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Akzo Nobel NV – ‘20-F’ for 12/31/05

On:  Thursday, 6/22/06, at 12:28pm ET   ·   For:  12/31/05   ·   Accession #:  1208646-6-385   ·   File #:  0-17444

Previous ‘20-F’:  ‘20-F’ on 6/16/05 for 12/31/04   ·   Next & Latest:  ‘20-F’ on 6/21/07 for 12/31/06   ·   3 References:   By:  SEC – ‘UPLOAD’ on 3/20/07 By:  SEC – ‘UPLOAD’ on 1/4/07 By:  SEC – ‘UPLOAD’ on 10/17/06 

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  As Of                Filer                Filing    For·On·As Docs:Size              Issuer               Agent

 6/22/06  Akzo Nobel NV                     20-F       12/31/05    7:2.1M                                   Imprima/FA

Document/Exhibit                   Description                      Pages   Size 

 1: 20-F        Annual Report of a Foreign Private Issuer           HTML   1.98M 
 2: EX-8        Opinion re: Tax Matters                             HTML    237K 
 3: EX-12       Statement re: Computation of Ratios                 HTML     13K 
 4: EX-12       Statement re: Computation of Ratios                 HTML     14K 
 5: EX-13       Annual or Quarterly Report to Security Holders      HTML      9K 
 6: EX-13       Annual or Quarterly Report to Security Holders      HTML      9K 
 7: EX-15       Letter re: Unaudited Interim Financial Information  HTML      8K 

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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 20-F

(Mark one)

AKZO NOBEL N.V.
(Exact name of registrant as specified in its charter)

The Netherlands
(Jurisdiction of incorporation or organization)

76 Velperweg, 6824 BM Arnhem
(Address of principal executive offices)

Securities registered or to be registered pursuant to Section 12 (b) of the Act:

* Not for trading, but only in connection with the registration of American Depositary Shares, pursuant to the requirements of the Securities and Exchange Commission

Securities registered or to be registered pursuant to Section 12 (g) of the Act: None

Securities for which there is a reporting obligation pursuant to Section 15 (d) of the Act: None

Indicate the number of outstanding shares of each of the issuer's classes of capital or common shares as of the close of the period covered by the annual report:

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act

Yes

No

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If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.

Yes

No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act (Check one):

Large accelerated filer

Accelerated filer

Non-accelerated filer

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes

No

Indicate by check mark which financial statement item the registrant has elected to follow.

Item 17

Item 18

If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes

No

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PART I

INTRODUCTION

The consolidated financial statements of Akzo Nobel N.V. and subsidiaries appearing in this annual report are prepared in accordance with International Financial Reporting Standards (“IFRS”) as adopted by the European Union, and also comply with the financial reporting requirements included in section 9 of Book 2 of the Netherlands Civil Code, as far as applicable. IFRS differ in certain respects from accounting principles generally accepted in the United States (“US GAAP”). The significant differences between IFRS and US GAAP affecting Akzo Nobel's net income and shareholder's equity are discussed in Note 23 of the Notes to the Consolidated Financial Statements of Akzo Nobel.

The terms “Akzo Nobel” or “the company” are sometimes used herein for convenience in contexts where reference is made to the consolidated companies of Akzo Nobel N.V. in general. Such terms are also used for convenience in referring to individual segments and subsidiaries.

In this annual report, unless otherwise specified or the context otherwise requires, references to “dollars”, “U.S. dollars” and “USD” are to the United States currency. The European currency euro is sometimes referred to as EUR. For convenience only (except where noted otherwise), certain euro figures have been translated into dollars at the rate of EUR 0.843 = USD 1.00, the noon buying rate in The City of New York for cable transfers in foreign currencies as announced by the Federal Reserve Bank of New York for customs purposes (the “Noon Buying Rate”) on December 31, 2005. These translations should not be construed as a representation that the euro amounts actually represent such dollar amounts or could be converted into dollars at the rate indicated. On June 19, 2006, the Noon Buying Rate was EUR 0.794 = USD 1.00.

Akzo Nobel is currently looking to sell a minority stake in, and seek a listing in certain markets outside the United States for shares in its human pharmaceutical and animal health businesses. If completed, such sale will likely, going forward, have a material impact on the company’s business, financial condition, and results of operations. The shares of the new vehicle have not been, and will not be, registered under the U.S. Securities Act of 1933, as amended, and may not be offered or sold within the United States except to qualified institutional buyers in reliance on the exemption from the registration requirements provided by Rule 144A or pursuant to and in accordance with Regulation S under the U.S. Securities Act.

In order to utilize the “Safe Harbor” provisions of the United States Private Securities Litigation Reform Act of 1995, Akzo Nobel is providing the following cautionary statement. This document contains certain forward-looking statements with respect to the financial condition, results of operations and business of Akzo Nobel, and certain of the plans and objectives of Akzo Nobel with respect to these items. These statements may generally, but not always, be identified by the use of words such as “anticipate”, “assume”, “intend”, “plan”, “project”, “should”, “expect”, “estimate”, “believe” or similar expressions. In particular, among other statements, certain statements in Item 4 “Information on the Company” with regard to strategy, management objectives, including return on investment targets, market trends, market standing, market share estimates based on management’s estimates, benefits that may result from future restructuring programs, the product volumes, the costs and expenditures related to environmental compliance or remediation, Health, Safety and Environment targets, future research and development initiatives, the Pharma pipeline, the statements in Item 8 “Financial Information” with regard to the outcome of disputes with tax

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authorities, the outcome or consequences of pending or future legal or regulatory proceedings–including antitrust investigations and other potential related lawsuits–and their effect on the company, and those statements in Item 5 “Operating and Financial Review and Prospects” with regard to trends in results of operations, margins, overall market and macro-economic trends, risk management, exchange rates, and objectives such as return on capital are forward-looking in nature as are all statements under “Forward Looking Statement on 2006” and Item 11 “Quantitative and Qualitative Disclosures about Market Risk”.

By their nature, forward looking statements involve risk and uncertainty because they relate to events and depend on circumstances that will occur in the future. There are a number of factors that could cause actual results and developments to differ materially from those expressed or implied by these forward looking statements. These factors include, but are not limited to, levels of business spending in major economies (as well as other developments in the economies of the company’s markets in Asia, Latin America, North America, and Europe), the development in market value of pension plan assets, governmental regulations, changes in customer needs, progress of drug development, clinical testing, and regulatory approval, the levels of marketing expenditures by Akzo Nobel and its competitors, the introduction of new products by competitors, raw material and employee costs, future foreign exchange and interest rates, changes in tax rates and product regulation, future business combinations, acquisitions or dispositions, environmental liabilities, and the outcome of tax disputes, antitrust investigations, potential product liability claims and other lawsuits, and wars and acts of terrorism or sabotage.

Statements made in Item 4 “Information on the Company” referring to Akzo Nobel’s competitive position are based on management estimates, and in some cases, the statements are also based on information from a range of sources, including analysts’ reports, independent market studies and Akzo Nobel’s internal assessment of market share based on publicly available information about the financial results and performance of market participants unless otherwise noted. Such references to the company’s positioning generally refer to its market share based on revenues.

In the analysis of the development of revenues, when compared to the previous year, the company distinguishes between the effects from changed volumes, changed selling prices, currency translation, acquisitions, and divestments. Autonomous revenues growth, which sometimes is used in the discussions in this report, is a non-GAAP measure and is defined as the change in revenues attributable to changed volumes and selling prices. Autonomous revenues growth excludes currency, acquisition, and divestment effects. As a result, autonomous growth numbers reflect comparable revenues performance, and are used and analyzed by the company’s management for this purpose. Because of the comparability of revenues performance that can be analyzed by reviewing autonomous growth numbers, the company’s management believes that these numbers are useful for those reviewing our financial performance. However, the autonomous growth numbers should not be viewed in isolation or as alternatives to the comparable GAAP measure of revenues and should be read in conjunction with such measure.

The company uses the term “Incidentals” in the statement of income. Incidentals is a non-GAAP measure and is defined as special benefits, results on divestments, restructuring and impairment charges, and charges related to major legal, antitrust, and environmental cases. Operating income excluding incidentals is one of the key figures management uses to assess the company’s performance, as this figure better reflects the underlying trends in the results of the activities.

EBIT margin, formerly called return on sales, is operating income (EBIT) as percentage of revenues.

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Item 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISORS

Not applicable.

Item 2. OFFER STATISTICS AND EXPECTED TIMETABLE

Not applicable.

Item 3. KEY INFORMATION

A. SELECTED CONSOLIDATED FINANCIAL DATA

The selected financial data set forth on the following pages are derived from previously published financial information of Akzo Nobel, including the consolidated financial statements for the years ended December 31, 2005 and 2004, which appear elsewhere in this annual report. The selected financial data should be read in conjunction with, and are qualified in their entirety by reference to, such financial statements, including the notes thereto.

The audited consolidated financial statements of Akzo Nobel for the years ended December 31, 2005 and 2004, have been audited by KPMG Accountants N.V., independent registered public accounting firm, whose report thereon is included in Item 18. The consolidated balance sheets as of December 31, 2003, 2002 and 2001, and the consolidated statements of income and the consolidated statements of cash flows for the years ended December 31, 2003, 2002, and 2001 were also audited by KPMG Accountants N.V.; however, those balance sheets, statements of income, and statements of cash flows are not included in this Form 20-F.

Reference is made to Note 23 of the Notes to the Consolidated Financial Statements regarding differences between IFRS and US GAAP that affected Akzo Nobel's net income and shareholders' equity, as well as certain other lines of the Consolidated Statement of Income and the Consolidated Balance Sheet.

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The table below sets forth the number of common shares outstanding and the amounts of interim, final and total dividends declared (and the U.S.-dollar equivalents) on the common shares in respect of the fiscal years indicated.

* Dividends per common share in U.S. dollars are based on the Noon Buying Rate at December 31 of each year.

The following table sets forth for the fiscal periods indicated the average exchange rates for U.S. dollars into euros per dollar based on the applicable Noon Buying Rate.

* The average of the Noon Buying Rates on the last day of each month during the period.

The following table sets forth for the months indicated the high and low rates for U.S. dollars expressed in euros per dollar.

On June 19, 2006, the noon buying Rate was EUR 0.794 = USD 1.00.

Dividends, if any, will be paid in euros, and any exchange rate fluctuations may affect the USD amounts received by holders of ADSs upon conversion by the depositary of such dividends.

B. CAPITALIZATION AND INDEBTEDNESS

Not applicable.

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C. REASONS FOR THE OFFER AND USE OF PROCEEDS

Not applicable.

D. RISK FACTORS

This section describes some of the risks that could affect the company’s business. The factors below should be considered in connection with any forward-looking statements in the company’s Annual Report on Form 20-F and the cautionary statements contained in the introduction on pages 3 and 4. Forward looking statements can be identified generally as those containing words such as “anticipate”, “assume”, “intend”, “plan”, “project”, “should”, “expect”, “estimate”, “believe”, and words and terms of similar substance in connection with any discussion of future operating or financial performance.

Doing business inherently involves taking risks, and by taking measured risks we strive to be a sustainable company. Risk management is also one of the essential elements of the company’s corporate governance. This calls for creating a proper balance between entrepreneurial attitude and risk levels associated with business opportunities. We foster a high awareness of business risks and internal control procedures, geared to safeguarding transparency in our operations.

Our Risk Management framework complies with the Enterprise Risk Management – Integrated Framework of COSO (the Committee of Sponsoring Organizations of the Treadway Commission). The procedures and results are reviewed by the Board of Management and discussed in the Supervisory Board.

The diversity of businesses within Akzo Nobel leads to a large number of different risk factors, each of which may result in a material impact on a particular business unit but may not materially affect the company as a whole. The diversity of the company’s businesses and processes is its strength, as some of these factors may offset each other.

Under the explicit understanding that this is not an exhaustive enumeration, our major risk factors are listed below. There can be no assurance that our Risk Management function or our diversity will be able to mitigate any risks we may face. The risks below are not the only ones that Akzo Nobel faces. Some risks are not yet known to Akzo Nobel and some that Akzo Nobel does not currently believe to be material could later turn out to be material. All of these risks could materially affect Akzo Nobel’s businesses, revenues,

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operating income, net income, net assets, and liquidity and capital resources. The company’s risk management systems endeavors the timely discovery of such additional risks.

The factors that could affect our financial condition or our business or could cause actual results to differ materially include the following:

External risks

The company may face intense competition from new products and from lower-cost generic products.

The company’s products that are under patent protection face competition from competitors’ proprietary products. This competition may increase as new products enter the market. The company faces increasing competition from lower-cost generic products after patents on its products expire and from low-cost producers in other business areas. Loss of patent protection typically leads to loss of revenues in the product’s markets and could affect the company’s future results.

As new products enter the market, the company’s products may become obsolete or competitors’ products may be more effective or more effectively marketed and sold than its own products. If Akzo Nobel fails to maintain its competitive position, this could have a material adverse effect on its business and results of operations.

Regulations which limit the prices we may charge for our pharmaceutical products can reduce the company’s revenues and adversely affect its business and results of operations.

In addition to normal price competition in the marketplace, the prices of Akzo Nobel’s pharmaceutical products are restricted by price controls imposed by governments and health care providers in most countries. Price controls operate differently in different countries and can cause wide variations in prices between markets. Currency fluctuations can aggravate these differences. The existence of price controls can limit the revenues Akzo Nobel earns from its products and may have an adverse effect on its business and results of operations.

About 27 percent of the company’s earnings are derived from the healthcare markets. In many countries, the prices for our products are regulated. In the United States, Medicare reform could result in de facto price controls on prescription drugs. In Europe, the company’s operations are also subject to price and market regulations. Many governments are introducing healthcare reforms in an attempt to curb increasing healthcare costs. In Japan, where Akzo Nobel also operates, governmental price cuts are introduced biannually. In response to rising healthcare costs, many governments and private medical care providers, such as HMOs, have instituted reimbursement schemes that favor the substitution of generic pharmaceuticals for more expensive brand-name pharmaceuticals. In the United States, generic substitution statutes have been enacted by virtually all states and permit or require the dispensing pharmacist to substitute a less expensive generic drug instead of the original brand-name drug. As a result, the company expects pressure on operating results in its pharmaceuticals business to continue.

Product regulation may adversely affect the company’s ability to bring new products to market.

The company and its competitors are subject to strict government controls on the development, manufacture, labeling, distribution and marketing of products. The company must obtain and maintain regulatory approval for its pharmaceutical and other products from regulatory agencies before certain products may be sold in a particular jurisdiction. The submission of an application to a regulatory authority

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does not guarantee that a license to market the product will be granted. Each authority may impose its own requirements and delay or refuse to grant approval, even though a product has been approved by another country. In the company’s principal markets, the approval process for a new product is complex, lengthy and expensive. For pharmaceutical products, the time taken to obtain approval varies by country but generally takes from eight months to several years from the date of application. Regulatory delays, the inability to complete clinical trials successfully, claims and concerns about safety and efficacy, new discoveries, patents and products of competitors and related patent disputes and claims about adverse side effects are only a few of the factors that could adversely affect the realization of product registration. This increases the company’s cost in developing new products and increases the risk that it will not succeed in selling them successfully.

Additional data for Livial^® were submitted to the U.S. Food and Drug Administration (FDA) in December 2005. In June 2006, however, the FDA determined that the NDA submitted for this product was “not approvable”.

The company’s business will continue to expose it to risks of environmental liabilities.

The company uses hazardous materials, chemicals, biological and toxic compounds in its product development programs and manufacturing processes, which have exposed it, and in the future could expose it, to risks of accidental contamination and events of noncompliance with environmental laws and regulatory enforcement, and personal injury and property damage claims resulting therefrom. If an accident occurred or if the company were to discover contamination caused by prior operations, it could be liable for cleanup obligations, damages or fines, which could have an adverse effect on its business and results of operations.

The environmental laws of many jurisdictions impose actual and potential obligations on the company to remediate contaminated sites. These obligations may relate to sites:

These environmental remediation obligations could significantly reduce the company’s operating results. In particular, the provisions and accruals for these obligations may be insufficient if the assumptions underlying the accruals prove incorrect or if the company is held responsible for additional, currently undiscovered contamination.

Stricter environmental, safety and health laws and enforcement policies could result in substantial costs and increase potential liabilities of the company, and could subject the company’s handling, manufacture, use, reuse or disposal of substances or pollutants to more rigorous scrutiny than is currently the case.

Consequently, compliance with these laws could result in significant capital expenditures as well as other costs and liabilities, thereby affecting Akzo Nobel’s business and operating results.

The company will be responsible for any liabilities arising out of non-compliance with laws and regulation e.g. antitrust litigation.

Reference is made to Note 15 and Note 25 of the Notes to the Consolidated Financial Statements in this report.

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Because Organon depends on the sale of a limited number of products to generate a substantial portion of its revenues, factors adversely affecting the sale of any of these products could materially harm its revenues and results of operations.

Organon depends on sales of a limited number of products that account for a substantial portion of its revenues. For example, in 2005, revenues from Puregon^®, Remeron^®, Livial^®, Mercilon^®, Esmeron^®, and NuvaRing^® in aggregate accounted for approximately 50% of Organon’s revenues. Despite the anticipated launch of several new products over the next few years, including asenapine, we expect to continue to depend on a limited number of key products for the foreseeable future. As a result of this dependence, factors adversely affecting the sale of any of these products could materially adversely affect our revenues and results of operations. These factors include, but are not limited to competition from other branded pharmaceuticals that may be equivalent or superior to our own products or that the market perceives to be more attractive; competition from generic versions of branded pharmaceuticals, irrespective of the way they are marketed, once the term of patent protection and regulatory exclusivity for the original branded pharmaceuticals has expired; technological advances; the marketing strategies of our competitors; supply chain interruptions; work stoppages; changes in prescription practices; changes in the reimbursement policies of third-party payers; and other unforeseen adverse events.

Our business will suffer if we are unable to obtain or defend intellectual property rights in relation to our products, if we are accused of infringing third parties’ intellectual property rights or, if we are unable to gain access to, or our licensing partners terminate our rights to, the intellectual property rights of others.

The company’s ability to remain competitive and to capture additional market share depends in part on our ability to obtain and defend patents, trademarks, and other forms of intellectual property protection for our products, and on our development and manufacturing processes and our know-how. The process of obtaining patents is lengthy and expensive. We also intend to prosecute patents as appropriate,. However, there can be no assurance that patents will be granted in relation to any of our currently pending or future applications or that such patents will be of sufficient scope and strength to provide us with any meaningful legal protection, any commercial advantage, or any ability to recoup our investment in product development.

It may become necessary for us to seek to enforce our patents, trademarks, licenses, and other forms of intellectual property protection and to protect our trade secrets by taking legal action or to engage in litigation in order to defend ourselves against claims of alleged infringement of someone else’s intellectual property brought against us by third parties. There can be no assurance that we will be able to successfully settle or otherwise resolve claims that may be brought against us by third parties in the future. If we are unable to successfully settle future claims on terms acceptable to us, we may be required to engage in costly and time-consuming litigation and may be prevented from, or experience substantial delays in, marketing our existing pharmaceuticals and launching new ones. If we fail in any such dispute, in addition to paying money claims, we may lose valuable intellectual property rights. Any of these events could require us to divert substantial financial and management resources that we would otherwise be able to devote to our business.

The outcome of tax disputes, litigation, indemnification and guarantees, and regulatory action could adversely affect the company’s business and results of operations.

Since December 2002, the company has been involved in several cases regarding its product Remeron^®. During 2004 and 2005, settlements were reached in all these cases, the last of which was approved in November 2005 by the United States District Court for the district of, New Jersey.

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Late January 2006, Akzo Nobel Nederland B.V. and the Akzo Nobel Pension Fund in the Netherlands received a summons from the Association of Retired Akzo Nobel Employees with regard to the changed financing of the company's Dutch pension plan. Based on legal advice, Akzo Nobel Nederland and the Akzo Nobel Pension Fund do not believe the results of this claim will be material.

A number of other claims are pending against Akzo Nobel N.V. and its subsidiaries, all of which are contested. The company is also involved in disputes with tax authorities in several jurisdictions. While the outcome of these claims and disputes cannot be predicted with certainty, the company believes, based upon legal advice and information received, that the final outcome will not materially affect the consolidated financial position of the company but could be material to the company’s result of operations or cashflows in any one accounting period.

Product liability claims could adversely affect the company’s business and results of operations. The company’s financial condition and results of operations could be adversely affected if the company does not successfully mitigate risks associated with insurance of pharmaceutical products.

Given the widespread impact that brand-name drugs have on the health of patient populations, pharmaceutical and medical devices companies have historically been subject to large product-liability claims and settlements caused by the use of their products. The company also runs the risk of product liability claims from its Coatings and Chemicals products. Presently, the company is involved in a number of product liability cases claiming damages as a result of its products. It believes that any reasonably foreseeable unaccrued costs and liabilities associated with such matters will not have a material adverse effect on the company’s consolidated financial position but could be materially adverse to its results of operations. There can, however, be no assurance that a future product liability claim or series of claims that are not fully covered by insurance would not have an adverse effect on the company’s business or results of operations.

Bad publicity and damage to the company’s brands could adversely affect its business and results of operations.

The reputation of the company’s brands is critical to its business. The success in promoting and enhancing its brands is dependent on providing safe high-quality products, particularly in the pharma business. If it fails to successfully promote its brands, or if it receives bad publicity as a result of a product liability case or publicized health or other risks associated with its products, the value of the company’s brands will be diminished. This could have a material and adverse effect on the business and results of operations.

Exchange rate fluctuations can have a harmful impact on the company’s financial results.

The company has operations in more than 80 countries throughout the world. As a result, a substantial portion of its assets, liabilities, revenues and expenses are denominated in various currencies other than the euro, principally the U.S. dollar, the British pound, the Swedish krona, the Japanese yen, and Latin American and Asian currencies. Because the company’s financial statements are denominated in euro, fluctuations in currency exchange rates could have a material impact on its reported results. The company has a hedging policy for certain currency exchange rate risks.

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The company’s financial condition and results of operations could be adversely affected if the company does not successfully mitigate risks associated with interest rate changes.

A portion of the company’s investments, loans and borrowings bear interest on a non-fixed basis. Accordingly, changes in interest rates can affect the cost of these interest-bearing investments, loans and borrowings. The company mitigates interest risk by financing noncurrent assets and a certain portion of current assets with equity, long-term liabilities and long-term borrowings with fixed interest rates. In the event that this strategy is not successful, the business, financial condition and operating results of the company could be materially and adversely affected as a result of changes in interest rates.

Adverse stock market developments may affect assets of pension funds, causing higher pension charges and pension premiums payable.

The company has a number of defined benefit pension plans, covering a major part of its employees. Plan assets principally consist of long-term interest-earning investments, quoted equity securities, and real estate. The performance of stock markets could have a material impact on the company’s financial statements as some 50 percent of plan assets are equity securities. The poor performance of the stock markets in 2001 and 2002 had a negative influence on the investment results of Akzo Nobel’s pension funds, resulting in additional pension charges, pension premiums and payments to such funds in 2002 and subsequent years.

A downgrading by credit rating agencies could result in higher financing costs or reduced availability of credit.

At present the company’s long-term credit rating from Moody’s is A3 with a short-term rating of P-2, both with a so-called “stable outlook”. The current long-term credit rating from Standard & Poor’s is A– and their short-term rating is A-2, both with a so-called “stable outlook”.

The present rating is three notches above the so-called “high-yield zone”. However, if the company’s rating would decline or would approach or enter the high-yield zone, this would result in increased financing costs for the company and could also reduce availability of credit, especially at commercially acceptable rates.

A security rating is not a recommendation to buy, sell or hold securities. The rating may be subject to revision or withdrawal at any time by the rating organization. Each rating should be evaluated independently of any other rating.

Because the company conducts international operations, it is exposed to a variety of risks, many of them beyond its control, that could adversely affect its business.

Akzo Nobel is a global company with operations in Europe, North America, Latin America, Asia, the Middle East, and Africa. In addition to general business risk and the risks described in this section, the company’s international operations are subject to a variety of potential risks including: political and economic instability, the risk of hyperinflation in some countries, currency and interest-rate fluctuations, lack of local business experience, difficulty in enforcing property rights, local security concerns, and language and other cultural barriers. In addition, changes in the tax laws of some countries where the company does business can affect the company’s net income.

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Inability to access raw materials, growth in cost and expenses for raw materials, petroleum and natural gas, and changes in product mix may adversely influence the future results of the company.

Important raw materials or auxiliary materials for the company’s production processes are salt, petroleum and petroleum derivatives, natural gas, titanium dioxide, and electricity. Some of these components are available only from a small source of suppliers. Although Akzo Nobel aims to use its purchasing power and long-term relationships with suppliers to acquire raw materials and their constant delivery at the best conditions, the company cannot assure that it will always be able to establish or maintain good relationships with such suppliers or that such suppliers will continue to exist or be able to supply ingredients in conformity with regulatory requirements or the company’s requests. In addition, growth in the costs and expenses of these components resulting from a shortage or a change in Akzo Nobel’s product mix may adversely influence the company’s business and financial results. Akzo Nobel is sensitive to price movements in raw materials. In particular, energy prices pose a risk.

Seasonality may adversely affect the operating results of the company’s Coatings and Chemicals business.

A portion of the company’s Coatings and Chemicals business is seasonal, with revenues and earnings being relatively higher during the outdoor season and lower during the indoor season. The operating results may be harmed if bad weather delays the outdoor season in the major markets in which the company operates and the company is not able to offset during the corresponding financial year the lag in earnings resulting from such delay.

Strategic Decision Making Risks

A failure to manage expansion effectively could adversely affect the company’s business.

Management of the company’s growth, as well as the commencement of commercial manufacturing and marketing of the company’s forthcoming products, will require continued expansion of the company’s systems and internal controls and an increase in the company’s manufacturing, marketing and sales operations. In addition, the company intends to continue to add new personnel. Any failure to manage growth effectively and integrate new personnel on a timely basis could adversely affect the company’s business.

The company may not be able to identify significant technology improvements or future acquisitions or may not be successful in integrating acquired businesses.

The company may not be able to identify significant technology improvements or future acquisitions or may not be successful in integrating acquired businesses. The company continuously aims for sustainable growth of its business through research and development, production, and sale of new products and regularly adds new businesses through alliances, ventures, or acquisitions. We place a strong focus on integration of acquisitions as this is critical to achieve the expected results. The company does not know if it will be able to identify any future acquisitions, joint ventures, or alliances. A failure to identify future transactions may impair the company’s future growth.

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Internal Risks

The company’s research and development efforts may not succeed or its competitors may develop more effective or successful products.

In order to remain competitive, the company must commit substantial resources each year to research and development through its dedicated resources as well as through various collaborations with third parties. Ongoing investments in new product launches and research and development for future products could produce higher costs without a proportional increase in revenues. Especially in the Pharma businesses, the research and development process can take from six to fourteen years, from discovery to commercial product launch. This process is conducted in various stages, and during each stage there is a substantial risk that the company will not achieve its goals and accordingly may abandon a product for which it has spent substantial amounts.

Due to the inherent unpredictability and high degree of failure associated with the development of new pharmaceuticals, there can be no assurance that we will be able to successfully and timely launch new drugs and other pharmaceutical products. If we do not succeed in developing products for which regulatory approval can be sought, our ability to realize a profitable return on our investment would be diminished. Specifically, if we do not successfully complete our current Phase III registrational trial, receive regulatory approval or achieve market acceptance for asenapine, Organon’s main pipeline drug in the CNS area developed in collaboration with Pfizer, we may be unable to commercialize asenapine within the timeframe we planned, or at all, which could have a negative effect on our business and results of operations.

The company is looking for more partners to share the burden and success of product development in this area.

If the company fails to continue developing commercially successful products or fails to find suitable partners, this could have a material adverse effect on the company’s business and results of operations. If its competitors develop more effective products or a greater number of successful new products, or if the competitive position of its European operations changes in a negative way, this could also have a material adverse effect on the company’s business and results of operations.

On the other hand, there is also risk involved with the reliance on partners for the sharing of costs and generation of revenues. If these partners do not perform in accordance with our agreements with them, this could also have a material adverse effect on the company’s business and results of operations.

It can also be the case that due to unwanted side effects of pharmaceutical products, in particular, which appear at a later stage after introduction of a product, the company may decide or may be forced to withdraw a certain product from the market. This also could have a material adverse effect on its business and results of operation.

Risks in production processes can adversely affect the company’s results of operations.

Certain chemical production processes are hazardous, and natural disasters, operator error or other occurrences could result in explosions, fires, or equipment failure, which could result in injury or death, or damage to property or the environment, and business interruption.

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It is the company’s policy to try to mitigate production risks by spreading of production and an adequate inventory policy combined with contingency planning and appropriate risk transfer arrangements (e.g. insurances).

Losses and liabilities arising from such events, in so far as not covered by insurance, would significantly reduce the company’s revenues or increase costs and could have a material adverse effect on its operations or financial condition.

If the company’s management of change is not adequate it may possibly lead to failure to attract the right people or the loss of key staff or knowledge or other business disruption, which could have an effect on productivity and reduced customer focus.

The company puts emphasis on attracting, retaining, motivating, and educating staff, using Human Resources instruments and reduces uncertainty in the working environment through information and communication programs.

The company’s future operating results depend in part upon its ability to attract and retain qualified management, scientific, technical, marketing, and support personnel. Competition for such personnel is intense, and there can be no assurance that the company will be able to continue to attract and retain such personnel.

Item 4. INFORMATION ON THE COMPANY

Akzo Nobel N.V. is a public limited liability company (“Naamloze Vennootschap”) organized under the law of the Netherlands for an indefinite period. The principal executive offices of Akzo Nobel N.V. are located at Velperweg 76, 6824 BM Arnhem, the Netherlands. Its telephone number is +31 (26) 366 4433 and its fax number is +31 (26) 366 3250.

The company’s E-mail address is ACC@akzonobel.com, and the address of its website is www.akzonobel.com. Any correspondence regarding this Annual Report on Form 20-F should be directed to the Company Secretary.

The name and address of the person authorized to receive notices and communications from the U.S. Securities and Exchange Commission is:

Steven J. Miller
SVP and General Counsel Akzo Nobel Inc.
Akzo Nobel Inc.
7 Livingstone Avenue
Dobbs Ferry, NY 10522-2222
+ 1 (914) 674-5181

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Copies to:

A. Jan A.J. Eijsbouts
General Counsel
Akzo Nobel N.V.
Velperweg 76
6824 BM Arnhem
The Netherlands
+ 31 (26) 366 2730

OVERVIEW

Akzo Nobel is a Global Fortune 500 company and is listed on both the Euronext Amsterdam and NASDAQ stock exchanges. It is also included on the Dow Jones Sustainability Indexes and the FTSE4Good Index. Based in the Netherlands, we are a multicultural organization serving customers throughout the world with human and animal healthcare products, coatings, and chemicals. We employ around 61,500 people and conduct our activities in four segments–human and animal health, coatings, and chemicals–subdivided into 13 business units, with operating subsidiaries in more than 80 countries. Consolidated revenues for 2005 totaled EUR 13.0 billion, of which 19% was in human healthcare products, 8% in animal healthcare products, 43% in coatings, and 30% in chemical products.

In the pharmaceutical industry, Akzo Nobel is smaller than many of its competitors, but it has significant positions in gynecology, infertility, and selected areas of anesthesia. Akzo Nobel believes that based on revenues it is the largest coatings producer in the world; its products and markets vary widely from architectural paints in some countries to industrial coatings in others. In the chemical products industry, Akzo Nobel is a significant competitor in a number of markets, and on a global basis the company competes with a number of larger chemical companies.

Demand for Akzo Nobel's products, particularly its chemical and coatings products, is generally reflective of the overall health of economies in Western Europe, the United States, and Asia, and is, except for certain Coatings and Chemicals activities, generally not seasonal in nature.

It is Akzo Nobel’s objective to develop or acquire new and defend existing leading positions in its markets, while maintaining structural long-term profitability. In addition to its core business, the company focuses on the development of new and improved products in major growth sectors that draw on the company’s technological and marketing know-how. The company is pursuing expansion in Eastern Europe, South-East Asia, and Latin America.

A. HISTORY AND DEVELOPMENT OF THE COMPANY

Akzo was created in 1969, out of the merger between AKU N.V. (“AKU”) and Koninklijke Zout-Organon N.V., and in 1994 it was renamed Akzo Nobel, after the merger with Nobel Industries AB (“Nobel”).

AKU N.V. was founded in 1911 under the name of N.V. Nederlandsche Kunstzijdefabriek. Over the years this company grew into an international concern with interests in the field of cellulose fibers and, following the Second World War, synthetic textile and carpet fibers as well as industrial fibers. At the time of the 1969 merger, AKU's principal countries of operation were the Netherlands, Germany, the United States, the United Kingdom, Spain, and several Latin American countries, where activities were often carried out through joint ventures with local partners.

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Koninklijke Zout-Organon N.V. was set up in 1967 as a holding company in connection with the merger between Koninklijke Zout-Ketjen N.V. and N.V. Koninklijke Zwanenberg-Organon. Koninklijke Zout-Ketjen N.V. had interests in companies active in salt refining, basic chemicals, specialty chemicals, and coatings. While these companies were mainly active in the Netherlands, they had built up major export positions at the time of the merger. N.V. Koninklijke Zwanenberg-Organon consisted of companies active in food/nonfood products and chemical products and of pharmaceutical companies producing brand-name drugs, nonprescription products, and raw materials for the pharmaceutical industry.

Nobel was formed in 1984 through the merger of Bofors (established in 1646) and KemaNobel, founded in 1871. At the time of the merger with Akzo in 1994, Nobel was a leading European producer of chemicals (pulp and paper chemicals and surfactants) and coatings (paints for professional and consumer markets, industrial coatings, and industrial products). Nobel had operations in more than 30 countries.

In July 1998, Akzo Nobel acquired Courtaulds plc (“Courtaulds”), an international chemical company with leading positions in high-tech industrial coatings and man-made fibers. Its best known brands, International Paints, Courtelle acrylic fibers, and Tencel^®, a new cellulosic fiber, were included in the acquisition. Courtaulds, which was founded in 1816 as a silk weaving company, pioneered the global man-made fiber industry at the beginning of the 20^th century. In the 1960s Courtaulds acquired International Paint and Pinchin Johnson.

In November 1999, the company acquired Hoechst Roussel Vet (“HR Vet”), the veterinary business of Hoechst AG, substantially enlarging the product range of Intervet, Akzo Nobel’s animal health business, and leading to its establishment as a leader in the animal health business.

After the Courtaulds acquisition, the fibers operations of Akzo Nobel and Courtaulds were combined into a separate organization, named Acordis. At December 31, 1999, Acordis was sold to a newly established company. Akzo Nobel retained a stake–at present of some 20 percent–in this company, which is gradually divesting its activities.

In 2004, the company started the restructuring of the Chemicals business by selling the Catalysts, Phosphorus Chemicals and Coating Resins activities. Following this, a new strategic focus for Chemicals was announced in February 2005, resulting in the streamlining of the portfolio in order to competitively realign the business for sustainable growth, profitability, and leadership positions in selected markets. In this new set-up, Chemicals is organized in five growth platforms: Pulp & Paper Chemicals, Base Chemicals, Functional Chemicals, Surfactants, and Polymer Chemicals. The realignment of the Chemicals group also involved the planned divestment of several businesses with combined 2004 revenues of EUR 700 million. These businesses are among others Ink & Adhesive Resins, Oleochemicals, PVC Additives, Salt Specialties, Solar Salt Australia, and Methyl Amines/Choline Chloride. In the meantime, several of these businesses have been divested or offers have been received. The company expects to complete all remaining divestments resulting from the strategic realignment of its Chemicals portfolio during 2006. Recently, it was decided to withdraw Salt Specialties from its list of Chemicals businesses to be divested, as it became clear that a satisfactory deal based on the company’s original divestment offer would not be forthcoming. Flexsys, the 50/50-joint venture with Solutia, is also expected to be sold during 2006.

Over the years, Akzo Nobel acquired and divested numerous other activities and businesses, which all were of a much lesser size than the ones mentioned above. For recent acquisitions and divestments reference is made to Note 2 of the Notes to the Consolidated Financial Statements.

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For a list of the company’s subsidiaries see Exhibit 8 to this Report, which is incorporated by reference herein.

B. BUSINESS OVERVIEW

Operations are organized in segments on the basis of affinity between activities: Human Pharmaceuticals (Organon) and Animal Health (Intervet)–together also referred to as Pharma–Coatings and Chemicals. Within the Coatings and Chemicals segment, the activities are carried out in business units.

The Board of Management is the highest executive authority and is entrusted with the management of the company, which means, among other things, that it defines the strategic direction, establishes the policies, and manages the company’s day-to-day operations. The members of the Board of Management collectively manage the company and are responsible for its performance. They are jointly and individually accountable for all decisions made by the Board of Management. At the corporate level, key tasks are coordinated in the fields of strategy; finance; control; human resources; technology; legal affairs and intellectual property; communications; health, safety, and environment; information management; and risk and insurance management.

STRATEGY

Akzo Nobel is a diversified, multicultural, and truly global company with activities in Pharma, Coatings, and Chemicals. We aim to create above-average economic value over the business cycle. We strive to attract talented, ambitious people who are proud to work for our company. We seek to be respected in the societies in which we operate.

Capital allocation is focused on building sustainable leading business positions, reflected in attractive growth, returns significantly above the costs of capital, and substantial operational cash flows. We actively restructure our activities to meet our goals and divest activities where we cannot meet the criteria.

We develop competitive advantages by combining the focus and entrepreneurial spirit of a decentralized business unit organization with the scale and power of a corporate center that provides access to global capital markets, managerial talent, and best management practices.

Our deeply ingrained Business Principles are the expression of a strong, shared international culture. They guide us in the complex, ever-changing global environment in which we operate and are enforced through training and letters of representation. Their enforcement is monitored by our Compliance Committee.

After a comprehensive review of all the options for Akzo Nobel’s businesses going forward, we have concluded that the most appropriate solution for all parts of the business is to separate Organon and Intervet from our Coatings and Chemicals activities. After evaluating available options management is jointly convinced that a sale of a minority stake, by way of an offer of its shares, of Organon/Intervet best enhances shareholder value. Depending on the condition of the market and the performance of our business, full separation of Organon/Intervet is expected to be completed within 2 to 3 years after the sale of the aforementioned minority stake.

Pharma

In recent years, our Organon human healthcare business has experienced a phase of declining revenues. As a consequence, we have adjusted the strategy and the organization and have lowered the cost base.

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We believe that in 2005, we saw the expected turning point. We believe the decline in revenues has bottomed-out and looking ahead we expect further top-line growth. To further strengthen the growth potential we have continued to invest heavily in R&D and pre-marketing to boost our pipeline. This temporary acceptance of a relatively low operational profit margin is in line with our medium-term value creation philosophy.

We actively pursue alliances with third parties for the development of new products, especially in the biotechnology sector. In addition, we expect that we will out-license various projects in order to obtain financial benefits from products and technologies that we have discovered in our research activities but that are not part of our core Pharma businesses.

Intervet, our animal health business, is the world’s third-largest animal health company as measured by 2005 revenues. We aim to build upon our broad-based market leadership in animal health through our commitment to R&D and, where appropriate, through licensing deals and add-on acquisitions.

In 2002, we launched our Nobilon business to develop, license, and manufacture human vaccines. Nobilon became operational in mid-2003. In our vaccine activities we combine the expertise and know-how of Organon and Intervet, using all their technical, regulatory, and product development capabilities.

Pharma’s medium-term financial targets are an EBIT margin of around 17.5% and ROI of 35%. For the long-term, we strive for an EBIT-margin of over 20% and ROI of 40%.

Coatings

Our Coatings business is world leader in terms of revenues. It embraces most of the markets in both consumer and industrial applications for paints and coatings.

We are focusing on growth in the emerging markets of Asia, Eastern and Central Europe, and South and Central America through autonomous development and acquisitions. We will also continue to enhance our presence in the mature markets through selected acquisitions.

Our ambition is to remain the biggest coatings company in the world and also a leader in all our product markets and key geographic regions. We intend to participate in the consolidation of the coatings industry, which we believe is inevitable, as our supplier and customer bases strengthen globally.

Our global scale allows us to further develop our leading positions in technology. We are progressively increasing our investments in R&D towards 3.5% of revenues. Our increasing innovation efforts will allow better differentiation of our activities in the highly competitive markets in which we operate. We are also using our scale in purchasing of raw materials to secure our margins.

Our medium-term financial target is 25% ROI.

Chemicals

We have streamlined our Chemicals portfolio and are concentrating on growing profitable businesses which we have identified within selected strategic markets. This has resulted in our exiting non-core businesses and rationalizing support structures around the selected core platforms.

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The leading guideline is to focus on profitable growth in those market segments where we have a competitive advantage and can achieve sustainable, above-average financial returns.

We have now organized our activities in five growth platforms: Pulp & Paper Chemicals, Base Chemicals, Functional Chemicals, Surfactants, and Polymer Chemicals. We have made significant progress in 2005 with the divestment of the remaining non-core activities and the balance will be completed in the first half of 2006.

Our ambition is to strengthen our leading position in selected markets by investing in organic growth and through participating in industry consolidation.

Our financial target is to achieve ROI of around 17.5% over the cycle.

Financing Objectives

To ensure the sustained growth of our businesses, and to be able to finance expansion, we want to maintain a solid balance sheet. We aim for a well-spread maturity schedule of our long-term debt and a strong liquidity position.

We will defend our single A credit ratings.

ACTIVITIES OF AKZO NOBEL

Industry Segment Information

Akzo Nobel's financial reporting and industry segment information consists of results from the following segments: Organon, Intervet, Coatings, and Chemicals. The information presented below illustrates the relative importance of the individual segments.

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Percent of total revenues and total operating income

A summary of the activities of each segment is given below. For more details on Akzo Nobel’s activities, reference is made to “Business Review and Developments at Business Units”. See Item 5 “Operating and Financial Review and Prospects” for a discussion on factors affecting comparability between periods.

Description of Pharma's Business

Within the Pharma segment, the business is carried out in business units. The business units and their products (as at December 31, 2005) are summarized below:

PHARMA

Organon

Intervet

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Akzo Nobel’s healthcare activities extend around the world. It engages in research, development, manufacturing, and marketing in selected areas of human pharmaceuticals and animal health. These include prescription medicines, veterinary products, as well as complex active pharmaceutical ingredients.

In recent years, our Organon human healthcare business has experienced a phase of declining revenues. As a consequence, we have adjusted the strategy and the organization and have lowered the cost base.

We believe that in 2005, we saw the expected turning point. We believe the decline in revenues has bottomed-out and looking ahead we expect further top-line growth. To further strengthen the growth potential we have continued to invest heavily in R&D and pre-marketing to boost our pipeline. This temporary acceptance of a relatively low operational profit margin is in line with our medium-term value creation philosophy.

Akzo Nobel’s human healthcare business, Organon, has an international reputation based on quality products and innovative R&D. Through unprecedented commitment to women's health over many years, Organon has contributed significantly to three clinical areas of great importance in gynecology: contraception, fertility and hormone therapy. In addition, significant product candidates in the areas of psychiatric disorders and anesthesiology have been produced.

Organon is among a few international companies conducting research into contraception. Sold as Desogen^® in the United States, Marvelon^® is one of the world’s most prescribed contraceptive pills. However, sales of our oral contraceptives have been adversely affected by generic competition in the United States. NuvaRing^®, our contraceptive vaginal ring, has now been introduced in more than 25 countries and is steadily increasing sales in many markets. Puregon^®/Follistim^®, the biotech fertility product of Organon, has become one of our biggest selling products. Performance was particularly boosted by strong U.S. sales resulting from a successful launch of the Follistim Pen^® and relevant product line extensions. In 2005, Puregon^®/Follistim^® was also introduced in Japan and China.

Organon’s main pipeline drug in the CNS area is asenapine, developed in-house and currently in phase III development in collaboration with Pfizer. Asenapine is a novel psychopharmacologic agent that is currently

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being developed for the treatment of schizophrenia and acute mania in bipolar disorder. The unique profile of asenapine may help patients through control of positive and negative symptoms with a tolerability and safety profile that we believe to be superior to other products on the market. The phase III clinical development program for asenapine is expected to be finalized by the end of 2006. See “Risk Factors” for risks associated with the regulatory approval of pharmaceuticals under development.

Organon focused strongly on collaborations during 2005, with new alliances being established and some promising partnerships being prolonged.

Organon is also a leading manufacturer of complex active pharmaceutical ingredients, with production facilities in several countries. Organon provides market-driven and technology-based manufacturing of chemical and biochemical APIs as well as biotechnological compounds. Our expertise lies in complex organic chemistry and extractions for API manufacturing as well as in cell culture, fermentation, and chromatographic purification for biotechnology. We use these technologies to manufacture steroids, synthetic peptides, opiate analogues, carbohydrates, heparins, and human gonadotrophins in API manufacturing and insulin recombinant proteins as well as proprietary innovative products in biotechnology manufacturing. This expertise provides us with an improved foundation for integral product and process development regarding biotechnology. This focus on biotechnology also led to our entering into various R&D agreements with third parties during 2005.

Intervet, our animal health business, develops, manufactures, and markets a variety of innovative high-quality products intended for use in animals. Intervet’s diverse portfolio of marketed products covers species in livestock, such as poultry, cattle, sheep, pigs, and fish, and companion animals, such as cats, dogs, and horses, and includes both vaccines and animal pharmaceuticals (mainly anti-parasitic, anti-infective, and specialty pharmaceuticals such as endocrine fertility products and injectors for treating mastitis and metritis). Intervet has an international reputation and works closely with leading research institutes, universities, and other companies.

During 2005, large parts of the feed additive business were divested. These activities no longer fitted into the core business operations and had become distanced from Intervet's strategic focus.

In 2002, we launched the Nobilon business, to develop, license, and manufacture human vaccines, with particular emphasis on influenza. Nobilon became operational in mid-2003. We believe, this is a growing market where we can benefit from our experience in vaccines and biotechnology in general. The expertise and know-how of Organon and Intervet are combined in this area, utilizing their technical, regulatory, and product development capabilities. In addition to vaccines, we also intend to continue to pursue productive areas of cooperation in the research and development function, shared compound libraries, and formulation and process development.

The products in our drug development pipeline will change over time as new compounds progress from research to development and from development to market. Owing to the nature of the drug development process, it is not unusual for some compounds, especially those in the early stages of investigation, to be terminated as they progress through development.

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The following table shows our late-stage product candidates:

Explanatory remarks

Description of Coatings' Business

Within the Coatings segment, the business is carried out in business units. The business units and their products (as at December 31, 2005) are summarized below:

COATINGS

Decorative Coatings

Industrial Finishes

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Powder Coatings

Marine & Protective Coatings

Car Refinishes

Akzo Nobel is a leading producer of paints, finishes, stains, and synthetic resins for industrial applications, professional painters, and of products for the do-it-yourself sector. Product areas are decorative/ architectural paint, car refinishes, liquid and powder coatings for industrial use (on wood, plastics, and metal), marine and yacht coatings, protective coatings, aerospace coatings, and industrial and consumer adhesives.

Akzo Nobel’s global strategy for its coatings business is to extend leading positions in clearly defined product areas and specialist niche markets, which demand high levels of technical expertise and customer service.

The company supports the international initiative of Coatings Care^®–a program for continuous improvement in Safety, Health, and the Environment–and is constantly seeking optimal ways to match the principles of eco-efficiency with those of high performance.

Within the field of decorative coatings, Akzo Nobel has a number of top-quality professional and do-it-yourself brands, which target national markets (e.g. Crown^® (United Kingdom) and Flexa^® (the

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Netherlands)), multinational markets (e.g. Nordsjö^® and Trimetal^®), and truly international markets (e.g. Sikkens^®, Levis^®, and Sadolin^®). The strength of these brands reflects the company’s color know-how and customer orientation, as well as the excellent performance and high environmental profile of its waterborne and high-solids paints.

Another prominent area is industrial coatings, especially volatile organic compounds (“VOC”)-compliant waterborne paints, high solids, and powder coatings, which are used to beautify and protect metal, plastic, and wooden substrates. Applications range from home appliances to wooden furniture and heavy-duty goods vehicles. The company is the market leader in powder coatings and is strong in industrial wood finishes, coil coatings, and plastic coatings.

The Car Refinishes business includes the car repair and commercial vehicles sector. With Sikkens^®, Akzo Nobel Coatings has been a major player for years, ensuring a fast, efficient, and top-quality result for every type of repair. Combined worldwide expertise enables the company to continually develop new technologies and products of the highest quality. The company also offers the equipment and expertise to go with these products, such as the revolutionary Automatchic system, which permits bodyshops to measure and match colors on the spot, or the CarInfo II system, which automates administrative processes in the bodyshop and produces a wealth of management information that can greatly improve bodyshop profitability.

The company is an international market leader in marine, yacht, and protective coatings for heavy-duty applications, such as oil rigs. The company’s tradename International^® is well known all over the world. The company supplies antifouling coatings that keep ships’ and yachts’ hulls free of barnacles, making it easier for them to travel through the water and thereby saving fuel costs for owners. The company also provides paints for ships’ superstructures, such as Interfine^®, which transforms rust stains into colorless deposits.

The company offers a wide range of VOC-compliant coatings and other products qualified by the world’s major aircraft manufacturers and used for aircraft maintenance.

Description of Chemicals' Business

Within the Chemicals segment, the business is carried out in business units. The business units and their products (as at December 31, 2005) are summarized below:

CHEMICALS

Pulp and Paper Chemicals

Base Chemicals

Functional Chemicals

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Surfactants

Polymer Chemicals

Divestment unit

The portfolio of Akzo Nobel Chemicals is a mix of specialty, functional, and commodity chemicals based upon leading positions in selected areas of the chemical industry.

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In 2005, Akzo Nobel Chemicals made good progress, as it successfully implemented a strategy to streamline its portfolio in order to competitively realign the business for sustainable growth, profitability, and leadership positions in selected markets. The result is a smaller portfolio that is stronger, creates more value, and is better structured to meet our financial expectations. The Chemicals activities are now concentrated in five business units: Pulp & Paper Chemicals, Polymer Chemicals, Surfactants, Functional Chemicals, and Base Chemicals (the latter will comprise the Chlor-Alkali, Electrolysis Salt, and Energy businesses).

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The realignment of the Chemicals group also involved the planned divestment of a number of businesses with combined 2004 revenues of EUR 700 million. These businesses are among others Ink & Adhesive Resins, Oleochemicals, PVC Additives, Salt Specialties, Solar Salt Australia, and Methyl Amines/Choline Chloride. In the meantime, several of these businesses have been divested or offers have been received. The company expects to complete all remaining divestments resulting from the strategic realignment of its Chemicals portfolio during 2006. Recently, it was decided to withdraw Salt Specialties from its list of Chemicals businesses to be divested, as it became clear that a satisfactory deal based on the company’s original divestment offer would not be forthcoming. Flexsys, the 50/50-joint venture with Solutia, is also expected to be sold during 2006.

Akzo Nobel is a leader in environmentally compatible pulp bleaching chemicals, notably with sodium chlorate worldwide, and is strong in hydrogen peroxide. The company is also a prominent producer of chemicals for the wet-end manufacture of paper and board, notably retention and drainage agents, wet-strength resins, and sizing agents.

In Northwest Europe, the company has leading positions in the production of chlorine and caustic soda for industrial applications.

Akzo Nobel is the largest producer of salt for electrolysis in Northwest Europe, and manufactures high-quality evaporated salt with strong consumer brands such as JOZO^®. Both the production and electrolysis of salt require a great deal of energy. By operating in joint ventures with Dutch electricity distribution companies, the company is able to make use of combined heat and power generation (cogeneration, an energy efficient process during which both steam and electricity are generated at the same plant). The company has been active in cogeneration since the 1930s.

Akzo Nobel is strong in functional chemicals. It is the world’s principal producer of chelates, which deliver micronutrients to plants, and make organophosphorus-based fire retardants for plastics and hydraulic fluids. In addition, Akzo Nobel is a leading global producer of ethylene amines. Other key products include monochloroacetic acid, in which the company leads the worldwide market, as well as carboxymethyl cellulose, which serve as water-soluble thickening agents, and choline chloride, a food and animal feed additive.

In surfactants, Akzo Nobel is the market leader in cationic (fatty amine-based) surfactants in Europe and a major producer of non-ionic ethylene oxide-based surfactants. The company also makes specialty cellulose-based rheology additives for paint and building applications.

The company is the market leader in polymerization catalysts and additives for the processing and manufacturing of plastics worldwide. It produces organic peroxides for thermosetting and cross-linking applications, UV Cure Chemicals for the Graphic Arts, coatings and other industries, and polysulphide chemicals for the aerospace, marine and construction industries.

In addition, the company has established a strong presence, both globally and regionally, through joint ventures. Joint ventures include Flexsys, Delamine, and Eka Polymer Latex.

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GEOGRAPHIC DATA

Below, geographic information for Akzo Nobel is presented for revenues, operating income, identifiable assets, and expenditures for property, plant and equipment.

See Item 5 “Operating and Financial Review and Prospects” for a discussion on factors affecting comparability between periods.

INSURANCE

Akzo Nobel’s insurance policy is part of a general risk management philosophy emphasizing the importance of creation of risk awareness throughout the entire organization and promotion of loss control efforts. Risk finance, normally in the form of insurance, is seen as a last resort to provide financial coverage for mainly catastrophe-like events. Events of frequent nature with limited financial effect are self-insured with the use

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of 100-percent-owned captive insurance companies. The limits of insurance are based on loss scenarios as well as normal practice in Akzo Nobel’s type of industry.

For property damage/business interruption, for 2005 in general, the exposure retained in the captive insurance arrangements is limited to EUR 12 million per occurrence with an annual aggregate of EUR 30 million. When losses exceed this annual aggregate, external insurers will provide coverage from a deductible level of EUR 0.5 million. Damages from acts of terrorism are excluded from insurance coverage. For damages from natural disasters Akzo Nobel retains 5 percent of these damages. The maximum amount of loss covered by external insurers for property damage/business interruption is EUR 250 million.

For general and product liability of Coatings, Chemicals, and Intervet and for general liability of Organon (including Diosynth), in 2005 the exposure retained in the captive insurance arrangements is limited to EUR 10 million per claim with an annual aggregate of EUR 20 million. When losses exceed this annual aggregate, external insurers will provide coverage from a deductible level of EUR 0.5 million. For product liability of Organon (including Diosynth), in 2005 the exposure retained in the captive insurance arrangements is limited to EUR 25 million (EUR 40 million for HRT-products) per claim without any annual aggregate. Liabilities as a result of acts of terrorism are excluded from insurance coverage. The maximum amount of loss covered by external insurers for general product liability is EUR 450 million plus in excess thereof USD 150 million.

HUMAN RESOURCES

Akzo Nobel’s decentralized organizational structure supports its ambitions and offers the company’s employees broad scope and responsibility in various disciplines, permitting them to develop their talents at an early stage of their careers. Akzo Nobel provides opportunities and resources; employees can use these to develop their skills and to be ready for change even before it becomes a necessity. Some recent developments in this area are described below.

In 2005, Akzo Nobel began to establish consistent company-wide human resources programs with the objective of bringing best-in-class solutions to all businesses and to foster high quality management of our human resources. We believe that this is a significant step towards a stronger talent focus throughout the company and that it will create synergies between all businesses by providing a common agenda, processes, and tools for all employees and managers.

A common performance appraisal program, the Performance & Development Dialog (P&D Dialog), was launched in January 2005. In the first year alone, more than 80% of all employees took part in this process, with the remainder due to participate from 2006 onwards. We believe that the success of each of Akzo Nobel’s businesses depends on the quality of our people–their continued growth and development. We therefore need strong people management and strong human resources programs in all our businesses.

We need to continue to drive for a high performance culture, which is in alignment with our Business Principles. The P&D Dialog embraces all these elements and gives all of our global businesses a common process and vocabulary for setting and appraising performance objectives. It also enables and supports an ongoing dialog and feedback discussion between employee and manager in all phases of the annual process, from objective setting through to mid-year review, year-end assessment, rating, and feedback discussions.

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In order to compete in the marketplace both now and in the future, we believe that there are key qualities and critical capabilities that will help us to remain a successful company. The P&D Dialog, therefore, also enables performance differentiation based on globally consistent competencies:

We also stress the importance of high quality people management by clearly expressing the need for managers to emphasize important factors such as the continuous management of performance, an ongoing focus on developing others, and the stimulation of an open climate in all teams. As part of the P&D Dialog, the year-end assessment also includes an assessment and dialog on these competencies and capabilities. They will also form part of short and long-term development discussions, which will be introduced as part of a planned extension of the P&D Dialog in 2006.

The development of the future leadership of Akzo Nobel is a key responsibility of the company’s current leadership. In order to complement the existing leadership talent focus and to facilitate a more structured and global approach, we established a company-wide program in 2005 for the identification and review of leadership talent.

RESEARCH AND DEVELOPMENT

Through strong customer and market orientation, our R&D activities provide an excellent platform for sustainable business development. We are focusing on innovative approaches and technologies that ensure continuity and profitable growth. In 2005, R&D expenditures amounted to EUR 834 million, up 2 percent on 2004. The main driver continued to be Organon, which accounted for 52 percent of Akzo Nobel’s total R&D expenditures. Total R&D staff decreased from 6,700 at year-end 2004, to 6,600 at year-end 2005. Organon’s R&D expenses were 18 percent of revenues, reflecting its continuous commitment to research and development. R&D expenditures as incurred by each of the groups are as follows:

Organon

In 2004, Organon radically changed its R&D policy and structure. The organizational structure now covers the entire R&D process from the early exploratory stage up to demonstration of Proof of Concept. This new policy focuses even more on the elaboration of new creative ideas, but always against the backdrop of sufficient output generation. Over time, we hope this approach will contribute to the development of innovative drug candidates.

In terms of Research & Development, Organon spent about 18% of its 2005 revenues on R&D, focusing mainly on promising compounds within phases II and III. This trend is expected to continue.

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Organon’s main pipeline drug in the CNS area is asenapine, developed in-house and currently in phase III development in collaboration with Pfizer. Asenapine is a novel psychopharmacologic agent that is currently being developed for the treatment of schizophrenia and acute mania in bipolar disorder. The unique profile of asenapine may help patients through control of positive and negative symptoms with a tolerability and safety profile that we believe to be superior to other products on the market. The phase III clinical development program for asenapine is expected to be finalized by the end of 2006. See “Risk Factors” for risks associated with the regulatory approval of pharmaceuticals under development.

Sugammadex is another promising compound currently in phase III.

For Livial^® in the United States, additional data was submitted to the FDA in December. In June 2006, however, the FDA determined that the NDA submitted for this product was “not approvable”.

We also received an action letter from the FDA in June 2005 for our contraceptive implant Implanon^® (etonogestrel) which maintained the “approvable” status of this New Drug Application (NDA). and requested additional information; in January 2006, we submitted additional information to the FDA in response to its request. We hope to be in a position to launch Implanon^® in the United States in the second half of 2006. See “Risk Factors” for risks associated with the regulatory approval of pharmaceuticals under development.

In order to expand our biotechnology capabilities into new therapeutic areas, we established a new biotechnology research facility in Cambridge, Massachusetts, in June 2005, which focuses on monoclonal antibody research in immunology and certain areas of oncology. Together with our operations in Oss, the Netherlands, this facility is expected to be central to the expansion of our research into New Biological Entities (“NBEs”).

Our focus on biotechnology also led to R&D agreements with various third parties during 2005. A collaborative agreement was signed with Lexicon Genetics, with the intention to jointly discover, develop, and commercialize novel biotherapeutics. Agreements were also signed in the United States with Cypress to codevelop and commercialize a novel pharmacological treatment for Obstructive Sleep Apnea.

A development and marketing agreement was also signed with Théramex SA in France (a subsidiary of Merck KGaA) to in-license their contraceptive NOMAC/E₂ and to commence Phase III trials and co-market the final developed oral contraceptive. Furthermore, Organon entered into several other partnerships, most recently with French-based Sanofi-Aventis for the sale and distribution of the postoperative nausea and vomiting treatment Anzemet^® (a trademark of Merrell Pharmaceuticals Inc.) in the United States.

Intervet

Intervet will continue to focus on major food and companion animal markets, and we hope to see positive trends beyond 2005, when the introduction of new products resulting from our extensive research and development programs should enhance our existing portfolio. The acquisition of AgVax Developments Ltd enables Intervet to benefit from AgVax’s close collaboration with its former parent company, AgResearch, New Zealand’s largest Crown Research Institute.

Nobilon

In 2002, Akzo Nobel launched its Nobilon business to develop, license and manufacture human vaccines on a global scale, with particular emphasis on influenza. Nobilon is working on the development of vaccines used for annual revaccination of humans against influenza, and on vaccines that will be used to control the impact of a human influenza pandemic. Working from a dedicated, fully licensed facility in the Netherlands,

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Nobilon produces antigens for our business and uses cell culture technology in the research and development of its vaccines. The advantages of cell culture technology include not having to use eggs, which may become scarce during an influenza outbreak. Tissue culture processes also allow for better technical control during production compared with traditional methods using eggs.

We are also working on a vaccine for use in the event of an avian influenza pandemic. Licensing of this product depends on developments in the field and on the emergency procedures that would be issued by the regulatory bodies should the threat of a pandemic necessitate such procedures.

Coatings

In the customer-driven, technology-based organization of the Coatings business units the main driver for R&D is defining customer specific solutions. The framework for the carefully balanced portfolio of both short-term and long-term innovation projects is set by three main prerequisites:

These projects are executed by the various business units in geographically spread locations, always in the vicinity of the markets they serve. Examples of achievements during 2005 are:

The focus of our long-term-innovative R&D programs is gradually shifting toward new generation polymer engineering, applying new academic science, and creatively utilizing the potential of nanotechnology.

Chemicals

Continuous upgrading of core technologies is a key issue for all Chemicals business units in order to achieve and secure competitive market advantages. Therefore, R&D programs are customer-oriented, maintaining an adequate balance between short-term and long-term innovation goals. Sustainability is a major driver in the R&D efforts for both current and future operations and products. These programs are executed through R&D resources embedded in the individual business centers, with R&D units in place in all major markets.

To ensure access to developments in the scientific world and to be able to explore and exploit the latest technologies, business units also collaborate on technology programs, often including university partners. These efforts are supported by centers of excellence. These programs include:

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With the aim to start up and significantly grow (new) businesses, an integrated team of business and R&D professionals–called The Innovations Unit–exploits ideas, internal competencies, and portfolio synergies. This approach has already led to promising results. R&D successes were particularly achieved in the area of process yield improvements at several production units of Polymer Chemicals, promising new developments in the areas of product quality and costs, both for vacuum and solar salt operations, improvement of energy efficiency in Akzo Nobel’s processes, and improvement in the efficiency of energy production by our joint ventures through combined heat and power generation.

CORPORATE SOCIAL RESPONSIBILITY

Corporate Social Responsibility (“CSR”) is a fundamental component of our business strategy and key to the long-term success of Akzo Nobel. We are convinced that sustained growth requires simultaneous success in developing our employees, caring for the environment, and contributing to the societies in which we operate. We want to be known as a responsible company and to be open and accountable to our stakeholders.

Legitimate concerns in society have led to greater transparency, as well as to a fostering of better relations with all stakeholders. For Akzo Nobel, the key challenge has been to continue the process of anchoring CSR systematically in organizational structures and processes. All the company’s businesses are expected to monitor progress and set ambitious CSR targets during the strategic planning processes.

In 2005, for the first time, Akzo Nobel was included on the Dow Jones Sustainability Indexes, a series of global sustainability benchmarks first launched in September 1999. This followed our decision to use the SAM (Sustainable Asset Management) Group’s review process to measure our CSR performance. This will enable us to target key areas for improvement with respect to the economic, environmental, and social aspects of our operations, and to benchmark our performance against our peers.

Other milestones during 2005 included the launch of our first CSR Report–the second was published in April 2006 – prior to the Annual General Meeting of Shareholders. We embraced Responsible Care^® (a trademark of the European Chemical Industry Council) and Coatings Care^® further by formally implementing the Responsible Care^® Global Charter. We also introduced a Privacy Code of Conduct aimed at protecting all privacy data relating to employees, suppliers, customers and others, and provided financial and physical support to communities affected by natural disasters in Southeast Asia, Romania, India, and the United States. We also focused on improving our product stewardship lifecycle efforts in all our operations, and on maintaining a good safety record.

In the first quarter of 2006, Akzo Nobel’s strong commitment to CSR has received further recognition with an inclusion on the FTSE Group’s prestigious FTSE4Good Index. The European equivalent of the Dow Jones Sustainability Indexes in the United States (on which Akzo Nobel was included last year), the FTSE4Good indexes–which are used extensively by investors worldwide–measure the performance of companies that meet globally recognized CSR standards.

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Community Program

In June 2005, the Akzo Nobel Community Program was launched. This is a unique, worldwide initiative designed to encourage employees to become actively involved in the local communities in which they live and work. The program makes funding available to people at all our sites, giving them the opportunity to become engaged in worthwhile projects in their own communities. It was launched in tandem with a partnership between Akzo Nobel and the Red Cross which will focus on projects in China and Indonesia and will also give employees the chance to get involved.

We regard the Akzo Nobel Community Program as a clear expression of the company’s commitment to being socially responsible, a core value which is embedded in our Company Statement. The Board of Management will therefore annually review the funding based on the success of the Community Program and our company’s financial performance.

BUSINESS REVIEW AND DEVELOPMENTS AT BUSINESS UNITS

For financial details on acquisitions or divestments, reference is made to Note 2 of the Notes to the Consolidated Financial Statements.

ORGANON – Prescription Drugs

Business Review

Revenues 2005: EUR 2,425 million; 2004: EUR 2,344 million

Organon’s revenues in 2005 (EUR 2,425 million, up 3%) started growing again following several years of declining revenues since Remeron^® lost its exclusive rights in the United States. The lack of new product introductions in the main markets has also had an impact in recent years. But the strong performances of Puregon^® and NuvaRing^® were instrumental in contributing to this return to growth in 2005.

Organon’s main products developed as follows: