft and automotive industries. We intend to benefit from this demand for substitute materials in our Advanced Materials business by combining our innovative strength with our “broad base,” our expertise in a broad range of materials and technologies.

We are active in a broad range of markets for carbon-based industrial products. Our Performance Products business area (formerly the Carbon & Graphite business area, which accounted for €716.1 million, or 60.1% of our sales revenue in 2006), serves the metallurgical industries, including the steel, primary aluminum and other non-ferrous metallurgical industries, such as silicon metal and phosphorous producers. By far the most important customer industry of our Performance Products business area is the electric arc furnaces (“EAF”) and blast furnaces and blast oxygen furnaces (“BF/BOF”) steel industry, which generated €605.1 million, or 84.5%, of the Performance Products business area’s sales revenue in 2006. €76.0 million, or 10.6%, of the business area’s sales revenue in 2006 was attributable to the aluminum industry and €35.0 million, or 4.9%, to other metallurgical industries. The metallurgical industries are mature global industries, which have in the past tended to grow in a stable manner at approximately the same rate as the economy as a whole (GDP growth), and are characterized by a certain degree of cyclicality.

Our Advanced Materials business area serves a wide range of manufacturing industries with a wide selection of custom-made graphite-based products, as well as innovative materials, products and solutions on the basis of carbon fibers. Our Graphite Materials & Systems (former Specialties and a part of former SGL Technologies) business unit’s key industries include the chemical, energy

Our products for the metallurgical industries include graphite electrodes and carbon-based furnace linings for the production of steel, cathode blocks used in aluminum production, and carbon electrodes for the production of other non-ferrous metals. According to our estimates, the worldwide market for our products for the metallurgical industries was approximately €3.5 billion in 2006. Graphite electrodes represent our largest business, accounting for 79.6% of our Performance Products business area’s sales revenue in 2006. Carbon products (i.e. furnace linings, cathodes and carbon electrodes) accounted for the remainder of the business area’s sales revenue in the same period.

We provide the steel industry with graphite electrodes, which are a necessary component of steel production in EAF, and carbon-based furnace linings for BF/BOF used for steelmaking. EAF and BF/BOF steel production are the two primary steelmaking technologies with EAF accounting for approximately 32% of total steel production in 2006. EAF steelmaking operations are commonly referred to as mini-mills because their production capacity is generally smaller than that of BF/BOF facilities. Electric arc furnaces range in size from those producing approximately 25 tons of steel per production cycle, or “heat,” to those producing approximately 150 tons per heat. Graphite electrodes act as conductors of electricity in the furnace, generating sufficient heat to melt scrap metal or other material used to produce steel. EAF steelmaking is generally regarded as more efficient and cost-effective than BF/BOF steelmaking. Although EAF production is unlikely to entirely replace BF/BOF, a number of factors have favored its growth at the expense of the older technology. These include lower required investments, lower energy consumption, greater environmental sustainability and technological advances.

Demand for both graphite electrodes and furnace linings is directly linked to the demand for finished steel. The steel industry is generally cyclical in nature and experiences significant fluctuations based on numerous factors. However, the EAF steel industry and hence the graphite electrodes market have generally been less cyclical than the BF/BOF steel industry and the furnace linings market. The cyclicality of the EAF steel and graphite electrodes markets has become less pronounced in recent years. Due to the cost advantages of EAF steelmaking, graphite electrodes are preferentially consumed in steel down cycles. Furnace linings are also preferentially consumed in steel down cycles, as furnaces then tend to be relined for maintenance. Furthermore, as prices for scrap metal adjust to ensure EAF competitiveness, we expect steel producers to prefer BOF production.

Since its development in the 1960s, mini-mill technology has produced a steadily increasing portion of total steel production. Due primarily to the cost-effectiveness of EAF steelmaking, EAF steel production worldwide has grown steadily from 100 million tons in 1972 (approximately 16% of total steel production) to approximately 397 million tons in 2006 (approximately 32% of total steel production), according to the estimates of market studies from the International Iron and Steel Institute (IISI) from 1972 to 2004 and our internal estimates for the years 2005 and 2006. We believe that the global share of EAF steel in total steel production will remain stable, and that long-term growth prospects for the EAF steel industry are favorable, with annual EAF steel production growing in line with global GDP in the next five years.

The following table shows worldwide crude and EAF steel production in 1972, in 1980 and from 1990 through 2006.

EAF steelmaking consumes graphite electrodes, for which we believe there are currently no substitute products. Beginning in the 1970s, technological improvements reduced “specific consumption,” or the quantity of graphite electrodes consumed per metric ton of steel produced. During the same period, graphite electrode manufacturing capacity began to expand. As a result, by the mid-1980s there was significant excess manufacturing capacity in this industry. In the late 1980s and early 1990s, graphite electrode producers began to consolidate and to reduce manufacturing capacity. As a result, supply and demand were generally in balance during the 1990s. In the late 1990s, however, external factors began to adversely affect the graphite electrode industry, causing oversupply and price erosion. These factors included the Asian financial crises of 1998 to 1999, the structural crisis in the U.S. and Japanese steel industries in 2001 and worldwide recessionary trends in 2002. Insolvencies of graphite manufacturers in both Germany and the United States started another consolidation phase of the industry, including site closures. Due to this consolidation and reduction of capacity as well as the growing demand of the steel industry in the period from 2003 until 2006, the graphite electrode industry has begun to return to profitability.

Technological improvements in equipment design and production process, use of higher quality scrap metals and other raw materials and improvements in the size, strength and quality of graphite electrodes (including significant improvements developed by the SGL Group) have increased the efficiency and reduced the cost of EAF steel production. According to our estimates, these improved efficiencies have reduced worldwide specific consumption. We expect that, as the cost of further marginal improvements in the efficiency of EAF steelmaking increases, the rate of decline in specific consumption will grow more slowly. We believe that the long-term growth potential of EAF steel will be offset by reductions in specific consumption due to further quality improvements of graphite electrodes, which will result in steady to slightly increased demand for graphite electrodes over the long-term. In view of the increased consolidation and stability in the global steel market and the fact that the graphite electrodes market is generally less cyclical than the steel market, we expect the graphite electrodes market to experience stable, modest growth in the medium term, until China will begin to generate scrap.

The manufacture of high-quality graphite electrodes is a mature, capital intensive business that requires extensive engineering know-how developed over years of experience working with the various raw materials and their suppliers, furnace manufacturers and steelmakers (including working on the specific applications for finished electrodes). It also requires high-quality raw material sources and a developed energy supply infrastructure. There have been no significant new entrants in the

Our main markets for furnace linings are Europe, Asia and North America. Furnace linings, which are recently experiencing modest growth, typically account for a modest portion of our business. A modern furnace design can be used for more than ten years of furnace operation before it becomes necessary to replace the linings.

Cathode blocks and other products are used to equip electrolysis cells for the production of primary aluminum. Demand for cathode blocks therefore varies directly with the demand for primary aluminum. In the past aluminum producers had very modest growth, but that growth has recently accelerated to approximately 5% p.a. This was primarily due to the general increase in energy costs which boosted demand for aluminum as a light-weight and low-cost, yet high performance material. Demand for cathodes for relining and new smelters accelerated in 2006 in line with the growth of demand for aluminum. We expect the aluminum industry to continue to grow in the medium-term.

We sell cathodes to all major aluminum smelters worldwide. According to our estimates, in 2006 our share of the market for cathodes in general was nearly one quarter by sales and of the market for graphitized cathodes nearly one third by sales.

Carbon electrodes serve as conductors of electricity in a furnace to generate sufficient heat to reduce silicon dioxide in a continuous process. The production of silicon metal in furnaces that use carbon electrodes involves a process similar to that used for graphite electrodes, but at lower temperatures.

Demand for carbon electrodes is directly related to the volume of silicon and phosphorus production. The main drivers of the silicon and phosphorus markets are the needs of silicon for the semiconductor, solar, fertilizer and other industries. Silicon and phosphorus production, and hence demand for carbon electrodes, has been relatively stable since the early 1990s. In 2001, demand declined significantly, primarily as a result of the energy crisis in Brazil. Demand for carbon electrodes returned to stability in 2002. After a period of rather stable global demand between 2003 and 2005, demand increased in 2006, which lead to higher prices.

The manufacture of high-quality carbon electrodes is a mature, capital intensive business that requires extensive engineering know-how developed over years of experience working with the various raw materials and their suppliers, furnace manufacturers and steelmakers (including working on the specific applications for finished electrodes). It also requires high-quality raw material sources and a developed energy supply infrastructure. There have been no significant new entrants in the manufacture of carbon electrodes since the 1940s. Our primary markets for carbon electrodes are the Americas and Europe. According to our estimates, in 2006 our share of the worldwide market for carbon electrodes by sales was nearly half.

Our key manufacturing industries are the chemical, energy (specifically energy generation, energy management, and energy efficiency), semiconductor, aerospace and defense, and automotive industries.

Our main products for the chemical industry include expanded graphite gaskets and foils for sealing applications, as well as heat exchangers, columns, pumps and synthesis units from our process technology business line. Our main products for the electronic materials industry include graphite parts (crucibles and molds) for LED (light emitting diode) production, and graphite for lithium-ion batteries. We have seen strong demand and growth in the battery markets, especially in Asia, in the

Our main products for the energy industry are graphite crucibles and molds for solar energy production, SiC-coated wafer-carriers for solar-cells, expanded graphite for thermal management, and carbon composite materials for windmill rotor blades. We have a leading position in graphite products for the solar markets in both Europe and North America. Strong demand and growth has been observed in solar markets. We estimate that our global market share was approximately 20% in 2006. We expect that the trend towards bigger blades in the windmill industry will significantly increase the demand for industrial grade carbon fibers and composite materials.

Our products for the semiconductor industry include specialty graphites for semiconductor products, such as heaters, crucibles and susceptors. Demand in the semiconductor market is highly cyclical. After a downturn during 2001 and 2002, the semiconductor market has recovered over the last three years. According to management estimates we have a strong position in graphite products for the semiconductor markets in both Europe and North America.

Our products for the aerospace and defense industry include a broad range of composite components for military and commercial aircraft, as well as rocket nozzles for propulsion systems and products for armoring applications.

Our main products for the automotive industry are carbon-ceramic brake discs, fuel cell components, and graphite for particle filters for diesel engines. The automotive markets are growing only moderately in Europe, North America and Japan but strongly in China. While our traditional home markets were in Europe, we are now looking for expansion into other regions as well. We estimate that our global market share in 2006 was approximately 10%. Although the market for high-performance carbon-ceramic brake discs is in the initial stages of development, we have already built an attractive customer base consisting of clients such as Audi and Porsche. We believe that the market for our fuel cell components, which are currently in the research and development phase, also have significant potential for growth. In the long-term, development of this business and of the fuel cell component industry in general, is dependent on the achievement of significant reductions in fuel cell production and distribution costs

The carbon and graphite industry is highly competitive with competition based primarily on price, product quality and customer service. Of the major manufacturers of carbon and graphite products worldwide the SGL Group is the largest, based on its 2006 sales revenue, according to management estimates.

Of the major manufacturers worldwide of graphite electrodes, our principal product, the SGL Group and GrafTech International Ltd. (“GrafTech”) (formerly UCAR International Inc.) are the largest on the basis of metric tons produced. In addition to the SGL Group and GrafTech, there are graphite electrode manufacturers in the United States (two), Japan (four) and several in Russia, India and China. We estimate that our share of the global market for graphite electrodes was approximately 20% (in terms of volume) in 2006.

We believe that we are one of the largest manufacturers of carbon electrodes worldwide. According to our estimates, we supplied a significant market share of the worldwide market for carbon electrodes (without composite electrodes) in 2006.

Approximately ten manufacturers compete in the global market for cathodes used in the primary aluminum industry. We estimate that our share of the cathodes market was nearly one

The graphite products market is served by many competitors with different product ranges and value added segments. We believe that globally-oriented international companies, including the SGL Group, Le Carbone Lorraine, Toyo Tanso, Tokai Carbon, Morgan Crucible, Poco and the Schunk Group account for more than two-thirds of the total market volume worldwide. A significant part of the market is served by small, local machine shops, which machine and finish goods supplied to them by the major graphite producers in a semi-finished state. We believe that we have a leading position in the supply of graphite and CFRC products for electronic and industrial applications in Europe and North America. The process technology market is highly fragmented with many locally-based, often family-owned smaller companies. Our main competitors in the market for carbon-based process equipment applications are Le Carbone Lorraine and Graphite India. Key competitors in the market for expanded graphite products are GrafTech and Le Carbone Lorraine.

Our Carbon Fibers & Composites business unit competitors are carbon-based advanced materials and composites companies. Our main competitors for fiber products are Zoltek, Toho and Formosa. In the market segments for carbon composites the key competitors include Thiokol, Hexcel, ATPX and Cytec.

Our Performance Products business area (formerly the Carbon & Graphite business area, which accounted for approximately 60% of our sales revenue in 2006) is our core business segment. It comprises the production and marketing of our established carbon and graphite products. Our carbon and graphite products are based on petroleum coke, coal tar, petroleum pitch and anthracite coal which are our primary raw materials, and have many exceptional properties that we optimize for various applications through our manufacturing processes. Our carbon and graphite products exhibit stability under high temperatures, are non-corrosive and conduct heat and electricity. As a result, these products are used in a wide range of applications.

Following the organizational realignment as of February 1, 2007, the Performance Products business area consists of two business lines, graphite and carbon electrodes, and cathodes and furnace linings. Key products are:

Graphite electrodes are our largest business, accounting for approximately 80% of the sales revenues in our Performance Products business area in 2006, while carbon products (i.e. furnace linings, cathodes and carbon electrodes) accounted for 20% of the business area’s sales revenue.

In order to further strengthen our core graphite electrodes business, we are currently constructing a new graphite electrodes production hub in Malaysia which we expect to start production in 2008. The new plant will have the dual advantages of state-of-the-art technology, allowing us to preserve our high level of product quality, while also providing us with a low-cost base due to low local energy and labor costs. We intend to integrate the new production site into our global production network and make it our fully integrated production hub in Asia from which we can target the regional Southeast Asian markets as well as India, South Korea and Taiwan, benefiting from the optimal logistics afforded by the geographical location in Southeast Asia. Initially the annual production capacity will be approximately 30,000 metric tons, which can be expanded to up to approximately 60,000 metric tons.

With regard to our cathodes business, we intend to grow with our key partners in the aluminum industry and leverage our global production infrastructure to satisfy the growing demand for graphitized cathodes. We also expect to be able to benefit from our capability to swing between the production of graphitized cathodes and graphite electrodes and thereby adjust production to fluctuations in demand for either product.

Our Advanced Materials business area (formerly the Specialties and SGL Technologies business areas, which accounted for approximately 40% of our sales revenue in 2006) comprises the production and marketing of carbon and graphite-based products and materials for diverse applications in manufacturing industries, continuing to combine our innovative strength with our expertise in a broad range of materials and technologies. In markets that are increasingly demanding greener substitutes for established materials, carbon fiber and graphite-based products provide an attractive alternative to conventional materials, particularly steel, due to their qualities of being able to withstand high temperatures and extreme loads while being lightweight. We therefore expect demand for carbon and graphite-based products to increase further over the coming years, in particular for “green technologies” applications in connection with wind and solar energy generation, improvement of fuel- and energy efficiency, environmental protection and innovative applications in the aircraft and automotive industries. We intend to benefit from this demand for substitute materials in our Advanced Materials business by combining our innovative strength with our “broad base”, our expertise in a broad range of materials and technologies.

Our Graphite Materials & Systems business unit largely corresponds to the former Specialties business area, which accounted for approximately 25% of our sales revenue in 2006. Customer industries include the chemical, energy (specifically energy generation, energy management, and energy efficiency) and semiconductor industries, as well as the metallurgical, mechanical engineering, high-temperature processes and automotive industries. Approximately one-third of the Specialties business area’s revenues in 2006 was attributable to products launched within the last four years, such as specialty graphites for heaters for the semiconductor industry, graphite parts for LED and solar cells production, as well as graphite for lithium-ion batteries and particle filters for diesel engines.

Following the organizational realignment as of February 1, 2007, our Graphite Materials & Systems business unit consists of three business lines: graphite specialties, process technology and expanded graphite.

Our graphite specialties business line develops and manufactures a wide variety of advanced materials customized to serve a number of applications, including electronic, industrial, high-temperature, automotive and mechanical applications. Our products for electronic applications include components made of high-purity fine-grain graphite, felt and CFRC for the semiconductor, solar energy and LED industries, as well as for power and thermal management solutions. Our product range for industrial applications consists of parts made of extruded, isostatically, die and vibration molded graphite, high purity graphite, soft and rigid felt and CFRC for tool manufacturing, glass and ceramics industry, ferrous and non-ferrous metallurgy, refractory manufacturing, electrochemistry, the nuclear industry and medical technology. For high-temperature applications we supply mold stock and machined graphite parts, CFRC, soft and rigid felt, graphite foils and sheets for heat treatment applications, aerospace and chemical process technology. For automotive and mechanical applications we supply mold stock and mechanical components made of carbon graphite, graphite and graphite-filled high performance plastics for the automotive industry, household appliances, mechanical engineering as well as powder and granules for compounding.

Products of our process technology business line comprise heat exchangers, columns, pumps, quenchers, bursting discs and HCl (Hydrogen Chlorine) synthesis units made of DIABON¹ process equipment graphite as well as pumps made of exotic metals and LICUFLON¹ PTFE (PolyTetraFluorEthylen), Teflon-lined vessels and columns for corrosive applications in the chemical, environmental, mining, pulp, energy, pharmaceutical and agricultural industries. Furthermore we offer complete engineered systems made from DIABON and LICUFLON.

Our expanded graphite business line primarily manufactures foils that are based on natural graphite and can withstand extremely high temperatures and aggressive corrosion. These foils are used in sealing applications as an alternative to asbestos, as well as in sealing technology in the automobile construction industry and the chemical industry. In addition, milled exfoliated products based on natural graphite can be used for the growing market of fillers, for example in high-performance batteries, as well as in a variety of other areas of application in which electrical and thermal conductivity is important. Our most recent product based on expanded natural graphite is ECOPHIT^TM, launched in March 2007. ECOPHIT^TM is an innovative graphite construction material that can be used to improve the performance of existing air conditioning systems in buildings and to develop innovative heat distribution and heat storage systems. The ECOPHIT^TM product family includes both foils and plates of different thickness, as well as granules and powder. Furthermore, phase change materials and graphite composite materials are manufactured from these products and used in high-performance thermal energy storage systems.

Over the last few years, we have been able to improve our cost position through site specialization, simplification of production and product portfolio, headcount reduction and continuous improvement programs. Now the strategic focus of our Graphite Materials & Systems business unit is on strengthening our production presence and market share in Asia and Eastern Europe, increasing sales by developing and marketing innovative products and applications, particularly for “green technologies”, and continuing to implement our cost-saving and margin-improving strategy. In particular, we intend to increase our capacity for the production of extruded and isostatically molded graphite, increase sales of our process technology products in Asia and Russia, and optimize our production infrastructure for expanded graphite products in the EU, North America and Asia. In line with this strategy we set up a company together with Sinyuan Industrial Material Co., Ltd. (China) at the beginning of 2006 for the manufacture of expanded graphite products for the Asian market. SGL Group holds 60% of the shares in the joint venture, and Sinyuan Industrial Material Co., Ltd. holds 40%. Furthermore, in the middle of 2006, we set up a joint venture with Tokai Carbon Co., Ltd. (Japan) for the production and sale of process technology products for the Asian market, in particular China, Japan and South Korea. SGL Group holds 51% of the shares in the joint venture, and Tokai Carbon Co., Ltd. holds 49%.

The new Carbon Fibers & Composites business unit largely corresponds to our former SGL Technologies business area, which accounted for approximately 15% of our sales revenue in 2006. Key customer industries are energy and industrial applications and the aerospace and defense, and automotive industries, which we serve with innovative materials, products and solutions on the basis of composite components and materials made from carbon fibers for a wide variety of applications. We cover the entire value chain of carbon fiber-based composites, from carbon fibers through composites to components. Key products include carbon fibers for the construction of windmill blades, high-temperature applications and for the reinforcement of cement and plastic, as well as carbon-ceramic brake discs.

Following the organizational realignment as of February 1, 2007, our Carbon Fibers & Composites business unit consists of four business lines which manufacture carbon fibers, brake discs, composite materials and composite components.

Carbon fibers serve as base materials in the manufacture of products that must be both stiff and lightweight, and able to conduct heat and electricity, particularly in the aviation and aerospace industries. We produce carbon fibers in two forms, i.e. oxidized fibers and carbonized fibers. Oxidized fibers are used in high performance carbon-carbon aircraft brakes as well as for specialty flame-retardant insulation applications. Carbonized fibers are used primarily in chopped form as reinforcement in thermoplastic housings, such as mobile telephone and printer and laptop computer housings. Industrial grade continuous carbon fibers are used as reinforcement in blades for windmill applications.

Carbon composites includes carbon fiber reinforced plastics (“CFRP”). CFRP are used in medical equipment and in the textile and wire making industries. The composite materials and components we produce range from relatively standard carbon or fiberglass reinforced plastics, used for x-ray tables and secondary aircraft structures, to high performance, high temperature composites used for rocket motor nozzles.

Our carbon ceramic automotive brakes (carbon ceramic discs) are made from a ceramic composite material, composed of carbon fiber within a silicon carbide matrix and are called carbon fiber-reinforced silicon carbide or C/SiC. The main advantages of the carbon ceramic discs are a very high and consistent friction performance and significant lower weight compared to traditional automotive brake discs. Carbon-ceramic discs are designed to last much longer than ordinary brake discs. Carbon Fibers & Composites began batch production of carbon-ceramic brake discs in a newly constructed plant in 2002 to serve the increasing demand from Porsche. Since mid-2005 we also supply discs for high-end automobiles produced by Audi. In 2006, the complexity of the brake disc business further increased due to additional car-model launches.

We intend to strengthen our position in the global carbon fiber market and become one of the leading manufacturers of carbon fibers and composites and relevant semi-finished products for the wind energy and automotive industries. We also aim to increase demand for our composite components from the aerospace and defense industries, and expand our portfolio of brake discs products. Measures designed to achieve our strategic goals include capacity expansion and targeted acquisitions and cooperation with partners from our customer industries for jointly developing customized final applications as well as finished parts and manufacturing techniques.

In order to increase our capacity for the production of directly processable carbon fiber based prepregs (carbon fiber materials that are impregnated with resins and used for the manufacture of carbon fiber composite components), we commissioned a state-of-the-art production site in Meitingen, Germany in December 2006. The new production facility allows us to expand the range of prepregs to larger applications and from niches into already established and growing markets. In addition, we have secured the long-term supply of raw materials for the production of carbon fibers through our joint venture with Lenzing AG, Austria. Furthermore, we plan to start operation of a new carbon fiber production line in August 2007 and two more lines by 2008. We believe that these measures will increase our carbon fiber production capacity from 2,400 tons at present to 6,600 tons by the end of 2010.

Furthermore, in line with our strategy we entered into joint ventures for the development of innovative carbon-fiber based products for the automotive and wind energy industries. We acquired a majority interest in company with with F.A. Kümpers GmbH in April 2007 through which we have also gained access to innovative technologies for processing carbon fibers into multi-axial fabrics. We believe that these technologies will allow us access to large potential markets for carbon fibers, in particular, in the automotive and wind energy industries. Our strategic alliance with the Japanese Mitsubishi Rayon Corp. has already brought about the successful launch of a high-quality multi-filament carbon fiber in early 2007. Compared to the low-filament fibers already on the market, production of the new multi-filament fiber is particularly cost-effective while preserving the high standard of quality. We have concluded long-term purchase agreements with a major customer from the wind energy industry based on this high-quality multi-filament carbon fiber.

Our sales revenue from graphite electrodes fluctuates from quarter to quarter due to factors related to our customers’ businesses, such as customer inventory levels, scheduled customer plant shutdowns and vacations, and changes in customer production schedules in response to seasonal changes in customer energy costs, strikes and work stoppages by our customers’ employees. In addition, customers may change their order patterns in response to price changes. During the period prior to the effective date of a price increase, customers tend to buy additional quantities of graphite electrodes at the then lower price, which adds to our sales revenue during that period. During the period following the effective date of a price increase, customers tend to use those additional quantities before placing further orders, which reduces our sales revenue during that period. Similarly, customers tend to use up their inventories and delay purchases when they expect price reductions.

The primary raw materials for graphite electrodes and graphite specialties products are petroleum coke (needle coke for electrodes and regular grades for specialty products), coal tar pitch and petroleum pitch. The primary raw materials for carbon electrodes are anthracite coal and coal tar pitch and, in some instances, a petroleum coke-based material. The primary raw material for flexible graphite is natural graphite flake, which is obtained primarily from China and Canada. Due to the wider range of technological products our Carbon Fibers & Composites business area produces, various key raw materials are required. In the case of carbon fibers, for example, these are polyacrylonitrile (“PAN”) fiber precursors, while the production of foils is based mainly on natural graphite.

The availability of high-quality raw materials is limited, and the market for our primary raw material petroleum coke, in particular needle coke, is dominated by a small number of large suppliers with substantial market power. This market may undergo further consolidation. We source all our raw materials from a variety of suppliers, including the most important petroleum coke suppliers. We have established strong ties to these suppliers and cooperated with them on the implementation of joint quality monitoring and improvement programs for many years. Procurement agreements with key suppliers, especially of needle coke, are for the most part annual, with most of our annual agreements having been regularly renewed in recent years. Our procurement agreements generally provide for fixed or minimum purchase quantities, by which we have managed to secure stable volumes of supply. Prices in annual agreements are usually fixed and renegotiated in case of renewal, while in case of agreements with a term of more than one year prices are calculated according to specified mechanisms on the basis of defined parameters such as suppliers’ raw material prices, particularly crude oil prices, and SGL’s average sales prices. Furthermore, in order to secure our long-term supply of the raw materials required for the production of carbon fibers we have signed a joint venture with Lenzing AG, Austria, in March 2007 and are currently awaiting approval of the joint venture by the competent antitrust authorities. In this joint venture, a special polyacrylonitrile (PAN) fiber precursor, a raw material for carbon fibers, will be manufactured which will make us independent of the purchase of this raw material for carbon fibers from third parties. In view of the foregoing, we believe that, under current conditions, we have secured our required supplies of raw materials at adequate quantities.

We purchase electric power and natural gas used in our manufacturing processes from national as well as local power supply companies. In recent years, prices for petroleum coke have gone through cycles of both volatility and stability. During these times, we have mitigated the effect of price increases by improving operating efficiency and by implementing cost-cutting measures and hedging arrangements, such as long-term supply agreements for electric power and natural gas, as well as hedges for natural gas.

We sell our Performance Products in our local markets primarily through our direct sales force, which operates from our sales offices and is supported by our own customer service personnel. The SGL Group’s local sales organizations or local independent sales agents service export customers with the assistance of our direct sales force. Most of these independent sales agents have worked with the SGL Group for many years.

In the Graphite Materials & Systems and Carbon Fibers & Composites business units, we make the majority of our sales through our specialized sales organizations specifically dedicated to each such business area. We also use independent exclusive sales agents in certain locations. From time to time, the Performance Products sales organization also assists in sales of Graphite Materials & Systems products, particularly outside of Europe and North America.

Since we are globally oriented with a diverse customer base, we regularly hold regional conferences to present and discuss our business strategies, targets and philosophy with our representatives in Germany and throughout the world.

For many years, we have been strongly committed to supporting our sales activity by providing a high level of customer service. As with our sales and distribution organizations, each of our customer service personnel is specifically dedicated to one of our three business areas. In addition to providing basic support services, we also assist our customers with their technical problems, focusing on the design and operation of production equipment (such as EAF technology), as well as on specifications for and use of our products. Since 1992 we have established long-term cooperation arrangements with several key customers to focus on technical improvements and product development.

To our key accounts, we generally sell our products on the basis of annual framework sales agreements. These agreements usually provide for fixed prices. During the term of the agreement, the customers place orders in accordance with the terms and conditions of the agreement. Our customers in the Performance Products business area generally place orders for electrodes three to six months prior to the specified delivery date pursuant to their forecasted full-year demand. We manufacture and manage electrode inventory levels on the basis of rolling sales forecasts. Other products, particularly in the Graphite Materials & Systems and Carbon Fibers & Composites business units, are generally manufactured to order. Finished products are generally stored at our manufacturing facilities. We ship products to customers primarily overland and by sea, using “just in time” techniques where practicable.

We own over 300 patents registered in the United States, Europe and in other major world markets and have numerous applications pending for new technologies and processes. Our activities are continuously complemented by a global patent strategy in order to secure technology and market positions at an early stage. We thus applied for 95 new patents in 2006, 28 of which were for new inventions (compared to 18 the previous year). In addition, we have obtained licenses to various domestic and foreign patents. These patents, patent applications and licenses are, in the aggregate, important to our competitive position, and the loss of a great number of patents worldwide could have a material adverse effect on our business. In our Carbon Fibers & Composites business area we depend to a significant extent on patents and licenses (see Item 3, “Risk Factors — Risks Relating to Our Business — We may not be able to protect the intellectual property which may be important for the development of our Advanced Materials business area”). However, we believe that we are not currently dependent on any individual patent or license or group of patents or licenses in our established business areas.

The manufacture of graphite electrodes takes, on average, approximately two months. Graphite electrodes range in size from three inches to 32 inches in diameter and two feet to nine feet in length and weigh between 20 pounds and 4,800 pounds (2.2 metric tons). Carbon electrodes, cathodes and furnace linings are manufactured in a process comparable to that for graphite electrodes, except that impregnation and graphitization are used only for particular grades of cathodes and furnace linings.

The manufacture of graphite electrodes involves the following six primary processes:

The production of a variety of graphite specialties grades generally follows a process similar to that used for graphite electrodes, but uses additional forming techniques (such as isostatic and die molding), additional treatments like purification and more intricate machining. Specialty graphite products use different mixtures of raw materials due to fine grain formulations and different processing time periods.

Expanded graphite is made from mined natural graphite flake, which is acid-treated, heat-treated and rolled into sheets of desired thickness and width and produced in highly specialized production lines. Fibers and composites that use polymer raw materials also require highly sophisticated and highly specialized facilities, in addition our main production lines for carbon and graphite products. Our high temperature technology expertise is essential for the manufacture of graphite fibers and composites.

Carbon fibers are based on PAN, which in a first step is thermally stabilized under oxygen at approximately 200-300° Celsius. The resulting oxidized fibers are already a saleable product. In a second step, oxidized fibers can be carbonized under nitrogen at approximately 1,200-1,400° Celsius. The resulting materials are carbon fibers which can either be prepared for sale on spools and in boxes or further processed by chopping, weaving and filament winding.

We use statistical process controls in all manufacturing processes and have implemented a quality management program that involves continuous in-house training. We generally warrant to our customers that our products will meet the SGL Group’s and the customers’ specifications. With the exception of 1997, in which we conducted a recall of graphite electrodes in North America due to a defect in a new piece of production equipment at one of our U.S. production sites, electrode returns and replacements have to date amounted to less than 1% of our sales revenue.

Our domestic and international manufacturing facilities and operations are subject to numerous environmental laws and regulations as well as administrative orders relating to alleged prior violations of laws or regulations. These legislation and orders could require us to install additional controls for certain emission sources or to change our manufacturing processes in future years. We believe we possess all material permits necessary for the current operation of our facilities. Although we believe that we are currently in material compliance with applicable laws, regulations and permits, our operations, like those of our competitors, involve certain environmental risks.

We seek to minimize environmental risk by developing, implementing and improving material resources, production and abatement techniques. Using advanced techniques, we aim to improve working conditions and reduce the environmental impact of our own operations and those of our customers’ businesses. Our goal is to comply with the European Union’s Integrated Pollution Prevention and Control (“IPPC”) directive while at the same time creating economically and technically viable conditions to assure long-term competitiveness. We augment the efforts of our internal auditors, research and development team and operations supervisors with periodic, active cooperation with national and international state agencies and organizations. We have adjusted the organization of our environmental team to create an integrated Environmental, Health & Safety Audit (“EHSA”) management system tailored to the demands of our industry. Our goal is to achieve internal standards according to ISO 14001, generally recognized as the highest standard in this field. We use our Internal Management and Audit System for continuous EHSA Risk Assessment in our efforts to achieve permanent, sustainable improvements in performance.

International regulations govern the transportation of hazardous goods. Air pollution, wastewater, solid waste and occupational health and safety are generally regulated by national laws. In the European Union, these areas are generally covered by EU directives and guidelines. In particular, the EU’s IPPC directive requires certain industries, including the carbon and graphite industry, to implement advanced techniques. The IPPC directive does not itself create binding regulation. Rather, it serves as a framework for regulators in the EU member states in establishing national regulations. Although national-level implementation of the IPPC directive may lead to more restrictive national environmental regulations, based on our experience in Germany we believe that national regulations based on the IPPC directive will tend to be more lenient than those proposed in the directive itself. We believe that we are in compliance, or in the process of achieving compliance, with the heightened requirements of IPPC directive-based regulation.

In Germany we are subject to environmental laws and regulations including the Federal Pollution Control Act, the Water Resources Management Act and the Waste Act. Under these statutes and their related bodies of regulation, the authorities may inspect our production sites every one to three years. We must also comply with the Plant Security Act, the Employment Security Act, Regulations for the Prevention of Accidents and the Toxic Substances Control Act (which includes technical regulations on hazardous substances) and the Dangerous Chemicals Ordinance.

Similar laws are already in force in Austria, Italy and a number of other EU countries; France and Spain are in the process of adopting new laws to comply with EU requirements. We expect that most European national environmental laws and regulations will be replaced over the near- to medium-term by common EU requirements (or by national regulations based on EU directives). National governments will remain free to adopt requirements stricter than those required by the EU.

With regard to the regulation of chemicals, the new EU regulation (EC) no. 1907/2006 of December 18, 2006, concerning the registration, evaluation, authorization and restriction of chemicals (“REACH”), imposes a new regulatory framework for the manufacture, importation and use of chemical substances in the EU which may entail increased compliance costs. Under the REACH regulation, enterprises manufacturing or importing a chemical substance in quantities exceeding one ton per year in or to the EU market are required to register the substance with the European Chemicals Agency by submitting comprehensive information on the properties of the substance and on how to effectively manage the risks entailed by the use of the substance for evaluation by the Agency. To this end, manufacturers and importers have to gather the relevant information and conduct safety assessments. Down-stream users of chemicals must implement the risk management measures for dangerous substances identified by suppliers. Failure to register means that the substance

In the United States we are subject to environmental requirements including those imposed by the Clean Air Act, the Clean Water Act, the Resource Conservation and Recovery Act, the Safe Drinking Water Act and similar federal, state and local laws regulating air emissions, water discharges and solid and hazardous waste generation, storage, transportation and disposal. The Comprehensive Environmental Response, Compensation and Liability Act of 1980 (Superfund) and similar state laws can impose joint and several liability for releases of hazardous substances into the environment, without regard to fault or the lawfulness of the original activity. Categories of potentially responsible parties can include current or former owners and operators of a contaminated site and companies that generated or sent waste to a site. The Toxic Substances Control Act and related laws are designed to assess the risk to health and the environment of new products at early developmental stages. In addition, laws adopted or proposed in various states impose reporting or remediation requirements if historical contamination is discovered, operations cease or property is transferred or sold. We believe that we are currently in material compliance with applicable U.S. laws and regulations.

From time to time we have received claims seeking environmental cleanup or similar costs with respect to properties that either the SGL Group or others currently or previously owned or operated. We believe that the extent of contamination and our liability, if any, arising from such claims will not have a material adverse effect on our financial condition or results of operations.

We have established and continue to establish accruals for environmental liabilities where it is probable that a liability has been incurred and the amount of the liability can be reasonably estimated. We adjust accruals on a periodic basis as we make new remediation commitments or receive information indicating that previous estimates should be changed. We believe that, taking into account our environmental accruals, our current environmental liabilities will not have a material adverse effect on our financial condition or results of operations.

Estimates of future costs of environmental protection are necessarily imprecise. Uncertainties affecting these estimates include the impact of new laws and regulations, the availability and application of new and diverse technologies and the extent of insurance coverage. Subject to this inherent imprecision, on the basis of our experience in managing environmental matters we believe that costs and capital expenditures related to environmental protection over the next several years will not have a significant impact on our financial condition or results of operation.

As a management holding company, SGL is legally separate from its various operating subsidiaries in the SGL Group. SGL’s Board of Management, however, provides overall strategic direction and monitors the operations of the Group. Individual members of the Board of Management have a group coordination function for specific business units and functional as well as regional responsibilities. See Item 6, “Directors, Senior Management and Employees—Directors and Senior Management—Board of Management”.

Our operational business is managed by Business Areas. At the beginning of 2002, we combined the former regional business units of Carbon and Graphite and Specialties into global Business Areas to improve efficiency and respond to the increasing globalization of our key customers. With this change and the divestiture of the surface protection business, all three of our Business Areas — Carbon and Graphite, Specialties and SGL Technologies — are organized on a global basis. Our organizational structure is thus identical with our segment reporting.

Our production sites and Group companies are managed by the relevant Business Area (or, in the case of multi-business area sites, by a management committee). The boards of directors of individual Group companies have responsibility for those companies’ legal and financial affairs. Centralized corporate functions support the SGL Board of Management and provide services to all businesses and to individual legal entities within the Group. In 2005, we merged the previously decentralized research and development activities into the newly created central function “Technology & Innovation”.

After years focusing on restructuring and refinancing as well as current global trends such as growing ecological challenges and accelerated substitution of traditional materials by advanced materials and innovations, SGL changed its corporate brand with effect from February 1, 2007 to “SGL Group – The Carbon Company”. In this context of realignment, SGL adjusted also its organizational structure into two business areas Performance Products and Advanced Materials.

The following table lists SGL Group’s principal consolidated subsidiaries as at December 31, 2006 and its ownership interest in each:

As of December 31, 2006, we operated 38 main manufacturing facilities worldwide, all of which are located in Europe, North America and Asia. Effective January 2005, we sold the surface protection and plastic application business with manufacturing facilities in Germany, United States, China, France and Italy. We also have other properties, including office buildings, research laboratories and warehouses, primarily in United States, Germany, Poland, France, Italy and Austria. The size of land we own is approximately 1,913 thousand square meter in the United States (473 acres), 804 thousand square meters (199 acres) in Germany, 727 thousand square meters (180 acres) in Poland, 619 thousand square meters (153 acres) in Italy, 341 thousand square meters (84 acres) in Canada, 174 thousand square meters (43 acres) in France, 168 thousand square meters (42 acres) in Austria and 114 thousand square meters (28 acres) in Spain. We own most of our manufacturing facilities and other properties.

We are harmonizing our manufacturing processes throughout the Group to permit global sourcing from all locations with consistent and interchangeable quality levels. We produce graphite electrodes in the United States, Canada, Germany, Italy, Spain, Austria and Poland. Carbon electrode production is concentrated in Poland and cathodes and furnace linings are manufactured in Germany and Poland. Our feeder stock for specialty graphite products is manufactured in Germany, France and the United States. In Europe, we have further optimized production by concentrating extruded, molded and isostatic pressed graphite product grades in the facilities best suited for this work. We have taken similar restructuring measures in North America, discontinuing manufacture of molded and isostatic products in the United States. We produce our process technology products in Germany, with additional production facilities in France and the United States. Approximately 70% of our carbon fibers and composites are manufactured outside of Germany, primarily in the United States and the United Kingdom.

We currently have capacity to manufacture approximately 280,000 metric tons of heavy bulk carbon and graphite products annually (excluding Specialties). This capacity includes approximately 220,000 metric tons of graphite electrodes. In 2006, we sold approximately 209,000 metric tons of graphite electrodes compared with 222,000 metric tons in 2005.

As of March 31, 2007 we operated the following main facilities

As of December 31, 2006 we had material pledges on our property under the syndicated loans. These agreements entailed the pledging of equity interests of most Group companies. The rights of use of intangible assets have been assigned for all German members of the Group, for two U.S. subsidiaries, and for SGL CARBON SpA in Italy. For more details on the pledges properties; see Item 10, “Additional Information – Material Contracts”. We believe that our facilities, which are of varying ages and types of construction, are in good condition, are suitable for our operations and generally provide sufficient capacity to meet our requirements for the foreseeable future.

In our Performance Products business area we strengthened our core graphite electrodes business by constructing a new graphite electrodes production hub in Banting, Malaysia which we expect to begin production (machining and graphitization) in 2008. Its initial annual production capacity of approximately 30,000 metric tons can be expanded to up to approximately 60,000 metric tons. In our Graphite Materials & Systems business unit, we intend to increase our capacity for the production of extruded and isostatically molded graphite and optimize our production infrastructure for expanded graphite products in the EU, North America and Asia. In order to increase our capacity for the production of directly processable carbon fiber based prepregs, we commissioned a state of the art production site in Meitingen, Germany in December 2006. The new production facility allows us to expand the range of prepregs to larger applications and from niches into already established and growing markets. In addition, we have secured the long-term supply of raw materials for the production of carbon fibers through our joint venture with Lenzing AG, Austria. Furthermore, we plan to start operation of a new carbon fiber production line in August 2007 and two additional lines by 2008. We believe that these measures will increase our carbon fiber production capacity from 2,400 tons at present to 6,600 tons by the end of 2010. Capacity utilization levels remain high at all of our plants.

None.

You should read this operating and financial review together with the description of our business, the general information about SGL Group and the Consolidated Financial Statements, including the notes thereto contained elsewhere in this annual report. We prepared our consolidated financial information in accordance with IFRS or, where indicated, in accordance with U.S. GAAP. IFRS differs in certain significant respects from U.S. GAAP. See “– U.S. GAAP reconciliation” and “– Significant differences between IFRS and U.S. GAAP” as well as notes 35 to our Consolidated Financial Statements contained elsewhere in this annual report. These forward-looking statements are subject to risks, uncertainties and other factors that could cause our actual results to differ materially from those expressed or implied by our forward looking statements. See “Forward-looking statements” and “Risk Factors.”

The SGL Group is one of the world’s leading carbon companies. We provide our customers with a global distribution network that is supported by more than 38 production locations in the European Union, Russia North America and Asia. Our key to success is a comprehensive portfolio of materials and the relevant technologies. As a result our product solutions are applied in a wide range of industries with a focus on steel, aluminum, chemical, automotive, energy and aerospace. Our customers are located in industrialized countries throughout the world. In 2006, we sold products in more than 80 countries, with sales outside Germany accounting for approximately 85% of our sales revenue.

Until December 31, 2004, 18 subsidiaries and two joint ventures were excluded from consolidation and accounted for at cost, since these were deemed to be not material as whole. In the Consolidated Financial Statements as of December 31, 2005, these subsidiaries have been included in consolidation and the joint ventures have been accounted for using the equity method. In this context, the opening balances of assets, liabilities and equity as of January 1, 2004, as well as the Consolidated Balance sheet as of December 31, 2004 and the Consolidated Income Statement and Cash Flow Statement for the year then ended, have been restated retrospectively.

IFRS 2 “Share-based payment” is effective for annual periods beginning on or after January 1, 2005. The IFRS is to be applied retrospectively on all share-based payments granted since November 7, 2002, that still existed when the standard became effective and requires comparable information to be restated. This also includes a restatement to the opening balances of the retained earnings in the earliest period presented.

The revised IAS 1 “Presentation of financial statements” defines a presentation of current and non-current assets and liabilities as separate groups in the Consolidated Balance Sheets. The standard must be used for reporting periods of a fiscal year beginning on January 1, 2005 or later. The company’s Consolidated Balance Sheet was structured accordingly and the previous years’ figures were adjusted. In prior years, we presented costs related to antitrust proceedings and restructuring expenses separately in our Consolidated Income Statements. Beginning with the year ended December 31, 2005, we have stopped reporting these items separately and the prior years statements have been adjusted to reflect his change.

We realigned our business areas with effect from February 1, 2007 creating a new structure consisting of two business areas “Performance Products” and “Advanced Materials” encompassing three business units: “Performance Products,” “Graphite Materials & Systems” and “Carbon Fibers & Composites.” Performance Products corresponds to the former Carbon and Graphite business area and contains the new business unit Performance Products. Advanced Materials comprises the former Specialties and SGL Technologies business areas which have been re-grouped into the two remaining business units, Graphite Materials & Systems and Carbon Fibers & Composites. Graphite Materials & Systems comprises the activities of the former Specialties business area as well as the expanded natural graphite business line which was previously part of the former SGL Technologies business area, while Carbon Fibers & Composites encompasses the carbon fiber and composites activities of the former SGL Technologies business area.

Since the beginning of 2005, we managed our operations in three business areas that reflect the products that we produce and market – Carbon and Graphite, Specialties, and SGL Technologies. Prior to 2005, we operated a fourth business area, Corrosion Protection. We discontinued the Corrosion Protection business area in January 2005 due to the sale of our Surface Protection and Plastic Process Technologies businesses, which represented more than 70% of the sales of this business area. The remaining process technology business was reclassified from Corrosion Protection to Specialties. The segment reporting for all previous years has been adjusted to reflect this reorganization. The divested surface protection business is shown separately as a discontinued operation for the years discussed in this report. All other descriptions and discussions refer to the continuing operations.

Our SGL Excellence program focuses on creating customer value and enhancing our competitiveness. We have based our SGL Excellence program on a philosophy which focuses on a culture of continuous improvement. In connection with the SGL Excellence program, we generated significant cost savings based on continuing cost reduction projects and restructuring programs. As part of these restructuring programs, we significantly reduced our total number of employees. Total cost savings attributable to these and other initiatives amounted to approximately €26 million, approximately €21 million, and approximately €36 million in 2006, 2005 and 2004, respectively. We are targeting further cost reductions in the future. Our planned measures include:

The SGL Excellence program has provided sustainable cost reductions, having contributed total annual cost reductions across all functions since its launch. Our ability to achieve cost savings will depend on a number of factors. These factors include our ability to accurately estimate the magnitude of costs incurred in connection with the implementation of our cost-reduction measures and our ability to achieve targeted operating efficiencies with a leaner production base.

We generate revenue primarily in U.S. dollars and in euro. The remainder of our revenue is denominated principally in other European currencies (primarily British Pounds and Polish Zloty). Purchases of our principal raw material, petroleum coke, are denominated in U.S. dollars. Other principal production costs, such as labor and energy, are denominated in the currency of the country in which the relevant production facilities are located. We currently operate our primary manufacturing facilities in Europe and North America.

Fluctuations in currency rates, especially between the U.S. dollar and the euro, can influence our operating and financial results. After the value of the U.S. dollar declined relative to the euro during 2004, reaching a low-point at the end of 2004, the U.S. dollar strengthened against the euro in 2005, weakened again in 2006. Currency fluctuations have several effects on our results, some of which may offset others. A weak dollar tends to have a negative effect on revenue and results. See Item 3 “Risk Factors – Risks relating to our business – We are exposed to currency exchange rate risks and interest rate risks.” In addition, we have major assets, debts and other liabilities in the United States or denominated in U.S. dollars. Fluctuations in the euro-U.S. dollar exchange rate can cause currency translation effects in our consolidated balance sheet. A continued increase in the value of the euro relative to the U.S. dollar reduces our dollar denominated liabilities and it also reduces the contribution of our U.S. businesses to our consolidated results of operations. A stronger dollar will tend to increase, and a weaker dollar to decrease, our non-current and current assets as well as equity and liabilities. In the 2004 fiscal year, the translation effect of all exchange rate fluctuations increased our equity by €2.3 million, which was due to the fact that the weakening of the U.S. dollar was offset by the strengthening of other currencies (mainly the Polish zloty). In 2005, our equity increased by €20.5 million mainly due to the stronger U.S. dollar. In the 2006 fiscal year, our equity decreased

Our sales revenue for a number of our products, in particular graphite electrodes, fluctuates from quarter to quarter due to such factors as customer inventory levels, scheduled customer plant shutdowns, changes in customer production schedules in response to seasonal changes in energy costs, weather conditions, and strikes and work stoppages. In addition, customers may change their order patterns in response to price changes. During the period prior to the effective date of a price increase, customers tend to buy additional quantities of graphite electrodes at the then lower price, which adds to our sales revenue during that period. During the period following a price increase, customers tend to use those additional quantities before placing further orders, which reduces our sales revenue during that period. Similarly, customers tend to use up their inventories and delay purchases when they expect price reductions. Sales from project related businesses, such as for process technology and furnace linings, are normally lowest in the first quarter and highest in the fourth quarter.

We generate revenue primarily through the manufacture and sale of carbon and graphite products to customers from several industries, including steelmaking, aluminum production, chemicals, mechanical and systems engineering, automotive, energy and aerospace. Our revenue from trading and other sources is not significant.

Our consolidated sales revenue reflects net sales, that is, sales revenue after elimination of intersegment sales. The following table shows the sales revenue of the SGL Group and its year-on-year change on a consolidated basis as well as by business area/unit and geographical region for the years ended December 31, 2006, 2005 and 2004. After the divesture of the Surface Protection and Plastic Process Technologies businesses in beginning of 2005 we reclassified the remaining Process Technology business into the Specialties business area and no longer present a Corrosion Protection business area. All prior periods have been adjusted accordingly.

Sales revenue is recognized at the time of transfer of risk, following delivery of a product or rendering of the services, net of any discounts and rebates granted. We grant discounts to our customers for early payment of amounts outstanding. We also provide volume discounts to our customers based on their total purchases during a specified term. Such discounts are recorded as a reduction of revenue based on our estimate of the number of customers that will ultimately earn these discounts. We record most of our revenue under purchase contracts with major industrial

Over the last decade, we have significantly broadened the geographical range of our sales in North America and Europe. Since 2001 we have also been increasing our revenues generated in Asia, a trend that we expect to continue in the coming years with the ongoing industrialization of eastern and southeastern Asia. We believe that our broad base, having a product portfolio that serves many industries, and the global distribution of our business reduces our exposure to economic cyclicality in any single region or customer industry. In particular, the target industries of the former Specialties business area are more strongly diversified, thereby reducing to some degree that business area’s exposure to economic slow-down in any one key industry.

Major components of cost of sales include the cost of raw materials, personnel expenses and energy. Raw material costs in the former Carbon and Graphite business area consist primarily of purchases of petroleum-based needle coke and coal tar binder and impregnation pitch. Specialties production uses similar raw materials as well as additional forming techniques, treatments and combinations of other raw materials. Historically, we have not had difficulty obtaining these raw materials. Procurement agreements with key suppliers, especially of needle coke, are used to secure the necessary supplies of raw materials. Some of these agreements are long-term (i.e. three years or above), but most are on an annual basis and have been regularly renewed in recent years. Our procurement agreements generally provide for fixed or minimum purchase quantities, which provide us with stable volumes of supply. Prices in annual agreements are usually fixed and renegotiated on renewal, while in the case of agreements with a term of more than one year prices are calculated according to specified formulas based on defined parameters such as the suppliers’ raw material prices, particularly crude oil prices, and SGL’s average sales prices. The market for high quality graphite electrodes continues to be under strain due to the shortage of the most important raw material – high quality needle coke. However, in view of our long-term supplier relationships, we do not anticipate procurement bottlenecks in 2007 or 2008.

Personnel expenses, including wages, salaries, social security and pension expenses, represent the second most significant item in our cost of sales. We incur substantial energy costs, primarily for electricity, in connection with the production of our graphite electrode and other graphite and carbon products. Energy costs over the last several years have been highly volatile and trending upwards. Our cost of sales includes straight-line depreciation of property, plant and equipment having estimated useful lives ranging from three to 41 years. In the periods discussed below, raw material and energy prices have generally increased, reducing gross profit margin (calculated as sales revenue less cost of sales, divided by sales revenue).

Selling expenses consist primarily of the expenses of our sales organization as well as distribution expenses, such as packaging materials, freight charges and sales commission expenses. We include in sales organization expenses wages and salaries, social security, pension expense, office space and expenses, in each case related to our sales force.

We incur research costs in connection with the development of new materials and compounds for high technology applications, particularly for development of products in the SGL Technologies business area, such as carbon ceramics for the automotive industry and components for fuel cells. In 2005, we began merging the previously decentralized research and development activities into the newly created central function “Technology and Innovation” (“T&I”). This centralization process was largely completed in the 2006 fiscal year. This results in optimization of the information flow, shorter and more transparent decision-making processes and more cost-effective use of the infrastructure. All this directly increases the efficiency of our research and development activities. It is not, however, directly targeted at reducing costs. In 2006, we succeeded in making our research and development services much more effective by coordinating our innovation strategy directly with the strategies

Our general and administrative expenses comprise personnel and non-personnel costs attributable to the SGL Group’s parent holding company and other administrative centers. These costs include accounting, treasury, senior human resources management and legal expenses, the cost of professional advisors and pension expense related to personnel in general administration. We also incurred general and administrative expenses in connection with the development of a common management information system and external advisory expenses related to acquisitions, divestments and other corporate projects. Since the beginning of 2005, general and administrative expenses include expenses related to the implementation of certain procedures required under the Sarbanes-Oxley Act and, starting in 2006, to the audit required thereunder.

The major components of other operating income (expense) include costs relating to antitrust proceedings, restructuring expenses, insurance payments received, exchange gains and losses from operating activities, gains and losses from sales of property, plant and equipment, bank charges and income and/or loss from additions to and releases of provisions.

Restructuring expenses are included in other operating expenses. Expenses in connection with EU antitrust proceedings are shown separately to increase transparency for any year-on-year comparison. Expenses related to the continuing restructuring programs (initiated in prior years) and other measures to improve efficiency and further reduce costs resulted in a total expense of €4.2 million in 2006 (€20.8 million in 2005 and €19.7 million in 2004). Expenses recorded in connection with EU antitrust proceedings resulted in a charge of €32.1 million in 2006 (€0.0 million in 2005 and €0.0 million in 2004). We paid to the European Commission in 2006 the final fine for graphite electrodes imposed on us by it on July 18, 2001 and finally assessed by the European Court of Justice (the “ECJ”) at €75.7 million, excluding interest. The maximum amounts of the EU fine finally assessed by the ECJ at €18.5 million plus accrued interest on May 10, 2007, and the EU fine still being appealed were fully provided for on our Consolidated Balance Sheet at the end of 2006. We have cash deposited €23.6 million covering the fine that had been imposed by the European Commission in connection with mechanical and electrical contacts at the end of 2003. The graphite specialties fine of €22.3 million including accrued interest was previously secured by bank guarantees and on February 8, 2007, cash deposited to the European Commission without legal recognition of the 2005 European Court of First Instance (the “CFI”) judgment. For more information on the European antitrust proceedings, see Item 8, “Financial Information – Legal Proceedings – Antitrust court proceedings (Europe/South Korea)” below.

Our financial result comprises interest expense and interest income as well as other financing costs. Interest expense includes, among other things, interest expense on loans, the interest component of appropriations to pension provisions and accrued or paid interest on liabilities from antitrust proceedings. When the United Stated Department of Justice (the “DOJ”) imposed a fine on SGL in connection with an antitrust investigation in 1999, we discounted the resulting antitrust fine to its present value and recorded this amount as a liability on our Consolidated Balance Sheet using an interest rate of 4%. In each succeeding reporting period, we have recalculated the present value of this liability, which has resulted in a regular interest expense from the discounting of the liability. In the first half of 2002, we agreed to an amended fine payment schedule with the DOJ. This amended payment schedule resulted in a one-time reduction in our net financing costs due to a reduction in the present value of the outstanding antitrust liability, which was paid in full in 2005.

Because the DOJ antitrust liability was denominated in U.S. dollars, changes in the euro/U.S. dollar exchange rate from period to period may give rise to translation effects on our Consoildated Balance Sheet. To reduce the resulting exposure to currency exchange rates, we hedged the antitrust

We also included an accrued interest portion for the EU fines starting in 2003. This is reflected in a separate line within the net interest result. Until end of 2005 we accrued amounts based on an estimated interest rate. Background for such treatment was our appeal on interest charges raised by the EU commission in the three fines. This appeal was finally rejected by the ECJ in connection with the final decisions of the fine for graphite electrodes on June 29, 2006. As a consequence we fully provisioned or partly paid in case of the graphite electrode case outstanding interest on the level of the originally imposed interest rate by the EU-Commission. Based on the decision from June 29, 2006 we had to expense an additional interest portion of €12.8 million in 2006 besides the normal expenses amounting to €1.3 million in 2006.

As a result of the financing of payments related to antitrust proceedings since 1998, the funding of development and start-up expenses of our brake disc businesses since 1999, the acquisition of the KCH group (a major part of the former SGL Acotec Group) in 1999 and ZEW (now SGL CARBON Polska S.A.) in 2000 net interest expense increased. Our net interest expense peaked in 2005 due to the financing completed in February 2004 mainly impacted by the 8.5% coupon on the €270.0 million Old Senior Notes issued by SGL CARBON Luxembourg S.A (see item 10, “Additional Information – Material Contracts – The Old Senior Notes”). We successfully managed to reduce our net financial debt during the past two years from €321.6 million at the end of 2004 to €229.1 million at the end of 2006.

Tax expenses include current and deferred income tax expenses. Our income tax expense reflects income tax liabilities in respect of pre-tax earnings from our consolidated group companies, which cannot offset these earnings against existing tax loss carry-forwards or other tax credits in other consolidated group companies. Deferred tax benefits and expense result from the capitalization of deferred taxes or the revaluation of capitalized deferred tax assets that arose from tax loss carry-forwards as well as from temporary differences between the carrying amounts of assets and liabilities in financial statements prepared under IFRS as compared to the amounts prepared under local tax accounting rules (calculated by the balance sheet liability method). In 2006, 2005 and 2004 deferred tax assets from tax loss carry-forwards were uniformly recognized in the Consolidated Financial Statements on the basis of a rolling projection of the estimated earnings to be taxed at the level of individual subsidiaries or on the level of tax groups. Uncertainties about certain planning assumptions and other underlying conditions are taken into account. Based on the restructuring measures taken, the disposal of the loss generating Surface Protection business, the significant reduction of the net financial debt and the improved economic market environment for our business segments, we assume that the capitalized deferred tax assets on loss carry-forwards can be utilized in the future.

German corporations are subject to a uniform 25% corporate income tax on both distributed and retained earnings. Furthermore, a solidarity surcharge of 5.5% is added to the corporation tax rate, resulting in an overall corporation income tax rate of 26.4% for 2006, 2005 and 2004. German corporations are also subject to a trade tax. The amount of the trade tax depends on the municipality in which a company maintains its operations. The trade tax generally amounts to between approximately 15% and 20% of taxable earnings, depending on the municipality’s tax assessment rate. Trade tax is deductible as an operating expense in the calculation of a company’s income that is subject to corporation tax. The overall German income tax rate thus amounts to 38.4%. Due to changes in German legislation, generally only 60% of tax loss carry-forwards may be offset from current annual income. Losses up to an amount of €1 million can be completely deducted from corporation income tax as well as from trade tax.

The income tax rate for our American companies is currently 39% (2005: 39%). Some of the income tax rates for other foreign group companies were significantly lower. In 2006 and 2005, these were 35% in Spain, 34% in France, 33% in Canada, 30% in the UK, 25% in Austria and 19% in Poland.

The following table shows our Consolidated Income Statements for the 2006, 2005 and 2004 fiscal years.

The following table shows selected Consolidated Income Statement data expressed as a percentage of total sales revenue for the years 2006, 2005 and 2004: