MANAGEMENT REPORT

YEAR 2005

ECONOMIC SCENARIO

Despite the Real appreciation of over 11.8% in relation to the US Dollar in 2005 the Brazilian balance of trade reached a record – US$ 44.7 billion – thanks to the strength of exports from segments less vulnerable to exchange variation.

Due to the high basic interest rate, the Brazilian GNP rose by a mere 2%.

The Brazilian chemical industry was adversely affected by the appreciation of the Real and the resulting intensification of finished-product imports, especially from China, which damaged not only local production but also exports, in the latter case due to the lack of attractive margins.

The manufacturers of chemicals for industrial use suffered a 3% loss in domestic sales in Reais in the period, an unprecedented event in the last ten years.

The 45% and 25% increase in the international average prices of oil and nafta, respectively, resulted in substantial increases in prices of petrochemical raw materials in the domestic market, thus impairing this sector´s performance in 2005.

OPERATIONS

The local shipments fell by 5%. Organic products decreased by 14%, whereas the inorganic products rose by 4%.

Among the organic products those relating to plasticizers had a 19% decrease, also due to the unavailability of alcohols (which in turn, was caused by a programmed plant stoppage for maintenance purposes)

In 2005, the exports fell by 43% from 10% to 6% of the Company´s shipments, due to a lower supply of competitive raw materials.

Both the relative participation of organic and inorganic products and the market segmentation based on net revenue figures reflect the decrease in exports for the period.

Relative Participation of Organic and Inorganic

Products Based on Net Revenue Figures

Market Segmentation Based on Net Revenue Figures

INVESTMENTS AND STRATEGIC MANAGEMENT

2005 was a year of intense activity at the Camaçari Complex in the state of Bahia, the following being worth mentioning:

a) A new 2 ethyl hexanoic acid plant with capacity of 10 thousand tons per year, and the use of proprietary technology and equipment idle until then. The operations successfully started in May;

b) A new boiler, especially tailored for burning production-generated liquid and gaseous residues, thus reducing organic effluents that require treatment and generating part of the steam consumed at the complex;

c) Streamlining, modernization, automation and capacity expansion to 49 thousand tons per year of the plasticizer plant, all completed in November, which now ensures safer operation and higher productivity, with lower effluent generation;

d) Modernization, automation and expansion of aldehyde production to 142 thousand tons per year at the oxi-alcohol plants, all completed during the programmed maintenance stop, which enabled better use of assets;

e) Studies for reactivation through expansion and modernization of the maleic anhydride plant at this industrial complex.

These investments in Camaçari are financially supported by the “Banco Nacional de Desenvolvimento Econômico e Social – BNDES” (National Economic and Social Development Bank) and “Banco do Nordeste do Brasil – BNB” (The Brazilian Northeast Bank) whose joint disbursement 2005 totalled R$ 50 million. As agreed with the “BNDES”, on April 28, 2005 the Company increased its capital by R$ 25,0 million, through reserve capitalization.

At Várzea Paulista, the following accomplishments stood out: (i) completion of the first stage of the polyester resin plant´s expansion; (ii) the strategic technological alliance with DSM Composite Resins AG, which made it possible for Elekeiroz to enter new market segments demanding differentiated products; and (iii) investments in operational, safety- and productivity- related improvements at the other plants.

Jointly with PETROBRÁS the first stage of studies dealing with the acrylic acid, acrilates and highly-absorbent polymers complex was completed. Led by PETROBRÁS, the second stage of this study is due to begin in the second quarter 2006.

In the year 2005, several studies led to the formation of six committees by executives from the Itausa Group´s industrial companies Duratex, Itautec and Elekeiroz, namely “Inteligência Corporativa” (Corporate Intelligence); “Riscos e Ética” (Risks and Ethics); “Governança Corporativa” (Corporate Governance); “Gestão de Talentos” (Talent Management); “Excelência Operacional” (Operational Excellence); and “Excelência Comercial” (Commercial Excellence) . Their objective is to divulge the best practices adopted by the Group´s industrial companies, in order to capture synergy while reducing costs and endeavouring to create value for the shareholders.

PERFORMANCE IN THE YEAR

In 2005, the stability of weighted average unit prices in Reais combined with a lower volume of shipments caused gross revenues to fall by 5% and exports by 38%.

Given the impossibility of passing on higher raw material costs to selling prices, the lower unit weighted average´s direct margin of contribution adversely affected the operating income - R$ 52,7 million - and the net income - R$ 43,1 million.

The profitability deemed satisfactory considering the businesses as a whole and the adverse market conditions faced the Company, reached 13.6% as measured by the ROE; 11.3% as measured by the ROIC; and 12.6% based on the EBITDA.

ENVIRONMENT-CONSCIOUS PERFORMANCE

The Company has adhered to the “Programa de Atuação Responsável” (Responsible Care Program).

A special boiler installed at the Camaçari plant is already operative, thus allowing collection and preparation for burning of all heavy liquid gas and effluent emissions. By burning these residues, the Company not only protects the environment but also generates part of the steam required for plant operation, thus enabling economy in the system as a whole.

In Várzea Paulista, a post-reactor now being installed at the phtalic anhydride plant (an operation foreseen for the 1st quarter 2006), is expected to process raw material into products, while reducing gaseous discharges to zero and improving quality of finished products.

HUMAN RESOURCES

At the end of 2005 the Company had 796 co-workers on whom it spent: (i) R$ 51,1 million of compensation and legally stipulated social charges; (ii) R$ 7,0 million of meals, staples, transportation allowance, medical care, insurance and supplementary pension/retirement expenses; (iii) R$ 0,5 million of internal training and development programs and continuing education incentives encompassing development of chemistry technicians, university degrees and language learning, all of which took over 72,2 thousand hours.

DIVIDENDS

Subject to consultation with, and approval by, the General Shareholders´ Meeting, the Administrative Council declared and recorded as income for the year 2005 dividends in the form of Interest on Own Capital in the amount of R$ 14,1 million (R$ 12,0 million net of withholding tax at 15%) the equivalent to 29% of the Net Income after setting up the legally stipulated Legal Reserve

On June 29, 2005 and on December 22,2005 respectively, the following gross amounts in Reais were declared: R$ 14,95 (R$ 12,7075 net of withholding tax) and a supplementary R$ 7,47 gross (R$ 6,3495 net) totalling R$ 22,42 gross (R$ 19,0570 net), per thousand-share lots.

“CVM” INSTRUCTION 381

Directa Auditores S/C did only financial and independent auditing work, having provided no other services to the Company in the year.

ACKNOWLEDGEMENTS

We are grateful to all co-workers, clients, suppliers and shareholders for their efforts, partnership and trust during one more year of work.