As filed with the Securities and Exchange Commission on March 14, 2007

 

**UNITED STATES**

**SECURITIES AND EXCHANGECOMMISSION**

**WashingtonD.C. 20549**

**FORM 20-F**
| **o**      | **REGISTRATION STATEMENT PURSUANT TO SECTION 12(b)  OR 12(g) OF THE SECURITIES EXCHANGE ACT OF 1934** |
|------------|-------------------------------------------------------------------------------------------------------|
| ** ** | **OR**                                                                                                |
| **x**      | **ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF  THE SECURITIES EXCHANGE ACT OF 1934**             |
| ** ** | **For the  Fiscal Year Ended December 31, 2006**                                                      |
| ** ** | **OR**                                                                                                |
| **o**      | **TRANSITION REPORT PURSUANT TO SECTION 13 OR  15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**         |
| ** ** | **OR**                                                                                                |
| **o**      | **SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR  15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**      |

 

Commission filenumber:**1-15050**

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**BASF AKTIENGESELLSCHAFT**

(Exact Name ofRegistrant as Specified in Its Charter)

**BASF CORPORATION***

(Translation ofRegistrant’s name into English)

|                                                  |   | **Carl  Bosch Strasse 38**                |
|--------------------------------------------------|--------|-------------------------------------------|
| **Federal  Republic of Germany**                 |   | **Ludwigshafen,  GERMANY 67056**          |
| (Jurisdiction of  incorporation or organization) |   | (Address of  principal executive offices) |

 

Securitiesregistered 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 representing BASF |       | New York Stock  Exchange                      |
| ordinary shares  of no par value              |       |                                          |
|                                          |       |                                          |
| BASF ordinary  shares of no par value         |       | New York Stock  Exchange**                    |

 

Securitiesregistered or to be registered pursuant to Section 12(g) of the Act:

**None**

(Title of Class)

Securities forwhich there is a reporting obligation pursuant to Section 15(d) of the Act:

**None**

(Title of Class)

Indicate thenumber of outstanding shares of each of the issuer’s classes of capital orcommon stock as of the close of the period covered by the annual report.

As of December 31,2006, there were 499,680,000 BASF ordinary shares of no par value outstanding.

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

Yes x No o

If this report isan annual or transition report, indicate by check mark if the registrant is notrequired to file reports pursuant to Section 13 or 15(d) of the SecuritiesExchange Act of 1934.

Yes o No x

Note—checking thebox above will not relive any registrant required to file reports pursuant toSection 13 or 15(d) of the Securities Exchange Act of 1934 from theirobligations under those sections.

Indicate by checkmark whether the registrant (1) has filed all reports required to be filed bySection 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding12 months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements for thepast 90 days.

Yes x No o

Indicate by checkmark whether the registrant is a large accelerated filer, an accelerated filer,or a non-accelerated filer. See definition of “accelerated filer and largeaccelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):
|    Large accelerated filer x | Accelerated  filer o | Non-accelerated  filer o |
|---------------------------------------------|----------------------|--------------------------|

 

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

Item 17 oItem 18 x

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

Yes oNo x

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*   BASFCorporation is also the name of a wholly owned subsidiary of the Registrant inthe United States.

** Not for trading, but only in connection withthe registration of American Depositary Shares

 

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BASF Aktiengesellschaft is incorporated as a stockcorporation organized under the laws of the Federal Republic of Germany. Asused in this Annual Report, “BASF Aktiengesellschaft” refers solely to the ultimateparent company of the BASF Group. “BASF” refers to BASF Aktiengesellschaft andits consolidated subsidiaries.

The Consolidated Financial Statements of BASF arebased on the International Financial Reporting Standards (IFRS) and itsinterpretations issued by the International Accounting Standards Board (IASB).

The reconciliation of significant deviations to U.S.generally accepted accounting principles (U.S. GAAP) is described in Note 31 tothe Consolidated Financial Statements included in Item 18.

**Forward-Looking Information May Prove Inaccurate**

This Annual Report contains certain forward-lookingstatements and information relating to BASF that are based on the currentexpectations, estimates and projections of its management and information currentlyavailable to BASF. These statements include, but are not limited to, statementsabout BASF’s strategies, plans, objectives, expectations, intentions,expenditures and assumptions and other statements contained in this AnnualReport that are not historical facts. When used in this document, the words “anticipate,”“believe,” “estimate,” “expect,” “intend,” “plan” and “project” and othersimilar expressions are generally intended to identify forward-lookingstatements.

These statements reflect the current views of BASFwith respect to future events. They are not guarantees of future performanceand involve certain risks and uncertainties that are difficult to predict. In addition,certain forward-looking statements are based upon assumptions as to future eventsthat may not prove to be accurate.

Many factors could cause the actual results,performance or achievements of BASF to be materially different from any futureresults, performance or achievements that may be expressed or implied by such forward-lookingstatements. These factors include, among others:

·                  changes ingeneral political, economic and business conditions in the countries or regionsin which BASF operates;

·                  changes in thelaws or policies of governments or other governmental or quasi-governmental activitiesin the countries in which BASF operates;

·                  changes in thecomposition of BASF Group companies, joint venture activities, divestitures andthe successful integration of acquisitions;

·                  increased pricecompetition and the introduction of competing products by other companies; 

·                  the ability todevelop, introduce and market innovative products and applications;

·                  the length anddepth of product and industry business cycles, particularly in the automotive, construction,electrical and textile industries;

·                  changes in thedemand for, supply of, and market prices of crude oil, refined products,natural gas and petrochemicals, including changes in production quotas in OPECcountries and the deregulation of the natural gas transmission industry in Europe;

·                  the cost andavailability of feedstock and other raw materials, including naphtha andprecious metals and the price of steam cracker products;

·                  the ability topass increases in raw material costs on to customers;

·                  changes in thedegree of patent and other legal protection afforded to BASF’s products;

·                  regulatoryapproval, particularly in the areas of fine chemicals, agricultural productsand plant biotechnology and market acceptance of new products includinggenetically modified competitive products;

2

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·                  unexpectednegative results from research and development and testing of current product candidates;

·                  the ability tomaintain plant utilization rates and to implement planned capacity additionsand expansions;

·                  the ability toreduce production costs by implementing technological improvements to existing plants;

·                  the existence oftemporary industry surplus production capacity resulting from the integrationand start-up of new world-scale plants;

·                  potentialliability resulting from pending or future litigation;

·                  potentialliability for remedial actions under existing or future environmentalregulations;

·                  changes incurrency exchange rates, interest rates and inflation rates; and

·                  changes inbusiness strategy and various other factors referenced in this Annual Report.

Many of these factors are macroeconomic in nature andare, therefore, beyond the control of BASF’s management. Should one or more ofthese risks or uncertainties materialize, or should underlying assumptionsprove incorrect, actual results may vary materially from those described hereinas anticipated, believed, estimated, expected, intended, planned or projected.BASF does not intend, and does not assume any obligation, to update theforward-looking statements contained in this Annual Report.

3

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**TABLE OF CONTENTS**
|              | ** ** | **PART I**                                                                        | ** ** | ** ** |
|--------------|------------|-----------------------------------------------------------------------------------|------------|------------|
|         |       |                                                                              |       | **Page**   |
| **Item 1.**  | ** ** | **Identity of Directors,  Senior Management and Advisers**                        |       | 5          |
| **Item 2.**  | ** ** | **Offer Statistics and  Expected Timetable**                                      |       | 5          |
| **Item 3.**  | ** ** | **Key  Information**                                                              |       | 6          |
| **Item 4.**  | ** ** | **Information  on the Company**                                                   |       | 15         |
|         |       | History and Development of the Company                                            |       | 15         |
|         |       | Business Overview                                                                 |       | 17         |
|         |       | Organizational  Structure                                                         |       | 51         |
|         |       | Description  of Property                                                          |       | 51         |
|         | ** ** | **A Unresolved Staff Comments**                                                   |       | 53         |
| **Item 5.**  | ** ** | **Operating  and Financial Review and Prospects**                                 |       | 54         |
|         |       | Basis of Presentation                                                             |       | 54         |
|         |       | Results of Operations                                                             |       | 58         |
|         |       | Liquidity and Capital Resources                                                   |       | 80         |
|         |       | Exchange Rate Exposure and Risk Management                                        |       | 86         |
|         |       | Research  and Development                                                         |       | 87         |
| **Item 6.**  | ** ** | **Directors, Senior Management and Employees**                                    |       | 89         |
| **Item 7.**  | ** ** | **Major  Shareholders and Related Party Transactions**                            |       | 104        |
| **Item 8.**  | ** ** | **Financial  Information**                                                        |       | 105        |
| **Item 9.**  | ** ** | **The Offer and Listing**                                                         |       | 108        |
| **Item 10.** | ** ** | **Additional  Information**                                                       |       | 110        |
| **Item 11.** | ** ** | **Quantitative  and Qualitative Disclosures About Market Risk**                   |       | 115        |
| **Item 12.** | ** ** | **Description  of Securities Other than Equity Securities**                       |       | 124        |
|         |       |                                                                              |       |       |
|         | ** ** | **PART II**                                                                       |       | 125        |
| **Item 13.** | ** ** | **Defaults,  Dividend Arrearages and Delinquencies**                              |       | 125        |
| **Item 14.** | ** ** | **Material  Modifications to the Rights of Security Holders and Use of Proceeds** |       | 125        |
| **Item 15.** | ** ** | **Controls and  Procedures**                                                      |       | 126        |
| **Item 16.** | ** ** | **A Audit  Committee Financial Expert**                                           |       | 129        |
|         | ** ** | **B  Code of Ethics**                                                             |       | 129        |
|         | ** ** | **C Principal Accountant Fees and Services**                                      |       | 129        |
|         | ** ** | **D Exemptions from the Listing Standards for Audit  Committees**                 |       | 130        |
|         | ** ** | **E Purchases of Equity Securities by the Issuer and  Affiliated Purchasers**     |       | 130        |
|         |       |                                                                              |       |       |
|         | ** ** | **PART III**                                                                      |       | F-1        |
| **Item 17.** | ** ** | **Financial  Statements**                                                         |       | F-1        |
| **Item 18.** | ** ** | **Financial  Statements**                                                         |       | F-1        |
| **Item 19.** | ** ** | **Exhibits**                                                                      |       | E-1        |

 

4

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**PART I**

Item1.             Identity of Directors,Senior Management and Advisers

Not applicable.

Item2.             Offer Statistics and ExpectedTimetable

Not applicable.

5

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Item 3.             Key Information

**SELECTEDFINANCIAL DATA**

The following selected financial data for the years2006, 2005 and 2004 are excerpted from the Consolidated Financial Statements ofBASF, which have been audited by Deloitte & Touche GmbH in 2004 and 2005,independent accountants during this period. In 2006, KPMG DeutscheTreuhand-Gesellschaft Aktiengesellschaft Wirtschaftsprüfungsgesellschaft wasthe independent registered public accounting firm for BASF. Starting from January1, 2004, the accounting and reporting of the BASF Group is performed accordingto International Financial Reporting Standards (IFRS). Selected data are alsoprovided in accordance with U.S. GAAP for the years 2006 through 2002.

The selected financial data presented below inaccordance with U.S. GAAP for the years 2006, 2005 and 2004 have been derivedfrom the Consolidated Financial Statements included in Item 18. Data for 2003and 2002 have been derived from prior years’ statements. The reconciliation of thedifferences between IFRS and U.S. GAAP is described in Note 31 to theConsolidated Financial Statements included in Item 18.

6

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**Million€, except per share data and certain other data**
| ** **                                                                                                   | ** ** | **2006**   | ** ** | **2005**   | ** ** | **2004**   | ** ** |
|--------------------------------------------------------------------------------------------------------------|------------|------------|------------|------------|------------|------------|------------|
| **Income  Statement Data**                                                                                   |       |       |       |       |       |       |       |
| **IFRS**                                                                                                     |       |       |       |       |       |       |       |
| Sales                                                                                                        |       | 52,610     |       | 42,745     |       | 37,537     |       |
| Gross profit on  sales                                                                                       |       | 14,912     |       | 13,178     |       | 11,815     |       |
| Income from  operations                                                                                      |       | 6,750      |       | 5,830      |       | 5,193      |       |
| Financial result                                                                                             |       | (223       | )          | 96         |       | (846       | )          |
| Income before  taxes                                                                                         |       | 6,527      |       | 5,926      |       | 4,347      |       |
| Net income                                                                                                   |       | 3,466      |       | 3,168      |       | 2,133      |       |
| Net income after  minority interests                                                                         |       | 3,215      |       | 3,007      |       | 2,004      |       |
| Basic earnings  per share                                                                                    |       | 6.37       |       | 5.73       |       | 3.65       |       |
| **Balance  Sheet Data**                                                                                      |       |       |       |       |       |       |       |
| **IFRS**                                                                                                     |       |       |       |       |       |       |       |
| Long-term assets                                                                                             |       | 26,899     |       | 20,543     |       | 20,518     |       |
| Short-term  assets                                                                                           |       | 18,392     |       | 15,127     |       | 14,930     |       |
| **Total  assets**                                                                                            |       | **45,291** | ** ** | **35,670** | ** ** | **35,448** |       |
| Stockholders’  equity                                                                                   |       | 18,578     |       | 17,523     |       | 16,602     |       |
| *Thereof subscribed capital*                                                                                 | * *   | *1,279*    | * *   | *1,317*    | * *   | *1,383*    | * *   |
| Long-term  liabilities                                                                                       |       | 12,733     |       | 9,762      |       | 10,372     |       |
| Short-term  liabilities                                                                                      |       | 13,980     |       | 8,385      |       | 8,474      |       |
| **Total  stockholders’ equity and liabilities**                                                         |       | **45,291** | ** ** | **35,670** | ** ** | **35,448** |       |
| **Capital  Expenditures and Depreciation**                                                                   |       |       |       |       |       |       |       |
| Additions to  intangible assets and property, plant and equipment (1)                                        |       | 10,039     |       | 2,523      |       | 2,163      |       |
| Amortization of  intangible assets and depreciation of property, plant and equipment,  including impairments |       | 2,973      |       | 2,403      |       | 2,492      |       |
| **Key  Ratios**                                                                                              |       |       |       |       |       |       |       |
| Return on sales  (%) (2)                                                                                     |       | 12.8       |       | 13.6       |       | 13.8       |       |
| Return on assets  (%) (3)                                                                                    |       | 17.5       |       | 17.7       |       | 13.2       |       |
| Return on equity after  taxes (%) (4)                                                                        |       | 19.2       |       | 18.6       |       | 12.9       |       |

 

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(1) Additions to intangibleassets and property, plant and equipment includes acquisitions.

(2) Return on sales (%) iscalculated by dividing income from operations by sales.

(3) Return on assets (%) is calculated by dividing income before taxesplus interest expenses by the average amount of total assets.

(4) Return on equity after taxes (%) is calculated by dividing netincome by the average amount of stockholders’ equity.

7

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**Million€, except per share data and certain other data**
| ** **                  | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
|-----------------------------|------------|----------|------------|----------|------------|----------|------------|----------|------------|----------|------------|
| **U.S.  GAAP**              |       |     |       |     |       |     |       |     |       |     |       |
| Net income                  |       | 3,094    |       | 3,061    |       | 1,863    |       | 1,320    |       | 1,716    |       |
| Basic earnings  per share   |       | 6.13     |       | 5.83     |       | 3.39     |       | 2.35     |       | 2.96     |       |
| Diluted earnings  per share |       | 6.13     |       | 5.83     |       | 3.39     |       | 2.35     |       | 2.96     |       |
| Stockholders’ equity   |       | 18,394   |       | 17,945   |       | 17,159   |       | 17,324   |       | 18,040   |       |

 

**Weighted average of shares outstanding used in determiningearnings per share:**
| ** **                              | ** ** | **2006**    | ** ** | **2005**    | ** ** | **2004**    | ** ** | **2003**    | ** ** | **2002**    | ** ** |
|-----------------------------------------|------------|-------------|------------|-------------|------------|-------------|------------|-------------|------------|-------------|------------|
| Weighted average  of shares outstanding |       | 504,479,083 |       | 525,124,659 |       | 548,714,243 |       | 561,886,993 |       | 579,118,368 |       |

 

For each year in the period2002-2006, there was no dilutive effect on earnings per share and therefore theweighted average of shares outstanding used in determining diluted earnings pershare is not reported.

8

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**Reportableoperating segment data**

**Million€**
| ** **                                 | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
|--------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| **Chemicals**                              |       |     |       |     |       |     |       |
| Sales                                      |       | 11,572   |       | 8,103    |       | 7,020    |       |
| Income from  operations                    |       | 1,380    |       | 1,326    |       | 1,284    |       |
| Assets                                     |       | 10,473   |       | 6,146    |       | 5,219    |       |
| **Plastics**                               |       |     |       |     |       |     |       |
| Sales                                      |       | 12,775   |       | 11,718   |       | 10,532   |       |
| Income from  operations                    |       | 1,192    |       | 1,015    |       | 694      |       |
| Assets                                     |       | 6,911    |       | 6,639    |       | 6,187    |       |
| **Performance  Products**                  |       |     |       |     |       |     |       |
| Sales                                      |       | 10,133   |       | 8,267    |       | 8,005    |       |
| Income from  operations                    |       | 669      |       | 863      |       | 1,128    |       |
| Assets                                     |       | 9,727    |       | 4,863    |       | 4,538    |       |
| **Agricultural  Products & Nutrition** |       |     |       |     |       |     |       |
| *Thereof Agricultural Products*            |       |     |       |     |       |     |       |
| Sales                                      |       | 3,079    |       | 3,298    |       | 3,354    |       |
| Income from  operations                    |       | 447      |       | 681      |       | 602      |       |
| Assets                                     |       | 4,458    |       | 5,156    |       | 4,985    |       |
| *Thereof Fine Chemicals*                   |       |     |       |     |       |     |       |
| Sales                                      |       | 1,855    |       | 1,732    |       | 1,793    |       |
| Income from  operations                    |       | (66      | )          | (58      | )          | 56       |       |
| Assets                                     |       | 1,596    |       | 1,481    |       | 1,308    |       |
| **Oil  & Gas**                         |       |     |       |     |       |     |       |
| Sales                                      |       | 10,687   |       | 7,656    |       | 5,263    |       |
| Income from  operations                    |       | 3,250    |       | 2,410    |       | 1,643    |       |
| Assets                                     |       | 5,434    |       | 4,895    |       | 4,063    |       |
| **Others**                                 |       |     |       |     |       |     |       |
| Sales                                      |       | 2,509    |       | 1,971    |       | 1,570    |       |
| Income from  operations                    |       | (122     | )          | (407     | )          | (214     | )          |
| Assets                                     |       | 6,692    |       | 6,490    |       | 9,148    |       |
| **BASF  Group**                            |       |     |       |     |       |     |       |
| Sales                                      |       | 52,610   |       | 42,745   |       | 37,537   |       |
| Income from  operations                    |       | 6,750    |       | 5,830    |       | 5,193    |       |
| Assets                                     |       | 45,291   |       | 35,670   |       | 35,448   |       |

 

9

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**Dividends**

The following table lists the annual dividends payableper BASF Share in euros and the U.S. dollar equivalent for each of the yearsindicated. The table also discloses the dividend amount per BASF Share for 2006proposed by the Supervisory Board and the Board of Executive Directors forapproval at the Annual Meeting to be held on April 26, 2007. The table does notreflect the related tax credits available to eligible taxpayers. See “Item 10.Additional Information — Taxation of Dividends” and “Item 8. FinancialInformation — Dividend Policy” for further information.
| ** **                                 | ** ** | **Dividend Paid for Each** | ** ** |
|--------------------------------------------|------------|--------------------------------------|------------|
| ** **                                 | ** ** | **BASF share**                       | ** ** |
| **Year Ended December 31,** | ** ** | **Euro**                             | ** ** | **Dollar** | ** ** |
| 2006                                       |       | 3.00                                 |       | 3.96 |   |
| 2005                                       |       | 2.00                                 |       | 2.37 |   |
| 2004                                       |       | 1.70                                 |       | 2.30 |   |
| 2003                                       |       | 1.40                                 |       | 1.76 |   |
| 2002                                       |       | 1.40                                 |       | 1.47 |   |

 

The euro dividend amounts are translated solely forthe convenience of the reader into U.S. dollars (rounded to the nearest cent)at the Noon Buying Rate on the dividend payment date. For the dividend proposedto be paid in 2007 for the year ended December 31, 2006, the euro amount istranslated into U.S. dollars (rounded to the nearest cent) on the basis of theNoon Buying Rate on December 31, 2006 of $1.3197 = €1.00.

**Exchange Rate Information**

On January 1, 2002, the euro became the sole legaltender for business transactions in Germany and the other eleven countriesparticipating in the European Monetary Union at that time. 

10

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The table below sets forth, for the periods and datesindicated, the high, low, period-average and period-end Noon Buying Rates foreuros expressed in U.S. dollars for one euro. No representation is made thatthe euro or U.S. dollar amounts referred to herein could have been or could beconverted into U.S. dollars or euros, as the case may be, at any particularrate.

**U.S. Dollar for One Euro**
| ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **Period**     | ** ** | **Period** | ** ** |
|------------|------------|------------|------------|------------|------------|----------------|------------|------------|------------|
| **Year**   | ** ** | **High**   | ** ** | **Low**    | ** ** | **Average**(1) | ** ** | **End**    | ** ** |
| 2006       |       | 1.3327     |       | 1.1860     |       | 1.2661         |       | 1.3197     |       |
| 2005       |       | 1.3476     |       | 1.1667     |       | 1.2400         |       | 1.1842     |       |
| 2004       |       | 1.3625     |       | 1.1801     |       | 1.2478         |       | 1.3538     |       |
| 2003       |       | 1.2597     |       | 1.0361     |       | 1.1411         |       | 1.2597     |       |
| 2002       |       | 1.0485     |       | 0.8594     |       | 0.9495         |       | 1.0485     |       |

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(1) The average of theNoon Buying Rates on the last business day of each full month during therelevant period.

The high and low exchange rates for the euro for eachmonth during the previous six months is set forth below:

**U.S. Dollar for One Euro**
| **Month**       | ** ** | **High** | ** ** | **Low** | ** ** |
|-----------------|------------|----------|------------|---------|------------|
| February, 2007  |       | 1.3246   |       | 1.2933  |       |
| January, 2007   |       | 1.3286   |       | 1.2904  |       |
| December, 2006  |       | 1.3327   |       | 1.3073  |       |
| November, 2006  |       | 1.3261   |       | 1.2705  |       |
| October, 2006   |       | 1.2773   |       | 1.2516  |       |
| September, 2006 |       | 1.2833   |       | 1.2648  |       |

 

The Noon Buying Rate for the euro on March 1, 2007 wasquoted by the Federal Reserve Bank of New York at 1.3173 U.S. dollars for oneeuro.

Because a substantial portion of the BASF Group’srevenues and expenses are denominated in currencies other than the euro,results of operations and cash flows may be materially affected by movements inthe exchange rate between the euro and the respective currencies to which theGroup is exposed. For a discussion of the effect exchange rate fluctuationshave on the BASF Group’s business and operations and also the hedgingtechniques used to manage the Group’s exposure to such fluctuations, see “Item5. Operating and Financial Review and Prospects — Exchange Rate Exposure andRisk Management” and “Item 11. Quantitative and Qualitative Disclosures aboutMarket Risk.”

**Risk Factors**

BASF’s business, financial condition or results ofoperations could suffer adverse material effects due to any of the followingrisks. While all the risks considered material are described below, these arenot the only risks BASF faces. Additional risks not known by BASF or notpresently considered material might also impair BASF’s business operations. 

***Certaindevelopments in the global economy generally may adversely affect BASF’s salesand earnings.***

Four major economic factors may pose risks affectingBASF’s sales and earnings: 1. The oil price development could differ from theexpected levels, 2. The U.S. dollar may further devaluate against the euro andAsian currencies, 3. China’s economy might experience a significantly reducedgrowth rate compared with expectations; and 4. The U.S. economy mightexperience a greater or longer slowdown in growth than economic forecasterscurrently anticipate. While currently not expected, a possible risk is a hardlanding of the U.S. economy. 

11

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Decreasing demand for chemical products in Europe, theUnited States and Asia could consequently have an adverse effect on both salesand earnings. Those areas that are subject to commoditization, such as BASF’sbasic inorganic chemicals, petrochemicals, intermediates and plastic operationsare particularly vulnerable, whereas BASF’s agricultural, nutrition, cosmeticsand natural gas operations as well as the recently acquired businessescatalysts and construction chemicals are less likely to be impacted. BASF isalso regionally diversified and therefore less likely to be impacted fromweakness in a specific region.

***Changes in regulation couldimpact BASF’s business and operating results.***

BASF must comply with a broad range of regulatorycontrols on the testing, manufacturing and marketing of many of its products.BASF expects that regulatory controls worldwide, and especially in the EuropeanUnion (E.U.), will become increasingly more demanding. The European Union haspassed new legislation on chemicals (REACH) to govern the registration,evaluation and authorization of chemicals. The new legislation will come intoforce in the relevant E.U. member states on June 1, 2007. We have been activelyinvolved in numerous E.U. projects to support the efficient and economicallypracticable implementation of REACH and are now making detailed preparationsfor its introduction. We expect implementation to be associated with expensesof approximately €50 million per year in the period up to 2018. 

Within the framework of E.U. emissions trading, theBASF Group was allocated allowances (EUA) for approximately 7 million metrictons of carbon dioxide (CO2) per year for the affected plants at our Europeansites for 2006. For the second trading period (2008 to 2012), a number ofchemical plants will also be included in the Europe-wide trading system.

As a globally operating organization, we also conductbusiness with customers in Iran. A range of our products, particularly Plasticsand Performance Products, is delivered mostly to private companies. These salesare insignificant in comparison to the consolidated sales of BASF (less than0.2% in 2004, 2005 and 2006) and in our opinion are not otherwise significantto BASF’s consolidated operations. Sales to customers in Iran of dual-useproducts, which are products that can be used for both civil and militarypurposes and could be used as precursors for agents in chemical weapons,represented less than 0.01% of BASF’s consolidated sales in each of 2004, 2005and 2006. The customers of these dual-use products are state-owned companies.BASF employs procedures for compliance with applicable export controllegislation, including those of the European Union and Germany, whichincorporate international export control arrangements also agreed to by theUnited States and incorporated to the Export Administration Regulations (EAR)of the U.S. Department of Commerce. These transactions may lead some potentialcustomers and investors to avoid doing business with us or investing in ourshares.

***BASFis exposed to foreign currency and interest rate risks.***

BASF conducts a significant portion of its operationsoutside of Europe and is therefore exposed to risks associated with thefluctuations of foreign currencies. BASF is subject to interest rate risks inthe ordinary course of its business.

Risk management is centralized at BASFAktiengesellschaft and BASF Group companies designated for that purpose. BASFhedges against financial risks through derivative instruments such as forwardexchange contracts, currency options, interest rate and currency swaps, andcombined instruments. There can be no assurance, however, that BASF’s hedging strategywill be effective and that foreign currency and interest rate fluctuations willnot adversely affect BASF’s results of operations. See “Item 11. Quantitative andQualitative Disclosures About Market Risk” for additional information about thenominal value and market value of BASF’s financial instruments.

BASF is also subject to credit risks to the extentthat counterparties to transactions may not be able to perform theircontractual obligations. Although BASF aims to limit the risk of default byentering into transactions only with top-rated financial institutions and byadhering to fixed limits, defaults with respect to significant contracts mayadversely affect BASF’s operating results.

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***Significant variations in thecost and availability of raw materials, energy, precursors and intermediatesmay adversely affect BASF’s operating results.***

BASF uses significant amounts of raw materials andenergy in manufacturing a wide variety of products. Significant variations inthe cost and availability of raw materials, energy, precursors and intermediatesmay adversely affect BASF’s operating results. To control these costs andsupply risks, BASF purchases raw materials through negotiated long-termcontracts with prices that periodically float. Additionally required purchaseson spot markets are made using optimized procedures. Supply contracts for themost strategically important raw materials are negotiated and concludedcentrally for the BASF Group. For more information, see “Item 4. Information onthe Company — Supplies and Raw Materials.” 

BASF’s individual business units constantly monitorchanges in their relevant supply markets and take action to minimize theirrisks accordingly.

***Cyclicalitymay adversely affect BASF’s operating margins.***

The results of BASF’s Chemicals, Plastics andPerformance Products segments are affected by cyclicality and migration ofvarious industries in which they operate, including the automotive,construction, electrical and electronics, as well as the textile industries.BASF’s strategy to deal with these risks is its diversity and the constantexpansion of the cyclically resilient businesses, such as agrochemicals, activeingredients for pharmaceuticals and nutrition, as well as trading andtransmission of natural gas. The recent acquisitions of Engelhard Corp. and theconstruction chemicals business from Degussa AG further reduce BASF’scyclicality. In cyclical businesses, BASF seeks to maintain cost leadership.BASF strives to anticipate customer migration tendencies and adjusts tocustomer industries by continued investment activities in emerging growthmarkets.

***Theresults of BASF’s crop-protection business are dependent on weather conditionsand can be affected by local and regional economic circumstances.***

Sales volumes of BASF’s crop protection products aresubject to the agricultural sector’s dependency on weather conditions. Adverseweather conditions in a particular growing region could materially negativelyaffect the results of operations of BASF’s crop protection business. Demand forcrop protection products is further influenced by the agricultural policies ofgovernments and multinational organizations. In addition, BASF’scrop-protection products are typically sold pursuant to contracts with longpayment terms. These extended payment periods make BASF’s crop-protectionbusiness susceptible to losses on receivables during local or regional economiccrises and may adversely affect BASF’s operating results. An appreciation ofthe Brazilian real could negatively influence the agricultural business inBrazil and consequently decrease BASF’s result.

***Explorationrisk may adversely affect the business of BASF’s Oil & Gas segment.***

The future growth of the exploration and productionunit of our Oil & Gas segment is dependent on successful findings. Thesearch for new oil and natural gas reserves involves certain geological risksthat relate to the availability of hydrocarbon products and the qualitythereof. The exploration and production industries are experienced indiligently managing these risks. We diversify our risks through a balancedexploration portfolio.

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***Failure to develop new products andproduction technologies may harm BASF’s competitive position and operatingresults.***

BASF’soperating results depend on the development of commercially viable new productsand production technologies. BASF devotes substantial resources to research anddevelopment. Because of the lengthy development process, technologicalchallenges and intense competition, there can be no assurance that any of theproducts BASF is currently developing, or may begin to develop in the future,will become market-ready and achieve substantial commercial success.

***Negative developments in equity and bondmarkets may make extraordinary contributions to pension funds necessary.***

The fundassets required to cover future pension obligations are actuarially determinedusing assumptions concerning the expected return on plan assets. The planassets are partially comprised of equity investments. Declining returns onequity and bond markets could trigger an additional contribution to the pensionplan to cover future pension obligations. Amortizing additional contributionsthat are deferred as a prepaid pension expense increases future pensionexpenses.

***BASF is dependent upon hiring and retaininghighly qualified management and technical personnel.***

Competitionfor highly qualified management and technical personnel is intense in theindustries in which BASF operates. BASF’s future success depends in part on itscontinued ability to hire, integrate and retain highly skilled employees.

***BASF is subject to the risks associatedwith the use of information technology.***

BASF isdependent upon technology for the distribution of information within the BASFGroup and to customers and suppliers. This information technology is subject torisks associated with defects, errors, failures and computer viruses. Tocontrol potential risks relating to information technology, BASF uses the latesthardware and software and has integrated uniform information technologyinfrastructures, backup systems, replicated databases, virus and accessprotection, encoding systems and a high degree of internal networking. Therecan be no assurance, however, that BASF’s information technology systems willnot fail and cause material disruptions to BASF’s business.

***BASF is subject to security risks.***

Assessingsecurity risks on a worldwide basis and determining their potential impact onBASF has become an extremely difficult undertaking since the terrorist attacksin the United States. BASF’s corporate security is in close contact with localsecurity offices through its Group-wide network, and takes controlled precautionarysteps with the help of constantly updated security measures and recommendations(e. g., travel restrictions, tighter access controls for production plants,updating of rescue and evacuation plans, emergency services, etc.) to protectthe company and its employees.

***BASF is subject to risks arising fromacquisitions and investment decisions.***

Theimplementation of decisions related to acquisitions and investments isassociated with complex risks due to the high level of capital involved and thelong-term capital commitment. To reduce the risks in view of the recentacquisitions, BASF integrated the evaluation of risks related to the precious metaltrading into its Group-wide risk management system. Also, programs have beenestablished to retain key personnel.

***Litigation could harm BASF’s operatingresults and cash flows.***

Forfurther information see “Item 8. Financial Information — Legal Proceedings” andNote 24 to the Consolidated Financial Statements.

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| Item 4. |   | Information on  the Company |
|---------|--------|-----------------------------|

 

**HISTORYAND DEVELOPMENT OF THE COMPANY**

BASFAktiengesellschaft was incorporated as a stock corporation under the laws ofthe Federal Republic of Germany on January 30, 1952 under the name “BadischeAnilin- und Soda-Fabrik AG.” In 1973, the company changed its name to BASFAktiengesellschaft. BASF Aktiengesellschaft’s headquarters are located inLudwigshafen, Germany; its registered office is located at Carl Bosch Strasse38, 67056 Ludwigshafen, Federal Republic of Germany, telephone 011-49-621-60-0.The company’s agent for U.S. federal securities law purposes is BASFCorporation, located at 100 Campus Drive, Florham Park, NJ 07932, telephone(973) 245-6000.

Wecontinually review our businesses and align them to achieve profitable andsustainable growth. Our significant acquisitions and divestitures between 2004and 2006 are listed below:

***Acquisitions***

·                  BASF acquired **PEMEAS GmbH**, a supplier of fuel cellcomponents, on **December 13, 2006**.The company operates manufacturing and R&D facilities in Germany and in theUnited States. In 2007, PEMEAS GmbH will be officially renamed to BASF FuelCell GmbH.

·                  On February 28, 2006, BASFreached an agreement with **Degussa AG**,Germany, to acquire the company’s **globalconstruction chemicals business**. The transaction was concludedon **July 1, 2006**with a purchase price for equityof €2.2 billion. The business will be fully integrated into the PerformanceProducts segment. Approximately 7,400 employees were transferred to BASF inJuly 2006.

·                  The acquisition of **Johnson Polymer**, a producer of water-basedresins for the coatings and printing inks industry, was completed on **July 1, 2006**and involves one production siteeach in the United States and in the Netherlands, as well as technical centersand offices in Asia Pacific. The purchase price was $482 million or €379million.

·                  The Belgian biotechnologycompany **CropDesign N.V.**wasacquired by BASF on **June 26, 2006**andhas been integrated into BASF Plant Science Group as an affiliate to BASF PlantScience GmbH.

·                  BASF concluded its acquisitionof **Engelhard Corp.**on **June 6, 2006**, having spent $4.8 billion or approximately€3.8 billion for 100% of the shares of the company. The acquisition involves 50production sites and 22 R&D centers in more than 20 countries. We are inthe process of integrating both Engelhard’s domestic U.S. operations and itsinternational operations into our global business. Approximately 7,300Engelhard employees were transferred to BASF as a result of the acquisition.

·                  On **October 1, 2005**, BASF purchased the Swissfine chemicals firm **Orgamol S.A.**

·                  BASF acquired the global **electronic chemicals business**from**Merck KGaA**on **April 15, 2005**.

***Divestitures***

·                  BASF divested its global **terbufos insecticide business**toAMVAC Chemical Corporation on **November 27,2006**.

·                  BASF sold major parts of its **Micro Flo generic agrochemical business**inthe United States to Arysta LifeScience on **March 31,2006**.

·                  On **August 1, 2005**, BASF, along with ShellChemicals, our 50% joint venture partner, sold **Basell**, a polyolefin joint venture, toNell Acquisition S.a.r.l., a subsidiary of Access Industries.

·                  BASF divested its **printing systems business**to CVC Capital Partners on**November 30, 2004**.

·                  On **July 20, 2004**, BASF divested its 30% share in**DyStar**to Platinum Equity.

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***Planned Transactions***

·                  On April 27, 2006, BASF andGazprom signed an additional framework agreement that demonstrates the intentionof the two companies to extend their cooperation. The agreement foresees anexchange of assets in the production and marketing of natural gas. BASFsubsidiary Wintershall Holding AG will receive an interest of 25% less oneshare in the company Severneftegazprom (SNGP), which holds the license in theYuzhno Russkoye gas field in Siberia. Additionally, Wintershall Holding AG willreceive a further 10% in the form of non-voting preferred shares. In return,Gazprom will participate with 49% in a BASF Group company with interest inonshore exploration and production activities in Libya and will increase itsshare in WINGAS GmbH from 35% to 50% minus one share. The contracts to legallyfinalize this agreement are expected to be signed in the first half of 2007. 

Forfurther information see also “Item 8. Financial Information” and Note 2 of“Item 18. Financial Statements.”

***Major capital expenditures between 2004 and2006 and those currently in progress include:***
| ** **               | ** ** | ** **             | ** ** | ** **                                             | ** ** | **Projected Annual**                   | ** ** | **Start-up/**               | ** ** |
|--------------------------|------------|------------------------|------------|--------------------------------------------------------|------------|---------------------------------------------|------------|-----------------------------|------------|
| ** **               | ** ** | ** **             | ** ** | ** **                                             | ** ** | **Capacity at Completion**        | ** ** | **Projected Start-up** | ** ** |
| **Segment**              | ** ** | **Location**           | ** ** | **Project**                                            | ** ** | **of Project (metric tons)** | ** ** | **of Operations**      | ** ** |
| **Chemicals**            |       | Antwerp,  Belgium      |       | Expansion  steam cracker                               |       |                                        |       | 2007                        |       |
|                     |       |                   |       | ·      ethylene          |       | 1,080,000                                   |       |                        |       |
|                     |       |                   |       | ·      propylene         |       | 650,000                                     |       |                        |       |
|                     |       |                   |       | ·      benzene           |       | 280,000                                     |       |                        |       |
|                     |       | Caojing,  China        |       | Polytetrahydrofuran                                    |       | 60,000                                      |       | 2005                        |       |
|                     |       | Geismar,  Louisiana    |       | Alkylethanolamines                                     |       | 28,000                                      |       | 2007                        |       |
|                     |       | Nanjing,  China        |       | Integrated production site major products include:     |       |                                        | (1)        | 2005                        |       |
|                     |       |                   |       | ·      ethylene          |       | 600,000                                     |       |                        |       |
|                     |       |                   |       | ·      propylene         |       | 300,000                                     |       |                        |       |
|                     |       |                   |       | ·      ethylene  glycols |       | 350,000                                     |       |                        |       |
|                     |       |                   |       | ·      aromatics         |       | 300,000                                     |       |                        |       |
|                     |       |                   |       | ·      oxo  alcohols     |       | 250,000                                     | (2)        |                        |       |
|                     |       |                   |       | ·      organic  acids    |       | 80,000                                      |       |                        |       |
|                     |       | Port  Arthur, Texas    |       | Butadiene                                              |       | 410,000                                     | (3)        | 2004                        |       |
| **Plastics**             |       | Altamira, Mexico       |       | EPS expansion                                          |       | 150,000                                     | (4)        | 2005                        |       |
|                     |       | Antwerp,  Belgium      |       | Teluran  (ABS)                                         |       | 200,000                                     |       | 2004                        |       |
|                     |       |                   |       | Propylene  oxide                                       |       | 300,000                                     | (5)        | 2008                        |       |
|                     |       |                   |       | Hydrogen  peroxide                                     |       | 230,000                                     | (6)        | 2008                        |       |
|                     |       |                   |       | MDI  (diphenylmethane diisocyanate) expansion          |       | 560,000                                     |       | 2007                        |       |
|                     |       | Caojing,  China        |       | MDI  (diphenylmethane diisocyanate)                    |       | 240,000                                     | (7)        | 2006                        |       |
|                     |       |                   |       | TDI  (toluene diisocyanate)                            |       | 160,000                                     | (8)        | 2006                        |       |
|                     |       | Geismar,  Louisiana    |       | Polyols  expansion                                     |       | 350,000                                     |       | 2008                        |       |
|                     |       | Kuantan,  Malaysia     |       | Ultradur  (PBT)                                        |       | 60,000                                      | (9)        | 2006                        |       |
|                     |       | Ludwigshafen,  Germany |       | Ultrason  (PES/PSU) expansion                          |       | 12,000                                      |       | 2007                        |       |
|                     |       | Shanghai,  China       |       | Compounding  engineering plastics                      |       | 45,000                                      |       | 2006                        |       |
|                     |       |                   |       | Polyurethanes  specialties                             |       |                                        |       | 2007                        |       |
|                     |       | Schwarzheide,  Germany |       | Ecoflex                                                |       | 6,000                                       |       | 2006                        |       |
| **Performance Products** |       | Antwerp,  Belgium      |       | Acrylic  acid                                          |       | 320,000                                     |       | 2008                        |       |
|                     |       |                   |       | Superabsorbents                                        |       | 175,000                                     |       | 2007                        |       |
|                     |       | Caojing,  China        |       | Isocyanate  Oligomers                                  |       | 8,000                                       |       | 2007                        |       |
|                     |       | Freeport,  Texas       |       | Superabsorbents                                        |       | —                                      | (10)       | 2007                        |       |
|                     |       | Ludwigshafen,  Germay  |       | Butyl  acrylate                                        |       | —                                      |       | 2008                        |       |
|                     |       | Nanjing,  China        |       | Acrylic  monomers                                      |       | 160,000                                     | (1)        | 2005                        |       |
|                     |       |                   |       | Acrylic esters                                         |       | 215,000                                     |       | 2005                        |       |

 

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| **Oil & Gas** |   | Urengoy, Russia  |   | Achimgaz |   | 42,000,000    | (11) | 2007 |   |
|-------------------|--------|------------------|--------|----------|--------|---------------|------|------|--------|
|              |   | Haidach, Austria |   | Haidach  |   | 2,400,000,000 | (12) | 2011 |   |
|              |   | Lippe, Germany   |   | WEDAL    |   | 300,000       | (13) | 2006 |   |

 

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(1)             Conducted through a joint venture betweenSinopec Corp., China (50%) and BASF (50%) (capacity reflects total jointventure capacity).

(2)             Calculated as butyraldehyde.

(3)             Conducted through a joint venture betweenShell Chemical Company, Texas (60%), BASF (24%) and Total Petrochemicals USA,Inc., Texas (16%) (capacity reflects total joint venture capacity).

(4)             Conducted through the joint venturePolioles S.A. de C.V., Mexico (capacity reflects total joint venture capacityof which BASF has a 50% share).

(5)             Conducted through a joint venture with DowChemical, Michigan (capacity reflects total joint venture capacity).

(6)             Conducted through a joint venture withSolvay S.A., Belgium and Dow Chemical, Michigan (capacity reflects total jointventure capacity).

(7)             Conducted through a joint venture withSinopec Shanghai Gao Qiao Petrochemical Corporation, China; ShanghaiChlor-Alkali Chemical Co. Ltd., China; and the Shanghai Hua Yi (Group) Company,China as well as Huntsman China Investments B.V., the Netherlands (capacityreflects total joint venture capacity of which BASF has a 35% share).

(8)             Conducted through a joint venture withSinopec Shanghai Gao Qiao Petrochemical Corporation, China and the Shanghai HuaYi (Group) Company, China (capacity reflects total joint venture capacity ofwhich BASF has a 70% share).

(9)             Conducted through a joint venture withToray Industries Inc., Japan (capacity reflects total joint venture capacity ofwhich BASF has a 50% share).

(10)       Superabsorbant plant in Freeport willreplace capacities in Aberdeen, Mississippi, and Portsmouth, Virginia thataccount for 160,000 metric tons in total.

(11)       Conducted through a joint venture withUrengoygazprom, Russia, of which Wintershall has a 50% share (capacity reflectsannual plateau production to boe (barrel oil equivalent, Wintershall share)from the Achimov formation of the Urengoy field in Siberia, Russia).

(12)       Haidach storage in which WINGASparticipates with a share of 33% together with partners Rohöl-Aufsuchungs AG (RAG),Austria, and Gazprom export, Russia (capacity reflects total available naturalgas volume in cubic meters.

(13)       Compression station Lippe as part of the WEDAL pipelinefully owned by WINGAS (capacity reflects the extension of the hourlycompression in cubic meters).

 

**BUSINESS OVERVIEW**

**Introduction**

BASFis a transnational chemical company that comprises the parent company, BASFAktiengesellschaft of Ludwigshafen, Germany, and 327 consolidated subsidiaries.The company operates more than 150 production sites. 

Forthe year ended December 31, 2006, BASF reported sales of €52,610 million,income from operations of €6,750 million, and net income after minorityinterests of €3,215 million. Based on customer location, BASF’s activities inEurope accounted for 56.1% of BASF’s total sales in 2006; North America (whichincludes the United States, Mexico and Canada) accounted for 21.9% of sales;the Asia Pacific region accounted for 15.4% of sales; and the South America,Africa, Middle East region accounted for 6.6% of sales.

**Structure**

BASFhas five business segments: Chemicals, Plastics, Performance Products,Agricultural Products & Nutrition and Oil & Gas. These businesssegments encompass BASF’s 14 operating divisions. For financial reportingpurposes, the two operating divisions of BASF’s Agricultural Products &Nutrition business segment are separate reportable operating segments:Agricultural Products and Fine Chemicals. 

BASF’soperations are linked with what is referred to as the “Verbund” structure.Verbund loosely translates as “integration,” but the meaning encompasses farmore than what is traditionally associated with backward or forwardintegration. In production processes, BASF does not simply look forward and backwardto find potential efficiencies, but rather examines every input and everyoutput of these processes. At Verbund sites, BASF uses byproducts of chemicalreactions, which might otherwise have to be disposed of, as raw materials forother processes. In addition, many chemical processes release heat energy,which BASF converts into steam and then uses to drive other processes within aVerbund site. This allows our Verbund sites to consume less fossil fuel thanwould otherwise be required. The close proximity of plants to each other at aVerbund site also allows the use of pipelines to transport intermediateproducts, instead of railcars, barges or trucks, thus resulting in furthersavings. By reusing byproducts and residual materials, using energy and otherraw materials efficiently and keeping the distances that substances need to be transportedto a minimum, BASF reduces the impact on the environment and saves money. Thisconcept of benefiting from interconnectivity is applied to other areas as well,such as R&D, purchasing and managing customer relationships, where globallyinteractive teams maximize BASF’s productivity.

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**Group Strategy**

Chemistrystands for the future that we are helping to shape as the world’s leadingchemical company. We are developing our strengths through innovations andacquisitions. Sustainability guides our actions in pursuing this goal.

***Growth through acquisition***

In2006, we continued on our profitable growth path with the acquisitions ofEngelhard Corp., the construction chemicals business of Degussa AG, JohnsonPolymer, CropDesign N.V. and PEMEAS GmbH. We have clear criteria for makingacquisitions: We focus on innovative business areas that grow faster than themarket as a whole and that make our portfolio more resilient to cyclicality.The contribution to sales and operating income from the new businesses showsthat we are on the right path. The synergies are higher than expected.

Tofurther improve our market position, we will continue in our efforts tooptimize our portfolio and implement measures to restructure our businesses andreduce costs. Our global Verbund enables us to operate competitively in allregions.

Asthe world’s leading chemical company, we will continue to concentrate on theorganic growth of our core activities: chemistry, agricultural products andnutrition as well as oil and gas.

***Growth through innovation***

Wecontinue to purposely strengthen our research and development. In the processwe focus on market-driven innovations, new business models and technology areasof the future. We create new business opportunities with a global network thatincludes centers of excellence and interdisciplinary cooperation. We havecombined the important technology-driven issues of the future into five growthclusters:

·      Energy management

·      Raw material change

·      Nanotechnology

·      Plant biotechnology

·      White (industrial) biotechnology

***Our four strategic guidelines***

Four strategic guidelinesdescribe our path to the future, with which we align our activities:

·      Earn a premium on our cost of capital

·      Help our customers to be more successful

·      Form the best team in industry

·      Ensure sustainable development

Thecombination of these four guidelines makes us successful.

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***Earn a premium on our cost of capital***

We raise the value of BASF byearning a premium on our cost of capital. To achieve this goal, we have beenexpanding on our value-based management strategy. Earnings before interest andtaxes (EBIT) after cost of capital is the key performance and managementindicator for our operating divisions and business units. We measure ourbusiness decisions and performance on the basis of how it influences earningsafter cost of capital. Every employee endeavors to improve cost structures anduse capital more efficiently in order to grow profitably.

The BASF Group must achievean EBIT of 10% on its operating assets to meet the interest rate payments toproviders of debt, to satisfy the returns expected by providers of equity andto cover tax expenses. The cost of capital percentage before interest and taxesof 10 percent corresponds to a weighted average cost of capital (WACC) ofapproximately 6 percent after taxes. The cost of capital percentage dependsprimarily on three factors: the capital structure of the BASF Group, the levelof interest rates on debt and the return expected by shareholders. We calculateour cost of equity on the basis of the market value of BASF shares. The cost ofcapital percentage is reviewed annually in the light of current data. EBITafter cost of capital is calculated by subtracting income taxes for oilproduction that are noncompensable with German taxes (see Note 8 of Item 18)and the cost of capital from the BASF Group’s EBIT. Finally, EBIT foractivities not assigned to the segments is subtracted since this is alreadyprovided for in the cost of capital percentage.

For 2007, the cost of capitalpercentage has been reduced from 10 percent to 9 percent. This change was dueto the increase in debt capital on BASF’s balance sheet as a result of thefinancing of acquisitions. Debt capital bears fewer risks and hence costs arelower than for equity. The average cost of capital percentage for the BASFGroup for 2007 is therefore reduced accordingly.

***Help our customers to be more successful***

We are there wherever ourcustomers are. We invested timely in growth markets and are now active in allimportant markets worldwide.

In order to grow profitably,we need to understand our customers’ businesses as if they were our own. Wework closely with our customers to identify their needs and develop the rightsolutions. We then select the best business models suited to our customers’needs. This ensures the success of our customers and, thereby, our own.

***Form the best team in industry***

As the best team in industry,we secure our company’s long-term success. We rely on the strength of each teammember. This diverse range of competencies helps us to better understand ourcustomers and develop the products and solutions they need to become moresuccessful.

We offer attractivedevelopment opportunities as well as pay linked to individual and companyperformance to attract and retain the best specialists and managers worldwide.We greatly value personnel development and managers who act as role models. Ourdialogue-oriented management culture plays an important role in this regard. Itis shaped by our Values and Principles and by BASF’s Leadership Compass.

***Ensure sustainable development***

For BASF, sustainabledevelopment means integrating environmental protection and socialresponsibility in our business processes so that they contribute to ourlong-term economic success. BASF’s Sustainability Council develops and monitorsthe necessary strategies, which are implemented with the support of regionalnetworks. We systematically identify sustainability issues that are relevant toBASF and evaluate them in terms of their opportunities and risks. Oursustainability strategy has the goal of avoiding risks, promoting our existingbusiness and creating new business opportunities. This is why we are placingmore emphasis on integrating sustainability into our customer relations from2007 onward.

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**CHEMICALS**

**SegmentOverview**

The Chemicals segmentproduces a wide range of products, from standard chemicals, such aspetrochemical commodities and inorganic chemicals, to higher-valueintermediates, inorganic specialties and catalysts, allowing BASF to fullyexploit the benefits of its Verbund. The segment is organized into fourdivisions: Inorganics, Catalysts, Petrochemicals and Intermediates. Keyinformation is provided in the following table:

**Million €**
| ** **                                                        | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
|-------------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Sales to third  parties                                           |       | 11,572   |       | 8,103    |       | 7,020    |       |
| Percentage of  total BASF sales                                   |       | 22       | %          | 19       | %          | 19       | %          |
| Intersegmental  transfers                                         |       | 4,483    |       | 3,826    |       | 3,395    |       |
| Income from  operations                                           |       | 1,380    |       | 1,326    |       | 1,284    |       |
| Additions to property,  plant and equipment and intangible assets |       | 3,539    |       | 639      |       | 601      |       |

 

The products aresold to a multitude of industries including the chemical, construction,automotive, electrical, electronics, detergents, colorants, coatings, healthand nutrition industries. Although most of the segment’s sales are to externalcustomers, 27.9% of the segment’s total sales are intersegmental transfers toother BASF operations for the manufacture of higher-value products. Theproducts manufactured for captive use include many basic and intermediatechemicals.

The Chemicalssegment forms the basis of BASF’s Verbund because its divisions bothintensively consume and manufacture products along the company’s corevalue-adding chains. Most of the commodity products are produced at our majorVerbund sites in Ludwigshafen, Germany; Antwerp, Belgium; Geismar, Louisianaand Freeport, Texas; Kuantan, Malaysia; and Nanjing, China. In addition, wehave dedicated chemical operations near our customers: for example, ourplasticizer production and our catalysts production.

The principal rawmaterials used in the Chemicals segment are naphtha, natural gas, butane,propane, sulfur, salt and precious metals. The segment purchases less than 5%of its raw materials from other BASF operations. Natural gas, a key rawmaterial for the Chemicals segment, is acquired both through BASF’s jointventure WINGAS GmbH and from external sources. All other principal rawmaterials are purchased from external sources. BASF does not rely on a dominantsupplier for the raw materials of its Chemicals segment.

**SegmentStrategy**

The Chemicalssegment focuses on the supply of standard chemicals for internal demand and onoffering a broad range of intermediate and higher value-added products, such ascatalysts, to external customers. The high and steady internal demand forchemical building blocks produced by the Chemicals segment ensures a highcapacity utilization of BASF’s plants. BASF’s capital expenditures and researchand development efforts are focused on building world-scale plants as well ason developing new technologies, improved processes and new products. Keystrategies of the Chemicals segment include the following:

·                  Optimize thecosts of production for our standard chemicals: BASF continuously optimizes itschemical operations through economies of scale, cost- and technology-leadership and process integration at theVerbund sites;

·                  Increase sales of higher value-addingproducts: BASF aims to increase sales of higher value-adding products, such ascatalysts, intermediates and chemical specialties through product and processinnovation in collaboration with customers;

·                  Adapt product portfolios to market demand inthe regions: BASF continuously optimizes its regional production structures inEurope, North America (NAFTA) andAsia.

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**Researchand Development**

In 2006, the Chemicalssegment spent €178 million in research activities. Research activities arefocused on the development of improved or new production processes as well ason the development of innovative products to extend our product portfolio.

We continuously improve ourmanufacturing processes to maintain cost-competitiveness and develop newcost-effective production technologies. In Ludwigshafen, Germany, we arebuilding a plant for cyclododecanone, a key intermediate to produce thehigh-performance plastic polyamide 12 and aroma chemicals. Based on butadieneand nitrous oxide as raw materials, both available in our Verbund, our plantwill use an innovative three-stage process, whereas conventional processesrequire five steps.

Together with customers, weimprove existing products and develop innovative new applications. For example,BASF, the world’s largest producer of formic acid, and Tekion, a North Americandeveloper of micro fuel cells for portable electronic products, are jointlydeveloping a formic acid fuel for Tekion’s fuel cell technology. With thistechnology, portable electronic devices can be safely operated over a longertime period; these devices are refueled by simply swapping a cartridgecontaining formic acid.

Cooperations with leadinginstitutes and universities provide valuable technological impulses for ourresearch and development. For example, in our portfolio of ionic liquids withthe brand name BasionicsTM, BASF has set up a research partnership with theUniversity of Alabama to study the dissolution and processing of cellulose withionic liquids for fiber manufacturing. For that partnership, the University ofAlabama and BASF have been jointly awarded the 2006 Deals of Distinction Awardfor the Chemical, Energy and Materials Industry Sector by the renowned “LicensingExecutive Society Inc.” This was the third international award for BasionicsTM.

**Products**

The Chemicals segment has thefollowing major product lines:

***Inorganics division***

*InorganicSpecialties*

BASF offers a wide range of inorganic specialtieswhich includes carbonyl iron powder, hydroxylamine free base, hydroxylammoniumsulfate, boron specialties and BASF’s innovative Catamold® line of products forpowder injection molding of metal and ceramic components. The Catamold® line is especially suitedfor manufacturing tiny, intricate devices such as watch casings and orthodonticappliances. BASF sells these products globally to manufacturers in theautomotive, construction and medical sectors, among other industries.

*ElectronicMaterials*

BASF produces inorganicspecialties in electronic grade, such as hydroxylamine free base for use inmanufacturing semiconductors, light-emitting diodes, and flat and plasma screendisplays.

*InorganicChemicals*

BASF produces inorganicchemicals, which are the starting materials for fertilizers, plastics, aminesand other high-value chemicals. The products range from basic chemicals such aschlorine, sodium hydroxide, nitric acid and sulfuric acid to inorganic saltssuch as sodium and potassium alcoholates to ammonium salts. More than half ofthese products are for captive use within BASF’s Verbund. The remainingproducts are sold primarily to other chemical companies.

*Glues andImpregnating Resins*

BASF offers a wide variety oftailor-made adhesives for the wood products industry. These adhesives are usedto bind together the particles, fibers and strands found in all types ofparticleboards. In addition, BASF produces impregnating resins, which are usedto manufacture decorative paper and laminated flooring. BASF is also a producerof glues and impregnating resin raw materials such as ammonia, formaldehyde,methanol, urea and melamine. Europe is the primary market for this group ofproducts.

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***Catalysts division***

*EnvironmentalCatalysts*

Environmental Catalystsenable regulatory compliance by providing technologies that control emissionsfrom mobile sources, including gasoline- and diesel-powered passenger cars,sport-utility vehicles, trucks, buses and motorcycles. The division alsosupplies a variety of industrial markets, including aerospace, powergeneration, process industries, temperature sensing and utility engines withemission-control technologies, material products made primarily from platinumgroup metals, and thermal spray and coating technologies.

*ProcessCatalysts*

Process Catalysts includechemical-process catalysts and additives for chemical, petrochemical andpetroleum refining customers, as well as aluminas and adsorbents. The productoffering also includes custom process catalysts, such as those that enableconversion of gas-to-liquid and syngas production, and petroleum refiningcatalysts. In addition, additives based on the division’s unique DistributedMatrix Structure (DMS) technology platform are offered. It includes theNaphthaMax II and Flextec refining catalysts. The division also serves marketsfor polyolefin catalysts with catalysts, such as Lynx 1000.

*MaterialsServices*

Materials Services supportsthe catalysts business and BASF’s customers with precious and base metals andrelated services. This is a distribution and materials services business thatpurchases and sells precious metals, base metals, other commodities, andrelated products and services. It uses a variety of pricing and deliveryarrangements structured to meet the logistical, financial and price riskmanagement requirements of BASF, its customers and suppliers. Additionally,Materials Services offers the related services of precious metal refining andstorage, and produces precious-metal salts and solutions.

***Petrochemicals division***

*CrackerProducts*

BASF produces the entirerange of cracker products from ethylene and propylene to benzene and C4 cuts.Of these, propylene is the most important starting product for BASF’svalue-adding chains. Benzene is used captively, while the residues from benzeneextraction are sold as gasoline components. Butadiene is used captively toproduce dispersions and ABS (acrylonitrile-butadiene-styrene) and is also soldin the merchant market. Isobutene (a C4 hydrocarbon) serves as the startingmaterial for the polyisobutene value-adding chain of gasoline additives and asthe basic building block in vitamin synthesis. In Europe, all n-butenes areused in the synthesis of plasticizers and detergent alcohols. Higher olefinsare marketed to the adhesives industry.

*AlkyleneOxides and Glycols*

Ethylene oxide derived fromethylene is used mainly to produce surfactants, ethanolamines, glycols andglycol ethers. Ethylene glycol is a product used in antifreeze by theautomotive industry and for the production of fibers, films and PET(polyethylene terephthalate) plastic bottles by polyester manufacturers.Propylene oxide is synthesized from propylene and serves as a base for a widevariety of products, including hydraulic fluids, solvents and propylene glycol.

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*Solvents*

BASF offers a wide range ofoxygenated, halogen-free solvents that are used to dissolve other chemicals andfacilitate chemical reactions. BASF is the world’s largest producer of oxoalcohols and is also a major producer of acetates, glycol ethers, glycol etheracetates and specialty solvents such as cyclohexanone. BASF sells most of theseproducts globally, primarily to the coatings, pharmaceuticals and cosmeticsindustries.

*Plasticizersand Plasticizer Raw Materials*

BASF manufactures standardand specialty plasticizers, which are used in chemical processes to make rigidplastics flexible. BASF also sells the plasticizer precursor phthalic anhydridefor use in dyestuffs and unsaturated polyester resins, and markets plasticizersbased on higher alcohols. Our newest specialty product is the plasticizerHexamoll® DINCH, used for sensitive applications.

***Intermediates division***

*Amines*

BASF is among the world’s topthree producers of amines, which are principally used to make detergents andcleaning products, process chemicals, agricultural products andpharmaceuticals. BASF offers approximately 140 different amines worldwide. Keyproducts include ethanolamines, ethyleneamines, alkylamines, alkylalkanolaminesand various specialty and aromatic amines. Several chiral intermediates are ofincreasing importance for pharmaceuticals and agricultural products. As gastreatment technology we offer aMDEA®,short for activated methyldiethanolamine, for the removal of acid gases likehydrogen sulphide and carbon dioxide.

*Butanedioland its derivatives*

BASF is the world’s largestmanufacturer of 1,4-butanediol, which is a chemical building block for productssuch as polyesters and polyurethanes. Its derivatives are used to manufactureproducts ranging from fibers to paints and include tetrahydrofurane, PolyTHF®, gamma-butyrolactone and N-methylpyrrolidone.

*Polyalcoholsand Specialties*

Our polyalcohols such as1,6-hexanediol (HDO®) and neopentylglycol (Neol®) are mainly used to produce a wide range of coatings. In addition, BASFoffers specialties like carbonates and various special acetylenics, such asvinylmonomers and higher alkylpyrrolidones.

*Acids andSpecialty Intermediates*

This product group comprisesboth commodity acid products and specialty intermediate products. Carbon acidssuch as formic acid, propionic acid and 2-ethylhexanoic acid can be used tomanufacture preservatives for the feed and food industries as well asauxiliaries for textile and leather applications. Specialty intermediates, suchas derivatives of phosgene including acid chlorides and chloroformates, glyoxaland its derivatives, glutaraldehyde and various other chemicals, such asformamide and triphenylphosphine, are often used in the manufacture of paper,polymers, textiles and leather products.

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**DivisionInformation**

**Inorganics**

BASF’s Inorganics divisionmanufactures about 550 products of which approximately 50% are used captively.The remainder is sold to external customers worldwide in a broad range ofindustries.

In 2006 the Inorganics division’ssales to third parties were €1,134 million. Thereof, Europe accounted for 66%;Asia Pacific for 22%; North America (NAFTA) for 8%, and South America, Africa,Middle East for 4%. The catalysts business unit, which was previously part ofthe Inorganics division, was assigned to the new Catalysts division effectiveJanuary 1, 2006. Inorganics division’s sales have been adjusted accordingly.

BASF is one of the largestmanufacturers of electronic chemicals for use in the production ofsemiconductors. In 2006, BASF began construction of a new integrated productionplant for these process chemicals in Ludwigshafen, Germany. The new productionfacility will serve European customers in the semiconductor industry. It isscheduled to open at the end of 2007. Additionally, BASF established aclean-room laboratory and a technical application center in Ludwigshafen in thefall of 2006.

The Inorganics divisioncompetes on the basis of strong customer relationships, comprehensive productservices and price. In the market for specialty products, the division alsocompetes with innovative products, such as electronic grade chemicals andspecialties like inorganic powders for injection molding. The Inorganicsdivision sells its products primarily through BASF’s own sales force as well asthrough distributors.

BASF’s Inorganics divisionfaces a variety of competitors. BASF considers Arkema, Yara, DSM, Degussa andGentek to be the main competitors of the Inorganics division. In the market forglues and impregnating resins, Nordkemi and Arkema are among BASF’scompetitors.

**Catalysts**

The new Catalysts division iscomprised of the catalysts businesses and precious metal operations ofEngelhard Corp., acquired in June 2006, as well as of BASF’s previouslyexisting catalyst business. The division develops, manufactures and marketsenvironmental and process catalysts and related technologies to a wide range ofmarkets and customers globally and also actively trades precious and basemetals to meet the logistical, financial and price risk requirements of BASF,its customers and suppliers.

In 2006, Catalysts divisionsales to third parties were €2,411 million. Thereof, Europe accounted for 39%;North America (NAFTA) for 36%; Asia Pacific for 15%; South America, Africa, andthe Middle East for 10%.

Key success factors for theCatalysts division are achieving technological and cost leadership bycontinuous process and product innovation and exploiting the growth potentialfor our environmental technologies, especially in Asia. Customer demand forenvironmental technologies is driven by increasingly stringent environmentalregulations being adopted worldwide. There is no significant seasonal impact onthe division’s businesses. The main raw materials are precious metals andnatural gas. BASF has maintained strong, long-standing relationships with manyof the primary suppliers of platinum group metals around the world, ensuringavailability of precious metals, such as platinum, palladium and rhodium forits customers and for its own manufacturing. Precious metal prices can beaffected by high volatility, however most of the precious metals are providedin advance by the customers. The customers often purchase these metals from ourMaterials Services business, but they may also be supplied by other sources.

The Catalysts divisionmarkets its technologies through its own sales force as well as through distributors.BASF is among the top three providers worldwide of the main products andservices of the Catalysts division’s businesses. BASF considers JohnsonMatthey, Umicore, and Delphi to be the main competitors in the environmentaland emissions control markets. In the chemical and process catalysts market, weconsider WR Grace, Süd-Chemie, Albemarle, Johnson Matthey and Dow Chemical tobe the key competitors.

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**Petrochemicals**

The Petrochemicals divisionsells more than 200 products and represents the first step in BASF’s Verbundapproach to integration for the company’s petrochemical-based, high-valueproducts.

In 2006, the Petrochemicalsdivision’s sales to third parties amounted to €5,754 million. Thereof, NorthAmerica (NAFTA) accounted for 49%; Europe for 36%; Asia Pacific for 13%; andSouth America, Africa, Middle East for 2%.

The Petrochemicals divisionsells products through BASF’s own sales force as well as through wholesalers.Specialty chemical and other chemical companies are the primary externalcustomers of this division, some of which are also competitors of BASF. Oursteam crackers, the core of the petrochemicals division, mainly supply productsfor captive use within the company, although BASF does maintain positions inthe merchant markets for olefins to ensure high capacity utilization.Approximately 40% of the division’s total sales are to other BASF divisions.

The Petrochemicals divisionproduces commodities that are subject to cyclicality in pricing. Changes in rawmaterials prices have an almost immediate effect on the division’s financialperformance. Competition in the market is based on strong customerrelationships, comprehensive product services and price.

BASF considers Celanese,Degussa, Dow Chemical, Eastman Chemicals, ExxonMobil Chemical, Formosa PlasticsCorporation, INEOS, SABIC, Sasol, Shell Chemicals and SINOPEC to be the maincompetitors of its Petrochemicals division.

**Intermediates**

The Intermediates divisionmanufactures approximately 600 products that are sold worldwide. The customerstypically purchase the division’s chemical products as precursors for theirhigher-value chemicals such as plastics, polyurethanes, textile fibers, resins,paints, surfactants, colorants, coatings, pharmaceuticals and agriculturalproducts.

In 2006, the Intermediatesdivision’s sales to third parties were €2,273 million. Thereof, Europeaccounted for 51%; Asia Pacific for 27%; North America (NAFTA) for 17%; andSouth America, Africa, Middle East for 5%.

The majority of theIntermediates division’s products are sold externally. They are generally quiteresilient to economic cycles and are often the result of multi-step productionprocesses within BASF. The division additionally sells many of its productswithin BASF, with internal transfers accounting for approximately 25% of thedivision’s total sales.

In addition to our ‘valueover volume’ strategy, the key to the Intermediates division’s success lies inachieving technological and cost leadership, offering customized products andincreasingly, developing a global production presence.

BASF sells this division’sproducts through its own sales force as well as through distributors. BASF isamong the top three producers worldwide of the main products of its fourstrategic intermediates’ business units. BASF considers Taminco, Dow andHuntsman to be the main competitors in the amines markets. In the butanedioland derivatives market, the company’s main competitors are ISP, Invista,Lyondell, Dairen, Mitsubishi Chemicals and new entrants, especially from China.Eastman Chemical and Ube Industries are considered to be the main competitorsin the areas of polyalcohols and specialties. Finally, the main competitors forBASF’s acids and specialty intermediates business are Kemira and Perstorp.

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**PLASTICS**

**SegmentOverview**

BASF is one of the world’sleading plastics manufacturers and offers one of the industry’s mostcomprehensive product ranges. The segment is organized into three divisions:Styrenics, Performance Polymers, and Polyurethanes. Key information is providedin the following table:

**Million €**
| ** **                                                        | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
|-------------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Sales to third  parties                                           |       | 12,775   |       | 11,718   |       | 10,532   |       |
| Percentage of  total BASF sales                                   |       | 24       | %          | 27       | %          | 28       | %          |
| Intersegmental  transfers                                         |       | 526      |       | 471      |       | 677      |       |
| Income from  operations                                           |       | 1,192    |       | 1,015    |       | 694      |       |
| Additions to property,  plant and equipment and intangible assets |       | 631      |       | 490      |       | 473      |       |

 

The Plastics segmentpurchases over two-thirds of its raw materials from external suppliers. Theprincipal raw materials are benzene, toluene, ethylene, propylene, butadiene,acrylonitrile, cyclohexane and ammonia. BASF has a policy of maintainingmultiple suppliers for raw materials of its Plastics segment in order to remainindependent from any dominant supplier.

For products such as styreneand isocyanates, where economies of scale are most important, plants tend to belocated at our Verbund sites. For higher margin products such as polyurethanesystems, plants tend to be regionally located to foster closer relations withour customers.

**SegmentStrategy**

BASF’s Plastics segment seeksto strengthen its position in the styrenics, nylon and polyurethanevalue-adding chains of chemistry through the following strategies:

·                  Marketing and selling products moreefficiently than competitors in key regional markets: To support this strategicgoal, BASF is realigning its businesses with standard products, specialties andsystems solutions to meet the changing market and customer demands and isintroducing new business models for the respective products.

·                  Establishing efficient business processes forstandard products: In the standard products business, BASF is streamlining itsportfolio to include only a limited number of product lines combined withappropriate marketing processes to consistently deliver high-quality productsat minimum costs with optimum reliability.

·                  Increasing sales of selected specialtyproducts: BASF is expanding its position in the market for specialty productsthat can be easily derived from the company’s value-adding chains of chemistry.These have the potential to generate competitive advantages for our customersand BASF.

·                  Boosting the efficiency of the company’sglobal production activities: BASF is shifting production from older or smallerplants to more efficient world-scale plants that rely on new technologies andoffer substantial economies of scale. In Asia, the company is continuing toexpand its production capacities and is building on its well-established basein the region.

·                  Optimizing the regional portfolios: Toincrease efficiency significantly, BASF is improving processes and coststructures in Europe and consolidating businesses in North America. In Asia,BASF continues to strengthen its position as one of the leading manufacturersof plastics.

·                  Working closely with customers in developingnew specialties and systems solutions: For specialties as well as systemssolutions, BASF is cooperating with customers in the early development phasesof new applications, which is a significant factor for the long-term success ofour business.

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·                  Using e-commerce more extensively as adistribution channel: BASF’s sales through e-commerce channels, such as ourproprietary PlasticsPortal, increased by more than 30 percent to over €4billion in 2006. BASF expects that sales via these distribution channels willcontinue to increase in the future.

**Researchand Development**

In 2006, the Plastics segmentspent €145 million on research activities. We consider research and developmentto be a key element in ensuring the long-term success of our Plastics segment.Our research and development activities are focused on manufacturing processesand product development, including systems solutions for customers.

We seek to improve existingmanufacturing processes and also to develop new cost-effective manufacturingalternatives. A good example of this is the new hydrogen peroxide to propyleneoxide (HPPO) technology. Together with Dow, we developed this innovativeprocess, which generates only the end-product propylene oxide (PO) and avoidsco-products. This process is a highly cost-effective method to produce PO, andplants using this technology require a significantly lower investment comparedto those based on conventional PO production processes. The construction of aworld-scale plant using this process at our Antwerp Verbund site began in 2006.

In product development, wework together with customers in order to develop innovative new products andimprovements to our existing products. For example, our Ultradur® High Speed has been well received by the market as it allows ourcustomers in the automotive and electronics industry to reduce theirmanufacturing costs by reducing production times.

**Products**

The Plastics segment containsthe following significant product lines:

***Styrenics division***

*PS(Polystyrene)*

BASF’s polystyrene productsrange from rigid and transparent general-purpose plastics to highimpact-resistant grades that customers shape using injection molding, extrusionand blow molding. Primary applications include packaging and householdappliances.

*EPS(Expandable Polystyrene)*

BASF sells expandablepolystyrene under the brand names Styropor® andNeopor®. The advantages of expandable polystyreneinclude heat insulation, high compressive strength, shock absorption, lowweight and moisture resistance. Primary applications include buildinginsulation and packaging.

*XPS(Extruded Polystyrene)*

BASF sells extrudedpolystyrene under the brand name Styrodur®.It is a green, extruded, rigid polystyrene foam that is made using carbondioxide as a blowing agent. Styrodur® offersheat insulation, low water absorption and compressive strength. The primaryapplication is building insulation.

*SAN(Styrene-Acrylonitrile Copolymers)*

Luran® is BASF’s trade name for SAN plastic. It is transparent, chemical anddishwasher resistant and offers a high degree of stiffness and resistance totemperature change. Primary applications include household and toiletry itemsand packaging.

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*ABS(Acrylonitrile-Butadiene-Styrene Copolymers)*

Terluran® is the trade name for BASF’s top styrene copolymer plastic. It offerssuperior surface quality, mechanical properties and chemical resistance.Primary applications include electrical and electronic equipment and automotivecomponents.

*ASA(Acrylonitrile-Styrene-Acrylate Copolymers)*

Luran® S is the trade name for BASF’s styrene copolymer plastic modified withrubber to make it resistant to weathering, aging and chemicals. Primaryapplications include exterior automotive components, electrical and electronicequipment.

*MABS(Methacrylate-Acrylonitrile-Butadiene-Styrene Copolymer)*

Terlux® is the trade name for BASF’s MABS plastic. It offers transparency,luster, toughness and resistance to chemicals. Primary applications includehygiene and cosmetic product containers as well as medical equipment housings.

*MF(Melamine Resin Foam)*

BASF sells melamine resinfoam under the brand name Basotect®.It is a flexible foam material that absorbs sound and offers high heatresistance and good flame retardant attributes. Primary applications includeautomotive components and soundproofing materials.

***Performance Polymers division***

*PA(Polyamide) and Intermediates*

Ultramid® and Capron® are the trade names for BASF’s engineeringplastics based on nylon 6, nylon 6,6 and other copolymers. They offer toughnessand strength as well as both heat and chemical resistance. Primary applicationsinclude automotive engine intake manifolds and flame-retardant plastics for electricalcomponents such as switches.

Ultramid® is also the trade name for BASF’s base resin of nylon 6 and 6,6 sold inthe fibers and extrusion market. Primary applications include carpets andtextiles as well as films for food packaging.

Intermediates includecaprolactam for nylon 6 and adipic acid and hexamethylenediamin for nylon 6,6.

*PBT(Polybutylene Terephthalate)*

Ultradur® is the trade name for BASF’s engineering plastic based on PBT. Itfeatures high stiffness, strength, dimensional stability and heat and agingresistance. Primary applications include electrical connectors and automotivecomponents.

*POM(Polyoxymethylene)*

Ultraform® is the trade name for BASF’s POM plastic. It offers high stiffness andstrength, resilience and low wear. Primary applications include clips andfasteners as well as mechanical and precision engineering devices such asshafts and gears.

*PES(Polyethersulfone) and PSU (Polysulfone)*

Ultrason® S and E are the trade names for BASF’s PES and PSU plastics. The mostimportant features of Ultrason are stiffness and resistance to water and oilysubstances even at high temperatures. Other important features includeelectrical insulation properties and dimensional stability. Primaryapplications include automobile oil circulation systems, headlight reflectors,microwave dishes and medical equipment.

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***Polyurethanes division***

*MDI(Diphenylmethane Diisocyanate)*

MDI is a versatile isocyanatethat can be used to make flexible foams as well as semi-rigid and rigidpolyurethane plastics. Primary applications include furniture interiors,automotive components and shoe soles.

*TDI(Toluene Diisocyanate)*

TDI is an isocyanate usedprimarily in the manufacture of flexible foams. Primary applications includefoam cushions for furniture and automotive components.

*PolyetherPolyols*

Polyether polyols arecombined with isocyanates to make virtually all polyurethane products, otherthan those made with polyester polyols. Primary applications include rigid andflexible foams.

*PolyesterPolyols*

Polyester polyols arecombined with isocyanates to make primarily semi-rigid polyurethane plastics.Primary applications include cable sheathing and shoe soles.

*PolyurethaneSystems*

BASF’s worldwide polyurethanesystems group offers tailor-made polyurethane products for a wide variety ofapplications. BASF develops ready-to-use, tailor-made polyurethane systems forcustomers. Automotive OEM (original equipment manufacturer) suppliers comprisea significant customer group for polyurethane systems. OEM suppliers make seats,steering wheels, fenders and dashboards using BASF’s polyurethane systems.

*TPU(Thermoplastic Polyurethane Elastomers)*

TPU is sold under the tradename Elastollan® and is based on both polyether polyols andpolyester polyols. It is supplied in granular form to customers who use itprimarily to make flexible plastic cable coverings. Customers for theseproducts are primarily in the automotive and cable and wire industries.

*CellularElastomers*

Cellular elastomers are soldunder the names Cellasto®, Elastocell® andEmdicell® and are shock-absorbing, rigid plastics.Microcellular polyurethane parts for antivibration applications are sold, forexample, as molded end-products for use as shock absorbers and buffers in theautomotive industry.

**DivisionInformation**

**Styrenics**

BASF is one of a few globalproducers among a multitude of regional and local suppliers. Besides the majormarket in Europe, the focus of the styrene polymer business remains on theemerging markets in Asia.

In 2006, the Styrenicsdivision’s sales to third parties were €4,994 million. Thereof, Europeaccounted for 47%; Asia Pacific for 27%; North America (NAFTA) for 19%; andSouth America, Africa, Middle East for 7%.

Overall demand for styrenicscontinues to rise due to economic growth in both industrialized countries andemerging markets. BASF believes that cost-efficient business processes alongwith an appropriate number of products manufactured in highly competitiveworld-scale plants are crucial to ensuring the continued competitiveness of itsstyrenics products. As a consequence, and in response to polystyrene overcapacitiesin Western Europe, the production plant of polystyrene in Tarragona, Spain wasshut down permanently at the end of the year. With the acquisitions of thestyrene copolymer business of Lanxess in Europe as well as in South America andof Repsol in Europe, BASF will strengthen its market position in these regionsand also improve the utilization of the respective production capacities.

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Volatility of raw material prices and increasingpricing pressure from low-cost producers, especially in Asia, are reducing margins.Thus, cost leadership in production and efficient business processes areimportant for BASF to meet the demands of our customers for consistent quality,reliable supply and competitive prices.

In specialties, BASF seeks profitable growth by focusingon specific market needs as well as by increasing application development andworldwide sales. The global business unit for specialties, which was establishedat the beginning of 2005, continues to develop innovative service offerings.

The Styrenics division sells products primarilythrough its own regional sales force, supported by BASF technical and marketingexperts. The Styrenics division is increasingly relying on e-commerce (e.g.BASF’s PlasticsPortal) for distributing its products. In some areas, such asEurope and South America, nearly all orders are received through electronicchannels.

BASF considers Dow and Total to be the maincompetitors of the Styrenics division. The division also competes in NorthAmerica with Nova and in Europe with Enichem. In Asia, BASF competes with otherregional competitors, such as Chi Mei, Loyal and LG Chem.

**Performance Polymers**

BASF is one of the world’s leading producers ofengineering plastics, extrusion products and fiber intermediates. BASFsuccessfully integrated the engineering plastics businesses of Leuna-MiramidGmbH in Europe and Lati USA Inc. in North America, which were both acquired in2005. Furthermore, the 50:50 joint venture with Toray Industries Inc. for PBTin Kuantan, Malaysia successfully started its operations in 2006. BASF’sengineering plastics business also expanded its North American manufacturingoperations with the installation of a compounding capacity at the Altamira sitein Mexico.

To further support the profitable growth of ouractivities, a new compounding plant in Shanghai, China will come on stream in2007, accompanied by a technical development center. Additionally, BASF willincrease its capacities for the engineering plastic Ultrason® in Ludwigshafen. In NAFTA, the Polyamideproduction will be consolidated through the start-up of a new world-scale plantin Freeport, Texas. 

In 2006, the Performance Polymers division’s sales to thirdparties were €2,932 million. Thereof, Europe accounted for 47%; North America(NAFTA) for 29%; Asia Pacific for 22%; and South America, Africa, Middle Eastfor 2%. 

Performance Polymers products are sold worldwide, andmore than two-thirds of the customers are engineering plastics customers. Thiscustomer base consists largely of high-performance plastic molder and plasticscomponent manufacturers in the automotive, consumer electronics, electricalequipment and packaging industries. These customers often rate productperformance and customer support as important, but prices are becomingincreasingly critical to customers in choosing a supplier.

To compete effectively in this market, the PerformancePolymers division seeks to increase its preferred supplier status with globalcustomers, many of whom demand collaboration in developing specific plasticsapplications. The division works with suppliers of automotive manufacturers todevelop specific applications for parts, such as engine components, airbag housingsand electronic connectors. For the electrical and electronic industries, newproduct grades have been especially developed to meet specific standards andoffer improved processing properties.

The division’s customers for engineering plastics areprimarily global companies that demand uniform worldwide standards for productsand services in all major markets. BASF sells engineering plastics productsprimarily through its own regional sales force supported by BASF’s technicaldevelopment centers in all regions. These centers not only help customers todevelop applications but also independently research new markets andapplications in which plastics can replace more conventional materials such asmetal. In Asia, the division is expanding its sales force to build on its solidposition in the market.

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The markets forcaprolactam and other fiber intermediate products are characterized by theirlarge volumes, cyclicality, price competition and commodity pricing. Growthrates are usually low compared to the engineering plastics and extrusionmarket. The markets for extrusion grades, particularly films for foodpackaging, are gaining importance as they are less cyclical and show highgrowth rates in Asia, particularly in China. Innovation and operationalexcellence are critical success factors for both the extrusion and fiberintermediate markets, and therefore BASF is focusing on production synergies inthese areas. 

The PerformancePolymers division sells products primarily through its own regional salesforce, supported by the division’s technical and marketing experts. Thedivision is increasingly relying on e-commerce as a channel for distributingits products and operates its own portal, PlasticsPortal.com.

BASF considersCelanese, DSM, Dupont, General Electric, Lanxess, Rhodia, Solutia and UBE to bethe main competitors of the Performance Polymers division. 

**Polyurethanes**

BASF’s Polyurethanes division is one of the world’sthree largest producers of polyurethanes: important specialty plastics used toproduce a wide spectrum of rigid, flexible, foamed and compact components forconsumer products. 

In 2006, the Polyurethanes division’s sales to thirdparties were €4,849 million. Thereof, Europe accounted for 37%; North America(NAFTA) for 31%; Asia Pacific for 26%; and South America, Africa, Middle East for6%.

BASF offers over 3,500 customized polyurethanesolutions. These products, the vast majority of which are sold to externalcustomers, are used to make a variety of automotive parts, including bumpers,steering wheels and instrument panels. BASF’s polyurethanes can also be foundin household goods, such as mattresses and upholstery, and in sports equipment,such as in-line skates and athletic shoes. The fashion industry is increasinglyusing BASF’s polyurethanes, particularly to manufacture synthetic leathers. 

To build on its strong relationships with customers,the Polyurethanes division is expanding its regional activities, focusing aboveall on the Asian market. In Caojing, China, BASF, together with local andinternational joint venture partners, successfully started up an integratedmanufacturing facility for MDI and TDI in 2006. On September 27, 2006, BASF andDow Chemical began construction of a production plant for propylene oxide (PO)based on the HPPO technology at BASF’s Verbund site in Antwerp, Belgium. Thistechnology is a joint development of BASF and Dow. BASF has also partnered withSolvay S. A. in the production of hydrogen peroxide (HP) for the HPPO process.The HPPO plant will be the first of its kind worldwide. 

In 2007 BASF will significantly expand its productioncapacities for MDI in Antwerp, Belgium to take advantage of the growing globaldemand for MDI. Together with Dow Chemical BASF is conducting a feasibilitystudy for a world-scale TDI facility in Europe. The production plant isexpected to start operations in 2011. 

For polyurethane systems and special elastomers,strong relationships with leading industry customers are crucial because of thehighly individualized nature of these products. To strengthen its relationshipswith customers, BASF has established a global network of system houses. Systemhouses are production sites that work closely with customers to provideproducts specially formulated for individual needs. The Polyurethanes division currentlyhas about 30 system houses around the world in locations near customers. BASFwill continue to establish or acquire more.

Global demand for all polyurethane products isexpected to continue to grow faster than the global economy as the economicexpansion continues. The market for polyurethane basic materials is lesscyclical than the market for most other standard plastics, primarily becausepolyurethane basic materials are relatively specialized. Competition in themarket for basic materials is based primarily on price, although productquality and technical application assistance are also important to customers.

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The markets for polyurethane systems and specialelastomers are even less cyclical than those for polyurethane basic materials.Competition in the market for polyurethane systems and special elastomers isbased primarily on a supplier’s ability to satisfy customers’ technicalapplication needs by providing tailormade formulations of isocyanates andpolyols and also on a supplier’s ability to accommodate customers’ just-in-timemanufacturing by delivering customized products quickly and at the appropriatetime.

BASF considers Bayer Material Science, Dow, Huntsman,Lyondell and Shell Chemicals to be the main competitors of the Polyurethanesdivision.

**PERFORMANCEPRODUCTS**

**Segment Overview**

BASF is a leading global producer of constructionchemicals, coatings, functional polymers and performance chemicals through itsPerformance Products segment. The segment’s products make essential contributionto the performance of many everyday items – from cars to houses and fromdetergents to diapers. The product portfolio covers a broad range of high-valuechemicals, formulations and integrated chemical systems solutions for theautomotive, coatings, construction, plastics, oil, paper, packaging, textile,leather, detergent, hygiene and chemical industries. The segment’s productsenhance the functionality and performance of our customers’ products.

**Million €**
| ** **                                                        | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
|-------------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Sales to third  parties                                           |       | 10,133   |       | 8,267    |       | 8,005    |       |
| Percentage of  total BASF sales                                   |       | 19       | %          | 19       | %          | 21       | %          |
| Intersegmental  transfers                                         |       | 390      |       | 352      |       | 291      |       |
| Income from  operations                                           |       | 669      |       | 863      |       | 1,128    |       |
| Additions to property,  plant and equipment and intangible assets |       | 4,490    |       | 347      |       | 304      |       |

 

New products are key drivers of our segment’ssuccessful growth. Products, chemical system solutions and applicationtechnologies are developed according to the specific requirements of ourcustomers in order to meet their future challenges. The Performance Productssegment focuses on partnering with customers in order to supply innovative,tailor-made solutions.

The Performance Products segment serves a broad rangeof customers – from multinational industrial clients and medium-sizedbusinesses to craftsmen. We regard customers as the most important partners inmaking BASF’s chemical innovation happen. This partnership with our customersis built on trust and reliability. The recent acquisitions of the constructionchemicals business from Degussa AG, Johnson Polymer as well as the pigmentbusiness of Engelhard Corp. have brought the Performance Products segmentcloser to the customer and opened up further opportunities for innovation.

The Performance Products segment purchasesapproximately 50% of its raw materials from other BASF operations and does notrely on a dominant external supplier. The segment’s principal raw materials arepropylene, oxo alcohols, butadiene, styrene, ethylene oxide, propylene oxide,naphthalene, aliphatic alcohols, pigments, solvents and resins. The segment’sproducts often represent the final stages in many value-adding chains withinBASF’s Verbund.

The bulk of the production for the PerformanceProducts segment is located at our Verbund sites to take advantage of theefficiencies offered by these sites. However, in certain cases, plants arelocated near our customers to reduce transportation costs, such as forconstruction chemicals products, or in the case of automotive OEM coatings, tomeet our customers’ just-in-time delivery needs.

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**Segment Strategy**

The segment’s strategy is to enhance the value of ourbusiness and the performance of our customers’ products by innovation,operational excellence and active portfolio management. Our target is to hold astrong position among the top three players in all markets we serve. The keyelements of the segment’s success are therefore:

·                  To shape our business portfolio byactively managing our portfolio, as demonstrated by our recent acquisitions ofthe construction chemicals business from Degussa AG, Johnson Polymer and thepigments business of Engelhard Corp. We have added businesses in high-growthmarkets, which are innovation-driven, reduce our cyclicality and bring uscloser to the customer.

·                  To further speed up the launch of newproducts, chemical system solutions and application technologies developed in researchand development centers in close cooperation with our customers.

·                  To introduce new business models,such as the “system supplier for coating materials,” that integrate us into theprocesses of our customers.

·                  To expand our central and regionalresearch and development centers in order to work closely with our customers toidentify and develop product innovations and customer-specific systemsolutions.

·                  To optimize our production network atVerbund sites and at those sites that are located close to the customer acrossall regions, and adjust it as our customers’ industries relocate.

·                  To increase our operationalexcellence, especially within our standard product portfolio (e. g. acrylicmonomers, standard dispersions, standard surfactants), based on maintainingbest-in-class technology and setting benchmarks in total-cost-to-the-customer.

**Research and Development**

In 2006, the segment spent €288 million on researchactivities. The main focus of the segment’s research and development is oninnovative and eco-efficient products and system solutions that are tailor-madefor the processes and technologies of our customers. Close cooperation withcustomers holding leading market positions is of great importance in order tofully exploit research resources and reduce the time to market. In addition,state-of-the-art application centers and pilot plants, for instance forconcrete admixtures, coatings, paper finishing or pressure-sensitive adhesives,are a key success factor. These plants and application centers allow us todeepen our understanding of the customers’ processes and to assess new chemicalsystems under real application conditions. In 2006, we established newtechnical application centers in Mangalore, India for OEM coatings and inKrieglach, Austria for concrete admixtures. We expanded our activities fortextile and leather chemicals in Thane, India and for textile and leatherchemicals, chemicals for detergents and formulators as well as polymerdispersions in Shanghai, China.

Recent examples of successful innovations and systemsolutions include the following:

·                  Expanding our Acronal® CRproduct portfolio for pressure-sensitive adhesives to support our customerswith ready-to-use formulations compatible with the newest coatingstechnologies.

·                  Introducing our new OEM coatingtechnology (Integrated Process II), which incorporates the functionality of thefiller layer into the basecoat. This has led to the shortest coating process inthe world, which is already used in the Mini production line in Oxford, UK (BMWGroup).

·                  Launching ournew functional pigment Lumogen® Black that absorbs less solar energy thanconventional pigments and therefore keeps sun-exposed surfaces cooler.

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**Products**

The Performance Products segment contains thefollowing significant product lines:

***ConstructionChemicals***

*Admixture Systems*

BASF technologies for admixture systems optimize theproperties of concrete especially if it is used in extreme environments or incomplex constructions projects, such as bridges, skyscrapers and tunnels. Our wellknown brands include: Glenium®, Rheobuild®,Pozzolith® and Meyco®. 

*Construction Systems*

In the construction systems business, BASF offersadhesives (PCI®,Chemrex®), repairmortars (Emaco®),sports and industrial flooring (Conipur®, Ucrete®,Mastertop®), sealants(Masterflex®, Sonoplastic®), waterproofing membranes(Masterseal®), andproducts for wall systems and facades (Heck®, Senergy®,Colfirmit®, Rajasil®).

***Coatings***

*Automotive OEM (Original EquipmentManufacturer) Coatings Solutions*

BASF offers complete automobile coatings solutions aswell as extensive technical support to major vehicle manufacturers. Most of theworld’s leading automobile manufacturers are long-standing customers of BASF.

*Automotive Refinish / CommercialTransport Coatings Solutions*

For the refinishing of cars and commercial vehicles,BASF offers topcoat and undercoat materials under the well-known brand namesGlasurit®, R-M® and Salcomix®. Most of these systems, which are sold topaint distributors and automotive repair shops, increasingly usesolvent-reducing waterborne coatings as well as high-solid systems.

*Industrial Coatings Solutions*

BASF offers environmentally efficient systems forcoating industrial products. Application technologies include precoatings,powder, electro-deposition and liquid coatings that are used on householdappliances, radiator components, industrial buildings and pipes. BASF is thesecond-largest coil-coatings producer.

*Decorative Paints*

BASF is the leading producer of decorative paints forinterior and exterior use in the South American market. BASF’s dispersion andbuilding paints are marketed under the Suvinil® trademark and enjoy a high levelof customer recognition.

***Functional Polymers***

*Acrylic Monomers*

BASF is the world’s largest producer of acrylicmonomers, which are sold directly to internal and external customers in theform of acrylic acid, acrylic esters and special acrylates. Acrylic monomersare used as precursors to manufacture polymer dispersions for variousapplications, superabsorbents, detergents, flocculants and fibers for a widerange of industries.

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*Superabsorbents*

BASF sells superabsorbents globally primarily to thepersonal hygiene industry, which uses these products to manufacture diapers andother sanitary care products. Superabsorbents are also marketed for industrialapplications, such as packaging or agriculture.

*Adhesive and Construction Polymers*

BASF’s polymer products consist mainly of polymerdispersions for the production of adhesives, paints, non-woven materials andconstruction chemicals. BASF’s strength lies in its technical expertise and applicationknow-how.

*Paper Chemicals*

BASF offers the paper industry a comprehensive rangeof chemical products for many aspects of the paper production process,including the manufacture of untreated paper and paper finishing. TheFunctional Polymers division’s product range of paper chemicals consists ofpaper-processing chemicals, paper dyes and polymer dispersions for coating.

*Kaolin*

Effective June 2006, the kaolin business became partof the Functional Polymers division through the acquisition of Engelhard Corp.Kaolin is extracted from mines and is primarily used as coating pigment in thepaper industry.

**Performance Chemicals**

*Pigments and Resins for Coatings andPlastics*

The Performance Chemicals division offers organic andinorganic pigments, pigment preparations, functional colorants, lightstabilizers and resins. Through the acquisition of Johnson Polymer and the pigmentbusiness of Engelhard, the product portfolio was broadened by including water-basedresins as well as effect pigments and specialty minerals. Resins arefilm-forming components used in UV (ultraviolet) curing coatings, urethane systems,melamine-based coatings and water-based coatings and inks. Pigments are insolublecoloring and iridescent materials used in paints, plastics, inks and otherspecial applications. BASF’s pigments and resins are used primarily inautomotive, decorative and industrial paint applications, as well as in theplastics and graphic arts industries.

*Isobutene Derivatives*

Isobutene is the starting material for polyisobutene,the most important component for BASF’s branded fuel additives. Through itshighly reactive polyisobutenes, BASF has established a new standard in the fueland lubricant additives market. BASF is the only industry supplier with aproduct portfolio spanning low to ultra-high molecular polyisobutenes as wellas polyisobutene derivatives.

*Surfactants*

BASF produces a wide range of nonionic surfactantsbased on aliphatic alcohols, ethylene oxide and propylene oxide. Such productsare used in detergents and cleaners and textile and leather auxiliaries. 

*Hydrocyanic Acid Derivative*

BASF produces several chelating agents based onhydrocyanic acid, which serve as process chemicals in various industries.Applications include pulp manufacturing, electroplating, laundry detergents,cleaners and photographic chemicals.

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*Performance Chemicals for Textiles*

BASF offers textile and dyeing auxiliaries, pigmentpreparations for textile printing and inks for ink-jet printing technology.BASF’s product range covers a wide spectrum of textile applications. 

*Leather Dyes and Chemicals*

BASF is one of the world’s leading producers ofleather chemicals and dyes, producing a full range of products for nearly everyaspect of the leather production process.

**Division Information**

**Construction Chemicals**

The Construction Chemicals division comprises theconstruction chemicals business that was acquired from Degussa AG on July 01,2006. The main rationale for this acquisition was to enter into a business thatreduces the cyclicality of the BASF portfolio and to exploit the potential forprofitable growth via innovations driven by research and development.

In 2006, the Construction Chemicals division’s salesto third parties were €1,120. Thereof, Europe accounted for 50%; North America(NAFTA) for 28%; South America, Asia Pacific for 14% and Africa, Middle Eastfor 8%.

BASF Construction Chemicals serves the constructionindustry with innovative solutions and solution packages for constructionprojects. Our core competence lies in concrete technology, especially concrete admixtures,but also extends to concrete curing or repair systems (admixture systems). Weare the global market leader with a number one position in Europe, NAFTA andAsia Pacific. In Admixture Systems, Sika and W.R. Grace are considered to bethe main competitors.

The associated fields (construction systems), such asmortar, adhesives (for tiling etc.), sealants, expansion joints and flooring,wall and roofing systems, are another pillar of our business. In thisfragmented market, we have a sizeable business in several segments in thedeveloped regions of Europe and NAFTA (e.g. tile fixing systems in Europe,sealants in NAFTA). BASF considers RPM and Mapei to be the main competitors ofits construction systems business.

Our main growth drivers will be the emerging marketsin Asia (especially China), Eastern Europe and the Middle East, where we expectstrong construction activities in housing, industry and infrastructure, includingtunneling and mining. Key success factors are excellence in formulation,manufacturing and logistics, effective technical service, constant innovationin close cooperation with lead customers, effective utilization of differentsales channels and strong brand recognition.

In the future we plan to accelerate our businessgrowth even further by rolling out technologies used in one region to the others,by establishing a sizeable business in emerging markets, particularly China,and by expanding the business in mature markets by introducing innovativeproducts and solutions.

**Coatings**

BASF offers innovative and environmentally friendlyproducts for the automotive industry, including both finishes and refinishes,and for particular segments of the industrial coatings market. BASF also sells decorativepaints in South America for interior and exterior use in residential andcommercial buildings.

In 2006, the Coatings division’s sales to thirdparties were €2,337 million. Thereof, Europe accounted for 46%; North America(NAFTA) for 24%; South America, Africa, Middle East for 18%; and Asia Pacificfor 12%.

BASF’s Coatings division provides customers with innovativehigh-solid, waterborne and powder coating systems that reduce or eliminatesolvent emissions. BASF sees significant growth opportunities for its“Integrated Process II” for automotive OEM coatings, which is in the marketrollout phase. This innovative system simplifies the conventional process byrequiring fewer coating layers, thus offering substantial cost-saving potentialwhile reducing the environmental impact of auto body painting.

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The key to the division’s success is maintainingpreferred supplier status with major customers by collaborating with them todevelop system solutions. These system solutions help the division todifferentiate its product offerings from those of its competitors and fosterlasting relationships with customers. 

BASF sells products of the Coatings division tocustomers, particularly those in the automotive industry, primarily through itsown sales force. Third-party distributors also sell products of the automotiverefinish coatings, industrial coatings and South American decorative paintbusinesses. The Coatings division sells virtually all of its products toexternal customers.

The Coatings division also uses e-commerce as animportant distribution channel, in particular for its automotive refinishcoatings. In North America, customers of BASF’s automotive refinishtechnologies business can order products online at bodyshopmall.com. Forcustomers in Europe, the division has established similar e-commerce portals tosell its Glasurit® and R-M® brands.

BASF considers DuPont, PPG Industries and Akzo Nobelto be the main competitors of the Coatings division, while Nippon Paint Companyand Kansai Paint Company are considered to be the division’s key competitors inAsia.

**Functional Polymers**

BASF’s Functional Polymers division is one of thelargest producers worldwide of acrylic acid and its downstream products, whichare mainly superabsorbents and dispersions. Polymer dispersions are used in amultitude of industries, including the manufacturing of paper, decorativepaints, adhesives, construction chemicals, non-woven materials, carpets, fibersand plastics. The Functional Polymers division also manufactures wet-endchemicals for paper production. The most important customers of the Functional Polymersdivision are in the paper, construction chemistry, adhesive, hygiene, coatings,chemicals and packaging industries.

Effective June 2006, the kaolin business of formerEngelhard became part of the Functional Polymers division. Kaolin is primarilyused as coating pigment in the paper industry.

In 2006, the Functional Polymers division’s sales tothird parties were €3,387 million. Thereof, Europe accounted for 48%; NorthAmerica (NAFTA) for 29%; Asia Pacific for 15%; and South America, Africa and MiddleEast for 8%.

The Functional Polymers division’s strategic goal isto achieve long-term profitable growth in all regions and to increase marketshare in the rapidly growing markets in Asia.

The division sells approximately 90% of its productsto external customers. The vast majority of the division’s products areprimarily sold through BASF’s own regional sales network. Some smallercustomers purchase products through distributors.

The Functional Polymers division also uses e-commerceas a distribution channel for its products. The division is increasinglyselling its products through Elemica Holding Ltd., an independentbusiness-tobusiness e-commerce company. The division’s participation inWorldAccount, BASF’s integrated global extranet platform, will benefit itscustomers for adhesive and construction polymers as well as paper chemicals.

Acrylic monomers are predominantly commodities and cantherefore be affected by cyclicality. Other products, particularly polymerdispersions for adhesives, paints and non-wovens; superabsorbents; and paperprocess chemicals are relatively resilient to economic cycles and competeprimarily on the basis of product innovation and service.

BASF considers Rohm & Haas to be the maincompetitor in acrylic monomers and polymer dispersions. Dow, Kemira, Ciba SpecialtyChemicals and Akzo are BASF’s main competitors in paper chemicals. In the superabsorbentsbusiness, BASF’s main global competitors are Degussa and Nippon Shokubai.

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**Performance Chemicals**

BASF is one of the world’s largest manufacturers ofhigh-value performance chemicals, which the company sells to a broad range ofcustomers worldwide in a wide variety of industries including the plastics, coatings,construction, detergent, automotive, oil, leather and textile industries.

BASF’s strength is its Verbund approach: This givesthe Performance Chemicals division an advantage over small and medium-sizedcompanies that lack the cost advantages of integration. 

In 2006, the Performance Chemicals division’s sales tothird parties were €3,289 million. Thereof, Europe accounted for 53%; NorthAmerica (NAFTA) for 21%; Asia Pacific for 18%; and South America, Africa,Middle East for 8%.

The Performance Chemicals division comprises fivedifferent businesses: Coatings, Plastics, and Specialties; Automotive and OilIndustry; Detergents and Formulators; Textiles; and Leather. Each business followsits own strategy, focusing on innovative products and systems solutions forgrowing markets.

In 2006 the Performance Chemicals divisioncomplemented its portfolio with the integration of two acquired businesses: JohnsonPolymer, with its range of water-based resins, extends our resins portfolio andthe pigment business of Engelhard, known for its high value pigments, strengthensour position in the pigments market.

The division sells its products globally, with roughly90% of its products to external customers. BASF’s own regional sales networksells most of the Performance Chemicals division’s products. Distributors sell theremainder of the products, primarily to smaller customers. In the Asia Pacificregion, we are increasing our sales activities to meet the needs of growingmarkets, especially in the textile and leather industries, which are continuingto relocate their activities from Europe and North America to Asia.

The Performance Chemicals division’s principalcompetitors vary according to industry. However, BASF considers Ciba, Clariant,Shell, Sasol, Dow and Bayer to be the main competitors of the division.

**AGRICULTURALPRODUCTS & NUTRITION**

**Segment Overview**

This segment consists of the Agricultural Products andFine Chemicals divisions, which are treated as separate reportable operatingunits. The segment offers opportunities for high returns and is typically more resilientto economic cycles. Key financial information is provided in the followingtable:

**Million €**
| ** **                                                        | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
|-------------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| **Agricultural  Products**                                        |       |     |       |     |       |     |       |
| Sales to third  parties                                           |       | 3,079    |       | 3,298    |       | 3,354    |       |
| Percentage of  total BASF sales                                   |       | 6        | %          | 8        | %          | 9        | %          |
| Intersegmental  transfers                                         |       | 25       |       | 29       |       | 26       |       |
| Income from  operations                                           |       | 447      |       | 681      |       | 602      |       |
| Additions to  property, plant and equipment and intangible assets |       | 88       |       | 74       |       | 100      |       |
| **Fine  Chemicals**                                               |       |     |       |     |       |     |       |
| Sales to third  parties                                           |       | 1,855    |       | 1,732    |       | 1,793    |       |
| Percentage of  total BASF sales                                   |       | 4        | %          | 4        | %          | 5        | %          |
| Intersegmental  transfers                                         |       | 17       |       | 28       |       | 30       |       |
| Income from  operations                                           |       | (66      | )          | (58      | )          | 56       |       |
| Additions to property,  plant and equipment and intangible assets |       | 378      |       | 222      |       | 153      |       |

 

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**Agricultural Products**

**Overview**

The Agricultural Products division is a leadinginnovator and supplier of fungicides, insecticides and herbicides. Thedivision’s products are used by farmers to improve crop yields and crop qualityand by other customers for uses in non-crop areas such as in public health,structural/urban pest control, turf and ornamental plants, vegetationmanagement and forestry.

Capital expenditures in the Agricultural Productsdivision involved mainly optimization measures at several sites.

**Strategy**

The Agricultural Products division directs majorresources at meeting the needs of the high-value agricultural markets inWestern and Central Europe, North America, Brazil and Japan. The division aimsto sustain its role as a leading innovator by continuing significant researchand development activities focusing on fungicides, insecticides and selectedherbicides, where it expects further market growth and high demand forinnovations. Profitability of the Agricultural Products division is driven by:

·                  New products from its researchpipeline or from acquisitions;

·                  Alignment of resources as well asproduct and service offering to customers’ needs; and

·                  Effective management of assets andcosts.

The division is well positioned for continuedprofitable growth: We have a significant presence in core markets, a strongresearch and development pipeline, a high share of patent-protected productsand high customer satisfaction.

BASF aims to grow profitably through innovation andacquisition, especially with new fungicides and insecticides and in specificapplications such as seed treatment and plant health. Products recentlylaunched from the research pipeline include the fungicides F 500® and boscalid.

The division continues to implement cost and assetoptimization measures in mature or non-core segments. In 2006, it divestedmajor parts of its Micro Flo generic agrochemical business in the United Statesand its global terbufos insecticide business.

**Major Products**

*F 500*®* (pyraclostrobin)*

F 500® (pyraclostrobin) is a major new fungicidalactive ingredient of the strobilurin class of chemistry. It is highlyeffective, safe for crops and has a favorable toxicological andecotoxicological profile. As of the end of 2006, F 500® hadbeen approved in more than 60 countries for over 150 crops in over 100 indications.Products containing F 500® have been launched successfully in allregions.

*Boscalid*

Boscalid is one of the most recent active ingredientsfrom our research and is highly effective for controlling fungal diseases,especially in fruits and vegetables. With its broad spectrum of activity andcrop uses, boscalid is becoming the backbone of our specialty crop business,complementing our strobilurins and other molecules. Launched for the 2003 -2004 season, it received registrations in over 50 countries for more than 200crops in over 100 indications by the end of 2006.

*Fipronil*

Fipronil is an active ingredient of a new class ofinsecticide chemistry and was acquired from Bayer CropScience on March 21,2003. It plays a strategic role in BASF’s insecticides portfolio. Fipronil putsthe Agricultural Products division in a position to strongly participate inongoing and future shifts in demand towards more modern insecticides. Furthermore,it strengthens BASF’s position in other attractive market segments, such asstructural/urban pest control, turf and ornamental plants.

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*The CLEARFIELD**® Production System*

The CLEARFIELD*®* Production System combines herbicide-resistantseeds developed by using enhanced plant breeding methods with custom-designedherbicide solutions. CLEARFIELD*®* crops currently being marketed include canola,sunflower, corn, rice and wheat.

**Research and Development**

BASF’s research and development activities inAgricultural Products cover all three areas of crop protection: fungicides,insecticides and herbicides. Agrochemical research activities are directed tothe discovery of active ingredients with economic, biological and ecologicaladvantages. Development activities are primarily focused on high-value segmentsin core markets and for core active ingredients.

In 2006, research spending in the AgriculturalProducts division was approximately 11% of the division’s sales to thirdparties. 

BASF is currently working on developing seven newactive ingredients and on one new herbicidetolerance project. These inventionsare being prepared for market launch and have a peak sales potential of €800million. Seven additional crop protection active ingredients with a peak salespotential of €1 billion are currently being introduced to the market. In 2006,BASF launched the corn herbicide topramezone to the market and advanced one newfungicide from its promising discovery pipeline to its development pipeline.
| ** **                                | ** ** | **Uses**                            | ** ** | **Total Peak Sales Potential** | ** **                 |
|-------------------------------------------|------------|-------------------------------------|------------|-----------------------------------------------|----------------------------|
| **Projects  in market launch**            |       |                                |       | around €1,000 million                    |                       |
| 4 fungicides                              |       | Cereals,  Soybeans, Specialty Crops |       |                                          |                       |
| 2 herbicides                              |       | Cereals,  Corn                      |       |                                          |                       |
| 1 insecticide                             |       | Non-Crop                            |       |                                          |                       |
| **Projects  in development**              |       |                                |       |                                          |                       |
| **(launch  targeted for 2007 and later)** |       |                                |       | around €800 million                      |                       |
| 4 fungicides                              |       | Cereals,  Specialty Crops           |       |                                          |                       |
| 1 herbicide                               |       | Corn,  Non-crop                     |       |                                          |                       |
| 1 herbicide  tolerance                    |       | Soybeans                            |       |                                          |                       |
| 2 insecticides                            |       | Specialty  Crops, Non-crop          |       |                                          |                       |   |
| **Total**                                 |       |                                |       | ** **                                    | around €1,800 million |   |

 

**Markets and Distribution**

In 2006, the Agricultural Products division’s sales tothird parties were €3,079 million. Thereof, Europe accounted for 45%; NorthAmerica (NAFTA) for 29%; South America, Africa, Middle East for 17%; and Asia Pacificfor 9%.

The Agricultural Products division markets itsproducts globally, focusing on high-value markets. The following table showssales by product group:

**Million €**
| **Product Group**                        | ** ** | **2006 Sales** | ** ** |
|-----------------------------------------------|------------|---------------------|------------|
| Herbicides                                    |       | 1,215               |       |
| Fungicides                                    |       | 1,167               |       |
| Insecticides and  other agrochemical products |       | 697                 |       |
| **Agricultural Products**                     | ** ** | **3,079**           | ** ** |

 

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The Agricultural Products division directs marketingand sales efforts through multi-staged marketing channels, which includewholesalers and commercial distributors.

The global market for agricultural products isseasonal, since the main markets for these products are in the NorthernHemisphere. Sales are higher in the first and second quarters of the year, whenthe growing season in North America and Europe is underway. Sales during thesecond half of the year, driven primarily by the main growing season in SouthAmerica, are lower.

BASF considers the main competitors of theAgricultural Products division to be Bayer CropScience, Dow Chemical, DuPont,Monsanto and Syngenta.

**Governmental Regulation**

In most countries, crop protection products mustobtain governmental regulatory approval prior to marketing. The regulatoryframework for crop protection and environmental health products is directed at ensuringthe protection of the consumer, the applicator and the environment. Thestrictest standards are applied in the United States, Japan and Western Europe.

It generally takes five to seven years from thediscovery of a new active ingredient until the dossier is submitted to theappropriate regulatory agency for product approval. The standard time frame forregistration of an agricultural product is typically 30 to 36 months.

**Fine Chemicals**

**Overview**

BASF’s Fine Chemicals division develops, manufacturesand sells approximately 1,000 different products, which are sold to customersworldwide in the pharmaceutical, cosmetics and nutrition industries. In all ofthe division’s main product groups except amino acids, BASF is one of the toptwo suppliers. The recent acquisitions of the Effect Pigments and Personal CareMaterials from Engelhard Corp. in 2006 and Orgamol’s Custom Synthesis businessin 2005, the start-up of geraniol and linalool plants in the aromachemicalsbusiness as well as our own feed enzymes production, strengthened our abilityto serve our customers in strategic high value markets.

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**Strategy**

The Fine Chemicals division aims to achieve superiorgrowth and a leading position in the markets it serves by leveraging chemicalexpertise, global presence, reliability of its technical service and product quality.The Pharma Solutions and Cosmetic Solutions businesses focus on deliveringinnovative products and customized solutions to the markets they serve. Thetrend towards commoditization in the human and animal nutrition businessrequires the division to provide its customers with value-added products and reliableservice. The division expects considerable growth in its custom synthesisbusiness for the pharmaceuticals industry.

**Products**

*Vitamins*

BASF is the second largest vitamins producerworldwide, and vitamins account for approximately one-fourth of sales in theFine Chemicals division. BASF markets all of the 13 naturally occurringvitamins. In six of these vitamins BASF has a production position. The FineChemicals division sells vitamins mainly to the human and animal nutritionindustries, with a growing presence in the cosmetics industry.

*Carotenoids*

These are nature-identical products that providehealth benefits and are also used to color food. This product line includesbeta-carotene, canthaxanthine and astaxanthine. 

*Active Ingredients and AdvancedIntermediates*

The main products in this category are caffeine,pseudoephedrine, theophylline, ibuprofen, povidone iodine and isotretinoin.Beverage manufacturers account for approximately 80% of the caffeine demand, andpharmaceutical applications make up the remaining share.

*Custom Synthesis*

BASF offers a range of customized manufacturing andformulation capabilities to the worldwide pharmaceuticals industry. Theseactivities are complemented by flexible, multi-product cGMP plants, in particularat the Orgamol sites in Evionnaz, Switzerland, and in St. Vulbas, France andBASF’s chemical and biotechnological research and development skills.

*Polymers*

The Fine Chemicals division sells highly functionalpolymers for diverse uses such as binders, disintegrants, coatings andsolubilizers for the pharmaceutical industry, filtration aids for beverages, ingredientsfor hair care products such as hairsprays, styling mousses, gels and hairconditioners for the cosmetics industry.

*Amino Acids*

Amino acids, such as lysine, are feed additives thatserve as an efficient protein source for animal nutrition.

*Enzymes*

Enzymes, which are proteins that function asbiochemical catalysts, are used for animal nutrition to improve feedabsorption. BASF’s enzyme product line includes Natuphos®, Natustarch®, and Natugrain®.

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*Organic Acids*

These are used as preservatives for grains andcompound feeds and more recently as growth-enhancing agents. BASF offers a widerange of organic acid products that suppress the growth of molds and bacteria.BASF is the leading supplier of standard and tailor-made organic acids for thefeed industry in Europe and Asia.

*Cosmetics Ingredients*

These are raw materials for personal care productswith the major applications being hair, skin, sun and oral care, effectpigments and beauty care solutions. The Fine Chemicals division is the worldmarket leader in UV absorbers for cosmetic applications and offers the fullrange of UVA and UVB absorbers. 

*Aroma Chemicals*

These are raw materials for flavor and fragrancecompounds that are used in many consumer products industries such as the food,personal care and the fabrics and home care industries.

**Research and Development**

The focus of the Fine Chemicals division’s researchand development activities was changed in 2005 from process innovation toproduct innovation. The major product launches in 2006 comprise various new vitaminand carotenoid formulations; Luviset Shape, a new polymer for hair sprays;T-Lite® Max a new UV filter; and new formulation aidsfor pharma ingredients. In 2006; the Fine Chemicals division spentapproximately 4% of its sales to third parties on research activities (2005:approximately 4%).

Process improvements — mainly for biotechnologicalproduction processes — are ongoing to further improve our cost position.

**Markets and Distribution**

In 2006, the Fine Chemicals division’s sales to thirdparties were €1,855 million. Thereof, Europe accounted for 46%; North America(NAFTA) for 26%; Asia Pacific for 19%; and South America, Africa, Middle East for9%.

The main customers of the Fine Chemicals division areglobal players in the animal nutrition, human nutrition, pharmaceuticals,personal care and flavors and fragrances industries.

BASF sells the majority of its fine chemicals productsthrough its own sales force. Through its sales and marketing departments, BASFworks closely with customers to develop systems and solutions as well as newproducts.

BASF’s competitive position depends to a large extenton its ability to compete on price, product quality and customer service. BASFexpects the trend towards globalization and consolidation for both manufacturingand the consumer industries to continue. The trend toward commoditization forhuman and animal nutrition business is also continuing. Due to theunsatisfactory earnings trend, we announced a restructuring program in October2006, which includes the consolidation of these two businesses into one organizationresponsible for nutrition and the closure of our nutrition research station inOffenbach/Queich, Germany. Also affected by this restructuring program will beour Lysine production in Gunsan, Korea, as our Lysine business still suffersfrom high raw material prices and overcapacities.

BASF considers its main competitors in the animalnutrition area to be DSM, Archer Daniels Midland, Novo Nordisk, Adisseo Group,and new entrants from China. In the human nutrition area, BASF’s main competitorsare DSM of the Netherlands and several Asian companies. In pharmaceuticalactive ingredients, BASF considers Albemarle Corporation, Shasun, HubeiBiocause, International Specialty Products Colorcon, Degussa/Rhoem, DowChemical and FMC Corporation to be its main competitors, as well as a number ofother Chinese and Indian suppliers. In cosmetics and aroma chemicals, LCUnited, International Specialty Products, Millennium Specialty Chemicals,National Starch & Chemical, Givaudan, Symrise and Kuraray are BASF’s maincompetitors.

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**Governmental Regulation**

BASF’s various Fine Chemicals products are subject toregulation by government agencies throughout the world. The primary emphasis ofthese requirements is to assure the safety and effectiveness of BASF’s products.Of particular importance in the United States is the Food and DrugAdministration (FDA), which regulates many of BASF’s Fine Chemicals products.Animal health products are also regulated in the United States by the UnitedStates Department of Agriculture and the Environmental Protection Agency.

In the E. U., similar regulatory systems areestablished on the national level of different member states as well as on thepan-European government level. Positive lists and negative lists in Europeregulate the usage of various substances in order to ensure consumer safety.

**Plant biotechnology**

BASF has identified biotechnology and geneticengineering as key technologies of the 21st century. From 2006 to 2008, BASFhas earmarked €330 million for research in plant biotechnology, one of our fivegrowth clusters.

BASF Plant Science develops plants for more efficientagriculture, healthier nutrition and for use as renewable raw materials. Forexample, we have developed a potato with altered starch composition for use asa renewable raw material in the paper, textile and adhesives industry. Underthe name Amflora, this product is presently undergoing approval in Europe; weaim to begin commercial cultivation in several countries in 2007.

BASF Plant Science operates in eight locations inEurope and North America with more than 600 employees. We are continuouslystrengthening our respective activities. In June 2006, we acquired the Belgianbiotechnology CropDesign N.V. The acquisition complements BASF Plant Science’sexisting gene discovery and extends its leading position in access toagronomically important genetic traits. CropDesign has specialized in traitsthat, for example, increase yields in crops, such as corn and soybeans, or makethem more resistant to drought.

The CropDesign’s genetic traits strengthen the alreadyexisting pipeline of BASF Plant Science. One key technology of our research isthe metabolic profiling of Metanomics, our subsidiary in Berlin, Germany. AtMetanomics, scientists identify the metabolic function of plant genes, thusmaking it easier to develop plants with the desired characteristics. Ourdatabase contains over 1.5 million metabolic profiles. They represent more than35,000 genes out of model crops, field crops and other sources. The knowledgegained by BASF in this field is unparalleled and opens up significant opportunitiesfor the future. Since plant biotechnology is a corporate technology platform,expenses are reported under “other.”

**OIL& GAS**

**Segment Overview**

BASF conducts the activities of its Oil & Gassegment through Wintershall Group (“Wintershall”). Wintershall and itsaffiliated companies are active in two sectors: Oil and Natural Gas Explorationand Production and Natural Gas Distribution and Trading. Key information isprovided in the table below: 

**Million €**

** **
| ** **                                                        | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
|-------------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Sales to third  parties, net of natural gas taxes                 |       | 10,687   |       | 7,656    |       | 5,263    |       |
| Percentage of  total BASF sales                                   |       | 20       | %          | 18       | %          | 14       | %          |
| Intersegmental  transfers                                         |       | 1,062    |       | 723      |       | 546      |       |
| Sales including  intersegmental transfers                         |       | 11,749   |       | 8,379    |       | 5,809    |       |
| Royalties                                                         |       | 333      |       | 281      |       | 243      |       |
| Sales including  intersegmental transfers, less royalties         |       | 11,416   |       | 8,098    |       | 5,566    |       |
| Income from  operations(1)                                        |       | 3,250    |       | 2,410    |       | 1,643    |       |
| Additions to property,  plant and equipment and intangible assets |       | 545      |       | 624      |       | 388      |       |

 

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(1)             Incometaxes on oil production in North Africa and the Middle East that arenoncompensable with German corporate income tax in the amount of €1,282 millionin 2006 (2005: €1,072 million; 2004: €668 million) are not deducted from incomefrom operations but are reported as income taxes. Please see Note 8 to theConsolidated Financial Statements. 

**Segment Strategy**

In Europe, the segment strategy is driven by theintegration of the Exploration and Production business and the Natural GasDistribution and Trading business. Our “Gas for Europe” concept is based on theincreasing demand for natural gas imports into Western Europe. Thus, one of thekey drivers of our upstream activities is exploration for, and development andproduction of, gas in and around Europe with our midstream business bringingthe gas to market.

Wintershall focuses on building strong alliances withits business partners to develop new projects. The most prominent examplesinclude our participation with Gazprom in the Nord Stream pipeline project, thedevelopment of the Achimov formation in the Urengoy field in Western Siberia,and the development of one of the largest undeveloped Russian gas fields,Yuzhno Russkoye, in Western Siberia.

In the Oil and Natural Gas Exploration and Productionbusiness, we have increased production by 40% since 1999. This is in line withour long-term objective to increase production during the current decade by 50%.BASF’s goal is to maintain a robust ratio of proved reserves to production anda balanced portfolio of assets operated both by Wintershall and by thirdparties. To ensure the company’s ongoing competitiveness and efficiency,Wintershall focuses geographically on a selected number of core regions. Theseare Europe, North Africa, South America (Southern Cone) as well as Russia andthe Caspian Sea area.

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The Natural Gas Distribution and Trading strategy isbased on a strong infrastructure including pipeline and storage facilities thatare strategically located for gas imports to, and distribution within, Germanyas well as for transit to other European countries. Sales activities areconducted mainly via WINGAS, a joint venture between Wintershall and Gazprom,which is regionally focused on Germany, the countries bordering Germany and theUK. A key element of BASF’s asset-based growth strategy is the participation,together with Gazprom and E.ON, in the Nord Stream project, which will provideEurope with 55 billion cubic meters of Russian gas in two phases with a plannedstart up date of the first phase in 2010. Based on significant expansions ofWINGAS’s pipeline infrastructure in Germany, the planned Nord Stream pipelinewill be tied into WINGAS’s European infrastructure to transport the additionalNord Stream gas volumes to the targeted markets in Germany and Europe. Tosupport the business expansion into other European countries, we have initiatedprojects to build additional storage capacities in Jemgum, Germany, in Haidach,Austria, and in Saltfleetby, UK.

**Reserves**

The Oil & Gas segment’s most significant oilreserves are in Libya and Germany. The most significant natural gas reservesare in Argentina, Germany and the Netherlands. The Oil & Gas segment’sproved oil and gas reserves and proved developed oil and gas reserves bygeographic area were as follows:
| ** **                       | ** ** | ** **  | ** ** | ** ** | ** ** | ** **    | ** ** | ** **      | ** ** | ** **       | ** ** | ** ** | ** ** | **Rest of**     | ** ** |
|----------------------------------|------------|-------------|------------|------------|------------|---------------|------------|-----------------|------------|------------------|------------|------------|------------|----------------------|------------|
| ** **                       | ** ** | ** **  | ** ** | ** ** | ** ** | ** **    | ** ** | **The**         | ** ** | **Rest of** | ** ** | ** ** | ** ** | **World**            | ** ** |
| ** **                       | ** ** | **Germany** | ** ** | **Libya**  | ** ** | **Argentina** | ** ** | **Netherlands** | ** ** | **World**        | ** ** | **Total**  | ** ** | **(at equity)** | ** ** |
| **At December 31, 2006**         | ** ** | ** **  | ** ** | ** ** | ** ** | ** **    | ** ** | ** **      | ** ** | ** **       | ** ** | ** ** | ** ** | ** **           | ** ** |
| **Oil (millions of barrels)**    | ** ** | ** **  | ** ** | ** ** | ** ** | ** **    | ** ** | ** **      | ** ** | ** **       | ** ** | ** ** | ** ** | ** **           | ** ** |
| Proved reserves                  |       | 68          |       | 306        |       | 54            |       | 1               |       | 1                |       | 430        |       | 12                   |       |
| Proved developed  reserves       |       | 42          |       | 303        |       | 45            |       | 1               |       | 1                |       | 392        |       | 12                   |       |
|                             |       |        |       |       |       |          |       |            |       |             |       |       |       |                 |       |
| **Gas (billions of cubic feet)** | ** ** | ** **  | ** ** | ** ** | ** ** | ** **    | ** ** | ** **      | ** ** | ** **       | ** ** | ** ** | ** ** | ** **           | ** ** |
| Proved reserves                  |       | 376         |       | 232        |       | 1,408         |       | 200             |       | 14               |       | 2,230      |       | —               |       |
| Proved developed  reserves       |       | 352         |       | 232        |       | 978           |       | 196             |       | 10               |       | 1,768      |       | —               |       |
|                             |       |        |       |       |       |          |       |            |       |             |       |       |       |                 |       |
| **At December 31, 2005**         |       |        |       |       |       |          |       |            |       |             |       |       |       |                 |       |
| **Oil (millions of barrels)**    |       |        |       |       |       |          |       |            |       |             |       |       |       |                 |       |
| Proved reserves                  |       | 79          |       | 329        |       | 57            |       | 2               |       | 2                |       | 469        |       | 11                   |       |
| Proved developed  reserves       |       | 50          |       | 317        |       | 44            |       | 2               |       | 2                |       | 415        |       | 11                   |       |
|                             |       |        |       |       |       |          |       |            |       |             |       |       |       |                 |       |
| **Gas (billions of cubic feet)** |       |        |       |       |       |          |       |            |       |             |       |       |       |                 |       |
| Proved reserves                  |       | 395         |       | 217        |       | 1,462         |       | 249             |       | 24               |       | 2,347      |       | —               |       |
| Proved developed  reserves       |       | 346         |       | 209        |       | 1,000         |       | 187             |       | 21               |       | 1,763      |       | —               |       |
|                             |       |        |       |       |       |          |       |            |       |             |       |       |       |                 |       |
| **At December 31, 2004**         | ** ** | ** **  | ** ** | ** ** | ** ** | ** **    | ** ** | ** **      | ** ** | ** **       | ** ** | ** ** | ** ** | ** **           | ** ** |
| **Oil (millions of barrels)**    | ** ** | ** **  | ** ** | ** ** | ** ** | ** **    | ** ** | ** **      | ** ** | ** **       | ** ** | ** ** | ** ** | ** **           | ** ** |
| Proved reserves                  |       | 82          |       | 362        |       | 48            |       | 1               |       | 8                |       | 501        |       | 13                   |       |
| Proved developed  reserves       |       | 53          |       | 335        |       | 36            |       | 1               |       | 7                |       | 432        |       | 13                   |       |
|                             |       |        |       |       |       |          |       |            |       |             |       |       |       |                 |       |
| **Gas (billions of cubic feet)** | ** ** | ** **  | ** ** | ** ** | ** ** | ** **    | ** ** | ** **      | ** ** | ** **       | ** ** | ** ** | ** ** | ** **           | ** ** |
| Proved reserves                  |       | 439         |       | 217        |       | 1,530         |       | 265             |       | 12               |       | 2,463      |       | —               |       |
| Proved developed reserves        |       | 389         |       | 201        |       | 954           |       | 189             |       | 12               |       | 1,745      |       | —               |       |

 

At 2006 levels ofproduction, proved oil reserves would last approximately seven years, andproved gas reserves would last approximately eight years. For additionalinformation on reserves, please see “Supplementary information concerning oiland gas producing activities (unaudited)” included in Item 18.

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**Exploration and Production**

The net quantities of oil and gas produced as well asthe average sales price and production cost (lifting cost) per unit of oil andgas produced in each of the last three years were as follows:
| ** **                                                        | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
|-------------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| **Oil**                                                           |       |     |       |     |       |     |       |
| Net quantities  produced (millions of barrels)                    |       | 63       |       | 65       |       | 64       |       |
| Average sales  price less royalties (per barrel)                  |       | €   | 42.46      |     | €     | 34.36    |       | € | 22.54 |   |
| Average  production cost (lifting cost) (per barrel)              |       | €   | 3.85       |     | €     | 3.42     |       | € | 3.06 |   |
|                                                              |       |     |       |     |       |     |       |
| **Gas**                                                           |       |     |       |     |       |     |       |
| Net quantities  produced (billions of cubic feet)                 |       | 278      |       | 272      |       | 258      |       |
| Average sales  price less royalties (per thousand cubic feet)     |       | €   | 2.86       |     | €     | 2.44     |       | € | 2.26 |   |
| Average production cost  (lifting cost) (per thousand cubic feet) |       | €   | 0.57       |     | €     | 0.56     |       | € | 0.53 |   |

 

Wintershall’stotal gross and net productive wells, total gross and net developed acres andtotal gross and net undeveloped acres (both leases and concessions) as ofDecember 31, 2006, were as follows:
| ** **                                    | ** ** | ** **  | ** ** | ** ** | ** ** | ** **    | ** ** | **The**         | ** ** | **Rest of**   | ** ** | ** ** | ** ** | **Rest of World** | ** ** |
|-----------------------------------------------|------------|-------------|------------|------------|------------|---------------|------------|-----------------|------------|--------------------|------------|------------|------------|-----------------------------|------------|
| ** **                                    | ** ** | **Germany** | ** ** | **Libya**  | ** ** | **Argentina** | ** ** | **Netherlands** | ** ** | **World **(1) | ** ** | **Total**  | ** ** | **(at equity)**        | ** ** |
|                                          |       |        |       |       |       |          |       |            |       |               |       |       |       |                        |       |
| **Oil**                                       |       |        |       |       |       |          |       |            |       |               |       |       |       |                        |       |
| Total gross  productive wells                 |       | 522         |       | 72         |       | 54            |       | 9               |       | 242                |       | 899        |       | 14                          |       |
| Total net  productive wells                   |       | 245         |       | 65         |       | 17            |       | 9               |       | 12                 |       | 348        |       | 7                           |       |
|                                          |       |        |       |       |       |          |       |            |       |               |       |       |       |                        |       |
| **Gas**                                       |       |        |       |       |       |          |       |            |       |               |       |       |       |                        |       |
| Total gross  productive wells                 |       | 146         |       | —     |       | 211           |       | 132             |       | 8                  |       | 497        |       | —                      |       |
| Total net  productive wells                   |       | 56          |       | —     |       | 52            |       | 22              |       | 3                  |       | 133        |       | —                      |       |
|                                          |       |        |       |       |       |          |       |            |       |               |       |       |       |                        |       |
| **Oil and  Gas Acreages (thousand of acres)** |       |        |       |       |       |          |       |            |       |               |       |       |       |                        |       |
| Total gross  developed acres                  |       | 188.4       |       | 53.3       |       | 274.9         |       | 110.8           |       | 81.3               |       | 708.7      |       | 1.0                         |       |
| Total net  developed acres                    |       | 66.3        |       | 51.3       |       | 67.4          |       | 19.0            |       | 6.3                |       | 210.3      |       | 0.5                         |       |
| Total gross  undeveloped acres                |       | 3,588.0     |       | 984.1      |       | 8,470.0       |       | 2,687.2         |       | 27,332.6           | (2)        | 43,061.9   |       | 3,367.0                     |       |
| Total net undeveloped  acres                  |       | 1,996.9     |       | 395.7      |       | 3,731.5       |       | 680.7           |       | 21,168.3           | (2)        | 27,973.1   |       | 1,683.5                     |       |

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(1)    Consolidated activities only

(2)    Themajority relates to Mauritania

In 2006, Wintershall spent €523 million forexploration, acquisition and investment, compared with €492 million in 2005.Thereof, €221 million was spent in Europe (2005: €239 million), €138 million inNorth Africa/Middle East (2005: €89 million), €102 million in Russia/CaspianSea (2005: €70 million) and €62 million in South America (2005: €94 million). 

Either directly or through its subsidiaries,Wintershall was involved in the drilling and completion of 32 exploration andappraisal wells, which resulted in 14 successful wells. As of December 31,2006, Wintershall had begun drilling 10 additional exploratory wells.

*Europe*

In Germany, the offshore field Mittelplate, withapproximately 200 million barrels of proved initial reserves, is the country’slargest known oil reservoir. Wintershall is a 50% partner together with RWE DEAAG. On the offshore production platform, a new drilling rig with a highercapacity was installed in 2006.

In the Netherlands, the gas discovery L5-10 was takeninto production from the refurbished and modernized platform L5-C (formerK10-V). Wintershall is one of the largest gas producers in the Netherlands. InApril, our Norwegian subsidiary Wintershall Norge A.S. was established and inJuly the license 273 was awarded. During the sixth license round in Denmark weacquired three exploration blocks. Exploration will be operated by Wintershallwith a share of 35%.

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*North Africa/Middle East*

In Libya, Wintershall operates eight onshore oilfields and produces associated natural gas for local consumption. In 2006, thedevelopment of existing fields and new fields continued. During the third EPSA-IVround we acquired blocks 1 – 4 in area 201 in the Kufra basin and will be theoperator with a share of 65%. Offshore Libya, Wintershall holds a 12.5%interest in the Al Jurf oil field. As announced, Gazprom plans to take over 49%in a company holding onshore exploration and production rights in Libya.

In Mauritania, we are active in two onshore and oneoffshore exploration blocks. Offshore Qatar, the potential of an appraisalcampaign is being evaluated.

*South America/Southern Cone*

Wintershall produces substantial volumes of itsnatural gas in Argentina. Off the coast of Tierra del Fuego, the Aries gasfield began production in January 2006. Wintershall holds a share of 37.5%through its subsidiary Wintershall Energia. Furthermore, Wintershall continuedits exploration efforts with both operated and non-operated licenses.

*Russia and Caspian Sea area*

BASF has a cooperation agreement with Gazprom thatprovides a legal and commercial framework for common field developmentprojects. Wintershall and Gazprom are cooperating in the development of large gas/condensatefields in Western Siberia. In the first project, the development of the Achimovformation in a part of the Urengoy field, two of the six wells of the firstproject phase were completed successfully. Progress in construction of thesurface facilities will lead to a production start-up in mid 2007.

Wintershall plans to be a partner with 25% minus oneshare in Severneftegazprom (SNG), which is the license owner of the YuzhnoRusskoye gas field in Western Siberia. Additionally, Wintershall plans toreceive a further 10% in the company in the form of non-voting preferred sharesresulting in an economic participation of 35% minus one share. The intended participationwill significantly increase Wintershall’s natural gas reserve base.

In the Volga region, the joint venture companyWolgodeminoil, with its partners Wintershall and Lukoil, continued oil explorationand production activities.

Offshore Turkmenistan, the first exploration well wasplugged and abandoned.

***Risks andopportunities***

In general, oil and gas exploration and productionactivities require high levels of investment and entail special economic risksand opportunities. These activities tend to be highly regulated and companies engagingin these activities generally may face intervention by governments in matterssuch as: 

·                  The award of exploration andproduction licenses,

·                  The imposition of specific drillingand other work-related obligations,

·                  Environmental protection measures,

·                  Control over the development andabandonment of fields and installations,

·                  Restrictions on production and

·                  Imposition of special tax regimes onhydrocarbon production.

Crude oil prices are subject to international supplyand demand and other factors that are beyond an oil company’s control. Suchfactors can also affect the price of natural gas sold under long-termcontracts, because in Germany and in many other countries, natural gas pricingis typically tied to prices of refined products pursuant to a specified timelag. Crude oil prices are generally set in U.S. dollars, while costs may beincurred in a variety of currencies. Fluctuations in exchange rates cantherefore give rise to foreign exchange exposures.

As with most international oil and gas companies,substantial portions of the oil and gas reserves of Wintershall are located incountries which can be considered politically and economically less stable thanthe OECD countries.  To date, politicalrisks have not significantly affected the Oil & Gas segment or had a materialadverse effect on BASF’s financial condition or results of operations.

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Wherever possible, Wintershall arranges capitalinvestment guarantees by the German government to protect its investments. Germangovernment guarantees currently cover a total investment volume by Wintershallof approximately €719 million, including inventory of raw materials andsupplies.

General uncertainties are inherent in estimatingquantities of proved reserves and in projecting future rates of production andtiming of development expenditures. The accuracy of any reserve estimate is a functionof the quality of available data, reservoir engineering and geologicalinterpretation and judgment. Results of drilling, testing and production afterthe date of the estimate may require substantial upward or downward revisions.In addition, changes in oil and natural gas prices could have an effect on the economicallyrecoverable reserves. Accordingly, reserve estimates could be materiallydifferent from the quantities of oil and natural gas that are ultimatelyrecovered. To reduce uncertainties, Wintershall has used for some years independent,internationally recognized reserve auditors to perform reserves audits of itsmajor oil and gas fields.

**Natural Gas Distribution and Trading**

BASF conducts its natural gas distribution and tradingactivities in two joint ventures with Gazprom export, a subsidiary of Gazprom.

·                  WINGAS, in which Wintershallcurrently has a 65% share and

·                  WIEH, in which Wintershall has a 50%share, although profit distributions are differentiated according to customersand sales countries.

In 2007, Gazprom plans to increase its share in WINGASfrom 35 to 50% minus one share (see also Item 4. Information on the Company — Historyand Development of the Company).

WINGAS owns and operates a large pipeline system inGermany that is more than 2,000 kilometers in length and is currently the thirdlargest German natural gas transmission and distribution company. The companyalso owns and operates the largest underground natural gas storage site inWestern Europe with a working gas capacity of 157 billion cubic feet.

Capital expenditures of WINGAS and its subsidiaries in2006 totaled €134 million. The main projects were the extension of pipelinesand the construction of compressor stations to increase the capacities of STEGALand WEDAL as well as the ongoing development of the gas storage facility inHaidach, Austria. 

In 2006, the name of the North European Gas PipelineCompany (NEGP) was changed to Nord Stream AG. Nord Stream is a pipeline thatwill run from Vyborg in Russia through the Baltic Sea to Greifswald in Germanywhere it will be connected with the pipeline systems of WINGAS and E.ONRuhrgas. Gazprom will participate with 51% and BASF and E.ON AG with 24.5%each. A potential participation of the Dutch company, Gasunie, would reduce ourshare to 20%.

Procurement of Russian gas is supplemented bypurchases of West European gas. In 2006, WINGAS entered into severalprocurement contracts with a range of West European suppliers to diversify its procurementportfolio. Moreover, WINGAS used procurement opportunities at West Europeantrading hubs, such as the National Balancing Point (NBP) in Great Britain andZeebrugge in Belgium.

WIEH exclusively acts as a trading company, purchasingRussian natural gas and marketing it to WINGAS and VNG-Verbundnetz Gas AG, atransmission and distribution company in Eastern Germany in which Wintershallhas a 15.8% share. WIEH also markets Russian natural gas in central Europethrough its wholly owned Swiss subsidiary WIEE.

Due to new European and German legislation, the WINGASgas transmission division was transferred into an independently operatingwholly owned company on January 1, 2006.

The sales volume of WINGAS, WIEH and WIEE totaled 1,198billion cubic feet compared with 1,127 billion cubic feet the year before.BASF’s consolidated sales volume in 2006 was 847 billion cubic feet, representinga 6% increase over the previous year’s sales volume of 797 billion cubic feet. WINGAS’sbiggest customer is BASF’s own Verbund site in Ludwigshafen. In 2006, BASFpurchased approximately 114 billion cubic feet for its Ludwigshafen site andother sites in Germany and Belgium. Approximately 37 billion cubic feet weresold to other BASF companies in Germany and Great Britain, and 11 billion cubicfeet were sold to WIEH.

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**ENVIRONMENTALMATTERS**

BASF is subject to extensive, evolving andincreasingly stringent international and local environmental laws andregulations concerning: the production, distribution, handling and storage ofour products; the disposal of materials; the practices and proceduresapplicable to construction and operation of sites; the exploration andproduction of oil and gas; and the maintenance of safe conditions in theworkplace.

Although BASF believes that its production sites andoperations currently fully comply with all applicable laws and regulations,these laws and regulations have required, and in the future could require, BASFto take action to remediate the effects on the environment of the priordisposal or release of chemicals, petroleum substances or waste. Such laws andregulations have applied, and in the future could apply, to various sites,including BASF’s chemical plants, oil fields, waste disposal sites, chemicalwarehouses and natural gas storage sites. In addition, such laws andregulations have required, and in the future could require, BASF to installadditional controls for certain emission sources, undertake changes in itsoperations in future years and remediate soil or groundwater contamination atcurrent and/or former sites and facilities.

BASF’s operating costs for environmental protectiontotaled €657 million in 2006. These costs are recurring or one-time costsassociated with sites or measures that are incurred in the avoidance, reductionor elimination of deleterious effects on the environment. They include thecosts of disposal sites, such as wastewater treatment plants and residueincinerators. They also comprise different levies such as effluent levies andwater levies, costs for disposal services by third parties, monitoring,analyses and surveillance carried out by mobile and stationary units as well asresearch and development costs for reducing the incidence of residues. BASFspent approximately €116 million in 2006 on capital expenditures for pollution controldevices and equipment.

BASF also incurs costs to remediate the impact of thepast disposal as well as the release of chemicals or petroleum substances orwaste, both at its own sites and at third-party sites to which BASF sent waste fordisposal. Worldwide, BASF had established provisions of €271 million for cleanupcosts at such sites as of December 31, 2006, and €253 million as of December31, 2005. 

In the United States, liability for remediation ofcontamination is imposed generally pursuant to the federal ComprehensiveEnvironmental Response Compensation and Liability Act (Superfund) and analogousstate laws. Although such U.S. laws generally allow the recovery of the totalcost of cleanup from any single responsible party, cleanup costs typically areshared among several responsible parties at third-party sites where multipleparties sent waste to the site for disposal, and sometimes at owned or operatedsites where a predecessor or other third-party disposed of waste on-site. BASFhas been notified that it may be a potentially responsible party at such sites.The proceedings related to these sites are in various stages. The cleanup processhas not been completed at most sites. The number, potential liability andfinancial viability of other parties are typically not fully resolved, and thestatus of the insurance coverage for most of these proceedings is uncertain.Consequently, BASF cannot accurately determine the ultimate liability for investigationor cleanup costs at these sites. As events progress at each site for which BASFhas been named a potentially responsible party or is otherwise involved inremediation of contamination, BASF accrues, as appropriate, a liability forsite cleanup.

For information on provisions for environmentalprotection and remediation costs, see Note 21 to the Consolidated FinancialStatements included in Item 18.

BASF also establishes provisions for currently knownpotential soil contamination at BASF sites that are still in operation. Ingeneral, investigations into potential contamination and subsequent cleanupsare only required when a site is closed and the existing production facilitiesdismantled. Taking into account BASF’s experience to date regardingenvironmental matters and currently known facts, BASF believes that capitalexpenditures and remedial actions necessary to comply with existing laws andconditions governing environmental protection, exceeding the existingprovisions, will not have a material effect on BASF’s consolidated financialcondition or results of operations.

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In connection with the onshore and offshore oil andgas activities conducted by BASF’s subsidiary, Wintershall, BASF is subject toan increasing number of international and national laws, regulations and directivesgoverning the protection of the environment.

Wintershall performs environmental impact studieswhere new oil and gas activities are planned and complies with all applicableenvironmental regulations during and after onshore and offshore exploration andproduction. It is impossible to accurately predict the effect of futuredevelopments in such laws and regulations on Wintershall’s future earnings andoperations. BASF can make no assurance that Wintershall will not incur materialcosts and liabilities relating to environmental matters.

In recent years, the operations of all chemicalcompanies have become subject to increasingly stringent legislation andregulations related to occupational safety and health, product registration andenvironmental protection. Such legislation and regulations are complex andconstantly changing and there can be no assurance that future changes in lawsor regulations would not require BASF to install additional controls forcertain of its emission sources, to undertake changes in its manufacturingprocesses or to investigate possible soil or groundwater contamination andremediate proven contamination at sites where such cleanup is not currentlyrequired.

The European Union has passed new legislation onchemicals (REACH) to govern the registration, evaluation and authorization ofchemicals. The new legislation will come into force in the relevant E.U. memberstates on June 1, 2007. We have been actively involved in numerous E.U.projects to support the efficient and economically practicable implementationof REACH and are now making detailed preparations for its introduction. Weexpect implementation to be associated with expenses of approximately €50million per year in the period up to 2018.

Within the framework of E.U. emissions trading, theBASF Group was allocated allowances (EUA) for approximately 7 million metrictons of carbon dioxide (CO2) per year for the affected plants at our Europeansites for 2006. For the second trading period (2008 to 2012), a number ofchemical plants will also be included in the Europe-wide trading system.

**SUPPLIESAND RAW MATERIALS**

**Raw materials procurement**

The major raw materials that feed BASF’s Verbundproduction sites are hydrocarbon-based raw materials such as naphtha and LPG(liquefied petroleum gas). These are feedstocks for the steam crackers that areoperated in Ludwigshafen, Germany; Antwerp, Belgium; Port Arthur, Texas, UnitedStates and Nanjing, China. BASF monitors the market for naphtha and hedges itsexposure by using swaps and options. Other important hydrocarbon-based rawmaterials are natural gas, benzene and propylene. For its German operations,BASF primarily sources its natural gas from Russia by means of long-termnatural gas supply contracts. In the United States, BASF secures its naturalgas requirements based on shorter-term supply contracts related to nationalsources with various suppliers. Other important raw materials for BASF includecyclohexane, ammonia, titanium dioxide and methanol.

BASF applies e-commerce as a tool to continuouslyimprove the efficiency of its procurement processes. This has a positive impacton process times and process quality. BASF uses the electronic marketplace cc-hubwoo,in which we own a stake, for procuring technical goods and services. BASF hasintegrated the marketplace Elemica in the purchasing processes for rawmaterials. Elemica is used as trading platform for chemical products by morethan 230 customers and suppliers.

BASF has a policy of maintaining, when possible,multiple sources of supply for its raw materials. BASF has not experienced anyongoing major difficulty in obtaining sufficient supplies of raw materials inrecent years and believes it will generally be able to obtain them atcompetitive market prices in the future. However, BASF cannot guarantee thatunforeseen developments will not adversely affect its ability to obtainsufficient, competitively priced raw materials in the future.

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**ORGANIZATIONALSTRUCTURE**

BASF Aktiengesellschaft is the ultimate parent companyof the BASF Group. The Group operates in five business segments that encompassBASF’s 14 operating divisions. The business segments are reportable segmentsexcept for the business segment Agricultural Products & Nutrition, which istreated as two reportable units, disclosing separately the AgriculturalProducts and Fine Chemicals divisions.

Business operations are run by 68 regional and globalbusiness units, organized along business or product lines. As profit centers,they are responsible for all business operations – from production to marketingand sales, with processes oriented to their customers.

In addition to its operating divisions and businessunits, BASF has three corporate divisions that support the Board of ExecutiveDirectors in directing the company’s activities, and 11 competence centers thatoversee strategic activities and set global standards. The corporate divisionsare Legal, Taxes & Insurance; Strategic Planning & Controlling; andFinance. The competence centers are Polymer Research; Chemicals Research &Engineering; Specialty Chemicals Research; Human Resources; Environment, Safety& Energy; Global Procurement and Logistics; Information Services; CorporateEngineering; Occupational Medicine & Health Protection; Science Relations& Innovation Management and BASF Plant Science.

The following table sets forth significantsubsidiaries owned, directly or indirectly, by BASF Aktiengesellschaft:
| **Name of Company**                               | ** ** | **Percentage owned (%)** | ** ** |
|-------------------------------------------------------------|------------|------------------------------------|------------|
| BASF Coatings AG, Münster, Germany                     |       | 100                                |       |
| BASF Schwarzheide GmbH, Schwarzheide, Germany               |       | 100                                |       |
| Elastogran GmbH,  Lemförde, Germany                    |       | 100                                |       |
| Wintershall  Holding AG, Kassel, Germany                    |       | 100                                |       |
| BASF Antwerpen N.V., Antwerp, Belgium                       |       | 100                                |       |
| BASF Española  S.L.,Tarragona, Spain                   |       | 100                                |       |
| BASF Catalysts  LLC., Iselin, New Jersey, United States     |       | 100                                |       |
| BASF  Corporation, Florham Park, New Jersey, United States  |       | 100                                |       |
| BASF S.A., São  Paulo,Brazil                           |       | 100                                |       |
| BASF Company  Ltd., Seoul, South Korea                      |       | 100                                |       |
| WINGAS GmbH, Kassel,  Germany                               |       | 65                                 |       |
| BASF Petronas Chemicals  Sdn. Bhd., Petaling Jaya, Malaysia |       | 60                                 |       |

 

**DESCRIPTIONOF PROPERTY**

BASF owns and operates numerous production and manufacturingsites throughout the world. The principal offices of BASF Aktiengesellschaftare located in Ludwigshafen, Germany. In addition, BASF operates regionalheadquarters, sales offices, distribution centers and research and developmentfacilities worldwide. We believe that our production sites are well alignedwith both our present capacity requirements, and our future growth strategy. Weare constantly evaluating the location, efficiency and capacity of our plants,and taking action where appropriate.

At the heart of BASF’s integration strategy are itsVerbund production sites, which produce a wide range of products. These canvary significantly in quantity produced and sales price. The following is a descriptionof our operational Verbund sites and production capacities of certainsignificant products. Capacities are listed in metric tons per year unlessotherwise noted.

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| Segment                         | ** ** | **Product**                                      | ** ** | **Production Sites** | ** ** |
|---------------------------------|------------|--------------------------------------------------|------------|---------------------------|------------|
| ** **                      | ** ** | ** **                                       | ** ** | ** **                | ** ** | ** ** | ** ** | ** ** | ** ** | **Kuantan,** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                      | ** ** | ** **                                       | ** ** | ** **                | ** ** | ** ** | ** ** | **Geismar,** | ** ** | **Malaysia,** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                      | ** ** | ** **                                       | ** ** | **Ludwigs-**              | ** ** | ** ** | ** ** | **Louisiana** | ** ** | **and** | ** ** | ** ** | ** ** | **Total World** | ** ** | ** ** | ** ** |
| ** **                      | ** ** | ** **                                       | ** ** | **hafen,**                | ** ** | **Antwerp,** | ** ** | **and Free-** | ** ** | **Nanjing,** | ** ** | **Other** | ** ** | **Capacity /** | ** ** | ** ** | ** ** |
| ** **                      | ** ** | ** **                                       | ** ** | **Germany**               | ** ** | **Belgium** | ** ** | **port, Texas** | ** ** | **China** | ** ** | **Sites** | ** ** | **Notes** | ** ** | ** ** | ** ** |
| **Acreage / number of plants:** | ** ** | **1,760 / 250**                                  | ** ** | **1,470 / 54**            | ** ** | **2,800 / 32** | ** ** | **370 / 22** | ** ** | ** ** | ** ** | ** ** |   |   |   |
| **Chemicals**                   |       | Ammonia                                          |       | x                         |       | x |   |   |   |   |   |   |   | 1,525,000 |   |   |   |
|                                 |       | Chlorine                                         |       | x                         |       |   |   |   |   |   |   |   |   | 360,000 |   |   |   |
|                            |       | Formaldehyde  condensation products              |       | x                         |       |   |   |   |   |   |   |   |   | 750,000 |   |   |   |
|                                 |       | Ethylene                                         |       | x                         |       | x |   | x |   | x |   | x |   | 2,955,000 |   | (1)(10) |   |
|                            |       | Propylene                                        |       | x                         |       | x |   |   |   | x |   | x |   | 2,280,000 |   | (1)(4)(10) |   |
|                                 |       | Benzene                                          |       | x                         |       | x |   |   |   | x |   | x |   | 790,000 |   | (1)(10) |   |
|                            |       | Butadiene                                        |       | x                         |       |   |   |   |   |   |   | x |   | 515,000 |   | (2) |   |
|                                 |       | Oxo  C4 alcohols  (calculated as  butyraldehyde) |       | x                         |       |   |   | x |   | x |   | x |   | 1,360,000 |   | (3)(10) |   |
|                            |       | Plasticizers                                     |       | x                         |       |   |   |   |   | x |   | x |   | 395,000 |   | (3) |   |
|                                 |       | Ethylene  oxide                                  |       | x                         |       | x |   | x |   | x |   |   |   | 1,175,000 |   | (10) |   |
|                            |       | Ethanolamines  and erivatives                    |       | x                         |       | x |   |   |   |   |   |   |   | 270,000 |   |   |   |
|                                 |       | Alkylamines                                      |       | x                         |       | x |   |   |   | x |   | x |   | 221,000 |   | (10) |   |
|                            |       | 1,4-Butanediol                                   |       | x                         |       |   |   | x |   | x |   | x |   | 505,000 |   | (5)(3) |   |
|                                 |       | Polytetrahydrofuran                              |       | x                         |       |   |   | x |   |   |   | x |   | 185,000 |   |   |   |
|                            |       | 1,6-Hexanediol                                   |       | x                         |       |   |   | x |   |   |   |   |   | 42,000 |   |   |   |
|                                 |       | Neopentylglycol                                  |       | x                         |       |   |   | x |   |   |   | x |   | 145,000 |   | (6) |   |
|                            |       | Formic  and propionic  acid                      |       | x                         |       |   |   |   |   | x |   |   |   | 230,000  110,000 |   | (10) |   |
|                                 |       | Phosgene  derivatives                            |       | x                         |       |   |   |   |   |   |   | x |   | 60,000 |   |   |   |
| **Plastics**                    |       | Styrene  and  styrene- based polymers            |       | x                         |       | x |   |   |   |   |   | x |   | 5,789,100 |   | (7) |   |
|                                 |       | Polyamide                                        |       | x                         |       | x |   | x |   |   |   | x |   | 670,000 |   |   |   |
|                            |       | Polyamide  precursors                            |       | x                         |       | x |   | x |   |   |   | x |   | 1,290,000 |   |   |   |
|                                 |       | Isocyanates                                      |       |                      |       | x |   | x |   |   |   | x |   | 1,100,000 |   |   |   |
|                            |       | Polyols                                          |       |                      |       | x |   | x |   |   |   | x |   | 650,000 |   |   |   |
| **Plastics/  Chemicals**        |       | Propylene  oxide                                 |       |                      |       |   |   |   |   |   |   |   |   | 625,000 |   | (8)(9) |   |
| **Performance Products**        |       | Organic  pigments                                |       | x                         |       |   |   |   |   |   |   | x |   | 21,000 |   |   |   |
|                                 |       | HDI                                              |       |                      |       |   |   |   |   |   |   | x |   | 10,000 |   |   |   |
|                            |       | Polyisobutene                                    |       | x                         |       | x |   |   |   |   |   |   |   | 100,000 |   |   |   |
|                                 |       | Nonionic  surfactants                            |       | x                         |       | x |   | x |   |   |   | x |   | 420,000 |   |   |   |
|                            |       | MethanesulfonicAcid                              |       |                      |       |   |   |   |   |   |   | x |   | 10,000 |   |   |   |
|                                 |       | Solventborne  coatings                           |       |                      |       |   |   |   |   |   |   | x |   | 400,000 |   |   |   |
|                            |       | Waterborne  coatings/                            |       |                      |       |   |   |   |   |   |   |   |   | 45,000/ |   |   |   |
|                            |       | Decorative  paints                               |       |                      |       |   |   |   |   |   |   | x |   | 320,000 |   |   |   |
|                                 |       | Acrylic  monomers                                |       | x                         |       | x |   | x |   | x |   | x |   | 950,000 |   | (3)(10) |   |
|                            |       | Superabsorbents                                  |       | x                         |       | x |   |   |   |   |   | x |   | 315,000 |   |   |   |
|                                 |            |                                                  |            |                           |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

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| (1)    | Includes the total  production capacity conducted through a joint venture between BASF (60%) and  Total Petrochemicals USA, Inc. (40%), of: Ethylene 935,000 metric tons;  Propylene 830,000 metric tons; Benzene 110,000 metric tons (including  operation of metathesis) in Port Arthur, Texas, United States.                                                                                                                                           |
|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (2)    | Includes the  total production capacity conducted through a joint venture between Shell  Chemical Company (60%), BASF (24%) and Total Petrochemicals USA, Inc. (16%)  of: Butadiene 410,000 metric tons in Port Arthur, Texas, United States.                                                                                                                                                                                                              |
| (3)    | Includes the  total production capacity conducted through a joint venture between BASF  (60%) and PETRONAS (40%) of: Oxo C4 alcohols 250,000 metric tons; Phthalic  anhydride 40,000 metric tons; Plasticizers 100,000 metric tons; 1,4-Butanediol  resp. equivalents 100,000 metric tons; Acrylic monomers 160,000 metric tons  in Kuantan, Malaysia.                                                                                                     |
| (4)    | Includes the  total production capacity conducted through a joint venture between BASF  (51%) and Sonatrach (49%) of: Propylene 350,000 metric tons in Tarragona,  Spain.                                                                                                                                                                                                                                                                                  |
| (5)    | Includes 25,000  metric tons through BASF Idemitsu Co. Ltd. — a joint venture in Japan between  BASF (67%) and Idemitsu Kosan Co. Ltd. (33%) in Chiba, Japan (capacity  reflects total joint venture capacity).                                                                                                                                                                                                                                       |
| (6)    | Includes 25,000  metric tons per year through BASF JCIC Neopentylglycol Co. Ltd. – a joint  venture in China between BASF (60%) and Jilin Chemical Industrial Co. Ltd.  (40%) in Jilin, China (capacity reflects total joint venture capacity).                                                                                                                                                                                                       |
| (7)    | Capacity  reflects total joint venture capacities. These include:                                                                                                                                                                                                                                                                                                                                                                                          |
|   | ·  550,000  metric tons of styrene monomer through a 50 – 50 joint venture with Shell  Nederland Chemie B.V. in Moerdijk, the Netherlands;                                                                                                                                                                                                                                                                                                  |
|   | ·  550,000  metric tons of styrene monomer through a 50 – 50 joint venture with Shell  Eastern Petroleum Pte. Ltd in Singapore;                                                                                                                                                                                                                                                                                                             |
|   | ·  372,000  metric tons of styrene and styrene-based polymers through a joint venture  between BASF (60%) and  Yangzi  Petrochemical Corporation (40%) in Nanjing, China; and                                                                                                                                                                                                                                                               |
|   | ·  165,000  metric tons of expandable polystyrene through a 50 – 50 joint venture with  Alfa Group in Altamira, Mexico.                                                                                                                                                                                                                                                                                                                     |
| (8)    | Of which 500,000  are only for polyurethane application.                                                                                                                                                                                                                                                                                                                                                                                                   |
| (9)    | Partially  conducted through a 50 – 50 joint venture with Shell Nederland Chemie B.V. in  Moerdijk, Netherlands, and through a 50 –50 joint venture with Shell Eastern  Petroleum Pte. Ltd. in Singapore (capacity reflects total joint venture  capacity).                                                                                                                                                                                      |
| (10)   | Includes the  total production capacity conducted through a joint venture between BASF  (50%) and Sinopec (50%), of: Ethylene 600,000 metric tons, Propylene 300,000  metric tons, Benzene 130,000 metric tons, Ethylene oxide 250,000 metric tons,  Ethylene glycol 300,000 metric tons, Alkyl amines 36,000 metric tons, Formic  acid 50,000 metric tons, Propionic acid 30,000 metric tons and Acrylic  monomers 160,000 metric tons in Nanjing, China. |

 

See “Item 4. Information on the Company—EnvironmentalMatters” for information on environmental issues related to BASF’s properties.Additional information regarding BASF’s property, plant and equipment iscontained in Note 12 to the Consolidated Financial Statements included in Item18.

For information on BASF’s oil and natural gasexploration and production activities, see “Item 4. Information on the Company—Oil& Gas” and “Supplementary information concerning oil and gas producingactivities (unaudited)” in Item 18.

**Item4A.**                     Unresolved Staff Comments

Not applicable.

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Item 5.    Operating and Financial Review and Prospects

**BASIS OF PRESENTATION**

**Overview**

The Consolidated FinancialStatements of BASF included in Item 18 of this report have been prepared basedon BASF’s accounting principles in accordance with International FinancialReporting Standards (IFRS). All of the binding IFRS as well as thepronouncements of the International Financial Reporting InterpretationsCommittee (IFRIC) were applied.

IFRS which had not beenendorsed by the European Union by the balance sheet date had no effect on BASF’sConsolidated Financial Statements.

There are certain differencesrelating to accounting principles that are required under U.S. GAAP but are notallowed under IFRS. The effects of BASF’s reconciliation of the differencesbetween IFRS and U.S. GAAP for the years 2006, 2005 and 2004 are described inNote 31 to the Consolidated Financial Statements included in Item 18.

In 2005, BASF implementedSection 404 of the Sarbanes-Oxley Act, and the internal control process forfinancial reporting was uniformly documented in a new, separate IT system. Oursystem complies with the requirements of the COSO Report and the Public CompanyAccounting Oversight Board (PCAOB) (See also Item 15 “Controls and Procedures”).

In accordance with IFRS 1 –First-time adoption of International Financial Reporting Standards theretrospective application of standards concerning the derecognition offinancial assets and financial liabilities, hedge accounting and estimates isprohibited.

Furthermore IFRS 1 permitselective exceptions from full retrospective application of IFRS accountingpolicies. BASF used the exception concerning employee benefits, cumulativetranslation differences and business combinations.

*Employeebenefits*

Cumulative actuarial gainsand losses resulting from the measurement of defined benefit plans at the dateof transition are recognized directly in equity. BASF decided to use the optionof IAS 19.93A-D; actuarial gains and losses following the conversion to IFRSare directly offset against retained earnings.

*Cumulativetranslation adjustments*

Cumulative adjustments fromthe translation of financial statements prepared in a currency other than thepresentation currency are deemed to be zero at the date of transition by anoffset against retained earnings as of January 1, 2004. The cumulativetranslation adjustments following the conversion to IFRS are recognized inother comprehensive income as a separate component of stockholders’ equity.

*BusinessCombinations*

BASF used the exception notto apply IFRS 3. On the basis of IFRS, Business Combinations prior to the dateof transition have not been restated.

**Outlook for2007**

For 2007, we expect continuedrobust growth, with real economic growth of the global economy of 3.2%. This ispredicated on stable geopolitical conditions and sound economic policies.

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We have based our businessplanning on the following assumptions:

·      Oilprices at approximately $55/barrel on average in 2007 with a downward trend inthe following years

·      Anaverage euro/dollar exchange rate of $1.30 per euro

·      Moderatelyhigher interest rates in the course of 2007, primarily in Europe.

In the following descriptionsof results of operations in the segments, we make forecasts for sales andearnings in 2007. These forecasts are based on the assumptions of the abovedescribed scenario.

**CriticalAccounting Policies**

Critical accounting policiesare those that are most important to the presentation of the company’sfinancial condition and results of operations. These policies requiremanagement’s difficult, subjective and complex judgment in the preparation ofthe financial statements and accompanying notes. Management makes estimates andassumptions about the effect of matters that are inherently uncertain, relatingto the reporting of assets, liabilities, revenues, expenses and the disclosureof contingent assets and liabilities. The company’s most critical accountingpolicies are discussed below.

*Pensionprovisions and similar obligations*

Obligations arising fromcompany pension plans are based on actuarial computations made by external actuariesaccording to the projected unit credit method. Accordingly, assumptions must bemade with regard to discount factors, salary and pension trends and, in thecase of externally financed obligations, to the growth and return on the fundassets used to finance future obligations.

These assumptions areredefined as of each balance sheet date, taking into account the currentcircumstances. Discount factors are based on returns for securities or bondswith high credit ratings. The expected return on fund assets is based onlong-term developments as observed in the capital markets as well as therespective portfolio structures. If the actual developments deviate from theassumptions made, the resulting actuarial profits or losses are offset againstequity.

See Note 20 to theConsolidated Financial Statements included in Item 18 for further details withregard to the change in pension obligations and financing status.

*Provisionsfor litigation and claims*

The evaluation of risksassociated with claims for damages and litigation and the determination of theamounts of related provisions are subject to considerable judgment.

It is not possible toestimate the full consequences of litigation. Corresponding provisions areestablished to the extent that they are considered probable and the amount canbe reasonably estimated.

The level of provisions alsoconsiders the outcomes of similar cases and legal opinions, taking into accountthe current circumstances. The actual outcome of legal proceedings may differconsiderably from these estimates. See also Note 24 to the ConsolidatedFinancial Statements included in Item 18 for further information with regard tolitigation and claims.

*Deferredtaxes on loss carryforwards*

Tax loss carryforwards areprimarily related to restructuring measures at subsidiaries in the NorthAmerican (NAFTA) region. In countries in the NAFTA region, these carryforwardsmay be set against future taxable income for up to 20 years.

The realization of deferredtax assets on these carryforwards is dependent upon the economic development ofour subsidiaries in the NAFTA region. An evaluation is affected by difficultiesin predicting long-term economic developments. Significant valuationadjustments were not made to deferred tax assets on tax loss carryforwards in2006 in view of the long carryforward period and the good economic developmentin the NAFTA region.

See also Note 8 to theConsolidated Financial Statements included in Item 18 for further information ondeferred taxes.

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*Taxprovisions*

The use of estimates isimportant in determining provisions for potential losses that may arise from taxaudits and litigation. We estimate and provide for potential losses that mayarise from litigation and regulatory proceedings and tax audits to the extentthat such losses are probable and can be estimated, in accordance with SFAS No.5, “Accounting for Contingencies.” Significant judgment is required in makingthese estimates, and our final liabilities may ultimately be materiallydifferent. Significant judgment is required in determining our annual tax rateand in evaluating our tax positions. We establish reserves when, despite our beliefthat our tax return positions are fully supportable, we believe that certainpositions are subject to challenge and that we may not succeed. We adjust thesereserves, as well as the related interest, in light of changing facts andcircumstances, such as the progress of a tax audit.

*Goodwill*

Goodwill is no longer to beamortized. Instead, goodwill is written off only if the carrying value of thecash-generating unit to which goodwill has been allocated is impaired. Acash-generating unit has to be reviewed at least once a year for impairment. Animpairment exists if the book value of the cash-generating unit exceeds therecoverable amount, generally determined based upon the discounted value ofexpected future cash flows. An impairment loss will be allocated to reduce thecarrying amount of goodwill first, before any other assets of the cashgenerating unit will be impaired.

A significant portion ofgoodwill is associated with the acquisition of both Engelhard Corp. and theconstruction chemicals business of Degussa AG in 2006 and the crop protectionbusiness of American Home Products Corporation in 2000. The value of thisgoodwill is not impaired given the present and future profitability of thebusiness.

Write-offs due to impairmentwere not necessary in 2006.

*Provisionsfor environmental protection measures and site remediation*

The company recordsliabilities for environmental issues in the accounting period in which itsresponsibility is established and the cost can be reasonably estimated.Provisions are discounted if the effect of discounting is material. Accordingly,assumptions must be made with regard to discount factors.

At environmental sites inwhich more than one potentially responsible party has been identified, thecompany records a liability for its allocable share of costs related to itsinvolvement with the site, as well as an allocable share of costs related toinsolvent parties or unidentified shares. At environmental sites in which thecompany is the only potentially responsible party, a liability is recorded forthe total estimated costs of remediation before consideration of recovery frominsurers or other third parties. The process of estimating environmentalliabilities is complex and dependent on physical and scientific data at thesite, uncertainties as to remedies and technologies to be used and the outcomeof discussions with regulatory agencies.

See also Note 21 to theConsolidated Financial Statements included in Item 18 for further explanationswith regard to the accrual of provisions for environmental protection measuresand site remediation.

*Impairmentof long-lived assets*

Impairment tests oflong-lived assets are made when conditions indicate a possible loss. Impairmenttests are based on a comparison of the carrying amount of the asset and itsrecoverable amount. The asset is written down to the recoverable amount if therecoverable amount is less than the carrying amount. The recoverable amount isthe higher value of the fair value less cost to sale and the discounted valueof future cash flows. The impairment is reversed if the basis for itsrecognition subsides.

The estimation of the cashflows is based on information available at that time, including factors such asexpected sales, customer trends, operating efficiency, material, energy prices,etc. The assumptions used in the cash flow projections reflect the marketconditions at the time an impairment becomes known. Assumptions are also madewith regard to the discount factors.

56

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**IFRSaccounting standards not yet adopted**

Theeffects of IFRSs and IFRICs not applied or not yet endorsed by the EuropeanUnion in the reporting year 2006 were reviewed:

IFRS7 “Financial Instruments: Disclosures” requires more extensive disclosureregarding financial instruments. The disclosure requirements in IAS 32 wereincorporated into IFRS 7 and extended. In addition to the existing disclosurerequirements regarding the approach, presentation and measurement of financialinstruments, additional information is required regarding the type and extentof risks stemming from financial instruments. As BASF already publishesextensive information in its notes to the financial statements regarding risk,it is not expected that this will have any material effect on the ConsolidatedFinancial Statements of the BASF Group. IFRS 7 is to be applied for reportingyears beginning on or after January 1, 2007.

IFRS8 “Operating Segments” replaces IAS 14 and adopts the ‘management approach’ toreporting on the financial performance of its operating segments of thecorresponding U.S. GAAP standard. This leads to segmentation based on theinternal reporting structure and associated with this the disclosure ofmanagement information used for evaluating segment performance and deciding howto allocate resources to operating segments. Vertically integrated segments shouldbe considered as operating segments if they are managed as such. IFRS 8 shallbe applied for reporting years for the periods beginning on or after January 1,2009. Earlier application is permitted. As BASF uses the same performanceindicators for external reporting as for internal management reporting, it is expectedthat IFRS 8 will not have any effect on the Consolidated Financial Statementsof the BASF Group.

IFRIC9 “Reassessment of Embedded Derivatives” clarifies the accounting for embeddedderivatives according to IAS 39. The interpretation concludes that an entity,when it first becomes a party to a contract, must assess whether any embeddedderivatives contained in the contract are required to be separated from thehost contract and accounted for as if they were stand-alone derivatives.Subsequent reassessment is prohibited unless there is a change in the terms ofthe contract that significantly modifies the cash flows that otherwise would berequired under the contract, in which case reassessment is required. IFRIC 9 isto be applied to reporting years for the periods beginning on or after June 1,2006. Earlier application is permitted. IFRIC 9 will have no material effect onthe Consolidated Financial Statements of the BASF Group.

IFRIC10 “Interim Financial Reporting” addresses the interaction between therequirements of IAS 34 “Interim Financial Reporting” and IAS 36 “Impairment ofAssets” and IAS 39 “Financial Instruments: Recognition and Measurement.” Theinterpretation concludes that where an entity has recognized an impairment lossin an interim period according to IAS 36 or IAS 39, that impairment should notbe reversed in subsequent interim financial statements or in annual financialstatements. IFRIC 10 shall be applied for reporting years for the periodsbeginning on or after November 1, 2006. Earlier application is permitted. IFRIC10 will have no effect on the Consolidated Financial Statements of the BASFGroup.

IFRIC11 “Group and Treasury Share Transactions” regulates how to apply IFRS 2 “Groupand Treasury Share Transactions” to share-based payment arrangements involvingan entity’s own equity instruments or equity instruments of another entity inthe same group. The interpretation requires a share-based payment arrangementin which an entity receives goods or services as consideration for its ownequity instruments to be accounted for as an equity-settled share-based paymenttransaction. The interpretation also provides guidance on whether share-basedpayment arrangements, in which suppliers of goods or services of an entity areprovided with equity instruments of the entity’s parent, should be accountedfor as cash-settled or equity-settled in the entity’s financial statements.IFRIC 11 shall be applied for reporting years for the periods beginning on orafter March 1, 2007. Earlier application is permitted. IFRIC 11 will have noeffect on the Consolidated Financial Statements of the BASF Group.

IFRIC12 “Service Concession Arrangements” regulates the accounting for serviceconcessions arrangements between private sector companies and government orother public sector entities to provide public services. IFRIC 12 will have noeffect on the Consolidated Financial Statements of the BASF Group.

57

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**New U.S.GAAP accounting standards not yet adopted**

SFAS 157 “Fair ValueMeasurements” provides further guidance for measuring fair value and expandsdisclosures about fair value measurements. The Statement applies to allaccounting pronouncements that require or permit fair value measurements, butdoes not enlarge its scope. Fair value is defined as the price in an orderlytransaction between market participants that would be received to sell theasset or paid to transfer the liability. SFAS 157 establishes a three-step fairvalue hierarchy. Highest priority is given to quoted prices in an activemarket. Observable data for identical assets or liabilities is preferred toprices that relate only to similar assets and liabilities. The lowest priorityis given to unobservable data e.g. data that reflects the company’s ownassumptions. The fair value hierarchy in SFAS 157 shows that fair value ismarket related and is not an entity specific value. The statement has to beapplied to reporting periods beginning after November 15, 2007. BASF iscurrently determining the effect on the Group’s financial statements. Nomaterial effect is expected.

Interpretation FIN 48 “Accountingfor Uncertainty in Income Taxes” provides specific guidance on howuncertainties in income tax positions and the resulting potential tax benefitsshould be recognized, measured, presented and disclosed in an enterprise’sfinancial statements. FIN 48 defines a “more-likely-than-not” threshold thatmust be met before a tax benefit can be recognized. If this condition isfulfilled for an uncertain tax position, the tax benefit is measured as thelargest amount that is greater than 50 percent likely of being realized uponultimate settlement with a taxing authority having full knowledge of allrelevant information.  Any previouslyrecognized tax benefit has to be derecognized in its entirety, if the thresholdis no longer met.  FIN 48 requiresqualitative and quantitative disclosures about potential tax benefits that havebeen recognized for tax purposes, but not recognized in the financialstatements. FIN 48 is effective for annual financial statements coveringperiods beginning after December 15, 2006. The interpretation will have nomaterial effects on the Consolidated Financial Statements of BASF Group.

**RESULTS OF OPERATIONS**

**BASF Group**

This Management’s Discussionand Analysis of Financial Condition and Results of Operations are based on IFRSand should be read in conjunction with the Consolidated Financial Statementsand the Notes to the Consolidated Financial Statements included in Item 18 ofthis Annual Report.

2006 was a record year forthe BASF Group. Both sales and income from operations increased compared withthe previous year. This can be attributed not only to acquisitions but also tothe organic growth of the existing businesses.

The following table setsforth sales and income for BASF.

**Million €, except per share data or certain otherdata**
| ** **                                           | ** ** | ** ** | ** ** | **% Change from** | ** ** | ** ** | ** ** | **% Change from** | ** ** | ** ** | ** ** |
|------------------------------------------------------|------------|------------|------------|-----------------------------|------------|------------|------------|-----------------------------|------------|------------|------------|
| **Sales and Earnings**                     | ** ** | **2006**   | ** ** | **Previous Year**      | ** ** | **2005**   | ** ** | **Previous Year**      | ** ** | **2004**   | ** ** |
| Sales                                                |       | 52,610     |       | 23.1                        |       | 42,745     |       | 13.9                        |       | 37,537     |       |
| Income from  operations                              |       | 6,750      |       | 15.8                        |       | 5,830      |       | 12.3                        |       | 5,193      |       |
| Income from  operations as a percentage of sales (%) |       | 12.8       |       | —                      |       | 13.6       |       | —                      |       | 13.8       |       |
| Financial Result                                     |       | (223       | )          | .                           |       | 96         |       | .                           |       | (846       | )          |
| Income before  taxes                                 |       | 6,527      |       | 10.1                        |       | 5,926      |       | 36.3                        |       | 4,347      |       |
| Net income after  minority interests                 |       | 3,215      |       | 6.9                         |       | 3,007      |       | 50.0                        |       | 2,004      |       |
| Net income as a  percentage of sales (%)             |       | 6.1        |       | —                      |       | 7.0        |       | —                      |       | 5.3        |       |
| Basic earnings per  share                            |       | 6.37       |       | 11.2                        |       | 5.73       |       | 57.0                        |       | 3.65       |       |

 

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***2006 compared with 2005***

*Sales*

Sales in 2006 rose by 23.1%compared with the previous year to €52,610 million. The sales growth was due tothe following factors:
| ** **                                                | ** ** | **2006**           | ** ** |
|-----------------------------------------------------------|------------|--------------------|------------|
| ** **                                                | ** ** | **Million €** | ** ** | **As % of sales** | ** ** |
| Volumes                                                   |       | 2,358              |       | 5.5 |   |
| Prices                                                    |       | 3,530              |       | 8.3 |   |
| Currencies                                                |       | (96                | )          | (0.2 | ) |
| Acquisitions and  additions to the scope of consolidation |       | 4,240              |       | 9.9 |   |
| Divestitures                                              |       | (167               | )          | (0.4 | ) |
| **Total**                                                 | ** ** | **9,865**          | ** ** | **23.1** | ** ** |

 

Higher sales volumes wereachieved in almost all areas of our portfolio, in many businesses this wasconnected with increases in sales prices due to higher raw material costs. Inthe Oil & Gas segment sales increased due to higher crude oil and naturalgas prices.

At €4,230 million,acquisitions significantly contributed to the increase in sales. Importantacquisitions were:

·      EngelhardCorp., acquired on June 6, 2006

·      Theconstruction chemicals business of Degussa AG, acquired on July 1, 2006

·      JohnsonPolymer, which was also acquired on July 1, 2006

Additions to the scope ofconsolidation contributed €10 million to the increase in sales. Divestituresreduced sales by €167 million, particularly as the result of the sale of partsof our businesses with generic crop protection products in North America(NAFTA) in 2006 and the divestiture of the polystyrene business in the UnitedStates and Canada in 2005.

*Income fromOperations*

Compared with the previousyear, we increased income from operations by €920 million to €6,750 million.Income from operations as a percentage of sales was 12.8% compared with 13.6%in the previous year. At €2,126 million, we again earned a high premium on ourcost of capital (2005: €2,354 million).

We largely offsetpersistently high raw material prices by increasing our sales prices. Inparticular, higher prices in the oil and gas business as well as increases involumes and prices in the Plastics segment contributed to this improvement inearnings. Earnings in the Agricultural Products division were significantlylower than in 2005. This was a result of lower volumes and margins in Braziland lower volumes for fungicides in Europe due to unfavorable weatherconditions.

*Incomebefore taxes*

Compared with the previousyear, income before taxes increased by €601 million to €6,527 million.

The financial resultdecreased by €319 million to €(223) million. Interest charges increased due toacquisition financing. The financial result of the previous year contained atax-free special gain from the sale of our 50% stake in Basell N.V.

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*Netincome/earnings per share*

In 2006, we achieved a netincome after minority interests of €3,215 million. This is an increase of €208million, or 6.9%, compared with the previous year.

Minority interests in theamount of €251 million belonged primarily, as in the previous year, to ourpartners in natural gas trading companies and in the steam cracker in PortArthur, Texas.

At 46.9%, the tax rateremained approximately at the same level as in 2005. The noncompensable foreignincome taxes on oil production increased from €1,072 million to €1,282 million.The capitalization of the remaining corporate income tax credit in Germanylowered income taxes. In 2005, the tax-free earnings from the sale of our stakein Basell N.V. contributed to the reduced tax rate.

Earnings per share in 2006 increasedto €6.37, compared with €5.73 in 2005.

***2005 compared with 2004***

*Sales*

Sales in 2005 rose 13.9%compared with the previous year to €42,745 million. The change in sales was dueto the following factors:
| ** **                                                | ** ** | **2005**                | ** ** |
|-----------------------------------------------------------|------------|-------------------------|------------|
| ** **                                                | ** ** | **Million €** | ** ** | **As % of sales** | ** ** |
| Volumes                                                   |       | 932                     |       | 2.5 |   |
| Prices                                                    |       | 4,144                   |       | 11.0 |   |
| Currencies                                                |       | 362                     |       | 1.0 |   |
| Acquisitions and  additions to the scope of consolidation |       | 406                     |       | 1.1 |   |
| Divestitures                                              |       | (636                    | )          | (1.7 | ) |
| **Total**                                                 | ** ** | **5,208**               | ** ** | **13.9** | ** ** |

 

Higher sales volumes wereachieved mainly in the Chemicals and Oil & Gas segments. We were also ableto implement price increases in almost all areas of our portfolio. Theappreciation of the U.S. dollar, especially in the second half of the year, hadonly a minor overall impact on sales. Companies in the Asia Pacific regiongenerated significantly higher sales, one reason being the startup of theplants at our new Verbund site in Nanjing, China.

Our acquisitions contributed€325 million to the increase in sales. This was primarily due to theacquisition of the electronic chemicals business of Merck KGaA, Darmstadt,Germany, in April 2005. The acquisition of the Swiss fine chemicals companyOrgamol and other smaller firms in the Plastics segment took place in thefourth quarter, so there was no substantial effect on sales. Additions to thescope of consolidation contributed €81 million to sales.

Divestitures reduced sales by€636 million, particularly as a result of the sale of our printing systemsbusiness in the fourth quarter of 2004. In addition, the Agricultural Productsdivision continued with its portfolio optimization measures. We also sold ourpolystyrene business in the United States and Canada to INEOS on April 25,2005.

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*Income fromoperations*

Compared with 2004, weincreased income from operations by €637 million to €5,830 million. Income fromoperations as a percentage of sales was 13.6% compared with 13.8% in 2004. Theincrease in earnings was primarily due to higher prices for our products inalmost all segments. The Plastics segment especially increased its earnings substantiallydespite the high volatility of raw material prices. Higher oil prices also ledto significantly higher earnings in our Oil & Gas segment.

In addition, restructuringmeasures introduced in previous years paid off: Earnings were boosted by theLudwigshafen Site Project, which was completed this year. We also reduced costsin North America (NAFTA) earlier than expected.

*Incomebefore taxes*

Compared with the previousyear, income before taxes and minority interests rose by €1,579 million to€5,926 million in 2005.

In 2005, return on assets,calculated as income before taxes plus interest expenses as a percentage ofaverage total assets, increased to 17.7%, compared with 13.2% in the previousyear.

*Netincome/Earnings per share*

Net income after minority interestwas €3,007 million in 2005. This represents an increase of €1,003 million, or50%, compared with 2004.

Minority interests containedprofits of €161 million payable to shareholders of consolidated companies. In2005, these were primarily our partner companies in natural gas trading and thesteam cracker in Port Arthur, Texas.

The tax rate declined by 4percentage points, mostly as a result of tax-free earnings from the sale of ourstake in Basell N.V. The previous year contained non-tax-deductible write-downson participating interests.

Noncompensable foreign incometaxes on oil production rose by €404 million to €1,072 million as a result ofhigher oil prices.

Earnings per share in 2005were €5.73 compared with €3.65 in the previous year.

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**Chemicals**

**SegmentData**

**Million €**
| ** **                                                        | ** ** | ** ** | ** ** | **% Change from** | ** ** | ** ** | ** ** | **% Change from** | ** ** | ** ** | ** ** |
|-------------------------------------------------------------------|------------|------------|------------|-----------------------------|------------|------------|------------|-----------------------------|------------|------------|------------|
| ** **                                                        | ** ** | **2006**   | ** ** | **Previous Year**      | ** ** | **2005**   | ** ** | **Previous Year**      | ** ** | **2004**   | ** ** |
| Sales to third  parties                                           |       | 11,572     |       | 42.8                        |       | 8,103      |       | 15.4                        |       | 7,020      |       |
| *Thereof Inorganics*                                              | * *   | *1,134*    | * *   | *20.0*                      | * *   | *945*      | * *   | *20.4*                      | * *   | *785*      | * *   |
| * Catalysts*                                                 | * *   | *2,411*    | * *   | .                           | * *   | *72*       | * *   | *22.0*                      | * *   | *59*       | * *   |
| * Petrochemicals*                                            | * *   | *5,754*    | * *   | *13.2*                      | * *   | *5,084*    | * *   | *21.4*                      | * *   | *4,189*    | * *   |
| * Intermediates*                                             | * *   | *2,273*    | * *   | *13.5*                      | * *   | *2,002*    | * *   | *0.8*                       | * *   | *1,987*    | * *   |
| Intersegmental  transfers                                         |       | 4,483      |       | 17.2                        |       | 3,826      |       | 12.7                        |       | 3,395      |       |
| Sales including  intersegmental transfers                         |       | 16,055     |       | 34.6                        |       | 11,929     |       | 14.5                        |       | 10,415     |       |
| Income from  operations                                           |       | 1,380      |       | 4.1                         |       | 1,326      |       | 3.3                         |       | 1,284      |       |
| Assets                                                            |       | 10,473     |       | 70.4                        |       | 6,146      |       | 17.8                        |       | 5,219      |       |
| Research and  development expenses                                |       | 178        |       | 56.1                        |       | 114        |       | 16.3                        |       | 98         |       |
| Additions to property,  plant and equipment and intangible assets |       | 3,539      |       | 453.8                       |       | 639        |       | 6.3                         |       | 601        |       |

 

The Chemicals segmentcomprises the Inorganics, Catalysts, Petrochemicals and Intermediatesdivisions.

***2006 compared with 2005***

*SegmentOverview*

In 2006, we increased salesto third parties by €3,469 million compared with the previous year, to a totalof €11,572 million (volumes 9%, prices 6%, portfolio 29%, currencies –1%).

The new Catalysts division,formed after the acquisition of Engelhard Corp. on June 6, significantlycontributed to the positive sales development of the segment. Engelhard’semission-control and process catalysts business, Materials Services business aswell as BASF’s existing catalysts business form the new division.

Sales in the other threedivisions grew because of higher sales volumes and sales prices. All regionscontributed to this growth. In Asia, we increased sales mainly due to thebusiness at our Verbund production site in Nanjing, China, which, in 2005, wasnot yet in operation for the full year. Income from operations increased by 4%compared with the previous year to €1,380 million, despite significantacquisition-related charges related to the costs of the integration of Engelhardand the use of step-up on inventories. The mothballing of the THF plant inCaojing, China, was another special charge affecting earnings adversely.

Assets increased by €4,327million compared with 2005 to €10,473 million. This was mainly due to the acquisitionof Engelhard.

We expect a further increasein sales for 2007, with a significant contribution from the Catalysts division,and stable business in all other divisions. Earnings will be adversely impactedby the integration costs of Engelhard, scheduled plant turnarounds and theexpansion of the steam cracker in Antwerp, Belgium in the second half of theyear. We are nevertheless confident of exceeding the previous year’s strongearnings in 2007.

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*Inorganics*

We increased sales to thirdparties by €189 million in 2006 to €1,134 million (volumes 11%, prices 4%,portfolio 6%, currencies –1%). High demand in all business units of thedivision contributed to this increase. Moreover, the growth in sales resultedfrom the acquisition of the electronic chemicals business of Merck KGaA in Darmstadt,Germany. This business, which was acquired in April 2005, contributed for thefirst time a full-year’s sales and earnings in 2006.

Income from operations in2006 was below the previous year’s results, as significantly higher natural gasprices reduced margins, particularly for methane-based products like ammoniaand methanol. The significant decline could not be offset by the earnings frominorganic specialties and basic chemicals, which improved thanks to strong demand.

The catalysts business, whichwas previously grouped under Inorganics, was assigned to the new Catalystsdivision retroactive to January 1, 2006. The previous year’s figures have beenadjusted accordingly.

We expect sales to growslightly in 2007. In particular, our businesses with inorganic specialties andelectronic chemicals will contribute to this growth. Despite higher researchexpenses and the costs for starting up our new Electronic Materials CenterEurope, we intend to achieve the earnings of the previous year.

*Catalysts*

The new Catalysts divisionconsists of the catalysts and Materials Services business of Engelhard Corp.,acquired in June 2006, and BASF’s existing catalysts business. We develop andproduce emission-control and process catalysts, and market them worldwide. TheMaterials Services unit supplies precious metals and renders services to ourcatalysts business and to customers of BASF. We are expanding our leading rolein catalyst technology through continuous process and product innovation, and alsoby exploiting our growth potential, primarily in Asia.

In 2006, we achieved sales of€2,411 million. The strong demand for catalysts in the emerging marketsprimarily contributed to this positive business trend. In addition, the globalbusiness for diesel catalysts for use in heavy-duty vehicles also developedwell. New government directives on emissions have also supported our business.

Sales of emission-controlcatalysts for gasoline engines in North America (NAFTA) declined due to lowerproduction of SUV’s and small trucks. The global demand for chemical catalystsand catalysts for oil refining developed well. In the Materials Servicesbusiness, sales increased due to larger trade volumes and higher precious metalprices. Earnings exceeded the expectations we had before the acquisition ofEngelhard. The integration is proceeding according to plan and the synergiesare higher than we had expected before the acquisition.

BASF expects to achieveannual synergies of $200 million from the acquisition of Engelhard Corp., whichwe intend to reach by the year 2010. These effects arise primarily from thereduction of overlapping functions and processes, for instance, inadministration, sales and logistics. The integration means a reduction of about800 jobs worldwide, primarily in the United States. The integration costs,excluding the use of step-up on inventories, are expected to amount toapproximately $120 million.

In 2007, we expectsignificantly higher sales and earnings thanks to the full-year contribution ofthe acquired businesses. In addition, there will be persistent growth in theareas of environmental technologies for vehicles as well as catalysts for thechemical industry and oil refining.

*Petrochemicals*

We significantly improved salesto third parties by €670 million in 2006 to €5,754 million (volumes 7%, prices7%, currencies –1%). All product lines contributed to this increase. The firstthree quarters were characterized by persistently high crude oil and naphthacosts compared with the previous year. High volume demand for our crackerproducts as well as alkylene oxides/glycols, plasticizers and solvents enabledus to increase our sales prices in almost all product lines.

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Income from operationsexceeded the previous year’s very strong level. In addition to scheduled plantturnarounds, we also had unplanned shutdowns in Antwerp, Belgium; Port Arthur,Texas; and Tarragona, Spain, caused by power outages and flooding. Overall, ourproduction facilities continued to operate at high capacity utilization rates.This contributed to the strong earnings.

In 2006, we largely completedthe restructuring of our plasticizers production in the United States. InPasadena, Texas, we converted the production of chemical intermediates used inthe production of plasticizers from 2-ethylhexanol to 2-propylheptanol. At thebeginning of 2007, new production for plasticizers will be started up there. InEurope, we are expanding the production capacity of the innovative plasticizerHexamoll® DINCH. We have started to prepare the steamcracker expansion in Antwerp, Belgium in 2006; it will be completed in thesecond half of 2007.

In 2007, we expect ourbusiness to continue to develop positively. Because of the expected lower crudeoil prices, the sales trend will be weaker than in 2006. Maintenance shutdownsof the crackers in Port Arthur, Texas, and Antwerp, Belgium, are planned forthe second half of 2007. Assuming a continuation of the strong global economyand continued high demand, we expect earnings to match the high level of 2006.

*Intermediates*

In 2006, we increased salesto third parties by €271 million to €2,273 million (volumes 12%, prices 2%).Business was characterized by high demand in all product lines and regions.

We were largely able to offsetsignificantly increased prices of important raw materials by raising our salesprices; we improved margins for some products.

The restructuring measures of2005 led to lower fixed costs and higher capacity utilization in 2006. Incomefrom operations was negatively impacted by special charges, especially due tothe mothballing of the THF plant in Caojing, China. As a result, income fromoperations did not reach the level of the previous year. The mothballing ofthis plant is a significant measure in our worldwide restructuring of thebutanediol value-adding chain, which is part of our program to increaseefficiency. The plants for THF and PolyTHF® inYokkaichi, Japan were closed.

In 2007, we expect a furtherincrease in sales in all regions with continued strong growth in demand.Beginning in the second half of the year, we expect pressure on our margins,particularly for butanediol and its derivatives, because a number ofcompetitors will start up new production plants, primarily in Asia.Nevertheless, in 2007 we want to improve our earnings through our measures toenhance efficiency and further increase capacity utilization rates.

***2005 compared with 2004***

*SegmentOverview*

Compared with the previousyear, we increased sales to third parties by €1,083 million to €8,103 millionin 2005 due to higher prices and volumes (volumes 5%, prices 8%, portfolio 2%).This was primarily due to the plants at our Verbund site in Nanjing, China, aswell as the acquisition of the electronic chemicals business of Merck KGaA, Darmstadt,Germany.

We increased income fromoperations again by 3.3% compared with the exceedingly strong level in 2004.Earnings grew despite the hurricanes in the United States and additional costsfor the startup of our plants in Nanjing and Caojing, China. It was mostlypossible to pass on higher raw material prices to customers due to continuingstrong demand in many product lines.

At €6,146 million, assetswere €927 million higher than in 2004 due to the following measures in our keyregions:

In Europe, we successfullystarted up new plants. At the Ludwigshafen site, for example, we commencedproduction of the petrochemical cyclohexane. We also started production oftriethylenediamine, an important basic product in the manufacture ofpolyurethanes, in Antwerp, Belgium.

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In North America (NAFTA), weare aligning production of plasticizers with our customers’ needs. At our sitein Pasadena, Texas, we are converting the 2-ethylhexanol plant to produce2-propylheptanol. At the same site, a new plant is also being built to producethe plasticizer Palatinol® DPHPfrom 2-propylheptanol. The production capacity of the 2-ethylhexanol plant is alsobeing increased at the site in Freeport, Texas. We aim to start up the new andexpanded plants in mid-2006.

In Asia, we reached severalmilestones in the expansion of our chemicals business. The purchase of theelectronic chemicals business from Merck KGaA, Darmstadt, Germany, complementsour portfolio and strengthens our position in this growth industry in Asia. Thecreation of a new, global business unit headquartered in Hong Kong is alsocontributing to this success. In Nanjing, China, we started operations at aVerbund site in this important market together with Sinopec, our Chinesepartner. Since then, both the steam cracker and the downstream plants have beenoperating reliably. This site is a key factor in supplying our Chinesecustomers with important petrochemical raw materials. We started production ofTHF and PolyTHF® at the world-scale plant at our site inCaojing, China. Among other things, PolyTHF® isused to make spandex fibers.

*Inorganics*

In 2005, we increased salesto third parties by €160 million to €945 million (volumes 1%, prices 1%,portfolio 18%). The sales growth was mainly due to the purchase of theelectronic chemicals business in April 2005.

Income from operations in2005 was slightly higher than the previous year’s already high level. Highernatural gas prices, particularly in the second half of 2005, resulted in aslightly lower contribution to earnings from methane-based products. However,this was offset by continued improvement in earnings from basic inorganicchemicals.

The acquisition of Merck KGaA’sactivities serves to develop BASF’s electronic chemicals business. Itconsiderably strengthens BASF’s market position in Europe and Asia, making BASFthe leading provider of electronic chemicals in the growth areas ofsemiconductors and flat screens.

*Petrochemicals*

In 2005, we significantlyincreased sales to third parties by €895 million to €5,084 million (volumes12%, prices 9%). All product lines contributed to this increase. Sales growthfor cracker products, in particular, was higher than average in view ofincreased prices for crude oil and naphtha. Sales of alkylene oxides andglycols as well as plasticizers and solvents also increased thanks to strongdemand.

With business remainingstrong, income from operations exceeded the very high level recorded in 2004.Raw material prices were considerably higher and very volatile, with recordhighs for crude oil and naphtha. We were largely able to pass on theseincreases to our customers in the form of higher prices. Capacity utilizationrates at our plants were again very high. As a result, our margins were high,especially in the first half of the year. In the fall of 2005, hurricanesforced us to shut down our plants in the Gulf of Mexico for several weeks.

*Intermediates*

Sales to third partiesamounted to €2,002 million (volumes –9%, prices 9%, currencies 1%). In linewith our “value before volume” strategy, we offset lower sales volumes comparedwith 2004 thanks to price increases in all regions and nearly all strategic businessunits.

Global demand in strategicbusiness units the amines, carboxylic acids and specialty intermediates wasstrong in 2005. From the second quarter onward, the butanediol and derivativesbusiness was affected by a decline in demand for PolyTHF®, in particular in Asia. This was due to a textile trading disputelasting several months between China and the United States as well as betweenChina and the EU. In the second half of 2005, the strategic business unitpolyalcohols and specialties recovered following initially weak demand in itsmost important application, coatings.

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Income from operations waslower than in 2004 due to provisions for restructuring and plant closures.  In the first half of 2005, raw material costsremained overall constant, and price increases led to significantly improvedmargins. After the hurricanes in the Gulf of Mexico in the third quarter of2005, however, the prices of almost all important raw materials rosedramatically worldwide. Costs for the startup of six new plants in Caojing andNanjing, China, also negatively impacted earnings in the second half of theyear.

Earnings in 2005 were alsoimpaired mainly by provisions established for the restructuring and partialclosure of the site in Feluy, Belgium, and the closure of plants for THF andPolyTHF® in Yokkaichi, Japan.

**Plastics**

**SegmentData****Million€**
| ** **                                                        | ** ** | ** ** | ** ** | **% Change from** | ** ** | ** ** | ** ** | **% Change from** | ** ** | ** ** | ** ** |
|-------------------------------------------------------------------|------------|------------|------------|-----------------------------|------------|------------|------------|-----------------------------|------------|------------|------------|
| ** **                                                        | ** ** | **2006**   | ** ** | **Previous Year**      | ** ** | **2005**   | ** ** | **Previous Year**      | ** ** | **2004**   | ** ** |
| Sales to third  parties                                           |       | 12,775     |       | 9.0                         |       | 11,718     |       | 11.3                        |       | 10,532     |       |
| *Thereof Styrenics*                                               | * *   | *4,994*    | * *   | *10.5*                      | * *   | *4,518*    | * *   | *1.5*                       | * *   | *4,450*    | * *   |
| * Performance  Polymers*                                     | * *   | *2,932*    | * *   | *0.8*                       | * *   | *2,909*    | * *   | *12.4*                      | * *   | *2,587*    | * *   |
| * Polyurethane*                                              | * *   | *4,849*    | * *   | *13.0*                      | * *   | *4,291*    | * *   | *22.8*                      | * *   | *3,495*    | * *   |
| Intersegmental  transfers                                         |       | 526        |       | 11.7                        |       | 471        |       | (30.4                       | )          | 677        |       |
| Sales including  intersegmental transfers                         |       | 13,301     |       | 9.1                         |       | 12,189     |       | 8.7                         |       | 11,209     |       |
| Income from  operations                                           |       | 1,192      |       | 17.4                        |       | 1,015      |       | 46.3                        |       | 694        |       |
| Assets                                                            |       | 6,911      |       | 4.1                         |       | 6,639      |       | 7.3                         |       | 6,187      |       |
| Research and  development expenses                                |       | 145        |       | 7.4                         |       | 135        |       | (0.7                        | )          | 136        |       |
| Additions to property,  plant and equipment and intangible assets |       | 631        |       | 28.8                        |       | 490        |       | 3.6                         |       | 473        |       |

 

The Plastics segmentcompromises the Styrenics, Performance Polymers and Polyurethanes division.

***2006 compared with 2005***

*SegmentOverview*

Sales to third partiesincreased in 2006 by €1,057 million over the previous year to a total of€12,775 million (volumes 5%, prices 4%).

Overall, we increased bothsales volumes and sales prices. Despite further increases in raw materialcosts, all three divisions increased earnings. Compared with the previous year’sstrong earnings, we increased income from operations for the segment by €177million to €1,192 million. However, pressure on our sales prices increasedtowards the end of the year.

Despite higher volumes andimproved prices, the earnings situation for styrenics continues to beunsatisfactory. We have therefore strengthened our measures to improve earningsin this division. For Performance Polymers, 2006 was characterized by thecontinued expansion of our business in engineering plastics. We integratedLeuna Miramid GmbH and LATI USA, Inc., which we had acquired in 2005. In thePolyurethanes division, we started up the isocyanate production complex, whichwas built together with partners in Caojing, China. In order to continue toparticipate profitably in the growing global polyurethane market, we expandedour global network of system houses.

In 2007, we aim to at leastmatch the high level of earnings of 2006. We want to further improve earningsin the Styrenics division, successfully bring to market increased productionvolumes for polyurethanes and expand the position of engineering plastics inthe Performance Polymers division.

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*Styrenics*

In the Styrenics division, weachieved sales to third parties of €4,994 million in 2006. Sales were thereforesignificantly higher than in 2005 (volumes 7%, prices 5%, portfolio –1%). Thelargest increases were reported in Europe, where a strong upswing in theconstruction sector supported sales and made price increases possible. Businessalso grew in Asia. In North America (NAFTA), increased imports from Asia led topersistent price pressure. Earnings were significantly higher than the weak earningsin 2005 due to higher prices and volumes and reduced costs.

The 70,000 metric tonpolystyrene plant in Tarragona, Spain, was closed at the end of the year. Thisstep was necessary due to falling demand for polystyrene over the past threeyears and the resulting excess capacity in Western Europe.

Mid-year, we started aproject designed to achieve a sustainable increase in the division’sprofitability. In this project, global management teams are analyzingstrategies and processes, optimizing costs and implementing innovationprojects.

We aim to achieve animprovement in earnings for 2007. Our business in Europe as well as our globalspecialties business will primarily contribute to this improvement.

*PerformancePolymers*

At €2,932 million, sales tothird parties in 2006 were slightly higher than in the previous year (volumes –4%,prices 4%, portfolio 2%, currencies –1%). We increased sales prices andsuccessfully integrated Leuna Miramid GmbH and the engineering plasticsbusiness from LATI USA, Inc. in North America (NAFTA), both of which wereacquired in 2005. This represents a further strengthening of our position inengineering plastics.

We succeeded in increasingearnings despite a further rise in raw material prices. Sales price increasesin all product lines, as well as worldwide growth in the sales volumes ofengineering plastics, contributed significantly to this result.

We have expanded ourengineering plastics business worldwide. In Kuantan, Malaysia, we startedoperations at a PBT plant together with our partner, Toray Industries Inc.,Japan, thereby further aligning our product portfolio towards higher-valueengineering plastics.

A compounding plant tosupport our engineering plastics business in North America (NAFTA) startedoperations in Altamira, Mexico. In 2007, we will start operations of acompounding plant, as well as a Technical Center for engineering plastics, inShanghai, China. We are also increasing our capacities for our engineeringplastic Ultrason® in Ludwigshafen, Germany. Our U.S. polyamide-6production will be optimized in 2007 with the startup of a new world-scaleplant in Freeport, Texas.

In the polyamides andintermediates business, we have further developed our globally managedcommodity business model to capitalize on region- and segment-specific marketadvantages. We will expand our cooperation with our customers in the areas ofdevelopment and innovation.

In 2007, we aim to match thestrong level of earnings of 2006 for Performance Polymers.

*Polyurethanes*

Due to strong demand, weincreased sales to third parties by €558 million in 2006 to €4,849 million(volumes 10%, prices 2%, portfolio 1%). All of the regions contributed to thisgrowth. In particular, we are taking advantage of the strong market growth inAsia, and in 2006, we started operations of world-scale plants for MDI and TDIin Caojing, China, together with our partners.

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We again increased incomefrom operations, although prices for raw materials and energy were extraordinarilyhigh in 2006 and to some extent have increased further.

BASF and Dow Chemical havelaid the foundation stone at the BASF Verbund site in Antwerp, Belgium, for aproduction facility to manufacture propylene oxide (PO) using hydrogen peroxide(HP), using the new HPPO process. This innovative technology will ensure a costefficient supply of propylene oxide in the future. It is the first plant of itskind in the world. BASF and Dow jointly developed the HPPO technology, and theBelgian-based Solvay Group participates in the production of the raw materialhydrogen peroxide. The plant should be commissioned in early 2008 and will havean annual capacity of 300,000 metric tons. In Asia Pacific, we are expandingour business through the construction of a production site for polyurethanespecialties in Shanghai, China, which is scheduled to start up in 2007. We areworking with Dow to study the economic feasibility of a new world-scale TDIplant in Europe. With a capacity of 300,000 metric tons, it would be thelargest plant of its kind in the world. Our MDI plant in Antwerp, Belgium, willbe expanded to become the largest in the world; in the second quarter of 2007,we will increase annual capacity from 450,000 metric tons to 560,000 metrictons.

We expect continued positivegrowth of our customers’ industries in 2007, particularly in dynamic marketssuch as China. We do not expect any noticeable relief in raw materials costs.Nevertheless, we aim to achieve earnings in 2007 equal to the level of 2006.

***2005 compared with 2004***

*SegmentOverview*

Sales to third parties roseby €1,186 million to €11,718 million in 2005 (volumes 1%, prices 9%, currencies1%).

Income from operations roseby €321 million to €1,015 million compared with last year’s strong level.  In the Performance Polymers and Polyurethanesdivisions, sales and earnings continued to improve as a result of higher pricesdespite high and volatile raw material costs. Only the Styrenics division fellshort of the previous year’s high earnings, even though sales remained stable.This was due to both the high volatility of benzene and styrenics prices aswell as a decline in market demand.

Price increases werenecessary to pass on higher raw material costs. As a result, demand in the secondhalf of 2005 was lower than originally forecast. Our margins therefore cameunder pressure and softened slightly.

We further strengthened thepolyurethanes and performance polymers businesses through acquisitions. Alldivisions continued to optimize their business models. Here, we focused onworking closer with customers to implement their ideas for new products andapplications. Specialties in the Styrenics division were combined in a singleglobal business unit.

In 2005, we investedprimarily in the further expansion of our business in the Performance Polymers andPolyurethanes divisions. Inventories and especially receivables rose comparedwith the previous year as a result of significantly higher sales volumes andprices. This increased the segment’s total assets.

*Styrenics*

At €4,518 million, sales tothird parties in the Styrenics division in 2005 remained at the previous year’slevel (volumes –3%, prices 4%, currencies 2%, portfolio –1%). This was due to adecline in demand and structural effects.

Income from operations wasconsiderably below last year’s high level. In contrast to 2004, we were able topass on further increases in raw material costs to customers only after aconsiderable delay. The high volatility of benzene and styrene prices had anegative impact on earnings. The decline in demand had a negative impact andwas caused to some extent by substitution of styrenics by other materials.

We have consistentlyproceeded to reorient our business models. Since the start of 2005, we havecombined specialties in a single global unit. This has the essential advantagethat all activities are now coordinated worldwide “under one roof.” Sincethen, we have marketed our product range worldwide under the new PlasticsPlus® brand. A successful example of a product innovationis the rapid global introduction of Ecovio®, a biodegradable plastic partly based on renewable rawmaterials.

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We have reachedimportant milestones in the restructuring of our business in North America(NAFTA). The measures carried out in 2005 included divestiture of thepolystyrene business together with the site in Joliet, Illinois. In addition,we transferred production of Styropor® from South Brunswick, New Jersey, to Altamira,Mexico.

*PerformancePolymers*

Sales to thirdparties rose €322 million to €2,909 million in 2005 (volumes 4%, prices 8%). Inparticular, sales in Asia increased significantly compared with 2004.

Income fromoperations increased despite persistently high raw material prices. We succeededin implementing substantial price increases, especially for polyamides andintermediates, which made a significant contribution to earnings.

We expanded ourengineering plastics business worldwide. In Asia, we increased compoundingcapacities in Pasir Gudang, Malaysia, and in Shanghai, China. Additionally, weare building a new PBT plant in Kuantan, Malaysia, together with our Japanesepartner Toray Industries Inc. This plant is scheduled to start operations inmid-2006.

We acquired thecompany Leuna-Miramid GmbH, in Leuna, Germany, strengthening our position inengineering plastics in Europe.

By acquiring theNorth American business of LATI USA, Inc., we consolidated our market positionin this region. The restructuring measures underway in this region willcontinue.

We have rigorouslycontinued to optimize our globally managed commodity business model forpolyamides and intermediates. This provides us with the flexibility to exploitregional market advantages.

In engineeringplastics, we are expanding our cooperation with key customers. Here, we arefocusing on new applications and new uses for plastics.

*Polyurethanes*

Sales to thirdparties rose by €796 million to €4,291 million in 2005 (volumes 2%, prices 17%,currencies 2%, portfolio 2%). The strongest growth was recorded in the AsiaPacific region.

We improved incomefrom operations compared with 2004. This was mainly due to sales prices, whichrose during the course of the year. Significantly higher raw material andenergy costs did, however, impact our business.

In 2005, ourcapital expenditures again focused on Asia: The production facility for thebasic materials MDI and TDI, which we are building with partners in Caojing,China, is scheduled to start operations in summer 2006. The additionalcapacities will be used to meet the constantly rising demand in Asia, and inChina in particular. In addition, this facility will provide the necessarystarting materials for the production of specialties in Shanghai, China, whichis planned for 2007.

At our Verbundsite in Antwerp, Belgium, we raised the production capacity for MDI from 360,000to 450,000 metric tons per year in 2005 in order to meet increased demand.

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**PerformanceProducts**

**SegmentData****Million€**
| ** **                                                       | ** ** | ** ** | ** ** | **% Change from** | ** ** | ** ** | ** ** | **% Change from** | ** ** | ** ** | ** ** |
|------------------------------------------------------------------|------------|------------|------------|-----------------------------|------------|------------|------------|-----------------------------|------------|------------|------------|
| ** **                                                       | ** ** | **2006**   | ** ** | **Previous Year**      | ** ** | **2005**   | ** ** | **Previous Year**      | ** ** | **2004**   | ** ** |
| Sales to third parties                                           |       | 10,133     |       | 22.6                        |       | 8,267      |       | 3.3                         |       | 8,005      |       |
| *Thereof  Performance Chemicals*                                 | * *   | *3,289*    | * *   | *13.8*                      | * *   | *2,889*    | * *   | *(10.5*                     | *)*        | *3,228*    | * *   |
| *Construction  Chemicals*                                        | * *   | *1,120*    | * *   | *—*                    | * *   | *—*   | * *   | *—*                    | * *   | *—*   | * *   |
| *Coatings*                                                       | * *   | *2,337*    | * *   | *7.2*                       | * *   | *2,180*    | * *   | *7.8*                       | * *   | *2,022*    | * *   |
| *Functional  Polymers*                                           | * *   | *3,387*    | * *   | *5.9*                       | * *   | *3,198*    | * *   | *16.1*                      | * *   | *2,755*    | * *   |
| Intersegmental  transfers                                        |       | 390        |       | 10.8                        |       | 352        |       | 21.0                        |       | 291        |       |
| Sales including  intersegmental transfers                        |       | 10,523     |       | 22.1                        |       | 8,619      |       | 3.9                         |       | 8,296      |       |
| Income from operations                                           |       | 669        |       | (22.5                       | )          | 863        |       | (23.5                       | )          | 1,128      |       |
| Assets                                                           |       | 9,727      |       | 100.0                       |       | 4,863      |       | 7.2                         |       | 4,538      |       |
| Research and  development expenses                               |       | 288        |       | 34.6                        |       | 214        |       | (1.4                        | )          | 217        |       |
| Additions to property, plant and equipment and intangible assets |       | 4,490      |       | 1,193.9                     |       | 347        |       | 14.1                        |       | 304        |       |

 

The Performance Productssegment consists of the Performance Chemicals, Construction Chemicals,Coatings and Functional Polymers divisions.

***2006 compared with 2005***

*SegmentOverview*

In 2006, we were able toboost sales to third parties by €1,866 million compared with the prior year toa total of €10,133 million(volumes 2%, prices 2%, portfolio 19%).

All divisions postedincreases in sales volumes. From a regional perspective, the strongest growthwasin North America(NAFTA). A significant portion of this sales increase came from the businessesnewly acquired in June and July,2006. The construction chemicals business acquired from Degussa AG is managed as a new division. The pigmentsbusiness for paper coating from Engelhard Corp. was assigned to the Functional Polymers division. Thepigments business for the coatings and printing ink industry, also from Engelhard Corp., was assigned to thePerformance Chemicals division, as was the water-based resins business for the paint and printing inkindustries from Johnson Polymer. With the acquired businesses, we have complemented the portfolio of the segmentwith innovative, profitable and growing areas of business.  Throughthe integration into our existing divisions, we achieve the highest possiblesynergy potential.

Overall, 2006 was a successful year due to ourmeasures to reduce fixed costs as well as the innovations we successfullybrought to market, despite further increases in raw material costs and achallenging market environmentin some businesses. Whereas the business in both Coatings and PerformanceChemicals was successful, Functional Polymers posted a decline in earnings dueto rising pressure on margins, mainly in the acrylic acid value-adding chainand with paper chemicals. Special charges resulted from various restructuringmeasures as well as from the integration of the acquired businesses. 

Earnings in the ConstructionChemicals, Performance Chemicals and Functional Polymers divisions werenegatively affected by higher depreciation and amortization charges related tothe acquisitions. Overall, income from operations declined to €699 million,which is €194 million below the previous year’s strong level.

Capital expenditures increased by €4,143 million to€4,490 million, largely due to the acquisitions.  

In 2007, we want to increase sales and earnings in achallenging market environment. We plan to achieve this by strengthening ourproduct portfolio through innovations and accelerating the expansion of our business in Asia.

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*ConstructionChemicals*

The new BASF division is the worldwide market andtechnology leader in the field of construction chemicals and systems. Theconcrete admixtures from the Admixture Systems business unit ensure optimal concrete characteristics, even under extremeconditions. The Construction Systems unit offers building systems, sports andindustrial flooring as well as façade products.

Sales to third parties developed very positively in2006, primarily for Admixture Systems in Europe and the Middle East, andConstruction Systems in Europe and North America (NAFTA). In Asia, the weak constructionmarket in Taiwan and Korea as well as the negative currency effect in Japan,were offset by good volume growth in Southeast Asia and Australia. Earningsgrowth was also positive and exceeded our expectations. The integration isbeing implemented rapidly; the synergy potential arising from the acquisition hasbeen identified and is being systematically realized. We expect furtherincrease in sales and earnings in 2007. In particular, we intend to participatein the dynamic development of the growth markets of Eastern Europe, the Middle East and China.

*Coatings*

Sales to third parties increased by €157 million to€2,337 million (volumes 2%, prices 3%, portfolio 2%). We were able to increase sales in allregions.

Income from operations was above the previous year.All units and regions contributed to this development.

In the area of automotive OEM coatings, our businessin China, Eastern Europe and South America grew, whereas business in Japan,Western Europe and the United States declined. We expanded our system supplierbusiness, which enables our customers to reduce the overall costs of coatingprocesses.  In addition to supplying products, we alsoprovide inventory management and other additional services for our customers.

In automotive refinish coatings, we increased ourearnings in all regions. High demand in the commercial transport sectorcontributed to this, as did an expansion of business with the body shops ofmajor automotive manufacturers.

Earnings in industrial coatings also surpassed thoseof the previous year, as growing coil-coating exports to Eastern Europe morethan compensated for weaker business in Japan and North America (NAFTA).

In the architectural coatings business in SouthAmerica, we improved our earnings with our Suvinil® brand.

We plan to further increase sales and earnings in2007. We are expanding our presence in the growth markets of Eastern Europe andAsia, particularly in China and India, and are continuing with our measures to improve efficiency across all regions andunits.

*FunctionalPolymers*

We achieved sales to third parties of €3,387 millionin 2006, which represents an increase of €189 million over the previous year(volumes 1%, portfolio 5%).  

Sales increased in North America (NAFTA) and Europe.The inclusion of Engelhard’s pigments business for paper coating contributed €149 million.

The performance of the individual business units wasmixed: Sales of acrylic monomers were approximately at the same level as in2005. We were unable to pass on the higher raw material costs, which led tolower margins. In 2006, we continued to follow our strategy of realizing costadvantages through competitive world-scale plants on the one hand, andincreasing the sales volume of our downstream products within the acrylic acidvalue-adding chain on the other. In this way, we were able to increase sales inadhesives and construction polymers, primarily in Europe and Asia. Sales ofsuperabsorbents also increased.

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Income from operations failed to match the stronglevel of the previous year. This was primarily due to margin pressure for acrylicmonomers, whose business environment is characterized by overcapacities.  Further consolidation in the paper industryis adversely impacting our business in paper chemicals. Increases in our sales prices could not completelyoffset higher raw material prices.

We expect a slight increase in sales in 2007, broughtabout by good demand conditions in all businesses, particularly for adhesivesand construction polymers. Despite sustained pressure on margins in this challenging market environment, ourgoal is to exceed the earnings level of 2006.

*PerformanceChemicals*

Sales to third parties increased by €400 million to€3,289 million compared with 2005 (volumes 3%, prices 2%, portfolio 9%). Ofthis amount, €275 million was due to the inclusion of Johnson Polymer and the pigmentbusiness for the coating and printing ink industry from Engelhard Corp.

We increased sales in the existing business due tovolume growth in all businesses and regions. In particular, performancechemicals for coatings, plastics and specialties, as well as for the automotiveand oil industries postedhigher sales than last year. Overall, earnings from the existing businessincreased significantly. Performance chemicals for detergents and formulatorswere at the high level of the previous year, while earnings from textilechemicals were lower. In performance chemicals for leather, our restructuring measuresallowed us to improve our earnings in spite of the ongoing challenging marketsituation.

In 2007, we expect a continuation of the positivesales development and higher earnings to which our sustained program toincrease efficiency and the acceleration of the expansion of our business inAsia will contribute.

***2005 compared with 2004***

*Segment Overview*

Sales to third parties in 2005 climbed €262 million to€8,267 million compared with 2004 (prices 7%, currencies 1%, portfolio –5%).This more than offset the decline in sales due to the sale of the printing systems business in November 2004.

The sales growth was duemainly to rigorously implemented price increases. The Functional Polymersdivision, in particular,continued to grow profitably. The positive development of business in Asia gave additional impetus to growth.

The strong improvement in themargins in the Performance Polymers and price increases in PerformanceChemicals and Coatings had a positive effecton income from operations. The income from operations fell short of the previous year, which included thegain from the divestiture of the printing systems business.

As a result, 2005 was anothersuccessful year for the Performance Products segment despite furtherincreases in raw material costs and achallenging market environment in some business areas. Our Verbund structure and our strong position in Asiaagain had a positive impact.

We increased capitalexpenditures by €43 million to €347 million. The most important projects weretheintegrated productioncomplex for acrylic acid in Nanjing, China, and the construction of asuperabsorbents plant inFreeport, Texas. In addition, we started work on the construction of a plantfor raw materials for HDI-basedcoatings in Caojing, China.

*Coatings*

Sales to third partiesincreased by €158 million to €2,180 million (volumes - 2%, prices 3%,currencies3%, portfolio4%). In all regions, sales increased in local currency terms.

Significantly higher rawmaterial costs put pressure on our margins. As a result, earnings were lowerthan in 2004. Positive currencyeffects offset the impact of stagnation in the automotive industry only to a limited extent. We increased bothvolumes and sales of automotive (OEM) and automotive refinish coatings. We continued with our measures to optimize ourportfolio and restructure the industrial coatings business unit. In East Asia, we strengthened ourbusiness by acquiring the remaining shares in our Japanese joint venture BASF NOF Coatings.

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Higher raw material costsdepressed our margins in the automotive coatings business unit. This wascompounded by the impact ofsluggish growth in the automotive industry in Europe and North America (NAFTA).

We continued to expand oursystem supplier concept for reducing the total cost of coating processesfor customers. In addition tosupplying our products, we provide inventory management and other customer services.

In the refinish coatingsbusiness, earnings remained at last year’s level, although margins were lowerbecause of changes in the productmix and higher raw material costs. We achieved above-average increases in exports to Eastern Europe.

In the architectural coatingsbusiness in South America, we strengthened our market leadership withour Suvinil® brandand improved earnings.

*FunctionalPolymers*

At €3,198 million, sales tothird parties increased by €443 million compared with 2004 (volumes 1%,prices 14%, currencies 1%). This significantincrease was primarily the result of passing on higher raw material costs to our customers.

We increased sales considerably,in particular for starting materials for adhesives raw materials andacrylic monomers. Higher sales volumes ofacrylic monomers resulted from the start of operations at our plants in Nanjing, China. Our world-scaleplants for the production of acrylic acid and acrylates at this new BASF Verbund site were completed on schedule.Operations started successfully in the first quarter, and full production capacity was available by theend of April. In Europe, we suffered losses in dispersions for paper finishing as a result of the longindustrial dispute in the Finnish paper industry. We discontinued our business with dispersions for the carpetindustry in Europe because of the unsatisfactory earnings situation and reduced our production capacities by closingan old plant. Income from operations was significantly higher than in 2004. All product lines, andespecially acrylic monomers, contributed to this thanks to high capacity utilization of cost-efficient plants.

*PerformanceChemicals*

As a result of the sale ofthe printing systems business in 2004, sales to third parties declined by €339million to €2,889 million (prices5%, portfolio –16%). Sales from ongoing business increased in all regions due to higher prices for our products.Significantly higher sales compared with 2004 were posted, in particular for performance chemicals fordetergents and formulators as well as for the automotive and oil industries.

The positive earnings trendin these two business units contrasted with lower earnings for performancechemicals for paints, coatingsand specialties as well as for leather. On the other hand, our restructuring measures enabled us to improve earningsin performance chemicals for textiles despite the persistently difficult environment.

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**AgriculturalProducts & Nutrition**

The Agricultural Products& Nutrition segment comprises the Agricultural Products division and theFine Chemicals division. Forreporting purposes each division is considered a reportable segment. The following data relate to the divisions.

**AgriculturalProducts**

**SegmentData****Million€**
| ** **                                                        | ** ** | **2006** | ** ** | **% Change from  Previous Year** | ** ** | **2005** | ** ** | **% Change from  Previous Year** | ** ** | **2004** | ** ** |
|-------------------------------------------------------------------|------------|----------|------------|-------------------------------------------------|------------|----------|------------|-------------------------------------------------|------------|----------|------------|
| Sales to third  parties                                           |       | 3,079    |       | (6.6                                            | )          | 3,298    |       | (1.7                                            | )          | 3,354    |       |
| Intersegmental  transfers                                         |       | 25       |       | (13.8                                           | )          | 29       |       | 11.5                                            |       | 26       |       |
| Sales including  intersegmental transfers                         |       | 3,104    |       | (6.7                                            | )          | 3,327    |       | (1.6                                            | )          | 3,380    |       |
| Income from  operations                                           |       | 447      |       | (34.4                                           | )          | 681      |       | 13.1                                            |       | 602      |       |
| Assets                                                            |       | 4,458    |       | (13.5                                           | )          | 5,156    |       | 3.4                                             |       | 4,985    |       |
| Research and  development expenses                                |       | 334      |       | 10.2                                            |       | 303      |       | 11.4                                            |       | 272      |       |
| Additions to property,  plant and equipment and intangible assets |       | 88       |       | 18.9                                            |       | 74       |       | (26.0                                           | )          | 100      |       |

 

***2006 compared with 2005***

At €3,079 million, sales tothird parties were €219 million lower than in 2005 (volumes –1%,prices/currencies –3%, portfolio –3%). Lower prices for agriculturalcommodities and increased energy costsnegatively impacted our business in important markets. Additionally,weather conditions in 2006 limited the use of fungicides.

Sales in Europe declined by2% to €1,389 million. A late start to the season in Northern Europe andthe effects of the drought of 2005 in SouthernEurope reduced demand for fungicides. As a result, competition among crop protection suppliersintensified, which led to a partial decline in prices. In contrast, the development of our business in the growthmarkets of Central and Eastern Europe was encouraging. Our business with innovative products for thecultivation of rapeseed, which is becoming a significant source of renewable energy in Europe, alsodeveloped favorably.

In North America (NAFTA),sales declined by 7% to €887 million as a consequence of the sale of partsof our generics business. Salesfrom our ongoing product portfolio were stronger than in 2005 despite difficult market conditions. A good share ofthis was contributed by our newly developed fungicide Boscalid, which allowed us to successfully expand ourbusiness in specialty crops.

In Asia, we increased oursales by 8% to €274 million. Despite negative currency effects and achallenging environment in the importantJapanese market, we were able to grow with innovative products.

In South America, salesdeclined by 21% to €529 million. This was mainly due to the development inBrazil, where the appreciation ofthe Brazilian real put our export-oriented customers under considerable pressure. This led to reductions in bothdemand and price, particularly for soybean fungicides. In line with our prudent business policy, we have adjustedour business to reflect the increased market risks. Our fungicide Opera®,with the active ingredient F 500®, maintained itsleading market position. In addition, we have continued to develop our business with other important crops, suchas sugarcane, which is used in theproduction of ethanol.

Income from operationsdeclined significantly by €234 million to €447 million. This was primarily duetounfavorabledevelopments in Europe and Brazil. Since our sales prices are partlydenominated in U.S. dollars, theappreciation of the Brazilian real put additional pressure on our margins. Inaddition, bad debts in Braziladversely affected our earnings. We generated special income from ourportfolio-optimization measures.This included the sale of major parts of the generics business of Micro FloCompany LLC in Memphis,Tennessee, and the global business with the active ingredient Terbufos. Weincreased research and development expenditure by €31 million to €334 million.As a percentage of sales,research and development expenses were 10.8%, compared with 9.2% in 2005. Wefurther reduced our assets by€698 million to €4,458 million. Our measures to reduce current assets and our divestitures contributed significantlyto this result, helped by currency effects and lower volumes. We will continue to stringently manage receivables andinventories.

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For 2007, assuming improvedseasonal conditions, we anticipate increased sales and earnings. In anintensely competitive environment, ourinnovative product portfolio puts us in a strong position, allowing us to grow profitably by exploiting significanttrends in agriculture, such as the increased use of plants for renewable energy production.

***2005 compared with 2004***

At €3,298 million, sales tothird parties were €56 million lower than in 2004 (volumes –1%,prices/currencies –1%).

Our sales in Europe (based onthe location of the company) declined by 4% to €1,507 million.Persistently dry weather in parts of southernEurope led to lower sales volumes. However, our business in the Central and Eastern European growthmarkets developed positively. The launch of Boscalid, our newly developed fungicide, also had a positiveimpact on our business.

We successfully expanded ourbusiness in North America (NAFTA), where sales rose by 9% to €946million. Here, our product Headline®, which contains the active ingredient F 500®,made a major contribution thanksto its positive effects on crop health and yields.

Sales in Asia declined by 2%to €212 million due to the transfer of distribution in Australia. Thisreorganization enabled us to reduce sellingexpenses and increase our profitability and the market presence of our products.

In South America, salesdeclined by 10% to €633 million. This was mainly due to conditions in Brazil,where persistently dry weatherreduced harvests and the appreciation of the real put our export-oriented customers under considerable pressure.In this region, we continued with our cautious business policy, which aims to achieve long-term success. Ourfungicide Opera® with the active ingredient F 500® continued to affirm itsmarket leadership. In addition, we successfully expanded our insecticidebusiness in Brazil with the seedtreatment product Standak®, which contains the active ingredientfipronil.

We increased income fromoperations by €79 million to €681 million. Higher demand for our innovativeproducts and the sale of threenon-strategic active ingredients offset the negative impact of lower sales and scheduled rises in research anddevelopment expenses.

We increased research anddevelopment expenditure by €31 million to €303 million. As a percentageof sales, research and development expensesamounted to 9.2%, compared with 8.1% in 2004.

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**FineChemicals**

**SegmentData****Million€**
| ** **                                                        | ** ** | **2006** | ** ** | **% Change from  Previous Year** | ** ** | **2005** | ** ** | **% Change from  Previous Year** | ** ** | **2004** | ** ** |
|-------------------------------------------------------------------|------------|----------|------------|-------------------------------------------------|------------|----------|------------|-------------------------------------------------|------------|----------|------------|
| Sales to third  parties                                           |       | 1,855    |       | 7.1                                             |       | 1,732    |       | (3.4                                            | )          | 1,793    |       |
| Intersegmental  transfers                                         |       | 17       |       | (39.3                                           | )          | 28       |       | (6.7                                            | )          | 30       |       |
| Sales including  intersegmental transfers                         |       | 1,872    |       | 6.4                                             |       | 1,760    |       | (3.5                                            | )          | 1,823    |       |
| Income from  operations                                           |       | (66      | )          | (13.8                                           | )          | (58      | )          | .                                               |       | 56       |       |
| Assets                                                            |       | 1,596    |       | 7.8                                             |       | 1,481    |       | 13.2                                            |       | 1,308    |       |
| Research and  development expenses                                |       | 70       |       | .                                               |       | 70       |       | (22.2                                           | )          | 90       |       |
| Additions to property,  plant and equipment and intangible assets |       | 378      |       | 70.3                                            |       | 222      |       | 45.1                                            |       | 153      |       |

 

***2006 compared with 2005***

Sales to third parties roseby €123 million to €1,855 million in 2006 (volumes 2%, prices –3%, portfolio8%). The acquisitions ofEngelhard Corp. and the Orgamol Group contributed significantly to this result.

As part of the acquisition ofEngelhard on June 6, 2006, we acquired two business areas, EffectPigments and Personal Care Materials. Theintegration of these activities extends our customer portfolio and strengthens our position, especially instrategic cosmetic markets, such as France and the United States.

The custom synthesis businessof Orgamol, acquired in late 2005, has been integrated. Sales in thestandard active ingredients business declined,in particular due to the drop in the market for Pseudoephedrine in North America (NAFTA). Therefore our pharmasite in Minden, Germany will be restructured to maintain its competitiveness, as announced in August2006.

We are exposed more and moreto a trend toward the standardization of products and solutions in theAnimal Nutrition and Human Nutritionbusinesses. Therefore, in October 2006, we announced measures for more cost-efficient marketing structures,which will be implemented by year-end 2007. These measures include the combination of the Human Nutritionand Animal Nutrition businesses to form the unit Nutrition, which has already been completed, and the planned closure ofthe animal nutrition station in Offenbach/Queich,Germany in the second quarter of 2007. Additional steps to restructure ourlysine business in Gunsan, Koreaare being prepared.

Earnings were negativelyimpacted by charges due to restructuring measures and declined significantly,despite the partial reduction of a fine imposed by the E.U. in 2001 for theanti-trust violations relatedto vitamins.

We improved earnings in thearoma chemicals business, which was expanded by the startup of thegeraniol and linalool plants in early 2006.Starting of our own production of feed enzymes in 2006 allowed us to increase added value and achieve costadvantages. In addition, we achieved a reduction in fixed costs, especially for marketing and sales.Assets in the Fine Chemicals division increased in 2006 compared with 2005, primarily as a result of theEngelhard acquisition. On a comparable basis, we were able to reduce our operating assets.

As a result of our measures,we will further improve the efficiency of our structures and processes, andincrease earnings in 2007.

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***2005 compared with 2004***

In 2005, sales fell by €61million to €1,732 million (volumes 3%, prices –7%, currencies 1%).

We achieved furtherprofitable growth in the product lines fat-soluble vitamins and organic acids,whichare used in animalnutrition, and aroma chemicals. Business with lysine and vitamin C wassignificantly negatively impactedby falling prices. Regulatory changes for the active ingredient pseudoephedrinein the U.S. pharmaceuticalsmarket led to lower sales in the Pharma Solutions unit. Sales were also reducedby the disposal of theCramlington production site, which still contributed to business in 2004.Effective October 1, 2005, weacquired the Orgamol Group with sites in Switzerland and France. Thisacquisition will enable us toexpand the high-growth contract manufacturing business, which involves theexclusive manufacture of activeingredients and intermediates for the pharmaceutical industry.

Following the start of ourown production of feed enzymes from 2006 onward, we will be able to realizethe added value created by theseproducts and achieve cost advantages.

In addition to the decline insales prices, earnings were negatively affected by increasingly high costsfor raw materials and energy inthe course of the year. Cost reductions, for example in the citral productline, only partially offset operatingcosts.

We introduced a restructuringprogram in view of the unsatisfactory earnings trend. One-time chargesrelated to this program are largely accountedfor the closure of the vitamin C plant in Grenaa, Denmark, and for a reduction in the workforce at theproduction site in Minden, Germany.

Assets in the Fine Chemicalsdivision increased in 2005 as a result of the Orgamol acquisition. On acomparable basis, however, we reducedoperating assets.

**Oil &Gas**

**Segmentdata****Million€**
| ** **                                                        | ** ** | **2006** | ** ** | **% Change from  Previous Year** | ** ** | **2005** | ** ** | **% Change from  Previous Year** | ** ** | **2004** | ** ** |
|-------------------------------------------------------------------|------------|----------|------------|-------------------------------------------------|------------|----------|------------|-------------------------------------------------|------------|----------|------------|
| Sales to third  parties                                           |       | 10,687   |       | 39.6                                            |       | 7,656    |       | 45.5                                            |       | 5,263    |       |
| *Thereof natural gas trading*                                     | * *   | *6,132*  | * *   | *47.5*                                          | * *   | *4,157*  | * *   | *49.5*                                          | * *   | *2,781*  | * *   |
| Intersegmental  transfers                                         |       | 1,062    |       | 46.9                                            |       | 723      |       | 32.4                                            |       | 546      |       |
| Sales including  intersegmental transfers                         |       | 11,749   |       | 40.2                                            |       | 8,379    |       | 44.2                                            |       | 5,809    |       |
| Royalties                                                         |       | 333      |       | 18.5                                            |       | 281      |       | 15.6                                            |       | 243      |       |
| Sales including  intersegmental transfers, less royalties         |       | 11,416   |       | 41.0                                            |       | 8,098    |       | 45.5                                            |       | 5,566    |       |
| Income from  operations(1)                                        |       | 3,250    |       | 34.9                                            |       | 2,410    |       | 46.7                                            |       | 1,643    |       |
| *Thereof natural gas trading*                                     | * *   | *605*    | * *   | *91.5*                                          | * *   | *316*    | * *   | *(7.1*                                          | *)*        | *340*    | * *   |
| Assets                                                            |       | 5,434    |       | 11.0                                            |       | 4,895    |       | 20.5                                            |       | 4,063    |       |
| Additions to property,  plant and equipment and intangible assets |       | 545      |       | (12.7                                           | )          | 624      |       | 60.8                                            |       | 388      |       |
| Exploration expenses                                              |       | 167      |       | (3.5                                            | )          | 173      |       | (11.3                                           | )          | 195      |       |

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(1)             Incometaxes on oil production in North Africa and the Middle East that arenoncompensable with German corporate income tax in the amount of  €1,282 in 2006 (2005: €1,072 million; 2004:€668 million) are not deducted from income from operations, but are reported asincome taxes. Please see Note 8 to the Consolidated Financial Statements.

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***2006 compared with 2005***

Sales to third parties roseby €3,031 million to €10,687 million in 2006 (volumes 7%, prices/currencies33%). The primary reasons forthis were further increases in oil and gas prices and the expansion of our natural gas trading business.

In the exploration and productionbusiness, net sales to third parties increased by €1,056 million to€4,555 million compared with the previousyear. The price of Brent crude rose by just under $11 per barrel to an average price of $65 per barrel. On aeuro basis, this represents an increase of €8 per barrel to €52 per barrel. Despite a regularly scheduledmaintenance shutdown in Libya, oil and gas production at 111 million barrels of oil equivalent nearlyreached the previous year’s high level. Natural gas production increased primarily in Argentina.

At €6,132 million, ournatural gas trading business sector generated significantly higher sales tothirdparties than in theprevious year. Higher prices and increased volumes contributed to this result.In total, natural gas volumes grewby 6.3% to 351.0 billion kilowatt hours. On a consolidated basis, gas sales volumes rose 6.0% from 233.5 billionkilowatt hours in 2005 to 247.6 billion kilowatt hours in 2006. WINGAS expanded its market position both inside andoutside of Germany. A significant share of this was due to spot market trading.

Income from operations roseby €840 million to €3,250 million. In the exploration and productionbusiness sector, income from operationsincreased by €551 million to €2,645 million, as a result of higher prices. Included are €1,282 million fromincome taxes on oil production in North Africa and the Middle East that are noncompensable with German corporateincome taxes. These taxes are reported as income taxes.

Income from operations in ournatural gas trading business rose by €289 million to €605 million.Compared with the unsatisfactory situation ofthe previous year, our margins improved significantly. Spot market trading and the persistent cold weatherat the beginning of 2006 had an additional positive impact on earnings.

Assets in the Oil & Gassegment rose by €539 million to €5,434 million. Capital expenditures inexploration and production related to projectsin Germany, the Netherlands, Libya, and Argentina as well as the development of the ZAO Achimgaz jointventure with Gazprom in Western Siberia.

In 2006, 32 wildcat andappraisal wells were drilled in the search for new oil and natural gasdeposits,of which 14 weresuccessful. Moreover, we have acquired licenses to explore for oil and gas inLibya and in the North Sea offthe coasts of Germany, Denmark and Norway. We replenished 48% of the volumes drilled in 2006. In natural gas trading,we invested primarily in the further expansion of our infrastructure.

Compared with 2005, provencrude oil reserves declined by 9% to 58 million metric tons. Thereserve-to-production ratio remained unchangedat 7 years. Proven natural gas reserves declined by 5% to 60 billion cubic meters. Thereserve-to-production ratio declined by 1 year to 8 years. In 2005, BASF andOAO Gazprom decided to extend their cooperation. Wintershall will receive astake of 25% minus one share inOAO Severneftegazprom (SNG), which holds the license to explore for gas in the Yuzhno Russkoye natural gas field inWestern Siberia. In addition, Wintershall will receive non-voting preferred shares and will thus hold aneconomic interest in SNG of 35% minus one share. With more than 600 billion cubic meters of recoverablenatural gas reserves, the Yuzhno Russkoye field is approximately three times the size of Achimgaz. In return,Gazprom will increase its stake in WINGAS from 35% to 50% minus one share and receive a 49% interest ina BASF Group company that holds onshore exploration and production rights in Libya. The contractualclosing is expected to take place in the first half of 2007 and will significantly increase our reserve basis. Thetechnical concept for the natural gas pipeline through the Baltic Sea, Nord Stream (formerly North European GasPipeline – NEGP) has been completed and the approval process initiated. Wintershall holds a 24.5%stake in Nord Stream, which could be reduced to 20% through the inclusion of an additional partner.

In the Achimgaz joint venturefor the production of natural gas and condensate from the Achimovdeposit of the Urengoy field, two of six wellsfor the first project phase were successfully completed. The construction ofthe necessary infrastructure has progressed far enough such that the start ofproduction is planned for mid-2007. 

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In 2007, we expect thefavorable conditions that marked both business sectors in 2006 to weaken.This will only be partiallyoffset by the ongoing good operational business in natural gas trading. Salesand earnings are thus expected toremain strong; however, we do not expect to achieve the peak values recorded in 2006.

***2005 compared with 2004***

Sales to third parties in2005 rose by €2,393 million to €7,656 million (volumes 7%, prices/currencies38%). This was due to thesignificant rise in oil prices, increases in crude oil and natural gasproduction, as well as theexpansion of the natural gas business.

In the exploration andproduction business sector, net sales to third parties in 2005 increased by€1,017 million to €3,499 million.The average reference price of crude oil (Brent) rose compared with the previous year by $16 per barrel to $55 perbarrel. On a euro basis, this represents a rise of €13 per barrel to €44 per barrel. Crude oil and natural gasproduction rose by 3.1% to 112 million barrels of oil equivalent. This was mainly due to an increase in crudeoil and associated gas production volumes in Libya. In 2004, our production in Libya was temporarilyrestricted by OPEC resolutions. Natural gas production was expanded in Argentina and the Netherlands.

Sales in our natural gastrading business sector rose by €1,376 million to €4,157 million as a result ofincreased volumes and prices. Gasvolumes overall increased by 8.6% to 330.2 billion kilowatt hours. On a consolidated basis, gas sales volumes rose11.1% from 210.2 billion kilowatt hours in 2004 to 233.5 billion kilowatt hours in 2005. In Germany, WINGAS againgrew faster than the market and acquired new customers, in particular in the power station sector. Weexpanded our marketing activities in Belgium, the United Kingdom, the Czech Republic and Austria.

Income from operations roseby €767 million to €2,410 million. Income from operations in the explorationand production business sector,which is included in this amount, increased by €791 million to €2,094 million, mainly as a result of higher prices.Income from operations includes income taxes on oil production in North Africa and the Middle East of €1,072million that are noncompensable with German corporate income tax. These taxes are reported as incometax.

Income from operations fromnatural gas trading declined by €24 million to €316 million. Our buyingand selling prices largely depend on the priceof crude oil. However, the time lag between changes is longer for selling prices than for buying prices. Thecontinuous increase in oil prices over a long time therefore impaired our trading margin during thereporting period.

Assets in the Oil & Gassegment rose by €832 million to €4,895 million compared with the previousyear. Additions to tangibleassets mainly involved exploration and production activities in Germany, the Netherlands, Libya and Argentina.

In 2005, 16 wildcat andappraisal wells were drilled in the search for new oil and natural gasdeposits,11 of which weresuccessful. We replenished 52% of the volumes drilled in 2005. In the naturalgas trading sector, we invested primarilyin expanding our infrastructure.

Proved crude oil reservesdeclined by 6% to 63 million tons compared with year-end 2004. Thereserve-to-production ratio was seven years,compared with eight years at year-end 2004. Proved natural gas reserves of 63 billion cubic metersdeclined by 5% compared with the previous year. The reserve to-production ratio is nine years.

To further extend ourlong-standing cooperation with our Russian partner Gazprom, we signed amemorandum of understanding covering the entirevalue-adding chain – from production and transportation through to natural gas trading. Under theterms of the memorandum of understanding, Gazprom is to increase its stake in WINGAS. The YuzhnoRusskoye field in Western Siberia is to be developed jointly. It is also planned to jointly construct the NorthEuropean Gas Pipeline (NEGP) through the Baltic Sea. Following startup, whichis scheduled for 2010, WINGAS is to obtain up to 9 billion cubic meters of gasper year for the next 25 yearsfrom the new pipeline.

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In our Achimgaz joint venturewith Gazprom, roads and construction site work for the drilling andproduction facilities have been largelycompleted. This joint venture will produce natural gas and condensate from the Achimov deposit of the Urengoy gasfield in western Siberia. The first drilling site of the six planned production wells to be drilled in the firstphase of the project is expected to start operations at the beginning of 2006.

**LIQUIDITY AND CAPITAL RESOURCES**

The following table setsforth the summarized cash flows of BASF in each of the last three fiscalyears:

**Million €**
| **Statement of cash flow**                                                                | ** ** | **2006**   | ** ** | **2005**   | ** ** | **2004**   | ** ** |
|----------------------------------------------------------------------------------------------------------|------------|------------|------------|------------|------------|------------|------------|
| Net income                                                                                               |       | 3,215      |       | 3,007      |       | 2,004      |       |
| Depreciation and  amortization of intangible assets, property, plant and equipment and  financial assets |       | 2,994      |       | 2,427      |       | 3,119      |       |
| Changes in net  working capital                                                                          |       | 10         |       | 250        |       | (193       | )          |
| Miscellaneous  items                                                                                     |       | (279       | )          | (434       | )          | (296       | )          |
| **Cash  provided by operating activities before external financing of pension  obligations**             | ** ** | **5,940**  | ** ** | **5,250**  | ** ** | **4,634**  | ** ** |
| External  financing of pension obligations (CTA)                                                         |       | —     |       | (3,660     | )          | —     |       |
| **Cash provided  by operating activities**                                                               | ** ** | **5,940**  | ** ** | **1,590**  | ** ** | **4,634**  | ** ** |
| Payments related  to tangible and intangible assets                                                      |       | (2,411     | )          | (1,948     | )          | (2,057     | )          |
| Acquisitions /  divestitures                                                                             |       | (6,240     | )          | 995        |       | 570        |       |
| Financial  investments and other items                                                                   |       | 237        |       | 247        |       | 254        |       |
| **Cash  used in investing activities**                                                                   | ** ** | **(8,414** | **)**      | **(706**   | **)**      | **(1,233** | **)**      |
| Capital  increases / repayments                                                                          |       | (920       | )          | (1,425     | )          | (781       | )          |
| Changes in  financial liabilities                                                                        |       | 4,574      |       | 299        |       | (203       | )          |
| Dividends                                                                                                |       | (1,233     | )          | (982       | )          | (852       | )          |
| **Cash  provided by (used in) financing activities**                                                     | ** ** | **2,421**  | ** ** | **(2,108** | **)**      | **(1,836** | **)**      |
| Net changes in  cash and cash equivalents                                                                |       | (53        | )          | (1,224     | )          | 1,565      |       |
| Cash and cash equivalents  as of beginning of year and other changes                                     |       | 887        |       | 2,132      |       | 521        |       |
| **Cash and cash equivalents as of  end of year**                                                         | ** ** | **834**    | ** ** | **908**    | ** ** | **2,086**  | ** ** |

 

***2006 compared with 2005***

*Cash provided by operating activities*

In 2006, cash provided byoperating activities was €5,940 million due to the significant rise in cash earnings.Before the external financing of pension obligations in 2005, this representsan increase of 13.1% over the previous record year of 2005. Despite thesignificantly higher volume of business, working capital decreased slightly.

Miscellaneous items primarilyreflects the reclassification of gains on the sale of securities and ondivestitures, which is included as part of cash inflows under cash used ininvesting activities.

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*Cash usedin investing activities*

Net expenses increased to€8,414 million compared with €706 million in 2005. This significant increasewas primarily due toacquisitions, whereas in 2005 we received proceeds from the sale of our stake inBasell N.V.

Expenditures for acquisitionstotaled €6,397 million and were primarily attributable to:

·                                          the acquisition of Engelhard Corp., whoseshares we purchased for €3.8 billion;

·                                          the construction chemicals business of DegussaAG, whose equity we acquired for**€2.2 billion; and

·                                          Johnson Polymer, which we acquired for €379million.

We generated proceeds of €157million from divestitures. This primarily resulted from cash inflowsrelated mainly to portfolio optimizationmeasures in the Agricultural Products division.

We invested a total of €2,411million in property, plant and equipment and intangible assets.This is 23.8% more than in the 2005. Capitalexpenditures were thus again below the level of depreciation and amortization. On a regional basis, these capitalexpenditures were as follows:
| %                                                 | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
|---------------------------------------------------|------------|------------|------------|------------|------------|------------|------------|
| **Capital expenditures by region** | ** ** | **2006**   | ** ** | **2005**   | ** ** | **2004**   | ** ** |
| Europe                                            |       | 47         |       | 57         |       | 56         |       |
| North America  (NAFTA)                            |       | 41         |       | 11         |       | 12         |       |
| Asia, Pacific                                     |       | 7          |       | 28         |       | 28         |       |
| South America,  Africa, Middle East               |       | 5          |       | 4          |       | 4          |       |
| **Total**                                         | ** ** | **100**    | ** ** | **100**    | ** ** | **100**    | ** ** |

 

We spent €201 million on financialassets, marketable securities and financial receivables. The disposal oflong-term assets and the sale of securities generated proceeds of €438million.

In the **Chemicals**segment, capital investments,including acquisitions, rose by €2,900 millioncompared with the previous year to €3,539million in 2006. Major projects included:

·                                          the acquisition of Engelhard Corp., and theintegration of its catalysts activities, including its materials services business, in the new Catalystsdivision;

·                                          the construction of a plant for the productionof alkylethanolamine in Geismar, Louisiana; and

·                                          the increase in production capacity of thesteam cracker in Antwerp, Belgium, for catalysts in Pasadena, Texas as well as for Hexamoll® DINCH in Ludwigshafen, Germany.

In the **Plastics**segment, we spent €631 million oncapital expenditures in 2006. This represents anincrease of 28.8% compared with the previousyear. Among the important capital investments were:

·                                          the startup of plants for TDI and MDI inCaojing, China; for PBT in Kuantan, Malaysia and for Ecoflex® inSchwarzheide, Germany;

·                                          the construction of a PUR systems house, acompounding plant for engineering plastics and a production plant for TPU in Shanghai, China;

·                                          the acquisition of a DNT plant in Geismar,Louisiana;

·                                          the expansion of production capacity forpolyamide 6 in Freeport, Texas for Polyol in Geismar, Louisiana and for Ultrason®‚in Ludwigshafen, Gemany; and

·                                          the start of construction of a hydrogenperoxide and HPPO plant in Antwerp, Belgium.

In the **Performance Products**segment, investmentsin 2006 including acquisitions increased from€347 million to €4,490 million. The mostimportant projects were:

·                                          the acquisition of the construction chemicalsbusiness of Degussa AG and of Johnson Polymer, a producer of water-based resins,

·                                          the integration of the pigments business fromthe acquisition of Engelhard Corp.,

·                                          the expansion of the plant for acrylic acidand superabsorbents in Antwerp, Belgium and

·                                          the construction of a plant forsuperabsorbents in Freeport, Texas and of a plant for HDI-based raw materials for coatings in Caojing, China.

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In the **Agricultural Products & Nutrition segment**,we spent €466 million on capital expenditures,including acquisitions, in 2006 compared with€296 million in the previous year.

·                                          The **AgriculturalProducts**division invested €88 million, mainly in optimizationmeasures at various sites.

·                                          The **FineChemicals**division spent €378 million on capital expenditures mainlyfor the acquisition of the EffectPigments and Personal Care Materials business from the acquisition of EngelhardCorp. and optimization measuresat various sites.

In the **Oil & Gas**segment, we invested €545million compared with€624million in 2005. Key projects included:

·                                          the development of the Achimov formation inthe Urengoy field;

·                                          the Haidach natural gas storage project inAustria;

·                                          the capacity expansion of the natural gaspipeline WEDAL; and

·                                          development of new oil and natural gas storagefacilities in Libya and Argentina.

*Cashprovided by financing activities*

In 2006, cash provided byfinancing activities was €2,421 million compared with €(2,108) million cashused in 2005.

We spent a total of €938million to buy back 14.7 million shares at an average price of €63.84 pershare.

€1,233 million was paid individends and profit transfers in 2006. Of this amount, €1,015 million, or€2.00 per share, was for dividendpayments to shareholders of BASF Aktiengesellschaft for the fiscal year 2005. Minority interests in fully consolidatedcompanies received €218 million.

In order to financeacquisitions, bonds with a total value of €2 billion as well as commercialpaper wereissued in thesecond quarter of 2006. Financial indebtedness increased by 140.6% comparedwith 2005 and amounted to €9,483million. Net debt increased by €5,616 million to €8,649 million. Financialliabilities are discussed indetail in Note 22 to the Consolidated Financial Statements included in Item 18.Detailed information on otherfinancial liabilities is provided in Note 23 to the Consolidated FinancialStatements included in Item 18.

***Current situation***

*Workingcapital*

Available capital resourcesare sufficient to cover the present working capital demands based on ourbusiness requirements.

*Transferrestrictions*

Some of our subsidiaries areoperating in countries that restrict or exacerbate the free transfer of funds suchas loan advances, dividends or capital repatriation. In order to ensure thatthere is no material impact of such restrictions on the BASF Group, BASFconstantly seeks to minimize those risks by means of appropriate financingstrategies. Based on our experience, we have concluded that we are notmaterially restricted by legal, fiscal or economic means to transfer funds fromour Group companies to BASF Aktiengesellschaft.

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*Restrictivecovenants associated with borrowings*

Our financial debts areusually not subject to financial covenants that could, in case of default,causeearlier repayments,additional collateral or the use of any other legal means.

Some of our joint ventures inChina have entered into project financings for the construction of plantsand sites. The loans within theproject financing amount to $0.8 billion (BASF share). These project financings contain usual financial covenants,mainly debt service cover ratios. The debt service cover ratio is defined as the ratio of the cash flow availablefor debt service to the debt service. Besides this, a debt-to-equity ratio is also being used. The debt-to-equityratio is defined as the ratio of the aggregate of all utilizations under the term loans to the aggregate of thepaid-in capital and all shareholder loans provided by the joint venture partners.

***Commitments for investments***

Planned capital expendituresin 2007 will amount to almost €2,180 million and will therefore likely bebelow the level of depreciation andamortization. We expect a comparable level of capital expenditures in 2008. Weaim to finance these planned expenditures from cash provided by operatingactivities.

The main focus of ourinvestment commitments is on Europe.

Of the amount planned for2007, 64% is scheduled to be invested in Europe; 20% in North America(NAFTA); 10% in Asia Pacific; and 6% in SouthAmerica, Africa Middle East. By segments, 25% is scheduled to be invested by Chemicals; 20% by Plastics;20% by Performance Products; 7% by Agricultural Products & Nutrition; 14% by Oil & Gas; and 14%is scheduled to be invested for infrastructure and others.

Major projects by segment include:

*Chemicals*

·                                          Acquisition of Guilin REEcat Catalyst Co.,Ltd., Guilin, China, a producer of catalysts for**motorbikes headquartered in Guilin, China.

·                                          Construction of the Electronic MaterialsCenter Europe in Ludwigshafen as well as a plant to produce Cyclododecanone in Ludwigshafen

·                                          Startup of the expanded plasticizer productionin North America (NAFTA), as well as the additional capacity of the steam cracker in Antwerp,Belgium and the expanded capacity for Hexamoll® DINCH in Ludwigshafen

·                                          Production capacity for catalysts in Pasadena,Texas

*Plastics*

·                                          Construction of an HPPO plant in Antwerp,Belgium

·                                          Start-up of a PUR systems house, a productionplant for TPU in Shanghai, China as well as a compounding plant for engineering plastics in Shanghai, China

·                                          Expansion of polyol production in Geismar,Louisiana and MDI production capacity in Antwerp, Belgium

·                                          Startup of expanded production capacities forpolyamide 6 in Freeport, Texas and for Ultrason® in Ludwigshafen, Germany

*Performance Products*

·                                          Construction of a plant for HDI-based coatingsin Caojing, China

·                                          Startup of a superabsorbents plant inFreeport, Texas

·                                          Expansion of our plant for acrylic acid andsuperabsorbents in Antwerp, Belgium

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*Oil & Gas*

·                  Development of the Achimov formation in theUrengoy gas and condensate field as well as the Cenoman formation in the YuzhnoRusskoye gas field in Russia

·                  Further development of existing oil fields inLibya

·                  Development of new natural gas reserves in theNorth Sea and in Argentina

·                  Conversion of the Haidach natural gas field inAustria and the Saltflcetby natural gas field in the United Kingdom intonatural gas storage facilities 

·                  Construction of the first line of the NordStream Pipeline through the Baltic Sea from Vyborg, Russia to Greifswald,Germany

·                  Start of the expansion of Wingasinfrastructure in the context of the Nord Stream project

***2005 compared with 2004***

*Cash provided by operating activities*

At €5,250 million, cash providedby operating activities before external financing of pension obligations washigh in 2005, primarily as a result of the significant increase in earnings.This represents a rise of 13.3% compared with the very strong level in 2004.

We further reduced networking capital despite a higher volume of business. Balance sheet items neverthelessincreased, in particular due to the rise in the value of the U.S. dollar.

“Miscellaneous items”primarily reflects the reclassification of the gain from the sale of the stakein Basell N.V., which is included as part of cash inflows in cash used ininvesting activities.

*Externalfinancing of pension obligations*

As of the end of the year, wetransferred approximately €3.7 billion into a Contractual Trust Arrangement(CTA). This money will be usedsolely to finance pension obligations to the company’s employees and pensioners. This measure will lessen theimpact of pension payments on BASF’s future cash flow and will further improve the transparency of ourfinancial reporting. There will be no effect on the benefit levels for employees and pensioners of BASF; the pensionswill also continue to be paid by BASF.

*Cash usedin investing activities*

Net capital expendituresdeclined by €527 million, or 42.7%, compared with 2004. This significantdecline was due primarily to cashinflows from portfolio measures.  

We spent €1,948 million, or5.3% less than in 2004, on additions to tangible and intangible assets. Asa result, capital expenditureswere again substantially below the level of depreciation and amortization.

Expenditures for acquisitionstotaled €536 million and were primarily related to the acquisition of theelectronic chemicals business ofMerck KGaA, Darmstadt, Germany, as well as the Swiss fine chemicals company Orgamol. We generated proceeds of€1,531 million from divestitures, the most important of which was the sale of the stake in Basell.Additional cash inflows were related to further portfolio optimization measures in the Agricultural Products divisionand the sale of our polystyrene business in the United States.

Changes in financial assets,marketable securities and financial receivables resulted in an outflow of €211million. The sale and disposal of long-term assets and securities generatedproceeds of €458 million.

In 2005, we invested a totalof €2,523 million in tangible and intangible assets, including acquisitions,compared with €2,163 million in2004. 

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In the **Chemicals**segment, investments andacquisitions in 2005 rose by 6.3% compared with theprevious year to €639 million. Major projectsincluded:  

·                  Completion and startup of the steam cracker, asyngas plant and production plants for formic acid, C4 oxo alcohols, ethylene oxide and ethyleneglycol, propionic acid, methylamines and dimethyl-formamide at the new Verbund site in Nanjing, China;

·                  Completion and startup of plants forcyclohexane and isopropanolamine in Ludwigshafen, Germany;  

·                  Completion and startup of a THF/PolyTHF® plant in Caojing, China;  

·                  Optimization of plasticizer production inNorth America (NAFTA); and  

·                  Acquisition of the electronic chemicalsbusiness of Merck KGaA, Darmstadt, Germany.

In the **Plastics**segment, we spent €490 million oncapital expenditures and acquisitions in 2005. This was an increase of 3.6%compared with the previous year. Among the important investments were:

·                  Expansion of MDI production capacity inAntwerp, Belgium;

·                  Construction of new MDI and TDI plants inCaojing, China;

·                  Acquisition of the global TDI business ofHuntsman, United States;

·                  Establishment of a PUR systems house inBangpoo, Thailand;

·                  Construction of a PBT plant in Kuantan,Malaysia;

·                  Expansion of capacities for engineering plasticscompounding in Pasir Gudang, Malaysia;

·                  Start of expansion of production capacitiesfor polyamide 6 in Freeport, Texas; and

·                  Acquisition of Leuna Miramid GmbH, Leuna,Germany.

In the **Performance Products**segment, investmentsin 2005 increased by 14.1% to €347 million. The most important projects were: 

·                  Completion and startup of plants for acrylicacid and acrylates at the new Verbund site in Nanjing, China;

·                  Construction of a superabsorbents plant inFreeport, Texas; and

·                  Construction of a plant for raw materials forHDI-based coatings at the site in Caojing, China.

In the **Agricultural Products & Nutrition**segment,we spent €296 million on capital expenditures and acquisitions in 2005 comparedwith €253 million in the previous year. The Agricultural Products division invested€74 million, mainly in optimization measures at various sites. The FineChemicals division spent €222 million on capital expenditures and acquisitionsin 2005. Major projects included:

·                  Construction of a plant for citral derivativesin Ludwigshafen and the completion of a plant for UV absorbers in Ludwigshafen,Germany;

·                  Construction of a feed enzymes plant inLudwigshafen, Germany; and 

·                  Acquisition of the Swiss fine chemicalscompany Orgamol with sites in Switzerland and France.

In the **Oil & Gas**segment, we invested €624million compared with €388 million in 2004. Key projects included:

·                  Pipeline connection to the Mittelplateoffshore oil field in Germany;

·                  Debottlenecking of the STEGAL natural gaspipeline;

·                  Start of development of the Achimov horizon inan area of the Urengoy field in Russia;

·                  Start of conversion of the Haidach natural gasfield in Austria into a natural gas storage facility;

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·                  Acquisition of the Saltfleetby natural gasfield in the United Kingdom; and

·                  Development of new natural gas deposits in theDutch North Sea and in Argentina.

*Cash usedin financing activities*

In 2005, cash used infinancing activities was €2,108 million compared with €1,836 million in 2004. 

We spent a total of €1,435million to buy back 26.06 million shares at an average price of €55.05 per share.

€982 million was paid individends and profit transfers in 2005. Of this amount, €904 million, or €1.70 pershare, was for dividend payments to shareholders of BASF Aktiengesellschaft forfiscal year 2004. Shareholders of fully or proportionately consolidatedcompanies received €78 million.

*Cash andcash equivalents*

Cash and cash equivalentsdeclined due to the transfer of funds into a Contractual Trust Arrangement andamounted to €908 million at the end of 2005. As a result, cash and cashequivalents as a proportion of total assets declined to 2.5%.

Net debt, defined as cash andcash equivalents less financial indebtedness, increased by €1,822 million to€3,033 million in 2005 due to the decline in cash and cash equivalents and theincrease in financial indebtedness in 2005. Financial indebtedness increased by19.5% in comparison with the previous year and amounted to €3,941 million.

**EXCHANGE RATE EXPOSURE AND RISK MANAGEMENT**

BASF conducts its business inmany currencies other than the euro. About 56% of BASF’s 2006 sales,56% of 2005 sales and 57% of 2004 sales wereto customers in Europe, about 44% of 2006 sales, 44% of 2005 sales and 43% of 2004 sales were tocustomers outside Europe. Moreover, about 40% of BASF’s 2006 sales, 41% of 2005 sales and 40% of 2004sales were attributable to BASF operations conducted outside Europe.

As a result of BASF’s foreigncurrency exposure, exchange rate fluctuations have a significant impactin the form of both translation risk andtransaction risk on BASF’s Consolidated Financial Statements. Translation risk is the risk that BASF’sConsolidated Financial Statements expressed in euros for a particular period or as of a certain date may be affectedby changes in the prevailing rates of the various currencies of the reporting subsidiaries against theeuro. Transaction risk arises when the currency structure of BASF’s costs and liabilities deviates to some extentfrom the currency structure of BASF’s sales proceeds and assets.

The effect of exchange ratefluctuations on BASF’s income from operations for 2006, 2005 and 2004is shown in BASF’s Consolidated Financial Statementsunder the line items “Other operating income” and “Other operating expense.” See Notes 5 and 6to the Consolidated Financial Statements included in Item 18 for further information. The net effect ofexchange rate fluctuations on BASF’s income from operations amounted to a net gain of  €30.5 million in 2006, a net loss of €111.9million in 2005 and a net gain of €83.3 million in 2004.

In 2006, foreign currencytranslation adjustments had a negative effect of €457 million on stockholders’equity primarily due to theweakening of the U.S. dollar and of currencies dependent on the U.S. dollar in Asia, South America and, in particular,in the NAFTA region. In 2005, foreign currency translation adjustments had a positive effect of €715 million onstockholders’ equity primarily due to the stronger U.S. dollar and currencies depending on the U.S. dollar inAsia, South America and, in particular, in the NAFTA region. In 2004, foreign currency translation adjustmentshad a negative effect of €231 million on stockholders’ equity primarily due to the weakening of the U.S.dollar and of currencies dependent on the U.S. dollar in Asia, South America and, in particular, in the NAFTAregion.

Exchange rate risk managementis centralized at BASF Aktiengesellschaft. BASF bases its foreignexchange risk management generally onexposures derived from receivables and payables on the balance sheet. Future sales revenues or expenses areonly considered if such transactions have a high probability of occurrence. Receivables and payables in aparticular currency are netted. Normally at BASF, receivables generated from export sales exceed payablesfrom raw material purchases resulting in substantial net exposures in U.S. dollar.

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To mitigate the impact ofcurrency exchange rate fluctuations, the exposure to currency risk is assessedon a daily basis. BASF applies aselective hedging strategy - a varying portion of the exposure in each currency is hedged based on forecasts of theexchange rate development versus the euro.  

In 2006, BASF’s hedgingtransactions have been aimed primarily at minimizing exchange rate risksagainst the U.S. dollar, theBritish pound, the Korean won and the Japanese yen. See “Item 11. Quantitative and Qualitative Disclosure About MarketRisk” and Note 26 to the Consolidated Financial Statements included in Item 18 for further information.

**RESEARCH AND DEVELOPMENT**

BASF’s research anddevelopment activities aim to develop new and improved products, find newapplications for existingproducts and develop more cost-efficient and environmentally soundmanufacturing processes.

BASF spent €1,277 million onresearch and development activities in 2006 compared with €1,064million in 2005 and €986 million in 2004. Ofthe total research and development expenditures, the Chemical segment spent 13.9%, Plastics 11.4%,Performance Products 22.6%, Agricultural Products 26.1%, Fine Chemicals 5.5% and Others 20.5%. BASF spent79.2% of its annual research budget in Germany, 8.1% in other European countries, 10.0% in NorthAmerica and 2.7% in Asia and South America.

Starting in 2005, expenses inthe Oil & Gas segment related to exploration for oil and gas deposits andto dry holes are recorded asother operating expenses rather than as research and development expenses. This disclosure reflects the economicsubstance of these expenses more appropriately and improves the comparability of BASF’s financial statements.

BASF employs about 8,300people worldwide in various research and development activities. About5,000 employees are involved in research anddevelopment work in Ludwigshafen, making the facility one of the world’s largest research centers in thechemical industry.

The four central technologyplatforms in Ludwigshafen, and a number of decentralized research anddevelopment sites worldwide, form an efficientnetwork that makes an important contribution to BASF’s Verbund approach to integration. In addition,BASF conducts research activities through almost 1,400 research cooperations with universities, researchinstitutes and industrial partners in many countries worldwide and through various research jointventures. Product and market-related development worldwide is conducted in close cooperation withcustomers and joint-venture partners.

The biggest share of BASF’sresearch spending is devoted to the area of agriculture and nutrition. TheLimburgerhof Agricultural Centernear Ludwigshafen, Germany, and the research center in Research Triangle Park (RTP) in Raleigh, NorthCarolina, develop agricultural products using our network of experimental and research stations around the world.BASF conducts its own plant biotechnology research and is also involved in various biotechnology researchjoint ventures. The activities are concentrated in the central technology platform BASF Plant Science GmbH,which currently employs more than 600 people worldwide.

The acquisitions of EngelhardCorp., the construction chemicals activities of Degussa AG and JohnsonPolymer as well as CropDesign N.V., abiotechnology company, and PEMEAS GmbH, a fuel cell technology company, have strengthened our capacity forinnovation. With the integration of Engelhard, we have acquired 22 research and development centersand are global leaders in the field of catalysis. The integration of Degussa’s construction chemicals unitimproves our position in the fast-growing construction chemicals business.

BASF Future Business GmbH, a100% subsidiary of BASF Aktiengesellschaft, was founded with thegoal of developing new business areas togetherwith partners both inside and outside the BASF Group. BASF Venture Capital GmbH, a wholly ownedsubsidiary of BASF Future Business GmbH focuses on venture capital investments. Both companiesdirect their activities on high-growth markets and future challenges, especially in the field ofmaterial sciences and energy management.

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BASF puts great emphasis onobtaining patents, trademarks, copyrights and designs to protect itsinvestment in research and development and thedeveloped intellectual property. The company seeks the optimum protection for significant product andprocess developments.

**COMMITMENTS**

**Off-BalanceSheet Arrangements**

Our unconsolidated entitiesare not considered variable interest entities and do not constitute other off-balancesheet arrangements.

**ContractualObligations and Commercial Commitments**

The table below summarizesBASF’s contractual and commercial obligations as of December 31, 2006. 

**Million €**
| ** **                                                         | ** ** | ** **   | ** ** | ** **         | ** ** | **One year to** | ** ** | ** **          | ** ** |
|--------------------------------------------------------------------|------------|--------------|------------|--------------------|------------|---------------------------|------------|---------------------|------------|
| ** **                                                         | ** ** | ** **   | ** ** | **Under one** | ** ** | **less than**        | ** ** | **After five** | ** ** |
| **Contractual Obligations**                                   | ** ** | **Total**    | ** ** | **year**           | ** ** | **five years**       | ** ** | **years**           | ** ** |
| Financial debt                                                     |       | 9,483.1      |       | 3,694.9            |       | 2,858.2                   |       | 2,930.0             |       |
| Miscellaneous  liabilities                                         |       | 2,795.3      |       | 1,823.7            |       | 553.4                     |       | 418.2               |       |
| Commitments from  long-term rental and operating leasing contracts |       | 1,281.0      |       | 329.9              |       | 519.1                     |       | 432.0               |       |
| Purchase  commitments for raw materials and natural gas            |       | 74,580.8     |       | 11,055.4           |       | 25,402.5                  |       | 38,122.9            |       |
| **Total**                                                          | ** ** | **88,140.2** | ** ** | **16,903.9**       | ** ** | **29,333.2**              | ** ** | **41,903.1**        |       |

 

“Contractual obligations” areobligations to make payments or transfer assets under existing contracts.“Financial debt” comprises futureprincipal and deferred interest payments that we need to make to settle our financial liabilities. This includesprimarily bonds and liabilities to credit institutions. See also Note 22 to our Consolidated Financial Statementsincluded in Item 18. “Miscellaneous liabilities” comprise advances received on accounts of orders, non-tradeliabilities of our joint ventures to partners, tax, social security and payroll liabilities and deferred income aswell as various other items that require cash settlements. “Commitments from long-term rental and leasingcontracts” encompass the total minimum undiscounted future payments for leasing and otherlong-term rental contracts. “Purchase commitments for raw materials and natural gas” contain obligations from therespective long-term purchase contracts.

Additionally, remaining costsof construction in progress include obligations arising from futureinvestments in property, plant and equipment.They amount to €2,422.7 million as of December 31, 2006. Purchase commitments thereof amount to €687.2million. Furthermore, there are obligations resulting from capital contribution in the amount of €7.5million as of December 31, 2006.  

Please see Note 20 includedin Item 18, the Consolidated Financial Statements, for further informationregarding pension commitments. 

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Item 6.    Directors, Senior Management and Employees

In accordance with the GermanStock Corporation Act *(Aktiengesetz)*,BASF Aktiengesellschaft has aBoard of Executive Directors *(Vorstand)*and a Supervisory Board *(Aufsichtsrat)*.The two Boards are separate, andno individual is simultaneously a member of both Boards.

The Board of ExecutiveDirectors is responsible for managing the business of BASF Aktiengesellschaftin accordance with the GermanStock Corporation Act and BASF Aktiengesellschaft’s Articles of Association. The Board of Executive Directors alsorepresents the company in its dealings with third parties and in court.

The principal function of theSupervisory Board is to appoint and supervise the Board of ExecutiveDirectors. The Supervisory Board may not makemanagement decisions, but BASF’s Articles of Association or the Supervisory Board itself may requirethe prior consent of the Supervisory Board for certain types of transactions.

Members of both the Board ofExecutive Directors and the Supervisory Board owe a duty of loyalty andcare to BASF Aktiengesellschaft. In exercisingthese duties, the applicable standard of care is that of a diligent and prudent business person. Membersof both Boards must take into account a broad range of considerations when making decisions, foremostthe interests of BASF Aktiengesellschaft, including its shareholders, employees and creditors and, toa certain extent, the interests of society. The members of the Board of Executive Directors and theSupervisory Board are personally liable to BASF Aktiengesellschaft for breaches of their duties of loyalty andcare.

**BOARD OF EXECUTIVE DIRECTORS**

The number of members of theBoard of Executive Directors is determined by the Supervisory Board,subject to a minimum of two members. As ofDecember 31, 2006, BASF Aktiengesellschaft’s Board of Executive Directors had nine members. OnJanuary 1, 2006 Dr. Martin Brudermüller joined the Board of Executive Directors.

Pursuant to the Memorandumand Articles of Association of BASF Aktiengesellschaft, any twomembers of the Board of Executive Directors orone member and the holder of a special power of attorney (Prokura) may bind the company.

The Board of ExecutiveDirectors must report regularly to the Supervisory Board on the currentbusinessof BASFAktiengesellschaft, on the company’s business policies and other fundamentalmatters regarding the futureconduct of the company’s business, on the company’s profitability, particularlyon its return on equity, on therisk exposure of the company and the risk management, as well as on anyexceptional matters that mayarise from time to time. The Supervisory Board is also entitled to requestspecial reports at any time.

The Supervisory Boardappoints members to the Board of Executive Directors for a maximum term offive years. Members of the Boardof Executive Directors may be re-appointed or have their terms extended for one or more terms of no more than fiveyears.

Under certain circumstances,such as a serious breach of duty or a bona fide vote of no confidence bya majority of votes at ashareholders’ meeting, a member of the Board of Executive Directors may be removed by the Supervisory Board priorto the expiration of her or his term. A member of the Board of Executive Directors may not deal with or voteon matters relating to proposals, arrangements or contracts between that member and the company.

The Articles of Associationof BASF Aktiengesellschaft require decisions of the Board of ExecutiveDirectors to be made by a simple majorityunless the law requires a larger majority. In case of a tie, the chairman has the casting voice.

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The following table lists thecurrent members of the Board of Executive Directors, their ages as ofDecember 31, 2006, the years in which theywere first appointed to the Board, the year in which their running term ends and a list of outsidedirectorships:

**Dr. JürgenHambrecht**
| Age: 60 |   | First year appointed: 1997 |   | Year term expires: 2011 |
|---------|--------|----------------------------|--------|-------------------------|

 
| **Professional Career** | ** ** |
|-------------------------|------------|
| 1976                    |       | Joined BASF Aktiengesellschaft’s Polymers  Laboratory, responsible for polystyrene, styrenic copolymers and  polyphenylene ethers |
| 1985                    |       | Head of Research and Purchasing at BASF Lacke und  Farben AG, Münster, Germany (now BASF Coatings AG) |
| 1990                    |       | President, Engineering Plastics division |
| 1995                    |       | President, East Asia division based in Hong Kong |
| 1996                    |       | Appointed to the Board of Executive Directors  effective May 16, 1997 |
| 2002                    |       | Appointed Chairman of the Board of Executive  Directors effective May 6, 2003 |

 

*Position& Main Areas of Responsibility*

Chairman of the Board ofExecutive Directors — Legal Taxes & Insurance; Strategic Planning & Controlling;Communications BASF Group; Global HR — Executive Management & Development;Investor Relations

*Membershipson Supervisory Boards*

Bilfinger Berger AG,Mannheim, Germany

**EggertVoscherau**
| Age: 63 |   | First year appointed: 1996 |   | Year term expires: 2008 |
|---------|--------|----------------------------|--------|-------------------------|

 
| **Professional  Career** | ** ** |
|--------------------------|------------|
| 1969                     |       | Joined BASF |
| 1981                     |       | Management position BASF Brasileira S.A., São Paulo,  Brazil |
| 1984                     |       | Managing Director, BASF Brasileira S.A., São Paulo,  Brazil |
| 1987                     |       | President, Crop Protection division |
| 1991                     |       | President, North American Consumer Products division  (Pharmaceuticals, Crop Protection and Fine Chemicals); in addition, from 1994  President of Latin America North division |
| 1996                     |       | Appointed to the Board of Executive Directors  effective November 1, 1996 |
| 1997                     |       | Chairman and Chief Executive Officer of BASF Corporation,  New Jersey |
| 2002                     |       | Appointed Vice Chairman of the Board of Executive  Directors, effective May 6, 2003 |

 

*Position& Main Areas of Responsibility*

Vice Chairman of the Board ofExecutive Directors and Industrial Relations Director; Human Resources;Environment, Safety & Energy; Occupational Medicine & HealthProtection; Corporate & Governmental Relations; Ludwigshafen Verbund Site;Antwerp Verbund Site; Europe

*Membershipson Supervisory Boards*

HDI Haftpflichtverband derDeutschen Industrie VVaG, Hannover, Germany (German Industry Liability Association)

Talanx AG, Hannover, Germany

CropEnergies AG, Mannheim,Germany

Deutsche Bahn AG, Berlin,Germany

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**Dr. KurtBock**
| Age: 48 |   | First year appointed: 2003 |   | Year term expires: 2007 |
|---------|--------|----------------------------|--------|-------------------------|

 
| **Professional Career** | ** ** | ** **                                                                            |
|-------------------------|------------|---------------------------------------------------------------------------------------|
| 1985                    |       | Joined BASF Aktiengesellschaft in the Finance  division                               |
| 1987                    |       | Executive Assistant to BASF’s Chief Financial  Officer                           |
| 1991                    |       | Head of Technology, Director Planning and  Controlling, Engineering Plastics division |
| 1992                    |       | Senior Vice President, Finance, Robert Bosch GmbH,  Stuttgart, Germany                |
| 1994                    |       | Senior Vice President, Finance and Accounting,  Robert Bosch GmbH                     |
| 1996                    |       | Managing Director, Robert Bosch Limitada, Campinas,  Brazil                           |
| 1998                    |       | Chief Financial Officer, BASF Corporation, New  Jersey                                |
| 2000                    |       | President, Logistics and Information Services                                         |
| 2002                    |       | Appointed to the Board of Executive Directors  effective January 1, 2003              |

 

*Position& Main Areas of Responsibility*

Executive Director and ChiefFinancial Officer — Finance; Global Procurement & Logistics; Information Services;Corporate Controlling; Corporate Audit; South America 

**Dr. MartinBrudermüller**
| Age: 45 |   | First year appointed: 2006 |   | Year term expires: 2008 |
|---------|--------|----------------------------|--------|-------------------------|

 
| **Professional Career** | ** ** |
|-------------------------|------------|
| 1988                    |       | Joined BASF Aktiengesellschaft in BASF’s ammonia  laboratory to work in chemical research |
| 1993                    |       | New business development/marketing, Intermediates  division |
| 1995                    |       | Delegated to BASF Italia Spa, Milan, Italy, Head of  Marketing and Sales Intermediates, pharmaceutical chemicals |
| 1999                    |       | Director Production fat-soluble vitamins, Fine  Chemicals division |
| 2001                    |       | Senior Vice President, Strategic Planning |
| 2003                    |       | President, Functional Polymers |
| 2005                    |       | Appointed to the Board of Executive Directors  effective January 1, 2006 |

 

*Position& Main Areas of Responsibility*

Executive Director — Asia Pacific (since April 1, 2006)

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**Dr. JohnFeldmann**
| Age: 57 |   | First year appointed: 2000 |   | Year term expires: 2009 |
|---------|--------|----------------------------|--------|-------------------------|

 
| **Professional Career** | ** ** |
|-------------------------|------------|
| 1988                    |       | Joined BASF Aktiengesellschaft in product management  for detergent additives |
| 1990                    |       | Group Leader, Strategic Planning |
| 1993                    |       | Vice President, Strategic Planning |
| 1996                    |       | President, South East Asia/Australia regional  division, headquartered in Singapore |
| 1999                    |       | Head of cross-divisional negotiating teams,  Ludwigshafen, Germany |
| 1999                    |       | Appointed to the Board of Executive Directors  effective January 1, 2000 |

 

*Position& Main Areas of Responsibility*

Executive Director — Styrenics; Performance Polymers; Polyurethanes; Oil& Gas; Polymer Research

**Dr. AndreasKreimeyer**
| Age: 51 |   | First year appointed: 2003 |   | Year term expires: 2007 |
|---------|--------|----------------------------|--------|-------------------------|

 
| **Professional Career** | ** ** |
|-------------------------|------------|
| 1986                    |       | Joined BASF Aktiengesellschaft’s Main Laboratory to  work in biotechnological research |
| 1989                    |       | Head of biological pilot plant, Main Laboratory |
| 1991                    |       | Group Leader Fermentations, Main Laboratory |
| 1993                    |       | Assistant to the Chairman of the Board of Executive Directors |
| 1995                    |       | Vice President, Regional Development at BASF South  East Asia Pte., Singapore |
| 1998                    |       | President, Fertilizers division |
| 2000                    |       | President, Dispersions division (in 2001 renamed  Functional Polymers division) |
| 2003                    |       | Appointed to the Board of Executive Directors  effective January 1, 2003 |

 

*Position& Main Areas of Responsibility*

Executive Director — Construction Chemicals (sinceJuly 2006); Coatings (since April 2006); Functional Polymers; PerformanceChemicals; Asia Pacific (until March 2006)

**Klaus PeterLöbbe**
| Age: 60 |   | First year appointed: 2002 |   | Year term expires: 2008 |
|---------|--------|----------------------------|--------|-------------------------|

 
| **Professional Career** | ** ** |
|-------------------------|------------|
| 1966                    |       | Joined BASF Aktiengesellschaft and initially worked  as trainee and product manager |
| 1975                    |       | Delegated to BASF Japan Ltd. |
| 1987                    |       | Head of Diols Marketing, Intermediates division |
| 1990                    |       | Group Vice President, Marketing, Intermediates  division |
| 1993                    |       | President, Industrial Chemicals division |
| 1996                    |       | President, Coatings division and Chairman of the  Board of Executive Directors of BASF Coatings AG, Münster, Germany |
| 2001                    |       | Appointed to the Board of Executive Directors  effective January 1, 2002 and Chairman and Chief Executive Officer of BASF Corporation,  New Jersey |

 

*Position& Main Areas of Responsibility*

Executive Director — Catalysts (since June 2006);Coatings (until March 2006); North America (NAFTA)

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**Dr. StefanMarcinowski**
| Age: 53 |   | First year appointed: 1997 |   | Year term expires: 2012 |
|---------|--------|----------------------------|--------|-------------------------|

 
| **Professional Career** | ** ** |
|-------------------------|------------|
| 1979                    |       | Joined BASF Aktiengesellschaft’s Main Laboratory to  work in biotechnological research |
| 1986                    |       | Assistant to the Chairman of the Board of Executive  Directors |
| 1988                    |       | Senior Vice President, Public Relations department |
| 1992                    |       | Vice-Presidents Executive, BASF S.A., São Paulo,  Brazil |
| 1995                    |       | President, Plastic Foams & Reaction Resins  division |
| 1996                    |       | Appointed to the Board of Executive Directors  effective May 16, 1997 |

 

*Position& Main Areas of Responsibility*

Executive Director and Research Executive Director —Inorganics; Petrochemicals; Intermediates; Chemical Research & Engineering;Corporate Engineering; Science Relations & Innovation Management; BASFFuture Business GmbH

**PeterOakley**
| Age: 53 |   | First year appointed: 1998 |   | Year term expires: 2008 |
|---------|--------|----------------------------|--------|-------------------------|

 
| **Professional Career** | ** ** |
|-------------------------|------------|
| 1977                    |       | Joined the Economics Department of BASF  Aktiengesellschaft |
| 1980                    |       | Financial Controller within the Southeast Asia  Regional division |
| 1984                    |       | Head of Finance, Administration and Logistics at  BASF China Ltd., Hong Kong |
| 1991                    |       | Group Vice President of the Crop Protection business  in North America, based in Raleigh, North Carolina |
| 1995                    |       | President, Crop Protection division |
| 1997                    |       | Appointed to the Board of Executive Directors  effective May 20, 1998 |

 

*Position& Main Areas of Responsibility*

Executive Director — Agricultural Products; FineChemicals; Specialty Chemicals Research; BASF Plant Science GmbH

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**SUPERVISORY BOARD**

The Supervisory Boardconsists of 20 members, 10 of whom are elected by shareholders at BASFAktiengesellschaft’s Annual Meeting and 10 of whom are elected by employees asrequired by the German Codetermination Act *(Mitbestimmungsgesetz)*.Any Supervisory Board member elected by the shareholders at BASFAktiengesellschaft’s Annual Meeting may be removed by a majority of the votescast at a subsequent meeting of shareholders. Any Board member elected by theemployees may be removed by three-quarters of the votes cast by the class ofemployees that the member represents.

Except for Hans DieterPötsch, all current shareholder representatives on the Supervisory Board wereelected at the AnnualShareholders Meeting on May 6, 2003. Hans Dieter Pötsch was appointed by the district court of Ludwigshafen witheffect as of March 2, 2004, as successor to Helmut Werner who passed away on February 6, 2004. The members of theSupervisory Board representing the company’s employees were elected on February 25, 2003, except forRalf Sikorski who was appointed by the district court of Ludwigshafen on August 7, 2003, as areplacement for Gerhard Zibell. Michael Vassiliadis became member of the Supervisory Board on August 1, 2004,after Jürgen Walter had resigned his membership on the Supervisory Board with effect as of July 31,2004. Michael Vassiliadis had already been elected by the company’s employees on February 25, 2003, assubstitute for Jürgen Walter.

The Supervisory Boardappoints a chairman and a deputy chairman from among its members. Thechairman of the Supervisory Board must beelected by a majority of two-thirds of the Board members. If a majority is not reached in the first vote, themembers of the Supervisory Board, who were elected by the shareholders, elect the chairman.

At least half of the totalrequired number of members of the Supervisory Board must be present orparticipate in decision-making to constitute aquorum. Unless otherwise provided for by law or BASF Aktiengesellschaft’s Articles of Association,resolutions are passed by a simple majority of the votes cast. In the event of a tie, a second vote is held, andthe chairman may cast a deciding vote.

Supervisory Board members areelected for terms of approximately five years. The terms expire at theend of the Annual Meeting after the fourthfiscal year following the year in which the members were elected. The current terms of all Supervisory Board membersexpire at the end of the Annual Meeting in 2008. Compensation for Supervisory Board members is determined by BASFAktiengesellschaft’s Articles of Association.

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The following table lists thecurrent members of BASF Aktiengesellschaft’s Supervisory Board, theirrespective ages as of December 31, 2006, theirprincipal occupation and the year in which they were first elected or appointed to the Supervisory Board:
|                                          | ** ** | ** ** | ** ** | ** **                                                                                                                                                                                                | ** ** | **Year First**          |
|------------------------------------------|------------|------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------|
| **Name**                                 | ** ** | **Age**    | ** ** | **Principal Occupation**                                                                                                                                                                                  | ** ** | **Elected / Appointed** |
| DR. JÜRGEN F.  STRUBE  Chairman     |       | 67         |       | Chairman of the Supervisory Board of BASF Aktiengesellschaft  Former Chairman of the Board of Executive Directors of BASF  Aktiengesellschaft                                                             |       | 2003                    |
| ROBERT OSWALD(1) Vice Chairman           |       | 51         |       | Deputy Chairman of the Supervisory Board of BASF Aktiengesellschaft  Chairman of the works council of the Ludwigshafen site of BASF Aktiengesellschaft  Chairman of the joint works council of BASF Group |       | 2000                    |
| RALF-GERD BASTIAN(1)                     |       | 49         |       | Member of the works council of the Ludwigshafen site  of BASF Aktiengesellschaft                                                                                                                          |       | 2003                    |
| WOLFGANG DANIEL(1)                  |       | 49         |       | Deputy Chairman of the works council of the  Ludwigshafen site of BASF Aktiengesellschaft                                                                                                                 |       | 1996                    |
| DR. FRANÇOIS N.  DIEDERICH          |       | 54         |       | Professor at the Swiss Federal Institute of  Technology Zürich                                                                                                                                       |       | 1998                    |
| MICHAEL DIEKMANN                         |       | 52         |       | Chairman of the Board of Management of Allianz SE                                                                                                                                                         |       | 2003                    |
| DR. TESSEN VON HEYDEBRECK |       | 61         |       | Member of the Board of Managing Directors of  Deutsche Bank AG                                                                                                                                            |       | 1998                    |
| ARTHUR L. KELLY                          |       | 69         |       | Chief Executive of KEL Enterprises L.P., Chicago,  Illinois                                                                                                                                               |       | 2000                    |
| ROLF KLEFFMANN(1)                        |       | 57         |       | Chairman of the works council of Wintershall Holding  AG’s Barnstorf oil plant                                                                                                                       |       | 1998                    |
| MAX DIETRICH  KLEY                       |       | 66         |       | Lawyer

Former Vice Chairman of the Board of Executive  Directors of BASF Aktiengesellschaft                                                                                                              |       | 2003                    |
| DR. RENATE  KÖCHER                  |       | 54         |       | Managing Director of the Institut für Demoskopie  Allensbach, Gesellschaft zum Studium der öffentlichen Meinung mbH                                                                             |       | 2003                    |
| EVA KRAUT(1)                             |       | 50         |       | Chairwoman of the works council of BASF IT Services  GmbH, Ludwigshafen                                                                                                                                   |       | 2002                    |
| ULRICH KÜPPERS(1)                   |       | 51         |       | Regional Manager of the Rhineland -  Palatinate/Saarland branch of the Mining, Chemical and Energy Industries  Union (IG BCE)                                                                             |       | 1994                    |
| KONRAD  MANTEUFFEL(1)                    |       | 54         |       | Member of the works council of the Ludwigshafen site  of BASF Aktiengesellschaft                                                                                                                          |       | 1999                    |
| DR. KARLHEINZ  MESSMER(1)           |       | 62         |       | Plant Manager at the Ludwigshafen site of BASF  Aktiengesellschaft

Chairman of the Committee of Executive  Representatives of BASF Aktiengesellschaft                                                    |       | 1993                    |
| HANS DIETER  PÖTSCH                 |       | 55         |       | Member of the Board of Management of Volkswagen AG                                                                                                                                                        |       | 2004                    |
| DR. HERMANN  SCHOLL                      |       | 71         |       | Chairman of Supervisory Council of Robert Bosch GmbH

Managing Director of Robert Bosch Industrietreuhand KG                                                                                              |       | 1998                    |
| RALF SIKORSKI(1)                    |       | 45         |       | Manager of the Ludwigshafen branch of the Mining,  Chemical and Energy Industries Union (IG BCE)                                                                                                          |       | 2003                    |
| ROBERT STUDER                            |       | 68         |       | Former Chairman of the Supervisory Board of the  Union Bank of Switzerland                                                                                                                                |       | 1993                    |
| MICHAEL  VASSILIADIS(1)                  |       | 42         |       | Member of the Central Board of Executive Directors  of the Mining, Chemical and Energy Industries Union (IG BCE)                                                                                          |       | 2004                    |

----

(1) Employee representative 

95

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The Supervisory Board hasestablished three committees: the Nomination and Compensation Committee, theAudit Committee and the Mediation Committee.

The Nomination andCompensation Committee determines the terms and conditions of employmentof the members of the Board ofExecutive Directors including the level and structure of their remuneration. In addition, the committee makesproposals regarding the appointment of members of the Board of Executive Directors. As of December 31, 2006,the members of this committee are Dr. Jürgen F. Strube, Robert Oswald, Dr. Tessen von Heydebreck andMichael Vassiliadis.

The Audit Committee overseesthe company’s accounting processes. Based on the independentauditor’s report, it reviews the company’sannual financial statements and reports to the Supervisory Board who then makes an informed decision whether ornot to approve the annual financial statements. The Audit Committee is responsible for dealing with theindependent auditors of the company. In particular, it awards the audit contract to the independent auditorelected at the Annual Shareholders’ Meeting, determines the focal points of the audit, as well as theauditor’s compensation, and approves non-audit services rendered by the independent auditor. As of December 31,2006, the members of the Audit Committee are Max Dietrich Kley, Dr. Karlheinz Messmer, Hans Dieter Pötsch and MichaelVassiliadis. The Supervisory Board hasdetermined that the Audit Committee currently includes two Audit Committeefinancial experts: Max DietrichKley and Hans Dieter Pötsch.

The Mediation Committeecomprises two members of the Supervisory Board elected at theShareholders’ Meeting and two members of theSupervisory Board elected by the employees. As of December 31, 2006, the members of thiscommittee are Dr. Jürgen F. Strube, Robert Oswald, Dr. Tessen von Heydebreck and Wolfgang Daniel. In theevent the Supervisory Board cannot reach the two-thirds majority required to appoint a member of theBoard of Executive Directors, the Mediation Committee submits a proposal for the appointment to theSupervisory Board.

**COMPENSATIONREPORT**

This report outlines the mainprinciples of the compensation system for the Board of Executive Directors.It also discloses the amount andstructure of the compensation for each individual Board member. Furthermore, this report provides informationon end-of-service undertakings with respect to Board members.

This report also includesinformation on the compensation of the Supervisory Board members.

The report meets thedisclosure requirements of the German Commercial Code (HGB) extended by theadditional requirements for theBoard of Executive Directors and the Supervisory Board based on the German Law on the Disclosure of Compensationof Members of the Board and is aligned with the recommendations of the German Corporate Governance Code.

**Remunerationof Board members**

The compensation of Boardmembers is determined and reviewed every two to three years by theNomination and Compensation Committee of theSupervisory Board. The last review took place on April 27, 2006. The determination of the amount andstructure of the compensation depends on the company’s size and its financial position as well as theperformance of the Board of Executive Directors. Globally operating European-based companies serve as areference.  

The compensation of Boardmembers is composed of

1.               a fixed yearly salary;

2.               an annual variable bonus;

3.               stock-based compensation in the form ofvirtual stock options (hereafter stock options) as a long-term component;

4.               non-monetary compensation and other additionalcompensation in varying amounts; and

5.               company pension benefits.

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The amount of the annualvariable compensation, the value of the options granted and the companypension are largely determined by companyperformance. This means, in terms of total compensation, significance is attached to companyperformance.

The compensation componentsare shown in detail below:

1.               The annual fixed compensation is paid in equalmonthly payments.

2.               The Board member’s annual variablecompensation (variable bonus) is based on the return on assets (ROA). Thevariable bonus for the prior fiscal year is payable after the Annual Meeting. Boardmembers, as other employee groups, may contribute a portion of their bonus upto a maximum of €30,000 annually into a deferred compensation program. Boardmembers have taken advantage of this offering to varying degrees.

3.               Board members may also participate in thestock option program (BOP) for senior executives.

4.               Non-monetary compensation and other additionalcompensation include delegation allowances, accident insurance premiums andother similar benefits, as well as the personal use of, or benefit from,communication equipment, company cars and security measures made available bythe company. The members of the Board did not receive loans or advances fromthe company.

5.               For details on the company pension benefits,see the section entitled “Pension Benefits” below. 

Based on the principlesabove, individual Board members received the following cash compensation forthe reporting year 2006:

**Thousand €**
| ** **                                                                    | ** ** | **Non-performance related** | ** ** | **Performance-related**             | ** ** | ** **                          | ** ** |
|-------------------------------------------------------------------------------|------------|----------------------------------|------------|-------------------------------------|------------|-------------------------------------|------------|
| ** **                                                                    | ** ** | **compensation**                 | ** ** | **compensation**                    | ** ** | ** **                          | ** ** |
| ** **                                                                    | ** ** | ** **                       | ** ** | **Non-monetary**                    | ** ** | ** **                          | ** ** | ** ** | ** ** |
| ** **                                                                    | ** ** | ** **                       | ** ** | **compensation and**           | ** ** | ** **                          | ** ** | ** ** | ** ** |
| ** **                                                                    | ** ** | ** **                       | ** ** | **other additional com-** | ** ** | ** **                          | ** ** | ** ** | ** ** |
| ** **                                                                    | ** ** | **Fixed salary**            | ** ** | **pensation**                       | ** ** | **Variable bonus**(1) (2) | ** ** | **Total** | ** ** |
| **Dr.  Jürgen Hambrecht,** Chairman of the Board of Executive  Directors |       | 1,100                            |       | 151                                 |       | 2,175                               |       | 3,426 |   |
| **Eggert  Voscherau,**Vice  Chairman of the Board of Executive Directors      |       | 732                              |       | 98                                  |       | 1,446                               |       | 2,276 |   |
| **Dr. Kurt  Bock**                                                            |       | 550                              |       | 109                                 |       | 1,088                               |       | 1,747 |   |
| **Dr.  Martin Brudermüller** (since January 1, 2006)                     |       | 550                              |       | 813                                 | (4)        | 1,088                               |       | 2,451 |   |
| **Dr.  John Feldmann**                                                        |       | 550                              |       | 74                                  |       | 1,088                               |       | 1,712 |   |
| **Dr.  Andreas Kreimeyer**                                                    |       | 550                              |       | 123                                 |       | 1,088                               |       | 1,761 |   |
| **Klaus  Peter Löbbe**                                                   |       | 535                              | (3)        | 725                                 | (4)        | 1,088                               |       | 2,348 |   |
| **Dr. Stefan  Marcinowski**                                                   |       | 550                              |       | 78                                  |       | 1,088                               |       | 1,716 |   |
| **Peter  Oakley**                                                             |       | 550                              |       | 114                                 |       | 1,088                               |       | 1,752 |   |
| **Total**                                                                     | ** ** | **5,667**                        | ** ** | **2,285**                           | ** ** | **11,237**                          | ** ** | **19,189** | ** ** |

----

(1)          This includes all contributions made to the deferred compensationprogram

(2)          Payable following the Annual Meeting 2007

(3)          Payment is made in local currency based on a theoretical net salary inGermany. As a result, there is a deviation from the contractually agreed fixed grosssalary (€550,000).

(4)          Includes payments to cover additional costs ofdelegates, such as assumption of prevailing local rental fees 

When comparing totalcompensation to 2005, it should be considered that the number of Board Membersincreased from eight to nine. Furthermore, the number of Board Members servingas delegates increased to two, thus increasing delegation allowancessignificantly. Adjusted for this effect, the cash compensation increased by8.5% in comparison to the previous year.

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The following table outlines detailsof the stock options for each Board member:

**Long-termincentive components (stock options)**
| ** **                                                                    | ** ** | **Options granted in 2006** | ** ** | **Personnel expenses relating to** | ** ** |
|-------------------------------------------------------------------------------|------------|--------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                                                    | ** ** | ** **                                 | ** ** | **Market value at**                     | ** ** | **stock options ** | ** ** |
| ** **                                                                    | ** ** | ** **                                 | ** ** | **option grant date**                   | ** ** | **from BOP 2000-2006** | ** ** |
| ** **                                                                    | ** ** | **Number**                                 | ** ** | **Thousand**€                                | ** ** | **Thousand**€ | ** ** |
| **Dr.  Jürgen Hambrecht,** Chairman of the Board of Executive  Directors |       | 38,448                                     |       | 716                                               |       | 1,805 |   |
| **Eggert  Voscherau,** Vice Chairman of the Board of Executive  Directors     |       | 25,532                                     |       | 475                                               |       | 1,083 |   |
| **Dr.  Kurt Bock**                                                            |       | 19,224                                     |       | 358                                               |       | 921 |   |
| **Dr.  Martin Brudermüller** (since January 1, 2006)                     |       | 7,740                                      |       | 144                                               |       | 274 |   |
| **Dr.  John Feldmann**                                                        |       | 19,224                                     |       | 358                                               |       | 1,009 |   |
| **Dr.  Andreas Kreimeyer**                                                    |       | 18,000                                     |       | 335                                               |       | 273 |   |
| **Klaus  Peter Löbbe**                                                   |       | 17,540                                     |       | 326                                               |       | 920 |   |
| **Dr.  Stefan Marcinowski**                                                   |       | 19,224                                     |       | 358                                               |       | 1,051 |   |
| **Peter  Oakley**                                                             |       | 19,224                                     |       | 358                                               |       | 1,088 |   |
| **Total**                                                                     | ** ** | **184,156**                                | ** ** | **3,428**                                         | ** ** | **8,424** |   |

 

The base price for theoptions granted in reporting year 2006 is €68.19.

**Pensionbenefits**

Annual pension units areaccrued for the members of the Board. The method of determination of theamount of the pension benefitsgenerally corresponds to that used for other employee groups. The method is designed such that both theperformance of the company and the progression of the individual Board member’s career significantly affect thepension entitlement.

The annual pension benefitsaccruing to Board members in a given reporting year (pension unit) arecomposed of a fixed and variable component.The fixed component is calculated by multiplying the annual fixed compensation above the Social SecurityContribution Ceiling by 35%. The resulting amount is converted into a lifelong pension payable onretirement using actuarial factors based on a discount rate (6%), the probability of death, invalidity andmortality (Heubeck-Richttafeln, 1998) and an assumed pension increase (1.5% per annum). This is the amountthat is payable upon retirement. The variable component of the pension unit depends on the return onassets (ROA) in the reporting year under consideration. The variable component is based on a ROA of 12% atwhich point the variable component is equal in value to the fixed component. Based on a ROA of 12%,there is a linear relationship between the variable component and the ROA figures between 10% and 14%. Thesum of the pension units accumulated over the respective reporting years determines the respectiveBoard member’s pension benefit at the end of service upon the attainment of retirement age of 60 years ordisability or death. Pension payments are adjusted on an annual basis according to the changes in the Germanconsumer price index.

The pension units alsoinclude survivor benefits. Upon the death of an active or former member of theBoard, the surviving spousereceives a survivor pension amounting to 60% of the Board member’s pensionentitlement. The orphan pensionamounts to 10% for each half-orphan, 33% for an orphan, 25% each for twoorphans and 20% each for three ormore orphans of the pension entitlement of the deceased Board member. The survivor benefits may not exceed 75% ofthe Board member’s total pension entitlement. If the survivor pensions exceed the upper limit, they will beproportionately reduced.

Board members are members ofthe BASF Pensionskasse VVaG, asare generally all employees of BASF Aktiengesellschaft. Contributionsand benefits are determined by the statutesand general conditions of the BASF Pensionskasse VVaG.

The service cost for thereporting year 2006 amounted to €830 thousand for Dr. Jürgen Hambrecht,€171 thousand for Eggert Voscherau, €625thousand for Dr. Kurt Bock, €571 thousand for Dr. Martin Brudermüller, €588 thousand for Dr. JohnFeldmann, €595 thousand for Dr. Andreas Kreimeyer, €154 thousand for Klaus Peter Löbbe, €577thousand for Dr. Stefan Marcinowski and €566 thousand for Peter Oakley. These amounts include thecosts for the pension claims arising from the deferred contribution program.

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**End of service benefits**

 

A Boardmember that leaves the company before the age of 60, whose employment contractis not renewed or is revoked is entitled to pension benefits. In such a case,the company is entitled to offset compensation received for any other work doneagainst pension benefits.

 

End ofservice following a change-of-control event: A change-of-control event, interms of this provision, occurs when a shareholder informs BASF of ashareholding of at least 25%, or the increase of such a holding.

 

If a Board member’s position is revoked within oneyear following a change-of-control event the Board member will continue toreceive the contractually agreed payments (fixed compensation and variablebonus) for the remaining contractual term of office. In addition, the Boardmember will receive a severance payment, depending on the remaining contractualterm of office, up to a maximum of 2.5 years of compensation (based on thefixed compensation and the previous year’s variable bonus), which, togetherwith the continuing compensation, may not exceed five years of compensation.Furthermore, the Board member may receive the market value of the option rightsacquired in connection with BOP within a period of three months. The prematuretermination of service due to the revocation of a Board member’s positionentitles the Board member to pension benefits. When calculating the amount ofthe pension benefits, the missing years of service up to the age of 60 yearswill be considered.

 

Theaforementioned is also applicable upon the occurrence of a change-of-controlevent, if the time to the end of the current contractual term of office is lessthan two years and the appointment is not subsequently extended by a minimum oftwo years.

 

Theaforementioned payments are only payable if the Board member has not givencause for the termination or non-renewal of his service contract.

 

**Previous Board members**

 

Totalcompensation for previous Board members and their surviving dependents amountedto €6.0 million in the reporting year 2006. Pension provisions for previousBoard members and their surviving dependants amounted to €75.1 million.

 

**Remuneration of Supervisory Boardmembers**

 

Thecompensation of the Supervisory Board is regulated by the Articles ofAssociation of BASF Aktiengesellschaft.

 

Eachmember of the Supervisory Board receives a fixed remuneration of €60,000 and a performance-orientedvariable remuneration for each full €0.01 by which the earnings per share (EPS)of the BASF Group declared in the BASF Group Consolidated Financial Statementsfor the year for which the remuneration is being paid exceeds the minimum EPS.The minimum EPS for the 2006 reporting year is €2.50. The performance-orientedvariable remuneration is €400 for each full €0.01 of EPS up to an EPS of €4.00,€300 for each further €0.01 of EPS up to an EPS of €5.00 and €200 for each€0.01 beyond this. The performance-oriented variable remuneration is limited toa maximum amount of €120,000. The minimum EPS and the corresponding thresholdsshall increase by €0.10 for each subsequent financial year. Based on the EPS of€6.37 published in the BASF Group Consolidated Statements 2006, theperformance-oriented compensation amounted to €117,400. The chairman of theSupervisory Board receives two and a half times and a deputy chairman one and ahalf times the remuneration of an ordinary member.

 

Membersof the Supervisory Board who are members of a committee, with the exception ofthe Mediation Committee formed in accordance with Section 27 (3) of the GermanCodetermination Act, shall receive a further fixed remuneration for thispurpose in the amount of €12,500. For the Audit Committee, the further fixed remunerationshall be €25,000. The chairman of a committee shall receive twice and a deputychairman one and half times the further fixed remuneration.

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The companyreimburses members of the Supervisory Board for out-of-pocket expenses and valueadded tax to be paid with regard to their activities as members of theSupervisory Board or of a committee. The company further grants the members ofthe Supervisory Board a fee of €500 for attending a meeting of the SupervisoryBoard or one of its committees to which they belong and includes theperformance of the duties of the members of the Supervisory Board in the coverof a consequential loss liability insurance concluded by it.

 

Thetotal compensation of the Supervisory Board amounted to €4.1million in 2006(2005: €3.4 million). 

Thecompensation of the individual Supervisory Board members related to thereporting year 2006 was as follows:

 

**Thousand €**

 
| ** **                                 | ** ** | ** **                  | ** ** | **Performance-oriented**       | ** ** | **Payment for committee** | ** ** | ** **                  | ** ** |
|--------------------------------------------|------------|-----------------------------|------------|--------------------------------|------------|-------------------------------------|------------|-----------------------------|------------|
| ** **                                 | ** ** | **Fixed compensation** | ** ** | **variable compensation** | ** ** | **membership(s)**                   | ** ** | **Total compensation** | ** ** |
| Prof. Dr. Jürgen  Strube, Chairman(1) |       | 150                         |       | 293.5                          |       | 25                                  |       | 468.5                       |       |
| Robert Oswald,  Vice Chairman(2)           |       | 90                          |       | 176.1                          |       | 12.5                                |       | 278.6                       |       |
| Ralf-Gerd  Bastian                         |       | 60                          |       | 117.4                          |       |                                |       | 177.4                       |       |
| Wolfgang Daniel                            |       | 60                          |       | 117.4                          |       |                                |       | 177.4                       |       |
| Prof. Dr. François N. Diederich       |       | 60                          |       | 117.4                          |       |                                |       | 177.4                       |       |
| Michael Diekmann                           |       | 60                          |       | 117.4                          |       |                                |       | 177.4                       |       |
| Dr. Tessen von  Heydebreck(2)              |       | 60                          |       | 117.4                          |       | 12.5                                |       | 189.9                       |       |
| Arthur L. Kelly                            |       | 60                          |       | 117.4                          |       |                                |       | 177.4                       |       |
| Rolf Kleffmann                             |       | 60                          |       | 117.4                          |       |                                |       | 177.4                       |       |
| Max Dietrich  Kley(3)                      |       | 60                          |       | 117.4                          |       | 50                                  |       | 227.4                       |       |
| Prof. Dr. Renate  Köcher              |       | 60                          |       | 117.4                          |       |                                |       | 177.4                       |       |
| Eva Kraut                                  |       | 60                          |       | 117.4                          |       |                                |       | 177.4                       |       |
| Ulrich Küppers                        |       | 60                          |       | 117.4                          |       |                                |       | 177.4                       |       |
| Konrad  Manteuffel                         |       | 60                          |       | 117.4                          |       |                                |       | 177.4                       |       |
| Dr. Karlheinz  Messmer(4)                  |       | 60                          |       | 117.4                          |       | 25                                  |       | 202.4                       |       |
| Hans Dieter  Pötsch(4)                |       | 60                          |       | 117.4                          |       | 25                                  |       | 202.4                       |       |
| Prof. Dr.  Hermann Scholl                  |       | 60                          |       | 117.4                          |       |                                |       | 177.4                       |       |
| Ralf Sikorski                              |       | 60                          |       | 117.4                          |       |                                |       | 177.4                       |       |
| Robert Studer                              |       | 60                          |       | 117.4                          |       |                                |       | 177.4                       |       |
| Michael Vassiliadis(2)(4)                  |       | 60                          |       | 117.4                          |       | 37.5                                |       | 214.9                       |       |

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(1)          Chairman of the Nomination and CompensationCommittee

(2)          Member of the Nomination and Compensation Committee

(3)          Chairman of the Audit Committee

(4)          Member of the Audit Committee

 

Compensationfor Supervisory Board membership and membership of Supervisory Board committeesis payable after the Annual Meeting, which approves the Consolidated FinancialStatements upon which the variable compensation is based. Accordingly,compensation relating to the reporting year 2006 will be paid following theAnnual Meeting on April 26, 2007.

 

In thereporting year 2006, the company paid the Supervisory Board member, Prof. Dr.Diederich, approximately €24,400 (CHF 38,400) plus value added taxes andout-of-pocket expenses for consulting work in the area of chemical researchbased on the consulting contract approved by the Supervisory Board. Beyondthis, Supervisory Board members did not receive any further compensation in2006 for services rendered personally in particular, the rendering of advisoryand agency services.

 

**Share Ownership by Members of theBoard of Executive Directors and the Supervisory Board**

 

Nomember of the Board of Executive Directors or the Supervisory Boardbeneficially owns 1% or more of the outstanding BASF Shares.

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**EMPLOYEES**

** **

Asof December 31, 2006, BASF employed a workforce of 95,247 worldwide, whichrepresents an increase of approximately 17.7% from the end of 2005. Theincrease in the number of employees can be primarily attributed to theacquisition of Engelhard Corp., the construction chemicals business of Degussa AGand Johnson Polymer. Of the total workforce, about 49.7% of the workforce isbased in Germany. Expenditures for salaries and wages totaled €5,030 million in2006, up from €4,553 million in 2005. For further information, see Note 12 tothe Consolidated Financial Statements included in Item 18.

 

Thefollowing table details BASF’s workforce on a regional basis as of December 31,2006, 2005 and 2004.

 
| ** **                          | ** ** | **2006**   | ** ** | **2005**   | ** ** | **2004**   | ** ** |
|-------------------------------------|------------|------------|------------|------------|------------|------------|------------|
| Europe                              |       | 61,444     |       | 56,614     |       | 57,540     |       |
| *Thereof Germany*                   | * *   | *47,296*   | * *   | *45,620*   | * *   | *46,666*   | * *   |
| North America  (NAFTA)              |       | 15,513     |       | 9,826      |       | 10,578     |       |
| Asia Pacific                        |       | 12,788     |       | 9,669      |       | 8,916      |       |
| South America, Africa,  Middle East |       | 5,502      |       | 4,836      |       | 4,921      |       |
| **Total**                           |       | **95,247** | ** ** | **80,945** | ** ** | **81,955** |       |

 

Asof December 31, 2006, BASF Aktiengesellschaft employed 33,220 people mainly atits headquarters in Ludwigshafen, Germany, compared with 34,143 people as ofDecember 31, 2005.

 

Anumber of BASF’s non-management employees are members of labor unions. Themajority of these union members belong to the Mining, Chemical and EnergyIndustries. None of BASF’s sites in Germany is operated on a “closed shop”basis, meaning that employees are not required to join a union. In Germany,collective bargaining agreements for employees below management level aregenerally negotiated between the association of employers within a particularindustry and the respective unions.

 

Inaddition, under German law, employees elect a works council that participatesin determining company site policy, especially with regard to certain voluntarycompensation matters and benefits.

 

Themost recent collective bargaining agreement for employees in Germanyrepresented by labor unions, which covers most of BASF’s employees in Germany,was signed in June 2005 with a term of 19 months.

 

BASFconsiders its labor relations to be positive and anticipates reaching futureagreements with its labor unions on terms satisfactory to all parties. Therecan be no assurances, however, that new agreements will be reached without awork stoppage or strike or on terms satisfactory to BASF. A prolonged workstoppage or strike at any of BASF’s major manufacturing sites could have amaterial adverse effect on the company’s results of operations. BASF has notexperienced any material strike for more than 10 years.

 

**Agreementsat the Ludwigshafen site and restructuring at BASF Corporation**

** **

TheExecutive Board and the employee’s works council have agreed on a targetheadcount of 32,000 employees in BASF Aktiengesellschaft to be reached in 2008.The target can be adjusted dependent on natural fluctuation. Enforcedredundancies will be avoided, if reached in time. The precondition for thisagreement is that the site is not impaired by economic factors or negativecircumstances that endanger BASF Aktiengesellschaft’s competitiveness to suchan extent that specific structural measures are necessary. The viability of theagreement will be reviewed and discussed with employee representatives eachyear.

 

In2006, we continued with our two-phase restructuring program in North America.The program’s goal of reducing annual fixed costs by €320 million ($400 million)million was achieved ahead of its planned target of mid-2007. As a result ofthe Engelhard Corp. integration, we expect annual synergies of €160 million($200 million) by 2010 primarily from reduction of duplication in areas such asadministration, distribution and logistics. The integration will lead to areduction of about 800 positions, the majority of which will be in the UnitedStates.

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**BASFStock Option Program (BOP)**

** **

TheBASF Stock Option Program (BOP) is offered to the Board of Executive Directorsand currently approximately 1,000 of BASF’s Senior Executives. In 2006, morethan 80% of the eligible Senior Executives opted to participate in the program.

 

Theparticipation in BOP requires a personal investment in BASF shares (“the BOPShares”), which have to be held for at least two years following the OptionGrant Date. The range (minimum/maximum) for the number of BOP Shares iscalculated on the basis of 10% to 30% of the Executive’s annual variablecompensation (gross, in Euro) and the relevant “market price” of the BASFShares, which is the volume weighted average of the prices quoted in the Xetraelectronic trading system of Deutsche Börse AG on the first trading day of theGerman Stock Exchange in Frankfurt following the Annual Shareholders’ Meeting(the “BOP Basic Price”). An Executive participating in the BOP receives fouroption rights for each BOP Share. In 2006, the BOP Basic Price was € 68.19(2005: €50.03, 2004: €42.73). Annual variable compensation for any SeniorExecutive is determined by such Senior Executive’s supervisors pursuant toGroup-wide rules established by the Board of Executive Directors, and is basedon BASF’s performance and the Senior Executive’s individual performance.

 

Optionrights granted in 1999 expired in May 2005 and those granted in 2000 expired inMay 2006. Option rights granted since 2001 may not be exercised prior to July 1two years after the granting. Option rights granted in 2001 expire 15 daysafter the eighth Annual Meeting of BASF Aktiengesellschaft following the grantdate. Option rights granted in 2002-2006 expire on June 30, eight years afterthe granting.

 

Thevalue of the option rights is paid in cash. BASF reserves the right to delivershares instead of the cash settlement, if this is advisable for legal, economicor other reasons.

 

Eachof the option rights entitles the holder to two subscription rights. The firstsubscription right grants participants a cash settlement, based on thedifference between the BASF Share Price on the exercise date and the BOP BasicPrice, provided that the market price of BASF Shares on the exercise date ismore than 30% higher than the BOP Basic Price. The second subscription rightgrants participants a cash settlement, provided that the BASF Share outperformsthe benchmark index. For options granted from 2001 to 2004, the benchmark isthe Dow Jones Global Chemicals Total Return Index. The index relevant foroptions granted since 2005 is the MSCI World Chemicals IndexSM.The cash settlement amount is equal to the relevant BOP Basic Price multipliedby twice the percentage by which BASF Shares have outperformed the benchmarkindex since the date of issue of the relevant right.

 

Anoption right may be exercised if the exercise criteria for one or both of theunderlying subscription rights have been satisfied. If an option right isexercised based on the exercisability of only one subscription right then theother unexercisable subscription right is forfeited. The monetary benefitresulting from the exercise of option rights being granted for one BOP Sharemay not exceed 10 times the personal investment.

 

Fordetails about the number of stock options granted see the table below:

 
| ** **                                                | ** ** | **2006**      | ** ** | **2005**      | ** ** | **2004**      | ** ** |
|-----------------------------------------------------------|------------|---------------|------------|---------------|------------|---------------|------------|
| Stock options  outstanding as of January 1                |       | 5,400,609     |       | 4,643,465     |       | 3,833,959     |       |
| Stock options  granted                                    |       | 1,701,844     |       | 1,807,800     |       | 1,115,964     |       |
| *Thereof to members of the Board of Executive  Directors* | * *   | *184,156*     | * *   | *209,792*     | * *   | *120,356*     | * *   |
| Option rights  forfeited (1)                              |       | 44,144        |       | 66,950        |       | 64,464        |       |
| Option rights  exercised                                  |       | 985,306       |       | 983,706       |       | 241,994       |       |
| **Stock options outstanding as of  December 31**          | ** ** | **6,073,043** | ** ** | **5,400,609** | ** ** | **4,643,465** |       |

----

(1)          Option rights forfeit ifthe option holders no longer work for BASF (for reasons other than retirement)or have sold part of their BOP Shares prior to the end of the two-year holdingperiod.

 

102

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**EmployeeStock Purchase Program**

** **

In1999, BASF Aktiengesellschaft and several other German subsidiaries of BASFlaunched a stock purchase program for those employees who are not entitled toparticipate in BOP. At present, various European and Mexican subsidiariesparticipate in the program. The program allows an employee to purchase BASFShares at market prices by using all or part of the annual variable salary thatthe employee receives from the employing company. For every block of 10 BASFShares so purchased, the employee will be granted one additional BASF Shareafter one, three, five, seven and 10 years without further payment, providedthat the BASF Shares purchased under the program are still held by the employee.

 

In2002, most companies improved the employee share purchase program. The firstblock of 10 shares purchased in any year now attracts one free incentive sharein each of the following 10 years. In addition, all new employees entering intoa permanent contract with BASF are offered five free shares, which must be heldfor ten years. In 2006 employees worldwide purchased 539,190 shares through theemployee share purchase program. Of those, 441,900 were acquired by employeesof BASF Aktiengesellschaft and 97,290 by employees of other BASF Groupcompanies. As a result, 78.8% of the eligible employees currently hold sharesin the company.

 
| ** **                                                          | ** ** | **2006**      | ** ** | **2005**      | ** ** | **2004**      | ** ** |
|---------------------------------------------------------------------|------------|---------------|------------|---------------|------------|---------------|------------|
| Number of BASF  Shares held under the program as of January 1       |       | 2,795,130     |       | 2,405,230     |       | 2,091,400     |       |
| Number of BASF  Shares purchased under the program                  |       | 539,190       |       | 565,000       |       | 468,320       |       |
| Maximum amount  of free shares granted                              |       | 365,840       |       | 375,535       |       | 323,235       |       |
| Shares expired                                                      |       | 166,535       |       | 175,100       |       | 154,490       |       |
| **Number of BASF Shares held  under the program as of December 31** | ** ** | **3,167,785** | ** ** | **2,795,130** | ** ** | **2,405,230** |       |

 

Asof January 1, 2006 BASF Corporation introduced a new Employee Stock PurchaseProgram (ESPP) for employees that are not eligible to participate in the BASFStock Option Program. This program replaced a similar program that had been inoperation from mid-2000 but has a different plan design. Under the new plan atthe end of each calendar quarter, the BASF Corporation calculates an amountequal to 15% of each participant’s payroll contributions made during thequarter. This value is used to determine the number of whole, hypothetical(company-provided) shares credited to each participant’s respective accountbased on the then current ADR market price (NYSE). The hypothetical shares aresubject to a vesting period equal to 2-years from date of each quarterly grant.Upon completion of the 2-year holding requirement, the actual vested shares(net of tax) are purchased by BASF Corporation on the open market, for furtherdeposit into the individual participant accounts. The prior plan has somelegacy vesting of company Discount & company Bonus shares, a portion ofwhich still vests each December 1 (through approximately 2013).

 

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Item7.    Major Shareholders and Related PartyTransactions

 

**MAJOR SHAREHOLDERS**

** **

Thecapital stock of BASF Aktiengesellschaft consists of ordinary shares with nopar value that are issued only in bearer form (“BASF Shares”). As of December31, 2006, BASF Aktiengesellschaft had an aggregate of 501,090,000 ordinaryshares outstanding. Thereof 1,410,000 are repurchased shares intended to becancelled. The outstanding number of shares as disclosed in the financialstatements is 499,680,000.

 

OnMay 2, 2006, Allianz Aktiengesellschaft (now: Allianz SE) notified theSecurities and Exchange Commission on Schedule 13G under the Securities andExchange Act of 1934 that they beneficially own 27,688,542 BASF Sharesrepresenting about 5.4% of the BASF Shares. On January 9, 2007, Axa S.A.notified BASF Aktiengesellschaft, according to the rules of the German SecuritiesTrading Law, that on January 3, 2007, the share of the voting rights directlyor indirectly held by Axa S.A. has exceeded the limit of 5% and amounted to5.17% of the voting rights.

 

Becausethe holders of BASF Shares are not registered with BASF Aktiengesellschaft orany other organization, BASF Aktiengesellschaft generally cannot determine whoits shareholders are or how many shares a particular shareholder owns unlessthe shareholder has notified its shareholding to BASF Aktiengesellschaft. Notwithstandingthe foregoing, based on its survey of January 2006, BASF Aktiengesellschaftbelieves that approximately 14% of the BASF Shares were held by shareholders inthe United States as of the beginning of 2006.

 

Toits knowledge, BASF Aktiengesellschaft is not owned or controlled directly orindirectly by any corporation, foreign government or any person, jointly orseverally.

 

**RELATED PARTY TRANSACTIONS**

 

Certainmembers of the Supervisory Board and the Board of Executive Directors aremembers of supervisory or executive boards of non-affiliated companies withwhich BASF engages in certain transactions in the ordinary course of business.These transactions are executed at prevailing market rates and terms at thetime of the transaction. There are no loans outstanding to members of theSupervisory Board or the Board of Executive Directors.

 

Materialsupply relationships exist between the proportionally consolidated Groupcompanies Wintershall Erdgas Handelshaus GmbH & Co. KG, Berlin, Germany;Wintershall Erdgas Handelshaus Zug AG, Zug, Switzerland; and companies of theBASF Group, for the supply of oil and gas. The unconsolidated portion of thesesupplies amounted to €765.5 million in 2006 and €632.1 million in 2005.

 

Alltransactions were executed on an arms-length basis.

 

Pleasesee Note 13 to the Consolidated Financial Statements included in Item 18 fordetails regarding payables and receivables with companies accounted forproportionally, at acquisition cost, or according to the equity method.

 

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Item8.    Financial Information

 

**CONSOLIDATED FINANCIAL STATEMENTS**

 

See“Item 18. Financial Statements.”

 

**EXPORT SALES**

 

BASFmanufactures products mainly in Europe (primarily Germany), North America andAsia. BASF’s products are then sold in markets worldwide. Therefore, a largeshare of BASF’s products is manufactured in Germany and exported for sale inAsia and to a lesser extent in South America. The following table sets forthBASF’s regional exports:

 

**Million €**

 
| ** **                          | ** ** | **Regional** | ** ** | **Produced in**    | ** ** | **Regional Exports** | ** ** |
|-------------------------------------|------------|--------------|------------|-------------------------|------------|---------------------------|------------|
| **Region**                          | ** ** | **Sales**    | ** ** | **Region**              | ** ** | **(Imports)**             | ** ** |
| ** **                          | ** ** | ** **   | ** ** | **Million €** | ** ** | ** **                | ** ** |
| Europe                              |       | 29,529       |       | 31,444                  |       | 1,915                     |       |
| *Thereof Germany*                   | * *   | *11,062*     | * *   | *22,963*                | * *   | *11,901*                  | * *   |
| North America  (NAFTA)              |       | 11,522       |       | 11,415                  |       | (107                      | )          |
| Asia Pacific                        |       | 8,102        |       | 7,450                   |       | (652                      | )          |
| South America, Africa,  Middle East |       | 3,457        |       | 2,301                   |       | (1,156                    | )          |
| **Total**                           | ** ** | **52,610**   | ** ** | **52,610**              | ** ** | **—**                |       |

 

**LEGAL PROCEEDINGS**

 

**AntitrustClaims Relating to Vitamins**

** **

OnNovember 21, 2001, the European Commission imposed a fine of €296.2 millionagainst BASF Aktiengesellschaft in connection with certain violations ofantitrust laws relating to the sale of vitamin products in the European Unionbetween 1989 and early 1999. On appeal of BASF, the European Court of FirstInstance reduced the fine to €236.8 million on March 15, 2006. On December 9,2004, the European Commission imposed an additional fine of €35 million forviolations of certain antitrust laws relating to the sale of vitamin B4(choline chloride) in the mid-nineties. BASF has also appealed against thisdecision. A further proceeding is still pending in Brazil.

 

OneState court lawsuit on behalf of indirect purchasers is still pending in theUnited States in connection with said antitrust law violations. Further claimsfor damages have been filed in the United Kingdom.

 

Forthese proceedings, the company has established provisions that it anticipatesto be sufficient based on our current state of knowledge.

 

BASFAktiengesellschaft had been named as a defendant in Empagran S.A. et al. vs. F.Hoffmann-LaRoche, Ltd., et al., a federal class action filed in the U.S.District Court for the District of Columbia purportedly on behalf of allpersons who purchased vitamins from the defendants outside the United Statesbetween January 1, 1988 and February 1999. The Empagran complaint alleged thatthe plaintiffs were overcharged on their vitamins purchases as the result of aworldwide conspiracy among the defendants to fix vitamin prices. By decisiondated June 7, 2001, the District Court for the District of Columbia dismissedthe Empagran complaint for lack of subject matter jurisdiction. On January 17,2003, a divided panel of the United States Court of Appeals for the District ofColumbia Circuit reversed the District Court’s ruling. The Court of Appealsheld that the United States antitrust laws permit the assertion of federal subjectmatter jurisdiction over claims by foreign purchasers based on purchases madeand purported damages felt outside the United States. BASF Aktiengesellschaftand the other defendants petitioned for a Writ of Certiorari to the UnitedStates Supreme Court. The Supreme Court granted the petition, and on June 14,2004, vacated the Court of Appeals’ ruling and remanded the case to the Courtof Appeals by an 8-0 decision. On June 28, 2005, the Court of Appeals, onremand, ruled that plaintiffs’ alleged link between foreign injury and domesticeffects was legally insufficient to trigger jurisdiction under the Sherman Actand therefore affirmed the district court’s dismissal of the action. On October26, 2005, plaintiffs filed a new petition for a Writ of Certiorari to the U.S.Supreme Court. The Supreme Court denied the plaintiffs’ petition, on January 6,2006. An attempt of the plaintiffs to reinstate the case at the District Courthas been rejected. The proceedings are, therefore, terminated and the case isfinally dismissed.

105

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**OtherProceedings**

** **

In2005, several class action lawsuits against BASF Aktiengesellschaft and BASFCorporation were filed in U.S. courts. It was alleged that sales of TDI, MDIand polyether polyols had violated antitrust laws. BASF is defending itselfagainst these lawsuits.

 

InFebruary 2006, the U.S. Department of Justice served a Grand Jury subpoena uponBASF Corporation requesting the presentation of documents relating to the saleof TDI, MDI, polyether polyols and related systems during the period of 1999through the present. BASF Corporation is cooperating with the U.S. Departmentof Justice in this regard.

 

InAugust 2005, the European Commission issued Statements of Objections againstseveral European producers of methacrylates and polymethacrylates for allegedanticompetitive behavior between 1995 and 2000, inter alia against BASFAktiengesellschaft. In May 2006, the European Commission terminated theinvestigation against BASF Aktiengesellschaft without imposing any fine.

 

BASFCorporation, Bayer Corporation and Bayer CropScience Corporation have been suedby a number of plaintiffs for damages because of alleged price fixing in thedistribution of the termiticides Premise® (Bayer) and Termidor® (BASF) in the United States. Theplaintiffs contend that BASF and Bayer have each engaged in unlawful resaleprice maintenance resulting in overcharges to plaintiffs’ purchasers who areprofessionals in termite control. The plaintiffs are suing for trebled damagesof $600 million. BASF maintains that its pricing was lawful because its saleswere through agency agreements rather than through distributors and thereforethe claims are without merits.

 

In July 2006, the US-companyMoncrief Oil International has filed a declaratory action against BASFAktiengesellschaft and its subsidiary Wintershall AG at the District Court ofFrankenthal, Germany, Moncrief seeks to have declared null and void agreementsconcluded or to be concluded between BASF/Wintershall and Gazprom in connectionwith the proposed joint exploitation of the Russian gas field Yuzhno Russkoye.Subject matter of the action is Moncrief’s allegation that BASF/Wintershallunlawfully induced Gazprom to violate alleged contracts between subsidiaries ofGazprom and Moncrief. Moncrief is alleging to incur damages in the amount ofseveral billion U.S. Dollars, if it should be excluded from the exploitation ofthe gas field. BASF and Wintershall are of the opinion that all claims arewithout any merit. The negotiations of BASF/Wintershall with Gazprom where atno time directed against Moncrief Oil International. On December 14, 2006,first oral arguments were held in front of the District Court. The DistrictCourt set the next hearing for oral arguments for May 31, 2007.

 

**DIVIDENDPOLICY**

** **

TheBoard of Executive Directors and the Supervisory Board of BASFAktiengesellschaft propose dividends based on BASF Aktiengesellschaft’syear-end unconsolidated financial statements. The proposal is then voted on atBASF’s Annual Meeting. The Annual Meeting is usually convened during the secondquarter of each year.

 

Sinceall BASF Shares are in bearer form, dividends are either remitted to thecustodian bank on behalf of the stockholder, generally within two daysfollowing the Annual Meeting, or in the case of stockholders personallypossessing certificates, made available immediately following the AnnualMeeting upon submission of the dividend coupon therefore at the offices of BASFAktiengesellschaft in Ludwigshafen, Germany, or the offices of BASF Aktiengesellschaft’sappointed paying agents. Record holders of BASF’s American Depositary Receipts(ADRs) on the dividend record date will be entitled to receive payment of thedividend less withholding tax of 15% in respect of the year for which it isdeclared. See “Item 10. Additional Information” for further information. Cashdividends payable to ADR holders will be paid to the Bank of New York, asdepositary, in euros and, subject to certain exceptions, will be converted bythe depositary into U.S. dollars. The amount of dividends received by holdersof ADRs may be affected by fluctuations in exchange rates. See “Item 3. KeyInformation-Exchange Rate Information” for further information.

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BASFAktiengesellschaft expects to continue to pay dividends, although there can beno assurance as to the particular amounts that would be paid from year to year.The payment of future dividends will depend on BASF’s financial condition. See“Item 5. Operating and Financial Review and Prospects.”

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Item9.    The Offer and Listing

 

**LISTING DETAILS**

** **

**PrincipalMarket for BASF Shares**

** **

Theprincipal trading market for BASF Shares is the Frankfurt Stock Exchange. BASFShares are also traded on the other German stock exchanges, namely Berlin, Bremen,Düsseldorf, Hamburg, Hannover, Munich and Stuttgart. In addition, BASF Sharesare traded on the London and Swiss stock exchanges. 

 

SinceJune 7, 2000, American Depositary Receipts (ADRs), each representing one BASFShare, have been traded on the New York Stock Exchange (NYSE) under the tradingsymbol “BF.”

 

Optionson BASF Shares are traded on Eurex, the German-Swiss derivatives market jointlyowned and operated by Deutsche Börse AG and the Swiss Stock Exchange.

 

**SharePrice History**

 

Thetable below shows, for the periods indicated, the high and low official dailyquotation for BASF Shares on the Frankfurt Stock Exchange as reported byDeutsche Börse AG and also the high and low of the DAX. See “Item 3. KeyInfomation-Exchange Rate Information” for information on exchange rates betweenthe U.S. dollar and the euro during the periods in this table.

 
| ** **                                  | ** ** | **Price per BASF Share (€)** | ** ** | **DAX (€)** | ** ** |
|---------------------------------------------|------------|-------------------------------------------------------|------------|-----------------------|------------|
| **Quarterly Highs and Lows** | ** ** | **High**                                              | ** ** | **Low**               | ** ** | **High** | ** ** | **Low** | ** ** |
| **2002**                                    |       |                                                  |       |                  |       |   |   |   |   |
| First Quarter                               |       | 47.56                                                 |       | 40.75                 |       | 5,462.55 |   | 4,745.58 |   |
| Second Quarter                              |       | 49.80                                                 |       | 44.05                 |       | 5,343.88 |   | 4,099.05 |   |
| Third Quarter                               |       | 47.70                                                 |       | 35.90                 |       | 4,483.03 |   | 2,769.03 |   |
| Fourth Quarter                              |       | 40.79                                                 |       | 32.90                 |       | 3,380.20 |   | 2,597.88 |   |
| **2003**                                    |       |                                                  |       |                  |       |   |   |   |   |
| First Quarter                               |       | 39.25                                                 |       | 28.41                 |       | 3,157.25 |   | 2,202.96 |   |
| Second Quarter                              |       | 40.53                                                 |       | 33.81                 |       | 3,304.15 |   | 2,450.19 |   |
| Third Quarter                               |       | 43.05                                                 |       | 36.52                 |       | 3,668.67 |   | 3,146.55 |   |
| Fourth Quarter                              |       | 44.58                                                 |       | 37.55                 |       | 3,965.16 |   | 3,276.64 |   |
| **2004**                                    |       |                                                  |       |                  |       |   |   |   |   |
| First Quarter                               |       | 45.63                                                 |       | 40.49                 |       | 4,151.83 |   | 3,276.07 |   |
| Second Quarter                              |       | 44.89                                                 |       | 40.60                 |       | 4,134.10 |   | 3,754.37 |   |
| Third Quarter                               |       | 47.65                                                 |       | 42.54                 |       | 4,035.02 |   | 3,646.99 |   |
| Fourth Quarter                              |       | 53.00                                                 |       | 46.87                 |       | 4,261.79 |   | 3,854.41 |   |
| **2005**                                    |       |                                                  |       |                  |       |   |   |   |   |
| First Quarter                               |       | 58.30                                                 |       | 51.34                 |       | 4,428.09 |   | 4,201.81 |   |
| Second Quarter                              |       | 56.82                                                 |       | 50.11                 |       | 4,627.48 |   | 4,201.81 |   |
| Third Quarter                               |       | 62.50                                                 |       | 53.80                 |       | 5,048.74 |   | 4,530.18 |   |
| Fourth Quarter                              |       | 65.33                                                 |       | 58.37                 |       | 5,458.58 |   | 4,806.05 |   |
| **2006**                                    |       |                                                  |       |                  |       |   |   |   |   |
| First Quarter                               |       | 65.95                                                 |       | 61.65                 |       | 5,984.19 |   | 5,334.30 |   |
| Second Quarter                              |       | 69.49                                                 |       | 58.97                 |       | 6,140.72 |   | 5,292.14 |   |
| Third Quarter                               |       | 64.93                                                 |       | 60.69                 |       | 6,004.33 |   | 5,396.85 |   |
| Fourth Quarter                              |       | 74.24                                                 |       | 63.62                 |       | 6,611.81 |   | 5.992.22 |   |

 

108

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**Monthly Highs and Lows of theLast Six Months****(1)**
| ** ** | ** ** | **High** | ** ** | **Low** | ** ** |
|------------|------------|----------|------------|---------|------------|
| **2006**   |       |     |       |    |       |
| September  |       | 64.93    |       | 61.36   |       |
| October    |       | 69.06    |       | 63.62   |       |
| November   |       | 71.60    |       | 67.30   |       |
| December   |       | 74.24    |       | 69.00   |       |
|       |       |     |       |    |       |
| **2007**   |       |     |       |    |       |
| January    |       | 74.82    |       | 71.95   |       |
| February   |       | 80.14    |       | 75.50   |       |

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(1)          Effective January 2, 2001, the Frankfurt Stock Exchange nolonger determines official daily quotes for odd-lot trades (Kassakurse). As ofthis date, the stock price information provided above is based on Xetra, the integratedcomputerized trading system through which the Frankfurt Stock Exchange conductstrading in equity securities.

 

**Trading on the New York Stock Exchange**

** **

The following table sets forth, for the period indicated, the highand low sales price per BASF ADR in U.S. dollars, as reported on the New YorkStock Exchange Composite Tape.

 

 
| ** ** | ** ** | **High** | ** ** | **Low** | ** ** |
|------------|------------|----------|------------|---------|------------|
| **2006**   |       |     |       |    |       |   |   |   |   |
| September  |       | USD      |       | 83.11   |       | USD |   | 77.96 |   |
| October    |       | USD      |       | 87.98   |       | USD |   | 81.15 |   |
| November   |       | USD      |       | 92.61   |       | USD |   | 85.69 |   |
| December   |       | USD      |       | 97.76   |       | USD |   | 92.19 |   |
|       |       |     |       |    |       |   |   |   |   |
| **2007**   |       |     |       |    |       |   |   |   |   |
| January    |       | USD      |       | 97.64   |       | USD |   | 92.80 |   |
| February   |       | USD      |       | 105.46  |       | USD |   | 97.50 |   |

 

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Item10.  Additional Information

 

**ARTICLES OF ASSOCIATION**

** **

BASFis a stock corporation organized in the Federal Republic of Germany under theGerman Stock Corporation Act (*Aktiengesetz*).BASF is registered in the Commercial register maintained by the local court inLudwigshafen/Rhine, Germany, under the entry number HRB 3000. Copies of BASF’sArticles of Association are publicly available on our website, www.basf.com,and an English translation was filed with the Securities and ExchangeCommission.

 

Exceptfor the information provided below, BASF incorporates herein all informationregarding its Articles of Association by reference to its RegistrationStatement on Form 20-F (File No. 1-15909), as filed with the Securities andExchange Commission on May 25, 2000.

 

**AnnualGeneral Meetings**

** **

Underthe German Stock Corporation Act, the Board of Executive Directors must call,within the first eight months of each fiscal year, an Ordinary Annual GeneralMeeting of BASF Aktiengesellschaft for the purpose of providing theshareholders with the annual financial statements and the management report anddeciding on the appropriation of the balance sheet profits. Furthermore, anAnnual General Meeting may be called by the Board of Executive Directors, bythe Supervisory Board or by holders of BASF Shares representing, in theaggregate, at least 5% of the issued share capital of BASF Aktiengesellschaft.Notice of an Annual General Meeting must be published in the electronic GeneralFederal Gazette at least thirty days prior to the day by the end of which theshareholders have to notify their attendance at the Annual General Meeting asdescribed below. The notice must state the time, place and agenda of the AnnualGeneral Meeting and the conditions for shareholder participation.

 

Tobe eligible to attend and vote at an Annual General Meeting, a shareholder mustnotify his attendance in writing, by fax or in text form no later than the endof the seventh day prior to the day of the Annual General Meeting and mustprove his right to attend the meeting and to exercise the voting right. Proofof the shareholding must be provided latest by the end of the seventh day priorto the day of the Annual General Meeting in written or text form or by fax inthe English or German language, e.g. a confirmation by the institution wherethe shares are deposited. Such evidence of shareholding must relate to thebeginning of the twenty-first day prior to the day of the Annual GeneralMeeting. The notification of attendance and the proof of shareholding must bereceived by BASF at the address specified in the notice of the Annual GeneralMeeting.

 

**Acquisitionof BASF Shares by BASF Aktiengesellschaft**

** **

Underthe German Stock Corporation Act, a stock corporation may acquire its ownshares in a limited number of exceptional cases, including if so authorized bya shareholder resolution adopted at an Annual General Meeting. At the AnnualMeetings of BASF Aktiengesellschaft held on April 28, 2005 and May 4, 2006, theshareholders authorized the Board of Executive Directors to buy back BASFShares representing up to 10% of BASF Aktiengesellschaft’s outstanding sharecapital. The Board of Executive Directors may either cancel the repurchasedshares, reducing the company’s outstanding share capital, reissue the sharessubject to a further resolution adopted at an Annual Meeting or with theapproval of the Supervisory Board, use the shares for the acquisition ofcompanies, parts of companies or holdings in companies in return for thetransfer of BASF shares. In 2006, BASF Aktiengesellschaft had bought 14,699,000BASF Shares, or approximately 2.86% of the outstanding BASF Shares on December31, 2005. The Board of Executive Directors has cancelled 13,969,000 repurchasedBASF Shares (thereof 680,000 shares repurchased in 2005), thus reducing thecompany’s outstanding share capital.

 

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**EXCHANGECONTROLS AND OTHER LIMITATIONS AFFECTING SECURITY HOLDERS**

** **

Thereare, except in limited embargo circumstances pursuant to resolutions adopted bythe United Nations or the European Union, no legal restrictions in Germany oninternational capital movements and foreign exchange transactions.

 

Forstatistical purposes only, every individual or corporation residing in Germany(a “Resident”) must report to the German Central Bank, subject only to certainimmaterial exceptions, any payment received from or made to or on account of anindividual or corporation residing outside Germany (a “Nonresident”) if suchpayment exceeds €12,500 or the equivalent in a foreign currency. In addition,Residents must report any claims against or any liabilities payable toNonresidents if such claims or liabilities in the aggregate exceed €5,000,000or the equivalent in a foreign currency during any one month.

 

NeitherGerman Law nor the Articles of Association of BASF Aktiengesellschaft imposeany limitations on the rights of Nonresident or foreign owners to hold or voteBASF Shares, including those represented by American Depositary Receipts(ADRs).

 

**TAXATION**

** **

Thefollowing is a summary of material U.S. federal income and German taxconsiderations relating to the ownership of American Depositary Shares (ADSs)or BASF Shares by an Eligible U.S. Holder (as defined below).

 

Thediscussion is based on tax laws of the United States and Germany as in effecton the date of this Annual Report, including the Convention between the UnitedStates of America and the Federal Republic of Germany for the Avoidance ofDouble Taxation and the Prevention of Fiscal Evasion with respect to Taxes onIncome and Capital and to Certain Other Taxes (the “Income Tax Treaty”), andthe Convention between the United States of America and the Federal Republic ofGermany for the Avoidance of Double Taxation with respect to Taxes on Estates,Inheritances and Gifts (the “Estate Tax Treaty”). All such laws are subject tochange, possibly with retroactive effect, and are subject to differentinterpretations. The discussion is also based in part upon the representationsof the depositary and the assumption that each obligation in the DepositAgreement and any related agreement will be performed in accordance with itsterms.

 

Thediscussion does not purport to be a comprehensive description of all the taxconsiderations that may be relevant to the ownership of ADSs or BASF Shares. Inparticular, it does not address any aspect of U.S. federal tax law other thanincome taxation, or any aspect of German tax law other than income, gift,inheritance and wealth taxation, and it does not cover the tax laws of anystate or municipality, or any jurisdiction outside the United States andGermany. Moreover, the discussion does not consider any specific facts orcircumstances that may apply to a particular Eligible U.S. Holder, and does nottake into account any special tax rules to which certain holders (including,without limitation, tax-exempt organizations, persons subject to thealternative minimum tax, securities broker-dealers, financial institutions,persons holding ADSs or BASF Shares in a hedging transaction or as part of astraddle or conversion transaction, persons having a functional currency otherthan the U.S. dollar, persons that own, or that are treated as owning, 10% ormore of the voting power of our stock and persons that received ADSs or BASFShares pursuant to the exercise of employee stock options or otherwise ascompensation) may be subject.

 

Ownersof ADSs or BASF Shares are urged to consult their tax advisers regarding theU.S. federal, state, local, German and other tax consequences of owning anddisposing of ADSs or BASF Shares. In particular, owners of ADSs or BASF Sharesare urged to consult their tax advisers to confirm their status as EligibleU.S. Holders and the consequence to them if they do not so qualify.

 

Forpurposes of the discussion that follows, an “Eligible U.S. Holder” is anybeneficial owner of ADSs or BASF Shares who or which (i) is a resident of theUnited States for the purposes of the Income Tax Treaty, such as a U.S. citizenor U.S. corporation, (ii) is not also a resident of the Federal Republic ofGermany for the purposes of the Income Tax Treaty, (iii) owns the ADSs or BASFShares as capital assets, (iv) does not hold ADSs or BASF Shares as part of thebusiness property of a permanent establishment located in Germany or as part ofa fixed base of an individual located in Germany and used for the performanceof independent personal services, (v) is entitled to benefits under the IncomeTax Treaty with respect to income and gain derived in connection with the ADSsor BASF Shares and (vi) if not an individual, is not subject to the limitationon benefits restrictions in the Income Tax Treaty.

 

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Ingeneral, for U.S. federal income tax purposes, holders of ADRs evidencing ADSswill be treated as the owners of the BASF Shares represented by those ADSs.

 

**Taxationof Dividends**

** **

UnderU.S. federal income tax law, Eligible U.S. Holders are generally required toinclude in their gross income, as dividend income from a qualified foreigncorporation, the gross amount of any distribution paid from the current oraccumulated earnings and profits of BASF (as determined under U.S. federalincome tax principles). The amount of dividend income for U.S. federal incometax purposes is not reduced by German taxes withheld from a dividenddistribution in respect of the ADSs or BASF Shares. Dividends received before2011 by non-corporate Eligible U.S. Holders may be eligible for tax treatmentas “qualified dividend income” that would be taxed as a capital gain. EligibleU.S. Holders that are corporations will not be entitled to thedividends-received deduction with respect to dividend distributions.

 

Asa German corporation, BASF is required to withhold taxes on dividends paid toGerman resident and nonresident stockholders. The required withholding rateapplicable to BASF dividends is 20% plus a solidarity surcharge of 5.5%thereon, equal to 1.1% of the gross dividend (i.e., 5.5% of the 20% tax).Accordingly, a total German withholding tax of 21.1% of the gross dividend isrequired.

 

AnEligible U.S. Holder is entitled to a refund of a portion of the withholdingtax, reducing the net German tax rate to that permitted under the Income TaxTreaty, i.e., 15% of the gross dividend.

 

Theportion of the German income tax withheld that cannot be refunded under theIncome Tax Treaty may be claimed either as a foreign tax credit against the U.S.federal income tax liability of an Eligible U.S. Holder or as a deduction incomputing taxable income. For U.S. foreign tax credit purposes, dividendsreceived in respect of the ADSs or BASF Shares generally will be treated as passiveincome (or, in some circumstances, financial services income) derived fromsources outside the United States. The rules and limitations relating toforeign tax credits are complex, and Eligible U.S. Holders should consult theirown tax advisers regarding the availability of foreign tax credits and theapplication of the foreign tax credit limitations to their particularsituations. Beginning in 2003, adjustments to these calculations may berequired in the case of dividend income treated as “qualified dividend income.”

 

Toillustrate the foregoing, for each $100 gross amount of dividend paid by BASFin 2005 to an Eligible U.S. Holder, $21.10 of German tax would be withheld, ofwhich $6.10 would be refundable. For U.S. federal income tax purposes, the U.S.Holder would report dividend income of $100 (to the extent paid out of currentand accumulated earnings and profits) and foreign taxes paid of $15, forpurposes of calculating the Foreign Tax Credit or the deduction for taxes paid.

 

ForU.S. federal income tax purposes, dividends paid by BASF in euros are includedin the gross income of an Eligible U.S. Holder in a U.S. dollar amountcalculated by reference to the exchange rate in effect on the date thedividends (including the deemed refund of German corporate tax) are received bysuch Eligible U.S. Holder or, in the case of ADSs, by the depositary. If adividend paid in euros is converted into U.S. dollars on the date received,Eligible U.S. Holders generally should not be required to recognize foreigncurrency gain or loss in respect of the dividend.

 

**GeneralRefund Procedures Regarding German Withholding Tax**

** **

Pursuantto administrative procedures, claims for refunds under the Income Tax Treatygenerally must be submitted to the German Federal Tax Authority eitherindividually by an Eligible U.S. Holder, or collectively (introduced on a trialbasis) by the depositary (or a custodian as its designated agent) on behalf ofall Eligible U.S. Holders owning ADSs. Claims must be filed within four yearsof the end of the calendar year in which the dividend was received.

 

The collective refundprocedure may not be available for Eligible U.S. Holders entitled to refunds inexcess of €150 for the calendar year. In such event, those holders must fileseparate claims or may qualify for the simplified refund procedure describedbelow. Details of the collective refund procedure will be available from thedepositary.

 

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Individualclaims for refund have to be made on a special German claim form that must befiled with the German Federal Tax Authority at Bundeszentralamt für Steuern,Friedhofstrasse 1, 53225 Bonn, Germany. The German claim-for-refund form may beobtained from the German Federal Tax Authority at the same address whereapplications are filed, or from the Embassy of the Federal Republic of Germanyat 4645 Reservoir Road, N.W., Washington, D.C. 20007-1998. Forms can also beobtained from the Office of the Assistant Commissioner (International), InternalRevenue Service, 950 L’Enfant Plaza South, SW, Washington, D.C. 20024,Attention: Taxpayer Service Division.

 

Aspart of the individual refund claim, an Eligible U.S. Holder must submit to theGerman Federal Tax Authority the original bank voucher (or certified copythereof) issued by the paying entity documenting the tax withheld, and anofficial IRS certification on IRS Form 6166 of such Eligible U.S. Holder’s lastfiled U.S. federal income tax return. Requests for IRS certification on Form6166 are made by sending a properly completed and signed IRS Form 8802 withrequired documentation described in the instructions to the form and in IRSPublication 686, Certification for Reduced Tax Rates in Tax Treaty Countries.Form 8802 may be filed by mail to: Internal Revenue Service, PhiladelphiaAccounts Management Center, U.S. Residency Certification Request, P.O. Box16347, Philadelphia, P.A. 19114-0447; or by fax to the Philadelphia ServiceCenter at 215-516-1035 or 215-516-3412.

 

TheInternal Revenue Service will send the certification to you, or your properlydesignated agent, to be included with the refund claim and documentation filedwith the German Federal Tax Authority.

 

**SimplifiedRefund Procedure regarding German Withholding Tax in respect of ADSs or BASFShares Deposited with The Depository Trust Company in New York**

** **

Asimplified refund procedure is available to Eligible U.S. Holders applying forTreaty-based refunds of German Tax withheld from dividends paid in respect ofADSs or BASF Shares deposited with The Depository Trust Company in New York.Under the simplified refund procedure, refund applications will be filed in aspecial (simplified) collective procedure with the aid of the “ElectiveDividend Service” (the “EDS”) installed at The Depository Trust Company.

 

Inthe EDS system, the participants maintaining accounts at The Depository TrustCompany report the positions held by them at the relevant cutoff date thatqualify for share dividends subject to withholding tax at the appropriate ratesunder the Income Tax Treaty. The reports of the individual participants will becompiled by The Depository Trust Company into a collective application andsubmitted to the German Federal Tax Authority for conditional refund. Afterinitially checking only arithmetical correctness, the German Federal TaxAuthority will make a refund as required to The Depository Trust Company. Therefund will be made at the earliest on the due date of the withholding taxpursuant to German tax law.

 

TheDepository Trust Company will distribute the refund amounts in accordance withEDS data to the participants to be passed on to the beneficial owners.

 

**Taxationof Capital Gains**

** **

Upona sale or other taxable disposition of ADSs or BASF Shares, an Eligible U.S.Holder will recognize a gain or loss for U.S. federal income tax purposes in anamount equal to the difference between the amount realized from the sale orother disposition, and the Eligible U.S. Holder’s tax basis in the ADSs or BASFShares. Such gain or loss generally will be treated as a capital gain or lossderived from U.S. sources, and will be a long-term capital gain or loss if theEligible U.S. Holder’s holding period for the ADSs or BASF Shares exceeds oneyear. In the case of certain Eligible U.S. Holders (including individuals),long-term capital gains are taxable at preferential U.S. federal income taxrates. The deduction of capital losses is subject to certain limitations underU.S. federal income tax law.

 

Depositsand withdrawals of BASF Shares in exchange for ADSs generally will not beconsidered a taxable event for U.S. federal income tax purposes.

 

113

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Underthe Income Tax Treaty, an Eligible U. S. Holder will not be liable for Germantax on capital gains realized or accrued on the sale or other disposition ofADSs or BASF Shares.

**Gift andInheritance Taxes – German Taxation**

An Eligible U.S. Holder who isan individual and whose domicile is determined to be in the UnitedStates for purposes of the Estate Tax Treatywill not be subject to German inheritance and gift tax (the equivalent of the U.S. federal estate and gifttax) upon the individual’s death or upon the making of a gift unless the ADSs or BASF Shares (i) are part ofthe business property of a permanent establishment located in Germany or (ii) are part of the assets of afixed base of an individual located in Germany and used for the performance of independent personal services.An individual’s domicile in the United States, however, does not prevent imposition of German inheritanceand gift tax with respect to an heir, donee, or other beneficiary who is domiciled in Germany at the time theindividual died or the gift was made.

The Estate Tax Treaty alsoprovides a credit against U.S. federal estate and gift tax liability for theamount of inheritance and gifttax paid to Germany, subject to certain limitations, in a case where the ADSs or BASF Shares are subject to Germaninheritance or gift tax and U.S. federal estate or gift tax.

**OtherGerman Taxes**

There are no German transfer,stamp or other similar taxes that would apply to Eligible U.S. Holders thatpurchase or sell ADSs or BASF Shares.

**INFORMATIONREPORTING AND BACKUP WITHHOLDING**

Dividends on ADSs or BASFShares, and payments of the proceeds of a sale of ADSs or BASF Shares,paid within the United States or throughcertain U.S.-related intermediaries are subject to Internal Revenue Service information reporting, and may besubject to backup withholding at a 28% rate unless the holder (i) is a corporation or other exempt recipient or(ii) provides a correct taxpayer identification number, certifies that no loss of exemption from backup withholdinghas occurred and otherwise complies with the backup withholding requirements.

**DOCUMENTSON DISPLAY**

BASF is subject to theinformational requirements of the Securities Exchange Act of 1934, as amended.In accordance with theserequirements, BASF files reports and other information with the Securities and Exchange Commission. These materials,including this Annual Report and the exhibits thereto, may be inspected and copied at the Commission’sPublic Reference Room at 450 Fifth Street, N.W., Washington, D.C. 20549 and at the Commission’s regionaloffices at 175 W. Jackson Boulevard, Suite 900, Chicago, Illinois 60604, and 233 Broadway, New York,N.Y. 10279. Copies of the materials may be obtained from the Public Reference Room of the Commission at450 Fifth Street, N.W., Washington, D.C. 20549 at prescribed rates. The public may obtaininformation on the operation of the Commission’s Public Reference Room by calling the Commission in the UnitedStates at 1-800-SEC-0330. The Commission also maintains a web site at www.sec.gov that containsreports, proxy statements and other information regarding registrants that file electronically with theCommission. BASF’s Annual Report and some of the other information submitted by BASF to theCommission may be accessed through this website. In addition, material filed by BASF can be inspected at theoffices of the New York Stock Exchange at 20 Broad Street, New York, N.Y. 10005.

114

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Item 11.  Quantitative and Qualitative Disclosures About Market Risk

BASF is exposed to foreigncurrency, interest rate and price risks in the normal course of business. Incases where BASF intends to hedgeagainst these risks, derivatives are used, including foreign currency forward contracts, currency options, interestrate/currency swaps, combined instruments and commodity derivatives. In addition, financial derivativeinstruments are used as a substitute for original financial instruments, such as shares or fixed-incomesecurities.

Exclusive use is made ofcommonly used instruments with sufficient market liquidity. Generally,derivative instruments are only used if theyhave corresponding underlying positions arising from the operating business, cash investments andfinancing. The leverage effect that can be achieved with derivatives is deliberately not used. Afterthe acquisition of Engelhard Corp., BASF continues to run the Materials Services business for preciousmetals. The Materials Services business holds, in closely monitored situations for which exposure levels andtransaction size limits have been set by senior management, large, unhedged metal-related commodity positionsthat are subject to market price fluctuations. Such positions may include varying levels of derivativecommodity instruments. All other metal-related commodity transactions are hedged on a daily basis,using forward, future, option or swap contracts to substantially eliminate the exposure to price risk.

The risks arising fromchanges in exchange rates, interest rates and commodity prices as a result ofthe underlying transactions andthe derivative transactions concluded to hedge them are monitored constantly. For this purpose, marketquotations or computer or mathematical models are used to determine the current market values not only of theunderlying transactions but also of the derivative transactions and these are compared with each other. Wherederivative instruments were entered into as a substitute for original financial instruments, market trendsare also monitored continually.

Where derivatives have apositive market value, BASF is exposed to credit risks in the event ofnonperformance by the counterparties. Thecredit risk is minimized by entering into derivative contracts exclusively with major creditworthycounterparties.

To ensure efficient riskmanagement, market risks are centralized at BASF Aktiengesellschaft andBASF Group companies designated for thispurpose, except when certain subsidiaries have been authorized to close derivative contracts under theprinciples mentioned above. BASF has developed and implemented internal guidelines based on the principles ofseparation of the placement function from the settlement function for derivative instruments.

**INTERESTRATE RISK MANAGEMENT**

BASF employs interest-ratesensitive financial instruments to manage the liquidity and cash needs ofits operations. Financialliabilities consist of bank loans (13% of financial liabilities), which BASFGroup companies worldwide havewith numerous local banks in their various local currencies. Additionally, BASF has four fixed-rate euro bonds (42% offinancial liabilities), one 3-Month-EURIBOR variable-rate bond (5% of financial liabilities), commercial paper inU.S. dollar (34% of financial liabilities) and four fixed-rate notes (3% of financial liabilities), as well as anumber of variable and fixed-rate infrastructure and environmental bonds denominated in U.S.-dollar bonds with apreferred tax status in the United States (3% of financial liabilities). BASF has entered into a numberof interest rate derivatives in order to limit fluctuations in its financing costs.

In addition to the interestrate risk exposure resulting from financial liabilities described above, BASFentered into a number of combinedinterest/currency derivatives. Such derivatives were concluded to optimize theinternal financing of Group companies worldwide and to offer the internal parties the desired credit terms andcash flows.  

115

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The following information ondebt is presented in euro equivalents, which is BASF’s reportingcurrency.

**Principal (Notional) Amount Interest Rate –  December 31, 2006****(1)**

**Million €**
| ** **                                         | ** ** | ** **                           | ** ** | ** ** | ** ** | ** **   | ** ** | ** **  | ** ** | ** **  | ** ** | ** **     | ** ** | ** **  | ** ** | **Fair Value** | ** ** |
|----------------------------------------------------|------------|--------------------------------------|------------|------------|------------|--------------|------------|-------------|------------|-------------|------------|----------------|------------|-------------|------------|---------------------|------------|
| ** **                                         | ** ** | **Expected Maturity Date** | ** ** | ** ** | ** ** | **December** | ** ** |
| **Debt, including current portion** | ** ** | **2007**                             | ** ** | **2008**   | ** ** | **2009**     | ** ** | **2010**    | ** ** | **2011**    | ** ** | **Thereafter** | ** ** | **Total**   | ** ** | **31, 2006**   | ** ** |
| **U.S.  dollar (USD)**                             |       |                                 |       |       |       |         |       |        |       |        |       |           |       |        |       |                |       |
| Fixed rate                                         |       | 3,381.6                              |       | 6.9        |       | 104.1        |       | 28.0        |       | 21.6        |       | 250.8          |       | 3,793.0     |       | 3,705.6             |       |
| Weighted average  interest rate (fixed)            |       | 5.24                                 | %          | 5.95       | %          | 4.42         | %          | 5.64        | %          | 5.97        | %          | 4.48           | %          |        |       |                |       |
| Variable rate                                      |       | 38.4                                 |       | 12.0       |       | 12.0         |       | 12.0        |       | 12.0        |       | 459.0          |       | 545.4       |       | 545.4               |       |
| Interest rate (variable)                           |       | 5.41                                 | %          | 6.57       | %          | 6.57         | %          | 6.57        | %          | 6.57        | %          | 4.52           | %          |        |       |                |       |
| **Subtotal**                                       | ** ** | **3,420.0**                          | ** ** | **18.9**   | ** ** | **116.1**    | ** ** | **40.0**    | ** ** | **33.6**    | ** ** | **709.8**      | ** ** | **4,338.4** | ** ** | **4,251.0**         |       |
| **Euro  (EUR)**                                    |       |                                 |       |       |       |         |       |        |       |        |       |           |       |        |       |                |       |
| Fixed rate                                         |       | 22.9                                 |       | 8.6        |       | 0.4          |       | 1,000.4     |       | 1,000.4     |       | 1,905.8        |       | 3,938.5     |       | 3,870.5             |       |
| Weighted average  interest rate (fixed)            |       | 4.47                                 | %          | 4.13       | %          | 4.07         | %          | 3.63        | %          | 4.05        | %          | 3.73           | %          |        |       |                |       |
| Variable rate                                      |       | 105.1                                |       | 0.4        |       | 500.4        |       | 7.4         |       | 7.2         |       | 0.1            |       | 620.6       |       | 621.1               |       |
| Interest rate  (variable)                          |       | 3.44                                 | %          | 4.09       | %          | 3.83         | %          | 3.00        | %          | 3.00        | %          | 3.00           | %          |        |       |                |       |
| **Subtotal**                                       | ** ** | **128.0**                            | ** ** | **9.0**    | ** ** | **500.8**    | ** ** | **1,007.8** | ** ** | **1,007.6** | ** ** | **1,905.9**    | ** ** | **4,559.1** | ** ** | **4,491.6**         |       |
| **Chinese  renminbi (CNY)**                        |       |                                 |       |       |       |         |       |        |       |        |       |           |       |        |       |                |       |
| Fixed rate                                         |       | 59.6                                 |       | 9.3        |       | 76.9         |       | 18.6        |       | 18.6        |       | 136.0          |       | 319.0       |       | 319.0               |       |
| Weighted average  interest rate (fixed)            |       | 5.11                                 | %          | 6.16       | %          | 5.60         | %          | 6.16        | %          | 6.16        | %          | 5.75           | %          |        |       |                |       |
| Variable rate                                      |       | 11.9                                 |       | —     |       | —       |       | —      |       | —      |       | 173.4          |       | 185.3       |       | 185.3               |       |
| Interest rate  (variable)                          |       | 5.51                                 | %          | —     |       | —       |       | —      |       | —      |       | 5.51           | %          |        |       |                |       |
| **Subtotal**                                       | ** ** | **71.5**                             | ** ** | **9.3**    | ** ** | **76.9**     | ** ** | **18.6**    | ** ** | **18.6**    | ** ** | **309.4**      | ** ** | **504.3**   | ** ** | **504.3**           |       |
| **Other  currencies**                              |       |                                 |       |       |       |         |       |        |       |        |       |           |       |        |       |                |       |
| Fixed rate                                         |       | 162.8                                |       | 6.5        |       | —       |       | —      |       | —      |       | 6.8            |       | 176.1       |       | 176.1               |       |
| Weighted average  interest rate (fixed)            |       | 10.41                                | %          | 4.42       | %          | —       |       | —      |       | —      |       | 4.40           | %          |        |       |                |       |
| Variable rate                                      |       | 7.5                                  |       | —     |       | —       |       | —      |       | —      |       | —         |       | 7.5         |       | 7.5                 |       |
| Interest rate  (variable)                          |       | 7.02                                 | %          | —     |       | —       |       | —      |       | —      |       | —         |       |        |       |                |       |
| **Subtotal**                                       |       | **170.3**                            | ** ** | **6.5**    | ** ** | —       | ** ** | —      | ** ** | —      | ** ** | **6.8**        | ** ** | **183.6**   | ** ** | **183.6**           |       |
| **Total**                                          | ** ** | ** **                           | ** ** | ** ** | ** ** | ** **   | ** ** | ** **  | ** ** | ** **  | ** ** | ** **     | ** ** | **9,585.4** | ** ** | **9,430.5**         | ** ** |

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(1)          In the Consolidated Financial Statements,financial liabilities are initially valued at present value. Subsequentvaluation follows the effective interest method. Therefore, the total bookvalue of the financial liabilities is €102.3 million lower than the totalprincipal amount as shown above.

**Principal (Notional) Amount Interest Rate –December 31, 2005****(1)**

**Million €**
| ** **                                         | ** ** | ** **                           | ** ** | ** ** | ** ** | ** **   | ** ** | ** ** | ** ** | ** **  | ** ** | ** **     | ** ** | ** **  | ** ** | **Fair Value** | ** ** |
|----------------------------------------------------|------------|--------------------------------------|------------|------------|------------|--------------|------------|------------|------------|-------------|------------|----------------|------------|-------------|------------|---------------------|------------|
| ** **                                         | ** ** | **Expected Maturity Date** | ** ** | ** ** | ** ** | **December** | ** ** |
| **Debt, including current portion** | ** ** | **2006**                             | ** ** | **2007**   | ** ** | **2008**     | ** ** | **2009**   | ** ** | **2010**    | ** ** | **Thereafter** | ** ** | **Total**   | ** ** | **31, 2005**   | ** ** |
| **U.S. dollar (USD)**                              |       |                                 |       |       |       |         |       |       |       |        |       |           |       |        |       |                |       |
| Fixed rate                                         |       | 11.8                                 |       | —     |       | —       |       | 15.8       |       | 24.2        |       | 86.2           |       | 138.0       |       | 139.5               |       |
| Weighted average interest  rate (fixed)            |       | 5.13                                 | %          | —     |       | —       |       | 5.48       | %          | 6.03        | %          | 3.04           | %          |        |       |                |       |
| Variable rate                                      |       | 4.0                                  |       | 7.8        |       | 7.8          |       | 7.7        |       | 7.7         |       | 545.9          |       | 580.9       |       | 580.9               |       |
| Interest rate (variable)                           |       | 5.16                                 | %          | 5.89       | %          | 5.89         | %          | 5.89       | %          | 5.04        | %          | 3.87           | %          |        |       |                |       |
| **Subtotal**                                       |       | **15.8**                             |       | **7.8**    |       | **7.8**      |       | **23.5**   |       | **31.9**    |       | **632.1**      |       | **718.9**   |       | **720.4**           |       |
| **Euro (EUR)**                                     |       |                                 |       |       |       |         |       |       |       |        |       |           |       |        |       |                |       |
| Fixed rate                                         |       | 13.0                                 |       | 0.7        |       | 0.4          |       | 0.4        |       | 1,000.4     |       | 1,403.6        |       | 2,418.5     |       | 2,430.2             |       |
| Weighted average  interest rate (fixed)            |       | 3.04                                 | %          | 8.57       | %          | 2.99         | %          | 2.99       | %          | 3.59        | %          | 3.40           | %          |        |       |                |       |
| Variable rate                                      |       | 162.5                                |       | 3.4        |       | 7.1          |       | 14.2       |       | 14.2        |       | 21.2           |       | 222.6       |       | 222.6               |       |
| Interest rate  (variable)                          |       | 2.37                                 | %          | 3.39       | %          | 3.00         | %          | 3.00       | %          | 3.00        | %          | 3.00           | %          |        |       |                |       |
| **Subtotal**                                       |       | **175.5**                            |       | **4.1**    |       | **7.5**      | ** ** | **14.6**   |       | **1,014.6** |       | **1,424.8**    |       | **2,641.1** |       | **2,652.8**         |       |
| **Chinese renminbi (CNY)**                         |       |                                 |       |       |       |         |       |       |       |        |       |           |       |        |       |                |       |
| Fixed rate                                         |       | 22.8                                 |       | —     |       | 63.0         |       | —     |       | —      |       | 165.5          |       | 251.3       |       | 251.3               |       |
| Weighted average  interest rate (fixed)            |       | 4.40                                 | %          | —     |       | 5.06         | %          | —     |       | —      |       | 5.18           | %          |        |       |                |       |
| Variable rate                                      |       | —                               |       | —     |       | 19.5         |       | —     |       | —      |       | 258.3          |       | 277.8       |       | 277.8               |       |
| Interest rate  (variable)                          |       | —                               |       | —     |       | 5.18         | %          | —     |       | —      |       | 5.51           | %          |        |       |                |       |
| **Subtotal**                                       |       | **22.8**                             |       | **—** |       | **82.5**     |       | **—** |       | **—**  |       | **423.8**      |       | **529.1**   |       | **529.1**           |       |
| **Other Currencies**                               |       |                                 |       |       |       |         |       |       |       |        |       |           |       |        |       |                |       |
| Fixed rate                                         |       | 17.6                                 |       | 0.4        |       | —       |       | 6.7        |       | —      |       | 7.9            |       | 32.6        |       | 32.6                |       |
| Weighted average  interest rate (fixed)            |       | 9.79                                 | %          | 12.61      | %          | —       |       | 4.35       | %          | —      |       | 3.66           | %          |        |       |                |       |
| Variable rate                                      |       | 27.6                                 |       | —     |       | —       |       | 0.9        |       | —      |       | —         |       | 28.5        |       | 28.5                |       |
| Interest rate  (variable)                          |       | 9.48                                 | %          | —     |       | —       |       | 3.80       | %          | —      |       | —         |       |        |       |                |       |
| **Subtotal**                                       |       | **45.2**                             |       | **0.4**    |       | **—**   |       | **7.6**    |       | **—**  |       | **7.9**        |       | **61.1**    |       | **61.1**            |       |
| **Total**                                          |       |                                 |       |       |       |         |       |       |       |        |       |           |       | **3,950.2** |       | **3,963.4**         | ** ** |

 

----

(1)   In the Consolidated Financial Statements,financial liabilities are initially value at present value. Subsequentvaluation follows the effectiveinterest method. Therefore, the total book value of the financial liabilitiesis €9.2 million lower than therespective total principal amount as shown above.

116

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The following information onderivatives is presented in euro equivalents, which is BASF’s reporting currency.The instruments’ actual cash flows are denominated in the currencies notedparenthetically.

**InterestRate Swaps –  December 31, 2006**
| ** **                                | ** ** | **Expected Maturity Date**             | ** ** | ** ** | ** ** |
|-------------------------------------------|------------|--------------------------------------------------|------------|------------|------------|
| ** **                                | ** ** | **(Notional amounts, Million €)** | ** ** | ** ** | ** ** |
| ** **                                | ** ** | ** **                                       | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **There-** | ** ** | ** ** | ** ** | **Fair** | ** ** |
| ** **                                | ** ** | **2007**                                         | ** ** | **2008**   | ** ** | **2009** | ** ** | **2010** | ** ** | **2011** | ** ** | **after** | ** ** | **Total** | ** ** | **Value** | ** ** |
| **Euro  (EUR)**                           |       |                                             |       |       |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Payer swap                                |       | —                                           |       | —     |       | — |   | 14 |   | — |   | — |   | 14 |   | (0.79 | ) |
| Weighted average  pay rate (fixed)        |       | —                                           |       | —     |       | — |   | 5.99 | % | — |   | — |   | — |   | — |   |
| Weighted average  receive rate (variable) |       | —                                           |       | —     |       | — |   | 3.55 | % | — |   | — |   | — |   | — |   |
| **U.S.  dollar (USD)**                    |       |                                             |       |       |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Payer swap                                |       | —                                           |       | —     |       | 82 |   | 59 |   | — |   | — |   | 141 |   | 2.47 |   |
| Weighted average  pay rate (fixed)        |       | —                                           |       | —     |       | 4.30 | % | 4.7 | % | — |   | — |   | — |   | — |   |
| Weighted average  receive rate (variable) |       | —                                           |       | —     |       | 5.37 | % | 5.61 | % | — |   | — |   | — |   | — |   |
| Receiver swap                             |       | —                                           |       | —     |       | — |   | — |   | — |   | 130 |   | 130 |   | (7.00 | ) |
| Weighted average  pay rate (variable)     |       | —                                           |       | —     |       | — |   | — |   | — |   | 5.38 | % | — |   | — |   |
| Weighted average  receive rate (fixed)    |       | —                                           |       | —     |       | — |   | — |   | — |   | 4.25 | % | — |   | — |   |

 

The total notional amount ofinterest-rate swaps increased from €199 million in 2005 to €285 million in2006 due primarily to theadditional volume related to the Engelhard acquisition. The total fair value ofthe interest-rate swaps decreasedfrom €(2.41) million in 2005 to €(5.32) million in 2006.

**Interest Rate Swaps****–**** December 31, 2005**
| ** **                                | ** ** | **Expected Maturity Date  (National amounts, Million €)** | ** ** | ** ** | ** ** |
|-------------------------------------------|------------|-----------------------------------------------------------------------------------------|------------|------------|------------|
| ** **                                | ** ** | **2006**                                                                                | ** ** | **2007**   | ** ** | **2008** | ** ** | **2009** | ** ** | **2010** | ** ** | **There-  after** | ** ** | **Total** | ** ** | **Fair  Value** | ** ** |
| **Euro  (EUR)**                           |       |                                                                                    |       |       |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Payer swap                                |       | —                                                                                  |       | —     |       | — |   | — |   | 56 |   | — |   | 56 |   | (4.89 | ) |
| Weighted average  pay rate (fixed)        |       | —                                                                                  |       | —     |       | — |   | — |   | 6.0 | % | — |   | — |   | — |   |
| Weighted average  receive rate (variable) |       | —                                                                                  |       | —     |       | — |   | — |   | 2.2 | % | — |   | — |   | — |   |
| **U.S.  dollar (USD)**                    |       |                                                                                    |       |       |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Payer swap                                |       | —                                                                                  |       | —     |       | — |   | 82 |   | 61 |   | — |   | 143 |   | 2.48 |   |
| Weighted average  pay rate (fixed)        |       | —                                                                                  |       | —     |       | — |   | 4.3 | % | 4.7 | % | — |   | — |   | — |   |
| Weighted average  receive rate (variable) |       | —                                                                                  |       | —     |       | — |   | 4.7 | % | 3.8 | % | — |   | — |   | — |   |

 

***Combined Interest Rate and Cross Currency Swaps***

For combined Interest Rateand Cross Currency Swaps please see the section on foreign currency exchangerate risk below.

**FOREIGNEXCHANGE RISK MANAGEMENT**

The principal derivativefinancial instruments used by BASF to hedge foreign currency exposures resultingfrom product sales, purchases of raw materials and commercial paper denominatedin foreign currency are foreign currency forward contracts and currencyoptions. In 2006, transactions in these hedging instruments were primarilyaimed at hedging the exchange rate risk arising from the U.S. dollar, the Britishpound, the Korean won and the Japanese yen.

Intercompany loans within theBASF Group must frequently be denominated in a currency that isforeign to the intercompany borrower or theintercompany lender or both. The foreign currency risks inherent in such loans are hedged by foreign currencyforward contracts or foreign currency borrowings from third parties in such cases where the loan has ashort-term or a variable maturity. Longer-term intercompany loans with fixed maturity schedules are hedgedprimarily with forward foreign exchange contracts and cross-currency swaps.

The following tables provideinformation about significant derivative financial instruments that are sensitiveto changes in foreign currency exchange rates.

117

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** **

**ForeignCurrency Forward Contracts –  December31, 2006****(1)**
| ** **                    | ** ** | ** **                | ** ** | **Weighted**           | ** ** | ** **                | ** ** |
|-------------------------------|------------|---------------------------|------------|------------------------|------------|---------------------------|------------|
| ** **                    | ** ** | ** **                | ** ** | **Average**            | ** ** | ** **                | ** ** |
| ** **                    | ** ** | **Contract**              | ** ** | **Forward**            | ** ** | **Fair**                  | ** ** |
| ** **                    | ** ** | **Amount**                | ** ** | **Exchange Rate** | ** ** | **Value**                 | ** ** |
| ** **                    | ** ** | **(Million **€) | ** ** | ** **             | ** ** | **(Million **€) | ** ** |
| **Euro  (EUR)**               |       |                      |       |                   |       |                      |       |
| Purchase U.S. dollar  (USD)   |       | 3,700.2                   |       | 1.30                   |       | (72.25                    | )          |
| Purchase British  pound (GBP) |       | 261.8                     |       | 0.69                   |       | 5.00                      |       |
| Sell British  pound (GBP)     |       | 340.0                     |       | 0.69                   |       | (8.46                     | )          |
| Sell U.S. Dollar  (USD)       |       | 7,495.9                   |       | 1.30                   |       | 166.34                    |       |
| Sell Japanese  yen (JPY)      |       | 479.0                     |       | 150.91                 |       | 14.69                     |       |
| **U.S.  dollar (USD)**        |       |                      |       |                   |       |                      |       |
| Purchase Korean  won (KRW)    |       | 265.3                     |       | 932.17                 |       | 1.12                      |       |
| Purchase  Japanese yen (JPY)  |       | 227.3                     |       | 107.43                 |       | (10.17                    | )          |
| Sell Korean won  (KRW)        |       | 165.4                     |       | 943.20                 |       | (2.39                     | )          |
| Sell Japanese  yen (JPY)      |       | 228.9                     |       | 110.59                 |       | 11.39                     |       |
| Sell Brazilian  real (BRL)    |       | 70.4                      |       | 2.17                   |       | (0.58                     | )          |
| **Other currencies**          |       | 479.2                     |       | —                 |       | (2.72                     | )          |

----

(1)          All maturing in 2007 except for €412.8 millionin 2008, €573.2 million in 2009, and €8.5 million in 2010.  

The total contract amount offoreign currency forward contracts increased from €5,676 million in 2005to €13,713 million in 2006,mainly due to new hedges of items denominated in foreign currencies. This is primarily due to the acquisition ofEngelhard. The total fair value of the foreign currency forward contracts increased from €35 million in 2005 to€102 million in 2006, mainly due to the lower value of the U.S. dollar compared to the euro.

**Foreign Currency Forward Contracts – December 31,2005****(1)**

 
| ** **                    | ** ** | **Contract  Amount** | ** ** | **Weighted  Average  Forward  Exchange Rate** | ** ** | **Fair  Value**     | ** ** |
|-------------------------------|------------|----------------------|------------|----------------------------------------------------|------------|---------------------|------------|
| ** **                    | ** ** | **(Million**€)  | ** ** | ** **                                         | ** ** | **(Million**€) | ** ** |
| **Euro  (EUR)**               |       |                 |       |                                               |       |                |       |
| Purchase U.S. dollar  (USD)   |       | 749.9                |       | 1.19                                               |       | 0.46                |       |
| Purchase British  pound (GBP) |       | 255.8                |       | 0.71                                               |       | 3.90                |       |
| Sell Brazilian  real (BRL)    |       | 109.7                |       | 2.73                                               |       | 4.30                |       |
| Sell British  pound (GBP)     |       | 388.0                |       | 0.70                                               |       | (3.09               | )          |
| Sell U.S. dollar  (USD)       |       | 3,097.5              |       | 1.18                                               |       | 33.76               |       |
| Sell Japanese  yen (JPY)      |       | 173.5                |       | 138.94                                             |       | (0.96               | )          |
| **U.S.  dollar (USD)**        |       |                 |       |                                               |       |                |       |
| Purchase Korean  won (KRW)    |       | 188.8                |       | 1,021.72                                           |       | 1.99                |       |
| South Korean won  (KRW)       |       | 106.9                |       | 1,034.44                                           |       | (2.23               | )          |
| **Other currencies**          |       | 605.9                |       | —                                             |       | (3.13               | )          |

 

----

(1)          All maturing in 2006 except for €288.8 million in 2007, €369.2 millionin 2006, and €173.8 million in 2009, and €3.5 million in 2010.

 

118

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**ForeignCurrency Options –  December 31, 2006**
| ** **                                                            | ** ** | **Expected Maturity Date**       | ** ** | ** ** | ** ** |
|-----------------------------------------------------------------------|------------|--------------------------------------------|------------|------------|------------|
| ** **                                                            | ** ** | **(Notional amounts, Million**€) | ** ** | ** ** | ** ** |
| ** **                                                            | ** ** | ** **                                 | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **There-** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                                            | ** ** | **2007**                                   | ** ** | **2008**   | ** ** | **2009** | ** ** | **2010** | ** ** | **2011** | ** ** | **after** | ** ** | **Total** | ** ** | **Fair Value** | ** ** |
| **Purchase  euro (EUR) / sell Japanese yen (JPY) (long)**             |       | 6                                          |       | —     |       | — |   | — |   | — |   | — |   | 6 |   | 0.07 |   |
| Weighted Average  Strike Price (JPY/EUR)                              |       | 155.20                                     |       | —     |       | — |   | — |   | — |   | — |   |   |   |   |   |
| **Purchase  euro (EUR) / sell Polish zloty (PLN) (long)**             |       | 25                                         |       | —     |       | — |   |   |   | — |   | — |   | 25 |   | 0.23 |   |
| Weighted Average  Strike Price (PLN/EUR)                              |       | 3.88                                       |       | —     |       | — |   | — |   | — |   | — |   |   |   |   |   |
| **Purchase  euro (EUR) / sell U.S. dollar (USD) (long)**              |       | 931                                        |       | —     |       | — |   | — |   | — |   | — |   | 931 |   | 43.11 |   |
| Weighted Average  Strike Price (USD/EUR)                              |       | 1.27                                       |       | —     |       | — |   | — |   | — |   | — |   |   |   |   |   |
| **Purchase  euro (EUR) / sell U.S. dollar (USD) (short)**             |       | 29                                         |       | —     |       | — |   | — |   |   |   | — |   | 29 |   | (0.00 | )(1) |
| Weighted Average  Strike Price (USD/EUR)                              |       | 1.24                                       |       | —     |       | — |   | — |   | — |   | — |   |   |   |   |   |
| **Purchase  U.S. dollar (USD) / sell euro (EUR) (long)**              |       | 85                                         |       | —     |       | — |   | — |   | — |   | — |   | 85 |   | 0.14 |   |
| Weighted Average  Strike Price (USD/EUR)                              |       | 1.33                                       |       | —     |       | — |   | — |   | — |   | — |   |   |   |   |   |
| **Purchase  U.S. dollar (USD) / sell Brazilian real (BRL) (long)**    |       | 5                                          |       | —     |       | — |   | — |   | — |   | — |   | 5 |   | 0.02 |   |
| Weighted Average  Strike Price (BRL/USD)                              |       | 2.26                                       |       | —     |       | — |   | — |   | — |   | — |   |   |   |   |   |
| **Purchase  euro (EUR) / sell British pound (GBP) (long)**            |       | 15                                         |       | —     |       | — |   | — |   | — |   | — |   | 15 |   | 0.00 | (2) |
| Weighted Average  Strike Price (GBP/EUR)                              |       | 0.68                                       |       | —     |       | — |   | — |   | — |   | — |   |   |   |   |   |
| **Purchase  euro (EUR) / sell Hungarian forint (HUF) (long)**         |       | 14                                         |       | —     |       | — |   | — |   | — |   | — |   | 14 |   | 0.10 |   |
| Weighted Average  Strike Price (HUF/EUR)                              |       | 261.00                                     |       | —     |       | — |   | — |   | — |   | — |   |   |   |   |   |
| **Purchase  euro (EUR) / sell South African rand (ZAR) (long)**       |       | 7                                          |       | —     |       | — |   | — |   | — |   | — |   | 7 |   | 0.00 | (2) |
| Weighted Average  Strike Price (ZAR/EUR)                              |       | 9.50                                       |       | —     |       | — |   | — |   | — |   | — |   |   |   |   |   |
| **Purchase  South Korean won (KRW) / sell U.S. dollar (USD) (long)**  |       | 75                                         |       | —     |       | — |   | — |   | — |   | — |   | 75 |   | 0.20 |   |
| Weighted Average  Strike Price (KRW/USD)                              |       | 918.57                                     |       | —     |       |   |   | — |   | — |   | — |   |   |   |   |   |
| **Purchase  South Korean won (KRW) / sell U.S. dollar (USD) (short)** |       | 40                                         |       | —     |       | — |   | — |   | — |   | — |   | 40 |   | (0.06 | ) |
| Weighted Average Strike  Price (KRW/USD)                              |       | 966.51                                     |       | —     |       | — |   | — |   | — |   | — |   |   |   |   |   |

----

(1)          The fair value of this contract is less than €0.00 but greater than€(0.005) million.

(2)          The fair value of this contract is more than€0.00 but less than €0.005 million.

The total volume of foreigncurrency options decreased from €3,407 million on December 31, 2005, to €1,232million on December 31, 2006, due to the expiration of contracts. The totalfair value of foreign currency option contracts increased from €(34) million in2005 to €44 million in 2006 mainly due to the lower value of the US dollarcompared to euro.

**ForeignCurrency Options – December 31, 2005**
|                                                           | ** ** | **Expected Maturity Date**       | ** ** | ** ** | ** ** |
|-----------------------------------------------------------|------------|--------------------------------------------|------------|------------|------------|
| ** **                                                | ** ** | **(Notional amounts, Million**€) | ** ** | ** ** | ** ** |
| ** **                                                | ** ** | **2006**                                   | ** ** | **2007**   | ** ** | **2008** | ** ** | **2009** | ** ** | **2010** | ** ** | **There-  after** | ** ** | **Total** | ** ** | **Fair  Value** | ** ** |
| **Purchase euro (EUR)/ sell Japanese yen (JPY) (long)**   |       | 8                                          |       | —     |       | — |   | — |   | — |   | — |   | 8 |   | 0.01 |   |
| Weighted Average Strike  Price (JPY/EUR)                  |       | 143.62                                     |       | —     |       | — |   | — |   | — |   | — |   |   |   |   |   |
| **Purchase euro (EUR) / sell Japanese yen (JPY) (short)** |       | 4                                          |       | —     |       | — |   | — |   | — |   | — |   | 4 |   | (0.00 | )(1) |
| Weighted Average Strike  Price (JPY/EUR)                  |       | 133.9                                      |       | —     |       | — |   | — |   | — |   | — |   |   |   |   |   |
| **Purchase euro (EUR)/ sell Polish zloty (PLN) (long)**   |       | 14                                         |       | —     |       | — |   | — |   | — |   | — |   | 14 |   | 0.21 |   |
| Weighted Average Strike  Price (PLN/EUR)                  |       | 3.90                                       |       | —     |       | — |   | — |   | — |   | — |   |   |   |   |   |
| **Purchase euro (EUR)/ sell Polish zloty (PLN) (short)**  |       | 15                                         |       | —     |       | — |   | — |   | — |   | — |   | 15 |   | (0.07 | ) |
| Weighted Average Strike  Price (PLN/EUR)                  |       | 3.70                                       |       | —     |       | — |   | — |   | — |   | — |   |   |   |   |   |
| **Purchase euro (EUR)/ sell U.S. dollar (USD) (long)**    |       | 1,587                                      |       | 82         |       | — |   | — |   | — |   | — |   | 1,669 |   | 12.47 |   |
| Weighted Average Strike  Price (USD/EUR)                  |       | 1.27                                       |       | 1.23       |       | — |   | — |   | — |   | — |   |   |   |   |   |
| **Purchase euro (EUR/ sell U.S. dollar (USD) (short)**    |       | 1,469                                      |       | 1          |       |   |   |   |   |   |   |   |   | 1,470 |   | (49.95 | ) |
| Weighted Average Strike  Price (USD/EUR)                  |       | 1.20                                       |       | 1.32       |       | — |   | — |   | — |   | — |   |   |   |   |   |
| **Purchase U.S. dollar (USD) / sell euro (EUR) (short)**  |       | 152                                        |       | —     |       | — |   | — |   | — |   | — |   | 152 |   | (0.04 | ) |
| Weighted Average Strike  Price (USD/EUR)                  |       | 1.32                                       |       | —     |       | — |   | — |   | — |   | — |   |   |   |   |   |
| **Purchase U.S. dollar (USD) / sell**                     |       |                                       |       |       |       |   |   |   |   |   |   |   |   |   |   |   |   |
| **Brazilian real (BRL) (long)**                           |       | 73                                         |       | 2          |       | — |   | — |   | — |   | — |   | 75 |   | 3.85 |   |
| Weighted Average Strike  Price (BRL/USD)                  |       | 2.42                                       |       | 2.57       |       | — |   | — |   | — |   | — |   |   |   |   |   |

 

----

(1)          The fair value of this contract is less than€0.00 but greater than €(0.005) million.

119

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**Cross Currency Swaps –  December 31, 2006**

** **
| ** **                                                           | ** ** | **Expected Maturity Date**       | ** ** | ** ** | ** ** |
|----------------------------------------------------------------------|------------|--------------------------------------------|------------|------------|------------|
| ** **                                                           | ** ** | **(Notional amounts,**Million €) | ** ** | ** ** | ** ** |
| ** **                                                           | ** ** | ** **                                 | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **There-** | ** ** | ** ** | ** ** | **Fair** | ** ** |
| ** **                                                           | ** ** | **2007**                                   | ** ** | **2008**   | ** ** | **2009** | ** ** | **2010** | ** ** | **2011** | ** ** | **after** | ** ** | **Total** | ** ** | **Value** | ** ** |
| **Receive  euro (EUR) / Pay U.S. dollar (USD)**                      |       |                                       |       |       |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Notional amount                                                      |       | 99                                         |       | 24         |       | — |   | — |   | 16 |   | — |   | 139 |   | 35.77 |   |
| Average contract  rate U.S. dollar (USD) per euro (EUR)              |       | 0.90                                       |       | 1.07       |       | — |   | — |   | 1.30 |   | — |   |   |   |   |   |
| Weighted average  receive rate (variable, EUR)                       |       | 4.76                                       | %          | 4.94       | %          | — |   | — |   | 3.61 | % | — |   |   |   |   |   |
| Weighted average  pay rate (variable, USD)                           |       | 6.21                                       | %          | 6.08       | %          | — |   | — |   | 4.64 | % | — |   |   |   |   |   |
| **Receive  Euro (EUR) / Pay Japanese yen (JPY)**                     |       |                                       |       |       |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Notional amount                                                      |       | 6                                          |       | 6          |       | — |   | — |   | — |   | — |   | 12 |   | 2.16 |   |
| Average contract  rate Japanese yen (JPY) per euro (EUR)             |       | 129.00                                     |       | 154.81     |       | — |   | — |   | — |   | — |   |   |   |   |   |
| Weighted average  receive rate (fixed, EUR)                          |       | 3.39                                       | %          | 3.54       | %          | — |   | — |   | — |   | — |   |   |   |   |   |
| Weighted average  pay rate (fixed, JPY)                              |       | 1.04                                       | %          | 0.52       | %          | — |   | — |   | — |   | — |   |   |   |   |   |
| **Receive  Euro (EUR) / Pay Singapore dollar (SGD)**                 |       |                                       |       |       |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Notional amount                                                      |       | —                                     |       | —     |       | 15 |   | — |   | — |   | — |   | 15 |   | (0.51 | ) |
| Average contract  rate Singapore dollar (SGD) per euro (EUR)         |       | —                                     |       | —     |       | 2.14 |   | — |   | — |   | — |   |   |   |   |   |
| Weighted average  receive rate (fixed, EUR)                          |       | —                                     |       | —     |       | 3.84 | % | — |   | — |   | — |   |   |   |   |   |
| Weighted average  pay rate (fixed, SGD)                              |       | —                                     |       | —     |       | 2.93 | % | — |   | — |   | — |   |   |   |   |   |
| **Receive  Singapore dollar (SGD) / Pay Euro (EUR)**                 |       |                                       |       |       |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Notional amount                                                      |       | —                                     |       | —     |       | 2 |   | — |   | — |   | — |   | 2 |   | 0.09 |   |
| Average contract  rate Singapore dollar (SGD) per euro (EUR)         |       | —                                     |       | —     |       | 2.14 |   | — |   | — |   | — |   |   |   |   |   |
| Weighted average  receive rate (fixed, SGD)                          |       | —                                     |       | —     |       | 2.93 | % | — |   | — |   | — |   |   |   |   |   |
| Weighted average  pay rate (fixed, EUR)                              |       | —                                     |       | —     |       | 3.55 | % | — |   | — |   | — |   |   |   |   |   |
| **Receive  U.S. dollar (USD) / Pay Korean won (KRW)**                |       |                                       |       |       |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Notional amount                                                      |       | 91                                         |       | —     |       | — |   | — |   | — |   | — |   | 91 |   | (18.89 | ) |
| Average contract  rate Korean won (KRW) per U.S. dollar (USD)        |       | 1,188.86                                   |       | —     |       | — |   | — |   | — |   | — |   |   |   |   |   |
| Weighted average  receive rate (variable, USD)                       |       | 6.33                                       | %          | —     |       | — |   | — |   | — |   | — |   |   |   |   |   |
| Weighted average  pay rate (fixed, KRW)                              |       | 6.53                                       | %          | —     |       | — |   | — |   | — |   | — |   |   |   |   |   |
| **Receive  U.S. dollar (USD) / Pay Malaysian ringgit (MYR)**         |       |                                       |       |       |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Notional amount                                                      |       | —                                     |       | —     |       | — |   | — |   | 16 |   | — |   | 16 |   | (1.21 | ) |
| Average contract  rate Malaysian ringgit (MYR) per U.S. dollar (USD) |       | —                                     |       | —     |       | — |   | — |   | 3.80 |   | — |   |   |   |   |   |
| Weighted average  receive rate (variable, USD)                       |       | —                                     |       | —     |       | — |   | — |   | 4.65 | % | — |   |   |   |   |   |
| Weighted average  pay rate (variable, MYR)                           |       | —                                     |       | —     |       | — |   | — |   | 3.83 | % | — |   |   |   |   |   |
| **Receive  U.S. dollar (USD) / Pay Brazilian real (BRL)**            |       |                                       |       |       |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Notional amount                                                      |       | —                                     |       | —     |       | — |   | — |   | 25 |   | — |   | 25 |   | (1.29 | ) |
| Average contract  rate BRL per U.S. dollar (USD)                     |       | —                                     |       | —     |       | — |   | — |   | 2.14 |   | — |   |   |   |   |   |
| Weighted average  receive rate (variable, USD)                       |       | —                                     |       | —     |       | — |   | — |   | 5.72 | % | — |   |   |   |   |   |
| Weighted average  pay rate (variable, BRL)                           |       | —                                     |       | —     |       | — |   | — |   | 13.81 | % | — |   |   |   |   |   |
| Notional amount                                                      |       | —                                     |       | —     |       | — |   | — |   | 34 |   | — |   | 34 |   | (4.56 | ) |
| Average contract  rate BRL per U.S. dollar (USD)                     |       | —                                     |       | —     |       | — |   | — |   | 2.14 |   | — |   |   |   |   |   |
| Weighted average  receive rate (variable, USD)                       |       | —                                     |       | —     |       | — |   | — |   | 5.72 | % | — |   |   |   |   |   |
| Weighted average pay  rate (fixed, BRL)                              |       | —                                     |       | —     |       | — |   | — |   | 16.86 | % | — |   |   |   |   |   |

 

The total notional amount ofthe combined interest-rate and cross-currency swaps decreased from €1,439million in 2005 to €334 million as of December 31, 2006 due to expiringtransactions. The total fair value of the swaps changed from €128 million in2005 to €12 million in 2006, mainly due to the rise in the exchange rate of theUSD and the expiration of transactions with positive market values.

**Cross Currency Swaps – December 31, 2005**

 
| ** **                                                           | ** ** | **Expected Maturity Date**       | ** ** | ** ** | ** ** |
|----------------------------------------------------------------------|------------|--------------------------------------------|------------|------------|------------|
| ** **                                                           | ** ** | **(Notional amounts,**Million €) | ** ** | ** ** | ** ** |
| ** **                                                           | ** ** | ** **                                 | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **There-** | ** ** | ** ** | ** ** | **Fair** | ** ** |
| ** **                                                           | ** ** | **2006**                                   | ** ** | **2007**   | ** ** | **2008** | ** ** | **2009** | ** ** | **2010** | ** ** | **after** | ** ** | **Total** | ** ** | **Value** | ** ** |
| **Receive  euro (EUR / Pay U. S. dollar (USD)**                      |       |                                       |       |       |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Notional amount                                                      |       | 347                                        |       | 419        |       | — |   | — |   | 209 |   | — |   | 975 |   | 131.90 |   |
| Average contract  rate U. S. dollar (USD) per euro (EUR)             |       | 1.04                                       |       | 0.95       |       | — |   | — |   | 0.95 |   | — |   |   |   |   |   |
| Weighted average  receive rate (variable, EUR)                       |       | 2.67                                       | %          | 3.06       | %          | — |   | — |   | 3.49 | % | — |   |   |   |   |   |
| Weighted average  pay rate (fixed, USD)                              |       | 6.48                                       | %          | 7.61       | %          | — |   | — |   | 7.75 | % | — |   |   |   |   |   |
| Notional amount                                                      |       | 64                                         |       | 99         |       | 24 |   | — |   | — |   | 14 |   | 201 |   | 26.55 |   |
| Average contract  rate U. S. dollar (USD) per euro (EUR)             |       | 1.29                                       |       | 0.90       |       | 1.07 |   | — |   | — |   | 1.30 |   |   |   |   |   |
| Weighted average  receive rate (variable, EUR)                       |       | 3.83                                       | %          | 3.79       | %          | 3.89 | % | — |   | — |   | 2.91 | % |   |   |   |   |
| Weighted average  pay rate (variable, USD)                           |       | 5.98                                       | %          | 5.69       | %          | 5.68 | % | — |   | — |   | 4.44 | % |   |   |   |   |
| **Receive  euro (EUR) / Pay Japanese Yen (JPY)**                     |       |                                       |       |       |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Notional amount                                                      |       | —                                     |       | 12         |       | 12 |   | — |   | — |   | — |   | 24 |   | 1.69 |   |
| Average contract  rate Japanese Yen (JPY) per euro (EUR)             |       | —                                     |       | 129.00     |       | 129.00 |   | — |   | — |   | — |   |   |   |   |   |
| Weighted average  receive rate (fixed, EUR)                          |       | —                                     |       | 3.39       | %          | 3.54 | % | — |   | — |   | — |   |   |   |   |   |
| Weighted average  pay rate (fixed, JPY)                              |       | —                                     |       | 1.04       | %          | 0.52 | % | — |   | — |   | — |   |   |   |   |   |
| **Receive  euro (EUR) / Pay Singapore dollar (SGD)**                 |       |                                       |       |       |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Notional amount                                                      |       | —                                     |       | —     |       | — |   | 15 |   | — |   | — |   | 15 |   | (0.59 | ) |
| Average contract  rate Singapore dollar (SGD) per euro (EUR)         |       | —                                     |       | —     |       | — |   | 2.14 |   | — |   | — |   |   |   |   |   |
| Weighted average  receive rate (fixed, EUR)                          |       | —                                     |       | —     |       | — |   | 3.84 | % | — |   | — |   |   |   |   |   |
| Weighted average  pay rate (fixed, SGD)                              |       | —                                     |       | —     |       | — |   | 2.93 | % | — |   | — |   |   |   |   |   |
| **Receive  Singapore dollar (SGD) / Pay euro (EUR)**                 |       |                                       |       |       |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Notional amount                                                      |       | —                                     |       | —     |       | — |   | 2 |   | — |   | — |   | 2 |   | 0.10 |   |
| Average contract  rate Singapore dollar (SGD) per euro (EUR)         |       | —                                     |       | —     |       | — |   | 2.14 |   | — |   | — |   |   |   |   |   |
| Weighted average  receive rate (fixed, SGD)                          |       | —                                     |       | —     |       | — |   | 2.93 | % | — |   | — |   |   |   |   |   |
| Weighted average  pay rate (fixed, EUR)                              |       | —                                     |       | —     |       | — |   | 3.55 | % | — |   | — |   |   |   |   |   |
| **Receive  U.S. dollar (USD) / Pay Korean won (KRW)**                |       |                                       |       |       |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Notional amount                                                      |       | 34                                         |       | 173        |       | — |   | — |   | — |   | — |   | 207 |   | (31.69 | ) |
| Average contract  rate Korean won (KRW) per U.S. dollar (USD)        |       | 1,161.00                                   |       | 1,183.14   |       | — |   | — |   | — |   | — |   |   |   |   |   |
| Weighted average  receive rate (variable, USD)                       |       | 5.37                                       | %          | 5.47       | %          | — |   | — |   | — |   | — |   |   |   |   |   |
| Weighted average  pay rate (fixed, KRW)                              |       | 4.78                                       | %          | 5.52       | %          | — |   | — |   | — |   | — |   |   |   |   |   |
| **Receive  U.S. dollar (USD) / Pay Malaysian ringgit (MYR)**         |       |                                       |       |       |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Notional amount                                                      |       | —                                     |       | —     |       | — |   | — |   | — |   | 15 |   | 15 |   | (0.18 | ) |
| Average contract  rate Malaysian ringgit (MYR) per U.S. dollar (USD) |       | —                                     |       | —     |       | — |   | — |   | — |   | 3.80 |   |   |   |   |   |
| Weighted average  receive rate (variable, USD)                       |       | —                                     |       | —     |       | — |   | — |   | — |   | 4.44 | % |   |   |   |   |
| Weighted average pay  rate (variable, MYR)                           |       | —                                     |       | —     |       | — |   | — |   | — |   | 4.14 | % |   |   |   |   |

 

120

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**MARKETABLESECURITIES**

As of December 31, 2006, BASFowned debt and equity securities that are exposed to price changes.These financial instruments are used asprofitable investments of BASF’s cash surplus and are not held for trading purposes. All securities are quoted onstock exchanges, and the funds have readily determinable market prices. The securities are reflected inthe financial statements at their fair value of €55.8 million. See Note 16 to the Consolidated FinancialStatements in Item 18 for further information. BASF carefully monitors developments in the financial markets.

A 10% change in overallequity prices would not materially impact BASF’s operations, financial positionor cash flows.

**COMMODITYPRICE RISKS**

Certain BASF divisions areexposed to fluctuations in prices for raw materials and commodities. BASFoperates in markets where theprices of raw materials and products are commonly affected by cyclical movements of the economy.

In order to secure the supplyof raw materials, BASF generally relies on long-term supply contracts andbuys additional quantities on thespot market. Some of the most important raw materials are naphtha, propylene, benzene, titanium dioxide,cyclohexane, methanol and ammonia.

The following measures aretaken to reduce and manage risks in the purchase of raw materials:

·                  BASF reduces supply problems by entering intolong-term contracts with at least two suppliers for each significant raw material. The quantitiescontracted are divided amongst the suppliers based on their ability to ensure supply security.BASF enters into long-term contracts only after a strict evaluation of the supplier’s financial baseand technical capabilities as well as its environmental safety record, so that supply problems andquality problems are reduced to a minimum.

·                  Price risks are managed through severalmeasures. Purchasing raw materials in a mix via long-term contracts as well as from spot markets allowsBASF to obtain favorable conditions. In our long-term contracts, price conditions are usually basedon published raw material price quotations and lead to the permanent adjustment of prices (pricegliding clauses) or are adjusted at least on a quarterly basis.

·                  Additionally, commodity hedging derivativesare used to manage risks from price volatility. The company uses futures contracts, options andswaps to buy, sell or exchange commodities. These hedging instruments are used for the purchasesof oil, oil products and natural gas to counteract the high volatility in oil prices.

Furthermore, in the naturalgas trading business, commodity derivatives are used to hedge margins.In order to reduce margin risks, which canarise in the volatile markets if purchase and sales contracts have different price structures, respective hedginginstruments are applied, mainly swaps of appropriate oil products.

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The following table providesinformation related to oil and oil products, natural gas, coffee and soybean contractsof commodities and commodity derivatives as of December 31, 2006:
| ** **                     | ** ** | **Contract Volumes**   | ** ** | ** **   | ** ** | ** **                | ** ** | ** **          | ** ** |
|--------------------------------|------------|-----------------------------|------------|--------------|------------|---------------------------|------------|---------------------|------------|
| **Type of Contract** | ** ** | **(Notional amounts)** | ** ** | **Maturity** | ** ** | **Nominal Value**    | ** ** | **Fair Value** | ** ** |
| ** **                     | ** ** | ** **                  | ** ** | ** **   | ** ** | **(Million **€) | ** ** |
| **Oil and  Oil products**      |       |                        |       |         |       |                      |       |                |       |
| Call Options  (Purchased)      |       | 300,000                     | mt         | 2007         |       | 237.8                     |       | 0.42                |       |
| Put Options  (Written)         |       | 360,000                     | mt         | 2007         |       | 165.1                     |       | (15.67              | )          |
| Call Options  (Purchased)      |       | 600,000                     | bbls       | 2007         |       | 50.4                      |       | 0.20                |       |
| Put Options  (Written)         |       | 600,000                     | bbls       | 2007         |       | 32.3                      |       | (2.97               | )          |
| Swaps  (Purchased)             |       | 3,748,000                   | bbls       | 2007         |       | 103.3                     |       | (8.15               | )          |
| Swaps  (Purchased)             |       | 1,068,000                   | bbls       | 2008         |       | 3.5                       |       | 0.22                |       |
| Swaps  (Purchased)             |       | 302,639                     | mt         | 2007         |       | 127.3                     |       | (12.18              | )          |
| Swaps  (Purchased)             |       | 361,994                     | mt         | 2008         |       | 176.7                     |       | (26.89              | )          |
| Swaps (Sale)                   |       | 2,399,842                   | bbls       | 2007         |       | 27.2                      |       | 6.34                |       |
| Swaps (Sale)                   |       | 1,235,000                   | bbls       | 2008         |       | 12.0                      |       | 0.78                |       |
| Swaps (Sale)                   |       | 216,765                     | mt         | 2007         |       | 69.8                      |       | 9.26                |       |
| Swaps (Sale)                   |       | 486,742                     | mt         | 2008         |       | 143.5                     |       | 16.45               |       |
| Swaps (Sale)                   |       | 24,576                      | mt         | 2009         |       | 7.8                       |       | 0.88                |       |
| Futures (Long)                 |       | 800,000                     | bbls       | 2007         |       | 38.0                      |       | (0.56               | )          |
| Futures (Short)                |       | 1,825,000                   | bbls       | 2007         |       | 88.0                      |       | 0.91                |       |
| Futures (Long)                 |       | 2,772,000                   | Gal        | 2007         |       | 4.2                       |       | (0.43               | )          |
| Futures (Short)                |       | 2,772,000                   | Gal        | 2007         |       | 4.7                       |       | 0.91                |       |
| **Natural  Gas**               |       |                        |       |         |       |                      |       |                |       |
| Call Options  (Purchased)      |       | 9,093,500                   | MMBtu      | 2007         |       | 58.4                      |       | 1.69                |       |
| Call Options  (Written)        |       | 7,457,500                   | MMBtu      | 2007         |       | 59.3                      |       | (0.35               | )          |
| Put Options  (Purchased)       |       | 720,000                     | MMBtu      | 2007         |       | 5.9                       |       | 2.22                |       |
| Put Options  (Written)         |       | 9,813,500                   | MMBtu      | 2007         |       | 51.4                      |       | (6.34               | )          |
| Swaps  (Purchased)             |       | 3,137,500                   | MMBtu      | 2007         |       | 23.4                      |       | (7.28               | )          |
| Swaps (Written)                |       | 1,150,000                   | MMBtu      | 2007         |       | 6.7                       |       | 0.99                |       |
| Futures (Long)                 |       | 420,000                     | MMBtu      | 2007         |       | 2.8                       |       | (0.56               | )          |
| Futures (Short)                |       | 420,000                     | MMBtu      | 2007         |       | 2.5                       |       | 0.31                |       |
| **Coffee**                     |       |                        |       |         |       |                      |       |                |       |
| Put Options  (Purchased)       |       | 18,200                      | Bags       | 2007         |       | 1.9                       |       | 0.04                |       |
| **Soybeans**                   |       |                        |       |         |       |                      |       |                |       |
| Call Options  (Purchased)      |       | 30,000                      | Bushels    | 2007         |       | 0.2                       |       | 0.01                |       |

 

----

| mt:    |   | metric ton                   |
|--------|--------|------------------------------|
| bbls:  |   | barrels                      |
| MMBtu: |   | Million British thermal unit |
| Gal:   |   | Gallon                       |

 

The following tableprovides information related to all comodities and commodity derivativecontracts as of December 31, 2005:

 
| **Type of Contract** | ** ** | **Contract Volumes  (Notional amounts)** | ** ** | **Maturity** | ** ** | **Nominal Value**    | ** ** | **Fair Value** | ** ** |
|--------------------------------|------------|----------------------------------------------------|------------|--------------|------------|---------------------------|------------|---------------------|------------|
| ** **                     | ** ** | ** **                                         | ** ** | ** **   | ** ** | **(Million €)** | ** ** |
| **Oil and Oil Products**       |       |                                               |       |         |       |                      |       |                |       |
| Call Options  (Purchased)      |       | 240,000 mt                                         |       | 2006         |       | 100.9                     |       | 7.15                |       |
| Put Options (Written)          |       | 480,000 mt                                         |       | 2006         |       | 190.7                     |       | (6.85               | )          |
| Call Options (Purchased)       |       | 720,000 bbls                                       |       | 2006         |       | 36.4                      |       | 3.26                |       |
| Call Options (Written)         |       | 50,000 bbls                                        |       | 2006         |       | 2.5                       |       | (0.13               | )          |
| Put Options (Purchased)        |       | 100,000 bbls                                       |       | 2006         |       | 4.5                       |       | 0.05                |       |
| Put Options (Written)          |       | 1,440,000 bbls                                     |       | 2006         |       | 67.0                      |       | (1.99               | )          |
| Swaps (Purchase)               |       | 4,539,090 bbls                                     |       | 2006         |       | 126.9                     |       | (9.16               | )          |
| Swaps (Purchase)               |       | 352,632 bbls                                       |       | 2007         |       | 11.3                      |       | (6.05               | )          |
| Swaps (Purchase)               |       | 291,831 mt                                         |       | 2006         |       | 84.8                      |       | (15.16              | )          |
| Swaps (Purchase)               |       | 107,541 mt                                         |       | 2007         |       | 29.5                      |       | 6.18                |       |
| Swaps (Sale)                   |       | 1,967 bbls                                         |       | 2006         |       | 24.5                      |       | 3.77                |       |
| Swaps (Sale)                   |       | 2,385 bbls                                         |       | 2007         |       | 26.6                      |       | (1.02               | )          |
| Swaps (Sale)                   |       | 1,188 bbls                                         |       | 2008         |       | 12.0                      |       | (0.25               | )          |
| Futures (Long)                 |       | 324,000 bbls                                       |       | 2006         |       | 16.7                      |       | (0.03               | )          |
| Futures (Short)                |       | 668,000 bbls                                       |       | 2006         |       | 33.7                      |       | 0.16                |       |
| **Natural Gas**                |       |                                               |       |         |       |                      |       |                |       |
| Call Options  (Purchased)      |       | 9,551,200 MMBtu                                    |       | 2006         |       | 104.9                     |       | 4.30                |       |
| **Coffee**                     |       |                                               |       |         |       |                      |       |                |       |
| Put Options (Purchased)        |       | 7,147 Bags                                         |       | 2006         |       | 0.8                       |       | 0.01                |       |

 

----

| mt:    |   | metric ton                   |
|--------|--------|------------------------------|
| bbls:  |   | barrels                      |
| MMBtu: |   | Million British thermal unit |

 

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**METAL-RELATEDPRICE RISK**

BASF performed a “value-at-risk” analysis on all of itsmetal-related commodity assets and liabilities. The value-at-risk calculationuses historical price and volatility data to predict market risk on a one-dayinterval with a 95% confidence level. BASF uses this model only as a supplementto other risk management tools and not as a substitute for the experience andjudgment of senior management and dealers who have extensive knowledge of themarkets and adjust positions and revise strategies as the markets change. Basedon the “value-at-risk” analysis in the context of a 95% confidence level, themaximum potential one-day loss in fair value was approximately €2.5 million atDecember 31, 2006. Since all metal-related commodities and commodity derivativeinstruments are traded in U.S. dollar, the value-at-risk figures were calculatedin U.S. dollar and translated into euro at the spot exchange rate as ofDecember 31, 2006. The actual one-day changes in fair value of BASF’smetal-related commodity assets and liabilities never exceeded the average ofthe “value-at-risk” amounts as of the yearly open and close for BASF’s 2006fiscal year. 

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Item 12.  Description of Securities Other than Equity Securities

Not applicable.

124

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**PART II**

Item 13.  Defaults, Dividend Arrearages and Delinquencies

None.

Item 14.  Material Modifications to the Rights of Security Holders and Use ofProceeds

Not applicable.

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Item 15.  Controls and Procedures

**(a)  Disclosure Controls and Procedures**

As of December 31, 2006, theend of the period covered by this report, BASF performed an evaluationof the effectiveness of the design andoperation of its disclosure controls and procedures (as defined in Exchange Act Rule 13a-15(e)). Disclosurecontrols and procedures include controls and procedures designed to ensure that information requiredto be disclosed by BASF in the reports that BASF files or submits under the Act is recorded, processed,summarized and reported within the time periods specified by the SEC’s rules and forms and isaccumulated and communicated to our management, including BASF’s Chairman of the Board of Executive Directors,Dr. Jürgen Hambrecht and BASF’s Chief Financial Officer, Dr. Kurt Bock, the certifying officers, asappropriate to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controlsand procedures, management recognized that any controls and procedures, no matter how well designed and operated, canprovide only reasonable, rather thanabsolute assurance of achieving the desired control objectives. Based on theforegoing, the Chairman of theBoard of Executive Directors and the Chief Financial Officer concluded thatBASF’s disclosure controls andprocedures were effective as of December 31, 2006, the end of the periodcovered by this report.

**(b)**** ****Management’s Annual Report on Internal Control OverFinancial Reporting**

BASF’s management isresponsible for establishing and maintaining adequate internal control overfinancial reporting. BASF’sinternal control system was designed to provide reasonable assurance to BASF’s management regarding the reliability offinancial reporting and the preparation and fair presentation of its published consolidated financial statements.

All internal control systems,no matter how well designed, have inherent limitations. Therefore, eventhose systems determined to be effective maynot prevent or detect misstatements and can provide only reasonable assurance with respect to financialstatement preparation and presentation. Also, projections of any evaluation of effectiveness to futureperiods are subject to the risk that controls may become inadequate because of changes in conditions, or that thedegree of compliance with the policies or procedures may decline.

BASF’s management assessedthe effectiveness of the Company’s internal control over financialreporting as of December 31, 2006. In makingthis assessment, it used the criteria established in “Internal Control –  Integrated Framework” issued by the Committeeof Sponsoring Organizations of the Treadway Commission (COSO). Based on the evaluation under these criteria,management has concluded that BASF’sinternal control over financial reporting was effective as of December 31,2006.

Management’s assessment aswell as the effectiveness of internal control over financial reporting as ofDecember 31, 2006 have beenaudited by KPMG Deutsche Treuhand Gesellschaft Aktiengesellschaft Wirtschaftsprüfungsgesellschaft, Frankfurt,Germany (“KPMG”), an independent registered public accounting firm, as stated in their reportwhich is included herein.

**(c)**** ****Attestation Report of the Registered Public AccountingFirm**

See report of KPMG, anindependent registered public accounting firm, which appears below.

**(d)**** ****Changes in Internal Control Over Financial Reporting**

There were no changes to BASF’sinternal control over financial reporting that occurred during the periodcovered by this Form 20-F that have materially affected, or are reasonablylikely to materially affect, the Company’s internal control over financialreporting.

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**REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**

We have audited management’sassessment, included in the accompanying Management’s AnnualReport on Internal Control Over FinancialReporting that BASF Aktiengesellschaft, maintained effective internal control over financial reporting asof December 31, 2006, based on criteria established in Internal Control– Integrated Framework issued by theCommittee of Sponsoring Organizations of the Treadway Commission (“COSO”). BASF Aktiengesellschaft’smanagement is responsible for maintaining effective internal control over financial reporting andfor its assessment of the effectiveness of internal control over financial reporting. Our responsibility is toexpress an opinion on management’s assessment and an opinion on the effectiveness of the company’s internalcontrol over financial reporting based on our audit.

We conducted our audit inaccordance with the standards of the Public Company Accounting OversightBoard (United States). Thosestandards require that we plan and perform the audit to obtain reasonable assurance about whether effectiveinternal control over financial reporting was maintained in all material respects. Our audit included obtainingan understanding of internal control over financial reporting, evaluating management’s assessment, testing andevaluating the design and operating effectiveness of internal control, and performing such other proceduresas we considered necessary in the circumstances. We believe that our audit provides a reasonablebasis for our opinions. A company’s internal control over financial reporting is a process designed toprovide reasonable assurance regarding the reliability of financial reporting and the preparation of financialstatements for external purposes in accordance with generally accepted accounting principles. A company’sinternal control over financial reporting includes those policies and procedures that (1) pertain to themaintenance of records that, in reasonable detail, accurately and fairly reflect the transactions anddispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded asnecessary to permit preparation of financial statements in accordance with generally accepted accounting principles,and that receipts and expenditures of the company are being made only in accordance withauthorizations of management and directors of the company; and (3) provide reasonable assurance regardingprevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that couldhave a material effect on the financial statements. Because of its inherent limitations, internal controlover financial reporting may not prevent or detect misstatements. Also, projections of any evaluation ofeffectiveness to future periods are subject to the risk that controls may become inadequate because of changes inconditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, management’sassessment that BASF Aktiengesellschaft maintained effective internalcontrol over financial reporting as ofDecember 31, 2006, is fairly stated, in all material respects, based on criteria established in Internal Control– IntegratedFramework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Also in our opinion,BASF Aktiengesellschaft maintained,in all material respects, effective internal control over financial reportingas of December 31, 2006, based oncriteria established in Internal Control – Integrated Framework issued by theCommittee of SponsoringOrganizations of the Treadway Commission (COSO).

127

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We have also audited, inaccordance with the standards of the Public Company Accounting OversightBoard (United States), theconsolidated balance sheet of BASF Aktiengesellschaft and subsidiaries as of December 31, 2006 and the relatedconsolidated statements of income, recognized income and expense, stockholders’ equity, and cash flows for theyear then ended and our report dated February 21, 2007 expressed an unqualified opinion on thosefinancial statements.

 

Frankfurt am Main, Germany

February 21, 2007
| /s/ KPMG Deutsche Treuhand  Gesellschaft Aktiengesellschaft |   |
|-------------------------------------------------------------|--------|
| Wirtschaftsprüfungsgesellschaft                        |

 

128

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Item16A.                                             Audit Committee Financial Expert

Our Supervisory Board hasdetermined that the Company’s Audit Committee currently includes twoAudit Committee financial experts: MaxDietrich Kley and Hans Dieter Pötsch. Max Dietrich Kley and Hans Dieter Pötsch are independent, as the term isdefined in Rule 10A-3 under the Securities Exchange Act for purposes of the listing standards of the NewYork Stock Exchange that are applicable to BASF.

Item 16B.                Code of Ethics

The Company has adopted acode of ethics for financial matters that applies to the Board of ExecutiveDirectors, including the ChiefExecutive Officer, the Chief Financial Officer, and the senior management of financial reporting and controlling, aswell as to all of the Company’s employees performing similar functions in and outside Germany and to all other seniorfinancial personnel. The code of ethics for financial matters is available onthe Company’s website at **corporate.basf.com/en/investor/cg/sarbanes.htm**.

Item 16C.                Principal Accountant Fees and Services

The principal accountant ofthe Company for the year 2005 was Deloitte & Touche. Based on therecommendation of the Supervisory Board, theAnnual Meeting held on May 4, 2006 appointed KPMG Deutsche Treuhand Gesellschaft AktiengesellschaftWirtschaftsprüfungsgesellschaft, Frankfurt, Germany (“KPMG”) to serve as the Company’s independent registered publicaccounting firm for the year 2006.Fees billed to the Company for professional services by its principalaccountant, KPMG in 2006 and Deloitte& Touche in 2005, were as follows:

**Million €**
| **Type of Fees** | ** ** | **2006** | ** ** | **2005** | ** ** |
|----------------------------|------------|----------|------------|----------|------------|
| Audit Fees                 |       | 23.9     |       | 12.8     |       |
| Audit-related  Fees        |       | 0.2      |       | 5.1      |       |
| Tax Fees                   |       | 0.2      |       | 0.9      |       |
| All Other Fees             |       | 0.8      |       | 0.5      |       |
| **Total**                  | ** ** | **25.1** | ** ** | **19.3** | ** ** |

 

In the above table, “auditfees” are the aggregate fees billed by KPMG in 2006 and Deloitte & Touchein 2005 for professional servicesin connection with the audit of the Company’s consolidated annual financial statements as well as audits ofstatutory financial statements of BASF Aktiengesellschaft and its affiliates. Also included in “audit-fees” areamounts billed for attestation services in relation to regulatory filings and other compliance requirements. “Auditrelated fees” are fees billed by the independent auditor for confirmation ofthe conformance to certain legal and contractual obligations. “Tax fees” include primarily fees for taxadvice on actual or contemplated transactions, expatriate employee tax services and transfer pricing studies. “Otherfees” are billed for due diligence engagements related to divestitures and in connection with insurance damage claimsas well as numerous other services.

In accordance with Germanlaw, BASF’s independent auditors are appointed by the Annual Shareholders’Meeting based on a recommendationof our Supervisory Board. The Audit Committee of the Supervisory Board prepares the board’s recommendation onthe selection of the independent auditors. Subsequent to the auditors’ appointment, the Audit Committeeawards the contract and in its sole authority approves the terms and scope of the audit and all auditengagement fees as well as monitors the auditors’ independence. On May 4, 2006, the Annual Shareholders’Meeting appointed KPMG Deutsche Treuhand Gesellschaft AktiengesellschaftWirtschaftsprüfungsgesellschaft, to serve as the Company’s independent auditorsfor the year 2006.

In order to assure theintegrity of independent audits, BASF’s Audit Committee adopted pre-approvalpolicies and procedures pursuantto which the Audit Committee annually pre-approves certain types of services to be performed by BASF’s independentauditors. Under the policies, the Company’s independent auditors are not allowed to perform anynon-audit services that may impair the auditors’ independence under therules of the U.S. Securities and Exchange Commission (SEC) and the PublicCompany Accounting Oversight Board (PCAOB). Furthermore, the Supervisory Board has limited the aggregate amount of non-audit fees payable to KPMG during2006 to a maximum of €1.5 million for services rendered for BASF Aktiengesellschaft and €5.0 million forservices for all other companies of the BASF Group. In 2005, services relating to the audit of the internalcontrol system over financial reporting required by the Sarbanes-Oxley Act were approved separately bythe Audit Committee.

129

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Services not included in oneof the types of pre-approved services covered by the pre-approval policiesand procedures require specificauthorization of the Audit Committee. An approval may not be granted if the service falls into a category of servicesnot permitted by applicable law, SEC or PCAOB Rules or if it is inconsistent with maintaining auditorindependence.

Item 16D.               Exemptions from the Listing Standards forAudit Committees

With regard to one member ofthe Audit Committee, BASF relies on the exemption afforded by Rule10A-3(b)(1)(iv)(C) under the SecuritiesExchange Act. We believe that such reliance does not materially adversely affect the ability of the AuditCommittee to act independently or to satisfy the other requirements of Rule 10A-3.

Item 16E.                Purchases of Equity Securities by the Issuerand Affiliated Purchasers

BASF Aktiengesellschaft has astock repurchase program currently in existence. Purchases made in 2006 inaccordance with this program are listed in the table below.

**IssuerPurchases of Equity Securities**
| **Period**                              | ** ** | **(a) Total Number of  Shares Purchased** | ** ** | **(b) Average Price  Paid per Share** | ** ** | **(c) Total Number of  Shares Purchased  as Part of Publicly  Announced Plans or  Programs** | ** ** | **(d) Maximum Num-  ber of Shares (or  Approximate Euro  Value) that May Yet  Be Purchased Under   the Plans or Pro-  grams** | ** ** |
|-----------------------------------------|------------|---------------------------------------------------------------|------------|-----------------------------------------------------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| From January 1  to January 31, 2006     |       | 4,320,000                                                     |       | 62.82                                                     |       | 4,320,000                                                                                                                                 |       | 67,521,118                                                                                                                                                                                          |       |
| From February 1  to February 28, 2006   |       | 1,049,000                                                     |       | 64.31                                                     |       | 1,049,000                                                                                                                                 |       | 500,059,436                                                                                                                                                                                         | (1)        |
| From March 1 to  March 31, 2006         |       | 890,000                                                       |       | 63.75                                                     |       | 890,000                                                                                                                                   |       | 443,323,889                                                                                                                                                                                         |       |
| From April 1 to April  30, 2006         |       | 860,000                                                       |       | 64.23                                                     |       | 860,000                                                                                                                                   |       | 388,084,983                                                                                                                                                                                         |       |
| From May 1 to  May 31, 2006             |       | 1,300,000                                                     |       | 65.39                                                     |       | 1,300,000                                                                                                                                 |       | 303,073,654                                                                                                                                                                                         |       |
| From June 1 to  June 30, 2006           |       | 2,380,000                                                     |       | 60.92                                                     |       | 2,380,000                                                                                                                                 |       | 158,093,859                                                                                                                                                                                         |       |
| From July 1 to  July 31, 2006           |       | —                                                        |       | —                                                    |       | —                                                                                                                                    |       | 158,093,859                                                                                                                                                                                         |       |
| From August 1 to  August 31, 2006       |       | 370,000                                                       |       | 62.65                                                     |       | 370,000                                                                                                                                   |       | 134,914,718                                                                                                                                                                                         |       |
| From September 1  to September 30, 2006 |       | 1,660,000                                                     |       | 62.78                                                     |       | 1,660,000                                                                                                                                 |       | 30,698,259                                                                                                                                                                                          |       |
| From October 1  to October 31, 2006     |       | 460,000                                                       |       | 66.25                                                     |       | 460,000                                                                                                                                   |       | 217,484                                                                                                                                                                                             |       |
| From November 1  to November 30, 2006   |       | 440,000                                                       |       | 70.26                                                     |       | 440,000                                                                                                                                   |       | 469,304,043                                                                                                                                                                                         | (2)        |
| From December 1  to December 31, 2006   |       | 970,000                                                       |       | 70.97                                                     |       | 970,000                                                                                                                                   |       | 400,465,833                                                                                                                                                                                         |       |
| **Total**                               | ** ** | **14,699,000**                                                | ** ** | **63.84**                                                 | ** ** | **14,699,000**                                                                                                                            | ** ** | **—**                                                                                                                                                                                          |       |

----

(1)          On February 22, 2006, the decision was announced by the Board ofExecutive Directors to increase the value of the program by another €500million.

(2)          On November 2, 2006, the decision wasannounced by the Board of Executive Directors to increase the value of theprogram by another €500 million.

130

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**PART III**

Item 17.  Financial Statements

Not applicable.

Item 18.  Financial Statements

The following ConsolidatedFinancial Statements, together with the reports of KPMG Deutsche Treuhand-GesellschaftAktiengesellschaft and Deloitte & Touche GmbH thereon, are filed as part ofthis Annual Report.
|                                                                                             | ** ** | ** ** |
|---------------------------------------------------------------------------------------------|------------|------------|
| Reports  of Independent Registered Public Accounting Firms                                  |       |       |
|                                                                                        |       |       |
| Consolidated Financial Statements                                                           |       |       |
|                                                                                        |       |       |
| Consolidated Statements of  Income for the years 2006, 2005 and 2004                        |       |       |
|                                                                                        |       |       |
| Consolidated Balance Sheets at  December 31, 2006 and 2005                                  |       |       |
|                                                                                        |       |       |
| Consolidated Statements of  Recognized Income and Expense for the years 2006, 2005 and 2004 |       |       |
|                                                                                        |       |       |
| Consolidated Statements of  Stockholders’ Equity for the years 2006, 2005 and 2004     |       |       |
|                                                                                        |       |       |
| Consolidated Statements of  Cash Flows for the years 2006, 2005 and 2004                    |       |       |
|                                                                                        |       |       |
| Notes to the Consolidated  Financial Statements                                             |       |       |
|                                                                                        |       |       |
| Supplementary  information concerning oil and gas producing activities (unaudited)          |       |       |

 

F-1

----

**REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**

To the Supervisory Board ofBASF Aktiengesellschaft:

We have audited the accompanyingconsolidated balance sheet of BASF Aktiengesellschaft andsubsidiaries (“BASF” or the Company) as ofDecember 31, 2006, and the related consolidated statements of income, recognized income and expense, stockholders’equity and cash flows for the year then ended. These consolidated financial statements are theresponsibility of the Company’s management. Our responsibility is to express an opinion on these consolidatedfinancial statements based on our audit.

We conducted our audit in accordancewith the standards of the Public Company AccountingOversight Board (United States). Thosestandards require that we plan and perform the audit to obtain reasonable assurance about whether thefinancial statements are free of material misstatement. An audit includes examining, on a test basis, evidencesupporting the amounts and disclosures in the financial statements. An audit also includes assessingthe accounting principles used and significant estimates made by management, as well as evaluating theoverall financial statement presentation. We believe that our audit provides a reasonable basis for ouropinion.

In our opinion, theconsolidated financial statements referred to above present fairly, in allmaterialrespects, thefinancial position of BASF as of December 31, 2006, and the results of theiroperations and their cash flowsfor the year ended December 31, 2006, in conformity with InternationalFinancial Reporting Standards, asadopted by the European Union (“IFRS”).

IFRS, as adopted by theEuropean Union, vary in certain significant respects from accountingprinciples generally accepted in the UnitedStates of America. Information relating to the nature and effect of such differences is presented in Note 31 tothe financial statements.

We also have audited, inaccordance with the standards of the Public Company Accounting OversightBoard (United States), theeffectiveness of the Company’s internal control over financial reporting as of December 31, 2006, based on criteriaestablished in Internal Control–Integrated Framework issued by the Committee of Sponsoring Organizations of theTreadway Commission (COSO), and our report dated February 21, 2007 expressed an unqualified opinion on management’sassessment of, and the effective operationof, internal control over financial reporting.
|                                    |
|-----------------------------------------|
| /s/ KPMG Deutsche Treuhand-Gesellschaft |   |
|                                    |
| Aktiengesellschaft                      |
|                                    |
| Wirtschaftsprüfungsgesellschaft    |
|                                    |
|                                    |
| Frankfurt am Main, Germany              |
|                                    |
| February 21, 2007                       |

 

F-2

----

**REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**

We have audited theaccompanying consolidated balance sheet of BASF Aktiengesellschaft andsubsidiaries as of December 31, 2005, and therelated consolidated statements of income, recognized income and expense, stockholders’ equity, andcash flows for the years ended December 31, 2005 and 2004. These financial statements are theresponsibility of the Company’s management. Our responsibility is to express an opinion on these financialstatements based on our audits.

We conducted our audits inaccordance with auditing standards generally accepted in Germany andthe standards of the Public Company AccountingOversight Board (United States). Those standards require that we plan and perform the audit to obtainreasonable assurance about whether the financial statements are free of material misstatement. An auditincludes examining, on a test basis, evidence supporting the amounts and disclosures in the financialstatements. An audit also includes assessing the accounting principles used and significant estimates madeby management, as well as evaluating the overall financial statement presentation. We believe that ouraudits provide a reasonable basis for our opinion.

In our opinion, suchconsolidated financial statements present fairly, in all material respects, thefinancialposition of BASFAktiengesellschaft and its subsidiaries as of December 31, 2005, and theresults of their operations andtheir cash flows for each of the years ended December 31, 2005 and 2004 inconformity with InternationalFinancial Reporting Standards.

Application of accountingprinciples generally accepted in the United States of America would haveaffected stockholders’ equity asof December 31, 2005 and net income for the years ended December 31, 2005 and 2004 to the extent summarized by theCompany in Note 31 to the Consolidated Financial Statements.
|                                 |   |                   |
|--------------------------------------|--------|------------------------|
| Frankfurt am Main, Germany           |   |                   |
|                                 |   |                   |
|                                 |   |                   |
| February 21, 2006                    |   |                   |
|                                 |   |                   |
|                                 |   |                   |
| Deloitte & Touche GmbH           |   |                   |
|                                 |   |                   |
| Wirtschaftsprüfungsgesellschaft |   |                   |
|                                 |   |                   |
|                                 |
| Dr. Künnemann                   |   | Dr. Beine              |
|                                 |   |                   |
| Wirtschaftsprüfer               |   | Wirtschaftsprüfer |
|                                      |        |                        |  |  |

 

F-3

----

**BASF GROUP**

**ConsolidatedStatements of Income**

**Million €, except per shareamounts**
| ** **                                                   | ** ** | **Note**   | ** ** | **2006**     | ** ** | **2005**     | ** ** | **2004**     | ** ** |
|--------------------------------------------------------------|------------|------------|------------|--------------|------------|--------------|------------|--------------|------------|
| Sales                                                        |       | (4)        |       | 52,609.7     |       | 42,744.9     |       | 37,536.6     |       |
| Cost of sales                                                |       |       |       | (37,697.5    | )          | (29,566.8    | )          | (25,721.2    | )          |
| **Gross profit on sales**                                    | ** ** | ** ** | ** ** | **14,912.2** | ** ** | **13,178.1** | ** ** | **11,815.4** | ** ** |
| Selling expenses                                             |       |       |       | (4,995.5     | )          | (4,329.9     | )          | (4,309.2     | )          |
| General and  administrative expenses                         |       |       |       | (893.2       | )          | (780.1       | )          | (707.4       | )          |
| Research and  development expenses                           |       |       |       | (1,276.6     | )          | (1,063.7     | )          | (986.5       | )          |
| Other operating income                                       |       | (5)        |       | 934.1        |       | 600.2        |       | 1,046.1      |       |
| Other operating  expenses                                    |       | (6)        |       | (1,931.1     | )          | (1,775.1     | )          | (1,665.9     | )          |
| **Income from operations**                                   | ** ** | ** ** | ** ** | **6,749.9**  | ** ** | **5,829.5**  | ** ** | **5,192.5**  |       |
| Income from companies  accounted for using the equity method |       |       |       | 35.0         |       | 5.6          |       | (7.2         | )          |
| Other income from  participations                            |       |       |       | 36.7         |       | 342.4        |       | (588.5       | )          |
| Interest result                                              |       |       |       | (371.9       | )          | (170.0       | )          | (206.1       | )          |
| Other financial result                                       |       |       |       | 77.0         |       | (81.9        | )          | (43.9        | )          |
| **Financial result**                                         | ** ** | (7)        | ** ** | **(223.2**   | **)**      | **96.1**     | ** ** | **(845.7**   | **)**      |
| **Income before taxes**                                      | ** ** | ** ** | ** ** | **6,526.7**  | ** ** | **5,925.6**  | ** ** | **4,346.8**  | ** ** |
| Income taxes                                                 |       | (8)        |       | (3,060.6     | )          | (2,758.1     | )          | (2,213.5     | )          |
| **Net income**                                               | ** ** | ** ** | ** ** | **3,466.1**  | ** ** | **3,167.5**  | ** ** | **2,133.3**  | ** ** |
| Minority interests                                           |       | (9)        |       | 250.9        |       | 160.8        |       | 129.0        |       |
| **Net income after minority  interests**                     | ** ** | ** ** | ** ** | **3,215.2**  | ** ** | **3,006.7**  | ** ** | **2,004.3**  | ** ** |
| **Earnings per share (€)**                              | ** ** | (3)        | ** ** | **6.37**     | ** ** | **5.73**     | ** ** | **3.65**     | ** ** |
| Dilution effect                                              |       |       |       | —       |       | —       |       | —       |       |
| **Diluted earnings per share (€)**                      | ** ** | (3)        | ** ** | **6.37**     | ** ** | **5.73**     | ** ** | **3.65**     | ** ** |

 

The accompanying Notes are anintegral part of these Consolidated Financial Statements.

F-4

----

**BASF GROUP**

**ConsolidatedBalance Sheets**

**Million €**
| ** **                                             | ** ** | ** ** | ** ** | **At December 31,** | ** ** |
|--------------------------------------------------------|------------|------------|------------|-------------------------------|------------|
| **Assets**                                             | ** ** | **Note**   | ** ** | **2006**                      | ** ** | **2005** | ** ** |
| **Long-term assets**                                   |       |       |       |                          |       |   |   |
| Intangible assets                                      |       | (11)       |       | 8,921.6                       |       | 3,719.6 |   |
| Property, plant and  equipment                         |       | (12)       |       | 14,901.5                      |       | 13,986.9 |   |
| Investments accounted  for using the equity method     |       | (13)       |       | 650.5                         |       | 244.3 |   |
| Other financial assets                                 |       | (13)       |       | 1,190.3                       |       | 813.0 |   |
| Deferred taxes                                         |       | (8)        |       | 622.4                         |       | 1,254.7 |   |
| Other receivables and  miscellaneous long-term assets  |       | (15)       |       | 612.2                         |       | 524.0 |   |
|                                                   |       |       |       | **26,898.5**                  | ** ** | **20,542.5** |   |
| **Short-term assets**                                  |       |       |       |                          |       |   |   |
| Inventories                                            |       | (14)       |       | 6,672.4                       |       | 5,430.2 |   |
| Accounts receivable, trade                             |       |       |       | 8,222.8                       |       | 7,020.2 |   |
| Other receivables and  miscellaneous short-term assets |       | (15)       |       | 2,607.3                       |       | 1,586.4 |   |
| Marketable securities                                  |       | (16)       |       | 55.8                          |       | 183.0 |   |
| Cash and cash  equivalents                             |       | (16)       |       | 834.2                         |       | 907.8 |   |
|                                                   |       |       |       | **18,392.5**                  | ** ** | **15,127.6** |   |
| **Total assets**                                       |       |       |       | **45,291.0**                  | ** ** | **35,670.1** |   |

 
| ** **                                                   | ** ** | ** ** | ** ** | **At December 31,** | ** ** |
|--------------------------------------------------------------|------------|------------|------------|-------------------------------|------------|
| **Stockholders’ equity and liabilities** | ** ** | **Note**   | ** ** | **2006**                      | ** ** | **2005** | ** ** |
| **Stockholders’ equity**                                |       |       |       |                          |       |   |   |
| Subscribed capital                                           |       | (17)       |       | 1,279.2                       |       | 1,316.8 |   |
| Capital surplus                                              |       | (17)       |       | 3,141.0                       |       | 3,100.2 |   |
| Retained earnings                                            |       | (18)       |       | 13,301.9                      |       | 11,928.0 |   |
| Other comprehensive  income                                  |       | (18)       |       | 325.5                         |       | 696.7 |   |
| Minority interests                                           |       | (19)       |       | 530.5                         |       | 481.8 |   |
|                                                         |       |       |       | **18,578.1**                  | ** ** | **17,523.5** |   |
| **Long-term liabilities**                                    |       |       |       |                          |       |   |   |
| Provisions for pensions  and similar obligations             |       | (20)       |       | 1,452.0                       |       | 1,546.6 |   |
| Other provisions                                             |       | (21)       |       | 3,079.8                       |       | 2,791.2 |   |
| Deferred taxes                                               |       | (8)        |       | 1,441.0                       |       | 699.3 |   |
| Financial indebtedness                                       |       | (22)       |       | 5,788.2                       |       | 3,681.7 |   |
| Other liabilities                                            |       | (22)       |       | 971.6                         |       | 1,042.8 |   |
|                                                         |       |       |       | **12,732.6**                  | ** ** | **9,761.6** |   |
| **Short-term liabilities**                                   |       |       |       |                          |       |   |   |
| Accounts payable, trade                                      |       |       |       | 4,754.7                       |       | 2,777.0 |   |
| Provisions                                                   |       | (21)       |       | 2,848.3                       |       | 2,762.5 |   |
| Tax liabilities                                              |       | (8)        |       | 858.7                         |       | 887.2 |   |
| Financial indebtedness                                       |       | (22)       |       | 3,694.9                       |       | 259.3 |   |
| Other liabilities                                            |       | (22)       |       | 1,823.7                       |       | 1,699.0 |   |
|                                                         |       |       |       | **13,980.3**                  | ** ** | **8,385.0** |   |
| **Total stockholders’ equity and liabilities**          |       |       |       | **45,291.0**                  | ** ** | **35,670.1** |   |

 

The accompanying Notes are anintegral part of these Consolidated Financial Statements.

F-5

----

**BASF GROUP**

**ConsolidatedStatements of Recognized Income and Expense**

**Million €**
| **Income and expense items**                   | ** ** | **2006**    | ** ** | **2005**    | ** ** | **2004**    | ** ** |
|---------------------------------------------------------------|------------|-------------|------------|-------------|------------|-------------|------------|
| **Net income**                                                |       | **3,466.1** | ** ** | **3,167.5** | ** ** | **2,133.3** |       |
|                                                          |       |        |       |        |       |        |       |
| Fair value changes in  available-for-sale securities          |       | 83.3        |       | 66.7        |       | 96.6        |       |
| Cash-flow hedges                                              |       | (8.5        | )          | (21.2       | )          | (42.4       | )          |
| Change in foreign  currency translation adjustments           |       | (456.9      | )          | 714.5       |       | (230.6      | )          |
| Actuarial gains/losses  from pensions and similar obligations |       | 159.6       |       | (1,075.9    | )          | (364.5      | )          |
| Deferred taxes                                                |       | (36.7       | )          | 413.2       |       | 147.1       |       |
| Minority interests                                            |       | (20.8       | )          | 29.4        |       | (19.4       | )          |
| **Total income and expense  recognized in equity**            | ** ** | **(280.0**  | **)**      | **126.7**   | ** ** | **(412.9**  | **)**      |
| **Total income and expense for  the period**                  | ** ** | **3,186.1** | ** ** | **3,294.2** | ** ** | **1,720.4** | ** ** |
| *Thereof  BASF*                                               | * *   | *2,956.0*   | * *   | *3,104.0*   | * *   | *1,610.8*   | * *   |
| *Thereof minority interests*                                  | * *   | *230.1*     | * *   | *190.2*     | * *   | *109.6*     | * *   |

 
| ** **                           | ** ** | **Retained**     | ** ** | ** **                               | ** ** | ** **          | ** ** | ** **    | ** ** | ** **           | ** ** | ** **                      | ** ** |
|--------------------------------------|------------|------------------|------------|------------------------------------------|------------|---------------------|------------|---------------|------------|----------------------|------------|---------------------------------|------------|
| ** **                           | ** ** | **earnings**     | ** ** | **Other comprehensive income** | ** ** | ** **          | ** ** |
| ** **                           | ** ** | ** **       | ** ** | ** **                               | ** ** | **Fair value** | ** ** | ** **    | ** ** | ** **           | ** ** | ** **                      | ** ** |
| ** **                           | ** ** | ** **       | ** ** | **Foreign**                              | ** ** | **changes in** | ** ** | ** **    | ** ** | **Total of**    | ** ** | **Total income and**  | ** ** |
| **Development of income**  | ** ** | ** **       | ** ** | **currency**                             | ** ** | **available-**      | ** ** | ** **    | ** ** | **other**            | ** ** | **expense recog-**         | ** ** |
| **and expense recognized** | ** ** | **Actuarial**    | ** ** | **translation**                          | ** ** | **for-sale**        | ** ** | **Cash-flow** | ** ** | **comprehen-**       | ** ** | **nized directly in** | ** ** |
| **directly in equity**     | ** ** | **gains/losses** | ** ** | **adjustment**                           | ** ** | **securities**      | ** ** | **hedges**    | ** ** | **sive income** | ** ** | **equity**                      | ** ** |
| **As of January 1, 2006**            | ** ** | **(893.8**       | **)**      | **474.7**                                | ** ** | **258.5**           | ** ** | **(36.5**     | **)**      | **696.7**            | ** ** | **(197.1**                      | **)**      |
| Additions                            |       | —           |       | —                                   |       | 123.9               |       | (16.2         | )          | 107.7                |       | 107.7                           |       |
| Releases                             |       | 159.6            |       | (456.9                                   | )          | (40.6               | )          | 7.7           |       | (489.8               | )          | (330.2                          | )          |
| Deferred taxes                       |       | (47.6            | )          | 8.8                                      |       | (0.8                | )          | 2.9           |       | 10.9                 |       | (36.7                           | )          |
| **As of December 31, 2006**          | ** ** | **(781.8**       | **)**      | **26.6**                                 | ** ** | **341.0**           | ** ** | **(42.1**     | **)**      | **325.5**            | ** ** | **(456.3**                      | **)**      |
|                                 |       |             |       |                                     |       |                |       |          |       |                 |       |                            |       |
| **As of January 1, 2005**            | ** ** | **(233.9**       | **)**      | **(226.2**                               | **)**      | **192.6**           | ** ** | **(26.9**     | **)**      | **(60.5**            | **)**      | **(294.4**                      | **)**      |
| Additions                            |       | (1,075.9         | )          | 714.5                                    |       | 78.5                |       | (25.6         | )          | 767.4                |       | (308.5                          | )          |
| Releases                             |       | —           |       | —                                   |       | (11.8               | )          | 4.4           |       | (7.4                 | )          | (7.4                            | )          |
| Deferred taxes                       |       | 416.0            |       | (13.6                                    | )          | (0.8                | )          | 11.6          |       | (2.8                 | )          | 413.2                           |       |
| **As of December 31, 2005**          | ** ** | **(893.8**       | **)**      | **474.7**                                | ** ** | **258.5**           | ** ** | **(36.5**     | **)**      | **696.7**            | ** ** | **(197.1**                      | **)**      |
|                                 |       |             |       |                                     |       |                |       |          |       |                 |       |                            |       |
| **As of January 1, 2004**            | ** ** | **—**       | ** ** | **—**                               | ** ** | **99.1**            | ** ** | **—**    | ** ** | **99.1**             | ** ** | **99.1**                        | ** ** |
| Additions                            |       | (364.5           | )          | (230.6                                   | )          | 101.2               |       | (43.1         | )          | (172.5               | )          | (537.0                          | )          |
| Releases                             |       | —           |       | —                                   |       | (4.3                | )          | 0.7           |       | (3.6                 | )          | (3.6                            | )          |
| Deferred taxes                       |       | 130.6            |       | 4.4                                      |       | (3.4                | )          | 15.5          |       | 16.5                 |       | 147.1                           |       |
| **As of December 31, 2004**          | ** ** | **(233.9**       | **)**      | **(226.2**                               | **)**      | **192.6**           | ** ** | **(26.9**     | **)**      | **(60.5**            | **)**      | **(294.4**                      | **)**      |

 

The accompanying Notes are anintegral part of these Consolidated Financial Statements.

F-6

----

**BASF GROUP**

**ConsolidatedStatements of Stockholders’ Equity**

**Million €**
| ** **                                                                                   | ** ** | **Number of sub-** | ** ** | ** **     | ** ** | ** **  | ** ** | ** **         | ** ** | **Other com-** | ** ** | ** **   | ** ** | **Total stock-** | ** ** |
|----------------------------------------------------------------------------------------------|------------|------------------------------|------------|----------------|------------|-------------|------------|--------------------|------------|---------------------|------------|--------------|------------|-----------------------|------------|
| ** **                                                                                   | ** ** | **scribed shares**      | ** ** | **Subscribed** | ** ** | **Capital** | ** ** | **Retained ** | ** ** | **prehensive**      | ** ** | **Minority** | ** ** | **holders’**     | ** ** |
| ** **                                                                                   | ** ** | **outstanding**              | ** ** | **capital**    | ** ** | **surplus** | ** ** | **earnings**       | ** ** | **income**(1)       | ** ** | **interest** | ** ** | **equity**            | ** ** |
| **As of January 1, 2006**                                                                    | ** ** | **514,379,000**              | ** ** | **1,316.8**    | ** ** | **3,100.2** | ** ** | **11,928.0**       | ** ** | **696.7**           | ** ** | **481.8**    | ** ** | **17,523.5**          | ** ** |
| Share buy-back and  cancellation of own shares including own shares intended to be cancelled |       | (14,699,000                  | )          | (37.6          | )          | 35.8        |       | (936.6             | )          | —              |       | —       |       | (938.4                | )          |
| Capital withdrawal/  contribution                                                            |       | —                       |       | —         |       | —      |       | —             |       | —              |       | 18.1         |       | 18.1                  |       |
| Dividends paid                                                                               |       | —                       |       | —         |       | —      |       | (1,014.5           | )          | —              |       | (217.9       | )(2)       | (1,232.4              | )          |
| Net income                                                                                   |       | —                       |       | —         |       | —      |       | 3,215.2            |       | —              |       | 250.9        |       | 3,466.1               |       |
| Income and expense  recognized directly in equity                                            |       | —                       |       | —         |       | —      |       | 112.0              |       | (371.2              | )          | (20.8        | )          | (280.0                | )          |
| Changes in scope of  consolidation and other changes                                         |       | —                       |       | —         |       | 5.0         | (3)        | (2.2               | )          | —              |       | 18.4         |       | 21.2                  |       |
| **December 31, 2006**                                                                        | ** ** | **499,680,000**              | ** ** | **1,279.2**    | ** ** | **3,141.0** | ** ** | **13,301.9**       | ** ** | **325.5**           | ** ** | **530.5**    | ** ** | **18,578.1**          | ** ** |
|                                                                                         |       |                         |       |           |       |        |       |               |       |                |       |         |       |                  |       |
| **As of January 1, 2005**                                                                    | ** ** | **540,440,410**              | ** ** | **1,383.5**    | ** ** | **3,027.6** | ** ** | **11,923.1**       | ** ** | **(60.5**           | **)**      | **328.5**    | ** ** | **15,602.2**          | ** ** |
| Share buy-back and  cancellation of own shares including own shares intended to be cancelled |       | (26,062,229                  | )          | (66.7          | )          | 67.0        |       | (1,435.1           | )          | —              |       | —       |       | (1,434.8              | )          |
| Exercise of exchange  rights  of formerWintershall  shareholders                             |       | 819                          |       | —         |       | —      |       | —             |       | —              |       | —       |       | —                |       |
| Capital  withdrawal/contribution                                                             |       | —                       |       | —         |       | —      |       | —             |       | —              |       | 9.5          |       | 9.5                   |       |
| Dividends paid                                                                               |       | —                       |       | —         |       | —      |       | (903.9             | )          | —              |       | (78.2        | )(2)       | (982.1                | )          |
| Net income                                                                                   |       | —                       |       | —         |       | —      |       | 3,006.7            |       | —              |       | 160.8        |       | 3,167.5               |       |
| Income and expense  recognized directly in equity                                            |       | —                       |       | —         |       | —      |       | (659.9             | )          | 757.2               |       | 29.4         |       | 126.7                 |       |
| Changes in scope of  consolidation and other changes                                         |       |                         |       | —         |       | 5.6         | (3)        | (2.9               | )          |                |       | 31.8         |       | 34.5                  |       |
| **December 31, 2005**                                                                        | ** ** | **514,379,000**              | ** ** | **1,316.8**    | ** ** | **3,100.2** | ** ** | **11,928.0**       | ** ** | **696.7**           | ** ** | **481.8**    | ** ** | **17,523.5**          | ** ** |
|                                                                                         |       |                         |       |           |       |        |       |               |       |                |       |         |       |                  |       |
| **As of January 1, 2004**                                                                    | ** ** | **556,643,410**              | ** ** | **1,425.0**    | ** ** | **2,985.0** | ** ** | **11,632.5**       | ** ** | **99.1**            | ** ** | **318.7**    | ** ** | **16,460.3**          | ** ** |
| Share buy-back and  cancellation of own shares including own shares intended to be cancelled |       | (16,203,000                  | )          | (41.5          | )          | 39.4        |       | (723.6             | )          | —              |       | —       |       | (725.7                | )          |
| Capital  withdrawal/contribution                                                             |       | —                       |       | —         |       | —      |       | 4.1                |       | —              |       | (59.6        | )          | (55.5                 | )          |
| Dividends paid                                                                               |       | —                       |       | —         |       | —      |       | (774.1             | )          | —              |       | (77.7        | )(2)       | (851.8                | )          |
| Net income                                                                                   |       | —                       |       | —         |       | —      |       | 2,004.3            |       | —              |       | 129.0        |       | 2,133.3               |       |
| Income and expense  recognized directly in equity                                            |       | —                       |       | —         |       | —      |       | (233.9             | )          | (159.6              | )          | (19.4        | )          | (412.9                | )          |
| Changes in scope of  consolidation and other changes                                         |       | —                       |       | —         |       | 3.2         | (3)        | 13.8               |       | —              |       | 37.5         |       | 54.5                  |       |
| **December 31, 2004**                                                                        | ** ** | **540,440,410**              | ** ** | **1,383.5**    | ** ** | **3,027.6** | ** ** | **11,923.1**       | ** ** | **(60.5**           | **)**      | **328.5**    | ** ** | **16,602.2**          | ** ** |

 

----

(1)          Details are provided in the “Consolidated Statements of RecognizedIncome and Expense” above.

(2)          Including profit and loss transfers

(3)          Granting of BASF shares under the employeeshare program “plus”

The accompanying Notes are anintegral part of these Consolidated Financial Statements.

F-7

----

**BASF GROUP**

**ConsolidatedStatements of Cash Flows**

**Million €**
| ** **                                                                                               | ** ** | **2006**     | ** ** | **2005**     | ** ** | **2004**     | ** ** |
|----------------------------------------------------------------------------------------------------------|------------|--------------|------------|--------------|------------|--------------|------------|
| Net income after  minority interests                                                                     |       | 3,215.2      |       | 3,006.7      |       | 2,004.3      |       |
| Depreciation and  amortization of intangible assets, property, plant and equipment and financial  assets |       | 2,993.6      |       | 2,426.6      |       | 3,118.5      |       |
| Changes in pension provisions,  defined benefit assets and other non-cash items                          |       | (72.4        | )          | (11.8        | )          | 87.9         |       |
| Net gains from disposal  of long-term assets and securities                                              |       | (206.9       | )          | (422.1       | )          | (383.8       | )          |
| Changes in inventories                                                                                   |       | (518.6       | )          | (412.3       | )          | (503.5       | )          |
| Changes in receivables                                                                                   |       | 22.4         |       | 357.2        |       | (1,150.4     | )          |
| Changes in operating  liabilities and other provisions                                                   |       | 506.4        |       | 306.0        |       | 1,461.0      |       |
| **Cash provided by operating  activities before external financing of pension obligations**              | ** ** | **5,939.7**  | ** ** | **5,250.3**  | ** ** | **4,634.0**  | ** ** |
| External financing of  pension obligations (CTA)                                                         |       | —       |       | (3,660.0     | )          | —       |       |
| **Cash provided by operating  activities**                                                               | ** ** | **5,939.7**  | ** ** | **1,590.3**  | ** ** | **4,634.0**  | ** ** |
| Payments related to  intangible assets and property, plant and equipment                                 |       | (2,410.9     | )          | (1,947.7     | )          | (2,057.0     | )          |
| Payments related to  financial assets and securities                                                     |       | (201.1       | )          | (211.4       | )          | (203.8       | )          |
| Payments related to  acquisitions                                                                        |       | (6,396.7     | )          | (535.7       | )          | (103.6       | )          |
| Proceeds from  divestitures                                                                              |       | 156.5        |       | 1,530.8      |       | 674.0        |       |
| Proceeds from the  disposal of long-term assets and marketable securities                                |       | 438.1        |       | 458.3        |       | 457.4        |       |
| **Cash used in investing  activities**                                                                   | ** ** | **(8,414.1** | **)**      | **(705.7**   | **)**      | **(1,233.0** | **)**      |
| Capital  increases/repayments                                                                            |       | 18.1         |       | 9.5          |       | (55.5        | )          |
| Share repurchases                                                                                        |       | (938.4       | )          | (1,434.8     | )          | (725.7       | )          |
| Proceeds from the  addition of financial liabilities                                                     |       | 7,868.7      |       | 2,241.5      |       | 706.7        |       |
| Repayment of financial  liabilities                                                                      |       | (3,294.6     | )          | (1,942.4     | )          | (909.7       | )          |
| Dividends paid                                                                                           |       |         |       |         |       |         |       |
| to shareholders  of BASF Aktiengesellschaft                                                              |       | (1,014.5     | )          | (903.9       | )          | (774.1       | )          |
| to minority  shareholders                                                                                |       | (217.9       | )          | (78.2        | )          | (77.7        | )          |
| **Cash provided by (used in)  financing activities**                                                     | ** ** | **2,421.4**  | ** ** | **(2,108.3** | **)**      | **(1,836.0** | **)**      |
| **Net changes in cash and cash  equivalents**                                                            | ** ** | **(53.0**    | **)**      | **(1,223.7** | **)**      | **1,565.0**  | ** ** |
| Effects on cash and  cash equivalents                                                                    |       |         |       |         |       |         |       |
| from foreign  exchange rates                                                                             |       | (30.0        | )          | 35.3         |       | (17.3        | )          |
| from changes in  scope of consolidation                                                                  |       | 9.4          |       | 10.3         |       | 57.6         |       |
| Cash and cash  equivalents at the beginning of the year                                                  |       | 907.8        |       | 2,085.9      |       | 480.6        |       |
| **Cash and cash equivalents at the end of the year**                                                     | ** ** | **834.2**    | ** ** | **907.8**    | ** ** | **2,085.9**  | ** ** |

 

For further informationregarding the Statements of Cash Flows, see explanations in Note 10.

The accompanying Notes are anintegral part of these Consolidated Financial Statements.

F-8

----

**BASF GROUP**

**NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS**

**1.****             ****Summary of accountingpolicies**

**(a)****      ****Basis of presentation**

The consolidated financialstatements of BASF Aktiengesellschaft are valid as of December 31, 2006and were prepared in accordance withInternational Financial Reporting Standards (IFRS) as adopted by the European Union. All of the binding IFRS inthe reporting year 2006 as well as the pronouncements of the International Financial ReportingInterpretations Committee (IFRIC) were applied. IFRS which had not been endorsed by the European Union by thebalance sheet date had no effect on BASF’s Consolidated Financial Statements.

The accounting policies andvaluation methods that have been applied are the same as those of theprevious year. Exceptions to this are changesrequired by the application of new or revised standards and interpretations. In this regard, there were nomaterial changes in 2006.

On February 20, 2007, the2006 Consolidated Financial Statements were authorized for issue by theBoard of Executive Directors and submitted forapproval through the audit committee to the Supervisory Board of BASF Aktiengesellschaft at theirmeeting on February 27, 2007.

**(b)****         ****Scope of consolidation**

The Consolidated FinancialStatements include BASF Aktiengesellschaft, the parent company, with itsheadquarters in Ludwigshafen,Germany as well as all the material subsidiaries in which BASF Aktiengesellschaft directly or indirectlyexercises a majority of the voting rights (collectively, the “Company”). Material, jointly operated companies areincluded on a proportional consolidation basis.
| ** **                                     | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
|------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Consolidated companies  as of January 1        |       | 180      |       | 160      |       | 154      |       |
| *Thereof  proportionally consolidated*         | * *   | *15*     | * *   | *12*     | * *   | *12*     | * *   |
| First-time  consolidations                     |       | 151      |       | 28       |       | 20       |       |
| *Thereof  proportionally consolidated*         | * *   | *4*      | * *   | *4*      | * *   | *—* | * *   |
| *Thereof  changes in the consolidation method* | * *   | *—* | * *   | *(1*     | *)*        | *—* | * *   |
| Deconsolidations                               |       | 3        |       | 8        |       | 14       |       |
| *Thereof  proportionally consolidated*         | * *   | *—* | * *   | *—* | * *   | *—* | * *   |
| Consolidated as of  December 31                |       | **328**  | ** ** | **180**  | ** ** | **160**  |       |
| *Thereof proportionally  consolidated*         | * *   | *19*     | * *   | *15*     | * *   | *12*     | * *   |

 

Subsidiaries and jointventures whose impact on the financial position, cash flows and results of the Companyare individually and in aggregate immaterial are not consolidated.

Subsidiaries and jointventures not consolidated due to immateriality, non-proportionally consolidatedjoint venture companies, as well as the remaining associated companies areaccounted for using the equity method. Associated companies are those entitiesin which the Company has a participation of at least 20% or can exercise asignificant influence over the operating and financial policies. In total, thisapplies to:
| ** **           | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
|----------------------|------------|----------|------------|----------|------------|----------|------------|
| Subsidiaries         |       | 11       |       | 11       |       | 13       |       |
| Joint ventures       |       | 6        |       | 2        |       | 3        |       |
| Associated companies |       | 3        |       | 3        |       | 3        |       |
| **Total**            | ** ** | **20**   | ** ** | **16**   | ** ** | **19**   | ** ** |

 

F-9

----

First-time consolidations in2006 comprised:

·                  a total of 59 companies related to theacquisition of Engelhard Corp.;

·                  a total of 65 companies related to theacquisition of the construction chemicals business from Degussa AG;

·                  a total of three companies related to theacquisition of Johnson Polymer;

·                  CropDesign N.V., a biotechnology companyacquired in June;

·                  PEMEAS GmbH, acquired in December; and

·                  an additional 22 subsidiaries due to theirincreased importance, which were previously not consolidated, with headquartersin Germany, Spain, Australia, China, Malta and Switzerland.

In 2006, three companies were deconsolidated.

First-time consolidations in2005 comprised:

·                  three companies in Asia and four in Europe inconnection with the acquisition of the electronic chemicals business of MerckKGaA, Darmstadt, Germany;

·                  the acquired Leuna Miramid GmbH, Leuna,Germany, which produces and sells polyamide and polyamide compounds;

·                  three companies in connection with theacquisition of a consulting company, plan business market enabling services AG,which is focused on the design of business processes and their mapping in ITsystems;

·                  three companies headquartered in Switzerlandand in France as a result of the acquisition of the Swiss fine chemicalscompany, Orgamol;

·                  ZAO Achimgaz, headquartered in the RussianFederation, a joint venture with OAO Gazprom for the exploration of gas, whichhas been proportionally consolidated;

·                  six newly founded companies with headquartersin Canada, Germany, the United Kingdom and the United States; and

·                  seven previously unconsolidated companies withheadquarters in Germany, China, Taiwan, Malaysia and Turkey due to theirincreased importance

First-time consolidations in2004 comprised:

·                  BASF Performance Polymers GmbH, Rudolstadt,Germany, which produces nylon granules and compounding products;

·                  Foam Enterprises Inc., United States, whichholds a direct stake in a butadiene pipeline in the United States;

·      BASFPipeline Holdings LLC, United States, which holds a direct stake in a butadienepipeline in the United States;

·      threeWintershall companies in Brazil, which explore for oil and gas in Brazil;

·                  eight previously unconsolidated European andtwo U.S. companies due to corporate restructuring; and

·                  four previously unconsolidated companies with headquartersin China, Japan, and Germany due to their increased importance.

F-10

----

Deconsolidations in 2004included two companies due to their decreased significance and five due to restructuringor liquidation. A further seven companies were eliminated from the scope ofconsolidation as a result of the sale of the printing systems business to CVCPartners.

In 2004, aquisitions primarilyconcerned the takeover of the plasticizers business from Sunoco, United States.The transaction involved production plants for phthalic anhydride and oxo alcoholsin Pasadena, Texas, as well as various intangible assets and inventories.

Changes in the scope ofconsolidation concerning previously unconsolidated subsidiaries and joint ventureshad the following effects on the sales and the balance sheet of the BASF Group:
| ** **                                                 | ** ** | **2006**                | ** ** | **2006** | ** ** | **2005**                | ** ** | **2005** | ** ** | **2004**                | ** ** | **2004** | ** ** |
|------------------------------------------------------------|------------|-------------------------|------------|----------|------------|-------------------------|------------|----------|------------|-------------------------|------------|----------|------------|
| ** **                                                 | ** ** | **Million €** | ** ** | **%**    | ** ** | **Million €** | ** ** | **%**    | ** ** | **Million €** | ** ** | **%**    | ** ** |
| **Sales**                                                  | ** ** | **9.9**                 | ** ** | .        | ** ** | **81.2**                | ** ** | **0.2**  | ** ** | **43.5**                | ** ** | **0.1**  | ** ** |
| Long-term assets                                           |       | 59.6                    |       | 0.3      |       | 3.2                     |       | .        |       | 3.5                     |       | .        |       |
| *Thereof  property, plant and equipment*                   | * *   | *16.2*                  | * *   | *0.1*    | * *   | *26.7*                  | * *   | *0.2*    | * *   | *57.3*                  | * *   | *0.4*    | * *   |
| Short-term assets                                          |       | (108.2                  | )          | (0.7     | )          | (38.0                   | )          | (0.3     | )          | 17.3                    |       | 0.1      |       |
| *Thereof  cash and cash equivalents*                       | * *   | *9.3*                   | * *   | *1.0*    | * *   | *10.3*                  | * *   | *0.5*    | * *   | *57.6*                  | * *   | *12.0*   | * *   |
| **Total assets**                                           | ** ** | **(48.6**               | **)**      | **(0.1** | **)**      | **(34.8**               | **)**      | **(0.1** | **)**      | **20.8**                | ** ** | **0.1**  | ** ** |
| Stockholders’ equity                                  |       | (0.3                    | )          | .        |       | 3.1                     |       | .        |       | 37.8                    |       | 0.2      |       |
| Long-term liabilities                                      |       | (18.7                   | )          | (0.2     | )          | 16.8                    |       | 0.2      |       | 0.2                     |       | .        |       |
| *Thereof  financial indebtedness*                          | * *   | *6.9*                   | * *   | *0.2*    | * *   | *9.4*                   | * *   | *0.5*    | * *   | *—*                | * *   | *—* | * *   |
| Short-term liabilities                                     |       | (29.6                   | )          | (0.4     | )          | (54.7                   | )          | (0.6     | )          | (17.2                   | )          | (0.2     | )          |
| *Thereof  financial indebtedness*                          | * *   | *—*                | * *   | *—* | * *   | *16.2*                  | * *   | *1.1*    | * *   | *3.9*                   | * *   | *0.8*    | * *   |
| **Total stockholders’ equity  and  liabilities** | ** ** | **(48.6**               | **)**      | **(0.1** | **)**      | **(34.8**               | **)**      | **(0.1** | **)**      | **20.8**                | ** ** | **0.1**  | ** ** |
| Contingent liabilities and other financial obligations     |       | 31.5                    |       | 1.0      |       | 46.3                    |       | 1.6      |       | 89.8                    |       | 2.8      |       |

 

F-11

----

**Proportionalconsolidation**

Material proportionallyconsolidated companies are as follows:

·                  Wintershall Erdgas Handelshaus GmbH & Co.KG, Berlin, Germany as well as Wintershall Erdgas Handelshaus Zug AG,Switzerland, in which our jointly operated trading activities with Gazprom are combined;

·                  ELLBA C.V., Rotterdam, the Netherlands, andELLBA Eastern Private Ltd., Singapore, which are operated together with Shelland produce propylene oxide and styrene monomer; and

·                  BASF-YPC Company Ltd., a joint venture betweenBASF and Sinopec, that operates the Verbund site in Nanjing, China.

Condensed financialinformation relating to the company’s pro rate interest in jointly operatedcompanies accounted for using the proportional consolidation method is asfollows: 

**Million €**
| ** **                                                  | ** ** | **2006**    | ** ** | **2005**    | ** ** | **2004**    | ** ** |
|-------------------------------------------------------------|------------|-------------|------------|-------------|------------|-------------|------------|
| **Income statement information**                            |       |        |       |        |       |        |       |
| Sales                                                       |       | 4,256.0     |       | 3,150.5     |       | 2,258.6     |       |
| Gross profit on sales                                       |       | 334.7       |       | 183.2       |       | 178.1       |       |
| Income from operations                                      |       | 259.6       |       | 123.8       |       | 116.6       |       |
| Income before taxes                                         |       | 260.2       |       | 127.6       |       | 124.9       |       |
| Net income                                                  |       | 242.1       |       | 113.7       |       | 99.3        |       |
| **Balance sheet information**                               |       |        |       |        |       |        |       |
| Long-term assets                                            |       | 1,258.6     |       | 1,396.4     |       | 1,241.9     |       |
| *Thereof  property, plant and equipment*                    | * *   | *1,185.1*   | * *   | *1,325.1*   | * *   | *1,177.0*   | * *   |
| Short-term assets                                           |       | 1,023.1     |       | 775.9       |       | 527.8       |       |
| *Thereof  marketable securities, cash and cash equivalents* | * *   | *82.3*      | * *   | *47.3*      | * *   | *24.5*      | * *   |
| **Total Assets**                                            | ** ** | **2,281.7** | ** ** | **2,172.3** | ** ** | **1,769.7** | ** ** |
| Stockholders’ equity                                   |       | 718.1       |       | 630.7       |       | 678.4       |       |
| Long-term liabilities                                       |       | 740.7       |       | 948.7       |       | 668.5       |       |
| *Thereof  financial indebtedness*                           | * *   | *342.5*     | * *   | *547.0*     | * *   | *370.0*     | * *   |
| Short-term liabilities                                      |       | 822.9       |       | 592.9       |       | 422.8       |       |
| *Thereof  financial indebtedness*                           | * *   | *36.3*      | * *   | *9.9*       | * *   | *16.0*      | * *   |
| **Stockholders’ equity and  liabilities**              | ** ** | **2,281.7** | ** ** | **2,172.3** | ** ** | **1,769.7** | ** ** |
| Contingent liabilities  and other financial obligations     |       | 244.6       |       | 128.5       |       | 77.1        |       |
| **Cash flow information**                                   |       |        |       |        |       |        |       |
| Cash provided by  operating activities                      |       | 340.8       |       | 207.6       |       | 79.6        |       |
| Cash used in investing  activities                          |       | (105.3      | )          | (205.5      | )          | (267.9      | )          |
| Cash provided by (used  in) financing activities            |       | (192.9      | )          | 14.4        |       | 181.6       |       |
| Net change in cash and cash equivalents                     |       | 42.6        |       | 16.5        |       | (6.7        | )          |

 

F-12

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**Associatedcompanies accounted for using the equity method**

Material associated companiesaccounted for using the equity method include the Solvin Group (BASFshare: 25%), Svalöf Weibull Group (BASF share:40%), N. E. Chemcat Corporation(1) (BASFshare: 42%), Heesung-EngelhardCorporation (BASF share: 49%) and Shanghai Lianheng Isocyanate Co. Ltd. (BASF share: 35%). Condensed financialinformation is shown below.(2)

**Million €**
| ** **                                                  | ** ** | **2006**    | ** ** | **2005**    | ** ** | **2004**    | ** ** |
|-------------------------------------------------------------|------------|-------------|------------|-------------|------------|-------------|------------|
| **Income statement information**                            | ** ** | ** **  | ** ** | ** **  | ** ** | ** **  | ** ** |
| Sales                                                       |       | 1,980.4     |       | 1,372.0     |       | 8,052.7     |       |
| Gross profit on sales                                       |       | 379.6       |       | 351.3       |       | 1,131.7     |       |
| Income from operations                                      |       | 174.2       |       | 103.8       |       | 296.4       |       |
| Income before taxes                                         |       | 186.1       |       | 102.0       |       | 318.3       |       |
| Net income                                                  |       | 122.7       |       | 67.0        |       | 222.6       |       |
| BASF’s share of net  income                            |       | 36.4        |       | 16.8        |       | 93.9        |       |
| **Balance sheet information**                               | ** ** | ** **  | ** ** | ** **  | ** ** | ** **  | ** ** |
| Long-term assets                                            |       | 655.3       |       | 477.3       |       | 5,258.4     |       |
| *Thereof  property, plant and equipment*                    | * *   | *589.5*     | * *   | *459.5*     | * *   | *3,430.0*   | * *   |
| Short-term assets                                           |       | 1,112.3     |       | 672.1       |       | 2,486.4     |       |
| *Thereof  marketable securities, cash and cash equivalents* | * *   | *153.2*     | * *   | *48.6*      | * *   | *8.0*       | * *   |
| **Total assets**                                            | ** ** | **1,767.6** | ** ** | **1,149.4** | ** ** | **7,744.8** | ** ** |
| Stockholders’ equity                                   |       | 772.1       |       | 343.4       |       | 3,540.3     |       |
| Long-term liabilities                                       |       | 352.4       |       | 190.6       |       | 2,158.0     |       |
| *Thereof  financial indebtedness*                           | * *   | *132.4*     | * *   | *123.3*     | * *   | *1,338.7*   | * *   |
| Short-term liabilities                                      |       | 643.1       |       | 615.4       |       | 2,046.5     |       |
| *Thereof  financial indebtedness*                           | * *   | *39.8*      | * *   | *20.4*      | * *   | *329.9*     | * *   |
| **Total stockholders’ equity and  liabilities**        | ** ** | **1,767.6** | ** ** | **1,149.4** | ** ** | **7,744.8** | ** ** |
| BASF’s proportional interest                           |       | 268.3       |       | 95.4        |       | 1,695.8     |       |

 

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(1)          The market capitalization of the 42% share in N.E. Chemcat Corporationamounts to a total of €267.4 million as of December 31, 2006.

(2)          The newly acquired Engelhard companies wereincluded using estimated figures.

**(c)****         ****Summary of significantaccounting policies**

***Balance sheet date:***The individual financial statements of the companies consolidated in the Consolidated Financial Statements of theBASF Group (hereinafter referred to as “consolidated companies”) are generally prepared as of the balance sheetdate of the Consolidated Financial Statements.

***Uniform valuation:***Assets and liabilities of consolidated companies are accounted for andvalued uniformly in accordancewith the principles described herein. For companies accounted for using theequity method, materialdeviations from our accounting policies are adjusted.  

***Eliminations:***Transactions between consolidated companies as well as inter-companyprofits resulting from sales andservices rendered between consolidated companies are eliminated in full or forjointly operated companies on apro rata basis. Material inter-company profits related to companies accountedfor using the equity method areeliminated.

***Capital consolidation:***Capital consolidation is based on the purchase method. Initially, allassets, liabilities and intangibleassets that are to be capitalized are valued at fair value. Finally, theacquisition cost is compared withthe proportionate share of the net assets acquired at fair value. Thedifferences are capitalized asgoodwill. Goodwill is not amortized, but written down in the case of impairment(see Note 11 for furtherinformation on intangible assets).

F-13

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***Revenue recognition:***Revenues from the sale of goods or the rendering of services arerecognized upon the transfer ofownership and risk to the buyer. They are recognized without sales taxes.Allowances are made for rebatesand trade discounts. Provisions are made to cover return of products, estimated future warranty obligations and otherclaims.

Revenues from the sale ofprecious metals to industrial customers are recognized at the time of shipmentand the corresponding purchase price is recorded at cost of sales.

Revenues from the trading ofprecious metals and their derivatives with broker-traders are recorded on a netbasis. In these transactions, physical delivery generally does not take place.

In certain cases, customeracceptance is required. In these cases, revenues are recognized after customeracceptance occurs.

Long-term contracts primarilyconcern the construction of chemical plants for third parties. Realizationof revenues and costs takes placeaccording to the stage of completion when the outcome of the construction contract can be reliablyestimated. To the extent that the outcome of the construction cannot be estimated reliably, revenue is recognizedonly to the extent of contract costs incurred. Expected losses on the construction contract are recognizedwith a write-down to the fair value.

Revenue from interest-bearingassets is recognized on the outstanding receivables at reporting dateusing the interest rates calculated under theeffective interest method. Dividends from participations not accounted for under the equity method arerecognized when the shareholders’ right to receive payment is established.

Payments relating to the saleor licensing of technologies or technological expertise are recognizedin income according to the contractuallyagreed transfer of the rights and obligations relating to those technologies.

***Borrowing costs:***If the construction phase of property, plant or equipment extends beyonda period of one year, theinterest incurred on borrowed capital that is directly attributable to thatasset is capitalized as part ofthe cost of that asset up to the date the asset is ready for its intended useor available for sale. All otherborrowing costs are recognized as an expense in the period in which they areincurred.

***Investment subsidies:***Government grants related to the acquisition or construction ofproperty, plant and equipmentreduce the acquisition or construction cost of the respective assets. Othergovernment grants or governmentassistance are treated as deferred income and recognized as income over theunderlying period or the expecteduseful life of the related asset.

***Foreign currency transactions:***The cost of assets acquired in foreigncurrencies and revenues from salesin foreign currencies are recorded at the exchange rate at the date of thetransaction. Foreign currency receivablesand liabilities are valued at the exchanges rates on the balance sheet date.

***Translation of foreign currency financial statements:***The translation of foreign currency financial statements depends on the functionalcurrencies of the consolidated companies. Translation is based on the current rate method: balance sheet itemsare translated to euros at year-end rates and expenses and income are translated to euros at monthlyaverage rates and accumulated for the year. The translation adjustments due to the use of the current ratemethod are shown under currency translations adjustments as a component of other comprehensive incomein equity and are recognized in income only upon the disposal of a company.

For certain companies outsidethe euro or U.S. dollar zone, the euro or the U.S. dollar is the functionalcurrency. The temporal method istherefore used to make the translation: long-term assets, excluding loans, and paid-in capital, are translatedusing historical rates. Other assets, liabilities and provisions are translated using year-end rates. Equity isthen calculated as the balancing figure. Expenses and income are converted at monthly average rates andaccumulated to year-end figures, except for those items derived from balance sheet items converted athistorical rates. Asset and foreign exchange gains or losses resulting from the conversion process are reported inother operating expenses or other operating income.

F-14

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**Acquiredintangible assets – excluding goodwill and intangible assets with indefiniteuseful****lives:**Acquiredintangible assets – excluding goodwill – are valued at cost less scheduledstraight-line amortization. Theuseful life is determined based on the period of the underlying contract andthe period of time over which theintangible asset is expected to be used. Impairment losses are recognized ifthe recoverable amount of the assetis lower than the carrying amount. The recoverable amount is the higher of fair value less selling costs andvalue-in-use. Reversals of impairment losses are recorded if the reasons for the previous years’ impairmentlosses no longer exist.

Depending on the type ofintangible asset, the impairment loss is recorded as cost of sales, selling expense,research and development expense or other operating expense.

**Intangibleassets with indefinite useful lives:**Intangible assets with indefinite useful lives are trade names that havebeen acquired as part of the 2006 acquisitions. They will be tested forimpairment annually.

***Internally generated intangible assets:***Internally generated intangible assets areprimarily comprised of internallydeveloped software. Such software as well as other internally generated assetsfor internal use is valued atcost and amortized over their useful lives. Impairments are recognized if thecarrying amount of an assetexceeds the recoverable amount.

Development costs also include,in addition to those costs directly attributable to the development ofthe asset, an appropriate allocation ofoverhead cost. Borrowing costs are capitalized to the extent that they are material and related to the periodover which the asset is generated.

The average amortizationperiod for intangible assets with definite useful lives is ten years for 2006and nine years for 2005 based on the following expected useful lives:
| **Amortization  periods**                     | ** ** | **Years** |
|-----------------------------------------------|------------|-----------|
| Distribution and similar rights               |       | 2–20 |
| Product rights, licenses and trademarks       |       | 2–30 |
| Know-how, patents and production technologies |       | 3–25 |
| Internally generated intangible assets        |       | 3–5  |
| Other rights and values                       |       | 2–20 |

 

***Goodwill:***Goodwillis only written down if there is an impairment. Impairment testing takes place annually or if there is anindication of an impairment. The goodwill impairment test is based on cash-generating units and compares therecoverable amount of the unit with the respective book value. The cash-generating units at BASF are, in general,the business units. Recoverable amount is the higher of net sales price and the value-in-use.Value-in-use is generally determined using the discounted cash flow method. The estimated cash flows are generallybased on the current business plans for the next three years and on the expertise of the respectivebusiness unit management. For cash flow projections beyond the detailed planning period, growth ratesranging from 0% to 2% were assumed depending on the individual business units. The discount rates used dependon the underlying business and the country in which the business operates and correspond to pre-taxdiscount rates. As a basis, after-tax rates ranging from 6.7% to 9.9% were used. If the impairment lossexceeds the carrying amount of goodwill, the goodwill is written down completely and the remaining impairmentloss is allocated to the remaining assets in the cash generating unit. Goodwill impairment losses are reportedunder other operating expenses.

The goodwill of BASF Group ismainly attributable to the Catalysts division of the Chemicals segment,the Construction Chemicals division of thePerformance Products segment and the Agricultural Products division of the Agricultural Products andNutrition segment.

Goodwill of €1,284 millionrelates to the Catalysts division, €665 million relates to the Construction Chemicalsdivision and €1,375 million relates to the Agricultural Products division.

F-15

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***Emission rights:***Emission right certificates granted free-of-charge by the GermanEmissions Trading Authority(DEHSt) or a similar authority in other European countries, are recognized onthe balance sheet at their fairvalue at the time they are credited to the electronic register run by therelevant government authority. Purchasedemission rights are recorded at cost. A write-down is recorded if the fairvalue on the balance sheet dateis lower than the carrying amount.

***Property, plant and equipment:***Property, plant and equipment are stated atacquisition or production costless scheduled depreciation over their estimated useful life. Low-value assetsare fully written off in the yearof acquisition and are shown as disposals. The revaluation model is not used.

The cost of self-constructedplants includes direct costs, appropriate allocations of material andmanufacturing overhead and an appropriateshare of the administrative costs for those areas involved in the construction of the plants. Borrowing coststhat are incurred during the period of construction are capitalized. For companies in Germany, borrowing costs wereestimated at 4.5% whereas country-specific rates were used for Group companies outside Germany.

Expected costs involved inthe regularly scheduled shutdown of important plants are capitalized aspart of the asset and depreciated using thestraight-line method over the period to the next planned shutdown. In oil and gas exploration, theestimated discounted costs for rehabilitating sites, especially the filling of wells and the removal of productionfacilities, are capitalized as part of the individual asset.  

Both movable and immovablefixed assets, including long-distance natural gas pipelines, aredepreciated using the straight-line method.The weighted-average periods of depreciation used were as follows:
| **Depreciation periods**                     | ** ** | **2006**    | ** ** | **2005**    | ** ** |
|---------------------------------------------------|------------|-------------|------------|-------------|------------|
| ** **                                        | ** ** | **(Years)** | ** ** | **(Years)** | ** ** |
| Buildings and  structural installations           |       | 26          |       | 28          |       |
| Industrial plant and  machinery                   |       | 11          |       | 13          |       |
| Long-distance natural  gas pipelines              |       | 25          |       | 25          |       |
| Factory and office equipment and other facilities |       | 9           |       | 8           |       |

 

Impairment losses arerecorded whenever events or changes in circumstances indicate that thecarrying amount of an asset may not berecoverable. The evaluation is based on the present value of the discounted expected future cash flows. Animpairment loss is recorded for the difference between the carrying amount and the discounted value offuture cash flows.

In oil and gas exploration,exploration and production costs are accounted for using the successfulefforts method. Under this method, costs ofsuccessful exploratory drillings and other development drilling operations are capitalized as property, plantand equipment. Successful drillings are depreciated based on the production and estimated availableresources. Geophysical investigations, including unsuccessful exploratory drilling, exploratory andexploratory dry-hole costs, are charged against income.

Investment properties held torealize capital gains or rental income are immaterial. They are valued at thelower of acquisition cost less scheduled depreciation and fair value.

***Leasing:***Accordingto IAS 17, leasing contracts are classified as either financing or operatingleases. Assets which are subject to operating leases are not capitalized.Leasing payments are charged to income in the year they are incurred.

A lease is classified as a financelease if it transfers substantially all of the risks and rewards related to itsownership. Assets subject to a finance lease are recorded at the lower of thefair value of the leased property or the present value of the minimum leasepayments. Leasing payments are apportioned between the interest component andthe principal component. The principal component reduces the outstanding liability,while the interest component is charged as interest expense. Depreciation takesplace over the the shorter of the useful life of the asset or the period of thelease.

Details regarding theindividual leasing contracts are presented in Note 27.

F-16

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***Investments in companies accounted for using the equity method:***Investments accounted for using the equitymethod are accounted for under the same principles as for consolidatedsubsidiaries. The carrying amounts of these companies are adjusted annuallybased on the pro rata share of income, dividends and other changes instockholders’ equity. Goodwill associated with such investments is not amortizedbut is written down only in the case of an impairment.

***Financial instruments:***Financial assets and financial liabilities are recognized on the balancesheet when BASF Group becomes aparty to a financial instrument. Financial assets are derecognized when the contractual rights to the cash flowsfrom the financial asset expire or when the financial asset with all risks and rewards of ownership is transferred.Financial liabilities are removed from the books when the contractual obligation expires or is discharged orcancelled. Standard purchases and sales of financial instruments are accounted for using settlement date and inprecious metals trading using the day of trading. According to IAS 32, financial instruments include primaryinstruments such as accounts receivable and accounts payable, and other financing-relatedreceivables and liabilities. Financial instruments also include derivatives, which are used to hedge risks, such asthose arising from changes in currency exchange and interest rates.

Financial assets andliabilities are divided into the following valuation categories:

·                  ***Financialassets and liabilities***thatare measured at fair value and recognized in income include exclusively derivatives and other tradinginstruments. Within this valuation category are included bank balances, cash balances and checks, whichare shown under cash and cash equivalents, as well as derivatives shown under other assets and other liabilities.

·                  ***Loans andreceivables***comprisefinancial assets with fixed or determinable payments, which are not quoted on an active market and are notderivatives or classified as available-for-sale. Also included in this category are otherreceivables and loans classified under “accounts receivable, trade;” “other receivables and miscellaneousshort-term assets;” and “other receivables and miscellaneous long-term assets.” Initial valuation is madeat fair value, which generally matches the nominal value of the receivable or loan. Interest-freeand low-interest long-term loans and receivables are recognized at actual cash value. Subsequent valuations are generallymade at historical cost, underconsideration of the effective interest method.

·                  ***Held-to-maturityfinancial instruments***consistoff non-derivative financial assets with fixed or determinable payments, and a fixed term, forwhich the Company has the ability and intent to hold until maturity, and which do not fall underother valuation categories. Initial valuation is made at fair value, which generally matches the nominalvalue. Subsequent valuations are generally made at historical cost, under consideration of theeffective interest method. For the BASF Group, there are no material financial assets that fall underthis category.

·                  ***Available-for-salefinancial instruments***comprisefinancial assets which are not derivatives and do not fall under any of the previously stated valuation categories.Participations booked under theitem “other financial assets” not accounted for using the equity method, andsecurities which areavailable-for-sale as well as long-term securities are included. Initialvaluation is done at fair value.Changes in the fair value are recognized in equity under the item “othercomprehensive income” and areonly recognized in income when they are disposed of or are impaired.Participations whose fair valuecannot be reliably determined are carried at the historical cost, and arewritten down in the case of animpairment in value. For these participations, the book values represent the best estimates of value.

·                  ***Financialliabilities***are initiallyvalued at fair value, which usually corresponds to the amount received. Subsequent valuations are generallymade at historical cost, under the effective interest method.

In 2006, 2005 and 2004, therewere no reclassifications between these valuation categories.

Derivative financialinstruments can be embedded within other contracts. Under IFRS, embeddedderivatives are recordedseparately from their base contracts and shown at fair value.  

F-17

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Derivatives within the BASFGroup are generally used for hedging purposes. The majority of thesecontracts, however, are not accounted forusing hedge accounting as defined under IFRS. Nonetheless, these derivatives are effective hedges in thecontext of the Group strategy. Changes in the fair value of the derivatives almost completely offset thechange in the value of the underlying contracts.

The BASF Group uses hedgeaccounting only for selected hedges of future transactions (“cash flowhedge”). The effective portion of the changein fair value is thereby recorded directly in equity under other comprehensive income, taking deferred taxesinto account. The ineffective portion is recognized immediately in income. In the case of future transactionsthat will lead to a non-financial asset or a non-financial debt, the cumulated fair value changes in equity areimmediately charged against the acquisition cost. For future transactions that will lead to the recognitionof financial debts or assets, the cumulated fair value changes in equity offset against the purchase priceupon initial recognition. The hedging time frame of future transactions generally extends up to one year;the maturity of the hedging instrument is based upon the effective date of the future transaction.

If there is objectiveevidence of a permanent impairment of an available-for-sale financialinstrument,impairmentwrite-downs are made. The indications include above all, a sustaineddeterioration in the market value,a significant reduction in credit quality, the existence of transfer risks,payment delays, higher probabilityof insolvency, the necessity of debtor recapitalization or the disappearance ofan active market.  

If the reason for awrite-down for loans and receivables as well as held-to-maturity financialinstrumentsno longerexists, the write-down is reversed up to the cost basis and recognized inincome. In the case of available-for-salesecurities, reversals of write-downs principally are not recognized in theincome statement, but are takendirectly to equity (other comprehensive income). Reversals of write-downs arerecognized in income in the caseof debt instruments; reversals of write-downs above this amount are recognizedin equity. Participations forwhich a fair value cannot be reliably determined are carried at cost.

***Deferred tax assets:***Deferred tax assets are recorded for temporary differences between thecarrying amount of assets andliabilities in the Consolidated Financial Statements and the carrying amountsfor tax purposes. In addition,deferred taxes are recognized for tax loss carryforwards to the extent that itis probable that future taxableprofit for the relevant tax authority will be available against which the taxloss carryforwards can be utilized.For companies located in Germany, a 38% tax rate is applied; for other companies, the tax rates applicable in theindividual countries are used. Appropriate valuation allowances are made if expected future earnings of acompany make it seem more likely than not that the tax benefits will not be realized.

***Inventories:***Inventories are carried at acquisition cost or production cost.Write-downs are made if the netrealizable value is lower than the carrying amount. The net realizable value isthe estimated selling price inthe ordinary course of business less the estimated costs of completion andcosts necessary to make the sale.

Cost of sales include, inaddition to direct costs, an appropriate allocation of production overheadcosts based on normal utilizationrates of the production plants. In addition, pensions, social services and voluntary social benefits are includedas well as allocations for administrative costs, provided they relate to the production process. Financing costsare not included in production costs.

IAS 2 “Inventories” does notapply to commodity broker-traders. Accordingly, precious metals held for tradingpurposes are measured at fair value. Changes in fair value are recognized inincome.

***Pension provisions and other employee obligations:***Provisions for pensions are based on actuarial computations made according to theprojected unit credit method. Similar obligations, especially healthcare costs and life insurance premiumsof retired staff and their dependents in North America, are included in pension provisions. Actuarialprofits and losses are offset against retained earnings. The calculation of pension provisions are based onactuarial reports.

***Other provisions:***Other provisions are accrued when there is a present obligation as aresult of a past event and whenthere is a probable outflow of resources whose amount can be reliablyestimated. The amount of theprovision is the probable amount required to settle the obligation.

F-18

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Provisions for German tradeincome tax and German corporate income tax and similar income taxesare made in the amount necessary to meet theexpected payment obligations, less any prepayments that have been made. Other taxes assessed areappropriately considered.

Provisions are establishedfor certain environmental protection measures and risks if the measures arelikely necessary as a result oflegal or regulatory obligations or other events, and these measures were not already capitalized. Provisions forrequired recultivations associated with oil and gas operations primarily concern the filling of wells and theremoval of production facilities upon the termination of production. The present value of the obligationincreases the cost of the respective asset when it is initially recognized.

Provisions are made forexpected severance payments or similar personnel expenses as well as fordemolition expenses and othercharges related to the closing down of operations that have been planned and publicly announced by management.

The probable amount requiredto settle long-term obligations is discounted if the effect of discountingis material. In this case,valuation of the provision is done at present value. Financing costs are shownin other financial results.

Provisions for long-serviceand anniversary bonuses are generally calculated based on actuarialprinciples. For signed contracts under theGerman early retirement programs, provisions for the present value of supplemental payments are provided intheir full amount and the wage and salary payments due during the passive phase of agreements areaccrued in installments and discounted. Provisions are recorded for the expected costs that are anticipated tobe contracted during the term of the collective bargaining agreements, taking into consideration the ceilingsprovided in the collective bargaining agreements.  

The formation of provisionsfor the BASF stock option program (BOP) is described in detail in Note 25.

***Deferred tax liabilities:***Deferred tax liabilities are recorded for temporary differences betweenthe carrying amount of assets andliabilities in the consolidated financial statements and the carrying amounts for tax purposes to the extent thatthere is a surplus of deferred tax liabilities relating to a taxation authority.

***Earnings per share:***The calculation of earnings per share is based on the average number ofcommon shares outstanding duringthe applicable period and the net income after minority interests. Treasuryshares are included in thecalculation for the period of time that they were outstanding. In 2006, 2005and 2004 there was no dilutiveeffect.

***Use of estimates and assumptions in financial statement preparation:***The carrying amount of assets, liabilities and provisions, contingentliabilities and other financial obligations in the Consolidated Financial Statements depends on the use ofestimates and assumptions. They are based on the circumstances and estimates on the balance sheet date and affect thereported amounts of revenues and expensesduring the reporting periods. These assumptions affect the selection of usefullives of property, plant andequipment and intangible assets, the measurement of provisions, the carryingvalue of investments, and othersimilar evaluations of assets and obligations. Given the uncertainty regardingthe determination of thesefactors, actual results may differ from these estimates.

The use of estimates atclosing date is especially significant for the following items:

·                  ***Goodwill***has to be allocated to cash-generating unitsand tested for impairment once a year. Impairment write-downs are recognized when the carrying amount of thecash-generating unit exceeds therecoverable value.

·                  ***Deferredtax assets***are alsorecognized for tax loss carryforwards. Their realization depends on the future taxable profits of the respectiveGroup companies. Allowances are recorded when it is uncertain if future earnings will besufficient to take advantage of the tax loss carryforwards. See Note 8 for additional information.

·                  ***Pensionprovisions***are influencedby assumptions covering the future development of wages and salaries, future pension payments, interestrates and the performance of plan assets. Differences between assumptions and actual events couldlead to an over- or underfunding of pension liabilities which are offset against retained earnings.See Note 20 for additional information.

F-19

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·                  ***Otherprovisions***also coverrisks resulting from legal disputes and proceedings. In order to determine the amount of the provisions, thefacts relating to each case, the size of the claim, claims awarded in similar cases and independentexpert advice are considered along with assumptions regarding the probability of a successfulclaim and the range of possible claims. The actual costs can deviate from these estimates. See Note 21for more information.

Other provisions also include expected charges for the rehabilitation ofcontaminated sites, therecultivationof landfills, the removal of environmental contamination at existing productionor storage facilities and othersimilar measures. If the respective group company is the only possibleresponsible party that can beidentified, the provision covers the entire expected claim. At sites operated together by one or more parties, theprovision covers only BASF’s share of the expected claim. The determination of the amount of the claimis complex and is based on the available site data, the technology and processes used as well ascurrent regulations. See Note 23 for more information.

Assumptions have to be made in determining the discount rate to be usedin calculating long-termprovisions.

·                  ***Write-downs***of assets are made in thecase of an impairment. An impairment test is conducted if certain events indicate an impairment.Impairment tests are based on a comparison of the carrying value and the recoverable amount. Therecoverable amount is the higher of net realizable value and value-in-use. The determination ofvalue-in-use requires the estimation and discounting of cash flows. The estimation of the cash flowsconsiders all the information available at that date, which may deviate from actual developments. Thisincludes, among other things, expected revenue from sales of products, the return on investments,materials and energy costs. If the recoverable value is lower than the carrying value, a write-down inthe amount of the difference is recognized. See Note 11 and 12 for more information.

**IFRSs andIFRICs not yet to be considered in the preparation of these statements**

The effects of IFRSs andIFRICs not yet to be applied or not yet endorsed by the European Union in thereporting year 2006 were reviewed:

·                  IFRS 7 “Financial Instruments: Disclosures”requires more extensive disclosure regarding financial instruments. The disclosure requirements inIAS 32 were incorporated into IFRS 7 and extended. In addition to the existing disclosurerequirements regarding the approach, presentation and measurement of financial instruments,additional information is required regarding the type and extent of risks stemming from financialinstruments. As BASF already publishes extensive information in its notes to the financial statementsregarding risk, it is not expected that this will have any material effect on the ConsolidatedFinancial Statements of the BASF Group. IFRS 7 is to be applied for reporting years beginning on orafter January 1, 2007.

·                  IFRS 8 “Operating Segments” replaces IAS 14and adopts the ‘management approach’ already prescribed under SFAS 131 “Disclosures about Segments of an Enterpriseand Related Information.” Thisleads to segmentation for reporting purposes based on the internal reportingstructure and associated with this thedisclosure of management information used for evaluating segment performanceand deciding how to allocateresources to operating segments. IFRS 8 shall be applied for the periodsbeginning on or after January 1,2009. Earlier application is permitted. As BASF already uses the sameperformance indicators forexternal reporting as for internal management reporting, it is expected thatIFRS 8 will not have any effecton the Consolidated Financial Statements of the BASF Group.

·                  IFRIC 9 “Reassessment of Embedded Derivatives”clarifies the accounting for embedded derivatives according to IAS 39. The interpretationconcludes that an entity, when it first becomes a party to a contract, must assess whether any embeddedderivatives contained in the contract need to be separated from the host contract and accounted for as if they were stand-alonederivatives. Subsequent reassessmentis prohibited unless there is a change in the terms of the contract thatsignificantly modifies the cashflows related to the contract, in which case reassessment is required. IFRIC 9is to be applied to reportingyears for the periods beginning on or after June 1, 2006. Earlier application is permitted. IFRIC 9 has no materialeffect on the Consolidated Financial Statements of the BASF Group.

F-20

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·                  IFRIC 10 “Interim Financial Reporting andImpairment” addresses the interaction between the requirements of IAS 34 “Interim FinancialReporting” and IAS 36 “Impairment of Assets” and IAS 39 “Financial Instruments: Recognition andMeasurement.” The interpretation concludes that where an entity has recognized an impairment loss in aninterim period for which a reversal is prohibited according to IAS 36 or IAS 39, that impairment shouldnot be reversed in subsequent interim financial statements or in annual financial statements. IFRIC 10 shall be appliedfor reporting periods beginning onor after November 1, 2006. Earlier application is permitted. IFRIC 10 has nomaterial effect on theConsolidated Financial Statements of the BASF Group.

·                  IFRIC 11 “Group and Treasury ShareTransactions” regulates how to apply IFRS 2 “Group and Treasury Share Transactions” to share-basedpayment arrangements involving an entity’s own equity instruments or equity instruments of another entity in the samegroup. Accordingly, share-basedpayment arrangements in which an entity receives services as consideration forits own equity instruments shallbe accounted for as an equity-settled share-based payment transaction. Furthermore, IFRIC 11 prescribes theaccounting for share-based compensation systems involving the granting of equity instruments of theparent company. IFRIC 11 shall be applied to financial years beginning on or after March 1, 2007. Anearlier application is allowed. Share-based compensation systems exist at BASF in the form of the BASF stock optionprogram (BOP) for seniorexecutives and BASF’s incentive share program for all eligible employees (plus/doubleplus). The BOP does not fallunder IFRIC 11 as it is settled in cash and accounted for as cash settled. In the ‘plus’ program, employees of BASFAktiengesellschaft and various subsidiaries are granted shares of BASF Aktiengesellschaft through theirrespective companies. The shares are purchased on the open market. The ‘plus’ program has until now already beenaccounted for as equity settled sothat IFRIC 11 has no effect on the Consolidated Financial Statements of theBASF Group.

·                  IFRIC 12 “Service Concession Arrangements”regulates the accounting for service concession arrangements between private sector companies and government or otherpublic sector entities to providepublic services. IFRIC 12 will have no effect on the Consolidated FinancialStatements of the BASF Group,because neither BASF Aktiengesellschaft nor its group companies have concluded such service concession arrangements.

F-21

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**2.****             ****Acquisitions/Divestitures**

**EngelhardCorp.**

On June 6, 2006, BASFacquired Engelhard Corp., located in Iselin, New Jersey, United States. Sincethis date, the sales and earningsof Engelhard Corp. have been included in the BASF Group Consolidated Financial Statements. The cash settlement for100% of the shares, including incidental acquisition costs, was €3,844 million. The acquisition comprises50 production sites and 22 research and development centers in over 20 countries. With theacquisition of Engelhard, BASF has become one of the leading suppliers of catalysts worldwide.

The catalyst and MaterialsServices activities of Engelhard Corp., which made up approximately 86%of Engelhard’s sales, were combined with theexisting catalyst activities of BASF to form the new Catalysts division of the Chemicals segment. Theremaining businesses, which made up roughly 14% of Engelhard’s sales, were integrated into BASF’s FineChemicals, Performance Polymers and Performance Chemicals divisions. Goodwill primarily resulted fromthe know-how of employees, as well as the synergy effects from combining activities and restructuringmeasures. In total, €1,883 million was recognized as goodwill.

Since the acquisition date,Engelhard has contributed sales of €2,678.1 million and income fromoperations of €14.6 million to the BASF Group.This includes charges in connection with the integration in the amount of €111.0 million. If Engelhard hadbeen included in the BASF Group Consolidated Financial Statements as of January 1, 2006, Engelhardwould have contributed sales of €4,906.8 million and income from operations of €94.1 million to the BASFGroup.(1)

The following overviewprovides preliminary book and fair values for the acquired assets andliabilitiesas of June 6,2006. The fair value of the other intangible assets primarily includestechnology, customer relationshipsand the Engelhard trade name.

**Purchase price allocation for Engelhard Corp.**

**Million €**
| ** **                                      | ** ** | ** **                          | ** ** | **Adjustment to** | ** ** | **Fair value as of** | ** ** |
|-------------------------------------------------|------------|-------------------------------------|------------|------------------------|------------|-------------------------------------|------------|
| ** **                                      | ** ** | **Historical book value** | ** ** | **fair value**    | ** ** | **acquisition date**           | ** ** |
| **Long-term assets**                            | ** ** | **1,513.3**                         | ** ** | **3,383.5**            | ** ** | **4,896.8**                         | ** ** |
| Property, plant and  equipment                  |       | 717.3                               |       | 422.5                  |       | 1,139.8                             |       |
| Goodwill                                        |       | 316.5                               |       | 1,566.2                |       | 1,882.7                             |       |
| Other intangible assets                         |       | 46.8                                |       | 1,080.8                |       | 1,127.6                             |       |
| Investments                                     |       | 223.2                               |       | 236.3                  |       | 459.5                               |       |
| Other long-term assets                          |       | 209.5                               |       | 77.7                   |       | 287.2                               |       |
| **Short-term assets**                           | ** ** | **2,444.7**                         | ** ** | **256.3**              | ** ** | **2,701.0**                         | ** ** |
| Inventories                                     |       | 429.8                               |       | 247.5                  |       | 677.3                               |       |
| Other short-term assets                         |       | 2,014.9                             |       | 8.8                    |       | 2,023.7                             |       |
| **Total assets**                                | ** ** | **3,958.0**                         | ** ** | **3,639.8**            | ** ** | **7,597.8**                         | ** ** |
| **Long-term liabilities**                       | ** ** | **462.4**                           | ** ** | **817.3**              | ** ** | **1,279.7**                         | ** ** |
| Provision for pensions  and similar obligations |       | 82.4                                |       | 142.6                  |       | 225.0                               |       |
| Deferred taxes                                  |       | .                                   |       | 670.8                  |       | 670.8                               |       |
| Financial indebtedness                          |       | 224.4                               |       | —                 |       | 224.4                               |       |
| Other liabilities                               |       | 155.6                               |       | 3.9                    |       | 159.5                               |       |
| **Short-term liabilities**                      | ** ** | **2,377.9**                         | ** ** | **96.1**               | ** ** | **2,474.0**                         | ** ** |
| **Total liabilities**                           | ** ** | **2,840.3**                         | ** ** | **913.4**              | ** ** | **3,753.7**                         | ** ** |
| **Net assets/purchase price**                   | ** ** | **1,117.7**                         | ** ** | **2,726.4**            | ** ** | **3,844.1**                         | ** ** |

 

----

(1)          The unaudited pro forma results are forcomparison purposes only and do not necessarily represent the results thatwould have been achieved if the transaction had taken place on January 1, 2006.These results should not be understood to be a guarantee of future results ordevelopments.

F-22

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**Constructionchemicals business of Degussa AG**

On July 1, 2006, BASFacquired the construction chemicals business from Degussa AG in Düsseldorf,Germany. The acquisition includesproduction and distribution facilities in over 50 countries as well as a research and development center inTrostberg, Germany. The acquisition represents a forward integration of BASF’s existing construction chemicalsvalue-adding chain. The cash offer was €2,210 million, including incidental acquisition costs.

As of July 1, 2006, the newlyestablished Construction Chemicals division of the Performance Productssegment comprises the Admixture Systems andConstruction Systems acquired from Degussa.

Other intangible assetsprimarily included customer relationships, trademarks and technologies.Goodwill resulted from future synergy effectsfrom combining purchasing activities and the standardization of IT systems as well as the know-how of theemployees who transferred to BASF. To the extent that other cash-generating units also benefited from thesynergy effects in the forward integration of their existing value-added chains, they were allocated anappropriate share of goodwill. In total, goodwill resulting from the acquisition amounted to €801.0 million.

Since the acquisition date,construction chemicals activities have contributed sales of €1,120.3 millionand income from operations of€20.5 million to the BASF Group. Thisincludes charges in connection with the integration in the amount of €59.5 million. If the Degussa construction chemicals businesshad been included in the BASF GroupConsolidated Financial Statements as of January 1, 2006, it would havecontributed sales of €2,188.7million and income from operations of €97.8 million to the BASF Group.(1)

The following overviewprovides preliminary book and fair values of the acquired assets andliabilities as of July 1, 2006.

**Purchase price allocation for the construction chemicals business ofDegussa AG**

**Million €**
| ** **                                      | ** ** | ** **                          | ** ** | **Adjustment to** | ** ** | **Fair value as of** | ** ** |
|-------------------------------------------------|------------|-------------------------------------|------------|------------------------|------------|-------------------------------------|------------|
| ** **                                      | ** ** | **Historical book value** | ** ** | **fair value**    | ** ** | **acquisition date**           | ** ** |
| **Long-term assets**                            | ** ** | **924.2**                           | ** ** | **2,019.5**            | ** ** | **2,943.7**                         | ** ** |
| Property, plant and  equipment                  |       | 390.0                               |       | 77.8                   |       | 467.8                               |       |
| Goodwill                                        |       | 225.9                               |       | 575.1                  |       | 801.0                               |       |
| Other intangible assets                         |       | 216.2                               |       | 1,338.9                |       | 1,555.1                             |       |
| Investments                                     |       | 42.1                                |       | 27.7                   |       | 69.8                                |       |
| Other long-term assets                          |       | 50.0                                |       | —                 |       | 50.0                                |       |
| **Short-term assets**                           | ** ** | **855.7**                           | ** ** | **58.5**               | ** ** | **914.2**                           | ** ** |
| Inventories                                     |       | 227.6                               |       | 58.5                   |       | 286.1                               |       |
| Other short-term assets                         |       | 628.1                               |       | —                 |       | 628.1                               |       |
| **Total assets**                                | ** ** | **1,779.9**                         | ** ** | **2,078.0**            | ** ** | **3,857.9**                         | ** ** |
| **Long-term liabilities**                       | ** ** | **172.4**                           | ** ** | **507.6**              | ** ** | **680.0**                           | ** ** |
| Provision for pensions  and similar obligations |       | 97.0                                |       | 20.1                   |       | 117.1                               |       |
| Deferred taxes                                  |       | 32.6                                |       | 487.5                  |       | 520.1                               |       |
| Financial indebtedness                          |       | 1.5                                 |       | —                 |       | 1.5                                 |       |
| Other liabilities                               |       | 41.3                                |       | —                 |       | 41.3                                |       |
| **Short-term liabilities**                      | ** ** | **955.0**                           | ** ** | **2.6**                | ** ** | **957.6**                           | ** ** |
| **Total liabilities**                           | ** ** | **1,127.4**                         | ** ** | **510.2**              | ** ** | **1,637.6**                         | ** ** |
| **Minority interests**                          | ** ** | **9.7**                             | ** ** | **0.6**                | ** ** | **10.3**                            | ** ** |
| **Net assets/purchase price**                   | ** ** | **642.8**                           | ** ** | **1,567.2**            | ** ** | **2,210.0**                         | ** ** |

 

----

(1)          The unaudited pro forma results are forcomparison purposes only and do not necessarily represent the results thatwould have been achieved if the transaction had taken place on January 1, 2006.These results should not be understood to be a guarantee of future results ordevelopments.

F-23

----

**JohnsonPolymer**

On July 1, 2006, BASFacquired 100% of the business of Johnson Polymer from JohnsonDiversey,Inc. Since this date, the financial results ofJohnson Polymer have been included in the BASF Group Consolidated Financial Statements. The cash settlement forthe debt-free business, including incidentalacquisition costs, amounted to €379 million.

The acquisition comprisedproduction facilities in the United States and the Netherlands and technicalapplication centers and branchesin Asia. Johnson Polymer is a global leader in the production and marketing of water-based resins. With theacquisition, BASF expands its portfolio of high-solid and UV resins for the coating and paint industry andstrengthens its market presence in North America.

Johnson Polymer was fullyintegrated into the Performance Chemicals division of the Performance Products segment.Other intangible assets primarily concerned technologies.

Goodwill related to theJohnson Polymer acquisition resulted from know-how of employees transferredto BASF Group, future synergyeffects from the combining of activities and the cost savings potential from restructuring measures. Based on thepurchase price allocation, goodwill was recognized in the amount of €18.7 million.

Since the acquisition date,Johnson Polymer has contributed sales of €157.5 million and a loss fromoperations of €(3.6) million to the BASFGroup. This included special charges related to the integration in the amount of €4.7 million. If JohnsonPolymer had been included in the BASF Group Consolidated Financial Statements as of January 1, 2006, it wouldhave contributed €321.0 million to sales and €3.3 million to income from operations.(1)

The following overviewprovides preliminary book and fair values for the acquired assets andliabilities as of July 1, 2006.

**Purchase price allocation for Johnson Polymer**

**Million €**
| ** **                                      | ** ** | ** **                          | ** ** | **Adjustment to** | ** ** | **Fair value as of** | ** ** |
|-------------------------------------------------|------------|-------------------------------------|------------|------------------------|------------|-------------------------------------|------------|
| ** **                                      | ** ** | **Historical book value** | ** ** | **fair value**    | ** ** | **acquisition date**           | ** ** |
| **Long-term assets**                            | ** ** | **34.4**                            | ** ** | **309.6**              | ** ** | **344.0**                           | ** ** |
| Property, plant and  equipment                  |       | 31.0                                |       | 15.2                   |       | 46.2                                |       |
| Goodwill                                        |       | 0.4                                 |       | 18.3                   |       | 18.7                                |       |
| Other intangible assets                         |       | 0.2                                 |       | 277.8                  |       | 278.0                               |       |
| Investments                                     |       | 1.7                                 |       | (1.7                   | )          | —                              |       |
| Other long-term assets                          |       | 1.1                                 |       | —                 |       | 1.1                                 |       |
| **Short-term assets**                           | ** ** | **89.5**                            | ** ** | **2.5**                | ** ** | **92.0**                            | ** ** |
| Inventories                                     |       | 30.7                                |       | 2.5                    |       | 33.2                                |       |
| Other short-term assets                         |       | 58.8                                |       | —                 |       | 58.8                                |       |
| **Total assets**                                | ** ** | **123.9**                           | ** ** | **312.1**              | ** ** | **436.0**                           | ** ** |
| **Long-term liabilities**                       | ** ** | **2.4**                             | ** ** | **24.3**               | ** ** | **26.7**                            | ** ** |
| Provision for pensions  and similar obligations |       | 0.2                                 |       | —                 |       | 0.2                                 |       |
| Deferred taxes                                  |       | 0.3                                 |       | 24.3                   |       | 24.6                                |       |
| Financial indebtedness                          |       | —                              |       | —                 |       | —                              |       |
| Other liabilities                               |       | 1.9                                 |       | —                 |       | 1.9                                 |       |
| **Short-term liabilities**                      | ** ** | **30.4**                            | ** ** | **—**             | ** ** | **30.4**                            | ** ** |
| **Total liabilities**                           | ** ** | **32.8**                            | ** ** | **24.3**               | ** ** | **57.1**                            | ** ** |
| **Net assets/purchase price**                   | ** ** | **91.1**                            | ** ** | **287.8**              | ** ** | **378.9**                           | ** ** |

 

----

(1)          The unaudited pro forma results are for comparison purposes only and donot necessarily represent the results that would have been achieved if thetransaction had taken place on January 1, 2006. These results should not beunderstood to be a guarantee of future results or developments.

F-24

----

In addition, the followingacquisitions were also completed and settled in cash in 2006 for a total purchaseprice of €300.6 million:

·                  On March 31, 2006, BASF acquired a DNTproduction facility in Geismar, Louisiana from Air Products and Chemicals, Inc.in Pennsylvania. DNT is an intermediate product used in the production ofPolyurethane.

·                  On June 26, 2006, BASF acquired CropDesignN.V. The biotechnology company located in Gent, Belgium strengthens BASF’splant biotechnology activities with its research facilities. 

·                  On December 13, 2006, BASF acquired PEMEASGmbH, a leading producer of fuel cell components located in Frankfurt am Main,Germany. PEMEAS has production and research facilities in Germany and in theUnited States.

To conduct the purchase priceallocation for all acquisitions, BASF obtained appraisals from external experts.Due to the fact that the valuations are not yet fully completed, the purchaseprice allocations are preliminary and may, according to IFRS, be adjusted whenfinalized within one year after the date of acquisition.

The following overviewprovides a summary of the purchase price allocations for all acquisitions completedin 2006:

**Million €**
| ** **                                                       | ** ** | ** **    | ** ** | **Degussa**       | ** ** | ** **  | ** ** | ** **       | ** ** | ** **  | ** ** |
|------------------------------------------------------------------|------------|---------------|------------|-------------------|------------|-------------|------------|------------------|------------|-------------|------------|
| ** **                                                       | ** ** | ** **    | ** ** | **Constructions** | ** ** | **Johnson** | ** ** | **Other**        | ** ** | ** **  | ** ** |
| ** **                                                       | ** ** | **Engelhard** | ** ** | **Chemicals**     | ** ** | **Polymer** | ** ** | **Acquisitions** | ** ** | **Total**   | ** ** |
| Purchase price                                                   |       | 3,823.7       |       | 2,208.3           |       | 378.8       |       | 300.6            |       | 6,711.4     |       |
| Incidental  acquisition cost                                     |       | 20.4          |       | 1.7               |       | 0.1         |       | —           |       | 22.2        |       |
| **Total  purchase price**                                        | ** ** | **3,844.1**   | ** ** | **2,210.0**       | ** ** | **378.9**   | ** ** | **300.6**        | ** ** | **6,733.6** | ** ** |
| Net assets at  historic book value                               |       | 1,117.7       |       | 642.8             |       | 91.1        |       | 106.2            |       | 1,957.8     |       |
| **Preliminary  difference**                                      | ** ** | **2,726.4**   | ** ** | **1,567.2**       | ** ** | **287.8**   | ** ** | **194.4**        | ** ** | **4,775.8** | ** ** |
| **Adjustments  to fair value**                                   | ** ** | ** **    | ** ** | ** **        | ** ** | ** **  | ** ** | ** **       | ** ** | ** **  | ** ** |
| **Long-term  assets**                                            | ** ** | ** **    | ** ** | ** **        | ** ** | ** **  | ** ** | ** **       | ** ** | ** **  | ** ** |
| Property, plant  and equipment                                   |       | 422.5         |       | 77.8              |       | 15.2        |       | 25.7             |       | 541.2       |       |
| Elimination of historical  goodwill                              |       | (316.5        | )          | (225.9            | )          | (0.4        | )          | —           |       | (542.8      | )          |
| Other intangible  assets                                         |       | 1,080.8       |       | 1,338.9           |       | 277.8       |       | 122.6            |       | 2,820.1     |       |
| Investments                                                      |       | 236.3         |       | 27.7              |       | (1.7        | )          | (1.9             | )          | 260.4       |       |
| Other long-term  assets                                          |       | 77.7          |       | —            |       | —      |       | 10.8             |       | 88.5        |       |
| **Short-term  assets**                                           | ** ** | ** **    | ** ** | ** **        | ** ** | ** **  | ** ** | ** **       | ** ** | ** **  | ** ** |
| Inventories                                                      |       | 247.5         |       | 58.5              |       | 2.5         |       | —           |       | 308.5       |       |
| Other short-term  assets                                         |       | 8.8           |       | —            |       | —      |       | —           |       | 8.8         |       |
| **Total  assets**                                                | ** ** | **1,757.1**   | ** ** | **1,277.0**       | ** ** | **293.4**   | ** ** | **157.2**        | ** ** | **3,484.7** | ** ** |
| **Long-term  liabilities**                                       | ** ** | ** **    | ** ** | ** **        | ** ** | ** **  | ** ** | ** **       | ** ** | ** **  | ** ** |
| Provision for  pensions and similar obligations                  |       | 142.6         |       | 20.1              |       | —      |       | —           |       | 162.7       |       |
| Deferred taxes                                                   |       | —        |       | —            |       | —      |       | —           |       | —      |       |
| Financial  indebtedness                                          |       | —        |       | —            |       | —      |       | —           |       | —      |       |
| Other  liabilities                                               |       | 3.9           |       | —            |       | —      |       | —           |       | 3.9         |       |
| **Short-term  liabilities**                                      | ** ** | **96.1**      | ** ** | **2.6**           | ** ** | **—**  | ** ** | **—**       | ** ** | **98.7**    | ** ** |
| **Total  liabilities**                                           | ** ** | **242.6**     | ** ** | **22.7**          | ** ** | **—**  | ** ** | **—**       | ** ** | **265.3**   | ** ** |
| **Total  adjustments to fair value**                             | ** ** | **1,514.5**   | ** ** | **1,254.3**       | ** ** | **293.4**   | ** ** | **157.2**        | ** ** | **3,219.4** | ** ** |
| **Deferred  tax liabilities related to fair value  adjustments** | ** ** | **670.8**     | ** ** | **487.5**         | ** ** | **24.3**    | ** ** | **35.5**         | ** ** | **1,218.1** | ** ** |
| Minority  interests                                              |       | —        |       | 0.6               |       | —      |       | —           |       | 0.6         |       |
| **Remaining goodwill**                                           | ** ** | **1,882.7**   | ** ** | **801.0**         | ** ** | **18.7**    | ** ** | **72.7**         | ** ** | **2,775.1** | ** ** |

 

F-25

----

The material acquisitions in2005 concerned the purchase of the electronic chemicals business of Merck KGaA,Darmstadt, Germany as well as the 100% share of the Swiss fine chemicalscompany, Orgamol S.A.

In 2004 acquisitionsprimarily concerned the takeover of the plasticizer business from Sunoco,United States. The transaction included production plants for phthalicanhydride and oxo alcohols in Pasadena, Texas, as well as various intangibleassets and inventories.

All acquired assets andliabilities are recognized at fair value. Differences between the acquisitionprice and the net fair value of the cost of the identifiable assets,liabilities and contingent liabilities were recognized as goodwill.

**Effects of acquisitions in the year of acquisition**

**Million €**
| ** **                                              | ** ** | **2006**     | ** ** | **2006**   | ** ** | **2005**   | ** ** | **2005**   | ** ** | **2004**   | ** ** | **2004**   | ** ** |
|---------------------------------------------------------|------------|--------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|
| ** **                                              | ** ** | ** **   | ** ** | **%**      | ** ** | ** ** | ** ** | **%**      | ** ** | ** ** | ** ** | **%**      | ** ** |
| Long-term assets                                        |       | 8,501.7      |       | 41.4       |       | 601.1      |       | 2.9        |       | 91.4       |       | 0.4        |       |
| *Thereof property, plant and equipment*                 | * *   | *1,753.6*    | * *   | *12.5*     | * *   | *329.5*    | * *   | *2.5*      | * *   | *58.3*     | * *   | *0.4*      | * *   |
| Short-term assets                                       |       | 3,719.0      |       | 24.6       |       | 201.6      |       | 1.4        |       | 31.4       |       | 0.3        |       |
| *Thereof cash and cash equivalents*                     | * *   | *336.9*      | * *   | *37.1*     | * *   | *14.2*     | * *   | *0.7*      | * *   | *0.9*      | * *   | *0.2*      | * *   |
| **Total  assets**                                       | ** ** | **12,220.7** | ** ** | **34.3**   | ** ** | **802.7**  | ** ** | **2.3**    | ** ** | **122.8**  | ** ** | **0.4**    | ** ** |
|                                                    |       |         |       |       |       |       |       |       |       |       |       |       |       |
| Stockholders’ equity                               |       | 0.8          |       | .          |       | —     |       | —     |       | —     |       | —     |       |
| Long-term  liabilities                                  |       | 2,025.8      |       | 20.8       |       | 117.6      |       | 1.1        |       | 2.6        |       | .          |       |
| *Thereof financial indebtedness*                        | * *   | *227.2*      | * *   | *6.2*      | * *   | *2.0*      | * *   | *0.1*      | * *   | *—*   | * *   | *—*   | * *   |
| Long-term  liabilities                                  |       | 3.460.5      |       | 41.3       |       | 135.2      |       | 1.6        |       | 15.7       |       | 0.2        |       |
| *Thereof financial indebtedness*                        | * *   | *958.4*      | * *   | *369.6*    | * *   | *45.9*     | * *   | *3.2*      | * *   | *—*   | * *   | *—*   | * *   |
| **Total  stockholders’ equity and liabilities**    | ** ** | **5,487.1**  | ** ** | **15.4**   | ** ** | **252.8**  | ** ** | **0.7**    | ** ** | **18.3**   | ** ** | **0.1**    | ** ** |
| **Purchase  price**                                     | ** ** | **6,733.6**  | ** ** | ** ** | ** ** | **549.9**  | ** ** | ** ** | ** ** | **104.5**  | ** ** | ** ** | ** ** |
| Contingent liabilities  and other financial obligations |       | 252.8        |       | 7.7        |       | 71.7       |       | 2.5        |       | —     |       | —     |       |

 

If Engelhard Corp., theDegussa construction chemicals business and Johnson Polymer had beenincluded in the BASF Group ConsolidatedFinancial Statements as of January 1, 2006, the proforma sales would have been to €56,070.5 million and thenet income would have been €3,155.8 million(1).The remaining acquisitions in2006 did not have any material effect on the proforma sales or net income ofthe BASF Group.

In 2006, BASF divested thefollowing activities:

·                  On March 31, 2006, BASF sold major parts ofthe Micro Flo Company LLC, Memphis, Tennessee to Arysta LifeScience North America Corporation. The divested businessincludes many generic, off-patentcrop protection products and their corresponding registrations, trademarks andpatents, as well as a developmentlaboratory.

·                  On November 27, 2006, BASF sold its globalTerbufos insecticide business to AMVAC Chemical Corporation. It comprises the active ingredient Terbufos (trademarkCounter®) and the formulation and production processes, registrations andpatents including a special application technology called “Lock ‘n Load” as well as inventories.

----

(1)          The unaudited pro forma results are forcomparison purposes only and do not necessarily represent the results thatwould have been achieved if the transactions had taken place on January 1,2006. These results should not be understood to be a guarantee of futureresults or developments.

F-26

----

In 2005, BASF divested thefollowing activities:

·                  BASF and Shell Chemicals sold their 50 – 50joint venture Basell to Nell Acquisition S.a.r.l., Luxemborg, a subsidiary of Access Industries, New York.The sales price totaled €4.4 billion, including liabilities.  

·                  Furthermore, our polystyrene business in theUnited States and Canada, including our production plant in Joliet, Illinois, was sold to INEOSon April 25, 2005.  

**Effects of divestitures in the year of divestiture**

**Million €**
| ** **                                              | ** ** | **2006**   | ** ** | **2006**   | ** ** | **2005**     | ** ** | **2005**   | ** ** | **2004**   | ** ** | **2004**   | ** ** |
|---------------------------------------------------------|------------|------------|------------|------------|------------|--------------|------------|------------|------------|------------|------------|------------|------------|
| ** **                                              | ** ** | ** ** | ** ** | **%**      | ** ** | ** **   | ** ** | **%**      | ** ** | ** ** | ** ** | **%**      | ** ** |
| **Sales**                                               | ** ** | **(167.0** | **)**      | **(0.4**   | **)**      | **(636.1**   | **)**      | **(1.7**   | **)**      | **(246.7** | **)**      | **(0.7**   | **)**      |
|                                                    |       |       |       |       |       |         |       |       |       |       |       |       |       |
| Long-term assets                                        |       | (41.2      | )          | (0.2       | )          | (1,028.3     | )          | (5.0       | )          | (119.0     | )          | (0.5       | )          |
| *Thereof property, plant and equipment*                 | * *   | *(0.3*     | *)*        | *.*        | * *   | *(52.2*      | *)*        | *(0.4*     | *)*        | *(85.4*    | *)*        | *(0.6*     | *)*        |
| Short-term  assets                                      |       | (41.0      | )          | (0.3       | )          | (94.9        | )          | (0.6       | )          | (362.5     | )          | (2.9       | )          |
| *Thereof cash and cash equivalents*                     | * *   | *—*   | * *   | *—*   | * *   | *—*     | * *   | *—*   | * *   | *(3.1*     | *)*        | *(0.6*     | *)*        |
| **Total  assets**                                       | ** ** | **(82.2**  | **)**      | **(0.2**   | **)**      | **(1,123.2** | **)**      | **(3.2**   | **)**      | **(481.5** | **)**      | **(1.4**   | **)**      |
|                                                    |       |       |       |       |       |         |       |       |       |       |       |       |       |
|                                                    |       |       |       |       |       |         |       |       |       |       |       |       |       |
| Stockholder’s  equity                              |       | 99.2       |       | 0.6        |       | 362.7        |       | 2.2        |       | 360.4      |       | 2.2        |       |
| Long-term  liabilities                                  |       | (27.1      | )          | (0.3       | )          | 50.3         |       | 0.5        |       | (59.6      | )          | (0.5       | )          |
| *Thereof financial indebtedness*                        | * *   | *—*   | * *   | *—*   | * *   | *—*     | * *   | *—*   | * *   | *—*   | * *   | *—*   | * *   |
| Short-term  liabilities                                 |       | 2.2        |       | .          |       | (5.4         | )          | (0.1       | )          | (105.2     | )          | (1.5       | )          |
| *Thereof financial indebtedness*                        | * *   | *—*   | * *   | *—*   | * *   | *—*     | * *   | *—*   | * *   | *(0.3*     | *)*        | *(0.1*     | *)*        |
| **Total  stockholders’ equity and liabilities**    | ** ** | **74.3**   | ** ** | **0.2**    | ** ** | **407.6**    | ** ** | **1.1**    | ** ** | **195.6**  | ** ** | **0.6**    | ** ** |
| **Proceeds  from divestitures**                         | ** ** | **156.5**  | ** ** | ** ** | ** ** | **1,530.8**  | ** ** | ** ** | ** ** | **677.1**  | ** ** | ** ** | ** ** |
| Contingent liabilities  and other financial obligations |       | —     |       | —     |       | —       |       | —     |       | (4.5       | )          | (0.1       | )          |

 

**Plannedacquisitions/divestitures**

On December 11, 2006, BASFsigned an agreement to purchase the manufacturer of catalysts formotorcycles, Guilin REE cat Catalyst Co., Ltd.with its headquarters in Guilin, China. With this acquisition, BASF expands its leading position intechnologies for reducing emissions. The transaction is expected to be closed in the second quarter of 2007.

On April 27, 2006, BASF andGazprom signed a framework agreement on an asset swap. The BASFsubsidiary Wintershall will participate with35% less one share in the natural gas field Yuzhno Russkoye. In return, Gazprom increases its share in WINGASGmbH to 50% less one share. Furthermore, Gazprom will participate in a Wintershall company that hasexploration and production rights in Libya. The final contracts will likely be signed in the second half of2007.

F-27

----

**3.****             ****Earnings per share**

**Earningsper share**
| ** **                                                           | ** ** | **2006**   | ** ** | **2005**   | ** ** | **2004**   | ** ** |
|----------------------------------------------------------------------|------------|------------|------------|------------|------------|------------|------------|
| **Net income after minority interests under IFRS  (Million €)** | ** ** | 3,215.2    |       | 3,006.7    |       | 2,004.3    | ** ** |
| **Number of shares (1.000)**                                         | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Weighted-average number of outstanding shares                        |       | 504,479    |       | 525,125    |       | 548,714    |       |
| **Earnings per share under IFRS (€)**                           | ** ** | **6.37**   | ** ** | **5.73**   | ** ** | **3.65**   | ** ** |

 

The calculation of earningsper share is based on the weighted-average number of common sharesoutstanding. The calculation of dilutedearnings per common share reflects all possible outstanding common shares and their effect on income. The BASFemployee participation program “plus” and the BASF stock option program for senior executives (BOP) areconsidered in the calculation of diluted earnings per share according to IFRS.

In 2006, 2005 and 2004, thepotentially dilutive instruments were antidilutive and were therefore not considered.

**4.****             ****Reporting by segment andregion**

BASF is a worldwide chemicalmanufacturer which offers a wide range of products, includingperformance chemicals, plastics, dyes andpigments, dispersions, automotive and industrial coatings, agricultural products, fine chemicals, crudeoil and natural gas.

The Company conducts itsworldwide operations through 14 operating divisions, which have beenaggregated into five reporting segments basedon the nature of the products and production processes, the type of customers, the channels ofdistribution and the nature of the regulatory environment.

The Chemicals segmentcomprises the Inorganics, Petrochemicals and Intermediates divisions as wellas the Catalysts divison,established in 2006. The Plastics segment is composed of the Styrenics, Performance Polymers and Polyurethanesdivisions. The Performance Products segment is made up of the Performance Chemicals, Coatings and FunctionalPolymers divisions as well as the Construction Chemicals division, established in 2006. TheAgricultural Products & Nutrition segment comprises the Agricultural Products and Fine Chemicals divisions.The Oil & Gas segment consists of the operating division Oil and Gas, which conducts oil and gas explorationand production and natural gas trading.

Business activities notallocated to any operating division are shown as ‘other’ and include, amongother things, the sale offeedstock, the remaining fertilizers activities, engineering and other servicesas well as rental income andleases. The income from operations recorded under other also includes costs of research related to the Group of €258.0million in 2006, €225.0 million in 2005 and €168.0 million in 2004.

Other further includesforeign transaction gains and losses from financial indebtedness and foreigncurrency hedging in the amount of€86.0 million in 2006, €(97.0) million in 2005 and €54.0 million in 2004.

Transfers between thereportable segments are shown separately and generally executed atmarket-based prices.

The allocation of assets anddepreciation to the segments is based on economic control. Assets used by morethan one segment are allocated based on the percentage of usage.

F-28

----

**Segments**

**Million €**
| ** **                                                                             | ** ** | ** ** | ** ** | ** **   | ** ** | ** **   | ** ** | **Agricultural Products** | ** ** | ** **                  | ** ** | ** ** | ** ** | ** ** | ** ** | ** **   | ** ** |
|----------------------------------------------------------------------------------------|------------|------------|------------|--------------|------------|--------------|------------|--------------------------------|------------|-----------------------------|------------|------------|------------|------------|------------|--------------|------------|
| ** **                                                                             | ** ** | ** ** | ** ** | ** **   | ** ** | ** **   | ** ** | **& Nutrition**       | ** ** | **Oil & Gas** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                                                             | ** ** | ** ** | ** ** | ** **   | ** ** | **Perfor-**  | ** ** | **Agri-**                      | ** ** | **Fine**                    | ** ** | ** ** | ** ** | ** ** | ** ** | **Thereof**  | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                                                             | ** ** | **Chemi-** | ** ** | ** **   | ** ** | **mance**    | ** ** | **cultural**                   | ** ** | **Chemi-**                  | ** ** | ** ** | ** ** | ** ** | ** ** | **Explora-** | ** ** | ** ** | ** ** | **BASF** | ** ** |
| **2006**                                                                               | ** ** | **cals**   | ** ** | **Plastics** | ** ** | **Products** | ** ** | **Products**                   | ** ** | **cals**                    | ** ** | **Total**  | ** ** | ** ** | ** ** | **tion**     | ** ** | **Other** | ** ** | **Group** | ** ** |
| Net sales                                                                              |       | 11,572     |       | 12,775       |       | 10,133       |       | 3,079                          |       | 1,855                       |       | 4,934      |       | 10,687     |       | 4,555        |       | 2,509 |   | 52,610 |   |
| Change (%)                                                                             |       | 42.8       |       | 9.0          |       | 22.6         |       | (6.6                           | )          | 7.1                         |       | (1.9       | )          | 39.6       |       | 30.2         |       | 27.3 |   | 23.1 |   |
| Intersegmental  transfers                                                              |       | 4.483      |       | 526          |       | 390          |       | 25                             |       | 17                          |       | 36         |       | 1,062      |       | 287          |       | 450 |   | 6,947 |   |
| Sales including  transfers                                                             |       | 16,055     |       | 13,301       |       | 10,523       |       | 3,104                          |       | 1,872                       |       | 4,970      |       | 11,749     |       | 4,842        |       | 2,959 |   | 59,557 |   |
| Income from  operations                                                                |       | 1,380      |       | 1,192        |       | 669          |       | 447                            |       | (66                         | )          | 381        |       | 3,250      |       | 2,645        |       | (122 | ) | 6,750 |   |
| Change (%)                                                                             |       | 4.1        |       | 17.4         |       | (22.5        | )          | (34.4                          | )          | (13.8                       | )          | (38.8      | )          | 34.9       |       | 26.3         |       | 70.0 |   | 15.8 |   |
| Assets                                                                                 |       | 10,473     |       | 6,911        |       | 9,727        |       | 4,458                          |       | 1,596                       |       | 6,054      |       | 5,434      |       | 2,300        |       | 6,692 |   | 45,291 |   |
| *Thereof goodwill*                                                                     | * *   | *1,422*    | * *   | *157*        | * *   | *1,352*      | * *   | *1,375*                        | * *   | *192*                       | * *   | *1,567*    | * *   | *64*       | * *   | *64*         | * *   | *151* | * * | *4,713* | * * |
| *Thereof property, plant and equipment*                                                | * *   | *3,895*    | * *   | *3,131*      | * *   | *2,771*      | * *   | *550*                          | * *   | *590*                       | * *   | *1,140*    | * *   | *3,117*    | * *   | *1,438*      | * *   | *848* | * * | *14,902* | * * |
| Debt                                                                                   |       | 2,762      |       | 1,636        |       | 2,350        |       | 845                            |       | 561                         |       | 1,406      |       | 2,508      |       | 998          |       | 16,051 |   | 26,713 |   |
| Research expense                                                                       |       | 178        |       | 145          |       | 288          |       | 334                            |       | 70                          |       | 404        |       | .          |       | .            |       | 262 |   | 1,277 |   |
| Additions to property,  plant and equipment and intangible assets                      |       | 3,539      |       | 631          |       | 4,490        |       | 88                             |       | 378                         |       | 466        |       | 545        |       | 411          |       | 368 |   | 10,039 |   |
| Depreciation and  amortization  of property, plant and equipment and intangible assets |       | 855        |       | 523          |       | 508          |       | 216                            |       | 250                         |       | 466        |       | 516        |       | 363          |       | 105 |   | 2,973 |   |
| *Thereof due to impairments*                                                           | * *   | *188*      | * *   | *3*          | * *   | *48*         | * *   | *.*                            | * *   | *114*                       | * *   | *114*      | * *   | .          | * *   | *.*          | * *   | *.* | * * | *353* | * * |
| **2005**                                                                               |       |       |       |         |       |         |       |                           |       |                        |       |       |       |       |       |         |       |   |   |   |   |
| Net sales                                                                              |       | 8,103      |       | 11,718       |       | 8,267        |       | 3,298                          |       | 1,732                       |       | 5,030      |       | 7,656      |       | 3,499        |       | 1,971 |   | 42,745 |   |
| Change (%)                                                                             |       | 15.4       |       | 11.3         |       | 3.3          |       | (1.7                           | )          | (3.4                        | )          | (2.3       | )          | 45.5       |       | 41.0         |       | 25.5 |   | 13.9 |   |
| Intersegmental  transfers                                                              |       | 3,826      |       | 471          |       | 352          |       | 29                             |       | 28                          |       | 53         |       | 723        |       | 235          |       | 468 |   | 5,893 |   |
| Sales including  transfers                                                             |       | 11,929     |       | 12,189       |       | 8,619        |       | 3,327                          |       | 1,760                       |       | 5,083      |       | 8,379      |       | 3,734        |       | 2,439 |   | 48,638 |   |
| Income from  operations                                                                |       | 1,326      |       | 1,015        |       | 863          |       | 681                            |       | (58                         | )          | 623        |       | 2,410      |       | 2,094        |       | (407 | ) | 5,830 |   |
| Change (%)                                                                             |       | 3.3        |       | 46.3         |       | (23.5        | )          | 13.1                           |       | .                           |       | (5.3       | )          | 46.7       |       | 60.7         |       | (90.2 | ) | 12.3 |   |
| Assets                                                                                 |       | 6,146      |       | 6,639        |       | 4,863        |       | 5,156                          |       | 1,481                       |       | 6,637      |       | 4,895      |       | 2,155        |       | 6,490 |   | 35,670 |   |
| *Thereof goodwill*                                                                     | * *   | *133*      | * *   | *143*        | * *   | *266*        | * *   | *1,496*                        | * *   | *6*                         | * *   | *1,502*    | * *   | *64*       | * *   | *64*         | * *   | *31* | * * | *2,139* | * * |
| *Thereof property, plant and equipment*                                                | * *   | *3,567*    | * *   | *3,155*      | * *   | *1,944*      | * *   | *618*                          | * *   | *747*                       | * *   | *1,365*    | * *   | *3,033*    | * *   | *1,355*      | * *   | *923* | * * | *13,987* | * * |
| Debt                                                                                   |       | 1,766      |       | 1,676        |       | 1,766        |       | 951                            |       | 538                         |       | 1,489      |       | 1,836      |       | 903          |       | 9,614 |   | 18,147 |   |
| Research expense                                                                       |       | 114        |       | 135          |       | 214          |       | 303                            |       | 70                          |       | 373        |       | 1          |       | .            |       | 227 |   | 1,064 |   |
| Additions to property,  plant  and equipment and intangible assets                     |       | 639        |       | 490          |       | 347          |       | 74                             |       | 222                         |       | 296        |       | 624        |       | 381          |       | 127 |   | 2,523 |   |
| Depreciation and  amortization  of property, plant and equipment and intangible assets |       | 616        |       | 489          |       | 364          |       | 226                            |       | 147                         |       | 373        |       | 449        |       | 322          |       | 112 |   | 2,403 |   |
| *Thereof due to impairments*                                                           | * *   | *61*       | * *   | .            | * *   | *10*         | * *   | *9*                            | * *   | *16*                        | * *   | *25*       | * *   | .          | * *   | .            | * *   | *1* | * * | *97* | * * |
| **2004**                                                                               |       |       |       |         |       |         |       |                           |       |                        |       |       |       |       |       |         |       |   |   |   |   |
| Net sales                                                                              |       | 7,020      |       | 10,532       |       | 8,005        |       | 3,354                          |       | 1,793                       |       | 5,147      |       | 5,263      |       | 2,482        |       | 1,570 |   | 37,537 |   |
| Change (%)                                                                             |       | 22.0       |       | 19.9         |       | 4.9          |       | 5.6                            |       | (2.8                        | )          | 2.5        |       | 9.9        |       | 14.7         |       | 14.0 |   | 12.5 |   |
| Intersegmental  transfers                                                              |       | 3,395      |       | 677          |       | 291          |       | 26                             |       | 30                          |       | 52         |       | 546        |       | 173          |       | 462 |   | 5,423 |   |
| Sales including  transfers                                                             |       | 10,415     |       | 11,209       |       | 8,296        |       | 3,380                          |       | 1,823                       |       | 5,199      |       | 5,809      |       | 2,655        |       | 2,032 |   | 42,960 |   |
| Income from  operations                                                                |       | 1,284      |       | 694          |       | 1,128        |       | 602                            |       | 56                          |       | 658        |       | 1,643      |       | 1,303        |       | (214 | ) | 5,193 |   |
| Assets                                                                                 |       | 5,219      |       | 6,187        |       | 4,538        |       | 4,985                          |       | 1,308                       |       | 6,293      |       | 4,063      |       | 1,899        |       | 9,148 |   | 35,448 |   |
| *Thereof goodwill*                                                                     | * *   | *11*       | * *   | *125*        | * *   | *237*        | * *   | *1,509*                        | * *   | *2*                         | * *   | *1,511*    | * *   | *64*       | * *   | *64*         | * *   | *25* | * * | *1,973* | * * |
| *Thereof property, plant and equipment*                                                | * *   | *3,283*    | * *   | *2,857*      | * *   | *1,892*      | * *   | *661*                          | * *   | *639*                       | * *   | *1,300*    | * *   | *2,814*    | * *   | *1,255*      | * *   | *917* | * * | *13,063* | * * |
| Debt                                                                                   |       | 1,836      |       | 1,836        |       | 2,287        |       | 1,100                          |       | 704                         |       | 1,804      |       | 1,902      |       | 1,081        |       | 9,181 |   | 18,846 |   |
| Research expense                                                                       |       | 98         |       | 136          |       | 217          |       | 272                            |       | 90                          |       | 362        |       | .          |       | .            |       | 173 |   | 986 |   |
| Additions to property,  plant  and equipment and intangible assets                     |       | 601        |       | 473          |       | 304          |       | 100                            |       | 153                         |       | 253        |       | 388        |       | 329          |       | 144 |   | 2,163 |   |
| Depreciation and  amortization  of property, plant and equipment and intangible assets |       | 573        |       | 499          |       | 375          |       | 285                            |       | 150                         |       | 435        |       | 455        |       | 330          |       | 155 |   | 2,492 |   |
| *Thereof  due to impairments*                                                          | * *   | *52*       | * *   | .            | * *   | *4*          | * *   | *25*                           | * *   | .                           | * *   | *25*       | * *   | .          | * *   | .            | * *   | *70* | * * | *151* | * * |

 

F-29

----

**Regions**

**Million €**
| ** **                                                                             | ** ** | ** ** | ** ** | ** **  | ** ** | ** **  | ** ** | ** **  | ** ** | **South**    | ** ** | ** ** | ** ** |
|----------------------------------------------------------------------------------------|------------|------------|------------|-------------|------------|-------------|------------|-------------|------------|--------------|------------|------------|------------|
| ** **                                                                             | ** ** | ** ** | ** ** | ** **  | ** ** | ** **  | ** ** | ** **  | ** ** | **America,** | ** ** | ** ** | ** ** |
| ** **                                                                             | ** ** | ** ** | ** ** | ** **  | ** ** | **North**   | ** ** | ** **  | ** ** | **Africa,**  | ** ** | ** ** | ** ** |
| ** **                                                                             | ** ** | ** ** | ** ** | **Thereof** | ** ** | **America** | ** ** | **Asia**    | ** ** | **Middle**   | ** ** | **BASF**   | ** ** |
| **2006**                                                                               | ** ** | **Europe** | ** ** | **Germany** | ** ** | **(NAFTA)** | ** ** | **Pacific** | ** ** | **East**     | ** ** | **Group**  | ** ** |
| **Location  of customers**                                                             |       |       |       |        |       |        |       |        |       |         |       |       |       |
| Sales                                                                                  |       | 29,529     |       | 11,062      |       | 11,522      |       | 8,102       |       | 3,457        |       | 52,610     |       |
| Change (%)                                                                             |       | 24.3       |       | 24.8        |       | 21.6        |       | 24.6        |       | 14.8         |       | 23.1       |       |
| Share (%)                                                                              |       | 56.1       |       | 21.0        |       | 21.9        |       | 15.4        |       | 6.6          |       | 100.0      |       |
| **Location  of companies**                                                             |       |       |       |        |       |        |       |        |       |         |       |       |       |
| Sales                                                                                  |       | 31,444     |       | 22,963      |       | 11,415      |       | 7,450       |       | 2,301        |       | 52,610     |       |
| Sales including  transfers                                                             |       | 39,612     |       | 25,842      |       | 13,892      |       | 10,968      |       | 2,426        |       | 66,898     |       |
| Income from  operations                                                                |       | 5,485      |       | 4,125       |       | 869         |       | 181         |       | 215          |       | 6,750      |       |
| Assets                                                                                 |       | 24,849     |       | 15,902      |       | 11,611      |       | 6,498       |       | 2,333        |       | 45,291     |       |
| *Thereof property, plant and equipment*                                                | * *   | *7,977*    | * *   | *5,216*     | * *   | *3,331*     | * *   | *3,018*     | * *   | *576*        | * *   | *14,902*   | * *   |
| Additions to  property, plant and equipment and intangible assets                      |       | 4,682      |       | 2,580       |       | 4,158       |       | 700         |       | 499          |       | 10,039     |       |
| Depreciation and  amortization of property,  plant and equipment and intangible assets |       | 1,647      |       | 983         |       | 584         |       | 665         |       | 77           |       | 2,973      |       |
| Employees  (December 31)                                                               |       | 61,444     |       | 47,296      |       | 15,513      |       | 12,788      |       | 5,502        |       | 95,247     |       |
| **2005**                                                                               |       |       |       |        |       |        |       |        |       |         |       |       |       |
| **Location  of customers**                                                             |       |       |       |        |       |        |       |        |       |         |       |       |       |
| Sales                                                                                  |       | 23,755     |       | 8,865       |       | 9,479       |       | 6,500       |       | 3,011        |       | 42,745     |       |
| Change (%)                                                                             |       | 11.3       |       | 20.1        |       | 15.9        |       | 22.4        |       | 11.4         |       | 13.9       |       |
| Share (%)                                                                              |       | 55.6       |       | 20.7        |       | 22.2        |       | 15.2        |       | 7.0          |       | 100.0      |       |
| **Location  of companies**                                                             |       |       |       |        |       |        |       |        |       |         |       |       |       |
| Sales                                                                                  |       | 25,093     |       | 17,100      |       | 9,542       |       | 6,042       |       | 2,068        |       | 42,745     |       |
| Sales including  transfers                                                             |       | 28,565     |       | 19,932      |       | 10,110      |       | 6,334       |       | 2,160        |       | 47,169     |       |
| Income from  operations                                                                |       | 4,385      |       | 3,019       |       | 855         |       | 297         |       | 293          |       | 5,830      |       |
| Assets                                                                                 |       | 19,961     |       | 13,374      |       | 7,789       |       | 6,112       |       | 1,808        |       | 35,670     |       |
| *Thereof property, plant and equipment*                                                | * *   | *7,334*    | * *   | *5,045*     | * *   | *2,534*     | * *   | *3,594*     | * *   | *525*        | * *   | *13,987*   | * *   |
| Additions to  property, plant and equipment and intangible assets                      |       | 1,433      |       | 837         |       | 281         |       | 697         |       | 112          |       | 2,523      |       |
| Depreciation and  amortization of property,  plant and equipment and intangible assets |       | 1,473      |       | 915         |       | 460         |       | 403         |       | 67           |       | 2,403      |       |
| Employees  (December 31)                                                               |       | 56,614     |       | 45,620      |       | 9,826       |       | 9,669       |       | 4,836        |       | 80,945     |       |
| **2004**                                                                               |       |       |       |        |       |        |       |        |       |         |       |       |       |
| **Location  of customers**                                                             |       |       |       |        |       |        |       |        |       |         |       |       |       |
| Sales                                                                                  |       | 21,343     |       | 7,382       |       | 8,182       |       | 5,309       |       | 2,703        |       | 37,537     |       |
| Change (%)                                                                             |       | 10.0       |       | 4.4         |       | 14.2        |       | 18.8        |       | 16.4         |       | 12.5       |       |
| Share (%)                                                                              |       | 56.9       |       | 19.7        |       | 21.8        |       | 14.1        |       | 7.2          |       | 100.0      |       |
| **Location  of companies**                                                             |       |       |       |        |       |        |       |        |       |         |       |       |       |
| Sales                                                                                  |       | 22,536     |       | 15,216      |       | 8,165       |       | 4,911       |       | 1,925        |       | 37,537     |       |
| Sales including  transfers                                                             |       | 25,527     |       | 17,751      |       | 8,655       |       | 5,461       |       | 1,803        |       | 41,446     |       |
| Income from  operations                                                                |       | 4,236      |       | 3,131       |       | 286         |       | 361         |       | 310          |       | 5,193      |       |
| Assets                                                                                 |       | 21,815     |       | 14,567      |       | 7,254       |       | 4,888       |       | 1,491        |       | 35,448     |       |
| *Thereof property, plant and equipment*                                                | * *   | *7,245*    | * *   | *5,067*     | * *   | *2,364*     | * *   | *3,013*     | * *   | *441*        | * *   | *13,063*   | * *   |
| Additions to  property, plant and equipment and intangible assets                      |       | 1,202      |       | 816         |       | 271         |       | 608         |       | 82           |       | 2,163      |       |
| Depreciation and  amortization of property,  plant and equipment and intangible assets |       | 1,530      |       | 975         |       | 608         |       | 250         |       | 104          |       | 2,492      |       |
| Employees (December 31)                                                                |       | 57,540     |       | 46,666      |       | 10,578      |       | 8,916       |       | 4,921        |       | 81,955     |       |

 

F-30

----

**5.****             ****Other operating income**

**Million €**
| ** **                                                                | ** ** | **2006**  | ** ** | **2005**  | ** ** | **2004**    | ** ** |
|---------------------------------------------------------------------------|------------|-----------|------------|-----------|------------|-------------|------------|
| Reversal and  adjustment of provisions                                    |       | 275.2     |       | 118.4     |       | 154.4       |       |
| Revenue from  miscellaneous revenue-generating activities                 |       | 62.3      |       | 85.3      |       | 71.7        |       |
| Gains from  foreign currency transactions                                 |       | 119.7     |       | 43.3      |       | 145.6       |       |
| Gains from the  translation of financial statements in foreign currencies |       | 10.8      |       | 57.3      |       | 12.1        |       |
| Gains from  disposal of property, plant and equipment and divestitures    |       | 127.8     |       | 107.4     |       | 448.7       |       |
| Gains on the  reversal of impairment losses on receivables                |       | 89.0      |       | 92.1      |       | 64.5        |       |
| Other                                                                     |       | 249.3     |       | 96.4      |       | 149.1       |       |
| **Total**                                                                 | ** ** | **934.1** | ** ** | **600.2** | ** ** | **1,046.1** | ** ** |

 

The ***reversal and adjustment ofprovisions***primarily concerned risks arising from lawsuits anddamage claims, risks from salesas well as from various other items in the normal course of business and the reversal of the provisions for risksrelated to the pharmaceutical business divested in 2001 in the amount of €80 million. Provisions are reversedor adjusted if the circumstances at closing date indicate that the risks are no longer probable or that theprobable amount has been reduced.

***Revenue from miscellaneous revenue-generating activities***primarily represents revenues from energysales, sales of raw materials as well as income from rentals and logisticsservices.

***Gains from foreign currency transactions***represent gains arising from foreign currencypositions and foreign currency derivatives as well as from the valuation ofreceivable and liabilities denominated in foreign currencies at the spot rateon the balance sheet date.

***Gains from the translation of financial statements in foreigncurrencies***includesgains arising from use of the temporal method.

***Gains from disposal of property, plant and equipment and divestitures***primarily concerned divestitures in theAgricultural Products segment to optimize the portfolio in 2006 and 2005 andthe sale of the printing systems business in 2004.

***Gains on the reversal of allowances for doubtful receivables***result primarily from an improved assessmentof the creditworthiness of customers. This primarily relates to a significantlyimproved creditworthiness of our customers in Europe due to improved economic conditions.

***Other gains***containthe partial reduction by €66 million of the fine imposed by the European Unionin 2001 for anti-trust violations related to vitamins, income frommiscellaneous sales and various other sundry items.

F-31

----

**6.****             ****Other operating expenses**

**Million €**
| ** **                                                                                                                                                                                    | ** ** | **2006**    | ** ** | **2005**    | ** ** | **2004**    | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------|------------|-------------|------------|-------------|------------|
| Integration and  restructuring measures                                                                                                                                                       |       | 399.4       |       | 446.5       |       | 542.8       |       |
| Environmental  protection and safety measures, costs of demolition   and planning costs related to the preparation of capital expenditure projects  not subject   to mandatory capitalization |       | 180.5       |       | 158.3       |       | 168.3       |       |
| Amortization of  intangible assets and depreciation of property, plant and equipment                                                                                                          |       | 430.3       |       | 204.6       |       | 209.3       |       |
| Costs from  miscellaneous revenue-generating activities                                                                                                                                       |       | 85.1        |       | 84.7        |       | 69.7        |       |
| Losses from  foreign currency transactions                                                                                                                                                    |       | 48.4        |       | 189.5       |       | 30.3        |       |
| Losses from the  translation of financial statements in foreign currencies                                                                                                                    |       | 51.6        |       | 23.0        |       | 44.1        |       |
| Losses from  disposal of assets                                                                                                                                                               |       | 21.8        |       | 15.5        |       | 12.2        |       |
| Oil and gas  exploration expenses                                                                                                                                                             |       | 167.3       |       | 172.9       |       | 194.9       |       |
| Expenses from  additions to allowances for doubtful receivables                                                                                                                               |       | 90.4        |       | 102.9       |       | 97.7        |       |
| Other                                                                                                                                                                                         |       | 456.3       |       | 377.2       |       | 296.6       |       |
| **Total**                                                                                                                                                                                     | ** ** | **1,931.1** | ** ** | **1,775.1** | ** ** | **1,665.9** | ** ** |

 

***Integration and restructuring measures***in 2006 were related primarily to therestructuring of the FineChemicals division as well as acquisition expenses. In 2005 this includedadditional charges to further improveefficiency at the sites in Ludwigshafen, Germany, and Feluy, Belgium. In 2004,this item included additionalcharges from the Ludwigshafen Site Project and restructuring measures in NorthAmercia.

Further expenses were relatedto the ***demolition andremoval measures as well as the preparation******of capitalexpenditure projects***tothe extent that they were not subject to mandatory capitalization according to IFRS.

***Costs from miscellaneous revenue-generating activities***refer to costs related to the items shown asmiscellaneous revenue-generating activities (see Note 5).

***Losses from foreign currency transactions***include losses from foreign currency positionsand derivatives and the valuation of receivables and liabilities in foreigncurrencies at the closing rate on the balance sheet date.

***Expenses from additions to allowances for doubtful receivables***in 2006 was impacted by our business in SouthAmerica where the financial strength of our customers in the agriculturalsector significantly decreased. 

***Other expenses***were incurred as a result of the write-offs of obsolete inventories inthe amount of €74.6 million in 2006, €103.0 million in 2005 and €83.0 millionin 2004 as well as due to numerous other items.

F-32

----

**7.****             ****Financial result**

**Million €**
| ** **                                                                | ** ** | **2006**   | ** ** | **2005**   | ** ** | **2004**   | ** ** |
|---------------------------------------------------------------------------|------------|------------|------------|------------|------------|------------|------------|
| **Income  (losses) from companies accounted for using the equity method** | ** ** | **35.0**   | ** ** | **5.6**    | ** ** | **(7.2**   | **)**      |
| Income from  participations in affiliated and associated companies        |       | 44.5       |       | 53.5       |       | 10.5       |       |
| Income from the  disposal or write-ups of participations                  |       | 6.8        |       | 310.7      |       | 38.1       |       |
| Income from  profit transfer agreements                                   |       | 1.5        |       | 9.0        |       | 2.3        |       |
| Losses from loss  transfer agreements                                     |       | (3.1       | )          | (13.6      | )          | (15.2      | )          |
| Impairment of, and  losses from, disposals of participations              |       | (13.9      | )          | (17.9      | )          | (625.4     | )          |
| Income from tax  allocation to participating interests                    |       | 0.9        |       | 0.7        |       | 1.2        |       |
| **Other  income from participations**                                     | ** ** | **36.7**   | ** ** | **342.4**  | ** ** | **(588.5** | **)**      |
| Interest  expenses                                                        |       | (543.0     | )          | (351.9     | )          | (288.9     | )          |
| Interest income                                                           |       | 146.5      |       | 153.3      |       | 66.3       |       |
| Interest and  dividend income from securities and receivables             |       | 24.6       |       | 28.6       |       | 16.5       |       |
| **Interest  result**                                                      | ** ** | **(371.9** | **)**      | **(170.0** | **)**      | **(206.1** | **)**      |
| Write-ups/profits  from the sale of securities and receivables            |       | 85.3       |       | 16.1       |       | 13.7       |       |
| Impairment/losses  from the disposal of securities and receivables        |       | (7.1       | )          | (6.7       | )          | (40.3      | )          |
| Net financing  income/(expense) from defined benefit plans                |       | 56.1       |       | (120.8     | )          | (134.8     | )          |
| Net financing  income/(expense) from other long-term personnel provisions |       | (18.1      | )          | (15.3      | )          | (20.3      | )          |
| Interest accrued  on other interest-bearing liabilities                   |       | (39.8      | )          | (36.4      | )          | (31.4      | )          |
| Construction  interest                                                    |       | 36.6       |       | 43.0       |       | 72.5       |       |
| Other financial  expenses and income                                      |       | (36.0      | )          | 38.2       |       | 96.7       |       |
| **Other  financial result**                                               | ** ** | **77.0**   | ** ** | **(81.9**  | **)**      | **(43.9**  | **)**      |
| **Financial result**                                                      | ** ** | **(223.2** | **)**      | **96.1**   | ** ** | **(845.7** | **)**      |

 

***Interest expenses***rose in 2006 primarily due to higher debt related to the financing ofthe acquisitions. The significantly improved net financing result from definedbenefit obligations is due to the establishment of a Contractual TrustArrangement (CTA) in December 2005.

***Income from the disposal or reversals of impairments of participations***primarily contains the gain of the sale of our50% share of Basell in 2005. In 2004, in contrast, valuation adjustments on participationswere necessary, which were shown under impairment of, and losses from,disposals of participations.

**8.****             ****Income taxes**

**Million €**
| ** **                                                                    | ** ** | **2006**    | ** ** | **2005**    | ** ** | **2004**    | ** ** |
|-------------------------------------------------------------------------------|------------|-------------|------------|-------------|------------|-------------|------------|
| German corporate income tax, solidarity surcharge, German trade  income taxes |       | 492.9       |       | 433.4       |       | 532.4       |       |
| Foreign income tax                                                            |       | 2,235.0     |       | 1,970.1     |       | 1,396.5     |       |
| Taxes for prior years                                                         |       | (3.2        | )          | 81.5        |       | (16.1       | )          |
| Capitalization of corporate income tax credits                                |       | (51.8       | )          | —      |       | —      |       |
| **Current taxes**                                                             | ** ** | **2,672.9** | ** ** | **2,485.0** | ** ** | **1,912.8** | ** ** |
| Deferred taxes                                                                |       | 387.7       |       | 273.1       |       | 300.7       |       |
| *Thereof Germany*                                                             | * *   | *275.3*     | * *   | *72.6*      | * *   | *280.6*     | * *   |
| **Income taxes**                                                              | ** ** | **3,060.6** | ** ** | **2,758.1** | ** ** | **2,213.5** | ** ** |
| *Thereof income taxes on  oil-producing operations*                           | * *   | *1,736.1*   | * *   | *1,450.0*   | * *   | *911.0*     | * *   |
| Other taxes                                                                   |       | 207,6       |       | 183.2       |       | 179.4       |       |
| **Tax expense**                                                               | ** ** | **3,268.2** | ** ** | **2,941.3** | ** ** | **2,392.9** | ** ** |

 

F-33

----

Income before taxes is brokendown into domestic and foreign income as follows:

**Million €**
| ** **                                           | ** ** | **2006**    | ** ** | **2005**    | ** ** | **2004**    | ** ** |
|------------------------------------------------------|------------|-------------|------------|-------------|------------|-------------|------------|
| Germany                                              |       | 2,088.5     |       | 1,524.5     |       | 1,270.5     |       |
| Foreign oil production  branches of German companies |       | 1,814.6     |       | 1,514.6     |       | 975.0       |       |
| Foreign                                              |       | 2,623.6     |       | 2,886.5     |       | 2,101.3     |       |
| **Total**                                            | ** ** | **6,526.7** | ** ** | **5,925.6** | ** ** | **4,346.8** | ** ** |

 

In Germany a uniformcorporate tax of 25% and thereon a solidarity surcharge of 5.5% is levied onall earnings. In addition to corporate income tax, income generated in Germanyis subject to a trade tax that varies depending on the municipality in whichthe company is located. After accounting for trade tax, which is a deductibleoperating expense, BASF has a weighted-average trade tax rate of 15.3%. BecauseGerman trade tax is deductible, it also reduces the assessment basis forcorporate income tax. For German companies, deferred taxes are calculated usinga tax rate of 38%.

Income from foreign Groupcompanies is taxed at the income tax rates applicable in the respective countriesof domicile.

For foreign Group companies,deferred taxes are calculated using the tax rates applicable in the individualforeign countries. Such rates averaged 33% in 2006 and 29% in 2005 and 2004.

Income taxes on foreign oil-producingoperations in certain regions are compensable up to the level of the Germancorporate income tax on this foreign taxable income. The non-compensable amountis shown separately in the following table.

Other taxes include realestate taxes and other comparable taxes in the amount of €90.3 million in 2006,€90.0 million in 2005 and €93.0 million in 2004; they are allocated to theappropriate functional costs.

**Reconciliationfrom the statutory tax rate in Germany to the effective tax rate**
| ** **                                                                                 | ** ** | **2006**                  | ** ** | **2005** | ** ** | **2004**                  | ** ** |
|--------------------------------------------------------------------------------------------|------------|---------------------------|------------|----------|------------|---------------------------|------------|
| ** **                                                                                 | ** ** | **(Million €)** | ** ** | **%**    | ** ** | **(Million €)** | ** ** | **%** | ** ** | **(Million €)** | ** ** | **%** | ** ** |
| Expected German  corporate income tax (25%)                                                |       | 1,631.7                   |       | 25.0     |       | 1,481.4                   |       | 25.0 |   | 1,086.7 |   | 25.0 |   |
| Solidarity surcharge                                                                       |       | 13.8                      |       | 0.2      |       | 13.4                      |       | 0.2 |   | 12.7 |   | 0.3 |   |
| German trade income tax  net of corporate income tax                                       |       | 240.9                     |       | 3.7      |       | 141.2                     |       | 2.4 |   | 177.5 |   | 4.1 |   |
| Foreign tax-rate  differential                                                             |       | 157.2                     |       | 2.4      |       | 113.5                     |       | 1.9 |   | 44.5 |   | 1.0 |   |
| Tax exempt income                                                                          |       | (196.1                    | )          | (3.0     | )          | (208.4                    | )          | (3.5 | ) | (209.2 | ) | (4.8 | ) |
| Non-deductible expenses                                                                    |       | 106.6                     |       | 1.6      |       | 155.6                     |       | 2.6 |   | 325.3 |   | 7.5 |   |
| Income after taxes of  companies accounted for using the equity method                     |       | (8.8                      | )          | (0.1     | )          | (1.4                      | )          | . |   | 1.8 |   | . |   |
| Taxes for prior years                                                                      |       | (3.2                      | )          | .        |       | 81.5                      |       | 1.4 |   | (16.1 | ) | (0.4 | ) |
| Income taxes on oil-producing  operations non-compensable with German corporate income tax |       | 1,282.4                   |       | 19.7     |       | 1,072.5                   |       | 18.1 |   | 667.7 |   | 15.4 |   |
| Deferred taxes for  planned dividend distributions of Group companies                      |       | 15.2                      |       | 0.2      |       | 9.5                       |       | 0.2 |   | 107.5 |   | 2.5 |   |
| Capitalization of  corporate income tax credits                                            |       | (51.8                     | )          | (0.8     | )          | —                    |       | — |   | — |   | — |   |
| Other                                                                                      |       | (127.3                    | )          | (2.0     | )          | (100.7                    | )          | (1.7 | ) | 15.1 |   | 0.3 |   |
| **Income taxes/effective tax rates**                                                       | ** ** | **3,060.6**               | ** ** | **46.9** | ** ** | **2,758.1**               | ** ** | **46.6** | ** ** | **2,213.5** | ** ** | **50.9** | ** ** |

 

F-34

----

Tax exempt earnings arose from the sale ofparticipations or securities. Deferred taxes result from the followingtemporary differences between tax balances and the valuation of assets andliabilities according to IFRS:

**Deferredtax assets and liabilities****Million €**
| ** **                           | ** ** | **Tax assets** | ** ** | **Tax liabilities** | ** ** |
|--------------------------------------|------------|---------------------|------------|--------------------------|------------|
| ** **                           | ** ** | **2006**            | ** ** | **2005**                 | ** ** | **2006** | ** ** | **2005** | ** ** |
| Intangible  assets                   |       | (469.2              | )          | (111.0                   | )          | 647.6 |   | 282.2 |   |
| Property, plant  and equipment       |       | (385.7              | )          | (456.8                   | )          | 672.8 |   | 343.0 |   |
| Financial assets                     |       | (37.8               | )          | 12.7                     |       | 213.5 |   | 0.2 |   |
| Inventories and  accounts receivable |       | 164.9               |       | 3.6                      |       | 278.6 |   | 110.8 |   |
| Provisions for  pensions             |       | 377.9               |       | 641.0                    |       | (253.2 | ) | 2.9 |   |
| Other provisions  and liabilities    |       | 159.5               |       | 415.2                    |       | (231.1 | ) | (44.2 | ) |
| Tax loss  carryforwards              |       | 627.3               |       | 840.0                    |       | — |   | — |   |
| Other                                |       | 313.2               |       | 44.7                     |       | 112.8 |   | 4.4 |   |
| Valuation  allowances                |       | (127.7              | )          | (134.7                   | )          | — |   | — |   |
| *Thereof for tax loss carryforwards* | * *   | *(43.7*             | *)*        | *(37.3*                  | *)*        | *—* | * * | *—* | * * |
| **Total**                            | ** ** | **622.4**           | ** ** | **1,254.7**              | ** ** | **1,441.0** | ** ** | **699.3** | ** ** |
| *Thereof  short–term*           | * *   | *275.3*             | * *   | *369.4*                  | * *   | *251.0* | * * | *137.5* | * * |

 

IFRSrequires the revaluation of all assets and liabilities from the acquisitions in2006 according to IFRS 3. This has resulted in significant deviations betweenthe fair values and the values in the tax accounts, which has led to deferredtax liabilities, which are subsequently netted against existing deferred taxassets. The breakdown above of the netted tax positions by originating balancesheet items therefore also shows negative amounts. The valuation of deferredtax assets depends on the estimation of the probability of the reversal of thevaluation differences and the utilization of the tax loss carryforwards. Adeferred tax asset is recognized for future tax benefits arising from temporarydifferences and for tax loss carryforwards to the extent that the tax benefitsare likely to be realized. Based on experience and the expected development oftaxable income, it is assumed that the benefit of deferred tax assetsrecognized will be realized.

Deferredtax assets were offset against deferred tax liabilities of the same maturity ifthey relate to the same taxation authority.

Deferredtaxes for undistributed earnings of subsidiaries in the amount of €8,751.7million in 2006 and €7,918.7 million in 2005 were not recognized, as they areeither not subject to taxation or they are expected to be reinvested forindefinite periods of time. For these timing differences, only the respectivewithholding tax, taking into consideration the German taxation of 5% ondividends paid, would need to be considered.

Theregional distribution of tax loss carryforwards is as follows:

**Million €**
| ** ** | ** ** | **2006**    | ** ** | **2005**    | ** ** |
|------------|------------|-------------|------------|-------------|------------|
| Germany    |       | 64.4        |       | 30.1        |       |
| Foreign    |       | 1,758.1     |       | 2,114.5     |       |
| **Total**  | ** ** | **1,822.5** | ** ** | **2,144.6** | ** ** |

 

German tax losses may becarried forward indefinitely. Foreign loss carryforwards exist primarily inNorth America (NAFTA). These expire starting in 2020. Loss carryforwards in theNAFTA region were reduced in 2006 and 2005 as a result of high earnings.

For tax loss carryforwards of€112.3 million in 2006, €72.2 million in 2005 and €87.0 million in 2004 valuationallowances were recorded.

F-35

----

Tax obligations are comprisedof both tax liabilities and short-term tax provisions. Tax liabilitiesprimarily concern the assessed income tax and other taxes. Tax provisionsconcern estimated income taxes not yet assessed for the current and theprevious year.

**Tax obligations****Million €**
| ** **      | ** ** | **2006**  | ** ** | **2005**  | ** ** |
|-----------------|------------|-----------|------------|-----------|------------|
| Tax provisions  |       | 294.4     |       | 330.7     |       |
| Tax liabilities |       | 564.3     |       | 556.5     |       |
| **Total**       | ** ** | **858.7** | ** ** | **887.2** | ** ** |

 

**9.Minority interestsMillion €**
| ** **                     | ** ** | **2006**  | ** ** | **2005**  | ** ** | **2004**  | ** ** |
|--------------------------------|------------|-----------|------------|-----------|------------|-----------|------------|
| Minority  interests in profits |       | 265.1     |       | 179.0     |       | 145.5     |       |
| Minority  interests in losses  |       | 14.2      |       | 18.2      |       | 16.5      |       |
| **Total**                      | ** ** | **250.9** | ** ** | **160.8** | ** ** | **129.0** | ** ** |

 

Minority interests in profitsrelate primarily to the Group companies engaged in trading and distribution ofnatural gas and to the operating company for the steam cracker in Port Arthur,Texas. Minority interests in losses mainly related to BASF Plant Science.

See Note 19 for a detailedanalysis of consolidated subsidiaries with minority shareholdings.

F-36

----

**10. Otherinformation**

**Additional information on Consolidated Statements ofCash Flows**

Cash provided by operating activities includes the following cash flows:

**Million €**
| ** **           | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
|----------------------|------------|----------|------------|----------|------------|----------|------------|
| Income tax  payments |       | 2,730.0  |       | 2,252.4  |       | 1,543.0  |       |
| Interest  payments   |       | 319.0    |       | 220.3    |       | 226.6    |       |
| Dividends received   |       | 47.5     |       | 68.1     |       | 47.6     |       |

 

**Personnelcosts****Million €**
| ** **                                                              | ** ** | **2006**    | ** ** | **2005**    | ** ** | **2004**    | ** ** |
|-------------------------------------------------------------------------|------------|-------------|------------|-------------|------------|-------------|------------|
| Wages and  salaries                                                     |       | 5,029.8     |       | 4,553.0     |       | 4,579.1     |       |
| Social security  contributions and expenses for pensions and assistance |       | 1,180.0     |       | 1,021.4     |       | 1,035.8     |       |
| *Thereof for pension benefits*                                          | * *   | *286.7*     | * *   | *242.4*     | * *   | *227.4*     | * *   |
| **Total**                                                               | ** ** | **6,209.8** | ** ** | **5,574.4** | ** ** | **5,614.9** | ** ** |

 

German Group companies incurredcosts for employee representatives to comply with statutory regulations of€11.3 million in 2006, €11.4 million in 2005 and €11.2 million in 2004.

**Average number of employees**
| ** **                                  | ** ** | **Fully-consolidated companies** | ** ** | **Proportionally consolidated  companies** | ** ** | **BASF Group** | ** ** |
|---------------------------------------------|------------|---------------------------------------|------------|-------------------------------------------------|------------|---------------------|------------|
| ** **                                  | ** ** | **2006**                              | ** ** | **2005**                                        | ** ** | **2004**            | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
| Europe                                      |       | 58,497                                |       | 56,284                                          |       | 59,783              |       | 376 |   | 270 |   | 252 |   | 58,873 |   | 56,554 |   | 60,035 |   |
| *Thereof Germany*                           | * *   | *46,017*                              | * *   | *45,618*                                        | * *   | *47,830*            | * *   | *18* | * * | *16* | * * | *14* | * * | *46,035* | * * | *45,634* | * * | *47,844* | * * |
| NorthAmerica  (NAFTA)                       |       | 12,789                                |       | 9,934                                           |       | 11,002              |       | 466 |   | 466 |   | 488 |   | 13,255 |   | 10,400 |   | 11,490 |   |
| Asia Pacific                                |       | 10,384                                |       | 8,732                                           |       | 7,911               |       | 1,740 |   | 1,694 |   | 1,912 |   | 12,124 |   | 10,426 |   | 9,823 |   |
| SouthAmerica,  Africa, Middle East          |       | 5,199                                 |       | 4,827                                           |       | 5,000               |       | — |   | — |   | — |   | 5,199 |   | 4,827 |   | 5,000 |   |
| **BASF  Group**                             | ** ** | **86,869**                            | ** ** | **79,777**                                      | ** ** | **83,696**          | ** ** | **2,582** | ** ** | **2,430** | ** ** | **2,652** | ** ** | **89,451** | ** ** | **82,207** | ** ** | **86,348** | ** ** |
| *Thereof with trainee contracts*            | * *   | *2,036*                               | * *   | *2,329*                                         | * *   | *2,549*             | * *   | *2* | * * | *2* | * * | *2* | * * | *2,038* | * * | *2,331* | * * | *2,551* | * * |
| *Thereof  with limited–term contracts* | * *   | *1,966*                               | * *   | *1,709*                                         | * *   | *1,738*             | * *   | *24* | * * | *12* | * * | *233* | * * | *1,990* | * * | *1,721* | * * | *1,971* | * * |

 

Thenumber of employees in proportionally-consolidated companies is included in thefigures above in full. Considered pro-rata, the average number of employees inthe BASF Group was 88,160 in 2006, 80,922 in 2005 and 85,022 in 2004.

In 2006, the number ofemployees increased due primarily to the acquisitions of Engelhard, theconstruction chemicals business of Degussa and Johnson Polymer.

In2005, the number of employees fell primarily due to ongoing measures to improvethe efficiency of our sites in Europe and North America. As a result of theacquisition of the electronic chemicals business from Merck KGaA, the number ofemployees increased by 578 in 2005.

Asa result of the sale of the fibers business, 1,214 employees transferred toHoneywell in 2004. The sale of the printing systems resulted in a reduction inthe number of employees by 326 in 2005 and 2,029 in 2004.

F-37

----

**11.Intangible assets**

**Developments 2006Million €**
| ** **                                  | ** ** | ** **              | ** ** | **Product**           | ** ** | **Know-how,**        | ** ** | ** **   | ** ** | **Internally** | ** ** | ** **             | ** ** | ** **  | ** ** |
|---------------------------------------------|------------|-------------------------|------------|-----------------------|------------|----------------------|------------|--------------|------------|----------------|------------|------------------------|------------|-------------|------------|
| ** **                                  | ** ** | **Distribution,**       | ** ** | **rights,**           | ** ** | **patents and** | ** ** | ** **   | ** ** | **generated**  | ** ** | ** **             | ** ** | ** **  | ** ** |
| ** **                                  | ** ** | **supply and**     | ** ** | **licenses and** | ** ** | **production**       | ** ** | ** **   | ** ** | **intangible** | ** ** | **Other rights**  | ** ** | ** **  | ** ** |
| ** **                                  | ** ** | **similar rights** | ** ** | **trademarks**        | ** ** | **technology**       | ** ** | **Goodwill** | ** ** | **assets**     | ** ** | **and values**(1) | ** ** | **Total**   | ** ** |
| **Acquisition  costs**                      |       |                    |       |                  |       |                 |       |         |       |           |       |                   |       |        |       |
| Balance as of  January 1, 2006              |       | 548.3                   |       | 723.3                 |       | 995.7                |       | 2,138.5      |       | 272.6          |       | 807.3                  |       | 5,485.7     |       |
| Changes in scope  of consolidation          |       | —                  |       | 3.0                   |       | —               |       | 6.1          |       | 1.4            |       | 22.6                   |       | 33.1        |       |
| Additions                                   |       | 1,411.5                 |       | 522.2                 |       | 1,069.3              |       | 2,775.1      |       | 24.7           |       | 167.7                  |       | 5,970.5     |       |
| Disposals                                   |       | 84.8                    |       | 16.7                  |       | 357.4                |       | 47.2         |       | 76.7           |       | 57.9                   |       | 640.7       |       |
| Transfers                                   |       | 4.7                     |       | 0.1                   |       | (0.5                 | )          | —       |       | —         |       | 68.4                   |       | 72.7        |       |
| Exchange  differences                       |       | (44.7                   | )          | (20.3                 | )          | (23.3                | )          | (159.3       | )          | (6.5           | )          | (43.7                  | )          | (297.8      | )          |
| Balance as of  December 31, 2006            |       | 1,835.0                 |       | 1,211.6               |       | 1,683.8              |       | 4,713.2      |       | 215.5          |       | 964.4                  |       | 10,623.5    |       |
| **Amortization**                            | ** ** | ** **              | ** ** | ** **            | ** ** | ** **           | ** ** | ** **   | ** ** | ** **     | ** ** | ** **             | ** ** | ** **  | ** ** |
| Balance as of  January 1, 2006              |       | 260.4                   |       | 322.7                 |       | 652.2                |       | —       |       | 179.0          |       | 351.8                  |       | 1,766.1     |       |
| Changes in scope  of consolidation          |       | —                  |       | —                |       | —               |       | —       |       | —         |       | 22.5                   |       | 22.5        |       |
| Additions                                   |       | 122.7                   |       | 80.6                  |       | 111.3                |       | —       |       | 50.1           |       | 126.7                  |       | 491.4       |       |
| Disposals                                   |       | 84.1                    |       | 15.5                  |       | 330.6                |       | —       |       | 76.4           |       | 29.3                   |       | 535.9       |       |
| Transfers                                   |       | 2.7                     |       | —                |       | 0.4                  |       | —       |       | —         |       | 0.2                    |       | 3.3         |       |
| Exchange  differences                       |       | (4.4                    | )          | (10.8                 | )          | (5.9                 | )          | —       |       | (3.2           | )          | (21.2                  | )          | (45.5       | )          |
| Balance as of  December 31, 2006            |       | 297.3                   |       | 377.0                 |       | 427.4                |       | —       |       | 149.5          |       | 450.7                  |       | 1,701.9     |       |
| **Net book value as of December  31, 2006** | ** ** | **1,537.7**             | ** ** | **834.6**             | ** ** | **1,256.4**          | ** ** | **4,713.2**  | ** ** | **66.0**       | ** ** | **513.7**              | ** ** | **8,921.6** | ** ** |

----

(1)             Includinglicenses on such rights and values

Additionsin 2006 related in particular to the acquisition of Engelhard Corp., theconstruction chemicals business of Degussa AG and Johnson Polymer. On pages F-22to F-26 you can find the most important facts and figures, including thederivation of goodwill for each acquisition.

Impairments of €9.5 millionin 2006 primarily concerned know-how and patents and were charged to otheroperating expenses. There were no material reversals of impairments.

Concessions for oil and gasproduction with a net book value of €59.0 to produce oil and gas in certainlocations and involve obligations to deliver a portion of the resources tolocal companies. At the end of the term of a concession, the rights arereturned.

F-38

----

**Developments 2005Million €**
| ** **                                  | ** ** | ** **              | ** ** | **Product**           | ** ** | **Know-how,**        | ** ** | ** **   | ** ** | **Internally** | ** ** | ** **             | ** ** | ** **  | ** ** |
|---------------------------------------------|------------|-------------------------|------------|-----------------------|------------|----------------------|------------|--------------|------------|----------------|------------|------------------------|------------|-------------|------------|
| ** **                                  | ** ** | **Distribution,**       | ** ** | **rights,**           | ** ** | **patents and** | ** ** | ** **   | ** ** | **generated**  | ** ** | ** **             | ** ** | ** **  | ** ** |
| ** **                                  | ** ** | **supply and**     | ** ** | **licenses and** | ** ** | **production**       | ** ** | ** **   | ** ** | **intangible** | ** ** | **Other rights**  | ** ** | ** **  | ** ** |
| ** **                                  | ** ** | **similar rights** | ** ** | **trademarks**        | ** ** | **technology**       | ** ** | **Goodwill** | ** ** | **assets**     | ** ** | **and values**(1) | ** ** | **Total**   | ** ** |
| **Acquisition  costs**                      |       |                    |       |                  |       |                 |       |         |       |           |       |                   |       |        |       |
| Balance as of  January 1, 2005              |       | 708.0                   |       | 727.3                 |       | 928.0                |       | 1,972.4      |       | 272.1          |       | 693.4                  |       | 5,301.2     |       |
| Changes in scope  of consolidation          |       | —                  |       | —                |       | 0.8                  |       | 2.2          |       | —         |       | 2.7                    |       | 5.7         |       |
| Additions                                   |       | 56.7                    |       | 15.6                  |       | 63.6                 |       | 136.6        |       | 22.6           |       | 40.1                   |       | 335.2       |       |
| Disposals                                   |       | 223.6                   |       | 38.8                  |       | 28.7                 |       | 92.6         |       | 30.5           |       | 72.5                   |       | 486.7       |       |
| Transfers                                   |       | (0.4                    | )          | (3.5                  | )          | 15.9                 |       | (44.9        | )          | 0.4            |       | 88.2                   |       | 55.7        |       |
| Exchange  differences                       |       | 7.6                     |       | 22.7                  |       | 16.1                 |       | 164.8        |       | 8.0            |       | 55.4                   |       | 274.6       |       |
| Balance as of  December 31, 2005            |       | 548.3                   |       | 723.3                 |       | 995.7                |       | 2,138.5      |       | 272.6          |       | 807.3                  |       | 5,485.7     |       |
| **Amortization**                            | ** ** | ** **              | ** ** | ** **            | ** ** | ** **           | ** ** | ** **   | ** ** | ** **     | ** ** | ** **             | ** ** | ** **  | ** ** |
| Balance as of  January 1, 2005              |       | 407.9                   |       | 261.1                 |       | 579.8                |       | —       |       | 143.8          |       | 302.0                  |       | 1,694.6     |       |
| Changes in scope  of consolidation          |       | —                  |       | —                |       | 0.6                  |       | —       |       | —         |       | 0.7                    |       | 1.3         |       |
| Additions                                   |       | 70.0                    |       | 60.3                  |       | 83.9                 |       | —       |       | 61.7           |       | 92.4                   |       | 368.3       |       |
| Disposals                                   |       | 220.5                   |       | 9.7                   |       | 19.5                 |       | —       |       | 30.0           |       | 69.6                   |       | 349.3       |       |
| Transfers                                   |       | 0.2                     |       | —                |       | (0.1                 | )          | —       |       | —         |       | (0.6                   | )          | (0.5        | )          |
| Exchange  differences                       |       | 2.8                     |       | 11.0                  |       | 7.5                  |       | —       |       | 3.5            |       | 26.9                   |       | 51.7        |       |
| Balance as of  December 31, 2005            |       | 260.4                   |       | 322.7                 |       | 652.2                |       | —       |       | 179.0          |       | 351.8                  |       | 1,766.1     |       |
| **Net book value as of December  31, 2005** | ** ** | **287.9**               | ** ** | **400.6**             | ** ** | **343.5**            | ** ** | **2,138.5**  | ** ** | **93.6**       | ** ** | **455.5**              | ** ** | **3,719.6** | ** ** |

----

(1)             Includinglicenses on such rights and values

Additions in 2005 primarilyrelated to the acquisition of the electronic chemicals business of Merck KGaA,Darmstadt, Germany, and the Swiss fine chemicals company Orgamol S.A.

Write-downs of €30.4 millionin 2005 primarily concerned customer relationships and were charged to otheroperating expenses. There were no material write-ups.

Concessions for oil and gasproduction with a net book value of €59.8 million in 2005 convey the rights toproduce oil and gas in certain locations and involve obligations to deliver aportion of the resources to local companies. At the end of the term of aconcession, the rights are returned.

The emission rights grantedwithout charge were included in the line item ‘transfers’ in the column ‘otherrights and values.’

F-39

----

**12. Property, plant and equipment**

**Developments2006****Million €**
| ** **                                  | ** ** | ** **                      | ** ** | ** **             | ** ** | ** **             | ** ** | **Advance**              | ** ** | ** **   | ** ** |
|---------------------------------------------|------------|---------------------------------|------------|------------------------|------------|------------------------|------------|--------------------------|------------|--------------|------------|
| ** **                                  | ** ** | ** **                      | ** ** | **Machinery**          | ** ** | **Miscellaneous**      | ** ** | **payments and**    | ** ** | ** **   | ** ** |
| ** **                                  | ** ** | **Land, land rights** | ** ** | **and technical** | ** ** | **equipment and** | ** ** | **construction in** | ** ** | ** **   | ** ** |
| ** **                                  | ** ** | **and buildings**          | ** ** | **equipment**          | ** ** | **fixtures**           | ** ** | **progress**             | ** ** | **Total**    | ** ** |
| **Acquisition  costs**                      | ** ** | ** **                      | ** ** | ** **             | ** ** | ** **             | ** ** | ** **               | ** ** | ** **   | ** ** |
| Balance as of  January 1, 2006              |       | 7,098.0                         |       | 33,533.4               |       | 2,688.6                |       | 1,302.2                  |       | 44,622.2     |       |
| Changes in scope  of consolidation          |       | 3.2                             |       | 14.4                   |       | 5.0                    |       | 7.1                      |       | 29.7         |       |
| Additions                                   |       | 630.6                           |       | 1,672.7                |       | 216.2                  |       | 1,548.9                  |       | 4,068.4      |       |
| Disposals                                   |       | 242.3                           |       | 413.9                  |       | 145.7                  |       | 45.0                     |       | 846.9        |       |
| Transfers                                   |       | 149.1                           |       | 927.5                  |       | 73.1                   |       | (1,152.9                 | )          | (3.2         | )          |
| Exchange  differences                       |       | (194.7                          | )          | (907.5                 | )          | (74.9                  | )          | (62.6                    | )          | (1,239.7     | )          |
| Balance as of  December 31, 2006            |       | 7,443.9                         |       | 34,826.6               |       | 2,762.3                |       | 1,597.7                  |       | 46,630.5     |       |
| **Depreciation**                            | ** ** | ** **                      | ** ** | ** **             | ** ** | ** **             | ** ** | ** **               | ** ** | ** **   | ** ** |
| Balance as of  January 1, 2006              |       | 4,242.5                         |       | 24,103.2               |       | 2,264.2                |       | 25.4                     |       | 30,635.3     |       |
| Change in scope  of consolidation           |       | 0.2                             |       | 10.9                   |       | 2.4                    |       | —                   |       | 13.5         |       |
| Additions                                   |       | 234.2                           |       | 2,074.4                |       | 173.1                  |       | 0.4                      |       | 2,482.1      |       |
| Disposals                                   |       | 175.8                           |       | 384.2                  |       | 136.6                  |       | 23.1                     |       | 719.7        |       |
| Transfers                                   |       | 6.1                             |       | 2.2                    |       | (5.6                   | )          | (0.2                     | )          | 2.5          |       |
| Exchange  differences                       |       | (85.3                           | )          | (538.5                 | )          | (60.9                  | )          | —                   |       | (684.7       | )          |
| Balance as of  December 31, 2006            |       | 4,221.9                         |       | 25,268.0               |       | 2,236.6                |       | 2.5                      |       | 31,729.0     |       |
| **Net book value as of December  31, 2006** | ** ** | **3,222.0**                     | ** ** | **9,558.6**            | ** ** | **525.7**              | ** ** | **1,595.2**              | ** ** | **14,901.5** | ** ** |

 

Impairment losses of €344.0million in 2006 related in particular to the Intermediates division of theChemicals segment. Of this amount, €184.2 million was attributable to themothballing of the THF plant at the site in Caojing, China.

Further impairment lossesresulted from the measures to restructure the Fine Chemicals division,especially the lysine and vitamin B2 business at the site in Gunsan, Korea.

F-40

----

**Developments2005****Million €**
| ** **                                  | ** ** | ** **                      | ** ** | ** **             | ** ** | ** **             | ** ** | **Advance**              | ** ** | ** **   | ** ** |
|---------------------------------------------|------------|---------------------------------|------------|------------------------|------------|------------------------|------------|--------------------------|------------|--------------|------------|
| ** **                                  | ** ** | ** **                      | ** ** | **Machinery**          | ** ** | **Miscellaneous**      | ** ** | **payments and**    | ** ** | ** **   | ** ** |
| ** **                                  | ** ** | **Land, land rights** | ** ** | **and technical** | ** ** | **equipment and** | ** ** | **construction in** | ** ** | ** **   | ** ** |
| ** **                                  | ** ** | **and buildings**          | ** ** | **equipment**          | ** ** | **fixtures**           | ** ** | **progress**             | ** ** | **Total**    | ** ** |
| **Acquisition  costs**                      | ** ** | ** **                      | ** ** | ** **             | ** ** | ** **             | ** ** | ** **               | ** ** | ** **   | ** ** |
| Balance as of  January 1, 2005              |       | 6,475.2                         |       | 30,238.9               |       | 2,596.1                |       | 2,132.0                  |       | 41,442.2     |       |
| Change in scope  of consolidation           |       | 8.1                             |       | 16.3                   |       | 6.5                    |       | 5.8                      |       | 36.7         |       |
| Additions                                   |       | 234.8                           |       | 742.8                  |       | 94.5                   |       | 1,115.7                  |       | 2,187.8      |       |
| Disposals                                   |       | 134.9                           |       | 581.6                  |       | 165.8                  |       | 8.3                      |       | 890.6        |       |
| Transfers                                   |       | 240.1                           |       | 1,831.1                |       | 54.4                   |       | (2,095.9                 | )          | 29.7         |       |
| Exchange  differences                       |       | 274.7                           |       | 1,285.9                |       | 102.9                  |       | 152.9                    |       | 1,816.4      |       |
| Balance as of December  31,2005             |       | 7,098.0                         |       | 33,533.4               |       | 2,688.6                |       | 1,302.2                  |       | 44,622.2     |       |
| **Depreciation**                            | ** ** | ** **                      | ** ** | ** **             | ** ** | ** **             | ** ** | ** **               | ** ** | ** **   | ** ** |
| Balance as of  January 1, 2005              |       | 3,972.5                         |       | 22,216.5               |       | 2,170.8                |       | 19.7                     |       | 28,379.5     |       |
| Change in scope  of consolidation           |       | 1.0                             |       | 5.2                    |       | 3.8                    |       | —                   |       | 10.0         |       |
| Additions                                   |       | 198.0                           |       | 1,674.0                |       | 154.9                  |       | 8.0                      |       | 2,034.9      |       |
| Disposals                                   |       | 90.5                            |       | 521.1                  |       | 152.9                  |       | 3.1                      |       | 767.6        |       |
| Transfers                                   |       | 42.5                            |       | (3.4                   | )          | 4.2                    |       | 0.8                      |       | 44.1         |       |
| Exchange  differences                       |       | 119.0                           |       | 732.0                  |       | 83.4                   |       | —                   |       | 934.4        |       |
| Balance as of  December 31,2005             |       | 4,242.5                         |       | 24,103.2               |       | 2,264.2                |       | 25.4                     |       | 30,635.3     |       |
| **Net book value as of December  31, 2005** | ** ** | **2,855.5**                     | ** ** | **9,430.2**            | ** ** | **424.4**              | ** ** | **1,276.8**              | ** ** | **13,986.9** | ** ** |

 

Additions in 2005 were mainlydue to the completion and start up of a steam cracker, a syngas plant as wellas other production plants at the Verbund site in Nanjing, China and theacquisition of the electronic business from Merck KGaA, Darmstadt, Germany.

Impairment losses of €76.5million in 2005 primarily related to restructuring measures in theIntermediates division in Asia. There were no material write-ups.

F-41

----

**13.Participations accounted for using the equity method and other financial assets**

**Developments2006****Million €**
| ** **                                  | ** ** | **Investments**                | ** ** | ** **             | ** ** | ** **             | ** ** | ** **         | ** ** | ** **         | ** ** |
|---------------------------------------------|------------|--------------------------------|------------|------------------------|------------|------------------------|------------|--------------------|------------|--------------------|------------|
| ** **                                  | ** ** | **accounted for**         | ** ** | **Investments**        | ** ** | **Investments**        | ** ** | **Shares**         | ** ** | ** **         | ** ** |
| ** **                                  | ** ** | **using the equity** | ** ** | **in affiliated** | ** ** | **in associated** | ** ** | **in other**  | ** ** | **Long–term** | ** ** |
| ** **                                  | ** ** | **method**                     | ** ** | **companies**          | ** ** | **companies**          | ** ** | **participations** | ** ** | **securities**     | ** ** |
| **Acquisition  cost carried forward**       | ** ** | ** **                     | ** ** | ** **             | ** ** | ** **             | ** ** | ** **         | ** ** | ** **         | ** ** |
| Balance as of  January 1, 2006              |       | 299.7                          |       | 256.1                  |       | 83.1                   |       | 424.4              |       | 6.7                |       |
| Change in scope  of consolidation           |       | —                         |       | (21.1                  | )          | (10.1                  | )          | —             |       | (0.2               | )          |
| Additions                                   |       | 405.5                          |       | 144.4                  |       | 12.3                   |       | 6.8                |       | 36.3               |       |
| Disposals                                   |       | —                         |       | 15.6                   |       | 21.5                   |       | 0.9                |       | —             |       |
| Transfers/Changes  in market value          |       | 3.1                            |       | 0.1                    |       | (0.5                   | )          | 133.6              |       | (0.2               | )          |
| Exchange  differences                       |       | (2.4                           | )          | (2.7                   | )          | (1.1                   | )          | (0.9               | )          | (0.1               | )          |
| Balance as of  December 31, 2006            |       | 705.9                          |       | 361.2                  |       | 62.2                   |       | 563.0              |       | 42.5               |       |
| **Accumulated  valuation adjustments**      |       |                           |       |                   |       |                   |       |               |       |               |       |
| Balance as of  January 1, 2006              |       | 55.4                           |       | 103.9                  |       | 24.3                   |       | 28.6               |       | 1.1                |       |
| Change in scope  of consolidation           |       | —                         |       | (11.0                  | )          | —                 |       | —             |       | —             |       |
| Additions                                   |       | —                         |       | 6.3                    |       | 3.6                    |       | 3.1                |       | 0.1                |       |
| Disposals                                   |       | —                         |       | 5.4                    |       | 18.2                   |       | 0.2                |       | —             |       |
| Transfers                                   |       | —                         |       | (4.3                   | )          | —                 |       | (0.4               | )          | —             |       |
| Exchange  differences                       |       | —                         |       | (0.4                   | )          | —                 |       | —             |       | —             |       |
| Balance as of  December 31, 2006            |       | 55.4                           |       | 89.1                   |       | 9.7                    |       | 31.1               |       | 1.2                |       |
| **Net book value as of December  31, 2006** | ** ** | **650.5**                      | ** ** | **272.1**              | ** ** | **52.5**               | ** ** | **531.9**          | ** ** | **41.3**           | ** ** |

 

**Developments2006****Million €**
| ** **                                  | ** ** | ** **        | ** ** | **Loans to**      | ** ** | ** **         | ** ** | ** **               | ** ** | **Investments**                | ** ** |
|---------------------------------------------|------------|-------------------|------------|------------------------|------------|--------------------|------------|--------------------------|------------|--------------------------------|------------|
| ** **                                  | ** ** | ** **        | ** ** | **associated**         | ** ** | ** **         | ** ** | ** **               | ** ** | **accounted for**         | ** ** |
| ** **                                  | ** ** | **Loans to** | ** ** | **companies and** | ** ** | **Other**          | ** ** | ** **               | ** ** | **using the equity** | ** ** |
| ** **                                  | ** ** | **affiliated**    | ** ** | **participating**      | ** ** | **loans and** | ** ** | **Other financial** | ** ** | **method and other** | ** ** |
| ** **                                  | ** ** | **companies**     | ** ** | **interests**          | ** ** | **investments**    | ** ** | **assets**               | ** ** | **financial assets**      | ** ** |
| **Acquisition  cost carried forward**       | ** ** | ** **        | ** ** | ** **             | ** ** | ** **         | ** ** | ** **               | ** ** | ** **                     | ** ** |
| Balance as of  January 1, 2006              |       | 139.6             |       | 140.1                  |       | 55.8               |       | 1,105.8                  |       | 1,405.5                        |       |
| Changes in scope  of consolidation          |       | 42.1              |       | 29.0                   |       | 0.8                |       | 40.5                     |       | 40.5                           |       |
| Additions                                   |       | 13.4              |       | 50.7                   |       | 30.2               |       | 294.1                    |       | 699.6                          |       |
| Disposals                                   |       | 63.8              |       | 6.9                    |       | 19.2               |       | 127.9                    |       | 127.9                          |       |
| Transfers/Changes  in market value          |       | 0.3               |       | 0.6                    |       | (7.5               | )          | 126.4                    |       | 129.5                          |       |
| Exchange  differences                       |       | (0.1              | )          | (11.5                  | )          | (1.3               | )          | (17.7                    | )          | (20.1                          | )          |
| Balance as of  December 31, 2006            |       | 131.5             |       | 202.0                  |       | 58.8               |       | 1,421.2                  |       | 2,127.1                        |       |
| **Accumulated  valuation adjustments**      |       |              |       |                   |       |               |       |                     |       |                           |       |
| Balance as of  January 1, 2006              |       | 127.5             |       | 2.1                    |       | 5.3                |       | 292.8                    |       | 348.2                          |       |
| Changes in scope  of consolidation          |       | 19.6              |       | —                 |       | —             |       | 8.6                      |       | 8.6                            |       |
| Additions                                   |       | 5.4               |       | 1.2                    |       | 0.3                |       | 20.0                     |       | 20.0                           |       |
| Disposals                                   |       | 60.7              |       | —                 |       | 0.5                |       | 85.0                     |       | 85.0                           |       |
| Transfers                                   |       | —            |       | 0.9                    |       | (1.7               | )          | (5.5                     | )          | (5.5                           | )          |
| Exchange  differences                       |       | 0.4               |       | —                 |       | —             |       | —                   |       | —                         |       |
| Balance as of  December 31, 2006            |       | 92.2              |       | 4.2                    |       | 3.4                |       | 230.9                    |       | 286.3                          |       |
| **Net book value as of December  31, 2006** | ** ** | **39.3**          | ** ** | **197.8**              | ** ** | **55.4**           | ** ** | **1,190.3**              | ** ** | **1,840.8**                    | ** ** |

 

F-42

----

**Developments2005****Million €**
| ** **                                  | ** ** | **Investments**                | ** ** | ** **             | ** ** | ** **             | ** ** | ** **         | ** ** | ** **         | ** ** |
|---------------------------------------------|------------|--------------------------------|------------|------------------------|------------|------------------------|------------|--------------------|------------|--------------------|------------|
| ** **                                  | ** ** | **accounted for**         | ** ** | **Investments**        | ** ** | **Investments**        | ** ** | **Shares**         | ** ** | ** **         | ** ** |
| ** **                                  | ** ** | **using the equity** | ** ** | **in affiliated** | ** ** | **in associated** | ** ** | **in other**  | ** ** | **Long–term** | ** ** |
| ** **                                  | ** ** | **method**                     | ** ** | **companies**          | ** ** | **companies**          | ** ** | **participations** | ** ** | **securities**     | ** ** |
| **Acquisition  cost carried forward**       | ** ** | ** **                     | ** ** | ** **             | ** ** | ** **             | ** ** | ** **         | ** ** | ** **         | ** ** |
| Balance as of  January 1, 2005              |       | 1,654.5                        |       | 272.0                  |       | 86.5                   |       | 425.7              |       | 12.1               |       |
| Change in scope  of consolidation           |       | (9.3                           | )          | (11.8                  | )          | (7.0                   | )          | —             |       | —             |       |
| Additions                                   |       | 16.4                           |       | 24.5                   |       | 12.8                   |       | 3.7                |       | 0.1                |       |
| Disposals                                   |       | 1,352.1                        |       | 39.3                   |       | 0.4                    |       | 58.8               |       | 6.0                |       |
| Transfers/Changes  in market value          |       | (9.8                           | )          | 9.7                    |       | (10.6                  | )          | 52.7               |       | 0.5                |       |
| Exchange  differences                       |       | —                         |       | 1.0                    |       | 1.8                    |       | 1.1                |       | —             |       |
| Balance as of  December 31, 2005            |       | 299.7                          |       | 256.1                  |       | 83.1                   |       | 424.4              |       | 6.7                |       |
| **Accumulated  valuation adjustments**      |       |                           |       |                   |       |                   |       |               |       |               |       |
| Balance as of January  1, 2005              |       | 554.0                          |       | 100.0                  |       | 30.8                   |       | 20.3               |       | 1.4                |       |
| Change in scope  of consolidation           |       | —                         |       | 0.4                    |       | —                 |       | —             |       | —             |       |
| Additions                                   |       | —                         |       | 3.4                    |       | 4.1                    |       | 8.3                |       | —             |       |
| Disposals                                   |       | 498.6                          |       | 10.5                   |       | —                 |       | —             |       | —             |       |
| Transfers                                   |       | —                         |       | 10.2                   |       | (10.6                  | )          | —             |       | (0.3               | )          |
| Exchange  differences                       |       | —                         |       | 0.4                    |       | —                 |       | —             |       | —             |       |
| Balance as of  December 31, 2005            |       | 55.4                           |       | 103.9                  |       | 24.3                   |       | 28.6               |       | 1.1                |       |
| **Net  book value as of December 31, 2005** | ** ** | **244.3**                      | ** ** | **152.2**              | ** ** | **58.8**               | ** ** | **395.8**          | ** ** | **5.6**            | ** ** |

 

**Developments2005****Million €**
| ** **                                  | ** ** | ** **        | ** ** | **Loans to**      | ** ** | ** **         | ** ** | ** **               | ** ** | **Investments**                | ** ** |
|---------------------------------------------|------------|-------------------|------------|------------------------|------------|--------------------|------------|--------------------------|------------|--------------------------------|------------|
| ** **                                  | ** ** | ** **        | ** ** | **associated**         | ** ** | ** **         | ** ** | ** **               | ** ** | **accounted for**         | ** ** |
| ** **                                  | ** ** | **Loans to** | ** ** | **companies and** | ** ** | **Other**          | ** ** | ** **               | ** ** | **using the equity** | ** ** |
| ** **                                  | ** ** | **affiliated**    | ** ** | **participating**      | ** ** | **loans and** | ** ** | **Other financial** | ** ** | **method and other** | ** ** |
| ** **                                  | ** ** | **companies**     | ** ** | **interests**          | ** ** | **investments**    | ** ** | **assets**               | ** ** | **financial assets**      | ** ** |
| **Acquisition  cost carried forward**       | ** ** | ** **        | ** ** | ** **             | ** ** | ** **         | ** ** | ** **               | ** ** | ** **                     | ** ** |
| Balance as of  January 1, 2005              |       | 196.3             |       | 102.1                  |       | 65.6               |       | 1,160.3                  |       | 2,814.8                        |       |
| Changes in scope  of consolidation          |       | —            |       | —                 |       | —             |       | (18.8                    | )          | (28.1                          | )          |
| Additions                                   |       | 5.3               |       | 51.6                   |       | 11.3               |       | 109.3                    |       | 125.7                          |       |
| Disposals                                   |       | 6.9               |       | 21.1                   |       | 5.5                |       | 138.0                    |       | 1,490.1                        |       |
| Transfers/Changes  in market value          |       | (55.8             | )          | (7.2                   | )          | (20.0              | )          | (30.7                    | )          | (40.5                          | )          |
| Exchange  differences                       |       | 0.7               |       | 14.7                   |       | 4.4                |       | 23.7                     |       | 23.7                           |       |
| Balance as of  December 31, 2005            |       | 139.6             |       | 140.1                  |       | 55.8               |       | 1,105.8                  |       | 1,405.5                        |       |
| **Accumulated  valuation adjustments**      |       |              |       |                   |       |               |       |                     |       |                           |       |
| Balance as of  January 1, 2005              |       | 65.5              |       | —                 |       | 4.2                |       | 222.2                    |       | 776.2                          |       |
| Changes in scope  of consolidation          |       | —            |       | —                 |       | —             |       | 0.4                      |       | 0.4                            |       |
| Additions                                   |       | 4.8               |       | 2.1                    |       | 0.7                |       | 23.4                     |       | 23.4                           |       |
| Disposals                                   |       | (60.9             | )          | —                 |       | 0.2                |       | (50.2                    | )          | 448.4                          |       |
| Transfers                                   |       | (3.7              | )          | —                 |       | 0.6                |       | (3.8                     | )          | (3.8                           | )          |
| Exchange differences                        |       | —            |       | —                 |       | —             |       | 0.4                      |       | 0.4                            |       |
| Balance as of  December 31, 2005            |       | 127.5             |       | 2.1                    |       | 5.3                |       | 292.8                    |       | 348.2                          |       |
| **Net book value as of December  31, 2005** | ** ** | **12.1**          | ** ** | **138.0**              | ** ** | **50.5**           | ** ** | **813.0**                | ** ** | **1,057.3**                    | ** ** |

 

Additions to investments accounted for using the equity method in 2006were primarily due to investments in N.E. Chemcat Corporation, Heesung-EngelhardCorporation and Prodrive Engelhard LLC acquired in connection with theEngelhard acquisition. The disposals in 2005 related almost entirely to thesale of our 50% stake in Basell.

F-43

----

Additions to investments inaffiliated companies in 2005 concerned, in particular, BASF Polyurethane Specialties(China) Company Ltd. in the amount of €10.7 million, held by BASFBeteiligungsgesellschaft mbH and BASF Aktiengesellschaft.

The shares in otherparticipations and long-term securities were recognized at fair value.

In 2006, there were no long-termsecurities sold; in 2005, the disposal of available-for-sale securitiesgenerated sales proceeds of €6.4 million and a gain of €0.5 million.

The sale of otherparticipations generated a loss of €0.4 million in 2006. The sale of otherparticipations generated proceeds of €65.2 million and a gain of €7.4 millionin2005. The disposal of available-for-sale securities generated income of lessthan €0.1 million in 2004. Due to impairments of other participations and long-termsecurities, write-downs of €3.2 million in 2006, €8.3 million in 2005 and €20.2million in 2004 were charged to income.

The market values ofavailable-for-sale long-term securities and shares in other participations aresummarized below. This includes fixed-term, interest-bearing securities with abook value of €0.5 million that are due within one to five years.

**Million €**
| ** **                                     | ** ** | **2006**        | ** ** | **2005**        | ** ** |
|------------------------------------------------|------------|-----------------|------------|-----------------|------------|
| ** **                                     | ** ** | ** **      | ** ** | ** **      | ** ** | **Recognized** | ** ** | ** ** | ** ** | ** ** | ** ** | **Recognized** | ** ** |
| ** **                                     | ** ** | **Original**    | ** ** | **Book /** | ** ** | **in other** | ** ** | **Original** | ** ** | **Book /** | ** ** | **in other** | ** ** |
| ** **                                     | ** ** | **acquisition** | ** ** | **market**      | ** ** | **comprehensive** | ** ** | **acquisition** | ** ** | **market** | ** ** | **comprehensive** | ** ** |
| ** **                                     | ** ** | **cost**        | ** ** | **values**      | ** ** | ** income** | ** ** | **cost** | ** ** | **values** | ** ** | **income** | ** ** |
| Shares in funds                                |       | 39.7            |       | 39.2            |       | — |   | 4.0 |   | 4.0 |   | — |   |
| Shares in other  participations and securities |       | 208.1           |       | 534.2           |       | 335.4 |   | 221.2 |   | 397.4 |   | 202.8 |   |
| **Total**                                      |       | **247.8**       | ** ** | **573.4**       | ** ** | **335.4** | ** ** | **225.2** | ** ** | **401.4** | ** ** | **202.8** |   |

 

**14.InventoriesMillion €**
| ** **                                      | ** ** | **2006**    | ** ** | **2005**    | ** ** |
|-------------------------------------------------|------------|-------------|------------|-------------|------------|
| Raw materials and factory supplies              |       | 1,656.0     |       | 1,213.8     |       |
| Work-in-process, finished goods and merchandise |       | 4,962.0     |       | 4,148.5     |       |
| Advance payments and services-in-process        | ** ** | 54.4        |       | 67.9        | ** ** |
| **Total**                                       | ** ** | **6,672.4** | ** ** | **5,430.2** | ** ** |

 

Work-in-processand finished goods and merchandise are combined into one item due to theproduction conditions in the chemical industry. Services-in-process relatesmainly to inventory not invoiced at balance sheet date.

Impairmentlosses on inventory amounted to €2.7 million in 2006 and €3.6 million in 2005.Of the total inventory, €1,528.7 million in 2006 and €1,074.3 million in 2005was valued at net realizable value. Reversals of impairment losses are made ifthe reasons for the impairment no longer apply. Reversals amounted to €8.2million in 2006 and 35.4 million in 2005. Inventories were valued using theweighted-average cost method.

F-44

----

**15. Other receivables and miscellaneous assets****Million €**
| ** **                                                                         | ** ** | **2006**    | ** ** | **2005**                | ** ** |
|------------------------------------------------------------------------------------|------------|-------------|------------|-------------------------|------------|
| ** **                                                                         | ** ** | ** **  | ** ** | **Thereof  short-term** | ** ** | ** ** | ** ** | **Thereof  short-term** | ** ** |
| Receivables from  affiliated companies                                             |       | 309.2       |       | 308.9                   |       | 383.8 |   | 383.8 |   |
| Prepaid expenses                                                                   |       | 189.3       |       | 150.5                   |       | 136.1 |   | 123.0 |   |
| Prepaid pension  costs                                                             |       | 366.9       |       | —                  |       | 288.3 |   | — |   |
| Miscellaneous  receivables and other assets                                        |       | 2,354.1     |       | 2,147.9                 |       | 1,302.2 |   | 1,079.6 |   |
| *Thereof receivables from associated companies and  other participating interests* |       | *61.6*      |       | *56.2*                  |       | *55.7* |   | *52.1* |   |
| *Thereof other assets*                                                             | * *   | *2,292.5*   | * *   | *2,091.7*               | * *   | *1,246.5* | * * | *1,027.5* | * * |
| **Total**                                                                          | ** ** | **3,219.5** | ** ** | **2,607.3**             | ** ** | **2,110.4** | ** ** | **1,586.4** | ** ** |

 

Prepaid expenses includedprepayments for operating expenses of €30.4 million in 2006 and €32.9 millionin 2005 as well as prepayments for insurance premiums of €35.0 million in 2006and €28.0 million in 2005.

**Composition of other assetsMillion €**
| ** **                               | ** ** | **2006**    | ** ** | **2005**    | ** ** |
|------------------------------------------|------------|-------------|------------|-------------|------------|
| Tax refund  claims                       |       | 406.5       |       | 276.7       |       |
| Loans and  interest receivables          |       | 28.5        |       | 134.0       |       |
| Derivative  instruments                  |       | 294.3       |       | 296.6       |       |
| Employee  receivables                    |       | 33.3        |       | 31.7        |       |
| Rents and  deposits                      |       | 58.9        |       | 55.7        |       |
| Insurance claims                         |       | 36.1        |       | 12.4        |       |
| Receivables from  joint venture partners |       | 46.0        |       | 129.8       |       |
| Precious metal  trading positions        |       | 1,006.8     |       | —      |       |
| Other                                    |       | 382.1       |       | 309.6       |       |
| **Total**                                | ** ** | **2,292.5** | ** ** | **1,246.5** | ** ** |

 

Preciousmetal trading positions comprised above all long positions in precious metals,which are largely hedged through sales and derivatives, predominately forwardcontracts. The derivatives had a positive market value in the amount of €1.8million. Unhedged precious metal positions were included in this amount.

Theprepaid expenses amounted to €5.1 million in 2006 and €3.9 million in 2005.

**Valuationallowances for doubtful receivables****Million €**
| ** **                  | ** ** | **As of**      | ** ** | **Additions** | ** ** | **Releases**  | ** ** | **Additions**          | ** ** | **Reversals**          | ** ** | **Balance as of** | ** ** |
|-----------------------------|------------|---------------------|------------|---------------|------------|---------------|------------|------------------------|------------|------------------------|------------|-----------------------------|------------|
| ** **                  | ** ** | **January 1,** | ** ** | **affecting** | ** ** | **affecting** | ** ** | **not affecting** | ** ** | **not affecting** | ** ** | **December 31,**       | ** ** |
| ** **                  | ** ** | **2006**            | ** ** | **income**    | ** ** | **income**    | ** ** | **income**             | ** ** | **income**             | ** ** | **2006**                    | ** ** |
| Accounts  receivable, trade |       | 355.8               |       | 85.6          |       | 83.6          |       | 26.2                   |       | 30.7                   |       | 353.3                       |       |
| Miscellaneous  receivables  |       | 46.5                |       | 4.8           |       | 5.4           |       | 0.4                    |       | 3.9                    |       | 42.4                        |       |
| **Total**                   | ** ** | **402.3**           | ** ** | **90.4**      | ** ** | **89.0**      | ** ** | **26.6**               | ** ** | **34.6**               | ** ** | **395.7**                   | ** ** |

 

F-45

----

**Valuation allowances for doubtful receivables****Million €**
| ** **                  | ** ** | **As of**      | ** ** | **Additions** | ** ** | **Releases**  | ** ** | **Additions**          | ** ** | **Reversals**          | ** ** | **Balance as of** | ** ** |
|-----------------------------|------------|---------------------|------------|---------------|------------|---------------|------------|------------------------|------------|------------------------|------------|-----------------------------|------------|
| ** **                  | ** ** | **January 1,** | ** ** | **affecting** | ** ** | **affecting** | ** ** | **not affecting** | ** ** | **not affecting** | ** ** | **December 31,**       | ** ** |
| ** **                  | ** ** | **2005**            | ** ** | **income**    | ** ** | **income**    | ** ** | **income**             | ** ** | **income**             | ** ** | **2005**                    | ** ** |
| Accounts  receivable, trade |       | 336.3               |       | 86.2          |       | 87.5          |       | 38.4                   |       | 17.6                   |       | 355.8                       |       |
| Miscellaneous  receivables  |       | 33.0                |       | 16.7          |       | 4.6           |       | 8.0                    |       | 6.6                    |       | 46.5                        |       |
| **Total**                   | ** ** | **369.3**           | ** ** | **102.9**     | ** ** | **92.1**      | ** ** | **46.4**               | ** ** | **24.2**               | ** ** | **402.3**                   | ** ** |

 

The reversals affectingincome resulted mainly from the improved assessment of the creditworthiness ofour customers.

The reversals not affectingincome related primarily to changes in the scope of consolidation, translationadjustments and write-offs of uncollectible receivables.

***Contingent assets***were immaterial in 2006 and 2005.

**16.Marketable securities, cash and cash equivalents**

Cash and cash equivalents of€834.2 million in 2006 and €907.8 million in 2005 were made up primarily ofcash on hand and bank balances. Additionally, short-term securities in theamount of €55.8 million existed as of December 31, 2006.

**Short-termsecurities****Million €**
| ** **                                 | ** ** | **2006**                        | ** ** | **2005**                 | ** ** |
|--------------------------------------------|------------|---------------------------------|------------|--------------------------|------------|
| ** **                                 | ** ** | **Original  acquisition  cost** | ** ** | **Book/  market  value** | ** ** | **Recognized  in other  comprehensive  income** | ** ** | **Original  acquisition  cost** | ** ** | **Book/  market  value** | ** ** | **Recognized  in other  comprehensive  income** | ** ** |
| Fixed-term,  interest-bearing certificates |       | 15.8                            |       | 15.7                     |       | (0.1 | ) | 13.5 |   | 13.7 |   | 0.2 |   |
| Shares                                     |       | 36.0                            |       | 39.8                     |       | 7.7 |   | 122.0 |   | 169.3 |   | 54.6 |   |
| Other securities                           |       | 0.3                             |       | 0.3                      |       | — |   | — |   | — |   | — |   |
| **Total**                                  | ** ** | **52.1**                        | ** ** | **55.8**                 | ** ** | **7.6** | ** ** | **135.5** | ** ** | **183.0** | ** ** | **54.8** | ** ** |

 

The sale of marketablesecurities resulted in proceeds of €166.4 million and income of €84.1 millionin 2006 and in proceeds of €65.5 million and income of €32.3 million in 2005.In 2004 the sale of marketable securities resulted in proceeds of €20.0 millionand income of €9.2 million.

**Maturities of debt securities****Million €**
| ** **             | ** ** | **2006**                  | ** ** | **2005**                    | ** ** |
|------------------------|------------|---------------------------|------------|-----------------------------|------------|
| ** **             | ** ** | **Original**              | ** ** | **Book / market** | ** ** | **Original** | ** ** | **Book / market** | ** ** |
| ** **             | ** ** | **acquisition cost** | ** ** | **value**                   | ** ** | **acquisition cost** | ** ** | **value** | ** ** |
| Less than 1 year       |       | 6.0                       |       | 5.9                         |       | — |   | — |   |
| Between 1 and 5  years |       | 7.2                       |       | 7.2                         |       | 13.5 |   | 13.7 |   |
| More than 5  years     |       | 2.6                       |       | 2.6                         |       | — |   | — |   |
| **Total**              | ** ** | **15.8**                  | ** ** | **15.7**                    | ** ** | **13.5** | ** ** | **13.7** | ** ** |

 

F-46

----

**17. Capital and reserves****Million €**
| ** **                                                                                                                                                      | ** ** | **Conditional capital** | ** ** | **Authorized capital** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------|------------|-----------------------------|------------|
| ** **                                                                                                                                                      | ** ** | **2006**                     | ** ** | **2005**                    | ** ** | **2006** | ** ** | **2005** | ** ** |
| January 1                                                                                                                                                       |       | 411.7                        |       | 424.0                       |       | 500.0 |   | 500.0 |   |
| Conditional  capital for the stock option program BOP 1999/2000 and the BOP 2001/2005, decrease  due to expiration of option rights                             |       | (5.3                         | )          | (12.3                       | )          | — |   | — |   |
| Conditional  capital to ensure the exercise of options on BASF shares in the event of the issuance  of stock warrants, retirement due to expiry (April 1, 2006) |       | (384.0                       | )          | —                      |       | — |   | — |   |
| **December 31**                                                                                                                                                 | ** ** | **22.4**                     | ** ** | **411.7**                   | ** ** | **500.0** | ** ** | **500.0** | ** ** |

 
| ** **                                                       | ** ** | ** **      | ** ** | **Subscribed**     | ** ** | **Capital**        | ** ** |
|------------------------------------------------------------------|------------|-----------------|------------|--------------------|------------|--------------------|------------|
| ** **                                                       | ** ** | **Outstanding** | ** ** | **capital**        | ** ** | **reserves**       | ** ** |
| **Subscribed capital**                                      | ** ** | **shares**      | ** ** | **Million €** | ** ** | **Million €** | ** ** |
| Outstanding  shares as of December 31, 2006                      |       | 501,090,000     |       | 1,282.8            |       | 3,141.0            |       |
| Repurchased  shares intended to be cancelled                     |       | (1,410,000      | )          | (3.6               | )          | —             |       |
| **Outstanding shares as disclosed  in the financial statements** | ** ** | **499,680,000** | ** ** | **1,279.2**        | ** ** | **3,141.0**        | ** ** |

 

**Share buyback/own shares**

The Board of ExecutiveDirectors received approval at the Annual Meeting on May 4, 2006, to buy backBASF’s shares to a maximum amount of 10% of subscribed capital byNovember 3, 2007. The shares shall be purchased on the stock exchange orthrough a public purchase offer addressed to all shareholders. If BASF sharesare purchased on a stock exchange, the price paid for the shares may not behigher than the highest market price on the buying day and may not be lowerthan 25% of that market price. In the case of a public purchase offer, theprice offered by BASF may be a maximum of 10% higher than the highest marketprice on the third trading day prior to the publishing of the public purchaseoffer. This authorization supersedes the prior authorization to repurchase BASFshares granted by the Annual Meeting on April 28, 2005.

In addition, the Board ofExecutive Directors was authorized at the Annual Meeting on May 4, 2006 topurchase shares through the use of put and call options. The price paid foroptions purchased may not exceed the fair value of such options calculated withrecognized financial models using the same assumptions, such as strike price,while the price received for written options may be less than such value.

The Board of ExecutiveDirectors is authorized to cancel the repurchased shares without the approvalof a further resolution at the Annual Meeting. A sale of treasury shares isonly authorized after a corresponding resolution at the Annual Meeting, exceptwhen, with the approval of the Supervisory Board, the shares are used toacquire companies, parts of companies or participations in companies in returnfor shares.

In 2006, a total of 14,699,000shares, or 2.86% of the issued shares, were acquired under the respectiveapprovals. The average purchase price was €63.84 per share. A total of 13,969,000shares were cancelled by December 31, 2006. Thereof were included 680,000shares that were acquired in 2005. As of the balance sheet date, 1,410,000shares of BASF stock were held by BASF. These were acquired for the purpose ofcancellation. Therefore, these shares reduce the subscribed capital as ofDecember 31, 2006. BASF spent of total of €938.4 million on the share buy-backprogram in 2006.

26,062,229 shares, or 4.8% ofthe issued shares, were acquired in 2005. The average purchase price was €55.05per share.

F-47

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**Conditionalcapital**

Of the conditional capital,€22.4 million is reserved for the exercise of options from the option program forBoard members and senior executives (BOP 2001/2005). In general the intrinsicvalue of exercised options is paid out in cash and no shares are issued fromconditional capital.

**Authorizedcapital**

At the Annual Meeting ofApril 29, 2004, shareholders authorized the Board of Executive Directors, withthe approval of the Supervisory Board, to increase subscribed capital byissuing new shares in an amount of up to €500.0 million against cash orcontribution in kind through May 1, 2009. The Board of Executive Directors isempowered to decide on the exclusion of shareholders’ subscription rights forthese new shares.

**Capitalsurplus**

Capital surplus includesshare premiums from the issuance of shares, the fair value of options andnegative goodwill from the capital consolidation resulting from acquisitions ofsubsidiaries in exchange for issue of BASF shares at par value.

**18.Retained earnings and other comprehensive income****Million €**
| ** **               | ** ** | **2006**     | ** ** | **2005**     | ** ** | **2004**     | ** ** |
|--------------------------|------------|--------------|------------|--------------|------------|--------------|------------|
| Legal reserves           |       | 311.0        |       | 291.7        |       | 258.6        |       |
| Other retained  earnings |       | 12,990.9     |       | 11,636.3     |       | 11,664.5     |       |
| **Total**                | ** ** | **13,301.9** | ** ** | **11,928.0** | ** ** | **11,923.1** | ** ** |

 

Changes in the scope ofconsolidation led to a reduction in the legal reserves of €0.4 million in 2006.In 2005, there were no changes. Transfers from other retained earnings andprofit retained increased legal reserves by €19.7 million in 2006 and €33.1million in 2005. The offsetting of actuarial gains and losses resulted in anincrease in retained earnings of €112.0 in 2006 and a reduction in retainedearnings of €659.9 million in 2005.

**Othercomprehensive income**

Certain expenses and incomehave been recorded according to IFRS outside of the income statement. Includedamong these items are translation adjustments, valuation of securities at fairvalue and changes in the fair value of derivatives held to hedge future cashflows.

**Translationadjustments**

Thedifference between the net equity of a company calculated at the spot exchangerate at the date of the transaction and at the closing rate is recognized as atranslation adjustment in equity and is recorded in income only upon disposal.

**Cash flowhedges**

In2006, the acquisition costs of the hedged inventories and related cost of saleswere increased by €20.4 million due to basis differences of cashflow hedges. In2005, there was a reduction of €17.4 million through cash flow hedges.

Thetotal ineffective portion of all fair value changes of derivatives affecting theincome statement amounted to €14.5 million in 2006 and €3.9 million in 2005.

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**Valuationof securities at fair value**

Changesin value of available-for-sale securities are accounted for in othercomprehensive income, without impacting the income statement, until thesecurities are disposed of. Upon disposal, the changes accumulated in equityare recognized in income.

**19.Minority interests****Million €**
| **Group company**                                      | ** ** | **Partner**                                                                                                                   | ** ** | **2006**              | ** ** | **2005**                | ** ** |
|-------------------------------------------------------------|------------|-------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------|------------|-------------------------|------------|
| ** **                                                  | ** ** | ** **                                                                                                                    | ** ** | **Equity stake** | ** ** | **Million €** | ** ** | **Equity stake** | ** ** | **Million €** | ** ** |
| ** **                                                  | ** ** | ** **                                                                                                                    | ** ** | **(%)**               | ** ** | ** **              | ** ** | **(%)** | ** ** | ** ** | ** ** |
| WINGAS GmbH,  Kassel, Germany                               |       | Gazprom-Group,  Moscow, Russia                                                                                                |       | 35.0                  |       | 75.1                    |       | 35.0 |   | 81.4 |   |
| Yangzi-BASF Styrenics  Co. Ltd.,  Nanjing, China            |       | Yangzi Petrochemical  Corp. Ltd., Nanjing, China                                                                              |       | 40.0                  |       | 44.3                    |       | 40.0 |   | 45.3 |   |
| BASF India Ltd.,  Mumbai, India                             |       | Shares are publicly  traded                                                                                                   |       | 47.3                  |       | 29.3                    |       | 47.3 |   | 28.4 |   |
| BASF PETRONAS Chemicals  Sdn. Bhd.  Petaling Jaya, Malaysia |       | PETRONAS (Petroliam Nasional  Bhd.),  Kuala Lumpur, Malaysia                                                                  |       | 40.0                  |       | 127.9                   |       | 40.0 |   | 117.2 |   |
| BASF SONATRACH  PropanChem S.A.,  Tarragona, Spain     |       | SONATRACH,  Algiers, Algeria                                                                                                  |       | 49.0                  |       | 50.0                    |       | 49.0 |   | 36.9 |   |
| BASF FINA  Petrochemicals Ltd.,  Port Arthur, Texas    |       | Total Petrochemicals Inc.,  Houston, Texas                                                                                    |       | 40.0                  |       | 114.3                   |       | 40.0 |   | 124.4 |   |
| Shanghai BASF  Polyurethane Company  Shanghai, China        |       | Shanghai Hua Yi  (Group) Company,

Shanghai, China and SINOPEC  Shanghai Gao QIAO Petrochemical  Corporation, Shanghai, China |       | 30.0                  |       | 43.1                    |       | 30.0 |   | 29.8 |   |
| Other                                                       |       |                                                                                                                          |       |                  |       | 46.5                    |       |   |   | 18.4 |   |
| **Total**                                                   | ** ** | ** **                                                                                                                    | ** ** | ** **            | ** ** | **530.5**               | ** ** | ** ** | ** ** | **481.8** | ** ** |

 

**20.Provisions for pensions and similar obligations**

Inaddition to state pension plans, most employees are entitled to Company pensionbenefits from either defined contribution or defined benefit plans. Benefitsgenerally depend on years of service, contributions or compensation, and takeinto consideration the legal framework of labor and social security laws of thecountries where companies are located. To control the risks of changing marketconditions, as well as increasing life-expectancies, since 2004 new employeeshave been increasingly offered defined contribution plans.

ForBASF Aktiengesellschaft and other German subsidiaries, a basic level ofbenefits is provided by the legally independent funded plan, BASF PensionskasseVVaG, which is financed by contributions of employees and the Company and thereturns on its assets. In mid-2004, the defined benefit plan of BASF PensionskasseVVaG was closed and a new defined contribution plan was introduced. To fulfilllegal liquidity obligations (Section 53c VAG), a contribution of €34.7 millionin 2006 and €135.5 million in 2005 was made to the equity of the BASFPensionskasse, which did not have an impact on the income statement. Additionalemployee pension commitments at German Group companies are financed almostexclusively via pension provisions.

InDecember 2005, BASF established a Contractual Trust Arrangement (CTA), “BASFPensionstreuhand e.V.,” and contributed funds of €3,660 million to financeemployee pension commitments of BASF Aktiengesellschaft. The funds areadministered by this trustee and serve exclusively to finance the pension obligationsof BASF Aktiengesellschaft. Since the contributed funds are classified as planassets according to IAS 19, they are netted against existing pension obligations.

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Inthe case of non-German subsidiaries, pension benefits are covered in some casesby pension provisions, but mainly by external insurance companies or pensionfunds.

Themeasurement date for most of the pension plans is December 31. The most recentactuarial mortality tables are used.

Thevaluations using the projected unit credit method per IAS 19 were carried outunder the following assumptions:

**Assumptions used to determine thedefined benefit obligation as of December 31**
| ** **                                | ** ** | **Germany**   | ** ** | **Foreign**   | ** ** |
|-------------------------------------------|------------|---------------|------------|---------------|------------|
| ** **                                | ** ** | **in %** | ** ** | **in %** | ** ** |
| **(weighted average)**               | ** ** | **2006**      | ** ** | **2005**      | ** ** | **2006** | ** ** | **2005** | ** ** |
| Discount rate                             |       | 4.50          |       | 4.25          |       | 5.31 |   | 5.18 |   |
| Projected  increase of wages and salaries |       | 2.50          |       | 2.50          |       | 4.46 |   | 4.55 |   |
| Projected pension  increase               |       | 1.75          |       | 1.50          |       | 0.56 |   | 0.51 |   |

 

**Assumptionsused to determine expenses for pension benefits**
| ** **                                | ** ** | **Germany**   | ** ** | **Foreign**   | ** ** |
|-------------------------------------------|------------|---------------|------------|---------------|------------|
| ** **                                | ** ** | **in %** | ** ** | **in %** | ** ** |
| **(weighted average)**               | ** ** | **2006**      | ** ** | **2005**      | ** ** | **2004** | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
| Interest rate                             |       | 4.25          |       | 5.25          |       | 5.75 |   | 5.42 |   | 5.58 |   | 5.93 |   |
| Projected  increase of wages and salaries |       | 2.50          |       | 2.50          |       | 2.50 |   | 4.48 |   | 3.80 |   | 3.88 |   |
| Projected  pension increase               |       | 1.50          |       | 1.50          |       | 1.50 |   | 0.49 |   | 0.51 |   | 0.60 |   |
| Expected return on plan  assets           |       | 4.92          |       | 5.16          |       | 6.25 |   | 7.71 |   | 8.21 |   | 8.39 |   |

 

Similar obligations refer tocommitments by BASF’s North American Group companies to provide for the costsof medical and life insurance benefits for employees and eligible dependentsafter retirement. They are based upon an actuarial valuation, considering thefuture cost trend and a discount rate of 5.75%.

The assumptions regarding theoverall expected long-term rate of return are based on forecasts of expectedindividual asset class returns and the desired portfolio structure. Theforecasts are based on long-term historical average returns and take intoconsideration the current yield level and the inflation trend. In 2006, the interestrate was adjusted to developments in the capital markets.
| ** **                                        | ** ** | **Target**                      | ** ** | **Plan assets** | ** ** |
|---------------------------------------------------|------------|---------------------------------|------------|----------------------|------------|
| ** **                                        | ** ** | **allocation (in %)** | ** ** | **(in %)**      | ** ** |
| **Plan asset portfolio structure** | ** ** | **2007**                        | ** ** | **2006**             | ** ** | **2005** | ** ** |
| Equities                                          |       | 35                              |       | 39                   |       | 31 |   |
| Debt securities                                   |       | 53                              |       | 51                   |       | 30 |   |
| Real estate                                       |       | 5                               |       | 3                    |       | 3 |   |
| Other                                             |       | 7                               |       | 7                    |       | 36 |   |
| **Total**                                         | ** ** | **100**                         | ** ** | **100**              | ** ** | **100** | ** ** |

 

Thehigh percentage of assets under other in 2005 was due to the inclusion of BASFPensionstreuhand e.V. for the first time. Funds contributed in December 2005were first placed on deposit, and were invested according to the target assetallocation in 2006.

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The target asset allocationhas been defined using asset liability studies and is reviewed regularly.Accordingly, plan assets are aligned with long-term pension liabilities, takinginto consideration investment risks and adherence to government regulations.The existing portfolio structure is oriented towards the target assetallocation. In addition, current market views are taken into consideration. Inorder to mitigate risk and maximize return, a widely spread global portfolio ofindividual asset classes is held.

**Development of the definedbenefit obligationMillion €**
| ** **                                        | ** ** | **2006**     | ** ** | **2005**     | ** ** |
|---------------------------------------------------|------------|--------------|------------|--------------|------------|
| Defined benefit  obligation as of January 1       |       | 11,907.5     |       | 9,814.1      |       |
| Service cost                                      |       | 262.7        |       | 192.7        |       |
| Interest cost                                     |       | 541.9        |       | 527.4        |       |
| Benefits paid                                     |       | (631.8       | )          | (566.0       | )          |
| Participants’  contributions                 |       | 40.0         |       | 39.3         |       |
| Change in  actuarial assumptions                  |       | (57.0        | )          | 1,530.4      |       |
| Acquisition  related effects                      |       | 938.9        |       | 71.7         |       |
| Settlements and  other plan changes               |       | (61.9        | )          | 5.5          |       |
| Exchange rate  changes                            |       | (246.9       | )          | 292.4        |       |
| **Defined benefit obligation as  of December 31** | ** ** | **12,693.4** | ** ** | **11,907.5** |       |

 

**Developmentof plan assetsMillion €**
| ** **                                                        | ** ** | **2006**     | ** ** | **2005**     | ** ** |
|-------------------------------------------------------------------|------------|--------------|------------|--------------|------------|
| Plan assets as  of January 1                                      |       | 11,015.2     |       | 6,204.3      |       |
| Expected return  on plan assets                                   |       | 619.4        |       | 421.7        |       |
| Difference  between expected and actual returns                   |       | 158.9        |       | 438.4        |       |
| Employer  contributions                                           |       | 187.7        |       | 244.5        |       |
| One-time  contribution to fund the CTA by BASF Aktiengesellschaft |       | —       |       | 3,660.0      |       |
| Participants’  contributions                                 |       | 40.0         |       | 39.3         |       |
| Benefits paid                                                     |       | (404.6       | )          | (336.2       | )          |
| Acquisition  related effects                                      |       | 697.1        |       | 62.6         |       |
| Other changes                                                     |       | (19.8        | )          | 26.4         |       |
| Exchange rate  changes                                            |       | (215.4       | )          | 254.2        |       |
| **Plan assets as of December 31**                                 | ** ** | **12,078.5** | ** ** | **11,015.2** |       |

 

The pension funds heldsecurities issued by BASF Group companies, whose total market value amounted to€11.9 million on December 31, 2006 and €13.4 million on December 31, 2005. Themarket value of real estate held by BASF pension funds and rented to BASF Groupcompanies amounted to €47.3 million as of December 31, 2006 and €43.8 millionas of December 31, 2005. No material transactions took place between thepension funds and BASF Group companies in 2006, 2005 and 2004.

F-51

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The carrying amounts in the balance sheet are as follows:

**Reconciliation of the definedbenefit obligation to the provisions for pensions and similar obligationsMillion €**
| ** **                                           | ** ** | **2006**    | ** ** | **2005**    | ** ** |
|------------------------------------------------------|------------|-------------|------------|-------------|------------|
| Defined benefit  obligation as of December 31        |       | 12,693.4    |       | 11,907.5    |       |
| less plan assets as of December 31                   |       | 12,078.5    |       | 11,015.2    |       |
| **Funded  status**                                   | ** ** | **614.9**   | ** ** | **892.3**   | ** ** |
| Unrecognized  past service cost                      |       | 0.1         |       | (2.7        | )          |
| Asset ceiling in  accordance with IAS 19.58          |       | 10.0        |       | 1.9         |       |
| Capitalized  defined benefit asset                   |       | 366.9       |       | 288.3       |       |
| **Provisions  for pensions**                         | ** ** | **991.9**   | ** ** | **1,179.8** | ** ** |
| Provisions for  similar obligations                  |       | 460.1       |       | 366.8       |       |
| **Provisions for pensions and  similar obligations** | ** ** | **1,452.0** | ** ** | **1,546.6** | ** ** |

 

Actuarialgains and losses are recognized directly in retained earnings in the reportingperiod in which they occur. Past service costs are amortized over the averageservice period of the entitled employees until the benefits become vested.

€159.6million in actuarial gains were charged to retained earnings in 2006 and €1,075.9million in actuarial losses in 2005. Since the introduction of this accountingpolicy, a total actuarial loss of €1,280.8 million has been charged againstretained earnings, not taking deferred taxes into account.

**Currentfunding situation of the plans****Million €**
| ** **                                            | ** ** | **2006**       | ** ** | **2005**             | ** ** |
|-------------------------------------------------------|------------|----------------|------------|----------------------|------------|
| ** **                                            | ** ** | **Defined**    | ** ** | ** **           | ** ** | **Defined** | ** ** | ** ** | ** ** |
| ** **                                            | ** ** | **benefit**    | ** ** | ** **           | ** ** | **benefit** | ** ** | ** ** | ** ** |
| ** **                                            | ** ** | **obligation** | ** ** | **Plan assets** | ** ** | **obligation** | ** ** | **Plan assets** | ** ** |
| Unfunded pension  plans                               |       | 676.0          |       | —               |       | 606.3 |   | — |   |
| Partially funded  pension plans                       |       | 2,872.3        |       | 2,586.4              |       | 7,299.2 |   | 6,758.5 |   |
| **Total  of pension plans that are not fully funded** | ** ** | **3,548.3**    | ** ** | **2,586.4**          | ** ** | **7,905.5** | ** ** | **6,758.5** | ** ** |
| Fully funded  pension plans                           |       | 9,145.1        |       | 9,492.1              |       | 4,002.0 |   | 4,256.7 |   |
| **Total**                                             | ** ** | **12,693.4**   | ** ** | **12,078.5**         | ** ** | **11,907.5** | ** ** | **11,015.2** | ** ** |

 

The transfer between plansthat are partially funded and plans that are fully funded was mainly due tochanges in the BASF Pensionskasse VVaG.

**Differencesbetween actuarial assumptions and the actual development****Million €**
| ** **                                 | ** ** | **2006**  | ** ** | **2005**  | ** ** | **2004**    | ** ** |
|--------------------------------------------|------------|-----------|------------|-----------|------------|-------------|------------|
| Defined benefit  obligation                |       | 12,693.4  |       | 11,907.5  |       | 9,814.1     |       |
| *Thereof impact of experience adjustments* | * *   | *(59.2*   | *)*        | *19.5*    | * *   | *22.6*      | * *   |
| Plan assets                                |       | 12,078.5  |       | 11,015.2  |       | 6,204.3     |       |
| *Thereof impact of experience adjustments* | * *   | *158.9*   | * *   | *438.4*   | * *   | *192.8*     | * *   |
| **Funded status**                          | ** ** | **614.9** | ** ** | **892.3** | ** ** | **3,609.8** |       |

 

F-52

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**Expectedpayments resulting from pension obligations existing as of December 31, 2006****Million €**
| ** **        | ** ** | ** ** | ** ** |
|-------------------|------------|------------|------------|
| 2007              |       | 652.5      |       |
| 2008              |       | 642.7      |       |
| 2009              |       | 654.6      |       |
| 2010              |       | 685.9      |       |
| 2011              |       | 696.8      |       |
| 2012 through 2016 |       | 3,721.7    |       |

 

**Composition of expenses for pension benefits****Million €**
| ** **                                                                         | ** ** | **2006**  | ** ** | **2005**  | ** ** | **2004**  | ** ** |
|------------------------------------------------------------------------------------|------------|-----------|------------|-----------|------------|-----------|------------|
| Service cost                                                                       |       | 262.7     |       | 192.7     |       | 185.9     |       |
| Amortization of  past service cost                                                 |       | 2.4       |       | 1.9       |       | 6.0       |       |
| Settlement  gains/losses                                                           |       | (40.4     | )          | (3.6      | )          | (10.2     | )          |
| Expenses for  similar obligations                                                  |       | 2.4       |       | 0.1       |       | .         |       |
| **Expenses  for defined benefit plans charged to income from operations**          | ** ** | **227.1** | ** ** | **191.1** | ** ** | **181.7** | ** ** |
| Interest cost                                                                      |       | 541.9     |       | 527.4     |       | 528.6     |       |
| Expected return  on plan assets                                                    |       | (619.4    | )          | (421.7    | )          | (409.6    | )          |
| Expenses for  similar obligations                                                  |       | 21.4      |       | 15.1      |       | 15.8      |       |
| **Expenses(+)/Income(–)  from defined benefit plans in the financial result** | ** ** | **(56.1** | **)**      | **120.8** | ** ** | **134.8** | ** ** |
| **Expenses  for defined contribution plans**                                       | ** ** | **59.6**  | ** ** | **51.7**  | ** ** | **45.7**  | ** ** |
| **Expenses for pension benefits**                                                  | ** ** | **230.6** | ** ** | **363.6** | ** ** | **362.2** | ** ** |

 

The estimated contributionpayments for defined benefit plans for 2007 are €128.3 million. In addition, contributionsto public pension plans amounted to €354.1 million in 2006, €317.7 million in2005 and €307.6 million in 2004.

**21. Otherprovisions****Million €**
| ** **                                                | ** ** | **2006**    | ** ** | **2005**       | ** ** |
|-----------------------------------------------------------|------------|-------------|------------|----------------|------------|
| ** **                                                | ** ** | ** **  | ** ** | **Thereof**    | ** ** | ** ** | ** ** | **Thereof** | ** ** |
| ** **                                                | ** ** | **Total**   | ** ** | **short-term** | ** ** | **Total** | ** ** | **short-term** | ** ** |
| Recultivation  obligations                                |       | 649.4       |       | 16.7           |       | 589.4 |   | 0.2 |   |
| Environmental  protection and remediation costs           |       | 271.5       |       | 67.4           |       | 252.9 |   | 63.8 |   |
| Personnel costs                                           |       | 1,749.9     |       | 1,037.3        |       | 1,599.2 |   | 929.0 |   |
| Sales and  purchase risks                                 |       | 1,064.5     |       | 996.0          |       | 919.0 |   | 917.0 |   |
| Restructuring  costs                                      |       | 154.8       |       | 140.0          |       | 266.3 |   | 241.8 |   |
| Legal, damage  claims, guarantees and related commitments |       | 200.0       |       | 119.2          |       | 446.9 |   | 238.3 |   |
| Other                                                     |       | 1,838.0     |       | 471.7          |       | 1,480.0 |   | 372.4 |   |
| **Total**                                                 | ** ** | **5,928.1** | ** ** | **2,848.3**    | ** ** | **5,553.7** | ** ** | **2,762.5** | ** ** |

 

**Recultivationobligations** concernestimated costs for the filling of wells and the removal of productionequipment after the end of production.

**Environmentalprotection and remediation costs** concern expected costs for rehabilitating contaminated sites,recultivating landfills, removal of environmental contamination at existingproduction or storage sites and other measures.

**Thepersonnel cost** provisions include obligations to grantlong-service bonuses and anniversary payments, variable compensation includingrelated social security contributions and other accruals as well as provisionsfor early retirement programs for employees nearing retirement. BASF’s Germangroup companies have various programs that entitle employees who are at least 55years old to reduce their working hours to 50% for up to six years. Under sucharrangements, employees generally work full time

F-53

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during the first half of thetransition period and leave the Company at the start of the second half.Employees receive a minimum 85% of their net salary throughout the transitionperiod.

**The salesand purchase risks**provisionsinclude warranties, product liability, customer rebates, payment discounts andother price reductions, sales commissions and provisions for expected losses oncommitted purchases as well as provisions for onerous contracts.

**Restructuringcosts** provisionsinclude severance payments to employees as well as specific site shutdown orrestructuring costs, including the costs for demolition and similar measures.Additions in 2006 consist primarily of restructuring measures in the Fine Chemicalsdivision. Additions in 2005 comprised personnel measures at the Ludwigshafensite, restructuring measures in North America (NAFTA) and restructuringexpenses within the Agricultural Products & Nutrition segment. Provisionswere reduced in 2006 and 2005 due to restructuring measures initiated in theprior year and, in 2006, especially to severance payments.

**Provisionsfor legal, damage claims, guarantees and related commitments** include the expected cost of litigation,obligations under damage claims, other guarantees and for antitrustproceedings. The reversal carried out in 2006 was primarily due to thetermination of the European Commission’s investigation against BASF and otherproducers of methacrylates and polymethacrylates (see Note 24) as well as theprovision no longer required for guarantees and retained risks from thepharmaceuticals business sold.

**Other** also included long-term tax provisions. Theserelate to amounts accrued for expected tax payments as well as risks associatedwith tax audits.

**Otherchanges** in the amountof €142.3 million contained increases in provisions due to acquisitions andchanges in the scope of consolidation. Provisions developed as follows:

**Million €**
| ** **                                                | ** ** | **January 1,** | ** ** | ** **    | ** ** | **Interest**    | ** ** | ** **      | ** ** | ** **    | ** ** | **Other**   | ** ** | **December**      | ** ** |
|-----------------------------------------------------------|------------|---------------------|------------|---------------|------------|-----------------|------------|-----------------|------------|---------------|------------|-------------|------------|-------------------|------------|
| ** **                                                | ** ** | **2006**            | ** ** | **Additions** | ** ** | **compounding** | ** ** | **Utilization** | ** ** | **Reversals** | ** ** | **changes** | ** ** | **31, 2006** | ** ** |
| Recultivation  obligations                                |       | 589.4               |       | 85.8          |       | 17.1            |       | (17.6           | )          | (30.3         | )          | 5.0         |       | **649.4**         |       |
| Environmental  protection and remediation costs           |       | 252.9               |       | 85.1          |       | 2.7             |       | (45.9           | )          | (17.8         | )          | (5.5        | )          | **271.5**         |       |
| Personnel costs                                           |       | 1,599.2             |       | 1,159.6       |       | 18.0            |       | (878.0          | )          | (92.3         | )          | (56.6       | )          | **1,749.9**       |       |
| Sales and  purchase risks                                 |       | 919.0               |       | 1,242.7       |       | .               |       | (1,007.7        | )          | (74.6         | )          | (14.9       | )          | **1,064.5**       |       |
| Restructuring  costs                                      |       | 266.3               |       | 72.7          |       | 0.4             |       | (163.8          | )          | (25.3         | )          | 4.5         |       | **154.8**         |       |
| Legal, damage  claims, guarantees and related commitments |       | 446.9               |       | 39.3          |       | 8.9             |       | (105.3          | )          | (160.8        | )          | (29.0       | )          | **200.0**         |       |
| Other                                                     |       | 1,480.0             |       | 891.3         |       | 5.1             |       | (513.7          | )          | (126.3        | )          | 101.6       |       | **1,838.0**       |       |
| **Total**                                                 | ** ** | **5,553.7**         | ** ** | **3,576.5**   | ** ** | **52.2**        | ** ** | **(2,732.0**    | **)**      | **(527.4**    | **)**      | **5.1**     | ** ** | **5,928.1**       | ** ** |

 

**RestructuringCharges**

**Fine Chemicals**:Ongoing margin deterioration through increased standardization in the nutritionbusinesses, especially in Lysin and Vitamin C as well as the drop in 2006 inthe market for Pseudoephedrin, a pharma active ingredient, resulted inunsatisfying earnings. As a consequence, a major restructuring package wasdecided for the Fine Chemicals division resulting in charges of €123 million in2006 for restructuring of these businesses and facilities, including €68million in provisions that are expected to be utilized during theimplementation phase. The implementation of the measures was started in mid2006 and we expect it to be completed by the end of 2007.

Thetotal charge includes €65 million in revenues for reimbursement of the VitaminC fine, €41 million in charges for headcount measures, €102 million inwrite-downs of intangible assets, property, plant and equipment, and €45million in other expenses.

The largest portion of the charges (€114 million) wasincurred at the production sites in Gunsan, Korea (Lysin/Vitamins) and Minden,Germany (Pharma Actives). Expenses and revenues are reported as other operatingexpenses and other operating income, respectively, and are charged to the Fine Chemicalsdivision.

**Intermediates**: BASFhas decided to mothball its tetrahydrofuran (THF) plant in Caojing, China. Theplant has a capacity of 80,000 metric tons and supplies the raw material THF tothe polytetrahydrofuran (PolyTHF®)manufacturing plant at the same site. The mothballing of the THF plant willstart in the first quarter of 2007, and the PolyTHF plant will be supplied inthe future from BASF’s global production network. The THF plant was shut downfor technical reasons after a salt leakage in the first quarter of 2006 and hasnot been started up since then. The mothballing of the plant is part of theglobal restructuring of BASF’s butanediol value-adding chain in response totough market conditions, in particular raw material price increases anddevelopments in the competitive environment. The mothballing of the THF plantled to an impairment loss of €184 million in 2006. For additional costsexpected in connection with the restructuring, a provision of €34 million wasset up. There will be no layoffs. The employees will be deployed in ongoing andpipeline projects. The total amount of €218 million is reported in otheroperating expenses and charged to the Intermediates division.

**Personnel measures at theLudwigshafen site**: In order to adjust the number of workforcewithout enforced redundancies, it was agreed with the employee representativesto offer voluntary termination benefits to employees whose workplace becameredundant in the course of restructuring measures. A target headcount of 32,000employees in BASF Aktiengesellschaft should be reached in 2008.The offers madein 2005 and 2004 were accepted by around 1,100 employees. Therefore, provisionsof €35 million in 2005 and €102 million in 2004 were set up. These amounts werecharged to other operating expenses and allocated to the business unitsconcerned. €119 million were used to cover severance payments, thereof €75million in 2006. The amounts paid depend on the actual salary level and the ageof the employees affected. The remaining provisions are expected to be utilizedduring 2007.

F-54

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**22.Liabilities**

**Financialindebtedness****Million €**
| ** **                                                | ** ** | ** **  | ** ** | ** **             | ** ** | **Carrying amounts based on** | ** ** |
|-----------------------------------------------------------|------------|-------------|------------|------------------------|------------|----------------------------------------------|------------|
| ** **                                                | ** ** | **Nominal** | ** ** | **Effective**          | ** ** | **effective interest method**      | ** ** |
| ** **                                                | ** ** | **volume**  | ** ** | **interest rate** | ** ** | **2006**                                     | ** ** | **2005** | ** ** |
| 3.5% Euro Bond 2003/2010 of  BASF Aktiengesellschaft      |       | 1,000       |       | 3.63                   | %          | 995.7                                        |       | 994.8 |   |
| 3.375% Euro Bond 2005/2012 of  BASF Aktiengesellschaft    |       | 1,400       |       | 3.42                   | %          | 1,396.8                                      |       | 1,396.0 |   |
| 4% Euro Bond 2006/2011 of BASF Aktiengesellschaft         |       | 1,000       |       | 4.05                   | %          | 998.2                                        |       | — |   |
| 4.5% Euro Bond 2006/2016 of  BASF Aktiengesellschaft      |       | 500         |       | 4.62                   | %          | 495.6                                        |       | — |   |
| 3 Month EURIBOR Bond 2006/2009 of BASF Aktiengesellschaft |       | 500         |       | variable               |       | 499.7                                        |       | — |   |
| Other bonds                                               |       |        |       |                   |       | 613.8                                        |       | 308.9 |   |
| Commercial paper                                          |       |        |       |                   |       | 3,219.3                                      |       | — |   |
| **Bonds and other liabilities to the capital  markets**   | ** ** | ** **  | ** ** | ** **             | ** ** | **8,219.1**                                  | ** ** | **2,699.7** | ** ** |
| Liabilities to credit institutions                        |       |        |       |                   |       | 1,264.0                                      |       | 1,241.3 |   |
| **Total**                                                 | ** ** | ** **  | ** ** | ** **             | ** ** | **9,483.1**                                  | ** ** | **3,941.0** | ** ** |

 

**Breakdown of financial liabilities by currency:Million €**
| ** **        | ** ** | **2006**    | ** ** | **2005**    | ** ** |
|-------------------|------------|-------------|------------|-------------|------------|
| U.S.dollar        |       | 4,250.1     |       | 718.9       |       |
| Euro              |       | 4,545.1     |       | 2,631.9     |       |
| Malaysian ringgit |       | 18.3        |       | 16.3        |       |
| Brazilian real    |       | 125.4       |       | 2.0         |       |
| Chinese renminbi  |       | 504.3       |       | 529.1       |       |
| Other             |       | 39.9        |       | 42.8        |       |
| **Total**         | ** ** | **9,483.1** | ** ** | **3,941.0** | ** ** |

 

**Maturitiesof financial liabilities:****Million €**
| ** **                      | ** ** | **2006**    | ** ** | **2005**    | ** ** |
|---------------------------------|------------|-------------|------------|-------------|------------|
| Following year 1                |       | 3,694.9     |       | 259.3       |       |
| Following year 2                |       | 43.7        |       | 12.3        |       |
| Following year 3                |       | 694.4       |       | 97.8        |       |
| Following year 4                |       | 1,062.1     |       | 45.7        |       |
| Following year 5                |       | 1,058.0     |       | 1,041.3     |       |
| Following year 6 and thereafter |       | 2,930.0     |       | 2,484.6     |       |
| **Total**                       | ** ** | **9,483.1** | ** ** | **3,941.0** | ** ** |

 

**Bonds andother liabilities to the capital markets**

Other bonds consistedprimarily of industrial revenue and pollution control bonds that are used to financeinvestments in the United States. In addition, bonds with a value of €299.2million were assumed in connection with the acquisition of Engelhard Corp. Theweighted-average interest rate was 3.8% in 2006 and 2.7% in 2005. Theweighted-average effective interest rate was 3.8% in 2006, and 2.7% in 2005.The average maturity amounted to 214 months as of December 31, 2006 and 317months as of December 31, 2005.

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**Liabilitiesto credit institutions**

Liabilities to creditinstitutions related to a large number of different credit institutions invarious countries. Liabilities to credit institutions denominated in ringgitand renminbi resulted from the local financing of investments in Malaysia andChina. 

BASF Aktiengesellschafthad committed and unused credit lines with variable interest rates of €4,898.3million as of December 31, 2006 and €2,119.2 million as of December 31, 2005.Additional uncommitted credit lines of BASF Aktiengesellschaft amounted to€227.0 million as of December 31, 2006 and €227.0 million as of December 31,2005 – these are free of any commitment fees.

The weighted-averageinterest rate on borrowings was 6.1% on December 31, 2006 and 4.7% in 2005.

Liabilities to companiesin which participations are held include the proportional amount of liabilitiesof joint venture companies accounted for using the proportional consolidationmethod of €110.5 million as of December 31, 2006 and €80.0 million as ofDecember 31, 2005. Further liabilities relating to associated companiesaccounted for using the equity or cost method were €190.0 million as ofDecember 31, 2006 and €253.1 million as of December 31, 2005.

**Maturitiesof liabilities****Million €**
| ** **                                         | ** ** | **2006**           | ** ** | **2005**           | ** ** |
|----------------------------------------------------|------------|--------------------|------------|--------------------|------------|
| ** **                                         | ** ** | **Less than** | ** ** | ** **         | ** ** | **More than** | ** ** | **Less than** | ** ** | ** ** | ** ** | **More than** | ** ** |
| ** **                                         | ** ** | **1 year**    | ** ** | **1-5 years** | ** ** | **5 years** | ** ** | **1 year** | ** ** | **1-5 years** | ** ** | **5 years** | ** ** |
| **Accounts payable, trade**                        | ** ** | **4,754.7**        | ** ** | **—**         | ** ** | **—** | ** ** | **2,777.0** | ** ** | **—** | ** ** | **—** | ** ** |
| Bonds and other  liabilities to the capital market |       | 3,219.3            |       | 2,596.8            |       | 2,403.0 |   | — |   | 1,009.0 |   | 1,690.7 |   |
| Liabilities to credit  institutions                |       | 475.6              |       | 261.4              |       | 527.0 |   | 259.3 |   | 188.0 |   | 794.0 |   |
| **Financial indebtedness**                         | ** ** | **3,694.9**        | ** ** | **2,858.2**        | ** ** | **2,930.0** | ** ** | **259.3** | ** ** | **1,197.0** | ** ** | **2,484.7** | ** ** |
| Advances received on  orders                       |       | 108.6              |       | —             |       | — |   | 121.3 |   | — |   | — |   |
| Liabilities on bills                               |       | 46.6               |       | 3.4                |       | — |   | 45.0 |   | 2.5 |   | — |   |
| Liabilities relating to  social security           |       | 136.4              |       | 18.3               |       | — |   | 174.0 |   | 0.1 |   | — |   |
| Non-trade liabilities  to joint venture partners   |       | 187.5              |       | 182.8              |       | 382.8 |   | 116.9 |   | 93.0 |   | 473.1 |   |
| Derivative instruments                             |       | 149.3              |       | 30.9               |       | — |   | 154.0 |   | 31.4 |   | — |   |
| Liabilities arising  from finance leases           |       | 15.3               |       | 55.5               |       | 34.1 |   | 15.9 |   | 50.0 |   | 51.6 |   |
| Miscellaneous  liabilities                         |       | 1,052.9            |       | 66.0               |       | 1.3 |   | 985.2 |   | 75.1 |   | 87.4 |   |
| Deferred income                                    |       | 127.1              |       | 196.5              |       | — |   | 86.7 |   | 178.6 |   | — |   |
| **Other liabilities**                              | ** ** | **1,823.7**        | ** ** | **553.4**          | ** ** | **418.2** | ** ** | **1,699.0** | ** ** | **430.7** | ** ** | **612.1** | ** ** |
| **Total**                                          | ** ** | **10,273.3**       | ** ** | **3,411.6**        | ** ** | **3,348.2** | ** ** | **4,735.3** | ** ** | **1,627.7** | ** ** | **3,096.8** | ** ** |

 

Finance leasing liabilitiesare detailed in Note 27.

**Securedliabilities and contingent liabilities****Million €**
| ** **                          | ** ** | **2006** | ** ** | **2005** | ** ** |
|-------------------------------------|------------|----------|------------|----------|------------|
| Liabilities to credit  institutions |       | 6.6      |       | 4.2      |       |
| Other liabilities                   |       | 6.9      |       | 7.1      |       |
| **Total**                           | ** ** | **13.5** | ** ** | **11.3** | ** ** |

 

Certain liabilities weresecured with mortgages on land and €6.9 million of securities were pledged as collateral.In addition, BASF Aktiengesellschaft has given covenants in favor of BASFPensionskasse VVaG with regard to adhering to certain balance sheet ratios.

F-56

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**23.Contingent liabilities and other financial obligations**

The contingencies listedbelow are stated at nominal value.

**Contingent liabilitiesMillion €**
| ** **                                                | ** ** | **2006**  | ** ** | **2005**  | ** ** |
|-----------------------------------------------------------|------------|-----------|------------|-----------|------------|
| Bills of exchange                                         |       | 10.7      |       | 8.9       |       |
| *Thereof  to affiliated companies*                        | * *   | *—*  | * *   | *0.3*     | * *   |
| Guarantees                                                |       | 330.4     |       | 330.8     |       |
| *Thereof  to affiliated companies*                        | * *   | *70.0*    | * *   | *50.6*    | * *   |
| Warranties                                                |       | 35.8      |       | 93.8      |       |
| Granting collateral on  behalf of third-party liabilities |       | 16.3      |       | 12.7      |       |
| **Total**                                                 | ** ** | **393.2** | ** ** | **446.2** | ** ** |

 

**Other financial obligationsMillion €**
| ** **                                                             | ** ** | **2006**    | ** ** | **2005**    | ** ** |
|------------------------------------------------------------------------|------------|-------------|------------|-------------|------------|
| Remaining cost of  construction in progress                            |       | 2,422.7     |       | 1,927.8     |       |
| *Thereof  purchase commitment*                                         | * *   | *687.2*     | * *   | *692.2*     | * *   |
| *Thereof  for the purchase of intangible assets*                       | * *   | *18.8*      | * *   | *2.2*       | * *   |
| Obligation arising from  long-term leases (excluding financing leases) |       | 1,281.0     |       | 827.4       |       |
| Payment and loan  commitments and other financial obligations          |       | 7.5         |       | 92.4        |       |
| **Total**                                                              | ** ** | **3,711.2** | ** ** | **2,847.6** | ** ** |

 

**Obligations from long-termrental and lease contracts (excluding financing leases)Million €**
| ** **          | ** ** | ** **  | ** ** |
|---------------------|------------|-------------|------------|
| 2007                |       | 329.9       |       |
| 2008                |       | 182.2       |       |
| 2009                |       | 142.8       |       |
| 2010                |       | 107.2       |       |
| 2011                |       | 86.9        |       |
| 2012 and thereafter |       | 432.0       |       |
| **Total**           | ** ** | **1,281.0** | ** ** |

 

Property, plant and equipmentused under long-term leases primarily concern buildings and IT infrastructure.Finance leasing obligations are explained in detail in Note 27.

**Purchasecommitments for raw materials and natural gas from long-term contracts**

The Company has entered intolong-term purchase contracts for natural gas, which are subject to continuousprice adjustments. These obligations to purchase relate to long-term supplycontracts with customers with terms between one and 13 years.

The Company purchases rawmaterials, both on the basis of long-term contracts and on spot markets. Thefixed purchase obligations of long-term purchase contracts a remaining term ofmore than one year as of December 31, 2006, are as follows:

**Purchase obligations fromnatural gas and raw material supply contractsMillion €**
| ** **          | ** ** | ** **   | ** ** |
|---------------------|------------|--------------|------------|
| 2007                |       | 11,055.4     |       |
| 2008                |       | 7,831.7      |       |
| 2009                |       | 6,849.7      |       |
| 2010                |       | 5,658.7      |       |
| 2011                |       | 5,062.4      |       |
| 2012 and thereafter |       | 38,122.9     |       |
| **Total**           | ** ** | **74,580.8** | ** ** |

 

F-57

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**24. Risksfrom litigation and claims**

**AdministrativeProceedings and Litigation Relating to Vitamins**

On November 21, 2001, theEuropean Commission imposed a fine of €296.2 million against BASF Aktiengesellschaftin connection with certain violations of antitrust laws relating to the sale ofvitamin products in the European Union between 1989 and early 1999. On appealof BASF, the European Court of First Instance, in a decision dated March 15,2006, reduced the fine to €236.8 million. On December 9, 2004, the EuropeanCommission imposed an additional fine of €35 million for violations of certainantitrust laws relating to the sale of vitamin B4 (choline chloride) in themid-1990s. BASF has also appealed against this decision. Further proceedingsare still pending in Brazil.

One State court lawsuit on behalf of indirectpurchasers is still pending in the United States in connection with saidantitrust law violations. Further claims for damages have been filed in theUnited Kingdom. For these proceedings, the company has established provisionsthat it anticipates to be sufficient based on our current state of knowledge. 

BASFAktiengesellschaft was named as a defendant in Empagran S. A. et al. vs. F.Hoffmann-LaRoche, Ltd, et al., a federal class action filed in the U.S.District Court for the District of Columbia purportedly on behalf of allpersons who purchased vitamins from the defendants outside the United Statesbetween January 1, 1988 and February 1999. The Empagran complaint alleged thatthe plaintiffs were overcharged on their vitamins purchases as the result of aworldwide conspiracy among the defendants to fix vitamin prices. By decisiondated June 7, 2001, the District Court for the District of Columbia dismissedthe Empagran complaint for lack of subject matter jurisdiction. On January 17,2003, a divided panel of the United States Court of Appeals for the District ofColumbia Circuit reversed the District Court’s ruling. The Court of Appeals heldthat the United States antitrust laws permit the assertion of federal subjectmatter jurisdiction over claims by foreign purchasers based on purchases madeand purported damages felt outside the United States. BASF Aktiengesellschaftand the other defendants petitioned for a Writ of Certiorari to the UnitedStates Supreme Court. The Supreme Court granted the petition, and on June 14,2004, vacated the Court of Appeals’ ruling and remanded the case to the Courtof Appeals by an 8-0 decision. On June 28, 2005, the Court of Appeals, onremand, ruled that plaintiffs’ alleged link between foreign injury and domesticeffects was legally insufficient to trigger jurisdiction under the Sherman Actand therefore affirmed the district court’s dismissal of the action. On October26, 2005, plaintiffs filed a new petition for a writ of certiorari to the U.S.Supreme Court. The Supreme Court denied the plaintiffs’ petition January 6,2006. An attempt by the plaintiffs to once again bring the case before thedistrict court was denied. The proceedings are, therefore, terminated and thecase is finally dismissed.

**OtherProceedings**

In 2005, several class action lawsuits against BASF Aktiengesellschaftand BASF Corporation were filed at U.S. courts. It was alleged that sales ofTDI, MDI and polyether polyols had violated antitrust laws. BASF is defendingitself against these lawsuits.

In February 2006, the U.S. Department of Justice served a Grand Jurysubpoena upon BASF Corporation requesting the presentation of documents relatingto the sale of TDI, MDI, polyether polyols and related systems during theperiod of 1999 through the present. BASF Corporation is cooperating with theU.S. Department of Justice in this regard.

In August 2005, the European Commission issued Statements of Objectionsagainst several European producers of methacrylates and polymethacrylates foralleged anticompetitive behavior between 1995 and 2000, inter alia against BASFAktiengesellschaft. In May 2006, the European Commission terminated theinvestigation against BASF Aktiengesellschaft without imposing any fine.

BASF Corporation, Bayer Corporation and Bayer CropScience Corporationhave been sued by a number of plaintiffs for damages because of alleged pricefixing in the distribution of the termiticides Premise® (Bayer) and Termidor® (BASF) in the United States. Theplaintiffs contend that BASF and Bayer have each engaged in unlawful resaleprice maintenance resulting in overcharges to plaintiffs purchasers who areprofessionals in termite control. The plaintiffs are suing for trebled damagesof $600 million. BASF maintains that its pricing was lawful because its saleswere through agency agreements rather than through distributors and thereforethe claims are without merits.

F-58

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In July 2006, the US-companyMoncrief Oil International has filed a declaratory action against BASF Aktiengesellschaftand its subsidiary Wintershall AG at the District Court of Frankenthal.Moncrief seeks to have declared null and void agreements concluded or to beconcluded between BASF/Wintershall and Gazprom in connection with the proposedjoint exploitation of the Russian gas field Yuzhno Russkoye. Subject matter ofthe action is Moncrief’s allegation that BASF/Wintershall had unlawfullyinduced Gazprom to violate alleged contracts between subsidiaries of Gazpromand Moncrief. Moncrief is alleging to incur damages in the amount of severalbillion U.S. dollars, if it should be excluded from the exploitation of the gasfield. BASF/Wintershall are of the opinion that all claims are without anymerit. The negotiations of BASF/Wintershall with Gazprom were at no timedirected against Moncrief Oil International. On December 14, 2006 first oralarguments were held in front of the district court. The district court set thenext hearing for oral arguments for May 31, 2007.

**25. BASF StockOption Program (BOP) - and BASF Incentive Share Program “Plus”**

**Stock-basedcompensation**

In 2006, BASF continued theBASF stock option program (BOP) for senior executives of the BASF Group. Thisprogram has existed since 1999. Approximately 1,000 senior executives,including the Board of Executive Directors, are currently entitled toparticipate in this program. 

To participate in the stockoption program, each participant must hold as a personal investment BASF sharesin the amount of 10% to 30% of his or her individual variable compensation. Thenumber of shares to be held is determined by the amount of variablecompensation designated by the participant and the weighted-average marketprice for BASF shares on the first business day after the annual meeting, whichwas €68.19 on May 5, 2006 (basic price). 

For each BASF share held asan individual investment, a participant receives four options. Each optionconsists of two parts, right A and right B, which may be exercised if definedthresholds have been met: The threshold of right A is met if the price of theBASF share has increased by more than 30% in comparison to the base price(absolute threshold). The value of right A will be the difference between themarket price of BASF shares at the exercise date and the basic price; it islimited to 100% of the basic price. Right B may be exercised if the cumulativepercentage performance of BASF shares exceeds (relative threshold) thepercentage performance of the MSCI World Chemicals IndexSM (MSCI Chemicals). The value ofright B will be the basic price of the option multiplied by twice thepercentage outperformance of BASF shares compared to the MSCI Chemicals Indexon the exercise date. It is limited to the closing price on the date ofexercise minus computed nominal value of BASF shares. Shares of the individualinvestment must be held for at least two years following the granting of theoptions.

The options were granted onJuly 1, 2006 and may be exercised following a two-year vesting period, betweenJuly 1, 2008 and June 30, 2014. During the exercise period, it is not possibleto exercise options during certain periods (closed periods). Each option rightmay only be exercised if the performance targets are achieved and may only beexercised once, meaning that if only one performance target is met and thatoption is exercised, the other option right lapses. The maximum gain for aparticipant from the BOP program is limited to 10 times the original individualinvestment and will generally be settled in cash.

The stock option programs BOP2000–2005 were structured in a similar way to BOP 2006. To participate in theBOP program, each participant must hold BASF shares in the amount of 10% to 30%of his or her individual variable compensation (BOP 2001–2005) or must make anindividual investment in BASF shares in the amount of 10% to 30% of his or herindividual variable compensation that is used to purchase BASF shares at themarket price on the first business day after the Annual Meeting (BOP 2000). Theoptions may be exercised following a vesting period of two years (BOP 2001–2005)or three years (BOP 2000).

F-59

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The benchmarkindex used to determine the value of right B for BOP 2000 is the Dow Jones EUROSTOXXSM TotalReturn Index (EURO STOXXSM).This was replaced by the Dow Jones Chemicals Total Return Index (DJ Chemicals)between 2001 and 2004, and starting in 2005 by the MSCI Chemicals. The MSCIChemicals is a global industry index for the chemical industry that measuresthe performance of the companies contained within it in their respective localcurrencies, which significantly reduces currency effects.

The model used in thevaluation of the share option plans is based on the arbitrage-free valuationmodel according to Black-Scholes. Due to the complexity of the option programsa numerical solution method was used (Monte Carlo simulation). Details on thefair value and the number of options issued are described below.

**Fair valueand assumptions used as of December 31, 2006****(1)**
| ** **                                    | ** ** | **BASF stock option program** | ** ** |
|-----------------------------------------------|------------|----------------------------------------------|------------|
| ** **                                    | ** ** | **2006**                                     | ** ** | **2005** | ** ** |
| Fair value                                    |       | €                                       | 26.27      |   | € | 34.65 |   |
| Dividend yield                                |       | 2.71                                         | %          | 2.71 | % |
| Risk free interest rate                       |       | 3.95                                         | %          | 3.94 | % |
| Volatility of BASF  shares                    |       | 23.35                                        | %          | 22.68 | % |
| Volatility MSCI  Chemicals                    |       | 16.19                                        | %          | 16.19 | % |
| Correlation BASF share  price: MSCI Chemicals |       | 84.46                                        | %          | 84.46 | % |
|                                               |            |                                              |            |  |  |  |  |

----

(1)             Itis assumed that the options will be exercised based upon the potential gains.

 

Volatility was determined onthe basis of the monthly closing prices over a historical period correspondingto the remaining term of the options.

**Optionsoutstanding**
| ** **                                 | ** ** | **2006**                | ** ** | **2005**      | ** ** |
|--------------------------------------------|------------|-------------------------|------------|---------------|------------|
| ** **                                 | ** ** | **Weighted-**           | ** ** | ** **    | ** ** | **Weighted-** | ** ** | ** ** | ** ** |
| ** **                                 | ** ** | **average base**   | ** ** | **Options**   | ** ** | **average** | ** ** | **Options** | ** ** |
| ** **                                 | ** ** | **price (€)** | ** ** | **(Number)**  | ** ** | **base price (€)** | ** ** | **(Number)** | ** ** |
| Options  outstanding as of January 1       |       | 45.83                   |       | 5,400,609     |       | 43.64 |   | 4,643,465 |   |
| Options granted                            |       | 68.19                   |       | 1,701,884     |       | 50.03 |   | 1,807,800 |   |
| Options expired  and forfeited**(1)**      |       | 50.96                   |       | 44,144        |       | 43.79 |   | 66,950 |   |
| Options  exercised                         |       | 44.26                   |       | 985,306       |       | 43.36 |   | 983,706 |   |
| **Options  outstanding as of December 31** | ** ** | **52.31**               | ** ** | **6,073,043** | ** ** | **45.83** | ** ** | **5,400,609** | ** ** |
| Thereof  exercisable options               |       | 43.50                   |       | 2,589,231     |       | 44.16 |   | 2,493,669 |   |

----

 

(1)          Optionrights are forfeited if the option holders no longer work for BASF or have soldpart of their individual investment before the two-year holding period.They remainvalid in the case of retirement.

The weighted-average maturity of the outstandingoptions was 5.77 years on December 31, 2006 and 5.86 years on December 31, 2005.The basic prices were within a range of €38.94 to €68.19 in 2006, and €38.94 to€50.03 in 2005. Because of a resolution by the Board of Executive Directors in2002, to generally settle stock options in cash, options outstanding as ofDecember 31, 2006 are valued with the fair value as of the balance sheet date.This amount is accrued as a provision over the respective vesting period.Because of this, an amount of €67.3 million was charged to income as apersonnel expense in 2006, and €56.2 million was charged in 2005. Provisionswere increased from €108.8 million on December 31, 2005 to €147.2 million onDecember 31, 2006.

The total intrinsic value of exercisable optionsamounted to €88.9 million on December 31, 2006 and €55.0 million on December31, 2005.

The cash outflow for the settlement of stock optionsamounted to €28.9 million in 2006, €29.3 million in 2005 and €9.4 million in2004.

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**BASF “plus”incentive share program**

In1999, BASF started an incentive share program called “plus” for all eligible employeesexcept the senior executives entitled to participate in the BOP. Currently,employees of German and of various European and Mexican subsidiaries areentitled to participate in the program. Each participant must make anindividual investment in BASF shares from his or her variable compensation. Forevery 10 BASF shares purchased in the program, a participant receives one BASFshare at no cost after one, three, five, seven and 10 years of holding the BASFshares. The first 10 shares entitle the participant to receive one BASF shareat no extra cost for each year for the next ten years. The right to receivefree BASF shares lapses if a participant sells the individual investment inBASF shares, if the participant  stopsworking for the Company or one year after retirement. Details on the incentiveshare program are described below.

**Number ofshares held under the program**
| ** **                                           | ** ** | **2006**      | ** ** | **2005**      | ** ** |
|------------------------------------------------------|------------|---------------|------------|---------------|------------|
| As of January 1                                      |       | 2,795,130     |       | 2,405,230     |       |
| Number of shares  added to the individual investment |       | 539,190       |       | 565,000       |       |
| Number of  subscription rights forfeited             |       | (166,535      | )          | (175,100      | )          |
| **As of December 31**                                | ** ** | **3,167,785** | ** ** | **2,795,130** | ** ** |

 

The free shares tobe provided by the company are valued at the fair value of the grant date. Fairvalue is determined on the basis of the stock price of BASF shares, taking intoaccount the present value of dividends, which are not paid during the term ofthe program. The weighted-average fair value at grant date amounted to €58.06for the program in 2006 and €39.57 for the program in 2005.

The fair value ofthe free shares to be granted is booked through the income statement againstcapital surplus over the period until the shares are issued.

Provisions for thecosts for the 1999 – 2002 program continue to be accrued proportionally on thebasis of the BASF closing stock price.

Compensation costof €13.4 million was recorded in 2006 and €12.2 million in 2005 for theemployee stock program.

**26.Derivatives and other financial instruments**

**The use ofderivative instruments**

TheCompany is exposed to foreign currency, interest rate and commodity price risksduring the normal course of business. These risks are hedged through acentrally determined strategy with the use of derivative instruments. Inaddition, derivative instruments are used to replace transactions in originalfinancial instruments, such as shares or fixed-interest securities. Derivativeinstruments are only used to hedge a corresponding underlying position orplanned transaction arising from the operating business, cash investments,financing or planned sales. The leverage effect that can be achieved withderivatives is consciously not used. The derivative instruments held by the Companyare not held for the purpose of trading.

Wherederivatives have a positive market value, the Company is exposed to creditrisks in the event of non-performance of their counterparts. This credit riskis minimized by trading contracts exclusively with major creditworthy financialinstitutions and partners, within pre-defined credit limits.

Toensure efficient risk management, market risks are centralized at BASFAktiengesellschaft, except when certain subsidiaries have been authorized toconclude derivative contracts under the principles mentioned above. Contractingand execution of these instruments is performed according to internalguidelines, and complies with strict control mechanisms.

Therisks arising from changes in exchange rates, interest rates, and prices as aresult of the underlying transactions and the derivative transactions concludedto hedge them are monitored constantly.

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**Financialrisks**

**Foreigncurrency risk:** Changes in foreign exchange rates could leadto a decline in value in financial instruments. Foreign currency risks areespecially prevalent in receivables and payables that are not denominated inthe local currency of BASF Group companies, or for future foreign currencytransactions. To hedge foreign exchange risks, foreign exchange forwardcontracts and currency options are used, especially against the U.S. dollar,the British pound, the Brazilian real, and the Korean won.

**Defaultand credit risk:** This is the risk that the counterparties donot fulfill their contractual obligations. The book value of all financialassets plus the nominal value of contingent liabilities excluding potentialwarranty obligations represents the maximal default risk.

Due to the globalactivities and diversified customer structure of the BASF Group, there is nosignificant concentration of default risk.

**Interest rate risk:** Interest rate risks result from changes inprevailing interest rates, which can cause a change in the present value offixed rate instruments, as well as a change in the interest payments ofvariable rate instruments. To hedge this risk, and in particular to hedge therisk for loans to group companies, interest rate swaps, and combined interestand currency derivatives are used.  Theserisks are relevant in the case of investments and financial obligations but arenot of material significance on the operating side.

**Risks from commodity positions:** In certain cases, BASF holds large commoditypositions in base and precious metals whose value is exposed to market pricevolatility. These positions could also encompass derivative instruments. Theyare subject to a permanent internal control and are only entered into withinset limits and exposure constraints. In addition, BASF uses commodityderivatives to hedge against price volatility in the procurement of rawmaterials and in natural gas trading.

**Book valueof interest-bearing financial instruments****Million €**
| ** **             | ** ** | **December 31, 2006** | ** ** | **December 31, 2005** | ** ** |
|------------------------|------------|---------------------------------|------------|---------------------------------|------------|
| ** **             | ** ** | **Fixed-**                      | ** ** | **Variable -**             | ** ** | **Fixed-** | ** ** | **Variable-** | ** ** |
| ** **             | ** ** | **interest rate**          | ** ** | **interest rate**          | ** ** | **interest rate** | ** ** | **interest rate** | ** ** |
| Loans                  |       | 149.9                           |       | 142.6                           |       | 148.9 |   | 51.7 |   |
| Securities             |       | 15.7                            |       | —                          |       | 13.7 |   | — |   |
| Financial indebtedness |       | 8,124.6                         |       | 1,358.5                         |       | 2,831.3 |   | 1,109.7 |   |

 

***Fair value of financial instruments***

The fair value of a financialinstrument is the price at which the instrument could be exchangedbetweenunrelated parties. When pricing on an active market is available, for exampleon a stock exchange, this price is used. In other cases a valuation is based onan internal valuation model, using current marketparameters. Commonly usedtechniques include net present value, and option pricing models. The fair valueof financial debt is determined on the basis of interbank interest rates.

For trade accounts receivableand other financial assets, marketable securities, cash and cash equivalents aswell as trade accounts payable and other financial liabilities, the book value approximatesthe fair value. Participations which are not traded on an active market andwhose net present value could not be reliably determined are contained within“other financial assets.” These are therefore carried at cost, as the bestapproximation of the market value. The book value of these participations amountsto €856.6 on December 31, 2006, and €606.8 on December 31, 2005. The book valueof financial indebtedness amounted to €9,483.1 million in 2006 and €3,941.0million in 2005. The market value of finan cial indebtedness amounted to€9,430.5 million in 2006 and €3,963.4 million in 2005. The difference betweenbook and market values resulted primarily due to changes in market interestrates.

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**Derivative InstrumentsMillion €**
| ** **                                   | ** ** | **Nominal value as of December 31** | ** ** | **Market value as of December 31** | ** ** |
|----------------------------------------------|------------|--------------------------------------------------------------|------------|-------------------------------------------------------------|------------|
| ** **                                   | ** ** | **2006**                                                     | ** ** | **2005**                                                    | ** ** | **2006** | ** ** | **2005** | ** ** |
| Foreign currency  forward contracts          |       | 13,713.4                                                     |       | 5,675.5                                                     |       | 101.9 |   | 35.1 |   |
| Currency options                             |       | 1,231.8                                                      |       | 3,407.3                                                     |       | 43.8 |   | (33.5 | ) |
| **Foreign  currency derivatives**            | ** ** | **14,945.2**                                                 | ** ** | **9,082.8**                                                 | ** ** | **145.7** | ** ** | **1.6** | ** ** |
| Interest swaps                               |       | 284.9                                                        |       | 199.1                                                       |       | (5.3 | ) | (2.4 | ) |
| Combined  interest and currency swaps        |       | 334.3                                                        |       | 1,438.5                                                     |       | 11.6 |   | 127.8 |   |
| **Interest  derivatives**                    | ** ** | **619.2**                                                    | ** ** | **1,637.6**                                                 | ** ** | **6.3** | ** ** | **125.4** | ** ** |
| **Commodity derivatives/Other  derivatives** | ** ** | **12,441.0**                                                 | ** ** | **873.7**                                                   | ** ** | **(36.1** | **)** | **(15.8** | **)** |

 

Forward exchange contractsgenerally mature within one year.

The nominal values are thetotals of the purchases and sales of the particular derivatives on a grossbasis. The fair market values correspond to resale or termination values, whichare determined from market quotations or by the use of option pricing modelsor, in the case of unlisted contracts, the termination amount in the event ofpremature cancellation. Offsetting changes in the valuation of the underlyingtransactions are not included.

Positive fair values ofderivatives are contained within the item other receivables in the amount of €296.1million in 2006 and €296.6 million in 2005. Negative fair values in the amountof €180.2 million in 2006 and €185.4 million in 2005 are shown under otherliabilities.

Commodity derivatives with afair value of €(25.8) million are used in line with cash flow hedge accounting tohedge prices for raw materials, such as naphtha. The hedged raw materials willmost likely impact the cash flow and income statement in 2007.

**27. Leasing**

***Leased assets***

Property, plant and equipmentinclude those assets which are considered to be economically owned through afinancing lease. They primarily concern the following items:

**Leasedassets****Million €**
| ** **                                     | ** ** | **2006**                  | ** ** | **2005**                     | ** ** |
|------------------------------------------------|------------|---------------------------|------------|------------------------------|------------|
| ** **                                     | ** ** | **Acquisition cost** | ** ** | **Net book value** | ** ** | **Acquisition cost** | ** ** | **Net book value** | ** ** |
| Land, land  rights and building                |       | 34.8                      |       | 23.8                         |       | 78.9 |   | 63.0 |   |
| Machinery and  technical equipment             |       | 205.0                     |       | 131.2                        |       | 114.6 |   | 65.3 |   |
| Miscellaneous  equipment and fixtures          |       | 76.4                      |       | 23.1                         |       | 83.5 |   | 28.0 |   |
| Advance payments  and construction in progress |       | —                    |       | —                       |       | — |   | — |   |
| **Total**                                      | ** ** | **316.2**                 | ** ** | **178.1**                    | ** ** | **277.0** | ** ** | **156.3** | ** ** |

 

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**Liabilities from financingleasesMillion €**
| ** **                  | ** ** | **2006**                 | ** ** | **2005**     | ** ** |
|-----------------------------|------------|--------------------------|------------|--------------|------------|
| ** **                  | ** ** | **Minimum leasing** | ** ** | **Interest** | ** ** | **Leasing** | ** ** | **Minimum leasing** | ** ** | **Interest** | ** ** | **Leasing** | ** ** |
| ** **                  | ** ** | **payments**             | ** ** | **portion**  | ** ** | **liability** | ** ** | **payments** | ** ** | **portion** | ** ** | **liability** | ** ** |
| Following year 1            |       | 21.6                     |       | 6.3          |       | 15.3 |   | 22.9 |   | 7.0 |   | 15.9 |   |
| Following year 2            |       | 19.7                     |       | 5.9          |       | 13.8 |   | 20.6 |   | 6.6 |   | 14.0 |   |
| Following year 3            |       | 18.2                     |       | 5.5          |       | 12.7 |   | 18.7 |   | 6.2 |   | 12.5 |   |
| Following year 4            |       | 18.3                     |       | 5.0          |       | 13.3 |   | 17.0 |   | 5.8 |   | 11.2 |   |
| Following year 5            |       | 21.5                     |       | 5.8          |       | 15.7 |   | 17.7 |   | 5.4 |   | 12.3 |   |
| More than 5 years  in total |       | 52.0                     |       | 17.9         |       | 34.1 |   | 77.5 |   | 25.9 |   | 51.6 |   |
| **Total**                   | ** ** | **151.3**                | ** ** | **46.4**     | ** ** | **104.9** | ** ** | **174.4** | ** ** | **56.9** | ** ** | **117.5** | ** ** |

 

Additional payments arisefrom contractual obligations. In 2005, less than €0.1 million in additional leasepayments above the minimum lease expense were recorded in income. In thecurrent year, there were no such payments.

Offsetting these leasingliabilities, expected minimum lease payments from sub-leases amounted to €2.5million in 2006 and less than €0.1 million in 2005.

In addition, BASF is a lesseeunder operating leases. The resulting lease obligations totaling €1,281.0million in 2006 and €827.4 million in 2005 are due in the following years:

**Commitments due to operating lease contractsMillion €**
| ** **       | ** ** | **Nominal value of the future** | ** ** |
|------------------|------------|-----------------------------------------------------|------------|
| ** **       | ** ** | **minimum payments**                           | ** ** |
| ** **       | ** ** | **as of December 31**                | ** ** |
| ** **       | ** ** | **2006**                                            | ** ** | **2005** | ** ** |
| Less than 1 year |       | 329.9                                               |       | 171.9 |   |
| 1–5 years   |       | 519.1                                               |       | 391.5 |   |
| Over 5 years     |       | 432.0                                               |       | 264.0 |   |
| ** **       | ** ** | **1,281.0**                                         | ** ** | **827.4** | ** ** |

 

In 2006, leases for preciousmetals of €106.2 million were included in commitments due to operating leasecontracts of less than one year. These metals were immediately further leasedto third parties.

Offsetting the other leasingcommitments are expected minimum lease payments from sub-lessees amounting to€13.3 million in 2006 (2005: €13.9 million). Minimum lease payments in theamount of €234.4 million (prior year: €183.6 million), conditional leasepayment of €0.8 million (prior year: €0.6 million), and payments received fromsub-leases of €3.7 million (prior year: €3.3 million) were included in income fromoperations in 2006.

***BASF as lessor***

BASF acts as both a lesseeand a lessor under finance leasing. BASF acts as a lessor in a minor capacityonly for financing leases. Receivables on financing leases were €0.3 million in2006 and less than €0.5 million in 2005. In 2006, nominal minimum paymentsarising from operating leases amounted to €113.9 million within one year and€25.7 million within the next five years. For 2005, these figures amounted to€7.3 million within one year and €27.2 million within the next five years.

Precious metal accounts of€639.3 million continue to be held for customers where the metals are storedphysically at BASF.

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**28.Compensation for the Board of Executive Directors and Supervisory Board of BASFAktiengesellschaft****Million €**
| ** **                                                                                                 | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
|------------------------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Board of  Executive Directors’ compensation                                                           |       |     |       |     |       |     |       |
| Performance-related  and fixed payments                                                                    |       | 19.2     |       | 15.3     |       | 14.0     |       |
| Market value of  options granted in the fiscal year on date of grant                                       |       | 3.4      |       | 5.6      |       | 2.7      |       |
| Pension benefits                                                                                           |       | 4.7      |       | 3.7      |       | 3.1      |       |
|                                                                                                       |       |     |       |     |       |     |       |
| Supervisory  Board’s compensation                                                                     |       | 4.1      |       | 3.4      |       | 2.7      |       |
|                                                                                                       |       |     |       |     |       |     |       |
| Total  compensation of former members of the Board of Executive Directors and their  surviving dependents  |       | 6.0      |       | 5.8      |       | 6.0      |       |
| Pension  provisions for former members of the Board of Executive Directors and their  surviving dependents |       | 75.1     |       | 77.7     |       | 69.9     |       |
| Loans to members  of the Board of Executive Directors and the Supervisory Board                            |       | —   |       | —   |       | —   |       |
| Guarantees to members of  the Board of Executive Directors and the Supervisory Board                       |       | —   |       | —   |       | —   |       |

 

Performance-relatedcompensation for Board members is based on the return on assets, whichcorresponds to earnings before taxes plus borrowing costs as a percentage ofaverage assets.

From January 1, 2006 theBoard consisted of 9 members (2005: 8). In addition, two Board members weredelegated abroad (2005: 1 member), which resulted in a noticeable increase indelegation-related expenses. On a comparable basis, cash compensation rose by8.5% compared to 2005.

Moreover, in 2006, themembers of the Board of Executive Directors were granted 184,156 options underthe BASF stock option program.

Option rights of active andformer members of the Board resulted in personnel expenses of €8.4 million (2005:€6.3 million).

The names, individualcompensation and memberships on other supervisory boards of the members of theBoard of Executive Directors and the Supervisory Board are reported in theCompensation Report in Item 6 – Directors, Senior Management and Employees.

**29.Related-party transactions**

IAS 24 “Related PartyDisclosures” requires the disclosure of transactions with related parties; bothwith companies that are not consolidated, as well as with individuals.

Material supply relationshipsexist between the proportionally consolidated joint venture companies WintershallErdgas Handelshaus GmbH & Co. KG, Berlin, Wintershall Erdgas HandelshausZug AG, Zug, Switzerland, and companies of the BASF Group for the supply of oiland gas. The unconsolidated portion of these supplies amounted to €765.5million in 2006 and €632.1 million in 2005.

In 2005, a material supplyrelationship existed between the BASF Group and the Basell Group, which wasaccounted for by the equity method until August 2005. Deliveries to the BasellGroup totaled €284.8 million in 2005. All transactions were at arm’s length.

Please see Notes 15 and 22for details regarding receivables and payables with companies accounted forproportionally, at acquisition cost, or according to the equity method.

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**30. Servicesprovided by the external auditor**

BASF Group companies haveused the following services from KPMG in 2006 and Deloitte in 2005:

**Million €**
| ** **          | ** ** | **2006** | ** ** | **2005** | ** ** |
|---------------------|------------|----------|------------|----------|------------|
| Audit fees          |       | 23.9     |       | 12.8     |       |
| Audit-related  fees |       | 0.2      |       | 5.1      |       |
| Tax fees            |       | 0.2      |       | 0.9      |       |
| All other fees      |       | 0.8      |       | 0.5      |       |
| **Total**           | ** ** | **25.1** | ** ** | **19.3** | ** ** |

 

Theaudit fees concerned the audit of the annual financial statements of the BASFGroup as well as the legally required audit of the financial statements of BASFAktiengesellschaft and the consolidated subsidiary companies and jointventures. The increase in 2006 resulted from the audit of the newly acquiredcompanies and the initial audit of numerous consolidated subsidiaries by theexternal auditor of the BASF Group.

Audit-relatedfees primarily concerned billed services for confirmations of the compliancewith certain contractual obligations.

Taxfees related to numerous consulting assignments.

Allother fees primarily concerned amounts billed in connection with divestmentprojects.

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**31. Summaryof significant differences between IFRS and U.S. GAAP**

The Consolidated FinancialStatements have been prepared in accordance with IFRS. The following is asummary of the differences to net income and shareholders’ equity, which differfrom U.S. GAAP:

**Reconciliation of net income to U.S. GAAP****Million €, Except Per Share Amounts**
| ** **                                                                                             | ** ** | **Note**   | ** ** | **2006**    | ** ** | **2005**    | ** ** | **2004**    | ** ** |
|--------------------------------------------------------------------------------------------------------|------------|------------|------------|-------------|------------|-------------|------------|-------------|------------|
| **Net  income after minority interests according to IFRS**                                             | ** ** | ** ** | ** ** | **3,215.2** | ** ** | **3,006.7** | ** ** | **2,004.3** | ** ** |
| **Adjustments  required to conform with U.S. GAAP**                                                    | ** ** | ** ** | ** ** | ** **  | ** ** | ** **  | ** ** | ** **  | ** ** |
| Accounting for  pensions                                                                               |       | (a)        |       | (153.9      | )          | (72.6       | )          | (24.6       | )          |
| Accounting for  provisions                                                                             |       | (b)        |       | 86.6        |       | 6.5         |       | 6.1         |       |
| Accounting for  financial instruments                                                                  |       | (c)        |       | (29.4       | )          | —      |       | —      |       |
| Valuation  adjustments relating to companies accounted for using the equity method                     |       | (e)        |       | —      |       | —      |       | (108.4      | )          |
| Acquisitions                                                                                           |       | (f)        |       | (110.6      | )          | (21.8       | )          | —      |       |
| Other  adjustments                                                                                     |       | (g)        |       | (6.6        | )          | 168.0       |       | (12.2       | )          |
| Deferred taxes                                                                                         |       | (h)        |       | 93.0        |       | (26.2       | )          | (2.4        | )          |
| **Adjustments  to U.S. GAAP**                                                                          | ** ** | ** ** | ** ** | **(120.9**  | **)**      | **53.9**    | ** ** | **(141.5**  | **)**      |
| **Net  income in accordance with U.S. GAAP**                                                           | ** ** | ** ** | ** ** | **3,094.3** | ** ** | **3,060.6** | ** ** | **1,862.8** | ** ** |
| Cumulative  effect of change in accounting for stock options                                           |       |       |       | 24.6        |       | —      |       | —      |       |
| **Net  income in accordance with U.S. GAAP before cumulative effect of change in  accounting**         | ** ** | ** ** | ** ** | **3,118.9** | ** ** | **3,060.6** | ** ** | **1,862.8** | ** ** |
| **Earnings  per share in accordance with U.S. GAAP**                                                   | ** ** | ** ** | ** ** | **6.13**    | ** ** | **5.83**    | ** ** | **3.39**    | ** ** |
| Cumulative  effect of change in accounting for stock options                                           |       |       |       | 0.05        |       | —      |       | —      |       |
| **Earnings  per share in accordance with U.S. GAAP before cumulative effect of change in  accounting** | ** ** | ** ** | ** ** | **6.18**    | ** ** | **5.83**    | ** ** | **3.39**    | ** ** |
| Dilutive effect                                                                                        |       |       |       | —      |       | —      |       | —      |       |
| **Diluted earnings per share in  accordance with U.S. GAAP**                                           | ** ** | ** ** | ** ** | **6.13**    | ** ** | **5.83**    | ** ** | **3.39**    | ** ** |

 

**Reconciliationof stockholders’ equity to U.S. GAAP****Million €**
| ** **                                                                         | ** ** | **Note**   | ** ** | **2006**     | ** ** | **2005**     | ** ** |
|------------------------------------------------------------------------------------|------------|------------|------------|--------------|------------|--------------|------------|
| **Stockholders’  equity in accordance with IFRS as of December 31**           | ** ** | ** ** | ** ** | **18,578.1** | ** ** | **17,523.5** | ** ** |
| Minority interests                                                                 |       |       |       | (530.5       | )          | (481.8       | )          |
| **Stockholders’  equity excluding minority interests**                        | ** ** | ** ** | ** ** | **18,047.6** | ** ** | **17,041.7** | ** ** |
| **Adjustments  required to conform with U.S. GAAP**                                |       |       |       |         |       |         |       |
| Accounting for  pensions                                                           |       | (a)        |       | 35.7         |       | 920.1        |       |
| Accounting for  provisions                                                         |       | (b)        |       | 204.5        |       | 113.0        |       |
| Accounting for  financial instruments                                              |       | (c)        |       | (12.6        | )          | (12.1        | )          |
| Reversal of  goodwill amortization and write-offs due to impairment                |       | (d)        |       | 318.8        |       | 344.5        |       |
| Valuation  adjustments relating to companies accounted for using the equity method |       | (e)        |       | 38.9         |       | 39.0         |       |
| Acquisitions                                                                       |       | (f)        |       | (131.5       | )          | (21.8        | )          |
| Other  adjustments                                                                 |       | (g)        |       | (24.9        | )          | (16.2        | )          |
| Deferred taxes                                                                     |       | (h)        |       | (82.5        | )          | (463.4       | )          |
| **Adjustments  to U.S. GAAP**                                                      | ** ** | ** ** | ** ** | **346.4**    | ** ** | **903.1**    | ** ** |
| **Stockholders’ equity in  accordance with U.S. GAAP as of December 31**      | ** ** | ** ** | ** ** | **18,394.0** | ** ** | **17,944.8** | ** ** |

 

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**Earnings per share****Million €, Except Per Share Amounts**
| ** **                                                                                            | ** ** | **2006**    | ** ** | **2005**    | ** ** | **2004**    | ** ** |
|-------------------------------------------------------------------------------------------------------|------------|-------------|------------|-------------|------------|-------------|------------|
| **Net  income in accordance with U.S. GAAP**                                                          | ** ** | **3,094.3** | ** ** | **3,060.6** | ** ** | **1,862.8** | ** ** |
| **Number  of shares (1,000)**                                                                         | ** ** | ** **  | ** ** | ** **  | ** ** | ** **  | ** ** |
| Weighted-average  undiluted number of shares                                                          |       | 504,479     |       | 525,125     |       | 548,714     |       |
| Dilutive effect                                                                                       |       | —      |       | —      |       | —      |       |
| Weighted-average  diluted number of shares                                                            |       | 504,479     |       | 525,125     |       | 548,714     |       |
| **Basic  earnings per share in accordance with U.S. GAAP**                                            | ** ** | **6.13**    | ** ** | **5.83**    | ** ** | **3.39**    | ** ** |
| Dilutive effect                                                                                       |       | —      |       | —      |       | —      |       |
| **Diluted  earnings per share in accordance with U.S. GAAP**                                          | ** ** | **6.13**    | ** ** | **5.83**    | ** ** | **3.39**    | ** ** |
| Cumulative  effect of change in accounting for stock options                                          |       | 0.05        |       | —      |       | —      |       |
| **Earnings per share in  accordance with U.S. GAAP before cumulative effect of change in accounting** | ** ** | **6.18**    | ** ** | **5.83**    | ** ** | **3.39**    | ** ** |

 

The calculation of earningsper share is described in detail in Note 4.

**(a)  Accounting for pensions**

Under IFRS, BASF elected anaccounting policy to offset actuarial gains and losses directly againstretained earnings in the year in which they occur and not recognize them inincome.

Under U.S. GAAP, the “corridorapproach” was used whereby the portion of the actuarial gains and lossesexceeding 10% of the greater amount of the pension obligation or fair value ofplan assets at the beginning of the year is recognized in income. Differencesin income result from the amortization of unrealized actuarial gains and lossesin income under U.S. GAAP.

Except for the asset ceilingand the unrecognized past service cost under IFRS, the funded status of thepension obligations and related assets is recognized on the balance sheet. ForU.S. GAAP purposes, BASF adopted the recognition provisions of SFAS 158“Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans”as of December 31, 2006. Accordingly, the funded status is now recognized onthe balance sheet, such that actuarial gains and losses are directly offsetagainst the other comprehensive income component within shareholders’ equity. Therefore,the difference in total stockholders’ equity arising from the differenttreatment of actuarial gains and losses no longer exists. The adoption of SFAS158 largely explains the significant decrease in the difference in equitycompared with the previous year. For income stating purposes under U.S. GAAP, actuarialgains and losses continue to be amortized according to the previouslyestablished accounting policies, i.e. the 10% corridor (so-called “recycling”).Therefore, the differences related to actuarial gains and losses between IFRSand U.S. GAAP in the income statement will continue in the future.

Moreover, differences inincome and equity also occur due to the different rules for recognizing prior servicecosts under IFRS. Differences in equity occur as the “asset ceiling” is notapplicable under U.S. GAAP.  Until adoptionof SFAS 158, the recognition of an additional minimum liability in othercomprehensive income according to U.S. GAAP led to differing balances in stockholders’equity. There is no additional minimum liability after adoption of SFAS 158 at December31, 2006.

Pension and similarprovisions and expenses which fall under the scope of SFAS 87 and SFAS 106 arebased on the same actuarial assumptions as under IFRS (See Note 20).

F-68

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**Actuariallosses and prior service cost according to SFAS 87 / 106****Million €**
| ** **                                                                      | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
|---------------------------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Actuarial losses  as of December 31                                             |       | 2,246.9  |       | 2,587.1  |       | 1,505.8  |       |
| Amortization of  actuarial losses in the current reporting year                 |       | 140.4    |       | 62.2     |       | 15.4     |       |
| Unrecognized  prior service cost as of December 31                              |       | 39.4     |       | 54.2     |       | 64.3     |       |
| Amortization of  unrecognized prior service cost for the current reporting year |       | 11.5     |       | 10.4     |       | 9.2      |       |

 

In 2007, it is expected thatamortization of actuarial losses in the amount of €110.8 million and of prior servicecosts in the amount of €10.1 million will be recognized in profit and loss.

The Accumulated BenefitObligation (ABO) based on current salary levels amounted to €12,085.0 millionin 2006 compared with €11,398.0 million in 2005 and €9,419.9 million in 2004.This obligation applies to pension plans.

**Current funding situationMillion €**
| ** **                                            | ** ** | **2006**     | ** ** | **2005**             | ** ** |
|-------------------------------------------------------|------------|--------------|------------|----------------------|------------|
| ** **                                            | ** ** | **ABO**      | ** ** | **Plan assets** | ** ** | **ABO** | ** ** | **Plan assets** | ** ** |
| Unfunded pension  plans                               |       | 643.1        |       | —               |       | 582.2 |   | — |   |
| Under-funded  pension plans                           |       | 1,110.8      |       | 1,025.0              |       | 6,954.6 |   | 6,756.6 |   |
| **Total  of pension plans that are not fully funded** | ** ** | **1,753.9**  | ** ** | **1,025.0**          | ** ** | **7,536.8** | ** ** | **6,756.6** | ** ** |
| Over-funded  pension plans                            |       | 10,331.1     |       | 11,053.5             |       | 3,861.2 |   | 4,258.6 |   |
| **Total**                                             | ** ** | **12,085.0** | ** ** | **12,078.5**         | ** ** | **11,398.0** | ** ** | **11,015.2** | ** ** |

 

Under IFRS, the balance ofthe expected return on plan assets and the interest costs pertaining to the pensionobligation is recognized in the financial results (see Note 7). According toU.S. GAAP, these items are considered in personnel costs. As a result, incomefrom operations, according to U.S. GAAP, would be higher in 2006 by €56.1million and lower in 2005 by €120.8 million as well as in 2004 by €134.8million, and the financial result accordingly lower respectively higher.

Actuarial losses of €2,246.9million and unrecognized prior service costs of €39.4 million were recognizedin other comprehensive income as of December 31, 2006 as a result of theadoption of the recognition provisions of SFAS 158. Considering deferred taxes,the first-time application of SFAS 158 resulted in a decrease in stockholders’equity in the amount of €1,235.8 million.

**Maturities of pension provisions and defined benefit assets****Million €**
| ** **                        | ** ** | **2006**    | ** ** | **2005**    | ** ** |
|-----------------------------------|------------|-------------|------------|-------------|------------|
| Pension  provisions, short-term   |       | 82.8        |       | 18.8        |       |
| Pension  provisions, long-term    |       | 1,344.4     |       | 1,002.6     |       |
| **Total**                         | ** ** | **1,427.2** | ** ** | **1,021.4** | ** ** |
|                              |       |        |       |        |       |
| Prepaid pension  cost, short-term |       | —      |       | —      |       |
| Prepaid pension  cost, long-term  |       | 377.8       |       | 683.2       |       |
| **Total**                         | ** ** | **377.8**   | ** ** | **683.2**   | ** ** |

 

F-69

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**(b)Accounting for provisions**

The reconciliation itemcontains the following deviations:

***Provisions for part-time programs for employees nearing retirement age:***Under IFRS, agreedupon supplemental payments within the early retirement programs are immediately accrued in their full amount, anddiscounted at a rate of 3.75%. A provision is also recorded for the expected costs for agreements that areanticipated to be concluded during the term of the collective bargaining agreements, taking into considerationthe ceilings on the number of employee participants provided in such collective bargaining agreements. Inaccordance with U.S. GAAP, provisions may only be recorded for employees who have accepted an offer, and thesupplemental payments are accrued over the employee’s remaining service period. This resulted in anincrease in income under U.S. GAAP of €72.8 million in 2006 and a decrease of €29.4 million in 2005 and€22.3 million in 2004. Stockholders’ equity increased by €202.9 million at December 31, 2006 (includingthe effects from acquisitions) and by €125.3 million at December 31, 2005.

***Provisions for restructuring measures:***SFAS 146, “Accounting for Costs Associatedwith Exit and Disposal Activities”requires expected costs associated with the exit or disposal of businessactivities to be accrued onlywhen a liability against a third party exists. In case of a retention period,severance payments to employeesare accrued over the term of this period. Voluntary termination benefitsoffered in connection with therestructuring can be recognized as a liability only when the employee acceptsthe offer.  

***Discounting of provisions and liabilities:***According to IFRS, long-term provisions andliabilities are to be discountedto their present value if the effect from discounting is material. Under U.S.GAAP, however, discounting isonly permissible for specific types of provisions and liabilities when theamount and timing of the cashflows can be reliably predicted. This resulted in an income effect of €7.8million in 2006, €10.8 million in2005 and €47.0 million in 2004, and a decrease in equity of €22.5 million in2006 and €30.5 million in 2005.

**(c)Accounting for financial instruments**

The guidelines for accountingfor financial instruments according to IAS 39 “Financial Instruments:Recognition and Measurement” and SFAS 133 “Accountingfor Derivatives and Hedging Activities” are very similar in concept. The reconciliation items relate to the differingtreatment of fair value changes of derivatives within equity, which are a component of a cash flow hedge for a probableforecast transaction. According toIAS 39, for hedging future transactions, there is an election regarding theaccounting treatment of these fairvalue changes. BASF has chosen to adjust the basis of the non-financial assetsor liabilities resulting from thehedged forecast transactions. The other option allows the valuation changes tobe charged to the incomestatement in the same period in which the hedged transaction flows through theincome statement. According toSFAS 133, only the second method is allowed, while netting against acquisitioncosts is prohibited. Thisdifference leads to a difference in other comprehensive income and has noimpact on income. Differences inincome arise from transactions that can be accounted for as cash flow hedge according to IAS 39, but not under U.S.GAAP.  

**(d)Reversal of goodwill amortization and write-offs due to impairment**

According to SFAS 142,effective January 1, 2002, goodwill is only written down if an impairmentexists. According to IFRS 1 “First-timeAdoption” in conjunction with IFRS 3 “Business Combinations,” regularly scheduled amortization of goodwillhas been replaced by impairment testing effective as of January 1, 2004. The accumulated scheduledamortization on goodwill in 2002 and 2003, recorded under previous GAAP prior to the transition date toIFRS, has been reversed for U.S. GAAP purposes and increases stockholders’ equity.  

F-70

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**(e)Valuation adjustments relating to companies accounted for using the equity****method**

This item containsdifferences from companies accounted for using the equity method that resultfrom different dates on which thescheduled amortization for goodwill was discontinued under U.S. GAAP (2002) and IFRS (2004).  

**(f)Acquisitions**

Differences between U.S. GAAPand IFRS with respect to purchase accounting involve in particular thetreatmentof in-processresearch and development projects of acquired businesses. Whereas these costsare expensed in the first year ofconsolidation under U.S. GAAP, IFRS requires that these costs are capitalized as intangible assets and amortized overtheir useful lives. This resulted in a decrease in income in accordance with U.S. GAAP of €110.6 million in 2006 and€25.5 million in 2005. There were no in-process research and development costs in connection withacquisitions in 2004.

According to U.S. GAAP,contingent purchase price adjustments of acquisitions are only accountedfor at the time of payment of thecontingent price adjustment. IFRS 3, however, requires the recognition of probable purchase price adjustments atestimated values in the first consolidation of an acquired business. If the purchase price is less than the fairvalue of assets and liabilities acquired as a result of these differing practices, the difference is to be bookedimmediately to the income statement according to IFRS, whereas according to U.S. GAAP it reduces the valuesassigned to the acquired assets. This resulted in an income effect of €3.7 million in 2005. There were nosuch differences in 2006 and 2004 as a result of contingent price adjustments.

Overall, the accounting foracquisitions resulted in a decrease in stockholders’ equity of €131.5 millionin 2006 and €21.8 million in2005.

**(g) Otheradjustments**

This item primarily includesremaining differences in accounting for stock options after implementationof SFAS 123R, differences arisingfrom the accounting of sale and leaseback transactions as well as provisions for major overhauls of large scaleplants.

Following a resolution by theBoard of Executive Directors in 2002, stock options are to be settled incash. Under U.S. GAAP up to 2005,such obligations were to be accounted for as stock appreciation rights based on the intrinsic value of the options onthe balance sheet date. Under SFAS 123R, which became effective for periods beginning after June 15,2005, these options have to be valued with their fair value as of the balance sheet date. The provision hasto be accrued over the vesting period of the options. The implementation of SFAS 123R decreased incomeby €24.6 million in 2006. In the 2006 Consolidated Financial Statements, all obligationsresulting from stock options are accounted for based upon the fair value on the balance sheet date. Therefore,after the implementation of SFAS 123R, no more differences in income and equity exist for stock optionsgranted in 2002 and thereafter.

Under IFRS, anticipated costsnecessary for the major overhaul of large scale plants prescribed atcertain intervals are capitalized as a part ofthe respective asset and depreciated on a straight-line basis over the period until the next regularlyscheduled major overhaul. According to U.S. GAAP, provisions for such costs were established. In 2005, thisaccounting method was changed to comply with IFRS. The pretax cumulative effect of €117.0 million wasrecognized in income in 2005. The net effect after taxes amounted to €76.0million.

F-71

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Gains from the sale ofassets, which continue to be used under operating leases are to be recognizedin income under IFRS, if the saleis an arm’s length transaction. U.S. GAAP requires the deferral of the gain and its recognition in income over theuseful life of the asset.

**(h)Deferred taxes**

The adjustments required toconform with U.S. GAAP would result in taxable temporary differencesbetween the valuation of assets andliabilities in the Consolidated Financial Statements and the carrying amount for tax purposes. Resulting adjustmentsfor deferred taxes primarily relate to the following:  

**Million €**
| ** **                                                          | ** ** | ** ** | ** ** | **Stockholders’ equity** | ** ** | **Net income** | ** ** |
|---------------------------------------------------------------------|------------|------------|------------|------------------------------------|------------|---------------------|------------|
| **Note**                                                            | ** ** | ** ** | ** ** | **2006**                           | ** ** | **2005**            | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
| Accounting for  pensions                                            |       | (a)        |       | (12.8                              | )          | (348.5              | )          | 57.5 |   | 27.4 |   | 10.2 |   |
| Accounting for  provisions                                          |       | (b)        |       | (81.7                              | )          | (51.6               | )          | (28.3 | ) | (5.2 | ) | 10.7 |   |
| Accounting for  financial instruments                               |       | (c)        |       | 4.5                                |       | 4.3                 |       | (4.9 | ) | (5.3 | ) | — |   |
| Reversal of  goodwill amortization and write-offs due to impairment |       | (d)        |       | (71.6                              | )          | (96.2               | )          | — |   | — |   | — |   |
| Acquisitions                                                        |       | (f)        |       | 51.7                               |       | 9.3                 |       | 42.7 |   | 9.3 |   | — |   |
| Other  adjustments                                                  |       | (g)        |       | 27.4                               |       | 19.3                |       | 26.0 |   | (52.4 | ) | (23.3 | ) |
| **Total**                                                           |       |       |       | **(82.5**                          | **)**      | **(463.4**          | **)**      | **93.0** | ** ** | **(26.2** | **)** | **(2.4** | **)** |

 

***New U.S. GAAP accounting standards not yet adopted:***

SFAS 157 “Fair ValueMeasurements” provides further guidance for measuring fair value and expandsdisclosures about fair valuemeasurements. The Statement applies to all accounting pronouncements that require or permit fair valuemeasurements, but does not enlarge its scope. Fair value is defined as theprice in an orderly transactionbetween market participants that would be received to sell the asset or paid to transfer the liability. SFAS 157establishes a three-step fair value hierarchy. Highest priority is given to quoted prices in an active market.Observable data for identical assets or liabilities is preferred to prices that relate only to similar assets andliabilities. The lowest priority is given to unobservable data e.g. data that reflects the company’s own assumptions.The fair value hierarchy in SFAS 157 shows that fair value is market related and is not an entity specificvalue. The statement has to be applied to reporting periods beginning after November 15, 2007. BASF iscurrently determining the effect on the Group’s financial statements.

Interpretation FIN 48 “Accountingfor Uncertainty in Income Taxes” provides specific guidance on howuncertainties in income tax positions and theresulting potential tax benefits should be recognized, measured, presented and disclosed in an enterprise’sfinancial statements. FIN 48 defines a “more-likely-than-not” threshold that must be met before a taxbenefit can be recognized. If this condition is fulfilled for an uncertain tax position, the tax benefit ismeasured as the largest amount that is greater than 50 percent likely of being realized upon ultimate settlement with ataxing authority having full knowledge of all relevant information. Any previously recognized tax benefit has tobe derecognized in its entirety, if the threshold is no longer met. FIN 48 requires qualitative and quantitativedisclosures about potential tax benefits that have been recognized for tax purposes, but not recognized in thefinancial statements. FIN 48 is effective for annual financial statements covering periods beginning afterDecember 15, 2006.

F-72

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**Otherchanges in stockholders’ equity**

The option allowed by IFRS 1to offset currency translation adjustments against retained earnings asof January 1, 2004 was exercised. Under U.S.GAAP, the translation adjustment is to be carried forward unchanged.

According to U.S. GAAP,specifically SFAS 130, certain expenses and income are recognized outsideof profit or loss (OtherComprehensive Income):  

**Million €**
| ** **                                                 | ** ** | **2006**    | ** ** | **2005**    | ** ** | **2004**    | ** ** |
|------------------------------------------------------------|------------|-------------|------------|-------------|------------|-------------|------------|
| **Net  income in accordance with U.S. GAAP**               |       | **3,094.3** | ** ** | **3,060.6** | ** ** | **1,862.8** |       |
| Change of  foreign currency translation adjustments        |       |        |       |        |       |        |       |
| Gross                                                      |       | (489.9      | )          | 765.6       |       | (291.3      | )          |
| Deferred taxes                                             |       | 20.9        |       | (33.1       | )          | 17.2        |       |
| Change in  unrealized holding gains on securities          |       |        |       |        |       |        |       |
| Gross                                                      |       | 83.3        |       | 66.7        |       | 95.6        |       |
| Deferred taxes                                             |       | 13.2        |       | 4.5         |       | 0.3         |       |
| Change in  unrealized losses from cash flow hedges         |       |        |       |        |       |        |       |
| Gross                                                      |       | 20.5        |       | (21.2       | )          | (54.0       | )          |
| Deferred taxes                                             |       | (6.1        | )          | 11.6        |       | 18.7        |       |
| Change in  additional minimum liability for pensions       |       |        |       |        |       |        |       |
| Gross                                                      |       | 1,730.7     |       | (1,179.7    | )          | (514.7      | )          |
| Deferred taxes                                             |       | (659.5      | )          | 457.1       |       | 197.0       |       |
| Change in  actuarial gains / losses and prior service cost |       |        |       |        |       |        |       |
| Gross                                                      |       | (2,286.3    | )          | —      |       | —      |       |
| Deferred taxes                                             |       | 884.5       |       | —      |       | —      |       |
| **Other  comprehensive income (loss)**                     | ** ** | **(688.7**  | **)**      | **71.5**    | ** ** | **(531.2**  | **)**      |
| **Comprehensive income**                                   | ** ** | **2,405.6** | ** ** | **3,132.1** | ** ** | **1,331.6** | ** ** |

 

**Million €**
| ** **                                                                                                                | ** ** | **2006**     | ** ** | **2005**     | ** ** |
|---------------------------------------------------------------------------------------------------------------------------|------------|--------------|------------|--------------|------------|
| **Stockholders’  equity in accordance with U.S. GAAP (before accumulated other comprehensive  income) on January 1** |       | **20,546.8** | ** ** | **19,408.9** |       |
| **Accumulated  other comprehensive income**                                                                               |       |         |       |         |       |
| Foreign currency  translation adjustments                                                                                 |       |         |       |         |       |
| Gross                                                                                                                     |       | (1,093.3     | )          | (603.4       | )          |
| Deferred taxes                                                                                                            |       | 57.0         |       | 36.1         |       |
| Unrealized  holding gains on securities                                                                                   |       |         |       |         |       |
| Gross                                                                                                                     |       | 346.2        |       | 262.9        |       |
| Deferred taxes                                                                                                            |       | (27.7        | )          | (40.9        | )          |
| Unrealized  losses from cash flow hedges                                                                                  |       |         |       |         |       |
| Gross                                                                                                                     |       | (58.8        | )          | (79.3        | )          |
| Deferred taxes                                                                                                            |       | 25.6         |       | 31.7         |       |
| Additional  minimum liability for pensions                                                                                |       |         |       |         |       |
| Gross                                                                                                                     |       | —       |       | (1,730.7     | )          |
| Deferred taxes                                                                                                            |       | —       |       | 659.5        |       |
| Actuarial gains  / losses and prior service cost                                                                          |       |         |       |         |       |
| Gross                                                                                                                     |       | (2,286.3     | )          | —       |       |
| Deferred taxes                                                                                                            |       | 884.5        |       | —       |       |
| **Accumulated  other comprehensive income**                                                                               |       | **(2,152.8** | **)**      | **(1,464.1** | **)**      |
| **Total stockholders’ equity in  accordance with U.S. GAAP including comprehensive income on December 31**           |       | **18,394.0** | ** ** | **17,944.8** |       |

 

F-73

----

 

**Supplementaryinformation concerning oil and gas producing activities (unaudited)**

**Oil and gasproducing activities**

“Additional Petroleum Data” disclosures are presentedin accordance with the provisions of SFAS 69, “Disclosure of Oil and GasProducing Activities.” Accordingly, volumes of reserves and production exclude royaltyinterests of third parties, royalty payments and export duties are shown asreductions in revenues.

**Accountingfor suspended well costs**

Exploratory drilling costs are temporarily capitalizeduntil the drilling of the well is complete and the results have been evaluated.If hydrocarbons are found, and, subject to further appraisal activity which mayinclude the drilling of further wells, are likely to be capable of commercialdevelopment, the costs continue to be carried as an asset. All such carriedcosts are subject to technical, commercial and management review at least oncea year to confirm the continued intent to develop or otherwise extract valuefrom the discovery. When this is no longer the case, the costs are written off.When proved reserves of oil or natural gas are determined and development issanctioned, the relevant expenditure is transferred to property, plant andequipment.

The following table indicates the changes to thecompany’s suspended exploratory well costs.

**Capitalized exploration well-drilling costs****(1)**

**Million €**
| ** **                                             | ** ** | **Years ended December, 31** | ** ** |
|--------------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                             | ** ** | **2006**                                    | ** ** | **2005** | ** ** | **2004** | ** ** |
| **At  January 1**                                      | ** ** | **61.5**                                    | ** ** | **47.7** | ** ** | **35.2** | ** ** |
| Additions  pending determination of proved reserves    |       | 59.9                                        |       | 51.8 |   | 25.1 |   |
| Capitalized  exploratory well costs charged to expense |       | (21.4                                       | )          | (5.4 | ) | — |   |
| Reclassifications  to wells, facilities and equipment  |       | (13.7                                       | )          | (32.6 | ) | (12.6 | ) |
| **Ending Balance at December 31**                      | ** ** | **86.3**                                    | ** ** | **61.5** | ** ** | **47.7** | ** ** |

 

----

(1) only consolidatedcompanies

The following table provides an aging of capitalizedwell costs and number of projects.

**Capitalized exploration well-drilling costs****(1)**

**Million €**
| ** **                                              | ** ** | **Years Ended December, 31** | ** ** |
|---------------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                              | ** ** | **2006**                                    | ** ** | **2005** | ** ** | **2004** | ** ** |
| Wells for which  drilling is not completed              |       | 32.0                                        |       | 29.8 |   | 13.4 |   |
| Wells that have  been capitalized less than one year    |       | 29.4                                        |       | 24.6 |   | 16.7 |   |
| Wells that have  been capitalized greater than one year |       | 24.9                                        |       | 7.1 |   | 17.5 |   |
| **Total**                                               | ** ** | **86.3**                                    | ** ** | **61.5** | ** ** | **47.7** | ** ** |
| **Number  of wells****(1)**                             | ** ** | **18**                                      | ** ** | **14** | ** ** | **15** | ** ** |

 

----

(1) only consolidatedcompanies

**Results ofoperations from oil and gas producing activities**

Results of operations from oil and gas producingactivities represent only those revenues and expenses directly associated withWintershall’s oil and gas production. These amounts do not include anyallocation of interest expenses or corporate overheads and are therefore notnecessarily indicative of contributions to consolidated net earnings of the Company.Estimated income taxes were computed by applying the statutory income tax ratesto the pretax income from producing activities.

 

F-74

----

**Million €**
| ** **                                                      | ** ** | **Germany** | ** ** | **Libya** | ** ** | **Argentina** | ** ** | **the  Netherlands** | ** ** | **Rest of   World** | ** ** | **Total** | ** ** | **Rest of   World   (at equity)** | ** ** |
|-----------------------------------------------------------------|------------|-------------|------------|-----------|------------|---------------|------------|----------------------|------------|-------------------------------|------------|-----------|------------|-------------------------------------------------------|------------|
| **2006**                                                        |       |        |       |      |       |          |       |                 |       |                          |       |      |       |                                                  |       |
| **Results  of operations**                                      |       |        |       |      |       |          |       |                 |       |                          |       |      |       |                                                  |       |
| Sales to consolidated companies                                 |       | 38          |       | 245       |       | —        |       | —               |       | 25                            |       | 308       |       | —                                                |       |
| Sales to third parties                                          |       | 659         |       | 2,020     |       | 300           |       | 467                  |       | 67                            |       | 3,513     |       | 50                                                    |       |
| Royalties / export duties                                       |       | 100         |       | 157       |       | 54            |       | 2                    |       | 20                            |       | 333       |       | 21                                                    |       |
| **Total  sales**                                                |       | **597**     | ** ** | **2,108** | ** ** | **246**       | ** ** | **465**              | ** ** | **72**                        | ** ** | **3,488** | ** ** | **29**                                                |       |
| Production costs                                                |       | 89          |       | 154       |       | 70            |       | 82                   |       | 8                             |       | 403       |       | 9                                                     |       |
| Exploration expenses                                            |       | 10          |       | 30        |       | 12            |       | 62                   |       | 53                            |       | 167       |       | 2                                                     |       |
| Depreciation, depletion, amortization and valuation  provisions |       | 60          |       | 53        |       | 33            |       | 122                  |       | 6                             |       | 274       |       | 1                                                     |       |
| Other                                                           |       | —      |       | 20        |       | (7            | )          | —               |       | (1                            | )          | 12        |       | —                                                |       |
| **Total  costs**                                                |       | **159**     | ** ** | **257**   | ** ** | **108**       | ** ** | **266**              | ** ** | **66**                        | ** ** | **856**   | ** ** | **12**                                                |       |
| **Income  before taxes**                                        |       | **438**     | ** ** | **1,851** | ** ** | **138**       | ** ** | **199**              | ** ** | **6**                         | ** ** | **2,632** | ** ** | **17**                                                |       |
| Income taxes                                                    |       | 167         |       | 1,677     |       | 21            |       | 59                   |       | 40                            |       | 1,964     |       | 4                                                     |       |
| **Income  after taxes**                                         |       | **271**     | ** ** | **174**   | ** ** | **117**       | ** ** | **140**              | ** ** | **(34**                       | **)**      | **668**   | ** ** | **13**                                                |       |
| **2005**                                                        |       |        |       |      |       |          |       |                 |       |                          |       |      |       |                                                  |       |
| **Results  of operations**                                      |       |        |       |      |       |          |       |                 |       |                          |       |      |       |                                                  |       |
| Sales to consolidated companies                                 |       | 15          |       | —    |       | —        |       | —               |       | —                        |       | 15        |       | 8                                                     |       |
| Sales to third parties                                          |       | 531         |       | 1,943     |       | 254           |       | 358                  |       | 86                            |       | 3,172     |       | 33                                                    |       |
| Royalties                                                       |       | 68          |       | 164       |       | 26            |       | 6                    |       | 17                            |       | 281       |       | 8                                                     |       |
| **Total  sales**                                                |       | **478**     | ** ** | **1,779** | ** ** | **228**       | ** ** | **352**              | ** ** | **69**                        | ** ** | **2,906** | ** ** | **33**                                                |       |
| Production costs                                                |       | 97          |       | 123       |       | 66            |       | 66                   |       | 9                             |       | 361       |       | 7                                                     |       |
| Exploration expenses                                            |       | 10          |       | 24        |       | 12            |       | 51                   |       | 76                            |       | 173       |       | 3                                                     |       |
| Depreciation, depletion, amortization and valuation             |       | 45          |       | 54        |       | 26            |       | 118                  |       | 7                             |       | 250       |       | 1                                                     |       |
| Other                                                           |       | 2           |       | 9         |       | (1            | )          | —               |       | 10                            |       | 20        |       | 10                                                    |       |
| **Total  costs**                                                |       | **154**     | ** ** | **210**   | ** ** | **103**       | ** ** | **235**              | ** ** | **102**                       | ** ** | **804**   | ** ** | **21**                                                |       |
| **Income  before taxes**                                        |       | **324**     | ** ** | **1,569** | ** ** | **124**       | ** ** | **117**              | ** ** | **(34**                       | **)**      | **2,100** | ** ** | **12**                                                |       |
| Income taxes                                                    |       | 123         |       | 1,411     |       | 25            |       | 37                   |       | 12                            |       | 1,608     |       | 3                                                     |       |
| **Income  after taxes**                                         |       | **201**     | ** ** | **158**   | ** ** | **99**        | ** ** | **80**               | ** ** | **(46**                       | **)**      | **492**   | ** ** | **9**                                                 |       |
| **2004**                                                        |       |        |       |      |       |          |       |                 |       |                          |       |      |       |                                                  |       |
| **Results  of operations**                                      |       |        |       |      |       |          |       |                 |       |                          |       |      |       |                                                  |       |
| Sales to consolidated companies                                 |       | 16          |       | —    |       | —        |       | —               |       | —                        |       | 16        |       | 4                                                     |       |
| Sales to third parties                                          |       | 389         |       | 1,346     |       | 201           |       | 261                  |       | 56                            |       | 2,253     |       | 22                                                    |       |
| Royalties                                                       |       | 48          |       | 158       |       | 20            |       | 5                    |       | 12                            |       | 243       |       | 4                                                     |       |
| **Total  sales**                                                |       | **357**     | ** ** | **1,188** | ** ** | **181**       | ** ** | **256**              | ** ** | **44**                        | ** ** | **2,026** | ** ** | **22**                                                |       |
| Production costs                                                |       | 88          |       | 134       |       | 46            |       | 58                   |       | 6                             |       | 332       |       | 7                                                     |       |
| Exploration expenses                                            |       | 7           |       | 33        |       | 15            |       | 64                   |       | 74                            |       | 193       |       | 2                                                     |       |
| Depreciation, depletion, amortization and valuation             |       | 42          |       | 25        |       | 21            |       | 93                   |       | 4                             |       | 185       |       | 2                                                     |       |
| Other                                                           |       | (4          | )          | —    |       | —        |       | —               |       | 2                             |       | (2        | )          | 3                                                     |       |
| **Total  costs**                                                |       | **133**     | ** ** | **192**   | ** ** | **82**        | ** ** | **215**              | ** ** | **86**                        | ** ** | **708**   | ** ** | **14**                                                |       |
| **Income  before taxes**                                        |       | **224**     | ** ** | **996**   | ** ** | **99**        | ** ** | **41**               | ** ** | **(42**                       | **)**      | **1,318** | ** ** | **8**                                                 |       |
| Income taxes                                                    |       | 85          |       | 879       |       | 20            |       | 14                   |       | 23                            |       | 1,021     |       | 2                                                     |       |
| **Income after taxes**                                          |       | **139**     | ** ** | **117**   | ** ** | **79**        | ** ** | **27**               | ** ** | **(65**                       | **)**      | **297**   | ** ** | **6**                                                 |       |

 

F-75

----

 **Costs incurred in oil andgas property acquisition, exploration and development****activities**

Costs incurred representamounts capitalized or charged against income as incurred in connectionwith oil and gas property acquisition,exploration and development activities. Exploration and development costs include applicable depreciation ofsupport equipment and sites used in such activities.  

**Million €**
| ** **              | ** ** | **Germany** | ** ** | **Libya** | ** ** | **Argentina** | ** ** | **The  Netherlands** | ** ** | **Rest of  World** | ** ** | **Total** | ** ** | **Rest of   World   (at equity)** | ** ** |
|-------------------------|------------|-------------|------------|-----------|------------|---------------|------------|----------------------|------------|-------------------------|------------|-----------|------------|-------------------------------------------------------|------------|
| **2006**                |       |        |       |      |       |          |       |                 |       |                    |       |      |       |                                                  |       |
| **Costs  incurred**     |       |        |       |      |       |          |       |                 |       |                    |       |      |       |                                                  |       |
| Property  acquisitions: |       |        |       |      |       |          |       |                 |       |                    |       |      |       |                                                  |       |
| Proved                  |       | —      |       | —    |       | —        |       | —               |       | —                  |       | —    |       | —                                                |       |
| Unproved                |       | —      |       | —    |       | —        |       | —               |       | —                  |       | —    |       | —                                                |       |
| Exploration             |       | 16          |       | 52        |       | 17            |       | 68                   |       | 43                      |       | 196       |       | 6                                                     |       |
| Development             |       | 47          |       | 60        |       | 45            |       | 72                   |       | 3                       |       | 227       |       | —                                                |       |
| **Total  costs**        | ** ** | **63**      | ** ** | **112**   | ** ** | **62**        | ** ** | **140**              | ** ** | **46**                  | ** ** | **423**   | ** ** | **6**                                                 |       |
| **2005**                |       |        |       |      |       |          |       |                 |       |                    |       |      |       |                                                  |       |
| **Costs  incurred**     |       |        |       |      |       |          |       |                 |       |                    |       |      |       |                                                  |       |
| Property  acquisitions: |       |        |       |      |       |          |       |                 |       |                    |       |      |       |                                                  |       |
| Proved                  |       | —      |       | —    |       | —        |       | —               |       | —                  |       | —    |       | —                                                |       |
| Unproved                |       | —      |       | —    |       | —        |       | —               |       | —                  |       | —    |       | —                                                |       |
| Exploration             |       | 26          |       | 34        |       | 13            |       | 31                   |       | 44                      |       | 148       |       | 3                                                     |       |
| Development             |       | 81          |       | 43        |       | 70            |       | 71                   |       | 5                       |       | 270       |       | —                                                |       |
| **Total  costs**        | ** ** | **107**     | ** ** | **77**    | ** ** | **83**        | ** ** | **102**              | ** ** | **49**                  | ** ** | **418**   | ** ** | **3**                                                 |       |
| **2004**                |       |        |       |      |       |          |       |                 |       |                    |       |      |       |                                                  |       |
| **Costs  incurred**     |       |        |       |      |       |          |       |                 |       |                    |       |      |       |                                                  |       |
| Property  acquisitions: |       |        |       |      |       |          |       |                 |       |                    |       |      |       |                                                  |       |
| Proved                  |       | —      |       | —    |       | —        |       | —               |       | —                  |       | —    |       | —                                                |       |
| Unproved                |       | —      |       | —    |       | —        |       | —               |       | —                  |       | —    |       | —                                                |       |
| Exploration             |       | 8           |       | 54        |       | 15            |       | 39                   |       | 40                      |       | 156       |       | 3                                                     |       |
| Development             |       | 58          |       | 61        |       | 45            |       | 61                   |       | 3                       |       | 228       |       | —                                                |       |
| **Total costs**         | ** ** | **66**      | ** ** | **115**   | ** ** | **60**        | ** ** | **100**              | ** ** | **43**                  | ** ** | **384**   | ** ** | **3**                                                 |       |

 

F-76

----

**Capitalizedcosts relating to oil and gas producing activities**

Capitalized costs representtotal expenditures on proved and unproved oil and gas properties withrelated accumulated depreciation, depletionand amortization.  

**Million €**
| ** **                                                                   | ** ** | **Germany** | ** ** | **Libya**  | ** ** | **Argentina** | ** ** | **The  Netherlands** | ** ** | **Rest of  World** | ** ** | **Total**  | ** ** | **Rest of   World   (at equity)** | ** ** |
|------------------------------------------------------------------------------|------------|-------------|------------|------------|------------|---------------|------------|----------------------|------------|-------------------------|------------|------------|------------|-------------------------------------------------------|------------|
| **2006**                                                                     | ** ** | ** **  | ** ** | ** ** | ** ** | ** **    | ** ** | ** **           | ** ** | ** **              | ** ** | ** ** | ** ** | ** **                                            | ** ** |
| **Capitalized  Costs**                                                       | ** ** | ** **  | ** ** | ** ** | ** ** | ** **    | ** ** | ** **           | ** ** | ** **              | ** ** | ** ** | ** ** | ** **                                            | ** ** |
| Gross costs:                                                                 |       |        |       |       |       |          |       |                 |       |                    |       |       |       |                                                  |       |
| Proved properties                                                            |       | 501         |       | 1,032      |       | 805           |       | 435                  |       | 22                      |       | 2,795      |       | 14                                                    |       |
| Unproved properties                                                          |       | 13          |       | —     |       | —        |       | 224                  |       | 7                       |       | 244        |       |                                                  |       |
| Other equipment                                                              |       | 576         |       | 34         |       | —        |       | 493                  |       | 174                     |       | 1,277      |       | 2                                                     |       |
| Accumulated  depreciation, depletion, amortization and valuation allowances: |       |        |       |       |       |          |       |                 |       |                    |       |       |       |                                                  |       |
| Proved properties                                                            |       | 390         |       | 640        |       | 495           |       | 288                  |       | 2                       |       | 1,815      |       | 8                                                     |       |
| Unproved properties                                                          |       | —      |       | —     |       | —        |       | 112                  |       | 4                       |       | 116        |       |                                                  |       |
| Other equipment                                                              |       | 402         |       | 29         |       | —        |       | 319                  |       | 174                     |       | 924        |       | 1                                                     |       |
| **Total  net costs**                                                         | ** ** | **298**     | ** ** | **397**    | ** ** | **310**       | ** ** | **433**              | ** ** | **23**                  | ** ** | **1,461**  | ** ** | **7**                                                 |       |
| **2005**                                                                     |       |        |       |       |       |          |       |                 |       |                    |       |       |       |                                                  |       |
| **Capitalized  Costs**                                                       | ** ** | ** **  | ** ** | ** ** | ** ** | ** **    | ** ** | ** **           | ** ** | ** **              | ** ** | ** ** | ** ** | ** **                                            | ** ** |
| Gross costs:                                                                 |       |        |       |       |       |          |       |                 |       |                    |       |       |       |                                                  |       |
| Proved properties                                                            |       | 455         |       | 937        |       | 757           |       | 433                  |       | 79                      |       | 2,661      |       | 13                                                    |       |
| Unproved properties                                                          |       | 18          |       | —     |       | —        |       | 206                  |       | 19                      |       | 243        |       | —                                                |       |
| Other equipment                                                              |       | 564         |       | 35         |       | —        |       | 398                  |       | 171                     |       | 1,168      |       | 2                                                     |       |
| Accumulated  depreciation, depletion, amortization and valuation allowances: |       |        |       |       |       |          |       |                 |       |                    |       |       |       |                                                  |       |
| Proved properties                                                            |       | 455         |       | 581        |       | 465           |       | 236                  |       | 65                      |       | 1,802      |       | 7                                                     |       |
| Unproved properties                                                          |       | —      |       | —     |       | —        |       | 77                   |       | 6                       |       | 83         |       | —                                                |       |
| Other equipment                                                              |       | 283         |       | 28         |       | —        |       | 251                  |       | 170                     |       | 732        |       | 2                                                     |       |
| **Total  net costs**                                                         | ** ** | **299**     | ** ** | **363**    | ** ** | **292**       | ** ** | **473**              | ** ** | **28**                  | ** ** | **1,455**  | ** ** | **6**                                                 | ** ** |
| **2004**                                                                     |       |        |       |       |       |          |       |                 |       |                    |       |       |       |                                                  |       |
| **Capitalized  Costs**                                                       | ** ** | ** **  | ** ** | ** ** | ** ** | ** **    | ** ** | ** **           | ** ** | ** **              | ** ** | ** ** | ** ** | ** **                                            | ** ** |
| Gross costs:                                                                 |       |        |       |       |       |          |       |                 |       |                    |       |       |       |                                                  |       |
| Proved properties                                                            |       | 410         |       | 847        |       | 664           |       | 428                  |       | 3                       |       | 2,352      |       | 13                                                    |       |
| Unproved properties                                                          |       | 5           |       | —     |       | —        |       | 197                  |       | 30                      |       | 232        |       | —                                                |       |
| Other equipment                                                              |       | 468         |       | 33         |       | —        |       | 276                  |       | 167                     |       | 944        |       | 2                                                     |       |
| Accumulated  depreciation, depletion, amortization and valuation allowances: |       |        |       |       |       |          |       |                 |       |                    |       |       |       |                                                  |       |
| Proved properties                                                            |       | 324         |       | 517        |       | 430           |       | 171                  |       | —                  |       | 1,442      |       | 6                                                     |       |
| Unproved properties                                                          |       | —      |       | —     |       | —        |       | 40                   |       | 21                      |       | 61         |       | —                                                |       |
| Other equipment                                                              |       | 346         |       | 25         |       | —        |       | 155                  |       | 153                     |       | 679        |       | 1                                                     |       |
| **Total net costs**                                                          | ** ** | **213**     | ** ** | **338**    | ** ** | **234**       | ** ** | **535**              | ** ** | **26**                  | ** ** | **1,346**  | ** ** | **8**                                                 | ** ** |

 

F-77

----

 **Oil and natural gas reserves**

Proved oil and gas reservesare the estimated volumes of crude oil, natural gas and natural gas liquidsthat are shown by geological andengineering data with reasonable certainty to be recoverable in future years from known reserves under existingeconomic and operating conditions, i. e., prices and costs as of the date the estimates are made. Prices onlyreflect changes in existing prices resulting from contractual arrangements, not escalation based on futureconditions. Proved reserves exclude royalties and interests of third parties.

Proved developed reserves arereserves that can be expected to be recovered through existing wellswith existing equipment and operating methods.Additional oil and gas expected to be obtained through the application of fluid injection or otherimproved recovery techniques for supplementing natural forces and mechanisms of primary recovery are included asproved developed reserves only after testing in the form of a pilot project or after the operation ofan installed program has confirmed through production response that increased recovery will be achieved.

Numerous uncertainties areinherent in estimating quantities of proved reserves and in projecting futurerates of production and timingdevelopment expenditures. The accuracy of any reserve estimate is a function of the quality of available data andengineering and geological interpretation and judgment. Results of drilling, testing and production after thedate of the estimate may necessitate substantial upward or downward revisions. In addition, changes inoil and natural gas prices could have an effect on the quantities of proved reserves because the estimates ofreserves are based on prices and costs at the date when such estimates are made.

The tables below show theestimated net quantities, calculated in compliance with Regulation S-X,Rule 4–10(a), as of December 31, 2006, 2005and 2004 of the Company’s proved oil and gas reserves and proved developed oil and gas reserves, as wellas changes in estimated proved reserves as a result of production and other factors. The Company’sreserves for 2006, 2005 and 2004 include reserves owned directly by the Company and its consolidatedsubsidiaries.  

F-78

----

** **
| ** **                                                  | ** ** | **Germany** | ** ** | **Libya** | ** ** | **Argentina** | ** ** | **The  Netherlands** | ** ** | **Rest of  World** | ** ** | **Total** | ** ** | **Rest of   World   (at equity)** | ** ** |
|-------------------------------------------------------------|------------|-------------|------------|-----------|------------|---------------|------------|----------------------|------------|-------------------------|------------|-----------|------------|-------------------------------------------------------|------------|
| **2006**                                                    |       |        |       |      |       |          |       |                 |       |                    |       |      |       |                                                  |       |
| **Estimated  proved oil reserves (millions of barrels)**    |       |        |       |      |       |          |       |                 |       |                    |       |      |       |                                                  |       |
| Proved developed  and undeveloped reserves, as of January 1 |       | 79          |       | 329       |       | 57            |       | 2                    |       | 2                       |       | 469       |       | 11                                                    |       |
| Revisions and other changes                                 |       | (1          | )          | 22        |       | 3             |       | —               |       | —                  |       | 24        |       | 1                                                     |       |
| Extensions and discoveries                                  |       | —      |       | —    |       | —        |       | —               |       | —                  |       | —    |       | 1                                                     |       |
| Improved recovery                                           |       | —      |       | —    |       | —        |       | —               |       | —                  |       | —    |       | —                                                |       |
| Purchase of reserves                                        |       | —      |       | —    |       | —        |       | —               |       | —                  |       | —    |       | —                                                |       |
| Sale of reserves                                            |       | —      |       | —    |       | —        |       | —               |       | —                  |       | —    |       | —                                                |       |
| Production                                                  |       | 10          |       | 45        |       | 6             |       | 1                    |       | 1                       |       | 63        |       | 2                                                     |       |
| **As of  December 31**                                      | ** ** | **68**      | ** ** | **306**   | ** ** | **54**        | ** ** | **1**                | ** ** | **1**                   | ** ** | **430**   | ** ** | **12**                                                | ** ** |
| Proved developed  reserves, as of January 1                 |       | 50          |       | 317       |       | 44            |       | 2                    |       | 2                       |       | 415       |       | 11                                                    |       |
| As of December  31                                          |       | 42          |       | 303       |       | 45            |       | 1                    |       | 1                       |       | 392       |       | 12                                                    |       |
| **Estimated  proved gas reserves (BSCF)**                   |       |        |       |      |       |          |       |                 |       |                    |       |      |       |                                                  |       |
| Proved developed  and undeveloped reserves, as of January 1 |       | 395         |       | 217       |       | 1,462         |       | 249                  |       | 24                      |       | 2,347     |       | —                                                |       |
| Revisions and other changes                                 |       | 32          |       | 41        |       | 73            |       | 9                    |       | —                  |       | 155       |       | —                                                |       |
| Extensions and discoveries                                  |       | —      |       | —    |       | —        |       | 16                   |       | —                  |       | 16        |       | —                                                |       |
| Improved recovery                                           |       | —      |       | —    |       | —        |       | —               |       | —                  |       | —    |       | —                                                |       |
| Purchase of reserves                                        |       | —      |       | —    |       | —        |       | —               |       | —                  |       | —    |       | —                                                |       |
| Sale of reserves                                            |       | —      |       | —    |       | —        |       | —               |       | 10                      |       | 10        |       | —                                                |       |
| Production                                                  |       | 51          |       | 26        |       | 127           |       | 74                   |       | —                  |       | 278       |       | —                                                |       |
| **As of  December 31**                                      | ** ** | **376**     | ** ** | **232**   | ** ** | **1,408**     | ** ** | **200**              | ** ** | **14**                  | ** ** | **2,230** |       | —                                                |       |
| Proved developed  reserves, as of January 1                 |       | 346         |       | 209       |       | 1,000         |       | 187                  |       | 21                      |       | 1,763     |       | —                                                |       |
| As of December  31                                          |       | 352         |       | 232       |       | 978           |       | 196                  |       | 10                      |       | 1,768     |       | —                                                |       |
| **2005**                                                    |       |        |       |      |       |          |       |                 |       |                    |       |      |       |                                                  |       |
| **Estimated  proved oil reserves (millions of barrels)**    |       |        |       |      |       |          |       |                 |       |                    |       |      |       |                                                  |       |
| Proved developed  and undeveloped reserves, as of January 1 |       | 82          |       | 362       |       | 48            |       | 1                    |       | 8                       |       | 501       |       | 13                                                    |       |
| Revisions and other changes                                 |       | 6           |       | 7         |       | 15            |       | 2                    |       | (4                      | )          | 26        |       | —                                                |       |
| Extensions and discoveries                                  |       | —      |       | 7         |       | —        |       | —               |       | —                  |       | 7         |       | —                                                |       |
| Improved recovery                                           |       | —      |       | —    |       | —        |       | —               |       | —                  |       | —    |       | —                                                |       |
| Purchase of reserves                                        |       | —      |       | —    |       | —        |       | —               |       | —                  |       | —    |       | —                                                |       |
| Sale of reserves                                            |       | —      |       | —    |       | —        |       | —               |       | —                  |       | —    |       | —                                                |       |
| Production                                                  |       | 9           |       | 47        |       | 6             |       | 1                    |       | 2                       |       | 65        |       | 2                                                     |       |
| As of December 31                                           |       | 79          |       | 329       |       | 57            |       | 2                    |       | 2                       |       | 469       |       | 11                                                    |       |
| Proved developed reserves, as of January 1                  |       | 53          |       | 335       |       | 36            |       | 1                    |       | 7                       |       | 432       |       | 13                                                    |       |
| As of December 31                                           |       | 50          |       | 317       |       | 44            |       | 2                    |       | 2                       |       | 415       |       | 11                                                    |       |
| **Estimated  proved gas reserves (BSCF)**                   |       |        |       |      |       |          |       |                 |       |                    |       |      |       |                                                  |       |
| Proved developed  and undeveloped reserves, as of January 1 |       | 439         |       | 217       |       | 1,530         |       | 265                  |       | 12                      |       | 2,463     |       | —                                                |       |
| Revisions and other changes                                 |       | 7           |       | 21        |       | 52            |       | 32                   |       | (6                      | )          | 106       |       | —                                                |       |
| Extensions and discoveries                                  |       | —      |       | 5         |       | —        |       | 25                   |       | —                  |       | 30        |       | —                                                |       |
| Improved recovery                                           |       | —      |       | —    |       | —        |       | —               |       | —                  |       | —    |       | —                                                |       |
| Purchase of reserves                                        |       | —      |       | —    |       | —        |       | —               |       | 20                      |       | 20        |       | —                                                |       |
| Sale of reserves                                            |       | —      |       | —    |       | —        |       | —               |       | —                  |       | —    |       | —                                                |       |
| Production                                                  |       | 51          |       | 26        |       | 120           |       | 73                   |       | 2                       |       | 272       |       | —                                                |       |
| As of December  31                                          |       | 395         |       | 217       |       | 1,462         |       | 249                  |       | 24                      |       | 2,347     |       | —                                                |       |
| Proved developed  reserves, as of January 1                 |       | 389         |       | 201       |       | 954           |       | 189                  |       | 12                      |       | 1,745     |       | —                                                |       |
| As of December 31                                           |       | 346         |       | 209       |       | 1,000         |       | 187                  |       | 21                      |       | 1,763     |       | —                                                |       |

** **

F-79

----

** **
| ** **                                                  | ** ** | **Germany** | ** ** | **Libya** | ** ** | **Argentina** | ** ** | **The  Netherlands** | ** ** | **Rest of  World** | ** ** | **Total** | ** ** | **Rest of   World   (at equity)** | ** ** |
|-------------------------------------------------------------|------------|-------------|------------|-----------|------------|---------------|------------|----------------------|------------|-------------------------|------------|-----------|------------|-------------------------------------------------------|------------|
| **2004**                                                    |       |        |       |      |       |          |       |                 |       |                    |       |      |       |                                                  |       |
| **Estimated proved oil reserves (millions of  barrels)**    |       |        |       |      |       |          |       |                 |       |                    |       |      |       |                                                  |       |
| Proved developed  and undeveloped reserves, as of January 1 |       | 93          |       | 407       |       | 52            |       | 0                    |       | 10                      |       | 562       |       | 14                                                    |       |
| Revisions and other changes                                 |       | (1          | )          | (11       | )          | 4             |       | 1                    |       | —                  |       | (7        | )          | —                                                |       |
| Extensions and discoveries                                  |       | —      |       | 10        |       | 0             |       | —               |       | —                  |       | 10        |       | —                                                |       |
| Improved recovery                                           |       | —      |       | —    |       | —        |       | —               |       | —                  |       | —    |       | —                                                |       |
| Purchase of reserves                                        |       | —      |       | —    |       | —        |       | —               |       | —                  |       | —    |       | —                                                |       |
| Sale of reserves                                            |       | —      |       | —    |       | —        |       | —               |       | —                  |       | —    |       | —                                                |       |
| Production                                                  |       | 10          |       | 44        |       | 8             |       | 0                    |       | 2                       |       | 64        |       | 1                                                     |       |
| As of December 31                                           |       | 82          |       | 362       |       | 48            |       | 1                    |       | 8                       |       | 501       |       | 13                                                    |       |
| Proved developed reserves, as of January 1                  |       | 60          |       | 338       |       | 28            |       | 0                    |       | 10                      |       | 436       |       | 14                                                    |       |
| As of December 31                                           |       | 53          |       | 335       |       | 36            |       | 1                    |       | 7                       |       | 432       |       | 13                                                    |       |
| **Estimated  proved gas reserves (BSCF)**                   |       |        |       |      |       |          |       |                 |       |                    |       |      |       |                                                  |       |
| Proved developed  and undeveloped reserves, as of January 1 |       | 453         |       | 226       |       | 1,463         |       | 253                  |       | 16                      |       | 2,411     |       | —                                                |       |
| Revisions and other changes                                 |       | 42          |       | 9         |       | 177           |       | 73                   |       | (3                      | )          | 298       |       | —                                                |       |
| Extensions and discoveries                                  |       | —      |       | 1         |       | —        |       | 4                    |       | —                  |       | 5         |       | —                                                |       |
| Improved recovery                                           |       | —      |       | —    |       | —        |       | —               |       | —                  |       | —    |       | —                                                |       |
| Purchase of reserves                                        |       | —      |       | —    |       | —        |       | 7                    |       | —                  |       | 7         |       | —                                                |       |
| Sale of reserves                                            |       | —      |       | —    |       | —        |       | —               |       | —                  |       | —    |       | —                                                |       |
| Production                                                  |       | 56          |       | 19        |       | 110           |       | 72                   |       | 1                       |       | 258       |       | —                                                |       |
| As of December  31                                          |       | 439         |       | 217       |       | 1,530         |       | 265                  |       | 12                      |       | 2,463     |       | —                                                |       |
| Proved developed  reserves, as of January 1                 |       | 395         |       | 137       |       | 604           |       | 151                  |       | 16                      |       | 1,303     |       | —                                                |       |
| As of December 31                                           |       | 389         |       | 201       |       | 954           |       | 189                  |       | 12                      |       | 1,745     |       | —                                                |       |

 

**Standardizedmeasure of discounted future net cash flows relating to proved oil and****gas reserves**

The following information hasbeen prepared in accordance with SFAS No. 69, which requires thestandardized measure of discounted future netcash flows to be based on year-end sales prices, costs and statutory income tax rates and a 10% annualdiscount rate. Because prices used in the calculation are as of December 31, the standardized measure couldvary significantly from year to year depending on market conditions at that specific date.  

The projection should not beviewed as realistic estimates of future cash flows nor should the“standardized measure” be interpreted asrepresenting current value to the company. Material revisions of estimates of proved reserves may occur in thefuture, development and production of the reserves may not occur in the period assumed, actual pricesrealized are expected to vary significantly from those used and actual costs may also vary. The company’sinvestment and operating decisions are not based on the information presented below, but on a widerange of reserves, and on different price and cost assumptions from those reflected in this information.

Beyond the aboveconsiderations, the “standardized measure” is also not directly comparable withasset balances appearingelsewhere in the Consolidated Financial Statements because any such comparison would require a reconciling adjustment.

F-80

----

**Standardizedmeasure of discounted future net cash flows relating to proved oil and****gas reserves****Million €**
| ** **                                        | ** ** | **Germany** | ** ** | **Libya**  | ** ** | **Argentina** | ** ** | **The  Netherlands** | ** ** | **Rest of  World** | ** ** | **Total**  | ** ** | **Rest of   World   (at equity)** | ** ** |
|---------------------------------------------------|------------|-------------|------------|------------|------------|---------------|------------|----------------------|------------|-------------------------|------------|------------|------------|-------------------------------------------------------|------------|
| **2006**                                          |       |        |       |       |       |          |       |                 |       |                    |       |       |       |                                                  |       |
| **Discounted  future net cash flow**              |       |        |       |       |       |          |       |                 |       |                    |       |       |       |                                                  |       |
| Revenues                                          |       | **3,949**   | ** ** | **12,249** | ** ** | **2,346**     | ** ** | **1,267**            | ** ** | **92**                  | ** ** | **19,903** | ** ** | **257**                                               |       |
| Production/development  costs                     |       | 1,428       |       | 2,222      |       | 986           |       | 478                  |       | 57                      |       | 5,171      |       | 160                                                   |       |
| Income taxes                                      |       | 832         |       | 8,709      |       | 240           |       | 360                  |       | 20                      |       | 10,161     |       | 33                                                    |       |
| Future net cash  flows                            |       | 1,689       |       | 1,318      |       | 1,120         |       | 429                  |       | 15                      |       | 4,571      |       | 64                                                    |       |
| Discounted to  present value at a 10% annual rate |       | 678         |       | 437        |       | 423           |       | 35                   |       | 24                      |       | 1,597      |       | 5                                                     |       |
| **Total**                                         | ** ** | **1,011**   | ** ** | **881**    | ** ** | **697**       | ** ** | **394**              | ** ** | **(9**                  | **)**      | **2,974**  | ** ** | **59**                                                | ** ** |
| **2005**                                          |       |        |       |       |       |          |       |                 |       |                    |       |       |       |                                                  |       |
| **Discounted  future net cash flow**              |       |        |       |       |       |          |       |                 |       |                    |       |       |       |                                                  |       |
| Revenues                                          |       | 4,102       |       | 14,521     |       | 3,081         |       | 1,347                |       | 80                      |       | 23,131     |       | 313                                                   |       |
| Production/development  costs                     |       | 1,483       |       | 1,722      |       | 1,205         |       | 443                  |       | 36                      |       | 4,889      |       | 166                                                   |       |
| Income taxes                                      |       | 1,094       |       | 10,956     |       | 264           |       | 385                  |       | 47                      |       | 12,746     |       | 12                                                    |       |
| Future net cash  flows                            |       | 1,525       |       | 1,843      |       | 1,612         |       | 519                  |       | (3                      | )          | 5,496      |       | 135                                                   |       |
| Discounted to  present value at a 10% annual rate |       | 469         |       | 656        |       | 607           |       | 63                   |       | 2                       |       | 1,797      |       | 42                                                    |       |
| **Total**                                         | ** ** | **1,056**   | ** ** | **1,187**  | ** ** | **1,005**     | ** ** | **456**              | ** ** | **(5**                  | **)**      | **3,699**  | ** ** | **93**                                                | ** ** |
| **2004**                                          |       |        |       |       |       |          |       |                 |       |                    |       |       |       |                                                  |       |
| **Discounted  future net cash flow**              |       |        |       |       |       |          |       |                 |       |                    |       |       |       |                                                  |       |
| Revenues                                          |       | 2,647       |       | 9,169      |       | 2,384         |       | 958                  |       | 176                     |       | 15,334     |       | 170                                                   |       |
| Production/development  costs                     |       | 1,224       |       | 1,362      |       | 744           |       | 391                  |       | 63                      |       | 3,784      |       | 86                                                    |       |
| Income taxes                                      |       | 639         |       | 6,645      |       | 199           |       | 182                  |       | 104                     |       | 7,769      |       | 20                                                    |       |
| Future net cash  flows                            |       | 784         |       | 1,162      |       | 1,441         |       | 385                  |       | 9                       |       | 3,781      |       | 64                                                    |       |
| Discounted to  present value at a 10% annual rate |       | 187         |       | 398        |       | 636           |       | 56                   |       | 0                       |       | 1,277      |       | 22                                                    |       |
| **Total**                                         | ** ** | **597**     | ** ** | **764**    | ** ** | **805**       | ** ** | **329**              | ** ** | **9**                   | ** ** | **2,504**  | ** ** | **42**                                                | ** ** |

 

F-81

----

**Summary of changes in standardizedmeasure of discounted future net cash flows****relating to proved oil andgas reserves****Million €**
| ** **                                                            | ** ** | **Germany** | ** ** | **Libya**  | ** ** | **Argentina** | ** ** | **The  Netherlands** | ** ** | **Rest of  World** | ** ** | **Total**  | ** ** | **Rest of   World   (at equity)** | ** ** |
|-----------------------------------------------------------------------|------------|-------------|------------|------------|------------|---------------|------------|----------------------|------------|-------------------------|------------|------------|------------|-------------------------------------------------------|------------|
| **2006**                                                              | ** ** | ** **  | ** ** | ** ** | ** ** | ** **    | ** ** | ** **           | ** ** | ** **              | ** ** | ** ** | ** ** | ** **                                            | ** ** |
| **Summary of changes**                                                |       |        |       |       |       |          |       |                 |       |                    |       |       |       |                                                  |       |
| Balance as of January 1                                               |       | 1,056       |       | 1,187      |       | 1,005         |       | 456                  |       | (5                      | )          | 3,699      |       | 93                                                    |       |
| Sales and transfers of  oil and gas produced, net of production costs |       | (508        | )          | (1,954     | )          | (176          | )          | (383                 | )          | (64                     | )          | (3,085     | )          | (20                                                   | )          |
| Net changes in price  and in development and production costs         |       | 131         |       | (744       | )          | (336          | )          | 138                  |       | 3                       |       | (808       | )          | (24                                                   | )          |
| Extension, discoveries  and improved recovery, less related costs     |       | —      |       | —     |       | —        |       | 50                   |       | —                  |       | 50         |       | 10                                                    |       |
| Revisions of previous  quantity estimates                             |       | (54         | )          | 519        |       | 80            |       | 30                   |       | 16                      |       | 591        |       | 8                                                     |       |
| Development costs  incurred during the period                         |       | 34          |       | 54         |       | 37            |       | 42                   |       | 3                       |       | 170        |       | —                                                |       |
| Changes in estimated  future development costs                        |       | 29          |       | (20        | )          | (36           | )          | (14                  | )          | 1                       |       | (40        | )          | 2                                                     |       |
| Purchase (sales) of  reserves in place – net                     |       | —      |       | —     |       | —        |       | —               |       | (2                      | )          | (2         | )          | —                                                |       |
| Accretion of discounts                                                |       | 156         |       | 725        |       | 109           |       | 64                   |       | 2                       |       | 1,056      |       | 9                                                     |       |
| Net changes in income  taxes                                          |       | 168         |       | 1,114      |       | 14            |       | 11                   |       | 36                      |       | 1,343      |       | (13                                                   | )          |
| Other                                                                 |       | (1          | )          | —     |       | —        |       | —               |       | 1                       |       | —     |       | (6                                                    | )          |
| **Balance as of December 31**                                         | ** ** | **1,011**   | ** ** | **881**    | ** ** | **697**       | ** ** | **394**              | ** ** | **(9**                  | **)**      | **2,974**  | ** ** | **59**                                                | ** ** |
| **2005**                                                              |       |        |       |       |       |          |       |                 |       |                    |       |       |       |                                                  |       |
| **Summary of changes**                                                |       |        |       |       |       |          |       |                 |       |                    |       |       |       |                                                  |       |
| Balance as of January 1                                               |       | 597         |       | 764        |       | 805           |       | 329                  |       | 9                       |       | 2,504      |       | 42                                                    |       |
| Sales and transfers of  oil and gas produced, net of production costs |       | (381        | )          | (1,656     | )          | (162          | )          | (286                 | )          | (55                     | )          | (2,540     | )          | (26                                                   | )          |
| Net changes in price  and in development and production costs         |       | 1,048       |       | 3,946      |       | 205           |       | 300                  |       | —                  |       | 5,499      |       | 63                                                    |       |
| Extension, discoveries  and improved recovery, less related costs     |       | —      |       | 360        |       | —        |       | 55                   |       | —                  |       | 415        |       | —                                                |       |
| Revisions of previous  quantity estimates                             |       | (85         | )          | 113        |       | 115           |       | 174                  |       | 9                       |       | 326        |       | 5                                                     |       |
| Development costs  incurred during the period                         |       | 79          |       | 44         |       | 60            |       | 57                   |       | 4                       |       | 244        |       | —                                                |       |
| Changes in estimated  future development costs                        |       | (18         | )          | (16        | )          | (52           | )          | (45                  | )          | (16                     | )          | (147       | )          | (1                                                    | )          |
| Purchase (sales) of  reserves in place – net                     |       | —      |       | —     |       | —        |       | —               |       | —                  |       | —     |       | —                                                |       |
| Accretion of discounts                                                |       | 93          |       | 439        |       | 88            |       | 40                   |       | 8                       |       | 668        |       | 5                                                     |       |
| Net changes in income  taxes                                          |       | (277        | )          | (2,807     | )          | (54           | )          | (168                 | )          | 36                      |       | (3,270     | )          | 5                                                     |       |
| Other                                                                 |       | —      |       | —     |       | —        |       | —               |       | —                  |       | —     |       | —                                                |       |
| **Balance as of December 31**                                         | ** ** | **1,056**   | ** ** | **1,187**  | ** ** | **1,005**     | ** ** | **456**              | ** ** | **(5**                  | **)**      | **3,699**  | ** ** | **93**                                                | ** ** |
| **2004**                                                              |       |        |       |       |       |          |       |                 |       |                    |       |       |       |                                                  |       |
| **Summary of changes**                                                |       |        |       |       |       |          |       |                 |       |                    |       |       |       |                                                  |       |
| Balance as of January 1                                               |       | 547         |       | 657        |       | 379           |       | 220                  |       | 16                      |       | 1,819      |       | 44                                                    |       |
| Sales and transfers of  oil and gas produced, net of production costs |       | (269        | )          | (1,054     | )          | (135          | )          | (198                 | )          | (38                     | )          | (1,694     | )          | (15                                                   | )          |
| Net changes in price  and in development and production costs         |       | 178         |       | 1,519      |       | 323           |       | 49                   |       | 8                       |       | 2,077      |       | 11                                                    |       |
| Extension, discoveries  and improved recovery, less related costs     |       | —      |       | 148        |       | —        |       | 7                    |       | —                  |       | 155        |       | —                                                |       |
| Revisions of previous  quantity estimates                             |       | 44          |       | (152       | )          | 171           |       | 151                  |       | (1                      | )          | 213        |       | 1                                                     |       |
| Development costs  incurred during the period                         |       | 62          |       | 62         |       | 45            |       | 61                   |       | 3                       |       | 233        |       | 0                                                     |       |
| Changes in estimated  future development costs                        |       | (12         | )          | (54        | )          | (3            | )          | 36                   |       | (3                      | )          | (36        | )          | (4                                                    | )          |
| Purchase (sales) of  reserves in place – net                     |       | —      |       | —     |       | —        |       | 4                    |       | —                  |       | 4          |       | —                                                |       |
| Accretion of discounts                                                |       | 85          |       | 367        |       | 46            |       | 28                   |       | 9                       |       | 535        |       | 5                                                     |       |
| Net changes in income  taxes                                          |       | (38         | )          | (729       | )          | (21           | )          | (29                  | )          | 15                      |       | (802       | )          | 0                                                     |       |
| Other                                                                 |       | —      |       | —     |       | —        |       | —               |       | —                  |       | —     |       | —                                                |       |
| **Balance as of December 31**                                         | ** ** | **597**     | ** ** | **764**    | ** ** | **805**       | ** ** | **329**              | ** ** | **9**                   | ** ** | **2,504**  | ** ** | **42**                                                | ** ** |

 

F-82

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Item19.         Exhibits
| 1.1    |   | Articles of Association (*Satzung*) of BASF Aktiengesellschaft as amended to date  (previously filed as Exhibit 2.1 to BASF Aktiengesellschaft’s Registration  Statement on Form 20-F dated March 14, 2005, File No. 1-15909) |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   | * *                                                                                                                                                                                                                           |
| 8.1    |   | List of subsidiaries of BASF Aktiengesellschaft  (List of Shares Held 2006)                                                                                                                                                        |
|   |   |                                                                                                                                                                                                                               |
| 12.1   |   | Certification of Chief Executive Officer pursuant to  Section 302 of the Sarbanes-Oxley Act of 2002                                                                                                                                |
|   |   |                                                                                                                                                                                                                               |
| 12.2   |   | Certification of Chief Financial Officer pursuant to  Section 302 of the Sarbanes-Oxley Act of 2002                                                                                                                                |
|   |   |                                                                                                                                                                                                                               |
| 13.1   |   | Certification Chief Executive Officer pursuant to  18. U.S.C. Section 1350, as adopted pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002                                                                                  |
|   |   |                                                                                                                                                                                                                               |
| 13.2   |   | Certification Chief Financial Officer pursuant to  18. U.S.C. Section 1350, as adopted pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002                                                                                  |

 

 

E-1

----

**SIGNATURES**

The registrant herebycertifies that it meets all of the requirements for filing on Form 20-F andthat it has duly caused and authorized the undersigned to sign this annualreport on its behalf.
| Date: March 6, 2007 | BASF AKTIENGESELLSCHAFT |
|---------------------|-------------------------|
|                |                    |   |
|                |                    |   |
|                | By:                     |
|                |                    |   |
|                |                    |   |  |
|                |                    | Name: | Dr. Jürgen Hambrecht |
| * *            |                    | Title: | *Chairman of the Board of Executive* |
| * *            |                    | * * | *Directors* |
|                | By:                     |   |
|                |                    |   |
|                |                    |   |  |
|                |                    | Name: | Dr. Kurt Bock |
| * *            |                    | Title: | *Chief Financial Officer, Member of* |
| * *            |                    | * * | *the Board of Executive Directors* |

 

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