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SECURITIES
  AND EXCHANGE COMMISSION
  Washington, D.C. 20549

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FORM 20-F

(Mark one)

|( ) |  | REGISTRATION
      STATEMENT PURSUANT TO SECTION 12 (b) OR (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          
|( ) |  | TRANSITION
      REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF1934
      
      Commission file number 0-17444 or                   
|( ) |  | SHELL
      COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
      ACT OF 1934 
      Date of event requiring this shell company report



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

The
  Netherlands(Jurisdiction of incorporation or
  organization)

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

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

|Title of each class               | Name
        of each exchange on which registered
|--------------------------------- | -------------------------------------------------
|American Depositary
      Shares  | NASDAQ/NMS                                       
|Common shares of
      EUR 2 each | NASDAQ/NMS*                                      

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

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

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

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

|Common shares, par
      value EUR 2 per share     | 286,147,260
|-------------------------------------------------- | -----------
|Priority shares,
      par value EUR 400 per share | 48         

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

|Yes | No
|--- | --



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

|Yes | No
|--- | --

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

|Large
        accelerated filer | Accelerated
        filer | Non-accelerated
        filer
|------------------------------- | ------------------------- | -----------------------------

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

|Yes | No
|--- | --

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

|Item
        17 | Item
        18
|--------------- | ---------------

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

|Yes | No
|--- | --

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1

|                | Akzo
      Nobel N.V.                                                              |    
|--------------- | ---------------------------------------------------------------------------------- | ---
|                | TABLE
      OF CONTENTS                                                            |    
|                |                                                                                    |    
|PART I          |                                                                                    |    
|                |                                                                                    |    
|                | Introduction                                                                       | 3  
|                |                                                                                    |    
|Item
      1    | Identity
      of directors, senior management and advisors                        | 5  
|                |                                                                                    |    
|Item
      2    | Offer
      statistics and expected timetable                                      | 5  
|                |                                                                                    |    
|Item
      3    | Key
      information                                                              | 5  
|                |                                                                                    |    
|Item
      4    | Information
      on the company                                                   | 16 
|                |                                                                                    |    
|Item
      4.A  | Unresolved
      staff comments                                                    | 59 
|                |                                                                                    |    
|Item
      5    | Operating
      and financial review and prospects                                 | 59 
|                |                                                                                    |    
|Item
      6    | Directors,
      senior management and employees                                   | 78 
|                |                                                                                    |    
|Item
      7    | Major
      shareholders and related party transactions                            | 100
|                |                                                                                    |    
|Item
      8    | Financial
      information                                                        | 102
|                |                                                                                    |    
|Item
      9    | The
      offer and listing                                                        | 103
|                |                                                                                    |    
|Item
      10   | Additional
      information                                                       | 105
|                |                                                                                    |    
|Item
      11   | Quantitative
      and qualitative disclosure about market risk                    | 116
|                |                                                                                    |    
|Item
      12   | Description
      of securities other than equity securities                       | 119
|                |                                                                                    |    
|PART II         |                                                                                    |    
|                |                                                                                    |    
|Item
      13   | Defaults,
      dividend arreages and delinquencies                                | 119
|                |                                                                                    |    
|Item
      14   | Material
      modifications to the rights of security holders and use of proceeds | 119
|                |                                                                                    |    
|Item
      15   | Disclosure
      Controls and Procedures                                           | 119
|                |                                                                                    |    
|Item
      16.A | Audit
      Committee Financial Expert                                             | 120
|                |                                                                                    |    
|Item
      16.B | Code
      of Ethics                                                               | 120
|                |                                                                                    |    
|Item
      16.C | Principal
      Accountant Fee and Services                                        | 120
|                |                                                                                    |    
|Item
      16.D | Exemptions
      from the listing standards for audit committees                   | 121
|                |                                                                                    |    
|Item
      16.E | Purchases
      of Equity Securities by the Issuer and Affiliated Purchasers       | 121
|                |                                                                                    |    
|PART III        |                                                                                    |    
|                |                                                                                    |    
|Item
      17   | Financial
      statements                                                         | 121
|                |                                                                                    |    
|Item
      18   | Financial
      statements                                                         | 122
|                |                                                                                    |    
|Item
      19   | Exhibits                                                                           | 202
|                |                                                                                    |    
|                | Signatures
      and Certifications                                                | 203
|                |                                                                                    |    
|                | Exhibit
      Index                                                                | 203

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PART I

INTRODUCTION

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

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

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

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

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

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

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

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

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

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

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

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Item
  1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISORS

Not applicable.

Item
  2. OFFER STATISTICS AND EXPECTED TIMETABLE

Not applicable.

Item
  3. KEY INFORMATION

A. SELECTED CONSOLIDATED
  FINANCIAL DATA

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

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

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

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|                                               |                                                                  | 
|---------------------------------------------- | ---------------------------------------------------------------- | 
|                                               | Selected
        financial data for the years ended December 31, | 
|In millions, except
      per share amounts    | 2005                                                             | 
|                                               |                                                                  | 
|                                               | USD                                                              | 
|                                               | (a)                                                              | 
|Consolidated Income
      data:                |                                                                  | 
|                                               |                                                                  | 
|Amounts in accordance
      with IFRS:         |                                                                  | 
|                                               |                                                                  | 
|Revenues                                       | 15,421                                                           | 
|                                               |                                                                  | 
|Operating income                               | 1,763                                                            | 
|                                               |                                                                  | 
|Net income                                     | 1,140                                                            | 
|                                               |                                                                  | 
|Basic earnings per
      share / ADS (b)       | 3.99                                                             | 
|                                               |                                                                  | 
|Amounts in accordance
      with US GAAP:      |                                                                  | 
|                                               |                                                                  | 
|Revenues                                       | 15,321                                                           | 
|                                               |                                                                  | 
|Operating income                               | 1,291                                                            | 
|                                               |                                                                  | 
|Net income                                     | 842                                                              | 
|                                               |                                                                  | 
|Basic earnings per
      share / ADS (b) (c)   | 2.95                                                             | 
|                                               |                                                                  | 
|Diluted earnings per
      share / ADS (b) (c) | 2.94                                                             | 
|                                               |                                                                  | 
|Consolidated Balance
      Sheet data:         |                                                                  | 
|                                               |                                                                  | 
|Amounts in accordance
      with IFRS:         |                                                                  | 
|                                               |                                                                  | 
|Total assets                                   | 14,739                                                           | 
|                                               |                                                                  | 
|Long-term borrowings                           | 3,205                                                            | 
|                                               |                                                                  | 
|Shareholders
      equity                     | 4,051                                                            | 
|                                               |                                                                  | 
|Amounts in accordance
      with US GAAP:      |                                                                  | 
|                                               |                                                                  | 
|Total assets                                   | 19,157                                                           | 
|                                               |                                                                  | 
|Long-term borrowings                           | 3,127                                                            | 
|                                               |                                                                  | 
|Shareholders
      equity                     | 7,949                                                            | 
|                                               |                                                                  | 

|(a) | Amounts
      in this column have been translated solely for the convenience of the reader
      at the Noon Buying Rate on December 31, 2005, of EUR 0.843 = USD 1.00.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(b) | American
      Depositary Shares.                                                                                                                                      
|(c) | For the
      breakdown on earnings from continued and discontinued operations see Note
      23 of the Notes to the Consolidated Financial Statements under (n).      

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

|             |  |                        |  |                       |  |                                  |  |       |  |       |  |         |  |       |  |       | 
|------------ |  | ---------------------- |  | --------------------- |  | -------------------------------- |  | ----- |  | ----- |  | ------- |  | ----- |  | ----- | 
|             |  | Number
      of shares |  |                       |  | Dividends
      per common share |  |       | 
|Year ended   |  |                        |  |                       |  |                                  |  | EUR   |  |       |  |         |  | USD*  |  |       | 
|December 31, |  | Average                |  | End
        of period |  | Interim                          |  | Final |  | Total |  | Interim |  | Final |  | Total | 
|             |  |                        |  |                       |  |                                  |  |       |  |       |  |         |  |       |  |       | 
|2001         |  | 285,888,385            |  | 285,854,813           |  | 0.30                             |  | 0.90  |  | 1.20  |  | 0.26    |  | 0.79  |  | 1.06  | 
|2002         |  | 285,827,092            |  | 285,691,957           |  | 0.30                             |  | 0.90  |  | 1.20  |  | 0.32    |  | 0.94  |  | 1.26  | 
|2003         |  | 285,691,957            |  | 285,691,957           |  | 0.30                             |  | 0.90  |  | 1.20  |  | 0.38    |  | 1.14  |  | 1.52  | 
|2004         |  | 285,745,587            |  | 285,773,239           |  | 0.30                             |  | 0.90  |  | 1.20  |  | 0.41    |  | 1.23  |  | 1.64  | 
|2005         |  | 285,773,239            |  | 285,773,239           |  | 0.30                             |  | 0.90  |  | 1.20  |  | 0.36    |  | 1.06  |  | 1.42  | 
|             |  |                        |  |                       |  |                                  |  |       |  |       |  |         |  |       |  |       | 
|

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

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

|                     |  |          | 
|-------------------- |  | -------- | 
|Year
        ended   |  | Average* | 
|December
        31, |  |          | 
|                     |  |          | 
|2001                 |  | 1.12     | 
|2002                 |  | 1.06     | 
|2003                 |  | 0.88     | 
|2004                 |  | 0.80     | 
|2005                 |  | 0.80     | 
|                     |  |          | 

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

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

|              |  |      |  |      | 
|------------- |  | ---- |  | ---- | 
|              |  | High |  | Low  | 
|              |  |      |  |      | 
|              |  |      |  |      | 
|December 2005 |  | 0.85 |  | 0.83 | 
|January 2006  |  | 0.84 |  | 0.81 | 
|February 2006 |  | 0.84 |  | 0.82 | 
|March 2006    |  | 0.84 |  | 0.82 | 
|April 2006    |  | 0.83 |  | 0.80 | 
|May 2006      |  | 0.79 |  | 0.78 | 
|              |  |      |  |      | 

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

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

B. CAPITALIZATION AND
  INDEBTEDNESS

Not applicable.

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C. REASONS FOR THE OFFER
  AND USE OF PROCEEDS

Not applicable.

D. RISK FACTORS

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

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

| | Within
      Akzo Nobel all managers at all levels are responsible for risk management
      as an integral part of their day-to-day operations and decisions.                                                                                                                                                          
|- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | They are all required
      to identify enterprise risks affecting their businesses and to manage them
      adequately.                                                                                                                                                                                                
| | The Akzo
      Nobel Risk Management function supports and develops the framework that
      enables managers to fulfill these responsibilities.                                                                                                                                                                        
| | Risk boundaries
      are governed by Akzo Nobels Company Statement, Business Principles,
      Internal Authority Schedules, and Corporate Directives in such areas as
      Finance & Control; Insurance; Health, Safety and Environment; Human
      Resources; Communications; and Legal and Intellectual Property.
| | Risk reporting
      covers the perceived likelihood, the assessed impact, and the effectiveness
      of control measures in place to deal with risks. Reporting on these elements
      as well as those preemptive and remedial actions is an integral part of
      our Business Planning & Review cycle.           
| | The internal
      control system, audit procedures, and independent appraisals provide reasonable
      assurance of the effectiveness of our risk management approach.                                                                                                                                                

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

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

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

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

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

External risks

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

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

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

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

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

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

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

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

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

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

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

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

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

| | that the
      company currently owns or operates;           
|- | -------------------------------------------------------------
| | that the company formerly
      owned or operated; or        
| | where waste from the
      companys operations was disposed.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Strategic Decision Making
  Risks

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

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

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

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

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Internal Risks

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Item
  4. INFORMATION ON THE COMPANY

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

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

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

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

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Copies to:

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

OVERVIEW

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

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

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

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

A. HISTORY AND DEVELOPMENT
  OF THE COMPANY

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

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

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

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

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

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

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

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

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

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

B. BUSINESS OVERVIEW

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

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

STRATEGY

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

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

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

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

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

Pharma

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

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

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

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

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

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

Coatings

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

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

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

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

Our medium-term financial
  target is 25% ROI.

Chemicals

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

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

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

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

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

Financing Objectives

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

We will defend our single
  A credit ratings.

ACTIVITIES OF AKZO NOBEL

Industry Segment Information

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

|                                                                                          |          |  |                          |   |       |  |       |  
|----------------------------------------------------------------------------------------- | -------- |  | ------------------------ | - | ----- |  | ----- | -
|                                                                                          | Revenues |  | Operating
        income |  
|Millions of euros                                                                         | 2005     |  | 2004                     |   | 2005  |  | 2004  |  
|                                                                                          |          |  |                          |   |       |  |       |  
|                                                                                          |          |  |                          |   |       |  |       |  
|Organon                                                                                   | 2,425    |  | 2,344                    |   | 415   |  | 275   |  
|Intervet                                                                                  | 1,094    |  | 1,027                    |   | 238   |  | 184   |  
|Coatings                                                                                  | 5,555    |  | 5,237                    |   | 384   |  | 406   |  
|Chemicals                                                                                 | 3,890    |  | 4,317                    |   | 312   |  | 869   |  
|Miscellaneous products,
      intragroup deliveries, non-allocated items and eliminations | 36       |  | (92                      | ) | 137   |  | (207  | )
|                                                                                          |          |  |                          |   |       |  |       |  
|Total                                                                                     | 13,000   |  | 12,833                   |   | 1,486 |  | 1,527 |  
|                                                                                          |          |  |                          |   |       |  |       |  



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|                              |                             |  |              |  |                                       |  |      |  |      |  |      | 
|----------------------------- | --------------------------- |  | ------------ |  | ------------------------------------- |  | ---- |  | ---- |  | ---- | 
|                              |                             |  |              |  | Property,
        plant and equipment |  |      | 
|                              | Identifiable
        assets |  | Expenditures |  | Depreciation                          | 
|Millions of euros             | 2005                        |  | 2004         |  | 2005                                  |  | 2004 |  | 2005 |  | 2004 | 
|                              |                             |  |              |  |                                       |  |      |  |      |  |      | 
|                              |                             |  |              |  |                                       |  |      |  |      |  |      | 
|Organon                       | 2,262                       |  | 2,075        |  | 95                                    |  | 103  |  | 118  |  | 113  | 
|Intervet                      | 1,082                       |  | 968          |  | 54                                    |  | 54   |  | 40   |  | 38   | 
|Coatings                      | 3,328                       |  | 3,094        |  | 112                                   |  | 122  |  | 126  |  | 119  | 
|Chemicals                     | 2,946                       |  | 2,773        |  | 252                                   |  | 269  |  | 233  |  | 260  | 
|Miscellaneous products,       |                             |  |              |  |                                       |  |      |  |      |  |      | 
|nonallocated
      items and  |                             |  |              |  |                                       |  |      |  |      |  |      | 
|eliminations,
      including |                             |  |              |  |                                       |  |      |  |      |  |      | 
|cash
      and cash           |                             |  |              |  |                                       |  |      |  |      |  |      | 
|equivalents                   | 2,506                       |  | 2,723        |  | 1                                     |  | 3    |  | 11   |  | 10   | 
|                              |                             |  |              |  |                                       |  |      |  |      |  |      | 
|                              | 12,124                      |  | 11,633       |  | 514                                   |  | 551  |  | 528  |  | 540  | 
|Nonconsolidated               |                             |  |              |  |                                       |  |      |  |      |  |      | 
|companies                     | 301                         |  | 318          |  |                                       |  |      |  |      |  |      | 
|                              |                             |  |              |  |                                       |  |      |  |      |  |      | 
|Total                         | 12,425                      |  | 11,951       |  | 514                                   |  | 551  |  | 528  |  | 540  | 
|                              |                             |  |              |  |                                       |  |      |  |      |  |      | 

Percent of total revenues
  and total operating income

|                                                    |          |  |                        |   |      |  |      |  
|--------------------------------------------------- | -------- |  | ---------------------- | - | ---- |  | ---- | -
|                                                    | Revenues |  | Operating
      income |  
|                                                    | 2005     |  | 2004                   |   | 2005 |  | 2004 |  
|                                                    |          |  |                        |   |      |  |      |  
|                                                    |          |  |                        |   |      |  |      |  
|Organon                                             | 19       |  | 18                     |   | 28   |  | 18   |  
|Intervet                                            | 8        |  | 8                      |   | 16   |  | 12   |  
|Coatings                                            | 43       |  | 41                     |   | 26   |  | 27   |  
|Chemicals                                           | 30       |  | 34                     |   | 21   |  | 57   |  
|Miscellaneous products
      and nonallocated items |         |  | (1                     | ) | 9    |  | (14  | )
|                                                    |          |  |                        |   |      |  |      |  
|Total                                               | 100      |  | 100                    |   | 100  |  | 100  |  
|                                                    |          |  |                        |   |      |  |      |  

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

Description of Pharma's
  Business

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

PHARMA

Organon

|· | Brand-name
      prescription pharmaceuticals in the fields gynecology, including both contraceptives
      and hormone therapy, fertility, neuroscience (CNS), and anesthesia,
      as well as complex active pharmaceutical ingredients based on chemical and
      biochemical processes.
|- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Intervet

|· | Veterinary
      vaccines and animal pharmaceuticals.
|- | -----------------------------------------------------



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

|                                |                                   |                                       |   |                                               
|------------------------------- | --------------------------------- | ------------------------------------- | - | ----------------------------------------------
|Major
        Product Lines     | Key
        Products/Applications | Competitive
        Position*        
|                                |                                   |                                       |   |                                               
|Prescription
        drugs,     | ·                                 | Contraceptives,
        infertility   | · | Among
        top four suppliers of           
|complex
        active          |                                   | treatments,
        hormone therapy   |   | hormonal
        contraceptives, second       
|pharmaceutical                  |                                   | (HT)
        and osteoporosis, CNS  |   | largest
        in infertility products; among
|ingredients,
        and animal |                                   | products
        (antidepressants,    |   | top
        five players in HT; investing for 
|products                        |                                   | antipsychotics),
        and muscle   |   | growth
        in CNS; world leader in        
|                                |                                   | relaxants                             |   | neuromuscular
        relaxants               
|                                |                                   | Complex
        active pharmaceutical |   | Leading
        supplier of steroids and      
|                                |                                   | ingredients                           |   | synthetic
        peptides, strong in         
|                                |                                   |                                       |   | heparins
        and insulin recombinant      
|                                |                                   |                                       |   | proteins                                      
|                                | ·                                 | Animal
        vaccines and           | · | Worlds
        third-largest supplier of     
|                                |                                   | pharmaceuticals                       |   | animal
        health products, leading       
|                                |                                   |                                       |   | producer
        of animal health vaccines    
|                                |                                   |                                       |   |                                               

|* | See
      the cautionary statements and the remarks on how the company determined
      its competitive positions under Introduction on pages 3 and 4.
|- | ------------------------------------------------------------------------------------------------------------------------------------------------------

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

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

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

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

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

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

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

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

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

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

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

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

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The following table shows
  our late-stage product candidates:



|Project and compound | Description 
      main indications                                                        | Clinical Development
      Phase                                          
|-------------------- | ------------------------------------------------------------------------------------------- | --------------------------------------------------------------------------
|                     |                                                                                             |                                                                           
|Gynecology           |                                                                                             |                                                                           
|Implanon®            | Progestogen implant                                                                         | Approvable in the United
      States (approved outside the United States)
|                     |                                                                                             |                                                                           
|Org 50081            | Serotonin -2-Blocker
      (hot flashes)                                                    | III                                                                       
|NOMAC/E2             | Oral contraceptive
      in-licensed from                                                   | III                                                                       
|                     | Théramex (Merck
      KGaA)                                                                 |                                                                           
|                     |                                                                                             |                                                                           
|Fertility            |                                                                                             |                                                                           
|Org 36286            | Sustained Follicle
      Stimulant                                                          | III *                                                                     
|                     |                                                                                             |                                                                           
|Neuroscience         |                                                                                             |                                                                           
|asenapine            | dopamine/serotonin
      antagonist                                                         | III                                                                       
|Org 50081            | Serotonin-2-Blocker
      (insomnia)                                                        | II (scheduled to move
      to Phase                                      
|                     |                                                                                             | III in 2006)                                                              
|                     |                                                                                             |                                                                           
|Anesthesia           |                                                                                             |                                                                           
|sugammadex           | Selective muscle relaxant
      binding agent                                               | III                                                                       
|                     |                                                                                             |                                                                           
|Veterinary products  | Numerous
      new products (vaccines and pharmaceuticals) in various stages of development



Explanatory remarks

|Phase
      II  | Determination
      of initial evaluation of efficacy and identification of possible adverse
      effects, conducted in a small number of patients.                                                                             
|--------------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Phase
      III | Large
      comparative study (compound versus placebo and/or established treatment)
      in patients to further evaluate dosage, efficacy, and safety.                                                                         
|Filed           | Marketing
      authorization application (Europe) or new drug application (United States)
      filed with relevant regulatory authorities.                                                                                     
|Approvable      | The FDA
      in principle has a positive opinion on the product but has some additional
      questions, which may or may not require additional clinical studies. Also
      the labeling might still be under discussion.     
|*               | Phase II
    clinical trials completed. Planning and implementation of Phase III commenced.
    Approval by the FDA for the commencement of Phase III clinical trials on patients
    is expected during the second half of 2006.

Description of Coatings'
  Business

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

COATINGS

Decorative Coatings

|· | Coatings
      for decoration and protection of architectural structures for professional
      uses and the do-it-yourself sector.
|- | -----------------------------------------------------------------------------------------------------------------------------------

Industrial Finishes

|· | Coatings
      for industrial applications on wood and sheet metal (coil coatings).
|- | -----------------------------------------------------------------------------------



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Powder Coatings

|· | Powder
      coatings for industrial application in architectural, automotive, domestic
      appliance, and other industrial markets such as coatings for pipes.
|- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------

Marine & Protective
  Coatings

|· | Coatings
      for protection and decoration of hulls, interiors, and superstructures of
      ships and yachts, aerospace coatings, protective coatings, and fire-retardant
      products for large plants and offshore installations.
|- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Car Refinishes

|· | Finishes
      for passenger cars, commercial transportation, and automotive plastic components.
|- | ------------------------------------------------------------------------------------------------

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

|Major
        Product Lines | Key
        Products/Applications | Competitive
        Position*               
|--------------------------- | --------------------------------- | --------------------------------------------
|                            |                                   |                                             
|Coatings and related        | ·                                 | Coatings
      for decoration and           
|products                    |                                   | protection of architectural
      structures
|                            | ·                                 | Powder coatings, coatings
      for wood,   
|                            |                                   | metal, coil and plastics,
      and non-    
|                            |                                   | stick coatings                              
|                            | ·                                 | Coatings for protection
      and           
|                            |                                   | decoration of hulls,
      interiors, and   
|                            |                                   | superstructures for
      ships and yachts, 
|                            |                                   | aerospace coatings,
      protective        
|                            |                                   | coatings, and fire-retardant
      products 
|                            |                                   | for large plants and
      offshore         
|                            |                                   | installations                               
|                            | ·                                 | Finishes for passenger
      cars,          
|                            |                                   | commercial transportation
      and         
|                            |                                   | automotive plastic
      components         

|* | See the
      cautionary statements and the remarks on how the company determined its
      competitive positions under Introduction on pages 3 and 4.
|- | ------------------------------------------------------------------------------------------------------------------------------------------------------

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

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

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

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

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

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

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

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

Description
  of Chemicals' Business

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

CHEMICALS

Pulp and
  Paper Chemicals

|· | Pulp
      bleaching chemicals and chemicals for the manufacture of paper and board,
      specialty resins for adhesives and polymer manufacturing, and high performance
      separation products for pharmaceuticals.
|- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Base Chemicals

|· | Chlorine
      and caustic soda for industrial applications, high quality salt for electrolysis
      and other chemical industries, and supply of energy (cogeneration) and other
      utilities.
|- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Functional
  Chemicals

|· | Chelates,
      micronutrients, flame retardants, animal feed additives, PVC additives,
      and intermediates such as carbon disulfide, monochloroacetic acid, methyl
      amines, and ethylene amines.
|- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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Surfactants

|· | Surfactants
      and fatty acids used in detergents, cleaning, and personal care, as well
      as in asphalt production and the agriculture, oil, mining, and textile industries;
      cellulosic specialties such as thickeners and additives for coatings, building
      materials, pharmaceutical products, food, mining and oil.
|- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Polymer Chemicals

|· | Polymerization
      catalysts such as organic peroxides, metal alkyls, and custom-manufactured
      Ziegler-Natta systems for the polymer-producing industry; high-purity metal
      organics for the electronic industry, and intermediates for pharmaceutical
      products.
|- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Divestment unit

|· | Following
      the portfolio realignment of Chemicals, the company intends to divest several
      businesses that do not fit the new strategy. These activities became part
      of the divestment unit. Included in this unit are Ink & Adhesive Resins,
      Oleochemicals, PVC Additives, Salt Specialties, Solar Salt Australia, and
      Methyl Amines/Choline Chloride.
|- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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



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|Major
        Product Lines | Key
        Products/Applications | Competitive
        Position*               
|--------------------------- | --------------------------------- | --------------------------------------------
|                            |                                   |                                             
|Specification,              | ·                                 | Pulp bleaching
      chemicals and          
|functional, and             |                                   | chemicals for the manufacture
      of      
|specialty chemicals         |                                   | paper and board, specialty
      resins for 
|                            |                                   | printing ink, adhesives
      and polymer   
|                            |                                   | manufacturing, and
      high               
|                            |                                   | performance separation
      products for   
|                            |                                   | pharmaceuticals                             
|                            | ·                                 | Chlorine and caustic
      soda for         
|                            |                                   | industrial applications                     
|                            | ·                                 | Salt for electrolysis,
      other chemical 
|                            |                                   | industries, food applications,
      and    
|                            |                                   | consumer use                                
|                            | ·                                 | Functional chemicals
      such as          
|                            |                                   | chelates, micronutrients,
      animal feed 
|                            |                                   | additives, PVC additives,
      and         
|                            |                                   | intermediates such
      as carbon          
|                            |                                   | disulfide, monochloroacetic
      acid,     
|                            |                                   | methyl amines, and
      ethylene amines    
|                            | ·                                 | Surfactants and fatty
      acids used in   
|                            |                                   | detergents, cleaning,
      and personal    
|                            |                                   | care, as well as in
      asphalt production
|                            |                                   | and the agro, oil,
      mining, and textile
|                            |                                   | industries, cellulosic
      specialties as 
|                            |                                   | thickeners and additives
      for coatings,
|                            |                                   | building materials,
      pharmaceutical    
|                            |                                   | products, food, mining
      and oil, and   
|                            |                                   | expandable microspheres                     
|                            | ·                                 | Polymerization catalysts
      such as      
|                            |                                   | organic peroxides,
      metal alkyls, and  
|                            |                                   | custom manufactured
      Ziegler-Natta     
|                            |                                   | systems for the polymer-producing           
|                            |                                   | industry; high-purity
      metal organics  
|                            |                                   | for the electronic
      industry, and      
|                            |                                   | intermediates for pharmaceutical            
|                            |                                   | products                                    

|* | See
      the cautionary statements and the remarks on how the company determined
      its competitive positions under Introduction on pages 3 and 4.
|- | ------------------------------------------------------------------------------------------------------------------------------------------------------

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

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

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

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

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

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

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

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

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

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GEOGRAPHIC DATA

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

|                         |                                  |  |                             |  |                          |  |        |  |       |   |       |  
|------------------------ | -------------------------------- |  | --------------------------- |  | ------------------------ |  | ------ |  | ----- | - | ----- | -
|                         | Revenues                         |  | Revenues                    |  | Operating
        income | 
|                         | by
        region of destination |  | by
        region of origin |  |                          |  |        | 
|Millions of euros        | 2005                             |  | 2004                        |  | 2005                     |  | 2004   |  | 2005  |   | 2004  |  
|                         |                                  |  |                             |  |                          |  |        |  |       |   |       |  
|                         |                                  |  |                             |  |                          |  |        |  |       |   |       |  
|The Netherlands          | 862                              |  | 844                         |  | 2,459                    |  | 2,748  |  | 474   |   | 446   |  
|Germany                  | 1,238                            |  | 1,165                       |  | 1,152                    |  | 1,050  |  | 144   |   | 159   |  
|Sweden                   | 516                              |  | 509                         |  | 1,237                    |  | 1,155  |  | 137   |   | 33    |  
|United Kingdom           | 809                              |  | 833                         |  | 754                      |  | 848    |  | (59   | ) | (57   | )
|Other European countries | 4,075                            |  | 4,122                       |  | 3,069                    |  | 2,921  |  | 527   |   | 532   |  
|USA and Canada           | 2,400                            |  | 2,445                       |  | 2,116                    |  | 2,221  |  | (67   | ) | 60    |  
|Latin America            | 830                              |  | 729                         |  | 626                      |  | 493    |  | 85    |   | 133   |  
|Asia                     | 1,590                            |  | 1,536                       |  | 1,231                    |  | 1,087  |  | 192   |   | 175   |  
|Other regions            | 680                              |  | 650                         |  | 356                      |  | 310    |  | 53    |   | 46    |  
|                         |                                  |  |                             |  |                          |  |        |  |       |   |       |  
|Total                    | 13,000                           |  | 12,833                      |  | 13,000                   |  | 12,833 |  | 1,486 |   | 1,527 |  
|                         |                                  |  |                             |  |                          |  |        |  |       |   |       |  



|                                                 |                             |  |                           |  |                                  |  |      | 
|------------------------------------------------ | --------------------------- |  | ------------------------- |  | -------------------------------- |  | ---- | 
|                                                 |                             |  |                           |  | Expenditures
      for property, | 
|                                                 | Identifiable
        assets |  | plant
      and equipment | 
|Millions of euros                                | 2005                        |  | 2004                      |  | 2005                             |  | 2004 | 
|                                                 |                             |  |                           |  |                                  |  |      | 
|                                                 |                             |  |                           |  |                                  |  |      | 
|The Netherlands                                  | 3,061                       |  | 2,959                     |  | 179                              |  | 189  | 
|Germany                                          | 750                         |  | 828                       |  | 25                               |  | 23   | 
|Sweden                                           | 863                         |  | 847                       |  | 65                               |  | 60   | 
|United Kingdom                                   | 690                         |  | 582                       |  | 31                               |  | 29   | 
|Other European countries                         | 2,112                       |  | 2,163                     |  | 81                               |  | 81   | 
|USA and Canada                                   | 1,959                       |  | 1,794                     |  | 51                               |  | 52   | 
|Latin America                                    | 619                         |  | 454                       |  | 42                               |  | 61   | 
|Asia                                             | 1,017                       |  | 834                       |  | 32                               |  | 47   | 
|Other regions                                    | 329                         |  | 295                       |  | 8                                |  | 9    | 
|                                                 |                             |  |                           |  |                                  |  |      | 
|                                                 | 11,400                      |  | 10,756                    |  | 514                              |  | 551  | 
|Eliminations and cash
      and cash equivalents | 724                         |  | 877                       |  |                                  |  |      | 
|Nonconsolidated companies                        | 301                         |  | 318                       |  |                                  |  |      | 
|                                                 |                             |  |                           |  |                                  |  |      | 
|Total                                            | 12,425                      |  | 11,951                    |  | 514                              |  | 551  | 
|                                                 |                             |  |                           |  |                                  |  |      | 

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

INSURANCE

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

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

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

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

HUMAN RESOURCES

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

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

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

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

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

| | ongoing
      customer focus;             
|- | ------------------------------------------
| | clear
      commitment to quality;        
| | relentless
      focus on results;        
| | drive
      for innovation;               
| | teamwork
      at all levels; and         
| | unwavering
      commitment to our values.

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

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

RESEARCH AND DEVELOPMENT

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

|          |                           |  |                             |  |      |  |      | 
|--------- | ------------------------- |  | --------------------------- |  | ---- |  | ---- | 
|          | Millions
        of euros |  | percent
        of revenues | 
|          | 2005                      |  | 2004                        |  | 2005 |  | 2004 | 
|          |                           |  |                             |  |      |  |      | 
|          |                           |  |                             |  |      |  |      | 
|Organon   | 433                       |  | 395                         |  | 18   |  | 17   | 
|Intervet  | 113                       |  | 118                         |  | 10   |  | 12   | 
|Coatings  | 176                       |  | 169                         |  | 3    |  | 3    | 
|Chemicals | 102                       |  | 125                         |  | 3    |  | 3    | 
|          |                           |  |                             |  |      |  |      | 

Organon

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

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

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

Sugammadex is another promising
  compound currently in phase III.

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

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

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

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

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

Intervet

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

Nobilon

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

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

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

Coatings

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

| | meeting
      environmental regulations;                              
|- | ----------------------------------------------------------------------
| | improving
      the performance of products also in color aspects; and
| | defining
      and applying novel product and process technologies.   

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

| | Decorative
      Coatings introduced Alpha®Tacto®, the worlds
      first decorative paint product with the ability to reproduce the look and
      feel of suede, leather or woven fabric, depending on how it is applied to
      the wall. Other recent coatings innovations include Crown®Easycleana
      washable matt paintand the Color Wall an innovative concept
      for a store color display allowing customers to take large sample sheets
      home with them to help make decisions about color schemes.
|- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Marine
      & Protective Coatings' level of R&D spending was at a record level.                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | R&D
      within Car Refinishes continues to focus on the overhaul and maintenance
      of major product lines in line with European legislation being introduced
      in 2007. This legislation will enforce the use of waterborne systems and
      ban solvent-borne systems. Preparations for this switch started a number
      of years ago and we are on track with the delivery of compliant products.                                                                                                               

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

Chemicals

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

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

| | reduction
      of energy and raw material consumption by applying front-end separation
      technology;
|- | ---------------------------------------------------------------------------------------------------------
| | waste
      and energy reduction using modern solid catalysts;                                           



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| | closed
      loop production through process intensification;                                
|- | ---------------------------------------------------------------------------------------------
| | low energy
      routes to high quality emulsions;                                           
| | more stable
      and safer processes by application of control room simulation;             
| | prospects
      of nanochemistry; and                                                        
| | shortening
      time to market and/or time to production by high throughput experimentation.

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

CORPORATE SOCIAL RESPONSIBILITY

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

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

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

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

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

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Community Program

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

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

BUSINESS REVIEW AND
  DEVELOPMENTS AT BUSINESS UNITS

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

ORGANON  Prescription
  Drugs

Business Review

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

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

Organons main products
  developed as follows:

|                                   |  |          |  |                  |   |                   |  
|---------------------------------- |  | -------- |  | ---------------- | - | ----------------- | -
|Millions
      of euros            |  | 2005     |  | Total            |   | Autonomous        |  
|                                   |  | revenues |  | change
        % |   | growth
        %1 |  
|                                   |  |          |  |                  |   |                   |  
|                                   |  |          |  |                  |   |                   |  
|Contraceptives                     |  | 564      |  | 8                |   | 7                 |  
|-
        of which NuvaRing®       |  | 127      |  | 57               |   | 58                |  
|Puregon®
        /Follistim®       |  | 355      |  | 20               |   | 24                |  
|Remeron®                           |  | 283      |  | (22              | ) | (22               | )
|Livial®                            |  | 154      |  | (4               | ) | (6                | )
|Pharmaceutical
        ingredients |  | 228      |  | 8                |   | 8                 |  
|                                   |  |          |  |                  |   |                   |  

|1 | Autonomous
      sales growth is defined as the change in revenues attributable to changed
      volumes and selling prices. In this case it only excludes the change in
      revenues attributable to currency translation effects. Acquisitions and
      divestments were not applicable. Reference is made to the remarks under
      Introduction on page 4.
|- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Operating income showed
  a strong growth compared with the previous year (EUR 415 million, up 51%) despite
  rising R&D expenses, the settlement of the final lawsuit for Remeron®in the United States, and an impairment charge of EUR 67 million in the
  pharmaceutical ingredients unit. Organon received significant cash amounts from
  Johnson & Johnson for terminating the copromotion contract for Risperdal®and from Duramed/Barr for the patent litigation settlement involving our
  oral contraceptive Mircette®.

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For Organon, the process
  of integrating Diosynth into its business operations was one of its main focuses
  for 2005. This strategic amalgamation mainly involved activities based in the
  Netherlands, and all necessary procedures were recently completed. The key ongoing
  aim is to improve control of our logistic processes and create a platform for
  further development of biotechnology within the company.

The first positive results
  from the alignment of processes are beginning to filter through. Improvements
  in our supply chain management enabled us to reduce working capital and improve
  the reliability of deliveries. We also identified overcapacity in certain manufacturing
  resources. The biotechnology platform which has been created helps us to focus
  more on research, especially in the fields of immunology and specific areas
  of oncology. Here, Organon is actively looking to team up with third parties
  where appropriate. In fact, Organon focused strongly on collaborations during
  2005, with new alliances being established and some promising partnerships being
  prolonged. One long-lasting copromotion agreement was ended (the Risperdal®
  copromotion with Johnson & Johnson), although the royalties arrangement
  remained intact.

One of the main reasons
  for integrating Organon and Diosynth was to improve our foundation for integral
  product and process development regarding biotechnology. In order to expand
  our biotechnology capabilities into new therapeutic areas we established a new
  biotechnology research facility in Cambridge, Massachusetts, in June 2005, which
  focuses on monoclonal antibody research in immunology and certain areas of oncology.
  Together with our operations in Oss, the Netherlands, this facility is expected
  to be central to the expansion of our research into New Biological Entities
  (NBEs).

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

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

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

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

Sugammadex is another promising
  compound currently in phase III.

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

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

Puregon®/Follistim®,
  the biotech fertility product of Organon, has become one of our biggest selling
  products. Performance was particularly boosted by strong U.S. sales resulting
  from a successful launch of the Follistim Pen® and relevant product
  line extensions. In 2005, Puregon®/Follistim®
  was also introduced in Japan and China.

NuvaRing®,
  the contraceptive vaginal ring of Organonwhich has now been introduced
  in more than 25 countriesis also continuing to enjoy steadily increasing
  sales in many markets. In fact, we achieved a milestone in November when, for
  the first time, more than one million rings were sold within the space of a
  month to women around the world. Another important development took place in
  November. After a successful pilot in three states, we launched a direct-to-consumer
  advertising campaign to promote NuvaRing® throughout the United
  States, mainly consisting of television commercials.

Evidence of the synergy
  that could be exploited between Organon and Intervet also became clear in 2005
  with the collaboration together with human vaccine business Nobilon. By tapping
  into existing expertise available in both the Organon and Intervet businesses,
  Nobilon has been able to make great progress in developing a flu vaccine for
  humans, based on cell tissue culture technology.

Streamlining efforts at
  Organon, including the newly-integrated Diosynth operations, focused mainly
  on overcapacities in manufacturing resources caused by the continued slow market
  for pharmaceutical ingredients. Meanwhile, low volume growth, destocking by
  big pharma companies and delays in product introductions are maintaining the
  overcapacity in the fine chemicals segment. We are currently in the process
  of implementing measures to address this overcapacity, as well as restructuring
  our IT organization to establish a more centralized approach, improving our
  logistic performance.

Looking ahead, we are positive
  about the future. We will be finalizing several phase III projects, while we
  expect a number of partnerships that have been established over the last few
  years to start bearing fruit.

Nobilon

It is becoming increasingly
  clear that infectious diseases do not limit themselves to geographical borders.
  An additional challenge is that the impact caused by these diseases is often
  not restricted to a single species. Concern is therefore rising about the spread
  of avian influenza from birds to humans and the possible outbreak of a pandemic
  which could have serious consequences for human health.

In 2002, Akzo Nobel launched
  its Nobilon business to develop, license, and manufacture human vaccines on
  a global scale, with particular emphasis on influenza. Nobilon became operational
  in mid-2003. Nobilon also combines the expertise and know-how of the companys
  Organon and Intervet businesses, utilizing their technical, regulatory, and
  product development capabilities.

Nobilon is working on the
  development of vaccines used for annual revaccination of humans against influenza
  and on vaccines that will be used to control the impact of a human influenza
  pandemic.

Working from a dedicated,
  fully licensed facility in the Netherlands, Nobilon produces antigens for our
  business and uses cell culture technology in the research and development of
  its vaccines. The use of cell

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culture technology displays
  significant advantages, such as reduced dependence on eggs in times of shortage,
  fewer logistical issues, and more consistent quality.

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

INTERVET  Veterinary
  Products

Business Review

Revenues 2005: EUR 1,094
  million; 2004: EUR 1,027 million

Intervet produced consistently
  strong results in 2005 as the strategic initiatives introduced in recent years
  began to pay off. Revenues increased by 7% to EUR 1,094 million, with volume
  growth being the main contributor. These increased volumes and the resulting
  boost in earnings were favorably impacted by efficiency improvements in manufacturing,
  supply chain and marketing, and the result of the divestment of the feed additives
  business. Intervet was therefore able to deliver an operating income of EUR
  238 millionup 29% from 2004 and equivalent to an operating margin of 21.8%.

We further expanded our
  strong market position in Europewhere the business generates more than
  50% of its revenuesand our development in North America was characterized
  by growth in key segments, while revenues in Latin America were boosted by substantial
  growth in Brazil and Chile. The acquisition of AgVax Developments Ltd in New
  Zealand also is expected to bolster our expansion in Oceania. This strong growth
  was achieved even though Intervet divested interests in non-core areas such
  as the diagnostic and feed additive segments.

Intervet will continue
  to focus on major food and companion animal markets, and we hope to see similarly
  positive trends beyond 2005, when new products resulting from our extensive
  research and development programs should enhance our existing portfolio.

Looking at 2005 in more
  detail, market gains in Europe were largely attributed to improved supplies
  and the strong sales growth of Cobactan®, our innovative range
  of anti-infective formulations based on the proprietary molecule cefquinome.
  In North America, revenues were buoyed by new product introductions in the companion
  animal sector and Continuum® (a combination vaccine with long-lasting
  immunity). The recently launched cattle bioline Vista® also received
  a very positive response. Latin American performance was boosted by major growth
  in Brazil (in various markets) and in Chile, where the main driver was increased
  sales of fish vaccines. In Asia, where large areas have been severely affected
  by outbreaks of avian influenza, business is growing.

The acquisition of AgVax
  Developments Ltd enables Intervet to benefit from AgVaxs close collaboration
  with its former parent company, AgResearch, New Zealands largest Crown
  Research Institute. AgVax is an animal health company that focuses on the development
  of vaccines to increase the productivity of the sheep sector.

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

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The years other main
  highlights included Intervet signing a contract with the Ministry of Agriculture
  in the Netherlands to set up the countrys first vaccine bank of Porcilis®
  Pesti®, Intervet's marker vaccine against Classical Swine Fever.
  The agreement covers a reserve of 500,000 doses of the vaccine for emergency
  vaccination in the event of a Dutch outbreak of the disease. The contract is
  significant because it indicates that vaccine banks can play a crucial role
  in a countrys contingency plans against possible outbreaks of highly infectious
  diseases. We also officially re-opened our refurbished foot and mouth disease
  (FMD) vaccine production unit in Pune, India, which was initially
  opened in 2003. FMD is a major problem in India and is responsible for substantial
  shortfalls in dairy production.

In 2005, India was also
  a major focus of Intervets continued commitment to creating social, environmental
  and economic benefits for the communities in which we operate. In June, for
  example, Intervet India was honored for the depth and scale of its involvement
  in the local community and for the strong relationships it has established with
  all its stakeholders.

From an operational perspective,
  Intervet benefited from various efficiency improvements in manufacturing during
  2005. We continued our major investment program in Boxmeer, the Netherlands,
  aimed at modernizing our multifunctional headquarters site and expanding our
  production capacity and packaging facilities. In addition, we decided to further
  expand production capacity for bacterial vaccines at our U.K. site in Milton
  Keynes. As a result, part of the production of key bacterial fish and swine
  vaccines can now take place in the United Kingdom, while capacity in Boxmeer
  can be used to accommodate new product introductions. The successful finalization
  of our logistics and manufacturing initiative launched in 2003 to implement
  SAP was an important step to developing further into a global organization.

In 2005, Intervet introduced
  the Dieter Lütticken Award, which was presented to a scientist from the
  University of Bern in Switzerland. Set up last year, the reward honors scientists
  working in research areas that comply with the 3Rs concept (Reduce, Refine,
  Replace) in veterinary product development and production, where finding alternatives
  to using animals in testing is a top priority.

COATINGS

Business Review

Coatings experienced a
  tough year due to steeply rising raw material costs and difficult economic conditions
  in mature markets, especially in Western Europe. Our businesses addressed these
  issues by focusing on tight cost control and by pushing through price increases.
  Coatings managed to keep profits at an acceptable level, although the ROI excluding
  incidentals slipped to just below 20%. Including incidentals, ROI was 17.8%.

Revenues grew autonomously
  by 4%, mainly fueled by growth in the emerging markets of Asia Pacific, Eastern
  Europe, and the Middle East. During the year, we opened two new Powder Coatings
  facilities and two Decorative Coatings plants in China and Vietnam. We also
  announced the intention to acquire the Chinese decorative coatings company Guangzhou
  Toide Paint Manufacturing Co. (which was completed in the first quarter of 2006),
  established a Powder Coatings joint venture in Egypt, and invested in the construction
  of a new Powder Coatings plant in Russia. At the end of 2005, the emerging markets
  represented 34% of our worldwide revenues.

The industrial activities
  put in a strong performance, especially in the second half of 2005. Successful
  marketing initiatives expanded the business base and the average pricing in
  all markets improved. Marine &

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Protective Coatings had
  another good year. Higher sales of added-value products are offering clear operational
  and financial benefits to our customers, while the growth in target developing
  markets continues. Car Refinishes results remained under pressure and restructuring
  programs are being carried out to address this situation. The performance of
  Decorative Coatings showed a mixed picture. In some of the large western European
  countries results were under pressure, while in the emerging markets earnings
  improved.

In mature markets, we continued
  to improve our portfolio through selective acquisitions. During 2005, we agreed
  to acquire Swiss Lack, the leading supplier of decorative coatings in Switzerland,
  and ICIs German industrial wood finishes business Zweihorn GmbH. In addition,
  we continued to further expand the commercial distribution network of our European
  Decorative Coatings business by acquiring a number of wholesalers in Germany,
  the largest market for architectural paints in Europe.

Securing our margins against
  a backdrop of increasing raw material prices will be a challenge for the future,
  particularly in mature markets. We will address this challenge not only by means
  of aggressive cost management, but also by increasing our innovation efforts.
  This will allow better differentiation of our products and services to counteract
  continuous price erosion in the highly competitive markets in which we operate.

Developments in the
  Coatings Business Units

Decorative CoatingsRevenues 2005:
  EUR 2,038 million; 2004: EUR 1,929 million

Akzo Nobels Decorative
  Coatings unit is made up of the Decorative Coatings Europe and Decorative Coatings
  International businesses. In the course of 2006 we have the intention to merge
  these two units into one global business unit. Decorative Coatings Europe and
  Decorative Coatings International serve the professional and do-it-yourself
  markets. The companys major brands include Sikkens®, Sadolin®,
  Crown®, Astral®, Marshall®, Trimetal®,
  Nordsjö®, Levis®, Herbol®,
  Vivechrom®, and Flexa®. The companys leading
  building adhesive brand is Schönox®.

Decorative Coatings
  Europe

Decorative Coatings Europe
  had a difficult 2005. With the economic recovery occurring later than predicted,
  consumer confidence deteriorated and spending was low in most countries, especially
  in the major European countries. The exception was the Nordic area. Margins
  were also under pressure because of aggressive price hikes imposed on our industry
  by raw material and packaging suppliers. Both distributors and competitors have
  fought aggressively for volume in this weak market, although by the end of the
  year, the situation improved slightly, especially in Southern Europe.

We acquired a number of
  commercial distributors in 2005mainly in Germany, France and theNetherlandsreflecting
  our strategy to secure sustainable availability of our brands at local level
  for our professional customers. We also acquired the ICI Groups German
  industrial interior wood business, Zweihorn, while the purchase of Switzerlands
  leading paint company, Swiss Lack, was completed on January 1, 2006.

Our consolidation efforts
  also continued with the closure of sites in France and Denmark and we achieved
  considerable cost improvements in production and logistics, which will have
  an ongoing positive impact

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during the next few years.
  As the year progressed, a number of cost efficiencies and restructuring projects
  were initiated aimed at creating a stronger platform for growth in 2006 and
  beyond.

A closer look at our 2005
  performance reveals that within our Trade activitieswhere overall results
  were weaker than in the previous yearbusiness in the United Kingdom, Germany,
  and France was affected by difficult market conditions. But considerable improvements
  were posted in other countries on the back of organic growth, price increases
  and, most importantly, the acquisition of a number of distributors. Increased
  raw material costs and changes in the business depressed margins.

Our Retail activities were
  hampered by a lack of consumer confidence in most Western European countries.
  After many years of uninterrupted growth, the U.K. market contracted. Key markets
  were characterized by major changes in customer and product mix, in addition
  to fierce competition for volumes, resulting in more competitive pricing. All
  this led to heightened pressure on margins, as well as higher costs for raw
  materials. As a consequence, Retails results were considerably lower than
  in 2004, mainly due to weak performance in France and the United Kingdom. Growth
  was posted in the difficult German market. We also acquired new customers in
  the large-scale outlet sector.

Our Joinery business had
  another good year in spite of a decline in the important German market. Sales
  improved in Central and Southern Europe, while progress was made regarding the
  integration of BASFs joinery business, which was acquired in 2004.

A number of successful
  product launches took place during 2005, notably that of the Sikkens®
  brands Alpha® Tacto®, the worlds first
  decorative paint product with the ability to reproduce the look and feel of
  suede, leather, or woven fabric, depending on how it is applied to the wall.

Decorative Coatings
  International

Decorative Coatings Internationals
  performance in 2005 came under severe pressure from dramatic price rises for
  raw materials and packaging. This negative effect was offset, however, by increasing
  prices and changing the product mix, which made it possible to achieve a slightly
  improved contribution margin.

In terms of our performance
  at country level, Russia and Chinathe two major growth areas for 2005both
  posted double-digit growth. New capacity at our Moscow facility enabled us to
  make additional investments at the site earlier than expected. Our Building
  Adhesives businesses also produced pleasing results, despite difficult conditions
  in some markets. Elsewhere, further inroads were made in some of the Central
  European and Eastern European markets, with good volume growth, while the French
  business emerged in better shape following a cost reduction program.

In the Americas, our wood
  care activities again proved highly successful, with growth in both volumes
  and profits. Next Wave Technologyour more environmentally friendly
  low VOC rangewas well received in North America, while the Brazilian operation
  managed to improve profitability in a subdued market. In Turkey, our performance
  improved with restored margins and stronger profitability, while in North Africaand
  Morocco in particulardifficult market conditions negatively affected our
  performance.

In 2005, we signed a letter
  of intent to acquire the coatings activities of Guangzhou Toide Manufacturing
  Co., the biggest private Chinese manufacturer of emulsion paint. This deal was
  closed during the first quarter of 2006. We also officially opened two new plants,
  one near Ho Chi Minh City in Vietnam, the other in Suzhou near Shanghai, China.

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Industrial ActivitiesRevenues 2005:
  EUR 1,740 million; 2004: EUR 1,592 million

Akzo Nobels industrial
  activities are made up of the Industrial Finishes and Powder Coatings businesses.

Industrial Finishes

Industrial Finishes delivered
  notable growth in 2005 as a result of geographic expansion and successful marketing
  initiatives. Operations in the frontier markets of China, India, Brazil, and
  Eastern Europe sustained top-line growth in a difficult global industrial market.
  Overall returns, however, were negatively affected by the significant increase
  in the cost of petrochemical derivatives. In addition, 2005 proved particularly
  problematic for our European-based businesses, with demand being consistently
  weak in the major industrial economies in the West. In spite of all these challenges
  we were able to deliver solid results.

Conditions in the global
  Coil Coatings business were particularly unfavorable due to volatile steel prices
  and a hesitant commercial construction industry. Wood Coatings benefited from
  a healthy residential construction industry, which kept demand for coatings
  for flooring, kitchen cabinetry, and building products at a strong level throughout
  2005. Wood Coatings also capitalized on the shift of the household furniture
  industry to Asia, successfully replacing volume lost in North America. Consumer
  electronics and related marketskey sectors for our Specialty Plastics
  businesssignificantly improved during the year after a slow start, resulting
  in a solid overall performance. The Adhesives business, which is predominantly
  European-based, offset weak demand in Western Europe by successfully growing
  in Austria, Russia, and Eastern Europe.

Strategic investments continued
  to bolster our production and logistics capabilities throughout the year, further
  improving not only quality, but also responsiveness to our customers in this
  increasingly demanding global economy. To complement current growth, we also
  invested in our ongoing, value-driven R&D activities and devoted extensive
  resources to the governance efforts and human resources development system within
  Akzo Nobel.

Looking ahead, as the demands
  of the marketplace change rapidly, so too will the structure, products, and
  global delivery sources of our business. Compressing margins, along with low
  growth in mature markets, are clear challenges. Value engineering, prudent margin
  recovery, additional investment in Eastern Europe and Asia, and the streamlining
  of resources in mature markets will be the key success factors for 2006 and
  beyond. Whatever the prevailing market conditions, the focus will always remain
  on our customers and a successful value exchange, which will yield sustained
  organic growth and improved financial performance.

By combining our dedicated
  customer focus, decentralized organizational structure, global reach, and Akzo
  Nobels extensive technology base, we believe that Industrial Finishes
  will remain very competitive in the markets in which we operate.

Powder Coatings

Powder Coatings posted
  growth in revenues in line with 2004, which was a good result given the turbulent
  conditions encountered during the first few months of the year. Despite rising
  raw material prices, we sought to protect and preserve our margins while maintaining
  our focus on servicing our customers needs. At the same time, we achieved
  a further strengthening and broadening of our global spread.

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Consolidation of our world
  leadership position received significant attention during the year as we completed
  our expansion projects in China on schedule. We opened a second facility at
  Baoan in the south of the country, while in the north, we relocated from Beijing
  to a new site in Langfang, which is well positioned to exploit new opportunities
  in that region. Also in Asia Pacific, we completed a further purchase of shares
  of Akzo Nobel Chang Cheng.

We achieved good revenue
  growth in the newly developing powder markets of Central and Eastern Europe,
  and there is now a clear need for manufacturing in the region. We therefore
  started construction work on a new powder coatings plant in Russia. Located
  at Orekhovo-Zuevo, 100 kilometers east of Moscow, the facility will supply markets
  throughout Russia, Ukraine, Belarus, and other CIS countries.

We also invested in the
  Middle East with the acquisition of a controlling 60% share in Egyptian market
  leader Coatech. The joint venture company, now known as Akzo Nobel Powder Coatings
  SAE, operates from the companys existing modern manufacturing facility
  near Cairo. In the United States, the construction of a new warehouse in Nashville
  represents Phase 1 of a major site improvement/development plan, which will
  continue during 2006.

Looking more closely at
  our business activities, we launched a new sub-business unit at the beginning
  of 2005SBU Functional Coatings. The unit was set up to accelerate the
  globalization of this high margin business, and we are greatly encouraged by
  the outstanding results the unit has achieved in its first year. We also made
  major progress in transferring our acrylics powder know-how from the United
  States to Europe and Asia Pacific, which is particularly important for the fast-growing
  automotive alloy wheels market. Further globalization is supported by the commissioning
  of acrylic powder manufacturing units at our sites in Bensheim, Germany, and
  Ningbo, China.

The Architectural business
  was also highly active during 2005. As this is a key global market for usand
  one in which we have a leadership position in Europe and Asia Pacificwe
  decided to launch a new marketing initiative in the United States based on a
  full product range, including the unique fluorocarbon-based hyper-durable product
  Interpon® D3000.

Our Cromadex coatings organization
  in Europe delivered excellent results and increased its geographic coverage
  with the establishment of a start-up activity in Spain. We will continue to
  expand this supply concept further in 2006. The Non-Stick Coatings business
  had a difficult 2005, and we recruited to rebuild and strengthen the management
  team.

Looking ahead, there should
  be opportunities for growth in Asia Pacific, Eastern and Central Europe, and
  Mexico. Efforts to improve our structural production cost levels will also remain
  a priority.

Marine & Protective
  CoatingsRevenues 2005:
  EUR 975 million; 2004: EUR 879 million

Our 2005 business performance
  was strong and met expectations. In the first half of the year rising raw materials
  costs squeezed margins, particularly in the Marine and Heavy Industrial sectors.
  The U.S. dollar was also weak compared with previous years and this had a further
  negative impact on the business, especially in Marine newbuilding, where contracts
  were agreed two to three years ago.

To respond to the adverse
  conditions prevailing throughout the year, it was necessary to raise prices
  for a number of products. However, this proved insufficient to restore margins,
  and additional measures were required to generate a satisfactory performance.
  Revenues from added-value products, offering clear

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operational and financial
  benefits to our customers, were up. In our more mature markets, productivity
  improvements were required to protect our competitiveness, while we achieved
  good levels of growth in our target developing markets.

As regards individual business
  performance, International® Marine Coatings continued to benefit
  from record levels of ship newbuilding, although margins were depressed by steep
  raw material price increases. We sold record levels of Intershield®
  for newbuilding, but dry-docking activity was lower as ship owners and ship
  managers maximized time at sea, while freight rates remained attractive. During
  2005, we coated our 100th vessel with Intersleek®,
  an environmentally friendly foul-release antifouling which has been
  endorsed by the World Wildlife Fund. The product delivers significant operational
  savings to our customers.Performance
  at the units new business venture in Japanwhich commenced in November
  2004also met expectations.

International®
  Protective Coatings felt the squeeze on margins more than other market areas,
  particularly in the United States. Solid growth was posted in China, Central
  and Eastern Europe, and Asia Pacific. Our financial performance also continued
  its upward momentum in these growth areas. On the product front, Interchar®,
  a new member of the Chartek® family of fire protection products,
  was launched in 2005. Based on technology created for NASA, Interchar®
  offers the construction industry significant benefits in terms of keeping buildingsand
  their occupantssafer by offering flame retardant coatings which delay
  the effects of fire on steel constructions.

Yacht Coatings fell back
  from its 2004 peak due to weaker demand in the U.S. market. Performance in Europe
  was solid and growth continued in the Asia Pacific region. The Awlgrip®
  business improved further and benefited from a dedicated management team.

Our Aerospace Coatings
  operation continued to benefit from higher build rates of new aircraft and livery
  changes on existing ones. The airline operators, particularly in the United
  States, have suffered from substantially higher fuel costs, and this has led
  to some downturn in business on specific accounts. Overall, however, Aerospace
  Coatings delivered its best ever results.

In 2005, we continued to
  invest in growth markets with satisfactory results. We plan to continue building
  on our solid platform in 2006 and beyond, although our commitment to our Business
  Principles has limited our growth capability in some parts of the world. Our
  level of spending on R&D has never been higher. We are committed to a plan
  for increasing the rate of organic growth, and these investments will be of
  significant importance to our continued success.

Car RefinishesRevenues 2005:
  EUR 886 million; 2004: EUR 893 million

The year was dominated
  by harsh market conditions and higher raw material prices, but Car Refinishes
  successfully reversed the downward trend. Revenues were only slightly down on
  2004. Results remained under pressure and restructuring programs are being carried
  out. Stagnating growth in the refinishes market in the United States and Western
  Europe during 2005 was partly offset by market growth outside these territories,
  notably in Eastern Europe and Asia.

We were active in growing
  markets in Eastern Europe, Asia, and South America, and posted volume growth
  in North America, aided by focused sales programs. The pressure on volumes and
  results in Western Europe continued in 2005, however, with our coatings activities
  for plastic components in the automotive industry suffering from a depressed
  market in both Europe and the United States. Developments in our

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Commercial Vehicles activities
  were above expectations, and a more focused approach in this market is generating
  good results.

We strengthened our distribution
  activities with the purchase of a distributor in the Netherlands and an importer
  in Switzerland.

In response to lower market
  growth in Europe and the United States, a restructuring of Car Refinishes was
  announced in mid-2004, which is still ongoing. In addition to a better cost
  structure, the program will also result in growth in the mainstream part and
  the trade part of the refinishes market. Furthermore, we also placed a strong
  focus on fine-tuning of our marketing, distribution, and branding policies.

To achieve continued success,
  we consider operational excellence to be a prerequisite for all our activities.
  Significant progress has already been made in this area, but we see scope for
  further improvement. Major programs to enhance our reputation in color matching
  and color accuracy have also been started. In R&D, we continue to focus
  on the overhaul and maintenance of our major product lines in line with European
  legislation being introduced in 2007, which will enforce the use of waterborne
  systems and ban solvent-borne systems. Preparations for this switch started
  a number of years ago, and we are on track with the delivery of compliant products.

CHEMICALS

Business Review

Akzo Nobel Chemicals made
  good progress in 2005, as it successfully implemented a strategy to streamline
  its portfolio in order to competitively realign the business for sustainable
  growth, profitability, and leadership positions in selected markets.

Total Chemicals revenues
  and operating income decreased, largely due to divestment effects. For the ongoing
  businesses however, revenues and operating income improved compared with 2004.
  ROI excluding incidentals was more than 16%, which underlines the progress which
  has been made toward meeting our medium-term target of 17.5%. Overall performance
  improved across the board against a backdrop of raw material price increases
  and rising energy costs. Including incidentals, ROI was 14.4%.

Now organized in five growth
  platformsPulp & Paper Chemicals, Base Chemicals, Functional Chemicals,
  Surfactants, and Polymer Chemicalsthe Chemicals group is starting to reap
  the benefits of an improved structure and a more focused approach as a result
  of the strategic revision which began in 2004.

Despite significantly higher
  energy costs, Base Chemicals turned in an excellent performance in 2005, driven
  by higher volumes and continuing cost reduction and restructuring programs.
  Functional Chemicals performed robustly as market demand remained high, while
  Polymer Chemicals results were slightly lower compared with 2004. Pulp
  & Paper Chemicals had a mixed year due to margin pressure, experiencing
  particularly adverse conditions in Europe, but profitable growth in South America
  and Asia. Profits improved at the newly formed Surfactants business on the back
  of its revised focus and efficiency measures.

The realignment of the
  Chemicals group also involved the planned divestment of a number of businesses
  with combined 2004 revenues of EUR 700 million. These businesses are among others
  Ink & Adhesive Resins, Oleochemicals, PVC Additives, Salt Specialties, Solar
  Salt Australia, and Methyl Amines/Choline Chloride. In the meantime, several
  of these businesses have been divested or offers have been received. The company
  expects to complete all remaining divestments resulting from the strategic realignment
  of its

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Chemicals portfolio during
  2006. Recently, it was decided to withdraw Salt Specialties from its list of
  Chemicals businesses to be divested, as it became clear that a satisfactory
  deal based on the companys original divestment offer would not be forthcoming.
  Flexsys, the 50/50-joint venture with Solutia, is also expected to be sold during
  2006.

Key milestones in 2005
  included a EUR 26 million investment in two chemicals businesses in Swedena
  further capacity increase at the ethylene amines facility in Stenungsund and
  the construction of a new plant in Skoghall to manufacture water treatment chemicals.
  We also invested EUR 24 million to increase capacity at our primary cellulose
  derivatives manufacturing plant in Sweden and expanded our chlorine operations
  in Rotterdam, the Netherlands.

Investments totaling EUR
  15 million were announced in Chinathe construction of a new polysulfides
  plant in Taixing and a new paper chemicals site in Guangzhou. China also featured
  strongly as we continued with our ambition to pursue growth based on innovation
  and geographic focus, particularly in emerging markets, where the potential
  for expansion remains significant. Several businesses are already running into
  production capacity constraints in other parts of the world and we will be looking
  to establish new footholds in China in the near future.

With the five growth platforms
  now firmly established, our streamlined businesses are ready to fully implement
  the strategic plans for the future and expand both operations and profitability.

Developments in the
  Chemicals Business Units

Pulp & Paper ChemicalsRevenues 2005:
  EUR 893 million; 2004: EUR 854 million

The Pulp & Paper Chemicals
  business (which trades under the name Eka Chemicals) had a mixed worldwide performance
  in 2005. Conditions in our main market, Europe, were difficult due to several
  onetime effects, while a labor conflict in the Finnish pulp and paper industry
  during the first half of the year also had a major impact. Although revenues
  picked up after the resolution of the dispute, this still had a negative impact
  on our 2005 result. Our Bleaching Chemicals performance was also impacted by
  high and rising energy costs.

Rationalization and currency
  effects from 2004 kept North American pulp and paper production stable during
  the year. But hereand in Europehigher productivity and increased
  efficiency will only be possible through rationalization and the continued phasing
  out of unprofitable mills. High energy costs are also affecting the North American
  industry, although Eka Chemicals has been able to effectively manage its energy
  supply. Growing demand in Eastern Europe, with its low labor cost and large
  forest assets, has the potential to prompt the development of an expanding pulp
  and paper industry in the region.

The continuing expansion
  of the Asian economiesled by China and Indiais fueling rapid growth,
  notably in the Chinese paper industry, with the countrys economic boom
  leading to increased demand for paper and packaging board in particular. We
  have already responded to this development, and at the end of 2005, the construction
  of our second paper chemicals plant began in Guangzhou in Southern Chinaa
  highly important paper production region.

Both Asia Pacific and South
  America showed a clear growth profile during 2005, with substantial new capacity
  coming on stream. Not only did Eka Chemicals strengthen its position in South
  America with the successful start-up of a bleaching chemicals plant at Veracelour
  new pulp mill complex in Bahia, Brazilbut

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we also inaugurated a plant
  for colloidal silica production for paper chemicals in Rio de Janeiro. The fall
  in imports due to increased domestic production in Brazil will further improve
  our competitiveness.

Looking at Brazil in more
  detail, the start-up of the huge Veracel project represents a milestone in Eka
  Chemicals plans to manage the entire value chain in pulp and paper production.
  At the world class Veracel pulp mill, Eka is managing the total chemicals supply
  as part of a 15-year agreement. Our ongoing R&D efforts continue to focus
  on developing capacity in terms of chemistry, measurement, and control of chemical
  processes at our customers mills. Indeed, more efficient research and
  development is one of the main targets of the restructuring process, which started
  in 2005 and runs through 2006.

During 2005, we also expanded
  our wet strength additives business, while we maintained a strong and leading
  position for sodium chlorate in North America, where we have established ourselves
  as a key supplier of chemicals to the wood-containing paper industry.

Looking at some of our
  specialty products businesses, the Purate® novel system for water
  purification and bleaching at small-scale nonwood fiber mills is progressing
  well, including commercialization and several key installations during 2005.
  Permascand, which mainly produces equipment for electrolytic processes, continued
  to operate efficiently and gives us a clear competitive advantage over other
  chlorate producers. For Expancel, a world leader in thermoplastic microspheres,
  we believe there is still significant growth potential geographically, including
  its use in other applications, for example as an additive in special paper production.
  Kromasil®which is used for separation in liquid chromatography,
  both for analytical purposes and in pharmaceutical productionperformed
  well, with strong potential for further growth. The colloidal silica products
  are expanding into construction and coating industries, in addition to the paper
  and electronic industries, creating a world leading silica sol production business.

We made one divestment
  during the year. In August, Nordmann, Rassmann GmbH (NRC), Hamburg, took over
  Kemi-Intressen AB, a wholly-owned subsidiary of Eka Chemicals.

Base ChemicalsRevenues 2005:
  EUR 787 million; 2004: EUR 732 million

Despite significantly higher
  energy costs, Base Chemicals posted an excellent performance in 2005, driven
  by higher volumes and continuing cost reduction and restructuring programs.
  We have changed significantly as a business over the last 12 months following
  Akzo Nobels strategic review of its Chemical portfolio, and have integrated
  the Energy and Industrial Salt businesses into our operations.

The unit is now made up
  of a strong and integrated product chain consisting of energy, salt, chlor-alkali,
  and chlorine derivatives. We are now preparing for growth based on cost and
  market leadership. Further cost reductions, output increases, and alignment
  of the asset base are also planned to drive our ambition of achieving operational
  excellence throughout our value chain.

Current energy prices have
  led to a substantial increase in costs. The impact is already being felt by
  both the Salt businesswhich uses energy-efficient but gas-fired cogeneration
  technologyand the Chlor-Alkali business, which requires high electricity
  consumption. The strong dependency on gas in the Netherlands is now considered
  to be a serious threat to investing in further expansion. In an effort to address
  this issue, Akzo Nobel has joined several other energy-intensive Dutch companies
  in a consortium. The consortiums aim is to achieve competitive electricity
  prices based on a balanced fuel mix, along with long-term commitments from industry
  to purchase power. If successful, this would help create a more level playing
  field with surrounding countries. We also plan to focus on energy-saving technologies,
  with investments in

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narrow- and zero-gap membrane
  technology set to continue, while in 2006, a fuel cell pilot plant, which uses
  hydrogen from the electrolysis process to produce electricity for chlorine production,
  is planned to commence operation.

In terms of individual
  business performance in 2005, Energy had a challenging year due to the volatility
  of oil and gas prices and the ongoing liberalization of the energy market. Although
  gas-fired cogeneration plants are major contributors to the Dutch energy efficiency
  program, the economic viability of such plants is under threat from prevailing
  high gas costs.

The Salt operations (chemical
  transformation salt for electrolysis, road salt for deicing, and dried salt
  for consumption) performed well in 2005, with higher volumes and efficiency
  improvements mainly compensating for higher energy costs. Production capacity
  at the Hengelo plant in the Netherlands increased by 400,000 tons, making it
  the largest vacuum salt production facility in the world, with an annual capacity
  of 2.4 million tons. Also in the Netherlands, Akzo Nobel became involved with
  a project to store gas in salt caverns, which received official approval. The
  company will not provide equity for the joint venture, but will be compensated
  for the work it carries out, including preparing the caverns and processing
  the brine.

The Chlor-Alkali business
  also performed well in 2005. Capacity at the Rotterdam chlorine plant in the
  Netherlands has been increased to 620,000 tons per annum, which makes it one
  of the largest in the world. Elsewhere in the Netherlands, a modern membrane
  electrolysis plant is currently being built in Delfzijl. Meanwhile, chlorine
  plants based on outdated diaphragm and mercury technology were closed in Delfzijl,
  and in Bohus, Sweden.

Ecosystems faced a challenging
  year, but our position in the European water treatment market was significantly
  strengthened by the investment in a new plant in Skoghall, Sweden. The new facility,
  which came on stream in December, manufactures ferric chloride and has an annual
  production capacity of 35 kilotons.

Other key events during
  2005 included a detailed investigation of the service functions at our Dutch
  sites, with a decision being taken to outsource a number of these activities.
  This process will have consequences for the size and organization of the service
  departments in the years ahead. High gas prices also had a dramatic effect on
  the results of our Methanor joint venture, in which we have a 30% stake. At
  the end of 2005, a decision was made to cease operations during 2006. We also
  divested our 50% equity interest in Kemax, a calcium chloride producer.

Functional ChemicalsRevenues 2005:
  EUR 703 million; 2004: EUR 667 million

Functional Chemicals slightly
  improved on its strong 2004 performance despite significantly higher raw material
  and energy costs and unfavorable currency effects. Return on investment remained
  strong for all our businesses as demand and capacity utilization remained high
  in most markets. The composition of the unit was slightly revised during the
  year due to Akzo Nobels strategic review of its Chemicals portfolio. But
  we believe that the robust performance of the Functional Chemicals businesses,
  together with strong technology and market positions and significant global
  growth potential, make it an attractive platform for profitable growth.

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Expansion played a key
  role during 2005, with five of the six Functional Chemicals businesses either
  increasing capacity or committing to further expansion of their manufacturing
  capabilities. Current plans also call for substantial further investments in
  additional plant capacities over the next few years.

Ethylene Amines continued
  to consolidate its already strong global position. Capacity was increased again,
  which we believe should enable growth momentum to stay above market growth during
  the next few years. Margins and bottom-line results were sustained at a healthy
  level amid steep increases in raw material prices. Attention will continue to
  be paid to effectively supplying the fast growing Asian market in order to secure
  the leading position we have built up in the region during the last decade.

MCA (Monochloroacetic Acid)
  further strengthened its worldwide number one position, improving top and bottom-line
  results in a market where supply and demand are currently more closely aligned.
  Global demand chain management and technology exchange, combined with several
  debottlenecking projects at our plants around the world, helped us to meet growing
  customer demand. Construction of the worlds largest MCA plant at Delfzijl
  in the Netherlands is also on schedule. The additional capacity will enable
  us to meet further demand and facilitate further growth.

At Cellulosic Specialtieswhere
  new product development remains a key success factorvolume growth in 2005
  was constrained by limited available capacity for Bermocoll®
  products at the Örnsköldsvik plant in Sweden, and by fierce competition
  in technical applications for CMC (Carboxyl Methyl Cellulose). Operating income
  remained strong. Sales of building additives for the construction industryand
  to the mining and oil exploration industriesincreased, while sales to
  the pharmaceutical sector decreased. During the course of the year, the restructuring
  program initiated in 2004 to improve efficiency at the Örnsköldsvik
  site neared completion. This program is expected to favorably impact the 2006
  results. In November, a capacity expansion at the Bermocoll®
  production line at Örnsköldsvik was also announced to support the
  continued growth of this attractive business area. This investment, combined
  with the restructuring project at the plant, will turn the site into one of
  the largest and most cost-effective of its kind in the world.

Despite flat sales, Chelates
  further improved its bottom line compared with 2004. This was mainly due to
  improvements at its U.S. operations following the establishment of a production
  joint venture with BASF in Lima, Ohio. Chelates also entered into a supply and
  distribution contract for our Micronutrients business with the Plant Nutrition
  Alliance, which includes the companies Yara and SQM. This agreement significantly
  widens the reach and improves the quality of distribution for our products to
  the global agricultural market. Chelates also started up a production facility
  in Suzhou, China, for the production of AMFE products for the photographic industry.
  Significant progress was made in rolling out iron compound Ferrazone®.
  This product, an iron chelate, addresses iron deficiency in human nutrition
  at a minimal cost to individuals. Iron deficiency is the planets most
  common nutritional disorder, affecting 3.5 billion people in the developing
  world, undermining the health of 500 million women of reproductive age, and
  leading to more than 60,000 childbirth deaths a year.

Polysulfides continued
  on its profitable growth path of recent years and further strengthened its global
  leadership position. Both top and bottom-line improved significantly. Debottlenecking
  efforts added more than 2,000 tons of capacity at the Greiz plant in Germany.
  In the third quarter, approval was obtained to build a grass roots plant in
  Taixing, China, adjacent to the Functional Chemicals MCA production plant. This
  investment will create a manufacturing base in the fastest growing market for
  Polysulfides in the world and should facilitate continued profitable growth
  of the business on a global basis.

Sulfur Products delivered
  a better overall performance despite flat sales. Lower costs more than offset
  the negative effects of a continuing decline in demand for carbon disulfide
  and thiocyanates. After a strong first

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half, second half results
  were affected by raw material and energy price hikes, and by Hurricane Katrina,
  which impacted the LeMoyne operation in the United States.

SurfactantsRevenues 2005: EUR 511
  million; 2004: EUR 538 million

Akzo Nobels Surfactants
  businessformerly part of Surface Chemistrywas formed in early 2005
  as part of the companys realignment of its Chemicals portfolio into five
  platforms for growth. As a result of this new strategy, the business revised
  its product mix in order to de-emphasize commodity applications and focus more
  on markets where we add value. Although this new focus led to lower revenues
  in 2005, a combination of restructuring, cost-saving programs, and strict margin
  management compensated this and resulted in improved profitability.

Like the rest of the chemical
  industry, Surfactants was impacted by historically high crude oil prices in
  2005, as well as several natural disasters such as droughts and hurricanes.
  We had to contend with pressure from major customers to reduce costs, and from
  petrochemical raw material suppliers to pass on higher oil and gas prices. In
  spite of these pressures, we managed to recover margin lost in 2004 by sourcing
  alternative raw materials, improving product mix and raising prices. We will
  benefit from new product introductions to the agro-chemical and petroleum markets,
  combined with geo expansion in China, Eastern Europe, CIS, and South America.
  We also expect to commercialize products into new market segments such as fuel
  emulsion and wood preservatives.

From a geographic perspective,
  after several years of re-engineering the business processes and reducing the
  cost structure, we believe our financial performance in Europe turned the corner
  during 2005 and our focus is on revenue growth. However, the testing and registration
  costs required to comply with the pending European REACH Directive will present
  a major challenge for our broad specialty product portfolio.

In the Americas, we have
  experienced reduced market demand and margin erosion in the fabric-care market.
  Asia continues on a growth path but has suffered margin erosion due to local
  competition. We have evaluated options for local Chinese manufacturing and have
  identified a clear path forward.

During 2005, Svensk Etanolkemi
  AB (Sekab)a joint venture company in northern Sweden supplying ethanol
  derivatives and biofuels to the European marketwas divested to a local
  consortium company, Nordsvensk Etanolsamverkan AB.

We have made major progress
  on our cost structure over the past couple of years, including the closure of
  the Littleborough site in the United Kingdom, consolidation of the office and
  laboratory in Nacka, Sweden, andmore recentlythe optimization of
  our Houston plant in the United States. The decision to deemphasize commodity
  market segments led to an announcement that the McCook site in the United States
  will be closed by the end of 2007.

Polymer ChemicalsRevenues 2005:
  EUR 471 million; 2004: EUR 442 million

The 2005 financial performance
  for Polymer Chemicals was in line with our 2004 results, and was below expectations.
  Margins were under pressure, mainly as a result of sharp hikes in raw material
  costs, which outpaced the price increases we introduced for our products, especially
  in the Americas. To address this situation, double-digit price increases for
  all products were announced in the fourth quarter of 2005.

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Firmly established by Akzo
  Nobel as one of the platforms for growth within its newly aligned Chemicals
  segment, we successfully implemented our restructuring and cost-savings programs.
  This, together with our operational excellence programs in the areas of purchasing,
  supply chain, and information technology, are driving the business towards its
  objective of achieving a global cost leadership position. As a result of the
  divestment program, which was announced as part of the companys new Chemicals
  strategy, our U.S. polymerization catalysts plant in Edison, New Jersey, was
  divested in April 2006.

In general, the polymer
  industry is continuing to show healthy growth rates, which are slightly above
  GDP in the Americas and Europe. In China, the rate of growth is almost 10%,
  with the country well on its way to becoming a net polymer exporting nation.
  We are in an excellent position to capitalize on this, as we have state-of-the
  art Chinese production facilities in both Tianjin and Ningbo. The relocation
  of our organic peroxide production capacity from Europe to China and Mexico
  is progressing well and will be finalized by mid-2006.

Our businesses enjoyed
  varying levels of success during 2005, as illustrated by the mixed results of
  the High Polymer Specialties (HPS) operation. Global volumes and sales of organic
  peroxides to the high polymer thermoplastic industry grew in line with overall
  market growth. The fastest growth was in Asia Pacific, due to a concerted effort
  to supply the new polymer producing locations in China. The business is also
  continuing to optimize its manufacturing activities by closely aligning operations
  at its Mexico and Texas sites. Sales of HPS specialty antifouling agents
  and suspending agents continue to improve as part of our effort to grow this
  new business in Asia Pacific and the Americas. New and improved products are
  also being brought to commercial production and should start to produce positive
  results in 2006.

Cross-linking Peroxides,
  Thermoset Peroxides, and Polymer Additives (XTP) had a fairly good year. Revenues
  grew by 7%, while the financial performance saw a similar improvement. The polymer
  additives activities are growing quickly, and because this business has been
  the hardest hit in terms of raw material cost increases, price improvement programs
  were vital in defending our margins. We also maintained our global market leadership
  in several categories of cross-linking peroxides and polymer additives.

Organometallic Specialties
  (OMS) registered significant price improvements in the latter part of 2005,
  although this did not fully compensate the raw material price hikes we experienced
  throughout the year. We were particularly impacted by persistent price rises
  in olefins and solvents, but were able to recover from low margins in some areas
  by sacrificing capacity in order to control operating costs. Hurricanes Katrina
  and Rita also had a significant negative sales impact on our business operations
  on the U.S. Gulf Coast.

On the product development
  front, good progress has been made during the last 12 months, while three new
  business ventures have taken significant strides forward. High Purity Metalorganics
  (HPMO), which serves the compound semiconductor industry, continued its year-on-year
  improvement driven by the introduction of an industry-leading product delivery
  system known as Hiperloop. Given the continued demand for lasers and light
  emitting diodes (LEDs), we believe HPMO should continue to register growth,
  particularly from its product line in Deer Park, Texas.

Meanwhile, the FuzeBox®
  metal deposition venturewhich coats fasteners with aluminum to improve
  corrosion performancemoved closer to commercialization. The first semi
  commercial FuzeBox® unit was installed in the second quarter
  of 2006. The Continuous Initiator Dosing (CID) venture, which is a process improvement
  technology for the manufacture of PVC, also moved closer to full commercialization
  with the signing of the first commercial license.

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Nonconsolidated Company
   Flexsys

Operating income of this
  50%-owned rubber chemicals joint venture was considerably better than in the
  previous year, which was caused by improved market conditions for the key product
  groups and the effects of the cost-saving programs started in 2004.

The company is in the process
  of divesting its 50%-stake in Flexsys.

SERVICE BUSINESSES

Engineering

Compared with 2004, Akzo
  Nobel Engineerings revenues were slightly lower, but volumes remained
  healthy. More than half of our activities involved Akzo Nobel Chemicals business
  units or external chemical companies worldwide, while third party fiber activities
  accounted for another quarter. Consultancy services provided to the companys
  Organon and Intervet businesses declined, but are expected to increase again.
  Akzo Nobel Engineering and the Akzo Nobel Chemicals Group intend to combine
  forces by integrating their service activities in areas such as engineering,
  inspection, technology, safety, health, environment, regulatory affairs, toxicology,
  and sustainable development. This will result in a more effective organization
  with a broader knowledge base.

Nobilas

Nobilas established itself
  during 2005 as a professional service provider in the field of international
  vehicle accident management. Significant progress was made on developing the
  dedicated ICT proprietary system Condor, which supports the complete accident
  management process, including web-enabled customer views. Nobilas is now active
  in 12 countries in Western Europe and North America and all country organizations
  are connected to the central Condor system. Nobilas volume of repairs
  and related services grew by 40% in 2005 and further opportunities for growth
  are expected in the near future, especially in the corporate fleets, leasing,
  and insurance areas.

SOURCES AND AVAILABILITY
  OF RAW MATERIALS

Raw materials essential
  to our business are purchased in the normal course of business from numerous
  suppliers worldwide. Important raw materials or auxiliary materials for the
  companys production processes are salt, petroleum and petroleum derivatives,
  natural gas, titanium dioxide, and electricity. In principal, these materials
  are widely available from multiple sources. No serious shortages or delays were
  encountered in 2005 and although we expect to be able to meet our requirements
  from our strategic reserves in the foreseeable future, increases to the volume
  of production of any product may be impeded by the limited availability of certain
  raw materials.

Although Akzo Nobel aims
  to use its purchasing power and long-term relationships with suppliers to acquire
  raw materials and their constant delivery at the best conditions, the company
  cannot assure that it will always be able to establish or maintain good relationships
  with such suppliers or that such suppliers will continue to exist or be able
  to supply ingredients in conformity with regulatory requirements or the companys
  requests.

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MARKETING AND DISTRIBUTION

The company sells its products
  in more than 130 countries. The sales, marketing and distribution functions
  are decentralized within the company. Each business unit has its own sales,
  marketing and distribution network for its products. The organization of these
  functions varies from business unit to business unit.

For the geographical distribution
  of sales, see Item 5 Operating and Financial Review and Prospects.

Organon and IntervetThe company sells
  its human-healthcare prescription medicines primarily through sales representatives
  to wholesale drug distributors, independent and chain pharmacies, hospitals,
  government entities and other institutions. The products are dispensed to the
  public through prescriptions written by physicians. Similar procedures generally
  apply for the animal-healthcare products, whereby representatives of the company
  visit veterinarians or farmers.

The company deploys sales
  forces of representatives and supporting medical staff to visit medical prescribers
  and healthcare purchasers or veterinarians to promote the companys (prescription)
  products.

However, the traditional
  relationship between the company and its ultimate customers is changing as a
  result of the Internet. Patients are better informed and want to have more of
  a say in their treatment. The Internet is a unique tool for establishing contacts
  between the company, the prescribers of its products, and the end users.

CoatingsCoatings are sold
  through a range of distribution channels. The operations in the Decorative sector
  are serving the Retail (Do-it-yourself), Trade (Professionals) and Specialties
  markets. Due to concentration of retailers, their purchasing power is increasing.
  The products of the other coatings activities are mainly sold through a direct
  sales force.

ChemicalsChemical products
  are sold in a wide range of industries. These products are either marketed directly
  or through independent merchants, wholesalers, and distributors who resell them
  to smaller users. Commodity products are sold through a direct sales force or
  through distributors primarily to other operators in the chemical industry.

INTELLECTUAL PROPERTY

The companys intellectual
  property portfolio includes numerous patent applications and patents, trademark
  applications and registrations, domain name registrations and trade secrets,
  which all help to protect its products, processes, goodwill, and know-how. Where
  appropriate, the company seeks intellectual property rights in relevant regional
  markets. The company monitors its competitors, enforces its own intellectual
  property rights whenever and wherever advisable and challenges third party intellectual
  property rights and claims, whenever appropriate. Intellectual property agreements
  are in force with many of the companys employees, and there are numerous
  confidentiality agreements in force with customers and suppliers to protect
  the companys know-how.

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GOVERNMENT REGULATION

Akzo Nobels businesses
  are subject to the normal regulatory framework applicable to a pharmaceutical
  and chemical company, notably various health, safety and environmental rules
  both at national and local levels. The company also voluntarily conforms to
  a number of international and national codes of best practice appropriate to
  its business.

Besides the normal regulatory
  framework for chemical companies, the company is subject to more extensive regulations
  for the veterinary and human pharmaceutical industry1. The international
  pharmaceutical industry is highly regulated. National and supranational regulatory
  authorities administer numerous laws and regulations regarding the testing,
  approval, manufacturing, import, labeling, and marketing of drugs, and also
  review the safety and effectiveness of pharmaceutical and biological products.
  Further regulations exist on the non-clinical and clinical development of pharmaceutical
  and biological products in particular. These regulatory requirements are a major
  factor in determining whether a substance can be developed into a marketable
  product and the amount of time and expense associated with such development.

The introduction of new
  pharmaceutical products generally entails a lengthy regulatory approval process.
  Of particular importance is the requirement in all major countries that products
  be authorized or registered by governmental regulatory authorities prior to
  marketing and that such authorization or registration is maintained subsequently.
  The regulatory process requires increased testing and documentation for clearance
  of new drugs and vaccines, and a corresponding increase in the expense of product
  development. To register such a product, a registration file containing evidence
  regarding the quality, safety and efficacy of the product must be submitted
  to regulatory authorities. The registration process may take one to several
  years, depending on the jurisdiction, the quality of the data submitted, the
  efficiency of the registration authoritys procedures, and the nature of
  the product.

In the United States, applications
  for drug registration are submitted to and reviewed by the United States Food
  and Drug Administration (FDA). Registrations of veterinary vaccines
  are reviewed by the US Department of Agriculture (USDA) in a slightly
  different procedure. The FDA regulates the testing, approval, manufacturing,
  labeling, and marketing of pharmaceutical products intended for commercialization
  in the United States, as well as the monitoring of all pharmaceutical products
  currently on the U.S. market. The pharmaceutical development and registration
  process is intensive, lengthy, and rigorous. A new drug application is filed
  with the FDA if the data demonstrate sufficient quality, safety, and efficacy.
  The new drug application must contain all the specific information that has
  been gathered and also covers all subjects tested in clinical trials. Very similar
  requirements apply to field trials for veterinary drugs and to vaccine registrations
  with the USDA.

If the FDA or the USDA,
  as the case may be, approves a new drug application, the new drug becomes available
  for physicians or veterinarians to prescribe.

Thereafter for human drugs,
  the drug license owner must submit periodic update reports to the FDA, including
  any cases of adverse reactions. For some drugs, the FDA requires additional
  studies to evaluate long-term effects or to gather information on the use of
  the product under special conditions. The FDA also requires compliance with
  standards relating to laboratory, clinical, and manufacturing practices.

In the European Union (EU),
  there are two types of marketing authorization, namely the Community Authorisation
  (Community responsibility) and the National Authorisation (responsibility of
  the competent

1In this section, the term pharmaceutical industry encompasses both
  human and animal healthcare, unless specifically indicated.

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authorities of the Member
  States). A Community Authorisation is obtained via the Centralized Procedure
  (CP). In the CP, applications are made to the European Medicines
  Agency (EMEA) for review and a scientific opinion by its Committees.
  The EMEAs opinion is forwarded to the European Commission for authorization,
  which is valid across all EU member-states. The CP is mandatory for biotechnology
  products, orphan medicinal products, and for products containing a new active
  substance developed for some specifically defined indications (e.g. AIDS, cancer).
  It is optional for products containing new active substances, products which
  constitute a significant therapeutic, scientific or technical innovation or
  products for which a Community authorization would be in the interest of patient
  health at community level.

When a National Authorisation
  is needed in more than one member state the Mutual Recognition Procedure (MRP)
  or the Decentralised Procedure (DP) needs to be followed. In the
  MRP, a first authorization is granted by a single EU member-state. Subsequently,
  mutual recognition of this first authorization can be sought from the remaining
  EU member-states. In the DP, a Reference Member State prepares an assessment
  report based on its own assessment and contributions from the Concerned Member
  States. Potentially serious public health concerns that cannot be resolved during
  the DP or MRP will be referred to a Co-ordination Group followed by a referral
  procedure (and a binding Commission decision) if no consensus is reached. EU
  member-states also run their own pharmacovigilance systems to which post-marketing
  adverse events are reported. The EMEA coordinates the pharmacovigilance activities
  within the EU. In the EU, pharmaceutical companies have to comply with GLP,
  GMP, and GCP regulations in order to develop, produce, and test pharmaceutical
  and biological products.

In Japan, applications
  for marketing authorization are made to the Pharmaceutical and Medical Devices
  Organization (PMDA). After a check on GLP and GCP compliance and
  a reliability review of the data, the PMDA performs a scientific review of the
  NDA application and prepares a review report. This review report is forwarded
  to the Ministry of Health, Labor and Welfare (MHLW). The review
  report of the PMDA is also forwarded to the Pharmaceutical Affairs Food &
  Sanitation Council (PAFSC), a consultative body to the MHLW. After
  advice from the PAFSC, only the Minister of MHLW is authorized to issue a license.
  For veterinary products, a similar procedure applies whereby the Ministry of
  Agriculture, Forestry and Fisheries is authorized to issue licenses.

PRICE CONTROLS

In addition to the forms
  of regulation already referred to, in many countries the prices of human pharmaceutical
  products are controlled by law and are subject to drug reimbursement programs
  with varying price control mechanisms. Governments may also influence the prices
  of pharmaceutical products through their control of national healthcare organizations,
  which may bear a large part of the cost of supplying such products to consumers.
  Generic substitution becomes an increasingly important issue worldwide, and
  it is actively supported by governmental and healthcare policies in several
  countries.

In the United States, debate
  over the reform of the healthcare system has resulted in an increased focus
  on pricing. Although there are currently no government price controls over private
  sector purchases in the United States, federal legislation requires pharmaceutical
  manufacturers to pay prescribed rebates on certain drugs to enable them to be
  eligible for reimbursement under certain healthcare programs. In the absence
  of new government regulation, managed care has become a potent force in the
  market place that increases downward pressure on the prices of the pharmaceutical
  products. In addition, the current national debate over Medicare costs could
  increase pricing pressures. As of January 1, 2006, Medicare pays for outpatient
  pharmaceutical coverage for beneficiaries and the U.S. government could use
  its enormous purchasing power to demand discounts from pharmaceutical companies
  thereby creating de facto price controls on prescription drugs. On the other
  hand, Medicare coverage of outpatient pharmaceuticals may

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increase the volume of
  pharmaceutical drug purchases, offsetting, at least in part, potential price
  discounts. As a result, we expect that pressure on pricing and operating results
  will continue.

In the EU, governments
  influence the price of human pharmaceutical and biological products through
  their control of national healthcare systems that fund a large part of the cost
  of such products to consumers. The downward pressure on healthcare systems in
  general, particularly prescription drugs, has become very intense. As a result,
  increasingly high barriers are being erected to the entry of new products, as
  exemplified by the National Institute for Clinical Excellence in the United
  Kingdom, which evaluates the data supporting new medicines and passes reimbursement
  recommendations to the government. In addition, in some countries cross-border
  imports from low-priced markets (parallel imports) exert a commercial pressure
  on pricing within a country.

In Japan, the National
  Health Ministry biannually reviews the pharmaceutical prices of individual human
  products. In the past, these reviews have resulted in price reductions. It is
  expected that the Japanese government will perform a healthcare reform and that
  the pharmaceutical pricing system will be one of the issues closely looked at.
  Key issues are the evaluation of innovative products and the pricing of long-listed
  products, including the biannual reduction of reimbursement prices adjusted
  for actual discounts given.

C. ORGANIZATIONAL STRUCTURE

For a description of the
  organization of the company see B. Business Overview.

Reference is made to Exhibit
  8 for a list of the companys subsidiaries.

D. PROPERTY, PLANT AND
  EQUIPMENT

A substantial portion of
  Akzo Nobels principal production plants and research facilities are located
  in Europe and North America. Akzo Nobels principal production plants and
  research facilities are located in the Netherlands, Germany, United Kingdom,
  Sweden, France, Italy, the United States, Brazil, and China. In total, Akzo
  Nobel has over 300 production plants throughout the world.

The most important production
  sites for Pharma are in Oss and Boxmeer, the Netherlands; Swords, Ireland; Durham,
  North Carolina; and DeSoto, Kansas.

The major Coatings sites
  are based in Montataire, France; Sassenheim, the Netherlands; Cologne,Germany;
  Barcelona, Spain; Cernobbio, Italy; Malmö, Sweden; Darwen and Hull, United
  Kingdom; Houston, Texas; Columbus, Ohio; High Point, North Carolina; Nashville,
  Tennessee; São Paulo, Brazil; Suzhou Jiashan, Shanghai, and Tianjin,
  China; Chilseo, Republic of Korea; and Melbourne, Australia.

For Chemicals, the major
  production sites are located in Delfzijl, Hengelo, and Rotterdam, the Netherlands;
  Bohus and Stenungsund, Sweden; Pasadena, Texas; and Bahia, Brazil.

Akzo Nobels policy
  is generally to own its facilities. The net book value of its property, plant
  equipment was EUR 3.4 billion at December 31, 2005. The book value of property,
  plant and equipment financed by installment buying and leasing was EUR 61 million
  at December 31, 2005. Akzo Nobel has rented certain offices and warehouses by
  means of operational leases.

Akzo Nobel believes that
  its production plants and research facilities are well maintained and generally
  adequate to meet its needs for the foreseeable future.

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Further discussions on
  relevant developments in property, plant and equipment are included in Item
  4.B under B  Business Review and Developments at Business Units.

For environmental issues
  affecting the companys properties, reference is made to Legal Proceedings
  in Item 8 Financial Information.

Item
  4.A UNRESOLVED STAFF COMMENTS

None.

Item
  5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS

The following discussion
  is based on the consolidated financial statements of Akzo Nobel included in
  this annual report under Item 18 and should be read in conjunction with those
  statements and the other financial information included herein, including the
  industry segment information and information by geographical area.

The consolidated financial
  statements of Akzo Nobel appearing in this annual report are prepared in accordance
  with IFRS, which differ in certain respects from US GAAP. The significant differences
  between IFRS and US GAAP affecting Akzo Nobel's net income and shareholders
  equity are described in Note 23 of the Notes to the Consolidated Financial Statements
  of Akzo Nobel.

Any trends, uncertainties,
  demands, commitments, or events that are reasonably likely to have a material
  effect on the companys revenues, income from operations, profitability,
  liquidity or capital resources, or that would cause the reported financial information
  not necessarily to be indicative of future operating results or financial condition,
  if any, are discussed in the relevant chapters below. For developments in the
  first quarter of 2006 reference is made the Report for the 1st Quarter
  of 2006, which has been furnished on Form 6-K to the Commission on April 20,
  2006, which is incorporated by reference into this Annual Report.

2005 COMPARED TO 2004

Net income was up 2% compared
  with 2004 and amounted to EUR 961 million, which is EUR 3.36 per share (2004:
  EUR 3.31). Organon earnings were up due to increased revenues and to income
  derived from deals with other pharma companies. Premarketing costs and R&D
  expenses were higher as a consequence of our investments in future growth. Intervets
  EBIT was up substantially. Coatings revenues showed satisfactory growth of 6%
  but margins were under pressure from increased raw material prices and weaker
  European economies, especially in the first half of the year. In the second
  half, performance of the industrial coatings activities improved. Chemicals
  present operations achieved robust growth in revenues and EBIT, despite higher
  energy and raw material prices.

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|Revenues, Cost,
      and Income                               |                             |   |        |  
|-------------------------------------------------------------- | --------------------------- | - | ------ | -
|                                                               |                             |   |        |  
|                                                               | Statement
        of income |  
|Millions of euros                                              | 2005                        |   | 2004   |  
|                                                               |                             |   |        |  
|Revenues                                                       | 13,000                      |   | 12,833 |  
|Cost of sales                                                  | (7,066                      | ) | (6,825 | )
|                                                               |                             |   |        |  
|                                                               |                             |   |        |  
|Gross profit                                                   | 5,934                       |   | 6,008  |  
|Selling expenses                                               | (3,297                      | ) | (3,254 | )
|Research and development
      expenses                        | (834                        | ) | (816   | )
|General and administrative
      expenses                      | (693                        | ) | (674   | )
|Other operating income/(expenses)                              | 16                          |   | (1     | )
|IAS 39 fair value adjustments                                  | 26                          |   |        |  
|Incidentals :                                                  |                             |   |        |  
|- Special benefits                                             | 571                         |   | 84     |  
|- Results on divestments                                       | 44                          |   | 579    |  
|- Restructuring and
      impairment charges                   | (169                        | ) | (197   | )
|- Charges related to
      major legal, antitrust, and         |                             |   |        |  
|environmental
      cases                                      | (112                        | ) | (202   | )
|                                                               |                             |   |        |  
|Operating income                                               | 1,486                       |   | 1,527  |  
|Financing charges,
      net                                   | (156                        | ) | (144   | )
|                                                               |                             |   |        |  
|                                                               |                             |   |        |  
|Operating income less
      financing charges                  | 1,330                       |   | 1,383  |  
|Income taxes                                                   | (336                        | ) | (412   | )
|                                                               |                             |   |        |  
|                                                               |                             |   |        |  
|Earnings of consolidated
      companies after taxes           | 994                         |   | 971    |  
|Earnings from nonconsolidated
      companies                  | 4                           |   | 10     |  
|                                                               |                             |   |        |  
|                                                               |                             |   |        |  
|Profit for the period                                          | 998                         |   | 981    |  
|Minority interest,
      attributable to minority shareholders | (37                         | ) | (36    | )
|                                                               |                             |   |        |  
|                                                               |                             |   |        |  
|Net income, attributable
      to equity holders               | 961                         |   | 945    |  
|                                                               |                             |   |        |  
|

RevenuesRevenues from our present
  operations amounted to EUR 13.0 billion, up 6% on last year. This was mainly
  attributable to autonomous growth across all segments. Organons revenues
  decline in recent years was reversed with growth of 3%. Intervet performed well,
  delivering 7% growth. Coatings and Chemicals realized healthy autonomous growth
  of 4%. On balance, currency translation had a slight positive effect during
  the year.

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Akzo Nobels total
  revenues developed as follows:

|                                    |       |  |        |   |       |  |             |  |              |   
|----------------------------------- | ----- |  | ------ | - | ----- |  | ----------- |  | ------------ | --
|                                    |       |  |        |   |       |  | Currency    |  | Divestments/ |   
|In percent                          | Total |  | Volume |   | Price |  | translation |  | translation  |   
|                                    |       |  |        |   |       |  |             |  |              |   
|                                    |       |  |        |   |       |  |             |  |              |   
|Organon                             | 3     |  | 2      |   |      |  | 1           |  |             |   
|Organon                             | 3     |  | 2      |   |      |  | 1           |  |             |   
|Intervet                            | 7     |  | 5      |   | 1     |  | 2           |  | (1           | ) 
|Coatings                            | 6     |  | (1     | ) | 5     |  | 1           |  | 1            |   
|Chemicals, present
      operations | 4     |  | 1      |   | 3     |  |            |  |             |   
|Akzo Nobel                          | 1     |  | 1      |   | 3     |  | 1           |  | (4           | )1
|                                    |       |  |        |   |       |  |             |  |              |   

|1 | Includes
      the effect of the Chemicals businesses divested in 2004.
|- | -----------------------------------------------------------------------

Operating IncomeOperating
  income excluding incidentals from present operations was EUR 1,152 million,
  on balance down 6% compared with 2004. EBIT margin was 8.9% (2004: 10.0%). Total
  operating income for the year decreased by 3% from EUR 1,527 million to EUR
  1,486 million with an EBIT margin of 11.4% (2004: 11.9%).

Organons earnings
  were up on the previous year due to revenues growth of 3% and the special benefits
  derived from deals with other pharma companies. NuvaRing® and
  Puregon® were the main drivers of revenues growth. The decline
  of Remeron® sales was less than expected. Sales of Livial®
  were slightly down. Intervet earnings were boosted by strong autonomous growth
  of 6% and improved supply chain management. In the first half year, Coatings
  earnings were impacted by significantly increased raw material prices and weaker
  European economies, while in the second half, the industrial coatings activities
  delivered a strong performance. Earnings from the present Chemicals operations
  were up 18%, despite higher energy and raw material prices.

The special benefits are
  attributable to the termination of the Risperdal® copromotion
  contract (EUR 149 million) and the settlement with Duramed/Barr on their infringement
  of Organons rights to the Mircette® patent (EUR 109 million).
  In addition, the new Dutch defined contribution pension plan and the termination
  of the postretirement healthcare scheme resulted in a release of provisions
  of EUR 283 million. The divestment of Intervets feed additives business
  and the companys stake in Svensk Ethanolkemie resulted in a profit of
  EUR 44 million. The restructuring and impairment charges of EUR 169 million
  were due to programs at Organons active pharmaceutical ingredients business
  and several Coatings and Chemicals projects. The settlement of the last Remeron®
  court case cost EUR 64 million, while a charge of EUR 39 million was recorded
  for additions to the provision for antitrust cases.

R&D ExpensesAkzo Nobels
  R&D expenses were EUR 834 million, which is equivalent to 6.4% of revenues.
  For 2004, this was EUR 816 million and 6.4%, respectively. In 2005, Organon
  spent 18% of its revenues on R&D. The Intervet ratio amounted to 10%, while
  for Coatings and Chemicals this ratio remained unchanged at around 3%.

Net Financing ChargesFinancing
  charges increased from EUR 144 million in 2004 to EUR 156 million in 2005 due
  to higher interest charges on discounted provisions (2005: EUR 41 million; 2004:
  EUR 21 million). However, interest on net interest-bearing borrowings was lower
  due to decreased net liabilities (2005: EUR 115 million; 2004: EUR 123 million).
  Interest coverage decreased from 10.6 to 9.5. EBITDA coverage was 13.2 (2004:
  14.5).

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Income TaxesThe tax charge
  decreased from 30% in 2004 to 25% in 2005. This is attributable to the geographical
  mix of the companys results and favorable settlements of certain tax disputes.

Earnings from Nonconsolidated
  CompaniesEarnings from
  nonconsolidated companies were EUR 4 million, down EUR 6 million compared to
  2004. The overall operational performance of the nonconsolidated companies on
  balance improved slightly, as higher results for Flexsys and most of the other
  Chemicals joint ventures more than offset the earnings decline at Methanor and
  the loss of earnings from the divested Catalysts joint ventures. 2005 earnings
  include net incidental losses of EUR 37 million (2004: EUR 29 million). These
  concerned an impairment charge for Methanor and charges related to guarantees
  for environmental costs at Acordis.

IncidentalsIncidentals
  are special benefits, results on divestments, restructuring and impairment charges,
  and charges related to major legal, antitrust, and environmental cases.

Special BenefitsIn 2005, the
  special benefits mainly relate to the termination of the Risperdal®
  copromotion (EUR 149 million), the settlement with Duramed/Barr on Mircette
  (EUR 109 million), the release of provisions due to termination of the postretirement
  healthcare plan in the Netherlands, and the change to a defined contribution
  plan in the Netherlands (EUR 283 million). In 2004, the special benefits mainly
  related to the full transfer of Arixtra® to Sanofi-Synthélabo
  (EUR 54 million), the early entrance fee for a marketing license for Remeron®
  in Germany, and the settlement of insurance claims for the West Orange site.

Results on divestmentsResults on
  divestments in 2005 mainly concern the divestment of Intervets feed additives
  business and the divestment of the companys interest in Svensk Ethanolkemie
  AB. In 2004, the gain on the divestments is mainly related to the divestment
  of Catalysts, Phosphorus Chemicals, and Coating Resins.

Legal, antitrust,
  and environmental casesCharges related
  to major legal, antitrust, and environmental cases for 2005 include EUR 64 million
  for the settlement of the last Remeron® case, EUR 39 million
  for antitrust cases, and EUR 9 million for environmental risks at derelict sites
  of companies acquired in the past. In 2004, these charges related to antitrust
  (EUR 102 million), Remeron® cases (EUR 89 million), and environmental
  cases (EUR 11 million).

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Restructuring and
  Impairment ChargesThe restructuring
  and impairment charges in 2005 consist of the following elements:

|                     |      |  
|-------------------- | ---- | -
|Millions of euros    |      |  
|                     |      |  
|                     |      |  
|Asset impairments at |      |  
| Organon            | (67  | )
| Coatings           | (5   | )
| Chemicals          | (49  | )
|Restructurings at    |      |  
| Organon            | (3   | )
| Coatings           | (31  | )
| Chemicals          | (14  | )
|                     |      |  
|Total                | (169 | )
|                     |      |  

In 2005, the asset impairments
  mainly relate to Organon's active pharmaceutical ingredients activities and
  the Chemicals McCook plant in the United States. Organon's active pharmaceutical
  ingredients activities are under pressure from difficult market circumstances,
  leading to a pre-tax impairment charge of EUR 67 million. The impairment of
  the McCook plant was the result of restructuring of the production capacity
  in order to address the more competitive environment in which the Surfactants
  business operates. In addition, several smaller impairments at Chemicals and
  Coatings were recognized. Restructuring charges relate to several relatively
  smaller plans within the company and comprise accruals for employee benefits
  and for costs directly associated with plans to exit specific activities and
  to close down facilities. For all restructurings a detailed formal plan exists,
  and the implementation of the plan has started or the plan has been announced.

Restructuring of
  ActivitiesProvisions
  for restructuring of activities comprise accruals for certain employee termination
  benefits and for costs which are directly associated with plans to exit specific
  activities, primarily related to costs associated with closing down facilities.

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|                                                                |             |   |       |   |           |  
|--------------------------------------------------------------- | ----------- | - | ----- | - | --------- | -
|                                                                | Termination |   | Exit  |   | Total     |  
|Millions of euros                                               | benefits    |   | costs |   | provision |  
|                                                                |             |   |       |   |           |  
|                                                                |             |   |       |   |           |  
|Balance at December
      31, 2003                              | 211         |   | 83    |   | 294       |  
|                                                                |             |   |       |   |           |  
|Changes in exchange
      rates                                 |             |   | (2    | ) | (2        | )
|Additions charged to
      income as restructuring charge under |             |   |       |   |           |  
|incidentals                                                     | 90          |   | 31    |   | 121       |  
|Other additions charged
      to income                         | (12         | ) | 14    |   | 2         |  
|Utilization                                                     | (119        | ) | (53   | ) | (172      | )
|Divestiture                                                     | (2          | ) |       |   | (2        | )
|                                                                |             |   |       |   |           |  
|                                                                |             |   |       |   |           |  
|                                                                |             |   |       |   |           |  
|Balance at December
      31, 2004                              | 168         |   | 73    |   | 241       |  
|                                                                |             |   |       |   |           |  
|Changes in exchange
      rates                                 |             |   | 2     |   | 2         |  
|Additions charged to
      income as restructuring charge under |             |   |       |   |           |  
|incidentals                                                     | 48          |   |       |   | 48        |  
|Other additions charged
      to income                         | 3           |   | 14    |   | 17        |  
|Utilization                                                     | (71         | ) | (38   | ) | (109      | )
|Amounts reversed during
      the year                          | (9          | ) | (2    | ) | (11       | )
|Unwind of discount                                              | 8           |   | 3     |   | 11        |  
|                                                                |             |   |       |   |           |  
|Balance at December
      31, 2005                              | 147         |   | 52    |   | 199       |  
|                                                                |             |   |       |   |           |  

2005 movementsFor the additions
  charged to income reference is made to the disclosure under restructuring and
  impairment charges in 2005 compared to 2004. The additions to termination benefits
  involve approximately 645 jobs at various sites all over the world.

During 2005, the total
  amount paid and charged against the related liability amounted to EUR 71 million
  for termination benefits and EUR 38 million for exit costs. These payments and
  charges all concerned the execution of plans decided upon during 2005 and prior
  years.

The company has a sizeable
  number of restructuring programs involving personnel reductions at numerous
  sites all over the world, none of which are individually significant to the
  consolidated financial statements of the company.

2004 movementsThe additions
  to termination benefits involve approximately 1,840 jobs at various sites all
  over the world.

During 2004, the total
  amount paid and charged against the related liability amounted to EUR 119 million
  for termination benefits and EUR 53 million for exit costs. These payments and
  charges all concerned the execution of plans decided upon during 2004 and prior
  years.

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Number of employeesThe number
  of employees developed as follows:

|           |                      |  |                |   |         |   |                      | 
|---------- | -------------------- |  | -------------- | - | ------- | - | -------------------- | 
|Number of  | December
        31, |  |                |   | Other   |   | December
        31, | 
|employees  | 2005                 |  | Restructurings |   | changes |   | 2004                 | 
|           |                      |  |                |   |         |   |                      | 
|           |                      |  |                |   |         |   |                      | 
|Organon    | 14,100               |  |               |   | 10      |   | 14,090               | 
|Intervet   | 5,260                |  |               |   | (10     | ) | 5,270                | 
|Coatings   | 29,200               |  | (500           | ) | 840     |   | 28,860               | 
|Chemicals  | 11,430               |  | (390           | ) | (70     | ) | 11,890               | 
|Others     | 1,350                |  | (30            | ) | 40      |   | 1,340                | 
|           |                      |  |                |   |         |   |                      | 
|Akzo Nobel | 61,340               |  | (920           | ) | 810     |   | 61,450               | 
|           |                      |  |                |   |         |   |                      | 

At the end of 2005, the
  company had 61,340 employees, virtually unchanged from year-end 2004. Growth
  of our business in emerging markets and acquisitions resulted in a workforce
  expansion of 810, while restructuring programs in Coatings and Chemicals in
  the mature markets resulted in a decrease of 920.

Revenues and Operating
  Income by ActivitiesEarnings development per
  group was as follows.

|                                         |          |  |                        |   |       |  |       |  
|---------------------------------------- | -------- |  | ---------------------- | - | ----- |  | ----- | -
|                                         | Revenues |  | Operating
      income |  
|Millions of euros                        | 2005     |  | 2004                   |   | 2005  |  | 2004  |  
|                                         |          |  |                        |   |       |  |       |  
|                                         |          |  |                        |   |       |  |       |  
|Organon                                  | 2,425    |  | 2,344                  |   | 415   |  | 275   |  
|Intervet                                 | 1,094    |  | 1,027                  |   | 238   |  | 184   |  
|Coatings                                 | 5,555    |  | 5,237                  |   | 384   |  | 406   |  
|Chemicals                                | 3,890    |  | 4,317                  |   | 312   |  | 869   |  
|Miscellaneous products,
      intragroup |          |  |                        |   |       |  |       |  
|deliveries,
      and eliminations       | 36       |  | (92                    | ) | 137   |  | (207  | )
|                                         |          |  |                        |   |       |  |       |  
|Total                                    | 13,000   |  | 12,833                 |   | 1,486 |  | 1,527 |  
|                                         |          |  |                        |   |       |  |       |  

Organon

|                          |                     | 
|------------------------- | ------------------- | 
|                          | Percentage          | 
|                          | of
        revenues | 
|Country
        of origin | 2005                | 
|                          |                     | 
|                          |                     | 
|The Netherlands           | 31                  | 
|Germany                   | 2                   | 
|United Kingdom            | 2                   | 
|France                    | 4                   | 
|Other European countries  | 34                  | 
|USA and Canada            | 12                  | 
|Latin America             | 5                   | 
|Asia                      | 8                   | 
|Other regions             | 2                   | 
|                          |                     | 

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2005 was a turning point
  for Organon, as the organization established a solid base for future growth.
  Organons revenues in 2005 (EUR 2,425 million, up 3%) started growing again
  following several years of declining sales since Remeron® lost
  its market exclusivity in the United States. The strong performances of Puregon®
  and NuvaRing® were instrumental in contributing to this return
  to growth in 2005.

Sales of Organons
  key products developed as follows:

|                             |          |  |                      |   |                   |  
|---------------------------- | -------- |  | -------------------- | - | ----------------- | -
|Millions
      of euros or % | 2005     |  | Total
        change |   | Autonomous        |  
|                             | revenues |  | %                    |   | growth
        %1 |  
|                             |          |  |                      |   |                   |  
|                             |          |  |                      |   |                   |  
|                             |          |  |                      |   |                   |  
|Contraceptives               | 564      |  | 8                    |   | 7                 |  
| of which NuvaRing®         | 127      |  | 57                   |   | 58                |  
|Puregon®/Follistim®          | 355      |  | 20                   |   | 24                |  
|Remeron®                     | 283      |  | (22                  | ) | (22               | )
|Livial®                      | 154      |  | (4                   | ) | (6                | )
|Pharmaceutical ingredients   | 228      |  | 8                    |   | 8                 |  
|                             |          |  |                      |   |                   |  

|1 | Autonomous
      sales growth is defined as the change in sales attributable to changed volumes
      and selling prices. In this case it only excludes the change in sales attributable
      to currency translation effects. Acquisitions and divestments were not applicable.Reference
      is made to the remarks under Introduction on page 4.
|- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Operating income showed
  strong growth compared to the previous year (EUR 415 million, up 51%) despite
  rising R&D expenses, the settlement of the last lawsuit for Remeron®in the United States, and an impairment charge of EUR 67 million in the
  pharmaceutical ingredients unit. Organon received significant cash amounts from
  Johnson & Johnson for terminating the copromotion contract for Risperdal®and from Duramed/Barr for the patent litigation settlement involving our
  oral contraceptive Mircette®.

Organons contraceptive
  vaginal ring, NuvaRing®which has now been introduced in
  more than25 countriesis also continuing to enjoy steadily increasing sales
  in many markets. After a successful pilot in three states, a direct-to-consumer
  advertising campaign was launched in November to promote NuvaRing®throughout the United States, mainly consisting of television commercials.

Puregon/Follistim®,
  Organons biotech fertility product, has become one of our biggest selling
  products. Performance was particularly boosted by strong U.S. sales resulting
  from a successful launch of the Follistim Pen and product line extensions.
  In 2005, Puregon®/Follistim®was also introduced
  in Japan and China.

For Livial®in
  the United States, additional data was submitted to the FDA in December 2005.
  In June 2006, however, the FDA determined that the NDA submitted for this product
  was not approvable.

NobilonThe development
  of human influenza vaccines by Nobilon, in cooperation with Organon and Intervet,
  is progressing according to schedule.

Nobilon is in the process
  of upscaling its influenza antigen production based on cell culture technology.



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Intervet

|                          |                     | 
|------------------------- | ------------------- | 
|                          | Percentage          | 
|                          | of
        revenues | 
|Country
        of origin | 2005                | 
|                          |                     | 
|                          |                     | 
|The Netherlands           | 34                  | 
|Germany                   | 13                  | 
|United Kingdom            | 5                   | 
|France                    | 5                   | 
|Other European countries  | 12                  | 
|USA and Canada            | 15                  | 
|Latin America             | 9                   | 
|Asia                      | 3                   | 
|Other regions             | 4                   | 
|                          |                     | 

Intervet produced consistently
  strong results during 2005, as the strategic initiatives introduced in recent
  years began to pay off. Revenues increased by 7% to EUR 1,094 million, with
  volume growth being the main contributor. These increased volumes and the resulting
  boost in earnings were favorably impacted by efficiency improvements in manufacturing,
  supply chain, and marketing, and the result on the divestment of the feed additives
  business. Intervet was therefore able to deliver an operating income of EUR
  238 million, up 29% from 2004 and equivalent to an EBIT margin of 21.8%.

We further expanded our
  strong market position in Europewhere the business generates more than
  50% of its revenuesand our development in North America was characterized
  by growth in key areas, while sales in Latin America were boosted by substantial
  growth in Brazil and Chile. This strong growth was achieved even though a number
  of disposals took place, with Intervet divesting interests in noncore areas
  such as the diagnostic and feed additive activities.

Intervet will continue
  to sharpen its focus on major food and companion animal markets, and we expect
  to see similarly positive trends beyond 2005, when new products resulting from
  our extensive research and development programs should enhance our existing
  portfolio.

Looking at 2005 in more
  detail, market gains in Europe were largely attributable to improved supplies
  and the strong sales growth of Cobactan®, our innovative range
  of anti-infective formulations based on the proprietary molecule cefquinome.
  In North America, sales were buoyed by new product introductions in the companion
  animal sector, including Vetsulin® (the first insulin to treat
  diabetes in dogs) and Continuum® (a combination vaccine with
  long-lasting immunity). The recently launched cattle bioline Vista®
  also received a very positive response. Latin American performance was boosted
  by major growth in Brazil (in various markets) and in Chile, where the main
  driver was increased sales of fish vaccines. In Asia, where large areas have
  been severely affected by outbreaks of avian influenza, business is growing.

The acquisition of AgVax
  Developments Ltd enables Intervet to benefit from AgVaxs close collaboration
  with its former parent company, AgResearch, New Zealands largest Crown
  Research Institute.

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

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Coatings

|                                       |                       |  |                                |                       | 
|-------------------------------------- | --------------------- |  | ------------------------------ | --------------------- | 
|                                       | Percentage
        of |  |                                | Percentage
        of | 
|                                       | revenues              |  |                                | revenues              | 
|Business
        unit                  | 2005                  |  | Country
        of origin      | 2005                  | 
|                                       |                       |  |                                |                       | 
|                                       |                       |  |                                |                       | 
|Decorative Coatings                    | 36                    |  | The Netherlands                | 7                     | 
|Industrial Coatings
      and Finishes | 31                    |  | Germany                        | 10                    | 
|Marine & Protective
      Coatings     | 17                    |  | Sweden                         | 7                     | 
|Car Refinishes                         | 16                    |  | United
      Kingdom           | 10                    | 
|                                       |                       |  | France                         | 8                     | 
|                                       |                       |  | Other European
      countries | 21                    | 
|                                       |                       |  | USA and
      Canada           | 15                    | 
|                                       |                       |  | Latin America                  | 4                     | 
|                                       |                       |  | Asia                           | 13                    | 
|                                       |                       |  | Other regions                  | 5                     | 
|                                       |                       |  |                                |                       | 

Coatings experienced a
  tough year due to steeply rising raw material prices and difficult economic
  conditions in mature markets, especially in Western Europe. Our businesses addressed
  these issues by focusing on tight cost control and by pushing through price
  increases. Coatings managed to keep profits at an acceptable level, although
  the ROI excluding incidentals slipped to just below 20%. Including incidentals,
  ROI was 17.8%.

Revenues grew autonomously
  by 4%, mainly fueled by growth in the emerging markets of Asia Pacific, Eastern
  Europe, and the Middle East. During the year, we opened two new Powder Coatings
  facilities and two Decorative Coatings plants in China and Vietnam. We also
  announced the acquisition of the Chinese decorative coatings company Guangzhou
  Toide Paint Manufacturing Co. (which was completed in the first quarter of 2006),
  established a Powder Coatings joint venture in Egypt, and invested in the construction
  of a new Powder Coatings plant in Russia. At the end of 2005, emerging markets
  represented 34% of our worldwide sales.

The industrial activities
  put in a strong performance especially in the second half of 2005. Successful
  marketing initiatives expanded the business base and the average pricing in
  all markets improved. Marine & Protective Coatings had another good year.
  Higher sales of added-value products are offering clear operational and financial
  benefits to our customers, while the growth in target developing markets continues.
  Car Refinishes results remained under pressure and restructuring programs are
  being carried out to address this situation. The performance of Decorative Coatings
  showed a mixed picture. In some of the large western European countries results
  were under pressure, while in the emerging markets earnings improved.

In mature markets, we continued
  to improve our portfolio through selective acquisitions. During 2005, we acquired
  Swiss Lack, the leading supplier of decorative coatings in Switzerland; ICIs
  German industrial wood finishes business Zweihorn GmbH; and BASFs joinery
  business Glasurit®. In addition, we continued to further expand
  the commercial distribution network of our European Decorative Coatings business
  by acquiring a number of wholesalers in Germany, the largest market for architectural
  paints in Europe.

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69

Chemicals

|                                  |                                                 |  |                                  |                                                 | 
|--------------------------------- | ----------------------------------------------- |  | -------------------------------- | ----------------------------------------------- | 
|Business unit                     | Percentage
      of
        revenues
      2005 |  | Country of origin                | Percentage
      of
        revenues
      2005 | 
|                                 
|                                 
|                                  |                                                 |  |                                  |                                                 | 
|                                  |                                                 |  |                                  |                                                 | 
|Pulp
        and Paper Chemicals  | 22                                              |  | The
        Netherlands          | 24                                              | 
|Base
        Chemicals            | 19                                              |  | Germany                          | 9                                               | 
|Functional
        Chemicals      | 17                                              |  | Sweden                           | 21                                              | 
|Surfactants                       | 13                                              |  | UK                               | 1                                               | 
|Polymer
        Chemicals         | 12                                              |  | Other
        European countries | 10                                              | 
|Activities
        to be divested | 17                                              |  | USA
        and Canada           | 21                                              | 
|                                  |                                                 |  | Latin
        America            | 5                                               | 
|                                  |                                                 |  | Asia                             | 7                                               | 
|                                  |                                                 |  | Other
        regions            | 2                                               | 
|                                  |                                                 |  |                                  |                                                 | 

Akzo Nobel Chemicals made
  good progress in 2005, as it successfully implemented a strategy to streamline
  its portfolio in order to competitively realign the business for sustainable
  growth, profitability, and leadership positions in selected markets.

Revenues and operating
  income improved compared to 2004. The record ROI excluding incidentals of more
  than 16% underlines the progress which has been made toward our medium term
  target of 17.5%. The overall performance improved across the board against a
  backdrop of raw material price increases and rising energy costs. Including
  incidentals, ROI was 14.4%.

Now organized in five growth
  platformsBase Chemicals, Functional Chemicals, Polymer Chemicals, Pulp
  & Paper Chemicals, and Surfactantsthe Chemicals group is starting
  to reap the benefits of an improved structure and a more focused approach as
  a result of the strategic revision which began in 2004.

Despite significantly higher
  energy costs, Base Chemicals turned in an excellent performance in 2005, driven
  by higher volumes and continuing cost reduction and restructuring programs.
  Functional Chemicals performed robustly as market demand remained high, while
  results of Polymer Chemicals were slightly down compared to 2004. Pulp &
  Paper Chemicals had a mixed year due to margin pressure, experiencing particularly
  adverse conditions in Europe, but profitable growth in South America and Asia.
  Profits improved at the newly formed Surfactants business on the back of its
  revised focus and efficiency measures.

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

With the five growth platforms
  now firmly established, our streamlined businesses are ready to fully implement
  the strategic plans for the future and expand both operations and profitability.

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Geographic Developments

|                             |                                 |  |                            |  |                                       |  |                    |  |       |   |       |   |        |  |        | 
|---------------------------- | ------------------------------- |  | -------------------------- |  | ------------------------------------- |  | ------------------ |  | ----- | - | ----- | - | ------ |  | ------ | 
|                             | Revenues,by
        destination |  | Revenues,by
        origin |  | Operating 
                    income |  | Identifiableassets | 
|Millions of euros            | 2005                            |  | 2004                       |  | 2005                                  |  | 2004               |  | 2005  |   | 2004  |   | 2005   |  | 2004   | 
|                             |                                 |  |                            |  |                                       |  |                    |  |       |   |       |   |        |  |        | 
|                             |                                 |  |                            |  |                                       |  |                    |  |       |   |       |   |        |  |        | 
|The Netherlands              | 862                             |  | 844                        |  | 2,459                                 |  | 2,748              |  | 474   |   | 446   |   | 3,061  |  | 2,959  | 
|Germany                      | 1,238                           |  | 1,165                      |  | 1,152                                 |  | 1,050              |  | 144   |   | 159   |   | 750    |  | 828    | 
|Sweden                       | 516                             |  | 509                        |  | 1,237                                 |  | 1,155              |  | 137   |   | 33    |   | 863    |  | 847    | 
|United Kingdom               | 809                             |  | 833                        |  | 754                                   |  | 848                |  | (59   | ) | (57   | ) | 690    |  | 582    | 
|Other European countries     | 4,075                           |  | 4,122                      |  | 3,069                                 |  | 2,921              |  | 527   |   | 532   |   | 2,112  |  | 2,163  | 
|USA and Canada               | 2,400                           |  | 2,445                      |  | 2,116                                 |  | 2,221              |  | (67   | ) | 60    |   | 1,959  |  | 1,794  | 
|Latin America                | 830                             |  | 729                        |  | 626                                   |  | 493                |  | 85    |   | 133   |   | 619    |  | 454    | 
|Asia                         | 1,590                           |  | 1,536                      |  | 1,231                                 |  | 1,087              |  | 192   |   | 175   |   | 1,017  |  | 834    | 
|Other regions                | 680                             |  | 650                        |  | 356                                   |  | 310                |  | 53    |   | 46    |   | 329    |  | 295    | 
|Eliminations, cash
      and |                                 |  |                            |  |                                       |  |                    |  |       |   |       |   |        |  |        | 
|cash
      equivalents, and  |                                 |  |                            |  |                                       |  |                    |  |       |   |       |   |        |  |        | 
|nonconsolidated              |                                 |  |                            |  |                                       |  |                    |  |       |   |       |   |        |  |        | 
|companies,
      net         |                                 |  |                            |  |                                       |  |                    |  |       |   |       |   | 1,025  |  | 1,195  | 
|                             |                                 |  |                            |  |                                       |  |                    |  |       |   |       |   |        |  |        | 
|                             |                                 |  |                            |  |                                       |  |                    |  |       |   |       |   |        |  |        | 
|Total                        | 13,000                          |  | 12,833                     |  | 13,000                                |  | 12,833             |  | 1,486 |   | 1,527 |   | 12,425 |  | 11,951 | 
|                             |                                 |  |                            |  |                                       |  |                    |  |       |   |       |   |        |  |        | 

Revenues and earnings in
  2005 were only slightly affected by changes in key foreign currencies relative
  to the euro.

Revenues (by destination)
  in the Netherlands mainly increased in the Coatings area, while the other segments
  were at or slightly below last year's level. In Germany, both Coatings and Chemicals
  increased revenues. Revenues for Pharma in the United States were strong, particularly
  boosted by Puregon®/Follistim®, due to the successful
  launch of the Follistim PenTM and product line extensions. Also NuvaRing®
  grew strongly in the United States, aided by a direct-to-customer advertising
  campaign in place since November. Coatings revenues in the United States also
  increased on last year. Lower revenues in the United States for Chemicals were
  caused by the impact of the Chemicals divestments. Revenues in Latin America
  increased for all segments. Growth in Asia also continued, especially for Coatings.

In 2005, operating income
  in Sweden increased considerably compared to 2004, for a large part due to better
  performance of Coatings and Chemicals. Furthermore, lower restructuring charges
  contributed to the improved Swedish operating income. The decline in U.S. operating
  income related to the settlement of the Remeron® court cases
  and restructuring and impairment charges for several units. Lower 2005 operating
  income in Latin America is mainly attributable to the divestment results included
  in 2004 operating income.

LIQUIDITY AND CAPITAL
  RESOURCES

To Akzo Nobel's knowledge,
  and other than as disclosed herein, there are no trends or any demands, commitments,
  events or uncertainties that will result in or that are reasonably likely to
  result in a material change in Akzo Nobel's liquidity. As of the date of this
  Annual Report, Akzo Nobel has no material commitments for capital expenditures
  other than arising from the normal course of business, and other than as disclosed
  herein, and, to the knowledge of Akzo Nobel, there are no material trends, favorable
  or unfavorable, in Akzo Nobel's capital resources. Akzo Nobel believes that
  its capital resources and funds

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71

generated by operations
  will be sufficient to satisfy present and future capital expenditures and other
  commitments in connection with its ongoing business. Akzo Nobel may, however,
  utilize other sources of funding, from time to time, as and when appropriate.

Condensed Statement
  of Cash Flows

|                                                                              |       |   |       |  
|----------------------------------------------------------------------------- | ----- | - | ----- | -
|Millions
        of euros                                                     | 2005  |   | 2004  |  
|                                                                              |       |   |       |  
|                                                                              |       |   |       |  
|Cashflow from operations                                                      | 1,624 |   | 1,188 |  
|Changes in working
      capital                                              | (248  | ) | (32   | )
|Changes in provisions                                                         | (598  | ) | (63   | )
|                                                                              |       |   |       |  
|                                                                              |       |   |       |  
|Net cash from
      operating activities                                      | 778   |   | 1,093 |  
|                                                                              |       |   |       |  
|Capital expenditures                                                          | (514  | ) | (551  | )
|Investments in intangible
      assets                                        | (67   | ) | (28   | )
|Net cash effect of
      acquisitions                                         | (55   | ) | (80   | )
|Proceeds from divestments/redemptions                                         | 91    |   | 1,047 |  
|Other                                                                         | (44   | ) | 146   |  
|                                                                              |       |   |       |  
|                                                                              |       |   |       |  
|Net cash from
      investing activities                                      | (589  | ) | 534   |  
|                                                                              |       |   |       |  
|Cash dividends paid                                                           | (366  | ) | (366  | )
|Changes in borrowings                                                         | (188  | ) | (169  | )
|                                                                              |       |   |       |  
|                                                                              |       |   |       |  
|Net cash used
      for financing activities                                  | (554  | ) | (535  | )
|                                                                              |       |   |       |  
|Effect of exchange
      rate changes on cash and cash equivalents and impact |       |   |       |  
|of IAS 32/39                                                                  | 40    |   | (8    | )
|                                                                              |       |   |       |  
|Change in cash and
      cash equivalents                                     | (325  | ) | 1,084 |  
|                                                                              |       |   |       |  
|

Net cash provided by operating
  activities amounted to EUR 0.8 billion in 2005, compared to EUR 1.1 billion
  in 2004. The cashflow from operations was EUR 0.5 billion above last year, mainly
  the result of special benefits like the termination of the Risperdal copromotion
  and the settlement with Duramed/Barr on Mircette. On the other hand, taxes paid
  were substantially up as a result of the settlement of tax returns and assessments.

Working capital increased
  EUR 0.2 billion on last year, mainly the result of higher working capital needs
  due to strong revenues growth in the last quarter of 2005.

Changes in provisions included
  the one-time contributions to the companys Pension Fund in the Netherlands
  due to the changes in the pension plan.

Net cash from investing
  activities was an outflow of EUR 0.6 billion compared to an inflow of EUR 0.5
  billion last year. This decline is mainly attributable to lower proceeds from
  divestments and lower dividends received from nonconsolidated companies.

Capital expenditures amounted
  to EUR 514 million, EUR 37 million below the 2004 level. Capital expenditures
  were 97% of depreciation. Investments are targeted at priority businesses and
  regions, particularly China and Central and Eastern Europe, where growth continued
  at high rates and where we

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72

opened several new factories.
  Chemicals investments also include projects in the Netherlands, Sweden,
  and Brazil.

Investments in intangible
  assets were mainly due to the new R&D collaboration contracts with Lexicon
  Genetics and Merck KGaA affiliate Laboratoire Théramex.

Acquisition expenditures
  cover several bolt-on acquisitions in Coatings and the AgVax acquisition at
  Intervet.

Proceeds from divestments
  principally related to the sales of the feed additives business of Intervet
  and the Svensk Ethanolkemie operations of Chemicals. Last years proceeds
  principally stemmed from the divestment of Catalysts, Phosphorus Chemicals and
  Resins.

Net cash used for financing
  activities was with EUR 0.5 billion at last year's level. The main changes in
  borrowings in 2005 were the redemption of the NLG 500 million 1995-2005 bond
  (EUR 227 million), partially offset by the termination of a currency swap, which
  generated EUR 78 million1. Dividends paid were at the same level
  as in 2004.

Akzo Nobel has a U.S. commercial
  paper program of USD 1.0 billion and a euro commercial paper program of EUR
  1.5 billion. At December 31, 2005, these commercial paper programs were not
  used.

At December 31, 2005, the
  total amount of long-term credit facilities arranged by Akzo Nobel amounted
  to EUR 1.5 billion. This facility can be used for general corporate financing
  purpose and supports our commercial paper programs in the euro-market and in
  the United States. During 2005, none of the facilities were used.

In May 2006, Akzo Nobel
  entered into a new seven-year EUR 1.5 billion multi-currency revolving credit
  facility. The new financial arrangement replaced the aforementioned previous
  EUR 1.5 billion credit facility, which was due to expire in November 2008. It
  will, like the previous facility, be used as liquidity backup for Akzo Nobels
  commercial paper programs and for general funding purposes.

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

The present rating is 3
  notches above the so-called high-yield zone. However, if the companys
  rating, due to whatever circumstances would decline or would approach or enter
  the high-yield zone, this will not only result in increased financing cost for
  the company, but could also reduce availability of credit, especially at commercially
  acceptable rates.

It should be noted, however,
  that the companys present loan documentation does not include any rating
  covenants.

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

|1 | In January
      2005, the company terminated a currency swap contract whereby EUR 250 million
      floating-rate EURIBOR-related liabilities were swapped into USD 223 million
      LIBOR-related liabilities, generating EUR 78 million in cash proceeds. This
      swap was part of an interest rate currency swap whereby euro-denominated
      fixed rate liabilities were swapped into floating rate U.S. dollar-denominated
      liabilities.
|- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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At December 31, 2005, the
  company had a cash position of EUR 1.5 billion, which was freely available in
  full. The cash position was slightly down on last year, mainly attributable
  to the payments to the Dutch Pension Fund in connection with the transition
  to the defined contribution scheme, and lower proceeds from divestments. Net
  interest-bearing borrowings1 were up EUR 0.5 billion to EUR 1.6 billion.

For additional information
  on the type of financial instruments used by the company, the maturity profile
  of the companys debt, and the currency and interest rate structure of
  such debt, see Item 11 Quantitative and Qualitative Disclosures about
  Market Risk under Foreign Currency Exchange Risk Management and Interest
  Rate Risk Management.

Equity increased EUR 0.8
  billion as a result of retained 2005 income.

Year-end gearing2
  improved from 0.52 at January 1, 2005, to 0.44 at December 31, 2005.

Contractual obligations

The following table summarizes
  our principal contractual obligations at December 31, 2005.

|                                                    |       |  |                                |  |       |  |       |  |                 | 
|--------------------------------------------------- | ----- |  | ------------------------------ |  | ----- |  | ----- |  | --------------- | 
|Contractual obligations                             |       |  | Payments
        due by period | 
|Millions of euros                                   |       |  | Less
        than              |  | 1-3   |  | 4-5   |  | After
        5 | 
|                                                    | Total |  | 1
        year                 |  | years |  | years |  | years           | 
|                                                    |       |  |                                |  |       |  |       |  |                 | 
|                                                    |       |  |                                |  |       |  |       |  |                 | 
|Long-term debt and
      capital lease obligations* | 2,745 |  | 43                             |  | 637   |  | 1,097 |  | 968             | 
|Commitments for interest**                          | 564   |  | 137                            |  | 262   |  | 118   |  | 47              | 
|Operating leases and
      other long-term          |       |  |                                |  |       |  |       |  |                 | 
|commitments                                         | 822   |  | 261                            |  | 266   |  | 175   |  | 120             | 
|Commitments for raw
      materials and services    | 1,513 |  | 655                            |  | 697   |  | 93    |  | 68              | 
|Commitments for capital
      expenditures          | 76    |  | 66                             |  | 10    |  |       |  |                 | 
|                                                    |       |  |                                |  |       |  |       |  |                 | 
|Total Contractual Obligations                       | 5,720 |  | 1,162                          |  | 1,872 |  | 1,483 |  | 1,203           | 
|                                                    |       |  |                                |  |       |  |       |  |                 | 

|   |                                                                                                                                                                                                                                                                                                           
|-- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|*  | Of
        which capital leases total EUR 32 million, reasonably spread over future
        years.                                                                                                                                                                                                        
|** | Interest
        commitments based on fixed interest rates. For some loans interest rate
        swaps were concluded, whereby the fixed rate is changed in a floating
        LIBOR or floating EURIBOR rate. Reference is made to Note 16 of the Notes
        to the Consolidated Financial Statements.

All purchase commitments
  for raw materials and services are in the ordinary course of business.

Guarantees related to nonconsolidated
  companies totaled EUR 3 million (at December 31, 2004:EUR 5 million). As general
  partners in several partnerships, Akzo Nobel companies are liable for obligations
  incurred by these partnerships. At December 31, 2005, the risk ensuing from
  known liabilities associated with these partnerships was EUR 113 million (at
  December 31, 2004: EUR 92 million).

Certain Trading Activities

Although the company hedges
  certain foreign currency, interest, and raw material pricing exposures, it does
  not actively trade in derivative financial instruments. Furthermore, the company
  does not hold any derivative financial instruments where fair values are determined
  other than on an active trading market.

|1 | Defined
      as Long-Term Borrowings plus Short-Term Borrowings less Cash and Cash Equivalents.
|- | ------------------------------------------------------------------------------------------------
|2 | Net Interest-Bearing
      Borrowings divided by Equity.                                        

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Off-Balance Sheet Transactions

Other than the activities
  in nonconsolidated joint ventures with other (industrial) partners and operational
  leases of certain assets, the company does not utilize special-purpose entities
  or engage in other off-balance sheet activities.

Reference is made to Note
  9 of the Notes to the Consolidated Financial Statements.

Guarantees related to nonconsolidated
  companies totaled EUR 3 million (at December 31, 2004:EUR
  5 million). As general partners in several partnerships, Akzo Nobel companies
  are liable for obligations incurred by these partnerships. At December 31, 2005,
  the risk ensuing from known liabilities associated with these partnerships was
  EUR 113 million (at December 31, 2004: EUR 92 million).

RESEARCH AND DEVELOPMENT,
  PATENTS AND LICENSES

Research and development
  spending amounted to EUR 816 million in 2004, and EUR 834 million in 2005. The
  companys research and development policies are specific to each of its
  three groups. For additional information regarding the companys research
  and development policies for the last three years, see Item 4 Information
  on the company under B. Business Overview.

CRITICAL ACCOUNTING
  POLICIES

For the financial years
  2004 and 2005, Akzo Nobel has presented its financial statements in accordance
  with International Financial Reporting Standards (IFRS). The preparation
  of Akzo Nobels financial statements requires us to make estimates and
  judgments that affect the reported amounts of assets and liabilities, revenues
  and expenses, and related disclosure of contingent liabilities at the date of
  our financial statements. The policies that management considers to be most
  important to the presentation of Akzo Nobels financial condition and results
  of operations and to require the most significant demands on management's judgments
  and estimates about matters that are inherently uncertain are discussed below.
  Management cautions that future events often vary from forecasts and that estimates
  routinely require adjustment.

Akzo Nobel believes that
  of its significant accounting policies, the following may involve a higher degree
  of judgment and complexity, which in turn could materially affect net income
  and the balance sheet if various assumptions were changed significantly. A complete
  description of Akzo Nobels accounting policies is presented in Item 18
  under Summary of Significant Accounting Policies Used in Preparing the Consolidated
  Financial Statements.

Impairment of intangible
  assets and property, plant and equipment

The company reviews long-lived
  assets for impairment when events or circumstances indicate carrying amounts
  may not be recoverable. Assets subject to this review include intangible and
  tangible fixed assets.

In determining impairments
  of intangible and tangible fixed assets, management must make significant judgments
  and estimates to determine if the cash flows generated by those assets are less
  than their carrying value. Determining cash flows requires the use of judgments
  and estimates that have been included in the company's strategic plans and long-range
  planning forecasts. The data necessary for the execution of the impairment tests
  are based on management estimates of future cash flows, which require estimating
  revenue growth rates and profit margins. Assets are written down to their recoverable
  amount.

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The recoverable amount
  of impaired assets is determined by taking into account these estimated cash
  flows and using a net present value technique based on discounting these cash
  flows with business specific discount rates.

Changes in assumptions
  and estimates included within the impairment reviews could result in significantly
  different earnings than those recorded in the financial statements.

Accounting for income
  taxes

As part of the process
  of preparing consolidated financial statements, the company is required to estimate
  income taxes in each of the jurisdictions in which the company operates. This
  process involves estimating actual current tax expense and temporary differences
  between tax and financial reporting. Temporary differences result in deferred
  tax assets and liabilities, which are included within the consolidated balance
  sheet. The company must then assess the likelihood that deferred tax assets
  will be recovered from future taxable income. A valuation allowance is recognized
  to reduce deferred tax assets if, and to the extent, it is more likely than
  not that all or some portion of the deferred tax assets will not be realized.

The company has recorded
  a valuation allowance of EUR 35 million as of December 31, 2005, based on estimates
  of taxable income by jurisdiction in which the company operates and the period
  over which deferred tax assets are recoverable. In the event actual results
  differ from these estimates in future periods, and depending on the tax strategies
  that the company may be able to implement, changes to the valuation allowance
  could be required, which could impact our financial position and results of
  operations.

Provisions

By their nature, provisions
  for contingent liabilities are dependent upon estimates and assessments whether
  the criteria for recognition have been met, including estimates as to the outcome
  and the amount of the potential cost of resolution. Contingent liabilities are
  recognized by a charge against income when it is probable that a liability has
  been incurred and the amount of such liability can be reasonably estimated.

Contingent liabilities
  and provisioning for environmental matters, antitrust cases, other litigation,
  and tax disputes are discussed in Note 15  Commitments and Contingent
  Liabilities of the Notes to the Consolidated Financial Statements of Akzo Nobel.
  For provisions for environmental matters such estimates are based on the nature
  and seriousness of the contamination as well as on the technology required for
  cleanup. The provision for antitrust cases is based on an estimate of the costs,
  fines and civil damages, taking into account legal advice and the current facts
  and circumstances. Provisions for other litigation and tax disputes are also
  based on an estimate of the costs, taking into account legal advice and information
  currently available.

Should the actual outcome
  differ from the assumptions and estimates, revisions to the estimated provisions
  would be required, which could impact our financial position and results of
  operations.

Also provisions for termination
  benefits and exit costs involve managements judgment in estimating the
  expected cash outflows for severance payments and site closure or other exit
  costs. Should the actual cash outflows differ from the assumptions and estimates,
  additional charges would be required, which could impact our financial position
  and results of operations.

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Accounting for pensions
  and other postretirement benefits

Retirement benefits represent
  obligations that will be settled in the future and require assumptions to project
  benefit obligations and fair values of plan assets. Retirement benefit accounting
  is intended to reflect the recognition of future benefit costs over the employee's
  approximate service period, based on the terms of the plans and the investment
  and funding decisions made by the company. The accounting requires management
  to make assumptions regarding variables such as discount rate, rate of compensation
  increase, return on assets, and future healthcare costs. Periodically management
  consults with outside actuaries regarding these assumptions. Changes in these
  key assumptions can have a significant impact on the projected benefit obligations,
  funding requirements and periodic cost incurred. For details on key assumptions
  and policies, see Note 13 of the Notes to the Consolidated Financial Statements
  of Akzo Nobel.

It should be noted that
  when discount rates decline or rates of compensation increase due to e.g. increased
  inflationpension and postretirement benefit obligations will increase.
  Net periodic pension and postretirement costs might also increase, but that
  depends on the actual relation between the unrecognized loss and the so-called
  corridor (10% of the greater of benefit obligations and plan assets) as well
  as on the relative change of the discount rate versus the change of the benefit
  obligation.

If the company would have
  to lower the assumed expected return on plan assets, this would result in higher
  net periodic pension costs.

NEW ACCOUNTING PRONOUNCEMENTS

IFRSFor the implementation of
  IFRS reference is made to Note 24 of the Notes to the Consolidated Financial
  Statements.

The company has not yet
  determined the impact of new accounting standards issued, but not yet effective.

US GAAPThe Financial Accounting
  Standards Board (FASB) issued several pronouncements, of which the
  following are applicable to the company.

In May 2005 the FASB issued
  SFAS No. 154 Accounting Changes and Error Corrections, which replaces
  APB Opinion No. 20 and SFAS No. 3. The Statement establishes retrospective application
  as the required method for reporting a change in accounting principle in the
  absence of explicit transition requirements for new accounting pronouncements.
  Error corrections must be applied in the same way as accounting changes. In
  conformity with the transition guidance in this Statement, the company adopted
  SFAS No. 154 as from May 2005.

In March 2005, FASB Interpretation
  No. 47 Accounting for Conditional Asset Retirement Obligations was
  issued. The Statement clarifies that the obligation to perform the asset retirement
  activity is unconditional even though uncertainty exists about the timing and
  the method of settlement. Accordingly the company would be required to recognize
  a liability for the fair value of a conditional asset retirement obligation
  if that fair value can be reasonably estimated. The Statement became effective
  on December 31, 2005. The company has investigated the existence of such obligations
  and concluded that the effects on the financial statements are negligible, as
  under IFRS also similar provisions were recognized already. It should be

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noted that the company
  also has asset retirement obligations which can not be estimated since the company
  plans to operate these assets indefinitely, and no comparable, historical or
  other information is available to determine the obligation.

In December 2004, the FASB
  issued SFAS No. 123R (revised 2004), concerning share-based payment. The Statement
  is a revision of SFAS No. 123, Accounting for Stock-Based Compensation
  and supersedes APB Opinion No. 25 Accounting for Stock Issued to Employees,
  that allowed the use of the intrinsic value for measuring stock-based compensation
  expenses for stock issued to employees. The revised Statement focuses primarily
  on accounting for transactions in which an entity obtains employee services
  in share-based payment transactions. SFAS 123R requires the measurement of all
  employee share-based payments to employees, including grants of employee stock
  options, using a fair-value-based method and recording of such expense in the
  consolidated statements of income. The company adopted SFAS No. 123R (Revised
  2004) effective January 2005, the impact of this change was not material.

In November 2004, the FASB
  issues SFAS No. 151, Inventory Costs, An Amendment of ARB No. 43, Chapter
  4. This Statement clarifies the accounting for abnormal amounts of idle
  facility expense, freight handling costs, and wasted material (spoilage). The
  statement requires that those items be recognized as current-period charges
  and prohibits such costs from being capitalized in inventory. In addition, Statement
  151 requires that allocation of fixed production overheads to the cost of conversion
  be based on the normal capacity of the production facilities. In accordance
  with the early adoption provisions of the Statement, the company has adopted
  SFAS No. 151 effective January 1, 2005. This Statement did not have a material
  effect on the companys financial statements, given the inventory valuation
  accounting policies already applied.

FORWARD LOOKING STATEMENT
  ON 2006

We base our expectations
  for 2006 on the assumption that the world economy will continue to show the
  positive growth patterns of last year. In the regional mix, we assume that the
  emerging markets will continue to grow at the same rate as last year, the economy
  in the United States will slow down somewhat and the mature European economies
  will improve moderately. Furthermore, we assume no new price hikes for energy
  and other raw materials. Finally, we base our expectations on a relatively stable
  development of currencies.

In such an environment,
  we expect the company to be well positioned for significant further growth of
  revenues across its portfolio in line with the last quarters of 2005. With respect
  to earnings we aspire to achieve increases in our ongoing activities in Chemicals,
  robust improvements in our Coatings business and a continuation of the positive
  trends at Intervet. As in the last quarters in 2005, at Organon we plan to find
  the right balance between the required expenditures in R&D and marketing
  and sales for new products with the ambition to protect our margin.

In 2006, we plan to accelerate
  our focus on investments in growth. We will use the increasing room to maneuver
  for growth opportunities in the attractive strategic areas across our Coatings,
  Chemicals, and Pharma portfolios. We will also use our means to further reduce
  pension liabilities from the past and to strengthen our balance sheet. We expect
  the number of employees to increase in emerging markets, while headcount will
  decrease in mature markets as a result of restructuring programs. Capital expenditures
  are planned in the order of magnitude of EUR 600 million.

We continue to manage our
  balance sheet in a highly disciplined manner, whereby other options for shareholder
  value creation, such as a share buy-back program, are evaluated against investments
  and acquisitions for growth.

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Item
  6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES

A. DIRECTORS AND SENIOR
  MANAGEMENT

Corporate Governance

Akzo Nobel N.V. is a public
  limited liability company (Naamloze Vennootschap) established under
  the laws of the Netherlands. Its common shares are listed on Euronext Amsterdam
  and quoted on NASDAQ in the form of American Depositary Shares.

Akzo Nobels management
  and supervision structure is organized in a so-called two-tier system, comprising
  a Board of Management, solely composed of executive directors, and a Supervisory
  Board, solely composed of nonexecutive directors. The two Boards are independent
  of each other and are accountable to the General Meeting of Shareholders for
  the performance of their functions.

Akzo Nobels corporate
  governance structure is based on the requirements of the Dutch Civil Code, the
  companys Articles of Association, and the rules and regulations applicable
  to companies listed on Euronext Amsterdam and NASDAQ, complemented by several
  internal procedures. These procedures include a risk management and control
  system, as well as a system of assurance of compliance with laws and regulations.

Over the last decade, Akzo
  Nobel has been enhancing and improving its corporate governance standards in
  accordance with applicable laws and regulations. Most notable are the Dutch
  Corporate Governance Code adopted in 2003 (the Code) and the U.S.
  Sarbanes-Oxley Act of 2002 (SOX) and its implementation rules by
  the SEC and NASDAQ.

The Code contains principles
  and best practices for Dutch companies with listed shares. Akzo Nobel agrees
  both with the general approach and with the vast majority of its principles
  and best practice provisions. Corporate governance at Akzo Nobel was placed
  on the agenda of the 2004 and 2005 General Meeting of Shareholders as a separate
  item for discussion. This specifically included a number of aspects where Akzo
  Nobels corporate governance deviates from the Code, as explained in the
  2004 Annual Report. The Board of Management and the Supervisory Board have taken
  these discussions into account in formulating a position on the companys
  corporate governance. One of the results was an amendment of the Articles of
  Association that has been approved by the Annual General Meeting of Shareholders
  in 2005.

In this chapter, Akzo Nobels
  corporate governance is addressed and deviations from the Code are explained,
  in accordance with the Codes apply or explain principle.

The Board of Management
  and the Supervisory Board believe that the companys corporate governance
  structure as described here is the most appropriate for Akzo Nobel at this point
  in time. Except for those aspects of the companys governance structure
  which can only be amended with the approval of the General Meeting of Shareholders,
  the Board of Management and the Supervisory Board may make adjustments to the
  way the Code is applied as described below, to the extent this is considered
  to be in the interest of the company and its affiliated enterprises in the manner
  described below. If such adjustments are made, they will be published and reported
  in the annual report for the relevant year.

Supervisory Board

The overall responsibility
  of the Supervisory Board is to exercise supervision over the policies adopted
  by the Board of Management and over the general conduct of the business of the
  company and its subsidiaries. This

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specifically includes supervision
  of the achievement of the companys operational and financial objectives,
  the corporate strategy designed to achieve the objectives, and the main financial
  parameters and risk factors. The Supervisory Board also provides the Board of
  Management with advice. In fulfilling its duties, the Supervisory Board and
  its members are guided by the interests of the company and its affiliated enterprises.

Appointment, Independence,
  and Composition The nomination procedures outlined on page 86 and 87 for the members of the
  Supervisory Board and the Board of Management apply. As a general rule, based
  on the rotation schedule, a Supervisory Board members tenure is four years.
  In principle, members are eligible for reelection twice. However, in deviation
  of the Code (provision III.3.5), a member can be nominated for reelection more
  often if in a specific case this is considered to be in the company's interest.
  Accordingly, in 2005, Abraham Cohen was appointed for a fourth term.

The composition of the
  Supervisory Board is such that the members are able to act with due objectivity
  and independently of one another and of the Board of Management.

All Supervisory Board members
  meet the independence requirements as stated in Code provisions III.2.1, III.2.2
  and III.2.3, except for Cees van Lede and Dolf van den Brink. In this respect,
  it should be noted that Mr. van Lede is a former member of the Board of Management
  of Akzo Nobel, who retired from this position in 2003. As a long-standing policy,
  Akzo Nobel welcomes the recent knowledge and expertise of the affairs and business
  of the company in one member of the Supervisory Board. Mr. van den Brink was
  a member of the Managing Board of ABN AMRO, one of the companys principal
  banks. He retired from this position in 2002. Mr. van den Brink is still a consultant
  on macroeconomic policies to this bank, but in this capacity he is not involved
  in its management. Although this is formally not in compliance with Code provision
  III.2.3, the companys conclusion is that Mr. van den Brink should be considered
  as an independent Supervisory Board member.

No member of the Supervisory
  Board holds more than five supervisory board memberships in Dutch listed companies.

The Supervisory Board is
  governed by its Rules of Procedure, which include detailed provisions on how
  to deal with conflicts of interest and potential conflicts of interest between
  members of the Supervisory Board and the company. The Rules of Procedure, encompassing
  the Profile and the Charters of the Committees, reflect the tasks and responsibilities
  of the Supervisory Board and are available on Akzo Nobels corporate website.

The Chairman of the Supervisory
  Board determines the agenda and chairs the meetings of the Supervisory Board,
  monitors the proper functioning of the Supervisory Board and its Committees,
  arranges for the adequate provision of information to the members of the Supervisory
  Board, and acts on behalf of the Supervisory Board as the main contact for the
  Board of Management. He also initiates the evaluation of the functioning of
  the Supervisory Board and the Board of Management, and chairs the General Meeting
  of Shareholders. Until April 2006, the Supervisory Board was chaired by Aarnout
  Loudon, a former chairman of the Board of Management who retired from this position
  in 1994. This was a temporary deviation from the Code (provision III.4.2). The
  company believed that in view of the experience and expertise of Mr. Loudon
  as Chairman of the Supervisory Board, it was in the best interest of the company
  that Mr. Loudon remained Chairman until his present term expired at the end
  of April 2006. The Annual General Meeting of Shareholders in 2004 confirmed
  this by reappointing Mr. Loudon accordingly. After his resignation from the
  Supervisory Board, this temporary deviation no longer exists.

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During 2005, the Supervisory
  Board consisted of the following persons:

|                          |                                                                                   |                      | 
|------------------------- | --------------------------------------------------------------------------------- | -------------------- | 
|Supervisory
        Board | Principal
        Occupation                                                      | Member
        since | 
|                          |                                                                                   |                      | 
|Aarnout Loudon1,2         | Former Chairman of
      the Board of Management of Akzo Nobel NV                 | 1994                 | 
|(1936, Dutch),            | Former member of The
      First Chamber of the Dutch Parliament                  | Current
      term   | 
|Chairman                  | Chairman of the Supervisory
      Board of ABN AMRO Holding NV                    | 2004-2006            | 
|                          | Nonexecutive Director
      of Royal Dutch Shell plc                              |                      | 
|                          | Member of the International
      Advisory Board of Allianz AG (Germany)          |                      | 
|Maarten van den Bergh3,4  | Former President of
      Royal Dutch Petroleum Company                           | 2005                 | 
|(1942, Dutch)             | Former Vice Chairman
      Committee of Managing Directors of Royal               | Current
      term   | 
|Deputy Chairman5          | Dutch/Shell Group plc                                                             | 2005-2009            | 
|                          | Chairman of the Board
      of Lloyds TSB Group plc (United Kingdom)              |                      | 
|                          | Nonexecutive Director
      of Royal Dutch Shell plc, British Airways plc, and BT |                      | 
|                          | Group plc                                                                         |                      | 
|Virginia Bottomley1,2     | Former Secretary of
      State for Health and Member of the British Cabinet      | 2000                 | 
|(1948, British)           | Governor of the London
      School of Economics                                  | Current
      term   | 
|                          | Governor of the Ditchley
      Foundation                                         | 2004-2008            | 
|                          | Executive Director
      of Odgers Ray & Berndtson (United Kingdom)               |                      | 
|                          | Trustee of the Economist
      newspaper                                          |                      | 
|Dolf van den Brink6,8     | Professor Financial
      Institutions, University of Amsterdam                   | 2004                 | 
|(1948, Dutch)             | Economic Advisor to
      the Managing Board of ABN AMRO Bank NV                  | Current
      term   | 
|                          | Former Member of the
      Managing Board of ABN AMRO Bank NV                     | 2004-2008            | 
|                          | Chairman of the Supervisory
      Boards of Van der Moolen Holding NV and         |                      | 
|                          | Nyenrode University                                                               |                      | 
|                          | Member of the Supervisory
      Board of Samas-Groep NV                           |                      | 
|Uwe-Ernst Bufe6           | Former CEO of Degussa
      AG (Germany)                                          | 2003                 | 
|(1944, German)            | Member of the Supervisory
      Boards of UBS Investment Deutschland AG and       | Current
      term   | 
|                          | Altana AG (Germany)                                                               | 2003-2007            | 
|                          | Member of the Supervisory
      Board of Solvay SA and Umicore SA (Belgium)       |                      | 
|Abraham Cohen6            | Former Senior Vice
      President of Merck & Co. (USA)                           | 1992                 | 
|(1936, American)          | Former president of
      Merck Sharp & Dohme International Inc. (USA)            | Current
      term   | 
|                          | Chairman of the Board
      of Directors of Vasomedical (New York) and of         | 2005-2009            | 
|                          | Neurobiological Technologies
      (California)                                   |                      | 
|                          | Nonexecutive Director
      of Teva Pharmaceutical Industries (Israel) and of     |                      | 
|                          | Chugai Pharmaceuticals
      (Japan)                                              |                      | 
|Cees van Lede             | Former Chairman of
      the Board of Management of Akzo Nobel NV                 | 2003                 | 
|(1942, Dutch)             | Chairman of the Supervisory
      Board of Heineken NV                            | Current
      term   | 
|                          | Member of the Supervisory
      Boards of Philips Electronics NV and Air Liquide  | 2003-2007            | 
|                          | (France)                                                                          |                      | 
|                          | Nonexecutive Director
      of Reed Elsevier, Sara Lee Corp. (USA) and Air        |                      | 
|                          | France/KLM (France)                                                               |                      | 
|                          | Chairman of the Board
      of Directors of INSEAD (France)                       |                      | 
|Alain Mérieux             | Chairman of bioMérieux                                                            | 2002                 | 
|(1938, French)            | Director of Eurazeo
      and Compagnie Plastic Omnium (France)                   | Current
      term   | 
|                          |                                                                                   | 2002-2006            | 
|Lars Thunell7             | President and CEO of
      SEB Skandinaviska Enskilda Banken AB (Sweden)          | 1999                 | 
|(1948, Swedish)           | Chairman of the Board
      of IBX, Integrated Business Exchange (Sweden)         | Stepped
      down   | 
|                          |                                                                                   | Jan.
      1, 2006   | 
|Karel Vuursteen1,2        | Former CEO of Heineken
      NV                                                   | 2002                 | 
|(1941, Dutch)             | Member of the Board
      of Directors of Heineken Holding                        | Current
      term   | 
|                          | Member of the Supervisory
      Boards of ING Group NV                            | 2002-2006            | 
|                          | Member of the Supervisory
      Board of Electrolux AB (Sweden)                   |                      | 
|                          | Member of the Supervisory
      Board of Henkel AG (Germany)                      |                      | 
|                          |                                                                                   |                      | 

|1 Member
      of the Remuneration Committee                   | 5 As of May 1, 2005                                          
|-------------------------------------------------------------- | -------------------------------------------------------------
|2 Member
      of the Nomination Committee                     | 6 Member
      of the Audit Committee until January 1, 2006  
|3 Member
      of the Remuneration Committee as of May 1, 2005 | 7 Chairman
      of the Audit Committee until January 1, 2006
|4 Member
      of the Nomination Committee as of May 1, 2005   | 8 Chairman
      of the Audit Committee as of January 1, 2006

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The Supervisory Board is
  assisted by the Secretary. All members of the Supervisory Board have access
  to the advice and service of the Secretary, who is responsible for ensuring
  that the Supervisory Board procedures are followed and that the Supervisory
  Board acts in accordance with its statutory obligations under the Articles of
  Association.

Changes in the Supervisory
  BoardEffective May 1, 2005, Deputy
  Chairman of the Supervisory Board Maarten van Veen stepped down, having reached
  the age limit.

Also effective May 1, 2005,
  Maarten van den Bergh, Chairman of Lloyds TSB Group plc and nonexecutive director
  of Royal Dutch Shell plc., was appointed to the Supervisory Board for a four-year
  term. Mr. van den Bergh was appointed Deputy Chairman of the Supervisory Board
  and in October 2005, it was announced that Mr. van den Bergh would succeed Aarnout
  Loudon as Chairman after the latters resignation at the end of April 2006.

Abraham Cohen was reappointed.
  This is his fourth term and therefore an exception to the Supervisory Boards
  Rules of Procedure, as explained at the Annual General Meeting of Shareholders
  in 2005.

Following his nomination
  as Executive Vice President of the International Finance Corporation, and member
  of the Group Management of the World Bank, Lars Thunell had to step down from
  Akzo Nobels Supervisory Board as of December 31, 2005.

At the 2006 General Meeting
  of Shareholders, Mr. Loudon resigned from the Supervisory Board after a long
  and distinguished career with the company. First employed by Akzo N.V. in 1969,
  Mr. Loudon became Chairman of the Board of Management in 1982, a position he
  held for 12 years until his retirement in 1994. CEO during some of the most
  significant years in the companys recent history, he guided Akzo through
  its merger with Nobel and laid the foundations for the significant growth which
  followed. Mr. Loudon has been Chairman of the Supervisory Board of Akzo Nobel
  N.V. since 1995.

The 2006 General Meeting
  of Shareholders appointed Antony Burgmans, Chairman of Unilever NV/plc and former
  Vice Chairman of Unilever plc, and Louis R. Hughes, at present Chief Executive
  Officer of GBS Laboratories, and former Executive Vice President of General
  Motors Corp. (USA), to the Supervisory Board for a four-year term to fill the
  vacancies created by the resignation of Messrs. Loudon and Thunell.

Also at this meeting, Karel
  Vuursteen and Alain Mérieux stepped down and were reappointed.

All nominations were made
  in accordance with the membership profile, which can be found on Akzo Nobels
  corporate website.

RemunerationSupervisory Board members
  receive a fixed annual remuneration which is determined by the General Meeting
  of Shareholders. In accordance with the Articles of Association, the Supervisory
  Board has determined additional remuneration for its Chairman and the members
  of its Committees. A proposal has been approved by the 2006 General Meeting
  of Shareholders to adjust the fee structure of the Supervisory Board. More information
  on the Remuneration of the Supervisory Board members can be found under B 
  Compensation.

Supervisory Board members
  are subject to the Akzo Nobel Rules on Inside Information and report all transactions
  in Akzo Nobel shares to the applicable authorities. The company has chosen not
  to follow

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provision III.7.3 of the
  Code that requires notification by members of the Supervisory Board of all changes
  in their holdings of shares in Dutch listed companies, as this is governed by
  the companys own internal code. The same considerations apply as stated
  in this respect for members of the Board of Management.

CommitteesThe Supervisory Board has
  established three Committees: the Audit Committee, the Nomination Committee,
  and the Remuneration Committee. Each Committee has a charter describing its
  role and responsibility and the manner in which it discharges its duties and
  reports to the full Supervisory Board. These charters are included in the Rules
  of Procedure, published on the companys corporate website. The Committees
  report on their deliberations and findings to the full Supervisory Board.

The Audit Committee assists
  the Supervisory Board in overseeing the quality and integrity of the accounting,
  auditing, reporting, and risk management practices of the company, as well as
  on a number of other subjects, as included in its charter. Until January 1,
  2006, the Chairman of the Audit Committee was Lars Thunell, who in the opinion
  of the Supervisory Board met the requirements of a financial expert pursuant
  to SOX and the Code and who is independent under the meaning of
  Rule 10A-3 of the US Securities and Exchange Act of 1934, as amended. After
  Mr. Thunells resignation, Mr. van den Brink took over the position of
  Chairman of the Audit Committee. The Supervisory Board has determined that Mr.
  van den Brink meets the financial expert requirements.

One area of particular
  focus in corporate governance is the independence of the auditors. The AuditCommittee has been
  delegated direct responsibility for the compensation and the oversight of the
  auditors and the services they provide to the company. The auditors are prohibited
  from providing certain nonaudit services to the company. In order to anchor
  this in the companys procedures, the Supervisory Board adopted the Akzo
  Nobel Auditors Independence Policy and the related Akzo Nobel Audit
  Committee Preapproval Policy on Audit, Audit-Related, and Nonaudit Services.
  All the aforementioned documents and policies are available on Akzo Nobels
  corporate website.

The Nomination Committee
  focuses on drawing up selection criteria and appointment procedures forSupervisory
  Board and Board of Management members, assessing the size and composition of
  both Boards, assessing the functioning of the individual members, making proposals
  for appointments and reappointments, and supervising the Board of Management
  on the selection of senior management.

The Remuneration Committee
  is responsible for drafting proposals to the Supervisory Board on the remuneration
  policy for the Board of Management, for overseeing the remuneration of individual
  members of the Board of Management and the remuneration schemes for Akzo Nobel
  executives involving Akzo Nobel shares. The Committee also prepares Supervisory
  Board proposals to the General Meeting of Shareholders concerning the remuneration
  of the members of the Supervisory Board. The Remuneration Committee was chaired
  by Mr. Loudon. As Mr. Loudon was Chairman of the Supervisory Board and a former
  member of the Board of Management, this constituted, for continuity reasons,
  a temporary deviation from Code provision III.5.11. This situation no longer
  exists after Mr. Loudons resignation at the end of April 2006.

The Nomination Committee
  and the Remuneration Committee, which until 2005 were combined in one committee,
  consist of the same members.

Supervisory Board
  ActivitiesThe full Supervisory Board
  met six times during the course of 2005, which included one meeting fully dedicated
  to the companys strategy. All meetings were plenary sessions with the
  full Board of Management and were well attended by all Supervisory Board members.
  The October meeting, held at the Akzo Nobel Coatings site in

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Sassenheim, the Netherlands,
  focused in particular on both the Decorative Coatings and Car Refinishes businesses,
  as well as the locations Esthetic Center.

On two occasions, the Supervisory
  Board held separate meetings, which were attended in part by the CEO. During
  these meetings, the Supervisory Board conducted a self-assessment and appraised
  its committees, working methods, procedures, and performance, as well as evaluating
  the functioning of the Board of Management and its individual members. The Supervisory
  Board also assessed its relationship with the Board of Management and discussed
  the composition of the Supervisory Board and its committees.

The Chairman of the Supervisory
  Board prepares the meetings with the assistance of the CEO. The Supervisory
  Board discussed such issues as company strategy, corporate governance, risk
  management, and the approval of major investments, acquisitions, and divestments.
  Regular agenda items included financial and operational performance, share price
  development, operational planning, course of business, and the annual financing
  and investment plan.

In 2005, the Supervisory
  Board again devoted considerable time to discussions on the companys strategy.
  The Supervisory Board reviewed and discussed in-depth with the Board of Management
  the overall company strategy and strategic options, including objectives, associated
  risks, and the mechanisms for controlling financial risks, in a separate strategy
  session in February 2005. During regular meetings, the companys strategic
  direction was a major point of discussion. After thorough evaluation of all
  available options the Board of Management and the Supervisory Board are jointly
  convinced that the separation of Pharma into a new company best enhances shareholder
  value. The final decision and timing will have to wait on various developments
  in the second half of 2006. The Supervisory Board also discussed and consented
  to the companys strategic realignment of the Chemicals group into five
  growth platforms.

|Other discussion
      topics included:
|---------------------------------------
|                                      
|                                      
|                                      
|                                      
|                                      

In February 2005, the full
  Supervisory Board received training on the companys future obligations
  pursuant to SOX 404 and their consequences for the company.

In light of SOX and the
  Dutch Corporate Governance Code, corporate governance was reviewed and subsequently
  a proposal to amend the Articles of Association was submitted to and approved
  by the General Meeting of Shareholders in 2005. In addition, the Rules of Procedure
  of the Supervisory Board and its Committees have also been reviewed and amended.
  The Rules of Procedure are available on the companys corporate website
  (www.akzonobel.com).

The Board of Management
  keeps the Supervisory Board regularly informed of intended organizational changes
  and appointments of senior managers.

Audit CommitteeThe Audit Committee consists
  of four members and was chaired by Mr. Thunell until his resignation effective
  December 31, 2005. He has been succeeded as committee chairman by Dolf van den
  Brink.

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The Audit Committee had
  seven regular meetings in 2005. In principle, the CEO, the CFO, the director
  of corporate control, the internal auditor, and the lead partner of the external
  auditor, KPMG, attend all regular meetings. In addition, the Audit Committee
  met twice without management being present to conduct self-evaluation and appraise
  performance. A meeting with only the internal auditor, and one with only the
  external auditor present, was also held.

The Audit Committee regularly
  discussed financial statements, the Annual Report on Form 20-F for SEC filing,
  internal and external control procedures, risk management, Internal Auditing
  reports, planning, tax, and the external auditors performance and independence.
  Before each announcement of quarterly results, the Audit Committee was informed
  of the figures and consulted on the reports and press releases to be published.

In addition, considerable
  time was spent during 2005 on corporate governance. The Committee reviewed its
  own functioning and proposed a revised Charter, which was later approved by
  the Supervisory Board and included in the Rules of Procedure.

|The Audit
      Committee further discussed such items as:
|----------------------------------------------------------
|                                                         
|                                                         
|                                                         
|                                                         
|                                                         
|                                                         
|                                                         

Issues discussed in Audit
  Committee meetings are reported back to the full Supervisory Board in subsequent
  meetings of this Board.

Remuneration Committee1The Remuneration Committee
  consists of four members and was chaired by Mr. Loudon. The Committee met four
  times in 2005, with three of the meetings being combined sessions with the Nomination
  Committee.

The Remuneration Committee
  made a recommendation on the remuneration and remuneration policy for the members
  of the Board of Management, including personal targets.

The Supervisory Board approved
  the Committees recommendations and the remuneration policy was adopted
  by the General Meeting of Shareholders in 2005. Also, a performance-related
  share plan and a revised performance-related option plan, both for executives,
  were approved by the General Meeting of Shareholders in 2005.

The Remuneration Committee
  also reviewed the remuneration of the members of the Supervisory Board and its
  Committee. The Supervisory Board approved the Committees recommendations
  and submitted the remuneration proposal to the General Meeting of Shareholders
  in 2006, which approved in on April 25, 2006.

More information on the
  remuneration of the Board of Management and the proposed revised remuneration
  of the Supervisory Board can be found under B  Compensation.

1For remuneration purposes, memberships of the Remuneration Committee and of
  the Nomination Committee count as one committee membership.

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Nomination Committee1

The Nomination Committee
  consists of four members and was chaired by Mr. Loudon. The Committee met four
  times in 2005, with three of the meetings being combined sessions with the Remuneration
  Committee.

The Nomination Committee
  made proposals as described above for the succession of Mr. Loudon in 2006 in
  the Supervisory Board and in the Remuneration and Nomination Committees, as
  well as for the vacancy which arose in November 2005 due to the unexpected resignation
  of Mr. Thunell, following his appointment to the World Bank.

Board of Management

GeneralThe Board of Management is
  entrusted with the management of the company, which means, among other things,
  that it defines the strategic direction, establishes the policies, and manages
  the companys day-to-day operations. The members of the Board of Management
  collectively manage the company and are responsible for its performance. They
  are jointly and individually accountable for all decisions made by the Board
  of Management. In performing its duties, the Board of Management is guided by
  the interest of the company and its affiliated enterprises.

The Chief Executive Officer
  (CEO) leads the Board of Management in its overall management of the company
  to achieve its performance goals and ambitions. He is the main point of liaison
  with the Supervisory Board. The Chief Financial Officer (CFO) is specifically
  responsible for the companys financial affairs. The Board of Management
  has members with specific responsibilities for the companys main segments:
  Organon, Intervet, Coatings, and Chemicals.

Within the segments, business
  is carried out in business units. The General Managers thereof are responsible
  for the performance of their business units and report to the individual member
  of the Board of Management who is responsible for the segment to which the business
  unit belongs. To safeguard consistency and coherence for the total organization,
  Corporate Directives have been established by the Board of Management.

To steer effectively the
  strategy and operations of the business units, the Board of Management has delegated
  certain authorities to Board Committees for Organon and Intervet, Coatings,
  and Chemicals. Furthermore, a Pensions Board Committee oversees the general
  pension policies to be implemented in the various pension plans of the company.
  Board Committees consist of at least two Board members. Delegation of authorities
  to Board Committees and individual Board members is laid down in an internal
  authority schedule.

Representative authority,
  including the signing of documents, is vested in at least two members of the
  Board of Management jointly. The Board of Management may appoint corporate agents,
  whose powers of attorney will be determined by the Board of Management upon
  their appointment.

The Board of Management
  appoints its own secretary, who may be and at this moment is the same person
  as the Secretary of the Supervisory Board. This is Mr. G.H. (Han) Jalink (1949,
  Dutch), serving in this capacity since 2002.

1For remuneration purposes, memberships of the Remuneration Committee and of
  the Nomination Committee count as one committee membership.

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The composition of the
  Board of Management on May 31, 2006 was as follows:

|                            |                               |                                | 
|--------------------------- | ----------------------------- | ------------------------------ | 
|                            |                               | Served
        in such or      | 
|Board
        of Management | Position
        with company | similar
        capacity since | 
|                            |                               |                                | 
|                            |                               |                                | 
|Hans Wijers                 | Chairman
      and CEO        | 2002                           | 
|(1951, Dutch)               | Coatings1                     |                                | 
|Rob Frohn                   | CFO                           | 2004                           | 
|(1960, Dutch)               |                               |                                | 
|Toon Wilderbeek             | Pharma                        | 2002                           | 
|(1950, Dutch)               |                               |                                | 
|Leif Darner                 | Chemicals                     | 2004                           | 
|(1952, Swedish)             |                               |                                | 
|                            |                               |                                | 
|1From May 1, 2005           |                               |                                | 

Effective May 1, 2005,
  Rudy van der Meer retired from the Board of Management. It was decided not to
  fill the vacancy. The total number of members of the Board of Management was
  reduced by one and fixed at four by the General Meeting of Shareholders in 2005.
  In addition to his duties as CEO, Hans Wijers also took over Mr. van der Meers
  responsibility for Akzo Nobels Coatings businesses.

Appointment, Conflicts
  of InterestThe General Meeting of Shareholders
  appoints the members of the Board of Management. The Meeting of Holders of Priority
  Shares is entitled to make binding nominations for such appointments. As a rule,
  the members of the Board of Management step down at the Annual General Meeting
  in the year in which they reach the age of 62. Members of the Board of Management
  can be removed from office by the General Meeting of Shareholders.

Starting with the appointments
  made in 2004, members of the Board of Management are appointed for four-year
  terms, with the possibility of reappointment. This is in line with the Codes
  provision II.1.1. However, the contracts of the members of the Board of Management
  appointed before 2004 were not renegotiated, as this was not felt to be in the
  interest of the company.

The Meeting of Holders
  of Priority Shares has the right to make binding nominations for the appointment
  of members of the Board of Management and the Supervisory Board. The priority
  shares are held by the Foundation Akzo Nobel. The Board of the Foundation Akzo
  Nobel consists of the members of the Supervisory Board who are not members of
  the Audit Committee.

According to the Codes
  recommendation (provision IV.1.1), the General Meeting of Shareholders should
  be able to pass a resolution to cancel the binding nature of a nomination for
  the appointment of the Supervisory Board or the Board of Management. The Articles
  of Association provide that the holders of priority shares have the power to
  draw up binding nominations for appointments as aforesaid, which cannot be canceled
  by the General Meeting of Shareholders.

The company subscribes
  to the Codes principle in general and thereforeas described at the
  2004 Annual Report and discussed at the General Meeting of Shareholders in 2005it
  has been decided that in normal circumstances, the members of the Supervisory
  Board and the Board of Management will be appointed on the basis of a nonbinding
  nomination by the Supervisory Board. The Board of the Foundation Akzo Nobel
  has confirmed its intention to use its binding nomination rights only in the
  case of exceptional circumstances, such as in the event of a (threatened) hostile
  takeover (reference is made to the description of antitakeover provisions and
  control below). In both of the aforesaid situations, resolutions to appoint
  a person as a member

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of the Supervisory Board
  or the Board of Management require a simple majority. Of course shareholders,
  meeting the requirements laid down in the Articles of Association, are also
  entitled to nominate members of the Supervisory Board or the Board of Management.
  According to the Articles of Association, such appointments will require a two-thirds
  majority representing at least 50% of the outstanding share capital.

Although a deviation from
  provision IV.I.I. of the Code, the Supervisory Board and the Board of Management
  believe these provisions will enhance the continuity of the companys management
  and policies.

Members of the Board of
  Management are allowed to hold a maximum of two supervisory board memberships
  in other listed companies. This is in line with the Code (provision II.1.7).
  The exception to this rule is that in the year prior to their retirement, Board
  of Management members are allowed to hold more than two supervisory board memberships
  in order to allow them to prepare for postretirement, as long as this does not
  interfere with the performance of their tasks as members of the Board of Management.
  Acceptance of external supervisory board memberships is subject to approval
  by the Supervisory Board, which power has been delegated to the Chairman of
  the Supervisory Board.

The handling of (potential)
  conflicts of interest between the company and members of the Board ofManagement
  is governed by the Rules of Procedure for the Board of Management. Decisions
  to enter into transactions under which Board of Management members would have
  conflicts of interests that are of material significance to the company, and/or
  to the relevant Board of Management member, require the approval of the Supervisory
  Board and will be mentioned in the Annual Report.

Antitakeover Provisions
  and Control

According to provision
  IV.3.9 of the Code, the company is required to provide an overview of its actual
  or potential antitakeover measures and of the circumstances in which they may
  be used.

The priority shares may
  be considered to constitute a form of antitakeover measure. In the context of
  the nomination rights of the Meeting of Holders of Priority Shares the following
  can be noted. As stated above in connection with the nomination procedure for
  members of the Supervisory Board and of the Board of Management, the Foundation
  Akzo Nobel has confirmed that it intends to make use of its binding nomination
  rights in the event of exceptional circumstances only. These circumstances include
  situations where in the opinion of the Board of the Foundation the continuity
  of the companys management and policies is at stake. This may be the case
  if a public bid for the common shares of the company has been announced or has
  been made, or the justified expectation exists that such bid will be made without
  any agreement having been reached in relation to such a bid with the company.
  The same shall apply if one shareholder, or more shareholders acting in a concerted
  way, are holding a substantial percentage of the issued common shares of the
  company without making an offer, or if, in the opinion of the Board of the Foundation
  Akzo Nobel, the exercise of the voting rights by one shareholder or more shareholders,
  acting in a concerted way, is materially in conflict with the interests of the
  company and its enterprise. In such cases the Supervisory Board and the Board
  of Management, in accordance with their statutory responsibility, will evaluate
  all available options with a view to serving the best interests of the company,
  its enterprise, and its shareholders and other stakeholders. In order to allow
  for sufficient time to conduct such an evaluation, the Board of the Foundation
  Akzo Nobel reserves the right to make use of its binding nomination rights for
  the appointment of members of the Supervisory Board and of the Board of Management
  in such circumstances.

In the event of a hostile
  takeover bid, in general the Supervisory Board and the Board of Management reserve
  the right to use all powers available to them in the interest of the company
  and its enterprise.

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B. COMPENSATION

Remuneration in 2005

Pursuant to the Dutch Disclosure
  of Remuneration of Board Members Act, total remuneration and shares held
  by members of the Supervisory Board and the Board of Management are specified
  below.In 2005, the
  aggregate remuneration of the Supervisory Board and Board of Management was
  EUR 7.4 million. The aggregate amount set aside or accrued by the company in
  2005 to provide pension, retirement or similar benefits for those individuals
  was EUR 1.4 million, while the aggregate amount of other compensations was EUR
  0.3 million.

Supervisory BoardIn respect of their functions
  the members of the Supervisory Board received the following total remuneration:

|                           |        |  |        | 
|-------------------------- | ------ |  | ------ | 
|In
        euros           | 2005   |  | 2004   | 
|                           |        |  |        | 
|                           |        |  |        | 
|Aarnout Loudon, Chairman1) | 59,000 |  | 59,000 | 
|Maarten van den Bergh4)    | 32,000 |  |        | 
|Maarten van Veen3)         | 16,000 |  | 48,000 | 
|Virginia Bottomley1)       | 48,000 |  | 48,000 | 
|Dolf van den Brink2)       | 52,000 |  | 32,000 | 
|Uwe-Ernst Bufe2)           | 53,000 |  | 48,000 | 
|Abraham Cohen2)            | 54,000 |  | 48,000 | 
|Cees van Lede              | 41,000 |  | 41,000 | 
|Alain Mérieux              | 41,000 |  | 41,000 | 
|Lars Thunell5)             | 55,000 |  | 48,000 | 
|Karel Vuursteen1)          | 48,000 |  | 48,000 | 
|                           |        |  |        | 

|1) Member
      of the Remuneration Committee and member of the Nomination Committee.                                             
|----------------------------------------------------------------------------------------------------------------------------------
|2) Member
      of the Audit Committee.                                                                                           
|3)
      Until May 1, 2005, Deputy Chairman and member of the Remuneration Committee
      and member of the Nomination Committee.
|4) From
      May 1, 2005, Deputy Chairman and member of the Remuneration Committee and
      member of the Nomination Committee. 
|5) Until
      December 31, 2005, member of the Supervisory Board and member of the Audit
      Committee.                        

In accordance with the
  articles of association and good corporate governance practice, the remuneration
  of Supervisory Board members is not dependent on the results of the company.
  Members of the Audit Committee receive a fee for attending a meeting of the
  Committee in person. This fee depends on the country of residence of the member
  involved.

The company does not grant
  stock options and/or shares to its Supervisory Board members and does not provide
  loans to them.

Travel expenses and facilities
  for members of the Supervisory Board are borne by the company and reviewed by
  the Audit Committee.

Board of Management

GeneralThe remuneration policy and
  the individual service contracts of the members of the Board of Management are
  determined by the Supervisory Board within the framework of the remuneration
  policy as adopted by the General Meeting of Shareholders. The Supervisory Boards
  Remuneration Committee prepares all relevant

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information and provides
  advice to the Supervisory Board on all matters relating to the remuneration
  and other conditions of employment of the Board of Management.

The objective of the companys
  remuneration policy is to provide remuneration in a form that will attract,
  retain, and motivate the members of the Board of Management as top managers
  of a major international company. In the determination and differentiation of
  the remuneration levels of the CEO, the CFO, and the other members, due allowance
  is made for the individuals specific responsibilities. Remuneration is
  differentiated on a basis comparable to that in other large Dutch multinational
  companies. To ensure that remuneration is linked to performance, a significant
  proportion of the remuneration package is variable and dependent on short- and
  long-term performance of the individual Board member and the company.

Remuneration PolicyThe companys remuneration
  policy, including all structures and policies related to the remuneration and
  employment contracts of the Board of Management, is in line with the Dutch Corporate
  Governance Code.

|The total
      remuneration package of the members of the Board of Management consists
      of:
|-------------------------------------------------------------------------------------------------
|                                                                                                
|                                                                                                
|                                                                                                
|                                                                                                
|                                                                                                
|                                                                                                

To ensure overall competitiveness
  of the remuneration provided, the remuneration levels of the Board of Management
  are assessed against a peer group. The Remuneration Committee consults professional
  independent remuneration experts to ensure an appropriate comparison.

Statistical models are
  used to modify the data of the peer group companies to assume a similar size
  as Akzo Nobel and a similar scope of responsibilities of the Board of Management.
  This remuneration package is based on a remuneration policy as adopted by the
  General Meeting of Shareholders in April 2005.

It is the companys
  policy to move gradually toward overall remuneration levels that are at the
  median level of the external benchmark of the following peer group of companies:

| | Aegon         |  | Royal DSM     
|- | ------------- | - | --------------
| | Heineken      |  | Wolters Kluwer
| | Reed Elsevier |  | Royal Numico  
| | TNT           |  | Royal Ahold   
| | VNU           |  | Royal KPN     

Royal Ahold and Royal KPN
  are not included in the peer group for the CEO. There have been no adjustments
  in the peer group as published in the 2004 Annual Report.

In line with the companys
  remuneration policy, variable performance-related remuneration is an important
  part of total compensation.

Base SalaryThe objective of the base
  salary is to enable recruitment and retention of top managers of a major international
  company.

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While the focus on variable
  performance-related compensation elements will continue, the base salaries need
  to become more aligned with the market median in order to remain competitive.
  The Supervisory Board considers each year whether the circumstances allow a
  reconsideration of the base salaries.

Short-Term Incentive
  (Annual Bonus)The target short-term incentive
  (annual bonus) is 80% of the base salary for the CEO and 65% for the other members
  of the Board of Management.

The objectives of the short-term
  incentive are to reward economic value creation (EVA) for our shareholders and
  other stakeholders, to measure individual and collective performance and to
  encourage progress in the achievement of long-term strategic objectives.

The bonus opportunity is
  linked to EVA for 70%; the remaining 30% is based on qualitative individual
  and collective targets. On the outcome of these elements, the Remuneration Committee
  applies an overall rating based on the principles of the Performance and Development
  Dialog, an appraisal system that has been implemented throughout Akzo Nobel
  in 2005. For the Board of Management, the rating includes a reasonableness test,
  in which the Supervisory Board critically assesses the actual ambition level
  of the performance targets in light of the assumptions made at the beginning
  of the year. It also includes an assessment of the progress made in achieving
  long-term strategic objectives.

This method for bonus determination
  is also the basis of the compensation framework for executives in the company
  as introduced in January 2005.

The performance measure
  EVA is used in order to encourage the Board of Management to create long-term
  value for the companys shareholders and other stakeholders. EVA is calculated
  by deducting from net operating profit after taxes (NOPAT) a capital charge
  representing the cost of capital calculated on the basis of an average return
  investors expect. The elements of the EVA calculation cannot be derived directly
  from the data given in the financial statements, as they take into account certain
  adjustments such as addition of nonrecurring items and special treatment of
  strategic investments, acquisitions and divestments.

Targets are set in the
  context of the medium-term objectives of the company and qualify as commercially
  sensitive information. The company will not disclose the targets. The Supervisory
  Board ensures that targets are realistic and sufficiently stretching. The target
  EVA for the bonus will be determined annually by the Supervisory Board and will
  be derived from budget. The EVA-related part of the bonus has a performance
  threshold level of 80% and a maximum performance level of 120% of the targeted
  EVA. The companys auditors have ascertained that the actual EVA calculation
  is in line with the guidelines and rules as established.

Long-Term IncentivesThe objectives of the Akzo
  Nobel long-term incentive plan are to encourage long-term economic and shareholder
  value creation, both absolute and relative to our competitors, to align the
  interests of the Board of Management with those of shareholders and to ensure
  retention of the members of the Board of Management.

The long-term incentive
  plan consists of performance stock options and performance shares.

Under the stock option
  plan, stock options will be conditionally granted on performance upon vesting.
  The number of stock options that will be granted to the Board of Management
  is determined by the Supervisory Board. Market levels as well as company-specific
  circumstances will be taken into account in determining the appropriate conditional
  number of options to be granted. The actual number of options which the Board
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Management receives depends
  on the companys performance during a three-year vesting period. The total
  option term is seven years.

The performance measure
  used to determine the number of options that vest is set by the average of the
  results of the comparison between planned and realized EVA on Invested Capital
  (EOI) or economic value created in relation to invested capital during the period
  of three consecutive years. This measure is used to encourage EVA performance
  over a longer period of time. The EOI targets are set annually by the Supervisory
  Board.

Stock options will not
  vest below 80% of the targeted EOI. The number of granted options is also the
  maximum number of options that vest upon achieving the targeted performance.
  If targeted performance is exceeded, there will be no increase in the number
  of options that vest. The specific targets will not be disclosed as they qualify
  as commercially sensitive information.

The expected value of performance
  stock options for the Board of Management is based on the Binomial Option Pricing
  Model, which is in line with international accounting regulations.

As a policy, the exercise
  price of the stock options is the Euronext Amsterdam opening price on the first
  day after the General Meeting of Shareholders that the Akzo Nobel share is quoted
  ex dividend.

The aim of the performance
  share plan is to align the interests of the Board of Management and the shareholders
  in order to improve the performance of the company. Under the plan, shares will
  be granted to the members of the Board of Management provided that certain performance
  targets are achieved and the contract of employment is continued. These targets
  are determined by the Supervisory Board in the first quarter of the year of
  issue on the basis of the weighted average of the price of the Akzo Nobel share
  increased by the dividend paid over a period of three years (Total Shareholder
  Return). The TSR will be compared with the following peer group:

| | Bayer                              |  | Merck KGaA    
|- | ---------------------------------- | - | --------------
| | CIBA Specialty
      Chemicals     |  | Novo Nordisk  
| | Clariant                           |  | PPG Industries
| | Degussa                            |  | Schering      
| | Dow Chemical
      Company         |  | Serono        
| | Royal DSM                          |  | Solvay        
| | Dupont
      de Nemours            |  | UCB           
| | Imperial
      Chemical Industries |  | Valspar       

There have been no adjustments
  in the peer group as published in the 2004 Annual Report. Based on this peer
  group, Akzo Nobel will be ranked for its total return to shareholders. Independent
  external specialists will conduct this analysis to determine the number of shares
  that will vest over a three-year period.

Given the companys
  historical performance, market expectations, and strategy, the following performance
  incentive zone will apply. There will be no shares that vest for a position
  below the tenth position of the sixteen peer companies. For the fifth position,
  all shares conditionally granted will vest. The maximum number of shares will
  vest only for the first position within the peer group. This is 150% of the
  target value of the number of shares conditionally granted.

The expected value of the
  performance share plan is based on probability analyses. In valuating its incentive
  plans, the company is assisted by independent external advisers.

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PensionsThe pension plan for all
  the members of the Board of Management appointed after January 1, 2002, is based
  on an income- and age-related defined contribution plan. The available premium
  is invested with a pension fund. The pension payment at pension age depends
  on the premiums received and the investment results during the period. The premium
  percentages to be paid for the Board member concerned are fixed by the Supervisory
  Board taking into account pension build up (internally or externally) in the
  period preceding the appointment as Board member and the rules applicable in
  the country of origin. External reference data can be used in determining market
  competitive levels of pension arrangements. If applicable, pension rights built
  up in the period preceding Board membership will be adjusted in conformity with
  the relevant rules and regulations. Members of the Board of Management pay a
  personal contribution.

Members of the Board of
  Management normally retire in the year that they reach the age of 62.

Employment AgreementsEmployment agreements for
  members of the Board of Management appointed in 2004 and subsequent years are
  concluded for a period of four years in conformity with the Dutch Corporate
  Governance Code. After this initial term reappointments may take place for consecutive
  periods of four years each or for shorter periods as will follow from the application
  of the date of retirement. If reappointment does not take place and the employment
  agreement between the Board member concerned and Akzo Nobel N.V. is not continued,
  the Board member will be entitled to a severance payment, established in accordance
  with the Dutch Corporate Governance Code. The amount of this severance payment
  shall in principle not exceed the equivalent of one year of base salary, or
  in case of termination upon the first term of four years two years of base salary.
  The employment agreements for the members of the Board of Management appointed
  before 2004 have not been adjusted in this respect. However, the Supervisory
  Board has the intention to take the provisions of the Code as guidance for establishing
  severance payments. The employment contracts allow the Supervisory Board to
  request a Board member to resign between the age of 60 and the regular retirement
  age for effective succession planning within the Board. In such an exceptional
  situation, the Board member concerned will be entitled to fixed salary payments
  until the date of retirement.

The notice period by the
  Board member is subject to a term of three months; notice by the company shall
  be subject to a six months term.

Amendment in the
  Remuneration PolicyNo major changes in the remuneration
  policy are proposed. However, the level of total cash compensation of the CEO
  was reviewed and considered too far below the market median level.

Therefore, the Supervisory
  Board intends to increase the target short-term incentive (annual bonus) for
  the CEO from 80% to 100% of base salary as per 2006. This increase will bring
  the Total Target Cash Compensation of the CEO more in line with our remuneration
  policy of targeting overall remuneration at the market median level and supports
  the focus on variable performance-related compensation. For the other members
  of the Board of Management the target short-term incentive (65% of the base
  salary) will not change in 2006. The maximum bonus for the CEO will not exceed
  150% of his base salary (1.5 times target bonus) and 100% for the other members
  of the Board of Management.

This change in the Remuneration
  Policy was approved by the General Meeting of Shareholders on April 25, 2006.

Where required, the pension
  arrangements have been brought in line with the new pension legislation as from
  January 1, 2006.

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Remuneration in 2005

GeneralThe remuneration decisions
  made in 2005 are in line with the remuneration policy as adopted by the General
  Meeting of Shareholders. The Supervisory Board considered the median market
  development of the peer group. Special attention was given to alignment of labor
  conditions between the Board of Management and executives, especially of the
  level below the Board of Management.

The remuneration policy
  stresses the importance of the variable remuneration components. In 2005, the
  value of fixed and variable components at target levels
  breaks down as follows:

|         |       |  |                                           |  |         | 
|-------- | ----- |  | ----------------------------------------- |  | ------- | 
|         | CEO   |  | Other
        
              Boardmembers |  | Average | 
|         |       |  |                                           |  |         | 
|         |       |  |                                           |  |         | 
|Fixed    | 36.5% |  | 42.0%                                     |  | 40.6%   | 
|Variable | 63.5% |  | 58.0%                                     |  | 59.4%   | 
|         |       |  |                                           |  |         | 

This breakdown is in line
  with the policy to provide a highly performance-related remuneration package.
  The variable components are related to stretching performance targets. Therefore,
  the reward related to these components may be lower than indicated. Only in
  case actual performance exceeds targeted performance a reward may be granted
  that is higher than indicated.

Base Salary 2005The salaries of the members
  of the Board of Management were increased by 3% on January 1, 2005. The base
  salary was fixed at EUR 665,000 on a yearly basis for the CEO and EUR 475,000
  for the other members.

In spite of the salary
  adjustment in 2005, the base salary level of the CEO remains approximately 30%
  below the median level of the peer group of companies used in the external comparison.
  For the other members the percentage amounts to approximately 10% below the
  median level.

Short-Term Incentive
  (annual bonus) 2005Bonuses, to be paid out over
  2005 to the members of the Board of Management, are based on achieved target
  performance and a score of the P&D dialog which exceeded 100%.

Long-Term Incentives
  2005In 2005, the Remuneration
  Committee fixed the number of options relating to the option arrangement 2002-2012.
  The options were granted on the condition that the number of options could (after
  three years) be reduced by a maximum of 50% if an EVA on Invested Capital target
  was not or not sufficiently met. As the EVA on Invested Capital criterion has
  been achieved during the years 20022004, all options vested.

Under the option plan applicable
  as from the year 2004, 23,000 conditional options were granted to the CEO and
  15,000 to the other members of the Board of Management. The member of the Board
  of Management who retired in 2005 (Mr. Van der Meer) only received options (15,000).
  The number of performance-related shares granted to the members of the Board
  of Management in 2005 amounted to 33,000 for the CEO and 22,000 for the other
  Board members.

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Akzo Nobels Total
  Shareholders Return, compared with the peer group over a three-year period,
  determines the number of performance-related shares that will become unconditional:

| | for the two-year period
      ending 2005: Akzo Nobels position is 9 (2004: 13); and
|- | -------------------------------------------------------------------------------------
| | for the one-year period
      ending 2005: Akzo Nobels position is 7.               

Overview of Remuneration
  2005The members of the Board
  of Management received the following salaries, performance-related bonuses,
  emoluments and other compensations.

|                                           |         |  |         | 
|------------------------------------------ | ------- |  | ------- | 
|In
        euros                           | 2005    |  | 2004    | 
|                                           |         |  |         | 
|                                           |         |  |         | 
|Hans Wijers, Chairman                      |         |  |         | 
|Salary                                     | 665,000 |  | 644,900 | 
|Bonus                                      | 790,000 |  | 628,500 | 
|Other emoluments                           | 6,600   |  | 6,000   | 
|                                           |         |  |         | 
|Leif Darner, from July
      1, 2004       |         |  |         | 
|Salary                                     | 475,000 |  | 230,300 | 
|Bonus                                      | 460,000 |  | 207,300 | 
|Other emoluments                           | 4,800   |  | 3,100   | 
|                                           |         |  |         | 
|Rob Frohn, from May
      1, 2004          |         |  |         | 
|Salary                                     | 475,000 |  | 307,000 | 
|Bonus                                      | 460,000 |  | 276,300 | 
|Other emoluments                           | 7,100   |  | 4,300   | 
|                                           |         |  |         | 
|Rudy van der Meer,
      until May 1, 2005 |         |  |         | 
|Salary                                     | 158,300 |  | 460,500 | 
|Bonus                                      | 155,000 |  | 392,400 | 
|Other emoluments                           | 1,100   |  | 3,000   | 
|                                           |         |  |         | 
|Toon Wilderbeek                            |         |  |         | 
|Salary                                     | 475,000 |  | 460,500 | 
|Bonus                                      | 460,000 |  | 414,500 | 
|Other emoluments                           | 3,200   |  | 6,000   | 
|                                           |         |  |         | 

Other emoluments concern
  employers charges (social contributions and healthcare contributions).

Other CompensationsOther compensations for members
  of the Board of Management borne by the company amounted to EUR 120,100 for
  Mr. Darner, related to compensation for living expenses and contributions to
  an international school. The compensation fee for Mr. Frohn and Mr. Wilderbeek
  relating to their move to the Netherlands amounted to EUR 34,600 and EUR 24,200,
  respectively.

As a consequence of their
  25th year of service with the company, Mr. Wilderbeek and Mr. Darner received
  a one month salary net (EUR 39,600).

Effective May 1, 2005,
  Mr. Van der Meer retired two years before the formal retirement age of 62. As
  a consequence, salary and pension provisions of EUR 1,300,000 have been made.

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Pension ChargesAfter deduction of any contributions
  made by members of the Board of Management, pension expenses borne by the company
  were as follows:

|                                     |         |  |         | 
|------------------------------------ | ------- |  | ------- | 
|In
        euros                     | 2005    |  | 2004    | 
|                                     |         |  |         | 
|                                     |         |  |         | 
|Hans Wijers                          | 354,600 |  | 281,300 | 
|Leif Darner, from July
      1, 2004 | 167,900 |  | 44,500  | 
|Rob Frohn, from May
      1, 2004    | 111,900 |  | 119,900 | 
|Rudy van der Meer                    | 187,700 |  | 15,100  | 
|Toon Wilderbeek                      | 261,400 |  | 300,700 | 
|                                     |         |  |         | 

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The aggregate number of
  options held by the members of the Board of Management at December 31, 2005,
  is as follows:

|                             |                           |  |                                           |  |                                                              |  |                               |  |                              |  |                                                              |  |                        | 
|---------------------------- | ------------------------- |  | ----------------------------------------- |  | ------------------------------------------------------------ |  | ----------------------------- |  | ---------------------------- |  | ------------------------------------------------------------ |  | ---------------------- | 
|Number of options            | Year
      of
      issue |  | Exercise
      price
        in
      EUR |  | Outstanding
        at
      December
        31,
      2004 |  | Granted
      in
        2005 |  | Lapsed
      in
        2005 |  | Outstanding
        at
      December
        31,
      2005 |  | Expiry
        date    | 
|                             |                           |  |                                           |  |                                                              |  |                               |  |                              |  |                                                              |  |                        | 
|                             |                           |  |                                           |  |                                                              |  |                               |  |                              |  |                                                              |  |                        | 
|Hans Wijers                  | 2002                      |  | 46.53                                     |  | 14,850                                                       |  |                               |  |                              |  | 14,850                                                       |  | April
        25, 2012 | 
|                             | 2003                      |  | 19.51                                     |  | 29,700                                                       |  |                               |  |                              |  | 29,700                                                       |  | April
        22, 2010 | 
|                             | 2004                      |  | 31.45                                     |  | 23,000                                                       |  |                               |  |                              |  | 23,000                                                       |  | April
        25, 2011 | 
|                             | 2005                      |  | 31.98                                     |  |                                                              |  | 23,000                        |  |                              |  | 23,000                                                       |  | April
        24, 2012 | 
|Value outstanding            |                           |  |                                           |  |                                                              |  |                               |  |                              |  |                                                              |  |                        | 
|options, in EUR              |                           |  |                                           |  |                                                              |  |                               |  |                              |  | 1,100,511                                                    |  |                        | 
|                             |                           |  |                                           |  |                                                              |  |                               |  |                              |  |                                                              |  |                        | 
|Leif Darner                  | 2000                      |  | 44.82                                     |  | 4,950                                                        |  |                               |  | 4,950                        |  |                                                              |  |                        | 
|                             | 2001                      |  | 46.75                                     |  | 4,950                                                        |  |                               |  |                              |  | 4,950                                                        |  | April
        30, 2006 | 
|                             | 2002                      |  | 46.53                                     |  | 4,950                                                        |  |                               |  |                              |  | 4,950                                                        |  | April
        25, 2009 | 
|                             | 2003                      |  | 19.51                                     |  | 4,950                                                        |  |                               |  |                              |  | 4,950                                                        |  | April
        22, 2010 | 
|                             | 2004                      |  | 31.45                                     |  | 15,000                                                       |  |                               |  |                              |  | 15,000                                                       |  | April
        25, 2011 | 
|                             | 2005                      |  | 31.98                                     |  |                                                              |  | 15,000                        |  |                              |  | 15,000                                                       |  | April
        24, 2012 | 
|Value outstanding            |                           |  |                                           |  |                                                              |  |                               |  |                              |  |                                                              |  |                        | 
|options, in EUR              |                           |  |                                           |  |                                                              |  |                               |  |                              |  | 411,552                                                      |  |                        | 
|                             |                           |  |                                           |  |                                                              |  |                               |  |                              |  |                                                              |  |                        | 
|Rob Frohn                    | 2000                      |  | 44.82                                     |  | 4,950                                                        |  |                               |  | 4,950                        |  |                                                              |  |                        | 
|                             | 2001                      |  | 46.75                                     |  | 4,950                                                        |  |                               |  |                              |  | 4,950                                                        |  | April
        30, 2006 | 
|                             | 2002                      |  | 46.53                                     |  | 4,950                                                        |  |                               |  |                              |  | 4,950                                                        |  | April
        25, 2009 | 
|                             | 2003                      |  | 19.51                                     |  | 4,950                                                        |  |                               |  |                              |  | 4,950                                                        |  | April
        22, 2010 | 
|                             | 2004                      |  | 31.45                                     |  | 15,000                                                       |  |                               |  |                              |  | 15,000                                                       |  | April
        25, 2011 | 
|                             | 2005                      |  | 31.98                                     |  |                                                              |  | 15,000                        |  |                              |  | 15,000                                                       |  | April
        24, 2012 | 
|Value outstanding            |                           |  |                                           |  |                                                              |  |                               |  |                              |  |                                                              |  |                        | 
|options, in EUR              |                           |  |                                           |  |                                                              |  |                               |  |                              |  | 411,552                                                      |  |                        | 
|                             |                           |  |                                           |  |                                                              |  |                               |  |                              |  |                                                              |  |                        | 
|Rudy van der Meer            | 2000                      |  | 44.82                                     |  | 26,400                                                       |  |                               |  |                              |  | 26,400                                                       |  | April
        27, 2010 | 
|retired at May 1,
      2005 | 2001                      |  | 46.75                                     |  | 25,661                                                       |  |                               |  |                              |  | 25,661                                                       |  | April
        30, 2011 | 
|                             | 2002                      |  | 46.53                                     |  | 26,400                                                       |  |                               |  |                              |  | 26,400                                                       |  | April
        25, 2012 | 
|                             | 2003                      |  | 19.51                                     |  | 26,400                                                       |  |                               |  |                              |  | 26,400                                                       |  | April
        22, 2010 | 
|                             | 2004                      |  | 31.45                                     |  | 15,000                                                       |  |                               |  |                              |  | 15,000                                                       |  | April
        25, 2011 | 
|                             | 2005                      |  | 31.98                                     |  |                                                              |  | 15,000                        |  |                              |  | 15,000                                                       |  | April
        24, 2012 | 
|Value outstanding            |                           |  |                                           |  |                                                              |  |                               |  |                              |  |                                                              |  |                        | 
|options, in EUR              |                           |  |                                           |  |                                                              |  |                               |  |                              |  | 1,196,998                                                    |  |                        | 
|                             |                           |  |                                           |  |                                                              |  |                               |  |                              |  |                                                              |  |                        | 
|Toon Wilderbeek              | 2000                      |  | 44.82                                     |  | 6,600                                                        |  |                               |  | 6,600                        |  |                                                              |  |                        | 
|                             | 2001                      |  | 46.75                                     |  | 6,600                                                        |  |                               |  |                              |  | 6,600                                                        |  | April
        30, 2006 | 
|                             | 2002                      |  | 46.53                                     |  | 3,300                                                        |  |                               |  |                              |  | 3,300                                                        |  | April
        25, 2009 | 
|                             | 2002                      |  | 46.53                                     |  | 13,200                                                       |  |                               |  |                              |  | 13,200                                                       |  | April
        25, 2012 | 
|                             | 2003                      |  | 19.51                                     |  | 26,400                                                       |  |                               |  |                              |  | 26,400                                                       |  | April
        22, 2010 | 
|                             | 2004                      |  | 31.45                                     |  | 15,000                                                       |  |                               |  |                              |  | 15,000                                                       |  | April
        25, 2011 | 
|                             | 2005                      |  | 31.98                                     |  |                                                              |  | 15,000                        |  |                              |  | 15,000                                                       |  | April
        24, 2012 | 
|Value outstanding            |                           |  |                                           |  |                                                              |  |                               |  |                              |  |                                                              |  |                        | 
|options, in EUR              |                           |  |                                           |  |                                                              |  |                               |  |                              |  | 888,534                                                      |  |                        | 
|                             |                           |  |                                           |  |                                                              |  |                               |  |                              |  |                                                              |  |                        | 

In 2005, no stock options
  were exercised by the members of the Board of Management.

C. BOARD PRACTICES

Rules of Procedure,
  Codes of Conduct, Complaints ProceduresThe Supervisory Board has
  adopted Rules of Procedure that address internal procedural issues for the Board
  of Management. The members of the Board of Management are subject to the Akzo
  Nobel Rules on Inside Information, which limits their opportunities to trade
  in Akzo Nobeland in certain circumstancesother

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companys shares.
  Transactions in Akzo Nobel shares executed by the Board of Management are notified
  to the Dutch Authority for the Financial Markets in accordance with Dutch law
  and, if necessary, to other relevant authorities.

The Akzo Nobel Rules on
  Inside Information provide that making use of inside information by executing
  transactions in Akzo Nobel securities, as well as securities other than Akzo
  Nobel securities, is prohibited if the person concerned has inside information
  regarding such securities. The rules also provide that the Compliance Officer
  may determine that transactions in securities other than Akzo Nobel securities
  are prohibited, irrespective of whether he or she has inside information and
  has notified the relevant designated persons thereof. Akzo Nobel has chosen
  not to follow the provisions of the Code (provision II.2.6) requiring notification
  by members of the Board of Management of all changes in holdings of shares in
  Dutch listed companies, as it believes that in addition to the cited restrictions,
  this will create an unnecessary administrative burden.

A comprehensive code of
  conduct followed by officers and employees committed to individual and corporate
  integrity is one of the critical foundations of good corporate governance. Akzo
  Nobels Company Statement and Business Principles set out the companys
  position. They guide all our employees in their daily work. The company has
  established several procedures to arrange for company-wide dissemination of
  the Business Principles and training. It has also established procedures to
  monitor compliance with the Business Principles in general, and certain of its
  provisions in particular, and to provide for enforcement of the Business Principles.
  The Business Principles are available on the companys corporate website.

The Board of Management
  has adopted a Code of Ethics for senior financial officers. The designated persons,
  including the CEO and the CFO, have to confirm annually in writing that they
  have adhered to this Code. The Code of Ethics can be found on the companys
  corporate website.

A complaints procedure
  enables employees to file complaints concerning practices that violate the Business
  Principles, Policy statements on Human Resources, HSE and Security, and Corporate
  Directives. This procedure ensures that employees have the opportunity to report
  alleged irregularities without jeopardizing their legal position. Furthermore,
  there is a procedure for complaints regarding accounting, internal control,
  and auditing matters. Pursuant to SOX, the Audit Committee is directly responsible
  for receiving and handling complaints based on this financial complaints procedure
  and for providing confidentiality for whistleblowers on such matters. These
  procedures are posted on the companys corporate website.

Summary of Significant
  Differences between Dutch Corporate Governance Practices and the NASDAQ Corporate
  Governance Standards

In accordance with NASDAQ
  Rule 4350(a)(1), Akzo Nobel N.V. as a foreign private issuer may follow its
  home country practice in lieu of certain requirements of Rule 4350, provided
  it discloses in its annual reports filed with the SEC each requirement of Rule
  4350 that it does not follow and describes the home country practice followed
  in lieu of such requirements.

Akzo Nobel N.V. does not
  follow the requirements of Rule 4350(b)(1)(A) and Rule 4350(g). Rule 4350(b)(1)(A)
  states that each issuer shall distribute to shareholders copies of an annual
  report containing audited financial statements of the company and its subsidiaries.
  The report shall be distributed to shareholders a reasonable period of time
  prior to the company's annual meeting of shareholders and shall be filed with
  NASDAQ at the time it is distributed to shareholders. Rule 4350(g) states that
  each issuer shall solicit proxies and provide proxy statements for all meetings
  of shareholders and shall provide copies of such proxy solicitation to Nasdaq.
  It is not common practice in the Netherlands nor is it required by Dutch law
  for listed companies to actively distribute to shareholders copies of the annual
  report containing audited financial statements of the company

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and its subsidiaries. The
  same can be said for soliciting proxies and providing proxy statements for meetings
  of shareholders.

Because shares in Dutch
  listed companies usually are bearer shares (as are Akzo Nobel N.V.'s common
  shares), and because these shares are held by securities intermediaries, Dutch
  listed companies generally do not know who their shareholders are. This prevents
  the distribution of materials to shareholders. To solve this problem, Akzo Nobel
  N.V. was one of the key companies in the establishment of the Shareholders
  Communication Channel, a project of Euronext Amsterdam, banks in the Netherlands,
  and several major Dutch companies to enable communication between a company
  and its shareholders and amongst shareholders themselves. Through the Shareholders'
  Communication Channel, Akzo Nobel N.V. can communicate with shareholders who
  hold their shares through an associated bank and have actively indicated that
  they want to participate in this system. In practice, this means that mainly
  Dutch retail investors are reached through the Shareholders' Communication Channel.

Akzo Nobel N.V. uses the
  Shareholders Communication Channel to distribute the notice of the General
  Meeting of Shareholders and a voting instruction form, thereby giving shareholders
  the possibility to have their votes executed by a civil law notary at the General
  Meeting of Shareholders. As for ADR holders, they are also sent the notice of
  the General Meeting of Shareholders and a voting instruction form via the sponsor
  of the ADR Program, Deutsche Bank. For all the relevant information about the
  General Meeting of Shareholders, shareholders participating in the Shareholders'
  Communication Channel and ADR holders are referred to the company's corporate
  website, on which all relevant information, including the annual report containing
  audited financial statements, are published. Neither these documents nor a proxy
  statement are distributed. This is not required by Dutch law. Article 2:394
  of the Dutch Civil Code requires public limited liability companies to publish
  the annual accounts, the annual report and the other documents as referred to
  in article 2:392 of the Dutch Civil Code by depositing copies of these documents
  at the commercial registry kept by the Chamber of Commerce and Industry. In
  addition, it is common practice that listed companies publish these documents
  on their company website. Akzo Nobel N.V. follows this practice and also posts
  its Form 20-F on the company's corporate website. As the Form 20-F is filed
  with the SEC via the Electronic Data Gathering, Analysis, and Retrieval (EDGAR)
  system, it is also publicly available via the website of the SEC. Finally, if
  a shareholder or ADR holder so requests, he is provided with a copy of these
  documents free of charge.

The practice described
  above is in line with the best practice provisions of the Dutch Corporate Governance
  code of December 9, 2003, that is applicable to all Dutch listed companies.

D. EMPLOYEES

The tables below set forth
  the distribution of the number of employees per group and geographical area
  for the last two fiscal years.

|          |                                                    | 
|--------- | -------------------------------------------------- | 
|          | Number
      of employees per segment, December 31 | 
|          | 2005                                               | 
|          |                                                    | 
|          |                                                    | 
|Organon   | 14,100                                             | 
|Intervet  | 5,260                                              | 
|Coatings  | 29,200                                             | 
|Chemicals | 11,430                                             | 
|Other     | 1,350                                              | 
|          |                                                    | 
|Total     | 61,340                                             | 
|          |                                                    | 

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|                         |                                                              | 
|------------------------ | ------------------------------------------------------------ | 
|                         | Number
      of employees by country or region, December 31, | 
|                         | 2005                                                         | 
|                         |                                                              | 
|The Netherlands          | 11,580                                                       | 
|Germany                  | 4,120                                                        | 
|Sweden                   | 3,950                                                        | 
|United Kingdom           | 4,100                                                        | 
|Other European countries | 12,850                                                       | 
|USA and Canada           | 8,210                                                        | 
|Latin America            | 4,390                                                        | 
|Asia                     | 9,810                                                        | 
|Other regions            | 2,330                                                        | 
|                         |                                                              | 
|Total                    | 61,340                                                       | 
|                         |                                                              | 

At the end of 2005, the
  company had 61,340 employees, virtually unchanged from year-end 2004. Growth
  of our business in emerging markets and acquisitions resulted in a workforce
  expansion of 810, while restructuring programs in Coatings and Chemicals in
  the mature markets resulted in a decrease of 920.

To date, the major restructuring
  programs initiated in 2001 and expanded during 2003, 2004 and 2005, have resulted
  in a total workforce reduction by 10,000, some 15 percent of the companys
  workforce.

The company generally has
  good relationships with the labor unions.

E. SHARE OWNERSHIP

Shares of Akzo Nobel
  N.V. held by the Members of the Supervisory Board and the Board of ManagementAt May 31, 2006, the members
  of Supervisory Board held 10,400 Akzo Nobel N.V. common shares and did not hold
  any other Akzo Nobel N.V. securities, except for Mr. Van Lede who still holds
  options under the Akzo Nobel Stock Option Plan, stemming from the time when
  he was Chairman of Akzo Nobels Board of Management and for which reference
  is made to the table below.

The ownership of Akzo Nobel
  N.V. common shares breaks down as follows:

|                   |       | 
|------------------ | ----- | 
|Number of shares   |       | 
|                   |       | 
|                   |       | 
|Virginia Bottomley | 500   | 
|Abraham Cohen      | 4,000 | 
|Cees van Lede      | 5,500 | 
|Karel Vuursteen    | 400   | 
|                   |       | 

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100

At May 31, 2006, Mr. Van
  Lede held the following options:

|                          |  |                                           |  |                                                              |  |                              |  |                                                              |  |                        | 
|------------------------- |  | ----------------------------------------- |  | ------------------------------------------------------------ |  | ---------------------------- |  | ------------------------------------------------------------ |  | ---------------------- | 
|Year
      of
      issue |  | Exercise
      price
        in
      EUR |  | Outstanding
        at
      December
        31,
      2004 |  | Lapsed
      in
        2005 |  | Outstanding
        at
      December
        31,
      2005 |  | Expiry
        date    | 
|                          |  |                                           |  |                                                              |  |                              |  |                                                              |  |                        | 
|2000                      |  | 44.82                                     |  | 39,600                                                       |  |                              |  | 39,600                                                       |  | April
        27, 2010 | 
|2001                      |  | 46.75                                     |  | 38,491                                                       |  |                              |  | 38,491                                                       |  | April
        30, 2011 | 
|2002                      |  | 46.53                                     |  | 39,600                                                       |  |                              |  | 39,600                                                       |  | April
        25, 2012 | 
|2003                      |  | 19.51                                     |  | 39,600                                                       |  |                              |  | 39,600                                                       |  | April
        22, 2010 | 
|                          |  |                                           |  |                                                              |  |                              |  |                                                              |  |                        | 

At May 31, 2006, the members
  of the Board of Management held 13,099 Akzo Nobel N.V. common shares. The ownership
  breaks down as follows:

|                 |       | 
|---------------- | ----- | 
|Number of shares |       | 
|                 |       | 
|                 |       | 
|Hans Wijers      | 5,934 | 
|Leif Darner      | 1,425 | 
|Rob Frohn        | 3,000 | 
|Toon Wilderbeek  | 2,740 | 
|                 |       | 

Members of the Board of
  Management held no options other than the aforementioned stock options.

No member of the Supervisory
  Board or the Board of Management beneficially owns more than 1 percent of Akzo
  Nobel N.V. common shares.

Item
  7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS

A. MAJOR SHAREHOLDERS

As required by the Disclosure
  of major Holdings in Listed Companies Act 1996, the Netherlands Authority for
  the Financial Markets announced in July 2002 that ING had acquired a position
  of 5 percent in Akzo Nobel common shares. At May 31, 2006, ING held 18,615,931
  common shares, representing 6.5 percent of Akzo Nobel common shares outstanding.
  ING does not have any different voting rights from the rights of other common
  shareholders.

At year-end 2005, Akzo
  Nobel estimates that there were approximately 59 percent of its shares (including
  ADRs) held in the United States, 18 percent in the Netherlands, 4 percent in
  the United Kingdom, and 19 percent in other countries. About 10 percent of the
  total number of shares were owned by private investors and 90 percent by institutional
  investors.

In February 1989, Akzo
  Nobel established a sponsored American Depositary Receipt facility with Morgan
  Guaranty Trust Company of New York, as depositary, pursuant to which American
  Depositary Receipts (ADRs) representing American Depositary Shares
  (ADSs) are issued. In October 1999, Akzo Nobel terminated its depositary
  arrangements with Morgan Guaranty Trust Company and appointed Citibank, N.A.,
  as depositary for its ADR facility. In October 2004, Akzo Nobel terminated its
  depositary arrangements with Citibank, N.A. and appointed Deutsche Bank Trust
  Company Americas, as depositary for its ADR facility. In connection with the
  four-for-one stock split, which took effect on July 1, 1998, the ADSs were redenominated
  so that one ADS represents one Akzo Nobel common share (until July 1, 1998 each
  ADS represented one-half

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101

of a common share of Akzo
  Nobel). Akzo Nobel has been informed by the depositary that in the United States
  as of May 31, 2006, there were 47,804,724 sponsored ADSs (representing 17 percent
  of the outstanding common shares) which were held by 1,690 record holders.

Relations with Shareholders
  and Other InvestorsAkzo Nobel has three classes
  of shares: common shares, cumulative preferred shares, and priority shares.
  Common shares are traded on the Euronext Amsterdam stock exchange and in the
  form of American Depositary Shares on NASDAQ in the United States. No preferred
  shares have been issued to date. It has been communicated that the preferred
  shares merely have a financing function, which means that, if necessary, they
  will be issued at or near to the prevailing quoted price for common shares.
  The priority shares are held by the Foundation Akzo Nobel. The Foundations
  Board consists of members of Akzo Nobels Supervisory Board who are not
  members of the Audit Committee.

General Meetings of Shareholders
  are held at least once a year. The General Meeting of Shareholders is convened
  by public notice. The agenda and the notes to the agenda are published in advance
  and posted on the companys corporate website. The notes to the agenda
  contain all relevant information with respect to the proposed resolutions. All
  resolutions are made on the basis of the one share, one vote principle.
  The General Meeting of Shareholders reviews the Annual Report and decides on
  adoption of the Financial Statements and the dividend proposal, as well as on
  the discharge of the members of the Supervisory Board and the Board of Management.
  Holders of common shares in aggregate representing at least 1% of the total
  issued capital may submit proposals in writing for the agenda of the General
  Meeting at the companys office, at least six weeks in advance. Such requests
  shall be granted unless the Supervisory Board and the Board of Management are
  of the opinion that this is evidently not in the best interest of the company.
  The General Meeting of Shareholders will be provided with all requested information,
  unless the Supervisory Board and the Board of Management are of the motivated
  opinion that this is contrary to an overriding interest of the company.

The company attaches great
  value to shareholder relations. Akzo Nobel uses the ShareholdersCommunication
  Channel to distribute the agenda of the Annual General Meeting and to allow
  shareholders who hold their shares through an associated bank, participation
  in the proxy voting at said meeting. Holders of American Depositary Shares are
  also given the opportunity to vote by proxy.

In conformity with relevant
  laws and regulations, the company provides all shareholders and other parties
  in the financial markets with equal and simultaneous information about matters
  that may influence the share price, thereby taking into account possible exceptions
  permitted by those laws and regulations.

Akzo Nobel actively communicates
  its strategy and the developments of its businesses to the financial markets.
  Members of the Board of Management and business managers regularly attend analysts
  meetings in Europe and the United States. The quarterly results, press conferences,
  and the analysts conference calls, as well as the presentations at analysts
  meetings organized by the company, are all announced in advance, and are available
  as webcasts and accessible online. Presentations to (institutional) investors
  are held at regular intervals and, in principle, are announced on the companys
  website or by press releases. Other meetings with analysts or investors are
  not normally announced in advance, nor can they be followed by webcast or any
  other means. Discussions in such meetings are limited to information that is
  already in the public domain. This is in line with the requirement to ensure
  that all shareholders and other parties in the financial market have equal and
  simultaneous access to information that may influence the share price. In this
  respect, the company complies with applicable laws and regulations. In principle,
  analyst meetings, presentations to (institutional) investors, and direct meetings
  with investors are not held shortly before publication of the quarterly and
  annual results.

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102

B. RELATED PARTY TRANSACTIONS

The nonconsolidated companies
  of Akzo Nobel N.V. are shown in Exhibit 8, to which reference is made. Certain
  nonconsolidated companies sell goods and provide services to consolidated Akzo
  Nobel companies. In addition, consolidated Akzo Nobel companies sell goods and
  provide services to certain nonconsolidated companies. Such transactions were
  not significant on an individual or aggregate basis. These transactions were
  conducted at arms length with terms comparable to transactions with third
  parties.

In the ordinary course
  of business the company has transactions with various organizations with which
  certain of its members of the Supervisory Board or Board of Management are associated
  but no material transactions responsive to this item have been entered into
  in the period commencing January 1, 2003 to the date of this report. Likewise
  there have been no transactions with members of the Supervisory Board or Board
  of Management, any other senior management personnel or any family member of
  such persons. Also no loans have been extended to members of the Supervisory
  Board or Board of Management, any other senior management personnel or any family
  member of such persons.

C. INTEREST OF EXPERTS
  AND COUNSEL

Not applicable.

Item
  8. FINANCIAL INFORMATION

A. CONSOLIDATED STATEMENTS
  AND OTHER FINANCIAL INFORMATION.

See Item 18 Financial
  Statements for the Consolidated Financial Statements of the company.

The consolidated financial
  statements of Akzo Nobel have been prepared in accordance with International
  Financial Reporting Standards (IFRS) and its interpretations adopted by the
  EU. This is for the company materially the same as in accordance with IFRS as
  adopted by the International Accounting Standards Board (IASB). An explanation
  of how the transition from NL GAAP to IFRS has affected the reported financial
  position, financial performance and cash flows of the company is provided below:

Explanation of Transition
  to IFRS

Reference is made to Note
  24 of the Notes to the Consolidated Financial Statements in this report.

Legal Proceedings

See Note 15 and Note 25
  of the Notes to the Consildated Financial Statements in this report.

Dividend Policy

It is Akzo Nobels
  current intention to pay a dividend of 35  40 percent of net income excluding
  restructuring and impairment charges and results on divestments, but this is
  subject to earnings, managements views on the business and allocation
  of capital, as well as the impact of acquisitions and divestments, and so could
  change at any time.

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103

B. SIGNIFICANT CHANGES

Report for the First
  Quarter of 2006The report for
  the first quarter of 2006 was published on April 20, 2006 and a Form 6-K was
  furnished with the SEC on the same date. The report is incorporated by reference
  in this Annual Report.

Acquisition of Sico
  Inc.In April 2006, Akzo Nobel
  N.V. made an offer of CAD 20.00 per common share to acquire Sico Inc. (Sico),
  Canadas leading coatings company. Sicos two largest shareholderswho
  own around 34 percent of the companys common sharesexpressed their
  full support for the deal and signed a binding commitment to tender their shares
  under the offer. The Sico Board of Directors also recommended the offer to its
  shareholders. The total price on a fully diluted basis is CAD 295 million (approximately
  EUR 210 million) representing 9 times EBITDA of Sico in 2005. This amount will
  include preferred shares which Akzo Nobel will acquire at par value as well
  as other net debt.

On June 1, 2006, Akzo Nobel
  announced Sico shareholders holding approximately 97% of the outstanding Sico
  common shares on a fully-diluted basis and all of the Sico Class B preferred
  shares have accepted the offer. As at least 90% of outstanding common shares
  have been deposited under the Offer, the Offeror intends to acquire the common
  shares held by shareholders who did not accept the Offer under the compulsory
  acquisition provisions of the Companies Act (Québec). A motion will be
  filed with the Superior Court of Québec for approval of the Notice of
  Compulsory Acquisition.

Hydrogen Peroxides antitrust
  casesIn 2006, the company entered
  into a plea agreement with the US Department of Justice resolving its investigation
  of alleged antitrust violations in the hydrogen peroxides business, pursuant
  to which the company was sentenced by the US Federal Court for the Northern
  District of California on May 17, 2006, to pay a fine of USD 32 million. In
  addition, in April of 2006, the company was informed by the EU Commission on
  its decision to fine the company for alleged violations of the EU competition
  law rules in hydrogen peroxides, imposing a fine of EUR 25 million. The company
  will file an appeal against this decision.

Item
  9. THE OFFER AND LISTING

A. OFFER AND LISTING
  DETAILS

The tables below sets forth
  the high and low sales prices for Akzo Nobel common shares on the EURONEXT stock
  exchange in Amsterdam during the periods indicated and for the ADSs on NASDAQ/NMS.
  One ADS represents one Akzo Nobel common share.

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|                    |            |                            |  |                                 |  |       |  |       | 
|------------------- | ---------- | -------------------------- |  | ------------------------------- |  | ----- |  | ----- | 
|                    |            | Amsterdam                  |  | NASDAQ/NMS                      | 
|                    |            | High                       |  | Low                             |  | High  |  | Low   | 
|                    |            | In
        euros per share |  | In
        U.S. dollars per ADS | 
|                    |            |                            |  |                                 |  |       |  |       | 
|2001                |            | 57.85                      |  | 33.73                           |  | 54.50 |  | 31.00 | 
|2002                |            | 54.50                      |  | 27.25                           |  | 47.30 |  | 27.56 | 
|2003                |            | 32.44                      |  | 16.00                           |  | 38.67 |  | 18.12 | 
|2004                |            | 33.79                      |  | 24.87                           |  | 43.75 |  | 30.88 | 
|2005                |            | 40.18                      |  | 30.82                           |  |       |  |       | 
|                    |            |                            |  |                                 |  |       |  |       | 
|2004                | 1stquarter | 33.79                      |  | 28.05                           |  | 42.66 |  | 34.87 | 
|                    | 2ndquarter | 32.30                      |  | 27.85                           |  | 38.05 |  | 33.59 | 
|                    | 3rdquarter | 30.62                      |  | 24.87                           |  | 37.33 |  | 30.88 | 
|                    | 4thquarter | 32.68                      |  | 27.92                           |  | 43.75 |  | 34.88 | 
|2005                | 1stquarter | 35.54                      |  | 30.96                           |  | 46.16 |  | 39.56 | 
|                    | 2ndquarter | 36.28                      |  | 30.82                           |  | 46.84 |  | 38.96 | 
|                    | 3rdquarter | 36.40                      |  | 32.23                           |  | 43.84 |  | 39.33 | 
|                    | 4thquarter | 40.18                      |  | 34.65                           |  | 47.16 |  | 42.25 | 
|                    |            |                            |  |                                 |  |       |  |       | 
|December
      2005 |            | 40.18                      |  | 37.86                           |  | 47.16 |  | 44.63 | 
|January
      2006  |            | 40.15                      |  | 38.30                           |  | 48.49 |  | 46.46 | 
|February
      2006 |            | 44.08                      |  | 39.71                           |  | 52.69 |  | 47.31 | 
|March
      2006    |            | 45.60                      |  | 41.20                           |  | 54.72 |  | 48.79 | 
|April
      2006    |            | 49.41                      |  | 42.91                           |  | 59.34 |  | 52.57 | 
|May
      2006      |            | 46.90                      |  | 40.61                           |  | 59.55 |  | 52.83 | 
|                    |            |                            |  |                                 |  |       |  |       | 

B. PLAN OF DISTRIBUTION

Not applicable.

C. MARKETS

As of May 31, 2006, the
  Akzo Nobel common shares were listed on the following stock exchanges:

|The Netherlands:          | Euronext
      Amsterdam                       
|------------------------- | -----------------------------------------------
|United States of America: | NASDAQ/NMS, as American
      Depositary Shares

The Euronext stock exchange
  in Amsterdam is the principal trading market for Akzo Nobel common shares.

D. SELLING SHAREHOLDERS

Not applicable.

E. DILUTION

Not applicable.

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105

F.
  EXPENSES OF THE ISSUE

Not applicable

Item
  10. ADDITIONAL INFORMATION

A.
  SHARE CAPITAL

Not applicable.

B.MEMORANDUM
  AND ARTICLES OF ASSOCIATION

The following description
  sets out certain information concerning the companys common shares and
  summarizes certain provisions of the companys Articles of Association
  (the Articles of Association or the Articles) and the
  Dutch Civil Code1. This summary does not purport to be complete and
  is qualified in its entirety by reference to the companys Articles of
  Association and the Dutch Civil Code.

The Articles of Association
  were amended by resolution of the General Meeting of Shareholders on April 21,
  2005. The amended Articles of Association came into effect on July 1, 2005.
  The amended Articles were furnished on Form 6-K on July 12, 2005.The companys
  authorized capital is EUR 1,600,019,200, which is divided into 48 priority shares
  of EUR 400 each, 600,000,000 common shares of EUR 2 each, and 200,000,000 cumulative
  preferred shares of EUR 2 each, divided into fifty series numbered 1 through
  50 of 4,000,000 shares each. As of December 31, 2005, 48 priority shares and
  286,147,260 common shares were issued and fully paid up.

Principal Objects

Article 3 of the companys
  Articles of Association provides that its objects include participation directly
  or indirectly in partnerships, companies and other legal entities, and to do
  all such things necessary to manage and finance such entities, including the
  holding and administering of patents and other intellectual property rights.

General

All of the issued and outstanding
  common shares are fully paid and nonassessable. Common shares are registered
  shares or bearer shares, at the option of the shareholder concerned. Registered
  shares may be Model I shares (no share certificate issued) or Model II shares
  (share certificate issued without a dividend sheet). A shareholder may also
  elect to replace Model I shares with Model II shares, and vice versa, subject
  to any minimum number of shares established by the Board of Management. Model
  I registered shares may be transferred by delivery to the company of a signed
  deed of transfer in the form made available by the company. Model II registered
  shares may be transferred by delivery of the certificate for such shares, if
  the form on its reverse, of a similar instrument accompanying the certificate,
  has been signed by the transferor.

|1All references to the Articles of Association and the Dutch Civil
      Code are based upon English translations of such documents and are qualified
      by the original Dutch provisions.
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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Voting Rights

At shareholders meetings
  each cumulative preferred share and each common share is entitled to one vote.
  Each priority share is entitled to two hundred votes. Attendance, whether by
  person or by proxy, for purposes of having the right to vote at a general meeting
  is decided upon by the chairman of the general meeting in accordance with the
  Articles of Association. Unless the Articles of Association or the Dutch Civil
  Code stipulate otherwise, all resolutions of the General Meeting of Shareholders
  must be approved by a majority of the votes cast. The chairman of the meeting
  shall decide the manner of voting, including the possibility of voting by acclamation.

The number of members of
  both the Supervisory Board and the Board of Management is determined by the
  General Meeting of Shareholders on the proposal of the Supervisory Board. The
  members of both Boards are appointed and removed from office by the General
  Meeting of Shareholders. Appointment shall be made from a binding list of at
  least two nominees for each vacancy to be filled, such list to be drawn up by
  the meeting of holders of priority shares within three months of the date that
  the Board of Management shall by registered letter have invited the holders
  of priority shares to do so. If the binding list of nominees has not been drawn
  up in time, the General Meeting of Shareholders shall be free to nominate and
  appoint candidates of its own choice. Nominees for any one vacancy may not at
  the same meeting be nominated to fill any other vacancy. The priority shares
  are held by the Foundation Akzo Nobel. The Board of the Foundation consists
  of the members of the Supervisory Board who are not member of the Audit Committee.
  Due to a grandfathering provision of the legislator at the time, these nominations
  cannot be cancelled by the General Meeting of Shareholders. The Board of the
  Foundation has confirmed its intention to use its binding nomination rights
  only in case of exceptional circumstances, such as in the event of a (threatened)
  hostile takeover. This is confirmed in the Articles of Association of the Foundation.

In the event the meeting
  of holders of priority shares has not drawn up a binding list as referred to
  above, the Supervisory Board may make a nonbinding nomination consisting of
  one person. In the event the meeting of holders of priority shares has not drawn
  up a binding list as referred to above, a resolution to appoint a member of
  the Board of Management, not nominated by the Supervisory Board, shall be adopted
  by at least a two-thirds majority of the votes cast, if such majority represents
  more than half the issued share capital.

|                                                                                                                   
|-------------------------------------------------------------------------------------------------------------------
|Unless
      the General Meeting of Shareholders resolves otherwise at the proposal of
      the Supervisory Board:
|a.                                                                                                                 
|b.                                                                                                                 

A member of the Supervisory
  Board may be reappointed with due observance of the provisions mentioned above.

A member of the Board of
  Management shall be appointed for a maximum period of four years, provided however
  that unless such member of the Board of Management has resigned at an earlier
  date, his term of office shall lapse on the day, in the fourth year after the
  year of his appointment, on the last day of the month in which the annual General
  Meeting is held. A member may be reappointed with due observance of the preceding
  sentence. By resolution of the General Meeting of Shareholders, the maximum
  period of four years may be deviated from.

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The General Meeting of Shareholders
  can only adopt a resolution to remove a member of the Supervisory Board or a
  member of the Board of Management from office by a two-thirds majority of the
  votes cast, in the event that less than half of the issued capital is represented,
  unless the Supervisory Board itself proposes the removal.

The General Meeting of Shareholders
  determines the remuneration of the members of the Supervisory Board, which shall
  consist of a fixed amount per annum and which may include a variable remuneration.

The General Meeting of Shareholders
  adopts the remuneration policy for the Board of Management, upon a proposal
  of the Supervisory Board. The remuneration of members of the Board of Management
  will, with due observance of this policy, be determined by the Supervisory Board.
  A proposal regarding the arrangements for the remuneration of the Board of Management
  in the form of shares or rights to acquire shares shall need the approval of
  the General Meeting of Shareholders.

Resolutions of the Board
  of Management with regard to an important change in the identity or character
  of the company or the enterprise shall be subject to the approval of the General
  Meeting of Shareholders.

A proposal to dissolve the
  company requires the prior approval of the Supervisory Board. A resolution to
  dissolve the company may be adopted only by a majority of at least two-thirds
  of the votes cast in a General Meeting of Shareholders at which at least two-thirds
  of the outstanding capital is represented. If the required proportion of outstanding
  capital is not represented at such a meeting, a second meeting may be convened
  for a date within four weeks of the date of the first meeting. At such second
  meeting a resolution to dissolve the company may be adopted by a majority of
  at least two-thirds of the votes cast, regardless of the capital represented.
  In the notice convening such a meeting it shall be stated that and why a resolution
  may be adopted regardless of the part of the capital represented at such meeting.

Amendment of the Articles
  of Association

A proposal to amend the
  Articles of Association requires approval of the Meeting of the Holders of Priority
  Shares. The General Meeting of Shareholders may only resolve upon an amendment
  of these Articles which changes the special rights enjoyed by holders of priority
  shares if such change has been approved by a meeting of holders of priority
  shares. A resolution to give such approval must be adopted by a majority of
  at least three-fourths of the outstanding priority shares. Amendment of the
  Articles of Association to the effect that the special rights accorded holders
  of any series of preferred shares are changed, shall require the prior approval
  of the meeting of holders of that series of preferred shares. The General Meeting
  of Shareholders may only resolve upon an amendment of these Articles which changes
  the special rights enjoyed by holders of priority shares if such change has
  been approved by a meeting of holders of priority shares. A resolution to give
  such approval must be adopted by a majority of at least three-fourths of the
  outstanding priority shares.

General Meeting of Shareholders

|The
      Articles use "persons entitled to attend shareholders meetings" to mean:
|----------------------------------------------------------------------------------
|(a)                                                                               
|(b)                                                                               
|(c)                                                                               

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|The
      Articles use "persons entitled to attend shareholders meetings and to vote
      thereat" to mean:
|------------------------------------------------------------------------------------------------------------
|(a)                                                                                                         
|(b)                                                                                                         

With due observance of the
  mandatory rules of law and of the provisions of the Articles, the Board ofManagement
  may issue further instructions concerning the manner in which shareholders and
  other persons entitled to attend shareholders' meetings may exercise their rights.

Notice of a General Meeting
  of Shareholders shall be given by the Board of Management or by the Supervisory
  Board through advertisements inserted in one or more national daily newspapers
  and in the Official List of Euronext Amsterdam N.V. (the Amsterdam stock exchange).
  The period intervening between the date on which notice of a meeting is given
  and the date fixed for such meeting, not counting either of these dates, shall
  be at least twenty-one days.

One or more persons entitled
  to attend shareholders meetings and vote thereat who alone or jointly
  represent at least one-hundredth part of the total issued capital may submit
  proposals for consideration at the General Meeting of Shareholders, provided
  that such proposals be submitted in writing to the companys office at
  least six weeks in advance of the meeting. However, the Board of Management
  reserves the right not to place proposals from persons mentioned above in this
  paragraph on the agenda if it judges them to be evidently not in the interest
  of the company.

Article 110 of Book 2 of
  the Dutch Civil Code provides that one or more shareholders, who jointly represent
  at least one-tenth of the issued capital may, on their application, be authorized
  by the President of the Court to convene a General Meeting of Shareholders.
  The President of the Court shall disallow the application if it does not appear
  to him that the applicants have previously requested the Board of Management
  and the Supervisory Board in writing, stating the exact matters to be considered,
  to convene a General Meeting of Shareholders and neither the Board of Management
  nor the Supervisory Board, which in this case have equal powers, have taken
  the necessary steps so that the General Meeting of shareholders could be held
  within six weeks after the request. For the application of this article, holders
  of depositary receipts issued for shares with cooperation of the company have
  the same rights as shareholders.

Without prejudice to the
  other provisions of article 47 of the Articles, the members of the Supervisory
  Board and the Board of Management and the persons entitled to attend shareholders
  meetings shall have the right to attend the General Meeting of Shareholders.

Every person entitled to
  attend shareholders' meetings and vote thereat shall have the right to attend
  the General Meeting of Shareholders, either in person or by proxy duly authorized
  in writing, to address the meeting, and to vote thereat:

|(a) | provided
      that he has declared his intention to do so not later than on the day named
      in the convening notice, which day cannot be earlier than seven and not
      later than five clear days before the day of the meeting (not counting either
      the day that he declared his intention or the day of the meeting), at the
      venue specified in that notice; and                                                                                                                                                                                                                                             
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(b) | in the
      case of a holder of bearer shares, a usufructuary with the right to vote,
      or a pledgee with the right to vote, provided that he has deposited the
      document evidencing his right not later than on the day named in the convening
      notice, which day cannot be earlier than seven and not later than five clear
      days before the day of the meeting (not counting the day that the share
      certificates were deposited or the day of the meeting), at the venue specified
      in that notice, against a receipt. This receipt shall also serve as ticket
      of admission to the meeting.

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109

Every person
  entitled to attend shareholders' meetings shall have the right to attend the
  General Meeting of Shareholders, either in person or by proxy duly authorized
  in writing, and to address the meeting. The provisions of the preceding paragraph
  apply mutatis mutandis

The Board of
  Management may decide that those persons shall be considered as entitled to
  attend meetings or attend meetings and vote thereat that, at a record date then
  to be set, have these rights and had their names recorded in a register designated
  by the Board of Management for that purpose, regardless of who would have been
  entitled, at the time of the General Meeting of Shareholders, to attend the
  meeting, or attend the meeting and vote thereat, if a record date as contemplated
  in this paragraph had not been set. The convening notice for the meeting shall
  both state the record date and the manner in which the persons entitled to attend
  the meeting, or attend the meeting and vote thereat, may have their names registered
  and exercise their rights. These provisions shall apply notwithstanding the
  provisions of the second and third paragraphs of this article.

The person
  entitled to attend shareholders meetings who wishes to be represented
  at the General Meeting of Shareholders by a proxy duly authorized in writing
  shall present the proxy statement, or cause it to be presented, at the place
  specified in the convening notice not later than on the date named therein.

Any disputes
  on the question whether a person entitled to attend shareholders meetings
  or a proxy has furnished sufficient proof of his identity to be allowed to attend
  the General Meeting of Shareholders and exercise the right to vote, and on all
  other issues connected with the correct procedure at the meeting, shall be decided
  by the chairman of that meeting. The chairman shall decide on admission to the
  meeting of persons other than those entitled under article 47 of the Articles.

For the purpose
  of article 47 of the Articles, the company has the right to go by the account
  of the keepers of registers as referred to in this article or in the convening
  notice or notices, and by the account of agencies or banks involved in ascertaining
  who is entitled to attend the meeting or attend the meeting and vote thereat.

General Meetings
  of Shareholders are presided over by the Chairman of the Supervisory Board or,
  in his absence, by one of the Deputy Chairmen or, if all Deputy Chairmen are
  absent, by one of the other members of the Supervisory Board. If no member of
  the Supervisory Board is present, the meeting shall choose a chairman.

|The
      annual General Meeting of Shareholders shall be held each year not later
      than June 30. The agenda for this meeting shall at least comprise the following
      items:                                                                                                    
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(a)                                                                                                                                                                                                                                                                                      
|(b)                                                                                                                                                                                                                                                                                      
|(c)                                                                                                                                                                                                                                                                                      
|(d)                                                                                                                                                                                                                                                                                      
|(e)                                                                                                                                                                                                                                                                                      
|These items need not
        be included in the agenda if an extension has been granted of the term
        for the preparation of the annual financial statements and the submission
        of the annual report, or if a proposal for such an extension is part of
        the agenda.

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110

Dividends

With the approval of the
  Supervisory Board, with due observance of the relevant provisions of the Dutch
  Civil Code, and without prejudice to the provisions of paragraph 6 of article
  43 of the Articles of Association, the Board of Management may declare an interim
  dividend to be debited to the profit for the current fiscal year, the additional
  paid-in capital, or any other reserve not being statutory reserves. An interim
  dividend of this kind may be paid wholly or partly in shares and may be restricted
  to one class of shares or one or more series of a particular class.

From the profits as shown
  by the approved statement of income a dividend shall first of all be paid to
  the preferred shares in the manner described in Article 43 of the Articles of
  Association. The Board of Management shall be authorized to determine, with
  the approval of the Supervisory Board, what share of profit remaining shall
  be carried to the reserves. The remaining profit shall be placed at the disposal
  of the General Meeting of Shareholders, with due observance of the following
  sentence, it being provided that no further dividend shall be paid on the preferred
  share. From the remaining profit, distributions shall, to the extent possible,
  be made to the priority shares and then equally to the common shares, all in
  conformity with Article 43 of the Articles of Association. Article 105 of Book
  2 of the Dutch Civil Code provides that distribution of profits to shareholders
  may be made only to the extent that shareholders equity exceeds the sum
  of the amount of the paid and the called up part of the capital and the reserves
  which must be maintained under the law or Articles of Association. Under Dutch
  law, a company may make interim distributions if it demonstrates that it has
  fulfilled the above requirement by providing an interim statement of assets
  and liabilities on a date no earlier than the first day of the third month preceding
  the month in which the resolution to make a distribution is published.

Cash dividends by virtue
  of paragraph 4 of article 20, article 42, or article 43 of the Articles of Association
  that have not been collected within five years of the commencement of the second
  day on which they became due and payable shall revert to the Company.

Liquidation Rights

|The
      assets remaining after payment of all debts and of the liquidation costs
      shall be distributed as follows:
|-------------------------------------------------------------------------------------------------------------------------
|(a)                                                                                                                      
|                                                                                                                         
|                                                                                                                         
|                                                                                                                         
|(b)                                                                                                                      
|(c)                                                                                                                      
|(d)                                                                                                                      

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111


|(e) | any residue left after
      this payment shall be distributed among the holders of common shares, in
      proportion to their individual holdings.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------

Preemptive
  Rights

The company
  may only issue authorized shares in accordance with a proposal of the Board
  of Management and only after the General Meeting of Shareholders has adopted
  a resolution to issue such shares or granted to the Board of Management a general
  empowerment of a duration not greater than five years to issue such shares.
  Such a resolution or empowerment is valid only if it has been approved by every
  group of holders of shares of the same class whose rights the issue will adversely
  affect. The company may not issue shares without the approval of the Supervisory
  Board. Generally, subject to certain limitations and qualifications, Article
  96 (a) of Book 2 of the Dutch Civil Code provides each shareholder a preemptive
  right to acquire any issue of shares pro rata to the aggregate amount of his
  shares. Under the Dutch Civil Code and Article 5 of the Articles of Association,
  such preemptive rights may be restricted or excluded by a resolution of the
  General Meeting of Shareholders.

Capital
  Reduction

The General
  Meeting of Shareholders may, upon the proposal of the Board of Management which
  has been duly approved by the Supervisory Board, resolve to reduce the issued
  capital of the company by canceling shares or by reducing the par value of shares
  by means of amendment of the Articles of Association. Partial repayment may
  be made for all shares or exclusively for common shares, preferred shares or
  any series of preferred shares.

Treasury
  Shares

With due observance
  of Dutch statutory law, the company may acquire for a consideration fully paid-up
  shares in the company's capital, as well as depositary receipts for such shares.
  For any such acquisition the Board of Management shall require the authorization
  of the General Meeting of Shareholders and the approval of the Supervisory Board.
  There is no obligation for neither the company nor for any shareholder to engage
  in such a transaction.

Indemnification
  of Members of the Board of Management and the Supervisory Board

Unless Dutch
  law provides otherwise, the following shall be reimbursed to current and former
  members of the Board of Management and Supervisory Board:

|(i)   | the reasonable
      costs of conducting a defense against claims based on acts or failures to
      act in the exercise of their duties or any other duties currently or previously
      performed by them at the companys request;                                                  
|----- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(ii)  | any damages
      or fines payable by them as a result of an act or failure to act as referred
      to under (i);                                                                                                                                                                      
|(iii) | the reasonable
      costs of appearing in other legal proceedings in which they are involved
      as current or former members of the Board of Management or Supervisory Board,
      with the exception of proceedings primarily aimed at pursuing a claim on
      their own behalf.

There shall be no entitlement
  to reimbursement as referred to above if and to the extent that (i) a Dutch
  court has established in a final and conclusive decision that the act or failure
  to act of the person concerned may be characterized as willful ("opzettelijk"),
  intentionally reckless ("bewust roekeloos"), or seriously culpable ("ernstig
  verwijtbaar") conduct, unless Dutch law provides otherwise or this would, in
  view of the circumstances of the case, be unacceptable according to standards
  of reasonableness and fairness, or (ii) the costs or financial loss of the person
  concerned are covered by an insurance and the insurer has paid out the costs
  or financial loss.

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112

The company may take out
  liability insurance for the benefit of the persons concerned. The Supervisory
  Board may give further implementation to the above with respect to members of
  the Board of Management. The Board of Management may give further implementation
  to the above with respect to members of the Supervisory Board.

Conflict of Interest

Paragraph 3 of article
  30 of the Articles of Association provides that when a member of the Supervisory
  Board has a conflict of interest with respect to a matter to be resolved on
  by the Supervisory Board, he shall not be entitled to vote on that matter. This
  principle is elaborated on in the regulations of the Supervisory Board as referred
  to in paragraph 3 of article 31 of the Articles of Association. In accordance
  with paragraph 5 of article 35 of the Articles of Association, the Board of
  Management has drawn up a set of regulations, including provisions in respect
  of, amongst other things, a conflict of interest between the Company and a member
  of the Board of Management. The provisions in the regulations of the Supervisory
  Board and the regulations of the Board of Management with respect to conflicts
  of interest are in line with the best practice provisions of the Dutch Corporate
  Governance Code.

C. MATERIAL CONTRACTS

On October 20, 2003 the
  company entered into a contract with Pfizer on asenapine. This contract was
  filed as Exhibit 4.a. to the Annual Report on Form 20-F 2003, which is incorporated
  by reference herein. The company has not entered into other material contracts
  (other than those entered into in the ordinary course of business) in the past
  two years. For a description of significant acquisitions and divestments in
  2005 and 2004 reference is made to Note 2 of the Notes to the Consolidated Financial
  Statements in Item 18 Financial Statements.

D. EXCHANGE CONTROLS

There are no legislative
  or other legal provisions currently in force in the Netherlands or arising under
  the Articles of Association restricting remittance to holders of securities
  of the company not resident in the Netherlands. Cash dividends payable in euros
  on the securities of the company may be officially transferred from the Netherlands
  and converted into any other convertible currency.

There are no limitations,
  either by the laws of the Netherlands or in the Articles of Association, which
  affect the rights of non-resident or foreign owners to hold or vote Akzo Nobel
  common shares.

E. TAXATION

Netherlands Taxation

The statements below only
  represent a broad overview of the present Netherlands tax laws and the present
  United States/Netherlands Tax Convention (the Tax Treaty) applicable
  to holding and disposing shares of Akzo Nobel, which are both subject to change,
  and are not to be read as extending by implication to matters not specifically
  referred to herein.

|As
      to individual tax consequences, each investor in the common shares should
      consult his own tax advisor.
|---------------------------------------------------------------------------------------------------------------------





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113

Withholding
  TaxIn general,
  a dividend distributed by a company resident in the Netherlands (such as Akzo
  Nobel) is subject to a withholding tax imposed by the Netherlands at a rate
  of 25 percent. Stock dividends paid out of the companys additional paid-in
  capital recognized for Netherlands tax purposes are not subject to the above
  withholding tax.

Pursuant to
  the provisions of the Tax Treaty, dividends paid by the company to a shareholder
  that is a resident of the United States (as defined in the Tax Treaty), are
  generally eligible for a reduction in the rate of Netherlands withholding tax
  to 15 percent unless (I) the beneficial owner of the dividends carries on business
  in the Netherlands through a permanent establishment, or performs independent
  personal services in the Netherlands from a fixed base, and the common shares
  form part of the business property of such permanent establishment or pertain
  to such fixed base, or (II) the beneficial owner of the dividends is not entitled
  to the benefits of the Tax Treaty under the treaty-shopping provisions
  thereof. Dividends paid to qualifying exempt US pension trusts and certain qualifying
  exempt US organizations are exempt from Netherlands withholding tax under the
  Tax Treaty.

Capital
  GainsCapital gains
  realized upon the sale or exchange of common shares by a non-resident individual
  or by a nonresident corporation of the Netherlands are exempt from Netherlands
  income tax, corporation tax or withholding tax, unless (I) such gains are effectively
  connected with a permanent establishment in the Netherlands of the shareholders
  trade or business or (II) are derived from a direct, indirect or deemed substantial
  holding of common shares of such company (such substantial holding not being
  a business asset).

In general,
  an individual has a substantial holding if he holds either directly or indirectly
  and either independently or jointly with his spouse, at least 5 percent of the
  nominal paid-up capital of any class of shares in a company.

Under the Tax
  Treaty, however, the Netherlands may tax a capital gain derived from a substantial
  holding only if the alienator has been a resident of the Netherlands at any
  time during the five-year period preceding the alienation and at the time of
  the alienation owns, either alone or together with family-related individuals,
  at least 25 percent of any class of shares of such company.

Estate
  and Gift TaxesNo estate,
  inheritance or gift taxes are imposed by the Netherlands on the transfer of
  common shares if, at the time of the death of the shareholder or the transfer
  of the common shares (as the case may be), such shareholder or transferor is
  not a resident of the Netherlands, unless such common shares are attributable
  to a permanent establishment or permanent representative of the shareholder
  in the Netherlands.

|Inheritance
      or gift taxes (as the case may be) are due, however, if such shareholder
      or transferor:
|---------------------------------------------------------------------------------------------------------------
|(a)                                                                                                            
|(b)                                                                                                            

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114

United States Taxation

This section describes
  the material United States federal income tax consequences of owning shares
  or ADSs. It applies to you only if you hold your shares or ADSs as capital assets
  for tax purposes. This section does not apply to you in all respects if you
  are a member of a special class of holders subject to special rules, including:

| | a dealer in securities,                                                                                                  
|- | -------------------------------------------------------------------------------------------------------------------------
| | a trader in securities
      that elects to use a mark-to-market method of accounting for your securities
      holdings,
| | a tax-exempt organization,                                                                                               
| | a life insurance company,                                                                                                
| | a person liable for
      the alternative minimum tax,                                                                   
| | a person that actually
      or constructively owns 10 percent or more of the voting stock of Akzo Nobel,                
| | a person that holds
      shares or ADSs as part of a straddle or a hedging or conversion transaction,
      or          
| | a U.S. holder (as defined
      below) whose functional currency is not the U.S. dollar.                                 

This section is based on
  the Internal Revenue Code of 1986, as amended, its legislative history, existing
  and proposed regulations, published rulings and court decisions, and the laws
  of the Netherlands, all as currently in effect, as well as the Tax Treaty. These
  laws are subject to change, possibly on a retroactive basis. In addition, this
  section is based in part upon the representations of the Depositary and the
  assumption that each obligation in the Deposit Agreement and any related agreement
  will be performed in accordance with its terms.

You are a U.S. holder if
  you are a beneficial owner of shares or ADSs, and you are:

| | a citizen or resident
      of the United States, - a domestic corporation,                                                                                                                                                
|- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | an estate whose income
      is subject to United States federal income tax regardless of its source,
      or                                                                                                             
| | a trust if a United
      States court can exercise primary supervision over the trusts administration
      and one or more United States persons are authorized to control all substantial
      decisions of the trust.

|You
      should consult your own tax advisor regarding the United States federal,
      state and local, Dutch and other tax consequences of owning and disposing
      of shares and ADSs in your particular circumstances.
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

In general, and taking
  into account the earlier assumptions, for United States federal income tax purposes,
  if you hold ADRs evidencing ADSs, you will be treated as the owner of the shares
  represented by those ADRs.Exchanges
  of shares for ADRs, and ADRs for shares generally will not be subject to United
  States federal income tax.

Taxation of DividendsUnder the United States federal
  income tax laws, if you are a U.S. holder, you must include in your gross income
  the gross amount of any dividend paid by Akzo Nobel out of its current or accumulated
  earnings and profits (as determined for United States federal income tax purposes).
  You must include any Netherlands tax withheld from the dividend payment in this
  gross amount even though you do not in fact receive it. The dividend is taxable
  income that you must include in income when you, in the case of shares, or the
  Depositary, in the case of ADSs, receive the dividend, actually or constructively.
  If you are a noncorporate U.S. holder, dividends paid to you in taxable years
  beginning before January 1, 2011 that constitute qualified dividend income will
  be taxable to you at a maximum rate of 15 percent provided that you hold the
  shares or ADSs for more than 60 days during the 121-day period beginning 60
  days before the ex-dividend date and meet other holding period requirements.
  Dividends paid by Akzo Nobel with respect to the shares or ADSs generally will
  be qualified dividend income. The dividend will not be eligible for the dividends-received
  deduction generally allowed to United States corporations in respect of dividends
  received from other United States corporations. The amount

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115

of the dividend
  distribution that you must include in your income as a U.S. holder will be the
  U.S. dollar value of the euro payments made, determined at the spot euro/ U.S.
  dollar rate on the date the dividend distribution is includible in your income,
  regardless of whether the payment is in fact converted into U.S. dollars. Generally,
  any gain or loss resulting from currency exchange fluctuations during the period
  from the date you include the dividend payment in income to the date you convert
  the payment into U.S. dollars will be treated as ordinary income or loss and
  will not be eligible for the special tax rate applicable to qualified dividend
  income. The gain or loss generally will be income or loss from sources within
  the United States for foreign tax credit limitation purposes. Distributions
  in excess of current and accumulated earnings and profits, as determined for
  United States federal income tax purposes, will be treated as a non-taxable
  return of capital to the extent of your basis in the shares or ADSs and thereafter
  as capital gain.

|Subject
      to certain limitations, the Netherlands tax withheld in accordance with
      the Tax Treaty and paid over to the Netherlands will be creditable or deductible
      against your United States federal income tax liability. Under a provision
      of the Netherlands dividend tax act, Akzo Nobel will apply a credit against
      the amount of the dividend tax withheld before remittance to the Netherlands
      tax authorities. This credit is the lesser of:                                                                                                                                                                                                                                                                                                        
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|·                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|·                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|Because
      of this credit, the US tax authorities may take the view that the Netherlands
      withholding tax eligible for credit against United States Federal income
      taxes should be limited accordingly.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|Special
      rules apply in determining the foreign tax credit limitation with respect
      to dividends that are subject to the maximum 15% rate.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|Dividends will be
        income from sources outside the United States, and dividends paid in taxable
        years beginning before January 1, 2007, generally will be "passive income"
        or "financial services income" while dividends paid in taxable years beginning
        before December 31, 2006 generally will be passive or general
        income, which, in either case, is treated separately from other types
        of income for purposes of computing the foreign tax credit allowable to
        you.                                                                                                                                                                                                                                                          
|Taxation
      of Capital GainsIf you are a U.S. holder and you sell or otherwise dispose of your
      shares or ADSs, you will recognize capital gain or loss for United States
      federal income tax purposes equal to the difference between the U.S. dollar
      value of the amount that you realize and your tax basis, determined in U.S.
      dollars, in your shares or ADSs. Capital gain of a noncorporate U.S. holder
      that is recognized in taxable years beginning before January 1, 2011, is
      generally taxed at a maximum rate of 15 percent where the holder has a holding
      period greater than one year. The gain or loss will generally be income
      or loss from sources within the United States for foreign tax credit limitation
      purposes.
|F.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|Not
      applicable.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|G.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|Not
      applicable.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          

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H. DOCUMENTS ON DISPLAY

The documents that are
  exhibits to or incorporated by reference in this Annual Report can be read at
  the U.S. Securities and Exchange Commissions public reference facilities
  at room 1024, 450 Fifth Street, NW, Washington, D.C. 20549. Please call the
  SEC at 1-800-SEC-0330 for further information on the public reference rooms
  and their copy charges. The companys filings since November 4, 2002, are
  also publicly available through the SECs website located at http://www.sec.gov.

Item
  11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Foreign Currency Exchange
  Risk ManagementAkzo Nobel has operations
  in more than 80 countries and, as a result, is exposed to changes in foreign
  currency exchange rates. The company manages most of these exposures on a consolidated
  basis, which allows netting certain exposures to take advantage of any natural
  offsets. To the extent the company enters into forward exchange contracts to
  hedge transaction exposures, these principally arise with respect to assets
  and liabilities or firm commitments related to sales and purchases. The purpose
  of Akzo Nobel's foreign currency hedging activities is to protect the company
  from the risk that the eventual functional currency net cash flows resulting
  from trade transactions would be adversely affected by changes in exchange rates.

At December 31, 2005, the
  following contracts to buy and sell currencies were outstanding, all having
  maturities within one year:

|                    |                       |  |                        |  |                        |   |                         |  
|------------------- | --------------------- |  | ---------------------- |  | ---------------------- | - | ----------------------- | -
|Currency            | Buy
        contracts |  | Sell
        contracts |  | Mark
        to market |   | Mark
        to market  |  
|                    |                       |  |                        |  | value                  |   | value                   |  
|Millions of euros   |                       |  |                        |  | buy
        contracts* |   | sell
        contracts* |  
|                    |                       |  |                        |  |                        |   |                         |  
|                    |                       |  |                        |  |                        |   |                         |  
|U.S. dollar         | 232                   |  | 479                    |  | 2                      |   | 7                       |  
|Canadian dollar     | 61                    |  | 22                     |  | 2                      |   |                        |  
|Pound sterling      | 314                   |  | 38                     |  | (2                     | ) |                        |  
|Swedish krona       | 215                   |  | 156                    |  | (1                     | ) | 4                       |  
|Japanese yen        | 4                     |  | 103                    |  |                       |   |                        |  
|Swiss franc         | 28                    |  |                       |  |                       |   |                        |  
|Australian dollar   | 9                     |  | 28                     |  |                       |   |                        |  
|Norwegian krone     | 120                   |  | 107                    |  | 1                      |   | 2                       |  
|Danish krone        | 5                     |  |                        |  |                       |   |                        |  
|Singapore dollar    | 29                    |  | 19                     |  |                       |   |                        |  
|Mexican pesos       | 1                     |  | 36                     |  |                       |   |                        |  
|Other               | 26                    |  | 61                     |  |                       |   | (3                      | )
|                    |                       |  |                        |  |                        |   |                         |  
|Total               | 1,044                 |  | 1,049                  |  | 2                      |   | 10                      |  
|                    |                       |  |                        |  |                        |   |                         |  
|* Asset/(Liability) |                       |  |                        |  |                        |   |                         |  

The table below summarizes
  information on instruments and transactions that are sensitive to foreign currency
  exchange rates. For debt obligations, the table presents principal cash flows
  and related weighted average interest rates by expected maturity dates.

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|                                            |                              |  |      |  |      |  |      |  |      |  |            |  |       |  |      
|------------------------------------------- | ---------------------------- |  | ---- |  | ---- |  | ---- |  | ---- |  | ---------- |  | ----- |  | -----
|Financial
      Instruments (Balance Sheet) |                              |  |      |  |      |  |      |  |      |  |            |  |       |  |      
|                                            | Expected
      maturity date |  |      |  |      |  |      | 
|Millions of euros                           | 2005                         |  | 2006 |  | 2007 |  | 2008 |  | 2009 |  | Thereafter |  | Total |  | Fair 
|                                            |                              |  |      |  |      |  |      |  |      |  |            |  |       |  | value
|                                            |                              |  |      |  |      |  |      |  |      |  |            |  |       |  |      
|Long-term borrowings
      (USD)            |                              |  |      |  | 86   |  |      |  | 15   |  | 120        |  | 221   |  | 230  
|Average interest rate
      %               |                              |  |      |  | 6.44 |  |      |  | 6.28 |  | 6.54       |  | 6.48  |  |      
|                                           

The company does not use
  financial instruments to hedge the translation risk related to equity and earnings
  of foreign subsidiaries and nonconsolidated companies.

Interest Rate Risk Management

In principle, the company
  manages interest risk by matching the duration of assets and liabilities. As
  a consequence, noncurrent assets and a certain portion of current assets are
  financed with equity, provisions, and long-term borrowings with fixed interest
  rates. The remainder of current assets is financed with short-term debt, including
  floating rate short-term borrowings. In order to achieve an appropriate mix
  of fixed and floating rate exposure within the companys policy, a number
  of swap contracts and forward rate agreements have been entered into.

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118

The table below provides
  information about the companys financial instruments that are sensitive
  to changes in interest rates. For debt obligations the table presents principal
  cash flows and related weighted average interest rates by expected maturity
  dates. For interest rate swaps, the table presents notional amounts and weighted
  average interest rates by expected maturity dates.

|                                                   |                                                                                                      |                                |   |      |   |         |   |      |                        |         |   |                          |    |           |    |          |  |           | 
|-------------------------------------------------- | ---------------------------------------------------------------------------------------------------- | ------------------------------ | - | ---- | - | ------- | - | ---- | ---------------------- | ------- | - | ------------------------ | -- | --------- | -- | -------- |  | --------- | 
|                                                   |                                                                                                      | Expected
        maturity date |   |      |   |         |   |      |                        |         |   |                          |   
|Millions of euros                                  |                                                                                                      |                                |   |      |   |         |   |      |                        |         |   |                          |    | Effective |    |          |  | Estimated | 
|                                                   |                                                                                                      |                                |   |      |   |         |   |      |                        | There-  |   |                          |    | interest  |    | Carrying |  | fair      | 
|                                                   |                                                                                                      | 2007                           |   | 2008 |   | 2009    |   | 2010 |                        | after   |   | Total                    |    | rate      |    | amount   |  | value     | 
|                                                   |                                                                                                      |                                |   |      |   |         |   |      |                        |         |   |                          |    |           |    |          |  |           | 
|Assets                                             |                                                                                                      |                                |   |      |   |         |   |      |                        |         |   |                          |    |           |    |          |  |           | 
|Subordinated loan to
      Akzo Nobel Pension Fund |                                                                                                      |                                |   |      |   |         |   |      |                        | (100    | ) | (100                     | )  | 5.1       |    | 87       |  | 87        | 
|Average interest rate                              |                                                                                                      |                                |   |      |   |         |   |      |                        | 3.5     |   | 3.5                      |    |           |    |          |  |           | 
|                                                   |                                                                                                      |                                |   |      |   |         |   |      |                        |         |   |                          |    |           |    |          |  |           | 
|Liabilities                                        |                                                                                                      |                                |   |      |   |         |   |      |                        |         |   |                          |    |           |    |          |  |           | 
|Long-term borrowings                               |                                                                                                      |                                |   |      |   |         |   |      |                        |         |   |                          |    |           |    |          |  |           | 
|                                                   |                                                                                                      |                                |   |      |   |         |   |      |                        |         |   |                          |    |           |    |          |  |           | 
|Fixed
      Rate (EUR)                             |                                                                                                      |                                |   |      |   |         |   |      |                        |         |   |                          |    |           |    |          |  |           | 
|                                                   |                                                                                                      |                                |   |      |   |         |   |      |                        |         |   |                          |    |           |    |          |  |           | 
|Bond
      loan 98/08                              |                                                                                                      |                                |   | 511  |   |         |   |      |                        |         |   | 511                      |    | 5.49      |    | 513      |  | 539       | 
|Average
      interest rate %                      |                                                                                                      |                                |   | 5.38 |   |         |   |      |                        |         |   | 5.38                     |    |           |    |          |  |           | 
|                                                   |                                                                                                      |                                |   |      |   |         |   |      |                        |         |   |                          |    |           |    |          |  |           | 
|Bond
      loan 02/09                              |                                                                                                      |                                |   |      |   | 1,000   |   |      |                        |         |   | 1,000                    |    | 5.76      |    | 1,064    |  | 1.069     | 
|Average
      interest rate %                      |                                                                                                      |                                |   |      |   | 5.63    |   |      |                        |         |   | 5.63                     |    |           |    |          |  |           | 
|                                                   |                                                                                                      |                                |   |      |   |         |   |      |                        |         |   |                          |    |           |    |          |  |           | 
| Bond
      loan 03/11                         |                                                                                                      |                                |   |      |   |         |   |      |                        | 750     |   | 750                      |    | 4.41      |    | 791      |  | 776       | 
|Average
      interest rate %                      |                                                                                                      |                                |   |      |   |         |   |      |                        | 4.25    |   | 4.25                     |    |           |    |          |  |           | 
|                                                   |                                                                                                      |                                |   |      |   |         |   |      |                        |         |   |                          |    |           |    |          |  |           | 
|                                                   |                                                                                                      |                                |   |      |   |         |   |      |                        |         |   |                          |    |           |    |          |  |           | 
|Fixed
      Rate (USD)                             |                                                                                                      |                                |   |      |   |         |   |      |                        |         |   |                          |    |           |    |          |  |           | 
|                                                   |                                                                                                      |                                |   |      |   |         |   |      |                        |         |   |                          |    |           |    |          |  |           | 
|Bond
      loan 07                                 |                                                                                                      | 86                             |   |      |   |         |   |      |                        |         |   | 86                       |    | 6.24      |    | 86       |  | 88        | 
|Average
      interest rate %                      |                                                                                                      | 6.44                           |   |      |   |         |   |      |                        |         |   | 6.44                     |    |           |    |          |  |           | 
|                                                   |                                                                                                      |                                |   |      |   |         |   |      |                        |         |   |                          |    |           |    |          |  |           | 
|Bond
      loan 09                                 |                                                                                                      |                                |   |      |   | 15      |   |      |                        |         |   | 15                       |    | 6.35      |    | 15       |  | 16        | 
|Average
      interest rate %                      |                                                                                                      |                                |   |      |   | 6.28    |   |      |                        |         |   | 6.28                     |    |           |    |          |  |           | 
|                                                   |                                                                                                      |                                |   |      |   |         |   |      |                        |         |   |                          |    |           |    |          |  |           | 
|Bond
      loan 12                                 |                                                                                                      |                                |   |      |   |         |   |      |                        | 120     |   | 120                      |    | 6.57      |    | 120      |  | 126       | 
|Average
      interest rate %                      |                                                                                                      |                                |   |      |   |         |   |      |                        | 6.54    |   | 6.54                     |    |           |    |          |  |           | 
|                                                   |                                                                                                      |                                |   |      |   |         |   |      |                        |         |   |                          |    |           |    |          |  |           | 
|Interest rate derivatives                          |                                                                                                      |                                |   |      |   |         |   |      |                        |         |   |                          |    |           |    |          |  |           | 
|Interest rate swaps                                |                                                                                                      |                                |   |      |   |         |   |      |                        |         |   |                          |    |           |    |          |  |           | 
|                                                   |                                                                                                      |                                |   |      |   |         |   |      |                        |         |   |                          |    |           |    |          |  |           | 
|Fixed to variable (EUR)                            |                                                                                                      |                                |   |      |   | 500     |   |      |                        |         |   | 500                      |    |           |    | 48       |  | 48        | 
|Average pay rate%                                  |                                                                                                      |                                |   |      |   | Euribor | + | 0.47 |                        |         |   |                          |    |           |    |          |  |           | 
|Average receive rate%                              |                                                                                                      |                                |   |      |   | 5.625   |   |      |                        |         |   |                          |    |           |    |          |  |           | 
|                                                   |                                                                                                      |                                |   |      |   |         |   |      |                        |         |   |                          |    |           |    |          |  |           | 
|Fixed to variable (EUR)                            |                                                                                                      |                                |   |      |   |         |   |      |                        | 450     |   | 450                      |    |           |    | 23       |  | 23        | 
|Average pay rate%                                  |                                                                                                      |                                |   |      |   |         |   |      |                        | Euribor |   | 6 months
        + 0.43  |    |           |    |          | 
|Average receive rate%                              |                                                                                                      |                                |   |      |   |         |   |      |                        | 4.25    |   |                          |    |           |    |          |  |           | 
|                                                   |                                                                                                      |                                |   |      |   |         |   |      |                        |         |   |                          |    |           |    |          |  |           | 
|Fixed to variable (EUR)                            |                                                                                                      |                                |   |      |   |         |   |      |                        | 200     |   | 200                      |    |           |    | 10       |  | 10        | 
|Average pay rate%                                  |                                                                                                      |                                |   |      |   |         |   |      |                        | Euribor |   | 6 months
        + 0.445 |    |           |    |          | 
|Average receive rate%                              |                                                                                                      |                                |   |      |   |         |   |      |                        | 4.25    |   |                          |    |           |    |          |  |           | 
|                                                   |                                                                                                      |                                |   |      |   |         |   |      |                        |         |   |                          |    |           |    |          |  |           | 
|Cross currency swap                                |                                                                                                      |                                |   |      |   |         |   |      |                        |         |   |                          |    |           |    |          |  |           | 
|                                                   |                                                                                                      |                                |   |      |   |         |   |      |                        |         |   |                          |    |           |    |          |  |           | 
|Variable (EUR) to Variable
      (USD)             |                                                                                                      |                                |   |      |   | 250     |   | EUR/ | 223USD                 |         |   |                          | 64 |           | 64 |         
|Average receive rate%                              |                                                                                                      |                                |   |      |   | 250     |   | EUR  | Euribor
        + 0.47 |         |   |                          |    |           |    |         
|Average pay rate%                                  |                                                                                                      |                                |   |      |   | 223     |   | USD  | Libor
        + 0.439  |         |   |                          |    |           |    |         
|Forward rate agreements                            | Fixed interest
      rate on deposits                                                                |                                |   |      |   |        
|                                                   | 
        in a range from 2.06% to 2.64% on EUR 100 million to EUR 300 million maturity
        2006 |                                |  |      |  |        
|                                                   | 
        in a range from 2.34% to 2.47% on EUR 100 million maturity 2007                            |                                |  |      |  |        
|                                                   |                                                                                                      |                                |   |      |   |        

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119

Commodities

In order to hedge the price
  risk of natural gas, the company has entered into swap contracts for the underlying
  fuels, with an average volume per month of 43,600 tons for the period of January
  through December 2006, whereby the price is fixed. The company also concluded
  futures contracts to hedge the price risk attached to the purchase of 2,600
  million m3 of gas, reasonably spread over the period 2006-2008. For
  none of these contracts hedge accounting is applied.

Furthermore, the company
  entered into futures contracts for electricity in order to hedge the price risk
  for the expected use of electricity by certain subsidiaries over the period
  2006-2008, spread in tranches of three months. For these contracts cash flow
  hedge accounting is applied.

The fair value
  of such contracts is as follows:

|                               |                  | 
|------------------------------ | ---------------- | 
|Millions of euros;
      asset | Fair
      value | 
|                               |                  | 
|Electricity futures            | 18               | 
|Petroleum swaps                | 4                | 
|Gas futures                    | 1                | 
|                               |                  | 

Item
  12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES

Not applicable.

PART II

Item
  13. DEFAULTS, DIVIDEND ARREAGES AND DELINQUENCIES

None.

Item
  14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OFPROCEEDS

None.

Item
  15. DISCLOSURE CONTROLS AND PROCEDURES

Akzo Nobel has a Disclosure
  Committee which monitors procedures established by the company and advises the
  Board of Management to ensure adequate and timely disclosure of financial and
  nonfinancial information.

Under the supervision and
  with the participation of the companys management, including the companys
  Chief Executive Officer and Chief Financial Officer, the company has evaluated
  the effectiveness of the design and operation of its disclosure controls and
  procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities
  and Exchange Act of 1934) as of the end of the period covered by this Annual
  Report. Based on that evaluation, the Chief Executive Officer and Chief Financial
  Officer have concluded that these disclosure controls and procedures are effective
  at the reasonable assurance level.

In designing and evaluating
  our disclosure controls and procedures, our management, including the Chief
  Executive Officer and Chief Financial Officer, recognized that any controls
  and procedures, no matter how well

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120

designed and operated,
  can provide only reasonable assurance of achieving the desired control objectives,
  and the Board of Management necessarily was required to apply its judgment in
  evaluating the cost-benefit relationship of possible controls and procedures.
  Because of the inherent limitations in all control systems, no evaluation of
  controls can provide absolute assurance that all control issues and instances
  of fraud, if any, within the company have been detected.

There were no significant
  changes in the companys internal controls over financial reporting during
  the period covered by this Annual Report that have materially affected, or are
  reasonably likely to materially affect, the companys internal controls
  over financial reporting. The company is continuously working toward improvement
  of its process and procedures regarding its financial reporting and their assessment.

Item
  16A. AUDIT COMMITTEE FINANCIAL EXPERT

The Supervisory Board has
  determined, that its member Dolf van den Brink meets the requirements of an
  Audit Committee Financial Expert as defined in Item 16A of Form 20-F. Mr. van
  den Brink is independent for purposes of the NASDAQ listing requirements.

Item
  16B. CODE OF ETHICS

The company recognizes
  that its businesses have responsibilities within the communities in which they
  operate. The company has a Financial Code of Ethics which applies to the Chief
  Executive Officer, the Chief Financial Officer, the Senior Vice President Finance,
  the Director Corporate Control, the Director Corporate Tax, the Director Corporate
  Internal Audit, the Group Controllers, the Business Unit Controllers, the country
  controllers, and certain other senior financial officers specifically designated
  for the purpose.

The company has published
  its Financial Code of Ethics on its website (www.akzonobel.com).

No changes have been made
  to the Financial Code of Ethics since its adoption and no waivers have been
  granted therefrom to the officers mentioned above.

Akzo Nobel is subject to
  the Corporate Governance Code 2004 of The Netherlands and the CorporateGovernance
  Rules of NASDAQ, both of which require that the company has a code of conduct.
  The companys Business Principles, which apply to all employees including
  the members of the Board of Management, complies with the Corporate Governance
  Code of the Netherlands and serves as the code of conduct for the purpose of
  the Corporate Governance Rules of NASDAQ. The company has established several
  procedures to arrange for dissemination of the Business Principles and training
  company-wide. It also has established procedures to monitor compliance with
  the Business Principles in general and certain of its provisions in particular
  and to provide for enforcement of the Business Principles.

Item
  16C. PRINCIPAL ACCOUNTANT FEE AND SERVICES

The external auditor is
  appointed by the General Meeting of Shareholders on the proposal of the Supervisory
  Board. The appointment is for an indefinite period of time with a review every
  three years by the Audit Committee. The Audit Committee advises the Supervisory
  Board, which will communicate the results of this assessment to the General
  Meeting of Shareholders. The lead auditor in charge of the Akzo Nobel account
  will be changed every five years.

The Audit Committee has
  been granted direct responsibility for compensation and oversight of the auditors
  and the services they provide to the company. The Committee formally evaluates
  the independence of the external

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121

auditor and preapproves
  the fees for all audit, audit-related, and permitted nonaudit services rendered
  by the external auditor. The external auditors are prohibited from providing
  certain non-audit services to the company. In order to anchor this in the procedures
  of the company, the Audit Committee adopted the Akzo Nobel Auditors Independence
  Policy and the related Akzo Nobel Audit Committee Preapproval Policy
  on Audit, Audit-Related, and Nonaudit Services. The Audit Committee has
  adopted a policy on auditor independence which governs the external auditors
  appointment, rotation, responsibilities, services rendered, compensation, and
  oversight. These policies can be found on the companys website (www.akzonobel.com).

The aggregate fees billed
  by KPMG for professional services rendered for the years 2005 and 2004 were
  as follows:

|                   |      |  |      | 
|------------------ | ---- |  | ---- | 
|Millions of euros  | 2005 |  | 2004 | 
|                   |      |  |      | 
|                   |      |  |      | 
|Audit fees         | 8.8  |  | 7.8  | 
|Audit-related fees | 2.9  |  | 2.8  | 
|Tax fees           | 1.0  |  | 2.5  | 
|Other fees         | 0.1  |  | 0.5  | 
|                   |      |  |      | 
|Total              | 12.8 |  | 13.6 | 
|                   |      |  |      | 

Audit fees consist of fees
  for the examination and audit of both the consolidated financial statements
  and statutory financial statements of certain subsidiaries of Akzo Nobel N.V.
  Audit-related fees primarily consist of fees in connection with audits of acquisitions
  and divestments and accounting consultations. Tax fees mainly relate to tax
  compliance and expatriate tax services. Other fees mainly comprise IT review
  and other permitted consultancy services.

All services rendered by
  KPMG have been approved by the Audit Committee.

Item
  16D. EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES

None. Our Supervisory Board
  has determined that all members of the Audit Committee satisfy the independence
  requirements of Rule 10A-3 of the U.S. Securities and Exchange Act of 1934,
  as amended.

Item
  16E. PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS

During 2005, no Akzo Nobel
  N.V. common shares were repurchased.

PART III

Item
  17. FINANCIAL STATEMENTS

Akzo Nobel has responded
  to Item 18.

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122

Item
  18. FINANCIAL STATEMENTS

|INDEX TO
      FINANCIAL STATEMENTS  | Page                                                                                                           |    
|------------------------------------ | -------------------------------------------------------------------------------------------------------------- | ---
|                                     |                                                                                                                |    
|Report
      of independent auditors | 123                                                                                                            |    
|                                     |                                                                                                                |    
|Financial
      Statements:          |                                                                                                                |    
|                                    | Summary
      of significant accounting policies used in preparing the consolidated financial
      statements | 124
|                                    | Consolidated
      balance sheets at December 31, 2005 and 2004                                                | 132
|                                    | Consolidated
      statements of income for the years ended December 31, 2005 and 2004                         | 133
|                                    | Consolidated
      statements of cash flows for the years ended December 31, 2005 and 2004                     | 134
|                                    | Consolidated
      Statement of changes in equity for the years ended December 31, 2005 and
      2004         | 135
|                                    | Notes
      to the consolidated financial statements                                                           | 136
|                                     |                                                                                                                |    
|FINANCIAL
      STATEMENT SCHEDULE1  |                                                                                                                |    
|                                     |                                                                                                                |    
|II                                   | Valuation
      and qualifying accounts                                                                        | 202

1 Schedules
  other than the one listed under this heading are omitted for the reason that
  they are not required or are not applicable.

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123

REPORT
  OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Management
  of Akzo Nobel N.V. and Supervisory Board:

We have audited the consolidated
  financial statements of Akzo Nobel N.V. and subsidiaries as listed in the accompanying
  index. In connection with our audits of the consolidated financial statements,
  we have also audited the financial statement schedule as listed in the accompanying
  index. These consolidated financial statements and the financial statement schedule
  are the responsibility of the company's management. Our responsibility is to
  express an opinion on these consolidated financial statements and the financial
  statement schedule based on our audits.

We conducted our audits
  in accordance with the standards of the Public Company Accounting Oversight
  Board (United States of America). 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 Akzo Nobel N.V. and subsidiaries at December 31, 2005
  and 2004, and the results of their operations and their cash flows for each
  of the years in the two-year period ended December 31, 2005, in conformity with
  International Financial Reporting Standards as adopted by the EU. Also in our
  opinion, the related financial statement schedule, when considered in relation
  to the basic consolidated financial statements taken as a whole, presents fairly,
  in all material respects, the information set forth therein.

International Financial
  Reporting Standards as adopted by the EU 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 23 to the consolidated financial statements.

Arnhem, the NetherlandsFebruary 6, 2006, except
  to Note 25, which is as of June 22, 2006

KPMG Accountants N.V.

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124

SUMMARY
  OF SIGNIFICANT ACCOUNTING POLICIES USED IN PREPARING THE CONSOLIDATED FINANCIAL
  STATEMENTS

General

The consolidated financial
  statements of Akzo Nobel N.V., as from January 1, 2005, have been prepared in
  accordance with International Financial Reporting Standards (IFRS) as adopted
  by the European Union, and also comply with the financial reporting requirements
  included in section 9 of Book 2 of the Netherlands Civil Code, as far as applicable.

The financial statements
  as prepared by the Board of Management and as presented in this report are subject
  to approval by the General Meeting of Shareholders.

The accounting policies
  as set out below have been applied in preparing the financial statements for
  the year ended December 31, 2005, the comparative information presented in these
  financial statements for the year ended December 31, 2004 and in the preparation
  of the IFRS opening balance sheet at January 1, 2004 (the date of transition
  to IFRS), with the exception of IAS 32 and 39 for financial instruments, which
  have been applied prospectively as from January 1, 2005. An explanation on how
  the transition to IFRS has affected the reporting is provided in Note 24.

Consolidation

The consolidated financial
  statements include the accounts of Akzo Nobel N.V. and its subsidiaries. Subsidiaries
  are companies over which Akzo Nobel N.V. directly and/or indirectly has control.
  In assessing control, potential voting rights that are presently exercisable
  or convertible are taken into account. The financial statements of subsidiaries
  are included in the consolidated financial statements from the date that control
  commences until the date that control ceases. Minority interest in equity and
  earnings is shown separately. Transactions between consolidated companies are
  eliminated.

Valuation

The principles of valuation
  and determination of income used in the consolidated financial statements are
  based on historical costs, unless stated otherwise in the principles of valuation
  of assets and liabilities.

Translation of Foreign
  Currencies

In the balance sheet, amounts
  in foreign currencies are translated into euros at year-end exchange rates.
  Foreign exchange differences are included in income.

Statements of income in
  foreign currencies are translated into euros at average exchange rates. Foreign
  exchange differences resulting from translation into euros of shareholders
  equities and of intercompany loans of a permanent nature with respect to subsidiaries
  outside the euro region are recorded as a separate component within shareholders
  equity. Upon disposal or liquidation of a foreign entity these cumulative translation
  adjustments are recognized as income or expense.

Transactions in foreign
  currencies are translated at the foreign exchange rate ruling at the date of
  the transaction.

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125

Before being consolidated,
  the financial statements of subsidiaries established in hyperinflationary countries
  are adjusted for the effects of changing prices.

Principles of Valuation
  of Assets and Liabilities

Property, Plant and
  EquipmentProperty, plant and equipment
  are valued at cost less accumulated depreciation and impairment charges. Costs
  include the financing charges of capital investment projects under construction.

Government grants to compensate
  for the cost of an asset are deducted from the cost of the related asset.

Depreciation is computed
  by the straight-line method based on the estimated useful life. In the majority
  of cases the useful life of plant equipment and machinery is 10 years, and for
  buildings ranges from 20 to 30 years. Land is not depreciated. Residual value
  is in the majority of cases assumed to be insignificant. In cases where the
  book value so computed exceeds the recoverable amount an impairment charge is
  recognized in income.

Depreciation methods, useful
  lives and residual values are reassessed annually.

Gains and losses on the
  sale of property, plant and equipment are included in income.

Parts of property, plant
  and equipment that have different useful lives are accounted for as separate
  items of property, plant and equipment.

Cost of major maintenance
  activities are capitalized as a separate component of property, plant and equipment,
  and depreciated over the estimated useful life. Maintenance costs which cannot
  be separately defined as a component of property, plant and equipment are expensed
  in the period in which they occur.

Financial leases at inception
  are recognized in the balance sheet at the lower of the assets fair value
  or the present value of the minimum lease payments, and are amortized on a straight-line
  basis over the shorter of the lease-term or the useful life of the asset. If
  the book value so computed exceeds the recoverable amount of the assets an impairment
  charge is recognized. Operational leases are not capitalized. Costs related
  to these contracts are expensed ratably over the term of the lease.

Intangible AssetsIntangible assets with a
  finite life, such as licenses, know-how and intellectual property rights, are
  capitalized at historic cost and amortized on a straight-line basis over the
  estimated useful life, which in the majority of cases ranges from 10 to 15 years.
  Development costs are capitalized if it is probable that sufficient future economic
  benefits will be generated by the intangible asset arising from development,
  and amortized on a straight-line basis over the estimated useful life, which
  in the majority of cases is 5 years. In cases where the book value so computed
  exceeds the recoverable amount an impairment charge is recognized in income.

Intangible assets with
  an indefinite life, which presently only include purchased goodwill, are not
  amortized, but tested for impairment annually. In cases where the book value
  of the intangibles exceeds the recoverable amount an impairment charge is recognized
  in income. Goodwill is determined as the difference between the fair value of
  the consideration paid for new interests and the fair value of the purchased
  net assets at the date of acquisition. Goodwill related to a nonconsolidated
  company is included in the carrying amount of that nonconsolidated company.

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Financial Noncurrent
  AssetsInterests in companies where
  Akzo Nobel can exercise significant influence but not control, are treated as
  nonconsolidated companies and are stated at the amount of Akzo Nobels
  share in shareholders equity from the date that significant influence
  commences until the date that significant influence ceases. The
  calculation of shareholders equity is based as much as possible on the
  Akzo Nobel principles of valuation. When the share of losses exceeds the interest
  in the company, the carrying amount is reduced to nil and recognition of further
  losses is discontinued, unless Akzo Nobel has incurred legal or constructive
  obligations on behalf of the company.

Jointly controlled companies
  are equity accounted for as nonconsolidated companies.

Unrealized gains arising
  from transactions with nonconsolidated companies are eliminated to the extent
  of Akzo Nobels interest in the company and are eliminated against the
  investment in the nonconsolidated company. Unrealized losses are eliminated
  in the same way as unrealized gains, but only to the extent that there is no
  evidence of impairment.

Loans to nonconsolidated
  companies are carried at amortized cost less impairment losses.

For the valuation of deferred
  tax assets, see Deferred Taxes.

Other financial noncurrent
  assets classified as held to maturity are recognized at amortized cost less
  impairment losses, while other financial noncurrent assets classified as available
  for sale are stated at fair value, with gains and losses resulting from changes
  in the fair value recognized directly in equity and impairment losses recognized
  in the statement of income. Upon derecognition of financial noncurrent assets
  classified as available for sale, the cumulative gain or loss previously recognized
  directly in equity is recognized in the statement of income.

InventoriesInventories are stated at
  the lower of cost or net realizable value. Costs of inventories comprise all
  costs of purchase, costs of conversion and other costs incurred in bringing
  the inventories to the present location and condition. The costs of conversion
  of inventories include direct labor and fixed and variable production overheads,
  and takes into account the stage of completion. Net realizable value is the
  estimated selling price in the ordinary course of business, less the estimated
  costs of completion and selling expenses.

ReceivablesTrade and other receivables
  are stated at their cost less impairment losses. Long-term receivables are discounted
  to their net present value.

Cash and Cash EquivalentsCash and cash equivalents
  include all cash balances and short-term highly liquid investments that are
  directly convertible into known amounts of cash. These are stated at fair value.

Assets and Liabilities
  Classified as Held for SaleAssets and liabilities are
  classified as held for sale if it is highly probable that the carrying amount
  will be recovered through a sale transaction rather than through continuing
  use. When reclassifying assets as held for sale, the assets are recognized at
  the lower of the carrying amount or fair value less selling costs. Assets held
  for sale are not depreciated but tested for impairment. Impairment losses on
  assets and liabilities held for sale are recognized in the statement of income.

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Shareholders
  EquityThe consideration paid for
  repurchased shares, including directly attributable cost, is deducted from equity.

Dividends are recognized
  as a liability in the period in which they are declared.

ProvisionsProvisions are recorded when
  a present legal or constructive obligation as a result of a past event exists,
  and it is probable that an outflow of economic benefits is required to settle
  the obligation. Provisions are stated at net present value, taking the timing
  of cash outflows into account. The expected future cash outflows are discounted
  at appropriate pre-tax interest rates, reflecting current market assessments
  of the time value of money and, if applicable, the risks specific to the liability.
  The increase of provisions as a result of the passage of time is recognized
  in the statement of income under Financing Charges.

Provisions for restructuring
  are recognized when a detailed and formal restructuring plan has been approved,
  and the restructuring has either commenced or has been announced publicly. Future
  operating costs are not provided for.

Pensions and Other
  Postretirement BenefitsDefined Contribution Plans

Obligations for contributions
  to defined contribution plans are recognized in the statement of income as incurred.

Defined Benefit PlansMost of the companys
  defined benefit pension plans are funded with plan assets that have been segregated
  in a trust or foundation. For plans which are not separately funded, the company
  recognizes a provision.Valuations
  of both funded and unfunded plans are carried out by independent actuaries based
  on the projected unit credit method. Pension costs primarily represent the increase
  in the actuarial present value of the obligation for projected pension benefits
  based on employee service during the year and the interest on this obligation
  in respect of employee service in previous years, net of the expected return
  on plan assets.

In certain countries the
  company also provides postretirement benefits other than pensions to its employees.
  These plans are generally not funded. Valuations of the obligations under these
  plans are carried out by independent actuaries based on the projected unit credit
  method. The costs relating to such plans primarily consist of the present value
  of the benefits attributed on an equal basis to each year of service and the
  interest on this obligation in respect of employee service in previous years.

Actuarial gains and losses
  that arise after January 1, 2004, in calculating the companys obligation
  in respect of a plan, are recognized to the extent that any cumulative unrecognized
  actuarial gain or loss exceeds ten percent of the greater of the present value
  of the defined benefit obligation and the fair value of plan assets. That portion
  is recognized in the statement of income over the expected average remaining
  working lives of the employees participating in the plan. Otherwise, actuarial
  gains or losses are not recognized.

When the benefits of a
  plan are improved, the portion of the increased benefit relating to past service
  by employees is recognized as an expense in the statement of income on a straight-line
  basis over the average period until the benefits become vested. To the extent
  that the benefits vest immediately, the expense is recognized immediately in
  the statement of income.

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128

Other Long-Term Employee
  BenefitsOther long-term employee
  benefits include long-service or sabbatical leave, jubilee or other long-service
  benefits and other employee benefits payable more than 12 months after the related
  service rendered. These provisions are stated at present value.

Deferred TaxesDeferred tax assets and liabilities
  are based on temporary differences between the valuation of assets and liabilities
  for accounting purposes and the valuation for tax purposes. Measurement of deferred
  tax assets and liabilities is based upon the enacted or substantially enacted
  tax rates expected to apply to taxable income in the years in which those timing
  differences are expected to be reversed. Deferred taxes are not discounted.
  The tax effect on the elimination of intercompany profit in inventories is based
  on the tax rate of the country of the company receiving the goods.

Deferred tax assets, including
  assets arising from losses carried forward, are recognized if it is probable
  that the asset will be realized. Nonrefundable dividend taxes are taken into
  account in the determination of provisions for deferred taxes to the extent
  of earnings expected to be distributed by affiliated companies. If separate
  tax rates exist for distributed and undistributed profits, the current and deferred
  taxes are measured at the tax rate applicable to undistributed profits. The
  income tax consequences of dividends are recognized when a liability to pay
  the dividend is recognized. Deferred taxes are not provided for the following
  temporary differences: the initial recognition of goodwill, the initial recognition
  of assets or liabilities that affect neither accounting nor taxable profit,
  and differences relating to investments in subsidiaries to the extent that they
  will probably not reverse in the foreseeable future.

Stock-Based CompensationThe stock option plan allows
  certain employees of the company to acquire Akzo Nobel N.V. common shares. These
  options generally vest if the employee stays with the company during an uninterrupted
  three-year period. The company also has a Performance Share Plan, under which
  shares are conditionally granted to certain employees. The actual number of
  shares which the employees will receive, depends on the employee having stayed
  with the company during an uninterrupted three-year period and the companys
  Total Shareholder Return (TSR) performance over a three-year period, compared
  with TSR performance of a specified peer group.

The fair value of the options
  or performance shares granted is recognized as an employee expense with a corresponding
  increase in shareholders equity. The fair value is measured at grant date
  and spread over the period during which the employees become unconditionally
  entitled to the options or performance shares. The fair value of the options
  and performance shares granted is measured using a binomial lattice model, taking
  into account the terms and conditions upon which the options and performance
  shares were granted. For the performance shares this also includes the market
  conditions expected to impact the companys TSR performance in relation
  to the selected peers. The amount recognized as an expense is adjusted to reflect
  the actual number of options or performance shares that vest, except where forfeiture
  or extra vesting of performance shares is only due to the actual TSR performance
  differing from the performance anticipated at the grant of the performance shares.

Long-Term Borrowings
  and Short-Term DebtLong-term borrowings are
  stated at amortized cost, applying the effective interest rate method unless
  fair value interest rate hedging is applied. In that case a synthetic bond is
  presented, which is measured at fair value, as an adjustment of the underlying
  bond which is stated at amortized cost. Short-term debt is stated at fair value.

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Trade and Other PayablesTrade and
  other payables are stated at fair value.

Derivative Financial
  InstrumentsDerivative
  financial instruments include forward exchange contracts, interest rate derivatives
  and commodity contracts, as well as embedded derivatives included in normal
  business contracts.

2005Forward exchange
  and commodity contracts are measured at fair value in the balance sheet, with
  changes in the fair value recognized in income, unless cash flow hedge accounting
  is applied. In the latter case, the effective part of the fair value change
  is deferred in shareholders equity until the hedged transactions have
  been reflected in the accounts. The fair values are recognized in the balance
  sheet under Trade and Other Receivables, or under Trade and Other Payables.

For the interest rate derivates
  the company in principle applies fair value hedge accounting. The changes in
  fair value are recognized in the statement of income, where the effective part
  is offset by the fair value change of the underlying bond. Such amounts are
  included in Financing Charges. The fair value of the derivatives is recognized
  in the balance sheet under Other Financial Noncurrent Assets.

2004Results on
  forward exchange contracts are recognized in income to offset the foreign exchange
  differences on the related hedged items. Exchange differences on anticipatory
  hedges of firm commitments regarding sales and purchases are deferred on the
  balance sheet until the hedged transactions have been reflected in the accounts.
  The capitalized or accrued amounts are included in receivables or current liabilities.

Principles of Determination
  of IncomeThe determination
  of income is closely associated with the valuation of assets and liabilities.
  In addition, the following principles are observed in the preparation of the
  statement of income:

RevenuesRevenues are
  defined as the revenue from the sale and delivery of goods and services and
  royalty income, net of rebates, discounts and similar allowances, and net of
  sales tax. Revenue from sales of goods is recognized when the significant risks
  and rewards have been transferred to a third party. Service revenues are recognized
  as services are rendered. No revenue is recognized if there are significant
  uncertainties regarding the recovery of the consideration due, associated cost,
  or the possible return of goods, or if management keeps continuing involvement
  with the goods.

Costs of SalesCosts of sales
  comprise the manufacturing costs of the goods sold and delivered, and any inventory
  write-downs to lower net realizable value. Manufacturing costs include such
  items as:

| | the costs
      of raw materials and supplies, energy, and other materials;           
|- | --------------------------------------------------------------------------------------
| | depreciation
      and the costs of maintenance of the assets used in production;     
| | salaries,
      wages, and social charges for the personnel involved in manufacturing.

The costs of services and
  royalties, generally, are included in the functional cost lines, as applicable:
  Selling Expenses, Research and Development Expenses, or General and Administrative
  Expenses.



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130

Research Costs and
  Preparation and Start-up ExpensesResearch costs and preparation
  and start-up expenses are charged to income as incurred.

Government GrantsGovernment grants related
  to cost are recognized in the statement of income in the same periods as the
  related cost to be compensated and are deducted from the relevant cost. For
  government grants related to assets, see the accounting policy for Property,
  Plant and Equipment.

Financing ChargesFinancing charges comprise
  the interest payable on borrowings, calculated using the effective interest
  method. Also the interest expense component of finance lease payments and the
  increase of provisions as a result of the passage of time are recognized under
  Financing Charges. Entries in the statement of income related to interest rate
  derivatives are also recognized under Financing Charges.

Interest income is recognized
  under Financing Charges, using the effective interest method.

Taxes on IncomeTaxes on income comprise
  both current and deferred taxes, including effects of changes in tax rates.

Income tax is recognized
  in the statement of income, unless it relates to items recognized directly in
  equity or deferred tax recognized in a purchase price allocation.

Earnings from Nonconsolidated
  CompaniesIncome from nonconsolidated
  companies consists of Akzo Nobels share in earnings of these companies
  and interest on loans granted to them, with an allowance being made for taxes
  relating to these items.

ImpairmentsThe carrying amounts of the
  assets, inventories and deferred tax assets are reviewed at balance sheet date
  to determine whether there is any indication of impairment. If such indication
  exists, the recoverable amount of the asset is estimated. For goodwill and other
  intangible assets with an indefinite useful life the recoverable amount is estimated
  at each balance sheet date. The recoverable amount of an asset or its cash generating
  unit is the greater of the net selling price and the value in use, whereby estimated
  future cash flows are discounted to their present value.

The discount rate used
  reflects current market assessments of the time value of money and, if appropriate,
  the risks specific to the assets.

An impairment loss is recognized
  whenever the carrying amount of an asset or its cash generating unit exceeds
  its recoverable amount. Impairment losses are recognized in the statement of
  income.

Emission RightsEmission rights granted by
  the government are recognized at cost, which is generally nil. A provision is
  recorded if the actual emission of pollutants is higher than the emission rights
  received.

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131

Use of EstimatesThe preparation of the financial
  statements in conformity with IFRS requires management to make judgments, estimates
  and assumptions that affect amounts reported in the consolidated financial statements.
  The estimates and assumptions are based on experience and various other factors
  that are believed to be reasonable under the circumstances, and are used to
  judge the carrying values of assets and liabilities that are not readily apparent
  from other sources. Actual results may differ from those estimates. The estimates
  and underlying assumptions are reviewed on an ongoing basis.

Revisions to accounting
  estimates are recognized in the period in which the estimate is revised, or
  in the revision and future periods if the changed estimates affect both current
  and future periods.

Segment ReportingThe primary segment reporting
  is based on the business segments of the company, whereby the business segments
  are engaged in providing products or services which are subject to risks and
  rewards which differ from the risks and rewards of the other segments. In determining
  whether products and services are related, aspects such as the nature of the
  products or services, the nature of the production processes, and the type or
  class of customers for the products or services are taken into consideration.
  Segments reported are Organon, Intervet, Coatings, and Chemicals, which also
  reflects the management structure of the company. The secondary segment reporting
  is based on the geographical areas in which the company operates, whereby economic
  environments with comparable risks and returns are grouped together. Intersegment
  pricing is determined on an arms length basis.

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|CONSOLIDATED
      BALANCE SHEETS                                                          |                    |   |        |  
|------------------------------------------------------------------------------------------ | ------------------ | - | ------ | -
|                                                                                           |                    |   |        |  
|Before allocation of
      profit                                                          | December
      31, |  
|Millions of euros,
      except per share amounts                                          | 2005               |   | 2004   |  
|                                                                                           |                    |   |        |  
|Assets                                                                                     |                    |   |        |  
|Current assets                                                                             |                    |   |        |  
|Cash
      and cash equivalents (Note 3)                                                   | 1,486              |   | 1,811  |  
|Receivables
      (Note 4)                                                                 | 2,596              |   | 2,400  |  
|Accounts
      receivable from nonconsolidated companies                                   | 63                 |   | 33     |  
|Income
      tax receivable                                                                | 137                |   | 210    |  
|Inventories
      (Note 5)                                                                 | 1,987              |   | 1,978  |  
|Assets
      held for sale (Note 6)                                                        | 322                |   |        |  
|Prepaid
      expenses                                                                     | 114                |   | 118    |  
|                                                                                           |                    |   |        |  
|Total current assets                                                                       | 6,705              |   | 6,550  |  
|                                                                                           |                    |   |        |  
|Intangible assets (Note
      7)                                                           | 488                |   | 448    |  
|Property, plant and
      equipment, net (Note 8)                                          | 3,432              |   | 3,535  |  
|Nonconsolidated companies
      (Note 9)                                                   | 301                |   | 318    |  
|Deferred tax assets
      (Note 21)                                                        | 895                |   | 794    |  
|Other assets                                                                               | 604                |   | 306    |  
|                                                                                           |                    |   |        |  
|Total assets                                                                               | 12,425             |   | 11,951 |  
|                                                                                           |                    |   |        |  
|Liabilities and
      shareholders equity                                                 |                    |   |        |  
|Short-term liabilities                                                                     |                    |   |        |  
|Short-term
      borrowings (Note 10)                                                      | 314                |   | 258    |  
|Income
      tax payable                                                                   | 380                |   | 468    |  
|Current
      liabilities (Note 11)                                                        | 2,953              |   | 2,707  |  
|Payables
      to nonconsolidated companies                                                | 4                  |   | 2      |  
|Current
      portion of long-term borrowings (Note 12)                                    | 43                 |   | 302    |  
|Liabilities
      held for sale (Note 6)                                                   | 60                 |   |        |  
|                                                                                           |                    |   |        |  
|Total short-term liabilities                                                               | 3,754              |   | 3,737  |  
|                                                                                           |                    |   |        |  
|Long-term borrowings
      (Note 12)                                                       | 2,702              |   | 2,392  |  
|                                                                                           |                    |   |        |  
|Long-term liabilities
      (Note 13)                                                      | 2,393              |   | 3,077  |  
|                                                                                           |                    |   |        |  
|Minority interest                                                                          | 161                |   | 140    |  
|                                                                                           |                    |   |        |  
|Shareholders
      equity (Note 14)                                                       |                    |   |        |  
|Priority
      shares:                                                                     |                    |   |        |  
|48
      shares authorized and outstanding of EUR 400 per share                            |                   |   |       |  
|Common
      shares:                                                                       |                    |   |        |  
|Authorized
      600,000,000 shares of EUR 2 per share                                     |                    |   |        |  
|Outstanding
      at December 31, 2004: 286,147,260 shares                                 |                    |   | 572    |  
|Outstanding
      at December 31, 2005: 286,147,260 shares                                 | 572                |   |        |  
|Additional
      paid-in capital                                                           | 1,803              |   | 1,803  |  
|Cumulative
      translation differences                                                   | 142                |   | (20    | )
|Other
      reserves                                                                       | (64                | ) | (694   | )
|Undistributed
      profits                                                                | 875                |   | 859    |  
|Statutory
      reserves                                                                   | 87                 |   | 85     |  
|                                                                                           |                    |   |        |  
|Total shareholders
      equity                                                           | 3,415              |   | 2,605  |  
|                                                                                           |                    |   |        |  
|Total liabilities and
      shareholders equity                                           | 12,425             |   | 11,951 |  
|                                                                                           |                    |   |        |  
|                                                                                           |                    |   |        |  
|See accounting
      policies and accompanying notes to consolidated financial statements. |                    |   |       

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|CONSOLIDATED
      STATEMENT OF INCOME                                                     |                                               |   |        |  
|------------------------------------------------------------------------------------------ | --------------------------------------------- | - | ------ | -
|                                                                                           |                                               |   |        |  
|                                                                                           | for
      the years ended 
      December 31, |  
|Millions of euros,
      except per share amounts                                          | 2005                                          |   | 2004   |  
|                                                                                           |                                               |   |        |  
|                                                                                           |                                               |   |        |  
|Revenues                                                                                   | 13,000                                        |   | 12,833 |  
|Cost of sales                                                                              | (7,066                                        | ) | (6,825 | )
|                                                                                           |                                               |   |        |  
|                                                                                           |                                               |   |        |  
|Gross margin                                                                               | 5,934                                         |   | 6,008  |  
|                                                                                           |                                               |   |        |  
|Selling
      expenses                                                                     | (3,297                                        | ) | (3,254 | )
|Research
      and development expenses                                                    | (834                                          | ) | (816   | )
|General
      and administrative expenses                                                  | (693                                          | ) | (674   | )
|IAS
      39 fair value adjustments (Note 17)                                              | 26                                            |   |        |  
|Incidentals (Note 18):                                                                     |                                               |   |        |  
|- Special benefits                                                                         | 571                                           |   | 84     |  
|- Results on divestments                                                                   | 44                                            |   | 579    |  
|- Restructuring and
      impairment charges                                               | (169                                          | ) | (197   | )
|- Charges related to
      major legal, antitrust and environmental cases (Note 15)        | (112                                          | ) | (202   | )
|Other
      operating income/(expenses), net (Note 19)                                     | 16                                            |   | (1     | )
|                                                                                           |                                               |   |        |  
|Operating income                                                                           | 1,486                                         |   | 1,527  |  
|                                                                                           |                                               |   |        |  
|Financing charges,
      net (Note 20)                                                     | (156                                          | ) | (144   | )
|                                                                                           |                                               |   |        |  
|Operating income less
      net financing charges                                          | 1,330                                         |   | 1,383  |  
|Income taxes (Note
      21)                                                               | (336                                          | ) | (412   | )
|                                                                                           |                                               |   |        |  
|Earnings of consolidated
      companies less income taxes                                 | 994                                           |   | 971    |  
|Earnings from nonconsolidated
      companies (Note 9)                                     | 4                                             |   | 10     |  
|                                                                                           |                                               |   |        |  
|Earnings before minority
      interest                                                    | 998                                           |   | 981    |  
|Minority interest                                                                          | (37                                           | ) | (36    | )
|                                                                                           |                                               |   |        |  
|Net income                                                                                 | 961                                           |   | 945    |  
|                                                                                           |                                               |   |        |  
|                                                                                           |                                               |   |        |  
|Basic earnings per
      share                                                             | 3.36                                          |   | 3.31   |  
|                                                                                           |                                               |   |        |  
|Diluted earnings per
      share                                                           | 3.35                                          |   | 3.30   |  
|                                                                                           |                                               |   |        |  
|                                                                                           |                                               |   |        |  
|See accounting
      policies and accompanying notes to consolidated financial statements. |                                               |   |       

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|CONSOLIDATED
      STATEMENT OF CASH FLOWS                                           |      |   |       |   |       |   |       |  
|------------------------------------------------------------------------------------ | ---- | - | ----- | - | ----- | - | ----- | -
|                                                                                     |      |   |       |   |       |   |       |  
|Millions
        of euros                                                            | 2005 |   |       |   | 2004  |   |       |  
|                                                                                     |      |   |       |   |       |   |       |  
|Profit for the period                                                                | 998  |   |       |   | 981   |   |       |  
|Adjustments to reconcile
      earnings to cash generated from operating activities: |      |   |       |   |       |   |       |  
|Depreciation
      and amortization                                                  | 569  |   |       |   | 565   |   |       |  
|Impairment
      losses                                                              | 132  |   |       |   | 74    |   |       |  
|Financing
      charges                                                              | 156  |   |       |   | 144   |   |       |  
|Earnings
      from nonconsolidated companies                                        | (17  | ) |       |   | (52   | ) |       |  
|Taxes
      recognized in income                                                     | 338  |   |       |   | 415   |   |       |  
|                                                                                     |      |   |       |   |       |   |       |  
|Operating profit
      before changes in working capital and provisions              |      |   | 2,176 |   |       |   | 2,127 |  
|Changes
      in trade and other receivables                                         | (169 | ) |       |   | (163  | ) |       |  
|Changes
      in inventories                                                         | 38   |   |       |   | (23   | ) |       |  
|Changes
      in trade and other payables                                            | (117 | ) |       |   | 154   |   |       |  
|Changes
      in provisions                                                          | (598 | ) |       |   | (63   | ) |       |  
|Other                                                                                | 28   |   |       |   | (4    | ) |       |  
|                                                                                     |      |   |       |   |       |   |       |  
|                                                                                     |      |   | (818  | ) |       |   | (99   | )
|                                                                                     |      |   |       |   |       |   |       |  
|Cash generated from
      operating activities                                       |      |   | 1,358 |   |       |   | 2,028 |  
|                                                                                     |      |   |       |   |       |   |       |  
|Interest paid                                                                        | (145 | ) |       |   | (139  | ) |       |  
|Income taxes (paid)/received                                                         | (391 | ) |       |   | (217  | ) |       |  
|Pretax gain on divestments                                                           | (44  | ) |       |   | (579  | ) |       |  
|                                                                                     |      |   |       |   |       |   |       |  
|                                                                                     |      |   | (580  | ) |       |   | (935  | )
|                                                                                     |      |   |       |   |       |   |       |  
|Net cash from operating
      activities                                             |      |   | 778   |   |       |   | 1,093 |  
|                                                                                     |      |   |       |   |       |   |       |  
|Capital expenditures                                                                 | (514 | ) |       |   | (551  | ) |       |  
|Investments in intangible
      assets                                               | (67  | ) |       |   | (28   | ) |       |  
|Interest received                                                                    | 34   |   |       |   | 21    |   |       |  
|Repayments from nonconsolidated
      companies                                      | 27   |   |       |   | 11    |   |       |  
|Dividends received                                                                   | 19   |   |       |   | 123   |   |       |  
|Acquisition of consolidated
      companies1                                         | (55  | ) |       |   | (80   | ) |       |  
|Proceeds from sale
      of interests1                                               | 64   |   |       |   | 1,036 |   |       |  
|Loan and prepaid premiums
      to APF2                                              | (150 | ) |       |   |       |   |       |  
|Other changes in noncurrent
      assets                                             | 53   |   |       |   | 2     |   |       |  
|                                                                                     |      |   |       |   |       |   |       |  
|Net cash from investing
      activities                                             |      |   | (589  | ) |       |   | 534   |  
|                                                                                     |      |   |       |   |       |   |       |  
|New long-term borrowings                                                             | 3    |   |       |   | 22    |   |       |  
|Repayment of borrowings                                                              | (269 | ) |       |   | (191  | ) |       |  
|Termination of currency
      swap                                                   | 78   |   |       |   |       |   |       |  
|Dividends                                                                            | (366 | ) |       |   | (366  | ) |       |  
|                                                                                     |      |   |       |   |       |   |       |  
|Net cash from financing
      activities                                             |      |   | (554  | ) |       |   | (535  | )
|                                                                                     |      |   |       |   |       |   |       |  
|Net change in cash
      and cash equivalents                                        |      |   | (365  | ) |       |   | 1,092 |  
|Cash and cash equivalents
      at January 1                                         |      |   | 1,811 |   |       |   | 727   |  
|Effect of exchange
      rate changes on cash and cash equivalents                   |      |   |       |   |       |   |       |  
|and impact of IAS 32/39                                                              |      |   | 40    |   |       |   | (8    | )
|                                                                                     |      |   |       |   |       |   |       |  
|Cash and cash equivalents
      at December 31                                       |      |   | 1,486 |   |       |   | 1,811 |  
|                                                                                     |      |   |       |   |       |   |       |  
|1 Net of cash acquired
      or disposed of.                                         |      |   |       |   |       |   |       |  
|2 Akzo
      Nobel Pension Fund in the Netherlands.                                  |      |   |       |   |       |   |       |  
|                                                                                     |      |   |       |   |       |   |       |  

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|CONSOLIDATED
      STATEMENT OF CHANGES IN EQUITY                  |                                                   
|------------------------------------------------------------------ | --------------------------------------------------
|                                                                   |                                                   
|                                                                   | Attributable
      to equity holders of the parent
|                                                                   |                                                   
|                                                                   |                                                   
|                                                                   |                                                   
|                                                                   |                                                   
|                                                                   |                                                   
|                                                                   | Subscr.                                           
|Millions of euros                                                  | share                                             
|                                                                   | capital                                           
|                                                                   |                                                   
|Balance
      at January 1, 2004                                   | 572                                               
|Equity
      settled transactions                                  |                                                   
|Changes
      in exchange rates in                                 |                                                   
|respect
      of affiliated companies                              |                                                   
|                                                                   |                                                   
|Income
      directly recognized in equity                         |                                                   
|Net
      income                                                   |                                                   
|                                                                   |                                                   
|Total
      income/(expenses)                                      |                                                   
|Dividend
      paid                                                |                                                   
|Change
      minority interests in                                 |                                                   
|subsidiaries                                                       |                                                   
|Capitalized
      development cost                                 |                                                   
|                                                                   |                                                   
|Balance at December
      31, 2004                                 | 572                                               
|Implementation IAS
      32 and 39                                 |                                                   
|Equity settled transactions                                        |                                                   
|Changes in fair value
      of derivatives                         |                                                   
|Changes in exchange
      rates in respect of affiliated companies |                                                   
|                                                                   |                                                   
|Income directly recognized
      in equity                         |                                                   
|Net income                                                         |                                                   
|                                                                   |                                                   
|Total income/(expenses)                                            |                                                   
|Dividend paid                                                      |                                                   
|Change minority interests
      in subsidiaries                    |                                                   
|Capitalized development
      cost                                 |                                                   
|                                                                   |                                                   
|                                                                   |                                                   
|Balance at December
      31, 2005                                 | 572                                               
|                                                                  

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136

NOTES
  TO THE CONSOLIDATED FINANCIAL STATEMENTS OF AKZO NOBEL

(1)Industry Segment Information and Geographic
Data

Segment information is presented in respect of the companys business and geographical segments. The primary segment reporting is based on the business segments, which also forms the basis
for the companys management and internal reporting structure. The secondary segment reporting is based on the geographical areas in which the company operates, whereby segment revenue is based on the geographical location of customers and
segment assets are based on the geographical location of the assets.

Segment results, assets and liabilities include items directly attributable to a segment as well as those that can be allocated on a reasonable basis.

(a)Industry
  Segment InformationThe information
  presented below illustrates the relative importance of the individual groups.

|                                                                                         |         
|---------------------------------------------------------------------------------------- | --------
|                                                                                         | Revenues
|Millions of euros                                                                        | 2005    
|                                                                                         |         
|Organon                                                                                  | 2,425   
|Intervet                                                                                 | 1,094   
|Coatings                                                                                 | 5,555   
|Chemicals                                                                                | 3,890   
|Miscellaneous products, intragroup
    deliveries, non- allocated items and eliminations | 36      
|                                                                                         |         
|Total                                                                                    | 13,000  
|                                                                                         |         



|                                                                                                              |                          
|------------------------------------------------------------------------------------------------------------- | -------------------------
|                                                                                                              | Identifiable
      assets
|Millions of euros                                                                                             | 2005                     
|                                                                                                              |                          
|Organon                                                                                                       | 2,262                    
|Intervet                                                                                                      | 1,082                    
|Coatings                                                                                                      | 3,328                    
|Chemicals                                                                                                     | 2,946                    
|Miscellaneous
      products, nonallocated items, and eliminations, including cash and cash
      equivalents | 2,506                    
|                                                                                                              |                          
|                                                                                                              | 12,124                   
|Nonconsolidated                                                                                               |                          
|companies                                                                                                     | 301                      
|                                                                                                              |                          
|Total                                                                                                         | 12,425                   
|                                                                                                              |                          

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137

NOTES TO THE
  CONSOLIDATED FINANCIAL STATEMENTS OF AKZO NOBEL

(b)Geographic
  DataBelow geographic
  information for Akzo Nobel is presented for revenues, operating income, identifiable
  assets and expenditures for property, plant and equipment.

|                         |                                                                         |  |                                                              |  |                                     |  |        |  |       |   |       |  
|------------------------ | ----------------------------------------------------------------------- |  | ------------------------------------------------------------ |  | ----------------------------------- |  | ------ |  | ----- | - | ----- | -
|                         | Revenues
      by 
               region of 
               destination |  | Revenues
      by 
            region of 
            origin |  | Operating
      
            income | 
|Millions of euros        | 2005                                                                    |  | 2004                                                         |  | 2005                                |  | 2004   |  | 2005  |   | 2004  |  
|                         |                                                                         |  |                                                              |  |                                     |  |        |  |       |   |       |  
|The Netherlands          | 862                                                                     |  | 844                                                          |  | 2,459                               |  | 2,748  |  | 474   |   | 446   |  
|Germany                  | 1,238                                                                   |  | 1,165                                                        |  | 1,152                               |  | 1,050  |  | 144   |   | 159   |  
|Sweden                   | 516                                                                     |  | 509                                                          |  | 1,237                               |  | 1,155  |  | 137   |   | 33    |  
|United Kingdom           | 809                                                                     |  | 833                                                          |  | 754                                 |  | 848    |  | (59   | ) | (57   | )
|Other European countries | 4,075                                                                   |  | 4,122                                                        |  | 3,069                               |  | 2,921  |  | 527   |   | 532   |  
|USA and Canada           | 2,400                                                                   |  | 2,445                                                        |  | 2,116                               |  | 2,221  |  | (67   | ) | 60    |  
|Latin America            | 830                                                                     |  | 729                                                          |  | 626                                 |  | 493    |  | 85    |   | 133   |  
|Asia                     | 1,590                                                                   |  | 1,536                                                        |  | 1,231                               |  | 1,087  |  | 192   |   | 175   |  
|Other regions            | 680                                                                     |  | 650                                                          |  | 356                                 |  | 310    |  | 53    |   | 46    |  
|                         |                                                                         |  |                                                              |  |                                     |  |        |  |       |   |       |  
|Total                    | 13,000                                                                  |  | 12,833                                                       |  | 13,000                              |  | 12,833 |  | 1,486 |   | 1,527 |  
|                         |                                                                         |  |                                                              |  |                                     |  |        |  |       |   |       |  



|                                                 |                                              |  |                                                  |  |      |  |      | 
|------------------------------------------------ | -------------------------------------------- |  | ------------------------------------------------ |  | ---- |  | ---- | 
|                                                 | Identifiable
        
                assets |  | Capital
        
                   expenditures | 
|Millions of euros                                | 2005                                         |  | 2004                                             |  | 2005 |  | 2004 | 
|                                                 |                                              |  |                                                  |  |      |  |      | 
|The Netherlands                                  | 3,061                                        |  | 2,959                                            |  | 179  |  | 189  | 
|Germany                                          | 750                                          |  | 828                                              |  | 25   |  | 23   | 
|Sweden                                           | 863                                          |  | 847                                              |  | 65   |  | 60   | 
|United
      Kingdom                             | 690                                          |  | 582                                              |  | 31   |  | 29   | 
|Other
      European countries                   | 2,112                                        |  | 2,163                                            |  | 81   |  | 81   | 
|USA and
      Canada                             | 1,959                                        |  | 1,794                                            |  | 51   |  | 52   | 
|Latin
      America                              | 619                                          |  | 454                                              |  | 42   |  | 61   | 
|Asia                                             | 1,017                                        |  | 834                                              |  | 32   |  | 47   | 
|Other
      regions                              | 329                                          |  | 295                                              |  | 8    |  | 9    | 
|                                                 |                                              |  |                                                  |  |      |  |      | 
|                                                 | 11,400                                       |  | 10,756                                           |  | 514  |  | 551  | 
|Eliminations
      and cash and cash equivalents | 724                                          |  | 877                                              |  |      |  |      | 
|Nonconsolidated
      companies                  | 301                                          |  | 318                                              |  |      |  |      | 
|                                                 |                                              |  |                                                  |  |      |  |      | 
|Total                                            | 12,425                                       |  | 11,951                                           |  | 514  |  | 551  | 
|                                                 |                                              |  |                                                  |  |      |  |      | 

(2) Acquisitions
  and Dispositions

In February 2005, Akzo Nobel announced it would focus its Chemicals portfolio on five strategic areas with clear prospects for profitable leadership. As a consequence of the strategic review,
businesses with 2004 revenues of around EUR 700 million will be divested. The processes to realize these divestments are on track. The divestment process for a number of these activities is at such a stage that the assets and liabilities thereof
qualify as held for sale. See note 6 of these consolidated financial statements.

In September 2003, Akzo Nobel announced its plan to sell Catalysts, Coating Resins, and Phosphorus Chemicals from its Chemicals portfolio. In 2004 these divestments were completed. Effective July
31, 2004, Catalysts and Phosphorus Chemicals were divested for EUR 616 million and EUR 231 million, respectively,

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138

NOTES TO THE
  CONSOLIDATED FINANCIAL STATEMENTS OF AKZO NOBEL

resulting in an after-tax gain of EUR 338 million and EUR 68 million, respectively. In December 2004, Coating Resins was divested for EUR 110 million, resulting in an after-tax gain of EUR 35
million.

In July 2004, the German decorative paint wholesaler Timpe & Mock was acquired for an amount of EUR 35 million, including EUR 17 million of goodwill.

During 2005 and 2004, Akzo Nobel acquired several other businesses in strategic markets and geographic areas. Also a number of other activities were divested in 2005 and 2004. None of these were
significant to the consolidated financial statements.

All acquisitions were accounted for on the basis of the purchase accounting method.

The acquisitions in 2005 contributed EUR 49 million to revenues. If all acquisitions had occurred on January 1, 2005, additional revenues would have been EUR 84 million. Given their limited size,
the acquisitions in 2005 only had a marginal contribution to net income, even if all acquisitions had occurred on January 1, 2005.

The acquisitions in 2005 had (at acquisition date) the following effect on Akzo Nobels assets and liabilities:

|                                        |                   |  
|--------------------------------------- | ----------------- | -
|                                        | Recognized values |  
|                                        |                   |  
|Property, plant and equipment           | 18                |  
|Intangible assets                       | 23                |  
|Inventories                             | 11                |  
|Trade and other receivables             | 14                |  
|Provisions                              | (4                | )
|Long-term borrowings                    | (15               | )
|Trade and other payables                | (7                | )
|                                        |                   |  
|Net identifiable assets and liabilities | 40                |  
|Goodwill on acquisitions                | 15                |  
|                                        |                   |  
|Consideration paid                      | 55                |  
|Cash acquired                           |                  |  
|                                        |                   |  
|Net cash outflow                        | 55                |  
|                                        |                  

(3) Cash
  and Cash Equivalents

|                       |       |  |       | 
|---------------------- | ----- |  | ----- | 
|Millions of euros      | 2005  |  | 2004  | 
|                       |       |  |       | 
|Cash in banks          | 342   |  | 282   | 
|Short-term investments | 1,144 |  | 1,529 | 
|                       |       |  |       | 
|Total                  | 1,486 |  | 1,811 | 
|                       |       |  |       | 

Short-term investments almost entirely consist of cash loans, time deposits, marketable private borrowings, and marketable securities immediately convertible into cash.

At December 31, 2005 and December 31, 2004, the amount of cash and cash equivalents was freely available.

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139

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF AKZO NOBEL

(4) Receivables

|                                                |       |   |       |  
|----------------------------------------------- | ----- | - | ----- | -
|Millions
      of euros                         | 2005  |   | 2004  |  
|                                                |       |   |       |  
|Trade
      receivables                         | 2,161 |   | 1,971 |  
|Non-income
      taxes                          | 108   |   | 125   |  
|Fair
      value derivatives                    | 28    |   |       |  
|Other
      receivables                         | 319   |   | 317   |  
|                                                |       |   |       |  
|                                                | 2,616 |   | 2,413 |  
|Discounted
      drafts with recourse           | (20   | ) | (13   | )
|                                                |       |   |       |  
|Total                                           | 2,596 |   | 2,400 |  
|                                                |       |   |       |  
|Allowances
      for doubtful accounts included |       |   |       |  
|as
      a deduction from receivables           | 142   |   | 157   |  
|                                                |       |   |       |  

(5) Inventories

|                                                |       |  |       | 
|----------------------------------------------- | ----- |  | ----- | 
|Millions
      of euros                         | 2005  |  | 2004  | 
|                                                |       |  |       | 
|Raw materials
      and supplies                | 616   |  | 596   | 
|Work
      in process                           | 401   |  | 400   | 
|Finished
      products and goods for resale    | 963   |  | 977   | 
|Inventory
      prepayments                     | 7     |  | 5     | 
|                                                |       |  |       | 
|Total                                           | 1,987 |  | 1,978 | 
|                                                |       |  |       | 
|Provisions
      for obsolescence deducted from |       |  |       | 
|inventory
      book values                     | 147   |  | 146   | 
|                                                |       |  |       | 

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140

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF AKZO NOBEL

(6) Assets and
      Liabilities classified as Held for Sale

In February 2005, Akzo Nobel announced it would focus its Chemicals portfolio on five strategic areas with clear prospects for profitable leadership. As a consequence of the strategic review,
businesses with 2004 revenues of around EUR 700 million will be divested. The process to realize these divestments is on track. The divestment process for a number of these activities is in such a stage that the assets and liabilities thereof
qualify as held for sale. The following activities are included in the disposal group: Oleochemicals, Solar Salt Australia, Ink & Adhesive Resins, PVC Additives, Polymerization Catalysts, EMC and Carbide.

Assets held for sale include the following:

|                                    |      | 
|----------------------------------- | ---- | 
|                                    | 2005 | 
|                                    |      | 
|Property,
      plant and equipment | 164  | 
|Inventories                         | 75   | 
|Trade
      and other receivables   | 83   | 
|                                    |      | 
|                                    | 322  | 
|                                    |      | 

Liabilities classified
  as held for sale include the following:

|                               |      | 
|------------------------------ | ---- | 
|                               | 2005 | 
|                               |      | 
|Trade
      and other payables | 60   | 
|                               |      | 
|                               | 60   | 
|                               |      | 

The impairment charge for assets held for sale amounted to EUR 16 million.

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141

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF AKZO NOBEL

(7) Intangible Assets

|                                                         |       |   |          |   |                                                             |   |                         |  
|-------------------------------------------------------- | ----- | - | -------- | - | ----------------------------------------------------------- | - | ----------------------- | -
|Millions of euros                                        | Total |   | Goodwill |   | Licenses, know- how, and intellectual
      property rights |   | Development
      costs |  
|                                                         |       |   |          |   |                                                             |   |                         |  
|Balance
      at January 1, 2004                         |       |   |          |   |                                                             |   |                         |  
|Cost
      of acquisition through business combinations  | 598   |   | 310      |   | 288                                                         |   |                         |  
|Cost
      of internally developed intangibles           | 11    |   |          |   |                                                             |   | 11                      |  
|Accumulated
      amortization/impairment                | (185  | ) | (58      | ) | (124                                                        | ) | (3                      | )
|                                                         |       |   |          |   |                                                             |   |                         |  
|Book
      value                                         | 424   |   | 252      |   | 164                                                         |   | 8                       |  
|                                                         |       |   |          |   |                                                             |   |                         |  
|Changes
      in book value                              |       |   |          |   |                                                             |   |                         |  
|Acquisitions
      through business combinations         | 48    |   | 47       |   | 1                                                           |   |                         |  
|Other
      investments - including internally developed | 28    |   |         |   | 25                                                          |   | 3                       |  
|Divestitures                                             | (5    | ) | (1       | ) | (4                                                          | ) |                         |  
|Amortization                                             | (25   | ) |          |   | (22                                                         | ) | (3                      | )
|Impairments                                              | (14   | ) | (14      | ) |                                                             |   |                         |  
|Change
      in exchange rates                           | (8    | ) | (7       | ) | (1                                                          | ) |                         |  
|                                                         |       |   |          |   |                                                             |   |                         |  
|Total
      changes in 2004                              | 24    |   | 25       |   | (1                                                          | ) |                        |  
|                                                         |       |   |          |   |                                                             |   |                         |  
|Balance
      at December 31, 2004                       |       |   |          |   |                                                             |   |                         |  
|Cost
      of acquisition through business combinations  | 628   |   | 342      |   | 286                                                         |   |                         |  
|Cost
      of internally developed intangibles           | 13    |   |          |   |                                                             |   | 13                      |  
|Accumulated
      amortization/impairment                | (193  | ) | (65      | ) | (123                                                        | ) | (5                      | )
|                                                         |       |   |          |   |                                                             |   |                         |  
|Book
      value                                         | 448   |   | 277      |   | 163                                                         |   | 8                       |  
|                                                         |       |   |          |   |                                                             |   |                         |  
|Changes
      in book value                              |       |   |          |   |                                                             |   |                         |  
|Acquisitions
      through business combinations         | 36    |   | 13       |   | 23                                                          |   |                         |  
|Other
      investments  including internally developed | 67    |   | 5        |   | 59                                                          |   | 3                       |  
|Divestitures                                             | (2    | ) | (2       | ) |                                                             |   |                         |  
|Amortization                                             | (41   | ) |          |   | (38                                                         | ) | (3                      | )
|Impairments                                              | (35   | ) | (21      | ) | (14                                                         | ) |                         |  
|Change
      in exchange rates                           | 15    |   | 13       |   | 2                                                           |   |                         |  
|                                                         |       |   |          |   |                                                             |   |                         |  
|Total
      changes in 2005                              | 40    |   | 8        |   | 32                                                          |   |                        |  
|                                                         |       |   |          |   |                                                             |   |                         |  
|Balance
      at December 31, 2005                       |       |   |          |   |                                                             |   |                         |  
|Cost
      of acquisition through business combinations  | 722   |   | 348      |   | 374                                                         |   |                         |  
|Cost
      of internally developed intangibles           | 16    |   |          |   |                                                             |   | 16                      |  
|Accumulated
      amortization/impairment                | (250  | ) | (63      | ) | (179                                                        | ) | (8                      | )
|                                                         |       |   |          |   |                                                             |   |                         |  
|Book
      value                                         | 488   |   | 285      |   | 195                                                         |   | 8                       |  
|                                                         |       |   |          |   |                                                             |   |                         |  

For details on the impairment charges reference is made to Note 18.

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142

NOTES TO THE CONSOLIDATED
  FINANCIAL STATEMENTS OF AKZO NOBEL

(8) Property,
  Plant and Equipment

|                                                  |        |   |                          |   |                                                 |   |                       |   |                                                                        |   |                                                             |  
|------------------------------------------------- | ------ | - | ------------------------ | - | ----------------------------------------------- | - | --------------------- | - | ---------------------------------------------------------------------- | - | ----------------------------------------------------------- | -
|Millions
      of euros                           | Total  |   | Buildings
      and land |   | Plant
      equipment
      and
      machinery |   | Other
      equipment |   | Construction
      in progress
      and prepayments
      on projects |   | Assets
      not used
      in the production
      process |  
|                                                  |        |   |                          |   |                                                 |   |                       |   |                                                                        |   |                                                             |  
|Balance
      at January 1, 2004                  |        |   |                          |   |                                                 |   |                       |   |                                                                        |   |                                                             |  
|Cost
      of acquisition                         | 9,837  |   | 2,736                    |   | 5,692                                           |   | 902                   |   | 446                                                                    |   | 61                                                          |  
|Accumulated
      depreciation/impairment         | (5,870 | ) | (1,130                   | ) | (4,027                                          | ) | (671                  | ) |                                                                        |   | (42                                                         | )
|                                                  |        |   |                          |   |                                                 |   |                       |   |                                                                        |   |                                                             |  
|Book
      value                                  | 3,967  |   | 1,606                    |   | 1,665                                           |   | 231                   |   | 446                                                                    |   | 19                                                          |  
|                                                  |        |   |                          |   |                                                 |   |                       |   |                                                                        |   |                                                             |  
|Changes
      in book value                       |        |   |                          |   |                                                 |   |                       |   |                                                                        |   |                                                             |  
|Acquisitions
      through business combinations  | 8      |   |                          |   | 4                                               |   | 4                     |   |                                                                        |   |                                                             |  
|Divestitures                                      | (301   | ) | (90                      | ) | (181                                            | ) | (6                    | ) | (24                                                                    | ) |                                                             |  
|Capital
      expenditures                        | 551    |   | 146                      |   | 362                                             |   | 75                    |   | (34                                                                    | ) | 2                                                           |  
|Transfer
      between categories                 |        |   | (51                      | ) | (3                                              | ) | (2                    | ) | (2                                                                     | ) | 58                                                          |  
|Disinvestments                                    | (32    | ) | (7                       | ) | (17                                             | ) | (3                    | ) | (1                                                                     | ) | (4                                                          | )
|Depreciation                                      | (540   | ) | (107                     | ) | (354                                            | ) | (78                   | ) |                                                                        |   | (1                                                          | )
|Impairments                                       | (63    | ) | (4                       | ) | (20                                             | ) | (14                   | ) |                                                                        |   | (25                                                         | )
|Changes
      in exchange rates                   | (55    | ) | (26                      | ) | (23                                             | ) | (3                    | ) | (3                                                                     | ) |                                                             |  
|                                                  |        |   |                          |   |                                                 |   |                       |   |                                                                        |   |                                                             |  
|Total
      changes in 2004                       | (432   | ) | (139                     | ) | (232                                            | ) | (27                   | ) | (64                                                                    | ) | 30                                                          |  
|                                                  |        |   |                          |   |                                                 |   |                       |   |                                                                        |   |                                                             |  
|Balance
      at December 31, 2004                |        |   |                          |   |                                                 |   |                       |   |                                                                        |   |                                                             |  
|Cost
      of acquisition                         | 9,141  |   | 2,576                    |   | 5,186                                           |   | 830                   |   | 382                                                                    |   | 167                                                         |  
|Accumulated
      depreciation/impairment         | (5,606 | ) | (1,109                   | ) | (3,753                                          | ) | (626                  | ) |                                                                        |   | (118                                                        | )
|                                                  |        |   |                          |   |                                                 |   |                       |   |                                                                        |   |                                                             |  
|Book
      value                                  | 3,535  |   | 1,467                    |   | 1,433                                           |   | 204                   |   | 382                                                                    |   | 49                                                          |  
|                                                  |        |   |                          |   |                                                 |   |                       |   |                                                                        |   |                                                             |  
|Changes
      in book value                       |        |   |                          |   |                                                 |   |                       |   |                                                                        |   |                                                             |  
|Acquisitions
      through business combinations  | 18     |   | 6                        |   | 10                                              |   | 2                     |   |                                                                        |   |                                                             |  
|Divestitures                                      | (1     | ) |                          |   | (1                                              | ) |                       |   |                                                                        |   |                                                             |  
|Capital
      expenditures                        | 514    |   | 96                       |   | 365                                             |   | 84                    |   | (33                                                                    | ) | 2                                                           |  
|Transfer
      between categories                 |        |   | (38                      | ) | 31                                              |   | 62                    |   | (54                                                                    | ) | (1                                                          | )
|Disinvestments                                    | (13    | ) | (8                       | ) | (2                                              | ) | (1                    | ) |                                                                        |   | (2                                                          | )
|Depreciation                                      | (528   | ) | (105                     | ) | (339                                            | ) | (81                   | ) |                                                                        |   | (3                                                          | )
|Impairments                                       | (97    | ) | (35                      | ) | (57                                             | ) | (3                    | ) |                                                                        |   | (2                                                          | )
|Transfer
      to noncurrent assets held for sale | (164   | ) | (41                      | ) | (74                                             | ) | (43                   | ) | (6                                                                     | ) |                                                             |  
|Changes
      in exchange rates                   | 168    |   | 72                       |   | 77                                              |   | 8                     |   | 9                                                                      |   | 2                                                           |  
|                                                  |        |   |                          |   |                                                 |   |                       |   |                                                                        |   |                                                             |  
|Total
      changes in 2005                       | (103   | ) | (53                      | ) | 10                                              |   | 28                    |   | (84                                                                    | ) | (4                                                          | )
|                                                  |        |   |                          |   |                                                 |   |                       |   |                                                                        |   |                                                             |  
|Balance
      at December 31, 2005                |        |   |                          |   |                                                 |   |                       |   |                                                                        |   |                                                             |  
|Cost
      of acquisition                         | 9,419  |   | 2,665                    |   | 5,386                                           |   | 890                   |   | 298                                                                    |   | 180                                                         |  
|Accumulated
      depreciation/impairment         | (5,987 | ) | (1,251                   | ) | (3,943                                          | ) | (658                  | ) |                                                                        |   | (135                                                        | )
|                                                  |        |   |                          |   |                                                 |   |                       |   |                                                                        |   |                                                             |  
|Book
      value                                  | 3,432  |   | 1,414                    |   | 1,443                                           |   | 232                   |   | 298                                                                    |   | 45                                                          |  
|                                                  |        |   |                          |   |                                                 |   |                       |   |                                                                        |   |                                                             |  

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143

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF AKZO NOBEL

The total book value
  of land at December 31, 2005 was EUR 222 million (at December 31, 2004: EUR
  234 million).

The book value of property, plant and equipment financed by installment buying and leasing and not legally owned by the company was EUR 61 million at December 31, 2005 (at December 31, 2004: EUR
44 million).

For details on the impairment charges reference is made to Note 17.

(9) Nonconsolidated
  Companies

|                                         |      |  |      | 
|---------------------------------------- | ---- |  | ---- | 
|Millions
      of euros                  | 2005 |  | 2004 | 
|                                         |      |  |      | 
|Investments in nonconsolidated companies | 285  |  | 301  | 
|Loans to nonconsolidated companies       | 16   |  | 17   | 
|                                         |      |  |      | 
|Total                                    | 301  |  | 318  | 
|                                         |      |  |      | 

Dividends received from nonconsolidated companies in 2005 and 2004 amounted to EUR 19 million and EUR 123 million, respectively.

Earnings from nonconsolidated companies in 2005 include a tax charge of EUR 2 million and in 2004 a tax charge of EUR 4 million.

At December 31, 2005, consolidated retained earnings included EUR 128 million (2004: EUR 132 million) of undistributed earnings from Akzo Nobel's investments in nonconsolidated companies. Accounts
receivable from and payable to nonconsolidated companies are separately presented in the Consolidated Balance Sheet.

The most important nonconsolidated
  companies are the 50-percent interest in Flexsys, the remaining 20% interest
  in the former Fibers activities, and the 30-percent interest in Methanor.

Summarized information of nonconsolidated companies on a 100-percent basis follows:

|                             |       |  |       | 
|---------------------------- | ----- |  | ----- | 
|Millions
      of euros      | 2005  |  | 2004  | 
|                             |       |  |       | 
|Current assets               | 629   |  | 797   | 
|Noncurrent assets            | 1,000 |  | 982   | 
|                             |       |  |       | 
|Total assets                 | 1,629 |  | 1,779 | 
|                             |       |  |       | 
|Current liabilities          | 537   |  | 435   | 
|Noncurrent liabilities       | 480   |  | 600   | 
|Shareholders equity         | 612   |  | 744   | 
|                             |       |  |       | 
|Total liabilities and equity | 1,629 |  | 1,779 | 
|                             |       |  |       | 

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NOTES TO THE CONSOLIDATED
  FINANCIAL STATEMENTS OF AKZO NOBEL

|                        |       |  |       | 
|----------------------- | ----- |  | ----- | 
|Millions
      of euros | 2005  |  | 2004  | 
|                        |       |  |       | 
|Revenues                | 2,500 |  | 2,653 | 
|Income before tax       | 74    |  | 248   | 
|Net income / (loss)     | 21    |  | 214   | 
|                        |       |  |       | 

The decrease in the 2005 statement of income figures is mainly caused by incidental losses, related to the closure of Methanor and guarantees for environmental costs at Acordis. The operational
performance of the nonconsolidated companies improved slightly. The lower earnings as a result of the divested Catalysts operations were partly compensated by higher results for Flexsys.

Certain nonconsolidated companies sell goods and provide services to consolidated Akzo Nobel companies. In addition, consolidated Akzo Nobel companies sell goods and provide services to certain
nonconsolidated companies. Such transactions were not significant. Management believes that the terms and pricing of these intersegment transactions are reasonable from a market perspective.

(10) Short-term
      Borrowings

|                                                |                                                         |  |                                                           | 
|----------------------------------------------- | ------------------------------------------------------- |  | --------------------------------------------------------- | 
|                                                | Balance
      at end of year in
      millions of euros |  | Weighted
      average interest rate
      at end of year | 
|                                                |                                                         |  |                                                           | 
|Year
      ended December 31, 2004              |                                                         |  |                                                           | 
|Banks                                           | 241                                                     |  | 5%                                                        | 
|Commercial
      paper                          |                                                         |  |                                                           | 
|Borrowings
      from nonconsolidated companies | 17                                                      |  | 2%                                                        | 
|Current
      portion of long-term borrowings   | 302                                                     |  |                                                           | 
|                                                |                                                         |  |                                                           | 
|Year
      ended December 31, 2005              |                                                         |  |                                                           | 
|Banks                                           | 298                                                     |  | 2%                                                        | 
|Commercial
      paper                          |                                                         |  |                                                           | 
|Borrowings
      from nonconsolidated companies | 16                                                      |  | 2%                                                        | 
|Current
      portion of long-term borrowings   | 43                                                      |  | 2%                                                        | 
|                                                |                                                         |  |                                                           | 

Commercial paper relates
  to Akzo Nobels commercial paper program in the United States, which at
  December 31, 2005, as at December 31, 2004, had a maximum of USD 1.0 billion
  (year-end 2005:EUR
  0.8 billion; year-end 2004: EUR 0.7 billion), and to Akzo Nobels Euro
  commercial paper program, which at December 31, 2005, as at December 31, 2004,
  had a maximum of EUR 1.5 billion. At December 31, 2005, and at December 31,
  2004, there was no commercial paper outstanding.

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(11) Current
  Liabilities

|                                                                         |      
|------------------------------------------------------------------------ | -----
|Millions of euros                                                        | 2005 
|                                                                         |      
|Prepayments
      by customers                                           | 24   
|Payable
      to suppliers                                               | 1,180
|Taxes
      and social security contributions                            | 153  
|Amounts
      payable to employees                                       | 369  
|Dividends                                                                | 4    
|Pensions                                                                 | 272  
|Current
      portion of long-term liabilities related to restructurings | 118  
|Current
      portion of other long-term liabilities                     | 383  
|Fair
      value derivatives                                             | 13   
|Other                                                                    | 437  
|                                                                         |      
|Total                                                                    | 2,953
|                                                                         |      

(12) Long-term
  Borrowings

|                                  |      
|--------------------------------- | -----
|Millions of euros                 | 2005 
|                                  |      
|Debentures                        | 2,588
|Debt
      to credit institutions | 52   
|Other
      borrowings            | 62   
|                                  |      
|Total                             | 2,702
|                                  |      

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146

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF AKZO NOBEL

Debentures and other
  borrowings can be specified as follows:

|                                                                                                         |                               
|-------------------------------------------------------------------------------------------------------- | ------------------------------
|Millions of euros                                                                                        |                               
|                                                                                                         |                               
|Debentures                                                                                               |                               
|5.38 %                                                                                                   | 1998
      maturing 2008      
|5.63 %                                                                                                   | 2002
      maturing 2009      
|4.25 %                                                                                                   | 2003
      maturing 2011      
|6.44 %                                                                                                   | 1997
      maturing 2007 (USD)
|6.54 %                                                                                                   | 1997
      maturing 2012 (USD)
|Other
      debenture loans with various currencies, rates approximately 6% and various
      maturities |                               
|                                                                                                         |                               
|                                                                                                         |                               
|                                                                                                         |                               
|Debt
      to credit institutions                                                                        |                               
|Debt
      with various currencies and various rates                                                     |                               
|                                                                                                         |                               
|                                                                                                         |                               
|                                                                                                         |                               
|Other
      borrowings                                                                                   |                               
|Borrowings
      with various currencies, various rates, and various maturities;                         |                               
|including
      capital lease obligations                                                                |                               
|                                                                                                         |                               
|                                                                                                         |                               
|                                                                                                         |                               

Aggregate maturity is as follows:

|                  |      
|----------------- | -----
|Millions of euros | 2005 
|                  |      
|2007              | 109  
|2008              | 528  
|2009              | 1,088
|2010              | 10   
|Later             | 967  
|                  |      
|Total             | 2,702
|                  |      

During 2005, the average
  effective interest rate was 4.2%. The weighted average interest rate in 2004
  was 4.9%.

None of the debt to credit institutions and other borrowings have been secured by mortgages etc.

At December 31, 2005, the total amount of long-term credit facilities arranged by Akzo Nobel was EUR 1.5 billion (at December 31, 2004: EUR 1.5 billion). Neither at the end of 2005 nor at the end
of 2004, the facilities were used.

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147

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF AKZO NOBEL

Finance lease liabilities are included under other borrowings. The amounts payable in respect of these finance liabilities are due as follows:

|                            |                               
|--------------------------- | ------------------------------
|Millions of euros           | Minimum
        lease payments
|                            |                               
|Between
      1 and 5 years | 20                            
|More
      than 5 years     | 3                             
|                            |                               
|Total                       | 23                            
|                            |                               

(13) Long-term
  Liabilities

|                                                |      
|----------------------------------------------- | -----
|Millions of euros                               | 2005 
|                                                |      
|Deferred
      tax liabilities                  | 156  
|Deferred
      income                           | 27   
|Pension
      and other postretirement benefits | 1,805
|Restructuring
      of activities               | 81   
|Environmental
      costs                       | 185  
|Other                                           | 139  
|                                                |      
|Total                                           | 2,393
|                                                |      

Deferred
  Tax ProvisionsFor details
  on the total position for deferred taxes reference is made to Note 21.

Deferred
  IncomeIn December
  2003, the company received an initial payment of EUR 88 million from Pfizer
  for the co-development and co-marketing agreement for asenapine. Such payments
  have been reported as deferred income and recognized as revenue in subsequent
  years. For this payment, recognition is based on the development costs expected
  for the (remaining) first part of the development period, currently anticipated
  to be from 2004 to 2007. At December 31, 2005, the remaining balance of the
  deferred amount was EUR 27 million.

Provisions
  for Pensions and Postretirement Benefits other than PensionsAkzo Nobel
  has a number of defined benefit pension plans. The benefits of these plans are
  based primarily on years of service and employees compensation. The funding
  policy for the plans is consistent with local requirements in the countries
  of establishment.

Obligations under the defined benefit plans are systematically provided for by depositing funds with trustees or separate foundations, under insurance policies, or by balance sheet provisions.
Plan assets principally consist of long-term interest-earning investments, quoted equity securities, and real estate.

Akzo Nobel also provides certain healthcare and life insurance benefits for most of the companys retired employees in the United States and, until the end of 2005, in the Netherlands. The
company accrues for the expected costs of providing such postretirement benefits during the years that the employee renders the necessary services.

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148

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF AKZO NOBEL

Valuations of the obligations under the pension and other postretirement plans are carried out by independent actuaries.

During 2005, Akzo Nobel reached agreement with the unions on a change of its pension plan in the Netherlands, so that, effective December 31, 2005, it changed from a defined benefit plan to a
defined contribution plan. In connection with this change, the company paid a one-time nonrefundable contribution of EUR 151 million, prepaid EUR 50 million of employee premiums, and granted a EUR 100 million subordinated loan, which has a fair
value of EUR 87 million. In addition, certain changes were made to the early retirement plan. These changes resulted in a curtailment and settlement of defined benefit obligations of EUR 4,575 million and of plan assets of EUR 4,502 million. All in
all, the net pre-tax gain was EUR 114 million, which was recognized as Special Benefit.

Effective December 31, 2005, due to changes in the Dutch national healthcare system, the company also terminated its postretirement healthcare plan in that country, except for a gradually
declining transition arrangement until June 30, 2009. Due to this curtailment, the defined benefit obligation decreased by EUR 150 million. The net pre-tax gain on the termination was EUR 169 million, which was recognized as Special
Benefit.

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149

NOTES TO THE
  CONSOLIDATED FINANCIAL STATEMENTS OF AKZO NOBEL

Below a table is provided with a summary of the changes in the pension benefit obligation and plan assets for 2005 and 2004.

|                                       |         
|-------------------------------------- | --------
|                                       |         
|                                       | Pensions
|Millions
      of euros                | 2005    
|                                       |         
|Benefit
      obligation               |         
|Balance
      at beginning of year     | (8,975  
|Acquisitions                           | (4      
|Settlements/curtailments               | 4,575   
|Service
      costs                    | (209    
|Contribution
      by employees        | (32     
|Interest
      costs                   | (437    
|Plan
      amendments                  |         
|Benefits
      paid                    | 484     
|Actuarial
      gains and losses       | (747    
|Changes
      in exchange rates        | (165    
|                                       |         
|Balance
      at end of year           | (5,510  
|                                       |         
|Plan
      assets                      |         
|Balance
      at beginning of year     | 6,781   
|Acquisitions                           | 1       
|Settlements/curtailments               | (4,502  
|Contribution
      by employer         | 397     
|Contribution
      by employees        | 32      
|Benefits
      paid                    | (436    
|Actual
      return on plan assets     | 1,197   
|Changes
      in exchange rates        | 126     
|                                       |         
|Balance
      at end of year           | 3,596   
|                                       |         
|Funded
      status                    | (1,914  
|Unrecognized
      net loss            | 328     
|Unrecognized
      prior service costs | 1       
|Medicare
      receivable              |         
|                                       |         
|Net
      balances                     | (1,585  
|                                       |         

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF AKZO NOBEL

The defined benefit obligation breaks down as follows:

|                              |      
|----------------------------- | -----
|                              | 2005 
|                              |      
|Wholly or partly funded plans | 5,207
|Unfunded plans                | 303  
|                              |      
|                              | 5,510
|                              |      

At January 1, 2004, the funded status was as follows:

|                                 |         
|-------------------------------- | --------
|Asset/(liability)                | Pensions
|                                 |         
|Defined
      benefit obligation | (8,579  
|Plan
      assets                | 6,347   
|                                 |         
|Funded
      status              | (2,232  
|                                 |         

The difference between the actual and the expected return on plan assets was a gain of EUR 736 million in 2005, and of EUR 228 million in 2004.

In the United States, the Medicare Prescription Drug Improvement and Modernization Act of 2003 introduced prescription drug benefits for retirees as well as a federal subsidy to sponsors of
postretirement healthcare plans, which both began at January 1, 2006. This reimbursement right has been recognized as an asset under Other Financial Noncurrent Assets, measured at fair value. At December 31, 2005, this value was EUR 68 million
(December 31, 2004: EUR 53 million).

The 2005 and 2004 net periodic pension costs for the defined benefit pension plans were as follows:

|                                                          |         
|--------------------------------------------------------- | --------
|                                                          |         
|                                                          | Pensions
|Millions
      of euro                                    | 2005    
|                                                          |         
|Service
      costs for benefits earned during the period | 209     
|Interest
      costs on projected benefit obligation      | 437     
|Expected
      return on plan assets                      | (461    
|Amortization
      of unrecognized losses                 | 11      
|Settlement/curtailment
      loss/(gain)                  | (132    
|                                                          |         
|Net periodic
      pension costs                          | 64      
|                                                          |         

During 2005, the principal defined benefit pension plans covered some 55% of Akzo Nobels employees. Due to the changes in the Dutch pension plan, for 2006 this will be some 35%. The
remaining plans primarily

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NOTES TO THE
  CONSOLIDATED FINANCIAL STATEMENTS OF AKZO NOBEL

represent defined contribution
  plans. Expenses for these plans totaled EUR 57 million in 2005 and EUR 41 million
  in 2004.

The weighted average assumptions underlying the computations were:

|                                                 |         
|------------------------------------------------ | --------
|                                                 | Pensions
|Percent                                          | 2005    
|                                                 |         
|Pension
      benefit obligation at December 31, |         
|
      discount rate                            | 4.7     
|
      rate of compensation increase            | 3.9     
|Net periodic
      pension costs                 |         
|
      discount rate                            | 4.9     
|
      rate of compensation increase            | 3.2     
|
      expected return on plan assets           | 6.7     
|                                                 |         

The 2005 weighted average
  discount rate for the calculation of the obligation no longer includes the Dutch
  pension plan. The assumptions for the expected return on plan assets were based
  on a review of the historical returns of the asset classes in which the assets
  of the pension plans are invested. The historical returns on these asset classes
  were weighted based on the expected long-term allocation of the assets of the
  pension plans.

Akzo Nobels primary objective with regard to the investment of pension plan assets is to ensure that in each individual scheme sufficient funds are available to satisfy future benefit
obligations. For this purpose so-called asset and liability management (ALM) studies are made periodically at each pension fund. For each of the pension plans an appropriate mix is determined on the basis of the outcome of these ALM studies, taking
into account the national rules and regulations.

Pension plan assets principally
  consist of long-term interest-earning investments, quoted equity securities,
  and real estate. At December 31, 2005 and 2004, plan assets did not include
  financial instruments issued by the company, nor any property occupied or other
  assets used by it. The weighted average pension plan asset allocation at December
  31, 2005 and 2004, and the target allocation for 2006 for the pension plans
  by asset category are as follows:

|                                             |                          
|-------------------------------------------- | -------------------------
|                                             | Target
        allocation
|Percent                                      | 2006                     
|                                             |                          
|Equity
      securities                      | 50-55                    
|Long-term
      interest earning investments | 35-45                    
|Real
      estate                            | 5-10                     
|Other                                        | 0-5                      
|                                             |                          
|Total                                        |                          
|                                             |                          

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF AKZO NOBEL

Weighted average assumptions
  for other postretirement benefits were as follows:

|                                                           |     
|---------------------------------------------------------- | ----
|Percent                                                    | 2005
|                                                           |     
|Assumed
      healthcare cost trend rates at December 31 : |     
|
      healthcare trend rate assumed for next year        | 8.5 
|
      rate to which the cost rate is assumed to decline  |     
|(the
      ultimate rate)                                  | 5.0 
|
      year that the rate reaches the ultimate trend rate | 2009
|                                                           |     

In line with plan agreements in place until December 31, 2005, allowances under the healthcare plan in the Netherlands are assumed not to increase anymore.

Assumed healthcare cost trend rates have a significant effect on the amounts reported for the healthcare plans. A one percentage point change in assumed healthcare cost trend rates would have the
following effects:

|                                                    |                                         
|--------------------------------------------------- | ----------------------------------------
|Millions
      of euros                             | 1 percentage
      point 
      increase
|                                                    |                                         
|Effect
      on total of service and interest costs | 8                                       
|Effect
      on postretirement benefit obligation   | 72                                      
|                                                    |                                         

Cash FlowsThe company expects to contribute EUR 160 million to its pension plans in 2006.

The following benefit payments, which take into account the effect of future service, are expected to be paid.

|                        |         
|----------------------- | --------
|                        |         
|Millions
      of euros | Pensions
|                        |         
|2006                    | 279     
|2007                    | 285     
|2008                    | 302     
|2009                    | 303     
|2010                    | 315     
|2011-2015               | 1,598   
|                        |         

Provisions
  for Restructuring of ActivitiesProvisions
  for restructuring of activities comprise accruals for certain employee termination
  benefits and for costs which are directly associated with plans to exit specific
  activities, primarily related to costs associated with closing down facilities.

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  CONSOLIDATED FINANCIAL STATEMENTS OF AKZO NOBEL

The changes in these provisions (including the short-term portion) are summarized as follows:

|                                                                            |            
|--------------------------------------------------------------------------- | -----------
|                                                                            | Termination
|Millions
      of euros                                                     | benefits   
|                                                                            |            
|Balance
      at December 31, 2003                                          | 211        
|Changes
      in exchange rates                                             |            
|Additions
      charged to income as restructuring charge under incidentals | 90         
|Other
      additions charged to income                                     | (12        
|Utilization                                                                 | (119       
|Divestiture                                                                 | (2         
|                                                                            |            
|Balance
      at December 31, 2004                                          | 168        
|Changes
      in exchange rates                                             |            
|Additions
      charged to income as restructuring charge under incidentals | 48         
|Other
      additions charged to income                                     | 3          
|Utilization                                                                 | (71        
|Amounts
      reversed during the year                                      | (9         
|Unwind
      of discount                                                    | 8          
|                                                                            |            
|Balance
      at December 31, 2005                                          | 147        
|                                                                            |            

At December 31, 2005,
  the provision for termination benefits involves 2,380 employees that either
  already have been terminated or will be terminated in the near future (December
  31, 2004: 2,870).

Provisions
  for Environmental CostsFor details
  on environmental exposures reference is made to Note 15.

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NOTES TO THE
  CONSOLIDATED FINANCIAL STATEMENTS OF AKZO NOBEL

Other
  provisionsOther provisions
  relate to a great variety of risks and commitments, including provisions for
  antitrust cases of EUR 204 million. Reference is made to Note 15.

(14) Shareholders'
  Equity

Capital
  StockAuthorized
  capital stock of Akzo Nobel N.V. is EUR 1,600,019,200 and consists of 48 priority
  shares of EUR 400, 600 million common shares of EUR 2 and 200 million cumulative
  preferred shares of EUR 2. Subscribed share capital consists of 48 priority
  shares, 286,147,260 common shares, and no preferred shares.

In 2005, no common shares were issued. In connection with Akzo Nobels stock option plan, the company held 374,021 common shares at December 31, 2005 (December 31, 2004: 374,021).

The priority shares are held by the Stichting Akzo Nobel (the Foundation). The Board of the Foundation consists of the members of the Supervisory Board who are not members of the Audit
Committee. The Meeting of Holders of Priority Shares has the right to make binding nominations for the appointment of members of the Board of Management and the Supervisory Board.

However, in normal circumstances, the members of the Supervisory Board and the Board of Management will be appointed on the basis of a nonbinding nomination by the Supervisory Board. In 2005, the
Board of the Foundation has confirmed its intention to use its binding nomination rights only in the case of exceptional circumstances, such as in the event of a (threatened) hostile. To formalize this intention, the priority shares were transferred
to a new Foundation, that has incorporated this limitation in its Articles of Association. In both of the aforesaid situations, resolutions to appoint a person as a member of the Supervisory Board or the Board of Management require a simple
majority. Of course, shareholders, meeting the requirements laid down in the Articles of Association, are also entitled to nominate members of the Supervisory Board or the Board of Management. According to the Articles of Association, such
appointments will require a two-thirds majority representing at least 50% of the outstanding share capital.

Amendment of the Articles of Association and dissolution of the company shall require the approval of the Meeting of Holders of Priority Shares.

The Board of Management is authorized to determine, with the approval of the Supervisory Board, the share of the profits to be added to retained earnings. The remainder of the profits shall be
available for dividends to shareholders as follows: first to priority shares at 6 percent or the statutory interest whichever is lower, of their par value, with the balance available to common shares.

In case of liquidation, from the balance remaining after payment of debts, the holders of priority shares and common shares shall in that order be repaid the par value of their shares. From the
balance remaining thereafter, accrued and unpaid dividends, if any, shall be paid first on the priority shares. Any balance remaining thereafter shall be distributed among the holders of common shares, pro rata according to the number of common
shares.

According to Netherlands law, each holder of common shares has a preemptive right to acquire any issue of shares pro rata to the aggregate amount of his shares.

Each common share is entitled to one vote.

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155

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF AKZO NOBEL

2005
  Dividend ProposalIn the annual
  meeting of shareholders it was proposed that dividend on priority shares of
  EUR 768 and on common shares of EUR 343 million will be distributed. Following
  acceptance of this proposal, holders of common shares will receive a dividend
  of EUR 1.20 per share of EUR 2, of which EUR 0.30 was paid earlier as an interim
  dividend. The final dividend of EUR 0.90 has been made payable from May 5, 2006.

Statutory
  reservesAt the Annual
  Meeting of Shareholders of April 26, 2001, an amendment of the Articles of Association
  was approved whereby the par value of the priority shares was adjusted from
  NLG 1,000 to EUR 400 and of the common shares and the cumulative preferred shares
  from NLG 5 to EUR 2. As the revised par values are somewhat lower than the original
  par values, in accordance with section 67a of Book 2 of the Netherlands Civil
  Code, the company recognized a statutory reserve of EUR 77 million for this
  reduction in subscribed share capital. Statutory reserves also include EUR 8
  million for capitalized development costs, as well as the reserves relating
  to the earnings retained by affiliated companies after 1983. Statutory reserves
  are nondistributable.

Translation reserves comprises all foreign exchange differences arising from the translation of the financial statements of foreign operations as well as from the translation of intercompany loans
with a permanent nature and liabilities that hedge the net investments in a foreign subsidiary.

Changes in fair value of derivatives comprise the effective portion of the cumulative net change in the fair value of cash flow hedging instruments related to hedged transactions that have not yet
occurred.

Equity settled transactions include the stock option program and the performance share plan whereby options or shares are granted to all members of the Board of Management, Senior Vice Presidents,
and Executives. For details of the stock option plan and the performance share plan for the Board of Management and other executives, see below under stock appreciation rights.

Stock
  Options/Stock Appreciation RightsStock
  Options and Performance-Related SharesPerformance-related
  stock options and performance-related shares are granted to all members of the
  Board of Management, Senior Vice Presidents, and Executives. The number of participants
  was 675 in 2005 (2004: 733). The options for Senior Vice Presidents and Executives
  expire after five years. Options granted from 2002 onwards expire after seven
  years. Options granted to members of the Board of Management as from 2000 expire
  after ten years. Options granted from 2003 onwards expire after seven years.
  All outstanding options from the series 2000, except those for the members of
  the Board of Management, lapsed in 2005. Options issued as from 1999 cannot
  be exercised during the first three years. The company currently does not purchase
  own shares in connection with its stock option plan. No financing facilities
  exist for option rights or tax payable thereon. One option entitles the holder
  thereof to buy one Akzo Nobel N.V. common share of EUR 2 or one American Depositary
  Share (ADS). As of 2005, all options only entitle the holder thereof to buy
  Akzo Nobel common shares. The exercise price is the Euronext Amsterdam opening
  price on the first day that the Akzo Nobel share is quoted ex dividend or the
  opening price for an ADS on NASDAQ on the first day that the Akzo Nobel ADS
  is quoted ex dividend.

In 2004, a performance-related share plan for the Board of Management was introduced. In 2005, the plan was also introduced for the Executives. Under this plan, a number of conditional shares are
granted to the

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156

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF AKZO NOBEL

members of the Board of Management, Senior Vice Presidents and Executives each year. The actual number of shares to be granted depends on the company's Total Shareholder Return (TSR) performance
over a three-year period, compared with TSR-performance of a specified peer group. For further details on the performance-related share plan, see under B. Compensation in Item 6  Directors, Senior Management and Employees of this Annual
Report.

Options outstanding at December 31, 2005, have the following exercise prices and expiry dates:

|                                   |                      |  |                                        |  |                      | 
|---------------------------------- | -------------------- |  | -------------------------------------- |  | -------------------- | 
|Year
      of issue                | Exercise
      price |  | Outstanding
      at December 31, 2005 |  | Expiry
      date    | 
|                                   |                      |  |                                        |  |                      | 
|Common
      Shares                | In
      EUR         |  |                                        |  |                      | 
|                                   |                      |  |                                        |  |                      | 
|Vested
      options               |                      |  |                                        |  |                      | 
|2000                               | 44.82                |  | 148,500                                |  | April
      27, 2010 | 
|2001                               | 46.75                |  | 839,740                                |  | April
      30, 2006 | 
|2001                               | 46.75                |  | 144,342                                |  | April
      30, 2011 | 
|2002                               | 46.53                |  | 836,160                                |  | April
      25, 2009 | 
|2002                               | 46.53                |  | 176,550                                |  | April
      25, 2012 | 
|                                   |                      |  |                                        |  |                      | 
|                                   |                      |  | 2,145,292                              |  |                      | 
|Unvested
      options             |                      |  |                                        |  |                      | 
|2003                               | 19.51                |  | 961,510                                |  | April
      22, 2010 | 
|2004                               | 31.45                |  | 886,280                                |  | April
      25, 2011 | 
|2005                               | 31.98                |  | 815,898                                |  | April
      24, 2012 | 
|                                   |                      |  |                                        |  |                      | 
|                                   |                      |  | 2,663,688                              |  |                      | 
|American
      Depositary Receipts | In
      USD         |  |                                        |  |                      | 
|                                   |                      |  |                                        |  |                      | 
|Vested
      options               |                      |  |                                        |  |                      | 
|2001                               | 41.69                |  | 133,210                                |  | April
      30, 2006 | 
|2002                               | 42.05                |  | 139,810                                |  | April
      25, 2009 | 
|Unvested
      options             |                      |  |                                        |  |                      | 
|2003                               | 21.21                |  | 178,970                                |  | April
      22, 2010 | 
|2004                               | 37.25                |  | 203,000                                |  | April
      25, 2011 | 
|                                   |                      |  |                                        |  |                      | 
|                                   |                      |  | 654,990                                |  |                      | 
|                                   |                      |  |                                        |  |                      | 
|Total                              |                      |  | 5,463,970                              |  |                      | 
|                                   |                      |  |                                        |  |                      | 

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF AKZO NOBEL

Stock option activity
  during the periods indicated was as follows:

|                             |               |   |                              |  |           |   |                 | 
|---------------------------- | ------------- | - | ---------------------------- |  | --------- | - | --------------- | 
|                             | Common shares |   | American Depositary Receipts | 
|                             |               |   |                              |  |           |   |                 | 
|                             |               |   | Weighted-                    |  |           |   | Weighted-       | 
|                             |               |   | average                      |  |           |   | average         | 
|                             | Number of     |   | exercise price,              |  | Number of |   | exercise price, | 
|                             | options       |   | in EUR                       |  | options   |   | in USD          | 
|                             |               |   |                              |  |           |   |                 | 
|Balance at December 31, 2003 | 5,085,800     |   | 40.17                        |  | 485,100   |   | 33.55           | 
|Granted                      | 904,480       |   | 31.45                        |  | 216,800   |   | 37.25           | 
|Exercised                    |              |   |                              |  |          |   |                 | 
|Expired/forfeited            | (1,087,338    | ) | 42.33                        |  | (36,290   | ) | 32.64           | 
|                             |               |   |                              |  |           |   |                 | 
|Balance at December 31, 2004 | 4,902,942     |   | 38.08                        |  | 665,610   |   | 34.81           | 
|Granted                      | 819,486       |   | 31.98                        |  |           |   |                 | 
|Exercised                    |              |   |                              |  | (2,640    | ) | 41.69           | 
|Expired/forfeited            | (913,448      | ) | 44.25                        |  | (7,980    | ) | 33.45           | 
|                             |               |   |                              |  |           |   |                 | 
|Balance at December 31, 2005 | 4,808,980     |   | 35.87                        |  | 654,990   |   | 34.79           | 
|                             |               |   |                              |  |           |   |                 | 

Until July 1, 2005, the stock options qualified as cash-settled options as the employee had the option to receive cash from the company upon exercise of the options. Effective July 1, 2005, the
arrangement was changed, so that the employee now has to take the shares from the company upon exercise of the options, and then could sell these shares immediately afterwards through her or his bank.

The fair value of employee service received in return for share options granted are measured by reference to the fair value of share options granted. Until July 1, 2005, the company recognized at
each balance sheet a liability for the fair value of the options outstanding per that date, taking into account the passage of time of the three-year vesting period. The change in this fair value was recognized in income. At July 1, 2005, the fair
value of the liability was EUR 20 million (December 31, 2004: EUR 16 million) and the charge recognized in the first half of 2005 amounted to EUR 4 million (full year 2004: EUR 4 million charge). At July 1, 2005, this liability was credited to
shareholders equity.

The amortized grant date fair value of the options outstanding at July 1, 2005, was EUR 41 million of a total grant date fair value of EUR 53 million. As a consequence, the remaining EUR 12
million will be charged to income over the remaining vesting period of the stock options after July 1, 2005. The charge for the second half of 2005 was EUR 3 million.

The expected value of performance stock options for the Board of Management is based on the Binominal Option Pricing Model, using certain assumptions. These assumptions were used for these
calculations only, and do not necessarily represent an indication of managements expectations of future developments. In addition, option valuation models require the input of highly subjective assumptions, including expected share price
volatility. The companys employee stock options have characteristics significantly different from those of traded options and changes in the subjective assumptions used for the calculation can materially affect the fair value estimate.

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NOTES TO THE
  CONSOLIDATED FINANCIAL STATEMENTS OF AKZO NOBEL

The fair values at grant date for the options granted during 2004 and 2005 were as follows:

|                           |                |  |                      |  |                | 
|-------------------------- | -------------- |  | -------------------- |  | -------------- | 
|                           |                |  |                      |  | Fair
    value | 
|                           |                |  |                      |  | at grant       | 
|Year of issue              | Exercise price |  | Expiry
      date    |  | date           | 
|                           |                |  |                      |  |                | 
|Common Shares              | In EUR         |  |                      |  | In EUR         | 
|                           |                |  |                      |  |                | 
|2004                       | 31.45          |  | April
      25, 2011 |  | 7.94           | 
|2005                       | 31.98          |  | April
      24, 2012 |  | 7.45           | 
|                           |                |  |                      |  |                | 
|American Depositary Shares | In USD         |  |                      |  | In USD         | 
|                           |                |  |                      |  |                | 
|2004                       | 37.25          |  | April
      25, 2011 |  | 8.48           | 
|                           |                |  |                      |  |                | 

The assumptions used for the options granted during the years 2004, and 2005, were as follows:

|                                     |                                         |  |                                         |  |                              |  |                                             | 
|------------------------------------ | --------------------------------------- |  | --------------------------------------- |  | ---------------------------- |  | ------------------------------------------- | 
|Year
      of issue  year of expiry | Risk-free
        interest
        rate |  | Expected
        dividend
        yield |  | Expected
        option life |  | Expected
      share price
      volatility | 
|                                     |                                         |  |                                         |  |                              |  |                                             | 
|Common
      Shares                  |                                         |  |                                         |  |                              |  |                                             | 
|2003
       2010                    | 3.3%                                    |  | 3.6%                                    |  | 5 yrs                        |  | 33.7%                                       | 
|2004
       2011                    | 3.2%                                    |  | 4.1%                                    |  | 5 yrs                        |  | 35.2%                                       | 
|2005
       2012                    | 3.25%                                   |  | 4.4%                                    |  | 5 yrs                        |  | 33.4%                                       | 
|                                     |                                         |  |                                         |  |                              |  |                                             | 
|American
      Depositary Receipts   |                                         |  |                                         |  |                              |  |                                             | 
|2003
       2010                    | 2.8%                                    |  | 3.6%                                    |  | 5 yrs                        |  | 31.8%                                       | 
|2004
       2011                    | 2.8%                                    |  | 4.1%                                    |  | 5 yrs                        |  | 32.7%                                       | 
|                                     |                                         |  |                                         |  |                              |  |                                             | 

The expected volatility is based in the historic volatility (calculated based on the weighted average remaining life of the share options), adjusted for any expected changes to future volatility
due to publicly available information. Share options are granted under a service condition and a non-market performance condition. Such conditions are not taken into account in the grant date fair value measurement. There are no market conditions
associated with the share option grants.

The grant date fair value of the performance shares is amortized as a charge against income over the three-year vesting period. The fair value at grant date is based on the Monte Carlo simulation
model taking market conditions into account. The value was calculated by external actuaries and amounted to EUR 10.84 for the performance shares conditionally granted in 2004 and EUR 12.67 for the 2005 performance shares. The 2005 charge recognized
aggregated EUR 3 million (2004: EUR 0.4 million).

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NOTES TO THE
  CONSOLIDATED FINANCIAL STATEMENTS OF AKZO NOBEL

|                                           |             |   |             |  
|------------------------------------------ | ----------- | - | ----------- | -
|                                           | 2005        |   | 2004        |  
|                                           |             |   |             |  
|Issued ordinary shares at January 1        | 286,147,260 |   | 286,147,260 |  
|Effect of own shares held                  | (374,021    | ) | (401,673    | )
|                                           |             |   |             |  
|Shares for basic earnings per share        | 285,773,239 |   | 285,745,587 |  
|Effect of dilutive shares:                 |             |   |             |  
| for stock options                        | 658,646     |   | 423,348     |  
|
      for performance-related share plan | 519,841     |   | 236,962     |  
|                                           |             |   |             |  
|Shares for diluted earnings per share      | 286,951,726 |   | 286,405,897 |  
|                                           |             |   |             |  

(15) Commitments
  and Contingent Liabilities

Environmental
  MattersThe company
  is subject to extensive European Union, national and local laws and regulations
  governing discharges to the air and water as well as the handling and disposal
  of solid and hazardous wastes. In addition, the company is subject to regulatory
  requirements governing the remediation of environmental contamination associated
  with past releases of hazardous substances. Governmental authorities have the
  power to enforce compliance with these requirements, and violators may be subject
  to civil or criminal penalties, injunctions, or both. Third parties also may
  have the right to sue to enforce compliance. The company is involved in (legal)
  proceedings with regulatory authorities in various countries that may require
  the company to pay fines relating to violations of environmental laws and regulations,
  comply with more rigorous standards or other requirements, and incur capital
  and operating expenses to meet such obligations.

The company is subject to hazardous substance cleanup laws in various countries that impose liability for the costs of cleaning up contamination resulting from past spills, disposal or other
releases of hazardous substances. In particular, the company may be subject to liability under the United States Comprehensive Environmental Response, Compensation and Liability Act (CERCLA or Superfund) and similar laws that
impose liabilitywithout a showing of fault, negligence or regulatory violationon the generators of hazardous substances that have caused, or may cause, environmental contamination. Pursuant to CERCLA, in certain circumstances, the United
States Environmental Protection Agency (EPA) may order one or more potentially responsible parties (PRPs) to clean up environmental contamination. In other cases, the EPA may clean up a site and then seek reimbursement of
expenditures of federal funds from PRPs. Courts have interpreted CERCLA generally to impose joint and several liability without regard to fault for cleanup (and certain other) costs on all PRPs. This means that each PRP conceivably could be held
liable for the entire amount of necessary cleanup costs. As a practical matter, however, liability is often apportioned among PRPs based on the volume and/or toxicity of the wastes disposed by each PRP.

It is the companys policy to accrue and charge against earnings environmental cleanup costs when it is probable that a liability has been incurred and an amount is reasonably estimable.
These accruals are reviewed periodically and adjusted, if necessary, as assessments and cleanups proceed and additional information becomes available. Environmental liabilities can change substantially by the emergence of additional information on
the nature or extent of contamination, the necessity of employing particular methods of remediation, actions by governmental agencies or private parties, or other factors of a similar nature. Cash expenditures often lag behind the period in which an
accrual is recorded by a number of years.

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NOTES TO THE
  CONSOLIDATED FINANCIAL STATEMENTS OF AKZO NOBEL

In accordance with the aforementioned policies, as of December 31, 2005 the aggregate environmental related long-term liabilities and accruals accounted for amounted to EUR 268 million (December
31, 2004: EUR 242 million). The liabilities have been discounted, using an average discount rate of 5 percent.

The obligations for environmental liabilities for each of the next five years and thereafter are as follows:

|                        |            | 
|----------------------- | ---------- | 
|Millions
      of euros | Obligation | 
|                        |            | 
|2006                    | 83         | 
|2007                    | 73         | 
|2008                    | 23         | 
|2009                    | 20         | 
|2010                    | 22         | 
|Later                   | 47         | 
|                        |            | 
|Total                   | 268        | 
|                        |            | 

Although the company believes that over the years it and its predecessors utilized operating practices that were standard in the relevant industry and were in compliance with existing
environmental regulations, hazardous materials may have been released in or under currentlyor previouslyoperated sites. Consequently, the company may be required to remediate contamination at some of these sites. Although the company
does not have sufficient information to estimate its potential liability in connection with any potential future remediation, it believes that if any such remediation is required, it will occur over an extended period of time. The company
anticipates that there may be a need for future provisions for environmental costs which, in management's opinion based on information currently available, would not have a material adverse effect on the companys financial position and
liquidity, but could be materially adverse to the companys results of operations or cash flows in any one accounting period.

Antitrust
  CasesAkzo Nobel
  is involved in investigations by the antitrust authorities in the European Union,
  the United States, and Canada into alleged violations of the respective antitrust
  laws for some products in these jurisdictions. The company is fully cooperating
  with the authorities in these investigations. In addition, the company is defending
  civil damage claims in relation to some of these alleged antitrust violations.
  At December 31, 2004, the company had a provision for antitrust cases of EUR
  167 million. Fines, civil damage settlements, and legal costs incurred in 2005
  in connection with these cases amounted to EUR 12 million (2004: EUR 5 million).

In 2005, based on an estimate of probable fines, civil damage claims, and costs to be paid over a number of years to come  taking into account legal advice and the current facts and
circumstances  the company added EUR 39 million to the provision for antitrust cases. At December 31, 2005, the provision for antitrust cases amounted to EUR 204 million. Included in this amount are provisions for three cases pending in appeal
by the company with the EU Court of First Instance against decisions by the EU Commission to impose fines on the company for violations of EU competition laws regarding the following products: Sodium Gluconates (EUR 10 million), Choline Chloride
(EUR 21 million) and Monochloroacetic Acid (EUR 84 million).

For further developments reference is made to Note 25 Subsequent Events.

It should be understood, however, that in light of possible future developments such as (a) the outcome of investigations by the various antitrust authorities, (b) potential additional lawsuits by
(direct or indirect) purchasers, (c) possible future civil settlements, and (d) rulings or judgments in the pending investigations or in related civil suits, the antitrust cases are likely to result in additional liabilities and related costs. The
company

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at this point in time cannot estimate any additional amount of loss or range of loss in excess of the recorded amounts with sufficient certainty to allow such amount or range of amounts to be
meaningful. Moreover, if and to the extent that the contingent liabilities materialize, they are typically paid over a number of years and the timing of such payments cannot be predicted with confidence.

The company believes that the aggregate amount of any additional fines and civil damages to be paid will not materially affect the company's financial position. The aggregate amount, however,
could be material to the company's results of operations or cash flows in any one accounting period.

With regard to Flexsys, a 50/50 joint venture for rubber chemicals with Solutia Inc., authorities in the United States, Canada, and Europe are investigating alleged antitrust violations in the
rubber chemicals industry. We have been informed by Flexsys management that it is cooperating with the authorities and will continue to do so and pursuant to this cooperation has been granted conditional amnesty by the US DOJ, the Canadian BOC and
the EU Commission. We are also aware of a number of purported class actions and an individual action having been filed against Flexsys in federal court (by direct purchasers), which have been settled in 2005, and in various state courts (by alleged
indirect purchasers) in the United States, and in the province of Quebec, Canada. The company is involved as codefendant in State actions in Florida and Massachusetts. Flexsys has recognized certain provisions for these cases but the company does
not believe that the plaintiffs will be able to establish liability on the part of the company nor does it believe that it will be liable for funding any judgments against settlements made by, or related costs incurred by Flexsys. The carrying value
of the companys investment in Flexsys, however, may be affected by these cases.

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

Late January 2006, Akzo Nobel Nederland B.V. and the Akzo Nobel Pension Fund in the Netherlands received a summons from the Association of Retired Akzo Nobel Employees with regard to the changed
financing of the company's Dutch pension plan. Based on legal advice, Akzo Nobel Nederland and the Akzo Nobel Pension Fund have confidence in a positive outcome of the proceedings.

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

For further developments reference is made to Note 25 Subsequent Events.

CommitmentsPurchase
  commitments for property, plant and equipment aggregated EUR 76 million at December
  31, 2005. At December 31, 2004, these commitments totaled EUR 96 million. In
  addition, the company has purchase commitments for raw materials and supplies
  incident to the ordinary conduct of business, for a total of EUR 1.5 billion
  (2004: EUR 1.2 billion).

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  CONSOLIDATED FINANCIAL STATEMENTS OF AKZO NOBEL

Long-term liabilities contracted in respect of leasehold, rental, operational leases, research, etc., aggregated EUR 822 million at December 31, 2005 (at December 31, 2004: EUR 557 million).
Payments due within one year amount to EUR 261 million (2004: EUR 165 million); payments between one and five years EUR 441 million (2004: EUR 269 million) and payments due after more than five years amount to EUR 120 million (2004: EUR 123
million).

Obligations under long-term non-cancelable operating leases and other commitments for each of the next five years and thereafter are as follows:

|                        |       |  |       |  |       | 
|----------------------- | ----- |  | ----- |  | ----- | 
|Millions
      of euros | Lease |  | Other |  | Total | 
|                        |       |  |       |  |       | 
|2006                    | 103   |  | 158   |  | 261   | 
|2007                    | 77    |  | 76    |  | 153   | 
|2008                    | 53    |  | 60    |  | 113   | 
|2009                    | 37    |  | 66    |  | 103   | 
|2010                    | 31    |  | 41    |  | 72    | 
|Later                   | 86    |  | 34    |  | 120   | 
|                        |       |  |       |  |       | 
|Total                   | 387   |  | 435   |  | 822   | 
|                        |       |  |       |  |       | 

GuaranteesGuarantees relating
  to nonconsolidated companies amounted to EUR 3 million (at December 31, 2004:
  EUR 5 million). As general partner in several partnerships, Akzo Nobel companies
  are liable for obligations incurred by these partnerships. At December 31, 2005,
  the risk ensuing from these liabilities was EUR 113 million (at December 31,
  2004: EUR 92 million).

(16) Information
  about Financial Instruments

For information on the commercial paper programs reference is made to Note 10. For information on the standby multicurrency loan facility reference is made to Note 13.

Foreign
  Exchange Risk ManagementThe company
  enters into forward exchange contracts to hedge the entire transaction risk
  on sales, purchases, and financing transactions denominated in currencies other
  than the functional currency of the subsidiary concerned. The purpose of Akzo
  Nobels foreign currency hedging activities is to protect the company from
  the risk that the eventual functional currency net cash flows resulting from
  committed trade or financing transactions are adversely affected by changes
  in exchange rates. Most forward exchange contracts outstanding at year-end have
  a maturity of less than one year. Where necessary, the forward exchange contracts
  are rolled over at maturity. Incidentally, the company may apply hedge accounting.
  The company does not use financial instruments to hedge the translation risk
  related to equity, intercompany loans of a permanent nature, and earnings of
  foreign subsidiaries and nonconsolidated companies. Currency derivatives are
  not used for speculative purposes.

At December 31, 2005, outstanding contracts to buy currencies totaled EUR 1.0 billion (at December 31, 2004: EUR 1.1 billion), while contracts to sell currencies totaled EUR 1.0 billion (at
December 31, 2004: EUR 0.9 billion). These contracts mainly relate to U.S. dollars, Canadian dollars, Swedish kronor, Norwegian kronor, pounds sterling, and Japanese yen, all having maturities within one year.

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NOTES TO THE
  CONSOLIDATED FINANCIAL STATEMENTS OF AKZO NOBEL

The company does not use financial instruments to hedge the translation risk related to equity, intercompany loans of a permanent nature, and earnings of foreign subsidiaries and nonconsolidated
companies.

Interest
  Risk ManagementIn principle,
  the company manages interest risk by matching the duration of assets and liabilities.
  As a consequence, noncurrent assets and a certain portion of current assets
  are financed with equity, provisions, and long-term borrowings with fixed interest
  rates. The remainder of current assets is financed with short-term debt, including
  floating rate short-term borrowings. In order to achieve an appropriate mix
  of fixed and floating rate exposure within the companys policy, a number
  of swap contracts and forward rate agreements have been entered into.

The company swapped EUR 500 million fixed rate liabilities with an interest rate of 5.625% with partially 3-months and partially 6-months floating rate EURIBOR-related liabilities, maturing in
2009. In addition, the company swapped EUR 250 million 3-months floating rate EURIBOR liabilities into USD 223 million 3-months floating rate LIBOR liabilities, maturing in 2009. The combined effective interest rate was 4.18% .

The company swapped fixed rate liabilities with an interest rate of 4.25% with 6-months floating rate EURIBOR-related liabilities for an amount of EUR 650 million, maturing in 2011. The combined
effective interest rate was 2.69% .

The company classifies the interest rate swaps as fair value hedges and states them at fair value.

The company concluded forward rate agreements whereby interest on deposits was fixed for a volume of EUR 100 million to EUR 300 million in the range from 2.06% to 2.64% during the period January
to April 2006 and for a volume of EUR 100 million in the range from 2.34% to 2.47% during the period October 2006 to March 2007. For the forward rate agreements no hedge accounting is applied.

Credit
  RiskThe company
  has a credit risk management policy in place. The exposure to credit risk is
  monitored on an ongoing basis. Credit evaluations are performed on all customers
  requiring credit. Generally the company does not require collateral in respect
  of financial assets.

Investments in cash and cash equivalents are entered into with counterparties which have a high credit rating and limits per counterparty have been set. Transactions involving derivative financial
instruments are with counterparties with sound credit ratings and with whom the Group has contractual netting agreements. The company has no reason to expect nonperformance by the counterparties to these agreements.

Due to the geographical spread of the company and the diversity of its customers, at balance sheet date the company was not subject to any significant concentration of credit risks. The maximum
exposure to credit risk is represented by the carrying amount of each financial asset, including derivative financial instruments, in the balance sheet.

CommoditiesIn order
  to hedge the price risk of natural gas, the company has entered into swap contracts
  for the underlying fuels, with an average volume per month of 43,600 tons for
  the period of January through December 2006, whereby the price is fixed. The
  company also concluded futures contracts to hedge the price risk attached to
  the purchase of 2,600 million m3 of gas, reasonably spread over the period 2006-2008.
  For none of these contracts hedge accounting is applied.

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Furthermore, the company entered into futures contracts for electricity in order to hedge the price risk for the expected use of electricity by certain subsidiaries over the period 2006-2008,
spread in tranches of three months. For these contracts cash flow hedge accounting is applied.

Sensitivity
  AnalysisBy managing
  interest rate and currency risks, the company aims to reduce the impact of short-term
  fluctuations on the companys earnings. Over the longer-term, however,
  permanent changes in foreign exchange and interest rates would have an impact
  on consolidated earnings.

At December 31, 2005, the decrease in the companys profit before tax as a result of a general increase of one percentage point in interest rates would be negligible. Cash and cash
equivalents, short-term borrowings and interest swaps have been included in this assessment.

Fair Value of Financial InstrumentsThe carrying values and estimated fair values of financial instruments do not differ materially with the exception of the following:

|                                                   |                         |   |                             |   |                       |   |                             |  
|-------------------------------------------------- | ----------------------- | - | --------------------------- | - | --------------------- | - | --------------------------- | -
|                                                   | December
      31, 2005 |   | December
      31, 2004     |  
|                                                   |                         |   |                             |   |                       |   |                             |  
|Asset/(liability)                                  | Carrying
      amount   |   | Estimated
      fair values |   | Carrying
      amount |   | Estimated
      fair values |  
|                                                   |                         |   |                             |   |                       |   |                             |  
|Subordinated
      loan to Akzo Nobel Pension Fund | 87                      |   | 87                          |   |                       |   |                             |  
|Trade
      and other receivables                  | 2,773                   |   | 2,773                       |   | 2,551                 |   | 2,551                       |  
|Cash
      and cash equivalents                    | 1,486                   |   | 1,486                       |   | 1,811                 |   | 1,811                       |  
|Interest
      rate currency swaps                 |                         |   |                             |   | 175                   |   | 237                         |  
|Interest
      swap contracts                      | 81                      |   | 81                          |   |                      |   | 32                          |  
|Cross
      currency swap contracts                | 64                      |   | 64                          |   |                      |   |                            |  
|Forward
      rate agreements                      |                        |   |                            |   |                      |   |                            |  
|Forward
      exchange contracts:                  |                         |   |                             |   |                       |   |                             |  
|
      asset                                      | 23                      |   | 23                          |   | 58                    |   | 59                          |  
|
      liability                                  | (11                     | ) | (11                         | ) | (47                   | ) | (47                         | )
|Long-term
      borrowings                         | (2,702                  | ) | (2,833                      | ) | (2,392                | ) | (2,566                      | )
|Short-term
      borrowings                        | (357                    | ) | (357                        | ) | (258                  | ) | (258                        | )
|Trade
      and other payables                     | (2,191                  | ) | (2,191                      | ) | (2,511                | ) | (2,511                      | )
|Electricity
      futures                          | 18                      |   | 18                          |   |                       |   |                             |  
|Petroleum
      swaps                              | 4                       |   | 4                           |   |                       |   |                            |  
|Gas futures                                        | 1                       |   | 1                           |   |                       |   |                            |  
|                                                   |                         |   |                             |   |                       |   |                             |  
|                                                   | (724                    | ) | (855                        | ) | (613                  | ) | (692                        | )
|                                                   |                         |   |                             |   |                       |   |                             |  
|Unrecognized
      (losses)/gains                  |                         |   | (131                        | ) |                       |   | (79                         | )
|                                                   |                         |   |                             |   |                       |   |                             |  

The fair value of foreign currency contracts, swap contracts, forward rate agreements, petroleum options, and gas futures was estimated by calculation and obtaining quotes from dealers and
brokers.

The fair value of the company's long-term borrowings was estimated based on the quoted market prices for the same or similar issues or on the current rates offered to the company for debt with
similar maturities.

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The carrying amounts of cash and cash equivalents, receivables, short-term borrowings, and other current liabilities approximate fair value due to the short maturity period of those instruments.

(17) IAS
  39 Fair Value Adjustments

IAS 39 fair value adjustments concern changes in the fair value of forward exchange contracts, petroleum swaps, and gas futures, for which no cash flow hedge accounting is applied. As a
consequence, the changes in fair value of these contracts are recognized in income directly.

(18) Incidentals

Incidentals are special benefits, results on divestments, restructuring and impairment charges, and charges related to major legal, antitrust, and environmental cases.

In 2005, the special benefits mainly relate to the termination of the Risperdal®copromotion (EUR 149 million), the settlement with Duramed/Barr on Mircette (EUR 109 million), the release of provisions due to termination of the postretirement healthcare plan in the Netherlands, and the
change to a defined contribution plan in the Netherlands (EUR 283 million).

Results on divestments in 2005 mainly concerns the divestment of Intervets feed additives business BioVet and the divestment of the companys interest in Svensk Ethanolkemie AB.

In 2005 and 2004, the following restructuring and impairment charges for consolidated companies were included:

|                     |      |   |      |  
|-------------------- | ---- | - | ---- | -
|Millions of euros    | 2005 |   | 2004 |  
|                     |      |   |      |  
|Asset impairments at |      |   |      |  
|
      Organon      | (67  | ) | (31  | )
|
      Intervet     |      |   |     |  
|
      Coatings     | (5   | ) | (16  | )
|
      Chemicals    | (49  | ) | (30  | )
|Restructurings at:   |      |   |      |  
|
      Organon      | (3   | ) | (19  | )
|
      Intervet     |      |   |     |  
|
      Coatings     | (31  | ) | (38  | )
|
      Chemicals    | (14  | ) | (61  | )
|
      Others       |      |   | (2   | )
|                     |      |   |      |  
|Total                | (169 | ) | (197 | )
|                     |      |   |      |  

In 2005, the asset impairments mainly relate to Organon's active pharmaceutical ingredients activities and the Chemicals McCook plant in the United States. Organon's active pharmaceutical
ingredients activities are under pressure from difficult market circumstances, leading to a pre-tax impairment charge of EUR 67 million. The impairment of the McCook plant was the result of restructuring of the production capacity in order to
address the more competitive environment in which the Surfactants business operates. In addition, several smaller impairments at Chemicals and Coatings were recognized. Restructuring charges relate to several relatively smaller plans within the
company and comprise accruals for employee benefits and for costs directly

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166

NOTES TO THE
  CONSOLIDATED FINANCIAL STATEMENTS OF AKZO NOBEL

associated with plans to exit specific activities and to close down facilities. For all restructurings a detailed formal plan exists, and the implementation of the plan has started or the plan has
been announced.

Charges related to major legal, antitrust and environmental cases for 2005 include EUR 64 million for the settlement of the last Remeron®case, EUR 39 million for antitrust cases and EUR 9 million for environmental risks at derelict sites of companies acquired in the past.

2004In 2004,
  the special benefits mainly related to the full transfer of Arixtra®
  to Sanofi-Synthélabo (EUR 54 million), the early entrance fee for a marketing
  license for Remeron® in Germany, and the settlement of insurance
  claims for the West Orange site.

The gain on the divestments is mainly related to the divestment of Catalysts, Phosphorus Chemicals, and Coating Resins.

Pharmas restructuring losses mainly concern impairment and closure costs of the Organon production site in West Orange, New Jersey, and other worldwide cost reduction programs. Coatings
restructuring charges predominantly concern the rationalization programs at Car Refinishes. Restructurings and impairments at Chemicals relate to the closure of a Surface Chemistry site in the United Kingdom, the chlorine production in Bohus,
Sweden, and staff cuts at Polymer Chemicals in Germany. In total, these restructurings affect 1,840 jobs worldwide.

As can be noted from the above, impairment charges mainly relate to assets on sites (to be) closed. The impairment was determined based on the estimated fair value at which the assets are expected
to be sold. Assets, for which it is not possible to be sold, were written down to zero.

In 2004, these charges related to antitrust (EUR 102 million), Remeron®cases (EUR 89 million) and environmental cases (EUR 11 million).

(19) Other
  operating income/(expenses)

The following items are
  included as other results:

|                                          |      |  |      |  
|----------------------------------------- | ---- |  | ---- | -
|Millions of euros                         | 2005 |  | 2004 |  
|                                          |      |  |      |  
|Results
      on sale of redundant assets | 5    |  | 5    |  
|Currency
      exchange differences       | 5    |  | (4   | )
|Other
      items                         | 6    |  | (2   | )
|                                          |      |  |      |  
|Total                                     | 16   |  | (1   | )
|                                          |      |  |      |  

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167

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(20) Financing
  Charges

|                                                                            |      |   |      |  
|--------------------------------------------------------------------------- | ---- | - | ---- | -
|Millions of euros                                                           | 2005 |   | 2004 |  
|                                                                            |      |   |      |  
|Interest
      income                                                       | 34   |   | 19   |  
|Interest
      expense                                                      | (149 | ) | (142 | )
|Interest
      on discounting of provisions and other long-term receivables | (41  | ) | (21  | )
|                                                                            |      |   |      |  
|Total                                                                       | (156 | ) | (144 | )
|                                                                            |      |   |      |  

Interest expense was reduced by EUR 3 million and EUR 4 million in 2005 and 2004, respectively, due to the capitalization of financing expenses of capital investment projects under construction.

(21) Income
  Taxes

In assessing the valuation of the deferred tax assets, management considers whether it is probable that some portion or all of the deferred tax assets will be realized. The ultimate realization of
the deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future
taxable income, and tax planning strategies in making this assessment. The amount of the deferred tax assets considered realizable, however, could change in the near term if future estimates of projected taxable income during the carryforward period
are revised. Deferred tax assets and liabilities relate to the following balance sheet items:

Tax charges are as follows:

|                                                                                                                                               |      |   |      |  
|---------------------------------------------------------------------------------------------------------------------------------------------- | ---- | - | ---- | -
|Millions of euros                                                                                                                              | 2005 |   | 2004 |  
|                                                                                                                                               |      |   |      |  
|Operating
      income less financing charges                                                                                                  | (336 | ) | (412 | )
|Nonconsolidated
      companies1                                                                                                               | (2   | ) | (4   | )
|                                                                                                                                               |      |   |      |  
|Total                                                                                                                                          | (338 | ) | (416 | )
|                                                                                                                                               |      |   |      |  
|1 Includes
      nonrefundable withholding taxes for dividends and income taxes relating
      to the company's share in partnership earnings. |      |   |      |  

Pre-tax income (including earnings from nonconsolidated companies) in the Netherlands and from foreign operations is as follows:

|                  |       |  |       | 
|----------------- | ----- |  | ----- | 
|Millions of euros | 2005  |  | 2004  | 
|                  |       |  |       | 
|The Netherlands   | 423   |  | 455   | 
|Foreign           | 913   |  | 942   | 
|                  |       |  |       | 
|Total             | 1,336 |  | 1,397 | 
|                  |       |  |       | 

| | 
| | 

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168

NOTES TO THE
  CONSOLIDATED FINANCIAL STATEMENTS OF AKZO NOBEL

The tax (charges)/benefits in the Netherlands and from foreign operations were as follows:

|                   |      |   |      |   |      |   |      |  
|------------------ | ---- | - | ---- | - | ---- | - | ---- | -
|Millions of euros  |      |   | 2005 |   |      |   | 2004 |  
|                   |      |   |      |   |      |   |      |  
|Current
      tax  |      |   |      |   |      |   |      |  
|The Netherlands    | (29  | ) |      |   | (44  | ) |      |  
|Foreign            | (358 | ) |      |   | (383 | ) |      |  
|                   |      |   |      |   |      |   |      |  
|                   |      |   | (387 | ) |      |   | (427 | )
|Deferred
      tax |      |   |      |   |      |   |      |  
|The Netherlands    | (103 | ) |      |   | (33  | ) |      |  
|Foreign            | 152  |   |      |   | 44   |   |      |  
|                   |      |   |      |   |      |   |      |  
|                   |      |   | 49   |   |      |   | 11   |  
|                   |      |   |      |   |      |   |      |  
|Total              |      |   | (338 | ) |      |   | (416 | )
|                   |      |   |      |   |      |   |      |  

Included in the deferred income tax (expense)/benefit above are benefits of operating loss carryforwards of EUR 44 million and EUR 12 million for the years ended December 31, 2005 and 2004,
respectively. Also included in the deferred income tax expense above are net adjustments of the beginning-of-the-year balance of the valuation allowance of a decrease of EUR 2 million and an increase of EUR 1 million for the years ended December 31,
2005 and 2004, respectively.

The table below reconciles the normal corporation tax rates in the Netherlands to the effective consolidated rates in the statement of income.

|                                                                                |      |   |      |  
|------------------------------------------------------------------------------- | ---- | - | ---- | -
|Percentages                                                                     | 2005 |   | 2004 |  
|                                                                                |      |   |      |  
|Corporate
      tax rate in the Netherlands                                     | 32   |   | 35   |  
|Nontaxable
      income from nonconsolidated companies (excluding partnerships) | (1   | ) | (2   | )
|Effect
      of lower tax rates in certain countries1                           | (6   | ) |      |  
|Nondeductible
      expenses/(tax exempt income)                                | 2    |   | (5   | )
|Effect
      of tax losses utilized                                             |      |   | 1    |  
|Under/(over)
      provided in prior years                                      | (2   | ) | 1    |  
|                                                                                |      |   |      |  
|Total                                                                           | 25   |   | 30   |  
|                                                                                |      |   |      |  

Nondeductible expenses in 2005 relates to several smaller items. Tax exempt income in 2004 mainly concerns the non taxable gains on the divestments at Chemicals. The 2005 reversal of the
overprovision in prior years for 2005 mainly concerned a tax settlement in Germany.

At December 31, 2005, losses carried forward amounted to EUR 520 million, of which the tax effect of EUR 102 million is not recognized in the balance sheet. Of the total losses carried forward EUR
12 million will expire within one year, while EUR 92 million will expire within five years. EUR 226 million will expire after 5 years. For EUR 190 million of losses, there is no expiration date. Of the net deferred taxes EUR 230 million is expected
to reverse in 2006.

|1 | Includes the effects
        of changes in enacted tax rates.
|- | -------------------------------------------------------------

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169

NOTES TO THE
  CONSOLIDATED FINANCIAL STATEMENTS OF AKZO NOBEL

The tax effects of temporary
  differences that give rise to significant portions of the deferred tax assets
  and deferred tax liabilities at December 31, 2005 and 2004, are presented below.

|                                                   |        |   |             |   |        |   |             |  
|-------------------------------------------------- | ------ | - | ----------- | - | ------ | - | ----------- | -
|                                                   | 2005   |   |             |   | 2004   |   |             |  
|                                                   | Assets |   | Liabilities |   | Assets |   | Liabilities |  
|                                                   |        |   |             |   |        |   |             |  
|Intangible assets                                  | 139    |   | 12          |   | 55     |   | 14          |  
|Property, plant and equipment                      | 71     |   | 158         |   | 43     |   | 152         |  
|Inventories                                        | 25     |   | 14          |   | 36     |   | 41          |  
|Trade and other receivables                        | 29     |   | 32          |   | 26     |   | 18          |  
|Provisions:                                        |        |   |             |   |        |   |             |  
|
      pensions and other postretirement benefits | 347    |   | 30          |   | 583    |   | 49          |  
|
      restructuring                              | 30     |   | 1           |   | 37     |   | 3           |  
|
      other provisions                           | 399    |   | 52          |   | 328    |   | 37          |  
|Other items                                        | 75     |   | 187         |   | 91     |   | 301         |  
|Net operating loss carryforwards                   | 145    |   |             |   | 119    |   |             |  
|Valuation allowances                               | (35    | ) |             |   | (53    | ) |             |  
|                                                   |        |   |             |   |        |   |             |  
|Tax assets/liabilities                             | 1,225  |   | 486         |   | 1,265  |   | 615         |  
|Set-off of tax                                     | (330   | ) | (330        | ) | (471   | ) | (471        | )
|                                                   |        |   |             |   |        |   |             |  
|Net deferred taxes                                 | 895    |   | 156         |   | 794    |   | 144         |  
|                                                   |        |   |             |   |        |   |             |  

Deferred tax assets and
  liabilities are offset only when there is a legally enforceable right to set
  off tax assets against tax liabilities and when the deferred tax assets and
  liabilities relate to the same tax authority.

The movement in temporary differences during the year is as follows:

|                                                   |                             |   |                           |   |                      |   |                      |  |                               |  
|-------------------------------------------------- | --------------------------- | - | ------------------------- | - | -------------------- | - | -------------------- |  | ----------------------------- | -
|                                                   | Net
balance January 1,
2004 |   | Changes
in exchange rates |   | Recognized in
income |   | Recognized in
equity |  | Net
balance December 31, 2004 |  
|                                                   |                             |   |                           |   |                      |   |                      |  |                               |  
|Intangible assets                                  | 57                          |   | (3                        | ) | (13                  | ) |                      |  | 41                            |  
|Property, plant and equipment                      | (96                         | ) | 2                         |   | (15                  | ) |                      |  | (109                          | )
|Inventories                                        | (20                         | ) | (1                        | ) | 16                   |   |                      |  | (5                            | )
|Trade and other receivables                        | 11                          |   |                          |   | (3                   | ) |                      |  | 8                             |  
|Provisions:                                        |                             |   |                           |   |                      |   |                      |  |                               |  
|
      pensions and other postretirement benefits | 578                         |   | (5                        | ) | (39                  | ) |                      |  | 534                           |  
|
      restructuring                              | 43                          |   |                          |   | (9                   | ) |                      |  | 34                            |  
|
      other provisions                           | 260                         |   | (10                       | ) | 41                   |   |                      |  | 291                           |  
|Other items                                        | (310                        | ) | 7                         |   | 93                   |   |                      |  | (210                          | )
|Net operating loss carryforwards                   | 169                         |   | (5                        | ) | (45                  | ) |                      |  | 119                           |  
|Valuation allowances                               | (40                         | ) | 2                         |   | (15                  | ) |                      |  | (53                           | )
|                                                   |                             |   |                           |   |                      |   |                      |  |                               |  
|Tax assets/liabilities                             | 652                         |   | (13                       | ) | 11                   |   |                      |  | 650                           |  
|                                                   |                             |   |                           |   |                      |   |                      |  |                               |  

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170

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF AKZO NOBEL

|                                                   |                               |   |                           |   |                      |   |                      |   |                               |  
|-------------------------------------------------- | ----------------------------- | - | ------------------------- | - | -------------------- | - | -------------------- | - | ----------------------------- | -
|                                                   | Net balance December
31, 2004 |   | Changes
in exchange rates |   | Recognized in income |   | Recognized in equity |   | Net
balance December 31, 2005 |  
|                                                   |                               |   |                           |   |                      |   |                      |   |                               |  
|Intangible assets                                  | 41                            |   | 7                         |   | 79                   |   |                      |   | 127                           |  
|Property, plant and equipment                      | (109                          | ) | (5                        | ) | 27                   |   |                      |   | (87                           | )
|Inventories                                        | (5                            | ) | 1                         |   | 15                   |   |                      |   | 11                            |  
|Trade and other receivables                        | 8                             |   | 1                         |   | (12                  | ) |                      |   | (3                            | )
|Provisions:                                        |                               |   |                           |   |                      |   |                      |   |                               |  
|
      pensions and other postretirement benefits | 534                           |   | 14                        |   | (228                 | ) |                      |   | 320                           |  
|
      restructuring                              | 34                            |   | 2                         |   | (7                   | ) |                      |   | 29                            |  
|
      other provisions                           | 291                           |   | 22                        |   | 38                   |   |                      |   | 351                           |  
|Other items                                        | (210                          | ) | (2                        | ) | 100                  |   | (7                   | ) | (119                          | )
|Net operating loss carryforwards                   | 119                           |   | 11                        |   | 15                   |   |                      |   | 145                           |  
|Valuation allowances                               | (53                           | ) | (4                        | ) | 22                   |   |                      |   | (35                           | )
|                                                   |                               |   |                           |   |                      |   |                      |   |                               |  
|Tax assets/liabilities                             | 650                           |   | 47                        |   | 49                   |   | (7                   | ) | 739                           |  
|                                                   |                               |   |                           |   |                      |   |                      |   |                               |  

The valuation allowance for deferred tax assets as of December 31, 2005 and 2004, was EUR 35 million and EUR 53 million, respectively. The net change in the valuation allowance for the years ended
December 31, 2005 and 2004, was a decrease of EUR 18 million and an increase of EUR 13 million, respectively, due to changed assessments of realizability of deferred tax assets.

No taxes have been provided for approximately EUR 2.4 billion of unremitted earnings of certain foreign subsidiaries as of December 31, 2005 (2004: EUR 1.4 billion). The remittance of these
amounts would not lead to an income tax charge in the Netherlands and, in case of nonrefundable withholding taxes, part of these withholding taxes would be available for tax credits.

(22) Earnings
      from Nonconsolidated Companies

The 2005 earnings from nonconsolidated companies amounted to EUR 4 million net of a tax charge of EUR 2 million (2004: EUR 10 million net of tax charge of EUR 4 million). The operational
performance of the nonconsolidated companies on balance improved slightly, as the higher results posted by Flexsys offset the loss of earnings from the divested Catalysts joint ventures. 2005 earnings include net incidental losses of EUR 37 million,
mainly related to the closure of Methanor and guarantees for environmental costs at Acordis. In 2004, the net incidental loss of EUR 29 million related to antitrust charges recognized at Flexsys and guarantees for pension charges granted to Acordis
at the time of its divestment.

(23) Application
of Generally Accepted Accounting Principles in the United States of America

The accounting principles followed in the preparation of the consolidated financial statements (IFRS) differ in some respects from those generally accepted in the United States of America (US
GAAP).

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171

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF AKZO NOBEL

The reconciliation of net income is as follows:

|                                                                             |                                       |  
|---------------------------------------------------------------------------- | ------------------------------------- | -
|                                                                             | For
      the year ended December 31, |  
|Millions of euros                                                            | 2005                                  |  
|                                                                             |                                       |  
|Net income
      in accordance with IFRS                                     | 961                                   |  
|Adjustments
      to reported income:                                        |                                       |  
|Goodwill
      write-downs (a)                                               | (46                                   | )
|Pensions
      (b)                                                           | (212                                  | )
|Subordinated
      loan and prepaid employee premiums in the Netherlands (b) | 15                                    |  
|Other
      postretirement benefits (b)                                      | (72                                   | )
|Joint
      venture (c)                                                      | (2                                    | )
|Stock
      compensation (d)                                                 | 1                                     |  
|Employee
      share plan (e)                                                |                                       |  
|Development
      costs (f)                                                  |                                      |  
|Restructuring
      provisions (g)                                           | (16                                   | )
|Tax on
      the elimination of intercompany profits (h)                     | (7                                    | )
|Derivatives
      (i)                                                        | 8                                     |  
|Assets
      held for disposal (j)                                           | (2                                    | )
|Intangible
      assets (k)                                                  | (24                                   | )
|Income
      taxes (l)                                                       | 106                                   |  
|                                                                             |                                       |  
|Net income
      / (loss) in accordance with US GAAP                         | 710                                   |  
|                                                                             |                                       |  
|Per
      share and ADS in accordance with US GAAP, in euros:                |                                       |  
|Basic
      earnings / (loss) per share/ADS                                  | 2.48                                  |  
|Diluted
      earnings / (loss) per share/ADS                                | 2.47                                  |  
|                                                                             |                                       |  

Comprehensive income
is as follows:

|                                                                         |      |   |      |  
|------------------------------------------------------------------------ | ---- | - | ---- | -
|Millions of euros                                                        | 2005 |   | 2004 |  
|                                                                         |      |   |      |  
|Net income / (loss) in accordance with US GAAP                           | 710  |   | 832  |  
|Other comprehensive income / (loss), net of taxes                        |      |   |      |  
|
      Foreign currency translation adjustments                         | 253  |   | (78  | )
|Excess of minimum
      liability over unrecognized prior service cost, |      |   |      |  
|before
      taxes                                                       | (115 | ) | 72   |  
|Tax on excess
      of minimum liability over unrecognized prior        |      |   |      |  
|service
      cost                                                       | 41   |   | (7   | )
|                                                                         |      |   |      |  
|Comprehensive income / (loss)                                            | 889  |   | 819  |  
|                                                                         |      |   |      |  



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172

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF AKZO NOBEL

The accumulated other comprehensive income / (loss) balances are as follows:

|                                   |                                          |   |                                      |   |                                        |  
|---------------------------------- | ---------------------------------------- | - | ------------------------------------ | - | -------------------------------------- | -
|Millions of euros                  | Foreign currency translation adjustments |   | Minimum pension liability adjustment |   | Accumulated other comprehensive income |  
|                                   |                                          |   |                                      |   |                                        |  
|Balance
      at December 31, 2003 | (1,066                                   | ) | (824                                 | ) | (1,890                                 | )
|2004 change                        | (78                                      | ) | 65                                   |   | (13                                    | )
|                                   |                                          |   |                                      |   |                                        |  
|Balance
      at December 31, 2004 | (1,144                                   | ) | (759                                 | ) | (1,903                                 | )
|2005 change                        | 253                                      |   | (74                                  | ) | 179                                    |  
|                                   |                                          |   |                                      |   |                                        |  
|Balance
      at December 31, 2005 | (891                                     | ) | (833                                 | ) | (1,724                                 | )
|                                   |                                          |   |                                      |   |                                        |  

The reconciliation of shareholders equity is as follows:

|                                                      |                    |   |        |  
|----------------------------------------------------- | ------------------ | - | ------ | -
|                                                      | December
      31, |  
|Millions of euros                                     | 2005               |   | 2004   |  
|                                                      |                    |   |        |  
|Shareholders equity in accordance with IFRS          | 3,415              |   | 2,605  |  
|Adjustments to reported shareholders equity:         |                    |   |        |  
|Goodwill (a)                                          | 3,056              |   | 3,036  |  
|Pensions (b)                                          | 1,496              |   | 1,650  |  
|Minimum pension liability (b)                         | (1,228             | ) | (1,103 | )
|Other postretirement benefits (b)                     | 61                 |   | 124    |  
|Joint venture (c)                                     | 17                 |   | 8      |  
|Stock-compensation (d)                                |                    |   | (1     | )
|Development costs (f)                                 | (8                 | ) | (8     | )
|Restructuring provisions (g)                          | 1                  |   | 17     |  
|Tax effect on eliminations of intercompany profit (h) | (40                | ) | (33    | )
|Derivatives (i)                                       | 61                 |   | 95     |  
|Assets held for disposal (j)                          | (2                 | ) |        |  
|Intangible assets (k)                                 | (24                | ) |        |  
|Income taxes (l)                                      | (104               | ) | (263   | )
|                                                      |                    |   |        |  
|Shareholders equity in accordance with US GAAP       | 6,701              |   | 6,127  |  
|                                                      |                    |   |        |  

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173

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF AKZO NOBEL

An analysis of the change of shareholders' equity under US GAAP is as follows:

|                                                            |       |   |       |  
|----------------------------------------------------------- | ----- | - | ----- | -
|Millions of euros                                           | 2005  |   | 2004  |  
|                                                            |       |   |       |  
|Balance at beginning of year                                | 6,127 |   | 5,651 |  
|Net income / (loss)                                         | 710   |   | 832   |  
|Dividends paid                                              | (343  | ) | (343  | )
|Equity settled transactions                                 | 28    |   |       |  
|Foreign currency translation adjustments                    | 253   |   | (78   | )
|Excess of minimum liability over unrecognized prior service |       |   |       |  
|costs,
      net of income taxes                            | (74   | ) | 65    |  
|                                                            |       |   |       |  
|Balance at end of year                                      | 6,701 |   | 6,127 |  
|                                                            |       |   |       |  

The differences, which have an effect on net income and/or shareholders' equity, are as follows:

|(a) | For NL GAAP purposes,
        until 1999 goodwill was charged directly to shareholders' equity. Under
        IFRS goodwill is capitalized and tested for impairment annually. Akzo
        Nobel has elected the transition option in IFRS 1 to apply IFRS 3 prospectively
        from the transition date. This implicates that all prior business combination
        accounting is frozen at transition date and the value of goodwill is
    frozen at January 1, 2004.                                                                                                                                                                                         
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|    | For US GAAP, until
        2001 goodwill was capitalized and amortized over its estimated useful
    life not exceeding 40 years.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|    | The company adopted
        the provisions of SFAS No. 141 as of July 1, 2001, and of SFAS No. 142
        effective January 1, 2002. As of January 1, 2002, goodwill is determined
        to have an indefinite useful life, and therefore no longer amortized.
        Annually goodwill is tested for impairment in accordance with the provisions
    of SFAS No. 142.                                                                                                                                                                                                                                                                                           
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|    | As a consequence,
        the unamortized goodwill balances per January 1, 2002, of pre 2000 acquisitions
    are to be capitalized for US GAAP and are no longer amortized.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|    | The company annually
        tests the US GAAP goodwill for impairment. The impairment test in accordance
        with the provisions of SFAS No. 142 did not result in additional charges
        in the company's statement of income, except for the write down of remaining
        unamortized goodwill associated with businesses disposed of. For 2005,
        the write down mainly related to some Chemicals activities which are
        classified as held for sale. The goodwill has been written down to net
        realizable value. For 2004, the write down concerns unamortized goodwill
    of Catalysts, Phosphorus Chemicals and Coating Resins.
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|    | An analysis of
        the change in the reconciling item for goodwill under US GAAP during
    2005 and 2004 is as follows:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          

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174

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF AKZO NOBEL

| |                                                |       |  
| | ---------------------------------------------- | ----- | -
| | Millions
      of euros                        |       |  
| |                                                |       |  
| | Balance
      at December 31, 2003             | 3,163 |  
| | Additional
      write-downs (see (b) below)   | (92   | )
| | Foreign
      currency translation adjustments | (35   | )
| |                                                |       |  
| | Balance
      at December 31, 2004             | 3,036 |  
| | Additional
      write-downs                   | (46   | )
| | Foreign
      currency translation adjustments | 66    |  
| |                                                |       |  
| | Balance
      at December 31, 2005             | 3,056 |  
| |                                                |       |  
| |                                                |       |  

|(b) | Until December 31,
        2004, the company used to account for pensions and other postretirement
        benefits in accordance with SFAS 87 and SFAS 106. For the adoption of
        IFRS, also IAS 19 Employee Benefits in respect of pensions and other
        postretirement benefits had to be implemented. As a consequence, the
        company had to recognize the funded status at January 1, 2004, of the
        projected benefit obligation insofar as this was not covered by provisions
        or prepaid pension assets. Any unvested portion of past service cost
        at that date had to be excluded. On January 1, 2004, the company had
        a significant deficit for its pensions and other postretirement benefit
        plans. For the IFRS opening balance this deficit has been charged against
        shareholders equity. Going forward, the full recognition of the
        deficit at January 1, 2004 resulted in lower net periodic pension cost
        for 2004 and 2005 under IFRS, as the deferred losses under SFAS 87 and
    SFAS 106 no longer were to be amortized.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|    | Furthermore, the
        company had also recognized a minimum pension liability for the deficit
        determined on the accumulated benefit obligation (ABO) level, as required
        under SFAS 87. As this is not allowed under IAS 19, the minimum pension
    liability-related entries were reversed in the IFRS balance sheet.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|    | For US GAAP purposes
    these changes as a result of the IFRS implementation have been reversed.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|    | During 2005, Akzo
        Nobel reached an agreement with the unions on a change of its pension
        plan in the Netherlands, so that, effective December 31, 2005, it changed
        from a defined benefit plan to a defined contribution plan for IFRS,
        as the actuarial or investment risks related to the Dutch plan no longer
        rest with the company. However, SFAS 87 specifically prescribes for a
        defined contribution plan that the plan provides an individual account
        for each participant. The Dutch plan does not provide such individual
        accounts per participant as it is a collective defined contribution plan.
        Therefore, in accordance with SFAS 87 the changed pension plan in the
        Netherlands still is to be qualified as a defined benefit plan for US
    GAAP purposes.                                                                                                                                                                                                                                                                

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175

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF AKZO NOBEL

| | Below
      a table is provided with a summary of the changes in the pension benefit
      obligation and plan assets for 2005 and 2004 on SFAS 87 basis. |                                          
| | --------------------------------------------------------------------------------------------------------------------------------------------------------- | -----------------------------------------
| |                                                                                                                                                           |                                          
| |                                                                                                                                                           |                                          
| |                                                                                                                                                           | The
      
                   Netherlands
| | Millions
      of euros                                                                                                                                   | 2005                                     
| |                                                                                                                                                           |                                          
| | Benefit
      obligation                                                                                                                                  |                                          
| | Balance
      at beginning of year                                                                                                                        | (4,375                                   
| | Acquisitions/divestments                                                                                                                                  | (1                                       
| | Settlements/curtailments                                                                                                                                  |                                          
| | Service
      costs                                                                                                                                       | (129                                     
| | Contribution
      by employees                                                                                                                           | (24                                      
| | Interest
      costs                                                                                                                                      | (192                                     
| | Plan
      amendments                                                                                                                                     | 16                                       
| | Benefits
      paid                                                                                                                                       | 209                                      
| | Actuarial
      gains and losses                                                                                                                          | (417                                     
| | Changes
      in exchange rates                                                                                                                           |                                          
| |                                                                                                                                                           |                                          
| | Balance
      at end of year                                                                                                                              | (4,913                                   
| |                                                                                                                                                           |                                          
| | Plan
      assets                                                                                                                                         |                                          
| | Balance
      at beginning of year                                                                                                                        | 3,706                                    
| | Acquisitions                                                                                                                                              | 1                                        
| | Settlements/curtailments                                                                                                                                  |                                          
| | Contribution
      by employer                                                                                                                            | 418                                      
| | Contribution
      by employees                                                                                                                           | 24                                       
| | Benefits
      paid                                                                                                                                       | (207                                     
| | Actual
      return on plan assets                                                                                                                        | 701                                      
| | Changes
      in exchange rates                                                                                                                           |                                          
| |                                                                                                                                                           |                                          
| | Balance
      at end of year                                                                                                                              | 4,643                                    
| |                                                                                                                                                           |                                          
| | Funded
      status                                                                                                                                       | 270                                      
| |                                                                                                                                                           |                                          
| | Unrecognized
      net loss                                                                                                                               | 545                                      
| | Unrecognized
      prior service costs                                                                                                                    | 95                                       
| |                                                                                                                                                           |                                          
| | Net balances
      in accordance with US GAAP                                                                                                             | 370                                      
| | Difference
      between net balance according to IFRS                                                                                                    |                                          
| | and US
      GAAP                                                                                                                                         | (424                                     
| |                                                                                                                                                           |                                          
| | Net balances
      in accordance with IFRS *                                                                                                              | (54                                      
| |                                                                                                                                                           |                                          
| |                                                                                                                                                           |                                          

| | *                                                                   | The
      2005 net balances for the Netherlands and Total include the IFRS book value
      of the subordinated loan and the remaining balance of the prepaid employee
      premiums, aggregating EUR 126 million.
| | ------------------------------------------------------------------- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |                                                                     |                                                                                                                                                                                                                    
| | Since
      2005, the measurement date of all plans is December 31.

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176

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF AKZO NOBEL

| | Details
      for minimum pension liability are as follows: |                      
| | ----------------------------------------------------------- | ---------------------
| |                                                             |                      
| |                                                             |                      
| |                                                             | The
      Netherlands
| | Millions
      of euros                                     | 2005                 
| |                                                             |                      
| | Accumulated
      benefit obligation                        | (4,223               
| | Plan
      assets                                           | 4,643                
| |                                                             |                      
| | Minimum
      pension liability                             |                      
| |                                                             |                      
| | Intangible
      asset                                      |                      
| |                                                             |                      
| | Total
      credit/(charge) to shareholders equity:        |                      
| | 
      before taxes                                        |                      
| | 
      after taxes                                         |                      
| |                                                             |                      
| | Credit/(charge)
      to shareholders equity               |                      
| | for change
      in minimum pension liability:              |                      
| | 
      before taxes                                        | 120                  
| | 
      after taxes                                         | 82                   
| |                                                             |                      
| |                                                             |                      

| | For all foreign plans
      the accumulated benefit obligation exceeded plan assets both at December
      31, 2005, and at December 31, 2004.
| | ----------------------------------------------------------------------------------------------------------------------------------------------
| |                                                                                                                                               
| | The 2005 and 2004
        net periodic pension costs for the defined benefit pension plans were
    as follows:                               
| |                                                                                                                                               

| |                                                |                      
| | ---------------------------------------------- | ---------------------
| |                                                | The
      Netherlands
| | Millions
      of euro; charge/(income)        | 2005                 
| |                                                |                      
| | Service
      costs for benefits earned during |                      
| | the
      period                               | 129                  
| | Interest
      costs on projected benefit      |                      
| | obligation                                     | 192                  
| | Expected
      return on plan assets           | (248                 
| | Amortization
      of prior service costs      | 12                   
| | Amortization
      of net actuarial losses     | 10                   
| | Settlement/curtailment
      loss/(gain)       |                      
| |                                                |                      
| | Net periodic
      pension costs in accordance |                      
| | with
      US GAAP                             | 95                   
| | Difference
      between costs according to    |                      
| | IFRS
      and US GAAP                         | (143                 
| |                                                |                      
| | Net periodic
      pension costs in accordance |                      
| | with
      IFRS                                | (48                  
| |                                                |                      
| |                                               

| |  | 
| |  | 

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177

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF AKZO NOBEL

| | The difference
        between the US GAAP and IFRS pension cost in the Netherlands mainly concerns
        the reversal of the special benefit for the curtailment and settlement
        recognized under IFRS, due to the transition to a defined contribution
    plan.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | In connection with
        the change of the pension plan in the Netherlands, the company prepaid
        EUR 50 million (of which at year-end 2005 EUR 41 million was still outstanding)
        of employee premiums and granted a subordinated loan of EUR 100 million.
        The prepaid premiums were recognized at discounted value of EUR 39 million
        at year-end 2005. The subordinated loan was recognized at fair value
        of EUR 87 million. The difference between book value and nominal value
        was taken into account in the special benefit upon the curtailment and
        settlement. Under SFAS 87 such payments qualify as plan assets at nominal
        value, so that the recognized assets in the IFRS balance sheet have to
        be reversed. The difference between the book value and nominal value
        of EUR 15 million has been taken into account in US GAAP net income.
        The aforementioned payments were treated as investing activities in the
        IFRS statement of cash flows. For US GAAP however, they should be included
    in the cash flow from operating activities.
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | The weighted average
    assumptions underlying the computations were:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       

| |                                        |                        
| | -------------------------------------- | -----------------------
| |                                        | The
        Netherlands
| | Percent                                | 2005                   
| |                                        |                        
| | Pension
      benefit obligation at    |                        
| | December
      31,                     |                        
| | 
      discount rate                  | 4.0                    
| | rate
      of compensation increase   | 2.9                    
| | Net periodic
      pension costs:      |                        
| | discount
      rate                   | 4.5                    
| | 
      rate of compensation increase  | 2.5                    
| | 
      expected return on plan assets | 6.8                    
| |                                        |                        
| |                                       

| | The assumptions
      for the expected return on plan assets were based on a review of the historical
      returns of the asset classes in which the assets of the pension plans are
      invested. The historical returns on these asset classes were weighted based
      on the expected long-term allocation of the assets of the pension plans.                                                                                                                                                                                      
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | Akzo Nobels
      primary objective with regard to the investment of pension plan assets is
      to ensure that in each individual scheme sufficient funds are available
      to satisfy future benefit obligations. For this purpose so-called asset
      and liability management (ALM) studies are made periodically at each pension
      fund. For each of the pension plans an appropriate mix is determined on
      the basis of the outcome of these ALM studies, taking into account the national
      rules and regulations.
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | Pension plan assets
      principally consist of long-term interest-earning investments, quoted equity
      securities, and real estate. At December 31, 2005 and 2004, plan assets
      did not include financial instruments issued by the company, nor any property
      occupied or other assets used by it.                                                                                                                                                                                                                         

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178

NOTES TO THE
  CONSOLIDATED FINANCIAL STATEMENTS OF AKZO NOBEL

| | The
      weighted average pension plan asset allocation at December 31, 2005 and
      2004, and the target allocation for 2006 for the pension plan in the Netherlands
      by asset category are as follows: |                        
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | -----------------------
| |                                                                                                                                                                                                                  |                        
| |                                                                                                                                                                                                                  |                        
| |                                                                                                                                                                                                                  | Target
      allocation
| | Percent                                                                                                                                                                                                          | 2006                   
| |                                                                                                                                                                                                                  |                        
| | Equity
      securities                                                                                                                                                                                          | 30
       50          
| | Long-term
      interest earning investments                                                                                                                                                                     | 40 
      60          
| | Real
      estate                                                                                                                                                                                                | 7.5
       12.5       
| | Other                                                                                                                                                                                                            | (5)
       10         
| |                                                                                                                                                                                                                  |                        
| | Total                                                                                                                                                                                                            |                        
| |                                                                                                                                                                                                                  |                        



| |                                                                                                                                                                                                 |                        
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | -----------------------
| | The
      weighted pension plan asset allocation at December 31, 2005 and 2004, and
      the target allocation for 2006, for the foreign pension plans by asset category
      are as follows: |                        
| |                                                                                                                                                                                                 |                        
| |                                                                                                                                                                                                 |                        
| |                                                                                                                                                                                                 | Target
      allocation
| | Percent                                                                                                                                                                                         | 2006                   
| |                                                                                                                                                                                                 |                        
| | Equity
      securities                                                                                                                                                                         | 50
       55          
| | Long-term
      interest earning investments                                                                                                                                                    | 35 
      45          
| | Real
      estate                                                                                                                                                                               | 5 
      10           
| | Other                                                                                                                                                                                           | 0 
      5            
| |                                                                                                                                                                                                 |                        
| | Total                                                                                                                                                                                           |                        
| |                                                                                                                                                                                                 |                        

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179

NOTES TO THE
  CONSOLIDATED FINANCIAL STATEMENTS OF AKZO NOBEL



| | Postretirement
      benefit plans concern healthcare benefits plans in the Netherlands and the
      United States. Below a table is provided with a summary of the changes in
      the accumulated postretirement benefit obligations and plan assets for 2005
      and 2004.                                                                                                                                                                                                                                                                                                                                                                                |                        
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | -----------------------
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |                        
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |                        
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  | The
        Netherlands
| | Millions
      of euros; asset/(liability)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       | 2005                   
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |                        
| | Benefit
      obligation                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |                        
| | Balance
      at beginning of year                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               | (156                   
| | Settlements/curtailments                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         | 150                    
| | Service
      costs                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              | (4                     
| | Interest
      costs                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             | (7                     
| | Benefits
      paid                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              | 8                      
| | Actuarial
      gains and losses                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 | (14                    
| | Changes
      in exchange rates                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |                        
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |                        
| | Balance
      at end of year                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     | (23                    
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |                        
| | Plan
      assets                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |                        
| | Balance
      at beginning of year                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |                        
| | Benefits
      paid                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |                        
| | Actual
      return on plan assets                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |                        
| | Changes
      in exchange rates                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |                        
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |                        
| | Balance
      at end of year                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |                        
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |                        
| | Funded
      status                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              | (23                    
| | Unrecognized
      net loss/gain                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |                        
| | Unrecognized
      prior service costs                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           | 2                      
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |                        
| | Net balances
      in accordance with                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |                        
| | US
      GAAP                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    | (21                    
| | Difference
      between accrual                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |                        
| | according
      to IFRS and                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |                        
| | US
      GAAP                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    | (4                     
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |                        
| | Net balances
      in accordance with                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |                        
| | IFRS                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             | (25                    
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |                        
| | In the United States, the Medicare Prescription Drug Improvement and Modernization
      Act of 2003 introduced prescription drug benefits for retirees as well as
      a federal subsidy to sponsors of postretirement healthcare plans, which
      both began at January 1, 2006. This reimbursement right under IFRS has been
      recognized as an asset under Other Financial Noncurrent Assets, measured
      at fair value. At December 31, 2005, this value was EUR 68 million (December
      31, 2004: EUR 53 million). In accordance with US GAAP, this reimbursement
      right is netted with the postretirement healthcare benefit liability. |                        

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180

NOTES TO THE
  CONSOLIDATED FINANCIAL STATEMENTS OF AKZO NOBEL



| | Net
      periodic other postretirement benefit costs are as follows: |                        
| | --------------------------------------------------------------------- | -----------------------
| |                                                                       |                        
| |                                                                       |                        
| |                                                                       | The
        Netherlands
| | Millions
      of euros; charge/(income)                              | 2005                   
| |                                                                       |                        
| | Service
      costs for benefits allocated to                         |                        
| | the
      period                                                      | 4                      
| | Interest
      costs on accumulated                                   |                        
| | postretirement
      obligation                                       | 7                      
| | Amortization
      of prior service costs                             |                       
| | Amortization
      of unrecognized losses                             | 1                      
| | Settlements/curtailments/(gain)                                       | (102                   
| |                                                                       |                        
| | Net periodic
      other postretirement benefit                       |                        
| | costs
      in accordance with US GAAP                                | (90                    
| | Difference
      between costs according to                           |                        
| | IFRS
      and US GAAP                                                | (68                    
| |                                                                       |                        
| | Net periodic
      other postretirement benefit                       |                        
| | costs
      in accordance with IFRS                                   | (158                   
| |                                                                       |                        



| |                                                                               |                        
| | ----------------------------------------------------------------------------- | -----------------------
| | The
      assumptions for postretirement benefits were as follows:            |                        
| |                                                                               |                        
| |                                                                               |                        
| |                                                                               | The
        Netherlands
| | Percent                                                                       | 2005                   
| |                                                                               |                        
| | Discount
      rate for net periodic benefit cost                             | 4.5                    
| | Discount
      rate for benefit obligations at December 31                    | 4.0                    
| | Assumed
      healthcare cost trend rates at December 31 :                    |                        
| | 
      healthcare trend rate assumed for next year                           |                       
| | 
      rate to which the cost rate is assumed to decline (the ultimate rate) |                       
| | 
      year that the rate reaches the ultimate trend rate                    | 2006                   
| |                                                                               |                        



| |                                                                                                                                                                                                                                          |                                                    
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ---------------------------------------------------
| | Assumed
      healthcare cost trend rates have a significant effect on the amounts reported
      for the healthcare plans. A one percentage point change in assumed healthcare
      cost trend rates would have the following effects: |                                                    
| |                                                                                                                                                                                                                                          |                                                    
| |                                                                                                                                                                                                                                          |                                                    
| |                                                                                                                                                                                                                                          |                                                    
| |                                                                                                                                                                                                                                          |                                                    
| |                                                                                                                                                                                                                                          | Millions
      of euros                            
| |                                                                                                                                                                                                                                          |                                                    
| |                                                                                                                                                                                                                                          | Effect
      on total of service and interest costs
| |                                                                                                                                                                                                                                          | Effect
      on postretirement benefit obligation  
| |                                                                                                                                                                                                                                          |                                                    

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181

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF AKZO NOBEL

| | Cash Flows                                                                                                                                         
| | ---------------------------------------------------------------------------------------------------------------------------------------------------
| | The company
    expects to contribute EUR 240 million to its pension plans in 2006 (the Netherlands:
    EUR 80 million; foreign: EUR 160 million).
| |                                                                                                                                                    
| | The following benefit
        payments, which take into account the effect of future service, are expected
    to be paid.                         

| |                         |             |  |         |  |                                 |  |             |  |            | 
| | ----------------------- | ----------- |  | ------- |  | ------------------------------- |  | ----------- |  | ---------- | 
| |                         |             |  |         |  |                                 |  |             |  |            | 
| |                         | Pensions    |  |         |  | Other
      retirement benefits | 
| |                         | The         |  |         |  |                                 |  | The         |  | The United | 
| | Millions
      of euros | Netherlands |  | Foreign |  | Total                           |  | Netherlands |  | States     | 
| |                         |             |  |         |  |                                 |  |             |  |            | 
| | 2006                    | 207         |  | 262     |  | 469                             |  | 10          |  | 23         | 
| | 2007                    | 217         |  | 265     |  | 482                             |  | 7           |  | 24         | 
| | 2008                    | 227         |  | 270     |  | 497                             |  | 5           |  | 25         | 
| | 2009                    | 238         |  | 276     |  | 514                             |  | 1           |  | 27         | 
| | 2010                    | 249         |  | 283     |  | 532                             |  |             |  | 28         | 
| | 2011-2015               | 1,437       |  | 1,500   |  | 2,937                           |  |             |  | 167        | 
| |                         |             |  |         |  |                                 |  |             |  |            | 

|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(c) | During 1995, the
      company transferred its rubber chemicals activities into a 50-50 joint venture,
      Flexsys, with Solutia Inc. Under IFRS the carrying value of the investment
      at December 31, 2005, was EUR 127 million and under US GAAP EUR 144 million,
      (at December 31, 2004: EUR 89 million and EUR 97 million, respectively).
      The higher carrying value under US GAAP is principally related to the goodwill
      associated with the Akzo Nobel businesses transferred into the joint venture.
      Such goodwill had been previously charged directly to equity for NL GAAP
      purposes. Furthermore the difference relates to the accounting for Pensions.
      Under IFRS, IAS 19 has been applied, whereas for US GAAP SFAS 87 is applicable.
      The impact on 2005 US GAAP net income was a reconciling item of EUR 2 million
      loss (2004: EUR 4 million loss). The change in minimum pension liability
      was a release of EUR 10 million for 2005 (2004: an addition of EUR 2 million).
|   
|(d) | In accordance with
      IFRS, IFRS 2 has been applied for 2004 and 2005. In 2004 the company applied
      APB 25, whereby compensation costs included the change in the liability
      for the difference between the exercise and the market price. This resulted
      in a credit reconciling item of EUR 2 million for 2004. No proforma information
      is required, as the compensation expenses calculated pursuant to the provisions
      of FAS 123 are the same as those for APB 25, due to the cash settlement
      feature of the companys stock option scheme until June 2005.                                                                                                                                                                                                                                                                                                                                                                                                                                               
|   
|    | As of 2005, the
      company has elected to apply SFAS 123R, as a result of which there no longer
      is a difference with IFRS 2. The remaining difference of EUR 1 million (charge
      to equity) at December 31, 2004 has been reversed in 2005 income.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|   
|(e) | Under the Akzo Nobel
      Employee Share Plan Akzo Nobel granted shares to employees. From 2002 onwards
      the value of the shares on the grant date was recognized as a charge in
      the income statement spread over the vesting period, which was 3 years.
      For the shares granted in 2001 no charge was recognized. In accordance with
      US GAAP the fair value of the shares granted in 2001 had to be recognized
      as a charge against income over the vesting period of the grant. For 2004
      this resulted in an additional charge of EUR 1 million. In November 2003,
      the Board of Management to accelerate the                                                                                                                                                                                                                                                                                                                                                                                            

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182

NOTES TO THE
  CONSOLIDATED FINANCIAL STATEMENTS OF AKZO NOBEL

|    | settlement of the
      Employee Share Plan. As a result all shares granted became unconditional
      at May 1, 2004.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|(f) | In accordance with
      IFRS development costs are to be capitalized and amortized, if certain conditions
      have been met. US GAAP does not allow capitalization and amortization of
      development costs. For US GAAP purposes, these costs have to be expensed
      as incurred. During 2005, the company capitalized additional development
      costs for EUR 3 million and recognized an amortization charge of EUR 3 million.
      For 2004, EUR 3 million of development cost were capitalized and a EUR 3
      million amortization charge was recognized for IFRS purposes.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|   
|(g) | In accordance with
      IFRS a provision for restructuring is recognized at the moment a formal
      plan is approved, the plan identifies all significant actions to be taken
      to complete the plan, the period of time necessary to complete the plan
      indicates that significant changes to the plan are not likely, and in case
      of termination benefits, communication to the people involved an communication
      of the benefit arrangement is communicated before balance sheet date. For
      US GAAP purposes SFAS 146 Accounting
      for Costs Associated with Exit or Disposal Activitiesbecame
      effective for exit or disposal activities that are initiated after December
      31, 2002, which means that a provision for exit cost can only be recognized
      if the goods or services for the exit program have been delivered. As a
      consequence, at December 31, 2005, provisions for exit costs of EUR 9 million
      (EUR 6 million after taxes) recognized in accordance with IFRS could not
      be recognized. In 2004, EUR 17 million (EUR 11 million after taxes) were
      not recognized for US GAAP purposes since the goods or services for the
      exit program had not been delivered.
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|    | In addition, EUR
      8 million of provisions for termination benefits (EUR 5 million after tax)
      have to be recognized for US GAAP purposes in accordance with SFAS 88Employers Accounting for
      Settlements and Curtailments of Defined Benefit Pension Plans and for Termination
      Benefits,
      since these cost qualify as part of ongoing restructuring plans. For IFRS
      the criteria for recognition were not met, since announcement of the plans
      took place after balance sheet date. In 2004 there were no ongoing plans
      which did not qualify for IFRS purposes which had to be recognized for US
      GAAP.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|   
|    | In 2004, EUR 9 million
      (EUR 6 million after tax) were recognized under IFRS for provisions for
      termination benefits, which already were recognized for US GAAP in 2003
      as part of ongoing plans in accordance with SFAS 88Employers
      Accounting for Settlements and Curtailments of Defined Benefit Pension Plans
      and for Termination Benefits.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|   
|(h) | In accordance with
      IFRS the tax effect on the elimination of intercompany profit in inventories
      is based on the tax rate of the country of the company receiving the goods.
      For US GAAP purposes, the tax effect on the elimination of intercompany
      profit in inventories should be based on the tax rate of the company sending
      the goods, thus fully eliminating intercompany sales in the statement of
      income. For 2005, this resulted in an decrease in net income of EUR 7 million
      and a decrease in shareholders equity of EUR 40 million. For 2004
      net income increased with EUR 43 million, while shareholders equity
      decreased with EUR 33 million.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|   
|(i) | In accordance with
      the NL GAAP standard for financial instruments, which was still applied
      in the 2004 IFRS financial statements, results on foreign currency forward
      hedging contracts (determined at year- end exchange rates) are recognized
      in income to offset the foreign exchange differences on the related hedged
      items. Exchange differences on anticipatory hedges of firm commitments regarding
      sales and purchases are deferred on the balance sheet until the hedged transactions
      have been reflected in the                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF AKZO NOBEL

| | accounts. For interest
      swap contracts, interest is accrued in the statement of income as part of
      interest expense.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | Statement of Financial
      Accounting Standards No. 133,Accounting
      for Derivative Instruments(SFAS 133), as amended, was
      adopted by Akzo Nobel in 2001. This statement establishes accounting and
      reporting standards for derivative instruments, including certain derivative
      instruments embedded in other contracts (collectively referred to as derivatives),
      and for hedging activities. The Statement requires every derivative instrument
      be recorded in the balance sheet as either an asset or liability measured
      at its fair value. SFAS 133 requires that changes in the derivatives fair
      value be recognized currently in earnings unless specific hedge accounting
      criteria are met. The company does not designate its derivatives for hedge
      accounting in accordance with US GAAP. Accordingly for US GAAP, all changes
      in fair value of derivative instruments are recognized currently in earnings.
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | The development
        for the year ended December 31, 2004, was as follows:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             

| |                                      |      |  
| | ------------------------------------ | ---- | -
| |                                      |      |  
| | Millions
      of euros; gain/(loss) | 2004 |  
| |                                      |      |  
| | Foreign
      currency contracts     | 3    |  
| | Interest
      rate currency swaps   | 8    |  
| | Interest
      rate swap contracts   | 28   |  
| | Forward
      rate agreements        |     |  
| | Petroleum
      options              | (2   | )
| | Petroleum
      swaps                |     |  
| | Gas futures                          | (2   | )
| |                                      |      |  
| | Total                                | 35   |  
| |                                      |      |  
| | Net effect
      after taxes         | 24   |  
| |                                      |      |  
| |                                      |      |  

| | Effective January
        1, 2005, the Company adopted IAS 32 and 39 for financial instruments.
        As a consequence all derivative instruments are measured at fair value
        in the balance sheet, with changes in the fair value recognized in income,
        unless cash flow hedging is applied. In the latter case, the effective
        part of the fair value change is deferred in shareholders equity
        until the hedged transactions have been reflected in the accounts. During
        2005, the company deferred pre-tax gains of EUR 16 million (EUR 11 million
        after taxes) in shareholders equity. The company does not elect
        to apply hedge accounting for US GAAP purposes. As a consequence, the
        credit in IFRS
shareholders equity has to be taken into account in US GAAP income.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | For the interest
          rate derivatives under IFRS the company in principle applies fair value
          hedge accounting. The changes in fair value are recognized in the statement
          of income, where the effective part is offset by the fair value change
          of the underlying synthetic bond. The company has elected not to apply
          hedge accounting for US GAAP. As a consequence, the hedged bonds have
          to be valued at amortized cost, not at fair value. During 2005, under
          IFRS the company recognized a benefit for the change in fair value
    of the bonds of EUR 8 million (EUR 5 million after taxes).                                                                                                                                                                            
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | On balance,
          the effect on 2005 US GAAP income is a gain of EUR 8 million (EUR 6
    million after taxes).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               

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184

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF AKZO NOBEL

|    | The difference between
      the fair value and amortized cost of the bonds for which under IFRS hedge
      accounting was applied is a decrease of the liability (i.e. a credit to
      shareholders equity)
of EUR 61 million (EUR 43 million after taxes).                                                                                                                                                                                                                                                          
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|(j) | Under IFRS, assets and liabilities are classified as held for sale if it is highly probable that the carrying amount will be recovered through a sale transaction rather than through continuing
use. When reclassifying assets as held for sale, the assets are recognized at the lower of the carrying amount or fair value less selling costs. Assets held for sale are not depreciated but tested for impairment. Impairment losses on assets and
liabilities held for sale are recognized in the statement of income.
|   
|    | Under US GAAP the criteria in this respect are different. As a result of that the reclassification to the lines Assets Held for Disposal and to Liabilities Held for Disposal should be reversed. It should be noted that
these assets did not qualify as discontinued operation under US GAAP.                                                                                                                                                                                                                         
|   
|    | For assets held for sale it concerns reclassification to the following balance sheet lines:                                                                                                                                                                                                                                                                                                                                                                                                                               
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           

| |                                     |      | 
| | ----------------------------------- | ---- | 
| |                                     | 2005 | 
| |                                     |      | 
| | Property,
      plant and equipment | 164  | 
| | Inventories                         | 75   | 
| | Trade
      and other receivables   | 83   | 
| |                                     |      | 
| |                                     | 322  | 
| |                                     |      | 
| |                                     |      | 

| | For liabilities
      classified as held for sale it concerns the following balance sheet line: |      | 
| | ----------------------------------------------------------------------------------------------- | ---- | 
| |                                                                                                 |      | 
| |                                                                                                 |      | 
| |                                                                                                 | 2005 | 
| |                                                                                                 |      | 
| | Trade
      and other payables                                                                  | 60   | 
| |                                                                                                 |      | 
| |                                                                                                 | 60   | 
| |                                                                                                 |      | 
| |                                                                                                 |      | 

|    | The fact that assets held for sale are not depreciated resulted under IFRS in a benefit for 2005 of EUR 2 million. Under US GAAP, this depreciation should be continued, resulting in a charge of
EUR 2 million.                                                             
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(k) | During 2005, Akzo Nobel made upfront payments of EUR 27 million for cooperations with Théramex and Lexicon, which under IFRS were capitalized as intangible asset. The 2005 amortization
charge on these intangibles was EUR 3 million.                                      
|   
|    | Under US GAAP, such amounts cannot be capitalized as intangible asset, because they relate to research and development. As a consequence, the investment amount less the 2005 amortization charge,
on balance EUR 24 million, is recognized as expense in US GAAP net income.
|   
|(l) | Represents the income tax effects of the aforementioned adjustments, excluding adjustment (h).                                                                                                                                                                               

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF AKZO NOBEL

|(m) | The company
      holds minority stakes (mostly 49 or 50 percent) in certain companies, which
      have been fully consolidated into the consolidated financial statements
      of Akzo Nobel, taking into account the minority interest of the other shareholders.
      This treatment is allowed for IFRS purposes, as there is de facto control.
      This mainly concerns the following companies:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|   
|    | The
      effect of the difference with US GAAP  which requires accounting under
      the equity method of such interestson shareholders equity and
      net income is nil.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|   
|    | If these
      interests had been treated as nonconsolidated companies on a US GAAP basis
      the Consolidated Statement of Income for the year ended December 31, 2005,
      would have shown a decrease in revenues of EUR 84 million, in operating
      income of EUR 8 million, in earnings of consolidated companies less income
      taxes of EUR 6 million, and in minority interest of EUR 3 million. On the
      other hand earnings from nonconsolidated companies would have increased
      by EUR 3 million.                                                                                                                                                                                                                                                                                                                                                                                                                                         
|   
|    | The
      Consolidated Statement of Income for the year ended December 31, 2004, would
      have shown a decrease in revenues of EUR 38 million, in operating income
      of EUR 5 million, in earnings of consolidated companies less income taxes
      of EUR 4 million, and in minority interest of EUR 2 million. On the other
      hand earnings from nonconsolidated companies would have increased by EUR
      2 million.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|   
|    | The
      major effects on the Consolidated Balance Sheet as at December 31, 2005,
      would have been a decrease in current assets of EUR 29 million, in property,
      plant and equipment of EUR 16 million, in short-term liabilities of EUR
      16 million, and in minority interest of EUR 12 million, and an increase
      in long- term borrowings of EUR 5 million. On the other hand, nonconsolidated
      companies would have increased by EUR 12 million.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|   
|    | The
      major effects on the Consolidated Balance Sheet as at December 31, 2004,
      would have been a decrease in current assets of EUR 23 million, in property,
      plant and equipment of EUR 10 million, in short-term liabilities of EUR
      18 million, in long-term borrowings of EUR 1 million, and in minority interest
      of EUR 7 million. On the other hand, nonconsolidated companies would have
      increased by EUR 7 million.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|   
|(n) | In November
      2002, the FASB issued interpretation No. 45, Guarantors Accounting
      and Disclosure Requirements for Guarantees, including Indirect Guarantees
      of Indebtedness to Others. At December 31, 2005 there were some small agreements
      to provide additional consideration in a business combination to the seller
      if contractually specified conditions related to the acquired entity are
      achieved. The company had recognized contingent liabilities for estimated
      payments amounting to EUR 1 million, included in the obligations under long-term
      non-cancelable operating leases and other commitments, as reported above
      under Commitments. The total maximum exposure also amounted to EUR 1 million.
      At December 31, 2004, we had recognized contingent liabilities for estimated
      payments amounting to EUR 5 million, while the total maximum exposure amounted
      to EUR 21 million.
|   
|(o) | During
      2004, the company divested the Catalysts, Phosphorus Chemicals, and Coatings
      Resins activities. For IFRS these divested activities do not qualify for
      treatment as discontinued operation. For                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 

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186

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF AKZO NOBEL

| | US GAAP, however,
        these activities do qualify as discontinued operation. The disclosures
    as prescribed in SFAS 144 are as follows.
| | ----------------------------------------------------------------------------------------------------------------------------------------------
| |                                                                                                                                               

| |                                                                         |                                       |   |        |  |      |   |        | 
| | ----------------------------------------------------------------------- | ------------------------------------- | - | ------ |  | ---- | - | ------ | 
| |                                                                         | For
      the year ended December 31, |  
| | Millions
      of euros; gain/(loss)                                    | 2004                                  |   | 2003   | 
| |                                                                         |                                       |   |        |  |      |   |        | 
| | Revenues                                                                |                                       |   |        |  |      |   |        | 
| | Continued
      operations                                              |                                       |   | 12,063 |  |      |   | 12,115 | 
| | Discontinued
      operations                                           |                                       |   | 617    |  |      |   | 816    | 
| |                                                                         |                                       |   |        |  |      |   |        | 
| | Total                                                                   |                                       |   | 12,680 |  |      |   | 12,931 | 
| |                                                                         |                                       |   |        |  |      |   |        | 
| | Income
      from continuing operations before
      income taxes       | 624                                   |   |        |  | 710  |   |        | 
| | Income
      taxes                                                      | (251                                  | ) |        |  | (195 | ) |        | 
| |                                                                         |                                       |   |        |  |      |   |        | 
| | Income
      from continuing operations                                 |                                       |   | 373    |  |      |   | 515    | 
| |                                                                         |                                       |   |        |  |      |   |        | 
| | Income
      from discontinued operations (including gains on disposal) | 531                                   |   |        |  | 66   |   |        | 
| | Income
      taxes                                                      | (72                                   | ) |        |  | (22  | ) |        | 
| |                                                                         |                                       |   |        |  |      |   |        | 
| | Income
      from discontinuedoperations                                |                                       |   | 459    |  |      |   | 44     | 
| |                                                                         |                                       |   |        |  |      |   |        | 
| | Net
      income                                                        |                                       |   | 832    |  |      |   | 559    | 
| |                                                                         |                                       |   |        |  |      |   |        | 
| | Earnings
      from continuing operations per
      share               |                                       |   |        |  |      |   |        | 
| | 
      Basic                                                           |                                       |   | 1.31   |  |      |   | 1.80   | 
| | 
      Diluted                                                         |                                       |   | 1.30   |  |      |   | 1.80   | 
| | Earnings
      from discontinued operations
      per share             |                                       |   |        |  |      |   |        | 
| | 
      Basic                                                           |                                       |   | 1.61   |  |      |   | 0.15   | 
| | 
      Diluted                                                         |                                       |   | 1.60   |  |      |   | 0.15   | 
| |                                                                         |                                       |   |        |  |      |   |        | 

The reconciliation of the elements of the earnings per share computation is as follows:

|                                      |             |  |             |  |             | 
|------------------------------------- | ----------- |  | ----------- |  | ----------- | 
|                                      | 2005        |  | 2004        |  | 2003        | 
|                                      |             |  |             |  |             | 
|Shares for basic earnings per share   | 285,773,239 |  | 285,745,587 |  | 285,691,957 | 
|Effect of dilutive securities         | 1,178,487   |  | 660,310     |  | 721,016     | 
|                                      |             |  |             |  |             | 
|Shares for diluted earnings per share | 286,951,726 |  | 286,405,897 |  | 286,412,973 | 
|                                      |             |  |             |  |             | 

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187

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF AKZO NOBEL

(24) Explanation
  of Transition to IFRS

The company changed its accounting policies in order to be in compliance with International Financial Reporting Standards (IFRS) and the interpretations as adopted by the European Union.

In preparing the opening balance sheet on IFRS basis, the company has adjusted amounts previously reported in financial statements prepared in accordance with NL GAAP. As the company publishes
comparative information for one year in the Annual Report, the transition date to IFRS is January 1, 2004. An explanation of how the transition to IFRS has affected the financial position, financial performance and cash flows of the company is set
out in the following tables and the accompanying notes.

IFRS Impact
  – Net Income up; Shareholders Equity Down; Funds Balance UnchangedIn summary,
  the impact of IFRS on the companys accounts is an increase in net income
  for 2004 of EUR
  89 million, but a decline in shareholders equity, at December 31, 2004,
  of EUR 431 million. This is mainly attributable to the differences in the method
  of accounting under IFRS for pensions and other postretirement benefits, the
  recognition of deferred taxes on intercompany profit, the recognition of the
  payment received from Pfizer for the asenapine cooperation, and the recognition
  of goodwill. For the most part, the changed accounting is a matter of timing
  of the recognition of assets, liabilities, and related results. However, there
  is no impact on the underlying cash flows of the businesses.

Changes in Accounting Principles Due to the Adoption of IFRS

Employee BenefitsPensions and
  Other Postretirement BenefitsUntil December 31, 2004,
  the company accounted for pensions and other postretirement benefits in accordance
  with SFAS 87 and SFAS 106.

For the implementation of IAS 19 Employee Benefits in respect of pensions and other postretirement benefits, the company had to recognize the funded status, at January 1, 2004, of the projected
  benefit obligation (PBO) insofar as this was not covered by provisions or prepaid pension assets in the NL GAAP balance sheet. Any unvested portion of past service cost at that date had to be excluded.

On January 1, 2004, the company had a significant deficit for its pension and other postretirement benefit plans. The deficit in excess of provisions and prepaid pension assets in the NL GAAP
balance sheet has been charged against shareholders equity in the IFRS opening balance sheet at January 1, 2004. This concerned an amount of EUR 1,356 million after taxes. At December 31, 2004, this amount was EUR 1,246 million after taxes.

In the NL GAAP balance sheet, the company had also recognized a so-called minimum pension liability for the deficit determined on the accumulated benefit obligation (ABO) level, as required under
SFAS 87. This consisted of an after-tax charge against shareholders equity (January 1, 2004: EUR 824 million; December 31, 2004: EUR 759 million) and recognition of an intangible asset (January 1, 2004: EUR 165 million; December 31, 2004: EUR
137 million). As these are not allowed under IAS 19, the minimum pension liability-related entries were reversed, partly offsetting the aforementioned recognition of the deficits on a PBO basis.

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188

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF AKZO NOBEL

The consequences of the U.S. Medicare Prescription Drug Improvement and Modernization Act of 2003 have also been taken into account in the IFRS opening balance sheet. This resulted in the
recognition of a tax-free financial noncurrent asset of EUR 43 million (at December 31, 2004: EUR 53 million).

Going forward, the full
recognition of the deficit at January 1, 2004 resulted in lower net period pension
costs for 2004, as the deferred losses under SFAS 87 and SFAS 106 no longer had
to be
amortized. As a result
of the improved pension funding situation at December 31, 2004, IFRS-based 2005
pension charges were expected to drop by some EUR 50 million, compared to 2004.
Included in the 2004 net  income effect of IAS 19 is an after-tax gain of EUR
43 million for the settlements/curtailments as a consequence of the Catalysts
divestment.

Other Employee
  BenefitsIAS 19 requires provisioning
  of long-term employee benefits, such as payments on the occasion of a service
  jubilee of an employee. This was not specifically required under NL GAAP, where
  costs for such benefits often were recognized on a pay-as-you-go basis. The
  required provision for other long-term benefits in accordance with IAS 19 amounts
  to EUR 24 million, which is EUR 15 million after taxes (at December 31, 2004:
  EUR 24 million and EUR 15 million, respectively).

RevenuesGeneralRevenues under IFRS are
  defined as the revenue from the sale and delivery of goods and services and
  royalty income, net of rebates, discounts, and similar allowances, and net of
  sales tax. Revenues are recognized when the significant risks and rewards have
  been transferred to a third party.

The company used to report royalty income under Other Results in the statement of income. Under IFRS, royalty income is reclassified to Revenues. Also proceeds for certain services rendered by the
company, which used to be deducted from cost lines in the statement of income, have now been reclassified to Revenues.

Pfizer PaymentIn December 2003, the company
  received an initial payment of EUR 88 million (EUR 70 million after taxes) from
  Pfizer under the co-development and co-marketing agreement for asenapine. In
  accordance with the contract and the spirit thereof, this payment is a nonrefundable
  reimbursement of the expenses incurred by Akzo Nobel in prior years for the
  development of asenapine-related know-how so far. In accordance with NL GAAP,
  such payment was recognized as income immediately.

In accordance with IFRS revenue recognition rules, nonrefundable upfront fees are initially reported as deferred income and are recognized as revenue based on the (expected) development costs over
the remaining first part of the development period, currently anticipated to be from 2004 to 2007. At December 31, 2004 an amount of EUR 56 million (EUR 45 million after taxes) was deferred.

Consequently, this payment, which had already been recognized in 2003 NL GAAP income, is again recognized in IFRS revenues, but now over the years 2004-2007.

Income Taxes

As allowed under NL GAAP, the tax effect on the elimination of intercompany profit in inventories was based on the tax rate of the country of the company sending the goods, thus fully eliminating
intercompany sales in the

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189

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF AKZO NOBEL

statement of income. IFRS,
however, prescribes that tax on such elimination is to be based on the tax rate
of the country of the company receiving the goods. As a consequence, the deferred
tax  asset related to intercompany profit increased by EUR 76 million at January
1, 2004. At December
31, 2004, this amount was EUR 33 million. Going forward, the impact on earnings
will be determined by the changes in levels of intercompany inventory in the
various countries.

Furthermore, IFRS specifically prescribes that current and deferred tax assets and liabilities in countries which have separate tax rates for distributed and undistributed profits are measured at
the tax rate applicable to undistributed profits. The income tax consequences of dividends are recognized when a liability to pay the dividend is recognized. For NL GAAP in certain circumstances such current and deferred tax assets and liabilities
can be measured at the tax rate applicable to distributed profits. The impact of this difference on the companys accounts is limited.

Business Combinations

Under NL GAAP, goodwill is capitalized and amortized. IFRS 3 prescribes that goodwill must be capitalized and not amortized, but tested for impairment annually.

Akzo Nobel has elected the transition option in IFRS 1 to apply IFRS 3 prospectively from the transition date. This option was chosen rather than to restate all previous business combinations. The
impact of IFRS 3 and associated transitional arrangements on Akzo Nobel is as follows:

| | all prior business combination accounting is frozen at the transition date;
      and                                                                                               
|- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | the value of goodwill is frozen at January 1, 2004, and amortization previously
      reported under NL GAAP for 2004 is removed for financial statements prepared
      under IFRS.

ProvisionsDiscountingIFRS, in principle, prescribes
  discounting of all provisions, which is not always the case in NL GAAP.
  The impact of discounting
  of provisions thus far undiscounted at January 1, 2004, was a decrease in provisions
  of EUR 16 million, which was EUR 11 million after taxes. At December 31, 2004,
  these amounts were EUR 29 million and EUR 20 million, respectively.

Going forward, the interest accrued on discounted provisions are recognized under financing charges. Under NL GAAP, such charges were included in operating income.

Restructuring
  ProvisionsIn accordance with NL GAAP,
  restructuring provisions are recognized if the restructuring has been announced
  to the employees involved before the date of the financial statements. Under
  IFRS, a restructuring can only be recognized if this is announced before the
  balance sheet date.

Restructurings for which provisions amounted to EUR 9 million (EUR 6 million after taxes) were announced in January 2004. Therefore, these provisions did not qualify for recognition under IFRS in
the balance sheet at January 1, 2004, but were recognized under IFRS in the first quarter of 2004. In the quarters of 2004, certain restructuring provisions reported under NL GAAP did not meet the IFRS recognition criteria either and therefore they
were deferred for recognition in the next quarter. At December 31, 2004, all provisions qualified for recognition under IFRS.

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190

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF AKZO NOBEL

Share-Based Payments

In accordance with NL GAAP,
the company recognized expenses related to stock options as a direct charge to
shareholders equity when the related payments were incurred.

In accordance with IFRS 2, the companys stock option plans qualify as so-called cash-settled plans. As a consequence, the company has to charge the fair value of the stock options against
income (first spread over the vesting period and later over the remaining life of the options) and recognize a related liability in the balance sheet. This liability at January 1, 2004, amounted to EUR 11 million, which is EUR 8 million after taxes.
At December 31, 2004, these amounts were EUR 16 million and EUR 10 million, respectively. The fair value has been calculated using the binomial options valuation model. The charge to income over the relevant option vesting periods is adjusted to
reflect actual and expected levels of vesting.

Nonconsolidated Companies

Valuation of the companys interest in nonconsolidated companies is based as much as possible on IFRS, as adopted by Akzo Nobel. The impact of the difference between NL GAAP and IFRS for
nonconsolidated companies on the companys accounts is limited.

Jointly Controlled
  CompaniesFor interests
  in jointly controlled legally incorporated companies IFRS prescribes that they
  must be either proportionally consolidated or equity accounted as a nonconsolidated
  company. The chosen method has to be applied to all such interests. Under NL
  GAAP, the company equity accounted most of the jointly controlled interests.
  However, the joint venture with Sanofi-Synthélabo (for the antithrombotic
  Arixtra®) was proportionally consolidated.

Under IFRS, the company has elected to equity account all jointly controlled interests. The impact of the deconsolidation in the January 1, 2004, balance sheet of the joint venture with
Sanofi-Synthélabo was not significant and did not affect shareholders equity or net income. Due to the change in set up in the first quarter of 2004, this joint venture ceased to exist and was replaced by a revenue arrangement based on
future sales from jointly developed antithrombotic products.

It should be noted that the cooperation with Pfizer for asenapine is not legally incorporated. As a consequence, this cooperation is proportionally consolidated for both NL GAAP and IFRS.

Nonrecurring Items

In its NL GAAP statements, the company separately reported so-called nonrecurring items. These related to income and expenses resulting from normal business operations, which, because of their
size or nature, were disclosed separately to give a better understanding of the underlying result for the period. These included items such as restructurings and impairment charges, significant gains and losses on the disposal of businesses, and
costs related to major lawsuits and antitrust cases not meeting the requirements for extraordinary items.

NL GAAP operating income before nonrecurring items was one of the key figures management used to assess the performance of the company, as these figures better reflected the underlying trends in
the results of the activities.

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191

NOTES TO THE
  CONSOLIDATED FINANCIAL STATEMENTS OF AKZO NOBEL

IFRS does not allow this concept. Therefore, the company will not report IFRS earnings figures excluding nonrecurring items. However, for a better understanding of the companys earnings
development, the most important elements of nonrecurring items are now reported as Incidentals on separate lines within operating income in the statement of income.

Cumulative Translation Differences

The company chose the option in IFRS 1 whereby cumulative translation differences in shareholders equity are deemed to be zero at the date of transition. The negative NL GAAP balance of EUR
1,045 million at January 1, 2004, is deducted from Other Reserves, which therefore starts with a negative balance of EUR 435 million. However, as 2004 net income is higher than dividends paid during the year, the balance of Other Reserves and
Undistributed Profit at December 31, 2004, shows a positive balance of EUR 165 million. It should be noted that if the company would ever have negative Other Reserves, in principle, it will still be able to pay dividends but then from Additional
Paid-in Capital.

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192

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF AKZO NOBEL

RECONCILIATION
  OF EQUITY

|                                                |                             |   |                                  |   |                     |  
|----------------------------------------------- | --------------------------- | - | -------------------------------- | - | ------------------- | -
|Millions of euros                               | Capital
        andreserves |   | Minimumpension
        liability |   | Shareholdersequity |  
|                                                |                             |   |                                  |   |                     |  
|NL GAAP shareholders equity at January 1, 2004 | 3,326                       |   | (824                             | ) | 2,502               |  
|Pensions and other postretirement benefits      | (1,313                      | ) | 824                              |   | (489                | )
|Deferred taxes on intercompany profit           | 76                          |   |                                  |   | 76                  |  
|Pfizer payment                                  | (70                         | ) |                                  |   | (70                 | )
|Discounting of provisions                       | 11                          |   |                                  |   | 11                  |  
|Other long-term employee benefits               | (15                         | ) |                                  |   | (15                 | )
|Share-based payments                            | (8                          | ) |                                  |   | (8                  | )
|Restructuring provisions                        | 6                           |   |                                  |   | 6                   |  
|Other                                           | 12                          |   |                                  |   | 12                  |  
|                                                |                             |   |                                  |   |                     |  
|IFRS shareholders equity at January 1, 2004    | 2,025                       |   |                                  |   | 2,025               |  
|                                                |                             |   |                                  |   |                     |  



|                                        |       |   |         |  
|--------------------------------------- | ----- | - | ------- | -
|Millions of euros                       | IFRS  |   | NL GAAP |  
|                                        |       |   |         |  
|Subscribed share capital                | 572   |   | 572     |  
|Additional paid-in capital              | 1,803 |   | 1,803   |  
|Cumulative translation differences      |       |   | (1,045  | )
|Other statutory reserves                | 85    |   | 85      |  
|Other reserves and undistributed profit | (435  | ) | 1,911   |  
|                                        |       |   |         |  
|Capital and reserves                    | 2,025 |   | 3,326   |  
|Minimum pension liability               |       |   | (824    | )
|                                        |       |   |         |  
|Shareholders equity                    | 2,025 |   | 2,502   |  
|                                        |       |   |         |  

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193

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF AKZO NOBEL

CONSOLIDATED BALANCE
SHEET
  As at January 1, 2004

|                                                 |                          |   |                            |  |                       |   |      |   |       |   |        | 
|------------------------------------------------ | ------------------------ | - | -------------------------- |  | --------------------- | - | ---- | - | ----- | - | ------ | 
|                                                 | NL
      GAAP,           |   | Effect
      of transition |  | IFRS
      at         |  
|Millions
      of euros                          | at
      January 1, 2004 |   | to
      IFRS              |  | January
      1, 2004 |  
|                                                 |                          |   |                            |  |                       |   |      |   |       |   |        | 
|Assets                                           |                          |   |                            |  |                       |   |      |   |       |   |        | 
|Property, plant and
      equipment              |                          |   | 3,967                      |  |                       |   |      |   |       |   | 3,967  | 
|Intangible assets                                |                          |   | 590                        |  |                       |   | (166 | ) |       |   | 424    | 
|Financial noncurrent
      assets:               |                          |   |                            |  |                       |   |      |   |       |   |        | 
| deferred tax
      assets                      | 790                      |   |                            |  | 145                   |   |      |   | 935   |   |        | 
| nonconsolidated
      companies                | 353                      |   |                            |  |                       |   |      |   | 353   |   |        | 
| other financial
      noncurrent assets        | 723                      |   |                            |  | (395                  | ) |      |   | 328   |   |        | 
|                                                 |                          |   |                            |  |                       |   |      |   |       |   |        | 
|                                                 |                          |   | 1,866                      |  |                       |   | (250 | ) |       |   | 1,616  | 
|                                                 |                          |   |                            |  |                       |   |      |   |       |   |        | 
|Total noncurrent
      assets                    |                          |   | 6,423                      |  |                       |   | (416 | ) |       |   | 6,007  | 
|                                                 |                          |   |                            |  |                       |   |      |   |       |   |        | 
|Inventories                                      | 2,133                    |   |                            |  | (14                   | ) |      |   | 2,119 |   |        | 
|Income tax receivable                            | 161                      |   |                            |  |                       |   |      |   | 161   |   |        | 
|Trade and other receivables                      | 2,510                    |   |                            |  | 8                     |   |      |   | 2,518 |   |        | 
|Cash and cash equivalents                        | 727                      |   |                            |  |                       |   |      |   | 727   |   |        | 
|Assets classified
      as held for sale         |                          |   |                            |  |                       |   |      |   |       |   |        | 
|                                                 |                          |   |                            |  |                       |   |      |   |       |   |        | 
|Total current
      assets                       |                          |   | 5,531                      |  |                       |   | (6   | ) |       |   | 5,525  | 
|                                                 |                          |   |                            |  |                       |   |      |   |       |   |        | 
|Total assets                                     |                          |   | 11,954                     |  |                       |   | (422 | ) |       |   | 11,532 | 
|                                                 |                          |   |                            |  |                       |   |      |   |       |   |        | 
|Equity                                           |                          |   |                            |  |                       |   |      |   |       |   |        | 
|Subscribed share
      capital                   | 572                      |   |                            |  |                       |   |      |   | 572   |   |        | 
|Additional paid-in
      capital                 | 1,803                    |   |                            |  |                       |   |      |   | 1,803 |   |        | 
|Cumulative translation
      differences         | (1,045                   | ) |                            |  | 1,045                 |   |      |   |       |   |        | 
|Other statutory reserves                         | 85                       |   |                            |  |                       |   |      |   | 85    |   |        | 
|Other reserves, minimum
      pension liability, |                          |   |                            |  |                       |   |      |   |       |   |        | 
|and undistributed
      profits                  | 1,087                    |   |                            |  | (1,522                | ) |      |   | (435  | ) |        | 
|                                                 |                          |   |                            |  |                       |   |      |   |       |   |        | 
|Akzo Nobel
      N.V. shareholders equity       |                          |   | 2,502                      |  |                       |   | (477 | ) |       |   | 2,025  | 
|Minority
      interest                          |                          |   | 140                        |  |                       |   |      |   |       |   | 140    | 
|                                                 |                          |   |                            |  |                       |   |      |   |       |   |        | 
|Total equity                                     |                          |   | 2,642                      |  |                       |   | (477 | ) |       |   | 2,165  | 
|                                                 |                          |   |                            |  |                       |   |      |   |       |   |        | 
|Liabilities                                      |                          |   |                            |  |                       |   |      |   |       |   |        | 
|Provisions                                       | 3,332                    |   |                            |  | (408                  | ) |      |   | 2,924 |   |        | 
|Deferred income                                  |                          |   |                            |  | 88                    |   |      |   | 88    |   |        | 
|Deferred tax liabilities                         | 591                      |   |                            |  | (325                  | ) |      |   | 266   |   |        | 
|Long-term borrowings                             | 2,677                    |   |                            |  |                       |   |      |   | 2,677 |   |        | 
|                                                 |                          |   |                            |  |                       |   |      |   |       |   |        | 
|Total noncurrent
      liabilities               |                          |   | 6,600                      |  |                       |   | (645 | ) |       |   | 5,955  | 
|                                                 |                          |   |                            |  |                       |   |      |   |       |   |        | 
|Short-term borrowings                            | 441                      |   |                            |  | 40                    |   |      |   | 481   |   |        | 
|Income tax payable                               | 177                      |   |                            |  | 90                    |   |      |   | 267   |   |        | 
|Trade and other payables                         | 2,094                    |   |                            |  | (46                   | ) |      |   | 2,048 |   |        | 
|Current portion of
      provisions              |                          |   |                            |  | 616                   |   |      |   | 616   |   |        | 
|Liabilities classified
      as held for sale    |                          |   |                            |  |                       |   |      |   |       |   |        | 
|                                                 |                          |   |                            |  |                       |   |      |   |       |   |        | 
|Total current
      liabilities                  |                          |   | 2,712                      |  |                       |   | 700  |   |       |   | 3,412  | 
|                                                 |                          |   |                            |  |                       |   |      |   |       |   |        | 
|Total equity
      and liabilities               |                          |   | 11,954                     |  |                       |   | (422 | ) |       |   | 11,532 | 
|                                                 |                          |   |                            |  |                       |   |      |   |       |   |        | 

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194

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF AKZO NOBEL

CONSOLIDATED STATEMENT
  OF INCOMEReconciliation
  of Profit for 2004

|                                                   |              
|-------------------------------------------------- | -------------
|Millions
      of euros                            | NL
      GAAP
|                                                   |              
|Revenues                                           |              
|Cost of sales                                      |              
|                                                   |              
|Gross profit                                       |              
|                                                   |              
|Selling expenses                                   | (3,255       
|Research and development
      expenses            | (823         
|General and administrative
      expenses          | (676         
|Other operating income
      / (expenses)          | 46           
|Incidentals:                                       |              
| special benefits                                 | 60           
| results on
      divestments                     | 509          
| restructuring
      and impairment charges       | (199         
| charges related
      to major legal, antitrust, |              
|and environmental
      cases                      | (199         
|                                                   |              
|                                                   |              
|                                                   |              
|Operating income                                   |              
|                                                   |              
|Financing charges,
      net                       |              
|                                                   |              
|Operating income
      less net financing charges  |              
|                                                   |              
|Taxes                                              |              
|                                                   |              
|Earnings of consolidated
      companies, after    |              
|tax                                                |              
|Earnings from nonconsolidated
      companies      |              
|                                                   |              
|Profit for the period                              |              
|Minority interest,
      attributable to minority  |              
|shareholders                                       |              
|                                                   |              
|Net income, attributable
      to the holders of   |              
|equity                                             |              
|                                                   |              
|In EUR                                             |              
|Basic net income
      per share                   |              
|Diluted net income
      per share                 |              
|                                                   |              

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195

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF AKZO NOBEL

CONSOLIDATED
  BALANCE SHEET
  As at December 31, 2004

|                                                 |                        
|------------------------------------------------ | -----------------------
|                                                 | NL
      GAAP, at      
|Millions
      of euros                          | December
      31, 2004
|                                                 |                        
|Assets                                           |                        
|Property, plant and
      equipment              |                        
|Intangible assets                                |                        
|Financial noncurrent
      assets:               |                        
| deferred tax
      assets                      | 705                    
| nonconsolidated
      companies                | 318                    
| other financial
      noncurrent assets        | 730                    
|                                                 |                        
|                                                 |                        
|                                                 |                        
|Total noncurrent
      assets                    |                        
|                                                 |                        
|Inventories                                      | 1,978                  
|Income tax receivable                            | 210                    
|Trade and other receivables                      | 2,557                  
|Cash and cash equivalents                        | 1,811                  
|Assets classified
      as held for sale         |                        
|Total current
      assets                       |                        
|                                                 |                        
|Total assets                                     |                        
|                                                 |                        
|Equity                                           |                        
|Subscribed share
      capital                   | 572                    
|Additional paid-in
      capital                 | 1,803                  
|Cumulative translation
      differences         | (1,070                 
|Other statutory reserves                         | 85                     
|Other reserves, minimum
      pension liability, |                        
|and undistributed
      profits                  | 1,646                  
|                                                 |                        
|Akzo Nobel
      N.V. shareholders equity       |                        
|Minority
      interest                          |                        
|                                                 |                        
|Total equity                                     |                        
|                                                 |                        
|Liabilities                                      |                        
|Provisions                                       | 3,240                  
|Deferred income                                  |                        
|Deferred tax liabilities                         | 479                    
|Long-term borrowings                             | 2,694                  
|                                                 |                        
|Total noncurrent
      liabilities               |                        
|                                                 |                        
|Short-term borrowings                            | 258                    
|Income tax payable                               | 350                    
|Trade and other payables                         | 2,208                  
|Current portion of
      provisions              |                        
|Liabilities classified
      as held for sale    |                        
|                                                 |                        
|Total current
      liabilities                  |                        
|                                                 |                        
|Total equity
      and liabilities               |                        
|                                                 |                        

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196

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF AKZO NOBEL

RECONCILIATION
  OF EQUITY

|                                                        |                           
|------------------------------------------------------- | --------------------------
|Millions of euros                                       | Capital
      and reserves
|                                                        |                           
|NL GAAP
      shareholders equity at December 31, 2004 | 3,795                     
|Pensions
      and other postretirement benefits        | (1,193                    
|Deferred
      taxes on intercompany profit             | 33                        
|Termination
      of goodwill amortization              | 19                        
|Pfizer
      payment                                    | (45                       
|Discounting
      of provisions                         | 20                        
|Other
      long-term employee benefits                 | (15                       
|Share-based
      payments                              | (10                       
|Other                                                   | 1                         
|                                                        |                           
|IFRS
      shareholders equity at December 31, 2004    | 2,605                     
|                                                        |                           



|                                        |      
|--------------------------------------- | -----
|Millions of euros                       | IFRS 
|                                        |      
|Subscribed share capital                | 572  
|Additional paid-in capital              | 1,803
|Statutory reserves                      | 85   
|Cumulative translation differences      | (20  
|Other reserves and undistributed profit | 165  
|                                        |      
|Capital and reserves                    | 2,605
|Minimum pension liability               |      
|                                        |      
|Shareholders equity                    | 2,605
|                                        |      

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197

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF AKZO NOBEL

CONSOLIDATED
  STATEMENT OF CASH FLOWSFor
  the year ended December 31, 2004

|                                                  |              
|------------------------------------------------- | -------------
|Millions
      of euros                           | NL
      GAAP
|                                                  |              
|Profit
      for the period                       | 891          
|Adjustments
      to reconcile earnings to cash   |              
|provided
      from operating activities:         |              
|Depreciation
      and amortization               | 593          
|Impairment
      losses                           | 74           
|Financing
      charges                           |              
|Earnings
      from nonconsolidated companies     | (52          
|Taxes
      recognized in income                  |              
|                                                  |              
|Operating
      profit before changes in working  |              
|capital
      and provisions                      |              
|Changes
      in trade and other receivables      | (169         
|Changes
      in inventories                      | (23          
|Changes
      in trade and other payables         | 348          
|Changes
      in provisions                       | (107         
|Other                                             | 104          
|                                                  |              
|                                                  |              
|                                                  |              
|Cash
      generated by operations                |              
|                                                  |              
|Interest
      paid                               |              
|Income
      taxes (paid)/received                |              
|Pretax
      gain on divestments                  | (509         
|                                                  |              
|                                                  |              
|                                                  |              
|Net
      cash from operating activities          |              
|                                                  |              
|Capital
      expenditures                        | (551         
|Investments
      in intangible assets            | (28          
|Interest
      received                           |              
|Repayments
      in nonconsolidated companies     | (29          
|Dividends
      received                          | 123          
|Acquisition
      of consolidated companies1      | (80          
|Proceeds
      from sale of interests1            | 1,036        
|Other
      changes in noncurrent assets          | 6            
|                                                  |              
|Net
      cash from investing activities          |              
|                                                  |              
|New long-term
      borrowings                    | 22           
|Repayment
      of borrowings                     | (191         
|Dividends                                         | (366         
|                                                  |              
|Net
      cash from financing activities          |              
|                                                  |              
|Net
      change in cash and cash equivalents     |              
|Cash
      and cash equivalents at January 1      |              
|Effect
      of exchange rate changes on cash and |              
|cash
      equivalents                            |              
|                                                  |              
|Cash
      and cash equivalents at December 31    |              
|                                                  |              

|1 | Net of cash acquired
      or disposed of.
|- | ------------------------------------------

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198

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF AKZO NOBEL

IFRS standards with a prospective impact

Financial Instruments

IFRS as applied for the restated figures of 2004 did not include standards IAS 32 and 39 for financial instruments. The company opted for the transition provision of IFRS 1 to apply these
standards as from January 1, 2005. The after-tax effect of the implementation of IAS 32 and 39 on January 1, 2005, on balance, was a charge to shareholders equity of EUR 9 million. The principal effects of the implementation of IAS 32 and 39
are described per instrument below.

Long-Term BorrowingsLong-term borrowings
  used to be valued at nominal value, any placement costs or premium or discount
  on issue used to be amortized on a straight line basis. IFRS prescribes that
  such borrowings are valued at amortized cost applying the effective interest
  rate method. The effect on shareholders equity at January 1, 2005 was
  a credit of EUR 1 million after taxes.

Cash and Cash
  EquivalentsShort-term investments
  used to be valued at the lower of cost or market value. Under IFRS they need
  to be valued at market value. The effect on shareholders equity at January
  1, 2005 was an after-tax credit of EUR 1 million.

Forward Exchange
  ContractsForward exchange
  contracts concluded to hedge receivables or payables in foreign currency used
  to be valued at spot rates prevailing at the balance sheet date. Foreign currency
  hedges of anticipatory transactions or firm commitments used to be deferred
  in the balance sheet until the hedged transactions had been reflected in the
  accounts. Forward exchange contracts under IFRS need to be valued at fair value
  in the balance sheet and changes in fair value are to be recognized in the statement
  of income. The company in principle will not apply hedge accounting for these
  types of contracts. The effect on shareholders equity at January 1, 2005
  was an after-tax charge of EUR 1 million.

The company used to net the value of the forward exchange contracts per contract partner. Under IFRS such netting is not allowed. As a consequence, all contracts are recognized separately on the
appropriate lines in the balance sheet.

Interest Rate
  DerivativesThe company
  holds certain interest swaps and currency swaps to hedge fixed-rate interest-bearing
  borrowings and in some cases foreign currency exchange risks. Interest rate
  derivatives in a hedge relationship used not to be valued in the balance sheet.
  The interest on the fixed and floating rate parts were recognized in the statement
  of income on an accrual basis. The cross currency element in the interest rate
  currency swaps was recognized in the balance sheet at the spot rate prevailing
  at the balance sheet date. The changes in the values so calculated were recognized
  in the statement of income to offset the currency exchange differences on the
  borrowings in foreign currency. Under IFRS these contracts have to be valued
  at fair value in the balance sheet. The company applies fair value hedge accounting
  for these contracts. The impact on shareholders equity at January 1, 2005,
  on balance, was an after-tax charge of EUR 5 million. This is the combined effect
  of the fair value adjustment of the interest-rate derivatives and the fair value
  adjustment of the underlying bonds. The company also had some forward rate agreements,
  for which no hedge accounting is applied. The effect on shareholders equity
  per January 1, 2005, is negligible. It should be noted that the

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199

NOTES TO THE
  CONSOLIDATED FINANCIAL STATEMENTS OF AKZO NOBEL

company used to net the recorded book value of the interest derivatives with the book value of the loans. Under IFRS this netting is not allowed. The instruments under IFRS are now recorded
separately on the appropriate line items in the balance sheet.

CommoditiesIn order to cover the price
  risk of natural gas and electricity, the company has entered into certain petroleum
  swaps and gas and electricity futures, which have to be recognized at fair value
  in the balance sheet. For the electricity related contracts cash flow hedge
  accounting is applied. For the other contracts no hedge accounting is applied.
  The effect on shareholders equity as of January 1, 2005 was an after tax
  charge of EUR 5 million.

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200

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF AKZO NOBEL

CONSOLIDATED
  BALANCE SHEETAs at January 1,
  2005, after implementation of IAS 32 and 39

|                                                |                         |   |                             |  |                       |   |               |   |       |   |        | 
|----------------------------------------------- | ----------------------- | - | --------------------------- |  | --------------------- | - | ------------- | - | ----- | - | ------ | 
|                                                | IFRS
      at           |   |                             |  |                       |   | IFRS
      at |  
|Millions
      of euros                         | December
      31, 2004 |   | Effect
      of IAS 32 & 39 |  | January
      1, 2005 |  
|                                                |                         |   |                             |  |                       |   |               |   |       |   |        | 
|Assets                                          |                         |   |                             |  |                       |   |               |   |       |   |        | 
|Property, plant and
      equipment             |                         |   | 3,535                       |  |                       |   |               |   |       |   | 3,535  | 
|Intangible assets                               |                         |   | 448                         |  |                       |   |               |   |       |   | 448    | 
|Financial noncurrent
      assets:              |                         |   |                             |  |                       |   |               |   |       |   |        | 
| deferred tax
      assets                     | 794                     |   |                             |  | 5                     |   |               |   | 799   |   |        | 
| nonconsolidated
      companies               | 318                     |   |                             |  |                       |   |               |   | 318   |   |        | 
| other financial
      noncurrent assets       | 306                     |   |                             |  | 259                   |   |               |   | 565   |   |        | 
|                                                |                         |   |                             |  |                       |   |               |   |       |   |        | 
|                                                |                         |   | 1,418                       |  |                       |   | 264           |   |       |   | 1,682  | 
|                                                |                         |   |                             |  |                       |   |               |   |       |   |        | 
|Total noncurrent
      assets                   |                         |   | 5,401                       |  |                       |   | 264           |   |       |   | 5,665  | 
|                                                |                         |   |                             |  |                       |   |               |   |       |   |        | 
|Inventories                                     | 1,978                   |   |                             |  |                       |   |               |   | 1,978 |   |        | 
|Income tax receivable                           | 210                     |   |                             |  |                       |   |               |   | 210   |   |        | 
|Trade and other receivables                     | 2,551                   |   |                             |  | 30                    |   |               |   | 2,581 |   |        | 
|Cash and cash equivalents                       | 1,811                   |   |                             |  | 1                     |   |               |   | 1,812 |   |        | 
|Assets classified
      as held for sale        |                         |   |                             |  |                       |   |               |   |       |   |        | 
|                                                |                         |   |                             |  |                       |   |               |   |       |   |        | 
|Total current
      assets                      |                         |   | 6,550                       |  |                       |   | 31            |   |       |   | 6,581  | 
|                                                |                         |   |                             |  |                       |   |               |   |       |   |        | 
|Total assets                                    |                         |   | 11,951                      |  |                       |   | 295           |   |       |   | 12,246 | 
|                                                |                         |   |                             |  |                       |   |               |   |       |   |        | 
|Equity                                          |                         |   |                             |  |                       |   |               |   |       |   |        | 
|Subscribed share
      capital                  | 572                     |   |                             |  |                       |   |               |   | 572   |   |        | 
|Additional paid-in
      capital                | 1,803                   |   |                             |  |                       |   |               |   | 1,803 |   |        | 
|Cumulative translation
      differences        | (20                     | ) |                             |  |                       |   |               |   | (20   | ) |        | 
|Other statutory reserves                        | 85                      |   |                             |  |                       |   |               |   | 85    |   |        | 
|Other reserves, and
      undistributed profits | 165                     |   |                             |  | (9                    | ) |               |   | 156   |   |        | 
|                                                |                         |   |                             |  |                       |   |               |   |       |   |        | 
|Akzo Nobel
      N.V. shareholders equity      |                         |   | 2,605                       |  |                       |   | (9            | ) |       |   | 2,596  | 
|                                                |                         |   |                             |  |                       |   |               |   |       |   |        | 
|Minority
      interest                         |                         |   | 140                         |  |                       |   |               |   |       |   | 140    | 
|                                                |                         |   |                             |  |                       |   |               |   |       |   |        | 
|Total equity                                    |                         |   | 2,745                       |  |                       |   | (9            | ) |       |   | 2,736  | 
|                                                |                         |   |                             |  |                       |   |               |   |       |   |        | 
|Liabilities                                     |                         |   |                             |  |                       |   |               |   |       |   |        | 
|Provisions                                      | 2,877                   |   |                             |  | 5                     |   |               |   | 2,882 |   |        | 
|Deferred income                                 | 56                      |   |                             |  |                       |   |               |   | 56    |   |        | 
|Deferred tax liabilities                        | 144                     |   |                             |  |                       |   |               |   | 144   |   |        | 
|Long-term borrowings                            | 2,392                   |   |                             |  | 289                   |   |               |   | 2,681 |   |        | 
|                                                |                         |   |                             |  |                       |   |               |   |       |   |        | 
|Total noncurrent
      liabilities              |                         |   | 5,469                       |  |                       |   | 294           |   |       |   | 5,763  | 
|                                                |                         |   |                             |  |                       |   |               |   |       |   |        | 
|Short-term borrowings                           | 560                     |   |                             |  |                       |   |               |   | 560   |   |        | 
|Income tax payable                              | 468                     |   |                             |  |                       |   |               |   | 468   |   |        | 
|Trade and other payables                        | 2,209                   |   |                             |  | 10                    |   |               |   | 2,219 |   |        | 
|Current portion of
      provisions             | 500                     |   |                             |  |                       |   |               |   | 500   |   |        | 
|Liabilities classified
      as held for sale   |                         |   |                             |  |                       |   |               |   |       |   |        | 
|                                                |                         |   |                             |  |                       |   |               |   |       |   |        | 
|Total current
      liabilities                 |                         |   | 3,737                       |  |                       |   | 10            |   |       |   | 3,747  | 
|                                                |                         |   |                             |  |                       |   |               |   |       |   |        | 
|Total equity
      and liabilities              |                         |   | 11,951                      |  |                       |   | 295           |   |       |   | 12,246 | 
|                                                |                         |   |                             |  |                       |   |               |   |       |   |        | 

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201

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF AKZO NOBEL

(25) Subsequent
  Events

In March 2006, Akzo Nobel sold a Coatings plant near Barcelona, Spain. This resulted in an after tax book profit of approximately EUR 75 million.

In 2006, the company
  entered into a plea agreement with the US Department of Justice resolving its
  investigation of alleged antitrust violations in the hydrogen peroxides business,
  pursuant to which the company was sentenced by the US Federal Court for the
  Northern District of California on May 17, 2006, to pay a fine of USD 32 million.
  In addition, in April of 2006, the company was informed by the EU Commission
  on its decision to fine the company for alleged violations of the EU competition
  law rules in hydrogen peroxides, imposing a fine of EUR 25 million. The company
  will file an appeal against this decision. As a consequence of these developments,
  the Company added EUR 31 million to the provision for antitrust cases in the
  first quarter of 2006.

In the first quarter of 2006, the company recognized restructuring and impairment charges of EUR 42 million predominantly related to restructuring activities at Chemicals sites, especially
Delfzijl, the Netherlands.

On June 1, 2006, Akzo Nobel announced that it had acquired approximately 97% of the share capital of Sico Inc. (Sico), Canadas leading coatings company. The company intends to
acquire the remaining shares under the compulsory acquisition provisions of the Companies Act (Québec). The total price will be approximately EUR 210 million.

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202

Schedule
  IIVALUATION
  AND QUALIFYING ACCOUNTS

|                               |                               
|------------------------------ | ------------------------------
|Millions
      of euros        | Balance at beginning of period
|                               |                               
|Reserves for doubtful accounts |                               
|Year ended                     |                               
|December 31, 2003              | 182                           
|Year ended                     |                               
|December 31, 2004              | 166                           
|Year ended                     |                               
|December 31, 2005              | 165                           
|                               |                               

|* | Other is principally
      due to divestments.
|- | ----------------------------------------------

Other reserves of a similar
  nature, such as for warranties, are not material to the consolidated financial
  statements.

Item
  19.EXHIBITS

|(a) | Financial
      statements filed as a part of this annual report. (See index to financial
      statements and schedule set forth in Item 18.)
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------
|   
|(b) | Exhibits
      filed as part of this annual report                                                                                            
|   
|    | 1.                                                                                                                                            
|    | 4.c                                                                                                                                           
|    | 8.                                                                                                                                            
|    | 12.a                                                                                                                                          
|    | 12.b                                                                                                                                          
|    | 13.a                                                                                                                                          
|    | 13.b                                                                                                                                          
|    | 15.a                                                                                                                                          

The amount of long-term debt securities of Akzo Nobel authorized under any individual instrument does not exceed 10 percent of the total assets of Akzo Nobel and its subsidiaries on a consolidated
basis. Akzo Nobel agrees to furnish copies of any or all such instruments to the Securities and Exchange Commission upon request.

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203

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.



|Akzo
      Nobel N.V.      |   |                                           |      
|-------------------------- | - | ----------------------------------------- | -----
|                           |   |                                           |      
|                           |   |                                           |      
|                           |   |                                           |      
|                           |   |                                           |      
|By                         | : | /s/ G.J.
      Wijers                     | By   
|Name                       | : | G.J.
      Wijers                         | Name 
|Title                      | : | Chairman
      of the Board of Management | Title
|                           |   |                                           |      
|Dated:
      June 22, 2006

EXHIBIT
  INDEX

|(a) | Financial
      statements filed as a part of this annual report. (See index to financial
      statements and schedule set forth in Item 18.)
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------
|   
|(c) | Exhibits
      filed as part of this annual report                                                                                            
|   
|    | 1.                                                                                                                                            
|    | 4.c                                                                                                                                           
|    | 8.                                                                                                                                            
|    | 12.a                                                                                                                                          
|    | 12.b                                                                                                                                          
|    | 13.a                                                                                                                                          
|    | 13.b                                                                                                                                          
|    | 15.a                                                                                                                                          

---