**As
      filed with the Securities and Exchange Commission on May 29,
      2006**


UNITED
        STATES


**SECURITIES
      AND EXCHANGE COMMISSION**


Washington
      D.C. 20549


**___________**


**FORM
      20-F**




o
              REGISTRATION
                  STATEMENT PURSUANT TO SECTION 12(b) OR 12(g) OF THE SECURITIES
                  EXCHANGE
                  ACT OF 1934
 OR
 x
              ANNUAL
                  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
                  ACT OF
                  1934
 for
                  the fiscal year ended December 31,
                  2005
 OR
 o
              TRANSITION
                  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
                  ACT OF
                  1934
 OR
 o
              SHELL
                  COMPANY PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE
                  ACT OF
                  1934
 **Commission
        file number 0-12828**





**AKTIEBOLAGET
      VOLVO (publ)**


*(Exact
      name of Registrant as specified in its charter)*





**VOLVO
      CORPORATION**


*(Translation
      of Registrant's name into English)*





**Kingdom
      of Sweden**


*(Jurisdiction
      of incorporation or organization)*





**S-405
      08**


**Göteborg,
      Sweden**


*(Address
      of principal executive offices)*





Securities
      registered pursuant to Section 12(b) of the Act:
**None**





Securities
      registered pursuant to Section 12(g) of the Act:





**Title
                of class**
            **Name
                of each exchange on which registered****Class
                B, common stock**
              **quota
                value SEK 6,**
              **American
                Depositary Shares**
              **each
                representing one Share**
              **of
                class B common stock**
            **NASDAQ**





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 stock as of the close of the period covered by the annual
      report:




**A
                shares**
            **131,374,699****B
                shares**
            **273,088,810**




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


Yes x No
      o




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


Yes o 
No
x





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, as
      amended, 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 x** **No o** **Not Applicable o**





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 x Accelerated
      Filer o   Non-Accelerated
      Filer o





Indicate
      by check mark which financial statement item the Registrant has elected to
      follow: ****





**Item
      17 o** **Item 18** **x**





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




Yes o 
No
x











INTRODUCTION
              AND USE OF CERTAIN TERMS
            3Certain
              Forward-Looking Statements
            4PART I
            
            5ITEM 1.
                IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND
                ADVISERS
            5ITEM
                2. OFFER STATISTICS AND EXPECTED
                TIMETABLE
            5ITEM
                3. KEY INFORMATION
            5


3.A.
            Selected
                Financial Data
            53.B.
            Capitalization
              and Indebtedness
            83.C.
            Reasons
              for the offer and use of proceeds
            83.D.
            Risk
              factors
            8ITEM
                  4. INFORMATION ON THE COMPANY
            124.A.
            History
              and Development of Company
            124.B.
            Business
              Overview
            174.C.
            Organizational
              Structure
            334.D.
            Property,
                Plants and Equipment
            33ITEM
              4A. UNRESOLVED STAFF COMMENTS
            34ITEM
              5. OPERATING AND FINANCIAL REVIEW AND
              PROSPECTS
            355.A.
            Operating
                Results.
            355.B.
            Liquidity
              and Capital Resources
            405.C.
            Research
              and Development, Patents and Licenses
            465.D.
            Trend
              Information
            465.E.
            Off-Balance
              Sheet Arrangements
            475.F.
            Tabular
              Disclosure of Contractual Obligations
            47ITEM
              6. DIRECTORS, SENIOR MANAGEMENT AND
              EMPLOYEES
            486.A.
            Directors
              and Senior Management
            486.B.
            Compensation
            546.C.
            Board
                Practices
            546.D.
            Employees
            546.E.
            Share
                Ownership
            55ITEM
              7. MAJOR SHAREHOLDERS AND RELATED PARTY
              TRANSACTIONS
            577.A.
            Major
              Shareholders
            577.B.
            Related
                Party Transactions
            577.C.
            Interests
                of Experts and Counsel
            58ITEM
              8. FINANCIAL INFORMATION
            598.A.
            Consolidated
                Statements and Other Financial
                Information
            598.B.
            Significant
                Changes
            60ITEM
              9. THE OFFER AND LISTINGS
            619.A.
            Offer
              and Listing Details
            619.B.
            Plan
              of Distribution
            629.C.
            Markets
            629.D.
            Selling
                Shareholders
            629.E.
            Dilution
            629.F.
            Expenses
              of the Issue
            62ITEM
                10. ADDITIONAL INFORMATION
            6210.A.
            Share
              capital
            6210.B.
            Memorandum
                and articles of association
            6310.C.
            Material
              contracts
            6510.D.
            Exchange
                controls
            6510.E.
            Taxation
            6510.F.
            Dividends
                and paying agents
            6910.G.
            Statement
                by experts
            6910.H.
            Documents
                on display
            6910.I.
            Subsidiary
              Information
            69ITEM
              11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
              MARKET RISK
            69ITEM
              12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY
              SECURITIES
            69PART
              II
            
            70ITEM
              13. DEFAULTS, DIVIDEND ARREARAGES AND
              DELINQUENCIES
            70ITEM
                  14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY
                  HOLDERS AND USE OF PROCEEDS
            70ITEM
              15. CONTROLS AND PROCEDURES
            70ITEM
              16. AAUDIT
              COMMITTEE FINANCIAL EXPERT
            70ITEM
              16. BCODE
              OF ETHICS
            70ITEM
              16. CPRINCIPAL
              ACCOUNTANT FEES AND SERVICES
            71ITEM
              16. D EXEMPTION FROM THE LISTING STANDARDS FOR AUDIT
              COMMITTEES
            71ITEM
              16. E PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND
              AFFILIATED PURCHASERS
            72  1
  PART
                III
              73ITEM
                  17. FINANCIAL STATEMENTS
              73ITEM
                  18. FINANCIAL STATEMENTS
              74ITEM
                  19. EXHIBITS
              75SIGNATURES
              76




2






**INTRODUCTION
      AND USE OF CERTAIN TERMS**




Unless
      otherwise indicated, all amounts herein are expressed in Swedish kronor
      (“krona”, “kronor” or “SEK”) or in United States dollars (“dollars” or “US$”).
      Merely for the convenience of the reader, this Annual Report presents
      translations into dollars of certain krona amounts. Unless otherwise stated,
      such translations have been made at the noon buying rate of dollars in terms
      of
      kronor in New York City for cable transfers as certified for customs purposes
      by
      the Federal Reserve Bank of New York (the “Noon Buying Rate”) on December 31,
      2005, which was 7.937 kronor per dollar (0.126 U.S. dollars per krona). The
      Noon
      Buying Rate on December 31, 2005 differs from certain of the actual rates used
      in the preparation of the consolidated financial statements of Volvo, which
      are
      expressed in kronor, and therefore, dollar amounts appearing herein may differ
      significantly from actual dollar amounts which were translated into kronor
      in
      the preparation of those consolidated financial statements in accordance with
      accounting principles generally accepted in Sweden. See “Item 3. Key Information
      - 3.A. Selected Financial Data”. No representation is made that krona amounts
      have been, could have been or could be converted into dollars at the Noon Buying
      Rate on December 31, 2005 or on any other date as of which a convenience
      translation based on the Noon Buying Rate was 7.937 kronor per dollar (0.126
      U.S. dollars per krona).




________________________________________________





As
      used
      herein, “Volvo”, the “Company” or the “Group” refers to Aktiebolaget Volvo and
      its consolidated subsidiaries and “AB Volvo” refers to Aktiebolaget Volvo,
      unless the context indicates otherwise. “Trucks” refers to the combined truck
      operations of the Volvo Group, consisting of the truck brands Mack, Renault
      Trucks and Volvo, which are individually referred to as “Mack Trucks”, “Renault
      Trucks” and “Volvo Trucks”, respectively.




________________________________________________


From
      January 1, 2005, AB Volvo prepared its consolidated financial statements in
      accordance with International Financial Reporting Standards as adopted by the
      European Union (“IFRS”). IFRS as adopted by the EU differ in certain respects
      from IFRS as issued by the International Accounting Standards Board (IASB).
      However, the consolidated financial statements for the periods presented would
      not be materially different had the Company applied IFRS as issued by the IASB.
      References to IFRS hereafter should be construed as references to IFRS as
      adopted by the EU. AB Volvo restated its financial statements from January
      1,
      2004 to IFRS. See Notes 1 and 3 to the consolidated financial statements. In
      addition, consolidated net income and stockholders’ equity are reported as
      reconciled to United States generally accepted accounting principles (“U.S.
      GAAP”). Unless otherwise indicated, all amounts and percentages presented herein
      are based on IFRS. IFRS as applied by the Company differs in certain significant
      respects from U.S. GAAP. For a discussion of the significant differences between
      IFRS and U.S. GAAP affecting AB Volvo’s consolidated financials statements and
      reconciliation to U.S. GAAP of consolidated stockholders’ equity and
      consolidated net income as of and for the years ended December 31, 2005 and
      2004, see Note 37 to the consolidated financial statements. As a result of
      AB
      Volvo’s transition to IFRS reporting, certain amendments have been made to the
      adjustments recorded in its reconciliation of net income and equity under U.S.
      GAAP for the financial year 2004.




________________________________________________





At
      times,
      this annual report presents financial and other information for a specific
      year
      that is immediately followed by an amount within (brackets). This amount within
      (brackets) represents the corresponding amount for the previous
      year.




________________________________________________


Volvo
      owns
      or otherwise has rights (as described under the section “Patents, Trademarks and
      Licenses” below) to a substantial number of trademarks that it uses in
      conjunction with its business, including, but not limited to, the following
      trademarks mentioned in this Annual Report: “Volvo”, “Volvo Penta”, “Renault”,
“Mack”, “Duoprop” and “Aquamatic” (see “Item 4. Information on the Company
 — 4.B Business Overview — Patents, Trademarks and Licenses”).




________________________________________________
   3
  Certain
          information presented in this annual report on Form 20-F relating to the
          markets
          in which Volvo operates, such as the size of the particular market and
          the
          market share of Volvo within such markets, has been obtained by Volvo from
          market research reports, analysts’ reports and other publicly available
          information, as well as from internally developed market data. While Volvo
          has
          no reason to believe that third-party sourced information is not reliable,
          such
          information has not been independently verified. Accordingly, the accuracy
          or
          completeness of this information cannot be guaranteed.


**Certain
      Forward-Looking Statements**




This
      Annual Report on Form 20-F includes “forward-looking statements” within the
      meaning of Section 27A of the U.S. Securities Act of 1933, as amended, and
      Section 21E of the U.S. Securities Exchange Act of 1934, as amended. Certain
      statements included in this Annual Report, including without limitations, those
      concerning (i) Volvo’s strategies, (ii) the economic outlook for the commercial
      transport equipment industries, (iii) expectations regarding prices, (iv) the
      development and commercial introduction of new products, (v) the quantitative
      and qualitative disclosures about market risk and (vi) Volvo’s liquidity and
      capital resources and expenditures, contain certain forward-looking statements
      concerning the Company’s operations, economic performance and financial
      condition. These statements can often be identified by the use of
      forward-looking terminology such as “believes”, “expects”, “may”, “are expected
      to”, “will”, “will continue”, “should”, “seeks”, or “anticipates”. Although the
      Company believes that the expectations reflected in such forward-looking
      statements are reasonable, no assurance can be given that such expectations
      will
      prove to have been correct. Accordingly, results could differ materially from
      those set out in the forward-looking statements as a result of, among other
      factors, (i) changes in economic, market and competitive conditions, (ii)
      success of business and operating initiatives, (iii) changes in the regulatory
      environment and other government actions, (iv) fluctuations in exchange rates
      and (v) risks inherent in business management.




Certain
      of
      these factors are discussed in more detail elsewhere in this annual report,
      including under “Item 3.D-Risk Factors” and “Item 5-Operating and Financial
      Review and Prospects”. Volvo undertakes no obligation to publicly update or
      revise any forward-looking statements, whether as a result of new information,
      future events or otherwise, except as required by law or stock exchange
      regulation. It is not possible to foresee or identify all factors that could
      cause future results to differ from expected or historic results. Therefore,
      investors should not consider the foregoing factors to be an exhaustive
      statement of all risks, uncertainties or factors that could potentially cause
      actual results to differ from projections in this annual report.






4




**PART I**




**ITEM 1.
      IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND
      ADVISERS**




Not
      applicable.





**ITEM
      2. OFFER STATISTICS AND EXPECTED
      TIMETABLE**




Not
      applicable.





**ITEM
      3. KEY INFORMATION**




**3.A****Selected
      Financial Data**




The
      selected financial data set forth below as at and for each of the years ended
      December 31, 2004 and 2005 has been prepared in accordance with IFRS and derived
      from the consolidated financial statements of Volvo. See “Item 18 - Financial
      Statements”. The selected financial data set forth below as at and for the years
      ended December 31, 2001, 2002 2003, 2004 and 2005 has been prepared in
      accordance with U.S. GAAP and derived from the consolidated financial statements
      of Volvo. See Item 8 - Financial Statements.




This
      selected financial data should be read in conjunction with, and is qualified
      in
      its entirety by reference to, the consolidated financial statements and notes
      thereto included in Item 18 of this annual report.




**AMOUNTS
                  IN ACCORDANCE WITH IFRS from 2004****1,**(In
                  millions, except per share amounts)2004
              3
              2005
              
              2005
              4SEK
              
              SEK
              
              USDNet
                  sales
              211,076
              
              240,559
              
              30,309Net
                  sales from continuing operations
              211,076
              
              240,559
              
              30,309Operating
                  income
              14,679
              
              18,151
              
              2,287Net
                  income
              9,907
              
              13,106
              
              1,651Net
                  income per share5
              23.58
              
              32.21
              
              4.06Diluted
                  income per share
              23.55
              
              32.16
              
              4.05Cash
                  dividends per share6
              12.50
              
              16.75
              
              2.11Total
                  assets
              223,968
              
              257,135
              
              32,397Non-current
                  liabilities
              45,064
              
              48,814
              
              6,150Shareholders’
                  equity
              70,155
              
              78,768
              
              9,924Share
                  capital
              2,649
              
              2,554
              
              322Weighted
                  average number of shares. (in thousands)7
              418,528
              
              405,242
              
              405,242






5




2004
              3
              
              2005
              
              
              2005
              4**AMOUNTS
                  IN ACCORDANCE WITH U.S. GAAP****1**SEK
              
              
              SEK
              
              
              USDOperating
                  income (loss)
              
              19,010
              
              
              16,051
              
              
              2,022Net
                  income (loss)
              
              14,416
              
              
              11,396
              
              
              1,436Basic
                  net income  per share5
              
              34.44
              
              
              28.12
              
              
              3.54Diluted
                  net income per share5
              
              34.40
              
              
              28.08
              
              
              3.54Shareholders’
                  equity
              
              73,079
              
              
              79,486
              
              
              10,015




2001
              
              2002
              2
              2003**AMOUNTS
                  IN ACCORDANCE WITH U.S. GAAP****1****for the years 2001-2003**SEK
              
              SEK
              
              SEKNet
                  sales
              189,280
              
              186,198
              
              183,291Operating
                  income (loss)
              (4,014)
              
              (5,171)
              
              5,275Net
                  income (loss)
              (4,320)
              
              (6,265)
              
              3,979Income
                  (loss) from continuing operations
              (4,320)
              
              (6,265)
              
              3,979Basic
                  net income (loss) per share8
              (10.23)
              
              (14.94)
              
              9.49Diluted
                  net income (loss) per share8
              (10.23)
              
              (14.94)
              
              9.48Income
                  per share from discontinued operations8
              -
              
              -
              
              -Income
                  (loss) per share from continuing operations8
              (10.23)
              
              (14.94)
              
              9.49Total
                  assets
              258,426
              
              232,126
              
              232,180Shareholders’
                  equity
              81,291
              
              71,182
              
              74,790Share
                  capital
              2,649
              
              2,649
              
              2,649Weighted
                  average number of shares. (in thousands)7
              422,429
              
              419,445
              
              419,445Cash
                  dividends per share6
              8.00
              
              8.00
              
              8.00




1
            The
                consolidated financial statements of Volvo are prepared in accordance
                with
                IFRS, from 2005 with the comparison year 2004 restated accordingly.
                IFRS
                differs in certain respects from generally accepted accounting principles
                in the United States (US GAAP). See Notes 1 and 37 to the consolidated
                financial statements.





2
            Net
                income (loss) in 2002 in accordance with US GAAP included value
                adjustments amounting to SEK 9,683 million pertaining to Volvo’s
                shareholdings in Scania AB, Deutz AB and Henlys Group plc. If a security’s
                quoted market price has been below the carrying value for an extended
                period of time, US GAAP includes a presumption that the decline is
                other
                than temporary. Under such circumstances, US GAAP requires that a
                value
                adjustment must be recorded in net income with a corresponding credit
                to
                Other comprehensive income.





3
            In
                2004, operating income from continuing operations under IFRS included
                a
                write-down of shares in Henlys Group plc amounting to SEK 95 million
                and a
                positive revaluation of shares in Scania AB amounting to SEK 915
                million.
                In accordance with US GAAP earlier recorded value adjustments have
                been
                reversed amounting to net, positive, SEK 5.157
                million.





4
            Translated
                for convenience at US$ 1 = SEK 7.937 the Noon Buying Rate on December
                30,
                2005. Such translations should not be construed as representations
                that
                the SEK amounts represent, or have been or could be converted into,
                United
                States dollars at that or any other
                rate.




6




5
            Net
                income (loss) per share is calculated as net income divided by the
                weighted average number of shares outstanding during the year. The
                weighted average number of shares outstanding during 2005 was
                405,242,037.





6
            Cash
                dividends are those declared out of the unrestricted equity of the
                parent
                company as recommended by the Board of Directors and approved by
                the
                Annual General Meeting of Shareholders held in the spring of the
                following
                year. In addition to a cash dividend of SEK 8.00 per share, the Board
                of
                Directors in March, 2004, proposed the Annual General Meeting to
                approve a
                dividend of 2 shares in the wholly owned subsidiary Ainax AB for
                every 31
                shares in AB Volvo. Ainax AB would at the date of the distribution
                hold
                27,320,838 Series A shares in Scania AB and a working capital of
                SEK 100
                million. At the Annual General Meeting of AB Volvo on April 16, 2004,
                the
                Board’s proposal was approved. Based upon the carrying value of the net
                assets at April 16, 2004, the dividend of shares in Ainax AB represents
                a
                value of approximately SEK 15.00 per Volvo
                share.





7
            On
                January 2, 2001, the 13,860,494 Class A shares and 30,291, 594 Class
                B
                shares that were repurchased during 2000 were transferred to Renault
                S.A.
                as partial payment for the shares of Renault V.I. and Mack Trucks.
                Subsequently during the beginning of 2001, AB Volvo repurchased an
                additional 10% of its outstanding shares - 13,860,494 Class A shares
                and
                30,291,594 Class B shares of which 5% - 6,930,247 Class A shares
                and
                15,145,797 Class B shares were transferred to Renault S.A. as final
                payment for the shares of Renault V.I. and Mack Trucks. Following
                these
                transactions, 419,444,842 Volvo shares were outstanding at December
                31,
                2001, and the weighted average number of shares outstanding in 2001
                was
                422,429,364.





The
                weighted average number of shares outstanding during 2002 and 2003
                was
                419,444,842.





On
                June 17, 2004, the Board of AB Volvo decided to acquire, through
                purchase
                on the Stockholm Stock Exchange, a maximum of 22,076,045 Series A
                and/or B
                shares, not exceeding a total purchase amount of SEK 4,300 million.
                By
                year-end 2004, a total of 9,315,000 Volvo A and B shares were repurchased
                equivalent to SEK 2,532 million. The total number of shares held
                by Volvo
                as treasury stock at year-end was 31,391,043 or 7.1% of the registered
                shares whereof Series A shares 7,075,246 and Series B shares 24,315,797.
                The weighted average number of shares outstanding during 2004 was
                418,528,773. During 2005, a total of 5,730,000 Volvo shares were
                repurchased.





Total
                share capital by year end 2004 amounted to SEK 2,649 million and
                was based
                on 441,520,885 registered shares. During 2005 share capital was reduced
                by
                SEK 95 million through cancellation without repayment of 3,084,619
                Series
                A shares and 12,752,222 Series B shares. After reduction share capital
                amounts to SEK 2,554 million and is based on 425,684,044 registered
                shares. The total number of registered shares by year end 2005 amounted
                to
                425,684,044. Volvo held 5% of the registered shares at year end 2005,
                21,220,535 shares whereof Series A shares 4,145,627 and Series B
                shares
                17,074,908. The total number of outstanding Volvo shares by year
                end 2005
                amounted to 404,463,509 whereof Series A shares 131,374,699 and Series
                B
                shares 273,088,810. The average number of outstanding shares was
                405,242,037 in 2005.





8
            U.S.
                GAAP basic and diluted net income (loss) per share is calculated
                as net
                income (loss) determined in accordance with U.S. GAAP divided by
                the
                weighted average number of shares outstanding during the year. Diluting
                securities during the period have impacted the average numbers of
                shares
                with 11 thousand, 117 thousand, 494 thousand and 625 thousand, for
                the
                respective year 2002, 2003, 2004 and
                2005.




**Exchange
      Rates**




Fluctuations
      in the exchange rate between the krona and the dollar will affect the dollar
      equivalent of the krona price of the B Shares traded on the Stockholm Stock
      Exchange and, as a result, should affect the price of the American Depositary
      Shares in the United States. Such fluctuations will also affect the dollar
      amounts received by holders of American Depositary Shares on conversion by
      the
      depositary of cash dividends paid in kronor on the B Shares represented by
      the
      American Depositary Shares.




Since
      a
      substantial portion of the Company’s sales are sales outside Sweden (93% in 2004
      and 94% in 2005), earnings are materially affected by movements in the exchange
      rate between the krona and the currencies in which such sales are invoiced.
      See
“ Item 5. Operating and Financial Review and Prospects - 5.A Operating Results
      -
      General Impact of Currency Fluctuations.”




The
      following table sets forth certain information with respect to the Noon Buying
      Rate for cable transfers in SEK as certified for customs purpose by the Federal
      Reserve Bank of New York for the years shown:




7




Year
            
            Average1
            
            High
            
            Low
            
            Period-End2001
            
            
            10.4328
            
            
            11.0270
            
            
            9.3250
            
            
            10.45712002
            
            
            9.6571
            
            
            10.7290
            
            
            8.6950
            
            
            8.69502003
            
            
            8.0351
            
            
            8.7920
            
            
            7.1950
            
            
            7.19502004
            
            
            7.3320
            
            
            7.7725
            
            
            6.5939
            
            
            6.66872005
            
            
            7.5170
            
            
            8.2434
            
            
            6.7312
            
            
            7.9370November
                2005
            
            
            -
            
            
            8.2434
            
            
            7.9749
            
            
            -December
                2005
            
            
            -
            
            
            8.1162
            
            
            7.8323
            
            
            -January
                2006
            
            
            -
            
            
            7.8097
            
            
            7.5385
            
            
            -February
                2006
            
            
            -
            
            
            7.9656
            
            
            7.6487
            
            
            -March
                2006
            
            
            -
            
            
            7.9604
            
            
            7.6491
            
            
            -April
                2006
            
            
            -
            
            
            7.7580
            
            
            7.3579
            
            
            - _________


1
            The
                average of the Noon Buying Rates on the last day of each month during
                the
                year.




The
      noon
      buying rate on May 10, 2006 was 7.2867.




**Credit
      ratings**




In
      October
      2005 Moody's Investors Service assigned a global long term A3 rating (stable
      outlook) on AB Volvo (publ) and confirmed its global short term P-2 rating.
      The
      following rating agencies confirmed its credit ratings on AB Volvo (publ) in
      2005; Standard & Poor's International Ratings confirmed its global short
      term A2 rating ; Dominion Bond Rating Services confirmed its short term R-1
      (low) rating for Volvo’s short term borrowing in the Canadian market, and its
      unsolicited long term rating A (low) (stable outlook); Rating and Investment
      Information, Inc. confirmed its long-term rating to A+ in the Japanese market.
      Volvo Treasury AB is assigned a K-1 rating by Standard & Poor's for
      short-term borrowing in Sweden. Fitch Ratings confirmed its global unsolicited
      short term rating F2, and the unsolicited long term rating A- (stable
      outlook).




**Inflation**




The
      effects of inflation on the Group’s operations have not been significant in
      recent years.




**3.B.****Capitalization
      and Indebtedness**




Not
      applicable.





**3.C****Reasons
      for the offer and use of proceeds.**




Not
      applicable.





**3.D****Risk
      factors******




**The
      commercial vehicles industry is cyclical.** Historically,
      the Volvo Group’s markets have undergone significant changes in demand as the
      general economic environment has fluctuated. Investments in infrastructure,
      major industrial projects, mine operations and housing construction all impact
      the Group’s operations, since its products are an important part of these
      activities. Economic trends in Europe and North America are particularly
      important for the Volvo Group, since a significant portion of the Group’s net
      sales are generated in these markets.




8




The
      cyclical demand for the Group’s products has, at times, restricted, and may in
      the future temporarily restrict, the ability of the Volvo Group to manufacture
      and deliver orders in a timely manner. A prolonged delay in the Group's ability
      to deliver ordered products on a timely basis at a time when its competitors
      are
      not experiencing the same difficulty could adversely affect the Group's market
      shares.




To
      cope
      with the peaks and troughs in our industries, we need to act appropriately
      in
      the various stages of the business cycle. This may involve adjusting production
      capacity and operating expenses. See “Item 5. Operating and Financial Review and
      Prospects 3⁄4 5.A.
      Operating Results.”




There
      can
      be no assurances as to the future performance of the commercial vehicles
      industry or the timing or severity of changes in economic conditions affecting
      the commercial vehicles industry.




**Competition
      is intense among manufacturers of commercial vehicles and
      engines.** Continued
      consolidation in the industry is expected to create fewer but stronger
      competitors. Volvo’s products face substantial competition from commercial
      vehicles and engines provided by these and other manufacturers, and such
      competition may have a significant impact on the prices Volvo receives for
      its
      products and on the Group’s future sales volume. Our major competitors are
      DaimlerChrysler, Paccar, Navistar, MAN, Scania, Fiat, Caterpillar, Komatsu,
      Cummins and Brunswick.




In
      recent
      years, new competitors have emerged in Asia, particularly in China. These new
      competitors are mainly active on their domestic markets, but are expected to
      also increase their presence in other parts of the world.




Our
      brands
      are well-known and strong in many parts of the world. For the Volvo Group,
      it is
      important that all brands in the Group are developed and supported. Strong
      brands together with an attractive product portfolio make it possible for Volvo
      to be competitive.




There
      can
      be no assurance that Volvo will be able to compete successfully in the future.
      See “Item 4. Information on the Company 3⁄4 4.B.
      Business Overview.”




**Prices
      for commercial vehicles may change.** The
      prices
      of commercial vehicles have, at times, changed considerably in certain markets
      over a short period. This volatility is caused by several factors - such as
      short-term variations in demand, shortages of certain component products,
      uncertainty regarding underlying economic conditions, changes in import
      regulations, excess inventory and increased competition. Overcapacity within
      the
      industry can occur if there is an economic downturn in the Group's major markets
      or worldwide, potentially leading to further increased price
      pressure.




The
      financial result of the business depends on our ability to quickly react to
      changes in demand and particularly to adapt production levels, to reduce
      production and operating expenses, as well as deliver new competitive products
      and services.




There
      can
      be no assurances that such price volatility will not continue or that price
      volatility will not begin in markets which to date have not experienced such
      volatility. Overcapacity within the industry will likely occur if there is
      an
      economic downturn in Volvo’s major markets or worldwide, leading, potentially,
      to further increased price pressure. Price volatility in certain markets could
      adversely affect the Group’s results of operations.




**The
      Group’s operations are exposed to currency fluctuations** .
      In 2004
      and 2005, approximately 90% of Volvo’s sales were in countries other than
      Sweden. Changes in exchange rates have a direct impact on the Volvo Group’s
      income statement, balance sheet and cash flow, as well as an indirect impact
      on
      Volvo’s competitiveness, which over time affects the Group’s earnings. The Volvo
      Group’s income statement is affected primarily by the translation of revenues
      and expenditures in foreign currencies, while the balance sheet is affected
      primarily by the translation of the net assets of foreign subsidiaries into
      Swedish kronor. In addition, currency movements may affect Volvo’s pricing of
      products sold and materials purchased in foreign currencies as well as those
      of
      its competitors, which may be affected differently by such movements. Since
      Volvo has substantial manufacturing operations in Sweden and generates a
      substantial portion of its revenues in currencies other than the Swedish krona,
      Volvo’s earnings in Swedish kronor could be adversely affected by an
      appreciation of the Swedish krona against other currencies. There can be no
      assurances that exchange rate fluctuations will not adversely affect the Group’s
      results of operations, cash flow, financial condition or relative price
      competitiveness in the future.




9




The
      objective of Volvo’s management of currency risks is to minimize short-term
      negative impact on Volvo’s income and financial position. Volvo uses forward
      contracts and currency options to hedge the value of future payments in foreign
      currencies. As with all hedging instruments, there are risks associated with
      the
      use of foreign currency forward exchange contracts, as well as interest rate
      swap agreements. While providing protection from certain fluctuations in
      currency exchanges and interest rates, by utilizing such hedging instruments
      Volvo potentially foregoes benefits that might result from such fluctuations
      in
      currency exchange and interest rates. Volvo has entered into, and expects to
      continue to enter into, such hedging arrangements with counterparties that
      are
      carefully selected and approved primarily on the basis of general
      creditworthiness. However, any default by such counterparties might have an
      adverse effect on Volvo.




See
“Item
      18 - Financial Statements - Note 36”. See “Item 11. Quantitative and Qualitative
      Disclosures about Market Risk.”




**Volvo’s
      profitability is dependent upon the successful introduction of new products.** The
      Volvo
      Group’s long-term profitability depends on the Company’s ability to successfully
      launch and market its new products. Product life cycles continue to shorten,
      putting increased focus on the success of the Group's product development.
      It is
      highly important to meet and exceed customer expectations to be competitive
      in
      established markets and to be able to expand into additional markets and/or
      product segments.




Many
      of
      our products take a long time to develop from initial idea to finished product.
      It is important to involve customers in the early stages of the development
      process, to ensure the success of new products and at the same time being at
      the
      forefront in the research and development of new technologies that are important
      to the development of efficient products.




As
      both
      Volvo and its competitors either have recently introduced or plan to introduce
      new products or updated versions of existing products, Volvo cannot predict
      the
      market shares its new products will achieve. An inability by Volvo to introduce
      new innovating products in a timely fashion or to meet customer demand would
      have an adverse effect on the Group’s results of operations.




**Volvo
      relies on suppliers for the provision of certain raw materials and components.** Volvo
      purchases raw materials, parts and components from numerous outside suppliers.
      A
      majority of the Group’s requirements for raw materials and supplies is filled by
      single-source suppliers. The effects of delivery interruptions vary depending
      on
      the item or component. Certain items are standard throughout the industry,
      whereas others are internally developed and require unique tools that are
      time-consuming to replace. A supplier’s inability to deliver could have negative
      consequences for production at certain Volvo Group manufacturing
      sites.




The
      Volvo
      Group’s costs for raw materials and components can vary significantly over a
      business cycle. Cost variations may be caused by changes in world market prices
      for raw materials or by an inability of our suppliers to deliver.




The
      companies in the Volvo Group and their suppliers work closely together to manage
      material flows by monitoring suppliers’ financial stability, quality systems and
      production flexibility. However, there can be no assurances that it will not
      experience problems in the future. Unanticipated increases in the prices of
      raw
      material or components could also adversely affect the financial results of
      Volvo’s business.




**The
      commercial vehicles industry is subject to extensive government regulation.** Regulations
      regarding exhaust emission levels, noise, safety and levels of pollutants from
      production plants are extensive within the industry. These regulations are
      subject to change, often making them more restrictive. The costs to comply
      with
      these regulations can be significant for the automotive industry.




Most
      of
      the regulatory challenges regarding products relate to reduced engine emissions.
      The Volvo Group is a large player in the commercial vehicle industry and the
      world’s largest producer of heavy-duty diesel engines. The product development
      capacity within the Volvo Group is well consolidated to be able to focus
      resources for research and development to meet tougher emission regulations.
      Future product regulations are well known (provided that they are not changed),
      and the product development strategy is well tuned to the introduction of new
      regulations. The new regulations regarding product emissions are stringent,
      but
      our current assessment is that they are manageable for the Volvo
      Group.




10




Volvo
      has
      had production facilities in numerous countries worldwide for many years. A
      worldwide production standard for environmental performance has been introduced,
      enabling production plants to achieve best industry standard.




**Volvo
      is reliant on the proper protection and maintenance of its intangible assets.** The
      Volvo
      Group’s products are primarily sold under the brand names "Volvo", "Volvo
      Penta", "Volvo Aero", "Renault", "Mack", "Prévost" and "Nova Bus". AB Volvo owns
      or otherwise has rights to a number of patents and brands that refer to the
      products the Company manufactures. These patents and brands, acquired over
      a
      number of years, have been valuable as the Volvo Group’s operations expanded. We
      do not consider that any of the Group’s operations are heavily dependent on any
      single patent or group of patents. However, an inability to protect intellectual
      property would have an adverse effect on Group operations.




Through
      Volvo Trademark Holding AB, AB Volvo and the Volvo Car Corporation jointly
      own
      the brand ”Volvo”. AB Volvo has the exclusive right to use the Volvo name and
      trademark for its products and services. Similarly, the Volvo Car Corporation
      has the exclusive right to use the mark for its products and services. To
      protect these rights and avoid any weakening of the brand, AB Volvo and the
      Volvo Car Corporation jointly introduced a control function governing the use
      of
      the brand name, to prevent others from taking unfair advantage of
      it.




Similar
      control functions apply to the use of the "Mack" brand name, which is owned
      by
      AB Volvo. The Volvo Group’s rights to use the Renault brand are restricted to
      the truck industry only and are regulated by a license from Renault SA, which
      owns the "Renault" brand.




See
“Item
      4.B - Business Overview - Patents, Trademarks and Licenses”.




**Complaints
      or litigation from customers and other third parties could adversely affect
      Volvo** .
      The
      Volvo Group could be the target of complaints and legal actions initiated by
      customers, employees and other third parties alleging health, environmental,
      safety or business-related issues, or failure to comply with applicable
      legislation and regulations. Even if such disputes were to be resolved
      successfully, without having adverse financial consequences, they could
      negatively impact the Group’s reputation and divert financial and management
      resources that could be used for other purposes.




**Volvo’s
      Financial Services business area conducts business under highly competitive
      conditions in an industry with inherent risks.** Financing
      for users of Volvo’s products is available through a variety of competitive
      sources, principally commercial banks and finance and leasing companies. Volvo
      Financial Services emphasizes prompt and responsive service to meet customer
      requirements and offers various financing plans designed to increase the
      opportunity for sales of its products and to generate financing income for
      the
      Group. The financial services offered involve risks relating to residual value,
      credit risk and cost of capital. Competition for customers and/or these risks
      may affect the Group’s results of operations in the future.




**Other
      factors.** Volvo
      continuously reviews its manufacturing and administrative processes with the
      aim
      of ensuring that Volvo products and operations meet applicable legal and other
      regulatory requirements. Volvo does also have insurance coverage in certain
      areas, for example product liability, business interruption and
      property.




11




**ITEM
      4. INFORMATION ON THE COMPANY**




**4.A.****History
      and Development of Company**




AB
      Volvo
      is an international transport equipment group with a worldwide marketing
      organization and production. AB Volvo, which was incorporated in 1915 under
      the
      laws of Sweden, started production of cars in 1927 and of trucks in 1928.
      Historically Volvo has operated in two main areas: cars and vehicles for
      commercial use. The latter includes trucks, buses, construction equipment and
      marine and industrial engines. Operations also include production and
      maintenance of aircraft engines and financial services. In March 1999, Volvo
      sold Volvo Cars to Ford Motor Company. As a result of this sale, Volvo is today
      focused entirely on the commercial transport products segment. Through the
      acquisition of Mack Trucks Inc. and Renault V.I. in 2001, the Volvo Group
      strengthened its position as a producer of heavy trucks.




Headquartered
      in Göteborg, Sweden, the Volvo Group had 81,856 employees at December 31, 2005.
      With 46% of sales in Western Europe, 5% in Eastern Europe, 29% in North America,
      5% in South America and 10% in Asia, the Group operates in an international
      environment with production and assembly carried out on six continents. Its
      shares are traded on the Stockholm Stock Exchange in Sweden and in the United
      States its American Depositary Shares are traded on the Nasdaq National Market
      (“NASDAQ”).




Volvo’s
      brand name is strongly identified with quality, safety and concern for the
      environment. The Group’s position in the fields of vehicle safety and quality is
      being consolidated through continuing improvements and technical innovations.
      In
      the environmental area, Volvo is intensifying its efforts to reduce the negative
      impact on the environment throughout the entire life cycle of its
      products.




AB
      Volvo
      is domiciled in Göteborg, Sweden. The address and telephone number of AB Volvo
      is S-405 08, Göteborg, Sweden, +46 31 660000.




**Significant
      events in 2005**




**Volvo
      Trucks launched new flagship in North America.** In
      February, Volvo Trucks unveiled its new flagship for the North American market,
      the Volvo VT 880. The new truck is aimed at the prestige segment and is equipped
      with the new 16-liter engine, which was previously launched in Europe. The
      16-liter engine incorporates advanced emissions controls and is designed to
      be
      able to meet emissions standards that will go into effect in 2007 and 2010.
      Towards the end of the year, the engine was also launched for the Volvo VN
      models.




**Volvo
      Trucks launched its cleanest and most fuel-efficient trucks ever.** In
      September, Volvo launched a new generation of trucks, the Volvo FH and Volvo
      FM.
      They are powered by an entirely new 13-liter engine and an improved 9-liter
      engine with SCR (Selective Catalytic Reduction) technology that meets
      forthcoming European exhaust emissions requirements.




With
      the
      launch of the new Volvo FH and Volvo FM models, Volvo Trucks takes a large
      step
      forward with regard to technology and environmental care. The all-new 13-liter
      engine has more power and better driveability than its predecessor and is
      available with power outputs of up to 520 hp. Compared with the current 12-liter
      engine, its fuel consumption is reduced by up to 5%. At the same time, the
      9-liter engine has been upgraded and is now more powerful, offering better
      driveability. Both engines also meet the new emissions requirements that come
      into force in 2006 and, once the engines' software is updated, also the
      requirements that become effective in 2009 (Euro 5). The new truck models went
      into production in Gothenburg, Sweden, and Ghent, Belgium, towards the end
      of
      the year.




**New
      Renault Magnum** .
      Renault
      Trucks launched a new generation of its Renault Magnum tractor for long haulage
      at the beginning of 2005. Roll-out of the new generation is an example of the
      product renewal under way at Renault Trucks. The new generation features a
      new
      chassis and is equipped with a new engine, the DXI 12, and gearboxes such as
      the
      automated Optidriver II.




**New
      Renault Premium Route.** In
      September, Renault Trucks introduced a new generation of its truck model for
      national transportation, Renault Premium Route. Among other improvements, the
      new generation features a new driveline and chassis.




12




It
      is
      equipped with a new 11-liter engine in power classes up to 440 hp and is
      designed for a wide range of transport needs. The new 11-liter engine is more
      efficient and, compared with the earlier engine, delivers up to 5% fuel savings.
      Other new features include an automatic Optidriver II transmission, an improved
      cab and a new front-end design. The first deliveries of the new Renault Premium
      occurred in October 2005.




**New
      products from Mack Trucks.** In
      October, Mack Trucks introduced a new range of trucks and heavy-duty diesel
      engines scheduled for launch in 2006. The new Mack Pinnacle is aimed at Mack
      Truck’s core customers for local and regional hauling, while the upgraded Mack
      Granite series reinforces Mack Truck’s leading position in the segment for
      construction vehicles in North America. First to be introduced from the new
      MackPower (MP) engine line is the 11-liter MP7, which features the new base
      architecture necessary to meet EPA 2007 emissions standards. Mack Trucks also
      plans to launch a 13-liter version of the engine, the MP8, in 2007.




**First
      order for Volvo's new gas bus.** Volvo
      Buses is one of Europe's leading manufacturers of gas buses with more than
      1,000
      gas-powered vehicles delivered since 1992. During 2005, the company advanced
      to
      the next phase with the launch of its new 9-liter gas engine for natural gas
      or
      biogas. The new 9-liter engine outperforms its predecessor and maintains
      emission levels below both Euro 5 and EEV, the European Union's special
      environmental class for environmentally adapted vehicles.




In
      September, Volvo Buses received its first order for the new Volvo 7700 with
      a
      gas engine. The local transit company in Bern, Switzerland placed an order
      for
      32 articulated buses, with an option for 39 more.




**Volvo
      Buses closed plant in Heilbronn, Germany.** Volvo
      Buses manufactured one of its coach models, the Volvo 9900, a unique low-volume
      product, at its Heilbronn plant. The financial results for the Volvo 9900 had
      been unsatisfactory for many years. The decision to close this plant is in
      line
      with Volvo Buses' long-term strategy for achieving profitability and continuing
      to upgrade its global coach range and concentrate manufacturing at its main
      plants. Costs related to the closure, approximately SEK 95 M, were charged
      against second quarter earnings in 2005.




**Volvo
      Buses received order for 2,000 city buses in China.** In
      December it was announced that Volvo Buses received its largest order to date
      in
      China. Shanghai’s largest transit company Shanghai Ba-Shi (Group) Industrial Co.
      Ltd., ordered 2,000 Volvo B6R, a new 10.5-meter city bus. The bus has a high
      portion of locally purchased components and, consequently, complies with the
      Chinese Automotive Policy established in April 2005. Some 1,000 buses will
      be
      delivered through to summer 2006 and the remaining 1,000 through summer 2007.
      The chassis will be provided as package modules from Volvo Buses’ plant in
      Borås, Sweden. They will be assembled at the Sunwin bus plant in Shanghai, where
      the bodies are also being manufactured.




**Volvo
      CE launched new series of motor graders.** In
      November, Volvo Construction equipment launched an entire new series of motor
      graders, G900. The series comprises two platforms totaling seven models from
      15
      to 21 tons. The two smaller models are equipped with the 7.2-liter Volvo D7
      engine, while the larger graders have the 9.4-liter engine, Volvo D9. The
      engines feature the new technology, VAC-T (Volvo Advanced Combustion
      Technology), which gives low emissions corresponding to standards in accordance
      with EU Stage IIIA and US Tier 3.




**Volvo
      Aero signed major contracts.** It
      was
      announced in December that Volvo Aero in Trollhättan, Sweden, will produce parts
      of the world’s largest aircraft engine, GE90-115B, which is on the Boeing
      777-200LR and 777-300ER. In accordance with a new agreement with General
      Electric, Volvo Aero will manufacture components to the GE90-115B for an
      estimated order value of about SEK 2 billion during the next ten years. Volvo
      Aero will start production of several components of the engine in
      2006.




**AB
      Volvo sold Celero Support service company.** AB
      Volvo
      announced in October, 2005 that it would sell the Group's service company Celero
      Support AB to Coor Service Management for SEK 680 M less the company’s net debt.
      The sale resulted in a capital gain for Volvo of about SEK 430 M, which was
      recognized in the fourth quarter. Celero Support AB provides various office
      and
      workplace services as well as maintenance of industrial plants and properties.
      Celero Support AB had 1,100 employees, with sales of about SEK 1.4
      billion.




13




**Write-down
      of holding in Blue Bird.** During
      the
      fourth quarter of 2005, AB Volvo wrote down its shareholding in Peach County
      Holdings, Inc. by about SEK 550 M. As of December 31, 2005, Volvo held 42.5%
      of
      the US-based company, which in turn owns the American school bus manufacturer
      Blue Bird. Since its reorganization in the preceding year, Blue Bird has not
      performed well. Since Volvo decided not to be further involved in continued
      activities regarding the company’s funding needs and improved liquidity, a
      write-down was made. After the write-down, the value of Volvo’s shareholdings in
      Peach County Holdings, Inc. is zero. In January 2006, Peach County Holdings,
      Inc. entered into bankruptcy proceedings (Chapter 11) and as a consequence
      of
      Volvo choosing not to participate in the continued reorganization, Volvo’s
      shares in the company were cancelled.




**Sale
      of properties resulted in gain of SEK 188 M.** In
      February, Danafjord AB (the Volvo Group’s real estate company) sold some of its
      non-strategic properties in Torslanda and Kalmar which were valued at
      approximately SEK 515 M. The sale resulted in a capital gain of SEK 188 M for
      Volvo Financial Services, which manages Danafjord.




**Tax
      rulings yielded Volvo nearly SEK 300 M.** The
      Swedish Administrative Court of Appeal delivered rulings in several tax cases
      affecting various companies in the Volvo Group. Combined, the court rulings
      had
      a positive effect of nearly SEK 300 M on AB Volvo's second-quarter earnings.
      In
      all, 16 different rulings were delivered covering the tax-assessment years
      1991-1999. All of the cases involved appeals of County Administrative Court
      rulings. To a large extent, the Court of Appeal’s verdicts followed previous
      rulings by the lower courts. The Court of Appeal did, however, overturn a lower
      court ruling and granted AB Volvo a tax deduction of SEK 1.5 billion on the
      sale
      of shares in Volvo Trucks North America to an American subsidiary in 1996.
      To a
      large extent, the Volvo Group had already made provisions for tax expenses
      based
      on the original rulings of the lower courts. Accordingly, the rulings of the
      Court of Appeal had a positive effect of nearly SEK 300 M on AB Volvo, including
      SEK 70 M in interest.




**US
      Supreme Court supported Volvo Trucks in antitrust case.** In
      January
      2006, the US Supreme Court issued a ruling in favor of Volvo Trucks in a dispute
      with one of its dealers regarding competitive pricing practices. The US Supreme
      Court found that under US law there is no obligation to provide the same
      discounts to dealers in conjunction with them participating in different
      negotiations. Volvo’s position in the case, which has broad implications beyond
      the heavy-truck industry, was supported by the US Department of
      Justice.




**Share
      buyback completed.** March
      1,
      2005 marked the completion of the share repurchase program, authorization for
      which the Board received at the Annual General Meeting on April 16, 2004. The
      goal of the repurchase program was to optimize AB Volvo’s capital structure. A
      total of 300,000 Series A shares and 14,475,000 Series B shares were
      repurchased, corresponding to SEK 4,295 M. Following the repurchase, AB Volvo
      held a total of 7,230,246 Series A shares and 29,890,797 Series B shares,
      corresponding to approximately 8.4% of the total number of shares in the
      company. Post the below described cancellation AB Volvo owns 5% of its own
      shares.




**Cancellation
      of shares and new repurchase mandate.** The
      Annual
      General Meeting resolved that the Company’s share capital be reduced by SEK
      95,021,046 through cancellation without repayment of 3,084,619 Series A shares
      and 12,752,222 Series B shares that the company repurchased. The cancellation
      was implemented during the second quarter of 2005. After the cancellation,
      AB
      Volvo owns 5% of its own shares. The Annual General Meeting also resolved to
      authorize the Board of Directors of AB Volvo to decide on the purchase and
      transfer of the company’s own shares. After the decision no further purchases of
      own shares were made during the remainder of 2005.




**Allotment
      of shares in incentive program.** Senior
      executives in the Volvo Group were allotted 63,667 Series B Volvo shares under
      the framework of the incentive program approved at the 2004 Annual General
      Meeting. Shares were allotted based on the degree of fulfillment of certain
      financial goals for fiscal year 2004, as established by the Board.




**New
      share based incentive program.** During
      the Annual General Meeting it was decided to implement a new, share-based
      incentive program during the second quarter of 2005 for senior executives at
      the
      Volvo Group. The program stipulated that a maximum of 185,000 Series B shares
      in
      the Company could be allotted to a maximum of 165 senior executives (including
      members of Group Management), during the first six months of 2006.




14




**Significant
      events in 2006**




**New
      Volvo FH16.** In
      the
      beginning of February 2006, Volvo Trucks launched a new Volvo FH16 with a Volvo
      D16E engine rated at 660 hp. As the result of a newly developed engine brake,
      braking power was increased by 15%. The strong driveline features Volvo’s
      I-Shift gearbox system dimensioned to handle trailer weights of 60 tons or
      more.




**Volvo
      became major shareholder in Nissan Diesel.** On March
      21, 2006 AB Volvo acquired 40 million common shares, corresponding to 13% of
      the
      common shares, in the Japanese truck manufacturer Nissan Diesel from Nissan
      Motor Co. Ltd, (“Nissan Motor”) with an option to acquire the remaining 6% of
      the common shares in Nissan Diesel, owned by Nissan Motor, from Nissan Motor
      within four years. The purchase price is approximately SEK 1.5 billion for
      the
      13% stake acquired.




The
      transaction is believed to strengthen the Volvo Group's Asian strategy and
      could
      provide the Group with a stronger dealer and service network in Japan and
      Southeast Asia, and create a possibility for further industrial cooperation
      with
      Nissan Diesel in such areas as engines and transmissions.




**Renault
      Trucks signed agreement in principle with Nissan Motor concerning new light
      truck.** In
      February, AB Volvo's subsidiary Renault Trucks entered into an agreement in
      principle with Nissan Motor Co., Ltd concerning the sales and marketing of
      a new
      light truck. The new truck, which will be manufactured by Nissan and sold under
      the Renault name, will supplement Renault Trucks' existing offer of light
      trucks, Renault Master and Renault Mascott.




In
      accordance with the agreement, the new truck will be sold via Renault Trucks'
      dealers, and deliveries are scheduled to commence during the first half of
      2007.
      The new truck will be based on the same platform as that to be used for the
      next
      generation Nissan Cabstar and Atlas.




**Volvo
      Group premiered hybrid technology for heavy vehicles.** In
      March
      2006 Volvo Group presented a new, efficient hybrid solution for heavy vehicles.
      The Volvo Group’s hybrid concept provides maximum fuel-saving effects on routes
      with frequent braking and accelerations, for example, city bus traffic, city
      distribution, refuse collection and construction work. Based on calculations,
      fuel savings can amount to 35% in these applications.




**Volvo
      Trucks launched new models for the North American market.** In
      March,
      Volvo Trucks announced a broadening of its product program on the North American
      truck market with the launch of two models with new cab variants for the
      prestige segment, the Volvo VT830 and Volvo VN730. Both models are intended
      primarily for owner operators. The newly launched cab models offer the same
      interior roominess, and the lower roof provides better aerodynamics and
      correspondingly improved fuel economy for rigs with low trailers, such as
      tankers.




**Volvo
      Aero signed major contracts.**  Volvo
      Aero
      reported in January 2006 that it had signed a contract covering production
      of
      the largest component in an aircraft engine, the fan case, for the Rolls-Royce
      Trent 1000 engine. The engine will be mounted on Boeing’s new aircraft, the 787
      Dreamliner. The fan case will be produced in titanium and have a diameter of
      three meters. The sales value of the contract is estimated at SEK 1.1 billion
      during a period of 15-20 years.




It
      was
      also announced in January 2006, that Volvo Aero and General Electric have agreed
      that Volvo Aero will increase its part of GE’s new engine, GEnx. Volvo Aero will
      manufacture additional components for the engine. The new agreement is expected
      to generate sales of SEK 6 billion over a 30-year period.




**Annual
      General Meeting of AB Volvo.** At
      the
      Annual General Meeting of AB Volvo held on April 5, 2006, the Board's proposal
      to pay a dividend to the shareholders of SEK 16.75 per share, a total of about
      SEK 6,775 million, was approved.




Per-Olof
      Eriksson, Tom Hedelius, Leif Johansson, Louis Schweitzer and Finn Johnsson
      were
      re-elected members of the Board of AB Volvo and Ying Yeh, Philippe Klein and
      Peter Bijur were newly elected. Finn Johnsson was elected Board
      Chairman.




The
      Meeting resolved to establish a share-based incentive program during the second
      quarter of 2006 for senior executives in the Volvo Group. The program mainly
      involves that a maximum of 518,000 Series B shares in the Company could be
      allotted to a maximum of 240 senior executives, including members of the Group
      Executive Committee, during the first six months of 2007. The allotment shall
      depend on the degree of fulfillment of certain financial goals for the 2006
      fiscal year, which have been set by the Board. If these goals are fulfilled
      in
      their entirety and if the price of the Volvo B share at the time of allotment
      is
      SEK 370, the costs for the program will amount to about SEK 230 million. So
      that
      Volvo shall be able to meet its commitment in accordance with the program in
      a
      cost-efficient manner, the Meeting further resolved that Volvo may transfer
      own
      shares (treasury stock) to the participants in the program.




15




**Capital
      Expenditures**




The
      following table sets forth the Group’s aggregate capital expenditures for
      property, plant and equipment, intangible assets and assets under operating
      leases, by principal business areas for each of the two years ended December
      31:




2004
            
            2005**Capital
              Expenditures**
            
            (In
                millions of SEK)Trucks
            
            
            5,030
            
            
            7,190Buses
            
            
            176
            
            
            250Construction
                Equipment
            
            
            1,158
            
            
            906Volvo
                Penta
            
            
            297
            
            
            243Volvo
                Aero
            
            
            801
            
            
            904Financial
                Services
            
            
            4,784
            
            
            386Other
                and corporate capital expenditures
            
            
            237
            
            
            4,972**Group
                total**
            
            
            **12,483**
            
            
            **14,851**




Investment
      projects were principally for plant and machinery for the production, design
      and
      development of commercial vehicles and machinery. The following table
      illustrates the geographic distribution of the capital
      expenditures:




2004
            
            2005(In
                millions of SEK)Sweden
            
            
            3,690
            
            
            5,935Europe
                (excluding Sweden)
            
            
            6,305
            
            
            5,770North
                America
            
            
            1,835
            
            
            2,451Other
                countries
            
            
            653
            
            
            695**Group
                total**
            
            
            **12,483**
            
            
            **14,851**





Capital
      expenditures for property, plant and equipment in 2005, amounted to SEK 6.8
      billion (SEK 5.8 billion). Capital expenditures in Trucks, which amounted to
      SEK
      4.5 billion (SEK 3.5 billion), were made to improve efficiency in the European
      industrial system, increase the number of service workshops for the dealer
      network in Europe, continued modification of the Hagerstown plant in North
      America for manufacturing of engines and transmissions and for a changeover
      for
      production of a new 13-litres engine in Skövde, Sweden, and a new 11-liter
      engine in Vénissieux. Capital expenditures decreased in Construction Equipment
      from SEK 1.0 billion to SEK 0.8 billion, mainly for development of production
      plants and in tools and equipment for new products. In Volvo Aero the level
      of
      capital expenditures increased from 0.2 billion to SEK 0.3 billion. Investments
      remained at the same level as last year in Buses at SEK 0.1 billion and
      decreased in Volvo Penta from SEK 0.2 billion to SEK 0.1 billion. Approved
      future capital expenditures amounting to SEK 7.8 billion (SEK 8.2 billion)
      relate mainly to investments for the next generation of trucks and engines.
      A
      major part of the investments relate to entrance fees to become a partner in
      the
      new GEnx engine and in the LM2500 industrial gas turbines, according to
      agreements with General Electric.




Capital
      expenditures for intangible assets, mainly product and software
      development, amounted to SEK 3.5 billion (SEK 2.3 billion). The capital
      expenditures were distributed among Trucks SEK 2.4 billion (SEK 1.2
      billion), Buses SEK 0.1 billion (SEK 0.1 billion,), Construction Equipment
      SEK
      0.2 billion (SEK 0.1 billion) and Volvo Penta SEK 0.1 billion (SEK 0.1
      billion) and Volvo Aero SEK 0.6 billion (SEK 0.6 billion). A major part of
      the
      investments in Volvo Aero relate to entrance fees to become a partner in the
      new
      GEnx engine and in the LM2500 industrial gas turbines, according to agreements
      with General Electric.






16






Capital
      expenditures for assets under operating leases amounted to SEK 4.5 billion
      (SEK 4.4 billion). The capital expenditures pertained mainly to vehicles and
      machines subject to new operating lease contracts with external customers within
      Financial Services’ operations in North America and Western Europe.




Capital
      expenditures currently in progress are shown in “Item 5.B - Liquidity and
      Capital Resources”.





**4.B.****Business
      Overview**




**General**




Seven
      years ago, the operations of the Volvo Group were concentrated on those products
      with the strongest positions and most competitive volumes. This meant that
      Volvo
      exited the car industry and transferred these resources over to commercial
      vehicles, machines and engines through a series of acquisitions.




In
      recent
      years, major changes have been implemented in the organization to coordinate
      the
      new structure and simultaneously renew large segments of the product range.
      The
      result is a streamlined Group with considerably reduced costs and strong global
      market positions.




Three
      large acquisitions were made on three different continents: Samsung’s excavator
      operations in Southeast Asia, Renault Trucks in Europe and Mack Trucks Inc.
      in
      North America. These acquisitions strengthened the Group’s presence in Asia and
      made the Volvo Group the largest heavy truck manufacturer in Europe, with a
      market share of 25.2 percent, and among the largest in North America, with
      a
      19.6 percent market share by the end of 2005. Following the acquisitions, Volvo
      believes it is the world’s largest manufacturer of diesel engines, in the 9-16
      liter segment, for heavy vehicles and machinery.




All
      business areas hold strong positions in their respective markets. Volvo Buses
      is
      one of the world’s largest bus manufacturers and Volvo Construction Equipment
      (“Volvo CE”) is one of the largest manufacturers of construction equipment.
      Volvo Penta is a global market leader in marine leisure diesel engines.
      Components from Volvo Aero are included in 80 percent of all new major aircraft
      in the world.




**Strong
      growth in all major markets**




Demand
      for
      the Volvo Group’s products is increasing due to the general economic development
      with rising trade among the various regions of the world, growing transportation
      needs and an increasing need to build new infrastructure.




The
      Volvo
      Group is active in an industry that is cyclical with an underlying growth rate
      in mature markets of about 4% over a business cycle. In growth regions, such
      as
      Asia and Eastern Europe, the rate of increase is considerably
      higher.




Increasingly
      stringent environmental requirements are a factor that has contributed to rising
      costs for product development and manufacturing. One of the main reasons is
      that
      substantial investments are required to conduct research and development into
      new technologies to reduce emissions from vehicles and into supplementary fuels
      and alternative drivelines. To ensure that these costs are spread among larger
      volumes, a consolidation process is under way among manufacturers through
      mergers and acquisitions.




In
      mature
      markets in the US and Europe, the truck industry has been consolidating for
      several decades and has made considerable progress, also with several
      intercontinental acquisitions. In other areas, such as the construction
      equipment sector, the pressure for consolidation is expected to
      increase.




At
      the
      same time, in growth markets, new competitors have grown into significant
      regional players. This structural transformation is creating opportunities
      for
      the Volvo Group, which has a strong financial position.




17




The
      Volvo
      Group occupies an established position in European and North American markets,
      which are showing relatively firm underlying growth. However, the fastest growth
      rates are noted in parts of the world where the Group had very insignificant
      operations just 10-15 years ago. In these markets, such as Asia, the Volvo
      Group
      intends to grow.




China
      and
      India are examples of markets that have already reached a considerable size
      and
      in the future will become even more important for the Volvo Group’s development.
      The market in Eastern Europe is also growing strongly and the Group is well
      positioned to capitalize on the market trend.




**Sales
      by Geographical Areas**




The
      following table sets forth the geographic distribution of the Volvo Group’s net
      sales. Sales are shown based upon the market where the customer is
      located.




2004
            
            2005Market
              area:
            
            (in
                millions of SEK)Western Europe
            
            
            108,015
            
            
            112,037Eastern Europe
            
            
            11,062
            
            
            11,986North America
            
            
            54,769
            
            
            69,743South America
            
            
            7,338
            
            
            12,479Asia
            
            
            20,789
            
            
            22,699Other markets
            
            
            9,103
            
            
            11,615**Total**
            
            
            **211,076**
            
            
            **240,559**




**Strategy**




The
      Volvo
      Group focuses its business on products for commercial use. The Group’s business
      areas have competitive volumes and strong global positions. The objective is
      to
      be number 1 or 2 in terms of size in the sectors in which we are active, or
      to
      show a superior growth rate. An important element of this strategy is to
      strengthen positions on markets with high growth potential and to increase
      the
      customer base.




*Customer
      oriented strategy.* The
      ability to attract various categories of customers is one of our most valuable
      assets. Our brands are well-known and strong in most parts of the world. Strong
      brands combined with an attractive product portfolio enable the Group to stay
      competitive. Currently, we are working intensively with developing our dealer
      networks and as a result improving service to our customers.




*Strong
      product portfolio.* The Volvo
      Group’s large volumes provide resources to aggressively develop customized
      customer offerings optimized for various applications. Concurrently, this
      provides the Group the possibility to invest in future technologies such as
      alternative drivelines and supplementary fuels. In recent years, the rate of
      product renewal has increased significantly within all of the business areas
      and
      2005 was another year with major product launches. By capitalizing on economies
      of scale and Group-wide technologies and architecture, the Volvo Group will
      further strengthen its product portfolio in the years ahead and thus increase
      its competitiveness.




*Capitalize
      on economics of scale.* The
      Group’s size and structure creates opportunities for effectively utilizing
      Volvo’s collective resources and achieving economies of scale in a number of key
      areas. The development and manufacturing of engines have been concentrated
      in a
      separate business unit, Volvo Powertrain, which provides the Group with engines
      and other driveline components. There is also Volvo Parts, which optimizes
      inventory management and distribution of spare parts, and Volvo Logistics,
      which
      handles optimal logistics solutions for the Group’s materials flow.




*Reduce
      costs.* With
      the
      aim of reducing the costs of developing and manufacturing products, the Group
      establishes systems and structures for the transfer of technologies and best
      practices. Common production methods and internal processes are increasingly
      being used, which creates flexibility and efficiency. In addition, larger
      volumes make the Volvo Group an attractive business partner, which increases
      the
      possibilities of attracting the best suppliers.




18




We’re
      working on increasing the degree of shared components and utilizing shared
      modules. For example, Volvo Powertrain has developed two Group-wide engine
      platforms that gradually will replace the previous 18 engine platforms. This
      will be occurring concurrently with the introduction of new products in the
      coming years. We are engaged in increasing numbers of Group-wide development
      projects often in cooperation with selected suppliers.




*Flexibility.* An
      important task in the internal efficiency enhancement work is to achieve a
      more
      rapid adjustment to fluctuations in the economy. This involves both the ability
      to increase production and sales in upturns and to reduce them in economic
      downturns. This trend also requires increased flexibility among
      suppliers.




*Capital
      rationalization.* Since
      2001, working capital has been significantly improved, mainly through a
      reduction in inventories and accounts receivable. In combination with the
      increased profitability, the capital that has been released has created a strong
      cash flow, which has enabled the Volvo Group to engage in product renewal
      throughout the entire business cycle. In the coming years work in this area
      will
      focus on using sales and administrative resources more efficiently.




**Summary
      of Group Businesses**




**Volvo
      Trucks** .
      Volvo
      began manufacturing trucks in 1928 and specializes in heavy trucks, with gross
      vehicle weight above 16 tons. Volvo Trucks products are marketed in more than
      130 countries. The greater part of the sales takes place in Europe, North and
      South America and Asia.




**Renault
      Trucks.** Renault
      Trucks traces its origin to the Berliet and Renault companies founded in 1895
      and 1898. With a product program that ranges from light trucks for city
      distribution to heavy long-haul trucks and military vehicles, Renault Trucks
      is
      a true multispecialist with the ability to meet the specific requirements of
      all
      types of road transport. Renault Trucks has a strong presence in Europe with
      1,350 dealers and service centers, which on a global basis extends to
      2,000.




**Mack
      Trucks.** Mack
      Trucks is one of the largest manufacturers of heavy-duty trucks and major
      product components in North America. Since its founding in 1900, Mack has built
      on its reputation of strength and durability to become one of the leading
      heavy-duty truck brands in the North American market. In the US, Mack is a
      leader in the vocational segments of the heavy-duty truck market. A clear
      majority of Mack vehicles employ drivelines manufactured in-house - a unique
      feature in the North American truck industry. In addition, Mack trucks are
      sold
      and serviced in more than 45 countries.




**Buses.** Volvo
      Buses has a broad range of modern buses that offer efficient transport
      solutions. The product offering includes complete buses and chassis for city
      and
      intercity traffic as well as coaches.




**Construction
      Equipment.** Volvo
      CE’s products, spare parts and services are offered worldwide in more than 125
      markets. Customers are using the products in a number of different applications
      including general construction, road construction and maintenance, forestry,
      demolition, waste handling, material handling and extraction.




**Volvo
      Penta** .
      Volvo
      Penta offers complete power systems and service for leisure boats, workboats
      and
      industrial applications such as power-generating equipment. Volvo Penta operates
      within three areas of activity: Marine Leisure, Marine Commercial and
      Industrial.




**Volvo
      Aero** .
      Volvo
      Aero offers a wide range of services and products for the commercial, aerospace
      and military aircraft industries, including high-technology components for
      engines, sale of parts for engines and aircrafts and overhaul and repair of
      aircraft engines and gas turbine engines. In addition, Volvo Aero provides
      aftermarket services for gas turbine engines and systems.




**Financial** **Services** .
      Volvo
      Financial Services (VFS) provides services in four main areas: customer finance
      and insurance, treasury operations, real estate management and related
      services. These services enable Volvo to take a Group-wide approach to financial
      risk.




19




**Trucks**




**The
      total market.** Overall,
      demand was very high on the markets in Europe, North America and South America.
      The total market for heavy trucks in Europe 27 (EU member countries plus Norway
      and Switzerland) rose 9% to 276,700 trucks in 2005, which is a new record level.
      Registration in the UK increased by 5%, in France by 21%, while the market
      in
      Germany was up 4% and in Spain by 10%.




The
      market
      for heavy trucks in North America (Class 8) rose 29% in 2005 to 328,900 heavy
      trucks, compared with 255,500 trucks in 2004. This was driven by the continued
      strong US economy, with rising transport needs. In addition, demand was driven
      by a need to renew truck fleets and that some customers wanted to purchase
      new
      trucks prior to the new, stricter emissions legislation becoming effective
      on
      January 1, 2007.




The
      market
      for heavy trucks in Brazil declined by 9%.




**Business
      environment.** As
      a
      result of the strong demand in Europe and North America, the capacity
      utilization of truck manufacturers overall was high during the year. However,
      the investments in increased capacity were limited, due in part to supplier
      difficulties in meeting the already high pace of production for new
      trucks.




Instead
      of
      investing in increased production, truck manufacturers focused on raising
      capacity utilization in existing plants through various forms of efficiency
      enhancement measures and by aligning prices to the prevailing market
      demand.




The
      sharp
      price hikes on certain raw materials, mainly steel, receded during the year.
      The
      business area succeeded in offsetting the higher raw material costs through
      increased efficiency and active pricing.




In
      2005,
      Trucks accounted for 67% of Volvo’s sales.




**Volvo
      Trucks.** Volvo
      Trucks has developed into one of the world’s largest producers of heavy trucks
      with a total weight exceeding 16 tons. Volvo Trucks’ products are marketed in
      more than 130 countries. The trucks are used for a wide range of applications,
      from distribution in congested city traffic to heavy-duty construction in desert
      heat or timber transport in remote forestlands.




Volvo
      Trucks’ competitive product range was strengthened further in 2005. At the
      beginning of the year, Volvo Trucks launched the Volvo VT 880 flagship with
      a
      16-liter Volvo engine in the North American market. Later in the year, the
      16-liter engine was also offered in the Volvo VN models in North America and
      in
      April, the first D12 engine manufactured in the US was delivered.




During
      the
      autumn, Volvo Trucks rolled out the new Volvo FH and Volvo FM models with the
      new 13- and 9-liter engines. The engines comply with the forthcoming Euro 4
      and
      Euro 5 emission standards and improvements include a reduction in fuel
      consumption of up to 5%. Moreover, a new generation of Volvo VM was launched
      in
      Brazil and the product line was expanded with a three-axle model that handles
      a
      total weight of 26 tons.




During
      2005, Volvo Trucks delivered 103,696 trucks, an increase of 7% compared with
      a
      year earlier. Deliveries rose 23% in North America and 2% in Asia (which
      includes deliveries in Iran of 14,980 trucks in 2005 and 14,253 trucks in 2004).
      Deliveries in Europe decreased by 1%.




During
      the
      year, Volvo Trucks continued to strengthen its dealer network in Europe,
      including the inauguration of the first wholly owned service facility in Russia,
      outside St. Petersburg.




**Renault** **Trucks.** With a
      product range stretching from light commercial vehicles for city distribution
      to
      heavy trucks for long-distance transport, Renault Trucks is equipped to meet
      the
      demands placed on various types of highway transportation. Renault Trucks has
      a
      strong market presence, with 1,350 dealerships and service locations in Europe
      and 650 in the rest of the world.




The
      total
      renewal of the product range, which began at the end of 2003 and continued
      through 2004, was completed in 2005 with the new Renault Magnum and Renault
      Premium Route. The new Renault Magnum, intended for long haulage, was introduced
      in February 2005. It features a new chassis, new engine and gearbox and
      extensive improvements in driver comfort. In addition, fuel consumption was
      reduced considerably. A new version of the Renault Premium, a truck for national
      haulage, was introduced in September. Among other features, the new version
      offers an improved driver cab, new driveline and chassis as well as being
      equipped with a more powerful and fuel-efficient engine. In October, a new
      version of Renault Magnum was shown. It is fitted with a new 13-liter engine,
      developing 500hp and meeting the Euro4/5 with SCR-technology.




20




Deliveries
      by Renault Trucks amounted to 74,461 vehicles, which was 6% more than a year
      earlier. Deliveries in Europe rose 3% to 60,988 trucks, while deliveries in
      the
      rest of the world increased by 22% to 13,473.




**Mack
      Trucks.** Mack
      Trucks is one of the leading producers of heavy-duty trucks in North America.
      Since its founding, Mack Trucks has focused on power and reliability, which
      has
      contributed to making the company one of the strongest heavy-duty truck brands
      in the North American market. In the US, Mack Trucks is the predominantly
      leading producer of trucks in the construction, economic haul and refuse
      segments. In total, Mack Trucks has sales and service in more than 45
      countries.




Mack
      Trucks’ deliveries rose 42% to 36,222 trucks in 2005, compared with 25,469
      trucks in the preceding year. The improved sales are the result of increased
      demand in Mack Trucks' core segments in North America.




The
      positive development of the American economy fueled a high pace of activity
      in
      the construction and transport industries, which consequently resulted in Mack
      Trucks posting historically high order bookings at the beginning of 2005. When
      the industry’s production capacity for 2005 reached its ceiling, customers
      became more cautious with ordering trucks for delivery in 2006. Demand slowed
      to
      more sustainable levels during the rest of the year, but remained highly
      favorable bolstered by the strong economy in the US.




In
      October, Mack Trucks took the largest step to date in the renewal of its product
      line with the launch of two model series, Mack Pinnacle and Mack Granite, and
      a
      new line of heavy-duty diesel engines.




The
      new
      trucks are based on the Advantage and Cornerstone chassis introduced in 2004
      and
      early 2005, which means that Mack Trucks’ range in construction and highway
      transport will be completely renewed when Mack shifts to the new engine
      generation in the beginning of 2007.




The
      new
      engine series, Mack Power (MP), features many different engine alternatives
      and
      is the key in Mack Trucks’ solution to the new emission standards that become
      effective in January 2007. The first engine introduced is the 11-liter MP7,
      which meets current standards and will be sold in 2006. This will be followed
      by
      an upgraded version of the MP7 and a new 13-liter engine, MP8, which meet the
      emission standards that become effective in 2007.




**Strategic
      development.** The
      ambitions for 2006 are:


·
            Successful
                introductions and production
                change-overs.  ·
            Introduce
                engines in all trucks that meet future emissions standards in Europe
                and
                the US.  ·
            Maintain
                high pace of activity in the development of alternative
                drivelines.  ·
            Further
                development of dealer network.




**Products.** The
      customer offering is based on an adequate vehicle specification for every
      customer's needs. The truck operations of the Volvo Group have a broad range
      of
      truck specifications for all kinds of transport needs, from city distribution
      to
      construction work and long-distance transports. More than 90 % of the trucks
      branded Volvo are sold in the heavy truck segment (above 16 tons), where all
      models are based on the company's shared technology and
      architecture.




Customers
      are also offered an extensive range of support services. For example, financial
      services include many different kinds of leasing solutions, often in combination
      with service and insurance agreements.




**Production.** The
      following table sets forth, by series, the number of trucks produced by Volvo
      during each of the years 2001 through 2005 and the numbers of trucks produced
      by
      Mack and Renault during the years 2001 through 2005.




21




Number
                of trucks produced
            
            2001
            
            2002
            
            2003
            
            2004
            
            2005Volvo
                FL -series
            
            
            6,690
            
            
            5,640
            
            
            4,820
            
            
            4,980
            
            
            5,052Volvo
                FL7, 10, and 12-series and
              FM7,
                10, and 12-series
            
            
            14,580
            
            
            15,300
            
            
            17,480
            
            
            18,900
            
            
            20,102Volvo
                FH-series
            
            
            28,920
            
            
            31,880
            
            
            33,720
            
            
            45,010
            
            
            42,951Volvo
                NL and NH-series
            
            
            2,400
            
            
            1,490
            
            
            1,940
            
            
            1,170
            
            
            2,312Volvo
                VN, VT series and VHD
            
            
            12,860
            
            
            14,300
            
            
            17,080
            
            
            25,640
            
            
            32,256Volvo
                VM
            
            
            -
            
            
            -
            
            
            400
            
            
            1,600
            
            
            1,842Total
            
            
            65,450
            
            
            68,610
            
            
            75,440
            
            
            97,300
            
            
            104,515Mack
                CH
            
            
            7,298
            
            
            7,540
            
            
            1,744
            
            
            2,006
            
            
            3,786Mack
                CL
            
            
            984
            
            
            288
            
            
            64
            
            
            170
            
            
            364Mack
                Vision
            
            
            2,122
            
            
            2,523
            
            
            4,811
            
            
            7,283
            
            
            9,403Mack
                Granite
            
            
            1,099
            
            
            4,592
            
            
            6,217
            
            
            10,935
            
            
            16,568Mack
                DM
            
            
            703
            
            
            528
            
            
            458
            
            
            519
            
            
            365Mack
                DMM
            
            
            111
            
            
            47
            
            
            -
            
            
            -
            
            
            -Mack
                LE
            
            
            1,393
            
            
            1,084
            
            
            964
            
            
            849
            
            
            1,238Mack
                MR
            
            
            3,015
            
            
            1,668
            
            
            2,034
            
            
            2,603
            
            
            3,325Mack
                RB
            
            
            488
            
            
            103
            
            
            130
            
            
            130
            
            
            23Mack
                RD
            
            
            4,532
            
            
            2,298
            
            
            921
            
            
            17Mack
                RD8
            
            
            86
            
            
            35
            
            
            54
            
            
            4Other
            
            
            -
            
            
            -
            
            
            1,122
            
            
            1,121
            
            
            1,126Total
            
            
            21,831
            
            
            20,706
            
            
            18,519
            
            
            25,637
            
            
            36,198Renault
                Kerax
            
            
            7,967
            
            
            7,677
            
            
            6,674
            
            
            7,063
            
            
            8,800Renault
                Midlum
            
            
            12,764
            
            
            12,545
            
            
            12,801
            
            
            16,018
            
            
            15,484Renault
                Premium
            
            
            17,918
            
            
            16,150
            
            
            15,567
            
            
            17,250
            
            
            18,991Renault
                Magnum
            
            
            7,027
            
            
            7,848
            
            
            7,516
            
            
            8,801
            
            
            8,202Total
            
            
            45,676
            
            
            44,220
            
            
            42,558
            
            
            49,132
            
            
            51,477Total
                Volvo, Mack and Renault
            
            
            132,957
            
            
            133,536
            
            
            136,517
            
            
            172,069
            
            
            192,190





**Production
      and capacity.** Production of trucks in 2005 amounted to 104,515 Volvo Trucks (97,300), 51,477
      Renault Trucks (49,132) and 36,198 Mack Trucks (25,637). In addition, Renault
      Trucks also distributes the Renault Mascott and Renault Master trucks, which
      are
      produced by Renault SAS and the SISU trucks.




Renault
      Trucks’ plant in Blainville, France opened a new, ultramodern facility for
      pretreatment of cabs for painting, with higher capacity, better quality and
      improved environmental features.




To
      meet
      the favorable demand for products in the construction segment, Mack Trucks
      started a second shift in May 2005 at the plant in Macungie, Pennsylvania,
      in
      the US, which increased production capacity by about 40%.




Investments
      to produce the engines of tomorrow for the North American market continued
      in
      Hagerstown, Maryland in the US. During the year, series production of Volvo’s
      12- and 16-liter engines was started and pre-production of the new Mack engines
      series was initiated toward year-end.




22




Volvo
      Trucks opened a new assembly plant in Durban, South Africa, as a consequence
      of
      operations being discontinued at the plant in Botswana. AB Volvo decided during
      the year to invest SEK 650 M in a new paint shop at the Umeå cab plant in
      Sweden. The new facility is expected to be the world’s cleanest topcoat paint
      shop.




**Markets
      and Sales.** In 2005,
      Trucks accounted for 67% of Volvo’s sales. Volvo’s truck operations’ sales by
      principal geographic market area and operating income for the years 2004 and
      2005 are set forth in the following table:




2004
            
            2005(In
                millions of SEK)Western
                Europe
            
            
            68,664
            
            
            70,567Eastern
                Europe
            
            
            8,767
            
            
            9,139North
                America
            
            
            35,154
            
            
            46,129South
                America
            
            
            5,223
            
            
            7,657Asia
            
            
            12,378
            
            
            13,551Other
                markets
            
            
            6,693
            
            
            8,353Total
                sales
            
            
            136,879
            
            
            155,396Operating
                income
            
            
            8,992
            
            
            11,717







Total
      deliveries from the Group’s truck operations amounted to 214,379 trucks in 2005,
      an increase of 11% compared with 2004. In Europe, 103,622 trucks were delivered,
      compared with 102,666 trucks in 2004. Deliveries in North America were up 32%
      compared with 2004 and totaled 64,974 trucks. Deliveries in Asia continued
      to
      develop favorably. During 2005, 14,980 trucks were sold to Iran (14,253 in
      2004). Towards the end of the year there was a significant decline in order
      intake and sales volumes.




**Buses**




**The
      total market** .
      The
      total bus market rose moderately or continued at a high level in most parts
      of
      the world during 2005. However, a slowdown was noted in Europe at the end of
      the
      year. Economic growth in Asia remained strong and bus sales continued to rise
      in
      many countries. Considerable price pressure continued in many
      markets.




**General.** As
      of
      December 31, 2005, Volvo was one of the largest manufacturers, by volume, of
      heavy buses, coaches and bus chassis (with a total weight above 12 tons) in
      the
      world. Volvo Buses' product line comprises complete buses, bus chassis and
      bodies for various applications such as city, intercity buses and coaches as
      well as related services. Priority is given to transport economy, reliability
      and environmental characteristics in the development of products of Volvo Buses.
      Buses’ customers are primarily bus operators with vehicle fleets varying from a
      single bus up to as many as 20,000 buses.




In
      2005,
      Buses accounted for 7% of Volvo’s sales.




**Business
      environment.** The
      consolidation trend toward large bus operators continues. However, there is
      still potential for small companies in the coach segment. The large operators
      are expected to become stronger as they focus on reliability and life-cycle
      costs. They want to cooperate with few suppliers who can offer complete
      solutions: vehicles, financing, after-market and various forms of software
      solutions.




Regional
      authorities and large cities are placing heavy demands on bus safety and minimal
      environmental impact. There is also an increasing demand for vehicles that
      operate on alternative fuels.




The
      increasingly difficult traffic situation in many large cities has led to a
      growing interest in Bus Rapid Transit (BRT) systems, which allows buses to
      travel in separate bus lanes. The buses are modern articulated buses with a
      high
      capacity and the bus stops are adapted for rapid boarding and exiting. Volvo
      Buses is the leading supplier of buses within BRT.




**Strategic
      development.** Volvo
      Buses' ambition for 2006 is to:




23






·
            Continue
                the implementation of the earnings-improvement program within
                Volvo.




·
            A
                reduction in product costs through such measures as increased
                standardization and enhancement of the production
                process.




·
            Renewal
                of the engine program to meet the requirements of Euro 4 and Euro
                5.




·
            Improved
                customer service through expanded cooperation with dealers and service
                centers.




**Products.** Volvo
      Buses has a broad range of modern buses that offer efficient transport
      solutions. The product offering includes complete buses and chassis for city
      and
      intercity traffic, as well as coaches.




In
      2005, a
      low-floor version of the Volvo B9S was launched, both as an articulated bus
      and
      a bi-articulated bus. The chassis is highly suited for modern mass transit
      systems, so-called Bus Rapid Transit (BRT), featuring quick and comfortable
      entering and exiting for passengers. The new chassis was delivered as an
      articulated bus in the new BRT system in Santiago, Chile and bi-articulated
      bus
      in Göteborg, Sweden. The new Volvo B6R midibus was presented in China together
      with an updated version of the Volvo 9300. In India, the Volvo B7RLE city bus
      was launched and an updated version of the Volvo 8300 was introduced in Mexico.
      In Europe, the Volvo 8700 BLEA articulated bus was launched.




The
      business area also continued its broadening of a complete offering to customers,
      including such actions as opening new Bus Service Centers and a continued focus
      on service contracts and financial solutions. Also during the year, the company
      began to offer customers assistance with the analysis and improvement of fuel
      consumption.




**Production
      and capacity.** During
      the year, Volvo produced 10,406 buses (8,089) and bus chassis. The chassis
      plant
      in Borås, Sweden, produced more complete chassis and kits than ever before and
      the plant in Wroclaw, Poland, manufactured a record number of
      buses.




**Markets
      and Sales** .
      Sales by
      Volvo Buses by principal geographic market area and operating income for the
      years 2004 and 2005 are set forth in the following table:




2004
            
            2005(In
                millions of SEK)Western
                Europe
            
            
            6,422
            
            
            6,564Eastern
                Europe
            
            
            526
            
            
            578North
                America
            
            
            2,960
            
            
            4,247South
                America
            
            
            521
            
            
            2,641Asia
            
            
            1,632
            
            
            1,612Other
                markets
            
            
            661
            
            
            947Total
                sales
            
            
            12,772
            
            
            16,589Operating
                income
            
            
            158
            
            
            470





Volvo
      delivered 10,675 buses and bus chassis during 2005, compared with 8,232 buses
      and bus chassis in 2004. Increased sales were reported in many markets,
      including Europe, North America, South America and parts of Asia.




During
      the
      year, Volvo Buses received an order for 1,779 city buses for the Transantiago
      BRT system in Santiago, Chile.




However,
      volumes were lower in China during the year, even though at the end of the
      year
      Volvo Buses received its largest order to date when Shanghai’s largest transport
      company, Shanghai Ba-Shi Group, ordered 2,000 buses. The order was for the
      Volvo
      B6R, Volvo’s new 10.5-meter long city bus. The buses will be delivered by the
      end of summer 2007.




Volvo’s
      market share was strengthened in nearly all markets, with the exception of
      China
      and Brazil. The company maintained its position as market leader in the Nordic
      region and in the UK. In Europe, the market share increased to 15.0% (14.1%)
      and
      in the North American coach segment market share rose to 19.9%
      (18.9%).




24




**Volvo
      CE**




**The
      total market** .
      In 2005,
      the total market for heavy and compact construction machines in Volvo
      Construction Equipment’s product segment rose by 10%. In North America, the
      market grew by 10%, Western Europe by 7%, while the other markets rose by
      13%.




Total
      market growth was driven by both heavy and compact construction machines. The
      North American market for heavy construction machines grew 16%, while the market
      in Europe rose 4%. The other markets increased by 6%.




The
      total
      market for compact construction equipment grew in 2005 by 11%, compared with
      the
      preceding year. The North American market showed growth of 8% and the European
      market was up 8%. Other markets rose by 21%.




The
      Chinese market recovered from a temporarily low level, which is favorable for
      construction equipment in general and for the excavator business in particular.
      In contrast, the weak trend in Korea remained unchanged.




In
      total,
      Volvo CE increased its market share during the year due to new products and
      improved distribution. Deliveries increased by 13% and reached an all-time
      high
      level of more than 33,000 units.




**General** .
      Volvo CE
      has production facilities in Sweden, Germany, France, Poland, the US, Canada,
      Brazil, South Korea and China. Volvo CE’s products are sold and serviced through
      an extensive network of independent distributors and dealers worldwide, combined
      with Volvo CE’s own sales and marketing companies. Operations are focused on
      strong growth. The objective is to broaden the range of products, continue
      to
      penetrate new markets outside Europe and North America and implement programs
      directed at important customer segments. Services such as financing, handling
      of
      used equipment and information technology support in the sales and distribution
      process are also being intensively developed.




In
      2005,
      Construction Equipment accounted for 15% of Volvo’s sales.




**Business
      environment.** The
      industry was characterized by a general upswing in 2005. Consolidation among
      small and medium-size manufacturers continued, although it has not progressed
      as
      far as the truck sector. The large players concentrated on launching new
      products, strengthening their presence in key growth markets and expanding
      their
      distribution networks.




**Strategic
      development.** Volvo
      CE’s
      ambitions for 2006 are to:




·
            Further
                develop excavator business.




·
            Capitalize
                on investments made in Korea, China and
                Germany.




·
            Continue
                to focus on the after-market and on rental operations, as well as
                reduce
                expenses for sales and
                administration.




·
            Continue
                the dealer development program.




·
            New
                products and services for new segments and
                customers.




**Products.** Volvo
      Construction Equipment’s products, spare parts and services are offered
      worldwide in more than 125 markets. Customers are using the products in a number
      of different applications including general construction, road construction
      and
      maintenance and in the refuse, mining and forestry industries.




Volvo
      Construction Equipment’s product portfolio includes wheeled and crawler
      excavators, articulated haulers, wheel loaders, motor graders and a range of
      compact equipment such as wheel loaders, excavators, backhoe loaders and
      skid-steer loaders. The pace of product renewal in the past few years has been
      high. The customer offering includes services such as financing, leasing and
      used equipment sales. Manufacturing facilities are located in Sweden, Germany,
      France, Poland, the US, Canada, Brazil, Korea and China.




25




Volvo
      Construction Equipment’s rental initiative, Volvo Rents, continues to develop
      favorably. During the year, about 40 new outlets were opened and the total
      number at year-end amounted to 116, with 65 in North America and 51 in Europe.
      A
      further 50 facilities are expected to open in 2006.




**Markets
      and Sales.** Sales
      by
      Construction Equipment by principal geographic market area and operating income
      for the years 2004 and 2005 are set forth in the following table:




2004
            
            2005(In
                millions of SEK)Western
                Europe
            
            
            12,443
            
            
            14,213Eastern
                Europe
            
            
            1,010
            
            
            1,311North
                America
            
            
            8,601
            
            
            10,337South
                America
            
            
            922
            
            
            1,238Asia
            
            
            4,961
            
            
            5,717Other
                markets
            
            
            1,423
            
            
            2,000Total
                Sales
            
            
            29,360
            
            
            34,816Operating
                Income
            
            
            1,898
            
            
            2,752





**Production
      and capacity.** To
      reduce
      costs and exploit synergies, Volvo Construction Equipment decided to institute
      joint management for wheel loaders and articulated haulers.




In
      March
      2005 Volvo launched its largest excavator to date, the EC 700 B. This 70-ton
      excavator, which is manufactured in Korea, is in high demand. It is designed
      and
      tested to withstand extreme conditions during heavy work; for example, highway
      and water projects and large-scale loading and excavation in stone quarries.
      Volvo CE’s excavator business has performed very well since the acquisition of
      Samsung’s construction equipment division in 1998. Its annual volume has gone
      from approximately 5,000 machines to nearly 9,000 machines in 2005. A key
      component of Volvo Construction Equipment’s strategy is to expand in excavators,
      since it is the largest product area in the industry.




At
      year-end, an entirely new generation of motor graders was introduced - the
      G 900
      series. It consists of seven machines weighing from 15.5 to 20.9 tons. All
      machines are equipped with Volvo V-ACT engines. The new motor graders will
      be
      manufactured at the Goderich, Canada plant.




**Volvo
      Penta**




**The
      total market.** The
      total
      market for large marine engines remained strong - however, demand for small
      engines subsided, due to lower demand for leisure boats in small-size classes.
      The world market for industrial engines was significantly lower than in the
      preceding year as a result of the sharp decline in the Chinese market. A
      recovery in global demand for industrial engines was noted, however, toward
      the
      end of the year.




**General** .
      By
      supplying technologically superior products focused on performance, operational
      reliability and environmental characteristics, and by being sensitive to
      customer demands for effective service solutions, Volvo Penta is a global leader
      and has one of the industry’s strongest brands. With more than 5,000 dealers in
      some 130 countries, Volvo Penta has a strong global presence.




Volvo
      Penta’s diesel engine business in Marine Leisure continued to grow in 2005. The
      addition of several new customers among boat builders in Europe and North
      America has strengthened Volvo Penta’s position as a world-leading supplier of
      diesel engines for leisure boats. In recent years in the US, Volvo Penta has
      strengthened its position significantly as a supplier of gasoline engines to
      independent boat builders. This trend continued in 2005. Volvo Penta’s
      sterndrive gasoline engines attracted special attention during the year for
      their high quality.




The
      plant
      in Vara in Sweden manufactures large diesel engines. Gasoline engines and drive
      systems are developed and manufactured in the United States.




In
      2005,
      Volvo Penta accounted for approximately 4% of Volvo’s sales.




26




**Business
      environment.** Total
      volumes in the marine industry are considerably lower than in, for example,
      the
      automotive industry. Boat production has not yet undergone restructuring or
      standardization to the same degree as the production of passenger cars and
      trucks, however, the trend in the leisure boat industry has gained pace in
      recent years. Volvo Penta’s operations have recently become increasingly
      integrated with boat builders’ operations, particularly through specially
      adapted production and logistics solutions.




Due
      to the
      new Volvo Penta IPS power system, it is now possible to significantly
      rationalize boat production - a key success factor in the launch of the
      system.




In
      its
      Industrial and Marine Commercial segments, Volvo Penta endeavors to achieve
      the
      same type of integration with the manufacturer of the end-product, by promoting
      production efficiency.




**Strategic
      development.** Volvo
      Penta has implemented extensive product introductions in recent years. In 2006,
      the ambitions are to:




·
            Ensure
                more efficient production and logistics solutions for Volvo Penta
                customers.




·
            Ongoing
                focus on cost control and positive cash
                flow.




·
            Ensure
                the launch of the Volvo Penta IPS enjoys continuing
                success




**Products** .
      Volvo
      Penta offers complete drive systems and service for leisure boats, workboats
      and
      industrial applications such as diesel-powered generating equipment. Volvo
      Penta
      operates in three areas of activity: Marine Leisure, Marine Commercial and
      Industrial.




The
      award-winning new drive system for leisure and commercial boats - the Volvo
      Penta IPS (Inboard Performance System) - replaces traditional shaft
      installations for boats in the 35 to 50-foot class. The Volvo Penta IPS provides
      dramatic improvements in top speed, acceleration and comfort. The new joystick
      function enables Volvo Penta IPS boats to maneuver and dock in a secure manner,
      even in confined harbors. In the leisure boat industry several new boat models
      based on the Volvo Penta IPS were launched during the year. Toward year-end
      2005, the new drive system was launched for boats in commercial operation as
      well.




Volvo
      Penta introduced a new 16-liter diesel engine, which is the most important
      engine segment for the commercial marine business.




**Production
      and capacity.** Capacity
      utilization at Volvo Penta plants was high during the year. In the second half
      of the year, measures were taken to reduce the number of temporary personnel
      at
      the diesel engine plant in Vara, Sweden, and the gasoline engine plant in
      Lexington, Tennessee, in the US - to ensure the ongoing favorable balance
      between production pace and demand.




At
      Volvo’s
      joint engine plant in Skövde, Sweden, Volvo Penta helped improve capacity
      utilization through sales of 12- and 16-liter engines.




**Markets
      and Sales** .
      The
      following table sets forth Volvo Penta’s sales by geographic market area and
      operating income for the years 2004 and 2005:




2004
            
            2005(In
                millions of SEK)Western
                Europe
            
            
            4,723
            
            
            4,845Eastern
                Europe
            
            
            184
            
            
            257North
                America
            
            
            2,500
            
            
            2,832South
                America
            
            
            142
            
            
            208Asia
            
            
            1,324
            
            
            1,427Other
                markets
            
            
            184
            
            
            207Total
                sales
            
            
            9,057
            
            
            9,776Operating
                income
            
            
            940
            
            
            943





**Volvo
      Aero**




**The
      total market.** Airline
      passenger traffic, having recovered in 2004, continued to improve in 2005.
      After
      the first eleven months, the increase in passenger traffic was 6%. Despite
      the
      increasing numbers of people flying today, the IATA still expects airlines
      to
      continue to report losses for 2005. There are large regional differences,
      however. European airlines and carriers in the Asia-Pacific region posted
      profits in 2005. The large American companies, on the other hand, continue
      to
      struggle with significant losses.


27




**General** .
      Volvo
      Aero develops and manufactures high-technology components for aircraft and
      rocket engines. In addition, it offers a broad range of services, including
      spare parts for aircraft engines and aircraft, sale, brokering and leasing
      of
      aircraft engines and aircraft, and maintenance and repair of aircraft engines.
      Volvo Aero also provides after-market services for gas turbines and turbine
      systems.




Volvo
      Aero
      has specialized its operations on developing and manufacturing certain selected
      components in aircraft engines. This is carried out in close cooperation with
      its corporate partners. Volvo Aero conducts operations on a global basis and
      has
      manufacturing plants in Sweden, Norway and the US.




In
      2005,
      Volvo Aero accounted for approximately 3% of Volvo’s sales.




**Business
      environment.** Order
      bookings for large commercial aircraft basically increased in each month of
      the
      year. Airbus and Boeing announced a combined order intake of 2,140 orders in
      2005 compared with 647 in 2004. Aircraft deliveries increased by 10% from 606
      to
      668 in 2005.




**Strategic
      Development.** For
      2006,
      the ambitions are to;




·
            Meet
                challenges in design and manufacturing, particularly regarding the
                new
                GEnx engine.




·
            Continue
                precision delivery of engine components without losing focus on
                costs.




·
            New
                development assignments for the RM12 Gripen
                engine.




·
            Increase
                after-market volumes and
                profitability.




**Products** .
      Volvo
      Aero offers a wide range of services and products for the commercial, aerospace
      and military aircraft industries, including high-technology components for
      engines, sale of parts for engines and aircrafts and overhaul and repair of
      aircraft engines and gas turbine engines. In addition, Volvo Aero provides
      aftermarket services for gas turbine engines and systems.




The
      company operates in close cooperation with partners. In 2005, important
      contracts on engine programs, such as the new engine GEnx and the industrial
      gas
      turbine LM2500, were signed with General Electric.




**Production
      and capacity** .
      During
      the year, cooperation with General Electric was increased. Volvo Aero and
      General Electric signed contracts whereby Volvo Aero increased its share in
      the
      LM2500 stationary gas turbine. Since 1997 Volvo Aero has been a risk-sharing
      partner on the LM2500, which became known as the most reliable gas turbine
      in
      its class. At the end of November, almost exactly one year after signing the
      contract for the new GEnx aircraft engine, Volvo Aero delivered the first
      components - right on schedule.




On
      February 12, 2005 the new Ariane 5 rocket, the ECA, was successfully launched.
      Since December 2002, working under intense time constraints, Volvo Aero has
      further developed the exhaust nozzle of the rocket, which can support a
      significantly greater usable load than before. The launch of the rocket was
      extremely significant for the ongoing European space program.




Volvo
      Aero
      Norway signed a contract with Pratt & Whitney to manufacture a component for
      the F135 engine for the F-35 JSF fighter aircraft.




Volvo
      Aero
      signed a contract with Snecma for the serial manufacture of nozzles and turbines
      for the Ariane 5. In addition, Volvo Aero and Snecma also signed a cooperation
      agreement to develop new turbine technologies for the aerospace industry.




28


In
      April
      2005 the world’s largest passenger aircraft, the Airbus A380, flew for the first
      time. The A380 has Trent 900-type Rolls Royce engines, an engine program in
      which Volvo Aero is part-owner. In addition Volvo Aero delivers components
      for
      the second engine alternative, the GP7000.




**Markets
      and Sales.** The
      following table sets forth Volvo Aero’s sales by geographic market area and
      operating income for the years 2004 and 2005:




2004
            
            2005(In
                millions of SEK)Western
                Europe
            
            
            3,130
            
            
            3,346Eastern
                Europe
            
            
            49
            
            
            60North
                America
            
            
            3,127
            
            
            3,612South
                America
            
            
            138
            
            
            168Asia
            
            
            400
            
            
            284Other
                markets
            
            
            81
            
            
            68Total
                sales
            
            
            6,925
            
            
            7,538Operating
                income
            
            
            403
            
            
            836




**Financial
      Services**




Volvo
      Financial Services (VFS) provides services in three main areas: customer finance
      and insurance, treasury operations and real-estate management. These services
      enable Volvo to apply a Group-wide approach to financial risk. They also play
      a
      key role in Volvo’s strategy for becoming the world’s leading provider of
      commercial transport solutions.




Volvo's
      expanding customer finance operations cover Europe, North America, Australia,
      and parts of South America and Asia. VFS conducts customer finance operations
      in
      more than 50 countries. Finance programs are offered to the dealers and
      end-customers of Volvo's business areas. The range of financial services
      includes installment contracts, financial and operational leasing, and the
      financing of dealers. In many markets insurance service and maintenance
      contracts are also offered separately or in combination with financing services.




Volvo’s
      internal bank, Volvo Treasury, coordinates the Group’s global funding strategy
      and financial infrastructure. It is responsible for the management of all
      interest-bearing assets and liabilities and the execution of foreign-exchange
      transactions. A diversified funding strategy kept the Group's borrowing cost
      at
      competitive levels and gave strong support to VFS's growing customer finance
      activities in 2005.




Operations
      within Danafjord, VFS’s real-estate unit, include the renting and development of
      commercial real estate in Sweden and, increasingly, in other countries. During
      the year, Danafjord sold some of its non-strategic property in Kalmar and
      Torslanda generating a gain of SEK 188 million. The occupancy rate at the end
      of
      2005 was 99.9% (99.8), and 52% (52) of the total was accounted for by tenants
      outside the Volvo Group. 81% (84) of the leases extend for five years or
      more.




During
      2005, VFS developed and launched a new strategic initiative called “Commercial
      Focus” (CF) to further improve its effectiveness and contribute greater value to
      the Group's Business Areas, its dealers and customers. The goals of CF are
      to
      integrate VFS's activities more closely with those of the other Business Areas,
      enhance the depth and breadth of VFS's services and develop how services are
      provided to key accounts. The first six of numerous global projects were started
      in 2005 to support these goals. VFS believes this initiative will increase
      its
      market share as it continues to maintain prudent pricing and credit
      levels.




**Strategic
      development.** For
      2006
      the ambitions for Financial Services are:




·
            Expand
                customer finance operations in growth markets.




**·**
            Closely
                monitor and adapt operations to economic
                conditions.




**·**
            Maintain
                low costs for funding the Group’s
                operations.




29


**Expanding
      credit portfolio.** During
      2005, the volume of new financing amounted to SEK 33 billion, up by more than
      SEK 3.5 billion compared with 2004.




On
      December 31, 2005, total assets amounted to SEK 86 billion (72 billion), of
      which SEK 79 billion (64 billion) related to the net credit portfolio. Adjusted
      for the effects of foreign-exchange movements, the credit portfolio grew by
      10%
      during the year, compared with growth of 11% in the preceding year.




From
      a
      currency perspective, 37% of the portfolio was denominated in EUR, 35% in USD,
      9% in GBP and 6% in CAD. The remaining 13% is primarily a mix of other European
      and Latin American currencies.




**Suppliers**




Volvo’s
      decision on whether to manufacture or to purchase from suppliers any particular
      component is made competitively on commercial terms. Although Volvo manufactures
      certain major components, including engines, transmissions and truck cabs,
      components are, to a large extent, purchased from suppliers outside of the
      Volvo
      Group. Increasingly, Volvo contracts with suppliers to manufacture an entire
      functional unit, such as completely finished seats, with the supplier assuming
      full responsibility for production to Volvo’s specifications. The primary
      prerequisites for cooperation with suppliers are near zero-defect quality level,
      competitive cost, and flexible and reliable delivery performance. Volvo also
      considers environmental matters in its selection of suppliers.




**Sources
      and availability of raw materials.** Volvo
      purchases raw materials, parts and components from numerous outside suppliers.
      A
      majority of the Group’s requirements for raw materials and supplies is filled by
      single-source suppliers. The impact of an interruption in supply will vary
      by
      commodity and components. Some parts are generic to the industry while others
      are of a proprietary design requiring unique tooling, which would take time
      to
      recreate. The inability of a supplier to deliver could have an adverse effect
      on
      production at certain of Volvo’s manufacturing locations.




The
      cost
      for raw material and components can vary significantly over the business cycle.
      These variations can occur due to changes in the commodity market or our
      suppliers' ability to deliver.




See
“Item
      3.D - Risk Factors - Volvo relies on suppliers for the provision of certain
      raw
      materials and components”.




**Marketing**




The
      greater part of the sales of Volvo’s products takes place in Europe, North
      America and Asia. Globally the majority of Volvo’s products is sold through
      independent dealers. In Europe a majority of Volvo’s products is sold through
      independent dealers but a significant part of sales is carried out through
      Volvo’s own dealer network. In North America products are sold mainly through
      independent dealers but Volvo also has a substantial part of direct sales to
      large fleet customers.




**Research
      and Development**




In
      2005
      and 2004, research and development expenses were SEK 7,557 million and SEK
      7,614
      million, respectively. Considerable research work is devoted not only to
      traditional product development, but also to developing effective software
      and
      total solutions designed to improve profitability in Volvo’s customer’s
      business.




**New
      improved products** Volvo's
      research and development focuses on its customers' business, environmentally
      adapted solutions and safety awareness. In the beginning of 2005 Volvo
      introduced two new truck models based on shared technology and architecture:
      Renault Magnum and Volvo VT880. In product development, all business areas
      and
      business units use a well-structured process with quality gates and milestones
      specifying the requirements that have to be fulfilled before a project is
      allowed to continue. Safety and environmental requirements are also key
      parameters in the process.




The
      focus
      on product quality in the development process as well as in the interface with
      the customer has led to improved results in customer satisfaction
      measurements.




30


**Safety
      in focus.** Safety
      is
      one of Volvo's core values and research in this field has a high priority.
      Safety relates to the use of our products in society. We strive to minimize
      the
      risks and consequences of accidents, and to improve the safety and work
      conditions for vehicle operators. The Volvo Group has a strong commitment to
      provide customers with products that meet high demands on safety and we shall
      thereby be recognized as a leading producer of safe products, components and
      systems.




Safety
      aspects have a prominent role in all our product development and are based
      on an
      awareness of the user’s expected behavior. The basis for good safety is reliable
      and efficiently functioning products that respond in the anticipated manner.
      The
      user must be offered optimal conditions for handling the vehicle, even in
      complex situations.




The
      Volvo
      Group has made considerable progress in developing systems that help drivers
      to
      drive safely. For example, our trucks and buses can be equipped with
      electrically controlled disc brakes. These can be used in a stabilization
      system, Electronic Stability Program, ESP. Another example is the Adaptive
      Cruise Control, ACC, an electronic system that automatically adjusts the vehicle
      speed and distance in relation to the vehicle ahead.




**Environmental
      improvement and utilization.** Improved
      fuel efficiency results in lower costs for our customers and is an effective
      way
      to reduce emissions of carbon dioxide. In order to improve air quality,
      regulators in many countries are placing even more stringent requirements on
      reducing emissions, especially of nitrogen oxides and particulates.




In
      order
      to meet these demands, we are continuously developing new engine technologies
      that reduce fuel consumption and emissions. The harmful substances in emissions
      have been reduced by up to 85% over the past twenty years. Fuel consumption
      and
      carbon dioxide emissions have been cut by 30% over the same period.




Our
      products use primarily diesel engines, due to their energy efficiency and their
      potential for low emissions. While the primary focus is on developing diesel
      engines, Volvo has also made significant strides in the areas of alternative
      engine types and fuels. In the long term, we regard dimethylether as a possible
      fuel alternative. It can be used in the diesel process, has a high level of
      efficiency and can be produced from renewable raw materials.




**Patents,
      Trademarks and Licenses**




Volvo’s
      patents, trademarks, trade names and licenses are important to the business
      of
      each of the business areas within Volvo. Volvo owns or otherwise has rights
      to a
      substantial number of trademarks that it uses in conjunction with its business.
      Volvo believes that the level of protection of trademarks and other intellectual
      property rights used in its business is and has historically been adequate
      relative to its business. Volvo will use its best efforts to maintain the
      protection of such rights to the same extent in the future and is continuously
      evaluating and renewing its trademark and trade name registrations in all
      countries in which Volvo does any material amount of business. After the sale
      of
      Volvo Cars to Ford, the Volvo trademark is owned by Volvo Trademark Holding
      AB,
      which is jointly owned by AB Volvo and Volvo Car Corporation. The right to
      use
      the trademark “Volvo” has thereafter been regulated through license agreements
      made between Volvo Trademark Holding AB and AB Volvo and Volvo Car Corporation,
      respectively.




Volvo
      Car
      Corporation has the right to use the “Volvo” trademark for passenger cars,
      minivans carrying up to 10 passengers, light trucks with payload up to 1,500
      kilograms, sports utility vehicles and other vehicles, but not buses or other
      vehicles used solely for commercial purposes, that have a gross vehicle weight
      of not greater than 5,400 kilograms (12,000 lbs. gross weight). AB Volvo has
      the
      right to use the trademark for trucks, buses, construction equipment, industrial
      and marine engines, aerospace equipment and all other products (apart from
      those
      which Volvo Car Corporation has the right to use the trademark for). To secure
      these rights and avoid having the trademark eroded, AB Volvo and Volvo Car
      Corporation have jointly adopted mechanisms to control their respective use
      of
      the trademark and to prevent others from taking undue advantage of
      it.




With
      regard to the “Mack” trademark, which is owned within the Volvo Group, similar
      control mechanisms apply. Volvo’s right to use the “Renault” trademark are
      limited to the truck sector only and are governed by a license agreement with
      the French company Renault SA, the owner of the “Renault”
trademark.




31


**Regulatory
      Matters**




**Environmental
      and Other Regulatory Matters**




The
      corporate values of quality, safety and environmental care are present in the
      daily operations of the Volvo Group. Quality and environmental management
      systems are used in all parts of the organization as the means for addressing
      responsibility and objectives. The Group policies and a common network of
      environmental auditors monitor compliance with the Group guidelines and
      objectives.




During
      2002, improved energy efficiency and lower emissions were defined as the focused
      environmental agenda for the entire Volvo Group, and objectives for the coming
      three-year period were developed.




**Reduced
      emissions.** The
      Volvo
      Group primarily uses diesel engines in its products, due to their high energy
      efficiency and their potential for low emissions. The main focus in development
      is on diesel engines. Improved fuel efficiency is an effective way of reducing
      carbon dioxide emissions, as well as reducing costs for the Group’s customers.




In
      order
      to improve air quality, regulators in many countries are placing even more
      stringent requirements on reducing emissions, especially of nitrogen oxides
      and
      particulates. In the US and the EU, among other places, the requirements are
      set
      to become considerably more rigorous during the next few years. All heavy trucks
      and buses registered in the EU from October 1, 2006 must meet the Euro 4
      emissions standards. There are significant differences concerning exhaust
      emissions between an engine fulfilling the current Euro 3 requirements and
      one
      that meets the Euro 4 requirements. Emissions of nitrogen oxides (NOx) have
      to
      be reduced from 5 to 3.5 g/KWh, corresponding to a reduction of 30%. Particle
      emissions (PM) have to be reduced from 0.1 to 0.02 g/KWh, a reduction of no
      less
      than 80%. Euro 5, which will take effect on October 1, 2009 will require that
      NOx emissions levels in accordance with Euro 4 be halved.




To
      fulfill
      the new requirements for trucks and buses due to be introduced in Europe in
      2006
      (Euro 4) and 2009 (Euro 5), new solutions are needed for diesel engines. The
      Group’s solution to meet the requirements is diesel engines with even more
      efficient combustion and after treatment of exhaust gases with the additive
      AdBlue and Selective Catalytic Reduction (SCR). In North America, the Volvo
      Group has chosen to use an exhaust recirculation system - High-performance
      Exhaust Gas Recirculation (HEGR) - to reduce emissions of nitrogen oxides (NOx),
      combined with a diesel particulate filter.




Fuel
      efficiency is the main interest of all our customers, with its direct link
      to
      the operating costs of the business. Improved total fuel efficiency is also
      the
      most rewarding way to decrease carbon dioxide (CO2) emissions. How a vehicle
      is
      driven also has a significant effect on fuel consumption. For example, the
      same
      vehicle’s fuel consumption can vary by as much as 20% between different drivers.
      In some markets, the Volvo Group companies offer driver training programs that
      cover both fuel-efficient driving and safe driving.




At
      the
      same time to improve ambient air quality, increasingly stricter emission
      regulations put pressure on the engine development to decrease mainly nitrogen
      oxides (NOx) and particle emissions. Unfortunately, higher fuel efficiency
      normally means higher emissions of NOx, a physical fact resulting from higher
      combustion temperatures. This balance is the challenge for all the Volvo Group
      business areas.




The
      recent
      product launches demonstrate how the stricter emission requirements have been
      met with highly competitive fuel efficiency. Volvo Penta’s new medium-heavy
      marine diesel engines, D6-350 and D4-260, and the new D9, a future alternative
      to outboard engines demonstrate decreased fuel consumption combined with
      substantially lower emissions as well as advantages in terms of weight and
      noise
      levels. The key to this strategy is a close collaboration between engine
      development and each application, to ensure the right combination of engine,
      transmission, chassis and body. The I-shift transmission used in the Volvo
      Trucks is an example of this integration.




32


**4.C.****Organizational
      Structure**




The
      Volvo
      Group's operations during 2005 were organized in eight business areas: Volvo
      Trucks, Renault Trucks and Mack Trucks, Buses, Construction Equipment, Volvo
      Penta, Volvo Aero and Financial Services. In addition to the eight business
      areas, there are certain operations, consisting mainly of service companies
      that
      are designed to support the business areas' operations. In the financial
      reporting the business areas Volvo Trucks, Renault Trucks and Mack Trucks are
      reported as one segment.




Each
      business area except Financial Services has total responsibility for its
      operating income and operating capital. The Financial Services business area
      has
      responsibility for its net income and total balance sheet within certain
      restrictions and principles that are established centrally.




The
      supervision and coordination of treasury and tax matters is organized centrally
      to obtain the benefits of a Group wide approach. The legal structure of the
      Volvo Group is based on optimal handling of treasury, tax and administrative
      matters and, accordingly, differs from the operating structure.




See
“Item
      18 - Financial Statements - Note 4” for information concerning Volvo’s group
      structure and significant subsidiaries, including the name, country of
      incorporation, proportion of ownership interest and, to the extent different,
      proportion of voting power held.




**4.D.****Property,
      Plants and Equipment**




At
      December 31, 2005, the eight business areas of Volvo had manufacturing
      facilities worldwide.




Major
      components for the Group’s products are manufactured in Sweden, including
      engines, power transmission systems, cabs and sheet metal
      components.




Trucks
      are
      assembled in plants in Sweden, Belgium, France, Spain, Brazil, Venezuela,
      Australia, the United States, China, India and South Africa.




Volvo’s
      bus production takes place in Sweden, Finland, Poland, Brazil, Canada, Mexico,
      India, China and South Africa.




Facilities
      for production of construction equipment are located in Sweden, Germany, France,
      Poland, the United States, Canada, Brazil, South Korea and China.




Volvo
      Penta’s production facilities are in Sweden, United States and China.




The
      production facilities of Volvo Aero are located in Sweden, Norway and the United
      States.




The
      major
      part of the properties owned by the Volvo Group is used in the Group’s own
      operations. A certain number of the properties owned are leased to Volvo Car
      Corporation. The greater part of Volvo’s production facilities is owned by
      Volvo.




Volvo
      believes that the Group’s principal manufacturing facilities and other
      significant properties are in good condition and are adequate to meet the needs
      of the Volvo Group.




**Environmentally
      adapted production** .
      Environmental protection and responsible utilization of our shared natural
      resources are obvious aspects of Volvo’s production. The Volvo Group places
      environmental requirements on all facilities. These requirements include
      guidelines for the utilization of chemicals, energy use, emissions into the
      air
      and water, waste management, environmental organization and improvement
      efforts.




Since
      1989, routine audits are conducted in order to monitor environmental efforts.
      Auditors identify environmental risks and any necessary measures that must
      be
      taken. Follow-up is conducted to ensure that work is completed. We have
      insurance coverage for environmentally related damages to the immediate
      surroundings, for example in the event of a sudden emission.




All
      of
      Volvo’s production facilities have the requisite environmental permits. In
      Sweden, there are 16 facilities that require permits. Those permits encompass
      waste, noise and emissions into the air, ground and water. One Swedish
      environmental permit is subject to renewal in 2006.




**Freight.** Air
      pollution from our own industrial operations is substantially lower than the
      emission from transport of goods to and from our production facilities. In
      order
      to encourage environmental improvement measures in our transport systems, Volvo
      Logistics, the Group's procurement company for transport services, continuously
      assesses the environmental work of contracted transport companies according
      to a
      classification system. Every new supplier contract includes an environmental
      clause whereby the transport company undertakes to operate in accordance with
      the ISO 9000 and ISO 14001 standards.


33





**ITEM
      4A. UNRESOLVED STAFF COMMENTS.**




Not
      applicable.




34


**ITEM
      5. OPERATING AND FINANCIAL REVIEW AND
      PROSPECTS.**




**5.A.****Operating
      Results****.**




The
      following operating financial review should be read in conjunction with the
      Company's Consolidated Financial Statements included herein. The Consolidated
      Financial Statements and the financial information discussed below have been
      prepared in accordance with International Financial Reporting Standards, IFRS,
      as adopted by European Union, EU. For a discussion of the principal differences
      between IFRS and US GAAP, see “Item 18.  Financial
      Statements—Note 37.”




**General**





The
      following table sets forth the Volvo Group’s sales and operating income by
      business areas for each of the years in the two-year period ended December
      31,
      2005.




2004
            
            2005Net
                sales
            
            (In
                millions of SEK)Trucks
            
            
            136,879
            
            
            155,396Buses
            
            
            12,722
            
            
            16,589Construction
                Equipment
            
            
            29,360
            
            
            34,816Volvo
                Penta
            
            
            9,057
            
            
            9,776Volvo
                Aero
            
            
            6,925
            
            
            7,538Financial
                Services
            
            
            9,598
            
            
            7,549Other
                and eliminations
            
            
            6,535
            
            
            8,895Total,
                as reported
            
            
            **210,401**
            
            
            **240,559**Operating
                income (loss)1Trucks
            
            
            8,992
            
            
            11,717Buses
            
            
            158
            
            
            470Construction
                Equipment
            
            
            1,898
            
            
            2,752Volvo
                Penta
            
            
            940
            
            
            943Volvo
                Aero
            
            
            403
            
            
            836Financial
                Services
            
            
            1,365
            
            
            2,033Other
            
            
            923
            
            
            -600Total,
                as reported
            
            
            **14,679**
            
            
            **18,151**


____________


1
            Operating
                income in 2004 included reversal of write-down of shares in Scania
                AB of
                915, which was reported in Other and write-down of shares in Henlys
                Group
                plc of 95, which was reported in
                Buses.




**Volvo’s
      investment in Scania AB**




During
      1999 and 2000, Volvo acquired 45.5% of the capital and 30.6% of the voting
      rights in Scania AB, one of the world’s leading manufacturers of trucks and
      buses. As a condition in connection with the European Commission’s approval of
      Volvo’s acquisition of Renault V.I. and Mack Trucks Inc. in 2001, Volvo
      undertook to divest its holding in Scania not later than April 2004. In April
      2004, the Annual General Meeting approved a dividend to AB Volvo's shareholders
      of 99% of the shares in Ainax AB, a wholly owned subsidiary holding all of
      Volvo's Scania Series A shares. The distribution of shares in Ainax AB to
      Volvo’s shareholders was made on June 8, 2004 and the value of this dividend was
      SEK 6,310 million. Volvo has no longer any holdings in Scania AB or Ainax
      AB.




**Volvo’s
      investment in Henlys Group plc**





During
      1998 and 1999, Volvo acquired 9.9% of the capital and voting rights in Henlys
      Group plc at a total acquisition cost of SEK 524 million. Henlys Group was
      a
      British company involved in manufacturing and distribution of buses and bus
      bodies in Great Britain and North America. Volvo and Henlys Group jointly owned
      the shares of the North American bus operations Prévost and Nova Bus. In
      February and March 2004, Henlys announced that its earnings for 2004 were
      expected to be significantly lower than previously anticipated. As a consequence
      of receiving this information, it was determined at the date when Volvo issued
      its 2003 financial statements that Volvo's holding in Henlys Group plc was
      permanently impaired at December 31, 2003, and a write-down was charged to
      Volvo’s operating income under Swedish GAAP for 2003. On June 10, 2004, Henlys
      Group announced that it was holding discussions with its lending banks and
      other
      principal creditors regarding a restructuring of the Henlys Group, and that
      it
      intended to delist its shares from the London Stock Exchange, Volvo wrote-down
      its remaining stake, SEK 95 million, in the second quarter 2004.




35


In
      October
      1999, Volvo issued a convertible debenture loan to Henlys Group of USD 240
      million in connection with Henlys Group’s acquisition of the US school bus
      manufacture Bluebird. The convertible debenture loan matured in October 2009.
      During the autumn 2004 Henlys Group was restructured. As part of the
      restructuring, Volvo Group reached an agreement to acquire the remaining 50%
      of
      the North American bus manufacturer Prévost Car Inc., containing the Prévost and
      Nova brands. The purchase price was SEK 554 million including two loans made
      available to Prévost Car Inc. by Henlys. In accordance with the agreement,
      Prévost Car Inc. became a wholly owned subsidiary of Volvo Bus Corporation. The
      agreement also involved Volvo converting part of the convertible debenture
      loan
      of SEK 1,601 million issued to Henlys into common and preferred shares in a
      newly established US-based company, Peach County Holdings Inc, containing the
      US
      school bus manufacturer Blue Bird. After the conversion Volvo owned 42,5% of
      the
      common shares in the new company. The conversion resulted in a write-down of
      approximately SEK 1.3 billion 2004, see “Item 18.  Financial
      Statements—Note 11.”




**Peach
      County Holdings, Inc**




During
      the
      fourth quarter of 2005 Volvo wrote down its shareholding in Peach County
      Holdings, Inc. by about SEK 550 M. At December 31, 2005 Volvo held 42.5% of
      the
      US-based company, which in turn owns the American school bus manufacturer Blue
      Bird. Since its reconstruction in the preceding year, Blue Bird has not
      developed well. The write-down was made as a consequence of Volvo’s decision not
      to participate in continued financing efforts. After the write-down, the value
      is zero. In January 2006, Peach County Holdings entered into reorganization
      proceedings (Chapter 11) and as a consequence of Volvo choosing not to
      participate in the continued reconstruction, Volvo’s shares in the company were
      cancelled.




**Volvo
      and Renault agreement**




In
      July
      2000, AB Volvo reached an agreement with Renault S.A. to acquire Mack Trucks
      and
      Renault V.I., the truck operations of Renault, in exchange for 15% of AB Volvo's
      shares.




During
      2001, AB Volvo and Renault S.A. entered into a dispute regarding the final
      value
      of the acquired assets and liabilities in Renault V.I. and Mack Trucks. The
      dispute was settled during the fourth quarter of 2004 and an amount of SEK
      981
      million has reduced the goodwill amount pertaining to the acquisition of Renault
      V.I.




**Economic
      and market conditions.** 2005
      continued to be a strong year in global economic momentum. The economic
      expansion in the United States remained buoyant despite tighter monetary
      conditions. The Euroland economy failed to match the acceleration seen in 2004.
      Metal and oil prices appreciated sharply in 2005.




Overall,
      demand was very high in the markets in Europe, North America and South America.
      The total market for heavy trucks, based on the number of registered vehicles,
      in EU member countries plus Norway and Switzerland) rose 9% to 276,700 trucks
      in
      2005, which is a new record level. Registration in the UK increased by 5%,
      in
      France by 21%, while the market in Germany was up 4% and in Spain by 10%. The
      market for heavy trucks in North America (Class 8) rose 29% in 2005 to 328,900
      heavy trucks, compared with 255,500 trucks in 2004. This was driven by the
      continued strong US economy, with rising haulage needs. In addition, demand
      was
      driven by a need to renew truck fleets and that some customers wanted to
      purchase new trucks prior to the new, stricter emissions legislation becoming
      effective on January 1, 2007. The market for heavy trucks in Brazil declined
      by
      9%. In 2005, the total market for heavy and compact construction machines in
      Volvo Construction Equipment’s product segment rose by 10%. In North America,
      the market grew by 10%, Western Europe by 7%, while the other markets rose
      by
      13%. Total market growth was driven by both heavy and compact construction
      machines. The North American market for heavy construction machines grew 16%,
      while the market in Europe rose 4%. The other markets increased by 6%. The
      total
      market for compact construction equipment grew in 2005 by 11%, compared with
      the
      preceding year. The North American market showed growth of 8% and the European
      market was up 8%. Other markets rose by 21%. The Chinese market recovered from
      a
      temporarily low level, which is favorable for construction equipment in general
      and for the excavator business in particular. In contrast, the weak trend in
      Korea remained unchanged.




36


**Factors
      affecting results.** The
      Volvo
      Group’s sales are principally affected by unit sales volume and vehicle prices
      as well as by currency fluctuations, product mix and sales of optional
      equipment. The profitability of Volvo’s operations depends on a number of
      factors, including research and development expenses and the ability to achieve
      cost and capital efficiencies in product manufacturing.




**Impact
      of Currency Fluctuations.** A
      substantial amount of Volvo’s assets and debt are denominated in currencies
      other than Swedish kronor or located in countries other than Sweden. Most of
      Volvo’s sales take place outside Sweden with invoicing in U.S. dollars and other
      currencies. The sales outside Sweden amounted to, SEK 196,470 million and SEK
      225,225 million, or 93% and 94% of Group sales in 2004 and 2005,
      respectively.




A
      large
      part of Volvo’s production takes place outside Sweden. In addition, a large
      percentage of the Group’s suppliers are located outside the production countries
      from which Volvo imports, among other things, parts and various raw materials,
      which may be invoiced in currencies other than kronor. Volvo’s sales and income,
      expressed in kronor, may be materially affected by fluctuations in the exchange
      rates between the kronor and the currencies in which the Group sells to customer
      or purchases from suppliers.




Changes
      in
      exchange rates have both dynamic and direct effect on income. The dynamic
      effects include the pricing of products sold and materials purchased in foreign
      currency. Changes in exchange rates also affect competitors and thus have an
      indirect impact on Volvo’s competitiveness. The direct effects arise mainly when
      income, expense, assets and liabilities in foreign currencies are translated
      to
      Swedish kronor at rates different than those used to translate financial items
      for an earlier period.




The
      average exchange rates between the Swedish krona and other major currencies
      such
      as the US dollar and the Euro were almost unchanged for 2005 compared to 2004.




The
      total
      effect of changes in currency exchange rates on operating income in 2005
      compared with 2004 was positive by approximately SEK 100 million. The
      transactional effect of changed spot-market rates was positive, approximately
      SEK 1,000 million. The effect on income of forward and option contracts amounted
      to a loss of SEK 566 million (gain of SEK 828 million in 2004), which resulted
      in a negative impact of SEK 1,394 million for 2005, compared with 2004. Changes
      in spot rates in connection with the translation of income in foreign
      subsidiaries and the revaluation of balance sheet items in foreign currencies
      had a positive impact of SEK 651 million.




**Adoption
      of International Financial Reporting Standards.** From
      January 1, 2005, AB Volvo prepared its consolidated financial statements in
      accordance with IFRS. AB Volvo restated its financial statements from January
      1,
      2004 to IFRS. See Notes 1 and 3 to the consolidated financial statements. In
      addition, consolidated net income and stockholders’ equity are reported as
      reconciled to U.S. GAAP. Unless otherwise indicated, all amounts and percentages
      presented herein are based on IFRS. IFRS as applied by the Company differs
      in
      certain significant respects from U.S. GAAP. For a discussion of the significant
      differences between IFRS and U.S. GAAP affecting AB Volvo’s consolidated
      financials statements and reconciliation to U.S. GAAP of consolidated
      stockholders’ equity and consolidated net income as of and for the years ended
      December 31, 2005 and 2004, see Note 37 to the consolidated financial
      statements. As a result of AB Volvo’s transition to IFRS reporting, certain
      amendments have been made to the adjustments recorded in its reconciliation
      of
      net income and equity under US GAAP for the financial year 2004.




37


**Results
      from continuing operations**




**2005
      compared with 2004**





**Volvo
      Group.** Net
      sales
      in 2005 amounted to SEK 240,559 million (211,076), an increase of 14% compared
      with a year earlier. Adjusted for changes in currency rates, net sales rose
      11%.
      Net sales for the Group’s truck operations amounted to SEK 155,396 million,
      which adjusted for changed exchange rates corresponded to an increase of 11%.
      The increase was attributable to higher sales, primarily in North America,
      South
      America and Other markets. Demand in North America was driven by a continued
      strong US economy, which resulted in increased transport needs. In addition,
      there is a need to renew truck fleets, which certain hauling companies are
      doing
      prior to the new, stricter emission legislation becoming effective at the
      beginning of 2007. In Europe, demand rose somewhat from an already historically
      high level. In total, Volvo delivered 214,379 trucks in 2005, 11% more than
      in
      the preceding year.




Net
      sales
      within Buses rose 30% compared with 2004. Adjusted for currency effects and
      purchase of the outstanding 50% of Prévost and Nova Bus, the increase was 18%.
      The increase is attributable mainly to South America, where a large number
      of
      buses were delivered to the new, efficient rapid transit bus system in Santiago,
      Chile.




As
      a
      result of a broadened production range and improved market shares in a rising
      world market, net sales in Construction Equipment increased by 19%. Adjusted
      for
      currency effects and divested operations, the increase was 18%.




Volvo
      Penta succeeded in offsetting the reduction in deliveries of industrial engines
      to China through growing on other markets. Net sales rose 8% in 2005, or 7%
      adjusted for currency changes.




The
      recovery in the aerospace industry affected Volvo Aero positively and, after
      several years of reduced sales, net sales again increased. The upturn was 9%
      in
      2005, and adjusted for changes in currency rates, the increase was the
      same.




Strong
      economic growth combined with a major need to replace ageing fleets of trucks
      and construction equipment contributed an increase of 28% in net sales in North
      America. The rate of growth in Europe was significantly lower for the Group,
      which is reflected in the weaker economic development in Europe in many
      important countries. Net sales in South America were up 71% as a consequence
      of
      the increased sales of mainly trucks and buses.




Operating
      income in 2005 increased 24% to SEK 18,151 million (14,679). Excluding a
      positive effect on operating income from revaluation of shares in Scania AB
      and
      Henlys Group of SEK 820 million in 2004, the increase was 31%. The improvement
      is due mainly to increased volumes, higher gross margins and a higher portion
      of
      capitalized development expenses.




Trucks
      reported operating income of SEK 11,717 million (8,992), up 30%. The increase
      is
      attributable primarily to North America, where Mack Trucks and Volvo Trucks
      increased profitability through a favorable price realization and increased
      volumes. In Europe, Renault Trucks continued to improve its earnings while
      profitability for Volvo Trucks’ operations in Europe declined somewhat from a
      favorable level. Operating income for the European truck operations was impacted
      by increased costs during the second half of 2005 as a consequence from launches
      and production changeovers in connection to the introduction of a new generation
      of trucks and engines.




Operating
      income in Buses continued to improve as a result of the restructuring
      implemented earlier and higher sales volumes, particularly in South America.
      Operating income for full-year 2005 was SEK 470 million, compared to SEK 158
      million in 2004.




Through
      strong cost control and increased volumes, Volvo Construction Equipment
      continued to improve its profitability. Operating income rose by 45% to SEK
      2,752 million in 2005.




Volvo
      Penta maintained its high profitability during 2005 and at the same time
      implemented aggressive investments in product development and substantial
      marketing efforts to capitalize on the new and competitive product portfolio.
      Operating income remained at the same level as in 2004, SEK 943 million (940).




As
      an
      effect of the recovery in the aerospace industry, volumes rose for Volvo Aero.
      Combined with a favorable product mix and price realization, this resulted
      in an
      increase in operating income of 107% to SEK 836 million in 2005.




Operating
      margin for the Volvo Group during 2005 was 7.5% compared to 7.0%
      2004.




38


**Trucks** . Net
      sales
      for Volvo’s truck operations amounted to SEK 155,396 M, which adjusted for
      changed exchange rates corresponded to an increase of 11%. The increase was
      attributable to higher sales, primarily in North America, South America and
      Other markets. Demand in North America was driven by a continued strong U S
      economy, which resulted in increased transport needs. In addition, there is
      a
      need to renew truck fleets, which certain hauling companies are doing prior
      to
      the new, stricter emission legislation becoming effective at the beginning
      of
      2007. In Europe, demand rose somewhat from an already historically high level.
      In total, Volvo delivered 214,379 trucks in 2005, 11% more than in the preceding
      year.




Research
      and development expenses for Trucks in 2005 amounted to SEK 5,200 million,
      compared with SEK 5,491 million in 2004.




**Buses.**  Volvo
      delivered 10,675 buses and bus chassis (8,232) during 2005. Increased sales
      were
      reported in many markets, including Europe, North America, South America and
      parts of Asia. During the year, Volvo Buses received an order for 1,779 city
      buses for the Transantiago BRT system in Santiago, Chile.




Net
      sales
      during 2005 rose to SEK 16,589 million (SEK 12,722 million). The increase
      was attributable largely to increased sales and improved pricing. Operating
      income increased from SEK 158 M, including a write-down of shares SEK 95
      million, to SEK 470 million.




The
      improved earnings were due to increased volumes, higher prices, prior
      restructuring and general cost reductions. Earnings were adversely affected
      by
      SEK 95 million in costs for the closure of the plant in Heilbronn,
      Germany.




Research
      and development expenses for Buses in 2005 amounted to SEK 569 million, compared
      with SEK 484 million in 2004.




**Construction
      Equipment** .
      Net
      sales rose by 19% to SEK 34,816 million (SEK 29,360 million). Adjusted for
      exchange-rate effects, the increase was 18%. The increase was attributable
      mainly to increased volumes, improved distribution and advantageous product
      and
      market mix.




Operating
      income improved by 45% during the year and amounted to SEK 2,752 million (SEK
      1,898 million), which represents an operating margin of 7.9% (6.5%). The
      earnings and margin improvements are due to advantageous product and market
      mix,
      increased productivity and good control of selling and administrative expenses.
      A program to lower selling and administration expenses was launched in 2005
      to
      strengthen the operating margin.




Research
      and development costs for Construction Equipment in 2005 amounted to SEK 1,083
      million compared with SEK 1,033 million in 2004.




**Volvo** **Penta** .
      Sales
      rose by 8% to a total of SEK 9,776 million, compared with SEK 9,057 million
      in
      the preceding year, due mainly to the strong performance of the Marine Leisure
      segment. Volvo Penta maintained its high profitability during 2005 and at the
      same time implemented aggressive investments in product development and
      substantial marketing efforts to capitalize on the new and competitive product
      portfolio. Operating income remained at the same level as in 2004, SEK 943
      million (940). The operating margin amounted to 9.6% (10.4).




Research
      and development costs for Penta in 2005 amounted to SEK 413 million compared
      with SEK 311 million in 2004.




**Volvo
      Aero.** Volvo
      Aero’s net sales rose by 9% to SEK 7,538 million (6,925). The sales increase
      comes primarily from increased volumes, particularly in component manufacturing.




Operating
      income amounted to SEK 836 million (403). The earnings improvement is mainly
      attributable to increased volumes and higher capacity utilization at the
      production plants in Trollh’ttan, Sweden and Kongsberg, Norway. Stronger
      demand for new spare parts and an advantageous product mix also contributed
      to
      the earnings improvement. Operating margin rose to 11.1% (5.8).




The
      most
      profitable segment is still the production of spare parts and components
      for commercial aircraft engines. The after-market contributed to the earnings
      improvement. Volumes continued to be low in the engine overhaul operations
      and
      profitability was unsatisfactory.




39


Research
      and development costs in Volvo Aero amounted to SEK 225 million in 2005,
      compared with SEK 209 million in 2004.




**Volvo
      Financial Services, VFS.** Operating
      income for VFS in 2005 amounted SEK 2,033 million, up 49% from the SEK 1,365
      million reported in 2004. Return on equity was 15.3% (11.1), with a year-end
      equity ratio of 11.2% (11.6%). Throughout 2005, VFS successfully achieved a
      healthy balance among credit risk, volume, sales penetration and professional
      pricing. All customer finance regions improved performance over the prior year.
      Write-offs in 2005 totaled SEK 297 million, corresponding to an annualized
      write-off ratio of 0.40% (0.66). On December 31, total credit reserves amounted
      to SEK 1,751 million giving a credit-reserve ratio at year-end of
      2.17%.




**Other.** Operating
      income in 2005 from the Group’s other operations included AB Volvo and certain
      internal service companies and amounted to a loss of SEK 600 million (gain
      SEK
      923 million). Operating income from the Group’s other operations in 2004
      included a revaluation of Scania shares with SEK 915 million. In 2005 other
      operations included effects from Celero Support AB that was divested with a
      capital gain of SEK 430 million. In total during 2005, Volvo’s holding in Peach
      County Holding, Inc. (Blue Bird) impacted operating income negatively with
      an
      amount of SEK 653 million including a write-down of SEK 550 million during
      the
      fourth quarter.




**Net
      interest expense.** The
      net
      interest expense for 2005 amounted to SEK 318 million compared to SEK 433
      million for the previous year. The improvement is primarily a result of lower
      cost for the pension liability due to lower pension debt as a result of capital
      injections to the Group’s pension foundations.




**Other
      financial income and expenses.** Other
      financial income and expenses were positively impacted by marked-to-market
      revaluation of derivatives used for hedging of the customer finance portfolio.
      The positive revaluation impact is a result of higher long-term interest rates
      in the US and Canada and was for the full year SEK 251 million. There was no
      revaluation impact in 2004, as marked-to-market valuation was not applicable
      in
      IFRS before 2005.




**Income
      taxes.** During
      2005, income tax expenses of SEK 4,908 million were reported, compared
      with SEK 3,129 million for 2004. The income tax expense was related to
      current and deferred tax expenses.




**Minority
      interests.** Minority
      interests in the Volvo Group were mainly attributable to Volvo Aero Norge AS
      (22%), Volvo Aero Services LP (5%) and Wuxi da Hao Power Co, Ltd
      (30%).




**5.B.
      Liquidity and Capital Resources**




Cash
      flows
      relating to major acquisitions and divestments of subsidiaries are included
      in
      the consolidated cash flow from the point of acquisition or through to the
      point
      of divestment. The effects of changes in exchange rates on translation of
      foreign subsidiaries have also been excluded since these effects do not
      influence cash flow. For further information regarding the impact of changes
      in
      foreign exchange rates see “- 5.A. Operating Results - General - Impact of
      Currency Fluctuations”.




**Cash
      flow from operating activities** .
      Cash
      flow from operating activities decreased to SEK 14.0 billion in 2005 from SEK
      15.3 billion in 2004. The decrease between 2005 and 2004 was mainly due to
      transfers made during the year to pension foundations, in the amount of SEK
      4.4
      billion and also due to strong sales growth.




**Cash
      flow from/used in investing activities** .
      Net cash
      used in investing activities in 2005 amounted to SEK 12.5 billion compared
      with
      SEK 0.8 billion in 2004.




40


Investments
      in fixed assets in 2005 amounted to SEK 10.3 billion compared to SEK 7.4 billion
      in 2004. Investments in fixed assets in Trucks, which amounted to SEK 6.8
      billion (SEK 4.7 billion in 2004), were made to
      improve efficiency in the European industrial system, increase the number
      of service workshops for the dealer network in Europe,
      continued modification of the Hagerstown plant in North America
      for manufacturing of engines and transmissions and for a changeover
      for production of a new 13-litres engine in Skövde, Sweden, and a new
      11-liter engine in Vénissieux. the move
      of the assembly line for the MD9 and MD11 engines from Skövde, Sweden to Lyon,
      France. Capital
      expenditures increased in Construction Equipment from SEK 0.7 billion to SEK
      0.9
      billion, mainly for development of production plants and in tools and equipment
      for new products. In Volvo Aero the level of capital expenditures increased
      from 0.5 billion to SEK 0.8 billion. A major part of the investments relate
      to
      entrance fees to become a partner in the new GEnx engine and in the LM2500
      industrial gas turbines, according to agreements with General Electric.
      Investments remained at the same level as last year in Buses at
      SEK 0.2 billion and decreased in Volvo Penta from SEK 0.3 billion
      to SEK 0.2 billion.




Investments
      in leasing assets amounted to SEK 4.5 billion in 2005 compared with SEK 4.4
      billion in 2004.




Cash
      flow
      from investments in shares was positive SEK 0.3 billion in 2005 and positive
      SEK
      15.1 billion in 2004. In 2004, SEK 14.9 billion was related to the divestment
      of
      the Scania B shares.




Net
      acquisitions of subsidiaries and other business units in 2005 had a positive
      effect on cash flow by SEK 0.7 billion. The amount includes among others the
      sale of properties in Danafjord and the sale of the service company Celero
      Support. Net acquisitions of subsidiaries and other business units in 2004
      had a
      negative effect on cash flow by SEK 0.1 billion.




Interest-bearing
      receivables including marketable securities had a negative impact on cash flow
      by SEK 1.3 billion in 2005, SEK 6.4 billion in 2004.





**Cash
      flow from financing activities.** Net cash
      flow used in financing activities amounted to SEK 3.3 billion in 2005 and SEK
      14.7 billion in 2004. Net
      borrowings increased during 2005 by SEK 3.6 billion. The new borrowing
      during the year, mainly through the issue of bonds, contributed SEK 42 billion
      (amortization of debt was SEK 33.4 billion). The
      decrease in loans during 2004 reduced liquid funds of net SEK 8.8 billion,
      of
      which new borrowing during the year contributed SEK 19.1 billion (amortization
      of debt was SEK 28.9 billion).




Cash
      dividends paid to AB Volvo shareholders in 2005 totaled SEK 5.1 billion and
      SEK
      3.4 billion in 2004.




Repurchase
      of own shares in 2005 amounted to SEK 1.8 billion and to SEK 2.5 billion in
      2004.




**Change
      in cash and cash equivalents.** The
      Group’s liquid funds decreased during 2005 by SEK 0.7 billion, of which changes
      in exchange rates increased liquid funds by SEK 1.1 billion. Liquid funds at
      year-end amounted to SEK 8.8 billion. Liquid funds were SEK 9.2 billion at
      December 31, 2004.




**Net
      financial position** is
      calculated as liquid funds and short-term and long-term interest bearing
      receivables reduced by short-term and long-term interest-bearing loans
      (including provisions for pensions and other post retirement benefits). Net
      financial position is focused on Volvo operations excluding Volvo Financial
      Services, since the net financial position in the customer finance companies
      is
      stable. For additional information on Volvo’s Financial Services operations see
      further on page 44.




Net
      financial position at December 31, 2005 was calculated as follows:


(in
                millions of SEK)
            
            Volvo
                Group, excl Financial ServicesCash
                and cash equivalents
            
            
            7,385Marketable
                securities1)
            
            
            28,662Short-term
                interest-bearing receivables and loans
            
            
            6,292Long-term
                interest-bearing receivables and loans
            
            
            1,399Financial
                assets
            
            
            43,738Loans
            
            
            13,097Provisions
                for pensions and other post-employment benefits
            
            
            11,966Financial
                liabilities
            
            
            25,063Net
                financial assets
            
            
            18,675





The
      Group’s, excluding Financial Services, net financial position, which totaled net
      financial assets of SEK 18.1 billion at the beginning of the year, totaled
      net
      financial assets of SEK 18.7 billion at December 31, 2005. The increase was
      due
      primarily to positive cash flow from operating activities partly offset by
      dividends paid to AB Volvo shareholders, repurchase of own shares and effects
      of
      changes in accounting principles (IFRS). The net financial position including
      long-term and short-term customer financing receivables was for the Volvo Group,
      including Financial Services, SEK 16.4 billion for 2005.




41


The
      net
      financial position as a percentage of shareholders’ equity and minority
      interests was 23.7% at the end of 2005 compared with 25.8% at the end of
      2004.




Volvo
      generally maintains lines of credit throughout the geographical areas where
      it
      conducts business. The unused portion of committed credit lines, which may
      be
      used without restrictions, amounted to approximately SEK 21 billion at the
      end
      of 2005. Of these facilities approximately SEK 20 billion consists of stand-by
      facilities with varying maturities up to the end of 2010.




**Credit
      risks.** Credit
      risks are related to customer credits, to the deposit of liquid funds and to
      engagements in derivative instruments. Credit risk depends on the
      creditworthiness of counterparts and is reduced through careful evaluation
      of
      their ability to fulfill their obligations.




Customer
      credits comprise of credit granted to agents and dealers as well as loans made
      to end-customers by customer-financing companies. In addition, an evaluation
      of
      the political and economic situation in the purchaser’s country is made in
      connection with export transactions. At year-end 2005, Volvo’s accounts
      receivable amounted to SEK 24.8 billion. The average age of these receivables
      was 34 days.




Operations
      are governed by common policies for credits and by rules for classifying
      customers. The credit portfolio is distributed properly among different
      categories of customers and different industries. Credit risks are managed
      through active monitoring and follow-up routines and, in appropriate cases,
      procedures for repossessing products. Allocations are also made to credit-risk
      reserves. The credit risk in customer financing is distributed among a large
      number of individual customers and dealers. Collateral is provided in the form
      of the products being financed. When issuing credit, an effort is made to
      balance risk exposure and expected yield. Total assets in the consolidated
      customer-financing companies, consisting mainly of current and long-term
      accounts receivable, amounted to SEK 81.5 billion in 2005 compared to SEK 67.1
      billion in 2004.




The
      liquidity in the Group is invested mainly in local cash pools or directly with
      Volvo Treasury. Volvo Treasury invests the liquid funds in the money and capital
      markets. This concentrates the credit risk within the Group’s in-house bank. All
      investments must meet criteria for low credit risk and high liquidity. In
      accordance with Volvo’s credit policy, counterparts for both investments and
      transactions in derivatives must in general have received a rating of “A” or
      better from one of the well-established credit-rating institutions.




The
      derivative instruments used by Volvo to reduce its foreign-exchange and
      interest-rate risk in turn give rise to a counterparty risk, the risk that
      a
      counterparty will not fulfill its part of a forward or option contract, and
      that
      a potential gain will not be realized. Transactions with derivative instruments
      are mainly conducted via Volvo Treasury, which means that the counterparty
      risk
      is concentrated within the Group's in-house bank. Where appropriate, the Volvo
      Group arranges master netting agreements with the counterparties to reduce
      exposure.




**Policies
      and procedures.** The
      Volvo
      Group Financial Risk Policies form the basis for each Group company’s action
      program. Monitoring and control is conducted continuously in each company as
      well as centrally. Most of the Volvo Group’s financial transactions are carried
      out through Volvo’s in-house bank, Volvo Treasury, which conducts its operations
      within established risk mandates and limits.




**Commercial
      exposure.** The
      objective of the Volvo Group Currency Policy is to minimize the short-term
      impact of adverse exchange rate fluctuations on the Volvo Group’s operating
      income, by hedging the Group's forecasted transaction exposure, including firm
      flows. In order to meet the objective of the Volvo Group Currency Policy,
      forecasted currency flows representing firm exposure and forecasted exposure
      with a pre-fixed price in local currency should be hedged. Volvo uses forward
      exchange contracts and currency options to hedge these flows. In accordance
      with
      the Group’s currency policy, between 50% and 80% of the net flow in each
      currency is hedged for the coming 6 months, 30% to 60% for months 7 through
      12
      and firm flows beyond 12 months should normally be hedged.




**Financial
      exposure.** Loans
      and
      deposits in the Group companies are mainly made through Volvo Treasury in local
      currencies and financial currency exposure in the individual entities is thereby
      being minimized. Volvo Treasury uses various derivative instruments in order
      to
      provide deposits and lending in different currencies without increasing the
      company’s own risk. The Volvo Group’s net financial position is being affected
      by changes in currency rates because financial assets and liabilities are
      allocated between Group companies operating in different currencies.




42


**Interest-rate
      risks.** Interest-rate
      risks relate to the risk that changes in interest-rate levels affect the Group’s
      profit. By matching fixed-interest periods of financial assets and liabilities,
      Volvo reduces the effects of interest-rate changes. Interest-rate swaps are
      used
      to change the interest-rate periods of the Group’s financial assets and
      liabilities. Exchange-rate swaps make it possible to borrow in foreign
      currencies in different markets without incurring currency risks.




Volvo
      also
      holds standardized futures and forward-rate agreements. The majority of these
      contracts are used to secure interest levels for short-term borrowing or
      deposits.




**Liquidity
      risks.** Volvo
      ensures maintenance of a strong financial position by continuously keeping
      a
      certain percentage of sales in liquid assets. A proper balance between short-
      and long-term borrowing, as well as the ability to borrow in the form of credit
      facilities, are designed to ensure long-term financing.




**Non-current
      liabilities.** Volvo
      Treasury AB and Volvo Group Finance Europe BV issue most of the Group’s
      non-current liabilities. The total outstanding non-current liabilities,
      excluding current portion as per year-end amounted to SEK 43.6 billion (SEK
      40.4
      billion). The material currencies issued were the Euro, US dollar, Swedish
      kronor, Pound Sterling and Canadian dollar amounting to SEK 22.6 billion, SEK
      8.0 billion, SEK 5.5 billion, SEK 1.8 billion and SEK 1.9 billion, respectively.




Most
      of
      Volvo’s non-current liabilities are issued with a fixed interest rate, with
      currency and interest rate risk hedged using derivative instruments.




The
      maturity structure of the Group’s non-current liabilities is set considering the
      long-term funding needs within the Group. Approximately 72% mature within two
      to
      three years, 20% within four to five years and 8% within six years or later.
      See
      Note 26 to Volvo’s consolidated financial statements.




**Residual
      value risks.** Residual-value
      risk is attributable primarily to contracts involving buy-back or trade-back
      commitments, residual value guarantees or operational lease contracts. It
      comprises the risk that the product, at the end of the contract period, has
      another residual value than foreseen when the contract was entered. This may
      force Volvo to dispose of used products at a loss. Residual-value risks are
      managed within Volvo's business areas through solid knowledge of the market,
      knowledge of product and price trends, and programs supporting the value of
      second-hand products. It is Volvo’s policy to provide for this exposure on a
      continuing basis, so that the book value of these vehicles are in line with
      current and anticipated future price levels on used commercial vehicles.




**Repurchase
      of shares of AB Volvo.** The total
      number of outstanding Volvo shares by year-end 2003 was 419,444,842. The average
      number of outstanding shares was 419,444,842 in 2003. On April 16, 2004, the
      Annual General Meeting resolved that Volvo may transfer treasury stock to
      fulfill undertakings for the Company’s employee stock options program of 2002.
      Furthermore, the Meeting decided to establish a new share-based incentive
      program during the second quarter of 2004 for senior executives in the Volvo
      Group and it was resolved that Volvo may transfer own shares to the participants
      in the new share-based incentive program. The Annual General Meeting of AB
      Volvo
      also authorized the Board of Directors to decide on the acquisition of own
      shares for, among other reasons, to create a more effective capital management
      for AB Volvo. Accordingly, on June 16, 2004, the Board decided to acquire
      through purchase on Stockholmsbörsen a maximum of 22,076,045 Series A and/or
      Series B shares, however, not to exceed a total purchase amount of SEK 4.3
      billion.




The
      purchases were carried out during the period October 27, 2004, up until March
      1,
      2005. The repurchases were made within the so-called spread and settlements
      were
      reported via Stockholmsbörsen in accordance with applicable rules.




By
      year-end 2004, a total of 9,315,000 Volvo A and B shares were repurchased for
      a
      total amount of approximately SEK 2,532 million. The total number of shares
      held
      by Volvo as treasury stock at year-end was 31,391,043 or 7,1% of the registered
      shares. The weighted average number of shares outstanding during 2004 was
      418,528,773. In 2005 the repurchasing of shares continued and an additional
      5,730,000 shares equivalent to SEK 1,763 million were repurchased during the
      period up until March 1, when the purchasing of own shares was finalized. On
      March 1, 2005 Volvo held a treasury stock of own shares to the equivalent of
      8.4% of registered shares.




43


Volvo
      transferred a total of 63,667 of own shares to the holders of the share-based
      incentive program in April 2005. During 2005 share capital was reduced by SEK
      95
      million through cancellation without repayment of 3,084,619 Series A shares
      and
      12,752,222 Series B shares. After reduction share capital amounts to SEK 2,554
      million and is based on 425,684,044 registered shares. The total number of
      registered shares by year end 2005 amounted to 425,684,044. Volvo held 5% of
      the
      registered shares at year end 2005, 21,220,535 shares whereof Series A shares
      4,145,627 and Series B shares 17,074,908.




**Capital
      Expenditures for Property, Plant and Equipment.**





Capital
      expenditures that had been approved but not yet implemented at year-end 2005
      amounted to approximately SEK 7.8 billion. The distribution of these
      investments, by principal business areas, is as follows:




(in
                billions of SEK)Trucks
            
            
            5.5Buses
            
            
            0.2Construction
                Equipment
            
            
            0.6Volvo
                Penta
            
            
            0.2Volvo
                Aero
            
            
            0.5Other
                and corporate expenditures
            
            
            0.8Total
            
            
            7.8





Historically,
      Volvo’s principal method of financing capital expenditures has been with funds
      provided by operations, supplemented by outside borrowings as required. These
      sources of financing will continue to be utilized. Volvo has sufficient working
      capital to meet its needs for the foreseeable future.




**Financial
      Services operations**





Supplementary
      income statements and balance sheets




In
      the
      supplementary income statements and balance sheets below, all Financial Services
      activities are separated from Volvo’s other operations in order to show how the
      activities have developed.




Condensed
                income statements, Financial Services
            
            2004
            
            2005(In
                  millions of SEK)Net
                sales
            
            
            9,598
            
            
            7,549Income
                after financial items
            
            
            1,365
            
            
            2,033Income
                taxes
            
            
            (430
            )
            
            (609
            )Net
                income
            
            
            935
            
            
            1,424




The
      condensed balance sheets below are presented for the Total Volvo Group as well
      as separately for Financial Services and for the Volvo Group excluding Financial
      Services. Separate condensed balance sheets are presented for Financial Services
      and for Volvo’s industrial and commercial operations (“Volvo Group excluding
      Financial Services”) since the capital structures of these operations are
      significantly different and therefore this additional information is requested
      from shareholders and creditors in order to be able to better evaluate the
      financial position of the Volvo Group. The Volvo Group’s financial targets as
      established by its Board of Directors further include separate targets for
      the
      capital structure within Financial Services and Volvo’s industrial and
      commercial operations.




44





**Volvo
                  Group, exclFinancial Services1**
              
              **Financial
                  Services**
              
              **Total
                  Volvo Group**Condensed
                balance sheets
              
              **2004**
              
              **2005**
              
              **2004**
              
              **2005**
              
              **2004**
              
              **2005**AssetsIntangible
                  assets
              
              
              16.6
              
              
              20.3
              
              
              0.0
              
              
              0.1
              
              
              16.6
              
              
              20.4Property,
                  plant and equipment
              
              
              27.3
              
              
              31.3
              
              
              3.9
              
              
              3.7
              
              
              31.2
              
              
              35.0Assets
                  under operating leases
              
              
              8.5
              
              
              10.3
              
              
              12.8
              
              
              0.7
              
              
              19.5
              
              
              20.8Shares
                  and participations
              
              
              10.1
              
              
              10.3
              
              
              0.2
              
              
              0.0
              
              
              2.0
              
              
              0.8Long-term
                  customer finance receivables
              
              
              0.1
              
              
              0.7
              
              
              25.2
              
              
              39.1
              
              
              25.2
              
              
              31.2Long-term
                  interest bearing receivables
              
              
              1.8
              
              
              1.4
              
              
              0.0
              
              
              0.0
              
              
              1.7
              
              
              1.4Other
                  long-term receivables
              
              
              6.4
              
              
              7.2
              
              
              0.2
              
              
              0.3
              
              
              6.0
              
              
              7.0Inventories
              
              
              28.3
              
              
              33.6
              
              
              0.3
              
              
              0.3
              
              
              28.6
              
              
              33.9Short-term
                  customer finance receivables
              
              
              0.1
              
              
              0.6
              
              
              26.1
              
              
              38.9
              
              
              26.0
              
              
              33.3Short-term
                  interest bearing receivables
              
              
              10.3
              
              
              6.3
              
              
              0.0
              
              
              0.0
              
              
              1.6
              
              
              0.5Other
                  short-term receivables
              
              
              30.0
              
              
              36.8
              
              
              1.6
              
              
              1.6
              
              
              29.7
              
              
              35.9Marketable
                  securities
              
              
              25.9
              
              
              28.7
              
              
              0.1
              
              
              0.2
              
              
              26.0
              
              
              28.8Cash
                  and bank accounts
              
              
              8.8
              
              
              7.4
              
              
              0.9
              
              
              0.9
              
              
              8.8
              
              
              8.1Total
                  assets
              
              
              174.2
              
              
              194.9
              
              
              71.5
              
              
              85.8
              
              
              222.9
              
              
              257.1Shareholders’
                  equity and liabilitiesShareholders’
                  equity
              
              
              69.6
              
              
              78.8
              
              
              8.3
              
              
              9.6
              
              
              69.6
              
              
              78.8Provisions
                  for post employment benefits
              
              
              14.2
              
              
              12.0
              
              
              0.0
              
              
              0.0
              
              
              14.2
              
              
              12.0Other
                  provisions
              
              
              14.0
              
              
              17.1
              
              
              0.9
              
              
              1.3
              
              
              14.9
              
              
              18.5Loans
              
              
              14.0
              
              
              13.1
              
              
              57.8
              
              
              70.0
              
              
              61.8
              
              
              74.9Other
                  liabilities
              
              
              62.4
              
              
              73.9
              
              
              4.5
              
              
              4.9
              
              
              62.4
              
              
              72.9Total
                  shareholders’ equity and liabilities
              
              
              174.2
              
              
              194.9
              
              
              71.5
              
              
              85.8
              
              
              222.9
              
              
              257.1Shareholders’
                  equity and minority interests as percentage of total assets
              
              
              40.0
              
              
              40.4
              
              
              11.6
              
              
              11.2
              
              
              31.3
              
              
              30.6


____________


1
            Financial
                Services operations are reported in accordance with the equity
                method.




**Net
      sales and income.** The net
      sales value consists mainly of interest income and fees for rental and leasing
      contracts. Total sales of SEK 7,549 million in 2005 were 21% lower than in
      2004.




Income
      after financial items amounted to SEK 2,033 million (SEK 1,365 million).
      Throughout 2005, VFS successfully achieved a healthy balance among credit risk,
      volume, sales penetration and pricing. All customer finance regions improved
      performance over the prior year.




At
      year-end 2005 the credit portfolio amounted to SEK 79 billion (SEK 64 billion).
      Excluding currency effects, the portfolio growth was 10.0% (10.8%). Provision
      is
      made for both credit risks and residual-value risks to the degree that
      residual-value risks are attributable to the customer-financing company. For
      customers unable to fulfill their contractual obligations, specific provisions
      for credit risks are made based on an individual assessment of each contract.
      In
      addition, in accordance with established policies, provisions are made for
      estimated credit and residual value losses for each customer-financing
      company.




Provisions
      for estimated credit value losses amounted to 2.2% (2.1%) of the credit
      portfolio at year-end 2004. Realized credit losses in 2005 amounted to SEK
      297
      million (SEK 429 billion).




**Financial
      position.** Total
      assets in Financial Services operations increased during the year, to SEK 85.8
      billion from SEK 71.5 billion in 2004. 35% of the credit portfolio is
      denominated in USD and 37% in Euro.




45


Customer
      and leasing receivables amounted to SEK 78.0 billion compared to SEK 63.4
      billion in 2004. Assets under operating leases decreased from 0.8 billion in
      2004 to SEK 0.7 billion in 2005.




Volvo’s
      objective is to maintain an equity/assets ratio of 10% in its Financial Services
      operations. The equity/assets ratio, calculated as shareholders’ equity and
      minority interests as percentage of total assets was 11.2% in 2005, compared
      to
      11.6% in 2004.




**U.S.
      GAAP information**




The
      Volvo
      Group’s financial statements have been prepared in accordance with IFRS, which
      vary in some respects from U.S. GAAP. Note 37 to Volvo’s consolidated financial
      statements for 2005 summarizes the effect that the application of U.S. GAAP
      would have on consolidated net income and shareholders’ equity. Also see Note 37
      to Volvo’s consolidated financial statements for discussion of the impact of
      recently issued US accounting pronouncements.




**Critical
      Accounting Policies and Estimates**




Volvo’s
      significant accounting principles are set out on pages F-7 to F-11 of the
      consolidated financial statements and conform to IFRS as adopted by the EU.
      In
      note 2, Key sources of estimation uncertainty, to the consolidated financial
      statements, corresponding information to Critical Accounting Policies and
      Estimates are included. In accordance with Financial Reporting Release No.
      60
      (FR60) issued by the Securities and Exchange Commission of the United States,
      registrants are required to provide additional disclosure of accounting
      principles in which estimates, judgments and assumptions are particularly
      sensitive and which, if actual results are different, may have a material impact
      on the financial statements. The note 2 applied by Volvo are deemed to meet
      these criteria.




**Introduction
      of new accounting policies**




For
      a
      description of changes in accounting principles see
“Item
      18 - Financial Statements - Note 1”. For a description of changes in US
      generally accepted accounting principles see “Item 18 - Financial Statements -
      Note 37”. T he
      financial impacts of the transition to IFRS are described in note 3, Impact
      of
      IFRS, to the consolidated financial statements.




**5.C.****Research
      and Development, Patents and Licenses**




For
      a
      description of the Company’s research and development activities for the last
      two years, see “Item 4. Information on the Company — 4.B Business Overview -
      Research and Development.” For a description of the Company's patents and
      licenses, see “Item 4. Information on the Company — 4.B Business Overview -
      Patents, Trademarks and Licenses.”




Research
      and development expenses in 2005 amounted to SEK 7,557 million compared with
      SEK
      7,614 million in 2004. In accordance with IAS 38 intangible assets, expenditures
      for development of new products and production systems shall be reported as
      intangible assets if such expenditures with a high degree of certainty will
      result in future financial benefits for the company. The acquisition value
      for
      such intangible assets shall be amortized over the estimated useful life of
      the
      assets. The application of IAS 38 means that high demands are established in
      order for these development expenditures to be reported as assets. For example,
      it must be possible to prove the technical functionality of a new product prior
      to this development being reported as an asset. In normal cases, this means
      that
      expenditures are capitalized only during the industrialization phase of a
      product development project. Other research and development expenses are charged
      to income as incurred. See further in Notes 1 and 3 to the Consolidated
      Financial Statements.




**5.D.****Trend
      Information**




For
      a
      discussion of trend information see “Item 5. Operating and Financial Review and
      Prospects - 5.A. Operating Results.”




46




**5.E.****Off-Balance
      Sheet Arrangements**




The
      Group’s off-balance sheet arrangements at December 31, 2005
      include:




i.
            guaranteed
                bank loans and other credits for associated companies in an amount
                of SEK
                13 million.




ii.
            guaranteed
                bank loans and other credits for customers and others in an amount
                of SEK
                1,267 million.




iii.
            tax
                claims in an amount of SEK 695 million for actual or anticipated
                actions
                against the Volvo Group for which provisions are not considered
                necessary.




iv.
            other
                contingent liabilities amounting to SEK 5,875
                million.




See
“Item
      18 - Financial Statements - Note 29”




**5.F.****Tabular
      Disclosure of Contractual Obligations**




Long-term
      financial obligations include:


(in
                  millions of SEK)
              
              Payments
                  Due by PeriodTotal
              
              Less
                  than 1 year
              
              1-3
                years
              
              4-5
                years
              
              After
                  5
                yearsLong-term
                  debt, including current maturities and financial lease obligations
                  (a)
              
              
              64,781
              
              
              21,226
              
              
              31,287
              
              
              8,839
              
              
              3,429Operating
                  leases
              
              
              3,361
              
              
              1,018
              
              
              929
              
              
              701
              
              
              713Total
              
              
              68,142
              
              
              22,244
              
              
              32,216
              
              
              9,540
              
              
              4,142




(a)
      as
      recognized in Volvo’s Consolidated Balance Sheet as of December 31,
      2005.





At
      December 31, 2005, Volvo further had commitments to repurchase used products
      through buy-back contracts and residual value guarantees with external customers
      in an amount of SEK 3,959 million (these commitments are reflected in Volvo's
      consolidated financial statements either as non-current liabilities, current
      liabilities or contingent liabilities).





The
      Volvo
      Group has no contractual obligations to contribute, during 2006, to Volvo
      related pension funds. The future payments will be influenced by future
      actuarial assumptions and could not thus be estimated. More about Volvo pensions
      could be found in F-pages note 24, Post-employment benefits.




47


**ITEM
      6. DIRECTORS, SENIOR MANAGEMENT AND
      EMPLOYEES**




**6.A.****Directors
      and Senior Management**




**Corporate
      bodies in corporate governance**




The
      governance and control of the Volvo Group is carried out through a number of
      corporate bodies. At General Meetings, the shareholders exercise their voting
      rights with regard, for example, to the composition of the Board of Directors
      of
      AB Volvo and election of external auditors. An Election Committee proposes
      candidates to serve as Board members, Board Chairman and external auditors.
      The
      Board is responsible for the Group’s long-term development and strategy as well
      as controlling and evaluating the company’s daily operations. In addition, the
      Board appoints the President of AB Volvo, who is also the Chief Executive
      Officer (CEO). The duties of the Board are partly exercised through its Audit
      Committee and its Remuneration Committee. The CEO is in charge of the daily
      management of the Group in accordance with guidelines and instructions provided
      by the Board. The presidents of the Group’s eight business areas report to the
      CEO.




**Swedish
      Code of Corporate Governance**




Volvo
      applies the Swedish Code of Corporate Governance (“the Code”).




**Election
      Committee**




The
      Election Committee is the shareholders’ body responsible for submitting to the
      Annual General Meeting the names of candidates to serve as Chairman and other
      members of the Board, the fees to be paid, distributed among the Chairman,
      other
      members of the Board and any remuneration for work on the Board’s committees. In
      the years in which election of auditors for Volvo shall be held, the Election
      Committee presents proposals for election of auditors and audit fees to be
      paid
      based on the preparations carried out by Volvo’s Audit Committee.




In
      conjunction with the Election Committee proposing candidates for Chairman and
      the other members of the Board, the Election Committee shall comment on whether
      those persons who are proposed are to be considered as independent in relation
      to the company and company management as well as to large shareholders in the
      company. The Election Committee’s proposal shall be presented to Volvo in
      sufficient time to be able to be included in the notice of the Annual General
      Meeting and at the same time on Volvo’s website.




The
      Election Committee, which was appointed at Volvo’s Annual General Meeting in
      2005, comprised Volvo’s Chairman Finn Johnsson, Lars Idermark, representing the
      Second Swedish National Pension Fund, Marianne Nilsson, representing Robur
      Funds, Curt Källströmer, representing Svenska Handelsbanken and Thierry
      Moulonguet, representing Renault SAS. The Election Committee internally selected
      Lars Idermark as Chairman. The work of the Election Committee was during 2005
      governed by the instructions approved by the Volvo Annual General Meeting in
      2005. The 2006 Annual General Meeting elected the Board Chairman Finn Johnsson,
      Curt Källströmer, Eva Halvarsson, representing the Second Swedish National
      Pension Fund, Björn Lind, representing SEB-fonder and others, and Thierry
      Moulonguet as members of the Election Committee.




**Board
      of Directors**




In
      2005,
      Volvo’s Board of Directors consisted of eight members elected by the Annual
      General Meeting. In addition, the Board had three members and two deputy members
      appointed by employee organizations. The CEO, Leif Johansson, was a member
      of
      the Board.




The
      Board
      held six regular meetings and three extraordinary meetings in 2005.




The
      Board
      has adopted work procedures for its activities that contain rules pertaining
      to
      the distribution of work between the Board members, the number of Board
      meetings, matters to be handled at regular meetings of the Board and duties
      incumbent on the Chairman. In addition thereto, the work procedures contain
      directives concerning the tasks of the Audit Committee and the Remuneration
      Committee respectively. The Board has also issued written instructions
      specifying when and how information required to evaluate the company’s and
      Group’s financial position should be reported to the Board as well as the
      distribution of duties between the Board and the President and in what
      circumstances the Executive Vice President and Deputy CEO is to substitute
      for
      the CEO.




48


The
      Annual
      General Meeting decides on the fees to be paid to the Board members elected
      by
      the shareholders. The Annual General Meeting held on April 12, 2005 approved
      a
      total fee to the Board, for the time until the end of the next Annual General
      Meeting, of SEK 4,775,000. The fee was to be distributed among the Board Members
      according to the following. The Chairman of the Board receives a fee of SEK
      1,350,000, the remaining members a total of SEK 2,700,000 to be distributed
      among the members as the Board decides. In addition, the Chairman of Audit
      Committee shall receive SEK 250,000 and the other two members of the Audit
      Committee SEK 125,000 each and the members of the Remuneration Committee SEK
      75,000 each.




During
      the
      year, the Board reviewed the business plans and strategies for the various
      businesses in the Volvo Group. In addition thereto, the Board reviewed the
      financial positions of AB Volvo and the Volvo Group on a regular basis and
      acted
      in order to ascertain that there are efficient systems in order to follow-up
      and
      control the business and financial position of the Volvo Group. In connection
      therewith, the Audit Committee is responsible for preparing for the Board’s work
      through quality assurance of the company’s financial reporting through reviewing
      the interim reports and the annual report. The Board has met with the company’s
      auditors during 2005. The Board also dealt regularly with matters involving
      divestments, acquisitions, the establishment of new operations, and matters
      related to investments in product renewal and product development in the Group’s
      business areas.




The
      Board’s work is mainly performed through the Board meetings and through meetings
      in the respective committees of the Board. In addition thereto, the chairman
      of
      the Board is in regular contact with the CEO in order to discuss the on-going
      business and to ensure that the decisions taken by the Board are
      executed.




During
      2005, the Board performed its yearly evaluation of the Board’s work. The written
      report has been submitted to the Election Committee.




**Independence
      Requirements**




The
      Board
      of Directors of Volvo must meet independence requirements pursuant to the rules
      of the Stockholm Stock Exchange, the Code and NASDAQ’s regulations, as well as
      the Sarbanes-Oxley Act.




**Audit
      Committee**




In
      December 2002, the Board established an Audit Committee primarily for the
      purpose of overseeing the accounting and financial reporting processes and
      the
      audit of the financial statements. The Audit Committee is responsible for
      preparing the Board’s work through quality assurance of the company’s financial
      reporting through reviewing the interim reports and the annual report. In
      addition, the Audit Committee’s task is to establish guidelines specifying what
      other services than audit the company may procure from the company’s auditors
      and to provide guidelines for and decisions on transactions with companies
      and
      persons closely associated with Volvo. The Audit Committee is also responsible
      for evaluating the auditors’ work as well as to provide the Election Committee
      with the results of the evaluation and to assist in preparing proposals for
      auditors.




In
      2005,
      the Audit Committee comprised Board members Haruko Fukuda, Ken Whipple and
      Per-Olof Eriksson, Chairman. The Audit Committee held three ordinary meetings
      and one extraordinary meeting in 2005. The Audit Committee met with the external
      auditors and Head of Internal Audit at the ordinary meetings as well as the
      external auditors without the presence of the company management.




As
      of
      April 5, 2006, the Audit Committee consists of Per-Olof Eriksson, Ying Yeh
      and
      Peter Bijur. The Board of Directors has determined that each of Per-Olof
      Eriksson, Ying Yeh and Peter Bijur are “audit committee financial expert” as
      defined in Item 16A of Form 20-F.




**Remuneration
      Committee**




In
      April
      2003, the Board established a Remuneration Committee primarily for the purpose
      of preparing and deciding on issues relating to remuneration to senior executive
      in the Group. The duties of the Committee include presenting recommendations
      for
      resolution by the Board regarding terms of employment and remuneration for
      the
      President and Executive Vice President of AB Volvo, principles for remuneration,
      including pensions and severance payment for other members of the Group
      Executive Committee, and principles for variable salary systems, share-based
      incentive programs, pensions and severance payment for other senior executives
      in the Group. In addition the Remuneration Committee decides the individual
      terms of employment for the other members of the Group Executive Committee
      in
      accordance with the principles established by the Board.




49


In
      2005,
      the Remuneration Committee comprised Board members Tom Hedelius, Louis
      Schweitzer and Finn Johnsson, Chairman. The Remuneration Committee held four
      meetings during the year.




**Disclosure
      Committee**




A
      Disclosure Committee was established in 2004. The Committee contributes to
      ensuring that Volvo fulfills its obligations according to applicable legislation
      as well as to listing rules to timely disclose to the financial market all
      material information that affects the share price.




The
      Committee comprises the heads of the corporate staffs, Corporate Finance,
      Internal Audit, Investor Relations, Corporate Legal and Financial
      Reporting.







50


The
      Directors and Deputy Directors of AB Volvo during the full year 2005, their
      respective ages, the years in which such positions were attained and their
      material memberships on the Boards of other companies are: ****


**Name**
              **Age**
              **Position
                  and Other Directorships**Finn
                  Johnsson
              60
              Chairman
                  of the Board (since February 2004). Director (since 1998). Chairman
                  of the
                  Remuneration Committee. Chairman of the Boards of, Outokumpu Copper
                  Oy,
                  Thomas Concrete Group AB, Unomedical A/S, KappAhl AB and City Airline.
                  Member of the Boards of Skanska AB and AB Industrivärden.Per-Olof
                  Eriksson
              68
              Director
                  (since 1994). Chairman of the Audit Committee. Master of Engineering,
                  Hon.
                  Dr. of Technology. Board Chairman: Callans Trä AB and Odlander,
                  Fredriksson & Co. Board member: Investment AB Öresund, Assa Abloy,
                  Senea AB, Elkem AS, Södersjukhuset AB, Cross country Systems AB and KTH
                  Holding AB. Member of the Royal Swedish Academy of Engineering
                  Sciences.Patrick
                  Faure
              60
              Director
                  (since 2001). Bachelor of Laws. Chairman and CEO of Renault F1
                  Team. Board
                  member: VINCI, ERTICO.Haruko
                  Fukuda
              60
              Director
                  (since 2003). Member of the Audit Committee. Caliber Global Investment
                  Ltd. (Chairman), Investec plc, Aberdeen Asian Smaller Companies
                  Investment
                  Trust plc. Senior Advisor at Lazard, Advisor at METRO AG. Honorary
                  Fellow
                  of New Hall Cambridge, Chairman of the Advisory Board of New Hall
                  Cambridge, Honorary Vice President of the Japan Society, Trustee
                  of
                  Mitsubishi Trust Oxford Foundation, Freeman of the City of
                  London.Tom
                  Hedelius
              67
              Director
                  (since 1994). Member of the Remuneration Committee. Master of Business
                  Administration, Hon. Dr. of Economics. Board Chairman: AB Industrivärden,
                  Bergman & Beving AB and Sandrews. Honorary Chairman: Svenska
                  Handelsbanken. Vice Chairman: Addtech AB, Lagercrantz Group AB
                  and Jan
                  Wallanders och Tom Hedelius stiftelse. Board member: Svenska Cellulosa
                  Aktiebolaget SCA and Lundbergs AB.Leif
                  Johansson
              55
              Director
                  (since 1997). Master of Engineering. President of AB Volvo and
                  Chief
                  Executive Officer of the Volvo Group since 1997. With Volvo since
                  1997.
                  Board member: Bristol-Myers Squibb Company, Confederation of Swedish
                  Enterprise and The Association of Swedish Engineering Industries.
                  Member
                  of the Royal Swedish Academy of Engineering Sciences.Louis
                  Schweitzer
              64
              Director
                  (since 2001). Member of the Remuneration Committee. Bachelor of
                  Laws.
                  Board Chairman: Renault SA and AstraZeneca Plc. Board member: Philips,
                  Electricité de France, BNP-Paribas, VEOLIA and L’Oréal.Ken
                  Whipple
              72
              Director
                  (since 2001). Member of the Audit Committee. Bachelor of Business
                  and
                  Engineering. Board Chairman of CMS Energy Corporation and Glenlore
                  Enterprises. Board member: 14 JP Morgan Fleming Mutual Funds and
                  Korn-Ferry International AB.Martin
                  Linder*
              33
              Director
                  (since May 2004)Olle
                  Ludvigsson*
              58
              Director
                  (since 1988). Deputy Director 1983 - 1988.Johnny
                  Rönnkvist*
              59
              Director
                  (since 1999).Berth
                  Thulin*
              55
              Deputy
                  Director (since 1999).Margareta
                  Öhlin*
              59
              Deputy
                  Director (since 2005).
  _____________________________*
                  Employee representative
  51
 
 
  At
            the
            Annual General Meeting on April 5, 2006, Haruko Fukuda and Patrick Faure
            left
            the Board of Directors
            and Ying Yeh, Philippe Klein and Peter Bijur were elected as new
            Directors.
  Ying
                      Yeh
                  57
                  President
                      and Chairman of Kodak North Asia Region.Philippe
                      Klein
                  49
                  Senior
                      Vice President, CEO’s Office Renault S A and member of the Renault
                      Management Committee.Peter
                      Bijur
                  63
                  Board
                      member: Gulfmark Offshore Inc.**Secretary
                      to the Board**Eva
                      Persson
                  53
                  Secretary
                      to the Board (since 1997). Senior Vice President and General
                      Counsel of AB
                      Volvo.
  **Volvo
            Group Executive Committee**
  The
            members of the Volvo Group Executive Committee are appointed by, and
            report to,
            the Chief Executive Officer.
  Executive
            Vice President and Deputy Chief Executive Officer Lennart Jeansson, member
            of
            Volvo’s Group Executive Committee since 1986, left the Group Executive Committee
            on June 30, 2005 in conjunction with his retirement. The role of Executive
            Vice
            President and Deputy Chief Executive Officer was assumed by Jorma Halonen.
  Former
            Senior Vice President of AB Volvo, Karl-Erling Trogen, who had been a
            member of
            the Group Executive Committee since 1994, left the Group Executive Committee
            in
            December, 2005 and retired January 31, 2006.
  Stefan
            Johnsson, Volvo’s Senior Vice President and Chief Financial Officer since 1998,
            left this position on November 30, 2005, to assume responsibility for
            a number
            of Volvo’s central business units. Stefan Johnsson continues to be a member of
            the Group Executive Committee. Pär Östberg, former Chief Financial Officer of
            Renault Trucks, has been appointed Chief Financial Officer for the Volvo
            Group
            and member of the Group Executive Committee.
  The
            senior
            executive officers of the Volvo Group, together with the years in which
            they
            were appointed to their respective offices, are as follows:
 **Name**
                  **Age**
                  **Position**Leif
                      Johansson
                  55
                  President
                      of AB Volvo and Chief Executive Officer of the Volvo Group
                      (since 1997).
                      President and CEO of Electrolux Group (1994-1997), President
                      of AB
                      Electrolux (1991-1997), President of Facit AB (1982-1983),
                      President of
                      Husqvarna Motorcyklar AB (1979-1981). Member of Volvo Board
                      (since
                      1997).Jorma
                      Halonen
                  58
                  Executive
                      Vice President of AB Volvo and Deputy CEO (since 2004). President of
                      Volvo Truck Corporation (2001-2004). Various positions at Scania
                      (1990-2001). Member of Group Executive Committee (since
                      2002).Pär
                      Östberg
                  44
                  Born
                      1962. Senior Vice President of AB Volvo and CFO of the Volvo
                      Group since
                      December 2005. Senior Vice President and CFO of Renault Trucks
                      (2004-2005). Member of the Group Executive Committee since
                      December 2005,
                      responsible for finance, strategy and business development.
  52
  **Name**
                  **Age**
                  **Position**Eva
                      Persson
                  53
                  Senior
                      Vice President of AB Volvo and General Counsel of the Volvo
                      Group (since
                      1997). Member of Group Executive Committee (since 1997), responsible
                      for
                      legal, tax and security matters.Stefan
                      Johnsson
                  47
                  Senior
                      Vice President of AB Volvo responsible for business units and
                      human
                      resources. Senior Vice President and CFO of the Volvo Group
                      (1998-November
                      2005). President of Volvo Group Finance Sweden (1994-1998).
                      Member of
                      Group Executive Committee (since 1998).Per
                      Löjdquist
                  57
                  Senior
                      Vice President of AB Volvo (since 1997), responsible for corporate
                      communications and investor relations. Member of the Group
                      Executive
                      Committee (since 1997).Michel
                      Gigou
                  60
                  Senior
                      Vice President of AB Volvo, President of Volvo Trucks North
                      America and
                      Chairman of the Board of Mack Trucks, Inc. (2000-2003). President of
                      Mack Trucks, Inc. (1996-2000). Previously at Renault S.A, with
                      various
                      positions in Europe. Member of Group Executive Committee (since
                      2002).Karl-Erling
                      Trogen
                  60
                  Senior
                      Vice President of AB Volvo until January 2006. President of
                      Volvo Truck
                      Corporation (1994-2000). President of Volvo Trucks North America
                      (1991-1994). Member of the Group Executive Committee
                      (1994-2005).Lars-Göran
                      Moberg
                  63
                  President
                      of Volvo Powertrain (since 2000). Member of the Group Executive
                      Committee
                      (since 2001).Staffan
                      Jufors
                  55
                  President
                      of Volvo Trucks (since 2004). President of AB Volvo Penta (1998-2004).
                      Vice President of Volvo Car Corporation, Olofström (1992-1998). Member of
                      the Group Executive Committee (since 1998).Stefano
                      Chmielewski
                  54
                  President
                      of Renault Trucks (since May 1, 2003). Senior Vice President
                      Sales,
                      Renault Trucks 2001-2003. Various positions with Iveco and
                      VW 1982-2001.
                      Member of Volvo Group Executive Committee (since 2003).Paul
                      Vikner
                  57
                  President
                      of Mack Trucks, Inc. since 2001. Executive Vice President of
                      Sales and
                      Marketing, Mack Trucks, Inc. 1996-2001. Previously at Iveco
                      Trucks North
                      America and Isuzu Trucks North America 1972-1994. Member of
                      Group
                      Executive Committee (since 2004).Håkan
                      Karlsson
                  45
                  President
                      of Volvo Bus Corporation. President of Volvo Logistics 2000-2003.
                      Member
                      of Group Executive Committee (since 2003).Tony
                      Helsham
                  52
                  President
                      of Volvo Construction Equipment (since 2000).  President and CEO of
                      Euclid Hitachi Heavy Equipment (1995-1998). President of Volvo
                      Construction Equipment Korea, (1998-2000). Member of Group
                      Executive
                      Committee (since 2000).
   53
  **Name**
                  **Age**
                  **Position**Göran
                      Gummeson
                  59
                  President
                      of Volvo Penta (since 2004). Various positions with Volvo Penta
                      since
                      1991, head of Volvo Penta’s European operations (1998-2004). Member of the
                      Group Executive Committee (since 2004).Fred
                      Bodin
                  59
                  President
                      of AB Volvo Aero Corporation (since 1997). Senior Vice President
                      of AB
                      Volvo (1993-1997). General Counsel (1988-1997). Member of the
                      Group
                      Executive Committee (since 1993).Salvatore
                      L Mauro
                  46
                  President
                      of Volvo Financial Services (since 2001). President of Volvo
                      Car Finance
                      Europe (1999-2001). Vice President and CFO Volvo Car Finance
                      Inc.
                      (1993-1996). Member of the Group Executive Committee (since
                      2001).
  Michel
            Gigou, member of the Group Executive Committee since 2002, retired on
            April 30,
            2006. Within the Group Executive Committee, Michel Gigou’s responsibilities
            included Volvo’s operations in China, a responsibility that is now assumed by
            Jorma Halonen.
  During
            2006, Volvo’s Group Executive Committee will be expanded through the addition of
            Jan-Eric Sundgren, currently President of Chalmers University of Technology
            (“Chalmers”). This transition will occur when a successor has been appointed at
            Chalmers. Jan-Eric Sundgren’s responsibilities will include contacts with public
            authorities, universities and colleges. He will also focus on technological
            and
            research-related matters within the Volvo Group and have Group-wide
            responsibility for environmental and safety issues.
  It
            was
            announced in December 2005 that Olof Persson will become the new President
            of
            Volvo Aero. Volvo Aero’s current President, Fred Bolin, has announced his
            intention to retire at the end of 2006 in conjunction with his 60th birthday.
            Olof Persson, 41, is currently President of the Canadian aircraft and
            train
            manufacturer Bombardier’s Mainline and Metro division for trains and subways. He
            will assume his new position as President on July 1, 2006 and will also
            be
            included in the Volvo Group Executive Committee.
  **6.B.****Compensation**
  See
            note
            34 to Volvo’s consolidated financial statements for additional information
            concerning the compensation of the company’s directors and executive
            officers.
  **6.C.****Board
            Practices**
  AB
            Volvo
            does not provide its board members with any pension or retirement
            benefits.
  For
            details on service contracts with the members of the Group Executive
            Committee
            and certain other senior executives see “Item 18 - Financial Statements - Note
            34”.
  For
            details regarding the time of appointments for the members of the board
            and the
            members of the Group Executive Committee, please refer to “- 6.A. - Directors
            and Senior Management” above. The members of the board are appointed annually by
            the ordinary general meeting of the shareholders and their respective
            term of
            office is until the next ordinary general meeting of the shareholders
            has been
            held. This does not apply to employee representatives who are appointed
            by their
            respective employee organization for a period decided by the employee
            organization.
  **6.D.****Employees**
  The
            number
            of employees in Volvo as of December 31, 2005, was 81,860.
  54


2003
            
            2004
            
            2005Trucks
            
            
            46,900
            
            
            49,450
            
            
            50,240Buses
            
            
            6,680
            
            
            7,700
            
            
            7,710Construction
                Equipment
            
            
            9,280
            
            
            9,930
            
            
            10,290Volvo
                Penta
            
            
            1,440
            
            
            1,580
            
            
            1,560Volvo
                Aero
            
            
            3,440
            
            
            3,350
            
            
            3,460Financial
                Services
            
            
            1,060
            
            
            1,100
            
            
            1,070Other
                operations
            
            
            6,940
            
            
            7,970
            
            
            7,530Total,
                as reported
            
            
            75,740
            
            
            81,080
            
            
            81,860





The
      following table sets forth the approximate number of employees, by geographic
      area, at December 31, 2003, 2004 and 2005:




2003
            
            2004
            
            2005Europe
            
            
            55,500
            
            
            57,460
            
            
            56,720North
                America
            
            
            12,270
            
            
            14,620
            
            
            15,140South
                America
            
            
            2,640
            
            
            3,110
            
            
            3,690Asia
            
            
            3,710
            
            
            4,130
            
            
            4,210Other
                markets
            
            
            1,620
            
            
            1,760
            
            
            2100Total,
                as reported
            
            
            75,740
            
            
            81,080
            
            
            81,860




In
      accordance with customary Swedish practices, factory workers in Sweden belong
      to
      unions within the Swedish Trade Union Confederation and office workers belong
      to
      unions within the Federation of Salaried Employees in Industry and Services.
      Wages and general working conditions are negotiated in collective bargaining
      at
      the national level between the employers’ association and the labor union
      association within each industry. Within the limits established by these
      agreements, the Company also negotiates directly with the union representing
      its
      employees. In accordance with the Swedish Co-Determination Act regarding
      employee participation in decision-making, Volvo is required to negotiate with
      trade unions regarding important changes in operations and in working and
      employment conditions. Within the Group, special negotiating committees and
      other participatory arrangements have been established in each of the business
      areas.




Since
      1988, three employee representatives have been appointed to the Board of
      Directors and two others as Deputy Members. See “6.A. - Directors and Senior
      Management.”




**6.E.****Share
      Ownership**


**Board
                  Members**
              **Holdings,
                  April 30, 2006***Finn
                  Johnsson
              2,000
                  Volvo Series B sharesPer-Olof
                  Eriksson
              6,200
                  Volvo Series A sharesTom
                  Hedelius
              2,693
                  Volvo shares, including 2,000 Series A sharesLeif
                  Johansson
              50,562
                  Volvo shares, including 43,538 Series B shares, and 50,000 employee
                  stock
                  options.Louis
                  Schweitzer
              2,000
                  Volvo Series B sharesPhilippe
                  Klein
              NonePeter
                  Bijur
              NoneYing
                  Yeh
              None
  **Deputy
                  Board Members**Martin
                  Linder
              NoneOlle
                  Ludvigsson
              155
                  Volvo Shares, including 105 Series B sharesJohnny
                  Rönnkvist
              285
                  Volvo shares, including 235 Series A sharesBerth
                  Thulin
              100
                  Volvo Series B sharesMargareta
                  Öhlin
              None
  55
  **Executive
                  officers**
              **Holdings,
                  April 30, 2006***Leif
                  Johansson
              50,562
                  Volvo shares, including 43,538 Series B shares and 50,000 employee
                  stock
                  optionsJorma
                  Halonen
              4,000
                  Volvo Series B shares and 25,000 employee stock optionsStefano
                  Chmielewski
              5,000
                  employee stock optionsPaul
                  Vikner
              25,000
                  employee stock optionsHåkan
                  Karlsson
              4,352
                  Volvo shares, including 4,085 Series B shares, and 5,000 employee
                  stock
                  optionsTony
                  Helsham
              25,000
                  employee stock optionsStaffan
                  Jufors
              4,208
                  Volvo shares, including 3,054 Series B shares, and 25,000 employee
                  stock
                  optionsGöran
                  Gummeson
              2,750
                  Volvo Series B shares and 5,000 employee stock optionsFred
                  Bodin
              25,000
                  employee stock optionsSalvatore
                  L. Mauro
              1,003
                  American Depositary Receipts (ADRs) of AB Volvo; 25,000 employee
                  stock
                  optionsLars-Göran
                  Moberg
              9,858
                  Volvo shares, including 9,652 Series B shares, and 25,000 employee
                  stock
                  optionsStefan
                  Johnsson
              4,075
                  Volvo shares, including 4,000 Series B shares, and 25,000 employee
                  stock
                  optionsPer
                  Löjdquist
              6,398
                  Volvo shares, including 3,224 Series B shares and 25,000 employee
                  stock
                  optionsEva
                  Persson
              500
                  Volvo shares, including 252 Series A shares and 25,000 employee
                  stock
                  optionsPer
                  Östberg
              1,000
                  Volvo Series B sharesMichel
                  Gigou
              25,000
                  employee stock options
  *
      The
      cumulative shareholdings of the Board members and executive officers correspond
      to less than 1% of the votes and shares in the Company.




**Option
      Programs and Share Based Incentive Programs** .
      During
      2005 Volvo had two different types of option programs for certain senior
      executives outstanding, one call option program (expired during 2005) and
      one program for employee stock options (expires 2006/2008). The employee stock
      options are exercisable as of May 6, 2006, and consequently at the date of
      this
      annual report the shareholdings and the holdings of employee stock options
      may
      have changed. Furthermore, Volvo had a share based incentive program. The AGM
      resolved to establish a new share-based incentive program during the second
      quarter of 2006 for senior executives in the Volvo Group. The program mainly
      involves that a maximum of 518,000 Series B shares in the Company could be
      allotted to a maximum of 240 senior executives, including members of Group
      Management, during the first six months of 2007. The allotment shall depend
      on
      the degree of fulfillment of certain financial goals for the 2006 fiscal year
      and which are set by the Board. If these goals are fulfilled in their entirely
      and if the price of the Volvo B share at the time of allotment is SEK 370,
      the
      costs for the program will amount to about SEK 230 million. So that Volvo shall
      be able to meet its commitment in accordance with the program in a
      cost-efficient manner, the AGM further resolved that Volvo may transfer own
      shares (treasury stock) to the participants in the program. Detailed information
      on the Option Programs and share-based incentive programs are reported in Note
      34 to the consolidated financial statements included in Item 18 of this annual
      report.




**Profit
      sharing and Volvo Company Pension.** Volvo is
      a worldwide organization with a global profit sharing scheme. The system, Volvo
      Profit Sharing, comprises approximately 66,000 employees throughout the world.
      Implementation of the profit sharing system requires that the return on the
      Company's shareholders' equity exceed 10%.




Profit
      sharing involves a focus on Volvo's success factors: growth, product cycle
      management and operational excellence. Because employees profit sharing is
      linked to the development of the Volvo Share, their understanding of the role
      of
      shareholders within the company will increase. Profit sharing also helps to
      make
      Volvo more attractive as an employer to both present and future employees.
      Profit sharing gives employees an additional incentive to have a favorable
      impact on earnings and to feel a greater sense of solidarity with Volvo. In
      2005
      the return of the company’s shareholder equity exceeded 18% before cost for
      profit sharing system, which amounted to approximately SEK 450 million (SEK
      200
      million). There were no payments for profit sharing to employees for 2003 and
      2002.




56


Since
      1995, Volvo has offered employees in Sweden an extra pension-savings plan via
      Volvo's 60-Year Fund. Effective in 2000, as a result of the changed conditions
      for pension-savings, this plan was replaced by the Volvo Company Pension, a
      defined-contribution pension insurance policy that is paid for by Volvo. The
      objective is the same as that of the 60-Year Fund: to improve the financial
      position of employees when they retire with pension benefits .




**ITEM
      7. MAJOR SHAREHOLDERS AND RELATED PARTY
      TRANSACTIONS.**




**7.A.****Major
      Shareholders**




The
      shares
      of AB Volvo are divided into two classes, A Shares and B Shares. Each A Share
      confers one vote per share and each B Share confers one tenth of one vote per
      share.




On
      April
      30, 2006, Renault SAS was known to AB Volvo to be the holder of shares
      representing 21.3% of the votes and 21.8% of the share capital of AB Volvo,
      based on the number of outstanding shares. The holding of Renault SAS consists
      of 27,720,989 A Shares and 60,583,188 B Shares. It equals 21.1% of the number
      of
      outstanding A Shares and 22.2% of the B Shares. The holding of A Shares equals
      6.9% of the total number of outstanding shares. The holding of B Shares equals
      15.0% of the total number of outstanding shares.




On
      April
      30, 2006, AMF Pension held shares representing 4.0% of the votes and 3.2% of
      the
      share capital of AB Volvo. This holding consists of 5,550,000 A shares and
      7,350,000 B Shares equaling 4.2% of the number of outstanding A shares and
      2.7%
      of the number of outstanding B Shares. The holding of A Shares equals 1.4%
      of
      the total number of outstanding shares. The holding of B Shares equals 1.8%
      of
      the total number of outstanding shares.




On
      April
      30, 2006, Alecta Pension held shares representing 3.6% of the votes and 3.2%
      of
      the share capital of AB Volvo. This holding consists of 4,854,000 A shares
      and
      8,004,000 B Shares equaling 3.7% of the number of outstanding A shares and
      2.9%
      of the number of outstanding B Shares. The holding of A Shares equals 1.2%
      of
      the total number of outstanding shares. The holding of B Shares equals 2.0%
      of
      the total number of outstanding shares.




As
      far as
      known to AB Volvo, it was not directly owned or controlled by another
      corporation or by any foreign government as of April 30, 2006.




As
      of
      April 30, 2006, the directors and members of the executive committee of AB
      Volvo, as a group, held 101,839 shares of AB Volvo of which 20,337 were A
      Shares, representing less than one percent of the nominal share capital and
      voting rights in AB Volvo.




On
      April
      30, 2006, there were approximately 195,808 shareholders of Volvo’s shares
      registered with the Swedish Securities Register Center, VPC AB
      (“VPC”).




**7.B.****Related
      Party Transactions**




The
      Company and Group Companies have entered into various transactions in the normal
      course of business with Renault SAS and subsidiaries (“Renault”). Amounts due
      from and due to Renault amounted to SEK 57, 81 and 93 million and SEK 762,
      554
      and 537 million, respectively, at December 31, the respective year 2005, 2004
      and 2003. Sales to and purchases from Renault amounted to SEK 182, 277 and
      310
      million and SEK 3,493, 3,242, and 2,756 million, respectively, for 2005, 2004
      and 2003. The sales were mainly from Renault Trucks and consisted of bus
      components and spare parts. The purchases was mainly made by Renault Trucks
      and
      consisted of light trucks. The transactions also comprise a trademark license
      from Renault for the use of the trademark “Renault”. For information regarding
      the acquisition of Renault V.I. and Mack trucks see “Item 4. Information on the
      Company - 4.A. History and Development of Company”.




57


During
      the
      year, AB Volvo sold properties to market price to members in group management
      for an amount of SEK 17 million.




AB
      Volvo
      and Renault SAS signed a settlement agreement regarding the disagreement the
      companies have had since 2001 pertaining to Volvo's acquisition of Renault
      V.I.
      and Mack. According to the acquisition agreement in 2000, AB Volvo received
      100%
      of the shares in Renault's truck subsidiaries, Renault V.I. and Mack in exchange
      for 15% of the shares in AB Volvo. Since then, AB Volvo and Renault SAS have
      had
      ongoing discussions regarding the value of certain acquired assets and
      liabilities of Renault V.I. and Mack. In accordance with this settlement,
      Renault SAS transferred SEK 989 million to AB Volvo in January
      2005.




The
      Company and Group Companies have entered into various transactions in the normal
      course of business with Svenska Handelsbanken AB ("SHB") and its subsidiaries.
      The transactions are mainly loans from SHB to Volvo Treasury Companies within
      Business Area Financial Services. Such loans are guaranteed by AB Volvo. The
      amounts outstanding under such loans as of December 31, 2005, 2004 and 2003
      were
      SEK 3,286, 2,699 and 2,899 million respectively. In addition, Group Companies
      have entered into various other transactions, e.g. conduit facilities, letters
      of credit, factoring, and dealership in note issues, with SHB.




The
      Company and Group Companies have entered into various transactions in the normal
      course of business with Deutz AG (“Deutz”). The agreements cover the development
      and long-term supply by Deutz of certain small and medium size diesel engines.
      Volvo owns 7% of the capital and voting rights in Deutz.


The
      Company and Group Companies have entered into various transactions in the normal
      course of business with Shanghai Sunwin Bus Corporation (“Sunwin Bus”), Xian
      Silver Bus Corporation (“Silver Bus”) and Jinan Hua Wo Truck Corporation (“Hua
      Wo Truck”). All these entities are entities over which Volvo has joint control
      together with one or more external parties. Volvo currently owns 50% of the
      capital and voting rights of all these joint ventures. Transactions with these
      entities mainly comprise of sales of components for bus and truck manufacturing.
      Volvo also purchases manufactured trucks from Hua Wo Truck. Up until September
      2004 Prévost Holding BV (“Prévost) was a joint venture where Volvo held 50% of
      the capital and voting rights. As of October 2004 Prévost Car Inc. is a wholly
      owned subsidiary of Volvo Buses. See “Item 5.A - Volvo’s investment in Henlys
      Group plc”.




**7.C****Interests
      of Experts and Counsel**




Not
      applicable.




58


**ITEM
      8. FINANCIAL INFORMATION**




**8.A.****Consolidated
      Statements and Other Financial Information**




**8.A.1**
            See
                Item 18.





**8.A.2**
            See
                Item 18.





**8.A.3**
            See
                “Report of Independent Registered Public Accounting Firm “, page
                F-2.





**8.A.4**
            We
                have complied with this
                requirement.





**8.A.5**
            Not
                applicable.





**8.A.6**
            Volvo
                Group’s exports from Sweden were SEK 71,133 and 62,653, millions the
                respective year 2005 and 2004. The corresponding percentages, 30%
                and 30%
                of total sales.





**8.A.7**  **Litigation** .
      In March
      1999, an FH 12 Volvo truck was involved in a fire in the Mont Blanc tunnel.
      The
      tunnel suffered considerable damage from the fire, which continued for 50 hours.
      39 people lost their lives in the fire, and 34 vehicles were trapped in the
      tunnel. The Mont Blanc tunnel was re-opened for traffic in 2002. An expert
      group
      was appointed by the Commercial Court in Nanterre, France, to investigate the
      cause of the fire and the losses it caused. At present, it is not possible
      to
      anticipate the result of this on-going investigation or the result of other
      French legal actions in progress regarding the fire. Following the closure
      in
      October 2003 of an investigation for potential criminal liability for the fire,
      the trial for unintentional manslaughter started in Bonneville (France) on
      31st
      January, 2005 and lasted until late April 2005. The judgment was given on 27th
      July 2005. Volvo Truck Corporation was one of 16 parties tried for unintentional
      manslaughter. Volvo Truck Corporation was acquitted and not required to pay
      any
      civil damages to the plaintiffs. Volvo Truck Corporation's acquittal with
      regards to criminal charges is final. Some of the plaintiffs have appealed
      the
      award of civil damages and those proceedings, hence, are ongoing. A claim was
      filed with the Commercial Court in Nanterre by the insurance company employed
      by
      the French tunnel operating company against certain Volvo Group companies and
      the trailer manufacturer in which compensation for the losses claimed to have
      been incurred by the tunnel operating company was demanded. The claimant
      requested that the Court postpone its decision until the expert group has
      submitted its report. The Court of Nanterre has since then declined jurisdiction
      in favor of the civil Court of Bonneville before which several other claims
      had
      been filed in connection with this matter. As a result, the Court of Bonneville
      is likely ultimately to rule on all civil liability claims filed in France
      against Volvo Group companies in connection with the Mont-Blanc tunnel fire.
      Volvo Group companies are also involved in proceedings regarding this matter
      before courts in Aosta and Turin (Italy) and Brussels (Belgium). Although the
      aggregate amount claimed is substantial, Volvo is unable presently to determine
      the ultimate outcome of the legal proceedings mentioned above, the only
      exception being the criminal charges mentioned above from which Volvo Truck
      Corporation has now been acquitted.




Between
      1985 and 1995, Volvo Aero Norway A/S (“VAN”) and Snecma entered into several
      agreements relating to the supply by VAN of components for the Snecma CFM56
      engine. These aircraft engine programs are long term agreements, with an
      expected term of not less than thirty years. In 2005, Snecma filed a request
      for
      arbitration against VAN, requesting a declaratory award stating that Snecma
      is
      entitled to calculate VAN’s compensation under the agreements in other ways than
      the common and undisputed interpretation of the agreements during nearly twenty
      years of performance. An award in Snecma’s favor would mean that the
      compensation would be significantly reduced. It is difficult to assess the
      magnitude of such a reduction of the concession levels since, instead of fixed
      levels of payment, the levels of payment to VAN would be affected by the actual
      payments received by Snecma from its customers. VAN has no access to the
      commercial information needed to calculate the payment levels in such case.
      VAN
      has rejected Snecma’s claims. Arbitral hearings are expected to be finalized at
      the beginning of the autumn 2006.




AB
      Volvo
      has received a document subpoena from the United States Securities and Exchange
      Commission (the "SEC") in connection with the SEC's investigation into the
      United Nations Oil For Food Program. Volvo is cooperating with this
      investigation. Volvo is also aware that the Swedish and French authorities
      are
      also separately investigating the Oil for Food program.




Volvo
      is
      involved in a number of other legal proceedings incidental to the normal conduct
      of its businesses. Volvo does not believe that any liabilities related to such
      proceedings are likely to be, in the aggregate, material to the financial
      condition of the Volvo Group.




59





**8.A.8**  **Dividend
      policy.**




AB
      Volvo
      has paid annual cash dividends on its A and B Shares each year since 1935.
      Under
      Swedish company law, a dividend may be paid from funds available for dividends
      if recommended by the Board of Directors and approved by the Annual General
      Meeting of Shareholders. No interim dividend may be paid in respect of a
      financial period as to which audited financial statements have not been adopted
      by the Annual General Meeting of Shareholders. Consequently, AB Volvo pays
      only
      a yearly dividend, generally in the month of April subsequent to the year to
      which the dividend relates.




The
      following table sets forth the cash dividends per share in kronor, and the
      dollar equivalents, paid in respect of each of the five years ended December
      31,
      2005:




Year
            Dividend
                Paid per Share(SEK)
            (US$1)2001
            8.00
            0.792002
            8.00
            0.952003
            8.002
            1.062004
            12.50
            1.792005.
            16.75
            2.16


____________


1  Translated
      for convenience only into dollars at the Noon Buying Rate on the dividend
      payment date.


2  In
      addition, a dividend of 2 shares in Ainax AB for every 31 Volvo shares was
      distributed on June 8, 2004. The Annual General Meeting of AB Volvo resolved
      to
      transfer all A shares in Scania AB held by Volvo to Ainax AB and thereafter
      to
      distribute 27,060,958 shares in Ainax AB to Volvo’s shareholders. The value of
      the distribution of shares in Ainax AB was set at SEK 6,309,538,645,
      corresponding to approximately SEK 15.00 per Volvo share.





Dividends
      received by United States holders of American Depositary Shares or B Shares
      are
      subject to Swedish withholding taxes. See “Item 10. Additional Information -
      10.E Taxation”.




The
      share
      capital of the parent company is divided into two classes: A and B shares.
      Both
      classes have the same rights except that each A share carries one voting right
      and each B share carries one-tenth of a voting right.




**8.B.****Significant
      Changes**




None.




60


**ITEM
      9. THE OFFER AND LISTINGS.**




**9.A.****Offer
      and Listing Details**




**9.A.1.**  Not
      applicable.





**9.A.2.**  Not
      applicable.





**9.A.3.**  Not
      applicable.





**9.A.4**





The
      table
      below sets forth, for the periods indicated, the high and low closing sales
      prices in SEK for A shares and B shares traded on the Stockholmsbörsen
      (Stockholm Stock Exchange) and in U.S. dollars for the ADSs traded on NASDAQ.
      Each ADS represents one B Share. The data below reflects price and volume
      information for trades completed by members of the Stockholmsbörsen during the
      day as well as for inter-dealer trades completed off the Stockholmsbörsen and
      certain inter-dealer trades completed during trading on the previous business
      day.




**A
                shares**
            ****
            **B
                shares**
            ****
            **ADSs****High**
            ****
            **Low**
            ****
            **High**
            ****
            **Low**
            ****
            **High**
            ****
            **Low****(SEK
                per Share)**
            ****
            **(SEK
                per Share)**
            ****
            **($
                per ADS)****Annual
                information for the past five years**2005
            
            
            368.5
            
            
            249.5
            
            
            378.5
            
            
            260
            
            
            50.50
            
            
            37.792004
            
            
            272
            
            
            210
            
            
            283
            
            
            220.5
            
            
            41.36
            
            
            30.292003
            
            
            216
            
            
            130.5
            
            
            225
            
            
            136
            
            
            30.62
            
            
            16.032002
            
            
            201
            
            
            117
            
            
            209.5
            
            
            124
            
            
            20.90
            
            
            13.402001
            
            
            191.5
            
            
            114.5
            
            
            198
            
            
            121
            
            
            20.13
            
            
            11.42**Quarterly
                information for the past two years****2006**First
                Quarter
            
            
            373
            
            
            326
            
            
            382.5
            
            
            335.5
            
            
            49.89
            
            
            42.20**2005**First
                Quarter
            
            
            317.5
            
            
            249.5
            
            
            330.5
            
            
            260
            
            
            48.36
            
            
            37.79Second
                Quarter
            
            
            310
            
            
            267.5
            
            
            321
            
            
            278
            
            
            44.95
            
            
            39.39Third
                Quarter
            
            
            344.5
            
            
            306
            
            
            355.5
            
            
            316.5
            
            
            45.50
            
            
            40.58Fourth
                Quarter
            
            
            368.5
            
            
            295
            
            
            378.5
            
            
            305
            
            
            47.50
            
            
            38.30**2004**First
                Quarter
            
            
            248.5
            
            
            210
            
            
            258.5
            
            
            220.5
            
            
            34.90
            
            
            30.25Second
                Quarter
            
            
            265
            
            
            223
            
            
            274
            
            
            233
            
            
            36.64
            
            
            31.26Third
                Quarter
            
            
            266
            
            
            235
            
            
            276.5
            
            
            245
            
            
            36.32
            
            
            32.97Fourth
                Quarter
            
            
            272
            
            
            246
            
            
            283
            
            
            255.5
            
            
            41.36
            
            
            35.49**Monthly
                information for most recent six months**April
                2006
            
            
            371.5
            
            
            341.5
            
            
            380.5
            
            
            349.5
            
            
            50.50
            
            
            45.50March
                2006
            
            
            360
            
            
            326.5
            
            
            368
            
            
            336
            
            
            47.37
            
            
            42.20February
                2006
            
            
            368
            
            
            326
            
            
            380
            
            
            335.5
            
            
            49.89
            
            
            43.29January
                2006
            
            
            373
            
            
            340.5
            
            
            382.5
            
            
            350.5
            
            
            49.53
            
            
            46.26December
                2005
            
            
            368.5
            
            
            335
            
            
            378.5
            
            
            346
            
            
            47.50
            
            
            42.77November
                2005
            
            
            341
            
            
            314.5
            
            
            352.5
            
            
            325
            
            
            43.65
            
            
            40.80





Fluctuations
      in the exchange rate between the Swedish Kronor and the U.S. dollar will
      affect the U.S. dollar equivalent of the Swedish Kronor price of the shares
      on the Stockholmsbörsen.




61


**9.A.5.**  Not
      applicable.





**9.A.6.**  Not
      applicable.





**9.A.7.**  Not
      applicable.





**9.B.****Plan
      of Distribution**




Not
      applicable.





**9.C****Market****s**




The
      principal market for both Volvo’s A and B Shares is the Stockholmsbörsen.
      Volvo’s A and B. Since December 1984, ADSs representing AB Volvo’s B Shares
      (prior to January 1, 1993, Non-Restricted B Shares) have been traded in the
      United States through NASDAQ. These American Depositary Shares are evidenced
      by
      American Depositary Receipts (“ADRs”) issued by JP Morgan Chase Bank, N.A., as
      depositary, and are traded under the symbol “VOLV”. Each ADS outstanding
      represents one B Share deposited with JP Morgan Chase Bank, N.A. JP Morgan
      Chase
      Bank, N.A. has advised Volvo that, as of December 31, 2005, there were about
      13
      million ADSs outstanding and 3,246 record holders. On the basis of this
      information, the ADSs held on such date in the United States represented
      approximately 4.8% of AB Volvo’s outstanding B Shares.




AB
      Volvo
      believes that there has also been very limited over-the-counter market in the
      United States for its A and B Shares.




Trading
      on
      the Stockholmsbörsen continues until 5:30 P.M. each business day. In addition to
      official trading on the Exchange, there is also trading off the Exchange during
      official trading hours. The Stockholmsbörsen publishes a daily Official List,
      which includes the volume of recorded transactions in each listed stock,
      together with the prices of the highest and lowest recorded trades of the day.
      The Official List reflects price and volume information for trades completed
      by
      members on the floor during the day, as well as for inter-dealer trades
      completed off the floor and certain inter-dealer trades completed on the floor
      during the previous business day.




The
      Annual
      General Meeting of shareholders 2005 authorized, up until the AGM 2006, the
      Board of Directors to repurchase and transfer Company shares as follows. The
      decision concerned an authorization of the Board to decide on the acquisition
      and/or transfer of Company shares and meant that both Series A and Series B
      shares could be acquired and/or transferred.




In
      November 2003, Volvo obtained an exemption from Nasdaq from the shareholder
      approval requirements pursuant to Nasdaq Marketplace Rule 4350(i)(1)(A) with
      respect to certain equity compensation plans.




**9.D****Selling
      Shareholders**




Not
      applicable.





**9.E****Dilution**




Not
      applicable





**9.F****Expenses
      of the Issue**




Not
      applicable.




**ITEM
      10. ADDITIONAL INFORMATION**




**10.A****Share
      ca****pital**




Not
      applicable.





62


**10.B****Memorandum
      and articles of association**




AB
      Volvo
      is registered in the Swedish Companies Register under the number 556012-5790.
      AB
      Volvo’s corporate purposes are to concentrate on the following product areas:
      transportation, food processing, energy and finance (with the exception,
      however, of activities that are subject to the relevant law on banking
      activities and credit market companies), management of real estate, goods and
      chattels and other operations associated with these activities. The new Swedish
      Companies Act entered into force on January 1, 2006, and as a consequence
      thereof a number of changes to the articles of association were necessitated.
      At
      the General Meeting of Shareholders held on April 5, 2006, it was resolved
      to
      amend the articles of association in order to comply with the new Swedish
      Companies Act. Set forth below is a summary of certain material provisions
      of
      the current AB Volvo Articles of Association and the new Swedish Companies
      Act.
      This description does not purport to be complete.




According
      to the Articles of Association, each Class A Share confers one vote per share
      and each Class B Share confers one-tenth of one vote per share. In all other
      respects, AB Volvo’s Class A and B shares rank equally. Notice of the annual
      general meeting of shareholders or an extraordinary meeting of shareholders
      at
      which a proposal for a change of the Articles of Association will be considered
      must be given not less than four or more than six weeks prior to the meeting.
      Notice of any other extraordinary meetings of the shareholders must be given
      not
      less than two nor more than six weeks prior to the meeting. In order to be
      entitled to attend and vote at a general meeting of shareholders, a shareholder
      must be registered in the register of shareholders five weekdays prior to the
      date of the meeting. The Articles of Association provide that a shareholder
      must
      give notice to AB Volvo of its intention to attend the meeting not later than
      the date specified in the notice convening the meeting (a date not earlier
      than
      the fifth weekday preceding the meeting). A shareholder may attend and vote
      at
      the meeting in person or by proxy. A person designated in the register as a
      nominee (including the depositary of the ADRs) is not entitled to vote at a
      general meeting, nor is a beneficial owner whose shares are registered in the
      name of a nominee (including the depositary of the ADRs) unless the beneficial
      owner first arranges to have such owner’s own name entered in the register of
      shareholders.




According
      to the Articles of Association the share capital of AB Volvo shall comprise
      a
      minimum of SEK 1,800 million and not more than SEK 7,200 million. The number
      of
      shares shall be a minimum of 300,000,000 and a maximum of
      1,200,000,000.




Apart
      from
      specially appointed members and deputy members, the Board of AB Volvo is to
      consist of not less than six and not more than twelve members with not more
      than
      the same number of deputies.




According
      to the Swedish Companies Act, a member of the board of directors or the managing
      director may not take part in matters regarding agreements, litigation or other
      legal proceedings between the director and the company, between the company
      and
      third parties where the director has a material interest in the matter which
      may
      conflict with the interests of the company, or agreements between the company
      and a legal entity which the director may represent, either individually or
      together with any other person. The total compensation to the Board of Directors
      is decided by the Annual General Meeting.




The
      board
      members are charged with the organization of the company and the management
      of
      the company’s operations and the managing director is charged with the
      day-to-day management of the company in accordance with any guidelines and
      instructions provided by the board of directors. The managing director thus
      has
      borrowing powers only to the extent such borrowing is part of the day-to-day
      management of the company and in accordance with any guidelines and instructions
      provided by the board of directors.




Under
      the
      Swedish Companies Act, the annual general meeting of the shareholders shall
      be
      held within six months of the end of each financial year. The annual report
      and
      the audit report, and where the company is a parent company, the consolidated
      annual report and the audit report on the group shall be presented at such
      meeting. At the meeting resolutions shall be passed with respect to (i) adoption
      of the income statement and the balance sheet, (ii) dispositions of the
      company’s profit and loss according to the adopted balance sheet, (iii)
      discharge from liability for the members of the board and managing director
      and
      (iv) other matters which according to the Swedish Companies Act or the articles
      of association rest upon the general meeting for resolution.




Under
      Swedish law, only a general meeting of shareholders (annual or extraordinary)
      may authorize the payment of dividends. A Swedish limited company may not
      distribute dividends to such an extent that the company’s restricted equity is
      not fully covered after the distribution. The calculation shall be based on
      the
      latest adopted balance sheet and any changes in the restricted equity that
      have
      occurred after the balance day shall be considered. Consequently, profits that
      have not yet been adopted by the annual general meeting may not be distributed.
      The foregoing applies regardless of whether the dividend is decided on an annual
      general meeting or by an extraordinary general meeting during the course of
      a
      financial year. Further, no dividend may be distributed unless the dividend
      is
      deemed justifiable on both the company and the group level with regard to the
      demands on company and group equity imposed by the type, scope and risks of
      the
      business and with regard to the need to strengthen the company’s and the group’s
      balance sheet, liquidity and overall position. Further, the payment of dividends
      which may not exceed the amount recommended by the Board of Directors, except
      that in the event a demand is made by holders of at least 10% of the total
      number of shares outstanding, a dividend of at least 50% of the net profits
      for
      the fiscal year remaining after certain deductions and with certain limitations
      must be declared. A decision to issue new shares shall specify the time from
      which the new shares are entitled to receive dividends. The right to receive
      dividends shall, however, commence no later than for the fiscal year following
      the year during which the shares were registered. Any person entered in the
      share register and in a list pursuant to Chapter 4, s. 39 of the Swedish
      Companies Act on the stipulated recording date shall be deemed to be entitled
      to
      receive a dividend, and, in the event of a bonus issue, new shares due to the
      holder and to exercise the shareholder’s preferential right to take part in a
      new issue of shares.





63


Under
        the
        Swedish Companies Act, resolutions at the general meeting of the shareholders
        are normally passed by a simple majority of votes cast. Exceptions include,
        but
        are not limited to: (i) resolutions to waive shareholder preferential rights
        in
        connection with an issue of new shares or to reduce the share capital, which
        require a qualified two-thirds majority of the votes cast as well as support
        of
        at least two-thirds of the shares represented at the general meeting; (ii)
        resolutions which restrict the transferability of shares, or limit the number
        of
        shares in respect of which a single shareholder may vote, or which deal with
        certain other special matters, in which case a minimum quorum and a larger
        majority, or in some cases unanimity, is required; (iii) resolutions which
        amend
        the Articles of Association in other respects, for which a majority consisting
        of at least two-thirds of the shares represented at the meeting and of the
        votes
        cast is required; (iv) resolutions implying that the legal position of certain
        shares would be adversely changed for which, in addition to (iii) above,
        the
        approval of all holders of such shares represented at the meeting and
        representing at least nine-tenths of all such shares is required; and (v)
        resolutions implying that the legal position of an entire class of shares
        would
        be adversely changed, for which, in addition to (iii) above, the approval
        of the
        holders of at least half of all the shares of such class and of nine-tenths
        of
        the shares of such class represented at the meeting is required.


In
      addition to the quorum rules above, the Swedish Companies Act contains certain
      other provisions granting rights to a minority of the shareholders. Such rights,
      subject to the minority reaching a certain minimum size, include but are not
      limited to; (i) the right to have a matter at a general meeting of the
      shareholders adjourned to a resumed general meeting; (ii) the right to allow
      the
      company to institute an action for damages in favor of the company against
      a
      board member, the managing director, a shareholder or the auditor; (iii) the
      right to request that the general meeting declares a dividend in an amount
      of at
      least half the sum of the net profit for the past financial year remaining
      after
      certain deductions; (iv) the right to request that the board convenes an extra
      ordinary general meeting of the shareholders; (v) the right to request that
      the
      County Administrative Board appoints an auditor to take part in the auditing
      of
      the company or that the County Administrative Board appoints a special examiner
      to examine a specific past period or matter relating to the
      company.




In
      December 1988, Volvo obtained an exemption from Nasdaq from the quorum
      requirements of Nasdaq Marketplace Rule 4350(f). This rule requires that Volvo
      specify in its constitutional documents a quorum of not less than 331⁄3% of the
      outstanding shares of its common voting shares. The exemption was granted on
      the
      basis that such quorum requirements were not required by Swedish corporate
      law
      and would be contrary to the generally accepted business practice in
      Sweden.




A
      shareholder or proxy for one or more shareholders may at any general meeting
      of
      shareholders, unless the company’s articles of association provide otherwise,
      cast the full number of votes represented by such holder’s shares. AB Volvo’s
      Articles of Association do not prevent the shareholders from casting the full
      number of votes represented by such shareholder’s shares.




64


There
      are
      no provisions in the Articles of Association limiting foreigners’ right to
      purchase, own, sell or vote for AB Volvo shares. As a general rule under Swedish
      law, AB Volvo shares may be freely sold to and owned by nationals from other
      countries than Sweden. In some cases of transactions in AB Volvo shares, certain
      flagging and ownership examination rules apply to the transaction, irrespective
      of the nationality of the parties involved.




The
      Swedish Financial Instruments Trading Act provides that any person, foreign
      or
      Swedish, who has acquired or transferred shares in a Swedish limited liability
      company that has issued shares which are quoted on a securities exchange within
      the European Economic Area or are, without being listed, quoted on a securities
      exchange or an authorized market-place in Sweden, shall within seven days
      thereafter report in writing the acquisition or the transfer to the company
      and
      the Swedish exchanges and market-places where shares in the company are quoted
      or, if the shares are not quoted in Sweden, to the Swedish Financial Supervisory
      Authority (the FSA), if:





(1)
            the
                acquisition results in the acquirer’s share of the number of votes for all
                shares in the company reaching or exceeding any of the thresholds
                10, 20,
                33.33, 50 and 66.67%, or





(2)
            the
                transfer results in the transferor’s share of the number of votes for all
                shares in the company falling below any of the thresholds described
                in (1)
                above.





In
      connection with the above, shares owned by persons and companies that are
      affiliated to or are acting in concert with the acquirer or the transferor
      shall
      be treated as if the shares were the acquirer’s or transferor’s
      own.




It
      is
      prevailing market practice on the Swedish securities market pursuant to
      self-regulation that any person, who holds 5% or more of the capital and/or
      voting rights in a company, that acquires or transfers shares and/or forms
      of
      securities that can be converted into or exchanged into shares in a listed
      or
      quoted Swedish limited liability company shall make an announcement when his
      holding increases or decreases above or below 5% of the share capital or the
      total number of voting rights in the company, as well as above or below each
      subsequent 5% threshold. In addition, any person who holds less than 30% of
      the
      total voting rights in such company and who acquires shares so that after the
      acquisition he possesses 30% or more of the votes in the company, shall make
      a
      public offer to acquire all of the outstanding shares in the
      company.




As
      of July
      1, 2005 Volvo is subject to the Swedish corporate governance code.




**10.C****Material
      contracts**




None.




**10.D****Exchange
      controls**




There
      are
      no Swedish governmental laws, decrees or regulations that restrict the export
      or
      import of capital or that affect the remittance of dividends or other payments
      to non-residents of Sweden who hold Volvo shares. In addition, since January
      1,
      1993, there have been no limitations imposed by Swedish law or Volvo’s Articles
      of Association on the right of non-residents of Sweden or non-citizens of Sweden
      to hold or vote for Volvo shares.




**10.E****Taxation**




**General.** The
      taxation discussion set forth below is intended only as a general summary and
      does not purport to be a complete analysis or listing of all potential tax
      effects relevant to ownership and disposition of B Shares or ADSs represented
      by
      ADRs. The statements of United States and Swedish tax laws set out below are
      based on the laws in force as of the date of this Annual Report and may be
      subject to changes in United States or Swedish tax law and in the double
      taxation convention or treaty between the United States and Sweden, occurring
      after that date, possibly with retroactive effect.




65


The
      following summary outlines certain material United States federal income tax
      consequences and certain material Swedish tax consequences to “U.S. Holders”. A
      U.S. Holder is a beneficial owner of ADSs or B Shares who (i) is a citizen
      or
      individual resident of the United States for United States federal income tax
      purposes, a corporation (or other entity taxable as a corporation for United
      States federal income tax purposes) created or organized in or under the laws
      of
      the United States or of any state thereof (including the District of Columbia),
      an estate the income of which is subject to United States federal income
      taxation regardless of its source, or a trust if a court within the United
      States is able to exercise primary supervision over its administration and
      one
      or more U.S. persons have the authority to control all of the substantial
      decisions of the trust; and (ii) holds the ADSs or B Shares as capital assets.
      Because this summary is not exhaustive of all possible tax considerations (such
      as situations involving taxpayers who own (directly, indirectly or by
      attribution) 10% or more of the voting stock or outstanding share capital of
      Volvo, who are securities broker-dealers, financial institutions, banks,
      insurance companies, regulated investment companies, partnerships, persons
      subject to the alternative minimum tax, persons holding ADSs or B Shares as
      part
      of a straddle, hedging or conversion transaction, persons who acquired the
      ADSs
      or B Shares pursuant to the exercise of the employee stock options or otherwise
      as compensation, U.S. expatriates, tax-exempt entities, or taxpayers whose
      functional currency is not the U.S. dollar), U.S. Holders are urged to consult
      their tax advisors as to the overall United States federal, state and local
      tax
      consequences, as well as the overall Swedish tax consequences, of their
      ownership of ADSs or B Shares. In particular, U.S. Holders are urged to consult
      their tax advisors concerning whether they are eligible for benefits under
      the
      Treaty (as defined below). Additionally,
      if a partnership (or other entity treated as a partnership for United States
      federal income tax purposes) holds ADSs or B Shares, the tax treatment of a
      partner will depend upon the status of the partner and the activities of the
      partnership. A partner in a partnership that holds ADSs or B Shares is urged
      to
      consult its own tax advisor regarding the specific tax consequences of owning
      and disposing of ADSs or B Shares. Other
      holders of ADSs or B Shares are also urged to consult their own tax advisors
      as
      to the overall tax consequences of their ownership of such ADSs or B
      Shares.




For
      the
      purposes of both the convention between the United States of America and Sweden
      for the avoidance of double taxation and the prevention of fiscal evasion with
      respect to taxes on income, as amended (the “Treaty”), and the United States
      Internal Revenue Code of 1986, as amended (the “Code”), U.S. Holders of ADSs
      will be treated as the owners of the underlying B Shares that are represented
      by
      such ADSs.




**Taxation
      of Dividends.** For
      United States federal income tax purposes, the gross amount of any dividends
      paid by Volvo (including the amount any Swedish withholding tax thereon) to
      U.S.
      Holders of ADSs or B Shares will generally be taxed as ordinary dividend income
      to such Holders. Dividends paid by Volvo will not be eligible for the dividends
      received deduction generally allowed to corporate U.S. shareholders with respect
      to dividends received from other U.S. corporations. The amount of any dividend
      that will be included in gross income will be the U.S. dollar value of the
      payment (including the amount of any Swedish taxes withheld therefrom)
      calculated by reference to the spot rate in effect of the date of receipt by
      the
      U.S. Holder in the case of B Shares (or the date of receipt by the Depositary
      in
      the case of ADSs) regardless of whether the payment is in fact converted into
      U.S. dollars. A U.S. Holder of B Shares who converts kronor into U.S. dollars
      on
      the date of receipt generally should not recognize any exchange gain or loss.
      A
      U.S. Holder of B Shares who does not convert kronor into U.S. dollars on the
      date of receipt generally will have a tax basis in the kronor equal to its
      U.S.
      dollar value at the time of receipt. Exchange gain or loss, if any, recognized
      by the U.S. Holder on a subsequent conversion or disposition of the kronor
      generally will be treated as U.S. source ordinary income or loss. A U.S. Holder
      of ADSs ordinarily will be paid in U.S. dollars. Special rules govern the manner
      in which accrual method taxpayers are required (or may elect) to determine
      the
      U.S. dollar amount includible in income in the case of taxes withheld in a
      foreign currency. Certain of these rules have changed effective January 1,
      2005.
      Accrual basis taxpayers therefore are urged to consult their own tax advisors
      regarding the requirements and elections applicable in this regard.




In
      general, under Swedish tax law, dividends paid by a Swedish corporation such
      as
      Volvo to non-residents of Sweden are subject to Swedish withholding tax at
      a
      rate of 30%. However, pursuant to the Treaty, dividends paid by Volvo to a
      shareholder who is (i) treated as a resident of the United States for the
      purpose of application of the Treaty, (ii) who qualifies for treaty benefits
      under the “Limitation on Benefits” article of the Treaty, and (iii) who does not
      have a “permanent establishment” or “fixed place of business” in Sweden (or in
      the case of an individual U.S. Holder who does not perform or has not performed
      independent personal services in Sweden) to which the receipt of the dividend
      is
      attributable will generally be subject to Swedish withholding tax at a reduced
      rate of 15%. A U.S. Holder of ADSs or B Shares may be required to provide
      documentary evidence that such Holder is entitled to the reduced 15% withholding
      tax rate under the Treaty. The gross amount of such dividends will be treated
      as
      foreign source income for United States federal income tax purposes. This may
      be
      relevant in determining the Holder’s foreign tax credit limitation.




66


Subject
      to
      certain conditions and limitations, the Swedish withholding taxes described
      above will be treated as foreign taxes eligible for credit against a U.S.
      Holder’s United States federal income tax liability. The rules governing the
      foreign tax credit are complex. Under the Code, the limitation on foreign taxes
      eligible for credit is calculated separately with respect to “passive income”,
      or in the case of certain U.S. Holders “financial services income”. Under
      recently enacted legislation, for taxable years beginning January 1, 2007,
      dividend income generally will constitute “passive category income” or, in the
      case of certain U.S. Holders, “general category income”. The consequences of the
      separate limitation calculation will depend on the nature and sources of each
      U.S. Holder’s income. In lieu of claiming a credit, a U.S. Holder who itemizes
      deductions may elect to deduct against income all of such Holder’s foreign
      income taxes in the taxable year. A deduction, however, does not reduce taxes
      on
      a dollar-for-dollar basis like a credit, but the deduction for foreign taxes
      paid is not subject to the same limitations as those applicable to the foreign
      tax credit. Each U.S. Holder is urged to consult its own tax advisor concerning
      whether the Holder is eligible for benefits under the Treaty, and whether,
      and
      to what extent, a foreign tax credit will be available.




Certain
      U.S. Holders (including individuals) are eligible for reduced rates of U.S.
      federal income tax (at a maximum rate of 15%) in respect of “qualified dividend
      income” received in taxable years and beginning before January 1, 2011. For this
      purpose, qualified dividend income generally includes dividends paid by a
      non-U.S. corporation if, among other things, the U.S. Holders meet certain
      minimum holding periods and the non-U.S. corporation satisfies certain
      requirements, including that either (i) the shares (or ADSs) with respect to
      which the dividend has been paid are readily tradable on an established
      securities market in the United States or (ii) the non-U.S. corporation is
      eligible for the benefits of a comprehensive U.S. income tax treaty (such as
      the
      Treaty) which provides for the exchange of information. Volvo currently believes
      that dividends paid with respect to its ADSs and B Shares should constitute
      qualified dividend income for U.S. federal income tax purposes, and Volvo
      anticipates that its dividends will be reported as qualified dividends on Forms
      1099-DIV delivered to U.S. holders. Each individual U.S. Holder of ADSs or
      B
      Shares is urged to consult his own tax advisor regarding the availability to
      him
      of the reduced dividend tax rate in light of his own particular situation and
      regarding the computation of his foreign tax credit limitation with respect
      to
      any qualified dividend income paid by Volvo to him, as applicable.




The
      United
      States Treasury has expressed concern that parties to whom ADSs are released
      may
      be taking actions that are inconsistent with the claiming of foreign tax credits
      or reduced tax rates in respect of qualified dividends by U.S. Holders of ADSs.
      Accordingly, the analysis of the creditability of Swedish withholding taxes
      or
      the availability of qualified dividend treatment could be affected by future
      actions that may be taken by the United States Treasury with respect to
      ADSs.




**Tax
      on Sale, Exchange or Other Disposition.** For
      United States federal income tax purposes, a U.S. Holder generally will
      recognize capital gain or loss on any sale, exchange or other disposition of
      ADSs or B Shares in an amount equal to the difference between the U.S. dollar
      value of the amount realized on the sale, exchange or other disposition and
      the
      U.S. Holder’s adjusted tax basis (determined in U.S. dollars) in the ADSs or B
      Shares. This capital gain or loss will be U.S. source income or loss and will
      be
      treated as a long-term capital gain or loss if the U.S. Holder’s holding period
      in the ADSs or B Shares exceeds one year. In the case of a U.S. Holder who
      is an
      individual, capital gains generally will be subject to United States federal
      income tax at preferential rates if specified minimum holding periods are met.
      The deductibility of capital losses is subject to significant
      limitations.




The
      deposit and withdrawal of B Shares in exchange for ADSs by a U.S. Holder under
      the deposit agreement will not be subject to United States federal income tax
      or
      Swedish income tax.




In
      general, under the Treaty, a shareholder who is (i) treated as a resident of
      the
      United States for the purpose of application of the Treaty, (ii) who qualifies
      for treaty benefits under the “Limitation on Benefits” article of the Treaty,
      and (iii) who does not have a “permanent establishment” or “fixed place of
      business” in Sweden (or in the case of an individual U.S. Holder who does not
      perform or has not performed independent personal services in Sweden) to which
      the holding of the ADSs or B Shares is attributable and (iv) who was not an
      individual resident of Sweden within ten years preceding the disposition of
      the
      ADSs or B Shares will not be subject to Swedish tax on any capital gain derived
      from the sale, exchange or other disposition of ADSs or B Shares. Different
      rules may apply to a shareholder who is resident in more than one
      country.




67


**Passive
      Foreign Investment Company Status.** A
      non-U.S. corporation will be classified as a Passive Foreign Investment Company
      (a “PFIC”) for any taxable year if at least 75% of its gross income consists of
      passive income (such as dividends, interest, rents or royalties (other than
      rents or royalties derived in the active conduct of a trade or business and
      received from an unrelated person), or gains on the disposition of certain
      minority interests), or at least 50% of the average value of its assets consist
      of assets that produce, or are held for the production of, passive income.
      Volvo
      currently believes that it did not qualify as a PFIC for the taxable year ending
      December 31, 2005 for United States federal income tax purposes. If Volvo were
      to become a PFIC in any taxable year, the tax on distributions on its ADSs
      or B
      Shares and on any gains realized upon the disposition of ADSs or B Shares may
      be
      less favorable than as described herein. Furthermore, dividends paid by Volvo
      would not be “qualified dividend income” and would be subject to tax at the
      higher rates applicable to other items of ordinary income. U.S. Holders should
      consult their tax advisors regarding the potential application of the PFIC
      rules
      to Volvo.




**Swedish
      Estate and Gift Taxes.** The
      Swedish tax on Estate and Gifts has been abolished as from December 17, 2004.
      The transfer of an ADS or B Share by gift or by reason of the death of the
      owner
      prior to this date will still be subject to Swedish gift or inheritance tax
      if
      the donor or decedent is domiciled or resident in Sweden or is a Swedish citizen
      or is married to a Swedish citizen and has left Sweden less than ten years
      before the gift transaction or death. If the ADS or B Share was classified
      among
      fixed or current assets of a business activity run in Sweden by the donor or
      decedent, the transfer prior to December 17, 2004, would also be subject to
      Swedish gift or estate tax as a general rule. Further, transfers before that
      date by gift would be subject to Swedish gift tax if either the donor or donee
      is a Swedish citizen or if the donee is a Swedish legal entity. ADSs or B Shares
      transferred by reason of the death of a Swedish citizen prior to December 17,
      2004, will also be taxable. Under the applicable Treaty this tax liability
      may
      be limited.




**Swedish
      Taxes on Property.** Only
      individuals, estates of deceased individuals, Swedish foundations and Swedish
      associations and societies are liable to the Swedish Tax on Property
      (“förmögenhetsskatt”). An individual (and the estate of him/her) who is not a
      Swedish citizen and has not stayed in Sweden at all or only temporary will
      not
      be liable to the tax. Should he or she stay here more than temporary but not
      more permanently and without having any other substantial connection to Sweden,
      tax liability will arise but only for private real estate in Sweden. Any
      individual staying here more permanently (six months may sometimes be used
      as a
      rule of thumb) or having any other substantial connection to Sweden will be
      liable to the Swedish Tax on Property also for ADSs and B Shares. The treaty
      may
      limit this liability.




In
      general, under the Treaty, a U.S. citizen who is not also a Swedish citizen
      will
      not be subject to the Swedish tax on property unless ADSs or B Shares are
      included in a business carried on in Sweden. There are exemptions in the Treaty
      also for individuals with other conditions.




**United
      States Information Reporting Backup Withholding.** Holders
      of ADSs or B Shares may, under certain circumstances, be subject to United
      States information reporting requirements and backup withholding at a current
      rate of 28% with respect to dividends paid on or the proceeds from a sale,
      exchange or redemption of ADSs or B Shares, unless such Holder provides an
      accurate taxpayer identification number or certificate of foreign status and
      makes any other required certification, or is otherwise exempt from backup
      withholding. Certain exempt recipients (such as corporations) are not subject
      to
      the information reporting requirements and backup withholding. Any U.S. persons
      who are required to establish their exempt status generally must provide such
      certification on IRS Form W-9 (Request for Taxpayer Identification Number and
      Certification). Non-U.S. holders generally will not be subject to United States
      information reporting or backup withholding. However, such holders may be
      required to provide certification of non-U.S. status (generally on IRS Form
      W-8BEN) in connection with payments received in the United States or through
      certain U.S.-related financial intermediaries. Backup withholding is not an
      additional tax. Amounts withheld as backup withholding may be credited against
      a
      Holder’s United States federal income tax liability. A Holder may obtain a
      refund of any excess amounts withheld under the backup withholding rules by
      timely filing the approximate claim for refund with the IRS and furnishing
      any
      required information.




68


**United
      States State and Local Taxes.** In
      addition to United States federal income tax, U.S. Holders may be subject to
      United States state and local taxes with respect to their ADSs or B
      Shares.




**10.F****Dividends
      and paying agents**




Not
      applicable.




**10.G****Statement
      by experts**




Not
      applicable.




**10.H****Documents
      on display**




The
      documents referred to in this report can be read at the U.S. Securities and
      Exchange Commission’s public reference facilities at Room 1024, 450 Fifth
      Street, N.W., Washington, D.C. 20549 or at the website www.sec.gov .
      A copy
      of Form 20-F is also displayed on the Company’s homepage www.volvo.com under
      Investor Relations, Financial Reports, Other publications.




**10.I****Subsidiary
      Information**




Not
      applicable.




**ITEM
      11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
      RISK**




Quantitative
      and qualitative disclosures about market risk are reported in Note 36 to the
      consolidated financial statements included in Item 18 of the document.




**ITEM
      12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY
      SECURITIES**




Not
      applicable.




69




**PART
      II**







**ITEM
      13.DEFAULTS, DIVIDEND ARREARAGES AND
      DELINQUENCIES**




None.







**ITEM
      14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY
      HOLDERS AND USE OF PROCEEDS**




None.




**ITEM
      15. CONTROLS AND PROCEDURES**




The
      Company maintains disclosure controls and procedures that are designed to ensure
      that information required to be disclosed in the Company’s Exchange Act reports
      is recorded, processed, summarized and reported within the time periods
      specified in the SEC’s rules and forms, and that such information is accumulated
      and communicated to the Company’s management, including its President and Chief
      Executive Officer and Senior Vice President and Chief Financial Officer, as
      appropriate, to allow timely decisions regarding required
      disclosure.




As
      of the
      end of the period covered by this Form 20-F, the Company carried out an
      evaluation, under the supervision and with the participation of the Company’s
      management, including the Company’s President and Chief Executive Officer and
      the Company’s Senior Vice President and Chief Financial Officer, of the
      effectiveness of the design and operation of the Company’s disclosure controls
      and procedures (as defined in United States Securities Exchange Act of 1934,
      as
      amended, Rule 13a-15(e)). Based on the foregoing, the Company’s President and
      Chief Executive Officer and Senior Vice President and Chief Financial Officer
      concluded that the Company’s disclosure controls and procedures were effective
      in timely identifying material information potentially required to be included
      in the Company’s SEC filings.




During
      2005 an Internal Control department within AB Volvo has been formed and internal
      control resources have been added in group companies.




The
      Internal Audit function has been strengthened and since January 1, 2006 all
      internal auditors report to the Head of Corporate Audit, AB Volvo and are thus
      independent from group companies.




There
      have
      been no changes in the Company’s internal control over financial reporting, that
      occurred during the period covered by this Form 20-F, that have materially
      affected, or are reasonably likely to materially affect, our internal control
      over financial reporting.




**ITEM
      16.A****AUDIT
      COMMITTEE FINANCIAL EXPERT**




The
      Board
      of Directors has determined that each of Haruko Fukuda, Per-Olof Eriksson and
      Ken Whipple are “audit committee financial expert” as defined in Item 16A of
      Form 20-F.




As
      of
      April 5, 2006, the Audit Committee consists of Per-Olof Eriksson, Ying Yeh
      and
      Peter Bijur. The Board of Directors has determined that each of Per-Olof
      Eriksson, Ying Yeh and Peter Bijur are “audit committee financial expert” as
      defined in Item 16A of Form 20-F. Further, the Board of Directors determined
      that each of Per-Olof Eriksson, Ying Yeh and Peter Bijur are “independent
      directors” as defined by NASDAQ rules.




**ITEM
      16.B****CODE
      OF ETHICS**




The
      Company has adopted a code of ethics that applies to, inter alia, its Chief
      Executive and Chief Financial Officer. This code of ethics is posted on the
      Company’s website, www.volvo.com, and may be found as follows: From our main web
      page, first click on “Volvo Group” then on “our values” and on “Volvo Code of
      Conduct”.





70


**ITEM
      16.C****PRINCIPAL
      ACCOUNTANT FEES AND SERVICES******




PricewaterhouseCoopers
      AB has served as the Company’s independent public auditors for the financial
      years in the two-year period ended December 31, 2005. The Annual General Meeting
      elects the auditors for a period of four years. The following table presents
      the
      aggregate fees for professional services and other services rendered by
      PricewaterhouseCoopers AB to the Company in 2004 and 2005.





2004
            
            2005(In
                millions of SEK)Audit
                Fees (1)
            
            
            78
            
            
            78Audit-related
                Fees (2)
            
            
            20
            
            
            28Tax
                Fees (3)
            
            
            16
            
            
            17All
                Other Fees (4)
            
            
            0
            
            
            0Total
                Fees
            
            
            **114**
            
            
            **123**




(1)  Audit
      Fees
      consist of fees billed for the annual audit services engagement and other audit
      services, which are those services that only the external auditor reasonably
      can
      provide, and include the Company’s audit; statutory audits; comfort letters and
      consents; attest services; and assistance with and review of documents filed
      with the SEC.


(2)  Audit-related
      Fees consist of fees billed for assurance and related services that are
      reasonably related to the performance of the audit or review of the Company’s
      financial statements or that are traditionally performed by the external
      auditor, and include consultations concerning financial accounting and reporting
      standards; internal control reviews of new systems; review of security controls;
      due diligence related to acquisitions; accounting assistance and audits in
      connection with proposed or completed acquisitions; and employee benefit plan
      audits.


(3)  Tax
      Fees
      include fees billed for tax compliance services, including the preparation
      of
      original and amended tax returns and claims for refund; tax consultations,
      such
      as assistance and representation in connection with tax audits and appeals,
      tax
      advice related to mergers and acquisitions and transfer pricing.


(4)  All
      Other
      Fees include fees billed for training; forensic accounting and data system
      reviews.





The
      Audit
      Committee approves annually a catalogue of Extended Audit Services, Audit
      Related Services and Tax Services that may be performed by the independent
      auditors. In addition, the Audit Committee limits the fee that the independent
      auditors may receive when performing the permitted services. When the fee for
      a
      permitted service is above such threshold level but below a certain higher
      level
      decided by the Audit Committee, the Head of Corporate Audit, AB Volvo, is
      authorized to approve requests to retain the independent auditors. Services
      that
      are not included in the catalogue of permitted services or where the fee for
      the
      service is not within the range delegated to the Head of Corporate Audit,
      require the pre-approval by the Audit Committee.





**ITEM
      16.D EXEMPTION FROM THE LISTING STANDARDS FOR AUDIT
      COMMITTEES******




Not
      applicable





71





**ITEM
      16.EPURCHASES OF EQUITY SECURITIES BY THE ISSUER AND
      AFFILIATED PURCHASERS**




**Period**
            **Total
                Number of Shares Purchased**
            **Average
                PricePaid per share**
            **Total
                Number of Shares Purchased as Part of PubliclyAnnounced
                Programs**
            **Maximum
                Numberof Shares that may yet be Purchased under the
                Programs**2005-01-01
                to 2005-01-31
            -
            -
            -
            12,761,0452005-02-01
                to 2005-02-29
            5,415,000
            SEK
                302.82
            5,415,000
            7,346,0452005-03-01
                to 2005-03-31
            315,000
            SEK
                311.47
            315,000
            7,031,0452005-04-01
                to 2005-04-30
            -
            -
            -
            -2005-05-01
                to 2005-05-31
            -
            -
            -
            -2005-06-01
                to 2005-06-30
            -
            -
            -
            -2005-07-01
                to 2005-07-31
            -
            -
            -
            -2005-08-01
                to 2005-08-31
            -
            -
            -
            -2005-09-01
                to 2005-09-30
            -
            -
            -
            -2005-10-01
                to 2005-10-31
            -
            -
            -
            -2005-11-01
                to 2005-11-30
            -
            -
            -
            -2005-12-01
                to 2005-12-31
            -
            -
            -
            -2006-01-01
                to 2006-01-31
            -
            -
            -
            -2006-02-01
                to 2006-02-28
            -
            -
            -
            -2006-03-01
                to 2006-03-31
            -
            -
            -
            -2006-04-01
                to 2006-04-30
            -
            -
            -
            -





·
            On
                April 16, 2004 the Annual General Meeting of AB Volvo authorized
                the Board
                of Directors to decide on the acquisition of own shares. On June
                17, 2004
                the board of AB Volvo decided to acquire through purchase on
                Stockholmsbörsen (Stockholm Exchange) a maximum of 22,076,045 Series A
                and/or Series B shares, however, not to exceed a total purchase amount
                of
                SEK 4,300,000,000 (USD 645
                million).





·
            The
                purchases under the program were carried out during the period October
                27,
                2004 to March 1, 2005.





·
            The
                repurchase program expired on April 11, 2005 but was terminated prior
                to
                expiration date, see above.





·
            The
                Annual General Meeting for 2005 of AB Volvo authorized the Board
                of
                Directors to decide on the acquisition of own shares. The Board of
                Directors took no decision to exercise the right to acquire own shares.








72




**PART
      III**




**ITEM
      17. FINANCIAL STATEMENTS**




Not
      applicable.







73


**ITEM
      18. FI** **NANCIAL
      STATEMENTS**




The
      following financial statements are filed as part of this Annual Report on Form
      20-F.





INDEX
      TO
      FINANCIAL STATEMENTS


AB
                  VOLVO AND SUBSIDIARIES:
              PageReports
                  of Independent Registered Public Accounting Firm:
              F-2Consolidated
                  Financial Statements:Consolidated
                  Income Statements for the Years EndedDecember
                  31, 2004 and 2005
              F-3Consolidated
                  Balance Sheets at December 31, 2004 and 2005
              F-4Changes
                  in Consolidated Shareholders’ equity for the Years EndedDecember
                  31, 2004 and 2005
              F-5Consolidated
                  Cash Flow Statements for the Years EndedDecember
                  31, 2004 and 2005
              F-6Notes
                  to the Consolidated Financial Statements
              F-7


74


**ITEM
      19. EXHIBITS**




**1.**
              Articles
                  of Association as amended April 5, 2006 (in English
                  translation).******2.***
              Amended
                  and Restated Deposit Agreement among AB Volvo, JP Morgan Chase
                  Bank N.A.
                  as depositary and holders of ADSs, dated as of January 5, 2005.**8.**
              For
                  information concerning Volvo’s group structure and significant
                  subsidiaries, including the name, country of incorporation, proportion
                  of
                  ownership interest and, to the extent different, proportion of
                  voting
                  power held, see Note 4 to Volvo’s consolidated financial
                  statements.**12.1**
              Certification
                  of Leif Johansson, President and Chief Executive Officer of AB
                  Volvo
                  (publ), pursuant to Section 13(a) of the Securities Exchange Act
                  of 1934,
                  as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley
                  Act
                  of 2002.**12.2**
              Certification
                  of P’r Östberg, Senior Vice President and Chief Financial Officer of AB
                  Volvo (publ), pursuant to Section 13(a) of the Securities Exchange
                  Act of
                  1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley
                  Act of 2002.**13.1**
              Certification
                  pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section
                  906 of
                  the Sarbanes-Oxley Act of 2002.*
                  Incorporated by reference from an exhibit to the Registration Statement
                  on
                  Form F-6, filed with the SEC on January 5, 2005 (Commission File
                  Number
                  333-121846).




75


**SIGNATURES**




The
      registrant hereby certifies that it meets all of the requirements for filing
      on
      Form 20-F and that it has duly caused and authorized the undersigned to
      sign this annual report on its behalf.









AKTIEBOLAGET
      VOLVO (publ)




By:
            /s/
                Leif Johansson
              Name:
                   Leif Johansson
                Title:
                   President and Chief Executive
                  Officer





Dated
      May
      29, 2006







76


**INDEX
        TO FINANCIAL STATEMENTS**
 
  
  AB
                  VOLVO AND SUBSIDIARIES:
              PageReport
                  of Independent Registered Public Accounting
                  Firm:
              F-2Consolidated
                  Financial Statements:Consolidated
                  Income Statements for the Years EndedDecember
                  31, 2004 and 2005
              F-3Consolidated
                  Balance Sheets at December 31, 2004 and
                  2005
              F-4Changes
                  in Consolidated Shareholders’ equity for the
                  Years EndedDecember
                  31, 2004 and 2005
              F-5Consolidated
                  Cash Flow Statements for the Years EndedDecember
                  31, 2004 and 2005
              F-6Notes
                  to the Consolidated Financial
                  Statements
              F-7
 
 F-1
 **REPORT
          OF INDEPENDENT REGISTERED** **PUBLIC ACCOUNTING FIRM**
  To
          the
          Board of Directors and Shareholders of AB Volvo:
 
 We
          have
          audited the accompanying consolidated balance sheets of AB Volvo and its
          subsidiaries at December 31, 2005 and 2004 and the related consolidated
          income
          statements, cash-flows statements and statements of changes in shareholders’
equity for each of the two years ended December 31, 2005. These financial
          statements are the responsibility of the Company’s management. Our
          responsibility is to express an opinion on these financial statements based
          on
          our audits.
 
 We
          conducted our audits in accordance with the standards of the Public Company
          Accounting Oversight Board (United States). Those standards require that
          we plan
          and perform the audit to obtain reasonable assurance about whether the
          financial
          statements are free of material misstatement. An audit includes examining,
          on a
          test basis, evidence supporting the amounts and disclosures in the financial
          statements. An audit also includes assessing the accounting principles
          used and
          significant estimates made by management, as well as evaluating the overall
          financial statement presentation. We believe that our audits provide a
          reasonable basis for our opinion.
 
 In
          our
          opinion, the consolidated financial statements referred to above present
          fairly,
          in all material respects, the financial position of AB Volvo and its
          subsidiaries at December 31, 2005 and 2004,
          and
          the results of their operations and their cash flows for each of the two
          years
          ended December 31, 2005, in
          conformity with International Financial Reporting Standards as adopted
          by the
          European Union .
 
 As
          discussed in the accounting policies, note 1, the Group adopted International
          Accounting Standards (IAS) 32  *Financial
          Instruments: Disclosure and Presentation* and
          IAS
          39  *Financial
          Instruments: Recognition and Measurement*  in
          accordance with IFRS as adopted by the EU. The change has been accounted
          for
          prospectively from 1 January 2005 .
 
 International
          Financial Reporting Standards adopted by the European Union vary in certain
          significant respects from accounting principles generally accepted in the
          United
          States of America. Information relating to the nature and effect of such
          differences is presented in Note 32 to the consolidated financial
          statements.
  
 PricewaterhouseCoopers
          AB
 Göteborg,
          Sweden
 May
          22,
          2006
 
 F-2
  **Consolidated
        income statements**
 **SEK
                  M**
              
              
              
              2004
              
              **2005****Net
                  sales**
              
              
              Note
                  7
              
              
              211,076
              
              
              **240,559**Cost
                  of sales
              
              
              
              
              
              (164,170
              )
              
              (186,662
              )**Gross
                  income**
              
              
              
              
              
              46,906
              
              
              **53,897**Research
                  and development expenses
              
              
              Note
                  7
              
              
              (7,614
              )
              
              (7,557
              )Selling
                  expenses
              
              
              
              
              
              (19,369
              )
              
              (20,778
              )Administrative
                  expenses
              
              
              
              
              
              (5,483
              )
              
              (6,301
              )Other
                  operating income and expenses
              
              
              Note
                  8
              
              
              (618
              )
              
              (590
              )Income
                  from investments in associated companies
              
              
              Note
                  7, 9
              
              
              27
              
              
              (557
              )Income
                  from other investments
              
              
              Note
                  10
              
              
              830
              
              
              **37****Operating
                  income**
              
              
              Note
                  7
              
              
              14,679
              
              
              **18,151**Interest
                  income and similar credits
              
              
              
              
              
              821
              
              
              **654**Interest
                  expenses and similar charges
              
              
              
              
              
              (1,254
              )
              
              (972
              )Other
                  financial income and expenses
              
              
              Note
                  11
              
              
              (1,210
              )
              
              **181****Income
                  after financial items**
              
              
              
              
              
              13,036
              
              
              **18,014**Income
                  taxes
              
              
              Note
                  12
              
              
              (3,129
              )
              
              (4,908
              )**Income
                  for the period**
              
              
              
              
              
              9,907
              
              
              **13,106**Attributable
                  to:Equity
                  holders of the parent company
              
              
              
              
              
              9,867
              
              
              **13,052**Minority
                interests
              
              
              Note
                13
              
              
              40
              
              
              549,907
              
              
              **13,106**Basic
                  earnings per share, SEK
              
              
              
              
              
              23.58
              
              
              **32.21**Diluted
                  earnings per share, SEK
              
              
              
              
              
              23.55
              
              
              **32.16**
 
 
 F-3
 
 **Consolidated
        balance sheets**
 **SEK
                  M**
              
              
              
              December
                  31, 2004
              
              **December
                  31, 2005****Assets**Non-current
                  assetsIntangible
                  assets
              
              
              Note
                  14
              
              
              
              
              
              17,612
              
              
              
              
              
              **20,421**Tangible
                  assets
              
              
              Note
                  14Property,
                  plant and equipment
              
              
              
              
              
              29,764
              
              
              
              
              
              **33,930**Investment
                  property
              
              
              
              
              
              1,387
              
              
              
              
              
              **1,071**Assets
                  under operating leases
              
              
              
              
              
              19,534
              
              
              50,685
              
              
              **20,839**
              
              
              **55,840**Financial
                  assetsAssociated
                  companies, other shares and participations
              
              
              Note
                  15
              
              
              2,003
              
              
              
              
              
              **751**Long-term
                  customer-financing receivables
              
              
              Note
                  16
              
              
              25,187
              
              
              
              
              
              **31,184**Deferred
                  tax assets
              
              
              Note
                  12
              
              
              5,078
              
              
              
              
              
              **5,332**Other
                  long-term receivables
              
              
              Note
                  17
              
              
              2,763
              
              
              35,031
              
              
              **3,122**
              
              
              **40,389**Total
                  non-current assets
              
              
              
              
              
              
              
              
              103,328
              
              
              
              
              
              **116,650**Current
                  assetsInventories
              
              
              Note
                  18
              
              
              
              
              
              28,598
              
              
              
              
              
              **33,937**Short-term
                  receivablesCustomer-financing
                  receivables
              
              
              Note
                  19
              
              
              26,006
              
              
              
              
              
              **33,282**Current
                  tax assets
              
              
              
              
              
              1,426
              
              
              
              
              
              **855**Other
                  receivables
              
              
              Note
                  20
              
              
              29,864
              
              
              57,296
              
              
              **35,464**
              
              
              **69,601**Marketable
                  securities
              
              
              Note
                  21
              
              
              
              
              
              25,955
              
              
              
              
              
              **28,834**Cash
                  and cash equivalents
              
              
              Note
                  22
              
              
              
              
              
              8,791
              
              
              
              
              
              **8,113**Total
                  current assets
              
              
              
              
              
              
              
              
              120,640
              
              
              
              
              
              **140,485****Total
                  assets**
              
              
              
              
              
              
              
              
              223,968
              
              
              
              
              
              **257,135****Shareholders’
                  equity and liabilities**Shareholders’
                  equity
              
              
              Note
                  23Share
                  capital
              
              
              
              
              
              2,649
              
              
              
              
              
              **2,554**Additional
                  contributed capital
              
              
              
              
              
              -
              
              
              
              
              
              **-**Reserves
              
              
              
              
              
              (71
              )
              
              
              
              
              **2,924**Retained
                  earnings
              
              
              
              
              
              57,481
              
              
              
              
              
              **59,978**Income
                  for the period
              
              
              
              
              
              9,867
              
              
              
              
              
              **13,052**Equity
                  attributable to the equity holders of the parent company
              
              
              
              
              
              69,926
              
              
              
              
              
              **78,508**Minority
                  interests
                Total
                  shareholders’ equity
              
              
              
              
              
              229
              
              
              70,155
              
              
              **260**
              
              
              **78,768**Non-current
                  provisionsProvisions
                  for post-employment benefits
              
              
              Note
                  24
              
              
              14,703
              
              
              
              
              
              **11,986**Provisions
                  for deferred taxes
              
              
              Note
                  12
              
              
              515
              
              
              
              
              
              **2,265**Other
                  non-current provisions
              
              
              Note
                  25
              
              
              7,296
              
              
              22,514
              
              
              **7,012**
              
              
              **21,263**Non-current
                  liabilities
              
              
              Note
                  26Bond
                  loans
              
              
              
              
              
              27,612
              
              
              
              
              
              **27,570**Other
                  loans
              
              
              
              
              
              12,799
              
              
              
              
              
              **15,985**Other
                  long-term liabilities
              
              
              
              
              
              4,653
              
              
              45,064
              
              
              **5,259**
              
              
              **48,814**Current
                  provisions
              
              
              Note
                  25
              
              
              
              
              
              7,182
              
              
              
              
              
              **9,279**Current
                  liabilities
              
              
              Note
                  27Loans
              
              
              
              
              
              21,396
              
              
              
              
              
              **31,330**Trade
                  payables
              
              
              
              
              
              30,813
              
              
              
              
              
              **35,693**Current
                  tax liabilities
              
              
              
              
              
              1,753
              
              
              
              
              
              **1,726**Other
                  current liabilities
              
              
              
              
              
              25,091
              
              
              79,053
              
              
              **30,262**
              
              
              **99,011****Total
                  shareholders’ equity and liabilities**
              
              
              
              
              
              
              
              
              223,968
              
              
              
              
              
              **257,135**Assets
                  pledged
              
              
              Note
                  28
              
              
              
              
              
              3,046
              
              
              
              
              
              **3,255**Contingent
                  liabilities
              
              
              Note
                  29
              
              
              
              
              
              9,189
              
              
              
              
              
              **7,850**
 
 
 F-4
 **Changes
        in consolidated Shareholders'
        equity**
 
 Shareholders ́
                  equity attributable to equity holders of the parent
                  company**SEK
                  M**
              
              
              
              Share
                  capital
              
              Other
                  reserves
              
              Translation
                  reserve
              
              Retained
                  earnings
              
              **Total**
              
              Minority
                  interests
              
              **Total
                  equity****Balance
                  at January 1, 2004**
              
              
              
              **2,649**
              
              **—**
              
              —
              
              **69,666**
              
              **72,315**
              
              **217**
              
              **72,532**Translation
                  differences
              
              
              
              
              
              **—**
              
              
              —
              
              
              (151
              )
              
              —
              
              
              (151
              )
              
              (6
              )
              
              (157
              )Translation
                  differences on hedge instruments of net investments in foreign
                  operations
              
              
              
              
              
              
              
              
              —
              
              
              80
              
              
              —
              
              
              80
              
              
              —
              
              
              80*Net
                  income recognised directly in equity*
              
              
              
              
              
              
              
              
              *—*
              
              
              (71
              )
              
              *—*
              
              
              (71
              )
              
              (6
              )
              
              (77
              )Income
                  for the period
              
              
              
              
              
              —
              
              
              —
              
              
              —
              
              
              9,867
              
              
              9,867
              
              
              40
              
              
              9,907*Total
                  recognised income and expense for the period*
              
              
              
              
              
              
              
              
              *—*
              
              
              (71
              )
              
              *9,867*
              
              
              *9,796*
              
              
              *34*
              
              
              *9,830*Cash
                  dividend
              
              
              
              
              
              —
              
              
              —
              
              
              —
              
              
              (3,356
              )
              
              (3,356
              )
              
              (9
              )
              
              (3,365
              )Distribution
                  of shares in Ainax AB to shareholders
              
              
              
              
              
              —
              
              
              —
              
              
              —
              
              
              (6,310
              )
              
              (6,310
              )
              
              —
              
              
              (6,310
              )Repurchase
                  own shares
              
              
              Note
                  23
              
              
              —
              
              
              —
              
              
              —
              
              
              (2,532
              )
              
              (2,532
              )
              
              —
              
              
              (2,532
              )Share
                  based payments
              
              
              Note
                  34
              
              
              —
              
              
              —
              
              
              —
              
              
              14
              
              
              14
              
              
              —
              
              
              14Other
                  changes
              
              
              
              
              
              —
              
              
              —
              
              
              —
              
              
              (1
              )
              
              (1
              )
              
              (13
              )
              
              (14
              )**Balance
                  at December 31, 2004**
              
              
              
              
              
              **2,649**
              
              
              **—**
              
              
              (71
              )
              
              **67,348**
              
              
              **69,926**
              
              
              **229**
              
              
              **70,155**IFRS
                  Transition effect IAS 39
              
              
              
              
              
              —
              
              
              1,007
              
              
              —
              
              
              (659
              )
              
              348
              
              
              —
              
              
              348**Balance
                  at January 1, 2005**
              
              
              
              
              
              **2,649**
              
              
              **1,007**
              
              
              (71
              )
              
              **66,689**
              
              
              **70,274**
              
              
              **229**
              
              
              **70,503**Translation
                  differences
              
              
              
              
              
              —
              
              
              24
              
              
              3,543
              
              
              —
              
              
              3,567
              
              
              24
              
              
              3,591Translation
                  differences on hedge instruments of net investments in foreign
                  operations
              
              
              
              
              
              —
              
              
              —
              
              
              (220
              )
              
              —
              
              
              (220
              )
              
              —
              
              
              (220
              )Available-for-sale
                  investments:
              
              
              Note
                  15Valuation gains/(losses) taken to equity
              
              
              
              
              
              —
              
              
              83
              
              
              —
              
              
              —
              
              
              83
              
              
              —
              
              
              83Cash
                  flow hedges
              
              
              Note
                  36
              
              
              —
              
              
              (1,442
              )
              
              —
              
              
              —
              
              
              (1,442
              )
              
              —
              
              
              (1,442
              )*Net
                  income recognised directly in equity*
              
              
              
              
              
              
              
              
              (1,335
              )
              
              *3,323*
              
              
              *—*
              
              
              *1,988*
              
              
              *24*
              
              
              *2,012*Income
                  for the period
              
              
              
              
              
              —
              
              
              —
              
              
              —
              
              
              13,052
              
              
              13,052
              
              
              54
              
              
              13,106*Total
                  recognised income and expense for the period*
              
              
              
              
              
              
              
              
              (1,335
              )
              
              *3,323*
              
              
              *13,052*
              
              
              *15,040*
              
              
              *78*
              
              
              *15,118*Cash
                  dividend
              
              
              
              
              
              —
              
              
              —
              
              
              —
              
              
              (5,055
              )
              
              (5,055
              )
              
              (28
              )
              
              (5,083
              )Repurchase
                  own shares
              
              
              Note
                  23
              
              
              —
              
              
              —
              
              
              —
              
              
              (1,764
              )
              
              (1,764
              )
              
              —
              
              
              (1,764
              )Share
                  based payments
              
              
              Note
                  34
              
              
              —
              
              
              —
              
              
              —
              
              
              23
              
              
              23
              
              
              —
              
              
              23Decrease
                  of share capital
              
              
              Note
                  23
              
              
              (95
              )
              
              —
              
              
              —
              
              
              95
              
              
              —
              
              
              —
              
              
              —Other
                  changes
              
              
              
              
              
              —
              
              
              —
              
              
              —
              
              
              (10
              )
              
              (10
              )
              
              (19
              )
              
              (29
              )**Balance
                  at December 31, 2005**
              
              
              
              
              
              **2,554**
              
              
              (328
              )
              
              **3,252**
              
              
              **73,030**
              
              
              **78,508**
              
              
              **260**
              
              
              **78,768**
  F-5
  **Consolidated
        cash-flow statements**
 **SEK
                  M**
              
              
              
              
              
              2004
              
              
              
              **2005****Operating
                  activities**Operating
                  income
              
              
              
              
              
              
              
              
              14,679
              
              
              
              
              
              **18,151**Depreciation
                  and amortization
              
              
              Note
                  14
              
              
              
              
              
              10,003
              
              
              
              
              
              **9,894**Other
                  items not affecting cash
              
              
              Note
                  30
              
              
              
              
              
              (30
              )
              
              
              
              
              **415**Changes
                  in working capital:(Increase)/decrease
                  in receivables
              
              
              
              
              
              
              
              
              (4,017
              )
              
              
              
              
              (1,253
              )(Increase)/decrease
                  in customer finance receivables
              
              
              Note
                  30
              
              
              
              
              
              (7,382
              )
              
              
              
              
              (7,773
              )(Increase)/decrease in inventories
              
              
              
              
              
              
              
              
              (2,243
              )
              
              
              
              
              (2,438
              )Increase/(decrease) in liabilities and provisions
              
              
              
              
              
              
              
              
              4,797
              
              
              
              
              
              (983
              )Interest
                  and similar items received
              
              
              
              
              
              
              
              
              1,047
              
              
              
              
              
              **2,430**Interest
                  and similar items paid
              
              
              
              
              
              
              
              
              (335
              )
              
              
              
              
              (2,341
              )Other
                  financial items
              
              
              
              
              
              
              
              
              (25
              )
              
              
              
              
              (70
              )Income
                  taxes paid
              
              
              
              
              
              
              
              
              (1,194
              )
              
              
              
              
              (2,023
              )**Cash
                  flow from operating activities**
              
              
              
              
              
              
              
              
              15,300
              
              
              
              
              
              **14,009****Investing
                  activities**Investments
                  in fixed assets
              
              
              
              
              
              (7,405
              )
              
              
              
              
              (10,271
              )Investments
                  in leasing assets
              
              
              
              
              
              (4,360
              )
              
              
              
              
              (4,549
              )Disposals
                  of fixed assets and leasing assets
              
              
              
              
              
              2,444
              
              
              
              
              
              **2,646**Shares
                  and participations, net
              
              
              Note
                  30
              
              
              15,064
              
              
              
              
              
              **336**Acquired
                  and divested subsidiaries and other business units, net
              
              
              Note
                  4,30
              
              
              (141
              )
              
              
              
              
              **650**Interest-bearing
                  receivables including marketable securities
              
              
              
              
              
              (6,413
              )
              
              (811
              )
              
              (1,359
              )
              
              (12,547
              )**Cash
                  flow after net investments**
              
              
              
              
              
              
              
              
              14,489
              
              
              
              
              
              **1,462****Financing
                  activities**Increase
                  (decrease) in bond loans and other loans
              
              
              Note
                  30
              
              
              (8,840
              )
              
              
              
              
              **3,564**Cash
                  dividend to AB Volvo shareholders'
              
              
              
              
              
              (3,356
              )
              
              
              
              
              (5,055
              )Repurchase
                  of own shares
              
              
              
              
              
              (2,532
              )
              
              
              
              
              (1,764
              )Dividends
                  to minority shareholders
              
              
              
              
              
              (9
              )
              
              
              
              
              (28
              )Other
              
              
              
              
              
              38
              
              
              (14,699
              )
              
              **15**
              
              
              (3,268
              )**Change
                  in cash and cash equivalents, excluding translation
                  differences**
              
              
              
              
              
              
              
              
              (210
              )
              
              
              
              
              (1,806
              )Translation
                  difference on cash and cash equivalents
              
              
              
              
              
              
              
              
              (205
              )
              
              
              
              
              **1,128****Change
                  in cash and cash equivalents**
              
              
              
              
              
              
              
              
              (415
              )
              
              
              
              
              (678
              )**Cash
                  and cash equivalents, January 1**
              
              
              **Note
                  22**
              
              
              
              
              
              9,206
              
              
              
              
              
              **8,791****Cash
                  and cash equivalents, December 31**
              
              
              **Note
                  22**
              
              
              
              
              
              8,791
              
              
              
              
              
              **8,113**
 
 The
        effects of major acquisitions and divestments of subsidiaries in each year
        have
        been excluded from other changes for the balance sheet items in the
        cash-flow statement. The effects of currency movements in translation of
        foreign
        Group companies have also been excluded since these effects do not affect
        cash flow. Cash and cash equivalents include cash and bank balances.
  F-6
 
 **Notes
        to consolidated financial statements**
 
 **General
        information**
 Amounts
        in
        SEK M unless otherwise specified. The amounts within parentheses refer to
        the
        preceding year, 2004.
 
 
 **Note
        1 - Accounting principles**
 The
        consolidated financial statements for AB Volvo and its subsidiaries have
        been
        prepared in accordance with International Financial Reporting Standards (IFRS)
        issued by the International Accounting Standards Board (IASB), as adopted
        by the
        EU. Those portions of IFRS not adopted by the EU have no material effect
        on this
        report. This annual report is prepared in accordance with IAS 1 Presentation
        of
        Financial Statements and in accordance with the Swedish Companies Act. In
        addition, RR30 Supplementary Rules for Groups, was applied, issued by the
        Swedish Financial Accounting Standards Council. IFRS differs in some
        respects from US GAAP, see further in Note 37.
  In
        the
        preparation of these financial statements, the company management has made
        certain estimates and assumptions that affect the value of assets and
        liabilities as well as contingent liabilities at the balance sheet date.
        Reported amounts for income and expenses in the reporting period are also
        affected. The actual future outcome of certain transactions may differ from
        the
        estimated outcome when these financial statements were issued. Any such
        differences will affect the financial statements for future fiscal periods.
  **Changes
        of accounting principles**
 Effective
        in 2005 Volvo has applied International Financial Reporting Standards (IFRS)
        in
        its financial reporting. In accordance with the IFRS transition rules in
        IFRS 1,
        Volvo applies retroactive application from the IFRS transition date at January
        1, 2004. The general rule is that restatement of financial reporting for
        periods
        after the transition date should be made as if IFRS has been applied
        historically. All comparison figures from 2004, in tables and the notes,
        have
        been restated. There are certain exceptions from the general rule of which
        the
        most significant for Volvo are:
 -       
        IAS 39 Financial instruments: Recognition and measurement which is applicable
        from January 1, 2005.
 -       
        Non-amortization of intangible assets with indefinite useful lives (e.g.
        goodwill) in accordance with IFRS 1 should be applied
        retroactively only from the transition date January 1, 2004.
  The
        transition from Swedish GAAP to IFRS is being made according to a regulation
        applicable to all listed companies within the European Union as of 2005.
        Refer
        to Note 3, Effect of transition to IFRS for a more detailed overview of the
        transition.
  Refer
        to
        the 2004 Annual Report for a description of the previous Swedish accounting
        principles applied by Volvo.
  *New
        accounting principles in 2005*
 The
        following IFRS standards are applied as of 2005, in accordance with the
        respective standards transition rules or in accordance with IFRS 1, IAS 39:
        Financial Instruments: Recognition and Measurement, and IFRS 5, Non-Current
        Assets Held for Sale and Discontinued Operations. Neither of these standards
        requires retroactive reporting. Accordingly, the comparison year 2004 is
        not
        restated with regard to these standards. Volvo has decided to apply the amended
        IAS 39 regarding hedging of commercial cash flows with earlier adoption from
        January 1, 2005.
  *New
        accounting principles in 2006*
 As
        of
        2006, Volvo applies IFRIC 4, Determining Whether an Arrangement Contains
        a
        Lease. The International Financial Reporting Interpretation Committee (IFRIC)
        issue its interpretations of IASB’s accounting standards. The effect of applying
        IFRIC 4 for Volvo mainly comprises certain type-bound supplier tools and
        is
        expected to be limited, see also note 37, US GAAP. IFRS 6, Exploration for
        and
        Evaluation of Mineral Assets, is not applicable to Volvo, while IFRS 7,
        Financial Instruments: Disclosure, shall be applied for the financial year
        beginning after January 1, 2007. IFRS 7 involves disclosure requirements
        and
        does not affect Volvo’s financial position.
  F-7
  IFRIC
        5,
        Rights to interests arising from Decommissioning Restoration and Environmental
        Rehabilitation Funds,  IFRIC 6, Liabilities arising from participating
        in a Specific Market - Waste Electrical and Electronic
        Equipment, IFRIC 7, Applying the Restatement Approach under IAS 29
        Financial reporting in Hyperinflationary Economies and  IFRIC 8,
        Scope of IFRS 2, which should be adopted as from 2006 or later are not expected
        to have any significant effects on Volvo’s financial position.
  **Consolidated
        financial statements**
 The
        consolidated financial statements comprise the Parent Company, subsidiaries,
        joint ventures and associated companies. Subsidiaries are defined as companies
        in which Volvo holds more than 50% of the voting rights or in which Volvo
        otherwise has a controlling influence. Joint ventures are companies over
        which
        Volvo has joint control together with one or more external parties. Associated
        companies are companies in which Volvo has a significant influence, which
        is
        normally when Volvo’s holding equals to at least 20% but less than 50% of the
        voting rights.
  The
        consolidated financial statement have been prepared in accordance with the
        principles set forth in IAS 27, Consolidated and Separate Financial Statements.
        Accordingly, intra-Group transactions and gains on transactions with associated
        companies are eliminated.
  All
        business combinations are accounted for in accordance with the purchase method.
        Volvo applies IFRS 3, Business Combinations for acquisitions after January
        1,
        2004, in accordance with the IFRS 1 transition rules.  Volvo has decided
        not to restate prior acquisitions. Volvo values acquired identifiable assets,
        tangible and intangible, and liabilities at fair value. Surplus amounts compared
        with the purchase consideration are reported as goodwill. Any lesser amount,
        so-called negative goodwill, is reported in the income statement.
  Companies
        that have been divested are included in the consolidated financial statements
        up
        to and including the date of divestment. Companies acquired during the year
        are
        consolidated as of the date of acquisition.
  Joint
        ventures are reported by use of the proportionate method of
        consolidation.
  Holdings
        in associated companies are reported in accordance with the equity method.
        The
        Group’s share of reported income in such companies is included in the
        consolidated income statement in Income from investments in associated
        companies, reduced in appropriate cases by depreciation of surplus values
        and
        the effect of applying different accounting principles. Income from associated
        companies are included in operating income due to that the investments are
        of operating nature.
 
 For
        practical reasons, most of the associated companies are included in the
        consolidated accounts with a certain time lag, normally one quarter. Dividends
        from associated companies are not included in consolidated income. In the
        consolidated balance sheet, the book value of shareholdings in associated
        companies is affected by Volvo’s share of the company’s net income, reduced by
        depreciation of surplus values and by the amount of dividends
        received.
  **Translation
        to Swedish kronor of foreign companies**
 AB
        Volvo's
        functionell currency is Swedish kronor. All reporting in group
        companies for group purposes is made in the currency where the company
        has the majority of their revenues and expenses; normally the 
currency of the country where the company is located. AB Volvo's and The
        Volvo Group's reporting currency is Swedish kronor. In preparing the
        consolidated financial statements, all items in the income statements of
        foreign
        subsidiaries and joint ventures (except subsidiaries in highly inflationary
        economies) are translated to Swedish kronor at the average exchange rates
        during
        the year (average rate). All balance sheet items are translated at exchange
        rates at the respective year-ends (year-end rate). The differences in
        consolidated shareholders’ equity arising as a result of variations between
        year-end exchange rates are charged or credited directly to shareholders’ equity
        as a separate component.
  The
        accumulated translation differance derived from a certain subsidiary, joint
        venture or associated company is reversed to income as a part of the income
        arising from the divestment or liquidation of such a
        company.
  IAS
        29,
        Financial Reporting in Hyperinflationary Economies, is applied to financial
        statements of subsidiaries operating in highly inflationary economies. Volvo
        applies reporting based on historical value. Translation differences are
        charged against earnings for the year.  Currently, Volvo has no
        subsidiaries with a functional currency that could be considered a
        hyperinflationary currency.
  F-8
  **Receivables
        and liabilities in foreign currency**
 In
        the
        individual Group companies as well as in the consolidated accounts, receivables
        and liabilities in foreign currency are valued at period-end exchange rates.
        Translation differences on operating assets and liabilities are recognized
        in operating income, while translation differences arising in financial
        assets and liabilities are charged to other financial income and expenses.
  Currency swap contracts
        are reported at fair value, unrealized gains on exchange rates are reported
        as
        short term receivables and unrealized losses on exchange rates are reported
        as
        short term liabilities.
  Exchange
        rate differences on loans and other financial instruments in foreign currency,
        which are used to hedge net assets in foreign subsidiaries and associated
        companies, are offset against translation differences in the shareholders’
equity of the respective companies.
  Exchange
        rate gains and losses on payments during the year and on the valuation of
        assets
        and liabilities in foreign currencies at year-end are credited to, or charged
        against, income in the year they arise. The more important exchange rates
        applied are shown above.
  **Exchange
                  rates**
              
              Average
                  rate
              Year-end
                  rateCountry
              Currency
              2004
              2005
              2004
              2005Brasil
              BRL
              2.5388
              3.0947
              2.5125
              3.4215Canada
              CAD
              5.6495
              6.1864
              5.4635
              6.8435Denmark
              DKK
              1.2285
              1.2471
              1.2126
              1.2651Euro
              EUR
              9.1408
              9.2943
              9.0163
              9.4393Great
                  Britain
              GBP
              13.4515
              13.5849
              12.7163
              13.7388Japan
              JPY
              0.0680
              0.0679
              0.0638
              0.0679Norway
              NOK
              1.0926
              1.1611
              1.0890
              1.1770South
                  Korea
              KRW
              0.0065
              0.0073
              0.0064
              0.0079United
                  States
              USD
              7.3655
              7.4791
              6.6138
              7.9538
 
 **Net
        sales and revenue recognition**
 The
        Group’s reported net sales pertain mainly to revenues from sales of goods and
        services. Net sales are reduced by the value of discounts granted and by
        returns.
  Income
        from the sale of goods is recognized when significant risks and rewards of
        ownership have been transferred to external parties, normally when the goods
        are
        delivered to the customers. If, however, the sale of goods is combined with
        a
        buy-back agreement or a residual value guarantee, the sale is accounted for
        as
        an operating lease transaction if significant risks of the goods are retained
        in
        Volvo. Income from the sale of workshop services is recognized when the service
        is provided. Rental revenues and interest income in conjunction with financial
        leasing or installment contracts are recognized during the underlying contract
        period. Revenue for maintenance contracts are recognized according to how
        costs associated with the contracts are distributed during the
        contract period.
  Interest
        income is recognized on a continuous basis and dividend income when it is
        received.
  **Leasing
        - Volvo as the lessor**
 Leasing
        contracts are defined in two categories, operational and financial, depending
        on
        the contract’s financial implications. Operational leasing contracts are
        reported as non-current assets in Assets in operational leases. Income from
        operational leasing is reported equally distributed over the leasing period.
        Straight-line depreciation is applied to these assets in accordance with
        the
        terms of the undertaking and the deprecation amount is adjusted to correspond
        to
        the calculated realizable value when the undertaking expires. Assessed
        impairments are charged in the income statement. The product’s assessed
        realizable value at expiration of the undertaking is reviewed continually
        on an
        individual basis.
  F-9
  Financial
        leasing agreements are reported as Non-current respective Short-term
        receivables in the customer financing operations. Income from financial leasing
        contracts is distributed between interest income and amortization of the
        receivable in the customer financing operations.
  In
        accordance with IAS 14, Segment reporting, operational leasing contracts
        should
        be reclassified to financial in the segment reporting of Volvo Financial
        Services if the residual value in these contracts is guaranteed to Volvo
        Financial Services by another Volvo business area. In the Volvo Group’s
        consolidated balance sheet, these leasing agreements are still reported as
        operating leases. Reclassification from operational to financial leasing
        contract also affects the income statement with regards to sales and
        depreciation. Volvo Financial Service’s sales are reduced as a result of the
        reclassification as well as depreciation, which affect cash flow from operating
        activities. However, the Volvo consolidated balance sheet and income statement
        still recognizes leasing contracts as operational and, accordingly, reports
        higher sales and depreciation.
  **Investments
        in other companies**
 Volvo
        accounts for all investments in companies, except if these investments are
        classified as associated companies in accordance with IAS 39, Financial
        Instruments: Recognition and Measurement. Companies listed on a financial
        exchange should be reported in the balance sheet to market value. Under IAS
        39,
        unrealized gains and losses attributable to the change in market value of
        investments are reported in a separate component of shareholders’ equity except
        when decline in value is other than temporary. If the value decline is
        considered other than temporary, the value should be written down through
        the income statement. IAS 39 is applied by Volvo as of January 1, 2005 and
        the
        difference in valuation compared with Swedish GAAP and the 2004 accounting
        principles is that all such investments have been carried at their cost of
        acquisition unless there has been a permanent decrease in value. The difference
        between the valuation at December 31, 2004 and January 1, 2005 is reported
        in
        shareholders’ equity. Unlisted shares, for which a reliable fair value can
        not be determined, should be reported at a historical cost reduced in
        appropriate cases by write-downs.
  **Reporting of
        financial assets and liabilities**
 Volvo
        reports marketable securities in accordance with IAS 39 based on classification
        of these assets into a category valued at fair value through profit and loss.
        As
        of January 1, 2005, Volvo applies IAS 39, regarding the time that financial
        assets should be derecognized from the balance sheet. This occurs when
        substantially all risks and rewards have been transferred to an external
        party.
        Corresponding principles are applied regarding financial assets in Volvo’s
        segment reporting. Under Swedish GAAP, for the 2004 comparison year, financial
        assets should be derecognized at settlement or if the ownership of the financial
        assets had been transferred to an external party.
  Financial
        liabilities are reported at historical value reduced by amortization.
        Transaction cost in connection with raising financial liabilities are amortized
        over the financial loan's duration as a financial expense.
 
 **Receivables**
 Accounts
        receivables are initially recognized at fair value, normally equal with the
        nominal amount. In cases in which the payment terms exceed one year, the
        receivable is carried at its discounted present value. Provisions for doubtful
        receivables are made on a current basis after an assessment of whether the
        customer’s ability to pay has changed.
 
 **Hedge
        accounting**
 In
        accordance with IAS 39, which is applied by Volvo as of January 1, 2005,
        certain
        financial instruments shall be reported at fair value in the balance
        sheet **.** In
        order
        to apply hedge accounting, the following criteria must be met: the position
        being hedged is identified and exposed to market value movements, for instance
        related to  exchange-rate or interest-rate movements, the purpose of the
        loan/instrument is to serve as a hedge and the hedging effectively protects
        the
        underlying position against changes in the fair value. Financial instruments
        used for the purpose of hedging future currency flows are accounted for as
        hedges if the currency flows are considered highly probable to
        occur.
  -
        For
        financial instruments used to hedge forecasted internal commercial cash flows
        and forecasted electricity consumption, the fair value is debited or credited
        to
        a separate component of equity to the extent the requirements for cash-flow
        hedge accounting are fulfilled. To the extent that the requirements are not
        met,
        the unrealized gain or loss will be charged to income statement. Gains and
        losses on hedges are reported at the same time that the gains and losses
        arise
        on the items hedged and are recognized in consolidated shareholders’
equity.
  F-10
  -
        For
        financial instruments used to hedge interest and currency risks on loans,
        Volvo
        previously applied through and including 2004 hedge accounting in accordance
        with Swedish GAAP. The difference between the carrying value according to
        Swedish GAAP  and the fair value according to IFRS as of January 1,
        2005 will be charged against the income statement over the
        remaining time of the hedged instrument.  Under the more complex rules in
        IAS 39, Volvo has chosen not to apply hedge accounting. The difference between
        carrying values reported under Swedish GAAP and fair values to be reported
        under
        IFRS pertains to unrealized interest-rate gains and losses attributable to
        the
        period between the reporting date and maturity dates of the derivatives.
        The
        unrealized gains and losses will be charged to the financial net in the income
        statement.
  -
        Volvo
        applies hedge accounting for certain net investments in foreign operations.
        The
        current result for such hedges is reported in a separate component in
        shareholders’ equity. In the event of a divestment, the accumulated result from
        the hedge is recognized in the income statement.
  **Research
        and development expenses**
 Volvo
        applies IAS 38, Intangible Assets, for reporting of research and development
        expenses. In accordance with this accounting recommendation, expenditures
        for
        development of new products, production systems and software shall be reported
        as intangible assets if such expenditures with a high degree of certainty
        will
        result in future financial benefits for the company. The acquisition value
        for
        such intangible assets shall be amortized over the estimated useful life
        of the
        assets. The rules means that high demands are established in order for these
        development expenditures to be reported as assets. For example, it must be
        possible to prove the technical functionality of a new product or software
        prior
        to this development being reported as an asset. In normal cases, this means
        that
        expenditures are capitalized only during the industrialization phase of a
        product development project. Other research and development expenses are
        charged
        to income as incurred.
 
 **Depreciation,
        amortization and impairments of tangible and intangible non-current assets**
 Volvo
        applies historical costs for valuation of intangible and tangible assets.
        Loan
        expenses during the acquisition period for a non-current asset are
        expenses. Depreciation is based on the historical cost of the assets,
        adjusted in appropriate cases by write-downs, and estimated useful lives.
  Depreciation
                  periodsCapitalized
                  type-specific tools
              2
                  to
                  8 yearsOperational
                  leases
              3
                  to
                  5 yearsMachinery
              5
                  to
                  20 yearsBuildings
                  and Investment property
              25
                  to 50 yearsLand
                  improvements
              20
                  yearsProduct
                  and software development
              3-8
                  years
 
 In
        connection with its participation in aircraft engine projects with other
        companies, Volvo Aero in certain cases pays an entrance fee. These entrance
        fees
        are capitalized as an immaterial asset and amortized over 5 to 10 years.
  The
        estimated value of investment property is based on discounted cash flow
        projections. The valuation is performed by the Group's Real Estate business
        unit. The required return is based on current property market conditions
        for
        comparable properties in comparable locations.
  Goodwill
        is reported as intangible non-current assets with indefinite useful life.
        Annually, testing is carried out to determine any impairment through calculation
        of the asset’s recovery value. If the calculated recovery value is less than the
        carrying value, a write down is made to the asset’s recovery value.
  Similarly,
        impairment testing is carried out at the closing date if there is any indication
        that a non-current asset has declined in value.
  F-11
  **Leasing
        - Volvo as the lessee**
 Volvo
        evaluates leasing contracts in accordance with IAS 17, Leases. In those cases
        in
        which  the financial risk and benefits that are related to ownership are in
        significant respects held by Volvo, Volvo reports the asset in the balance
        sheet
        at the lowest of the leased object’s fair value or the present value of minimal
        leasing fees. The future leasing fees are reported as loans. The lease object
        is
        depreciated in accordance with Volvo’s principle for the respective non-current
        asset. The leasing fees are distributed between amortization and interest
        expenses.
  **Non-current
        assets held for sale and discontinued operations**
 Volvo
        applies IFRS 5, Non-current Assets Held for Sale and Discontinued Operations
        as
        of 2005. Processes are continuously ongoing regarding the sale of assets
        or
        groups of assets at minor values. In cases in which the criteria for being
        classified as a non-current asset held for sale are fulfilled and the asset
        or
        group of assets is other than of minor value, the asset or group of assets
        and
        the related liabilities are reported on a separate line in the balance sheet.
        The asset or group of assets are tested for impairment and valued at
        fair value after deduction for selling expenses if impaired.
  **Inventories**
 Inventories
        are stated at the lower of cost, in accordance with the first-in, first-out
        method (FIFO), or net realizable value. The historical value is based on
        the standard cost method, including costs for all direct manufacturing expenses
        and the apportionable share of the capacity and other related manufacturing
        costs. The standard costs is tested regularly an adjustment is made based
        on
        current conditions. Costs for research and development, selling, administration
        and financial expenses are not included. Net realizable value is calculated
        as
        the selling price less costs attributable to the sale.
 
 **Share-based
        payments**
 Volvo
        applies IFRS 2, Share-based Payments for the new share-based incentive program
        adopted at the  Annual General Meetings in 2004 and 2005. IFRS 2
        distinguishes “cash-settled” and “equity-settled”, in Volvo case, shares,
        components of share-based payments. The Volvo program include both a
        cash-settled and an equity-settled part. The value of
        the equity-settled payments is determined at the
        grant-date, recognized as an expense during the vesting period and
        credited to equity. The fair value is calculated according to share
        price reduced by dividend connected to the share before the allotment. The
        additional social costs are reported as a liability, revalued at each balance
        sheet date in accordance with URA 46, issued by the Swedish Financial
        Accounting Standards Council's Emergency Issue Task Force. The cash settled
        payment is revalued at each balance sheet day and is reported as an expense
        during the vesting period and as a short term liability. An assessment whether
        the terms of payment will be fulfilled is made continuously. If the assessment
        changes, the expense will be adjusted. The equity-settled part was earlier
        accounted for at fair value and provided for as an accrued expense over the
        vesting period with a "true-up"each reporting date.
  **Pensions
        and similar obligations (Postemployment benefits)**
 Volvo
        applies IAS 19, Employee Benefits, for pensions and similar obligations.
        In
        accordance with IAS 19, actuarial calculations should be made for all
        defined-benefit plans in order to determine the present value of obligations
        for
        benefits un-vested by its current and former employees. The actuarial
        calculations are prepared annually and are based upon actuarial assumptions
        that
        are determined close to the balance sheet date each year. Changes in the
        present
        value of obligations due to revised actuarial assumptions are treated as
        actuarial gains or losses which are amortized over the employees’ average
        remaining service period to the extent these exceed the corridor value for
        each
        plan. Deviations between expected return on plan assets and actual return
        are
        treated as actuarial gains or losses. Provisions for post-employment benefits
        in
        Volvo’s balance sheet correspond to the present value of obligations at
        year-end, less fair value of plan assets, unrecognized actuarial gains or
        losses
        and unrecognized unvested past service costs.
  In
        accordance with the IFRS transition rules, the carrying amount of the liability
        is determined at January 1, 2004 in accordance with IAS 19 and
        the actuarial gains and losses set at zero. As a supplement to IAS 19,
        Volvo applies URA 43 in accordance with the recommendation from the
        Swedish Financial Accounting Standards Council in calculating the Swedish
        pension liabilities.
  For
        defined contribution plans premiums are expensed as incurred.
   F-12
  **Provisions
        for residual value risks**
 Residual
        value risks are attributable to operational leasing contracts and sales
        transactions combined with buy-back agreements or residual value guarantees.
        Residual value risks are the risks that Volvo in the future would have to
        dispose used products at a loss if the price development of these products
        is
        worse than what was expected when the contracts were entered. Provisions
        for
        residual value risks are made on a continuing basis based upon estimations
        of
        the used products’ future net realizable values. The estimations of future net
        realizable values are made with consideration of current prices, expected
        future
        price development, expected inventory turnover period and expected variable
        and
        fixed selling expenses. If the residual value risks are pertaining to products
        that are reported as tangible assets in Volvo’s balance sheet, these risks are
        reflected by depreciation or write-down of the carrying value of these assets.
        If the residual value risks are pertaining to products, which are not reported
        as assets in Volvo’s balance sheet, these risks are reflected under the line
        item short-term provisions.
  **Warranty
        expenses**
 Estimated
        costs for product warranties are charged to operating expenses when the products
        are sold. Estimated costs include both expected contractual warranty obligations
        as well as expected goodwill warranty obligations. Estimated costs are
        determined based upon historical statistics with consideration of known changes
        in product quality, repair costs or similar. Costs for campaigns in connection
        with specific quality problems are charged to operating expenses when the
        campaign is decided and announced.
  **Restructuring
        costs**
 Restructuring
        costs are reported as a separate line item in the income statement if they
        relate to a considerable change of the Group structure. Other restructuring
        costs are included in Other operating income and expenses. A provision for
        decided restructuring measures is reported when a detailed plan for the
        implementation of the measures is complete and when this plan is communicated
        to
        those who are affected.
  **Deferred
        taxes, allocations and untaxed reserves**
 Tax
        legislation in Sweden and other countries sometimes contains rules other
        than
        those identified with generally accepted accounting principles, and which
        pertain to the timing of taxation and measurement of certain commercial
        transactions. Deferred taxes are provided for on differences that arise between
        the taxable value and reported value of assets and liabilities (temporary
        differences) as well as on tax-loss carryforwards. However, with regards
        to the
        valuation of deferred tax assets, that is, the value of future tax reductions,
        these items are recognized provided that it is probable that the amounts
        can be
        utilized against future taxable income.
  Deferred
        taxes on temporary differences on participations in subsidiaries and associated
        companies are only reported when it is probable that the difference will
        be
        recovered in the near future.
  Tax
        laws
        in Sweden and certain other countries allow companies to defer payment of
        taxes
        through allocations to untaxed reserves. These items are treated as temporary
        differences in the consolidated balance sheet, that is, a split is made between
        deferred tax liability and equity capital (restricted reserves). In the
        consolidated income statement an allocation to, or withdrawal from, untaxed
        reserves is divided between deferred taxes and net income for the year.
  **Cash-flow
        statement**
 The
        cash-flow statement is prepared in accordance with **** IAS
        7, **** Cash
        Flow
        Statement, indirect method. The cash-flow statements of foreign Group companies
        are translated at the average rate. Changes in Group structure, acquisitions
        and
        divestments, are reported net, excluding cash and cash equivalents, in the
        item
        Acquisition and divestment of subsidiaries and other business units and are
        included in Cash Flow from Investing Activities. The reported operating cash
        flow for 2005 was affected by the adoption of IAS 39. The adjusted opening
        value
        at January 1, 2005 was used in calculating cash flow.
  Cash
        and
        cash equivalents include cash, bank balances and parts of Marketable Securities.
        Marketable Securities comprise interest-bearing securities, the majority of
        which with terms exceeding three years. However, these securities have high
        liquidity and can easily be converted to cash. In accordance with IAS 7, 
certain investment in marketable securities are excluded from the definition
        of
        cash and cash equivalents in the cash-flow statement if the date of
        maturity of such instruments is later than three months after the investment
        was
        made.
   F-13
  **Earnings per
        share**
 Earnings per
        share is calculated as the period's net income attributed to the
        shareholders of the parent company, divided with the average number of
        outstanding shares per reporting period. To calculate the result
        after dilution per share, the average number of shares is adjusted
        with the value of the share based incentive program and employee stock option
        program recalculated to number of shares.
 
 
 **Note
        2 - Key sources of estimation uncertainty**
  **Key
        sources of estimation uncertainty**
 Volvo’s
        significant accounting principles are set out in and conform to IFRS as adopted
        by the EU. The preparation of Volvo’s Consolidated Financial Statements requires
        the use of estimates, judgements and assumptions that affect the reported
        amounts of assets, liabilities and provisions at the date of the financial
        statements and the reported amounts of sales and expenses during the periods
        presented. In preparing these financial statements, Volvo’s management has made
        its best estimates and judgements of certain amounts included in the financial
        statements, giving due consideration to materiality. The application of these
        accounting principles involves the exercise of judgement and use of assumptions
        as future uncertainties and, as a result, actual results could differ from
        these
        estimates. In accordance with IAS 1, preparers are required to provide
        additional disclosure of accounting principles in which estimates, judgments
        and
        assumptions are particularly sensitive and which, if actual results are
        different, may have a material impact on the financial statements. The
        accounting principles applied by Volvo that are deemed to meet these criteria
        are discussed below:
  **Impairment
        of goodwill, other intangible assets and other non-current
        assets**
 Property,
        plant and equipment, intangible assets, other than goodwill, and certain
        other
        non-current assets are amortized and depreciated over their useful lives.
        Useful
        lives are based on management’s estimates of the period that the assets will
        generate revenue. If, at the date of the financial statements, there is any
        indication that a tangible or intangible non-current asset has been impaired,
        the recoverable amount of the asset should be estimated. The recoverable
        amount
        is the higher of the asset’s net selling price and its value in use, estimated
        with reference to management’s projections of future cash flows. If the
        recoverable amount of the asset is less than the carrying amount, an impairment
        loss is recognized and the carrying amount of the asset is reduced to the
        recoverable amount. Determination of the recoverable amount is based upon
        management’s projections of future cash flows, which are generally made by use
        of internal business plans or forecasts. While management believes that
        estimates of future cash flows are reasonable, different assumptions regarding
        such cash flows could materially affect our valuations. Intangible and tangible
        non-current assets amounted to 55,840 whereof 11,072
        represents goodwill. For Goodwill and certain other intangible assets with
        indefinite life-time an annual impairment review is performed at the
        year-end closing. Such an impairment review will require management to
        determine the fair value of Volvo’s cash generating units, reporting units for
        US GAAP purposes, on the basis of projected cash flows and internal business
        plans and forecasts. Volvo has since 2002 performed a simliar impairment
        review
        in accordance with US GAAP. No impairment charges were required for the
        period 2002-2005 *.*
  **Residual
        value risks**
 In
        the
        course of its operations, Volvo is exposed to residual value risks through
        operating lease agreements and sales combined with repurchase agreements.
        The
        products, primarily trucks, for which Volvo has a residual value commitment,
        are
        generally recognized in the balance sheet as assets under operating leases.
        Depreciation expenses for these products are charged on a straight-line basis
        over the term of the commitment in amounts required to reduce the value of
        the
        product to its estimated net realizable value at the end of the commitment.
        Estimated impairment losses are immediately charged to income. The estimated
        net
        realizable value of the products at the end of the residual value commitments
        is
        monitored individually on a continuing basis. In monitoring estimated net
        realizable value of each product under a residual value commitment, management
        makes consideration of current price-level of the used product model, value
        of
        options, mileage, condition, future price deterioration due to expected change
        of market conditions, alternative distribution channels, inventory lead-time,
        repair and reconditioning costs, handling costs and overhead costs in the
        used
        product divisions. Provisions for residual value risk amount to
        931.
  **Revenue
        recognition**
 Revenue
        from the sale of goods is recognized when significant risks and rewards of
        ownership have been transferred to external parties, normally when the goods
        are
        delivered to the customers. If, however, the sale of goods is combined with
        a
        buy-back agreement or a residual value guarantee, the sale is accounted for
        as
        an operating lease transaction under the condition that significant risks
        of the
        goods are retained by Volvo. In certain cases Volvo enters into a buy-back
        agreement or residual value guarantee after Volvo sold the product to an
        independent party or in combination with an undertaking from the customer
        that
        in the event of a buy-back to purchase a new Volvo product. In such cases,
        there
        may be a question of judgement regarding whether or not significant risks
        and
        rewards of ownership have been transferred to the customer. If it is determined
        that such an assessment was incorrect, Volvo’s reported revenue and income for
        the period will decline and instead be distributed over several reporting
        periods.
   F-14
  **Deferred
        taxes**
 Under
        IFRS, deferred taxes are recognized for temporary differences, which arise
        between the taxable value and reported value of assets and liabilities as
        well
        as for unutilized tax-loss carryforwards. Volvo records valuation allowances
        against deferred tax assets where management does not expect such assets
        to be
        realized based upon current forecasts. In the event that actual results differ
        from these estimates or management adjusts these estimates in future periods,
        changes in the valuation allowance may need to be done that could
        materially impact our financial position and the income for the period. At
        December 31, 2005, a valuation allowance of 2.972 was established for
        the value of deferred tax assets. Net of this valuation allowance, deferred
        tax
        assets net of 10.216 were recognized in the Group’s balance sheet.
  **Inventory
        obsolescence**
 Inventories
        are reported at the lower of historical cost, in accordance with the first-in,
        first-out method (FIFO), and net realizable value. The estimated net
        realizable value includes management consideration of out-dated articles,
        over-stocking, physical damages, inventory-lead-time, handling and other
        selling
        costs. If the estimated net realizable value is lower than historical cost,
        a
        valuation allowance is established for inventory obsolescence. The total
        inventory value, net from inventory obsolescence allowance, is per December
        31,
        2005, 33.937.
  **Credit
        loss reserves**
 The
        establishment of credit loss reserves on customer financing receivables is
        dependent on estimates including assumptions regarding past dues, repossession
        rates and the recovery rate on the underlying collateral. At December 31,
        2005,
        the total credit loss reserves in Volvo Financial Services amounted to 2.17%
        of
        the total credit portfolio, SEK 79 billions.
  **Pensions
        and other post-employment benefits**
 Provisions
        and costs for post-employment benefits, i.e. mainly pensions and health-care
        benefits, are dependent on assumptions used by actuaries in calculating such
        amounts. The appropriate assumptions and actuarial calculations are made
        separately for each population in the respective countries of Volvo’s
        operations. The assumptions include discount rates, health care cost trends
        rates, inflation, salary growth, long-term return on plan assets, retirement
        rates, mortality rates and other factors. Discount rate assumptions are based
        on
        long-term high quality corporate bond and government bond yields available
        at
        year-end. Health care cost trend assumptions are developed based on historical
        cost data, the near-term outlook, and an assessment of likely long-term trends.
        Inflation assumptions are based on an evaluation of external market indicators.
        The salary growth assumptions reflect the long-term actual experience, the
        near-term outlook and assumed inflation. Retirement and mortality rates are
        based primarily on officially available mortality statistics. We review our
        actuarial assumptions on an annual basis and make modifications to them when
        it
        is deemed appropriate to do so. Actual results that differ from management's
        assumptions are accumulated and amortized over future periods and, therefore,
        generally affect the recognized expense and recorded provisions in such future
        periods. for more information regarding costs and assumptions for
        post-employment benefits. At December 31, 2005 net provisions for
        post-employment benefits amounted to 11.462.
  **Product
        warranty costs**
 Estimated
        costs for product warranties are charged to cost of sales when the products
        are
        sold. Estimated warranty costs include contractual warranty and goodwill
        warranty (warranty cover in excess of contractual warranty or campaigns which
        is
        accepted as a matter of policy or normal practice in order to maintain a
        good
        business relation with the customer). Warranty provisions are estimated with
        consideration of historical claims statistics, the warranty period, the average
        time-lag between faults occurring and claims to the company and anticipated
        changes in quality indexes. Differences between actual warranty claims and
        the
        estimated claims generally affect the recognized expense and provisions in
        future periods. Refunds from suppliers, that decrease Volvo’s warranty costs,
        are recognized to the extent these are considered to be virtually certain.
        At
        December 31, 2005 warranty cost provisions amounted to 8.163.
   F-15
  **Legal
        proceedings**
 Volvo
        only
        recognizes liabilities in the accounts where Volvo has a present obligation
        from
        a past event, a transfer of economic benefits is probable and Volvo can make
        a
        reliable estimate of what the transfer might be. In instances such as these,
        a
        provision is calculated and recognized in the balance sheet. In instances
        where
        these criteria are not met, a contingent liability may be disclosed in the
        notes
        to the accounts. A contingent liability will be disclosed when a possible
        obligation has arisen but its existence will only be confirmed by future
        events
        not wholly within Volvo’s control or in circumstances where an obligating event
        has occurred but it is not possible to quantify the size or likelihood of
        that
        obligation crystallizing. Realization of any contingent liabilities not
        currently recognized or disclosed in the financial statements could have
        a
        material effect on Volvo’s financial condition. Volvo regularly reviews
        significant outstanding legal cases following developments in the legal
        proceedings in order to assess the need for provisions in our financial
        statements. Among the factors that Volvo considers in making decisions on
        provisions are the nature of the litigation, claim or assessment, the legal
        processes and potential level of damages in the jurisdiction in which the
        litigation, claim or assessment has been brought, the progress of the case
        (including progress after the date of the financial statements but before
        those
        statements are issued), the opinions or views of legal counsel and other
        advisers, experience in similar cases, and any decision of Volvo’s management as
        to how Volvo intends to respond to the litigation, claim or assessment. To
        the
        extent the determinations at any time do not reflect subsequent developments
        or
        the eventual outcome of any claim, our future financial statements may be
        materially affected, with an adverse impact upon our results of operation,
        financial position and liquidity.
   **Note
        3 - Impact of IFRS**
  **Reporting
        in accordance with IFRS as from 2005**
 The
        Volvo
        Group’s financial reporting is up to 2004 prepared in accordance with generally
        accepted accounting principles in Sweden (“Swedish GAAP”). Effective from 2005,
        all listed companies within the European Union (“the EU”) are required to
        prepare their consolidated financial reporting in accordance with International
        Financial Reporting Standards (“IFRS”), as adopted by the EU. The purpose of the
        presentations on the following pages is to describe and explain the expected
        impact on Volvo’s financial reporting as a consequence of transition to IFRS.
        Volvo Group’s previous accounting principles are described in Note 1 of the 2004
        Annual Report. The presentation below focuses on the areas in which the
        transition to IFRS resulted in a change in accounting principles for
        Volvo.
  **Restatements
        and transition effects**
 In
        accordance with the IFRS transition rules (IFRS 1), Volvo applies IFRS as
        of
        January 1, 2005, with retroactive application from the IFRS transition date
        at
        January 1, 2004. The general rule is that restatement of financial reporting
        for
        periods after the transition date should be made as if IFRS has been applied
        historically.  There are certain exceptions from the general rule of which
        the most significant for Volvo are:
 -
        IAS 39
        Financial instruments: Recognition and measurement which can be applied from
        January 1, 2005.
 -
        Non-amortization of intangible assets with indefinite useful lives (e.g.
        goodwill) in accordance with IFRS should be applied retroactively only from
        the transition date January 1, 2004.
 -
        IFRS 3
        Business Combinations which can be applied from January 1, 2004, without
        restatements of previous acquisitions.
 -
        IFRS 2
        Share-based payments are applied for share-based payments granted after November
        7, 2002.
 The
        enclosed income statements and other specifications prepared in accordance
        with
        IFRS therefore include restatements and transition effects as follows:
  **Capitalization
        and amortization of development costs**
 Effective
        on January 1, 2001, Volvo adopted the accounting standard RR 15 “Intangible
        Assets” under Swedish GAAP. According to this accounting standard, expenditures
        relating to development of new and existing products and software should
        be
        capitalized and amortized over their estimated useful life. According to
        the
        transition rules for RR 15, no retroactive application was permitted. According
        to the transition rules for IFRS, the accounting standard IAS 38, Intangible
        Assets, which is mainly similar to RR 15 regarding the accounting for
        development costs, should be applied retroactively for development costs
        incurred prior to 2001. The restatements and transition effects attributable
        to
        this accounting change therefore pertains to retroactive capitalization and
        amortization of development costs incurred prior to 2001.
   F-16
  **Minority
        interests**
 In
        accordance with IFRS, minority interests are presented as a separate component
        of Shareholders’ equity and is included in the income for the
        period in the income statement.
  **Non-amortization
        of intangible assets with indefinite useful lives**
 According
        to Swedish GAAP, all intangible assets have been amortized over their estimated
        useful lives. In accordance with IFRS, intangible assets considered to have
        indefinite useful lives should not be amortized. Such assets should rather
        be
        subject to an annual impairment test. Volvo has determined that intangible
        assets with indefinite useful lives include only goodwill. Volvo has chosen
        not
        to apply IFRS 3, retroactively in accodance with the IFRS transition
        rules. The restatements and transition effects attributable to this
        accounting change therefore pertain to reversal of goodwill amortization
        charged
        to the income statement under Swedish GAAP for 2004 and a corresponding increase
        of the carrying value of goodwill at December 31, 2004, adjusted for currency
        translation differences.
  **Employee
        benefits**
 Effective
        on January 1, 2003, Volvo adopted RR 29 “Employee benefits” under Swedish GAAP.
        RR 29 is similar to the IFRS accounting standard IAS 19. The only difference
        between Swedish GAAP and IFRS relates to the date of transition. In accordance
        with the transition rules of RR 29, actuarial gains and losses arising prior
        to
        January 1, 2003, were set to zero and charged to equity as of the transition
        date. In accordance with the IFRS transition rules, actuarial gains and losses
        arising prior to January 1, 2004, could be set to zero and charged to equity
        as
        of the transition date. The transition effects attributable to the accounting
        change therefore pertain to recognizing actuarial gains and losses that have
        arisen between January 1, 2003 and January 1, 2004. Volvo has applied URA
        43
        according to the statement from the Swedish Financial Accounting Standards
        Council in calculating the Swedish pension liabilities, in addition to IAS
        19.
  **Investments
        in other companies**
 Volvo
        accounts for all investments in companies, except if these investments are
        classified as associated companies in accordance with IAS 39, Financial
        Instruments: Recognition and Measurement. Companies listed on a financial
        exchange should be reported in the balance sheet to market value. Under
        Swedish GAAP such investments have been carried at their cost of acquisition
        unless there has been a permanent decrease in value. Under IAS 39, unrealized
        gains and losses attributable to the fair value of investments are
        reported in a separate component of shareholders’ equity except when a
        decline in value is other than temporary. The transition effect on January
        1, 2005, attributable to this accounting change is mainly related to Volvo’s
        investment in Deutz AG.
  **Fair
        value of derivative instruments**
 In
        accordance with IAS 39, which is applied by Volvo as of January 1, 2005,
        all
        derivative financial instruments should be reported in the balance sheet
        at fair
        value. The difference between IAS 39 and accounting principles applied for
        derivative financial instruments under Swedish GAAP is dependent on the use
        of
        the derivative instruments:
  -
        Derivative financial instruments used for hedging of forecasted commercial
        cash-flows and forecasted electricity consumption:
  Under
        Swedish GAAP Volvo has applied hedge accounting for the main part of these
        derivatives and these instruments have consequently not been reported in
        the
        balance sheet (“Off-balance sheet instruments”). Gains and losses on these
        contracts have been charged to the income statement at the time of maturity
        of
        the specific contracts. Under IFRS, the fair value of outstanding derivative
        instruments is debited or credited to a separate component of equity to the
        extent the requirements for cash-flow hedge accounting are fulfilled. To
        the
        extent that the requirements are not met, the unrealized gain or loss is
        charged to the income statement.
  -
        Derivative financial instruments used for hedging of interest-rate risks
        and
        currency-rate risks on loans:
   F-17
  Under
        Swedish GAAP Volvo has applied hedge accounting for these derivatives and
        the
        carrying value of such derivatives has therefore corresponded to currency-rate
        and interest-rate gains and losses accruable up to the reporting date. Under
        the
        more complex rules in IAS 39 Volvo has chosen not to apply hedge accounting
        for
        interest rate contracts. The difference between carrying values reported
        under
        Swedish GAAP and fair values to be reported under IFRS pertains to unrealized
        interest rate gains and losses attributable to the period between the reporting
        date and maturity dates of the derivatives. The difference should be charged
        to income over the hedged instrument's remaining time to maturity. The
        unrealized gains and losses will be charged to the financial net in the income
        statement.
  **Derecognition
        of financial assets**
 In
        accordance with IAS 39, which ís applied by Volvo as of January 1, 2005,
        financial assets should be derecognized from the balance sheet when
        substantially all risks and rewards have been transferred to an external
        party.
        Under Swedish GAAP, financial assets should be derecognized at settlement
        or if
        the ownership of the financial assets has been transferred to an external
        party.
        The transition effect on January 1, 2005, attributable to this accounting
        change
        is mainly related to certain dealer financing arrangements for which Volvo
        has
        retained components of credit risk. Such credit risk commitments have under
        Swedish GAAP been reported as contingent liabilities. This has mainly
        affected the segment reporting and to a less extent Volvo’s consolidated balance
        sheet.
 
 **Consolidation
        of temporary investments**
 Under
        Swedish GAAP, temporary investments in subsidiaries should not be consolidated.
        Under IFRS, all subsidiaries should be consolidated. Restatements and transition
        effects relating to this accounting change pertains mainly to Volvo’s investment
        in the LB Smith distribution business. This operation was acquired in May
        2003
        and at December 31, 2004 the major part of this operation had been divested.
        The
        2004 income statement is restated with the parts of LB Smith that have been
        divested during the year. The remaining part, still owned by Volvo, has been
        consolidated in full according to Swedish GAAP in the fourth quarter of
        2004.
  **IFRS
        2 Share-based Payments**
 Volvo
        has
        decided that the “new share-based incentive program” adopted at the 2004 Annual
        General Meeting is covered by IFRS 2 Share-based payments. The impact, however,
        was limited. The IFRS 2 distinguishes between “cash-settled” and
“equity-settled” components of share-based payments, in Volvo cases, shares. The
        Volvo program include both a cash-settled and an equity-settled part. The
        equity-settled part was earlier accounted for at fair value and provided
        for as
        an accrued expense over the vesting period with a “true up” each reporting date.
        According to IFRS 2 the fair value is determined at the grant-date, recognized
        as an expense during the vesting period and credited to equity. Additional
        social costs are reported as a liability and is revalued at each balance
        sheet day in accordance with URA 46.
  **IFRS
        5 Non-Current Asset Held for Sale and Discontinued
        Operations**
 IFRS
        5 is
        applied prospectively from January 1, 2005, according to IFRS 1. Volvo had
        not
        identified any non-current assets that could be classified held for sales
        and
        which would have had material impact on the balance sheet as of December
        31, 2004 and no effect has been identified in the 2004 income statement.
        Discontinued operations pertain to significant operations, such as operating
        segments, comprising one or more cash-generating units. The rules for
        discontinued operations have not been applicable for Volvo during 2004 and
        2005.
  **Other
        transition rules according to IFRS 1 and IFRS standards**
 In
        applying IFRS, Volvo had the possibility to chose to measure property,
        plant and equipment at fair value. Volvo has chosen not to use this possibility
        but continue the present valuation of property, plant and equipment at
        historical cost less accumulated depreciation. The same treatment is also
        used
        for investment properties. IFRS 1 provides an option how to treat the effects
        of
        Changes in Foreign Exchange Rates, according to IAS 21. A first time adopter
        of
        IFRS could set the cumulative translation difference to zero for foreign
        operations. Volvo has chosen this possibility and set the translation difference
        to zero at January 1, 2004. Assumptions made under previous GAAP shall not
        be changed under the transition to IFRS unless there is objective evidence
        that
        those were in error. Volvo has made no changes in assumptions in the preparation
        of comparative information prepared in accordance with IFRS. According to
        SIC 12, Special Purpose Entities should be consolidated as from January 1,
        2004. Volvo has not identified any such Special Purpose Entities.
   F-18
  **Definition
        of cash and cash equivalents in presentation of cash-flow statements**
 Under
        Swedish GAAP, all investments in marketable debt securities have been included
        in the definition of cash and cash equivalents for the purpose of the cash-flow
        statement. In accordance with Volvo’s financial risk policy, all such securities
        should fulfill requirements regarding low risk and high liquidity. Under
        IFRS,
        investments in marketable securities are excluded from the definition of
        cash
        and cash equivalents for the purpose of the cash-flow statement if these
        instruments have maturity dates beyond three months from the date of investment.
        In the 2004 closing no marketable securities were defined as cash equivalents
        according to IFRS. Classification of cash and cash equivalents in the cash-flow
        statement does not affect Volvo’s net financial position.
  In
        the
        transition to IFRS the following reclassification is done in the cash flow
        statement. Customer finance receivables, net, are reported within Cash flow
        from
        operating activities, instead of as previously being reported as Cash flow
        from
        investing activities. Cash flow related to customer financing operations
        arises
        mainly within Volvo Financial Services (VFS). Changes in customer financing
        are
        currently reported in Volvo’s cash-flow statement with VFS consolidated in
        accordance with the equity method as changes in working capital, since Volvo’s
        operations excluding VFS do not have any significant customer financing
        operations. Changes in customer financing operations are reported on a separate
        line in Volvo’s cash-flow statement including VFS. Volvo’s reported Operating
        Cash flow is not affected by the reclassification.
  **Classification
        of leasing contracts in segment reporting of Volvo Financial
        Services**
 In
        accordance with IFRS, operating lease contracts with end-customers are in
        segment reporting for Volvo Financial Services reported as financial leasing
        contracts if the residual value in these contracts is guaranteed to Volvo
        Financial Services by another Volvo business area. In the Volvo Group’s
        consolidated balance sheet, these leasing agreements are still reported as
        assets under operating lease. In comparison with the 2004 closing approximately
        SEK 12 billion is reclassified to financial leases from operating leases
        in the
        Volvo Financial Services segment reporting.
  **Cash-flow
                  statement**
              According
                  to previous presentation
              Presentation
                  according to IFRSSEK
                  billion
              2004
              2005
              2004
              2005**Operating
                  activities**Operating
                  income
              14,7
              18,2
              14,7
              18,2Depreciation
                  and amortization
              10,0
              9,9
              10,0
              9,9Other
                  non-cash items
              (0,1)
              0,4
              (0,1)
              0,4Change
                  in working capital
              (1,4)
              (4,7)
              (1,4)
              (4,7)Customer
                  Finance receivables, net
              
              
              (7,4)
              (7,8)Financial
                  items and income taxes
              (0,5)
              (2,0)
              (0,5)
              (2,0)**Cash
                  flow from operating activities**
              **22,7**
              **21,8**
              **15,3**
              **14,0****Investing
                  activities**Investments
                  in fixed assets
              (7,4)
              (10,3)
              (7,4)
              (10,3)Investment
                  in leasing vehicles
              (4,4)
              (4,5)
              (4,4)
              (4,5)Disposal
                  of fixed assets and leasing vehicles
              2,4
              2,6
              2,4
              2,6Customer
                  Finance receivables, net
              (7,4)
              (7,8)**Operating
                  cash flow**
              **5,9**
              **1,8**
              **5,9**
              **1,8**
   F-19
  **Financial
        position December 31, 2004**
 Updated,
        taking into account, all differences between Swedish GAAP and IFRS except
        IAS 39
        Financial instruments: Recognition and measurement and IFRS 5, Non-Current
        Assets Held for Sale and Discontinued Operations. The first column is the
        closing balance per December 31, 2004 according to Swedish GAAP. The impact
        of
        IFRS is shown as IFRS adjustment and the third column shows the adjusted
        closing
        balance December 31, 2004, according to IFRS. This balance has been opening
        balance for the 2005 reporting.
  **Consolidated
        balance sheets, December 31, 2004**
 Volvo
                  Group excl
                Financial
                  Services (1)
              
              
              
              Volvo
                  Group
                totalFinancial
                  ServicesDec
                  31
              IFRS
              Dec
                  31
              Dec
                  31
              IFRS
              Dec
                  31
              Dec
                  31
              IFRS
              Dec
                  31SEK
                  M
              2004
              adjustments
              2004
              2004
              adjustments
              2004
              2004
              adjustments
              2004**Assets**Intangible
                  assets
              16,564
              1,006
              17,570
              42
              
              42
              16,606
              1,006
              17,612Property,
                  plant and equipment
              27,260
              
              27,260
              3,891
              
              3,891
              31,151
              
              31,151Assets
                  under operating leases
              8,477
              
              8,477
              12,817
              (12,044)
              773
              19,534
              
              19,534Shares
                  and participations
              10,116
              
              10,116
              193
              
              193
              2,003
              
              2,003Long-term
                  customer finance receivables
              147
              
              147
              25,200
              8,687
              33,887
              25,187
              
              25,187Long-term
                  interest-bearing receivables
              1,797
              
              1,797
              5
              
              5
              1,741
              
              1,741Other
                  long-term receivables
              6,426
              66
              6,492
              212
              
              212
              6,034
              66
              6,100Inventories
              28,291
              
              28,291
              307
              
              307
              28,598
              
              28,598Short-term
                  customer finance receivables
              83
              
              83
              26,207
              3,324
              29,531
              26,006
              
              26,006Short-term
                  interest bearing receivables
              10,330
              
              10,330
              0
              
              0
              1,643
              
              1,643Other
                  short-term receivables
              30,043
              
              30,043
              1,628
              
              1,628
              29,647
              
              29,647Marketable
                  securities
              25,839
              
              25,839
              116
              
              116
              25,955
              
              25,955Cash
                  and cash equivalent
              8,789
              
              8,789
              914
              
              914
              8,791
              
              8,791**Total
                  assets**
              **174,162**
              **1,072**
              **175,234**
              **71,532**
              **(33)**
              **71,499**
              **222,896**
              **1,072**
              **223,968****Shareholders'
                  equity and liabilities**Shareholders'
                  equity
              69,409
              746
              70,155
              8,306
              
              8,306
              69,409
              746
              70,155Minority
                  interests
              229
              (229)
              -
              0
              
              -
              229
              (229)Provisions
                  for post-employment benefits
              14,129
              548
              14,677
              26
              
              26
              14,155
              548
              14,703Other
                  provisions
              14,020
              95
              14,115
              878
              (33)
              845
              14,898
              95
              14,993Loans
              13,968
              
              13,968
              57,860
              
              57,860
              61,807
              
              61,807Other
                  liabilities
              62,407
              (88)
              62,319
              4,462
              
              4,462
              62,398
              (88)
              62,310**Shareholders'
                  equity and liabilities**
              **174,162**
              **1,072**
              **175,234**
              **71,532**
              **(33)**
              **71,499**
              **222,896**
              **1,072**
              **223,968**
 1)
        Financial Services reported in accordance with the equity
        method.
  F-20
  **Financial
        position January 1, 2005**
 Updated
        taking into account all differences between Swedish GAAP and IFRS including
        IAS
        39 and IFRS 5. Impact of adopting IAS 39 is charged to Equity according to
        IFRS
        1 as of January 1, 2005. The IFRS balance including IAS 39 effects has been
        used
        as opening balance for cash flow calculation during 2005.
  **Consolidated
        balance sheets, January 1, 2005**
 Volvo
                  Group excl
                Financial
                  Services (1)
              
              
              
              Volvo
                  Group
                totalFinancial
                  ServicesDec
                  31
              IAS
                  39
              Jan
                  1
              Dec
                  31
              IAS
                  39
              Jan
                  1
              Dec
                  31
              IAS
                  39
              Jan
                  1SEK
                  M
              2004
              adjustments
              2005
              2004
              adjustments
              2005
              2004
              adjustments
              2005**Assets**Intangible
                  assets
              17,570
              
              17,570
              42
              
              42
              17,612
              
              17,612Property,
                  plant and equipment
              27,260
              
              27,260
              3,891
              
              3,891
              31,151
              
              31,151Assets
                  under operating leases
              8,477
              
              8,477
              773
              
              773
              19,534
              
              19,534Shares
                  and participations
              10,116
              (494)
              9,622
              193
              
              193
              2,003
              (494)
              1,509Long-term
                  customer finance receivables
              147
              424
              571
              33,887
              611
              34,498
              25,187
              1,035
              26,222Long-term
                  interest-bearing receivables
              1,797
              
              1,797
              5
              
              5
              1,741
              
              1,741Other
                  long-term receivables
              6,492
              985
              7,477
              212
              
              212
              6,100
              988
              7,088Inventories
              28,291
              
              28,291
              307
              
              307
              28,598
              
              28,598Short-term
                  customer finance receivables
              83
              430
              513
              29,531
              298
              29,829
              26,006
              727
              26,733Short-term
                  interest bearing receivables
              10,330
              
              10,330
              0
              
              0
              1,643
              
              1,643Other
                  short-term receivables
              30,043
              4,040
              34,083
              1,628
              
              1,628
              29,647
              1,690
              31,337Marketable
                  securities
              25,839
              
              25,839
              116
              
              116
              25,955
              
              25,955Cash
                  and cash equivalent
              8,789
              
              8,789
              914
              
              914
              8,791
              
              8,791**Total
                  assets**
              **175,234**
              **5,385**
              **180,619**
              **71,499**
              **909**
              **72,408**
              **223,968**
              **3,946**
              **227,914**
   F-21
  **Shareholders'
                  equity and liabilities**Shareholders'
                  equity
              70,155
              348
              70,503
              8,306
              
              8,306
              70,155
              348
              70,503Minority
                  interests
              -
              
              -
              -
              
              -
              -
              
              -Provisions
                  for post-employment benefits
              14,677
              
              14,677
              26
              
              26
              14,703
              
              14,703Other
                  provisions
              14,115
              439
              14,554
              845
              (6)
              839
              14,993
              432
              15,425Loans
              13,968
              3,340
              17,308
              57,860
              915
              58,775
              61,807
              1,908
              63,715Other
                  liabilities
              62,319
              1,258
              63,577
              4,462
              
              4,462
              62,310
              1,258
              63,568**Shareholders'
                  equity and liabilities**
              **175,234**
              **5,385**
              **180,619**
              **71,499**
              **909**
              **72,408**
              **223,968**
              **3,946**
              **227,914**
 1)
        Financial Services reported in accordance with the equity
        method.
  **Consolidated
                  income statements IFRS comparison 2004**VFS
                  reported according to the equity methodSEK
                  M unless otherwise specified
              
              **IFRS**
              
              **Sw
                  GAAP**Net
                  sales
              
              
              202,171
              
              
              201,496Cost
                  of sales
              
              
              (158,453
              )
              
              (158,231
              )**Gross
                  income**
              
              
              **43,718**
              
              
              **43,265**Research
                  and development expenses
              
              
              (7,614
              )
              
              (7,233
              )Selling
                  expenses
              
              
              (18,317
              )
              
              (18,048
              )Administrative
                  expenses
              
              
              (5,310
              )
              
              (5,321
              )Other
                  operating income and expenses
              
              
              7
              
              
              (658
              )Income
                  from Financial Services
              
              
              1,365
              
              
              1,365Income
                  from investments in associated companies
              
              
              2
              
              
              2Income
                  from other investments
              
              
              828
              
              
              828**Operating
                  income**
              
              
              **14,679**
              
              
              **14,200**Interest
                  income and similar credits
              
              
              993
              
              
              993Interest
                  expenses and similar charges
              
              
              (1,426
              )
              
              (1,404
              )Other
                  financial income and expenses
              
              
              (1,210
              )
              
              (1,210
              )**Income
                  after financial items**
              
              
              **13,036**
              
              
              **12,579**Minority
                  interest
              
              
              -
              
              
              (40
              )Income
                  taxes
              
              
              (3,129
              )
              
              (3,184
              )**Income
                  for the period**
              
              
              **9,907**
              
              
              **9,355***
                  Attributable to:Equity
                  holders of the parent company
              
              
              9,867
              
              
              -Minority
                  interest
              
              
              40
              
              
              -**9,907**
              
              
              **-**
   F-22
  **Depreciation
                  and amortization included above****Depreciation**Industrial
                  and Commercial
              
              
              (5,540
              )
              
              (5,540
              )Financial
                  Services
              
              
              (3,066
              )
              
              (3,066
              )**Total
                  Depreciation**
              
              
              **(8,606**
              **)**
              
              **(8,606**
              **)****Amortization**Industrial
                  and Commercial
              
              
              (1,333
              )
              
              (1,635
              )Financial
                  Services
              
              
              (63
              )
              
              (63
              )**Total
                  Amortization**
              
              
              **(1,396**
              **)**
              
              **(1,698**
              **)**Basic
                  earnings per share, SEK
              
              
              23.58
              
              
              22.35Diluted
                  earnings per share, SEK
              
              
              23.55
              
              
              22.33Average
                  number of shares, million
              
              
              418.5
              
              
              418.5
  **Key
        operating ratios**
 %
                  of
                  sales
              
              **IFRS**
              
              **Sw
                  GAAP**Gross
                  margin
              
              
              21.6
              
              
              21.5Research
                  and development expenses
              
              
              3.8
              
              
              3.6Selling
                  expenses
              
              
              9.1
              
              
              9.0Administrative
                  expenses
              
              
              2.6
              
              
              2.6Operating
                  margin
              
              
              7.3
              
              
              7.0
  **Net
        sales**
 SEK
                  M
              
              **IFRS**
              
              **Sw
                  GAAP**Trucks
              
              
              136,879
              
              
              136,879Buses
              
              
              12,722
              
              
              12,722Construction
                  Equipment (1
              
              
              29,360
              
              
              28,685Volvo
                  Penta
              
              
              9,057
              
              
              9,057Volvo
                  Aero
              
              
              6,925
              
              
              6,925Other
              
              
              7,228
              
              
              7,228**Net
                  sales**
              
              
              **202,171**
              
              
              **201,496**
 1)
        Consolidation of temporary investments, LB Smith, January-November.
 
  **Operating
        income**
 SEK
                  M
              
              **IFRS**
              
              **Sw
                  GAAP**Trucks
              
              
              8,992
              
              
              8,989Buses
              
              
              253
              
              
              185Construction
                  Equipment
              
              
              1,898
              
              
              1,572Volvo
                  Penta
              
              
              940
              
              
              937Volvo
                  Aero
              
              
              403
              
              
              377Volvo
                  Financial Services
              
              
              1,365
              
              
              1,365Other
                  units
              
              
              8
              
              
              (45
              )**Operating
                  income (1)**
              
              
              **13,859**
              
              
              **13,380**Revaluation
                  of shares
              
              
              820
              
              
              820**Operating
                  income (loss)**
              
              
              **14,679**
              
              
              **14,200**
 1)
         Excluding revaluation of shares in Scania AB and Henlys Group Plc.
   F-23
  **Operating
        margins**
 **%**
              
              **IFRS**
              
              **Sw
                  GAAP**Trucks
              
              
              6.6
              
              
              6.6Buses
              
              
              2.0
              
              
              1.5Construction
                  Equipment
              
              
              6.5
              
              
              5.5Volvo
                  Penta
              
              
              10.4
              
              
              10.3Volvo
                  Aero
              
              
              5.8
              
              
              5.4**Operating
                  margin (1**
              
              
              **6.9**
              
              
              **6.6****Operating
                  margin**
              
              
              **7.3**
              
              
              **7.0**
 1)
         Excluding revaluation of shares in Scania AB and Henlys Group Plc.
    **Significant
        differences between Swedish GAAP and IFRS**
  The
        most
        significant differences between Swedish GAAP and IFRS for Volvo are further
        explained below in the Equity- and net income reconciliation:
 
 **Summarized
        reconciliation of shareholders' equity**
 SEK
                  M
              
              **040101**
              
              **041231**
              
              **050101****Equity
                  under Swedish GAAP**
              
              
              **72,420**
              
              
              **69,409**
              
              
              **69,409*****IFRS
                  adjustments:***Capitalization
                  and amortization of intangible assets
              
              
              722
              
              
              340
              
              
              340Minority
                  interest
              
              
              217
              
              
              229
              
              
              229Non-amortization
                  of goodwill
              
              
              0
              
              
              665
              
              
              665Post
                  employee benefits
              
              
              (580
              )
              
              (473
              )
              
              (473
              )Investments
                  in listed companies
              
              
              
              
              
              
              
              
              (494
              )Fair
                  value gains and losses on derivatives for hedge of:-
                  Commercial cash flow
              
              
              
              
              
              
              
              
              1,195-
                  Electricity contracts
              
              
              
              
              
              
              
              
              (25
              )Consolidation
                  of temporary investments
              
              
              (152
              )
              
              -
              
              
              -Share
                  based payments
              
              
              0
              
              
              14
              
              
              14Deferred
                  taxes on IFRS adjustments
              
              
              (96
              )
              
              (29
              )
              
              (358
              )***Total
                  adjustments to IFRS***
              
              
              ***112***
              
              
              ***746***
              
              
              ***1,094*****Equity
                  under IFRS**
              
              
              **72,532**
              
              
              **70,155**
              
              
              **70,503**
  **Summarized
        reconciliation of net income**
 SEK
                  M
              
              **2004****Net
                  income under Swedish GAAP**
              
              **9,355*****IFRS
                  adjustments:***Capitalization
                  and amortization of intangible assets
              
              
              (382
              )Minority
                  interest
              
              
              40Non-amortization
                  of goodwill
              
              
              684Post-employment
                  benefits
              
              
              13Consolidation
                  of temporary investments
              
              
              142Deferred
                  taxes on IFRS adjustments
              
              
              55***Total
                  adjustments to IFRS***
              
              
              ***552*****Income
                  for the period under IFRS**
              
              
              **9,907**
   F-24
  **Summarized
        reconciliation of net financial position**
 SEK
                  bnVolvo
                  Group excl VFS**Net
                  financial position at December 31, 2004 under Swedish
                  GAAP**
              
              
              **18.7*****IFRS
                  adjustments:***Post-employment
                  benefits
              
              
              (0.5
              )Derecognition
                  of financial assets
              
              
              (3.4
              )***Total
                  adjustments to IFRS***
              
              
              ***(3.9***
              ***)*****Net
                  financial position at January 1, 2005 under IFRS**
              
              
              **14.8**
 
 
 **Note
        4 - Acquisition and divestments of shares in subsidiaries**
 AB
        Volvo's
        holding of shares in subsidiaries as of December 31, 2004 is shown in the
        table AB Volvo's holding of shares. Significant acquisitions, formations
        and divestments within the Group are listed below.
  **Celero
        Support AB**
 In
        November 2005 Volvo sold Celero Support AB to Coor Service Management
        for 680 before deduction for the company's net debt. The sale resulted
        in a gain of about 430. Celero Support AB is a service company with operations
        that include various office and workplace sevices as well as maintenance
        of industrial plants and properties. Celero Support has 1,100 employees,
        with sales totaling about SEK 1.4 billion.
  **Properties**
 In
        February 2005, Volvo Financial Services, via the Volvo Group's real estate
        company, Danafjord AB, entered an agreement on the sale of two wholly owned
        companies, which own properties in Torslanda and Kalmar valued at about 515.
        The
        sale yielded a capital gain of 188.
  **L.B.
        Smith (SABA Holding Inc.)**
 On
        May 2,
        2003 Volvo Construction Equipment purchased the assets amounting to USD 189
        M
        associated with the Volvo distribution business of L.B. Smith Inc. in the
        US. No
        goodwill or real estate was included in the deal. The major part of the
        dealerships was divested during 2004.
  **Renault
        V.I. and Mack**
 During
        the
        fourth quarter 2004 AB Volvo and Renault signed a settlement agreement regarding
        the disagreement the companies have had since 2001 pertaining to Volvo's
        acquisition of Renault V.I./Mack and the value of certain of the acquired
        assets
        and certain warranty claims. The settlement, EUR 108 M has reduced the
        goodwill amount pertaining to the acquisition of Renault V.I.
  **Prévost
        Car Inc.**
 During
        the
        third quarter 2004 the North American bus manufacturer Prévost Car Inc. became a
        wholly owned subsidiary of Volvo Bus Corporation. As part of the restructuring
        of the bus manufacturer Henlys Group Plc, Volvo Group reached an agreement
        to
        acquire the remaining 50% of the shares. Prévost Car Inc. was a former 50/50
        joint venture between Volvo and Henlys, reported in the Volvo Group accounts
        in
        accordance with the proportionate consolidation method. The purchase price
        was
        USD 83 M including two loans made available to Prévost Car Inc. by Henlys.
        Prévost Car Inc. contain the Prévost and Nova brands. Prévost
        manufactures coaches and bus shells for luxury mobile homes. Nova Bus
        manufactures city buses mainly for the Canadian market.
  **Axle
        manufacturing**
 During
        the
        third quarter 2004 Volvo and ArvinMeritor signed a Strategic Alliance
        Agreement for the supply of axels. As a consequence of the strategic
        alliance ArvinMeritor acquired the Volvo's axle plant and foundry in Lyon,
        France.
  The
        effects during 2005 and 2004 on the Volvo Group's balance sheet and cash
        flow statement in connection with the **acquisition
        of subsidiaries and other business units** are
        specified in the following table:
   F-25
  2004
              
              **2005**Intangible
                  assets
              
              
              (599
              )
              
              20Property,
                  plant and equipment
              
              
              300
              
              
              124Assets
                  under operating lease
              
              
              115
              
              
              0Shares
                  and participations
              
              
              (260
              )
              
              (80
              )Inventories
              
              
              630
              
              
              129Current
                  receivables
              
              
              958
              
              
              257Cash
                  and cash equivalents
              
              
              180
              
              
              42Other
                  assets
              
              
              62
              
              
              3Minority
                  interests
              
              
              (20
              )
              
              (45
              )Provisions
              
              
              (63
              )
              
              (4
              )Loans
              
              
              (347
              )
              
              (115
              )Liabilities
              
              
              (448
              )
              
              (203
              )**Acquired
                  net assets**
              
              
              **508**
              
              
              **128**Cash
                  and cash equivalents paid
              
              
              (508
              )
              
              (60
              )Cash
                  and cash equivalents according to acquisition
                  analysis
              
              
              180
              
              
              42**Effect
                  on Group cash and cash equivalents**
              
              
              **(328**
              **)**
              
              **(18**
              **)**
 
 The
        effects during 2005 and 2004 includes wholly owned  subsidiaries that
        previously were accounted for according to the equity method. The effects
        during
        2005 and 2004 on the Volvo Group's balance sheet and cash flow statement in
        connection with the **divestment
        of subsidiaries and other business units** are
        specified in the following table:
 
 2004
              
              **2005**Property,
                  plant and equipment
              
              
              (440
              )
              
              (519
              )Inventories
              
              
              (4
              )
              
              (41
              )Other
                  receivables
              
              
              181
              
              
              (334
              )Cash
                  and cash equivalents
              
              
              -
              
              
              (114
              )Provisions
              
              
              94
              
              
              (12
              )Other
                  liabilities
              
              
              50
              
              
              888**Divested
                  net assets**
              
              
              **(119**
              **)**
              
              **(132**
              **)**Cash
                  and cash equivalents received
              
              
              187
              
              
              782Cash
                  and cash equivalents, divested companies
              
              
              -
              
              
              (114
              )**Effect
                  on****Group
                  cash and cash equivalents**
              
              
              **187**
              
              
              **668**
  **AB
        Volvo's holding of shares**
 Dec
                  31, 2004
              
              Dec
                  31, 2005**AB
                  Volvo’s holding of shares and participations**
                **in
                  non-Group companies**
              
              Registration
                number
              
              Percentage
                holding (1)
              
              Carrying
                value,
                  SEK M
              
              Carrying
                value,
                  SEK MDeutz
                  AG, Germany
              
              
              -
              
              
              7
              
              
              670
              
              
              253Henlys
                  Group Plc, Great Britain
              
              
              -
              
              
              10
              
              
              0
              
              
              0Blue
                  Chip Jet HB, Sweden
              
              
              969639-1011
              
              
              40
              
              
              1
              
              
              0Other
                  investments
              
              
              
              
              
              
              
              
              20
              
              
              18**Total
                  carrying value, non-Group companies**
              
              
              
              
              
              
              
              
              **691**
              
              
              **271**
 1) Percentage
        figures refer to share capital as well as voting rights.
   F-26
  Dec
                  31, 2004
              
              Dec
                  31, 2005**AB
                  Volvo’s holding of shares and participations**
                **in
                  Group companies**
              
              Registration
                number
              
              Percentage
                holding
              
              Carrying
                value,
                  SEK M
              
              Carrying
                value,
                  SEK MVolvo
                  Global Trucks AB, Sweden
              
              
              556605-6759
              
              
              100
              
              
              8,420
              
              
              -**Volvo
                  Lastvagnar AB, Sweden**
              
              
              556013-9700
              
              
              100
              
              
              -
              
              
              8,678Volvo Truck Center Sweden AB, Sweden
              
              
              556072-7777
              
              
              100
              
              
              -
              
              
              -Volvo
                  Finland AB, Finland
              
              
              -
              
              
              100
              
              
              -
              
              
              -Volvo
                  Trucks (Deutschland) GmbH, Germany
              
              
              -
              
              
              100
              
              
              -
              
              
              -Volvo
                  Europa Truck NV, Belgium
              
              
              -
              
              
              100
              
              
              -
              
              
              -Volvo
                  Trucks (Schweiz) AG, Switzerland
              
              
              -
              
              
              100
              
              
              -
              
              
              -Volvo
                  Truck Espana, SA, Spain
              
              
              -
              
              
              100
              
              
              -
              
              
              -Volvo Truck and Bus Limited, Great Britain (1
              
              
              -
              
              
              100
              
              
              -
              
              
              -Volvo
                  Truck Latvia Sia, Latvia
              
              
              -
              
              
              100
              
              
              -
              
              
              -Volvo
                  Truck Czech S R O, Czech Republic
              
              
              -
              
              
              100
              
              
              -
              
              
              -Volvo Truck Slovak, Slovakia
              
              
              -
              
              
              100
              
              
              -
              
              
              -Volvo
                  do o Beograd, Yugoslavia
              
              
              -
              
              
              100
              
              
              -
              
              
              -Volvo Macedonia, Ltd, Macedonia
              
              
              -
              
              
              100
              
              
              -
              
              
              -Volvo Romania SRL, Romania
              
              
              -
              
              
              100
              
              
              -
              
              
              -Volvo Otomotiv Turk Ltd STI, Turkey
              
              
              -
              
              
              100
              
              
              -
              
              
              -Volvo
                  Trucks Canada Inc, Canada
              
              
              -
              
              
              100
              
              
              -
              
              
              -Volvo
                  Trucks de Mexico, Mexico
              
              
              -
              
              
              100
              
              
              -
              
              
              -Volvo
                  Peru Sociedad Anonima, Peru
              
              
              -
              
              
              100
              
              
              -
              
              
              -Volvo
                  Truck Australia Pty Ltd, Australia
              
              
              -
              
              
              100
              
              
              -
              
              
              -Volvo
                  India Ltd, India
              
              
              -
              
              
              100
              
              
              -
              
              
              -**Volvo
                  Holding Sverige AB, Sweden**
              
              
              556539-9853
              
              
              100
              
              
              7,634
              
              
              7,634Mack Canada, Canada
              
              
              -
              
              
              100
              
              
              -
              
              
              -Volvo
                  do Brasil, Veiculos Ltda, Brasil
              
              
              -
              
              
              100
              
              
              -
              
              
              -Volvo
                  Polska Sp. O.O., Poland
              
              
              -
              
              
              100
              
              
              -
              
              
              -Volvo
                  Southern Africa Pty Ltd, South Africa
              
              
              -
              
              
              100
              
              
              -
              
              
              -Banco
                  Volvo (Brasil) SA, Brasil
              
              
              -
              
              
              100
              
              
              -
              
              
              -**Volvo
                  Holding France SA, France**
              
              
              -
              
              
              100
              
              
              -
              
              
              -Volvo Compact Equipment SAS, France
              
              
              -
              
              
              100
              
              
              -
              
              
              -Volvo
                  CE Europe SAS, France
              
              
              -
              
              
              100
              
              
              -
              
              
              -VFS
                  Finance France, SA, France
              
              
              -
              
              
              100
              
              
              -
              
              
              -VFS
                  Location France SAS, France
              
              
              -
              
              
              100
              
              
              -
              
              
              -
  F-27
  **Renault
                  Trucks, France**
              
              -
              
              100
              
              -
              
              -Renault Trucks Commercial SA, France
              
              
              -
              
              
              100
              
              
              -
              
              
              -Renault
                  Trucks UK Ltd, Great Britain
              
              
              -
              
              
              100
              
              
              -
              
              
              -Renault
                  Trucks Deutschland GmbH, Germany
              
              
              -
              
              
              100
              
              
              -
              
              
              -Renault
                  Trucks Portugal Ltda, Portugal
              
              
              -
              
              
              100
              
              
              -
              
              
              -Renault
                  V I España SA, Spain
              
              
              -
              
              
              100
              
              
              -
              
              
              -Renault
                  Trucks, España, Spain
              
              
              -
              
              
              100
              
              
              -
              
              
              -Renault
                  Trucks Italia Spa, Italy
              
              
              -
              
              
              100
              
              
              -
              
              
              -Renault
                  Trucks Polska SP Z.OO, Poland
              
              
              -
              
              
              100
              
              
              -
              
              
              -Renault
                  Trucks CR, SRO, Czech Republic
              
              
              -
              
              
              100
              
              
              -
              
              
              -SARL
                  Renault Trucks Algerie, Algeria
              
              
              -
              
              
              100
              
              
              -
              
              
              -Renault
                  Trucks Ticaret AS, Turkey
              
              
              -
              
              
              100
              
              
              -
              
              
              -**Mack
                  Trucks Inc, USA**
              
              
              -
              
              
              100
              
              
              3,225
              
              
              3,225North
                  America Truck Leasing Group, Inc, USA
              
              
              -
              
              
              100
              
              
              -
              
              
              -Mack
                        de Venezuela, C.A., Venezuela
              
              
              -
              
              
              100
              
              
              -
              
              
              -Mack
                  Trucks Australia Pty Ltd, Australia
              
              
              -
              
              
              100
              
              
              -
              
              
              -**Volvo
                  Bussar AB, Sweden**
              
              
              556197-3826
              
              
              100
              
              
              1,877
              
              
              1,877Volvo
                  Bussar S’ffle AB, Sweden
              
              
              556058-3485
              
              
              100
              
              
              -
              
              
              -Acrivia
                  AB, Sweden
              
              
              556540-1691
              
              
              100
              
              
              -
              
              
              -Volvo
                  Bus Finland Oy, Finland
              
              
              -
              
              
              100
              
              
              -
              
              
              -Volvo
                  Austria, GmbH, Austria
              
              
              -
              
              
              100
              
              
              -
              
              
              -Prévost
                  Holding BV, Canada
              
              
              -
              
              
              100
              
              
              -
              
              
              -Shanghai Sunwin Bus Co, China (2
              
              
              -
              
              
              50
              
              
              -
              
              
              -XIAN Silver Bus Co, China (2
              
              
              -
              
              
              50
              
              
              -
              
              
              -**Volvo
                  Construction Equipment NV, The Netherlands**
              
              
              -
              
              
              100
              
              
              2,582
              
              
              2,582Volvo
                  Wheel Loaders AB, Sweden
              
              
              556310-1319
              
              
              100
              
              
              -
              
              
              -Volvo
                  Construction Equipment Components AB, Sweden
              
              
              556527-6820
              
              
              100
              
              
              -
              
              
              -Volvo
                  Articulated Haulers AB, Sweden
              
              
              556360-1615
              
              
              100
              
              
              -
              
              
              -Volvo
                  Construction Equipment Customer Support AB, Sweden
              
              
              556310-1301
              
              
              100
              
              
              -
              
              
              -Volvo
                  Construction Equipment International AB, Sweden
              
              
              556310-1293
              
              
              100
              
              
              -
              
              
              -Volvo Construction Equipment Cabs AB, Sweden
              
              
              556527-6838
              
              
              100
              
              
              -
              
              
              -Volvo
                  Construction Equipment Europe Ltd, Great Britain
              
              
              -
              
              
              100
              
              
              -
              
              
              -Volvo
                  Construction Equipment Europe GmbH, Germany
              
              
              -
              
              
              100
              
              
              -
              
              
              -Volvo
                  Motor Graders, Ltd, Canada
              
              
              -
              
              
              100
              
              
              -
              
              
              -
   F-28
  **AB
                  Volvo Penta, Sweden**
              
              556034-1330
              
              100
              
              421
              
              421Wuxi da Hao Power, Co Ltd, China
              
              
              -
              
              
              70
              
              
              -
              
              
              -**Volvo
                  Aero AB, Sweden**
              
              
              556029-0347
              
              
              100
              
              
              2,885
              
              
              2,885Volvo
                  Aero Engine Services AB, Sweden
              
              
              556328-9171
              
              
              100
              
              
              -
              
              
              -Volvo
                  Aero Norge AS, Norway
              
              
              -
              
              
              78
              
              
              -
              
              
              -**VNA
                  Holding Inc, USA**
              
              
              -
              
              
              100
              
              
              3,510
              
              
              3,510Volvo
                  Trucks North America, Inc, USA
              
              
              -
              
              
              100
              
              
              -
              
              
              -Arrow Truck Sales, Inc, USA
              
              
              -
              
              
              100
              
              
              -
              
              
              -Volvo
                  Construction Equipment North America Inc., USA
              
              
              -
              
              
              100
              
              
              -
              
              
              -Volvo
                  Penta of The Americas, Inc, USA
              
              
              -
              
              
              100
              
              
              -
              
              
              -Volvo
                  Aero North America Inc, USA
              
              
              -
              
              
              100
              
              
              -
              
              
              -Volvo Aero Services LP, USA
              
              
              -
              
              
              100
              
              
              -
              
              
              -Volvo
                  Treasury North America Inc, USA
              
              
              -
              
              
              100
              
              
              -
              
              
              -Volvo Commercial Finance LLC The Americas, USA
              
              
              -
              
              
              100
              
              
              -
              
              
              -Volvo Information Technology, North America, USA
              
              
              -
              
              
              100
              
              
              -
              
              
              -Volvo Treasury Canada, Inc., Canada
              
              
              -
              
              
              100
              
              
              -
              
              
              -Volvo Treasury AB, Sweden
              
              
              556135-4449
              
              
              100
              
              
              3,044
              
              
              3,044Sotrof AB, Sweden
              
              
              556519-4494
              
              
              100
              
              
              1,388
              
              
              1,388Danafjord AB, Sweden
              
              
              556006-8313
              
              
              100
              
              
              -
              
              
              -Volvo Group Finance Europe BV, The Netherlands
              
              
              -
              
              
              100
              
              
              1,003
              
              
              1,003Volvo Construction Equipment Korea Co Ltd, South Korea
              
              
              -
              
              
              100
              
              
              -
              
              
              -Volvo Financial Services AB, Sweden
              
              
              556000-5406
              
              
              100
              
              
              1,231
              
              
              1,413Volvo Truck Finance Holding BV, Netherlands
              
              
              -
              
              
              100
              
              
              -
              
              
              -VFS Financial Services (UK) Ltd, Great Britain
              
              
              -
              
              
              100
              
              
              -
              
              
              -VFS Deutschland GmbH, Germany
              
              
              -
              
              
              100
              
              
              -
              
              
              -VFS Financial Services Spain EFC, SA, Spain
              
              
              -
              
              
              100
              
              
              -
              
              
              -VFS Nordic AB, Sweden
              
              
              556579-1778
              
              
              100
              
              
              -
              
              
              -Kommersiella Fordon Europa AB, Sweden
              
              
              556049-3388
              
              
              100
              
              
              245
              
              
              249Volvo China Investment Co Ltd, China
              
              
              -
              
              
              100
              
              
              523
              
              
              523Volvo Truck & Bus Ltd, Great Britain (1
              
              
              -
              
              
              100
              
              
              413
              
              
              413Volvo Holding Mexico, Mexico
              
              
              -
              
              
              100
              
              
              388
              
              
              388
   F-29
  Volvo Technology Transfer AB, Sweden
              
              
              556542-4370
              
              
              100
              
              
              361
              
              
              361Volvo Powertrain AB, Sweden
              
              
              556000-0753
              
              
              100
              
              
              348
              
              
              348Volvo Parts AB, Sweden
              
              
              556365-9746
              
              
              100
              
              
              200
              
              
              200Volvo Group Insurance Förs’krings AB, Sweden
              
              
              516401-8037
              
              
              100
              
              
              182
              
              
              182Volvo Business Services, Sweden
              
              
              556029-5197
              
              
              100
              
              
              107
              
              
              107Volvo Danmark Holding AS, Denmark
              
              
              -
              
              
              100
              
              
              104
              
              
              104Volvo Italia Spa, Italy
              
              
              -
              
              
              100
              
              
              0
              
              
              0VFS Servizi Financiari Spa, Italy (3
              
              
              -
              
              
              100
              
              
              101
              
              
              101Volvo Norge AS, Norway
              
              
              -
              
              
              100
              
              
              56
              
              
              56Volvo Malaysia Sdn, Malaysia
              
              
              -
              
              
              100
              
              
              48
              
              
              48Rossareds Fastighets AB, Sweden
              
              
              556009-1190
              
              
              100
              
              
              26
              
              
              26Volvo Penta UK Ltd, Great Britain
              
              
              -
              
              
              100
              
              
              16
              
              
              16ZAO Volvo Vostok, Russia (4
              
              
              -
              
              
              100
              
              
              0
              
              
              0Volvo East Asia (Pte) Ltd, Singapore
              
              
              -
              
              
              100
              
              
              9
              
              
              9Volvo Information Technology AB, Sweden
              
              
              556103-2698
              
              
              100
              
              
              8
              
              
              8Other
                  holdings
              
              
              
              
              
              
              
              
              38
              
              
              13**Total
                  carrying value Group companies (5)**
              
              
              
              
              
              
              
              
              **40,393**
              
              
              **40,812**
  1)
        Total
        holding by VTC Holding and AB Volvo is 100%.
 2) Joint ventures, reported
        in accordance with the proportionate consolidation method in Volvo's
        consolidated accounts.
 3)
        Total
        holding by Volvo Italia and AB Volvo is 100%.
 4)
        Total
        holding by Volvo Trucks Deutschland and AB Volvo is 100%.
 5)
        AB
        Volvo’s share of shareholders’ equity in subsidiaries (including equity in
        untaxed reserves) was 67,804 (55,831).
   F-30
  
 **Note
        5 - Joint ventures**
 Joint
        ventures are companies over which Volvo has joint control together with one
        or
        more external parties. Joint ventures are reported by applying the proportionate
        consolidation method, in accordance with IAS 31 Joint ventures. Group
        holdings of shares in joint ventures are listed below.
 Dec
                  31, 2005Holding
                percentage
              Holding
                no
                  of shares**Shares
                  in Joint ventures**Shanghai
                  Sunwin Bus Corp., China
              50
              -Xian
                  Silver Bus Corp., China
              50
              -
 
 **Volvo's
                  share of joint ventures' income statements**
              
              2004
              
              **2005**Net
                  sales
              
              
              492
              
              
              345Operating
                  income
              
              
              (27
              )
              
              (62
              )Income
                  after financial items
              
              
              (32
              )
              
              (71
              )**Income
                  of the period**
              
              
              **(34**
              **)**
              
              **(71**
              **)****Volvo's
                  share of joint ventures' balance sheets**Non-current
                  assets
              
              
              100
              
              
              117Current
                  assets
              
              
              394
              
              
              386**Total
                  assets**
              
              
              494
              
              
              503Shareholders'
                  equity
              
              
              228
              
              
              207Provisions
              
              
              6
              
              
              1Long-term
                  liabilities
              
              
              0
              
              
              0Current
                  liabilities
              
              
              260
              
              
              295**Total
                  shareholders' equity and liabilities**
              
              
              **494**
              
              
              503
 
 F-31
 At
        the end
        of 2005 no guarantees were issued for the benefit of joint ventures, neither
        by
        Volvo alone or jointly with other venturers. At the same date Volvo's share
        of
        contingent liabilities issued by its joint ventures amounted to 0 (6).
  2004
              2005Number
                  of
                employees
              of
                  which
                women,
                  %
              Number
                  of
                employees
              of
                  which
                women,
                  %**Average
                  number of employees**Shanghai
                  Sunwin Bus Corp.
              604
              21
              567
              17Xian
                  Silver Bus Corp.
              252
              12
              243
              14**Total
                  number of employees**
              **856**
              **18**
              **810**
              **16**
 
 
 **Note
        6 - Associated companies**
 The
        following table presents summarized financial information for the
        associated companies partly owned by Volvo. Volvo consolidate
        the associated companies according to the equity method. For more
        information about Volvo's shareholding, see .
 
 **Income
                  statement data**
              
              2004
              
              2005Net
                  sales
              
              
              5,620
              
              
              5,779Cost
                  of operations
              
              
              (5,449
              )
              
              (5,588
              )Financial
                  income and expense
              
              
              (9
              )
              
              (10
              )**Income
                  before taxes**
              
              
              **162**
              
              
              **181**Income
                  taxes
              
              
              (7
              )
              
              (11
              )**Income
                  of the period**
              
              
              **155**
              
              
              **170**Dec
                  31
              
              
              
              
              
              Dec
                  31**Balance
                  sheet data**
              
              
              2004
              
              
              2005Property,
                  plant and equipment, net
              
              
              2,058
              
              
              740Other
                  non-current assets
              
              
              75
              
              
              10Current
                  assets
              
              
              9,408
              
              
              8,979**Total
                  Assets**
              
              
              **11,541**
              
              
              **9,729**Shareholders'
                  equity
              
              
              922
              
              
              608Provisions
              
              
              56
              
              
              38Long-term
                  liabilities
              
              
              1,073
              
              
              160Current
                  liabilities
              
              
              9,490
              
              
              8,923**Total
                  Shareholders' equity and liabilities**
              
              
              **11,541**
              
              
              **9,729**
 
 
 F-32
 
 **Note
        7 - Segment reporting**
  **Reporting
        by business segment**
  The
        Volvo
        Group's operations are organized in eight business areas: Volvo Trucks,
        Renault Trucks, Mack Trucks, Buses, Construction Equipment, Volvo Penta,
        Volvo Aero and Financial Services. In addition to the eight business areas,
        there are other operations consisting mainly of business units that are designed
        to support the business areas' operations. The business units include
        Powertrain, 3P, Volvo IT, Logistics and Parts. Each business area, except
        for
        Financial Services, has total responsibility for its operating income, operating
        capital and operating cash flow. The Financial Services business area has
        responsibility for its net income and total balance sheet within certain
        restrictions and principles that are established centrally. The supervision
        and coordination of treasury and tax matters is organized centrally to obtain
        the benefits of a Group-wide approach. The legal structure of the Volvo
        Group is based on optimal handling of treasury, tax and administrative matters
        and, accordingly, differs from the operating structure.
   The
        business units are designated to support the business areas and are therefore
        not reportable business segments. In Volvo's external financial reporting,
        the
        financial results within the business units Powertrain and Parts are distributed
        to the respective business segments. As the three truck brands share product
        development, production and other activities in business units such as 3P
        and
        Powertrain and also share certain infrastructure in distribution such as
        dealers, the truck brands are reported as one business segment.
  **Net
                  sales**
              
              2004
              
              2005Trucks
              
              
              136,879
              
              
              155,396Buses
              
              
              12,722
              
              
              16,589Construction
                  Equipment
              
              
              29,360
              
              
              34,816Volvo
                  Penta
              
              
              9,057
              
              
              9,776Volvo
                  Aero
              
              
              6,925
              
              
              7,538Other
                  and eliminations
              
              
              7,228
              
              
              7,076**Volvo
                  Group excl Financial Services**
              
              
              **202,171**
              
              
              **231,191**Financial
                  Services
              
              
              9,598
              
              
              7,549Eliminations
              
              
              (693
              )
              
              1,819**Volvo
                  Group total**
              
              
              **211,076**
              
              
              **240,559**
 
 The
        above
        sales figures include internal sales in the following amounts:
 **Net
                  sales to Group companies**
              
              2004
              
              2005Trucks
              
              
              690
              
              
              752Buses
              
              
              377
              
              
              102Construction
                  Equipment
              
              
              162
              
              
              127Volvo
                  Penta
              
              
              27
              
              
              42Volvo
                  Aero
              
              
              43
              
              
              82Other
              
              
              9,440
              
              
              10,589Eliminations
              
              
              (10,739
              )
              
              (11,694
              )**Total
                  excl Financial Services**
              
              
              **0**
              
              
              **0**Financial
                  Services
              
              
              693
              
              
              755Eliminations
              
              
              (693
              )
              
              (755
              )**Total
                  net sales to Group companies**
              
              
              **0**
              
              
              **0**
  Internal
        sales between business areas are generally made at standard cost of sales,
        including calculated interest and product improvement expenses. Internal
        sales
        from service companies are generally made at market prices.
  **Operating
                  income**
              
              2004
              
              2005Trucks
              
              
              8,992
              
              
              11,717Buses
              
              
              158
              
              
              470Construction
                  Equipment
              
              
              1,898
              
              
              2,752Volvo
                  Penta
              
              
              940
              
              
              943Volvo
                  Aero
              
              
              403
              
              
              836Financial
                  Services
              
              
              1,365
              
              
              2,033Other
              
              
              923
              
              
              (600
              )**Volvo
                  Group total**
              
              
              **14,679**
              
              
              **18,151**
  F-33
 Operating
        income in 2004 included reversal of write-down of shares in Scania AB of 
915, which was reported in Other and write-down of shares in Henlys Group
        Plc of 95, which was reported in Buses.
  **Depreciation
                  and amortization**
              
              2004
              
              2005Trucks
              
              
              5,306
              
              
              5,307Buses
              
              
              219
              
              
              249Construction
                  Equipment
              
              
              627
              
              
              658Volvo
                  Penta
              
              
              122
              
              
              224Volvo
                  Aero
              
              
              391
              
              
              366Other
              
              
              220
              
              
              88**Total
                  excl Financial Services**
              
              
              **6,885**
              
              
              **6,892**Financial
                  Services
              
              
              3,117
              
              
              429Reclassification
                  Group versus segment Financial Services
              
              
              -
              
              
              2,573**Volvo
                  Group total**
              
              
              **10,002**
              
              
              **9,894**
 
 **Research
                  and development expenses**
              
              2004
              
              2005Trucks
              
              
              5,491
              
              
              5,200Buses
              
              
              484
              
              
              569Construction
                  Equipment
              
              
              1,033
              
              
              1,083Volvo
                  Penta
              
              
              311
              
              
              413Volvo
                  Aero
              
              
              209
              
              
              225Other
              
              
              86
              
              
              67**Volvo
                  Group total**
              
              
              **7,614**
              
              
              **7,557**
 
 **Income
                  from investments in associated companies**
              
              2004
              
              2005Trucks
              
              
              13
              
              
              (6
              )Buses
              
              
              1
              
              
              7Construction
                  Equipment
              
              
              -
              
              
              0Volvo
                  Penta
              
              
              -
              
              
              0Volvo
                  Aero
              
              
              (1
              )
              
              68Other
              
              
              (11
              )
              
              (637
              )**Volvo
                  Group excl Financial Services**
              
              
              **2**
              
              
              **(568**
              **)**Financial
                  Services
              
              
              25
              
              
              11**Volvo
                  Group total**
              
              
              **27**
              
              
              **(557**
              **)**
 
 **Total
                  assets**
              
              2004
              
              2005Operating
                  assets, excluding Financial Services: (1Trucks
              
              
              71,439
              
              
              83,908Buses
              
              
              8,017
              
              
              10,499Construction
                  Equipment
              
              
              16,858
              
              
              21,435Volvo
                  Penta
              
              
              3,242
              
              
              3,700Volvo
                  Aero
              
              
              8,695
              
              
              10,118Other
              
              
              3,881
              
              
              2,938**Total
                  operating assets excluding Financial Services**
              
              
              **112,132**
              
              
              **132,598**Interest-bearing
                  financial assets
              
              
              46,312
              
              
              43,939Tax
                  receivables
              
              
              6,259
              
              
              5,982Total
                  assets in Financial Services
              
              
              71,499
              
              
              85,849Other
                  and eliminations
              
              
              (12,234
              )
              
              (11,233
              )**Volvo
                  Group total**
              
              
              **223,968**
              
              
              **257,135**
  1)
        Defined
        as Total assets less Interest-bearing financial assets and Tax
        receivables.
  F-34
 **Total
                  shareholders' equity and liabilities**
              
              2004
              
              2005Operating
                  liabilities, excluding Financial Services: (1Trucks
              
              
              55,105
              
              
              62,675Buses
              
              
              3,324
              
              
              4,728Construction
                  Equipment
              
              
              6,602
              
              
              9,348Volvo
                  Penta
              
              
              1,620
              
              
              1,820Volvo
                  Aero
              
              
              3,695
              
              
              4,622Other
              
              
              2,788
              
              
              2,783**Total
                  operating liabilities excluding Financial
                  Services**
              
              
              **73,134**
              
              
              **85,976**Financial
                  liabilities
              
              
              28,402
              
              
              24,670Tax
                  liabilities
              
              
              1,608
              
              
              2,578Total
                  liabilities in Financial Services
              
              
              63,193
              
              
              76,214Other
                  and eliminations
              
              
              (12,524
              )
              
              (11,071
              )**Total
                  liabilities**
              
              
              **153,813**
              
              
              **178,367**Shareholders'
                  equity
              
              
              70,155
              
              
              78,768**Volvo
                  Group total**
              
              
              **223,968**
              
              
              **257,135**
 1)
        Defined
        as Total liabilities less financial liabilities and tax liabilities.
 
 **Investments
                  in associated companies**
              
              2004
              
              2005Trucks
              
              
              37
              
              
              47Buses
              
              
              20
              
              
              35Construction
                  Equipment
              
              
              -
              
              
              -Volvo
                  Penta
              
              
              -
              
              
              -Volvo
                  Aero
              
              
              37
              
              
              3Financial
                  Services
              
              
              172
              
              
              23Other
              
              
              647
              
              
              87**Volvo
                  Group total**
              
              
              **913**
              
              
              **195**
 
 **Capital
                  expenditures**
              
              2004
              
              2005Trucks
              
              
              5,030
              
              
              7,190Buses
              
              
              176
              
              
              250Construction
                  Equipment
              
              
              1,158
              
              
              906Volvo
                  Penta
              
              
              297
              
              
              243Volvo
                  Aero
              
              
              801
              
              
              904Other
              
              
              237
              
              
              762**Volvo
                  Group excl Financial Services**
              
              
              **7,699**
              
              
              **10,255**Financial
                  Services
              
              
              4,784
              
              
              386Reclassification
                  Group versus segment Financial Services
              
              
              -
              
              
              4,210**Volvo
                  Group total**
              
              
              **12,483**
              
              
              **14,851**
 
 F-35
 **Reporting
                  by geographical segment**
                **Net
                  sales**
              
              2004
              
              2005Europe
              
              
              119,077
              
              
              124,023North
                  America
              
              
              54,769
              
              
              69,743South
                  America
              
              
              7,338
              
              
              12,479Asia
              
              
              20,789
              
              
              22,699Other
                  markets
              
              
              9,103
              
              
              11,615**Volvo
                  Group total***
              
              
              **211,076**
              
              
              **240,559***of
                  which:Sweden
              
              
              14,606
              
              
              15,334United
                  States
              
              
              45,926
              
              
              59,254France
              
              
              26,900
              
              
              27,610
 
 **Total
                  assets**
              
              2004
              
              2005Sweden
              
              
              79,578
              
              
              86,793Europe
                  excluding Sweden
              
              
              77,909
              
              
              86,530North
                  America
              
              
              48,165
              
              
              60,846South
                  America
              
              
              6,526
              
              
              10,131Asia
              
              
              7,757
              
              
              9,460Other
                  markets
              
              
              4,033
              
              
              3,375**Volvo
                  Group total**
              
              
              **223,968**
              
              
              **257,135**
 
 **Capital
                  expenditures**
              
              2004
              
              2005Sweden
              
              
              3,690
              
              
              5,935Europe
                  excluding Sweden
              
              
              6,305
              
              
              5,770North
                  America
              
              
              1,835
              
              
              2,451South
                  America
              
              
              247
              
              
              296Asia
              
              
              362
              
              
              259Other
                  markets
              
              
              44
              
              
              140**Volvo
                  Group total**
              
              
              **12,483**
              
              
              **14,851**
 
 **Note
        8 - Other operating income and expenses**
 
 2004
              
              2005Gains/losses
                  on currency related forward and options contracts
              
              
              828
              
              
              (566
              )Exchange
                  rate differences on trade receivables and payables
              
              
              (86
              )
              
              481Gains/losses
                  on divestment of group companies
              
              
              69
              
              
              697Change
                  in allowances and write offs for doubtful receivables, customer
                  financing
              
              
              (545
              )
              
              (460
              )Change
                  in allowances, and write offs for doubtful receivables,
                  other
              
              
              37
              
              
              (133
              )Expenses
                  for industrial relocation of Renault Trucks Villaverde plant in
                  Spain
              
              
              (470
              )
              
              -Expenses
                  for closing Volvo Buses Heilbronn plant in Germany
              
              
              -
              
              
              (95
              )Volvo
                  profit sharing program
              
              
              (200
              )
              
              (419
              )Other
                  income and expenses
              
              
              (250
              )
              
              (95
              )**Total**
              
              
              **(618**
              **)**
              
              **(590**
              **)**
 
 F-36
 **Note
        9 - Income from investments in associated companies**
 Income
        from investments in associated companies are specified below:
 2004
              
              2005**Income/loss**JV
                  Fonderie Venissieux
              
              
              5
              
              
              9Aviation
                  Lease Finance
              
              
              27
              
              
              6Thomas
                  Hardie Commercials Ltd
              
              
              8
              
              
              5Merkavim
                  Metal Works Ltd
              
              
              1
              
              
              4Peach
                  County Holdings
              
              
              -
              
              
              (103
              )Other
                  companies
              
              
              (12
              )
              
              (1
              )**Subtotal**
              
              
              **29**
              
              
              **(80**
              **)****Revaluation
                  and write-down of shares**Peach
                  County Holding
              
              
              -
              
              
              (550
              )Other
                  companies
              
              
              (2
              )
              
              (2
              )**Subtotal**
              
              
              **(2**
              **)**
              
              **(552**
              **)****Gains
                  (losses) on sale of shares in associated
                  companies**Aviation
                  Lease Finance
              
              
              -
              
              
              71Other
                  companies
              
              
              -
              
              
              4**Subtotal**
              
              
              **0**
              
              
              **75****Total
                  income (loss) from investments in associated
                  companies**
              
              
              **27**
              
              
              **(557**
              **)**
 
 **Note
        10 - Income from other investments**
 2004
              
              2005**Dividends
                  received**Holdings
                  of Volvo Technology Transfer (1
              
              
              -
              
              
              11Other
              
              
              11
              
              
              2**Subtotal**
              
              
              **11**
              
              
              **13****Revaluation
                  and write downs of shares**Scania
                  AB
              
              
              915
              
              
              -Henlys
                  Group Plc
              
              
              (95
              )
              
              -Holdings
                  of Volvo Technology Transfer (1
              
              
              (13
              )
              
              -Smith
                  Land & Improvement (SABA Holding)
              
              
              (22
              )
              
              -Other
              
              
              (8
              )
              
              (2
              )**Subtotal**
              
              
              **777**
              
              
              **(2**
              **)****Gain
                  (loss) on divestment of shares**Holdings
                  of Volvo Technology Transfer (1
              
              
              1
              
              
              40Bilia
                  AB
              
              
              24
              
              
              -Other
              
              
              17
              
              
              (14
              )**Subtotal**
              
              
              **42**
              
              
              **26****Total**
              
              
              **830**
              
              
              **37**
 1)
        A Volvo
        venture-capital company.
 
 F-37
 **Note
        11 - Other financial income and expenses**
  Other
        financial income and expenses in 2004 include a write-down of 1,196, pertaining
        to  the restructuring of Henlys Group Plc, note 15. The net
        amount of exchange losses were 20 (1). As from 2005 revaluation of derivatives
        related to Volvo's funding portfolio is accounted for as other financial
        income
        and expenses, 251 (-).
  **Note
        12 - Income taxes**
 Income
        taxes were distributed as follows:
 2004
              
              2005Current
                  taxes relating to the period
              
              
              (1,854
              )
              
              (2,568
              )Adjustment
                  of current taxes for prior periods
              
              
              288
              
              
              147Deferred
                  taxes originated or reversed during the period
              
              
              (1,662
              )
              
              (2,933
              )Recognition and
                  derecognition of deferred tax assets
              
              
              99
              
              
              446**Total
                  income taxes**
              
              
              **(3,129**
              **)**
              
              **(4,908**
              **)**
 Provisions
        have been made for estimated tax charges that may arise as a result of prior
        tax
        audits in the Volvo Group. Tax claims for which no provision has been deemed
        necessary of approximately 695 (1,433) were reported as contingent
        liabilities.
 
 Deferred
        taxes relate to income taxes payable or recoverable in future periods in
        respect
        of taxable temporary differences, deductible temporary differences, unused
        tax
        loss carryforwards or unused tax credit carryforwards.  Deferred tax assets
        are recognized to the extent that it is probable that the amount can be utilized
        against future taxable income. At December 31, 2005, the
        valuation allowance attributable to deductible temporary differences, unused
        tax
        loss carryforwards and unused tax credit carryforwards for which no deferred
        tax
        asset was recognized amounted to 2,972 (2,592).
 
 At
        year-end 2005, the Group had unused tax loss carryforwards of about 6,100
        (10,100), of which approximately 1,400 (1,900) will expire within 5
        years.
 
 The
        Swedish corporate income tax rate is 28%. The table below shows the principal
        reasons for the difference between this rate and the Group's tax rate, based
        on
        income after financial items.
 
 2004,
                  %
              
              2005,
                  %Swedish
                  corporate income tax rates
              
              
              28
              
              
              28Difference
                  in tax rate in various countries
              
              
              3
              
              
              3Capital
                  gains
              
              
              (3
              )
              
              (1
              )Other
                  non-taxable income
              
              
              (3
              )
              
              (1
              )Other
                  non-deductible expenses
              
              
              2
              
              
              1Adjustment
                  of current taxes for prior years
              
              
              (2
              )
              
              (1
              )Recognition and
                  derecognition of deferred tax assets
              
              
              (1
              )
              
              (2
              )Other,
                  net
              
              
              0
              
              
              0Income
                  tax rate for the Group
              
              
              **24**
              
              
              **27**
 
 **Specification
                  of deferred tax assets and tax liabilities**
              
              2004
              
              2005Deferred
                  tax assets:Unused
                    tax loss carryforwards
              
              
              3,223
              
              
              2,125Other
                  unused tax credits
              
              
              259
              
              
              295Intercompany profit in inventories
              
              
              294
              
              
              544Valuation
                  allowance for doubtful receivables
              
              
              587
              
              
              644Provisions
                  for warranties
              
              
              966
              
              
              1,449Provision
                  for residual value risks
              
              
              544
              
              
              576Provisions
                  forpost-employment benefits
              
              
              4,366
              
              
              4,541Provisions
                  for restructuring measures
              
              
              220
              
              
              120Fair
                  value of derivative instruments:Change
                  of hedge reserves
              
              
              -
              
              
              224Other
                  deductible temporary differences
              
              
              2,347
              
              
              2,670**12,806**
              
              
              **13,188**Valuation
                  allowance
              
              
              (2,592
              )
              
              (2,972
              )Deferred
                  tax assets after deduction for valuation allowance
              
              
              **10,214**
              
              
              **10,216**Deferred
                  tax liabilities:Accelerated
                  depreciation on property,plant
                  and equipment
              
              
              2,047
              
              
              2,347Accelerated
                  depreciation on leasing assets
              
              
              815
              
              
              1,297LIFO
                  valuation of inventories
              
              
              160
              
              
              217Capitalized
                  product and software development
              
              
              1,445
              
              
              1,970Untaxed
                  reserves
              
              
              126
              
              
              112Fair
                  value of derivative instruments:Change
                  of hedge reserves
              
              
              -
              
              
              95Other
                  taxable temporary differences
              
              
              1,058
              
              
              1,111**5,651**
              
              
              **7,149**Deferred
                  tax assets, net (1
              
              
              **4,563**
              
              
              **3,067**
 1)
        Deferred taxes are partially recognized in the balance sheet on a net basis
        after taking into account offsetting possibilities.
  F-38
 The
        cumulative amount of undistributed earnings in foreign subsidiaries, which
        Volvo currently intends to indefinitely reinvest outside of Sweden and upon
        which deferred income taxes have not been provided is approximately 16,810
        (12,211) at year end. There are different taxation rules depending on country,
        some which have no tax effect and some countries with withholding taxes.
        how
        Volvo handles equity currency risk.
  
 **Note
        13 - Minority interests**
 Minority
        interests in income (loss) for the period and in shareholders'
        equity consisted mainly of the minority interests in Volvo Aero Norge AS
        (22%), in Wuxi da Hao Power Co, Ltd (30%) and in Berliet Maroc S.A (30%).
 
 
 **Note
        14 - Intangible and tangible assets**
 **Acquisition
                    costs**
                
                Value
                    in
                  balance
                  sheet
                  2004
                
                Capital
                  expendi-
                  tures
                
                Sales/
                  scrapping
                
                Acquired
                  and
                    divest-
                  ed
                    opera-
                  tions(5
                
                Trans-
                  lation
                  differences
                
                Reclassi-
                  fications
                  and
                  other
                
                Value
                    in
                  balance
                  sheet
                  2005Goodwill
                    (1
                
                
                10,321
                
                
                -
                
                
                -
                
                
                20
                
                
                721
                
                
                10
                
                
                11,072Entrance
                    fees, aircraftengine
                    programs
                
                
                2,758
                
                
                374
                
                
                (34
                )
                
                -
                
                
                15
                
                
                (142
                )
                
                2,971Product
                    and software development
                
                
                8,585
                
                
                3,004
                
                
                (28
                )
                
                -
                
                
                189
                
                
                67
                
                
                11,817Other
                    intangible assets
                
                
                1,734
                
                
                95
                
                
                (13
                )
                
                -
                
                
                55
                
                
                (87
                )
                
                1,784**Total
                    intangible assets**
                
                
                **23,398**
                
                
                **3,473**
                
                
                **(75**
                **)**
                
                **20**
                
                
                **980**
                
                
                **(152**
                **)**
                
                **27,644**Buildings
                
                
                16,928
                
                
                742
                
                
                (113
                )
                
                (181
                )
                
                1,114
                
                
                57
                
                
                18,547Land
                    and land improvements
                
                
                3,988
                
                
                290
                
                
                (91
                )
                
                (7
                )
                
                402
                
                
                42
                
                
                4,624Machinery
                    and equipment (2
                
                
                39,530
                
                
                4,685
                
                
                (1,750
                )
                
                (457
                )
                
                2,606
                
                
                567
                
                
                45,181Construction
                    in progress
                  including
                    advance payments
                
                
                2,435
                
                
                1,112
                
                
                (6
                )
                
                -
                
                
                185
                
                
                (659
                )
                
                3,067Total
                    property, plant
                  and
                    equipment
                
                
                62,881
                
                
                6,829
                
                
                (1,960
                )
                
                (645
                )
                
                4,307
                
                
                7
                
                
                71,419Assets
                    under operating leases
                
                
                30,999
                
                
                4,549
                
                
                (3,770
                )
                
                -
                
                
                2,988
                
                
                (2,767
                )
                
                31,999**Total
                    tangible assets**
                
                
                **93,880**
                
                
                **11,378**
                
                
                **(5,730**
                **)**
                
                **(645**
                **)**
                
                **7,295**
                
                
                **(2,760**
                **)**
                
                **103,418**
 **Accumulated**
                    **depreciation
                      and**
                    **amortization**
                  
                  Value
                      in
                    balance
                    sheet
                    2004
                  
                  Deprecia-
                    tion
                      and
                    amortiza-
                    tion
                      (3
                  
                  Sales/
                    scrapping
                  
                  Acquired
                    and
                    divested
                    operations
                    (5
                  
                  Trans-
                    lation
                    differ-
                    ences
                  
                  Reclass-
                    ifications
                    and
                    other
                  
                  Value
                      in
                    balance
                    sheet
                    2005
                  
                  Net
                    carrying
                    value
                    in
                      balance
                    sheet
                      (4
                    2005Goodwill
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  11,072Entrance
                      fees,aircraft
                      engine programs
                  
                  
                  1,386
                  
                  
                  104
                  
                  
                  -
                  
                  
                  -
                  
                  
                  2
                  
                  
                  (55
                  )
                  
                  1,437
                  
                  
                  1,534Product
                      and software development
                  
                  
                  3,413
                  
                  
                  1,160
                  
                  
                  -
                  
                  
                  -
                  
                  
                  60
                  
                  
                  57
                  
                  
                  4,690
                  
                  
                  7,127Other
                      intangible assets
                  
                  
                  987
                  
                  
                  145
                  
                  
                  (13
                  )
                  
                  -
                  
                  
                  42
                  
                  
                  (65
                  )
                  
                  1,096
                  
                  
                  688**Total
                      intangible assets**
                  
                  
                  **5,786**
                  
                  
                  **1,409**
                  
                  
                  **(13**
                  **)**
                  
                  -
                  
                  
                  **104**
                  
                  
                  **(63**
                  **)**
                  
                  **7,223**
                  
                  
                  **20,421**Buildings
                  
                  
                  6,732
                  
                  
                  734
                  
                  
                  (37
                  )
                  
                  8
                  
                  
                  414
                  
                  
                  (37
                  )
                  
                  7,814
                  
                  
                  10,733Land
                      and land improvements
                  
                  
                  441
                  
                  
                  54
                  
                  
                  (2
                  )
                  
                  1
                  
                  
                  44
                  
                  
                  (17
                  )
                  
                  521
                  
                  
                  4,103Machinery
                      and equipment (2
                  
                  
                  24,557
                  
                  
                  3,582
                  
                  
                  (1,459
                  )
                  
                  (259
                  )
                  
                  1,569
                  
                  
                  93
                  
                  
                  28,083
                  
                  
                  17,098Construction
                      in progress,including
                      advance payments
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  3,067Total
                      property, plant
                    and
                      equipment
                  
                  
                  31,730
                  
                  
                  4,370
                  
                  
                  (1,498
                  )
                  
                  (250
                  )
                  
                  2,027
                  
                  
                  39
                  
                  
                  36,418
                  
                  
                  35,001Assets
                      under operating leases
                  
                  
                  11,465
                  
                  
                  4,115
                  
                  
                  (1,788
                  )
                  
                  -
                  
                  
                  1,118
                  
                  
                  (3,750
                  )
                  
                  11,160
                  
                  
                  20,839**Total
                      tangible assets**
                  
                  
                  **43,195**
                  
                  
                  **8,485**
                  
                  
                  **(3,286**
                  **)**
                  
                  **(250**
                  **)**
                  
                  **3,145**
                  
                  
                  **(3,711**
                  **)**
                  
                  **47,578**
                  
                  
                  **55,840**
 
 1) Includes
        on the date of  IFRS adoption, acquisition costs of 14,184 and
        accumulated amortization of 3,863.
  2) 
        Machinery and equipment pertains mainly to production equipment.
  3) 
        Includes write-downs, 72.
  4)  Acquisition
        costs less accumulated depreciation, amortization and write-downs.
  5)
        Includes subsidiaries and joint ventures that previously were accounted for
        according to the equity method.
  **Depreciation
                  and amortization by type of asset**
              
              2004
              
              2005Intangible
                  assets
              
              
              1,396
              
              
              1,409Property,
                  plant and equipment
              
              
              4,182
              
              
              4,370Assets
                  under operating leases
              
              
              4,425
              
              
              4,115**Total**
              
              
              **10,003**
              
              
              **9,894**
  
 **Capital
                  expenditures by type of asset**
              
              2004
              
              2005Intangible
                  assets
              
              
              2,287
              
              
              3,473Property,
                  plant and equipment
              
              
              5,790
              
              
              6,829Assets
                  under operating leases
              
              
              4,406
              
              
              4,549**Total**
              
              
              **12,483**
              
              
              **14,851**
  F-39
  **Goodwill**
  Annually,
        in connection with the annual closing, or more frequently if required, Volvo’s
        operations are evaluated and compared with its carrying value in order to
        identify any impairment of goodwill assets. Volvo’s evaluation model is based on
        a discounted cash-flow model. Evaluation is made on cash-generating units
        with
        reciprocal synergies, identified as Volvo’s operational areas or business areas.
        Goodwill assets are allocated to these operational areas on the basis of
        anticipated future utility. The evaluation is based on management’s best
        judgment of the operations’ development. The basis for this judgment is
        long-term forecasts of the market’s growth in relation to the development of
        Volvo’s operations. In the model, Volvo is expected to maintain stable capital
        efficiency over time. The evaluation is made on nominal value and the general
        rate of inflation, in line with the European target, is used. Volvo uses
        a
        discounting factor calculated to 12% before tax for 2005.
  During
        2005, the value of Volvo’s operations has exceeded the carrying value of
        goodwill for all operational areas, and accordingly, no impairment was
        recognized.  For the specified cash generating units Volvo has
        evaluated the value of goodwill with reasonable changed assumptions, negatively
        adjusted with one percentage point, where of no adjustment, each by each,
        would
        have such a big effect that there would be an impairment.
  **Goodwill
                  per Business Area**
              
              **2005**Volvo
                  Trucks
              
              
              4,096Renault
                  Trucks
              
              
              2,007Mack
                  Trucks
              
              
              982Buses
              
              
              1,134Construction
                  Equipment
              
              
              2,480Other
              
              
              373**Total
                  goodwill value**
              
              
              **11,072**
  Capital
        expenditures for property, plant and equipment approved but not yet implemented
        at December 31, 2005, amounted to SEK 7.8 billion (8.2).
  **Investment
        property**
  Investment
        property is property owned for the purpose of obtaining rental income and/or
        appreciation in value. The acquisition cost of investment property was
        1,534 (1.859) at year-end. Capital expenditures during 2005 amounted to 15
        (20). Accumulated depreciation was 463 (472) at year-end, whereof 53 (68)
        during
        2005. The estimated fair value of  investment property was SEK 1.9
        billion  (2,2) at year-end, based on the yield. The required return is
        based on current property market conditions for comparable properties in
        comparable locations. All investment properties were leased out during the
        year. Net income for the year was affected by 272 (332) in rental income
        from investment properties and 45 (66) in direct costs.
  **Note
        15 - Shares and participations**
  The
        market
        values of Volvo's holdings of shares and participations in listed companies
        as
        of December 31, 2005 are shown in the table below. As from 2005 shares
        in listed companies would be revaluated to current market value. The revaluation
        is booked to Equity and amounts to 83 (-).
  Carrying
                  value
              
              Market
                  valueDeutz
                  AG
              
              
              253
              
              
              253**Total
                  holdings in listed companies**
              
              
              **253**
              
              
              **253**Holdings
                  in non-listed companies (1
              
              
              303
              
              
              -**Total
                  shares and participations in other companies**
              
              
              **556**
              
              
              **-**1)
                  reported at cost
  F-40
  **Peach
        County Holdings Inc**
  In
        2004,
        as a part of the restructuring of Henlys Group Plc, see note 11,  the
        convertible debenture loan issued to Henlys was partly converted into shares
        in
        Peach County Holdings (owner of school bus manufacturer Blue Bird). Volvo’s
        holding in Peach County Holdings Inc is 42,5%. During
        the
        fourth quarter of 2005 Volvo wrote down its shareholding in Peach County
        Holdings, Inc. by about SEK 550 M. At December 31, 2005 Volvo held 42.5%
        of the
        US-based company, which in turn owns the American school bus manufacturer
        Blue
        Bird. Since its reconstruction in the preceding year, Blue Bird has not
        developed well. The write-down was made as a consequence of Volvo’s decision not
        to participate in continued financing efforts. After the write-down, the
        value
        is zero. In January 2006, Peach County Holdings entered into reconstruction
        proceedings (Chapter 11) and as a consequence of Volvo choosing not to
        participate in the continued reconstruction, Volvo’s shares in the company were
        cancelled.
  **Småföretagarinvest
        AB (previously Arbustum Invest AB)**
  In
        2005,
        Volvo's holding in Småföretagarinvest AB  decreased to 17% and the company
        is no longer considered as an associated company.
  **Group
                    holdings of shares**
                  **and
                    participations**
                  **in
                    non-Group companies**
                
                Registration
                  number
                
                Percentage
                  holding
                
                Dec
                    31, 2004
                  Carrying
                    value
                  SEK
                    M
                
                Dec
                    31, 2005
                  Carrying
                    value
                  SEK
                    M**Shares
                    in associated companies, equity method of
                    accounting**Blue
                    Chip Jet HB, Sweden
                
                
                969639-1011
                
                
                40
                
                
                90
                
                
                85Merakvim
                    Metal Works Ltd, Israel
                
                
                -
                
                
                27
                
                
                20
                
                
                26Diamond
                    Finance Ltd, Great Britain
                
                
                -
                
                
                40
                
                
                -
                
                
                23Thomas
                    Hardie Commercials Ltd, Great Britain
                
                
                -
                
                
                24
                
                
                10
                
                
                14Fonderie
                    Venissieus, France
                
                
                -
                
                
                49
                
                
                15
                
                
                21Quingdao
                    Sunwin Bus Corp, China
                
                
                
                
                
                21
                
                
                -
                
                
                9Arabian
                    Vehicle & Truck Industry Ltd, Saudi Arabia
                
                
                -
                
                
                25
                
                
                9
                
                
                9Peach
                    County Holdings Inc, USA
                
                
                -
                
                
                43
                
                
                556
                
                
                0Aviation
                    Lease Finance, USA
                
                
                -
                
                
                49
                
                
                172
                
                
                -Småföretagarinvest
                    AB (previously Arbustum Invest AB), Sweden
                
                
                -
                
                
                -
                
                
                35
                
                
                -Other
                    holdings
                
                
                -
                
                
                -
                
                
                6
                
                
                8**Total
                    shares and participations in associated companies
                    (1**
                
                
                
                
                
                
                
                
                **913**
                
                
                **195****Shares
                    and participations in other companies**Deutz
                    AG, Germany (2
                
                
                -
                
                
                7
                
                
                670
                
                
                253Småföretagarinvest
                    AB (previously Arbustum Invest AB), Sweden
                
                
                556543-4247
                
                
                17
                
                
                -
                
                
                32Other
                    holdings
                
                
                
                
                
                
                
                
                420
                
                
                271**Total
                    shares and participations in other companies**
                
                
                
                
                
                
                
                
                **1,090**
                
                
                **556****Carrying value
                    in accordance with Group balance sheet**
                
                
                
                
                
                
                
                
                **2,003**
                
                
                **751**
  1) Volvo’s share
        of shareholders' equity in associated companies (incl. equity in untaxed
        reserves) amounted to 195; (913). Excess values amounted to 0
        (0).
  2)
        Deutz
        AG is valued to market value as from January 1, 2005 according to IAS 39,
        more
        information note 1 Accounting principles and note 3 Effects of IFRS . The
        transition effect has been charged to equity.
  F-41
  **Changes
                  in the Volvo Group’s holdings of shares and
                  participations:**
              
              2004
              
              2005Balance
                  sheet, December 31, preceding year
              
              
              22,206
              
              
              2,003IFRS
                  transition effect
              
              
              -
              
              
              (494
              )Acquisitions
                  and divestments, net
              
              
              (20,740
              )
              
              (268
              )Net
                  of write-downs/revaluations
              
              
              772
              
              
              (552
              )New
                  issue of shares and shareholders’ contributions
              
              
              45
              
              
              28Share
                  of income in associated companies
              
              
              29
              
              
              (80
              )Change
                  in Group structure
              
              
              (280
              )
              
              (90
              )Fair
                  value of shares
              
              
              -
              
              
              83Translation
                  differences
              
              
              (29
              )
              
              159Dividends
              
              
              0
              
              
              (2
              )Other
              
              
              0
              
              
              (36
              )**Balance
                  sheet, December 31**
              
              
              **2,003**
              
              
              **751**
 
 **Note
        16 - Long-term customer-financing receivables**
 
 2004
              
              2005Installment
                  credits
              
              
              14,726
              
              
              17,865Financial
                  leasing
              
              
              10,334
              
              
              12,737Other
                  receivables
              
              
              127
              
              
              582Total
              
              
              **25,187**
              
              
              **31,184**
 
 **Note
        17 - Other long-term receivables**
 
 2004
              
              2005Other
                  loans to external parties
              
              
              1,377
              
              
              909Prepaid
                  pensions
              
              
              364
              
              
              524Other
                  receivables
              
              
              1,022
              
              
              1,689Total
              
              
              **2,763**
              
              
              **3,122**
  **Note
        18 - Inventories**
 
 2004
              
              2005Finished
                  products
              
              
              17,861
              
              
              21,617Production
                  materials, etc.
              
              
              10,737
              
              
              12,320Total
              
              
              **28,598**
              
              
              **33,937**
 Inventories
        recognised as cost of sale during the period, 172,567
        (150,800).
  **Increase
                  (decrease) in allowance for inventory
                  obsolescence**
              
              2004
              
              2005Balance
                  sheet, December 31, preceding year
              
              
              2,246
              
              
              2,124Increase
                  in allowance for inventory obsolescence charged to income
              
              
              244
              
              
              333Scrapping
              
              
              (226
              )
              
              (276
              )Translation
                  differences
              
              
              (85
              )
              
              177Reclassifications,
                  etc.
              
              
              (55
              )
              
              43Balance
                  sheet, December 31
              
              
              **2,124**
              
              
              **2,401**
 
 F-42
 
 **Note
        19 - Short-term customer-financing receivables**
 
 2004
              
              2005Installment
                  credits
              
              
              10,382
              
              
              13,174Financial
                  leasing
              
              
              5,488
              
              
              7,132Dealer financing
              
              
              8,850
              
              
              12,067Other
                  receivables
              
              
              1,286
              
              
              909Total
              
              
              **26,006**
              
              
              **33,282**
 
 
 **Note
        20 - Other short-term receivables**
 2004
              
              2005Accounts
                  receivable
              
              
              20,137
              
              
              24,784Prepaid
                  expenses and accrued income
              
              
              3,203
              
              
              3,509VAT
                  receivables
              
              
              1,561
              
              
              1,933Loans
                  to external parties
              
              
              1,642
              
              
              458Other
                  receivables
              
              
              3,321
              
              
              4,780**Total,
                  after deduction of valuation allowances for doubtful accounts receivable**
              
              
              **29,864**
              
              
              **35,464**
  
 **Change
                  of valuation allowances for doubtful accounts
                  receivable**
              
              2004
              
              2005Balance
                  sheet, December 31, preceding year
              
              
              932
              
              
              837Change
                  of valuation allowance charged to income
              
              
              (30
              )
              
              2Utilization
                  of valuation allowance related to actual losses
              
              
              (174
              )
              
              (90
              )Acquired
                  and divested operations
              
              
              1
              
              
              9Translation
                  differences
              
              
              17
              
              
              95Reclassifications,
                  etc.
              
              
              91
              
              
              53Balance
                  sheet, December 31
              
              
              **837**
              
              
              **906**
 
 **Note
        21 - Marketable securities**
 Marketable
        securities consist mainly of interest-bearing securities, distributed as
        shown
        below:
 2004
              
              2005Government
                  securities
              
              
              6,354
              
              
              4,226Banks
                  and financial institutions
              
              
              371
              
              
              464Real
                  estate financial institutions
              
              
              19,220
              
              
              24,020Other
              
              
              10
              
              
              124Total
              
              
              **25,955**
              
              
              **28,834**
 
 **Note
        22 - Cash and cash equivalents**
 2004
              
              2005Cash
                  in banks
              
              
              5,787
              
              
              5,652Time
                  deposits in banks
              
              
              3,004
              
              
              2,461Total
              
              
              **8,791**
              
              
              **8,113**
 
 F-43
 **Note
        23 - Shareholders' equity**
 The
        share
        capital of the Parent Company is divided into two series of shares: A and
        B.
        Both series carry the same rights, except that each Series A share carries
        the
        right to one vote and each Series B share carries the right to one tenth
        of a
        vote. The shares quota value is SEK 6.00.
  Total share
        capital by year end 2004 amounted to 2,649 and was based on
        441,520,885 registered shares. During 2005 share capital was reduced by 95
        through cancellation without repayment of 3,084,619 Series A shares and
        12,752,222 Series B shares. After reduction share capital amounts to 2,554
        and is based on 425,684,044 registered shares.
  The
        total
        number of registered shares by year end 2005 amounted to 425,684,044. Volvo
        held 5% of the registered shares at year end 2005,
        21,220,535 shares whereof Series A shares 4,145,627 and Series B shares
        17,074,908. At year end 2004, Volvo held 7% of the registered shares, 31,391,043
        shares whereof Series A shares 7,075,246 and Series B shares
        24,315,797. The total number of outstanding Volvo shares by year end
        2005 amounted to 404,463,509 whereof Series A shares 131,374,699
        and Series B shares 273,088,810. The average number of outstanding
        shares was 405,242,037 in 2005.
  Cash
        dividend decided by the Annual General Meeting 2005 was 12:50 (8:00) per
        share
        or total 5,055 (3,356).
  Unrestricted
        equity in the Parent Company at December 31, 2005 amounted to
        41,220.
  **Changes
                  in outstanding Volvo shares**Balance
                  December 31, 2004
              
              
              410,129,842Buy-back
                  of shares in 2005
              
              
              (5,730,000
              )Share-based
                  incentive program
              
              
              63,667**404,463,509**
 
 **Note
        24 - Provisions for post-employment benefits**
 Post-employment
        benefits, such as pensions, healthcare and other benefits are mainly settled
        by
        means of regular payments to independent authorities or bodies that assume
        pension obligations and administer pensions through defined contribution
        plans.
        The remaining post-employment benefits are defined benefit plans; that is,
        the
        obligations remain within the Volvo Group or are secured by own pension
        foundations. Costs and the obligations at the end of period for defined benefit
        plans are calculated based on actuarial assumptions and measured on a discounted
        basis. The Volvo Group defined benefits plans relate mainly to subsidiaries
        in
        the US and comprise both pensions and other benefits, such as healthcare.
        Other
        large-scale defined benefit plans apply for salaried employees in Sweden
        (mainly
        through the Swedish ITP pension plan) and employees in France and Great Britain.
        See note 1 for further information about the accounting principles.
 
 The
        following tables disclose information about defined benefit plans in the
        Volvo
        Group.Volvo report the difference between the obligations and the plan assets
        adjusted for actuarial gains and losses in the balance sheet.  The
        information refers to assumptions applied for actuarial calculations, periodical
        costs and the value of obligations and plan assets at year-end. The tables
        also
        include reconciliation of obligations and plan assets during the year and
        the
        difference between fair values and carrying amounts reported on the
        balance sheet date.
 
 **Assumptions
                  applied for**
                **actuarial
                  calculations**
              
              2004
                December
                  31
              
              2005
                December
                  31**Sweden**Discount
                  rate
              
              
              5.0
              
              
              4.0Expected
                  return on plan assets (1
              
              
              6.0
              
              
              6.0Expected
                  salary increases
              
              
              3.2
              
              
              3.2**United
                  States**Discount
                  rate
              
              
              5.75
              
              
              5.75Expected
                  return on plan assets (1
              
              
              7.65
              
              
              7.65Expected
                  salary increases
              
              
              3.5
              
              
              3.5
  F-44
  **France**Discount
                  rate
              
              
              4.75
              
              
              4.0Expected
                  salary increases
              
              
              3.0
              
              
              3.0**Great
                  Britain**Discount
                  rate
              
              
              5.25
              
              
              4.8Expected
                  return on plan assets (1
              
              
              6.25
              
              
              5.2-6.5Expected
                  salary increases
              
              
              3.5
              
              
              3.8-4.0
 
 1)
        Applicable for the following accounting period. These assumptions reflect
        the
        expected long-term return rate on plan assets, based upon historical yield
        rates for different categories of investments and weighted in accordance
        with
        the foundation's investment policy. The expected return has been calculated
        net
        of administrative expenses and applicable taxes.
 
 **Pension
                  costs**
              
              2004
              
              2005Current
                  service costs
              
              
              616
              
              
              788Interest
                  costs
              
              
              1,306
              
              
              1,315Expected
                  return on plan assets
              
              
              (931
              )
              
              (1,133
              )Actuarial
                  gains and losses (1
              
              
              (17
              )
              
              (107
              )Past
                  service costs-
                  Unvested
              
              
              7
              
              
              (4
              )-
                  Vested
              
              
              38
              
              
              (20
              )Curtailments
                  and settlements
              
              
              (28
              )
              
              (362
              )Termination
                  benefits
              
              
              729
              
              
              124**Pension
                  costs for defined benefit plans**
              
              
              **1,720**
              
              
              **601**Pension
                  costs for defined contribution plans
              
              
              2,681
              
              
              3,165**Total
                  pension costs**
              
              
              **4,401**
              
              
              **3,736**
  1)
        For
        each plan, actuarial gains and losses are reported as income or
        expenses, when the accumulated amount exceeds the so called corridor. The
        income
        or expenses are then recognized over the expected average remaining
        service period of the employees.
  **Costs
                  for post-employment benefits other than pensions**
              2004
              2005Current
                  service costs
              196
              188Interest
                  costs
              349
              323Expected
                  return on plan assets
              (12)
              (15)Actuarial
                  gains and losses (1
              6
              1Past
                  service costs-
                  Unvested
              (1)
              (1)-
                  Vested
              5
              4Curtailments
                  and settlements
              -
              0Termination
                  benefits
              47
              24**Total
                  costs for post-employment benefits other than
                  pensions**
              **590**
              **524**
  1)
        Actuarial gains and losses are for each plan reported as income or expenses,
        when the accumulated amount exceed the so called corridor. The income or
        expenses are then recognized over the expected average remaining service
        period
        of the employees.
  F-45
 An
        increase of one percentage point per year in healthcare costs would change
        the
        accumulated post-employment benefit obligation as of December 31, 2005 by
        approximately 208, and the post-employment benefit expense by approximately
        19.
        A decrease of 1% would decrease the accumulated value of obligations by
        about 198 and reduce costs by approximately 16.
 
 Calculations
        made as of December 31, 2005 show an annual increase of 10.0% in the weighted
        average per capita costs of covered healthcare benefits; it is assumed that
        the
        percentage will decline gradually to 5% and then remain at that
        level.
  **Obligations
                  in defined benefit plans**
              
              Sweden
                Pensions
              
              United
                States
                Pensions
              
              France
                Pensions
              
              Great
                Britain
                Pensions
              
              US
                Other
                benefits
              
              Other
                plans
              
              Total**Obligations
                  at January 1, 2004**
              
              
              **5,332**
              
              
              **10,707**
              
              
              **2,333**
              
              
              **2,986**
              
              
              **6,278**
              
              
              **1,595**
              
              
              **29,231**Acquisitions,
                  divestments and other changes
              
              
              140
              
              
              -
              
              
              (85
              )
              
              138
              
              
              -
              
              
              -
              
              
              **193**Service
                  costs
              
              
              176
              
              
              206
              
              
              19
              
              
              82
              
              
              193
              
              
              136
              
              
              **812**Interest
                  costs
              
              
              280
              
              
              668
              
              
              115
              
              
              172
              
              
              348
              
              
              72
              
              
              **1,655**Unvested
                  past service costs
              
              
              -
              
              
              3
              
              
              (66
              )
              
              -
              
              
              -
              
              
              -
              
              
              **(63**
              **)**Vested
                  past service costs
              
              
              (46
              )
              
              66
              
              
              -
              
              
              -
              
              
              -
              
              
              22
              
              
              **42**Termination
                  benefits
              
              
              88
              
              
              -
              
              
              205
              
              
              -
              
              
              -
              
              
              483
              
              
              **776**Curtailments
                  and settlements
              
              
              (35
              )
              
              (5
              )
              
              -
              
              
              -
              
              
              -
              
              
              35
              
              
              **(5**
              **)**Employee
                  contributions
              
              
              -
              
              
              -
              
              
              -
              
              
              30
              
              
              -
              
              
              1
              
              
              **31**Actuarial
                  gains (-) and losses (+)
              
              
              573
              
              
              683
              
              
              74
              
              
              215
              
              
              364
              
              
              39
              
              
              **1,948**Exchange
                  rate translation
              
              
              -
              
              
              (1,103
              )
              
              (19
              )
              
              (76
              )
              
              (576
              )
              
              29
              
              
              **(1,745**
              **)**Benefits
                  paid
              
              
              (271
              )
              
              (704
              )
              
              (497
              )
              
              (101
              )
              
              (532
              )
              
              (124
              )
              
              **(2,229**
              **)****Obligations
                  at December 31, 2004**
              
              
              **6,237**
              
              
              **10,521**
              
              
              **2,079**
              
              
              **3,446**
              
              
              **6,075**
              
              
              **2,288**
              
              
              **30,646**Acquisitions,
                  divestments and other changes
              
              
              (125
              )
              
              81
              
              
              -
              
              
              -
              
              
              6
              
              
              (1
              )
              
              **(39**
              **)**Service
                  costs
              
              
              203
              
              
              304
              
              
              37
              
              
              80
              
              
              184
              
              
              169
              
              
              **977**Interest
                  costs
              
              
              303
              
              
              637
              
              
              97
              
              
              195
              
              
              321
              
              
              83
              
              
              **1,636**Unvested
                  past service costs
              
              
              -
              
              
              3
              
              
              -
              
              
              (12
              )
              
              -
              
              
              -
              
              
              **(9**
              **)**Vested
                  past service costs
              
              
              (72
              )
              
              44
              
              
              -
              
              
              -
              
              
              1
              
              
              11
              
              
              **(16**
              **)**Termination
                  benefits
              
              
              104
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              44
              
              
              **148**Curtailments
                  and settlements
              
              
              (371
              )
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              **(371**
              **)**Employee
                  contributions
              
              
              -
              
              
              -
              
              
              -
              
              
              34
              
              
              -
              
              
              (2
              )
              
              **32**Actuarial
                  gains (-) and losses (+)
              
              
              810
              
              
              281
              
              
              (12
              )
              
              714
              
              
              (66
              )
              
              151
              
              
              **1,878**Exchange
                  rate translation
              
              
              -
              
              
              2,171
              
              
              92
              
              
              287
              
              
              1,222
              
              
              238
              
              
              **4,010**Benefits
                  paid
              
              
              (248
              )
              
              (763
              )
              
              (435
              )
              
              (109
              )
              
              (592
              )
              
              (224
              )
              
              **(2,371**
              **)****Obligations
                  at December 31, 2005**
              
              
              **6,841**
              
              
              **13,279**
              
              
              **1,858**
              
              
              **4,635**
              
              
              **7,151**
              
              
              **2,757**
              
              
              **36,521**of
                  whichFunded
                  defined benefit plans
              
              
              6,342
              
              
              12,962
              
              
              -
              
              
              4,135
              
              
              3,772
              
              
              1,744
              
              
              28,955
  F-46
 **Fair
                  value of plan assets in funded plans**
              
              Sweden
                Pensions
              
              United
                States
                Pensions
              
              France
                Pensions
              
              Great
                Britain
                Pensions
              
              US
                Other
                benefits
              
              Other
                plans
              
              Total**Plan
                  assets at January 1, 2004**
              
              
              **3,592**
              
              
              **6,727**
              
              
              **-**
              
              
              **2,254**
              
              
              **111**
              
              
              **1,062**
              
              
              **13,746**Acquisitions,
                  divestments and other changes
              
              
              129
              
              
              15
              
              
              -
              
              
              114
              
              
              -
              
              
              18
              
              
              **276**Actual
                  return on plan assets
              
              
              358
              
              
              691
              
              
              -
              
              
              224
              
              
              2
              
              
              51
              
              
              **1,326**Employer
                  contributions
              
              
              -
              
              
              1,153
              
              
              -
              
              
              83
              
              
              106
              
              
              105
              
              
              **1,447**Employee
                  contributions
              
              
              -
              
              
              -
              
              
              -
              
              
              30
              
              
              -
              
              
              1
              
              
              **31**Exchange
                  rate translation
              
              
              -
              
              
              (730
              )
              
              -
              
              
              (55
              )
              
              (20
              )
              
              1
              
              
              **(804**
              **)**Benefits
                  paid
              
              
              -
              
              
              (693
              )
              
              -
              
              
              (98
              )
              
              -
              
              
              (92
              )
              
              **(883**
              **)****Plan
                  assets at December 31, 2004**
              
              
              **4,079**
              
              
              **7,163**
              
              
              **-**
              
              
              **2,552**
              
              
              **199**
              
              
              **1,146**
              
              
              **15,139**Acquisitions,
                  divestments and other changes
              
              
              (97
              )
              
              (35
              )
              
              -
              
              
              (13
              )
              
              -
              
              
              4
              
              
              **(141**
              **)**Actual
                  return on plan assets
              
              
              755
              
              
              539
              
              
              -
              
              
              437
              
              
              6
              
              
              84
              
              
              **1,821**Employer
                  contributions
              
              
              1,188
              
              
              2,225
              
              
              -
              
              
              906
              
              
              18
              
              
              103
              
              
              **4,440**Employee
                  contributions
              
              
              -
              
              
              -
              
              
              -
              
              
              78
              
              
              -
              
              
              8
              
              
              **86**Exchange
                  rate translation
              
              
              -
              
              
              1,577
              
              
              -
              
              
              220
              
              
              37
              
              
              147
              
              
              **1,981**Benefits
                  paid
              
              
              -
              
              
              (741
              )
              
              -
              
              
              (108
              )
              
              (70
              )
              
              (128
              )
              
              **(1,047**
              **)****Plan
                  assets at December 31, 2005**
              
              
              **5,925**
              
              
              **10,728**
              
              
              **-**
              
              
              **4,072**
              
              
              **190**
              
              
              **1,364**
              
              
              **22,279**
  
 **Net
                  provisions for**
                **post-employment
                  benefits**
              
              Sweden
                Pensions
              
              United
                States
                Pensions
              
              France
                Pensions
              
              Great
                Britain
                Pensions
              
              US
                Other
                benefits
              
              Other
                plans
              
              Total**Funded
                  status at December 31, 2004**
              
              
              **(2,158**
              **)**
              
              **(3,358**
              **)**
              
              **(2,079**
              **)**
              
              **(894**
              **)**
              
              **(5,876**
              **)**
              
              **(1,142**
              **)**
              
              **(15,507**
              **)**Unrecognized
                  actuarial (gains) and losses
              
              
              456
              
              
              277
              
              
              69
              
              
              162
              
              
              240
              
              
              54
              
              
              **1,258**Unrecognized
                  past service costs
              
              
              -
              
              
              2
              
              
              (66
              )
              
              (3
              )
              
              (9
              )
              
              (7
              )
              
              **(83**
              **)****Net
                  provisions for post-employment benefits at December 31,
                  2004**
              
              
              **(1,702**
              **)**
              
              **(3,079**
              **)**
              
              **(2,076**
              **)**
              
              **(735**
              **)**
              
              **(5,645**
              **)**
              
              **(1,095**
              **)**
              
              **(14,332**
              **)**whereof
                  reported asPrepaid
                  pensions and other assets
              
              
              2
              
              
              166
              
              
              0
              
              
              0
              
              
              133
              
              
              70
              
              
              **371**Provisions
                  for post-employment benefits
              
              
              (1,704
              )
              
              (3,245
              )
              
              (2,076
              )
              
              (735
              )
              
              (5,778
              )
              
              (1,165
              )
              
              **(14,703**
              **)**
  **Net
                  provisions for**
                **post-employment****benefits**
              
              Sweden
                Pensions
              
              United
                States
                Pensions
              
              France
                Pensions
              
              Great
                Britain
                Pensions
              
              US
                Other
                benefits
              
              Other
                plans
              
              Total**Funded
                  status at December 31, 2005**
              
              
              **(916**
              **)**
              
              **(2,551**
              **)**
              
              **(1,858**
              **)**
              
              **(563**
              **)**
              
              **(6,961**
              **)**
              
              **(1,394**
              **)**
              
              **(14,243**
              **)**Unrecognized
                  actuarial (gains) and losses
              
              
              755
              
              
              770
              
              
              223
              
              
              592
              
              
              326
              
              
              201
              
              
              **2,867**Unrecognized
                  past service costs
              
              
              -
              
              
              3
              
              
              (67
              )
              
              (12
              )
              
              (12
              )
              
              2
              
              
              **(86**
              **)****Net
                  provisions for post-employment benefits at December 31,
                  2005**
              
              
              **(161**
              **)**
              
              **(1,778**
              **)**
              
              **(1,702**
              **)**
              
              **17**
              
              
              **(6,647**
              **)**
              
              **(1,191**
              **)**
              
              **(11,462**
              **)**whereof
                  reported asPrepaid
                  pensions and other assets
              
              
              0
              
              
              145
              
              
              0
              
              
              35
              
              
              253
              
              
              90
              
              
              **523**Provisions
                  for post-employment benefits
              
              
              (161
              )
              
              (1,923
              )
              
              (1,702
              )
              
              (18
              )
              
              (6,900
              )
              
              (1,282
              )
              
              **(11,986**
              **)**
  Volvo’s
        pension foundation in Sweden was formed in 1996 to secure obligations relating
        to retirement pensions for salaried employees in Sweden in accordance with
        the
        ITP plan (a Swedish individual pension plan). Plan assets amounting to 2,456
        was
        contributed to the foundation at its formation, corresponding to the value
        of the pension obligations at that time. Since its formation, net contributions
        of 1,420, whereof 1,188 during 2005,  have been made to the foundation. The
        plan assets in Volvo’s Swedish pension foundation are invested in Swedish and
        foreign shares and mutual funds, and in interest-bearing securities, in
        accordance with a distribution that is determined by the foundation’s Board of
        Directors. At December 31, 2005, the fair value of the foundation's plan
        assets amounted to 5,925 (4,079), of which 58% (55) was invested in shares
        or mutual funds. At the same date, retirement pension
        obligations attributable to the ITP plan amounted to 6,342
        (5,366). Swedish companies can secure new pension obligations
        through balance sheet provisions or pension fund contributions.
        Furthermore, a credit insurance must be taken out for the value of the
        obligations.  In addition to benefits relating to retirement pensions, the
        ITP plan also includes, for example, a collective family pension, which Volvo
        finances through insurance with the Alecta insurance company. According to
        an interpretation from the Swedish Financial Accounting Standards Council’s
        interpretations committee, this is a multi-employer defined benefit plan.
        For
        fiscal year 2005, Volvo did not have access to information from Alecta that
        would have enabled this plan to be reported as a defined benefit plan.
        Accordingly, the plan has been reported as a defined contribution plan. Alecta's
        funding ratio is 128.5% (128.0).
  F-47
  Volvo’s
        subsidiaries in the United States mainly secure their pension
        obligations through transfer of funds to pension plans. At the end of 2005,
        the total value of pension obligations secured by pension plans
        of this type amounted to 12,962 (10,287). At the same point in time, the
        total
        value of the plan assets in these plans amounted to 10,728 (7,163), of which
        60%
        (64) was invested in shares or mutual funds. The regulations for securing
        pension obligations stipulate certain minimum levels concerning the ratio
        between the value of the plan assets and the value of the obligations. During
        2005, Volvo contributed 2,225 (1,153) to the pension plans in order to
        comply with these regulations.
  During
        2005  Volvo has made extra contributions to the pensionplans in Great
        Britain in the amount of 906.
  Volvo's
        pensionfoundations had no investments in Volvo shares or other investments
        related to Volvo as per December 31, 2005.
  **Note
        25 - Other provisions**
 Value
                  in
                balance
                sheet
                  2004
              
              Provisions
                and
                reversals
              
              Utilization
              
              Acquired
                  and
                divested
                companies
              
              Trans-
                lation
                differences
              
              Reclassi-
                fications
              
              Value
                  in
                balance
                sheet
                  2005
              
              Whereof
                due
                  within
                12
                  months
              
              Whereof
                due
                  after
                12
                  monthsWarranties
              
              
              6,742
              
              
              7,332
              
              
              (6,610
              )
              
              4
              
              
              639
              
              
              56
              
              
              8,163
              
              
              4,441
              
              
              3,722Provisions
                  in insurance operations
              
              
              312
              
              
              76
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              388
              
              
              -
              
              
              388Restructuring
                  measures
              
              
              571
              
              
              (27
              )
              
              (215
              )
              
              7
              
              
              30
              
              
              6
              
              
              372
              
              
              273
              
              
              99Provisions
                  for residual value risks
              
              
              987
              
              
              95
              
              
              (186
              )
              
              7
              
              
              123
              
              
              (95
              )
              
              931
              
              
              472
              
              
              459Provisions
                  for service contracts
              
              
              1,512
              
              
              379
              
              
              (327
              )
              
              (39
              )
              
              97
              
              
              1
              
              
              1,623
              
              
              914
              
              
              710Other
                  provisions
              
              
              4,354
              
              
              2,436
              
              
              (2,368
              )
              
              24
              
              
              481
              
              
              (113
              )
              
              4,814
              
              
              3,179
              
              
              1,634Total
              
              
              **14,478**
              
              
              **10,291**
              
              
              **(9,706**
              **)**
              
              **3**
              
              
              **1,370**
              
              
              **(145**
              **)**
              
              **16,291**
              
              
              **9,279**
              
              
              **7,012**
 
 **Note
        26 - Non-current liabilities**
  The
        listing below shows the Group’s non-current liabilities in which the largest
        loans are distributed by currency. Most are issued by Volvo Treasury
        AB.
 
 Information
        on loan terms is as of December 31, 2005. Volvo hedges foreign-exchange and
        interest-rate risks using derivative instruments. See Note 36.
 
 **Bond
                  loans**
              
              2004
              
              2005GBP
                  2004/2006, 5.18%
              
              
              1,905
              
              
              -SEK
                  1998-2005/2007-2009, 1.78-5.2%
              
              
              4,798
              
              
              4,931JPY
                  2001-2005/2007-2011, 0.42-2.3%
              
              
              542
              
              
              475HKD
                  1999/2006, 7.99%
              
              
              85
              
              
              -CZK
                  2001-2005/2007-2010, 2.27-6.5%
              
              
              380
              
              
              400USD
                  1998-2005/2007-2008, 4.29-5.0%
              
              
              2,150
              
              
              1,788EUR
                  1997-2005/2007-2011, 2.33-6.12
              
              
              17,546
              
              
              19,928Other
                  bond loans
              
              
              206
              
              
              48Total
              
              
              **27,612**
              
              
              **27,570**
  F-48
  **Other
                  loans**
              
              
              2004
              
              
              2005USD
                  1989-2005/2007-2015, 4.07-13.0%
              
              
              5,360
              
              
              6,193EUR
                  1996-2005/2007-2013, 0.5-9.59%
              
              
              2,596
              
              
              2,735GBP
                  1995-2004/2007-2010, 4.87-7.58%
              
              
              1,269
              
              
              1,859SEK
                  1992-2004/2007-2013, 2.19-4.85%
              
              
              519
              
              
              647BRL
                  2000-2005/2008-2011, 5.0-18.35%
              
              
              944
              
              
              1,230CAD
                  2002-2004/2008-2010, 3.78-3.88%
              
              
              1,557
              
              
              1,950AUD
                  2004/2008, 5.89%
              
              
              49
              
              
              -MXN
                  2003/2007, 9.19-9.34%
              
              
              -
              
              
              835Other
                  loans
              
              
              505
              
              
              536Total
                  other long-term loans
              
              
              **12,799**
              
              
              **15,985**Deferred
                  leasing income
              
              
              1,377
              
              
              1,689Residual
                  value liability
              
              
              3,122
              
              
              2,931Other
                  long-term liabilities
              
              
              154
              
              
              639Total
              
              
              **45,064**
              
              
              **48,814**
 Of
        the
        above long-term loans, 1,501 (1,422) was secured.
  Long-term
                  loans mature as follows:2007
              
              
              17,8922008
              
              
              13,3952009
              
              
              3,6472010
              
              
              5,1922011
                  or later
              
              
              3,429Total
              
              
              **43,555**
 Of
        other
        long-term liabilities the majority will mature within five years.
 
 At
        year-end 2005, credit facilities granted but not utilized and which can be
        used without restrictions amounted to approximately SEK 21 billion (19).
        Approximately SEK 20 billion of these facilities consisted of stand-by
        facilities for loans with varying maturities through the year 2010. A fee
        normally not exceeding 0.25% of the unused portion is charged for credit
        facilities.
  **Note
        27 - Current liabilities**
 Balance
        sheet amounts for loans were as follows:
 2004
              
              2005Bank
                  loans
              
              
              4,267
              
              
              5,204Other
                  loans
              
              
              17,129
              
              
              26,126Total
              
              
              **21,396**
              
              
              **31,330**
  Bank
        loans
        include current maturities, 2,243 (2,259), of long-term loans. Other loans
        include current maturities of long-term loans, 18,983 (13,324), and commercial
        paper, 5,413 (2,667).
  Non-interest-bearing
        liabilities accounted for 67,681 (57,657), or 68% (73) of the Group’s total
        current liabilities.
  F-49
  Balance
          sheet amounts for Other current liabilities were as follows:
 2004
              
              2005Advances
                  from customers
              
              
              2,298
              
              
              2,460Wages,
                  salaries and withholding taxes
              
              
              4,987
              
              
              5,680VAT
                  liabilities
              
              
              1,193
              
              
              1,351Accrued
                  expenses and prepaid income
              
              
              9,736
              
              
              11,850Deferred
                  leasing income
              
              
              1,141
              
              
              1,406Residual
                  value liability
              
              
              1,873
              
              
              1,840Other
                  liabilities
              
              
              3,863
              
              
              5,675Total
              
              
              **25,091**
              
              
              **30,262**
  Secured
        bank loans at year-end 2005 amounted to 186 (194). The corresponding
        amount for other current liabilities was 1,685 (1,578).
  **Note
        28 - Assets pledged**
 2004
              
              2005Property,
                  plant and equipment - mortgages
              
              
              205
              
              
              593Assets
                  under operating leases
              
              
              1,665
              
              
              1,700Chattel
                  mortgages
              
              
              374
              
              
              350Receivables
              
              
              319
              
              
              360Inventories
              
              
              13
              
              
              16Cash,
                  marketable securities
              
              
              470
              
              
              230Other
                  assets pledged
              
              
              -
              
              
              6Total
              
              
              **3,046**
              
              
              **3,255**
 The
        liabilities for which the above assets were pledged amounted at year-end
        to 3,372 (3,194).
 
 **Note
        29 - Contingent liabilities**
 
 2004
              
              2005Credit
                  guarantees-
                  issued for associated companies
              
              
              110
              
              
              13-
                  issued for customers and others
              
              
              2,471
              
              
              1,267Tax
                  claims
              
              
              1,433
              
              
              695Other
                  contingent liabilities
              
              
              5,175
              
              
              5,875Total
              
              
              **9,189**
              
              
              **7,850**
  The
        reported amounts for contingent liabilities reflect the Volvo Group's risk
        exposure on a gross basis. The reported amounts have thus not been reduced
        because of counter guarantees received or other collaterals in cases where
        a
        legal offsetting right does not exist. At December 31, 2005, the estimated
        value
        of counter guarantees received and other collaterals, for example the estimated
        net selling price of used products, amounted to 4,479 (5,135). Tax claims
        pertain to charges against the Volvo Group for which provisions are not
        considered necessary. Other contingent liabilities pertain mainly to residual
        value guarantees.
  **Legal
        proceedings**
  In
        March
        1999, an FH 12 Volvo truck was involved in a fire in the Mont Blanc tunnel.
        The
        tunnel suffered considerable damage from the fire, which continued for 50
        hours.
        39 people lost their lives in the fire, and 34 vehicles were trapped in the
        tunnel. The Mont Blanc tunnel was re-opened for traffic in 2002. An expert
        group
        was appointed by the Commercial Court in Nanterre, France, to investigate
        the
        cause of the fire and the losses it caused. At present, it is not possible
        to
        anticipate the result of this on-going investigation or the result of other
        French legal actions in progress regarding the fire. Following the closure
        in
        October 2003 of an investigation for potential criminal liability for the
        fire,
        the trial for unintentional manslaughter started in Bonneville (France) on
        31st
        January, 2005 and lasted until late April 2005. The judgment was given on
        27th
        July, 2005. Volvo Truck Corporation was one of 16 parties tried for
        unintentional manslaughter. Volvo Truck Corporation was acquitted and not
        required to pay any civil damages to the plaintiffs. Volvo Truck Corporation's
        acquittal with regards to criminal charges is final. Some of the plaintiffs
        have
        appealed the award of civil damages and those proceedings, hence, are ongoing.
        A
        claim was filed with the Commercial Court in Nanterre by the insurance company
        employed by the French tunnel operating company against certain Volvo Group
        companies and the trailer manufacturer in which compensation for the losses
        claimed to have been incurred by the tunnel operating company was demanded.
        The
        claimant requested that the Court postpone its decision until the expert
        group
        has submitted its report. The Court of Nanterre has since then declined
        jurisdiction in favor of the civil Court of Bonneville before which several
        other claims had been filed in connection with this matter. As a result,
        the
        Court of Bonneville is likely ultimately to rule on all civil liability claims
        filed in France against Volvo Group companies in connection with the Mont-Blanc
        tunnel fire. Volvo Group companies are also involved in proceedings regarding
        this matter before courts in Aosta and Turin (Italy) and Brussels (Belgium).
        Although the aggregate amount claimed is substantial, Volvo is unable presently
        to determine the ultimate outcome of the legal proceedings mentioned above,
        the
        only exception being the criminal charges mentioned above from which Volvo
        Truck
        Corporation has now been acquitted.
  F-50
  Between
        1985 and 1995, Volvo Aero Norway A/S (“VAN”) and Snecma entered into several
        agreements relating to the supply by VAN of components for the Snecma CFM56
        engine. These aircraft engine programs are long term agreements, with an
        expected term of not less than thirty years. In 2005, Snecma filed a request
        for
        arbitration against VAN, requesting a declaratory award stating that Snecma
        is
        entitled to calculate VAN’s compensation under the agreements in other ways than
        the common and undisputed interpretation of the agreements during nearly
        twenty
        years of performance. An award in Snecma’s favour would mean that the
        compensation would be significantly reduced. It is difficult to assess the
        magnitude of such a reduction of the concession levels since, instead of
        fixed
        levels of payment, the levels of payment to VAN would be affected by the
        actual
        payments received by Snecma from its customers. VAN has no access to the
        commercial information needed to calculate the payment levels in such case.
        VAN
        has rejected Snecma’s claims. Arbitral hearings are expected to be finalized at
        the beginning of the autumn 2006.
  Volvo
        is
        involved in a number of other legal proceedings incidental to the normal
        conduct
        of its businesses. Volvo does not believe that any liabilities related to
        such
        proceedings are likely to be, in the aggregate, material to the financial
        condition of the Volvo Group.
  **Note
        30 - Cash flow**
 Other
        items not affecting cash pertain to risk provisions and losses related to
        doubtful receivables and customer-financing receivables, 602 (551), capital
        gains on the sale of subsidiaries and other business
        units  717 (95), write-down of shares in Peach County Holdings
        Inc in 2005 and in 2004 revaluation of shares in Scania AB
        and Henlys Group Plc amounting to 550 (negative 820), provision for
        industrial relocation and contractual pension - (530), IFRS transition
        effect - (negative 177) and other negative 20 (negative
        19).
  Net
        investments in customer-financing receivables resulted in 2005 in a
        negative cash flow of SEK 7.8 billion (7.4). In this respect, liquid
        funds were reduced by
        SEK 23.4  billion (19.4) pertaining to new investments
        in financial leasing contracts and installment contracts.
  Divestments
        of shares and participations, net in 2005 amounted to SEK 0.3 billion and
        in
        2004 to SEK 15.1 billion, mainly related to the divestment of the Scania
        B-shares.
  Acquired
        and divested subsidiaries and other business units, net in 2005 amounted
        to SEK
        0.6 billion and negative SEK 0.1 billion in 2004.
  During
        2005 and 2004 interest-bearing receivables including marketable
        securities, net reduced liquid funds by SEK 1.3 billion
        and SEK 6.4 billion, respectively.
  The
        change
        during the year in bonds and other loans increased liquid funds by SEK 3.6
        billion (decrease 8.8). New borrowing during the year, mainly the issue of
        bond
        loans, provided SEK 41.6 billion (19.1). Amortization during the year
        amounted to SEK 33.4 billion (28.9).
  F-51
 
 **Note
        31 - Leasing**
 At
        December 31, 2005, future rental income from noncancellable financial and
        operating leases (minimum leasing fees) amounted to 34,406 (25,181). Future
        rental income is distributed as follows:
 
 Financial
                  leases
              
              Operating
                  leases2006
              
              
              7,446
              
              
              4,8082007-2010
              
              
              14,060
              
              
              8,1972011
                  or later
              
              
              107
              
              
              1,532Total
              
              
              **21,613**
              
              
              **14,537**Allowance
                  for uncollectible future rental income
              
              
              (241
              )Unearned
                  rental income
              
              
              (1,503
              )Present
                  value of future rental income related to noncancellable
                  leases
              
              
              19,869
 At
        December 31, 2005, future rental payments (minimum leasing fees) related
        to
        noncancellable leases amounted to 4,396 (4,142).
 
 Future
        rental payments are distributed as follows:
 
 Financial
                  leases
              
              Operating
                  leases2006
              
              
              307
              
              
              1,0182007-2010
              
              
              476
              
              
              1,6302011
                  or later
              
              
              252
              
              
              713Total
              
              
              **1,035**
              
              
              **3,361**
  Rental
        expenses amounted to:
 
 2004
              
              2005Financial
                  leases:-
                  Contingent rents
              
              
              (30
              )
              
              0Operating
                  leases:-
                  Contingent rents
              
              
              (27
              )
              
              (34
              )-
                  Rental payments
              
              
              (910
              )
              
              (1,000
              )-
                  Sublease payments
              
              
              28
              
              
              23Total
              
              
              **(939**
              **)**
              
              **(1,011**
              **)**
 
 Book
        value
        of assets subject to finance lease:
 2004
              
              2005Acquisition
                  costs:Buildings
              
              
              526
              
              
              459Land
                  and land improvements
              
              
              66
              
              
              75Machinery
                  and equipment
              
              
              236
              
              
              198Assets
                  under operating lease
              
              
              1,065
              
              
              875Total
              
              
              **1,893**
              
              
              **1,607**Accumulated
                  depreciation:Buildings
              
              
              (56
              )
              
              (79
              )Land
                  and land improvements
              
              
              -
              
              
              -Machinery
                  and equipment
              
              
              (46
              )
              
              (39
              )Assets
                  under operating lease
              
              
              (518
              )
              
              (470
              )Total
              
              
              **(620**
              **)**
              
              **(588**
              **)**
  F-52
  Book
                  value:Buildings
              
              
              470
              
              
              380Land
                  and land improvements
              
              
              66
              
              
              75Machinery
                  and equipment
              
              
              190
              
              
              159Assets
                  under operating lease
              
              
              547
              
              
              405Total
              
              
              **1,273**
              
              
              **1,019**
 
 **Note
        32 - Transactions with related parties**
 The
        Volvo
        Group has transactions with some of its associated companies. The transactions
        consist mainly of sales of vehicles to dealers. Commercial terms and
        market prices apply for the supply of goods and services to/from associated
        companies.
 2004
              
              2005Sales
                  to associated companies
              
              
              279
              
              
              381Purchase
                  from associated companies
              
              
              73
              
              
              296Receivables
                  from associated companies, Dec 31
              
              
              174
              
              
              206Liabilities
                  to associated companies, Dec 31
              
              
              70
              
              
              65
 Group
        holdings of shares in associated companies are presented in Note 15, Shares
        and participations.
  The
        Volvo
        Group also has transactions with Renault SA and its subsidiaries. Sales to
        and
        purchases from Renault SA amounted to 182 (277) and 3,493
        (3,242). Amounts due from and due to Renault SA amounted to 57 (81)
        and 762 (554) respectively, at December 31, 2005. The sales were
        mainly from Renault Trucks to Renault SA and consisted of components
        and spare parts. The purchases were mainly made by Renault Trucks from
        Renault SA and consisted mainly of light trucks. Renault Trucks
        has a license from Renault SA for the use of the trademark "Renault". During
        the
        year, Renault Trucks received EUR 500,000 from Renault SA as compensation
        for a common development project.
  During
        the
        year, AB Volvo sold properties to market price to members in group
        management for an amount of 17.
  **Note
        33 - Government grants**
 During
        2005, government grants amounting to 173 (165) have been
        received, of which 143 (137) has been accounted for in the income
        statement. The grants were mainly received from the European Commission and
        the Swedish government.
 
 **Note
        34 - Personnel**
 In
        accordance with a resolution adopted at the Annual General Meeting 2005,
        the fee
        paid to the Board of Directors is a fixed amount of SEK 4,775,000, to be
        distributed as decided by the Board. The Chairman of the Board, Finn Johnsson,
        received a fee of SEK 1,350,000 as Board Chairman and SEK 75,000 as Chairman
        of
        the Remuneration Committee.
 **Remuneration
                  to senior executives**
                SEK
              
              Fixed
                salary
              
              Variable
                salary
              
              Other
                benefits
              
              PensionBoard
                  Chairman
              
              
              1,425,000
              
              
              -
              
              
              -
              
              
              -CEO
                  (1
              
              
              10,950,000
              
              
              5,292,500
              
              
              1,777,781
              
              
              20,835,641
                  (4Other
                  memebrs of GEC (1,2
              
              
              53,609,500
              
              
              21,849,000
              
              
              17,484,000
              
              
              56,745,000**Total
                  remuneration and benefits**
              
              
              **65,984,500**
              
              
              **27,141,500**
              
              
              **19,261,781**
              
              
              **77,580,641****Total
                  costs (3**
              
              
              **85,211,000**
              
              
              **34,875,000**
              
              
              **28,761,000**
              
              
              **92,782,000**
  1)
        Other
        benefits for the President and CEO includes SEK 1,204,000 related to
        allotted shares during 2005 and for other members of the GEC SEK 6,245,750
        related to allotted shares and SEK 3,104,448 pertaining cash payments
        linked to the share-based incentive program.
  4)
        In the
        beginning of 2005 a previuosly announced one-time payment of SEK 34 was
        made when Leif Johansson shifted over to a defined contribution based
        pension. SEK 20.8 M of this amount are reported as a cost in 2005. The
        remaining part will be charged during 2006.
  F-53
  **Terms
        of employment of the CEO**
  The
        President and Chief Executive Officer, Leif Johansson, is entitled to a fixed
        annual salary. In addition, he may receive a variable salary based on operating
        income and cash flow up to a maximum of 50% of his fixed annual salary. In
        2005,
        the variable salary corresponded to 48.3% of the fixed annual salary. Leif
        Johansson also participates in the Volvo Group long-term incentive program.
        In
        2005, Leif Johansson received 4,000 shares, since the financial goals for
        2004
        were achieved.
  Leif
        Johansson’s pension benefits are a defined-contribution pension, meaning that
        Leif Johansson’s pension will equal the sum of all premiums paid with the
        addition of possible return. A defined time for retirement does not exist.
        The
        pensionable salary consists of the current monthly salary times 12, Volvo's
        internal value for company car, together with the average of the outcome
        of the
        variable salary, maximized to 50% of the salary, for the previous five
        years. See point 4 above for premiums paid in 2005.
  Leif
        Johansson has a six-month notice of termination on his own initiative and
        12
        months notice of termination from AB Volvo. Leif Johansson is not entitled
        to
        severance payments.
  **Variable
        salaries**
  Leif
        Johansson, the members of the Group Executive Committee and a number of senior
        executives receive variable salaries in addition to fixed salaries. Variable
        salaries are in most cases based on the fulfilment of certain improvement
        targets. The targets are decided by the Board of Directors in AB Volvo and
        may
        relate to operating income and cash flow. A variable salary may amount to
        a
        maximum of 50% of the fixed annual salary.
  **Severance
        payments**
  The
        employment contracts for members of the Group Executive Committee and certain
        other senior executives contain rules governing severance payments when the
        company terminates the employment. The rules provide that, when the company
        terminates the employment, an employee is entitled to severance pay equal
        to the
        employee’s monthly salary for a period of 12 or 24 month, depending on age at
        date of severance.
  In
        agreements concluded after the spring of 1993, severance pay is reduced,
        in the
        event the employee gains employment during the severance period, in an amount
        equal to 75% of the income from new employment. In agreements concluded after
        the spring of 2004, severance pay is reduced by the full income from the
        new
        employment. Furthermore, age limit at date of notice of termination is
        removed and an employee is, with few exceptions, entitled to severance pay
        for a
        period of 12 months.
 
 **Pensions**
 Previous
        pension agreements for certain senior executives stipulated that early
        retirement could be obtained from the age of 60. The defined pension
        benefits are vested and earned gradually over the years up to the employee’s
        retirement age and are fully earned at age 60. During the period between
        ages of
        60 and 65 the employee receives a pension equal to 70% of the pensionable
        salary.
 
 Agreements
        for retirement at age 60 are no longer signed, and are instead replaced by
        a
        defined-contribution plan without a definite time for retirement. The premium
        constitutes 10% of the pensionable salary.
 
 Earlier
        defined-benefit pension plans, which entitled the employee to 50% of the
        pensionable salary after normal retirement age, have also been replaced by
        a
        defined-contribution plan. The premium constitutes of SEK 30,000 plus 20%
        of the
        pensionable salary over 30 income base amounts.
 Re-negotiation of
        earlier defined-benefits pension plans for senior executives to
        defined-contribution plans is now closed. The majority of the senior executives
        that earlier were entitled to defined-benefits pension plans have chosen
        to
        exchange those to defined-contribution plans.
 
 **Incentive
        programs**
 Volvo
        currently has two different types of incentive programs for certain senior
        executives outstanding, one program for employee stock options (expires
        2006/2008) and a share-based incentive program (allotment in 2006).
  F-54
 **Employee
        stock options program**
 The
        employee stock options may only be exercised if the holder is employed by
        Volvo
        at the end of the vesting period. However, if the holder’s employment with Volvo
        is terminated for any reason other than dismissal or the holder’s resignation,
        the options may be exercised in part, in relation to how large part of the
        vesting period the holder has been employed. If the holder retires during
        the
        vesting period, he or she may exercise the full number of options.
  **Share-based
        incentive program**
 In
        2004
        the Annual General Meeting approved a share-based incentive program for certain
        senior executives within the Volvo Group. Allotment of 63,667 shares in the
        program was executed in April 2005 and was based on the fulfillment of certain
        non-market based financial goals for fiscal year 2004. The allotment was
        made
        from Volvo’s treasury stock. Part of the allotment was carried out as a
        cash payment. The total costs for the share-based incentive program 2004/2005
        amounted to SEK 36 M and pertains to the costs for payments in shares
        and in cash.  The Annual General Meeting in 2005 decided on a similar
        program for allotment in 2006. Allotment will be made in 2006 and will be
        based
        on the fulfillment of certain non-market based  financial goals for
        fiscal year 2005. Assuming that the financial goals are met in full,
        Volvo’s cost for the incentive program including social fees will be
        approximately SEK 70 M, since the price of the Volvo B shares at the grant
        date,
        excluding dividend of SEK 12.50, was SEK 299.50. The Annual General
        Meeting decided that Volvo’s own shares may be used for allotment in this
        program.
  The
        Board
        has proposed to the Annual General Meeting to decide on a renewed share-based
        incentive program. The program means that a maximum of 518,000 (185,000)
        Volvo B
        shares could be allotted to approximately 240 (165) senior executives. It
        is
        proposed that the number of shares to be allotted depend on the fulfillment
        of
        certain non-market based  financial goals for fiscal year 2006. Assuming
        that the financial goals are met in full, the dividend is decided to be SEK
        16.75 and the price of the Volvo B share at the grant date is SEK 370,
        Volvo’s cost for the incentive program, including social costs, will be
        approximately SEK 230 M. The Board has furthermore proposed to the Annual
        General Meeting that Volvo’s own shares may be used for allotment in the
        share-based incentive program.
  **Financial
                  instruments and shares**
              
              2003/2008
                  employee
                stock
                  options number
              
              Shares
                  (1Board
                  Chairman
              
              
              -
              
              
              -CEO
              
              
              50,000
              
              
              4,000Other
                  members of GEC
              
              
              340,000
              
              
              31,000Other
                  senior executives
              
              
              548,750
              
              
              139,000**Total**
              
              
              **938,750**
              
              
              **174,000**
 1)
        The
        table shows payments in cash and the corresponding value in shares. Of the
        total
        174,000 shares, 105,000 shares have been alloted and a cash-settlement
        corresponding to 69,000 shares have been granted.
 
 
 Total
                  number of outstanding options**Summary
                  of option programs**
              
              Allotment date
              
              Dec
                  31, 2004
              
              Dec
                  31, 2005
              
              Excercise
                  price
              
              Term
                  of the options
              
              Value/
                  option
              
              Vesting,
                  years1998,
                  call options (1
              
              
              April
                  28, 2000
              
              
              101,830
              
              
              -
              
              
              302.12
              
              
              Apr
                  28, 2000-
                Apr
                  27, 2005
              
              
              55.75
              
              
              n/a2002,
                  employee stock options (2
              
              
              May
                  2, 2003
              
              
              945,000
              
              
              938,750
              
              
              163.00
              
              
              May
                  2, 2006 - May 1, 2008
              
              
              32.00
              
              
              3
  1)
              The
                  options gives the holder the right to acquire one Series B Volvo
                  share for
                  each option held from a third party. The price of the options is
                  based on
                  market valuation by UBS Warburg. The options were financed 50%
                  by the
                  company and 50% from the option holder’s variable salary.
  2)
              In
                  January 2000, a decision was made to implement a new incentive
                  program for
                  senior executives within the Volvo Group in the form of so-called
                  employee
                  stock options. The decision covers allotment of options for 2000,
                  2001 and
                  2002. The executives have not made any payment for the options.
                  The
                  employee stock options gives the holders the right to exercise
                  their
                  options or alternatively receive the difference between the actual
                  price
                  at that time and the exercise price determined at allotment. The
                  theoretical value of the options at allotment was set using the
                  Black
                  & Scholes pricing model for options. For the options allotted in
                  2003,
                  the Annual General Meeting has decided that Volvo’s own shares may be
                  used for the program
  F-55
 **Cost
        for incentive programs**
  Change
        in
        obligations related to the employee stock option programs is recorded in
        the income statement. The cost for the employee stock option program amounted
        to
        SEK 130 M. The cost for the share-based incentive program 2004/2005 was SEK
        13 M and for the share-based incentive program 2005/2006 SEK 49 M. Total
        cost for the three programs was SEK 192 M for 2005 (66). The cost for the
        incentive program includes both cash payments and costs for remuneration
        in
        shares, including social costs. At December 31, 2005, provision related to
        the
        employee stock option program and share-based incentive program amounted
        to SEK
        277 M (128).
  **Change
                  in number of options per program**
              
              ProgramNumber
                  of options
              
              2000
              
              2002Dec
                  31, 2003
              
              
              96,245
              
              
              1,050,000Alloted
              
              
              -
              
              
              -Cancelled
              
              
              -
              
              
              (105,000
              )Exercised
              
              
              (96,245
              )
              
              -Dec
                  31, 2004
              
              
              -
              
              
              945,000Alloted
              
              
              
              
              
              -Cancelled
              
              
              
              
              
              (6,250
              )Exercised
              
              
              
              
              
              -Dec
                  31, 2005
              
              
              
              
              
              938,750
  2004
              
              2005**Average
                  number of employees**
              
              Number
                  of employees
              
              of which
                  women, %
              
              Number
                  of employees
              
              of which
                  women, %**AB
                  Volvo**Sweden
              
              
              136
              
              
              54
              
              
              144
              
              
              50**Subsidiaries**Sweden
              
              
              27,034
              
              
              18
              
              
              27,843
              
              
              19Western
                  Europe
              
              
              26,325
              
              
              14
              
              
              25,894
              
              
              14Eastern
                  Europe
              
              
              2,731
              
              
              16
              
              
              3,481
              
              
              15North
                  America
              
              
              13,057
              
              
              19
              
              
              13,778
              
              
              20South
                  America
              
              
              3,040
              
              
              12
              
              
              3,656
              
              
              14Asia
              
              
              4,114
              
              
              16
              
              
              4,273
              
              
              15Other
                  countries
              
              
              1,759
              
              
              11
              
              
              2,259
              
              
              12**Group
                  total**
              
              
              **78,196**
              
              
              **16**
              
              
              **81,184**
              
              
              **17**
  2004
                
                2005**Board
                    members and chief officers**
                
                Number
                    at
                  year-end
                
                of
                    which
                  women,
                    %
                
                Number
                    at
                  year-end
                
                of
                    which
                  women,
                    %**AB
                    Volvo**Board
                    members
                
                
                11
                
                
                9
                
                
                11
                
                
                9CEO
                    and GEC
                
                
                17
                
                
                6
                
                
                17
                
                
                6**Volvo
                    Group**Board
                    members
                
                
                1,017
                
                
                15
                
                
                1,010
                
                
                10Presidents and
                    other senior executives
                
                
                1,276
                
                
                16
                
                
                1,305
                
                
                16
  F-56
 2004
              
              2005**Wages,
                  salaries and**
                **other
                  remunerations,**
                **SEK
                  M**
              
              Board
                  and
                Presidents
                  (1
              
              of
                  which
                variable
                salaries
              
              Other
                employees
              
              Board
                  and
                Presidents
                  (1
              
              of
                  which
                variable
                salaries
              
              Other
                employees**AB
                  Volvo**Sweden
              
              
              33.4
              
              
              11.6
              
              
              106.3
              
              
              42.8
              
              
              9.8
              
              
              97.9**Subsidiaries**Sweden
              
              
              79.3
              
              
              15.5
              
              
              9,041.7
              
              
              84.6
              
              
              15.6
              
              
              9,475.6Western
                  Europe
              
              
              442.3
              
              
              10.9
              
              
              8,905.3
              
              
              436.0
              
              
              6.3
              
              
              9,267.6Eastern
                  Europe
              
              
              14.5
              
              
              0.2
              
              
              367.0
              
              
              25.2
              
              
              2.0
              
              
              472.9North
                  America
              
              
              209.1
              
              
              10.2
              
              
              5,292.7
              
              
              199.4
              
              
              17.9
              
              
              5,965.5South
                  America
              
              
              7.2
              
              
              0.0
              
              
              363.9
              
              
              9.3
              
              
              0.0
              
              
              529.4Asia
              
              
              49.9
              
              
              0.7
              
              
              724.9
              
              
              58.9
              
              
              1.0
              
              
              957.2Other
                  countries
              
              
              12.7
              
              
              0
              
              
              394.5
              
              
              26.7
              
              
              0
              
              
              467.5**Group
                  total**
              
              
              **848.4**
              
              
              **49.1**
              
              
              **25,196.3**
              
              
              **882.9**
              
              
              **52.6**
              
              
              **27,233.6**
 
  2004
              
              2005**Wages,
                  salaries other**
                **remunerations
                  and social**
                **costs,
                  SEK M**
              
              Wages,
                salaries,
                remun.
              
              Social
                costs
              
              of
                  which
                pens.
                  costs
              
              Wages,
                salaries,
                remun.
              
              Social
                costs
              
              of
                  which
                pens.costs**AB
                  Volvo (2**
              
              
              139.7
              
              
              80.7
              
              
              48.7
              
              
              140.7
              
              
              78.6
              
              
              46.7Subsidiaries
              
              
              25,905.0
              
              
              10,964.8
              
              
              4,365.2
              
              
              27,975.9
              
              
              10,392.1
              
              
              3,688.9**Group
                  total (3**
              
              
              **26,044.7**
              
              
              **11,045.5**
              
              
              **4,413.9**
              
              
              **28,116.5**
              
              
              **10,470.7**
              
              
              **3,735.6**
  1)
        Including current and former Board members, Presidents and Executive Vice
        Presidents.
 2)
        The **Parent
        Company's** pension
        costs, pertaining to Board members and Presidents are disclosed in Note 22
        in
        the Parent Company.
 3)
        Of the **Group's** pension
        costs, 125.5 (157.8) pertain to Board members and Presidents. The Group's
        outstanding pension obligations to these individuals amount to 573.8
        (838.3).
  The
        cost
        for non-monetary benefits in the **Group** amounted
        to 1,055.9, of which 47.6 to Board members and presidents. The cost for
        non-monetary benefits in the **Parent
        company** amount to
        14.6, of which 3.7 to Board members and presidents.
  **Note
        35 - Fees to the auditors**
 
 **Audit
                  fees**
              
              2004
              
              2005Audit
                  fees to PricewaterhouseCoopers
              
              
              78
              
              
              78Audit
                  fees to other audit firms
              
              
              2
              
              
              1**Total**
              
              
              **80**
              
              
              **79****Other
                  fees to PricewaterhouseCoopers**Fees
                  for audit related services
              
              
              20
              
              
              28Fees
                  for tax services
              
              
              16
              
              
              17**Total**
              
              
              **36**
              
              
              **45****Fees
                  and other remuneration to external auditors total**
              
              
              **116**
              
              
              **124**
  F-57
  Auditing
        assignments involve examination of the annual report and financial accounting
        and the administration by the Board and the President, other tasks related
        to
        the duties of a company auditor and consultation or other services that may
        result from observations noted during such examination or implementation
        of such
        other tasks. All other tasks are defined as other assignments.
  Other
        fees
        in 2003 to PricewaterhouseCoopers amounted to 64.
  **Note
        36 - Financial risks and instruments**
  In
        its
        operations, the Volvo Group is exposed to various types of financial risks.
        Groupwide policies, which are updated and decided upon annually, form the
        basis
        of each Group company’s management of these risks. The objectives of the Group’s
        policies for management of financial risks are to optimize the Group’s capital
        costs by utilizing economies of scale, to minimize negative effects on income
        as
        a result of changes in currency or interest rates, to optimize risk exposure
        and
        to clarify areas of responsibility within the Group’s finance and treasury
        activities. Monitoring and control that established policies are adhered
        to is
        conducted continuously centrally and at each Group company. Most of the Volvo
        Group’s financial transactions are carried out through Volvo’s inhouse bank,
        Volvo Treasury, which conducts its operations within established risk mandates
        and limits. Credit risks are mainly managed by the different business
        areas.
  The
        nature
        of the various financial risks and objectives and policies for the management
        of
        these risks is described in the sections below. Volvo’s accounting policies for
        financial instruments are described in Note 1. As presented in Note 1, as
        of
        2005, Volvo applies IAS 39, Financial Instruments: Recognition and Measurement.
        In accordance with this standard all derivatives shall be reported at fair
        value
        in the balance sheet. In calculating the fair values of financial instruments,
        Volvo has primarily used official rates or prices quoted on the capital markets.
        In their absence, the valuation has been made by discounting future cash
        flows
        at the market interest rate for each maturity for instruments with maturities
        shorter than three months, the carrying value has been assumed to closely
        approximate the fair value. All reported fair values are calculated values
        that
        will not necessarily be realized. The effects of the transition to IAS 39
        are
        presented in Note 3..
  **Fair
        value of derivative instruments**
  In
        accordance with IAS 39, derivative financial instruments used for hedging
        of
        forecasted commercial cash-flows and electricity consumption have been reported
        at fair value, which is debited or credited to a separate component of equity
        to
        the extent the requirements for cash-flow hedge accounting are fulfilled.
        To the
        extent that the requirements are not met, the unrealized gain or loss is
        charged
        to the income statement. Gains and losses related to hedges are reported
        at the
        same time as the gains and losses on the items that are hedged effect the
        Group’s consolidated shareholders’ equity.
  **Change
                  in hedge reserve in equity  (1 (2**
              
              2005Balance
                  at January 1, 2005
              
              
              1,007Change
                  due to commercial derivatives
              
              
              (1,495
              )Change
                  due to commodity forward contracts
              
              
              53Translation
                  difference
              
              
              24Balance
                  at December 31, 2005
              
              
              (411
              )1)
                  After tax amounts.
                2)
                  Income has beed charged by 405 before tax concerning exchange rate
                  gains/losses on forward contracts and options, reversed from the
                  hedge
                  reserve in equity.
 
 Considering
        the more complex rules under IAS 39 regarding derivative financial
        instruments used for hedging of interest-rate risks and currency-rate risks
        on
        loans, Volvo has decided not to apply hedge accounting for interest-rate
        contracts. The unrealized gains and losses through to the settlement/expiration
        date of the financial instrument were charged to the financial net in the
        income
        statement.
  F-58
 **Currency
          risks**
  Currency
        risks in Volvo’s operations are related to changes in the value of contracted
        and projected future flows of payments (commercial currency risks), to changes
        in the value of loans and financial investments (financial currency risks)
        and
        to changes in the value of assets and liabilities in foreign subsidiaries
        (equity currency risks). The objective of Volvo’s management of currency risks
        is to minimize short-term negative impact on Volvo’s income and financial
        position as a consequence of changes in currency exchange rates.
  *Commercial
        currency risks*
 Volvo
        uses
        forward contracts and currency options to hedge the value of future payments
        in
        foreign currencies. According to the Group’s currency policy, between 50% to 80%
        of the projected net flow in each currency is hedged for the coming 6 months,
        30% to 60% for months 7 through 12 and firm flows beyond 12 months should
        normally be fully hedged. The nominal amount of all forward and option contracts
        outstanding as of December 31, 2005 was SEK 39.5 billion. The fair value
        of
        these contracts amounted on the same date to a loss of 732. If assuming an
        instantaneous 10% appreciation of the SEK against all other currencies, the
        fair
        value of contracts outstanding would amount to a gain of 2,621. If assuming
        an
        instantaneous 10% weakening of the SEK against all other currencies the fair
        value of contracts outstanding would be a loss of 4,101. Actual foreign currency
        rates rarely move instantaneously in the same direction and the actual impact
        of
        exchange rate changes may thus differ from the above sensitivity analyses.
        Further specifications of outstanding contracts are included in the tables
        below.
 
 **Outstanding
        forward contracts and option contracts as of December 31, 2005 for hedging
        of
        commercial currency risks.**
  **Currencies**
              
              **Other
                  currencies**
              
              **Fair
                  value (2**Net
                flow
                USD
              
              Net
                flow
                GBP
              
              Net
                flow
                EUR
              
              Net
                  SEKMillionDue
                  date 2006
              
              
              amount
              
              
              1,783
              
              
              219
              
              
              832
              
              
              6,635rate
                  (1
              
              
              7.46
              
              
              13.44
              
              
              9.32Due
                  date 2007
              
              
              amount
              
              
              906
              
              
              -
              
              
              -rate
                  (1
              
              
              7.46
              
              
              -
              
              
              -Due
                  date 2008
              
              
              amount
              
              
              106
              
              
              -
              
              
              -and
                  onwards
              
              
              rate
                  (1
              
              
              7.46
              
              
              -
              
              
              -**Total**
              
              
              
              
              
              **2,795**
              
              
              **219**
              
              
              **832**
              
              
              **6,635**of which, option contracts
              
              
              
              
              
              488
              
              
              0
              
              
              55
              
              
              862**Fair
                  value of forward and option contracts, SEK M (2**
              
              
              
              
              
              **(498**
              **)**
              
              **(28**
              **)**
              
              **(77**
              **)**
              
              **(129**
              **)**
              
              **(732**
              **)**
 1) Average
        forward contract rate.
 2)
        Outstanding forward contracts valued at market rates.
 
 **Net
                  flows per currency 2005**
              
              
              
              **Currencies**
              
              **Other
                  currencies**
              
              **Total**Million
              
              
              
              USD
              
              GBP
              
              EUR
              
              Net
                  SEKNet
                  flows 2005
              
              
              amount
              
              
              2,447
              
              
              383
              
              
              1,001rate
                  (3
              
              
              7.4791
              
              
              13.5849
              
              
              9.2943**Net
                  flows SEK M (3**
              
              
              
              
              
              **18,300**
              
              
              **5,200**
              
              
              **9,300**
              
              
              **14,400**
              
              
              **47,200****Hedged
                  portion, % (4**
              
              
              
              
              
              **73**
              
              
              **57**
              
              
              **83**
 3) Average
        exchange rate during the financial year.
 4)
        Outstanding currency contracts, regarding commercial exposure due in 2006,
        percentage of net flows 2005.
  F-59
  **Outstanding
                  forward contracts and option contracts for hedging of commercial
                  currency
                  risks**December
                  31, 2004
              
              December
                  31, 2005Notional
                amount
                (1
              
              Carrying
                value
              
              Fair
                value
              
              Notional
                amount
                (1
              
              Carrying
                value
              
              Fair
                valueForeign
                  exchange forward contractsForeign
                  exchange forward contracts-
                  receivable position
              
              
              26,203
              
              
              264
              
              
              1,775
              
              
              37,754
              
              
              536
              
              
              536-
                  payable position
              
              
              9,982
              
              
              (88
              )
              
              (511
              )
              
              36,980
              
              
              (1,272
              )
              
              (1,272
              )Options
                  - purchased-
                  receivable position
              
              
              2,831
              
              
              -
              
              
              112
              
              
              4,769
              
              
              51
              
              
              51-
                  payable position
              
              
              -
              
              
              -
              
              
              -
              
              
              3
              
              
              (3
              )
              
              (3
              )Options
                  - written-
                  receivable position
              
              
              233
              
              
              -
              
              
              0
              
              
              -
              
              
              -
              
              
              --
                  payable position
              
              
              2,729
              
              
              -
              
              
              (5
              )
              
              4,142
              
              
              (44
              )
              
              (44
              )Subtotal
              
              
              
              
              
              176
              
              
              1,371
              
              
              
              
              
              (732
              )
              
              (732
              )Commodity forward
                  contracts-
                  receivable position
              
              
              (10
              )
              
              -
              
              
              7
              
              
              394
              
              
              54
              
              
              54-
                  payable position
              
              
              243
              
              
              -
              
              
              (32
              )
              
              71
              
              
              (11
              )
              
              (11
              )Total
              
              
              
              
              
              176
              
              
              1,346
              
              
              
              
              
              (689
              )
              
              (689
              )
 1)
        The
        notional amount of the derivative contracts represents the gross contract
        amount
        outstanding. To determine the estimated fair value, the major part of the
        outstanding contracts have been marked to market. Discounted cash flows have
        been used in some cases.
  *Financial
        currency risks*
  Loans
        and
        deposits in the Group companies are mainly made through Volvo Treasury in
        local
        currencies and financial currency exposure in the individual entities are
        thereby being minimized. Volvo Treasury uses various derivative instruments
        in
        order to provide deposits and lending in different currencies without increasing
        the company’s own risk. The Volvo Group’s net financial position is being
        affected by changes in currency rates because financial assets and liabilities
        are allocated between Group companies operating in different
        currencies.
  *Equity
        currency risks*
  The
        Group
        value of assets and liabilities in foreign subsidiaries is affected by currency
        exchange rates in connection with the translation to SEK. Equity currency
        risks
        are being minimized by ongoing optimization of the amount of equity in foreign
        subsidiaries with consideration of commercial and legal prerequisites. Equity
        hedging could be made if the equity level of a foreign subsidiary is considered
        as too high. At year-end 2005, net assets in subsidiaries and in associated
        companies outside Sweden amounted to SEK 33.7 billion. Of this amount,
        SEK 0.8 billion was hedged by loans in foreign currencies. Hedging of
        investments in associated companies and other companies will be executed on
        a case-by-case basis.
  **Interest
        rate risks**
  Interest
        rate risks include the risks that changes in interest rates affects the Group’s
        income and cash-flow (cash-flow risks) or the fair value of financial assets
        and
        liabilities (price risks). By matching fixed interest periods of financial
        assets and liabilities the exposure for interest rate risks is reduced. Interest
        rate swaps are used to change the fixed interest rate periods of the Group’s
        financial assets and liabilities. Exchange rate swaps make it possible to
        borrow
        in foreign currencies in different markets without incurring currency risks.
        Volvo also holds standardized futures and forward rate agreements. The majority
        of these contracts are used to secure interest levels for short-term borrowing
        or deposits. Carrying amounts, fair values and additional specifications
        of
        derivative instruments used to manage currency and interest rate risks related
        to financial assets and liabilities are shown in the adjoining table.
  *Cash-flow
        risks*
  The
        exposure for cash-flow risks related to changes in interest rates pertains
        mainly to the Group’s customer financing operations and interest net. According
        to the Group policy, matching of interest rate terms between lending and
        funding
        should exceed 80% in the customer financing operations. At the end of 2005,
        this
        matching was 99%. Volvo’s interest-bearing assets, apart from the customer
        financing portfolio, consisted at the end of 2005 mainly of liquid funds
        that
        were invested in interest bearing securities with short-term maturities.
        By use
        of derivative instruments, the target is to achieve a fixed interest period
        of
        six months for the Group's liquid funds. At December 31, 2005, the average
        interest rate on liquid funds was 2.3%. Volvo’s interest bearing liabilities,
        apart from loans designated to funding of the customer financing portfolio,
        consisted on the same date mainly of provisions for post-employment benefits
        and
        loans. For the outstanding loans, the interest rate terms with
        consideration of derivative instruments were corresponding to a fixed interest
        period of six months. The average interest rate at year-end was 4.7%.
  F-60
  If
        assuming an instantaneous one percentage (100 basis points) increase in
        interest rates of all currencies from their levels at December 31, 2005,
        with
        all other variables held constant, Volvo’s income after financial items over a
        12-month period would increase by 225. If assuming a corresponding one
        percentage (100 basis points) decrease in interest rates, Volvo’s income
        after financial items would decrease by the same amount. It should be noted
        that the assumptions on which this sensitivity analysis is based upon rarely
        occur in reality. Actual interest rates rarely move instantaneously. Also,
        the
        sensitivity analysis assumes a parallel shift of the yield curve and that
        both
        assets and liabilities react correspondingly to changes in market interest
        rates. The impact from actual interest rate movements may thus differ from
        the
        above analysis.
  *Price
        risks*
  The
        exposure for price risks as a result of changes in interest rates is
        attributable to financial assets and liabilities with extended fixed interest
        rate terms. A comparison between carrying values and fair values of Volvo’s
        all financial assets, liabilities and derivative instruments is presented
        in the
        table  below.
  **Outstanding
                  derivate instruments for hedging of currency risks and interest
                  rate risks
                  related to financial assets and liabilities**December
                  31, 2004
              
              December
                  31, 2005Notional
                amount
              
              Carrying
                value
              
              Fair
                value
              
              Notional
                amount
              
              Carrying
                value
              
              Fair
                valueInterest-rate
                  swaps-
                  receivable position
              
              
              76,667
              
              
              1,659
              
              
              2,919
              
              
              101,483
              
              
              2,348
              
              
              2,348-
                  payable position
              
              
              68,018
              
              
              (1,585
              )
              
              (2,144
              )
              
              116,824
              
              
              (2,222
              )
              
              (2,222
              )Forwards
                  and futures-
                  receivable position
              
              
              497,951
              
              
              168
              
              
              168
              
              
              395,144
              
              
              120
              
              
              120-
                  payable position
              
              
              499,512
              
              
              (182
              )
              
              (182
              )
              
              343,309
              
              
              (112
              )
              
              (112
              )Foreign
                  exchange derivative contracts-
                  receivable position
              
              
              17,120
              
              
              286
              
              
              286
              
              
              18,619
              
              
              355
              
              
              355-
                  payable position
              
              
              8,273
              
              
              (82
              )
              
              (107
              )
              
              14,474
              
              
              (331
              )
              
              (331
              )Options
                  purchased, caps and floors-
                  receivable position
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              0
              
              
              0-
                  payable position
              
              
              200
              
              
              -
              
              
              (4
              )
              
              502
              
              
              (5
              )
              
              (5
              )Options
                  written, caps and floors-
                  receivable position
              
              
              133
              
              
              0
              
              
              0
              
              
              0
              
              
              0
              
              
              0-
                  payable position
              
              
              1,946
              
              
              (12
              )
              
              (12
              )
              
              822
              
              
              (5
              )
              
              (5
              )Total
              
              
              
              
              
              252
              
              
              924
              
              
              
              
              
              148
              
              
              148
  **Market
        risks attributable to investments in shares or other equity
        instruments**
  The
        Volvo
        Group is exposed to market risks attributable to investments in shares or
        other equity instruments because funds that have been transferred
        to Volvo's pension plans partially are invested in instruments of this
        nature. Additional information regarding plan assets and obligations of
        Volvo's pension plans is presented in .
  **Credit
        risks**
  Volvo’s
        granting of credits is governed by common policies and rules for classification
        of customers. The credit portfolio should include a proper distribution among
        different categories of customers and industries. Credit risks are managed
        through active monitoring, follow-up routines and in appropriate cases
        repossession of products. Furthermore, it is continuously monitored that
        appropriate allowances are made for doubtful receivables.
  F-61
  On
        December 31, 2005, the credit portfolio within Volvo’s customer financing
        operations amounted to approximately SEK 79 billion. The credit risks
        within this portfolio are distributed among a large number of individual
        customers and dealers. Collaterals exist in the form of the products being
        financed. When granting credits, an effort is made to balance risk exposure
        and
        expected yield.
  The
        Volvo
        Group’s financial assets are primarily managed by Volvo Treasury and invested in
        the money and capital markets. All investments must meet criteria for low
        credit
        risk and high liquidity. In accordance with Volvo’s credit policy,
        counterparties for both investments and transactions in derivatives must
        in
        general have received a rating of “A” or better from one of the well established
        credit-rating agencies.
  When
        using derivative instruments a counterparty risk will arise, i.e. the risk
        that a counterparty will not fulfill its part of a contract and that a potential
        gain will not be realized. Where appropriate, master netting agreements are
        signed with the respective counterparties to reduce exposure. The credit
        risk in
        futures contracts is limited through daily or monthly cash settlements of
        the
        net change in value of open contracts. The estimated gross exposure for
        counterparty risks related to forward exchange contracts, interest rate swaps
        and futures, options and commodity forward contracts amounted to 891;
        2,468; 51 and 54 as of December 31, 2005.
  **Liquidity
        risks**
  Volvo
        maintains a strong financial position by continuously keeping a certain
        percentage of sales in liquid assets. A proper balance between short-term
        and
        long-term borrowing, as well as the ability to borrow in the form of credit
        facilities, are designed to ensure long-term financing.
  **Fair
                  value of Volvo’s financial instruments (1**December
                  31, 2004
              
              December
                  31, 2005Carrying
                  value
              
              Fair
                  value
              
              Carrying
                  value
              
              Fair
                  value**Assets**Investments
                  in shares and participationsfair
                  value determinable (2
              
              
              670
              
              
              169
              
              
              253
              
              
              253fair
                  value not reliably determinable (3
              
              
              420
              
              
              -
              
              
              303
              
              
              -Customer-financing
                  receivables
              
              
              51,193
              
              
              51,948
              
              
              64,466
              
              
              65,365Other
                  loans to external parties and other interest-bearing
                  receivables
              
              
              3,047
              
              
              3,075
              
              
              1,355
              
              
              1,318Marketable
                  securities
              
              
              25,955
              
              
              25,955
              
              
              28,834
              
              
              28,834**Total**
              
              
              **81,285**
              
              
              **81,147**
              
              
              **95,211**
              
              
              **95,770****Liabilities**Long-term
                  bond loans and other loans (5
              
              
              40,411
              
              
              41,684
              
              
              43,761
              
              
              44,338Short-term
                  bank loans and other loans (5
              
              
              21,396
              
              
              21,584
              
              
              31,589
              
              
              31,472**Total**
              
              
              **61,807**
              
              
              **63,268**
              
              
              **75,350**
              
              
              **75,810****Derivative
                  instruments (4**Outstanding
                  derivative contracts for hedging of commercial currency
                  risks
              
              
              176
              
              
              1,371
              
              
              -
              
              
              -Outstanding
                  commodity contracts
              
              
              -
              
              
              (25
              )
              
              -
              
              
              -Outstanding
                  derivative contracts for hedging of financial currency risks and
                  interest rate risks
              
              
              252
              
              
              924
              
              
              -
              
              
              -
  1)
        This
        table only includes a comparison between carrying values and fair values
        for interest bearing balance sheet items and derivative instruments. For
        non
        interest bearing financial instruments, such as accounts receivable and trade
        payables, the carrying values are considered to be equal to the fair
        values.
 2) Pertains
        mainly to Volvo’s investment in Deutz AG. For the purpose of these
        disclosures, fair values of listed shares are based upon quoted market prices
        at
        the end of the period.
 3) No
        single investment represents any significant amount.
 4)
        All
        derivative instruments has been booked to fair value in the balance sheet
        in
        accordance with IAS 39
 5)
        Including basis adjustment booked at the IFRS transition.
  F-62
 
 **Note
        37 - Net income and shareholders' equity in accordance with US
        GAAP**
 A
        summary
        of the Volvo Group’s net income and shareholders’ equity determined in
        accordance with US GAAP, is presented in the accompanying tables.
  In
        conjunction with the transition to IFRS, certain adjustment entries have
        changed
        as a result of Volvo’s own accounting having changed and become, in many
        instances, closer to US GAAP, see note 3 Impact from IFRS.
  Application
        of US GAAP would have the following effect on consolidated net income and
        shareholders’ equity:
  **Net
                  income**
              
              2004
              
              2005Income
                  for the period in accordance with IFRS
              
              
              9,907
              
              
              13,106Items
                  increasing (decreasing) reported net income******Derivative
                  instruments and hedging activities (A)**
              
              
              228
              
              
              9******Business
                  combinations (B)**
              
              
              -
              
              
              -**Investments
                  in debt and equity securities (C)**
              
              
              5,157
              
              
              -Restructuring
                  costs (D)
              
              
              311
              
              
              (153
              )Post-employment
                  benefits (E)
              
              
              (286
              )
              
              (307
              )Product
                  development (F)
              
              
              (565
              )
              
              (1,601
              )Entrance
                  fees, aircraft engine programs (G)
              
              
              (392
              )
              
              (156
              )Other
                  (H)
              
              
              (60
              )
              
              98Income
                  taxes on above US GAAP adjustments (I)
              
              
              156
              
              
              438Net
                  increase (decrease) in net income
              
              
              4,549
              
              
              (1,672
              )Minority
                  interest (J)
              
              
              (40
              )
              
              (38
              )**Net
                  income (loss) in accordance with US GAAP**
              
              
              **14,416**
              
              
              **11,396****Net
                  income (loss) per share, SEK in accordance with US
                  GAAP**
              
              
              **34.44**
              
              
              **28.12**Weighted
                  average number of shares outstanding (in thousands)
              
              
              418,529
              
              
              405,242
  **Shareholders’
                  equity**
              
              2004
              
              2005Shareholders’ equity
                  in accordance with IFRS
              
              
              70,155
              
              
              78,768Items
                  increasing (decreasing) reported shareholders' equityDerivative
                  instruments and hedging activities (A)
              
              
              1,300
              
              
              140Business
                  combinations (B)
              
              
              5,932
              
              
              5,932Investments
                  in debt and equity securities (C)
              
              
              (494
              )
              
              -Restructuring
                  costs (D)
              
              
              311
              
              
              158Post-employment
                  benefits (E)
              
              
              1,326
              
              
              990Product
                  development (F)
              
              
              (4,708
              )
              
              (6,450
              )Entrance
                  fees, aircraft engine programs (G)
              
              
              (1,320
              )
              
              (1,482
              )Other
                  (H)
              
              
              (56
              )
              
              70Income
                  taxes on above US GAAP adjustments (I)
              
              
              862
              
              
              1,620Net
                  increase (decrease) in shareholders' equity
              
              
              3,153
              
              
              978Minority
                  interest (J)
              
              
              (229
              )
              
              (260
              )**Shareholders’
                  equity in accordance with US GAAP**
              
              
              **73,079**
              
              
              **79,486**
 
 F-63
 **Significant
        differences between IFRS and US GAAP for Volvo**
 **A.**  *Derivative
        instruments and hedging activities.* Volvo
        uses forward exchange contracts and currency options to hedge the value of
        future commercial flows of payments in foreign currency and commodity purchases.
        As of 2005, Volvo applies IAS 39, Financial Instruments: Recognition and
        Measurement. The 2004 numbers have not been restated according to IAS 39.
        The
        accounting for derivative instruments and hedging activities under IFRS
        corresponds in substance with US GAAP.
  Volvo
        applied hedge accounting under US GAAP for certain commercial cash flow hedges
        for hedging of interest risk until 2003. At January 1, 2004 this hedge
        accounting was ended. The basis adjustment on previously hedged items booked
        in
        Other Comprehensive Income will be amortized over the remaining time to
        maturity for the contracts.
  At
        January
        1, 2005, Volvo ceased to apply hedge accounting for hedging of interest rate
        risks in fair value hedges. The basis adjustment on previously hedged items
        will
        be amortized over the remaining time to maturity for the contracts. The
        difference in net income and equity for the terminated hedges is
        assignable to different adjustment amounts for the hegdes items and different
        periods of transition.
  **Accounting
                  for derivative instruments**
              
              Net
                  income
              
              Shareholders’
                  equity**and
                  hedging activities**
              
              2004
              
              2005
              
              2004
              
              2005Derivatives
                  Commercial exposure
              
              
              (117
              )
              
              -
              
              
              1,170
              
              
              -Derivatives
                  Financial exposure
              
              
              23
              
              
              (4
              )
              
              672
              
              
              (3
              )Basis
                  adjustment on derecognised fair value hedges
              
              
              322
              
              
              13
              
              
              (542
              )
              
              143**Derivative
                  instruments and hedging activities in accordance with US
                  GAAP**
              
              
              **228**
              
              
              **9**
              
              
              **1,300**
              
              
              **140**
  **B.**  *Business
        combinations.* Effective
        January 1, 2004, acquisitions of certain subsidiaries in Volvo are reported
        in
        accordance with IFRS 3, Business Combinations. Effective in 2002, Volvo adopted
        SFAS 141 “Business Combinations” and SFAS 142 “Goodwill and Other Intangible
        Assets” in its determination of Net income and Shareholders’ equity in
        accordance with US GAAP. Substantially, the accounting principles in IFRS
        3 and
        US GAAP correspond. The main difference being that they have different periods
        of transition.
  In
        accordance with the transition rules of SFAS 142, Volvo has identified its
        “Reporting units” and determined the carrying value and fair value of each
        reporting unit as of January 1, 2002. No impairment loss was recognized as
        a
        result of the transitional goodwill evaluation. Furthermore, impairment tests
        have been performed, yearly in the year end close process, for
        existing goodwill. No impairment loss has been recognized as a result of
        these
        tests, see Note 14.
  In
        2001,
        AB Volvo acquired 100% of the shares in Renault V.I. and Mack Trucks Inc.
        from
        Renault SA in exchange for 15% of the shares in AB Volvo. The goodwill
        attributable to this acquisition was set at SEK 8.4 billion. Under US GAAP
        the
        corresponding goodwill amounted  to SEK 11.5 billion. The difference was
        mainly attributable to determination of the purchase consideration. In
        accordance with Swedish GAAP applicable in 2001, when a subsidiary is
        acquired through the issue of own shares, the purchase consideration is
        determined based on the market price of the issued shares at the time the
        transaction is completed. In accordance with US GAAP, such a purchase
        consideration is determined based on the market price of the underlying shares
        for a reasonable period before and after the terms of the transaction are
        agreed
        and publicly announced. The goodwill value has been reduced by 974  in
        accordance with an agreement reached  between AB Volvo and Renault SA about
        the final value of the acquired assets and liabilities in Renault V.I. and
        Mack
        Trucks. Volvo has chosen not to account for aquisitions prior to  2004
        according to IFRS 3.
  F-64
  In
        1995,
        AB Volvo acquired the outstanding 50% of the shares in Volvo Construction
        Equipment Corporation (formerly VME) from Clark Equipment Company in the
        US.
        Surplus value (goodwill) of SEK 2.8 billion was reported in conjunction with
        the
        acquisition. In the Volvo Group’s consolidated financial statements, the
        shareholding was written down by SEK 1.8 billion, which was estimated to
        correspond to that portion of the goodwill that was attributable to the Volvo
        trademark at the time of the acquisition. Under US GAAP, the goodwill of
        SEK 2.8
        billion was amortized over its estimated useful life (20 years) up to and
        including 2001. As of January 1, 2002, and in accordance with SFAS 142 (see
        above), no planned amortization of goodwill is made.
  Under
        IFRS
        no yearly amortization of goodwill is made. This corresponds with US GAAP
        and no adjustment of net income is made in 2005.
  Shareholders’
                  equity**Goodwill**
              
              2004
              
              2005Goodwill
                  in accordance withIFRS
              
              
              10,321
              
              
              11,072Items
                  affecting reporting of goodwill:Acquisition of Renault V.I. and Mack Trucks
                  Inc.
              
              
              3,744
              
              
              3,744Acquisition
                  of Volvo ConstructionEquipment
                  Corporation
              
              
              1,328
              
              
              1,328Other
                  acquisitions
              
              
              860
              
              
              860Net
                  change in accordance with US GAAP
              
              
              5,932
              
              
              5,932**Goodwill
                  in accordance with US GAAP**
              
              
              **16,252**
              
              
              **17,004**
 
 **C.** *Investments
        in debt and equity securities.*
  In
        accordance with US GAAP, Volvo applies SFAS 115: “Accounting for Certain
        Investments in Debt and Equity Securities.” SFAS 115 addresses the accounting
        and reporting for investments in equity securities that have readily
        determinable fair market values, and for all debt securities. As of 2005,
        Volvo
        applies IAS 39, Financial Instruments: Recognition and Measurement. IAS 39
        corresponds in substance with SFAS 115 regarding the accounting for investments
        in debt and equity securities, which means that adjustments to net income
        and
        shareholders’ equity in this regard are no longer made.
  For
        2004
        Volvo has chosen not to account for investments in debt and equity securities
        according to IAS 39, see Note 3 Impact from IFRS. The 2004 difference in
        net
        income is mainly due to the divestment of the investment in Scania.
  **Adjustment
                  from carrying amount**
                **2004
                  to fair value according to IFRS**
              
              SFAS
                  115
                gross
                  adjustment
                2004-12-31
              
              IFRS
                adjustment
              
              SFAS
                  115
                gross
                  adjustment
                2005-01-01Available
                  for sale
              
              
              (494
              )
              
              494
              
              
              0(494
              )
              
              494
              
              
              0
 
 The
                  carrying values and fair values for the securities were distributed
                  as
                  follows:December
                  31, 2004Carrying value
              
              Fair valueAvailable
                  for saleMarketable
                  securities
              
              
              387
              
              
              387Shares
                  and convertible debenture loan
              
              
              677
              
              
              183
  F-65
  **D.** *Restructuring
        costs.*
 Volvo
        reports restructuring costs in accordance with IAS 37 Provisions, contingent
        liabilities and contingent assets. Restructuring costs are reported in the
        year
        restructuring plans have been approved by the Boards of each company and
        communicated to all affected parties. The accounting standards
        for recoginizing restructuring costs under US GAAP, SFAS 146
“Accounting for costs Associated with Exit or Disposal Activities,” are more
        strict. Restructuring costs are, in some cases, accounted for on an
        accrual basis under US GAAP while under IFRS a provision is booked.
  During
        2004, Renault Trucks industrial relocation was treated differently under
        US
        GAAP, compared with IFRS. The restructuring costs will be distributed
        under US GAAP during 2004-2006 while they under IFRS was expensed in its
        entirety in 2004.
  **E.** *Provisions
        for post-employment benefits.* Effective
        2004, provisions for post-employment benefits in Volvo’s consolidated financial
        statements are accounted for in accordance with IAS 19, Employeee benefits.
        See
        Notes 1 and 24. In accordance with US GAAP, post-employment benefits should
        be
        accounted for in accordance with SFAS 87, “Employers Accounting for Pensions”
and SFAS 106, “Employers’ Accounting for Post-retirement Benefits Other than
        Pensions”. The differences between Volvo’s accounting principles according to
        IFRS and US GAAP pertain to different transition dates, recognition of past
        service costs and minimum liability adjustments.
 
 **Net
                  periodical costs for post-employment benefits**
              
              2004
              
              2005Net
                  periodical costs in accordance with IFRS
              
              
              4,401
              
              
              3,736Net
                  periodical costs in accordance with US GAAP
              
              
              4,687
              
              
              4,043**Adjustment
                  of this year's income in accordance with US GAAP, before
                  income taxes**
              
              
              **(286**
              **)**
              
              **(307**
              **)**Dec
                  31
              
              
              Dec
                  31**Net
                  provisions for post-employment benefits**
              
              
              2004
              
              
              2005Net
                  provisions for post-employment benefits in accordance with
                  IFRS
              
              
              (14,332
              )
              
              (11,462
              )Difference
                  in unrecognized actuarial (gains) and losses
              
              
              5,266
              
              
              5,762Difference
                  in unrecognized past service costs
              
              
              602
              
              
              686Minimum
                  liability adjustments
              
              
              (4,542
              )
              
              (5,458
              )**Net
                  provisions for post-employment benefits in accordance with US
                  GAAP**
              
              
              **(13,006**
              **)**
              
              **(10,472**
              **)**
 
 **Note
        37, part 3 - Net income and shareholders' equity in accordance with US
        GAAP**
 **F.**  *Product
        development* .
        Volvo
        applies IAS 38 Intangible Assets. In accordance with IAS 38, expenditures
        for
        development of new products, production and information systems should be
        recognized as intangible assets if such expenditures with a high degree of
        certainty will result in future financial benefits for the company. The
        acquisition value of such intangible assets should be amortized over the
        useful
        lives of the assets. Under US GAAP, all expenditures for development of new
        and existing products should be expensed as incurred. **G.**  *Entrance
        fees, aircraft engine programs.* In
        connection with its participation in aircraft engine programs, Volvo Aero
        in
        certain cases pays an entrance fee. In Volvo’s accounting these entrance fees
        are capitalized and amortized over 5 to 10 years. In accordance with US GAAP,
        these entrance fees are expensed as incurred.
  **H.** *Other* includes
        accounting differences regarding interest costs, leasing, share-based payments,
        guarantees, revenue recognition, consolidation of Variable Interest Entities
        and
        social costs on employee benefits.
  **Interest
        expenses:** In
        accordance with US GAAP, interest expense incurred in connection with the
        financing of the construction of property and other qualifying assets is
        capitalized and amortized over the useful life of the related assets. In
        Volvo’s
        consolidated accounts, interest expenses are reported in the year in which
        they
        arise.
  F-66
  **Leasing:** The
        differences regarding leasing transactions pertain to sale-leaseback
        transactions before 1997.
  **Share-based
        payments:** Volvo
        applies IFRS 2 Share-based payments: At grant date, the fair value of share
        payments is determined and the cost is recognized during the vesting period
        against shareholders’ equity. Adjustment in 2005 pertains to settlement of old
        options programs.
  **Guarantees:** In
        accordance with FIN 45 “Guarantor’s Accounting and Disclosure Requirement for
        Guarantees, Including indirect Guarantees of indebtedness for Others”, a
        liability should be recognized at the time a company issues a guarantee for
        the
        fair value of the obligations assumed under certain guarantee agreements.
        In
        accordance with IFRS, a liability should be recognized to the extent a company
        expects that a loss will be incurred as result of the guarantee commitment.
        At
        December 31, 2005, the gross value of credit guarantees issued for external
        parties amounted to 1,351 (2,869). The fair value of these guarantees recognized
        under US GAAP amounted to 62 (92). Counter guarantees received in respect
        of
        these commitments amounted to 58 (56).
  **Revenue
        recognition:** When
        determining timing for recognition of revenue, US GAAP focuses more on the
        formal contract terms while IFRS focuses more on actual risk that the residual
        value guarantee will be exercised. This means in certain cases that sales
        recognized under IFRS cannot be recognized under US GAAP.
  Under IFRS
        all sales not qualifying for revenue recognition are treated in the same
        way as
        deferred income. Under US GAAP sales that are made to companies who in turn
        lease out the equipment under operating leases are accounted for as financing
        transactions rather than as deferred income. The total impact of revenue
        recognition is an additional 322 (433) as assets under operating leases,
        343 (270) reduced residual value liability and 886 (783) as
        interest-bearing liabilities. The net income effect is positive 4 (negative
        53).
  **Variable
        Interest Entities:** In
        accordance with US GAAP FIN 46 certain entities should be consolidated where
        the
        Group is the Primary Beneficiary of the Variable Interest Entity. Volvo adopted
        FIN 46 as per January 1, 2004. In Volvo this has had a limited impact and
        a
        minor number of entities have been consolidated. The majority of the
        consolidated entities are so called Franchisees to Volvo Rents. The balance
        sheet impact is 25 (42) and the addition in sales is 109 (112).
  **Contracts
        with character of a leasing agreement:** Certain
        contracts do not have the legal form of a leasing agreement, but contain
        clauses
        based on which the contract can be considered a leasing agreement. In Volvo’s
        reporting, under IFRS, this type of asset is not recognized in the balance
        sheet. In accordance with US GAAP, an assessment is made about whether the
        contract is considered a financial or an operational lease and reporting
        shall
        be in accordance with the accounting principles applied. The total effect
        on
        Volvo in an adjustment of the 2005 figures is 67 in financial leasing assets,
        net, and 4 in increased depreciation. As of 2006, Volvo will report in
        accordance with IFRIC 4, Determining whether an agreement contains a lease
        or
        not, which in all significant respects coincides with US GAAP.
  **Cash
        flow:** In
        accordance with IFRS, receivables within Volvo’s customer financing operations
        are classified as cash flow from operating activities. Under US GAAP the
        classification depends on how the actual cash flow occurs. In cases when
        customer financing is to an external customer and thereby results in an actual
        cash flow, according to US GAAP this should be classified as cash flow from
        financing activities. Approximately 15% of Volvo's customer finance receivables
        relates to this kind of contracts and should hence be classified as cash
        flow
        from investing activities under US GAAP.
  **Payroll
        Tax:** An
        adjustment of positive 104 has been booked for social expenses on employee
        benefits.
  **I.**  *Income
        taxes on US GAAP adjustments.* Deferred
        taxes are reported for temporary differences arising from differences between
        US
        GAAP and IFRS.
  **J.**  *Minority
        interest:* In
        accordance with IFRS, minority interest is recognized a part of shareholders’
equity and are included in net income for the year in the income statement.
        Under US GAAP, minority interest is reported as a separate item in both the
        income statement and balance sheet.
  F-67
  **Comprehensive
                  income (loss)**
              
              2004
              
              2005Net
                  income (loss) in accordance with US GAAP
              
              
              14,416
              
              
              11,396Other
                  comprehensive income (loss), net of income taxesTranslation
                  differences
              
              
              (172
              )
              
              3,458Unrealized
                  gains and (losses) on securities (SFAS 115):Unrealized
                  gains (losses) arising during the year
              
              
              (14
              )
              
              83Less:
                  Reclassification adjustment for (gains) and losses included in
                  net
                  income
              
              
              (3,285
              )
              
              -Additional minimum liability for pension obligations (SFAS
                  87)
              
              
              (471
              )
              
              (284
              )Fair
                  value of cash-flow hedges (SFAS 133)
              
              
              13
              
              
              (1,442
              )Other
              
              
              (1
              )
              
              98Other
                  comprehensive income (loss), subtotal
              
              
              (3,930
              )
              
              1,913**Comprehensive
                  income (loss) in accordance with US GAAP**
              
              
              **10,486**
              
              
              **13,309**
 
 **Note
        37, continued, supplementary US GAAP information**
  **Recent
        US accounting pronouncements issued but not yet adopted**
  *SFAS123(R):
          Share-based payment*
 
 SFAS123(R)
          was issued in December 2004 and is effective for the first annual reporting
          period that starts after 15 December 2005. It supersedes APB Opinion 25,
          Accounting for Stock Issued to Employees. SFAS123(R) is concerned with
          how to
          account for transactions in which an entity exchanges its equity instruments
          for
          goods or services. It also addresses transactions in which an entity incurs
          liabilities in exchange for goods or services that are based on the fair
          value
          of the entity’s equity instruments or that may be settled by the issuance of
          those equity instruments. The main effect of this revised standard is a
          move
          from an intrinsic value method to a fair value based method.
  In
          March
          2005, the SEC issued Staff Accounting Bulletin No. 107, ”Share-Based Payment”
(“SAB No. 107”). SAB No. 107 provides guidance on the initial implementation of
          SFAS No. 123(R). In particular, the statement includes guidance related
          to share
          based payment awards with non-employees, valuation methods and selecting
          underlying assumptions such as expected volatility and expected term. It
          also
          gives guidance on the classification of compensation expense associated
          with SBP
          awards and accounting for the income tax effects of SBP awards upon the
          adoption
          of SFAS No. 123(R).
  We
          are
          currently assessing the guidance provided in SAB No. 107 in connection
          with the
          implementation of SFAS No. 123(R), but expect that the adoption of SFAS
          No.
          123(R) would have decreased the income statement charge under US GAAP by
          approximately SEK 100million for the year ended 31 December 2005.
 *SFAS151:
        Inventory costs*
 
 SFAS151
        was issued in November 2004 and is effective for all inventory costs incurred
        during fiscal years beginning after 15 June 2005. This statement amends ARB
        43
        and requires all idle facility expense, excessive spoilage, double freight
        and
        re-handling costs to be recognized as current-period charges regardless of
        whether they meet the criterion of ‘so abnormal’ (as previously stated in ARB
        43). In addition, ARB 43 required that the allocation of fixed production
        overheads to the costs of conversion be based on the normal capacity of the
        production facilities. Unallocated overheads are recognized as an expense
        in the
        period in which they are incurred. SFAS No. 151 is effective for inventory
        costs incurred during fiscal years beginning after June 15, 2005. The
        adoption of SFAS 151 is not expected to have a material effect on the results
        or
        net assets of the group.
  F-68
  *SFAS154:
        Accounting changes and error corrections*
 
 SFAS154
        was issued in May 2005 and is effective for fiscal years beginning after
        15
        December 2005. This statement replaces APB Opinion 20, Accounting Changes,
        and
        SFAS 3, Reporting Accounting Changes in Interim Financial Statements. SFAS
        No.
        154 provides guidance on the accounting for and reporting of accounting changes
        and error corrections. It establishes retrospective application as the required
        method for reporting a change in accounting principle. SFAS No. 154 provides
        guidance for determining whether retrospective application of a change in
        accounting principle is impracticable and for reporting a change when
        retrospective application is impracticable. SFAS No. 154 also addresses the
        reporting of a correction of an error by restating previously issued financial
        statements. SFAS No. 154 is effective for accounting changes and corrections
        of
        errors made in fiscal years beginning after December 15, 2005. We will be
        adopting this pronouncement beginning in our fiscal year 2006.
   *SFAS
        155: Accounting for Certain Hybrid Financial Instruments*
 
 In
        February 2006, the FASB issued FASB Statement No. 155 (SFAS 155), Accounting
        for
        Certain Hybrid Financial Instruments an amendment of FASB Statements No.
        133 and
        140. SFAS 155 nullifies the guidance from the FASB’s Derivatives Implementation
        Group (DIG) in Issue D1, Application of Statement 133 to Beneficial Interests
        in
        Securitized Financial Assets, which deferred the application of the bifurcation
        requirements of SFAS 133 for certain beneficial interests. SFAS 155 provides
        a
        fair value measurement option for certain hybrid financial instruments that
        contain an embedded derivative that could otherwise require bifurcation and
        requires that beneficial interests in securitized financial assets be analyzed
        to determine whether they are freestanding derivatives or whether they are
        hybrid instruments that contain embedded derivatives requiring bifurcation.
        SFAS
        155 also provides clarification on specific points related to derivative
        accounting. SFAS 155 is effective for fiscal years beginning after 15 September
        2006. The Company does not currently expect SFAS 155 to have a material impact
        on its financial position, results of operations or cash flows.
  
 *EITF
        05-05 Accounting for Early Retirement or Post-employment Programs with Specific
        Features*
 
 In
        June
        2005 EITF 05-05 Accounting for Early Retirement or Post-employment Programs
        with
        Specific Features (Such As Terms Specified in Altersteilzeit Early Retirement
        Arrangements) was issued. EITF 05-05 provides specific guidance on how to
        account for such features and is effective for fiscal years beginning after
        15
        December 2005. The Company is currently evaluating the impact of this
        EITF.
  F-69
  **Segment
        reporting**
  2004
              
              2005Long-lived
                  assets:1Europe
              
              
              69,269
              
              
              75,429North
                  America
              
              
              21,341
              
              
              27,128South
                  America
              
              
              1,934
              
              
              2,749Asia
              
              
              2,534
              
              
              3,198Other
                  markets
              
              
              410
              
              
              429**Total**
              
              
              **95,488**
              
              
              **108,933***whereof:*Sweden
              
              
              26,124
              
              
              27,099United
                  States
              
              
              17,842
              
              
              21,531France
              
              
              15,641
              
              
              17,426
 
 1)
        Defined
        as Non-current assets less Long-term interest-bearing financial assets and
        long-term deferred tax assets. The distribution between geographical areas
        is
        based on the domicile countries of the legal entities within the
        Group.
  **Allowance
        for customer-financing receivables**
  The
        changes in the valuation allowance for customer-financing receivables are
        presented in the table below:
  **Valuation
                  allowance for customer finance receivables**
              
              2004
              
              2005Balance
                  at December 31, preceding year
              
              
              1.364
              
              
              1,344Change
                  of reserve charged to income
              
              
              535
              
              
              446Utilization
                  of reserve related to
                actual
                  losses
              
              
              (422
              )
              
              (285
              )Translation
                  differences
              
              
              (52
              )
              
              191Reclassifications,
                  etc.
              
              
              (81
              )
              
              60Balance
                  at December 31, current year
              
              
              1.344
              
              
              1.756
 
 F-70
  **Accruals
        for restructuring measures**
  During
        2001 a provision for restructuring measures of 3,862 was recognized. In Trucks
        the restructuring provision included costs for the integration of Mack and
        Renault V.I. in order to secure coordination gains made possible through
        the
        acquisition. The integration measures included reduction of the North American
        production capacity through a decision to close Mack’s Winnsboro plant and
        transfer of production to Volvo’s New River Valley plant. The closure of the
        Winnsboro plant was concluded in the fourth quarter 2002. Integration measures
        further included restructuring of the global distribution system and production
        structure. In addition to the integration measures, restructuring costs in
        Trucks included significant personnel reductions due to the prevailing business
        conditions, especially in North America. Restructuring measures in Buses
        were
        attributable to the shut down of Nova Bus’ plant for city buses in Roswell,
        United States. In Construction Equipment, restructuring measures were pertaining
        to close down of fabrication in the Asheville plant, United States, and to
        an
        overall redundancy program. In total, approximately 4,200 employees were
        affected by reductions as a consequence of the restructuring measures. Most
        part
        of these employees had left the Group at December 31, 2003. The changes of
        accruals for restructuring measures relating to the programs described above
        are
        shown in the following table:
  **Accruals
                  for restructuring measures**
              
              2004
              
              2005Balance
                  at December 31, preceding year
              
              
              578
              
              
              113Accrual
                  charged to income:Termination
                  benefits
              
              
              -
              
              
              -Exit
                  costs
              
              
              -
              
              
              -Utilization
                  of provisions:Termination
                  benefits
              
              
              (365
              )
              
              (24
              )Exit
                  costs
              
              
              (99
              )
              
              (25
              )Translation
                  differences
              
              
              (1
              )
              
              4Balance
                  at December 31, current year
              
              
              113
              
              
              68
  F-71
 
 **Stock
        based compensation**
  Volvo
        has
        several stock option schemes, which are described in “Item 18 - Financial
        Statements - Note 34”. These plans are for US GAAP purposes accounted for in
        accordance with APB 25. The impact on net income for 2005 and 2004 of accounting
        for these plans in accordance with SFAS 123 would have been positive SEK
        100 M
        and SEK 30 M respectively.
   **Note
        38 Subsequent events**
  **Volvo
        became major shareholder in Nissan Diesel.** On March
        21 AB Volvo acquired 40 million common shares, corresponding to 13% of the
        common shares, in the Japanese truck manufacturer Nissan Diesel from Nissan
        Motor Co. Ltd, with an option to acquire the remaining 6% of the common shares
        in Nissan Diesel held by Nissan Motor within four years. The purchase price
        is
        approximately SEK 1.5 billion.
  The
        transaction strengthens the Volvo Group's Asian strategy and is intended
        to
        provide the Group with access to Nissan Diesel's dealer and service network
        in
        Japan and Southeast Asia, and create a possibility for further industrial
        cooperation with Nissan Diesel in such areas as engines and
        transmissions.
  **Renault
        Trucks signed agreement in principle with Nissan Motors concerning new light
        truck** .
        In
        February, AB Volvo's subsidiary Renault Trucks entered into an agreement
        in
        principle with Nissan Motor Co., Ltd concerning the sales and marketing of
        a new
        light truck. The new truck, which will be manufactured by Nissan and sold
        under
        the Renault name, will supplement Renault Trucks' existing offer of light
        trucks, Renault Master and Renault Mascott.
  In
        accordance with the agreement, the new truck will be sold via Renault Trucks'
        dealers, and deliveries are scheduled to commence during the first half of
        2007.
        The new truck will be based on the same platform as that to be used for the
        next
        generation Nissan Cabstar and Atlas.
  **Volvo
        Group premiered hybrid technology for heavy vehicles.**  In
        the
        beginning of March, Volvo Group presented a new, efficient hybrid solution
        for
        heavy vehicles. The
        Volvo
        Group’s hybrid concept provides maximum fuel-saving effects on routes with
        frequent braking and accelerations, for example, city bus traffic, city
        distribution, refuse collection and construction work. Calculations indicate
        that fuel savings can amount to 35 percent in these applications.
  **Volvo
        Trucks launched new models for the North American market** .
        In
        March, Volvo Trucks announced a broadening of its product program on the
        North
        American truck market with the launch of two models with new cab variants
        for
        the prestige segment, the Volvo VT830 and Volvo VN730. Both the Volvo VN
        and the
        Volvo VT will be available with a new sleeper cab with lower roof height.
        Both
        models are intended primarily for owner operators. The newly launched cab
        models
        offer the same interior roominess, and the lower roof provides better
        aerodynamics and correspondingly improved fuel economy for rigs with low
        trailers, such as tankers.
  **Annual
        General Meeting of AB Volvo.** At
        the
        Annual General Meeting of AB Volvo held on April 5, 2006, the Board's proposal
        to pay a dividend to the shareholders of SEK 16,75 per share, a total of
        about
        SEK 6,775 M, was approved.
  Per-Olof
        Eriksson, Tom Hedelius, Leif Johansson, Louis Schweitzer and Finn Johnsson
        were
        re-elected members of the Board of AB Volvo and Ying Yeh, Philippe Klein
        and
        Peter Bijur were newly elected. Finn Johnsson was elected Board Chairman.
  The
        Meeting resolved to establish a share-based incentive program during the
        second
        quarter of 2006 for senior executives in the Volvo Group. The program mainly
        involves that a maximum of 518,000 Series B shares in the Company could be
        allotted to a maximum of 240 senior executives, including members of the
        Group
        Executive Committee, during the first six months of 2007. The allotment shall
        depend on the degree of fulfillment of certain financial goals for the 2006
        fiscal year, which have been set by the Board. If these goals are fulfilled
        in
        their entirety and if the price of the Volvo B share at the time of allotment
        is
        SEK 370, the costs for the program will amount to about SEK 230 M. So that
        Volvo
        shall be able to meet its commitment in accordance with the program in a
        cost-efficient manner, the Meeting further resolved that Volvo may transfer
        own
        shares (treasury stock) to the participants in the program.
  **Renault
        Trucks launches new versions of Renault Midlum and Renault Premium D.** AB
        Volvo's
        subsidiary Renault Trucks has launched new versions of the Renault Midlum
        and
        Renault Premium Distribution targeted for distribution applications. Among
        other
        features, the new vehicles are equipped with a totally new cab, new chassis
        and
        new driveline. The new generation of the Renault Midlum and Renault Premium
        Distribution trucks is part of an extensive program of product renewal that
        Renault Trucks has been pursuing in recent years. The new versions are adapted
        for all needs in city transport and regional distribution.
  F-72